-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UCyw26wwhL/O0i936s80sx7zBlCz0V2330PI0xEo0a3tGbBwzZxxMYS9RHqLUv6m Lej7iYTfcDMYFqkTt6n3wA== 0000945234-05-000492.txt : 20050701 0000945234-05-000492.hdr.sgml : 20050701 20050701172512 ACCESSION NUMBER: 0000945234-05-000492 CONFORMED SUBMISSION TYPE: 20-F/A PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 20041231 FILED AS OF DATE: 20050701 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Western Forest Products Inc. CENTRAL INDEX KEY: 0001299951 STANDARD INDUSTRIAL CLASSIFICATION: LUMBER & WOOD PRODUCTS (NO FURNITURE) [2400] IRS NUMBER: 000000000 STATE OF INCORPORATION: A1 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 20-F/A SEC ACT: 1934 Act SEC FILE NUMBER: 033-74656-99 FILM NUMBER: 05934151 BUSINESS ADDRESS: STREET 1: 505 BURRARD STREET STREET 2: SUITE 1500 CITY: VANCOUVER STATE: A1 ZIP: V7X 1M5 BUSINESS PHONE: 604 665 6231 MAIL ADDRESS: STREET 1: 505 BURRARD STREET STREET 2: SUITE 1500 CITY: VANCOUVER STATE: A1 ZIP: V7X 1M5 20-F/A 1 o17303e20vfza.txt AMENDMENT 1 TO FORM 20-F UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 20-F/A Amendment No. 1 [ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) or (g) OF THE SECURITIES EXCHANGE ACT OF 1934 or [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2004, or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to ______________ Commission File No.: 033-74656-99 WESTERN FOREST PRODUCTS INC. (Exact name of Registrant as specified in its charter) CANADA (Jurisdiction of incorporation or organization) 3RD FLOOR, 435 TRUNK ROAD, DUNCAN, BRITISH COLUMBIA, V9L 2P9, CANADA (250) 748-3711 (Address and telephone number of principal executive office) Securities registered or to be registered pursuant to Section 12(b) of the Act: NONE Securities registered or to be registered pursuant to Section 12(g) of the Act: NONE Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: U.S.$221,000,000 15% SECURED BONDS DUE 2009 (Title of Class) Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report: (December 31, 2004) 25,635,424 COMMON SHARES Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark which financial statement item the registrant has elected to follow. Item 17 [X] Item 18 [ ] (APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS) Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [X] No [ ] (Business was operated by Doman Industries Limited which implemented a plan of compromise and arrangement under the Companies' Creditors Arrangement Act (Canada)). TABLE OF CONTENTS PRELIMINARY INFORMATION............................................................ 1 Basis of Presentation................................................. 1 Forward Looking Statements............................................ 1 PART 1............................................................................. 2 ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS................. 2 ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE............................... 2 ITEM 3. KEY INFORMATION....................................................... 2 A. Selected Financial Data.......................................... 2 B. Capitalization and Indebtedness.................................. 5 C. Reasons for the Offer and Use of Proceeds........................ 5 D. Risk Factors..................................................... 5 ITEM 4. INFORMATION ON THE COMPANY............................................ 11 A. History and Development of the Company........................... 11 B. Business Overview................................................ 14 C. Organizational Structure......................................... 28 D. Property, Plants and Equipment................................... 29 ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS.......................... 31 A. Operating Results................................................ 32 B. Liquidity and Capital Resources.................................. 40 C. Research and Development, Patents and Licenses................... 42 D. Trend Information................................................ 42 E. Off-Balance Sheet Arrangements................................... 45 F. Tabular Disclosure of Contractual Obligation..................... 45 G. Safe Harbour..................................................... 45 ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES............................ 45 A. Directors and Senior Management.................................. 45 B. Compensation..................................................... 49 C. Board Practices.................................................. 58 D. Employees........................................................ 62 E. Share Ownership.................................................. 62 ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS..................... 64 A. Major Shareholders............................................... 64 B. Related Party Transactions....................................... 65 C. Interests of Experts and Counsel................................. 65 ITEM 8. FINANCIAL INFORMATION................................................. 65 A. Consolidated Statements and Other Financial Information.......... 65 B. Significant Changes.............................................. 66 ITEM 9. THE OFFER AND LISTING................................................. 66 A. Offer and Listing Detail......................................... 66 B. Plan of Distribution............................................. 67 C. Markets.......................................................... 67 D. Selling Shareholder.............................................. 67 E. Dilution......................................................... 67 F. Expenses of Issue................................................ 67 ITEM 10. ADDITIONAL INFORMATION................................................ 67 A. Share Capital.................................................... 67 B. Articles and Bylaws.............................................. 67 C. Material Contracts............................................... 71 D. Exchange Controls................................................ 71 E. Taxation......................................................... 71 F. Dividends and Paying Agent....................................... 75 G. Statement by Experts............................................. 75 H. Documents on Display............................................. 75 I. Subsidiary Information........................................... 75 ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............ 75 Interest Rate Risk.................................................... 75 Foreign Currency Exchange Rate Risk................................... 76 ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES................ 76 PART II............................................................................ 76 ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES....................... 76 ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS................................................... 76 ITEM 15. CONTROLS AND PROCEDURES............................................... 77 ITEM 16. RESERVED.............................................................. 77 ITEM 16A AUDIT COMMITTEE FINANCIAL EXPERT...................................... 77 ITEM 16B CODE OF ETHICS........................................................ 77 ITEM 16C PRINCIPAL ACCOUNTANT FEES AND SERVICES................................ 77 ITEM 16D EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES............ 78 ITEM 16E PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS............................................................ 78 PART III........................................................................... 78 ITEM 17. FINANCIAL STATEMENTS.................................................. 78 ITEM 18. FINANCIAL STATEMENTS.................................................. 139 ITEM 19. EXHIBITS.............................................................. 139 APPENDIX A GLOSSARY OF CERTAIN TERMS............................................... 140 SIGNATURES......................................................................... 147 EXHIBITS........................................................................... 148
PRELIMINARY INFORMATION On July 27, 2004, Doman Industries Limited ("Doman") and certain of its subsidiaries (collectively with Doman, the "Predecessor") implemented a Plan of Compromise and Arrangement under the Companies' Creditors Arrangement Act (Canada) ("CCAA") and Reorganization under the Canada Business Corporations Act ("CBCA") (the "Plan") and emerged from protection under the CCAA. We were incorporated under the CBCA on April 27, 2004 under the name "4204247 Canada Inc." for the purposes of implementing the Plan. On June 21, 2004, we changed our name to "Western Forest Products Inc." On July 27, 2004, the Plan implementation date, we acquired the solid wood and pulp assets of our Predecessor. Until the Plan was implemented, we did not carry on business and had no material assets or liabilities. We commenced business on July 28, 2004 after the implementation of the Plan. Where appropriate, the discussion in this report covers the operation of our business for the period from July 28, 2004 to December 31, 2004 together with our Predecessor's operations from January 1, 2004 to July 27, 2004 compared with prior years operations of the Predecessor. This is intended to help security holders and other readers understand our business and certain key factors underlying our financial results. However, consolidated financial information and other operating information subsequent to the Plan implementation may not be comparable with the consolidated financial information and other operating information of 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 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, comparisons of our results with those of our Predecessor should be undertaken with caution and any discussion related thereto reviewed with caution. In this report, unless the context otherwise requires, the "Company", "we", "us", and "our" and similar terms refer to Western Forest Products Inc. and its subsidiaries and "Western" refers to Western Forest Products Inc. Certain other terms used in this report are defined under "Glossary of Certain Terms" which can be found under Appendix A. Unless otherwise specified, Canada - US exchange rates referenced herein are based on the Bank of Canada closing rate. BASIS OF PRESENTATION Unless otherwise specified, all monetary amounts are expressed in Canadian dollars and all accounting information is prepared in accordance with Canadian generally accepted accounting principles ("GAAP"). In accordance with such principles, our consolidated financial statements reflect fresh start accounting as of July 28, 2004. The information set forth in this report is as at June 27, 2005 unless an earlier or later date is indicated or otherwise required by the context. In this report, unless the context otherwise requires, references to "as of the date hereof" mean as of June 27, 2005. FORWARD LOOKING STATEMENTS This annual report contains statements which constitute forward-looking statements within the meaning of the United States Securities Exchange Act of 1934. Those statements appear in a number of places in this document and include statements regarding our intent, belief or current expectations primarily with respect to market and general economic conditions, future costs, expenditures, available harvest levels and our future operating performance. Such statements may be indicated by words such as "estimate", "expect", "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 risks and uncertainties, and that actual results may differ from those in the forward-looking statements as a result of various factors, including general economic and business conditions, 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 misjudgements in the course of preparing forward-looking statements. The information contained in this report identifies important factors, including the risks set forth in "Item 3. Key Information - D. Risk Factors", that could cause such differences. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by such cautionary statements. PART 1 ITEM 1.IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS Not applicable. ITEM 2.OFFER STATISTICS AND EXPECTED TIMETABLE Not applicable. ITEM 3.KEY INFORMATION A. SELECTED FINANCIAL DATA The following table summarizes our selected consolidated financial data prepared in accordance with Canadian GAAP for the period commencing July 28, 2004 and ending December 31, 2004 and selected consolidated financial data about our Predecessor for the period commencing January 1, 2004 and ending July 27, 2004 and for the years ended December 31, 2003, 2002, 2001 and 2000. In addition, information is presented to show the differences which would result from the application of U.S. GAAP. For a description of the differences between Canadian GAAP and U.S. GAAP, see note 13 of our consolidated financial statements for the period commencing July 28, 2004 and ending December 31, 2004 and note 17 of our Predecessor's consolidated financial statements for the period commencing January 1, 2004 and ending July 27, 2004 and for the years ended December 31, 2003 and 2002, included under "Item 17. Financial Statements". The information in the table was extracted or derived from the more detailed consolidated financial statements and related notes included herein or previously filed by our Predecessor and should be read in conjunction with such consolidated financial statements and with the information appearing under the heading, "Item 5. Operating and Financial Review and Prospects". Due to the differences in our corporate and financial structure from that of our Predecessor, the application of "fresh start" accounting as explained in note 1 to our 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, our consolidated financial and other information may not be comparable with the consolidated financial information and other information issued by our Predecessor. Accordingly, the following selected consolidated financial information should be reviewed with caution. - 2 - CANADIAN GAAP
YEARS ENDED DECEMBER 31, -------------------------------------------------- JUL 28, 2004 TO JAN 1, 2004 TO 2003 2002 2001 2000 DEC 31, 2004 JUL 27, 2004 ----------- ----------- ----------- ----------- --------------- -------------- PREDECESSOR PREDECESSOR PREDECESSOR PREDECESSOR COMPANY PREDECESSOR RESTATED(1) RESTATED(1) RESTATED(1) RESTATED(1) --------------- -------------- ----------- ----------- ----------- ----------- (thousands of dollars except per share amounts) OPERATING RESULTS Sales...................................... $ 324,106 433,704 621,088 655,720 718,858 864,709 Operating earnings (loss).................. $ (12,191) 29,286 (65,574) 10,661 (246,700) 83,527 Interest expense........................... $ (19,838) (71,349) (100,849) (107,982) (106,801) (102,645) Foreign exchange gain (loss)............... $ 27,436 (24,228) 189,180 10,228 (66,561) (40,189) Other income (expense)..................... $ (96) (5,869) 2,200 4,275 14,399 3,787 Financial restructuring costs.............. $ - (11,391) (7,790) (7,259) - - Income taxes - recovery (expense).......... $ (781) (77) (1,034) (810) 93,216 18,058 Net earnings (loss) from continuing operations................................. $ (5,470) (83,628) 16,133 (90,887) (312,447) (37,462) Net loss from discontinued operations...... $ - (12,426) (19,937) (73,218) (100,407) (2,288) Net loss................................... $ (5,470) (96,054) (3,804) (164,105) (412,854) (39,750) Provision for dividends on preferred shares..................................... $ - (2,753) (4,779) (4,499) (4,514) (4,354) Net loss attributable to common shares..... $ (5,470) (98,807) (8,583) (168,604) (417,368) (44,104) FINANCIAL POSITION Working capital............................ $ 114,601 - (720,928) 149,074 232,161 395,057 Total assets............................... $ 696,435 - 749,052 843,926 974,532 1,473,534 Net Assets................................. $ 249,705 - (417,125) (413,321) (238,664) 174,190 Long-term debt............................. $ 253,522 - 162,063 1,061,725 1,071,954 1,050,400 SHAREHOLDERS' EQUITY Preferred shareholders..................... $ - 64,076 64,076 64,076 64,076 64,076 Common shareholders........................ $ 249,705 (64,076) (481,201) (479,597) (304,940) 107,914 EARNINGS (LOSS) PER COMMON SHARE Net earnings (loss) from continuing operations - basic and diluted............. $ (0.21) (2.03) 0.27 (2.25) (7.46) (0.98) Net loss - basic and diluted............... $ (0.21) (2.33) (0.20) (3.97) (9.82) (1.04) Weighted average number of common shares - basic and diluted (thousands)..... 25,636 42,481 42,481 42,481 42,481 42,481
Note: (1) Restated to reflect sale of Port Alice pulp mill on May 11, 2004 by our Predecessor and to include Port Alice pulp mill as discontinued operations, and the adoption of new accounting policies for asset retirement obligations and classification of duties and freight costs. See notes 2(k) and 16(c) to our Predecessor's audited consolidated financial statements filed under Item 17. Financial Statements. - 3 - U.S. GAAP
YEARS ENDED DECEMBER 31, -------------------------------------------------- JUL 28, 2004 TO JAN 1, 2004 TO 2003 2002 2001 2000 DEC 31, 2004 JUL 27, 2004 ----------- ----------- ----------- ----------- --------------- -------------- PREDECESSOR PREDECESSOR PREDECESSOR PREDECESSOR COMPANY PREDECESSOR RESTATED(1) RESTATED(1) RESTATED(1) RESTATED(1) --------------- -------------- ----------- ----------- ----------- ----------- (thousands of dollars except per share amounts) OPERATING RESULTS Sales...................................... $ 324,106 433,704 621,088 655,720 718,858 864,709 Operating earnings (loss).................. $ (12,191) 30,711 (62,976) (30,793) (251,975) 84,027 Interest expense........................... $ (19,838) (71,349) (100,849) (107,982) (106,801) (102,645) Foreign exchange gain (loss)............... $ 27,436 (24,228) 189,180 10,228 (66,561) (40,189) Other income (expense)..................... $ (96) (5,869) 2,200 4,275 14,399 3,787 Financial restructuring costs.............. $ - (11,391) (7,790) (7,259) - - Earnings from CCAA wind-up proceedings..... $ - 566,822 - - - - Income taxes - recovery (expense).......... $ (781) (77) (1,034) (810) 92,537 17,865 Net earnings (loss) from continuing operations................................. $ (5,470) 484,619 18,731 (132,341) (318,401) (37,155) Net loss from discontinued operations...... $ - (12,426) (19,937) (73,218) (100,407) (2,288) Net earnings (loss)........................ $ (5,470) 472,193 (1,206) (205,559) (418,808) (39,443) Provision for dividends on preferred shares..................................... $ - (2,753) (4,779) (4,499) (4,514) (4,354) Net earnings (loss) attributable to common shares.............................. $ (5,470) 469,440 (5,985) (210,058) (423,322) (43,797) FINANCIAL POSITION Working capital............................ $ 114,601 - (720,928) 149,074 232,161 395,057 Total assets............................... $ 696,435 - 693,984 786,260 958,320 1,456,822 Net Assets................................. $ 249,490 - (472,193) (473,187) (257,076) 161,732 Long-term debt............................. $ 253,522 - 162,063 1,061,725 1,071,954 1,050,400 SHAREHOLDERS' EQUITY Preferred shareholders..................... $ - 64,076 64,076 64,076 64,076 64,076 Common shareholders........................ $ 249,490 (64,076) (536,269) (537,263) (321,152) 97,656 EARNINGS (LOSS) PER COMMON SHARE Net earnings (loss) from continuing operations - basic and diluted............. $ (0.21) 11.34 0.33 (3.22) (7.60) (0.98) Net earnings from CCAA wind-up proceedings - basic and diluted............ $ - 13.34 - - - - Net earnings (loss) - basic and diluted.... $ (0.21) 11.06 (0.14) (4.94) (9.96) (1.03) Weighted average number of common shares - basic and diluted (thousands)..... 25,636 42,481 42,481 42,481 42,481 42,481
Note: (1) Restated to reflect sale of Port Alice pulp mill sold on May 11, 2004 by our Predecessor and to include Port Alice pulp mill as discontinued operations. - 4 - EXCHANGE RATES The following table sets out the exchange rates, based on the noon buying rates in New York City for cable transfers in foreign currencies, as certified for customs purposes by the Federal Reserve Bank of New York, for the conversion of Canadian dollars into United States dollars in effect at the end of the following periods, and the average exchange rates (based on the average of the exchange rates on the last day of each month in such periods) and the range of high and low exchange rates for such periods.
YEARS ENDED DECEMBER 31 -------------------------------------------------- 2004 2003 2002 2001 2000 ------ ------ ------ ------ ------ End of period................ 0.8310 0.7738 0.6329 0.6279 0.6669 High for period.............. 0.8493 0.7738 0.6619 0.6697 0.6969 Low for period............... 0.7158 0.6349 0.6200 0.6241 0.6410 Average for period........... 0.7719 0.7205 0.6370 0.6446 0.6727
The following table sets out the range of high and low exchange rates, based on the noon buying rate discussed above, for the conversion of Canadian dollars into U.S. dollars, for the following periods.
LOW HIGH 2004 December................................................................ 0.8064 0.8435 2005 January................................................................. 0.8050 0.8346 February................................................................ 0.7961 0.8134 March................................................................... 0.8024 0.8322 April................................................................... 0.7957 0.8233 May..................................................................... 0.7872 0.8082
On June 27, 2005, the noon buying rate of exchange, as reported by the Federal Reserve Bank of New York, for the conversion of Canadian dollars into United States dollars was U.S.$0.8125 per Canadian dollar. B. CAPITALIZATION AND INDEBTEDNESS Not applicable. C. REASONS FOR THE OFFER AND USE OF PROCEEDS Not applicable. D. RISK FACTORS The following factors, any of which could have a material adverse effect on our operations and financial conditions and cash flow, should be carefully considered in evaluating our business. VARIABLE OPERATING RESULTS AND PRODUCT PRICING Our financial performance is principally dependent on the prices we receive for our lumber, log, pulp and other products. Average prices that we receive for lumber and logs are dependent on the product mix sold as prices vary significantly between species and grade. There is generally some correlation between lumber and log prices over the long term although they may not correlate closely in the short term due to supply imbalances. Prices for our products are highly cyclical and have fluctuated significantly in the past and may fluctuate significantly in the future. We cannot provide any assurance as to the timing and extent of any price improvements. On an annualized basis we estimate that (i) a change of $50 per thousand board feet of lumber would impact operating earnings, net earnings and per share earnings by approximately $35 million, $23 million and $0.88 per share respectively, and (ii) a change of $50 per air dried metric tonne ("ADMT") of pulp would impact operating earnings, net earnings and per share earnings by approximately $14 million, $9 million and $0.35 per share respectively. See "Item 5. Operating and Financial Review and Prospects - A. Operating Results - D. Trend Information - Product Pricing" for a discussion of current pricing and market conditions. - 5 - Our financial performance is also dependent on the rate at which we utilize our production capacity. When capacity utilization is reduced in response to weak demand for products, the cost per unit of production will increase, and profitability decrease. For example, the down-time to be taken at our logging and sawmill operations over the summer of 2005 will reduce working capital and preserve liquidity but will also result in higher cost per unit due to the lower production volumes and the expensing of fixed cost over this period. The markets for our products are highly cyclical and are characterized by periods of excess product supply due to many factors, including: - additions to industry capacity; - increased industry production; - periods of insufficient demand due to weak general economic activity or other causes including weather factors; and - inventory destocking by customers. Demand for our products is influenced to a significant degree by the global level of economic activity. Additionally, even though costs may increase, our customers may not accept price increases for the products. We are not able to predict with certainty market conditions and prices for our products. Our future financial condition and results of operations will depend primarily upon the prices we receive for lumber, logs and pulp, and a deterioration in prices of or demand for our products could have a material adverse effect on our financial condition, results of operations and ability to satisfy our debt obligations. See "Item 5. Operating and Financial Review and Prospects". RISKS OF EXCHANGE RATE FLUCTUATIONS Approximately 65% of our sales are made in US dollars, while most of our operating costs and expenses are incurred in Canadian dollars. Our results of operations are reported in Canadian dollars. Significant variations in relative currency values, particularly a significant increase in the value of the Canadian dollar relative to the US dollar, has had, and in the future could have, a material adverse effect on our operating earnings and cash flows. On an annualized basis, excluding the effect on our long-term debt, we estimate that a change of 1% in the value of the Canadian dollar per US$1.00 would impact operating earnings, net earnings and per share earnings by approximately $4.1 million, $2.7 million and $0.10 per share respectively. All of our long term debt of US$210.9 million at December 31, 2004, is denominated in $US. The exchange rate at December 31, 2004, was $1.2020 (Canadian dollars to purchase a US dollar). A 1% change in the US dollar has an effect of $2.5 million on the principal amount of our Secured Bonds and an effect of $0.3 million on our annual interest expense on our Secured Bonds when translated into Canadian dollars. Both of the changes would be recorded in our statement of operations. Appreciation of the Canadian dollar against the U.S. dollar for the period from July 28, 2004 to December 31, 2004 resulted in a non-cash foreign exchange gain included in income of $27.4 million. In the first quarter of 2005 we recorded a non-cash foreign exchange loss of $1.6 million as a result of the Canadian dollar weakness. See "Item 5. Operating and Financial Review and Prospects - D. Trend Information - Foreign Currencies" and "Item 11. Quantitative and Qualitative Disclosures About Market Risk - Foreign Currency Exchange Rate Risk". SOFTWOOD LUMBER DISPUTE The United States Department of Commerce ("USDOC") found that imports of softwood lumber from Canada into the United States were dumped and unfairly subsidized and the United States International Trade Commission ("USITC") determined that the softwood lumber industry in the United States was threatened with material injury by reason of the imports of softwood lumber from Canada. As a result of this determination, the USDOC issued countervailing and anti-dumping duty orders, which took effect on May 22, 2002. These duties have had a material adverse impact on the operations of our Predecessor and on our operations including reduced profit margins. Cumulative duties, including those of our Predecessor, from May 22, 2002, when cash deposits were made necessary for shipments of Canadian lumber into the US, until March 31, 2005, total approximately US$80.6 million. Pursuant to the Plan implemented by our Predecessor, we have the right to any refunds of duties paid by our Predecessor, and may have the obligation to pay further duties. Although the Federal Government of Canada (the "Federal Government"), other provincial governments of Canada and Canadian forest product companies (collectively "Canadian Interests") have initiated challenges under the North American Free Trade Agreement ("NAFTA") and before the World Trade - 6 - Organization ("WTO"), it is not possible to predict the ultimate results of such challenges. The final amount of countervailing and antidumping duties that may be assessed on Canadian softwood lumber exports to the US cannot be determined at this time and will depend on the outcome of the challenges and appeals of the final determinations to any reviewing courts, NAFTA or WTO panels or on a negotiated settlement. Unless the challenges are resolved in favour of Canadian lumber companies, the softwood lumber dispute will continue to adversely impact on our future operations and cash flow. See "Item 4. Information on the Company - B. Business Overview - Softwood Lumber Dispute". SUBSTANTIAL LEVERAGE AND ABILITY TO SERVICE INDEBTEDNESS As at December 31, 2004, we had approximately $333 million indebtedness outstanding comprising our Secured Bonds and Working Capital Facility. The level of debt that we have and the limitations imposed on us by our Secured Bond Indenture, Working Capital Facility and other debt agreements that we have entered into has had and will continue to have important consequences for our business, including the following: - a significant portion of our cash flow from operations is used for servicing debt, rather than operations; - we may not be able to obtain additional debt or equity financing for future working capital, capital expenditures or other corporate purposes; - we may remain vulnerable to economic downturns and be less able to take advantage of significant business opportunities and react to changes in market or industry conditions; and - our less leveraged competitors may have a competitive advantage. Our ability to pay our debt obligations depends on our current and future performance. To a significant extent, our performance will be subject to general economic, financial, competitive, legislative, regulatory and other factors, including lumber and pulp prices, all of which are beyond our control. No assurance can be given that our business will generate sufficient cash flow from operations to pay our debt obligations or fund our other liquidity needs. We did not generate sufficient cash flow from operations during the period July 28, 2004 to December 31, 2004 to service our debt obligations and had to draw on our Working Capital Facility. We believe it will be necessary for us to reduce our level of indebtedness and debt service requirements to sustain and improve our operating performance, particularly if market conditions for our products do not improve. Although we will likely seek to refinance our Secured Bonds after they become redeemable on July 28, 2005, we cannot provide any assurance that we will be able to do so on favourable terms or at all or that we can secure any further credit facilities or that the terms of any such credit facilities will be favourable. See "Item 5. Operating and Financial Review and Prospects" for a discussion of the results of operation, liquidity and current outlook. See also "Item 10. Additional Information - Articles and Bylaws - Secured Bonds - Working Capital Facility" for a discussion of the terms of our Secured Bonds and Working Capital Facility. CASH FLOW AND LIQUIDITY The continuing softwood lumber dispute and our debt service requirements are putting pressure on our liquidity and capital resources. Based on current market conditions and our current capital structure and operating cost structure, we have not generated sufficient cash flows from operations to meet our debt obligations and to fund the capital requirements of our business. See "Item 5. Operating and Financial Review and Prospects" for a discussion of the results of operation, liquidity and current outlook. As discussed therein, we have taken and will be taking certain steps, including taking down-time at our logging and sawmill operations during the summer of 2005 and deferring payment of 50% of the interest due on June 30, 2005 on our Secured Bonds, to improve our liquidity situation in the short term. We have initiated a strategic review of our operations to address long term liquidity and operating prospects and strategy. Although we believe the steps we have taken to date should give us sufficient liquidity to sustain our current operations into 2006, there can be no assurance that we will be successful in our efforts to implement our plan to reduce our debt service requirements and improve our cash flow. If we fail to improve our cash flow and business conditions do not improve, we will likely have to seek to restructure our obligations. COMPETITION The markets for our products are highly competitive on a domestic and international level, with a large number of major companies competing in each market. Many of our competitors have substantially greater financial resources and less debt than - 7 - we do. Some of our competitors have the advantage of not being affected by fluctuations in the value of the Canadian dollar. We also compete indirectly with firms that manufacture substitutes for solid wood products, including non-wood and engineered wood products. While the principal basis for competition is price, we also compete to a lesser extent on the basis of quality and customer service. Changes in the level of competition, industry capacity and the global economy has had and is expected to continue to have a significant impact on our selling prices and our overall profitability. Our competitive position is influenced by factors including the availability, quality and cost of fibre, energy and labour, and plant efficiencies and productivity in relation to our competitors. Our competitive position has also been and is expected to continue to be affected by the US countervailing duties and anti-dumping rates imposed on our softwood lumber shipments to the US. See "Item 4. Information on the Company - B. Business Overview - Sales, Marketing and Distribution - Competition - Softwood Lumber Dispute". DEPENDENCY ON FIBRE OBTAINED FROM GOVERNMENT TIMBER TENURES Approximately 95% of the timberlands in which we operate are owned by the Province of British Columbia (the "Province" or "British Columbia") and administered by the Ministry of Forests of British Columbia ("Ministry of Forests"). The Forest Act (British Columbia) (the "Forest Act") empowers the Ministry of Forests to grant timber tenures, including tree farm licenses ("TFLs"), forest licences ("FLs") and timber sales licences to producers. The Provincial Chief Forester must conduct a review of allowable annual cut ("AAC") for each timber supply area ("TSA") and each TFL in the Province on a periodic basis which is usually once every five years. This review is then used to determine the AAC for licences issued by the Provincial government of British Columbia ("Provincial Government" or "Crown"). Such assessments have in the past resulted and may in the future result in reductions of the AACs attributable to licences held by British Columbia forest companies, including the licences that we own. There can be no assurance that the amounts of such future reductions on our licenses, if any, will not be material or the amounts of compensation, if any, for such reductions will be fair and adequate. See "Item 4. Information on the Company - B. Business Overview - Forest Resources". FOREST POLICY CHANGES IN BRITISH COLUMBIA In March 2003, the Provincial Government began implementing the most significant legislative reforms in the Province's forest industry in over 40 years. These BC reforms include (i) market pricing - for stumpage purposes, (ii) appurtenancy - the removal of the requirement to link fibre supply under harvesting licences to specified conversion facilities, (iii) cut control - introduction of new cut control provisions and elimination of minimum harvesting requirements, and (iv) industry rationalization - through transfers, mergers or division of forest tenures and changes of control of licence holders. The most controversial aspect of the new legislation involved the Provincial Government taking back approximately 20% of the AAC from major licence holders, including us. The first phase of negotiations on compensation due to us recently concluded and a final comprehensive settlement agreement is expected to be reached in 2005. See "Item 4. Information on the Company - B. Business Overview - Forest Resources - Take Back Settlement". Early in 2004, significant updates were made to the 2003 legislation package through the Forest Statutes Amendment Act (British Columbia). Late in the year another set of updates were made through the Forest Statutes Amendment Act (No.2) (British Columbia). As many of the legislative changes are still in the process of being implemented, it is not possible to predict how our business will be affected by these changes in 2005 and future periods. See "Item 4. Information on the Company - B. Business Overview - Forest Resources". STUMPAGE FEES Stumpage is the fee that the Provincial Government charges forest companies to harvest timber from Crown land in British Columbia. On January 16, 2004, the Provincial Government announced the move to a more open and competitive market pricing system for timber and logs for the coastal region. Prior to February 29, 2004, the amount of stumpage paid for each cubic metre of wood harvested from the coastal region was based on a target rate set by the Provincial Government. Since February 29, 2004, stumpage for the coastal region is being set using a market pricing system (the "MPS"). The MPS uses the results from BC Timber Sales auctions to predict the value of Crown timber harvested under long-term tenures. In this way the Crown believes that stumpage prices will become market based. The stumpage system is complex. It continues to be the subject of discussion involving, among other things, lumber trade issues between Canada and the US in response to the US claim that BC's forest industry is subsidized and consequently may be - 8 - subject to further amendments. Periodic changes in the Provincial Government's administrative policy can also affect stumpage and the viability of individual logging operations. There can be no assurance that current changes or future changes to the stumpage system or the Provincial Government's administrative policy will not have a material impact on stumpage fees that we pay and consequently affect our financial condition, results of operations and cash flows. See "Item 4. Information on the Company - B. Business Overview - Forest Resources". FOREST RESOURCE RISK AND NATURAL CATASTROPHES Our timber tenures are subject to the risks associated with standing forests, in particular, forest fires. Procedures and controls are in place to manage such risk through prevention and early detection. Most of the timber we harvest comes from Crown tenures and insurance coverage is maintained only for loss of logs due to fire and other occurrences following harvesting. Utilizing the services of an insurance consultant, we believe we have adequate insurance coverage to protect our assets from undue risk and that this coverage is in line with that of other large forest product companies operating in British Columbia. However, there is no assurance that this coverage would be adequate to provide protection against all eventualities, including natural catastrophes. INTERNATIONAL BUSINESS In general, our sales are subject to the risks of international business, including: - fluctuations in foreign currencies; - changes in the economic strength of the countries in which we conduct business; - trade disputes; - changes in regulatory requirements; - tariffs and other barriers; - quotas, duties, taxes and other charges or restrictions upon exportation; and - transportation costs and the availability of carriers. Our principal products are sold in international markets. As a result, economic conditions in the US, Japan and Europe, the strength of the housing markets in the US and Japan, international sensitivity to interest rates, and the strength of world markets for NBSK pulp can all have a significant effect on our operations and results. See "Item 4. Information on the Company - B. Business Overview - Sales, Marketing and Distribution". ENVIRONMENTAL REGULATION We are subject to extensive environmental laws and regulations. These laws and regulations impose stringent standards on our operations and impose liability to remedy problems for which we are legally responsible regarding, among other things: - air emissions; - land and water discharges; - operations or activities affecting watercourses or the natural environment; - operations or activities affecting species at risk; - use and handling of hazardous materials; - use, handling and disposal of waste; and - 9 - - remediation of environmental contamination. We may incur substantial costs to comply with current or future requirements, to respond to orders or directions made, to remedy problems for which we are legally responsible or to comply with new environmental laws that may be adopted from time to time. In addition, we may discover currently unknown environmental problems or conditions affecting our operations or activities or for which we are otherwise legally responsible. Any such event could have a material adverse effect on our business, financial condition, results of operations or cash flow. See "Item 4. Information on the Company - B. Business Overview - Environment". FIRST NATIONS LAND CLAIMS First Nations in British Columbia have made claims of rights and title to substantial portions of land in the Province including areas where our timber tenures and operations are situated, creating uncertainty as to the status of competing property rights. The Supreme Court of Canada has held that aboriginal groups may have a spectrum of aboriginal rights in lands that have been traditionally used or occupied by their ancestors; however, such rights or title are not absolute and may be infringed by government in furtherance of a legislative objective, including forestry, subject to meeting a justification test. The effect on any particular lands will not be determinable until the exact nature of historical use, occupancy and rights in any particular piece of property have been clarified. First Nations are seeking compensation from governments with respect to these claims, and the effect of these claims on timber tenure rights, including our timber tenures, cannot be estimated at this time. The Federal Government and Provincial Government have been seeking to negotiate settlements with aboriginal groups throughout British Columbia in order to resolve these claims. Any settlements that may result from these negotiations may involve a combination of cash, resources, grants of conditional rights to gather food on public lands, and some rights of self-government. The effect of such a settlement on our timber tenures or the amounts of compensation that we would receive for any taking from our tenures as a result of this process, if any, cannot be estimated at this time. Current Provincial Government policy requires that forest management and operating plans take into account and not infringe on aboriginal rights and title, proven or unproven, and provide for consultation with First Nations. This policy is reflected in the terms of our timber tenures, which provide that the Ministry of Forests may refuse to issue cutting permits in respect of a timber tenure if it is determined that the forestry operation would interfere with aboriginal rights and title. First Nations have, at times, sought to restrict the Provincial Government from granting or renewing forest tenures and other operating authorizations without their consent if these decisions could affect lands claimed by them. There can be no assurance that changes to the terms of our timber tenures as a consequence of such consultation or action will not have an adverse effect on our business, financial condition, results of operations or cash flow. The issues surrounding aboriginal title and rights are not likely to be resolved by the Federal Government or Provincial Government in the near future. See "Item 4. Information on the Company - B. Business Overview - First Nations Land Claims". REGULATORY RISKS Forestry and pulp operations are subject to extensive federal, provincial, state, municipal and other local laws and regulations, including those governing forestry (see above), exports, taxes, labour standards, occupational health, waste disposal, environmental protection and remediation (see above), protection of endangered and protected species and land use and expropriation. Under certain laws and regulations, we are also required to obtain permits, licences and other authorizations to conduct our operations, which permits, licences and authorizations may impose additional conditions that we must comply with. Although we budget for expenditures to maintain compliance with such laws and permits, there can be no assurance that these laws and regulations will not change in the future in a manner that could have an adverse effect on our financial condition, liquidity or results of operations or on the manner that we conduct our operations. RELIANCE ON DIRECTORS, MANAGEMENT AND OTHER KEY PERSONNEL We rely upon the experience and expertise of our personnel. No assurance can be given that we will be able to retain our current personnel and attract additional personnel as necessary for the development and operation of our business. Loss of, or failure to attract and retain key personnel could have a material adverse effect on us. - 10 - EMPLOYEES AND LABOUR RELATIONS The majority of the hourly paid employees at our manufacturing facilities and timber harvesting operations are unionized. Our current collective agreements expire in June 2007, in respect of the majority of our hourly workers in our solid wood segment, and in April 2008, in respect of our hourly workers in our pulp segment. Our inability to negotiate an acceptable contract at the time that our existing collective agreements expire with any of the unions could result in a strike or work stoppage by the affected workers and increased operating costs as a result of higher wages or benefits paid to union members. If the unionized workers engage in a strike or other work stoppage, we could experience a significant disruption of our operations or higher ongoing labour costs, which could have a material adverse effect on our business, financial condition, results of operations or cash flow. In addition, we rely on certain third parties whose workforces are unionized to provide us with services needed to operate our business. If their workers engage in strike or other work stoppages, we could experience disruption of our operations. See "Item 4. Information on the Company - B. Business Overview - Human Resources". INABILITY TO ENFORCE CERTAIN CIVIL LIABILITIES The enforcement of civil liabilities by investors under applicable U.S. federal and state securities laws will be affected adversely by the fact that: - we are organized under the laws of Canada; - all of our officers and directors are residents of Canada; and - all or a substantial portion of our assets are located outside the U.S. As a result, it may be difficult or impossible to effect service of process upon us or our officers or directors from within the U.S. It may also be difficult to realize against us in the U.S., upon judgments of U.S. courts for civil liabilities under applicable U.S. federal and state securities laws. Courts in Canada (1) may not enforce judgments of U.S. courts obtained in actions against us or our officers or directors predicated upon the civil liability provisions of applicable U.S. federal and state securities laws and (2) may not enforce, in original actions, liabilities against us or our officers or directors predicated upon such laws. ENFORCING UNITED STATES BANKRUPTCY AND OTHER LAWS IN CANADA We are organized under the laws of Canada and our principal operating assets are located outside of the U.S. Under bankruptcy laws in the U.S., courts typically have jurisdiction over a debtor's property, wherever it is located, including property situated in other countries. Courts outside of the U.S. may not recognize the U.S. bankruptcy court's jurisdiction. Accordingly, difficulties may arise in administering a U.S. bankruptcy case involving a Canadian debtor with property located outside of the U.S. Any orders or judgments of a bankruptcy court in the U.S. may not be enforceable. ITEM 4.INFORMATION ON THE COMPANY A. HISTORY AND DEVELOPMENT OF THE COMPANY As noted above, we were incorporated under "CBCA" on April 27, 2004 under the name "4204247 Canada Inc." On June 21, 2004, we changed our name to "Western Forest Products Inc." Our head office is located at 3rd Floor, 435 Trunk Road, Duncan, British Columbia, V9L 2P9 and our telephone number is 250-748-3711. Our registered office is located at Suite 2100, 1075 West Georgia Street, Vancouver, British Columbia, V6E 3G2 and its telephone number is 604-631-3131. HISTORY Our Predecessor's first major sawmill came into production at Ladysmith, British Columbia on Vancouver Island in 1967 and three additional sawmills were built on Vancouver Island between 1973 and 1980. In 1980, the Predecessor and two other British Columbia forest products companies formed 4018958 Canada Inc. (formerly Western Forest Products Limited) ("WFPL"), which purchased the British Columbia timber resources and manufacturing facilities of ITT Industries of Canada Limited. The Predecessor increased its ownership of the outstanding voting shares of WFPL to 56.1% in 1989 and in 1992 - 11 - purchased the remaining minority shareholdings. In 1994, the Predecessor completed the construction of a value-added lumber remanufacturing plant at Chemainus on Vancouver Island. In 1997, the Predecessor acquired certain assets from Pacific Forest Products Limited, including three sawmills, timber tenures having an AAC of approximately 1.7 million cubic metres ("m3") from Crown timber and a perpetual supply of 330,000 to 350,000 m3 of sawlogs under a saw log agreement with a third party. In 2002 the Predecessor experienced significant liquidity constraints due to, among other things, negative cash flow, industry-wide effects of high operating costs and provincial stumpage rates, compliance with the Forest Practices Code of British Columbia Act, softwood lumber trade dispute between Canada and the United States, weakness in the Japanese economy, weak pulp prices, and high debt servicing costs. At that time, it had outstanding indebtedness of over one billion dollars. Based on the financial outlook at that time, our Predecessor did not have the financial capability to make payments on debts as they became due, and consequently filed for protection under the CCAA. On November 7, 2002, our Predecessor was granted protection from its creditors pursuant to the CCAA. Over the ensuing months, the general stay of proceedings against creditors was extended by the Court on a number of occasions to allow the Predecessor to negotiate with various stakeholders to develop a plan of compromise and arrangement. A number of alternatives were considered. In addition, during this time, our Predecessor took several steps to downsize its operations in order to preserve cash resources, including extensive curtailment in production, reduction of working capital and disposition of certain assets. Our Predecessor also ceased operations at and dismantled three sawmills. On May 11, 2004, the Predecessor sold substantially all of its Port Alice pulp mill assets (including adjusted working capital valued at $2.73 million) in consideration for one dollar and the assumption of all outstanding obligations relating to the Port Alice pulp mill, including employee and pension liabilities to Port Alice Specialty Cellulose Inc. ("PASCI"), an affiliate of LaPointe Partners Inc., an unrelated party. The sale was approved by the Court on May 11, 2004. The Plan reflected the agreement reached by our Predecessor with certain of Doman's unsecured noteholders after extensive negotiations. The Plan was approved by the Predecessor's unsecured creditors on June 7, 2004 and sanctioned by the Court on June 11, 2004. On July 27, 2004, the Predecessor implemented the Plan and emerged from protection under the CCAA. We were incorporated for the purposes of implementing the Plan and on July 27, 2004, the Plan Implementation Date, we acquired the Solid Wood Assets and Pulp Assets of the Predecessor. Until the Plan was implemented, we did not carry on business and had no material assets or liabilities. We commenced business on July 28, 2004 after the implementation of the Plan. (For a more detailed discussion of the Predecessor's financial situation leading to the CCAA proceedings and the restructuring efforts please see the Information Circular and Proxy Statement of our Predecessor dated May 7, 2004 and Doman's Form 20-F dated May 21, 2004, which can be found on EDGAR at www.sec.gov and on SEDAR at www.sedar.com, under the name, Doman Industries Limited.) THE PLAN The purpose of the Plan was to (1) compromise the claims of our Predecessor's affected creditors so as to enable the Predecessor's solid wood and pulp businesses to be carried on under a new corporate structure, with relief from the debt servicing and repayment obligations that it was subject to at that time; and (2) facilitate the refinancing of Doman's senior secured notes through the distribution of certain warrants (exercisable for Western's secured bonds ("Secured Bonds") and common shares ("Common Shares")) and the sale of certain private placement units consisting of Secured Bonds and Common Shares. The significant steps in the implementation of the Plan included: (a) the incorporation of two new corporations, Western and Western Pulp Limited ("WPL"); (b) the segregation of the principal operating assets of our Predecessor into two separate operating groups: the Solid Wood Assets, which were transferred to the Company, and the Pulp Assets, which were transferred to WPL; WPL became a wholly owned subsidiary of Western; (c) the unsecured indebtedness of our Predecessor was compromised and converted to approximately 75% of the Common Shares of Western, subject to certain cash elections; in addition, the Predecessor's unsecured creditors were entitled to class A and B warrants of Western (exercisable for Secured Bonds and Common Shares) ("Class A and B Warrants"); (d) the indebtedness held by Doman's senior secured noteholders was refinanced in full through a combination of a distribution of Class A and B Warrants to the Predecessor's unsecured creditors and a private placement to certain unsecured noteholders of Doman, the Standby Purchasers; for proceeds of US$210 million, Western issued Secured Bonds (aggregate principal face value of US$221 million) and approximately 25% of the Common Shares to the Standby Purchasers and those unsecured creditors of our Predecessor who exercised the Class A and B Warrants; the - 12 - proceeds of U.S.$210 million were used primarily to repay Doman's senior secured noteholders and to cover our Predecessor's CCAA exit cost, with the remaining amount released to us for working capital purposes; (e) Western entered into the Working Capital Facility, which provides for revolving advances up to $100 million, and reorganized certain intercorporate debt; and (f) Western issued three tranches of its non-transferable class C warrants ("Class C Warrants") to purchase up to 10% of the Common Shares on the terms set out in the Plan to existing shareholders of Doman; no other distributions were made, or other compensation paid, to Doman shareholders under the Plan. On August 3, 2004, the Common Shares began trading on the Toronto Stock Exchange ("TSX") under the symbol "WEF". For further information about the Plan, please see the Information Circular and Proxy Statement of our Predecessor pertaining to the Plan dated May 7, 2004 and related documents of our Predecessor, which documents are available at EDGAR at www.sec.gov and on SEDAR at www.sedar.com, under the name, Doman Industries Limited. PRIOR SALES In connection with the implementation of the Plan of our Predecessor, effective as of June 28, 2004, we issued 110,426 Class A and B Warrants under our Class A and B Warrant Indenture to affected creditors of our Predecessor. The Class A and B Warrants entitled the holders to acquire plan units ("Plan Units"), each Plan Unit consisting of US$1,000 principal amount of our Secured Bonds and 29 Common Shares, until July 19, 2004 at a price of US$950 per Plan Unit. The Standby Purchasers agreed to subscribe for and take-up any Plan Units not subscribed for by affected creditors of our Predecessor pursuant to the exercise of the Class A and B Warrants and to subscribe for additional units, each unit consisting of US$1,000 principal amount of our Secured Bonds and 29 Common Shares, at a price of US$950 per unit. On the Plan Implementation Date, in connection with the implementation of the Plan, (1) 19,226,931 Common Shares were distributed to the affected creditors of our Predecessor; (2) 2,890,053 Common Shares and US$99,657,000 principal amount of Secured Bonds were issued to the holders of the Class A and B Warrants upon the exercise of Class A and B Warrants; and (3) 3,518,947 Common Shares and US$121,343,000 principal amount of Secured Bonds were issued to the Standby Purchasers pursuant to their standby commitment and a concurrent private placement. (4,136 Common Shares were subsequently cancelled due to the resolution of disputed claims in our Predecessor's CCAA proceedings. 23,837 Common Shares are held in trust by Computershare pending resolution of disputed claims in our Predecessors' CCAA proceedings.) See "Item 10. Additional Information - B. Articles and Bylaws - Secured Bonds" for a description of our Secured Bonds. Also, in connection with the implementation of the Plan of our Predecessor, 569,373 Tranche 1 Class C Warrants, 854,146 Tranche 2 Class C Warrants and 1,423,743 Tranche 3 Class C Warrants were issued effectively on the Plan Implementation Date for no consideration, to certain Doman shareholders in accordance with the terms of the Plan. See "Item 10 Additional Information - B. Articles and Bylaws - Class C Warrants" for a description of our Class C Warrants. CAPITAL EXPENDITURES Capital expenditures in 2004 totalled $36.2 million expended by us and our Predecessor, of which $35.2 million was expended in the solid wood segment and $1.0 million was expended in the pulp segment. Approximately $27.4 million of the solid wood capital expenditures was for logging roads. The following table summarizes the capital expenditures of the Company's two business segments for each of the last three years:
Period from Period from Years Ended December 31 Three Years Ended July 28 to January 1 to ------------------------------ December 31, 2004 December 31, 2004 July 27, 2004 2003 2002 ----------------- ----------------- -------------- -------------- -------------- Pro Forma(1) (2) Company Predecessor(2) Predecessor(2) Predecessor(2) ----------------- ----------------- -------------- -------------- -------------- (millions of dollars) Solid Wood Segment(3) $ 93.4 $ 11.6 $ 23.6 $ 28.4 $ 29.8 Pulp Segment 1.7 -- 1.0 0.7 -- ----------------- ----------------- -------------- -------------- -------------- $ 95.1 $ 11.6 $ 24.6 $ 29.1 $ 29.8 ================= ================= ============== ============== ==============
(1) Combined expenditure by the Company and the Predecessor. (2) Expenditure by the Predecessor excludes expenditures for Port Alice operations. (3) We have adopted a new accounting policy which requires that we expense the cost of spur roads in the period the work is incurred. Our Predecessor capitalized and amortized spur roads. See "Item 5 Operating and Financial Review and Prospects" for further details of the accounting policy change. - 13 - See "Item 5. Operating and Financial Review and Prospects" and "Item 17. Financial Statements" for further discussions of principal capital expenditures. See "Item 4. Information on the Company - A. History and Development of the Company - History" for a discussion of the disposition of the Port Alice pulp mill by our Predecessor. B. BUSINESS OVERVIEW COMPANY PROFILE We are a major integrated softwood forest products company operating in the solid wood and pulp businesses in British Columbia. Our primary business is solid wood and includes timber harvesting, reforestation, forest management, sawmilling logs into lumber and wood chips and value-added lumber remanufacturing. Our pulp operations consist of producing and marketing Northern Bleached Softwood Kraft ("NBSK") pulp. All of our operations are located in the coastal region of British Columbia. Our products are sold in 25 to 30 countries worldwide. Our allowable annual timber harvest from our regulated forest tenures was approximately 3.9 million cubic metres in 2004 (before take-back under the Forest Revitalization Act (British Columbia) ("FR Act") - see "Item 4. Information on the Company - B. Business Overview - Forest Resources - Take Back Settlement" below). We had an additional 100,000 and 19,000 cubic meters respectively of volume available from unregulated timber licences and private lands. We also have a perpetual supply of 330,000 to 350,000 cubic metres of sawlogs under a sawlog purchase agreement with a third party. Harvest operations are conducted on government owned timberlands, in accordance with the terms and conditions of our three TFLs, seven FLs, TLs and private lands external to these tenures. As of the date hereof, our manufacturing plants consist of: - six sawmills with a total annual production capacity of approximately 1.1 billion board feet of green lumber (including one sawmill with an annual kiln drying capacity of 70-100 million board feet) and 700,000 units of wood chips; - one pulp mill with a total annual production capacity of approximately 275,000 ADMT of pulp; - a value-added lumber remanufacturing plant with an annual drying and production capacity of approximately 80 million board feet; and - a log merchandiser. STRATEGY Our strategy has been to maximize margin from our integrated timber and mill resources by extracting value and controlling costs through producing both commodity and high value products. Our sawmills process high quality logs, including hemlock, balsam and western red cedar, into primarily long length, wide width and upper grade lumber and commodity grades of lumber. Lower quality logs are first processed by our log merchandiser in order to extract the lumber quality portion of the logs for processing at our sawmills. The residual portion of such logs and smaller or defective logs not suitable for the production of lumber are used to produce wood chips that are then used to produce pulp. Hog fuel, a by-product from the sawmills and the log merchandiser, is used at our Squamish NBSK pulp mill and is also sold to other pulp mills as an energy resource. Our value-added lumber remanufacturing plant dries, saws and trims lumber for use in producing higher value products such as mouldings, frames and panelling. We believe that the efficient utilization of our timber resources is essential. Our timber harvesting sector will maximize log quality and value to our milling conversion plants while providing a low cost fibre supply. External log sales will maximize margin by selling higher value logs that do not currently fit the cutting profile of our sawmills. As discussed elsewhere herein, we are undertaking a strategic review of our business and capital structure. See "Item 5. Operating and Financial Review Prospects - A. Operating Results of Operations - July 28, 2004 to December 31, 2004 - Outlook - B. Liquidity and Capital Resources - Outlook" for a discussion of our plans. We anticipate that the review will be completed by the end of 2005. INDUSTRY British Columbia is one of the world's leading forest products regions, with lumber shipments averaging approximately 14 billion board feet per year and pulp and paper shipments of approximately seven million tonnes per year, supported by an annual - 14 - timber harvest averaging approximately 74 million cubic metres over the previous decade. In 2004 strong markets coupled with changes to the stumpage system and cut control requirements resulted in a provincial harvest of approximately 91.8 million cubic meters. Catastrophic wildfires in the southern interior of the Province in 2003 and 2004 as well as a continued expansion of the mountain pine beetle epidemic in the central and northern interior have led to temporary increases in the AAC in these areas in order to salvage dead and dying timber. With higher interior AACs and harvest levels, there has been a corresponding increase in the availability of chips from interior sawmills for pulp production which has kept the value of pulp logs on the coast depressed. British Columbia has two major forest regions, coastal and interior, which are differentiated by climate, terrain and forest type and have given rise to two distinctly different segments of the forest industry. Historically, approximately one-third (or approximately 25 million m3) of British Columbia's timber harvest has been from the coastal region. In contrast to the interior forests, the British Columbia coastal forests are distinguished by a wet maritime climate, rugged topography and a variety of high-value coastal forest species with highly productive growing sites. Over the past decade, the coastal timber harvest has declined as a result of the establishment of new parks and protected areas and AAC reductions to conform harvest levels to long-term sustained yields. The forest products industry categorizes lumber into either hardwoods or softwoods. Softwoods such as hemlock, cedar, spruce, pine and fir are used primarily in construction due to their strength. The forest industry also grades lumber into various classifications according to quality. The two broad categories within which all grades fall, based upon the absence or presence of defects and the grain of the wood, are upper grade lumber and commodity grade lumber, respectively. Upper grade lumber is a grade of lumber which is substantially clear of defects and is obtained primarily from mature timber in areas which have not been previously harvested. RECENT LEGISLATIVE AMENDMENTS AND OTHER FOREST POLICY INITIATIVES In connection with the Forest Revitalization Plan (the "FR Plan"), in March 2003 the Provincial Government began implementing the most significant legislative reforms in the Province's forest industry in over 40 years. The British Columbia reforms include (1) market pricing - for stumpage purposes, (2) appurtenancy - the removal of the requirement to link fibre supply under harvesting licences to specified conversion facilities, (3) cut control - introduction of new cut control provisions and elimination of minimum harvesting requirements, (4) industry rationalization - through transfers, mergers or division of forest tenures and changes of control of licensees. The most controversial aspect of the new legislation involved the Provincial Government taking back approximately 20% of the AAC from major licence holders. The FR Act required that we surrender 685,216 m3 of our AAC derived from our TFLs (including TLs contained within TFLs) and FLs by March 31, 2006, as well as 20% of the unreverted area of TLs outside of TFLs. Details are provided under "Item 4. Information on the Company - B. Business Overview - Forest Resources - Take Back Settlement" below. Early in 2004, significant updates were made to the 2003 legislation package through the Forest Statutes Amendment Act (British Columbia). Late in the year another set of updates were made through the Forest Statutes Amendment Act (No.2) (British Columbia). In addition to the above provincial legislative changes, the Federal Government also introduced legislation which may have some impact upon the forest industry in British Columbia, one of which is the Species at Risk Act (Canada). This particular statute could affect and possibly redefine future forest practices in British Columbia should the Provincial Government fail to act to the Federal Government's satisfaction. It is not yet possible to gauge the overall impact of these legislative changes and policy initiatives on our business, as many have just been brought into force and are still in the process of being implemented. FOREST RESOURCES Timber Tenures Approximately 95% of all forest resources in British Columbia are owned by the Province and administered by the Ministry of Forests. Subject to provincial legislation and related regulations, rights to harvest timber on such land may be granted on behalf of the Province by the Ministry of Forests in the form of timber tenures. Our timber tenures comprise TFLs, FLs and TLs. We undertake to manage the forest lands to which our timber tenures relate to produce an annual harvest in accordance with the terms of our TLs and the AAC volumes determined by the Ministry of Forests for each TFL and FL. - 15 - A TFL is a replaceable timber tenure that requires the licensee to manage a specified area of timberland on a sustained yield basis. TFLs are granted for 25-year terms and, subject to satisfactory performance of its obligations under the TFL agreement by the licensee, are replaced by the Minister of Forests every five to 10 years with a new TFL with a 25-year term. Over 74% of our total AAC is derived from our three TFLs: TFL Nos. 6, 19 and 25. TFL Nos. 6, 19 and 25, acquired from our Predecessor, were replaced in 2000, 2001 and 1999, respectively, for 25 year terms. We expect the timeline for replacing TFL No. 25 is May 2006, however, the Province believes they still must perform adequate consultation with potentially affected First Nations. (See "Item 4. Information on the Company - B. Business Overview - First Nations Land Claims"). Other areas of the Province's timberlands which are not designated as TFLs are organized into TSAs. FLs are issued within each TSA with the AAC being determined at the TSA level and the overall harvest for the TSA managed by the Ministry of Forests on a sustained yield basis. FLs are volume-based tenures which authorize a specified volume of timber to be cut within a specific TSA. FLs generally have a term of 15 years and are replaceable every five to ten years with a new FL with a term of 15 years, subject to satisfactory performance by the licensee of its forest management obligations in the FL. We have seven FLs, two of which are located in the Mid Coast TSA. The remaining five are located in the Kingcome, Strathcona, Soo, Fraser and Sunshine Coast TSAs. All of the FLs we acquired from our Predecessor were replaced in 1998 for 15 year terms. The Ministry of Forests indicated that offers for replacement would be forthcoming once the Ministry has had adequate consultation with potentially affected First Nations. By the end of 2004 the Province had still not completed consultation on these tenure replacements. (See "Item 4. Information on the Company - B. Business Overview - First Nations Land Claims".) We also hold and harvest timber from 143 TLs, covering an area of approximately 85,000 hectares. TLs are area-based tenures which, if external to TFLs, permit the licensee to harvest the area over a specified period of time but without any periodic limits. Nineteen of our TLs are situated outside of our TFLs while 124 are included within them. At the end of 2004, our 143 TLs contained approximately 21 million m3 of mature timber. TLs within a TFL are managed on an integrated basis with other government and private timberlands within the same TFL and remain part of the TFL after harvest. The timing of harvesting from external TLs is subject to the practice guidelines of the Ministry of Forests, but is otherwise at our discretion. The terms of our TLs within our TFLs coincide with the terms of the TFLs in which they are incorporated. Those TLs which are outside of our TFLs expire at varying dates ranging from 2005 to 2016. Our Predecessor's 1998 study of its TLs situated outside of TFLs indicated a feasible harvest schedule of approximately 100,000 m3 annually over the next 20 years. In 2004, legislation governing TL renewals was replaced. The Crown may now agree to a single extension to a TL term for no longer than three years. This change will require us to re-evaluate our timetable to harvest this unregulated volume. In 2004 approximately 14% of our annual harvest combined with that of our Predecessor for the year ended December 31, 2004 was from TLs. In that regard, approximately 560,000 and 81,000 m3 were harvested respectively from internal and external TLs. Timber Harvest The AACs for TFLs and TSAs are determined by the Chief Forester of the Province and is intended to reflect timber conditions, regional and local economic and social interests, and environmental considerations. In mid-2003, the annual and periodic timber harvest requirements were changed as a result of the enactment of the Forestry Revitalization Amendment Act (British Columbia). For major licences, the volume of timber to be harvested over any five year cut control period, other than the final cut control period for a licence, continues to be capped at 110% of the sum of the AACs for that period and 100% of the sum of the AACs for the final five year cut control period. However, there are no longer any annual cut controls nor any minimum harvesting requirement for any cut control period. Furthermore, the tenure holder has lost the ability to request the carry forward of unharvested volumes of timber into new cut control periods and any unharvested volume left at the end of a cut control period can be taken by the Crown and reallocated to other parties. This legislative change was applied retroactively to the beginning of 2003 as it pertained to annual cut controls and retroactively to the beginning of any active five year period as it applied to five year cut control limits. At the beginning of 2004 two unresolved issues remained from 2003 in two licences regarding our Predecessor's failure to satisfy its 2002 harvesting requirements. The FL A19231 determination was resolved in our favour with no penalty assigned. The FL A16845 determination resulted in a permanent reduction of 10,000 m3 to this FL's AAC. - 16 - Existing legislation requires the Chief Forester for British Columbia to review sustainable timber harvesting levels in each TSA and TFL in the Province every five years and to issue a "determination" relating to the same which may recommend reductions or increases in the AAC of the TSA or TFL. The Provincial Chief Forester was expected to determine a new AAC for TFL 25 during the year. However, as discussed previously under "Item 4. Information on the Company - B. Business Overview - Forest Resources - Timber Tenures" a replacement for TFL 25 did not occur in 2004 and an AAC determination for TFL 25 is now anticipated in 2005. In summary, no adjustments as a result of these reviews were made to any of our tenure AACs in 2004. Under Part 13 of the Forest Act, the Province can "designate" areas of Crown land and then suspend or vary permits licences and plans in force within the area. At the same time, the Province can reduce the AAC attributable to the designated area. If the Provincial Government determines that it is in the "public interest", Part 13 of the Forest Act enables it to specify Crown land as a "designated area" for a period of up to a maximum of 10 years. Once Crown land is specified as a designated area, all harvesting and permit rights are suspended or varied. When the term of the designated area expires, the harvesting and permit rights will be restored. Following the first stage of the Central Coast Land and Resource Management Plans ("LRMP") in 2001, the Province designated various areas in the plan area and reduced the AACs of various tenures. On July 1, 2004 the Central and North Coast Part 13 designations were cancelled and then replaced. The AAC reductions that accompanied the first Part 13 designations were not reintroduced and AACs for affected licences returned to their previous levels. The Provincial Government met its announced goal of protecting 12% of the land area of the Province from development through the establishment of parks by the end of 2000. However, meeting this protection goal did not end land use planning processes that have continued through 2004. While the tenures contributing some 60% of our AAC have been dealt with under the regional Vancouver Island Summary Land Use Plan, the balance remained subject to other sub-regional land use processes. As a result of the FR Act reducing our harvesting rights (see below "Item 4. Information on the Company - B. Business Overview - Forest Resources - Take Back Settlement") our interests have declined in two outstanding LRMPs. We remained significantly engaged in the completion phase of the Central Coast LRMP and provided input to the North Coast LRMP where we have limited interests. We continued to engage with the Central Coast LRMP as part of the Coast Forest Conservation Initiative (a strategic forum of the five licensees operating in the area) and through interaction with the Rainforest Solutions Project (a strategic forum of the four major environment non-government organizations engaged in the LRMP) through the Joint Solutions Project. The latter sub-process has provided a mediated forum for communication between major licensees and the major environmental non-governmental organizations with interests in the Central Coast. The Chairman of the Central Coast LRMP submitted the final consensus report to the Provincial Government in May 2004. The Provincial Government used the report and the draft North Coast LRMP to begin negotiations with Central and North Coast First Nations on the final LRMP outcomes. The North Coast LRMP concluded with a consensus report in February 2005. First Nations negotiations commenced in the fall and are expected to complete in 2005. As these negotiations are confidential it is not possible to predict to what degree our tenures in the two LRMP planning areas, which includes FL A16845 and A16847 and Blocks 2 and 5 of TFL 25, will be impacted. However, we anticipate that we will see overall reductions in total AAC of similar magnitude to those under the previous Part 13 declaration, which was approximately 235,000 m3. Fibre Supply Our fibre requirements are met with logs harvested from our timber tenures and private lands, logs purchased on the open market, logs acquired under a sawlog purchase agreement entered into with a third party, log trading activities and logs acquired in exchange for wood chips. Our log trading department is responsible for ensuring an adequate supply of suitable logs for our plants. We engage in log trading activities to correct imbalances in the supply and demand in terms of the size, grade and species of logs. In addition, in order to ensure a continuing supply of timber, we maintain an active reforestation program. All of our timber harvesting operations are located in the coastal region of British Columbia. Logging is conducted primarily on government timberlands allocated to us under our TFLs, and to a lesser extent, under our FLs and TLs. In addition, some logging takes place on private lands. The timber covered by our timber tenures contains a substantial amount of presently harvestable mature timber stands that are located in areas that have never been commercially harvested. We believe that these stands are particularly valuable, as the substantial size of the trees should allow us to produce a high volume of upper grade lumber. Upper grade lumber is sold based upon appearance and is used in the manufacturing of doors, window frames, panelling, mouldings and siding. - 17 - The long-term species distribution of our timber resources is approximately 60% hemlock and balsam, and 35% cedar and cypress, with the balance made up of Sitka spruce, Douglas fir and various minor species. Production over the five year period through 2004 has closely mirrored this distribution with 42% hemlock, 18% balsam, 25% cedar, 5% cypress, 8% Douglas fir and 2% spruce harvested. This indicates that harvest plans are accessing the timber profile rather than targeting specific higher valued species. The available cut, including the AAC of our TFLs and FLs, log supply and log usage for each of the last three years are set out in the following table:
Actual Cut(1) ------------------------------------------------------------- Available Cut(2) Period from Period from Year Ended December 31 as at December 31 July 28 to January 1 to ------------------------- ----------------------------------- December 31, 2004 July 27, 2004 2003 2002 2004 2003 2002 ----------------- ------------- ----------- ----------- ------- ----------- ----------- Company Predecessor Predecessor Predecessor Company Predecessor Predecessor ----------------- ------------- ----------- ----------- ------- ----------- ----------- (thousands of cubic metres) TFLs.......................... 1,240 1,932 2,266 2,640 2,917 2,847 2,917 FLs........................... 304 351 261 311 976 929 1,009 Other lands(3)................ 33 65 89 81 449 449 449 ----- ----- ----- ----- ----- ----- ----- Total log production...... 1,577 2,348 2,616 3,032 4,342 4,225 4,375 ===== ===== ===== ===== ===== ===== ===== Total logs purchased.......... 418 749 1,216 1,017 ===== ===== ===== ===== Total logs consumed(4)........ 1,373 2,006 3,506 3,110 ===== ===== ===== ===== Total logs sold............... 527 670 721 781 ===== ===== ===== =====
(1) The actual cut is produced volume. It does not include residue volume, which contributes to the AAC total. (2) The available cut for the TFLs and FLs is the AAC determined by the Province's Chief Forester. There was a temporary prorated AAC reduction of 135,000 m3 to TFL 25 and 99,428 m3 to FL Al6845 that was lifted on July 1, 2004. The amounts shown are before the take back settlement discussed below. It is anticipated that a new AAC reduction will be instituted once government to government negotiations on the Central and North Coast LRMPs are concluded in 2005. (3) 19,000 m3 of available cut is attributed to private managed forests lands outside of TFLs, 100,000 m3 to TLs outside of TFLs and 330,000 m3 of sawlogs in perpetuity under a sawlog purchase agreement with a third party. (4) Includes logs consumed by the Port Alice pulp mill until May 11, 2004 when it was sold by our Predecessor. The five year cut control period for many of the tenures we acquired from our Predecessor expired at the end of 2001. Approximately 1.4 million m3 of the cumulative AAC available during the five year period was not harvested due to depressed economic conditions in 2001 and a delay in harvest approvals as a result of the Central Coast LRMP. The Predecessor requested that this deficient volume be returned in the subsequent cut control period. During 2003, the Ministry of Forests rejected the request for approximately 28,000 m3 of the request and gave potential approval on 22,000 m3, subject to First Nations review. In 2004 the balance of the carry forward requests were denied. However, the Company continued to negotiate that the carry forward volume within TFLs be retained as standing inventory and not reallocated to other licensees. We anticipate a satisfactory resolution in 2005. We have some 30 logging and forestry operations on Vancouver Island, the South, Central and North Coast Mainland and the Queen Charlotte Islands. Approximately 70% of our operations are on Vancouver Island. For historical and legal reasons, logging is conducted by a combination of both company operated and contractor operations. We plan and co-ordinate all of the timber production from the various operating sites. As a result of the FR Plan take back at the end of 2004 and 2005 there will be a reduction in the number of operations in 2005 and 2006. (See "Item 4. Information on the Company - B. Business Overview - Forest Resources - Take Back Settlement") Logs are sorted and directed to either our sawmills or log merchandiser according to size, grade and species. Saw logs that meet our cut program criteria are shipped primarily to our sawmills while lower quality logs and small or defective parts of trees go to our log merchandiser. Wood chips from sawmill operations and the log merchandiser are shipped to, and form the basic raw material for the Squamish pulp mill. Bundle booms and self-dumping log barges are used to transport logs by water to our manufacturing plants and to the Vancouver log market. A small percentage of logs are delivered to our manufacturing plants by truck. Our sawmills have a total annual production capacity of approximately 700,000 units of wood chips. These wood chips are used at our Squamish pulp mill as a source of fibre, traded with third parties for sawlogs or sold. Wood residue produced by the - 18 - sawmills and the log merchandiser, principally sawdust and bark, is either used as hog fuel in the boiler at the Squamish pulp mill or sold to other pulp mills. Wood chips produced at the log merchandiser are transported by barge to the Squamish pulp mill or traded with other operators. The wood chip supply and usage for each of the last three years from our operations are set out in the following table:
Period from Period from Years Ended December 31 July 28 to January 1 to ------------------------- December 31, 2004 July 27, 2004 2003 2002 ----------------- ------------- ----------- ----------- Company Predecessor Predecessor Predecessor ----------------- ------------- ----------- ----------- (thousands of units) Wood Chips produced.................... 304 439 760 639 Wood Chips purchased................... 194 147 240 185 Total Wood Chips consumed.............. 361 371 682 555 Total Wood Chips sold.................. 142 193 307 288
Take Back Settlement Retroactive to March 31, 2003, the Provincial Government as part of the FR Plan, reduced the Crown land portion of the AAC from major tenure holders by 20%, less an exemption for the first 200,000 m3, in exchange for compensation payable by the Crown. The Crown's purpose for the FR Plan includes increasing the timber supply for new forest initiatives and allowing new participants into the forest industry in the Province. The FR Plan states that approximately half of this volume will be distributed to open opportunities for woodlots, community forests and First Nations and the other half will be distributed to BC Timber Sales. BC Timber Sales is an independent organization within the BC Ministry of Forests created to develop Crown timber for auction to establish market prices for timber in the Province. Currently, BC Timber Sales manages 13% of the Province's AAC, with its share increasing to approximately 20% after the conclusion of the timber reallocation initiative. The take-back under the FR Plan reduced our harvesting rights by 685,216 m3 from our TFLs and FLs and 827 hectares from our TLs. Although the legal take-back is retroactive to March 31, 2003, all licence holders were able to continue to operate in the normal course of business within the take-back areas until the Minister of Forests issues a final take-back order. The first phase of our negotiations with the Crown regarding the reduction of our harvesting rights began in November, 2003. These negotiations have concluded in early 2005 and a settlement framework agreement was reached on compensation to be paid to us by the Crown. In 2005, pursuant to terms of the settlement framework agreement, we received $16.5 million in compensation for the loss of the 685,216 m3 of AAC and 827 hectares of timber licences. Under this agreement, we also received an advance payment of $5 million towards compensation for improvements we made to Crown land in the take-back areas. The amounts were included as receivables in restricted assets as of December 31, 2004 and these proceeds resulted in no gain or loss due to the fair value allocations as at July 28, 2004. For purposes of the take-back, all of our Crown tenures were grouped together. This grouping of licences enabled the Crown to take-back 20% of the total AAC from the group of licences as a whole rather than requiring 20% be taken from each licence in the group. Negotiations in 2004 established where the take-back areas for our reductions would come from. We received two Ministerial Orders at the end of 2004 that put the AAC reductions into effect. The first Order reduced various tenure AACs by a cumulative 526,171 m3 effective December 31, 2004 while the second reduced various tenure AACs by a further 159,045 m3 effective December 31, 2005. By the end of 2005, the FR Act will have reduced our TFL AACs by 292,455 m3 and the FL AACs by 392,761 m3. The considerable effort put into negotiations with the Crown resulted in much of the take-back volume coming from tenures not directly associated with forestry dependent communities. Negotiations in 2005 will finalize take-back areas, complete the compensation payments for improvements and determine if there will be cost recovery for costs already incurred for planning and inventories. The final comprehensive settlement agreement is expected to be reached in 2005. Our Predecessor had commenced five separate legal actions against the Province alleging that the Province: (a) breached its contractual obligations to purchase two of the Predecessor's timber tenures; (b) improperly administered the stumpage payment system that resulted in overcharging the Predecessor for stumpage over a period of several years; - 19 - (c) caused the Predecessor substantial damages as a result of a change in the calculation of royalty fees; (d) breached its obligation to provide fibre supply on an annual basis to the Predecessor's Port Alice pulp mill; and (e) caused the Predecessor to suffer harm as a consequence of the assistance package provided to Skeena Cellulose pulp mill by the Province. These actions were transferred to us on the Plan Implementation Date. In May of 2005 we settled these actions with the Provincial Government for $1.3 million in cash. In 2003, the Crown budgeted for two funds totalling $275 million - $200 million to compensate British Columbia forest companies for the reduction of harvesting rights and $75 million to mitigate impacts on their displaced contractors as well as company and contractor employees. In early 2005 the Crown increased each fund by $50 million in fiscal 2005/06. We are working with the Crown to determine compensation for our displaced workers and contractors. Stumpage Charges Stumpage is the fee that the Provincial Government charges forest companies to harvest timber from Crown land as well as private timber harvested on the Province's land. Prior to February 29, 2004 the Comparative Value Pricing ("CVP") system determined the amount of stumpage to be paid and was based on a revenue target set by the Provincial Government and adjusted on a periodic basis. The only exception was volume harvested under the coastal "Hemlock Pilot". The "Hemlock Pilot" was introduced in September 2000 and was based on the Ministry of Forests Small Business Program's Market Pricing System ("MPS"). Cutting permits that met a strict criteria (hemlock/balsam content of 60% or more) were converted from the CVP system to the Hemlock Pilot MPS. The objective was to convert these permits to a "market-based" system that better reflected the economic reality of the price for hemlock lumber. No new Hemlock Pilot cutting permits were accepted past October 1, 2000. On February 29, 2004, CVP was replaced by the Coast MPS. All CVP stumpage rates (as at January 1, 2004) were frozen as of February 28, 2004, and stumpage billing for active cutting permits was continued at those rates while cutting permits issued after this date will be assessed stumpage under the Coast MPS. However, for cutting permits active on February 28, 2004, licensees were able to select whether to continue using CVP or move to the Coast MPS. Operations made this selection on the basis of which rate would be most advantageous. The transition also allowed for permits to be surrendered and this opportunity was used to retire permits which no longer were economic. However, where a surrendered permit had been activated but not completed, the licensee would have been billed for this un-harvested remaining volume. Until 1995, on those lands held under TLs, a royalty was payable when the timber was harvested. In 1995, the Provincial Government eliminated royalties for TLs and replaced them with stumpage, which increased to 100% of regular stumpage in 2001. The following table illustrates the relationship of stumpage and royalty expenses relative to the total log production for each of the last three years:
Period from Period from Years Ended December 31 July 28 to January 1 to ------------------------- December 31, 2004 July 27, 2004 2003 2002 ----------------- ------------- ----------- ----------- Company Predecessor Predecessor Predecessor ----------------- ------------- ----------- ----------- (thousands) Log production (cubic metres) 1,579 2,348 2,616 3,032 Stumpage and royalty expenses $ 23,169 $ 35,987 $ 53,737 $ 60,297
Forest Management We manage our forest tenures and privately owned forest lands according to Sustainable Forestry Management Principles, which include a commitment to meeting or exceeding government requirements. As part of the rights and responsibilities that accompany the Crown tenures held by us, staff carry out or supervise pre-harvest planning, subsequent road building and harvesting operations and the follow-up silviculture treatments to establish free-growing second growth stands. - 20 - Pre-harvest planning includes a wide spectrum of activities from the collection of inventory and assessment data to the development of higher level Management Plans for TFLs and Forest Development Plans for specific planning areas within TFLs or FLs. These plans take a broad range of timber and non-timber factors into account, including but not limited to: wildlife, fisheries, water quality, soil sensitivity, terrain stability, visual quality, biodiversity, archaeological sites and cultural features, cave and karst features, timber species distribution and value. These higher level plans provide direction for the development of site specific plans and lead to the applications for specific road building and harvesting permits. Following harvest, we reforest all disturbed areas and conduct follow-up surveys and silvicultural treatments to ensure that these harvested areas meet "free-growing" requirements within specified timelines. Once free-growing, young stands are left to develop without further attention into second growth forests ready for subsequent harvest. All of these "basic" silviculture requirements are carried out at our expense. In 2004, we and our Predecessor spent $6.5 million in meeting basic silviculture obligations. Our tenures are managed by a staff of registered professional foresters and engineers who are involved in planning and inventory, road and bridge development, harvesting, silviculture and forest health and protection programs. We operate the Saanich Forestry Centre, which includes a 3 million seedling nursery and a tree seed orchard that produces select seed for reforestation. In April 2002, the Provincial Government replaced Forest Renewal B.C. with the Forest Investment Account ("FIA"), administered by PricewaterhouseCoopers. FIA is funded by an appropriation approved by the Provincial Government, rather than a stumpage levy, and authorizes the Minister of Forests to provide funding for certain forest management activities. Specific amounts are dedicated to provincial level programs, while other amounts are allocated to tenure holders. Together with our Predecessor, we accessed $1.4 million from FIA to carry out a range of projects in 2004. SALES, MARKETING AND DISTRIBUTION We produce and market upper grades and commodity grades of lumber and various grades of NBSK pulp which are sold in 25 to 30 countries worldwide. Our lumber products are marketed and sold in North America by a separate sales and marketing division that primarily sells our lumber products directly to wholesale lumber distributors and also sells a minor amount through agents. Sales to the Japanese market is performed by our Japanese sales group based in Vancouver who sell direct to the Japanese trading houses. European lumber sales are made via agents. Direct liaison with the consumers of our lumber products provides us with the ability to react quickly to changes in market conditions and customer requirements and achieve lower selling costs. We adjust our sawmill processing programs in order to customize products to meet the specific requirements of our customers. Most of our lumber products are sold green (not kiln-dried or air-dried) however, certain specialty products require kiln-drying. We offer a comprehensive line of traditional components for the Japanese market. Our focus in Europe is kiln-dried, high-grade specialty products used predominantly in Germany, Italy and the United Kingdom. Our NBSK pulp is a commodity product, and sales are handled by our pulp sales division and by agents. NBSK pulp is sold primarily to paper producers and tissue manufacturers. The distribution of the Company's sales by geographic area and by product line for each of the last three years is set out in the following table: - 21 -
Period from Period from Years Ended December 31 July 28 to January 1 to --------------------------------- December 31, 2004 July 27, 2004 2003 2002 ----------------- -------------- -------------- -------------- Company Predecessor(1) Predecessor(1) Predecessor(1) ----------------- -------------- -------------- -------------- (thousands of dollars) Sales by geographic area Canada........................... $ 86,860 $ 122,563 $ 152,675 $ 180,677 U.S.............................. 110,753 141,544 215,164 235,812 Asia............................. 94,509 111,948 168,569 178,282 Europe........................... 29,299 46,687 73,020 55,814 Other............................ 2,685 10,962 11,660 5,135 ----------------- -------------- -------------- -------------- $ 324,106 $ 433,704 $ 621,088 $ 655,720 ================= ============== ============== ============== Sales by product line Lumber........................... $ 173,344 $ 236,602 $ 328,692 $ 382,599 Logs............................. 59,502 81,255 106,480 123,280 Sawmill by-products.............. 10,894 14,576 22,000 19,572 ----------------- -------------- -------------- -------------- 243,740 332,433 457,172 525,451 Pulp(1).......................... 80,366 101,271 163,916 130,269 ----------------- -------------- -------------- -------------- $ 324,106 $ 433,704 $ 621,088 $ 655,720 ================= ============== ============== ============== Solid Wood Segment Lumber Canada......................... $ 16,455 $ 26,731 $ 24,190 $ 37,650 U.S............................ 105,885 136,273 204,894 230,253 Asia........................... 39,734 52,685 77,578 94,905 Europe......................... 8,898 12,332 18,683 16,783 Other.......................... 2,372 8,581 3,347 3,008 ----------------- -------------- -------------- -------------- 173,344 236,602 328,692 382,599 ----------------- -------------- -------------- -------------- Logs Canada......................... 59,502 81,255 106,480 123,280 ----------------- -------------- -------------- -------------- Sawmill by-products Canada......................... 10,894 14,576 22,000 19,572 ----------------- -------------- -------------- -------------- Total Solid Wood Segment............ $ 243,740 $ 332,433 $ 457,172 $ 525,451 ================= ============== ============== ============== Pulp Segment(1) Canada........................... $ 9 $ 1 $ 5 $ 175 U.S.............................. 4,868 5,271 10,270 5,559 Asia............................. 54,775 59,263 90,991 83,377 Europe........................... 20,401 34,355 54,337 39,031 Other............................ 313 2,381 8,313 2,127 ----------------- -------------- -------------- -------------- Total Pulp Segment............... $ 80,366 $ 101,271 $ 163,916 $ 130,269 ================= ============== ============== ============== Total Solid Wood Segment and Pulp Segment $ 324,106 $ 433,704 $ 621,088 $ 655,720 ================= ============== ============== ==============
(1) Pulp sales of our Predecessor exclude sales from the Port Alice pulp mill which was sold by our Predecessor on May 11, 2004 to PASCI. - 22 - The following two charts illustrate the aggregate geographic distribution of our and our Predecessor sales for the year ended December 31, 2004 and for our Predecessor for the year ended December 31, 2003: PRO FORMA(1)(2) YEAR ENDED DECEMBER 31, 2004 Canada 28% U.S. 33% Asia 27% Europe 10% Other 2%
PREDECESSOR(2) YEAR ENDED DECEMBER 31, 2003 Canada 25% U.S. 34% Asia 27% Europe 12% Other 2%
(1) Combined sales of the Company and Predecessor. (2) Excludes the Predecessor's sales from the Port Alice pulp mill. Lumber from our sawmills is delivered to market by ocean-going vessel and barge, and by rail and truck. Pulp from the Squamish pulp mill is shipped by ocean-going vessel and barge. In a normal operating year, there is some seasonality to our operations with higher activity in the second and third quarters as construction activity, particularly in the US tends to be higher. Logging activity may also vary depending on weather conditions due to snow and ice in the winter and the threat of forest fires in the summer. Lumber shipments and sales into North American lumber markets are generally higher during the period from mid-March to mid-September of each year, coinciding with the preferred weather for housing construction. Other export markets for the solid wood segment do not have a pronounced seasonal pattern. Pulp shipments and sales are not seasonal in nature. COMPETITION We compete on both a domestic and international level with a large number of forest products firms, ranging from very large integrated firms to smaller specialty firms. Many of these competitors have substantially greater financial and operating resources than we do. We also compete indirectly with firms that manufacture substitutes for solid wood products, including non-wood and engineered wood products. The markets for pulp and lumber are highly competitive and sensitive to cyclical changes in industry capacity and the economy, both domestically and internationally. Changes in the level of competition, industry capacity and the global economy have a significant impact on our selling prices and overall profitability. Our competitive position is influenced by the availability, quality and cost of fibre, energy and labour, and our plant efficiencies and productivity in relation to our competitors. A number of forest policy changes have been announced and implemented by the Provincial Government. See "Item 4. Information on the Company - B. Business Overview - Recent Legislation Amendments and Other Forest Policy Initiatives". Greater ability to acquire new tenure has been balanced by a requirement for a "competition" test to ensure that markets for logs or chips are not detrimentally affected. The regulation to determine the competition test has not been prescribed. In the interim, the Provincial Government is determining whether competition is unduly restrictive for this purpose on a case by case basis. Hence, the impact cannot be determined at this point in time. Our competitive position has also been affected by countervailing duties and anti-dumping rates imposed by the government of the United States on shipments of softwood lumber into the United States from Canada. See "Item 4. Information on the Company - B. Business Overview - Softwood Lumber Dispute". - 23 - ENVIRONMENT Environmental Policy We are committed to the protection of the environment and work with government and other stakeholders to identify and address issues of environmental concern in all aspects of our business. Our operations are subject to a wide array of federal, provincial and local environmental legislation regulating water, land and air discharges and solid and hazardous waste management, disposal, transportation and remediation. To oversee and co-ordinate company-wide efforts to comply with such legislation, we have established an Environmental, Health and Safety Committee of the Board of Directors and implemented a reporting system that is designed to monitor environmental compliance with regulatory requirements, identify environmental issues and communicate them to all levels of management and operations. In conducting our operations, we attempt to minimize environmental impact through sound forestry and environmental management practices that meet or exceed government standards and adhere to an environmental policy based on the following: - Assessing and evaluating environmental risk on an ongoing basis in order to set environmental objectives and targets as well as proper operational control; - Allocating sufficient resources to ensure continuing compliance with environmental responsibilities; - Meeting or surpassing all applicable environmental regulations; - Establishing internal and external auditing and reporting procedures necessary to monitor environmental performance, continually improving environmental practices and the prevention of pollution; and - Promoting environmental awareness among our staff, employees and contractors and communicating our environmental performance, both internally and to the public. Environmental Management We have established an Environmental Management System ("EMS") for our forest operations, sawmills and pulp mills. Through third party audits by the Quality Management Institute, as well as internal audits, we have confirmed that the EMS remains in conformance with the International Organization for Standardization ("ISO") 14001 standard. These audits provide important feedback to senior management to ensure that staff, employees and contractors conduct their activities in compliance with the legislation and regulations relevant to the forest products industry. We use documents such as Standard Operating Procedures and Emergency Response Plans, and processes such as Management Review and Corrective/Preventative Action Requests, as a means through which to achieve adherence to our environmental policies. As of the date hereof, we believe that our solid wood segment is in substantial compliance with all applicable environmental legislation. As of the date hereof, we believe that environmental performance at the Squamish kraft mill is substantially in compliance with the requirements of applicable environmental legislation. Particulate emissions from the power boiler were a concern when burning certain types of hog fuel. Generally, we no longer burn these types of hog fuel in the power boiler. In addition, we are planning to install a new opacity meter this summer to optimize particulate emissions on the power boiler. Recovery boiler particulate emissions are close to permit requirements when the pulp mill is at maximum operating rates. Options for reducing particulate emissions are being investigated, including: (i) Skewed Gas Technology in the precipitator; (ii) Indirect liquor heater to increase liquor solids to the recovery boiler; and (iii) Automatic port cleaners for air flow stabilization. As of the date hereof power boiler dioxin/furan testing at the Squamish pulp mill meet the Canada Wide Standard of 0.5 ng/m3, measuring 0.392 ng/m3. The standard will be reviewed by Environment Canada in 2006 to determine if it can be lowered. This review is conducted every three years. -24- As of the date hereof, the environmental focus of the Federal Government and Provincial Government with respect to the pulp and paper industry is on air quality. The Federal Government is identifying "criteria air contaminants" ("CAC's") for which limits will be established. The BC Ministry of Water, Land and Air Protection will take the lead role in establishing the federal limits for CAC's including ozone, sulphur dioxide and PM2.5 (particulate matter below 2.5 micron in size). The limits have, for the most part been achieved in the Province. However the implementation of "no net increase" is unclear at this time. The Federal Government's primary initiative with respect to air quality improvement is the reduction of greenhouse gas emissions (Kyoto Protocol). Negotiations are in progress to determine the forest industry allocation with respect to greenhouse gas reduction requirements. Once this has been determined reduction requirements for individual operations can be assigned. The total greenhouse gas reduction requirement from large final emitters (this includes the pulp and paper industry) has recently been reduced from 55 mega tonnes to 45 mega tonnes. This should result in lower reduction requirements for the pulp and paper industry. Also with respect to air quality issues, the Provincial Government has initiated the process of developing an Airshed Management Plan for the Sea to Sky corridor road from Vancouver to Whistler, B.C. An Air Quality Committee has been established and includes representatives from the municipal governments, Ministry of Water, Land, and Air Protection, Ministry of Transport, Ministry of Health, our Squamish mill as well as another pulp and paper operation in the area, and First Nations representatives. A second meeting of the committee was held in June 2005 to discuss the vision, goals, and indicators for the Sea to Sky Corridor Air Quality Management Plan. We are represented at the committee and attend all meetings. The new Contaminated Sites Regulations (British Columbia) came into effect in the fall of 2004. In general, the new legislation will simplify the site remediation process should it be required. Forest certification is a worldwide initiative that provides independent third party assessments of sustainable forest management practices by forest products producers. It is voluntary and involves a systematic verification and assessment process against a set of criteria and elements. The most broadly accepted Canadian forest values generated to date are embodied in the Canadian Council of Forest Ministers ("CCFM") Sustainable Forest Management ("SFM") criteria and elements. The CCFM SFM criteria and elements are fully consistent with those of the Montreal and Helsinki processes, which are both recognized by governments around the world. The requirements of the Canadian Standards Association ("CSA") Z809 Standard are defined by the CCFM SFM criteria. In this standard, use of the CCFM SFM criteria and elements as a framework for value identification provides vital links between local level SFM and national and provincial-scale forest policy, as well as a strong measure of consistency in identification of local forest values across Canada. We undertook a review of our complementary CSA Chain of Custody ("COC") certification and based on the review small modifications were completed early 2005. The COC allows our Duke Point Sawmill, Silvertree-Vancouver Division Sawmill and Chemainus Value Added Division to apply the CSA product label and ensures customers that these products originate from sustainable managed forests. Positioning our operations to address customer needs will drive future certification initiatives. Management systems and COC documents continue to be developed for the remaining facilities on an as needed basis. In January 2004 the Squamish pulp mill achieved the Nordic Swan eco-label standard. Certifications obtained for our forest, solid wood operations and pulp mill are summarized as follows: Forest Operations - ISO 14001 Environmental Management System Certification of all forest operations (April 2003, re-registration scheduled by April 2006) - CSA Z809 2002 Sustainable Forest Management Certification of North Vancouver Island Region (December 2004, re-registration scheduled by December 2007) - CSA plus 1163 COC Certification for North Vancouver Island region (August 2002, re-qualification scheduled by November 2007) -25- Solid Wood Manufacturing - CSA Plus 1163 COC Certification for Duke Point (January 2002) and Silvertree-Vancouver Division (February 2003). Value-Added Facility - CSA Plus 1163 COC Certification (February 2002, re-qualified March, 2003) - ISO 14001 Environmental Certification (February 2002) Pulp Mill - Squamish - ISO 9001-2000 Quality Assurance Certification (1993) - ISO 14001 Environmental Management System Certification (May 1999) In addition to regular environmental programs, we have been active with other non-core business related environmental initiatives. Five salmon hatcheries supported in whole or in part by us released more than 800,000 salmon fry in 2004. We also actively participate in the BC Hydro Power Smart Program. FIRST NATIONS LAND CLAIMS First Nations in British Columbia have made claims of rights and title to substantial portions of land in the Province including areas where our timber tenures and operations are situated, creating uncertainty as to the status of competing property rights. The Supreme Court of Canada has held that aboriginal groups may have a spectrum of aboriginal rights in lands that have been traditionally used or occupied by their ancestors; however, such rights or title are not absolute and may be infringed by government in furtherance of a legislative objective, including forestry, subject to meeting a justification test. The effect on any particular lands will not be determinable until the exact nature of historical use, occupancy and rights in any particular piece of property have been clarified. First Nations are seeking compensation from governments with respect to these claims, and the effect of these claims on timber tenure rights, including our timber tenures, cannot be estimated at this time. The Federal Government and Provincial Government have been seeking to negotiate settlements with aboriginal groups throughout British Columbia in order to resolve these claims. In 1992, the Federal Government and Provincial Government instituted a tripartite treaty negotiation process with the First Nations Summit, representing the majority of the First Nations in British Columbia. Any settlements that may result from these negotiations may involve a combination of cash, resources, grants of conditional rights to gather food on public lands, and some rights of self-government. The effect of such a settlement on our timber tenures or the amounts of compensation that we would receive for any taking from our tenures as a result of this process, if any, cannot be estimated at this time. Some groups have also commenced litigation to pursue their claims. Subsequent to our Predecessor filing under the CCAA, one First Nation, being the Quatsino First Nation of the Kwakiutl Nation, commenced action against one of Doman's subsidiaries, and a number of other forest companies and claiming in respect of the subsidiary declaratory relief as to aboriginal title as to certain licenced tenures of the subsidiary and general unspecified damages and compensation for use of forest lands and trees. Pursuant to a negotiated Court order dated January 23, 2004 the Quatsino were permitted to and did file a proof of claim in respect of claims that were capable of compromise under the CCAA. These compromised claims included monetary claims or debt claims that the Quatsino might have as against the subsidiary, but did not include claims as to aboriginal title which are not capable of compromise under the CCAA. As a stated effort to facilitate the reorganization of the Predecessor the proof of claim of the Quatsino was valued by them at $1.00 and it was accepted by the Predecessor in such amount. Thus all claims of the Quatsino capable of compromise under the CCAA were valued at $1.00 and they received dividends on that amount under the Plan filed under the CCAA. However, the aboriginal title claims of the Quatsino were not affected by the Plan filed under the CCAA. In a landmark decision in late 2004, the Supreme Court of Canada determined that there is a duty to consult with and, where appropriate, accommodate First Nations where government decisions may impact on claimed, but as yet unproven, aboriginal rights or title. This decision also provided much needed clarification of the duties of consultation and accommodation. The Court found that third parties are not responsible for consultation or accommodation of aboriginal interests and that this responsibility lies with government. -26- Current Provincial Government policy requires that forest management and operating plans take into account and not infringe on aboriginal rights and title, proven or unproven, and provide for consultation with First Nations. This policy is reflected in the terms of our timber tenures, which provide that the Ministry of Forests may refuse to issue cutting permits in respect of a timber tenure if it is determined that the forestry operation would interfere with aboriginal rights and title. First Nations have, at times, sought to restrict the Provincial Government from granting or renewing forest tenures and other operating authorizations without their consent if these decisions could affect lands claimed by them. In addition, the Provincial Government is also negotiating Forest and Range Agreements with certain First Nations. These agreements are intended to provide workable accommodation of aboriginal interest that may be impacted by certain forestry decisions until such time as those interests are settled through the treaty process. To date, the Provincial Government has entered approximately 38 such agreements with various First Nations throughout the Province, including a number with First Nations whose traditional territories overlap some of our operating areas. As a result of the 2004 Supreme Court of Canada decision, industry does not have an obligation to consult or accommodate aboriginal interests, however, industry has a considerable interest in ensuring that Government conducts its consultation properly. We believe that the fostering of mutually beneficial business relationships with First Nations will facilitate these consultations and accommodation processes. We are aware of some 40 First Nations or First Nation Associations which have interests in the area within our tenures. Our Predecessor developed and we continue to develop working relationships with many First Nations. We have timber harvesting, silviculture, planning and other capacity building arrangements with First Nation groups. The issues surrounding aboriginal title and rights are not likely to be resolved by the Provincial Government in the near future. We are committed to working with both the Provincial Government and First Nations to resolve the issues. SOFTWOOD LUMBER DISPUTE On March 22, 2002 and further adjusted on April 25, 2002, the USDOC issued its final determination in the countervailing and anti-dumping investigations. The USDOC's final determination in the countervailing investigation resulted in a duty rate of 18.79% to be posted by cash deposits from May 22, 2002, the effective date of the Final Order. The USDOC's final determination in the antidumping investigation resulted in company specific duty rates ranging from 2.18% to 12.44% on the six companies investigated and an "all others rate" of 8.43% for all other companies, including our Predecessor. On May 16, 2002, the USITC published its final written determination on injury and stated that Canadian softwood lumber threatens material injury to the U.S. industry. As a result, effective from the Final Order date, cash deposits are required for shipments at the rates determined by the USDOC. All prior bonds or cash deposits posted prior to May 22, 2002 were refunded. Effective December 20, 2004, the USDOC implemented new deposit rates for shipments made after this date. The USDOC reduced the countervailing duty deposit rate to 17.18% from 18.79% and all the "all others" anti-dumping deposit rate to 3.78% from 8.43% for companies, including our Predecessor, that had requested a company-specific review. These new deposit rates are based on the USDOC's final rate determinations for the first administrative review period (May 22, 2002 to March 31, 2003 for the countervailing duty case and May 22, 2002 to April 30, 2003 for the anti-dumping duty case). Effective February 24, 2005, the USDOC further reduced the countervailing duty deposit rate to 16.37% to adjust for Ministerial errors. On June 1, 2005, the USDOC issued preliminary results for the second administrative review period from May 1, 2003 to April 30, 2004 in the anti-dumping case and April 1, 2003 to March 31, 2004 in the countervailing duty case. The review process resulted in preliminary anti-dumping rates ranging from 0.51% to 5.62% for the eight selected companies reviewed and a review specific average of 2.44% for all of the other companies that had requested a company-specific review. The review process also resulted in a preliminary countervailing rate of 8.18% for all imports of softwood lumber from Canada excluding companies and certain products from the Maritime provinces. These rates are preliminary, subject to review and comments, with expected final rates to be published in October of 2005 (unless the review is extended). The final rates will also be subject to appeals as discussed below. We were recently notified that we were not entitled to use the reduced "all others rate" of 3.78% on the basis that we had not filed a changed circumstances review request with the USDOC to confirm that we are the successor in interest to our Predecessor. We have since filed an application for an expedited changed circumstances review and while we believe the outcome will be favourable, we can provide no assurance as to its outcome. In the interim we will post anti-dumping deposits at the recently revised higher rate of 11.54%. As we had been posting deposits at our Predecessors' "all others rate" of 3.78% we may be required to post additional deposits amounting to $2.8 million covering the period from December 20, 2004 to April 26, 2005. We have received a preliminary ruling on our application accepting our position. A final ruling is expected in August 2005 provided there are no objections to the preliminary ruling by any of the parties involved. -27- We expensed $21.1 million in duties for the period from July 28, 2004 to December 31, 2004 representing the combined final countervailing and antidumping duties of 27.22% for the period from May 22, 2002 to December 20, 2004 and 20.96% from December 20, 2004 ($24.0 million for the period from January 1, 2004 to July 27, 2004 for the Predecessor; year ended December 31, 2003 for the Predecessor - $36.1 million). We together with our Predecessor have paid US$73.3 million in cash deposits since May 22, 2002 to December 31, 2004. We and other Canadian forest product companies, the Federal Government and Canadian provincial governments (collectively "Canadian Interests") categorically deny the US allegations and strongly disagree with the final countervailing and anti-dumping determinations made by the USITC and USDOC. Canadian Interests continue to pursue appeals of the final countervailing and dumping determinations with the appropriate courts, NAFTA panels and the WTO. NAFTA and WTO panels have issued several rulings with respect to the countervailing and anti-dumping investigations. The USDOC has responded to these rulings and modified its methodology and calculations in evaluating and calculating subsidy and dumping rates. However, primarily in the countervailing case, with each response to NAFTA panel rulings, the USDOC's methodology changes have resulted in substantive changes to the duty rates, both up and down, making it difficult to accurately estimate the final rates after all appeals will be complete. As a result, we have not recorded any receivable for prior periods as a result of the change in the cash deposit rate applicable to new shipments. A NAFTA panel, in reviewing the "threat of injury" determination made by the USITC, has ruled that the USITC has not been able to provide the NAFTA panel with substantive evidence to support the USITC ruling of "threat of injury". The NAFTA panel requested that the USITC reverse its ruling on "threat of injury" and the USITC reluctantly complied. US interests are appealing this ruling to an Extraordinary Challenge Committee ("ECC") panel. If the ECC panel upholds this finding by the NAFTA panel, we would expect that all prior duties paid would be refunded with interest. However, there can be no certainty that the USDOC would comply with this ruling and US industry and trade groups have indicated that they may even challenge the constitutional validity of NAFTA in US courts. The final amount of countervailing and anti-dumping duties that may be assessed on our Canadian softwood lumber exports to the US cannot be determined at this time and will depend on appeals of the final determinations to any reviewing courts, the outcome of proceedings before NAFTA or WTO panels or on a negotiated settlement. Notwithstanding the final rates established in the investigations, the final liability for the assessment of countervailing and anti-dumping duties will not be determined until each annual administrative review process is complete, including appeals. HUMAN RESOURCES As of December 31, 2004, we had 2,027 employees (of which 1,682 are hourly paid workers). The majority of our hourly paid workers in our solid wood segment are represented by the IWA Council of the United Steel Workers Union. We are a member of Forest Industrial Relations Limited, which represents forestry companies in the coastal region of the Province in their negotiations with the IWA Council. In May 2004, a new collective agreement was implemented. The agreement expires on June 14, 2007. Our hourly workers in the pulp segment are represented by the PPWC. In April 2003, a five year collective agreement with the PPWC was implemented. The agreement expires on April 30, 2008. In our logging operations approximately 50% of the harvesting operations is performed by contractors. The majority of the contractors have replaceable contracts under the Timber Harvesting Contract and Subcontract Regulation (British Columbia). C. ORGANIZATIONAL STRUCTURE As noted above, on July 27, 2004, our Predecessor implemented its Plan and emerged from protection under the CCAA. We were incorporated for the purposes of implementing the Plan and on July 27, 2004, the Plan Implementation Date, we acquired the Solid Wood Assets and Pulp Assets of our Predecessor. Until the Plan was implemented, we did not carry on business and had no material assets or liabilities. We commenced business on July 28, 2004, after the implementation of the Plan. The following chart sets out our significant subsidiaries and their primary activities. All of our subsidiaries are wholly-owned and were incorporated or continued under, and are all governed by, the CBCA. -28- WESTERN FOREST PRODUCTS INC. WESTERN WFP WFP LUMBER PULP WESTERN SALES LIMITED LUMBER LTD. LIMITED (Squamish pulp (holds certain timber (lumber sales) operations) tenures and sawmills) D. PROPERTY, PLANTS AND EQUIPMENT SOLID WOOD FACILITIES We own six sawmills, a log merchandiser and a value-added lumber remanufacturing plant. Five of the six sawmills use some computer controlled equipment to optimize the lumber recovery at the mill. Our high quality timber supply and the particular design of our sawmills enable us to produce specialty products such as upper grade lumber, lumber with long lengths (over 20 feet) and wide widths (over 10 inches), lumber produced from western red cedar, and baby squares and beams used in traditional Japanese housing. These products command premium prices compared to commodity construction grades, such as SPF 2x4 lumber. Much of the softwood timber in North America is not capable of producing substantial quantities of these specialty products, as the trees are too small. Five of our sawmills are located on Vancouver Island. Our Duke Point and Nanaimo sawmills are both located in Nanaimo. Our Ladysmith and Saltair sawmills are both located on the same property in Ladysmith. Our other sawmill on Vancouver Island is located at Cowichan Bay. The Duke Point and Nanaimo sawmills process large diameter logs of mixed species, while the Cowichan Bay, Ladysmith and Saltair sawmills process small diameter logs. All of our sawmills can handle mixed species. All of our sawmills on Vancouver Island have adjacent water lots which are leased from the Province and have barge loading facilities to handle water-borne shipments of sawmill products. The Duke Point, Cowichan Bay, Ladysmith and Saltair sawmills are situated on land we own. The Nanaimo sawmill is situated on an 8.5 hectare site, which includes 6.1 hectares that we own and 2.4 hectares leased from the Nanaimo Port Authority. The Nanaimo sawmill cuts predominantly Douglas fir and hemlock logs and produces a wide range of high-value specialty lumber products primarily for the Japanese market. The Saltair sawmill can cut for both the Japanese and North American markets and can process western red cedar. The Saltair and Nanaimo sawmills have received authorization to stamp their lumber as having met the quality control requirements of the Japanese Agricultural Standard, indicating that the lumber meets rigorous Japanese structural grading rules. The Saltair sawmill has three natural gas powered kilns that have been refurbished and are estimated to be capable of drying 70-100 million board feet of dimensional lumber per year. The Silvertree-Vancouver sawmill is located in Marpole, a suburb of Vancouver. It specializes in processing cedar logs and can also process large diameter hemlock. The sawmill is located on land which fronts the Fraser River and is owned by us. The mill has barge loading facilities to handle water-borne shipments of sawmill products. The water lots necessary to operate the mill are leased from the North Fraser Port Authority. The current annual lumber production capacity and actual lumber production for each of our sawmills for each of the last three years are set out in the following table: -29-
Lumber Production (MMfbm) -------------------------------------------------------------- Period from Period from Capacity(1) July 28 to January 1 to Years Ended December 31 (MMfbm) December 31, 2004 July 27, 2004 2003 2002(2) -------------------------------------------------------------- Sawmills Company Predecessor Predecessor Predecessor - ------------ ----------- ----------------- ------------- ----------- ----------- Cowichan Bay 215 56 79 122 122 Duke Point 225 52 63 86 89 Ladysmith 170 29 57 90 46 Nanaimo 200 60 75 128 122 Saltair 170 50 73 120 111 Silvertree 160 42 42 69 39 ----- --- --- --- --- 1,140 289 389 615 529 ===== === === === ===
(1) As at December 31, 2004 based on three shifts and 250 operating days. Normally operating two shifts. (2) In 2002, an additional 33 million board feet were produced at the Chemanius and old Silvertree sawmills prior to their ceasing operations. Our log merchandiser is located at Nanaimo on Vancouver Island. The plant extracts the lumber quality portion out of lower quality logs and processes the balance into wood chips and other by-products. The lumber portion is sent to our sawmills for processing and the wood chips are used principally at the Squamish pulp mill. The water lots necessary to operate this plant are leased from the Province and the Nanaimo Port Authority. Our value-added lumber remanufacturing plant dries, cuts, resaws and trims lumber into various grades and dimensions, which are used primarily in the manufacturing of mouldings, panelling and frames for doors and windows. The plant is located in Chemainus and is situated on land owned by us. It is comprised of 10 kilns, which are utilized to dry lumber produced at our sawmills, a planer mill, and resawing, sorting and trimming facilities. The plant has an annual drying and production capacity of approximately 80 million board feet of lumber and in 2003 processed 38 million board feet of lumber. See "Item 4. Information on the Company - B. Business Overview - Environment" for a discussion of environmental matters. Each of our sawmills, our log merchandiser and value-added lumber are subject to a first priority charge under the Secured Bond Indenture. See "Item 10. Additional Information - B. Articles and Bylaws - Secured Bonds - Working Capital Facility" for a discussion of encumbrances on our assets. PULP MILL We own and operate a NBSK pulp mill on the mainland of British Columbia near Squamish. The Squamish mill is located on the coast with easy access to water transportation. Electrical power consumption of approximately 23 mega watts annually is provided approximately two-thirds from the BC Hydro grid and one-third from our own hydro and thermal units. Fibre for the Squamish pulp mill comes from wood chips mostly produced by our sawmills and log merchandiser. The Squamish NBSK pulp mill is located approximately 65 kilometres north of Vancouver. The mill has a high quality water supply, access to a natural gas pipeline, close proximity to sources of raw materials, major storage and shipping terminals, and access via ferry to Squamish and then by road to Vancouver. The Squamish pulp mill is situated on land we own. The water lot necessary to operate the mill is leased from the Province. NBSK pulp is a long-fibred northern softwood pulp manufactured from primarily a mixture of hemlock, balsam, fir and cedar wood chips and is noted for its strength, whiteness and absorption properties. NBSK pulp is used to produce a variety of products, including lightweight publication grades of paper, tissues and hygiene products. The Squamish pulp mill received its official ISO 9001 registration in May 1993 and ISO 14001 registration in May, 1999. -30- The actual pulp production for the Squamish pulp for each of the last three years are set out in the following table:
Period from Period from Years Ended December 31 July 28 to January 1 to --------------------------- December 31, 2004 July 27, 2004 2003 2002 Capacity ------------------------------------------------------------------- ADMT Company Predecessor Predecessor Predecessor ------------------------------------------------------------------------------- Pulp Production (thousands of ADMT) 275(1) 119 147 253 204
(1) Annual production capacity as at December 31, 2004 based on three shifts per day and 340 days per year. See "Item 4. - Information on the Company - B. Business Overview - Environment" for a discussion of environmental matters. Our pulp mill is subject to a first priority charge under the Secured Bond Indenture. See "Item 10. Additional Information - B. Articles and Bylaws - Secured Bonds - Working Capital Facility" for a discussion of encumbrances on our assets. ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS The following discussion and analysis reports and comments on the financial condition and results of our operations on a consolidated basis, for the period commencing July 28, 2004 and ending December 31, 2004 to help security holders and other readers understand our Company and the key factors underlying our financial results. The discussion below is based upon, and the financial statements have been prepared in accordance with, Canadian GAAP and presented in Canadian dollars. For a description of the differences between Canadian GAAP and U.S. GAAP, see note 13 to the consolidated financial statements for the period commencing July 28, 2004 and ending December 31, 2004 and note 17 of our Predecessor's consolidated financial statements for the period commencing January 1, 2004 and ending July 27, 2004 and for the years ended December 31, 2003 and 2002, included in this report under "Item 17. Financial Statements". In addition to discussing and analyzing the financial condition and results of operations, the following discussion and analysis compares our results for the period from July 28, 2004 to December 31, 2004 combined with our Predecessor's results from January 1, 2004 to July 27, 2004 (pro forma) with the years ended December 31, 2003 and 2002 of our Predecessor. Our consolidated financial and other information may not be comparable with the consolidated financial information and other information issued by our Predecessor due to the differences in our corporate and financial structure from that of our Predecessor, the application of "fresh start" accounting as explained in note 1 to our consolidated financial statements as a result of the implementation of our Predecessor's Plan and differences in certain accounting policies from that applied by our Predecessor. Accordingly, the discussion and analysis of our financial condition and results of operations compared to our Predecessor should be reviewed with caution. We have prepared the financial information contained in the following discussion and analysis in accordance with Canadian GAAP. Reference is also made to Operating EBITDA. Operating EBITDA is defined as operating earnings (loss) plus amortization of property, plant and equipment plus write-down of property, plant and equipment and operating restructuring costs. Our management uses Operating EBITDA as a benchmark measurement of its own operating results, and as a benchmark relative to its competitors. Management considers Operating EBITDA to be a meaningful supplement to operating income as a performance measure primarily because depreciation expense and non-recurring capital asset impairment charges are not an actual cash cost, and depreciation expense varies widely from company to company in a manner that management considers largely independent of the underlying cost efficiency of their operating facilities. In addition, we believe Operating EBITDA is commonly used by securities analysts, investors and other interested parties to evaluate our financial performance. Operating 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, Operating EBITDA does not reflect the impact of a number of items that affect our net income (loss). The table below under "Item 5. Operating and Financial Review and Prospects - A. Operating Results - Results of Operations - 2004 versus 2003 - Comparison to the Results of Prior Periods of our Predecessor" provides a reconciliation of net earning (loss) attributable to common shares for the periods indicated. Operating 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 Operating EBITDA in the same manner, Operating EBITDA as calculated by us may differ from Operating EBITDA as calculated by other companies. -31- A. OPERATING RESULTS As discussed above, the Company's business is the harvesting of timber and the manufacturing and sale of lumber and pulp for worldwide markets. Factors that have affected and will continue to affect operating results include the economic health of the US, Japan and Canada, which are the leading markets for the Company's lumber products, and of Asia and Europe, which are the leading markets for the Company's pulp products. Demand for the Company's lumber products is significantly driven by the level of US housing starts, and indirectly is a function of the health of the US economy and mortgage borrowing rates. The supply of lumber to the US is tied to the levels of lumber industry production, the ability or inability of certain producers to shift production between different lumber markets and, since May 2002, the countervailing and anti-dumping duties imposed by the US upon Canadian producers of softwood lumber exports to the US. The Company, as a result, is unable to maintain significant lumber shipments to the US without incurring significant costs. We also market our lumber products to the Japanese market. As a result, the condition of the Japanese economy has a significant impact on the demand for our lumber products. The pulp industry is highly competitive on a global basis and producers compete primarily on price. Over the long-term, demand for NBSK pulp is a function of economic growth generally, and paper and paperboard demand specifically. The supply of market pulp is a function of both industry production and the level of inventories that exist, and, over short periods of time, NBSK prices are subject to wide fluctuations depending on the balance between demand and supply. -32- RESULTS OF OPERATIONS - JULY 28, 2004 TO DECEMBER 31, 2004
SELECTED FINANCIAL INFORMATION 2004 ---------------------------------------------- 5 mths 4th Qtr 3rd Qtr (millions of Canadian dollars-except per unit sales (July 28 to (Oct 1 to (July 28 to prices and per share amounts) Dec 31) Dec 31) Sept 30) ------------ ------------ ------------ Average Exchange Rate - Cdn$ to purchase one US$ $ 1.2622 $ 1.2219 $ 1.3227 Sales volumes Lumber - millions of board feet 293 158 135 Logs - thousands of cubic metres 527 236 291 Pulp - thousands of ADMT 126 74 52 Sales prices Lumber - per thousand board feet $ 593 $ 557 $ 634 Logs - per cubic metre $ 113 $ 118 $ 109 Pulp - per ADMT $ 639 $ 601 $ 694 Net sales Lumber $ 173.3 $ 87.8 $ 85.5 Logs 59.5 27.7 31.8 By-products 10.9 5.7 5.2 ------------ ------------ ------------ Solid wood segment 243.7 121.2 122.5 Pulp segment 80.4 44.6 35.8 ------------ ------------ ------------ 324.1 165.8 158.3 Costs and expenses 322.1 181.6 140.5 ------------ ------------ ------------ Operating earnings (loss) before amortization (Operating EBITDA) 2.0 (15.8) 17.8 Amortization of property, plant and equipment 14.2 8.7 5.5 Operating earnings (loss) (12.2) (24.5) 12.3 ------------ ------------ ------------ Other income and expense Interest (19.8) (11.2) (8.6) Exchange gains and (losses) on long-term debt 27.4 12.6 14.8 Other income (expense) (0.1) - (0.1) ------------ ------------ ------------ Earnings (loss) before income taxes (4.7) (23.1) 18.4 Income tax (expense) recovery (0.8) 3.5 (4.3) ------------ ------------ ------------ Net earnings (loss) $ (5.5) $ (19.6) $ 14.1 ============ ============ ============ Basic earnings (loss) per share $ (0.21) $ (0.76) $ 0.55 Diluted earnings (loss) per share $ (0.21) $ (0.76) $ 0.55 Shares outstanding (000's) 25,636 25,636 25,636 Use of cash in operating activities $ (25.1) $ (22.8) $ (2.3) Total assets(4) $ 696.4 $ 696.4 $ 730.9 Total long-term debt $ 253.5 $ 253.5 $ 265.4
Notes: 1. For ease of reference, we use the term "third quarter" to mean the period from July 28, 2004 to September 30, 2004 and the term "fourth quarter" to mean the period from October 1, 2004 to December 31, 2004. 2. The financial information presented has been prepared in accordance with Canadian GAAP, with the exception of references to Operating EBITDA, as discussed above. 3. Secured debt of US$210.9 million at December 31, 2004 (US$210.04 million at September 30, 2004) represents the US$210 million proceeds (from the issuance of Secured Bonds with an aggregate principal value of US$221 million) plus accretion of the discount on the issuance of the Secured Bonds, translated at an exchange rate of 1.2020 at December 31, 2004 (1.2616 at September 30, 2004). 4. Total assets as at September 30, 2004 restated for final July 28, 2004 "fresh start" entries (see note 1(b) to our audited consolidated financial statements). -33-
SEGMENTED INFORMATION 2004 ----------------------------------------- 5 mths 4th Qtr 3rd Qtr (July 28 to (Oct 1 to (July 28 to (millions of Canadian dollars) Dec 31) Dec 31) Sept 30) ----------- --------- ----------- OPERATING EBITDA Solid wood segment $ 9.4 $ (10.3) $ 19.7 Pulp segment (1.3) (1.8) 0.5 General corporate (6.1) (3.7) (2.4) ----------- --------- ----------- $ 2.0 $ (15.8) $ 17.8 =========== ========= =========== AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT Solid wood segment $ 13.1 $ 8.3 $ 4.8 Pulp segment 1.1 0.4 0.7 ----------- --------- ----------- $ 14.2 $ 8.7 $ 5.5 =========== ========= =========== OPERATING EARNINGS (LOSS) Solid wood segment $ (3.8) $ (18.7) $ 14.9 Pulp segment (2.3) (2.1) (0.2) General corporate (6.1) (3.7) (2.4) ----------- --------- ----------- $ (12.2) $ (24.5) $ 12.3 =========== ========= ===========
Overview of the Period from July 28, 2004 to December 31, 2004 Overall, markets in the fourth quarter of 2004 were weaker for both lumber and pulp compared to the period from July 28, 2004 to September 30, 2004 and the Canadian dollar strengthened by 8% from an average of $1.3227 in the July 28 to September 30, 2004 period to an average of $1.2219 in the fourth quarter. As a result, operating earnings before amortization, or Operating EBITDA, went from $17.8 million in the period July 28, 2004 to September 30, 2004 to negative $15.8 million in the fourth quarter and in total was $2.0 million for the period July 28, 2004 to December 31, 2004. In addition, net earnings of $14.1 million for the period July 28, 2004 to September 30, 2004 became a loss of $19.6 million in the fourth quarter of 2004. We took action in an attempt to mitigate the impact of the weaker markets on cash flow and prevent increases in log and lumber inventory by curtailing production at our logging operations and sawmills earlier than the normal planned shutdowns in the fourth quarter. Sales for the period July 28, 2004 to December 31, 2004 totalled $324.1 million, of which $158.3 million related to the third quarter and $165.8 million to the fourth quarter. The increase in sales reflects three months in the fourth quarter compared to just over two months in the third quarter although the increase due to this is not as high as might be expected as typically a significant portion of our lumber and pulp sales occur near the end of a month due to the timing of shipping of our lumber and pulp overseas by ocean vessels and the sales for the third quarter benefited from the inclusion of the last 3 days of July. Fourth quarter sales were also negatively impacted by a stronger Canadian dollar and lower sales prices for lumber and pulp. Total sales for the period July 28, 2004 to December 31, 2004 comprised $243.7 million for the solid wood segment (75% of the total) and $80.4 million for the pulp segment (25% of the total). Lumber sales for the period July 28, 2004 to December 31, 2004 totalled $173.3 million and comprised $85.5 million in the July 28 to September 30, 2004 period and $87.8 million in the fourth quarter and were likewise impacted by the timing of shipments and the price and foreign exchange factors described for total sales above. Offsetting this to some degree was an 8% shift away from hemlock to more valuable cedar and fir production in the fourth quarter. Log sales for the period July 28, 2004 to December 31, 2004 totalled $59.5 million and comprised $31.8 million in the July 28, 2004 to September 30, 2004 period and $27.7 million in the fourth quarter. A lower volume of outside log sales in the fourth quarter (236 km3 versus 291 km3 in the period July 28 to September 30, 2004) resulted in large part from reduced pulp log sales to PASCI for consumption in the Port Alice pulp mill. This pulp mill was sold by our Predecessor to PASCI on May 11, 2004. PASCI ceased operation in October and has subsequently filed under the Bankruptcy and Insolvency Act (Canada). As a result, pulp log sales to PASCI declined from 116 km3 in the period July 28 to September 30, 2004 to 34 km3 in the fourth quarter. Sales of pulp logs to PASCI subsequent to May 11, 2004, all made on a cash-basis by our Predecessor and ourselves, have been recorded as external sales made to a third party. Prior to the pulp mill sale, our Predecessor recorded the log flow as an internal transfer. -34- Pulp sales for the period July 28, 2004 to December 31, 2004 totalled $80.4 million and comprised $35.8 million in the July 28, 2004 to September 30, 2004 period and $44.6 million in the fourth quarter and were also impacted by the timing of shipments and the price and foreign exchange factors described for total sales above. Costs and expenses for the period from July 28, 2004 to December 31, 2004 totalled $322.1 million and comprised $140.5 million in the July 28, 2004 to September 30, 2004 period and $181.6 million in the fourth quarter. The increase in costs and expenses reflects three months in the fourth quarter compared to just over two months in the third quarter. However, as noted previously since a significant portion of our lumber and pulp sales occur near the end of a month due to the timing of shipping of our lumber and pulp overseas, the sales and therefore costs and expenses for the third quarter were higher as a result of this inclusion. In addition, in accordance with our new accounting policy for valuing log inventories, costs and expenses include an additional $6.5 million write-down for the fourth quarter and $6.8 million write-down for the five-month period ending December 31, 2004 to recognize the weaker pulp log market and an increase in our inventories as at December 31, 2004. Costs and expenses also includes a further $3.6 million for the fourth quarter and $6.8 million for the five-month period ending December 31, 2004 to recognize the adoption of our new policy to expense spur roads. Amortization of property, plant and equipment for the period July 28, 2004 to December 31, 2004 was $14.2 million, comprising $5.5 million in the July 28 to September 30, 2004 period and $8.7 million in the fourth quarter. Operating earnings (loss) for the period July 28, 2004 to December 31, 2004 was $(12.2) million, comprising $12.3 million in the July 28, 2004 to September 30, 2004 period and $(24.5) million in the fourth quarter. Interest expense of $19.8 million includes $17.0 million in interest on the long-term debt. The debt is denominated in US dollars at a 15% interest rate. The amount of interest in each period will fluctuate with changes in the exchange rate. Interest on the long-term debt for the period of July 28 to December 31, 2004 in the amount of $17.0 million was paid on December 31, 2004. Interest expense also includes $1.1 million in accretion on the long-term debt and $1.7 million in interest on the line of credit. The $27.4 million gain on the debt translation is a non-cash gain that affects earnings as the debt is marked to the current exchange rate. $14.8 million of the gain relates to the period July 28, 2004 to September 30, 2004 and $12.6 million relates to the fourth quarter reflecting the continuing strengthening of the Canadian dollar from US$1.3325 at July 27, 2004 to US$1.2616 at September 30, 2004 and US$1.2020 at December 31, 2004. The provision for income taxes represents large corporations tax. We have not recorded the tax benefit for the loss incurred during the period as we have not met the requirements for recognition under Canadian GAAP. As a result of the above factors, the net loss was $5.5 million and loss per share was $0.21 for the period from July 28, 2004 to December 31, 2004. Outlook THE FOLLOWING CONTAINS FORWARD-LOOKING STATEMENTS. SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS, INCLUDING THOSE SET FORTH IN "ITEM 3. KEY INFORMATION - D. RISK FACTORS" WHICH MAY CAUSE OUR ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS, TO BE MATERIALLY DIFFERENT FROM FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. SEE CAUTIONARY STATEMENTS UNDER "ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS - G. SAFE HARBOUR". Lumber prices in the US have been stronger to the date of this report as compared to late 2004 driven by continuing high US housing starts as well as supply problems early in the year caused by very wet weather and rail car shortages in western Canada. Prices have fallen off from the beginning of the year and are currently quite volatile due to demand/supply imbalances. The US dollar has also been recovering somewhat against the Canadian dollar over the past few months. Although the number of new building permits issued in the US remains high we are anticipating a softening in the market as we move into the second half of the year if higher interest rates materialized as expected. The Japanese market had a slow start to 2005 but we are expecting it to begin to recover towards the middle of the year. We anticipate increased availability of rail cars following the move of our rail loading activity to a third party provider, and an increase in the amount of dry lumber produced. The three kilns at our Saltair mill with a drying capacity for dimension lumber of between 70-100 million board feet have been brought back into service. -35- With respect to pulp markets, we have seen short term pricing weakness for softwood kraft pulp due to production and consumption imbalances in the market place. Producer inventories have risen as buyers de-stocked in the face of stalled prices. For the market as a whole, the ratio of demand to capacity for 2005 is the highest it has been for many years. As a result, we expect to see prices for softwood pulp firm in the latter half of 2005 as industry maintenance curtailment takes effect and softwood demand improves. We continue to pursue our strategy of managing our cash resources, improving our operations and growing the business. In response to lower than forecast sales and to reduce the amount of cash tied up in log and lumber inventories we will be taking down-time at both our logging and sawmilling operations over the summer. Taking this down-time should enable us to reduce our log and lumber inventories by approximately $40 - $50 million and generate cash. The operating performance of each of our assets, including our private timber lands, will be reviewed during the balance of 2005. To some extent the divisions had previously operated as autonomous business units. We believe synergies may exist in considering the business on a more holistic basis. Such a review will also consider the extent to which the current business can be grown internally. We expect to dispose of assets that do not form part of our core business. Longer-term we believe that consolidation of the British Columbia coastal forest industry will enhance the ability of coastal producers to compete in world markets. We will consider suitable opportunities to be involved in this consolidation as well as looking at other growth possibilities. RESULTS OF OPERATIONS - 2004 VERSUS 2003 - COMPARISON TO THE RESULTS OF PRIOR PERIODS OF OUR PREDECESSOR To assist shareholders and other readers understand our business, the following table compares the pro forma results of operations of the Company and its Predecessor for the year ended December 31, 2004 (results of our Predecessor for the period January 1, 2004 to July 27, 2004 are added to the Company's results for the period from July 28, 2004 to December 31, 2004 with no adjustment) with the results of the Predecessor for the years ended December 31, 2003 and 2002. -36-
Year Ended December 31 ---------------------------------------- (millions of Canadian dollars-except per unit sales prices) 2004 2003 2002 ---------- ----------- ----------- Pro forma Predecessor Predecessor Restated(1) Restated(1) ---------- ----------- ----------- Average Exchange Rate - Cdn$ to purchase one US$ $1.3041 $1.4132 $1.5700 Sales Lumber $ 409.9 $ 328.7 $ 370.2 CVD prior year refund - - 12.3 Logs 140.5 106.5 123.3 By-products 25.5 22.0 19.6 Other 0.3 - - ------- ------- ------- Solid wood segment 576.2 457.2 525.4 Pulp segment 181.6 163.9 130.3 ------- ------- ------- $ 757.8 $ 621.1 $ 655.7 ======= ======= ======= Sales Volumes Lumber (MMfbm) 669 596 591 Logs (km3) 1,194 721 782 Pulp - NBSK (thousand ADMT) 261 259 205 Production Volumes Lumber (MMfbm) 677 615 562 Logs (km3) 3,923 2,616 3,032 Pulp - NBSK (thousand ADMT) 266 253 204 Average Prices Lumber ($/mfbm) $ 613 $ 552 $ 627 Logs ($/m3) $ 118 $ 148 $ 158 Pulp - NBSK ($/ADMT) $ 696 $ 633 $ 635 Operating EBITDA Solid wood segment $ 75.0 $ 12.7 $ 78.4 Pulp segment 0.3 (17.7) (5.4) General corporate (10.9) (6.6) (7.2) ------- ------- ------- $ 64.4 $ (11.6) $ 65.8 ======= ======= ======= Amortization Solid wood segment $ 40.9 $ 36.4 $ 38.3 Pulp segment 6.4 9.6 8.1 ------- ------- ------- $ 47.3 $ 46.0 $ 46.4 ======= ======= ======= Write Down of Assets and Operating Restructuring Costs $ - $ 8.0 $ 8.8 ======= ======= ======= Segmented Operating Earnings (Loss) Solid wood segment $ 34.1 $ (31.6) $ 31.3 Pulp segment (6.1) (27.3) (13.5) ------- ------- ------- $ 28.0 $ (58.9) $ 17.8 ======= ======= ======= Interest expense $ (91.2) $(100.8) $(108.0) Foreign exchange gain $ 3.2 $ 189.2 $ 10.2 Other income (expense) $ (6.0) $ 2.2 $ 4.3 Financial restructuring costs $ (11.4) $ (7.8) $ (7.3) Income taxes expense $ (0.9) $ (1.0) $ (0.8) Net earnings (loss) from continuing operations $ (89.1) $ 16.1 $ (90.9) Net loss from discontinued operations $ (12.4) $ (19.9) $ (73.2) Net loss attributable to common shareholders $(104.3) $ (8.6) $(168.6)
Note: 1. The figures have been restated to exclude the results of Port Alice pulp mill and to include Port Alice pulp mill as discontinued operations of the Predecessor. -37- Reconciliation of Operating EBITDA to net loss attributable to common shares:
Year Ended December 31 --------------------------------------------- 2004 2003 2002 --------- ----------- ----------- Pro forma Predecessor Predecessor Restated(1) Restated(1) --------- ----------- ----------- Operating EBITDA $ 64.4 $ (11.6) $ 65.8 Amortization of property, plant and equipment (47.3) (46.0) (46.4) Write-down of property, plant and equipment and operating restructuring costs - (8.0) (8.8) --------- ----------- ---------- Operating earnings (loss) 17.1 (65.6) 10.6 Interest expense (91.2) (100.8) (108.0) Foreign exchange gain 3.2 189.2 10.2 Other income (expense) (6.0) 2.2 4.3 Financial restructuring costs (11.4) (7.8) (7.3) Income taxes (0.9) (1.0) (0.8) Net loss from discontinued operations (12.4) (19.9) (73.2) Provision for dividends on preferred shares (2.8) (4.8) (4.5) --------- ----------- ---------- Net loss attributable to common shareholders $ (104.3) $ (8.6) $ (168.6) ========= =========== ==========
Note: 1. The figures have been restated to exclude the results of Port Alice pulp mill and to include Port Alice pulp mill as discontinued operations of the Predecessor. As described above, our results of operations are not necessarily indicative of the results that may be expected for the full fiscal period or for any other period and any comparisons of financial performance with our Predecessor should be reviewed with caution. Sales for 2004 increased by 22% to $757.8 million from $621.1 million in 2003. Increases were achieved across all active segments. Sales for solid wood increased 26% to $576.2 million in 2004 from $457.2 million in 2003. This increase reflects: - An 11% upturn in lumber market prices from an average price per mfbm of $552 in 2003 to $613 in 2004. As most of our lumber sales are quoted in US dollars, the Canadian lumber prices were adversely affected by the foreign exchange rate that went from an average of US$1.4132 in 2003 to an average of US$1.3041 in 2004. Lumber sales volumes also increased by 12% to 669 MMfbm in 2004 from 596 MMfbm in 2003 reflecting strong markets and a new marketing program in the North Eastern United States. - Log sales in 2004 increased to $140.5 million from $106.5 million in 2003. Sales volume increased by 66% as a result of increased log production and the sale of pulp logs to PASCI in 2004. Log sales to PASCI in 2004 by our Predecessor and ourselves totalled 342 km3 at an average price of $55 per m3. Prior to the sale of the mill by our Predecessor to PASCI in May 2004, our Predecessor would have transferred these pulp logs internally and would not have recorded them as an external sale. The increase in the sales of lower value pulp logs to PASCI during 2004 also had the effect of pulling down the average log price realised in 2004 to $118 per m3 from $148 per m3 in 2003. Overall sales for the pulp segment increased to $181.6 million in 2004 from $163.9 million in 2003. The sales volume of kraft pulp was similar in the two years, however the sales price increased by $63 per ADMT. Operating EBITDA increased by $76.0 million from $(11.6) million in 2003 to $64.4 million in 2004. The primary factors for this increase were a $62.3 million increase in Operating EBITDA for the solid wood segment, due to increased lumber prices and increased log sales volumes plus an $18.0 million increase in Operating EBITDA for the pulp segment as a result of higher kraft pulp prices. The adoption of the accounting policies referenced above for the expensing of spur roads and the valuation of pulp log inventory reduces the proforma Operating EBITDA for 2004 by $17.2 million compared to what it would have been if these policies had not been adopted. The increase in general corporate costs of $4.3 million from 2003 to 2004 primarily represents reorganization expenses and legal and consulting costs with respect to evaluating corporate strategies. -38- Interest expense on a proforma basis for 2004 of $91.2 million compares to $100.8 million in 2003 for our Predecessor. The decrease is attributable to the different capital structure of Western after July 28, 2004 compared to our Predecessor as a result of the implementation of the Plan. The proforma foreign exchange gain for 2004 of $3.2 million compares to $189.2 gain recorded by our Predecessor. The gain relates to both Western and our Predecessor's long-term debt denominated in US dollars. The larger gain in 2003 compared to the 2004 proforma is attributable to the larger change in the US dollar exchange rate from the end of 2002 to the end of 2003 compared to the movement in 2004 as well as our lower debt balance following the implementation of the Plan. Financial restructuring costs relates to costs incurred by our Predecessor with respect to establishing and implementing the Plan. Discontinued operations represents the net loss incurred by our Predecessor in operating the Port Alice pulp mill. The mill was sold by our Predecessor in May 2004. As a result of the above factors proforma net loss attributable to common shares was $104.3 million compared to a net loss of $8.6 million in 2003. The net loss attributable to common shares is after the provision of a dividend to the preferred shareholders of our Predecessor in the amount of $2.8 million for the 2004 proforma and $4.8 million in 2003. The proforma results for 2004 includes a gain of $513.2 million recorded by our Predecessor directly against the deficit with respect to the net liabilities of our Predecessor extinguished on the implementation of the Plan. RESULTS OF OPERATIONS - 2003 VERSUS 2002 - COMPARISON OF THE RESULTS OF PREDECESSOR In 2003, the Predecessor's sales decreased by approximately 5% to $621.1 million from $655.7 million in 2002 as a result of a reduction in sales in the solid wood segment offset in part by an increase in sales in the pulp segment. Sales for the solid wood segment decreased by approximately 13% to $457.2 million in 2003 from $525.4 million in 2002, as a result of lower average sales realizations for lumber reflecting the stronger Canadian dollar in 2003, and lower outside log sales volume and prices. Sales for the pulp segment increased to $163.9 million in 2003 from $130.3 million in 2002, mostly as a result of higher sales volumes for kraft pulp. Although kraft prices, measured in US dollars, were also higher in 2003 than 2002, the stronger Canadian dollar resulted in marginally lower average sales prices in Canadian dollars. Cost of goods sold in 2003 increased to $528.9 million from $484.3 million in 2002 primarily as a result of increased pulp sales volume of 60,350 ADMT. In addition, the Squamish pulp mill took 15 days of downtime to carry out scheduled maintenance work in 2003 at a cost of approximately $12 million. No major maintenance shutdown had taken place in 2002 as market conditions had made it unnecessary. Softwood lumber duties increased to $36.1 million in 2003 from $22.3 million in 2002 reflecting the impact of duties for the full 2003 year compared to 2002 when duties commenced in May, and a $12.4 million refund in 2002 relating to the prior year. Amortization of property, plant and equipment decreased to $46.0 million in 2003 from $46.4 million in 2002. The decrease is attributable to the solid wood segment, in particular to lower amortization of logging roads, resulting from lower production levels in 2003, offset by higher amortization as a result of increased production at the Squamish pulp mill. The Predecessor's term debt of US $673 million at December 31, 2003 and 2002 was denominated in US dollars. The cash component of interest expense decreased to $96.4 million in 2003 from $102.7 million in 2002 as a result of the strengthening Canadian dollar. As a result of the CCAA Court order, interest payments were stayed after November 7, 2002, but continued to be accrued. Translating the term debt at current exchange rates resulted in an unrealized foreign exchange gain of $189.2 million in 2003 compared to $10.2 million in 2002. The year end exchange rates for the US dollar at December 31, 2003, 2002 and 2001 were 1.2965, 1.5776 and 1.5928. The write-down of property, plant and equipment relates to write-downs and severance payments to employees at our Predecessor's sawmills in both years. -39- As previously noted, financial restructuring costs represents the costs incurred by our Predecessor in establishing and implementing the Plan and discontinued operations represents the net loss incurred by our Predecessor in operating the Port Alice pulp mill that was sold by them in May, 2004. Net earnings from continuing operations was $16.1 million or $0.27 per share in 2003 compared to a loss of $90.9 million or $2.25 per share in 2002. After the loss on discontinued operations and the provision for dividends on the preferred shares there was a net loss of $8.6 million or $0.20 per share in 2003 compared to a loss of $168.6 million or $3.97 per share in 2002. B. LIQUIDITY AND CAPITAL RESOURCES
(millions of Canadian dollars) Year Ended December 31, -------------------------- Jul. 27 - Dec. Jan. 1 - Jul. 27, 31, 2004 2004 2003 2002 Company Predecessor Predecessor Predecessor Restated(1) Restated(1) Restated(1) -------------- ---------------- ----------- ----------- Cash generated from (used by): Cash from (used by) continuing operations $ (25.0) $ 0.4 $ 47.5 $ (19.5) Cash used by discontinued operations - (2.3) (30.7) (8.5) Cash from (used by) operating activities (25.0) (1.9) 16.8 (28.0) Cash from financing activities 28.4 19.3 8.6 19.4 Cash used by investing activities (12.0) (22.3) (26.4) (15.0) -------------- ---------------- ----------- ----------- Decrease in cash $ (8.6) $ (4.9) $ (1.0) (23.7) ============== ================ =========== ===========
Note: 1. Restated to include Port Alice pulp mill as discontinued operations. Our principal sources of liquidity are cash on hand, the unused portion of our Working Capital Facility, cash flow generated from operations and working capital. At December 31, 2004 we had a cash balance of $8.0 million plus available credit of $12.8 million under our Working Capital Facility to meet our operational requirements. By March 31, 2005, these amounts had increased to $12.0 million and $29.8 million respectively. On March 24, 2005, we established a working capital reserve account as defined in the Secured 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 March 31, 2005, proceeds from asset sales amounted to $21.3 million and now form the balance in the working capital reserve account and are shown on the balance sheet as restricted cash. A further $11.7 million was credited to the account following the sale of one of our former mill sites subsequent to the quarter end increasing the balance in the account to $33.0 million. Cash consumed in operations for the period from July 28, 2004 to December 31, 2004 was $25.0 million, of which $22.8 million arose in the fourth quarter primarily as a result of the payment of the bond interest of $17.0 million made on December 31, 2004. Interest was paid in full as we elected not to defer payment of 50% of the interest payable as permitted under the terms of the bond indenture. Working capital increased in the five month period and used $5.8 million of cash primarily as a result of the reduction in accounts payable and accruals due to the lower levels of logging activities at the end of the year. As discussed earlier, we curtailed logging production and shutdown the sawmills for a longer period than the normal year end shutdowns as a measured response to the weak lumber markets to conserve cash flow. Capital expenditures totalled $11.6 million, with the major portion, $6.3 million, being spent on the construction of logging roads with the balance spent as to $2.6 million on equipment for the sawmills and $2.7 million on logging equipment. Overall, we do not expect significant changes in the capital expenditure requirements of the business for 2005 compared to the five months to December 31, 2004. Our revolving Working Capital Facility was drawn down in the five month period by $28.4 million to a balance of $78.1 million as at December 31, 2004 to finance these outlays. Long-term debt consists of secured debt denominated in US dollars. On translation into Canadian dollars, it declined from $279.8 million at July 28, 2004 to $253.5 million at December 31, 2004 as a result of the strengthening Canadian dollar ($27.4 million) offset in part by the accretion ($1.1 million) for the discount on its issuance. -40- Outlook THE FOLLOWING CONTAINS FORWARD-LOOKING STATEMENTS. SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS, INCLUDING THOSE SET FORTH IN "ITEM 3. KEY INFORMATION - D. RISK FACTORS" WHICH MAY CAUSE OUR ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS, TO BE MATERIALLY DIFFERENT FROM FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. SEE CAUTIONARY STATEMENTS UNDER "ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS - G. SAFE HARBOUR". At the current market prices for our products and our current cost structure, we are not currently generating sufficient cash from operations to enable us to service both our long-term debt obligations and to take the actions we deem necessary to reduce costs, improve productivity and expand the markets for our products. As discussed above, we consumed $37 million in cash from operating and investing activities during the period from July 28, 2004 to December 31, 2004 which included the $17 million bond interest payment. These activities were primarily funded by our Working Capital Facility. For the quarter ended March 31, 2005 we generated cash flow of $15.2 million from operations including $12.0 million from working capital reductions and spent $2.5 million of cash on capital expenditures. Excluding the working capital movements we generated cash of $0.8 million in the first quarter of 2005. At March 31, 2005 we had a cash balance of $12.0 million, availability under the Working Capital Facility of $29.8 million and the working capital reserve account available of $33.0 million (including the proceeds of the sale of the Silvertree mill site received in April 2005) for a total of $74.8 million of available liquidity. Due to the highly cyclical nature of our business we believe we need available liquidity of approximately $50 million to enable us to have sufficient reserve for market downturns. We believe our working capital is sufficient to meet our short term requirements. Management's key focus for the remainder of 2005 is on the management of cash flow and improvement in the Company's financial position. We plan to achieve this through a review of the operating results for each of our assets including our private timberlands, the sale of non-core assets, the refinancing of our long-term bonds with lower interest debt, the rigorous review of capital projects and working capital management. We have elected to defer payment of 50% of the interest due on June 30, 2005 as permitted under the terms of the Secured Bond Indenture. This action was taken as a precautionary measure to maintain the Company's liquidity. There are a number of individually significant cash outlays that occur during the June, July and August, 2005 time period for items such as the bond interest payment, property taxes, vacation pay and the Squamish pulp mill annual maintenance program, that, when combined, would deplete our liquidity. The unpaid interest amounting to approximately $10.3 million carries interest at 15% and can be repaid at anytime during the Secured Bonds' life, and in any event no later than July 28, 2009. The availability of cash under our Working Capital Facility is based on the level of eligible trade receivables and product inventory. The maximum amount of the facility is $100 million but may be less if the eligible trade receivables and product inventory calculations do not support it. As noted earlier, we will be taking downtime at both our logging and sawmilling operations over the summer of 2005 with the objective to reduce the amount of cash tied up in log and lumber inventories by $40-$50 million. These actions will likely reduce the total amount that the Company can have outstanding under this facility to less than $100 million. However, as the cash generated from the reductions in inventory levels will be applied to reduce the amount drawn under the Working Capital Facility the net availability is expected to increase and interest expense will decrease accordingly. We are developing a strategic plan for the business and its capital structure. This plan will be designed to increase the cash flows generated by the business and may include the sale or closure of existing operations, non-capital and capital expenditure plans to reduce costs and improve productivity, marketing plans to increase both the value and extent of our sales, the reduction in borrowing costs and potential transactions with other coastal producers to grow the business. As discussed previously, we believe our debt burden is too high. The strategic plan will likely include consideration of ways to reduce the debt burden and may include a refinancing of existing debt, reducing the overall level of debt through the use of existing cash resources, proceeds from the sale of any non-core assets and a common share equity offering, or any combination thereof. Our ability to implement this plan will depend on us having sufficient financial resources. There can be no guarantee that we will be able to obtain the necessary financing and resources to undertake our plan. See "Item 10. Additional Information - B. Articles and Bylaws - Secured Bonds - Working Capital Facility" for a discussion of our Secured Bond Indenture and Working Capital Facility. -41- C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES Silviculture and tree improvement research is conducted primarily by our employees at our Saanich Forestry Centre on Vancouver Island and at our Port McNeill forest operations. The Centre is located north of Victoria, British Columbia and was founded in 1964. It has seed orchards, a seedling nursery with an annual capacity of approximately 3 million seedlings, and a laboratory that provides technical support to maintain seed and seedling quality. The Centre provides us with the ability to select and breed trees with superior growth and form that should improve the quality and quantity of timber produced over time. The Centre's nine seed orchards occupy 15 hectares and produce Douglas fir, western hemlock, western red cedar and Sitka spruce seed with improved properties. Yellow cedar hedges are also maintained for the production of improved cutting material. The nursery supplies our requirements for most species of seedlings. We, together with our Predecessor, spent approximately $641,000 on growth and yield studies, tree improvement and silviculture research in 2004. Our Squamish pulp mill has in-house laboratories and testing facilities for quality control and performance improvement. We also use the services and technical expertise of independent laboratories. Our logging and sawmilling operations also investigate new equipment and methods to improve operational efficiencies. We are a member of the Forest Engineering Research Institute of Canada which conducts research into forestry activities related to the harvesting and transportation of wood and the growing of trees. D. TREND INFORMATION COMPETITIVE POSITION AND CYCLICAL NATURE OF BUSINESS We compete at both a domestic and international level with a large number of forest products firms, ranging from very large integrated firms to smaller specialty firms. Many of these competitors have substantially greater financial and operating resources than we have. We also compete indirectly with firms that manufacture substitutes for solid wood products, including non-wood and engineered wood products. The markets for pulp and lumber are highly competitive and sensitive to cyclical changes in industry capacity and the economy, both domestically and international. Changes in the level of competition, industry capacity and the global economy have a significant impact on our selling prices and overall profitability. Our competitive position is influenced by the availability, quality and cost of fibre, energy and labour, and its plant efficiencies and productivity in relation to our competitors. PRODUCT PRICING The pricing for our products is subject to significant changes in both the short and long term as discussed above. On an annualized basis we estimate that (i) a change of $50 per thousand board feet of lumber would impact operating earnings, net earnings and per share earnings by approximately $35 million, $23 million and $0.88 per share respectively, and (ii) a change of $50 per air dried metric tonne ("ADMT") of pulp would impact operating earnings, net earnings and per share earnings by approximately $14 million, $9 million and $0.35 per share respectively. Our financial performance is also dependent on the rate at which we utilize our production capacity. When capacity utilization is reduced in response to weak demand for our products, our cost per unit of production increases, and our profitability decreases. FOREIGN CURRENCIES Since a significant amount of our sales are conducted in international markets, our financial results are subject to foreign currency rate fluctuations. In particular, all of our pulp sales are made in U.S. dollars, as are our lumber sales to the U.S. As a result, a significant amount of our sales revenue is denominated in U.S. dollars, while a large proportion of our costs (other than interest expense on our Secured Bonds) are in Canadian dollars. On an annualized basis, excluding the effect on our long-term debt, we estimate that a change of 1% in the value of the Canadian dollar per US$1.00 would impact operating earnings, net earnings and per share earnings by approximately $4.1 million, $2.7 million and $0.10 per share respectively. All of our long term debt of US$210.9 million at December 31, 2004, is denominated in $US. The exchange rate at December 31, 2004, was $1.2020. A 1% change in the US dollar has an effect of $2.5 million on our Secured Bonds and an effect of $0.3 million on our interest expense on our Secured Bonds when translated into Canadian dollars. -42- As at December 31, 2004, we did not have any forward foreign currency contracts outstanding. Significant variations in relative currency values, particularly a significant increase in the value of the Canadian dollar relative to the US dollar, could have a material adverse effect on our business, financial condition, results of operations and cash flows. CRITICAL ACCOUNTING ESTIMATES Recoverability of Property, Plant and Equipment and other Long-term Assets We assess the recoverability of our property, plant and equipment and other long-term assets by projecting the future cash flows to be generated by our manufacturing plants. These projections require estimates to be made regarding future commodity prices, foreign currency exchange rates, sales volumes, production volumes, operating costs and renewal of licenses and permits. There is a high degree of uncertainty in estimating future cash flows, primarily as a result of the uncertainty regarding future prices for commodities, foreign exchange rates and operating costs. The application of different assumptions for commodity prices, foreign exchange rates and operating costs could result in a conclusion that we would not recover the carrying amount of our property, plant and equipment and other long-lived assets, which could result in a material charge to earnings. Reforestation Liabilities We accrue our reforestation liabilities based on estimates of future costs at the time the timber is harvested. The estimate of future reforestation costs is based on a detailed analysis for all areas that have been logged and includes estimates for the extent of planting seedlings versus natural regeneration, the cost of planting including the cost of seedlings, the extent and cost of site preparation, brushing, weeding, thinning and replanting and the cost of conducting surveys. Our registered professional foresters conduct the analysis that is used to estimate these costs. However, these costs are difficult to estimate and can be affected by weather patterns, forest fires and wildlife issues that could impact the actual future costs incurred and result in material adjustments. Valuation of Inventory We value our inventories at the lower of cost and net realizable value. We estimate net realizable value by reviewing current market prices for the specific inventory based on recent sales prices and current sales orders. If the net realizable value is less than the cost amount, we will record a write-down. The determination of net realizable value at a point in time is generally both objective and verifiable. However, changes in commodity prices can occur suddenly which could result in a material write-down in inventories in future periods. Softwood Lumber Duties Softwood lumber duties represent contingent liabilities that require a cash deposit to be paid to US customs in order to ship softwood lumber products into the US. We have expensed softwood lumber duties based on the deposit amounts paid to US customs. The actual amount of the duties for softwood lumber products shipped will depend on the outcome of the USDOC administrative reviews, various challenges and appeals made to NAFTA panels, WTO panels and reviewing courts or on a negotiated settlement. Any difference between the deposit rate paid either by us or our Predecessor and the rate established on administrative review will be refunded to or paid by us, plus interest on the final settlement after all appeals. The actual amount paid in the future for softwood lumber duties on shipments made in current periods could be materially different than the amounts paid and expensed. Valuation of Accounts Receivable We record an allowance for doubtful collection of accounts receivable based on our best estimate of any potential uncollectable amounts. The best estimate considers past experience with our customer base and a review of current economic conditions and specific customer issues. We have significant exposure to individual customers with the largest customer representing approximately 11% of sales for the period from July 28, 2004 to December 31, 2004. However, all of our sales are either made on a cash basis, without credit terms, or are insured or backed by letters of credit for 90% of their sales value with the Export Development Corporation. Although we and our Predecessor have not had significant bad debt expenses in prior periods, deteriorating economic conditions could result in financial difficulties in our customer base that could lead to bad debts. In addition, although our sales are not concentrated in any particular customer, accounts receivable balances with particular customers can be material at any given time. -43- Pension and Other Post Retirement Benefits We have defined benefit pension plans and post-retirement medical and health benefit plans for our officers and employees. We retain independent actuarial consultants to perform actuarial valuations of plan obligations and asset values, and advise on the amounts to be recorded in the financial statements. Actuarial valuations include certain assumptions that directly affect the fair value of the assets and obligations and expenses recorded in the financial statements. These assumptions include the discount rate used to determine the net present value of obligations, the return on plan assets used to estimate the increase in the plan assets available to fund obligations and the increase in future compensation amounts and medical and health care costs used to estimate obligations. Actual experience can vary materially from the estimates and impact the cost of our pension and post retirement medical and health plans and future cash flow requirements. Environment We disclose environmental obligations when known and accrue the cost associated with the obligations when they are known and the costs can be reasonably estimated. We own a number of manufacturing sites that have been in existence for a significant period of time and as a result may have unknown environmental obligations. However, until the sites are decommissioned and the property, plant and equipment are removed a detailed environmental review cannot be completed. Until these reviews are performed, a reasonable cost estimate of the obligations, if any, cannot be determined. CHANGES IN ACCOUNTING POLICIES We have adopted the following accounting policies effective July 28, 2004, which policies differ from those applied by our Predecessor. Our accounting policy for logging roads expenses the cost of spur roads in the period the work is incurred. For intermediate and mainline roads, our practice is to capitalize the road cost. Intermediate roads are then amortized over the estimated timber volume that the road services whereas mainline roads are amortized on a straight line basis over a maximum of 20 years. This policy broadly reflects industry practice. Our Predecessor's past practice was to capitalize all roads and amortize them over the estimated timber volume. The new policy will reduce the amount of road spending that is capitalized compared to what it would otherwise have been. Although the overall impact on total expenses over time should not be significant, for financial statement presentation purposes it will effectively result in the transfer of expenses from amortization expense to operations expense and thus a reduction in Operating EBITDA. As of July 28, 2004, our accounting policy is to value inventory at the lower of cost and net realizable value as follows: - for lumber, we compare the average cost of the inventory to the estimated net realizable value for each species of lumber (hemlock, fir and cedar) separately; - for logs, we compare the average cost of the inventory to the estimated net realizable value for saw logs and pulp logs, separately; and - for NBSK pulp, we compare the average cost of the inventory to the estimated net realizable value for total pulp inventory. We believe that this policy results in a preferable approach to the valuation of inventory in that unrealized losses on lower value lumber and pulp log inventory are recognized immediately whereas the unrealized profits in higher value lumber and log inventories are recognized when sold. The practice of our Predecessor was to compare the average cost of inventory to the net realizable value for lumber, logs and NBSK pulp on a total basis for each. Our Predecessor's consolidated financial statements have not been adjusted for our newly adopted accounting policies. RISKS AND UNCERTAINTIES See "Item 3. Key Information - D. Risk Factors" for risks and uncertainties that may have a material effect on the operations of the Company. -44- E. OFF-BALANCE SHEET ARRANGEMENTS We do not have any financial instruments not recognized in our financial statements. Recognized financial instruments, consisting primarily of debt instruments, are discussed elsewhere in this discussion and analysis. We did not use any derivative financial instruments during the period from July 28, 2004 to December 31, 2004. We do not have any off-balance sheet arrangements as at December 31, 2004 or related party transactions during the period from July 28, 2004 to December 31, 2004. F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATION The following table summarizes our contractual obligations at December 31, 2004 and our payments due for each of the next five years commencing December 31, 2005 and thereafter:
(millions of Canadian dollars) Total 2005 2006 2007 2008 2009 Thereafter ------- ------ ----- ----- ----- ------- ---------- Long-term debt (1) $ 265.6 $ - $ - $ - $ - $ 265.6 $ - Operating leases 9.3 3.6 2.7 1.7 1.0 0.3 - Reforestation liability 13.9 7.1 2.9 1.4 1.6 0.3 0.6 ------- ------ ----- ----- ----- ------- ---------- Total contractual obligations $ 288.8 $ 10.7 $ 5.6 $ 3.1 $ 2.6 $ 266.2 $ 0.6 ======= ====== ===== ===== ===== ======= ==========
Note: 1. The amount shown for long-term debt represents the US$221 million Secured Bonds translated at the December 31, 2004 exchange rate of $1.2020. This amount is different to the Balance Sheet figure of $253.5 million due to the original issue discount of US$11 million which is being amortized over the 5 year term of the Secured Bonds. G. SAFE HARBOUR This annual report contains statements which constitute forward-looking statements within the meaning of the United States Securities Exchange Act of 1934. Those statements appear in a number of places in this document and include statements regarding our intent, belief or current expectations primarily with respect to market and general economic conditions, future costs, expenditures, available harvest levels and our future operating performance. Such statements may be indicated by words such as "estimate", "expect", "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 risks and uncertainties, and that actual results may differ from those in the forward-looking statements as a result of various factors, including general economic and business conditions, 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 misjudgements in the course of preparing forward-looking statements. The information contained in this report identifies important factors, including the risks set forth in "Item 3. Key Information - D. Risk Factors", that could cause such differences. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by such cautionary statements. ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES A. DIRECTORS AND SENIOR MANAGEMENT At each annual general meeting, the entire board of directors of Western retires and directors are elected for the next term. Each director serves until the close of the next annual general meeting or until his successor is elected or appointed unless his office is earlier vacated in accordance with our Articles or with the provisions of the CBCA. Our officers serve at the discretion of the Board. -45- DIRECTORS The following sets forth the names, provinces of residence and principal occupations of the directors of Western as of the date hereof (the information concerning the respective directors has been furnished by each of them).
NAME AND PROVINCE AND COUNTRY OF RESIDENCE POSITION WITH WESTERN DIRECTOR SINCE - --------------------- --------------------- -------------- JAMES ARTHURS(1)(2)(3) .............. Director July 27, 2004(5) BC, Canada LEE DONEY(2)(3) ..................... Director July 27, 2004(5) BC, Canada PETER GORDON(1) (4) ................. Director July 27, 2004(5) ON, Canada REYNOLD HERT ........................ President, Chief Executive Officer and Director October 4, 2004 BC, Canada JOHN LACEY(3)(4) .................... Director July 27, 2004(5) ON, Canada JOHN MACINTYRE(1)(3) ................ Director and Chairman of the Board July 27, 2004(5) ON, Canada JOHN B. NEWMAN(1)(3)(4) ............. Director July 27, 2004(5) ON, Canada
- ----------------- (1) Member of the Audit Committee. (2) Member of the Environmental, Health and Safety Committee. (3) Member of the Nominating and Corporate Governance Committee. (4) Member of the Management Resources and Compensation Committee. (5) Initially appointed in accordance with the Plan. James Arthurs, Director Mr. Arthurs is and has been since 2004, the Senior Vice President, Sales & Marketing for Integrated Paving Concepts Inc., a manufacturer of equipment, tooling and high technology coatings for the decorative asphalt industry. Prior to joining Integrated Paving Concepts, Mr. Arthurs was Managing Director, Operations, for The Jim Pattison Group, one of Canada's largest privately-held companies, from 2002 through 2004. From January 2002 to May 2002 he was the Sr. Vice-President and Chief Information Officer for Alderwoods Group, Inc. (emergent company of the Loewen Group, operating funeral homes and operations within North America and the U.K.) and from May 2000 to January 2002, he was with the Loewen Group. The Loewen Group was the subject of CCAA proceedings in Canada and Chapter 11 proceedings in the U.S. from June 1, 1999 to December 31, 2001. Previous positions included Vice President, Residential and Industrial Operations for Trus Joist, A Weyerhaeuser Company; and General Manager, Building Materials Distribution for MacMillan Bloedel Limited. In addition, Mr. Arthurs spent 16 years with IBM in a wide range of sales and management positions. Mr. Arthurs holds a Bachelor of Science Degree in Computer Science from the University of Calgary. Lee Doney, Director Mr. Doney is an independent consultant through his company, RLD Strategies. He is a director on the Community Living Board of the Provincial Government and the Chair of the Board of Columbia Power Corporation. Mr. Doney was a Deputy Minister in the British Columbia Government for over 15 years and served in a number of other posts in the government. Most recently, he was Deputy Minister of Skills and Development and Labour from June 2001 until his retirement in April 2004. Mr. Doney's previous responsibilities include Deputy Minister of Forests; Chief Executive Officer of Forest Renewal BC; Interim Chair, Industry Training and Apprenticeship Commission; Chief Executive Officer of the British Columbia Labour Force Development Board; Chairman of the Workers Compensation Board of Governors; Executive Director to the Provincial Round Table on the Environment and the Economy; and Executive Director for the BC Treaty Commission. He has a Masters Degree in Economics from Queens University. -46- Peter Gordon, Director Mr. Gordon is currently Managing Partner, Restructuring of Brascan Corporation, where he is co-manager of the Tricap Restructuring Fund, a $415 million fund providing investment capital and management assistance to companies experiencing financial or operational difficulties. He joined Brascan in 1998 where he has been directly involved in its investment banking and merchant banking activities. Prior to 1998, he spent over fifteen years in the Canadian mining industry in the marketing, operating and finance areas with Westmin Resources Limited and Noranda Inc. Mr. Gordon is currently a director of Vicwest Corporation and Northgate Minerals Corporation. He holds an MBA in addition to an engineering degree. Reynold Hert, President, Chief Executive Officer and Director Mr. Hert was appointed President, CEO and Director of Western on October 4, 2004. Prior to that he had spent 12 years with Weyerhaeuser in various roles, most recently in Kamloops, B.C., as Vice President, Canadian Forestlands and previously as Vice President, Canadian SPF Lumber. Mr. Hert joined Weyerhaeuser as part of the acquisition of Proctor & Gamble Grande Prairie assets. He managed the Grande Prairie sawmill at the time. He started in the Canadian forest industry while a forestry student at the University of Toronto, working in timber cruising in Ontario and Alberta. Mr. Hert has a Bachelor of Science Degree (Forestry) from the University of Toronto. John Lacey, Director Mr. Lacey became the Chairman of the Board of Directors of Alderwoods Group, Inc. (emergent company of Loewen Group, operating funeral homes and cemeteries within North America and the U.K.), on January 2, 2002. From January 1999 to January 2002, Mr. Lacey was the Chairman of the Board of Directors of the Loewen Group Inc., of which he was a director from December 1998 (The Loewen Group was the subject of proceedings in Canada and Chapter 11 proceedings in the U.S. from June 1, 1999 to December 31, 2001). From July 1998 to November 1998, he was President and Chief Executive Officer of The Oshawa Group Ltd. in Toronto, Ontario. From November 1996 to July 1998, he was President and Chief Executive Officer of WIC Western International Communications Inc. in Vancouver, British Columbia. Prior to that, Mr. Lacey served as President and Chief Executive Officer of Scott's Hospitality Inc. from 1990 to 1996. Mr. Lacey currently is a director of TELUS, Canadian Tire Corp., CIBC and Cancer Care Ontario and the Chairman of Doncaster Racing Inc. and Doncaster Consolidated Ltd. In addition, Mr. Lacey is a member of the advisory board of Tricap. John MacIntyre, Director and Chairman of the Board Mr. MacIntyre is, and has been since 2004, a partner in Birch Hill Private Equity (a successor to TD Capital's Private Equity Fund). From 2002 to 2004, he was an independent financial advisor. Until February 2002, Mr. MacIntyre was a Senior Vice-President of The Toronto-Dominion Bank, and Vice Chair, Global Head, Investment Banking, TD Securities. As Vice Chair, Investment Banking, he was responsible for global investment banking, corporate credit, trade finance and correspondent banking. Prior to joining TD Securities in 1987, Mr. MacIntyre was with Ernst & Young. Mr. MacIntyre has been a director of several public and private corporations, and is currently a director of Maple Leaf Sports & Entertainment Ltd., Persona Communications Ltd. and Wellspring. He is on the advisory boards for TD Capital and Tricap. Mr. MacIntyre is a Chartered Accountant, a Chartered Business Valuator and a graduate of Queen's University. John B. Newman, Director Since his retirement in 1990 as Deputy Chairman of Prudential Securities (Canada), Mr. Newman has served as Chairman and CEO of Multibanc Financial Holdings Limited, a private investment vehicle located in Toronto. Mr. Newman also served as Chairman and CEO of First Place Tower Inc., the owner of a 2.6 million square foot 72 storey office and retail complex located in Toronto, from its emergence from bankruptcy in 1995 until its sale in 1999. He is currently a director of a number of public and private Canadian corporations and trusts engaged in real estate, insurance, investment, manufacturing, distribution and financing, including Simmons Canada Inc., Multi-Fund Management Inc., Aviva Group Canada Ltd., Pilot Insurance Company and Utility Corporation. Mr. Newman was also an independent director of FT Capital Inc. until his resignation on December 17, 2002. FT Capital Inc. was operating under an agreed moratorium on its principal and interest payments on its subordinated debentures prior to Mr. Newman becoming one of its independent directors. Prior to Mr. Newman's resignation, FT Capital Inc. was subject to a number of cease trade orders issued in 2001 and 2002 by various securities regulatory authorities in Canada for failure to file financial statements while its principal shareholder B.C. Pacific Capital Corporation considered restructuring options with Brascan Financial Corporation. Those cease trade orders were subsequently terminated after FT Capital Inc. filed the requisite financial statements. -47- SENIOR MANAGEMENT (OTHER THAN CEO) The following sets forth the names, provinces of residence, offices held within Western of members of senior management (other than the CEO which is set forth above) of Western, as of the date hereof (the information concerning the respective members of senior management has been furnished by each of them).
NAME AND PROVINCE AND COUNTRY OF RESIDENCE POSITION WITH WESTERN - --------------------- ---------------------- TREVOR BONIFACE............................................. General Manager, Logging BC, Canada JOHN DALTON................................................. General Manager, Log Supply BC, Canada DAN DYCK.................................................... General Manager, Sawmills BC, Canada DAVE INGRAM................................................. General Manager, Pulp Operations BC, Canada PAUL IRELAND ............................................... Chief Financial Officer and Corporate Secretary BC, Canada MORRIS MANDZIUK ............................................ Treasurer BC, Canada DEBBIE NUSSBAUM............................................. Director, Human Resources BC, Canada CLEM TROMBLEY............................................... General Manager, Lumber Sales BC, Canada
Trevor Boniface, General Manager, Logging Mr. Boniface was named General Manager of Logging in January 2005 and prior to that was Regional Manager for the Nootka region since July 27, 2004. He was the Regional Manager for the Nootka region for Doman since 1998. Mr. Boniface started with Doman in 1977. As noted above, Doman and its subsidiaries were subject to CCAA proceedings. Mr. Boniface has a Bachelor of Science Degree in Forestry (Harvesting Option) and is also a Registered Professional Forester. John Dalton, General Manager, Log Supply Mr. Dalton has been our General Manager of Log Supply since July 27, 2004. Prior to that he was General Manager of Log Supply with Doman since 1983. Mr. Dalton initially started with Doman in 1965. As noted above, Doman and its subsidiaries were subject to CCAA proceedings. Mr. Dalton holds a Bachelor of Science Degree (Forestry) with a Business Administration option. Dan Dyck, General Manager, Sawmills Mr. Dyck has been our General Manager of Sawmills since July 27, 2004. Prior to that he was the General Manager of Sawmills for Doman since 2001 and prior to that he was the Manager of the Duke Point Sawmill. Mr. Dyck started with Doman in 1989. As noted above, Doman and its subsidiaries were subject to CCAA proceedings. Dave Ingram, General Manager, Pulp Operations Mr. Ingram has been the General Manager of Pulp Operations since July 27, 2004. Prior to that he was the General Manager of 4018974 Canada Inc. (formerly Western Pulp Inc.) (a subsidiary of Doman). From June 1991 to September 2004, he held the positions of Production Manager, Assistant Mill Manager and Mill Manager at the subsidiary's Squamish Operation. As noted above, Doman and its subsidiaries were subject to CCAA proceedings. Mr. Ingram held various technical and production positions with MacMillan Bloedel at their Harmac division from 1972 to 1991. Mr. Ingram is a graduate of Lakehead University with a diploma in Chemical Engineering Technology. -48- Paul Ireland, Chief Financial Officer and Corporate Secretary Mr. Ireland was appointed as Chief Financial Officer of Western on January 24, 2005. From 2002 to 2004, he was the Vice-President, Finance of Diavik Diamond Mines Inc., a unit of Rio Tinto plc. From 1994 to 2000, Mr Ireland was the Vice-President, Finance & Chief Financial Officer of Campbell Resources Inc. From 1992 to 1994 Mr. Ireland was the Manager of Special Projects and Internal Audit for Polaris Realty (Canada) Limited. Mr. Ireland started his career with Ernst & Whinney in London, UK and then moved to KPMG Peat Marwick Thorne in Toronto. He is a Chartered Accountant (Ontario, England and Wales). Morris Mandziuk, Treasurer Mr. Mandziuk has been our Treasurer since July 27, 2004. Prior to that he held various positions in the accounting, planning and treasury areas at Doman during his 16 years with the company. As noted above, Doman and its subsidiaries were subject to CCAA proceedings. Mr. Mandziuk is a Certified Management Accountant. Debbie Nussbaum, Director, Human Resources Ms. Nussbaum was named Director of Human Resources in May 2005 and prior to that was the Company's Employee Services Manager since July 27, 2004. She was the Employee Services Manager for the Sawmills Division of Doman since April, 2003. As noted above, Doman and its subsidiaries were subject to CCAA proceedings. From 1990 to 2003, Ms. Nussbaum held various positions within the scope of employee services for Repap Manitoba. Prior to that she held various positions in employee services with Tolko Industries, Manitoba. Ms Nussbaum has her certification in Payroll Management with a focus on Human Resource Management. Clem Trombley, General Manager, Lumber Sales Mr. Trombley has been our General Manager of Lumber Sales since July 27, 2004. He joined Doman in 1968 as Quality Control Supervisor. In 1972 he established Doman's sales department and was General Manager of Sales for Doman since 2001. As noted above, Doman and its subsidiaries were subject to CCAA proceedings. B. COMPENSATION We are required, under applicable securities legislation in Canada, to disclose to our securityholders details of compensation paid to certain members of our senior management and directors in our management proxy circular. The following is derived from the compensation disclosure in Western's recent management proxy circular required to be filed under applicable securities laws in Canada. SUMMARY COMPENSATION TABLE The following table provides a summary of compensation earned during the financial year ended December 31, 2004 by our Chief Executive Officer ("CEO"), Chief Financial Officer ("CFO") (as at December 31, 2004) and three of our most highly compensated executive officers (as defined under National Instrument 51-102 - Continuous Disclosure Obligations of the Canadian Securities Administrators), other than the CEO and CFO, whose total annual salary and bonus was in excess of $150,000, and any of our former executive officers that would have been one of the three most highly compensated executive officers except that the individual was not serving as an executive officer for us as of December 31, 2004 (collectively, the "Named Executive Officers"). Effective on the implementation of the Plan, the employment of the officers and employees of our Predecessor was continued by us substantially on the same terms and conditions as their employment with our Predecessor. Accordingly, for ease of reference the table contains the aggregate compensation paid to those Named Executive Officers employed by us and by our Predecessor for the year ended December 31, 2004. -49-
2004 ANNUAL COMPENSATION 2004 LONG TERM COMPENSATION ----------------------------------- ------------------------------------- AWARDS PAYOUTS ------------------------------------- SECURITIES RESTRICTED OTHER UNDER SHARES ALL ANNUAL OPTIONS/ OR OTHER NAME AND PRINCIPAL COMPENSA- SARS SHARE LTIP COMPENSA- POSITION WITH THE SALARY BONUS TION(1) GRANTED UNITS PAYOUTS TION(2) CORPORATION ($) ($) ($) (#) ($) ($) ($) - -------------------- ----------- -------- -------- --------- ---------- ---------- ------- --------- J.H. (RICK) DOMAN(3) Corporation 93,042 3,000 - - - - 835,058(4) Former President and Predecessor 224,583 - - - - - 3,258 Chief Executive ------- ------- ------- Officer Total 317,625 3,000 - - - - 838,316 ======= ======= ======= DAN DYCK Corporation 67,917 63,550 - - - - 2,191 General Manager, Predecessor 93,583 -- - - - - 3,039 Sawmills ------- ------- ------- Total 161,500 63,550 - - - - 5,230 ======= ======= ======= REYNOLD HERT(5) Corporation 92,330 125,000 - 250,000 - - 794 President and Chief Predecessor - - - - - - - Executive Officer ------- ------- ------- ------- Total 92,330 125,000 - 250,000 - - 794 ======= ======= ======= ======= PHILIP HOSIER(6) Corporation 73,042 78,000 - - - - 1,843 Former Corporate Predecessor 102,258 - - - - - 173,097(7) Secretary and ------- ------- ------- Vice-President, Total 175,300 78,000 - - - - 174,940 Finance ======= ======= ======= DAVE INGRAM Corporation 71,667 37,400 - - - - 2,302 General Manager, Predecessor 100,333 4,000 - - - - 3,217 Pulp Operations ------- ------- ------- Total 172,000 41,400 - - - - 5,519 ======= ======= ======= BERNI ZIMMERMANN(8) Corporation 74,400 19,000 - - - - 60,087(9) Consultant and Predecessor 104,160 - - - - - 2,987 Former General ------- ------- ------- Manager, Logging Total 178,560 19,000 - - - - 63,074 ======= ======= =======
- ------------------ (1) The aggregate amount of perquisites and other personal benefits that is less than $50,000 and 10% of the total annual salary and bonus for any of the Named Executives Officers are not reported. (2) Unless otherwise specified, amounts reported in this column refer to the dollar values of insurance premiums paid with respect to term life insurance, medical benefits and amounts contributed in respect of an employee savings plan. (3) Mr. Doman was the President and Chief Executive Officer of the Company from incorporation, April 27, 2004, until September 22, 2004. Mr. Doman's employment agreement with Doman was transferred to us on the implementation of the Plan. For a description of the terms of that agreement see the Annual Filing of Doman, dated April 16, 2004 available at www.sedar.com under the name Doman Industries Limited. Mr. Doman's employment was terminated effective September 22, 2004. Pursuant to his employment agreement, Mr. Doman was paid severance of $833,623 (made up of severance of $770,000, vacation pay of $44,423, car allowance of $19,200, and term life insurance, medical benefits and amounts contributed in respect of an employee savings plan of $1,435). (4) Mr. Doman's other compensation from the Predecessor and the Company for the year ended December 31, 2004 was $3,258 and $835,058 respectively, and includes the $833,623 paid as severance from the Company. (5) Mr. Hert became the President and Chief Executive Officer of the Company on October 4, 2004. Under his employment agreement, he is entitled to an annual base salary of $375,000. Under the terms of such agreement he was also entitled to a one time hiring bonus of $125,000. See "Item 6. Directors, Senior Management and Employees - B. Compensation - Employment Contracts - Executive Compensation Report" below. (6) Mr. Hosier was the Corporate Secretary of the Company from June 23, 2004 until May 2, 2005. He was Vice President, Finance of the Company from July 27, 2004 to January 24, 2005. (Mr. Paul Ireland was appointed CFO as of January 24, 2005.) Mr. Hosier retired from the Company in March 2005, but continues to work for the Company in a consulting role. (7) Pursuant to a retention agreement dated as of March 1, 2004 with Doman, Mr. Hosier was paid $65,000 for agreeing to remain in his position as Vice-President, Finance of Doman until the earlier of the implementation date of the Plan and June 30, 2004. He was also paid $105,517 vacation pay plus $2,580 for term life insurance, medical benefits and amounts contributed in respect of an employee savings plan. (8) Mr. Zimmermann was the General Manager, Logging of the Company from July 27, 2004 to December 31, 2004. He currently provides consulting services to the Company. (9) Mr. Zimmermann was paid $58,049 vacation pay plus $2,580 for term life insurance, medical benefits and amounts contributed in respect of an employee savings plan. Mr. Zimmermann is also entitled to severance of approximately $89,000 and a one time consulting retainer in the amount of $140,815. -50- The aggregate amount of compensation and benefits in kind (excluding pension benefits as set out below) paid during the financial year ended December 31, 2004 to all our members of senior management as at December 31, 2004 and former members of senior management as a group for services in all capacities paid by us and our Predecessor was approximately $3.2 million. RETIREMENT PLANS The following tables set forth annual benefits that become payable under pension plans established by 4018958 Canada Inc. (formerly Western Forest Products Limited, a subsidiary of Doman), which were transferred to us on the implementation of the Plan. As at December 31, 2004, D. Dyck, D. Ingram, R. Hert, P.G. Hosier and B. Zimmermann were members of the Western Forest Products Limited Salaried Employees Pension Plan (the "WFP Plan"). Also as at December 31, 2004, R. Hert and P.G. Hosier were members of the Western Forest Products Limited Supplementary Plan ("WFP Supplementary Plan"). The Doman Industries Limited Pension Plan (the "DIL Plan") was also transferred to us on the implementation of the Plan. However, none of the Named Executive Officers are members of the DIL Plan. D. Ingram is entitled to a separate supplement pension. See "Item 6. Directors, Senior Management and Employees - B. Compensation - Employment Contracts". TABLE I - THE WFP PLAN
Pensionable Years of Service Earnings --------------------------------------------------- ($) 15 20 25 30 35 40 - ----------- ------ ------ ------ ------ ------ ------ 100,000 24,855 33,140 41,425 49,710 57,995 66,280 125,000 27,495 36,660 45,825 54,990 64,155 73,320 150,000 27,495 36,660 45,825 54,990 64,155 73,320 175,000 27,495 36,660 45,825 54,990 64,155 73,320 200,000 27,495 36,660 45,825 54,990 64,155 73,320 225,000 27,495 36,660 45,825 54,990 64,155 73,320 250,000 27,495 36,660 45,825 54,990 64,155 73,320 275,000 27,495 36,660 45,825 54,990 64,155 73,320 300,000 27,495 36,660 45,825 54,990 64,155 73,320 325,000 27,495 36,660 45,825 54,990 64,155 73,320 350,000 27,495 36,660 45,825 54,990 64,155 73,320 375,000 27,495 36,660 45,825 54,990 64,155 73,320 400,000 27,495 36,660 45,825 54,990 64,155 73,320 ====== ====== ====== ====== ====== ======
Under the WFP Plan, pensionable earnings equal the highest average earnings of the member of the plan based upon a 60 consecutive month period while the WFP Plan is in operation. Pension benefits are equal to 1.9% of pensionable earnings per year of service to a maximum of 40 years minus an adjustment for Canada Pension Plan Benefits. Although the normal retirement age is 65, a member may retire up to 10 years prior to the age of 65. If a member retires before the age of 60 and receives a pension, his pension will be reduced. If a member retires before the age of 65, he will receive a bridging benefit which ranges from $3,098 to $9,720 for the range of earnings and years of service set out in Table II. Apart from the bridging benefit which terminates at age 65, pensions are paid for life with a guarantee of at least five years payment should the retired executive die within five years following retirement. Benefits payable under the WFP Plan are limited to the maximum amounts permitted under the Income Tax Act (Canada) (the "ITA Limit"). The WFP Supplementary Plan provides a pension supplement to members of the WFP Plan designated as participants by the Board in order to provide pension benefits to the level that members would receive if no ITA Limit was in place. Pensionable earnings and benefits under the WFP Plan, as supplemented by the WFP Supplementary Plan, are calculated upon the same basis as benefits and earnings under the WFP Plan alone, with the exception that the ITA Limit does not apply. The WFP Supplementary Plan is funded from our general operations. As at December 31, 2004, D. Dyck had completed and been credited with approximately 14.3 years of pensionable service, R. Hert had completed and been credited with approximately 0.3 years of pensionable service, P.G. Hosier had completed and been credited with approximately 25.3 years of pensionable service, D. Ingram had completed and been credited with approximately 13.6 years of pensionable service, and B. Zimmermann had completed and been credited with approximately 10.8 - 51 - years of pensionable service. As of September 22, 2004, the date of termination of his employment, J.H. Doman had completed and been credited with approximately 22.7 years of pensionable service. TABLE II -- THE WFP PLAN (AS SUPPLEMENTED BY THE SUPPLEMENTARY PLAN)
Pensionable Years of Service Earnings ---------------------------------------------------------------------------------------- ($) 15 20 25 30 35 40 - ----------- ------- ------- ------- ------- ------- ------- 100,000 24,855 33,140 41,425 49,710 57,995 66,280 125,000 31,980 42,640 53,300 63,960 74,620 85,280 150,000 39,105 52,140 65,175 78,210 91,245 104,280 175,000 46,230 61,640 77,050 92,460 107,870 123,280 200,000 53,355 71,140 88,925 106,710 124,495 142,280 225,000 60,480 80,640 100,800 120,960 141,120 161,280 250,000 67,605 90,140 112,675 135,210 157,745 180,280 275,000 74,730 99,640 124,550 149,460 174,370 199,280 300,000 81,855 109,140 136,425 163,710 190,995 218,280 325,000 88,980 118,640 148,300 177,960 207,620 237,280 350,000 96,105 128,140 160,175 192,210 224,245 256,280 375,000 103,230 137,640 172,050 206,460 240,870 275,280 400,000 110,355 147,140 183,925 220,710 257,495 294,280 ======= ======= ======= ======= ======= =======
For the year ended December 31, 2004, we and our Predecessor have set aside or accrued $162,000 to provide for pensions, retirement and similar benefits to our directors and senior officers and former directors and officers as at December 31, 2004. EMPLOYMENT CONTRACTS Mr. D. Ingram entered into an agreement with a subsidiary entity of Doman dated April 29, 1991, which was assigned to us on the implementation of the Plan, providing for a supplemental pension in addition to a regular pension from the WFP Plan. Mr. Ingram is entitled to a supplementary pension from us based on his pensionable service with us and our Predecessor, his final average earnings at his former employer and the WFP Plan's pension formula. This supplementary pension to Mr. Ingram is payable from our general operations. We have entered into an employment agreement with our current CEO, effective from October 4, 2005 and an employment agreement with our current CFO, effective from January 24, 2005 (collectively the "Employment Agreements"). The Employment Agreements are for an indefinite term and contain provisions for annual base salaries (subject to annual review), as well as provisions pertaining to eligibility for annual discretionary bonuses based on personal and corporate performance, participation in the WFP Plan, the WFP Supplementary Plan and our incentive stock option plan ("Option Plan"), eligibility for benefits, vacation, relocation allowances, vehicle allowances and in the case of the CEO the grant of options as described above. The Employment Agreements also contain severance provisions contemplating, in the case of termination without cause, severance payments equal to the sum of 24 months in the case of the CEO, and 12 months in the case of the CFO, of base salary plus the average yearly performance bonus over the past three years or less (collectively, the "Termination Payment"). In addition, upon such termination all vested options may only be exercised within 90 days of termination. The Employment Agreement in the case of the CEO provides for the entitlement for a period of 90 days to resign and receive the Termination Payment in the event of the occurrence of certain change in control events and that upon such change of control, all unvested options will vest. In the case of the CFO, the Employment Agreement provides that upon the occurrence of a material change in control of the Company, and the CFO is not offered employment on substantially the same terms, the CFO is entitled for a period of 90 days to resign and receive a lump sum payment equal to 24 months of salary plus bonus amounts due to the CFO. The foregoing summary of the Employment Agreements is qualified in its entirety by reference to the provisions of the Employment Agreements set out in Exhibits 4.6 and 4.7. Other than as noted above or elsewhere herein, we have no written employment agreements between us or any of our subsidiaries and a Named Executive Officer or any compensation arrangement where the Named Executive Officer entitled to receive more than $100,000 in event of resignation, retirement or other termination of the Named Executive Officer or on a change of control where such contract or arrangement is in existence at the end of the most recent completed financial year. - 52 - See "Item 6. Directors, Senior Management and Employees - B. Compensation - - Summary Compensation Table" for a summary of compensation earned by Named Executive Officers for the financial year ended December 31, 2004. Also see "Item 6. Directors, Senior Management and Employees - B. Compensation - Retirement Plans" for a discussion of retirement benefits available to Named Executive Officers. OPTION TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES Incentive Stock Option Plan Western has an Option Plan which permits the granting of options (the "Options") in accordance with the terms of the Option Plan to eligible participants to purchase up to a maximum of 2,500,000 Common Shares (representing approximately 9.75% of the issued and outstanding Common Shares as of June 21, 2005), which have been reserved for issuance under the Option Plan. As of June 21, 2005, 374,590 Options to purchase 374,590 Common Shares or approximately 1.46% of the issued and outstanding Common Shares have been granted to eligible participants, no Common Shares have been issued pursuant to the exercise of Options, and a total of 2,125,410 Options remain available under the Option Plan. Options which have expired, were cancelled or otherwise terminated without having been exercised are available for subsequent grants under the Option Plan.
NUMBER OF SECURITIES REMAINING AVAILABLE FOR NUMBER OF SECURITIES FUTURE ISSUANCE UNDER TO BE ISSUED UPON EQUITY COMPENSATION EXERCISE OF OUTSTANDING WEIGHTED-AVERAGE PLANS (EXCLUDING OPTIONS, WARRANTS AND EXERCISE PRICE OF SECURITIES REFLECTED IN RIGHTS OUTSTANDING OPTIONS, COLUMN (A)) AS AT DECEMBER 31, WARRANTS AND RIGHTS AS AT DECEMBER 31, 2004 AS AT DECEMBER 31, 2004 2004 PLAN CATEGORY (a) (b) (c) - ----------------------------- ----------------------- ----------------------- ----------------------- Equity compensation plans approved by securityholders NIL - NIL Equity compensation plans not approved by securityholders 299,590 9.72 2,200,410 Total 299,590 2,200,410
The Option Plan provides that the Board may from time to time grant Options to acquire Common Shares to any participant who is an employee, officer or director of us or our affiliates or a consultant to us or our affiliates. The Options are non-assignable and non-transferable otherwise than by will or by laws governing the devolution of property in the event of death. Each Option entitles the holder to acquire one Common Share, subject to certain adjustments. The exercise price for Options granted pursuant to the Option Plan will be determined by the Board on the date of the grant, which price may not be less than the market value. Market value is defined under the Option Plan as the closing price of the Common Shares on the TSX on the trading day immediately preceding the grant day and if there is no closing price, the last sale prior thereto. The term of the Options granted is determined by the Board, which term may not exceed a maximum of ten years from the date of the grant. Pursuant to the Option Plan, additional terms and conditions, including vesting requirements, may be imposed by the Board on Options granted under the Option Plan. The Option Plan does not contemplate that the Company will provide financial assistance to any optionee in connection with the exercise of the Option. The total number of Common Shares that may be reserved for issuance to any one participant pursuant to Options granted under the Option Plan may not exceed 5% of the Common Shares outstanding (on a non-diluted basis) on the grant date of the Options. The maximum number of Common Shares that may be issued to our insiders and their associates pursuant to Options granted under the Option Plan within any one-year period, when taken together with the number of Common Shares issued to such insiders and their associates under our other previously established or proposed share compensation arrangements, may not exceed 10% of the issued and outstanding Common Shares on a non-diluted basis at the end of such period and, in the case of any one insider and his associates, may not exceed 5% of such issued and outstanding Common Shares. The maximum number of Common Shares that may be reserved for issuance under Options granted to insiders and their associates under the Option Plan together with the number of Common Shares reserved for issuance to such insiders and their associates under our other - 53 - previously established or proposed share compensation arrangements may not exceed 10% of the issued and outstanding Common Shares on a non-diluted basis at the grant date of the Options. Unless otherwise determined by the Board, if the holder of the Option ceases to be an eligible participant under the Option Plan: (a) for any reason other than death, retirement, early retirement, sickness or disability, the Options held by the participant terminate; (b) as a result of retirement (other than early retirement), Options that are held by the participant that have vested continue in force; (c) by reason only of early retirement as permitted under the provisions of our pension plan, Options that are held by the participant that have vested continue in force; and (d) as a result of death, the legal representatives of the participant may exercise the Options that are held by the participant within six months after the date of the participant's death to the extent such Options were by their terms vested and exercisable as of the date of the participant's death or within the period of six months following the participant's death; In the event that: (a) we amalgamate, consolidate with or merge with or into another body corporate, holders of Options will, upon exercise thereafter of such Option, be entitled to receive and compelled to accept, in lieu of Common Shares, such other securities, property or cash which the holder would have received upon such amalgamation, consolidation or merger if the Option was exercised immediately prior to the effective date of such amalgamation, consolidation or merger; (b) the exchange or replacement of Common Shares with those in another company is imminent because of a proposed merger, amalgamation or other corporate arrangement or reorganization, the Board may, in its discretion, determine the manner in which all unexercised Options, granted under the Option Plan shall be treated including, for example, requiring the acceleration of the time for the exercise of outstanding Options and of the time for the fulfillment of any conditions or restrictions on such exercise; and (c) an offer to purchase all of the Common Shares is made by a third party, we may, at our option, require the acceleration of the time for the exercise of the Options granted under the Option Plan and of the time for the fulfillment of any conditions or restrictions on such exercise. The Board may, subject where required to securities regulators and/or TSX approval, from time to time amend, suspend or terminate the Plan in whole or in part. Pursuant to TSX requirements, shareholder approval is required for amendments that involve: (a) amendments to the number of securities issuable under the arrangement, including an increase to a fixed maximum number or a fixed maximum percentage or a change from a fixed maximum number to a fixed maximum percentage; (b) the introduction of a provision permitting reloading upon exercise; (c) any change to the eligible participants which would have the potential of broadening or increasing insider participation; (d) the addition of any form of financial assistance; (e) any amendment to the financial assistance provision which is more favourable to participants; (f) the addition of a cashless exercise feature, payable in cash or securities, which does not provide for a full deduction of the number of underlying securities from the reserved shares; (g) the addition of a deferred or restricted share unit or any other provision which results in participants receiving securities while no cash consideration is received by the issuer; and - 54 - (h) in circumstances where the amendment could lead to a significant or unreasonable dilution in the issuer's outstanding securities or may provide additional benefits to eligible participants, especially insiders at the expense of the issuer and its existing securityholders. The TSX also requires that disinterested shareholder approval be obtained in accordance with regulatory requirements if the exercise price of any outstanding option granted to an insider is reduced or the exercise period extended to the benefit of insiders. In addition, the Option Plan and any outstanding Options may be amended or terminated by the Board if the amendment or termination is required by any securities regulators, a stock exchange or a market as a condition of approval to a distribution to the public of the Common Shares or to obtain or maintain a listing or quotation of our Common Shares. The Board may also amend or terminate any outstanding Option, including, but not limited to, substituting another award of the same or of a different type or changing the date of exercise; provided, however that, the holder of the Option must consent to such action if it would materially and adversely affect the holder under the Option Plan. Under the Option Plan, the exercise price of any outstanding Option granted to an insider may not be reduced unless disinterested shareholder approval is obtained in accordance with TSX and securities regulatory requirements. The foregoing summary of the Option Plan is qualified in its entirety by reference to the provisions of the Option Plan available on EDGAR at www.sec.gov (under a Form 6-K dated March 28, 2005) and available on SEDAR at www.sedar.com under the name "Western Forest Products Inc.". Option Grants During the Financial Period Ended December 31, 2004 We granted the following options to the Named Executive Officers during the financial year ended December 31, 2004: OPTION/SARS GRANTS DURING 2004 FINANCIAL YEAR
COMMON SHARES % OF TOTAL MARKET VALUE(1) OF UNDER OPTIONS/SARS COMMON SHARES OPTIONS/SARS GRANTED TO EXERCISE OR UNDERLYING GRANTED EMPLOYEES IN BASE PRICE OPTIONS ON THE NAME (#) FINANCIAL YEAR ($/SHARE) DATE OF GRANT ($) EXPIRATION DATE - ----------------- ------------- -------------- ----------- ------------------ --------------- J.H. (Rick) Doman - - - - - Dan Dyck - - - - - Reynold Hert 250,000(2) 100% 9.25 2,312,500 Oct. 3, 2014 Philip Hosier - - - - - Dave Ingram - - - - - Berni Zimmermann - - - - -
NOTES: (1) Market value under the Option Plan is defined as the closing price on the TSX on the trading day immediately preceding the grant day. (2) These Options vest in increments of 20% at intervals of one year and immediately upon a change of control. Options must be exercised within 90 days of termination of employment without cause or resignation upon a change of control. See "Item 6. Directors, Senior Management and Employees - B. Compensation - Options to Purchase Securities from Registrant or Subsidiaries - Incentive Stock Option Plan" for a description of other terms that apply to the options. - 55 - AGGREGATED OPTIONS EXERCISED DURING 2004 FINANCIAL YEAR AND FINANCIAL YEAR-END OPTION VALUES
VALUE OF UNEXERCISED SECURITIES UNEXERCISED OPTIONS/SARS IN-THE-MONEY OPTIONS/SARS ACQUIRED AGGREGATE AT DECEMBER 31, 2004 AT DECEMBER 31, 2004 ON VALUE EXERCISABLE/ EXERCISABLE/ EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE(1) NAME (#) ($) (#) ($) - ----------------- ---------- --------- ------------------------- ------------------------- J.H. (Rick) Doman - - - - Dan Dyck - - - - Reynold Hert - - -/250,000 -/0 Philip Hosier - - - - Dave Ingram - - - - Berni Zimmermann - - - -
NOTES: (1) Based on a market value of $6.65 per share, being the closing trading price per Common Share on the TSX as of December 31, 2004. EXECUTIVE COMPENSATION REPORT Composition of the Management Resources and Compensation Committee During the period from the implementation of the Plan until December 31, 2004, the following individuals served as members of our Management Resources and Compensation Committee: John Lacey, Peter Gordon and John B. Newman, who were all directors of the Company during the time they served. None of the members of our Management Resources and Compensation Committee are officers or employees or were former officers or employees of the Company or any of our subsidiaries, had or has any relationship that requires disclosure hereunder in respect of indebtedness owed to the Company or, except as otherwise set out herein, any interest in material transactions involving the Company. In addition, none of our executive officers have served on the compensation committee (or in the absence of such committee the entire Board of Directors) of another issuer whose executive officer is a member of our Management Resources and Compensation Committee or Board. Report On Executive Compensation The Management Resources and Compensation Committee is responsible for, among other things, reviewing and approving the compensation of our executive officers except the CEO and in the case of the CEO, evaluating the CEO's performance in light of our corporate goals and making recommendations to the Board with respect to the CEO's compensation level based on this evaluation. The Committee meets periodically at the request of its Chair to review compensation policies relating to the Company and its subsidiaries and to approve specific compensation awards and benefits as well as other matters referred to the Committee by the Board. Executive Compensation Policies The Committee's policy is that executive officers of the Company, including the CEO and other Named Executive Officers, should be compensated based on the market value of the jobs they perform, their levels of performance and the performance of the Company. The Company's executive compensation policies are designed to recognize and reward executive officers based upon individual and corporate performance. The Committee monitors levels of executive remuneration to ensure overall compensation reflects the Company's objectives and philosophies and meets the Company's desired relative compensation position. The key components comprising executive officer compensation are base salary and annual bonus (short-term incentives) and participation in one or more pension plans and in an incentive stock option plan (long-term incentives). - 56 - The Committee approves salary ranges for executive officers of the Company based on competitive industry data for the markets in which the Company operates. In establishing base salaries and salary ranges, the objective of the Committee is to set target levels which, over time, will be competitive with market salaries. The Company's compensation policy is to set target levels near or consistent with the median level in the group of comparable forest product companies, i.e., B.C. based, large, publicly held, integrated forest product companies. Individual levels, which are set annually, may vary from this objective, depending upon individual performance levels. The CEO does not participate in discussions or reviews relating to his own compensation. As noted above, the Company provides annual incentive compensation to executive officers, including the Named Executive Officers, through the provision of incentive bonuses. Incentive bonuses are awarded annually, on a discretionary basis, to executive officers, based upon a review of Company and individual performance over the prior financial year relative to each executive officer's area of responsibility. In recognition of performance by the executive team, the Committee determined that bonuses be awarded to its Named Executive Officers as set out under the Summary Compensation Table in the Company's management information circular. The Company also has in place an incentive stock option plan. The incentive stock option plan is designed to encourage employees and executive officers to focus on the long-term interests of the Company and its shareholders. The Board has the authority to establish terms and conditions of each granted option, in accordance with the provisions of the incentive stock option plan. Except in the case of the CEO, as referenced above, the Company has not issued any options to executive officers under the incentive stock option plan during 2004. The Committee is in process of developing the eligibility criteria for specific grants of options under the incentive stock option plan. CEO Compensation The Committee's policy is that the salary of the CEO should, be in line with competitive salaries for positions of similar responsibility at large, integrated forest products companies in British Columbia that are, like the Company, publicly held. In assessing compensation paid to the CEO, the Committee also reviews available industry data relating to such companies. Given that the CEO was appointed on October 4, 2004, no change has been made to the CEO's salary. A hiring bonus of $125,000 was paid to the CEO in accordance with his employment agreement. This total compensation package is at the median of comparable forest product companies. COMPENSATION OF DIRECTORS Directors of Western who are not officers or employees are compensated for their services as directors through a combination of retainer fees and meeting attendance fees. Our Board has approved an annual retainer fee to be paid to such directors (other than the Chair of the Board) of $25,000 and the annual retainer fee to be paid to our Chair of $50,000. In addition, our Board has approved the payment of an additional fee of $5,000 per annum to the Chair of any committee of the Board and the payment to non-management directors of a fee of $1,000 for each director and committee meeting attended. Such directors are also to be reimbursed for expenses incurred in connection with their services as directors. The directors and former directors (other than inside directors) of Western were paid the following amounts as directors' fees for the year ended December 31, 2004: James Arthurs(1) $22,500 Lee Doney(1) 22,000 Peter Gordon(1) 23,500 John Lacey(1) 22,000 John MacIntyre(1) 35,500 John B. Newman(1) 27,000
(1) Messrs. Arthurs, Doney, Gordon, Lacey, MacIntyre and Newman were first appointed directors on July 27, 2004 in connection with the implementation of the Plan. Our directors are also eligible to participate in the Option Plan. Each independent director was granted 8,265 Options under the Option Plan, each Option entitling the holder to acquire one Common Share at the exercise price of $12.10 per share, until August 19, 2014. The exercise price represented a premium of 10% on the closing price on the first trading day on the TSX and a premium over the market price on the date of grant. The Options granted to these directors vest in increments of 20% at intervals of one year and immediately upon a change of control. See "Item 6. Directors, Senior Management and Employees - B. Compensation - Options to Purchase Securities from Registrant or Subsidiaries - Incentive Stock Option Plan" for a description of the term that apply to the Options. - 57 - In connection with, and subject to, the implementation of the Plan and appointment as a director of Western, each of the independent directors was paid a fee of $5,000 (part of the exit costs of our Predecessor) in recognition of services provided prior to their appointment as directors of the Company in carrying out due diligence, planning and organizing the future board and committees of the Company. DIRECTORS AND OFFICERS INDEMNIFICATION AND INSURANCE We have entered into indemnification agreements with each of our directors, directors of our subsidiaries and our CEO and CFO. There was no indemnification payable during the most recent financial year to our directors or officers. We maintain liability insurance for our directors and officers in the aggregate amount of $25 million, subject to a $350,000 deductible loss payable by us. The premium, in the amount of $350,000, was paid by us for the period from July 26, 2004 to July 26, 2005. C. BOARD PRACTICES The following describes the Company's corporate governance practices in accordance with National Instrument 58-101 - Disclosure of Corporate Governance Practices of the Canadian Securities Administrators and is derived from Western's recent management proxy circular required to be filed under applicable securities laws in Canada. BOARD OF DIRECTORS Western's Board is currently comprised of seven directors, six of whom are non-management directors. The independence status of each individual director is reviewed by the Board annually. In that regard, the Board considers a director to be independent if he has no direct or indirect material relationship with the Company, which in the view of the Board could reasonably be perceived to materially interfere with the exercise of the director's independent judgment. The Board has determined that six directors, a majority, are independent. The current position of each director as determined by the Board is as set out below: James Arthurs Independent Lee Doney Independent Peter Gordon Independent Reynold Hert Non-independent John Lacey Independent John MacIntyre Independent John B. Newman Independent Mr. Hert is a member of our management and therefore is not an independent director. As noted above, Mr. Gordon is an officer of Tricap, a significant shareholder (see "Item 7. Major Shareholder and Related Party Transactions"). Mr. Lacey and Mr. MacIntyre are on Tricap's independent advisory board. See "Item 6. Directors, Senior Management and Employees - A. Directors and Senior Management - E. Share Ownership" above for more information about each director, including directorships of other reporting issuers in Canada or in a foreign jurisdiction and share ownership. The Chair of the Board, John MacIntyre, is an independent member of the Board. He is responsible for providing leadership to the Board in matters relating to the execution of Board responsibilities and works with the CEO and the senior management team to address our responsibilities to our stakeholders. The Chair's duties are set out in the Board's mandate attached as Exhibit 15.1 hereto. The Board (through its Nominating and Corporate Governance Committee) examines its size annually to determine whether the number and composition of directors is appropriate and is generally satisfied that its current number and composition of directors is appropriate, providing a diversity of views and experience while maintaining efficiency. The Board believes that the composition of the Board fairly represents the interests of Western's shareholders. As part of our corporate governance regime, our independent directors hold regularly scheduled meetings, at which members of management are not in attendance. The meetings are held on the same day as Board meetings. Since we commenced business - 58 - on July 28, 2004 until December 31, 2004, we have held four Board meetings at which members of management were not present. The Board believes that all directors should attend all meetings of the Board and all meetings of each committee on which a director is a member. The following table summarizes the attendance of Board and committee members from July 28, 2004 to December 31, 2004:
Nominating and Management Environmental, Corporate Resources and Health and Governance Compensation Board Meetings Audit Committee Safety Committee Committee Meetings Committee Meetings NAME Attended Meetings Attended Meetings Attended Attended Attended - -------------------- -------------- ----------------- ----------------- ------------------ ------------------ James Arthurs 4 of 4 3 of 3 2 of 2 1 of 1 N/A J.H. (Rick) Doman(1) 1 of 1 N/A N/A N/A N/A Lee Doney 4 of 4 N/A 2 of 2 1 of 1 N/A Peter Gordon 4 of 4 3 of 3 N/A N/A 4 of 4 Reynold Hert(2) 2 of 2 N/A N/A N/A N/A John Lacey 3 of 4 N/A N/A 1 of 1 3 of 4 John MacIntyre 4 of 4 3 of 3 N/A 1 of 1 N/A John B. Newman 4 of 4 3 of 3 N/A 1 of 1 4 of 4
- ------------------ (1) Mr. Doman's directorship ended on September 22, 2004. (2) Mr. Hert was appointed director on October 4, 2004. BOARD MANDATE The Board has adopted a written mandate in which it has assumed responsibility for our stewardship and for overseeing the management of our business. In that regard, the Board carries out its mandate directly or indirectly through its committees described below. The responsibilities of the Board are included in the Board's mandate, a copy of which is attached as Exhibit 15.1 hereto. Our senior management is responsible for our day-to-day operations and management. Prior Board approval is required in connection with matters that the Board deems significant such as major acquisitions or divestitures, significant amendments to our credit facilities, significant financings or changes to our strategic objectives. POSITION DESCRIPTIONS The Board has developed written position descriptions for the Chair of the Board and the Chair of each Board committee. In addition, the Board and the CEO have developed a written position description for the CEO. The duties and responsibilities of the Chair and CEO are set out in the Board's mandate attached as Exhibit 15.1 hereto. The Board has also developed and approved the corporate goals and objectives that our CEO is responsible for meeting. ORIENTATION AND CONTINUING EDUCATION The Board has a process for the orientation of new Board members regarding the role of the Board, its committees and its directors and the nature of operation of our business. New members are given a tour of our operations, meet with members of management, the Chair of the Board and the Chairs of the Board committees and a copy of recent disclosure documents and the minutes of Board and committee meetings are provided to new members. In addition, the Board provides continuing education for its members to maintain or enhance their skills and abilities as directors and to keep their knowledge of the Company current. The Board also has in place a policy whereby directors may, subject to approval of the Chair or a majority of the independent Board members, engage outside advisers at the Company's expense. Each of the Board committees are also authorized to engage outside advisers at the Company's expense. ETHICAL BUSINESS CONDUCT The Board has adopted two written codes of conduct, an Employee Code of Conduct for employees and a Code of Business Conduct and Ethics for directors and officers, to promote integrity and good governance. - 59 - Our codes address the following matters: (a) conflicts of interest, including transactions and agreements in respect of which a director or executive officer has a material interest; (b) protection and proper use of corporate assets and opportunities; (c) confidentiality of corporate information; (d) fair dealing with our security holders, customers, suppliers, competitors and employees; (e) compliance with laws, rules and regulations; and (f) reporting of any illegal or unethical behavior. The Board has also adopted a Communication Policy and an Insider Trading Policy. A copy of the written codes and policies can be viewed on our website at www.westernforest.com. A copy of our codes and policies are also available from our Corporate Secretary. The Nominating and Corporate Governance Committee oversees compliance with each of the codes and policies, authorizes any waivers and confirms with management the appropriate disclosure of any waiver. Where appropriate, the Committee will also cause an investigation of any reported violation of the Code of Business Conduct and Ethics and oversees an appropriate response is taken to any violation. The CEO promotes compliance with the Employee Code of Conduct, causes an investigation of any reported violations to be undertaken and determines an appropriate response is taken to any violation. Certain of our directors are directors or officers of other issuers and, to the extent that such other issuers may participate in transactions or other ventures in which we may participate, the directors may have a conflict of interest in negotiating and concluding terms respecting the extent of such participation. The Board requires that directors provide disclosure to it of all boards and committees that they are members of, and all offices held at, other issuers. We also require conflicts of interest to be disclosed to our Code of Ethics Contact Person and reported to the Nominating and Corporate Governance Committee. In the event that conflicts of interest arises, a director who has such a conflict is required under the CBCA to disclose the conflict and (except in limited circumstances permitted by the CBCA) to abstain from voting for or against the approval of the matter. (See "Item 10. Additional Information - B. Articles and Bylaws".) In addition, in considering transactions and agreements in respect of which a director has a material interest our Board will require that the interested person absent themselves from portions of Board or committee meetings so as to allow independent discussion of points in issue and the exercise of independent judgment. In appropriate cases, we may also establish a special committee of independent directors to review a matter in which directors or management, may have a conflict. NOMINATION OF DIRECTORS The Nominating and Corporate Governance Committee will review the composition of the Board annually, assess the board annually, identify new candidates for nomination as directors to the Board and make recommendations to the Board for nominees for election as directors. In that regard, the committee considers: - the competencies and skills that are considered to be necessary for the Board, as a whole, to possess; - the competencies and skills that each existing director possesses; - the competencies and skills each new nominee will bring to the boardroom and whether the nominees can devote sufficient time to the Company and the Board; and - performance of existing directors. See "Item 6. Directors, Senior Management and Employees - C. Board Practices - Board Committees - Nominating and Corporate Governance Committee" below for a description of the committee's composition and responsibilities. - 60 - COMPENSATION AND BOARD ASSESSMENTS Compensation for directors is determined by the Nominating and Corporate Governance Committee. The Committee reviews industry standards for directors compensation in setting compensation levels for directors and may use consultants for guidance. Compensation levels for officers is determined by the Management Resources and Compensation Committee. See "Item 6. Directors, Senior Management and Employees - B. Compensation - Executive Compensation Report" above for a description of our executive compensation policies. We have retained Mercer Human Resource Consulting Limited, a compensation consultant, to provide competitive industry data on compensation for officers. The Board, its committees and individual directors will be regularly assessed with respect to their effectiveness and contribution. The assessment considers (a) compliance with the Board's mandate, (b) the charter of each committee of the Board and (c) the competencies and skills that the individual director brings to the Board. See "Item 6. Directors, Senior Management and Employees - C. Board Practices - Board Committees - Nominating and Corporate Governance Committee - Management Resources and Compensation Committee" below for a description of each committee's composition and responsibilities. BOARD COMMITTEES The Board has established four committees of directors, being the Environmental, Health and Safety Committee, Nominating and Corporate Governance Committee, the Management Resources and Compensation Committee and the Audit Committee. Each of the committees are composed of entirely independent members. Environmental, Health and Safety Committee The Environmental Health and Safety Committee is currently composed of James Arthurs and Lee Doney. Mr. Doney is the Chair of the committee. All of the members of the committee are independent. The committee's responsibilities, powers and operation are set out in its charter, a copy of which is attached as Exhibit 15.2 hereto. Nominating and Corporate Governance Committee The Nominating and Corporate Governance Committee is currently composed of James Arthurs, Lee Doney, John Lacey, John MacIntyre and John B. Newman. Mr. Newman is the Chair of the Committee. All of the members of this committee are independent. The committee's responsibilities, powers and operation are in its charter, a copy of which is attached as Exhibit 15.3 hereto. The committee has recommended the adoption of an Employee Code of Conduct and a Code of Business Conduct and Ethics. See "Item 6. Directors, Senior Management and Employees - C. Board Practices - Ethical Business Conduct" above. Management Resources and Compensation Committee As noted above, the Management Resources and Compensation Committee is currently composed of Peter Gordon, John Lacey and John B. Newman. All of the members of the committee are independent. Mr. Lacey is the Chair of the committee. The committee's responsibilities, powers and operation are set out in its charter, a copy of which is attached as Exhibit 15.4 hereto. Audit Committee The Audit Committee is currently composed of James Arthurs, Peter Gordon, John MacIntyre and John B. Newman. Mr. MacIntyre is the Chair of the committee. Each of the members of the committee is independent and financially literate as defined in Multilateral Instrument 52-110 - Audit Committees of the Canadian Securities Administrators. See "Item 6. Directors, Senior Management and Employees - A. Directors and Senior Management" for each member's education and/or experience. - 61 - The committee's responsibilities, powers and operation are set out in its charter, a copy of which is attached as Exhibit 15.5 hereto. See also "Item 16A Audit Committee Financial Expert" and "Item 16C Principal Accountant Fees and Services," for further particulars regarding our Audit Committee, including the Audit Committee's pre-approval policies and procedures for non-audit services and the service fees paid to our auditors. D. EMPLOYEES The following table sets out the number of employees employed by the Company as at December 31, 2004, and by our Predecessor as at December 31, 2003 and 2002, and the number of employees employed in the pulp segment and in the solid wood segment for the same date.
NO. OF EMPLOYEES 2004 2003 2002 COMPANY PREDECESSOR PREDECESSOR Total .......................... 2,027 2,442 2,412 Pulp Segment(1) ................ 321 669 773 Solid Wood...................... 1,706 1,773 1,639
- ------------------ (1) Number of employees include 356 and 432 employees employed at Port Alice by our Predecessor as at December 31, 2003 and 2002 respectively. In addition, we use contractors in our harvesting operations. As of December 31, 2004, we had approximately 400 contractors. See also "Item 4. Information on the Company - B. Business Overview - Human Resources". E. SHARE OWNERSHIP DIRECTORS The following table sets forth information, as of June 21, 2005, concerning the beneficial ownership of the Common Shares by each of the directors (the information concerning the respective directors has been furnished by each of them).
PERCENTAGE OF ISSUED CLASS OF SHARES NUMBER OF REPRESENTED BY SHARES SHARES BENEFICIALLY BENEFICIALLY NUMBER OF NAME OF DIRECTOR AND POSITION WITH THE COMPANY OWNED OWNED(1) OPTIONS - ----------------------------------------------- ------------ -------------- --------- JAMES ARTHURS NIL NIL 8,265(2) Director LEE DONEY NIL NIL 8,265(2) Director PETER GORDON See Note 4 See Note 4 8,265(2) Director REYNOLD HERT NIL NIL 300,000(3) President, Chief Executive Officer and Director JOHN LACEY 6,177(4) .024% 8,265(2) Director JOHN MACINTYRE 414(4) .002% 8,265(2) Director and Chairman of the Board JOHN B. NEWMAN NIL NIL 8,265(2) Director
- ------------------ (1) Rounded up to the nearest third decimal place. - 62 - (2) See "Item 6. Directors, Senior Management and Employees - B. Compensation - Compensation of Directors" for the terms of the Options granted. (3) See "Item 6. Directors, Senior Management and Employees - B. Compensation" for the terms of the 250,000 Options granted to Mr. Hert. On June 15, 2005, 50,000 Options were granted to Mr. Hert, each Option entitling him to acquire one Common Share at the exercise price of $3.50 until June 14, 2015. The Options granted vest in increments of 20% at intervals of one year and immediately upon a change of control. Vested Options must be exercised within 90 days of termination of employment without cause or resignation upon change of control. See "Item 6. Directors, Senior Management and Employees - B. Compensation - Options and Purchase Securities from Registrant or Subsidiaries - Incentive Stock Options Plan" for a description of other terms that apply to the Options. (4) Mr. Gordon, as described above under "Item 6. Directors, Senior Management and Employees - A. Directors and Senior Management", is an officer of Tricap. As of June 21, 2005 Tricap holds 5,138,228 Common Shares or 20.5% of our issued and outstanding Common Shares. (See "Item 7. Major Shareholders and Related Party Transactions - A. Major Shareholders" for a list of our other principal shareholders.) Also, as described above, each of Messrs. Lacey and MacIntyre are members of the independent advisory board of Tricap. Of the 5,138,228 Common Shares, 6,177 Common Shares are beneficially owned by Mr. Lacey and 441 Common Shares are beneficially owned by Mr. MacIntyre. However, Tricap has the right to control and direct those Common Shares, including the right to vote or dispose of the shares. SENIOR MANAGEMENT (OTHER THAN CEO) The following table sets forth information, as of June 21, 2005, concerning the beneficial ownership of the Common Shares by each member of senior management (other than the CEO which is set forth above) (the information concerning the respective members of senior management has been furnished by each of them).
PERCENTAGE OF ISSUED CLASS OF SHARES NUMBER OF REPRESENTED BY SHARES SHARES BENEFICIALLY BENEFICIALLY NUMBER OF NAME AND POSITION WITH THE COMPANY OWNED OWNED OPTIONS - ----------------------------------------------- ------------ -------------- --------- TREVOR BONIFACE NIL NIL NIL General Manager, Logging JOHN DALTON NIL NIL NIL General Manager, Log Supply DAN DYCK NIL NIL NIL General Manager, Sawmills DAVE INGRAM NIL NIL NIL General Manager and Director of WPL PAUL IRELAND NIL NIL 25,000(1) Chief Financial Officer and Corporate Secretary MORRIS MANDZIUK NIL NIL NIL Treasurer DEBBIE NUSSBAUM NIL NIL NIL Director, Human Resources CLEM TROMBLEY NIL NIL NIL General Manager, Lumber Sales
- ------------------ (1) On June 15, 2005, 25,000 Options were granted to Mr. Ireland, each Option entitling him to acquire one Common Share at the exercise price of $3.50 until June 14, 2015. The Options granted vest in increments of 20% at intervals of one year and immediately upon a change of control. Vested Options must be exercised within 90 days of termination of employment without cause or resignation upon change of control. See "Item 6. Directors, Senior Management and Employees - B. Compensation - Options and Purchase Securities from Registrant or Subsidiaries - Incentive Stock Options Plan" for a description of other terms that apply to the Options. As at June 21, 2005, 6,591 Common Shares or less than .026% of the Common Shares outstanding were beneficially owned, directly or indirectly, or control or direction was exercised over those shares, by the directors and members of senior management set out above of the Company as a group. (See footnote 4 to the directors table of share ownership above.) See "Item 6. Directors, Senior Management and Employees - B. Compensation - - Options to Purchase Securities from Registrant and Subsidiaries" for a discussion of the Option Plan. - 63 - ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS A. MAJOR SHAREHOLDERS To our knowledge, as of June 21, 2005 the following parties beneficially own, directly or indirectly, or exercise control or direction over, 5% or more of the outstanding Common Shares:
PERCENTAGE OF ISSUED NAME AND MUNICIPALITY OF RESIDENCE OF SHAREHOLDER NO. OF COMMON SHARES COMMON SHARES Harbert Distressed Investment Master Fund, Ltd. ("Master Fund"), HMC Distressed Investment Offshore Manager, L.L.C. and HMC Investors L.L.C. (collectively, "Harbert") (1) Dublin, Ireland, in the case of the Master Fund and New 8,065,910 31.5% York, NY, in the case of the others Tricap Management Limited (2) 5,138,228 20.5% Toronto, Ontario Merrill Lynch Investment Managers, L.P. ("MLIM") (3) 3,205,162 12.5% Plainsboro, New Jersey
(1) The "Report Filed by Eligible Institutional Investor Under Part 4" of National Instrument 62-103 of the Canadian Securities Administrators ("NI 62-103") which was filed on SEDAR by Harbert (on its behalf and other entities managed and controlled by Harbert) on August 6, 2004, indicates that Harbert beneficially owns, directly or indirectly, or exercises control or direction over 8,065,939 of our Common Shares. However, our counsel has been advised verbally by a representative of Harbert that as at June 20, 2005, 8,065,910 Common Shares are held by Harbert. (2) Based on an Early Warning Report dated May 24, 2005 filed on SEDAR by Tricap Management Limited (as manager for and on behalf of Tricap Restructuring Fund). Our counsel has received confirmation by a Tricap representative that as at June 20, 2005 Tricap's holding as reported has not changed. (3) The "Report Filed by Eligible Institutional Investor Under Part 4" of NI 62-103 which was filed on SEDAR by MLIM (as manager, together with its affiliates for and on behalf of certain investment funds) on August 10, 2004 indicates that MLIM beneficially owns, directly or indirectly, or exercises control or direction over 3,255,162 of our Common Shares. However, our counsel has been advised verbally by a representative of MLIM that as at June 17, 2005, 3,205,162 Common Shares are held by MLIM. See "Item 4. Information the Company - A. History and Development of the Company". As of June 21, 2005, to our knowledge: - approximately 21,226,793 Common Shares or 82.81% of issued and outstanding Common Shares were held by 67 registered shareholders resident in the U.S. (of which approximately 17,758,107 Common Shares were held by CEDE & Co. as registered holder for approximately 44 US participants in The Depository Trust Company ("DTC")); - approximately 290 Tranche 1 Class C Warrants or 0.05% of the issued and outstanding Tranche 1 Class C Warrants were held by 2 registered holders resident in the U.S., approximately 436 Tranche 2 Class C Warrants or 0.05% of the issued and outstanding Tranche 2 Class C Warrants were held by 2 registered holders resident in U.S. and approximately 728 Tranche 3 Class C Warrants or 0.05% of the issued and outstanding Tranche 3 Class C Warrants were held by 2 registered holders in the U.S. (however Computershare is holding in trust 10,280 Tranche 1 Class C Warrants or 1.81% of the issued and outstanding Tranche 1 Class C Warrants on behalf of 17 persons resident in the U.S. (including CEDE & Co. as registered holder for approximately 30 U.S. DTC participants), 15,421 Tranche 2 Class C Warrants or 1.81% of the issued and outstanding Tranche 2 Class C Warrants on behalf of 17 persons resident in the U.S. (including CEDE & Co. as registered holder for approximately 30 U.S. DTC participants) and 25,709 Tranche 3 Class C Warrants or 1.81% of the issued and outstanding Tranche 3 Class C Warrants on behalf of 18 persons resident in the U.S. (including CEDE & Co. as registered holder for approximately 30 U.S. DTC participants), which warrants may not be released to such persons without the submission of an accredited investor certificate in accordance with the requirements of the Class C Warrant Indenture); and - Secured Bonds with an aggregate principal amount of approximately US$198,054,000 or 89.62% of the aggregate principal amount of the Secured Bond were held by 64 registered holders resident in the U.S. - 64 - See "Item 10. Additional Information - B Articles and Bylaws - Class C Warrants - Secured Bonds". B. RELATED PARTY TRANSACTIONS The following table sets out as at the date hereof the aggregate indebtedness in respect of the purchase of securities and other indebtedness to us or any of our subsidiaries (other than routine indebtedness) and to another entity if the indebtedness is the subject of a guarantee, support agreement, letter of credit or similar arrangement provided by us or any of our subsidiaries by our present and former executive officers, directors and employees. Included in the table is the aggregate indebtedness to our Predecessor by its former executive officers, directors and employees amounting to $18,933 which was transferred to us on the implementation of the Plan.
Aggregate Indebtedness ($) TO THE CORPORATION OR ITS PURPOSE SUBSIDIARIES TO ANOTHER ENTITY SHARE PURCHASE NIL NIL NIL OTHER Employee Indebtedness $18,933(1) NIL
- ------------------ (1) The $18,933 represents an interest free housing loan to an employee that was granted by our Predecessor. The loan was transferred to us on the implementation of the Plan. Although the loan matured on August 1, 2002, as of the date hereof, it has not yet been repaid. The loan is unsecured but may, at our option, become secured against the borrower's residence. As at the date hereof and since the beginning of our most recently completed financial year, there was no indebtedness in respect of the purchase of securities and no other indebtedness owed to us or any of our subsidiaries (other than routine indebtedness) or to any other entity where the indebtedness was the subject of a guarantee, support agreement, letter of credit or similar arrangement provided by us or any of our subsidiaries, by any individual who is or was since the beginning of the recently completed financial year end a present or former executive officer or director of the Corporation or an associate of any of the foregoing. Other than as set forth herein, as of the date hereof we are not aware of any material interest, direct or indirect, of any shareholder of Western who holds more than 10% of the voting rights attached to the Common Shares, any of Western or our subsidiaries' directors or executive officers or any director or executive officer of any shareholder of Western who holds more than 10% of the voting rights attached to the Common Shares or any associate or affiliate of any of the foregoing, in any transaction which has been entered into since the commencement of our most recent completed financial year or in any proposed transaction which, in either case, has materially affected or will materially affect us or any of our subsidiaries. C. INTERESTS OF EXPERTS AND COUNSEL Not applicable. ITEM 8. FINANCIAL INFORMATION A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION See "Item 17. Financial Statements" for financial statements filed as part of this annual report. EXPORT SALES See "Item 4. Information on the Company - B. Business Overview - Sales, Marketing and Distribution" for the total amount of export sales and percentage and amount of export sales in the total amount of sales volume. - 65 - LEGAL PROCEEDINGS CBC, 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 because it intended to enter into an exclusive sales relationship with a third party and for breach of contract. CBC has sought two forms of relief: (a) $4.5 million in damages; and (b) an injunction precluding the entering into of the proposed sales contract with the third party. Although Proof of Claim materials were delivered to CBC pursuant to the Revised Claims Process Order of our Predecessor, no Proof of Claim was filed by CBC. The court accepted the position that there is no anti-trust legislation violation and that any monetary claim that CBC may have was provable in our Predecessor's CCAA proceeding. It declined to make any ruling regarding the breach of contract claim. The court dismissed CBC's complaint. CBC is appealing the decision. The claim is in the name of our Predecessor and continues to be vigorously defended. We believe there is no merit to the claim. See "Item 4. Information on the Company - A. History and Development of the Company" for a discussion of our Predecessors' Plan and the resolution of our Predecessor's CCAA proceedings. See also "Item 4. Information on the Company - - B. Business Overview" for a discussion of the disposition of our Predecessor's actions against the Provincial Government. In addition to the litigation discussed above or elsewhere herein, we are also subject to routine litigation incidental to our business, the outcome of which we do not anticipate will have a material adverse affect on our business or financial condition. DIVIDEND INFORMATION The payment of dividends on the Common Shares is at the discretion of the Board and depends on our financial condition, the need to finance capital expenditures, financial covenants in credit agreements and other factors the Board may consider appropriate. No dividends have been paid by us on the Common Shares. The Secured Bond Indenture contains covenants limiting certain restricted payments, including the payment of dividends on Common Shares (other than stock dividends). The Secured Bond Indenture provides, among other things, that any subsidiary may declare or pay dividends or otherwise make distributions in cash to us or a guarantor under the Secured Bond Indenture. See "Item 10. Additional Information - B. Articles and Bylaws - Secured Bonds". B. SIGNIFICANT CHANGES In response to lower than expected sales and to reduce the amount of cash tied up in log and lumber inventories, we announced in June 2005 that we will be taking down-time at both our logging and sawmilling operations over the summer 2005. Logging operations will be curtailed starting at various dates in July 2005 and all will be idle through to the end of August 2005. Critical road and bridge building programs may continue throughout this period. Taking the down-time should allow us to reduce our log and lumber inventories by approximately $40-$50 million. At the same time, we also announced that we will defer payment of 50% of the interest due on June 30, 2005 as permitted under the terms of the Secured Bond Indenture. The unpaid interest amounting to approximately $10.3 million carries interest at 15% and can be repaid at any time during the Secured Bonds' life, and in any event no later than July 28, 2009. Except as stated above or as otherwise disclosed herein, there are no significant changes that have occurred since the date of the annual financial statements. ITEM 9. THE OFFER AND LISTING A. OFFER AND LISTING DETAIL Not applicable except 9.A.4. The following table sets forth the annual, quarterly and monthly high and low sales prices of the Common Shares on the Toronto Stock Exchange ("TSX") for the periods indicated: - 66 -
COMMON SHARES HIGH LOW ANNUAL HIGHS AND LOWS 2004 (from August 3, 2004 to December 31, 2004)....................... $11.30 $6.63 QUARTERLY HIGHS AND LOWS 2004 Third Quarter (from August 3, 2004 to September 30, 2004)............ $11.30 $9.00 Fourth Quarter ....................................................... $ 9.70 $6.63 2005 First Quarter......................................................... $ 8.25 $6.80 MONTHLY HIGHS AND LOWS 2004 December.............................................................. $ 7.55 $6.63 2005 January............................................................... $ 8.20 $7.10 February.............................................................. $ 8.25 $6.80 March................................................................. $ 8.00 $7.25 April................................................................. $ 7.50 $7.00 May .................................................................. $ 6.35 $5.25
B. PLAN OF DISTRIBUTION Not applicable. C. MARKETS The Common Shares are listed for trading on the TSX under the stock symbol WEF. There is currently no organized public market for the Secured Bonds or the Class C Warrants and we do not intend to apply for the listing of the Secured Bonds or the Class C Warrants on any securities exchange. D. SELLING SHAREHOLDER Not applicable. E. DILUTION Not applicable. F. EXPENSES OF ISSUE Not applicable. ITEM 10. ADDITIONAL INFORMATION A. SHARE CAPITAL Not applicable. B. ARTICLES AND BYLAWS Western is organized under the laws of Canada, and has been assigned corporation number 420424-7. Western's Articles and Bylaws do not contain a description of its objects and purposes. We may perform any and all corporate activities permissible under the laws of Canada. - 67 - Under the CBCA, directors who have an interest in a contract or transaction must declare their interest and may not vote in respect of such contract or transaction (except where the contract or transaction relates primary to their remuneration, is for indemnity or insurance permitted under the CBCA or is with an affiliate), but they are still counted in the quorum present. Western's Articles and Bylaws do not restrict a director's power to vote compensation to themselves or any other members in the absence of an independent quorum. Western's Bylaws provide that the directors may, without authorization of the shareholders, exercise borrowing powers and permits them to delegate by board resolution such powers to a director, a committee of directors or an officer of Western. There is no mandatory retirement age for our directors and the directors are not required to own our securities in order to serve as directors. An annual meeting of Western's shareholders must be held once in every calendar year not later than 18 months after incorporation and thereafter not later than 15 months after the last preceding annual meeting, but no later than six months after the end of the preceding financial year, and at such place as the Board may determine in accordance with the CBCA. The holders of not less than 5% of Western's issued shares that carry the right to vote at a meeting may requisition the Board of Directors to call a meeting of shareholders for the purposes stated in the requisition. The Board of Directors may also whenever they think fit, convene a special meeting of shareholders. The quorum for the transaction of business at any meeting of shareholders of Western is one or more voting persons present or deemed to be present (a voting person being a shareholder entitled to vote at the meeting or a duly appointed proxyholder of, or duly authorized representative of, the shareholder so entitled), and holding or representing by proxy (in the aggregate) not less than one twentieth of the total votes attaching to all shares. The only persons entitled to be present at a meeting of shareholders are voting persons, the directors and auditors of Western and others who are entitled or required under the CBCA or our Articles or Bylaws to be present at a meeting of shareholders. Western's Articles provide that the Board is to consist of a minimum of three directors and a maximum of 15 directors. Western currently has 7 directors. At each annual meeting of shareholders of Western, the entire Board of Directors retires and directors are elected for the next term. Each director serves until the close of the next annual meeting or until his successor is elected or appointed, unless his office is earlier vacated in accordance with our Articles or with the provisions of the CBCA. No class of shareholders has the right to elect a specified number of directors or to cumulate their votes with respect to the election of directors. Not less than 25% of the members of our Board of Directors are required to be resident Canadians, in accordance with the CBCA. Western's Articles and Bylaws do not contain provisions that would have an effect of delaying, deferring or preventing a change in control of the Company and that would operate only with respect to a merger, acquisition or corporate restructuring of Western. The Board may however, by resolution authorize the issuance by the Board of preferred stock in series. Western's Articles and Bylaws do not contain any provisions governing the ownership threshold above which shareholder ownership must be disclosed and do not limit non-resident or foreign shareholders to hold or exercise voting rights. SHARE CAPITAL Western's authorized capital consists of an unlimited number of Common Shares and an unlimited number of Preferred Shares, of which, as of June 21, 2005, 25,631,795 Common Shares are issued and outstanding, and no Preferred Shares are issued and outstanding. All the Common Shares rank equally as to voting rights, participation in a distribution of our assets on a liquidation, dissolution or winding-up and the entitlement to dividends. The holders of the Common Shares are entitled to receive notice of all meetings of shareholders of Western (other than meetings of holders of another class of shares) and to attend and vote the shares at such meetings. Each of the Common Shares carries with it the right to one vote. In the event of our liquidation, dissolution or winding-up or other distribution of our assets for the purpose of winding up our affairs, the holders of Common Shares will be entitled to receive on a pro rata basis, all of our assets remaining after payment of all of our liabilities, subject to the rights of the holders of Preferred Shares. The Common Shares carry no pre-emptive, exchange or conversion rights. Subject to the rights of the holders of Preferred Shares, the holders of the Common Shares are entitled to receive on a pro rata basis such dividends as our Board of Directors may declare out of funds legally available therefor. Provisions as to the modification, amendment or variation of the rights attached to the Common Shares are contained in the CBCA. Generally speaking, substantive changes to Western's share capital require the approval of Western's shareholders by special resolution (at least 2/3 of the votes cast). - 68 - The Preferred Shares may, at any time or from time to time, be issued in one or more series, and the directors may, by resolution, fix the number of Preferred Shares in, and determine the designation, rights, privileges, restrictions and conditions attaching to the Preferred Shares of each series. Before issuing Preferred Shares of a series, the directors must file with the Director of the CBCA articles of amendment. Preferred Shares of each series rank on a parity with the Preferred Shares of every other series with respect to priority in the payment of dividends and in the distribution of our assets in the event of our liquidation, dissolution or winding-up or any other distribution of our assets among shareholders for the purpose of winding-up our affairs. If Preferred Shares were outstanding, the holders of such shares would be entitled to priority over the Common Shares with respect to the payment of dividends and the distribution of our assets on a liquidation, dissolution or winding-up or other distribution of our assets for the purpose of winding up our affairs. The Preferred Shares of each series may be given such other preferences not inconsistent with the above over the Common Shares as may be determined in the case of each series authorized to be issued. Except as otherwise required by law, the holders of the Preferred Shares are not entitled to receive notice of or to attend or to vote at any meeting of shareholders of Western. CLASS C WARRANTS As of June 21, 2005, 569,373 Tranche 1 Class C Warrants, 854,146 Tranche 2 Class C Warrants and 1,423,743 Tranche 3 Class C Warrants are issued and outstanding. The Class C Warrants were issued under the Class C Warrant Indenture entered into with the Class C Warrant Trustee in connection with the implementation of the Plan. Each Class C Warrant entitles the holder to purchase one Common Share (subject to certain adjustments) at the following exercise price: Cdn$16.28 for Tranche 1 Class C Warrants, Cdn$26.03 for Tranche 2 Class C Warrants, and Cdn$33.83 for the Tranche 3 Class C Warrants. The Class C Warrants are non-transferable and have a five-year term that expires on July 27, 2009, subject to early termination provisions. Western is entitled to give a 30-day notice of termination with respect to any tranche of Class C Warrants if, during a 20-day trading period ending prior to the fifth business day prior to the date of such notice, the Common Shares trade at a weighted average price per share that is more than 125% of the exercise price of such tranche. In addition, on or after the first anniversary of the Plan Implementation Date, the Class C Warrants will expire upon any amalgamation or similar business combination that results in the shareholders of the Western owning less than 80% of the issued and outstanding equity shares of the continuing entity. The foregoing summary is qualified in its entirety by reference to the provisions of the Class C Warrant Indenture available on EDGAR at www.sec.gov (under a Form 6-K dated March 28, 2005) and on SEDAR at www.sedar.com, under the name "Western Forest Products Inc.". STOCK OPTIONS Western has an Option Plan which permits the granting of options to eligible participants to purchase up to a maximum of 2,500,000 Common Shares, which have been reserved for issuance under the Option Plan. As of June 21, 2005, 374,590 options have been granted. See "Item 6. Directors, Senior Management and Employees - B. Compensation - Options to Purchase Securities From Registrant or Subsidiaries" for a discussion of the Option Plan. SECURED BONDS On July 27, 2004 Western issued the Secured Bonds, which have an aggregate principal face value of U.S.$221 million, under the Secured Bond Indenture entered into with the Secured Bond Trustee, in connection with the refinancing of the indebtedness held by Doman's senior secured noteholders under the Plan. The Secured Bonds are direct, secured obligations of Western and are guaranteed by certain of the subsidiaries of Western (but not WPL) pursuant to a Supplemental Bond Indenture. Pursuant to the Secured Bond Indenture and the Supplemental Bond Indenture and a number of security agreements entered into in connection with such indentures, the obligations under the Secured Bonds are secured by a first priority charge over all of the fixed assets of Western and such subsidiaries, which rank pari passu with any security granted to secure certain obligations under any hedging arrangements and which (pursuant to the Inter-Creditor Agreement) rank subordinate to the security interest of CIT Business Credit Canada Inc. ("CIT") under the Working Capital Facility as to current assets. The Secured Bonds have the following material terms: (a) maturing and fully repayable on July 28, 2009; (b) interest-bearing at the rate of 15% per annum, which may be deferred as to one-half of the amount payable on an interest payment date; (c) redeemable, at Western's option on or after July 28, 2005, in whole or in part, upon payment to the bondholders of all accrued - 69 - and unpaid interest thereon and the redemption price prevailing at the time notice of such redemption is given, which will be a certain percentage of the face value of the outstanding Secured Bonds in each year; and (d) the right of the holders of Secured Bonds to receive an offer to purchase from Western in certain events (Change of Control Offer and Surplus Proceeds Offer as defined in the Secured Bond Indenture). The Secured Bond Indenture contains the following covenants, among others, of Western in favour of the holders of the Secured Bonds: (a) not to incur additional debt, except for certain permitted indebtedness; (b) not to incur any liens to secure any debt, other than to secure the Secured Bonds or certain permitted indebtedness; (c) to apply net proceeds of specified asset sales, collateral loss events, softwood duty settlements, or capital markets transactions and any proceeds received from the Pulpco Note to a collateral cash account, to be disbursed, on Western's application to the Secured Bond Trustee, to Western to ensure adequate liquidity to achieve its business plan, to payment of deferred interest or to reinvestment in replacement collateral, and if the cash collateral account exceeds 5% of the outstanding principal amount of the Secured Bond's after taking into account reserves for such liquidity and reinvestment then to the obligation on Western to offer to purchase the Secured Bonds to the extent of the available amount in the cash collateral account, subject to a 25% limitation imposed on such offer in order to qualify for an exemption from Canadian interest withholding tax; (d) limitations on transaction(s) with affiliates; (e) mandatory repurchase of Secured Bonds upon a change of control event; (f) the right of the Secured Bond Trustee or the holders of not less than 25% in principal amount of the outstanding Secured Bonds upon an event of default to declare the principal amount of the outstanding Secured Bonds and accrued interest to be immediately due and payable; and (g) file and distribute quarterly and annual reports and other documents that would be required under sections 13(a) or 15(d) of the U. S. Securities Exchange Act of 1934. The foregoing summary is qualified in its entirety by reference to the provisions of the Secured Bond Indenture available on EDGAR at www.sec.gov (under a Form 6-K dated March 28, 2005) and available on SEDAR at www.sedar.com under the name "Western Forest Products Inc." WORKING CAPITAL FACILITY Western has entered into a revolving line of credit evidenced by the Working Capital Facility and dated as of July 27, 2004 with CIT providing for revolving advances up to $100 million principal. The total Working Capital Facility is subject to a borrowing base calculation based on the amount of eligible accounts receivable and inventories, which can vary significantly over time. The borrowing base is the sum of (a) 85% of eligible trade receivables; and (b) the least of (i) 65% of eligible inventory valued at the lower of cost or market; (ii) 80% of the appraised net recovery value of eligible inventory; and (iii) $175,000,000 (the "Inventory Loan Cap"); less (c) $40,000,000 ("net availability reserve"). The net availability reserve may be reduced to $25,000,000 if the Fixed Charge Coverage Ratio (as defined in the Working Capital Facility) for the period specified is not less than 1.10:1.00. The Inventory Loan Cap may be increased to $200,000,000 for a maximum period of 120 days once per year subject to certain conditions including, if the net availability reserve has been reduced to $25,000,000, that such Fixed Charge Coverage Ratio is maintained at all times during such period. The Working Capital Facility has a term of three years with automatic annual renewals. Interest on the Working Capital Facility is payable monthly at a rate equivalent to the CIBC prime bank rate plus 0.75% per annum, or at our option, Banker's Acceptances plus 2.25% per annum. Certain of our operating subsidiaries have provided guarantees to CIT to secure Western's obligations to CIT and Western granted CIT a first lien on, and security interest in, all of our present and future accounts receivable, inventory and other current assets. - 70 - The foregoing summary is qualified in its entirety by reference to the provisions of the Working Capital Facility attached as Exhibit 4.4 hereto. C. MATERIAL CONTRACTS We have entered into the following material contracts: (1) Secured Bond Indenture; and (2) Class C Warrant Indenture. We have also entered into the Working Capital Facility. See "Item 10. Additional Information - B. Articles and Bylaws" for a summary of these contracts. In addition, we have entered into employment contracts with our CEO and CFO. For a summary of the terms of such contracts, see "Item 6. Directors, Senior Management and Employees - B. Compensation - Employment Contract". Other than as disclosed herein, we have not entered into any material contracts, other than in the ordinary course of business, since our incorporation that are still in effect. D. EXCHANGE CONTROLS There are presently no governmental laws, decrees or regulations in Canada which restrict the export or import of capital, or which impose foreign exchange controls or affect the remittance of interest, dividends or other payments to non-resident holders of our securities. However, any remittances of dividends on shares to U.S. residents are subject to a 15% withholding tax (5% if the beneficial owner of the dividends is a corporation owning at least 10% of Western's voting shares) pursuant to the Canada-U.S. Tax Convention (1980), as amended (the "Treaty"). Except as provided in the Investment Canada Act (the "ICA"), there are no limitations specific to the rights of non-Canadians to hold or vote securities of the Company under the laws of Canada or British Columbia, or in Western's charter documents. The ICA requires non-Canadian persons or entities acquiring "control" (as defined in the ICA) of a corporation carrying on business in Canada to either notify, or file an application for review with, Investment Canada, the federal agency created by the ICA. The ICA is applicable to, and Investment Canada may review, transactions which result in the direct or indirect acquisition of control of a Canadian business, where the gross value of corporate assets, calculated in the manner prescribed, exceeds certain thresholds (generally five million dollars, in the case of direct acquisitions and fifty million dollars, in the case of indirect acquisitions), such thresholds being favourably varied by the Minister each year for WTO investors (including the U.S.), except where the activity of the business is related to uranium production, financial services, transportation or culture. No change of voting control will be deemed to have occurred, for purposes of the ICA, if less than one-third of the voting control of a Canadian corporation is acquired by an investor. If an investment is reviewable under the ICA, an application for review in the form prescribed is normally required to be filed with Investment Canada prior to the investment taking place, and the investment may not be implemented until the review has been completed and the Minister responsible for Investment Canada is satisfied that the investment is likely to be of net benefit to Canada. If the Minister is not satisfied that the investment is likely to be of net benefit to Canada, the non-Canadian applicant must not implement the investment, or if the investment has been implemented, may be required to divest itself of control of the business that is the subject of the investment. E. TAXATION CANADIAN INCOME TAX CONSIDERATIONS The following is a summary of the principal Canadian federal income tax consequences to a holder of Western's securities who is not resident in Canada nor deemed to be a resident of Canada under the ITA. The summary is of a general nature only, is not exhaustive of all income tax considerations, and is not intended to be, and should not be construed to be, legal or tax advice to any holder of our securities and no representation with respect to the particular tax consequences to any holder of Western's securities is made. Accordingly, holders of Western's securities should consult with their own tax advisors with respect to the income tax consequences to them of acquiring, holding or disposing of Western's securities, including the applicability and the effect of any state, local or foreign tax laws and recent changes in applicable tax laws. - 71 - This summary is based on the current provisions of the ITA and the regulations thereunder, our understanding of the current published administrative practices of the Canada Revenue Agency, and all specific proposals to amend the ITA and the regulations thereunder announced by the Minister of Finance (Canada) prior to the date hereof. This summary does not otherwise take into account or anticipate any changes in the law, whether by judicial, governmental or legislative decisions or action, nor does it take into account tax legislation or considerations of any province or territory of Canada or any jurisdiction other than Canada. This summary assumes that throughout the period that Western's securities are outstanding: (i) the holders have never been resident in Canada, (ii) Western's dealings with each of the holders will be at arm's length within the meaning of the ITA; (iii) the securities are capital property to the holders; (iv) the holders do not use or hold and are not deemed or considered to use or hold the securities in carrying on business in Canada and have not acquired any of them in one or more transactions considered to be an adventure in the nature of trade within the meaning of the ITA; (v) the holders are not otherwise required by or for the purposes of the laws of Canada to include an amount in respect of any of Western's securities in computing income from carrying on business in Canada; and (vi) with respect to the Secured Bonds, Western will not, under any circumstances, be obliged to pay more than 25% of the aggregate principal amount of the Secured Bonds within five years from the date of issue, except in the event of a default under the terms of the Secured Bonds or of any agreement relating thereto, or if the terms of the Secured Bonds or any such agreement become unlawful or are changed by legislative, judicial or certain administrative actions. This summary is not applicable to a holder of Western's securities that is a "financial institution", a "specified financial institution", or an interest in which would be a "tax shelter investment", all as defined in the ITA. Secured Bonds No Canadian taxes on income (including taxable capital gains) will generally be payable in respect of the holding, redemption or disposition of the Secured Bonds by non-resident holders. No Canadian withholding tax will be payable on interest paid or credited to non-resident holders of the Secured Bonds. The Western Shares Dividends. Dividends paid on Western's shares to a non-resident holder will be subject to withholding tax under the ITA at a rate of 25%, subject to a reduction under the provisions of any relevant tax treaty. For holders who are United States residents, under the Treaty this withholding tax rate is reduced to 15%, and to 5% where the beneficial owner of the dividends is a corporation resident in the United States that owns at least 10% of Western's shares. Capital Gains. A non-resident holder is not subject to tax under the ITA in respect of a capital gain realized upon the disposition of a Western share unless, subject to the provisions of a relevant tax treaty, the share represents "taxable Canadian property" to the holder, as defined in the ITA. Western's shares will be taxable Canadian property to a non-resident holder only if the non-resident holder, together with persons with whom the non-resident holder does not deal at arm's length, collectively owned not less than 25% of the issued shares of any class of the capital stock of Western at any time during the five year period preceding the disposition of such shares. For a holder who is a United States resident, even if the shares represent taxable Canadian property, under the Treaty no Canadian taxes will generally be payable on a capital gain realized on such shares, unless the value of such shares is derived principally from real property situated in Canada. UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS This section describes the material United States federal income tax consequences for U.S. Holders (as defined below) that own Western securities. This section does not apply to a U.S. Holder that is a member of a special class of holders subject to special rules, including: - a financial institution; - a dealer in securities or commodities; - a trader in securities; - a tax-exempt organization; - an insurance company; - 72 - - a person liable for the alternative minimum tax; - a person that holds Western securities as part of a "straddle," "hedge," "conversion transaction" or other integrated transaction; - a person whose functional currency is not the U.S. dollar; - a U.S. expatriate; - a regulated investment company; - a real estate investment trust; or - a partnership or other pass through entity. This section is based on the Internal Revenue Code of 1986, as amended, its legislative history, existing and proposed regulations, published rulings and court decisions, all as currently in effect. These laws are subject to change, possibly on a retroactive basis. For purposes of this discussion, a U.S. Holder is a beneficial owner of securities that is: - a citizen or resident of the United States; - a domestic corporation; - an estate, the income of which is subject to United States federal income tax regardless of its source; or - a trust, if a United States court can exercise primary supervision over the trust's administration and one or more United States persons are authorized to control all substantial decisions of the trust. U.S. Holders should consult their own tax advisors regarding the United States federal, state and local and other tax consequences of owning and disposing of Western securities in their particular circumstances. The Western Shares The following is a summary of certain U.S. federal income tax consequences of the acquisition, ownership and disposition of Western shares by U.S. Holders who, directly or indirectly, own less than 10% of Western voting shares, (ii) hold Western shares as capital assets and (iii) are residents of the United States and not also residents of Canada for purposes of the Treaty. Taxation of dividends and distributions. Subject to the passive foreign investment company ("PFIC") rules discussed below and the relevant Treaty provisions, the gross amount of distributions made by Western with respect to the Western shares (including the amount of any Canadian taxes withheld therefrom) will generally be includable in a U.S. Holder's gross income in the year actually or constructively received as foreign source dividend income to the extent that such distributions are paid out of Western's current or accumulated earnings and profits as determined under U.S. federal income tax principles. Distributions in excess of current and accumulated earnings and profits, as determined under United States federal income tax principles, will be treated as non-taxable returns of capital to the extent of the U.S. Holder's basis in the shares, and capital gain thereafter. No dividends-received deduction will be allowed for U.S. federal income tax purposes for distributions on Western shares. With respect to certain non-corporate U.S. Holders for taxable years beginning before January 1, 2009, dividends may be taxed at the lower applicable capital gains rate provided that (1) Western is not a PFIC (as discussed below) for either the taxable year in which the dividend is paid or the preceding taxable year, (2) Western is a "qualified foreign corporation" and (3) certain holding period requirements are met. U.S. Holders should consult their tax advisors regarding the availability of the lower rate for dividends paid with respect to Western shares. The amount of any distribution paid in Canadian dollars will be equal to the U.S. dollar value of such Canadian dollars on the date such distribution is received by a U.S. Holder, regardless of whether the payment is in fact converted into U.S. dollars at that time. If a distribution of Canadian dollars is converted into U.S. dollars on the date of receipt, a U.S. Holder generally should not be required to recognize foreign currency gain or loss with respect to the distribution. Gain or loss, if any, realized on - 73 - the sale or other disposition of such Canadian dollars will generally be U.S. source ordinary income or loss. The amount of any distribution of property other than cash will be the fair market value of such property on the date of distribution. Taxation of sales or other dispositions of Western shares. Subject to the PFIC rules discussed below, upon the sale or other disposition of Western shares, a U.S. Holder will recognize capital gain or loss for United States federal income tax purposes equal to the difference between the U.S. Holder's amount realized and the U.S. Holder's tax basis in such shares. If a U.S. Holder receives consideration for shares paid in a currency other than U.S. dollars, the U.S. Holder's amount realized will be the U.S. dollar value of the payment received. In general, the U.S. dollar value of such a payment will be determined on the date of receipt of the payment for cash basis taxpayers and on the date of disposition for accrual basis taxpayers. However, if the shares are treated as traded on an established securities market and the U.S. Holder is a cash basis taxpayer or an accrual basis taxpayer who has made a special election, the U.S. dollar value of the amount realized in a foreign currency is determined by translating the amount received at the spot rate of exchange on the settlement date of the sale. Capital gain of a non-corporate U.S. Holder is generally taxed at a reduced rate where the property is held more than one year. The gain or loss will generally be income or loss from sources within the United States for foreign tax credit limitation purposes. Passive foreign investment company rules. Western believes that its shares should not be treated as stock of a PFIC for United States federal income tax purposes for the taxable year that ended on December 31, 2004. There can be no assurance that Western will not be considered a PFIC in the current or any future taxable year because the PFIC determination is an annual factual determination and there are uncertainties in the application of the relevant rules. If Western were to be treated as a PFIC for any year during a U.S. Holder's holding period, unless that holder elects to be taxed annually on a mark-to-market basis with respect to the shares (which election may only be made if Western's shares are "marketable stock"), a U.S. Holder will be subject to special tax rules with respect to any "excess distribution" received and any gain realized from a sale or other disposition (including a pledge) of that holder's shares. Distributions a U.S. Holder receives in a taxable year that are greater than 125% of the average annual distributions received during the shorter of the three preceding taxable years or the holder's holding period for the shares will be treated as excess distributions. Under these special tax rules - the excess distribution or gain will be allocated rateably over the U.S. Holder's holding period for the shares, - the amount allocated to the current taxable year, and any taxable year prior to the first taxable year in which Western is treated as a PFIC, will be treated as ordinary income, and - the amount allocated to each other year will be subject to tax at the highest tax rate in effect for that year and the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year. The tax liability for amounts allocated to years prior to the year of disposition or "excess distribution" cannot be offset by any net operating losses for such years, and gains (but not losses) realized on the sale of the shares cannot be treated as capital, even if a U.S. Holder holds the Western shares as capital assets. If a U.S. Holder holds shares in any year in which Western is a PFIC, that holder will be required to file Internal Revenue Service Form 8621. Secured Bonds Interest, original issue discount, market discount and premiums. To the extent any portion of stated interest on the Secured Bonds is unconditionally payable in cash at least annually, such interest will constitute "qualified stated interest" and will be taxable to a U.S. Holder as ordinary income in accordance with the holder's method of accounting for U.S. federal income tax purposes. In addition the Secured Bonds will be treated as issued with original issue discount ("OID") equal to the excess of their "stated redemption price at maturity" over their "issue price." The stated redemption price at maturity of a Secured Bond will include all payments on the Secured Bond, other than qualified stated interest. Assuming a substantial portion of Secured Bonds were issued for money, the issue price will generally equal the consideration paid for such Secured Bonds upon the issuance thereof (or, if cash consideration were paid for the Secured Bonds and Western shares, an allocable portion thereof). U.S. Holders of Secured Bonds will recognize as additional interest income the amount of OID on the Secured Bonds as the discount accrues over the term of the Secured Bonds in accordance with a constant yield method. If a U.S. Holder purchased a Secured Bond for an amount greater than its adjusted issue price (its issue price increased by OID previously accrued on the Secured Bond and decreased by any payments other than qualified stated interest) and less than its stated redemption price, such holder will be considered to have purchased the Secured Bond at an acquisition premium, and will be able to reduce the amount of OID accruals by the allocable portion of such acquisition premium. If a U.S. Holder purchased a - 74 - Secured Bond at an amount in excess of its stated redemption price, such holder will be considered to have purchased the Secured Bond with amortizable bond premium, will not be subject to the OID rules and may elect to amortize such premium over the remaining term of the Secured Bond. If a U.S. Holder purchased a Secured Bond at an amount less than the Secured Bond's revised issue price, subject to a de minimis rule, such holder will be considered to have purchased the Secured Bond at a market discount, and any gain recognized will be treated as ordinary income to the extent of any accrued market discount on the Secured Bond (unless the holder has made an election to accrue market discount in income over the term of the Secured Bond). Alternatively, a U.S. Holder may elect to include qualified stated interest as well as OID, taking into account market discount, de minimis market discount, amortizable bond premium or acquisition premium, if any, in gross income on a constant yield basis. Sale, exchange or retirement of the Secured Bonds. Upon the sale, exchange, redemption, retirement at maturity or other disposition of a Secured Bond, a U.S. Holder generally will recognize taxable gain or loss equal to the difference between the sum of cash plus the fair market value of all other property received on such disposition (except to the extent such cash or property is attributable to accrued and unpaid interest, which amount will be taxable as ordinary income unless previously included in income) and such U.S. Holder's adjusted tax basis in the Secured Bond. A U.S. Holder's adjusted tax basis in a Secured Bond generally will equal the cost of the Secured Bond to such U.S. Holder, increased by OID included in income and any accrued market discount included in income with respect to the Secured Bond, and decreased by the amount of any payments (other than qualified stated interest) received by such U.S. Holder and any amortizable bond premium previously taken into account. Subject to the market discount rules discussed above, gain or loss recognized on the disposition of a Secured Bond generally will be capital gain or loss and will be long-term capital gain or loss if, at the time of such disposition, the U.S. Holder's holding period for the Secured Bond is more than one year. The deduction of capital losses is subject to certain limitations. F. DIVIDENDS AND PAYING AGENT Not Applicable. G. STATEMENT BY EXPERTS Not Applicable. H. DOCUMENTS ON DISPLAY By virtue of our Secured Bond Indenture, we are subject to the informational requirements of the U.S. Securities Exchange Act of 1934, as amended. In accordance with these requirements, we file reports and other information with the Securities and Exchange Commission. These materials, including this annual report and the exhibits hereto and Form 6-Ks, may be inspected and copied (at prescribed rates) at the public reference facilities maintained by the Commission at 100 F Street, N.E., Washington, D.C. 20549 and at the Commission's regional offices. In addition, the SEC maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC at www.sec.gov. The public may obtain information on the operation of the Commission's public reference facilities by calling the Commission in the United States at l-800-SEC-0330. We also file reports and other information with the securities regulator authorities in certain provinces of Canada. The filings are electronically available from the System for Electronic Document Analysis and Retrieval (SEDAR) at www.sedar.com, the Canadian equivalent of the Commission's electronic document gathering and retrieval system (EDGAR). I. SUBSIDIARY INFORMATION Not applicable. ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATE RISK The table below provides information about our financial instruments that are sensitive to changes in interest rates. The table presents, in respect of our long-term debt obligations, principal cash flows and related interest rates by expected maturity dates. The information is presented in Canadian dollar equivalents, which is our reporting currency. - 75 -
DECEMBER 31, 2004 ----------------------------------------------------------------------- EXPECTED MATURITY DATE ----------------------------------------------------------------------- Fair 2005 2006 2007 2008 2009 Thereafter Total Value(1) ---- ---- ---- ---- -------- ---------- -------- -------- (CDN.$ EQUIVALENT IN THOUSANDS) LIABILITIES Long-Term Debt: Fixed Rate.............. - - - - $265,945 - $265,945 $300,520 Interest Rate......... - - - - 15% - 15%
- ------------------ (1) Fair value determined based on the estimated market price of the Secured Bonds as at December 31, 2004 translated at the foreign exchange rate at December 31, 2004. FOREIGN CURRENCY EXCHANGE RATE RISK The table below provides information about our financial instruments by functional currency and presents such information in U.S. dollars. The table summarizes information with respect to our U.S. dollar-denominated long-term debt obligations that are sensitive to foreign currency exchange rates. The table presents principal cash flows and related interest rates by expected maturity dates:
DECEMBER 31, 2004 ----------------------------------------------------------------------- EXPECTED MATURITY DATE ----------------------------------------------------------------------- Fair 2005 2006 2007 2008 2009 Thereafter Total Value(1) ---- ---- ---- ---- -------- ---------- -------- -------- (US$ IN THOUSANDS) ON-BALANCE SHEET FINANCIAL INSTRUMENTS Cdn. $ Functional Currency: Liabilities Long-Term Debt: Fixed Rate............... - - - - $221,000 - $221,000 $249,730 Interest Rate........... - - - - 15% - 15%
- ------------------ (1) Fair value determined based on the estimated market price of the Secured Bonds as at December 31, 2004. For the impact of changes in foreign exchange rates on operations and long-term debt, please see "Item 5. Operating and Financial Review and Prospects - - D. Trend Information - Foreign Currencies". ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES Not applicable. PART II ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES In respect of the Company, none. See, however, "Item 4. Information on the Company - A. History and Development of the Company" for a discussion of our Predecessor's Plan. ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS In respect of the Company, none. See, however, "Item 4. Information on the Company - A. History and Development of the Company" for a discussion of our Predecessor's Plan. See "Item 8. Financial Information - A. Consolidated Statements and Other Financial Statements - Dividend Information" and "Item 10. Additional Information - B. Articles and Bylaws - Secured Bonds" for a discussion of restrictions on dividends. - 76 - ITEM 15. CONTROLS AND PROCEDURES We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the U.S. Securities Exchange Act of 1934, such as our annual report on Form 20-F, is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms. Our principal executive officer and principal financial officer have evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this annual report. Based on such evaluation, the conclusion of such officers is that such controls and procedures are effective at a reasonable assurance level that material information relating to us, including our consolidated subsidiaries, is made known to them by others within the Company and our consolidated subsidiaries, particularly during the period in which this report is being prepared. During and after such evaluation, there were no significant changes in our internal controls or in other factors that has materially affected these controls or is reasonably likely to materially affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. ITEM 16. RESERVED ITEM 16A AUDIT COMMITTEE FINANCIAL EXPERT The Board has determined that there is at least one audit committee financial expert serving on its audit committee. The Board has determined that John MacIntyre, the chair of the Board and the audit committee, qualifies as an audit committee financial expert, and that he is an independent (as defined under the New York Stock Exchange rules) board member. See "Item 6. Directors, Senior Management and Employees - A. Directors and Senior Management" for a description of Mr. MacIntyre's experience and education. ITEM 16B CODE OF ETHICS The Board has adopted two written codes of conduct, an Employee Code of Conduct for employees and a Code of Business Conduct and Ethics for directors and officers, including the CEO and CFO, to promote integrity and good governance. A copy of the Codes can be viewed on our website at www.westernforest.com. A copy is also available upon request from our corporate secretary without charge. ITEM 16C PRINCIPAL ACCOUNTANT FEES AND SERVICES EXTERNAL AUDITOR SERVICE FEES The aggregate fees billed for professional services rendered by our auditors, KPMG LLP to us and our Predecessor for the year ended December 31, 2004 are as follows: - 77 -
Period from July 28 to Period from January Year end December 31, 2004 1 to July 27, 2004 December 31, 2003 ----------------- ------------------- ----------------- Company Predecessor Predecessor ----------------- ------------------- ----------------- KPMG LLP (a) Audit fees: $ 315,000 Audit of the consolidated financial statements at December 31, 2004 $345,000 - - Audit of the opening balance sheet at July 28, 165,000 - - 2004 20,000 $ 38,500 - Quarterly reviews (b) Audit-Related Fees(1) 45,250 144,200 165,050 TOTAL AUDIT AND AUDIT-RELATED FEES 575,250 182,700 480,050 (c) Tax Fees(2) 117,570 416,818 131,851 (d) All Other Fees: Monitor fees in CCAA - 662,068 480,743 Internal control advisory fees - 45,000 - Forensic services - 30,000 40,833 TOTAL FEES $692,820 $1,336,586 $1,133,527
(1) Audit-related fees for the current year consist principally of fees for professional services rendered with respect to the auditors involvement with the CCAA Information Circular and related accounting assistance, audits of defined pension plans, and advice and assistance related to accounting issues and new standards. (2) Tax fees consist of fees for tax compliance services, tax planning and tax restructuring associated primarily with the CCAA process. PRE-APPROVAL POLICIES AND PROCEDURES OF NON-AUDIT SERVICES The Audit Committee has adopted the following pre-approval policies: (a) Annually, the Audit Committee will review a list of audit, audit-related, tax and other non-audit services and recommend pre-approval of these services. (b) All additional requests to engage our auditor for other services will be addressed on a case-by-case specific engagement basis. Except as otherwise permitted by applicable law, the engagement may only commence upon approval by the Audit Committee. The Audit Committee pre-approves all services to be rendered by its auditors. In particular, the Audit Committee pre-approves individually all non-audit services to be rendered by its auditors. The Audit Committee has pre-approved 100% of the services listed in items (b) to (d) of the table above in respect of the Company. We understand that Doman's audit committee has pre-approved 100% of the services listed in items (b) to (d) of the table above in respect of our Predecessor. ITEM 16D EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES Not applicable. ITEM 16E PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS None. PART III ITEM 17. FINANCIAL STATEMENTS (a) Financial Statements of the Company: 1. Report of Independent Registered Public Accounting Firm, KPMG LLP. - 78 - 2. Consolidated Balance Sheets as at December 31, 2004 and July 28, 2004. 3. Consolidated Statements of Operations and Consolidated Statements of Deficit for the period from July 28, 2004 to December 31, 2004. 4. Consolidated Statements of Cash Flows for the period from July 28, 2004 to December 31, 2004. 5. Notes to Consolidated Financial Statements. (b) Financial Statements of Doman Industries Limited(1) 1. Report of Independent Registered Public Accounting Firm, KPMG LLP. 2. Consolidated Balance Sheets as at July 28, 2004 and December 31, 2003. 3. Consolidated Statements of Operations and Consolidated Statements of Deficit for the period from January 1, 2004 to July 28, 2004 and for the years ended December 31, 2003 and 2002. 4. Consolidated Statements of Cash Flows for the period from January 1, 2004 to July 28, 2004 and for the years ended December 31, 2003 and 2002. 5. Notes to Consolidated Financial Statements. (1) Although not comparable, certain consolidated financial information and other information of Doman Industries Limited may be of limited interest to security holders of Western, and has been included in this annual report. - 79 - WESTERN FOREST PRODUCTS INC. THE FOLLOWING CONSOLIDATED FINANCIAL STATEMENTS ISSUED SUBSEQUENT TO THE IMPLEMENTATION OF THE PLAN MAY NOT BE COMPARABLE WITH THE CONSOLIDATED FINANCIAL STATEMENTS ISSUED BY DOMAN INDUSTRIES LIMITED PRIOR TO THE PLAN IMPLEMENTATION, DUE TO THE DIFFERENCES IN THE COMPANY'S CORPORATE AND FINANCIAL STRUCTURE AS COMPARED TO DOMAN, THE APPLICATION OF FRESH START ACCOUNTING RESULTING FROM IMPLEMENTATION OF THE PLAN AND DIFFERENCES IN CERTAIN ACCOUNTING POLICIES. ACCORDINGLY THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS DO NOT INCLUDE COMPARATIVE INFORMATION. CERTAIN CONSOLIDATED FINANCIAL INFORMATION OF DOMAN INDUSTRIES LIMITED MAY BE OF LIMITED INTEREST TO THE SECURITYHOLDERS OF THE COMPANY, AND HAS BEEN INCLUDED FOR 2004, 2003 AND 2002 IN THIS FORM 20-F. - 80 - Consolidated Financial Statements (Expressed in Canadian dollars) WESTERN FOREST PRODUCTS INC. For the period from July 28, 2004 to December 31, 2004 [KPMG LOGO] KPMG LLP Telephone (604) 691-3000 CHARTERED ACCOUNTANTS Fax (604) 691-3031 PO Box 10426 777 Dunsmuir Street Internet www.kpmg.ca Vancouver BC V7Y 1K3 Canada REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors of Western Forest Products Inc. We have audited the accompanying consolidated balance sheets of Western Forest Products Inc. as at December 31, 2004 and July 28, 2004 and the consolidated statements of operations and deficit and cash flows for the period from July 28, 2004 to December 31, 2004. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our audit opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2004 and July 28, 2004 and the results of its operations and its cash flows for the period from July 28, 2004 to December 31, 2004 in accordance with Canadian generally accepted accounting principles. Canadian generally accepted accounting principles vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in note 13 to the consolidated financial statements. /s/ KPMG LLP Chartered Accountants Vancouver, Canada March 15, 2005, except as to note 13 which is as of June 15, 2005 KPMG LLP, a Canadian limited liability partnership is the Canadian member firm of KPMG International, a Swiss cooperative. WESTERN FOREST PRODUCTS INC. Consolidated Balance Sheets (Expressed in thousands of Canadian dollars)
December 31, July 28, 2004 2004 ------------ ---------- (note 1) Assets Current assets: Cash $ 8,007 $ 16,640 Accounts receivable 77,970 77,109 Inventory (note 3) 176,709 185,569 Prepaid expenses 5,204 8,421 ---------- ---------- 267,890 287,739 Restricted assets (note 6) 24,428 - Investments 7,166 6,912 Property, plant and equipment (note 4) 395,554 421,662 Other assets 1,397 1,171 ---------- ---------- $ 696,435 $ 717,484 ========== ========== Liabilities and Shareholders' Equity Current liabilities: Bank indebtedness (note 5) $ 78,113 $ 49,738 Accounts payable and accrued liabilities 75,176 91,237 ---------- ---------- 153,289 140,975 Long-term debt (note 6) 253,522 279,825 Future income taxes (note 7) 10,537 10,537 Other liabilities 29,382 30,972 ---------- ---------- 446,730 462,309 Shareholders' equity: Share capital (note 8): Common shares 255,175 255,175 Deficit (5,470) - ---------- ---------- 249,705 255,175 ---------- ---------- $ 696,435 $ 717,484 ========== ==========
Basis of presentation and reorganization proceedings (note 1) Commitment and contingencies (note 9) See accompanying notes to consolidated financial statements. 1 WESTERN FOREST PRODUCTS INC. Consolidated Statement of Operations and Deficit (Expressed in thousands of Canadian dollars, except for share and per share amounts) For the period from July 28, 2004 to December 31, 2004 Sales $ 324,106 Costs and expenses: Cost of goods sold 263,374 Anti-dumping and countervailing duties 21,050 Freight expenses 27,903 Selling and administration 9,721 Amortization of property, plant and equipment 14,249 ----------- 336,297 ----------- Operating loss (12,191) Interest income (expense): Bank indebtedness (1,660) Long-term debt (17,045) Foreign exchange gains (losses) on translation of long-term debt 27,436 Amortization of deferred finance costs and debt discount (1,133) ----------- 7,598 Other expense (96) ----------- Loss before income taxes (4,689) Income taxes (note 7) (781) ----------- Net loss, being deficit, end of period $ (5,470) =========== Loss per share: Basic $ (0.21) Diluted (0.21) Weighted average number of common and non-voting shares outstanding (thousands of shares) 25,636 ===========
See accompanying notes to consolidated financial statements. 2 WESTERN FOREST PRODUCTS INC. Consolidated Statement of Cash Flows (Expressed in thousands of Canadian dollars) For the period from July 28, 2004 to December 31, 2004 Cash provided by (used in): Operations: Net earnings (loss) from continuing operations $ (5,470) Items not involving cash: Amortization of property, plant and equipment 14,249 Amortization and write-down of deferred charges 161 Foreign currency translation gain (27,436) Accretion of debt discount 1,133 Other (1,844) ----------- (19,207) Changes in non-cash working capital items: Accounts receivable (860) Inventory 8,860 Prepaid expenses 3,217 Accounts payable and accrued liabilities (17,061) ----------- (5,844) ----------- (25,051) Investments: Additions to property, plant and equipment (5,329) Additions to capitalized roads (6,307) Disposals of property, plant and equipment 2,949 Restricted assets (2,883) Other (387) ----------- (11,957) Financing: Bank indebtedness 28,375 ----------- Decrease in cash (8,633) Cash, beginning of period 16,640 ----------- Cash, end of period $ 8,007 =========== Supplementary information: Cash paid for: Interest $ 19,677 Income taxes - Non-cash item: Take-back proceeds receivable (note 9(b)(iii)) 21,546 ===========
See accompanying notes to consolidated financial statements. 3 WESTERN FOREST PRODUCTS INC. Notes to Consolidated Financial Statements (Tabular amounts expressed in thousands of Canadian dollars, except per share amounts) For the period from July 28, 2004 to December 31, 2004 1. BASIS OF PRESENTATION AND REORGANIZATION PROCEEDINGS: Western Forest Products Inc.'s ("Western" and together with its subsidiaries the "Company") business is the harvesting of timber and the manufacturing and sale of lumber and pulp for worldwide markets. Western's active subsidiaries, all wholly owned, are as follows: Western Pulp Limited WFP Lumber Sales Limited 4018982 Canada Inc. (formerly Doman Western Lumber Ltd.) On November 7, 2002, Doman Industries Limited ("Doman") and certain of its subsidiaries (collectively with Doman, the "Predecessor"), voluntarily filed for protection under the Companies' Creditors Arrangement Act (Canada) ("CCAA") with the British Columbia Supreme Court (the "Court"). On July 27, 2004, the Predecessor implemented a Plan of Compromise and Arrangement under the CCAA and Reorganization under the Canada Business Corporations Act (the "CBCA") (the "Plan") and emerged from protection under the CCAA. Western was incorporated under CBCA on April 27, 2004 under the name "4204247 Canada Inc." for the purpose of implementing the Plan. The Company changed its name to "Western Forest Products Inc." on June 21, 2004. On July 27, 2004, Western acquired the solid wood and pulp assets from the Predecessor. Until the Plan was implemented, Western did not carry on any business and had no material assets or liabilities. Western commenced active business on July 28, 2004. The purpose of the Plan was to (1) compromise the claims of the Predecessor's affected creditors so as to enable its solid wood and pulp businesses to be carried on under a new corporate structure, with relief from certain debt servicing and repayment obligations; and (2) facilitate the repayment of Doman's secured senior notes through the distribution of certain warrants (exercisable for Western's secured bonds and Common shares) and the sale of certain private placement units consisting of Western's secured bonds and Common shares. The significant steps in the implementation of the Plan included: (a) the incorporation of two new corporations, Western and Western Pulp Limited ("WPL"); (b) the segregation of the principal operating assets of the Predecessor into two separate operating groups: the solid wood assets, which were transferred to Western, and the pulp assets, which were transferred to WPL; WPL became a wholly-owned subsidiary of Western; (c) the unsecured indebtedness of the Predecessor was compromised and converted to approximately 75% of the Common shares of Western, subject to certain cash elections; in addition, the Predecessor's unsecured creditors were entitled to certain warrants (exercisable for the Company's secured bonds and Common shares); 4 WESTERN FOREST PRODUCTS INC. Notes to Consolidated Financial Statements (Tabular amounts expressed in thousands of Canadian dollars, except per share amounts) For the period from July 28, 2004 to December 31, 2004 1. BASIS OF PRESENTATION AND REORGANIZATION PROCEEDINGS (CONTINUED): (d) the indebtedness held by Doman's senior secured noteholders was refinanced in full through a combination of a distribution of Class A and B warrants to the Predecessor's unsecured creditors and a private placement to certain standby purchasers (the "Standby Purchasers"); for U.S.$210 million, the Company issued secured bonds with an aggregate principal face value of U.S.$221 million and approximately 25% of Western's Common shares to the Standby Purchasers and those unsecured creditors of the Predecessor who exercised the warrants; the proceeds of U.S.$210 million were used primarily to repay Doman's senior secured noteholders and to cover the Predecessors' CCAA exit costs, with the remaining amount released to the Company for working capital purposes. (e) Western entered into a working capital facility providing for revolving advances up to $100 million (note 5) and reorganized certain intercorporate debt; and (f) Western issued three tranches of non-transferable Class C warrants to purchase up to 10% of the Common shares of Western on the terms set out in the Plan to existing shareholders of Doman (note 8); no other distributions were made or other compensation paid to Doman shareholders under the Plan. The Company's balance sheet as at July 28, 2004 has been prepared under the provisions of The Canadian Institute of Chartered Accountants ("CICA") Handbook Section ("HB") 1625, "Comprehensive Revaluation of Assets and Liabilities" ("fresh start accounting"). Under fresh start accounting, the Company was required to determine its enterprise value. The enterprise value of $535 million was determined by the Company's management based on various third party reports and offers received in conjunction with the Predecessor's reorganization proceedings. 5 WESTERN FOREST PRODUCTS INC. Notes to Consolidated Financial Statements (Tabular amounts expressed in thousands of Canadian dollars, except per share amounts) For the period from July 28, 2004 to December 31, 2004 1. BASIS OF PRESENTATION AND REORGANIZATION PROCEEDINGS (CONTINUED): The following table summarizes the impact of adjustments required to implement the Plan and to reflect the adoption of fresh start accounting:
Adjustments Predecessor at --------------------------------- Western at July 27, 2004 July 28, 2004 Balance prior to Fresh Start Balance after Plan Implementation The Plan Accounting Plan ------------------- ------------- ----------- ------------- (note 1(a)) (note 1(b)) Assets Current assets: Cash $ 16,640 $ 279,750 (iii) $ - $ 16,640 (279,750) (ii) Accounts receivable 77,109 - - 77,109 Inventory 198,159 - (12,590) 185,569 Prepaid expenses 8,421 - - 8,421 ------------- ------------- ----------- ------------- 300,329 - (12,590) 287,739 Investments 10,085 (3,173) (ii) - 6,912 Property, plant and equipment 452,402 - (30,740) 421,662 Other assets 17,266 75 (iii) (16,170) 1,171 ------------- ------------- ----------- ------------- $ 780,082 $ (3,098) $ (59,500) $ 717,484 ============= ============= =========== ============= Liabilities and Shareholders' Equity (Deficiency) Current liabilities: Bank indebtedness $ 49,738 $ - $ - $ 49,738 Accounts payable and accrued liabilities 97,049 (5,812) (v) - 91,237 Accounts payable subject to compromise 21,694 (21,694) (i) - - Secured interest payable 62,841 (62,841) (iv) - - Unsecured interest subject to compromise 140,080 (140,080) (i) - - Current portion of long-term debt subject to compromise 683,573 (683,573) (i) - - Current portion of long-term debt 213,200 (213,200) (iv) - - ------------- ------------- ----------- ------------- 1,268,175 (1,127,200) - 140,975 Long-term debt - 279,825 (iii) - 279,825 Other liabilities 25,086 - 5,886 30,972 Future income taxes - - 10,537 10,537 Shareholders' equity (deficiency): Old preferred shares 64,076 (64,076) (iv) - - Old common and non-voting shares 242,942 (242,942) (iv) - - New common shares - 255,175 (ii) - 255,175 Deficit (820,197) 896,120 (iii) (75,923) - ------------- ------------- ----------- ------------- (513,179) 844,277 (75,923) 255,175 ------------- ------------- ----------- ------------- $ 780,082 $ (3,098) $ (59,500) $ 717,484 ============= ============= =========== =============
6 WESTERN FOREST PRODUCTS INC. Notes to Consolidated Financial Statements (Tabular amounts expressed in thousands of Canadian dollars, except per share amounts) For the period from July 28, 2004 to December 31, 2004 1. BASIS OF PRESENTATION AND REORGANIZATION PROCEEDINGS (CONTINUED): (a) Plan of Arrangement Adjustments: In exchange for Doman's U.S. $513 million of unsecured senior notes in default (the "Unsecured Notes") and the claims of other affected creditors, the beneficial holders of two series of Doman Unsecured Notes (the "Noteholders") and other creditors with affected claims (the "Affected Claims") (collectively with the Noteholders, the "Affected Creditors") received, on a pro rata basis, approximately 75% of the equity of the Company, consisting of newly issued common shares. (i) The following recorded liabilities of Doman, as at July 27, 2004, were liabilities subject to compromise. Accrued interest payable on Unsecured Notes $ 140,080 Long-term debt subject to compromise consisting of the Unsecured Notes 683,573 ------------ Noteholders' liabilities subject to compromise 823,653 ------------ Accounts payable and accrued liabilities subject to compromise 21,694 Other long-term liabilities - ------------ Other affected creditors' liabilities subject to compromise 21,694 ------------ Total $ 845,347 ============
(ii) Under the Plan, the Company acquired all the assets and liabilities of Doman not subject to compromise, but excluding the Port Alice pulp mill assets (previously sold by Doman on May 11, 2004), in exchange for 75% of the issued common shares of the Company and certain warrants of the Company. The remaining 25% of the issued common shares of the Company were issued to the new Senior Secured Bondholders as described below. The common share value of $255.2 million has been determined as the enterprise value of the Company using a going concern valuation approach, of $535 million less the $279.8 million value of the new Senior Secured Bonds ("Secured Bonds") issued to retire Doman's Senior Secured Notes ("Old Secured Notes"). The enterprise value has been determined by the Company's management based on various third party reports and offers received in conjunction with the reorganization proceedings. (iii) The Company issued Secured Bonds in the amount of US$221 million and 25% of the equity of the Company in exchange for cash of US$210 million. The Secured Bonds are recorded at the cash amount received of $279.8 million based on an exchange rate of 1.3325 at July 27, 2004. The difference between the cash paid and stated amount of the Secured Bonds represents a discount that will be accreted over the five year term of the Secured Bonds. (iv) The holders of the Old Secured Notes of Doman received a distribution of cash for 100% of their outstanding principle of US$160 million ($213.2 million) and unpaid interest of $62.8 million. (v) The Predecessor paid outstanding advisory fees of $5.8 million including legal, accounting and investment fees from cash on hand immediately before the transfer of assets to the Company. 7 WESTERN FOREST PRODUCTS INC. Notes to Consolidated Financial Statements (Tabular amounts expressed in thousands of Canadian dollars, except per share amounts) For the period from July 28, 2004 to December 31, 2004 1. BASIS OF PRESENTATION AND REORGANIZATION PROCEEDINGS (CONTINUED): (a) Plan of Arrangement Adjustments (continued): (vi) The existing shareholders of Doman received three tranches of non-transferable class C warrants (note 8(c)) to acquire up to 10% of the shares of the Company. The warrants will expire if on or after July 27, 2005, the Company amalgamates or completes a similar business combination that results in the shareholders of the Company owning less than 80% of the issued and outstanding equity shares of the continuing entity. In preparing the opening balance sheet, no value has been allocated to these warrants due to their contingent nature. (b) Fresh start accounting adjustments: The Company has performed a comprehensive revaluation of its balance sheet under the provisions of the Canadian Institute of Chartered Accountants ("CICA") Handbook Section ("HB") 1625, "Comprehensive Revaluation of Assets and Liabilities" ("Fresh Start Accounting"). Under Fresh Start Accounting, the Company is required to assess the fair value of its recorded and unrecorded assets and liabilities and prepare a "fresh start accounting" balance sheet upon emergence from the Plan. As required by CICA HB 1625, the enterprise value of $535 million has been allocated upon Fresh Start Accounting to the assets and liabilities of the Company in accordance with the guidance in CICA HB 1581 "Business Combinations": Current assets $ 287,739 Investments 6,912 Property, plant and equipment 421,662 Other assets 1,171 ------------- 717,484 Current liabilities 140,975 Secured Bonds 279,825 Other long-term liabilities 30,972 Future income taxes 10,537 ------------- 462,309 ------------- Equity value $ 255,175 =============
The adjustments required to arrive at the values above are as follows: Inventory valuation $ (12,590) Property, plant and equipment write-down (30,740) Deferred pension asset and other assets eliminated (16,170) ------------ (59,500) Other long-term liabilities fair value adjustment (5,886) Future income taxes (10,537) ------------ Elimination of remaining deficit $ (75,923) ============
8 WESTERN FOREST PRODUCTS INC. Notes to Consolidated Financial Statements (Tabular amounts expressed in thousands of Canadian dollars, except per share amounts) For the period from July 28, 2004 to December 31, 2004 2. SIGNIFICANT ACCOUNTING POLICIES: These consolidated financial statements are prepared in accordance with Canadian generally accepted accounting principles ("Canadian GAAP"), which require management to make assumptions and estimates that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Information regarding the measurement aspects of United States generally accepted accounting principles ("U.S. GAAP") as they affect the Company's consolidated financial statements is presented in note 13. The significant policies are summarized below. (a) Basis of consolidation: These consolidated financial statements include the accounts of Western Forest Products Inc. and all of its subsidiaries. All intercompany balances and transactions have been eliminated on consolidation. (b) Inventory: Inventory, other than supplies which are valued at average cost, are valued at the lower of average cost and net realizable value as follows: (i) Lumber by species (hemlock, fir and cedar); (ii) Logs by sawlogs and pulp logs; and (iii) NBSK pulp and chips in aggregate. (c) Property, plant and equipment: Property, plant and equipment are initially recorded at cost. Amortization periods range from 5 to 10 years, except: (i) Logging roads: spur roads are expensed; temporary roads with a life of over three years are capitalized and amortized on a unit of production basis over the estimated volume of timber; and mainline roads are amortized on a straight line basis over the expected lives of the roads which range from 7 to 20 years. (ii) Timberlands: are capitalized and amortized on a straight line basis over 40 years; and (iii) Squamish Pulp Mill: amortization is on a unit of production basis over 15 years. The Company conducts reviews for the impairment of property, plant and equipment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss would be recognized when estimates of future cash flows expected to result from the use of an asset and its eventual disposition are less than its carrying amount. 9 WESTERN FOREST PRODUCTS INC. Notes to Consolidated Financial Statements (Tabular amounts expressed in thousands of Canadian dollars, except per share amounts) For the period from July 28, 2004 to December 31, 2004 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): (d) Foreign currency translation: Transactions denominated in US dollars have been translated into Canadian dollars at the approximate rate of exchange prevailing at the time of the transaction. Monetary assets and liabilities have been translated into Canadian dollars at the period-end exchange rates. All exchange gains and losses are included directly in earnings. Exchange gains and losses included in earnings that relate to long-term debt are considered to be an integral part of financing costs and, accordingly, are included in interest expense. (e) Reforestation obligation: Timber is harvested under various licences issued by the Province of British Columbia. The future estimated reforestation obligation is accrued on the basis of the volume of timber cut. The obligation is recognized at the fair value in the period in which the legal obligation was incurred, with the fair value of a liability determined with reference to the present value of estimated future cash flows. In periods subsequent to the initial measurement, changes in the liability resulting from the passage of time and revisions to fair value calculations are recognized in the statement of operations as they occur. The non-current and current portion of this obligation are included in other liabilities and accounts payable and accrued liabilities, respectively. (f) Revenue recognition: Sales are recognized when title to the goods transfers and the risk and rewards of ownership are passed to the customer which is generally at the time products are shipped to external customers. Countervailing and anti-dumping duties and freight costs are included in costs and expenses. (g) Income taxes: The Company uses the liability method of accounting for future income taxes. Under the liability method, future income tax assets and liabilities are determined based on temporary differences (differences between the accounting bases and the tax bases of existing assets and liabilities), and are measured using the currently enacted, or substantively enacted, tax rates and laws expected to apply when these differences reverse. A valuation allowance is recorded against any future income tax asset if it is more likely than not that the asset will not be realized. (h) Employee future benefits: The Company recognizes the cost of retirement benefits and certain other post-employment benefits over the periods in which the employees render services to the entity in return for the benefits and with respect to pensions, requires the use of a discount rate, that is set with reference to market interest rates on high-quality debt instruments, to measure the accrued pension benefit obligation. 10 WESTERN FOREST PRODUCTS INC. Notes to Consolidated Financial Statements (Tabular amounts expressed in thousands of Canadian dollars, except per share amounts) For the period from July 28, 2004 to December 31, 2004 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): (i) Adoption of accounting policies: As a result of fresh start accounting, the Company adopted most of the accounting policies of the Predecessor Company except for the following: (i) for inventory valuation, the Predecessor aggregated lumber species in testing for lower of cost and net realizable value; (ii) for inventory valuation, the Predecessor aggregated sawlogs and pulp logs in testing for lower of cost and net realizable value; and (iii) for spur roads, the Predecessor capitalized spur roads and amortized the roads based on timber accessed by the roads. 3. INVENTORY: Raw materials $ 4,048 Logs 76,491 Finished pulp 6,510 Lumber 67,850 Supplies and other 21,810 --------- $ 176,709 =========
4. PROPERTY, PLANT AND EQUIPMENT:
Accumulated Net book December 31, 2004 Cost amortization value - ------------------------------ ---------- ------------ ---------- Land, buildings and equipment: Pulp mills $ 38,436 $ 1,112 $ 37,324 Solid wood facilities 96,602 5,008 91,594 Land 59,672 - 59,672 ---------- ------------ ---------- 194,710 6,120 188,590 Timberlands 176,759 848 175,911 Logging roads 38,334 7,281 31,053 ---------- ------------ ---------- $ 409,803 $ 14,249 $ 395,554 ========== ========== ==========
During the period ended December 31, 2004, the Company reduced timberlands by $16.5 million and roads by $4.0 million to recognize the timber-take back proceeds (note 9(b)(iii)). 11 WESTERN FOREST PRODUCTS INC. Notes to Consolidated Financial Statements (Tabular amounts expressed in thousands of Canadian dollars, except per share amounts) For the period from July 28, 2004 to December 31, 2004 4. PROPERTY, PLANT AND EQUIPMENT (CONTINUED): Amortization of property, plant and equipment: Amortization of buildings and equipment $ 6,120 Amortization of timberlands and logging roads 8,129 --------- $ 14,249 =========
5. BANK CREDIT FACILITY: On July 27, 2004, the Company established a three-year revolving credit facility, secured by receivables and inventory, which bears an interest rate of prime plus 0.75%. The size of this asset-backed facility is determined by the level of outstanding receivables and inventory, but cannot exceed $100,000,000. At December 31, 2004, of the $93,906,000 of the facility that was available to the Company, $78,113,000 had been drawn down and $2,949,000 was used to support standby letters of credit leaving a balance of $12,844,000 available for future use. 6. LONG-TERM DEBT:
December 31, July 28, 2004 2004 ----------- ----------- Secured Bonds (US $221,000,000), 15% due in 2009 $ 253,522 $ 279,825 =========== ===========
12 WESTERN FOREST PRODUCTS INC. Notes to Consolidated Financial Statements (Tabular amounts expressed in thousands of Canadian dollars, except per share amounts) For the period from July 28, 2004 to December 31, 2004 6. LONG-TERM DEBT (CONTINUED): On July 27, 2004, the Company issued US$221,000,000 of 15% Secured Bonds due 2009 for proceeds of US$210,000,000. Interest is payable semi-annually in arrears on December 31 and June 30 of each year commencing December 31, 2004. The Company has the right to defer payment of up to one-half of the interest payable on any interest payable date for up to five years but not beyond the maturity date of the Secured Bonds. The Secured Bonds are secured by a first priority charge over all of the fixed assets of the Company including timber tenures, sawmills and the value-added lumber remanufacturing plant. The security ranks subordinate to the security provided under the working capital facility (see note 5). The Secured Bonds are redeemable at the option of the Company at any time after July 27, 2005 at their principal amount plus (i) a premium (which decreases annually to their 2009 maturity date resulting in a redemption price of: 2005 - 107.50%; 2006 - 105.50%; 2007 - 103.50%; 2008 - 101.50%) and (ii) any accrued and unpaid interest. The indenture governing the Secured Bonds contains certain restrictions regarding, among other things, the ability of the Company to incur additional indebtedness (with certain exceptions) and limitations on the payment of dividends and other restricted payments. Subject to ensuring adequate liquidity, proceeds from asset sales, a softwood lumber duty settlement and capital market transactions are generally to be used to redeem Secured Bonds. At December 31, 2004, $2.9 million of cash from asset sales and $21.5 million in accounts receivable from the B.C. Government for the timber take-back (note 9 (b)(iii)) have been included in restricted assets on the balance sheet as these funds may be required to redeem Secured Bonds to the extent that the adequate liquidity criteria is met in the future. 7. INCOME TAXES: Income tax expense for the period from July 28, 2004 to December 31, 2004 differs from the amount that would be computed by applying the Company's combined Federal and Provincial statutory rate as follows:
2004 Tax rate ---------- -------- Net loss before taxes $ (4,689) ========== Expected income tax recovery $ 1,670 35.62 % Tax effect of: Capital gains tax rate on unrealized foreign exchange gain 4,685 99.91 Losses not recognized (5,961) (127.13) Large corporations tax (781) (16.66) Other (394) (8.40) ---------- -------- Income tax expense per financial statements $ (781) (16.66) % ========== ======== Income tax recovery (expense) comprised of: Current income tax expense $ (781) Future income tax expense - ========== ========
13 WESTERN FOREST PRODUCTS INC. Notes to Consolidated Financial Statements (Tabular amounts expressed in thousands of Canadian dollars, except per share amounts) For the period from July 28, 2004 to December 31, 2004 7. INCOME TAXES (CONTINUED):
December 31, July 28, 2004 2004 ------------ ----------- Future tax assets: Losses carried forward $ 5,961 $ - Reforestation and other accruals not deductible for tax until paid 10,464 11,032 ---------- ----------- 16,425 11,032 Valuation allowance (6,037) - ---------- ----------- 10,388 11,032 Future tax liabilities: Property, plant and equipment, due to differences in net book value and unamortized capital cost (16,240) (21,569) Unrealized foreign exchange gain (4,685) - ---------- ----------- (20,925) (21,569) ---------- ----------- Net future tax liability $ (10,537) $ (10,537) ========== ===========
In addition, at December 31, 2004, a subsidiary of the Company has unused tax losses carried forward of approximately $450,000,000 (July 28, 2004 - $500,000,000) expiring between 2005 and 2010 which are available to reduce taxable income and capital losses of $880,000,000 which are available indefinitely, but can only be utilized against capital gains. The ability of the Company and its subsidiary to utilize the losses carried forward and capital losses is not considered more likely than not and therefore, a valuation allowance has been provided against the tax assets. 8. SHARE CAPITAL: (a) Authorized and issued share capital: Western's authorized capital consists of an unlimited number of Common shares (the "Common Shares") and an unlimited number of preferred shares issuable in series, of which, as of December 31, 2004, 25,635,424 Common Shares are issued and outstanding, and no preferred shares are issued and outstanding. All Common Shares rank equally as to voting rights, participation in a distribution of the assets of Western on a liquidation, dissolution or winding-up of Western and the entitlement to dividends. 14 WESTERN FOREST PRODUCTS INC. Notes to Consolidated Financial Statements (Tabular amounts expressed in thousands of Canadian dollars, except per share amounts) For the period from July 28, 2004 to December 31, 2004 8. SHARE CAPITAL (CONTINUED): (b) Stock-based compensation plan: Western has an incentive stock option plan (the "Option Plan"), which permits the granting of options ("Options") to eligible participants to purchase up to a maximum of 2,500,000 Common Shares, which have been reserved for issuance under the Plan. The Option Plan provides that Western's Board of Directors may from time to time grant Options to acquire Common Shares to any participant who is an employee, officer or director of Western or its affiliates or a consultant to Western or its affiliates. The total number of Common Shares that may be reserved for issuance to any one participant pursuant to Options granted under the Option Plan may not exceed 5% of the issued and outstanding Common Shares of the Company outstanding (on a non-diluted basis) on the grant date of the Options. The maximum number of Common Shares that may be reserved for issuance under Options granted to insiders and their associates under the Option Plan may not exceed 10% of the issued and outstanding Common Shares on a non-diluted basis at the grant date of the Options. The maximum number of Common Shares that may be issued to the Company's insiders and their associates pursuant to Options granted under the Option Plan within any one-year period may not exceed 10% of the Company's issued and outstanding Common Shares on a non-diluted basis at the end of such period and, in the case of any one insider and his associates, may not exceed 5% of the issued and outstanding Common Shares. Each Option is exercisable, subject to vesting terms as may be determined by the Board, into one Common Share, subject to adjustments, at a price of not less than the closing price of the Common Shares on the TSX on the day immediately preceding the grant date. Options granted under the Option Plan expire, generally, a maximum of ten years from the date of the grant. The following table summarizes the Options outstanding at December 31, 2004:
Number of Exercise price per Weighted average Common Shares Common Share exercise price ------------- ------------------ --------------- Outstanding, July 28, 2004 - - - Granted 299,590 $ 9.72 $ 9.72 Cancelled - - - Exercised - - - ------- ---------- ---------- Outstanding, December 31, 2004 299,590 $ 9.72 $ 9.72 ======= ========== ==========
15 WESTERN FOREST PRODUCTS INC. Notes to Consolidated Financial Statements (Tabular amounts expressed in thousands of Canadian dollars, except per share amounts) For the period from July 28, 2004 to December 31, 2004 8. SHARE CAPITAL (CONTINUED): (b) Stock-based compensation plan (continued): Details of options outstanding under the share option plan at December 31, 2004 are as follows:
Options outstanding Options exercisable ---------------------------------- ------------------------------- Number Weighted Number Range of outstanding average Weighted exercisable, Weighted exercise December 31, remaining average December 31, average prices 2004 option life (yrs) exercise price 2004 exercise price - -------- ------------ ----------------- -------------- ------------ -------------- $ 12.10 49,590 4.5 $ 12.10 (1) - $ 12.10 $ 9.50 250,000 4.7 9.25 (2) - 9.25 - ------- ------- --- -------- ------------ -------- 299,590 $ 9.72 - $ 9.72 ======= ======= === ======== ============ ========
(1) Granted at a 10% premium above trading price of the shares at grant date. (2) Granted at the trading price of the shares at grant date. During the period ended December 31, 2004, 299,590 Options with a weighted average fair value of $4.51 per Common Share were granted and valued using the Black-Scholes option pricing model with the following weighted average assumptions: Risk-free interest rate (%) 4.5% Expected volatility (%) 30% Expected life (in years) 5 - 10 Expected dividends 0%
The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Option pricing models also require estimates, which are highly subjective, including expected volatility of the underlying stock. The Company bases estimates of volatility on historical stock prices. Changes in assumptions can materially affect estimates of fair values. The Company recorded compensation expense of $73,000 during the period based on the fair value of the options of $1,350,000 as determined under Black-Scholes using the above assumptions, and prorated for the vesting periods and the number of days in the reporting period. (c) Class C Warrants: The Company issued 569,373 Tranche 1 Class C Warrants, 854,146 Tranche 2 Class C Warrants and 1,423,743 Tranche 3 Class C Warrants (collectively, the "Class C Warrants") as of July 27, 2004. Each Class C Warrant entitles the holder to purchase one Common Share (subject to certain adjustments) at the following exercise price: $16.28 for Tranche 1 Class C Warrants, $26.03 for Tranche 2 Class C Warrants, and $33.83 for the Tranche 3 Class C Warrants. 16 WESTERN FOREST PRODUCTS INC. Notes to Consolidated Financial Statements (Tabular amounts expressed in thousands of Canadian dollars, except per share amounts) For the period from July 28, 2004 to December 31, 2004 8. SHARE CAPITAL (CONTINUED): (c) Class C Warrants (continued): The Class C Warrants are non-transferable and have a five-year term, subject to early termination provisions. Western is entitled to give a 30-day notice of termination with respect to any tranche of Class C Warrants if, during a 20-day trading period ending prior to the fifth business day prior to the date of such notice, the Company's Common shares trade at weighted average price per share that is more than 125% of the exercise price of such tranche. In addition, the warrants will expire if, on or after July 27, 2005, the Company amalgamates or completes a similar business combination that results in the shareholders of the Company owning less than 80% of the issued and outstanding equity shares of the continuing entity. For accounting purposes, no value has been allocated to these warrants due to their contingent nature. 9. COMMITMENT AND CONTINGENCIES: (a) Operating leases: Future minimum lease payments at December 31, 2004 under operating leases were as follows: 2005 $ 3,617 2006 2,672 2007 1,729 2008 981 Thereafter 322 ----------- $ 9,321 ===========
(b) Contingencies: (i) Softwood lumber duties: On March 21, 2002 and further adjusted on April 25, 2002, the U.S. Department of Commerce ("USDOC") issued its final determination in the countervailing and antidumping investigations. The USDOC's final determination in the countervailing investigation resulted in a duty rate of 18.79%. The USDOC's final determination in the antidumping investigation resulted in Company specific duty rates ranging from 2.18% to 12.44% on the six companies investigated and an all other rate of 8.43% for all other companies including this Company's Predecessor. On May 16, 2002, the U.S. International Trade Commission ("USITC") published its final written determination on injury and stated that Canadian softwood lumber threatens material injury to the U.S. industry. As a result, effective from May 22, 2002, cash deposits were required for shipments at the rates determined by the USDOC. All prior bonds or cash deposits posted prior to May 22, 2002 and since inception of this dispute on April 2, 2001 were refunded. 17 WESTERN FOREST PRODUCTS INC. Notes to Consolidated Financial Statements (Tabular amounts expressed in thousands of Canadian dollars, except per share amounts) For the period from July 28, 2004 to December 31, 2004 9. COMMITMENT AND CONTINGENCIES (CONTINUED): (b) Contingencies (continued): (i) Softwood lumber duties (continued): Effective December 20, 2004, the USDOC implemented new deposit rates for shipments made after this date. The USDOC reduced the countervailing duty deposit rate to 17.18% from 18.79% and the all others anti-dumping deposit rate to 3.78% from 8.43%. These new deposit rates are based on the USDOC's final rate determinations for the first Administrative review period (May 22, 2002 to March 31, 2003 for the countervailing duty case and May 22, 2002 to April 30, 2003 for the anti-dumping duty case). Effective February 24, 2005, the USDOC further reduced the countervailing deposit rate to 16.37% to adjust for ministerial errors. The Company has expensed $21,050,000 in duties for the period from July 28, 2004 to December 31, 2004 representing the combined final countervailing and antidumping duties of 27.22% for the period from May 22, 2002 to December 20, 2004 and 20.96% from December 20, 2004. The Company and its Predecessor have paid US$73,300,000 in cash deposits since May 22, 2002. The Company and other Canadian forest product companies, the Federal Government and Canadian provincial governments ("Canadian Interests") categorically deny the U.S. allegations and strongly disagree with the final countervailing and antidumping determinations made by the USITC and USDOC. Canadian Interests continue to pursue appeals of the final countervailing and dumping determinations with the appropriate courts, NAFTA panels and the WTO. NAFTA and WTO panels have issued several rulings with respect to the countervailing and anti-dumping investigations. The USDOC has responded to these rulings and modified its methodology and calculations in evaluating and calculating subsidy and dumping rates. However, primarily in the countervailing case, with each response to NAFTA panel rulings, the USDOC's methodology changes have resulted in substantive changes to the duty rates, both up and down, making it difficult to accurately estimate the final rates after all appeals will be complete. As a result, the Company has not recorded any receivable for prior periods as a result of the change in the cash deposit rate applicable to new shipments. A NAFTA Panel, in reviewing the "threat of injury" determination made by the USITC, has ruled that the USITC has not been able to provide the NAFTA Panel with substantive evidence to support the USITC ruling of "threat of injury". The NAFTA Panel requested that the USITC reverse its ruling on "threat of injury" with which the USITC reluctantly complied. US interests are appealing this ruling to an Extraordinary Challenge Committee ("ECC") Panel. If the ECC Panel upholds this finding by the NAFTA Panel, the Company would expect that all prior duties paid would be refunded with interest. However, there can be no certainty that the USDOC would comply with this ruling and US industry and trade groups have indicated that they may even challenge the constitutional validity of NAFTA in US courts. 18 WESTERN FOREST PRODUCTS INC. Notes to Consolidated Financial Statements (Tabular amounts expressed in thousands of Canadian dollars, except per share amounts) For the period from July 28, 2004 to December 31, 2004 9. COMMITMENT AND CONTINGENCIES (CONTINUED): (b) Contingencies (continued): (i) Softwood lumber duties (continued): The final amount of countervailing and antidumping duties that may be assessed on the Company's Canadian softwood lumber exports to the U.S. cannot be determined at this time and will depend on appeals of the final determinations to any reviewing courts, NAFTA or WTO panels. Notwithstanding the final rates established in the investigations, the final liability for the assessment of countervailing and antidumping duties will not be determined until each annual administrative review process is complete, including appeals. (ii) Litigation and claims: In the normal course of its business activities, the Company is subject to a number of claims and legal actions that may be made by customers, suppliers and others in respect of which either provision has been made or for which no material liability is expected. (iii) The Forest Revitalization Plan: Retroactive to March 31, 2003, the Government of British Columbia (the "Crown" or "Provincial Government") as part of the Forestry Revitalization Plan (the "FR Plan"), reduced the Crown land portion of the allowable annual cut ("AAC") from major tenure holders by 20%, less an exemption for the first 200,000 cubic metres, in exchange for compensation payable by the Crown. The take-back under the FR Plan reduced the Predecessor's and subsequently, the Company's, harvesting rights by 685,216 cubic metres from its tree farm licences ("TFL") and forest licences ("FL") and 827 hectares from its timber licences. Although the legal take-back is retroactive to March 31, 2003, all licence holders were able to continue to operate in the normal course of business within the take-back areas until the Minister of Forests issues a final take-back order. The first phase of negotiations with the Crown regarding the reduction of the Company's harvesting rights began in November 2003. These negotiations have recently concluded and a settlement framework agreement has been reached on compensation to be paid to the Company by the Crown. In 2005, pursuant to terms of the settlement framework agreement, the Company received $16.5 million in compensation for the loss of 685,216 cubic metres of AAC and 827 hectares of timber licences. Under this agreement, the Company also received an advance payment of $5 million towards compensation for improvements the Company made to Crown land in the take-back areas ($4 million has been recorded as a reduction in capitalized roads and $1 million has been recorded in accounts payable for future site obligations). The amounts were included as receivables in restricted assets as of December 31, 2004 and these proceeds resulted in no gain or loss due to the fair value allocations as at July 28, 2004. Negotiations in 2005 will finalize take-back areas, complete the compensation payments for improvements and determine if there will be cost recovery for costs already incurred for planning and inventories. The final comprehensive settlement agreement is expected to be reached in 2005. 19 WESTERN FOREST PRODUCTS INC. Notes to Consolidated Financial Statements (Tabular amounts expressed in thousands of Canadian dollars, except per share amounts) For the period from July 28, 2004 to December 31, 2004 9. COMMITMENT AND CONTINGENCIES (CONTINUED): (b) Contingencies (continued): (iii) The Forest Revitalization Plan (continued): In 2003, the Crown budgeted for two funds totalling $275 million - $200 million to compensate British Columbia forest companies for the reduction of harvesting rights and $75 million to mitigate impacts on their displaced contractors as well as company and contractor employees. In early 2005 the Crown announced that they would increase each fund by $50 million in fiscal 2005/06. The Company is working with the Crown to determine compensation for its displaced workers and contractors. 10. SEGMENTED INFORMATION: (a) Industry segments: The Company is an integrated Canadian forest products company operating in two industry segments. The Solid Wood Segment comprises the Company's timber harvesting, reforestation, sawmilling, value-added lumber remanufacturing and lumber marketing operations. The Pulp Segment comprises the Company's NBSK pulp manufacturing and sales operations.
July 28 to December 31, 2004 ---------------------------------------------- Solid wood Pulp Total ------------ ------------ ------------ Sales: To external customers $ 243,740 $ 80,366 $ 324,106 To other segment (1) 15,852 - 15,852 ------------ ------------ ------------ $ 259,592 $ 80,366 $ 339,958 ============ ============ ============
July 28 to December 31, 2004 ---------------------------------------------- Solid wood Pulp Total ------------ ------------ ------------ Segmented operating loss $ (3,676) $ (2,370) $ (6,046) General corporate expenses (6,145) Cash interest (18,705) Foreign exchange gain/amortization of finance costs 26,303 Other expense (96) Income tax expense (781) ------------ Net loss $ (5,470) ============
20 WESTERN FOREST PRODUCTS INC. Notes to Consolidated Financial Statements (Tabular amounts expressed in thousands of Canadian dollars, except per share amounts) For the period from July 28, 2004 to December 31, 2004 10. SEGMENTED INFORMATION (CONTINUED): (a) Industry segments (continued):
July 28 to December 31, 2004 ---------------------------------------------- Solid wood Pulp Total ------------ ------------ ------------ Identifiable assets $ 594,008 $ 84,609 $ 678,617 Corporate assets 17,818 ------------ ------------ ------------ $ 696,435 ============ ============ ============ Amortization of property, plant and equipment $ 13,137 $ 1,112 $ 14,249 ============ ============ ============ Capital expenditures $ 11,636 $ - $ 11,636 ============ ============ ============
(1) Inter-segment sales are accounted for at prevailing market prices. (b) Geographic information: (i) Sales: The Company's sales, based on the known origin of the customer, from July 28 to December 31, 2004 were as follows: Canada $ 86,860 United States 110,753 Asia 94,509 Europe 29,299 Other 2,685 ------------ $ 324,106 ============
(ii) Property, plant and equipment: All of the Company's property, plant and equipment are located in British Columbia, Canada. 11. PENSION PLANS: The Company's hourly paid employees are members of union pension plans established pursuant to collective bargaining agreements. The aggregate contributions made by the Company and charged to earnings amounted to $3,953,000 for the period from July 28, 2004 to December 31, 2004. The Company has defined benefit pension plans which cover substantially all salaried employees. The plans provide pensions based on length of service and final average annual earnings. The Company also has health care plans covering certain hourly and retired salaried employees. On July 28, 2004, the Company implemented fresh start accounting and recorded on its books a liability of $17,978,000 representing the excess of actuarial liabilities over the market value of assets as calculated by the Company's actuary. Included in this amount are the liabilities for the Supplementary pension plan ($6,681,000) and the hourly bridging and hourly non-pension post retirement plans ($10,097,000) all of which are unfunded arrangements. 21 WESTERN FOREST PRODUCTS INC. Notes to Consolidated Financial Statements (Tabular amounts expressed in thousands of Canadian dollars, except per share amounts) For the period from July 28, 2004 to December 31, 2004 11. PENSION PLANS (CONTINUED): Information about the Company's salaried pension plans and other non-pension benefits, in aggregate, for the period from July 28, 2004 to December 31, 2004 is as follows:
Salaried Non-pension pension plans plans ------------- ------------ Plan assets: Market value, beginning of period $ 89,333 $ - Company contributions 876 158 Employees' contributions 16 - Benefits paid (2,621) (158) Actual return on assets 7,138 - ------------ ------------ Market value, end of period $ 94,742 $ - ============ ============ Accrued benefit obligation: Balance, beginning of period $ 98,149 $ 9,162 Company current service cost 1,220 80 Past service cost - - Employees' contributions 16 - Benefits paid (2,621) (158) Interest on obligation 2,615 272 Actuarial loss 5,665 1,116 ------------ ------------ Balance, end of period $ 105,044 $ 10,472 ============ ============ Funded status (end of year): Funded status deficit $ (10,302) $ (10,472) Unamortized past service costs - - Unamortized net actuarial losses 1,259 1,116 ------------ ------------ Balance sheet liability $ (9,043) $ (9,356) ============ ============
Included in the accrued benefit obligations above for salaried pension plans and non-pension plans, at December 31, 2004, are the liabilities for the Supplementary pension plan ($6,524,000) and the hourly bridging and hourly non-pension post retirement plans ($11,601,000) which are unfunded arrangements. 22 WESTERN FOREST PRODUCTS INC. Notes to Consolidated Financial Statements (Tabular amounts expressed in thousands of Canadian dollars, except per share amounts) For the period from July 28, 2004 to December 31, 2004 11. PENSION PLANS (CONTINUED): The significant actuarial assumptions adopted in measuring the Company's accrued benefit obligations are as follows: Discount rate at beginning of year: Pension plans 6.50% Non-pension plans 6.50% Discount rate at end of year: Pension plans 6.00% Non-pension plans 6.00% Expected long term return on assets: WFP and Doman Plan 7.50% Other plans n/a Rate of compensation increases 3.50% Health care cost trend rate 6.90% for 2005 reducing to 4.30% in 2011 ========================================
The Company's salaried pension and non-pension benefits expense for 2004 is as follows:
Salaried Non-pension pension plans plans ------------ ------------ Current service cost $ 1,220 $ 80 Interest cost 2,615 272 Actual return on assets (7,138) - Amortization of past service cost - - Actuarial loss 5,665 1,116 Difference between actual and expected return on plan assets: Return on plan assets 4,406 - Actuarial loss (5,665) (1,116) ------------ ------------ $ 1,103 $ 352 ============ ============
12. FINANCIAL INSTRUMENTS AND RELATED DISCLOSURES: (a) Fair value of financial instruments: The estimated fair values of the Company's financial instruments as at December 31, 2004 are as follows:
Carrying Fair amount value ---------- ---------- Accounts receivable $ 99,515 $ 99,515 Restricted assets 24,428 24,428 Other investments 7,166 7,166 Bank indebtedness 78,113 78,113 Accounts payable and accrued liabilities 75,176 75,176 Secured Bonds (note 6) 253,522 286,480 ========== ==========
23 WESTERN FOREST PRODUCTS INC. Notes to Consolidated Financial Statements (Tabular amounts expressed in thousands of Canadian dollars, except per share amounts) For the period from July 28, 2004 to December 31, 2004 12. FINANCIAL INSTRUMENTS AND RELATED DISCLOSURES (CONTINUED): (a) Fair value of financial instruments (continued): The fair value of the Company's accounts receivable, bank indebtedness, and accounts payable and accrued liabilities was estimated to approximate their carrying values due to the immediate or short-term maturity of these financial instruments. The fair value of the Company's other investments, as a result of their nature, was also estimated to approximate their carrying values. The fair value of the Company's Secured Bonds was estimated based on market prices. (b) Concentration of credit risk: The Company has significant exposures to individual customers including one customer which comprised 11% of the Company's sales for the period from July 28, 2004 to December 31, 2004. However, all of the Company's sales are either made on a cash basis, without credit terms, or are insured for 90% of their sales value with the Export Development Corporation. 13. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES: As indicated in note 2, these consolidated financial statements have been prepared in accordance with Canadian GAAP, which, in the case of the Company, the measurement principles of which conform in all material respects with U.S. GAAP, except as set forth below. (a) Adjustments to consolidated statements of operations: Net loss in accordance with Canadian GAAP $ (5,470) Adjustments to conform to U.S. GAAP - ---------- Net loss in accordance with U.S. GAAP (5,470) Minimum pension liability adjustment (c) (215) ---------- Comprehensive loss in accordance with U.S. GAAP (d) $ (5,685) ========== Weighted average number of shares outstanding 25,636 ========== Basic loss per share in accordance with U.S. GAAP $ (0.21) Diluted loss per share in accordance with U.S. GAAP (0.21) ==========
24 WESTERN FOREST PRODUCTS INC. Notes to Consolidated Financial Statements (Tabular amounts expressed in thousands of Canadian dollars, except per share amounts) For the period from July 28, 2004 to December 31, 2004 13. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED): (b) Adjustments to consolidated assets, liabilities and shareholders' equity:
December 31, July 28, 2004 2004 ------------ ------------ Total assets in accordance with Canadian GAAP $ 696,435 $ 717,484 Adjustment to conform to U.S. GAAP - - ------------ ------------ Total assets in accordance with U.S. GAAP $ 696,435 $ 717,484 ============ ============ Total liabilities in accordance with Canadian GAAP $ 446,730 $ 462,309 Minimum pension liability (c) 215 - ------------ ------------ Total liabilities in accordance with U.S. GAAP $ 446,945 $ 462,309 ============ ============ Total shareholders' equity in accordance with Canadian GAAP $ 249,705 $ 255,175 Cumulative change in accumulated other comprehensive loss relating to: Minimum pension liability (c) (215) - ------------ ------------ Total shareholders' equity in accordance with U.S. GAAP $ 249,490 $ 255,175 ============ ============ Total liabilities and shareholders' equity $ 696,435 $ 717,484 ============ ============
25 WESTERN FOREST PRODUCTS INC. Notes to Consolidated Financial Statements (Tabular amounts expressed in thousands of Canadian dollars, except per share amounts) For the period from July 28, 2004 to December 31, 2004 13. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED): (c) Minimum pension liability: Under U.S. GAAP, if the accumulated benefit obligation exceeds the market value of plan assets, a minimum pension liability for the excess is recognized to the extent that the liability recorded in the balance sheet is less than the minimum liability. Any portion of this additional liability that relates to unrecognized prior service cost is recognized as an intangible asset while the remainder is charged to comprehensive income (loss). Canadian GAAP has no such requirement to record a minimum liability and does not have the concept of comprehensive income. (d) Comprehensive income (loss): SFAS No. 130, "Reporting Comprehensive Income", requires that a company classify items of other comprehensive income by their nature in a financial statement and display the accumulated balance of other comprehensive income separately from share capital and deficit in the shareholders' equity section of the consolidated balance sheet. (e) Variable interest entities: For U.S. GAAP purposes, the Company applies Financial Accounting Standards Board's ("FASB") Interpretation No. 46R, "Consolidation of Variable Interest Entities", which requires that the holders of variable interests in a variable interest entity ("VIE") evaluate if they expect to absorb the majority of the VIE's expected losses and/or receive the majority of its expected residual returns, or both, in which case they are identified as the primary beneficiary of the VIE and are required to consolidate the VIE regardless of the extent, if any, of voting interests. The application of FIN 46R has not impacted this U.S. GAAP reconciliation as the Company has not identified any VIEs in which it holds a variable interest. (f) Accounting standard issued but not yet implemented: Statement of Financial Accounting Standards No. 151, "Inventory Costs", provides guidance on the allocation of certain costs to inventory. This standard is effective for inventory costs incurred during fiscal years beginning after June 15, 2005, while the Company is currently evaluating the implications of this standard, it does not currently expect that this standard will have a significant impact on its U.S. GAAP consolidated financial position or results of operations. 26 Consolidated Financial Statements (Expressed in Canadian dollars) DOMAN INDUSTRIES LIMITED For the period from January 1, 2004 to July 27, 2004 Years ended December 31, 2003 and 2002 [KPMG LOGO] KPMG LLP Telephone (604) 691-3000 CHARTERED ACCOUNTANTS Fax (604) 691-3031 PO Box 10426 777 Dunsmuir Street Internet www.kpmg.ca Vancouver BC V7Y 1K3 Canada REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors of Western Forest Products Inc. We have audited the consolidated balance sheets of Doman Industries Limited as at July 27, 2004 and December 31, 2003 and the consolidated statements of operations, deficit and cash flows for the period from January 1, 2004 to July 27, 2004 and for the years ended December 31, 2003 and 2002. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our audit opinion. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at July 27, 2004 and December 31, 2003 and the results of its operations and its cash flows for the period from January 1, 2004 to July 27, 2004 and the years ended December 31, 2003 and 2002 in accordance with Canadian generally accepted accounting principles. Canadian generally accepted accounting principles vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in note 17 to the consolidated financial statements. /s/ KPMG LLP Chartered Accountants Vancouver, Canada March 15, 2005, except as to note 17 which is as of June 15, 2005 KPMG LLP, a Canadian limited liability partnership is the Canadian member firm of KPMG International, a Swiss cooperative. DOMAN INDUSTRIES LIMITED Consolidated Balance Sheets (Expressed in thousands of Canadian dollars)
July 27, December 31, 2004 2003 -------------- ----------- (Restated - note 2(k)) Assets Current assets: Cash $ - $ 21,561 Accounts receivable - 68,317 Inventory (note 3) - 159,020 Prepaid expenses - 6,763 -------------- ----------- - 255,661 Investments (note 4) - 10,786 Property, plant and equipment (note 5) - 460,415 Other assets (note 6) - 22,190 -------------- ----------- $ - $ 749,052 ============== =========== Liabilities and Shareholders' Deficiency Current liabilities: Bank indebtedness (note 7) $ - $ 30,427 Accounts payable and accrued liabilities - 124,818 Accounts payable subject to compromise (note 8) - 110,862 Secured interest payable - - Unsecured interest subject to compromise - - Current portion of long-term debt subject to compromise (note 9) - 503,042 Current portion of long-term debt (note 9) - 207,440 -------------- ----------- - 976,589 Long-term debt subject to compromise (note 9) - 162,063 Other liabilities - 27,525 -------------- ----------- - 1,166,177 Shareholders' deficiency: Share capital (note 10(a)): Preferred shares 64,076 64,076 Common and non-voting shares 242,942 242,942 Deficit (307,018) (724,143) -------------- ----------- - (417,125) -------------- ----------- $ - $ 749,052 ============== ===========
Basis of presentation and reorganization proceedings (note 1) Commitment and contingencies (note 14) See accompanying notes to consolidated financial statements. 1 DOMAN INDUSTRIES LIMITED Consolidated Statements of Operations (Expressed in thousands of Canadian dollars, except for share and per share amounts)
January 1, January 1, January 1, 2004 to 2003 to 2002 to July 27, December 31, December 31, 2004 2003 2002 ---------- ------------- ------------ (Restated - (Restated - note 2(k)) note 2(k)) Sales $ 433,704 $ 621,088 $ 655,720 Costs and expenses: Cost of goods sold 306,624 528,926 495,290 Anti-dumping and countervailing duties 23,991 36,088 22,271 Freight expenses 28,294 49,609 53,299 Selling and administration 12,473 18,080 19,036 Amortization of property, plant and equipment 33,036 45,973 46,389 Write-down of property, plant and equipment and operating restructuring costs (note 12) - 7,986 8,774 --------- ------------ ------------ 404,418 686,662 645,059 --------- ------------ ------------ Operating earnings (loss) 29,286 (65,574) 10,661 Interest income (expense): Bank indebtedness (1,686) (2,891) (995) Long-term debt (67,397) (93,547) (101,719) Foreign exchange gains (losses) on translation of long-term debt (24,228) 189,180 10,228 Amortization of deferred finance costs and debt discount (2,266) (4,411) (5,268) --------- ------------ ------------ (95,577) 88,331 (97,754) Other income (expense) (note 16(a)) (5,869) 2,200 4,275 Financial restructuring costs (note 13) (11,391) (7,790) (7,259) --------- ------------ ------------ Earnings (loss) before income taxes (83,551) 17,167 (90,077) Income taxes (note 11) (77) (1,034) (810) --------- ------------ ------------ Net earnings (loss) from continuing operations (83,628) 16,133 (90,887) Net loss from discontinued operations (note 16(c)) (12,426) (19,937) (73,218) --------- ------------ ------------ Net loss (96,054) (3,804) (164,105) Provision for dividends on preferred shares (2,753) (4,779) (4,499) --------- ------------ ------------ Net loss attributable to common and non-voting shares $ (98,807) $ (8,583) $ (168,604) ========= ============ ============
2 DOMAN INDUSTRIES LIMITED Consolidated Statements of Operations, Continued (Expressed in thousands of Canadian dollars, except for share and per share amounts)
January 1, January 1, January 1, 2004 to 2003 to 2002 to July 27, December 31, December 31, 2004 2003 2002 ------------ ------------- ------------- (Restated - (Restated - note 2(k)) note 2(k)) Net earnings (loss) from continuing operations per share: Basic $ (2.03) $ 0.27 $ (2.25) Diluted (2.03) 0.27 (2.25) Net loss from discontinued operations per share: Basic $ (0.29) $ (0.47) $ (1.72) Diluted (0.29) (0.47) (1.72) Net loss per share: Basic $ (2.33) $ (0.20) $ (3.97) Diluted (2.33) (0.20) (3.97) Weighted average number of common and non-voting shares outstanding (thousands of shares) 42,481 42,481 42,481
See accompanying notes to consolidated financial statements. 3 DOMAN INDUSTRIES LIMITED Consolidated Statements of Deficit (Expressed in thousands of Canadian dollars)
January 1, January 1, January 1, 2004 to 2003 to 2002 to July 27, December 31, December 31, 2004 2003 2002 ----------- ------------ ----------- (Restated - (Restated - note 2(k)) note 2(k)) Deficit, beginning of period $ (724,143) $ (720,339) $ (556,234) Net loss (96,054) (3,804) (164,105) Comprehensive revaluation adjustment on financial reorganization (note 1(a)(vii)) 513,179 - - ----------- ------------ ----------- Deficit, end of period $ (307,018) $ (724,143) $ (720,339) =========== ============ ===========
See accompanying notes to consolidated financial statements. 4 DOMAN INDUSTRIES LIMITED Consolidated Statements of Cash Flows (Expressed in thousands of Canadian dollars)
January 1, January 1, January 1, 2004 to 2003 to 2002 to July 27, December 31, December 31, 2004 2003 2002 ----------- ------------ ------------ (Restated - (Restated - note 2(k)) note 2(k)) Operations: Net earnings (loss) from continuing operations $ (83,628) $ 16,133 $ (90,887) Items not involving cash: Amortization of property, plant and equipment 33,036 45,973 46,389 Write-down of property, plant and equipment - - 5,618 Amortization and write-down of deferred charges 2,266 10,397 9,069 Foreign currency translation gain 24,228 (189,180) (10,228) Loss on property, plant and equipment disposals 450 (2,174) (5,527) Other (106) 5,679 (2,163) ----------- ------------ ------------ (23,754) (113,172) (47,729) Changes in non-cash working capital items: Accounts receivable (14,215) 23,144 (22,299) Inventory (51,670) 53,500 13,658 Prepaid expenses (4,052) 4,526 (2,669) Accounts payable and accrued liabilities 94,108 79,460 39,536 ----------- ------------ ------------ 24,171 160,630 28,226 ----------- ------------ ------------ Continuing operations 417 47,458 (19,503) Discontinued operations (2,307) (30,693) (8,543) ----------- ------------ ------------ (1,890) 16,765 (28,046) Investments: Additions to property, plant and equipment (3,506) (3,010) (2,210) Additions to capitalized roads (21,122) (26,160) (27,640) Disposals of property, plant and equipment 1,062 3,761 14,274 Other 1,224 (1,002) 298 ----------- ------------ ------------ (22,342) (26,411) (15,278) Discontinued operations - - 238 ----------- ------------ ------------ (22,342) (26,411) (15,040) Financing: Bank indebtedness 19,311 8,608 20,510 Finance costs - - (1,101) ----------- ------------ ------------ 19,311 8,608 19,409 ----------- ------------ ------------ Decrease in cash (4,921) (1,038) (23,677) Cash transferred to successor on CCAA wind-up proceedings (note 1) (16,640) - - Cash, beginning of period 21,561 22,599 46,276 ----------- ------------ ------------ Cash, end of period $ - $ 21,561 $ 22,599 =========== ============ ============ Supplementary information: Cash paid for: Interest $ 69,083 $ 96,438 $ 102,716 Income taxes 559 1,034 2,506 Non-cash items: Trade-in of equipment for new equipment under operating leases - - 463 =========== ============ ============
See accompanying notes to consolidated financial statements. 5 DOMAN INDUSTRIES LIMITED Notes to Consolidated Financial Statements (Tabular amounts expressed in thousands of Canadian dollars, except per share amounts) For the period from January 1, 2004 to July 27, 2004 Years ended December 31, 2003 and 2002 1. BASIS OF PRESENTATION AND REORGANIZATION PROCEEDINGS: Doman Industries Limited's ("Doman" and together with its subsidiaries the "Company") business was the harvesting of timber and the manufacturing and sale of lumber and pulp for worldwide markets. On November 7, 2002, Doman and certain of its subsidiaries (collectively the "Doman Group"), voluntarily filed for protection under the Companies' Creditors Arrangement Act (Canada) ("CCAA") with the British Columbia Supreme Court (the "Court"). On July 27, 2004, the Doman Group implemented a Plan of Compromise and Arrangement under CCAA and Reorganization under the Canada Business Corporations Act (the "CBCA") (the "Plan") and emerged from protection under CCAA. 4204247 Canada Inc. was incorporated under CBCA on April 27, 2004 for the purpose of implementing the Plan. 4204247 Canada Inc. changed its name to "Western Forest Products Inc." ("Western") on June 21, 2004. On July 27, 2004, Western acquired the solid wood and pulp assets from the Doman Group. Until the Plan was implemented, Western did not carry on any business and had no material assets or liabilities. Western commenced active business on July 28, 2004. The purpose of the Plan was to (1) compromise the claims of the Doman Group's affected creditors so as to enable its solid wood and pulp businesses to be carried on under a new corporate structure, with relief from certain debt servicing and repayment obligations; and (2) facilitate the repayment of Doman's secured senior notes through the distribution of certain warrants (exercisable for Western's secured bonds and Common shares) and the sale of certain private placement units consisting of Western's secured bonds and Common shares. The significant steps in the implementation of the Plan included: - the incorporation of two new corporations, Western and Western Pulp Limited ("WPL"); - the segregation of the principal operating assets of the Doman Group into two separate operating groups: the solid wood assets, which were transferred to Western, and the pulp assets, which were transferred to WPL; WPL became a wholly-owned subsidiary of Western; - the unsecured indebtedness of the Doman Group were compromised and converted to approximately 75% of the Common shares of Western, subject to certain cash elections; in addition, the Doman Group's unsecured creditors were entitled to certain warrants (exercisable for Western's secured bonds and Common shares); - the indebtedness held by Doman's senior secured noteholders was refinanced in full through a combination of a distribution of Class A and B warrants to the Doman Group's unsecured creditors and a private placement to certain standby purchasers (the "Standby Purchasers"); for U.S.$210 million, Western issued secured bonds with an aggregate principal face value of U.S.$221 million and approximately 25% of Western's Common shares to the Standby Purchasers and those unsecured creditors of the Doman Group who exercised the warrants; the proceeds of U.S.$210 million were used primarily to repay Doman's senior secured noteholders and to cover the Doman Group's CCAA exit costs, with the remaining amount released to Western for working capital purposes. 6 DOMAN INDUSTRIES LIMITED Notes to Consolidated Financial Statements (Tabular amounts expressed in thousands of Canadian dollars, except per share amounts) For the period from January 1, 2004 to July 27, 2004 Years ended December 31, 2003 and 2002 1. BASIS OF PRESENTATION AND REORGANIZATION PROCEEDINGS (CONTINUED): - Western entered into a working capital facility providing for revolving advances up to $100 million and reorganized certain intercorporate debt; and - Western issued three tranches of non-transferable Class C warrants to purchase up to 10% of the Common shares of Western on the terms set out in the Plan to existing shareholders of Doman; no other distributions were made or other compensation paid to Doman shareholders under the Plan. The following table summarizes the impact of the Plan on the Company:
July 27, 2004 July 27, 2004 Balance prior to Adjustments Balance after Plan Implementation The Plan Plan ------------------- ------------------ -------------- (note 1(a)) Assets Current assets: Cash $ 16,640 $ (16,640) (ii) $ - Accounts receivable 77,109 (77,109) (ii) - Inventory 198,159 (198,159) (ii) - Prepaid expenses 8,421 (8,421) (ii) - ------------------- ------------ -------------- 300,329 (300,329) - Investments 10,085 (10,085) (ii) - Property, plant and equipment 452,402 (452,402) (ii) - Other assets 17,266 (17,266) (ii) - ------------------- ------------ -------------- $ 780,082 $ (780,082) $ - =================== ============ ============== Liabilities and Shareholders' Equity (Deficiency) Current liabilities: Bank indebtedness $ 49,738 $ (49,738) (ii) $ - Accounts payable and accrued liabilities 97,049 (97,049) (ii) - Accounts payable subject to compromise 21,694 (21,694) (i) - Secured interest payable 62,841 (62,841) (iv) - Unsecured interest subject to compromise 140,080 (140,080) (i) - Current portion of long-term debt subject to compromise 683,573 (683,573) (i) - Current portion of long-term debt 213,200 (213,200) (iv) - ------------------- ------------ -------------- 1,268,175 (1,268,175) - Other liabilities 25,086 (25,086) (ii) - Shareholders' equity (deficiency): Preferred shares 64,076 - 64,076 Common and non-voting shares 242,942 - 242,942 Deficit (820,197) 513,179 (vii) (307,018) ------------------- ------------ -------------- (513,179) 513,179 - ------------------- ------------ -------------- $ 780,082 $ (780,082) $ - =================== ============ ==============
7 DOMAN INDUSTRIES LIMITED Notes to Consolidated Financial Statements (Tabular amounts expressed in thousands of Canadian dollars, except per share amounts) For the period from January 1, 2004 to July 27, 2004 Years ended December 31, 2003 and 2002 1. BASIS OF PRESENTATION AND REORGANIZATION PROCEEDINGS (CONTINUED): (a) Plan of Arrangement Adjustments: In exchange for Doman's U.S. $513 million of unsecured senior notes in default (the "Unsecured Notes") and the claims of other affected creditors, the beneficial holders of the two series of Doman Unsecured Notes (the "Noteholders") and other creditors with affected claims (the "Affected Claims") (collectively with the Noteholders, the "Affected Creditors") received, on a pro rata basis, approximately 75% of the equity of Western, consisting of newly issued common shares. (i) The following recorded liabilities of Doman, as at July 27, 2004 prior to Plan Implementation, were liabilities subject to compromise. Accrued interest payable on Unsecured Notes $ 140,080 Long-term debt subject to compromise consisting of the Unsecured Notes 683,573 ------------ Noteholders' liabilities subject to compromise 823,653 ------------ Accounts payable and accrued liabilities subject to compromise 21,694 Other long-term liabilities - ------------ Other affected creditors' liabilities subject to compromise 21,694 ------------ Total $ 845,347 ============
(ii) Under the Plan, Western acquired all the assets and liabilities of Doman not subject to compromise, but excluding the Port Alice pulp mill assets (previously sold by Doman on May 11, 2004), in exchange for 75% of the issued common shares of Western and certain warrants of Western. The remaining 25% of the issued common shares of Western were issued to the new Senior Secured Bondholders as described below. (iii) Western issued Secured Bonds in the amount of US$221 million and 25% of the equity of Western in exchange for cash of US$210 million. (iv) The holders of the Secured Notes of Doman received a distribution of cash for 100% of their outstanding principle of US$160 million ($213.2 million) and unpaid interest of $62.8 million. (v) The Doman Group paid outstanding advisory fees of $5.8 million including legal, accounting and investment fees from cash on hand immediately before the transfer of assets to Western. (vi) The existing shareholders of Doman received three tranches of non-transferable class C warrants to acquire up to 10% of the shares of the Company. The warrants will expire if on or after July 27, 2005, Western amalgamates or completes a similar business combination that results in the shareholders of Western owning less than 80% of the issued and outstanding equity shares of the continuing entity. (vii) The Company recorded a comprehensive revaluation adjustment on financial reorganization of $513,179,000 which represents the amount of net liabilities extinguished on final Plan implementation. 8 DOMAN INDUSTRIES LIMITED Notes to Consolidated Financial Statements (Tabular amounts expressed in thousands of Canadian dollars, except per share amounts) For the period from January 1, 2004 to July 27, 2004 Years ended December 31, 2003 and 2002 2. SIGNIFICANT ACCOUNTING POLICIES: These consolidated financial statements are prepared in accordance with Canadian generally accepted accounting principles ("Canadian GAAP"), which require management to make assumptions and estimates that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Information regarding the measurement aspects of United States generally accepted accounting principles ("U.S. GAAP") as they affect the Company's consolidated financial statements is presented in note 17. The significant policies are summarized below. (a) Basis of consolidation: These consolidated financial statements include the accounts of Doman Industries Limited and all of its subsidiaries. All intercompany balances and transactions have been eliminated on consolidation. (b) Inventory: Inventory, other than supplies which are valued at average cost, are valued at the lower of average cost and net realizable value. (c) Investments: Investments in companies over which the Company has the ability to exercise significant influence are accounted for using the equity method whereby the Company's proportionate share of earnings and losses is included in earnings. Dividends received are credited to the investment accounts. Other investments are accounted for using the cost method whereby income is included in earnings when received or receivable. (d) Property, plant and equipment: Property, plant and equipment, including those under capital lease, are initially recorded at cost, including capitalized interest and start-up costs incurred for major projects during the period of construction. Amortization of the pulp mills is provided on a unit-of-production basis over twenty-five years except for (i) the modernized portion of the Squamish pulp mill which is over forty years and (ii) other major replacements and renewals which are over twelve years. Amortization of the solid wood facilities and equipment is provided for the period these facilities are in operation on a straight-line basis over fifteen to twenty years for buildings and major plant and equipment and over five to ten years for mobile and office equipment. These rates reflect the estimated useful lives of the assets. Amortization of timberlands and logging roads is computed on the basis of the volume of timber cut. The Company conducts reviews for the impairment of property, plant and equipment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss would be recognized when estimates of future cash flows expected to result from the use of an asset and its eventual disposition are less than its carrying amount. During 2003 and 2002, the Company recorded impairment losses (note 5). 9 DOMAN INDUSTRIES LIMITED Notes to Consolidated Financial Statements (Tabular amounts expressed in thousands of Canadian dollars, except per share amounts) For the period from January 1, 2004 to July 27, 2004 Years ended December 31, 2003 and 2002 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): (e) Deferred financing costs: These costs are amortized on a straight-line basis over the term of the related debt. The amount of the amortization is included in interest on long-term debt. (f) Foreign currency translation: Transactions denominated in US dollars have been translated into Canadian dollars at the approximate rate of exchange prevailing at the time of the transaction. Monetary assets and liabilities have been translated into Canadian dollars at the year-end exchange rate. All exchange gains and losses are included directly in earnings. Exchange gains and losses included in earnings that relate to long-term debt are considered to be an integral part of financing costs and accordingly, are included in interest expense. (g) Reforestation obligation: Timber is harvested under various licences issued by the Province of British Columbia. The future estimated reforestation obligation is accrued on the basis of the volume of timber cut. The obligation is recognized at the fair value in the period in which the legal obligation was incurred, with the fair value of a liability determined with reference to the present value of estimated future cash flows. In periods subsequent to the initial measurement, changes in the liability resulting from the passage of time and revisions to fair value calculations are recognized in the statement of operations as they occur. The non-current and current portion of this obligation are included in other liabilities and accounts payable and accrued liabilities, respectively. (h) Revenue recognition: Sales are recognized when title to the goods transfers and the risk and rewards of ownership are passed to the customer which is generally at the time products are shipped to external customers. Countervailing and anti-dumping duties and freight costs are included in costs and expenses. (i) Income taxes: The Company uses the liability method of accounting for future income taxes. Under the liability method, future income tax assets and liabilities are determined based on temporary differences (differences between the accounting basis and the tax basis of the assets and liabilities), and are measured using the currently enacted, or substantively enacted, tax rates and laws expected to apply when these differences reverse. A valuation allowance is recorded against any future income tax asset if it is more likely than not that the assets will not be realized. (j) Employee future benefits: The Company recognizes the cost of retirement benefits and certain other post-employment benefits over the periods in which the employees render services to the entity in return for the benefits and with respect to pensions, requires the use of a discount rate, that is set with reference to market interest rates on high-quality debt instruments, to measure the accrued pension benefit obligation. 10 DOMAN INDUSTRIES LIMITED Notes to Consolidated Financial Statements (Tabular amounts expressed in thousands of Canadian dollars, except per share amounts) For the period from January 1, 2004 to July 27, 2004 Years ended December 31, 2003 and 2002 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): (k) Adoption of new accounting standards: Effective January 1, 2004, the Company adopted or changed the following accounting policies as required under new Canadian Institute of Chartered Accountants ("CICA") recommendations: (i) Asset retirement obligations: The Company retroactively adopted CICA new handbook section 3110 on the recognition and measurement of asset retirement obligations, which for the Company encompasses primarily reforestation liabilities. Under this new section, asset retirement obligations are recognized at the fair value in the period in which the legal obligation was incurred, with fair value of a liability determined with reference to the present value of estimated future cash flows. In periods subsequent to the initial measurement, changes in the liability resulting from the passage of time and revisions to fair value calculations are recognized in the statement of operations as they occur. The following changes to historical financial statements have been made to reflect the new policy:
Prior policy New policy ------------ ------------ Balance sheet as at December 31, 2003: Other long-term liabilities $ 29,725 $ 27,525 Deficit, ending 726,343 724,143 ============ ============
The adoption of the new standard did not have any effect on the results from operations or cash flows for the years ended December 31, 2003 and 2002. Utilizing a before-tax discount rate of 12%, the reforestation liability was estimated based on an assumption of undiscounted cash flows of $13,700,000 to be paid over a 10 year period. (ii) Hedging relationships and accounting for derivative financial instruments: The Company adopted the CICA new Accounting Guideline-13, "Hedging Relationships", which relates to the identification, designation, documentation and effectiveness of hedging relationships. The new requirements have been applied on a prospective basis to all instruments existing on, or entered into after, January 1, 2004. The Company did not have any derivative financial instruments outstanding as at January 1, 2004 nor did the Company use derivative financial instruments in the period from January 1, 2004 to July 27, 2004. 11 DOMAN INDUSTRIES LIMITED Notes to Consolidated Financial Statements (Tabular amounts expressed in thousands of Canadian dollars, except per share amounts) For the period from January 1, 2004 to July 27, 2004 Years ended December 31, 2003 and 2002 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): (k) Adoption of new accounting standards (continued): (iii) Impairment of long-lived assets: The Company adopted the new CICA recommendations of Section 3063, "Impairment of Long-Lived Assets". These recommendations require the Company to recognize an impairment loss when the carrying amount of a long-lived asset exceeds the sum of the undiscounted cash flows expected to result from its use and eventual disposition. The impairment loss is measured as the amount by which the long-lived asset's carrying amount exceeds its fair value. Prior standards required that an impairment loss was measured at the amount by which the long-lived asset's carrying amount exceeded its undiscounted cash flows. On adoption, this new standard did not impact the Company's consolidated financial statements. (iv) Countervailing and anti-dumping duties and freight costs: The CICA introduced a new recommendation for the application of GAAP, which provides guidance on alternate sources to consult with when an issue is not specifically addressed by Canadian GAAP. Prior to January 1, 2004, the Company, along with other companies in the forest industry, presented sales net of countervailing and anti-dumping duties and freight costs. In accordance with the new GAAP standard, countervailing and anti-dumping duties and freight costs have been reclassified to costs and expenses. Prior period amounts have been restated to reflect these reclassifications. The change in classification had no impact on net earnings or amounts presented in the consolidated balance sheets. (l) Comparative figures: Certain comparative figures have been reclassified to conform with the financial statement presentation adopted in the current year. 3. INVENTORY:
December 31, 2003 - ------------------ Raw materials $ 2,710 Logs 45,027 Finished pulp 9,871 Lumber 73,957 Supplies and other 27,455 ------------ $ 159,020 ============
4. INVESTMENTS: Included in investments at December 31, 2003 is $3,291,000 of restricted cash resulting from the sale of collateralized property. The funds must be used to invest in replacement collateral or to purchase senior secured notes. 12 DOMAN INDUSTRIES LIMITED Notes to Consolidated Financial Statements (Tabular amounts expressed in thousands of Canadian dollars, except per share amounts) For the period from January 1, 2004 to July 27, 2004 Years ended December 31, 2003 and 2002 5. PROPERTY, PLANT AND EQUIPMENT:
Accumulated amortization Net book December 31, 2003 Cost and write-downs value - ------------------------------ -------------- --------------- ------------ Land, buildings and equipment: Pulp mills $ 734,895 $ 551,231 $ 183,664 Solid wood facilities 255,398 162,826 92,572 Land 13,189 - 13,189 -------------- --------------- ------------ 1,003,482 714,057 289,425 Timberlands 153,992 56,074 97,918 Logging roads 349,444 276,372 73,072 -------------- --------------- ------------ $ 1,506,918 $ 1,046,503 $ 460,415 ============== =============== ============
At December 31, 2003, the Company reviewed the carrying value of its pulp mills and sawmills and determined that based on current economic conditions and plans, the carrying value for one of the Company's sawmills was not likely recoverable from future cash flows from operations and or sale and that an adjustment to the carrying value was required to equipment for a sawmill that was shut down in 2001. As a result, the Company recorded a write-down of the property, plant and equipment by $5,986,000 (2002 - $53,288,000). Amortization of property, plant and equipment:
Period from Year ended Year ended January 1, 2004 December 31, December 31, to July 27, 2004 2003 2002 ---------------- ------------ ------------ Amortization of buildings and equipment $ 10,435 $ 19,167 $ 18,333 Amortization of timberlands and logging roads 22,601 26,806 28,056 ---------------- ------------ ------------ $ 33,036 $ 45,973 $ 46,389 ================ ============ ============
6. OTHER ASSETS:
December 31, 2003 - --------------------------------------------- Pension and post retirement (note 16(b)) $ 18,622 Deferred financing costs, net of amortization 2,266 Other 1,302 ----------- $ 22,190 ===========
13 DOMAN INDUSTRIES LIMITED Notes to Consolidated Financial Statements (Tabular amounts expressed in thousands of Canadian dollars, except per share amounts) For the period from January 1, 2004 to July 27, 2004 Years ended December 31, 2003 and 2002 7. BANK CREDIT FACILITY: In March 2002, the Company established a three-year revolving credit facility, secured by receivables and inventory, which bore an interest rate of prime plus 1%. The size of this asset-backed facility was determined by the level of outstanding receivables and inventory, but could not exceed $65,000,000. At December 31, 2003, of the $59,648,000 of the facility that was available to the Company, $30,427,000 had been drawn down and $2,912,000 was used to support standby letters of credit. On July 27, 2004, this facility was repaid and extinguished in accordance with the Plan (note 1). 8. ACCOUNTS PAYABLE SUBJECT TO COMPROMISE: Accounts payable subject to compromise at December 31, 2003 consisted of the following (note 1):
December 31, 2003 - ----------------------------------------- Trade payables $ 17,751 Interest on 8-3/4% unsecured Senior Notes 65,342 Interest on 9-1/4% unsecured Senior Notes 27,769 ----------- $ 110,862 ===========
On July 27, 2004, these liabilities were settled in accordance with the Plan (note 1). 9. LONG-TERM DEBT:
December 31, 2003 - --------------------------------------------------------- Senior Notes (US $388,000,000), 8.75% due in 2004 $ 503,042 Senior Notes (US$125,000,000), 9.25% due in 2007 162,063 Senior Secured Notes (US$160,000,000), 12.00% due in 2004 207,440 ------------ $ 872,545 ============
The long-term debt was classified in the balance sheet at December 31, 2003 in accordance with its terms of repayment and compromise as follows:
December 31, 2003 - ------------------------------------------------------- Current portion of long-term debt subject to compromise $ 503,042 Current portion of long-term debt 207,440 Long-term debt subject to compromise 162,063 Long-term debt - ------------ $ 872,545 ============
14 DOMAN INDUSTRIES LIMITED Notes to Consolidated Financial Statements (Tabular amounts expressed in thousands of Canadian dollars, except per share amounts) For the period from January 1, 2004 to July 27, 2004 Years ended December 31, 2003 and 2002 9. LONG-TERM DEBT (CONTINUED): The Senior Notes were guaranteed by all of the Company's subsidiaries, except for Doman Industries (US) Limited and Doman's Freightways Ltd. The 8.75% Senior Notes were unsecured and were redeemable at the option of the Company at any time after March 15, 1999 at their principal amount plus (i) a premium (which decreased annually to 2002) and (ii) any accrued and unpaid interest. The 12.00% Senior Notes were redeemable at the option of the Company at any time after July 1, 2002 at their principal amount plus (i) a premium (which decreased annually to 2003) and (ii) any accrued and unpaid interest. The 12.00% Senior Notes were secured by a first priority lien upon a portion of the Company's timber tenures, eight of the Company's solid wood facilities, the Squamish pulp mill and the value-added lumber remanufacturing plant. The 9.25% Senior Notes were unsecured and were redeemable at the option of the Company at any time after November 15, 2002 at their principal amount plus (i) a premium (which decreased annually to 2005) and (ii) any accrued and unpaid interest. The Indentures governing the Senior Notes contained certain restrictions regarding, among other things, the ability of the Company to incur additional indebtedness (with certain exceptions) and the payment of cash dividends in certain circumstances. On July 27, 2004 these liabilities were settled in accordance with the Plan (note 1). 10. SHARE CAPITAL: (a) Authorized and issued share capital: Authorized shares (without par value): 5,000,000 Class A preferred 100,000 Class B preferred unlimited Class A common unlimited Class B non-voting Issued shares:
July 27, December 31, 2004 2003 ------------ ------------ Preferred shares issued: 1,281,526 Class A preferred, series 4 $ 64,076 $ 64,076 Common shares issued: 4,774,971 Class A common 903 903 37,706,012 Class B non-voting, series 2 242,039 242,039 ------------ ------------ 242,942 242,942 ------------ ------------ $ 307,018 $ 307,018 ============ ============
15 DOMAN INDUSTRIES LIMITED Notes to Consolidated Financial Statements (Tabular amounts expressed in thousands of Canadian dollars, except per share amounts) For the period from January 1, 2004 to July 27, 2004 Years ended December 31, 2003 and 2002 10. SHARE CAPITAL (CONTINUED): (b) Rights of classes of issued shares: The Class A preferred shares, series 4 have a cumulative annual dividend, generally payable quarterly, of 6% until January 31, 2004 and thereafter at the greater of (i) 6% and (ii) one-half of bank prime rate plus 1%. These preferred shares are redeemable at the option of the Company at any time at $50.00 per share plus any accrued and unpaid dividends. The Class A preferred shares carry the right to one vote at the Annual General meeting on all matters, other than the election of the directors in which respect they are entitled to vote separately, as a class, for up to two directors. The Class A common shares are convertible at the option of the holder into Class B non-voting shares, series 2 on a share-for-share basis. The Class B non-voting shares, series 2 have the same rights as the Class A common shares except that (i) they have no right to vote at meetings of shareholders and (ii) they are not convertible into another class of shares of the Company. However, if an offer to purchase is made to all or substantially all of the holders of the Class A common shares, each Class B non-voting share, series 2 shall, in certain circumstances, be deemed to be a Class A common share. (c) Changes in issued shares: Common and non-voting shares:
Number of shares ---------------------------------- Class B, Class A series 2 Total Amount ---------- ---------- ---------- ------------ Balance, July 27, 2004 and December 31, 2003 4,774,971 37,706,012 42,480,983 $ 242,942 ========== ========== ========== ============
(d) Dividends: The payment of quarterly cash dividends on the common and non-voting shares was suspended by the Company in the third quarter of 1996. The Company has deferred the payment of the quarterly cumulative dividends on the Series 4 Class A preferred shares from December 1, 1998 to July 27, 2004 in the aggregate amount of $25,253,000. 16 DOMAN INDUSTRIES LIMITED Notes to Consolidated Financial Statements (Tabular amounts expressed in thousands of Canadian dollars, except per share amounts) For the period from January 1, 2004 to July 27, 2004 Years ended December 31, 2003 and 2002 11. INCOME TAXES: Income tax expense for the period from January 1, 2004 to July 27, 2004 and the years ended December 31, 2003 and 2002 differs from the amount that would be computed by applying Federal and Provincial statutory rates as follows:
Period from Year ended Year ended January 1, 2004 December 31, December 31, to July 27, 2004 2003 2002 ---------------- ------------- ------------ Earnings (loss) before income taxes $ (83,551) $ 17,167 $ (90,077) ================ ============= ============ Combined Basic Federal and Provincial income tax rates 35.62% 35.62% 35.62% Expected income tax expense (recovery) $ (29,761) $ 6,115 $ (32,085) Tax effect of: Capital gains tax rate on unrealized foreign exchange gain 4,315 (33,693) - Increase in valuation allowance 25,446 18,089 15,826 Losses expiring during the year - 14,243 - Change in characterization of unrealized foreign exchange losses and other filing differences - - 18,591 Large corporations tax 77 1,034 810 Other - (4,754) (2,332) ---------------- ------------- ------------ 29,838 (5,081) 32,895 ---------------- ------------- ------------ Income tax expense (recovery) per financial statements $ 77 $ 1,034 $ 810 ================ ============= ============ Income tax expense (recovery) comprised of: Current income tax expense $ 77 $ 1,034 $ 810 Future income tax recovery - - - ---------------- ------------- ------------ $ 77 $ 1,034 $ 810 ================ ============= ============
17 DOMAN INDUSTRIES LIMITED Notes to Consolidated Financial Statements (Tabular amounts expressed in thousands of Canadian dollars, except per share amounts) For the period from January 1, 2004 to July 27, 2004 Years ended December 31,2003 and 2002 11. INCOME TAXES: The tax effects of temporary differences that give rise to significant portions of future tax assets and future tax liabilities at July 27, 2004 and December 31, 2003 are presented below:
July 27, December 31, 2004 2003 ------------ ------------ Future tax assets: Losses carried forward $ - $ 176,683 Accrued restructuring costs - 2,229 Inventory, primarily due to timing of realization of inter-company profits and write-downs - 6,257 Reforestation obligation, due to accrual for financial statement purposes - 1,247 Deferred finance costs, due to differences in timing of deductibility for tax - 2,186 Other - 6,583 ------------ ------------ - 195,185 Valuation allowance - (151,151) ------------ ------------ - 44,034 Future tax liabilities: Property, plant and equipment, due to differences in net book value and unamortized capital cost - (35,125) Pensions, due to accrual for financial statement purposes - (492) Unrealized foreign exchange gain - (8,339) Other - (78) ------------ ------------ - (44,034) ------------ ------------ Net future tax liability $ - $ - ============ ============
12. WRITE-DOWN OF PROPERTY, PLANT AND EQUIPMENT AND OPERATING RESTRUCTURING COSTS: The Company recorded restructuring costs, property, plant and equipment write-downs and other items consisting of the following:
July 27, December 31, December 31, 2004 2003 2002 ----------- ------------ ------------ Severance and other restructuring costs $ - $ 2,000 $ 3,156 Property, plant and equipment write-downs - 5,986 5,618 ----------- ------------ ------------ $ - $ 7,986 $ 8,774 =========== ============ ============
18 DOMAN INDUSTRIES LIMITED Notes to Consolidated Financial Statements (Tabular amounts expressed in thousands of Canadian dollars, except per share amounts) For the period from January 1, 2004 to July 27, 2004 Years ended December 31, 2003 and 2002 13. FINANCIAL RESTRUCTURING COSTS: The Company incurred the following pre-tax charges for costs associated with reorganizing its affairs under the protection of CCAA as follows:
Period from Year ended Year ended January 1, 2004 December 31, December 31, to July 27, 2004 2003 2002 ---------------- ------------ ------------ Investment banking and financing $ 1,590 $ 4,648 $ 2,599 Legal 8,018 2,039 1,686 Monitoring 1,114 359 81 Other 669 744 270 Write-off of deferred finance costs - - 2,623 ---------- --------- ---------- $ 11,391 $ 7,790 $ 7,259 ========== ========= ==========
14. COMMITMENT AND CONTINGENCIES: (a) Contingencies: (i) Softwood lumber duties: On March 21, 2002 and further adjusted on April 25, 2002, the US Department of Commerce ("USDOC") issued its final determination in the countervailing and antidumping investigations. The USDOC's final determination in the countervailing investigation resulted in a duty rate of 18.79% to be posted by cash deposits from the effective date of the Final Order (May 22, 2002 as discussed below). The USDOC's final determination in the antidumping investigation resulted in Company specific duty rates ranging from 2.18% to 12.44% on the six companies investigated and an all other rate of 8.43% for all other companies including this Company. On May 16, 2002, the US International Trade Commission ("USITC") published its final written determination on injury and stated that Canadian softwood lumber threatens material injury to the US industry. As a result, effective from the Final Order date of May 22, 2002, cash deposits are required for shipments at the rates determined by the USDOC. All prior bonds or cash deposits posted prior to May 22, 2002 were refunded. The Company has recorded countervailing and antidumping duties at 27.22% totalling $23,991,000 (2003 - $36,088,000; 2002 - $22,271,000) for the period from January 1, 2004 to July 27, 2004. These amounts have been recorded as costs and expenses. Cumulative duties from May 22, 2002, when cash deposits were made necessary for shipments of Canadian lumber into the U.S., until July 27, 2004 total $82,350,000 (2003 - $58,359,000). 19 DOMAN INDUSTRIES LIMITED Notes to Consolidated Financial Statements (Tabular amounts expressed in thousands of Canadian dollars, except per share amounts) For the period from January 1, 2004 to July 27, 2004 Years ended December 31, 2003 and 2002 14. COMMITMENT AND CONTINGENCIES (CONTINUED): (a) Contingencies (continued): (i) Softwood lumber duties (continued): The Company had accrued $6,627,000 for the period from August 17, 2001 to December 15, 2001 representing the preliminary USDOC countervailing duty rate of 19.31%, and $7,119,000 for the period from November 6, 2001 to May 6, 2002, representing the preliminary USDOC antidumping duty rate of 12.58%. In April 2002, the Company reversed these accruals, totaling $13,746,000 to reflect the effective date of the Final Order. The reversal has been recorded as a credit to costs and expenses. Of the reversal in the second quarter, $12,390,000 related to fiscal 2001 sales and $1,356,000 to 2002 sales. Any further adjustments resulting from a change in the countervailing and antidumping duty rates will be made prospectively. 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 by the USITC and USDOC. Canadian Interests continue to aggressively defend the Canadian industry in this US Trade dispute. Canadian Interests have appealed these decisions to NAFTA panels and the WTO. The final amount of countervailing and antidumping duties that may be assessed on Canadian softwood lumber exports to the US cannot be determined at this time and will depend on appeals of the final determinations to any reviewing courts, NAFTA or WTO panels. Notwithstanding the final rates established in the investigations, the final liability for the assessment of countervailing and antidumping duties will not be determined until each annual administrative review process is complete. In accordance with the terms of the Plan, the Company transferred any duty refunds to which it is entitled to Western (note 1). (ii) Litigation and claims: In the normal course of its business activities, the Company is subject to a number of claims and legal actions that may be made by customers, suppliers and others in respect of which either an adequate provision has been made or for which no material liability is expected. (iii) The Forest Revitalization Plan: In March 2003, the Government of B.C. ("Crown") introduced the Forestry Revitalization Plan (the "FR Plan") that provides for significant changes to Crown forest policy and to the existing allocation of Crown timber tenures to licensees. The changes prescribed in the Plan include the elimination of minimum cut control regulations, the elimination of existing timber processing regulations, and the elimination of restrictions limiting the transfer and subdivision of existing licensees. As well, through legislation, licensees, including the Company, would be required to return 20% of their replaceable tenure to the Crown. The FR Plan states that approximately half of this volume will be redistributed to open up opportunities for woodlots, community forests and First Nations and the other half will be available for public auction. The Crown acknowledged that licensees would be fairly compensated for the return of tenure and related costs such as roads and bridges. 20 DOMAN INDUSTRIES LIMITED Notes to Consolidated Financial Statements (Tabular amounts expressed in thousands of Canadian dollars, except per share amounts) For the period from January 1, 2004 to July 27, 2004 Years ended December 31, 2003 and 2002 14. COMMITMENT AND CONTINGENCIES (CONTINUED): (a) Contingencies (continued): (iii) The Forest Revitalization Plan (continued): The Company transferred its rights and interest in the timber tenures to Western under the terms of the Plan. 15. SEGMENTED INFORMATION: (a) Industry segments: The Company is an integrated Canadian forest products company operating in two industry segments. The Solid Wood Segment comprises the Company's timber harvesting, reforestation, sawmilling, value-added lumber remanufacturing and lumber marketing operations. The Pulp Segment comprises the Company's kraft ("NBSK") pulp manufacturing, pulp management and sales operations.
Period from January 1, 2004 to July 27, 2004 -------------------------------------------- Solid wood Pulp Total ----------- ----------- ------------ Sales: To external customers $ 332,433 $ 101,271 $ 433,704 To other segment (1) 25,399 - 25,399 ----------- ----------- ------------ $ 357,832 $ 101,271 $ 459,103 =========== =========== ============ Segmented operating earnings (loss) $ 37,781 $ (3,752) $ 34,029 General corporate expenses (4,743) Interest expense (95,577) Other income (expense) (5,869) Financial restructuring costs (11,391) Income tax expense (77) ----------- ----------- ------------ Net loss from continuing operations $ (83,628) =========== =========== ============ Amortization of property, plant and equipment $ 27,758 $ 5,278 $ 33,036 =========== =========== ============ Capital expenditures $ 23,644 $ 984 $ 24,628 =========== =========== ============
Year ended December 31, 2003 ---------------------------------------- Solid wood Pulp Total ---------- -------- -------- Sales: To external customers $ 457,174 $163,914 $621,088 To other segment (1) 58,584 - 58,584 ---------- -------- -------- $ 515,758 $163,914 $679,672 ========== ======== ========
21 DOMAN INDUSTRIES LIMITED Notes to Consolidated Financial Statements (Tabular amounts expressed in thousands of Canadian dollars, except per share amounts) For the period from January 1, 2004 to July 27, 2004 Years ended December 31, 2003 and 2002 15. SEGMENTED INFORMATION (CONTINUED): (a) Industry segments (continued):
Year ended December 31, 2003 ----------------------------------------------- Solid wood Pulp Total ----------- ------------ ------------ Segmented operating earnings (loss) $ (31,637) $ (27,303) $ (58,940) General corporate expenses (6,634) Interest income 88,331 Other income (expense) 2,200 Financial restructuring costs (7,790) Income tax expense (1,034) ----------- ------------ ------------ Net earnings from continuing operations $ 16,133 =========== ============ ============ Identifiable assets $ 484,188 $ 250,510 $ 734,698 Corporate assets, including investments 14,354 ----------- ------------ ------------ $ 749,052 =========== ============ ============ Amortization of property, plant and equipment $ 36,340 $ 9,633 $ 45,973 =========== ============ ============ Capital expenditures $ 28,434 $ 736 $ 29,170 =========== ============ ============
Year ended December 31, 2002 ----------------------------------------------- Solid wood Pulp Total ----------- ------------ ------------ Sales: To external customers $ 525,451 $ 130,269 $ 655,720 To other segment (1) 45,270 - 45,270 ----------- ------------ ------------ $ 570,721 $ 130,269 $ 700,990 =========== ============ ============ Segmented operating earnings (loss) $ 31,311 $ (13,509) $ 17,802 General corporate expenses (7,141) Interest expense (97,754) Other income (expense) 4,275 Financial restructuring costs (7,259) Income tax expense (810) ----------- ------------ ------------ Net loss from continuing operations $ (90,887) =========== ============ ============ Amortization of property, plant and equipment $ 38,278 $ 8,111 $ 46,389 =========== ============ ============ Capital expenditures $ 29,808 $ 42 $ 29,850 =========== ============ ============
(1) Inter-segment sales are accounted for at prevailing market price. 22 DOMAN INDUSTRIES LIMITED Notes to Consolidated Financial Statements (Tabular amounts expressed in thousands of Canadian dollars, except per share amounts) For the period from January 1, 2004 to July 27, 2004 Years ended December 31, 2003 and 2002 15. SEGMENTED INFORMATION (CONTINUED): (b) Geographic information: (i) Sales: The Company's sales, based on the known origin of the customer were as follows:
Period from Year ended Year ended January 1, 2004 December 31, December 31, to July 27, 2004 2003 2002 ---------------- ------------ ------------ Canada $ 122,563 $ 152,675 $ 180,677 United States 141,544 215,164 235,812 Asia 111,948 168,569 178,282 Europe 46,687 73,020 55,814 Other 10,962 11,660 5,135 ------------- ------------ ------------ $ 433,704 $ 621,088 $ 655,720 ============= ============ ============
(ii) Property, plant and equipment: All of the Company's property, plant and equipment were located in British Columbia, Canada. 16. OTHER INFORMATION: (a) Other income (expense):
Period from Year ended Year ended January 1, 2004 December 31, December 31, to July 27, 2004 2003 2002 ---------------- ------------ ------------ Gain (loss) on sale of properties $ (450) $ 2,174 $ 5,526 Write-down of non-trade receivables and other assets (3,620) - - BC Corporations capital tax (1,216) - (118) Write-off of deferred financing costs - - (1,178) Other (662) 23 36 Equity in operating earnings of significantly influenced investees 79 3 9 ----------- ----------- ----------- $ (5,869) $ 2,200 $ 4,275 =========== =========== ===========
(b) Pension plans: (i) The Company's hourly paid employees are members of union pension plans established pursuant to collective bargaining agreements. The aggregate contributions made by the Company and charged to earnings amounted to $4,575,000 in 2004, $8,751,000 in 2003 and $7,762,000 in 2002. An expense was recorded in 2002 of $1,700,000 to recognize accrued benefit obligations arising under hourly bridging plans which are unfunded arrangements. 23 DOMAN INDUSTRIES LIMITED Notes to Consolidated Financial Statements (Tabular amounts expressed in thousands of Canadian dollars, except per share amounts) For the period from January 1, 2004 to July 27, 2004 Years ended December 31, 2003 and 2002 16. OTHER INFORMATION (CONTINUED): (b) Pension plans (continued): (ii) The Company had defined benefit pension plans which covered substantially all salaried employees. The plans provide pensions based on length of service and final average annual earnings (as defined). The Company also had health care plans covering certain hourly and retired salaried employees. The pension and health care plans were transferred to Western on implementation of the Plan (note 1). Information about the Company's salaried pension plans and other non-pension benefits, in aggregate, for 2003 is as follows:
Salaried Non-pension pension plans plans ------------- ----------- Plan assets: Market value, beginning of year $ 91,416 $ - Company contributions 610 447 Employees' contributions 140 - Benefits paid (5,757) (447) Actual return on assets 12,670 - ------------- ----------- Market value, end of year $ 99,079 $ - ============= =========== Accrued benefit obligation: Balance at beginning of year $ 98,691 $ 11,759 Company current service cost 2,901 336 Past service cost - - Employees' contributions 140 - Benefits paid (5,757) (447) Interest on obligation 6,570 939 Actuarial loss (gain) 3,223 2,813 ------------- ----------- Balance at end of year $ 105,768 $ 15,400 ============= =========== Funded status (end of year): Funded status surplus (deficit) $ (6,689) $ (15,400) Unamortized past service costs 203 4,431 Unamortized net actuarial losses 18,552 - ------------- ----------- Balance sheet net asset $ 12,066 $ (10,969) ============= =========== Balance sheet net asset included in: Other assets $ 18,622 $ - Other liabilities (6,556) (10,969) ------------- ----------- $ 12,066 $ (10,969) ============= ===========
Included in the above pension plan accrued benefits obligations are the liabilities for the Supplementary Plans which are unfunded arrangements. At December 31, 2003, the accrued benefit obligations for these Plans was $8,732,000 (2002 - $7,992,000). 24 DOMAN INDUSTRIES LIMITED Notes to Consolidated Financial Statements (Tabular amounts expressed in thousands of Canadian dollars, except per share amounts) For the period from January 1, 2004 to July 27, 2004 Years ended December 31, 2003 and 2002 16. OTHER INFORMATION (CONTINUED): (b) Pension plans (continued): The significant actuarial assumptions adopted in measuring the Company's accrued benefit obligations are as follows: Discount rate at beginning of year: Pension plans 6.75% Non-pension plans 6.75% Discount rate at end of year: Pension plans 6.25% Non-pension plans 6.50% Expected long term return on assets: WFP and Doman Plan 7.50% Other plans n/a Rate of compensation increases 3.5% Health care cost trend rate 6.5% for 2004 grading down to 4.2% in 2010
The Company's salaried pension and non-pension benefits expense for the period January 1, 2004 to July 27, 2004 is as follows:
Salaried Non-pension pension plans plans ------------- ----------- Current service cost $ 1,765 $ 165 Interest on obligation 3,738 460 Expected return on assets (4,000) - Amortization of past service cost - - Amortization of net actuarial loss 585 83 Loss (gain) on sale of Port Alice pulpmill 1,417 (4,945) ------------- ----------- $ 3,505 $ (4,237) ============= ===========
The Company's salaried pension and non-pension benefits expense for 2003 is as follows:
Salaried Non-pension pension plans plans ------------- ----------- Current service cost $ 2,901 $ 336 Interest on obligation 6,570 939 Expected return on assets (6,668) - Amortization of past service cost 9 - Amortization of net actuarial loss 968 154 ------------- ----------- $ 3,780 $ 1,429 ============= ===========
25 DOMAN INDUSTRIES LIMITED Notes to Consolidated Financial Statements (Tabular amounts expressed in thousands of Canadian dollars, except per share amounts) For the period from January 1, 2004 to July 27, 2004 Years ended December 31, 2003 and 2002 16. OTHER INFORMATION (CONTINUED): (b) Pension plans (continued): The Company's salaried pension and non-pension benefits expense for 2002 is as follows:
Salaried Non-pension pension plans plans ------------- ----------- Current service cost $ 3,248 $ 291 Interest on obligation 6,373 748 Expected return on assets (7,495) - Amortization of past service cost 9 - Amortization of net actuarial loss 124 34 ------------- ----------- $ 2,259 $ 1,073 ============= ===========
(c) Discontinued operations: Effective May 11, 2004, the Company sold its Port Alice pulpmill to Port Alice Specialty Cellulose Inc., a subsidiary of Lapointe Partners, Inc. Under the purchase and sale agreement, the purchaser acquired all the assets used primarily or exclusively in the Port Alice pulpmill, including $2.73 million of adjusted working capital (as defined) and the assumption of outstanding obligations relating to the pulpmill, including employee and pension liabilities, for one dollar. The Company has applied discontinued operations accounting for the Port Alice pulp mill operations and restated prior year results for 2003 and 2002, accordingly. At December 31, 2003, the following assets and liabilities related to the Port Alice discontinued operations: Current assets $ 18,880 Long-term assets 2,402 ----------- 21,282 Current liabilities 8,124 Long-term liabilities 5,619 ----------- 13,743 ----------- Net assets of discontinued operations $ 7,539 ===========
26 DOMAN INDUSTRIES LIMITED Notes to Consolidated Financial Statements (Tabular amounts expressed in thousands of Canadian dollars, except per share amounts) For the period from January 1, 2004 to July 27, 2004 Years ended December 31, 2003 and 2002 16. OTHER INFORMATION (CONTINUED): (c) Discontinued operations (continued): For the periods presented, the following table provides disclosures for discontinued operations results from operations.
January 1, January 1, January 1, 2004 to 2003 to 2002 to July 27, December 31, December 31, 2004 2003 2002 ---------- ------------ ------------ Sales $ 12,764 $ 54,713 $ 60,386 Costs and expenses 19,394 74,650 133,604 --------- --------- --------- Operating earnings (loss) (6,630) (19,937) (73,218) Loss on disposal (5,796) - - --------- --------- --------- Net loss from discontinued operations $ (12,426) $ (19,937) $ (73,218) ========= ========= =========
Included in costs and expenses is nil (2003 - nil; 2002 - $2,092,000) in amortization and nil (2003 - nil; 2002 - $47,670,000) in write-downs of property, plant and equipment. 17. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES: As indicated in note 2, these consolidated financial statements have been prepared in accordance with Canadian GAAP, the measurement principles of which, in the case of the Company, conform in all material respects with U.S. GAAP, except as set forth below. (a) Adjustments to consolidated statements of operations: (i) Net loss:
Period from Year ended Year ended January 1, 2004 December 31, December 31, to July 27, 2004 2003 2002 ----------------- ------------ ------------ Net earnings (loss) in accordance with Canadian GAAP from continuing operations $ (83,628) $ 16,133 $ (90,887) Adjustments for pensions (c) 292 500 500 Write-down of property, plant and equipment (d) 1,133 2,098 (41,954) Earnings from CCAA wind-up proceedings (f) 566,822 - - Future tax impact of adjustments (g) (202,410) (925) 14,766 Increase (decrease) in valuation allowance resulting adjustments (g) 202,410 925 (14,766) --------- --------- --------- Net earnings (loss) from continuing operations in accordance with U.S. GAAP 484,619 18,731 (132,341) Provision for dividends on preferred shares (2,753) (4,779) (4,499) --------- --------- --------- Net earnings (loss) from continuing operations available to common and non-voting shares $ 481,866 $ 13,952 $(136,840) ========= ========= =========
27 DOMAN INDUSTRIES LIMITED Notes to Consolidated Financial Statements (Tabular amounts expressed in thousands of Canadian dollars, except per share amounts) For the period from January 1, 2004 to July 27, 2004 Years ended December 31, 2003 and 2002 17. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED): (a) Adjustments to consolidated statements of operations (continued): (i) Net loss (continued):
Period from Year ended Year ended January 1, 2004 December 31, December 31, to July 27, 2004 2003 2002 ---------------- ------------ ------------ Weighted average number of shares outstanding 42,481 42,481 42,481 ========= ========= ========= Basic earnings (loss) from continuing operations per share in accordance with U.S. GAAP $ 11.34 $ 0.33 $ (3.22) Diluted earnings (loss) from continuing operations per share in accordance with U.S. GAAP 11.34 0.33 (3.22) ========= ========= ========= Loss from discontinued operations in accordance with Canadian and U.S. GAAP $ (12,426) $ (19,937) $ (73,218) ========= ========= ========= Net earnings (loss) in accordance with U.S. GAAP $ 472,193 $ (1,206) $(205,559) Provision for dividends on preferred shares (2,753) (4,779) (4,499) --------- --------- --------- Net income (loss) available to common stockholders $ 469,440 $ (5,985) $(210,058) ========= ========= ========= Basic earnings (loss) per share in accordance with U.S. GAAP $ 11.06 $ (0.14) $ (4.94) Diluted earnings (loss) per share in accordance with U.S. GAAP 11.06 0.14 4.94 ========= ========= =========
(ii) Sales: The Company adopted new Canadian GAAP for presentation of sales as disclosed in note 2(k)(iv). This change eliminated a U.S. GAAP difference previously reported in 2003 and 2002. 28 DOMAN INDUSTRIES LIMITED Notes to Consolidated Financial Statements (Tabular amounts expressed in thousands of Canadian dollars, except per share amounts) For the period from January 1, 2004 to July 27, 2004 Years ended December 31, 2003 and 2002 17. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED): (b) Adjustments to consolidated assets, liabilities and shareholders' equity:
July 27, December 31, 2004 2003 -------- ------------ (Restated - note 17(e)) Total assets in accordance with Canadian GAAP $ - $ 749,052 Adjustment for pensions (c) - (15,212) Write-down of property, plant and equipment (d) - (39,856) Future income taxes relating to: Adjustment for pensions (g) - 5,419 Decrease in valuation allowance due to adjustments (g) - (5,419) -------- ------------ Total assets in accordance with US GAAP $ - $ 693,984 ======== ============ Total liabilities in accordance with Canadian GAAP $ - $ 1,166,177 Future income taxes relating to: Write-down of property, plant and equipment (g) - (14,197) Increase in valuation allowance due to adjustments (g) - 14,197 -------- ------------ Total liabilities in accordance with US GAAP $ - $ 1,166,177 ======== ============ Total shareholders' deficiency in accordance with Canadian GAAP $ - $ (417,125) Cumulative change in deficit relating to: Adjustment for pensions (c) - (15,212) Write-down of property, plant and equipment (d) - (39,856) -------- ------------ Total shareholders' deficiency in accordance with US GAAP $ - $ (472,193) ======== ============ Total liabilities and shareholders' equity $ - $ 693,984 ======== ============
(c) Pension and post-retirement benefits: In 2000, the Company adopted new Canadian accounting standards relating to pension and other post retirement benefits. The change in pensions and post retirement benefits was applied retroactively with an adjustment to opening deficit. The adjustment to assets, liabilities and opening deficit at December 31, 2003 under U.S. GAAP represents a $15,212,000 decrease in pension assets and $15,212,000 increase in deficit relating to experience gains which would not have been recorded under U.S. GAAP but rather would be recognized over the expected average remaining service life of the employee group to the extent the gains exceeded certain thresholds. For U.S. GAAP purposes, the 2004, 2003 and 2002 effect of the adjustment posted has been reversed and amortization of the experience gain of $292,000 (2003 - $500,000; 2002 - $500,000) has been recorded. 29 DOMAN INDUSTRIES LIMITED Notes to Consolidated Financial Statements (Tabular amounts expressed in thousands of Canadian dollars, except per share amounts) For the period from January 1, 2004 to July 27, 2004 Years ended December 31, 2003 and 2002 17. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED): (d) Long-lived assets: Under U.S. GAAP, in 2001 certain pulp mill assets were classified as "long-lived assets to be disposed of by sale" and were written down to fair market value. During 2002, these assets were reclassified to "long-lived assets held for use" as the Company no longer intended to sell these assets. For Canadian GAAP purposes, the assets were measured at their net recoverable amount for both years. US GAAP requires that a long-lived asset that is reclassified from "held for sale" to "held for use" be measured at the lower of its (a) carrying amount before the asset was classified as held for sale, adjusted for any amortization expense that would have been recognized had the asset been continuously classified as held and used, and (b) the fair value at the date of the subsequent decision not to sell. In the case of the pulp mill assets, the lower amount was the fair value at the date of the subsequent decision not to sell. The fair value was $41,954,000 less than the net book value of the pulp mill assets. As a result, for U.S. GAAP purposes, a further write-down of $41,954,000 and related future income tax recovery of $14,944,000 from amounts reported under Canadian GAAP would have been recorded in 2002. The adjustments for 2004 and 2003 relate to reversing the $1,133,000 and $2,098,000, respectively in amortization that would not have been recorded had the write-down been recorded in 2002. (e) Asset retirement obligation: The Company adopted the new Canadian GAAP standard for asset retirement obligations as disclosed in note 2(k)(i). This change eliminated a U.S. GAAP difference previously reported in 2003 and the 2003 amounts have been revised to remove this difference. (f) Earnings from CCAA wind-up proceedings: Under U.S. GAAP, the comprehensive valuation adjustments on financial reorganization of $513,179,000 are recorded in the statement of operations as earnings whereas under Canadian GAAP, it is treated as a capital transaction. In addition, on implementation of the Plan, the Company transferred all its assets and liabilities to Western. As a result, cumulative U.S. GAAP differences for the pension plans (note 17(c)) of $14,920,000 and for long-lived assets (note 17(d)) of $38,723,000 were realized on the transfer of these assets to Western. As a result, the earnings from CCAA wind-up proceedings would have been $53,643,000 higher due to these assets having lower net book values on transfer under U.S. GAAP. As a result, total earnings from CCAA wind-up proceedings under U.S. GAAP are $566,822,000. 30 DOMAN INDUSTRIES LIMITED Notes to Consolidated Financial Statements (Tabular amounts expressed in thousands of Canadian dollars, except per share amounts) For the period from January 1, 2004 to July 27, 2004 Years ended December 31, 2003 and 2002 17. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED): (g) Future income taxes: Under both Canadian and US GAAP, future tax assets and liabilities are measured using the income tax rates and income tax laws that, at the balance sheet date, are expected to apply when the assets are realized or the liabilities settled. In Canada, announcements of changes in income tax rates and tax laws by governments can have the effect of being substantively enacted at the balance sheet date even though the effective date is subsequent to the balance sheet date. When persuasive evidence exists that the government is able and committed to enacting the proposed changes in the foreseeable future, the substantively enacted rates and income tax laws are used to measure the future tax assets and liabilities. Under US GAAP, only the income tax rates and income tax laws enacted at the balance sheet date are used to measure the future income tax assets and liabilities. For the years ended December 31, 2003 and 2002, tax rate changes announced by governments in Canada but not yet enacted did not materially affect the amounts of future tax assets and liabilities reflected on the balance sheet and no adjustment is required for these amounts to be in accordance with US GAAP. The future tax impact of the US GAAP adjustments noted in (c), (d) and (f) would result in a future income tax expense of $202,410,000 for 2004 (2003 - expense of $925,000; 2002 - tax recovery of $14,766,000, respectively) and a future income tax adjustment to the balance sheet of nil (2003 - $5,419,000) increase in future tax assets and nil (2002 - $14,197,000) decrease in future tax liabilities. However, due to the Company not meeting the "more likely then not" requirement, a valuation allowance has been provided for these amounts in 2003. (h) Variable interest entities: For U.S. GAAP purposes, the Company applies Financial Accounting Standards Board's ("FASB") Interpretation No. 46R, "Consolidation of Variable Interest Entities", which requires that the holders of variable interests in a variable interest entity ("VIE") evaluate if they expect to absorb the majority of the VIE's expected losses and/or receive the majority of its expected residual returns, or both, in which case they are identified as the primary beneficiary of the VIE and are required to consolidate the VIE regardless of the extent, if any, of voting interests. The application of FIN 46R has not impacted this U.S. GAAP reconciliation as the Company has not identified any VIEs in which it holds a variable interest. 31 ITEM 18. FINANCIAL STATEMENTS See "Item 17. Financial Statements" for financial statements filed as part of this annual report. ITEM 19. EXHIBITS EXHIBIT NUMBER DESCRIPTION - -------- ----------- 1.1 Certificate of Incorporation and Articles(1) 1.2 Amended Bylaws of Western Forest Products Inc.(2) 4.1 Secured Bond Indenture and Supplemental Bond Indenture(1) 4.2 Class C Warrant Indenture(1) 4.3 Incentive Stock Option Plan(1) 4.4 Working Capital Facility 4.5 Western Forest Products Limited Supplementary Plan 4.6 CEO Employment Contract 4.7 CFO Employment Contract 8.1 List of significant subsidiaries of Western Forest Products Inc. 12.1 Certificate of Chief Financial Officer of Western Forest Products Inc. pursuant to 18 U.S.C. S. 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 12.2 Certificate of the Chief Executive Officer of Western Forest Products Inc. pursuant to 18 U.S.C. S. 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 13.1 Certificate of the Chief Executive Officer of Western Forest Products Inc. pursuant to 18 U.S.C. S. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 13.2 Certificate of the Chief Financial Officer of Western Forest Products Inc. to 18 U.S.C. S. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 15.1 Board Mandate 15.2 Environmental, Health and Safety Committee Charter 15.3 Nominating and Corporate Governance Committee Charter 15.4 Management Resources and Compensation Committee Charter 15.5 Audit Committee Charter (1) Incorporated by reference from the Form 6K of Western dated March 28, 2005. (2) Incorporated by reference from the Form 6K of Western dated June 20, 2005. - 140 - APPENDIX A GLOSSARY OF CERTAIN TERMS Certain terms used in this report are defined below. "AAC"......................................... Allowable annual cut -- the volume of timber which the holder of a tree farm licence or forest licence may harvest under the licence in any given year as determined by the Ministry of Forests. "ADMT"........................................ Air dried metric tonne -- a metric tonne of pulp with a moisture content of 10% or less. "annual cut".................................. The volume of timber which the holder of a timber licence expects to harvest annually from that timber licence. "Board" or "Board of Directors"............... The board of directors of Western. "board feet".................................. The plural of board foot; a board foot is calculated by multiplying 1" x 12" x 12" = 1 foot board measure gross count. Lumber is then finished (planed/sanded) to a smaller size and sold based on the original gross count. The difference between gross size and net size is approximately 72%. "CAC"......................................... Criteria air contaminants. "Canadian GAAP"............................... Canadian generally accepted accounting principles. "Canadian Interests".......................... The Federal Government, other provincial governments of Canada and Canadian forest product companies. "CBCA"........................................ Canada Business Corporations Act, as amended. "CCAA"........................................ Companies' Creditors Arrangement Act (Canada), as amended. "CCFM"........................................ Canadian Counsel of Forest Ministers. "Centre"...................................... Saanich Forest Centre. "CEO"......................................... Chief Executive Officer of Western. "CFO"......................................... Chief Financial Officer of Western. "CIT"......................................... CIT Business Credit Canada Inc. "COC"......................................... CSA Chair of Custody. "CSA"......................................... Canadian Standards Association. "CVP"......................................... Comparable Value Pricing. "Common Shares"............................... The common shares of Western. "Class A and B Warrant Indenture"............. The class A and B warrant indenture dated as of June 28, 2004 between Western and the Bank of New York.
- 141 - "Class A and B Warrants"...................... The class A and B warrants of Western issued pursuant to the Class A and B Warrant Indenture in connection with the Plan. "Class C Warrant Indenture"................... The class C warrant indenture dated as of July 27, 2004 between Western and Computershare. "Class C Warrants"............................ The class C warrants of Western, consisting of three tranches, Tranche 1, Tranche 2 and Tranche 3, issued pursuant to the Class C Warrant Indenture. "Class C Warrant Trustee" or "Computershare"............................... Computershare Trust Company of Canada. "Court" ...................................... The Supreme Court of British Columbia. "Doman" ...................................... Doman Industries Limited. "DFPL"........................................ WFP Forest Products Limited (formerly 4018940 Canada Inc. and prior to that, Doman Forest Products Limited). "DIL Plan".................................... The Doman Industries Limited Pension Plan. "DTC"......................................... The Depository Trust Company. "DWL"......................................... WFP Western Lumber Ltd. (formerly 4018982 Canada Inc. and prior to that, Doman-Western Lumber Ltd.). "EEC"......................................... Extraordinary Challenge Committee Panel. "EMS"......................................... Environmental Management Systems. "Employment Agreements"....................... The employment agreement, effective from October 4, 2005, entered into with our current CEO and the employment agreement, effective from January 24, 2005, entered into with our current CFO. "Federal Government".......................... The Federal Government of Canada. "fibre"....................................... The raw material used in the production of lumber and pulp consisting primarily of logs and wood chips. "Forest Act".................................. The Forest Act (British Columbia), as amended. "forest licence" or "FL"...................... A licence granted by the Ministry of Forests which entitles the holder to cut a specific volume of timber on government lands. "Forest Investment Account" or "FIA".......... A Provincial Government mechanism for promoting sustainable forest management in British Columbia through which the Minister of Forests may provide funding for certain forest management activities. "Forest Renewal B.C."......................... A Provincial Government program whose mandate was to plan and implement a program of expenditures in order to renew the forest economy of British Columbia, enhance the productive capacity and environmental value of forest lands, create jobs, provide training for forest workers and strengthen communities.
- 142 - "FR Act"...................................... Forest Revitalization Act (British Columbia). "FR Plan"..................................... Forest Revitalization Plan. "GAAP"........................................ Generally accepted accounting principles. "green"....................................... Green is lumber that is not kiln-dried or air-dried. "hectare"..................................... An area 100 meters by 100 meters, equal to 2.47 acres. "hog fuel".................................... Wood residue produced by a sawmill or a log merchandiser. "ISO"......................................... International Organization for Standardization. "ICA"......................................... Investment Canada Act, as amended. "Inter-Creditor Agreement".................... The inter-creditor agreement among Western, WPL, DWL, DFPL and WFP Lumber Sales Limited, CIT and the Secured Bond Trustee, dated as of July 27, 2004. "ITA"......................................... Income Tax Act (Canada), as amended. "ITA Limit"................................... Maximum amount of benefits that may be payable under a pension plan regulated by the ITA. "IWA Council"................................. IWA Council of the United Steelworkers Union. "log merchandiser"............................ The Company's log merchandiser located in Nanaimo, British Columbia, which extracts the lumber portions of lower quality logs and processes the balance into wood chips. "LRMP"........................................ Land and Resource Management Plans. "m3".......................................... A cubic metre. "Mfbm"........................................ One thousand board feet measure (see board feet). "MPS"......................................... Market Pricing System. "Ministry of Forests"......................... The Ministry of Forests of British Columbia. "MMfbm"....................................... One million board feet measure (see board feet). "NAFTA"....................................... The North American Free Trade Agreement. "Named Executive Officers".................... CEO, CFO and three of our most highly compensated executive officers (other than the CEO and CFO) whose total annual salary and bonus was in excess of $150,000, and any of our former executive officers that would have been one of the three most highly compensated executive officers except that the individual was not serving as an executive officer for us as of December 31, 2004.
- 143 - "NBSK pulp"................................... Northern Bleached Softwood Kraft pulp, a high quality white chemical kraft pulp produced from slow growing northern softwood trees and differentiated from other grades of pulp by its fibre length and strength. "OID"......................................... Original discount amount. "Operating EBITDA"............................ Operating earnings (loss) plus amortization of property, plant and equipment plus write-down of property, plant and equipment and operating restructuring costs. "Option Plan"................................. Western's incentive stock option plan. "Options"..................................... Options granted or available to be granted under the Option Plan. "PASCI"....................................... Port Alice Specialty Cellulose Inc., an affiliate of LaPointe Partners, Inc. "PFIC"........................................ Passive foreign investment company under U.S. federal income tax laws. "Plan"........................................ The plan of compromise and arrangement pursuant to the CCAA and reorganization pursuant to CBCA in respect of the Predecessor implemented on the Plan Implementation Date. "Plan Implementation Date".................... July 27, 2004. "Plan Units".................................. Units consisting of US$1,000 principal amount of Secured Bonds and 29 Common Shares issued upon exercise of the Class A and B Warrants in accordance with the Plan. "Port Alice Assets"........................... The Port Alice pulp mill and related assets of the Predecessor sold to PASCI by the Predecessor. "PPWC"........................................ Pulp, Paper and Woodworkers Union of Canada. "Predecessor"................................. Doman, Alpine Projects Limited, Diamond Lumber Sales Limited, DFPL, 4019008 Canada Inc. (formerly Doman's Freightways Ltd.), 0183903 B.C. Ltd. (formerly Doman Holdings Limited), 4018966 Canada Inc., (formerly Doman Investments Limited), 4019016 Canada Inc. (formerly Doman Log Supply Ltd.), DWL, Eacom Timber Sales Ltd., WFPL, 4018974 Canada Inc. (formerly Western Pulp Inc.), WPLP and Quatsino Navigation Company Limited. "Preferred Shares"............................ The preferred shares, issuable in series, of Western. "Province" or "British Columbia".............. The Province of British Columbia. "Provincial Government" or "Crown"............ The Provincial Government of British Columbia. "Pulp Assets"................................. All of the pulp related businesses and assets of the Predecessor, excluding the Port Alice Assets. "pulp segment"................................ The Company's pulp management, manufacturing and sales operations. "Pulpco Note"................................. The 5 year secured term, interest free, promissory note issued by WPL to WPLP which was subsequently assigned to Western pursuant to the Plan.
- 144 - "Quatsino".................................... Quatsino First Nation of the Kwakiutl Nation. "replaceable contract"........................ Replaceable contract under the Forest Act. An "evergreen" timber harvesting contract that is entered into between a holder of a replaceable licence and a contractor, whereby, the contractor is obligated to perform one or more defined phases of timber harvesting within the licence and, if satisfactorily performed, the licence holder is obligated, prior to the expiry of the term of the contract, to offer the contractor a replacement contract on substantially the same terms and conditions as the contract being replaced. "Secured Bond"................................ The U.S.$221 million of 15% secured bonds due July 28, 2009 issued by Western and guaranteed by substantially all of its subsidiaries. "Secured Bond Indenture"...................... The agreement between Western and the Secured Bond Trustee, as trustee, dated as of July 27, 2004, in respect of the Secured Bonds. "Secured Bond Trustee"........................ Bank of New York, as trustee for the holders of the Secured Bonds. "SFM"......................................... Sustainable Forest Management "Solid Wood Assets"........................... All of the businesses and assets of the Predecessor other than the Pulp Assets and the Port Alice Assets. "solid wood segment".......................... The Company's sawmilling, lumber remanufacturing, lumber marketing, log merchandiser and logging operations. "SPF 2x4 lumber".............................. 2" x 4" kiln dried random lengths of spruce, pine and fir lumber, which is a North American commodity grade of standard and better dimensional lumber. "Standby Purchasers".......................... Tricap, certain mutual funds for which Merrill Lynch Investment Managers LP or its affiliates serves as investment adviser, certain funds for which Quadrangle Group LCC or its affiliates serves as adviser or manager and Amaranth LLC. "Supplemental Bond Indenture"................. The supplement indenture to the Secured Bond Indenture among DFPL, DWL, WFP Lumber Sales Limited, WFP Quatsino Navigation Limited, Western and the Secured Bond Trustee, as trustee, dated as of July 27, 2004, in respect of the Secured Bonds. "sustained yield"............................. The yield that a forest can produce continuously (i.e. in perpetuity) at a given intensity of management without impairment of the land's productivity, with the intent that there will be a balance between timber growth and harvesting on a sustainable basis. "Termination Payment"......................... Severance payments equal to the sum of 24 months in the case of the CEO, and 12 months in the case of the CFO, of base salary plus the average yearly performance bonus over the past three years or less "timber licence" or "TL"...................... A licence granted by the Ministry of Forests which entitles the holder to harvest the area over a specified period. "timber supply areas" or "TSA"................ The areas of Provincial Government timberland which are not designated as TFLs.
- 145 - "tonne"....................................... A metric tonne -- 1,000 kilograms or 2,204.6 pounds. "Transfer Agent".............................. Computershare Investor Services Inc. "Treaty"...................................... Canada - U.S. Tax Convention (1980), as amended. "tree farm licence" or "TFL".................. A TFL is a replaceable timber tenure that requires the licensee to manage a specified area of timberland on a sustained yield basis. TFLs are granted for 25-year terms and, subject to satisfactory performance of its obligations under the TFL agreement by the licensee, are replaced by the Minister of Forests every five to 10 years with a new TFL with a 25-year term. "Tricap" ..................................... The Tricap Restructuring Fund. "TSX"......................................... The Toronto Stock Exchange. "USDOC"....................................... The United States Department of Commerce. "USITC"....................................... The United States International Trade Commission. "unit"........................................ Equals 200 cubic feet of wood chips. "upper grade lumber".......................... A grade of lumber which is substantially clear of knots. "U.S. GAAP"................................... United States generally accepted accounting principles. "WFPL"........................................ 4018958 Canada Inc. (formerly Western Forest Products Limited). "WFP Plan".................................... Western Forest Products Limited Salaried Employees Pension Plan. "WFP Supplementary Plan"...................... Western Forest Product Limited Supplementary Plan. "WPL"......................................... Western Pulp Limited (formerly 4204255 Canada Inc.), a corporation incorporated pursuant to the CBCA, for the purpose of acquiring and holding the Pulp Assets. "WPLP"........................................ Western Pulp Limited Partnership. "wood chips".................................. Small pieces of wood used to make pulp. The wood chips are produced either from wood waste in a sawmill or a log merchandiser or from pulp wood cut specifically for this purpose. Wood chips are generally uniform in size and are larger and coarser than sawdust. "Working Capital Facility" ................... A secured revolving operating loan facility of up to Cdn $100,000,000 provided by CIT under an agreement among Western, WPL, WFP Lumber Sales Limited, DFPL, DWL and CIT dated as of July 27, 2004. "WTO"......................................... The World Trade Organization.
- 146 - SIGNATURES The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf. WESTERN FOREST PRODUCTS INC. Per: /s/ R. Hert ---------------------------- Reynold Hert President and Chief Executive Officer Date: as of June 30, 2005. EXHIBITS TO FORM 20-F OF WESTERN FOREST PRODUCTS INC. JUNE 27, 2005 - 148 - EX-4.4 2 o17303exv4w4.txt WORKING CAPITAL FACILITY EXHIBIT 4.4 WORKING CAPITAL FACILITY FINANCING AGREEMENT CIT BUSINESS CREDIT CANADA INC. (AS LENDER) AND WESTERN FOREST PRODUCTS INC. (AS BORROWER) AND WESTERN PULP LIMITED, WFP LUMBER SALES LIMITED, DOMAN FOREST PRODUCTS LIMITED AND DOMAN-WESTERN LUMBER LTD. (AS GUARANTORS) DATED: JULY 27, 2004 TABLE OF CONTENTS
PAGE ARTICLE 1 DEFINITIONS ...................................... 2 ARTICLE 2 CONDITIONS PRECEDENT ............................. 19 ARTICLE 3 REVOLVING LOANS .................................. 23 ARTICLE 4 BA EQUIVALENT LOANS .............................. 28 ARTICLE 5 LETTERS OF CREDIT ................................ 28 ARTICLE 6 COLLATERAL ....................................... 30 ARTICLE 7 REPRESENTATIONS, WARRANTIES AND COVENANTS ........ 32 ARTICLE 8 INTEREST, FEES AND EXPENSES ...................... 42 ARTICLE 9 POWERS ........................................... 45 ARTICLE 10 EVENTS OF DEFAULT AND REMEDIES ................... 46 ARTICLE 11 TERMINATION ...................................... 50 ARTICLE 12 ASSIGNMENTS ...................................... 50 ARTICLE 13 MISCELLANEOUS .................................... 51
-i- EXHIBITS Exhibit A - Form of Borrowing Base Certificate Exhibit B - Form of Officer's Certificate SCHEDULES Schedule 1 - Collateral Information, etc. Schedule 2 - Material Agreements Schedule 3 - Forest and Timber Tenures, Licences of Occupation Environment Permits, Aquatic Leases, Water Licences and Permits, and Other Authorizations and their respective expiry dates THIS FINANCING AGREEMENT (this "Agreement") dated as of July 27, 2004 is entered into among Western Forest Products Inc. (the "Borrower"), Western Pulp Limited ("WPL"), WFP Lumber Sales Limited ("Salesco") Doman Forest Products Limited ("Doman FP") and Doman-Western Lumber Ltd. ("Doman WL"), and together with WPL, Salesco and Doman FP, the "Guarantors" and individually a "Guarantor"), and CIT Business Credit Canada Inc. (the "Lender"). Reference is made to the Introductory Statements below and Section 1.1 hereof for the definition of certain capitalized terms used herein. INTRODUCTORY STATEMENTS: A. Pursuant to that certain Financing Agreement, dated as of March 1, 2002 (as amended, supplemented or otherwise modified or restated from time to time, the "Pre-Filing Financing Agreement"), among Doman Forest Products Limited, Western Pulp Limited Partnership, Western Forest Products Limited, Western Pulp Inc. and Eacom Timber Sales Ltd. (collectively, the "Pre-Filing Borrowers"), Doman's Freightways Ltd., Doman Investments Limited, Doman Log Supply Ltd., Doman-Western Lumber Ltd., Diamond Lumber Sales Limited, Quatsino Navigation Company Limited and Alpine Projects Limited (the "Pre-Filing Guarantors"), Doman Industries Limited (the "Pre-Filing Parent"), and the Lender, the Lender made loans and advances to, and arranged for the issuance of letters of credit for and/or provided other financial accommodations to, or on behalf of, the Pre-Filing Borrowers (collectively, the "Pre-Filing Loans"); B. The obligations of the Pre-Filing Borrowers and the Pre-Filing Guarantors in respect of the Pre-Filing Loans were secured by valid, binding, enforceable and perfected liens, security interests and hypothecs in substantially all the inventory, accounts receivable and other current assets of the Pre-Filing Borrowers and the Pre-Filing Guarantors as set out in the Pre-Filing Financing Agreement; C. On November 7, 2002, the Pre-Filing Parent, the Pre-Filing Borrowers, the Pre-Filing Guarantors, and certain of their direct or indirect subsidiaries commenced proceedings under the Companies Creditors Arrangement Act (the "CCAA") the Company Act (British Columbia) (the "BCCA"), the Canada Business Corporations Act (the "CBCA"), and the Partnership Act (British Columbia) (the "BCPA"), and a plan of reorganization and of compromise and arrangement (as such plan of reorganization and of compromise and arrangement may be amended, modified or supplemented in accordance with its terms, the "Plan of Arrangement") was filed with the Supreme Court of British Columbia (the "Court") on April 30, 2004; D. The Plan of Arrangement was sanctioned and approved by the Court on June 14, 2004; E. Pursuant to the Plan of Arrangement, the obligations of the Pre-Filing Borrowers and the Pre-Filing Guarantors in respect of the Pre-Filing Loans and other obligations under the Pre-Filing Credit Agreement (collectively, "Pre-Filing Secured Claims") are to be repaid with the proceeds of loans to be made to the Borrower under this Agreement; F. Pursuant to the Plan of Arrangement and the Sanction Order, through a series of transactions, the Pre-Filing Borrowers, the Pre-Filing Guarantors and the Pre-Filing Parent will complete a corporate reorganization on the plan implementation date as defined in the Plan (the - 2 - "Plan Implementation Date"), with the result that the Lumber Assets (as defined in the Plan of Arrangement) will become the assets of the Borrower and the Pulp Assets (as defined in the Plan of Arrangement) will become the assets of WPL, respectively; G. Pursuant to Section 8.4(f) of the Plan of Arrangement, the Borrower is required, on or before the Plan Implementation Date, to have entered into this Agreement whereby the Lender will establish in favour of the Borrower a working capital facility in an amount not less than Cdn.$100,000,000, and the Lender has agreed to provide such working capital facility to the Borrower on the terms and conditions set forth herein. NOW THEREFORE, in consideration of the mutual conditions and agreements set forth in this Agreement, and for good and valuable consideration, the receipt of which is hereby acknowledged, the Lender, the Borrower and each Guarantor hereby agree as follows. ARTICLE 1 DEFINITIONS 1.1 In this Financing Agreement, the following terms shall have the following meanings unless the context expressly or by necessary implication otherwise requires: ACCESS AGREEMENTS shall mean access agreements between the Lender and the various landlords of locations at which Collateral or Guarantor's Collateral is located, providing the Lender access rights to the Collateral or the Guarantor's Collateral, as applicable, in form and substance satisfactory to the Lender in its sole and absolute discretion. ACCOMMODATION shall mean: (i) any advance made by way of a Prime Rate Loan at the request of the Borrower or which is deemed to be made by the Lender hereunder; (ii) any BA Equivalent Loan created hereunder; and (iii) any assistance provided by the Lender to the Borrower to obtain Letters of Credit and/or the granting of any Letter of Credit Guarantee by the Lender. ACCOUNTS shall mean any and all of the Borrower's and each Guarantor's existing and future: (a) accounts (as defined in the PPSA), and any and all other receivables (whether or not specifically listed on schedules furnished to the Lender), including all accounts created by, or arising from, all sales, leases, rentals of goods or renditions of services to its customers, including those accounts arising under the Borrower's or a Guarantor's trade names or styles, or through the Borrower's or a Guarantor's divisions; (b) any and all instruments, documents, chattel paper (including electronic chattel paper); (c) indemnification rights and tax refunds; (d) the proceeds or royalties of any and all licensing agreements or arrangements between the Borrower or a Guarantor and any licencee of the Borrower's or a Guarantor's General Intangibles; (e) reserves and credit balances arising in connection with or pursuant hereto; (f) guarantees, supporting obligations, payment intangibles and letter of credit rights (all as defined in the PPSA); (g) insurance policies or rights or claims relating to any of the foregoing; (h) any and all rights to payment, including, without limitation, those arising in connection with bank and non-bank credit cards; (i) any and all books and records and any electronic media and software relating to any and all of the foregoing (including any access codes in respect thereof); (j) notes, deposits or property of account debtors securing the obligations of any such account debtors to the Borrower or a Guarantor; (k) cash and non-cash proceeds (as defined in the PPSA) of any and all of the foregoing; (1) all demands, monies, choses in action and claims for monies now or hereafter due and payable in connection with any and all of the foregoing or otherwise; - 3 - and (m) all unpaid sellers or lessors rights (including rescission, replevin, reclamation, repossession and stoppage in transit) relating to the foregoing or arising therefrom and all rights to any goods represented by any of the foregoing, including rights to returned, reclaimed or repossessed goods. ADMINISTRATIVE MANAGEMENT FEE shall have the meaning provided for in Section 8.6 of this Financing Agreement. ASSETS shall mean, with respect to any Person, all property, assets and undertakings of such Person, both real and personal, of every kind and wheresoever situate, whether now owned or hereafter acquired. AUTHORIZATION shall mean, with respect to any Person, any authorization, order, permit, approval, tenure, grant, waiver, exemption, concession, lease, licence, consent, right, franchise, privilege, certificate, judgment, writ, injunction, award, determination, direction, decree, by-law, rule or regulation of any Governmental Entity or other Person having jurisdiction over such Person, whether or not having the force of law. AVAILABILITY RESERVE shall mean the sum of: (a) (i) (3) months rental payments or similar charges for the Borrower's or a Guarantor's leased premises where Collateral is stored or located or other locations where Collateral is stored or located which the Borrower or a Guarantor does not own and has not delivered to the Lender a waiver in form and substance satisfactory to the Lender, plus (ii) an amount equal to the greater of (x) (3) months estimated payments plus any other fees or charges which may become payable, or (y) the amount owing by the Borrower or a Guarantor to any applicable warehousemen, third party processor, lessor, licensor or other Person in possession or control of Collateral (as determined by the Lender in its reasonable business judgment), provided that any of the foregoing amounts shall be adjusted from time to time hereafter upon, (A) delivery to the Lender of any such acceptable form of waiver confirming the Lender's first perfected priority security interest, subject to Permitted Encumbrances, and unfettered access to such location to take possession of the Collateral, (B) the opening or closing of a Collateral location, and/or (C) any change in the amount of rental, storage lease, licence or processor payments or similar charges; (b) $40,000,000 as a net availability reserve, provided that, at any time after the date which is nine months after the Closing Date, the Borrower may require, by written notice to the Lender, that this net availability reserve be reduced from $40,000,000 to $25,000,000 if the Fixed Charge Coverage Ratio for the most recently completed Rolling Period is not less than 1.10:1.00 (the "NET AVAILABILITY BLOCK"); and (c) any reserve which the Lender may reasonably require from time to time pursuant to this Financing Agreement, including in respect of any and all indemnities provided by the Lender to The Toronto-Dominion Bank in respect of any outstanding letters of credit and any and all lease or licence payments or similar charges to ensure unfettered access to the Collateral, in respect of any claim or Encumbrance against any part of the Collateral which may be in priority to the Lender, including concerning any Taxes, pension and other benefits, Royalties, Priority Payables, any credit memos which have not yet been issued, debit memos, unpaid seller's thirty (30) day goods rights to repossess goods, unpaid sellers rights of stoppage in transit, Inventory value adjustments (not to exceed ten percent (10%) of the Borrower's or a Guarantor's cost of such Inventory in the absence of a Default or an Event of Default and the Lender cannot verify the market value of such Inventory to its satisfaction) from time to time to - 4 - reflect an Inventory value of the lower of cost or market (without duplication to the calculation of the Borrowing Base). BA EQUIVALENT LOAN shall mean an accommodation of credit made hereunder by the Lender up to the maximum amount of $25,000,000 based on the BA Equivalent Rate for the applicable Interest Period. BA EQUIVALENT RATE shall mean, for the Interest Period applicable to the Revolving Loan, the simple average of the annual rates for Canadian dollar Bankers' Acceptances, having such specified term (or a term as closely as possible comparable to such specified term), of CIBC that appears on the Reuters Screen CDOR Page as of 10:00 a.m. on such day that the Accommodation is made (or, if such day is not a Business Day, as of 10:00 a.m. on the immediately preceding Business Day), plus two and one quarter of one percent (2 1/4%) per annum. BANKERS' ACCEPTANCE shall mean a non-interest bearing bill of exchange denominated in Canadian dollars in a form acceptable to a Schedule I bank under the Bank Act (Canada) drawn and endorsed by or in the name of the Borrower and accepted by a Schedule I bank under the Bank Act (Canada). BLOCKED ACCOUNTS shall have the meaning provided for in Section 3.4(b) of Article 3 of this Financing Agreement. BLOCKED ACCOUNTS AGREEMENT shall have the meaning provided for in Section 3.4(b) of Article 3 of this Financing Agreement. BOND INDENTURE shall mean the indenture dated as of June 26, 2004 executed and delivered by the Borrower and the Guarantor in favour of the Bond Trustee and governing the issuance of the Borrower's 15% secured bonds due June 28, 2009. BOND TRUSTEE means The Bank of New York, in its capacity as trustee under the Bond Indenture. BORROWER shall have the meaning provided for in the introductory paragraph of this Agreement and shall extend to all of its successors and assigns. BORROWING BASE shall mean, subject to the Revolving Line of Credit, the sum of (a) eighty-five percent (85%) of the Borrower's and the Guarantors' aggregate outstanding Eligible Trade Receivables ("MARGINABLE TRADE RECEIVABLES"), plus (b) the lesser of (i) sixty-five percent (65%) of the aggregate value of the Borrower's and the Guarantors' Eligible Inventory, valued, on a monthly basis, at the lower of the Borrower's or the applicable Guarantor's cost and market, on an average cost basis, (ii) eighty percent (80%) of the aggregate appraised net recovery value of the Borrower's and the Guarantors' Eligible Inventory, and (iii) the Inventory Loan Cap, less (c) any applicable Availability Reserves. BORROWING BASE CERTIFICATE shall mean a certificate delivered by a designated authorized signing officer of the Borrower (for itself and on behalf of the Guarantors) in the form attached hereto as Exhibit A. - 5 - BUSINESS DAY shall mean any day on which the Lender is open for business in Toronto, Ontario. CIBC shall mean Canadian Imperial Bank of Commerce and any chartered bank which is its successor. CLAIM shall mean any claim of any nature whatsoever, including, without limitation, any demand, liability, obligation, debt, action, cause of action, suit, proceeding, judgment, award, assessment and reassessment. CLOSING DATE shall mean the date that this Financing Agreement has been duly executed by the parties hereto, delivered to the Lender out of escrow and the initial Accommodation has been made following the satisfaction or waiver of the conditions precedent in Section 2.1. COLLATERAL shall mean: (i) all present and future Accounts, Inventory (including any and all returned or repossessed merchandise or other goods which by sale resulted in Accounts) and Other Collateral of the Borrower and each Guarantor; (ii) all books, records, ledger cards, files, correspondence, invoices, documents, papers, electronically recorded data, computer programs, tapes, disks and related software (owned by the Borrower or a Guarantor or in which the Borrower or a Guarantor has an interest, including any and all access codes in respect thereof) which at any time evidence or contain information relating to any Accounts, Inventory, Other Collateral or Policies or are otherwise necessary or helpful in the collection thereof or realization thereupon, and all computer hardware, software and systems (owned by the Borrower or a Guarantor or in which the Borrower or a Guarantor has an interest, including any and all access codes in respect thereof) which at any time evidence or contain information relating to any Accounts, Inventory, Other Collateral or Policies or are otherwise necessary or helpful in the collection thereof or realization thereupon, and all computer hardware, software and systems (owned by the Borrower or a Guarantor or in which the Borrower or a Guarantor has an interest) which are part of or are used in connection with any of the above-mentioned electronically recorded data, computer programs, tapes, disks or software; (iii) all Documents of Title, policies and certificates of insurance pertaining to the Collateral, including comprehensive/umbrella property and casualty and business interruption insurance relating to the Borrower's or a Guarantor's respective businesses and credit/receivables insurance, all policies of insurance issued by Export Development Corporation and any other export insurer, together with any and all schedules and endorsements thereto from time to time and any and all monies and other sums payable to or receivable by the Borrower or a Guarantor from time to time under any of the foregoing, together with any and all present and future rights and benefits of the Borrower or a Guarantor under and in connection with any of the foregoing and all agreements, permissions, approvals and consents from time to time granted to the Borrower or a Guarantor under any or in connection with any of the foregoing, and all covenants, terms, conditions, representations and warranties made or expressed therein or implied by law in relation thereto, and all rights granted to the Borrower or a Guarantor under any of the foregoing to make claims, enforce performance, sue for and collect amounts owing, give consents or approvals, make selections, exercise options, participate in arbitration or other legal proceedings and/or give notices and declare defaults thereunder (collectively, the "POLICIES"), securities, and - 6 - other documents or instruments at any time evidencing or pertaining to any Accounts, Inventory, Other Collateral or Policies and all rights of the Borrower or a Guarantor thereunder; (iv) all guaranties, letters of credit, letters of guarantee, Encumbrances on real or personal property, leases and other agreements and property which at any time in any way secure or relate to any Accounts, Inventory, Other Collateral or Policies, or are acquired for the purpose of securing and enforcing any item thereof; (v) (A) all cash or other property at any time on deposit with or held by any financial institution for the account of the Borrower or a Guarantor (whether for safekeeping, custody, pledge, transmission or otherwise), (B) all present and future deposit accounts (whether time or demand or interest or non-interest bearing) of the Borrower or a Guarantor with any financial institution including those to which any such cash may at any time and from time to time be credited, (C) all investments and reinvestments (however evidenced) of amounts from time to time credited to such accounts, and (D) all interest, dividends, distributions and other proceeds payable on or with respect to (x) such investments and reinvestments, and (y) such accounts; provided that the foregoing shall not extend to any "Cash Collateral Account" established pursuant to Article 13 of the Bond Indenture or to any cash or other property contained in any such "Cash Collateral Account"; and provided further that with respect to (I) any monies or credits transferred or assigned to third parties for the purpose of making payments to the Borrower's or a Guarantor's employees; and (II) any monies or credits transferred or assigned to any financial institution as security for the Borrower's or a Guarantor's obligation to reimburse such financial institution with respect to any letters of credit or similar financial instruments issued by such institution in favour of any third party at the Borrower's or a Guarantor's request, the Lender's security interest shall rank in priority after the interests of: (III) with respect to the third parties and employees referenced in subparagraph (I). above, the interests of such third parties and of such employees; and (IV) with respect to the financial institutions and third parties referenced in subparagraph (II) above, the interests of such financial institutions and third parties (all of the employees and financial institutions referenced in subparagraphs (III) and (IV) are collectively the "payees"), and such payees shall be entitled to such monies and credits free and clear of the Lender's security interests; (vi) all products and proceeds of (i) to (v) above (including all claims to items referred to in (i) to (v) above) and all claims of the Borrower or a Guarantor against third parties for loss of, damage to, or destruction of, and payments due or to become due under leases, rentals and hires of, any or all of (i) to (v) above and proceeds payable under, or unearned premiums with respect to policies of insurance in whatever form (including the Policies) with respect to (i) to (v) above; but specifically excluding the Excluded Assets. For greater certainty, "COLLATERAL" shall also refer to the "COLLATERAL" of a Guarantor as the context so requires. COLLATERAL SECURITY AGREEMENTS shall mean, collectively, the security agreements entered into on the Plan Implementation Date by each of the Borrower and the Guarantors in favour of the Bond Trustee pursuant to the Bond Indenture, as such agreements exist on the date hereof. COMMITMENT FEE shall mean the fee in the amount of $100,000 paid by the Borrower to the Lender on April 2, 2004 under the terms of the Commitment Letter. - 7 - COMMITMENT LETTER shall mean the commitment letter, dated April 2, 2004, issued by the Lender to, and accepted by, the Pre-Filing Parent as permitted under the Meeting Order. COMPUTER ACCESS AGREEMENTS shall have the meaning ascribed thereto in Section 7.20 of this Financing Agreement. CONSOLIDATED BALANCE SHEET shall mean a consolidated balance sheet for the Borrower, prepared in accordance with GAAP. DEFAULT shall mean any event specified in Section 10.1 of Article 10 hereof, whether or not any requirement for the giving of notice, the lapse of time, or both, or any other condition, event or act, has been satisfied. DEFAULT RATE OF INTEREST shall mean a rate of interest per annum on any Obligation hereunder, equal to the sum of: (i) (a) two percent (2%) per annum, and (b) the applicable increment over the Prime Rate (as set forth in Section 8.1 of Article 8 hereof) plus the Prime Rate, or (ii) (a) two percent (2%) per annum, and the applicable increment over the BA Equivalent Rate plus the BA Equivalent Rate, which the Lender shall be entitled to charge the Borrower on all Obligations due the Lender by the Borrower, as further set forth in Section 10.2 of Article 10 of this Financing Agreement. DEPOSITORY ACCOUNTS shall mean the Lender's collection accounts as may be designated by the Lender from time to time. DOCUMENTS OF TITLE shall mean all present and future documents of title (as defined in the PPSA), and any and all warehouse receipts, bills of lading, shipping documents, chattel paper, instruments and similar documents, all whether negotiable or not and all goods and Inventory relating thereto and all cash and non-cash proceeds of the foregoing. EARLY TERMINATION DATE shall mean the date on which the Borrower terminates this Financing Agreement or the Revolving Line of Credit prior to the then applicable Maturity Date. EARLY TERMINATION FEE shall: (a) mean the fee the Lender is entitled to charge the Borrower in the event this Financing Agreement is terminated on a date prior to a Maturity Date; and (b) be determined by multiplying the maximum authorized Revolving Line of Credit by (x) two percent (2%) if the Early Termination Date occurs on or before one (1) year from the Closing Date, (y) one percent (1%) if the Early Termination Date occurs any time after one (1) year from, but on or prior to, two (2) years from the Closing Date, and (z) one half of one percent (0.50%) if the Early Termination Date occurs any time after two (2) years from, but prior to, a Maturity Date. EBITDA means, for any Person or Persons on a consolidated basis and for any period, without duplication, the amount equal to net income less any non-cash income included in net income, plus, to the extent deducted in determining net income, all interest expense (including foreign exchange losses on the translation of U.S.-Dollar-denominated debt, amortization of debt issue expenses, and non-cash interest accretion), depreciation and amortization expense and cash income tax expenses. EDC means Export Development Corporation (Canada). - 8 - ELIGIBLE INVENTORY shall mean the gross amount of the Borrower's and each Guarantor's finished and unfinished log, lumber and/or pulp, including northern bleached softwood, kraft pulp and wood chips, that is subject to a valid, first priority and fully perfected security interest in favour of the Lender, subject to Permitted Encumbrances, which at all times conform to the representations and warranties contained herein and otherwise continues to be acceptable to the Lender in the exercise of its reasonable business judgement, excluding, without duplication (a) pulp work in process, (b) raw materials other than logs or chips, (c) spare parts used for maintenance and repair of, and accessories to, machinery and equipment, (d) packaging materials and supplies, (e) unharvested, uncut or standing timber, (f) Inventory located outside the Province of British Columbia or not located at the Collateral Locations set out on Schedule 1 to this Financing Agreement unless the Lender is satisfied in its sole and absolute discretion that it has a first entitlement and priority perfected security interest in such Inventory, and (g) Inventory in transit from third parties unless the Lender is satisfied in its sole and absolute discretion that it has a first entitlement and priority perfected security interest in such Inventory, subject to Permitted Encumbrances; and less any reserves required by the Lender in its reasonable discretion, for special order goods, discontinued, slow moving, defective, rejected and obsolete Inventory, market value declines, bill and hold (deferred shipment), consignment sales, shrinkage and any applicable customs, freight, duties and Taxes, the non-payment of which could result in an Encumbrance in priority to the Lender's first secured priority position. ELIGIBLE TRADE RECEIVABLES shall mean the gross amount of the Borrower's and each Guarantor's Trade Receivables that are subject to a valid, first priority and fully perfected security interest in favour of the Lender, subject to Permitted Encumbrances, which, at all times, conform to the representations and warranties contained herein and otherwise continue to be acceptable to the Lender in the exercise of its reasonable business judgment, less, without duplication, the sum of: (a) any returns, rejections, repossessions, discounts, claims, rebates, guarantees, indemnities, set-offs, credits, fees, allowances and any other dilutive factor of any nature (whether issued, owing, granted, claimed or outstanding), and (b) reserves for any such Trade Receivables that arise from or are subject to or include: (i) sales to any Governmental Entity of the United States of America, or to any Governmental Entity of Canada, except for any such sales in relation to which the Borrower or a Guarantor has complied with any applicable legislation concerning the assignment of Accounts of such Governmental Entities as is needed to ensure that the Lender holds a valid, enforceable and first priority perfected security interest in such Trade Receivable, subject to Permitted Encumbrances, to the Lender's satisfaction in the exercise of its reasonable business judgment; (ii) foreign sales (sales to customers residing outside of Canada or the United States of America), other than (x) sales which otherwise comply with all of the other criteria for eligibility hereunder and are secured by letters of credit (in form and substance satisfactory to the Lender) issued or confirmed by, and payable at, banks acceptable to the Lender in its sole and absolute discretion, or (y) are subject to accounts receivable insurance acceptable to the Lender in its sole and absolute discretion which has been assigned to the Lender, in form and content acceptable to the Lender in its reasonable business judgement; (iii) Trade Receivables, other than from the sale of pulp, that remain unpaid for more than thirty (30) days from the due date, and Trade Receivables from the sale of pulp that remain unpaid for more than sixty (60) days from the due date; (iv) contra accounts; (v) sales to any employee, officer, agent, director, shareholder, subsidiary (as defined in the Company Act (British Columbia), or to any company affiliated (as defined in the Company Act (British Columbia) with any of the foregoing in any way; (vi) bill and hold (deferred shipment), guaranteed, conditional or consignment sales; (vii) sales to any customer which is: (A) insolvent, - 9 - (B) the debtor in any bankruptcy, insolvency, arrangement, restructuring, reorganization, receivership, liquidation or similar proceedings under any federal, provincial or state law, or (C) negotiating, or has called a meeting of its creditors for purposes of negotiating, a compromise of its debts; unless such Trade Receivables meet the requirements set out in (ii)(y) above; or (D) is financially unacceptable to the Lender or has a credit rating unacceptable to the Lender in its absolute and sole discretion, (viii) all sales to any customer if fifty percent (50%) or more of the aggregate dollar amount of all outstanding invoices to such customer, other than in respect of sales of pulp, are unpaid for more than thirty (30) days from the due date and are unpaid for more than sixty (60) days from due date in respect of sales of pulp; (ix) pre-billed Trade Receivables and Trade Receivables arising from progress billing; (x) sales not payable in Canadian or United States currency unless such sales are foreign sales contemplated by and in compliance with the requirements set out in (ii) above; and (xi) Trade Receivables that have been sold, assigned, transferred, encumbered or factored by the Borrower or a Guarantor to any Person. ENCUMBRANCE shall mean any lien, charge, mortgage, hypothec, pledge, security interest, claim and any other right or interest of a similar nature of third parties relating to any of the Collateral or the Guarantor Collateral, as applicable. ENVIRONMENTAL LAWS shall mean all applicable Laws relating to Hazardous Substances or pollution or relating to: (i) on-site or off-site contamination; (ii) releases of pollutants, contaminants, chemicals or other industrial, toxic or radioactive substances or Hazardous Substances into the environment; and (iii) the manufacture, processing, distribution, use, treatment, storage, transport or handling of Hazardous Substances, including the Waste Management Act (British Columbia), Water Act (British Columbia), Environmental Management Act (British Columbia), the Fisheries Act (Canada) and the Canadian Environmental Protection Act, 1999. EVENT(S) OF DEFAULT shall have the meaning provided for in Section 10.1 of Article 10 of this Financing Agreement. EXCLUDED ASSETS shall mean: (i) all machinery, equipment and other tangible personal property (i.e. other goods, and money, instruments, securities, chattel paper, and documents of title pertaining to same) used in the processing of Inventory or otherwise used in the carrying on of business from any of the Trustee Charged Operations, including all inventories of spare parts and accessories (whether the same are fixtures or not) but excluding, for greater certainty, all other Inventory as determined in accordance with GAAP and also excluding all money, instruments, securities, chattel paper and documents of title that are proceeds of or evidence or pertain to such Inventory; (ii) any "Cash Collateral Account" (as defined under the Bond Indenture) established under Article 13 of the Bond Indenture, including all money, securities, instruments or other investments and any interest or other income earned or accruing thereon that may from time to time be deposited therein or otherwise placed with or made or acquired by the Bond Trustee under Article 13 of the Bond Indenture or any other agreement or document entered into in connection therewith; - 10 - (iii) all present and future tree farm licences, forest licences, timber sale licences, timber licences, pulpwood agreements, wood lot licences and other forest tenures an agreements (as defined in the Forest Act (British Columbia)) and any other rights, licences or permits relating to or accruing under any of the foregoing from time to time, together with any and all renewals, amendments, modifications, consolidations, replacements or substitutions thereof or thereto; and all unharvested timber and rights to harvest timber within or arising pursuant to the forest tenures and all unharvested timber situate on any privately owned lands (the "Forest Tenures"); (iv) any and all permits, licences, approvals, consents, orders, rights, certificates, writs, injunctions, determinations, directions, decrees, authorizations, franchises, privileges, grants, waivers, exemptions and other concessions, whether or not having the force of law, of, by or from any Governmental Entity, relating to or in connection with any of the Trustee Charged Operations, including any and all leases and licences of aquatic lands or water lots, conditional or other water rights, permits or licences and road or road building rights, permits or licences (the "LICENCES"); (v) the lands and premises, including any aquatic lands or waterlots and related leases or licences, and any other interests in real property, comprising or appurtenant to any of the Trustee Charged Operations; and (vi) all proceeds from time to time owing to or received by the Borrower in respect of any disposition of, or any expropriation, condemnation or casualty involving an actual or constructive loss of, all or any portion of: (A) any of the assets listed in clauses (ii) through (v) inclusive above; (B) all goods, other than Inventory and proceeds of Inventory, which are in transit to or which are now or at any time hereafter located at any of the Trustee Charged Operations; (C) all chattel paper, documents of title and intangibles, other than Accounts and other than chattel paper, documents of title and intangibles that are proceeds of or evidence or pertain to Inventory, now or hereafter located at, forming part of, pertaining to, used or acquired for use in connection with, arising out of or necessary for the ownership, maintenance, use or operation of any of the Trustee Charged Operations; or (D) any proceeds of any assets covered by (A), (B) or (C) above; EXPIRY DATE shall have the meaning provided for in Section 4.2 of this Financing Agreement. EQUIVALENT AMOUNT shall mean on any day, with respect to an amount of Canadian dollars, the amount of United States dollars required to purchase that amount of Canadian dollars at CIBC's opening rate on such day, or, if such day is not a Business Day, on the next Business Day. FISCAL QUARTER shall mean, with respect to the Borrower, each three (3) month period ending on March 31, June 30, September 30 and December 31 of each Fiscal Year. - 11 - FISCAL YEAR shall mear each twelve (12) month period commencing on January 1 of each year and ending on the following December 31. FOREST TENURES shall have the meaning provided for in the definition of "Excluded Assets" in this Financing Agreement. FIXED CHARGE COVERAGE RATIO means, as of the last day of any Fiscal Quarter, the ratio of (a) EBITDA for the Rolling Period ended on that date minus capital expenditures made by the Borrower and its Subsidiaries during such Rolling Period to (b) the sum of (i) interest expense of the Borrower and its Subsidiaries for such Rolling Period plus (ii) the aggregate of all scheduled principal payments on Indebtedness made by the Borrower and its Subsidiaries during such Rolling Period and all scheduled capital lease payments made by the Borrower and its Subsidiaries during such Rolling Period. GAAP shall mean generally accepted accounting principles in Canada as in effect from time to time and for the period as to which such accounting principles are to apply, provided that in the event the Borrower modifies its accounting principles and procedures as applied as of the Closing Date, the Borrower shall provide to the Lender such statements of reconciliation as shall be in form and substance reasonably acceptable to the Lender. GENERAL INTANGIBLES shall mean all present and hereafter acquired intangibles (as defined in the PPSA), and shall include all present and future right, title and interest in and to: (a) all Trademarks, tradenames, corporate names, business names, logos and any other designs or sources of business identities; (b) Patents, together with any improvements on said Patents, utility models, industrial models, and designs; (c) Copyrights; (d) trade secrets; (e) licenses, permits and franchises; (f) all applications with respect to the foregoing; (g) all right, title and interest in and to any and all extensions and renewals; (h) all goodwill with respect to any of the foregoing; (i) any other forms of similar intellectual property, and; (j) all customer lists, distribution agreements, supply agreements and blueprints. GOVERNMENTAL ENTITY shall mean the Government of Canada, any other nation or any political subdivision thereof, whether provincial, state, territorial or local, and any agency, authority, instrumentality, regulatory body, court, central bank, fiscal or monetary authority or other authority regulating financial institutions, and any other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government, including the Bank Committee on Banking Regulation and Supervisory Practices of the Bank of International Settlements. GUARANTOR and GUARANTORS shall have the meaning provided for in the introductory statements of this Agreement and shall extend to each Guarantor's successors and assigns. GUARANTOR COLLATERAL shall mean, with respect to a Guarantor, any and all of the Assets of such Guarantor which would be Collateral if such Guarantor were the Borrower under this Financing Agreement. HAZARDOUS SUBSTANCE shall mean any Substance which is or is deemed by applicable Law to be, alone or in any combination, hazardous, hazardous waste, toxic, a pollutant, a deleterious substance, a contaminant or a source of pollution or contamination under any Environmental Laws, whether or not such Substance is defined as hazardous under any Environmental Laws. - 12 - INDEMNIFIED PARTY shall have the meaning provided for in Section 7.11 of Article 7 of this Financing Agreement. INITIAL APPRAISAL shall have the meaning provided for in subsection 2.1(v) of this Financing Agreement; INTERCREDITOR AGREEMENT shall mean that certain intercreditor agreement dated as of the date hereof among the Lender and the Bond Trustee. INTEREST PERIOD shall mean the period of 30, 60 and 90 days selected as the period of reference for the setting of the BA Equivalent Rate. INVENTORY shall mean any and all of the Borrower's and each Guarantor's present and hereafter acquired inventory (as defined in the PPSA), including all merchandise, inventory and goods, and all additions, substitutions and replacements thereof, wherever located, including the Trustee Charged Operations, together with all goods and materials used or usable in manufacturing, processing, reprocessing, packaging or shipping same in all stages of production from raw materials through work-in-process to finished goods and all proceeds thereof of whatever sort together with any unpaid seller's or lessor's rights (including rescission, replevin, reclamation, repossession and stoppage in transit relating to any of the foregoing or arising therefrom) to reclaim or repossess goods. INVENTORY LOAN CAP shall mean the amount of $175,000,000, as increased or decreased from time to time pursuant to Section 3.8 of Article 3 of this Financing Agreement. ISSUING BANK shall mean the bank issuing Letters of Credit for the Borrower. LAWS shall mean all federal, provincial, municipal, foreign and international statutes, acts, codes, ordinances, decrees, treaties, rules, regulations, municipal by-laws, judicial or arbitral or administrative or ministerial or departmental or regulatory judgments, orders, decisions, rulings or awards or any provisions of the foregoing, including general principles of common and civil law and equity, and all policies, practices and guidelines of any Governmental Entity binding on or affecting the Person referred to in the context in which such word is used (including, in the case of tax matters, any accepted practice or application or official interpretation of any relevant taxation authority); and "Law" means any one or more of the foregoing. LETTERS OF CREDIT shall mean all Canadian and United States dollar letters of credit issued with the assistance of the Lender in accordance with Article 5 hereof by the Issuing Bank for or on behalf of the Borrower. LETTER OF CREDIT FEE shall mean the fee payable to the Lender, chargeable to the Borrower under Article 8 of this Financing Agreement for (a) issuing a Letter of Credit Guarantee, and/or (b) otherwise assisting the Borrower in obtaining Letters of Credit, all pursuant to Article 5 hereof. LETTER OF CREDIT GUARANTEE shall mean the guarantee delivered by the Lender to the Issuing Bank of Borrower's reimbursement obligations under the Issuing Bank's reimbursement agreement, application for Letters of Credit or other like documents. - 13 - LETTER OF CREDIT SUB-LINE shall mean the commitment of the Lender to assist the Borrower in obtaining Letters of Credit, pursuant to Article 5 hereof, to a maximum aggregate amount of $10,000,000 or an Equivalent Amount. LICENCES shall have the meaning provided for in the definition of "Excluded Assets" in this Financing Agreement. LINE OF CREDIT shall mean the commitment of the Lender to (a) make Revolving Loans pursuant to Articles 3 and 4 of this Financing Agreement, and (b) assist the Borrower in obtaining Letters of Credit pursuant to Article 5 of this Financing Agreement; provided that nothing herein shall be deemed to increase the Lender's commitment hereunder. LINE OF CREDIT FEE shall: (a) mean the fee payable by the Borrower to the Lender at the end of each month for the Line of Credit pursuant to Article 8 of this Financing Agreement, and (b) be determined by multiplying the difference between (i) the maximum authorized Revolving Line of Credit, and (ii) the sum, for such month, of (x) the average daily balance of Revolving Loans, plus (y) the average daily balance of the face amount of all outstanding Letters of Credit for such month, by three-eighths of one percent (0.375%) per annum, for the number of days in said month, calculated on the basis of a 365 day year. LOAN DOCUMENTS shall mean this Financing Agreement, the Security Agreements, all other certificates, instruments, agreements, acknowledgements, indemnities and documents whatsoever executed from time to time in connection with this Financing Agreement, all as may be amended, renewed, extended, increased, replaced or supplemented from time to time. LOAN FACILITY FEE shall mean the fee in the amount of $350,000 minus the amount of the Commitment Fee payable by the Borrower to the Lender on the Closing Date in accordance with, and pursuant to, the provisions of Article 8 of this Financing Agreement. MARGINABLE TRADE RECEIVABLES shall have the meaning provided for in the definition of "Borrowing Base" in this Financing Agreement. MATERIAL ADVERSE EFFECT shall mean a material adverse effect (or a series of adverse effects, none of which is material in and of itself but which, cumulatively, results in a material adverse effect), in the sole determination of the Lender, on: (i) the business, operations, Assets or financial condition of the Borrower as it relates to the Collateral or the first secured priority position of the Lender, (ii) the ability of the Borrower or a Guarantor to perform any of its obligations under this Financing Agreement or any other Loan Document, (iii) the ability of the Lender to realize on the Collateral or satisfy the Obligations from such realization or to enforce any of the obligations of the Borrower or a Guarantor under this Financing Agreement or any other Loan Document in accordance with applicable Laws, or (iv) the Collateral, the Lender's Encumbrances on the Collateral or the priority of such Encumbrances. This definition shall apply, mutatis mutandis, to the Guarantors where the context so requires. MATERIAL AGREEMENT shall mean those instruments, documents, contracts and agreements listed on Schedule 2 of this Financing Agreement. MATURITY DATE shall mean the date occurring three (3) years from the Closing Date and, if this Financing Agreement is renewed from time to time pursuant to Section 11.1 of this Financing - 14 - Agreement, the same date occurring every year thereafter, subject to this Financing Agreement being terminated earlier in accordance with the provisions of this Agreement. MEETING ORDER means the Order dated April 30, 2004 issued by the Honourable Mr. Justice Tysoe of the Supreme Court of British Columbia in the proceeding relating to the Plan of Arrangement. NET AVAILABILITY shall mean at any time the amount by which the Borrowing Base exceeds the outstanding aggregate amount of all Revolving Loans and the face amount of all Letters of Credit. NET AVAILABILITY BLOCK shall have the meaning provided for in the definition of "Availability Reserve" in this Financing Agreement. NOTICE shall mean any claim, citation, directive, request for information, statement of claim, notice of investigation or other similar communication from any Person. OBLIGATIONS shall mean, without duplication, all loans, advances and extensions of credit made or deemed to be made by the Lender to the Borrower, or to others for the Borrower's account pursuant to this Financing Agreement, (including any and all indemnities provided to The Toronto-Dominion Bank by the Lender in respect of any outstanding Letters of Credit;), any and all payments made on the Borrower's behalf pursuant to any Computer Access Agreements and any and all Revolving Loans and Letter of Credit Guarantees; any and all indebtedness and obligations which may at any time be owing by the Borrower to the Lender pursuant to this Financing Agreement howsoever arising, whether now in existence or incurred by the Borrower from time to time hereafter; whether principal, interest, fees, costs, expenses or otherwise; whether such indebtedness is absolute or contingent, joint or several, matured or unmatured, direct or indirect and whether the Borrower is liable to the Lender for such indebtedness as principal, surety, endorser, guarantor or otherwise. Obligations shall also include, without limitation, indebtedness owing to the Lender by the Borrower or any Guarantor under any Loan Document, any indemnity under this Financing Agreement or under any other agreement or arrangement now or hereafter entered into between the Borrower or any Guarantor and the Lender relating to the Accommodations made pursuant to this Financing Agreement; indebtedness, liabilities, obligations or penalties incurred by, or imposed on, the Lender as a result of environmental claims arising out of the Borrower's or any Guarantor's operations, premises or waste disposal practices or sites; the Borrower's liability to the Lender as maker or endorser of any promissory note or other instrument for the payment of money; the Borrower's liability to the Lender under any instrument of guarantee or indemnity, or arising under any guarantee, endorsement or undertaking which the Lender may make or issue to others for the Borrower's account, including any Letter of Credit Guarantee or other accommodation extended by the Lender with respect to applications for Letters of Credit, the Lender's acceptance of drafts, the Lender's endorsement of notes or other instruments for the Borrower's account and benefit. ORDER shall mean any judicial or arbitral or administrative or ministerial or departmental or regulatory notice, decree, judgement, decision, ruling, award or order of any kind. OTHER COLLATERAL shall mean all now owned and hereafter acquired lockbox, Blocked Accounts and any other deposit accounts maintained with any bank or financial institutions into which the - 15 - proceeds of any Collateral or Guarantor Collateral, as applicable, are or may be deposited and all cash and other monies and properties in the possession or control of the Lender. OUT-OF-POCKET EXPENSES shall mean all of the Lender's present and future fees, costs and expenses incurred relative to this Financing Agreement or any other Loan Document, whether incurred heretofore or hereafter, which fees, costs and expenses shall include the cost of retaining external legal counsel, record searches, all costs and expenses incurred by the Lender in opening bank accounts, depositing cheques, receiving and transferring funds, and wire transfer charges, any charges imposed on the Lender due to returned items and "insufficient funds" of deposited cheques, and the Lender's standard fees relating thereto, any amounts paid by, incurred by or charged to, the Lender by the Issuing Bank under a Letter of Credit Guarantee or the Borrower's reimbursement agreement, application for Letters of Credit or other like document which pertain either directly or indirectly to such Letters of Credit, and the Lender's standard fees relating to the Letters of Credit and any drafts thereunder, travel, lodging, and similar expenses of the Lender's personnel in connection with inspecting and monitoring the Collateral from time to time hereunder, any applicable counsel fees and disbursements, fees and Taxes relating to same, and all expenses, costs and fees set forth herein. PERMITTED ENCUMBRANCES shall mean: (a) Encumbrances in favour of the Bond Trustee arising under the Bond Indenture and other Encumbrances expressly permitted, or consented to in writing by the Lender; (b) inchoate liens on the Collateral or Guarantor Collateral of local or provincial authorities for Taxes and claims imposed by Law for amounts not yet due and are not enforceable or registered against any of the Collateral or Guarantor Collateral; (c) liens of landlords and liens of carriers, warehousemen, bailees, mechanics, materialmen and other like liens imposed by Law, created in the ordinary course of business and for amounts not yet due (or which are being contested in good faith, by appropriate proceedings or other appropriate actions which are sufficient to prevent enforcement of such liens) and with respect to which adequate reserves or other appropriate provisions are being maintained in accordance with GAAP; (d) deposits made (and liens thereon) in the ordinary course of business (including reasonable security deposits for leases, indemnity bonds, surety bonds and appeal bonds) in connection with workers' compensation, unemployment insurance and other types of social security benefits or to secure the performance of tenders, bids, contracts (other than for the repayment or guarantee of borrowed money), statutory obligations and other similar obligations arising as a result of progress payments under government contracts; (e) Encumbrances granted to the Lender by the Borrower or any Guarantor; (f) liens of judgment creditors provided such liens do not exceed, in the aggregate, at any time, $1,000,000, other than liens bonded or insured to the reasonable satisfaction of the Lender; (g) liens in respect of Taxes for amounts which are not yet due and payable or which are being diligently contested in good faith by appropriate proceedings, and which liens are not (x) filed in any public records, (y) enforceable against the Collateral or the Guarantor Collateral, as applicable, or (z) for Taxes due to any Governmental Entity of Canada, the United States of America or any province or state thereof having similar priority statutes, as further set forth in Section 7.6 of this Financing Agreement which have become enforceable; and (h) liens or security interests granted against the Collateral or the Guarantor Collateral which are fully and unconditionally postponed and subordinate to the liens and security interests granted to the Lender, provided that any such subordinated creditor executes and delivers to and in favour of the Lender a priority, inter-creditor and standstill agreement in form and substance acceptable to the Lender, in its sole and absolute discretion. - 16 - PERSON shall mean an individual, partnership, corporation, trust, unincorporated association, joint venture, Governmental Entity or other entity whatsoever and pronouns have a similar extended meaning. POLICIES shall have the meaning provided for in the definition of "Collateral" in this Financing Agreement. PPSA shall mean the Personal Property Security Act of the Province of British Columbia as the same may be amended, supplemented or replaced and in effect from time to time. PRIME RATE shall mean the rate of interest per annum announced by CIBC from time to time as its prime rate in effect for Canadian dollar commercial loans in Canada at its principal office in Toronto, Ontario, which is not intended to be the lowest rate of interest charged by CIBC to its borrowers. PRIORITY PAYABLES shall have the meaning provided for in Section 7.6 of this Financing Agreement. PRIME RATE LOANS shall mean any loans or advances pursuant to this Financing Agreement made or maintained at a rate of interest based upon the Prime Rate. PULPCO NOTE shall mean the Secured Term Promissory Note of WPL, dated July 27, 2004, issued in favour of Western Pulp Limited Partnership and subsequently assigned to (and held on the Closing Date by) the Borrower, in the aggregate principal amount of Cdn.$110,000,000. REVOLVING LINE OF CREDIT shall mean, subject to the Borrowing Base, the aggregate commitment of the Lender to make loans, advances and extensions of credit pursuant to Articles 3 and 4 of this Financing Agreement and to assist in the issuance of Letters of Credit to the Borrower pursuant to Article 5 hereof, up to the maximum aggregate amount of $100,000,000. REVOLVING LOAN ACCOUNT shall mean the account on the Lender's books, in the Borrower's name, in which the Borrower will be charged with all Obligations under this Financing Agreement. REVOLVING LOANS shall mean the loans, advances and extensions of credit made, from time to time, to or for the account of the Borrower by the Lender, pursuant to Articles 3 and 4 of this Financing Agreement. ROLLING PERIOD means, commencing with the Fiscal Quarter ending September 30, 2004, each Fiscal Quarter taken together with the three immediately preceding Fiscal Quarters. ROYALTIES shall have the meaning provided for in Section 7.6 of this Financing Agreement. SANCTION ORDER means the Order of the Supreme Court of British Columbia in the proceedings relating to the Plan of Arrangement, sanctioning and approving the implementation of the Plan of Arrangement dated as of June 14, 2004. SECURED NOTES means the secured bonds issued by the Borrower pursuant to the Bond Indenture. - 17 - SECURITY AGREEMENTS shall have the meaning provided for in Article 6 of this Financing Agreement. SUBSIDIARY means, with respect to any Person (the "parent") at any date, any corporation, limited liability company, partnership, limited partnership, association or other entity the accounts of which would be consolidated with those of the parent in the parent's consolidated financial statements if such financial statements were prepared in accordance with GAAP as of such date, as well as any other corporation, limited liability company, partnership, limited partnership, association or other entity (a) of which securities or other ownership interests representing more than 50% of the equity or more than 50% of the ordinary voting power or, in the case of a partnership, more than 50% of the general partnership interests are, as of such date, owned, controlled or held, or (b) that is, as of such date, otherwise controlled, by the parent or one or more subsidiaries of the parent or by the parent and one or more subsidiaries of the parent. SUBSTANCE means any substance, waste, liquid, gaseous or solid matter, fuel, micro-organism, sound, vibration, ray, heat, odour, radiation, energy vector, plasma and organic or inorganic matter. TAXES shall mean all taxes, charges, fees, levies, imposts and other assessments, including all income, sales, use, goods and services, value added, capital, capital gains, alternative, net worth, transfer, profits, withholding, payroll, employer health, excise, real property and personal property taxes, and any other taxes, customs duties, fees, assessments, or similar charges in the nature of a tax, including Canada Pension Plan and provincial pension plan contributions, unemployment insurance payments and workers' compensation premiums, together with any installments with respect thereto, and any interest, fines and penalties with respect thereto, imposed by any Governmental Entity (any federal, state, provincial, municipal or foreign Governmental Entity), and whether disputed or not. TRADE RECEIVABLES shall mean any and all Accounts arising from the sale or distribution of logs, lumber and/or pulp, including Accounts arising from the sale or distribution of northern bleached softwood kraft pulp and chips. TRANSFEREE shall have the meaning provided for in Section 12.1 of this Financing Agreement. TRADEMARKS shall mean all present and hereafter acquired trademarks, trademark registrations, recordings, applications, tradenames, trade styles, service marks, prints and labels (on which any of the foregoing may appear), licences, issues, renewals, and any other intellectual property and trademark rights pertaining to any of the foregoing, together with the goodwill associated therewith and all cash and non-cash proceeds thereof. TRUSTEE CHARGED OPERATIONS shall mean, collectively: (i) the sawmill and related facilities, businesses and operations comprised by or carried on from the lands and premises located at or about 9401 Trans Canada Highway, North Cowichan, B.C., including, without limitation, any appurtenant aquatic lands or waterlots, and related leases or licences, and any other interests in any real property appurtenant thereto, all being (as of June 18, 1999) the lands with Parcel Identifiers 006 648 509, 004 802 161, and 004 601 572; - 18 - (ii) the value-added lumber remanufacturing plant and related facilities, businesses and operations comprised by or carried on from the lands and premises located at 3400 River Road, Chemainus, B.C., including, without limitation, any appurtenant aquatic lands or waterlots, and related leases or licences, and any other interests in any real property appurtenant thereto, all being (as of June 18, 1999) the lands with Parcel Identifier 023 017 775; (iii) the sawmill and related facilities, businesses and operations comprised by or carried on from the lands and premises located at or about 500 Duke Point Highway, North Cowichan, B.C., including, without limitation, any appurtenant aquatic lands or waterlots, and related leases or licences, and any other interests in any real property appurtenant thereto, all being (as of June 18, 1999) the lands with Parcel Identifier 005 788 561 and the Provincial Crown granted water lot licenses bearing nos. 103726, 103612, and 103674; (iv) the sawmill and related facilities, businesses and operations comprised by or carried on from the lands and premises located at or near the foot of Ludlow Road, Ladysmith, B.C., including, without limitation, any appurtenant aquatic lands or waterlots, and related leases or licences, and any other interests in any real property appurtenant thereto, all being (as of June 18, 1999) the lands with Parcel Identifiers 009 449 914 and 009 450 092; (v) the sawmill and related facilities, businesses and operations comprised by or carried on from the lands and premises located at 12308 Raven Road, Ladysmith, B.C., including, without limitation, any appurtenant aquatic lands or waterlots, and related leases or licences, and any other interests in any real property appurtenant thereto, all being (as of June 18, 1999) the lands with Parcel Identifiers 009 579 541, 009 579 630, 009 596 542, 009 579 591, and 009 450 068 and the Provincial Crown granted water lot lease bearing no. 120040; (vi) the sawmill and related facilities, businesses and operations comprised by or carried on from the lands and premises located at or about 500 Maughan Road, Nanaimo, B.C., including, without limitation, any appurtenant aquatic lands or waterlots, and related leases or licences, and any other interests in any real property appurtenant thereto, all being (as of June 18, 1999) the lands with Parcel Identifier 001 038 095 and the Provincial Crown granted water lot lease bearing no. 101523; (vii) the pulp mill and related facilities, businesses and operations comprised by or carried on from the lands and premises located at or near Squamish, B.C., including, without limitation, any appurtenant aquatic lands or waterlots, and related leases or licences, and any other interests in any real property appurtenant thereto, all being (as of June 18, 1999) the lands with Parcel Identifiers 015 910 717, 015 895 963, 015 822 061, 015 791 459, and 015 791 611 and the Provincial Crown granted water lot lease bearing nos. 233113, 234399, 233410, 231566, 231574 and 236807; (viii) the sawmill and related facilities, businesses and operations comprised by or carried on from the lands and premises located at or near Tahsis, B.C., including, without limitation, any appurtenant aquatic lands or waterlots, and related leases or licences, and any other interests in any real property appurtenant thereto, all being (as of June 18, 1999) the lands with Parcel Identifier 006 894 607 and the Provincial Crown granted water lot lease bearing no. 105393; (ix) the sawmill and related facilities, businesses and operations comprised by or carried on from the lands and premises located at 9001 Heather Street, Vancouver, B.C., including, without - 19 - limitation, any appurtenant aquatic lands or waterlots, and related leases or licences, and any other interests in any real property appurtenant thereto, all being (as of June 18, 1999) the lands with Parcel Identifiers 008 238 057, 013 038 796, 011 263 873 and 013 206 222 and the Provincial Crown granted water lot leases bearing nos. 05004, 05005, 05006, 05007 and 05008; and (x) the sawmill and related facilities, businesses and operations comprised by or carried on from the lands and premises located at or about 520 East Kent Avenue South, Vancouver, B.C., including, without limitation, any appurtenant aquatic lands or waterlots, and related leases or licences, and any other interests in any real property appurtenant thereto, all being (as of June 18, 1999) the lands with Parcel Identifiers 015 120 384, 015 120 392, 015 120 406, 015 101 436 and 009 742 697 and the Provincial Crown granted water lot leases bearing nos. 05023, 05025, 05021, 05022 and 05062; and, except where the plain meaning or context may otherwise require, the term "Trustee Charged Operations" shall include each or any part of such Trustee Charged Operations taken separately. ARTICLE 2 CONDITIONS PRECEDENT 2.1 The obligation of the Lender to make the initial Accommodation hereunder is subject to the following conditions to be fulfilled or performed at or prior to the Closing Date, which conditions are for the exclusive benefit of the Lender and may be waived in whole are in part by the Lender in its sole discretion: (a) LIEN SEARCHES - The Lender shall have received Tax, executions, Bank Act (Canada), litigation, PPSA and any other searches reasonably required by the Lender with results satisfactory to the Lender for all locations and names presently and previously used by the Borrower and each Guarantor. (b) INSURANCE - The Borrower shall have delivered to the Lender evidence satisfactory to the Lender that property, casualty, comprehensive/umbrella and business interruption insurance policies listing the Lender as an additional insured, first loss payee or mortgagee with respect to the Collateral and the Guarantor Collateral, as applicable, are in full force and effect, all as set forth in-Section 7.5 of Article 7 of this Financing Agreement. (c) PPSA FILINGS - Any financing statements required to be filed in order to create, in favour of the Lender, a first priority perfected security interest in the Collateral and the Guarantor Collateral, subject only to the Permitted Encumbrances, shall have been properly filed in each office in each jurisdiction required in order to create in favour of the Lender a first priority perfected security interest in the Collateral and the Guarantor Collateral, subject to Permitted Encumbrances. The Lender shall have received acknowledgement copies of all such filings (or, in lieu thereof, the Lender shall have received other evidence satisfactory to the Lender that all such filings have been made) and the Lender shall have received evidence that all necessary filing fees and all Taxes or other expenses related to such filings have been paid in full. - 20 - (d) BOARD RESOLUTION - The Lender shall have received copies of the minutes or resolutions of the board of directors of each of the Borrower and each Guarantor, as applicable, confirming that the execution and delivery of the Loan Documents is in the "best interests" of such Person and authorizing the execution, delivery and performance of (i) this Financing Agreement, (ii) the other Loan Documents, (iii) and any other related or ancillary documents, in each case certified by a designated authorized signing officer of the Borrower or the applicable Guarantor, as of the date hereof, together with a certificate of a designated authorized signing officer of each of the Borrower and the applicable Guarantor as to the incumbency and signature of the officers of each the Borrower and the applicable Guarantor executing this Financing Agreement, the other Loan Documents and any other certificate, agreements or documents to be delivered by them pursuant hereto, together with evidence of the incumbency of such designated authorized signing officer. (e) SANCTION ORDER - The Sanction Order shall have been issued and shall be in form and substance satisfactory to the Lender; the Sanction Order shall not have been stayed by any court having jurisdiction to issue any such stay, and the time to appeal the Sanction Order or to seek review, rehearing or certiorari with respect to the Sanction Order shall have expired; no appeal or petition for review, rehearing or certiorari with respect to the Sanction Order shall be pending, and the Sanction Order shall otherwise be in full force and effect; and the corporate transactions contemplated by Section 3 of the Plan of Arrangement (including the transfer of all Lumber Assets (as defined in the Plan of Arrangement) to the Borrower and all Pulp Assets (as defined in the Plan of Arrangement) to WPL) shall have been completed pursuant to documentation satisfactory in form and substance to the Lender. (f) PLAN OF ARRANGEMENT NOT AMENDED, ETC. - The Plan of Arrangement shall not have been amended, supplemented, restated or otherwise modified in any manner not approved by the Lender. (g) FEES - The Borrower shall have paid to the Lender the Loan Facility Fee. (h) BOND INDENTURE - The Bond Indenture shall have been executed and delivered by the parties thereto and all conditions thereunder shall have been satisfied or waived. (i) CORPORATE ORGANIZATION - The Lender shall have received (i) copies of the Certificates of Incorporation of the Borrower and each Guarantor certified by an officer of the Borrower and the applicable Guarantor, and (ii) a copy of the Articles and by laws of each of the Borrower and each Guarantor certified by a designated authorized signing officer thereof, all as amended through the date hereof. (j) OPINIONS - Counsel for the Borrower and each Guarantor shall have delivered to the Lender legal opinions relating to the transactions contemplated herein, in form and substance satisfactory to the Lender. - 21 - (k) ABSENCE OF DEFAULT - No Default or Event of Default shall have occurred or will occur upon the Lender making the initial Accommodation to the Borrower hereunder and no Material Adverse Effect, to the extent it affects the Lenders' first priority secured position, the Collateral, the Guarantor Collateral, the Borrowing Base or the Net Availability, shall have occurred since April 2, 2004 (the date of the Commitment Letter). (l) LEGAL RESTRAINTS/LITIGATION - As of the Closing Date, there shall be no: (x) litigation, investigation or proceeding (judicial or administrative) pending or threatened against the Borrower or any Guarantor or their respective Assets, by any Person or Governmental Entity arising out of this Financing Agreement or the Plan of Arrangement; (y) injunction, writ or restraining order restraining or prohibiting the consummation of the financing arrangements contemplated under this Financing Agreement or the Plan of Arrangement; or (z) suit, action, investigation or proceeding (judicial or administrative) pending against the Borrower or any Guarantor or their respective Assets, which, in the opinion of the Lender, if adversely determined, could have a Material Adverse Effect. (m) INTER-CREDITOR AGREEMENT - The Bond Trustee shall have executed and delivered to and in favour of the Lender, an inter-creditor agreement, in form and substance satisfactory to the Lender confirming, among other things, the Lender's first priority perfected security lien on and security interest in the Collateral and the Guarantor Collateral, as applicable. (n) CASH BUDGET PROJECTIONS - The Lender shall have received, reviewed and been satisfied with a six (6) month cash budget projection (July to December 2004) in the Borrower's standard form approved by the Lender. (o) ADDITIONAL DOCUMENTS - The Borrower and the Guarantor shall have executed and delivered to the Lender, all Loan Documents necessary to consummate the lending arrangements contemplated between the Borrower, the Guarantors and the Lender, all in form and substance satisfactory to the Lender. (p) EXAMINATION & VERIFICATION - The Lender shall have completed, to its satisfaction, an examination of the Bond Indenture and any and all insurance policies required hereunder and an examination and verification of the Collateral, the Guarantor Collateral and financial statements and books and records of the Borrower and the Guarantors. Such examination shall indicate that, after giving effect to all Revolving Loans and other Accommodations to be made on the Closing Date, the Borrower shall have an opening Net Availability of at least $10,000,000 (after giving effect to the Net Availability Block) as evidenced by a Borrowing Base Certificate to be delivered by the Borrower to the Lender as of the Closing Date. It is understood that such requirement contemplates that all debts and obligations are current, and that all payables are being handled in the normal course of the Borrower's businesses and consistent with their past practice. (q) BLOCKED ACCOUNTS - The Borrower shall have established a system of bank accounts with respect to, among other things, the collection of Trade Receivables - 22 - of the Borrower and the Guarantor as shall be acceptable to the Lender in all respects. Such accounts shall be subject to multi-party agreements (among the Borrower, the Guarantors (if applicable), the Lender and the depository bank), which shall be in form and substance satisfactory to the Lender. (r) EXISTING REVOLVING LOAN - The Pre-Filing Financing Agreement shall be concurrently terminated, and all loans and obligations of the Pre-Filing Borrower thereunder shall be paid or satisfied in full, including through utilization of the proceeds of the initial Revolving Loans to be made under this Financing Agreement. (s) SCHEDULES - The Borrower and the Guarantors or their counsel shall provide the Lender with the Schedules of information contemplated herein, including locations where any of the Collateral and the Guarantor Collateral is or may be stored or located. (t) ACKNOWLEDGEMENTS - The Borrower and each Guarantor shall have delivered to the Lender, any and all estoppels, acknowledgements, confirmations, documents, waivers, subordinations, postponements, discharges (including any and all registrations in favour of the Crown under the Miscellaneous Registrations Act (British Columbia) with respect to the Social Services Tax Act (British Columbia)), priority agreements, standstill agreements, access agreements, consents and inter-creditor and non-disturbance agreements, it may reasonably require to ensure its first priority, subject to Permitted Encumbrances, over and unfettered access to, the Collateral and the Guarantor Collateral. (u) REVIEW - The Lender shall have reviewed the Borrower's and each Guarantor's corporate and ownership structure and status, including, the Borrower's and each Guarantor's books and records; the Borrower's and each Guarantor's accounting records concerning any and all exports duties imposed by any Governmental Authority; any and all laws affecting the Borrower's and any Guarantor's operations and financial performance concerning such export duties, the Collateral, the Guarantor's Collateral, the Borrower's and each Guarantor's inventory control systems and collateral reporting capabilities; any and all Material Agreements, all material supply and customer contracts and any other due diligence, including management and bank reference checks, a review of the Borrower's rights to future supply of Eligible Inventory and the Forest Tenures, Licences and other Authorizations, the Lender may require, all with results satisfactory to the Lender. (v) MINISTRY OF FORESTS - The Lender shall have received written confirmation from the Ministry of Forests as to the existence and status of all such Forest Tenures, Licences and other Authorizations. (w) FINANCIAL STATEMENTS - The Lender shall have received and reviewed any and all consolidated financial statements and projections of the Borrower and the Guarantors, including income statements, balance sheets and cash flow statements, with results satisfactory to the Lender. - 23 - (x) FIELD EXAMINATION REPORT AND APPRAISAL REPORTS - The Lender shall have received and reviewed a field examination report with results satisfactory to the Lender. 2.2 CONDITIONS TO EACH EXTENSION OF CREDIT Subject to the terms of this Financing Agreement, including the Lender's rights pursuant to Section 10.2 of Article 10 hereof, the obligations of the Lender to make any Accommodation on any date (including the initial Accommodation) is subject to the following conditions, which conditions are for the exclusive benefit of the Lender and may be waived in whole or in part by the Lender: (a) REPRESENTATIONS AND WARRANTIES - Each of the representations and warranties made by the Borrower and the Guarantors in or pursuant to this Financing Agreement shall be true and correct in all material respects on and as of such date, as if made on and as of such date, except for those representations and warranties which speak to a specific date which shall be true and correct as of such date. (b) NO DEFAULT - No Default or Event of Default shall have occurred and be continuing on such date or would occur after giving effect to the Accommodation requested to be made on such date. (c) BORROWING BASE - Except as may be otherwise agreed to from time to time by the Lender and the Borrower in writing, after giving effect to any Accommodation requested to be made by the Borrower on such date, the aggregate outstanding balance of the Revolving Loans and outstanding Letters of Credit owing by the Borrower will not exceed the lesser of (i) the Revolving Line of Credit, or (ii) the Borrowing Base. Each borrowing by the Borrower hereunder shall constitute a representation and warranty by the Borrower and the Guarantors as of the date of such Accommodation that each of the representations, warranties and covenants contained in the Financing Agreement has been satisfied and is true and correct as of such date except for those representations and warranties which speak to a specific date which shall be true and correct as of such date, except as the Borrower, the Guarantors and the Lender shall otherwise agree herein or in a separate writing. ARTICLE 3 REVOLVING LOANS 3.1 (a) The Lender agrees, subject to the Revolving Line of Credit and the terms and conditions of this Financing Agreement, from time to time, but not prior to the Closing Date, on any Business Day prior to the Maturity Date, to make Canadian dollar loans and advances to the Borrower on a revolving basis by way of Prime Rate Loans and BA Equivalent Loans and subject to the limitations set forth herein, the Borrower may borrow, repay and reborrow such Revolving Loans. Such requests for Accommodations, subject to the Revolving Line of Credit, shall be in amounts not to exceed the Net Availability. All requests for loans and advances must be received by an officer of the Lender no later than 11:00 A.M., Toronto time (i) of the Business Day on which any such Prime Rate Loan is - 24 - required if such request is for an amount less than $25,000,000 and, (ii) one (1) Business Day prior to the Business Day on which any such Prime Rate Loan is required if such request is for an amount equal to or greater than $25,000,000. (b) Whenever the Borrower requests the Lender to make a Revolving Loan, it shall give the Lender notice in writing or irrevocable telephonic notice confirmed promptly in writing (but prior to any advance), specifying (A) the amount to be borrowed, (B) the requested borrowing date (which shall be a Business Day and shall be prior to a Maturity Date, and if applicable, any Early Termination Date, or prior to any effective termination date of this Financing Agreement, all as further set forth herein), and (C) specify whether the requested Revolving Loan shall be by way of a Prime Rate or BA Equivalent Loan and, if by way of a BA Equivalent Loan, the applicable Interest Period, in accordance with the provisions set forth herein. The Lender shall make loans and advances to the disbursement account of the Borrower with The Toronto-Dominion Bank at 700 West Georgia Street, Vancouver, B.C. or to such other disbursement account as may be agreed in writing between the Borrower and the Lender. (c) The Borrower shall not use any Accommodation other than for working capital purposes, for capital expenditures and other corporate purposes to the extent not otherwise prohibited or restricted by this Financing Agreement. (d) Unless demand is made earlier pursuant to the provisions of this Financing Agreement, the Borrower shall repay, and there shall become due and payable, the Obligations and all accrued and unpaid interest thereon, on the earlier of the Early Termination Date and the Maturity Date. 3.2 In furtherance of the continuing assignment and security interest in the Collateral and the Guarantor's Collateral, as applicable, the Borrower covenants and agrees to provide to the Lender various reports and information with respect to the Borrower and Guarantors as may be requested by the Lender, all in form and substance satisfactory to the Lender, including, without limitation, the following reports and information: (a) As at the last day of each month and within ten (10) Business Days of each month end; (i) a Borrowing Base Certificate as at such month end, including, without limitation, a summary of sales and collections journals; (ii) a monthly summary of aging of Trade Receivables by due date for the Borrower and the Guarantors. Notwithstanding the above, the Lender reserves the right to require each of the Borrower and the Guarantors to provide it with a detailed listing of aging of Trade Receivables at any time upon the Lender's request; (iii) a detailed monthly aging of accounts payable of the Borrower and the Guarantors; - 25 - (iv) a calculation and listing of the Trade Receivables which would not meet the criteria of an Eligible Trade Receivable; (v) an aged listing of the ten (10) largest Trade Receivables and accounts payable of the Borrower and the Guarantors for the month; and (vi) a reconciliation prepared by the Borrower of the cash receipts journal to the Blocked Accounts. (b) In addition to Section 3.2(a) above, the Borrower covenants and agrees to provide the Lender with the reports and information set out in 3.2(a)(i), (ii) and (iii) above within five (5) Business Days of the 15th day of each month, prepared as of the 15th day of such month and the following reports and information within five (5) Business Days of the 15th day of each month, prepared as at the previous month end: (i) a detailed monthly Inventory summary and physical Inventory listing; (ii) a calculation and listing of the Inventory which would not meet the criteria of Eligible Inventory; (iii) a reconciliation of the monthly Inventory summaries to the general ledger and to the financial statements of each of the Borrower and the Guarantors as at month end; (iv) a reconciliation of aging of Trade Receivables and accounts payable to the divisional trial balances, and the Borrower's and each Guarantor's general ledgers and to the consolidated financial statements for the Borrower, as at month end; and (v) a listing of all other Accounts and accounts payable of each of the Borrower and the Guarantors, including accruals, which are not aged. (c) In addition, upon the Lender's request, each of the Borrower and the Guarantors covenant and agree to provide the Lender with copies of agreements with, or purchase orders from, the Borrower's and the Guarantors' customers, and copies of invoices to customers, proof of shipment or delivery, access to their computers, electronic media and software programs associated therewith (including any access codes, electronic records, contracts and signatures) and such other documentation and information relating to said Accounts, any other Collateral and the Guarantor Collateral as the Lender may reasonably require, provided that such access does not constitute a violation of the Personal Information Protection and Electronic Documents Act (Canada) or any similar provincial privacy legislation in effect from time to time. The Borrower and the Guarantors hereby authorize the Lender to regard the Borrower's or the Guarantors' printed name or rubber stamp signature on assignment schedules or invoices as the equivalent of a manual signature by one of the Borrower's authorized signing officers or agents; - 26 - Notwithstanding the above, the Lender reserves the right at any time to request additional reports and information, and on a more frequent basis, as it may reasonably require. 3.3 The Borrower and the Guarantors covenant and agree with the Lender that any and all Taxes or fees relating to their business, their sales, the Collateral or the Guarantors' Collateral, as applicable, relating thereto, are their sole responsibility and that same will be paid by the relevant Person when due, subject to Section 7.6 of Article 7 of this Financing Agreement and that none of said Taxes or fees results in or represents an enforceable Encumbrance on or claim against the Collateral or the Guarantor's Collateral which has not been disclosed to the Lender, is not being contested in good faith by appropriate proceedings or actions sufficient to prevent the enforcement of any such Encumbrances and with respect to which adequate reserves are not being maintained by the Borrower or a Guarantor, as applicable, in accordance with GAAP. The Borrower and the Guarantors covenant and agree to make all of their books and records available to the Lender at its premises upon one (1) day notice during normal business hours, including any records handled or maintained for them by any other Person whatsoever. The Borrower and Guarantors also covenant and agree to make any and all environmental reports and reports and/or communications to the Ministry of Forests available to the Lender forthwith upon the Lender's reasonable request. 3.4 Until the Lender has advised the Borrower to the contrary upon the occurrence of a Default or an Event of Default, and subject to the provisions below, the Borrower and the Guarantors, at their expense, can enforce, collect and receive all amounts owing on the Trade Receivables in the ordinary course of its business. Upon the occurrence of a Default or an Event of Default which is continuing, any cheques, cash, credit card sales and receipts, notes or other instruments or property received by the Borrower or a Guarantor with respect to any Collateral, including Accounts, shall be held by the Borrower or a Guarantor in trust for the Lender, on behalf of the Lenders, separate from the Borrower's and the Guarantor's own property and funds, and upon the request of the Lender promptly turned over to the Lender with proper assignments or endorsements for deposit to the Depository Accounts. Upon the occurrence of a Default or an Event of Default which is continuing, the Borrower and the Guarantors shall, at the Lender's election: (i) indicate on all of its invoices that funds should be delivered to and deposited in a Depository Account; (ii) direct all of its account debtors to deposit any and all proceeds of Collateral into the Depository Accounts; (iii) irrevocably authorize and direct any banks which maintain the Borrower's and the Guarantor's initial receipt of cash, cheques and other items to promptly wire transfer all available funds to a Depository Account; and (iv) advise all such banks of the Lender's security interest in such funds. The Borrower and the Guarantors covenant and agree to provide the Lender with prior written notice of any and all deposit or disbursement accounts opened or to be opened subsequent to the Closing Date by any one or more of the Borrower or the Guarantors. All amounts received by the Lender in payment of Accounts will be credited to the Revolving Loan Account when the Lender is advised by its bank of its receipt of "collected funds" at the Depository Account in Toronto, Ontario on the Business Day of such advise if advised no later than 10:00 A.M. Toronto time or on the next succeeding Business Day if so advised after 10:00 A.M. Toronto time. No cheques, drafts or other instrument received by the Lender shall constitute final payment to the Lender unless and until such instruments have actually been collected. The Borrower shall establish and maintain, in its name and at its expense, deposit accounts with The Toronto-Dominion Bank (the "BLOCKED ACCOUNTS") into which the Borrower and the Guarantors shall thereafter promptly cause to be deposited into such Blocked Accounts, all Trade Receivables received by the Borrower and the Guarantors, - 27 - including all amounts payable to the Borrower from credit card issuers and credit card processors, all insurance proceeds and all proceeds from the sale of Collateral, except for amounts comprising or relating to Excluded Assets, and other Assets of the Borrower which are not Collateral and upon the occurrence of a Default or an Event of Default which is continuing, in addition to the above and subject to the above exclusion with respect of Excluded Amounts, all amounts on deposit in deposit accounts used by the Borrower, except for the term deposits held by The Toronto-Dominion Bank as cash collateral in respect of outstanding letters of credit, payroll, services and foreign exchange contracts. The Toronto-Dominion Bank shall enter into an agreement, in form and substance satisfactory to the Lender (the "BLOCKED ACCOUNTS AGREEMENT"), providing that all cash, cheques and items received or deposited in the Blocked Accounts are the property of the Lender, that the depository bank has no lien, security interest or other Encumbrance in or claim upon, or right of set-off against, the Blocked Accounts and any cash, cheques, items, wires or other funds from time to time on deposit therein, except as otherwise provided in the Blocked Accounts Agreement, and that automatically, on a daily basis, the depository bank will wire, or otherwise transfer, in immediately available funds, all funds received or deposited into the Blocked Accounts to such Depository Account as the Lender may from time to time designate for such purpose. The Lender may instruct the depository banks at which the Blocked Accounts are maintained to transfer all funds received or deposited into the Blocked Accounts to the Depository Account at any time. The Borrower and the Guarantors hereby confirm and agree that all amounts deposited in such Blocked Accounts and any other funds received and collected by the Lender, except for amounts comprising Excluded Assets, whether as proceeds of Collateral or otherwise, shall be the property of the Lender. For greater certainty, the same arrangements shall be made in respect of the corresponding accounts of each Guarantor. 3.5 The Borrower and each Guarantor covenants and agrees to notify the Lender: (a) of any matters materially adversely affecting the value, enforceability or collectability of any Account and of all customer disputes, offsets, defences, counterclaims, returns, rejections and all reclaimed or repossessed merchandise or goods, of any adverse effect in the value of their Inventory in such detail as the Lender may reasonably require from time to time, and (b) promptly of any such matters which are material, as a whole, to the Collateral. The Borrower and each Guarantor agree to issue credit memoranda promptly with duplicates to the Lender upon its reasonable request, after the occurrence of a Default or an Event of Default, upon accepting returns or granting allowances. 3.6 The Lender shall maintain a Revolving Loan Account on its books in which the Borrower will be charged with all loans and advances made by the Lender to it or for its account, and with any other Obligations, including any and all costs, expenses and reasonable legal fees which the Lender may incur in connection with the exercise of any of the rights or powers herein conferred upon the Lender, or in the prosecution or defence of any action or proceeding to enforce or protect any rights of the Lender in connection with this Financing Agreement, the other Loan Documents or the Collateral and the Guarantor Collateral, or any Obligations owing by the Borrower. The Borrower will be credited with all amounts received by the Lender from the Borrower or from others for the Borrower's account, including as above set forth, all amounts received by the Lender in payment of Accounts, and such amounts will be applied to payment of the Obligations as set forth herein. In no event shall prior recourse to any Accounts or other security granted to or by the Borrower or the Guarantor be a prerequisite to the Lender's right to demand payment of any Obligation. Further, it is understood that the Lender shall have - 28 - no obligation whatsoever to perform in any respect the Borrower's contracts or obligations relating to the Accounts or any other Collateral. 3.7 After the end of each month, the Lender shall promptly send the Borrower a statement showing the accounting for the charges, loans, advances and other transactions occurring between the Lender and the Borrower during that month; provided that any failure by the Lender to send any such statement shall not affect in any way the Borrower's or the Guarantor's continuing liability in respect of the obligations. The monthly statements shall constitute an account stated between the Borrower and the Lender and, absent manifest error, shall be deemed correct and binding on the Borrower unless the Lender receives a written statement of the exceptions within thirty (30) days of the receipt of the monthly statement by the Borrower. 3.8 Upon the request of the Borrower and provided the Borrower is in compliance with all other terms and conditions under this Financing Agreement, the Inventory Loan Cap may be increased from $175,000,000 to $200,000,000 for a maximum period of one hundred and twenty (120) days once per year during each Fiscal Year of the term of this Financing Agreement, provided further that the Net Availability Block is maintained at any and all times during such period (and, if the Borrower has required that the Net Availability Block be reduced from $40,000,000 to $25,000,000 as contemplated by the definition of "Availability Reserve", the Borrower shall also maintain the required Fixed Charge Coverage Ratio of 1.10:1.00 at all time during such period). Upon the Borrower not being in compliance with all of the terms and conditions of this Financing Agreement at any time during such one hundred and twenty (120) day period, the Inventory Loan Cap will thereafter revert back to $175,000,000 but will not impact the ability to increase the Inventory Loan Cap in subsequent years. ARTICLE 4 BA EQUIVALENT LOANS 4.1 Upon receipt of a request for an advance given in accordance with this Financing Agreement and subject to the provisions of this Financing Agreement, the Lender may make BA Equivalent Loans to the Borrower on a revolving basis up to a maximum principal amount of $25,000,000 at the BA Equivalent Rate for the applicable Interest Period within the scope and subject to the limits of the Revolving Line of Credit from time to time after the Closing Date. 4.2 BA Equivalent Loans may be drawn down by the Borrower at any time and from time to time in a minimum principal amount of $5,000,000 and amounts in excess thereof in integral multiples of $1,000,000 for the selected Interest Period (provided that in no event will a maturity date for a BA Equivalent Loan ("EXPIRY DATE") be a date beyond the then applicable Maturity Date of this Financing Agreement) and by irrevocable written notice of its request for a BA Equivalent Loan given to the Lender not later than 11:00 A.M. (Toronto time) two (2) Business Days prior to the requested drawdown date of the BA Equivalent Loan. Upon an Event of Default which is continuing, or if the Borrower fails to give the Lender written notice of its intention to renew any outstanding BA Equivalent Loan not later than 11:00 A.M. (Toronto time) two (2) Business Days prior to any applicable Expiry Date, all such outstanding BA Equivalent Loans shall be converted to Prime Rate Loans on the applicable Expiry Date. - 29 - ARTICLE 5 LETTERS OF CREDIT 5.1 In order to assist the Borrower in establishing or opening Letters of Credit with an Issuing Bank, the Borrower have requested the Lender, to join in the applications for such Letters of Credit, and/or guarantee payment or performance of such Letters of Credit and any drafts or acceptances thereunder through the issuance of the Letter of Credit Guarantees, thereby lending the Lender's credit to the Borrower and the Lender has agreed, subject to the Letter of Credit Sub-Line, to do so. These arrangements shall be handled by the Lender subject to the terms and conditions set forth below. 5.2 Within the Revolving Line of Credit and Net Availability, the Lender shall assist the Borrower in obtaining Letter(s) of Credit in an aggregate amount not to exceed the outstanding amount of the Letter of Credit Sub-Line, provided that (i) no Default or Event of Default exists hereunder, and (ii) such Letter(s) of Credit shall not have a term that ends subsequent to any applicable Maturity Date. The Lender's assistance for amounts in excess of the limitation set forth herein shall at all times and in all respects be in the Lender's sole discretion. It is understood that the term, form and purpose of each Letter of Credit and all documentation in connection therewith, and any amendments, modifications or extensions thereof, must be mutually acceptable to the Lender, the Issuing Bank and the Borrower. Any and all outstanding Letters of Credit shall reduce Net Availability. 5.3 The Lender shall have the right, without notice to the Borrower, to charge the Borrower's Revolving Loan Account with the amount of any and all indebtedness, liability or obligation of any kind incurred by the Lender under the Letters of Credit Guarantee at the earlier of (a) payment by the Lender under the Letters of Credit Guarantee, or (b) the occurrence of Default or an Event of Default. Any amount charged to the Borrower's Revolving Loan Account shall be deemed a Revolving Loan hereunder and shall incur interest at the rate applicable to Prime Rate Loans. 5.4 The Borrower hereby agrees to indemnify the Lender and their respective officers, directors, agents, representatives, advisors, employees and affiliates and holds each of them harmless from and against any and all damages, penalties, charges, costs, expenses, losses, claims, actions, proceedings, obligations, demands or liabilities incurred by any of them arising from any transactions or occurrences relating to Letters of Credit established or opened for the Borrower's account, the collateral relating thereto and any drafts or acceptances thereunder, and all obligations thereunder, including any such loss, claim, damages, penalties, costs, expenses, actions, proceedings, obligations, demands or liabilities due to any errors, omissions, negligence, misconduct or action taken by any Issuing Bank, other than for any such loss, claim or liability arising out of the gross negligence or wilful misconduct by any of them under the Letters of Credit. This indemnity shall be severable from and shall survive termination of this Financing Agreement. The Borrower agrees that any charges, disbursements, costs and expenses incurred by the Lender for the Borrower's account by the Issuing Bank shall be conclusive and may be charged to the Borrower's Revolving Loan Account. 5.5 The Borrower agrees that, absent gross negligence or wilful misconduct, any action taken by the Lender, if taken in good faith, or any action taken by any Issuing Bank, under or in connection with Letters of Credit or the Letter of Credit Guarantees, shall be binding on the Borrower and shall not result in any liability whatsoever of the Lender to the Borrower. In - 30 - furtherance thereof, the Lender shall have the full right and authority to: (a) clear and resolve any questions of non-compliance of documents; (b) give any instructions as to acceptance or rejection of any documents or goods; (c) execute any and all steamship or airways guarantees (and applications therefor), indemnities or delivery orders; (d) grant any extensions of the maturity of, time of payment for, or time of presentation of, any drafts, acceptances, or documents; and (e) agree to any amendments, renewals, extensions, modifications, changes or cancellations of any of the terms or conditions of any of the applications, Letters of Credit, drafts or acceptances; all in the Lender's sole name. The Issuing Bank shall be entitled to comply with and honour any and all such documents or instruments executed by or received solely from the Lender, all without any notice to or any consent from the Borrower. Notwithstanding any prior course of conduct or dealing with respect to the foregoing, including amendments and non-compliance with documents and/or the Borrower's instructions with respect thereto, the Lender may exercise its rights hereunder in its sole and reasonable judgment. In addition, without the Lender's express consent and endorsement in writing, the Borrower agree: (a) not to execute any and all applications for steamship or airway guarantees, indemnities or delivery orders; to grant any extensions of the maturity of, time of payment for, or time of presentation of, any drafts, acceptances or documents; or to agree to any amendments, renewals, extensions, modifications, changes or cancellations of any of the terms or conditions of any of the applications, Letters of Credit, drafts or acceptances; and (b) after the occurrence of a Default or an Event of Default which is not cured within any applicable grace period, if any, or waived by the Lender, not to (i) clear and resolve any questions of non-compliance of documents, or (ii) give any instructions as to acceptances or rejection of any documents or goods. 5.6 The Borrower agree that: (a) any necessary import, export or other licenses or certificates for the import or handling of the goods will have been promptly procured; (b) all foreign and domestic Laws in regard to the shipment and importation of the goods, or the financing thereof will have been promptly and fully complied with; and (c) any certificates in that regard that the Lender may at any time request will be promptly furnished. In connection herewith, the Borrower represents and warrants that all shipments made under any such Letters of Credit are in accordance with the Laws of the jurisdictions in which the shipments originate and terminate, and are not prohibited by any such Laws. The Borrower assumes all risk, liability and responsibility for, and agrees to pay and discharge, all present and future local, state, provincial, federal or foreign Taxes, duties, or levies. Any embargo, restriction, laws, customs, rules or regulations of any Governmental Entity, where the goods are or may be located, or wherein payments are to be made, or wherein drafts may be drawn, negotiated, accepted, or paid, shall be solely the Borrower's risk, liability and responsibility. 5.7 Any letter of credit issued with the assistance of the Lender pursuant to the Pre-Filing Financing Agreement and which remains outstanding on the Closing Date shall be deemed, from and after the Closing Date, to have been issued with the assistance of the Lender pursuant to this Financing Agreement. ARTICLE 6 COLLATERAL 6.1 As security for the prompt payment in full and performance of, all of the Obligations, (i) the Borrower will grant to the Lender, a continuing general collateral lien upon, and security interest in, the Collateral pursuant to a security agreement in form and substance - 31 - acceptable to the Lender, (ii) each Guarantor will execute and deliver to and in favour of the Lender an unlimited guarantee of the Obligations of the Borrower to the Lender, (iii) each Guarantor will grant to the Lender, a continuing general collateral lien upon, and security interest in, the Guarantor Collateral pursuant to a security agreement in form and substance acceptable to the Lender, (iv) each of the Borrower and Guarantors will execute and deliver to and in favour of the Lender, assignments of insurance and directions to pay in connection with the insurance requirements set out in Section 7.5 of this Financing Agreement, including concerning the Policies, in form and substance acceptable to the Lender, and (v) any other guarantees and security the Lender may require from the Borrower or the Guarantors relating to Accounts, Inventory, Other Collateral and Policies, the Collateral and the Guarantor Collateral, as applicable, from time to time, at its sole discretion (all of which are hereinafter collectively referred to as the "Security Agreements"). 6.2 The security interests granted under the Security Agreements shall extend and attach to the Collateral and the Guarantor's Collateral, as applicable, upon the execution thereof. 6.3 The Borrower and the Guarantors covenant and agree to safeguard, protect and hold all Inventory for the Lender's account and make no disposition thereof except in the ordinary course of its business or, if out of the ordinary course of its business, upon the prior written notice to the Lender. Upon a Default or an Event of Default, the Lender may exercise, in the Borrower's name, the rights of an unpaid seller, including stoppage in transit, replevin, rescission and reclamation. Upon a Default or an Event of Default which is continuing and the request of the Lender, the Borrower and the Guarantors hereby agree to immediately forward any and all proceeds of Collateral or the Guarantor Collateral to the Depository Account, and to hold any such proceeds (including any notes and instruments), in trust for the Lender pending delivery to the Lender. The Borrower and the Guarantors agree to use their best efforts to obtain and deliver to the Lender, within 30 days after the Closing Date, a duly executed Access Agreement from each landlord of each premises leased by the Borrower or a Guarantor and at which Collateral or Guarantor's Collateral is located, and to provide to the Lender a weekly status update on any Access Agreement which is not delivered to the Lender within 30 days after the Closing Date. 6.4 The rights and security interests granted to the Lender under any Security Agreements are to continue in full force and effect, notwithstanding the termination of this Financing Agreement or the fact that the Revolving Loan Account may from time to time be temporarily in a credit position, until the final indefeasible payment in full to the Lender and performance of all Obligations and the termination of this Financing Agreement. Any delay or omission by the Lender to exercise any right hereunder shall not be deemed a waiver thereof, or be deemed a waiver of any other right, unless such waiver shall be in writing and signed by the Lender. A waiver on any one occasion shall not be construed as a bar to, or waiver of, any right or remedy on any future occasion. 6.5 Notwithstanding the Lender's security interests and to the extent that the Obligations are now or hereafter secured by any Assets other than the Collateral or by the guarantee, endorsement, assets or property of any other Person, the Lender shall have the right in its sole discretion to determine which rights, liens, security interests or remedies the Lender shall at any time pursue, foreclose upon, relinquish, subordinate, modify or take any other action with - 32 - respect to, without in any way modifying or affecting any of them, or any of the Lender's rights hereunder. 6.6 Any balances to the credit of the Borrower and any Collateral or the Guarantor Collateral in the possession or control of the Lender may be held by the Lender as security for any Obligations and applied in whole or partial satisfaction of such Obligations when due as it sees fit. The liens and security interests granted in the Security Agreements, and any other lien or security interest the Lender may have, shall secure payment and performance of all now existing and future Obligations (or, in the case of the Guarantor, the Guarantors' obligations in respect thereof). The Lender may, in its discretion, charge any or all of the Obligations to the Revolving Loan Account when due. ARTICLE 7 REPRESENTATIONS, WARRANTIES AND COVENANTS 7.1 To induce the Lender to enter into this Financing Agreement and to make Accommodations available to the Borrower, each of the Borrower and Guarantors hereby jointly and severally represents and warrants to the Lender, and acknowledges that the Lender is relying on such representations and warranties in entering into this Financing Agreement, that: (a) the Borrower and each Guarantor is a corporation duly incorporated, organized and validly subsisting under the federal laws of Canada, and each of the Borrower and Guarantors has full power and capacity to own its Assets and to carry on its business as conducted and is duly qualified, registered and in good standing in every jurisdiction in which the Borrower or applicable Guarantor has Assets, an office or otherwise conducts or operates its business and the Guarantors and WFP Quatsino Navigation Limited are all of the Subsidiaries of the Borrower and WFP Quatsino Navigation Limited has one employee and no Assets; (b) the Borrower and each Guarantor has obtained all Forest Tenures, Licences and other Authorizations required to operate its business, and except as disclosed in writing by them to the Lender from time to time, they are not in default and have not received any Order or notice of any Claim or default with respect to any such Forest Tenures, Licences and other Authorizations, where such default or claim would have a Material Adverse Effect; (c) the Borrower and each Guarantor has full power and authority and full legal right to enter into and perform its obligations under the Loan Documents and to obtain Accommodations hereunder and has taken all action necessary to be taken by it to authorize such acts; (d) each Loan Document and all agreements and undertakings of the Borrower and Guarantors to which they are a party, are legal, valid and binding obligations enforceable against each of them in accordance with their respective terms, subject only to any applicable bankruptcy, insolvency, winding-up, reorganization, arrangement, moratorium or other laws or equitable remedies affecting creditors' rights generally; - 33 - (e) the consummation of the transactions herein contemplated, and the compliance with the terms, conditions and provisions of the Loan Documents will not conflict with, contravene or result in a breach of, or constitute a default under, any of the terms, conditions or provisions of the constating documents of the Borrower or Guarantors or any indenture, instrument, document, mortgage, agreement or undertaking, including the Bond Indenture, any collective bargaining agreement, or any Material Agreement to which they are a party or by which they are bound, or any Laws or Authorizations, or result in the creation or imposition of any Encumbrance (other than pursuant to the Security Agreements) upon any of their Assets; (f) the Borrower and each Guarantor is in compliance with all applicable Laws, including all Environmental Laws, Authorizations and Material Agreements, the Bond Indenture and any collective bargaining agreements and mortgages relating to any of their real property except where non-compliance would not have a Material Adverse Effect. No Default or Event of Default has occurred and is continuing; (g) the Borrower's and the Guarantors' books and records are true, complete and accurate in all material respects and all financial statements delivered to the Lender fairly present the consolidated financial position of the Borrower and the Guarantors as at the date thereof and the consolidated results of the operations of the Borrower and the Guarantors for the period referred to therein, and, except as noted therein, have been prepared by the Borrower and its auditors in accordance with GAAP; (h) the Borrower and each Guarantor: (i) is in compliance with all legally binding Orders to which it is subject, if any, relating to any Laws or Environmental Laws, except where the non-compliance thereof would not have a Material Adverse Effect; and (ii) except as disclosed in writing to the Lender from time to time, is not the subject of any existing or, to the knowledge of the Borrower or the applicable Guarantor, threatened actions, suits, proceedings, investigations or Orders relating to Environmental Laws, Laws or otherwise against the Borrower, the applicable Guarantor, the Collateral or the Guarantor Collateral, which if adversely determined, would have a Material Adverse Effect. (i) the Borrower and each Guarantor has good and marketable title to and legal and beneficial ownership of all of its Assets, the Collateral and Guarantor Collateral, as applicable, free and clear of any Encumbrances, other than Permitted Encumbrances; (j) no Person has any written or oral agreement, option, understanding or commitment, or any right or privilege capable of becoming such for the purchase from the Borrower or any Guarantor of any of the Collateral and Guarantor Collateral, as applicable, other than in the ordinary course of its business; - 34 - (k) each Trade Receivable is based on an actual and bona fide sale and delivery of Inventory or rendition of services by the Borrower and the Guarantors to their customers in the ordinary course of their business and to the best of the Borrower's and the Guarantors' knowledge, are not subject to any present, future or contingent defence, offset, counterclaim, dispute or other dilutive factor which has not been disclosed to the Lender and for which an appropriate reserve has not been made by the Lender; (l) all the work and services performed and goods supplied under any contract or agreement (oral or written) giving rise to any Accounts have been fully performed or supplied to acceptable standards as required by Law and by the terms (whether express or implied) of any such contract or agreement in respect thereof and to the satisfaction of the applicable customer of the Borrower and the applicable Guarantor and the work and services performed and goods supplied have been accepted by such customer, and where goods have been supplied, legal and proper delivery has been made and accepted by such customer; (m) at the time of issuance of each invoice, the amount payable by any customer of the Borrower or any Guarantor is not less than the face value of such invoice and such Accounts are due and payable not later than the date specified on such invoice, all as recorded in their respective books and records; (n) as of the date hereof, Schedules 1, 2 and 3 hereto correctly and completely set forth, for each of the Borrower and each Guarantor, its: (A) chief executive office, (B) Collateral and Guarantor Collateral locations, (C) predecessor names, (D) tradenames, (E) subsidiaries and affiliates (all as defined in the Canada Business Corporations Act), (F) deposit and disbursement bank accounts, (G) tenures, licences, permits, leases and other Authorizations, (H) Material Agreements, and (I) other information listed on said Schedules; (o) except for the Permitted Encumbrances, after filing of financing statements or other similar registrations in the applicable public office at the locations set forth in Schedule 1, the Security Agreements, in the jurisdictions of such locations set forth in Schedule 1, create a valid, perfected and first priority security interest in the Collateral and the Guarantor Collateral, as applicable, in the jurisdictions of such locations set forth in Schedule 1, subject to Permitted Encumbrances; the security interests granted constitute and shall at all times, subject to Permitted Encumbrances, constitute a first priority lien on, and security interest in, the Collateral and the Guarantor Collateral, as applicable, in the jurisdictions of such locations set forth in Schedule 1, and the Collateral and the Guarantor Collateral are not subject to any Encumbrance in favour of any Person (other than the Lender); (p) except for the Permitted Encumbrances, the Borrower and each Guarantor is, or will be, at the time additional Collateral or Guarantor Collateral, as applicable, is acquired by it, the absolute owner of the Collateral or Guarantor Collateral, as applicable, with full right to pledge, sell, assign, transfer and create a security interest therein, free and clear of any and all Encumbrances in favour of others; - 35 - (q) the Borrower and each Guarantor will, at its expense, forever warrant and, at the Lender's request, defend the Collateral and the Guarantor Collateral from any and all Claims of any other Person other than a holder of a Permitted Encumbrance; (r) all statements, information, reports, listings, schedules and certificates made or given to the Lender by all officers, directors and authorized representatives of the Borrower and the Guarantors are true, complete and accurate in all material respects; (s) no Person other than IBM Canada Ltd., J.D. Edwards World Solutions Company, Telus Enterprise Solutions Inc., Software Business Systems Inc. and Group West Systems Ltd. is supplying the Borrower and the Guarantor, nor has an Encumbrance on, any computer hardware, software or systems of the Borrower or the Guarantor; (t) the Borrower and each Guarantor possess all General Intangibles and rights thereto necessary to conduct their business as conducted as of the Closing Date; (u) the Borrower and the Guarantors have not withheld from or failed to disclose to the Lender, any matter or thing whatsoever which could reasonably be expected to be material to the Lender, including any proceedings commenced under the Woodworker Lien Act (British Columbia) or by any First Nations groups against any of their respective Assets. Each of the representations and warranties contained in Section 7.1 shall survive the execution and delivery of this Financing Agreement and be deemed to be repeated by the Borrower and the Guarantors at the time and date of each Accommodation notwithstanding any investigation made at any time by or on behalf of the Lender. 7.2 The Borrower and Guarantors covenant and agree to maintain books and records pertaining to the Collateral, the Guarantor Collateral and their Assets, as applicable, in accordance with GAAP. The Borrower and Guarantors covenant and agree that the Lender or its representatives may following a request on not less than one (1) Business Day notice, enter upon their respective premises, and any other premises where the Collateral and the Guarantor Collateral, as applicable, may be located, at any time during normal business hours for the purpose of inspecting the Collateral and the Guarantors Collateral, as applicable, and any and all records pertaining thereto. The Borrower and Guarantors covenant and agree to provide the Lender with, as soon as practicable, prior written notice of any change in the location of any Collateral and the Guarantor Collateral, as applicable, or its chief executive office, other than to locations, that as of the Closing Date, are known to the Lender and at which the Lender has filed financing statements and otherwise fully perfected its liens and security interests thereon. The Borrower and Guarantors also hereby consent to the Lender contacting any and all third parties the Lender may reasonably require from time to time, including the Ministry of Forests, the Ministry of Water, Air and Land Protection, the Ministry of Sustainable Resource Management, Canada Customs and Revenue Agency and other Governmental Entities concerning social services tax, corporation capital tax, logging tax, workers compensation, employment standards, the Forest Act, the Forest Practices Code, the Logging Act and the Waste Management Act, for purposes of verifying the state of the Collateral, the Guarantor Collateral, their respective businesses, Authorizations and Tax position, and the Borrower and each Guarantor covenants - 36 - and agrees to execute and deliver any authorization and consent requested by the Lender in respect thereof. 7.3 The Borrower and the Guarantors covenant and agree to execute and deliver to the Lender, from time to time, solely for the Lender's purpose of monitoring the Collateral and the Guarantor Collateral, such written statements, reports and schedules as the Lender and the Borrower may reasonably agree upon, designating, quantifying, qualifying, identifying or describing the Collateral and the Guarantor Collateral to the extent possible in the Borrower's standard form as approved by the Lender, acting reasonably. Their failure, however, to promptly give the Lender such statements, reports or schedules shall not in any way be deemed to affect, diminish, modify or otherwise limit the Lender's security interests in, or liens on, the Collateral or the Guarantor Collateral. 7.4 The Borrower and the Guarantors covenant and agree to comply with the requirements of all applicable Laws in order to grant to the Lender a valid and perfected first security interest and lien in the Collateral and the Guarantor Collateral, subject only to the Permitted Encumbrances. The Lender is hereby authorized by the Borrower and each Guarantor to file (including pursuant to the applicable terms of the PPSA or similar statutes in other applicable jurisdictions) from time to time any financing statements, continuations or amendments covering the Collateral and the Guarantor Collateral, whether or not the Borrower's or the Guarantors' signatures appear thereon. The Borrower and the Guarantors hereby consent to and ratify any and all execution and/or filing of financing statements on or prior to the Closing Date by the Lender. The Borrower and the Guarantors covenant and agree to do whatever the Lender may reasonably request, from time to time, by way of: (a) filing notices of Encumbrances, financing statements, amendments, renewals and continuations thereof; (b) cooperating with the Lender's agents, representatives, advisors and employees; (c) keeping records of the Collateral and the Guarantor Collateral; (d) transferring proceeds of the Collateral and the Guarantor Collateral to the Lender's possession upon a Default or an Event of Default; and (e) performing such further acts as the Lender may reasonably require in order to effect the purposes of this Financing Agreement. 7.5 The Borrower and the Guarantors hereby covenant and agree to maintain comprehensive/umbrella, property and casualty insurance and business interruption insurance on the Collateral and Guarantor Collateral, as applicable, and their respective businesses under such policies of insurance, with such insurance companies, in such reasonable amounts and covering such insurable risks as are at all times reasonably satisfactory to the Lender. All policies covering the Assets are, subject to the rights of any holders of claims against the Excluded Collateral, to be made payable to the Lender, in case of loss, under a standard non-contributory "mortgagee", "lender" or "secured party" clause and are to contain such other provisions as the Lender may require to fully protect the Lender its interest in the Collateral and the Guarantor Collateral and to any payments to be made under such policies. Copies of the policies are to be delivered to the Lender, with the loss payable endorsement in the Lender's favour and shall provide for not less than fifteen (15) days prior written notice to the Lender of any material supplement, addition or amendment or of any renewal, expiration, termination or cancellation. At the Borrower's or a Guarantor's request, or if the Borrower or a Guarantor fail to maintain such insurance, the Lender may arrange for such insurance, but at the Borrower's expense and without any responsibility on the Lender's part for: (i) obtaining the insurance; (ii) the solvency of the insurance companies; (iii) the adequacy of the coverage; or (iv) the collection of claims - 37 - thereunder. Upon the occurrence of a Default or an Event of Default, the Lender shall, subject to the rights of any holders holding claims against the Excluded Assets, have the sole right, and at its option, in the name of the Lender or the Borrower and the Guarantors, as the case may be, to file claims under any such insurance policies relating to the Collateral or the Guarantor Collateral, to receive, receipt and give acquittance for any payments that may be payable thereunder, and to execute any and all endorsements, receipts, releases, assignments, reassignments or other documents that may be necessary to effect the collection, compromise or settlement of any such claims under any such insurance policies. In the event of any loss or damage by fire or other casualty, insurance proceeds relating to Inventory shall be applied to reduce the Borrower's Revolving Loan. The insurance acquired by the Lender may, but need not, protect the Borrower's interest in the Collateral or the Guarantors' interest in the Guarantor Collateral and therefore such insurance may not pay claims which the Borrower or the Guarantors may have with respect to the Collateral or the Guarantor Collateral or pay any claim which may be made against the Borrower or the Guarantors in connection with the Collateral or the Guarantor Collateral. In the event the Lender purchases, obtains or acquires insurance covering all or any portion of the Collateral or the Guarantor Collateral, the Borrower covenants and agrees to be responsible for all of the applicable costs of such insurance, including premiums, interest (subject to the right to charge the Default Rate of Interest hereunder, at the applicable interest rate for Revolving Loans), fees and any other charges with respect thereto, until the effective date of the cancellation or the expiration of such insurance. The Lender may charge all of such premiums, fees, costs, interest and other charges to the Borrower's Revolving Loan Account. The Borrower and the Guarantors hereby acknowledge that the costs of the premiums of any insurance acquired by the Lender may exceed the costs of insurance which the Borrower and the Guarantor may be able to purchase on its own. In the event that the Lender purchases such insurance, the Lender will notify the Borrower of said purchase within thirty (30) days of the date of such purchase. If, within thirty (30) days after the receipt of such notice, the Borrower provides the Lender with proof that the Borrower or the Guarantors had the insurance coverage required pursuant to this Section 7.5(in form and substance satisfactory to the Lender) as of the date on which the Lender purchased insurance and the Borrower or the Guarantors continued at all times to have such insurance, then the Lender agrees to cancel the insurance purchased by the Lender. 7.6 The Borrower and the Guarantors covenant and agree to pay, when due, all Taxes, any and all rental, stumpage, scaling, permit fees and expenses, royalties and other amounts payable to the Crown under the Forest Act (British Columbia) and the Forest Practices Code (British Columbia) or otherwise ("ROYALTIES") and all other amounts, the non payment of which may result in an Encumbrance in priority to the Lender ("PRIORITY PAYABLES"), including any and all amounts owing or accruing due under the Workers Compensation Act (British Columbia), Employment Standards Act (British Columbia), the Woodworker Lien Act (British Columbia) and the Social Services Tax Act (British Columbia), pension benefit payments required to be contributed or funded by them, sales and excise taxes and duties, assessments, claims and other charges lawfully levied or assessed upon the Borrower and the Guarantors, unless such Taxes, Royalties or Priority Payables are being diligently contested in good faith by the Borrower or the Guarantor by appropriate proceedings sufficient to prevent any enforcement with respect to same and adequate reserves are established in accordance with GAAP. Notwithstanding the foregoing, if any garnishment shall be issued or any Encumbrance shall be filed or claimed thereunder (a) for Taxes, Royalties or Priority Payables due any Governmental Entity, or (b) which in the Lender's opinion might create a valid obligation having priority over the Lender's security over - 38 - the Collateral or the Guarantor Collateral, such Encumbrance or claim shall not be deemed to be a Permitted Encumbrance hereunder and the Borrower or the Guarantors shall immediately pay such Taxes, Royalties or Priority Payables and discharge the Encumbrance or garnishment unless such amount is being diligently contested in good faith by appropriate proceedings sufficient to prevent any enforcement with respect to same and adequate reserves are established in accordance with GAAP. If the Borrower or the Guarantors fail to do so promptly, then at the Lender's election, the Lender may (i) create an Availability Reserve in such amount as it may deem appropriate in its sole business judgment, or (ii) upon the occurrence of a Default or Event of Default, imminent risk of seizure or garnishment, filing of any priority Encumbrance, claim, forfeiture, or sale of the Collateral or the Guarantor Collateral, pay any such amounts on the Borrower's or the Guarantors' behalf, and the amount thereof shall be an Obligation secured hereby and due on demand. 7.7 The Borrower and Guarantors: (a) covenant and agree to comply with all Laws, including all Environmental Laws which the failure to comply with could have a Material Adverse Effect, provided that the Borrower or any Guarantor may contest any acts, rules, regulations, orders and directions of any Governmental Entity in any reasonable manner which will not, in the Lender's opinion, materially and adversely affect the Lender's priority in the Collateral or the Guarantor Collateral as determined by the Lender in its sole discretion; (b) covenant and agree to maintain and comply with any and all Authorizations required for the Borrower and the Guarantors to operate their business, including the Forest Tenures, Licences and any annual timber cutting rights, and any and all Laws as presently existing or as adopted or amended in the future, applicable to the Collateral or the Guarantor Collateral, the ownership and/or use of any of their real property and the operation of their business, which the failure to comply with would have a Material Adverse Effect; and (c) shall not be deemed to have breached any provision of this Section 7.7 if, (i) the failure to comply with the requirements of this Section 7.7 resulted from good faith error or innocent omission, (ii) the Borrower promptly commences and diligently pursues a cure of such breach, and (iii) such failure is cured within twenty (20) days following the Borrower's or the Guarantor's knowledge or receipt of notice (whichever is earlier) of such failure, or if such failure cannot in good faith be cured within twenty (20) days, such breach is cured within a reasonable time frame based upon the extent and nature of the breach and the necessary remediation, and in conformity with any applicable consent order, consensual agreement and applicable Law and with the consent of the Lender, not to be unreasonably withheld. 7.8 Until termination of this Financing Agreement and indefeasible payment and satisfaction of all Obligations due hereunder, the Borrower and the Guarantors covenant and agree that, unless the Lender shall have otherwise consented in writing, in addition to the reports and information set forth in Section 3.2 of this Financing Agreement, the Borrower will furnish to the Lender: (a) within ninety (90) days after the end of each Fiscal Year of the Borrower, an audited Consolidated Balance Sheet and all related consolidating work papers, as at the close of such year, and statements of profit and loss, cash flow and reconciliation of surplus of the Borrower for such year, audited by independent chartered accountants; (b) within sixty (60) days after the end of each Fiscal Quarter (except in respect of the last Fiscal Quarter of a Fiscal Year, which shall be delivered within ninety (90) days after the end of such Fiscal Quarter) a Consolidated Balance Sheet as at the end of such period and statements of profit and loss, cash flow and surplus of the Borrower, certified by an authorized financial or accounting officer of the Borrower, and if the Net Availability Reserve has been reduced from $40,000,000 to - 39 - $25,000,000 as contemplated in the definition of "Net Availability Reserve", a certificate of an authorized financial or accounting officer of the Borrower confirming the Fixed Charge Coverage Ratio for the Rolling Period ended on the last day of such Fiscal Quarter; (c) within thirty (30) days after the end of each month a Consolidated Balance Sheet as at the end of such period and statements of profit and loss, cash flow and surplus of the Borrower for such period, certified by an authorized financial or accounting officer of the Borrower; (d) copies of all reports provided to the Bond Trustee pursuant to Section 10.17 of the Bond Indenture, at the same time such reports are provided to the Bond Trustee, and (e) from time to time, such further information regarding the business affairs and financial condition of the Borrower and the Guarantors as the Lender may reasonably request, including, (i) the accountant's management practice letter, (ii) annual cash flow projections in the Borrower's standard form as approved by the Lender, acting reasonably; (iii) copies of any and all annual compliance opinions given by the Borrower's counsel to the trustee under the Bond Indenture, (iv) any and all material reports, notices or communications with the Ministry of Forests concerning its annual timber cutting rights, the Forest Tenures, the Licences and other Authorizations required to operate its business, and (v) any and all material reports, notices or communications with any First Nations group or its representatives regarding land claims or compensation therefor. The Borrower and the Guarantors covenant and agree to authorize and direct the Ministry of Forests to provide the Lender with all Ministry of Forests accounts receivable weekly aged balance printouts for each of the Borrower and the Guarantors (for the purposes of the Lender monitoring whether there are any arrears that could be secured by an Encumbrance) at the frequency which the Lender may determine in its sole discretion from time to time and in any event at least semi-monthly and more frequently in the Lender's sole discretion upon a Default or an Event of Default which is continuing. Each financial statement which the Borrower is required to submit hereunder must be accompanied by an officer's certificate, signed by a designated authorized signing officer of the Borrower, pursuant to which such officer must certify that: (x) the financial statement(s) fairly and accurately represent(s) the Borrower's and the Guarantors' financial condition at the end of the particular accounting period, as well as the Borrower's and the Guarantors' operating results during such accounting period, subject to year-end audit adjustments; (y) during the particular accounting period: (A) there has been no Default or Event of Default under this Financing Agreement, provided however, that if any such officer has knowledge that any Default or Event of Default has occurred during such period, the existence of and a detailed description of same shall be set forth in such officer's certificate; (B) the Borrower and the Guarantors have not received any notice of cancellation with respect to any of its insurance policies, including the Policies, which it is required to maintain or is contemplated pursuant hereto; and (C) the Borrower and the Guarantors have not received any notice that could result in a Material Adverse Effect, including from any Person under the Woodworker Lien Act (British Columbia) or from any Governmental Entity concerning duties, Taxes, Royalties, Priority Payables, cutting rights, the Forest Tenures, the Licences or other Authorizations required to operate their business; and (Z) they are current with respect to any and all pension benefit obligations, Taxes, Royalties and Priority Payables (unless such amounts are being diligently contested in good faith by appropriate proceedings sufficient to prevent any enforcement with respect to same, adequate reserves have been established in accordance with GAAP and such matters, in sufficient detail, are set forth in such Officers' certificate); substantially in the form attached hereto as Exhibit B. 7.9 Until termination of the Financing Agreement and indefeasible payment and satisfaction of all Obligations hereunder, the Borrower and the Guarantors covenant and agree - 40 - that, without the prior written consent of the Lender, except as otherwise herein provided, the Borrower and the Guarantors will not: (a) mortgage, assign, pledge or otherwise permit any Encumbrance or judgment, to exist on or claim to become enforceable against any of the property or assets of the Borrower or a Guarantor, except for Permitted Encumbrances; (b) sell, assign, transfer, lease, rent, factor or otherwise dispose of any of the Collateral or the Guarantor Collateral other than in the ordinary course of business and on terms and conditions satisfactory to the Lender in its absolute and sole discretion; (c) except for the transactions contemplated by the Plan of Arrangement, enter into any amalgamation, consolidation, reorganization, merger, continuance into another jurisdiction, restructuring or plan of arrangement resulting in a reorganization of share capital or file for a stay of proceedings under the Companies' Creditors Arrangements Act (Canada) or the Bankruptcy and Insolvency Act (Canada) staying the rights and remedies of the Lender; (d) cease to be engaged primarily in the forest products business; (e) move any Inventory forming part of the Collateral or the Guarantor Collateral from any location set out from time to time in Schedule 1 other than in the ordinary course of business. The Borrower and the Guarantors shall have the right to remove or add any locations set out at any time in Schedule 1, provided that the lender's security in the Collateral or the Guarantor Collateral is not, in the sole opinion of the Lender, adversely affected and that the Lender may not consider such Assets at any such additional location to be Eligible Inventory unless, if applicable, appropriate Availability Reserves or a landlord waiver, bailee waiver or access agreement to the Lender's satisfaction in its absolute and sole discretion has been delivered in respect of such location; (f) compromise, adjust or extend the time for payment of any Accounts forming part of the Collateral or the Guarantor Collateral or grant any discounts, allowances or credits thereon in each case other than in the normal course of business consistent with past practice; (g) Pay any management fees, declare any dividends, make any loans or repay any indebtedness or other amounts or make any other similar payments to their shareholders other than, payment of principal and interest when due under the Bond Indenture; (h) make or agree to make any voluntary redemption of Secured Bonds or any purchase of Secured Bonds in the open market, whether pursuant to Section 11.10 of the Bond Indenture or otherwise, or exercise any defeasance right under Article 14 of the Bond Indenture; - 41 - (i) permit the Fixed Charge Coverage Ratio to be less than 1.10:1.00 at any time after the Net Availability Reserve has been reduced from $40,000,000 to $25,000,000 as contemplated in the definition of "Net Availability Reserve". 7.10 The Borrower and the Guarantors covenant and agree to: (a) deliver to the Lender any other documents, statements, certificates, records, appraisals, notices, communications, printouts, reports and information (including concerning any of the Policies, environmental reports and the Ministry of Forests accounts receivable weekly aged balance printouts), the Lender may reasonably require from time to time; (b) maintain any and all Authorizations required to operate its business and shall immediately notify the Lender in writing of any termination, suspension, rescission, amendment, supplement, cancellation, change or expiration of such Authorizations and of any violation of any Authorizations, industry standard or Laws which could have a Material Adverse Effect; (c) fulfil and perform, in the ordinary course of its business, any and all obligations to its customers which could impact the recoverability of any Account; (d) forthwith notify the Lender in writing of any matter which could have a Material Adverse Effect, including any proceeding commenced by any Person under the Woodworker Lien Act (British Columbia) or any First Nations group against the Borrower's or Guarantor's Assets or any claim made or threatened by any Governmental Entity concerning duties relating to the Borrower's and the Guarantors' business; and (e) forthwith notify the Lender in writing of any matter which could jeopardize its first secured priority position, subject to Permitted Encumbrances, over the Collateral and the Guarantor's Collateral. 7.11 The Borrower and the Guarantors hereby covenant and agree, on a joint and several basis, to indemnify and hold harmless the Lender and its officers, directors, employees, agents, representatives, advisors and affiliates (each an "INDEMNIFIED PARTY") from, and holds each of them harmless from and against, any and all losses, liabilities, obligations, claims, actions, proceedings, demands, damages, penalties, costs, fees and expenses (including legal fees) and any payments made by the Lender pursuant to any indemnity provided by it with respect to or to which any Indemnified Party could be subject insofar as such losses, liabilities, obligations, claims, actions, damages, penalties, disbursements, costs, fees or expenses relate to the Loan Documents, including those which may arise from or relate to: (a) the Depository Account, the Blocked Accounts, any depository account of the Borrower and/or the agreements executed in connection therewith and any indemnity given by the Lender to The Toronto Dominion Bank in respect of standby letters of credit or otherwise; (b) any and all claims, costs, expenses or fees asserted against or incurred by the Lender as a result of the Borrower's or any Guarantor's failure to (i) comply with any Authorizations required for it to operate its business or any environmental pollution, hazardous material or environmental clean-up relating to any of its Collateral or Guarantor' Collateral locations, or (ii) pay any amounts to any Person who is in possession and/or control of any of the Collateral or the Guarantor Collateral; (c) or any claim or expense which results from the Borrower's or any Guarantor's operations and use of any of its Collateral or Guarantor Collateral locations, which the Lender may sustain or incur, all whether through the alleged or actual negligence of such person or otherwise, except and to the extent that the same results solely and directly from the gross negligence or wilful misconduct of such Indemnified Party as finally determined by a court of competent jurisdiction. The Borrower and the Guarantors hereby agree that this indemnity shall be severable from and shall survive any termination of this Financing Agreement, as well as payments of Obligations which may be due hereunder. The Lender may, in its sole business judgement, establish such Availability Reserves with respect thereto as it may deem advisable under the circumstances and, upon any termination - 42 - hereof, hold such reserves as cash reserves in a cash collateral account as continuing general collateral security or otherwise for any such contingent liabilities. 7.12 The Lender shall be entitled to obtain Inventory appraisal reports on an annual basis, and more frequently as the Lender may require in its reasonable business judgement, from an appraiser mutually acceptable to the Borrower and the Lender, at the Borrower's sole cost and expense. 7.13 The Borrower and the Guarantors covenant and agree to provide access to the Lender and its agents, representatives, appraisers, examiners and employees to all Collateral and Guarantor Collateral locations in respect of any and all such appraisals and field examinations and audits. 7.14 The Borrower and the Guarantors covenant and agree to defend the Collateral and Guarantor Collateral against the claims and demands of all persons. 7.15 The Borrower and the Guarantors covenant and agree not to amend or extend any payment terms or do any other act or thing where doing so would result in any Trade Receivable being excluded under coverage under any Policy or affect the ability to make a claim thereunder. 7.16 The Borrower and the Guarantors covenant and agree not to change any of their respective legal names without providing the Lender thirty (30) days prior written notice of their intention to make such change. 7.17 The Borrower and the Guarantors covenant and agree to keep any and all computer hardware, software and/or systems relating to the Collateral and the Guarantor Collateral at the Collateral and the Guarantor Collateral locations unless and until a satisfactory access agreement is executed and delivered to and in favour of the Lender, in form in substance satisfactory to the Lender, acting reasonably. 7.18 The Borrower and the Guarantors covenant and agree to maintain any and all worker's compensation or similar insurance as may be required under the laws of any jurisdiction in which they operate. 7.19 The Borrower and each Guarantor covenants and agrees to maintain its rights in, and the value of, its General Intangibles in the ordinary course of its business, including by making timely payment with respect to any applicable licensed rights, including any Royalties required to be paid to the Ministry of Forests, unless failure to do so would not have a Material Adverse Effect, result in an Encumbrance against any of the Collateral or prevent the Lender from having unfettered access to the Collateral at all times. 7.20 The Borrower and each Guarantor covenants and agrees to execute and deliver to and in favour of the Lender any and all data processing services and licenced hardware and software use and access agreements ("COMPUTER ACCESS AGREEMENTS") the Lender may reasonably require in connection with this Financing Agreement. 7.21 Each of the Borrower and the Guarantors covenant and agree that the indebtedness evidenced by the Pulpco Note is hereby subordinated and postponed to the prior indefeasible payment in full of the Obligations, and any security interest granted to secure the - 43 - obligations evidenced by the Pulpco Note are hereby subordinated and postponed to the security interests granted under the Security Agreement. Neither the Borrower nor any Guarantor will take or permit any action which is inconsistent with such subordinations and postponements. ARTICLE 8 INTEREST, FEES AND EXPENSES 8.1 Interest on Prime Rate Loans shall be payable monthly, in arrears, to the Lender as of the end of each month and interest on BA Equivalent Loans shall be payable to the Lender on the applicable Expiry Date, in arrears, based on a 365 day year and a 366 day year in the case of a leap year. Interest on Prime Rate Loans shall be an amount equal to the Prime Rate plus three-quarters of one percent (0.75%) per annum on the balance owing by the Borrower to the Lender in the Revolving Loan Account for Prime Rate Loans at the close of each day during such month. In the event of any change in the Prime Rate, the rate hereunder for Prime Rate Loans shall change, as of the date of such change, so as to remain three-quarters of one percent (0.75%) above the Prime Rate. The Lender shall be entitled to charge the Borrower's Revolving Loan Account for any and all fees, costs and expenses incurred by the Lender and permitted to be charged by the Lender under this Financing Agreement at the rate provided for herein for Prime Rate Loans when due until all such Obligations have been indefeasibly paid in full. Upon and after the occurrence of a Default or an Event of Default which is continuing and the giving of any required notice by the Lender in accordance with the provisions hereof, all Obligations shall bear interest at the Default Rate of Interest. 8.2 In consideration of the Lender's assistance with the issuance of Letters of Credit, the Borrower shall pay the Lender the Letter of Credit Fee which shall be an amount equal to two and three-quarters of one percent (2-3/4%) per annum, payable monthly in advance, on the face amount of each Letter of Credit; provided that upon and after the occurrence of a Default or an Event of Default which is continuing and the giving of any required notice by the Lender in accordance with the provisions hereof, the Letter of Credit Fee shall be an amount equal to four and three-quarters of one percent (4-3/4%) per annum. 8.3 Any and all charges, fees, commission, costs and expenses charged to the Lender for the Borrower's account by an Issuing Bank in connection with, or arising out of, Letters of Credit or out of transactions relating thereto will be charged to the Revolving Loan Account in full when charged to, or paid by the Lender, or as may be due upon any termination of this Financing Agreement. 8.4 Upon the last Business Day of each month, commencing on the last Business Day of the month that this Financing Agreement is executed and delivered, the Borrower shall pay to the Lender the Line of Credit Fee. 8.5 To induce the Lender to enter into this Financing Agreement and to make Accommodations to the Borrower, the Borrower shall pay to the Lender, on the Closing Date, the Loan Facility Fee. 8.6 The Borrower shall pay to the Lender on the Closing Date and on the first Business Day of each month thereafter an administrative management fee in the amount of $5,000, which the Borrower acknowledges and agrees shall be fully earned when paid (the "ADMINISTRATIVE MANAGEMENT FEE"). - 44 - 8.7 The Borrower shall promptly reimburse or pay the Lender for any and all Out-of-Pocket Expenses. 8.8 The Borrower shall pay the Lender's standard charges, fees, costs and expenses for (i) the Lender's field examinations and audits in an amount equal to $1,500 per person per day plus such field examiner's and auditor's out-of-pocket expenses, (ii) protecting, safeguarding, preserving or disposing of all or any part of the Collateral or Guarantor Collateral, and (iii) enforcing any of the Lender's rights hereunder or under any other Loan Document (which fees shall be in addition to any and all Out-of-Pocket Expenses), as incurred by the Lender. 8.9 The Borrower hereby authorizes and directs the Lender to charge the Revolving Loan Account with the amount of all payments due hereunder as such payments become due. The Borrower acknowledge and confirm that any charges which the Lender may so make to the Revolving Loan Account as herein provided will be made as an Accommodation to the Borrower. 8.10 In the event that the Lender (or any financial institution which may from time to time become a Lender hereunder (hereafter a "PARTICIPANT")) shall have determined in the exercise of its reasonable business judgment that, subsequent to the Closing Date, any change in applicable Law or guideline regarding capital adequacy, or any change in the interpretation or administration thereof, or compliance by the Lender or such participant with any new request or directive regarding capital adequacy (whether or not having the force of Law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on the Lender's or such participant's capital as a consequence of its obligations hereunder to a level below that which the Lender or such participant could have achieved but for such adoption, change or compliance (taking into consideration the Lender or such participant's policies with respect to capital adequacy) by an amount reasonably deemed by the Lender or such participant to be material, then, from time to time, the Borrower shall pay, no later than five (5) days following the Lender's or such participant's demand, to the Lender or such participant such additional amount or amounts as will compensate the Lender's or such participant's for such reduction. In determining such amount or amounts, the Lender or such participant may use any reasonable averaging or attribution methods. The protection of this Section 8.10 of Article 8 shall be available to the Lender or such participant regardless of any possible contention of invalidity or inapplicability with respect to the applicable Law or condition. A certificate of the Lender or such participant setting forth such amount or amounts as shall be necessary to compensate the Lender or such participant with respect to this Section 8.10 of Article 8 and the calculation thereof when delivered to the Borrower shall be, absent manifest error, prima facie evidence of such amount. Notwithstanding anything in this Section to the contrary, in the event the Lender or such participant has exercised its rights pursuant to this Section, and subsequent thereto determines that the additional amounts paid by the Borrower in whole or in part exceed the amount which the Lender or such participant actually required to be made whole, the excess, if any, shall be returned to the Borrower by the Lender or such participant. 8.11 In the event that any applicable Law or treaty, or any change therein or in the interpretation or application thereof, or compliance by the Lender or such participant with any request or directive (whether or not having the force of Law) from any central bank or other financial, monetary or other authority, shall: - 45 - (a) subject the Lender or such participant to any tax of any kind whatsoever with respect to this Financing Agreement or change the basis of taxation of payments to the Lender or such participant of principal, fees, interest or any other amount payable hereunder or under any other documents (except for changes in the rate of tax on the overall net income of the Lender or such participant by the federal government or the jurisdiction in which it maintains its principal office); (b) impose, modify or hold applicable any reserve, special deposit, assessment or similar requirement against assets held by, or deposits in or for the account of, advances or loans by, or other credit extended by the Lender or such participant by reason of or in respect to this Financing Agreement or the other Loan Documents; or (c) impose on the Lender or such participant any other condition with respect to this Financing Agreement or any other Loan Document; and the result of any of the foregoing is to increase the cost to the Lender or such participant of making, renewing or maintaining its loans hereunder by an amount that the Lender or such participant deems to be material in the exercise of its reasonable business judgment and acting in good faith or to reduce the amount of any payment (whether of principal, interest or otherwise) in respect of any of the loans by an amount that the Lender or such participant deems to be material in the exercise of its reasonable business judgment and acting in good faith, then, in any case the Borrower shall pay the Lender or such participant, within five (5) days following its demand, such additional cost or such reduction, as the case may be. For purposes of this Section 8.11, the term "taxes" does not include income taxes, franchise taxes or capital taxes imposed on the Lender or such participant. If the Lender and any participant becomes entitled to claim any additional amount pursuant to this Section 8.11, it shall notify the Borrower of the event by reason of which it has become so entitled upon the Lender becoming aware of such event. The Lender or such participant shall certify the amount of such additional cost or reduced amount to the Borrower and the calculation thereof and such certification shall be, absent manifest error, prima facie evidence of such amount. Notwithstanding anything in this Section 8.11 to the contrary, in the event the Lender or such participant has exercised its rights pursuant to this Section, and subsequent thereto determine that the additional amounts paid by the Borrower in whole or in part exceed the amount which the Lender or such participant actually required pursuant hereto, the excess, if any, shall be returned to the Borrower by the Lender or such participant. ARTICLE 9 POWERS 9.1 The Borrower and each Guarantor hereby constitutes the Lender, or any Person or agent the Lender may designate, as its attorney-in-fact, at the Borrower's cost and expense, and upon the occurrence of a Default or an Event of Default which is continuing, the Lender may exercise all of the following powers, which being coupled with an interest, shall be irrevocable until all Obligations to the Lender have been indefeasibly paid in full: (a) to receive, take, endorse, sign, assign and deliver, all in the name of the Lender or the Borrower or any Guarantor, as applicable, any and all cheques, notes, drafts, - 46 - and other documents or instruments relating to the Collateral and the Guarantor Collateral, as applicable; (b) to request from customers indebted on Accounts at any time, in the name of the Lender, information concerning the amounts owing on the Accounts; (c) to request from customers indebted on Accounts at any time, in the name of the Borrower or any Guarantor, as applicable, in the name of chartered accountants designated by the Lender or in the name of the Lender's designee, information concerning the amounts owing on the Accounts; (d) to transmit to customers indebted on Accounts notice of the Lender's interest therein and to notify customers indebted on Accounts to make payment directly to the Lender for the Borrower's or any Guarantor's account, as applicable; (e) to take or bring, in the name of the Lender, or the Borrower or any Guarantor, as applicable, all steps, actions, suits or proceedings deemed by the Lender necessary or desirable to enforce or effect collection of the Accounts; and (f) to request from any Persons or Governmental Entities contemplated in Section 7.2 of Article 7 hereof, any and all information concerning the Borrower or any Guarantor relating to any and all matters contemplated in Section 7.2 of Article 7 hereof. ARTICLE 10 EVENTS OF DEFAULT AND REMEDIES 10.1 Notwithstanding anything hereinabove to the contrary, the Lender may terminate this Financing Agreement immediately upon the occurrence of any of the following Events of Default: (a) failure of the Borrower to pay any of the Obligations within three (3) days of the due date thereof, provided that nothing contained herein shall prohibit the Lender from charging such amounts to the Revolving Loan Account on the due date thereof; (b) any representation or warranty made or deemed to be made by the Borrower or any Guarantor under this Financing Agreement or any other Loan Document shall prove to have been incorrect in any material respect when made or deemed to be made; (c) the Borrower or any Guarantor shall fail to perform or observe any term, covenant or agreement contained in this Financing Agreement or any other Loan Document on its part to be performed or observed and such failure shall remain unremedied for ten (10) days after written notice thereof shall have been given to the Borrower by the Lender; (d) a breach by the Borrower or any Guarantor of any representation, warranty, covenant or obligation under any Material Agreement (other than the non - 47 - payment of interest under the Indentures), any mortgage of any real property or any collective bargaining agreement which breach could result in a Material Adverse Effect and which remains unremedied within the applicable period provided for in such agreement; (e) a default or event of default under the Bond Indenture which remains unremedied within the applicable period provided for in the Bond Indenture; (f) the failure of the Borrower or any Guarantor to pay any and all Royalties, Taxes and Priority Payables when due, unless failure to pay such amounts is disclosed to the Lender, being diligently contested in good faith by appropriate proceedings sufficient to prevent any enforcement with respect to same and adequate reserves have been established in accordance with GAAP; (g) if the Borrower or any Guarantor breaches or is in violation of any Authorization, Law or industry standard, in connection with the operation of its business which breach or violation would have a Material Adverse Effect and which remains unremedied for ten (10) days; (h) the Borrower or any Guarantor shall: (i) admit in writing its inability to pay its debts generally, or make a general assignment for the benefit of creditors; (ii) file a notice of intention to file a proposal under any Law relating to bankruptcy, insolvency or reorganization or relief of creditors; (iii) institute or have instituted against it any proceeding seeking (x) to adjudicate it a bankrupt or insolvent, (y) any liquidation, winding-up, reorganization, arrangement, adjustment, protection, relief or composition of it or its debts under any Law relating to bankruptcy, insolvency or reorganization or relief of debtors, or (z) the entry of an order for relief or the appointment of a receiver, trustee or other similar official for it or for any substantial part of its Assets, and, in the case of any such proceeding instituted against it (but not instituted by it), such proceeding shall remain undismissed or unstayed for a period of ten (10) days or any of the actions sought in such proceeding (including the entry of an order for relief against it or the appointment of a receiver, trustee, custodian or other similar official for it or for any substantial part of its Assets) shall occur; or (iv) take any action to authorize any of the foregoing events; (i) any legally binding judgment or order for the payment of money in excess of $5,000,000 shall be rendered against the Borrower or any Guarantor and, if such judgment remains unpaid, either: (i) enforcement proceedings shall have been commenced by any creditor upon such judgment or order; or (ii) there shall be any period of ten (10) consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; (j) any failure to deal with any money in accordance with the cash management and Blocked Accounts arrangements contemplated in this Financing Agreement other than if the Borrower and the Guarantors provide their customers with appropriate notice and instructions in order to comply with such cash management and Blocked Accounts arrangements and notwithstanding such notice and - 48 - instructions, a customer inadvertently uses the old, incorrect wire transfer instructions and other than in respect of inadvertent clerical errors or inadvertent errors made by The Toronto-Dominion Bank (or any other applicable cash management bank), which are forthwith rectified; (k) the loss, damage, destruction or confiscation of any material part of the Borrower's Collateral or any of the Guarantor's Collateral, unless upon such event, at the option of the Lender, the Borrower or the applicable Guarantor pays to the Lender such amount as the Lender in its absolute and sole discretion determines is satisfactory, including insurance proceeds forthwith upon receipt of such insurance proceeds, if any; or (l) if any execution, sequestration, garnishment, claim, extent or other process of any court, tribunal or other Person becomes enforceable against the Borrower or any Guarantor for an amount in excess of $5,000,000 or if a distress or analogous process for an amount in excess of $5,000,000 becomes enforceable against or is levied upon the Collateral or the Guarantor Collateral and with respect to any such enforcement before judgement under the Laws of the Province of British Columbia, is not stayed or dismissed within fifteen (15) days after the date of such enforcement before judgement. 10.2 Upon the occurrence of an Event of Default which is continuing, the Lender may declare that the Revolving Line of Credit provided for in this Financing Agreement, and the obligation of the Lender to make Revolving Loans, assist with the opening of Letters of Credit and provide Letter of Credit Guarantees or make other accommodations of credit available to the Borrower, shall immediately terminate and cease without any further notice or demand to the Borrower or Guarantors whatsoever and, for greater certainty, it is hereby understood and agreed by the Borrower and the Guarantors that the Revolving Line of Credit shall be capped at the amount of the outstanding Obligations owing on the date and at the time of the occurrence of such Event of Default and at the amount of the outstanding Obligations owing at the end of business of each day thereafter, that no Accommodations shall be made or required to be made, notwithstanding any margining availability calculated in accordance with the terms and provisions hereof, that the definition of "Revolving Line of Credit" hereunder shall automatically be amended at the end of business of each day accordingly to reflect the revised maximum authorized credit limit established hereunder and that the Borrower shall continue to be required to comply with its obligations under Section 3.4 of this Financing Agreement notwithstanding the termination of the Revolving Line of Credit, unless such Event of Default is waived in writing by the Lender or cured to the Lender's satisfaction in the exercise of the Lender's reasonable judgment. In addition, upon the occurrence of an Event of Default which is continuing, the Lender may declare that: (a) all Obligations shall become immediately due and payable, including the face amount of all outstanding Letters of Credit and any and all interest accrued thereon up to the date thereof and with respect to BA Equivalent Loans, on a pro-rated basis, given the applicable Interest Period; (b) the Lender may charge the Borrower the Default Rate of Interest on all then outstanding or thereafter incurred Obligations in lieu of the interest otherwise provided for in this Financing Agreement, provided that, with respect to this Section 10.2 the Lender has given the Borrower written notice of the Event of Default; and (c) the Lender may immediately terminate this Financing Agreement. The exercise of any remedy is - 49 - not excluding any other remedy, which may be exercised at any time and from time to time by the Lender. 10.3 Immediately upon the occurrence of any Event of Default which is continuing and upon the enforcement of its security in accordance with applicable Law, in addition to all of its rights and remedies under the PPSA and any other like statute in other jurisdictions, the Lender may, to the extent permitted by Law: (a) remove from any premises where same may be located, any and all books and records, computers, electronic media and software programs associated with any Collateral or Guarantor Collateral (including any electronic records, contracts and signatures pertaining thereto), documents, instruments, files and records, and any receptacles or cabinets containing same, relating to the Accounts, or the Lender may use, at the Borrower's expense, such of the Borrower's personnel, supplies or space at the Borrower's or the Guarantors' places of business or otherwise, as may be necessary to properly administer and control the Accounts or the handling of collections and realizations thereon; (b) collect any Accounts, and bring suit, in the name of the Borrower or any Guarantor, as applicable, or the Lender, and generally shall have all other rights respecting Accounts, including the right to accelerate or extend the time of payment, settle, compromise, release in whole or in part any amounts owing on any Accounts and issue credits in the name of the Borrower or any Guarantor, as applicable, or the Lender; (c) sell, assign and deliver the Collateral or Guarantor Collateral and any returned, reclaimed or repossessed Inventory, with or without advertisement, at public or private sale, for cash, on credit or otherwise, at the Lender's sole option and discretion, and the Lender may bid or become a purchaser at any such sale; (d) foreclose the security interests in the Collateral or the Guarantor Collateral created by the Loan Documents by any available legal procedure, or to take possession of any or all of the Collateral, including, without limitation, any Inventory and/or other Collateral or Guarantor Collateral without judicial process, and to enter any premises where any Inventory and/or other Collateral or Guarantor Collateral may be located for the purpose of taking possession of or removing the same; and (e) exercise any other rights and remedies provided in law, in equity, by contract or otherwise. The Lender shall have the right, without notice or advertisement, to sell, lease, or otherwise dispose of all or any part of the Collateral or the Guarantor Collateral, whether in its then condition or after further preparation or processing, in the name of the Borrower or any Guarantor or the Lender, or in the name of such other party as the Lender may designate, either at public or private sale, in lots or in bulk, for cash or for credit, with or without warranties or representations, and upon such other terms and conditions as the Lender in its sole discretion may deem advisable, and the Lender shall have the right to purchase at any such sale. If any Collateral or Guarantor Collateral shall require rebuilding, repairing, maintenance or preparation, the Lender shall have the right, at its option, to do such of the aforesaid as is necessary, for the purpose of putting the Collateral or Guarantor Collateral in such saleable form as the Lender shall deem appropriate and any such costs shall be deemed an Obligation hereunder. The Borrower and the Guarantors agree, at the request of the Lender, to assemble the Collateral or Guarantor Collateral and to make it available to the Lender at its premises and to make available to the Lender its premises and facilities for the purpose of the Lender's taking possession of, removing or putting the Collateral or Guarantor Collateral in saleable form. The net cash proceeds resulting from the Lender's exercise of any of the foregoing rights, (after deducting all charges, costs and expenses, including reasonable legal fees) shall be applied by the Lender to the payment of the Obligations, whether due or to become due, in such order as the Lender may elect, and the Borrower and the Guarantors shall remain liable to the Lender for any deficiencies, and the Lender in turn agrees to remit to the Borrower and the Guarantor or its successors or assigns, any surplus resulting therefrom. The enumeration - 50 - of the foregoing rights is not intended to be exhaustive and the exercise of any right shall not preclude the exercise of any other rights, all of which shall be cumulative. The Borrower and the Guarantors, on a joint and several basis, hereby indemnify the Lender and hold the Lender harmless from and against any and all losses, damages, costs, expenses, claims, obligations, actions, suits, proceedings, demands, penalties, liabilities, Out-of-Pocket Expenses or otherwise, incurred or imposed on them by reason of the exercise of any of its rights, remedies and interests hereunder, including from any sale or transfer of Collateral or the Guarantor Collateral, preserving, maintaining or securing the Collateral or the Guarantor Collateral, defending its interests in Collateral or the Guarantor Collateral (including pursuant to any claims brought by the Borrower or any Guarantor, the Borrower or any Guarantor as debtor-in-possession, any secured or unsecured creditors of the Borrower or any Guarantor, any trustee, monitor, liquidator, receiver or receiver and manager, or otherwise), and the Borrower and the Guarantors, on a joint and several basis, hereby agree to so indemnify and hold the Lender harmless, absent their gross negligence or wilful misconduct as finally determined by a court of competent jurisdiction. The foregoing indemnification shall be severable from and shall survive any termination of this Financing Agreement until such time as all Obligations (including the foregoing) have been finally and indefeasibly paid in full. ARTICLE 11 TERMINATION 11.1 Unless terminated in accordance with Article 10 or this Section 11.1, the Maturity Date shall automatically be renewed after the initial three (3) years from the date hereof for successive one (1) year periods. For greater certainty, the Lender may terminate this Financing Agreement immediately upon the occurrence and continuance of an Event of Default. The Borrower may terminate this Financing Agreement at any time upon sixty (60) days' written notice to the Lender prior to the then applicable Maturity Date, provided that the Borrower pay to the Lender, immediately on demand, the Early Termination Fee, if the termination does not fall on a Maturity Date. Each of the Borrower and the Lender shall have the right not to renew this Financing Agreement at the end of any applicable Maturity Date upon ninety (90) days prior written notice to the other during the initial three (3) years from the date hereof and on ninety (90) days prior written notice to the other thereafter. All Obligations shall become due and payable as of any termination under this Section 11.1 or under Article 10 hereof and, pending a final accounting, the Lender may withhold any balances in the Borrower's account (unless supplied with an indemnity satisfactory to the Lender) to cover all of the Obligations, whether absolute or contingent, including, but not limited to, cash reserves for any contingent Obligations, including, without limitation, an amount equal to one hundred percent (102%) of the face amount of any outstanding Letters of Credit. All of the Lender's rights, liens and security interests shall continue after any termination until all Obligations have been indefeasibly paid and satisfied in full. ARTICLE 12 ASSIGNMENTS 12.1 The Lender shall have the right at any time to assign to one or more commercial banks, commercial finance lenders or other financial institutions all or a portion of its rights and obligations under this Financing Agreement (including, without limitation, its obligations under the Revolving Loans and its rights and obligations with respect to Letters of Credit). Upon - 51 - execution of an assignment and transfer agreement (a) the assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such assignment, have the rights and obligations of the Lender hereunder, and (b) the Lender shall, to the extent that its rights and obligations hereunder have been assigned by it pursuant to such assignment, relinquish its rights and be released from its obligations under this Financing Agreement. The Borrower and the Guarantors shall, if necessary, execute any documents reasonably required to effectuate the assignments. It shall be a condition of any assignment by the Lender hereunder that (i) the amount being assigned shall, if there is no Event of Default which is continuing, in no event be less than the lesser of $10,000,000 or the entire interest of the Lender hereunder, and the parties to such assignment shall execute and deliver to the Lender an assignment and transfer agreement. ARTICLE 13 MISCELLANEOUS 13.1 This Financing Agreement, the Loan Documents executed and delivered in connection therewith and prior to the Closing Date, the Commitment Letter, constitute the entire agreement between the Borrower, the Guarantors and the Lender; supersede any prior agreements; can be changed only by a writing signed by the Borrower, the Lender and the Guarantors; and shall bind and benefit the Borrower, the Lender, the Guarantors and their respective successors and assigns. 13.2 For purposes of the Interest Act (Canada): (i) whenever any interest or fee under this Financing Agreement is calculated using a rate based on a year of 360 or 365 days, as applicable, such rate determined pursuant to such calculation, when expressed as an annual rate, is equivalent to (x) such calculated rate, (y) multiplied by the actual number of days in the calendar year in which the period for which such interest or fee is calculated ends, and (z) divided by 360 or 365, as applicable, (ii) the principle of deemed reinvestment of interest shall not apply to any interest calculation under this Agreement; and (iii) the rates of interest stipulated in this Agreement are intended to be nominal rates and not effective rates or yields. 13.3 Notwithstanding any provision to the contrary contained in this Financing Agreement, in no event shall the aggregate "INTEREST" (as defined in Article 347 of the Criminal Code, Revised Statutes of Canada, 1985, c.46 as the same may be amended, replaced or re-enacted from time to time) payable under this Financing Agreement exceed the maximum amount of interest on the "CREDIT ADVANCED" (as defined in that Article) under this Financing Agreement lawfully permitted under that Article and, if any payment, collection or demand pursuant to this Financing Agreement in respect of "INTEREST" (as defined in that Article) is determined to be contrary to the provisions of that Article, such payment, collection or demand shall be deemed to have been made by mutual mistake of the Borrower and the Lender and the amount of such payment or collection shall be refunded to the Borrower. For purposes of this Financing Agreement, the effective annual rate of interest shall be determined in accordance with generally accepted actuarial practices and principles over the term the Line of Credit is outstanding on the basis of annual compounding of the lawfully permitted rate of interest and, in the event of dispute, a certificate of a fellow of the Canadian Institute of Actuaries appointed by the Lender will be conclusive for the purposes of such determination. 13.4 If any provision hereof or of any other agreement made in connection herewith is held to be illegal or unenforceable, such provision shall be fully severable, and the remaining - 52 - provisions of the applicable agreement shall remain in full force and effect and shall not be affected by such provision's severance. 13.5 Except as otherwise herein provided, any notice or other communication required hereunder shall be in writing (provided that, any electronic communications from the Borrower or the Guarantors with respect to any request, transmission, document, electronic signature, electronic mail or facsimile transmission shall be deemed binding on the Borrower or the Guarantors for purposes of this Financing Agreement, provided further that any such transmission shall not relieve the Borrower or the Guarantors from any other obligation hereunder to communicate further in writing), and shall be deemed to have been validly served, given or delivered when hand delivered or sent by facsimile, or three (3) days after deposit in the mail, with proper first class postage prepaid and addressed to the party to be notified or to such other address as any party hereto may designate for itself by like notice, as follows: (A) if to the Lender, at: CIT Business Credit Canada Inc. 207 Queens Quay West, Suite 700 Toronto, Ontario M5J 1A7 Attn: Account Executive Fax No.: (416) 507-5100 with a copy to: Blake, Cassels &: Graydon LLP Suite 2800, 199 Bay Street Commerce Court West Toronto, Ontario M5L 1A9 Attn: Michael R. Harquail Fax No.: (416) 863-2653 (B) if to the Borrower or a Guarantor, at: c/o Western Forest Products Inc. 3rd Floor 435 Trunk Road Duncan, British Columbia V9L 2P0 Attn: President Fax No: (250) 748-6045 - 53 - With a copy to: Fasken Martineau Dumoulin LLP Suite 2100, 1075 West Georgia Street Vancouver, British Columbia V6E 3G2 Attn: Michael Fitch Fax No.: 604-631-4779 provided, however, that the failure of the Lender to provide the Borrower's and the Guarantors' counsel with a copy of such notice shall not invalidate any notice given to the Borrower and the Guarantor and shall not give the Borrower or any Guarantor any rights, claims or defences due to the failure of the Lender to provide such additional notice. 13.6 Unless otherwise specified herein, all statements of or references to dollar amounts shall mean the lawful money of Canada. 13.7 The validity, interpretation and enforcement of this Financing Agreement and the other Loan Documents shall be exclusively (without regard to principles relating to conflicts of laws) governed by and enforced in accordance with the laws of the Province of British Columbia and the federal laws of Canada applicable therein. 13.8 Words denoting the singular include the plural and vice versa and words denoting any gender include all genders; headings shall not affect the interpretation of this Financing Agreement; the word "INCLUDING" shall mean "INCLUDING, WITHOUT LIMITATION" and "INCLUDES" shall mean "INCLUDES, WITHOUT LIMITATION". 13.9 No failure on the part of the Lender to exercise, and no delay in exercising any right under this Financing Agreement or any other Loan Document shall operate as a waiver of such right; nor shall any single or partial exercise of any right under this Financing Agreement or any other Loan Document preclude any other or further exercise thereof or the exercise of any other right; nor shall any waiver of one provision be deemed to constitute a waiver of any other provision (whether or not similar). No waiver of any of the provisions of this Financing Agreement or any other Loan Document shall be effective unless it is in writing duly executed by the waiving party. 13.10 In the event of any conflict or inconsistency between any of the provisions of this Financing Agreement or any other Loan Document, the provisions of this Financing Agreement shall prevail to the extent of such conflict or inconsistency. 13.11 Time shall be of the essence of this Financing Agreement. 13.12 Each party hereto intends that this Financing Agreement shall not benefit or create any right or cause of action in or on behalf of any other Person, other than the parties hereto and any other Person who may become a party hereto and no other Person shall be entitled to rely on any of the provisions hereof in any action, suit, proceeding, hearing or other forum. - 54 - 13.13 This Financing Agreement shall enure to the benefit of and be binding upon the parties hereto and any Person becoming a party to this Financing Agreement pursuant hereto, and their respective successors and permitted assigns. 13.14 This Financing Agreement may be executed in one or more counterparts by facsimile transmission, each of which shall be deemed to be an original and all of which, when taken together, shall constitute one and the same agreement. 13.15 Except as otherwise expressly provided for in this Financing Agreement, the covenants, representations and warranties, indemnities and power of attorneys contained in this Financing Agreement and the other Loan Document shall not merge and shall survive the closing of the financing transaction contemplated herein, and notwithstanding such closing, or any investigation made by or on behalf of any party, shall continue in full force and effect. 13.16 The Borrower and the Guarantors hereby consent to the Lender publishing and disclosing such details of the financing transaction contemplated herein in national publications as the Lender deems appropriate for advertising or public relations purposes. 13.17 The Borrower and each Guarantor hereby waives all rights to receive from the Lender a copy of any financing statement, financing change statement or verification statement filed at any time or from time to time in respect of any Security Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Financing Agreement to be effective, executed, accepted and delivered by their proper and duly authorized officers as of the date first set forth above. CIT BUSINESS CREDIT CANADA INC. By: /s/ E. Dennis McCluskey ------------------------- E. Dennis McCluskey President By: /s/ Donald Rogers ------------------------- Donald Rogers Vice President - 55 - WESTERN FOREST PRODUCTS INC. WESTERN PULP LIMITED By: /s/ P.G. Hosier By: /s/ P.G. Hosier -------------------------- -------------------------- Name: Philip G. Hosier Name: Philip G. Hosier Title: Corporate Secretary Title: Corporate Secretary By: _________________________ By: __________________________ Name: Name: Title: Title: DOMAN FOREST PRODUCTS LIMITED DOMAN-WESTERN LUMBER LTD. By: /s/ P.G. Hosier By: /s/ P.G. Hosier -------------------------- -------------------------- Name: Philip G. Hosier Name: Philip G. Hosier Title: Corporate Secretary Title: Corporate Secretary By: _________________________ By: __________________________ Name: Name: Title: Title: WFP LUMBER SALES LIMITED By: /s/ P.G. Hosier -------------------------- Name: Philip G. Hosier Title: Corporate Secretary By: _________________________ Name: Title: EXHIBIT A FORM OF BORROWING BASE CERTIFICATE CIT BUSINESS CREDIT CANADA INC. REPORT#: (as Lender) Borrowing Base Certificate Date _________ Client: WESTERN FOREST PRODUCTS INC., (, the "BORROWER")
ACCOUNTS RECEIVABLE INVENTORY ---------- --------- 1. TOTAL COLLATERAL (line 7 of previous report) $ $ ------------ -------------- 2. GROSS SALES (per attached report) (+) ------------ CREDIT MEMOS (per attached report) (-) ------------ 3. INVENTORY CHANGE (per attached report) (+/-) -------------- 4. (+/-) MISC. ADJUSTMENTS (back-up attached) (+/-) -------------- 5. NET COLLECTIONS (per attached report) (-) ------------- 6. DISCOUNTS ALLOWED (per attached report) (-) ------------- 7. TOTAL COLLATERAL (per this report) $ $ ------------ -------------- 8. A. MONTHLY INELIGIBLES $ $ ------------ -------------- B. OTHERS ------------ -------------- C. TOTAL INELIGIBLES (-) $ $ ------------ -------------- 9. TOTAL ELIGIBLE COLLATERAL (line 7 minus 8C) $ $ 10. MAXIMUM AVAILABLE: (Revolving Limit) A. Accounts Receivable at 85% of Line 9 $ ----------- B. Inventory at the lower of, 65% at the lower of $ Borrower's cost or market, and 80% of appraised net ------------- realizable value of Line 9 11. INVENTORY LOAN LIMIT (the lower of Line 10B or $ $175,000,000) ----------- -------------- 12. TOTAL AVAILABILITY RESERVES $ ---------- 13. BORROWING BASE (total of line 10 minus 12) $ ---------- CAD USD --- --- 14. LOAN BALANCE (Previous Report dated ______________) ---------- -------------- 15. ADVANCES (+) ---------- -------------- 16. CHARGES OR CREDITS (+/-) ---------- -------------- 17. NET COLLECTIONS (-) ---------- -------------- 18. IN TRANSIT COLLECTIONS (+) ---------- -------------- 19. A. REVOLVING LINE OF CREDIT BALANCE per this $ - $ - report ----------- -------------- EXCHANGE RATE $ --------------
- 2 - B. REVOLVING LOAN BALANCE IN CAD $ - ------------ CAD USD --- --- 20. LETTERS OF CREDIT $ $ ------------ ---------------- 21. NET AVAILABILITY (line 13 minus 19B and 20) $ ------------ 22. NET AVAILABILITY BLOCK $ ------------ 23. SURPLUS AVAILABILITY $ ------------
Pursuant to, and in accordance with, the terms and provisions of that certain Financing Agreement ("Agreement"), between the Lender, the Borrower, and Western Pulp Limited and WFP Lumber Sales Limited (the "Guarantors"), is executing and delivering to the Lender, this Borrowing Base Certificate accompanied by supporting data (collectively referred to as "Report"). The Borrower represents and warrants to the Lender that this Report is true, correct, and based on information contained in the Borrower's financial accounting records. The Borrower, by the executing of this Report, hereby ratifies, confirms and affirms as to the terms, conditions, and provisions of the Agreement, and further certifies on this_______day of____________________, 20___, that the Borrower and the Guarantors are in compliance with said Agreement and that there are no arrears for rent, any pension benefit obligation contributions, Royalties or any Priority Payables. AUTHORIZED SIGNATURE: DATE: __________________________ ________________________ EXHIBIT B FORM OF OFFICER'S CERTIFICATE TO: CIT BUSINESS CREDIT CANADA INC. (THE "LENDER") The undersigned, [TITLE], of WESTERN FOREST PRODUCTS INC. (the "BORROWER"), pursuant to Article 7 of the financing agreement dated July 27, 2004, among, inter alia, the Lender, the Borrower, Western Pulp Limited and WFP Lumber Sales Limited (the "GUARANTORS") (the "FINANCING AGREEMENT"), DOES HEREBY CERTIFY in his capacity as an authorized signing officer of the Borrower, and not in his personal capacity and without personal liability that: 1. The financial statements attached hereto fairly and accurately represent the Borrower's financial condition at the end of the particular accounting period set out in such financial statements, as well as the Borrower's consolidated operating results during such accounting period, subject to year-end audit adjustments; and 2. During the accounting period set out in such financial statements: (A) there has been no Default or Event of Default (as defined in the Financing Agreement) under the Financing Agreement [NOTE TO DRAFT: PROVIDED HOWEVER, THAT IF ANY SUCH OFFICER HAS KNOWLEDGE THAT ANY SUCH DEFAULT OR EVENT OF DEFAULT, INCLUDING, WITHOUT LIMITATION, NON-COMPLIANCE WITH ANY ORDERS, HAS OCCURRED DURING SUCH PERIOD, THE EXISTENCE OF AND A DETAILED DESCRIPTION OF SAME SHALL BE SET FORTH BELOW]; (B) neither the Borrower nor any Guarantor has received any notice of cancellation with respect to any of its insurance policies which it is required to maintain under the Financing Agreement, including, without limitation, the Policies (as defined in the Financing Agreement); (C) neither the Borrower nor any Guarantor has received any notice that could result in a Material Adverse Effect (as defined in the Financing Agreement), including, without limitation, from any Governmental Entity concerning duties, Taxes, Royalties, Priority Payables, the Forest Tenures, the Licences or other Authorizations required to operate its business (capitalized terms, are as defined in the Financing Agreement); and (D) the Borrower and the Guarantors are current with respect to any and all pension benefit obligations, Taxes, Royalties and Priority Payables. [NOTE TO DRAFT: UNLESS AN AMOUNT IS BEING DILIGENTLY CONTESTED IN GOOD FAITH, ETC., THE DETAILED DESCRIPTION OF WHICH SHALL BE SET FORTH BELOW.] - 2 - IN WITNESS WHEREOF, the undersigned has executed this Officer's Certificate on behalf of the Borrower and the Guarantors as of the day of , 200 . ___________________________ Name: Title: SCHEDULE 1 - COLLATERAL INFORMATION Exact Name and Jurisdiction of Organization of the Borrower and Guarantor: Borrower: Western Forest Products Inc. - CBCA Guarantor: Western Pulp Limited - CBCA Guarantor: WFP Lumber Sales Limited - CBCA Guarantor: Doman Forest Products Limited - CBCA Guarantor: Doman-Western Lumber Ltd. - CBCA PREDECESSOR NAMES AND TRADENAMES: Borrower: 4204247 Canada Inc. - Predecessor Name Guarantor: (WPL) 4204255 Canada Inc. - Predecessor Name Guarantor: (Salsco) 4204697 Canada Inc. - Predecessor Name Guarantor: Doman FP 4018940 Canada Inc. - Predecessor Name Guarantor: Doman WL 4018982 Canada Inc. - Predecessor Name SUBSIDIARIES AND AFFILIATES: See attached corporate chart appended to this Schedule 1 as 1-A illustrating the corporate structure of the Borrower, including all subsidiaries as at the Plan Implementation Date. JURISDICTION OF INCORPORATION OR FORMATION: Canada Business Corporations Act CHIEF EXECUTIVE OFFICE: For the Borrower and Guarantor the chief executive office is as follows: 3rd Floor 435 Trunk Road Duncan, B.C., V9L 2PQ PHONE: (250) 748-3711 FAX: (250) 748-6045 COLLATERAL AND GUARANTOR COLLATERAL LOCATIONS: See attached lists appended to this Schedule 1 a 1-B and 1-C. - 2 - SCHEDULE 1-A Western Forest Products Inc. Corporate Structure [FLOW CHART] REAL PROPERTY LOCATIONS
PROPERTY IDENTIFICATION PROPERTY LOCATION NUMBER PROPERTY DESCRIPTION - ----------------- -------------- -------------------- Chemainus Sawmill 004-601-572 Lot A, Section 14, Range 4, Chemainus District, Plan 13619 except part in plan VIP73021 004-802-161 Lot 2 of Section 14, Ranges 4 and 5, Chemainus District Plan 12657, except that part in plans 13619, VIP72173, and VIP73020 006-648-509 That part of Lot 13, Section 13, Range 4, Chemainus District, Plan 2051, lying to the north east of Plan 798 RW Chemainus Value Added 023-017-775 Lot A, Sections 14 and 15, Ranges 3 and 4, Plant and Cowichan Chemainus District, Plan VIP60627 Wholesale Yard Cowichan Bay Sawmill 003-723-674 Lot 1, Section 12, Ranges 2 and 3, Cowichan District, plan 19378 005-787-408 Section 13, Range 3, Cowichan District, except part in plans 22505 and 37455 005-787-491 That part of District Lot 160, Cowichan District, lying between the range and section lines encompassing section 13, Range 3, Cowichan District, as shown on plan attached to original Crown grant, dated 15/01/1872 (DD 25711), except part in plans 23400 and 37455 005-788-561 Fractional section 12, Range 3, Cowichan District, except parts in plan 19378 and 37455 005-788-749 That part of Section 12, Range 2, Cowichan District, shown coloured red on plan attached to Crown grant no. 1863 deposited under DD 263021, except out of said section 12, Ranges 2 and 3, that part thereof shown outlined in red on plan 936R and except those parts of said section 12, range 3, included within the boundaries of plan 19378 Nanaimo, Duke Point Sawmill 001-038-087 Lot 22, Section 9, and District Lots 370 and 429, Nanaimo District Plan 37924, except parts in plans 42196 and VIP63511 001-038-095 Lot 23, Sections 8 and 9, and District Lots 370 and 429,
- 2 - Nanaimo District, plan 37924 Other 013-181-131 Parcel "D" (Reference plan 6576), Section 3 Block 6 North Range 1 East New Westminster District Squamish Pulp Sawmill 015-910-717 District Lot 2351 Group 1 New Westminster District 015-895-963 District Lot 2802, Group 1, New Westminster District 015-822-061 District Lot 5899, Group 1, New Westminster District, except part in reference plan 5238 015-791-459 District Lot 6232, Group 1, New Westminster District 015-791-611 District Lot 6237, Group 1, New Westminster District 004-184-653 District Lot 3357 Group 1 New Westminster District 004-206-550 That Part of Lot 5681 Adjoining Lot 3357 and Shown Coloured Red on Sketch Annexed to Crown Grant Registered under No. 84274H Group 1 New Westminster District Vancouver Sawmill 008-238-057 Lot B, Block 4, District Lot 311, Plan 4803 011-263-873 Lot A (explanatory plan 1976), except part in reference plan 3327, south part of Block 5, District Lot 311, Plan 847 013-038-796 Lot E, Blocks 4,C,D,Y and Z, District Lots 311, 319, 323, 324, Plan 22094 013-206-222 Lot B, Blocks C, D, Y and Z, District Lot 319 Plan 22095 Mission 001-722-549 Lot I, District Lot 436, Group 1 New Westminster District, Plan 69567 014-842-386 Parcel "C" (reference plan 4578) , District Lot 436, Group 1, except: Firstly: Parcel "D" (reference plan 2583) Secondly: Parcel "B" (reference plan 4577) Thirdly: Parcel "H" (reference plan 5558) Fourthly: Parcel "H" (reference plan 6700) Fifthly: Part on plan 4898 Sixthly: Part subdivided by plan 23384, New Westminster District
- 3 - 1-C LOCATIONS WHERE INVENTORY STORED OTHER THAN DESTINATIONS OWNED BY THE BORROWER OR GUARANTOR WESTERN FOREST PRODUCTS INC. LIST OF LOCATIONS WHERE INVENTORY IS LOCATED
CODE DESCRIPTION COUNTRY NAME & MAILING ADDRESS CONTACT PHONE FAX CBD Cowichan Bay Dock Canada Westcan Terminals Limited John Milligan 250-386-1321 250-386-2734 P.O. Box 1442 189 Dallas Rd. Victoria, B. C. V8W 2X2 DEC Desticon - Coquitlam, BC Canada Desticon Transportation Fatima Hussain 604-931-7724 Services Inc. 225 North Road, Coquitlam, B.C. TBN DryTeck - Surrey, BC Canada DryTeck Lumber Services, 604-513-1131 604-513-1126 9356 193rd Street, Surrey, B. C. V4N 4E8 FVC Fraserview - Surrey, BC Canada Fraserview Cedar Reman, Gary [ILLEGIBLE] 604-590-3355 6630 - 144th Street Surrey, B. C. V3W 5R5 GPT Global Pacific - N Vancouver, BC Canada Global Pacific Terminals Inc. 604-924-3566 200 Bridge Street, North Vancouver, B.C. V7H 1W7
- 2 - MVR Mountain View - Abbotsford, BC Canada Mountain View Reload Inc. Rick Pike 604-850-5788 604-850-5789 419 Sumas Way, Abbotsford, B.C. V2S 8C4 NAW Nanaimo Assembly - Nanaimo, BC Canada Nanaimo Port Authority Gord Koster 250-754-7701 250-753-4899 P. O. Box 131, 104 Front Street, Nanaimo, B.C. V9R 5K4 NAR North American - Cloverdale, BC Canada North American Reload Brad Clark 604-574-0900 604-574-9077 #101 - 17618 - 58th Avenue, Cloverdale, B. C. V3S 1L3 PLR Pacific Lumber Reman - Surrey, Canada Pacific Lumber Remanufacturing Rob Sohi 604-582-0705 604-582-0704 BC 13482 - 116th Avenue, Surrey, B. C. V3R 9W4 scw Stuart Channel - Crofton, BC Canada TFL Forest Ltd. Brian Crosson 250-246-3234 250-246-9300 Stuart Channel Wharves P. O. Box 40, Crofton, B. C. VR 1R0 SHW Shawood Lumber - Langley, BC Canada Shawood Lumber Inc. Ken Kiers 604-888-2225 604-888-8446 20039 - 96th Avenue Langley, B.C. V1M 3C6 SMW Surrey Mill Work - Richmond, BC Canada Surrey Millwork (1990) Ltd. Kurt Bonnes 604-276-2843 604-276-2852 15360 Knox Way, Richmond, B. C. V6V 1L5 UWP Uneeda Wood - Chilliwack, BC Canada Uneeda Wood Products Bob 604-858-3431 604-858-6347 Goldsworthy 655 Unsworth Road, Chilliwack, B.C. V2R 4P4 WCC Westree - Abbotsford, BC Canada Westree Custom Cedar Products Mark Dumont 604-855-0933 604-855-1521
- 3 - 720 Riverside Road, Abbotsford, B.C. V2S 7N8 WES Westran - New Westminster, BC Canada Westran Services Limited Hugh [ILLEGIBLE] 604-520-6366 604-520-1024 76 Braid Street New Westminster, B. C. V3L 3P3 WRD Western Road - Abbotsford, BC Canada Western Road Road Systems Inc. Wes [ILLEGIBLE] 604-864-4945 604-864-8178 P. O. Box 8000, 34499 McClary Ave Abbotsford, B. C, V2S 6H1 BLB Berth 122, Long Beach USA Fremont Forest Products Jim [ILLEGIBLE] 562-945-2911 562-696-8574 13215 E. Penn Street, Suite 319, Whittier, CA 90607 CCK Cedar Creek Wholesale USA Cedar Creek Wholesale Inc. Mark [ILLEGIBLE] 800-621-2611 816-965-5575 13720 Botts Road, Grandview, Missouri 64030 CCL Cedar Creek Wholesale USA Cedar Creek Wholesale Inc. Dave [ILLEGIBLE] 918-258-9688 918-251-6405 6500 S. 145th East Avenue, P. O. Box 1900, Broken Arrow, OK 74013 DAL Dallas, Texas USA Warehouse Specialist, Inc. 214-660-8820 12110 Garland Road Dallas, Texas DES Desticon - Sumas, WA USA Desticon Transportation Services Inc. Bethan [ILLEGIBLE] 360-988-6444 360-988-0944 300 Bob Mitchell Road, Box 1270, Sumas, WA 98295 DET Desticon - Irving, TX USA Desticon Transportation Services Inc. 972-785-8844 2731 Carl Road, Irving, Texas 75062 MWR Midwest Reload - Big Lake, MN USA Division of Central Missouri Harold [ILLEGIBLE] 816-471-6754 P. O. Box 1056,
- 4 - Blue Springs, MO 64013 MWL Midwest Reload - Kansas City, MO USA Midwest Reload, Inc. Harold Mellon 816-471-6754 Division of Central Missouri P. O. Box 1056, Blue Springs, MO 64013 OLY Port of Olympia - Olympia, WA USA Port of Olympia John Wolfe 360-528-8042 604-528-8094 1022 Marine Drive, N.E. Olympia, Washington 98501-6961 PCI PCI Reload - Galena Park, TX USA PCI Transportation Inc. 713-673-6120 713-673-3973 P. O. Box 4, Galena, Texas 77547 PE Port Everglade, FL (was Eacom) USA Gulf Atlantic Lumber Sales Inc. Frank Morrison 813-623-3933 813-621-9436 4001-B McLane Drive, Tampa, Florida 33610-7440 RIG Reload Inc - Glendale, AZ USA Reload Inc. & Reload Express 602-939-9262 P. O. Box 15179, AII A/P St. Louis, MO 63110 RRF Robbins Reload - Fontana, CA USA Robbins Reload Inc. Randy Robbins 909-355-1577 909-355-4956 P. O. Box 757, Fontana, CA 92334-0757 RUS Russin - Montgomery, NY USA Russin Lumber Corp.. Brent Stuart 845-457-4000 845-457-4010 21 Leonards Drive, Montgomery, New York 12549 SHP Saga - Lumber enroute to US USA Saga Forest Carriers Jordan Welch 604-684-7569 604-684-7240 Suite 1350, 409 Granville Street, Vancouver, B. C. V6C 1T2 WCP Weiss Cascade - Centralia, WA USA Weiss Cascade Mike Jensen 360-807-9105 1703 Lum Road, Centralia, Washington
SCHEDULE 2 - MATERIAL AGREEMENTS A. MATERIAL CUSTOMER AGREEMENTS 1. Wood Pulp Contract No. 01/NBKP/1003/WP Supply Agreement made October 1, 2003 between Western Pulp Limited Partnership, as seller, and with APP Asia Pulp & Paper/Sinar Mas Group, as buyer, for the purchase and sale of Northern Softwood kraft pulp, "Squamish" brand, Canadian origin. 2. Wood Pulp Contract No. W-052/98-I Supply Agreement made January 25, 1999 between Western Pulp Limited Partnership, as seller, and Ascoli Paper S.R.L., as buyer, for the purchase and sale of Bleached Softwood Sulphate pulp, "Squamish" brand, Canadian origin, and addendum thereto effective January 1, 1999. 3. Wood Pulp Contract No. W-062/03-G Supply Agreement made June 04, 2003 between Western Pulp Limited Partnership, as seller, and Athens Paper Mill Co. S.A., as buyer, for the purchase and sale of Bleached Softwood Sulphate pulp, "Squamish" brand, Canadian origin. 4. Wood Pulp Contract No. W-028/90-I Supply Agreement made November 16, 1989 between Western Pulp Limited Partnership, as seller, and Cartiere Burgo SpA, as buyer, for the purchase and sale of Squamish Bleached Softwood pulp, and addendum thereto effective February 9, 1993. 5. Wood Pulp Contract No. W-035/94-I Supply Agreement made May 17, 1994 between Western Pulp Limited Partnership, as seller, and Cartiere Burgo SpA, as buyer, for the purchase and sale of Squamish Bleached Softwood pulp, and addendums thereto effective May 26, 1994. 6. Wood Pulp Contract No. W-054/99-I Undated Supply Agreement between Western Pulp Limited Partnership, as seller, and Cartiere Burgo SpA, as buyer, executed by seller and buyer in October and September 1999, for the purchase and sale of Bleached Softwood Sulphate pulp, "Squamish" brand, Canadian origin, and addendum thereto effective October 15, 1999. 7. Wood Pulp Contract No. W-060/03-I Supply Agreement made April 7, 2003 between Western Pulp Limited Partnership, as seller, and Cartiere Burgo SpA, as buyer, for the purchase and sale of Bleached Softwood Sulphate pulp, "Squamish" brand, Canadian origin, and addendum thereto effective January 1, 2003. 8. Wood Pulp Contract No. W-053/99-I - 2 - Undated Supply Agreement made September 9, 1999 between Western Pulp Limited Partnership, as seller, and Delfinet Sarl Luxembourg, as buyer, executed by seller and buyer in September 1999 for the purchase and sale of Bleached Softwood Sulphate pulp, "Squamish" brand, Canadian origin, and addendum thereto effective April 1, 1999. 9. Wood Pulp Contract No. W-040/96-I Supply Agreement dated May 13, 1996 between Western Pulp Limited Partnership, as seller, and Delicarta SpA., as buyer, for the purchase and sale of Squamish-K (SQ-K) Bleached Softwood Pulp packed in unitized bales, and addendum thereto dated May 13, 1996. 10. Wood Pulp Contract No. W-043/97-K Undated Supply Agreement made April 7, 2003 between Western Pulp Limited Partnership, as seller, and Hankuk Paper Mfg. Co. Ltd., as buyer, for the purchase and sale of Squamish-K (SQ-K) Bleached Softwood Pulp, and addendum thereto effective February 1, 1997. 11. Wood Pulp Contract No. W-063/03-K Supply Agreement made January 26, 2004 between Western Pulp Limited Partnership, as seller, and Hankuk Paper Manufacturing Co. Ltd., as buyer, for the purchase and sale of Bleached Softwood Sulphate pulp, "Squamish" brand, Canadian origin,, and addendum thereto effective October 1, 2003. 12. Wood Pulp Contract No. W-065/04-K Supply Agreement made April 2, 2004 between Western Pulp Limited Partnership, as seller, and MonaLisa Co., Ltd., as buyer, for the purchase and sale of Bleached Softwood Sulphate pulp, "Squamish" brand, Canadian origin,, and addendum thereto effective January 1, 2004. 13. Wood Pulp Contract No. W-059/02-U Supply Agreement made March 1, 2004 between Western Pulp Limited Partnership, as seller, and Noramex, L.L.C. d.b.a. Korimpeks Pulp & Paper, as buyer, for the purchase and sale of Bleached Softwood Sulphate pulp, "Squamish" brand, Canadian origin. 14. Wood Pulp Contract No. W-055/00-A Supply Agreement made May 8, 2000 between Western Pulp Limited Partnership, as seller, and Sappi Europe SA, as buyer, for the purchase and sale of Bleached Softwood Sulphate pulp, "Squamish" brand, Canadian origin, addendum thereto effective April 1, 2000, and undated addendum thereto executed April 22, 2002. 15. Wood Pulp Contract No. W-064/03-G Supply Agreement made November 9, 2003 between Western Pulp Limited Partnership, as seller, and SCA Hygiene Products GMBH, as buyer, for the purchase and sale of - 3 - Bleached Softwood Sulphate pulp, "Squamish" brand, Canadian origin, and addendum thereto effective April 1, 2003. 16. Wood Pulp Contract No. W-049/98-J Supply Agreement made April 1, 1998 between Western Pulp Limited Partnership, as seller, and Tokyo Pulp & Paper International Co., Ltd., as buyer, for the purchase and sale of Bleached Softwood Sulphate pulp and addendum thereto dated April 1, 1998. B. MATERIAL FIBRE SUPPLY AGREEMENTS 1. Crown Sawlog Agreement for the sale by TimberWest Holdings Ltd. and the purchase by Doman Forest Products Limited of 330,000m3 to 350,000m3 of sawlogs per annum in perpetuity. 2. Norske Agreements: (a) Hog Fuel Purchase Agreement dated April 14, 1978 between Doman Forest Products Limited and British Columbia Forest Products Limited (predecessor of Norske Skog Canada Limited). (b) Chip and Sawlog Supply Agreement dated September 8, 1980 between British Columbia Forest Products Limited and Doman Industries Limited whereby Doman Industries Limited sells 180,000 units of chips to Norske Skog Canada Limited in consideration for Norske Skog Canada Limited selling sawlogs to Doman Industries Limited based on a 1.3m3/unit ratio. (c) Sawdust Purchase Agreement dated January 1, 1987 between Crown Forest Industries Limited and Doman Forest Products Limited. (d) Letter Agreement dated November 15, 2002 to Doman Forest Products Limited from Norske Skog Canada Limited concerning payment terms for chips, sawdust, hog fuel and sawlogs. (e) Letter Agreement dated December 2, 2002 to Doman Forest Products Limited from Norske Skog Canada Limited concerning variation in supply arrangements. (f) Two Letter Agreements, both dated June 11, 2003, to Doman Forest Products Limited from Norske Skog Canada Limited - one concerning supply arrangements for chips sawdust, hog fuel and sawlogs, the other specifically concerning the supply of sawdust. SCHEDULE 3 - TENURES, LICENCES, PERMITS AND OTHER AUTHORIZATIONS (a) Timber Tenures; (b) Crown Leases and Licences of Occupation - Ministry of Sustainable Resource Management; (c) Port Authority Leases; (d) Special Use Permits - Ministry of Forests; (e) Water Licences and Permits; and (f) Environmental Permits. - 2 - TIMBER TENURES
CURRENT EXPIRY FOREST REGION/ LICENSEE TENURE DATE CURRENT AAC FOREST DISTRICT - ----------------- ------------- -------------- ----------- --------------- Western Forest Forest Licence Oct 29, 2013 83,981 Vancouver/ Products Inc. A19240 Campbell River & Port NcNeill Doman-Western Forest Licence Aug. 31, 2013 193,734 Vancouver/ Lumber Ltd. A16847 Mid Coast Western Forest Forest Licence Oct. 31, 2013 275,762 Vancouver/ Products Inc. A16845 Mid Coast Doman-Western Forest Licence Aug. 19, 2013 58,466 Vancouver/ Lumber Ltd. A19216 Squamish Doman-Western Forest Licence Oct. 18, 2013 355,814 Vancouver/ Lumber Ltd. A19231 Campbell River Doman-Western Forest Licence Nov. 11, 2013 33,545 Vancouver/ Lumber Ltd. A19228 Sunshine Coast Doman-Western Forest Licence Aug. 23, 2013 33,896 Vancouver/ Lumber Ltd. A19205 Chilliwack Western Forest Tree Farm Feb. 28, 2025 1,446,758 Vancouver/ Products Inc. Licence 6 Port McNeill Doman-Western Tree Farm Dec. 31, 2026 894,132 Vancouver/ Lumber Ltd. Licence 19 Campbell River Western Forest Tree Farm May 20, 2024 643,674 Vancouver/ Products Inc. Licence 25 Campbell River & South Island
- 3 - CROWN LEASES & LICENCES OF OCCUPATION - MINISTRY OF SUSTAINABLE RESOURCE MANAGEMENT (ADMINISTERED BY LAND AND WATER BRITISH COLUMBIA INC.)
LEGAL DESCRIPTION [LOCATION/OPERATION] FILE # DOCUMENT # - -------------------------------------- ------ ---------- District Lot 475 and 403 Nanaimo District [Nanaimo, Duke Point Sawrnill - Log handling and storage for Lease sawmill] # 1400767 #101523 [Hecate Bay - Aeroplane Float] Licence # 1402021 #105114 District Lot 474, Nanaimo District [Duke Point Lease Sawmill - log storage and handling purposes] # 1405599 #103961 Unsurveyed foreshore or land covered by water being part of the bed of Esperanza Inlet, Nootka District Licence # [Brodick Creek - Log dump & booming grounds] # 1405281 107548 Unsurveyed foreshore or land covered by water being part of the bed of Esperanza Inlet, Nootka District [Brodick Creek - Wharf & floats for boats & aircraft Licence moorage] # 1405282 #109044 That part of District Lot 160, Cowichan District [Cowichan Bay Sawmill - Log booming and storage Licence # purposes] # 1405508 109033 That part of Sections 11 and 12, Range 1, Cowichan District [Cowichan Bay Sawmill - powerline, waterline, Licence # pumphouse, well and access] # 1405520 109037 That part of District Lot 160, together with unsurveyed foreshore or land covered by water being part of the bed of Cowichan Bay, both of Cowichan District Licence # [Sawmill - log storage] # 1406547 109253 Those two sites consisting of unsurveyed foreshore or land covered by water being part of the bed of Hardy Inlet, Range 2, Coast District [MacNair - Log handling, Licence # storage & moorage] # 5404951 515245 All that parcel or tract of land in the vicinity of the mouth of Doris Creek, Range 2, Coast District Licence # [logging camp, repair shop & fuel tank storage area] # 5405961 514698 [Holberg, Camp - Camp residential] Lease # # 0086884 120619 District Lot 927, Renfrew District, containing 4.29 Lease # hectares [Jordan River - Dump, Booming & Storage] # 0124310 109389 Port McNeill, Block A of Lot 1711, Rupert District Lease # [Port McNeill - Log dump, booming, & storage] # 0129930 101107 Holberg Inlet - Log booming & storage, storage tanks, Lease # causeway, scow (un)loading & tie-up # 0137584 120531 Unsurveyed foreshore or land covered by water being part of the bed of Becher Bay, Metchosin District Licence # [Becher Bay - Log Storage, Booming] # 0139176 108873
- 4 -
LEGAL DESCRIPTION [LOCATION/OPERATION] FILE # DOCUMENT # - -------------------------------------- ------ ---------- District Lot 6039, Group 1, New Westminster District Lease # [Andys Bay - Log booming & storage] # 0165212 233408 Lot 6058, Group 1, New Westminster District [Andys Lease # Bay - Booming ground & log storage] # 0172838 231859 Block B of District Lot 6167, Group 1, New Westminster District [Andys Bay - Log booming & Lease # storage] # 0176109 235913 [Port McNeill - Booming & log storage] Lease # # 0195648 120481 Lot 2085, Rupert District [Holberg - Booming grounds Licence # & log storage] # 0202654 100975 District Lot 136, Metchosin District [Becher Bay - Log Lease # Storage] # 0208842 104788 District Lot 2986, Queen Charlotte District [Moresby - Licence # Wharfsite] # 0210372 633419 Lot 2092, Rupert District [Neroutsos Inlet # 0210673 Lease # Boomstick, Boomchain] 102189 District Lot 2094 and 2307, Rupert District Lease # [Port Alice - Log dump, storage] # 0210675 101591 [Ketchen Island - log handling/storage] # 210681 Lease # 101590 Block B of District Lot 6169, Group 1, New Westminster District [Andys Bay - Log booming, Lease # storage & towing] # 0211020 238525 District Lots 2104 and 2127, Rupert District [Mahatta Lease # River - Log handling & barge moorage] # 0217003 106498 Julian Cove - Log Storage Lease # # 0233447 120243 Lot 2117, Rupert District [Thurburn Bay - dump, Lease # sorting, booming] # 0233448 120182 Mahatta River - Log Storage Lease # # 0243702 120386 Lot 2238, Rupert District [Coal Harbour - Log Storage] Lease # # 0260680 101039 Lot 2239, Rupert District [Coal Harbour - Dump, DLS, Lease # log storage] # 0260681 101062 That part of District Lot 3034, Queen Charlotte District Licence # [Newcombe Inlet - Floating dock & moorage] # 0260691 635077 District Lot 3035, Queen Charlotte District [Sewell Inlet, Dryland Sort - Dryland sort, log dumping, storage, Lease # barge landing & docking facilities] # 0260693 635079 Lot 2244, Rupert District [Mahatta River - Log Storage] Lease # # 0263493 101364 District Lot 399, Rupert District [Jeune Landing, QDLS Lease # - - Boom, Store. Barge Load] # 0276688 103276 District Lot 138, Rupert District [Winter Harbour - Log Lease # storage] # 0278712 106590 Unsurveyed foreshore or land covered by water being part of the bed of Holberg Inlet, Rupert District [Log Licence # handling & storage] # 0287519 104964
- 5 -
LEGAL DESCRIPTION [LOCATION/OPERATION] FILE # DOCUMENT # - -------------------------------------- ------ ---------- District Lot 6866, Group 1, New Westminster District # 0295534 Lease # [Andys Bay - Log storage] 236151 District Lot 165, Rupert District [Holberg Inlet - Log # 0297040 Lease # storage] 103616 Block A of District Lot 140, Rupert District [Holberg Lease # - - Community hall, baseball field & recreation facility] # 0299137 103588 District Lot 121, Queen Charlotte District [Sewell Inlet # 0308435 Lease # - - Log storage, booming and barge loading] 740613 [Kultus Cove - Log storage & barge loading] # 0318076 Lease # 120426 Lot 309, Rupert District [Winter Harbour - Log dumping # 0319349 Lease # booming] 101027 District Lot 305, Range 1 Coast District [Heydon Bay - Lease # Log storage & boom tie-up] # 0331109 107582 Lot 353, Rupert District [Naka Creek - Wharf site, log Lease # dumping, booming & sorting] # 0333779 101670 District Lot 396, Rupert District [Schloss Island - Log Lease # Storage] # 0333988 102716 District Lot 1416, Rupert District [Mahatta River - Log Lease # booming & storage] # 0336224 106033 Lot 306, Range 1 Coast District [Heydon Bay - Boom, Lease # storage] # 0336794 101361 District Lot 391 and 449, Rupert District [Ingersoll - Lease # Dump,Boom,Storage] # 0337203 104519 District Lot 398, Rupert District [Robson Cove - Dump, Lease # Booming] # 0348089 102248 District Lot 405, Rupert District [Coal Harbour - Log Lease # handling, storage, tie-up] # 0354386 109384 District Lot 441, Rupert District [Hushamu creek - Dump, Lease # & storage] # 0356422 109631 District Lot 444, Rupert District [Hushamu creek - Lease # Storage, Boom Tie-up] # 0356423 103993 Rupert Arm - Dump, Booming, Sorting Lease # # 0356736 104306 District Lot 445, Rupert District [Rupert Arm - Lease # Storage, Boom Tie-up] # 1400146 104283 Part of the bed of Holberg Inlet, lying adjacent to Section 1, Rupert District [Holberg - Sewer outfall R/W Statutory Right of Way] # 1402064 #122527 District Lot 269, Range 1, Coast District [Heydon Bay - Lease # Log dumping, booming & wharfsite] # 1402563 105118 Unsurveyed foreshore or land covered by water being part of the bed of Neroutsos Inlet, Rupert District Licence # [Pender Point - Log Storage] # 1404014 106196 Unsurveyed foreshore or land covered by water being part of the bed of Neroutsos Inlet, Rupert District Licence # [Thurburn B - Boat dock] # 1404039 106038
- 6 -
LEGAL DESCRIPTION [LOCATION/OPERATION] FILE # DOCUMENT # - -------------------------------------- ------ ---------- That part of District Lot 1983, and all that foreshore or land covered by water being part of the bed of Heydon Bay, Range 1, Coast District [Heydon Licence # Bay - Log handling & storage] # 1405920 107620 Unsurveyed foreshore or land covered by water being part of Neroutsos Inlet, Rupert District [Port Alice Licence # - - Log handling & storage] # 1406050 107617 That part of Block B of District Lot 819, Rupert Licence # District [Holberg - Boat moorage and launch] # 1406692 105012 That part of District Lot 1982; together with unsurveyed foreshore or land covered by water being part of the bed of Frazer Bay, Range 1, Coast Licence # District [Log handling] # 1407101 109449 That part of Blocks A and B of District Lot 307, Licence # Rupert District [Michelson Point - Log Dump] # 1408338 105635 All that unsurveyed foreshore or land covered by water being part of the bed of Stafford Lake, Range Licence # 1, Coast District [Heli drop sites, booming & storage] # 1412178 109974 That part of district lot 1145, together with unsurveyed foreshore or land covered by water being part of the bed of Harrison Lake, Yale Division of Yale District [Harrison Lake, S of Silver Ck, N of Licence # Bear Ck - Heli drop zones] # 2407187 237634 District Lot 103 together with adjoining unsurveyed foreshore or land covered by water, being part of the bed of Smith Inlet, all in Range 2, Coast District [Piper River - Log dump, bundling, storage, Licence # dock and camp barge moorage] # 5404489 515198 Unsurveyed foreshore or land covered by water, being part of the bed of Yeo Cove, Range 3, Coast District Licence # [Log storage & float camp] # 5404857 514704 Unsurveyed foreshore or land covered by water being part of the bed of Ingram Bay, Spiller Inlet, Range 2, Coast District [Log handling, storage, float camp & Licence # dock] # 5405106 514874 Those parcels or tracts of land adjacent to Ingram Creek and Spiller Inlet, Range 2, Coast District [Dryland sort, log storage, repair shop, waste site, Licence # water tank & fuel] # 5406043 514895 All that parcel or tract of land in the vicinity of District Lot 134, Range 3, Coast District [Yeo Licence # Island, Dove Pt - Campsite] # 5406130 514825 All those five sites or parcels of land consisting of unsurveyed foreshore or land covered by water being part of the bed of Dean Channel, Range 3, Coast Licence District [Kimsquit - Heli Drop zones] # 5406287 # 515061 Unsurveyed foreshore or land covered by water being part of the bed of Mathieson Channel, Range 3, Coast Licence District [McPherson Creek - Log storage] # 5406428 # 515292 All that foreshore or land covered by water being part of the bed of Gordon Cove, Queen Charlotte District Licence [Log dumping & storage] # 6403419 # 633321
- 7 -
LEGAL DESCRIPTION [LOCATION/OPERATION] FILE # DOCUMENT # - -------------------------------------- --------- ---------- Unsurveyed foreshore or land covered by water being part of the bed of Griffin Passage, Range 3, Coast Licence # District [Log dumping, storage, breakwater & wharf] # 6404952 704226 All that unsurveyed Crown foreshore being part of the bed of Sheep Passage, within Range 3, Coast District Licence # [Sheep Passage .. Log dumping, handling & storage] # 6405949 740642 All that unsurveyed Crown foreshore being part of the bed of Thurston Harbour, Queen Charlotte District Lease # [Thurston Harbour - Log handling & storage] # 6406149 740643 All that unsurveyed Crown foreshore being part of the bed of Green Inlet, Range 3, Coast District [Green Inlet, Baffle Point - Log Storage, Barge load & Heli drop Licence # zones] # 6406212 740638 All that unsurveyed Crown foreshore being part of the bed of James Bay, Range 3, Coast District [Log dump, Licence # sort, barge moorage] # 6406214 635184 Unsurveyed Crown foreshore being part of the bed of Griffin Passage, Range 3, Coast District [E of Licence # Griffin Lake - log handling] # 6406406 635172 Unsurveyed Crown foreshore being part of the bed of Mathieson Channel, Range 3, Coast District [Hird Licence # Point - Log handling] # 6406407 635439 All that foreshore of land covered by water being part of the bed of Aaltanhash Inlet, Range 4, Coast District Licence # [Log handling] # 6406408 635037 All that foreshore of land covered by water being part of the bed of Klekane Inlet, Range 4, Coast District Licence # [Klekane Inlet, W shore, E of Scow Bay - log handling] # 6406409 635076 Saltair Sawmill - Millsite, jackladder, chip barge storage, barge loading, boom breakdown and log # 0081822 107564 storage Ladysmith Marina, (Ivy Green) - commercial marina # 0114642 109797 Woods Island, across from Ladysmith sawmill - Log Storage # 0128587 105568 Tahsis sawmill - sawmill , log handling and marina purposes # 0157142 105393 Harrison Lake - Log handling and storage # 0160406 237517 Head Bay - Garage, docking facility, log dumping, booming & storage # 0202227 104912 Tahsis Inlet - Log Booming & Storage # 0205654 101662 Tahis Inlet, West Bay - Log storage # 0207943 120272 Jacklah Bay - Log booming & storage # 0210462 102824 Maurelle Island, Calm Channel - Log dumping, booming & storage # 0233710 105345 Blowhole Bay - Moorage, Dryland Sort, log dump, booming & storage # 0236752 105561 Kilbella Bay - Log booming and loading # 0249061 512739 Santiago Creek - Log booming storage & boat house # 0253976 105300 Kendrick Inlet - Log dumping, booming & storage # 0257490 100882
- 8 -
LEGAL DESCRIPTION [LOCATION/OPERATION] FILE # DOCUMENT # - -------------------------------------- --------- ---------- Jacklah Bay - Log storage & booming # 0257508 100732 McCurdy Creek - Log dumping & storage # 0257509 105322 Tahsis Inlet - Log storage # 0271327 101403 Jacklah - Log storage # 0279515 103515 Tahsis, 230 Head Bay Rd - scow berths & log storage # 0279943 103141 Matchlee Bay - Log storage # 0282016 120212 Plumper Harbour - Log storage # 0293032 105700 Hanna Channel - Log storage # 0298449 107545 McCurdy Creek - Log storage, float & moorage water lot # 0306435 105563 Tahsis - Power line # 0308613 1927 Port Eliza - Log dump, storage, booming ground & boat tie up # 0313069 104876 Nesook Bay - Log handling # 0324552 104502 Houston Creek - Log handling # 0324553 104925 Zeballos Inlet - Log dump, booming & storage # 0324740 105519 Espinosa Inlet - Log dump, boom & storage, wharf & float camp # 0327268 109155 Tsowwin River - Log dumping, booming, storage & dock # 0327789 106595 Tahsis Inlet, N of Mozino Pt - Log dumping booming & storing # 0332211 105336 Muchalat Inlet - Log storage # 0347226 106088 Blowhole Bay - Log storage # 0348803 106325 Ladysmith, Burleith Arm - Log Storage & Sorting # 1400256 103451 Ladysmith, Woods Island - Log Storage # 1400257 109117 Woods Island, across from Saltair sawmill - Log Storage # 1400984 107523 Kleeptee, Williamson Passage - Log handling & storage # 1402115 109796 Houston River - Log handling, booming and storage # 1402799 100748 Jacklah Bay - log storage # 1402800 103172 Plumper Harbour - Log dumping & storage # 1402943 101394 Ladysmith, Burleith Arm - Log Sorting # 1404231 107632 Zeballos, Campsite - Residential, light industry # 1404832 105721 Gold River Pit - Gravel quarry, sawmill, asphalt plant # 1405228 107686 Zeballos - log dumping, booming & storage, wharf & scow grid # 1405380 103981 Gold River, Log dump - log dumping, handling and storage # 1408097 105637 Gold River, Dryland Sort - Dryland Sort # 1408328 105811 Silverado - Log dump, booming, barge grid, dock, ramp & habitat compensation reef # 1408725 108702 Bligh I., Fidalgo Passage - Log dumping booming & storage # 1408835 109077 Gold River, VIH Heli facility - Helicopter facility (office, hanger, landing area, fuel tanks) # 1408858 107782 Tahsis Inlet, N of Tahsis Narrows - Tie Up for heli barges # 1409389 107789 Hanna Channel - Log storage & booming # 1409470 108834 Kings Passage - Heli water drop and log storage # 1409684 109267
- 9 -
LEGAL DESCRIPTION [LOCATION/OPERATION] FILE # DOCUMENT # - -------------------------------------- --------- ---------- Harrison Lake - Log handling # 2404220 237263 Harrison Lake, Long Island - Log handling & storage # 2407941 238140 Sheemahant - Log handling, storage, Floating logging camp, docks & barge ramp # 5400801 514683 Owikeno Lake, 1st Narrows - Log Dump, storage, booming, floats, dock & barge ramp # 5401882 704363 Shotbolt Bay, West shore - Log storage, barge and ship loading # 5402061 512106 Kilbella Bay - Log sorting, bundling, dumping & barge # 5402417 515180 Owikeno Lake - Log handling, storage & loadout # 5405641 514667 Sheemahant - Airstrip & Logging Camp # 5405685 514870 Machmell - Campsite # 5405687 514862 Owikeno Lake, east of first narrows - Heli water drop sites, temp booming area # 5406506 704395 Tahsis Inlet - Log storage & booming # 0235216 120294 Tahsis Inlet - Log storage # 0235217 104304
SQUAMISH PULP MILL
LOCATION/OPERATION FILE # DOCUMENT # - -------------------------------------- --------- ---------- [WoodFibre, Squamish Pulpmill - Log storage, barge Lease # moorage] # 0044927 233113 Lot 2804, Group 1, New Westminster District [WoodFibre, Lease # Watts Pt 1 - Log storage] # 0138766 231574 District Lot 6001, Group 1, New Westminster District Lease # [WoodFibre, Watts Pt #2 - Log storage & booming] # 0158375 238401 Block A of District Lot 6053, Group 1, New Westminster Lease # District [WoodFibre, N. Bluffs - Log storage] # 0167009 234399 District Lot 3279, Group 1, New Westminster District Lease # [WoodFibre, S. Bluff - Log storage] # 0311786 233410 District Lot 3231, Group 1, New Westminster District Lease # [WoodFibre, Watts IV - Log Handling] # 2402937 236807 Block A of District lots 6847 and 7790, Group I, New Westminster District [Silverdale - Barge loading, log Lease # Storage & handling of wood products] # 0348756 238239 District Lot 7758, Group 1, New Westminster District Lease # [Silverdale - Log Storage] # 2404873 235156
- 10 - PORT AUTHORITY LEASES NORTH FRASER PORT AUTHORITY
LOCATION/OPERATION DOCUMENT # - ------------------ ----------- Vancouver Sawmill - Sawmill L # NF05004 Vancouver Sawmill - Sawmill scow moorage and barge loading facilities L # NF05005 Vancouver Sawmill - Sawmill, scow berth, pond, sort area & floats L # NF05006 Vancouver Sawmill - Sawmill L # NF05007 Vancouver Sawmill - Mill site, pond & log pockets L # NF05008 Silvertree Sawmill - Scow Moorage area and related piles and dolphins L # NF05021 Silvertree Sawmill - Barge mooring L # NF05022 Silvertree Sawmill - millsite L # NF05023 Silvertree Sawmill - Log sorting and/or holding grounds L # NF05025 Silvertree Sawmill - Maintenance and operation of a log holding area L # NF05062 Richmond Lumber Sales - A wharf site and scow berth, and related works and structures. L # NF05073 Richmond, ABC - Storage, Booming L # NF05035 Mitchell Island - log storage and booming area L # NF05038 Richmond, No Sag - Log boom storage L # NF05083 Twigg Island - Storage, Booming L # NF05089 F&K, Eburne Island - Scow Moor, Store, Boom L # NF05090 Burnaby, Big Bend - Log storage & booming L # NF08004
FRASER RIVER PORT AUTHORITY
LOCATION/OPERATION DOCUMENT # - ------------------ ---------- Surrey, AP#10, Port Mann - Log storage L # W32-00 Surrey, AP#3 - Log Storage L # W32-02 AP #2, Pitt River - Storage L # W32-06 AP #1, Pitt River - Storage L # W32-07 Poplar Island - Storage L # W32-09 Surrey, Port Mann, AP # 9 - Storage L # W32-11 Surrey, AP#5, Wing Dam - Booming, storage L # W32-12 Barnston Island, AP # 7 - Log storage L # W32-14 New Westminster, Evco - log storage L # W32-18
- 11 - NANAIMO PORT AUTHORITY
LOCATION/OPERATION DOCUMENT # - ------------------ ------------- Nanaimo, Duke Point Sawmill - Barge Loadout (Lot 1, Part Plan VIP L # NH#1 & 42197 NLD & Part Lot 447) 447 Nanaimo Sawmill - Log Storage L # NH#106 Nanaimo Sawmill - Sawmill site L # NHC FL 300 Nanaimo Sawmill - L # NH#103
- 12 - SPECIAL USE PERMITS- MINISTRY OF FORESTS
LOCATION/OPERATION PERMIT # FOREST DISTRICT - --------------------------------------- -------- ----------------------------- Kimsquit - Camp & Air Strip SUP11637 North Island - Central Coast Forest District MacNair - Log dump & Dryland sort SUP17712 North Island - Central Coast Forest District MacNair - Dryland sort waste disposal SUP17719 North Island - Central Coast site Forest District Brodick Creek - Dryland sort and SUP17737 Campbell River Forest logging camp site District MacNair - Rock quarry SUP21783 North Island - Central Coast Forest District Tom Bay - DLS, camp & shop, waste SUP23407 North Island - Central Coast disposal site Forest District Heydon Bay - Dryland sort SUP11656 Campbell River Forest District Botel Lake - Solid waste disposal site SUP20138 North Island - Central Coast Forest District San Josef - Rock quarry SUP20991 North Island - Central Coast Forest District Pegattem Cr - Road surfacing quarry SUP21086 North Island - Central Coast Forest District Yeo Island - Gravel pit & rock quarry SUP21571 North Island - Central Coast Forest District Yeo Island - DLS waste disposal SUP21854 North Island - Central Coast Forest District Varney Main - Gravel pit SUP22316 North Island - Central Coast Forest District Michelson Point - Log Dump SUP22366 North Island - Central Coast Forest District Jeune Landing - Gravel pit SUP22486 North Island - Central Coast Forest District Mount Pickering - Repeater site SUP22600 North Island - Central Coast Forest District Holberg - Disposal, solid waste SUP22785 North Island - Central Coast Forest District William Lake - Rock quarry SUP22885 North Island - Central Coast Forest District Holberg, Macjack 30 - Quarry SUP22942 North Island - Central Coast Forest District James Bay - Temporary Camp, future shop SUP23384 North Island - Central Coast facility Forest District Koprino, Simpson 101 - Rock quarry SUP23425 North Island - Central Coast Forest District (possibly South Island Forest District) Thurburn Bay, Dump - Shop, dump & SUP23485 North Island - Central Coast fuel storage Forest District Roderick, DLS debris dump - DLS SUP23532 North Island - Central Coast
- 13 - Debris disposal Forest District Jordan River, Loss Ck - Rock quarry SUP23558 South Island Forest District Naka Creek - Dryland Sort, shop, waste SUP23580 Campbell River Forest District disposal & burn sites Naka Creek - Campsite, fuel tanks SUP23588 Campbell River Forest District Stafford Lake - Camp & DLS waste SUP23622 Campbell River Forest District disposal site Holberg, NE 66 & Br 602 - Gravel pit SUP23678 North Island - Central Coast Forest District Winter Harbour, Log dump - Log dump SUP23773 North Island - Central Coast Forest District Botel Mn, shop & bone yard - shop & SUP23774 North Island - Central Coast bone yard Forest District Holberg, South Mn - Log dump SUP23775 North Island - Central Coast Forest District Koprino - Log dump & fuel station SUP23776 North Island - Central Coast Forest District Koprino - Powder magazine SUP23777 North Island - Central Coast Forest District Ingersoll - Dump SUP23801 North Island - Central Coast Forest District Mahatta River - Camp, dump & boneyard SUP23803 North Island - Central Coast Forest District Jeune landing, N of QDLS - Gravel pit SUP23805 North Island - Central Coast Forest District Holberg, Ronning 140 - Rock Pit SUP23970 North Island - Central Coast Forest District Holberg, NE Mn - Rock Pit SUP23979 North Island - Central Coast Forest District Holberg, Ronning 211 - Rock Pit SUP23985 North Island - Central Coast Forest District Holberg, Quatsino Mn - Rock Pit SUP23993 North Island - Central Coast Forest District Sewell - logging camp SUP24155 Queen Charlotte Island FOREST DISTRICT Sewel - dryland sort SUP24156 Queen Charlotte Island FOREST DISTRICT Sewell - powder magazine caps SUP24157 Queen Charlotte Island FOREST DISTRICT Sewell - powder magazine SUP24158 Queen Charlotte Island FOREST DISTRICT Sewell - communications tower SUP24159 Queen Charlotte Island FOREST DISTRICT Sewell - temporary timber processing SUP24160 Queen Charlotte Island site FOREST DISTRICT Sewell - fuel station SUP24161 Queen Charlotte Island FOREST DISTRICT Sewell - metal recycling site SUP24162 Queen Charlotte Island FOREST DISTRICT Sewell - DLS waste site SUP24163 Queen Charlotte Island
- 14 - FOREST DISTRICT Sewell - dock/fuel station SUP24164 Queen Charlotte Island FOREST DISTRICT Thurston Harbour - undeveloped land SUP24165 Queen Charlotte Island FOREST DISTRICT Sewell - gravel pits / log dump SUP24166 Queen Charlotte Island FOREST DISTRICT Kendrick Inlet - Log dump & storage SUP03457 Campbell River Forest District Blowhole Bay - Log dump & camp SUP05728 Campbell River Forest District Kendrick Inlet - Campsite SUP07189 Campbell River Forest District Port Eliza - Log Dump or dry land sort SUP07190 Campbell River Forest District Pt Eliza, Peculiar Point - Campsite SUP07298 Campbell River Forest District Oktwanch River - gravel pit & heli SUP08056 Campbell River Forest service landings District Sheemahant - Waste disposal, airstrip SUP10757 North Island - Central Coast Forest District Kilbella Bay - Camp SUP10788 North Island - Central Coast Forest District Machmell - Airstrip, disposal site SUP11630 North Island - Central Coast Forest District Kilbella Bay - Dryland Sort burn SUP11634 North Island - Central Coast site/disposal site Forest District Big Silver River - Campsite SUP12927 Chilliwack Forest District Kendrick Inlet - Landing debris dump SUP12941 Campbell River Forest District Sheemahant - quarries, pits, Heli sites SUP14078 North Island - Central Coast & zones, explosives Forest District Beano Creek - Gravel pit SUP15476 Campbell River Forest District Plumper Harbour - Equipment storage SUP15500 Campbell River Forest area District Kilbella - Gravel pit SUP15518 North Island - Central Coast Forest District Plumper Harbour - Camp SUP15529 Campbell River Forest District Harrison Lake - Rock quarry & Gravel SUP17114 Chilliwack Forest District pit Port Eliza - Dryland sort waste SUP17155 Campbell River Forest disposal site District Machmell - Gravel pits SUP17716 North Island - Central Coast Forest District Maurelle Island, Calm Channel - Dryland SUP20014 Campbell River Forest Sort & Log dump District Houston River - Waste Disposal Site SUP21606 Campbell River Forest District Nesook Bay - Dryland Sort & shop site SUP21625 Campbell River Forest
- 15 - District Gold River, Camp site - Campsite SUP21626 Campbell River Forest District Tsowwin Narrows, DLS - Log dump, SUP22497 Campbell River Forest dryland sort, shop & fuel storage District Muchalat Inlet - Dryland sort, camp, SUP22498 Campbell River Forest shop & boneyard District West Tahsis Inlet - Log dump & dryland SUP22499 Campbell River Forest sort District Head Bay - Dryland sort & dump SUP22500 Campbell River Forest District Silverado Creek - Dryland Sort SUP22555 Campbell River Forest District Callaghan Main, West - Gravel pits SUP22646 Sunshine Coast Forest District Rutherford Creek - Dryland Sort SUP22948 Sunshine Coast Forest District Little Zeballos R - Log dump, dryland SUP23037 Campbell River Forest sort & waste disposal District Head Bay - Waste disposal site SUP23182 Campbell River Forest District Squamish, Calalaghan - Rock quarry SUP23474 Squamish Forest District West Tahsis, DLS - DLS Refuse site SUP23562 Campbell River Forest District Owikeno Lake, NE of Phinney Ck - Log SUP23595 North Island - Central Coast dump or DLS Forest District Harrison Lake, Clear Ck FSR - Gravel SUP23618 Chilliwack Forest District Pit Blowhole Bay - Waste disposal site for SUP23681 Campbell River Forest DLS refuse District
SQUAMISH PULP MILL WoodFibre, Mill Ck - Garbage dump SUP7103 Squamish Forest District
- 16 - WATER LICENCES AND RELATED PERMITS Water licences and permits, all of which are presently held by Western Pulp Inc. as a general partner of and on behalf of Western Pulp Limited Partnership. SQUAMISH PULP MILL
LICENSE AND ISSUED TO PERMIT NO.'S. DATE ISSUED DESCRIPTION - --------- ------------- ----------- ----------- Whalen Pulp and Paper Mills Limited F.W.L. 4896 Aug. 5/25 Sylvia Lake Whalen Pulp and Paper Mills Limited F.W.L. 4897 Aug. 5/25 Sylvia Lake Whalen Pulp and Paper Mills Limited Permit Nov. 9/22 App. to Lot 2351 N.W.D. B.C. Pulp and Paper Company Limited F.W.L. 7218 Dec. 16/29 Woodfibre Creek Whalen Pulp and Paper Mills Limited Permit Aug. 31/21 Part of Lots 1337 & 3359, N.W.D. B.C. Pulp and Paper Company Limited F.W.L. 7219 Dec. 16/29 Sulphite Creek Whalen Pulp and Paper Mills Limited Permit Aug. 31/21 Part of Lot 1337 B.C. Pulp and Paper Company Limited F.W.L. 7220 Dec. 16/29 Woodfibre Creek Alaska Pine and Cellulose Ltd. F.W.L. 17264 May 1/59 Henriette Lake Alaska Pine and Cellulose Ltd. Permit 4512 May 1/59 Crown land around Henriette Lake Rayonier Canada Ltd. F.W.L. 17345 Feb. 1/60 Sylvia Lake Rayonier Canada Ltd. Permit 4607 Feb. 1/60 Crown land in Group 1, N.W.D. Rayonier Canada Ltd. F.W.L. 17346 Feb. 1/60 Henriette Lake Rayonier Canada Ltd. F.W.L. 17347 Feb. 1/60 Mill Creek Rayonier Canada Ltd. Permit 4606 Feb. 1/60 Lot l337, N.W.D. Rayonier Canada Ltd. F.W.L. 17348 Feb. 1/60 Henriette Lake Rayonier Canada Ltd. Permit 4605 Feb. 1/60 Lots 1337 7 3359 Group 1, N.W.D. Rayonier Canada Ltd. F.W.L. 17350 Feb. 1/60 Woodfibre Creek B.C. Pulp and Paper Company Limited Permit June 21/28 Lot 2351, N.W.D. Rayonier Canada Ltd. F.W.L. 17351 Feb. 1/60 Henriette Lake Rayonier Canada Ltd. Permit 4608 Feb. 1/60 bed of Henriette Lake and Lot 3357
- 17 -
LICENSE AND ISSUED TO PERMIT NO.'S. DATE ISSUED DESCRIPTION - --------- ------------- ----------- ----------- Rayonier Canada (B.C.) Ltd. F.W.L. 44329 June 16/75 Woodfibre Creek Rayonier Canada (B.C.) Ltd. F.W.L. 44330 June 16/75 Mill Creek
- 18 - ENVIRONMENTAL PERMITS SQUAMISH PULP MILL
LOCATION PERMIT # TYPE - -------- -------- ----------------- Woodfibre PE-01239 Effluent Woodfibre PA-01647 Air Woodfibre PE-02334 Effluent Woodfibre PR-07322 Refuse (Landfill)
EX-4.5 3 o17303exv4w5.txt WESTERN FOREST PRODUCTS LTD. SUPPLEMENTARY PLAN EXHIBIT 4.5 WESTERN FOREST PRODUCTS LIMITED SUPPLEMENTARY PLAN WESTERN FOREST PRODUCTS LIMITED SUPPLEMENTARY RETIREMENT PLAN DECEMBER 1988 1 ARTICLE 1 INTRODUCTION 1.1 NAME OF THE PLAN This is the "Western Forest Products Limited Supplementary Retirement Plan" for designated employees of Western Forest Products Limited and Western Pulp Inc. 1.2 PURPOSE OF THE PLAN This Supplementary Plan provides a pension supplement to Participants to provide the same retirement income ratio to Final Average Earnings as a Participant would receive from the Pension Plan if there was no maximum pension limitation. Benefits provided by the Supplementary Plan are in addition to and integrated with the benefits provided under the Western Forest Products Limited Retirement Plan for Salaried Employees. 1.3 ADMINISTRATION OF THE PLAN The Western Forest Products Limited Pension Committee shall be responsible for the overall operation and administration of the Supplementary Plan. 2 ARTICLE 2 DEFINITIONS 2.1 DEFINITIONS Wherever used in this Supplementary Plan, the words commencing with a capital letter have the meaning ascribed to them in Section 2 of the Pension Plan, unless otherwise defined in this subsection: (a) "Early Retirement Reduction" shall have the meaning ascribed to it in Article 6.3. (b) "Participant" shall mean an Employee who is designated to participate in the Supplementary Plan by virtue of the provisions of Article 3. (c) "Pension Plan" shall mean the Western Forest Products Limited Retirement Plan for Salaried Employees. (d) "Pension Plan Offset" shall mean the amount determined in accordance with Article 6.2. (e) "Supplementary Pension" shall have the meaning ascribed to it in Article 6.1. (f) "Supplementary Plan" shall mean the Western Forest Products Limited Supplementary Retirement Plan, as amended from time to time. 3 2.2 COMMON REFERENCES For the purposes of this Supplementary Plan, words importing the masculine gender will include the feminine gender and vice versa, unless a specific reference is made to the particular sex of a Participant. Similarly, words in the singular may include the plural and the plural may include the singular. 4 ARTICLE 3 PARTICIPATION 3.1 PARTICIPATION Each employee who is designated by the Board of Directors of the Company to be a Participant will become a Participant of the Supplementary Plan with effect as of the date of such designation, provided he signifies his agreement to participate. 3.2 DURATION A Participant shall continue to participate in the Supplementary Plan until the earliest of his date of death, early retirement date, Normal Retirement Date or, if he should cease to be an Employee before reaching age 55, his employment with the Company is otherwise terminated. Participation shall continue through any period of disability. 3.3 COMMUNICATION Each Participant will be provided with a copy of the provisions of the Supplementary Plan, together with a general description of the Supplementary Plan, including an explanation of the co-ordination of benefits under the Supplementary Plan and the Pension Plan. The general description shall not have any effect on the rights or obligations of any person under the Supplementary Plan and shall not be referred to in determining the meaning of any provision of the Supplementary Plan. The Company shall not be liable for any loss or damage occasioned to any person by reason of any error or omission in the general description of the Supplementary Plan. 3.4 EMPLOYMENT Participation in the Supplementary Plan shall not give any Participant the right to be retained in the employ of the Company, nor any right or interest in the Supplementary Plan other than as expressly provided herein. 5 ARTICLE 4 CONTRIBUTIONS 4.1 CONTRIBUTIONS BY PARTICIPANTS A Participant is not permitted to make any contributions to the Supplementary Plan. 6 ARTICLE 5 RETIREMENT 5.1 NORMAL RETIREMENT A Participant, who ceases to be employed by the Company upon attaining his Normal Retirement Date, shall become a retired Participant and shall be entitled to receive a Supplementary Pension. 5.2 EARLY RETIREMENT A Participant may retire early as permitted in the Pension Plan. Providing that the Company has consented to his retirement for the purposes of this Supplementary Plan, the benefit payable, commencing on his Early Retirement Date, shall be his Supplementary Pension. If the Company has not consented to the Participant's retirement, no benefit shall be payable under this Supplementary Plan until expiry of twelve (12) months from the Early Retirement Date. Company consent shall not be withheld provided that the Participant has given notice at least twelve (12) months prior to his intended Early Retirement Date. Company consent may be given to retirement after a notice period of less than twelve (12) months. 5.3 POSTPONED RETIREMENT A Participant may, upon the request of the Company, remain in active service with the Company after his Normal Retirement Date for a period to be agreed upon jointly by the Participant and the Company. If a Participant continues to work for the Company after his retirement in accordance with this Article 5.3, he shall become a retired Participant on his Normal Retirement Date and his retirement income shall be determined and shall commence as provided in Article 5.1 or 5.2, based on his Credited Service up to his Normal Retirement Date. 5.4 CESSATION OF BUSINESS If the Company should cease business, all Participants aged 55 or older who have not retired shall be deemed to have retired with the Company's consent on the business cessation date and no Early Retirement Reduction shall be applied in calculating their Supplementary Pensions. Participants who are Employees, but have not reached 7 age 55, on such date shall have the vested right to a Supplementary Pension, payable at age 55, calculated on the basis of earnings and service to the date of business cessation. 8 ARTICLE 6 AMOUNT OF RETIREMENT INCOME 6.1 SUPPLEMENTARY PENSION The Supplementary Pension, of a Participant, payable commencing on his retirement date, shall be the result of (a) minus (b), where: (a) is the pension that would be payable pursuant to the Pension Plan if the maximum pension restriction was not applied; and (b) is his Pension Plan Offset. 6.2 PENSION PLAN OFFSET The Pension Plan Offset shall be the pension that would be payable to the Participant from the Pension Plan on the retirement date, if a life pension, with a sixty (60) month minimum guaranteed period was chosen. 6.3 EARLY RETIREMENT REDUCTION The Early Retirement Reduction applicable to the Supplementary Pension of a Participant who retires on an early retirement date shall be determined as one-quarter of 1% (0.25%) for each month, if any, that the retirement date elected by the Participant precedes the first day of the month coincident with or next following the Participant's sixtieth birthday, except that no Early Retirement Reduction shall be applicable to a Supplementary Pension if there has been no adjustment for early retirement to the Participant's pension from the Pension Plan. 9 ARTICLE 7 SUPPLEMENTARY PENSIONS 7.1 GENERAL Upon his retirement, the Company shall pay to a Participant his annual Supplementary Pension in equal monthly installments. The first payment shall be made as of his retirement date and subsequent payments be made on the first day of each month. 7.2 SECURITY The Company may appoint a Canadian Trust Company to be the Supplementary Plan trustee and may create a trust fund or establish a letter of credit facility to be delivered to the trustee in order to secure the payment of Plan benefits should the Company be unable to or fail to pay them. 10 ARTICLE 8 TERMINATION OF SERVICE 8.1 TERMINATION OF SERVICE A Participant whose service with the Company is terminated prior to age fifty-five (55) for any reason other than disability or voluntary or involuntary cessation of business by the Company shall not be entitled to any benefits under the Supplemental Plan. 11 ARTICLE 9 DEATH BENEFITS 9.1 DEATH PRIOR TO RETIREMENT The benefits payable under the Supplementary Plan on the death of a Participant before or after retirement shall be calculated and paid as provided for the death of a Member of the Pension Plan, as if the Supplementary Pension is the same as the pension benefit provided by the Pension Plan. 12 ARTICLE 10 MISCELLANEOUS 10.1 ADMINISTRATION The Company will administer the Supplementary Plan and shall determine all questions regarding length of service, eligibility, retirements, reinstatements, the amounts to be credited as earnings and shall, consistent with the provisions of the Supplementary Plan and any Trust Agreement established for the Supplementary Plan, interpret and apply the intent of the Supplementary Plan. The Company may delegate some or all of its responsibilities to one or more persons or to a committee. 10.2 VARIANCE In carrying out the administration of the Supplementary Plan, the Company is empowered, if it believes such action to be warranted, to vary the terms and conditions of the Supplementary Plan to the extent necessary to comply with the terms of a judicial order, the terms of an agreement which has arisen out of the dissolution of a marriage or common-law relationship, or the terms of a written separation agreement, in respect of which the Company is obliged to comply in accordance with duly enacted provincial or federal legislation. 10.3 ACTUARY The Company shall have the aid and assistance of an Actuary who shall make actuarial valuations with respect to the operation and administration of the Supplementary Plan. 10.4 LIABILITY The Company shall be entitled to rely upon all recommendations made by the Actuary and upon any legal opinions delivered by legal counsel selected by the Company. The Company shall not be liable for action taken by it in good faith in reliance upon the Actuary or legal counsel. 10.5 EXPENSES All expenses incurred in the administration of the Supplementary Plan shall be paid by the Company. 13 10.6 NON-ALIENATION OF BENEFITS The Supplementary Pension provided herein is for a retired Participant's own use and benefit and is not capable of assignment or alienation and does not confer upon any Participant, personal representative or dependent, or any other person, any right or interest in the Supplementary Pension which is capable of being assigned or otherwise alienated. The Supplementary Pension is not capable of surrender or commutation and does not confer upon any Participant, personal representative or dependent, or any other person, any right or interest in the Supplementary Pension capable of being surrendered or commuted. 10.7 PAYMENT Notwithstanding any other provisions herein, whenever and as often as any person entitled to any payment hereunder shall, in the judgement of the Company, be physically or mentally incapable of personally receipting therefore, then unless a claim shall have been made by a duly appointed guardian or committee of such person, such payment may be made to any individual or institution then maintaining such person in the judgement of the Company, and such payment shall in every case constitute a full discharge and acquittance of all obligations to make such payments to such person. 10.8 AMENDMENT The Company reserves the right to amend, modify or terminate this Supplementary Plan or to merge it with another plan of the Company, in any way the Company may determine. Without in any way limiting the generality of the foregoing, the Company specifically reserves the right to make any amendment, modification, termination or merger of the Supplementary Plan in whole or in part as it deems necessary to fulfill any requirement specified or to be specified in any relevant provincial or federal legislation or in special regulations prescribed thereby. Any amendment or modification to the Supplementary Plan may, at the discretion of and as specified by the Company, be applicable to either an individual Participant, a specified group of Participants or the entire membership of the Supplementary Plan. However, no amendment, modification, termination or merger will: (a) cause a reduction in the amount or affect adversely the payment of any Supplementary Pension to any retired Participant theretofore retired under this Supplementary Plan, or 14 (b) cause a reduction in or affect adversely the payment of any Supplementary Pension to a Spouse; or (c) cause a reduction in benefits of any Participant at the date thereof. 10.9 PROOF OF AGE Payment of a Supplementary Pension to a retired Participant shall not commence until satisfactory proof of age has been submitted. 10.10 HEADINGS The insertion of headings is for convenience and reference only and shall not affect the construction or interpretation of this Plan. 10.11 LAWS The Plan shall be construed according to the laws of the Province of British Columbia. EX-4.6 4 o17303exv4w6.txt CEO EMPLOYMENT CONTRACT EXHIBIT 4.6 CEO EMPLOYMENT CONTRACT September 14, 2004 Mr. Reynold Hert 6774 Blackwell Road Kamloops, BC V2C 6V7 Dear Reynold: On behalf of the Board Of Directors of Western Forest Products Inc., we are very pleased to offer you the position of President and Chief Executive Officer of the Company. This offer of employment is subject only to final referencing and we would be delighted with your acceptance. COMPENSATION Your base salary will be Three Hundred and Seventy-Five Thousand Dollars ($375,000 CDN) per annum, paid on a bi-weekly basis. Your salary will be reviewed following your 2005 Performance Review and increasing to a minimum of $400,000 CDN for calendar year 2006. It is anticipated that Performance Reviews would be completed during the first quarter of each year. INCENTIVE COMPENSATION You will be eligible to participate in the Corporate Bonus Plan, with a bonus target of 50% of your base salary. Any payments under the Corporate Bonus Plan will depend upon corporate and personal performance and based on objectives mutually agreed between the Management Resources and Compensation Committee on behalf of the Board of Directors and yourself. All bonuses will be paid according to the terms of the plan. In order to compensate you for incentive compensation relating to your 2004 performance that may have been due you from your current employer, you will receive a one-time cash payment of One Hundred and Twenty-Five Thousand Dollars ($125,000 CDN) on January 1, 2005. BENEFITS You will be entitled to participate in the Corporation's existing benefit program for Executives effective from your start date. The details of which will follow under separate cover. PENSION You will be entitled to participate in the existing Western Forest Products Executive Pension Plan the details of which will follow under separate cover. SHARE OPTION PLAN You will be eligible to participate in the Company's Incentive Share Option Plan. The number of common shares to be granted under the option, the date of any grant and the strike price of the options will all be determined by the Board under the terms and conditions of the Company's Plan. All other terms of the grant of options will be determined by the Plan document. We will provide you with an option grant that has a term of ten years with vesting over a five year period. You will be provided with 250,000 options, to be priced and granted as of your start date. Your participation under the Incentive Share Option Plan will be reviewed following your 2005 Performance Review and an additional grant will be provided during the first quarter of 2006 under the terms of the Plan with a minimum of 75,000 additional options. RELOCATION You will be provided with a relocation program which will include the sale of your home in Kamloops (real estate fees and legal costs), movement of your personal furnishings to your new home and legal costs associated with the purchase of your new home. A sundry allowance equal to one half months base salary will be provided for other moving costs. Interim accommodation will be provided subject to prior approval. VEHICLE ALLOWANCE Vehicle Allowance will be provided at $1,200 CDN per month. START DATE Your start date will be no later than October 25, 2004 with the intention of commencing sooner, subject to your negotiated notice period. SEVERANCE PACKAGE In the event of termination without cause, you will be provided a separation payment equal to 24 months of salary plus bonus based on the average of bonus history over the past three years or shorter, if applicable. This payment is inclusive of all obligations by the Company. Vested options must be exercised within 90 days of termination. CHANGE OF CONTROL In the event of a change in control of Western Forest Products, you will be entitled, for a period of 90 days, thereafter, to resign your employment and receive the Severance Package referred to above. Additionally, all unvested options will vest and you will be entitled to exercise all options for a period of 90 days. For the purposes of this clause, change of control shall mean either (i) the acquisition of 50% or more of the total voting control of the Corporation by any person other than an existing shareholder or (ii) a merger of the Corporation with any other corporation which results in the voting securities of the Corporation representing less than 50% of the voting power of the surviving entity. EMPLOYMENT AGREEMENT You and the Board may wish to clarify details relative to this offer in a separate document. In no case will such clarifications reduce the values of this offer. The foregoing terms and conditions are accepted this 15 day of Sept., 2004. /s/ J. Peter Gordon /s/ R. Hert - ----------------------------------- --------------------------------- J. Peter Gordon Reynold Hert Director Western Forest Products Inc. - 2 - EX-4.7 5 o17303exv4w7.txt CFO EMPLOYMENT CONTRACT EXHIBIT 4.7 CFO EMPLOYMENT CONTRACT January 19, 2005 Mr. Paul Ireland 3912 Ragged Ass Road, Yellowknife, Northwest Territories X1A 2T4 Dear Paul: On behalf of Western Forest Products Inc., I am very pleased to offer you the position of Vice-President, Finance and Chief Financial Officer of the Company. COMPENSATION Your base salary will be Two Hundred and Twenty Five Thousand Dollars ($225,000 CDN) per annum, paid on a bi-weekly basis. Your salary will be reviewed on an annual basis with the first review to occur during the second quarter of 2006 coincident with your annual performance review. INCENTIVE COMPENSATION You will be eligible to participate in the Company's Short Term Incentive Plan, with a bonus target of 40% of your base salary. Any payments under the Corporate Bonus Plan will depend upon personal and corporate performance and will be paid according to the terms of the plan. BENEFITS You will be entitled to participate in the Corporation's benefit program effective from your start date. The details of which will follow under separate cover. PENSION You will be entitled to participate in the new Western Forest Products Pension Plan as announced recently, the details of which will follow under separate cover. You will also be eligible for participation in the supplemental pension plan. LONG TERM INCENTIVE PLAN The Company is in the process of developing a new Long Term Incentive Plan which will be designed to create alignment between the long term interests of our senior management team and our shareholders. This plan may involve the use of common share purchase options, restricted or deferred share units or other such equity-based compensation mechanisms. You will be eligible to participate in this Long Term Incentive Plan at a level to be determined by the Board but consistent with your position and experience. Awards under the Long Term Incentive Plan will be reviewed annually following your Performance Review. VACATION You will be credited with 11 years of service towards vacation calculations as of your start date. Your vacation entitlement will then change as per the company benefits outline as you hit future milestones. RELOCATION You will be provided with a relocation program covering the costs of acquiring a home in the Duncan area. A sundry allowance equal to one half months base salary will be provided for other moving costs. Interim accommodation will be provided subject to prior approval. VEHICLE ALLOWANCE Vehicle Allowance will be provided at $1,100.00 CDN per month. START DATE We understand you are able to commence work with us immediately. SEVERANCE PACKAGE In the event of termination without cause, you will be provided a separation payment equal to 12 months of salary plus bonus based on the average of bonus history over the past three years or shorter, if applicable. This payment is inclusive of all obligations by the Company. Any vested options must be exercised within 90 days of separation. CHANGE OF CONTROL In the event of a material change in control of Western Forest Products, and you are not offered employment on substantially the same terms and conditions you will be entitled, for a period of 90 days, thereafter, to resign your employment and receive a lump sum payment equal to 24 months of salary plus bonus amounts due to you. EMPLOYMENT AGREEMENT You and I may wish to clarify details relative to this offer in a separate document. In no case will such clarifications reduce the values of this offer. The foregoing terms and conditions are accepted this 20th day of January, 2005. /s/ R. Hert /s/ P. Ireland - ---------------------------------------- --------------------------------- Reynold Hert Paul Ireland President & Chief Executive Officer Western Forest Products Inc. - 2 - EX-8.1 6 o17303exv8w1.txt LIST OF SIGNIFICANT SUBSIDIARIES OF WFP INC. EXHIBIT 8.1 WESTERN FOREST PRODUCTS INC. LIST OF SIGNIFICANT SUBSIDIARIES 1. Western Pulp Limited 2. WFP Western Lumber Ltd. 3. WFP Lumber Sales Limited EX-12.1 7 o17303exv12w1.txt CERTIFICATE OF CFO PERSUANT TO SECTION 302 EXHIBIT 12.1 CERTIFICATIONS I, Paul Ireland, certify that: 1. I have reviewed this Amendment No. 1 to the annual report on Form 20-F of Western Forest Products Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report; 4. The company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-l5(e) and 15d-l5(e)) for the company and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Evaluated the effectiveness of the company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the company's internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting; and 5. The company's other certifying officer and I have disclosed, based on our most recent evaluation of internal controls over financial reporting, to the company's auditors and the audit committee of the company's board of directors (or persons performing the equivalent function): a. All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the company's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the company's internal controls over financial reporting. Date: as of June 30, 2005. /s/ P. Ireland ---------------------------------- Paul Ireland Chief Financial Officer Western Forest Products Inc. EX-12.2 8 o17303exv12w2.txt CERTIFICATE OF CEO PERSUANT TO SECTION 302 EXHIBIT 12.2 CERTIFICATIONS I, Reynold Hert, certify that: 1. I have reviewed this Amendment No. 1 to the annual report on Form 20-F of Western Forest Products Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report; 4. The company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-l5(e)) for the company and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Evaluated the effectiveness of the company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the company's internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting; and 5. The company's other certifying officer and I have disclosed, based on our most recent evaluation of internal controls over financial reporting, to the company's auditors and the audit committee of the company's board of directors (or persons performing the equivalent function): a. All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the company's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the company's internal controls over financial reporting. Date: as of June 30, 2005. /s/ R. Hert --------------------------------------- Reynold Hert President and Chief Executive Officer Western Forest Products Inc. EX-13.1 9 o17303exv13w1.txt CERTIFICATE OF CEO PERSUANT TO SECTION 906 EXHIBIT 13.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER ACCOMPANYING ANNUAL REPORT ON FORM 20-F REPORT OF WESTERN FOREST PRODUCTS INC. SECTION 906 OF SARBANES-OXLEY ACT OF 2002 (CHAPTER 63, TITLE 18 U.S.C. S. 1350) In connection with Amendment No. 1 to the annual report of Western Forest Products Inc. (the "Company") on Form 20-F for the fiscal year ended December 31, 2004 as filed with the Securities and Exchange Commission (the "Report"), I, Reynold Hert, President and Chief Executive Officer of the Company certify, pursuant to 18 U.S.C. S. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: 1. the Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934; and 2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: as of June 30, 2005. /s/ R. Hert -------------------------------------- Reynold Hert President and Chief Executive Officer Western Forest Products Inc. EX-13.2 10 o17303exv13w2.txt CERTIFICATE OF CFO PERSUANT TO SECTION 906 EXHIBIT 13.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER ACCOMPANYING ANNUAL REPORT ON FORM 20-F REPORT OF WESTERN FOREST PRODUCTS INC. SECTION 906 OF SARBANES-OXLEY ACT OF 2002 (CHAPTER 63, TITLE 18 U.S.C. S. 1350) In connection with Amendment No. 1 to the annual report of Western Forest Products Inc. (the "Company") on Form 20-F for the fiscal year ended December 31, 2004 as filed with the Securities and Exchange Commission (the "Report"), I, Paul Ireland, Chief Financial Officer of the Company certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to S. 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: 1. the Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934; and 2. the information contained in the Report fairly represents, in all material respects, the financial condition and results of operations of the Company. Date: as of June 30, 2005. /s/ P. Ireland --------------------------------- Paul Ireland Chief Financial Officer Western Forest Products Inc. EX-15.1 11 o17303exv15w1.txt BOARD MANDATE Exhibit 15.1 MANDATE OF THE BOARD OF DIRECTORS OF WESTERN FOREST PRODUCTS INC. 1. GENERAL The Board of Directors (the "Board") of Western Forest Products Inc. (the "Corporation") is responsible for the overall stewardship of the Corporation and is elected by the shareholders to represent and serve the interests of all shareholders of the Corporation. The Board will appoint a competent executive management team to run the day-to-day operations of the Corporation and will oversee and supervise the management of the business of the Corporation by that team. The Board will also review the Corporation's systems of corporate governance and financial reporting and controls with the objective that the Corporation reports accurate and complete financial information to shareholders and engages in ethical and legal corporate conduct. The Board will carry out its mandate directly and through the following committees of the Board (and such other committees as it may appoint from time to time): the Audit Committee, the Management Resources and Compensation Committee, the Nominating and Corporate Governance Committee and the Environmental, Health and Safety Committee. 2. APPOINTMENT, SUPERVISION AND COMPENSATION OF MANAGEMENT To carry out its responsibilities, the Board will: - Appoint the Chief Executive Officer ("CEO") and confirm the appointment of other senior officers comprising the senior management team ("SMT") and provide them with advice and counsel. - Monitor the performance of the CEO and SMT against a set of mutually agreed corporate objectives directed at maximizing shareholder value. - To the extent feasible, satisfy itself as to the integrity of the CEO and other senior officers and encourage the CEO and other senior officers to create a culture of integrity throughout the organization. - Approve CEO compensation. - Establish a process to provide for management succession. - Establish boundaries between the Board and management responsibilities and establish limits of authority delegated to management. - Review and consider for approval: - corporate strategy and operating plans; - capital and operating budgets; and - matters of policy; and any material amendments thereto or departures therefrom proposed by management. 3. STRATEGIC PLANNING AND RISK MANAGEMENT The Board will: - Adopt a strategic planning process and review and approve annually a corporate strategic plan which takes into account, among other things, the opportunities and risks of the business on a long-term and short-term basis. - Review for consistency with the corporate strategy and approve annually management's operational plans. - Monitor management's performance against both short-term and long-term strategic plans and annual performance objectives. - 2 - - Confirm that a management system is in place to identify the principal risks to the Corporation and its business and that appropriate procedures are in place to monitor and mitigate those risks. - Confirm that processes are in place to comply with the Corporation's by-laws, Codes of Conduct and all other significant policies and procedures. 4. FINANCIAL REPORTING, REGULATORY COMPLIANCE AND CONTROLS The Board will: - Approve the Corporation's financial statements and oversee the Corporation's compliance with applicable audit, accounting and financial reporting requirements. - Review and approve annual operating and capital budgets. - Review and assess the adequacy and effectiveness of the Corporation's internal control and management information systems. - Review operating and financial performance results relative to established strategy, budgets and objectives. - Review and assess the adequacy of the Audit Committee Charter periodically. - Confirm that management processes are in place to address and comply with applicable regulatory, corporate, securities and other compliance matters. 5. SHAREHOLDER COMMUNICATION AND DISCLOSURE The Board will: - Confirm that management has established a system for effective corporate communications including processes for consistent, transparent regular and timely public disclosure. - Approve the adoption of a disclosure policy relating to, among other matters, the confidentiality of the Corporation's business information (the "Communications Policy") and monitor compliance with such policy; - Report annually to shareholders on the Board's stewardship for the previous year. - Determine appropriate criteria against which to evaluate corporate performance against shareholder expectations and confirm that the Corporation has a system in place to receive feedback from shareholders. - Review and assess the adequacy of the Communications Policy and Insider Trading Policy periodically. 6. CORPORATE GOVERNANCE The Board will: - Establish an appropriate system of corporate governance including practices to permit the Board to function independently of management. - Adopt, from time to time, criteria for selection of Board members. - Approve the nomination of directors. Prior to approving such nominations, the Board should first consider what competencies and skills the Board, as a whole, should possess. It should then assess what competencies and skills each existing director possesses. It is unlikely that any one director will have all the competencies and skills required by the Board. Instead, the Board should be considered as a group, with each individual making his or her own contribution. Attention should also be paid to the personality and other qualities of each director as these may ultimately determine the boardroom dynamic. The Board should then consider the competencies and skills each new nominee will bring and whether he or she can devote sufficient time to the Board. - Establish committees, initially an Audit Committee, an Environmental, Health and Safety Committee, a Nominating and Corporate Governance Committee and a Management Resources and Compensation Committee and approve their respective charters, the limits of authority delegated to each committee and position descriptions for the Chair of the Committee. - The Board should regularly assess its own effectiveness, as well as effectiveness and contribution of each Board Committee and each individual director. An assessment should consider (a) - 3 - compliance with this Board mandate, (b) the Charter of each Board Committee, and (c) the competencies and skills each individual director is expected to bring to the Board. - Review on an annual basis the independence of each Board member and whether the composition of the Board needs to be changed due to independence concerns. - Review the adequacy and form of directors' compensation. - Arrange for non-management directors to meet regularly, and with the objective of not less frequently than quarterly, without management present. - Establish a minimum attendance expectation for Board members in respect of Board and committee meetings, keeping in mind the principle that the Board believes that all directors should attend and participate in all meetings of the Board and each committee on which he or she sits. 7. CODES OF CONDUCT The Board will: - Adopt a Code of Business Conduct and Ethics and an Employee Code of Conduct (collectively, the "Codes of Conduct") and monitor compliance with those codes. - Approve any waivers and require disclosure of any waivers of the Codes of Conduct in the Corporation's annual report or management information circular. 8. THE CHAIR OF THE BOARD The Chair of the Board reports to the shareholders and provides leadership to the Board in matters relating to the effective execution of all Board responsibilities and works with the CEO and SMT to address the organization's responsibilities to stakeholders including shareholders, employees, customers, governments and the public. The Chair of the Board will be a person other than the CEO. The Chair of the Board will: - Provide effective leadership so that the Board can function independently of management by requiring that the Board meets regularly without management and that the Board and Board members may engage outside advisors subject to the approval of the Chair or the majority of independent Board members. - Establish procedures to govern the Board's work including: - scheduling meetings of the Board and its committees; - chairing all meetings of the Board; - encouraging full participation, stimulating debate and facilitating consensus and clarity regarding decision-making; - developing the agenda for Board meetings with input from other Board members and management; - requiring that proper and timely information is delivered to the Board; - requiring that the Board has appropriate administrative support; and - addressing complaints, questions and concerns regarding Board matters. - Require that the Board fully exercises its responsibilities and duties and complies with applicable governance and other policies. - Meet or communicate regularly with the CEO regarding corporate governance matters, corporate performance and feedback from Board members. - Act as a liaison between the Board and management. - Serve as advisor to the CEO and other officers. - Together with the Nominating and Corporate Governance Committee, establish appropriate committee structures, including the assignment of Board members and the appointment of committee chairs. - Establish, together with the Nominating and Corporate Governance Committee, an adequate orientation and ongoing training programs for Board members. - 4 - - Together with the Board's Nominating and Corporate Governance Committee, establish performance criteria for the Board and for individual Board members and coordinate the evaluation of performance and reporting against these criteria. - Establish performance criteria for the CEO to facilitate the evaluation of the CEO's performance. - Work with the Nominating and Corporate Governance Committee to establish and manage a succession program for the CEO's position. - Oversee matters relating to shareholder relations and chair meetings of the shareholders. - Work with the CEO to represent the Corporation to external stakeholders including shareholders, the investment community, governments and communities. The Chair of the Board's performance will be measured by the Board, with the recommendations of the Nominating and Corporate Governance Committee, against the following key metrics: - The effectiveness with which the Board functions, including satisfaction of Board members regarding the functioning of the Board. - The extent to which the Corporation carries out its responsibilities to shareholders, employees, customers, governments, and the public. - The quality of communications between the Board and management, including satisfaction of members of management and Board members regarding this communication. 9. THE CHIEF EXECUTIVE OFFICER The CEO is accountable to the Board for achieving corporate objectives within specified limitations and in accordance with the CEO's performance objectives determined annually by the Board. The CEO will: - Provide vision and leadership for the Corporation. - Develop and recommend corporate strategies, and business and financial plans for the approval of the Board. - Execute the corporate strategy with a goal of achieving profitable growth and maximizing shareholder value for the Corporation's shareholders. - Manage the business operations in accordance with the strategic direction approved by the Board and within operational policies as determined by the Board. - Challenge management to set and achieve viable annual and long-term strategic and financial goals. - Monitor the performance of management against a set of initially agreed corporate objectives directed at maximizing shareholder value. - Recommend appropriate rewards and incentives for management. - Report information from management to the Board in a manner and time so that the Board may effectively monitor and evaluate corporate (operational and financial) performance against stated objectives and within executive limitations. - Report to the Board on relevant trends, anticipated media and analyst coverage, material external or internal changes, and any changes in the assumptions upon which any Board decision or approval has previously been made. - Advise the Board if, in the CEO's opinion, the Board is not in compliance with its own policies, or legal and/or regulatory requirements. - Provide the Board with all information and access that the Board may require in order to make fully-informed decisions. - Report in a timely manner any actual or anticipated non-compliance with any Board approved policy or decision. - 5 - - Promote compliance with the Employee Code of Conduct, cause an investigation of any reported violations to be undertaken and cause an appropriate response to be taken to any violation of the Employee Code of Conduct. Dated as of May 6, 2005 EX-15.2 12 o17303exv15w2.txt ENVIRONMENTAL, HEALTH AND SAFETY COMMITTEE CHARTER Exhibit 15.2 WESTERN FOREST PRODUCTS INC. ENVIRONMENTAL, HEALTH AND SAFETY COMMITTEE CHARTER 1. GENERAL The Board of Directors (the "Board") of Western Forest Products Inc. (the "Corporation") has established an Environmental, Health and Safety Committee (the "Committee") to assist the Board in respect of health and safety matters and the Corporation's compliance with applicable environmental legislation. 2. MEMBERS The Board will in each year appoint a minimum of two (2) directors as members of the Committee. All members of the Committee will be non-management directors. In addition, the Committee will have an appropriate representation of independent directors as required by law. 3. DUTIES The Committee shall have the following duties: (a) Safe Workplaces: Review the Corporation's health and safety policies and procedures and require that each of the locations at which the Corporation or its subsidiaries has operations has adequate programs in place to provide safe workplaces, including adequate employee safety instruction, safety equipment and reporting on unsafe workplace conditions. (b) Monitor Compliance: To review the policies, programs, and practices of the Corporation and monitor the adequacy of compliance systems in the following areas: - Environmental laws; and - Health and safety laws. (c) Recommendations: To report and make recommendations to the Board on such areas of regulatory compliance as are considered appropriate from time to time (it being understood that the Committee will focus on the adequacy of compliance systems, practices and procedures, while the full Board will continue to receive the management reports on actual compliance results, including quarterly safety statistics, environmental audit results, status of enforcement actions, and notice of other material developments). 4. CHAIR The Board will in each year appoint the Chair of the Committee from among the members of the Committee. In the Chair's absence, or if the position is vacant, the Committee may select another member as Chair. The Chair will have the right to exercise all powers of the Committee between meetings but will attempt to involve all other members as appropriate prior to the exercise of any powers and will, in any event, advise all other members of any decisions made or powers exercised. 5. MEETINGS The Committee will meet at the request of its Chair, but in any event it will meet when required to consider matters referred to it by the Board. Notices calling meetings will be sent to all Committee members. The Chair of the Committee shall develop and set the Committee's agenda, in consultation with the other members of the Committee. Each member of the Committee is free to suggest the inclusion of items on the agenda. The agenda and information concerning the business to be conducted at each Committee meeting shall be distributed to the members of the Committee in advance of each meeting to permit meaningful review. - 2 - 6. QUORUM A majority of members of the Committee, present in person, by teleconferencing, or by videoconferencing will constitute a quorum. 7. REMOVAL AND VACANCY A member may resign from the Committee, and may also be removed and replaced at any time by the Board, and will automatically cease to be a member as soon as the member ceases to be a director. The Board will fill vacancies in the Committee by appointment from among the directors of the Board in accordance with Section 2 of this Charter. Subject to quorum requirements, if a vacancy exists on the Committee, the remaining members will exercise all its powers. 8. EXPERTS AND ADVISORS In order to carry out its duties, the Committee may retain or appoint, at the Corporation's expense, such independent counsel and other experts and advisors as it deems necessary. The Committee shall provide notice to the Nominating and Corporate Governance Committee of its actions in this regard. 9. ACCESS The Committee may have access to and direct contact with any employee, contractor, supplier, customer or other person that is engaged in any business relationship with the Corporation to confirm information or to investigate any matter within the mandate of the Committee. 10. SECRETARY AND MINUTES The Chair of the Committee shall appoint a secretary for each meeting to keep minutes of such meeting. The minutes of the Committee will be in writing and duly entered into the books of the Corporation. The minutes of the Committee will be circulated to all members of the Board, redacted as may be determined necessary by the Chair to remove any sensitive personnel information not otherwise material to the Board. 11. GENERAL The Committee shall review and reassess the adequacy of this Charter annually and recommend any proposed changes to the Board for approval. Dated as of May 6, 2005 EX-15.3 13 o17303exv15w3.txt NOMINATING AND CORPORATE GOVERNANCE COMMITTEE CHARTER Exhibit 15.3 WESTERN FOREST PRODUCTS INC. NOMINATING AND CORPORATE GOVERNANCE COMMITTEE CHARTER 1. PURPOSE The Board of Directors (the "Board") of Western Forest Products Inc. (the "Corporation") has established a Nominating and Corporate Governance Committee (the "Committee") for the following purposes: (a) monitoring significant developments in the law and practice of corporate governance and the duties and responsibilities of directors of public corporations; (b) developing and recommending to the Board the corporate governance principles of the Corporation and any modification or amendments thereto; (c) recommending to the Board appropriate criteria for the selection of new directors and periodically reviewing such criteria and, as necessary, recommending changes thereto; (d) making recommendations to the Board with respect to Board size and composition, and assisting the Board in the identification and selection of individuals qualified to become Board members, based on the criteria for selection of new directors adopted from time to time by the Board; and (e) recommending such procedures as may be necessary to allow the Board to function independently of management. The Committee will also oversee compliance with policies established in respect of corporate governance. 2. MEMBERS Committee members, including the Committee Chair, shall be appointed annually by the Board and shall consist of at least four (4) members of the Board who meet the independence requirements of "National Policy 58-201 - Corporate Governance Guidelines". 3. DUTIES The Committee shall have the following duties: (a) Nomination, Composition and Operation of Board: Review and make recommendations to the Board respecting: (i) The constitution of the Board including: - the size and composition of the Board (including recommendations with reference to applicable rules, regulations or guidelines promulgated by regulatory authorities related to corporate governance); - general responsibilities and functions of the Board and its members, including position descriptions for the CEO and the Chair; - the organization and responsibilities of Board committees and position descriptions for the Chair of the Committee; and - the procedures for effective Board meetings so that the Board can function independently of management and without conflicts of interest; (ii) The long term plan for the composition of the Board of directors that takes into consideration the current strengths, skills and experience on the Board and the strategic direction of the Corporation. This plan will include: - 2 - - a written outline describing the desired qualifications, demographics, skills and experience for potential directors; - the appropriate rotation of directors on Board committees; - an interview process for potential candidates for Board membership; and - a list of future candidates for Board membership; (iii) When required, a candidate for appointment of the office of Chair of the Board; (iv) As required, candidates to fill any Board and Committee vacancies. In making its recommendations for nominees for election as members of the Board, the Committee should consider: - the competencies and skills that the Board considers to be necessary for the Board, as a whole, to possess; - the competencies and skills that the Board considers each existing director to possess; and - the competencies and skills each new nominee will bring to the boardroom and whether the new nominee can devote sufficient time to the Board and the Corporation. (v) At appropriate intervals: - compensation and benefit levels for the directors of the Corporation and its subsidiaries, and - compensation and benefit levels for the Chair of the Board; (vi) Annually, together with the Chairs of other Board Committees, the scope, duties and responsibilities of those Committees and when advisable, any amendments thereto, as well as the establishment or disbanding of Board Committees and changes to their composition, including the Chairs thereof; (vii) Periodically, directors and officers third-party liability insurance coverage; and (viii) The framework for delegating authority from the Board to management. (b) Governance Processes: The Committee will review, approve and report to the Board on: (i) Corporate governance in general and regarding the Board's stewardship role in the management of the Corporation; including the role and responsibilities of directors and appropriate policies and procedures for directors to carry out their duties with due diligence and in compliance with all legal and regulatory requirements; (ii) The orientation process for new directors and plans for the ongoing development of existing Board members; (iii) The establishment of appropriate processes for the regular evaluation of the effectiveness of the Board, its committees and its members; (iv) Annually, in conjunction with the Chair of the Board, the performance of individual directors, the Board as a whole, and Committees of the Board; (v) Annually, the performance evaluation of the Chair of the Board and the Chair of each Board Committee; (vi) Together with the Chair of the Board (where appropriate), address concerns of individual directors about matters that are not readily or easily discussed at full Board meetings; and (vii) The corporate governance disclosure section in the Corporation's annual report, and any other corporate governance matters required by public disclosure requirements. - 3 - (c) Recommend for adoption an Employee Code of Conduct, oversee compliance with the Corporation's Employee Code of Conduct, authorize any waiver granted in connection with this policy, and confirm with management the appropriate disclosure of any such waiver. (d) Oversee compliance with the Corporation's Communications Policy and the Corporation's Insider Trading Policy. Authorize any waiver granted in connection with such policies, and confirm with management the appropriate disclosure of any such waiver. (e) Recommend for adoption a Code of Business Conduct and Ethics (the "Code"), oversee compliance with the Code and monitor compliance. Authorize any waiver granted in connection with this policy, and oversee the appropriate disclosure of any such waiver. Cause an investigation of any reported violations of the Code to be undertaken and oversee an appropriate response being taken to any violation of the Code. 4. CHAIR The Board will in each year appoint the Chair of the Committee from among the members of the Committee. In the Chair's absence, or if the position is vacant, the Committee may select another member as Chair. The Chair will have the right to exercise all powers of the Committee between meetings but will attempt to involve all other members as appropriate prior to the exercise of any powers and will, in any event, advise all other members of any decisions made or powers exercised. 5. MEETINGS The Committee will meet at the request of its Chair, but in any event will meet when required to consider matters referred to it by the Board. Notices calling meetings will be sent to all Committee members. The Chair of the Committee shall develop and set the Committee's agenda, in consultation with the other members of the Committee. Each member of the Committee is free to suggest the inclusion of items on the agenda. The agenda and information concerning the business to be conducted at each Committee meeting shall be distributed to the members of the Committee in advance of each meeting to permit meaningful review. 6. QUORUM A majority of members of the Committee, present in person, by teleconference, or by videoconference will constitute a quorum. 7. REMOVAL AND VACANCY A member may resign from the Committee, and may also be removed and replaced at any time by the Board, and will automatically cease to be a member as soon as the member ceases to be a director. The Board will fill vacancies in the Committee by appointment from among the directors of the Board in accordance with Section 2 of this Charter. Subject to quorum requirements, if a vacancy exists on the Committee, the remaining members will exercise all its powers. 8. EXPERTS AND ADVISORS In order to carry out its duties, the Committee may retain or appoint, at the Corporation's expense, such independent counsel and other experts and advisors as it deems necessary. The Committee shall provide notice to the Chair of the Board of its actions in this regard. 9. ACCESS The Committee may have access to and direct contact with any employee, contractor, supplier, customer or other person that is engaged in any business relationship with the Corporation to confirm information or to investigate any matter within the mandate of the Committee. - 4 - 10. SECRETARY AND MINUTES The Chair of the Committee shall appoint a secretary for each meeting to keep minutes of such meeting. The minutes of the Committee will be in writing and duly entered into the books of the Corporation. The minutes of the Committee will be circulated to all members of the Board, redacted as may be determined necessary by the Chair to remove any sensitive personnel information not otherwise material to the Board. 11. GENERAL The Committee shall review and reassess the adequacy of this Charter annually and recommend any proposed changes to the Board for approval. Dated as of May 6, 2005 EX-15.4 14 o17303exv15w4.txt MANAGEMENT RESOURCES AND COMPENSATION COMMITTEE CHARTER Exhibit 15.4 WESTERN FOREST PRODUCTS INC. MANAGEMENT RESOURCES AND COMPENSATION COMMITTEE CHARTER 1. PURPOSE The Board of Directors (the "Board") of Western Forest Products Inc. (the "Corporation") has established a Management Resources and Compensation Committee (the "Committee") to assist the Board in the following areas: (a) appointing and compensating executive officers and approving succession plans for executive officers; (b) approving and reporting to the Board respecting the Corporation's human resources policies for executive officers; and (c) overseeing the administration of the Corporation's compensation and benefits plans. 2. MEMBERS Committee members, including the Committee Chair, shall be appointed annually by the Board based on recommendations of the Nominating and Corporate Governance Committee and shall consist of at least three (3) members of the Board who meet the independence requirements of "National Policy 58-201 - Corporate Governance Guidelines". 3. DUTIES The Committee shall have the following duties: (a) Recommending to the Board persons to be appointed as the executive officers of the Corporation. (b) Reviewing matters relating to the performance of the executive officers of the Corporation and, where applicable, succession to the executive officers of the Corporation and making recommendations to the Board in respect of such matters as may appear appropriate to the Committee. The Committee shall report to the Board at least annually on succession planning for executive officers of the Corporation. (c) Reviewing and approving corporate goals and objectives relevant to compensation of the Corporation's Chief Executive Officer ("CEO"), evaluating the CEO's performance in light of those corporate goals and objectives, and making recommendations to the Board with respect to the CEO's compensation level based on this evaluation. (d) Reviewing compensation policies applicable to other executive officers and other senior management personnel of the Corporation and reviewing and approving the compensation of the corporation's executive officers (except for the CEO, where the Committee will only make a recommendation to the Board regarding compensation). (e) Overseeing annual preparation and recommendation to the Board of the Report on Executive Compensation set forth in the Management Proxy Circular. (f) Reviewing the terms of all benefit, incentive and other compensation plans for executive officers and other senior management personnel of the Corporation, including, bonus plans, stock option plans and profit sharing plans, and any amendments thereto, and recommending to the Board the establishment, review and approval of amendments from time to time to such plans, as the Committee may deem appropriate. - 2 - (g) Recommending to the Board, or approving of, those officers, employees or classes of employees to be designated as eligible for participation in any benefit, incentive, compensation or other benefit plan, and the terms of such participation. (h) Reviewing the terms and conditions of all retirement pension plans of the Corporation (both pension plans and retirement savings plans), including overseeing the financial performance of the funds under such plans and making appropriate changes to fund management. (i) Pension Plan Responsibilities: - Review and recommend to the Board the establishment of and any material changes to any executive pension plan; - Review and recommend to the Board the establishment of and any material changes to any registered pension plans, including any supplementary pension plan; - Review and approve the appointment of the actuary for the (actuarial) management of the pension and supplementary pension plans; - Meet annually with the Audit Committee to jointly review and assess management's reports on pension plan oversight; and - Review management controls and processes with respect to the administration of all pension and supplementary pension plans and compliance with applicable legislation. Confirm with management that an actuarial valuation of the plans' assets and liabilities is completed no less frequently than as required by law. (j) Reviewing and recommending to the Board for approval the establishment of any employee incentive or share plan, and, where applicable, overseeing the administration of such incentive plan. 4. CHAIR The Board will in each year appoint the Chair of the Committee from among the members of the Committee. In the Chair's absence, or if the position is vacant, the Committee may select another member as Chair. The Chair will have the right to exercise all powers of the Committee between meetings but will attempt to involve all other members as appropriate prior to the exercise of any powers and will, in any event, advise all other members of any decisions made or powers exercised. 5. MEETINGS The Committee will meet at the request of its Chair, but in any event it will meet when required to consider matters referred to it by the Board. Notices calling meetings will be sent to all Committee members, to the CEO of the Corporation, to the Chair of the Board and to all other directors. The Chair of the Committee shall develop and set the Committee's agenda, in consultation with the other members of the Committee. Each member of the Committee is free to suggest the inclusion of items on the agenda. The agenda and information concerning the business to be conducted at each Committee meeting shall be distributed to the members of the Committee in advance of each meeting to permit meaningful review. 6. QUORUM A majority of members of the Committee, present in person, by teleconference, or by videoconference, will constitute a quorum. 7. REMOVAL AND VACANCY A member may resign from the Committee, and may also be removed and replaced at any time by the Board, and will automatically cease to be a member as soon as the member ceases to be a director. The Board will fill vacancies in the Committee by appointment from among the directors of the Board in accordance with Section 2 of this Charter. Subject to quorum requirements, if a vacancy exists on the Committee, the remaining members will exercise all its powers. - 3 - 8. EXPERTS AND ADVISORS In order to carry out its duties, the Committee may retain or appoint, at the Corporation's expense, such independent counsel and other experts and advisors as it deems necessary. The Committee shall provide notice to the Nominating and Corporate Governance Committee of its actions in this regard. 9. ACCESS The Committee may have access to and direct contact with any employee, contractor, supplier, customer or other person that is engaged in any business relationship with the Corporation to confirm information or to investigate any matter within the mandate of the Committee. 10. SECRETARY AND MINUTES The Chair of the Committee shall appoint a secretary for each meeting to keep minutes of such meeting. The minutes of the Committee will be in writing and duly entered into the books of the Corporation. The minutes of the Committee will be circulated to all members of the Board, redacted as may be determined necessary by the Chair to remove any sensitive personnel information not otherwise material to the Board. 11. GENERAL Committee shall review and reassess the adequacy of this Charter annually and recommend any proposed changes to the Board for approval. Dated as of May 6, 2005 EX-15.5 15 o17303exv15w5.txt AUDIT COMMITTEE CHARTER Exhibit 15.5 WESTERN FOREST PRODUCTS INC. AUDIT COMMITTEE CHARTER 1. PURPOSE The Board of Directors (the "Board") of Western Forest Products Inc. (the "Corporation") has established an Audit Committee (the "Committee") to assist the Board in fulfilling its oversight responsibilities regarding: (a) the accuracy and completeness of the Corporation's financial statements; (b) the internal control and financial reporting systems of the Corporation; (c) the selection and activities of the Corporation's external auditor; (d) risk management; (e) the Corporation's compliance with legal and regulatory requirements, and (f) any additional duties set out in this Charter or otherwise delegated to the Committee by the Board. 2. MEMBERS Committee members, including the Committee Chair, shall be appointed annually by the Board based on recommendations of the Nominating and Corporate Governance Committee and shall consist of at least three members of the Board who meet the independence requirements of Multilateral Instrument 52-110 - Audit Committees. All members of the Committee shall be financially literate. While the Board shall determine the definition of and criteria for financial literacy, this shall, at a minimum, include the ability to read and understand a set of financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of the issues that can reasonably be expected to be raised by the Corporation's financial statements. 3. DUTIES The Committee shall have the following duties: (a) Financial Reporting and Disclosure (i) Audited Annual Financial Statements: Review the audited annual financial statements as prepared by management in conjunction with the external auditors, related management discussion and analysis ("MD&A") and earnings press releases for submission to Board for approval. (ii) Quarterly Review: Review the unaudited quarterly financial statements, the related MD&A and earnings press releases for submission to the Board for approval. (iii) Significant Accounting Practices and Disclosure Issues: Review with management and the external auditor, significant accounting practices employed by the Corporation and disclosure issues, including complex or unusual transactions, judgmental areas such reserves or estimates, significant changes to accounting principles, and alternative treatments under Canadian GAAP for material transactions. This review process shall be undertaken in order to have reasonable assurance that the financial statements are - 2 - complete, do not contain any misrepresentations, and present fairly the Corporation's financial position and the results of its operations in accordance with Canadian GAAP. (iv) Compliance: Confirm through discussions with management and auditors whether Canadian GAAP and all applicable laws or regulations related to financial reporting and disclosure have been considered and obtain confirmations from management that Canadian GAAP and all such applicable laws have been complied with. (v) Legal Events: Review any actual or anticipated litigation or other events, including tax assessments, which could have a material current or future affect on the Corporation's financial statements, and the manner in which these have been disclosed in the financial statements. (vi) Off-Balance Sheet Transactions: Discuss with management the effect of any off-balance sheet transactions, arrangements, obligations and other relationships with unconsolidated entities or other persons that may have a material current or future affect on the Corporation's financial condition, changes in financial condition, results of operations, liquidity, capital expenditures, capital resources, or significant components or revenues and expenses. (vii) Disclosure Procedures: Satisfy itself that adequate procedures are in place for the review of the Corporation's public disclosure of financial information extracted from the Corporation's financial statements and periodically assess the adequacy of those procedures. (b) Oversight of Internal Controls (i) Review and Assessment: Review the adequacy and effectiveness of the Corporation's system of internal control and management information systems through discussions with management and the external auditor. (ii) Oversight: Oversee system of internal control, by: - Consulting with the external auditor regarding the adequacy of the Corporation's internal controls; - Monitoring policies and procedures for internal accounting, financial control and management information, electronic data control and computer security; - Obtaining from management adequate assurances that all statutory payments and withholdings have been made; and - Taking other actions as considered necessary. (iii) Fraud: Oversee investigations of alleged fraud and illegality relating to the Corporation's finances and any resulting actions. (iv) Complaint: Establish procedures for the receipt, retention and treatment of complaints received by the Corporation regarding accounting, internal accounting controls or auditing matters, the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters, and for the protection from retaliation of those who report such complaints in good faith. (c) External Audit (i) Appointment or Replacement: Recommend the appointment or replacement of the external auditor to the Board, who will consider the recommendation prior to submitting the nomination to the shareholders for their approval. (ii) Compensation: Review with management, and make recommendations to the Board, regarding the compensation of the external auditor. In making a recommendation with respect to compensation, the Committee shall consider the number and nature of reports - 3 - issued by the external auditor, the quality of internal controls, the size, complexity and financial condition of the Corporation, and the extent of other support provided by the Corporation to the external auditor. (iii) Reporting Relationships: The external auditor will report directly to the Committee. (iv) Performance: Review with management the terms of the external auditor's engagement, accountability, experience, qualifications and performance. Evaluate the performance of the external auditor. (v) Transition: Review management's plans for an orderly transition to a new external auditor, if required. (vi) Audit Plan: Review the audit plan and scope of the external audit with the external auditor and management, and consider the nature and scope of the planned audit procedures. (vii) Audit Plan Changes: Discuss with the external auditor any significant changes required in the approach or scope of their audit plan, management's handling of any proposed adjustments identified by the external auditor, and any actions or inactions by management that limited or restricted the scope of their work. (viii) Review of Results: Review, independently from management and without management present, the results of the annual external audit, the audit report thereon and the auditor's review of the related MD&A, and discuss with the external auditor the quality (not just the acceptability) of accounting principles used, any alternative treatments of financial information that have been discussed with management, the ramifications of their use and the auditor's preferred treatment, and any other material communications with management. (ix) Disagreements with Management: Resolve any disagreements between management and the external auditor regarding financial reporting. (x) Material Written Communications: Review all other material written communications between the external auditor and management, including the post-audit management letter containing the recommendations of the external auditor, management's response and, subsequently, follow up identified weaknesses. (xi) Interim Financial Statements: Engage the external auditor to review all internal financial statements and review the results of the auditor's review of the interim financial statements and the auditor's review of the related MD&A independent of and without management present. (xii) Other Audit Matters: Review any other matters related to the external audit that are to be communicated to the Committee under generally accepted auditing standards or that relate to the external auditor. (xiii) Meeting with External Auditor: Meet with the external auditor independently from management and without management present (1) at least annually to discuss and review specific issues; and (2) as appropriate with respect to any significant matters that the auditor may wish to bring to the Committee for its consideration. (xiv) Correspondence: Review with management and the external auditor any correspondence with regulators or governmental agencies, employee complaints or published reports that raise material issues regarding the Corporation's financial statements or accounting policies. (xv) Independence: At least annually, and before the external auditor issues its report on the annual financial statements, review and confirm the independence of the external auditor - 4 - through discussions with the auditor on their relationship with the Corporation, including details of all non-audit services provided. Consider the safeguards implemented by the external auditor to minimize any threats to their independence, and take action to eliminate all factors that might impair, or be perceived to impair, the independence of the external auditor. Consider the number of years the lead audit partner has been assigned to the Corporation, and consider whether it is appropriate to recommend to the Board a policy of rotating the lead audit partner more frequently than every five years, as is required under the rules of the Canadian Public Accountability Board. (xvi) Non-Audit/Audit Services: Pre-approve, in accordance with applicable law, any non-audit services to be provided to the Corporation by the external auditor, with reference to compatibility of the service with the external auditor's independence. (xvii) Hiring Policies: Review and approve the Corporation's hiring policies regarding partners, employees and former partners and employees of the present and former external auditor. (d) Risk Management Review and assess the adequacy of the Corporation's risk management policies and procedures with respect to the Corporation's principal business risks. Review and assess the adequacy of the implementation of appropriate systems to mitigate and manage the risks, and report regularly to the Board. Review the Corporation's insurance program. (e) Regulatory Compliance Review with management the Corporation's relationship with regulators and the timeliness and accuracy of Corporation filings with regulatory authorities. (f) Related Party Transactions Review with management all related party transactions and the development of policies and procedures related to those transactions. (g) Board Relationship and Reporting (i) Adequacy of Charter: Review and assess the adequacy of the Committee Charter annually and submit such amendments as the Committee proposes to the Board. (ii) Disclosure: Oversee appropriate disclosure of the Committee's Charter, and other information required to be disclosed by applicable legislation, in the Corporation's Annual Information Form and all other applicable disclosure documents, including any management information circular distributed in connection with the solicitation of proxies from the Corporation's securityholders. (iii) Reporting: Report regularly to the Board on Committee activities, issues and related recommendations. 4. CHAIR The Board will in each year appoint the Chair of the Committee. The Chair shall be financially literate. In the Chair's absence, or if the position is vacant, the Committee may select another member as Chair. The Chair will have the right to exercise all powers of the Committee between meetings but will attempt to involve all other members as appropriate prior to the exercise of any powers and will, in any event, advise all other members of any decisions made or powers exercised. 5. MEETINGS The Committee shall meet at the request of its Chair, but in any event it will meet at least four times a year. Notices calling meetings shall be sent to all Committee members. The external auditor or any member of - 5 - the Committee may call a meeting of the Committee. The Chair of the Committee shall develop and set the Committee's agenda, in consultation with the other members of the Committee. Each member of the Committee is free to suggest the inclusion of items on the agenda. The agenda and information concerning the business to be conducted at each Committee meeting shall be distributed to the members of the Committee in advance of each meeting to permit meaningful review. 6. QUORUM A majority of members of the Committee, present in person, by teleconference, or by videoconference will constitute a quorum. 7. REMOVAL AND VACANCY A member may resign from the Committee, and may be removed and replaced at any time by the Board, and will automatically cease to be a member as soon as the member ceases to be a director. The Board will fill vacancies in the Committee by appointment from among the directors of the Board in accordance with Section 2 of this Charter. Subject to quorum requirements, if a vacancy exists on the Committee, the remaining members will exercise all its powers. 8. EXPERTS AND ADVISORS In order to carry out its duties, the Committee may retain or appoint, at the Corporation's expense, such independent counsel and other experts and advisors as it deems necessary. The Committee shall provide notice to the Nominating and Corporate Governance Committee of its actions in this regard. 9. ACCESS The Committee may have access to and direct contact with any employee, contractor, supplier, customer or other person that is engaged in any business relationship with the Corporation to confirm information or to investigate any matter within the mandate of the Committee. 10. SECRETARY AND MINUTES The Chair of the Committee shall appoint a secretary for each meeting to keep minutes of such meeting. The minutes of the Committee will be in writing and duly entered into the books of the Corporation. The minutes of the Committee will be circulated to all members of the Board. Dated as of May 6, 2005 -----END PRIVACY-ENHANCED MESSAGE-----