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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 
  o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934-OR-ü
    
    ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2003-OR-TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED) for the transition period from
________ to _______Commission File Number: 333-7346
   AINSWORTH LUMBER CO. LTD. (Exact name of Registrant as specified in its charter)
 British Columbia, Canada(Jurisdiction of Incorporation) 3194 Bentall IV, P.O. Box 49307, 1055 Dunsmuir Street
Vancouver, British Columbia, V7X 1L3
CANADA (604) 661-3200(Address of Registrants principal executive offices)   Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None Securities for which there is
a reporting obligation pursuant to Section 15(d) of the Act
 
 Indicate the number of outstanding shares of each class of the issuers classes
of capital or common stock as of the close of the period covered by the annual
report. As at December 31, 2003, 14,564,948 common shares and 107,500 Class B common
shares were issued and outstanding. Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes    
ü    No   o Indicate by check mark which financial statement item the registrant has
elected to follow. Item 17   
o    Item 18    ü




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TABLE OF CONTENTS ITEM 1.
    
    IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
    
    
    1ITEM 2.
    
    OFFER STATISTICS AND EXPECTED TIMETABLE
    
    
    1ITEM 3.
    
    KEY INFORMATION
    
    
    2ITEM 4.
    
    INFORMATION ON THE REGISTRANT
    
    
    8ITEM 5.
    
    OPERATING AND FINANCIAL REVIEW AND PROSPECTS
    
    
    21ITEM 6.
    
    DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
    
    
    29ITEM 7.
    
    MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
    
    
    35ITEM 8.
    
    FINANCIAL INFORMATION
    
    
    36ITEM 9.
    
    THE OFFER AND LISTING
    
    
    37ITEM 10.
    
    ADDITIONAL INFORMATION
    
    
    38ITEM 11.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    42ITEM 12.
    
    DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
    
    
    43ITEM 13.
    
    DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
    
    
    44ITEM 14.
    
    MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
    
    
    44ITEM 15.
    
    CONTROLS AND PROCEDURES
    
    
    44ITEM 16.
    
    AUDIT COMMITTEE FINANCIAL EXPERT; CODE OF ETHICS; ACCOUNTANTS FEES AND SERVICES
    
    
    45ITEM 17.
    
    FINANCIAL STATEMENTS
    
    
    46ITEM 18.
    
    FINANCIAL STATEMENTS
    
    
    46ITEM 19.
    
    EXHIBITS
    
    
    47




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PART I 
 ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS A. Directors and Senior Management. Information not required for annual report. B. Advisors. Information not required since we are not required to disclose the
information in a jurisdiction outside of the United States. C. Auditors. Deloitte & Touche LLP, of Vancouver, British Columbia have served as our
auditors since 1993. Deloitte & Touche LLP is a member of the Institute of
Chartered Accountants of British Columbia. 
 ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE Information not required for annual report. 1




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ITEM 3. KEY INFORMATION A. Selected Financial Data. Selected Consolidated Financial Data and Other Data The following table sets forth, for the periods and dates indicated,
selected historical consolidated financial data and should be read in
conjunction with our audited consolidated financial statements (the
Consolidated Financial Statements) and Managements Discussion and Analysis
of Financial Condition and Results of Operations included elsewhere in this
annual report. The statement of operations data for the fiscal years ended
December 31, 2003, 2002 and 2001 and the balance sheet data as at December 31,
2003 and 2002 have been derived from our audited consolidated financial
statements, which are included elsewhere in this annual report. The statement
of operations data for the fiscal years ended December 31, 2000 and 1999 and
the balance sheet data as at December 31, 2001, 2000 and 1999 have been derived
from our audited consolidated financial statements, which are not included in
this annual report. We prepare our financial statements in accordance with
Canadian GAAP, which differs in certain respects from U.S. GAAP. For a
discussion of the principal differences between Canadian GAAP and U.S. GAAP as
they pertain to us, see note 22 to our audited consolidated financial
statements included elsewhere in this annual report. Fiscal year ended December 31,1999
    
    2000
    
    2001(1)
    
    2002
    
    2003(in millions except ratios, per share data and production data)Statement of Operational DataCanadian GAAPSales
    
    $
    368.6
    
    
    $
    350.2
    
    
    $
    326.7
    
    
    $
    356.1
    
    
    $
    481.1Cost of products sold
    
    
    224.9
    
    
    
    229.6
    
    
    
    244.0
    
    
    
    264.0
    
    
    
    260.9Selling and administration
    
    
    20.5
    
    
    
    26.3
    
    
    
    22.7
    
    
    
    21.9
    
    
    
    18.2Amortization of capital assets
    
    
    28.2
    
    
    
    27.4
    
    
    
    30.4
    
    
    
    32.0
    
    
    
    33.0Write-down of capital assets
    
    
    
    
    
    
    1.0
    
    
    
    3.3
    
    
    
    1.0
    
    
    
    13.7
    (2)Operating Earnings
    
    
    95.0
    
    
    
    65.9
    
    
    
    26.3
    
    
    
    37.2
    
    
    
    155.3Interest charges(3)(4)
    
    
    44.8
    
    
    
    35.6
    
    
    
    51.7
    
    
    
    57.2
    
    
    
    51.2Amortization of finance charges
    
    
    5.2
    
    
    
    2.1
    
    
    
    8.3
    
    
    
    5.3
    
    
    
    4.9Loss on repurchase of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.1Other (income) expense
    
    
    (4.4
    )
    
    
    (4.3
    )
    
    
    (2.8
    )
    
    
    (2.9
    )
    
    
    0.5Unrealized foreign exchange (gain) loss on long term debt
    
    
    (19.3
    )
    
    
    10.2
    
    
    
    17.4
    
    
    
    (4.3
    )
    
    
    (76.9
    )Income (loss) before income taxes
    
    
    68.7
    
    
    
    22.3
    
    
    
    (48.4
    )
    
    
    (18.1
    )
    
    
    175.6Income tax expense (recovery)
    
    
    29.0
    
    
    
    12.5
    
    
    
    (18.7
    )
    
    
    (0.3
    )
    
    
    51.9Income (loss) from continuing operations
    
    
    39.7
    
    
    
    9.8
    
    
    
    (29.7
    )
    
    
    (17.9
    )
    
    
    123.7Gain (loss) from discontinued operations
    
    
    (0.7
    )
    
    
    (14.4
    )
    
    
    4.2
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    39.0
    
    
    $
    (4.6
    )
    
    $
    (25.4
    )
    
    $
    (17.9
    )
    
    $
    123.7Basic and Fully Diluted Income (loss) per share
    
    $
    2.68
    
    
    $
    (0.32
    )
    
    $
    (1.75
    )
    
    $
    (1.23
    )
    
    $
    8.49U.S. GAAPNet income (loss)
    
    $
    39.2
    
    
    $
    (8.0
    )
    
    $
    (25.8
    )
    
    $
    (17.0
    )
    
    $
    125.0Other Financial DataCanadian GAAPEBITDA(5)
    
    $
    127.6
    
    
    $
    98.6
    
    
    $
    62.8
    
    
    $
    73.0
    
    
    $
    201.6Capital expenditures(6)
    
    
    36.1
    
    
    
    133.8
    
    
    
    20.1
    
    
    
    14.1
    
    
    
    8.2Ratio of earnings to fixed charges(7)
    
    
    2.4x
    
    
    
    1.6x
    
    
    
    
    
    
    
    

    
    
    
    4.1xU.S. GAAPEBITDA(5)
    
    $
    127.6
    
    
    $
    98.6
    
    
    
    62.8
    
    
    
    73.0
    
    
    $
    201.6Other Selected Operating DataOSB production volume (mmsf)
    
    
    924
    
    
    
    972
    
    
    
    1,197
    
    
    
    1,284
    
    
    
    1,351Specialty plywood production volume (mmsf)
    
    
    115
    
    
    
    94
    
    
    
    86
    
    
    
    98
    
    
    
    119Average OSB price realized ($  per msf)
    
    
    296
    
    
    
    263
    
    
    
    205
    
    
    
    202
    
    
    
    294Average specialty plywood price realized ($  per msf)
    
    
    647
    
    
    
    651
    
    
    
    683
    
    
    
    663
    
    
    
    601
 As at December 31,1999
    
    2000
    
    2001
    
    2002
    
    2003Balance Sheet DataCanadian GAAPCash and cash equivalents
    
    $
    
    
    
    $
    
    
    
    $
    87.0
    
    
    $
    80.2
    
    
    $
    194.1Total assets
    
    
    460.0
    
    
    
    540.4
    
    
    
    578.0
    
    
    
    555.1
    
    
    
    627.7Total debt, including current maturities(8)
    
    
    271.5
    
    
    
    303.7
    
    
    
    443.7
    
    
    
    440.4
    
    
    
    352.5Shareholders equity
    
    
    96.1
    
    
    
    91.6
    
    
    
    66.2
    
    
    
    48.4
    
    
    
    171.8U.S. GAAPTotal assets
    
    $
    453.8
    
    
    $
    528.9
    
    
    $
    566.2
    
    
    $
    544.7
    
    
    $
    619.3Total debt, including current maturities(8)
    
    
    271.5
    
    
    
    303.7
    
    
    
    443.7
    
    
    
    440.4
    
    
    
    352.5Shareholders equity
    
    
    92.3
    
    
    
    84.4
    
    
    
    58.7
    
    
    
    35.2
    
    
    
    159.3
  (1)
    
    Operations at the High Level OSB facility commenced in October 2000 with
income contributions being realized commencing in April 2001.(2)
    
    Includes a $13.3 million write-down of capital assets related to the
previously planned expansion of the Grande Prairie OSB facility.(3)
    
    Interest charges includes interest expense for the period, excluding
amortization of deferred financing costs, amortization of deferred debt
discounts, amortization of consent and commitment fees, unrealized foreign
exchange gains (losses) on long-term debt and realized foreign exchange
losses upon repayment of principal.(4)
    
    Excludes $1.5 million of interest charges capitalized to the High Level
project during fiscal 2000.(5)
    
    EBITDA represents operating earnings before amortization and write-down
of capital assets, plus interest and other income. For more information
regarding EBITDA, see Presentation of Financial Information. The
following table shows a reconciliation of EBITDA to net income (loss). Year ended December 311999
    
    2000
    
    2001
    
    2002
    
    2003(in millions)Net income (loss)
    
    $
    39.0
    
    
    $
    (4.6
    )
    
    $
    (25.4
    )
    
    $
    (17.9
    )
    
    $
    123.7Add: Loss (gain) from discontinued operations
    
    
    0.7
    
    
    
    14.4
    
    
    
    (4.2
    )
    
    
    
    
    
    
    Income tax (recovery) expense
    
    
    29.0
    
    
    
    12.5
    
    
    
    (18.7
    )
    
    
    (0.3
    )
    
    
    51.9Unrealized foreign exchange (gain) loss
    
    
    (19.3
    )
    
    
    10.2
    
    
    
    17.4
    
    
    
    (4.3
    )
    
    
    (76.9
    )Amortization of finance charges
    
    
    5.2
    
    
    
    2.1
    
    
    
    8.3
    
    
    
    5.3
    
    
    
    4.9Interest charges
    
    
    44.8
    
    
    
    35.6
    
    
    
    51.7
    
    
    
    57.2
    
    
    
    51.2Loss on repurchase of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.1Write-down of capital assets
    
    
    
    
    
    
    1.0
    
    
    
    3.3
    
    
    
    1.0
    
    
    
    13.7Amortization of capital assets
    
    
    28.2
    
    
    
    27.4
    
    
    
    30.3
    
    
    
    32.0
    
    
    
    33.0EBITDA
    
    $
    127.6
    
    
    $
    98.6
    
    
    $
    62.8
    
    
    $
    73.0
    
    
    $
    201.6
  (6)
    
    Includes capital expenditures of $144.7 million related to the
construction of the High Level OSB facility during the years ended
December 31, 1999, 2000 and 2001.(7)
    
    For purposes of calculating the ratio of earnings to fixed charges (i)
earnings consist of earnings (loss) from continuing operations before
income taxes plus fixed charges during the period and (ii) fixed charges
consist of interest expense on all debt, plus the portion of operating
lease rental expense that is representative of the interest factor and
amortization of finance charges. For the fiscal years ended December 31,
2002 and 2001, pre-tax earnings from continuing operations before fixed
charges were insufficient to cover fixed charges under Canadian GAAP by
$18.1 and $48.4 million respectively and under U.S. GAAP by $17.2 and
$48.8 million respectively.(8)
    
    Net of unamortized deferred discount. 2




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Exchange Rate Information We publish our consolidated financial statements in Canadian dollars. In
this document, except where otherwise indicated, all dollar amounts are
expressed in Canadian dollars. References to US$ are to United States dollars. The following table sets forth the high an low exchange rates for each of
the previous six months, and the average rate for each of the five most
recently completed financial years, calculated by using the average of the
exchange rate on the last day of each month during the year, based on the
inverse of the noon buying rate in the City of New York for cable transfers in
Canadian dollars as certified for customs purposes by the Federal Reserve Bank
of New York (the Noon Buying Rate): Monthly Data
    
    High
    
    Low
    
    Annual Data
    
    AverageApril, 2004
    
    
    0.7637
    
    
    
    0.7293
    
    
    
    2003
    
    
    
    0.7186March, 2004
    
    
    0.7708
    
    
    
    0.7484
    
    
    
    2002
    
    
    
    0.6369February, 2004
    
    
    0.7738
    
    
    
    0.7460
    
    
    
    2001
    
    
    
    0.6442January, 2004
    
    
    0.7880
    
    
    
    0.7496
    
    
    
    2000
    
    
    
    0.6724December, 2003
    
    
    0.7629
    
    
    
    0.7439
    
    
    
    1999
    
    
    
    0.6744November, 2003
    
    
    0.7645
    
    
    
    0.7418
 On May 11, 2004, the inverse of the noon buying rate was US$ 0.7212 = $1.00.
Unless otherwise indicated, the exchange rate in this document used to
translate US$ to Canadian dollars is the inverse of the Noon Buying Rate on
such date. B. Capitalization and indebtedness. Information not required for annual report. C. Reasons for the offer and use of proceeds. Information not required for annual report. D. Risk factors. Significant Indebtedness We currently have a significant amount of indebtedness and significant
debt service obligations. At December 31, 2003 we had $352.5 million in
outstanding indebtedness represented by senior secured notes and capital lease
obligations. On March 3, 2004, we successfully completed a refinancing of our
Senior Secured Notes. We issued US$210 million 6.75% Senior Unsecured Notes.
Together with our existing cash balance we utilized the proceeds from the notes
to repurchase US$87.1 million of our 13.875% notes and US$182.2 million of our
12.5% notes In addition, at both December 31, 2003 and March 31, 2004 we had
outstanding letters of credit of approximately $6.2 million. The indenture
governing the notes will permit us and our subsidiaries to incur additional
debt in the future, subject to limitations, which would increase the risks
described below. This high degree of leverage could have important consequences. For
example, it could:  
    
    make it more difficult for us to satisfy our obligations with respect to the notes and other indebtedness;
    
    increase our vulnerability to adverse economic and industry conditions;
    
    require us to dedicate a substantial portion of cash from operations
to service our indebtedness, thereby reducing the availability
of cash to fund working capital, capital expenditures and other general
corporate purposes;
    
    limit our ability to obtain financing for working capital, capital expenditures, general corporate purposes or acquisitions;
    
    place us at a disadvantage compared to our competitors that have a lower degree of leverage; and 3




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
    
    limit our flexibility in planning for, or reacting to, changes in our business and in the forest products industry. Cyclicality and Volatility The largest markets for OSB are commodity markets in which manufacturers
compete primarily on the basis of price. Our financial performance is dependent
on the selling prices of our OSB products, which have fluctuated significantly
in the past. The markets for these products are highly cyclical and
characterized by (1) periods of excess product supply due to industry capacity
additions, increased production and other factors, and (2) periods of
insufficient demand due to weak general economic conditions. Demand for our OSB
products is primarily driven by the residential and commercial construction and
repair and remodeling industries. These industries in turn are affected by real
estate prices, interest rates, credit availability, tax policy, energy costs,
weather conditions, natural disasters and general economic conditions, all of
which are beyond our control. The prices of commodity sheathing OSB and plywood
have historically been unpredictable. For example, during the past five years,
monthly average prices for commodity sheathing OSB have ranged from a low of
US$131 per msf North Central ( 7/16) to a high of US$508 per msf North Central
( 7/16). We are unable to predict market conditions and selling prices for our
OSB products, which may decline from current levels. Weakness in the market,
particularly in North America, could reduce our revenues and profitability and
could affect our ability to satisfy our obligations under our indebtedness,
including the notes. We cannot predict with certainty what market conditions,
demand and selling prices for our products will be in the future and prices or
demand for our products may decline from current levels. Any prolonged or
severe weakness in the market for any of our principal products would adversely
affect our business, financial condition, results of operations and cash flows. Competition We compete in North America and in overseas export markets with numerous
forest products companies, ranging from very large integrated firms, most of
which are larger than we are, to smaller firms that manufacture only a few
products. We also compete indirectly with firms that manufacture substitutes
for wood building materials. Our competitive position is influenced by the
availability, quality and cost of raw materials, energy and labor costs, plant
efficiencies and productivity in relation to our competitors. Some of our
competitors may have lower fiber and labor costs and fewer environmental and
governmental regulations to comply with than we do. Other competitors are less
leveraged than we are and therefore have greater financial resources than we
do. We currently face substantial competition in the OSB industry and may face
increased competition in the years to come if new manufacturing facilities are
built in North America and elsewhere. In addition, OSB capacity is constantly
increasing as a result of improvements to existing mills. In periods of reduced
demand, which lead to lower OSB prices, we may not be able to compete with
competitors who have greater financial resources and who are better able to
weather a prolonged decline in prices. Price of and Demand for Oriented Strand Board We are primarily a manufacturer of OSB and, to a lesser extent, a producer
of specialty overlaid plywood. For the year ended December 31, 2003, we
generated 82% of our revenues from OSB sales. We expect that OSB will continue
to account for most of our sales in the foreseeable future. This product
concentration could increase our exposure to a decline in demand or prices for
OSB as a result of general economic conditions affecting housing starts,
renovations and remodeling or industrial construction activity or the other
factors described above. No Assurance of Adequate Cash Flow Our ability to make payments on and to refinance our indebtedness,
including the notes, and to fund our operations, working capital and capital
expenditures, depends on our ability to generate cash in the future. Our cash
flow is subject to general economic, industry, financial, competitive,
operating, regulatory and other factors that are beyond our control. Our
business may not generate cash flow in an amount sufficient to enable us to
repay our indebtedness, including the notes, or to fund our other liquidity
needs. We may need to refinance all or a portion of our indebtedness, including the notes, on or
before maturity. Our ability to refinance our indebtedness or obtain additional
financing will depend on, among other things:  
    
    our financial condition at the time;
    
    restrictions in the indenture governing the notes; and
    
    other factors, including the condition of the financial markets or the forest products industry, particularly the OSB market. As a result, we may not be able to refinance any of our indebtedness, including
the notes, on commercially reasonable terms, or at all. If we do not generate
sufficient cash flow from operations, and additional borrowings or refinancings
or proceeds of asset sales are not 4




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available to us, we may not have sufficient
cash to enable us to meet all of our obligations, including payments on the
notes. Unexpected Costs or Liabilities Related to Voyageur Acquisition On
May 19, 2004 we expect to complete the acquisition of Voyageur Panel
Limited (Voyageur). Voyageur is a private Canadian company that
owns and operates an OSB facility in Barwick, Ontario. Although we conducted what we believed to be a prudent and thorough level
of investigation in connection with our acquisition of Voyageur, an unavoidable
level of risk remains regarding any undisclosed or unknown liabilities of or
issues concerning Voyageur. Following the acquisition, we may
discover that we
have acquired substantial undisclosed liabilities. In addition, we may be
unable to retain existing Voyageur customers or employees following our
acquisition of Voyageur. The existence of undisclosed liabilities or our
inability to retain existing Voyageur customers or employees could have a
material adverse effect on our business, financial condition, results of
operations and cash flows. Exchange Rate Fluctuations Our operating results are sensitive to fluctuations in the exchange rate
of the Canadian dollar to the U.S. dollar, as prices for our products are
denominated in U.S. dollars or linked to prices quoted in U.S. dollars. In
2003, over 75% of our sales and substantially all of Voyageurs sales were
denominated in U.S. dollars. Although we purchase certain quantities of raw
materials in U.S. dollars, most of our and Voyageurs operating costs are
incurred in Canadian dollars. Therefore, an increase in the value of the
Canadian dollar relative to the U.S. dollar reduces the amount of revenue in
Canadian dollar terms realized by us from sales made in U.S. dollars, which
reduces our operating margin and the cash flow available to fund our
operations. From January 1, 2003 to March 31, 2004, the value of the Canadian
dollar relative to the U.S. dollar increased by approximately US$0.13, or
20.6%. In addition, we are exposed to currency exchange risk on our debt,
including the notes and interest thereon, and assets denominated in U.S.
dollars. Since we present our financial statements in Canadian dollars, any
change in the value of the Canadian dollar relative to the U.S. dollar during a
given financial reporting period would result in a foreign currency loss or
gain on the translation of our U.S. dollar-denominated debt and assets into
Canadian dollars. Consequently, our reported earnings could fluctuate
materially as a result of foreign exchange translation gains or losses. We are not currently a party to any forward foreign currency exchange
contract, or other contract that could serve to hedge our exposure to
fluctuations in the U.S./Canada dollar exchange rate. Dependence on Timber Tenures The allowable annual cut under our forest license in British Columbia can
supply approximately 90% of the current timber requirements of our veneer and
specialty overlaid plywood operations either directly or through a long-term
log trade agreement with third parties. The forest license is renewable and the
current term extends until 2013. Under the terms of forest licenses granted in British Columbia, the amount
of commercial forest land available to the forest industry is periodically
assessed. We cannot predict whether the amount of timber that we are allowed to
harvest will be reduced in the future. In 2003, the British Columbia government
introduced the Forestry Revitalization Act which will result in significant
changes to the provincial forest management structure. The plan includes a 20%
reduction in harvesting rights for holders of long-term tenures and the
introduction of an auction-based timber pricing system. The province has
indicated that licensees will be fairly compensated for the return of tenure
and related costs such as roads and bridges. Although the legislation has been
enacted, the regulations and basis for compensation for the 20% timber reduction have not been published. The
effect of the timber take-back will result in a reduction of approximately
29,600 m3 of our existing allowable annual cut for which we will be
compensated. In Alberta, we obtain most of our fiber requirements from our Forest
Management Agreements, or FMAs, or Deciduous Timber Allocations issued by the
Alberta government, each of which is issued for a period of 20 years. There is
no assurance that such quotas and allocations will be renewed or extended on
acceptable terms, if at all. In addition, the FMAs and such quotas and
allocations contain terms or conditions that could, under certain
circumstances, result in a reduction of the amount of fiber available to us. The Voyageur facility requires approximately 686,000 m3 of timber annually
when operating at its current capacity of 440 mmsf. Voyageur has a current
annual commitment of 551,000 m3 of timber from Crown land under long-term
agreements and licenses with the Province of Ontario. Additional wood is
obtained from private sources in Ontario and Manitoba. There is no assurance
that we will be able to obtain a future supply of wood from either Crown or
private sources on terms that are adequate to support our planned operation of
the Voyageur facility. 5




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The costs of our fiber, including any fees charged for fiber, logging and
transportation, and market prices for purchased fiber have historically
fluctuated and could increase in the future. Any significant increase in the
cost of fiber could have a material adverse effect on our business, financial
condition, results of operations and cash flows. Exposure to Natural Disasters Our ability to harvest timber is subject to natural events such as forest
fires, adverse weather conditions, insect infestation, disease and prolonged
drought. The occurrence of any of these events could adversely affect our
ability to harvest or source timber. We may need to curtail production or
purchase fiber from third parties, which could increase our costs and reduce
cash from operations, which could, in turn, have a material adverse effect on
our business, financial condition, results of operations and cash flows. Effect of Government Regulation Legislation in British Columbia, Alberta, and Ontario empower provincial
regulatory agencies to develop regulations, set policies and establish and
maintain all aspects of sustainable forest management. Changes to these
regulations and policies could have an effect on our access to fiber for our
OSB operations or could increase the cost of our fiber. Changes to these laws
or regulations, or the implementation of new laws or regulations, could result
in additional expenses, capital expenditures and restrictions and delays in our
activities, which could impair our competitive position and have a material
adverse impact on our operations. In addition, if we fail to comply with
applicable legislation and regulations, our operations could be interrupted and
we could be subject to significant liabilities, including fines and other
penalties or take remedial actions, any of which could entail significant
expenditure. Environmental and Safety Regulation We are subject to a wide range of general and industry-specific
environmental and other laws and regulations imposed by federal, provincial and
local authorities in Canada, including those governing the use, storage,
handling, generation, treatment, emission, release, discharge and disposal of
certain hazardous materials and wastes, the remediation of contaminated soil
and groundwater, and the health and safety of employees. If we are unable to
extend or renew a material approval, license or permit required by such laws,
or if there is a delay in renewing any material approval, license or permit,
our business, financial condition, results of operations and cash flows could
be materially adversely affected. The process of obtaining certain required
approvals, including the completion of any necessary environmental impact
assessments, can be lengthy, subject to public input, controversial and
expensive. Our failure to comply with applicable environmental and safety laws
and regulations, and the permit requirements related thereto, could result in
civil or criminal fines or penalties or enforcement actions, including
regulatory or judicial orders enjoining or curtailing operations or requiring
corrective measures, installation of equipment or remedial actions, any of
which could result in significant capital expenditures or reduced results of
operations. We believe that we are in substantial compliance with all
applicable environmental and other laws and regulations and we regularly incur
capital and operating expenditures to maintain such compliance. However, future
events such as any changes in environmental or other laws and regulations,
including any new legislation that might arise as a result of the Government of
Canadas ratification of the United Nations Kyoto Protocol, or any change in
interpretation or enforcement of laws and regulations, may give rise to
additional expenditures or liabilities. These could have a material adverse
effect on our business, financial condition, results of operations and cash
flows. Labor Relations Any labor disruptions and any costs associated with labor disruptions at
our union or non-union facilities could have a material adverse effect on our
production levels and results of operations. In 2003, we renewed our collective
bargaining agreements with the Industrial, Wood and Allied Workers of Canada,
or IWA, which had expired on June 30, 2003. The renewed agreements have six
year terms expiring on June 30, 2009, and cover approximately 500 employees at
our Lillooet, Savona and 100 Mile House operations. The collective bargaining
agreement with the IWA at our temporarily closed Abbotsford operation expired
on June 30, 2003, and we are currently negotiating a new agreement with the
IWA. In 2000, Voyageur entered into a collective bargaining agreement with the
Communications, Energy and Paperworkers Union of Canada, or CEP. This contract
currently covers 120 workers employed at the Voyageur facility and expires on
August 31, 2005. Our inability to negotiate acceptable contracts, following the
expiration of the present collective bargaining agreements with the IWA and the
CEP could result in a strike or work stoppage by the affected workers and
increased operating costs as a result of higher wages or benefits paid to
unionized workers. Aboriginal Land Claims Canadian courts have recognized that aboriginal people may have
unextinguished claims of aboriginal rights and title to lands used or occupied
by their ancestors in those areas of British Columbia, constituting about 80%
of the province, where treaties have not yet been concluded. Aboriginal rights
may vary from limited rights of use for traditional purposes to a right of
aboriginal title, depending, among 6




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other things, on the nature and extent of
the prior aboriginal use and occupation. Some of our timber supply areas are
located within areas where there are claims of aboriginal rights and title. The courts have said that the Crown has an obligation to consult First
Nations, and accommodate their concerns, when there is a reasonable possibility
that a Crown authorized activity  such as a forest tenure  may infringe
asserted Aboriginal rights and title, even if those claims have not yet been
proven. If the Crown has not consulted as required, the obligation to consult
and accommodate may pass to the corporation receiving the interest in Crown
land. The courts have encouraged the federal and provincial governments,
together with aboriginal people, to resolve claims of aboriginal rights and
title through the negotiation of treaties. A treaty process has been
established to settle native claims in British Columbia. Many First Nations and
tribal groups are participating in this process, which will be ongoing for many
years to come. The pace of the treaty-making process will depend on the
commitment of the parties, the success of individual treaties, and whether
First Nations consider litigation to be a viable alternative to negotiations.
We cannot predict whether native land claims in British Columbia will affect
our existing forest licenses and timber tenures, or our right to harvest timber
to the full extent of those tenures, or our ability to renew or secure other
forest tenures in the future. Even in provinces such as Alberta and Ontario, which are entirely subject
to treaties between Indian bands and the federal Crown, natives may have a
right to exercise treaty rights on unoccupied Crown land, and have claimed a
right to be consulted in respect of activities on Crown land that may interfere
with their treaty rights. Our operations in Alberta are unencumbered by native
land claims and our Ontario operations (after our acquisition of Voyageur) will
be unencumbered by native land claims, but we cannot predict whether claims, or
what kind of claims, will be made in the future. International Sales We have customers located outside Canada and the United States. In 2003,
sales outside of Canada and the United States represented approximately 7% of
our sales. In 2004, after adjusting for our acquisition of Voyageur, we expect
that our sales outside of Canada and the United States will represent
approximately 5% of our sales. Our international operations present us with a
number of risks and challenges, including the effective marketing of our
products in other countries, tariffs and other trade barriers, and recessionary
environments in foreign economies. Co-Ownership of High Level The memorandum of agreement that governs the co-ownership of the High
Level OSB facility contains a buy-sell provision, which provides that if one
co-owner offers to buy the other partys interest, the party must either accept
the offer or purchase the interest owned by the offering co-owner at the same price and conditions. As a result,
we could be forced to sell our interest or purchase our co-owners interests,
which could affect our day-to-day operations and growth strategy. In addition,
if the co-owner of the High Level OSB facility fails to meet its funding
obligations for the High Level OSB facility, we may be required to fund the
entire High Level operation. We may not be able to make such additional cash
contributions if the co-owner were to default. If High Level fails to operate
at its design capacity, results of operations may suffer. Such circumstances
would lessen our ability to meet our debt obligation Ainsworth Family Control Members of the Ainsworth family beneficially own approximately 58% of our
common shares, and consequently have the ability to exercise control over our
business and affairs through their ability to elect all of our directors. These
family members also have the ability to control most matters requiring
shareholder approval. As with other shareholders, the Ainsworth familys
interests in our business, operations and financial condition may not be
aligned or may conflict, from time to time, with your interests. Absence of a Liquid Trading Market for the Companys Securities Our common shares are listed for trading on the Toronto Stock Exchange,
but are not listed on any U.S. stock exchange or quoted on the Nasdaq Stock
Market. No active trading market currently exists for our debt securities. Enforceability of Judgments We are organized under the laws of the Province of British Columbia. All
of our directors, controlling persons, officers and the representatives of the
experts named in this annual report, are residents of Canada, and a substantial
portion of their assets and substantially all of our assets are located outside
the United States. It may not be possible, therefore, for you to effect service
of process within the United States upon us, our directors and officers or such
experts. There is uncertainty as to the enforceability in Canadian courts 7




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of
(1) an original action predicated solely upon United States federal securities
laws and (2) of judgments of United States courts obtained in actions
predicated upon the civil liability provisions of United States federal
securities laws. Therefore, you may not be able to secure judgment against us,
our directors and officers or such experts in a Canadian court or, if
successful in securing a judgment against us or them in a U.S. court, you may
not be able to enforce such judgment in Canada. 
 ITEM 4. INFORMATION ON THE REGISTRANT A. History and Development of the Registrant The Company was formed under the laws of British Columbia on March 31,
1993, by the amalgamation of Ainsworth Lumber Co. Ltd. and its parent company,
Ainsworth Enterprises Ltd. Ainsworth Lumber Co. Ltd., the amalgamating
company, was previously the result of the amalgamation on December 3, 1970, of
Ainsworth Lumber Co. Ltd. (incorporated in 1956) and Little Bridge Creek
Logging Ltd. (incorporated in 1963). The Company was founded in 1950 by David
Ainsworth and originally consisted of a portable sawmill operation that
employed six people. In 1952, the initial sawmill operation was relocated to
100 Mile House, British Columbia which is approximately 450 kilometers north of
Vancouver. We built a permanent sawmill at 100 Mile House in 1957 and steadily
expanded our operations over a period of 12 years to include lumber planing and
drying facilities. This original sawmill was permanently shut down in
mid-1998. In 1975, we began construction of a second sawmill near Clinton, British
Columbia and in 1979, added a finger-joining facility at the 100 Mile House
site to add value to our off grade and shorter length lumber products. In
1986, we relocated the finger-joining facility to Abbotsford, British Columbia,
where a milder climate extends the operating season. On April 24, 2001 we
completed the sale of our Clinton lumber operations, including two forest
licenses, to West Fraser Mills Ltd. for net cash proceeds of $29.2 million. In 1987, we purchased from Evans Forest Products Limited (Evans) a
sawmill and veneer mill at Lillooet, British Columbia, a sawmill and specialty
plywood plant at Savona, British Columbia, and two forest licenses. This
acquisition substantially diversified our product line and initiated our entry
into the composite plywood business. The additional timber supply from the
forest licenses acquired from Evans also permitted us to manage our overall
timber supply more effectively through the implementation of a comprehensive
system of log transfers amongst the facilities to achieve optimal use of the
available timber. We invested approximately $21 million in our Lillooet plant
and Savona mill in the late 1990s to extend our product line and lower our
operating costs. In 1990, following a public call for tenders by the British Columbia
Ministry of Forests (MOF), we were granted pulpwood harvesting rights for a
25-year term for the purpose of operating an OSB facility. We subsequently
entered into our PA 16 Pulpwood Agreement with the MOF on April 26, 1990. In
May of 1993, we completed an initial public offering of 5.55 million Common
Shares at $10 per share. The $51.4 million net proceeds were used as partial
funding for the construction of the OSB plant at 100 Mile House. The OSB
plant was constructed in 1993-1994 and has been operating since August 1994. In 1994, the Alberta government submitted a request for proposals for a
Deciduous Timber Allocation (DTA) near Grande Prairie, Alberta. Our proposal
was accepted, and on August 9, 1994, we were granted a deciduous timber
allocation for a renewable 20-year term (formally issued in February 1995).
Construction of our second OSB facility near Grande Prairie began in October
1994, and production of the first OSB panels commenced on December 14, 1995.
In addition to the main facility, equipment was installed for further
processing the OSB and adding further value to the product lines. The
value-added facilities started operating in August 1997. In fiscal 1999 and
2000, we invested $12.3 million relating to the expansion of the Grande Prairie
operations, the completion of which has been delayed. In 2002, we invested $9.2
million in the Grande Prairie OSB facility which is anticipated to increase the
production capacity by up to 12%. In 1996, the Alberta Lands and Forest service issued a call for proposals
for a DTA in the Footner Timber Development Area near High Level, Alberta. We,
together with Grant Forest Products Corp. (Grant Forest Products), an Ontario
based private company involved in the manufacture and sale of OSB, made a joint
proposal through Footner Forest Products Ltd. (Footner Forest Products).
Footner Forest Products is a bare trustee and agent for Grant Forest Products
and Ainsworth. On January 31, 1997, Footner Forest Products submitted a
proposal to construct and operate an OSB plant near High Level, Alberta upon
receipt of a 20 year DTA. In September 1997, the Alberta government announced
that Footner Forest Products proposal had been selected. Construction of the
Footner OSB facility began in August 1999 and operation commenced in October
2000. On April 14, 2004, we entered in to an agreement to purchase 100% of the
outstanding common and Class A preferred shares and the net working capital of
Voyageur Panel Limited for US$159,000,000 plus net working capital plus the
lesser of US$10,000,000 and two thirds of the amount, if any, by which the
weighted average mill net price received by Voyageur exceeds a specified level.
Voyageur Panel owns an OSB mill based in Barwick, Ontario. The purchase will be
financed utilizing our existing cash balance together with the proceeds from a
debt offering. The transaction is expected to close on May 19, 2004 subject to
regulatory approval. 8




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Our corporate address is Suite 3194 Bentall IV, P.O. Box 49307, 1055
Dunsmuir Street, Vancouver, British Columbia, V7X 1L3. Our telephone number is
(604) 661-3200. 9




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B. Business overview Markets in Which We Operate Oriented Strand Board Market OSB is a structural panel used in building applications, primarily as a
substitute for plywood. Growth in the structural panel industry, which includes
plywood and OSB, is primarily driven by residential and commercial construction
activity. The relative abundance of fast growing deciduous and under-utilized
coniferous trees, combined with an automated manufacturing process, results in
a significant cost advantage for OSB over plywood. RISI estimates that the
average variable cost in 2003 of production for western Canadian OSB was $125
per msf compared to $262 per msf for plywood produced in British Columbia and
$263 for plywood produced in the southern United States. Declining
plywood-quality timber supplies are expected to continue to limit the efficient
production of plywood. We believe OSBs lower cost and comparable performance
characteristics versus plywood will continue to drive the market shift from
plywood to OSB and support the growth of our business. According to RISI, OSBs
share of the North American structural panel market has increased from 33% in
1994 to 58% in 2003 and is projected to grow to 68% of the market by 2008.
Furthermore, RISI estimates that between 1994 and 2003, annual consumption of
OSB in North America grew at a 10% compounded annual rate over the period. In
addition to the growing commodity sheathing market, OSB continues to penetrate
new markets through the use of new manufacturing techniques that incorporate
OSB into higher valued specialty industrial products such as webstock, rimboard
and stair systems. The following table shows a representative production cost
comparison between plywood and OSB: Plywood and OSB Production Cost Comparison Plywood
    
    OSBWood
    
    $
    170
    
    
    $
    45Labor
    
    
    70
    
    
    
    26Energy
    
    
    11
    
    
    
    9Glue & Wax
    
    
    18
    
    
    
    25Supplies
    
    
    26
    
    
    
    21Gross Variable
    
    
    294
    
    
    
    125Residuals
    
    
    (31
    )
    
    
    Total Variable
    
    $
    263
    
    
    $
    125
   Source: RISI, April 2004: 2003 Average Variable Costs for Western Canadian OSB
and Southern Yellow Pine Plywood ($  per msf 3/8 basis) Demand for structural panels has historically been correlated to
residential and commercial construction and repair and remodeling industries in
North America, Asia and Europe. According to RISI, from 1991 through 2003, U.S.
housing starts grew at a 5% compounded annual growth rate while residential
improvements and repairs expenditures grew at a 3% compounded annual growth
rate. RISI has forecast U.S. housing starts of 1.85 million in 2004, in line
with the 1.85 million started in 2003 and a 8.1% increase over 2002. Low
interest rates, rising consumer confidence and strong household formation
growth have bolstered U.S. housing starts to a level not experienced since
1986. We believe that housing starts will continue to be primarily
single-family construction, as opposed to multi-family homes, which has
accounted for nearly 80% of all homes built in the last five years. In
addition, according to RISI, the average home size in 2003 was 2,344 square
feet, over 10% larger than the average home size in 1994. The demand for OSB is driven by structural panel demand and the
substitution of OSB for higher cost plywood panels. OSB consumption and market
share in the structural panel market has increased over the last decade as a
result of greater acceptance of OSB as a substitute for plywood, increasing
production capacity to meet rising demand, a strong North American economy and
growth in OSB applications. OSB is accepted by all of the major North American
building codes as being structurally equivalent to plywood. OSB benchmark prices increased significantly in 2003 averaging US$293 per
msf North Central ( 7/16), an 84% increase over 2002 average OSB prices. This
increase resulted from tight OSB supply and demand conditions, brought on by a
robust new home construction market. As of April 23 2004, OSB benchmark prices
were at a record high US$520 North Central ( 7/16) and RISI is forecasting
benchmark prices in 2004 to average a record high US$405 per msf North Central
( 7/16), an increase of approximately 38% over 2003 average prices. According to RISI, North American housing starts, a major
driver of structural panel demand, are expected to average 1.9 million per year
between 2004 and 2008, and OSB demand is expected to grow at a 5.2% compounded
annual growth rate over the same period. The industry is consolidated with the top eight suppliers controlling more
than 88% of North American capacity. Due to long lead times associated with the
construction and ramp up of new OSB mills, major capacity additions have
traditionally taken 18 months to 10




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come on line and at least another 24 to 36
months to reach full production levels. Given these dynamics, RISI expects the
demand capacity ratio for OSB to average nearly 90% from 2004 through 2008. North American structural panel prices fluctuated considerably during the
1990s. Starting at recession lows in 1991, prices increased to record levels by
1994. The increase was particularly pronounced for OSB, but plywood prices also
increased significantly. Due to large increases in OSB production capacity, OSB
prices declined from 1995 to 1997, reaching a record low price of US$122 per
msf North Central ( 7/16) in April 1997. In 1998, OSB prices started to
recover and reached historically high levels in July 1999 before again
declining to a cyclical low in 2001 and 2002. By mid-2003, OSB benchmark prices
had rebounded, peaking at a monthly average record of US$465 per msf North
Central ( 7/16) set in October 2003, well above the previous monthly average
record of US$351 per msf North Central ( 7/16) set in July 1999. Export-Standard OSB Market Japan is the worlds second largest market for wood construction
materials, surpassed only by the United States. New building regulations, such
as the Housing Quality Assurance Law, should encourage more builders to adopt
structural panels such as OSB for wall sheathing, a previously atypical
practice, to mitigate the adverse effects of earthquakes. Although OSB
currently represents only a very small percentage of the Japanese panel market,
we expect OSB demand to grow considerably over the next decade. Other Pacific
Rim countries, including China and Korea, also show export growth potential. Value-Added Industrial OSB Market Since its market introduction, OSB has gained acceptance as a low cost
alternative to softwood plywood for use in residential construction as roof,
wall and floor sheathing. Further development of process technology and
advancements, such as greater flexibility in press sizes, has allowed OSB to
penetrate new markets. In addition, higher demand and growing environmental
concerns have increased pressure on North American timber supplies. More than
ever, forest products manufacturers are developing methods to utilize timber
resources as efficiently as possible. This is particularly evident in the
engineered wood products industry, where producers are employing relatively new
technologies to manufacture higher-valued products as replacements for
traditional wood products. Engineered wood products are manufactured with
lumber and panel products in a manner that maximizes physical strength and
dimensional stability while minimizing the amount and cost of wood used as raw
material. OSB is now gaining market share in these applications, which were
previously restricted to materials such as lumber, plywood, medium density
fiberboard, particleboard, lumber and non-wood products. For instance, wood
I-beams or I-joists are a replacement product for lumber joists used in
residential and non-residential construction. Value-added OSB products are
generally sold at a premium to commodity OSB sheathing and tend to exhibit more
stable demand characteristics. Specialty Overlaid Plywood Market Specialty overlaid plywood is manufactured with resin impregnated paper
sheets bonded onto one or both surfaces of the specialty engineered plywood
panels under heat and pressure. The resulting product combines the strength of
a heavy-duty wood product with the superior wear characteristics of an overlaid
surface. These features effectively meet the demanding requirements of concrete
forming, equipment decking and paint-grade signs. The principal application is
in the manufacture of concrete forms where the overlaid feature offers a number
of key benefits including a smooth concrete finish without defects or wood
grain patterns, ease of removal from the cured concrete and durability. We
believe that specialty overlaid plywood forms currently account for an
estimated 15% of the total concrete forming market with the bulk of demand met
with commodity non-overlaid wood panels. Specialty overlaid plywood is
specified by contractors and architects in applications requiring smooth
visible concrete surfaces including high rise and sports complex construction,
water treatment facilities, airports and highway infrastructure projects. Our Savona mill has the second largest overlaid plywood production output
in North America. A limited availability of high quality timber to produce
specialty overlaid plywood products is a barrier to entry for potential new
competitors in these markets. The value-added nature of overlaid plywood results in premium pricing and more
stable demand characteristics versus standard plywood. Competition is based on
structural performance and reuse cycles that permit multiple applications from
a single form, effectively lowering the end users cost. Our Business Overview We are a leading manufacturer of engineered wood products including
oriented strand board, or OSB, and specialty overlaid plywood. We are the sixth
largest manufacturer of OSB in North America and we believe one of the
lowest-cost suppliers of OSB to the markets we serve. Based in western Canada,
we own and operate two modern, low-cost OSB manufacturing facilities, and we
maintain a 11




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50% ownership interest in a third facility, the High Level OSB
facility. High Level has the largest design capacity of any OSB facility in the
world and we believe that when production reaches design capacity it will be
one of the worlds lowest cost OSB facilities. In addition, we are the second
largest manufacturer of specialty overlaid plywood in North America. We have long-term timber tenure agreements with British Columbia and
Alberta governments and other long-term supply agreements that currently
provide approximately 88% of the wood fiber requirements for our operations. We sell our products to North American and offshore export markets,
primarily Japan. We have a well-established sales presence and long-standing
customer relationships in our largest markets. For the year ended December 31,
2003, over 30% of our revenue was generated from our AinsworthEngineered®
value-added products, including export-standard OSB and specialty industrial
OSB and plywood products. These products generally exhibit more stable pricing
and command a premium price over commodity OSB sheathing and commodity plywood
sheathing products. Our common shares are traded on the Toronto Stock Exchange and for the
year ended December 31, 2003, we generated revenues of $481.1 million and
EBITDA of $201.6 million. For the year ended December 31, 2003, we generated
82% of our revenues from OSB sales. Voyageur Panel Limited On April 14, 2004, we entered into a definitive agreement to acquire all
of the outstanding shares of Voyageur Panel Limited, a private Canadian company
owned by Boise Cascade Corporation (47% owner), Abitibi Consolidated Company of
Canada (21% owner), the Northwestern Mutual Life Insurance Company (17% owner)
and Allstate Insurance Company (15% owner). Our acquisition of Voyageur, which
is expected to close on May 19, 2004. In connection with the acquisition,
we will be required to pay the sellers a purchase price of approximately US$159
million, plus net working capital (subject to adjustment upon closing). In
addition, we may be required to pay up to US$10 million in additional
consideration on March 31, 2005 in the event that OSB produced by the Voyageur
facility is sold at an average price that exceeds Cdn$275 per msf ( 3/8 basis)
between the closing of the acquisition and December 31, 2004. Competitive Strengths and Opportunities We believe that our business has the following competitive strengths and
opportunities, which we believe will be enhanced by our acquisition of
Voyageur: Established Low Cost OSB Facilities. Our existing three established OSB facilities from which we supply the
market, 100 Mile House (British Columbia), Grande Prairie (Alberta) and High
Level (Alberta), utilize modern automated equipment and have economies of scale
that increase efficiency and provide us with a low-cost competitive advantage.
The High Level facility, which we jointly own with another OSB producer, is the
worlds largest OSB facility at 860 mmsf per year design capacity, twice that
of the average North American single-line OSB facility. When High Level reaches
its design capacity, we expect it to be one of the worlds lowest-cost OSB
facilities, benefiting from economies of scale, a low-cost wood supply and state-of-the-art manufacturing equipment. High Level
utilizes a continuous press that results in greater production capacity, faster
press times and higher productivity. Our wholly-owned Grande Prairie facility,
the second largest capacity single-line facility in the world after High Level,
was recently benchmarked by an independent forest products research firm
against 18 other North American OSB facilities and scored in the top quartile
in a number of key operational measures, including total production costs,
employee productivity and wood recovery. Production at our wholly-owned 100
Mile House facility is focused on value-added products that command premium
pricing and generally yield higher margins than commodity OSB sheathing. For
the year ended December 31, 2003, 100 Mile Houses value-added OSB products
represented 63% of this facilitys total output. At current rates of
production, the High Level, Grande Prairie and 100 Mile House facilities will
provide annual OSB volumes of approximately 670 mmsf (of which 50% is ours),
670 mmsf and 425 mmsf, respectively. Our acquisition of Voyageur will add
another modern, high quality OSB facility to our system. This will allow us to
achieve improved economies of scale throughout our operations and provide us
with the opportunity to increase our production, including our production of
premium priced value-added products. Additionally, we believe that the Voyageur
facility provides us with the opportunity to achieve significant additional
production capacity without incurring significant capital expenditures. The
Voyageur facility produced approximately 432 mmsf in 2003. 12




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Proven OSB Operators. Our senior managers average over 23 years of experience in the forest
products industry and most of them have played key roles in the design and
implementation of the 100 Mile House, Grande Prairie and High Level OSB
facilities. All three OSB facilities were completed on-time and on-budget. We
completed construction of 100 Mile House in 1994 with a design capacity of 360
mmsf and currently operate the mill at approximately 425 mmsf, or 18% above
original design capacity. Similarly, we completed construction of the Grande
Prairie facility in 1995 with a design capacity of 540 mmsf and currently
operate the mill at approximately 670 mmsf, or 24% above original design
capacity. We also have improved our OSB profitability by reducing production
costs while manufacturing a greater percentage of value-added products.
According to an independent benchmarking study of 19 North American OSB mills,
we have one of the best asset utilization rates in the industry, expressed in
terms of OSB production per square foot of press. The Voyageur facility
currently has a production capacity of 440 mmsf, which we believe we can
increase to 500 mmsf by 2006. Long-Term, Low-Cost Fiber Supply. We have secured a long-term supply of wood fiber from governmental timber
tenure agreements and other long-term supply agreements in British Columbia and
Alberta. RISI reports that western Canada has the lowest-cost OSB wood sources
in North America, which provides us with a competitive cost advantage on the
largest raw material used in OSB production. Our long-term timber agreements
satisfy approximately 88% of our total wood fiber needs and provide us with
timber rights to harvest approximately 2.6 million m3 per year. With the
acquisition of Voyageur, we will gain a secure, long-term fiber supply through
long-term agreements with the Province of Ontario, which provide wood fiber
representing approximately 80% of the Voyageur facilitys needs based on
current production. Leading Market Positions. We are a leader in the value-added markets we serve, including
export-standard OSB and specialty industrial products. We have the largest
installed capacity designed to serve the growing Japanese OSB market. Both our
100 Mile House and Grande Prairie facilities were specifically designed to
economically produce three-foot wide panels used in Japanese construction, as
compared with four-foot wide panels used in North America. We are also a
principal supplier of specialty overlaid plywood used to manufacture
long-lasting concrete forming panels for the Canadian, United States and United
Kingdom construction markets. Growing Value-Added Product Mix. Our business strategy is to continue to increase our revenues generated
from value-added products including OSB webstock and rimboard, export-standard
OSB and specialty overlaid plywood. These products command premium pricing,
particularly during cyclical lows for commodity products, that enhances our
profitability and have more stable pricing than commodity OSB. We plan to
continue to use our versatile manufacturing equipment to enhance our offerings
of high-quality AinsworthEngineered® value-added products across our OSB and
specialty plywood businesses. We believe that our value-added product strategy
improves our financial results and helps us maintain profitability through
industry cycles. We also believe that our acquisition of Voyageur will provide
us with a significant opportunity to expand our value-added product mix.
Approximately 17% of Voyageurs 2003 sales volume was value-added products, which typically command premium prices. We believe we will be able to
increase output of value-added products to approximately 40% of total capacity
for the Voyageur facility by 2006. Strategically Located OSB Facilities. The 100 Mile House, Grande Prairie and High Level facilities are within

close proximity to western ports providing us with a transportation cost and
logistical advantage for supplying the Japanese and western United States
markets. For example, the proximity of our 100 Mile House facility to the port
of Vancouver allows us to supply our Japanese customers with less lead-time and
at a lower cost than our competitors. In addition, all three of our OSB
facilities are located near rail lines that facilitate the cost-effective
shipping of our products into the western United States. The U.S. Census Bureau
has predicted the population in the western states we serve will grow at nearly
double the rate of the total U.S. population over the next decade, which we
believe will further increase the demand for OSB to meet housing requirements
in the markets we serve. The Voyageur facility, located immediately adjacent to
the U.S. border in Western Ontario, will provide us with competitive market
access to the Central region of the United States and a more diversified
customer base. 13




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Timber Supply Timber Tenure Agreements The following table presents information about the long-term wood fiber
supply agreements at each of our OSB facilities as of December 31, 2003: Annual
    
    Long-term Supply
    
    Percent ofRequirement (m3)
    
    Agreements (m3)
    
    Requirement100 Mile House
    
    
    638,000
    
    
    
    585,000
    
    
    
    92
    %(1)Grande Prairie
    
    
    968,000
    
    
    
    791,000
    (2)
    
    
    82
    (3)High Level(4)
    
    
    1,350,000
    
    
    
    1,238,000
    
    
    
    92Total
    
    
    2,956,000
    
    
    
    2,614,000
    
    
    
    88
    %
    (1)
    
    100% beginning in 2007 due to increased supply of timber.(2)
    
    984,000 m3 until 2007.(3)
    
    102% until 2007.(4)
    
    Assumes the High Level OSB facility is operated at or near design
capacity of 860 mmsf. For the year ended December 31, 2003, the facilitys
available fiber supply was well over 100% of requirements. British Columbia We hold Forest License A18700 in British Columbia. Our forest license
covers the timber supply area of Lillooet, British Columbia. The Lillooet
timber supply area consists of approximately 1.1 million hectares (2.7 million
acres) in the Kamloops, British Columbia forest region and serves as the
primary timber source for our Lillooet veneer plant. The forest license is
renewable and the current term extends until 2013. We are currently entitled to
harvest an allowable annual cut, or AAC, of approximately 350,000 m3 under our
forest license. The AAC of our forest license can supply approximately 80% of
the current timber requirements of our veneer and specialty overlaid plywood
operations either directly or through a long-term log trade agreement with
third parties. The remaining percentage, primarily fir peeler logs, can be met
through purchases of timber harvested from government-owned lands by other
license holders and through purchases of logs from private landowners, farmers
and woodlot owners. In 2003, the British Columbia government introduced the Forestry
Revitalization Act which will result in significant changes to the provincial
forest management structure. The changes include a 20% reduction in harvesting
rights for holders of long-term tenures and the introduction of an
auction-based timber pricing system. The province has indicated that licensees
will be fairly compensated for the return of tenure and related costs such as
roads and bridges. Although the legislation has been enacted, the regulations
and basis for compensation for the 20% timber reduction have not been
published. The effect of the timber take-back will result in a reduction of
approximately 29,600 m3 of our existing allowable annual cut for which we will
be compensated. We hold Pulpwood Agreement No. 16 to support our OSB operations at 100
Mile House, British Columbia. The pulpwood agreement stipulates that before we
can harvest any pulpwood under the agreement, every reasonable effort must be
made to obtain the total suitable raw material requirements for the OSB mill
from (1) logging residues produced by us, including the fiber produced by West
Fraser Mills Ltd. in the 100 Mile House area pursuant to the terms of our fiber
supply agreements with West Fraser, and (2) logging residues and pulpwood
timber purchased from other sources within the timber supply areas covered by
the pulpwood agreement. If we are unable to meet our requirements from these
sources, then we are entitled to harvest up to 330,000 m3 per year of the
pulpwood stands within the timber supply area covered by the pulpwood
agreement. We estimate that in the long run, we will use all of our 330,000 m3 of
harvesting rights within the timber supply area covered by the pulpwood
agreement. Our agreements with West Fraser ensure a long-term supply of 100,000
m3 per year through 2006 and 150,000 m3 starting 2006 through 2011. Our
agreements with West Fraser may be subject to a reduction as a result of West
Frasers 20% take back as a result of the Forestry Revitalization Act. In late
2003, we secured long-term access to an additional 155,000 m3 per year of
pulpwood in the form of government tenures. The balance of our annual
requirement will be derived from market purchases and shorter term agreements. 14




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Alberta In 1994, we were granted a deciduous timber allocation, or DTA, in
connection with our Grande Prairie OSB facility. The Grande Prairie DTA is a
renewable 20-year certificate allowing for an annual harvest of approximately
791,000 m3 of deciduous timber, which expires in 2015. The Alberta Ministry of
Sustainable Resources issues timber licenses that operate in conjunction with
the DTA and specify where timber harvesting will take place within a five-year
period. As the holder of the DTA, we were required to construct and operate the
Grande Prairie OSB facility and must process all timber harvested under the DTA
at these facilities. We are also obligated to initiate a program of private log
purchases and to conduct our operations and forest management program in
accordance with provincial legislation and the requirements of the Alberta
Ministry of Sustainable Resource Development. In addition, as a result of
undercutting of the DTA allowable harvest during the 1995 to 2000 period, we
have rights under our DTA certificate to harvest an additional 200,000 m3 per
year through 2006. Our Grande Prairie DTA is the primary source of fiber for our Grande
Prairie OSB facility, capable of supplying approximately 100% of the plants
fiber requirements at full capacity during the period 2004 to 2006 and 82% in
subsequent years. The mills fiber requirement is expected to be 968,000 m3 in
the year ending December 31, 2004. The balance of the Grande Prairie OSB
plants requirements can be purchased from other low-cost sources, including
private land and government purchases, industrial timber salvage, incidental
deciduous volumes generated by non-DTA harvesting operations of other
operators, and volume gained through modified harvesting practices to increase
utilization. In 1996, the Alberta Lands and Forest Service issued a call for proposals
for a DTA located in the Footner Timber Development Area. We made a joint
proposal with another OSB producer, through Footner Forest Products Ltd., to
construct and operate an OSB plant at High Level, Alberta. For greater details
regarding the co-ownership of Footner see the section titled Co- Ownership
Arrangements for High Level. Footner was successful in its proposal. The
timber allocation is 828,000 m3 of deciduous timber annually for a period of 20
years and is supplied through a joint Forest Management Agreement which
supplies 677,000 m3, and three DTAs which supply 152,000 m3. In 2002, Footner,
on behalf of us and the other co-owner entered into a FMA with the Province of
Alberta and Tolko Industries Ltd. which provides us with a long-term agreement
to establish, grow, harvest and remove all deciduous timber on a sustained
yield basis within the area covered by the FMA. The FMA was formally approved
by the government of Alberta in July, 2002. We received government approval in
April 2004 to increase our annual allowable cut on the FMA from the existing
677,000 m3 to 701,000 m3. Footner has also negotiated 20-year volume supply
agreements of approximately 385,000 m3 annually with aboriginal groups who hold
DTAs or own their land. The High Level FMA the DTA and the long-term supply agreements with
aboriginal groups are the primary fiber source for the High Level OSB plant,
supplying approximately 92% of the plants anticipated fiber requirements once
it achieves design capacity. Other sources of fiber available to us include
purchases from private landowners and government, industrial timber salvage and
incidental deciduous volumes generated by non-DTA harvesting operations of
other operators. Timber Harvesting and Forest Management We are committed to responsible harvesting, reforestation and sustainable
forest management practices that are sensitive to environmental and social
considerations as well as the need to preserve a varied forest species mix.
Forest management techniques are in accordance with governmental laws,
regulations and policies and promote the long-term viability of the forest
resource. British Columbia We have adopted a strategic timber harvesting plan approved by the
Ministry of Forests that integrates harvesting from our forest license and
pulpwood agreement with timber volume supply agreements with West Fraser Mills
Ltd. to ensure that logs are directed to specific mills and end uses that
maximize the return on the timber resource. We manage these resources on a
sustained yield basis. Rationalization of the flow of logs to our mills reduces
our dependence on purchased logs. Timber harvesting is planned and supervised
by our woodlands staff, while harvesting and log hauling are performed by
independent contractors. Most of these independent contractors have
long-standing relationships with us. At 100 Mile House, the temperate climate
allows for year-round logging, subject to periodic limitations resulting from
adverse weather conditions and other factors. Since early 2000 we have worked with other forest tenure holders in our
British Columbia timber supply area to develop a sustainable forest management
(SFM) plan based on the Canadian Standards Association (CSA) certification
system. We are making the necessary preparations designed to achieve CSA
certification on the Lillooet license by the end of 2004. We believe that we
will be in a position to achieve ISO 14001 registrations, an environmental
management certification system for forestry related activities, on both the
Lillooet license and Pulpwood Agreement No. 16 in 2004. 15




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Alberta Our DTA at Grande Prairie and our FMA at High Level are managed on a
sustained yield basis. Harvesting under the DTAs is authorized under:  
    
    timber licenses, which create a five-year program of operations under
the DTA; and
    
    annual operating plans, which authorize the harvesting of specific
blocks of timber and impose operational requirements regarding such
matters as riparian set-backs and cut-block boundaries. Timber licenses under the DTA and FMA are issued as a right upon
compliance with cut control and other regulatory requirements. Logging operations at both the Grande Prairie and the High Level
facilities employ tree-length and cut-to-length roadside logging methods.
Year-round log deliveries are limited by wet ground conditions and a lack of
gravel for road ballast and construction. Grande Prairie ground conditions and
infrastructure allow an approximate eight-month logging season. At the High
Level OSB facility, the logging season is compressed into a 100-day period in
the winter, with very limited options for non-frozen ground operating
conditions. Terrain in the harvesting areas is flat to gently rolling, with the
main road systems previously put in place for oil and gas exploration and past
coniferous timber logging operations. We have developed a detailed forest management plan for the Grande Prairie
DTA and have committed to a proactive public involvement program in the
development of the plan. The detailed forest management plan has received
governmental approval. We have also completed an independent audit of our
operations at Grande Prairie, the results of which were submitted to the
government and summaries made available to the public. The audit established
that we met or exceeded government requirements. Our woodlands program in
Grande Prairie also received AFPA ForestCare certification in February 1999. In
November 2003, our Grande Prairie woodlands achieved ISO 14001 registration, an
environmental management system that applies to forestry, logging, and related
activities under the DTA. At the High Level OSB facility, Footner, on behalf of the co-owners, has
in place a detailed integrated forest management plan in the form of the
Footner-Tolko joint FMA. Footner is making the necessary preparations to
achieve ISO 14001 registrations for forestry, logging and related activities
under the FMA. Footner expects to achieve this ISO registration by August 2004. Environmental Regulation In addition to the laws and regulations governing the management and
stewardship of the forests where we harvest timber, we are subject to numerous
environmental laws and regulations of general application, including those
relating to air emissions, effluent discharges and waste management.
Environmental laws and regulations may impose liability and responsibility on
present and former owners, operators or users of facilities and sites for
contamination at such facilities and sites without regard to causation or
knowledge of contamination. Compliance with environmental laws and regulations
can significantly increase the costs of our operations and otherwise result in
significant costs and expenses. Violations of environmental laws and
regulations can subject us to additional costs and expenses, including defense
costs and expenses and civil and criminal penalties. We have obtained, or are
applying for amendments to, the necessary environmental operating permits
required to conduct our business. We believe that all of our operations are in
substantial compliance with all operating permits. Transportation and Distribution Our finished products are generally marketed on a delivered-price basis
and transported by common carriers. Timely and economical delivery of finished
goods to customers are important factors in our ability to compete effectively.
Virtually all sales are shipped directly to customers. A significant portion of the delivered cost of our products is
transportation costs. We have entered into various rail, truck and ocean
transportation agreements to provide reliable and competitive transportation
services. Our operations have the flexibility to load their products onto
various types of rail and road equipment, enabling them to take advantage of
the most competitive rates. We also reduce freight costs by shipping products
from the most logistically cost-effective mill. Our current North American
transportation strategy involves shipping approximately 70% of our total
production by rail, with the remainder shipped by truck. We continually test
alternative transportation options to minimize overall freight costs. Our
significantly large volume of annual shipments provides considerable leverage
for negotiating lower rates and more cost-effective transport equipment. 16




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Inventory adjustments are regularly required to manage short-term demand
imbalances and to consistently meet delivery schedules. Our practice is to ship
production immediately against an order file, however, our facility warehouses
can accommodate approximately five to seven days production if there is an
interruption in the transportation links. Marketing and Sales The principal markets for our products are the United States, Canada, Asia
and the United Kingdom. In North American markets, products are sold through
our Vancouver sales office to a large network of wholesale distributors,
building materials professionals and other integrated forest products companies
such as Louisiana-Pacific, Boise, Roseburg Forest Products and Georgia-Pacific.
Sales to Japan and other overseas markets are handled by Interior Export Lumber
Sales Ltd., or Interex, a cooperative sales company owned by six western
Canadian forest product companies, including ourselves. Within Interex, we are
the sole wood panel producer, providing both OSB and specialty overlaid plywood
products. The combined volume and mix of products provided by Interex enables
the members to more effectively compete against other large-scale, integrated
forest product companies than would be the case if each member independently
employed an export marketing program. Interex maintains sales offices in
Vancouver and Tokyo, Japan, and has local representatives in other major
markets. Interex receives a commission on the sales that it consummates. Any
commission amounts exceeding Interexs operating costs are refunded to its
members on a yearly basis based on volumes shipped. We also have sales agents
in a number of overseas markets that service key OSB and specialty overlaid
plywood customers. The following table sets out our net sales by region for the fiscal years
2001, 2002 and 2003. 2001
    
    2002
    
    2003(in thousands)Geographic sales informationCanada
    
    $
    49,271
    
    
    $
    69,078
    
    
    $
    84,278United States
    
    
    227,462
    
    
    
    246,928
    
    
    
    362,737Japan and other
    
    
    38,673
    
    
    
    33,194
    
    
    
    26,664Europe
    
    
    11,258
    
    
    
    6,855
    
    
    
    7,394Total
    
    $
    326,664
    
    
    $
    356,055
    
    
    $
    481,073
 A key component of our business strategy is to target higher-end niche
markets where products successfully compete on the basis of superior quality
and performance while maintaining a low-cost position on commodity sheathing
OSB products. To this end, we have been active in understanding customer needs
as they relate to the growing acceptance of engineered wood systems for housing
construction. Additionally, we continue to identify new market opportunities in
non-construction sectors and are responding by developing products with the
required performance attributes. See Research and Development. Competition We compete in North America and in Japan with numerous wood products
companies, ranging from very large integrated firms, several of which are
larger than we are, to smaller firms that manufacture only a few items. We also
compete indirectly with many firms that manufacture substitutes for wood
building materials. In the North American market for commodity sheathing OSB, we compete
principally with numerous plywood sheathing producers and other North American
OSB producers such as Weyerhaeuser, Tolko, Slocan, Louisiana-Pacific and Grant
Forest Products, depending on market destination and producing mill location.
Factors including production costs, freight charges and market dynamics between
producing and consuming regions have an impact on the competitive position of
all potential structural panel suppliers in a given market. OSBs significant
cost advantage over plywood continues to support OSB market growth. In the value-added OSB product lines, differentiation based on product
quality, technical know-how and customer service  along with our strategic
brand positioning  has sheltered us from intense competition from other,
mostly commodity-driven OSB producers. We sell value-added AinsworthEngineered®
webstock and rimboard OSB to most engineered floor systems manufacturers
including Boise, Louisiana-Pacific, Roseburg Forest Products and Pacific Wood
Tech, enabling them to more effectively compete with Trus Joist (a Weyerhaeuser
business), currently the world leader in engineered wood production and
marketing. The introduction of OSB to the Japanese market is relatively new. Although
OSB currently represents only a small proportion of the Japanese panel market,
we expect OSB to capture an increasing share of the structural panel market. We
had a leading position with an estimated 54% market share for OSB in the year
ended December 31, 2003. Other North American OSB producers have generally
played only a peripheral and opportunistic role in this market. Our principal
competition in Japan remains Indonesian and Malaysian plywood and domestic
softwood plywood. 17




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For the past several decades, two companies have dominated the North
American market for specialty overlaid plywood: Ainsworth and Olympic Panel
(formerly Simpson Timber). Olympic Panel is our primary competitor and has a
similar manufacturing and marketing approach to their business. Over the years,
opportunistic, smaller-size producers have attempted to make inroads into this
market but have succeeded only to a very limited extent. We believe that the
current competition encountered from cheaper, non-overlaid concrete-forming
plywood will gradually erode as end-users become educated about the benefits
and the installed cost-effectiveness of an initially more costly product line. Research and Development; Intellectual Property We focus our research and development efforts on improving manufacturing
efficiencies and developing new or improved products designed to expand the
offering of our AinsworthEngineered® OSB and specialty plywood products
including our Pourform® brands of concrete forming products. We also actively
work with our customers to develop customized engineered wood products using
the modern, versatile manufacturing equipment in place at our 100 Mile House,
Grande Prairie and Savona facilities. For instance, we often test engineered
strand wood products with enhanced structural properties for certain North
American customers that may lead to new market opportunities by providing cost
effective alternatives to products offered by our competitors. Beyond our
immediate focus on our current customers needs, we are also working to enhance
strategic alliances with industry and educational facilities to foster the
development of longer-term opportunities. We own several trademarks, trade
names and patents in connection with our OSB and specialty plywood products. Employees and Labor Relations We currently employ approximately 900 people. Our hourly employees in
British Columbia are covered under collective bargaining agreements with the
Industrial, Wood and Allied Workers of Canada, or IWA. In 2003, we renewed our
collective bargaining agreements with the IWA, which had expired on June 30,
2003. The renewed agreements have six year terms and expire on June 30, 2009,
and cover approximately 500 employees at our Lillooet, Savona and 100 Mile
operations. The collective bargaining agreement with the IWA at our temporarily
closed Abbotsford operation expired on June 30, 2003, and we are currently
negotiating with the IWA. We also have approximately 150 salaried employees in
British Columbia, engaged in sales, woodlands, manufacturing, supervisory and
administrative activities. We employ approximately 200 people in our non-union
Grande Prairie, Alberta operations. In addition, Footner employs approximately
150 people at the jointly-owned non-union High Level OSB facility. We also
engage independent contractors in British Columbia and Alberta, who provide
logging, trucking and road building services on a year-round basis. Legal Proceedings From time to time, we are involved in legal proceedings relating to claims
arising out of our operations in the ordinary course of business. We do not
believe there are any material proceedings pending or threatened against us or
any of our properties. C. Organizational Structure The Companys business and property interests are held either directly or
through wholly owned subsidiaries. D. Property, plant and equipment Overview We own and operate three OSB facilities, two 100% owned facilities in 100
Mile House, British Columbia and Grande Prairie, Alberta, and a 50% interest in
an OSB plant in High Level, Alberta. The company also owns a specialty plywood
plant at Savona, British Columbia, a veneer plant in Lillooet, British
Columbia, and a finger-joining facility in Abbotsford, British Columbia. On April 14, 2004, we entered in to an agreement to purchase 100% of the
outstanding common and Class A preferred shares and the net working capital of
Voyageur Panel Limited for US$159,000,000 plus net working capital plus the
lesser of US$10,000,000 and two thirds of the amount, if any, by which the
weighted average mill net price received by Voyageur exceeds a specified level.
Voyageur Panel owns an OSB mill based in Barwick, Ontario. Upon closing this
purchase the company will be operating four OSB facilities. Facilities Within the last 10 years we have been involved in the construction of
three OSB facilities in western Canada including 100 Mile House in British
Columbia (completed in 1994), Grande Prairie in Alberta (completed in 1995) and
High Level in Alberta (completed in 18




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2000). We also operate a specialty overlaid
plywood mill in Savona, British Columbia, an associated veneer plant in
Lillooet, British Columbia, and own a temporarily-closed finger-joined lumber
mill in Abbotsford, British Columbia. Our facilities represent total annual
capacity of approximately 1,525 mmsf of OSB (1,965 mmsf including the Voyageur
facility) and 155 mmsf of specialty overlaid plywood and 55 million board feet
of finger-joined lumber. We have some of the most modern, productive
manufacturing facilities in North America  our OSB manufacturing assets
average less than eight years of age and our specialty overlaid plywood assets
underwent a major modernization in 1998. We believe our modern facilities will
require only modest maintenance capital expenditures for the foreseeable
future. In fiscal 2004, we expect to have capital expenditures of approximately
$10 million to maintain current operations (approximately $13.0 million
including expected capital expenditures relating to the Voyageur facility). CapacityOriented Strand Board (mmsf)100 Mile House, British Columbia
    
    
    425Grande Prairie, Alberta
    
    
    670High Level, Alberta (50%-owned by us)(1)
    
    
    4301,525Specialty Overlaid Plywood (mmsf)Savona, British Columbia (Plywood)
    
    
    155Lillooet, British Columbia (Veneer)
    
    
    215370Finger-joined Lumber (million board feet)Abbotsford, British Columbia
    
    
    55
   (1)
    
    This facility is in its ramp-up phase. Its design capacity is 860 mmsf
per year and 50% of the production is ours. The mill is currently running
at approximately 75% of design capacity. Oriented Strand Board We jointly own the OSB facility at High Level, Alberta. This facility,
which is designed to be the largest OSB facility in the world at 860 mmsf per
year design capacity, is owned by the co-owners in equal one-half shares. The
plant site and log yard occupy approximately 643 acres of lands owned by the
co-owners and is directly serviced by rail. The High Level OSB facility is
operated for the co-owners by Footner Forest Products Ltd. Footner is also
jointly-owned in equal shares by us and the co-owner. Footner is a service
company that operates the plant as the agent for the co-owners and not for its
own account. All of the costs incurred by Footner in so doing are reimbursed by
the co-owners and the co-owners take away their respective one-half shares of
production from the plant for sale for their own account. We and the co-owner
have each invested approximately $145 million in the capital assets to
construct the facility. We believe the High Level OSB facility will be one of
the worlds lowest-cost producers of commodity sheathing OSB once full
production is achieved. At full capacity the plant will consume about 1.35
million m3 of fiber annually. By agreement between the co-owners, the plant
primarily produces commodity sheathing OSB for the North American market. High
Level utilizes modern technology with a 12-foot wide forming line and
continuous press. High Level has low-cost timber allocations granted by the
government of Alberta and long-term volume supply agreements that together
provide approximately 92% of its timber needs at full capacity. This timber is
secured through 2016 at very competitive stumpage rates. The facility, which
commenced operations in October 2000, is now operating at approximately 75% of
design capacity and continues to ramp-up to design capacity. High Level
contributed approximately 281 mmsf to our total OSB sales volume for the year
ended December 31, 2003, and we expect our share of production will be
increased to 430 mmsf per year once the facility is operating at design
capacity. For more details regarding the co-ownership arrangements for the High
Level plant, see Co-Ownership Arrangements for High Level. In 2002, Footner, on behalf of the owners of High Level, entered into a
Forest Management Agreement with the Province of Alberta and Tolko Industries
Ltd. which provides High Level with a long-term agreement to establish, grow,
harvest and remove all deciduous timber on a sustained yield basis within the
area covered by the FMA. Our OSB facility at Grande Prairie, Alberta, which was completed in
December 1995, is the second-largest capacity single-line OSB facility (after
the High Level OSB facility) in the world. We originally built the Grande
Prairie facility with a design capacity of 540 mmsf per year and currently
operate the facility at approximately 670 mmsf per year, or 24% above original
design capacity. The operation occupies approximately 160 acres of land owned
by us and is serviced by rail. The facility uses a 12-foot wide forming line
and press that provides the flexibility to produce, on a cost-efficient basis,
a variety of panel dimensions and grades to suit both North American and
Japanese markets. At full capacity, the facility will consume approximately
968,000 m3 of fiber annually. Grande Prairies low-cost position is supported
by an abundant low-cost fiber supply, economies of scale and superior up-time
and on-grade performance. In 2002, we invested approximately $9 million in
Grande Prairie to increase this facilitys productive capacity and reduce
production costs. 19




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Our OSB facility at 100 Mile House, British Columbia was completed in
August 1994. We originally built 100 Mile House with a design capacity of 360
mmsf per year and currently operate the facility at approximately 425 mmsf per
year, or 18% above original design capacity. At full capacity, the facility
consumes approximately 638,000 m3 of fiber annually. The operation occupies
approximately 57 acres of land owned by us and is directly serviced by rail.
This facility is our principal source of value-added OSB products for both our
North American and Japanese customers. For the year ended December 31, 2003,
63% of production was value-added OSB products. The facilitys proximity to the
port of Vancouver provides a significant competitive advantage on shipping
costs and delivery time to the growing Japanese market, where we are the market
leader. This facility has the same product quality certifications as our Grande
Prairie facility. The 100 Mile House facility was the first OSB facility to use
a nine-foot wide forming line and press that provides significant efficiency
advantages over the more traditional eight-foot wide press and allows us to
profitably serve the Japanese market where three-foot board is the standard. In
2000, we were the first OSB producer to install an inline panel stress rating
machine to meet quality
assurance specifications for Japans premium market. The 100 Mile House
facility is certified by the APA, the Engineered Wood Association, and its
products meet all applicable North American and Japanese Agricultural Standards
and building code specifications. Our 100 Mile House and Grande Prairie facilities were designed to
economically produce three-foot wide panels used in Japanese construction. For
example, Grande Prairie is one of the few plants in the world that utilizes a
12-foot wide forming line and press, giving it the flexibility to efficiently
produce either three-foot wide panels for the Japanese market or four-foot wide
panels for the North American market. We have the largest installed capacity
designed to serve the growing Japanese OSB market and are currently the
Japanese OSB market leader with an estimated 54% market share for the year
ended December 31, 2003. We believe that our ability to effectively compete in
Japan is a result of:  
    
    our press sizes, which can economically produce three-foot wide panels;  
    
    our proximity to western export terminals;  
    
    the high quality of our products; and  
    
    our experienced Japanese sales force. We are in the process of acquiring the Voyageur facility, a modern OSB
mill for which construction was completed in 1997. The facility has an annual
production capacity of approximately 440 mmsf, and for the year ended December
31, 2003, approximately 17% of production was of value-added OSB products. We
believe that, for the foreseeable future, the Voyageur facility will require
only modest expenditures for maintenance and capital improvements in line with
historical averages. We also believe that with minimal additional investment
the facility can be improved through initiatives designed to reduce cost and
increase production capacity to 500 mms by 2006. Specialty Overlaid Plywood We own and operate a specialty overlaid plywood mill in Savona, British
Columbia, and an associated veneer plant in Lillooet, British Columbia. Our Savona mill is the second largest producer of specialty overlaid
plywood panels in North America. Specialty overlaid plywood is a high
performance wood product used in concrete forms, trailer decking and
paint-grade signs and earns premium prices over commodity plywood. The plant is
located on a 64 acre site owned by us and is serviced by rail. Specialty
overlaid plywood products command premium prices that are less volatile than
conventional plywood sheathing and we have typically been able to realize
premium margins from our specialty overlaid plywood product line. In addition,
we have continued to focus our efforts on developing new products in order to
diversify our specialty overlaid plywood product lines and to access broader
international markets. Our Pourform® brands of concrete forming products are recognized for their
superior performance characteristics and longevity. The primary
AinsworthEngineered® specialty overlaid plywood product produced at Savona is a
medium density overlay concrete forming panel called Pourform-107®, which is
used for industrial concrete forming work, including high rise construction,
dams and highway infrastructure projects. Pourform-107®is manufactured using a
resin-impregnated paper overlay that leaves an architectural finish on the
concrete, and enables the panel to be re-used multiple times. The balance of
Savonas production consists of high- density overlaid panels used for concrete
forming, decking material for flat deck trailers, and general purpose overlaid
panels used for paint grade sign material as well as panels designed
specifically for use in flat deck trailers, dry freight vans and intermodal
container systems. Savonas annual capacity is 155 mmsf. Production of plywood
at the Savona mill for the fiscal year ended December 31, 2003 was 119 mmsf.
All of the Savona mills veneer requirements come from our veneer plant in
Lillooet. Our Lillooet veneer plant produces primarily high quality veneer,
principally for use in our Savona specialty overlaid plywood mill. The Lillooet
plant has the ability to supply all of our Savona veneer needs; however we also
sell spruce, pine and fir veneer products to 20




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other plywood producers and
industrial veneer users depending on prevailing market conditions. The Lillooet
plant site occupies 89 acres and is serviced directly by rail. The mill site is
located on land forming part of Lillooet Indian Reserve No. 1 and Cayoose Creek
Indian Reserve No. 1. The land is leased under a long-term tenancy agreement
with the Federal Department of Indian Affairs and Northern Development. Under
the terms of our forest license for the Lillooet timber supply area, we are
obliged to operate the Lillooet veneer plant to process an equivalent volume to
the volume harvested under that license per year. We invested approximately $21 million in our Savona mill and Lillooet
plant in the late 1990s to enhance our product offerings and lower our
operating costs. Finger Joined Lumber We own a finger-joined lumber facility in Abbotsford, British Columbia.
This facility converts low-value, off-grade and shorter-length lumber purchased
on the open market into finger-joined stud lumber products. This is
accomplished by removing defects in the purchased lumber and then machining and
gluing the remaining pieces together. Finger-joined lumber typically sells at
premium prices over natural lumber products. On December 20, 2002, we
temporarily shut-down the facility due to market conditions related to the
Canada-U.S. softwood lumber dispute. 
 ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS A. Operating results Certain statements in Managements Discussion and Analysis constitute
forward-looking statements that involve known business and economic risks,
uncertainties and other factors. These factors may cause the actual results,
performance or achievements of the Company to be materially different from any
future results, performance or achievements expressed or implied by such
forward-looking statements and may affect the future results as set forth in
this discussion and analysis. Overview We are principally engaged in the production of OSB and specialty plywood
for sale to markets in the United States, Canada, Asia and Europe. Our
operating results are affected by prevailing market prices for our principal
products, as well as our production volumes and costs of production. Sales of
our products are affected by residential and commercial construction and repair
and remodeling industries in North America and Japan and, to a lesser extent,
the commercial construction industry in Europe. These industries are highly
cyclical and are affected by numerous factors, including real estate prices,
interest rates, credit availability, tax policy, energy costs, weather
conditions, natural disasters and general economic conditions. During 2003, we achieved higher production volumes of both OSB and
specialty plywood compared to 2002. OSB production volume was 1,351 mmsf in
2003 compared to 1,284 mmsf in 2002, representing an increase of 5.2%.
Production volume at the High Level OSB facility and the Grande Prairie OSB
facility increased by 16.7% and 4.5%, respectively, compared to 2002.
Meanwhile, production at the 100 Mile House OSB facility was consistent with
2002. Specialty plywood production volume increased by 21.4% during the year
from 98 mmsf to 119 mmsf. This increase was primarily due to increased demand
for a new concrete forming plywood product and commodity plywood sheathing.
Veneer production sold to third parties decreased 12.7% due to the increased
demand for veneer at our Savona plywood facility. There was no production of
lumber in 2003 because the Abbotsford facility was temporarily closed due to
market conditions. Our operating results are sensitive to fluctuations in the exchange rate
of the Canadian dollar to the U.S. dollar, as prices for our products are
denominated in U.S. dollars or linked to prices quoted in U.S. dollars and we
have incurred substantially all of our debt in U.S. dollars. In 2003, over 75%
of our revenue was denominated in U.S. dollars, while most of our operating
costs were incurred in Canadian dollars. We have not hedged our exposure to
fluctuations in U.S. dollar revenue by entering into foreign exchange forward
contracts. Our value-added OSB products, including our export-standard OSB products,
typically carry higher prices and generate greater margins than our commodity
sheathing OSB products and tend to be less affected by fluctuations in the
economy. As a result, prices and margins for these products tend to be higher
and more stable through the economic cycle. The Lillooet veneer plant supplies the Savona specialty overlaid plywood
mill with veneer for making specialty overlaid plywood. The remaining veneer
production is sold to third party plywood producers. When our own plywood
production is high due to market conditions, sales of veneer to third parties
is generally reduced, and prices for such third party sales are generally
higher. Similarly, when 21




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our own plywood production is lower due to market conditions, sales of
veneer to third parties is correspondingly higher, and prices are generally
lower. Cost of products sold consists primarily of wood fiber, resins, waxes,
labor costs and energy. Wood fiber from timber is the primary raw material used
in our operations and is the most significant cost of our manufacturing
process. Fiber supply self-sufficiency is a key competitive element, because
the direct control and management of fiber supplies partially insulates an
operator from fluctuations in the market price of fiber. We supply our
manufacturing operations primarily from fiber resources held under long-term
agreements with the governments of British Columbia and Alberta, providing a
secure supply of fiber on a sustainable basis. Approximately 88% of the fiber
requirements for our OSB mills are supplied by the provincial government quotas
and allocations, and multi-year fiber agreements with other forest products
companies and aboriginal groups. We purchase the balance of our fiber
requirements in the open market. The year ended December 31, 2003 has seen a significant increase in the
pricing of OSB products, which has increased our sales and improved our
operating earnings. The following table summarizes certain of our results of operations: Year endedDecember 31,2001
    
    2002
    
    2003Sales:OSB
    
    $
    242.2
    
    
    $
    262.1
    
    
    $
    394.9Specialty plywood, and other products
    
    
    84.5
    
    
    
    94.0
    
    
    
    86.2Total
    
    
    326.7
    
    
    
    356.1
    
    
    
    481.1Cost of products sold:OSB
    
    
    171.0
    
    
    
    184.1
    
    
    
    187.5Specialty plywood, and other products
    
    
    73.0
    
    
    
    79.9
    
    
    
    73.4Total
    
    
    244.0
    
    
    
    264.0
    
    
    
    260.9Selling and administration
    
    
    22.7
    
    
    
    21.9
    
    
    
    18.2Amortization of capital assets
    
    
    30.4
    
    
    
    32.0
    
    
    
    33.0Write-down of capital assets
    
    
    3.3
    
    
    
    1.0
    
    
    
    13.7Operating earnings
    
    
    26.3
    
    
    
    37.2
    
    
    
    155.3Finance expense
    
    
    60.0
    
    
    
    62.5
    
    
    
    56.1Interest and other (income) expense
    
    
    (2.8
    )
    
    
    (2.9
    )
    
    
    0.5Unrealized foreign exchange (gain) loss on long-term debt
    
    
    17.4
    
    
    
    (4.3
    )
    
    
    (76.9
    )Income (loss) before income tax
    
    
    (48.4
    )
    
    
    (18.1
    )
    
    
    175.6Income tax (recovery) expense
    
    
    (18.7
    )
    
    
    (0.3
    )
    
    
    51.9Income (loss) from continuing operations
    
    
    (29.7
    )
    
    
    (17.9
    )
    
    
    123.7Gain from discontinued operations
    
    
    4.2
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    (25.4
    )
    
    $
    (17.9
    )
    
    $
    123.7
 Our geographic distribution of sales was as follows: Year endedDecember 31,2001
    
    2002
    
    2003All ProductsUnited States
    
    
    69.6
    %
    
    
    69.4
    %
    
    
    75.4
    %Canada
    
    
    15.1
    
    
    
    19.4
    
    
    
    17.5Japan and other
    
    
    11.8
    
    
    
    9.3
    
    
    
    5.5Europe
    
    
    3.5
    
    
    
    1.9
    
    
    
    1.6100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 Our Results of Operations Fiscal Year ended December 31, 2003 Compared to Fiscal Year ended December
31, 2002 Net income for the year ended December 31, 2003 was $123.7 million
compared to a net loss of $17.9 million in 2002. The increase in net income was
primarily attributable to a $118.1 million or 317.5% increase in operating
earnings and a $72.6 million increase in the unrealized foreign exchange gain
on U.S. dollar denominated debt from $4.3 million in 2002 to $76.9 million in
2003. 22




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Sales Sales in fiscal 2003 were $481.1 million compared to $356.1 million in
fiscal 2002, representing an increase of $125.0 million or 35.1%. OSB.Sales of OSB in 2003 were $394.9 million compared to $262.1 million
in 2002, representing an increase of $132.8 million or 50.7%. This increase was
due to an average price increase of 45.8% and by a 3.3% increase in shipment
volumes from 1,299 mmsf in fiscal 2002 to 1,341 mmsf in fiscal 2003. The
increased unit volume was due to capacity improvements at the 100 Mile House
and High Level facilities. Benchmark OSB prices increased sharply beginning in
mid-2003 and peaked at a record US$465 per msf (North Central, 7/16 inch basis)
monthly average price in October, well above the previous record of $351 per
msf set in July 1999. Specialty Overlaid Plywood and Other Products.Sales of specialty
overlaid plywood and other products were $86.2 million compared to $94.0
million in 2002, representing a decrease of $7.8 million or 8.3%. This decrease
was due primarily to a decrease in lumber and veneer sales only partially
offset by an increase in specialty overlaid plywood sales. Lumber revenue was
$17.0 million or 94.8% lower than 2002 because the Abbotsford facility has been
temporarily closed since December 2002 due to market conditions. Sales of
specialty overlaid plywood in 2003 were $71.8 million compared to $61.1 million
in 2002, representing an increase of $10.7 million or 17.5%. Specialty plywood
volume increased 29.2% from 92 mmsf in fiscal 2002 to 119 mmsf in fiscal 2003.
The increase in sales resulted from a 29.2% increase in shipment volumes driven
by higher market demand and a 9.1% decrease in average sales price. This lower
average sales price is largely attributable to a product mix comprised of an
increased proportion of relatively lower-priced commodity plywood sheathing
products. Cost of Products Sold Cost of products sold in fiscal 2003 was $260.9 million compared to $264.0
million in fiscal 2002, representing a decrease of $3.1 million or 1.2%. This
decrease is primarily due to the closure of the Abbotsford lumber facility
throughout 2003 and was partially offset by increased OSB and specialty plywood
shipment volumes. OSB.OSB cost of products sold in fiscal 2003 was $187.5 million compared
to $184.1 million in fiscal 2002, representing an increase of $3.4 million or
1.8%. This increase was due primarily to a 3.3% increase in OSB shipment
volumes generated primarily at the High Level and Grande Prairie facilities and
lower unit manufacturing costs resulting from higher production levels. Specialty Overlaid Plywood and Other Products.Specialty overlaid plywood
and other products cost of goods sold in fiscal 2003 was $73.4 million compared
to $79.9 million in fiscal 2002, representing a decrease of $6.5 million or
8.1%. This decrease was due primarily to a decrease in lumber shipments only
partially offset by an increase in specialty overlaid plywood shipments. Lumber
cost of products sold was $1.4 million in 2003 compared to $16.9 million in
2002, representing a decrease of $15.5 million or 91.7%. Meanwhile, specialty
overlaid plywood shipment volume increased by 29.2% in 2003 compared to 2002. Selling and Administration Selling and administration expense in fiscal 2003 was $18.2 million
compared to $21.9 million in fiscal 2002, representing a decrease of $3.7
million or 16.9%. This decrease was due to a number of management initiatives
to reduce administration costs. Amortization of Capital Assets Amortization of capital assets in fiscal 2003 was $33.0 million compared
to $32.0 million in fiscal 2002, representing an increase of $1.0 million or
3.1%. Amortization expense increased primarily due to increased production
volume at the High Level OSB facility. Increased production volume has an
impact on amortization as OSB facilities are amortized using the units of
production method. Finance Expense Finance expense, excluding unrealized foreign exchange gain on U.S. dollar
denominated debt, for 2003 was $56.1 million (including $51.2 million of direct
interest expense) compared to $62.5 million (including $57.2 million of direct
interest expense) in 2002, representing a decrease of $6.4 million or 10.21%.
This decrease was primarily due to the year-over-year appreciation of the
Canadian dollar relative to the U.S. dollar and a $0.1 million loss related to
the redemption of some outstanding 13.875% Notes and 12 1/2% Notes in December
2003. We recorded a $76.9 million unrealized foreign exchange gain on our U.S.
dollar denominated long-term debt for fiscal 2003 compared to an unrealized
gain of $4.3 million in 2002, representing an increase of $72.6 million. The
gain in 2003 reflects the year-over-year appreciation of the Canadian dollar
relative to the U.S. dollar. 23




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Interest and other expense for 2003 was $0.5 million compared to income of
$2.9 million in 2002. This decrease was related primarily to a foreign exchange
loss associated with our working capital. Write-down of capital assets for 2003 was $13.7 million compared to $1.0
million in 2002. This increase was primarily due to a $13.3 million write-down
of capital assets related to a planned 400 mmsf expansion of the Grande Prairie
OSB plant. The company has been unsuccessful in its attempt to secure
additional long-term timber tenures. Without confirmation of a secured timber
supply, the company has decided not to pursue the expansion of the Grande
Prairie facility at this time. Income Taxes Income tax expense in fiscal 2003 was $51.9 million compared to an income
tax recovery of $0.3 million in fiscal 2002. This increase was due to the
substantial increase in pre-tax income. Fiscal Year ended December 31, 2002 Compared to Fiscal Year ended December
31, 2001 The net loss for the year ended December 31, 2002 was $17.9 million
compared to $25.4 million in 2001. The decrease in the net loss was
attributable to several factors, including an $10.9 million or 41.4% increase
in operating earnings and a significant reduction in the unrealized foreign
exchange loss on U.S. dollar denominated debt from $17.4 million in 2001 to a
gain of $4.3 million in 2002. We recorded an income tax recovery of $0.3
million compared to $18.7 million in 2001, reflecting underlying business
results and the impact of non-deductible amounts. Sales Sales in fiscal 2002 were $356.1 million compared to $326.7 million in
fiscal 2001, representing an increase of $29.4 million or 9.0%. OSB.Sales of OSB in fiscal 2002 were $262.1 million compared to $242.2
million in fiscal 2001, representing an increase of $19.9 million or 8.2%. This
increase was due primarily to an 10.1% increase in shipment volumes from 1,179
mmsf in fiscal 2001 to 1,299 mmsf in fiscal 2002. The increase in shipment
volumes was partially offset by a decline in average OSB prices of 1.7%. The
High Level OSB facility generated a significant portion of the increase in
total OSB shipment volume as its results were capitalized until March 31, 2001.
Shipment volumes from High Level increased by 56.8% compared to 2001. Specialty Overlaid Plywood and Other Products.Sales of specialty
overlaid plywood and other products in fiscal 2002 were $94.0 million compared
to $84.5 million in fiscal 2001, representing an increase of $9.5 million or
11.2%. This increase was due to increased shipment volume of specialty overlaid
plywood and veneer. Specialty plywood volume increased 4.8% from 88 mmsf in
fiscal 2001 to 92 mmsf in fiscal 2002. Veneer sales increased by 45.9% to $12.7
million primarily because of a 41.3% increase in shipments. Cost of Products Sold Cost of products sold in fiscal 2002 was $264.0 million compared to $244.0
million in fiscal 2001, representing an increase of $20.0 million or 8.2%. This
increase was due to increased shipment volumes of OSB, specialty overlaid
plywood, veneer and lumber. OSB.OSB cost of products sold in fiscal 2002 was $184.1 million compared
to $171.0 million in fiscal 2001, representing an increase of $13.1 million or
7.7%. The increase in OSB cost of products sold in 2002 was attributable to a
10.1% increase in shipment volume and a 2.1% decrease in per unit production
costs. Specialty Overlaid Plywood and Other Products.Specialty overlaid plywood
and other products cost of goods sold in fiscal 2002 was $79.9 million compared
to $73.0 million in fiscal 2001, representing an increase of $6.9 million or
9.5%. This increase was primarily due to a $41.3% increase in veneer shipments,
a 35.9% increase in lumber shipments, and a 4.81% increase in specialty
overlaid plywood shipments. Selling and Administration Selling and administration expense in fiscal 2002 was $21.9 million
compared to $22.7 million in fiscal 2001 despite our incurring $2.4 million in
costs related to the restructuring of our senior management team and the
termination of our aircraft lease. 24




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Amortization of Capital Assets Amortization of capital assets in fiscal 2002 was $32.0 million compared
to $30.4 million in fiscal 2001, representing an increase of $1.6 million or
5.3%. Amortization expense increased primarily due to the High Level facility
results being included for the entire year. Increased production at each of our
OSB facilities also had an impact on amortization as OSB facilities are
amortized using the units of production method. Finance Expense Finance expense in fiscal 2002 was $62.5 million (including $57.2 million
of direct interest expense) compared to $60.0 million in fiscal 2001,
(including $51.7 million of direct interest expense) representing an increase
of $2.5 million or 4.2%. Finance expense increased by $2.5 million as a result
of the increase in total borrowings upon issuance of the 13.875% Notes December
20, 2001. Income Taxes We recorded an income tax recovery of $0.3 million in 2002 compared to
$18.7 million in 2001 reflecting underlying business results and the impact of
non-deductible amounts. Outlook Strong homebuilding activity and low inventories in key markets led to
record high OSB prices in the second half of 2003 and allowed us to generate
excellent operating earnings. We believe that OSB pricing will remain strong in
the near term as low mortgage rates and improved economic growth will support a
relatively high number of North American housing starts and home renovations.
We should also continue to benefit from increased OSB production as our High
Level OSB facility continues to ramp-up to design capacity and the Grande
Prairie OSB facility realizes the benefits from recent capital improvements.
Meanwhile, we will continue to maintain our operational focus on productivity
improvements, cost reductions and increasing the volume of value-added
AinsworthEngineered®wood products. Market Risk Market risk is the risk of loss arising from adverse changes in market
rates and prices, such as interest rates and foreign currency exchange rates.
Our existing senior secured notes are not subject to interest rate fluctuations
because the interest rate is fixed for the term of the debt. A significant portion of our products are sold in U.S. dollars. Most of
our costs, other than interest payable on the Notes and our existing senior
secured notes, which are payable in U.S. dollars, will be payable in Canadian
dollars and, therefore, our financial results are subject to foreign currency
exchange rate fluctuations. A significant appreciation in the value of the
Canadian dollar in terms of the U.S. dollar, while other factors remain
constant, will cause a relative decline in our revenues and our cash flow will
be diminished. We have not used derivative financial instruments to mitigate the
influence of market risk but we may do so in the future. Critical Accounting Policies Management has made certain judgments and estimates that affect the
reported amounts and other disclosures in our financial statements. Valuation of Inventory.We closely monitor conditions that could impact
valuation of inventories or otherwise risk impairment of our assets.
Inventories of logs, OSB, specialty plywood, veneer and lumber products are
valued at the lower of average cost and net realizable value. We base our
estimate of market value on sales orders that exist at balance sheet reporting
dates. Prices fluctuate over time and it is probable that market values at the
time of eventual sale will differ from our estimates. Loss contingencies.Our estimates of our loss contingencies for legal
proceedings and product warranty claims are based on various judgments and
assumptions regarding the potential resolution or disposition of the underlying
claims and associated costs. Valuation of Long-Lived Assets.On a quarterly basis, we review the
long-lived assets held and used by us (primarily property, plant, and
equipment, construction in progress and timber and logging roads) for
impairment. Assessing the appropriate valuation of the affected assets requires
us to make judgments, assumptions and estimates. In general, write-downs for
impairment are recognized when the book values exceed our estimate of the
undiscounted future net cash flows associated with the affected assets. During
2003, we recorded a $13.3 25




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million write-down of capital assets related to a
planned expansion of the Grande Prairie OSB plant. The planned expansion
involves the addition of a second manufacturing line alongside the existing OSB
plant to produce a further 400 mmsf of OSB and specialty products, and the
construction of a hardwood sawmill. The company has been unsuccessful in its
attempt to secure additional long-term timber tenures. Without confirmation of
a secured timber supply, the company has decided not to pursue the expansion of
the Grande Prairie facility at this time. We reviewed the carrying value of our
other capital assets, including construction in progress, at December 31, 2003,
and believe that our reported values are reasonable based on the current
circumstances. Amortization.Amortization of property, plant and equipment is
principally based on the units of production method where the cost of equipment
is amortized over the estimated units that will be produced during a
conservative estimate of its useful life. Future Income Tax Assets.We record future income tax assets including
the potential tax benefit of operating loss carry-forwards and future income
tax liabilities. The amounts that we record for these assets and liabilities
are based upon various judgments, assumptions and estimates, including
judgments regarding the tax rates that will be applicable to the future income
tax amounts, the likelihood that we will generate sufficient taxable income or
gain to utilize future income tax assets. Due to the numerous variables
associated with our judgments, assumptions and estimates relating to the
valuation of our future income tax assets and liabilities, and the effects of
changes in circumstances affecting these valuations, both the precision and
reliability of the resulting estimates are subject to uncertainties and, as
additional information becomes known, we may change our estimates. U.S. GAAP Reconciliation Our consolidated financial statements have been prepared in accordance
with Canadian GAAP. To the extent applicable to our consolidated financial
statements, Canadian GAAP conforms in all material respects with U.S. GAAP,
except as described in note 22 to our consolidated financial statements
included elsewhere in this annual report. 26




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B. Liquidity and Capital Resources Our continuing operations generated $133.6 million of cash after changes
in non-cash working capital in fiscal 2003. Non-cash working capital increased
$12.7 million in this period. The increase in non-cash working capital was due
to an increase in accounts receivable attributable to higher OSB prices, an
increase in inventories, and a decrease in accrued liabilities related to our
long-term debt with the year over year appreciation in the Canadian dollar
relative to the U.S. dollar. In fiscal 2002, our operations generated $7.4
million of cash after changes in non-cash working capital. Non-cash working
capital increased $7.5 million in fiscal 2002 primarily due to an increase in
log inventories and recognition of higher spare parts inventory levels at two
of our facilities. Net cash used for investing activities was $8.2 million in 2003 compared
to net cash used for investing activities of $14.2 million in 2002. Capital
expenditures in 2003 were $8.2 million compared to $14.1 million in 2002. Our
capital expenditures in 2003 were focused on several small-scale maintenance of
business and profit improvement projects at all facilities except Abbotsford.
The majority of our 2002 capital expenditures were on profit improvement
projects at the Grande Prairie and High Level OSB facilities, including $9.2
million invested in three capital projects at Grande Prairie to increase this
facilitys productive capacity by approximately 12% and reduce production
costs. In fiscal 2004, we expect to have capital expenditures of approximately
$10 million to maintain our current operations. Cash flows used in financing activities totaled $11.5 million in 2003 compared
to cash flows from financing activities of $39,000 in 2002. The increase in
cash flow used in financing activities was due to a redemption of US$5.9
million principal amount of 13.875% Notes and US$1.9 million principal amount
of 12 1/2% Notes in December 2003. At December 31, 2003 we had $194.1 million in cash and cash equivalents
compared to $80.2 million at December 31, 2002. On March 3, 2004, we (1) completed an offering of US$210.0 million
principal amount of 6.750% Senior Notes due March 15, 2014 and (2) amended the
indentures governing our 13.875% Notes and our 12 1/2% Notes to eliminate
substantially all of the covenants and certain events of default relating to
the Secured Notes, and to discharge and release the related security documents.
In addition, on March 18, 2004, we concluded separate tender offers for
US$184.1 million outstanding principal amount of the 12 1/2% Notes and US$89.1
million outstanding principal amount of the 13.875% Notes, in which we
purchased US$182.2 million principal amount of the 12 1/2% Notes and US$87.1
million principal amount of the 13.875% Notes. On March 15, 2004, we arranged a new five-year revolving credit facility
with a commercial lender. Our new credit facility allows us to borrow up to
$50.0 million, subject to a borrowing base determined by the amount of our
eligible accounts receivable and inventory, which may reduce the total
borrowings available. The new credit facility has been secured by a first
priority interest on eligible accounts receivable and inventory. Our cash flow is subject to general economic, industry, financial,
competitive, legislative, regulatory and other factors, including economic
conditions in North America, that are beyond our control. Our business may not
generate cash flow in an amount sufficient to fund our liquidity needs, which
would severely curtail our ability to continue operations. If our cash and
operating cash flow is insufficient to meet our operational expenses and debt
service obligations we will have to consider several options available to us
including, raising additional equity, sales of assets or seeking consent to
incur additional indebtedness. These options may not be available to us at all
or on satisfactory terms. C. Research and Development, Patents and Licenses We focus our research and development efforts on improving manufacturing
efficiencies and developing new or improved products designed to expand the
offering of our AinsworthEngineered® OSB and specialty plywood products
including our Pourform® brands of concrete forming products. We also actively
work with our customers to develop customized engineered wood products using
the modern, versatile manufacturing equipment in place at our 100 Mile House,
Grande Prairie and Savona facilities. For instance, we often test engineered
strand wood products with enhanced structural properties for certain North
American customers that may lead to new market opportunities by providing cost
effective alternatives to products offered by our competitors. Beyond our
immediate focus on our
current customers needs, we are also working to enhance strategic
alliances with industry and educational facilities to foster the development of
longer-term opportunities. We own several trademarks, trade names and patents
in connection with our OSB and specialty plywood products. We actively work with our customers to develop engineered wood products
that suit their individual needs. The modern, versatile manufacturing equipment
in place at our 100 Mile House and Grande Prairie facilities and Savona mill
enables us to develop and 27




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manufacture value-added OSB and specialty overlaid
plywood products. By actively working with the market, we endeavour to
continually develop engineered wood products, which service its needs. This
focus and our modern, versatile facilities enable Ainsworth to develop and
manufacture value-added OSB and specialty overlaid plywood products. Our
research and development efforts have resulted in several promising new
products that are undergoing field-testing, and we intend to release several
new products and brands in the future. In fiscal 2001, 2002, and 2003, we
spent $400,820, $210,830, and $385,500 on research and development. D. Trend Information See information provided above in Item 5.A hereof. E. Off-Balance Sheet Arrangements We do not have any material off-balance sheet arrangements other than
letters of credit pledged for collateral in the amount of $6.2 million at
December 31, 2003. We do not believe that we have any off-balance sheet
arrangements that have, or are reasonably likely to have a current or future
effect on our financial condition, changes in financial condition, results of
operation, liquidity or capital expenditures or resources that is material to
investors. F. Contractual Obligations The following table summarizes the timing of payments for which we have
contractual obligations as of March 31, 2004: Payment due by PeriodContractual
    
    
    
    
    
    Less than
    
    
    
    
    
    
    
    
    
    AfterObligation
    
    Total
    
    1 year
    
    2-3 years
    
    4-5 years
    
    5 years(in thousands of US$)Senior Notes(1)
    
    
    355,872
    
    
    
    12,269
    
    
    
    29,215
    
    
    
    33,272
    
    
    
    281,116Capital Lease Obligations(2)
    
    
    420
    
    
    
    155
    
    
    
    265
    
    
    
    
    
    
    
    Operating Lease Obligations(2)
    
    
    3,267
    
    
    
    1,556
    
    
    
    1,535
    
    
    
    166
    
    
    
    
    (3)
    (1)
    
    Under the indentures governing our 6.75% Senior Notes, we are required to
make interest payments in the amount of US$7.1 million each June 30 and
December 30. These notes mature on March 15, 2014. Under the indentures
governing our other outstanding senior notes, we are required to make
interest payments in the amount of US$0.2 million each January 15 and July
15 and in the amount of US$0.1 million each April 15 and October 15. These
notes mature on July 15, 2007.(2)
    
    The following are U.S. equivalents using an exchange rate of
US$0.7643=$1.00, the inverse of the noon buying rate on March 31, 2004.(3)
    
    We do not include operating lease obligations beyond five years in our
financial statements. 28




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##### 



ITEM 6. Directors, Senior Management and Employees A. Directors and Senior Management The directors and executive officers of the Company are as indicated in
the following table. Each director holds office until the next annual general
meeting of shareholders of the Company or until his or her successor is elected
or appointed, or unless his or her office is earlier vacated under any of the
relevant provisions of the articles of the Company or the Company Act (British
Columbia). Executive Officers are appointed to serve at the pleasure of the
Board of Directors. Name
    
    Age
    
    TitleBrian E. Ainsworth
    
    
    61
    
    
    Chairman, Chief Executive Officer and Director since May 1993D. Allen Ainsworth
    
    
    62
    
    
    President and Director since May 1993Catherine E. Ainsworth
    
    
    45
    
    
    Chief Operating Officer, Secretary since November 2001 and Director since
May 1993Robert Allen
    
    
    46
    
    
    Chief Financial Officer since November 2003David Ainsworth
    
    
    83
    
    
    Director since May 1993 and co-founder of AinsworthSusan Ainsworth
    
    
    82
    
    
    Director since May 1993 and co-founder of AinsworthD. Michael Ainsworth
    
    
    41
    
    
    Executive Vice-President, since May 2002Kevin Ainsworth
    
    
    38
    
    
    Senior Vice-President, B.C. Timberlands and Solid Wood GroupDouglas Ainsworth
    
    
    39
    
    
    Senior Vice-President, MarketingK. Gordon Green(1)(2)
    
    
    69
    
    
    Director since May 1993. Until October 1993 he was a Vice President and
Director, RBC Dominion Securities IncMorley Koffman(2)
    
    
    74
    
    
    Director since May 1993. He is a lawyer with the law firm Koffman KalefW. Gordon Lancaster(1)(2)
    
    
    60
    
    
    Director since May 1993. He is Chief Financial Officer of Ivanhoe Energy IncRon B. Anderson (1)(2)
    
    
    51
    
    
    Director since May 12, 2003. He is President of North Point Capital Corp
    (1)
    
    Member of the Audit Committee and the Compensation Committee(2)
    
    Member of the Corporate Governance Committee Brian E. Ainsworthhas served as Chairman of our Board of Directors and
Chief Executive Officer since May 1993. Mr. Ainsworth previously managed the
woodlands operations of Ainsworth Lumber Company, Ainsworths predecessor
corporation, for more than 30 years. D. Allen Ainsworthhas served as our President since May 1993. He has also
been a Director since May 1993. Mr. Ainsworth served as our Chief Operating
Officer until November 2001. Mr. Ainsworth previously managed the
manufacturing and sales operations of Ainsworth Lumber Company for more than 30
years. Catherine E. Ainsworthhas served as our Chief Operating Officer since
November 2001, and has served as a Director and our Secretary since May 1993.
Previously, Ms. Ainsworth served as our Chief Financial Officer from May 1993
to November 2001. Robert Allenhas served as our Chief Financial Officer since November
2003. Prior to joining us, Mr. Allen served as Chief Financial Officer and Vice
President of a startup, high technology advertising company located in
Vancouver. Previously, Mr. Allen spent eight years working for Skeena Cellulose
Inc., a large integrated forest products company in British Columbia, including
his last position as Chief Financial Officer and Vice President of finance from
2000 to 2002. Before joining Skeena in 1994, Mr. Allen held a senior financial
position at Western Forest Products Ltd. for a three year period. Mr. Allen
also worked for the accounting firm of Coopers & Lybrand from 1986 to 1991. Mr.
Allen is a graduate of the University of British Columbia and is a Chartered
Accountant. David Ainsworthco-founded Ainsworth Lumber Company in 1950. He has been a
Director since May 1993. Previously, Mr. Ainsworth served as our President. Susan Ainsworthco-founded Ainsworth Lumber Company in 1950. She has been
a Director since May 1993. D. Michael Ainsworthhas served as our Executive Vice-President since May
2002. Previously, he served as Vice-President, Marketing and Business
Development since November 1996. Mr. Ainsworth holds a Master of Science degree
in forest products marketing and a Bachelor of Science degree in forestry, both
of which he earned at the University of British Columbia. 29




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##### 



Kevin Ainsworthhas served as Senior Vice-President, B.C. Timberlands and
Specialty Plywood since November 2002. He has held a number of investor
relations and woodlands management positions with Ainsworth since 1992. Mr.
Ainsworth holds a Master of Business Administration degree and a Bachelor of
Science degree in forestry, both of which he earned at the University of
British Columbia. Douglas I. Ainsworthhas served as Senior Vice-President, Marketing since
November 2002. Previously, he served as the General Manager, Business
Development where he managed the construction and operational start-up of the
Grande Prairie OSB facility. Mr. Ainsworth has held a number of management
positions with Ainsworth since 1989. K. Gordon Greenhas been a director since May 1993. Mr. Green is a
corporate director and an independent financial consultant. Until October 1993
he was a Vice-President and Director of RBC Dominion Securities Inc., a
Canadian financial services company. Mr. Green has a Master of Business
Administration degree, which he earned at Harvard University, and a Bachelor of
Science degree in forestry, which he earned at the University of British
Columbia. Morley Koffmanhas been a director since May 1993. Mr. Koffman is a lawyer
with the Vancouver law firm Koffman Kalef. He has been appointed Queens
Counsel. Mr. Koffman holds a Bachelor of Laws degree and a Bachelor of Arts
degree, both of which he earned at the University of British Columbia. W. Gordon Lancasterhas been a director since May 1993. Mr. Lancaster, a
Chartered Accountant, currently serves as Chief Financial Officer of Ivanhoe
Energy Inc., a Vancouver-based international natural gas, oil and energy
company. Mr. Lancaster was with Deloitte & Touche LLP for 20 years, including
five years as partner. He also has more than 20 years of experience in senior
financial positions serving as Chief Financial Officer of First City Group,
Vancouver International Airport Authority, Lions Gate Entertainment Corp.,
Power Measurement Inc. and Xantrex Technology Inc. Ron B. Andersonhas been a director since May 12, 2003. Currently he
serves as President of North Point Capital Corp., a private merchant bank.
Previously, Mr. Anderson served as Senior Vice-President Corporate Development
of Parkside Developments LP, an affiliated company involved in real estate
development. He has a Bachelor of Commerce degree which he earned at the
University of British Columbia, and is a Certified General Accountant. Brian E. Ainsworth, D. Allen Ainsworth and Catherine E. Ainsworth are the
children of David Ainsworth and Susan Ainsworth. D. Michael Ainsworth and
Douglas Ainsworth are the children of D. Allen Ainsworth and Kevin Ainsworth
is the son of Brian E. Ainsworth. 30




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##### 



B. Compensation The following table provides a summary of compensation for the fiscal year
ended December 31, 2003 paid by us to our Chief Executive Officer and each of
our four other most highly compensated executive officers who were serving as
executive officers as at December 31, 2003, who we refer to in this annual
report as our Named Executive Officers. Summary Compensation Table Annual Compensation
    
    Long-term CompensationAwards
    
    PayoutsSecuritiesUnder
    
    Restricted
    
    Long-termOptions/
    
    Shares or
    
    IncentiveOther Annual
    
    SARs
    
    Restricted
    
    PlanSalary
    
    Bonus
    
    Compensation(1)
    
    Granted
    
    Share Units
    
    Payouts
    
    All OtherName and Principal Position
    
    Year
    
    ($)
    
    ($)
    
    ($)
    
    (#)
    
    ($)
    
    ($)
    
    CompensationBrian E. Ainsworth
    
    
    2003
    
    
    
    
    
    
    
    
    
    
    
    816,000
    (2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Chairman and Chief
Executive OfficerD. Allen Ainsworth
    
    
    2003
    
    
    
    412,500
    
    
    
    385,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    PresidentCatherine E. Ainsworth
    
    
    2003
    
    
    
    362,500
    
    
    
    435,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Chief Operating Officer
and SecretaryD. Michael Ainsworth
    
    
    2003
    
    
    
    200,000
    
    
    
    150,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Executive Vice-PresidentDouglas I. Ainsworth
    
    
    2003
    
    
    
    200,000
    
    
    
    150,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Senior Vice-President,
Marketing
    (1)
    
    The aggregate amount of all perquisites or other personal benefits given
to each of the Named Executive Officers named in the table the listed
financial year did not exceed 10% of his or her total base salary or
compensation and bonus for the year.(2)
    
    Represents management fees in the amount of $468,750 plus a bonus of
$329,250 and an automobile allowance of $18,000. See Employment
Agreement. The aggregate compensation paid to our executive officers and related
directors who are not listed above (4 persons), based on 2003 salaries and
bonuses, totaled $545,770. Compensation of Directors During the year ended December 31, 2003, our non-employee, non-related
directors were paid a retainer fee of $10,000 per year and a meeting attendance
fee of $1,000 per directors meeting attended. In connection with participation
on committees of our board of directors, non-employee directors were paid a
meeting attendance fee of $1,000 per committee meeting attended and
non-employee directors acting as chair of committees also earned $2,000 per
year for each committee chaired. A total of $90,667 was earned by our
non-employee directors as a group for this period. Our non-employee directors
are reimbursed for transportation and other out-of-pocket expenses incurred for
attendance at meetings of the board of directors and committee meetings. Pension Benefits Retirement benefits for the executive officers of the Company are provided
under the Companys pension plan (the Pension Plan) for all salaried
employees. The Pension Plan benefits are based on career average earnings,
accrued at 1.5% of yearly maximum pensionable earnings (YMPE), plus 2% of
gross earnings over YMPE. Benefits for all service accrued to December 31, 1994
are based on this same formula, but using average compensation over the
previous five-year period and the YMPE over the previous three-year period.
Compensation covered by the plan is the gross earnings as disclosed in the
Summary Compensation Table. The benefits are computed on a guaranteed five-year
life annuity, with no deduction for any other pension benefits received or
other offset amount. 31




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##### 



No pension benefits were paid by the Company in the financial year ended
December 31, 2003 to the Named Executive Officers. The actual credited years of
service and estimated annual benefits payable upon retirement at normal
retirement age (65 years) for the Named Executive Officers are as follows: Credited Years of Service
    
    Estimated Annual BenefitBrian E. Ainsworth
    
    
    44
    
    
    $
    88,200D. Allen Ainsworth
    
    
    44
    
    
    $
    85,300Catherine E. Ainsworth
    
    
    24
    
    
    $
    79,300D. Michael Ainsworth
    
    
    15
    
    
    $
    72,300Douglas I. Ainsworth
    
    
    15
    
    
    $
    74,900
 C. Board Practices See Item 6A for information on the term of office of the Companys
directors and executive officers and the period served in such offices. Employment Agreements We do not have any employment or management contracts or termination
arrangements with any of the officers identified above in Item 6.A, other
members of our administrative, supervisory or management bodies, or our
directors, except as described below. On April 25, 1999, we entered into a management and consulting agreement
with 2468 Holdings Ltd., a company controlled by Brian Ainsworth, our Chairman
and Chief Executive Officer. The management and administrative services under
the agreement are to be performed by Brian Ainsworth or such other individual
as we and 2468 Holdings determine from time to time. In consideration for the
services, we must pay 2468 Holdings an annual fee, currently $468,750, plus
such annual bonus as may be determined by the compensation committee of our
board of directors. The agreement is for an indefinite term, subject to the
right of either party to terminate it in accordance with its provisions. 2468
Holdings may terminate the agreement on 30 days written notice to us. We may
terminate the agreement at any time for cause. We may also terminate the
agreement at any time without cause by payment of a cancellation payment equal
to two times the annual fee for the year in which the termination occurs plus
two times the last bonus payable prior to the termination. In any event, the
agreement is to terminate upon the death of Brian Ainsworth, unless 2468
Holdings is able to provide a replacement representative acceptable to us. Committees Of The Board Of Directors Our board of directors has an audit committee, compensation committee and
a corporate governance committee. Audit Committee The members of the audit committee are Ron B. Anderson, K. Gordon Green
and W. Gordon Lancaster. The Audit Committee is responsible for reviewing our
financial reporting obligations, approving our external audit plan and meeting
with our external auditors to review performances. This committee reviews
applicable accounting procedures and appropriate internal controls and
procedures. The audit committee meets with our external auditors at least once
each fiscal quarter, and reviews interim results and the annual financial
statements prior to their approval by the Board of Directors. It also
meets with the external auditors independently of management and is ultimately
responsible for retaining and remunerating the external auditors. Compensation Committee The members of the compensation committee are Ron B. Anderson, K. Gordon
Green and W. Gordon Lancaster. The compensation committee meets and makes
recommendations to the board of directors relating to the compensation for
senior executives and for directors fees. 32




---



##### 



Corporate Governance Committee The members of the corporate governance committee are Morley Koffman, Ron
B. Anderson, K. Gordon Green and W. Gordon Lancaster. The corporate governance
committee is responsible for making representations to the Board of Directors
with respect to developments in the area of corporate governance and the
practices of the Board of Directors. It is the responsibility of the Corporate
Governance Committee to review, interview and recommend new potential Board
members as well as review, interview and recommend new potential Board members
as well as reviewing on an annual basis the credentials of all nominees for
re-election to the Board. This Committee assesses the effectiveness of the
Board as a whole, the committees of the Board and the contributions of
individual directors. Orientation and education of new Board members is
conducted by meetings by any new Board member with the Chief Executive Officer,
the Chief Financial Officer and other long-standing Board members to assist any
new director in learning about our key assets and about the industry in which
we are involved. D. Employees We currently employ approximately 900 people. Approximately 510 of our
hourly employees in British Columbia are covered under a collective bargaining
agreement with the Industrial Wood and Allied Workers of Canada. This agreement
expires on June 30, 2009. Our 155 salaried employees in British Columbia
include sales, woodlands, manufacturing, supervisory and administrative
personnel. We employ approximately 205 people in our Alberta operations. In
addition, Footner employs approximately 190 people at the jointly-owned High
Level OSB facility. We also engage independent contractors in British Columbia
and Alberta, who provide logging, trucking and road building services on a
year-round basis. E. Share Ownership Share Capital Structure We have an authorized capital consisting of 201,500,000 shares divided as
follows:  
    
    100,000,000 common shares without par value;  
    
    1,500,000 Class B Common Shares without par value, of which 350,000
are designated as Series 1 Class B Common Shares, 180,000 are designated
Series 2 Class B Common Shares and 187,500 are designated Series 3 Class
B Common Shares; and  
    
    100,000,000 preferred shares without par value, of which 300,000 are
designated as Series 1 Preferred Shares (all issued but subsequently
redeemed) and 4,000,000 are designated as Series 2 Preferred Shares (all
issued but subsequently redeemed). Only the common shares carry voting rights, with each common share
carrying the right to one vote. As of May 7, 2004, 14,660,064 common shares
were issued and outstanding. 33




---



##### 



The following table sets out information as at May 7, 2004 on ownership of
our common shares by our Named Executive Officers, directors and any person who
beneficially owns 5% or more of either class. At December 31, 2003 there were
no outstanding stock options. Common Shares beneficiallyName and positions
    
    owned or controlled
    
    % of ClassBrian E. Ainsworth
    
    
    2,507,186
    (1)
    
    
    17.21
    %Chairman, Chief Executive Officer and DirectorD. Allen Ainsworth
    
    
    2,757,186
    (2)
    
    
    18.93
    %President and DirectorCatherine E. Ainsworth
    
    
    53,200
    (3)
    
    
    0.37
    %Chief Operating Officer,
Secretary and DirectorD. Michael Ainsworth
    
    
    7,813
    
    
    
    0.01
    %Vice President, Marketing and Business DevelopmentDouglas I. Ainsworth
    
    
    150
    
    
    
    0.01
    %Senior Vice President, MarketingDavid Ainsworth
    
    
    3,129,188
    (4)
    
    
    21.48
    %DirectorSusan Ainsworth
    
    
    
    
    
    
    DirectorK. Gordon Green
    
    
    8,888
    
    
    
    0.05
    %DirectorMorley Koffman
    
    
    12,888
    
    
    
    0.07
    %DirectorW. Gordon Lancaster
    
    
    2,000
    
    
    
    0.01
    %DirectorGrant Forest Products Corp.(5)
    
    
    4,849,600
    
    
    
    33.2
    %All directors and executive officers as a group (12 people) own 8,487,012 common shares
    (1)
    
    These shares are controlled through 2468 Holdings Ltd.(2)
    
    These shares are controlled through 5678 Enterprises Ltd.(3)
    
    Catherine Ainsworth owns 53,200 common shares and also owns 4% of the
outstanding voting shares of 1234 Holdings Ltd., which owns 3,108,188
common shares. The common shares owned by 1234 Holdings Ltd. are to be
voted by Catherine Ainsworth as that companys representative to
proceedings of the Companys shareholders.(4)
    
    David Ainsworth owns 21,000 common shares. David Ainsworth owns 94% of
the outstanding voting shares of 1234 Holdings Ltd. which owns 3,108,188
common shares. The common shares owned by 1234 Holdings Ltd. are to be
voted by Catherine Ainsworth as that companys representative to
proceedings of the Companys shareholders.. Stock Options We have separate stock option plans for employees and non-employee
directors. The plans provide that the board of directors may grant options to
purchase common shares on terms that the directors may determine, within the
limitations of the plans and subject to the rules of applicable regulatory
authorities. The aggregate number of common shares reserved for issuance under
each plan is fixed at 500,000 common shares for the employees plan and 75,000
common shares for the directors plan. The exercise price for an option granted
under the plans will be determined by the board of directors but may not be
less than the closing price of our common shares on the stock exchange on which
our common shares principally traded on the day immediately preceding the date
of grant. Options granted under the plans are not assignable, except by will or
the laws of descent and distribution. The options are exercisable as to 20% of
the optioned shares on the date of grant and as to a further 20% of the
optioned shares on each of the first, second, third and fourth anniversaries
following the date of grant. The term of each option is five years, subject to
earlier termination in the event the optionee
ceases to be a director or employee by reason of death or termination of
directorship or employment. We do not provide any financial assistance to
optionees in order to facilitate the purchase of common shares pursuant to the
exercise of options granted under the plans. At December 31, 2003 there were
no outstanding stock options granted under the plans. 34




---



##### 



Employee Participation Share Plan An aggregate of 1.5 million Class B Common Shares are authorized for
issuance of which 717,500 have been designated for our employee participation
share plan. The plan is a significant element in compensation for our senior
executives and non-employee directors. It provides that the board of directors
may permit designated directors and senior employees to acquire Class B Common
Shares on the terms set forth in the plan. The Class B Common Shares may be
issued in series under the plan and 1.5 million common shares have been
reserved for issuance to provide for the conversion of the Class B Common
Shares into common shares. The plan provides that each series of Class B Common Shares will be
exchanged automatically on a date fixed by the board of directors for that
number of common shares that has value on the date of exchange equal to the
amount of any increase in the value from the date fixed by resolution of the
board of directors when authorizing the issuance of the Class B Common Shares
of an equal number of common shares. In the event of termination of the
employment and offices of a holder of Class B Common Shares, the date of
exchange will be accelerated and the number of vested shares held is subject to
reduction. We can redeem Class B Common Shares issued pursuant to the plan at
any time upon payment of the amount paid up and any declared but unpaid
dividends. In 2001, the holders of the Class B Common Shares issued on December 18,
1996 became entitled under the plan to exchange their Class B Common Shares for
common shares. On January 16, 2003 we issued 3,162 common shares at a deemed
issue price of $4.99 per common share, in exchange for the Class B common
shares issued on December 18, 1996. In 2003, the holders of the Class B Common
Shares issued on August 11, 1998 became entitled under the plan to exchange
their Class B Common Shares for common shares. On April 28, 2003 we issued
15,586 common shares at a deemed issue price of $3.50 per common share, in
exchange for Class B common shares issued on August 11, 1998. We then cancelled
the Class B common shares issued pursuant to the plan. On July 21, 2003 we
issued 600 common shares at a deemed issue price of $3.80 per common share
followed by the issuance of 800 common shares on November 30th at a deemed
issue price of $6.47 per common share, in exchange for Class B common shares
issued on June 25, 1999.On March 29, 2004 the company issued 95,116 common
shares in exchange for the remaining 107,500 Class B common shares which were
outstanding at December 31, 2003. At May 7, 2004, there were no Class B common
share outstanding. 
 ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS A. Major Shareholders We have an authorized capital consisting of 201,500,000 shares divided as
follows:  
    
    100,000,000 common shares without par value;
    
    1,500,000 Class B Common Shares without par value, of which
350,000 are designated as Series 1 Class B Common Shares, 180,000 are
designated Series 2 Class B Common Shares and 187,500 are designated
Series 3 Class B Common Shares; and
    
    100,000,000 preferred shares without par value, of which
300,000 are designated as Series 1 Preferred Shares (all issued but
subsequently redeemed) and 4,000,000 are designated as Series 2
Preferred Shares (all issued but subsequently redeemed). Only the common shares carry voting rights, with each common share
carrying the right to one vote. As of May 7, 2004, 14,660,064 common shares
were issued and outstanding. The shares held by our major shareholders do not
have different voting rights. As of April 30, 2004, 2.1% of our common shares
were held of record by 3 holders with addresses in the United States. To the knowledge of the directors or senior officers of the Company, no
person beneficially owns, directly or indirectly or exercises control or
direction over, common shares carrying more than 5% of the voting rights
attached to the Companys issued and outstanding common shares as at May 7,
2004, except as follows: Percentage ofName
    
    Number of Shares
    
    Outstanding SharesGrant Forest Products Corp.(1)
    
    
    4,849,600
    
    
    
    33.1
    %1234 Holdings Ltd.(2)
    
    
    3,108,188
    
    
    
    21.2
    %5678 Enterprises Ltd.(3)
    
    
    2,757,186
    
    
    
    18.8
    %2468 Holdings Ltd.(4)
    
    
    2,507,186
    
    
    
    17.1
    %
 35




---



##### 



(1)
    
    96% of the outstanding voting shares of 1234 Holdings Ltd. are owned by
David Ainsworth and the remainder are owned by Catherine Ainsworth. The
Common Shares owned by 1234 Holdings Ltd. are voted by Catherine Ainsworth
as that companys representative in relation to proceedings of the
Companys shareholders. David Ainsworth also owns personally an additional
20,000 Common Shares and Catherine Ainsworth owns personally an additional
53,200 Common Shares.(2)
    
    98% of the outstanding voting shares of 5678 Enterprises Ltd. are owned
by D. Allen Ainsworth and the remainder are owned by his two sons.(3)
    
    95% of the outstanding voting shares of 2468 Holdings Ltd. are owned by
Brian E. Ainsworth and the remainder are owned by his son and a family
trust. B. Related Party Transactions The following table set outs information on indebtedness since January 1,
2003 to us of any person who served as an officer or director during the year
ended December 31, 2003, including their associates and companies controlled by
them. As at December 31, 2003, the aggregate indebtedness owed to us by these
persons was $479,591. Largest Amount
    
    Amount Outstanding as atInvolvement of Issuer or
    
    Outstanding During
    
    December 31,Name and Principal Position
    
    Subsidiary
    
    2003
    
    2003D. Allen Ainsworth(1)
    
    Lender
    
    $
    479,591
    
    
    $
    479,591
  (1)
    
    The indebtedness is of Snow Mountain Contracting Ltd., a company owned by
D. Allen Ainsworth. The advances bear interest at the same rate that we
receive on our bankers acceptances and are unsecured and repayable on
demand. During the year, the company paid $120,000 in rental charges, for mobile
forestry and transportation equipment, to a company owned by persons related to
a director of the company. C. Interests of experts and counsel Information not required for annual report. 
 ITEM 8. FINANCIAL INFORMATION A. Consolidated Financial Statements and Other Financial Information See Item 18 36




---



##### 



B. Significant Changes No significant changes have occurred since the date of the annual
financial statements provided herein. 
 ITEM 9. THE OFFER AND LISTING A. Offer and Listing Details Senior Secured Notes There is currently no organized public market for the 6.75% Senior
Unsecured Notes, the 12.50% Senior Secured Notes or the 13.875% Senior Secured
Notes, and the Company does not intend to apply for a listing of the Senior
Secured Notes on any securities exchange. The 6.75% Senior Unsecured Notes were issued under an Indenture dated as
of March 3, 2004 between the Company and the Bank of New York, as trustee. The
12.50% Senior Secured Notes were issued under an Indenture dated as of July 10,
1997 between the Company and the Bank of New York, as trustee. The 13.875%
Senior Secured Notes were issued under an Indenture between the Company and the
Bank of Nova Scotia Trust Company of New York as the trustee. Common Shares The Companys common shares are traded on The Toronto Stock Exchange under
the symbol ANS.TO. Using information from published sources the following
information shows the high and low trading values of the Companys common
shares for the periods indicated: Annual Share Price Information For the year ended
    
    High
    
    LowDecember 31, 2003
    
    $
    12.66
    
    
    $
    3.00December 31, 2002
    
    $
    6.00
    
    
    $
    3.00December 31, 2001
    
    $
    6.25
    
    
    $
    3.10December 31, 2000
    
    $
    8.30
    
    
    $
    3.75December 31, 1999
    
    $
    12.85
    
    
    $
    2.80
 Quarterly Share Price Information For the quarter ended
    
    High
    
    LowMarch 31, 2004
    
    $
    29.90
    
    
    $
    12.20December 31, 2003
    
    $
    12.66
    
    
    $
    6.20September 30, 2003
    
    $
    8.05
    
    
    $
    4.50June 30, 2003
    
    $
    4.40
    
    
    $
    3.00March 31, 2003
    
    $
    4.30
    
    
    $
    3.35December 31, 2002
    
    $
    4.10
    
    
    $
    3.00September 30, 2002
    
    $
    4.95
    
    
    $
    3.26June 30, 2002
    
    $
    5.75
    
    
    $
    4.00
 Monthly Share Price Information For the month ended
    
    High
    
    LowApril 30, 2004
    
    $
    30.00
    
    
    $
    26.57March 31, 2004
    
    $
    29.95
    
    
    $
    25.75February 28, 2004
    
    $
    28.88
    
    
    $
    14.49January 31, 2004
    
    $
    15.91
    
    
    $
    11.88December 31, 2003
    
    $
    12.95
    
    
    $
    11.12November 30, 2003
    
    $
    12.50
    
    
    $
    6.50
 37




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##### 



B.
    
    Plan of DistributionInformation not required for annual report.C.
    
    MarketsThe Companys common shares are traded on The Toronto Stock Exchange under
the symbol ANS.TO.D.
    
    Selling ShareholdersInformation not required for annual report.E.
    
    DilutionInformation not required for annual report.F.
    
    Expenses of the issueInformation not required for annual report. 
 ITEM 10. ADDITIONAL INFORMATION  A.
    
    Share CapitalInformation not required for annual report.B.
    
    Memorandum and ArticlesInformation disclosed in Item 10.B of the annual report on Form 20-F for the
fiscal year ended December 31, 2001, as filed by the Company with the SEC on
May 17, 2002 is hereby incorporated by reference herein.C.
    
    Material contracts Contract No.
    
    Description1.
    
    Memorandum of Agreement (MOU) between Ainsworth and Grant dated December
9, 1999This agreement provides a broad outline for formal agreements
relating to the operation of High Level OSB mill. Among other things,
the MOU states that the operation will be jointly funded by both
parties allowing for an even share of the mills production. The MOU
also details the provision for a shotgun buy-sell provision and the
rights of both parties in the event of such an occurrence.2.
    
    First Supplement Indenture
made as of the 14th day of February 2001 among
the Company, Steen River and the Bank of New York, as trustee.With the written consent of the holders of the majority of the
Companys 12 1⁄2% Senior Secured Notes due July 15, 2007, the
Company, Steen River Forest Products Ltd. (Steen River) and The
Bank of New York, as trustee, entered into a First Supplemental
Indenture made as of the 14th day of February 2001 under which the
terms of the Companys Senior Secured Notes were amended to include
the following:
  (a)
    
    to expressly permit the Company and Steen River to
incur up to Cdn $52,000,000 of debt for the High Level OSB
project under a credit agreement (the High Level Credit
Agreement) with HSBC Capital (Canada) Inc. and B.C. Pacific
Capital Corp., and any renewal and replacement of the same
having a term until February 15, 2003;(b)
    
    to expressly permit the Company and Steen River to
grant first charge security over the High Level OSB project to
secure borrowings under the High Level Credit Agreements; 38




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##### 



(c)
    
    to expressly permit the Company to sell the issued shares
of Steen River or the Companys interest in the High
Level OSB project and to require the application of proceeds in
certain events to make an offer to purchase Senior Secured Notes
at par plus accrued interest;(d)
    
    to restrict the Company from making capital
expenditures in any fiscal year in excess of Cdn $21,000,000;(e)
    
    to permit the sale of the Clinton Operations to West
Fraser Mills Ltd;(f)
    
    to require the Company and Steen River to grant
second charge security over the High Level OSB project as
security for the Senior Secured Notes. 5.
    
    Second Supplement Indenture made as of the 20th day of December 2001,
among the Company, Steen River and the Bank of Nova Scotia Trust Company
of New York, as trustee.With the written consent of the holders of the majority of the
Companys 12 1⁄2% Senior Secured Notes due July 15, 2007, the
Company, Steen River and The Bank of Nova Scotia Trust Company of New
York, as trustee, entered into a Second Supplemental Indenture made
as of the 20th day of December 2001, under which the terms of the
Companys Senior Secured Notes were amended to include the following:
  (a)
    
    to expressly permit the Company to issue up to
US$95,000,000 aggregate principal amount of notes;(b)
    
    to expressly exclude transactions with Grant pursuant
to the buy/sell option and the right of first refusal from the
Limitation on Transactions with Affiliates covenant;(c)
    
    to expand the definition of Grant to include any
other party that becomes a party to the High Level project
arrangements; and(d)
    
    to expressly permit the Company to incorporate
certain subsidiaries and to designate them as Non-Guarantor
Restricted Subsidiaries; 6.
    
    Indenture made as of the 20th day of December 2001, among the Company,
Steen River and the Bank of Nova Scotia Trust Company of New York, as
trustee.On December 20, 2001, the Company issued US$95,000,000 aggregate
principal amount of 13.875% Senior Secured Notes due July 15, 2007,
as unconditionally guaranteed by Steen River, in a private placement
in the United States and outside the United States (the Original
Notes), under an indenture dated as of December 20, 2001, among the
Company, Steen River and the Bank of Nova Scotia Trust Company of New
York, as trustee (the Indenture). The Indenture restricts the
Companys ability and the ability of certain of its subsidiaries to:
  a)
    
    incur additional indebtedness and issue equity;
make investments;b)
    
    declare or pay dividends or make other
distributions;c)
    
    incur payment restrictions that other parties
impose;d)
    
    conduct transactions with affiliates;e)
    
    make asset sales and use proceeds from permitted
asset sales;f)
    
    make capital expenditures;g)
    
    incur liens;h)
    
    consolidate or merge with or into, or transfer
all or substantially all of the Companys assets to another
person;i)
    
    use the net proceeds from the offering of the
Original Notes; andj)
    
    modify the terms of the relationship with the
co-owner of the High Level OSB facility as expressed in the
memorandum of agreement relating to the facility. These covenants are subject to important qualifications and
limitations. For more details, see the section Description of the
Notes  Covenants contained in Amendment No. 2 to the Companys
registration statement on Form F-4 (file no. 333-83230) filed with
the United States Securities and Exchange Commission on April 15,
2002.
 39




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##### 



7.
    
    Exchange and Registration Rights Agreement made as of the 20th day of
December 2001, among the Company, Steen River and Goldman, Sachs & Co.Pursuant to an Exchange and Registration Rights Agreement dated
December 20, 2001, among the Company, Steen River and Goldman, Sachs
& Co., (the Registration Rights Agreement), the Company agreed that
holders of the Original Notes would be entitled to exchange the
Original Notes for registered notes (the Exchange Notes) with
substantially identical terms. The Exchange Notes, when issued, will
be governed by the Indenture. The Registration Rights Agreement
provided that the Company would: (i) file a registration statement by
February 19, 2002 regarding the exchange of the Original Notes for
Exchange Notes; (ii) use its best efforts to have the registration
statement declared effective by May 4, 2002; and (iii) complete the
exchange offer within 45 days after the registration statement is
declared effective.8.
    
    Indenture made as of the 3rd day of March 2004, among the Company and
The Bank of New York, as trustee .On March 3, 2004, we issued US$210,000,000 aggregate principal
amount of 6.750% Senior Secured Notes due March 15, 2014 in a private
placement in the United States and outside the United States (the
Original Notes), under an indenture dated as of March 3, 2004,
among the Company and The Bank of New York, as trustee (the
Indenture). The Indenture restricts our ability and the ability of
certain of our subsidiaries to:
  a)
    
    incur additional indebtedness and issue equity;
make investments;b)
    
    declare or pay dividends or make other
distributions;c)
    
    incur payment restrictions that other parties
impose;d)
    
    conduct transactions with affiliates;e)
    
    make asset sales and use proceeds from permitted
asset sales;f)
    
    make capital expenditures;g)
    
    incur liens;h)
    
    consolidate or merge with or into, or transfer
all or substantially all of the Companys assets to another
person; 9.
    
    Loan Agreement dated as of the 15th day of March 2004, among the Company
and GMAC Commercial Finance Corporation - CanadaOn March 15, 2004 we executed a credit agreement for a senior
secured revolving credit facility with a commercial lender. The new
credit facility is a five-year revolving credit facility permitting
maximum aggregate borrowings of $50.0 million, subject to a borrowing
base consisting of up to 85% of eligible accounts receivable plus up
to 65% of eligible raw material and finished goods inventory with
advances not to exceed 85% of the net orderly liquidation value of
the inventory.Up to $50.0 million is available to us under the new credit
facility, subject to the borrowing base, which may reduce the total
borrowings available to us. This credit facility is guaranteed by all
of our wholly-owned subsidiaries. This credit facility is secured by
all of our and any guarantors presently owned and hereafter acquired
accounts receivable and inventory. Liens and/or security interests on
our and any guarantors accounts receivable and inventory are
prohibited.This credit facility requires us to maintain at least $10.0 million
of excess availability of the borrowing base over actual borrowings
under the facility or a fixed charge coverage ratio of 1:1. In
addition, a borrowing base surplus of $5 million must be maintained
at all times.
 40




---



##### 



10.
    
    Share Purchase Agreement made as of the 14th day of April 2004, among
Boise Cascade Corporation, Abitib- Consolidated company of Canada, the
Northwestern Mutual Life Insurance Company, Allstate Insurance Company,
and Voyageur Panel Limited and Ainsworth Lumber Co. Ltd.On April 14, 2004, we entered into a definitive agreement to acquire
all of the outstanding shares of Voyageur Panel Limited, a private
Canadian company owned by Boise Cascade Corporation (47% owner),
Abitibi Consolidated Company of Canada (21% owner), the Northwestern
Mutual Life Insurance Company (17% owner) and Allstate Insurance
Company (15% owner). Our acquisition of Voyageur, which is expected
to close on May 19, 2004. In connection with the acquisition,
we will be required to pay the sellers a purchase price of
approximately US$159 million, and an additional amount of US$34
million for net working capital (subject to adjustment upon closing).
In addition, we may be required to pay up to US$10 million in
additional consideration on March 31, 2005 in the event that OSB
produced by the Voyageur facility is sold at an average price that
exceeds Cdn$275 per msf ( 3/8 basis) between the closing of the
acquisition and December 31, 2004.
  D.
    
    Exchange Controls The Investment Canada Act generally prohibits implementation of a
reviewable investment by an individual, government or agency thereof,
corporation, partnership, trust or joint venture that is not a Canadian as
defined in the Investment Canada Act (a non-Canadian), unless after review,
the minister responsible for the Investment Canada Act is satisfied that the
investment is likely to be of net benefit to Canada. An investment in common
shares of the Company by a non-Canadian (other than a WTO investor as defined
in the Investment Canada Act) would be reviewable under the Investment Canada
Act if it was an investment to acquire direct control of the Company and the
value of the assets of the Company was $5,000,000 or more. With regard to an investment in common shares of the Company by a WTO
Investor, it would be reviewable under the Investment Canada Act if it was an
investment to acquire direct control of the Company and the value of the assets
of the Company equals or exceeds a specified amount (the Review Threshold),
which is revised every year. The Review Threshold is $237 million for
investments completed in 2004 and is indexed as of the first of January every
year. A non-Canadian, whether a WTO Investor or otherwise, would acquire control
of the Company for the purposes of the Investment Canada Act if he acquired a
majority of the common shares of the Company. The acquisition of less than a
majority but one-third or more of the common shares of the Company would be
presumed to be an acquisition of control of the Company unless it could be
established the Company was not controlled in fact by the acquirer through the
ownership of common shares. Certain transactions in relation to the common shares of the Company would
be exempt from the Investment Act, including:  
    
    an acquisition of common shares of the Company by a person in
the ordinary course of that persons business as a trader or dealer
in securities;  
    
    an acquisition of control of the Company in connection with the
realization of a security interest granted for a loan or other
financial assistance and not for any purpose related to the provision
of the Investment Canada Act; and  
    
    an acquisition of control of the Company by reason of an
amalgamation, merger, consolidation or corporate reorganization
following which the ultimate direct or indirect control in fact of
the Company, though the ownership of voting interests, remains
unchanged. The Companys ability to declare and pay dividends is significantly
restricted by the covenants in the indentures governing its Senior Secured
Notes and in the documentation relating to its credit facilities.  E.
    
    Taxation The following paragraphs set forth certain Canadian federal income tax
considerations in connection with the purchase, ownership and disposition of
the Senior Secured Notes. The discussion is restricted to non-residents of
Canada who are residents of the United States and who hold such Senior Secured
Notes as capital property. The tax considerations set forth below are based
upon the provisions of the Income Tax Act(Canada), and on the Convention
between Canada and the United States of America with Respect to Taxes on Income
and on Capital, as well as regulations, rulings, judicial decisions and
administrative and assessing practices now in
effect in Canada, all of 41




---



##### 



which are subject to change. This discussion
does not take into account provincial or territorial laws of Canada, or laws of
foreign jurisdictions. The Company is not required to withhold tax from interest paid by it on
Senior Secured Notes to any non-resident of Canada with whom it is dealing at
arms length within the meaning of the Income Tax Act(Canada). Under such
laws and administrative assessing practices, no other tax on income (including
taxable capital gains) is payable in respect of the purchase, holding,
redemption or disposition of the Senior Secured Notes or the receipt of
interest or any premium thereon by holders with whom the Company deals at arms
length and who are not residents, and who are not deemed to be residents, of
Canada in any taxation year in which they hold the Senior Secured Notes, and
who do not use or hold, and are not deemed to use or hold, the Senior Secured
Notes in connection with carrying on a business in Canada, except that in
certain circumstances holders who are non-resident insurers carrying on an
insurance business in Canada and elsewhere may be subject to such taxes. The above description of Canadian income tax considerations is of a
general nature only and should not be construed as advice to any particular
holder of Senior Secured Note. Holders should consult with their Canadian tax
advisers with respect to their particular tax position.  F.
    
    Dividends and Paying AgentsInformation not required for annual report.G.
    
    Statements by ExpertsInformation not required for annual report.H.
    
    Documents on Display Any documents referred to in this annual report shall be available for
review at the registered office of the Company located at 19th Floor, 885 West
Georgia Street, Vancouver, B.C., Canada V6C 3H4. The Company is subject to
certain of the informational requirements of the Securities Exchange Act of
1934, as amended (the Exchange Act), and in accordance therewith, files
reports and other information with the SEC. As a foreign private issuer, the
Company is exempt from the rules under the Exchange Act prescribing the
furnishing and content of proxy statements, and its officers, directors and
principal shareholders are exempt from the reporting and short-swing profit
recovery provisions contained in Section 16 of the Exchange Act. As a foreign
private issuer, the Company is not required to publish financial statements as
frequently or as promptly as United States companies. The Companys reports
and other information filed with the SEC may be inspected and copied at the
public reference facilities maintained by the SEC at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the SECs regional offices at
Northwestern Atrium Center, 500 West Madison Street, 14th Floor, Chicago,
Illinois 60661-2551. Copies of such material can also be obtained from the
principal office of the SEC at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates.  I.
    
    Subsidiary InformationThis disclosure item is not applicable. 
 ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK  A.
    
    Quantitative Information About Market Risk We do not invest in market risk sensitive instruments such as derivative
financial instruments or derivative commodity instruments. 42




---



##### 



B.
    
    Qualitative Information About Market Risk We are exposed to changes in foreign currency exchange and are subject to
price risk due to changes in the market value of OSB, lumber, veneer and
plywood, such changes could adversely affect our future sales and carrying
values relating to our finished goods. Foreign Currency Rate Sensitivity A significant portion of our products are sold in U.S. dollars. Most of
our costs, other than interest payable on our senior secured notes, which is
payable in U.S. dollars, will be payable in Canadian dollars and, therefore,
our financial results are subject to foreign currency exchange rate
fluctuations. A significant appreciation in the value of the Canadian dollar in
terms of the U.S. dollar, while other factors remain constant, will cause a
relative decline in our revenues and our cash flow will be diminished. Given that the value of the Canadian dollar was US$0.7713 at December 31,
2003, we estimate that had the value of the Canadian dollar increased by
US$0.01 to US$0.7813, the value of our US dollar denominated long-term debt as
at December 31, 2003 would have decreased by approximately $7.3 million. We
also estimate that had the value of the Canadian dollar increased by US$0.01,
the annual interest payment amounts on our long-term debt as at December 31,
2003 would have decreased by approximately $0.9 million. We are not currently a party to any forward foreign currency exchange
contract, or other contract that could serve to hedge our exposure to
fluctuations in the U.S./Canada dollar exchange rate. Interest Rate Sensitivity Our U.S. dollar long-term debt is not subject in the near term to interest
rate fluctuations because the interest rate is fixed for the term of the debt. Commodity Price Sensitivity The largest markets for OSB are commodity markets in which manufacturers
compete primarily on the basis of price. Our financial performance is dependent
on the selling prices of our OSB products, which have fluctuated significantly
in the past. The markets for these products are highly cyclical and
characterized by (1) periods of excess product supply due to industry capacity
additions, increased production and other factors, and (2) periods of
insufficient demand due to weak general economic conditions. Demand for our OSB
products is primarily driven by the residential and commercial construction and
repair and remodeling industries. These industries in turn are affected by real
estate prices, interest rates, credit availability, tax policy, energy costs,
weather conditions, natural disasters and general economic conditions, all of
which are beyond our control. In addition, an increased use of just in time
inventory management in the forest products distribution chain has led to
increased volatility due to uneven buying patterns and lower field inventories
held in consuming markets. The prices of commodity sheathing OSB and plywood
have historically been unpredictable. For example, during the past five years,
monthly average prices for North Central OSB have ranged from a low of US$122
per msf (7/16 inches) to a high of US$470 per msf (7/16 inches). We are unable
to predict market conditions and selling prices for our commodity sheathing OSB
products, which may decline from current levels. The current economic downturn
in North America has had an adverse affect on demand and prices for our
commodity sheathing OSB products. Continued weakness in the market could reduce
our revenues and profitability and could affect our ability to satisfy our
obligations under our indebtedness. 
 ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES Information not required for annual report. 43




---



##### 



PART II 
 ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES  A.
    
    Indebtedness There has been no material default in the payment of principal or interest
on our outstanding indebtedness since the date of filing of our last annual
report on Form 20-F.  B.
    
    Preferred Shares We currently have no preferred shares outstanding. 
 ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS  A.
    
    On February 27, 2004 , we received the required consents from the holders
of our 12.5% Senior Secured Notes and the holders of our 13.875% Senior
Secured Notes to amend the indentures governing the senior secured notes.
The amendments will substantially eliminate all of the covenants and certain
of the events of default, and discharge and release all of the security documents.On March 3, 2004, we successfully completed a refinancing of our Senior
Secured Notes. We issued US$210 million 6.75% Senior Unsecured Notes.
Together with our existing cash balance we utilized the proceeds from the
notes to repurchase US$87.1 million of our 13.875% notes and US$182.2 million
of our 12.5% notes.B.
    
    This disclosure item is not applicable.C.
    
    By agreement made as the 12th day of February 2001, we transferred to
Steen River all of the right, title and interest of the Company in and to
the High Level OSB project in exchange for an assumption of debt and the
issuance of common shares in Steen River. Prior to amendment of the
indentures governing the 13.875% senior secured notes our interest in the
High Level OSB project was subject to a security interest granted in
connection with the issuance of our 13.875% Senior Secured Notes. The
transfer was made pursuant to Section 802 of the Indenture governing the
13.875% Senior Secured Notes.On April 24, 2001, we completed the sale of the Clinton operations to West
Fraser Mills Ltd.D.
    
    This disclosure item is not applicable.E.
    
    This disclosure item is not applicable.F.
    
    This disclosure item is not applicable. 
 ITEM 15. CONTROLS AND PROCEDURES Disclosure Controls and Procedures Disclosure controls and procedures are defined by the Securities and
Exchange Commission as those controls and other procedures that are designed to
ensure that information that we are required to disclose in reports filed or
submitted by us under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commissions rules and forms. Our management, with the
participation of our Chief Executive Officer and Chief Financial Officer, has
evaluated our disclosure controls and procedures as of the end of the period
covered by this report and determined that such disclosure controls and
procedures are effective. 44




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Internal Control Over Financial Reporting During the twelve months ended December 31, 2003, there was no change in
our internal controls over financial reporting that has materially affected, or
is reasonably likely to materially affect, our internal control over financial
reporting. The design of our system of controls and procedures is based, in part,
upon assumptions about the likelihood of future events. There can be no
assurance that the design of such system of controls and procedures will
succeed in achieving its goals under all potential future conditions,
regardless of how remote. 
 ITEM 16. AUDIT COMMITTEE FINANCIAL EXPERT; CODE OF ETHICS; ACCOUNTANT FEES AND SERVICES  A.
    
    Audit Committee Financial Expert The Board of Directors has determined that Mr. Gordon Lancaster, an
individual serving on the audit committee of the Companys Board of Directors,
is an audit committee financial expert, as that term is defined in Item
401(h)(2) of Regulation S-K under the Securities Exchange Act of 1934, as
amended. The Board of Directors has also determined that Mr. Lancaster is
independent.  B.
    
    Code of Ethics We have adopted a Code of Conduct that applies to all of our employees
including executives, senior officers and members of the board of directors.
We have attached a copy of the Code of Conduct as exhibit 14.1.  C.
    
    Principal Accountant Fees and Services Fees relating to the fiscal year ended December 31
    
    2002
    
    2003Audit Fees
    
    $
    177,720
    
    
    $
    175,000Audit-Related Fees
    
    
    27,150
    
    
    
    29,000Tax Fees
    
    
    83,000
    
    
    
    21,000Other Fees
    
    
    443,440
    
    
    
    Total
    
    $
    731,310
    
    
    $
    225,000
 The Audit Committee has adopted policies and procedures for the
pre-approval of audit related, tax services and other non-audit services
provided by the auditors. These policies and procedures are summarized below. The terms of engagement and scope of the annual audit of the financial
statements are agreed to by the Audit Committee in advance of the engagement of
the auditors in respect of the annual audit. The Audit Committee approves the
audit fees. The auditors are not permitted to provide non-audit services that would
compromise their independence or violate any laws or regulations that would
affect their appointment as auditors. They are eligible for selection to
provide non-audit services only to the extent that their skills and experience
make them a logical supplier of the services. The Audit Committee must
pre-approve the provision of all non-audit services by the auditors and will
consider regulatory guidelines in determining the scope of permitted services.
The Audit Committee has pre-approved non-audit services in respect of
individual assignments for permitted services that meet certain criteria.
Assignments outside these parameters must be specifically pre-approved by the
Audit Committee in advance of commissioning the work. In 2003, the Audit Committee of the Company approved all audit related,
tax services and other non-audit services performed by the our auditors.  D.
    
    Exemptions From Listing Standards for Audit CommitteesThis disclosure item is not applicable.E.
    
    Purchases of Equity Securities by the Issuer and its AffiliatesThis disclosure item is not applicable. 45




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##### 



PART III 
 ITEM 17. FINANCIAL STATEMENTS We have elected to provide financial statements for the financial year
ended December 31, 2003 and the related information pursuant to Item 18. 
 ITEM 18. FINANCIAL STATEMENTS Our financial statements have been prepared on the basis of accounting
principles generally accepted in Canada and comply in all material respects
with accounting principles generally accepted in the United States, except as
set forth in Selected Financial Data and Note 21 to the Consolidated
Financial Statements. Ainsworth Lumber Co. Ltd.
    
    Page No.Independent Auditors Report
    
    
    F-1Consolidated Balance Sheets as at December 31, 2003 and 2002
    
    
    F-2Consolidated Statements of Income and Retained Earnings (Deficit) for
the years ended December 31, 2003, 2002, and 2001
    
    
    F-3Consolidated Statements of Cash Flows for the years ended December 31,
2003, 2002, and 2001
    
    
    F-4Notes to the Consolidated Financial Statements
    
    
    F-5  F-17
 Steen River Forest Products Ltd.
    
    Page No.Independent Auditors Report
    
    
    F-18Consolidated Balance Sheets as at December 31, 2003 and December 31, 2002
    
    
    F-19Consolidated Statements of Operations and Deficit for the years ended
December 31, 2003 and 2002 and the period from February 14, 2001 to
December 31, 2001
    
    
    F-20Consolidated Statements of Cash Flows for the years ended December 31,
2003 and 2002 and the period from February 14, 2001 to December 31, 2001
    
    
    F-21Notes to the Consolidated Financial Statements
    
    
    F-22  F-27
 46




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##### 



ITEM 19. EXHIBITS ExhibitNumber
    
    Title1.1
    
    Articles of Incorporation of Ainsworth Lumber Co. Ltd.1.2
    
    By-laws of Ainsworth Lumber Co. Ltd.*2.1
    
    First Supplemental Indenture made
as of the 14th day of February 2001 among the Company, Steen River Forest Products
Ltd. (Steen River) and the Bank of New York, as trustee.*2.2
    
    Security Agreement and Floating Charge dated February 12, 2001 between Steen River and the Trust Company of Bank of
Montreal, as trustee (the Security Trustee).*2.3
    
    Security Pledge Agreement dated February 12, 2001 between the Company and the Security trustee.*2.4
    
    Assignment of Agreement dated February 12, 2001 between the Company and Steen River, as borrowers and the Security
Trustee.**2.5
    
    Indenture dated December 20, 2001, among the Company, Steen River and the Bank of Nova Scotia Trust Company of New
York.**2.6
    
    Exchange and Registration Rights Agreement dated December 20, 2001, among the Company, Steen River and Goldman, Sachs
& Co.2.7
    
    Indenture dated March 3, 2004, among the Company and Bank of New York.*4.1
    
    Loan Agreement dated February 12, 2001 between the Company and Steen River, as borrowers, and HSBC Capital (Canada)
Inc. and B.C. Pacific Capital Corporation, as lenders.***4.2
    
    Memorandum of Agreement dated December 9, 1999, between Ainsworth Lumber Co. Ltd. and Grant Forest Products Corp.**4.3
    
    Promissory Note in favor of Ainsworth Lumber Co. Ltd. from Snow Mtn. Contracting Ltd. in the amount of Cdn$554,216
dated February 13, 2002**4.4
    
    Promissory Note in favor of Ainsworth Lumber Co. Ltd. from 2468 Holdings Ltd. in the amount of US$259,195 dated
February 12, 2002**4.5
    
    Management and Consulting Agreement between Ainsworth Lumber Co. Ltd. and 2468 Holding Ltd. dated April 25, 19994.6
    
    Pulpwood Agreement No. 16, dated April 26, 1990 and made between the Minister of Forests of British Columbia, on
behalf of Her Majesty the Queen in Right of the Province of British Columbia and Ainsworth Lumber Co. Ltd., as
amended.***4.7
    
    Forest Licence A18700 dated March 24, 1998 and made between The Regional Manager, on behalf of Her Majesty the Queen
in Right of the Province of British Columbia and Ainsworth Lumber Co. Ltd.**4.8
    
    Letter Agreement with the Province of Alberta, dated July 16, 1999, with respect to High Level Timber Allocation**4.9
    
    Deciduous Timber Allocation No. DTAF 510001 with respect to High Level***4.10
    
    Amended Deciduous Timber Allocation No. DTAC 910001 with respect to Grande Prairie**4.11
    
    Deciduous Timber Permit DTPG 910001 with respect to Grande Prairie4.12
    
    Asset Purchase Agreement with West Fraser Mills Ltd. dated February 8, 2001μ±4.13
    
    Inter-Creditor Agreement dated December 20, 2001, among the Company, Steen River, the Trust Company of Bank of
Montreal and Computershare Trust Company of Canadaμμ±4.14
    
    Company Security Debenture dated December 20, 2001, between Ainsworth Lumber Co. Ltd. and Computershare Trust Company
of Canadaμμ±4.15
    
    Guarantor Security Debenture dated December 20, 2001, between Steen River Forest Products Ltd. and
Computershare Trust Company of Canadaμμ±4.16
    
    Securities Pledge Agreement dated December 20, 2001, between Ainsworth Lumber Co. Ltd. and Computershare Trust
Company of Canadaμμ±4.17
    
    Assignment of Memorandum of Agreement dated December 20, 2001, among the Company, Steen River and Computershare Trust
Company of Canadaμ4.18
    
    Assignment of Agreement dated February 12, 2001, as amended on December 20, 2001, among the Company, Steen River and
the Trust Company of the Bank of Montreal4.19
    
    Loan Agreement dated March 15,
2004 between Ainsworth Lumber Co. Ltd. and GMAC Commercial Finance Corporation 
Canada, as amended on May 19, 2004.4.20
    
    Share Purchase Agreement dated April 14, 2004, among Boise Cascade Corporation Abiti- Consolidated Company of
Canada, the Northwestern Mutual Life Insurance Company, Allstate Insurance Company, and Voyageur Panel Limited and
Ainsworth Lumber Co. Ltd.μμ±±4.21
    
    Executive Employment Agreement between Ainsworth Lumber Co. Ltd. and James Logan dated December 1, 20018.0
    
    List of Material Subsidiaries14.1
    
    Ainsworth Code of Ethics31.1
    
    Certification of CEO and CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 47




---



##### 



ExhibitNumber
    
    Title32.1
    
    Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
   
    
    Incorporated by reference to Amendment No. 2 to the Registration
Statement on Form F-4 filed by Ainsworth Lumber Co. Ltd. and Ainsworth
Lumber Inc. on October 29, 1997 (No. 333-7346)*
    
    Incorporated by reference to Form 20-F dated June 8, 2001**
    
    Incorporated by reference to the Registration Statement on Form F-4 filed
by Ainsworth Lumber Co. Ltd. and Steen River Forest Products Ltd. on
February 19, 2002 (No. 333-83230)***
    
    Incorporated by reference to Form 20-F filed on May 19, 2000
    
    Incorporated by reference to Form 20-F filed on June 8, 2001±μ
    
    Incorporated by reference to Amendment No.1 to the Registration
Statement on Form F-4 filed by Ainsworth Lumber Co. Ltd. and Steen
River Forest Products Ltd. on March 29, 2002 (No. 333-83230)±±
    
    Incorporated by reference to Amendment No.2 to the Registration
Statement on Form F-4 filed by Ainsworth Lumber Co. Ltd. and Steen
River Forest Products Ltd. on April 15, 2002 (No. 333-83230) 48




---



##### 



SIGNATURES Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this annual report to be signed on its
behalf by the undersigned, thereunto duly authorized. May 21, 2004AINSWORTH LUMBER CO. LTD.By:
    
    /s/ Robert AllenRobert AllenChief Financial Officer
 49




---



##### 



INDEX TO EXHIBITS ExhibitNumber
    
    Title1.1
    
    Articles of Incorporation of Ainsworth Lumber Co. Ltd.1.2
    
    By-laws of Ainsworth Lumber Co. Ltd.*2.1
    
    First Supplemental Indenture made
as of the 14th day of February 2001 among the Company, Steen River Forest Products
Ltd. (Steen River) and the Bank of New York, as trustee.*2.2
    
    Security Agreement and Floating Charge dated February 12, 2001 between Steen River and the Trust Company of Bank of
Montreal, as trustee (the Security Trustee).*2.3
    
    Security Pledge Agreement dated February 12, 2001 between the Company and the Security trustee.*2.4
    
    Assignment of Agreement dated February 12, 2001 between the Company and Steen River, as borrowers and the Security
Trustee.**2.5
    
    Indenture dated December 20, 2001, among the Company, Steen River and the Bank of Nova Scotia Trust Company of New
York.**2.6
    
    Exchange and Registration Rights Agreement dated December 20, 2001, among the Company, Steen River and Goldman, Sachs
& Co.2.7
    
    Indenture dated March 3, 2004, among the Company and Bank of New York.*4.1
    
    Loan Agreement dated February 12, 2001 between the Company and Steen River, as borrowers, and HSBC Capital (Canada)
Inc. and B.C. Pacific Capital Corporation, as lenders.***4.2
    
    Memorandum of Agreement dated December 9, 1999, between Ainsworth Lumber Co. Ltd. and Grant Forest Products Corp.**4.3
    
    Promissory Note in favor of Ainsworth Lumber Co. Ltd. from Snow Mtn. Contracting Ltd. in the amount of Cdn$554,216
dated February 13, 2002**4.4
    
    Promissory Note in favor of Ainsworth Lumber Co. Ltd. from 2468 Holdings Ltd. in the amount of US$259,195 dated
February 12, 2002**4.5
    
    Management and Consulting Agreement between Ainsworth Lumber Co. Ltd. and 2468 Holding Ltd. dated April 25, 19994.6
    
    Pulpwood Agreement No. 16, dated April 26, 1990 and made between the Minister of Forests of British Columbia, on
behalf of Her Majesty the Queen in Right of the Province of British Columbia and Ainsworth Lumber Co. Ltd., as
amended.***4.7
    
    Forest Licence A18700 dated March 24, 1998 and made between The Regional Manager, on behalf of Her Majesty the Queen
in Right of the Province of British Columbia and Ainsworth Lumber Co. Ltd.**4.8
    
    Letter Agreement with the Province of Alberta, dated July 16, 1999, with respect to High Level Timber Allocation**4.9
    
    Deciduous Timber Allocation No. DTAF 510001 with respect to High Level***4.10
    
    Amended Deciduous Timber Allocation No. DTAC 910001 with respect to Grande Prairie**4.11
    
    Deciduous Timber Permit DTPG 910001 with respect to Grande Prairie4.12
    
    Asset Purchase Agreement with West Fraser Mills Ltd. dated February 8, 2001μ±4.13
    
    Inter-Creditor Agreement dated December 20, 2001, among the Company, Steen River, the Trust Company of Bank of
Montreal and Computershare Trust Company of Canadaμμ±4.14
    
    Company Security Debenture dated December 20, 2001, between Ainsworth Lumber Co. Ltd. and Computershare Trust Company
of Canadaμμ±4.15
    
    Guarantor Security Debenture dated December 20, 2001,
between Steen River Forest Products Ltd. and
Computershare Trust Company of Canadaμμ±4.16
    
    Securities Pledge Agreement dated December 20, 2001, between Ainsworth Lumber Co. Ltd. and Computershare Trust
Company of Canadaμμ±4.17
    
    Assignment of Memorandum of Agreement dated December 20, 2001, among the Company, Steen River and Computershare Trust
Company of Canadaμ4.18
    
    Assignment of Agreement dated February 12, 2001, as amended on December 20, 2001, among the Company, Steen River and
the Trust Company of the Bank of Montreal4.19
    
    Loan Agreement dated March 15,
2004 between Ainsworth Lumber Co. Ltd. and GMAC Commercial Finance Corporation 
Canada, as amended on May 19, 2004.4.20
    
    Share Purchase Agreement dated April 14, 2004, among Boise Cascade Corporation Abiti- Consolidated Company of
Canada, the Northwestern Mutual Life Insurance Company, Allstate Insurance Company, and Voyageur Panel Limited and
Ainsworth Lumber Co. Ltd.μμ±±4.21
    
    Executive Employment Agreement between Ainsworth Lumber Co. Ltd. and James Logan dated December 1, 20018.0
    
    List of Material Subsidiaries14.1
    
    Ainsworth Code of Ethics31.1
    
    Certification of CEO and CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002




---



##### 



32.1
    
    Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
   
    
    Incorporated by reference to Amendment No. 2 to the Registration
Statement on Form F-4 filed by Ainsworth Lumber Co. Ltd. and Ainsworth
Lumber Inc. on October 29, 1997 (No. 333-7346)*
    
    Incorporated by reference to Form 20-F dated June 8, 2001**
    
    Incorporated by reference to the Registration Statement on Form F-4 filed
by Ainsworth Lumber Co. Ltd. and Steen River Forest Products Ltd. on
February 19, 2002 (No. 333-83230)***
    
    Incorporated by reference to Form 20-F filed on May 19, 2000
    
    Incorporated by reference to Form 20-F filed on June 8, 2001±μ
    
    Incorporated by reference to Amendment No.1 to the Registration
Statement on Form F-4 filed by Ainsworth Lumber Co. Ltd. and Steen
River Forest Products Ltd. on March 29, 2002 (No. 333-83230)±±
    
    Incorporated by reference to Amendment No.2 to the Registration
Statement on Form F-4 filed by Ainsworth Lumber Co. Ltd. and Steen
River Forest Products Ltd. on April 15, 2002 (No. 333-83230)




---



##### 



Independent Auditors Report To the Board of Directors of
Ainsworth Lumber Co. Ltd. We have audited the consolidated balance sheets of Ainsworth Lumber Co.
Ltd. as at December 31, 2002 and 2003 and the consolidated statements of
operations and retained earnings and cash flows for each of the years ended
December 31, 2001, 2002 and 2003. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian and United States
generally accepted auditing standards. Those standards require that we plan and
perform an audit to obtain reasonable assurance whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as at December 31, 2002 and December 31, 2003 and the results of its operations
and its cash flows for the years ended December 31, 2001, 2002 and 2003 in
accordance with Canadian generally accepted accounting principles. /s/ DELOITTE & TOUCHE LLP
Chartered Accountants
Vancouver, British Columbia
February 14, 2004 F-1




---



##### 



AINSWORTH LUMBER CO. LTD. Consolidated Balance Sheets As at December 31
(thousands of Canadian dollars) Note
    
    2002
    
    2003ASSETSCURRENT ASSETSCash and cash equivalents
    
    
    2
    
    
    $
    80,195
    
    
    $
    194,054Accounts receivable, net of allowance for doubtful
accounts of $320 (2002  $646)
    
    
    
    
    
    
    23,592
    
    
    
    30,242Inventories
    
    
    3
    
    
    
    50,906
    
    
    
    53,153Investment tax credit recoverable
    
    
    4
    
    
    
    
    
    
    
    30,060Income taxes receivable
    
    
    
    
    
    
    120
    
    
    
    Prepaid expenses
    
    
    
    
    
    
    2,655
    
    
    
    3,433157,468
    
    
    
    310,942CAPITAL ASSETS
    
    
    5
    
    
    
    369,263
    
    
    
    293,502OTHER ASSETS
    
    
    7
    
    
    
    28,321
    
    
    
    23,277$
    555,052
    
    
    $
    627,721LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIESAccounts payable
    
    
    
    
    
    $
    17,415
    
    
    $
    17,985Accrued liabilities
    
    
    
    
    
    
    36,954
    
    
    
    29,776Income taxes payable
    
    
    
    
    
    
    
    
    
    
    3,494Current portion of long-term debt
    
    
    10
    
    
    
    46
    
    
    
    25054,415
    
    
    
    51,505REFORESTATION OBLIGATION
    
    
    9
    
    
    
    4,634
    
    
    
    4,802LONG-TERM DEBT
    
    
    10
    
    
    
    440,332
    
    
    
    352,227FUTURE INCOME TAXES
    
    
    13
    
    
    
    7,300
    
    
    
    47,396506,681
    
    
    
    455,930COMMITMENTS AND CONTINGENCIES
    
    15 and 17SHAREHOLDERS EQUITYCapital stock
    
    
    11
    
    
    
    53,083
    
    
    
    53,110Contributed surplus
    
    
    
    
    
    
    375
    
    
    
    118Retained earnings (deficit)
    
    
    
    
    
    
    (5,087
    )
    
    
    118,56348,371
    
    
    
    171,791$
    555,052
    
    
    $
    627,721
 See accompanying Notes to the Consolidated Financial Statements F-2




---



##### 



AINSWORTH LUMBER CO. LTD. Consolidated Statements of Operations and Retained Earnings (Deficit) Years ended December 31
(thousand of Canadian Dollars, except share and per share data) Note
    
    2001
    
    2002
    
    2003SALES
    
    
    
    
    
    $
    326,664
    
    
    $
    356,055
    
    
    $
    481,073COSTS AND EXPENSESCosts of products sold
    
    
    
    
    
    
    244,009
    
    
    
    263,968
    
    
    
    260,915Selling and administration
    
    
    
    
    
    
    22,698
    
    
    
    21,908
    
    
    
    18,167Amortization of capital assets
    
    
    5
    
    
    
    30,377
    
    
    
    31,960
    
    
    
    32,972Write-down of capital assets
    
    
    5
    
    
    
    3,306
    
    
    
    1,044
    
    
    
    13,696300,390
    
    
    
    318,880
    
    
    
    325,750OPERATING EARNINGS
    
    
    
    
    
    
    26,274
    
    
    
    37,175
    
    
    
    155,323FINANCE EXPENSE
    
    
    12Interest charges
    
    
    
    
    
    
    (51,729
    )
    
    
    (57,151
    )
    
    
    (51,177
    )Amortization charges
    
    
    
    
    
    
    (8,278
    )
    
    
    (5,349
    )
    
    
    (4,867
    )Loss on repurchase of debt
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    (81
    )(60,007
    )
    
    
    (62,500
    )
    
    
    (56,125
    )OTHER INCOME (EXPENSE)
    
    
    
    
    
    
    2,768
    
    
    
    2,901
    
    
    
    (508
    )UNREALIZED FOREIGN EXCHANGE GAIN (LOSS) ON LONG TERM
DEBT
    
    
    
    
    
    
    (17,401
    )
    
    
    4,279
    
    
    
    76,932INCOME (LOSS) BEFORE INCOME TAXES
    
    
    
    
    
    
    (48,366
    )
    
    
    (18,145
    )
    
    
    175,622INCOME TAX EXPENSE (RECOVERY)
    
    
    13Current
    
    
    
    
    
    
    1,261
    
    
    
    1,777
    
    
    
    11,876Future
    
    
    
    
    
    
    (19,976
    )
    
    
    (2,049
    )
    
    
    40,096(18,715
    )
    
    
    (272
    )
    
    
    51,972INCOME (LOSS) FROM CONTINUING OPERATIONS
    
    
    
    
    
    
    (29,651
    )
    
    
    (17,873
    )
    
    
    123,650GAIN FROM DISCONTINUED OPERATIONS
    
    
    14
    
    
    
    4,227
    
    
    
    
    
    
    
    NET INCOME (LOSS)
    
    
    
    
    
    
    (25,424
    )
    
    
    (17,873
    )
    
    
    123,650RETAINED EARNINGS (DEFICIT), BEGINNING OF YEAR
    
    
    
    
    
    
    38,210
    
    
    
    12,786
    
    
    
    (5,087
    )RETAINED EARNINGS (DEFICIT), END OF YEAR
    
    
    
    
    
    $
    12,786
    
    
    $
    (5,087
    )
    
    $
    118,563BASIC AND FULLY DILUTED EARNINGS (LOSS) PER SHAREIncome (loss) from continuing operations
    
    
    
    
    
    $
    (2.04
    )
    
    $
    (1.23
    )
    
    $
    8.49Gain from discontinued operations
    
    
    
    
    
    
    0.29
    
    
    
    
    
    
    
    Earnings (loss) per share
    
    
    
    
    
    $
    (1.75
    )
    
    $
    (1.23
    )
    
    $
    8.49WEIGHTED-AVERAGE NUMBER OF SHARES OUTSTANDING
    
    
    
    
    
    
    14,544,800
    
    
    
    14,544,800
    
    
    
    14,558,707
 See accompanying Notes to the Consolidated Financial Statements F-3




---



##### 



AINSWORTH LUMBER CO. LTD. Consolidated Statements of Cash Flows Years ended December 31
(Thousands of Canadian dollars) Note
    
    2001
    
    2002
    
    2003CASH FLOWS FROM OPERATING ACTIVITIESIncome (Loss) from continuing operations
    
    
    
    
    
    $
    (29,651
    )
    
    $
    (17,873
    )
    
    $
    123,650Amounts not requiring an outlay of cash
Amortization of capital assets
    
    
    5
    
    
    
    30,377
    
    
    
    31,960
    
    
    
    32,972Amortization of financing costs
    
    
    
    
    
    
    1,385
    
    
    
    2,567
    
    
    
    2,568Amortization of debt discount
    
    
    
    
    
    
    721
    
    
    
    854
    
    
    
    852Unrealized foreign exchange (gain) loss; long-term
debt
    
    
    
    
    
    
    17,401
    
    
    
    (4,279
    )
    
    
    (76,932
    )Loss on repurchase of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    81Amortization of consent and commitment fees
    
    
    
    
    
    
    6,172
    
    
    
    1,929
    
    
    
    1,447Non-cash stock based compensation
    
    
    
    
    
    
    64
    
    
    
    29
    
    
    
    (230
    )Loss (gain) on disposal of capital assets
    
    
    
    
    
    
    (26
    )
    
    
    7
    
    
    
    400Writedown of capital assets
    
    
    5
    
    
    
    3,306
    
    
    
    1,044
    
    
    
    13,296Write-off of security deposits on lease termination
    
    
    
    
    
    
    
    
    
    
    980
    
    
    
    Adjustment to deferred pension assets
    
    
    
    
    
    
    (1,461
    )
    
    
    9
    
    
    
    803Change in non-current reforestation obligation
    
    
    
    
    
    
    624
    
    
    
    (218
    )
    
    
    168Utilization of investment tax credit
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    7,120Future income taxes
    
    
    
    
    
    
    (19,976
    )
    
    
    (2,049
    )
    
    
    40,096Change in non-cash operating working capital
    
    
    20
    
    
    
    (36,720
    )
    
    
    (7,530
    )
    
    
    (12,669
    )Cash provided by (used in) operating activities
    
    
    
    
    
    
    (27,784
    )
    
    
    7,430
    
    
    
    133,622Cash provided by discontinued operations
    
    
    14
    
    
    
    4,812
    
    
    
    
    
    
    
    (22,972
    )
    
    
    7,430
    
    
    
    133,622CASH FLOWS FROM INVESTING ACTIVITIESAdditions to capital assets
    
    
    
    
    
    
    (20,110
    )
    
    
    (14,113
    )
    
    
    (8,236
    )Decrease (increase) in other assets
    
    
    
    
    
    
    723
    
    
    
    (161
    )
    
    
    (144
    )Proceeds on disposals of capital assets
    
    
    
    
    
    
    201
    
    
    
    38
    
    
    
    151Discontinued operations, additions to capital assets
    
    
    
    
    
    
    (1,650
    )
    
    
    
    
    
    
    Discontinued operations, proceeds on disposal
    
    
    
    
    
    
    29,226
    
    
    
    
    
    
    
    8,390
    
    
    
    (14,236
    )
    
    
    (8,229
    )CASH FLOWS FROM FINANCING ACTIVITIESProceeds from issue of Senior Secured Notes
    
    
    
    
    
    
    151,316
    
    
    
    
    
    
    
    Redemption of Senior Secured Notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,985
    )Financing costs
    
    
    
    
    
    
    (7,007
    )
    
    
    
    
    
    
    Consent and commitment fees
    
    
    
    
    
    
    (14,164
    )
    
    
    
    
    
    
    Decrease in bank indebtedness
    
    
    
    
    
    
    (28,331
    )
    
    
    
    
    
    
    Increase (decrease) in capital lease obligations
    
    
    
    
    
    
    (270
    )
    
    
    39
    
    
    
    451101,544
    
    
    
    39
    
    
    
    (11,534
    )NET CASH INFLOW (OUTFLOW)
    
    
    
    
    
    
    86,962
    
    
    
    (6,767
    )
    
    
    113,859CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
    
    
    
    
    
    
    
    
    
    
    86,962
    
    
    
    80,195CASH AND CASH EQUIVALENTS, END OF YEAR
    
    
    
    
    
    $
    86,962
    
    
    $
    80,195
    
    
    $
    194,054SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Interest (including commitment, bonus and loan fees) paid
    
    
    
    
    
    $
    32,091
    
    
    $
    58,316
    
    
    $
    52,974Income taxes paid
    
    
    
    
    
    $
    1,253
    
    
    $
    726
    
    
    $
    1,567
 See accompanying Notes to the Consolidated Financial Statements F-4




---



##### 



AINSWORTH LUMBER CO. LTD. Notes to the Consolidated Financial Statements Years ended December 31
(Figures in tables are in thousands of Canadian dollars unless indicated otherwise) 1. SIGNIFICANT ACCOUNTING POLICIES These consolidated financial statements have been prepared in Canadian
dollars in accordance with Canadian generally accepted accounting principles
(Canadian GAAP) and include estimates and assumptions made by management.
These estimates and assumptions affect the reported amounts of assets and
liabilities and other disclosures in these consolidated financial statements.
Actual results may differ from those estimates. Canadian GAAP, in the case of the Company, differs in certain respects
from accounting principles generally accepted in the United States (U.S.
GAAP) as explained in Note 22. The significant accounting policies are: (a) Basis of consolidation These consolidated financial statements include the Companys
proportionate interest in a jointly controlled oriented strand board facility
in High Level, Alberta (Note 6) that is held by a wholly-owned subsidiary
company, Steen River Forest Products Ltd. (Steen). Steen exists for the sole
purpose of holding that interest. Steen has no operating results as all of its
operations are conducted on behalf of Ainsworth Lumber Co. Ltd. The Senior
Secured Notes (Note 10) are secured in part by priority interests on all of the
shares of Steen. (b) Cash and cash equivalents Cash and cash equivalents generally consist of cash balances with banks
and investments in high grade commercial paper with original maturities of less
than three months. (c) Inventories Logs, lumber and panel products are valued at the lower of average cost
and net realizable value. Materials and supplies are valued at cost. (d) Capital Assets Property, plant and equipment are stated at cost, including capitalized
debt financing costs, interest incurred for major projects during the period of
construction, and start-up costs. The cost of renewals and betterments that
extend the useful life of the property, plant and equipment is also
capitalized. The cost of repairs and replacements is charged to expense as
incurred. Oriented strand board facilities are amortized on the
units-of-production method based on the estimated useful life of the assets at
normal production levels over 15 years. Other panel product mills, the lumber
remanufacturing plant and other assets are amortized on the declining balance
basis at annual rates based on the estimated useful lives of the assets as
follows: Asset
    
    RateBuildings
    
    
    5
    %Machinery and equipment
    
    
    12% - 20
    %Office equipment
    
    
    15
    %
 Timber rights and logging roads are stated at cost and are amortized on
the basis of the volume of timber cut. The Company reviews the carrying values
of its capital assets on a regular basis, by reference to estimated future
operating results and undiscounted net cash flows. If the carrying value of
these assets exceeds estimated net recoverable amounts, a provision for
impairment will be made for an other than temporary decline in value. (e) Financing and debt discount costs Costs relating to long-term debt are amortized on the straight-line basis
over the term of the related debt. F-5




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##### 



AINSWORTH LUMBER CO. LTD. Notes to the Consolidated Financial Statements Years ended December 31
(Figures in tables are in thousands of Canadian dollars unless indicated otherwise) (f) Reforestation obligation Timber is harvested under various licenses issued by the Provinces of
British Columbia and Alberta. The future estimated reforestation obligation is
accrued and charged to earnings on the basis of the volume of timber cut. (g) Foreign currency translation Transactions denominated in U.S. dollars have been translated into
Canadian dollars at the approximate rate of exchange prevailing at the time of
the transaction. Monetary assets and liabilities denominated in foreign
currencies have been translated into Canadian dollars at the year-end exchange
rate. Exchange gains and losses, including unrealized foreign exchange gains
and losses on long-term debt, are included in earnings. (h) Earnings per share Earnings per share have been calculated using the weighted average number
of voting common shares outstanding during the periods. (i) Income taxes Income taxes are accounted for using the asset and liability method.
Future income taxes reflect the tax effect, using substantively enacted tax
rates, of differences between the book and tax bases of assets and liabilities
and the anticipated benefit of losses carried forward for income tax purposes. (j) Revenue recognition Revenue, net of shipping costs, is recognized upon shipment at agreed
prices to credit-approved customers, consistent with common forest industry
terms of trade. (k) Employee participation share plan The Company has an employee participation share plan which is described in
Note 11. The determination of compensatory adjustments measures the difference
between market value of the Companys Common Shares at the reporting date
compared to the market value as at the dates of issue of Class B shares and
options on the Common Shares. To the extent that these differences are
positive, notional compensatory amounts are measured and amortized over five
years, the vesting period. Any consideration paid by employees on purchase of
stock is credited to share capital. (l) Employee Benefit Plans The Company uses the projected benefit method prorated on services to
account for defined benefit pension plans earned by employees. The Company
accrues its obligations under employee benefits plans and the related costs,
net of plan assets. In determining pension expense, the unrecognized pension
surplus or liability, adjustments arising from changes in actuarial
assumptions, and experience gains and losses are being amortized on a
straight-line basis over the expected average remaining service life of the
employee group. The plan assets are valued at market values. (m) Comparative figures Certain comparative figures have been reclassified to conform to the
current year presentation. 2. CASH AND CASH EQUIVALENTS 2002
    
    2003Cash
    
    $
    29,975
    
    
    $
    2,506Cash equivalents
    
    
    50,220
    
    
    
    191,548$
    80,195
    
    
    $
    194,054
 F-6




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##### 



AINSWORTH LUMBER CO. LTD. Notes to the Consolidated Financial Statements Years ended December 31
(Figures in tables are in thousands of Canadian dollars unless indicated otherwise) 3. INVENTORIES 2002
    
    2003Logs
    
    $
    19,777
    
    
    $
    21,362Panel products
    
    
    13,312
    
    
    
    12,598Materials and supplies
    
    
    16,451
    
    
    
    19,159Lumber
    
    
    1,366
    
    
    
    34$
    50,906
    
    
    $
    53,153
 4. INVESTMENT TAX CREDIT RECOVERABLE At December 31 2003, the company recognized an unclaimed special
investment tax credit in respect of its investment in the Grande Prairie wood
processing facilities. The Company recorded the tax credit as a $37,180,000
reduction in the capital cost of the Grande Prairie assets and recognized the
portion of the tax credit to be utilized in 2003 as a $7,120,000 reduction to
federal taxes payable. 5. CAPITAL ASSETS 2002
    
    2003Net Book
    
    
    
    
    
    Accumulated
    
    Net BookValue
    
    Cost
    
    Depreciation
    
    ValueProperty, plant and equipmentPanel product mills
    
    $
    324,872
    
    
    $
    467,595
    
    
    $
    205,999
    
    
    $
    261,596Land
    
    
    1,964
    
    
    
    1,964
    
    
    
    
    
    
    
    1,964Other
    
    
    2,650
    
    
    
    11,367
    
    
    
    8,209
    
    
    
    3,158Construction in progress
    
    
    13,201
    
    
    
    1,030
    
    
    
    
    
    
    
    1,030342,687
    
    
    
    481,956
    
    
    
    214,208
    
    
    
    267,748Timber and logging roadsTimber rights and development costs
    
    
    11,773
    
    
    
    18,498
    
    
    
    7,443
    
    
    
    11,055Logging roads
    
    
    14,803
    
    
    
    22,148
    
    
    
    7,449
    
    
    
    14,69926,576
    
    
    
    40,646
    
    
    
    14,892
    
    
    
    25,754$
    369,263
    
    
    $
    522,602
    
    
    $
    229,100
    
    
    $
    293,502
 2001
    
    2002
    
    2003Amortization expense for the yearProperty, plant and equipment
    
    $
    27,832
    
    
    $
    29,560
    
    
    $
    31,128Timber and logging roads
    
    
    2,545
    
    
    
    2,400
    
    
    
    1,844$
    30,377
    
    
    $
    31,960
    
    
    $
    32,972
 In December 2003, the Company provided a write-down of capital assets of
$13.3 million in costs relating to the construction and design of the proposed
expansion of the Grande Prairie OSB operations. The company has been
unsuccessful in its attempt to secure additional long-term timber tenures.
Without confirmation of a secure timber supply, the Company has decided not to
pursue the expansion of the Grande Prairie facility at this time. 6. THE HIGH LEVEL OPERATION The Company has jointly developed an oriented strand board (OSB)
facility in High Level, Alberta. The Companys proportionate (50%) share of
major assets including plant and equipment is held by a bare trustee
corporation, on behalf of the Company, together with the 50% interest of a
third party in such assets. The Company and the third party also jointly control a company that is
responsible for log harvesting and oriented strand board production. The
Company reflects its investment in the High Level operation as an interest in
jointly controlled operations. F-7




---



##### 



AINSWORTH LUMBER CO. LTD. Notes to the Consolidated Financial Statements Years ended December 31
(Figures in tables are in thousands of Canadian dollars unless indicated otherwise) The following is a summary of the Companys proportionate interest in the
financial position and cash flow of the High Level operation: 2002
    
    2003AssetsReceivables
    
    $
    1,205
    
    
    $
    752Inventories
    
    
    5,520
    
    
    
    7,641Prepaid expenses
    
    
    298
    
    
    
    366Capital assets
    
    
    128,938
    
    
    
    123,676Current LiabilitiesExcess of cheques issued over cash in bank
    
    
    1,470
    
    
    
    1,814Accrued liabilities and accounts payable
    
    
    4,800
    
    
    
    3,609Cash FlowsCash applied to operating activities
    
    
    3,992
    
    
    
    3,816Cash used for investing activities
    
    
    3,354
    
    
    
    1,689
 Operating results to March 31, 2001 were capitalized as start-up costs
pursuant to the Companys accounting policies. By agreement between the Company and its co-venturer, if the co-venturer
does not pay its share of accounts payable and accrued liabilities, the Company
may pay such amounts and recover them from the co-venturers share of
production. The co-venturers share of accounts payable and accrued liabilities
amounted to $3,308,000 as at December 31, 2003 and $4,450,000 as at December
31, 2002. 7. OTHER ASSETS 2002
    
    2003Advances and deposits
    
    $
    5,393
    
    
    $
    5,537Accrued benefit asset (Note 16)
    
    
    4,959
    
    
    
    4,156Unamortized financing costs
    
    
    17,969
    
    
    
    13,584$
    28,321
    
    
    $
    23,277
 8. BANK LOAN FACILITIES As at December 31, 2003 the Company had outstanding letters of credit of
$6,228,000 (2002  $4,548,500) to support the Companys ongoing business
operations. The Company had an unutilized $7,250,000 foreign exchange and
future contract credit facility at December 31, 2003. 9. REFORESTATION OBLIGATION 2002
    
    2003Balance at beginning of year
    
    $
    5,771
    
    
    $
    5,679Expense for the year
    
    
    1,256
    
    
    
    2,2277,027
    
    
    
    7,906Paid during the year
    
    
    1,348
    
    
    
    1,842Balance at end of year
    
    $
    5,679
    
    
    $
    6,064Current, included in accrued liabilities
    
    $
    1,045
    
    
    $
    1,262Long-term
    
    
    4,634
    
    
    
    4,802$
    5,679
    
    
    $
    6,064
 F-8




---



##### 



AINSWORTH LUMBER CO. LTD. Notes to the Consolidated Financial Statements Years ended December 31
(Figures in tables are in thousands of Canadian dollars unless indicated otherwise) 10. LONG-TERM DEBT 2002
    
    2003U.S. $184,600,000 (2002  U.S.$186,500,000) Senior
Secured Notes due July 15, 2007 with interest payable
semi-annually at 12.5% per annum
    
    $
    294,222
    
    
    $
    239,334U.S.$89,085,000 (2002  U.S.$95,000,000) Senior Secured
Notes due July 15, 2007 with interest payable quarterly at
13.875% per annum
    
    
    149,872
    
    
    
    115,499Capital lease obligations
    
    
    97
    
    
    
    549444,191
    
    
    
    355,382Unamortized deferred debt discount
    
    
    (3,813
    )
    
    
    (2,905
    )440,378
    
    
    
    352,477Current portion
    
    
    (46
    )
    
    
    (250
    )$
    440,332
    
    
    $
    352,227
 In December 2003, the Company repurchased and cancelled U.S.$1,900,000 of
the U.S.$184,600,000 Senior Secured Notes and also repurchased and cancelled
U.S.$5,915,000 of the U.S.$89,085,000 Senior Secured Notes realizing a total
loss of $81,000. The U.S.$184,600,000 Senior Secured Notes are secured by a first priority
fixed charge on the Companys 100 Mile House and Grande Prairie mills and a
second priority floating charge on the Companys other properties and assets.
The U.S.$89,085,000 Senior Secured Notes are secured by a first priority pledge
of shares of Steen (Note 1(a)) and a first priority security interest in the
Companys Savona and Lillooet mills and the Companys current assets. The
indentures governing the Senior Secured Notes contain certain restrictions
regarding, among other things, the ability of the Company to incur additional
indebtedness and pay cash dividends. Under the terms of the indenture governing
the U.S.$89,085,000 Senior Secured Notes, the Company was required to create
the High Level Qualified Account. This account is to be funded with $10,000,000
on a monthly basis and is used as an imprest fund for the Companys
participation in the High Level operation. SUBSEQUENT EVENT On January 5, 2004 the Company made an offer to purchase up to
U.S.$53,625,000 of its outstanding Senior Secured Notes. The total
consideration for each U.S.$1,000 principal amounts for notes validly tendered
and not withdrawn was U.S.$1,060. This offer was made pursuant to the
indentures for both the U.S.$89,085,000 Senior Secured Notes and the
U.S.$184,600,000 Senior Secured Notes. The offer expired on February 5, 2004
with U.S.$70,000 validly tendered. On February 6, 2004, the Company extended
the offer period until February 26, 2004. 11. CAPITAL STOCK (a) The Companys authorized share capital is as follows: (i) 100,000,000 common shares without par value; (ii) 1,500,000 Class B non-voting common shares without par value, of
which 717,500 have been designated for an employee participation share plan.
The designated Class B common shares are convertible into the number of
common shares equivalent to the ratio of a) the greater of future
appreciation in market value of the common shares from the date the Board of
Directors of the Company resolve to issue the Class B common shares and the
issue price of the Class B common shares, divided by b) the market value of
the common shares when the conversion and completion of vesting occurs on the
fifth anniversary of issuance of the Class B common shares. Vesting occurs
equally upon the third, fourth and fifth anniversaries; and (iii) 100,000,000 preferred shares without par value, of which 300,000
have been designated Series 1 and 4,000,000 have been designated Series 2.
The Series 1 preferred shares are non-voting, redeemable at the issue price
of $10 and are entitled to a 6% non-cumulative dividend. The Series 2
preferred shares are non-voting with a cumulative dividend rate equal to 72%
of bank prime rate and are redeemable by the Company at any time or
retractable by the holder any time after five years from the date of issue. F-9




---



##### 



AINSWORTH LUMBER CO. LTD. Notes to the Consolidated Financial Statements Years ended December 31
(Figures in tables are in thousands of Canadian dollars unless indicated otherwise) (b) The Companys issued share capital is as follows: Class BCommon Shares
    
    Common SharesTotalIssued Share Capital
    
    Shares
    
    Amount
    
    Shares
    
    Amount
    
    AmountBalance at December 31, 2001 and
2002
    
    
    14,544,800
    
    
    $
    53,016
    
    
    
    447,500
    
    
    $
    67
    
    
    $
    53,083Exchange of Class B common shares
for common shares
    
    
    20,148
    
    
    
    78
    
    
    
    (222,500
    )
    
    
    (33
    )
    
    
    45Cancellation of Class B common
shares
    
    
    
    
    
    
    
    
    
    
    (117,500
    )
    
    
    (18
    )
    
    
    (18
    )Balance at December 31, 2003
    
    
    14,564,948
    
    
    $
    53,094
    
    
    
    107,500
    
    
    $
    16
    
    
    $
    53,110
 (c) Employee Participation Share Plan as at December 31, 2003 Common Share
    
    
    
    
    
    Number
    
    Class BConversion
    
    Issue
    
    of Shares
    
    Shares
    
    TotalDate Issued
    
    Base Price
    
    Price
    
    Vested
    
    Outstanding
    
    ConsiderationJune 25, 1999
    
    $
    3.00
    
    
    $
    0.15
    
    
    
    71,667
    
    
    
    107,500
    
    
    $
    16
 The market value per common share at December 31, 2003 was $12.28. During the year ended December 31, 2003 the Company issued 20,148 common
shares to the holders of 222,500 Class B common shares issued on December 18,
1996 and August 11, 1998 who became entitled under the Employee Participation
Share Plan to receive common shares in exchange for those Class B common
shares. The Company then cancelled 55,000 Class B common shares issued on December
18, 1996 and August 11, 1998 pursuant to the Plan and also cancelled 62,500
Class B common shares issued on June 25, 1999. 12. FINANCE EXPENSE 2001
    
    2002
    
    2003Current debt
    
    $
    17,362
    
    
    $
    276
    
    
    $
    35Loss on Repurchase of Debt
    
    
    
    
    
    
    
    
    
    
    81Long-term debt
    
    
    42,645
    
    
    
    62,224
    
    
    
    56,009$
    60,007
    
    
    $
    62,500
    
    
    $
    56,125
 Finance expense on long-term debt includes the amortization of deferred
financing costs, amortization of deferred debt discounts, and amortization of
consent and commitment fees as follows: $2,568,062, $852,275, and $1,446,281
respectively, for the year ended December 31, 2003; $2,566,750, $853,692, and
$1,929,035 respectively, for the year ended December 31, 2002; and $1,384,502,
$791,454 and $6,171,895 respectively, for the year ended December 31, 2001. 13. INCOME TAXES The adjusted income (loss) for purposes of providing for income taxes is: 2001
    
    2002
    
    2003Income (loss) from continuing operations before income
taxes
    
    $
    (48,366
    )
    
    $
    (18,145
    )
    
    $
    175,622Non (taxable) deductible items
    
    
    9,775
    
    
    
    13,532
    
    
    
    (35,149
    )Adjusted income (loss)
    
    $
    (38,591
    )
    
    $
    (4,613
    )
    
    $
    140,473
 F-10




---



##### 



AINSWORTH LUMBER CO. LTD. Notes to the Consolidated Financial Statements Years ended December 31
(Figures in tables are in thousands of Canadian dollars unless indicated otherwise) A reconciliation of the statutory tax rate to the effective tax rate on
adjusted income (loss) is as follows: 2001
    
    %
    
    2002
    
    %
    
    2003
    
    %Federal income tax, net
    
    $
    (8,529
    )
    
    
    (22.1
    )
    
    $
    (1,019
    )
    
    
    (22.1
    )
    
    
    31,044
    
    
    
    (22.1
    )Provincial taxes, net
    
    
    (6,020
    )
    
    
    (15.6
    )
    
    
    (720
    )
    
    
    (15.6
    )
    
    
    18,542
    
    
    
    (13.2
    )Tax expense (recovery)
    
    
    (14,549
    )
    
    
    (37.7
    )
    
    
    (1,739
    )
    
    
    (37.7
    )
    
    
    49,586
    
    
    
    (35.3
    )Large corporation tax
    
    
    1,261
    
    
    
    3.2
    
    
    
    1,777
    
    
    
    38.5
    
    
    
    1,123
    
    
    
    (0.8
    )Prospective effect of change of
enacted rates
    
    
    (3,093
    )
    
    
    (7.9
    )
    
    
    
    
    
    
    Other
    
    
    (2,334
    )
    
    
    (6.0
    )
    
    
    (310
    )
    
    
    (6.7
    )
    
    
    1,263
    
    
    
    (0.9
    )Tax expense (recovery)
    
    $
    (18,715
    )
    
    
    (48.4
    )
    
    $
    (272
    )
    
    
    (5.9
    )
    
    $
    51,972
    
    
    
    (37.0
    )Comprised of:Current taxes
    
    $
    1,261
    
    
    
    
    
    
    $
    1,777
    
    
    
    
    
    
    $
    11,876Future income taxes
    
    
    (19,976
    )
    
    
    
    
    
    
    (2,049
    )
    
    
    
    
    
    
    40,096$
    (18,715
    )
    
    
    
    
    
    $
    (272
    )
    
    
    
    
    
    $
    51,972
 Temporary timing differences and tax loss carryforwards which give rise to
the net future income tax liability are as follows: 2002
    
    2003Future tax liability, netTemporary timing differencesDepreciable capital assets
    
    $
    31,617
    
    
    $
    45,679Eligible capital expenditures
    
    
    (374
    )
    
    
    (3,454
    )Deferred pension costs
    
    
    1,766
    
    
    
    1,463Financing costs
    
    
    (12,181
    )
    
    
    7,956Accruals not currently deductible
    
    
    (2,364
    )
    
    
    (2,298
    )Other
    
    
    (385
    )
    
    
    Tax loss carryforwards
    
    
    (11,153
    )
    
    
    (1,950
    )Future income tax liability
    
    $
    7,300
    
    
    $
    47,396
 Capital losses of $10,500,000 can be carried forward indefinitely to be
applied against future capital gains.  14.
    
    DISCONTINUED OPERATIONS On April 24, 2001, the Company completed the sale of its Chasm lumber
operations to West Fraser Mills Ltd. Results of discontinued operations, including an allocation of applicable
indirect expenses, are as follows: 2001Sales
    
    $
    15,402Operating expenses
    
    
    12,730Depreciation and amortization
    
    
    Operating income
    
    
    2,672Administration expenses
    
    
    (123
    )Income tax expense
    
    
    (908
    )Net income
    
    
    1,641Gain on disposition, net of related taxes of $1,430
    
    
    2,586Gain from discontinued operations
    
    $
    4,227
 Cash provided by discontinued operations are as follows: 2001Net income from discontinued operations
    
    $
    4,227Items not requiring an outlay of cashGain on disposal of assets
    
    
    (4,015
    )Reforestation obligation
    
    
    877Future income taxes
    
    
    2,3383,427Change in non-cash operating working capital
    
    
    1,385Cash provided by discontinued operations
    
    $
    4,812
 F-11




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##### 



AINSWORTH LUMBER CO. LTD. Notes to the Consolidated Financial Statements Years ended December 31
(Figures in tables are in thousands of Canadian dollars unless indicated otherwise) In addition to cash proceeds of $29,226,000 for discontinued operations
disclosed in the consolidated statement of cash flows, long-term reforestation
obligations of $9,200,000 were assumed by the purchaser without cash effect. 15. COMMITMENTS The Company is committed to capital and operating lease payments in
respect of premises and equipment as follows: Capital
    
    OperatingLeases
    
    Leases2004
    
    $
    271
    
    
    $
    2,7352005
    
    
    347
    
    
    
    1,5502006
    
    
    
    
    
    
    4612007
    
    
    
    
    
    
    2182008
    
    
    
    
    
    
    Total minimum lease payments
    
    $
    618
    
    
    $
    4,964Imputed interest
    
    
    69Capital lease obligations
    
    $
    549
 Rent expense was $5,125,000, $5,627,000 and $4,317,298 for 2001, 2002 and
2003, respectively. The Company has entered into agreements with suppliers of energy. The
Companys Grande Prairie and High Level OSB facilities have established fixed
price contracts to purchase 10.95 megawatt hours (MWh) in 2004 and 7.25 MWh in
2005. The total commitment arising from these agreements is $4,500,000 in 2004
and $2,800,000 in 2005. During 2003, the Company entered into a fixed price propane supply
agreement which expires September 30, 2006. Based on the current annual
consumption, the estimated obligation in 2004 and 2005 are both $1,725,000 and
$1,365,000 in 2006. The Company also entered into fixed price natural gas
purchase contracts which expire in 2004. The total outstanding commitment in
respect of these contracts is $100,000. 16. PENSION PLANS The Company maintains a defined benefit pension plan for certain salaried
and certain hourly employees. The Company also participates in a multi-employer pension plan for hourly
employees who are subject to a collective bargaining agreement and sponsors a
Group Registered Retirement Savings Plan (RRSP) at two of its operations. The
Company made Group RRSP contributions of $2,347,000 for 2001, $1,155,000 for
2002 and $1,164,000 for 2003. Information about the Companys defined benefit pension plan is as
follows: 2001
    
    2002
    
    2003PLAN ASSETSFair value at beginning of year
    
    $
    41,588
    
    
    $
    27,718
    
    
    $
    25,801Return on plan assets
    
    
    2,687
    
    
    
    1,923
    
    
    
    1,757Employer contributions
    
    
    1,392
    
    
    
    1,701
    
    
    
    1,466Transfer of assets due to settlement, sale of
Chasm operations
    
    
    (9,716
    )
    
    
    
    
    
    
    Benefits paid
    
    
    (3,047
    )
    
    
    (2,185
    )
    
    
    (2,865
    )Experience (loss) gain
    
    
    (5,186
    )
    
    
    (3,356
    )
    
    
    741Fair value at end of year
    
    
    27,718
    
    
    
    25,801
    
    
    
    26,900ACCRUED BENEFIT OBLIGATIONBalance at beginning of year
    
    
    38,553
    
    
    
    28,934
    
    
    
    30,760Current service cost
    
    
    1,612
    
    
    
    1,419
    
    
    
    1,506Interest cost
    
    
    2,219
    
    
    
    2,048
    
    
    
    2,158Benefits paid
    
    
    (3,047
    )
    
    
    (2,185
    )
    
    
    (2,865
    )
 F-12




---



##### 



AINSWORTH LUMBER CO. LTD. Notes to the Consolidated Financial Statements Years ended December 31
(Figures in tables are in thousands of Canadian dollars unless indicated otherwise) 2001
    
    2002
    
    2003Plan improvement cost
    
    
    
    
    
    
    544
    
    
    
    Adjustment to discount rate
    
    
    
    
    
    
    
    
    
    
    2,100Liabilities released due to settlement, sale of
Chasm operations
    
    
    (10,403
    )
    
    
    
    
    
    
    Balance at end of year
    
    
    28,934
    
    
    
    30,760
    
    
    
    33,659NET DEFICIT, END OF YEAR
    
    $
    (1,216
    )
    
    $
    (4,959
    )
    
    $
    (6,759
    )ACCRUED BENEFIT ASSET IS COMPRISED OF:Funded Status  Plan Deficit
    
    $
    (1,216
    )
    
    $
    (4,959
    )
    
    $
    (6,759
    )Unamortized net actuarial loss
    
    
    8,599
    
    
    
    11,619
    
    
    
    12,476Unamortized transitional asset
    
    
    (2,415
    )
    
    
    (2,245
    )
    
    
    (2,070
    )Unamortized past service cost
    
    
    
    
    
    
    
    
    
    
    509Plan improvement cost
    
    
    
    
    
    
    544
    
    
    
    Accrued Benefit Asset
    
    $
    4,968
    
    
    $
    4,959
    
    
    $
    4,156PENSION EXPENSE IS COMPRISED OF:Accrual for Services
    
    $
    1,612
    
    
    $
    1,418
    
    
    
    1,506Interest on accrued benefits
    
    
    2,219
    
    
    
    2,048
    
    
    
    2,158Interest on pension fund assets
    
    
    (2,687
    )
    
    
    (1,923
    )
    
    
    (1,757
    )Amortization amountsUnfunded liability (surplus)
    
    
    (192
    )
    
    
    (173
    )
    
    
    (173
    )Experience gains and losses
    
    
    22
    
    
    
    336
    
    
    
    503Past service costs
    
    
    
    
    
    
    
    
    
    
    32Gain (Loss) on Settlement
    
    
    (687
    )
    
    
    
    
    
    
    Unamortized transition obligation recognized due
to Settlement
    
    
    (875
    )
    
    
    
    
    
    
    Unamortized experience gains / losses recognized
due to Settlement
    
    
    1,185
    
    
    
    
    
    
    
    $
    597
    
    
    $
    1,707
    
    
    $
    2,269
 The significant weighted-average actuarial assumptions adopted in
measuring the Companys accrued benefit obligations as at December 31 included
the following: 2001
    
    2002
    
    2003Discount rate
    
    
    7.0
    %
    
    
    7.0
    %
    
    
    6.5
    %Expected long-term rate of return on plan assets
    
    
    8.0
    %
    
    
    7.0
    %
    
    
    7.0
    %Rate of compensation increase
    
    
    4.5
    %
    
    
    4.5
    %
    
    
    4.5
    %
 17. CONTINGENCIES Consistent with the nature of its business, the Company is involved in
various legal actions. In the opinion of management, any resulting liability
would not have a material adverse effect on the Companys financial position. 18. RELATED PARTY TRANSACTIONS The Company had transactions with companies owned by or related to its
officers and directors as follows: 2001
    
    2002
    
    2003Rental charges for mobile forestry and transportation
equipment at normal commercial terms and prices
    
    $
    100
    
    
    $
    120
    
    
    $
    120Acquisition of capital assets
    
    
    
    
    
    
    22
    
    
    
    Amounts due from officers and companies with directors in
common included in other assets
    
    
    967
    
    
    
    466
    
    
    
    479Amounts due to companies with directors in common included
in accounts payable
    
    
    
    
    
    
    2
    
    
    
    
 The Companys co-venturer in the High Level operation (Note 6) is a
significant shareholder of the Company. F-13




---



##### 



AINSWORTH LUMBER CO. LTD. Notes to the Consolidated Financial Statements Years ended December 31
(Figures in tables are in thousands of Canadian dollars unless indicated otherwise) 19. SEGMENTED INFORMATION Following discontinuance of the Chasm lumber operations, the Company
operates in one business segment, manufacturing wood panel products. All capital assets are located in Canada. 2001
    
    2002
    
    2003Geographic sales information:Canada
    
    $
    49,271
    
    
    $
    69,078
    
    
    $
    84,278U.S.A.
    
    
    227,462
    
    
    
    246,928
    
    
    
    362,737Europe
    
    
    11,258
    
    
    
    6,855
    
    
    
    7,394Japan
    
    
    38,673
    
    
    
    33,194
    
    
    
    26,664$
    326,664
    
    
    $
    356,055
    
    
    $
    481,073
 20. CHANGE IN NON-CASH OPERATING WORKING CAPITAL 2001
    
    2002
    
    2003Accounts receivable
    
    $
    1,221
    
    
    $
    (1,388
    )
    
    $
    (6,650
    )Inventories
    
    
    7,400
    
    
    
    (5,440
    )
    
    
    (2,247
    )Prepaid expenses
    
    
    322
    
    
    
    (1,655
    )
    
    
    (778
    )Accounts payable and accrued liabilities
    
    
    (47,343
    )
    
    
    3,325
    
    
    
    (6,608
    )Income taxes receivable / payable
    
    
    1,680
    
    
    
    (2,372
    )
    
    
    3,614Total
    
    $
    (36,720
    )
    
    $
    (7,530
    )
    
    $
    (12,669
    )
 21. FINANCIAL INSTRUMENTS (a) Financial and credit risk The value of the Companys financial instruments will vary due to
fluctuations in interest rates and foreign exchange rates, and the degree of
volatility of these rates. The Company does not have a significant exposure to any individual
customer or counterparty. Concentrations of credit risk on trade accounts
receivable are with customers in the forestry industry in Canada and the United
States. (b) Fair values The fair value of the Companys accounts receivable, accounts payable and
accrued liabilities is estimated to approximate their carrying value due to the
immediate or short term maturity of these financial instruments. The fair value of the long-term debt is determined using quoted market
values for the Companys Senior Secured Notes. The estimated fair value may
differ from the amount which could be realized in an immediate settlement of
the instruments. The carrying value and fair value of the long term debt are as follows: 2002
    
    2003Carrying
    
    Fair
    
    Carrying
    
    FairValue
    
    Value
    
    Value
    
    ValueLONG-TERM DEBTSenior notes
    
    $
    444,094
    
    
    $
    465,333
    
    
    $
    354,833
    
    
    $
    414,041Capital leases
    
    
    97
    
    
    
    97
    
    
    
    549
    
    
    
    549$
    444,191
    
    
    $
    465,430
    
    
    $
    355,382
    
    
    $
    414,590
 F-14




---



##### 



AINSWORTH LUMBER CO. LTD. Notes to the Consolidated Financial Statements Years ended December 31
(Figures in tables are in thousands of Canadian dollars unless indicated otherwise) 22. U.S. GAAP RECONCILIATION As indicated in Note 1, these consolidated financial statements have been
prepared in accordance with Canadian GAAP, which, in the case of the Company,
conforms in all material respects with U.S. GAAP, except as set forth below: (a) Adjustments to assets, liabilities and shareholders equity 2002
    
    2003Total assets in accordance with Canadian GAAP
    
    $
    555,052
    
    
    $
    627,721Write-off of capitalized start-up costs (1)
    
    
    (10,380
    )
    
    
    (8,966
    )Intangible asset, arising from minimum pension liability
calculation (2)
    
    
    
    
    
    
    509Total assets in accordance with U.S. GAAP
    
    $
    544,672
    
    
    $
    619,264Total liabilities in accordance with Canadian GAAP
    
    $
    506,681
    
    
    $
    455,930Future
income taxes relating to write-off: of capitalized start-up costs (1)
    
    
    (3,700
    )
    
    
    (3,194
    )Minimum pension liability, net of tax effect (2)
    
    
    6,447
    
    
    
    7,273Total liabilities in accordance with U.S. GAAP
    
    $
    509,428
    
    
    $
    460,009Total shareholders equity in accordance with Canadian
GAAP
    
    $
    48,371
    
    
    $
    171,791Change in retained earnings relating to: Write-off of
capitalized start-up costs (1)
    
    
    (6,680
    )
    
    
    (5,772
    )Accumulated other comprehensive (loss) (2)
    
    
    (6,447
    )
    
    
    (6,764
    )Total shareholders equity in accordance with U.S. GAAP
    
    $
    35,244
    
    
    $
    159,255
 Consolidated Statement of Shareholders Equity Capital Stock
    
    $
    53,083
    
    
    $
    53,110Contributed surplus
    
    
    375
    
    
    
    118Accumulated other comprehensive loss (2)
    
    
    (6,447
    )
    
    
    (6,764
    )47,011
    
    
    
    46,464Retained earnings (deficit) in accordance with Canadian
GAAP
    
    
    (5,087
    )
    
    
    118,563Write-off of capitalized start-up costs (1)
    
    
    (6,680
    )
    
    
    (5,772
    )Retained earnings (deficit) in accordance with U.S. GAAP
    
    
    (11,767
    )
    
    
    112,791Shareholders equity in accordance with U.S. GAAP
    
    $
    35,244
    
    
    $
    159,255
 (b) Adjustments to earnings 2001
    
    2002
    
    2003Net income (loss) in accordance with Canadian GAAP
    
    $
    (25,424
    )
    
    $
    (17,873
    )
    
    $
    124,355Reversal of amortization of capitalized start-up costs,
net of future income taxes (1)
    
    
    (410
    )
    
    
    874
    
    
    
    677Net income (loss) in accordance with U.S. GAAP
    
    
    (25,834
    )
    
    
    (16,999
    )
    
    
    125,032Other comprehensive loss (2)
    
    
    (4,020
    )
    
    
    (2,427
    )
    
    
    (317
    )Comprehensive income (loss) in accordance with U.S. GAAP
    
    $
    (29,854
    )
    
    $
    (19,426
    )
    
    $
    124,715
 2001
    
    2002
    
    2003Basic and diluted income (loss) per share in accordance
with U.S. GAAP
    
    $
    (1.78
    )
    
    $
    (1.17
    )
    
    $
    8.57
    (1)
    
    Under U.S. GAAP, the direct operating losses arising during the start-up
phase of the oriented strand board facilities, which were capitalized
under Canadian GAAP, are charged against earnings. F-15




---



##### 



AINSWORTH LUMBER CO. LTD. Notes to the Consolidated Financial Statements Years ended December 31
(Figures in tables are in thousands of Canadian dollars unless indicated otherwise)  (2)
    
    Under U.S. GAAP the Company would recognize the difference between the
unfunded accumulated pension benefit obligation and the accrued benefit
asset (Note 16) as an additional minimum pension liability, and an equal
amount as an intangible asset, subject to the following. If the additional
liability exceeded unrecognized past service cost the excess would be
recognized as other comprehensive loss, net of any resulting tax benefits. (c) Discontinued Operations The loss from discontinued operations (Note 14) would not change if U.S.
GAAP was applied. All adjustments in (a) and (b) above relate to continuing
operations. (d) Other Information Regarding U.S. GAAP (i) Statement of Financial Accounting Standards (SFAS) No. 130,
Reporting Comprehensive Income,issued under U.S. GAAP, requires the reporting
and display of comprehensive income and its components in a full set of general
purpose financial statements. Comprehensive income, which incorporates net
income, includes all changes in equity during a period except those resulting
from investments by and distributions to owners. There is currently no
requirement to disclose comprehensive income under Canadian GAAP. Comprehensive
loss arising from minimum pension liability: 2001
    
    2002
    
    2003Amount arising in year
    
    $
    6,184
    
    
    $
    3,734
    
    
    $
    488Future income tax (recovery)
    
    
    (2,164
    )
    
    
    (1,307
    )
    
    
    (171
    )4,020
    
    
    
    2,427
    
    
    
    317Accumulated other comprehensive loss, beginning of year
    
    
    
    
    
    
    4,020
    
    
    
    6,447Accumulated other comprehensive loss, end of year
    
    $
    4,020
    
    
    $
    6,447
    
    
    $
    6,764
 (ii) SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities,establishes accounting and reporting standards for derivatives, and
for hedging activities. SFAS No. 149, Amendment of Statement 133 on Derivative
and Hedging Activities, amends and clarifies SFAS No. 133. SFAS No. 133 and
SFAS No. 149 do not have an impact on the Companys financial statements as the
Company does not enter into derivative transactions. (iii) In accordance with Canadian GAAP, joint ventures are required to be
proportionately consolidated regardless of the legal form of the entity. Under
U.S. GAAP, incorporated joint ventures are required to be accounted for by the
equity method. However, in accordance with practices prescribed by the SEC, the
Company has provided (Note 6) summary information regarding use of the
proportionate consolidation method. (iv) In June 2001, the Financial Accounting Standards Board (FASB)
introduced SFAS No. 141, Business Combinationsand SFAS No. 142, Goodwill and
Other Intangible Assets.SFAS No. 141 addresses the initial recognition and
measurement of goodwill and other intangible assets acquired in a business
combination. SFAS No. 142 addresses the initial recognition of intangible
assets acquired outside of a business combination whether acquired individually
or with a group of other assets. These standards require all future business
combinations to be accounted for using the purchase method of accounting.
Goodwill will no longer be amortized but instead will be subject to impairment
tests at least annually. SFAS No. 141 and 142 had no impact on the Companys
financial statements. (v) In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations,which addresses financial accounting and reporting
obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. SFAS No. 143 requires the company to
record the fair value of an asset retirement obligation as a liability in the
period in which it incurs a legal obligation associated with the retirement of
tangible long-lived assets that result from the acquisition, construction,
development and/or normal use of a long-lived asset. The fair value of the
liability is added to the carrying amount of the associated asset and this
additional carrying amount is depreciated over the life of the asset.
Subsequent to the initial measurement of the asset retirement obligation, the
obligation will be adjusted at the end of each period to reflect the passage of
time and changes in the estimated future cash flows underlying the obligation.
If the obligation is settled for other than the carrying amount of the
liability, the Company will recognize a gain or loss on settlement. SFAS No.
143 has no impact on the Companys financial statements. F-16




---



##### 



AINSWORTH LUMBER CO. LTD. Notes to the Consolidated Financial Statements Years ended December 31
(Figures in tables are in thousands of Canadian dollars unless indicated otherwise) (vi) In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets to
be held and used, to be disposed of other than by sale, and to be disposed of
by sale. The Company adopted SFAS No. 144 in the first quarter of 2002 on a
prospective basis without significant impact on the Companys financial
statements. (vii) Under U.S. GAAP, the Company would disclose shipping costs as part
of costs of products as a component of cost of sales, rather than netted
against revenue as per the Companys existing accounting policy. If the Company
had reported shipping costs as costs of products, revenue would have increased
by $62,000,000, $65,625,000, and $60,855,000, with a corresponding increase in
costs of products sold in 2001, 2002, and 2003 respectively. (viii) In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44,and 64, Amendment of FASB Statement No. 13, and Technical
Corrections.Among other things, SFAS No. 145 rescinds both SFAS No. 4, SFAS
No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements.
Through this rescission, SFAS No. 145 eliminates the requirement (in both SFAS
No. 4 and SFAS No. 64) that gains and losses from the extinguishment of debt be
aggregated and, if material, classified as an extraordinary item, net of the
related income tax effect. Generally, SFAS No. 145 is effective for
transactions occurring after May 15, 2002. SFAS No. 145 does not have a
material impact on the Companys financial statements. (ix) In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal of Activities.SFAS No. 146 requires that the
liability for a cost associated with an exit or disposal activity be recognized
at its fair value when the liability is incurred. Under previous guidance, a
liability for certain exit costs was recognized at the date that management
committed to an exit plan, which was generally before the actual liability had
been incurred. SFAS No. 146 does not have a material impact on the Companys
financial statements. (x) In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others.FIN 45 requires the recognition
of a liability by a guarantor at the inception of certain guarantees entered
into or modified after December 31, 2002. FIN 45 requires the guarantor to
recognize a liability for the non-contingent component of certain guarantees.
It requires the recognition of a liability for the obligation to stand ready to
perform in the event that specified triggering events or conditions occur. The
initial measurement of this liability is the fair value of the guarantees at
inception. The adoption of FIN 45 did not have a material impact on the
Companys financial statements. (xi) In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities.Its consolidation provisions are
applicable for all newly created entities created after January 31, 2003, and
is applicable to existing variable interest entities as July 1, 2003. With
respect to entities that do not qualify to be assessed for consolidation based
on voting interests, FIN 46 generally requires a company that has a variable
interest that will absorb a majority of the variable interest entitys expected
losses if they occur, receive a majority of the entitys expected residual
returns if they occur, or both to consolidate that variable interest entity.
FIN 46 does not have a material impact on the Companys financial statements. F-17




---



##### 



Independent Auditors Report To the Shareholder of
Steen River Forest Products Ltd. We have audited the consolidated balance sheets of Steen River Forest
Products Ltd. as at December 31, 2002 and 2003 and the consolidated statements
of operations and deficit and cash flows for the period from February 14, 2001
to December 31, 2001 and years ended December 31, 2002 and 2003. These
financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits in accordance with Canadian and United States
generally accepted auditing standards. Those standards require that we plan
and perform an audit to obtain reasonable assurance whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as at December 31, 2002 and 2003 and the results of its operations and its cash
flows for the period from February 14, 2001 to December 31, 2001 and years
ended December 31, 2002 and 2003. Chartered Accountants
Vancouver, British Columbia
February 14, 2004, except as to Note 14, which is
    as of March 3, 2004 F-18




---



##### 



STEEN RIVER FOREST PRODUCTS LTD. Consolidated Balance Sheets As at December 31
(Thousands of Canadian Dollars) 2002
    
    2003ASSETSCURRENTAccounts receivable
    
    $
    1,205
    
    
    $
    752Inventories (Note 3)
    
    
    5,521
    
    
    
    7,641Prepaid expenses
    
    
    298
    
    
    
    366TOTAL CURRENT ASSETS
    
    
    7,024
    
    
    
    8,759OTHER ASSETS
    
    
    218
    
    
    
    127CAPITAL ASSETS (Note 4)
    
    
    128,938
    
    
    
    123,676TOTAL ASSETS
    
    $
    136,180
    
    
    $
    132,562LIABILITIES AND SHAREHOLDERS EQUITYCURRENTBank indebtedness (Note 6)
    
    $
    1,470
    
    
    $
    1,814Accounts payable
    
    
    4,450
    
    
    
    3,309Accrued taxes
    
    
    350
    
    
    
    300TOTAL CURRENT LIABILITIES
    
    
    6,270
    
    
    
    5,423FUTURE INCOME TAXES (Note 7)
    
    
    993
    
    
    
    993DUE TO PARENT COMPANY (Note 8)
    
    
    31,061
    
    
    
    28,590TOTAL LIABILITIES
    
    
    38,324
    
    
    
    35,006COMMITMENTS AND CONTINGENCIES (Note 9)SHAREHOLDERS EQUITYCapital stockAuthorizedUnlimited common shares without par valueIssued (Note 1)1,000 shares
    
    
    96,761
    
    
    
    96,761Contributed surplus
    
    
    1,795
    
    
    
    1,795Deficit
    
    
    (700
    )
    
    
    (1,000
    )TOTAL SHAREHOLDERS EQUITY
    
    
    97,856
    
    
    
    97,556TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    136,180
    
    
    $
    132,562
 See accompanying Notes to the Consolidated Financial Statements. F-19




---



##### 



STEEN RIVER FOREST PRODUCTS LTD. Consolidated Statements of Operations and Deficit (Thousands of Canadian Dollars) Period fromFebruary 14,2001 to
    
    Year ended
    
    Year endedDecember 31,
    
    December 31,
    
    December 31,2001
    
    2002
    
    2003TRANSFER OF PRODUCTION AND FINANCE
COSTS TO PARENT COMPANY, at cost
    
    $
    45,164
    
    
    $
    46,766
    
    
    $
    52,891DIRECT COSTS OF PRODUCTIONCost of logs
    
    
    10,173
    
    
    
    14,175
    
    
    
    14,302Labour, material and overhead
    
    
    22,991
    
    
    
    27,362
    
    
    
    31,547Amortization
    
    
    3,324
    
    
    
    5,229
    
    
    
    7,042FINANCE EXPENSE
    
    
    8,676
    
    
    
    
    
    
    
    45,164
    
    
    
    46,766
    
    
    
    52,891INCOME BEFORE INCOME TAXES
    
    
    
    
    
    
    
    
    
    
    INCOME TAXESLarge corporations tax
    
    
    350
    
    
    
    350
    
    
    
    300NET LOSS
    
    
    (350
    )
    
    
    (350
    )
    
    
    (300
    )DEFICIT, BEGINNING OF PERIOD
    
    
    
    
    
    
    (350
    )
    
    
    (700
    )DEFICIT, END OF PERIOD
    
    $
    (350
    )
    
    $
    (700
    )
    
    $
    (1,000
    )
 See accompanying Notes to the Consolidated Financial Statements. F-20




---



##### 



STEEN RIVER FOREST PRODUCTS LTD. Consolidated Statements of Cash Flows (Thousands of Canadian Dollars) Period fromFebruary 14,2001 to
    
    Year ended
    
    Year endedDecember 31,
    
    December 31,
    
    December 31,2001
    
    2002
    
    2003CASH FLOWS FROM OPERATING ACTIVITIESNet loss
    
    $
    (350
    )
    
    $
    (350
    )
    
    $
    (300
    )Amounts not requiring an outlay of cashAmortization of capital assets
    
    
    3,324
    
    
    
    5,229
    
    
    
    7,042Change in non-cash operating working capital (Note 10)
    
    
    (23,871
    )
    
    
    (887
    )
    
    
    (2,926
    )Net cash provided by operating activities
    
    
    (20,897
    )
    
    
    3,992
    
    
    
    3,816CASH FLOWS FROM INVESTING ACTIVITIESDecrease (increase) in other assets
    
    
    
    
    
    
    (218
    )
    
    
    91Additions of capital assets
    
    
    (11,755
    )
    
    
    (3,136
    )
    
    
    (1,780
    )Net cash applied to investing activities
    
    
    (11,755
    )
    
    
    (3,354
    )
    
    
    (1,689
    )CASH FLOWS FROM FINANCING ACTIVITIESIncrease (decrease) in bank indebtedness
    
    
    2,100
    
    
    
    (630
    )
    
    
    344Repayment of bridge financing
    
    
    (34,020
    )
    
    
    
    
    
    
    Advances from (to) parent company
    
    
    31,069
    
    
    
    (8
    )
    
    
    (2,471
    )Net cash applied to financing activities
    
    
    (851
    )
    
    
    (638
    )
    
    
    (2,127
    )NET CASH OUTFLOW
    
    
    (33,503
    )
    
    
    
    
    
    
    CASH, BEGINNING OF PERIOD
    
    
    33,503
    
    
    
    
    
    
    
    CASH, END OF PERIOD
    
    $
    
    
    
    $
    
    
    
    $
    
 See accompanying Notes to the Consolidated Financial Statements. F-21




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##### 



STEEN RIVER FOREST PRODUCTS LTD. Notes to the Consolidated Financial Statements December 31, 2003 and 2002
(Thousands of Canadian Dollars, unless otherwise indicated) 1. INCORPORATION AND OPERATING MANDATE Steen River Forest Products Ltd. (the Company) was incorporated in
Alberta on February 8, 2001 as a wholly-owned subsidiary of Ainsworth Lumber
Co. Ltd. (Ainsworth or parent company). By February 14, 2001, Ainsworth
had transferred its interest in the High Level Project (Note 5) to the Company
coincident with assumption of liabilities from and issue of common shares to
Ainsworth. Substantially all of the activities of the Company are carried out
through the High Level Project. Under terms of its agreements with Ainsworth
and its creditors, the Companys operations are restricted to its interest in
the High Level Project and it provides all of its share of High Level oriented
strand board production to Ainsworth at cost. It is not anticipated that the
Company will create significant retained earnings or deficit. Effective
March 3, 2004, the Company was wound-up (See Note 14). 2. SIGNIFICANT ACCOUNTING POLICIES These consolidated financial statements have been prepared in Canadian
dollars in accordance with Canadian generally accepted accounting principles
(Canadian GAAP) and reflect the following significant accounting policies.
Management has made assumptions and estimates that affect the reported amounts
and other disclosures in these financial statements. Actual results may differ
from those estimates. Canadian GAAP, in the case of the Company, does not differ from accounting
principles generally accepted in the United States (U.S. GAAP) as explained
in Note 13. The significant accounting policies are: (a) Basis of consolidation These consolidated financial statements include the Companys 50%
proportionate interest in a jointly controlled oriented strand board facility
in High Level, Alberta (Note 5). (b) Inventories Logs and panel products are valued at the lower of average cost and net
realizable value. Materials and supplies are valued at cost. (c) Property, plant and equipment Property, plant and equipment are stated at cost, including capitalized
debt financing costs and interest incurred for major projects during the period
of construction. The cost of renewals and betterments that extend the useful
life of the property, plant and equipment is also capitalized. The cost of
repairs and replacements is charged to expense as incurred. Oriented strand
board facilities are amortized on the units-of-production method based on the
estimated useful life of the assets at normal production levels over 15 years. The Company reviews the carrying values of its capital assets on a regular
basis, by reference to estimated future operating results and undiscounted net
cash flows. If the carrying value of these assets exceeds estimated net
recoverable amounts, a provision for impairment will be made for the other than
temporary decline in value. (d) Revenue recognition Transfer of production is recognized when the risks and rewards pass to
the purchaser, which occurs upon completion of production. F-22




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STEEN RIVER FOREST PRODUCTS LTD. Notes to the Consolidated Financial Statements December 31, 2003 and 2002
(Thousands of Canadian Dollars, unless otherwise indicated) (e) Pension costs The Company makes contributions to a defined contribution pension plan at
the High Level plant. Contributions to this plan are reflected as expenses
(Note 12). (f) Income taxes Other than Canadian large corporation tax, which is calculated from a
basis other than net income, the Company, because of the unique nature of its
business (Note 1), generates no profit or loss upon which to base income taxes. 3. INVENTORIES December 31,
    
    December 31,2002
    
    2003Logs
    
    $
    3,183
    
    
    $
    4,037Materials and supplies
    
    
    2,338
    
    
    
    3,604$
    5,521
    
    
    $
    7,641
 4. CAPITAL ASSETS December 31,
    
    December 31,2002
    
    2003Net Book
    
    
    
    
    
    Accumulated
    
    Net BookValue
    
    Cost
    
    Amortization
    
    ValueProperty, plant and equipmentPanel product mill
    
    $
    128,938
    
    
    $
    139,271
    
    
    $
    15,595
    
    
    $
    123,676
 5. THE HIGH LEVEL PROJECT The Company jointly operates an oriented strand board facility in High
Level, Alberta. The Companys proportionate (50%) share of major assets
including property, plant and equipment is held by a bare trustee corporation,
on behalf of the Company, together with the interest of a third party. By agreement between the Company and its co-venturer, if the co-venturer
does not pay its share of accounts payable and accrued liabilities, the Company
may pay such amounts and recover them from the co-venturers share of
production. The co-venturers share of accounts payable and accrued
liabilities as at December 31, 2003 is $3,309,000 (2002 - $4,450,000). 6. BANK INDEBTEDNESS The High Level Project does not have autonomous bank credit arrangements.
Bank indebtedness reflects the Company proportionate interest in the excess of
cheques issued for ongoing operational items over cash in bank. All funding of
High Level operations is provided by the co-venturers, facilitated by a bank by
way of demand draws against each co-venturers independent sources of cash. 7. FUTURE INCOME TAXES Future income taxes reflect the tax effect of timing differences between
tax and balance sheet values of property, plant and equipment. F-23




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##### 



STEEN RIVER FOREST PRODUCTS LTD. Notes to the Consolidated Financial Statements December 31, 2003 and 2002
(Thousands of Canadian Dollars, unless otherwise indicated) 8. DUE TO PARENT COMPANY The amount is unsecured and non-interest bearing and has no formal terms
for repayment. 9. COMMITMENTS AND CONTINGENCIES The Companys shares are pledged as a second priority interest for
Ainsworths U.S. $184.6 million 121⁄2% senior secured notes due July 15,
2007, and as a first priority interest for Ainsworths U.S.
$89.1 million 13 7/8%
senior secured notes due July 15, 2007. The notes are secured by:  
    
    a security debenture creating, among other things, a first priority
security interest in all of the assets and properties of the Company
related to the High Level project; and
    
    a first priority assignment of the High Level memorandum of
agreement. 10. CHANGE IN NON-CASH OPERATING WORKING CAPITAL December 31,
    
    December 31,2002
    
    2003Accounts receivable
    
    $
    (1,205
    )
    
    $
    453Inventories
    
    
    (1,358
    )
    
    
    (2,120
    )Prepaid expenses
    
    
    (196
    )
    
    
    (68
    )Accounts payable and accrued taxes
    
    
    1,872
    
    
    
    (1,191
    )$
    (887
    )
    
    $
    (2,926
    )
 11. FINANCIAL INSTRUMENTS  (a)
    
    Financial and credit risksFinancial and credit risks, if any, have been assumed by Ainsworth.(b)
    
    Fair valuesThe fair values of the Companys cash, bank indebtedness, accounts payable,
accrued taxes and accrued interest were estimated to approximate their
carrying values due to the immediate or short-term maturity of these
instruments. No fair value has been estimated for the amount due to
Ainsworth due to the unique nature of this amount. 12. PENSION PLAN The Companys proportion of contributions to the defined contribution
pension plan at High Level in 2003 amounted to $565,000 (2001 - $523,000) F-24




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##### 



STEEN RIVER FOREST PRODUCTS LTD. Notes to the Consolidated Financial Statements December 31, 2003 and 2002
(Thousands of Canadian Dollars, unless otherwise indicated) 13. U.S. GAAP As indicated in Note 1, these consolidated financial statements have been
prepared in accordance with Canadian GAAP which, in the case of the Company,
conforms in all material respects with U.S. GAAP.  (a)
    
    Adjustment to assets, liabilities, earnings and shareholders equityNo net adjustment to assets, liabilities and shareholders equity would be
required to comply with U.S. GAAP.  (b)
    
    Other considerations  (i)
    
    Statement of Financial Accounting Standards (SFAS) No. 130,
Reporting Comprehensive Income, issued under U.S. GAAP, requires the
reporting and display of comprehensive income and its components in a
full set of general purpose financial statements. SFAS No. 130 does
not currently apply to the Company as there are no items of other
comprehensive income in any period presented.(ii)
    
    SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, establishes accounting and reporting standards for
derivatives, and for hedging activities. SFAS No. 149, Amendment of
Statement 133 on Derivative and Hedging Activities, amends and
clarifies SFAS No. 133. SFAS No. 133 and SFAS No. 149 do not have an
impact on the Companys financial statements as the Company does not
enter into derivative transactions.(iii)
    
    In accordance with Canadian GAAP, joint ventures are required to
be proportionately consolidated regardless of the legal form of the
entity. Under U.S. GAAP, incorporated joint ventures are required to
be accounted for by the equity method. However, in accordance with
practices prescribed by the SEC, the Company has provided (Note 5)
summary information regarding use of the proportionate consolidation
method.(iv)
    
    In June 2001, the Financial Accounting Standards Board (FASB)
introduced SFAS No. 141, Business Combinationsand SFAS No. 142,
Goodwill and Other Intangible Assets.SFAS No. 141 addresses the
initial recognition and measurement of goodwill and other intangible
assets acquired in a business combination. SFAS No. 142 addresses the
initial recognition of intangible assets acquired outside of a
business combination whether acquired individually or with a group of
other assets. These standards require all future business
combinations to be accounted for using the purchase method of
accounting. Goodwill will no longer be amortized but instead will be
subject to impairment tests at least annually. SFAS No. 141 and 142
had no impact on the Companys financial statements.(v)
    
    In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations, which addresses financial accounting and
reporting obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. SFAS No.
143 requires the company to record the fair value of an asset
retirement obligation as a liability in the period in which it incurs
a legal obligation associated with the retirement of tangible
long-lived assets that result from the acquisition, construction,
development and / or normal use of a long-lived asset. The fair value
of the liability is added to the carrying amount of the associated
asset and this additional carrying amount is depreciated over the life
of the asset. Subsequent to the initial measurement of the asset
retirement obligation, the obligation will be adjusted at the end of
each period to reflect the passage of time and changes in the
estimated future cash flows underlying the obligation. If the
obligation is settled for F-25




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##### 



STEEN RIVER FOREST PRODUCTS LTD. Notes to the Consolidated Financial Statements December 31, 2003 and 2002
(Thousands of Canadian Dollars, unless otherwise indicated)  other than the carrying amount of the liability, the Company will
recognize a gain or loss on settlement. SFAS No. 143 has no impact on
the Companys financial statements.(vi)
    
    In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets to be held and used, to be disposed of other than by
sale, and to be disposed of by sale. The Company adopted SFAS No. 144
in the first quarter of 2002 on a prospective basis without
significant impact on the Companys financial statements.(vii)
    
    In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44,and 64, Amendment of FASB Statement No. 13, and
Technical Corrections.Among other things, SFAS No. 145 rescinds both
SFAS No. 4, SFAS No. 64, Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements.Through this rescission, SFAS No. 145
eliminates the requirement (in both SFAS No. 4 and SFAS No. 64) that
gains and losses from the extinguishment of debt be aggregated and, if
material, classified as an extraordinary item, net of the related
income tax effect. Generally, SFAS No. 145 is effective for
transactions occurring after May 15, 2002. SFAS No. 145 does not have
a material impact on the Companys financial statements.(viii)
    
    In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal of Activities.SFAS No. 146 requires
that the liability for a cost associated with an exit or disposal
activity be recognized at its fair value when the liability is
incurred. Under previous guidance, a liability for certain exit costs
was recognized at the date that management committed to an exit plan,
which was generally before the actual liability had been incurred.
SFAS No. 146 does not have a material impact on the Companys
financial statements.(ix)
    
    In November 2002, the FASB issued Interpretation No. 45 (FIN
45), Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others.
FIN 45 requires the recognition of a liability by a guarantor at the
inception of certain guarantees entered into or modified after
December 31, 2002. FIN 45 requires the guarantor to recognize a
liability for the non-contingent component of certain guarantees. It
requires the recognition of a liability for the obligation to stand
ready to perform in the event that specified triggering events or
conditions occur. The initial measurement of this liability is the
fair value of the guarantees at inception. The adoption of FIN 45 did
not have a material impact on the Companys financial statements.(x)
    
    In January 2003, the FASB issued Interpretation No. 46 (FIN
46), Consolidation of Variable Interest Entities.Its consolidation
provisions are applicable for all newly created entities created after
January 31, 2003, and is applicable to existing variable interest
entities as July 1, 2003. With respect to entities that do not qualify
to be assessed for consolidation based on voting interests, FIN 46
generally requires a company that has a variable interest that will
absorb a majority of the variable interest entitys expected losses if
they occur, receive a majority of the entitys expected residual
returns if they occur, or both to consolidate that variable interest
entity. FIN 46 does not have a material impact on the Companys
financial statements.  14.
    
    SUBSEQUENT EVENTOn February 27, 2004, Ainsworth received the required consents from the holders of
its 13 7/8% Senior Secured Notes to amend the indentures governing the senior
secured notes. The amendments substantially eliminate all of the covenants
and certain of the events of default, and discharge and release all of the
security documents. Prior to F-26




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##### 



STEEN RIVER FOREST PRODUCTS LTD. Notes to the Consolidated Financial Statements December 31, 2003 and 2002
(Thousands of Canadian Dollars, unless otherwise indicated)  amendment of the indentures governing the 13.875% senior secured notes,
Ainsworths interest in the High Level OSB project was subject to a security interest
granted in connection with the issuance of its 13.875% Senior Secured Notes.On March 3, 2004, subsequent to the amendment of the indentures governing the
senior secured notes, Steen River Forest Products Ltd. transferred its
assets and liabilities to Ainsworth and was wound up. F-27