Difficult Business Conditions Impact Interfor's 4th Quarter Results

VANCOUVER, BRITISH COLUMBIA, Feb 12, 2009 (Marketwire via COMTEX) -- IFSPA | Quote | Chart | News | PowerRating -- INTERNATIONAL FOREST PRODUCTS LIMITED ("Interfor" or the "Company") (TSX:IFP.A) reported a net loss of $3.4 million ($0.07 per share) for the fourth quarter of 2008, before a non-cash valuation allowance of $15.1 million ($0.32 per share) relating to future income tax assets. This compares to a net loss of $8.9 million ($0.19 per share) in the fourth quarter of 2007. Including the valuation allowance, Interfor's net loss in the fourth quarter of 2008 was $18.5 million ($0.39 per share).

The loss for the quarter includes a one-time recovery of export taxes pursuant to the Softwood Lumber Agreement ($0.4 million after-tax, or $0.01 per share) and a recovery of previously expensed costs associated with a timber takeback by the Province of British Columbia ($1.6 million after-tax, or $0.03 per share).

Interfor's results for the fourth quarter reflect the sharp decline in business conditions and product prices which began in mid-September.

In the face of reduced demand, operations were actively curtailed in the quarter to limit inventory exposure. Lumber production totalled 118 million board feet compared to 150 million board feet in the fourth quarter of 2007 and 148 million board feet in the immediately preceding quarter. At the indicated rate, the Company's mills operated at less than 40% of available capacity in the fourth quarter.

Lumber sales totalled 133 million board feet compared to 161 million board feet in the fourth quarter of 2007 and 132 million board feet in the third quarter of 2008.

In spite of the difficult business environment and lower production level, EBITDA was positive in the fourth quarter at $2.0 million, compared to negative $4.6 million in the same quarter last year.

Cash generated from operations in the fourth quarter was $5.8 million before changes in working capital and negative $2.6 million after changes in working capital were taken into account.

Capital spending amounted to $31.0 million including $25.7 million on the new Adams Lake sawmill.

After taking account of capital spending, the Company ended the quarter with net debt of $167.8 million, or 29.2%, of invested capital.

Subsequent to the end of the quarter, the Company obtained a commitment from its lending syndicate to modify its credit facilities, effective April 24, 2009. Under the terms of the commitment, $35 million will be added to the Company's Revolving Term Line, bringing the amount available under that facility to $150 million. The maturity date of the line remains unchanged at April 24, 2011. In addition, the maturity date of the Company's Operating Line of Credit will be extended from April 24, 2009 to April 23, 2010. The amounts available under the Operating Line will be reduced from a maximum of $100 million to $65 million. The Company's Non-Revolving Term Line of US$35 million remains unchanged, maturing September 1, 2010. The modifications will enable the Company to fully utilize its credit lines during periods of reduced operating activity and is expected to be sufficient to meet the Company's foreseeable requirements.

The financial crisis impacting the global economy has had a material effect on lumber consumption worldwide, particularly in the United States. Product prices fell sharply in January, but have recovered somewhat in recent weeks as curtailments throughout the industry reduce available supply. In light of the uncertain economic environment, Interfor will maintain its disciplined approach to production and strict controls on capital spending.

Construction at Adams Lake, is on-time and on-budget, with approximately $16 million left to spend on the project as at year-end. The first line of the new mill was commissioned in 2008 with very encouraging results; a full start-up of the mill is scheduled for the second quarter of 2009.

Forward-Looking Statements

This release contains information and statements that are forward-looking in nature, including, but not limited to, statements containing the words "will" and "is expected" and similar expressions. Such statements involve known and unknown risks and uncertainties that may cause Interfor's actual results to be materially different from those expressed or implied by those forward-looking statements. Such risks and uncertainties include, among others: general economic and business conditions, product selling prices, raw material and operating costs, changes in foreign-currency exchange rates and other factors referenced herein and in Interfor's current annual report and management information circular available on www.sedar.com. The forward-looking information and statements contained in this report are based on Interfor's current expectations and beliefs. Readers are cautioned not to place undue reliance on forward-looking information or statements. Interfor undertakes no obligation to update such forward-looking information or statements, except where required by law.

ABOUT INTERFOR

Interfor is one of the Pacific Northwest's largest producers of quality wood products. The Company has operations in British Columbia, Washington and Oregon, including two sawmills in the Coastal region of British Columbia, three in the B.C. Interior, two in Washington and two in Oregon. For more information about Interfor, visit our website at www.interfor.com.

There will be a conference call on Friday, February 13, 2009 at 8:00 AM (Pacific Time) hosted by INTERNATIONAL FOREST PRODUCTS LIMITED for the purpose of reviewing the Company's release of its Fourth Quarter, 2008 Financial Results.

The dial-in number is 1-866-400-3310. The conference call will also be recorded for those unable to join in for the live discussion, and will be available until February 27, 2009. The number to call is 1-866-245-6755 Passcode 191906.

CONSOLIDATED STATEMENTS OF OPERATIONS For the three months and years ended December 31, 2008 and 2007 (unaudited) -------------------------------------------------------------------------- (thousands of Canadian 3 Months 3 Months Year Year dollars except Dec. 31, Dec. 31, Dec. 31, Dec. 31, earnings per share) 2008 2007 2008 2007, -------------------------------------------------------------------------- Sales $ 93,490 $ 115,390 $ 437,221 $ 611,008 Costs and expenses: Production 90,746 116,528 411,479 560,348 Selling and administration 3,554 3,637 16,867 16,776 Long term incentive compensation expense (recovery) (909) (998) (1,990) (476) Export taxes 319 808 3,433 8,755 Amortization of plant and equipment 4,484 6,774 21,846 30,129 Depletion and amortization of timber, roads and other 3,412 3,969 19,619 20,726 ------------------------------------------------------------------------- 101,606 130,718 471,254 636,258 -------------------------------------------------------------------------- Operating loss before restructuring costs (8,116) (15,328) (34,033) (25,250) Restructuring costs (note 12) (787) (335) (37,305) (1,975) -------------------------------------------------------------------------- Operating loss (8,903) (15,663) (71,338) (27,225) Interest expense on long-term debt (2,001) (617) (4,543) (2,835) Other interest income (expense) (463) 400 (588) 4,163 Other foreign exchange gain (loss) 884 (193) 912 (7,308) Other income (note 11) 255 172 1,418 5,983 Equity in earnings of investee companies 1,925 (159) 4,825 218 -------------------------------------------------------------------------- 600 (397) 2,024 221 -------------------------------------------------------------------------- Loss before income taxes (8,303) (16,060) (69,314) (27,004) Income taxes (recovery): Current (5,677) (5,965) (18,533) (9,570) Future 15,904 (1,158) 6,410 (4,113) -------------------------------------------------------------------------- 10,227 (7,123) (12,123) (13,683) -------------------------------------------------------------------------- Net loss $ (18,530) $ (8,937) $ (57,191) $ (13,321) -------------------------------------------------------------------------- -------------------------------------------------------------------------- Net loss per share, basic and diluted (note 13) $ (0.39) $ (0.19) $ (1.21) $ (0.28) -------------------------------------------------------------------------- -------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF RETAINED EARNINGS For the years ended December 31, 2008 and 2007 (unaudited) -------------------------------------------------------------------------- (thousands of Canadian dollars) Year Year Dec. 31, Dec. 31, 2008 2007 -------------------------------------------------------------------------- Retained earnings, beginning of year, as restated (note 2(d)) $ 170,584 $ 183,905 Net loss (57,191) (13,321) -------------------------------------------------------------------------- Retained earnings, end of period $ 113,393 $ 170,584 -------------------------------------------------------------------------- -------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF CASH FLOWS For the three months and years ended December 31, 2008 and 2007 (unaudited) -------------------------------------------------------------------------- (thousands of 3 Months 3 Months Year Year Canadian dollars) Dec. 31, Dec. 31, Dec. 31, Dec. 31, 2008 2007 2008 2007 -------------------------------------------------------------------------- Cash provided by (used in): Operating activities: Net loss $ (18,530) $ (8,937) $ (57,191) $ (13,321) Items not involving cash: Amortization of plant and equipment 4,484 6,774 21,846 30,129 Depletion and amortization of timber, roads and other 3,412 3,969 19,619 20,726 Future income taxes (recovery) 15,904 (1,158) 6,410 (4,113) Other assets (586) (300) (544) 1,030 Reforestation liability (669) (2,256) (4,421) (1,336) Other long-term liabilities (986) (570) (1,678) 257 Share of earnings net (in excess) of cash distributions of investee company (1,925) 159 (4,825) 4,151 Write-down of plant, equipment and timber (note 12) 434 - 31,427 - Unrealized foreign exchange losses (gains) 4,556 (123) 3,941 (6,094) Other (292) (108) (1,541) (6,117) ------------------------------------------------------------------------- 5,802 (2,550) 13,043 25,312 Cash generated from (used in) operating working capital: Accounts receivable 7,752 (2,504) 13,335 12,438 Inventories 12,306 12,447 12,025 2,791 Prepaid expenses 1,191 961 (117) (2,289) Accounts payable and accrued liabilities (22,312) (14,411) (16,358) (46,839) Income taxes (7,333) (3,700) (8,187) (36,399) ------------------------------------------------------------------------- (2,594) (9,757) 13,741 (44,986) Investing activities: Additions to property, plant and equipment (27,554) (11,433) (73,364) (44,726) Additions to deferred start-up costs - - - (959) Additions to logging roads and timber (3,448) (4,200) (17,512) (28,340) Proceeds on disposal of property, plant, equipment, timber and roads 3,121 272 5,096 8,256 Acquisitions (note 5) 7,010 - (76,919) - Deposit held in escrow for acquisition (note 5) - (8,761) 8,943 (8,761) Investments and other assets (384) (1,135) (2,116) (2,010) ------------------------------------------------------------------------- (21,255) (25,257) (155,872) (76,540) Financing activities: Repurchase of share capital (note 10) - - - (9,846) Issuance of share capital (note 10) - - 56 892 Increase (decrease) in bank indebtedness 25,191 - 30,589 (582) Proceeds from loan from Seaboard (note 9) 3,651 - 3,651 - Additions to long-term debt (note 8(b)) 5,000 - 139,064 - Repayments of long-term debt (note 8(b)) (10,000) - (48,925) - ------------------------------------------------------------------------- 23,842 - 124,435 (9,536) Foreign exchange gain (loss) on cash and cash equivalents held in a foreign currency 191 (697) 85 (314) -------------------------------------------------------------------------- Decrease in cash and cash equivalents 184 (35,711) (17,611) (131,376) Cash and cash equivalents, beginning of period - 53,506 17,795 149,171 -------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 184 $ 17,795 $ 184 $ 17,795 -------------------------------------------------------------------------- -------------------------------------------------------------------------- Supplementary disclosures Cash interest paid (received) $ 2,464 $ 217 $ 5,131 $ (1,328) Cash income taxes paid (received) (123) (1,757) (12,330) 26,977 -------------------------------------------------------------------------- -------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. CONSOLIDATED BALANCE SHEETS December 31, 2008 and December 31, 2007 (unaudited) -------------------------------------------------------------------------- (thousands of Canadian dollars) Dec. 31, Dec. 31, 2008 2007 -------------------------------------------------------------------------- restated- restated- Assets note 2(d) note 2(d) Current assets: Cash and cash equivalents $ 184 $ 17,795 Deposit (note 5) - 8,761 Accounts receivable 25,441 37,172 Income taxes recoverable 16,225 8,838 Inventories (note 7) 78,991 76,429 Prepaid expenses 7,779 6,267 Future income taxes 2,890 3,083 ------------------------------------------------------------------------- 131,510 158,345 Investments and other assets (note 2(d)) 19,372 12,270 Property, plant and equipment, net of accumulated amortization 396,387 300,150 Timber and logging roads, net of accumulated depletion and amortization 90,425 55,050 Goodwill and other intangible assets 13,078 13,078 Future income taxes - 7,000 Long-lived assets held for sale (note 6) 15,138 3,239 -------------------------------------------------------------------------- $ 665,910 $ 549,132 -------------------------------------------------------------------------- -------------------------------------------------------------------------- Liabilities and Shareholders' Equity Current liabilities: Bank indebtedness (note 8(a)) $ 30,589 $ - Accounts payable and accrued liabilities 45,163 49,999 Payable to investee company (notes 9 and 19(a)) 3,651 - ------------------------------------------------------------------------- 79,403 49,999 Reforestation liability, net of current portion 15,685 11,874 Long-term debt (note 8(b)) 137,414 34,696 Other long-term liabilities 12,407 8,859 Future income taxes 14,159 13,080 Shareholders' equity: Share capital (note 10) Class A subordinate voting shares 284,500 284,444 Class B common shares 4,080 4,080 Contributed surplus 5,408 5,408 Accumulated other comprehensive income (loss) (539) (33,892) Retained earnings (note 2(d)) 113,393 170,584 ------------------------------------------------------------------------- 406,842 430,624 -------------------------------------------------------------------------- $ 665,910 $ 549,132 -------------------------------------------------------------------------- -------------------------------------------------------------------------- Commitment and Contingencies (note 18) Subsequent events (note 19) See accompanying notes to consolidated financial statements. On behalf of the Board: E.L. Sauder H.C. Kalke Chairman Director CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) For the three months and years ended December 31, 2008 and 2007 (unaudited) ----------------------------------------------------------------------- (thousands of Canadian 3 Months 3 Months Year Year dollars) Dec. 31, Dec. 31, Dec. 31, Dec. 31, 2008 2007 2008 2007 ----------------------------------------------------------------------- Net loss $ (18,530) $ (8,937) $ (57,191) $ (13,321) Other comprehensive income (loss), net of income taxes (recovery): Net change in unrealized foreign currency translation gains (losses) 20,845 (1,172) 33,353 (27,531) ----------------------------------------------------------------------- Other comprehensive income (loss) 20,845 (1,172) 33,353 (27,531) ----------------------------------------------------------------------- Comprehensive income (loss) $ 2,315 $ (10,109) $ (23,838) $ (40,852) ----------------------------------------------------------------------- ----------------------------------------------------------------------- See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) For the years ended December 31, 2008 and December 31, 2007 (unaudited) ----------------------------------------------------------------------- (thousands of Canadian dollars) Year Year Ended Ended Dec. 31, Dec. 31, 2008 2007 ----------------------------------------------------------------------- Accumulated other comprehensive loss, beginning of year $ (33,892) $ (6,361) Other comprehensive income (loss) 33,353 (27,531) ----------------------------------------------------------------------- Accumulated other comprehensive loss, end of period $ (539) $ (33,892) ----------------------------------------------------------------------- ----------------------------------------------------------------------- See accompanying notes to consolidated financial statements.

INTERNATIONAL FOREST PRODUCTS LIMITED

Notes to Unaudited Interim Consolidated Financial Statements

(Tabular amounts expressed in thousands except per share amounts)

Three months and years ended December 31, 2008 and 2007 (unaudited)

1. Significant accounting policies:

These unaudited interim consolidated financial statements include the accounts of International Forest Products Limited and its subsidiaries (collectively referred to as "Interfor" or the "Company"). These interim consolidated financial statements do not include all disclosures required by Canadian generally accepted accounting principles for annual financial statements, and accordingly, these interim consolidated financial statements should be read in conjunction with Interfor's most recent audited annual consolidated financial statements. These interim consolidated financial statements follow the same accounting policies and methods of application used in the Company's audited annual consolidated financial statements as at and for the year ended December 31, 2008.

2. Adoption of changes in accounting policies:

Commencing January 1, 2008, the Company adopted five new Canadian Institute of Chartered Accountants ("CICA") accounting standards, together with a change in accounting policy of an investee company. The main requirements of these new standards and the change in accounting policy and the resulting financial statement impact are described below.

(a) Capital disclosures:

CICA Handbook Section 1535, Capital Disclosures, specifies the disclosure of the Company's objectives, policies and processes for managing capital, including: a description of what components of liabilities and shareholders' equity the Company defines as capital, and their balances; and the nature of any externally imposed capital restrictions, how those are managed, and the consequence of any non-compliance, if any. Refer to Note 16 for additional disclosures.

(b) Inventories:

CICA Handbook Section 3031, Inventories, provides significantly more guidance on the measurement of inventories, with an expanded definition of cost, and the requirement that inventory must be measured at the lower of cost and net realizable value. In addition, the section has additional disclosure requirements for accounting policies, carrying values, and the amount of any inventory write downs.

Lumber inventories are valued at the lower of cost and net realizable value on a specific product basis. Cost is determined as the weighted average of cost of production on a three month rolling average, lagged by one month and adjusted for exceptional costs, as in the case of a curtailment.

Log inventories are valued at the lower of cost and net realizable value on a specific boom basis where logs are in boom form, or in aggregate on a species and sort basis where the logs do not exist in boom form. Cost for internally produced log inventories is determined as the weighted average of cost of logging on a twelve month rolling average, lagged by one month and adjusted for exceptional costs, as in the case of a curtailment. Log inventories purchased from external sources are costed at acquisition cost. Net realizable value of logs is based on either replacement cost or, for logs for which have been committed to processing into lumber, on estimated net realizable value after taking into consideration costs of completion and sale.

The adoption of this new standard had no financial effect on the comparative consolidated financial statements of the Company. Refer to Note 7 for additional disclosures.

(c) Financial instruments - Disclosure and Presentation:

CICA Handbook Section 3862, Financial Instruments - Disclosures, and Section 3863, Financial Instruments - Presentation, replace Handbook Section 3861, Financial Instruments - Disclosure and Presentation, revising and enhancing disclosure requirements to provide additional information on the nature and extent of risks arising from financial instruments to which the Company is exposed and how it manages those risks. Refer to note 17 for additional disclosures.

(d) Equity investment:

Seaboard Shipping Company Limited ("Seaboard"), an equity investment of the Company, recently adopted the deferral method of accounting for dry-dock activities whereby actual costs incurred are deferred and amortized on a straight-line basis over the period until the next scheduled dry-dock activity. Previously, dry-dock activities were accounted for using the accrue-in-advance method. In accordance with CICA Handbook Section 1506, Accounting Changes, Seaboard adopted this policy retrospectively, resulting in the restatement of prior years' results. As the investment in Seaboard is accounted for using the equity method, the Company has recorded its share of the impact of the restatement as follows:

-------------------------------------------------------------------------- As previously As reported Adjustment adjusted -------------------------------------------------------------------------- Consolidated Statement of Retained Earnings for the year ended December 31, 2007: Retained earnings, beginning $ 181,477 $ 2,428 $ 183,905 Consolidated Balance Sheet as at December 31, 2007: Investments and other assets 9,842 2,428 12,270 Retained earnings, ending 168,156 2,428 170,584 -------------------------------------------------------------------------- --------------------------------------------------------------------------

The restatement has not affected net earnings (loss) previously reported for any of the periods presented in the Statement of Operations.

3. Comparative figures:

Certain of the prior period's figures have been reclassified to conform to the presentation adopted in the current year.

4. Seasonality of operating results:

The Company operates in the solid wood business which includes logging and manufacturing operations. Logging activities vary throughout the year due to a number of factors including weather, ground and fire season conditions. Generally, the Company operates the bulk of its logging divisions in the latter half of the first quarter, throughout the second and third quarters and in the first half of the fourth quarter. Manufacturing operations are less seasonal than logging operations but do depend on the availability of logs from the logging operations and from third party suppliers. In addition, the market demand for lumber and related products is generally lower in the first quarter due to reduced construction activity which increases during the spring, summer and fall.

5. Acquisitions:

During 2008, the Company completed two acquisitions, the details of which are more fully described below.

The purchase price of each of these acquisitions has been allocated to the fair value of assets acquired and related liabilities arising from the transactions, based on management's best estimates.

These acquisitions have been accounted for using the purchase method and the purchase price is allocated as follows:

-------------------------------------------------------------------------- Beaver Kootenay and Forks acquisition acquisition Total -------------------------------------------------------------------------- (note 5(a)) (note 5(b)) Net assets acquired: Current assets $ 9,245 $ 3,560 $ 12,805 Property, plant and equipment 22,226 30,659 52,885 Timber and logging roads 40,092 56 40,148 -------------------------------------------------------------------------- 71,563 34,275 105,838 Liabilities assumed: Current liabilities 13,711 19 13,730 Reforestation, post-retirement benefits and other long-term obligations 13,458 - 13,458 Future income taxes 1,731 - 1,731 -------------------------------------------------------------------------- $ 42,663 $ 34,256 $ 76,919 -------------------------------------------------------------------------- -------------------------------------------------------------------------- Cash consideration funded by: Cash on hand $ 15,947 $ 2,117 $ 18,064 Deposit held in escrow 9,007 - 9,007 Revolving Term Line 17,709 32,139 49,848 -------------------------------------------------------------------------- $ 42,663 $ 34,256 $ 76,919 -------------------------------------------------------------------------- --------------------------------------------------------------------------

(a) Kootenay operations acquisition from Pope and Talbot, Inc.:

On November 19, 2007, the Company and Pope and Talbot, Inc. ("P&T") entered into an Asset Purchase Agreement ("P&T APA"), as subsequently amended, for the acquisition of two southern B.C. interior sawmills and their related timber tenures and one sawmill in Spearfish, South Dakota. Subsequently, the Company assigned the right to purchase the Spearfish, South Dakota sawmill to Neiman Enterprises, Inc. ("Neiman"), a company based in Wyoming. The Company paid a US$8,800,000 interest-bearing deposit held in escrow in respect of the transaction.

On April 30, 2008, the Company concluded the acquisition of the Castlegar, B.C. and Grand Forks, B.C. ("Kootenay operations") sawmills, related timber harvesting rights and other related assets and assumption of liabilities and Neiman concluded its acquisition of the Spearfish sawmill and related assets.

To acquire these assets, the Company paid $49,689,000, of which $9,007,000 was funded through the deposit held in escrow, $17,709,000 was financed through its Canadian revolving term line of credit ("Revolving Term Line"), and the balance of $22,973,000 through cash on hand. Amounts paid in US$ were translated to CAD$ at the April 29, 2008 rate of CAD$1.0119: US$1.00.

At completion, a portion of the consideration paid was placed in escrow, pending final determination of the purchase price adjustments and obtaining of certain authorizations in accordance with the P&T APA. Because the amount to be released to the Company from escrow funds could not be determined until the Company had reached an agreement with P&T, no amounts were recorded as recoverable at acquisition.

On October 20, 2008, the Company reached an agreement with PricewaterhouseCoopers Inc., in its capacity as the Receiver of P&T, to settle all outstanding claims. Upon receipt of Court approval on December 1, 2008, the Company received US$7,675,000 ($9,494,000) from escrowed funds and after settlement with Neiman for its portion and finalization of transaction costs, the purchase price was reduced to $42,663,000.

The assets acquired include manufacturing facilities, timber harvesting rights and working capital. The Company assumed certain liabilities of P&T including pension and other employee related obligations. P&T compensated the Company for the future management of certain of these liabilities, including forestry related obligations, resulting in the transfer of portions of these liabilities to the Company at closing. Results of the operations of the acquired assets have been included in the Statement of Operations of the Company commencing May 1, 2008.

(b) Beaver and Forks operations acquisition from Portac, Inc.:

On September 30, 2008, the Company completed the acquisition of a sawmill, planer mill and inventories from Portac, Inc. ("Portac"), a subsidiary of Mitsui U.S., Inc. To acquire these assets, the Company paid US$32,181,000 ($34,256,000), of which US$30,200,000 ($32,139,000) was financed through its Revolving Term Line and the balance of US$1,981,000 ($2,117,000) through cash on hand.

Amounts paid in US$ were translated to CAD$ at the September 30, 2008 rate of CAD$1.0642: US$1.00.

The assets, which are located on the Olympic Peninsula in Washington State, have been renamed "Beaver Division". Results of the operations of the acquired facilities have been included in the Statement of Operations of the Company commencing October 1, 2008.

6. Long-lived assets held for sale:

The Company has developed formal plans to dispose of certain surplus properties and has classified these assets as assets held for sale (see also Subsequent events, note 19(b)). These assets include the properties and improvements of the former Queensboro sawmill site located in New Westminster, B.C. and the former Field sawmill site located in Courtenay, B.C. as well as surplus property and buildings located in Maple Ridge, B.C.

7. Inventories:

-------------------------------------------------------------------------- Dec. 31, 2008 Dec. 31, 2007 -------------------------------------------------------------------------- Logs $ 49,941 $ 53,631 Lumber 22,484 18,588 Other 6,566 4,210 -------------------------------------------------------------------------- $ 78,991 $ 76,429 -------------------------------------------------------------------------- --------------------------------------------------------------------------

Inventory expensed in the period includes production costs, amortization of plant and equipment, and depletion and amortization of timber, roads and other. The inventory writedown in order to record inventory at the lower of cost and net realizable value at December 31, 2008 was $20,270,000 (December 31, 2007 - $16,019,000).

8. Cash, bank indebtedness and long-term debt:

(a) Bank indebtedness:

-------------------------------------------------------------------------- Canadian U.S. Operating Operating 2008 Facility Facility Total -------------------------------------------------------------------------- Available line of credit $ 100,000 $ 12,180 $ 112,180 Maximum borrowing available 54,234 7,836 62,070 Operating Line borrowings 25,747 6,090 31,837 Outstanding letters of credit included in line utilization 5,105 146 5,251 Unused portion of line 23,382 1,600 24,982 -------------------------------------------------------------------------- -------------------------------------------------------------------------- 2007 -------------------------------------------------------------------------- Available line of credit $ 40,000 $ 9,913 $ 49,913 Maximum borrowing available 40,000 9,913 49,913 Operating Line borrowings - - - Outstanding letters of credit included in line utilization 4,818 119 4,937 Unused portion of line 35,182 9,794 44,976 -------------------------------------------------------------------------- --------------------------------------------------------------------------

In the second quarter of 2008, the Company renewed its existing Canadian operating line of credit ("Operating Line"), increasing the maximum available operating credit to $100,000,000 (2007 - $40,000,000). The Operating Line may be drawn in either CAD$ or US$ advances, and bears interest at bank prime plus a margin or, at the Company's option, at rates for Bankers' Acceptances or LIBOR based loans plus a margin, and in all cases dependent upon a financial ratio. Borrowings levels under the line are subject to a borrowing base calculation dependent on certain accounts receivable and inventories. The Operating Line is secured by a general security agreement which includes a security interest in all accounts receivable and inventories, charges against timber tenures, and mortgage security on sawmills. The Operating Line is subject to certain financial covenants including a minimum working capital requirement and a maximum ratio of total debt to total capitalization and a minimum net worth calculation. The line matures on April 24, 2009. As at December 31, 2008, the Operating Line was drawn by $25,747,000 (2007 - $nil).

On February 5, 2009, the Company received a financing commitment with respect to its Operating Line from its lenders, details of which are described in note 19(c).

In the second quarter of 2008, there was an increase to the interest rate margins in the U.S. operating line of credit ("U.S. Line") and in the third quarter, 2008, the maturity date was extended to April 24, 2009 and the Company provided a parent guarantee on the line. The U.S. Line is subject to a borrowing base calculation dependent upon certain accounts receivable and inventories of the Company's subsidiary, Interfor Pacific, Inc. ("IPI") and is secured by a security interest in the accounts receivable and inventories of the U.S. operating subsidiary.

Offsetting drawings under the operating lines at December 31, 2008 are cash balances less outstanding cheques of $1,249,000 (2007 - $nil).

(b) Long-term debt:

On April 25, 2008, the Company renewed its existing Revolving Term Line in 2008 increasing it from $10,000,000 to $115,000,000. The terms and conditions of the line remained unchanged, except for an increase to the interest rate margins and an extension of the maturity date to April 24, 2011. The Revolving Term Line may be drawn in either CAD$ or US$ advances, and bears interest at bank prime plus a margin or, at the Company's option, at rates for Bankers' Acceptances or LIBOR based loans plus a margin, and in all cases dependent upon a financial ratio.

To fund the Kootenay and Beaver acquisitions and the Adams Lake sawmill capital project, the Company utilized the Revolving Term Line and as at December 31, 2008, the Line was drawn by US$30,200,000 revalued at the December 31, 2008 exchange rate to $36,784,000, and $58,000,000 for total drawings of $94,784,000 (December 31, 2007 - $nil) leaving an unused available line of $20,216,000.

On February 5, 2009, the Company received a financing commitment with respect to its Non-Revolving Term Line from its lenders, details of which are described in note 19(c).

The U.S. dollar non-revolving term line (the "Non-Revolving Term Line") remains fully drawn at US$35,000,000 (December 31, 2007 - US$35,000,000) and was revalued at the quarter-end exchange rate to $42,630,000 (December 31, 2007 - $34,696,000). Effective September 1, 2008, the maturity date of the Non-Revolving Term Line was extended to September 1, 2010. The Non-Revolving Term Line bears interest at rates based on bank prime plus a premium depending upon a financial ratio or, at the Company's option, at rates for LIBOR based loans plus a margin. The foreign exchange loss of $7,934,000 (December 31, 2007 - $5,716,000 gain) arising on revaluation of the Non-Revolving Term Line was recognized in Other foreign exchange gain (loss) on the Statement of Operations.

Both of the term lines are secured by a general security agreement which includes a security interest in all accounts receivable and inventories, charges against timber tenures, and mortgage security on sawmills. The term lines are subject to certain financial covenants including a minimum working capital requirement and a maximum ratio of total debt to total capitalization and a minimum net worth calculation.

Minimum principal amounts due on long-term debt within the next five years are follows:

------------------------------------------------------- 2009 $ - 2010 42,630 2011 94,784 2012 - 2013 - ------------------------------------------------------- $ 137,414 ------------------------------------------------------- -------------------------------------------------------

9. Payable to investee company:

On December 29, 2008, the Seaboard Limited Partnership ("the Seaboard Partnership"), made an advance to its partners, with Interfor's share of the advance being $3,651,000. The Company signed an unsecured promissory note which was payable on demand on or before January 2, 2009 and was non-interest bearing until January 2, 2009 and bears interest at the rate of 4% per annum thereafter.

This advance was subsequently repaid (see note 19(a)).

10. Share capital:

On November 9, 2006, the Company commenced a normal course issuer bid ("NCIB 05") to acquire up to 2,366,000 Class A Subordinate Voting shares ("Class A Shares"). NCIB 05 terminated on November 8, 2007. Purchases are made at market prices with a maximum of two percent of the outstanding shares being purchased in any 30-day period. As the Company acquired Class A shares, the shares were cancelled and the excess of the cost of the shares over the assigned value was charged to contributed surplus.

On January 3, 2008, the Company commenced a normal course issuer bid ("NCIB 06") to acquire up to 1,300,000 Class A shares (representing approximately 2.8% of the outstanding Class A shares) through the facilities of the Toronto Stock Exchange. The Company did not repurchase any Class A shares through the normal course issuer bid in 2008. NCIB 06 terminated on January 7, 2009.

The Company also issued Class A shares as previously granted share options were exercised. There were no changes to the Class B shares.

The transactions in share capital are described below:

-------------------------------------------------------------------------- 3 Months 3 Months Year Year Dec. 31, Dec. 31, Dec. 31, Dec. 31, 2008 2007 2008 2007 -------------------------------------------------------------------------- Acquisitions under normal course issuer bid Number of shares purchased and cancelled - - - 1,220,100 Cost $ - $ - $ - $ 9,846 Excess of cost of shares over assigned value charged to contributed surplus - - - 2,312 Shares issued on exercise of options Number of shares - - 12,400 189,280 Proceeds $ - $ - $ 56 $ 892 -------------------------------------------------------------------------- --------------------------------------------------------------------------

11. Other income:

-------------------------------------------------------------------------- 3 Months 3 Months Year Year Dec. 31, Dec. 31, Dec. 31, Dec. 31, 2008 2007 2008 2007 -------------------------------------------------------------------------- Gain on disposal of surplus plant and equipment, timber, and other $ 131 $ 117 $ 794 $ 4,767 Gain on settlement of timber takeback 216 - 747 1,350 Other (expense) (92) 55 (123) (134) -------------------------------------------------------------------------- $ 255 $ 172 $ 1,418 $ 5,983 -------------------------------------------------------------------------- --------------------------------------------------------------------------

In the first quarter of 2008, the Company disposed of surplus equipment, generating a gain of $28,000. In the second quarter of 2008, the Company received compensation through the Forest Revitalization Act for obsolete infrastructure due to the timber takeback. This, coupled with additional sales of surplus equipment generated a gain of $595,000 and sales proceeds of $837,000.

Additional surplus equipment and a timber licence were sold in the third quarter of 2008, for sales proceeds of $1,110,000 and a gain of $627,000. In the fourth quarter of 2008, the Company received further compensation from the Province of British Columbia for a timber takeback in the Central Coast which combined with further disposals of surplus equipment to generate additional proceeds of $3,121,000 and a gain of $292,000.

In the addition to the sale of its interest in Tree Farm Licence 54 in the first quarter of 2007, the Company disposed of surplus property, plant and equipment throughout 2007. These dispositions combined to generate sales proceeds of $6,906,000 and a gain of $4,767,000. Under the terms of the Forest Revitalization Act, the Company received $1,350,000 in additional compensation for lost infrastructure and road construction costs resulting from the 2003 legislated takeback of certain logging rights on the B.C. Coast. This was recorded as proceeds on the disposal of roads in the third quarter of 2007.

12. Restructuring costs and write-downs of plant and equipment:

-------------------------------------------------------------------------- 3 Months 3 Months Year Year Dec. 31, Dec. 31, Dec. 31, Dec. 31, 2008 2007 2008 2007 -------------------------------------------------------------------------- Plant, equipment and timber write-downs $ 434 $ - $ 31,427 $ - Severance and other restructuring costs, net of recoveries 353 335 4,852 1,975 Other - - 1,026 - -------------------------------------------------------------------------- $ 787 $ 335 $ 37,305 $ 1,975 -------------------------------------------------------------------------- --------------------------------------------------------------------------

During the first quarter of 2008, the Company recorded severance costs of $2,240,000, as it permanently closed its Albion remanufacturing operation located in Maple Ridge, B.C., and also offered voluntary severance to hourly workers at its idled Queensboro sawmill located in New Westminster, B.C. In the second quarter of 2008, the Queensboro sawmill was permanently closed following more than one year of curtailment, and further voluntary and permanent shutdown severance and remediation costs totalling $3,259,000 were recorded, together with an impairment charge of $29,750,000 on the plant and equipment.

In the third quarter, 2008, due to deteriorating market conditions, the Company indefinitely curtailed the old Adams Lake sawmill and recorded an impairment charge of $1,243,000 on the plant and equipment and severance costs of $26,000.

The Company took an impairment charge on timber of $434,000 as well as additional severance costs of $353,000 in the fourth quarter, 2008.

During the first quarter of 2007, the Company recorded severance costs of $250,000, net of recoveries from the B.C. Forestry Revitalization Trust set up by the Government of British Columbia, as reimbursement for severance costs of workers who were displaced by the reductions in harvesting rights taken under the Forestry Revitalization Act. In the second quarter, 2007, the Company recorded additional severance costs of $1,013,000, and $377,000 for logging phase contractor buyouts and other restructuring.

The Company recorded net severance costs of $335,000 in the fourth quarter, 2007, after recoveries of $252,000 for restructuring costs previously expensed.

13. Net earnings (loss) per share:

-------------------------------------------------------------------------- 3 Months Dec. 31, 2008 3 Months Dec. 31, 2007 ------------------------------- --------------------------------- Net loss Shares Per share Net loss Shares Per share -------------------------------------------------------------------------- Basic earnings (loss) per share $ (18,530) 47,117 $ (0.39) $ (8,937) 47,105 $ (0.19) Share options - - - - 332(i) - -------------------------------------------------------------------------- Diluted earnings (loss) per share $ (18,530) 47,117 $ (0.39) $ (8,937) 47,105(i) $ (0.19) -------------------------------------------------------------------------- -------------------------------------------------------------------------- -------------------------------------------------------------------------- Year Dec. 31, 2008 Year Dec. 31, 2007 ------------------------------- --------------------------------- Net loss Shares Per share Net loss Shares Per share -------------------------------------------------------------------------- Basic earnings (loss) per share $ (57,191) 47,109 $ (1.21) $ (13,321) 47,575 $ (0.28) Share options - 45(i) - - 556(i) - -------------------------------------------------------------------------- Diluted earnings (loss) per share $ (57,191) 47,109 $ (1.21) $ (13,321) 47,575(i) $ (0.28) -------------------------------------------------------------------------- -------------------------------------------------------------------------- (i) Where the addition of share options to the total shares outstanding has an anti-dilutive impact on the diluted earnings (loss) per share calculation, those share options have not been included in the total shares outstanding for purposes of the calculation of diluted earnings (loss) per share.

14. Segmented information:

The Company manages its business as a single operating segment, solid wood. The Company purchases and harvests logs which are then manufactured into lumber products at the Company's sawmills, or sold. Substantially all of the Company's operations are located in British Columbia, Canada and the U.S. Pacific Northwest.

The Company sells to both foreign and domestic markets as follows:

-------------------------------------------------------------------------- 3 Months 3 Months Year Year Dec. 31, Dec. 31, Dec. 31, Dec. 31, 2008 2007 2008 2007 -------------------------------------------------------------------------- Canada $ 26,341 $ 52,953 $ 162,825 $ 222,276 United States 40,408 47,013 162,352 272,571 Japan 12,625 3,845 40,823 51,402 Other export 14,116 11,579 71,221 64,759 -------------------------------------------------------------------------- $ 93,490 $ 115,390 $ 437,221 $ 611,008 -------------------------------------------------------------------------- --------------------------------------------------------------------------

Sales by product line are as follows:

-------------------------------------------------------------------------- 3 Months 3 Months Year Year Dec. 31, Dec. 31, Dec. 31, Dec. 31, 2008 2007 2008 2007 -------------------------------------------------------------------------- Lumber $ 65,559 $ 70,754 $ 297,434 $ 434,468 Logs 18,311 35,617 103,620 118,571 Wood chips and other by products 8,869 7,169 30,610 50,260 Other 751 1,850 5,557 7,709 -------------------------------------------------------------------------- $ 93,490 $ 115,390 $ 437,221 $ 611,008 -------------------------------------------------------------------------- --------------------------------------------------------------------------

The Company has capital assets, goodwill and other intangible assets located in:

-------------------------------------------------------------------------- Dec. 31, Dec. 31, 2008 2007 -------------------------------------------------------------------------- Canada $ 317,141 $ 232,988 United States 197,887 138,529 -------------------------------------------------------------------------- $ 515,028 $ 371,517 -------------------------------------------------------------------------- --------------------------------------------------------------------------

15. Employee future benefits:

The total benefits cost under its various pension, retirement savings and other post-retirement benefit plans, including those acquired through the P&T asset acquisition, are as follows:

-------------------------------------------------------------------------- 3 Months 3 Months Year Year Dec. 31, Dec. 31, Dec. 31, Dec. 31, 2008 2007 2008 2007 -------------------------------------------------------------------------- Canadian employees deferred profit sharing plan $ 286 $ 512 $ 1,273 $ 1,688 Defined benefit plan 62 (183) 156 177 Unionized employees' pension plan 249 160 1,492 1,476 Post-retirement benefits plan 53 - 53 - U.S. employees 401(k) plan 138 121 495 582 Senior management supplementary pension plan 92 (121) 467 192 -------------------------------------------------------------------------- Total pension expense $ 880 $ 489 $ 3,936 $ 4,115 -------------------------------------------------------------------------- --------------------------------------------------------------------------

16. Capital management:

The Company's policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. The Company monitors the return on average invested capital, which it defines as net earnings (loss) plus after tax interest cost divided by the average of opening and closing invested capital comprised of the total of bank indebtedness, long-term debt and shareholders' equity.

The Company seeks to maintain a balance between the higher returns that might be possible with the leverage afforded by higher borrowing levels and the security afforded by a sound capital position. The Company's target is to create value for its shareholders over the long-term through increases in share value.

In January 2008, the Company filed a normal course issuer bid, as described in note 10. As all purchases are made at market prices, the timing of any purchases are managed based on the share price and available cash flow. The Company considers its shares to be undervalued, and a buy-back program is consistent with the Company's goal of creating long-term value for its shareholders. No shares were acquired under the program in 2008 despite extremely low market prices as the Company's cash resources were utilized to fund its acquisitions (note 2) and the global economy downturn resulted in a focus on cash conservation.

There were no changes in the Company's approach to capital management during the period. Under its debt financing agreements, the Company cannot exceed a total debt to total capitalization ratio of 45%, with total debt defined as the total of bank indebtedness, including letters of credit, and long-term debt, net of cash and cash equivalents and total capitalization defined as total debt plus Shareholders' Equity.

17. Financial instruments:

(a) Fair value of financial instruments:

At December 31, 2008, the fair value of the Company's long-term debt and bank indebtedness approximated its carrying value of $168,003,000 (December 31, 2007 - $34,696,000). The fair values of other financial instruments approximate their carrying values due to their short-term nature.

(b) Derivative financial instruments:

The Company employs financial instruments, such as interest rate swaps and foreign currency forward and option contracts, to manage exposure to fluctuations in interest rates and foreign exchange rates. The Company does not expect any credit losses in the event of non-performance by counter parties as the counterparties are the Company's Canadian bankers, which are highly rated.

As at December 31, 2008, the Company has outstanding obligations to sell a maximum of US$4,500,000 at an average rate of US$1.2339 to the CAD$1.00, sell Japanese yens 51,000,000 at an average rate of yens 83.11 to the CAD$1.00, and Japanese yens 65,000,000 at an average rate of yens 92.85 to the USD$1.00, and sell Euros EUR 90,000 at an average rate of $1.5908 to the CAD$1.00 during 2009. All foreign currency gains or losses to December 31, 2008 have been recognized in the Statement of Operations and the fair value of these foreign currency contracts of $113,000 has been recorded in accounts payable and accrued liabilities. In 2008, the Company had entered into a forward contract to purchase US$15,000,000 which was unwound at December 31, 2008, and the Company recorded $3,657,000 in realized foreign exchange gains.

During September 2005, the Company entered into a cross currency interest rate swap. The Company has agreed to receive US$20,000,000 at maturity on September 1, 2009 in exchange for payment of CAD$23,530,000 (an exchange rate of 1.1765). In addition, during the term of the swap the Company will pay an amount based on annual interest of 5.84% on the CAD$23,530,000 and will receive 90 day LIBOR plus a spread of 200 basis points on the US$20,000,000. LIBOR will be recalculated at set interval dates. The swap will mature on September 1, 2009 and has been marked to market with all gains or losses on the swap recognized in the Statement of Operations and total foreign exchange gains of $4,179,000 recognized in 2008 (2007 - $3,584,000 loss). The fair value of this cross currency interest rate swap is $409,000 a

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