Westbond Enterprises Corp V.WBE

Q4 Profit and Revenue up Large!

[The_brain]

WestBond Enterprises Corporation

Management Discussion and Analysis

dated July 8, 2009, to accompany the consolidated financial statements for the year

ended March 31, 2009

Caution Regarding Forward Looking Statements – This discussion includes statements about our

expectations for the future. We believe that our expectations are reasonable; however, actual

outcomes may differ materially from our expectations due to changes in operating performance,

availability of and prices for raw materials, availability of trained labour, US$/Cdn$ exchange rate

fluctuations, unexpected competition, and other technical, market and economic factors.

Description of Our Business

We, WestBond Enterprises Corporation (“WestBond” or the “Company”), are a paper converter that

supplies disposable paper products to many market segments. We initially grew to become one of

Canada’s leading manufacturers of medical disposables. In 2002 we expanded our product offering to

take advantage of high volume opportunities in personal hygiene products for away from home markets.

We sell mainly to major medical and industrial distributors in Canada and the United States and we also

sell to larger end-users on a direct basis.

Our product lines include clinical products such as examination table paper, dental bibs, sheets,

pillowcases and gowns. The personal hygiene product line consists of hand towels and bathroom tissue

in jumbo roll format as well as conventional formats. Our third major product line is patient wipes and

underlays for long-term care facilities (nursing homes).

Our goal is to increase sales by supplying a comprehensive paper product line directly to medium sized

janitorial contractors providing public washroom maintenance services and to small and medium sized

distributors who sell to the janitorial market. Our most significant competitors in the personal hygiene

product line use wholesale master distributors who sell to smaller distributors that sell to smaller

contractors. By selling direct or to the smaller distributors, we eliminate the “middle-man” and are able to

offer more competitive pricing. Also, unlike our most significant competitors, we will configure our

products to these customers’ specifications. Our current focus for expansion in this market is Canada

and western USA. We will also pursue opportunities to supply these products directly to smaller hotel,

motel and restaurant chains.

During 2005 we finished the installation of the last of the machines that permit us to provide a

comprehensive personal hygiene paper product line. In addition, in September 2005, we purchased the

equipment of a California based paper converter. The equipment included two more winders for the

personal hygiene line and a facial tissue folder, which allowed us to expand our product mix and capacity.

It also included a number of other machines that increased our operating efficiency. We are now in a

position to increase our marketing efforts. We expect an increase in sales of our personal hygiene

products over the next several months, and years. We also aim to increase our sales of clinical and longterm

care products.

Personal Hygiene Products – WestBond started this product line during 2002. Our decision to expand

into personal disposables such as hand towels and bathroom tissue was based on demands by existing

medical distributors who wanted to increase their purchasing ability with us. We evaluated this potential

and determined that the medical industry had a high demand for these types of products. In addition, we

soon learned that small to medium size distributors who sell to the janitorial market were not being

serviced well by other paper converters. We have made major capital expenditures to manufacture this

product line, which we expect will soon surpass sales volumes to the health care industry.

The personal hygiene paper products include roll and folded hand towels, jumbo roll bathroom tissue,

conventional high sheet-count bathroom tissue and a specialty line of roll towels and bathroom tissue.

This specialty line provides us with high margin products that few converters are able to produce. We

manufacture our products in 1 and 2 ply formats. We sell these products to Canadian and US distributors

and janitorial contractors in large order quantities.

Clinical Products – Historically, this product line represented the Company’s core business. Basically,

all paper products that are used by clinics, physicians, dentists, chiropractors and physiotherapists form

this product category. The equipment that was originally installed to manufacture these paper products

is very flexible, reliable and high speed. This allows us to develop new products that could be in demand

in the future.

Products in this group are sheets, examination table paper, pillowcases, dental bibs, aprons, gowns, and

drapes. The equipment is able to convert roll format as well as sheet format products in many case pack

and roll length configurations.

Long-Term Care Products – The products that comprise this category were originally part of the Clinical

Product Line. Sales in this area have increased to the point that we now dedicate two entire production

lines to these items. The products include patient wipes, mitts and underlays. All products are made with

very high quality air laid paper which results in very soft, very absorbent wipes which are used as

disposable wash cloths and perineal wipes.

Products are available in 1/4 fold, 1/8 fold, and roll formats, in a variety of widths and perforation lengths.

The long-term care market is growing and we continue to develop new products for major Canadian and

US distributors.

These three product groups represent WestBond’s ability to adapt to market demands and develop

product lines to satisfy these markets.

The following chart shows the portion of total sales that each of the product categories contributed during

the years ended March 31, 2005 through 2009.

Discussion of Operations and Financial Condition

You should refer to our consolidated financial statements for the year ended March 31, 2009 while you

read this discussion. Those financial statements provide significant, material information that is not

meant to be, nor is it, included in this discussion. This discussion is meant to provide information not

included in the financial statements and an explanation of some of the financial statement information.

Our net income for the year ended March 31, 2009 was $163,608, compared to $95,385 for the year

ended March 31, 2008. Our gross profit margin realized during 2009 was 21.0%, compared to 21.3% for

2008 and 23.4% for 2007. Our gross profit margins are under pressure due to increased competition

from US and Chinese product. The low value of the US dollar makes their product cheaper in Canada.

Lower selling and marketing and general and administrative expenses helped to offset this decrease.

0

1000

2000

3000

4000

5000

6000

7000

2005 2006 2007 2008 2009

Thou

sa

nd

s

of

Dollars

Fiscal years ended March 31

Sales, Cost of Sales and Gross Profit

Sales

Cost of sales

Gross Profit

Selected Annual Information

(Unaudited)

We have summarized selected financial information from the Company’s consolidated financial

statements, which are prepared in Canadian dollars and in accordance with Canadian generally

accepted accounting principles.

Years ended March 31,

Operating Results 2009 2008 2007

$ % of $ % of $ % of

sales sales sales

Sales 6,003,308 100.0 5,739,436 100.0 6,303,386 100.0

Cost of sales 4,743,313 79.0 4,515,344 78.7 4,828,349 76.6

Gross profit 1,259,995 21.0 1,224,092 21.3 1,475,037 23.4

Selling and marketing expenses 486,951 8.1 518,129 9.0 709,333 11.3

General and administrative expenses 583,647 9.7 637,498 11.1 667,977 10.6

Net income before tax 189,397 3.2 68,465 1.2 97,727 1.5

Income tax expense (recovery) 25,789 0.5 (26,920) -0.5 2,443 0.0

Net income 163,608 2.7 95,385 1.7 95,284 1.5

Net income per share, basic and diluted 0.01 0.01 0.01

Cash dividends declared per common share nil nil nil

March 31,

Financial Position 2009 2008 2007

$ $ $

Current assets 1,869,063 1,514,696 1,773,317

Plant and equipment 2,675,836 2,842,813 2,915,195

Total assets 4,544,899 4,357,509 4,688,512

Current liabilities 1,348,487 1,273,482 1,647,321

Long-term liabilities 425,406 494,189 644,811

Shareholders’ equity 2,771,006 2,589,838 2,396,380

Sales

Sales were $6,003,308 for the year ended March 31, 2009. This represents a 4.6% increase over the

year ended March 31, 2008. Sales increased in personal hygiene and long-term care products and

decreased in clinical and other products. Pressure from US competitors offering clinical and other

products in reduced value US dollars in the Canadian market has made it difficult for us to increase our

sales of these products.

The table below summarizes the sales of the Company for the last five fiscal years.

2009 2008 2007 2006 2005

$ $ $ $ $

Personal hygiene products 2,568,791 2,389,176 2,595,586 2,760,316 2,484,051

Clinical products 1,515,758 1,589,133 1,864,429 1,882,879 1,733,599

Long-term care products 1,744,811 1,548,265 1,616,840 1,387,861 1,223,751

Other products 173,948 212,862 226,531 228,370 210,869

Total sales 6,003,308 5,739,436 6,303,386 6,259,426 5,652,270

Change over previous year 4.6% -8.9% 0.7% 10.7% 11.5%

The decline in sales during 2008 follows a period of significant growth from 2004 to 2007. We have

reversed this trend in 2009 for the personal hygiene and and long-term care products. The growth was

caused by increased sales volumes, new customers and new products. Price increases have not been

significant during the last few years. The decrease in sales during 2008 is due to decreased volumes

from the personal hygiene and clinical and long-term care product lines. The weak US dollar also

reduced the Canadian dollar value of our sales to the US and caused US priced competitors’ product to

be cheaper in Canada. Approximately 29% of our sales are in US dollars.

We have developed a strategy that reduces the impact of the fluctuating US dollar on our profits. If the

Canadian dollar rises against the US dollar, we make our paper purchases in the United States and shift

our sales to Canadian distributors. If the US dollar rises against the Canadian dollar, then we purchase

our paper in Canada and shift our sales to US customers. We maintain a purchasing and selling

presence in both countries which allows us to grow profitably when market conditions are difficult for our

competitors.

We have expanded our production capacity and product offerings for the personal hygiene products from

2004 to 2007 and we intend to focus on increasing our sales of these products, both in the western

United States and across Canada. In September 2005 we purchased the equipment of a California

based paper converter. We refurbished and installed two tissue winders and a towel folder from this

purchase during 2006 and are now in the process of refurbishing and installing a facial tissue folder and

other equipment that will increase our efficiency. Last year we modified one of our paper rewinders which

has allowed us to produce high margin roll towel products.

In 2006 we also entered into an agency agreement with National Sales of Sacramento, California, who

represented WestBond’s complete product line throughout the western United States. Significant

competition from Asia and the weak US dollar prevented our sales expectations in this region from being

realized. We discontinued the agency agreement during 2007, although National Sales continues as a

commissioned agent.

Cost of Sales

The following table shows the components of cost of sales over the last five years.

2009 2008 2007 2006 2005

$ %

sales $ %

sales $ %

sales $ %

sales $ %

sales

Materials 3,225,162 53.7 3,028,269 52.8 3,305,299 52.4 3,376,830 54.0 2,989,137 52.9

Labour 490,067 8.2 456,779 8.0 491,718 7.8 484,963 7.8 433,963 7.7

Variable overhead 387,677 6.5 400,356 7.0 479,490 7.6 415,867 6.6 296,980 5.2

Fixed overhead 378,943 6.3 382,351 6.7 325,581 5.2 290,166 4.6 244,038 4.3

Depreciation 261,464 4.3 247,589 4.3 226,261 3.6 170,823 2.7 133,575 2.4

Total cost of sales 4,743,313 79.0 4,515,344 78.7 4,828,349 76.6 4,738,649 75.7 4,097,693 72.5

Materials are the most significant component of cost of sales. Bulk paper is our main materials cost.

Personal hygiene products and examination table paper have a high materials component and a low

labour component. By comparison, gowns, drapes, mitts, sheets and pillowcases have a higher labour

component and a relatively lower materials component. Our margins are lower for the personal hygiene

products, where much of the recent has growth occurred, than for the other product lines.

Paper prices, our most significant materials cost, have increased every year since 2006. Exchange rate

fluctuations; however, generally worked in our favour to offset the higher US dollar prices until the current

year. During the latter part of our 2009 fiscal year, the exchange rate fluctuations started to increase our

costs even more. We expect that paper prices will continue to remain unsettled during our 2010 fiscal

year. Our prices to our customers have been set to allow for paper cost increases of up to 10%.

Materials costs also fluctuate from differences in the yield factors (the amount of product that a certain

weight of paper will produce).

We had some difficulty obtaining paper supplies during the years ended March 31, 2008, 2007 and 2005

because of a shortage in supply and estimate we lost $200,000 of sales in 2005 and between $100,000

and $150,000 during 2007 and 2008 as a result. We have expanded our range of paper suppliers and

have increased our raw paper inventories in an attempt to ensure an uninterrupted supply in the future;

however, the inability to obtain paper at our current input prices may result in lost product sales or in

higher materials costs.

Labour in cost of sales averaged 8.2% of sales during 2009 and has been relatively stable over the last

five years. The current labour market near our factory was tight during the year and it is took extra time to

find and train new machine operators. We have seen some relief in the last few months caused by a

slowdown in the local construction industry. If we are unable to hire sufficient machine operators, we will

not be able to produce the additional products for sale.

Variable overhead normally fluctuates slightly from one period to the next. Increased maintenance

activities, factory supervision, training and stock transfer costs account for the earlier increases in variable

overhead. We curtailed some of these activities during 2008 and 2009 and reduced the costs to a more

sustainable level.

Higher rent added $56,629 to fixed overhead in 2008 and $28,861 in 2007. We rented additional

warehouse space which increased fixed overhead. Other fluctuations in fixed overhead are due to

differences in insurance premiums. Increases in depreciation expense are the result of bringing new

equipment into use.

Selling Expenses

Shipping costs are lower in 2009 than in 2008 because we negotiated better bulk shipping rates to the

US. The Company also discontinued the sales agency relationship in California, which reduced sales

commissions and other selling costs.

General and Administrative Expenses

Our general and administrative costs have decreased in 2009 over 2008 as a result of discontinuing

much of the corporate promotion activities, and to decreased bad debt expense and foreign exchange

gains, included in administration and office expense. These were offset by increases in audit fees,

included in professional fees, and in bank charges.

We only deal with customers that we consider creditworthy and believe that we are not subject to

significant risk due to bad debts. Recent general economic conditions may cause some of our customers

to be less creditworthy. We regularly monitor our receivables aging and discuss overdue accounts with

senior-level customer personnel to encourage more prompt payment and to evaluate future

creditworthiness. At March 31, 2009, accounts receivable include $46,189 that is more than 60 days past

due and against which we have made no allowance for loss. We believe that we will eventually receive

full payment of these amounts. During 2009 our bad debt losses amounted to $2,950, compared to

$13,000 for 2008.

We are exposed to fluctuations in the US/Cdn dollar exchange rates as portions of our cash, accounts

receivable and accounts payable are denominated in US dollars. While the amounts of exposure change

on a daily basis, we generally have more US dollar financial assets than US dollar liabilities. Over the

past year, our exposure ranged from US$105,000 to US$146,000 and averaged approximately

US$129,000 (calculated on a quarterly basis). Each change of 1% (e.g., a change from US$1.00 =

Cdn$1.20 to Cdn$1.21) in the value of the US dollar in relation to the Cdn dollar results in a gain or loss

(before income tax), with a corresponding effect on cash flows, of Cdn$1,000 on an exposure of

US$100,000. During 2009, our foreign exchange gains were $24,866, compared to losses of $11,002 in

2008. The US dollar financial assets generally result from sales to US customers. The US dollar financial

liabilities generally result from purchases of raw materials from US suppliers

Interest expense was lower in 2009 over 2008 because we reduced our term loans and because interest

rates were lower. Interest on our bank indebtedness and term loans fluctuates with the prime rate of

interest. At the levels of this debt at March 31, 2009, a 1% increase in the prime rate of interest would

increase total interest expense by $7,190 per year.

During the year ended March 31, 2009, professional fees include $9,519 paid to DuMoulin Black LLC, a

law firm in which J. Douglas Seppala, one of our directors, is a partner. The payments represent fees for

legal services provided to the Company at rates normally charged to arm’s length parties.

Income Taxes

The future income tax recovery in 2008 and the very low expense for 2009 are the result of reductions in

future income tax rates enacted during the years. The future income tax liabilities that were recorded up

to March 31, 2008 at an effective rate of 31% were reduced to 27%, creating a recovery of $55,601.

Further rate reductions, to 25% in 2009, have been enacted and created an additional recovery of

$38,760.

New Accounting Policies

New accounting standards adopted by the Canadian Institute of Chartered Accountants apply to financial

instruments, inventory and capital disclosure policies commencing with the year ended March 31, 2009.

The new standards are described in note 2 to the consolidated financial statements for the year ended

March 31, 2009. There was no significant effect on our financial statements as a result of adopting the

new standards.

The Canadian Institute of Chartered Accountants has also adopted new accounting standards that will

apply to the financial statements for the current financial year, ending March 31, 2010. The new

standards are described in note 2 to the consolidated financial statements for the year ended March 31,

2009. The adoption of these standards is not expected to have a significant effect on our financial

statements.

The CICA has discussed plans to converge Canadian GAAP with International Financial Reporting

Standards over a transition period expected to end in 2011. We are monitoring and reviewing CICA plans

to make the transition, but have not yet determined the impact on our consolidated financial statements.

Liquidity and Capital Resources

Our operating cash flows were $477,059 during the year ended March 31, 2009, an average of $39,755

per month, compared to $27,428 per month during 2008, before accounting for fluctuations in non-cash

working capital. We repaid one of our term loans in July 2007 in order to reduce the operating cash flows

required to maintain bank covenants in good standing. We are currently in compliance with all loan

covenants and do not anticipate further loan non-compliance issues. The funds to repay the loan came

from a private placement of 1,060,000 units at $0.095 per unit. Each unit comprises one share and one

warrant to purchase an additional share at $0.125 per share until July 17, 2012. Four of our directors,

Gennaro Magistrale, Owen Granger, J. Douglas Seppala and David Mills, purchased 1,000,000 of the

units. The pricing of the units and the terms and pricing of the warrants forming part of the units were

determined in accordance with the policies of the TSX Venture Exchange.

We plan to re-invest our surplus cash flow in new equipment to continue to expand the Company's

product lines and improve efficiency and to pay off bank debt. The total principal outstanding on term

loans was $133,998 at March 31, 2009. Principal repayments are $7,881 per month.

We have a revolving bank loan facility of $1,000,000, of which $585,000 was used at March 31, 2009.

The loan outstanding at any time may not be greater than the total of 75% of Canadian accounts

receivable, 50% of US accounts receivable and 50% of inventory, less accounts payable having priority

over the bank, such as to governments and employees. Accounts receivable older than 90 days and

inventory in excess of $700,000 are not included in the calculation.

We use the revolving bank loan facility primarily to finance operating working capital. Inventory and

accounts receivable levels normally fluctuate by as much as $150,000 and accounts payable by an

additional $150,000. We purchase our paper supplies in relatively large quantities and often have large

shipments to customers on credit, which are the main reasons for these fluctuations.

Substantially all of the Company’s assets are pledged as collateral for the revolving bank loan facility and

the term loans.

We currently plan to spend approximately $200,000 on equipment expansions and improvements during

the year ending March 31, 2010. We will finance these additions from operating cash flows. We may

acquire additional equipment, if worthy new product opportunities arise. Financing for additional

equipment would be available through operating cash flow and additional term loans.

Summary of Quarterly Results

(Unaudited)

The following table summarises the results of operations for the past eight quarters. We have extracted

the data from our consolidated financial statements, which are prepared in Canadian dollars and in

accordance with Canadian generally accepted accounting principles.

Quarters ended

Cdn$ x 1,000 Mar 31 Dec 31 Sep 30 Jun 30 Mar 31 Dec 31 Sep 30 Jun 30

2009 2008 2008 2008 2008 2007 2007 2007

Sales 1,543 1,572 1,455 1,434 1,364 1,462 1,574 1,340

Cost of sales 1,188 1,278 1,153 1,124 1,113 1,135 1,211 1,057

Gross profit 355 294 302 310 251 327 363 283

Selling and marketing expenses 120 120 129 118 119 125 154 122

General and administrative expenses 148 135 159 141 144 135 175 183

Net (loss) income before taxes 87 39 14 51 (12) 67 34 (22)

Income tax (recovery) expense 9 12 6 (1) (2) (26) 7 (6)

Net income (loss) 78 27 8 52 (10) 93 27 (16)

Net income (loss) per share, basic

and diluted - Cdn$ 0.007 0.002 0.001 0.005 (0.001) 0.008 0.003 (0.002)

Sales - % change over previous

quarter -1.8 8.1 1.5 5.1 -6.7 -7.1 17.5 -6.0

Costs, expenses and net income

- % of Sales

Cost of sales 77.0 81.3 79.3 78.4 81.5 77.6 76.9 78.9

Selling and marketing expenses 7.8 7.6 8.9 8.2 8.7 8.5 9.8 9.1

General and administrative expenses 9.6 8.6 10.9 9.9 10.6 9.2 11.1 13.7

Income tax (recovery) expense 0.6 0.8 0.4 -0.1 -0.1 -1.7 0.4 -0.5

Net (loss) income 5.0 1.7 0.5 3.6 -0.7 6.4 1.8 -1.2

The fluctuations in sales are, for the most part, due to changes in volume. The improved gross margin

during the quarter ended March 31, 2009 is due to lower materials costs and labour efficiencies.

Slight variations in cost of sales, as a percentage of sales, occur on a regular basis. These are caused

by fluctuations in the product mix, production efficiencies and prices for raw materials.

Share Capital

The Company has only one class of share capital, common shares without par value. The Company also

has warrants outstanding to purchase common shares, a stock option plan and a shareholder rights plan.

Amount at

July 8, 2009

Authorized common shares Unlimited

Issued common shares 11,063,800

Shares issuable on the exercise of outstanding warrants 1,060,000

Shares issuable on exercise of outstanding stock options 800,000

Shares available for future stock option grants 1,200,000

The stock option plan permits the directors of the Company to grant incentive options to the employees,

directors, officers and consultants of the Company. The maximum number of shares issuable under the

stock option plan is 2,000,000.

The shareholder rights plan (the “Plan”) is meant to protect the Company’s shareholders from unfair,

abusive or coercive takeover strategies. The Plan will remain in effect until the Company’s annual

general meeting in 2009. The Plan, in effect, allows holders of common shares to purchase additional

common shares from the Company at a 50% discount to the prevailing market price on the occurrence of

certain triggering events, including acquisition by a person or group of persons of 20% or more of the

shares of the Company in a transaction that is not a Permitted Bid under the Plan. The rights under the

Plan are not exercisable by the acquiring person or group of persons. The rights under the Plan are not

triggered by purchases of shares made pursuant to a take-over bid that is made to all shareholders on

identical terms by way of a take-over bid circular prepared in compliance with applicable securities laws,

and certain other conditions set out in the agreement signed to implement the Plan.

Other Information

Additional information relating to the Company is available on SEDAR at www.sedar.com and on the

Company’s web-site at www.westbond.ca.