News release today.
CANFIBRE GROUP LTD ("YCF-V;CNFBF-L")
- Management Discussion For The Quarter Ended June 30, 2000
Management Discussion and Analysis Year End December 31, 2000
Description Of Business
The CanFibre Group Ltd. (together with its subsidiaries, the
"Company") is primarily engaged in the development and commercialization
of technology for the production of composite wood products using solid
waste materials such as wood and other recycled wood fibres. The Company
has constructed two medium density fibreboard ("MDF") plants located in
Riverside, California and Lackawanna, New York.
Discussion of Operations and Financial Condition
Management defines the reaching of commercial operations as the
quarter in which a facility has the ability to produce at 50% capacity and
the Company has break-even cash flows from operations, all subject to a
reasonable time limit from substantial completion of construction. During
the quarter ended June 30, 2000, the Company's Riverside, CA facility
satisfied the 50% production capacity requirement. Although the operation
had not achieved a break-even cash flow, the construction had been
substantially complete for a significant amount of time, therefore the
facility has been deemed to be in commercial operations at the beginning
of the second fiscal quarter, April 1, 2000. The Lackawanna facility
remains a development stage enterprise.
As the Riverside facility is now deemed to be out of the development
stage, sales, cost of goods sold, interest expense and related income,
loan cost amortization and deferred credit amortization will no longer be
capitalized to construction in progress but will be reflected on the
Income Statement. Property, plant and equipment are stated at cost with
plant and equipment being depreciated over their estimated useful lives
beginning April 1, 2000.
On August 1, 2000, CanFibre was informed by its controlling
shareholder, Kafus Industries, that Kafus would no longer provide any
financial support to CanFibre from that date forward. Kafus had also
arranged a working capital line of credit with a subsidiary of Enron which
was also immediately curtailed.
These actions had the result of CanFibre and CanFibre of Riverside
experiencing an immediate and critical working capital shortage. As a
result, CanFibre took several steps to avoid a complete curtailment of
business activities including:
1) significantly curtailing production during August and September,
2) concentrating on generating cash through the sale of inventory,
3) laying off approximately half of the hourly employees,
4) hiring a workout consultant; and
5) contacting bondholders to propose an operating plan going forward.
On October 25, 2000 CanFibre of Riverside, Inc. voluntarily filed for
reorganization under Chapter 11 of the United States Bankruptcy Code.
This action was a result of failure of the facility to be completed on a
timely basis and the above noted liquidity crisis. The filing was made to
enable CanFibre Riverside to focus on operating its business and serving
its customers while it developed a plan of reorganization that would allow
completion of the facility and provide a suitable capital structure for
long-term growth. By April 2001, the Company, in conjunction with the
bondholders, decided to curtail operations and liquidate the assets.
Operations ceased at the facility on May 4, 2001.
Revenues from sale of product totaled $4,474,541 and cost of goods
sold was $11,304,979 resulting in an operating loss of $6,830,438 at the
Riverside facility during the fiscal year. Production rate for the year
was 32.4 % of capacity because of operations reductions noted above.
The Company's second operating subsidiary, CanFibre of Lackawanna,
LLC, produced first board in November 2000 under the control of the
CanFibre management team. Some delays were experienced after the
cancellation of the construction contract with SWEC due to the
contractor's failure to pay subcontractors. CanFibre management has been
successful in completing construction and is presently working towards
plant final acceptance.
Subsequent Events
On May 4, 2001, operations ceased at the Company's Riverside facility.
Working capital shortages, high energy costs and the failure to perfect
certain specialty products were the primary factors that prompted the
Company, in conjunction with the bondholders, to liquidate the assets of
the plant. Initial offers indicate that the realizable liquidation value
will be below the amounts due to secured debt holders.
Financings, Principal Purposes and Milestones
The Company, through CanFibre Riverside and CanFibre Lackawanna,
received two separate allocations of tax exempt bonds. The proceeds have
been used to finance the construction of medium density fibreboard ("MDF")
plants located in Riverside, California and Lackawanna, New York. In
1997, CanFibre Riverside acquired the land for the Riverside project and
commenced development activities. Most of the construction of the project
was completed in July 1999, and commercial operations commenced in the
second quarter of 2000. Subsequent to year end, the Company wound up the
Riverside operation.
In 1998, CanFibre Lackawanna acquired the land for the Lackawanna
project and commenced construction. Significant project construction
commenced in 1999 and was completed in 2000. Commercial operations are
expected to commence in 2001.
Delays in completion of the Lackawanna facility resulted from the
termination on May 2, 2000, by the Company of its engineering, procurement
and construction contract with Stone and Webster Engineering Corporation
("SWEC"). Contingency funds were used to cover payments that SWEC failed
to make to subcontractors and vendors. Additional funds were then required
to cover start-up expenditures. The Company was granted approval by its
secured creditors to use restricted cash for this purpose but, additional
capital is required. As of May 4, 2001, the Company has not been able to
generate positive cash flows from its operations and is experiencing a
critical working capital shortage.
Liquidity and Solvency
On August 22, 2000, a receiving Order was issued by the Supreme Court
of British Columbia against Kafus Industries Ltd. ("Kafus"), which owns
85.5% of the Company, adjudging Kafus to be bankrupt. As a result, Kafus
ceased any further funding to the Company. On October 24, 2000 the
Company was advised by PricewaterhouseCoopers Inc. ("PWCI"), the trustee
in bankruptcy of Kafus, that the British Columbia Supreme Court had issued
an order that contemplates the assignment of all the shares of the Company
owned or controlled by the bankrupt Kafus to ECT Merchant Investments
Corp. and related entities ("ECT"). The order also grants permission to
ECT to commence proceedings to collect all debts owed by the Company and
its affiliates to Kafus. The order was made after PWCI advised the
creditors of Kafus that it would not take any further action with respect
to the Kafus interests in CanFibre. The Company was advised on April 25,
2001 that the assignment had been completed.
Due to the Company's current economic situation, certain identifiable
intangibles were reviewed for impairment during the current fiscal year
and a total of $31,625,968 intangible and fixed asset costs were charged to
the income statement in the current period. Costs associated with the
acquisition of long-term debt had been capitalized and were being
amortized over the lives of the respective debt using the effective
interest rate method. As these costs may not represent any future
benefit, $19,607,149 of costs were charged to the income statement in the
current period. Project development and start up costs in the amount of
$5,744,777 were charged to the income statement in the current period.
Also, the unamortized balance of the acquired revenue contract in the
amount of $5,833,333 was charged to the income statement in the period.
The Company also adjusted its valuation of the investment in Kafus of
$276,118 and other assets totaling $164,591.
TEL: (416) 681-9990 The CanFibre Group Ltd.
FAX: (416) 681-9992 |
