Western Forest Products Announces Q1 2006 Results - Strategic Acquisitions Closed

DUNCAN, BC, May 12 /PRNewswire-FirstCall/ -- Western Forest Products Inc. (TSX: WEF) today announced its results for the first quarter of 2006. The Company will host a teleconference call on Tuesday, May 16, 2006 at 10:00 a.m. PST (1:00 p.m. EST) on the Company's results. (See below for details on participation).

During the first quarter of 2006 the Company completed a number of previously announced strategic initiatives to focus on the lumber business and refinance the balance sheet.

Q1 2006 Overview ------------------------------------------------------------------------- - EBITDA improved $5.2 million to negative $0.1 million from the fourth quarter of 2005 primarily due to lower softwood lumber duties and stumpage fees. - Net loss from continuing operations of $46.5 million or $1.81 per share includes a $27.9 million one time charge with respect to the early redemption of the Company's 15% Senior Secured Bonds. - Completed a $295 million rights offering to all shareholders for subscription receipts on March 9, 2006 with proceeds held in escrow to fund the acquisition of Cascadia Forest Products Ltd. which closed on May 1, 2006. - Completed the acquisition of the Englewood Logging Division, formerly owned by Canfor Corporation, on March 17, 2006 for $45 million payable from the price premium to be received on a new long-term fibre agreement. An additional $35 million up front cash premium was received by Western on entering the agreement. - Completed the refinancing of the Company's 15% Secured Bonds from the proceeds of two new term loans on March 10, 2006. - Narrowed the Company's business focus to lumber with the closure of the Squamish NBSK pulp mill on January 26, 2006. -------------------------------------------------------------------------

Commenting on the quarter, Reynold Hert, President and CEO noted, "With the completion of the acquisitions of Cascadia and Englewood we believe we have the necessary timber and sawmill assets that will allow us to compete globally in the softwood lumber markets. We will now set out to realize the $71 million of annual operating synergies we previously identified with these two transactions. At the same time, we are pursuing a $12.5 million upgrade to our Cowichan Bay sawmill that will improve recoveries and lower unit costs. This is the first of a number of measured, high pay back opportunities we can make in the business that will further improve our operating margins."

Subsequent Events

On May 1, 2006 Western completed its acquisition of Cascadia Forest Products for cash consideration paid on closing of $220.1 million subject to post closing adjustments that are expected to reduce the final purchase price by approximately $13.0 million. Also on May 1, 2006, the $295.0 million raised through our rights offering to all shareholders that closed on March 9, 2006 was released from escrow and used to fund the acquisition. The balance of the escrowed funds plus accrued interest earned on those funds was received by Western and will be primarily used to fund some of the structural changes that need to be made to the business and provide liquidity. The approximately 178.8 million subscription receipts issued to raise the $295.0 million were exchanged for common shares in Western on the same day except for approximately 84.6 million subscription receipts held by Tricap Management Limited ("Tricap") that will be exchanged for a new class of Non-voting shares once the creation of such class has been authorised at the next Annual General Meeting. Western now has 119,842,359 Common Shares issued and outstanding of which Tricap owns 49%.

+ + + + + + + Western Forest Products

Western is an integrated Canadian forest products company. Principal activities conducted by Western and its subsidiaries include timber harvesting, reforestation, sawmilling logs into lumber and wood chips, and value-added remanufacturing. Substantially all of Western's logging is conducted on government owned timberlands in British Columbia. All of Western's operations, employees and corporate facilities are located in the coastal region of British Columbia while its products are sold in over 20 countries worldwide. With the closing of the Cascadia acquisition, Western is the largest Coastal British Columbia woodland operator and lumber producer with an Annual Allowable Cut of approximately 7.7 million cubic meters of timber and lumber capacity in excess of 1.5 billion board feet from nine sawmills and five remanufacturing plants.

Forward-Looking Statements and Information

This press release contains forward-looking statements and forward- looking information within the meaning of applicable securities law. Those statements and information include statements or information regarding the intent, belief or current expectations of Western. Such statements or information may be indicated by words such as "approximately", "achieving", "estimated", "expect", "anticipate", "plan", "intend", "believe", "will", "should", "may" and similar words and phrases. Readers are cautioned that any such forward-looking statements or information are not guarantees and may involve known and unknown risks and uncertainties, and that the actual results may differ from those expressed or implied in the forward-looking statements or information as a result of various factors including, changes in government regulation, and misjudgments in the course of preparing forward-looking statements or information. The information contained under the "Risk Factors" section of Western's Annual Information Form and under the "Risks and Uncertainties" section of Western's Management's Discussion and Analysis identifies important factors that could cause such differences. All written and oral forward-looking statements or information attributable to Western or persons acting on behalf of Western are expressly qualified in their entirety by the foregoing cautionary statements. Western does not expect to update forward-looking statements or information as conditions change.

TELECONFERENCE CALL NOTIFICATION: Tuesday, May 16, 2006 at 10:00 a.m. PST/1:00 p.m. EST ---------------------------------------------------------------------

On Tuesday, May 16, 2006, Western Forest Products Inc. will host a teleconference call at 10:00 a.m. PST (1:00 p.m. EST). To participate in the teleconference please dial 1-866-250-4892 in Canada and the U.S. (toll free) and in Toronto or Internationally, 416-644-3416 before 10:00 a.m. PST (1:00 p.m. EST). This call will be taped, available one hour after the teleconference, and on replay until May 23, 2006. To hear a complete replay, please call 1-877-289-8525 in Canada and the U.S. (toll free), Passcode 21188987 followed by the number sign or in Toronto and Internationally, 416-640-1917, Passcode 21188987 followed by the number sign. This call will also be webcast from Western's website at http://www.westernforest.com/.

Contacts: For further information, please contact: Reynold Hert [phone] Paul Ireland [phone] President & CEO CFO Western Forest Products Inc. - 2006 First Quarter Report Management's Discussion & Analysis

The following discussion and analysis reports and comments on the financial condition and results of operations of Western Forest Products Inc. (the "Company", "Western", "us", "we", or "our"), on a consolidated basis, for our first quarter ended March 31, 2006 to help security holders and other readers understand our Company and the key factors underlying our financial results. You should read this discussion and analysis in conjunction with our unaudited interim consolidated financial statements and related notes thereto, for the first quarter ended March 31, 2006, and our audited annual consolidated financial statements and management's discussion and analysis ("MD&A") for the year ended December 31, 2005 (the "2005 Annual Report") which are filed on SEDAR at http://www.sedar.com/ under our Company's name.

Unless otherwise noted, the information in this discussion and analysis is updated to May 10, 2006. All financial references are in Canadian dollars unless otherwise noted.

Summary of Selected Quarterly Results Three Three Three Months Months Months Ended Ended Ended (millions of dollars March 31, December 31, March 31, except per share amounts) 2006 2005(1) 2005(1) ------------------------------------------------------------------------- Sales $ 118.2 $ 120.4 $ 122.6 Countervailing & anti-dumping duties $ (4.0) $ (6.0) $ (8.5) EBITDA(2) $ (0.1) $ (5.3) $ 6.8 EBITDA margin (0.1)% (4.4)% 5.5% Operating earnings (loss) $ (6.0) $ (10.6) $ 1.2 Interest expense $ (11.1) $ (11.5) $ (11.5) Premium and unamortized discount on bond redemption $ (27.9) $ - $ - Foreign exchange gain (loss) on long-term debt $ (0.9) $ (0.1) $ (1.6) Net loss from continuing operations $ (46.5) $ (10.5) $ (6.3) Income (loss) from discontinued operations $ (7.1) $ (74.1) $ 1.0 Net loss $ (53.6) $ (84.6) $ (5.3) ------------------------------------------------------------------------- Per share: Basic and diluted loss from continuing operations $ (1.81) $ (0.41) $ (0.25) Basic and diluted net loss $ (2.09) $ (3.30) $ (0.21) ------------------------------------------------------------------------- Cash flow from continuing operations $ (10.5) $ (5.5) $ 15.3 ------------------------------------------------------------------------- (1) Restated to treat the pulp segment as discontinued operations. (2) Non-GAAP measure - see page 7 for a discussion of EBITDA. Overview

The Company is in the process of building a margin focused lumber business located on the coast of British Columbia of sufficient size and scope to compete in global softwood lumber markets. The recent acquisitions of Cascadia Forest Products Ltd. ("Cascadia") and the Englewood Logging Division of Canadian Forest Products Ltd. are a key step in this strategy as they increase our access to high quality Crown-owned coastal timber as well as our lumber production capacity. The two transactions also offer the opportunity to lower our operating costs through available synergies and enhance our marketing and sales capability.

The acquisition of Cascadia was completed on May 1, 2006 for cash consideration paid on closing of $220.1 million subject to post closing adjustments that are expected to reduce the final purchase price by approximately $13.0 million. Also on May 1, 2006, the $295.0 million raised through a rights offering to all shareholders that closed on March 9, 2006 was released from escrow and used to fund the acquisition. The balance of the escrowed funds, plus accrued interest earned on the funds, was received by Western and will be primarily used to fund some of the structural changes that need to be made to the business and provide additional liquidity. The approximately 178.8 million subscription receipts issued to raise the $295.0 million were exchanged for common shares in Western on the same day except for approximately 84.6 million subscription receipts held by Tricap Management Limited ("Tricap") that will be exchanged for a new class of Non-voting shares provided the creation of such class has been authorized at the Company's next Annual General Meeting.

As previously announced, we redeemed our US$221.0 million 15% Secured Bonds on March 10, 2006 with the proceeds of two term loans of US$187.5 million and C$90.0 million obtained from the Brookfield Bridge Lending Fund. In addition to redeeming the bonds and paying all accrued interest the new term loans provided approximately $13 million of additional funds to the Company that was applied against the revolving credit facility.

On March 17, 2006 we substantially closed the acquisition of the Englewood Logging Division. The $45 million cost of the acquisition will be paid as a set-off against part of the consideration to be received from entering a long-term agreement to supply a partnership of Canadian Forest Products Ltd. and Oji Paper Canada Ltd. with residual wood chips and pulp logs. These wood chips and pulp logs were previously supplied to the Squamish pulp mill that we closed during the quarter. We also received $35 million cash on the execution of that agreement on March 17, 2006 that was also applied against the revolving credit facility. (For additional information on these transactions please refer to our Annual Information Form dated March 27, 2006 under "Acquisition of the Englewood Logging Division and New long-Term Fibre Supply Agreement" as filed on SEDAR).

The net loss from continuing operations for the first quarter of 2006 was $46.5 million ($1.81 per share) compared to a net loss from continuing operations of $10.5 million ($0.41 per share) in the fourth quarter of 2005 and a net loss from continuing operations of $6.3 million ($0.25 per share) in the first quarter of 2005. The results for the first quarter of 2006 include the loss on the early redemption of the Company's 15% Secured Bonds of $27.9 million that includes $19.2 million with respect to the early redemption premium and $8.7 million with respect to the unamortized debt discount. The results for the first quarter of 2005 benefited from the inclusion in other income of $5.8 million with respect to settlements under the British Columbia Forest Revitalization Plan.

First Quarter of 2006 EBITDA Compared to the Fourth Quarter of 2005 -------------------------------------------------------------------

The following table and discussion indicates the major factors impacting EBITDA for the current quarter compared to EBITDA as reported in the previous quarter (EBITDA for the comparative period has been restated to exclude the pulp segment that is now classified as discontinued operations):

(millions of dollars) ------------------------------------------------------------------------- EBITDA for the three months ended December 31, 2005 $ (5.3) Higher realized lumber prices partially offset by lower log prices 2.1 Higher log volumes sold partially offset by lower lumber volumes sold 5.9 Impact of mix of lumber and logs sold on revenues (10.0) Impact of a stronger Canadian dollar (2.2) Less shutdown cost 2.0 Lower anti-dumping and countervail duty 2.0 Lower stumpage 1.8 Other 3.6 ------------- EBITDA for the three months ended March 31, 2006 $ (0.1) ------------- -------------

The improvement in EBITDA during the quarter primarily reflects lower costs with respect to lower stumpage paid to harvest from Crown lands due to both log mix and rate, less shutdown expense as our sawmills took less downtime, and lower anti-dumping and countervail duty expense due to lower rates. The positive impact on EBITDA during the first quarter of 2006 of higher sales prices, primarily for Western Red Cedar, and higher volumes of logs sold were more than offset by the impact of a stronger Canadian dollar and the change in the mix of log sales to more pulp logs.

The anti-dumping and countervail duty deposit rates decreased from a combined total of 20.15% to 10.81% effective from December 12, 2005 and 10.80% effective from January 23, 2006.

First Quarter of 2006 EBITDA Compared to the First Quarter of 2005 ------------------------------------------------------------------

The following table and discussion indicates the major factors impacting EBITDA for the current quarter compared to EBITDA as reported in the first quarter of 2005 (EBITDA for the comparative period has been restated to exclude the pulp segment that is now classified as discontinued operations):

(millions of dollars) ------------------------------------------------------------------------- EBITDA for the three months ended March 31, 2005 $ 6.8 Lower realized lumber and log prices (7.8) Higher log and lumber volumes sold 3.0 Impact of mix of lumber and logs sold on revenues (3.6) Impact of a stronger Canadian dollar (4.8) Less shutdown cost 1.2 Lower anti-dumping and countervail duty 4.3 Lower stumpage 2.4 Other (1.6) ------------- EBITDA for the three months ended March 31, 2006 $ (0.1) ------------- -------------

The primary factors impacting the results for the first quarter of 2006 compared to the first quarter of 2005 are lower prices realized for lumber and logs, the impact of the external sale of lower value pulp logs to third parties whereas they were previously consumed by the Squamish pulp mill, and the strengthening of the Canadian dollar to an average of approximately C$1 (equal sign) US$0.87 in the first quarter of 2006 compared to C$1 (equal sign) US$0.82 in the first quarter of 2005.

Continuing Operations Three Three Three Months Months Months Ended Ended Ended (millions of dollars March 31, December 31, March 31, except where noted) 2006 2005 2005 ------------------------------------------------------------------------- Lumber sales $ 87.2 $ 91.3 $ 97.3 Log sales 23.7 25.5 18.2 By-product sales 7.3 3.6 7.1 ---------------------------------------- $ 118.2 $ 120.4 $ 122.6 ---------------------------------------- ---------------------------------------- Lumber production - millions of board feet 153 127 185 Lumber sales - millions of board feet 164 166 162 Log production - thousands of cubic metres 662 822 498 Log purchases - thousands of cubic metres 100 87 200 Log sales - thousands of cubic metres 262 212 166 Internal Log consumption - thousands of cubic metres 650 590 875 Average lumber sales revenue per thousand board feet $ 533 $ 549 $ 599 Average log sales revenue per cubic metre $ 90 $ 120 $ 110

Lumber sales of 164 million board feet in the quarter were comparable to the previous quarter and the first quarter of 2005. Lumber production of 153 million board feet compares to 127 million board feet in the fourth quarter of 2005 when we managed our lumber inventories down with extended shut downs, and 185 million board feet in the first quarter of 2005. Production in the first quarter of 2006 was impacted by a shortage of logs as the volume of logs available on the Vancouver log market was at unusually low levels even when considering normal seasonal fluctuations. This has been caused by a number of factors including low log and lumber prices in the fourth quarter of 2005 that have resulted in many logging operators avoiding building inventories heading into the traditional winter slow down as well as deeper snow pack at higher elevations preventing access to the logs.

By-product sales of wood chips and hog-fuel increased to $7.3 million in the first quarter of 2006 from $3.6 million in the fourth quarter of 2005 and $7.1 million in the first quarter of 2005. The increase from the fourth quarter primarily resulted from the increased lumber production.

Log production of 662,000 cubic metres in the first quarter of 2006 compares to 822,000 cubic metres in the fourth quarter of 2005 and 498,000 cubic metres in the first quarter of 2005. The decrease in production compared to the fourth quarter of 2005 reflects the planned cessation of logging in the early part of the first quarter due to seasonal weather conditions. The increase in log production in the first quarter of 2006 relative to the first quarter of 2005 is attributable to the delayed start up of logging operations in 2005 to reduce log inventories in response to market conditions.

As a result of the closure of the Squamish pulp mill, the pulp logs that were previously supplied to the pulp mill are now being sold to a third party under the long-term fibre supply contract. Accordingly, log sales revenue will now include these pulp logs whereas they were previously accounted for as internal transfers to the pulp segment and included as a part of the pulp mill's operating costs. Log sales to third parties increased to 262,000 cubic metres in the first quarter of 2006 compares to 212,000 cubic metres in the fourth quarter of 2005 and 166,000 cubic metres in the first quarter of 2005 primarily as a result of the sale of these pulp logs. In addition, the sale of lower value pulp logs has also resulted in the overall average log price received decreasing to $90 per cubic metre from $120 per cubic metre in the fourth quarter of 2005.

During the fourth quarter of 2005 we were notified that we had been selected as a mandatory respondent in the anti-dumping duty third administrative review of certain softwood lumber products from Canada. We do not expect to receive the final results of the USDOC third review that will establish our Company specific anti-dumping deposit rate until December 2006, consistent with the timing of the USDOC second administrative review determinations announced in 2005. This review process was adjourned by the US Department of Commerce on April 28, 2006 pending finalization of a framework agreement negotiated between the United States and Canadian Governments resolving the softwood lumber trade dispute. We are unable to predict at this time whether the framework agreement will be ratified.

Discontinued Operations

The last production shift at the Squamish pulp mill was on January 26, 2006 and most of the workforce completed their employment with the Company on March 9, 2006. The Company is evaluating possible future uses for the site.

The loss from discontinued operations during the first quarter of 2006 of $7.1 million compares to a loss of $74.1 million in the fourth quarter of 2005 and to income of $1.0 million in the first quarter of 2005. The loss for the first quarter of 2006 includes $4.5 million with respect to the cancellation of long-term contracts. The loss for the fourth quarter of 2005 includes the write-down and other restructuring costs associated with the closure of the pulp mill of $71.2 million.

The Company will incur ongoing costs for supervision, security, property taxes and other costs (including demolition costs less any recoveries for asset sales, if the Company decides to remove certain plant and equipment) in 2006 and future years depending on the Company's plans for the site. These costs will be expensed as incurred.

Other Corporate Items

Selling and administration expense for the first quarter of 2006 includes approximately $1.2 million with respect to legal and consulting fees incurred in connection with the softwood lumber anti-dumping review.

The Company recorded a charge of $27.9 million during the quarter in connection with the redemption of its 15% Secured Bonds with respect to the 107.5% redemption price for the bonds and the accretion of the balance of the discount that arose on the issue of the bonds in 2004.

Changes in Financial Position and Liquidity Three Three Three Months Months Months Ended Ended Ended (millions of dollars March 31, December 31, March 31, except where noted) 2006 2005 2005 ------------------------------------------------------------------------- Cash flow from continuing operations $ (10.5) $ (5.5) $ 15.3 Additions to property, plant and equipment $ (1.4) $ (2.1) $ (0.4) Additions to capitalized roads $ (2.2) $ 2.1 $ (2.0) Change in bank indebtedness $ (71.4) $ (0.7) $ (10.9) Total liquidity(1) $ 68.7 $ 54.5 $ 63.2 Financial ratios: Current assets to current liabilities 2.24 1.28 1.93 Debt to shareholders equity 8.75 4.21 1.83 Debt to market capitalization 8.67 9.1 2.57 (1) Total liquidity comprises cash, restricted cash and available credit under the Company's revolving credit facility.

Cash flow from continuing operations in the first quarter of 2006 of negative $10.5 million compares to negative cash flow of $5.5 million in the fourth quarter of 2005 and positive $15.3 in the first quarter of 2005. Cash flow from continuing operations for the first quarter of 2006 was impacted by the payment of interest of $37.3 million with respect to the Secured Bonds, which includes $10.0 million of interest that had been deferred from June 30, 2005. Cash flow from continuing operations in the first quarter of 2006 benefited from reductions in logging and lumber inventories by $19.3 million. Net working capital in the fourth quarter of 2005 also benefited from the timing of the semi-annual payment of the interest on the Company's 15% Secured Bonds being paid in January 2006 instead of December 2005.

Cash flow from continuing operations before the non-cash changes in working capital items was negative $12.2 million in the quarter compared to negative $16.4 million in the fourth quarter of 2005 and positive $1.7 million in the first quarter of 2005. The first quarter of 2006 cash flow was impacted by the same factors discussed in the reconciliation of EBITDA between the same periods.

Cash flow from investing activities for the first quarter of 2006 includes the $35 million non-refundable prepayment of the price premium received as consideration for entering the 40 year fibre supply agreement. The payment was applied to reduce the amount drawn under the Company's revolving line of credit.

On March 10, 2006 the Company completed the redemption of its Secured Bonds including paying all accrued interest thereon. The bond redemption amount of US$237.6 million (Cdn$275.9) plus accrued interest of US$14.9 million (Cdn$17.3 million) was funded from the proceeds of the new US$187.5 million and C$90.0 million term loans (total Canadian $307.8 million) obtained from the Brookfield Bridge Lending Fund that were also drawn on March 10, 2006. The redemption of the Secured Bonds also resulted in the release of the $8.9 million of restricted cash held in the Working Capital Reserve.

At March 31, 2006 the Company had cash of $11.8 million and availability under its revolving line of credit of $56.9 million. The closing of the acquisition of Cascadia on May 1, 2006 resulted in the $295.0 million raised through the issuance of 178.8 million subscription receipts plus interest earned thereon being released to the Company (see note 5 to the Unaudited Interim Consolidated Financial Statements). Of this amount, $220.1 million was paid for the acquisition of Cascadia and $76.4 million received by the Company, which will be primarily used to fund the structural changes that need to be made to the business and provide liquidity. The Company paid off Cascadia's revolving credit facility of approximately $6 million.

Selected Quarterly Information

To assist shareholders and other readers in understanding our business, we have included as Appendix A to the MD&A a table of the financial results and operating data for the Company and its Predecessor (Doman Industries Limited and certain of its subsidiaries) for the last eight quarters. We acquired the solid wood and pulp business of our Predecessor on July 27, 2004 in connection with the implementation of the Predecessor's Plan of Compromise and Arrangement under the Companies' Creditors Arrangement Act (Canada) and Reorganization under the Canada Business Corporations Act (the "Plan"). Note that in the case of the Predecessor the amounts shown do not extend beyond the operating earnings (loss) level as a comparison of items below that level is not meaningful as a result of the Predecessor's different capital structure.

In a normal operating year, there is some seasonality to the Company's operations with higher activity in the second and third quarters as construction activity, particularly in the U.S., tends to be higher. Logging activity may also vary depending on weather conditions due to snow and ice in the winter and the threat of forest fires in the summer.

Risks and Uncertainties

Our business is subject to a number of risks and uncertainties which are described in our 2005 Annual Report, and Annual Information Form which are available on Sedar at http://www.sedar.com/. Any of the risks and uncertainties described in the above noted documents could have a material adverse affect on our operations and financial conditions and cash flow and should be carefully considered in evaluating our business.

Outlook and Strategy

With the completion of the Cascadia and Englewood acquisitions, the Company has made substantial progress in executing its strategy of building a competitive, coastal softwood lumber business. The transactions have also resulted in Western having cash on hand and availability under its revolving credit line that we estimate are sufficient to enable us to begin initiating the structural changes we believe are required to increase productivity and reduce costs. The Company is continuing to work with its revolving credit lender to complete the revised and amended credit facilities for the newly amalgamated company that is expected to be completed by June 30, 2006.

Western's management team is now focused on integrating the operations of Cascadia and Englewood with the objective of making the necessary structural changes as quickly as possible. Western identified annual synergies of approximately $71.0 million after four years for the two acquisitions during its due diligence. Management will be working to further refine these estimates and put in place plans to capture the synergies at the earliest opportunity.

Western has committed approximately $12.5 million to fund capital improvements at its Cowichan Bay sawmill during the balance of 2006. The investment includes new optimizing and other production equipment that should substantially bring the mill to current technological levels. The improvements are expected to increase the amount of lumber recovered from each cubic metre of log consumed and substantially increase production, the value of the product produced, and reduce unit costs.

The US lumber market is expected to begin seeing a softening in demand later in the year due to rising interest rates that are expected to result in housing starts declining in 2006 compared to last year. Demand for Western Red Cedar is seasonal with higher demand in the spring as sales of decking and outdoor furniture increase. The mild winter has brought that demand forward resulting in higher demand and prices, particularly compared to the weak prices in the same period in 2005. Demand and prices are anticipated to fall off in the second half of 2006 as this seasonal demand slows down.

The Japanese market has been slow in the spring start up and prices have remained flat into the second quarter. Prices are expected to remain unchanged through the first half of 2006 as customers are assessing their new financial year. Overall, housing starts are expected to be slightly below 2005's level.

The recently announced framework agreement between the Canadian and United States Governments on the softwood lumber dispute could result in the Company receiving substantial refunds of duty deposits previously paid. At March 31, 2006 the Company had posted duty deposits of approximately US$107.3 million. The Company is not entitled to receive any refunds of duties paid by Cascadia prior to May 1, 2006. Subject to working capital needs as permitted under the Company's new long-term debt, any refunds will be primarily used to pay down debt.

Western is continuing the process of removing approximately 29,000 hectares of its private timberlands from their respective Tree Farm Licenses as a first stage in exploring their possible sale. Sale proceeds would also be primarily used to pay down the Company's long-term debt.

Outstanding Share Data

The Company completed its rights offering of subscription receipts to all shareholders on March 9, 2006 raising $295.0 million. On May 1, 2006, following the closing of the acquisition of Cascadia, the Company issued 94,210,564 Common Shares in exchange for an equal number of subscription receipts. As of May 12, 2006, 119,842,359 of our Common Shares are issued and outstanding. As of May 12, 2006, there are 84,571,206 subscription receipts outstanding held by Tricap that will be exchanged for an equal number of non- voting shares provided the creation of such class had been authorized by the Company's shareholders at the next Annual General Meeting.

In addition, we have 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") outstanding. As discussed in note 5 (b) to the Unaudited Interim Consolidated Financial Statements the exercise price for the Class C Warrants was amended effective April 5, 2006. We have reserved up to 2,847,262 Common Shares for issuance upon the exercise of the Class C Warrants. We have also reserved 2,500,000 Common Shares for issuance upon the exercise of options granted under our incentive stock option plan. As of May 12, 2006 we have granted 399,590 options under our incentive stock option plan.

Other Matters

Other than as described in this quarterly report, there has been no change to the information provided in our MD&A for the year ended December 31, 2005, dated March 27, 2006 ("2005 Annual MD&A") in respect of the following items: Contractual Obligations (other than ordinary course), Financial Instruments, Off-balance Sheet Arrangements, Transactions with Related Parties, Critical Accounting Estimates, Changes in Accounting Policy and Risks and Uncertainties. Please see our 2005 Annual MD&A for information on these items.

Additional information about the Company, including our Annual Information Form is available at http://www.sedar.com/ under the Company name, Western Forest Products Inc. Information about the operation of our business by our Predecessor prior to the implementation of the Plan, including our Predecessor's last Form 20-F, is available at http://www.sedar.com/ under the Predecessor's name, Doman Industries Limited.

On behalf of the Board of Directors John MacIntyre Reynold Hert Chairman President and Chief Executive Officer Duncan, BC May 12, 2006 Note:

We have prepared the financial information contained in this discussion and analysis in accordance with Canadian generally accepted accounting principles ("GAAP"). Reference is also made to EBITDA. EBITDA is defined as operating earnings (loss) plus amortization of property, plant and equipment and the write-down of property, plant and equipment and operating restructuring costs. We use EBITDA as a benchmark measurement of our own operating results, and as a benchmark relative to our competitors. We consider EBITDA to be a meaningful supplement to operating income as a performance measure primarily because amortization expense and property write-downs are not actual cash costs, and vary widely from company to company in a manner that we consider largely independent of the underlying cost efficiency of their operating facilities. Further, operating restructuring costs are not expected to occur on a regular basis and may make comparisons of our operating results between periods more difficult. We also believe EBITDA is commonly used by securities analysts, investors and other interested parties to evaluate our financial performance.

EBITDA does not represent cash generated from operations as defined by Canadian GAAP and it is not necessarily indicative of cash available to fund cash needs. Furthermore, EBITDA does not reflect the impact of a number of items that affect our net income (loss). EBITDA is not a measure of financial performance under GAAP, and should not be considered as an alternative to measures of performance under GAAP. Moreover, because all companies do not calculate EBITDA in the same manner, EBITDA as calculated by us may differ from EBITDA as calculated by other companies.

The foregoing contains statements which constitute forward-looking statements and forward-looking information within the meaning of applicable securities laws. Those statements and information appear in a number of places in this document and include statements and information regarding our intent, belief or current expectations primarily with respect to market and general economic conditions, future costs, expenditures, available harvest levels and our future operating performance. Such statements and information may be indicated by words such as "estimate", "expect", "anticipates", "plan", "intend", "believe", "will", "should", "may" and similar words and phrases. Readers are cautioned that any such forward-looking statements and information are not guarantees and may involve known and unknown risks and uncertainties, and that actual results may differ from those expressed or implied in the forward-looking statements or information as a result of various factors, including general economic and business conditions, product selling prices, raw material and operating costs, changes in foreign currency exchange rates, changes in government regulation, fluctuations in demand and supply for our products, industry production levels, our ability to execute our business plan and misjudgments in the course of preparing forward-looking statements or information. The information contained under the "Risk Factors" section in our Annual Information Form and under the "Risks and Uncertainties" section of our Management's Discussion and Analysis identifies important factors that could cause such differences. All written and oral forward-looking statements or information attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing cautionary statements.

Management's Discussion and Analysis - Appendix A Summary of Selected Results for the Last Eight Quarters (Unaudited) Selected Financial Information (millions of Canadian dollars except per unit sales price and per share amounts unless noted otherwise) Quarter ------------------------------------------------- 2006 2005 --------- --------------------------------------- 1st 4th 3rd 2nd 1st --------- --------------------------------------- ------------------------------------------------- Company ------------------------------------------------- Average Exchange Rate - Cdn $ to purchase one U.S. $ $1.1462 $1.1703 $1.2122 $1.2411 $1.2259 Net sales Lumber $ 87.2 $ 91.3 $ 88.2 $ 107.5 $ 97.3 Logs 23.7 25.5 22.2 26.0 18.2 By-Products 7.3 3.6 5.9 7.0 7.1 ------------------------------------------------- $ 118.2 $ 120.4 $ 116.3 $ 140.5 $ 122.6 ------------------------------------------------- ------------------------------------------------- Lumber Lumber production - millions of board feet 153 127 150 186 185 Lumber sales - millions of board feet 164 166 165 176 162 Logging Log production - thousands of cubic metres 662 822 465 1,148 498 Log purchases - thousands of cubic metres 100 87 147 192 200 Log sales- thousands of cubic metres 262 212 172 213 166 Internal Log consumption - thousands of cubic metres 650 590 719 844 875 Sales prices Lumber - per thousand board feet $ 533 $ 549 $ 535 $ 612 $ 599 Logs - per cubic metre $ 90 $ 120 $ 129 $ 122 $ 110 EBITDA(1) $ (0.1) $ (5.3) $ (11.5) $ (1.6) $ 6.8 Net earnings (loss) from continuing operations $ (46.5) $ (10.5) $ (8.2) $ (35.5) $ (6.3) Discontinued pulp operations Sales 20.0 40.6 40.4 45.9 40.1 Loss from discontinued operations (7.1) (74.1) (4.3) (1.7) 1.0 Pulp production - thousands of tonnes 18 71 69 72 67 Pulp sales - thousands of tonnes 34 69 71 73 62 Pulp sales price - per tonne $ 586 $ 582 $ 573 $ 624 $ 651 Net earnings (loss) (53.6) (84.6) (12.5) (37.2) (5.3) Net earnings (loss) per share from continuing operations - basic and diluted (1.81) (0.41) (0.32) (1.38) (0.25) Net earnings(loss) per share - basic and diluted $ (2.09) $ (3.30) $ (0.49) $ (1.45) $ (0.21) Reconciliation of EBITDA to net earnings (loss) EBITDA $ (0.1) $ (5.3) $ (11.5) $ (1.6) $ 6.8 Amortization of property, plant and equipment (5.9) (5.9) (4.5) (9.6) (5.6) Restructuring and other items 0.6 5.9 (8.5) - Interest expense (11.1) (11.5) (11.2) (11.8) (11.5) Foreign exchange gain (loss) on translation of long-term debt (0.9) (0.1) 13.3 (3.3) (1.6) Premium and unamortized discount on bond redemption (27.9) Other income / expense (0.4) 1.1 (0.5) 5.8 Financial restructuring costs - Financial restructuring costs - Income taxes (0.2) 10.6 (0.2) (0.2) (0.2) Net loss from discon- tinued operations (7.1) (74.1) (4.3) (1.7) 1.0 Provision for preferred dividends - - - ------------------------------------------------- Net earnings (loss) $ (53.6) $ (84.6) $ (12.5) $ (37.2) $ (5.3) ------------------------------------------------- ------------------------------------------------- Quarter --------------------------------------- 2004 --------------------------------------- 4th 3rd 3rd 2nd --------------------------------------- (July 28 (July 1 - Sept 30) - July 27) --------------------------------------- Company Predecessor (restated for sale of Port Alice pulp mill in May, 2004) --------------------------------------- Average Exchange Rate - Cdn $ to purchase one U.S. $ $1.2219 $1.3227 $1.3338 $1.3489 Net sales Lumber $ 87.8 $ 85.5 $ 21.4 $ 116.4 Logs 27.7 31.8 13.5 53.4 By-Products 5.7 5.2 2.9 6.5 --------------------------------------- $ 121.2 $ 122.5 $ 37.8 $ 176.3 --------------------------------------- --------------------------------------- Lumber Lumber production - millions of board feet 158 132 59 175 Lumber sales - millions of board feet 158 135 30 171 Logging Log production - thousands of cubic metres 896 681 421 1,158 Log purchases - thousands of cubic metres 144 231 81 395 Log sales - thousands of cubic metres 236 291 120 449 Internal Log consumption - thousands of cubic metres 768 605 261 936 Sales prices Lumber - per thousand board feet $ 557 $ 633 $ 712 $ 681 Logs - per cubic metre $ 117 $ 109 $ 113 $ 119 EBITDA(1) $ (14.0) $ 17.3 $ 10.2 $ 34.9 Net earnings (loss) from continuing operations $ (17.1) $ 14.4 (9.8) (32.9) Discontinued pulp operations Sales 44.6 35.8 6.4 52.2 Loss from discontinued operations (2.5) (0.3) (12.7) 3.8 Pulp production - thousands of tonnes 73 46 11 72 Pulp sales - thousands of tonnes 74 52 9 66 Pulp sales price - per tonne $ 601 $ 694 $ 734 $ 797 Net earnings (loss) (19.6) 14.1 (22.9) (30.3) Net earnings (loss) per share from continuing operations - basic and diluted (0.67) 0.56 Net earnings(loss) per share - basic and diluted $ (0.76) $ 0.55 Reconciliation of EBITDA to net earnings (loss) EBITDA $ (14.0) $ 17.3 $ 10.2 $ 34.9 Amortization of property, plant and equipment (8.3) (4.8) (4.0) (14.6) Restructuring and other items - - - - Interest expense (11.0) (8.6) (8.7) (31.3) Foreign exchange gain (loss) on translation of long-term debt 12.6 14.8 0.6 (16.1) Premium and unamortized discount on bond redemption Other income / expense - (0.1) (5.5) (0.4) Financial restructuring costs - - (3.1) (5.0) Income taxes 3.6 (4.2) 0.6 (0.4) Net loss from discon- tinued operations (2.5) (0.3) (12.6) 3.8 Provision for preferred dividends - - (0.4) (1.2) --------------------------------------- Net earnings (loss) $ (19.6) $ 14.1 $ (22.9) $ (30.3) --------------------------------------- ------------------------------------------------- (1) EBITDA restated to exclude pulp segment now classified as discontinued operations. Consolidated Balance Sheets (Unaudited) (Expressed in millions of Canadian dollars) ------------------------------------------------------------------------- March 31, December 31, 2006 2005 ------------------------------ (Restated - note 10) Assets Current assets: Cash $ 11.8 $ 29.6 Accounts receivable 45.5 50.7 Inventory 95.6 112.3 Restricted cash - 8.9 Prepaid expenses 4.0 3.8 Discontinued operations (note 10) 7.1 36.4 ------------------------------ 164.0 241.7 Investments 7.3 7.1 Property, plant and equipment 366.1 323.1 Other assets 8.2 2.6 Discontinued operations (note 10) 0.6 0.7 ------------------------------ $ 546.2 $ 575.2 ------------------------------ ------------------------------ Liabilities and Shareholders' Equity Current liabilities: Revolving credit facility (note 3) $ - $ 71.4 Accounts payable and accrued liabilities 56.9 79.3 Discontinued operations (note 10) 15.9 38.1 ------------------------------ 72.8 188.8 Long-term debt (note 4) 310.4 247.9 Other liabilities 19.0 19.9 Deferred revenue (note 2) 79.9 - Discontinued operations (note 10) 7.1 8.1 ------------------------------ 489.2 464.7 Shareholders' equity (note 5) Common shares 255.2 255.2 Contributed surplus 0.5 0.4 Deficit (198.7) (145.1) ------------------------------ 57.0 110.5 ------------------------------ $ 546.2 $ 575.2 ------------------------------ ------------------------------ Commitments and contingencies (note 6) See accompanying notes to consolidated financial statements Approved on behalf of the Board: "Reynold Hert" Director "John MacIntyre" Director Consolidated Statements of Operations for the Three Months Ended March 31 (Unaudited) (Expressed in millions of Canadian dollars except for share and per share amounts) ------------------------------------------------------------------------- 2006 2005 ------------------------------ (Restated - note 10) Sales $ 118.2 $ 122.6 Cost and expenses Cost of goods sold 95.3 91.5 Anti-dumping and countervailing duties 4.0 8.5 Freight expenses 12.7 10.2 Selling and administration 6.3 5.6 Amortization of property, plant and equipment 5.9 5.6 ------------------------------ 126.7 121.4 ------------------------------ Operating earnings (loss) (6.0) 1.2 Interest expense (11.1) (11.5) Foreign exchange loss on long-term debt (0.9) (1.6) Premium and unamortized discount on bond redemption (27.9) - Other income (expense) (0.4) 5.8 ------------------------------ Loss before income taxes (46.3) (6.1) Income tax expense (0.2) (0.2) ------------------------------ Net loss from continuing operations (46.5) (6.3) Net income (loss) from discontinued operations (note 10) (7.1) 1.0 ------------------------------ Net loss (53.6) (5.3) Deficit, beginning of period (145.1) (5.5) ------------------------------ Deficit, end of period $ (198.7) $ (10.8) ------------------------------ ------------------------------ Loss per share: Net loss from continuing operations - basic and diluted $ (1.81) $ (0.25) Net income (loss) from discontinued operations - basic and diluted $ (0.28) $ 0.04 Net loss - basic and diluted $ (2.09) $ (0.21) Weighted average number of common shares outstanding (thousands of shares) (note 5) 25,632 25,635 See accompanying notes to the consolidated financial statements Consolidated Statements of Cash Flows for the Three Months Ended March 31 (Unaudited) (Expressed in millions of Canadian dollars) ------------------------------------------------------------------------- 2006 2005 ------------------------------ (Restated - note 10) Cash provided by (used in): Operating activities: Net loss from continuing operations $ (46.5) $ (6.3) Items not involving cash: Amortization of property, plant and equipment 5.9 5.6 Foreign currency translation loss 0.9 1.6 Premium and unamortized discount on bond redemption 27.9 - Other (0.4) 0.8 ------------------------------ (12.2) 1.7 ------------------------------ Changes in non-cash working capital items: Accounts receivable 5.2 (4.4) Inventory 19.3 6.1 Prepaid expenses (0.3) 0.1 Accounts payable and accrued liabilities (22.5) 11.8 ------------------------------ 1.7 13.6 ------------------------------ Cash provided (used) by continuing operations (10.5) 15.3 Cash used by discontinued operations (note 10) (0.9) (0.1) ------------------------------ (11.4) 15.2 ------------------------------ Investing activities: Additions to property, plant and equipment (1.4) (0.4) Additions to capitalized roads (2.2) (2.0) Disposals of property, plant and equipment - 2.0 Restricted cash 8.9 (18.4) Englewood Logging Division (note 2) (3.0) - Price premium prepayment on long-term fibre agreement (note 2) 35.0 - Bill 28 take back proceeds and infrastructure advance - 21.5 Other (4.2) 0.1 Cash used in discontinued operations - (0.1) ------------------------------ 33.1 2.7 ------------------------------ Financing activities: Revolving credit facility (71.4) (10.9) Redemption of 15% Secured Bonds (note 4) (275.9) - Proceeds from term loans (note 4) 307.8 - ------------------------------ (39.5) (10.9) ------------------------------ Increase (decrease) in cash (17.8) 7.0 Cash, beginning of period 29.6 5.0 ------------------------------ Cash, end of period $ 11.8 $ 12.0 ------------------------------ ------------------------------ Supplementary information: Non-Cash item - Acquisition of Englewood Logging Division (note 2) $ 45.0 $ - See accompanying notes to the consolidated financial statements Notes to Unaudited Interim Consolidated Financial Statements (Tabular amounts expressed in millions of Canadian dollars) Western Forest Products Inc.'s (the "Company") business is timber harvesting and lumber manufacturing for worldwide markets. 1. Significant Accounting Policies These interim consolidated financial statements do not include all disclosures required by Canadian generally accepted accounting principles for annual financial statements and, accordingly, should be read in conjunction with the Company's most recent audited annual consolidated financial statements. These interim consolidated financial statements follow the same accounting policies and methods of application used in the Company's consolidated financial statements as at December 31, 2005 and for the year then ended except that the Company has adopted a new accounting policy with respect to a new balance sheet caption "deferred revenue" that arose on entering into a long-term fibre supply agreement (note 2). Deferred revenue will be amortized into income on a straight-line basis over the term of the agreement. 2. Acquisition of Englewood Logging Division and New Long-Term Fibre Supply Agreement On March 17, 2006 the Company closed its acquisition of the assets of the Englewood Logging Division, from a partnership between Canadian Forest Products Ltd. and Oji Paper Canada Ltd. ("the Partnership"), for $45.0 million plus closing adjustments and other costs of approximately $3.0 million. The acquisition comprises Tree Farm License 37 which currently has an annual allowable timber cut of approximately 945,000 cubic meters and includes approximately 6,800 hectares of fee simple lands, existing capital improvements, equipment and railway rolling stock. Transfer of the fee simple lands within Tree farm License 37 is postponed pending receipt of a required consent of the British Columbia Minister of Forests and Range and until that time the Company may harvest timber on such lands under contract with the landowner. The Company has assumed certain contracts and offered employment to all of the employees but has not assumed any other material pre-closing liabilities relating to the assets. The Company has granted a first charge over the acquired assets to secure its obligations to the Partnership under the fibre supply agreement. On March 17, 2006, the Company also executed a 40 year fibre supply agreement with the Partnership. As consideration for entering the fibre supply agreement, the Company will receive a price premium that will be earned as wood chips are delivered under the agreement. A non-refundable prepayment of the price premium of $35.0 million was received on March 17, 2006 and applied to reduce the amount drawn under the Company's revolving line of credit. A further $45 million price premium will be set-off against the consideration due on the acquisition of the Englewood Logging Division. The Company has recorded the price premium as deferred revenue. 3. Revolving Credit Facility On July 27, 2004 the Company established a three-year revolving credit facility, secured by receivables and inventory, which bears an interest rate of prime plus 0.75%. The size of this asset backed facility is determined by the level of outstanding receivables and inventory, but cannot exceed $100.0 million. At March 31, 2006, of the $60.8 million of the facility that was available to the Company, $3.9 million was used to support standby letters of credit leaving a balance of $56.9 million available for future use. 4. Long-Term Debt On July 27, 2004 the Company issued US$221.0 million of 15% Secured Bonds due in 2009 for proceeds of US$210.0 million. On March 10, 2006, the Company redeemed the Secured Bonds in full together with all accrued interest from the proceeds of two new term facilities obtained from Tricap Management Inc. ("Tricap") and its designated lender, the Brookfield Bridge Lending Fund ("BBLF"). Tricap is related to the Company by virtue of its 49% ownership of the Company's Common Shares (see note 11 with respect to the increase in Tricap's ownership from 20.05% of the Common Shares). BBLF is related to the Company by virtue of its voting arrangements with Brookfield Asset Management Inc. ("BAM") and BAM's voting arrangements with Tricap. The new debt financing consists of two secured term facilities, a four-year US$187.5 million facility, and a one-year Canadian $90.0 million facility, which may be extended for a second year at the Company's option. The secured loan is non-amortizing and is pre-payable, in whole or in part, at any time. Interest on amounts drawn under the US facility will be charged at the floating US one-month LIBOR rate plus 8.15%. Interest on the Canadian facility will be charged at the Canadian prime rate plus 5.25% and is being deferred and added to the principal amount outstanding in accordance with the terms of the facility. During the quarter the Company paid BBLF US$1.575 million in commitment fees with respect to the US term facility. A further Canadian $0.9 million commitment fee with respect to the Canadian facility has been deferred and added to the principal amount outstanding. The obligations under the facilities are secured by liens against all of the Companies properties and assets and include customary covenants including repayment of the facilities from the proceeds of asset sales and other non-operating cash inflows, with certain exceptions. The Company is able to deposit the proceeds of asset sales, new security issues and any softwood duty settlements into a working capital reserve in the amount of up to $25 million annually. 5. Shareholders Equity (a) Rights Offering The Company raised a total of $295.0 million through a rights offering of 178.8 million subscription receipts to all shareholders pursuant to a final prospectus dated January 31, 2006. The proceeds will be used to provide financing for the acquisition of Cascadia Forest Products Ltd. (see note 11) and to provide funding for some of the structural changes that need to be made to the combined business and provide additional liquidity. Under the terms of the rights offering, common shareholders received one right for each Common Share that enabled them to subscribe for 6.975 subscription receipts of the Company with each subscription receipt representing the right to receive one Common Share at a price of $1.65 per subscription receipt. The rights were listed for trading on the Toronto Stock Exchange and were exercisable until March 9, 2006. Pursuant to the terms of a standby agreement with the Company, Tricap purchased 51 million common share subscription receipts that had not been purchased by other rights holders under the rights offering at a price of $1.65 per subscription receipt to hold a total of 138.2 million subscription receipts. In accordance with the terms of the Subscription Receipts Agreement, on May 1, 2006 the Company only permitted 94.2 million of the 178.8 million subscription receipts outstanding to be exchanged for 94.2 million Common Shares. As a result, Tricap holds 49% of the Company's 119.8 million Common Shares now issued and outstanding. The remaining 84.6 million subscription receipts held by Tricap will be converted to a new class of non-voting shares provided the creation of such class has been authorized by the Company's shareholders at the next Annual General Meeting. The $295.0 million funds received on the rights offering were held in escrow and were not available to the Company until certain conditions were met, the principal one being the closing of the acquisition of Cascadia. Accordingly, for financial statement purposes the funds have not been shown on the face of the balance sheet at March 31, 2006 but will be recorded in shareholders equity on May 1, 2006, the date that the acquisition of Cascadia closed. (b) Class C Warrants The Company has outstanding 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") that were issued as of July 27, 2004. In accordance with the terms of the Class C Warrant Indenture, following the completion of the rights offering to all shareholders, effective April 5, 2006 the Class C Warrants have been re-priced whereby each Class C Warrant now entitles the holder to purchase one Common Share (subject to certain adjustments) at the following exercise price: $14.72 (previously $16.28) for Tranche 1 Class C Warrants, $23.54 (previously $26.03) for Tranche 2 Class C Warrants, and $30.60 (previously $33.83) for the Tranche 3 Class C Warrants. 6. Commitments and Contingencies (a) Softwood Lumber Duties The Company has recorded countervailing and anti-dumping duties assessed on Canadian softwood lumber exports to the United States totaling $4.0 million (2005 - $8.5 million) for the first quarter of 2006. Cumulative duties from May 22, 2002, when cash deposits were made necessary for shipments of Canadian lumber into the United States, until March 31, 2006, total US$107.3 million. Effective December 12, 2005, the USDOC implemented new deposit rates based on its second Administrative review period (April 1, 2003 to March 31, 2004 for the countervailing duty case; and May 1, 2003 to April 30, 2004 for the antidumping duty case) and reduced the CVD deposit rate to 8.70% and the all others antidumping rate to 2.11%. Effective January 23, 2006, the USDOC further amended the ant-dumping rate to 2.10% reducing the combined duty deposit rate of the Company to 10.8%. At the date of this report the Company's combined deposit rate is 10.80% (2004 - 21.21%). During the fourth quarter of 2005 the Company was notified that it had been selected as a mandatory respondent in the anti-dumping duty third administrative review of certain softwood lumber products from Canada. The Company was selected, along with seven other companies, under the USDOC new "probability proportional to size" sampling methodology. The review covers the period from May 1, 2004 to April 30, 2005. The Company is currently posting anti-dumping duty deposits at the "all others" rate of 2.10% on the value of our lumber shipments to the United States. Following the third review, the Company will post anti-dumping duties at a "company specific" rate that will be determined for us as a result of this review. The Company does not expect to receive the final results of the USDOC third review until December 2006, consistent with the timing of the USDOC second administrative review determinations announced in 2005. On April 27, 2006 the Government of Canada announced that it had reached a framework agreement with the Government of the United States resolving the softwood lumber trade dispute. The Company is unable to predict at this time whether the framework agreement will be ratified. The Company and other Canadian forest product companies, the Federal Government and Canadian Provincial Governments ("Canadian Interests") categorically deny the US allegations and strongly disagree with the final countervailing and antidumping determinations made. Canadian Interests continue to aggressively defend the Canadian industry in this US trade dispute and have appealed the US decisions to NAFTA panels and the WTO. The final amount of countervailing and anti-dumping duties that may be assessed on the Company's Canadian softwood lumber exports to the U.S. cannot be determined at this time and will depend on appeals of the final determinations to any reviewing courts, NAFTA or WTO panels. Notwithstanding the final rates established in the investigations, the final liability for the assessment of countervailing and anti-dumping duties will not be determined until each annual administrative review process is complete, including appeals. A fuller discussion of the softwood lumber duty issue can be found in our 2005 Annual Report and 2005 Annual Information Form. (b) Litigation and Claims In the normal course of its business activities, the Company may be subject to a number of claims and legal actions that may be made by customers, suppliers and others in respect of which either provision has been made or for which no material liability is expected. A lumber broker for our Predecessor, commenced an action in New York in 2001 alleging that our Predecessor was in breach of U.S. anti-trust legislation. The court dismissed the complaint however, the lumber broker is appealing the decision. Management believes the claim is without merit and will vigorously defend it. 7. Pension Expense The Company has defined benefit pension plans which cover substantially all salaried employees. The plans provide pensions based on length of service and final average earnings. The Company also has health care plans covering certain hourly and retired salaried employees. The Company recorded expense with respect to continuing operations of $0.7 million (2005 - $0.7 million) in the three months ended March 31, 2006 with respect to these defined benefit plans and a further $1.8 million (2005 - $1.7 million) with respect to the contributions to the hourly paid employee union pension plans. In addition, the Company recorded expense with respect to discontinued operations of $0.3 million (2005 - $0.4 million) in the three months ended March 31, 2006 with respect to these defined benefit plans and a further $0.1 million (2005 - $0.2 million) with respect to the contributions to the hourly paid employee union pension plans. 8. Financial Instruments The Company has significant exposures to individual customers including one customer which comprised 20% of the Company's sales for the three months ended March 31, 2006. The accounts receivable balance from the same customer comprised 36% of the Company's outstanding receivables at March 31, 2006 and was insured through the Export Development Corporation as to approximately 90% of the balance outstanding. The Company's general practice is to make sales on a cash basis, without credit terms, or to insure them for approximately 90% of their sales value with the Export Development Corporation. 9. Segmented Information The Company is an integrated Canadian forest products company operating in one industry segment comprising the Company's timber harvesting, reforestation, sawmilling, value-added lumber remanufacturing and lumber marketing operations. Until January 26, 2006 the Company also operated in the Pulp Segment that comprised the Company's NBSK pulp manufacturing and sales operations (note 10 - discontinued operations). 10. Discontinued Operations On December 15, 2005 the Company announced the closure of its Squamish, BC pulp mill and its exit from the pulp business. In the fourth quarter of 2005 the Company wrote down the pulp mill to its estimated recoverable value and recorded a charge of $10.8 million on parts and supplies inventory and $36.6 million on property, plant and equipment and recorded an additional charge of $23.8 million with respect to severance and other costs associated with the closure of the pulp mill. On January 26, 2006 production at the pulp mill ceased and on March 9, 2006 the majority of the workforce completed their employment with the Company. The Company is reviewing alternative uses for the site. The Company will incur ongoing costs for supervision, security, property taxes and other costs (including demolition costs less any recoveries for asset sales, if the Company decides to remove certain plant and equipment) in 2006 and future years depending on the Company's plans for the plant site. These costs will be expensed as incurred. The following table provides additional information with respect to the discontinued operations: Three Months Three Months (millions of dollars Ended Ended except where noted) March 31, 2006 March 31, 2005 --------------------------------------------------------------------- Sales $ 20.0 $ 40.1 ------------------------------ ------------------------------ Net earnings (loss) from discontinued operations before income taxes $ (7.1) $ 1.1 Income taxes - (0.1) ------------------------------ Net loss from discontinued operations after income taxes $ (7.1) $ 1.0 ------------------------------ ------------------------------ Cash provided (used in): Operating activities $ (0.9) $ (0.1) Investing activities - (0.1) ------------------------------ ------------------------------ Increase (decrease) in cash from discontinued operations $ (0.9) $ (0.2) ------------------------------ ------------------------------ Included in the net loss from discontinued operations for the three months ended March 31, 2006 is $4.5 million with respect to the cost to terminate certain long-term contracts. 11. Subsequent Events On May 1, 2006 the Company closed its acquisition of all of the issued and outstanding common shares of Cascadia Forest Products Ltd. ("Cascadia") from BAM, for approximately $220.1 million paid in cash on closing and subject to a post closing reduction for forest liabilities estimated at $13.0 million. The consideration paid includes certain amounts based on closing date estimates including an estimate of Cascadia's working capital on closing of $98.2 million. The purchase price paid will be subsequently adjusted to the actual amounts. Head Office 435 Trunk Road Duncan, British Columbia Canada V9L 2P9 E [phone] Fax: [phone] E-mail: [e-mail] Statements on the Internet http://www.westernforest.com/ http://www.sedar.com/