WESTERN FOREST PRODUCTS INC. - 20-F/A - 20060104 - RESULTS_OF_OPERATIONS
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).
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.
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, effective July 28, 2004, of the accounting policy to expense
rather than capitalize spur roads resulted in EBITDA for 2004 being $6.8 million
lower than it would otherwise have been. In addition, the new accounting
policies implemented on the same date to perform the lower of cost and market
test for logs by sawlog and pulplog instead of in total resulted in EBITDA being
lower for 2004 than it would otherwise have been by $6.8 million.
Cost of goods sold increased to $570.0 million in the 2004 Proforma period
compared to $528.9 million in 2003 due to the higher volumes of lumber, logs and
pulp sold as well as the $13.6 million impact of the adoption of the new
accounting policies described in the preceding paragraph.
Anti-dumping and countervailing duties expense increased to $45.0 million
in the 2004 Proforma period compared to $36.1 million in 2003 due to an increase
in the volume of softwood lumber shipments to the United States in 2004.
Freight expenses increased by 13% to $56.2 million in the 2004 Proforma
period compared to $49.6 million in 2003 primarily as a result of the increase
in lumber sales from 596 million board feet in 2003 to 669 million board feet in
2004.
Selling and administration costs increased to $22.2 million in the 2004
Proforma period compared to $18.1 million in 2003 and is primarily attributable
to reorganization expenses and legal and consulting costs with respect to
evaluating corporate strategies. The general corporate caption included in
Operating EBITDA refers to corporate administration costs only, excluding
selling costs, and increased for the same reasons as noted above for selling and
administration costs.
Amortization of property, plant and equipment increased to $47.3 million
in the 2004 Proforma period compared to $46.0 million in 2003. The periods are
not strictly comparable due to the implementation of "fresh start" accounting by
Western on July 28, 2004 and the change in accounting policy to expense spur
roads that was implemented on the same date. The implementation of "fresh start"
accounting resulted in the amortization of property, plant and equipment expense
being $9.4 million less than it would otherwise have been.
-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.
Other income (expense) was an expense of $6.0 million in the 2004 Proforma
period compared to income of $2.2 million in 2003. The 2004 expense is primarily
attributable to the write-down of non-trade receivables with respect to amounts
paid out under a previous line of credit that the Company is disputing as well
as receivables from the BC government with respect to capital tax that are
deemed to be not collectible. The income in 2003 primarily relates to gains
recorded on the sale of surplus properties.
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:
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.
2. Interest on the Company's US$221 million 15% Secured Bonds is payable on June
30 and December 31 of each year and has been calculated using the exchange
rate in effect on December 31, 2004 of $1.202. The above table assumes that
the Company pays the full amount of interest due on each payment date. The
Company does have the option to defer 50% of the interest due and payable on
each payment date under the terms of the secured bond indenture.
3. Pension and other post retirement benefit obligations are not included in the
table above. The Company expects to incur total cash outlays of approximately
$3.5 million related to these plans in 2005. Contributions beyond this date
are not readily determinable due to the amounts being dependent on future
employment levels, the economic environment and the return on pension assets.
Other post retirement benefits are unfunded arrangements and future cash
requirements will reflect health care cost trends and demographic changes.
Refer to note 11 to our audited consolidated financial statements for
additional information.
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".
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)
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.
(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:
(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 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, 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)
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 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 (note 8(d)) (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:
Loss for the period $ (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 gains (27,436)
Amortization of deferred finance costs and
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. See also note (a)(ii) below.
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 of the assets and
liabilities of Doman not subject to compromise, but excluding
the Port Alice pulp mill assets (previously sold 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 $535 million of the Company using a going
concern valuation approach, less the $279.8 million fair value
of the new Senior Secured Bonds ("Secured Bonds") issued to
retire Doman's Senior Secured Notes ("Old Secured Notes").
Enterprise value determined in accordance with CICA 1625 is
consistent with reorganization value as that term is used in
United States generally Accepted Accounting Principles ("U.S.
GAAP") which was determined in accordance with the American
Institute of Certified Public Accountants Statement of
Position 90-7, "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code". The Company engaged
independent financial advisors to assist in determining the
reorganization value and determined that the value was in a
range of $489 million to $611 million, with approximately $535
million representing the Company's best estimate. The
estimates of value took account of the many factors impacting
the solid wood and pulp industry segments in which the Company
operates including general economic factors such as predicted
housing starts in key markets and the impact of the softwood
lumber dispute between Canada and the United States. In
addition to offers received in conjunction with the
reorganization proceedings, various conventional valuation
techniques were used including discounted cash flow analysis,
comparable transaction analysis and the analysis of comparable
publicly traded company multiples. The valuation methods
utilized a number of estimates and assumptions including
projected future exchange rates and lumber and NBSK pulp
prices which, although considered reasonable by management,
may not be realized, and are subject to significant business,
economic and competitive uncertainties, many of which are
beyond our control. Changes in these estimates and assumptions
in the future may have a significant impact on our
reorganization value.
(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
=========
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.
(d) Diluted loss per share was calculated by reference to the weighted
average number of shares outstanding and did not take into account
299,590 options and 569,373 tranche 1, 854,146 tranche 2 and
1,423,743 tranche 3 warrants as these were anti-dilutive.
9. COMMITMENT AND CONTINGENCIES:
(a) Operating leases:
Future minimum lease payments at December 31, 2004 under operating
leases were as follows:
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 (d) (215)
----------
Comprehensive loss in accordance with U.S. GAAP (e) $ (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 (d) 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 (d) (215) -
------------ ------------
Total shareholders' equity in accordance with U.S. GAAP $ 249,490 $ 255,175
============ ============
Total liabilities and shareholders' equity $ 696,435 $ 717,484
============ ============
(c) Continuity of shareholders' equity (deficit):
January 1 to
July 28 to January 1 to December 31,
December 31, July 27, 2004 2003
2004 (Predecessor) (Predecessor)
------------ ------------- -------------
(Restated)
Shareholders' equity (deficit),
beginning of period $255,175 $(472,193) $(473,187)
Net income (loss), continuing (5,470) 484,619 18,731
Net income (loss), discontinued - (12,426) (19,937)
Other comprehensive gains (losses) (215)(d) - 2,200 (h)
-------- --------- ---------
Shareholders' equity (deficit), end of period $249,490 $ - $(472,193)
======== ========= =========
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):
(d) 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.
(e) 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.
(f) 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.
(g) 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.
(h) Adoption of new accounting standard:
Statement of Financial Accounting Standards No. 143, "Accounting for
Asset Retirement Obligations" was adopted by the Predecessor company
in the year ended December 31, 2003. This standard requires that the
fair value of a liability for an asset retirement obligation be
recognized in the period in which it is incurred. Under Canadian
GAAP, a similar standard to SFAS 143 was effective for periods
beginning January 1, 2004. The GAAP difference for 2003 relates to
adjusting the liability and deficit by $2,200,000 to reflect the
fair value of the liability as a result of discounting future
estimated cash flows as adjusted for inflation using a credit
adjusted discount rate of 12%. The new standard did not have an
impact on earnings.
26
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):
(i) Supplemental guarantor information:
The Company's 15% Secured Bonds due 2009 (see note 6) are guaranteed
by certain of its 100% owned subsidiaries. The guarantees are full
and unconditional and are on a joint and several basis. There are no
significant restrictions on the ability of the Company or its
guarantors to obtain funds from its subsidiaries by dividend or
loan.
The Company has not presented separate financial statements and
other disclosures in respect of the guarantor subsidiaries as
management does not believe that such information will be material
to the holders of the bonds. However, the following consolidating
information is being provided in respect of the guarantor
subsidiaries. Investments in subsidiaries are accounted for using
the equity method. The principal elimination entries eliminate
investments in subsidiaries and intercompany balances.
There are no significant differences between the information
presented below and that prepared under U.S. GAAP. The minimum
pension liability adjustment of $215,000 described in note 13(d) to
record comprehensive income under U.S. GAAP would be recorded by the
parent company, Western Forest Products Inc.
Supplemental consolidated balance sheet at December 31, 2004:
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):
(i) Supplemental guarantor information (continued):
Supplemental consolidated statement of operations and deficit for
the period ended December 31, 2004:
Subsidiary Guarantors Non-guarantors
Western Forest --------------------------- -------------- Consolidating
Products Inc. Lumber Sales WFP Lumber Western Pulp adjustments Consolidated
------------- ------------ ---------- ------------ ------------- ------------
Sales $ 247,380 $ 180,456 $ 1,185 $ 80,365 $(185,280) $ 324,106
Costs and expenses:
Cost of goods sold 231,276 144,790 - 72,588 (185,280) 263,374
Anti-dumping and
countervailing duties - 21,050 - - - 21,050
Freight expenses 2,132 17,753 - 8,018 - 27,903
Selling and administration 7,451 1,249 - 1,021 - 9,721
Amortization of property,
plant and equipment 11,952 - 1,185 1,112 - 14,249
--------- --------- -------- --------- --------- ---------
252,811 184,842 1,185 82,739 (185,280) 336,297
--------- --------- -------- --------- --------- ---------
Operating loss (5,431) (4,386) - (2,374) - (12,191)
Interest income (expense):
Bank indebtedness (1,468) - - (192) - (1,660)
Long-term debt (17,045) - - - - (17,045)
Foreign exchange gains
on translation
of long-term debt 27,436 - - - - 27,436
Amortization of deferred
finance costs and debt
discount (1,133) - - - - (1,133)
--------- --------- -------- --------- --------- ---------
7,790 - - (192) - 7,598
Equity loss of subsidiary
companies (7,180) - - - 7,180 -
Other expense (96) - - - - (96)
--------- --------- -------- --------- --------- ---------
Loss before income taxes (4,917) (4,386) - (2,566) 7,180 (4,689)
Income taxes (553) (71) - (157) - (781)
--------- --------- -------- --------- --------- ---------
Net loss, being deficit,
end of period $ (5,470) $ (4,457) $ - $ (2,723) $ 7,180 $ (5,470)
========= ========= =====+== ========= ========= =========
28
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):
(i) Supplemental guarantor information (continued):
Supplemental consolidated statement of cash flows for the period
ended December 31, 2004:
Subsidiary Guarantors Non-guarantors
Western Forest -------------------------- -------------- Consolidating
Products Inc. Lumber Sales WFP Lumber Western Pulp adjustments Consolidated
-------------- ------------ ---------- ------------ ------------- ------------
Cash provided by (used in):
Operations:
Loss for the period $ (5,470) $ (4,457) $ - $(2,723) $ 7,180 $ (5,470)
Items not involving cash:
Equity loss of subsidiary
companies 7,180 - - - (7,180) -
Amortization of property,
plant and equipment 11,948 1,185 1,116 - 14,249
Amortization and write-
down of deferred charges 161 - - - - 161
Foreign currency
translation gains (27,436) - - - - (27,436)
Amortization of deferred
finance costs and debt discount 1,133 - - - - 1,133
Other (2,086) - - 242 - (1,844)
-------- -------- -------- ------- -------- --------
(14,570) (4,457) 1,185 (1,365) - (19,207)
Changes in non-cash working capital items:
Accounts receivable 446 (3,096) - 1,790 - (860)
Inventory 14,333 (11,014) - 5,541 - 8,860
Prepaid expenses 2,774 4 - 439 - 3,217
Intercompany payables
(receivables) (12,075) 13,638 (4,706) 3,143 - -
Accounts payable and
accrued liabilities (12,626) 4,925 11 (9,371) - (17,061)
-------- -------- -------- ------- -------- --------
(21,718) - (3,510) 177 - (25,051)
Investments:
Additions to property, plant
and equipment (5,340) - - 11 - (5,329)
Additions to capitalized roads (6,307) - - - (6,307)
Disposals of property, plant
and equipment - - 2,949 - - 2,949
Restricted assets (2,883) - - - - (2,883)
Other (948) - 561 - - (387)
-------- -------- -------- ------- -------- --------
(15,478) - 3,510 11 - (11,957)
Financing:
Bank indebtedness 28,375 - - - - 28,375
-------- -------- -------- ------- -------- --------
Decrease in cash (8,821) - - 188 - (8,633)
Cash, beginning of period 16,084 - - 556 - 16,640
-------- -------- -------- ------- -------- --------
Cash, end of period $ 7,263 $ - $ - $ 744 $ - $ 8,007
======== ======== ======== ======= ======== =========
29
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/ Reynold Hert
----------------------------
Reynold Hert
President and Chief
Executive Officer
Date: as of January 3, 2006.
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
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.
(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: 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)
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.
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 -
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 -
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
EXHIBIT 12.1
CERTIFICATIONS
I, Paul Ireland, certify that:
1. I have reviewed this Amendment No. 2 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 January 3, 2006.
/s/ Paul Ireland
----------------------------------
Paul Ireland
Chief Financial Officer
Western Forest Products Inc.
EXHIBIT 12.2
CERTIFICATIONS
I, Reynold Hert, certify that:
1. I have reviewed this Amendment No. 2 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 January 3, 2006.
/s/ Reynold Hert
---------------------------------------
Reynold Hert
President and Chief Executive Officer
Western Forest Products Inc.
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. 2 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 January 3, 2006.
/s/ Reynold Hert
--------------------------------------
Reynold Hert
President and Chief Executive Officer
Western Forest Products Inc.
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. 2 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 January 3, 2006.
/s/ Paul Ireland
---------------------------------
Paul Ireland
Chief Financial Officer
Western Forest Products Inc.
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
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
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
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
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.
Next Section
Previous Section