Back to GetFilings.com

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004

COMMISSION FILE NUMBER 1-31215

MeadWestvaco Corporation

(Exact name of registrant as specified in its charter)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    Yes  x    No  ¨

At June 30, 2004, the aggregate market value of voting common stock held by nonaffiliates was $5,902,751,102 determined by multiplying the highest selling price of a common share on the New York Stock Exchange - Composite Transaction Tape on such date times the amount by which the total stock outstanding exceeded the stock beneficially owned by directors and executive officers of the Registrant. Such determination shall not, however, be deemed to be an admission that any person is an “affiliate” as defined in Rule 405 under the Securities Act of 1933.

At January 31, 2005, the number of shares of common stock of the Registrant outstanding was 204,014,042.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Annual Report to Shareholders are incorporated by reference in Part I and II. Portions of the Registrant’s Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on April 26, 2005, are incorporated by reference in Part III; definitive copies of said Proxy Statement will be filed with the Securities and Exchange Commission on or before March 25, 2005.

Table of Contents

Table of Contents

Part I

Item 1. Business

Introduction

This report covers the twelve-month period ended December 31, 2004. MeadWestvaco Corporation was formed in 2001 in connection with the merger of The Mead Corporation (“Mead”) and Westvaco Corporation (“Westvaco”), which was completed on January 29, 2002. For accounting purposes, the merger was treated as an acquisition of Mead by Westvaco. Therefore, the historical financial statements of Westvaco are the consolidated historical financial statements of MeadWestvaco. Accordingly, the financial results for the periods prior to the merger included in this report are the financial results of Westvaco.

General

MeadWestvaco Corporation, a Delaware corporation, is a global company with leading positions in packaging, coated and specialty papers, consumer and office products, and specialty chemicals. MeadWestvaco’s principal operating business segments are (1) packaging, (2) paper, (3) consumer and office products and (4) specialty chemicals.

Packaging

The Packaging segment produces bleached paperboard, Coated Natural Kraft® paperboard, kraft paperboard, linerboard and saturating kraft, and packaging for consumer products including packaging for media, beverage and dairy, cosmetics, tobacco, pharmaceuticals and health care products. The segment also produces corrugating medium, linerboard, and consumer packaging products at its Brazilian subsidiary, Rigesa, Ltda. In addition, the segment manufactures equipment that is leased to its beverage and dairy customers to package their products. Bleached paperboard is used for packaging high-value consumer products such as pharmaceuticals, cosmetics, tobacco, media products and nonrefrigerated beverages. Coated Natural Kraft® paperboard is used for a range of packaging applications, the largest of which for MeadWestvaco is multiple beverage packaging. Kraft paperboard is used for folding carton applications. Linerboard is used in the manufacture of corrugated boxes and containers. Saturating kraft is used in the manufacture of decorative laminates for kitchen countertops, furniture, flooring, wall panels, as well as in pad stock for electronic components.

Paper

The Paper segment manufactures, markets and distributes coated printing papers, carbonless copy papers and industrial specialty papers. MeadWestvaco makes a full range of coated papers for magazines, catalogs, textbooks and advertising materials, including specialty papers for labels and wraps. MeadWestvaco also produces digital printing papers; carbonless copy papers for business forms; and papers for specialty applications, including decorative laminated surfaces and automotive transmissions.

In January of 2005, the company entered into an agreement to sell all of its interests in its printing and writing paper business, related forestlands and other assets (“paper business”) to an affiliate of Cerberus Management LLC, a private investment firm, for $2.3 billion in cash. The company estimates that it will incur a pretax accounting loss of about $825 million to $840 million (approximately $625 million to $635 million after tax), of which $710 million ($548 million after tax) was recorded in the fourth quarter of 2004 for impairments of goodwill and other long-lived assets and other exit-related costs, most of which was associated with fair value adjustments of the paper business recorded in purchase accounting at the time of the Mead and Westvaco merger. The company expects to incur additional costs in 2005 of approximately $115 million to $130 million pretax once the divestiture is completed. The transaction is expected to close in the second quarter of 2005. Beginning in 2005, the company will report the paper business as a discontinued operation.

I-1

Table of Contents

Consumer and Office Products

The Consumer and Office Products segment manufactures, markets and distributes school and office products, time management products and envelopes in North America and Brazil through both retail and commercial channels. MeadWestvaco produces many of the leading brand names in school supplies, time-management and commercial office products, including Mead®, AT-A-GLANCE®, AMCAL® Cambridge®, Day Runner®, Five Star®, COLUMBIAN® and Trapper Keeper®.

Specialty Chemicals

The Specialty Chemicals segment manufactures, markets and distributes specialty chemicals derived from saw dust and from the by-products of the papermaking process. Products include, but are not limited to, activated carbon used in emission control systems for automobiles and trucks, printing ink resins, and emulsifiers used in asphalt paving and dyestuffs.

For a more detailed description of MeadWestvaco’s segments, including financial information, see Note T of the consolidated financial statements included in the MeadWestvaco 2004 Annual Report to Shareholders, incorporated herein by reference.

Marketing and distribution

The principal markets for MeadWestvaco’s products are in the United States, Canada, Latin America, Europe and Asia. MeadWestvaco operates in 29 countries and serves customers in approximately 100 nations. MeadWestvaco’s products are sold through a mixture of its own sales force and through paper merchants and distributors. The company has sales offices in key cities throughout the world.

Forestry

The principal raw material used in the manufacture of paper, paperboard and pulp is wood. MeadWestvaco’s strategy, based on the location of its mills and the composition of surrounding forestland ownership, is to provide a portion of its wood fiber from company-owned land and to rely on private woodland owners and private contractors and suppliers for the balance. MeadWestvaco owns approximately 2.2 million acres and manages an additional 103,000 acres worldwide. With the pending sale to Cerberus Capital Management, L.P. of MeadWestvaco’s Papers Group, 0.9 million acres of supporting forestlands will be conveyed. This will reduce MeadWestvaco’s U.S. land base to approximately 1.3 million acres of forest ownership, for supporting the continuing mill operations. The company may consider the sale of parcels that supply to its mills so long as it is able to obtain fiber supply agreements in conjunction with the sale.

MeadWestvaco expects to continue to obtain its wood requirements from company-owned or controlled forestlands, from private woodland owners and private contractors or suppliers, including participants in the company’s Cooperative Forest Management Program (CFM) which provides an additional source of wood fiber from acreage owned by participating landowners and managed with assistance from company foresters. The company believes that these sources will be able to adequately supply the company’s needs.

As of December 31, 2004, MeadWestvaco owned 131,000 acres of forestland in Brazil (more than 1,000 miles from the Amazon rainforests); and approximately 2,048,000 acres of forestland in the United States,

I-2

Table of Contents

including 651,000 acres in the North; 642,000 acres in the Central region; and 755,000 acres in the South. An additional 103,000 acres are managed in the South. After the sale of the paper business, MeadWestvaco will own approximately 1,268,000 acres of forestland.

Intellectual property

MeadWestvaco has a large number of foreign and domestic trademarks, trade names, patents, patent rights and licenses relating to its business. While, in the aggregate, intellectual property rights are material to MeadWestvaco’s business, the loss of any one or any related group of such rights would not have a material adverse effect on the business of MeadWestvaco, with the exception of the “Mead®” trademark for consumer and office products.

Competition

MeadWestvaco operates in very challenging domestic and international markets, and competes with many large, well-established and highly competitive manufacturers and service providers. In addition, the company’s business is affected by a range of macroeconomic conditions, including industry capacity; a trend in the paper and forest products industry toward consolidation; global competition; economic conditions in the U.S. and abroad; and currency exchange rates.

The company competes principally through quality; price; value-added products and services such as packaging solutions; customer service; innovation; technology; and product design. The company’s proprietary trademarks and patents, in the aggregate, are also important to the company’s competitive position in certain markets.

MeadWestvaco’s Packaging segment competes globally with manufacturers of value-added bleached and unbleached paperboard for packaging and graphic applications, as well as specialty paperboards, and numerous national and regional packaging service providers in the package design, development and manufacturing arenas. The Paper segment competes with numerous other major paper manufacturers, both domestic and foreign, including coated, carbonless and digital paper producers in the printing and writing segments and decorative laminating papermakers. The Consumer and Office Products segment competes with national and regional converters as well as foreign producers. The Specialty Chemicals segment competes on a worldwide basis with producers of activated carbons, refined tall oil products, lignin-based chemicals and specialty resins.

Research

MeadWestvaco’s research and development efforts are primarily focused on innovative product development and manufacturing process improvement, as well as on increased timber and fiber production on a sustainable basis.

Environmental Laws and Regulations

MeadWestvaco’s operations are subject to extensive regulation by federal, state and local authorities, as well as regulatory authorities with jurisdiction over foreign operations of the company. Over the years, MeadWestvaco has made significant capital expenditures to comply with environmental laws, rules and regulations. Due to changes in environmental laws and regulations, the application of such regulations and changes in environmental control technology, it is not possible for MeadWestvaco to predict with certainty the amount of capital expenditures to be incurred for environmental purposes. Taking these uncertainties into account, MeadWestvaco estimates that it will incur approximately $68 million in

I-3

Table of Contents

environmental capital expenditures in 2005 and approximately $46 million in 2006. The estimate for 2005 includes anticipated expenditures for MeadWestvaco’s Papers business which will be reporting as discontinued operations beginning January 1, 2005. Approximately $41 million was spent on environmental capital projects in 2004.

In the past, the company has separately reported anticipated capital expenditures for compliance with certain regulations promulgated under the Clean Air Act and Clean Water Act (“the Cluster Rules”), which were designed to reduce air and water discharges of specific substances from U.S. pulp and paper mills no later than 2006. These anticipated expenditures are now included in the expenditures stated above.

In addition, a portion of the company’s anticipated future environmental capital expenditures concern compliance with regulations promulgated under the Clean Air Act in 2004, commonly referred to as the “Industrial Boiler MACT Rules.” These rules are designed to reduce or limit emissions of various hazardous air pollutants associated with the operation of non-utility, industrial boilers. The rules apply to industrial, commercial and institutional boilers and process heaters in use at many U.S. industries and facilities, including pulp and paper mills, and require existing facilities to be in compliance by September 13, 2007. The company has taken steps already to comply with the Industrial Boiler MACT Rules and expects to incur capital expenditures beyond the expenditures stated above by approximately $3 million to comply with the Industrial Boiler MACT Rules.

MeadWestvaco has been notified by the U.S. Environmental Protection Agency (the “EPA”) or by various state or local governments that it may be liable under federal environmental laws or under applicable state or local laws with respect to the cleanup of hazardous substances at sites previously operated or used by the company. The company is currently named as a potentially responsible party (“PRP”), or has received third-party requests for contribution under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) and similar state or local laws with respect to numerous sites. Some of these proceedings are described in more detail in Part I, Item 3, “Legal Proceedings.” There are other sites which may contain contamination or which may be potential Superfund sites, but for which MeadWestvaco has not received any notice or claim. The potential liability for all these sites will depend upon several factors, including the extent of contamination, the method of remediation, insurance coverage and contribution by other PRPs. The company regularly evaluates its potential liability at these various sites. MeadWestvaco has liabilities of approximately $34 million for estimated potential cleanup costs based upon its close monitoring of ongoing activities and its past experience with these matters. Amounts to be charged to this liability are not included in the anticipated capital expenditures previously stated. The company believes that it is reasonably possible that costs associated with these sites may exceed amounts of recorded liabilities by an amount that could range from an insignificant amount to as much as $24 million. This estimate is less certain than the estimate upon which the environmental liabilities were based. After consulting with legal counsel and after considering established liabilities, it is our judgment that the resolution of pending litigation and proceedings is not expected to have a material adverse effect on the company’s consolidated financial condition or liquidity. In any given period or periods, however, it is possible such proceedings or matters could have a material effect on the results of operations.

Additional matters involving environmental proceedings for MeadWestvaco are set forth in Part I, Item 3, “Legal proceedings.”

I-4

Table of Contents

Employees

MeadWestvaco employs approximately 29,400 people worldwide, of whom approximately 20,600 are employed in the United States and 8,800 are employed internationally. Of this group, approximately 12,400 employees are represented by various labor unions under collective bargaining agreements. Additionally, most of MeadWestvaco’s European facilities have separate house union agreements or series of agreements specific to the workforce at each facility.

International operations

MeadWestvaco’s operations outside the United States are conducted through subsidiaries located in Canada, Latin America, Europe and Asia. While there are risks inherent in foreign investments, MeadWestvaco does not believe at this time that such risks are material to its overall business prospects. MeadWestvaco’s sales that were attributable to domestic operations were 81%, 82% and 85% for the years ended December 31, 2004, 2003 and 2002. MeadWestvaco’s sales that were attributable to foreign operations were 19%, 18% and 15% for the years ended December 31, 2004, 2003 and 2002. Export sales from MeadWestvaco’s U.S. operations were approximately 12% in each of the years ended December 31, 2004, 2003 and 2002. After the sale of the paper business, MeadWestvaco expects that sales that are attributable to domestic and foreign operations will be approximately 74% and 26%, respectively. For more information about domestic and foreign operations, see Note T to the consolidated financial statements included in the MeadWestvaco 2004 Annual Report to Shareholders, incorporated herein by reference.

Available Information

The company’s Internet address is www.meadwestvaco.com. Please note that MeadWestvaco’s Internet address is included in this annual report on Form 10-K as an inactive textual reference only. The information contained on the company’s website is not incorporated by reference into this Annual Report on Form 10-K and should not be considered part of this report. MeadWestvaco files annual, quarterly and current reports, proxy statements and other information with the SEC and it makes available free of charge most of the company’s SEC filings through its Internet website as soon as reasonably practicable after these materials are filed electronically with the SEC. You may access these filings via the hyperlink to the SEC website provided on the Investor Information page of the company’s website.

The MeadWestvaco Corporation’s Corporate Governance Principles and the company’s charters (Nominating and Governance Committee, Audit Committee, Compensation and Organization Development Committee, Finance Committee, and Safety, Health and Environment Committee) are included on the company’s website at the following address: http://www.meadwestvaco.com/corporate.nsf/investor. The company’s Code of Conduct can be found on the company’s website at the following address: http://www.meadwestvaco.com/corporate.nsf/investor/conduct, and print copies are available upon request.

Item 2. Properties

MeadWestvaco is headquartered in Stamford, Connecticut, and maintains a significant corporate and operational presence in Dayton, Ohio. MeadWestvaco believes that its facilities have sufficient capacity to meet current production requirements. For information concerning the company’s forestlands, see Part I, Item 1, “Business.” The locations of MeadWestvaco’s production facilities are as follows:

I-5

Table of Contents

I-6

Table of Contents

Leases

For financial data on certain MeadWestvaco leases, see Note H to the consolidated financial statements, included in the MeadWestvaco 2004 Annual Report to Shareholders, and incorporated herein by reference.

Other information

A limited number of MeadWestvaco facilities are owned, in whole or in part, by municipal or other public authorities pursuant to standard industrial revenue bond financing arrangements and are accounted for as property owned by MeadWestvaco. MeadWestvaco holds options under which it may purchase each of these facilities from such authorities by paying a nominal purchase price and assuming the indebtedness of the industrial revenue bonds at the time of the purchase.

I-7

Table of Contents

MeadWestvaco owns in fee all of the facilities listed above, except certain warehouses and general offices, as noted, and pending purchases.

Item 3. Legal proceedings

In 1998 and 1999, the EPA issued Notices of Violation to eight paper industry facilities, including Westvaco’s Luke, Maryland mill, alleging violation of the PSD regulations under the Clean Air Act. On August 28, 2000, an enforcement action in Federal District Court in Maryland was brought against Westvaco asserting violations in connection with capital projects at the mill carried out in the 1980s. The action alleges that Westvaco did not obtain PSD permits or install required pollution controls, and sought penalties of $27,500 per day for each claimed violation together with the installation of control equipment. MeadWestvaco strongly disagrees with the EPA’s allegations of Clean Air Act violations by Westvaco and is vigorously defending this action. On April 23, 2001, the Court granted Westvaco’s Motion for Partial Dismissal and dismissed the EPA’s claims for civil penalties under the major counts of the complaint. The Court held that these significant penalties were barred by the applicable statute of limitations. Following initial discovery, and in response to Motions for Partial Summary Judgment filed by Westvaco, the government abandoned several of its claims for injunctive relief. Discovery is proceeding in connection with the claims still remaining, and a series of motions and evidentiary hearings on discrete issues are expected in 2005. No trial date has been set, but a trial is not expected to commence before early 2006. Based on information currently available, MeadWestvaco does not expect this proceeding will have a material adverse effect on the company’s consolidated financial condition or liquidity. In any given period or periods, however, it is possible such proceeding could have a material effect on the results of operations.

In June 1996, the EPA issued administrative orders under Section 106 of CERCLA to Mead and two other potentially responsible parties (PRPs), relating to remediation of certain property within the Chattanooga Creek (Tennessee) Superfund site, including land located near a former, closed Mead manufacturing facility. In 1997, Mead indicated its intent to not comply with the Section 106 order. In 2004, the company and other potentially responsible parties (PRPs) reached a settlement and signed a Consent Decree with the U.S. EPA concerning the Chattanooga Creek Superfund Site. Under the terms of the Consent Decree, the private PRPs, including MeadWestvaco, will undertake final remediation action at the Chattanooga Creek Superfund Site, which is expected to begin in 2005. In addition, the PRPs, including MeadWestvaco, will reimburse the U.S. EPA for past costs incurred in connection with the site. This settlement resolves all the parties’ respective liabilities to the government with respect to the site. The Consent Decree is subject to public comment and must be approved by the federal district court before it takes effect. No objections are anticipated. MeadWestvaco does not expect this proceeding will have a material adverse effect on the company’s consolidated financial condition or liquidity. In any given period or periods, it is possible such proceeding could have a material effect on the results of operations.

MeadWestvaco has established liabilities of approximately $34 million relating to the aforementioned and other environmental proceedings. Additional information is included in Part I, Item 1, “Business - Environmental Laws and Regulations,” and Note O to the consolidated financial statements included in the MeadWestvaco 2004 Annual Report to Shareholders incorporated herein by reference.

I-8

Table of Contents

MeadWestvaco is involved in various other litigation and administrative proceedings arising in the normal course of business. Although the ultimate outcome of such matters cannot be predicted with certainty, management does not believe that the currently expected outcome of any proceeding, lawsuit or claim that is pending or threatened, or all of them combined, will have a material adverse effect on its consolidated financial condition or liquidity. In any given period or periods, however, it is possible such proceedings or matters could have a material effect on the results of operations.

Item 4. Submission of matters to a vote of security holders

There were no matters submitted to a vote of security holders of MeadWestvaco, through the solicitation of proxies or otherwise, during the fourth quarter of 2004.

Executive officers of the registrant

The following table sets forth certain information concerning the executive officers of MeadWestvaco:

MeadWestvaco’s officers are elected by the Board of Directors annually for one-year terms.

John A. Luke, Jr., President and Chief Executive Officer 2002-2003, Chairman of the Board, Chief Executive Officer and President of Westvaco 1996-2002;

James A. Buzzard, Executive Vice President 2002-2003, Executive Vice President of Westvaco, 2000-2002, Senior Vice President, 1999, Vice President, 1992-1999;

E. Mark Rajkowski, Vice President, Eastman Kodak Company and General Manager Worldwide Operations for Kodak’s Digital and Film Imaging Systems Business, 2003-2004; Chief Operating Officer of Eastman Kodak’s Consumer Digital Business, 2003; Vice President, Finance of Eastman Kodak 2001-2002; Corporate Controller of Eastman Kodak 1998-2001.

Linda V. Schreiner, Senior Vice President of Westvaco 2000-2002, Manager of Strategic Leadership Development 1999-2000, Senior Manager of Arthur D. Little, Inc. 1998-1999, Vice President of Signet Banking Corporation 1988-1998;

I-9

Table of Contents

Mark T. Watkins, Vice President of Mead 2000-2002, Vice President, Human Resources and Organizational Development of the Mead Paper Division 1999, Vice President, Michigan Operations of Mead Paper Division 1997;

Wendell L. Willkie, II, Senior Vice President and General Counsel of Westvaco 1996-2002;

Daniel J. McIntyre, Vice President, Public Policy of Pharmacia, Inc. 2000-2003, Vice President, Public Policy and Communications, Bayer Corporation, Pharmaceutical Division 1994-2000.

Robert E. Birkenholz, Assistant Treasurer 2003-2004; Assistant Treasurer, Amerada Hess Corporation 1997-2002;

John E. Banu, Vice President of Westvaco 1999-2002, Comptroller 1995-1999.

There are no family relationships among executive officers or understandings between any executive officer and any other person pursuant to which the officer was selected as an officer.

I-10

Table of Contents

Part II

Item 5. Market for the registrant’s common stock, related security holder matters and issuer purchases of equity securities

MeadWestvaco’s common stock is traded on the New York Stock Exchange under the symbol MWV.

This table reflects the range of market prices of MeadWestvaco common stock as quoted in the New York Stock Exchange Composite Transactions.

At December 31, 2004, the number of shareholders of record of MeadWestvaco common stock was approximately 34,730. This number includes approximately 20,404 current or former employees of the company who were MeadWestvaco shareholders by virtue of their participation in the company’s savings and investment plans.

The following table reflects historical dividend information for MeadWestvaco for the periods indicated.

II-1

Table of Contents

In November of 2003, under Item 703 of Regulation S-K, the SEC adopted rules requiring disclosure of all repurchases of registered equity securities in the preceding fiscal quarter made by or on behalf of the issuer. This rule applies when an employee delivers back to the issuer, or a benefit plan of the issuer, shares of stock that have already been issued to the employee. For MeadWestvaco, stock option swaps fall under this rule.

The common stock shares repurchased by the company during the quarter ended December 31, 2004 are as follows:

II-2

Table of Contents

Item 6. Selected financial data

II-3

Table of Contents

Item 7. Management’s discussion and analysis of financial condition and results of operations

Information required by this item is included on pages 14-30 of the MeadWestvaco 2004 Annual Report to Shareholders and attached hereto as Exhibit 13 and is incorporated herein by reference.

Item 7A. Quantitative and qualitative disclosures about market risk

The quantitative and qualitative disclosures about market risk information required by this Item are set forth on pages 25 and 26 of the MeadWestvaco 2004 Annual Report to Shareholders and are incorporated herein by reference.

II-4

Table of Contents

Item 8. Financial statements and supplementary data

The financial statements and related notes for MeadWestvaco, together with the report of PricewaterhouseCoopers LLP dated March 14, 2005, appearing on pages 31 to 57 of the MeadWestvaco 2004 Annual Report to Shareholders and attached hereto as Exhibit 13 are incorporated by reference in this Annual Report on Form 10-K.

The financial statements and related notes for Northwood Panelboard Company as of December 31, 2003 and March 31, 2004 are included below. The financial statements are included as Northwood Panelboard Company is deemed to be a significant subsidiary under Rule 3-09 under Regulation S-X. The company’s investment in Northwood Panelboard was sold in the first quarter of 2004.

Financial Statements

Northwood Panelboard Company

December 31, 2003 and 2002

REPORT OF INDEPENDENT ACCOUNTANTS

To the Partners of

Northwood Panelboard Company

We have audited the balance sheets of Northwood Panelboard Company as of December 31, 2003 and 2002 and the related statements of earnings, partners’ equity (deficiency) and cash flows for each of the years in the three-year period ended December 31, 2003. These financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with United States generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Partnership as at December 31, 2003 and 2002 and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2003 in conformity with United States generally accepted accounting principles.

/s/ Ernst & Young LLP

Ernst & Young LLP

Toronto, Canada,

January 9, 2004 [except as to note 6 which

    is as of January 26, 2004 and note 8[a]

    which is as of February 2, 2004].                                                                              Chartered Accountants

II-5

Table of Contents

Northwood Panelboard Company

BALANCE SHEETS

As at December 31

See accompanying notes

II-6

Table of Contents

Northwood Panelboard Company

STATEMENTS OF EARNINGS

Years ended December 31

See accompanying notes

II-7

Table of Contents

Northwood Panelboard Company

STATEMENTS OF PARTNERS’ EQUITY (DEFICIENCY)

Years ended December 31

See accompanying notes

II-8

Table of Contents

Northwood Panelboard Company

STATEMENTS OF CASH FLOWS

Years ended December 31

See accompanying notes

II-9

Table of Contents

Northwood Panelboard Company

NOTES TO FINANCIAL STATEMENTS

December 31, 2003

Organization and ownership

Northwood Panelboard Company [the “Partnership”] is a partnership, organized under the Minnesota Uniform Partnership Act, between Mead Panelboard, Inc. [a wholly-owned subsidiary of MeadWestvaco Corporation] and Nexfor (USA), Inc. [a wholly-owned subsidiary of Nexfor Inc.]. Each partner has a 50% interest in the Partnership’s equity and any distributions. The Partnership operates an oriented strand board mill near Bemidji, Minnesota.

The accompanying financial statements of the Partnership are presented in U.S. dollars in conformity with United States generally accepted accounting principles.

Revenue recognition

Sales are recognized when the risks of ownership pass to the purchaser. This is generally when goods are shipped. For a certain customer, sales are recognized when goods are received by the purchaser.

Financial instruments

The fair values of cash, due from manager, other receivables, bank indebtedness and accounts payable and accrued liabilities approximate their carrying values due to the short-term nature of these instruments. The fair value of long-term debt approximates its carrying value due to variable interest rates.

Inventories

Inventories are stated at the lower of cost or market value on a first-in, first-out basis. The cost for finished goods includes material, direct labour and an applicable share of overhead. Market value is defined as net realizable value for finished goods and replacement cost for raw materials and supplies.

Capital assets

Capital assets are stated at historical cost less accumulated depreciation. Costs of maintenance and repairs are charged to earnings. Depreciation is provided using the straight-line method based on the following estimated useful lives of the depreciable assets:

II-10

Table of Contents

Northwood Panelboard Company

NOTES TO FINANCIAL STATEMENTS

December 31, 2003

Long-lived assets

The Partnership assesses the recoverability of long-lived assets in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets”. When the carrying value of a long-lived asset is less than its net recoverable value as determined on an undiscounted basis, an impairment loss is recognized to the extent that its fair value, measured as the discounted cash flows over the life of the asset when quoted market prices are not readily available, is below the asset’s carrying value.

Deferred financing costs

Deferred financing costs consist of costs incurred to obtain long-term financing and are stated net of accumulated amortization, calculated using the straight-line method and amortized over the term of the related debt.

Income taxes

The Partnership pays no income taxes. Each partner is responsible for reporting its proportionate share of the Partnership’s taxable earnings or loss and tax credits in its tax return.

Use of estimates

The preparation of financial statements in conformity with United States 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 date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

2. RELATED PARTY TRANSACTIONS

Management services agreement

The Partnership receives services under a management services agreement with its manager, a wholly-owned subsidiary of Nexfor Inc. No amounts were paid or accrued under this agreement in 2003, 2002 and 2001.

Marketing agreement and concentration of sales

The Partnership has an exclusive sales agreement with its manager under which the company acts as sales agent for the oriented strand board produced by the mill. The manager sells the product at prevailing market prices and is paid a commission which is calculated as 3% of sales. The manager is responsible for sales, billings and collections, including all costs for bad debts. The manager’s sales to three end customers amounted to approximately 28%, 22% and 7% of total sales from the Partnership [2002 - 27%, 22% and 7%; 2001 - 23%, 18% and 8%], respectively. The Partnership derives its sales from customers in the U.S. and capital assets are located in the U.S.

II-11

Table of Contents

Northwood Panelboard Company

NOTES TO FINANCIAL STATEMENTS

December 31, 2003

The balance due from the manager is non-interest bearing and is due in approximately 20 days from the date of shipment to the ultimate customer.

In addition, during 2003, 2002 and 2001, the manager reimbursed the Partnership for expenditures related primarily for salaries and insurance costs made on its behalf amounting to $699,519, $914,829 and $2,277,514, respectively.

3. INVENTORIES

Inventories consist of the following:

4. CAPITAL ASSETS

Capital assets consist of the following:

Depreciation expense totalled $1,521,447, $1,522,104 and $1,821,244 in 2003, 2002 and 2001, respectively.

II-12

Table of Contents

Northwood Panelboard Company

NOTES TO FINANCIAL STATEMENTS

December 31, 2003

5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities consist of the following:

6. LONG-TERM DEBT

Long-term debt consists of the following:

The Partnership has a revolving credit agreement with a bank that allows for borrowings up to $10,000,000 until January 27, 2004 at any one or a combination of the following interest rates:

II-13

Table of Contents

Northwood Panelboard Company

NOTES TO FINANCIAL STATEMENTS

December 31, 2003

At December 31, 2003, the prime commercial lending rate was 4.00%, the certificate of deposit rate was 1.06%, and the Eurodollar quoted rate was 1.1575%. At December 31, 2003, the interest rate on the outstanding debt is 1.56% [2002 - 2.90%].

The agreement contains covenants and restrictions regarding, among other things, additional borrowings, mergers, sale of assets, mortgaging of properties and distributions. At December 31, 2003, additional distributions of $14,976,018 could be made without violating the restrictive covenant. The Partnership pays a commitment fee of 0.2 of 1% of the average daily unused portion of the commitment. Nexfor Inc. and MeadWestvaco Corporation each guarantee 50% of the borrowings.

Effective January 26, 2004, an amendment was made to the Partnership’s revolving credit agreement described above that amends the maturity date to January 25, 2005.

The Environmental Control Revenue Refunding Bonds are secured by a standby letter of credit provided by Nexfor Inc. Should the standby letter of credit not be renewed prior to expiry, the bondholders have the ability to draw down on the outstanding letter of credit. At December 31, 2003, the variable rate on the bonds was 1.26%.

The Environmental Improvement Revenue Bonds are secured by a standby letter of credit provided by MeadWestvaco Corporation. Should the standby letter of credit not be renewed prior to expiry, the bondholders have the ability to draw down on the outstanding letter of credit. At December 31, 2003, the variable rate on the bonds was 1.31%.

There are no mandatory principal repayments in the next five years.

7. INCENTIVE PLANS

The Partnership can change or eliminate these arrangements at its discretion.

II-14

Table of Contents

Northwood Panelboard Company

NOTES TO FINANCIAL STATEMENTS

December 31, 2003

8. COMMITMENTS AND CONTINGENCIES

II-15

Table of Contents

Financial Statements (Unaudited)

Northwood Panelboard Company

for the quarterly period ended March 31, 2004

BALANCE SHEETS

(Unaudited)