International Forest Products Limited
TSX : IFP.SV.A

International Forest Products Limited

October 27, 2005 20:22 ET

Interfor Earns $4.7 Million in the 3rd Quarter of 2005

VANCOUVER, BRITISH COLUMBIA--(CCNMatthews - Oct. 27, 2005) - International Forest Products Limited (TSX:IFP.SV.A) -

Gain on property sales drives earnings; operating results impacted by lower prices and stronger dollar

OPERATING RESULTS

International Forest Products Limited ("Interfor" or the "Company") recorded net earnings of $4.7 million or $0.10 per share in the 3rd Quarter of 2005 compared to net earnings of $9.0 million or $0.18 per share in the 2nd Quarter and a net loss of $3.1 million or $0.06 per share in the 3rd Quarter of 2004. Through the first 9 months of 2005 Interfor has recorded net earnings of $24.6 million or $0.51 per share compared to net earnings of $9.5 million or $0.20 per share for the 9 months ended September 30, 2004.

Interfor's results for the 3rd Quarter include a net gain of $7.3 million or $0.15 per share relating to unusual items. Other Income amounted to $8.0 million after-tax or $0.17 per share, almost entirely relating to the sale of the Company's former Squamish mill site. This gain was offset in part by $1.1 million in severance payments ($0.7 million after tax, or $0.02 per share) relating to staff changes within the Company's B.C. Coastal operations.

Market conditions in the U.S. deteriorated in the 3rd Quarter in spite of strong consumption. Benchmark SPF 2X4 prices dropped from an average of US$363 per thousand board feet in the 2nd Quarter to US$329 per thousand board feet during the 3rd Quarter. In Japan, hemlock 105mm squares improved to US$615 per thousand board feet in the 3rd Quarter from US$608 per thousand board feet in the 2nd Quarter on the strength of improved housing starts and lower inventories. Prices for most industrial grades and for cedar products were under downward pressure for most of the 3rd Quarter. Exacerbating the drop in product prices was the rising value of the Canadian dollar, which increased from an average of US$0.80 in the 2nd Quarter to US$0.83 in the 3rd Quarter, ending the quarter at a thirteen year high of US$0.86.

Lumber shipments increased to 308 million board feet in the 3rd Quarter from 263 million board feet in the 2nd Quarter and 238 million in the 3rd Quarter last year.

Sales revenue was $214 million compared to $213 million in the 2nd Quarter and $239 million in the 3rd Quarter of 2004.

EBITDA excluding Other Income was $13.8 million, down from $23.5 million in the 2nd Quarter and $31.2 million in the 3rd Quarter of 2004.

In spite of the difficult market environment Interfor's B.C. Interior and U.S. operations remained profitable during the 3rd Quarter, although returns were below those achieved in the 2nd Quarter.

The Company's B.C. Coastal operations were not profitable in the 3rd Quarter. The Coastal region suffers from high costs and poor productivity relative to other regions and has been disproportionately impacted by the ongoing softwood dispute and by the increase in the value of the Canadian dollar. Interfor's 3rd Quarter results in the Coastal region were further impacted by the carrying costs associated with the Field sawmill which has been curtailed since the 4th Quarter of 2004, and by operating losses in the Woodlands Division and Queensboro sawmill. The Company continues in discussions regarding the possible sale of Field and is working actively to reduce costs and improve results in its remaining Coastal operations.

During the 3rd Quarter Interfor paid $8.0 million ($5.3 million after tax or $0.11 per share) in deposits for countervailing and anti-dumping duties on shipments of 74 million board feet from Canada to the U.S. At the end of the 3rd Quarter Interfor had paid total deposits of US$85.8 million (CAD $99.8 million utilizing September 30, 2005 exchange rates) since the deposit requirement came into effect in May 2002.

CASH FLOW AND BALANCE SHEET

During the 3rd Quarter Interfor generated $8.4 million in cash from operations before changes in working capital, and $22.7 million after changes in working capital were considered.

Capital spending in the 3rd Quarter amounted to $16.2 million including $5.1 million on roads, $2.9 million on maintenance projects, $7.9 million on discretionary projects and $0.3 million on land development. In addition, $3.1 million in start-up costs associated with the Queensboro mill rebuild were deferred in the 3rd Quarter ($5.0 million year-to-date).

Interfor's net debt dropped to $66.7 million at the end of the 3rd Quarter from $87.7 million at the end of the 2nd Quarter, representing a ratio of net debt to invested capital of 14.5% compared to 18.3% at the end of the 2nd Quarter.

OUTLOOK

The price of structural lumber in the U.S. market has moved lower in recent weeks with SPF 2X4 currently trading in the range of US$315 - $325 per thousand board feet. Expectations are that prices will remain at or near current levels for the balance of the year. On the other hand, cedar prices have improved in recent weeks on the back of steady consumption and tight supply. In Japan, prices are expected to remain steady.

Log prices in most regions are beginning to adjust to new product price levels.

Interfor intends to operate its B.C. Interior and U.S. sawmills on a normal schedule in the 4th Quarter. The Company's Coastal sawmills will operate on a reduced basis with schedules reviewed on a regular basis to ensure the best possible financial results. The start-up of the Queensboro plant is proving to be more difficult than expected and a concerted effort is being directed towards resolving the deficiencies and improving performance.

Initiatives to streamline the Company's Coastal operations are ongoing and are expected to result in a number of changes in the 4th Quarter. At the same time, with its strong balance sheet, Interfor continues to look for growth opportunities in regions and in product lines with attractive fundamentals.

NORMAL COURSE ISSUER BID

Interfor's Board of Directors has authorized, subject to regulatory approval, a Normal Course Issuer Bid to purchase up to 2,384,000 or 5% of the Company's outstanding Class A shares. The Company will be in a position to commence buying shares two trading days after receiving approval from the Toronto Stock Exchange.

Under previous Normal Course Issuer Bids approved in 2000 and 2002, Interfor purchased 3,107,000 and 482,000 Class A shares respectively. All shares purchased under the plans were cancelled.

The Company believes that market conditions provide an opportunity to acquire shares at attractive prices and that purchases will enhance long-term shareholder value.

FORWARD-LOOKING STATEMENTS

This press release contains statements that are forward-looking in nature. Such statements involve known and unknown risks and uncertainties that may cause the actual results of the Company 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 the Company's annual statutory report.

EBITDA

In this Press Release reference is made to EBITDA and EBITDA excluding Other Income. EBITDA represents earnings before interest, taxes, depletion, amortization and restructuring costs and write-downs of plant and equipment. EBITDA excluding Other Income represents EBITDA less other income. The Company discloses EBITDA as it is a measure used by analysts and Interfor's management to evaluate the Company's performance. As EBITDA is a non-GAAP measure, it may not be comparable to EBITDA calculated by others. In addition, as EBITDA is not a substitute for net earnings, readers should consider net earnings in evaluating the Company's performance.

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 five sawmills in the Coastal region of British Columbia, one in the B.C. Interior, two in Washington and two in Oregon. In addition, Interfor operates a number of value-added remanufacturing and specialty products facilities in B.C. and Washington.

Additional information relating to the Company and its operations, including Interfor's Annual Statutory Information for 2004, can be found on its website at www.interfor.com and or on SEDAR at www.sedar.com.



SELECTED STATISTICS
-------------------
Three Months Ended Nine Months Ended
September 30 September 30
2005 2004 2005 2004
-------- -------- -------- --------

Lumber volume (MMfbm)
- Sales 308 238 828 622
- Production(1) 308 247 827 655

Log Volume (000 m3)
- Production 712 891 1,924 2,391

Prices ($/Mfbm)
- Lumber(2) 494 673 542 666
- Pulp Chips 25 40 27 38

Shares Outstanding (millions)
- Total at period end(3) 48.7 48.4 48.7 48.4
- Weighted average 48.7 48.4 48.7 48.4

(1) excluding volumes custom cut for third parties
(2) FAS basis, net of duty
(3) as of October 26, 2005 the number of shares outstanding
by class are as follows:
Class A Class B Total
47,688,576 1,015,779 48,704,355


There will be a conference call on Friday, October 28, 2005 at 8:00 AM (Pacific Time) hosted by INTERNATIONAL FOREST PRODUCTS LIMITED for the purpose of reviewing the Company's release of its Third Quarter 2005 Financial Results. The dial-in number is 1-800-640-7112.

The conference call will also be recorded for those unable to join in for the live discussion. The number to call is 1-800-558-5253 Reservation 21264561# and will be available until November 11, 2005.



William L. Sauder, Duncan K. Davies,
Chairman President and C.E.O.


CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months and nine months ended
September 30, 2005 and 2004 (unaudited)
--------------------------------------------------------------------
(thousands of
Canadian 3 Months 3 Months 9 Months 9 Months
dollars except Sept. 30, Sept. 30, Sept. 30, Sept. 30,
earnings per share) 2005 2004 2005 2004
--------------------------------------------------------------------

Sales $ 214,236 $ 238,952 $ 620,570 $ 620,790

Costs and expenses:
Production 188,485 192,497 528,858 506,851
Selling and
administration 4,552 4,451 15,142 14,147
Long term incentive
compensation 200 2,445 806 3,846
U.S. countervailing
and antidumping
duty deposits
(note 11(a)) 8,022 11,427 22,921 30,182
Amortization of
plant and equipment 7,409 6,022 19,927 16,457
Depletion and
amortization of
timber, roads
and other 8,404 9,659 22,077 25,489
-------------------------------------------------------------------
217,072 226,501 609,731 596,972

--------------------------------------------------------------------
Operating earnings
(loss) before
restructuring costs
and write-downs of
property, plant
and equipment (2,836) 12,451 10,839 23,818

Restructuring costs
and write-downs of
property, plant
and equipment (note 8) 1,136 20,143 27,597 20,743
--------------------------------------------------------------------
Operating
earnings (loss) (3,972) (7,692) (16,758) 3,075

Interest expense
on long-term debt (1,035) (441) (2,619) (675)
Other interest expense (254) (543) (744) (1,241)
Other income (note 7) 9,771 69 38,130 2,852
Equity in earnings
of investee companies 846 3,042 5,626 7,258
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9,328 2,127 40,393 8,194

--------------------------------------------------------------------
Earnings (loss)
before income taxes 5,356 (5,565) 23,635 11,269
Income taxes (recovery):
Current 1,366 1,250 3,700 2,100
Future (714) (3,760) (4,650) (310)
--------------------------------------------------------------------
652 (2,510) (950) 1,790
--------------------------------------------------------------------

Net earnings (loss) $ 4,704 $ (3,055) $ 24,585 $ 9,479
--------------------------------------------------------------------
--------------------------------------------------------------------

Net earnings (loss)
per share (note 9)
Basic $ 0.10 $ (0.06) $ 0.51 $ 0.20
Diluted $ 0.10 $ (0.06) $ 0.50 $ 0.19
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--------------------------------------------------------------------

See accompanying notes to consolidated financial statements


CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
For the nine months ended September 30, 2005 and 2004 (unaudited)
--------------------------------------------------------------------
(thousands of 9 Months 9 Months
Canadian dollars) Sept. 30, 2005 Sept. 30, 2004
--------------------------------------------------------------------

Retained earnings,
beginning of year $ 66,218 $ 41,505

Net earnings 24,585 9,479
--------------------------------------------------------------------

Retained earnings,
end of period $ 90,803 $ 50,984
--------------------------------------------------------------------
--------------------------------------------------------------------

See accompanying notes to consolidated financial statements


CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three and nine months ended
September 30, 2005 and 2004 (unaudited)
--------------------------------------------------------------------
3 Months 3 Months 9 Months 9 Months
(thousands of Sept. 30, Sept. 30, Sept. 30, Sept. 30,
Canadian dollars) 2005 2004 2005 2004
--------------------------------------------------------------------
Cash provided by (used in):
Operating activities:
Net earnings (loss) $ 4,704 $ (3,055) $ 24,585 $ 9,479
Items not involving cash:
Amortization of plant
and equipment 7,409 6,022 19,927 16,457
Depletion and
amortization of
timber, roads
and other 8,404 9,659 22,077 25,489
Future income taxes (714) (3,760) (4,650) (310)
Reforestation liability (425) (69) 554 2,335
Other long-term
liabilities (107) 510 (2,070) (1,501)
Equity in earnings of
investee companies (846) (3,042) (5,626) (7,258)
Writedown of property,
plant and equipment - 14,926 30,277 15,121
Other (10,072) (69) (38,414) (2,852)
--------------------------------------------------------------------
8,353 21,122 46,660 56,960
Cash generated from
(used in) operating
working capital:
Accounts receivable 2,553 (2,068) (6,753) (24,735)
Inventories 8,948 (1,895) 14,948 (39,398)
Prepaid expenses (2,679) 67 (577) (1,637)
Accounts payable and
accrued liabilities 4,117 13,811 (390) 38,218
Income taxes 1,427 1,039 650 1,270
--------------------------------------------------------------------
22,719 32,076 54,538 30,678

Investing activities:
Additions to property,
plant and equipment (11,076) (9,257) (42,564) (15,339)
Additions to logging
roads and timber (5,132) (7,284) (16,120) (22,340)
Additions to deferred
start-up costs
(note 1(b)) (2,100) - (3,215) -
Proceeds on disposal
of property, plant
and equipment 14,174 70 38,432 6,179
Acquisitions (note 3) - (98,955) (79,905) (98,955)
Cash received on
acquisition of
subsidiary (note 3) - - 2,650 -
Investments and
other assets (281) (626) 5,417 3,644
--------------------------------------------------------------------
(4,415) (116,052) (95,305) (126,811)

Financing activities:
Issuance of
share capital 97 - 287 81
Increase (decrease)
in bank indebtedness (14,150) (3,094) - 8,982
Funds from promissory
note payable to
investee company (note 5) - - 27,757 -
Additions to long-term
debt (note 6(b)) - 87,577 31,405 87,577
Repayments of long-term
debt (note 6(b)) - - (32,910) -
--------------------------------------------------------------------
(14,053) 84,483 26,539 96,640

Foreign exchange gain (loss)
on cash and cash equivalents
held in a foreign currency: (1,180) (507) (960) (507)
--------------------------------------------------------------------
Increase (decrease) in cash 3,071 - (15,188) -

Cash on deposit,
beginning of period - - 18,259 -
--------------------------------------------------------------------

Cash on deposit,
end of period $ 3,071 $ - $ 3,071 $ -
--------------------------------------------------------------------
--------------------------------------------------------------------

See accompanying notes to consolidated financial statements


CONSOLIDATED BALANCE SHEETS
September 30, 2005 and 2004 (unaudited) and December 31, 2004
(audited)
--------------------------------------------------------------------
(thousands of Sept. 30, Dec. 31, Sept. 30,
Canadian dollars) 2005 2004 2004
--------------------------------------------------------------------
Assets
Current assets:
Cash $ 3,071 $ 18,259 $ -
Accounts receivable (note 13(b)) 53,255 42,228 57,518
Inventories 104,159 108,763 146,609
Prepaid expenses 10,933 10,231 11,360
Future income taxes 6,030 7,281 5,613
-------------------------------------------------------------------
177,448 186,762 221,100
Investments and other assets:
Investments and advances 56,833 47,236 44,245
Deferred financing fee, net
of accumulated amortization 449 509 560
-------------------------------------------------------------------
57,282 47,745 44,805

Property, plant and
equipment, net of accumulated
amortization (note 1(b)) 294,350 235,449 248,215

Timber and logging roads, net
of accumulated depletion and
amortization 60,286 82,556 82,444

Goodwill and other intangible
assets 15,694 14,062 14,146
--------------------------------------------------------------------

$ 605,060 $ 566,574 $ 610,710
--------------------------------------------------------------------
--------------------------------------------------------------------

Liabilities and Shareholders'
Equity
Current liabilities:
Bank indebtedness (note 6(a)) $ - $ - $ 21,933
Accounts payable and accrued
liabilities 86,525 85,802 107,567
Income taxes payable 1,115 579 1,628
Promissory note payable to
investee company (note 5) 27,757 - -
-------------------------------------------------------------------
115,397 86,381 131,128

Reforestation liability, net
of current portion 17,536 16,982 18,505
Long-term debt (note 6(b)) 69,762 74,163 84,202
Other long-term liabilities 7,103 9,968 12,463
Future income taxes 2,886 6,332 7,633
Shareholders' equity:
Share capital
Class A subordinate voting
shares 294,868 294,581 293,543
Class B common shares 4,080 4,080 4,080
Contributed surplus 8,201 8,201 8,201
Cumulative translation
adjustment (5,576) (332) (29)
Retained earnings 90,803 66,218 50,984
-------------------------------------------------------------------
392,376 372,748 356,779

--------------------------------------------------------------------

$ 605,060 $ 566,574 $ 610,710
--------------------------------------------------------------------
--------------------------------------------------------------------

Contingencies (note 11)

See accompanying notes to consolidated financial statements

On behalf of the Board:

W. L. Sauder J. A. Milroy
Director Director


INTERNATIONAL FOREST PRODUCTS LIMITED
Notes to Unaudited Interim Consolidated Financial Statements
(Tabular amounts expressed in thousands except per share amounts)
Three and nine months ended September 30, 2005 and 2004 (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 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, 2004 except for the new accounting policy adopted subsequent to that date and the disclosure of an existing policy that is now significant, as detailed below.

(a) Variable interest entities:

Effective January 1, 2005, the Company adopted the Canadian Institute of Chartered Accountants ("CICA") Accounting Guideline 15, Consolidation of Variable Interest Entities on a prospective basis. The guideline prescribes the application of consolidation principles for entities that meet the definition of a variable interest entity ("VIE"). An enterprise holding other than a voting interest in a VIE could, subject to certain conditions, be required to consolidate the VIE if it is considered its primary beneficiary whereby it would absorb the majority of the VIE's expected losses, receive the majority of its expected residual returns, or both. The adoption of this new standard had no effect on the consolidated financial statements as the Company does not have any VIEs.

(b) Deferred start-up costs:

The Company has a historical accounting policy of deferring start-up costs on major plant construction to the extent these costs meet the criteria under CICA Emerging Issues Communication 27. During the 2nd Quarter, the Company completed major plant construction on its Queensboro mill and applied this accounting policy in the second and third quarters for start-up costs incurred. The Company deferred start-up costs until the mill reached sustainable production levels which had been defined as the earlier of:

(i) Seventy percent of production capacity for two consecutive months; or

(ii) Six months

and to a maximum of 20% of the total project cost.

Start-up costs totalling $5,000,000 were deferred in 2005 and will be amortized over five years on a straight-line basis starting in the 4th Quarter. These costs are included on the balance sheet in property, plant and equipment.

2. Comparative figures:

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

3. Acquisitions:

On May 31, 2005, the Company acquired the sawmill assets and inventory of Floragon Forest Products Molalla Inc. and Floragon Manufacturing LLC (together, "Floragon"), a sawmill in the U.S. Pacific Northwest for US$55,363,000. In addition, the vendors may qualify for an incentive payment based on the financial performance of the Floragon operation in the 12 months following the closing. To acquire these assets, the Company paid CAD$69,546,000, of which $31,405,000 was financed through the existing Revolving Line, $6,281,000 was financed through an operating line of credit with a U.S. bank, and the balance through cash on hand. Any further consideration that may be payable as a result of the incentive payment represents contingent consideration which will be recorded when the outcome is likely and the amount reasonably determinable.

In late 2004, the majority shareholders of an investee company exercised their option under a shareholders' agreement to put their shares to the Company. Consequently, effective May 31, 2005, Interfor acquired the remaining 51% of the common shares of Mapri Developments Ltd. ("Mapri"), in which the Company previously held a 49% interest. The consideration paid for the acquisition totalled $10,359,000 and was funded through cash on hand.

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



------------------------------------------------

Net assets acquired:
Cash $ 2,650
Other current assets 9,092
Property, plant and equipment 70,857
-----------------------------------------------
82,599

Liabilities assumed:
Current liabilities 664
Future income taxes 2,030
-----------------------------------------------
2,694
------------------------------------------------
$ 79,905
------------------------------------------------
------------------------------------------------

Consideration funded out of:
Cash on hand $ 42,219
Operating Lines 6,281
Revolving Line 31,405
-----------------------------------------------
$ 79,905
------------------------------------------------
------------------------------------------------


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 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. Promissory note payable to investee company:

On April 21, 2005, Seaboard Shipping Company Limited ("Seaboard"), in which the Company holds an equity interest, sold its 50% interest in Western Stevedoring Limited for $40,000,000 plus a $2,500,000 dividend. The after-tax proceeds of this transaction were loaned to Seaboard's shareholders at that time based on a formula related to each shareholder's share of shipments over a two year period. Interfor's share of the net after-tax cash proceeds on the sale totalled $27,757,000. The Company signed an unsecured promissory note which is payable on demand on or before January 31, 2006 and is non-interest bearing until January 31, 2006 and bears interest at the rate of 5% per annum thereafter.

6. Bank indebtedness and long-term debt:

(a) Bank indebtedness:

In the 1st Quarter of 2005, the Company secured a new operating line of credit with a U.S. bank in the amount of US$15,000,000. The line is subject to a borrowing base calculation dependent upon certain accounts receivable and inventories of the Company's subsidiary, Interfor Pacific Inc. As at September 30, 2005, the maximum borrowing available was US$15,000,000, of which US$12,879,000 was unused. The line utilization includes outstanding letters of credit of US$120,000. The loan bears interest at U.S. bank prime or, at the Company's option, at LIBOR plus 1?%. The line of credit is secured by the accounts receivables and inventories of Interfor Pacific Inc. and is subject to certain financial covenants including a maximum ratio of total debt to total capitalization. The line matures on March 1, 2006.

On acquisition of Mapri on May 31, 2005, the Company renewed Mapri's existing revolving line of credit of $4,000,000. This demand line bears interest at bank prime plus 1/4%, is secured by a general charge over all assets of Mapri and a specific charge against the inventories of B.W. Creative Wood Industries Ltd., a wholly-owned subsidiary of Mapri. The line is subject to a borrowing base calculation dependent upon certain accounts receivable and inventories and matures on August 1, 2006. Maximum borrowing available at September 30, 2005 was $2,740,000, which was not utilized.

In the 2nd Quarter of 2005, the Company renewed its existing Canadian operating line of credit. The terms and conditions of the line remain unchanged, with a maximum operating line of credit totalling $75,000,000 (2004 - $75,000,000), and subject to a borrowing base calculation dependent upon certain accounts receivable and inventories. The loan bears interest at bank prime plus a premium depending upon a financial ratio or, at the Company's option, at rates for Bankers' Acceptances. The line of credit is secured and is subject to certain financial covenants including a minimum working capital requirement and a maximum ratio of total debt to total capitalization. The line matures on April 27, 2006. As at September 30, 2005, the maximum borrowing available was $68,579,000 (2004 - $75,000,000), with outstanding letters of credit of $4,855,000 (2004 - $4,474,000) and bank indebtedness bringing the unused portion of the line to $63,724,000 (2003 - $40,188,000).

(b) Long-term debt:

By April 30, 2005, the Company had repaid US$26,700,000 (CAD$32,910,000) on its Canadian revolving term line (the "Revolving Line") to eliminate the outstanding balance.

On May 31, 2005, the Company drew US$25,000,000 on its Revolving Line in order to facilitate the acquisition of the sawmill assets of Floragon. As at September 30, 2005, the Revolving Line was drawn by US$25,000,000 (2004 - US$31,700,000) and revalued at the month-end exchange rate to CAD$29,067,000 (2004 - CAD$39,993,000). The Revolving 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 Bankers' Acceptances or LIBOR based loans and matures on April 27, 2007.

As at September 30, 2005, the $US non-revolving term line (the "Non-Revolving Line") remains fully drawn at US$35,000,000 (2004 - US$35,000,000) and revalued at the month-end exchange rate to CAD$40,695,000 (2004 - CAD$44,256,000). The Non-Revolving 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 and matures on September 1, 2009.

Both lines are secured and are subject to certain financial covenants including a minimum working capital requirement and a maximum ratio of total debt to total capitalization.

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



------------------------------------------------

2006 $ -
2007 29,067
2008 -
2009 40,695
2010 -
------------------------------------------------

$ 69,762
------------------------------------------------
------------------------------------------------

7. Other income:
-----------------------------------------------------------------------
-----------------------------------------------------------------------
3 Months 3 Months 9 months 9 months
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2005 2004 2005 2004
-----------------------------------------------------------------------

Gain on settlement of
timber takeback $ - $ - $ 6,373 $ -
Gain on disposal of
surplus property, plant
and equipment 10,072 69 12,557 2,852
Equity income participation
in gain on disposal of
Western Stevedoring - - 19,501 -
Other income (expense) (301) - (301) -
-----------------------------------------------------------------------
$ 9,771 $ 69 $ 38,130 $ 2,852
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-----------------------------------------------------------------------


Under the terms of the Forest Revitalization Act, the Company received $22,111,000 in compensation for the loss of logging rights on the B.C. Coast, including $17,611,000 related to the 20% reduction in harvest volumes and a $4,500,000 advance payment against lost infrastructure and road construction costs. $1,300,000 was recorded as a recovery of production costs and $20,811,000 was recorded as proceeds on the disposal of timber and roads and resulted in a net gain on settlement of timber takeback of $6,373,000 in the 1st Quarter.

On April 21, 2005, Seaboard, in which the Company holds an equity interest, sold its 50% interest in Western Stevedoring Limited for $40,000,000 plus a $2,500,000 dividend. As net earnings of Seaboard are distributed based on a percentage of shipments of product by the shareholders, Interfor participated in 71.2% of the net after-tax gain on the sale, with its share totalling $19,501,000, which was recorded in the 2nd Quarter.

On July 25, 2005, the Company completed the sale of surplus property located in Squamish, British Columbia (former location of its Squamish Lumber mill). The Company recorded sale proceeds of $12,975,000 and an after-tax gain of approximately $7,700,000 million in the 3rd Quarter of 2005.

8. Restructuring costs and write-downs of property, plant and equipment:

In the second quarter, following an extensive evaluation of its operations, the Company identified certain B.C. coastal assets which it did not consider to be part of its future core operations and reviewed the valuation of these non-core assets. An impairment charge of $28,007,000 was recorded to reduce the carrying values of these assets to estimated fair values.

During the second quarter, the Company also received $1,546,000 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. The associated costs had been expensed in prior years as restructuring costs. Interfor also recorded additional severances for hourly woodlands employees of $4,196,000 which were fully recovered from the B.C. Forestry Revitalization Trust. The recovery was recorded as an offset to the severance costs in restructuring. The Company continues to pursue mitigation of certain restructuring costs which it feels it is entitled to under the terms of the Trust, but the amount of any additional mitigation is not yet determinable and will be recorded when received.

In the third quarter, the Company recorded a further $1,136,000 in severance costs as it started implementation of its strategic plans for non-core assets.

Restructuring costs and write-downs of property, plant and equipment are as follows:



-----------------------------------------------------------------------
-----------------------------------------------------------------------
3 Months 3 Months 9 months 9 months
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2005 2004 2005 2004
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Property, plant, equipment
and timber write-downs $ - $ 14,926 $ 30,277 $ 15,121
Severance and other
restructuring costs
(recoveries) 1,136 5,217 (410) 5,622
Other (recoveries) - - (2,270) -
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$ 1,136 $ 20,143 $ 27,597 $ 20,743
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9. Net earnings (loss) per share:
-----------------------------------------------------------------------
-----------------------------------------------------------------------
3 months 3 months
Sept. 30, 2005 Sept. 30, 2004
------------------------ ------------------------
Net Per Net Per
earnings Shares share earnings Shares share
-----------------------------------------------------------------------

Basic earnings
(loss) per share $ 4,704 48,693 $ 0.10 $ (3,055) 48,409 $(0.06)
Share options - 530 - - 824 -
(i)
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Diluted earnings
(loss) per share $ 4,704 49,223 $ 0.10 $ (3,055) 48,409 $(0.06)
(i)
-----------------------------------------------------------------------
-----------------------------------------------------------------------

9 months 9 months
Sept. 30, 2005 Sept. 30, 2004
------------------------ ------------------------
Net Per Net Per
earnings Shares share earnings Shares share
-----------------------------------------------------------------------

Basic earnings per
share $ 24,585 48,676 $ 0.51 $ 9,479 48,407 $ 0.20
Share options - 611 - - 749 -
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Diluted earnings
per share $ 24,585 49,287 $ 0.50 $ 9,479 49,156 $ 0.19
-----------------------------------------------------------------------
-----------------------------------------------------------------------

(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.


10. 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 Pacific Northwest, U.S.A.

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



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3 Months 3 Months 9 months 9 months
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2005 2004 2005 2004
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Canada $ 56,764 $ 85,533 $ 173,480 $ 232,231
United States 124,314 79,265 329,403 183,449
Japan 17,929 49,714 61,825 133,127
Other export 15,229 24,440 55,862 71,983
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$ 214,236 $ 238,952 $ 620,570 $ 620,790
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Sales by product line are as follows:
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-----------------------------------------------------------------------
3 Months 3 Months 9 months 9 months
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2005 2004 2005 2004
-----------------------------------------------------------------------

Lumber $ 166,218 $ 180,979 $ 490,124 $ 468,220
Logs 26,707 37,586 74,490 97,399
Wood chips and other
by products 9,052 11,143 25,546 28,987
Other 12,259 9,244 30,410 26,184
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$ 214,236 $ 238,952 $ 620,570 $ 620,790
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The Company has capital assets, goodwill and other intangible assets
located in:
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Sept. 30, Sept. 30,
2005 2004
-----------------------------------------------------------------------

Canada $ 232,136 $ 266,388
United States 138,194 78,417
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$ 370,330 $ 344,805
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11. Contingencies:

(a) U.S. Softwood Lumber dispute:

The softwood lumber trade discussions and legal actions between the Government of Canada, the provincial governments and the U.S. Government are continuing. On August 31, 2004, a North American Free Trade Agreement ("NAFTA") Panel reaffirmed its prior rulings that the U.S. International Trade Commission ("ITC") had not demonstrated that the U.S. softwood lumber industry is threatened with material injury by reason of Canadian imports and remanded this determination back to the ITC to make a new determination consistent with the Panel's decision, which the ITC did on September 10, 2004, under protest. On October 12, 2004, the NAFTA panel issued an order affirming the negative determination of the ITC. The U.S. administration filed an appeal of the NAFTA injury decision to an Extraordinary Challenge Committee ("ECC"). On August 10, 2005 the ECC unanimously dismissed the U.S. Extraordinary Challenge in its entirety. The ECC upheld the NAFTA Panel decisions overturning the ITC rulings that Canadian softwood lumber imports threatened to injure the U.S. industry. The determination by the ECC could result in the termination of the duty cases and the refund of duties, with interest. However, the U.S. Coalition for Fair Lumber Imports has announced plans to initiate a constitutional challenge of the entire NAFTA dispute settlement system as a result of the ECC ruling. In addition, the U.S. administration takes the position that an ITC decision, issued on November 24, 2004, to bring the U.S. into compliance with an earlier adverse WTO decision, supersedes the September 10, 2004, ITC decision, thereby mooting the NAFTA appeals and ECC decision.

Effective December 20, 2004, the U.S. Department of Commerce ("USDOC") implemented new deposit rates based on the USDOC's final rate determinations for the first Administrative review period (May 22, 2002 to March 31, 2003 for the countervailing duty case; and May 22, 2002 to April 30, 2003 for the antidumping duty case). The USDOC reduced the countervailing duty ("CVD") deposit rate to 17.18% from 18.79% and reduced the all others antidumping deposit rate to 4.03% from 8.43%. These rates were subsequently amended by the USDOC on January 24, 2005 (antidumping deposit rate was reduced to 3.78%) and February 24, 2005 (countervailing duty deposit rate was reduced to 16.37%). At the date of this report the Company's combined deposit rate is 20.15%. The USDOC is scheduled to announce in early December 2005 final assessment rates for the first Administrative review period and new deposit rates for the second Administrative review period.

On October 5, 2005 the NAFTA Panel on CVD issued its decision on the USDOC's fourth remand determination which had resulted in a calculated CVD rate of 1.21 percent. In a unanimous decision for Canada, the Panel overturned the USDOC's last decision. If the USDOC fully implements the Panel decision, we understand that the CVD rate will be less than 1.0 percent meaning the duty must be revoked entirely. The USDOC has been ordered to comply with the remand by October 28, 2005. However, the USDOC could pursue further legal proceedings to delay the implementation of the decision and the return of deposits.

The Company has recorded $8,022,000 (2004 - $11,427,000) for the quarter and $22,921,000 (2004 - $30,182,000) for the nine months ended September 30, 2005 in respect of the countervailing and antidumping duties assessed on Canadian softwood lumber exports to the United States. Cumulative duties for the period from May 22, 2002 to September 30, 2005 charged to operations total $115,912,000 (US$85,834,000). These total U.S. deposits translated at quarter-end exchange rates equate to CAD$99,799,000 at September 30, 2005.

The Company and other Canadian forest product companies, the Federal Government and Canadian provincial governments ("Canadian Interests") continue to categorically deny the U.S. allegations that sales of Canadian softwood lumber into the U.S. threatens material injury to the U.S. industry. Canadian interests continue to pursue appeals of the final countervailing and dumping determinations with the appropriate courts, NAFTA panels and the World Trade Organization ("WTO").

The final amount of countervailing and antidumping duties that may be assessed on Canadian softwood lumber exports to the U.S. cannot be determined at this time and will depend on appeals of the final determinations to any reviewing courts, NAFTA or WTO panels. Notwithstanding the final rates established in the investigations, the final liability for the assessment of countervailing and antidumping duties will not be determined until each annual administrative review process is complete, including appeals.

(b) B.C. Forest Revitalization Plan:

In March 2003, the Government of B.C ("Crown") introduced the Forestry Revitalization Plan (the "Plan") that provides for significant changes to Crown forest policy and to the existing allocation of Crown timber tenures to licensees. The changes prescribed in the Plan include: the elimination of minimum cut control regulations, the elimination of existing timber processing regulations, and the elimination of restrictions limiting the transfer and subdivision of existing licenses. As well, through legislation, licensees, including the Company, will be required to return 20% of their replaceable tenure to the Crown. The Plan states that approximately half of this volume will be redistributed to open up opportunities for woodlots, community forests and First Nations and the other half will be available for public auction. The Crown has acknowledged that licensees will be fairly compensated for the return of tenure and related infrastructure costs.

In December 2004, the Crown issued Ministerial Orders to the Company specifying the timing and the volume of the take-back for replaceable tenures. Approximately 344,000 cubic metres of the Company's existing allowable annual cut on their replaceable tenures was taken in December 2004, and the balance of 235,000 cubic metres will be taken by December 31, 2005, for a total of 579,000 cubic metres. In addition, 20% of the Company's non-replaceable timber licences will also be reduced.

On March 28, 2005 the Company concluded a comprehensive agreement with the Province of British Columbia to compensate the Company for loss of forest tenure through the government's timber reallocation program. The Company received $22,111,000 in compensation for the loss of logging rights on the B.C. Coast, including $17,611,000 related to the 20% reduction in harvest volumes and a $4,500,000 advance payment against lost infrastructure and road construction costs. The Company is continuing its negotiation with the Crown for further compensation for infrastructure, but the amount and timing of additional compensation is not yet determinable. The Company will record any other compensation at the time the amounts to be recorded can be estimated.

12. Employee future benefits:

The total benefits cost under its various pension plans (described in the Company's audited annual consolidated financial statements) as follows:



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3 Months 3 Months 9 months 9 months
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2005 2004 2005 2004
-----------------------------------------------------------------------

Defined contribution plan $ 403 $ 454 $ 1,314 $ 1,396
Defined benefit plan 116 203 388 470
Unionized employees'
pension plan 1,278 1,458 3,456 3,865
U.S. employees benefit plan 110 - 423 -
Senior management
supplementary pension plan 41 26 276 79
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Total pension expense $ 1,948 $ 2,141 $ 5,857 $ 5,810
-----------------------------------------------------------------------
-----------------------------------------------------------------------


13. Financial instruments:

(a) 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 counter parties are the Company's bankers.

As at September 30, 2005, the Company has outstanding obligations to sell a maximum of US$7,000,000 at an average rate of CAD$1.1731 and Japanese yens 160,000,000 at an average rate of yens 90.21 to the CAD$1.00 during 2005. All foreign currency gains or losses to September 30, 2005 have been recognized in the statement of operations.

During September 2005, the Company entered into a cross currency interest rate swap. The Company swapped $20,000,000 USD denominated debt at an exchange rate of 1.1765 (CAD$23,530,000). The Company will pay 5.84%, including a spread of 200 basis points, on the Canadian dollar equivalent and 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. All gains or loss on the swap have been recognized in the Statement of Operations.

(b) Sale of receivables:

During 2000, the Company entered into an agreement to sell designated trade receivables, with limited recourse, to a Trust. As these trade receivables are collected, they are replaced by new receivables to maintain the aggregate outstanding balance. At September 30, 2005, the company received cash proceeds of $20,000,000 (2004 - $25,000,000), from the sale of receivables.

Contact Information

  • International Forest Products Limited
    Gerald J. Friesen
    Vice President and Corporate Secretary
    (604) 689-6804
    www.interfor.com