Mar 03, 2005. /Lesprom Network/. Uniforet’s sales increased by 16.9% in 2004. Highlights Increase in sales of 23.6% (16.9% for 2004) Improvement of operating earnings of $6.2 million ($26.7 million for 2004) Pulp mill rental revenues reach $0.5 million ($0.9 million for 2004) Uniforet Inc. reports a net loss of $1.7 million ($0.02 per share) for the fourth quarter ended December 31, 2004, which compares to a net loss of $9.0 million ($0.14 per share) for the corresponding period in 2003. Net earnings for the third quarter of 2004 had totaled $4.9 million ($0.07 per share). The improvement in the results for the fourth quarter of 2004 over those for the corresponding quarter of 2003 stems from the increase in net selling prices for lumber, from greater productivity at the sawmills and from the takeover of pulp mill operations by Katahdin. At the same time, improvement in results was curbed by the appreciation of the Canadian dollar and by the rise in transportation and energy costs. The startup of a third work shift at the Port-Cartier sawmill in late September 2004 led to an increase in production volumes during the quarter. For the fiscal year ended December 31, 2004, net loss was $3.4 million ($0.05 per share), compared to net earnings of $110.7 million ($1.68 per share) for the previous fiscal year, which contained among other things an after-tax gain on debt settlement of $116.3 million resulting from the Company's plan of arrangement with its creditors. Excluding non-recurring items and the foreign-exchange gain on long term debt and related taxes, net loss for fiscal 2003 had amounted to $27.6 million. Average selling prices for lumber for reference items (fob the Great Lakes), expressed in US dollars, show an improvement of 25.9% for 2X4-stud and of 11.2% for 2X4-random lengths in comparison with those in the corresponding period of the previous fiscal year. The Canadian dollar continued to advance in relation to US currency, rising by an average of 7.0% during the quarter compared to its level for the same period of 2003, in the process eliminating about $0.7 million in net earnings compared to those for the corresponding period of 2003. During the fourth quarter of 2004 the Company paid out $1.6 million ($1.2 million US) in countervailing and anti-dumping duties imposed on shipments of lumber to the US, bringing the total to $31.1 million ($22.3 million US) since implementation of those duties in May 2002. The complications involved in exporting Canadian lumber to the US market continued during the fourth quarter, adding confusion to the already extremely complex issue. On December 14, 2004, the US Department of Commerce announced the final results of the first administrative reviews of anti-dumping and countervailing duties. Overall rates were revised from 27.2% to 21.2%, although these had been revised to 13.2% at a previous administrative review carried out in June 2004 and, again, to 7.82% in August 2004. Deposits of these duties were to take place at the new rates of 21.2% as of December 20, 2004. Then, the combined rates were further revised, to 21.0%, on January 24, 2005. Still, it is worth bearing in mind that on August 31, 2004, the North American Free Trade Agreement (NAFTA) review panel handed down a final decision favorable to the Canadian industry, ruling that the US had not succeeded in making its case that the US softwood lumber industry is threatened with material injury by Canadian imports. As a result it demanded that the US Department of Commerce reverse its decision, which was done at the beginning of September. This victory for Canada meant that the US could not legally impose countervailing duties and anti-dumping penalties on imports of Canadian softwood lumber. Nevertheless, on October 13, 2004, the US government announced its intention to contest the decision of the NAFTA panel before a NAFTA extraordinary challenge committee. MANAGEMENT DISCUSSION AND ANALYSIS Comparison of the quarters ended December 31, 2004 and 2003 Sales for the fourth quarter of 2004 amounted to $ 44.3 million, up 23.6% over those of the same period in 2003 owing to an increase of 22.2% in selling prices for lumber, whereas the volume of lumber shipments decreased slightly, by 2.8%, to 74.1 million board feet. On the other hand, woodchip sales reflect an upswing of 36.6% in comparison with those of the corresponding period in 2003, the reason being an increase in shipments. Operating earnings for the fourth quarter of 2004 total $1.4 million, compared to an operating loss of $4.9 million for the corresponding period in 2003, stemming from the strong improvement in sales and the takeover of maintenance costs at the pulp mill by Katahdin following the transaction of April 2004. Sales and administration costs for the fourth quarter of 2004 show an increase of $0.3 million, totaling $1.6 million, the reason being the stock incentive plan charge entered on the books in conformity with the new accounting policy adopted in 2004. Depreciation of fixed assets show an increase of $0.5 million, totaling $2.5 million, because of increased sawmill production volume during the fourth quarter of 2004. Net rental revenues from the Port-Cartier pulp mill amounted to $0.5 million during the fourth quarter of 2004, while depreciation charges for this mill totaled $0.1 million. The maintenance costs for the mill, now presented as non-recurring items, had amounted to $0.6 million for the corresponding period in 2003. Financial expenses for the fourth quarter of 2004 total $3.3 million given that the new secured notes were issued on August 8, 2003, further to the Company's plan of arrangement with its creditors. Net loss for the fourth quarter amounts to $1.7 million ($0.02 per share), compared to a net loss of $9.0 million ($0.14 per share) for the corresponding period in 2003. Net earnings for the third quarter of 2004 had amounted to $4.9 million ($0.07 per share). COMPARISON OF THE 2004 AND 2003 FISCAL YEARS Sales for fiscal 2004 amounted to $176,0 million, up 16.9% over those of the previous fiscal year thanks to the important improvement of $84 per fbm in selling prices for lumber (23.3%), while shipments increased by 4.6% to total 291.4 million fbm. Woodchip sales show a drop of 7.4% compared with those of the previous fiscal year as a consequence of reduced shipments in 2004. The application of countervailing duties of 27.2% on all shipments to the US in 2004 eliminated more than $13.9 million in revenues in 2004. Moreover, the rapid strengthening of the Canadian dollar in relation to US currency in 2004 brought about a decrease in revenues of $5.8 million compared to those for 2003. Operating earnings for 2004 show a remarkable turnaround to total $9.9 million, which compares to a loss of $16.9 million in 2003. The important increase in operating earnings for 2004 results essentially from the improvement in selling prices for lumber, the reduction in unit costs of goods sold, and from the takeover of maintenance costs at the pulp mill by Katahdin as of May 8, 2004, further to the transaction of April 2004. Sales and administration costs for fiscal 2004 amount to $5.7 million, up $0.8 million over those of 2003 primarily as a result of the stock incentive plan charge, increases in insurance costs and contributions to industrial associations. Fixed-asset depreciation costs total $9.2 million in 2004, compared to $8.2 million in 2003, a result of increased sawmill production volume during the fiscal year. Net rental revenues after deduction of attributable expenses from the Port-Cartier pulp mill amounted to $0.9 million in fiscal 2004 and are comprised by revenues based on actual mill's production following its restart by Katahdin. Depreciation charges for this mill totaled $0.4 million in 2004. Mill maintenance costs had totaled $5.7 million in 2003 including $2.4 million, now presented as non-recurring items. The rest was assumed by the lumber sector to reflect operating cost for the biomass boiler and electricity plant. Non-recurring loss for fiscal 2004 stands at $0.9 million and represents the pulp mill maintenance costs incurred until Katahdin took them over on May 8, 2004. Non-recurring gains for fiscal 2003 had amounted to $156.4 million and consisted primarily of the pre-tax gain on debt settlement of $133.9 million resulting from the sanctioning of the Company's plan of arrangement with its creditors in 2003 and from the foreign exchange gain on long-term debt, which amounted to $25.6 million. Pulp mill maintenance costs had totaled $2.4 million in 2003. Financial costs for 2004 amount to $12.7 million, compared to $8.0 million in 2003, when the Company realized a foreign exchange gain in the amount of $6.1 million on accrued interest payable on long-term debt expressed in foreign currency during that fiscal year. Interest on long-term debt totals $6.4 million and shows a major reduction of $4.0 million compared to that of 2003, the primary reason being the diminished debt load resulting from the sanctioning in 2003 of the Company's plan of arrangement with its creditors. Accretion in the value of the Senior convertible note "B" and the note payable to a shareholder amounts to $4.4 million in 2004, compared to $2.8 million for 2003, further to the realization of the Company's plan of arrangement with its creditors in May 2003. Financial costs for 2004 also include an accretion charge for asset retirement obligations of $0.4 million. Net loss for 2004 stands at $3.4 million ($0.05 per share), compared to net earnings of $110.7 million ($1.68 per share) for the previous fiscal year, which included among other things a net after-tax gain on debt settlement of $116.3 million resulting from the Company's plan of arrangement with its creditors. Excluding non-recurring items and the foreign-exchange gain on long term debt and related taxes, net loss for fiscal 2003 would have amounted to $27.6 million. CASH FLOW AND FINANCIAL RESOURCES Operations for the fourth quarter of fiscal 2004 generated $2.9 million, compared to the $5.3 million required for the corresponding period in 2003, the principal reasons being the improvement in operating earnings and the reduction in financial expenses. On the other hand, non-cash operating items required $1.4 million compared to a minimal amount for the corresponding period in 2003. Additions to fixed assets for the fourth quarter of 2004 amounted to $3.0 million, primarily for the installation of an additional production line at the Peribonka sawmill, as well as for the installation of forestry infrastructures at Port-Cartier. Additions to fixed assets for the corresponding period of 2003 had totaled $1.8 million. In other respects, the Company disposed of a $1.0 million investment during the fourth quarter of 2004. Financing activities generated $0.3 million because of the increase in lines of credit. Repayment of long-term debt amounted to $0.3 million during the fourth quarter of 2004, compared to $4.5 million for the corresponding period in 2003, which included a cash repayment of $4.3 million to certain long-term creditors as part of the Company's plan of arrangement. For fiscal 2004, operations generated $11.6 million, whereas those for fiscal 2003 had required $22.4 million. This significant improvement in funds derives from the important growth in operating earnings during 2004 compared to the operating loss of $16.9 million in 2003, and from the substantial reduction in interest on long-term debt. Non-cash operating items required $5.5 million, compared to funds of $8.7 million generated in 2003 and primarily owing to the increase in log inventories and the reduction of certain accounts payable. Financing activities for the fiscal year required $0.8 million, compared to the $5.3 million generated in 2003. Investment activities required funds totaling $5.3 million in 2004, compared to $4.9 million in 2003. Additions to fixed assets in 2004 were $5.9 million, compared to $4.9 million in 2003. At December 31, 2004, bank overdraft stood at $14.3 million, and the Company's working capital amounted to $9.4 million, for a ratio of 1.25:1 compared to a ratio of 1.13:1 at December 31, 2003. During the first quarter of 2005, the Company has renewed its credit facilities with its lending institution up to May 31, 2005. REVIEW OF BALANCE SHEET Total assets of the Company at December 31, 2004, amounted to $143.8 million, up $5.9 million over those of December 31, 2003. Current assets expanded by $9.5 million to $46.5 million during the fiscal year ended December 31, 2004, primarily because of the increase in inventories of raw material needed to support the sawmills' full-capacity operation. Fixed assets totaled $97.3 million at December 31, 2004, down $3.6 million from those at December 31, 2003. Additions to fixed assets for 2004 amounted to $5.9 million, while an amount of $9.6 million was recorded in amortization charges. Moreover, the Company disposed of assets in the amount of $0.2 million during 2004. At December 31, 2004, current liabilities expanded by $4.2 million compared to their level at December 31, 2003, to stand at $37.1 million, primarily because of the increase in sums owing forestry contractors stemming from the buildup of raw-material inventories and accrued interest on Senior convertible note "B". In addition, the tranche of the long-term debt falling due in the short term shows a drop of $0.9 million compared to its level at December 31, 2003. Assets retirement obligations stood at $2.1 million at December 31, 2004 compared to $2.3 million in 2003. Long-term debt grew by $4.8 million to $89.9 million at December 31, 2004, compared to $85.1 million at December 31, 2003. That increase in long-term debt stems from the accretion, amounting to $4.4 million, in the value of the Senior convertible note "B" and the note payable to a shareholder since they were recorded at present value in the Company's balance sheet further to its plan of arrangement with its creditors in 2003. Repayment of long-term debt amounted to $1.0 million during fiscal 2004, whereas long-term debt itself rose by $0.6 million. Shareholders' equity stood at $14.7 million at December 31, 2004, down by $2.8 million from its level of $17.5 million at December 31, 2003, as a result of the net loss suffered during fiscal 2004. The Company's share capital consists of an unlimited number of class "A" and "B" subordinate voting shares and preferred shares. The class "A" and "B" subordinate voting shares carry the same privileges, except that the latter comprise 10 votes per share compared to only one for the class "A." The preferred shares may be issued in one or more series. The Senior convertible note "B" of an aggregate principal amount of $40 million may be converted, at the holder's discretion, into 80 million class "A" subordinate voting shares. Outlook Supported by positive housing-start statistics, the lumber market experienced a very interesting start to 2005 at the level of demand, which produced a rise in selling prices for lumber. After enjoying an exceptional strengthening during the last quarter of 2004, the Canadian dollar has remained relatively stable in the early part of fiscal 2005. Production and lumber shipment volume during the next quarter should be stable compared to those of the last quarter of 2004, as the two sawmills will be operating at full capacity throughout the first quarter of 2005. In another connection, on February 9, 2005, the Canadian government announced its intention to ask the World Trade Organization on February 25 to order the U.S. to reimburse the amount of $4.1 billion, which is the total of countervailing duties and anti-dumping penalties paid by Canadian lumber exporters since the litigation began on May 22, 2002. Uniforet manufactures softwood lumber and owns a pulp mill now rented by virtue of a long-term agreement. The Company carries on business through mills located in Port-Cartier and in the Peribonka area. Uniforet's Class A Subordinate Voting Shares are listed on the Toronto Stock Exchange under the trading symbol UNF.SV.A. The foregoing presents events that have affected the performance of Uniforet during the fourth quarter of 2004. It also contains forward- looking statements and estimates. Statements of this nature are subject to risks and uncertainties, known and unknown, and are liable to comprise risks and uncertainties that could cause actual results of the Company to differ materially from results presented or implicit. UNIFORET INC. Notes to the interim consolidated financial statements The unaudited interim condensed consolidated financial statements attached were prepared in accordance with generally accepted accounting principles in Canada, in compliance with the same accounting policies as those contained in note 2 of the consolidated financial statements for the fiscal year ended December 31, 2003. These unaudited interim condensed consolidated financial statements do not contain all the information required by generally accepted accounting principles. They should therefore be read in conjunction with the consolidated financial statements for the year ended December 31, 2003. Audited consolidated financial statements that comply with generally accepted accounting principles in Canada will be delivered to shareholders with the 2004 annual report. 1.Financial position of the Company and going concern : These interim consolidated financial statements are presented on the assumption that the Company is on going concern in accordance with Canadian generally accepted accounting principles. The going concern basis of presentation assumes the Company will continue in operation for the foreseeable future and be able to realize its assets and discharge its liabilities and commitments in the normal course of business. There is doubt about the appropriateness of the use of the going concern assumption because, although the financial reorganization was completed on October 3, 2003 and resulted in a significant decrease in financial expenses, this financial reorganization cannot single-handedly ensure that the Company remains a going concern. The trading environment in which the company operated in 2004 was turbulent, and presented important challenges to which the Company had to respond. The commercial dispute with the US over imports of Canadian softwood lumber to the US market continued in 2004. Despite decisions favorable to the Canadian industry handed down by the North American Free Trade Agreement (NAFTA) review panel, the US government announced, in early October 2004, its intention to contest these before a NAFTA extraordinary challenge committee. No resolution in this matter is foreseeable in the short term. The vigorous appreciation of the Canadian dollar over the last two years in relation to US currency made for important losses in revenues for Canadian export industries, significantly reducing their profit margins and their competitive position. Furthermore, the important hike in energy costs in 2004 gave rise to significant increases in the Company's delivery and production expenses, primarily at the level of raw materials and conversion costs. The Company has to generate the cash flow required to provide for the semi-annual interest payments of $4.2 million due in March 2005 and in September 2005, and to meet its general operating cash flow requirements. In that context, the Company will have to renew its current credit facilities, which expire on May 31, 2005, or obtain additional capital, in case of insufficient or non-renewal of its credit facilities. In other matters, the Company concluded on April 29, 2004, final agreements with a third party concerning the rental of its pulp mill and co- generation facilities of Port-Cartier. That transaction has permitted since May 8, 2004, for the elimination of maintaining costs of that mill, which amounted to more that 5.0 million in 2003. Moreover, the agreement provides that the realization of net earnings based on annual pulp production at the mill and the improvement in results at the adjacent sawmill. In the opinion of management, the improvement in these operating results in the course of recent quarters as well as the transaction described above will contribute to a mitigation of the unfavorable conditions that are casting doubt on the validity of the going-concern hypothesis used as part of the preparation of the present financial statements. However, there is no guarantee that the Company could generate sufficient cash-flows and/or that additional capital ultimately be obtained in order to provide for its financial obligations up until December 30, 2005. These financial statements assume the realization of assets and settlement of liabilities in the normal course of business and in accordance with the memorandums of understanding. If the going concern basis were not appropriate for these financial statements, then adjustments would be necessary in the carrying value of assets and liabilities, the reported revenues and expenses, and the balance sheet classifications used. 2.Accounting changes Asset retirement obligations Effective January 1, 2004, the Company adpoted, on a prospective basis, the new recommendation of Section 3110 of the CICA Handbook, relating to "Asset Retirement Obligations." According to this section, entities are required to recognize an obligation at its fair value when there is a legal obligation related to the retirement of a fixed asset in the period in which it is incurred. The resulting costs are capitalized and increase the carrying value of the fixed asset and are depreciated over its remaining useful life. The obligation is evaluated by using a credit-adjusted risk-free interest rate. Asset retirement obligations of the Company as affected by Section 3110 relate mainly to the covering of landfill sites and to the disposition of electrical transformers and their components. For these fixed assets, an obligation must be initially recognized in the period in which there is sufficient information to estimate potential settlement dates. As of January 1, 2004, the adoption of Section 3110 has resulted in a $0.4 million increase in net loss ($0.4 million reduction of net loss of 2003), a $1.1 million increase in opening deficit of fiscal 2003 and a $0.8 million increase in opening deficit for fiscal 2004, a $1.4 million increase in total assets ($1.5 million in 2003) and a $1.7 million increase in short term liabilities ($2.3 million in 2003).