FOREST PRODUCTS ACQUISITION OPPORTUNITY€¦ · forest products acquisition opportunity creekside industries ltd. information memorandum october, 2011

FOREST PRODUCTSACQUISITION OPPORTUNITY

CREEKSIDE INDUSTRIES LTD.

INFORMATION MEMORANDUM

October, 2011

INFORMATION MEMORANDUM


This Information Memorandum (the “Memorandum”) has been prepared by Creekside Industries Ltd. (“Creekside”or the “Company”) and its owners to assist interested parties in making their own independent evaluation of thebusiness and assets of the Company. This Memorandum is intended solely for the use of interested parties indetermining whether they have an interest in acquiring Creekside.

DISCLAIMER

While the information contained herein is believed to be accurate, neither Creekside, the Owners, nor any oftheir respective directors, officers, principals, employees, shareholders, representatives and agents(collectively, the “Parties”), make any representation or warranty, expressed or implied, as to the accuracy orcompleteness of this Memorandum or any of its contents. The Parties expressly disclaim any and all liabilityfor representations or warranties, expressed or implied, contained in, or omissions from, or misstatements,errors or inaccuracies in, this Memorandum or in any other written or oral communication transmitted ormade available to a prospective purchaser. Only those particular representations and warranties, if any,which may form part of a definitive purchase agreement that may be entered into in connection with theacquisition of Creekside, if, as and when executed by the Owners, and subject to such limitations andrestrictions as may be specified in such an agreement, will have any legal effect.

This Memorandum contains historical information, descriptions of current circumstances and statementsabout potential future developments, estimates, targets and projections. The latter, which are forward-looking, are presented to provide reasonable guidance to the reader, but the accuracy of those statementsdepends on a number of assumptions and are subject to various risks and uncertainties that may cause theaccuracy of such statements to be materially different from those expressed in, or implied by, thisMemorandum. These statements are not guaranteed by the Parties and actual outcomes will depend on anumber of factors that could affect the ability of Creekside to execute its business plan, including, but notlimited to, uncertainties associated with the effect of general economic and business conditions on the demandfor Creekside’s products, foreign exchange rate fluctuations, trade sanctions, the availability and cost of rawmaterials, competition, operational curtailments and transportation limitations, energy and fuel costs,natural disasters, fires, insect infestation, the effects of forestry, land use, environmental and othergovernment laws and regulations and aboriginal land claims. Accordingly, the Parties will not be liable forany direct, indirect or consequential loss or damages suffered by any person as a result of relying on anystatement in, or omission from, the Memorandum and any such liability is expressly disclaimed. Readersshould exercise caution in relying upon forward-looking statements. Nothing contained in this Memorandumis, or should be relied upon as, a promise or representation as to any future events, results or projections.

Each recipient of this Memorandum acknowledges that the Company has reviewed, but has not undertakenany independent investigation to verify the accuracy or completeness of the information contained herein.Each recipient of this Memorandum acknowledges that it will, in determining whether to make an acquisitionof Creekside, independently, and without reliance on the Owners, make its own appraisal of, andinvestigation into, the business operations, financial condition, credit worthiness, affairs, status and nature ofCreekside.

Any transaction involving the acquisition of Creekside will be subject to the terms of a definitive purchaseagreement which will supercede all prior communication, including this Memorandum.

Unless otherwise stated, all financial data in this Memorandum is stated in Canadian dollars, and relates to fiscalyears ended December 31.

CONFIDENTIALITY

This Memorandum is not intended for general circulation or publication. It is to be used only by the persons towhom it is transmitted for the sole purpose of determining whether there exists an interest in further pursuing anacquisition of Creekside.

Each recipient of this document acknowledges and agrees that the confidentiality of the information containedherein will be strictly preserved and will not be reproduced, disclosed or made available to any other party. Byaccepting this Memorandum, the recipient acknowledges and agrees that: (i) neither the recipient nor its agents,representatives, directors or employees will reproduce, copy, distribute or disseminate this Memorandum to others,in whole or in part, at any time without the prior written consent of the Owners and that it will keep confidential allinformation contained herein not already in the public domain; (ii) the recipient, its agents, representatives, directorsand employees will use this Memorandum for the sole purpose of deciding whether there exists an interest in therecipient further pursuing an acquisition of Creekside; and (iii) if the recipient does not wish to pursue this matter, itwill return this Memorandum to the Owners as soon as practicable, together with any other material relating toCreekside and its operations provided to it in connection with a possible acquisition of this entity.

In furnishing this Memorandum, the Owners undertake no obligation to provide the recipient with access to anyadditional information or provide any updates of any of the information contained herein.

FORM OF TRANSACTION

Creekside is owned 50% by Ivan Andersen Holdings Ltd. and 50% by Robert Stewart Holdings Ltd. (the“Owners”). The Owners are prepared to consider offers to purchase all of the assets, operations and business of theCompany on a going-concern basis. Their preference is to structure the transaction as an asset sale, although theymay be prepared to consider alternative structures under the appropriate terms and conditions.

Prospective purchasers should be aware that the Owners may elect to effect a pre-closing reorganization ofCreekside in order to facilitate an asset sale and for income tax purposes.

During the acquisition process, the Owners reserve the right to take any action, whether in or out of the ordinarycourse of business, which they deem necessary or prudent to preserve the assets of the Company.

The Owners reserve the right to negotiate with one or more prospective acquirers at any time and to enter into adefinitive purchase agreement for the sale of Creekside without prior notice to any other prospective acquirer. TheOwners also reserve the right to terminate, at any time, further participation in the investigation and proposal processby any party, to consider, reject or accept any expression of interest or offer for any reason whatsoever and toamend, modify or change the procedures outlined herein at any time without obligation to all or any of theprospective acquirers and without stating any reason therefore.


TABLE OF CONTENTS

INVESTMENT HIGHLIGHTS .................................................................................................. 1

EXECUTIVE SUMMARY .......................................................................................................... 3

LOCATION................................................................................................................................... 5

HISTORY ...................................................................................................................................... 5

REGIONAL FIBRE SUPPLY ..................................................................................................... 5

BUSINESS OF THE COMPANY ............................................................................................... 7

Operations.................................................................................................................................................................7

Fibre Supply .............................................................................................................................................................8

Description of Facilities..........................................................................................................................................10

Grade Outturn .........................................................................................................................................................12

Wood Chips ............................................................................................................................................................13

Capital Expenditures...............................................................................................................................................13

Human Resources ...................................................................................................................................................13

Current Status of Operations...................................................................................................................................14

ENVIRONMENT........................................................................................................................ 15

MATERIAL CONTRACTS ...................................................................................................... 16

LEGAL ISSUES.......................................................................................................................... 16

ACCOUNTANTS AND SOLICITORS .................................................................................... 16

SUMMARY OF APPENDICES

A Site Plan

B Plant Layout

C Equipment List

D Legal Description of Property

Creekside Industries Ltd. 1

INVESTMENT HIGHLIGHTSThe Owners’ decision to divest Creekside has created a compelling business opportunityto acquire a strategically located, state-of-the-art lumber remanufacturing operation.Prospective purchasers should consider the following:

HIGH DEGREE OF FIBRE SECURITY

Creekside has the capability of realizing a high degree of fibre security. Substantially allof the Company’s trim block requirements can be sourced from four sawmills in closeproximity to it. There are no other finger joint manufacturers in the area which competefor these trim blocks. The only other regional facility which can effectively utilize thisfibre, once it has been chipped, is the Castlegar pulpmill.

STATE-OF-THE-ART MANUFACTURING FACILITY

Approximately $8.6 million was invested in Creekside’s property, plant and equipmentduring its construction in 2006. The Company’s finger jointing equipment representsstate-of-the-art technology. The configuration of the mill is designed to allow highlyefficient processing of the available trim block profile. Plant design is focused on valueextraction, lumber recovery, mill performance and safety. These factors are expected tomake significant contributions toward establishing Creekside as a leader in BritishColumbia’s finger jointing industry.

Assuming that the Creekside plant is operating at normal design parameters, theCompany is expected to be profitable under existing lumber market conditions.

POTENTIAL TO BECOME A LOW COST PRODUCER

Creekside’s highly automated production process provides it with the potential to becomea low-cost producer of high quality, finger jointed lumber products. The capital intensivenature of the Company’s manufacturing process is expected to result in a significantreduction in labor costs as it results in fewer employees than are required in mostcomparable finger jointing plants. This translates into an estimated operational costsaving of about $12 per mfbm.

OPPORTUNITY TO MINIMIZE U.S. LUMBER TARIFFS

Most of the lumber sold by Creekside is to customers in the United States. The softwoodlumber agreement (“SLA”) between Canada and the United States came into effect in late2006 as a solution to a long standing trade dispute between the two countries overCanadian softwood lumber exports to the U.S. Under the SLA, B.C. interior lumberproducers pay an export tax based on a sliding scale which ranges from 0% to 15% of acomposite market price index.

However, by structuring its operations in a manner which takes advantage of certaintechnical provisions in the SLA, Creekside has an opportunity to pay an export charge nogreater than 5% levied on the price of its raw materials (i.e., the price of trim blocks),instead of a tax of up to 15% on the value of its finished goods. Creekside could be a


beneficiary of this tax reduction if it elected to take advantage of the opportunityavailable to it under the SLA.

REGION’S FORESTS ARE LESS EXPOSED TOMOUNTAIN PINE BEETLE INFESTATION

The forests of B.C.’s southern interior contain approximately 15% to 25% pine ascompared to the province’s northern and central interior which has approximately 50% to75% pine. This implies that the B.C southern interior is significantly less exposed to themountain pine beetle infestation than other regions of the province and the regionalsawmills which supply Creekside’s trim blocks are less likely to experience substantiallong term production curtailments.

The competitive advantages associated with the southern interior’s fibre basket arecompelling. International Forest Products Ltd. (“Interfor”), a major forest productscompany, has a stated objective of expanding its lumber capacity in this region.Interfor’s recent decision to invest $55 million to purchase the two Pope and Talbotsawmills at Castlegar and Grand Forks is strongly indicative of the company’s long termcommitment to the southern BC interior. Interfor’s President and CEO stated: “We viewthe acquisition of these mills as an attractive opportunity to add critical mass in one ofour core operating regions. The acquisition is consistent with our stated goal of addingcapacity in the Southern Interior region of B.C.”

In its analysis of the Pope and Talbot acquisition, Interfor highlighted the superiorcomposition of the region’s timber supply, stating that it had an “attractive species mix[consisting of] cedar and Douglas Fir [with a] low Lodgepole Pine content relative toB.C.’s Central and Northern Interior”

OPPORTUNITY TO BENEFIT FROM SUPPLY-INDUCEDRECOVERY IN LUMBER PRICES

The mountain pine beetle infestation is expected to result in a dramatic reduction oflumber production in British Columbia’s Northern and Central Interior. Recent surveysindicate that more than 400 million cubic metres of lodgepole pine have been affected bythis infestation. By 2014, entomologists expect the beetle will have killed 80% of theprovince’s pine trees. As a result, overall harvest levels in these regions may be reducedby 25% to 50%. Industry analysts expect that at some point over the next several years,B.C.’s annual allowable cut (AAC) will be reduced by as much as 38% from 65 millionm3 presently to 40 million m3. It is also expected that the grade and volume of lumberthat can be recovered from the beetle-infested logs will diminish over time.

This unprecedented structural reduction in B.C. harvest volumes over a sustained periodof time is expected to result in significantly higher North American lumber prices assawmill production is curtailed. However, harvesting in the southern interior of B.C.should be relatively unaffected for reasons mentioned previously.

Creekside is expected to be a beneficiary of these developments.


EXECUTIVE SUMMARYCreekside manufactures and markets finger-jointed lumber from its value-added, state-of-the-art manufacturing facility in Christina Lake, B.C.

Creekside’s principal products are 9 foot finger jointed studs which are marketedprimarily in North American residential and industrial markets. The Company alsomanufactures finger jointed studs in 8 and 10 foot lengths and finger jointed lumber in 6”widths and lengths up to 10 feet. Wood chips are a significant by-product of theCompany’s lumber production.

The Company’s manufacturing facility was constructed in 2006 at a cost ofapproximately $8.6 million and has an annual production capacity of approximately 13million board feet (“mmfbm”) of finger jointed lumber on a one-shift basis. It wasdesigned with state-of-the-art scanning systems and a mechanized infeed and sortingsystem which require significantly less labor than in most comparable finger jointingoperations.

At full production capacity, it is estimated that Creekside has an annual trim-blockrequirement of approximately 20 million board feet on a one-shift basis. Historically,these trim blocks have been sourced primarily from the Grand Forks, Castlegar and, to alesser extent, the Vaagen Brothers and Springer Creek sawmills, which have the capacityto provide the Company with all of its trim block requirements:

Trim Block Supply (1)

(mmfbm)

Castlegar 11.9Grand Forks 11.2Vaagen Brothers 6.5Springer Creek 5.0Total 34.6(1) based on 2-shift production at these sawmills

Historically, the majority of Creekside’s trim block requirements were supplied underlong-term contract with Grand Forks and Castlegar. The remainder of the Company’srequirements has been supplied through purchases in the open market, from mills such asVaagen Brothers and Springer Creek.

Creekside’s products are sold in markets open to a number of companies with similarproducts. Purchasing decisions by customers are based on price, quality and service.Prices and sales volumes are influenced by general economic conditions. Historically,the lumber manufactured by Creekside has been sold by the Sinclar Group under theterms of a sales agency agreement.

At normal production capacity, Creekside employs a total of approximately 14 people inits manufacturing facility, 10 of which are hourly production employees. The Company’soperations are non-union.

As a result of certain management issues experienced during the start-up phase ofoperations, equipment interface challenges which resulted in unacceptable productionvolume and quality, and a deteriorating lumber price environment; the Owners elected tosuspend manufacturing operations in late 2006 and terminate their partnership agreementwith the individual who had acted as the Company’s President and General Manager. Asat the date of this Memorandum, Creekside remains inactive.

LOCATION MAP


LOCATIONThe Creekside manufacturing plant is located just west of the town of Christina Lake, inthe southern interior of British Columbia. Christina Lake lies approximately 70kilometers west of Castlegar along Highway 3, the major east-west highway connectingVancouver and Calgary through the southern part of the provinces of B.C. and Alberta.

The mill is situated on Highway 395 approximately 5 kilometers south of the intersectionwith Highway 3; and approximately 0.5 kilometers north of the Canada / U.S. border.The border crossing on Highway 395 provides convenient road access to the UnitedStates.

Creekside’s property consists of an approximately 34 acre site in a rural industrial park.The site is zoned I-1 (Industrial) and is fully serviced with electricity, phone and naturalgas. All water is obtained from on-site wells. Rail loading facilities are available atInternational Reload Systems Ltd., about 0.5 kilometer south, which operates a lumberreload facility on the Burlington Northern Railway.

HISTORYCreekside was conceptualized in 2004 as a way to capitalize on the supply of trim blocksavailable from local sawmills in the southern B.C. interior. The project was developedby a subsidiary of Sinclar Enterprises Ltd. in conjunction with an individual from outsidethe Sinclar Group who acted as President and General Manager of the Company. Thepartners incorporated Creekside in 2004 and entered into a trim block supply agreement(the “Trim Block Supply Agreement”) with Pope and Talbot during that year. Thisagreement was subsequently amended and expanded in April, 2005. Planning for theventure proceeded and, by late 2005, a manufacturing site had been leased and a facilitywas under construction. The Company’s finger-jointing equipment was installed in early2006 and the plant commenced operations in about May of that year. The facilityoperated in start-up phase until November, 2006, when, for a number of reasons, it wasclosed. Refer to “Current Status of Operations”. As at the date of this Memorandum,Creekside remains inactive. The land which had been previously leased by the Companywas purchased in December, 2007.

REGIONAL FIBRE SUPPLYIn British Columbia’s North and Central Interior, a mountain pine beetle infestation hasbeen spreading since about 1994. Recent surveys indicate that more than 400 millioncubic metres of lodgepole pine in British Columbia have been affected by the mountainpine beetle. By 2014, entomologists expect the beetle will have killed 80% of theprovince’s pine trees (Source: BC Ministry of Forests and Range). The northern andcentral regions of the Province continue to be the most heavily affected by this infestationas the forests in these areas are comprised of approximately 50% to 75% lodgepole pine,which is the primary species affected by the beetle.

In contrast, the forests in the southern interior region of the Province are comprised ofonly approximately 15% to 25% lodgepole pine, thus making this region less susceptibleto the infestation. The following diagram indicates the extent and disposition of themountain pine beetle infestation in British Columbia as of 2007:


The forest tenures of the two sawmills which have historically supplied the majority ofCreekside’s trim blocks are contained within the Arrow and Boundary Timber SupplyAreas. The estimated long term average species distribution from these TSA’s is shownin the following chart:

Arrow and Boundary TSA’s - Estimated Species Distribution

Source: British Columbia Ministry of Forests and Range

BUSINESS OF THE COMPANYOperations

Creekside is positioned in the lumber industry as a value-added manufacturer of fingerjointed stud lumber with the potential to become a low-cost producer.

Creekside’s state-of-the-art finger jointing mill is a one-line mill, with a high degree ofmechanization and automation. This substitution of capital for labor is expected tosignificantly reduce the Company’s operating costs by lowering the number of employeesnormally required in a finger jointing plant. Creekside employs about 10 productionpeople per shift as compared to approximately 16 in other comparable finger jointingplants in the province. Refer to “Human Resources”. This translates to an operationalcost saving of about $12 per mfbm of production.

The Company’s fully mechanized trim block infeed and sorting equipment is a majorcomponent of its automated manufacturing process. This equipment provides it with theflexibility to process trim blocks in widths varying from 2”x4” to 2”x12” and in lengthsvarying from 9” to 24”.

The Company produces finger jointed, stud grade lumber in 4” and 6” widths, in eight toten foot lengths. Historically, the Company focused its production on nine foot lengths totake advantage of the price premium which was available for that product. It has a

Hemlock6%

Other4%

Larch14%

LodgepolePine23%

Douglas Fir42%

Spruce11%


production capacity of approximately 50 thousand board feet per shift, or approximately13 million board feet per year on a one-shift basis.

Wood chips are a significant by-product of the Company’s lumber production.Historically, all of these chips were delivered to the Zellstoff Celgar pulpmill inCastlegar, B.C.

Creekside sells its lumber in the United States and Canada as follows:

Geographic Distribution of Sales

In normal lumber market conditions, finger jointed studs command a price premium tostandard sawmill manufactured studs as they have a reduced tendency to bend, twist orbow. Historically, Creekside has benefited from an approximate $20 to $25 per mfbmpremium as a result of this factor.

Nine foot studs also command a premium to eight foot studs of approximately $5 to $10per mfbm, depending on market conditions. Historically, nine foot studs have accountedfor approximately 90% of Creekside’s total lumber sales.

Most sales to North American customers are shipped by rail or truck. Rail transportationand loading facilities are available at IRS Reload Ltd., which is located adjacent toCreekside’s plant.

Fibre Supply

Creekside’s fibre supply has historically been provided through long-term trim blocksupply agreements and open market purchases.

At full production capacity, Creekside requires approximately 20 million board feet oftrim blocks on a one-shift basis. Historically, the Company has sourced substantially allof these blocks from four sawmills in close proximity to its Christina Lake plant:

USA95%

Canada5%


Trim Block Supply

EstimatedSawmill Lumber Capacity (1) Trim Block Production

(million board feet)Castlegar 170 11.9Grand Forks 160 11.2Vaagen Brothers 130 6.5Springer Creek 100 5.0Total 560 34.6(1) based on 2-shift production at these sawmills

Large, modern sawmills typically produce approximately 5% to 8% of their total lumberproduction in the form of trim blocks.

Although the Castlegar and Grand Forks sawmills have historically provided the majorityof Creekside’s fibre requirements, the Company has purchased trim blocks from otherregional Canadian and US sawmills, including Vaagen Bros. Lumber and Springer CreekForest Products, both of which are within economic hauling distance of Creekside. Trimblocks are also produced by Interfor’s Adams Lake mill and Weyerhaeuser’s Princetonmill.

Until 2007, the Castlegar and Grand Forks sawmills were owned and operated by Popeand Talbot Inc. In April, 2005, Creekside entered into an amended trim block supplyagreement (the “Trim Block Supply Agreement”) with Pope and Talbot for the sale of allof the trim blocks produced at its Castlegar, Grand Forks (and Midway) sawmills. The2005 agreement replaced and modified an original trim block purchase agreement whichhad been executed in May, 2004.

Under the Trim Block Supply Agreement, Pope and Talbot agreed to sell to Creekside allof the trim blocks produced by its southern BC mills for a period of five years, with twoadditional five year renewal options. The trim blocks supplied by the sawmills would bekiln dried, planed lumber, in SPF, Douglas Fir/Larch and Hemlock species, produced in2” nominal thickness, in widths varying from 2”x4” to 2”x12” and lengths varying from:

(i) 9” to 24” in the case of 2”x4” and 2”x6” blocks, and(ii) otherwise in lengths varying from 12” to 24”,

Under the agreement, the price of the trim blocks is equal to the Random Lengths’ USdollar price for Western SPF 2”x4” – 8 foot finger jointed stud (mill net), adjusted for thefollowing:

(i) the effective duty under the US Softwood Lumber Agreement,(ii) the US $/Cdn $ exchange rate,(iii) a trim block to stud grade conversion factor(iv) a multiplier to which the parties agree for revenue sharing purposes:

a) 0.33 when SPF 2”x4” – 8 foot finger jointed stud prices are US$300 or more;

b) 0.28 when SPF 2”x4” – 8 foot finger jointed stud prices are lessthan US $300.

As part of its commitment under the Trim Block Supply Agreement, Pope and Talbotinstalled a trim block extraction system in its Grand Forks sawmill at an estimated cost ofapproximately $250,000. Castlegar had an existing rudimentary extraction system inplace at the time and upgraded it at an unknown cost. Creekside entered into an


arrangement with a third-party trucking company to transport the blocks to theCompany’s processing facility. Creekside was responsible for the cost of transportation.

In late 2007, Pope and Talbot declared bankruptcy and sought protection from itscreditors in both the U.S. and Canada. The company’s receiver began the process ofdisposing of its assets. On April 30, 2008, Interfor completed the purchase of theCastlegar and Grand Forks sawmills from Pope and Talbot at a net purchase price ofapproximately $55 million.

As a result of the Pope and Talbot bankruptcy and the closure of the Creekside plant, it isdoubtful that the Trim Block Supply Arrangement remains in effect. Prospectivepurchasers of Creekside should assume that new trim block supply arrangements willneed to be established with suitable suppliers.

As at the date of this Memorandum, Interfor’s Grand Forks sawmill and the Vaagen Bros.mill are operating on a one-shift basis. Interfor’s Castlegar mill was re-opened in 2010and is currently producing on a reduced basis. The company has stated that opportunitiesexist to improve the financial performance of the Grand Forks and Castlegar millsthrough improvements in operational efficiency and other non-capital initiatives. Thecompany has indicated that it may consider certain capital expenditures to enhance andreposition these sawmills.

One such initiative was announced in late 2010 when Interfor stated that it wasinvestigating the feasibility of constructing a new $100 million sawmill and associatedco-generation plant in Grand Forks. The co-gen plant was planned under BC Hydro’sPhase 2 Power Call and would have provided power to the sawmill utilizing the mill’sresiduals as its primary source of fuel. Excess electricity would have been supplied to theprovincial grid. In August, 2011 Interfor announced that the co-gen plant had not beenaccepted by BC Hydro, but that it was still evaluating the feasibility of the Grand Forkssawmill upgrade. A decision is expected in late 2011.

Also as at the date of this Memorandum, the Springer Creek sawmill is temporarilyclosed. When operating on a one-shift basis, Springer Creek has the capacity to supplyapproximately 5 million board feet of trim blocks annually and has expressed interest innegotiating a trim block supply arrangement with Creekside.

Description of Facilities

Creekside’s facilities consist of a single-line finger-jointing plant, a ramp and loadingdock, a chipper and chip loading facilities, a sawdust extraction system and an unpavedstorage yard.

In addition, the Company leased an approximately 4,700 square foot building from BellPole Company Ltd., the owner of the adjacent property. The building is situated within afew metres of the Company’s manufacturing plant and contained the Company’sadministrative offices and a maintenance shop. This lease was discontinued whenCreekside suspended operations, although, as of the date of this Memorandum, thebuilding is still available for use.

The Company’s finger-jointing operations are housed in a single, 26,275 square foot slab-on-grade, steel frame, sheet metal clad, industrial building which was constructed in2006. An ancillary utility building contains a diesel generator and the plant’s firesuppression system. Refer to Appendix B, Plant Layout.


Creekside processes only kiln-dried trim blocks of select species, including Douglas Fir,Larch, SPF and Hemlock. Cedar trim blocks cannot be used to manufacture structurallumber products. Under the Trim Block Supply Agreement, cedar trim blocks were notpurchased by the Company, however, occasionally, cedar blocks inadvertently enteredCreekside’s supply chain from either these or other suppliers, and needed to be removedduring processing. Under the Trim Block Supply Agreement, Pope and Talbot was toperform a species sort at the supplying sawmill and deliver separate loads of SPF,Douglas Fir/Larch and Hemlock trim blocks. However, this proved to be impractical inpractice and trim blocks of mixed species (excluding cedar) were determined to beacceptable. As a result, Creekside markets its products under a “Western Whitewood”COFI grade stamp, implying the mixed species.

Trim blocks from mountain pine beetle infected lumber are acceptable feedstock and canbe processed efficiently by Creekside’s equipment.

Kiln-dried trim blocks are pre-sorted by suppliers according to width and are received byCreekside in 4”, 6”, 8”, 10” or 12” widths. They are loaded into one of five infeed bins,each containing a uniform block width, as they enter the plant.

2”x4” and 2”x6” blocks are each sent directly to one of four secondary holding binsaccording to width. Eight inch or wider blocks are processed through a short-blockfeeder with a 180 block per minute capacity. The feeder consists of a 14 ft diameterrotating table with adjustable speed. Blocks are then passed through a four-sides Luxscangeometrical scanner where they are scanned for width. An automatic indexer feeds theblocks directly and sequentially to a 3 blade edger where the blocks are ripped to either4” or 6” width and delivered to one of the secondary holding bins. At the completion ofthis process, all blocks have been sorted, scanned for width and reside in a secondary setof holding bins as follows:

1) 2x4 natural2) 2x6 natural3) 2x4 ripped4) 2x6 ripped

The system includes a fifth holding bin, if required, for operational flexibility.

Sorted blocks of a uniform width from the secondary set of storage bins are batch fed to asecond system of feeders/scanners. Again, the short block feeder is a 14 ft diameterrotating table which feeds blocks to a Luxscan four sides geometric scanner whichcombines both laser and CCD technology. This system scans each block for dimensions,wane, rot and knot size; and provides a recommended optimal solution for each block. Itoptimizes edger processing and board turning by pattern matching according to a pre-determined set of wane rules. Scanned blocks are fed into a second automatic indexerwhich supplies the blocks directly and sequentially to two CCS-1000 automatic cross cutsaws. These saws remove those portions of the block with excessive wane or otherdeficiencies which reduce its grade. The upgraded blocks are fed to one of two tertiaryholding bins according to width – either 4” or 6”. Blocks held in the tertiary set of binshave been sized, chopped, and are upgraded such that they are suitable for the fingerjointing process. The tertiary set of bins acts as a buffer zone and enables thescanning/cross cut operation to process a different set of blocks (i.e., those of a differentwidth) from the finger jointing system.

A short-block feeder, consisting of a 14 ft diameter rotating table with an exit openingadjustable to block width, feeds the blocks in uniform batches from the tertiary set ofholding bins to a third automatic indexer and the finger jointer feeder system. Thissystem directs the blocks to a Conception CRP-200SE finger jointing system. The CRP-


2000SE consists of a double shaper with glue applicator, automatic corner transfer,assembly machine, highly productive press and 5 precision end trim saws.

The CRP 2000SE has an input speed of up to 180 pieces per minute and output of up to325 lineal feet per minute. It is capable of finger jointing blocks with the followingdimensions:

Length: 9” to 24”Width: 4” to 6”Thickness: 1-1/2” to 2”

After the finger jointed pieces have been end-glued, formed and pressed into a continuous27 foot long piece, they are sent to a landing table which acts as a buffer zone. At thelanding table, each finger jointed piece is cut to length (typically, three 9 foot lengths)and transferred to an accumulation conveyor which again acts as a buffer zone. They areplaned two sides and fed to a second accumulation conveyor. Finished pieces are graded,sorted and delivered to an automatic stacker where they are stacked in bundles, strappedand wrapped in preparation for shipment.

The mill has a single chipper which feeds a primary chip screen. Chips are conveyed toone of two end-to-end collection bins for transportation to a nearby pulp mill. Inaddition, the mill is equipped with a saw-dust collection and waste system. Sawdust,together with the undersize chips and fines from the chip screen, is conveyed to thesecond collection bin where it is held for sale locally.

Creekside’s plant is equipped with a fire-suppression system. A separate utility buildingadjacent to the main plant houses the plant’s pump and sprinkler system. Water for thesystem is drawn from an on-site well and stored in underground storage tanks.

Grade Outturn

The following graph illustrates the estimated proforma grade outturn of the plant,assuming that it is operating within normal design parameters:

Proforma Grade Outturn

9' Stud Grade90%

8' Stud Grade8%

Other2%


Wood Chips

Creekside is expected to produce approximately 4,000 odt’s of wood chips at fullproduction capacity on a one-shift basis. Historically, all of these chips have beendelivered to the Zellstoff Celgar pulpmill in Castlegar, B.C.

Capital Expenditures

The Owner’s total direct investment in Creekside’s property, plant and equipment isapproximately $8.6 million, as follows:

Property $ 482,000Building 978,000Production equipment 7,048,000Office equipment 18,000Mobile equipment 12,000Automotive 54,000

Total $ 8,592,000

Of the foregoing assets, the property, building and production equipment are available forsale pursuant to the transaction contemplated by this Memorandum. The office andmobile equipment, and automotive assets have previously been disposed of and are notavailable for sale.

In addition, Creekside capitalized approximately $329,000 in plant start-up costs duringthe period May, 2006 to November, 2006.

Human Resources

The table below sets forth the average historical level of hourly and salaried personnel atCreekside:

HUMAN RESOURCES

Hourly Salaried Total

Total 10 4 14

As a result of the high level of automation in its plant, the Company employs only aboutten hourly employees on a typical shift as follows:

1 Trim block infeed/scan1 1st sort1 Scan/chop saw1 Infeed to end-glue1 Planer1 Grader1 Forklift driver1 Maintenance1 Utility

10


Creekside is a non-union operation. Hourly wage rates for production employees areexpected to be comparable to those in the secondary manufacturing sector and areestimated at approximately $15 to $25 per hour depending on the position and theexperience of the employee.

Due to the relatively short period of the mill’s historical operations a meaningful safetyperformance record was not established. However, employee safety was a priority in thedesign of Creekside’s plant.

Current Status of Operations

Creekside’s plant operated in a start-up mode for approximately seven months from May,2006 to November, 2006, but was unable to achieve rated production capacity. Inaddition, grade outturn was unacceptable. Production averaged only 75% stud grade with25% economy. The plant was designed to manufacture approximately 98% stud gradewith only 2% economy.

During the period in which the Company was in production, several operational issueswere identified. These included: (i) the inability of the Company’s senior management toadequately address the operational challenges associated with the start-up phase ofproduction; (ii) issues associated with the new technology incorporated in some machinecenters in the plant; and (iii) an inexperienced labor force.

In an effort to address these issues, the Owners initiated an independent review andassessment of Creekside’s operations by an external consultant in July, 2006.

The review of Creekside’s operations was conducted by Mr. Martin Bokesch of MABConsulting Ltd. The scope of the report included a detailed review of the plant’sproduction processes in order to identify issues which were creating delays or stoppagesin the work flow and degradation of the grade outturn. Mr. Bokesch observed andrecorded the process flow of the plant over a two-day period. He devoted time toindividual machine centers observing flow, feed and stoppages. In addition, he helddiscussions with both senior management of the plant and production employees.

The report concluded that, although the plant was fundamentally sound, severalproduction deficiencies needed to be corrected. These fell into three major categories:

1. Machine issues – the most significant of these was the programmable logic chip(PLC) computer interface between the scanning system and the chop saws. Itappeared that the scanning system and the chop saws were not communicatingeffectively, resulting in sub-optimal cuts. Specifically, the scanning system memoryappeared to overflow beyond a certain stage, causing it to lose track of thecharacteristics of certain blocks which had been scanned. Hence, the scanningsystem was unable to convey the necessary information to the chop saws.

2. Design issues – these included items such as conveyer speeds which requiredadjustment; inadequate regulation of the trim block feed to the rotating sort tables;and a poorly functioning chipper.

3. Labor issues – there was a relatively young and inexperienced group of employeeson the production floor. Inadequate levels of training were also observed.


The report concluded: “My belief is that [it] is a fundamentally sound plant, with gooddesign parameters, and should be capable of reaching desired goals, and easily more, withcontinual monitoring and improvement”.

Over the next several months, the Company’s management attempted to address theissues identified in the report, however in many instances it was unable to do soeffectively. Attempts to address the production line issues were hindered by frictionbetween management and the equipment supplier. Eventually, the Company lost thesupport of the supplier.

By late 2006 it became apparent that the North American lumber market was in a severecyclical decline. The combination of unacceptable production volumes and quality, theapparent inability of the plant’s management to adequately address start-up operationalissues and a significantly deteriorating lumber price environment prompted a decision bythe Owners to suspend manufacturing operations and terminate the partnership agreementwith the individual who had acted as the Company’s President and General Manager. Asat the date of this Memorandum, the Company’s plant remains inactive.

ENVIRONMENTCreekside’s operations are subject to various federal, provincial and local environmentalprotection laws.

In September, 2006, Bell Pole Company, which was, at that time, the owner of theproperty on which Creekside’s plant is presently situated, retained SummitEnvironmental Consultants Ltd. to perform a Stage 1 Preliminary Site Investigation of itsproperty at 775 Highway 395, Christina Lake, B.C. The purpose of the report was tofacilitate the eventual sale of the property to Creekside. The assessment consisted of: (i)a review of Land Title records; (ii) interviews with knowledgeable individuals foranecdotal accounts of the past uses of the site; (iii) a Site Registry information searchfrom the Land Data B.C. database; (iv) a review of certain applicable files provided byBell Pole; and (v) a site inspection. The report concluded that there was a low probabilitythat any contamination of either soil or groundwater exists beneath the site and that therewas a low probability that any offsite contamination had occurred from the subject site.

In June, 2007, the Owners retained Pacific Environmental Consulting Ltd. to perform aPhase 1 Environmental Site Assessment of the Creekside property. The purpose of thereport was to identify apparent and potential contamination associated with the present orprevious use of the site in order to facilitate the sale of the Company. The scope of thework consisted of: (i) a review of Land Title records; (ii) discussions with the RegionalDistrict of Kooteney Boundary; (iii) a review of historical aerial photographs; (iv)interviews with knowledgeable individuals regarding present and former uses of the site;(v) a search of the B.C Ministry of Environment water well database; (vi) a review of theProvincial Site Registry; and (vii) a physical inspection of the site and adjacentproperties. The report concluded that the site has a low risk with respect to the potentialfor significant or widespread subsurface contamination.

As at the date of this Memorandum, to the extent that the Owners are aware, Creekside isin substantial compliance with all applicable environmental regulations.


MATERIAL CONTRACTSIn the normal course of business, Creekside’s operations are expected to be subject to anumber of material contracts. However, as at the date of this Memorandum, no suchcontracts exist.

LEGAL ISSUESFrom time to time, Creekside may be involved in legal proceedings relating to claimsarising out of their operations in the ordinary course of business. As at the date of thisMemorandum, the Owners are not aware of any material current or pending legalproceedings against Creekside, nor are there any material current or pending legalproceedings by the Company against a third party.

ACCOUNTANTS AND SOLICITORSThe accountants of Creekside are Deloitte & Touche LLP, Suite 500, 299 Victoria Street,Prince George, B. C., V2L 5B8.

The solicitors of Creekside are Hope Heinrich LLP, 1598 6th Ave., Prince George, B.C.,V2L5G7.

APPENDIX A

SITE PLAN

APPENDIX B

PLANT LAYOUT

APPENDIX C

EQUIPMENT LIST

EQUIPMENT LIST

Equipment installed and inclusive of drives, disconnects, software, hydraulics, control panels andelectrical hook-ups.

1. All grating, walkways and stairways

2. Vibrating conveyors2.1. 1 – 61’ 3”2.2. 1 – 47’ 6”2.3. 1 – 33’ 0”2.4. 1 – 50’ 7”

3. Belt Conveyors3.1. 2 – Edger clean-up belts No. 1 and No. 23.2. 2 – Singulator disc screen clean-up conveyor No. 1 and No. 23.3. 2 – Chop saw waste conveyor No. 1 and No. 23.4. 1 – Conveyor No. 1 to re-rip bin3.5. 2 - Conveyor No. 2 and No. 3 to re-rip bin3.6. 2 – Chop saw outfeed belts No. 1 and No. 23.7. 2 - Chop saw high grade and stud by-pass belts3.8. 2 – Finger-joint bins infeed and shear belts (High Grade)3.9. 2 - Finger-joint bins infeed and shear belts (Stud)3.10. 1 – Re-rip shear infeed conveyor3.11. 3 – shears with automated controls3.12. 1 – Vibrating outfeed belt to chopsaw walking floor3.13. 1 – Shear belt No 2 to chopsaw walking floor3.14. 5 - shears with automated controls3.15. 1 – Chipper infeed belt3.16. 1 – Chipper outfeed chain3.17. 1 – Chip conveyor to chip bins3.18. 1 – Walking floor vibrating conveyor by-pass shifting belt3.19. 1 – Triple stacked edger outfeed belt to walking floor bins3.20. 5 - shears with automated controls3.21. 1 – Chip screen overs belt conveyor to edger clean-up belt3.22. 1 – Added conveyor to edger clean-up belt No. 1

4. Chipper4.1. Chipper knife grinder

5. Chip screen

6. Dust collector fan and Cyclone assembly

7. Two chip bins

8. Planer including infeed and outfeed8.1. Planer head grinder8.2. Planer heads and knives

9. Air compressor(s)

10. Air dryer

11. Quality control equipment11.1. Bend tester11.2. Drying oven11.3. Pressure pot11.4. Scales

12. Keith Walking Floors (Trim block storage bins)12.1. 5 – 52’ x 10’12.2. 6- 54’ x 7’12.3. 2- 50’ x 7’

13. Three Conception short-block feeders complete with:13.1. capacity to feed up to 180 blocks per minute13.2. 14’ diameter rotating table, adjustable speed by a variable frequency drive13.3. 2” spinner roll to avoid blockage in the opening13.4. exit opening adjustable to the block width13.5. rotating brushes to avoid blockages13.6. bases

14. Two Luxscan Technologies Scanners

15. Three Automatic indexers15.1. to feed blocks directly and sequentially15.2. Powered by a servo motor

16. Dual Transfer16.1. Belt conveyor with automatic deflector

17. One Conception Edger complete with17.1. 4 moving blades17.2. for 2” x 4” to 2” x 12”17.3. from 9” to 24” long17.4. adjustable speed by a variable frequency drive17.5. base

18. Two CCS-1000 Automatic Cross-cut saws18.1. servo drive fee18.2. adjustable speed to 1000 ft/min18.3. 2 servo-motors, one for infeed rollers, one for outfeed rollers18.4. 1 – saw blade included18.5. for 2x3, 2x4, and 2x6 from 9” to 24” long; no mixed widths

19. Finger-jointer feeder with19.1. two chains with traverse bars19.2. synchronized with the shaper chain19.3. overhang type transfer to the shaper

20. CRP-2000SE Finger-Jointing System including:20.1. double shaper complete with adhesive applicator20.2. automatic corner transfer20.3. assembly machine20.4. highly productive press20.5. 4 – finger-jointer heads and knives20.6. precision end-trim saws20.7. tool-kit for head set-up20.8. capacities: input - 180 pieces per minute; output – 325 lineal feet per minute

21. Fully automatic Newman G-716 side-head grinder21.1. accumulation conveyors before planer to act as buffer zone21.2. planer outfeed belt

22. Automatic stacker22.1. accumulation conveyors before planer to act as buffer zone22.2. bundles up to 10’ long22.3. bundles 48” wide and 48” high22.4. stacker outfeed chain

23. Strapping and wrapping tools and equipment

24. Fire suppression system complete with pumps and controls24.1. fire hoses and fire extinguishers

25. Miscellaneous tools, spare parts and warehouse items

26. First-aid supplies and equipment

27. Office and lunch room furniture such as desks, tables, chairs, fridge, stove, microwave(s),filing cabinets

APPENDIX D

LEGAL DESCRIPTION OF PROPERTY

LEGAL DESCRIPTIONLot A, Plan KAP80226, District Lot 312, Similkameen Div of Yale Land DistrictPID: 026-566-460

ADDRESS795 Highway 395, Christina Lake, B.C.

Documents

FOREST PRODUCTS ACQUISITION OPPORTUNITY€¦ · forest products acquisition opportunity creekside industries ltd. information memorandum october, 2011