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U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
   FORM 40-F o REGISTRATION STATEMENT PURSUANT TO SECTION 12 OF THE
SECURITIES EXCHANGE ACT OF 1934
 þ ANNUAL REPORT PURSUANT TO SECTION 13(a) OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934  For the fiscal year ended December 31, 2004
    
    Commission File Number 1-11796
   Masonite International Corporation
  Premdor Inc.(Former name of issuer) Ontario
    
    2431
    
    98-0377314(Province or
other jurisdiction of
    
    (Primary
Standard Industrial
    
    (I.R.S.
Employerincorporation
or organization)
    
    Classification
Code Number)
    
    Identification
No.)
 1600 Britannia Road East
Mississauga, Ontario, Canada L4W 1J2
(905) 670-6500(Address and telephone number of issuers
principal executive offices) Mr. Steve MacIsaac
Masonite Holdings, Inc.
One North Dale Mabry
Tampa, Florida 33609
(813) 877-2726(Name, address (including zip code) and telephone number
(including area code) of agent for service in the United
States) Securities registered or to be registered pursuant to Section 12(b) of the Act: Title of each class
    
    Name of each exchange on which registeredCommon Shares, no par value
    
    New York Stock Exchange and The Toronto Stock Exchange
 Securities registered or to be 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: None For annual reports, indicate by check mark the information filed with this Form: þ þ
 Indicate the number of outstanding shares of each of the issuers classes of capital or common
stock as of the close of the period covered by the annual report: 
 Indicate by check mark whether the issuer by filing the information contained in this Form is also
thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the
Securities Exchange Act of 1934 (the Exchange Act). If Yes is marked, indicate the filing
number assigned to the issuer in connection with such Rule. Yes o                    No þ Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the
issuer was required to file such reports) and (2) has been subject to such filing requirements for
the past 90 days. Yes þ                    No o




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Documents included in this Form: No.
    
    Document1.
    
    Annual Information Form of the issuer for the fiscal year ended December 31, 20042.
    
    Consolidated Audited Financial Statements of the issuer as at and for the years ended on
December 31, 2004 and 2003, including a reconciliation to United States generally accepted
accounting principles3.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations of the
issuer4.
    
    Comments by Auditors for United States Readers on Canada-U.S. Reporting Difference
 DISCLOSURE CONTROLS AND PROCEDURES Disclosure Controls and Procedures Masonite maintains a system of disclosure controls and procedures that is designed to ensure
that information required to be disclosed by Masonite is accumulated and communicated to
management, including the Chief Executive Officer and the Chief Financial Officer, in a timely
manner. Under the supervision and with the participation of its management, including its Chief
Executive Officer and Chief Financial Officer, Masonite has evaluated the effectiveness of the
design and operation of these disclosure controls and procedures as of the end of the period
covered by this report. Based on that evaluation, Masonites Chief Executive Officer and Chief
Financial Officer concluded that Masonites system of disclosure controls and procedures is
effective. Change in Internal Controls Over Financial Reporting Masonite maintains a system of internal controls over financial reporting. There were no
changes in Masonite internal controls that occurred during the period covered by this report that
have materially affected, or are reasonably likely to materially affect, Masonites internal
control over financial reporting. AUDIT MATTERS Audit Committee The members of Masonites audit committee are Howard L. Beck, John J. Berton, John M. Cassaday
and Peter A. Crossgrove. Each of the members of Masonites audit committee is independent and
financially literate for the purposes of applicable Canadian and U.S. securities legislation.
Reference is made to Masonites Management Information Circular dated March 26, 2004 relating to
the Companys annual meeting of shareholders held on May 3, 2004 for information about the mandate
of the audit committee and the experience of each member of the audit committee that is relevant to
the performance of his responsibilities as an audit committee member. The Board of Directors of the Company has determined that it has at least one audit committee
financial expert serving on its audit committee. Mr. John Cassaday has been determined by the
board of Masonite to meet the audit committee financial expertcriteria prescribed by the
Securities and Exchange Commission (SEC) and applicable Canadian regulatory requirements and is
independent, as that term is defined by the New York Stock Exchanges listing standards applicable
to Masonite and applicable Canadian regulatory requirements. The SEC has indicated that the
designation of Mr. Cassaday as an audit committee financial expert does not make Mr. Cassaday an
expertfor any purposes, impose any duties, obligations or liability on Mr. Cassaday, that are
greater than those
imposed on members of the audit committee and Board of Directors who do not carry this
designation, or affect the duties, obligations or liability of any other member of the audit
committee. 2




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Audit and Related Fees For the year ended December 31, 2004, fees for audit and related services provided by KPMG
LLP, Masonites independent external auditors to Masonite were $1,616,000 (2003  $1,130,000).
Non-audit fees paid to KPMG LLP relating to tax planning and compliance in 2004 were $1,082,000
(2003  $1,076,000). Details are shown in the following table: Year Ended December 31, 2004
    
    
    Year Ended December 31, 2003Audit Fees
    
    
    $1,194,000
    
    
    
    $1,067,000Audit Related Fees
    
    
    $422,000
    
    
    
    $63,000Tax Fees
    
    
    $1,082,000
    
    
    
    $1,076,000All Other Fees
    
    Nil
    
    NilTotal:
    
    
    $2,698,000
    
    
    
    $2,206,000
 Audit Fees Audit fees were for professional services rendered by KPMG LLP for the audit of Masonites
annual financial statements and services provided in connection with statutory and regulatory
filings or engagements. Audit-Related Fees Audit-related fees were for assurance and related services reasonably related to the
performance of the audit of the annual statements and are not reported under Audit Feesabove.
These services primarily consisted of reviewing documents related to due diligence services for
business acquisitions and business divestitures. Tax Fees Tax fees were for tax compliance, tax advice and tax planning professional services. These
services consisted of tax compliance including the review of tax returns, and tax planning and
advisory services relating to common forms of domestic and international taxation (i.e. income tax,
capital tax, goods and services tax, value added tax and payroll tax). All Other Fees In 2004 and 2003, no fees for services were incurred other than those described above under
Audit Fees, Audit-Related Feesand Tax Fees. Pre-Approval Policies and Procedures It is within the mandate of Masonites audit committee to approve all audit and non-audit related
fees. The audit committee has pre-approved specifically identified non-audit tax-related services,
including tax compliance; the review of tax returns; and tax planning and advisory services
relating to common forms of domestic and international taxation (i.e. income tax, capital tax,
goods and services tax, value added tax and payroll tax). The audit committee will be informed
routinely as to the non-audit services actually provided by the auditors pursuant to this
pre-approval process. The auditors also present the estimate for the annual audit related services
to the Committee for approval prior to undertaking the annual audit of the financial statements. CODE OF ETHICS Masonite has adopted a Code of Ethics for its Chief Executive Officer, Chief Financial Officer
and directors and officers. The Code of Ethics is available on the Companys website at
www.masonite.com and in print to any shareholder who requests them. All amendments to the code,
and all waivers of a code with respect to any of




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the persons covered by it, will be posted on the
Companys website and provided in print to any shareholder who requests them. CORPORATE GOVERNANCE GUIDELINES The Company has adopted corporate governance guidelines and established committees regarding
such matters as, but not limited to: director qualification standards and responsibilities; access
by directors to management and independent advisors; director compensation; and management
succession. The guidelines and board committee charters are available on the Companys website at
www.masonite.com. Although the Company files as a foreign private issuer in the United States,
Masonite is in compliance with the listing requirements of the New York Stock Exchange as they
apply to U.S. domestic issuers. OFF-BALANCE SHEET ARRANGEMENTS The Company does not have any material off-balance sheet arrangements other than those
disclosed in notes 3, 9, 13 and 14 to the consolidated financial statements for the year ended
December 31, 2004. ADDITIONAL INFORMATION Additional information, including directors and officers remuneration and indebtedness,
principal holders of the Companys securities and shares authorized for issuance under equity
compensation plans, where applicable, is contained in the Companys Management Information Circular
dated March 4, 2005 with respect to the special meeting of shareholders to be held on March 31,
2005. Additional financial information is provided in the Companys consolidated financial
statements for the year ended December 31, 2004, together with the accompanying report of the
auditors, as well as the Companys Management Discussion and Analysis of Financial Condition and
Results of Operations for the period. Additional information about the Company may be found on SEDAR at www.sedar.com. FORWARD-LOOKING STATEMENTS This Annual Information Form and other written reports and oral statements made by the Company
may include forward-looking statements, all of which are subject to risks and uncertainties. One
can identify these forward-looking statements by their use of words such as expects, plans,
will, estimates, intends, forecasts, projects and other words of similar meaning, or by
the fact that they do not relate strictly to historical or current facts. These statements are
likely to address, but may not be limited to, the Companys growth strategy and financial results.
Readers must carefully consider any such statements and should understand that many factors could
cause actual results and developments to differ materially from the Companys forward-looking
statements. These factors may include inaccurate assumptions and a broad variety of other known
and unknown risks and uncertainties, including: general economic, market and business conditions;
levels of construction and renovation activity; competition; financing risks; ability to manage
expanding operations; commitments; new services; retention of key management personnel;
environmental and other government regulation; and other factors. No forward-looking statement can
be guaranteed and actual future results may vary materially. The Company disclaims any
responsibility to update these forward-looking statements.




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MASONITE INTERNATIONAL CORPORATION       ANNUAL INFORMATION FORM     March 4, 2005




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TABLE OF CONTENTS CORPORATE STRUCTURE
    
    
    1GENERAL DEVELOPMENT OF THE BUSINESS
    
    
    2THE BUSINESS
    
    
    4RISK FACTORS
    
    
    13DESCRIPTION OF CAPITAL STRUCTURE
    
    
    14MARKET FOR SECURITIES
    
    
    14DIVIDENDS
    
    
    15DIRECTORS AND OFFICERS
    
    
    15LEGAL PROCEEDINGS
    
    
    18TRANSFER AGENT AND REGISTRARS
    
    
    18AUDIT MATTERS
    
    
    18DISCLOSURE CONTROLS AND PROCEDURES
    
    
    19CODE OF ETHICS
    
    
    20CORPORATE GOVERNANCE GUIDELINES
    
    
    20OFF-BALANCE SHEET ARRANGEMENTS
    
    
    20ADDITIONAL INFORMATION
    
    
    20FORWARD-LOOKING STATEMENTS
    
    
    20
 -i-




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MASONITE INTERNATIONAL CORPORATION ANNUAL INFORMATION FORM March 4, 2005 Except where the context otherwise requires, all references in this annual information form
(AIF) to the Company are to Masonite International Corporation and its subsidiaries. In this
AIF, references to $ and Cdn.$ are to United States and Canadian dollars, respectively, and
unless otherwise indicated, the statistical and financial data contained in this AIF are presented
as at December 31, 2004. CORPORATE STRUCTURE The Company was formed by articles of amalgamation under the Business Corporations Act
(Ontario)on January 1, 2002 upon the amalgamation of Premdor Inc. and its wholly owned
subsidiaries, Masonite International Corporation and Les Portes Centenaires Ltée. (the
Amalgamation). The registered and principal office of the Company is located at 1600 Britannia
Road East, Mississauga, Ontario, L4W 1J2. The Companys common shares trade on the Toronto Stock
Exchange and the New York Stock Exchange under the symbol MHM. Subsidiaries and Investments The following corporate structure chart illustrates the Companys material subsidiaries
and investments as of March 4, 2005 and identifies their respective jurisdiction of incorporation
and the percentage of voting securities beneficially owned, or over which control or direction is
exercised by, the Company: (ORGANIZATIONAL FLOW CHART)




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GENERAL DEVELOPMENT OF THE BUSINESS General Masonite International Corporation is one of the worlds largest manufacturers of doors and
door components. On January 1, 2002, as a result of the Amalgamation, Premdor Inc. (Premdor)
changed its name to Masonite International Corporation (Masonite International). Masonite
International is a unique, integrated, global building products company with its corporate
headquarters in Mississauga, Ontario and its international administrative offices in Tampa,
Florida. It operates over 80 facilities in 18 countries in North America, South America, Europe,
Asia and Africa and has over 14,000 employees. The Company sells its products to customers in over
70 countries. Nature of the Business The principal business of the Company is the manufacture of doors, door components and door
entry systems for new residential construction, home repair, renovation and remodelling and
commercial use. The Company manufactures a broad line of interior doors, including standard
residential flush, molded-facing, stile and rail, louvre and specially-ordered commercial and
architectural doors. The Company also manufactures door components for internal use and sale to
other door manufacturers. It also manufactures exterior residential steel and fiberglass doors and
entry systems. These door products are manufactured, merchandised and sold to large distributors,
jobbers, home centre chains and wholesale and retail building supply dealers across North America,
South America, France, the United Kingdom, other parts of Europe and other countries in the Middle
East and Asia. Doors, door components and door entry systems accounted for over 95% of the
Companys total dollar sales in each of 2003 and 2004, with other building products accounting for
the balance. The Company commenced business in 1955 in Toronto, Ontario as the purchasing division of a
retail lumberyard. It began manufacturing doors in 1961. The Companys original product was a
full line of flush doors. Over time, the Company introduced other wood doors, including louvre,
stile and rail, plastic laminate, fire doors and pre-hung units. From 1975 to 2000, the Company expanded worldwide, initially establishing and acquiring door
manufacturers in Canada and then in the United States, the United Kingdom and France. During this
period, the Company completed and integrated multiple acquisitions, including acquisitions of door
component manufacturers, door manufacturers as well as logistical and fabrication centres. Through
this period of growth, the Company increased its sales of interior residential doors and expanded
its product line with architectural doors and steel and fiberglass exterior doors and entry
systems. Masonite Corporation On August 31, 2001, the Company completed the acquisition of Masonite Corporation from
International Paper Company for a purchase price including transaction costs of approximately $427
million, of which approximately $314 million was paid in cash and the remainder in the form of
unsecured subordinated long-term debt. Masonite Corporation is a global leader in engineered wood composite products, with
manufacturing facilities in North America, Europe, Asia and Africa. Masonite Corporations
products include molded door facings, as well as hardboard and softboard for residential and
commercial use. Masonite Corporation is the largest manufacturer of molded door facings in the
world. Prior to its acquisition, Premdor was Masonite Corporations single largest customer. -2-




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Masonite Corporation was founded in 1925 in Laurel, Mississippi by William H. Mason, whose
objective was to utilize the vast available quantities of sawmill waste to manufacture a useable
end product. Masonite Corporations first major invention and successful product was hardboard, a
conversion of wood fiber mat under intense heat and pressure into thin, dense, tough sheets used in
the manufacture of a variety of products for residential and commercial construction, retail and
other applications. In the early 1970s, Masonite Corporation began production of door facings,
also known as door skins. In 1975, Masonite Corporation began the first commercial production of
molded door facings. In 1996, Masonite Corporations exploration of scaled production
methodologies led to the acquisition of the FormTECTM process, a unique method of
manufacturing molded door facings on a micro-scale by molding already pressed thin MDF (medium
density fiberboard) purchased from third-party suppliers. Masonite International In 2002, the Company purchased the remaining interest in four less than wholly-owned
companies and acquired the shares of one door fabrication company. Consideration of $25.9 million
for these acquisitions was paid in a combination of cash, common shares of the Company and a note
payable. The Company also made an equity investment in a door component manufacturing entity. In 2003, the Company purchased 100% of the shares of a door pre-hanger for consideration of
approximately $3.5 million and increased its ownership percentage in a less than wholly owned
subsidiary for cash consideration of approximately $1.5 million. The net assets of the Lisbon
Falls, Maine manufacturing facility that were acquired as part of the Masonite Corporation
acquisition were disposed of in 2003. The Company also divested itself of another less than wholly
owned entity. In 2004, the Company completed several acquisitions. The most significant, the purchase of
the North American residential entry door business of The Stanley Works, was completed in March for
a total cost of approximately $164 million. This acquisition strengthened the Companys position
as a leader in entry doors in North America. During the second quarter, the Company expanded its
presence in Europe and became a manufacturer of residential interior doors in Eastern Europe with
the purchase of a 75% interest in a door manufacturer with production facilities in Poland and the
Czech Republic. The total consideration for this transaction was approximately $24 million.
Expansion in Europe continues to be one of several growth opportunities for the Company. In
addition, the Company acquired a 45% interest in a U.S. based manufacturer of door components for
consideration of approximately $10 million. In the third quarter, the Company increased its wood
composite molded door facing capacity with the acquisition of a 50% interest in a state-of-the-art
manufacturer located in Malaysia for total consideration of approximately $26 million. This
facility will allow the Company to increase the penetration of molded doors in Asia
and service its growing needs for wood composite molded door facings in North America. Finally,
the Company acquired a U.S. based manufacturer of interior residential doors and door components
for total consideration of approximately $32 million. Consolidation in the residential door
manufacturing industry is part of a broader pattern of consolidation amongst the Companys
customers and competitors in North America. The Company believes these acquisitions will allow it
to remain competitive and increase its sales by permitting access to new products and future
supplies of materials. During 2004 the Company commenced a program to rationalize and standardize its residential
entry door production in order to improve operating efficiencies. As a result of this decision,
the Company announced the closure of two entry door production facilities in North America. A
facility located in Canada was closed during the year and the closure of a U.S. based facility was
announced in the fourth quarter of 2004. The Company is in the process of completing the transfer
of production to its remaining entry door facilities. The Company also announced the transfer of
its post forming door facing manufacturing operations in Korea to another of its composite molded
door facing facilities. -3-




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Financing History In July 2002, the Company completed a refinancing of its existing bank facilities and entered
into an amended and restated credit agreement. At the closing of the refinancing, $650 million was
available to be drawn through a combination of term facilities having varying maturity dates and
interest rates. The bank facilities are secured by fixed and floating charges over substantially
all of the Companys assets. The Company used the proceeds from the refinancing to repay existing
indebtedness including the Companys subordinated long-term debt. In order to finance the Stanley Purchase, the Company negotiated additional term borrowings of
$200 million under its existing bank facilities. These additional borrowings are on terms
consistent with the July 2002 refinancing of the bank facilities. Agreement with KKR The Company has entered into a combination agreement dated December 22, 2004, as amended and
restated on January 16, 2005 and February 17, 2005, with Stile Acquisition Corp., an affiliate of
Kohlberg Kravis Roberts & Co. L.P., whereby all of the common shares of the Company would be
indirectly acquired by KKR for C$42.25 per share. The transaction is subject to the approval of
two-thirds of the votes cast at a special meeting of shareholders to be held on March 31, 2005 and
by a majority of the votes cast at such meeting other than in respect of common shares held by
senior management of Masonite. If the transaction receives shareholder approval, the Company will
begin the process of de-listing its common shares from the Toronto and New York stock exchanges. A
copy of the combination agreement has been filed on SEDAR at www.sedar.com and is attached as
Appendix B to the management information circular dated March 4, 2005 relating to the March 31
special meeting of shareholders being held to approve the transaction. THE BUSINESS Corporate Strategy Masonite Internationals primary objective is to increase shareholder value by pursuing
strategic growth through focusing on one product line  doors  and expanding throughout the world. With manufacturing facilities in 18 countries and sales worldwide,
Masonite International has continuously expanded through start-ups and acquisitions. It has
increased sales in North America and other regions through innovative merchandising and marketing
initiatives that emphasize quality, value and service. As demand for building products increases
outside North America, Masonite Internationals manufacturing, merchandising and sales expertise
enable it to become one of the leading door companies in the world. As part of this strategy, the
Companys goal was to achieve substantial vertical integration and this has been accomplished to a
large extent through the acquisition of Masonite Corporation. The Company has integrated the various operations in its North American segment as well as
its Europe and other segments to the point where the various operations share common systems,
financing and infrastructure. This approach is part of the Companys all products strategy which
has been put in place to improve the efficiency and effectiveness of the Companys marketing and
sales efforts. The all products strategy is a program the Company has developed for offering its
full range of door products to all of its North American customers on a coordinated, one-stop
shopping basis, using an integrated sales effort. Geographic Region Financial Information The following geographic segment financial information summarizes the Companys sales and
operating income for each of the years in the three year period ended December 31, 2004 and is
derived from the segmented information disclosure in the Companys audited consolidated financial
statements: -4-




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Year Ended December 311(dollars in thousands)2004
    
    
    2003
    
    
    2002Sales:North America
    
    $
    1,760,317
    
    
    $
    1,434,055
    
    
    $
    1,325,396Europe and other
    
    
    487,625
    
    
    
    380,573
    
    
    
    320,018Intersegment
    
    
    (48,077
    )
    
    
    (37,390
    )
    
    
    (25,898
    )$
    2,199,865
    
    
    $
    1,777,238
    
    
    $
    1,619,516Segment Operating Income:North America
    
    $
    207,014
    
    
    $
    179,142
    
    
    $
    165,331Europe and other
    
    
    54,212
    
    
    
    37,580
    
    
    
    28,511$
    261,226
    
    
    $
    216,722
    
    
    $
    193,842
   Note:(1)
    
    In 2003, the Company modified the manner in which the geographic segments are aggregated.
The comparative figures have been reclassified to conform with the new basis of
presentation. Products Demand for doors is derived from three principal sources: new residential construction;
repair, renovation and remodelling activity; and commercial renovation and construction. According
to information available to the Company, housing starts (in thousands) in countries that are currently most important to the Companys revenues were as follows: Year
    
    United States
    
    Canada
    United Kingdom
    
    France2004
    
    
    1,953
    
    
    
    233
    
    
    
    155
    
    
    3632003
    
    
    1,847
    
    
    
    217
    
    
    
    185

    
    
    3142002
    
    
    1,705
    
    
    
    205
    
    
    
    183
    
    
    302
 The Company estimates that in each of 2003 and 2004 the majority of its door sales were from
repair, renovation and remodelling, with the balance from new construction (both residential and
commercial). This estimate is based on the experience of management in the industry and the
Companys knowledge of its customers, however it is not based on any empirical data. The Company sells interior and exterior products, with interior products accounting for
approximately 62% of the total sales revenue in 2004 (66% in 2003) and exterior products accounting
for the balance of the Companys total sales revenue. While substantially all interior doors are
made with wood and related materials such as hardboard (including molded and flat door facings),
the use of wood in exterior doors in North America has declined over the last decade as a result of
the introduction of steel and fiberglass doors. The Companys exterior doors are made primarily of
steel or fiberglass. The Company offers an extensive range of interior and exterior doors, which
are available in a wide variety of sizes, styles and types. -5-




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The Company has become a leader in merchandising and advertising through point of sale
displays, in-store merchandising and training programs, magazine and television advertisements,
regional flyer programs and do-it-yourself videos for doors distributed through home centres. In
addition, the Company advertises its products at numerous events, including trade shows in Canada,
the United States, Europe, Asia and the Middle East. The Company has also developed consumer
brochures, including a planning guide and do-it-yourself products to assist
the consumer in the purchase and installation of doors, as well as training programs designed
to assist home centre sales personnel with product knowledge and sales strategies. The following is a description of the principal types of doors and door components that the
Company sells and manufactures worldwide: Molded Flush
    
    Doors made by sandwiching a wood or MDF frame and a
hollow or solid core between two molded hardboard
facings. These doors are used for closets, bedrooms,
bathrooms and hallways.Flush
    
    Doors made by sandwiching a wood or MDF frame and a
hollow or solid core between two facings made of plywood
or hardboard (flat or embossed). These doors are used
for closets, bedrooms, bathrooms and hallways.Stile and Rail
    
    Doors made from solid wood with vertical stiles,
horizontal rails and wood panels, which have been cut,
milled and assembled from a single type of lumber such as
clear pine, knotty pine, oak and mahogany. Where glass
panels are inserted between stiles and rails, the
resulting door when used for interior purposes is
referred to as a French door. For interior purposes
these doors are primarily used for hallways, room
dividers, closets and bathrooms. For exterior purposes
these doors are used as entry doors and decorative glass
inserts (lites) are often inserted into these doors.Louvre
    
    Doors with sloping horizontal slats that admit light and
air. These doors are used for hallways, closets, and
cabinets and as interior and exterior decorative
shutters.Bifold
    
    Hinged folding doors (typically molded flush, flush or
louvre doors) used in closets or as room dividers.Plastic Laminate
    
    Flush doors with a plastic veneer facing, generally for
commercial use.Pre-hung
    
    Interior and exterior doors sold together with door
frames as units.Architectural
    
    Doors custom-designed to architectural specifications
generally for commercial uses such as in office
buildings, hotels, schools and hospitals.Steel
    
    Exterior doors made by assembling two interlocking steel
facings (panelled or flat) or attaching two steel facings
to a wood or steel frame and injecting the core with
polyurethane insulation.Fiberglass
    
    Exterior doors made by assembling two fiberglass facings
to a wood frame or composite material and injecting the
core with polyurethane insulation.
 -6-




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Entry Systems
    
    Exterior doors sold pre-assembled in a door frame, with or
without lites and transoms.Molded Door Facings
    
    Thin sheets of molded hardboard produced by grinding or
defibrating wood chips, adding resin and other ingredients,
creating a thick fibrous mat composed of dry wood fibers and
pressing the mat between two steel dies to form a molded sheet,
the surface of which may be smooth or may contain a wood grain
pattern. Following pressing, molded door facings are trimmed,
painted and shipped to door manufacturing plants where they are
mounted on frames to produce molded doors.Door Framing Material
    
    Commonly referred to as cut stock.
Wood or MDF components that constitute the frame on which interior and exterior door
facings are attached.Door Lites
    
    Decorative and non-decorative insulated glass inserts primarily
used in exterior doors.Door Core
    
    A molded fibre mat used in the construction of solid core doors.
 The Companys sales and marketing efforts have increasingly reflected an international focus.
In 1990, door sales outside of North America represented 3% of aggregate door sales. In 2004, door
sales outside North America represented approximately 22% of the Companys aggregate door sales.
This increase in sales abroad is the result of acquisitions and internal growth. The Company
expects that a major portion of the future growth of its door business will be in the United
States, Europe, Mexico, the Middle East, South America and Asia. Intangible Properties In North America, doors are marketed primarily under the Masonite® brand. Other North
American brands include: Premdor®, Belleville®, Barrington®, Oakcraft®, StaTru® HD, ArTek®,
PREMVU®, Royal MahoganyTM, CavalierTM, Fast-FrameTM, Safe N
Sound®, PremcorTM, CrownTM, MiamiTM, Palazzo®, Bellagio®, Capri®,
CheyenneTM, SavannahTM, IndesignTM, and Mohawk®. In Europe, doors are marketed under the Premdor®, EkemTM, FonmartyTM,
MagriTM, MonnerieTM, BatimetalTM and Crosby® brands. The Company uses these trademarks and trade names in the conduct of its business as well as
the other trademarks and trade names mentioned throughout this AIF. The Company considers the use
of trademarks and trade names to be important in the development of product awareness, and for
differentiating products from competitors and between customers. Distribution Generally the major customers of door manufacturers are two-step distributors, one-step
distributors, jobbers, home centre chains and wholesale and retail building supply dealers. Retail
building supply dealers, lumberyards and home centre chains are the primary merchandisers to the
do-it-yourself segment of the repair, renovation and remodelling segment. Builders and
contractors purchase their door requirements primarily from one-step distributors, lumberyards,
home centre chains and wholesale building supply dealers. -7-




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##### 



(DISTRIBUTION PROCESS FLOW CHART) In Canada, the Company sells primarily to a distributor that resells the Companys products to
wholesale and retail building supply dealers, lumber yards, home centre chains and pre-hangers
(suppliers of doors to builders on an installed basis), some of which are members of buying groups.
In the United States, the Companys major customers are two-step distributors, one-step
distributors and large home centre chains. In Europe, the Companys customers are home centre
chains and large distributors. Door manufacturers in Canada, the United States, France and the
United Kingdom rely primarily on a combination of their own sales forces and independent sales
agents. Manufacturing Process The manufacture of wood doors is primarily an assembly operation. Cut-stock is either acquired
from suppliers or cut by the door manufacturer. If necessary, the cut-stock is milled into the
various dimensions required for different door styles and sizes. The assembly process varies by
type of door, from a relatively simple process for flush doors, where the door facings are glued to
a wood frame, to more complex procedures for the many pieces of a louvre or stile and rail door.
Following assembly, doors are trimmed to their final specifications. Short set-up times, proper
production scheduling and co-ordinated material movement are essential to achieve a flexible
process capable of producing a wide range of door types, sizes, materials and styles. The Company
makes use of flexible manufacturing operations together with scalable logistics primarily through
the use of common carriers to fill customers orders and to manage its investment in finished goods
inventory. The manufacture of insulated steel and fiberglass doors consists primarily of the fabrication
of steel sheets embossed into panel or flush door facings and fiberglass door facings which are
then assembled onto a wood or steel framing system. The doors are then injected with polyurethane
insulation. The Companys prehanging operations utilise interior flush doors, stile and rail and louvre
doors, and exterior doors from the Companys manufacturing operations and provide value added
fabrication and logistical services to big box retail home centres throughout North America.
These value added products include interior -8-




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##### 



doors which are machined for hinges, passage and lock
sets and then incorporated in a frame. Exterior doors are incorporated in a frame and may include
decorative glass lites (inserts). Research and Development The acquisition of Masonite Corporation in 2001 added significantly to the Companys R&D
capabilities. R&D activities are concentrated in the Companys 141,000 sq. ft. research centre in
West Chicago, Illinois. During 2004, the centre employed approximately 70 people engaged in
various forms of research and product development. The acquisition of the exterior door division
of The Stanley Works in 2004, deepened the Companys R&D base and enhanced its engineering
strength. Management is of the view that the new products and other developments resulting from the
Companys R&D efforts give the Company a competitive advantage. Management intends to continue to
capitalize on the Companys leadership in this area through the development of more new and
innovative products. The R&D capability also enables the Company to develop and implement product
and process improvements with respect to the production of molded door facings and doors that
enhance production efficiency and reduce costs. As an integrated manufacturer, the Company believes that it is well positioned to take
advantage of the growing global demand for a variety of molded door facing designs. This
capability is particularly important outside North America where newer molded door designs are
replacing traditional wood doors. The Company has an internal capability, unique in the industry,
to create new molded door facing designs and manufacture its own molds for use in its own
facilities. This provides the Company with the ability to develop proprietary designs that enjoy a
strong identity in the marketplace; more flexibility in meeting customer demand; quicker reaction
time in the production of new designs or design changes; and greater responsiveness to customer
needs. The Company estimates that it spent approximately $7.4 million on R&D during 2004. During
2004 R&D activities resulted in the development of new products that contain patent or patent
pending features, including SAVANNAH and CHEYENNE new interior door designs,  an
enhanced textured fiberglass exterior door in a mahogany finish and, a series of interior doors
with a finish that is applied through digital technology and branded under the mark INDESIGN.
Also, it resulted in several process changes. Competition In 2003, Masonite established its all-products strategy, which provides retail and wholesale
customers with an innovative and wide range of doors. The Stanley Purchase reinforces this
strategy initiative as it presents opportunities for more effective global procurement of raw
materials, product development and standardization and more efficient logistics. Moreover, the
all-products strategy provides customers in the home improvement and wholesale sectors with the
opportunity to market Masonites complete product line and allows Masonite to integrate its sales
force. Management believes that this strategy initiative is a significant competitive advantage. With respect to doors, the Company faces significant competition in North America.
Competitors based in Canada include other manufacturers that distribute on a national basis as well
as smaller regional manufacturers, which focus on particular products. There is a significantly
greater number of competitors based in the United States. Doors are shipped from Canada to the
United States and vice versa. In Europe, the Company faces significant competition from a number of regionally based
competitors and imports. Competition in both North America and Europe is vigorous because firms manufacture similar
products using similar raw materials and manufacturing methods and there has been excess capacity
in the industry. In many of the countries in which the Company operates, an increasingly large share of sales of building products
are sold through large home centers and other retailers. In addition, consolidation among
companies operating in different distribution channels has increased in recent years. These trends
are present to a lesser extent in Latin America and Asia and management expects them to accelerate
in those areas in future years. Management believes the Company is well-positioned to succeed with
these large customers as it offers comprehensive product lines, on-time and -9-




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##### 



complete deliveries,
and consistency in products and merchandising. The Company also provides its home center and other
large retailer customers value-added fabrication and logistical services, including store delivery
of pre-hung interior and exterior doors. Finally, the Company offers a broad range of interior and
exterior doors in the form of stock products, custom-designed and special order doors. This
extensive product and service offering
allows the Company to offer an all products strategy which allows one-stop shopping to
customers and reduces reliance on any one type or style of door. The Company is the largest manufacturer of molded door facings in the world. The rest of the
industry is comprised of one other large, integrated door manufacturer and a number of smaller
regional manufacturers. Competition in the molded door facing business is based on quality, price,
product design, logistics and customer service. The Company produces molded door facings to meet
its own requirements and serves as an important supplier to the door industry at large. The
Company manufactures molded door facings at its facilities in Mississippi, Ireland, Chile and
Malaysia. New Products In 2004, the Company launched several new products containing patentable or patented features
including CHEYENNE and SAVANNAH interior molded panel doors, a new BARRINGTON® MAHOGANY textured
wood-grain exterior fiberglass door and a digitally printed interior door  the INDESIGN
Collection. Other products in Masonites product offering were modified to keep pace with changing
consumer preferences. The SAVANNAH features the patent pending Deep Embossed Engineered Profile Technology
which enables maximum panel depth for enhanced definition. The CHEYENNE interior door is a
two-panel beaded plank design for the consumer looking for a rustic, country or western style. The new BARRINGTON MAHOGANY exterior fiberglass door is an extension of the BARRINGTON line
that was released in 2003. This new product includes a Mahogany wood-grain texture on the surface
of the product that, when stained, looks like an authentic hardwood Mahogany door. This product was
made to be compatible with the full array of BARRINGTON decorative glass, including the newest BR3
design with zinc caming. INDESIGN interior doors have a new finishing system that provides architectural and
design flexibility. By digitally printing doors, the Company replicates exotic veneers, custom
graphics and themes that would otherwise be unavailable or cost prohibitive for many consumers.
Three series were launched in 2004 within the INDESIGN Collection: the Luxury Wood Series features
premium wood-grain designs; the Reflection Series incorporates graphic designs on either
wood-grain or painted doors; and the DISNEY® Series includes a variety of licensed Disney themes
and characters printed onto the surface of a Masonite door. Over the past few years the company launched its OAKCRAFT®, ARTEK®, BARRINGTON® and BELLEVILLE®
Series of exterior fiberglass doors and the SAFE N SOUND® and PALAZZO® Series interior
doors. Raw Materials The primary raw materials used in the manufacture of wood doors are cut-stock (lumber cut to
the various sizes required for components) and door facings. Cut-stock is purchased from suppliers
located on the west coast of North America, the southern United States, Europe, eastern Canada,
southern Africa and South America. Plywood door facings are imported principally from the Far
East, although certain types of hardwood veneer door facings are sourced in North America.
Hardboard door facings are purchased from suppliers in Canada, the United States, South America and
Africa. Molded hardboard door facings are produced at the Companys facilities in the United
States, Ireland, Chile and South Korea. Subject to seasonal fluctuations, the lead time required
for shipments of plywood is approximately three months and ranges from two to eight weeks for
cut-stock and hardboard (molded and flat). -10-




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##### 



The primary raw materials used in the manufacture of steel and fiberglass doors are steel,
fiberglass, polyurethane and cut-stock, which are primarily purchased from suppliers in North
America. Periodically, certain commodity components used in the manufacture of doors rise in price
significantly or decrease in availability. As is the case for many industries in 2004, the Company
experienced increasing costs and,
in some cases shortages of supply, particularly in relation to steel, transportation,
petroleum-based products, lumber and wood related components. The risk associated with rising
material prices is that these costs may not be passed on to customers. The risk related to the
unavailability of certain raw materials is that the Companys sales will decline if alternative
door products manufactured by the Company are not accepted in the marketplace. The Company manages
these risks by developing strategic relationships with suppliers and customers, aggressively
searching for substitute components, developing new products and seeking alternative sources of
supply. Door prices are influenced primarily by the cost of raw materials, which usually comprise more
than 50% of the total cost of the finished product. Principal raw materials are commodity items
that are purchased from suppliers located in North America, the Far East, Europe, South America and
Africa. In most cases, purchases from those suppliers are priced in U.S. dollars or euros.
Fluctuations in the cost of raw materials and currency exchange rates affect all manufacturers of
doors. Seasonality The building products industry in North America is seasonal, particularly in the northeast and
midwest regions of the United States and in most regions of Canada. Masonite experiences a
decrease in sales in the first quarter of each year and also, to a certain extent, in the fourth
quarter of each year. During the winter months in certain regions in which Masonite operates,
inclement weather generally reduces building activity, particularly for new construction.
However, the Companys expansion into areas of more moderate climate (e.g., the southeast,
southern and western part of the United States, France, the United Kingdom and Mexico) and its
focus on the repair, renovation and remodelling segment, which is less seasonal than new
construction, has helped to smooth this influence on operations in the first and fourth quarters.
Additional product and geographic diversification resulting from the 2001 acquisition of Masonite
Corporation has also positively affected the seasonality of the Companys results. Significant Customers Masonite sells its products worldwide to a large number of customers. However, one customer
accounted for approximately 27% of Masonites sales. Due to the depth and breadth of the
relationship with this customer, which operates in multiple geographic regions and which sells a
variety of Masonites products, management of the Company believes that this relationship is likely
to continue. Management is of the view that, while this customer may be able to purchase and sell
some products that compete with Masonites products, it would be difficult to replace all of
Masonites products and services with those of competitors due to the range of products sold to
this customer and number of locations serviced. Environmental Protection The geographic breadth of the Companys facilities subject it to environmental laws,
regulations and guidelines in a number of jurisdictions, including Canada, the United States, the
United Kingdom, France, Mexico, Chile, Costa Rica, Israel, South Africa, South Korea and the
Republic of Ireland. Such laws, regulations and guidelines relate to, among other things, the
discharge of contaminants into water and air and onto land, the storage and handling of certain
regulated materials used in the manufacturing process and the disposal of wastes. The Companys efforts to ensure environmental compliance include the review of its operations
on an ongoing basis utilizing in-house staff and on a selective basis by specialized environmental
consultants. Environmental assessments are conducted as part of the Companys due diligence review
prior to the completion of acquisitions. -11-




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##### 



Based on recent experience and current projections, environmental protection requirements are
not expected to have a material effect on the Companys business, capital expenditures, operations
or financial position. Employees As at December 31, 2004, the Company employed approximately 14,000 employees of which an
estimated 3,500 were covered by collective bargaining agreements. The employees covered by
collective bargaining agreements are situated at the Companys operations as follows: Number
    
    
    Collective AgreementFacility
    
    of Employees
    
    
    Expiration DateCanada:Bethierville, Quebec
    
    
    115
    
    
    
    2005Lac-Megantic, Quebec
    
    
    230
    
    
    
    2006Lac-Megantic, Quebec
    
    
    260
    
    
    
    2007Mississauga, Ontario
    
    
    225
    
    
    
    2007New Westminster, British Columbia
    
    
    121
    
    
    
    2007St. Romuald, Quebec
    
    
    150
    
    
    
    2005St-Hyachinthe, Quebec
    
    
    180
    
    
    
    2007Toronto, Ontario
    
    
    62
    
    
    
    2006Vaughan, Ontario
    
    
    44
    
    
    
    2005United States:Mobile, Alabama
    
    
    180
    
    
    
    2007Stockton, California
    
    
    109
    
    
    
    2006Richmond, Indiana
    
    
    51
    
    
    
    2007South Bend, Indiana
    
    
    58
    
    
    
    2010Laurel, Mississippi
    
    
    650
    
    
    
    2011Toledo, Ohio
    
    
    40
    
    
    
    2005Vandalia, Ohio
    
    
    73
    
    
    
    2006Europe:(1)Barnsley, England
    
    
    229
    
    
    
    n/aBridgwater, England
    
    
    46
    
    
    
    n/aHedingham, England
    
    
    73
    
    
    
    n/aMiddlesbrough, England
    
    
    9
    
    
    
    n/aBordeaux, France
    
    
    78
    
    
    
    n/aDouvres, France
    
    
    15
    
    
    
    n/aOrange, France
    
    
    6
    
    
    
    n/aAfrica:South Africa
    
    
    493
    
    
    
    2005
   Note:(1)
    
    Employees in many European countries participate in industry-wide unions with centralized
bargaining. Local issues are, however, typically negotiated separately. -12-




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##### 



RISK FACTORS The Companys strategic focus is to expand and strengthen its core business of the manufacture
and sale of doors, door components and door entry systems. A strategy that specializes in a
relatively narrow product line in the building products industry may amplify the risks inherent in
the general effect of economic cycles on
residential construction and remodeling. The Company has addressed this risk by broadening its
customer base within the regions and sectors where the Companys products were already sold and by expanding market coverage through geographic
diversification. During the 1990s, the Company acquired numerous facilities in France and the
United Kingdom. The completion of the Masonite Corporation acquisition in 2001 added operations in
Ireland, South Africa and South Korea. Masonites 2004 annual sales outside North America exceeded
$440 million. The Company obtains labor and certain raw materials locally, denominated primarily in their
respective domestic currencies. Other raw materials are imported and prices are often quoted in
U.S. dollars or in the domestic currency in the country where the facility operates. Masonite sells
a significant portion of its products within the respective domestic channels of each country in
which it has a production facility at domestic market selling prices. In situations where import
or export commitments are undertaken, the Company may periodically enter into foreign exchange
contracts to manage and reduce the risk associated with foreign currency fluctuations. Gains and
losses on such contracts offset losses and gains on transactions being hedged. The amount of
foreign exchange contracts matches estimated foreign currency risks over a specified period of
time. The Companys policy is not to utilize foreign exchange contracts for trading or speculative
purposes. The foreign exchange contracts outstanding at December 31, 2004 are described in Note 13
of the annual audited consolidated financial statements. Almost 100% of the Companys interest-bearing debt outstanding at December 31, 2004 carried a
floating interest rate. Therefore, in the normal course of business the Company is exposed to
changes in short-term interest rates that can create uncertainty and variability in its cash flows.
To mitigate this exposure, in September 2001 the Company entered into a five-year interest rate
swap agreement converting a notional $250 million of floating-rate debt into fixed-rate debt that
currently bears interest at 7.96%. In August 2002, another five-year interest rate swap agreement
was executed converting an additional $75 million of amortizing floating-rate debt into a
fixed-rate debt at 5.72%. After giving effect to these interest rate swaps, approximately 58% of
the Companys outstanding interest-bearing debt carries a floating interest rate and the other 42%
is effectively at fixed rates as at December 31, 2004. Management believe that these interest rate
swaps are highly effective in achieving their economic purpose. Certain commodity components used in the manufacture of doors and door components periodically
experience significant changes in price or availability. If material cost increases are
persistent, there is no assurance that the Company will be able to sufficiently increase its
selling prices. In recent years, the Company has responded to fluctuating prices and decreasing
availability of certain materials by seeking sources for similar components from other geographic
regions, developing or purchasing substitute alternative materials and raising selling prices on
various products in certain areas. The geographic breadth of Masonites facilities subjects it to environmental laws, regulations
and guidelines in a number of countries. Such laws, regulations and guidelines relate to, among
other things, the discharge of contaminants into water and air and onto land, the storage and
handling of certain regulated materials used in the manufacturing process, and the disposal of
wastes. The Companys efforts to ensure environmental compliance include the review of existing
operations on an ongoing basis by the Companys environmental staff and on a selective basis by
external environmental consultants. In addition, environmental assessments are conducted as part
of the Companys due diligence review prior to completion of acquisitions. The Company has not incurred any significant costs relating to environmental matters in prior
years. Future expenditures required to comply with any changes in environmental requirements are
anticipated to be undertaken as part of the Companys ongoing capital investment program that is
primarily designed to improve the efficiency of various manufacturing processes. Masonite provides credit to its customers in the normal course of business. Masonite performs
credit evaluations of its customers and maintain reserves for potential credit losses which, when
realized, have been within the range of the Companys expectations. The Company does not generally
require collateral. Masonites credit risk is -13-




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##### 



minimized by undertaking transactions with a large
number of customers in various countries. Masonites credit risk is further minimized by insuring
a significant portion of total trade receivables through the use of credit insurance. DESCRIPTION OF CAPITAL STRUCTURE The Companys authorized share capital consists of an unlimited number of common shares and
unlimited number of first preference shares, issuable in series. Holders of common shares are
entitled to one vote per share at
meetings of shareholders and to receive dividends, if, as and when declared by the Board of
Directors of the Company. In the event of voluntary or involuntary liquidation, dissolution or
winding up of the Company, after payment of all outstanding debts, the remaining assets of the
Company available for distribution would be distributed rateably to the holders of common shares.
Holders of common shares have no pre-emptive redemption, exchange or conversion rights. The
preferred shares are non-voting, except as required by law, and will have such rights, privileges
and restrictions as will be fixed by the Board of Directors of the Company at the time of issue.
The preferred shares are entitled to preference over the common shares with respect to the payment
of dividends and distribution of the assets of the Company in the event of liquidation, dissolution
or winding up of the Company, whether voluntary or involuntary, or other distribution of assets of
the Company for purposes of winding up its affairs. At December 31, 2004, there were 54,796,531
common shares issued and outstanding and no preferred shares outstanding. The Companys senior secured debt has been rated as follows: Agency(1)
    
    Rating Assigned
    
    
    Description of RatingStandard and Poors
    
    BB+
    
    Outlook StableMoodys Investor Service
    
    Ba2
    
    Outlook Positive
   Notes:(1)
    
    An obligation noted BB or Ba2 is less vulnerable to non-payment
than other speculative issues. However it faces major ongoing uncertainties or
exposures to adverse business, financial or economic conditions, which could lead
to the obligors inadequate capacity to meet its financial commitment on the
obligation. The plus sign shows the relative standing within the rating
category. A stable outlook means that the outing is not likely to change. A security rating is not a recommendation to buy, sell or hold securities and may be subject
to revision or withdrawal at any time by the rating organization. MARKET FOR SECURITIES The Companys common shares are listed on the Toronto Stock Exchange and on the New York Stock
Exchange under the symbol MHM. The price ranges and trading volume of Masonites common shares
in 2004 on the Toronto Stock Exchange were as follows: -14-




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##### 



Month
    
    Toronto Stock Exchange (Cdn. $)High
    
    
    Low
    
    
    VolumeJanuary
    
    $
    35.43
    
    
    $
    32.60
    
    
    
    3,328,965February
    
    $
    36.97
    
    
    $
    33.50
    
    
    
    5,104,115March
    
    $
    37.30
    
    
    $
    34.55
    
    
    
    4,552,264April
    
    $
    38.49
    
    
    $
    35.42
    
    
    
    3,783,420May
    
    $
    36.20
    
    
    $
    32.05
    
    
    
    3,419,446June
    
    $
    34.62
    
    
    $
    32.00
    
    
    
    3,736,288July
    
    $
    34.11
    
    
    $
    30.27
    
    
    
    2,625,746August
    
    $
    33.09
    
    
    $
    29.37
    
    
    
    2,156,973September
    
    $
    33.69
    
    
    $
    31.80
    
    
    
    3,218,134October
    
    $
    34.10
    
    
    $
    29.54
    
    
    
    4,000,794November
    
    $
    35.25
    
    
    $
    33.44
    
    
    
    2,120,301December
    
    $
    41.77
    
    
    $
    32.51
    
    
    
    10,404,572
 DIVIDENDS The Company has not declared any dividends on its common shares in each of the three most
recently completed financial years. The payment of dividends is at the discretion of the Board of
Directors of the Company, which considers earnings, capital requirements, the financial condition
of the Company and other relevant factors including restrictions contained in the Companys banking
facilities. DIRECTORS AND OFFICERS The following table and associated notes set forth as at the date hereof the name of each
director and executive officer of the Company and certain senior managers of the Company, their
municipalities of residence, their respective principal occupations and, where applicable, their
membership on an executive committee of the Board of Directors. In addition, it indicates the
period during which each director has served as a director of the Company or its predecessor. As a
group, based on information provided to the Company by each director, executive officer, and senior
manager listed below, all directors, executive officers and the senior managers of the Company
listed below beneficially owned, directly or indirectly, or exercised control or direction over a
total of 2,097,137 common shares of the Company as of the date hereof, representing approximately
3.8% of the outstanding common shares. The terms of office of all of the directors of the Company
expire at the termination of the next annual meeting of shareholders or until their successor is
elected or appointed. -15-




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##### 



Present principal occupation (includingDirector of the Company or
    
    positions held with theName and municipality of residence
    
    its predecessor since
    
    Company)(5)HOWARD L. BECK, Q.C.(1)(2)(3)
    
    April 24, 1990
    
    Corporate DirectorToronto, Ontario, CanadaJOHN J. BERTON(1)
    
    May 13, 1991
    
    President, Starlaw Holdings LimitedToronto, Ontario, Canada
    
    
    
    (private investment company)JOHN M. CASSADAY(1)
    
    August 3, 1993
    
    President and Chief Executive Officer,Toronto, Ontario, Canada
    
    
    
    Corus Entertainment Inc.PETER A. CROSSGROVE, C.M.(2)(3)
    
    October 27, 1989
    
    Chairman of Board, Corporate DirectorToronto, Ontario, CanadaFREDRIK S. EATON, O.C., O. Ont.(3)
    
    August 10, 1994
    
    Chairman, White Raven Capital Corp.Toronto, Ontario, Canada
    
    
    
    (holding company)ALAN R. McFARLAND(2)
    
    March 24, 1994
    
    Managing Member, McFarland Dewey & Co.,New York, New York, USA
    
    
    
    LLC (investment bank)PHILIP S. ORSINO, F.C.A., O.C.
    
    October 27, 1989
    
    President and Chief Executive OfficerToronto, Ontario, CanadaJOSEPH L. ROTMAN(1)
    
    May 27, 1994
    
    Chairman and CEO, Roy-L Capital CorporationToronto, Ontario, Canada
    
    
    
    (private family investment company)SAUL M. SPEARS(3)
    
    December 17, 1979
    
    Corporate DirectorToronto, Ontario, CanadaJOHN F. AMBRUZ
    
    
    
    Executive Vice President StrategicWest Harrison, New York, USA
    
    
    
    DevelopmentPAUL A. BERNARDS, C.A., C.P.A.
    
    
    
    Executive Vice President and ChiefToronto, Ontario, Canada
    
    
    
    Financial OfficerBRENDA L. BROGDEN, C.G.A.(4)
    
    
    
    Director, AdministrationTerra Cotta, Ontario, CanadaHENRY COGHLAN
    
    
    
    Vice President, Technology and EngineeringElburn, Illinois, USAWILFRED A. CURTIS
    
    
    
    Vice President, Risk ManagementToronto, Ontario, CanadaPHILIP P. KOHNER
    
    
    
    Vice President, Human ResourcesClearwater, Florida, USAJAMES U. MORRISON
    
    
    
    Executive Vice President and Group ChiefTampa, Florida, USA
    
    
    
    Operating OfficerJOHN PRZEDPELSKI
    
    
    
    Chief Information OfficerTampa, Florida, USAJAMES RABE
    
    
    
    Vice President, Environmental Health andNaperville, Illinois, USA
    
    
    
    SafetyLAWRENCE P. REPAR
    
    
    
    Executive Vice President and Group ChiefTampa, Florida, USA
    
    
    
    Operating OfficerROBERT V. TUBBESING, C.A.
    
    
    
    Executive Vice President, FinanceToronto, Ontario, CanadaHARLEY ULSTER, L.L.B.
    
    
    
    Executive Vice President, General CounselToronto, Ontario, Canada
    
    
    
    and Corporate Secretary
 -16-




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##### 



Present principal occupation (includingDirector of the Company or
    
    positions held with theName and municipality of residence
    
    its predecessor since
    
    Company)(5)CHRISTOPHER A. VIROSTEK, C.A.,
    
    
    
    Controller, Financial ReportingC.P.A.(4)Mississauga, Ontario, Canada
   Notes:(1)
    
    Member of the Audit Committee.(2)
    
    Member of the Human Resource and Compensation Committee.(3)
    
    Member of the Nominating and Corporate Governance Committee.(4)
    
    Senior Manager.(5)
    
    Information provided with respect to the principal occupation of each director is based
on information furnished to the Company by such director. All of the above directors and
executive officers have held their present principal occupations or executive positions
with the same or associated firms for the past five years, except as indicated below. John F. Ambruz
    
    Prior to May 1, 2004, consultant to Masonite and
prior to May 2000, Vice President Strategic
Development of Premdor Inc.;Paul A. Bernards
    
    Prior to June 2004, Vice President and Corporate
Controller of the Company and prior to May 2000,
Corporate Controller of the Company;Brenda L. Brogden
    
    Prior to May 2003, Director of Corporate
Accounting of the Company;Henry Coghlan
    
    Prior to May 3, 2004, Manager, Technology and
Engineering, Masonite Corporation and prior to
September 1, 2001, Special Project Manager,
Masonite Corporation;Philip K, Kohner
    
    Prior to May 3, 2004, Manager, Human Resources,
Masonite Corporation and prior to September 1,
2001, Business Human Resource Leader, Masonite
CorporationJohn Przedpelski
    
    Prior to May 3, 2004, Chief Information Officer,
Masonite Door Corporation and prior to December
31, 2003, Chief Information Officer, Masonite
Holdings, Inc. and prior to October 11, 2002,
Chief Information Officer, Premdor U.S. Holdings
Inc.;James Rabe
    
    Prior to May 3, 2004, Vice President,
Environmental Health and Safety, Masonite
Corporation and prior to September 1, 2001
Manager, Environmental Health and Safety, Masonite
Corporation;James U. Morrison
    
    Prior to September 2001, Executive Vice President
and General Manager, Building and Industrial
Products, Masonite Corporation;Robert V. Tubbesing
    
    Prior to June 2004, Vice President and Chief
Financial Officer of the Company; andChristopher A. Virostek
    
    Prior to May 2003, Financial Controller of the
Company and prior to March 2002, Audit Manager in
public accounting practice
 One director of the Company, Mr. J.L. Rotman, has been a director of other companies,
which during the past ten years have been the subject of a cease trade or similar order while Mr.
Rotman was acting as a director of such companies. Livent Inc. was the subject of a cease trade
order issued by the Ontario Securities Commission on -17-




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##### 



August 7, 1998 following the discovery of
accounting irregularities. In November 1998 Livent Inc. filed a voluntary petition under Chapter
11 of the U.S. Bankruptcy Code and filed for protection under the Companies Creditors Arrangement
Act in Canada. The cease trade order was revoked effective November 20, 1998 and Mr. Rotman
resigned as a director of Livent Inc. on September 29, 1999. Paragon Entertainment Corporation
made a filing under the Companies Creditors Arrangement Act in April 1998; Mr. Rotman resigned as a
director of Paragon in June 1998. LEGAL PROCEEDINGS The Company is involved in various claims and legal actions. In the opinion of management,
the ultimate disposition of these matters will not have a material adverse effect on the Companys
consolidated financial position or liquidity. TRANSFER AGENT AND REGISTRARS The Companys transfer agent in Canada is Computershare Trust Company of Canada at its
principal office in Toronto, Ontario. The Companys transfer agent in the U.S. is Computershare Trust Company, Inc. AUDIT MATTERS Audit Committee The members of Masonites audit committee are Howard L. Beck, John J. Berton, John M.
Cassaday and Peter A. Crossgrove. Each of the members of Masonites audit committee is independent
and financially literate for the purposes of applicable Canadian and U.S. securities legislation.
Reference is made to Masonites Management Information Circular dated March 26, 2004 relating to
the Companys annual meeting of shareholders held on May 3, 2004 for information about the mandate
of the audit committee and the experience of each member of the audit committee that is relevant to
the performance of his responsibilities as an audit committee member. The Board of Directors of the Company has determined that it has at least one audit committee
financial expert serving on its audit committee. Mr. John Cassaday has been determined by the
board of Masonite to meet the audit committee financial expertcriteria prescribed by the
Securities and Exchange Commission (SEC) and applicable Canadian regulatory requirements and is
independent, as that term is defined by the New York Stock Exchanges listing standards applicable
to Masonite and applicable Canadian regulatory requirements. The SEC has indicated that the
designation of Mr. Cassaday as an audit committee financial expert does not make Mr. Cassaday an
expertfor any purposes, impose any duties, obligations or liability on Mr. Cassaday, that are
greater than those imposed on members of the audit committee and Board of Directors who do not
carry this designation, or affect the duties, obligations or liability of any other member of the
audit committee. Audit and Related Fees For the year ended December 31, 2004, fees for audit and related services provided by KPMG
LLP, Masonites independent external auditors to Masonite were $1,616,000 (2003  $1,130,000).
Non-audit fees paid to KPMG LLP relating to tax planning and compliance in 2004 were $1,082,000
(2003  $1,076,000). Details are shown in the following table: -18-




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##### 



Year Ended December 31, 2004
    
    
    Year Ended December 31, 2003Audit Fees
    
    
    $1,194,000
    
    
    
    $1,067,000Audit Related Fees
    
    
    $422,000
    
    
    
    $63,000Tax Fees
    
    
    $1,082,000
    
    
    
    $1,076,000All Other Fees
    
    Nil
    
    NilTotal:
    
    
    $2,698,000
    
    
    
    $2,206,000
 Audit Fees Audit fees were for professional services rendered by KPMG LLP for the audit of Masonites
annual financial statements and services provided in connection with statutory and regulatory
filings or engagements. Audit-Related Fees Audit-related fees were for assurance and related services reasonably related to the
performance of the audit of the annual statements and are not reported under Audit Feesabove.
These services primarily consisted of reviewing documents related to due diligence services for
business acquisitions and business divestitures. Tax Fees Tax fees were for tax compliance, tax advice and tax planning professional services. These
services consisted of tax compliance including the review of tax returns, and tax planning and
advisory services relating to common forms of domestic and international taxation (i.e. income tax,
capital tax, goods and services tax, value added tax and payroll tax). All Other Fees In 2004 and 2003, no fees for services were incurred other than those described above under
Audit Fees, Audit-Related Feesand Tax Fees. Pre-Approval Policies and Procedures It is within the mandate of Masonites audit committee to approve all audit and non-audit
related fees. The audit committee has pre-approved specifically identified non-audit tax-related
services, including tax compliance; the review of tax returns; and tax planning and advisory
services relating to common forms of domestic and international taxation (i.e. income tax, capital
tax, goods and services tax, value added tax and payroll tax). The audit committee will be
informed routinely as to the non-audit services actually provided by the auditors pursuant to this
pre-approval process. The auditors also present the estimate for the annual audit related services
to the Committee for approval prior to undertaking the annual audit of the financial statements. DISCLOSURE CONTROLS AND PROCEDURES Disclosure Controls and Procedures Masonite maintains a system of disclosure controls and procedures that is designed to ensure
that information required to be disclosed by Masonite is accumulated and communicated to
management, including the Chief Executive Officer and the Chief Financial Officer, in a timely
manner. Under the supervision and with the participation of its management, including its Chief
Executive Officer and Chief Financial Officer, Masonite has evaluated the effectiveness of the
design and operation of these disclosure controls and procedures as of the end of -19-




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##### 



the period covered by this report. Based on that evaluation, Masonites Chief Executive
Officer and Chief Financial Officer concluded that Masonites system of disclosure controls and
procedures is effective. Change in Internal Controls Over Financial Reporting Masonite maintains a system of internal controls over financial reporting. There were no
changes in Masonite internal controls that occurred during the period covered by this report that
have materially affected, or are reasonably likely to materially affect, Masonites internal
control over financial reporting. CODE OF ETHICS Masonite has adopted a Code of Ethics for its Chief Executive Officer, Chief Financial Officer
and directors and officers. The Code of Ethics is available on the Companys website at
www.masonite.com and in print to any shareholder who requests them. All amendments to the code,
and all waivers of a code with respect to any of the persons covered by it, will be posted on the
Companys website and provided in print to any shareholder who requests them. CORPORATE GOVERNANCE GUIDELINES The Company has adopted corporate governance guidelines and established committees regarding
such matters as, but not limited to: director qualification standards and responsibilities; access
by directors to management and independent advisors; director compensation; and management
succession. The guidelines and board committee charters are available on the Companys website at
www.masonite.com. Although the Company files as a foreign private issuer in the United States,
Masonite is in compliance with the listing requirements of the New York Stock Exchange as they
apply to U.S. domestic issuers. OFF-BALANCE SHEET ARRANGEMENTS The Company does not have any material off-balance sheet arrangements other than those
disclosed in notes 3, 9, 13 and 14 to the consolidated financial statements for the year ended
December 31, 2004. ADDITIONAL INFORMATION Additional information, including directors and officers remuneration and indebtedness,
principal holders of the Companys securities and shares authorized for issuance under equity
compensation plans, where applicable, is contained in the Companys Management Information Circular
dated March 4, 2005 with respect to the special meeting of shareholders to be held on March 31,
2005. Additional financial information is provided in the Companys consolidated financial
statements for the year ended December 31, 2004, together with the accompanying report of the
auditors, as well as the Companys Management Discussion and Analysis of Financial Condition and
Results of Operations for the period. Additional information about the Company may be found on SEDAR at www.sedar.com. FORWARD-LOOKING STATEMENTS This Annual Information Form and other written reports and oral statements made by the Company
may include forward-looking statements, all of which are subject to risks and uncertainties. One
can identify these forward-looking statements by their use of words such as expects, plans,
will, estimates, intends, forecasts, projects and other words of similar meaning, or by
the fact that they do not relate strictly to historical or current facts. These statements are
likely to address, but may not be limited to, the Companys growth strategy and financial results.
Readers must carefully consider any such statements and should understand that many factors could
cause actual results and developments to differ materially from the Companys forward-looking
statements. These factors may include inaccurate assumptions and a broad variety of other known
and unknown risks and uncertainties, including: general economic, market and business conditions;
levels of construction and renovation
activity; competition; financing risks; ability to manage expanding operations; commitments;
new services; retention -20-




---



##### 



of key management personnel; environmental and other government regulation;
and other factors. No forward-looking statement can be guaranteed and actual future results may
vary materially. The Company disclaims any responsibility to update these forward-looking
statements. -21-




---



##### 



Consolidated Financial Statements
(Expressed in U.S. dollars) MASONITE INTERNATIONALCORPORATION Years ended December 31, 2004 and 2003




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##### 



AUDITORS REPORT TO THE SHAREHOLDERS We have audited the consolidated balance sheets of Masonite International Corporation as at
December 31, 2004 and 2003 and the consolidated statements of operations, changes in shareholders
equity and cash flows for the years then ended. 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 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. In our opinion, these consolidated financial statements present fairly, in all material respects,
the financial position of the Company as at December 31, 2004 and 2003 and the results of its
operations and its cash flows for the years then ended in accordance with Canadian generally
accepted accounting principles. /s/ KPMG LLP Chartered Accountants Toronto, Canada
March 4, 2005




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##### 



MASONITE INTERNATIONAL CORPORATION
Consolidated Statement of Operations
(In thousands of U.S. dollars, except earnings per share) Years ended December 31, 2004 and 2003 2004
    
    
    2003Sales
    
    $
    2,199,865
    
    
    $
    1,777,238Cost of sales
    
    
    1,722,711
    
    
    
    1,380,178477,154
    
    
    
    397,060Selling, general and administration expenses
    
    
    188,126
    
    
    
    162,166Income before the undernoted
    
    
    289,028
    
    
    
    234,894Depreciation and amortization
    
    
    63,914
    
    
    
    48,561Interest
    
    
    39,968
    
    
    
    35,536Other
expense, net (note 15)
    
    
    7,703
    
    
    
    3,145Income before income taxes and non-controlling
interest
    
    
    177,443
    
    
    
    147,652Income taxes (note 16)
    
    
    42,653
    
    
    
    34,464Non-controlling interest
    
    
    6,839
    
    
    
    5,517Net income
    
    $
    127,951
    
    
    $
    107,671Earnings per share (note 18):Basic
    
    $
    2.34
    
    
    $
    2.00Diluted
    
    
    2.29
    
    
    
    1.95
 See accompanying notes to consolidated financial statements. 1




---



##### 



MASONITE INTERNATIONAL CORPORATION
Consolidated Balance Sheet
(In thousands of U.S. dollars) December 31, 2004 and 2003 2004
    
    
    2003AssetsCurrent assets:Cash and cash equivalents
    
    $
    86,488
    
    
    $
    129,676Accounts receivable (note 3)
    
    
    257,234
    
    
    
    258,264Inventories (note 4)
    
    
    421,786
    
    
    
    321,145Prepaid expenses
    
    
    16,695
    
    
    
    17,185Current future income taxes (note 16)
    
    
    19,653
    
    
    
    29,318801,856
    
    
    
    755,588Property, plant and equipment (note 5)
    
    
    931,180
    
    
    
    752,110Goodwill
    
    
    289,130
    
    
    
    130,475Intangible assets (note 6)
    
    
    37,023
    
    
    
    2,707Other assets (note 7)
    
    
    35,805
    
    
    
    43,956Long-term future income taxes (note 16)
    
    
    13,491
    
    
    
    8,315$
    2,108,485
    
    
    $
    1,693,151Liabilities and Shareholders EquityCurrent liabilities:Bank indebtedness (note 8)
    
    $
    19,082
    
    
    $
    6,608Trade accounts payable
    
    
    154,226
    
    
    
    150,702Accrued expenses and other liabilities
    
    
    165,493
    
    
    
    150,782Income taxes payable
    
    
    11,509
    
    
    
    27,013Current portion of long-term debt (note 9)
    
    
    24,834
    
    
    
    35,498375,144
    
    
    
    370,603Long-term debt (note 9)
    
    
    593,363
    
    
    
    447,260Long-term future income taxes (note 16)
    
    
    134,662
    
    
    
    106,662Non-controlling interest (note 10)
    
    
    88,368
    
    
    
    35,986Shareholders equity:Share capital (note 11)
    
    
    271,126
    
    
    
    266,870Contributed surplus
    
    
    587
    
    
    
    191Retained earnings
    
    
    529,611
    
    
    
    403,525Cumulative translation adjustments
    
    
    115,624
    
    
    
    62,054916,948
    
    
    
    732,640Commitments (note 13)Guarantees and contingencies (note 14)$
    2,108,485
    
    
    $
    1,693,151
 See accompanying notes to consolidated financial statements. On behalf of the Board: Peter A. Crossgrove [signed]
    
    DirectorPhilip S. Orsino [signed]
    
    Director
 2




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##### 



MASONITE INTERNATIONAL CORPORATION
Consolidated Statement of Changes in Shareholders Equity
(In thousands of U.S. dollars) Years ended December 31, 2004 and 2003 2004
    
    
    2003Common Shares:Balance at beginning of period
    
    $
    266,870
    
    
    $
    257,325Issued (note 11(a))
    
    
    4,750
    
    
    
    9,545Purchased for cancellation (note 11)
    
    
    (494
    )
    
    
    Balance at end of period
    
    $
    271,126
    
    
    $
    266,870Contributed Surplus:Balance at beginning of period
    
    $
    191
    
    
    $
    Stock-based compensation
awards (note 11(a))
    
    
    396
    
    
    
    191Balance at end of period
    
    $
    587
    
    
    $
    191Retained Earnings:Balance at beginning of period
    
    $
    403,525
    
    
    $
    295,854Net income
    
    
    127,951
    
    
    
    107,671Premium paid on common shares
purchased for cancellation (note 11)
    
    
    (1,865
    )
    
    
    Balance at end of period
    
    $
    529,611
    
    
    $
    403,525Cumulative Translation Adjustments:Balance at beginning of period
    
    $
    62,054
    
    
    $
    (738
    )Unrealized gain on translation of net
investments in foreign operations
    
    
    53,570
    
    
    
    62,792Balance at end of period
    
    $
    115,624
    
    
    $
    62,054
 See accompanying notes to consolidated financial statements. 3




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##### 



MASONITE INTERNATIONAL CORPORATION
Consolidated Statement of Cash Flows
(In thousands of U.S. dollars) Years ended December 31, 2004 and 2003 2004
    
    
    2003Cash provided by (used in):Operating activities:Net income
    
    $
    127,951
    
    
    $
    107,671Items not involving cash:Depreciation and amortization
    
    
    63,914
    
    
    
    48,561Impairment of property, plant and equipment
    
    
    2,919
    
    
    
    (Gain) loss on sale of property, plant
and equipment
    
    
    (5,145
    )
    
    
    2,385(Income) loss from equity investments
    
    
    (101
    )
    
    
    760Stock option plan
    
    
    396
    
    
    
    191Future income taxes
    
    
    29,498
    
    
    
    9,082Pension and post retirement income
    
    
    (2,527
    )
    
    
    (4,715
    )Non-controlling interest
    
    
    6,839
    
    
    
    5,517223,744
    
    
    
    169,452Change in non-cash operating working capital:Accounts receivable
    
    
    29,253
    
    
    
    (62,290
    )Inventories
    
    
    (75,258
    )
    
    
    (29,769
    )Income taxes payable
    
    
    (11,967
    )
    
    
    23,125Prepaid expenses
    
    
    1,165
    
    
    
    (5,977
    )Trade accounts payable
    
    
    (24,491
    )
    
    
    64,998Accrued expenses and other liabilities
    
    
    4,449
    
    
    
    (4,767
    )146,895
    
    
    
    154,772Financing activities:Change in bank and other indebtedness
    
    
    12,474
    
    
    
    2,357Proceeds from issuance of common shares
    
    
    4,750
    
    
    
    9,545Repurchase of common shares
    
    
    (2,359
    )
    
    
    Proceeds from issuance of long-term debt
    
    
    200,000
    
    
    
    Repayment of long-term debt
    
    
    (103,751
    )
    
    
    (51,140
    )Deferred financing fees
    
    
    (3,227
    )
    
    
    (600
    )107,887
    
    
    
    (39,838
    )Investing activities:Proceeds from sale of property, plant and
equipment
    
    
    10,381
    
    
    
    13,947Additions to property, plant and equipment
    
    
    (59,519
    )
    
    
    (49,454
    )Acquisitions (note 2)
    
    
    (254,779
    )
    
    
    (4,476
    )Equity investments
    
    
    
    
    
    
    (851
    )Other investing activities
    
    
    (13,893
    )
    
    
    (7,297
    )(317,810
    )
    
    
    (48,131
    )Net foreign currency translation adjustment
    
    
    19,840
    
    
    
    15,229(Decrease) increase in cash and cash equivalents
    
    
    (43,188
    )
    
    
    82,032Cash and cash equivalents, beginning of year
    
    
    129,676
    
    
    
    47,644Cash and cash equivalents, end of year
    
    $
    86,488
    
    
    $
    129,676
 Supplemental cash flow information (note 17) See accompanying notes to consolidated financial statements. 4




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##### 



MASONITE INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except share and per share amounts) Years ended December 31, 2004 and 2003  The primary business activity of Masonite International Corporation (the Company) is the
manufacture and sale of doors, door components and door entry systems.  1.
    Significant accounting policies: These consolidated financial statements are prepared in accordance with Canadian generally accepted
accounting principles (GAAP), which differs in some respects from United States GAAP as disclosed
in note 22. A summary of the significant accounting principles adopted by the Company is as
follows:  (a)
    Principles of consolidation:The consolidated financial statements include the accounts of the Company, its
subsidiaries and its proportionate share of assets, liabilities, revenues and expenses of
jointly controlled operations. During 2004, the Company adopted Accounting Guideline 15,
Consolidation of Variable Interest Entities (AcG-15). As a result of early adopting
this guideline on a prospective basis, the Company consolidates variable interest
entities (VIEs) for which it is deemed to be the primary beneficiary. The results of
subsidiaries acquired during the year are consolidated from their respective dates of
acquisition using the purchase method. Intercompany accounts and transactions have been
eliminated upon consolidation.(b)
    Generally accepted accounting principles:Effective January 1, 2004, the Company adopted Handbook sections 1100, Generally
Accepted Accounting Principles, and 1400, General Standards of Financial Statement
Presentation issued by the Canadian Institute of Chartered Accountants (CICA). These
sections establish standards for financial reporting and fair presentation in accordance
with Canadian GAAP and provide guidance on sources to consult when a matter is not dealt
with explicitly in the primary sources of Canadian GAAP. In addition, the Emerging
Issues Committee issued abstract 147, Implementation of Accounting Changes Resulting
from the Application of CICA 1100. This abstract specifically outlines how to account
for any changes in an accounting policy made as a result of adopting CICA 1100. The
adoption of these standards had no significant impact on these audited consolidated
financial statements.(c)
    Cash and cash equivalents:Cash includes cash equivalents which are short-term highly liquid investments with
original maturities of three months or less. 5




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##### 



MASONITE INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements (continued)
(In thousands of U.S. dollars, except share and per share amounts) Years ended December 31, 2004 and 2003   (d)
    Accounts receivable:Transfers of receivables are accounted for as sales when the Company is considered to
have surrendered control over the transferred accounts receivables and receives proceeds,
other than a beneficial interest, in the assets sold. This is considered to have
occurred when the transferred receivables have been put presumptively beyond the reach of
the Company and its creditors after the sale, there are no constraints put on the
transferee of taking advantage of its right to pledge or exchange the assets received,
and the Company no longer maintains effective control over the transferred receivables.
In recording a sale, the receivables are removed from the consolidated balance sheet and
a gain or loss is recognized immediately based on the carrying amount of the receivables
transferred.(e)
    Inventories:Raw materials are valued at the lower of cost and replacement cost. Finished goods are
valued at the lower of cost (comprised of materials and conversion costs) and net
realizable value. Cost is determined on a first-in, first-out basis. In determining the
net realizable value, the Company considers factors such as yield, turnover, expected
future demand and past experience.(f)
    Investments:Long-term investments over which the Company has significant influence are recorded on
the equity basis. The investments include the Companys share of undistributed earnings
and losses since acquisition and are reduced by the Companys share of dividends paid.
Investments are written down when there is evidence that a decline in value is other than
temporary. Equity income is included in other expense on the consolidated
statement of operations.(g)
    Property, plant and equipment:Property, plant and equipment are stated at cost. Depreciation is provided on the
carrying values of buildings and machinery and equipment by the straight-line method
based on the estimated useful lives as follows: 6




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##### 



MASONITE INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements (continued)
(In thousands of U.S. dollars, except share and per share amounts) Years ended December 31, 2004 and 2003    Buildings
    
    20-40 yearsMachinery and equipment
    
    5-25 years
  Improvements and extraordinary repairs that extend the life of an asset are capitalized;
other repairs and maintenance are expensed. When assets are retired or otherwise
disposed of, their carrying values and accumulated depreciation are removed from the
accounts.An impairment loss is recognized when the carrying amount of an asset to be held and used
exceeds the sum of the undiscounted cash flows expected from its use and disposal.
Impairments are measured as the amount by which the carrying amount of the asset exceeds
its fair value. Specified criteria must be met for classifying an asset as held-for-sale.
In addition, assets classified as held-for-sale must be measured at the lower of their
carrying amounts or fair value, net of estimated disposal costs.(h)
    Goodwill:The Company uses the purchase method of accounting for all business combinations. The
Company evaluates all business combinations for intangible assets that should be
recognized and reported apart from goodwill. Shares issued in business combinations are
measured using an average share price for a reasonable period before and after the date
the terms of the acquisition are agreed and announced.Goodwill is not amortized but instead is tested for impairment annually or more
frequently if events or changes in circumstances indicate the carrying amount may not be
recoverable. Impairment is tested at the reporting unit level by comparing the reporting
units carrying amount to its fair value. Fair values of reporting units are estimated
using an income approach. If the carrying amount exceeds fair value, there is impairment
in goodwill. Any impairment in goodwill is measured by allocating the fair value of the
reporting unit in a manner similar to a purchase price allocation and comparing the
notional goodwill from the fair value allocation to the carrying value of goodwill.The Company has completed the annual impairment test for its reporting units and has
determined that there is no impairment of goodwill. 7




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##### 



MASONITE INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements (continued)
(In thousands of U.S. dollars, except share and per share amounts) Years ended December 31, 2004 and 2003   (i)
    Intangible assets:Intangible assets include customer relationships, non-compete agreements, order backlogs
and patents and trademarks. Intangible assets are amortized on a straight-line basis
over their estimated useful lives, as follows: Customer relationships
    
    Over expected relationship period, not exceeding 12 yearsNon-compete agreements
    
    Over life of non-compete agreementOrder backlogs
    
    Over expected completion periodPatents
    
    Over expected useful life, not exceeding 17 years
  The Company reviews the carrying value of these assets at least annually for evidence of
impairment. An impairment loss is recognized when the estimate of undiscounted future
cash flows generated by such assets is less than the carrying amount. Measurement of the
impairment loss is based on the fair value of the asset, which is measured using
discounted cash flows when quoted market prices are not available.(j)
    Other assets:Other assets includes, equity investments, long-term receivables, pension assets and
deferred financing costs. Deferred financing costs are amortized over the term of the
loan.(k)
    Future income taxes:The Company uses the asset and liability method of accounting for income taxes. Under
the asset and liability method, future tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax bases.
Future tax assets and liabilities are measured using enacted or substantively enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on future tax assets and
liabilities of a change in tax rates is recognized in income in the period that includes
the date of enactment or substantive enactment. A valuation allowance is recorded to
reduce future tax assets to an amount that is anticipated to be realized on a more likely
than not basis. 8




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##### 



MASONITE INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements (continued)
(In thousands of U.S. dollars, except share and per share amounts) Years ended December 31, 2004 and 2003   (l)
    Employee future benefits:The Company maintains defined benefit pension plans and other post-retirement benefits
covering certain employees. Earnings are charged with the cost of benefits earned by
employees as services are rendered. The cost reflects managements best estimates of the
pension plans expected investment yields, wage and salary escalation, expected health
care costs, mortality of members, terminations and the ages at which members will retire.
Changes in these assumptions could impact future pension expense. The excess of the net
actuarial gain (loss) over 10% of the greater of the benefit obligation and the fair
value of plan assets at the beginning of the year is amortized over the average remaining
service lives of the members. The average remaining service life of the members is 14
years (2003  13) for the pension plan, 6 years (2003  8) for medical benefits and 13
years (2003  16) for life insurance benefits under the other employee post-retirement
benefits plan.Assets are valued at fair value for the purpose of calculating the expected return on
plan assets. Past service costs arising from plan amendments are amortized on a
straight-line basis over the average remaining service period of employees active at the
date of amendment.The difference between pension cost, determined on an accounting basis, and the funding
of pension costs, as required by regulatory authorities, gives rise to a timing
difference in the recognition of pension expense, which appears on the consolidated
balance sheet as a pension asset (note 7).When a restructuring of a benefit plan gives rise to both a curtailment and a settlement
of obligations, the curtailment is accounted for prior to the settlement. Curtailment
gains are offset against unrecognized losses and any excess gains and all curtailment
losses are recorded in the period in which the curtailment occurs.The Company is responsible for continuing to provide health care and life insurance
benefits for certain retired employees. The amount of the accumulated post-retirement
benefits obligation has been actuarially determined and benefit costs are charged against
the obligation as incurred. 9




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##### 



MASONITE INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements (continued)
(In thousands of U.S. dollars, except share and per share amounts) Years ended December 31, 2004 and 2003   (m)
    Severance and contractual termination benefits:Severance benefits are accrued and expensed when the benefit is probable and reasonably
estimable, which is generally when the decision to terminate the employee is made by
management of sufficient authority. A liability and expense is charged for contractual
termination benefits based on their fair value when it is probable that employees will be
entitled to the benefits, and the amount can be reasonably estimated. This occurs when
management approves and commits the Company to the obligation, managements termination
plan specifically identifies all significant actions to be taken, actions required to
fulfill managements plan are expected to begin as soon as possible, and significant
changes to the plan are not likely.(n)
    Earnings per share:Basic earnings per share are computed by dividing net earnings by the weighted average
number of shares outstanding during the reporting period. Diluted earnings per share are
computed similar to basic earnings per share, except that the weighted average number of
 shares outstanding is increased to include additional shares from the assumed exercise of
stock options, if dilutive. The number of additional shares is calculated by assuming
that outstanding stock options were exercised and that the proceeds from such exercises
were used to acquire shares of common stock at the average market price during the
reporting period.(o)
    Currency translation:The accounts of certain self-sustaining foreign operations of the Company are maintained
in functional currencies other than the U.S. dollar. Assets and liabilities have been
translated into U.S. dollars at exchange rates prevailing at the end of the year and
results of operations at the average exchange rates for the period. Unrealized exchange
gains and losses arising on the translation of the financial statements of the Companys
non-U.S dollar functional currency operations are accumulated in the cumulative
translation adjustments account in shareholders equity. 10




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##### 



MASONITE INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements (continued)
(In thousands of U.S. dollars, except share and per share amounts) Years ended December 31, 2004 and 2003   (p)
    Asset retirement obligations:Effective January 1, 2004, the Company adopted CICA Handbook section 3110, Asset
Retirement Obligations, (ARO) concerning future removal and site restoration. The
section establishes standards for the recognition, measurement and disclosure applicable
to legal obligations associated with the retirement of property, plant and equipment that
results from its acquisition, construction, development or normal operations. This
standard is effective on a retroactive basis with restatement of prior periods. The
obligations are measured initially at fair value in the year in which it is incurred.
Upon initial recognition of a liability for an ARO, a corresponding asset retirement cost
is added to the carrying amount of the related asset. Following the initial recognition
of an ARO, the carrying amount of the obligation is increased for the passage of time and
adjusted for revisions to the amount or timing of the underlying cash flows needed to
settle the obligation. The cost is amortized into income subsequently on the same basis
as the related asset. There was no significant impact on the audited consolidated
financial statements as a result of adopting this accounting policy.(q)
    Use of estimates:The preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the dates of the financial statements and the reported amounts of revenue and expenses
during the reporting period. Significant areas requiring the use of management estimates
include the valuation of the allowance for doubtful accounts, the net realizable value of
inventories, the determination of obligations under employee future benefit plans, the
determination of stock based compensation, the valuation of acquired intangible assets,
the determination of fair value of financial instruments, the fair value of goodwill and
the useful lives of long-lived assets as well as determination of impairment thereon, and
recoverability of future income tax assets. Actual results could differ from those
estimates.(r)
    Financial instruments:The estimated fair value of a financial instrument is the amount at which the instrument
could be exchanged in a current transaction between willing parties, other than a forced
or liquidation sale. These estimates, although based on the relevant market information
about the financial instrument, are subjective in nature and involve uncertainties and
matters of significant judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates. 11




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##### 



MASONITE INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements (continued)
(In thousands of U.S. dollars, except share and per share amounts) Years ended December 31, 2004 and 2003   (i)
    Fair values:The carrying values of cash, accounts receivable, bank indebtedness and trade
accounts payable and accrued expenses and other liabilities approximate fair values
because of the near-term nature of these instruments.The carrying values of interest-bearing amounts, including long-term debt,
approximate fair values since the interest rates are based on market rates of
interest for similar debt securities.Other financial instruments held or issued by the Company include long-term
receivables. The Company does not have plans to sell these financial instruments to
third parties and will realize or settle them in the ordinary course of business. No
quoted market prices exist for these instruments because they are not traded in an
active and liquid market. Accordingly, the fair values of these amounts are not
readily determinable.The fair value of interest rate swaps are based on valuation models prepared by
financial institutions and represents the estimated amounts the Company would pay or
receive to terminate the contracts.(ii)
    Credit risk:Credit risk arises from the potential default of a customer in meeting its financial
obligations to the Company. The Company has credit evaluation, approval and
monitoring processes, including credit insurance, intended to mitigate potential
credit risk.The Company evaluates the collectibility of accounts receivable and records an
allowance for doubtful accounts, which reduces the receivables to the amount
management reasonably believes will be collected. A specific allowance is recorded
against customer receivables that are considered to be impaired based on the
Companys knowledge of the financial condition of its customers and the availability
of credit insurance. 12




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##### 



MASONITE INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements (continued)
(In thousands of U.S. dollars, except share and per share amounts) Years ended December 31, 2004 and 2003   In determining the amount of the allowance, factors including, but not limited to,
the following are considered: the aging of the receivables, customer and industry
concentrations, current business environment, credit insurance available and
historical experience.Credit risk exists in the Companys interest rate swap agreement in the event of
non-performance by the counterparty. However, this risk is minimized as each
contract is with a major financial institution and represents an exchange between the
same parties, allowing for an offset in the event of non-performance.(iii)
    Financial instruments:The Company utilizes certain financial instruments, principally interest rate swap
contracts and forward currency exchange contracts to manage the risk associated with
fluctuations in interest rates and currency exchange rates. The Companys policy is
not to utilize financial instruments for trading or speculative purposes. Interest
rate swap contracts are used to reduce the impact of fluctuating interest rates on
the Companys long-term debt. These swap agreements require the periodic exchange of
payments without the exchange of the notional principal amount on which the payments
are based. Forward currency exchange contracts are used to reduce the impact of
fluctuating exchange rates on the Companys purchases of materials and sale of goods
in foreign currencies.The Company formally documents all significant relationships between hedging
instruments and hedged items, as well as its risk management objective and strategy
for undertaking various hedge transactions. This process includes linking all
derivatives to specific assets and liabilities on the balance sheet or to specific
firm commitments or anticipated transactions. The Company also formally assesses,
both at the hedges inception and on an ongoing basis, whether the derivatives that
are used in hedging transactions are highly effective in offsetting changes in fair
values or cash flows of hedged items. 13




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##### 



MASONITE INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements (continued)
(In thousands of U.S. dollars, except share and per share amounts) Years ended December 31, 2004 and 2003   Payments and receipts under interest rate swap contracts are recognized as
adjustments to interest expense on long-term debt. The forward premium or discount
on forward currency exchange contracts is amortized over the term of the forward
contract. Gains and losses on forward foreign exchange contracts are recognized in
revenues and expenses in the same period as the foreign currency revenues and
expenses to which they relate. At year-end, the unrealized gain or loss associated
with these financial instruments has not been reflected in the consolidated financial
statements. In the event that a hedged item is sold or cancelled prior to the
termination of the related hedging item, any unrealized gain or loss on the hedging
item is immediately recognized in income. In the event that a hedging item is sold
or cancelled, any unrealized gain or loss on the hedging item is deferred and
amortized over the original contractual life of the hedging item. Gains or losses on
hedged forecasted transactions are recognized in earnings immediately when the hedge
is no longer effective or the forecasted transaction is no longer expected.The Companys forward exchange contracts do not subject the Company to risk from
exchange rate movements because gains and losses on such contracts offset losses and
gains on transactions being hedged. The Company does not require collateral or other
security to support financial instruments with credit risk. Note 13 outlines the
outstanding foreign exchange forward contracts at December 31, 2004.Effective January 1, 2004, the Company adopted CICA Accounting Guideline 13, Hedging
Relationships (AcG-13), which establishes specific criteria for hedge accounting
and applies to all hedging relationships in effect on or after January 1, 2004. The
Company determined that all of its hedge agreements qualify for hedge accounting
under AcG-13.The Company assesses all hedging relationships to determine whether the criteria for
hedge accounting are met. To qualify for hedge accounting, the hedging relationship
must be appropriately documented at inception of the hedge and there must be
reasonable assurance, both at the inception and throughout the term of the hedge,
that the hedging relationship will be effective. Effectiveness requires a high
degree of correlation of changes in fair values or cash flows between the hedged item
and the hedging instrument. Effectiveness is assessed on an ongoing basis through
the term of the hedge in order to determine if hedge accounting remains appropriate. 14




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##### 



MASONITE INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements (continued)
(In thousands of U.S. dollars, except share and per share amounts) Years ended December 31, 2004 and 2003   (s)
    Stock-based compensation:Effective January 1, 2002, the Company began accounting for all stock-based payments to
non-employees, and employee awards that are direct awards of stock, call for settlement
in cash or other assets, or are stock appreciation rights that call for settlement by the
issuance of equity instruments, granted on or after January 1, 2002, using a fair value
based method.Prior to January 1, 2003, the Company accounted for employee stock options that were
settled by the issuance of common shares as capital transactions and no compensation cost
was recorded. Any consideration paid by employees on the exercise of stock options was
recorded as share capital. The Company discloses the pro forma effect of accounting for
these employee awards granted after January 1, 2002 as if the Company had accounted for
these employee awards under the fair value method, as disclosed in note 11. The
estimated fair value was determined using the Black-Scholes option pricing model. The
pro forma effect of awards granted to employees prior to January 1, 2002, have not been
included in the pro-forma net income and earnings per share information. Pro forma
compensation cost determined under the fair value method is amortized on a straight-line
basis over the vesting period.Effective January 1, 2003, the Company adopted the revised guidance for stock based
compensation, which requires that a fair value method of accounting, as outlined above,
to be applied to all stock-based compensation payments to both employees and
non-employees, and included in income. The Company has prospectively applied the fair
value method of accounting for stock option awards granted to employees after January 1,
2003, and accordingly, has recorded the compensation expense for such awards.The Company has granted deferred and restricted share units to certain executives and
members of management. The Company has recognized the compensation expense of these
grants on a straight-line basis over the vesting period. The compensation expense is
adjusted each period to reflect the market value of the vested instruments.(t)
    Revenue recognition:Revenue is recognized when persuasive evidence of an arrangement exists, performance has
occurred, the earnings process is complete and title has passed to the customer. 15




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##### 



MASONITE INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements (continued)
(In thousands of U.S. dollars, except share and per share amounts) Years ended December 31, 2004 and 2003   (u)
    Vendor rebates:The Company accounts for cash consideration received from a vendor as a reduction of cost
of sales and inventory, on the statement of operations and balance sheet respectively.
The cash consideration received represents agreed upon vendor rebates that are earned in
the normal course of operations.(v)
    Recently issued accounting standards:  (i)
    Emerging Issues Committee (EIC) 150, Determining Whether an
Arrangement Contains a LeaseThis abstract provides guidance on whether certain characteristics within an
agreement convey the right to use a tangible asset in return for a payment or series
of payments, which is similar to the substance of a lease, although it might not take
the form of a lease. If the criteria in the EIC are met, the arrangement is to be
accounted for as a lease. This EIC is effective for new arrangements entered into
after December 2004. In addition, existing arrangements that have been modified or
renewed after the effective date must be analyzed under the new criteria. The
Company has assessed the effect of this new standard and has determined that it does
not have a material impact on the financial statements.(ii)
    Comprehensive IncomeIn June 2004, the Accounting Standards Board (AcSB) of the CICA issued preliminary
guidance on its Financial Instruments project. The overall goal of this project is
to present a single statement of operations in which all changes in net assets flow
through Comprehensive Income (CI), which is defined as the change in equity (net
assets) of an enterprise during a period from transactions and other events and
circumstances from non-owners. The concept of CI is similar to recognition,
measurement and disclosure requirements under United States GAAP. The preliminary
guidance issued was to be effective October 1, 2005, but an announcement in November
2004 deferred the application date to fiscal years beginning on or after October 1,
2006. The adoption of this guidance could have a significant impact on the Companys
financial statements. Management has not yet assessed what impact this guidance
could have, if any, given the preliminary nature of the guidance issued to date. 16




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##### 



MASONITE INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements (continued)
(In thousands of U.S. dollars, except share and per share amounts) Years ended December 31, 2004 and 2003     2.
    Acquisitions: During 2004, the Company completed several acquisitions of entry door, interior door and door
component manufacturers. In March 2004, the Company purchased the residential entry door business
of The Stanley Works (Entry Door) for cash consideration
of $163,709. In June 2004, the Company
acquired 75% of the shares of a door manufacturer in Eastern Europe for cash consideration of
$23,631. In July 2004, the Company acquired a 50% equity interest in a door component manufacturing
facility in Malaysia for cash consideration of $25,514. In August 2004, the Company completed the
purchase of an interior door and door component manufacturer in the United States for cash
consideration of $31,978. The excess purchase price over the fair value of net identifiable assets
acquired was allocated to goodwill. The preliminary purchase price for these acquisitions, which are subject to certain post closing
adjustments, was allocated as follows: 2004
    
    
    2003Entry Door
    
    
    All Others
    
    
    Total
    
    
    TotalCurrent assets, less
cash acquired of
$6,098 (2003  $57)
    
    $
    17,806
    
    
    $
    25,810
    
    
    $
    43,616
    
    
    $
    1,986Property, plant and
equipment
    
    
    29,281
    
    
    
    76,097
    
    
    
    105,378
    
    
    
    602Goodwill
    
    
    115,722
    
    
    
    33,599
    
    
    
    149,321
    
    
    
    2,801Customer relationships
    
    
    27,000
    
    
    
    6,684
    
    
    
    33,684
    
    
    
    Patents
    
    
    2,000
    
    
    
    
    
    
    
    2,000
    
    
    
    Other intangible assets
    
    
    1,500
    
    
    
    455
    
    
    
    1,955
    
    
    
    Current liabilities
assumed
    
    
    (28,147
    )
    
    
    (11,127
    )
    
    
    (39,274
    )
    
    
    (1,614
    )Long-term debt assumed
    
    
    (1,453
    )
    
    
    (12,042
    )
    
    
    (13,495
    )
    
    
    (151
    )Future income taxes
    
    
    
    
    
    
    (7,121
    )
    
    
    (7,121
    )
    
    
    (78
    )163,709
    
    
    
    112,355
    
    
    
    276,064
    
    
    
    3,546Non-controlling
interest
    
    
    
    
    
    
    (31,232
    )
    
    
    (31,232
    )
    
    
    $
    163,709
    
    
    $
    81,123
    
    
    $
    244,832
    
    
    $
    3,546Consideration:Cash
    
    $
    163,709
    
    
    $
    81,123
    
    
    $
    244,832
    
    
    $
    2,934Note payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    612$
    163,709
    
    
    $
    81,123
    
    
    $
    244,832
    
    
    $
    3,546
 17




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##### 



MASONITE INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements (continued)
(In thousands of U.S. dollars, except share and per share amounts) Years ended December 31, 2004 and 2003  During the year, the Company increased its ownership percentage in a less than wholly owned
subsidiary to 82% for cash consideration of $234. Also during the year, the Company acquired a 45%
interest in a door component manufacturing facility in the United States for cash consideration of
$9,713 (net of cash acquired of $758). During 2003, the Company purchased 100% of the shares of a door pre-hanger for consideration of
$3,546 consisting of cash of $2,934 and a note payable of $612 and increased its ownership
percentage in a less than wholly owned subsidiary to 80% for cash consideration of $1,542. The
note payable issued as consideration in 2003 is non-interest bearing and is payable over 3 years. Information regarding goodwill acquired is as follows: 2004
    
    
    2003Goodwill attributable to North America
    
    $
    123,733
    
    
    $
    Goodwill attributable to Europe and other
    
    
    25,588
    
    
    
    2,801Total goodwill from acquisitions
    
    $
    149,321
    
    
    $
    2,801Goodwill deductible for income tax
purposes
    
    $
    97,752
    
    
    $
    612
  3.
    Accounts receivable:  (i)
    Facilities agreementAt the end of the second quarter, the Company entered into an agreement to sell up to
$75,000 of non-interest bearing trade accounts receivable. Under this agreement, the
Company retains servicing responsibilities, and is permitted to sell, on an ongoing
basis, additional eligible accounts receivable on an agreed upon timetable. There is no
recourse against the Company, and the Company does not have a retained interest in the
receivables sold under this agreement.At the time the interest is sold, the related receivables are removed from the balance
sheet. At year end, the Company had sold $74,991 (2003  $nil) of trade accounts
receivable under this agreement, and excluded this amount from the balance of accounts
receivable. The Company incurred charges in connection with the sale of receivables
amounting to $1,088 (2003  $nil) in the year which has been included in interest expense
on the consolidated statement of operations. 18




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##### 



MASONITE INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements (continued)
(In thousands of U.S. dollars, except share and per share amounts) Years ended December 31, 2004 and 2003   (ii)
    Acquired facilities agreementAs a result of the acquisition of Entry Door, the Company entered into an agreement with
a bank, with similar terms the acquired business had prior to the acquisition, whereby
the Company would sell receivables of a specific customer. Under this agreement, the
Company does not retain servicing responsibilities of the receivables sold. There is no
recourse against the Company, and the Company does not have a retained interest in the
receivables sold under this agreement.At the time the interest is sold, the related receivables are removed from the balance
sheet. At year-end, the Company had sold $24,614 (2003  $nil) of trade accounts
receivable under this agreement, and excluded this amount from the balance of accounts
receivable. The Company incurred charges in connection with the sale of receivables
amounting to $675 (2003  $nil) in the year which has been included in interest expense
on the consolidated statement of operations.  4.
    Inventories: 2004
    
    
    2003Raw Materials
    
    $
    258,879
    
    
    $
    198,552Finished
Goods
    
    
    162,907
    
    
    
    122,593$
    421,786
    
    
    $
    321,145
 19




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##### 



MASONITE INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements (continued)
(In thousands of U.S. dollars, except share and per share amounts) Years ended December 31, 2004 and 2003   5.
    Property, plant and equipment: Accumulated
    
    
    Net Book2004
    
    Cost
    
    
    Depreciation
    
    
    ValueLand
    
    $
    53,057
    
    
    $
    
    
    
    $
    53,057Buildings
    
    
    227,531
    
    
    
    40,086
    
    
    
    187,445Machinery and
equipment
    
    
    925,659
    
    
    
    234,981
    
    
    
    690,678$
    1,206,247
    
    
    $
    275,067
    
    
    $
    931,180
 Accumulated
    
    
    Net Book2003
    
    Cost
    
    
    Depreciation
    
    
    ValueLand
    
    $
    49,277
    
    
    $
    
    
    
    $
    49,277Buildings
    
    
    217,082
    
    
    
    35,923
    
    
    
    181,159Machinery and
equipment
    
    
    709,833
    
    
    
    188,159
    
    
    
    521,674$
    976,192
    
    
    $
    224,082
    
    
    $
    752,110
 Total depreciation expense charged to the consolidated statement of operations related to property,
plant and equipment for the fiscal year ended December 31, 2004 was $58,520 (2003  $47,507). 20




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##### 



MASONITE INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements (continued)
(In thousands of U.S. dollars, except share and per share amounts) Years ended December 31, 2004 and 2003   6.
    Intangible assets: Accumulated
    
    
    Net Book2004
    
    Cost
    
    
    Amortization
    
    
    ValueAmortizable intangible
assets:Customer relationships
    
    $
    33,684
    
    
    $
    2,017
    
    
    $
    31,667Order backlogs
    
    
    1,255
    
    
    
    1,255
    
    
    
    Non-compete agreement
    
    
    700
    
    
    
    120
    
    
    
    580Patents and trademarks
    
    
    5,257
    
    
    
    481
    
    
    
    4,776$
    40,896
    
    
    $
    3,873
    
    
    $
    37,023
 Accumulated
    
    
    Net Book2003
    
    Cost
    
    
    Amortization
    
    
    ValuePatents and trademarks
    
    
    2,950
    
    
    
    243
    
    
    
    2,707$
    2,950
    
    
    $
    243
    
    
    $
    2,707
 Total amortization expense charged to the consolidated statement of operations related to
intangible assets for the fiscal year ended December 31, 2004 was $3,630 (2003  $194).  7.
    Other assets: 2004
    
    
    2003Deferred charges, less accumulated amortization of
$3,356 (2003  $1,591)
    
    $
    10,545
    
    
    $
    8,735Equity investments
    
    
    3,514
    
    
    
    15,334Long-term receivables
    
    
    12,484
    
    
    
    11,345Pension asset (note 12(b))
    
    
    9,262
    
    
    
    8,542$
    35,805
    
    
    $
    43,956
 21




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##### 



MASONITE INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements (continued)
(In thousands of U.S. dollars, except share and per share amounts) Years ended December 31, 2004 and 2003  In 2003, the Company increased its equity interest in the shares of a door manufacturing and
distribution facility headquartered in Israel to 49.9% for consideration of $1,072. Included in long-term receivables is $6,198 (2003  $6,997) receivable over the next eight years
pursuant to a royalty agreement. Long-term receivables also include a $5,616 receivable from a
related supplier. This long-term receivable is non-interest bearing and is due in 2006. In 2003, a $2,500 non-interest bearing receivable due in March 2005 was included in long-term
receivables. At December 31, 2004, the remaining balance of $2,304 was reclassified to accounts
receivable and will be collected during the first quarter of 2005.  8.
    Bank indebtedness: The Company has a $100,000 revolving term loan available as part of its banking arrangements. The
loan bears interest at LIBOR plus 2.25% and is secured by fixed and floating charges over
substantially all of the Companys assets. There were no amounts outstanding on this loan at December
31, 2004 or 2003. Certain of the Companys subsidiaries also have credit facilities with local lenders. These
facilities are secured by a fixed and floating charge over the assets of the respective
subsidiaries and are non-recourse to the parent company. A subsidiary of the Company has an 8,000
loan due September 2005 bearing interest at EURIBOR plus 1.6%. The loan is secured by the assets
of the subsidiary. Another subsidiary has a $7,500 operating line of credit bearing interest at
LIBOR plus 0.5%. The loan is secured by the assets of the subsidiary. 22




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##### 



MASONITE INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements (continued)
(In thousands of U.S. dollars, except share and per share amounts) Years ended December 31, 2004 and 2003   9.
    Long-term debt: 2004
    
    
    2003Bank term loan, bearing interest at LIBOR plus
2.50% (2003  2.25%), due August 31, 2006
    
    $
    
    
    
    $
    34,418Bank term loan, bearing interest at LIBOR plus
2.00%, due August 31, 2006
    
    
    8,211
    
    
    
    Bank term loan, bearing interest at LIBOR plus
2.75% (2003  2.75%), due August 31, 2008
    
    
    419,722
    
    
    
    425,181Bank term loan, bearing interest at LIBOR plus
2.25%, due August 31, 2008
    
    
    148,517
    
    
    
    Bank term loan, bearing interest at LIBOR plus
1.40% (2003  2.75%), due June 28, 2007
    
    
    15,000
    
    
    
    20,000Bank term loan of $28,129, denominated in Canadian
dollars, bearing interest at Canadian prime plus
1%, due September 30, 2008
    
    
    23,347
    
    
    
    Other loans, at various interest rates and
maturities
    
    
    3,400
    
    
    
    3,159618,197
    
    
    
    482,758Less current portion
    
    
    24,834
    
    
    
    35,498$
    593,363
    
    
    $
    447,260
 The aggregate amount of principal repayments required in each of the next five years is as follows: 2005
    
    $
    24,8342006
    
    
    14,9752007
    
    
    166,1802008
    
    
    411,6272009
    
    
    581$
    618,197
 During the first quarter of 2004, the Company negotiated additional term borrowings of $200,000
that were used principally to fund acquisitions (see note 2). The new facilities consist of a
$50,000 term loan due August 31, 2006, and a $150,000 term loan due August 31, 2008. The
additional borrowings have terms and conditions substantially similar to the existing borrowings. Interest on long-term debt for the year ended December 31, 2004 was $35,165 (2003  $31,953). 23




---



##### 



MASONITE INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements (continued)
(In thousands of U.S. dollars, except share and per share amounts) Years ended December 31, 2004 and 2003  The Company has entered into interest rate swap agreements to convert floating rate debt into fixed
rate debt. At December 31, 2004, a total of $268,750 (2003  $293,750) of floating rate debt has
been converted into fixed rate debt at a weighted average interest
rate of 7.8% (2003  7.6%).
These agreements mature at various dates through 2006. At December 31, 2004, these agreements had
a fair value of $260,131 (2003  $274,585). Additional repayment of bank term loans may be required depending on the generation of excess cash
flow subject to performance against certain predetermined ratios as defined in the credit
agreement. The bank facilities are secured by fixed and floating charges over substantially all of
the Companys assets.  10.
    Non-controlling interest: 2004
    
    
    2003Balance, beginning of
period
    
    $
    35,986
    
    
    $
    28,231Share of results
    
    
    6,839
    
    
    
    5,517Impact of:Acquisitions
    
    
    39,797
    
    
    
    (2,142
    )Disposals
    
    
    
    
    
    
    (394
    )Foreign exchange
    
    
    5,746
    
    
    
    4,774Balance, end of period
    
    $
    88,368
    
    
    $
    35,986
  11.
    Share capital: Authorized The Company is authorized to issue an unlimited number of first preference shares, issuable in
series and non-voting with rights, privileges and restrictions to be fixed by the directors. In
addition, the Company is authorized to issue an unlimited number of common shares. Issued 2004
    
    
    2003Number of common shares
outstanding
    
    
    54,796,531
    
    
    
    54,433,799Share capital
    
    $
    271,126
    
    
    $
    266,870
 24




---



##### 



MASONITE INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements (continued)
(In thousands of U.S. dollars, except share and per share amounts) Years ended December 31, 2004 and 2003   In June 2004, the Company filed a Normal Course Issuer Bid (Share Repurchase) with the
Toronto Stock Exchange to repurchase up to 4,700,000 common shares, for cancellation, over
the period from June 11, 2004 to June 10, 2005. The shares will be repurchased at the market
price. The number of shares repurchased during any 30-day period may not exceed 2% of the
total outstanding common shares. For the year ended December 31, 2004, the Company purchased
for cancellation 100,000 (2003  nil) of its common shares for
$2,359 (2003  $nil) pursuant
to its Share Repurchase. Subsequent to year-end, the Company terminated its Share Repurchase
program.  (a)
    Stock option plansThe Company provides a stock option plan to allow management and key employees to
purchase shares of the Company. Information with respect to the Companys stock option
plan at December 31, 2004 and 2003 is as follows: 2004
    
    
    2003Weighted Average
    
    
    
    
    
    
    Weighted AverageNumber
    
    
    Exercise Price
    
    
    Number
    
    
    Exercise PriceOptions outstanding, beginning
of period
    
    
    2,743,750
    
    
    $
    12.20
    
    
    
    3,657,200
    
    
    $
    9.30Options granted
    
    
    
    
    
    
    
    
    
    
    113,000
    
    
    
    20.08Options exercised
    
    
    (462,732
    )
    
    
    10.27
    
    
    
    (1,024,450
    )
    
    
    9.32Options cancelled
    
    
    (5,340
    )
    
    
    19.43
    
    
    
    (2,000
    )
    
    
    15.90Options outstanding, end of
period
    
    
    2,275,678
    
    
    $
    13.75
    
    
    
    2,743,750
    
    
    $
    12.20
  The term of each option is 10 years and the vesting period is three years. The exercise
price for options is the closing share price of the Company on the Toronto Stock Exchange
on the day prior to the grant date. The options have expiry dates through 2013.In 2003, the Company adopted, on a prospective basis, the requirements for fair value
accounting for options granted to employees. There were no options granted in 2004. For
the options granted in 2003, the Company recognized $396 of compensation expense in 2004
(2003  $191). The weighted average assumptions used in the determination of the fair
value of stock options are as follows: 25




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##### 



MASONITE INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements (continued)
(In thousands of U.S. dollars, except share and per share amounts) Years ended December 31, 2004 and 2003    2004
    
    
    2003Risk-free rate
    
    
    n/a
    
    
    
    4.4
    %Expected dividend yield
    
    
    n/a
    
    
    
    0
    %Expected volatility of the market price
of
the Companys shares
    
    
    n/a
    
    
    
    32
    %Expected option life (in years)
    
    
    n/a
    
    
    
    5Weighted-average grant date fair values
of options issued
    
    
    n/a
    
    
    $
    7.23
  For options granted in 2002, the pro forma disclosure relating to the compensation
expense is as follows: 2004
    
    
    2003Net income as reported
    
    $
    127,951
    
    
    $
    107,671Deduct: Stock-based compensation costs using
fair value method, net of tax
    
    
    (512
    )
    
    
    (1,060
    )Pro forma net income
    
    $
    127,439
    
    
    $
    106,611Net income per share:Basic  as reported
    
    $
    2.34
    
    
    $
    2.00Basic  pro forma
    
    $
    2.33
    
    
    $
    1.98Diluted  as reported
    
    $
    2.29
    
    
    $
    1.95Diluted  pro forma
    
    $
    2.28
    
    
    $
    1.93
  Information with respect to outstanding options is as follows: Options outstanding
    
    
    Options exercisableAverage
    
    
    Weighted
    
    
    
    
    
    
    Weightedremaining
    
    
    average
    
    
    
    
    
    
    averageRange of
    
    Number
    
    
    contractual
    
    
    exercise
    
    
    Number
    
    
    exerciseexercise price
    
    outstanding
    
    
    life (years)
    
    
    price
    
    
    exercisable
    
    
    price$7.28  10.79
    
    
    502,500
    
    
    
    1.32
    
    
    $
    9.49
    
    
    
    502,500
    
    
    $
    9.49$11.04  12.53
    
    
    1,064,500
    
    
    
    4.15
    
    
    
    12.07
    
    
    
    1,064,500
    
    
    
    12.07$18.59  23.08
    
    
    708,678
    
    
    
    7.87
    
    
    
    19.29
    
    
    
    672,488
    
    
    
    19.082,275,678
    
    
    
    
    
    
    $
    13.75
    
    
    
    2,239,488
    
    
    $
    13.60
 26




---



##### 



MASONITE INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements (continued)
(In thousands of U.S. dollars, except share and per share amounts) Years ended December 31, 2004 and 2003   (b)
    Other stock-based compensation plans  i)
    2003 PlanIn 2003, the Company adopted a Restricted Share Unit (RSU) and Deferred Share Unit
(DSU) plan for certain key senior executives. Under this plan, the RSUs vest over
three years and the DSUs vest immediately, but are payable only on termination of
employment or retirement. Both instruments are settled in cash. The Company records
compensation expense for RSUs on a straight-line basis over the three year vesting
period and for DSUs immediately.ii)
    Full value incentive planIn 2004, the Company implemented a Full Value Incentive Plan. This plan replaces the
one-time grant of RSUs and DSUs that occurred in 2003. Under this plan, 70% of the
awards will be RSUs which will be subject to certain performance criteria. These
criteria include achieving pre-established earnings per share and return on equity
targets for the Company. The number of RSUs that will eventually vest at the end of
the three year term will depend on the achievement of the specified criteria. The
number of RSUs issued can be increased by up to 20% if the relevant performance
target is exceeded by a pre-determined amount, reduced by 20% if the results are
below the relevant target by a pre-determined amount, or cancelled if results are
below a minimum threshold. The balance of the awards are DSUs which vest in equal
annual instalments over a five year period commencing one year after the grant date
and are payable only on termination of employment or retirement. Both instruments
are settled in cash. Total compensation expense recorded for the two plans included in selling, general and
administration expense on the consolidated statement of operations was $5,552 (2003  $3,558). 27




---



##### 



MASONITE INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements (continued)
(In thousands of U.S. dollars, except share and per share amounts) Years ended December 31, 2004 and 2003   12.
    Employee future benefits:  (a)
    Defined contribution plans:For certain employees the Company matches a portion of employee contributions to defined
contribution retirement plans. Total contributions by the Company for the year ended
December 31, which has been recorded as expense, is as follows: 2004
    
    
    2003Cash
contributions
    
    $
    5,814
    
    
    $
    5,322
  (b)
    Defined benefit plan:The Company has a defined benefit plan covering approximately 2000 employees in the
United States. Benefits under the plan were largely curtailed in 2003, and are a
function of compensation levels, benefit formulas and years of service. The Company
accrues the expected costs of providing plan benefits during the periods in which the
employees render service. The measurement date used for the accounting valuation for the
defined benefit plan was December 31, 2004; while the most recent actuarial valuation was
completed in January 2004. Information about the Companys defined benefit plan is as
follows: Pension (income) expense:
    
    2004
    
    
    2003Current service cost
    
    $
    864
    
    
    $
    1,730Interest cost
    
    
    3,225
    
    
    
    3,399Expected return on plan assets
    
    
    (4,518
    )
    
    
    (3,974
    )Net amortization of prior service cost and
curtailments
    
    
    
    
    
    
    95Curtailment gain
    
    
    
    
    
    
    (6,538
    )Net pension income
    
    $
    (429
    )
    
    $
    (5,288
    )
 28




---



##### 



MASONITE INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements (continued)
(In thousands of U.S. dollars, except share and per share amounts) Years ended December 31, 2004 and 2003   Information with respect to the assets in the pension plan at December 31 is as follows: Pension asset:
    
    2004
    
    
    2003Fair value of plan assets, beginning of year
    
    $
    65,107
    
    
    $
    57,163Actual return on plan assets
    
    
    4,131
    
    
    
    9,827Employer contributions
    
    
    290
    
    
    
    Benefits paid
    
    
    (2,058
    )
    
    
    (1,883
    )Administrative expenses paid
    
    
    (545
    )
    
    
    Fair value of plan assets, end of year
    
    $
    66,925
    
    
    $
    65,107
  Information with respect to the accrued benefit obligation at December 31 is as follows: Pension liability:
    
    2004
    
    
    2003Accrued benefit obligation, beginning of year
    
    $
    56,565
    
    
    $
    50,514Current service cost
    
    
    864
    
    
    
    1,730Interest cost
    
    
    3,225
    
    
    
    3,399Actuarial (gain) loss
    
    
    (2,086
    )
    
    
    12,212Benefits paid
    
    
    (2,058
    )
    
    
    (1,883
    )Administrative expenses paid
    
    
    (545
    )
    
    
    Curtailments
    
    
    
    
    
    
    (9,407
    )Accrued benefit obligation, end of year
    
    $
    55,965
    
    
    $
    56,565
  A reconciliation of the accrued benefit obligation to the pension asset at December 31 is
as follows: Reconciliation to pension asset:
    
    2004
    
    
    2003Accrued benefit obligation, end of year
    
    $
    (55,965
    )
    
    $
    (56,565
    )Fair value of plan assets, end of year
    
    
    66,925
    
    
    
    65,107Unamortized actuarial gains
    
    
    (1,698
    )
    
    
    Pension asset, end of year
    
    $
    9,262
    
    
    $
    8,542
 29




---



##### 



MASONITE INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements (continued)
(In thousands of U.S. dollars, except share and per share amounts) Years ended December 31, 2004 and 2003   The Company also has a defined benefit plan in the United Kingdom, which has been
curtailed in prior years. The accrued benefit obligation of this defined benefit plan is
$631 (2003  $851).Information with respect to the amounts and types of securities that are held in the
plans assets are as follows: Information on plan assets:
    
    
    
    2004
    
    
    
    
    
    2003Amount
    
    
    % oftotalplan
    
    
    Amount
    
    
    % oftotalplanEquity securities
    
    $
    29,380
    
    
    
    43.9
    
    
    $
    29,754
    
    
    
    45.7Debt securities
    
    
    37,545
    
    
    
    56.1
    
    
    
    34,832
    
    
    
    53.5Other
    
    
    
    
    
    
    
    
    
    
    521
    
    
    
    0.8$
    66,925
    
    
    
    100.0
    
    
    $
    65,107
    
    
    
    100.0
  The significant actuarial assumptions adopted in measuring the Companys accrued benefit
obligations and costs are as follows (weighted average assumptions as at December 31): 2004
    
    
    2003Discount rate for:Accrued benefit obligations
    
    
    6.00
    %
    
    
    6.00
    %Net periodic pension cost
    
    
    6.00
    %
    
    
    6.75
    %Rate of compensation increase for:Accrued benefit obligations
    
    
    4.50
    %
    
    
    4.50
    %Net periodic pension cost
    
    
    4.50
    %
    
    
    4.50
    %Expected long-term rate of return on plan assets for:Accrued benefit obligations
    
    
    
    
    
    
    Net periodic pension cost
    
    
    7.00
    %
    
    
    7.00
    %
 30




---



##### 



MASONITE INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements (continued)
(In thousands of U.S. dollars, except share and per share amounts) Years ended December 31, 2004 and 2003   (c)
    Post-retirement benefits:The Company maintains a contributory retiree medical plan and a limited non-contributory
life insurance benefit covering approximately 350 employees in the United States. The
plan contains features such as co-insurance, co-pays and deductibles. The plan is
unfunded with benefits and contributions subject to change. The measurement date used for
the accounting valuation for the post-retirement benefit plan is December 31, 2004; while
the most recent actuarial valuation was completed in January 2004. Information about the
Companys post-retirement benefit plans is as follows: Costs:
    
    2004
    
    
    2003Post-retirement benefits expense:Current service cost
    
    $
    182
    
    
    $
    306Interest cost
    
    
    153
    
    
    
    267Amortization of net gain
    
    
    (116
    )
    
    
    Curtailment gain
    
    
    (2,015
    )
    
    
    Benefits paid
    
    
    (11
    )
    
    
    Post-retirement benefits (income) expense
    
    $
    (1,807
    )
    
    $
    573
  Information regarding the post-retirement obligation at December 31 is as follows: Post-retirement obligation:
    
    2004
    
    
    2003Accrued benefit obligation, beginning of year
    
    $
    5,218
    
    
    $
    5,095Current service cost
    
    
    182
    
    
    
    306Interest cost
    
    
    153
    
    
    
    267Actuarial gain
    
    
    (1,750
    )
    
    
    (450
    )Benefits paid
    
    
    (11
    )
    
    
    Curtailments
    
    
    (2,015
    )
    
    
    Accrued benefit obligation, end of year
    
    $
    1,777
    
    
    $
    5,218
 31




---



##### 



MASONITE INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements (continued)
(In thousands of U.S. dollars, except share and per share amounts) Years ended December 31, 2004 and 2003   A reconciliation of the post-retirement obligation to the accrued benefit liability at
December 31 is as follows: Reconciliation to post-retirement liability:
    
    2004
    
    
    2003Accrued benefit obligation, end of year
    
    $
    1,777
    
    
    $
    5,218Unrecognized net gain (loss)
    
    
    1,180
    
    
    
    (454
    )Accrued benefit liability, end of year
    
    $
    2,957
    
    
    $
    4,764
  Accrued benefit liabilities are included in accrued expenses and other liabilities on the
consolidated balance sheet.The impact of a 1% increase and a 1% decrease in health care cost trend rates at December
31 would be as follows: Impact of a 1% change in health care trends:
    
    2004
    
    
    20031% increase in health care cost ratesAccrued benefit obligation, end of year
    
    $
    1,936
    
    
    $
    6,286Change in accrued benefit obligation
    
    $
    159
    
    
    $
    1,068Service and interest cost
    
    $
    12
    
    
    $
    951% decrease in health care cost ratesAccrued benefit obligation, end of year
    
    $
    1,646
    
    
    $
    4,380Change in accrued benefit obligation
    
    $
    (131
    )
    
    $
    (838
    )Service and interest cost
    
    $
    (10
    )
    
    $
    (75
    )
 32




---



##### 



MASONITE INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements (continued)
(In thousands of U.S. dollars, except share and per share amounts) Years ended December 31, 2004 and 2003   The significant actuarial assumptions adopted in measuring the Companys accrued benefit
obligations are as follows (weighted average assumptions as at December 31): 2004
    
    
    2003Discount rate for:Accrued benefit obligations
    
    
    6.00
    %
    
    
    6.00
    %Net periodic post-retirement cost
    
    
    6.00
    %
    
    
    6.75
    %Rate of compensation increase for:Accrued benefit obligations
    
    
    0.00
    %
    
    
    0.00
    %Net periodic post-retirement cost
    
    
    0.00
    %
    
    
    0.00
    %Health care trend rate for:Accrued benefit obligations
    
    
    5.00
    %
    
    
    5.00
    %Net periodic post-retirement cost
    
    
    5.00
    %
    
    
    5.25
    %Ultimate year trend rate for:Accrued benefit obligations
    
    
    5.00
    %
    
    
    5.00
    %Net periodic post-retirement cost
    
    
    5.00
    %
    
    
    5.00
    %
  The ultimate health care trend rate of 5% was expected to be achieved in 2004.In 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 became
law. This legislation expanded Medicare to include, for the first time, coverage for
prescription drugs. The Company sponsors retiree medical programs for certain of its
locations. It has been determined that this legislation will have no impact on the Companys
costs or obligations under these programs.13.
    Commitments: The Company has entered into forward foreign currency contracts to hedge foreign currency risk. At
December 31, 2004, unrealized gains on outstanding foreign currency contracts totalled $2,252 (2003
 $625) and unrealized losses totalled $221 (2003  $1,353). The Company had the following
outstanding foreign exchange forward contracts representing commitments to buy and sell foreign
currencies at December 31, 2004: 33




---



##### 



MASONITE INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements (continued)
(In thousands of U.S. dollars, except share and per share amounts) Years ended December 31, 2004 and 2003  Year of Maturity
    
    Currency
    
    
    Amount
    
    
    Currency
    
    
    Weighted AverageSold
    
    
    Sold
    
    
    Purchased
    
    
    Rate2005
    
    GBP
    
    
    
    2,000
    
    
    USD
    

    
    
    1.84142005
    
    GBP
    

    
    
    6,000
    
    
    EUR
    
    
    
    1.45952005
    
    USD
    

    
    
    17,294
    
    
    CAD
    

    
    
    1.29262005
    
    USD
    

    
    
    1,945
    
    
    ZAR
    

    
    
    6.4893
 Future minimum payments, by year, under non-cancellable operating leases with initial or remaining
terms of one year or more consisted of the following at December 31, 2004: 2005
    
    $
    19,8462006
    
    
    14,8202007
    
    
    11,1862008
    
    
    7,3932009
    
    
    5,088Thereafter
    
    
    15,584$
    73,917
 Total rental expense, including non-cancellable operating leases as well as month-to-month leases,
incurred in the fiscal year ending December 31, 2004 of $29,001 (2003  $23,645). The Company has provided standard indemnifications to its landlords under certain property lease
agreements for claims by third parties in connection with the Companys use of the premises. The
maximum amount of these indemnifications cannot be reasonably estimated due to their nature.
Historically, the Company has not made any significant payments relating to such indemnifications. In addition to the above indemnifications, the Company has also provided routine indemnifications,
whose terms range in duration and often are not explicitly defined. These may include
indemnifications against adverse effects to changes in tax laws and patent infringements by third
parties. The maximum amounts from these indemnifications cannot be reasonably estimated. In some
cases, the Company has recourse against other parties to mitigate its risk of loss from these
indemnifications. Historically, the Company has not made significant payments relating to these
types of indemnifications. 34




---



##### 



MASONITE INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements (continued)
(In thousands of U.S. dollars, except share and per share amounts) Years ended December 31, 2004 and 2003   14.
    Guarantees and Contingencies: The Company is involved in various claims and legal actions. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse effect on the Companys
consolidated financial position or liquidity. The Company was a guarantor under certain performance letters of credit arising from a previous
transaction in the amount of $8,900 which was extinguished, at no cost to the Company, in March
2004.  15.
    Other expense, net: 2004
    
    
    2003Restructuring expenses
    
    $
    10,449
    
    
    $
    Transaction expenses
    
    
    2,500
    
    
    
    (Gain) loss on disposal of property, plant
and equipment
    
    
    (5,145
    )
    
    
    2,385(Income) loss from equity investments
    
    
    (101
    )
    
    
    760$
    7,703
    
    
    $
    3,145
  (i)
    Restructuring expenses:In 2004 the Company closed a non-core North American operation and undertook a program of
standardizing its entry door product offering, which resulted in the closure of two
manufacturing facilities. The first closure was completed in early 2004, and the second
was announced in late 2004 and is expected to be completed by March 2005. It is
anticipated that additional costs in respect of this second closure will be approximately
$1.5 million. As a result of this standardization and plant closures, a net impairment
charge of $2,919 on the property, plant and equipment was included in restructuring
expenses. Also included are transfer and severance costs related to employee
consolidation in the Companys United States headquarters. The costs incurred in fiscal
2004 are included in other expense on the consolidated statement of operations. 35




---



##### 



MASONITE INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements (continued)
(In thousands of U.S. dollars, except share and per share amounts) Years ended December 31, 2004 and 2003   The following table details the activity in the accrued restructuring liability and the
non-cash charge: Provision
    
    
    
    
    
    
    OutstandingDuring
    
    
    Paid During
    
    
    at December 31,2004
    
    
    2004
    
    
    2004Cash component:Contractual termination benefits
    
    $
    7,124
    
    
    $
    5,629
    
    
    $
    1,495Other
    
    
    406
    
    
    
    
    
    
    
    4067,530
    
    
    $
    5,629
    
    
    $
    1,901Non-cash component:Property, plant and equipment
write-down
    
    
    2,919Total restructuring
    
    $
    10,449
  (ii)
    Transaction expenses:As part of the pending transaction, certain costs and expenses have been incurred that
are directly attributable to the transaction. It is expected that additional costs will
be incurred in 2005 in order to complete the transaction (see note 23).(iii)
    (Gain) loss on disposal of property, plant and equipment:In 2004, the Company disposed of idle property, plant and equipment as well as other
machinery and equipment for cash consideration of $10,381. The disposal of these assets
resulted in a net gain of $5,145, which is included in other expense.In 2003, the Company disposed of the net assets of a manufacturing facility and other
machinery and equipment for cash consideration of $13,755. The disposal of these assets
resulted in a net loss of $2,385, which is included in other expense. The
Company also disposed of its interest in another less than wholly owned subsidiary for
cash consideration of $192. 36




---



##### 



MASONITE INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements (continued)
(In thousands of U.S. dollars, except share and per share amounts) Years ended December 31, 2004 and 2003   16.
    Income taxes: 2004
    
    
    2003Current
    
    $
    13,155
    
    
    $
    25,382Future
    
    
    29,498
    
    
    
    9,082$
    42,653
    
    
    $
    34,464
 The effective rates of income taxes provided in the consolidated statements of income vary from the
combined Canadian federal and provincial statutory income tax rates as follows: 2004
    
    
    
    
    
    
    2003Amount
    
    
    % ofpre-taxincome
    
    
    Amount
    
    
    % ofpre-taxincomeIncome tax computed at statutory income tax rate
    
    $
    59,621
    
    
    
    33.6
    
    
    $
    52,859
    
    
    
    35.8Reduction in rate of tax due to
income earned in foreign
jurisdictions
    
    
    (14,728
    )
    
    
    (8.3
    )
    
    
    (14,197
    )
    
    
    (9.6
    )Reduction for manufacturing and
processing in Canada
    
    
    
    
    
    
    
    
    
    
    (671
    )
    
    
    (0.5
    )Change in valuation allowance
    
    
    (239
    )
    
    
    (0.1
    )
    
    
    (1,484
    )
    
    
    (1.0
    )Other
    
    
    (2,001
    )
    
    
    (1.2
    )
    
    
    (2,043
    )
    
    
    (1.4
    )$
    42,653
    
    
    
    24.0
    
    
    $
    34,464
    
    
    
    23.3
 Future income tax assets arise from available income tax losses and future income tax deductions.
The Companys ability to use these income tax losses and future income tax deductions is dependent
upon the results of the operations of the Company in the tax jurisdictions in which such losses or
deductions arose. The tax effects of temporary differences that give rise to significant portions
of the future tax assets and liabilities are as presented below: 37




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##### 



MASONITE INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements (continued)
(In thousands of U.S. dollars, except share and per share amounts) Years ended December 31, 2004 and 2003  2004
    
    
    2003Future tax assets:Non-capital loss carryforwards
    
    $
    28,162
    
    
    $
    33,564Capital loss carryforwards
    
    
    3,523
    
    
    
    3,111Intangibles
    
    
    4,172
    
    
    
    4,271Amounts not currently deductible for tax purposes
    
    
    20,397
    
    
    
    29,318Other
    
    
    1,550
    
    
    
    4,09357,804
    
    
    
    74,357Valuation allowance
    
    
    (6,476
    )
    
    
    (7,715
    )51,328
    
    
    
    66,642Future tax liabilities:Plant and equipment
    
    
    (125,335
    )
    
    
    (116,886
    )Pension asset
    
    
    (4,397
    )
    
    
    (3,417
    )Unrealized foreign exchange gain
    
    
    (18,778
    )
    
    
    (13,516
    )Other
    
    
    (4,336
    )
    
    
    (1,852
    )(152,846
    )
    
    
    (135,671
    )Net future tax liability
    
    $
    (101,518
    )
    
    $
    (69,029
    )
  17.
    Supplemental cash flow information: 2004
    
    
    2003Interest paid
    
    $
    38,921
    
    
    $
    38,704Income taxes paid
    
    
    29,816
    
    
    
    16,925Income tax refunds
    
    
    8,534
    
    
    
    14,979Notes issued in connection with
business combinations
    
    
    
    
    
    
    612
 38




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##### 



MASONITE INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements (continued)
(In thousands of U.S. dollars, except share and per share amounts) Years ended December 31, 2004 and 2003   18.
    Earnings per share: The computations for basic and diluted earnings per share are as follows: 2004
    
    
    2003Net income
    
    $
    127,951
    
    
    $
    107,671Weighted average number of common
shares outstanding:
    
    
    
    
    
    
    
    

Basic
    
    
    54,773,000
    
    
    
    53,857,000Effect of share options
    
    
    1,216,000
    
    
    
    1,462,000Diluted
    
    
    55,989,000
    
    
    
    55,319,000Earnings per share:Basic
    
    $
    2.34
    
    
    $
    2.00Diluted
    
    
    2.29
    
    
    
    1.95
 In 2004 and 2003, all share options to purchase common shares were included in the computation of
diluted earnings per share because the exercise price was lower than the average market price of
the common shares during the reporting year. The sum of the basic and diluted earnings per share for the quarters may differ from the basic and
diluted earnings per share for the year due to differences in the average number of shares
outstanding.  19.
    Variable interest entities: Certain of the Companys investments were consolidated in fiscal 2004 as they represented variable
interest entities, as the Company was deemed to be the primary beneficiary of the investments. As
a result, their operating results were consolidated in the current year. The impact of
consolidating these investments as VIEs on the consolidated balance sheet is as follows: 39




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##### 



MASONITE INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements (continued)
(In thousands of U.S. dollars, except share and per share amounts) Years ended December 31, 2004 and 2003  InitialAdoption
    
    
    December 31,2004Current assets
    
    $
    5,436
    
    
    $
    17,507Property, plant and
equipment
    
    
    35,579
    
    
    
    83,750Goodwill
    
    
    84
    
    
    
    584Long-term future income
taxes
    
    
    5,873
    
    
    
    6,086Equity investments
    
    
    (10,727
    )
    
    
    Current liabilities
    
    
    5,684
    
    
    
    5,892Long-term debt
    
    
    21,996
    
    
    
    23,347Long-term future income
taxes
    
    
    
    
    
    
    601Non-controlling interest
    
    
    8,565
    
    
    
    36,251
  20.
    Jointly controlled operations: The investment in the 45% owned jointly controlled operation (see note 2) is accounted for under
the proportionate consolidation method. The following table summarizes the Companys proportionate
share of the jointly controlled operations that are included in these consolidated financial
statements. Intercompany transactions have been eliminated on consolidation. AcquisitionDate
    
    
    December 31,2004Statement of operations:Revenues
    
    $
    
    
    
    $
    6,437Operating expenses
    
    
    
    
    
    
    5,447Net income from continuing operations
    
    
    
    
    
    
    990Balance sheets:Current assets
    
    
    2,265
    
    
    
    3,694Non-current assets
    
    
    8,375
    
    
    
    8,647Current liabilities
    
    
    888
    
    
    
    799Non-current liabilities
    
    
    39
    
    
    
    36Statement of cash flows:Cash from operating activities
    
    
    
    
    
    
    1,605Cash used in investing activities
    
    
    
    
    
    
    (27
    )Cash used in financing activities
    
    
    
    
    
    
    (279
    )
 40




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##### 



MASONITE INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements (continued)
(In thousands of U.S. dollars, except share and per share amounts) Years ended December 31, 2004 and 2003   21.
    Segmented information: The Company manages its operations on a geographic basis and determines its operating segments
accordingly. The performance of the geographic segments is monitored on the basis of sales and
operating income. Intersegment transfers are negotiated as if the transactions were to third parties, at market
prices. The accounting policies of the segments are the same as those described in the summary of
significant accounting policies. Certain information with respect to geographic segments is as
follows: Geographic segment data
    
    2004
    
    
    2003Sales:North America
    
    $
    1,760,317
    
    
    $
    1,434,055Europe and other
    
    
    487,625
    
    
    
    380,573Intersegment
    
    
    (48,077
    )
    
    
    (37,390
    )$
    2,199,865
    
    
    $
    1,777,238Operating income:North America
    
    
    207,014
    
    
    
    179,142Europe and other
    
    
    54,212
    
    
    
    37,580261,226
    
    
    
    216,722Expenses:General
    
    
    36,112
    
    
    
    30,389Interest
    
    
    39,968
    
    
    
    35,536Other expense
    
    
    7,703
    
    
    
    3,145Income taxes
    
    
    42,653
    
    
    
    34,464Non-controlling interest
    
    
    6,839
    
    
    
    5,517133,275
    
    
    
    109,051Net income
    
    $
    127,951
    
    
    $
    107,671Identifiable assets:North America
    
    $
    1,440,493
    
    
    $
    1,088,486Europe and other
    
    
    554,762
    
    
    
    358,962Corporate assets, including cash
    
    
    113,230
    
    
    
    245,703$
    2,108,485
    
    
    $
    1,693,151
 41




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##### 



MASONITE INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements (continued)
(In thousands of U.S. dollars, except share and per share amounts) Years ended December 31, 2004 and 2003  The Company derives revenue from two major product lines, interior and exterior products as follows: 2004
    
    
    2003Sales:Interior products
    
    $
    1,364,683
    
    
    $
    1,164,563Exterior products
    
    
    835,182
    
    
    
    612,675$
    2,199,865
    
    
    $
    1,777,238
 Segmented export sales are as follows: 2004
    
    
    2003Sales:North America
    
    $
    14,295
    
    
    $
    15,987Europe and other
    
    
    61,305
    
    
    
    42,597$
    75,600
    
    
    $
    58,584
 Transfers between geographic regions and product lines are accounted for at the same prices as
sales to customers outside the enterprise. Included in sales in 2004 are sales from facilities in
Canada to all external customers of $362,000 (2003  $323,000). Also included in sales in 2004 are
sales to one customer of $594,000 (2003  $378,000). Depreciation and amortization are as follows: 2004
    
    
    2003North America
    
    $
    44,956
    
    
    $
    32,890Europe and other
    
    
    18,958
    
    
    
    15,671$
    63,914
    
    
    $
    48,561
 42




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##### 



MASONITE INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements (continued)
(In thousands of U.S. dollars, except share and per share amounts) Years ended December 31, 2004 and 2003  Capital expenditures are as follows: 2004
    
    
    2003North America
    
    $
    43,945
    
    
    $
    38,705Europe and other
    
    
    15,574
    
    
    
    10,749$
    59,519
    
    
    $
    49,454
 Additional segmented information is as follows: 2004
    
    
    2003Property, plant and
equipment:Canada
    
    $
    124,573
    
    
    $
    84,163North America
    
    $
    558,560
    
    
    $
    473,230Europe and other
    
    
    372,620
    
    
    
    278,880$
    931,180
    
    
    $
    752,110Equity investments:Canada
    
    $
    
    
    
    $
    11,381North America
    
    $
    
    
    
    $
    11,381Europe and other
    
    
    3,514
    
    
    
    3,953$
    3,514
    
    
    $
    15,334Goodwill:Canada
    
    $
    63,173
    
    
    $
    26,442North America
    
    $
    252,056
    
    
    $
    120,578Europe and other
    
    
    37,074
    
    
    
    9,897$
    289,130
    
    
    $
    130,475
  22.
    Reconciliation of Canadian and United States generally accepted accounting principles: These consolidated financial statements have been prepared in accordance with Canadian GAAP which differs in certain respects from United States GAAP.
Following is a summary of the effect of significant differences in GAAP on the Companys
consolidated financial statements. 43




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##### 



MASONITE INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements (continued)
(In thousands of U.S. dollars, except share and per share amounts) Years ended December 31, 2004 and 2003  If United States GAAP were applied, net income for the year would be adjusted as follows: 2004
    
    
    2003Net income based on Canadian GAAP
    
    $
    127,951
    
    
    $
    107,671Effect of SFAS 133, net of tax
    
    
    4,748
    
    
    
    2,318Net income based on United States GAAP
    
    $
    132,699
    
    
    $
    109,989Earnings per share under United States
GAAP
    
    $
    2.42
    
    
    $
    2.04Diluted earnings per share under United
States GAAP
    
    
    2.37
    
    
    
    1.99
 U.S. Accounting Standard SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, (SFAS 133) and SFAS No. 138, Accounting for Certain Derivative Instruments and
Certain Hedging Activities  an Amendment of SFAS 133, (SFAS 138) requires that all derivative
instruments be reported on the balance sheet at fair value and establishes criteria for designation
and effectiveness of hedging relationships. The Company enters into forward exchange contracts to hedge certain forecasted cash flows. The
contracts are for periods consistent with the forecasted transactions. All relationships between
hedging instruments and hedged items, as well as risk management objectives and strategies are
documented. Changes in the spot value of the foreign currency contracts that are designated,
effective and qualify as cash flow hedges of forecasted transactions are reported in accumulated
other comprehensive income and are reclassified into the same component of earnings and in the same
period as the hedged transaction is recognized. At December 31, 2004, the Company has recorded an
asset of $2,032, a tax liability of $729 and a corresponding gain of $1,303 to other comprehensive
income. Under Canadian GAAP, the derivative instruments are not marked to market and the related
off balance sheet gains and losses are recognized in earnings in the same period as the hedged
transactions. The Company has entered into interest rate swap agreements to convert a portion of its floating
rate debt into fixed rate debt in accordance with the Companys risk management objective of
mitigating the variability and uncertainty in its cash flows due to variable interest rates. As of
December 31, 2004, the total floating rate debt effectively converted to fixed rate debt was
$268,750 (2003  $293,250). These agreements mature at various dates through 2006. The criteria under SFAS 133 were not met prior to the establishment of the above noted interest
rate swap agreements. Accordingly, any change in the fair value of the interest rate swaps was
reported in income from inception to December 31, 2003. As of January 1, 2004, the Company had met
the criteria for designation and assessing the effectiveness of hedging relationships, thus the
interest rate swaps were designated as cash flow hedges. Under US GAAP, changes in fair values of these financial instruments that are designated as
effective and qualify as cash flow hedges are reported in accumulated other comprehensive income
and are reclassified into income in the same period as the hedged transaction is recalculated. United States GAAP requires that depreciation and amortization, impairment of property plant and
equipment, and restructuring expenses be included in the determination of operating income and does
not permit the disclosure of a subtotal of income before such items. 44




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##### 



MASONITE INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements (continued)
(In thousands of U.S. dollars, except share and per share amounts) Years ended December 31, 2004 and 2003  Comprehensive income under United States GAAP is as follows: 2004
    
    
    2003Net income based on United States GAAP
    
    $
    132,699
    
    
    $
    109,989Foreign currency translation adjustment
    
    
    53,570
    
    
    
    62,792Additional minimum liability, net of tax
    
    
    (715
    )
    
    
    357Effective
portion of derivative instruments, net of tax
    
    
    3,401
    
    
    
    Comprehensive income based on United
States GAAP
    
    $
    188,955
    
    
    $
    173,138
 Accounting policies: In July 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 146, Accounting
for Costs Associated with Exit or Disposal Activities. SFAS No. 146 requires the recognition of a
liability for an exit or disposal activity only when the costs are incurred and can be measured at
fair value. Prior standards required only a commitment to an exit or disposal plan in order to
recognize the majority of the costs. SFAS No. 146 is effective for exit or disposal activities
initiated after December 31, 2002. In November 2002, FASB issued FIN 45, Guarantors Accounting and Disclosure Requirements for
Guarantees Including Indirect Guarantees of Indebtedness of Others, which requires certain
disclosures of obligations under guarantees. The disclosure requirements of FIN 45 were effective
for the Companys year ended December 31, 2002. Effective for 2003, FIN 45 also requires the
recognition of a liability by a guarantor at the inception of certain guarantees entered into or
modified after December 31, 2002, based on the fair value of the guarantee. The Company has
adopted the disclosure requirements in its financial statements (see note 14). The Company was not
impacted by the measurement requirements of FIN 45 in 2004 or 2003. In January 2003, FASB issued FIN 46, Consolidation of Variable Interest Entities which was
revised in December 2003. FIN 46 requires variable interest entities, previously referred to as
special-purpose entities or off-balance sheet structures, to be consolidated by a company if that
company is subject to a majority of the risk of loss from the entitys activities or is entitled to
receive a majority of the entitys returns or both. The consolidation provisions of FIN 46 are
effective for new variable interest entities created after January 31, 2003, and are applicable to
existing entities of foreign private issuers as of January 1, 2004. The Company has consolidated
certain investments as a result of this requirement (see note 19). 45




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##### 



MASONITE INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements (continued)
(In thousands of U.S. dollars, except share and per share amounts) Years ended December 31, 2004 and 2003  During 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity. The standard is effective for the Companys U.S.
GAAP reporting for the year commencing January 1, 2004 and requires presentation as a liability for
instruments that meet certain criteria. This standard did not have a significant impact on the
Companys financial statements under U.S. GAAP. Recently issued accounting standards: During 2003, FASB issued SFAS No. 132 (Revised), Employers Disclosures about Pensions and Other
Post-Retirement Benefits. The statement requires additional disclosures about the assets,
obligations, cash flows and net periodic benefit cost of defined benefit plans and other
post-retirement benefit plans. The requirements of SFAS 132 do not have an impact on the Companys
consolidated financial statements. In November 2004, FASB issued SFAS No. 151, Inventory Costs  An Amendment of Accounting Research
Bulletin (ARB) No. 43, Chapter 4. This statement clarifies the accounting for abnormal amounts
of idle facility expense, freight, handling costs and wasted material. In addition, the statement
also addresses the allocation of fixed overheads to the costs of conversion, and concludes that it
should be based on the normal capacity of production facilities. The requirements of SFAS 151 are not expected to have an impact on the Companys consolidated financial statements. In December 2004, FASB issued SFAS No. 153, Exchanges of Non-Monetary Assets  An Amendment to
Accounting Principles Board (APB) Opinion No. 29. This statement eliminates the exception to
fair value for exchanges of similar productive assets and replaces it with a general exception for
exchange transactions that do not have commercial substance. That is, transactions that are not
expected to result in significant changes in the cash flows of the reporting entity. The
requirements of SFAS 153 are not expected to have an impact on the Companys consolidated financial
statements. In December 2004, FASB issued SFAS No. 123 (Revised), Share-Based Payments. This statement
requires an entity to recognize the grant-date fair value of stock options and other equity-based
compensation issued to employees in the statement of operations. SFAS 123 (Revised) eliminates the
ability to account for share-based compensation transactions using the intrinsic value method in
APB Opinion 25. The Company, effective January 1, 2003, adopted FASB Statement No. 123,
Accounting for Stock-Based Compensation as amended by FASB Statement No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure. Accordingly, these revisions to SFAS No.
123 are not expected to have a significant impact on the Companys consolidated financial
statements. 46




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##### 



MASONITE INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements (continued)
(In thousands of U.S. dollars, except share and per share amounts) Years ended December 31, 2004 and 2003  Canadian GAAP requires the proportionate consolidation of interests in joint ventures.
Proportionate consolidation is not permitted under U.S. GAAP and interests in joint ventures are
accounted for under the equity method. However, as allowed by the Securities and Exchange
Commission (SEC), reclassification is not required in an SEC filing when specified criteria are
met and the information is disclosed. These criteria have been met and the information is
disclosed in note 19. Although adoption of proportionate consolidation has no impact on net
earnings or shareholders equity, it does increase assets, liabilities, revenues, expenses and cash
flows from operations from those amounts otherwise reported under U.S. GAAP. Consolidated balance sheets: As a result of the differences in the method of adoption of CICA recommendations, and SFAS 109,
Accounting for Income Taxes, and SFAS 133, Accounting for Derivative Instruments and Hedging
Activities under United States GAAP, the carrying values of certain assets and liabilities would
be different. The following tables reconcile results as reported under Canadian GAAP with those
that would have been reported under United States GAAP: 2004
    
    Canadian GAAP
    
    
    United States GAAPBalance sheet:Current assets
    
    $
    801,856
    
    
    $
    803,888Goodwill
    
    
    289,130
    
    
    
    298,781Long-term future tax assets
    
    
    13,491
    
    
    
    17,369Current liabilities
    
    
    375,144
    
    
    
    379,362Long-term liabilities
    
    
    816,393
    
    
    
    825,012Retained earnings
    
    
    529,611
    
    
    
    531,389Accumulated other comprehensive income
    
    
    
    
    
    
    116,570
 2003
    
    Canadian GAAP
    
    
    United States GAAPBalance sheet:Current assets
    
    $
    755,588
    
    
    $
    756,172Goodwill
    
    
    130,475
    
    
    
    140,126Long-term future tax assets
    
    
    8,315
    
    
    
    14,639Current liabilities
    
    
    370,603
    
    
    
    370,813Long-term liabilities
    
    
    589,908
    
    
    
    609,226Retained earnings
    
    
    403,525
    
    
    
    400,558Accumulated other comprehensive income
    
    
    
    
    
    
    60,485
 47




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##### 



MASONITE INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements (continued)
(In thousands of U.S. dollars, except share and per share amounts) Years ended December 31, 2004 and 2003  Consolidated statements of cash flows: United States GAAP does not permit the disclosure of a subtotal for cash provided by operating
activities before the effect of changes in working capital.  23.
    Proposed transaction The Company entered into a Combination Agreement (the KKR Transaction) dated December 22, 2004,
as amended and restated on January 16, 2005 and February 17, 2005, with Stile Acquisition Corp.
(Stile) an affiliate of Kohlberg, Kravis and Roberts & Co. L.P. (KKR) whereby all of the issued
and outstanding common shares of the Company would be indirectly acquired by KKR for Cdn$42.25 per
share. The KKR Transaction is subject to approval by 66-2/3% of shareholders casting votes at a
special meeting of shareholders to be held March 31, 2005 and by a majority of the votes cast at
such meeting other than in respect of common shares held by senior management of the Company. Upon
receipt of the requisite shareholder approval, the Company will begin the process of de-listing its
common shares from the New York Stock Exchange and the TSX. If either a superior proposal from
another bidder is accepted, or the Company is sold to another party within twelve months of the KKR
Transaction being terminated, the Company has agreed to pay a fee to Stile of Cdn$27.5 million.
The amendment and restatement that was executed on February 17, 2005 also provides that the Company
will pay Stile a $20 million hedging cost fee if the requisite percentage of shareholders do
not approve the KKR Transaction.  24.
    Comparative figures Certain comparative figures have been reclassified to conform to the current year basis of
presentation. 48




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##### 



MASONITE INTERNATIONAL CORPORATION MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION HAS BEEN PREPARED BY MANAGEMENT AND IS A REVIEW OF THE COMPANYS FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2004 AND DECEMBER 31, 2003
BASED UPON CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. ALL AMOUNTS ARE IN UNITED STATES
DOLLARS UNLESS SPECIFIED OTHERWISE. THIS DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND
ACCOMPANYING NOTES. NOTE 22 TO THOSE STATEMENTS DESCRIBES DIFFERENCES BETWEEN CANADIAN AND UNITED
STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. Overview of the Business Masonite International Corporation (we or Masonite) is an integrated, global building products
company with our Corporate Headquarters in Mississauga, Ontario and our International
Administrative Offices in Tampa, Florida. We operate over 80 facilities in 18 countries in North
America, South America, Europe, Asia and Africa and have approximately 14,000 employees. We sell
our products to customers in over 70 countries. The demand for building products is influenced by various macroeconomic factors, including general
economic conditions, interest rates, levels of unemployment, consumer confidence and the
availability of credit. During periods when these macroeconomic factors are favorable, home prices
typically rise, the volume of existing home sales increases and consumers tend to be more willing
and able to undertake renovation, remodelling and repair projects for their homes. As a result,
the demand for building products such as our door components, doors and door entry systems rises
and a greater proportion of our sales in this area involve higher value products. Sales of our
products for renovation, remodelling and repair represent the fastest growing area of our business. When these macroeconomic factors are favorable, new residential and commercial construction also
increases, which in turn leads to increased demand for building products such as ours. Although
our sales to new residential and commercial construction projects are not as significant to our
business as our sales for renovation, remodelling and repair activities, the presence of favorable
macroeconomic factors will have a greater impact on our sales to new construction projects. We are a vertically integrated manufacturer of door components, doors and door entry systems. In
particular, we are among the worlds largest manufacturer of wood composite molded door facings and
among the largest manufacturers of wood composite molded doors, which represent the majority of our
interior door sales. In order to realize cost advantages and efficiencies provided by vertical
integration, we have integrated the various operations in our North American segment as well as our
Europe and other segment to the point where we share common systems, financing and infrastructure.
This approach is part of our all products strategy which has been put in place to improve the
efficiency and effectiveness of our marketing and sales efforts. The all products strategy is a
program we have developed for offering our full range of door products to all of our North American
customers on a coordinated, one-stop shopping basis, using an integrated sales effort. The sale of door components, doors and door entry systems is diversified by geography, distribution
channel and product. We sell door products in 70 countries. Products are sold through multiple
distribution channels reducing reliance on any one channel. Our 82 manufacturing and distribution
facilities are located near customers, which enables us to provide effective customer service
through multiple distribution channels. These distribution channels include: (i) direct
distribution to home centre retailers; (ii) one-step distribution that sells direct to home
builders and contractors; and (iii) two-step distribution through wholesale distributors. In many of the countries in which we operate, an increasingly large share of sales of building products are sold through
large home centres and other large retailers. In addition, consolidation among companies operating
in different distribution channels has increased in recent years resulting in more customers
operating nationally and internationally. These trends are present to a lesser extent in Latin
America and Asia but we expect them to accelerate in those areas in future years. We believe we
are well-positioned to succeed with these large customers as we offer comprehensive product lines,
a focus on on-time and complete deliveries, and consistency in products and merchandising. We also
provide our home centre and other large retailer customers value-added fabrication and logistical
services, including store delivery of pre-hung interior and exterior doors. Finally, we offer a
broad range of interior and exterior doors in the form of stock products, custom-designed doors and
special order doors. This extensive product and service offering allows us to offer an all
products strategy which allows one-stop shopping to customers and reduces reliance on any one type
or style of door. 1




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##### 



MASONITE INTERNATIONAL CORPORATION Recent Developments During 2004 we completed several acquisitions. The most significant, the purchase of the North
American residential entry door business of The Stanley Works, was completed in March for a total
cost of approximately $164 million. This acquisition strengthened our position as a leader in
entry doors in North America. During the second quarter, we expanded our presence in Europe by
acquiring a manufacturer of residential interior doors in Eastern Europe with the purchase of a 75%
interest in a door manufacturer with production facilities in Poland and the Czech Republic. The
total consideration for this transaction was approximately $24 million. We believe that expansion
in Europe will provide one of our most important future growth opportunities. In addition, we
acquired a 45% interest in a U.S. based manufacturer of door components for consideration of
approximately $10 million. In the third quarter we increased our wood composite molded door facing
capacity with the acquisition of a 50% interest in a state-of-the-art manufacturer located in
Malaysia for total consideration of approximately $26 million. This facility will allow us to
increase the penetration of wood composite molded doors in Asia and service our
growing needs for wood composite molded door facings in North America. Finally, we acquired a U.S.
based manufacturer of interior residential doors and door components for total consideration of
approximately $32 million. All consideration paid in 2004 was in cash. In recent years, both our
competitors and our customers have been increasing consolidation in the industry. We believe these
acquisitions will allow us to remain competitive and increase our sales by permitting access to new
regions, new products and future supplies of materials. We entered into a Combination Agreement (the KKR Transaction) dated December 22, 2004, as amended
and restated on January 16, 2005 and February 17, 2005, with Stile Acquisition Corp. (Stile) an
affiliate of Kohlberg, Kravis and Roberts & Co. L.P., whereby all of the issued and outstanding
common shares of Masonite would be indirectly acquired by KKR for Cdn$42.25 per share. The KKR
Transaction is subject to approval by 66-2/3% of shareholders casting votes at a special meeting of
shareholders to be held on March 31, 2005 and by a majority of the votes cast at such meeting other
than in respect of common shares held by our senior management. Upon receipt of the requisite
shareholder approval, we will begin the process of de-listing our common shares from the New York
Stock Exchange and the TSX. If we either accept a superior proposal from another bidder or are
sold to another party within twelve months of the KKR Transaction being terminated, we agreed to
pay a fee to Stile of Cdn$27.5 million. The amendment and restatement that we executed on February
17, 2005 also provides that we will pay Stile a $20 million hedging cost fee if the requisite
percentage of our shareholders do not approve the KKR Transaction. In connection with the KKR
Transaction, we incurred direct transaction costs in 2004 which have been included in other expense. Additional costs will be incurred in 2005 to complete the KKR Transaction. Upon the
close of the KKR Transaction, certain of our accounts will be impacted by fair value accounting
which may affect the forward looking statements contained herein. During 2004, we commenced a program to rationalize and standardize our residential entry door
production in order to improve operating efficiencies. As a result of this decision, we announced
the closure of two entry door production facilities in North America. A facility located in Canada
was closed during the year and the closure of a U.S. based facility was announced in the fourth
quarter. We are in the process of completing the transfer of production to our remaining entry
door facilities. We also announced the transfer of our post forming door facing manufacturing
operations in Korea to another of our wood composite molded door facing facilities. The shutdown
and termination costs for closing these facilities, and the impaired asset charge that resulted
from the standardization initiative, are included in other expense. Our results were negatively impacted during the year by several hurricanes in the Southeastern
U.S., a 25 day strike at an interior door manufacturing facility and certain employee transfer and
severance costs as we completed the consolidation in Tampa of key operating executives that began
with the shutdown of the Masonite Corporation Chicago headquarters in 2002. Selected Consolidated Financial InformationYears ended December 31 (in millions of United States dollars, except per share amounts) 2004
    
    
    2003
    
    
    2002Operating DataSales
    
    $
    2,199.9
    
    
    $
    1,777.2
    
    
    $
    1,619.5Net income
    
    
    128.0
    
    
    
    107.7
    
    
    
    89.5Net income per share*Basic
    
    
    2.34
    
    
    
    2.00
    
    
    
    1.70Diluted
    
    
    2.29
    
    
    
    1.95
    
    
    
    1.65Balance Sheet DataTotal assets
    
    
    2,108.5
    
    
    
    1,693.2
    
    
    
    1,462.8Long-term debt
    
    
    593.4
    
    
    
    447.3
    
    
    
    498.0
   Results of Operations  Fiscal 2004 Compared to Fiscal 2003 Consolidated Sales 2




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##### 



MASONITE INTERNATIONAL CORPORATION Years ended December 31 (in millions of United States dollars) 2004
    
    
    2003
    
    
    $ Change
    
    
    % ChangeSales
    
    $
    2,199.9
    
    
    $
    1,777.2
    
    
    $
    422.7
    
    
    
    23.8
    %
 Consolidated sales in 2004 increased approximately 24% or $423 million to $2.2 billion from sales
of $1.8 billion in 2003. Approximately one-half of this increase in sales was attributable to
existing operations, and the balance to businesses acquired during
2004. Demand in both the home improvement and new construction
sectors in the regions where our products are sold was stronger in 2004
than 2003. Over the past five years our revenues have increased at an annual compound rate of 14%
through a combination of acquisitions of businesses, gains in market share and new product
introductions. In 2003, our financial results were negatively affected by harsh weather conditions
early in the year and slower demand because of greater consumer uncertainty due to geopolitical
events. Sales in 2004 were positively impacted by acquisitions of businesses and the release of
several new interior and exterior products as well as by the continued implementation of our all
products strategy. Sales and Percentage of Sales by Principal Geographic RegionYears ended December 31 (in millions of United States dollars) 2004
    
    
    2003North America
    
    $
    1,760.3
    
    
    $
    1,434.180
    %
    
    
    81
    %Europe and other
    
    $
    487.6
    
    
    $
    380.622
    %
    
    
    21
    %Intersegment
    
    
    (48.1
    )
    
    
    (37.4
    )(2
    %)
    
    
    (2
    %)
 Sales in our principal segment, North America, increased by approximately 23% to $1.8
billion in 2004 compared to $1.4 billion in 2003. The 23% year-over-year sales increase was due to
an 8% increase in our existing operations and 15% from acquired businesses. North American sales
were positively impacted by the release of several new interior and exterior products as well as
the continued implementation of our all products strategy. Sales in our other segment, Europe and other, increased by approximately 28% to $488 million in
2004 compared to $381 million in 2003. The 28% year-over-year sales increase was due to a 22%
increase in our existing business and the balance from acquired businesses. Demand from the new
construction and home renovation sectors was strong in 2004 in the regions where our products are sold. In addition,
we increased our sales of door components to our North American segment and customers in Eastern
Europe. During 2004, we expanded our presence as a door manufacturer in Europe to include several
Eastern European countries. With the expansion of the European Union in 2004, we expect growth in
Europe to continue. Also partly impacting 2004 growth rates were the strengthening European
currencies relative to the U.S. dollar. Intersegment sales consist primarily of sales of door components from the Europe and other segment
to the North American segment. These sales increased in 2004 due to businesses acquired in 2004
and higher demand for doors in our North American segment. Sales and Percentage of
Sales by Product LineYears ended December 31 (in millions of United States dollars) 2004
    
    
    2003Interior
    
    $
    1,364.7
    
    
    $
    1,164.562
    %
    
    
    66
    %Exterior
    
    $
    835.2
    
    
    $
    612.738
    %
    
    
    34
    %
 The proportion of revenues from interior and exterior products was approximately 62% and 38%,
respectively, in 2004, compared to 66% and 34%, respectively, in 2003. The increase in exterior
products as a percentage of total sales was attributable to our continued focus on exterior
products and to the March 2004 acquisition of the entry door business from The Stanley Works. The
introduction of innovative new fiberglass exterior doors, new customers, new programs and continued
marketing and advertising also contributed to the growth in sales of exterior products. Cost of SalesYears ended December 31 2004
    
    
    2003Cost of sales, as a percentage of sales
    
    
    78.3
    %
    
    
    77.7
    %
 Cost of sales, expressed as a percentage of sales, increased to 78.3% in 2004 from 77.7% in 2003.
As is the case for many industries, we are experiencing increasing costs and, in some cases
shortages of supply, particularly in relation to steel, transportation, petroleum-based products,
lumber and wood related components. These cost increases impacted our financial results through
most of the year. The effects of these cost increases were mitigated through improvements to
operating leverage from the 12% increase in sales from existing businesses, the use of alternative
products and sources of supply, and price increases to customers. The continuing impact of these
and other measures is difficult to estimate due to 3




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##### 



MASONITE INTERNATIONAL CORPORATION the potential timing difference between input cost changes, ongoing availability of material and
our ability to mitigate these effects. The results for 2004 were also negatively impacted by hurricanes in the Southeastern U.S., a labor
disruption and certain realignment initiatives at our North American logistical facilities. Our
ten facilities in the areas most severely affected by four hurricanes in the Southeastern U.S. lost
a number of production and shipping days. While our properties were not damaged by the events,
these facilities were forced to temporarily close, as were many of our customers in the area. Also
in the third quarter of 2004, a labor disruption at one of our North American manufacturing
operations resulted in 25 lost days of production. Selling, General and Administrative ExpensesYears ended December 31 2004
    
    
    2003Selling, General and Administrative Expenses, as a
percentage of sales
    
    
    8.6
    %
    
    
    9.1
    %
 Selling, general and administrative expenses as a percentage of sales were 8.6%, or approximately
$188 million in 2004, compared with 9.1%, or approximately $162 million, in 2003. The relative
decrease in selling, general and administrative expenses as a percentage of sales is primarily due
to the fixed portion of these costs being applied over a larger sales base. In absolute terms,
selling, general and administration expense increased during the year primarily due to acquisitions
of businesses, certain sales related items such as commissions, and costs related to the adoption
of the full value incentive plan as discussed in the Critical Accounting Policies and Estimates
section. Consolidated EBITDA* MarginsYears ended December 31 2004
    
    
    2003Consolidated EBITDA margins
    
    
    13.1
    %
    
    
    13.2
    %
 Consolidated EBITDA margins declined to 13.1% in 2004 from 13.2% in 2003. This 13.1% margin is
consistent with our reported quarterly results for 2004. Increasingly, the investment and banking industries calculate and analyze the performance of a
company using an EBITDA measurement. The calculation of EBITDA as a percentage of sales for
Masonite over the last five years is as follows: 2004
    
    2003
    
    
    2002
    
    
    2001
    
    
    200013.1%
    
    
    13.2
    %
    
    
    13.0
    %
    
    
    10.1
    %
    
    
    8.5
    %
  See discussion of non-GAAP financial measures
 Segmented Operating MarginsYears ended December 31 2004
    
    
    2003North America
    
    
    11.8
    %
    
    
    12.5
    %Europe and other
    
    
    11.1
    %
    
    
    9.9
    %
 As disclosed in the segmented information of the financial statements, segment operating income
margins in the North American segment declined to 11.8% from 12.5% in 2004. The factors discussed
above disproportionately affected this segment. Our North American segment margins were also affected by changes in our employee benefit plans. We
recorded a curtailment gain on our post-retirement benefit program of approximately $2 million in
2004 and a net curtailment gain on our defined benefit pension plan of approximately $5 million in
2003. As part of the change that caused these curtailment gains, other defined contribution
pension plans in the United States were enhanced; resulting in increased expense for these plans of
approximately $3 million in 2004 and approximately $2 million in 2003 over comparative costs
absorbed in 2002. As disclosed in the segmented information of the financial statements, segment operating income
margins in the Europe and other segment increased to 11.1% for 2004 from 9.9% for the previous
year, primarily as a result of improvements in
operating efficiencies in our European operations, particularly in France, businesses acquired
during the year and an increase in sales of door components to our North American segment and
customers in Eastern Europe. Other ExpenseYears ended December 31 (in millions of United States dollars) 2004
    
    
    2003
    
    
    $ Change
    
    
    % ChangeOther expense
    
    $
    7.7
    
    
    $
    3.1
    
    
    $
    4.6
    
    
    
    144.9
    %
 Included in other expense in 2004 are costs associated with the shutdown of our Richmond,
Indiana exterior steel door plant; the transfer of the Seoul, South Korea post forming wood
composite molded door facing production to another 4




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##### 



MASONITE INTERNATIONAL CORPORATION facility; the consolidation of senior operating management in our Tampa, Florida headquarters; the
previously announced KKR Transaction; and a gain on disposal of property, plant and equipment. The shutdown of the Richmond operation, our smallest exterior door facility, is part of our ongoing
program of rationalization of exterior door capacity and standardization of exterior door
production and product specifications. The charges at the South Korea operation are the result of
transferring all of that facilitys post forming wood composite molded door facing production to
another of our wood composite molded door facing plants. Employee consolidation in our Tampa
headquarters, which included employee transfer and severance costs, is the completion of the
consolidation in Tampa of key operating executives that began with the shutdown of the former
Masonite Corporation Chicago headquarters in 2002. We have incurred significant legal, accounting
and other costs related to the proposed KKR Transaction. The Richmond facility shutdown resulted in a charge to other expense of approximately $4
million, primarily for severance and asset impairment charges. The transfer of the South Korea
production resulted in a charge to other expense of approximately $2 million, primarily
for employee termination costs. At this time, we expect that in the first quarter of 2005 an
additional approximately $2 million will be incurred for the Richmond shutdown and the South Korea
termination costs. The senior operating employee transfer and severance costs resulted in a charge
to other expense of approximately $2 million. The legal, accounting and other costs
related to the proposed KKR Transaction resulted in a charge to other expense of
approximately $3 million. During the year, the sale of certain idle real estate and other equipment for proceeds of
approximately $10 million resulted in a gain of approximately $5 million which was included in
other expense. Depreciation and Amortization ExpenseYears ended December 31 (in millions of United States dollars) 2004
    
    
    2003
    
    
    $ Change
    
    
    % ChangeDepreciation and amortization
    
    $
    63.9
    
    
    $
    48.6
    
    
    $
    15.3
    
    
    
    31.6
    %
 Depreciation and amortization expense increased approximately $15 million in 2004 to approximately
$64 million from approximately $49 million in 2003. The increase in depreciation and amortization
is the result of businesses acquired during the year as well as additional depreciation being
incurred on capital expenditures from 2003. Also, we included a total amortization charge of
approximately $3 million relating to amortizable intangible assets acquired during the current
year. This exceeds the range of $50 million to $52 million that was estimated in the 2003
Managements Discussion and Analysis, primarily due to the impact of acquisitions. Depreciation
and amortization in 2005 is expected to be in the range of $75 to $80 million. Interest ExpenseYears ended December 31 (in millions of United States dollars) 2004
    
    
    2003
    
    
    $ Change
    
    
    % ChangeInterest
    
    $
    40.0
    
    
    $
    35.5
    
    
    $
    4.5
    
    
    
    12.5
    %
 Interest expense increased approximately $5 million in comparison to 2003. This increase arose
because we incurred additional debt of $200 million to finance acquisitions during the year,
experienced an increase in interest rates and introduced the accounts receivable sale program that
is discussed in greater detail in Liquidity and Capital Resources  Business Risks and
Uncertainties. Approximately 58% of our debt is at floating rates, primarily LIBOR, which
increased during the year. Repayment of long-term debt from cash flow generated by operations was
approximately $104 million. 5




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##### 



MASONITE INTERNATIONAL CORPORATION Income Tax RatesYears ended December 31 2004
    
    
    2003Combined effective rate
    
    
    24.0
    %
    
    
    23.3
    %
 Masonites effective income tax rate is primarily the weighted average of federal, state and
provincial rates in various countries in which we have operations, including the United States,
Canada, France, the United Kingdom and Ireland. Our income tax rate is also affected by estimates
of realizability of tax assets, changes in tax laws and the timing of the expected reversal of
temporary differences. The combined income tax rate of 24.0% in 2004 was consistent with the
previous estimate of 24% to 25% contained in our 2003 Managements Discussion and Analysis. Our
combined effective income tax rate is expected to be to be in the range of 26% to 28% in 2005. Net Income and Net Income per ShareYears ended December 31 (in millions of United States dollars, except for per share amounts) 2004
    
    
    2003
    
    
    $ Change
    
    
    % ChangeNet income
    
    $
    128.0
    
    
    $
    107.7
    
    
    $
    20.3
    
    
    
    18.8
    %Net income per share (basic)
    
    $
    2.34
    
    
    $
    2.00
    
    
    $
    0.34
    
    
    
    17.0
    %Net income per share
(diluted)
    
    $
    2.29
    
    
    $
    1.95
    
    
    $
    0.34
    
    
    
    17.4
    %
 Our 2004 net income increased
approximately 19%, or $20 million, to a new record level of $128
million ($2.34 per share), from $108 million in 2003 ($2.00 per share). Basic earnings per share
of $2.34 in 2004 and $2.00 in 2003 are calculated using the weighted average number of shares
outstanding for the year of approximately 54.8 million and 53.9 million, respectively. On December 31, 2004 there were 54,796,531 common shares outstanding. Calculations of diluted earnings per share of $2.29 in 2004 and $1.95 in 2003 reflect the dilution
effect from the assumed exercise of options and warrants where the exercise price was lower than
the average market price of the common shares for the reporting period. Approximately 2.3 million
(2003  2.7 million) share options with an exercise price lower than the average market price were
outstanding at December 31, 2004 at prices ranging from $7.28 to $23.08 per share (2003  $6.67 to
$21.14). 6




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##### 



MASONITE INTERNATIONAL CORPORATION Foreign Currency TranslationYears ended December 31 (in millions of United States dollars) 2004
    
    
    2003
    
    
    $ Change
    
    
    % ChangeCumulative translation
adjustments
    
    $
    115.6
    
    
    $
    62.1
    
    
    $
    53.5
    
    
    
    86.3
    %
 The increase during the year in this unrealized cumulative translation balance, which is a
component of shareholders equity, was primarily the result of the continued strengthening of the
euro, the U.K. pound sterling and the Canadian dollar during 2004 compared to our reporting
currency, the U.S. dollar. There was a corresponding net increase of the translated value of our
net investment in the assets and liabilities of self-sustaining
foreign operations in the 17
foreign countries outside of the U.S. in which we operated in 2004. Results of Operations  Fourth Quarter of 2004 compared with Fourth Quarter of 2003 Consolidated SalesThree months ended December 31 (in millions of United States dollars) 2004
    
    
    2003
    
    
    $ Change
    
    
    % ChangeSales
    
    $
    570.2
    
    
    $
    455.9
    
    
    $
    114.3
    
    
    
    25.1
    %
 Consolidated sales in the fourth quarter of 2004 increased approximately 25% or $114 million to
$570 million from sales of $456 million in 2003. The 25% quarter-over-quarter sales increase was
the result of growth from existing operations (8%) and businesses acquired in 2004 (17%). In all
regions where Masonite's products are sold, demand in both the home improvement and new construction sectors was stronger this
quarter than the comparable period in 2003. Sales and Percentage of Sales by Principal Geographic RegionThree months ended December 31 (in millions of United States dollars) 2004
    
    
    2003North America
    
    $
    452.5
    
    
    $
    365.879
    %
    
    
    80
    %Europe and other
    
    $
    131.8
    
    
    $
    99.923
    %
    
    
    22
    %Intersegment
    
    
    ($14.2
    )
    
    
    ($9.8
    )(2
    %)
    
    
    (2
    %)
 Sales in our principal segment, North America, increased by approximately 24% to $453
million in the fourth quarter of 2004 compared to $366 million reported in the same period in 2003.
The 24% quarter-over-quarter sales increase was the result of growth from existing operations (4%)
and businesses acquired in 2004 (20%). Sales in our other segment, Europe and other, increased by approximately 32% to $132 million in the
fourth quarter of 2004 compared to $100 million in the same period in 2003. The 32%
quarter-over-quarter sales increase was the result of growth from existing operations (21%) and
businesses acquired in 2004 (11%). Sales and Percentage of
Sales by Product LineThree months ended December 31 (in millions of United States dollars) 2004
    
    
    2003Interior
    
    $
    368.9
    
    
    $
    305.565
    %
    
    
    67
    %Exterior
    
    $
    201.3
    
    
    $
    150.435
    %
    
    
    33
    %
 The proportion of revenues from interior and exterior products was approximately 65% and 35%
respectively, in the fourth quarter of 2004 compared to 67% and 33%, respectively, in the fourth
quarter of 2003. The traditional decrease in sales of exterior doors in the fourth quarter from
the second and third quarters is largely due to weather. Seasonal factors influence the demand for
exterior doors due to the reduction in replacement activity during the winter months. Sales of
interior doors are largely unaffected by seasonal factors. Cost of SalesThree months ended December 31 2004
    
    
    2003Cost of sales, as a percentage of sales
    
    
    78.1
    %
    
    
    77.7
    %
 Cost of sales, expressed as a percentage of sales, increased to 78.1% in the fourth quarter of 2004
from 77.7% in the fourth quarter of 2003, but improved from the third quarter of 2004. 7




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##### 



MASONITE INTERNATIONAL CORPORATION Selling, General and Administrative expensesThree months ended December 31 2004
    
    
    2003Selling, general and administrative expenses, as a
percentage of sales
    
    
    8.3
    %
    
    
    8.6
    %
 Selling, general and administrative expenses as a percentage of sales were 8.3%, or approximately
$47 million in 2004, compared with 8.6%, or approximately $39 million, in 2003. 8




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##### 



MASONITE INTERNATIONAL CORPORATION Consolidated EBITDA MarginsThree months ended December 31 2004
    
    
    2003Consolidated EBITDA margins
    
    
    13.6
    %
    
    
    13.7
    %
 Consolidated EBITDA margins decreased to 13.6% from 13.7% for the comparable three month periods of
2004 and 2003. This 13.6% margin is an improvement over our reported quarterly results for 2004. Segmented Operating MarginsThree months ended December 31 2004
    
    
    2003North America
    
    
    11.5
    %
    
    
    13.9
    %Europe and other
    
    
    11.7
    %
    
    
    6.8
    %
 As disclosed in the segmented information of the financial statements, segment operating income
margins in the North American segment decreased to 11.5% in 2004 from 13.9% in 2003 for the three
month period. During 2003, we realized a net pension gain on the curtailment of our defined
benefit pension plan as well as increased defined contribution pension expense as previously
discussed. As disclosed in the segmented information of the financial statements, segment operating income
margins in the Europe and other segment improved to 11.7% in 2004 from 6.8% in 2003 for the three
month period, primarily as a result of higher operating leverage, stronger demand for doors,
particularly in France, businesses acquired during the year and increased sales of door components
to our North American segment and Eastern Europe. Other ExpenseThree months ended December 31 (in millions of United States dollars) 2004
    
    
    2003
    
    
    $ Change
    
    
    % ChangeOther expense
    
    $
    9.7
    
    
    $
    2.7
    
    
    $
    7.0
    
    
    
    251.0
    %
 Included in other expense in the fourth quarter is approximately $10 million of costs
associated with the shutdown of our Richmond, Indiana exterior steel door plant; the transfer of
the Seoul, South Korea post forming wood composite molded door facing production to another
facility; the consolidation of senior operating management in our Tampa, Florida headquarters; and
the previously announced KKR Transaction. Depreciation and Amortization ExpenseThree months ended December 31 (in millions of United States dollars) 2004
    
    
    2003
    
    
    $ Change
    
    
    % ChangeDepreciation and amortization
    
    $
    19.6
    
    
    $
    12.5
    
    
    $
    7.1
    
    
    
    56.0
    %
 Depreciation and amortization expense increased approximately $7 million in the fourth quarter of
2004 to $20 million from $13 million in 2003. Interest ExpenseThree months ended December 31 (in millions of United States dollars) 2004
    
    
    2003
    
    
    $ Change
    
    
    % ChangeInterest
    
    $
    11.1
    
    
    $
    8.4
    
    
    $
    2.7
    
    
    
    32.0
    %
 Interest expense increased approximately $3 million in comparison to the fourth quarter of 2003. Income Tax RatesThree months ended December 31 2004
    
    
    2003Combined effective rate
    
    
    21.5
    %
    
    
    21.7
    %
 Our effective income tax rate is the weighted average of federal, state and provincial rates in
various countries in which we have operations including the United States, Canada, France, the
United Kingdom and Ireland. Our tax rate is also affected by the other expense items
previously discussed, as well as estimates of realizability of tax assets, changes in tax laws, and
the timing of the expected reversal of temporary differences. 9




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##### 



MASONITE INTERNATIONAL CORPORATION Net Income and Net Income per ShareThree months ended December 31 (in millions of United States dollars, except per share amounts) 2004
    
    
    2003
    
    
    $Change
    
    
    % ChangeNet income
    
    $
    27.3
    
    
    $
    29.2
    
    
    
    ($1.9
    )
    
    
    (6.4
    %)Net income per share (basic)
    
    $
    0.50
    
    
    $
    0.54
    
    
    
    ($0.04
    )
    
    
    (7.4
    %)Net income per share (diluted)
    
    $
    0.49
    
    
    $
    0.53
    
    
    
    ($0.04
    )
    
    
    (7.5
    %)
 Our 2004 net income for the fourth quarter decreased approximately 6%, or $2 million to $27 million
($0.50 per share) from $29 million in 2003 ($0.54 per share). The decline in earnings was a result
of a net charge to other expense (income) of approximately $10 million as previously discussed.
Basic earnings per share of $0.50 in the fourth quarter of 2004 and $0.54 in the fourth quarter of
2003 are calculated using the weighted average number of shares outstanding for the three-month
period of approximately 54.8 million and 54.2 million, respectively. Calculations of diluted
earnings per share of $0.49 in 2004 and $0.53 in 2003 reflect the dilution effect from the assumed
exercise of options and warrants where the exercise price was lower than the average market price
of the common shares for the reporting period. The weighted average number of diluted shares for
the quarter ended December 31, 2004 was approximately 56.0 million (2003  55.7 million). Liquidity and Capital Resources Capital Structure CompositionAs at December 31 2004
    
    
    2003Shareholders equity
    
    
    51.6
    %
    
    
    53.7
    %Non-controlling interest
    
    
    5.0
    
    
    
    2.6Short-term debt
    
    
    1.1
    
    
    
    0.5Long-term debt*
    
    
    34.7
    
    
    
    35.4Future income taxes
    
    
    7.6
    
    
    
    7.8100.0
    %
    
    
    100.0
    %
  *Includes current
portion of long-term debt
 Maintaining significant levels of liquidity and cash flow are important components of our financial
strategy. Historically, we have funded our growth through a combination of cash generated from operations,
long-term bank debt and other borrowings, and by the periodic issuance of common shares. In June 2004, we filed a Normal Course Issuer Bid (the Share Repurchase) with the Toronto Stock
Exchange. A copy of the Notice relating to the Share Repurchase may be obtained, without charge,
by contacting our Investor Relations Department at investorrelations@masonite.com. For the year
ended 2004, we purchased for cancellation 100,000 (2003  nil) of our common shares for
approximately $2 million (2003  $nil) pursuant to our Share Repurchase. Subsequent to year end,
we terminated this Share Repurchase. Cash flows from Operating ActivitiesYears ended December 31 (in millions of United States dollars) 2004
    
    
    2003Cash generated in operating activities
    
    $
    146.9
    
    
    $
    154.8
 The decrease in cash flows from operations in 2004 compared to 2003 was largely due to an
accumulation of inventory from the third quarter to the fourth quarter of 2004 of approximately $30
million. We expected an increase in inventories throughout 2004 to support the higher level of
sales and as a result of acquiring businesses. However, the year end increase of approximately $30
million occurred primarily because of a buildup of finished goods related to home centre sales in
January as well as the delayed receipt of raw materials, including steel, wood composite molded
door facings and pine products, from offshore sources due to earlier shipping capacity shortages
that occurred throughout 2004. During 2004, we entered into an agreement to sell up to $75 million of non-interest bearing
accounts receivable. The impact on cash flow was negligible when compared to 2003 as the program
benefits were offset by longer terms to certain customers. At December 31, 2004, $75 million (2003 
$nil) of receivables had been sold, and were excluded from accounts receivable. Under this
agreement, we retain servicing responsibilities but do not have a retained interest in the
receivables. When we acquired the entry door business of The Stanley Works, we continued an accounts receivable
sale program already established by The Stanley Works. Consequently, this program did not have any
impact on our comparable year-over-year cash flow. At December 31, 2004, approximately $25 million
(2003  $nil) of receivables had been sold, and were excluded from accounts receivable. Under this
agreement, we do not retain servicing responsibilities nor do we have a retained interest the
receivables. 10




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##### 



MASONITE INTERNATIONAL CORPORATION During 2004 and 2003, we used approximately $147 million and $155 million, respectively, in cash
generated from operations to fund additions to property, plant and equipment, repay long-term debt,
fund acquisitions of businesses and undertake additional other investing activities. Cash flows from Investing ActivitiesYears ended December 31 (in millions of United States dollars) 2004
    
    
    2003Cash used in investing activities
    
    
    ($317.8
    )
    
    
    ($48.1
    )
 The increase in cash used for investing activities in 2004 compared to 2003 was primarily due to
acquisition of businesses. In 2004, we spent approximately $254 million on acquisitions compared
to approximately $4 million in 2003. In March 2004, we purchased the residential entry door
business of The Stanley Works for cash consideration of $164 million; in June 2004 we acquired 75%
of the shares of a door manufacturer in Eastern Europe for cash consideration of $23 million; in
July 2004 we acquired a 50% equity interest in a door component manufacturer in Malaysia for cash
consideration of $26 million; and in August 2004 we completed the purchase of an interior door and
door component manufacturer in the United States for cash consideration of $32 million. We also
disposed of two redundant facilities and other production assets in the year resulting in proceeds
of disposal of approximately $10 million (2003  $14 million). We used $60 million to fund
additions to property, plant and equipment in 2004, which was somewhat higher than the $50 million
to $55 million estimated in the 2003 Management Discussion and Analysis (prior to The Stanley Works
acquisition) but consistent with updated estimates during the year. As in 2003, we continue to
invest in new products and processes as well as maintenance of our existing capital base. Cash used in investing activities in 2003 was primarily to fund additions to property, plant and
equipment of approximately $50 million. Additional capital expenditures were undertaken in 2003 to
support development of several new products at levels that were higher than initially forecast. We
continue to invest in our manufacturing operations to increase productivity, improve customer
service and introduce new products. Cash flows from Financing ActivitiesYears ended December 31 (in millions of United States dollars) 2004
    
    
    2003Cash generated (used) in financing activities
    
    $
    107.9
    
    
    
    ($39.8
    )
 Cash generated in financing activities in 2004 were primarily related to long-term debt. During
the year, we made repayments of long-term debt of approximately $104 million (2003  $51 million).
An additional $200 million was borrowed to fund current year
acquisitions of businesses (2003 
$nil) as discussed below. Cash was also generated from financing activities related to the
exercise of stock options for approximately $5 million (2003  $9 million), less the repurchase of
common shares under our Share Repurchase for approximately $2 million (2003  $nil). 11




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##### 



MASONITE INTERNATIONAL CORPORATION Credit FacilitiesYears ended December 31 (in millions of United States dollars) 2004
    
    
    2003Cash on hand
    
    $
    86.5
    
    
    $
    129.7Revolving bank credit line capacity
    
    $
    128.0
    
    
    $
    120.0Revolving bank credit line outstanding
    
    $
    19.1
    
    
    $
    6.6Term loans outstanding
    
    $
    618.2
    
    
    $
    482.8
 During the first quarter of 2004, we negotiated additional bank term borrowings of $200 million
that were used principally for The Stanley Works acquisition. The new facilities consist of a $50
million term loan due August 31, 2006, and a $150 million term loan due August 31, 2008. The
additional borrowings have the same terms and conditions as the existing borrowings. Revolving bank credit lines are maintained to ensure short-term availability of funds. We had
approximately $128 million of revolving bank credit lines
established at December 31, 2004 (2003 
$120 million). Total available bank credit lines of $128 million include $100 million of our main
revolving bank line and $28 million related to our consolidated subsidiaries bank credit lines. No
amounts were outstanding on the main revolving bank line as at December 31, 2004 and 2003. At
December 31, 2004, approximately $19 million (2003  $7 million) was drawn on the subsidiaries bank
credit lines and has been classified as bank indebtedness on the balance sheet. In addition to the facilities discussed above, debt of approximately $34 million (2003  $nil) was
assumed with companies acquired during the year. The aggregate amount of long-term debt repayments required over the next five years is
approximately $618 million as at December 31, 2004, compared to approximately $483 million at
December 31, 2003. Accelerated repayment of bank term loans may be required depending upon the
generation of excess cash flow subject to performance against certain predetermined ratios as
defined in the credit agreement. 12




---



##### 



MASONITE INTERNATIONAL CORPORATION Liquidity RatiosYears ended December 31 2004
    
    
    2003Working capital ratio
    
    
    2.14:1.0
    
    
    
    2.04:1.0Debt to equity ratio
    
    
    0.60:1.0
    
    
    
    0.49:1.0
 (see discussion on non-GAAP financial measures)
 The working capital ratio at December 31, 2004 was 2.14:1.0, which is consistent with prior years.
Over the last five years, our year-end working capital ratio has been in the range of 1.85:1.0 to
2.40:1. The debt to equity ratio was higher at December 31, 2004 than at December 31, 2003 due to the
additional debt incurred to fund the acquisition of the entry door business of The Stanley Works.
In our 2003 Managements Discussion and Analysis, we estimated that the debt to equity ratio would
increase to 0.75:1.0 at the date of that acquisition, as a result of that acquisition. Actual debt
to equity ratios of 0.67:1.0 at September 30, 2004 and 0.60:1.0 at December 31, 2004 demonstrate
that cash flows from operations provide the funds required to repay the long-term debt at their
respective payment and maturity dates. Contractual ObligationsAs at December 31 (in millions of United States dollars) Less than
    
    
    1-3
    
    
    4-5
    
    
    After 5Total
    
    
    1 year
    
    
    years
    
    
    years
    
    
    yearsShort-term debt
    
    $
    19
    
    
    $
    19
    
    
    $
    
    
    
    $
    
    
    
    $
    Long-term debt
    
    $
    618
    
    
    $
    25
    
    
    $
    592
    
    
    $
    1
    
    
    $
    Operating leases
    
    $
    74
    
    
    $
    20
    
    
    $
    26
    
    
    $
    12
    
    
    $
    16Commercial commitments(1)
    
    $
    34
    
    
    $
    32
    
    
    $
    2
    
    
    $
    
    
    
    $
    Total contractual
cash obligations
    
    $
    745
    
    
    $
    96
    
    
    $
    620
    
    
    $
    13
    
    
    $
    16
  (1) Commercial commitments consist of agreements to purchase goods and services that
are enforceable and legally binding. In addition, the purchase commitments specify all
significant terms including fixed or minimum quantities to be purchased and the timing of the
transaction. Commercial commitments exclude normal course purchase orders for raw materials or
other goods and services as they represent authorizations to purchase rather than binding
contracts.
 Our debt has been rated below investment grade by Moodys and Standard & Poors as Ba2 and BB+,
respectively, with a stable outlook. It is our longer term intention to obtain investment grade
status from both rating agencies at the earliest opportunity. Achieving investment grade status
should permit us to continue to improve borrowing terms. We believe that our current cash balance plus cash flows from operations and the additional bank
term loan referred to above will be sufficient to fund our near-term working capital and other
investment needs. Off-Balance Sheet Arrangements We do not have any material off-balance sheet arrangements other than those disclosed in Notes 1,
3, 9, 13 and 14 to our annual audited consolidated financial statements. Business Risks and Uncertainties Our strategic focus is to expand and strengthen our core business of the manufacture and sale of
doors, door components and door entry systems. A strategy that specializes in a relatively
narrow product line in the building products industry may amplify the risks inherent in the general
effect of economic cycles on residential construction and remodeling. We have addressed this risk
by broadening our customer base within the regions and sectors where our products were already sold and by expanding into new countries and regions. During the 1990s, we acquired numerous facilities in France and the
United Kingdom. The completion of the Masonite Corporation acquisition in 2001 added operations in
Ireland, South Africa and South Korea. Our 2004 annual sales outside North America exceeded $440 million. We obtain labor and certain raw materials locally, denominated primarily in their respective
domestic currencies. Other raw materials are imported and prices are often quoted in U.S. dollars
or in the domestic currency of the country where the facility operates. We sell a significant
portion of our products within the respective domestic channels of each country in which we have a
production facility at domestic market selling prices. In situations where import or export
commitments
are undertaken, we may periodically enter into foreign exchange contracts to manage and reduce the
risk associated with foreign currency fluctuations. Gains and losses on such contracts offset
losses and gains on transactions being hedged. The amount of foreign exchange contracts matches
estimated foreign currency risks over a specified period of time. Our 13




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##### 



MASONITE INTERNATIONAL CORPORATION policy is not to utilize foreign exchange contracts for trading or speculative purposes. Our
foreign exchange contracts outstanding at December 31, 2004 are described in Note 13 of the annual
audited consolidated financial statements. Almost 100% of our interest-bearing debt outstanding at December 31, 2004 carried a floating
interest rate. Therefore, in the normal course of business we are exposed to changes in short-term
interest rates that can create uncertainty and variability in our cash flows. To mitigate this
exposure, in September 2001 we entered into a five-year interest rate swap agreement converting a
notional $250 million of floating-rate debt into fixed-rate debt that currently bears interest at
7.96%. In August 2002, we executed another five-year interest rate swap agreement to convert an
additional $75 million of amortizing floating-rate debt into a fixed-rate debt at 5.72%. After
giving effect to these interest rate swaps, approximately 58% of our outstanding interest-bearing
debt carries a floating interest rate and the other 42% is effectively at fixed rates as at
December 31, 2004. We believe that these interest rate swaps are highly effective in achieving
their economic purpose. Certain commodity components used in the manufacture of doors and door components periodically
experience significant changes in price or availability. If material cost increases are
persistent, there is no assurance that we will be able to sufficiently increase our selling prices.
In recent years, we have responded to fluctuating prices and decreasing availability of certain
materials by seeking sources for similar components from other geographic regions, developing or
purchasing substitute alternative materials and raising selling prices on various products in
certain areas. The geographic breadth of our facilities subjects us to environmental laws, regulations and
guidelines in a number of countries. Such laws, regulations and guidelines relate to, among other
things, the discharge of contaminants into water and air and onto land, the storage and handling of
certain regulated materials used in the manufacturing process, and the disposal of wastes. Our efforts to ensure environmental compliance include the review of our existing operations on an
ongoing basis by our own environmental staff and on a selective basis by external environmental
consultants. In addition, environmental assessments are conducted as part of our due diligence
review prior to completion of acquisitions. We have not incurred any significant costs relating to environmental matters in prior years.
Future expenditures required to comply with any changes in environmental requirements are
anticipated to be undertaken as part of our ongoing capital investment program which is primarily
designed to improve the efficiency of various manufacturing processes. We provide credit to our customers in the normal course of business. We perform credit evaluations
of our customers and maintain reserves for potential credit losses which, when realized, have been
within the range of our expectations. We do not generally require collateral. Our credit risk is
minimized by undertaking transactions with a large number of customers in various countries. Our
credit risk is further minimized by insuring a significant portion of total trade receivables
through the use of credit insurance. Critical Accounting Policies and Estimates Our significant accounting policies are disclosed in Note 1 to the audited annual consolidated
financial statements. The preparation of these financial statements requires us to make estimates
that affect the reported amount of assets, liabilities, revenues and expenses, and related
disclosures of contingent items. The following discussion addresses our more critical accounting
policies. These policies are important to the presentation of the operating results and financial
position of Masonite and require significant judgment or the use of estimates. Inventory
We value our inventories on a first-in, first-out basis at the lower of cost and replacement cost
for raw materials, and the lower of cost and net realizable value for finished goods. In
determining net realizable value, we consider such factors as yield, turnover or aging, expected
future demand and past experience. A change in the underlying assumptions related to these factors
could affect the valuation of inventory and have a corresponding effect on cost of sales. Goodwill
We use the purchase method of accounting for all business acquisitions. Use of the purchase method
for acquisitions frequently results in the recording of goodwill as part of the purchase price.
Goodwill is not amortized but instead is tested for impairment in the fourth quarter of each year
or more frequently if events or changes in circumstances indicate that an impairment loss may have
been incurred. Goodwill impairment analysis is performed at the reporting unit level by comparing
the reporting units carrying amount to its fair value. Fair values of reporting units are
estimated using an income approach. In making this fair value assessment, we rely on a number of
factors including operating results, business plans, economic projections and anticipated future
cash flows. There are inherent uncertainties related to these factors and to our judgment in
applying them to the analysis of goodwill impairment. Since judgment is involved in performing
goodwill valuation analyses, any change in estimates can affect the valuation of goodwill. Intangible Assets
We assign value to intangible assets acquired in business combinations or other forms of
acquisitions. The value assigned to intangible assets such as customer relationships, non-compete
agreements and order backlogs is determined by estimating future cash flows, determining discount
rates, projecting rates of attrition and determining the useful lives of acquired assets. As
needed, independent external appraisers are engaged in assisting management to determine the
appropriate fair values to be assigned to the intangible assets. 14




---



##### 



MASONITE INTERNATIONAL CORPORATION In addition to the valuation of intangible assets, an impairment test is performed at least
annually which compares the carrying value of the intangible assets to future undiscounted cash
flows. As the estimates of future cash flows and attrition rates used to value the intangible
assets are based on future events, any changes from the estimated amounts could have an impact on
the annual impairment test and carrying value of the intangible assets. Income Taxes
Our consolidated income tax provision is calculated by determining taxable income and then applying
varying rates of income tax that are appropriate in the numerous taxing jurisdictions in which we
conduct business. In the ordinary course of conducting business internationally, there can be
numerous transactions and calculations where the ultimate tax outcome is uncertain. The final
result of these matters may be different from the estimates that have been made in determining
income tax provisions and accruals. If these estimates and assumptions are determined to be
inaccurate, there could be a material effect on our income tax provision and net income in the
period in which the determination is made. We have recorded $33 million of future income tax assets. Future tax assets are calculated based
on tax rates to be applied in future periods. Previously recorded tax assets and liabilities need
to be adjusted when the expected date of the future event is revised based on current information.
A valuation allowance has been recorded to reduce future tax assets to the amount of the future tax
benefit that is likely to be realized. In determining the need for the valuation allowance, we
considered such factors as projected future taxable income, the character of the income tax asset
and the reversal of future income tax liabilities. If assumptions related to these factors change
significantly, then the valuation allowance, income tax expense and net income may change
materially in the period for which the determination is made. Long-lived Assets
We periodically evaluate the recoverability of long-lived assets, including property, plant and
equipment and amortizable intangible assets based on a two-step impairment analysis. In performing
this evaluation, reliance is placed upon a number of factors which include operating results,
business plans, economic projections and anticipated cash flows. An impairment loss is recognized
when the carrying amount of the asset to be held and used exceed the sum of the undiscounted cash
flows expected from use. Impairment is measured as the amount by which the carrying value of the
asset exceeds the fair value. Fair values are based on assumptions concerning the amount and
timing of estimated future cash flows and assumed discount rates that reflect varying degrees of
perceived risk. Since fair value is based on estimates of future events, changes in estimates
could result in write downs. 15




---



##### 



MASONITE INTERNATIONAL CORPORATION Employee Future Benefit Plans
We maintain defined benefit plans and other post-retirement benefits covering certain employees.
Earnings are charged with the cost of benefits earned by employees as services are rendered. The
cost reflects our best estimates of the pension plans expected investment yields, wage and salary
escalation, expected health care costs, mortality of members, terminations and the ages at which
members will retire. Changes in these assumptions could impact future pension expense. The excess
of the net actuarial gain (loss) over 10% of the greater of the benefit obligation and the fair
value of plan assets at the beginning of the year is amortized over the average remaining service
lives of its members. These estimates may differ materially from actual results that will occur
over an extended period of time. Any significant differences may have a material effect on the
recorded pension expense and carrying value of the plans net assets or net liabilities. Stock-based Compensation
Effective January 1, 2002, we began accounting for all stock-based payments to non-employees,
employee awards that are direct awards of stock, that call for settlement in cash or other assets,
or are stock appreciation rights that call for settlement by the issuance of equity instruments,
granted on or after January 1, 2002, using a fair value based method. Prior to January 1, 2003, we accounted for employee stock options that were settled by the issuance
of common shares as capital transactions and no compensation cost was recorded. Any consideration
paid by employees on the exercise of stock options was recorded as share capital. We disclose the
pro forma effect of accounting for these employees awards granted after January 1, 2002 as if we
had accounted for these employee awards under the fair value method as disclosed in note 11 of the
annual audited consolidated financial statements. The estimated fair value was determined using
the Black-Sholes option pricing model, and is amortized to income on a straight line basis over the
vesting period. The pro-forma effect of awards granted to employees prior to January 1, 2002 have
not been included in the pro-forma net income and earnings per share information. Pro-forma
compensation cost determined under the fair value method is amortized on a straight line basis over
the vesting period. Effective January 1, 2003, we adopted the revised guidance for stock based compensation, which
requires that a fair value method of accounting, as outlined above, to be applied to all
stock-based compensation grants to both employees and non-employees, and included in income. We
have prospectively applied the fair value method of accounting for stock option awards granted to
employees after January 1, 2003, and accordingly, have recorded the compensation expense for such
awards. The determination of our obligations and compensation expense for the plans noted above use several
mathematical and judgment factors that include the expected volatility of our common share price,
the anticipated life of the option, an estimated risk free rate, and the number of options expected
to vest. Any difference in the number of options that actually vest can affect future compensation
expense. Other assumptions are not revised after the original estimate. In 2003 we adopted a Restricted Share Unit (RSU) and Deferred Share Unit (DSU) plan for
certain key senior executives. Under this plan, the RSUs vest over three years and the DSUs vest
immediately, but are payable only on termination of employment or retirement. Both instruments are
settled in cash. We record compensation expense for RSUs on a straight-line basis over the three
year vesting period and for DSUs immediately. In 2004, we implemented a Full Value Incentive
Plan. This plan replaces the one-time grant of RSUs and DSUs that occurred in 2003. Under this
plan, 70% of the awards will be RSUs which will be subject to certain performance criteria. These
criteria include achieving pre-established earnings per share and return on equity targets for
Masonite. The number of RSUs that will eventually vest at the end of the three year term will
depend on the achievement of the specified criteria. The number of RSUs issued can be increased
by up to 20% if the relevant performance target is exceeded by a pre-determined amount, reduced by
20% if the results are below the relevant target by a pre-determined amount, or cancelled if
results are below a minimum threshold. The balance of the awards are DSUs which vest in equal
annual instalments over a five year period commencing one year after the grant date. Both
instruments are settled in cash. Any significant change in our share price could have an impact on
the compensation expense recognized. Variable Interest Entities
In 2004, we adopted the guidelines under Accounting Guideline 15, Consolidation of Variable
Interest Entities. The guideline requires consolidation of variable interest entities for which
it is deemed to be the primary beneficiary. The determination of whether we are deemed to be the
primary beneficiary involves judgements and estimates by management. These judgements involve
determining the expected loss and expected returns from the variable
interest entity and a discount
rate to determine the present value of the expected cash flows. Changes in assumptions used may
affect the variability of the expected cash flows. Recent Accounting Pronouncements: 16




---



##### 



MASONITE INTERNATIONAL CORPORATION Included in Note 1 to our audited annual consolidated financial statements is a discussion on
recently adopted accounting policies. Non-GAAP Financial MeasuresThis Management Discussion and Analysis contains non-GAAP measures.
Securities regulators require that corporations caution readers that these terms do not have
standardized meanings under GAAP and are unlikely to be comparable to similar measures used by
other companies. Debt to equity ratio is defined as interest-bearing debt, net of cash, divided by
shareholders equity. EBITDA is defined as earnings before depreciation and amortization; interest;
gain (loss) on refinancing, net; other expense (income); income taxes; and non-controlling interest
(see table below). EBITDA margin is defined as EBITDA divided by sales. Reconciliation of Net Income to EBITDAYears ended December 31 (in millions of United States dollars) 2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Net income
    
    $
    128
    
    
    $
    108
    
    
    $
    90
    
    
    $
    39
    
    
    $
    38Non-controlling interest
    
    
    7
    
    
    
    6
    
    
    
    8
    
    
    
    5
    
    
    
    5Income taxes
    
    
    43
    
    
    
    34
    
    
    
    28
    
    
    
    13
    
    
    
    15Other expense (income)
    
    
    7
    
    
    
    3
    
    
    
    (1
    )
    
    
    1
    
    
    
    3(Gain) loss on refinancing (net)
    
    
    
    
    
    
    
    (3
    )
    
    
    17
    
    
    
    Interest
    
    
    40
    
    
    
    35
    
    
    
    43
    
    
    
    33
    
    
    
    23Depreciation & amortization
    
    
    64
    
    
    
    49
    
    
    
    45
    
    
    
    35
    
    
    
    26EBITDA
    
    $
    289
    
    
    $
    235
    
    
    $
    210
    
    
    $
    143
    
    
    $
    110
 Forward-Looking StatementsThis Annual Report and other written or oral statements made by us may
include forward-looking statements, all of which are subject to risks and uncertainties. One can
identify these forward-looking statements by their use of words such as expects, plans, will,
estimates, intends, forecasts, projects and other words of similar meaning, or by the fact
that they do not relate strictly to historical or current facts. These statements are likely to
address, but may not be limited to, our growth strategy and financial results. Readers must
carefully consider any such developments to differ materially from our forward-looking statements.
These factors may include inaccurate assumptions and a broad variety of other known and unknown
risks and uncertainties, including: general economic, market and business conditions; levels of
construction and renovation activity; competition; financing risks; ability to manage expanding
operations; commitments; new services; retention of key management personnel; environmental and
other government regulation; and other factors. No forward-looking statement can be guaranteed and
actual future results may vary materially. We disclaim any responsibility to update these
forward-looking statements. In addition to the information included in this Annual Report, our Annual Information Form can be
found on our website at www.masonite.com, and the on the SEDAR website at www.sedar.com. 17




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##### 



MASONITE INTERNATIONAL CORPORATION Quarterly Financial Information (Unaudited)(in millions of United States dollars) First Quarter
    
    
    Second Quarter2004
    
    
    2003
    
    
    2004
    
    
    2003Sales
    
    $
    468.0
    
    
    $
    402.2
    
    
    $
    564.6
    
    
    $
    457.0Net income
for the period
    
    $
    27.7
    
    
    $
    20.3
    
    
    $
    36.2
    
    
    $
    27.3Net income per share
for the period, basic (1)
    
    $
    0.51
    
    
    $
    0.38
    
    
    $
    0.66
    
    
    $
    0.51Net income per share
for the period, diluted (1)
    
    $
    0.50
    
    
    $
    0.37
    
    
    $
    0.65
    
    
    $
    0.50Third Quarter
    
    
    Fourth Quarter2004
    
    
    2003
    
    
    2004
    
    
    2003Sales
    
    $
    597.2
    
    
    $
    462.2
    
    
    $
    570.2
    
    
    $
    455.9Net income
for the period
    
    $
    36.7
    
    
    $
    30.8
    
    
    $
    27.3
    
    
    $
    29.2Net income per share
for the period, basic (1)
    
    $
    0.67
    
    
    $
    0.57
    
    
    $
    0.50
    
    
    $
    0.54Net income per share
for the period, diluted (1)
    
    $
    0.66
    
    
    $
    0.56
    
    
    $
    0.49
    
    
    $
    0.53
 (1)
    
    The sum of basic and diluted earnings per share for the four quarters may differ from the
basic and diluted earnings per share for the year due to differences in the average number of
shares outstanding. 18




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(KPMG LOGO)KPMG LLP
Chartered Accountants
Yonge Corporate Centre
4100 Yonge St.
Suite 200
North York, ON M2P 2H3
    
    Telephone (416) 228-7000
Fax (416) 228-7123
Internet www.kpmg.ca
 COMMENTS BY AUDITORS FOR U.S. READERS
ON CANADA  U.S. REPORTING DIFFERENCE
MASONITE INTERNATIONAL CORPORATION In the United States, reporting standards for auditors require the addition of an explanatory paragraph (following the opinion paragraph) when there is a change in accounting principles that has a material effect on the comparability of the companys financial statements, such as the changes described in Note 1(a) (variable interest entities) to the consolidated financial statements as at December 31, 2004 and 2003 and for the years then ended. Our report to the shareholders dated March 4, 2005, is expressed in accordance with Canadian reporting standards, which does not require a reference to such changes in accounting principles in the auditors report when the change is properly accounted for and adequately disclosed in the financial statements. /s/ KPMG LLP
Toronto, Canada
March 4, 2005     KPMG, a Canadian limited liability partnership is the Canadian
member firm of KPMG International, a Swiss cooperative.




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UNDERTAKING AND CONSENT TO SERVICE OF PROCESS A.     Undertaking The issuer undertakes to make available, in person or by telephone, representatives to respond
to inquiries made by the Commission staff, and to furnish promptly, when required to do so by the
Commission staff, information relating to: the securities registered pursuant to Form 40-F; the
securities in relation to which the obligation to file an annual report on Form 40-F arises; or
transactions in said securities. B.     Consent to Service of Process The issuer has previously filed with the Commission a Form F-X. EXHIBITS The following exhibits are filed as part of this report: Exhibit
    
    TitleNumber1.
    
    Consent of KPMG LLP2.
    
    Certification pursuant to Title 18, United States Code, Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Philip S. Orsino)3.
    
    Certification pursuant to Title 18, United States Code, Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Paul A. Bernards)




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##### 



SIGNATURE Pursuant to the requirements of the Exchange Act, the issuer certifies that it meets all of
the requirements for filing on Form 40-F and has duly caused this annual report to be signed on its
behalf by the undersigned, thereto duly authorized. MASONITE INTERNATIONAL CORPORATIONMarch 4, 2005
    By:
    /s/ Harley UlsterHarley UlsterExecutive Vice President, General
Counsel
and Corporate Secretary




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##### 



CERTIFICATION I, Philip S. Orsino, certify that:  1.
    I have reviewed this annual report on Form 40-F of Masonite International Corporation;2.
    Based on my knowledge, this annual report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this annual report;3.
    Based on my knowledge, the financial statements, and other financial information
included in this annual report, fairly present in all material respects the financial
condition, results of operations and cash flows of the issuer as of, and for, the periods
presented in this annual report;4.
    The issuers other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for the issuer and have:  a)
    designed such disclosure controls and procedures to ensure that
material information relating to the issuer, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;b)
    evaluated the effectiveness of the issuers disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures as of the end of the
period covered by this report based on such evaluation; andc)
    disclosed in this report any change in the issuers internal
control over financial reporting that occurred during the period covered by the
annual report that has materially affected, or is reasonably likely to
materially affect, the issuers internal control over financial reporting; and  5.
    The issuers other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the issuers auditors and the
audit committee of issuers board of directors (or persons performing the equivalent
functions):  a)
    all significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting which are
reasonably likely to affect the issuers ability to record, process, summarize
and report financial information; andb)
    any fraud, whether or not material, that involves management or
other employees who have a significant role in the issuers internal control
over financial reporting. Dated: March 4, 2005. /s/ Philip S. OrsinoPhilip S. OrsinoPresident and Chief Executive Officer




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##### 



CERTIFICATION I, Paul A. Bernards, certify that:  1.
    I have reviewed this annual report on Form 40-F of Masonite International Corporation;2.
    Based on my knowledge, this annual report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this annual report;3.
    Based on my knowledge, the financial statements, and other financial information
included in this annual report, fairly present in all material respects the financial
condition, results of operations and cash flows of the issuer as of, and for, the periods
presented in this annual report;4.
    The issuers other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for the issuer and have:  a)
    designed such disclosure controls and procedures to ensure that
material information relating to the issuer, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;b)
    evaluated the effectiveness of the issuers disclosure controls and
procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; andc)
    disclosed in this report any change in the issuers internal control
over financial reporting that occurred during the period covered by the annual
report that has materially affected, or is reasonably likely to materially affect,
the issuers internal control over financial reporting; and  5.
    The issuers other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the issuers auditors and the
audit committee of issuers board of directors (or persons performing the equivalent
functions):  a)
    all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably likely
to affect the issuers ability to record, process, summarize and report financial
information; andb)
    any fraud, whether or not material, that involves management or other
employees who have a significant role in the issuers internal control over
financial reporting; and Dated: March 4, 2005. /s/ Paul A. BernardsPaul A. BernardsExecutive Vice President and Chief Financial Officer




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##### 



EXHIBIT INDEX Number            Document 1.
    
    Consent of KPMG LLP2.
    
    Certification pursuant to Title 18, United States Code, Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Philip S. Orsino)3.
    
    Certification pursuant to Title 18, United States Code, Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Paul A. Bernards)