Sino-Forest Corporation

Sino-Forest Corporation

March 22, 2005 08:15 ET

Sino-Forest Corporation Announces Record Revenue and Net Income for Fourth Quarter and Year Ended December 31, 2004 and Restatement of Third Quarter 2004 Financial Results


NEWS RELEASE TRANSMITTED BY CCNMatthews

FOR: SINO-FOREST CORPORATION

TSX SYMBOL: TRE

MARCH 22, 2005 - 08:15 ET

Sino-Forest Corporation Announces Record Revenue and
Net Income for Fourth Quarter and Year Ended December
31, 2004 and Restatement of Third Quarter 2004
Financial Results

TORONTO, ONTARIO--(CCNMatthews - March 22, 2005) - Sino-Forest
Corporation (TSX:TRE) - (All amounts are in U.S. dollars)

Sino-Forest today announced net income for the fourth quarter of 2004 of
$20.1 million and diluted earnings per share of $0.15 compared to net
income for the fourth quarter of 2003 of $8.0 million and diluted
earnings per share of $0.07. EBITDA(1) for the fourth quarter of 2004
was $57.4 million compared to $22.8 million for the same quarter in
2003, an increase of 151.8%. The increase in net income for the fourth
quarter of 2004 was largely attributable to increase in sales of
standing timber including the commencement of selling 13,569 hectares of
mature pine trees under the Heyuan Pine Acquisition Undertaking.

For the year ended December 31, 2004, the Company had net income
attributable to shareholders of $52.8 million, an increase of 74.8%
compared to net income of $30.2 million attained in 2003. Diluted
earnings per share for the year ended December 31, 2004 was $0.43
compared to $0.32 for the year ended December 31, 2003. EBITDA(1) for
2004 was $125.3 million compared to $80.7 million in 2003, an increase
of 55.3%. The increase in net income for the year ended December 31,
2004, was also largely attributable to the same reasons mentioned above.

Revenue for the fourth quarter ended December 31, 2004 increased by
58.7% to $130.6 million compared to $82.3 million for the fourth quarter
in fiscal 2003. For the year ended December 31, 2004, revenue increased
by 24.5% to $330.9 million compared to $265.7 million attained in 2003.
The increase in revenue for the fourth quarter of 2004 and for the year
ended December 31, 2004 was attributable to the following:



3 months ended
December 31, 2004
---------------------------------------------------------------------
- Increase in volume (12,000 BDMT) of shipments
for principal sales $1,147,000
- Increase in wood chip prices of
approximately 3% 1,570,000
- Increase in volume (1,400 BDMT) of shipments
for agency sales 23,000
- Increase in hectares (15,227 hectares) from the
sale of standing timber 35,677,000
- Decrease in average standing timber prices
of approximately 14% (2,166,000)
- Increase in wood-based product sales, logs
and others 12,042,000
---------------------------------------------------------------------
Increase in revenue for the period $48,293,000
---------------------------------------------------------------------
---------------------------------------------------------------------

Year ended
December 31, 2004
---------------------------------------------------------------------
- Increase in volume (49,800 BDMT) of shipments
for principal sales $4,731,000
- Increase in wood chip prices of
approximately 3% 4,178,000
- Increase in volume (1,900 BDMT) of shipments
for agency sales 28,000
- Increase in hectares (16,739 hectares) from the
sale of standing timber 47,087,000
- Increase in average standing timber prices
of approximately 5% 2,600,000
- Increase in wood-based product sales, logs
and others 6,582,000
---------------------------------------------------------------------
Increase in revenue for the year $65,206,000
---------------------------------------------------------------------
---------------------------------------------------------------------



For the fourth quarter ended December 31, 2004, standing timber sales
were as follows:

---------------------------------------------------------------------
Sales Total Cost
Hectare Per Hectare Revenue Per Hectare
---------------------------------------------------------------------
Purchased Plantations 6,451 $4,124 $26,602,000 $1,399
---------------------------------------------------------------------
Heyuan Pine 13,569 $1,586 $21,526,000 $1,087
---------------------------------------------------------------------
Planted Plantations 1,102 $1,232 $1,358,000 $1,003
---------------------------------------------------------------------
Total 21,122 $2,343 $49,486,000 $1,178
---------------------------------------------------------------------


---------------------------------------------------------------------
Gross Gross
Total Cost Profit(2) Margin
---------------------------------------------------------------------
Purchased Plantations $9,028,000 $17,574,000 66.1%
---------------------------------------------------------------------
Heyuan Pine $14,753,000 $6,773,000 31.5%
---------------------------------------------------------------------
Planted Plantations $1,105,000 $253,000 18.6%
---------------------------------------------------------------------
Total $24,886,000 $24,600,000 49.7%
---------------------------------------------------------------------


In the fourth quarter of 2004, we sold 6,451 hectares of standing timber
from our purchased plantations for proceeds of $26.6 million. Cost of
the timber holdings depleted as a result of this sale was $9.0 million.
Gross margin from this sale was 66.1%. Average selling price of our
purchased plantations in the fourth quarter of 2004 was $4,124 per
hectare. In the fourth quarter of 2003, the Company sold 5,895 hectares
of standing timber from our purchased plantations for proceeds of $16.0
million. Costs of timber holdings depleted were approximately $8.1
million. Gross margin for the fourth quarter of 2003 was 49.4%. Average
selling price of purchased eucalyptus trees sold in the fourth quarter
of 2003 was $2,710 per hectare. The higher gross margin attained in the
fourth quarter of 2004 was due to the fact that the older pine trees
sold in the fourth quarter of 2004 commanded a higher price than the
younger eucalyptus trees sold in the fourth quarter of 2003. In general,
prices of larger plantation pine logs have increased 15% - 20% in 2004.

In the fourth quarter of 2004, we have also started selling mature pine
trees in Heyuan pursuant to the Undertaking received from our CJV
partner in Heyuan. We purchased an initial 30,000 hectares of mature
pine trees in the fourth quarter of 2004 for total cost of $32.6
million. The other 20,000 hectares that we have completed final
documentation to purchase are expected to be concluded in the first
quarter of 2005 as we needed some additional time to complete our
assessment of the plantations to be acquired. Of the 30,000 hectares
that was purchased, we sold 13,569 hectares of standing timber in the
fourth quarter of 2004, generating total revenue of $21.5 million. Our
cost on this sale was $14.8 million. Gross margin was 31.5%. We plan to
sell approximately 10,000 hectares to 12,000 hectares of mature pine
trees from our Heyuan Acquisition in the first quarter of 2005. The
first quarter of the year typically is our smallest quarter due to the
Chinese New Year holiday season.

In addition to the above, we sold 1,102 hectares of planted plantations
in the fourth quarter of 2004 for proceeds of $1.4 million. Cost of
timber holdings depleted as a result of this sale was approximately $1.1
million. Gross margin earned on this sale was 18.6%, which was
significantly lower than the margin earned on our purchased plantation
sales. The reason for the lower margin earned on this sale was because
this was younger eucalyptus trees which was planted in the early days of
our plantation development. Accordingly, the yield from this plantation
was much lower than the current planting plus the fact that some areas
of this plantation sold were affected by frost.

For the year ended December 31, 2004, we sold 37,369 hectares of
standing timber at an average selling price of $2,813 per hectare,
compared to 20,630 hectares of standing timber at an average selling
price of $2,687 per hectare in 2003. Revenue from sales of standing
timber increased 89.7%, from $55.4 million in 2003 to $105.1 million in
2004. Gross profit margin from sales of standing timber increased from
48.6% in 2003 to 57.0% in 2004.

For the fourth quarter ended December 31, 2004, wood chip shipments
increased 1.6% to 845,400 BDMT compared to 832,000 BDMT in the
corresponding period in 2003. For the year ended December 31, 2004, wood
chip shipments totaled 2,449,400 BDMT compared to 2,397,700 BDMT shipped
in 2003, an increase of approximately 2.2%. Of the total wood chips
shipped in 2004, 97,500 BDMT were export sales and 2,351,900 BDMT were
sold in the domestic market. Export and domestic shipments for 2003 were
123,700 BDMT and 2,274,000 BDMT respectively. For the year ended
December 31, 2004, the Company acted as principal on 1,496,900 BDMT
compared to 1,447,100 BDMT in 2003.

A summary of wood chip shipments for the fourth quarters and years ended
December 31, 2004 and 2003 is set out in the tables below:



---------------------------------------------------------------------
Wood Chip Shipments
Fourth quarter and year ended December 31, 2004
(thousands of BDMT)
---------------------------------------------------------------------
Agency Principal Total
---------------------------------------------------------------------
Market 4th Qtr. 2004 4th Qtr. 2004 4th Qtr. 2004
---------------------------------------------------------------------
Export 24,700 97,500 - - 24,700 97,500
---------------------------------------------------------------------
Domestic 295,200 855,000 525,500 1,496,900 820,700 2,351,900
---------------------------------------------------------------------
Total 319,900 952,500 525,500 1,496,900 845,400 2,449,400
---------------------------------------------------------------------


---------------------------------------------------------------------
Wood Chip Shipments
Fourth quarter and year ended December 31, 2003
(thousands of BDMT)
---------------------------------------------------------------------
Agency Principal Total
---------------------------------------------------------------------
Market 4th Qtr. 2003 4th Qtr. 2003 4th Qtr. 2003
---------------------------------------------------------------------
Export 25,700 96,700 - 27,000 25,700 123,700
---------------------------------------------------------------------
Domestic 292,800 853,900 513,500 1,420,100 806,300 2,274,000
---------------------------------------------------------------------
Total 318,500 950,600 513,500 1,447,100 832,000 2,397,700
---------------------------------------------------------------------


Commission income earned in the fourth quarter of 2004 from wood chip
shipments of 319,900 BDMT remained the same as in 2003 of approximately
$4.7 million.

The average wood chip price, net of VAT, in the fourth quarter of 2004
was approximately $95 per BDMT. The average price of wood chips, net of
VAT, attained in the fourth quarter of 2003 was $92 per BDMT. With
respect to sales in which the Company acted as an agent, the Company
earned an average of $14.7 per BDMT in the fourth quarter of 2004 and
2003.

For the fourth quarter of 2004, revenue from our wood-based business
amounted to $25.0 million, of which the Company reported an operating
loss of approximately $4.2 million, compared to revenue and operating
loss of $14.2 million and $3.5 million respectively, in the fourth
quarter of 2003. The increase in the operating loss in the fourth
quarter of 2004 was primarily attributable to the impairment of capital
assets of $3.2 million offset by an improvement in gross profit margin
of our wood-based business as a result of the reduction in average
production cost by approximately 7.7% from our particleboard production
plant and the higher margin attained from our sawmill, wood flooring and
greenery projects operations.

Costs and expenses were $102.2 million in the fourth quarter of 2004, an
increase of 49.2% compared to $68.5 million in the fourth quarter of
2003. The increase in cost of sales is largely attributable to increase
in sales in the fourth quarter of 2004. Selling, general and
administration expenses increased 10.5% from $5.7 million in the fourth
quarter of 2003 to $6.3 million in the fourth quarter in 2004 primarily
due to a charge for stock-based compensation of $1.2 million.

In the fourth quarter of 2004, impairment of timber holdings and capital
assets was $3.5 million representing a provision for the non-deductible
portion of our insurance claims for losses on fire of our timber
holdings of $0.3 million and the write-off of expenses of $3.2 million
of previously capitalized costs with respect to the development of the
manufacturing projects.

Interest expense increased 134.4% from $3.2 million in the fourth
quarter of 2003 to $7.5 million in the fourth quarter of 2004 as a
result of the issuance of $300 million non-convertible guaranteed senior
notes in August 2004. The notes bear interest at a rate of 9.125% per
annum and payable semi-annually.

"We are very pleased with our fourth quarter and 2004 results," said
Allen Chan, Chairman and CEO. "2004 was a record year for us in terms of
revenue and net income. Our financial position is strong and we are well
positioned to produce even better results in 2005 as prices of wood
products and logs continue to be strong and moving up. We are also very
pleased with the mature pine acquisition development in Heyuan, which
would have a significant contribution to revenue, net income and cash
flows in 2005," said Allen Chan.

Restatement of Third Quarter 2004 Financial Results

The Company also reported that, in connection with the preparation of
its fourth quarter and audited 2004 financial statements, it determined
that $2.4 million of project financing costs related to capital assets
under construction which had been previously capitalized on its
financial statements should more appropriately have been allocated to
its income statement as a write-off of deferred financing costs in the
third quarter of 2004. These costs related to costs of obtaining
pre-existing financing which have been repaid out of the proceeds of the
Company's US$300 million debt offering which was completed in the third
quarter of 2004.

As a result, the Company will be filing with Canadian securities
regulatory authorities restated consolidated interim financial
statements for quarterly period ended September 30, 2004. The Company's
management's discussion and analysis for this period will be amended
accordingly. These restated financial statements do not affect the
audited financial statements of the Company for the year ended December
31, 2004.

The following tables present the impact of the restatement adjustments
for the three month period ended September 30, 2004 and for the nine
month period ended September 30, 2004:



Period Ended September 30, 2004

---------------------------------------------------------------------
(all amounts in US$ 000's except
earnings per share) Original Restated
---------------------------------------------------------------------
Amortization and write-off
of deferred financing costs
Three Months 1,129 3,501
Nine Months 1,609 3,981
---------------------------------------------------------------------
Income before income taxes
Three Months 18,030 15,658
Nine Months 37,863 35,491
---------------------------------------------------------------------
Net income for the period
Three Months 16,388 14,016
Nine Months 35,002 32,630
---------------------------------------------------------------------
Earnings per share (both
basic and diluted)
Three Months $0.12 $0.11
Nine Months $0.30 $0.28
---------------------------------------------------------------------
Retained earnings $212,535 $210,163
---------------------------------------------------------------------
Capital Assets $380,957 $378,585
---------------------------------------------------------------------


(1) EBITDA for any period is defined as income from operations for the
period after adding back depreciation and amortization, impairment of
capital assets as well as depletion of timber holdings from cost of
sales, for the period. EBITDA is presented as additional information
because we believe that it is a useful measure for certain investors to
determine our operating cash flow and historical ability to meet debt
service and capital expenditure requirements. EBITDA is not a measure of
financial performance under Canadian GAAP and should not be considered
as an alternative to cash flows from operating activities, a measure of
liquidity or an alternative to net income as indicators of our operating
performance or any other measures of performance derived in accordance
with Canadian GAAP.

(2) Gross profit for any period is defined as total revenue less cost of
sales. Gross profit is presented as additional information because we
believe that it is a useful measure for certain investors to determine
our operating performance. Gross profit is not a recognized term under
Canadian GAAP and should not be considered as an alternative to net
income as an indicator of our operating performance or any other measure
of performance derived in accordance with Canadian GAAP. Because it is
not a Canadian GAAP measure, gross profit may not be comparable to
similar measures presented by other companies. Gross profit is
determined as follows:



3 Months Ended December 31 Years Ended December 31
2004 2003 2004 2003
---------------------------------------------------------------------
$000's $000's $000's $000's
---------------------------------------------------------------------
Total revenue 130,629 82,336 330,945 265,739
Cost of sales (91,778) (61,971) (229,433) (200,835)
---------------------------------------------------------------------
Gross profit 38,851 20,365 101,512 64,904
---------------------------------------------------------------------
---------------------------------------------------------------------


Please Note: This press release contains projections and forward-looking
statements regarding future events. Such forward-looking statements are
not guarantees of future performance of Sino-Forest and are subject to
risks and uncertainties that could cause actual results and company
plans and objectives to differ materially from those expressed in the
forward-looking statements. Such risks and uncertainties include, but
not limited to, changes in the PRC and international economies; changes
in currency exchange rates; changes in worldwide demand for the
Company's products; changes in worldwide production and production
capacity in the forest products industry; competitive pricing pressures
for the Company's products and changes in wood and timber costs.



CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(Expressed in thousands of U.S. dollars, except for earnings per
share information)
(Unaudited)

3 Months Ended Years ended
December 31 December 31
2004 2003 2004 2003
$ $ $ $
---------------------------------------------------------------------

Revenue
Sales 125,913 77,643 316,935 251,757
Commission income 4,716 4,693 14,010 13,982
---------------------------------------------------------------------
130,629 82,336 330,945 265,739
---------------------------------------------------------------------
Costs and expenses
Costs of sales 91,778 61,971 229,433 200,835
Selling, general and
administration 6,326 5,657 21,354 13,343
Impairment of timber
holdings and capital assets 3,503 - 3,916 -
Depreciation and
amortization 637 894 2,470 2,345
---------------------------------------------------------------------
102,244 68,522 257,173 216,523
---------------------------------------------------------------------
Income from operations
before the undernoted 28,385 13,814 73,772 49,216
Interest expense (note 2) (7,489) (3,180) (15,875) (12,243)
Amortization and write-off
of deferred financing costs (336) (248) (4,317) (842)
Other exchange gains 993 333 2,682 701
Interest income 774 61 1,366 240
Exchange gains (losses) on
long-term debt - (1,871) 190 (3,840)
---------------------------------------------------------------------
Income before income taxes 22,327 8,909 57,818 33,232
Provision for income taxes (2,183) (873) (5,044) (3,052)
---------------------------------------------------------------------
Net income for the period 20,144 8,036 52,774 30,180
Retained earnings, beginning
of period 210,163 169,497 177,533 147,353
---------------------------------------------------------------------
Retained earnings, end
of period 230,307 177,533 230,307 177,533
---------------------------------------------------------------------
---------------------------------------------------------------------

Earnings per share (note 8)
Basic $0.15 $0.09 $0.43 $0.38
---------------------------------------------------------------------
---------------------------------------------------------------------
Diluted $0.15 $0.07 $0.43 $0.32
---------------------------------------------------------------------
---------------------------------------------------------------------



CONSOLIDATED BALANCE SHEETS
(Expressed in thousands of U.S. dollars)
As at December 31,

2004 2003
$ $
---------------------------------------------------------------------

ASSETS
Current
Cash and cash equivalents 201,166 6,929
Short-term deposits (note 3) 24,089 21,674
Accounts receivable 81,787 67,345
Deposit for the purchase of logs 3,912 6,041
Due from PRC CJV partners 3,890 6,688
Other receivables and prepaid expenses 3,080 5,818
Inventories 2,736 1,170
---------------------------------------------------------------------
Total current assets 320,660 115,665
---------------------------------------------------------------------
Timber holdings 359,607 232,516
Capital assets, net 66,269 65,894
Deferred financing costs, net 8,869 4,230
Other assets 644 549
---------------------------------------------------------------------
756,049 418,854
---------------------------------------------------------------------
---------------------------------------------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Bank indebtedness (note 3) 28,508 39,025
Accounts payable and accrued liabilities (note 10) 36,783 22,051
Income taxes payable 18,504 13,465
Current portion of long-term debt (note 4) - 43,388
---------------------------------------------------------------------
Total current liabilities 83,795 117,929
---------------------------------------------------------------------
Long-term debt (note 4) 300,000 55,953
---------------------------------------------------------------------
Total liabilities 383,795 173,882
---------------------------------------------------------------------

Shareholders' equity
Share capital (note 5) 138,915 67,439
Contributed surplus (note 6) 3,032 -
Retained earnings (note 4) 230,307 177,533
---------------------------------------------------------------------
Total shareholders' equity 372,254 244,972
---------------------------------------------------------------------
756,049 418,854
---------------------------------------------------------------------
---------------------------------------------------------------------



CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in thousands of U.S. dollars)
(Unaudited)

3 Months Ended Years ended
December 31 December 31
2004 2003 2004 2003
$ $ $ $
---------------------------------------------------------------------

CASH FLOWS FROM OPERATING
ACTIVITIES
Net income for the period 20,144 8,036 52,774 30,180
Add (deduct) items not
affecting cash
Depletion of timber
holdings included in cost
of sales 24,886 8,061 45,158 29,126
Stock-based compensation 1,188 - 6,932 -
Amortization and write-off
of deferred financing costs 336 248 4,317 842
Impairment of timber
holdings and capital assets 3,503 - 3,916 -
Depreciation and amortization 637 894 2,470 2,345
Amortization of redemption
premium on long-term debt - 735 2,015 2,376
Other (56) - 335 -
Exchange losses (gains) on
long-term debt - 1,871 (190) 3,840
Accretion of Exchangeable
Notes - 796 23 4,616
---------------------------------------------------------------------
50,638 20,641 117,750 73,325
Net change in non-cash
working capital balances
(note 7) (8,454) 12,204 1,612 (3,749)
---------------------------------------------------------------------
Cash flows from operating
activities 42,184 32,845 119,362 69,576
---------------------------------------------------------------------

CASH FLOWS FROM FINANCING
ACTIVITIES
Increase in long-term debt - - 300,000 5,000
Repayment of long-term debt - - (101,189) (941)
Issue of shares, net of issue
costs (note 5) 220 4,972 67,576 17,455
Decrease in bank indebtedness (1,740) (8,062) (10,517) (9,039)
Increase in deferred
financing costs (11) (1,436) (9,364) (2,627)
Increase (decrease) in
amounts due to related
parties (note 10(b)) - 3,937 (3,937) 3,937
Decrease (increase) in pledged
short-term deposits 3,638 (1,821) 3,398 (2,071)
Issue of Convertible
Instruments - - - 14,017
---------------------------------------------------------------------
Cash flows from (used in)
financing activities 2,107 (2,410) 245,967 25,731
---------------------------------------------------------------------

CASH FLOWS USED IN INVESTING
ACTIVITIES
Additions to timber holdings (60,306) (32,754) (159,101) (89,194)
Additions to capital assets (2,594) (950) (6,083) (7,365)
Decrease (increase) in
non-pledged short-term
deposits (4,657) (61) (5,813) 7,003
Increase in other assets (6) - (95) -
---------------------------------------------------------------------
Cash flows used in investing
activities (67,563) (33,765) (171,092) (89,556)
---------------------------------------------------------------------

Net increase (decrease) in
cash and cash equivalents (23,272) (3,330) 194,237 5,751
Cash and cash equivalents,
beginning of period 224,438 10,259 6,929 1,178
---------------------------------------------------------------------
Cash and cash equivalents,
end of period 201,166 6,929 201,166 6,929
---------------------------------------------------------------------
---------------------------------------------------------------------

Supplemental cash flow
information
Cash payment for interest
charged to income 4,843 1,668 9,038 4,561
Cash payment for interest
capitalized 149 - 1,826 1,167
---------------------------------------------------------------------
---------------------------------------------------------------------
See accompanying notes



NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(Tabular figures are expressed in thousands of U.S. dollars, unless
otherwise indicated)


1. Basis of presentation

The interim consolidated financial statements do not conform in all
respects to the requirements of generally accepted accounting principles
for annual financial statements. Accordingly, these interim consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes included in the Company's Annual Report
for the year ended December 31, 2004.

These interim consolidated financial statements follow the same
accounting policies and methods of computation as used in the
consolidated financial statements for the year ended December 31, 2004.

The quarterly results are not necessarily indicative of results to be
expected for the entire year.

2. Interest expense



3 Months Ended Years Ended
December 31 December 31
2004 2003 2004 2003
$ $ $ $
---------------------------------------------------------------------
Interest on long-term debt 7,013 1,746 12,163 7,810
Interest on short-term debt 476 699 1,697 2,057
Amortization of redemption premium
on long-term debt - 735 2,015 2,376
---------------------------------------------------------------------
7,489 3,180 15,875 12,243
---------------------------------------------------------------------
---------------------------------------------------------------------


3. Short-term deposits and bank indebtedness

(a) Short-term deposits

As at December 31, 2004, short-term deposits are made for varying
periods of between one month and twelve months (2003 - one month to
twelve months) depending on the immediate cash requirements of the
Company, and earn interest at rate of 0.4% to 2.6% per annum (2003 -
0.1% to 1.1%).

(b) Bank indebtedness

Subsidiaries of the Company have established several credit facilities
to a maximum of approximately $38,591,000 (2003 - $60,681,000). These
credit facilities bear interest at 3.9% to 5.9% per annum as at December
31, 2004 (2003 - 3.2% to 7.0%) and are repayable on demand or due within
one year. Interest capitalized as part of the cost of assets under
construction and timber holdings for the fourth quarter of 2004 and for
the year ended December 31, 2004 amounted to $nil (2003 - $30,000) and
$nil respectively (2003 - $230,000).



As at December 31, credit facilities for the following were utilized:

2004 2003
$ $
---------------------------------------------------------------------

Trust receipt loans 17,334 12,004
Bank loans 11,174 27,021
---------------------------------------------------------------------
28,508 39,025
---------------------------------------------------------------------
---------------------------------------------------------------------


Certain of the Company's banking facilities are collateralized by:

(a) charges over certain of the Company's land-use rights, buildings and
timber holdings which have an aggregate net book value at December 31,
2004 of $4,600,000 (2003 - $9,161,000);

(b) certain short-term deposits at December 31, 2004 of $5,142,000 (2003
- $8,540,000); and

(c) timber holdings of nil hectares (2003 - 1,703 hectares) provided by
an independent third party.

In respect of the timber holdings pledged in (a) above, the PRC CJV
partners have undertaken to counter-indemnify the Company from their 30%
share of the harvested timber.

4. Long-term debt

On August 17, 2004, the Company issued $300,000,000 non-convertible
guaranteed senior notes. The notes bear interest at a rate of 9.125% per
annum and payable semi-annually. The notes mature on August 17, 2011.
The notes are:

- general obligations of the Company;

- guaranteed by the Subsidiary Guarantors on a senior basis subject to
certain limitations;

- senior in right of payment to any existing and future obligations of
the Company which are expressly subordinated in right of payment to the
notes; and

- at least pari passu in right of payment with all other unsecured,
unsubordinated indebtedness of the Company subject to any priority
rights of such unsubordinated indebtedness pursuant to applicable law.

On August 16, 2004, the Company entered into a currency swap contract.
Under the terms of the contract, the Company hedged RMB113,290,070 on
each of August 17 and February 17 in exchange for $13,687,500. The U.S.
dollars will be used to fully pay the Company's interest payments on the
$300,000,000 senior notes due on those dates. The term of the contract
is five years. The Company received $750,000 from the counter party to
enter into this contract. This amount is amortized into income over the
term of the contract on a straight-line basis.

The fair value of the non-convertible guaranteed senior notes and the
currency swap contract as at December 31, 2004 were approximately
$330,000,000 and $11,500,000, respectively.

Interest expenses for the fourth quarter of 2004 and for the year ended
December 31, 2004 was $7,013,000 and $10,219,000, respectively.

Under the terms of the above debt agreements, the Company must meet
certain financial and non-financial covenants including limitation on
dividend and other payment restrictions affecting the Company and the
restricted subsidiaries (as defined). The Company complied with all of
these financial and non-financial covenants as at December 31, 2004.



5. Share capital

Share capital consists of the following:

2004 2003
$ $
---------------------------------------------------------------------

Authorized
Unlimited common shares, without par value
Unlimited preference shares, issuable in
series, without par value

Issued
136,589,548 common shares
(2003 - 96,219,548 Class A
Subordinate-Voting Shares) 138,915 67,439
---------------------------------------------------------------------
138,915 67,439
---------------------------------------------------------------------
---------------------------------------------------------------------


Pursuant to articles of amendment filed by the Company on June 22, 2004,
the Class A Subordinate-Voting Shares of the Company were reclassified
as common shares and the Class B Multiple-Voting Shares of the Company
were eliminated.

During 2004, 200,000 stock options were exercised for proceeds of
$272,000 and 200,000 common shares were issued.

In May 2004, the Company completed a placement of 38,970,000 common
shares for aggregate gross proceeds of $74,284,000. Share issue costs
relating to the placement amounted to $6,980,000.

In conjunction with the completion of the equity offering in May 2004,
the Company purchased from management certain rights to acquire shares
in Sino-Wood pursuant to securities purchase agreements for a
pre-determined purchase price not to exceed Cdn.$12,000,000. The amount
was paid by the issuance of 2,400,000 common shares valued at Cdn.$2.65
per share based upon the offering price. One half of the shares vested
90 days following the completion of the offering and the remaining one
half will vest on the first anniversary of the completion of the
offering. The Company will record compensation expense of approximately
$7,800,000 over the vesting period. The compensation expense recorded in
the fourth quarter of 2004 and for the year ended December 31, 2004 was
$983,000 and $6,368,000, respectively.

Stock options

On May 11, 2004, options to acquire 2,820,000 common shares were granted
to employees and independent directors at an exercise price of Cdn.$2.72
in accordance with the Company's Stock Option Plan. The options granted
will vest over 3 years and expire on May 10, 2009. The fair value of the
stock options granted was estimated to be $2,458,000 on the date of
grant using the Black & Scholes option-pricing model with the following
assumptions:



---------------------------------------------------------------------
Dividend Yield 0.0%
Volatility 54.6%
Risk-free interest rate 3.7%
Expected option lives (in years) 3.5
Weighted average fair value of each option (in U.S. dollars) $0.87
---------------------------------------------------------------------
---------------------------------------------------------------------


The compensation expense recorded in the fourth quarter of 2004 and for
the year ended December 31, 2004 with respect to the above options
granted was $205,000 and $564,000, respectively.

The following table summarizes the changes in stock options outstanding
during the years ended December 31:



2004 2003
---------------------------------------------------------------------
Weighted Weighted
Number average Number average
of exercise of exercise
Shares price Shares price
---------------------------------------------------------------------
Cdn.$ Cdn.$

Balance, beginning of year 325,000 1.79 600,000 1.54
Options granted 2,820,000 2.72 325,000 1.79
Options exercised (200,000) 1.79 (600,000) 1.54
---------------------------------------------------------------------
Balance, end of year 2,945,000 2.68 325,000 1.79
---------------------------------------------------------------------
---------------------------------------------------------------------
Exercisable at year-end 125,000 1.79 325,000 1.79
---------------------------------------------------------------------
---------------------------------------------------------------------


6. Contributed surplus

The contributed surplus of $3,032,000 represents stock-based
compensation and options granted over the vesting period which was
charged to the income statement for the year ended December 31, 2004.

7. Statements of cash flows

The net change in non-cash working capital balances comprises the
following:



3 Months Ended Years Ended
December 31 December 31
2004 2003 2004 2003
$ $ $ $
---------------------------------------------------------------------

Accounts receivable (15,234) 6,325 (14,442) (27,155)
Due from Leizhou Forestry Bureau - - - 10,202
Due from PRC CJV partners (1,190) (300) 2,798 2,384
Other receivables and prepaid
expenses 1,775 1,491 2,347 594
Deposit for the purchase of
logs (a) (3,912) - (3,912) -
Inventories (320) (53) (1,566) (292)
Accounts payable and accrued
liabilities (b) 8,246 3,871 11,348 7,479
Income taxes payable 2,181 870 5,039 3,039
---------------------------------------------------------------------
(8,454) 12,204 1,612 (3,749)
---------------------------------------------------------------------
---------------------------------------------------------------------


(a) During 2004, the Company utilized a deposit on logs made in 2003 for
the purchase of timber holdings.

(b) As at December 31, 2004, the Company had an aggregate amount of
$7,377,000 payable in respect of timber holdings acquired during the
year included in accounts payable and accrued liabilities.

8. Earnings per share

The following table sets forth the computation of basic and diluted
earnings per share:



3 Months Ended Years Ended
December 31 December 31
2004 2003 2004 2003
$ $ $ $
---------------------------------------------------------------------

Net income used in
basic earnings per
share calculations 20,144 8,036 52,774 30,180
Share of net income by
holders of Class B
shares of Sino-Wood
upon conversion to
ordinary shares of
Sino-Wood - (1,527) - (4,536)
---------------------------------------------------------------------
Net income used in
diluted earnings per
share calculations 20,144 6,509 52,774 25,644
---------------------------------------------------------------------
---------------------------------------------------------------------

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

Weighted average
shares for basic
earnings per share 136,590,000 88,893,000 121,374,000 80,290,000
Stock-based payments
and options 734,000 153,000 305,000 89,000
---------------------------------------------------------------------
Adjusted weighted
average shares and
assumed conversions
for diluted earnings
per share 137,324,000 89,046,000 121,679,000 80,379,000
---------------------------------------------------------------------
---------------------------------------------------------------------



9. Segmented information

By industry segment

3 Months Ended
December 31, 2004
---------------------------------------------------------------------
Plant- Wood- Cor-
tation based porate Total
$ $ $ $
---------------------------------------------------------------------
Revenue from external customers
Sale of wood chips and logs 51,403 - - 51,403
Sale of imported logs - 22,556 - 22,556
Sale of wood-based products
and others - 2,468 - 2,468
Sale of standing timber 49,486 - - 49,486
Commission income 4,716 - - 4,716
---------------------------------------------------------------------
105,605 25,024 - 130,629
---------------------------------------------------------------------
---------------------------------------------------------------------
Income (loss) from operations
before interest, exchange
gains (losses) and
amortization of deferred
financing costs 35,490 (4,207) (2,898) 28,385
---------------------------------------------------------------------
---------------------------------------------------------------------
Identifiable assets 441,842 133,244 180,963 756,049
---------------------------------------------------------------------
---------------------------------------------------------------------
Interest income 10 35 729 774
---------------------------------------------------------------------
---------------------------------------------------------------------
Interest expense 152 314 7,023 7,489
---------------------------------------------------------------------
---------------------------------------------------------------------
Depreciation and amortization (10) 644 3 637
---------------------------------------------------------------------
---------------------------------------------------------------------
Provision for (recovery of)
income taxes 2,323 (139) (1) 2,183
---------------------------------------------------------------------
---------------------------------------------------------------------
Depletion of timber holdings
included in cost of sales 24,886 - - 24,886
---------------------------------------------------------------------
---------------------------------------------------------------------
Additions to timber holding
and capital assets 74,193 2,124 1 76,318
---------------------------------------------------------------------
---------------------------------------------------------------------


3 Months Ended
December 31, 2003
---------------------------------------------------------------------
Plant- Wood- Cor-
tation based porate Total
$ $ $ $
---------------------------------------------------------------------
Revenue from external customers
Sale of wood chips and logs 47,462 - - 47,462
Sale of imported logs - 11,585 - 11,585
Sale of wood-based products
and others - 2,621 - 2,621
Sale of standing timber 15,975 - - 15,975
Commission income 4,693 - - 4,693
---------------------------------------------------------------------
68,130 14,206 - 82,336
---------------------------------------------------------------------
---------------------------------------------------------------------
Income (loss) from operations
before interest, exchange
gains (losses) and
amortization of deferred
financing costs 18,913 (3,524) (1,575) 13,814
---------------------------------------------------------------------
---------------------------------------------------------------------
Identifiable assets 293,664 116,220 8,970 418,854
---------------------------------------------------------------------
---------------------------------------------------------------------
Interest income - 25 36 61
---------------------------------------------------------------------
---------------------------------------------------------------------
Interest expense 839 352 1,989 3,180
---------------------------------------------------------------------
---------------------------------------------------------------------
Depreciation and amortization 61 831 2 894
---------------------------------------------------------------------
---------------------------------------------------------------------
Provision for (recovery of)
income taxes 984 (113) 2 873
---------------------------------------------------------------------
---------------------------------------------------------------------
Depletion of timber holdings
included in cost of sales 8,061 - - 8,061
---------------------------------------------------------------------
---------------------------------------------------------------------
Additions to timber holding
and capital assets 32,629 1,074 1 33,704
---------------------------------------------------------------------
---------------------------------------------------------------------



By industry segment

Year Ended
December 31, 2004
---------------------------------------------------------------------
Plant- Wood- Cor-
tation based porate Total
$ $ $ $
---------------------------------------------------------------------
Revenue from external customers
Sale of wood chips and logs 143,418 - - 143,418
Sale of imported logs - 58,689 - 58,689
Sale of wood-based products
and others - 9,702 - 9,702
Sale of standing timber 105,126 - - 105,126
Commission income 14,010 - - 14,010
---------------------------------------------------------------------
262,554 68,391 - 330,945
---------------------------------------------------------------------
---------------------------------------------------------------------
Income (loss) from operations
before interest, exchange
gains (losses) and
amortization of deferred
financing costs 90,960 (7,899) (9,289) 73,772
---------------------------------------------------------------------
---------------------------------------------------------------------
Identifiable assets 441,842 133,244 180,963 756,049
---------------------------------------------------------------------
---------------------------------------------------------------------
Interest income 11 52 1,303 1,366
---------------------------------------------------------------------
---------------------------------------------------------------------
Interest expense 1,273 1,119 13,483 15,875
---------------------------------------------------------------------
---------------------------------------------------------------------
Depreciation and amortization 105 2,357 8 2,470
---------------------------------------------------------------------
---------------------------------------------------------------------
Provision for (recovery of)
income taxes 5,348 (306) 2 5,044
---------------------------------------------------------------------
---------------------------------------------------------------------
Depletion of timber holdings
included in cost of sales 45,158 - - 45,158
---------------------------------------------------------------------
---------------------------------------------------------------------
Additions to timber holdings
and capital assets 173,908 4,689 5 178,602
---------------------------------------------------------------------
---------------------------------------------------------------------


Year Ended
December 31, 2003
---------------------------------------------------------------------
Plant- Wood- Cor-
tation based porate Total
$ $ $ $
---------------------------------------------------------------------
Revenue from external customers
Sale of wood chips and logs 133,285 - - 133,285
Sale of imported logs - 57,211 - 57,211
Sale of wood-based products
and others - 5,822 - 5,822
Sale of standing timber 55,439 - - 55,439
Commission income 13,982 - - 13,982
---------------------------------------------------------------------
202,706 63,033 - 265,739
---------------------------------------------------------------------
---------------------------------------------------------------------
Income (loss) from operations
before interest, exchange
gains (losses) and
amortization of deferred
financing costs 59,117 (7,160) (2,741) 49,216
---------------------------------------------------------------------
---------------------------------------------------------------------
Identifiable assets 293,664 116,220 8,970 418,854
---------------------------------------------------------------------
---------------------------------------------------------------------
Interest income - 169 71 240
---------------------------------------------------------------------
---------------------------------------------------------------------
Interest expense 2,010 1,414 8,819 12,243
---------------------------------------------------------------------
---------------------------------------------------------------------
Depreciation and amortization 130 2,200 15 2,345
---------------------------------------------------------------------
---------------------------------------------------------------------
Provision for (recovery of)
income taxes 3,187 (146) 11 3,052
---------------------------------------------------------------------
---------------------------------------------------------------------
Depletion of timber holdings
included in cost of sales 28,540 586 - 29,126
---------------------------------------------------------------------
---------------------------------------------------------------------
Additions to timber holdings
and capital assets 89,252 7,303 4 96,559
---------------------------------------------------------------------
---------------------------------------------------------------------


By geographic segment

The Company conducts substantially all of its operations in one
geographic area, East Asia. During the quarter ended December 31, 2004,
sales in the PRC and to other countries amounted to approximately
$125,913,000 (December 31, 2003 - $77,491,000) and $nil (December 31,
2003 - $152,000), respectively.

10. Related party transactions

(a) Pursuant to the respective service agreements, the Company pays
consultancy fees to companies controlled by certain directors who are
also executives officers in lieu of their compensation. The consultancy
fees incurred for the fourth quarter of 2004 and for the year ended
December 31, 2004 amounted to $1,093,000 and (December 31, 2003 -
$936,000) and $1,491,000 (December 31, 2003 - $1,346,000) respectively.

In addition, as at December 31, 2004, the Company had an aggregate
amount of $1,019,000 (December 31, 2003 - $1,249,000) owed to these
related companies.

(b) The Company previously provided interest free loans to employees
under its stock option plan to finance the acquisition of common shares
upon the exercise of options. When the Company made these loans, the
proceeds of the sale of the relevant common shares were delivered to the
Company, the loan was repaid, and the balance of the proceeds were held
by the Company on behalf of the employees. At December 31, 2003,
$3,937,000 of proceeds were held by the Company and repaid during 2004.
These amounts were non-interest bearing and payable on demand.

The Company had also assisted its employees in facilitating the sale of
blocks of common shares held by employees. The proceeds of these sales
were deposited in the Company's accounts on a temporary basis to be held
by the Company on behalf of the employees. During 2004, the Company
facilitated the sale of common shares for an officer and the related
sales proceeds of $3,715,000 due to this executive officer was repaid.
This amount was non-interest bearing and payable on demand. The Company
does not intend to facilitate sales of common shares for employees in
the future.

(c) Interest expense for the fourth quarter of 2004 and for the year
ended December 31, 2004 on the Exchangeable Notes was nil (December 31,
2003 - $925,000) and $27,000 (December 31, 2003 - $5,160,000)
respectively in which one of the directors of the Company is an officer
and shareholder in a management company that provides certain advisory,
management and general administrative services to the entity that
ultimately held the Exchangeable Notes.

(d) Interest expense and redemption premium for the fourth quarter of
2004 and for the year ended December 31, 2004 on the Convertible
Instruments amounted to $nil (December 31, 2003 - $107,000) and $nil
(December 31, 2003 - $586,000) and $433,000 (December 31, 2003 -
$454,000) and $1,614,000 (December 31, 2003 - $1,900,000) respectively.
One of the directors of the Company is an officer and shareholder in a
management company that provides certain advisory, management and
general administrative services to the entity that ultimately held the
Convertible Instruments.

11. Commitments

As at December 31, 2004, the Company has various commitments to make
capital contributions to PRC Wholly Foreign Owned Enterprises. In
addition, the Company has capital commitments in respect of buildings,
timber holdings, plant and machinery of $21,838,000 (2003 - $15,887,000)
and purchase commitments in respect of logs of $27,119,000 (2003 -
$6,118,000). Commitments under operating leases for land and buildings
are as follows:



$
---------------------------------------------------------------------

Within one year 1,505
In the second year 1,284
In the third year 1,005
In the fourth year 843
In the fifth year 805
Thereafter 28,879
---------------------------------------------------------------------
34,321
---------------------------------------------------------------------
---------------------------------------------------------------------


12. Comparative Financial Statements

The comparative consolidated financial statements have been reclassified
from statements previously presented to conform to the presentation of
the December 31, 2004, consolidated financial statements.

-30-

Contact Information

  • FOR FURTHER INFORMATION PLEASE CONTACT:
    Sino-Forest Corporation (in Hong Kong)
    Mr. Kee Y.Wong, F.C.A.
    Executive Vice President and Chief Financial Officer
    (852) 2877-0078
    (852) 2877-0062 (FAX)
    or
    Sino-Forest Corporation (in Hong Kong)
    Mr. Allen T.Y. Chan
    Chairman and Chief Executive Officer
    (852) 2877-0078
    (852) 2877-0062 (FAX)
    or
    Sino-Forest Corporation (in Toronto)
    Mr. Jacques Charbin
    Investor Relations
    (416) 200-5513
    (905) 281-3338 (FAX)
    jacquescharbin@sinoforest.com