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The directors' expectations of a modest profit for the year to June 1999 were realised. The year's profit ($3.091 million) exceeded our expectations and the company expects further improvement in the year ahead. Evergreen's policy is to manage harvest levels to market conditions. Although there are no immediate plans to increase the company's harvest levels, our forest management has ensured that we are in a position to access significantly higher levels of harvesting as market conditions improve.
Investments Evergreen continues to invest to optimise the value of its existing forests. This year a further $7.319 million has been invested in our development forests. We seek to maximise the cost benefit of this investment as it is Evergreen's view that a high value end use product requires investment in forest development at the right time and at the right level. No new forest acquisitions have been made this year but Evergreen has increased its stake in Nuhaka and our objectives for growth remain.
Funding A major achievement during this last year has been the issuance of ten-year zero coupon convertible notes. This issue, on the basis of a 1 for 6 pro rata allocation to existing shareholders, raised $22.4 million. The notes carry an annualised pre-tax return of 7.18 percent and are able to be redeemed at the shareholder's option for cash or converted to ordinary shares at an exercise price of $0.55 on or before the redemption date of 19 March 2009. The company provided an incentive for existing shareholders through a ten percent discount on the first 1,000 notes applied for. The issue was well supported by shareholders and the notes are presently well supported in the market. Funds have been applied initially against the company's term borrowings with its banker. An extension to existing bank funding lines and an extension of the term of the arrangements has also been negotiated. These measures provide a stable and appropriate funding source for Evergreen's next development phase.
Market conditions New Zealand's economy generally, and the export commodity sector in particular, has enjoyed a slightly improved year. Timber prices have moved upwards but still have some distance to reach historical trend line levels. There is, however, justified optimism for improving price trends as there is some recovery in the Asian market and emerging opportunities in India and China. It is likely that more consistent yields will be earned from the more mature markets in the US, Japan and South Korea. Evergreen has been involved directly in the marketing of its production over the last year to a range of commodity and niche markets. Successful marketing of our wood is equally as important as good management of forests and harvesting practices. The company is confident that the experience gained over the past year will ensure a continuation of successful and well-managed forestry, harvesting and marketing activities. As at 30 June 1999 the company had considerable reserves of mature and semi-mature standing timber. The proportion of our forests 20 years and older by value is now very high and Evergreen is well placed to capture
Shareholder returns Forestry resource ownership is perceived as being a long-term investment, particularly as many New Zealanders have gained their exposure to the industry by joining others in the planting of trees. This perception rapidly changes when the trees are able to be harvested. The opportunity afforded to investors through Evergreen is that they are able to invest in a range of forest investments with a variety of maturities which provide an underlying investment yield which is short-term. As Evergreen moves out of the development phase and into the income-generating phase shareholder returns will increase. However while the company is still growing and showing a modest profit your Board has determined that shareholders' interests are best served by reinvesting the company's profits for capital growth rather than providing an initial dividend. As Evergreen's profits grow this policy will be reviewed.
Outlook The New Zealand forest industry continues to invest in extending the market for radiata products and the higher value applications of the resource. Improved product utilisation and the increasing role that plantation forests will play in meeting global demand provide a promising future for forestry. As one of New Zealand's major industry groups the quality of the investment and the strategic positioning of the product are fundamental. Evergreen has been nurturing its assets to provide good future value. The rearrangement of our funding lines and the successful implementation of the convertible note issue provide us with capacity for growth. We will continue to seek appropriate investments this year. On behalf of the Board I acknowledge the strong contribution of our executive team.
Peter D. Wilson
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