-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Mop2s4ZPP4w/h7ACc7hOQZcuSFpCfX6gbaQm7T/YOMqab+Vs7WSFO8Nx2eeKRZ8z ZwNDrwlMEKp5sWwbR8dYKw== 0000880224-04-000012.txt : 20040513 0000880224-04-000012.hdr.sgml : 20040513 20040513142845 ACCESSION NUMBER: 0000880224-04-000012 CONFORMED SUBMISSION TYPE: 40-F PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20040513 FILED AS OF DATE: 20040513 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERTAPE POLYMER GROUP INC CENTRAL INDEX KEY: 0000880224 STANDARD INDUSTRIAL CLASSIFICATION: CONVERTED PAPER & PAPERBOARD PRODS (NO CONTAINERS/BOXES) [2670] IRS NUMBER: 000000000 STATE OF INCORPORATION: A8 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 40-F SEC ACT: 1934 Act SEC FILE NUMBER: 001-10928 FILM NUMBER: 04802427 BUSINESS ADDRESS: STREET 1: 110E MONTEE DE LIESSE STREET 2: ST LAURENT CITY: QUEBEC H4T 1N4 CANAD STATE: A8 BUSINESS PHONE: 5147310731 MAIL ADDRESS: STREET 1: 110 E MONTEE LIESSE CITY: ST LAURENT STATE: A8 ZIP: 00000 40-F 1 ipg200340f.txt 2003 40-F/AIF UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 40-F ANNUAL REPORT PURSUANT TO SECTION 13(a) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year ended December 31, 2003 Commission file number: 1-10928 INTERTAPE POLYMER GROUP INC. (Exact name of Registrant as specified in its charter) Canada (Jurisdiction of incorporation or organization) Primary Standard Industrial Classification Code Number: 2670 110E Montee de Liesse, St. Laurent, Quebec H4T 1N4 Canada (866) 202-4713 (Address and telephone number of Registrant's principal executive offices) Burgess H. Hildreth 3647 Cortez Road West, Bradenton, Florida, 34219 (941) 739-7507 (Name, address and telephone number of Agent for service in the United States) Securities registered pursuant to Section 12(b) of the Act: Title of each class: Name of each Exchange on which registered: Common Shares, without nominal or New York Stock Exchange par value 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: X Annual Information Form X Audited Annual Financial Statements The number of outstanding shares of each of the issuer's classes of capital stock as of December 31, 2003 is: 40,944,876 Common Shares -0- Preferred Shares Indicate by check mark whether the registrant 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 file number assigned to the registrant in connection with such rule. Yes _______ No ___X___ 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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _______ The information contained in this 40-F and the exhibits attached hereto are incorporated by reference into Registration Statement No. 333-109944. Controls and Procedures. Disclosure Controls and Procedures. Intertape Polymer Group Inc. maintains disclosure controls and procedures designed to ensure not only that information required to be disclosed in its reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, but also that information required to be disclosed by the Registrant is accumulated and communicated to Management, including its principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure. Based on the annual evaluation made by Management as of December 31, 2003 of Intertape Polymer Group Inc.'s disclosure controls and procedures, with the participation of the principal executive officer and principal financial officer, the principal executive officer and principal financial officer have concluded that Intertape Polymer Group Inc.'s disclosure controls and procedures were adequate and effective to accomplish the purposes for which they were designed. Changes in Internal Control Over Financial Reporting. Based on the annual evaluation made by Management as of December 31, 2003 of Intertape Polymer Group Inc.'s internal control over financial reporting, with the participation of the principal executive and principal financial officers, the principal executive officer and principal financial officer have concluded that there have been no changes in Intertape Polymer Group Inc.'s internal controls over financial reporting that occurred during 2003 that has materially affected, or is reasonably likely to materially affect, Intertape Polymer Group Inc.'s internal control over financial reporting. -2- Blackout Period Notices. During 2003, Intertape Polymer Group Inc. was not required to send its directors and executive officers notices pursuant to Rule 104 of Regulation BTR concerning any equity security subject to a blackout period under Rule 101 of Regulation BTR. Intertape Polymer Group Inc.'s blackout periods are regularly scheduled and a description of such periods, including their frequency and duration and plan transactions to be suspended or affected are included in the documents under which Intertape Polymer Group Inc.'s plans operate and is disclosed to employees before enrollment or within thirty (30) days thereafter. Audit Committee Financial Expert The Board of Directors of Intertape Polymer Group Inc. has determined that it has at least one audit committee financial expert serving on its audit committee. Mr. J. Spencer Lanthier, being the former Chairman and Chief Executive Officer of KPMG Canada, and having the attributes set forth in Paragraph 8(b) of General Instruction B to Form 40-F, has been determined to be an audit committee financial expert. Further, Mr. Lanthier is "independent" as that term is defined by the New York Stock Exchange's corporate governance standards applicable to Intertape Polymer Group Inc. The Securities and Exchange Commission has stated that the designation of Mr. Lanthier as an audit committee financial expert does not make him an "expert" for any purpose, including without limitation, for purposes of Section 11 of the Securities Act of 1933. Further, such designation does not impose any duties, obligations or liability on Mr. Lanthier greater than those imposed on members of the audit committee and Board of Directors not designated as an audit committee financial expert, nor does it affect the duties, obligations or liability of any other member of the audit committee or Board of Directors. Code of Ethics Intertape Polymer Group Inc. has adopted a code of ethics entitled "Intertape Polymer Group Inc. Code of Business Conduct and Ethics", which is applicable to all of its employees, including its principal executive officer, principal financial officer, principal accounting officer or controller, and all persons performing similar functions. During the 2003 fiscal year, Intertape Polymer Group Inc. did not amend its Code of Business Conduct and Ethics and did not grant a waiver from any provision of its Code of Business Conduct and Ethics. Intertape Polymer Group Inc. will provide, without charge, to any person upon written or oral request, a copy of its Code of Business Conduct and Ethics. Requests should be directed to Burgess H. Hildreth, Intertape Polymer Group Inc., 3647 Cortez Road West, Bradenton, Florida 34210. Mr. Hildreth may be reached by telephone at (941) 739-7507. -3- Principal Accountant Fees and Services The following table sets forth the fees billed or billable for professional services rendered by Raymond Chabot Grant Thornton, Chartered Accountants, Intertape Polymer Group Inc.'s principal accountant, for the fiscal years ended December 31, 2003 and December 31, 2002: Year ended December 31, 2002 2003 __________________________ Audit Fees $752,674 $807,772 Audit-Related Fees 36,296 5,694 Tax Fees 97,427 80,421 All Other Fees 13,372 --- _________ ________ Total Fees: $899,769 $893,887 _________ ________ Audit Fees. Audit fees were for professional services rendered for the audits of Intertape Polymer Group Inc.'s consolidated financial statements, assisting its Audit Committee in discharging its responsibilities for the review of the Company's interim consolidated financial statements and services that generally only the independent auditor can reasonably provide, such as comfort letters, consents and assistance and review of documents filed with the Securities and Exchange Commission and Canadian securities regulatory authorities. Audit-Related Fees. Audit-related fees were for assurance and related services that are reasonably related to the performance of the audit or review of Intertape Polymer Group Inc.'s consolidated financial statements and are not reported under Audit Fees above. These services included consultations concerning financial accounting and reporting standards and the review of responses to the Canadian securities regulatory authorities' observation letters. Tax Fees. Tax fees were for tax compliance, tax advice and tax planning. These services included the preparation of the Canadian subsidiaries' income tax returns, the preparation of information returns for foreign affiliates, assistance with questions regarding tax audits and tax planning relating to common forms of domestic and international taxation (i.e. income tax, capital tax and excise tax) and advisory services regarding restructurings. All Other Fees. All other fees were for services provided other than the audit fees, audit-related fees and tax fees described above. These services consisted mainly of miscellaneous corporate reporting and advisory services prior to the enactment of the Sarbanes-Oxley Act of 2002 and the adoption of rules thereunder. Intertape Polymer Group Inc.'s Audit Committee pre-approves all audit engagement fees and terms of all significant permissible non-audit services provided by independent auditors. With respect to services other than audit, review or attest services set forth in the table above, -4- none were approved pursuant to the de minimus exception provided by paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X. Off-Balance Sheet Arrangements. Intertape Polymer Group Inc. maintains no off-balance sheet arrangements. Tabular Disclosure of Contractual Obligations Set forth below are the contractual obligations of Intertape Polymer Group Inc. as of December 31, 2003:
Contractual Obligations Payment due by period (in millions of U.S. Dollars) Total Less than 1-3 4-5 After 1 year years years 5 years(3) Long-Term Debt Obligations (1) 252.0 16.9 128.4 95.1 11.6 Capital (Finance) Lease Obligations(2) --- --- --- --- --- Operating Lease Obligations 18.3 6.6 6.3 3.2 2.2 Purchase Obligations --- --- --- --- --- Other Long-Term Liabilities Reflected on Balance Sheet under GAAP of the primary financial statements --- --- --- --- --- Total 270.3 23.5 134.7 98.3 13.8
(1) Intertape Polymer Group Inc. has certain financial covenants it must maintain in order to remain in good standing under its Credit Agreement, as amended, as well as its long-term debt agreements, as amended. For example, in order to avoid an acceleration of the maturity dates of the loans, Intertape Polymer Group Inc.'s total debt to consolidated total capitalization ratio must not exceed certain limits. Further, Intertape Polymer Group Inc. is also required to maintain ratios with respect to its fixed charges, consolidated net worth, and total debt to EBITDA during the terms of its loans. In order to eliminate a default with respect to the first quarter of 2004, pursuant to one specific covenant of its long-term debt agreements, Intertape Polymer Group Inc. requested and obtained an amendment to the long-term debt agreements. The amendment modified the Fixed Charge Coverage ratio (EBIDTA divided by fixed charges) for 2004 and the first six months of 2005. The covenants contained in the loan documents, as amended, do not restrict Intertape Polymer Group Inc.'s ability to conduct its daily operations; however, the covenants do contain debt restrictions which place practical limitations on its ability to borrow additional funds without the prior approval of its current bank lenders and noteholders. Further, several of Intertape Polymer Group Inc.'s financial covenants under its loan agreements, as amended, include ratios impacted by Intertape Polymer Group Inc.'s profitability. These ratios have escalations scheduled for the latter part of this year. Intertape Polymer Group Inc. may have difficulty meeting these escalated ratios and accordingly, may need to either refinance its existing debt or obtain additional amendments to the financial covenants in order to avoid future defaults. -5- (2) During 2003 Intertape Polymer Group Inc. entered into a capital lease agreement for the new Danville RDC. The twenty year lease agreement was commenced in January 2004. The value of the building and the related capital lease obligation of Intertape Polymer Group Inc. is approximately US$7.0 million. (3) Beginning in 2005, Intertape Polymer Group Inc. will likely need to secure funds either through issuing new debt or by raising additional equity or a combination of both in order to satisfy currently scheduled debt payments. During the last two years Intertape Polymer Group Inc. has been successful in reducing its total bank indebtedness and long-term debt by $125 million from internally generated cash and equity offerings. Intertape Polymer Group Inc. believes that it maintains good relations with its lenders, and consequently believes that it will be able to secure adequate funding to permit it to meet its obligations as they become due. Undertaking. Intertape Polymer Group Inc. undertakes to make available, in person or by telephone, representatives to respond to inquiries made by the Securities and Exchange Commission staff, and to furnish promptly, when requested 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. Signature. Pursuant to the requirements of the Securities Exchange Act of 1934, Intertape Polymer Group Inc. 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. INTERTAPE POLYMER GROUP INC. (Registrant) By: /s/Andrew M. Archibald (Signature) Name: Andrew M. Archibald, C.A. Title: Chief Financial Officer, Secretary, Vice President, Administration Date: May 3, 2004 -6- EXHIBIT INDEX Exhibit No. Description Page No. 1 Annual Information Form dated May 3, 2004 8 2 Consent of Independent Chartered Accountants 36 3 Certifications pursuant to Rule 13a-14(a) or Rule 15d-14(a), pursuant to Section 302 of the U.S. Sarbanes-Oxley Act of 2002 37 4 Certification pursuant to 18 U.S.C. Section 1350, as enacted pursuant to Section 906 of the U.S. Sarbanes-Oxley Act of 2002 41 5 2003 Annual Report, including: Audited Annual Consolidated Financial Statements (Pg. 25) Management's Discussion and Analysis for 2003 (Pg. 4) 44 6 Notice of Annual and Special Meeting of Shareholders and Management Proxy Circular 53 -7- EXHIBIT 1 Item 1. INTERTAPE POLYMER GROUP INC. ANNUAL INFORMATION FORM For the Year ended December 31, 2003 Dated: May 3, 2004 -8- INTERTAPE POLYMER GROUP INC. ANNUAL INFORMATION FORM Table of Contents Page Item 1. Cover Page 8 Item 2. Corporate Structure 11 2.1 Name and Incorporation 11 2.2 Intercorporate Relationships 11 Item 3. General Development of the Business 12 3.1 Three Year History 12 3.2 Significant Acquisitions and Significant Dispositions 15 3.3 Trends 15 3.4 Cautionary Statements and Risk Factors 15 Item 4. Narrative Description of the Business 19 General 19 Products 20 Sales and Marketing 24 Manufacturing; Quality Control 25 Equipment and Raw Materials 25 Research and Development; New Products 26 Trademarks and Patents 26 Competition 26 Environmental Regulation 27 Employees 28 Description of Property 28 Item 5. Selected Consolidated Financial Information 29 5.1 Annual Information 29 5.2 Dividends 30 Item 6. Management's Discussion and Analysis 30 -9- Item 7. Market For Securities 30 Item 8. Directors and Officers 30 Item 9. Additional Information 35 -10- Item 2. Corporate Structure 2.1 Name and Incorporation The business of Intertape Polymer Group Inc. ("Intertape Polymer Group" or the "Company") was established by Melbourne F. Yull, Intertape Polymer Group's Chairman of the Board and Chief Executive Officer, when Intertape Systems Inc., a predecessor of the Company, established a pressure-sensitive tape manufacturing facility in Montreal. Intertape Polymer Group was incorporated under the Canada Business Corporations Act on December 22, 1989 under the name "171695 Canada Inc." On October 8, 1991, the Company filed a Certificate of Amendment changing its name to "Intertape Polymer Group Inc." A Certificate of Amalgamation was filed by the Company on August 31, 1993, at which time the Company was amalgamated with EBAC Holdings Inc. In February 1992, Intertape Polymer Group completed an initial public offering of its common shares at the offering price of $5.035 (US$4.25)(after giving effect to a 2:1 stock split on June 4, 1996). The Company completed a second public offering of its common shares in Canada and the United States in October 1995, at the offering price of $9.88 (US$7.30) (after giving effect to a 2:1 stock split on June 4, 1996). The Company then completed a public offering of 3,000,000 of its common shares in Canada on a "bought deal" basis in March 1999, at the offering price of $40.25 (US$26.31) per share. In March 2002, the Company completed a public offering of 5,100,000 of its common shares in Canada on a "bought deal" basis at the offering price of $15.50 (US$9.35 after issue costs) per share. The shareholders, at the Company's June 11, 2003 annual and special meeting voted on the replacement of the Company's By-Law No. 1 with a new General By-Law 2003-1. The intent of the replacement by-law was to conform the Company's general by-laws with amendments that were made to the Canadian Business Corporations Act since the adoption of the general by-laws and to simplify the governance of the Company. Most recently, the Company completed a public offering of 5,750,000 of its common shares in Canada on a "bought deal" basis in October 2003, at the offering price of $10.00 (US$7.18 after issue costs) per share. 2.2 Intercorporate Relationships Intertape Polymer Group is a holding company which owns various operating companies in the United States and Canada. Intertape Polymer Inc. ("IPI"), incorporated under the Canada Business Corporations Act, is the principal operating company for the Company's Canadian operations. Intertape, Inc., a Virginia corporation, is the principal operating company for the Company's United States and international operations. The table below lists for each of the subsidiaries of the Company their respective place of incorporation and the percentage of voting securities beneficially owned or over which control or direction is exercised directly or indirectly by Intertape Polymer Group. Certain subsidiaries, each of which represents not more than ten percent of consolidated assets and not more than ten percent of consolidated sales and operating revenues of the Company, and all of which, in the aggregate, represent not more than twenty percent of total consolidated assets and total consolidated sales and operating revenues of the Company at December 31, 2003, have been omitted. -11- Corporation Place of Percentage of Incorporation Ownership or Control Intertape Polymer Group Inc. Canada Parent Intertape Polymer Inc. Canada 100% IPG Financial Services Inc. Delaware 100% IPG Holding Company of Nova Scotia Nova Scotia 100% IPG Finance LLC Delaware 100% Intertape Inc. Virginia 100% Central Products Company Delaware 100% Intertape Polymer Corp. Delaware 100% IPG Administrative Services Inc. Delaware 100% Intertape Woven Products Services S.A. de Mexico 100% IPG Holdings LP Delaware 100% Polymer International Corp. Virginia 100% IPG (US) Inc. Delaware 100% IPG (US) Holdings Inc. Delaware 100% IPG Technologies Inc. Delaware 100% Fibope Portuguesa-Filmes Biorientados S.A. Portugal 100% Item 3. General Development of the Business 3.1 Three Year History The Company commenced operations in 1981 and since has evolved into a recognized leader in the development and manufacture of specialized polyolefin plastic and paper packaging products and related packaging systems. For several years, Intertape Polymer Group's business strategy was primarily one of growth. Commencing in the mid-1990's, the Company made several strategically important acquisitions to further its business plan to either develop or acquire new products to complete the "basket of products" approach to the Company's markets. Over the past three years, the Company has transitioned from a period of rapid expansion to a period of operational consolidation and debt reduction. The Company has focused on implementing improvements aimed both at realizing the benefits of past acquisitions and optimizing the Company's efficiency and the quality of its products and services. In 2001, the Company completed the implementation of its Regional Distribution Centers ("RDCs"). The streamlined operations of the five RDCs permitted the Company to close the approximately -12- twenty-five leased warehouse facilities it was maintaining and consolidate product shipments through the RDCs. During 2002, the Company continued to monitor the operations of its RDCs and has re-assessed its overall RDC strategy. As a result, in its ongoing efforts to attain maximum efficiency, the Company announced in 2003 that it would consolidate three RDCs into a new facility adjacent to its existing manufacturing operations in Danville, Virginia. The new RDC became operational in January 2004 and should result in lower transactional costs to the Company as well as enhanced service levels to its customers. In its efforts to remain a low cost producer, in 2002 the Company completed the consolidation of its U.S. based operations for Flexible Intermediate Bulk Container ("FIBC") production into its Piedras Negras facility in Mexico. The Company's facility located in Piedras Negras, Mexico, 150 miles southwest of San Antonio, Texas, is in an industrial park with adjacent buildings that will permit future growth, if required. As a result of the Company's investments to increase its Menasha, Wisconsin production capabilities and efficiencies, the Company was able to close its water activated tape ("WAT") facility in Green Bay, Wisconsin, in December 2003, and consolidate operations in its WAT facility in Menasha, Wisconsin, a step which the Company believes will measurably reduce production costs. In June 2003, the Company acquired the remaining fifty percent of the issued and outstanding common shares of Fibope Portuguesa-Filmes Biorientados S.A. ("Fibope"), which it did not already own. This acquisition should provide Intertape Polymer Group with a platform from which to introduce its North American made products into European markets. The Company currently has no material changes planned for its business in 2004. The Company intends to continue enhancing the various elements of its existing revenue growth and debt reduction strategies. Completed Acquisitions
Year Annual Cost of Acquisitions Company Location Products (US$ in millions) 1996 $ 5.3 Tape, Inc. Green Bay, Wisconsin Water-activated packaging tapes 1997 $ 42.9 American Tape Co. Marysville, Michigan Pressure-sensitive Richmond, Kentucky tapes, masking tapes 1998 $113.2 Anchor Continental, Inc. Columbia, South Carolina Pressure-sensitive Inc. tapes, masking and duct tapes Rexford Paper Company Milwaukee, Wisconsin Pressure-sensitive and water-activated tapes -13 1999 $111.3 Central Products Company Menasha, Wisconsin Pressure-sensitive Brighton, Colorado and water-activated carton sealing tapes Spinnaker Electrical Tape Pressure-sensitive Company Carbondale, Illinois electrical tapes 2000 $ 38.4(subject to adjustment) Olympian Tape Sales, Inc. Cumming, Georgia Distribution of packaging products 2003 $7.2 Fibope Portuguesa- Portugal Manufacture and Filmes Biorientados distribution of shrink film S.A.
With respect to its debt facilities, in December, 2001, Intertape Polymer Group completed the refinancing of both its bank credit facilities and long- term debt. The Company and its subsidiaries entered into a Credit Agreement dated December 20, 2001, providing for revolving credit facilities in the aggregate amount of up to US$145 million secured by all of the Company's tangible and intangible assets. Further, the Company entered into Amended and Restated Note Agreements each dated December 20, 2001, with respect to its US$137.0 million Senior Notes and US$137.0 million Series A and B Senior Notes, increasing the interest rates and granting the noteholders a security interest in the tangible and intangible assets of the Company. During 2001, Intertape Polymer Group reduced its short-term debt by US$12.9 million and long-term debt by US$9.6 million. During 2002, the Company repaid and cancelled its two- year credit facility a year early and reduced its debt under the credit facilities and long-term notes by US$69.7 million ending the year with a balance of US$321.3 million. During 2003, the Company further reduced its long-term debt ending the year with a balance of US$252.0 million and cancelled its four-year credit facility two years early. The Company has retained one credit facility, a 364-day revolving credit facility in the amount of US$50.0 million, which is extended annually at the option of the lenders. If during any period the credit facility is not extended, the facility automatically converts to a two-year revolving term loan. As of December 31, 2003, the Company had total cash and credit availability of US$32.6 million. Pursuant to the requirements of the Canadian Institute of Chartered Accountants, which are comparable to the applicable U.S. standards, Intertape Polymer Group performed a goodwill impairment test as of December 31, 2002, which resulted in a one-time non-cash charge to operating expenses of US$70.0 million arising out of the Company's acquisition activity during the last decade. In March, 2003, the bankers and noteholders further amended the Company's financial covenants to accommodate this impairment ensuring that it would have no future negative impact on the covenants. No impairment charge was incurred for 2003. -14- 3.2 Significant Acquisitions and Significant Dispositions The Company made what it believes to be two strategically sound acquisitions. In June 2003 Intertape Polymer Group purchased the remaining common shares of Fibope, which it did not already own, for a purchase price of US$7.2 million, which was paid by the delivery of 1,030,767 common shares of Intertape Polymer Group. Upon completion of its analysis of the European markets, the Company intends to utilize this Portugal based company to provide the manufacturing and distribution platform necessary to launch the Company's North American made products into the European markets. The Company also entered into an agreement in December 2003 to acquire certain of the assets of tesa tape, inc. ("tesa") in connection with tesa's masking and duct tape operations for a purchase price of US$5.5 million. Upon the completion of the transaction in February 2004, Intertape Polymer Group integrated the business acquired from tesa into its Columbia, South Carolina, facility and entered into a three-year supply agreement with tesa. The Company believes that this acquisition will provide it access to additional large retail chains not previously serviced by it. While the Company believes the Fibope and tesa acquisitions further its growth strategy, the acquisition of the remaining shares of Fibope and certain of the assets of tesa do not meet the definition of "significant acquisitions". Acquisitions are a part of the Company's strategy for growth. It will continue to investigate favorable opportunities that present themselves during 2004. The Company did not make any significant dispositions during 2003, although, as a result of the consolidation of operations, the Company has listed for sale its Edmundston, New Brunswick, Canada, and Green Bay, Wisconsin facilities. These sales, however, would not constitute significant dispositions. 3.3 Trends The Company anticipates a continued growth in revenue for 2004. Intertape Polymer Group believes it will be able to accommodate additional increases in sales volume without the need for significant capital expenditures. Also, during 2004, the Company expects to implement the remaining cost reductions of its US$17.5 million program announced during 2002. In addition to the approximately US$6 million in cost reductions the Company expects during 2004 under the original program, it is also anticipated that the Company will realize an additional US$2.6 million in cost containment as a result of the closure of the Green Bay, Wisconsin facility. Next, Intertape Polymer Group intends to continue work towards the introduction of its products into new markets. Lastly, the Company plans to continue to reduce its debt in 2004. 3.4 Cautionary Statements and Risk Factors This Annual Information Form, including the Management's Discussion & Analysis incorporated herein by reference, contains certain "forward-looking statements" within the meaning of Section 27A of the U.S. Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the U.S. Securities Exchange Act of 1934, as amended (the "Exchange Act") -15- concerning, among other things, discussions of the business strategy of Intertape Polymer Group and expectations concerning the Company's future operations, liquidity and capital resources. When used in this Annual Information Form, the words "anticipate", "believe", "estimate", "intends", "expect" and similar expressions are generally intended to identify forward-looking statements. Such forward-looking statements, including statements regarding intent, belief or current expectations of the Company or its management, are not guarantees of future performance and involve risks and uncertainties. All statements other than statements of historical fact made in this Annual Information Form or in any document incorporated herein by reference are forward-looking statements. In particular, the statements regarding industry prospects and the Company's future results of operations or financial position are forward-looking statements. Forward-looking statements reflect the Company's current expectations and are inherently uncertain. Actual results may differ materially from those in the forward-looking statements as a result of various factors, including those factors set forth below and other factors discussed elsewhere in this Annual Information Form and in the Management's Discussion & Analysis included in the Company's Annual Report. In addition to the other information contained in this Annual Information Form, readers should carefully consider the cautionary statements and risk factors set forth below. Shortages in raw material decrease sales. In the past, there have been shortages from time to time in the supply of certain resins. In the event there are shortages, the Company's sales could decrease. Increases in raw material costs reduces gross margins. The cost of raw materials began to rise in the third quarter of 2002 and continued to do so in 2003. The Company has initiated a number of price increases to offset the increased costs, however, as a result of continued general economic weakness, it has been difficult and may continue to be difficult, for the Company to pass on these increases. Future acquisitions of companies may have an adverse effect on the Company's business, financial condition and operations. An important aspect of Intertape Polymer Group's business strategy is to acquire the assets of companies that will complement its existing products, expand its marketing area, improve distribution efficiencies, and enhance its technological capabilities. Financial risks to the Company in connection with future acquisitions include the use of its cash resources, incurring additional debt and liabilities, and potentially dilutive issuances of equity securities. Further, there are possible operational risks including difficulties assimilating the operations, products, technology, information systems and personnel of acquired companies; the loss of key personnel of acquired entities; the entry into markets in which the Company has no or limited prior experience; and difficulties honoring commitments made to customers of the acquired companies prior to the acquisition. The failure to adequately address these risks could adversely affect the Company's business. -16- The Company's credit facilities and bank indebtedness contain covenants that under certain circumstances limit Management's discretion in certain business matters. The Amended and Restated Note Agreements entered into in December 2001, as amended, relating to the US$137 million Senior Notes and US$137 million Series A and B Senior Notes ("Note Agreements") and the Credit Agreement entered into in December 2001, as amended, relating to the Company's revolving credit facilities contain financial and operating covenants that limit Management's discretion in certain business matters which may restrict the Company's ability to take advantage of potential business opportunities as they arise. These covenants place restrictions on, among other things, the Company's ability to incur additional indebtedness, to create liens or other encumbrances, to make certain payments (including dividends and repurchases of the Company's common shares), and to sell or otherwise dispose of assets and merge or consolidate with other entities. The revolving credit facilities also require the Company to meet certain escalating financial ratios and tests that may require the Company to take action to reduce or refinance its existing debt or act in a manner contrary to its business objectives. Failure by the Company to comply with the obligations in its revolving credit facilities and Note Agreements could result in an event of default which, if not cured, waived, or amended, would permit acceleration of the Company's indebtedness under the revolving credit facilities and Note Agreements and could allow the creditors and/or noteholders thereunder to exercise their security interests, both of which could have a material adverse effect on the Company. New products may fail to attract customers. Intertape Polymer Group's business plan involves the introduction of new products, which are both developed internally and obtained through acquisition. In the event the market does not accept these products or competitors introduce similar products, the Company's ability to expand its markets and generate organic growth could be negatively impacted and there could be an adverse affect on its financial condition and operating results. The Company may not be able to compete successfully with its larger competitors. The larger competitors of Intertape Polymer Group have greater financial resources with which to overcome what the Company believes to be significant barriers to entry into the existing packaging market, including the high cost of vertical integration, the significant number of patents already issued in respect of various processes and equipment, and the difficulties and cost of developing an adequate distribution network. Compliance with environmental laws and regulations could be costly. Intertape Polymer Group, like others in similar businesses, is subject to extensive environmental laws and regulations. The Company's policies and procedures have been designed to comply with these laws and regulations. Increasingly stringent environmental laws and regulations could necessitate the Company to make additional expenditures to achieve or maintain compliance. -17- Achieving and maintaining compliance with present and future environmental laws and regulations could restrict the Company's ability to modify or expand its plants or to continue manufacturing. Compliance could also require the acquisition of additional equipment. Some of Intertape Polymer Group's plants have a history of industrial use. Soil and groundwater contamination has occurred at some of the Company's plants. Environmental laws impose liability on an owner, tenant, or operator of real property for the removal or remediation of hazardous or toxic substances, even if they were unaware of or not responsible for the contamination. Further, any company who arranges for the disposal or treatment of hazardous substances at a disposal facility may be liable for the costs of remediation of such substances at such facility whether or not the company owns or operates the facility. In accordance with environmental laws and regulations, the Company periodically investigates, remediates, and monitors soil and groundwater contamination at certain of its plants. Contamination at its St. Laurent plant may have migrated to the adjacent property. The Company is investigating to determine what further action is required. Currently the Company is remediating contamination at its Columbia, South Carolina plant and has installed a hydraulic barrier at its St. Laurent, Quebec, plant to prevent further off-site migration of contaminated groundwater. The Company has completed its remediation activities at its Marysville, Michigan, facility and has requested final approval of the site from the State of Michigan. It is not anticipated that the ultimate resolution of these matters will have a material adverse effect on the Company's business or results of operations. Intertape Polymer Group obtains Phase I or similar environmental assessments, and Phase II assessments, if necessary, for most of the manufacturing facilities it owns or leases at the time it either acquires or leases such facilities. These assessments typically include general inspections with soil sampling and/or ground water analysis. The assessments have not revealed any environmental liability that, based on current information, the Company believes will have a material adverse effect on the Company. Nevertheless, the Company's assessment may not reveal all potential environmental liabilities and current assessments are not available for all facilities. Consequently, there may be material environmental liabilities that the Company is not aware of. In addition, ongoing clean up and containment operations may not be adequate for purposes of future laws and regulations. The conditions of the Company's properties could be affected in the future by the conditions of the land or operations in the vicinity of the properties. These developments and others, such as increasingly stringent environmental laws and regulations, increasingly strict enforcement of environmental laws and regulations, or claims for damage to property or injury to persons resulting from the environmental, health or safety impact of the Company's operations, may cause the Company to incur significant costs and liabilities that could have a material adverse effect on the Company. Anti-takeover provisions in the Company's Shareholder Protection Rights Plan may prevent an acquisition. On August 24, 1993, the shareholders of Intertape Polymer Group approved a Shareholder Protection Rights Plan (the "Plan"). Under the Plan, one common share purchase right was issued on September 1, 1993 in respect of each outstanding common share and became issuable in respect of each common share issued thereafter. Although the Plan was to have expired on September 1, 1998, on May 21, 1998, the shareholders approved an amendment extending the term of the Plan to September 1, 2003. The shareholders at their June 11, 2003 meeting, adopted an amended and restated Plan which, among other things, extended the Plan through the date immediately following the date of the Company's 2006 annual shareholders' meeting. The effect of the Plan is to -18- require anyone who seeks to acquire 20% or more of Intertape Polymer Group's voting shares to make a bid complying with specific provisions of the Plan. Thus, the provisions of the Plan could prevent or delay the acquisition of the Company by means of a tender offer, a proxy contest, or otherwise, in which shareholders might receive a premium over the then current market price of the Company's common shares. The Company's exemptions under the Exchange Act as a foreign private issuer limits the protections and information afforded investors. Intertape Polymer Group is a foreign private issuer within the meaning of the rules promulgated under the Exchange Act. As such, it is exempt from certain provisions applicable to United States companies with securities registered under the Exchange Act, including: the rules under the Exchange Act requiring the filing with the Securities and Exchange Commission of quarterly reports on Form 10-Q or current reports on Form 8-K; the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act; and the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and establishing insider liability for profits realized from any "short-swing" trading transaction (i.e., a purchase and sale, or sale and purchase, of the issuer's equity securities within a period of less than six months). Because of these exemptions, purchasers of Intertape Polymer Group's securities are not afforded the same protections or information generally available to investors in public companies organized in the United States. Intertape Polymer Group previously filed its annual reports on Form 20-F. Commencing with the year ended December 31, 2000, the Company files its annual report on Form 40-F. Intertape Polymer Group reports on Form 6-K with the Commission and publicly releases quarterly financial reports. Because Intertape Polymer Group is a Canadian company, it may be difficult for investors to effect service of process or enforce judgments against us. Intertape Polymer Group is a Canadian corporation, certain of its officers and directors, and its auditors are residents of Canada, and a portion of our assets are located outside of the United States. Accordingly, it may be difficult for investors to effect service of process within the United States upon Intertape Polymer Group or such persons, or to enforce against them judgments obtained in the United States predicated upon the civil liability provisions of the Securities Act. Item 4. Narrative Description of the Business General Intertape Polymer Group develops, manufactures and sells a variety of specialized polyolefin plastic packaging products. These products include INTERTAPE(TM) pressure-sensitive and water-activated tape, EXLFILM(R) shrink film ("EXLFILM(R)"), STRETCHFLEX(R) stretch wrap ("STRETCHFLEX(R)") and woven products. Most of the Company's products are derived from resins that are converted into films and adhesives. Resins also are combined with paper and converted into a variety of packaging products. Vertical integration, whereby -19- the Company performs each step in the conversion of polyolefin resins and paper into its various products, and continuous focus on improving manufacturing efficiencies allow the Company to be among the low-cost producers of each product it manufactures. This vertical integration combined with the use of high speed production equipment provides competitive advantages to the Company in flexibility and control of the manufacturing process and in speed of delivery. Management considers all of its products to be within one operational segment because all products are made basically from similar extrusion processes and differ only in the final stages of manufacturing. The Company expanded its product offering with the acquisitions of Spinnaker Electrical Tape Company, a U.S. manufacturer of pressure-sensitive electrical tapes, and Central Products Company, a U.S. manufacturer of a natural rubber pressure-sensitive tape. Central Products Company also manufactured hot melt and acrylic pressure-sensitive tapes, and a line of water-activated carton sealing tapes, giving the Company what it now believes to be 75% of the water-activated tape market. The Company's revenues are derived primarily from sales of its products in the United States and Canada, with approximately 84% of the Company's 2003 revenues attributable to sales from manufacturing facilities in the United States. The Company's head office is located in Montreal, Quebec and the Company maintains approximately 2.4 million square feet of manufacturing facilities throughout the United States, Canada and Portugal. Products INTERTAPE(TM) Carton Sealing Tape: Pressure-Sensitive and Water-Activated Tapes The Company produces a variety of pressure-sensitive plastic film carton sealing tape, ranging from commodity designed standard tape to tape tailored to meet customers' unique requirements. The product range encompasses tape with film thickness from 25 microns to 50 microns and adhesives formulated for manual as well as automatic applications. Carton sealing tape lends itself to use in high speed taping machines that replace other closure methods such as staples, hot melt glues and cold glues. The tape produced by the Company includes a wide range of customized colored and printed tape, as well as tape designed for cold temperature applications and label protection. The Company believes that it is one of the leading manufacturers of pressure-sensitive carton sealing tape and further believes that it is the only manufacturer in North America of all three types of adhesives; hot melt, acrylic, and natural rubber. Carton sealing tape is manufactured and sold under the INTERTAPE(TM) name to industrial distributors, leading retailers, and manufactured for sale under private labels. It is produced at the Company's Danville, St. Laurent, Richmond, and Brighton facilities and is primarily utilized by end-users for sealing corrugated cartons. Geographic territories in which the Company markets its products are serviced by sales personnel and manufacturers' representatives coordinated by regional managers. Distributors are appointed on a basis designed to achieve market penetration of both commodity and higher grade products. The Company markets carton sealing tapes, industrial tapes, equipment, and stretch and shrink films as a "basket of packaging and specialty products", an approach believed to be unique in the industry. This broad assortment of products is available from the Company's three RDCs and offers committed distribution partners opportunities for increased inventory turns, reduced storage space, and lower transaction costs. -20- The acquisition of Tape, Inc. and Central Products Company added a complete range of water-activated adhesive tapes to the Company's product mix. This product line is generally sold through the same distribution network as pressure-sensitive carton sealing tape which has allowed the Company to increase its market penetration for this product. Water-activated tapes are used exclusively in the mail order business and the furniture and apparel industries where a strong mechanical bond is needed to seal large boxes that will be subject to rigorous handling during shipment. The Company believes it is the largest producer of this type of tape and has in excess of 70% of the North American market. The Company's principal competitors for the sale of carton sealing tape products are Minnesota Mining & Manufacturing Co. ("3M"), Shurtape Technologies, Inc., and Sekisui TA Industries, Inc. INTERTAPE(TM) Masking Tapes: Performance and General Purpose The Company added masking tapes to its product line in December 1997 through the acquisition of American Tape Co. ("American Tape"), a leading manufacturer of these products and expanded its position in this product line with the acquisition of Anchor Continental, Inc. ("Anchor") in September 1998. Masking tapes are used for a variety of end-use applications which can be broadly described under two categories: general purpose and performance. General purpose applications include packaging and bundling, and residential and commercial paint applications. Performance applications include use in painting of aircraft, cars, buses and boats, where the properties of the tape, such as high temperature resistance and clean adhesive release, are individually designed for the customer's process. In February 2004 the Company purchased the assets of tesa tape, inc.'s masking tape operations, which were one of the Company's main competitors in this product line. The Company also entered into a three-year supply agreement with tesa tape, inc. The Company's processing capabilities include solvent and synthetic rubber, hot melt and acrylic adhesive alternatives. The Company believes that its unique adhesive systems provide it with a competitive advantage in this market. The main competitors for the sale of masking tapes include 3M and Shurtape Technologies, Inc. INTERTAPE(TM) Reinforced Filament Tape: Performance and General Purpose In addition to masking tapes, the Company's purchases of American Tape and Anchor also introduced reinforced filament tapes and tensiled polypropylene tapes (MOPP) to the Company's product line. Reinforced, general and specialty products are manufactured at the Company's facilities in Richmond, Kentucky and Marysville, Michigan. These facilities produce filament tape using synthetic, natural rubber and hot melt adhesives coated on a variety of plastic -21- films. The reinforcement is provided by fibreglass yarns laminated between the adhesive and backing layers. MOPP tapes are made from highly oriented polypropylene films and complement the reinforced filament products in several of the unitizing and bundling operations. Many of these filament tapes are odorless, stainless, and provide clean removal and are used in bundling, sealing, unitizing, palletizing and packaging, notably for household appliances. The Company's main competitor in the industrial filament tape market is 3M, and for commodity filament tapes the Company's main competitor is Tara Tape. Acrylic Coating The Company entered into the acrylic market in 1995 through its Danville, Virginia, plant. Acrylic coatings, when applied to film tapes, offer extended shelf life as well as increased performance under the extremes of low and high temperatures. In addition, certain applications utilize woven products as the base material to which acrylic coating is applied. The Company is completely self-sufficient in the production of film for pressure sensitive tapes for acrylic based adhesive tapes. INTERTAPE(TM) Duct Tape The acquisition of Anchor provided the Company a significant capacity in the duct tape product line, which has now been enhanced by the acquisition of the assets of the duct tape operation of tesa. Duct tapes are manufactured at the Columbia, South Carolina, facility. Most of the duct tape volume consists of polyethylene-coated cloth. Aluminum foil type tape accounts for much of the non-polyethylene coated product sales of the Company's duct tape products. Intertape Polymer Group has also entered into a three-year supply agreement with tesa for duct tape products. The main competitors are Tyco Adhesives and Shurtape Technologies, Inc. EXLFILM(R) Shrink Wrap EXLFILM(R) is a specialty plastic film which shrinks under controlled heat to conform to package shape as compared to other packaging forms that require unique machinery for different product sizes and shapes. The process provides versatility because it permits the over-wrapping of a variety of products of considerably different sizes and dimensions (such as printing and paper products, packaged foods, cassettes, toys, games and sporting goods, and hardware and housewares). The Company manufactures EXLFILM(R) at its plant in Truro, Nova Scotia, its Tremonton, Utah, facility and its facility in Portugal. The Company believes that its continued investment in equipment and product development will help it expand in this market. With the development of cross-linking technology, the Company has introduced a new line of high performance shrink film, EXLFILMPLUS(TM), which can be used to satisfy additional end user applications. The Company's shrink wrap products are sold through a select group of specialty distributors primarily to manufacturers of packaged goods and printing and paper products who package their products internally. -22- In addition to being served by the Company, the United States and Canadian markets for polyolefin shrink wrap are currently served by two large United States manufacturers, Sealed Air and Bemis Company, Inc., and to a lesser extent by foreign manufacturers. STRETCHFLEX(R) Stretch Wrap STRETCHFLEX(R) is a multi-layer plastic film that can be stretched without application of heat. It is used industrially to wrap pallet loads of various products to ensure a solid load for shipping. The Company has a total of seven cast lines, all using the state-of-the-art five-layer technology. This technology, combined with re-engineered film allows the Company to produce polyolefin stretch wrap that has higher performance while reducing manufacturing costs. The Company has the capacity to produce a total of 130 million pounds of STRETCHFLEX(R) annually at its Danville, Virginia, plant and its facility in Tremonton, Utah. The North American market for such polyolefin stretch wrap is served by a number of manufacturers, the largest of which are AEP, Tyco, and Linear Films, Inc. Industrial Electrical Tapes As a result of the Company's 1999 acquisition of certain assets of Spinnaker Electrical Tape Company, which included its Carbondale, Illinois, facility, the Company is now a manufacturer of specialty electrical and electronic tape. The new manufacturing capability and technology at the Carbondale, Illinois, facility, coupled with the Company's high temperature resistant products manufactured at its Marysville, Michigan, facility is providing the Company access to high margin markets. Competing manufacturers of industrial electrical tapes include 3M, and Permacel. Finally, the Company's acquisitions have positioned the Company as a stronger supplier of industrial tape, second only, in the estimation of management, to 3M in North America, with the additional capability to provide shrink and stretch wrap, a product line 3M does not offer. The Company's status as a low-cost, high value added single source supplier to its individual distributor customer base should, subject to economic factors, lead to sales growth in the future. Woven Products The Company produces a variety of finished products utilizing coated woven polyolefin fabrics, such as bags and lumber wrap, as well as coated woven polyolefin fabrics that are sold to other manufacturers which convert these fabrics into finished products, such as packaging, protective covers, pond liners, housewrap, recreational products, and temporary structures. NOVA-THENE(R) ProWrap lumber wrap is a polypropylene fabric which is extrusion coated and printed to customer specifications. It is used in the forest products industry to package kiln-dried cut lumber and other wood products. The Company believes that polypropylene products have certain advantages over traditional paper-plastic laminate and all polyethylene products, including superior strength, ease of application, durability, better appearance and the potential to be recycled. -23- The Company also manufactures other coated woven polyolefin fabrics that it supplies to converters which produce finished products for specific application, such as temporary and permanent shelters, recreational products, protective covers, pond liners, and flame retardant brattice cloth. The Company has developed a patented woven fabric, NOVA-SHIELD(TM), that meets the fire retardant specifications required for human occupancy and maintains the UV specifications for extended outdoor use. This product is used in applications where PVC was the primary fabric previously used. Further, the Company entered the metal wrap market with a patent pending wrap, NOVA-WRAP(TM), for steel and aluminum coils and sheets. The Company manufactures NOVA-PAC(R) sleeves for packaging fiberglass, cotton, synthetic fibers and other products. The Company's most recent woven product introduction is AquaMaster(TM), a coated fabric to be used primarily to line man-made canals to prevent water loss into the ground. In addition, the Company competes with manufacturers of coated woven fabrics such as Amoco Fabrics and Fibers Company and Fabrene, Inc., which sell their products to converters. FIBCs The Company produces flexible intermediate bulk containers ("FIBCs") at a facility in Piedras Negras, Mexico. The market for FIBCs is highly competitive and is not dominated by any single manufacturer. Sales and Marketing As of December 31, 2003, the Company maintained a sales force of 110 personnel. The Company participates in industry trade shows and uses trade advertising as part of its marketing efforts. The Company's overall customer base is diverse, with no single customer accounting for more than 5% of total sales. Sales from facilities located in the United States and Canada accounted for approximately 86% and 14% of total sales, respectively, in 2001, and approximately 85% and 15% in 2002, and 84% and 16% in 2003. Export sales currently represent less than 5% of total sales and are included in United States or Canadian sales depending on the manufacturing facility from which the sale originates. The Company's sales are primarily focused on distribution products and woven products. Distribution products go to market through a network of paper and packaging distributors throughout North America. Products sold into this segment include carton sealing, masking, duct and reinforced tapes, EXLFILM(R) and STRETCHFLEX(R). In order to enhance sales of its pressure-sensitive carton sealing tape, the Company also sells carton closing systems, including automatic and semi-automatic carton sealing equipment. Prior to the acquisition of Interpack, these products were manufactured by others. The Company's EXLFILM(R) and STRETCHFLEX(R) products are sold through its existing industrial distribution base primarily to manufacturers of packaged goods and printing and paper products which package their products internally. The industrial electrical tapes are sold to the electronics and electrical industries. -24- The Company's woven products are sold directly to the end-users. Intertape Polymer Group offers a line of lumberwrap, valve bags, FIBCs and specialty fabrics manufactured from plastic resins. The woven products are marketed throughout North America. Manufacturing; Quality Control The Company's philosophy is, where efficient, to manufacture products from the lowest cost raw material and add value to such products by vertical integration. The majority of the Company's products are manufactured through a process which starts with a variety of polyolefin resins which are extruded into film for further processing. Wide width biaxially oriented polypropylene film is extruded in the Company's facilities and this film is then coated in high-speed equipment with in-house-produced adhesive and cut to various widths and lengths for carton sealing tape. The same basic process applies for reinforced filament tape, which also uses polypropylene film and adhesive but has fiberglass strands inserted between the layers. Specific markets demand different adhesives and the Company manufactures acrylic solvent based rubber, "hot melt", aqueous acrylic, solvent acrylic, silicone and water-activated adhesives to respond to all demands. Masking tapes utilize the same process with paper as the coating substrate. Duct tapes utilize a similar process with either polyethylene or aluminum foil type coated cloth. Intertape Polymer Group is the only North American supplier of all four technologies of carton sealing tape: hot melt, acrylic, water-activated, and natural rubber. Further, the Company is the only United States manufacturer of natural rubber carton sealing tape. This broad family of carton sealing tapes is further enhanced by the Company's tape application equipment which is made in the Montreal facility. The technology for basic film extrusion, essential to the low cost production of pressure-sensitive tape products, also has been utilized by the Company to expand its product line into highly technical and sophisticated films. Extrusion of up to five layers of various resins is done in four of the Company's plants. These high value added films service the shrink and stretch wrap markets, both of which have high entry barriers. The Company maintains at each manufacturing facility a quality control laboratory and a process control program on a 24-hour basis to monitor the quality of all packaging and woven products it manufactures. At the end of 2003, four of the Company's plants were certified under the ISO-9002 quality standards program, and one has been certified under the ISO-9001 quality standards program. Equipment and Raw Materials The Company purchases mostly custom designed manufacturing equipment, including extruders, coaters, finishing equipment, looms, printers, bag manufacturing machines and injection molds, from manufacturers located in the United States and Western Europe, and participates in the design and upgrading of such equipment. It is not dependent on any one manufacturer for such equipment. -25- Polyolefin resins are a widely produced petrochemical product and are available from a variety of sources worldwide. The Company purchases raw materials from a limited number of vendors with whom, over time, it has developed long-term relationships. The Company believes that such long term relationships, together with the Company's centralized purchasing operations, have enhanced the Company's ability to obtain a continuity of supply of raw materials on competitively favorable purchase terms. Historically, fluctuations in raw material prices experienced by the Company have been passed on to its customers over time, however, the timing and extent of recent price increases has made it difficult to pass the full impact of such increases on to customers. Research and Development; New Products The Company has increased its emphasis on applied research which is more efficient in identifying new product opportunities, thus reducing research and development expenses. Research and development continues to focus on new products, technology developments, new product processes and formulations. The Company anticipates the introduction of several new products into its markets in 2004. Research and development expenses in 2001, 2002, and 2003 totaled US$4,182,000, US$3,169,000, and US$3,272,000, respectively. Trademarks and Patents The Company markets its tape products under the trademark INTERTAPE(TM) and various private labels. The Company's valve or open mouth bags are marketed under the registered trademark NOVA-PAC(R). Its woven polyolefin fabrics are sold under the registered trademark NOVA-THENE(R). Its shrink wrap is sold under the registered trademark EXLFILM(R). Its stretch films are sold under the registered trademark STRETCHFLEX(R). FIBC's are sold under the registered trademark CAJUN(R) BAGS. The Company has approximately 141 active registered trademarks, 55 in the United States, 21 in Canada, and 65 foreign, which include trademarks acquired from American Tape, Anchor, Rexford Paper Company and Central Products Company. The Company currently has 28 pending trademark applications. The Company does not have, nor does management believe it important to the Company's business to have, patent protection for its carton sealing tape products. However, the Company has pursued patents in select areas where unique products offer a competitive advantage in profitable markets, primarily in woven products for which the Company has approximately 7 patents and 3 patents pending, and shrink wrap for which the Company has approximately 9 patents and 7 patents pending. Competition The Company competes with other manufacturers of plastic packaging products as well as manufacturers of alternative packaging products, such as -26- paper, cardboard and paper-plastic combinations. Some of these competitors are larger companies with greater financial resources. Management believes that competition, while primarily based on price and quality, is also based on other factors, including product performance characteristics and service. No statistics, however, on the packaging market as a whole are currently publicly available. See "Products" for a discussion of the Company's main competitors. The Company believes that significant barriers to entry exist in the packaging market. Management considers the principal barriers to be: (i) the high cost of vertical integration which is necessary to operate competitively, (ii) the significant number of patents which already have been issued in respect of various processes and equipment, and (iii) the difficulties and expense of developing an adequate distribution network. Environmental Regulation The Company manufactures and sells a variety of specialized polyolefin plastic packaging products for industrial use at its manufacturing plants throughout North America and in Portugal. The Company is actively promoting environmental solutions, both in the development of its products and in its own manufacturing facilities. Furthermore, the Company's operations are subject to extensive environmental regulation in each of the countries in which it maintains facilities. For example, United States Federal and state environmental laws applicable to the Company include statutes (i) intended to allocate the cost of remedying contamination among specifically identified parties as well as to prevent future contamination (the "Comprehensive Environmental Response, Compensation, and Liability Act"); (ii) imposing national ambient standards and, in some cases, emission standards, for air pollutants which present a risk to public health or welfare (the "Federal Clean Air Act"); (iii) governing the management, treatment, storage and disposal of hazardous wastes (the "Resource Conservation and Recovery Act"); and (iv) regulating the discharge of pollutants into protected waterways (the "Clean Water Act of 1972"). The Company's use in its manufacturing processes of hazardous substances and the generation of hazardous wastes not only by the Company but by prior occupants of Company facilities suggest that hazardous substances may be present at or near certain of the Company's facilities or may come to be located there in the future. Consequently, the Company is required to monitor closely its compliance under all the various environmental regulations applicable to it. In addition, the Company arranges for the off-site disposal of hazardous substances generated in the ordinary course of its business. Except as described below, the Company believes that all of its facilities are in material compliance with applicable environmental laws and regulations. Intertape is currently remediating contamination at its Columbia, South Carolina plant, and has installed a hydraulic barrier at its St. Laurent, Quebec, plant to prevent off-site migration of contaminated groundwater. The Company has completed its remediation activities at its Marysville, Michigan, facility and has requested final approval of the site from the State of Michigan. Contamination at its St. Laurent plant may have migrated to the adjacent property. The Company is investigating to determine what additional action is required. In addition, though certain of the Company's facilities emit toluene and other pollutants, the emissions are within current permitted limitations. The Company believes that these emissions will meet the Maximum Available Control Technology requirements, although additional testing or modifications at the facilities may be required. -27- The Company believes that the ultimate resolution of these matters should not have a material adverse effect on the Company's business or results of operations. Employees As of December 31, 2003, the Company employed approximately 2,600 people, 700 of whom held either sales-related, operating or administrative positions and 1,900 of whom were employed in production. Approximately 50 hourly employees at the Montreal plant are unionized and subject to a collective bargaining agreement which expires on November 30, 2006. Approximately 170 hourly employees at the Marysville plant are unionized and subject to a collective bargaining agreement which expires on April 29, 2007. Approximately 170 hourly employees at the Menasha plant are unionized and subject to a collective bargaining agreement which expires on July 31, 2008. Finally, approximately 40 hourly employees at the Carbondale plant are unionized and subject to a collective bargaining agreement which expires on March 4, 2006. The Company has never experienced a work stoppage and considers its employee relations to be satisfactory. Description of Property The following table sets forth the principal manufacturing and distribution facilities owned or leased by the Company as of December 31, 2003:
Location Use Products Area(sq. ft Title United States: Bradenton, Florida Corporate Offices N/A 20,800 Owned Brighton, Colorado Manufacturing Pressure-sensitive carton sealing tapes 211,000 Leased to 1/1/14 Carbondale, Illinois Manufacturing Pressure-sensitive tapes electrical/electronic 193,500 Leased for $1 per acre per year until 2092 with a 99-year extension option Cerritos, California Distribution Tape/Packaging products 59,400 Leased to 11/15/04 Columbia, South Carolina Manufacturing and Carton sealing tape, Distribution Pressure-sensitive masking and duct tapes 490,000 Owned Cumming, Georgia Distribution Packaging products 172,000 Leased to 8/31/05 w/option to renew to 2010 and option to purchase Danville, Virginia Manufacturing and Carton sealing tape, Distribution STRETCHFLEX(R) and acrylic coating 281,000 Owned Denver, Colorado Warehouse Storage for finished goods 100,000 Leased on 6-month basis Green Bay, Wisconsin Closed N/A 156,000 Owned -28- Marysville, Michigan Manufacturing High performance masking, filament tape, and specialty pressure-sensitive tape 250,000 Owned Menasha, Wisconsin Manufacturing Water-activated adhesive tapes 195,000 Owned Ontario, California Warehouse and Leased to 8/31/04 Distribution Packaging products 45,630 w/option to renew Richmond, Kentucky Manufacturing and Carton sealing, masking Distribution and reinforced tape 200,000 Owned Tremonton, Utah Manufacturing and EXLFILM(TM), Distribution STRETCHFLEX(R) 115,000 Owned Canada: St. Laurent, Quebec Corporate Headquarters N/A 20,000 Leased to 6/30/05 St. Laurent, Quebec Slitting, Warehouse Carton sealing tape 40,000 Leased to 6/30/05 St. Laurent, Quebec Manufacturing and Distribution Carton sealing tape 25,000 Owned Truro, Nova Scotia Manufacturing Woven products, EXLFILM(TM) 260,000 Owned Edmundston, New Brunswick Closed N/A 65,000 Owned and for sale Mexico: Piedras Negras, Mexico Manufacturing FIBCs 161,026 Leased to 4/30/06 Portugal: Barcelos, Portugal Manufacturing and Distribution Exlfilm(TM) 35,500 Owned
Item 5. Selected Consolidated Financial Information 5.1 Annual Information The table set forth below provides a summary of the financial data for the three most recently completed financial years: -29- Three-year data (in accordance with Canadian GAAP)
($ in thousands except per share amounts) For the years ended December 31 2003 2002 2001 US$ CDN$ US$ CDN$ US$ CDN$ Total Revenue $621,321 $873,018 $601,575 $944,714 $594,905 $921,448 Total Net Income/Loss 18,178 25,542 (54,454) (85,517) (12,242) (18,962) Per share: Basic 0.51 0.71 (1.66) (2.61) (0.43) (0.67) Diluted 0.50 0.71 (1.66) (2.61) (0.43) (0.67) Total Assets 739,245 963,458 703,344 1,110,510 801,989 1,279,654 Total Long-term liabilities 235,596 307,052 291,494 460,240 380,036 606,385 Cash dividends declared per share N/A N/A N/A N/A N/A N/A
A discussion of the factors affecting the comparability of the above data and changes in accounting policies is contained in the Company's 2003 Annual Report and is attached to Form 40-F as Exhibit 5, to which this Annual Information Form is attached as Exhibit 1. 5.2 Dividends The Company has no written policy for the payment of dividends. So long as the payment does not result in a violation of the Company's covenants with its lenders and noteholders, there are no other restrictions that would prevent the Company from paying dividends. However, the Company has not paid dividends in the past three years and has no current intention to pay dividends in the upcoming fiscal year. Item 6. Management's Discussion and Analysis Management's Discussion and Analysis is contained in the Company's 2003 Annual Report, Pages 4 to 22, and is attached to Form 40-F as Exhibit 5, to which this Annual Information Form is attached as Exhibit 1. Item 7. Market for Securities The Company's common shares are currently traded on the New York Stock Exchange and the Toronto Stock Exchange under the symbol "ITP". The common shares are not traded on any other exchanges. Item 8. Directors and Officers The following table sets forth the name, residence, position, and principal occupations for the last five (5) years of each Director of the Company as of the date hereof, as well as the date upon which each Director was first elected. Each Director serves for a term of one year and may be nominated for re-election at the following annual shareholders' meeting. The next annual shareholders' meeting is to be held on June 2, 2004, at which time the current term of each Director will expire. -30-
Name of Position and Occupation First Year as Municipality of Residence Director Melbourne F. Yull Director, Chairman of the Board Sarasota, Florida CEO of the Company 1989 Michael L. Richards Director Westmount, Quebec Attorney, Senior Partner, Stikeman Elliott LLP 1989 Ben J. Davenport, Jr. Director Chatham, Virginia CEO, Chatham Oil Company; Chairman & CEO, First Piedmont Corporation 1994 L. Robbie Shaw Director Halifax, Nova Scotia Former Vice President, Nova Scotia Community College 1994 Gordon R. Cunningham Director Toronto, Ontario President, Cumberland Asset Management Corp. 1998 J. Spencer Lanthier Director Toronto, Ontario Former Chairman & CEO, KPMG Canada from 1993 to 1999 (Since Retired) 2001 Thomas E. Costello Director Longboat Key, Florida Former CEO of xpedx , a subsidiary of International Paper Company from 1991 to 2002 (Since Retired) 2002
The following table sets forth the name, residence and position of each executive officer of the Company as of the date hereof:
Name and Municipality of Residence Position and Occupation Melbourne F. Yull Sarasota, Florida Chief Executive Officer 1992 Andrew M. Archibald, C.A. Chief Financial Officer, Secretary, Sarasota, Florida Vice President, Administration 1995 Burgess H. Hildreth Sarasota, Florida Vice President, Human Resources 1998 -31- James A. Jackson Sarasota, Florida Vice President, Chief Information Officer 1998 H. Dale McSween Sarasota, Florida President, Distribution Products 1999 Gregory A. Yull Sarasota, Florida President-Film Products 1999 Jim Bob Carpenter Sarasota, Florida President, Woven Products, Procurement 1999 Duncan R. Yull Vice President, Sales, Distribution Sarasota, Florida Products 1999 Piero Greco Laval, Quebec Treasurer 2002 Victor DiTommaso, CPA Sarasota, Florida Vice President, Finance 2003 Mark J. Dougherty President, Retail 2004 Sarasota, Florida
The principal occupations of each executive officer for the last five (5) years is as follows: Melbourne F. Yull, established the business and has been the Company's Chief Executive Officer since 1992. Andrew M. Archibald has been Chief Financial Officer, Secretary, and Vice President Administration since May 1995. He was Vice President Finance from May, 1995, to January 15, 1999. Prior thereto he served as Vice-President, Finance and Secretary of the Company since 1989. Burgess H. Hildreth has been Vice President, Human Resources, since October, 1998. Prior to that he was the Vice President Administration of Anchor Continental, Inc. since June, 1996. James A. Jackson has been Vice-President, Chief Information Officer, since September 1, 1998. Prior to that he was the Managing Partner of Spectrum Information Management Systems since 1996. H. Dale McSween has been President, Distribution Products, since December, 1999. Prior thereto he served as Executive Vice-President and Chief Operating Officer from May 1995. Gregory A. Yull, a son of Melbourne F. Yull, has been President, Film Products, since June, 1999. Prior to that he was Products Manager - Films since 1995. -32- Jim Bob Carpenter has been President, Woven Products, Procurement, since May 1, 1999. Prior to that he was the General Manager of Polypropylene Fina Oil & Chemical Co. Duncan R. Yull, a son of Melbourne F. Yull, has been Vice President Sales, Distribution Products, since December, 1999. Prior to that he was a Regional Sales Manager for the Company until 1997 and was the Director of Sales until December, 1999. Piero Greco has been with the Company since January 2001 and was elected Treasurer on October 21, 2002. Prior to that he was Treasury Manager of Bombardier Inc. since October 1997. Victor DiTommaso was elected Vice President, Finance on April 24, 2003. Prior to that he was the Senior Vice President of Information Technology since July, 2000, of Walls Industries, Inc. and Senior Vice President of Finance since July, 1998. Mark J. "Doc" Dougherty was appointed President, Retail in February, 2004. Prior to that, he was Executive Vice President and General Manager of North America for U.S. Smokeless Tobacco Co. in 2003. Prior to that he was President and Managing Director of Crossmark, Inc., Global Division, during 2001 and 2002. Prior to that he served in various executive management capacities for PepsiCo. from January 1993 through December 2000. As of April 26, 2004, the directors and executive officers of the Company as a group owned beneficially, directly or indirectly, or exercise control or direction over, 833,359 common shares, representing approximately 2.03% of all common shares outstanding. In addition, the directors and executive officers as a group have 2,241,937 options to purchase common shares of the Company. The Board of Directors has established three committees, the Audit Committee, the Compensation Committee, and the Nominating & Governance Committee to facilitate the carrying out of its duties and responsibilities and to meet applicable statutory requirements. The Toronto Stock Exchange Guidelines for Corporate Governance (the "Guidelines") recommend that the Audit Committee be made up of outside directors only and that other board committees should be comprised generally of outside directors, a majority of whom should be unrelated directors. The Audit Committee complies with the Guidelines as it is composed of four outside directors, namely L. Robbie Shaw, Gordon R. Cunningham, Thomas E. Costello, and J. Spencer Lanthier. The Compensation Committee, as presently constituted, has one related director and three unrelated directors, namely Michael L. Richards, L. Robbie Shaw, Ben J. Davenport, Jr., and Gordon R. Cunningham. Mr. Richards is deemed to be a related director, inasmuch as the law firm of Stikeman Elliott LLP, of which he is a senior partner, provides legal services to the Company on a regular basis. The Company believes, however, that its relationship with Stikeman Elliott LLP does not inhibit Mr. Richards' ability to act impartially, nor his ability to act independently of the views of the management of the Company. The Nominating & Governance Committee is composed of all of the members of the Board, the majority of whom are unrelated directors. -33- The following is a summary description of the Committees of the Board of Directors and their mandates. Additional information regarding the Committees is contained in Management's Proxy Circular which is attached to Form 40-F as Exhibit 6, to which this Annual Information Form is attached as Exhibit 1. Audit Committee: The mandate of the Audit Committee is to review the annual financial statements of the Company and to make recommendations to the Board of Directors with respect thereto. The Audit Committee also reviews the nature and scope of the annual audit as proposed by the external auditors and management and, with the external auditors and management, the adequacy of the internal accounting control procedures and systems within the Company. In addition, in accordance with its charter, the Audit Committee now has the sole authority to make recommendations to the Shareholders regarding the appointment or replacement of the Company's external auditors and shall approve their remuneration. The Audit Committee shall also require the external auditors to provide a report at least annually setting forth the auditor's internal quality-control procedures and all relationships between the external auditors and the Company, if any. The Audit Committee may consult with management on these issues, but it may not delegate its responsibility therefor. The Audit Committee has the authority to retain legal, accounting or other consultants for advice if it deems it to be necessary. The Audit Committee also approves all audit engagement fees and terms of all significant permissible non-audit services provided by the independent auditors. Compensation Committee: The Committee is responsible for the evaluation and approval of the director and officer compensation policies, plans and programs of the Company. The Compensation Committee is responsible for conducting annual reviews and making recommendations to the Board of Directors with respect to the compensation, including the granting of stock options, of all directors, officers, and key executives of the Company. The Chairman and Chief Executive Officer does not participate in the Board of Directors' deliberations concerning the recommendations on his compensation. Nominating & Governance Committee: This Committee's charter states that the Committee is to: (i) assess on an annual basis the effectiveness of the Board as a whole as well as periodically evaluate the contribution of individual members of the Board; (ii) review, on a periodic basis, the size and composition of the Board and ensure that an appropriate number of unrelated directors sit on the Board; (iii) identify individuals qualified to become members of the Board as may be required and recommend to the Board new nominees for appointment; (iv) provide appropriate orientation to any new members of the Board; (v) recommend to the Board corporate governance guidelines and ensure the sufficiency of such guidelines on a periodic basis; and -34- (vi) review and advise the Board at least annually as to corporate governance issues. Item 9. Additional Information The Company, upon request to its Secretary, will provide to any person or entity: (1) when the securities of the Company are in the course of a distribution under a preliminary short form prospectus or a short form prospectus; (a) one copy of the Annual Information Form of the Company, together with one copy of any document, or the pertinent pages of any document, incorporated by reference in the Annual Information Form; (b) one copy of the consolidated financial statements of the Company for its most recently completed financial year for which financial statements have been filed together with the accompanying report of the auditor and one copy of the most recent unaudited interim financial statements of the Company that have been filed, if any, for any period after the end of its most recently completed financial year; (c) one copy of the information circular of the Company in respect of its most recent annual meeting of shareholders that involved the election of directors or one copy of any annual filing prepared instead of that information circular, as appropriate; and (d) one copy of any other documents that are incorporated by reference into the preliminary short form prospectus or the short form prospectus and are not required to be provided under clauses (a), (b) or (c); or (2) at any other time, one copy of any documents referred to in clauses (1)(a), (b) and (c) provided that the Company may require the payment of a reasonable charge if the request is made by a person or entity who is not a security holder of the Company. Additional information, including directors' and officers' remuneration and indebtedness, principal holders of the Company's securities, options to purchase securities, and interests of insiders in material transactions, if applicable, is contained in the Company's Notice of Annual and Special Meeting of Shareholders prepared for its June 2, 2004, annual and special meeting of shareholders. Additional financial information is provided in the Company's Consolidated Financial Statements for the fiscal year ended December 31, 2003. -35- Exhibit 2 CONSENT OF INDEPENDENT CHARTERED ACCOUNTANTS We consent to the incorporation of our report dated February 16, 2004, on our audits of the consolidated financial statements of Intertape Polymer Group Inc. as at December 31, 2003 and 2002 and for each of the years in the three- year period ended December 31, 2003, which report is included in this Annual Report on Form 40-F. /s/Raymond Chabot Grant Thornton Chartered Accountants General Partnership Montreal, Canada May 3, 2004 -36- Exhibit 3 CERTIFICATIONS I, Melbourne F. Yull, Chairman of the Board and Chief Executive Officer of Intertape Polymer Group Inc., certify that: 1. I have reviewed this annual report on Form 40-F of Intertape Polymer Group Inc.; 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 Registrant as of, and for, the periods presented in this annual report; 4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures [as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)] and internal control over financial reporting [as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)] for the Registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this annual 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; and d. Disclosed in this annual report any change in the Registrant's internal control over financial reporting that occurred during the period covered by this annual report that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting. -37- 5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent function): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. Date: May 3, 2004 /s/Melbourne F. Yull Melbourne F. Yull, Chairman of the Board and Chief Executive Officer -38- ______________________________________________________________________________ I, Andrew M. Archibald, C.A., Chief Financial Officer, Secretary, and Vice President, Administration of Intertape Polymer Group Inc., certify that: 1. I have reviewed this annual report on Form 40-F of Intertape Polymer Group Inc.; 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 Registrant as of, and for, the periods presented in this annual report; 4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures [as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)] and internal control over financial reporting [as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)] for the Registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this annual 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; and d. Disclosed in this annual report any change in the Registrant's internal control over financial reporting that occurred during the period covered by this annual report that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting. 5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent function): -39- a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. Date: May 3, 2004 /s/Andrew M. Archibald Andrew M. Archibald, C.A., Chief Financial Officer, Secretary and Vice President, Administration -40- Exhibit 4 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ENACTED PURSUANT TO SECTION 906 OF THE U.S. SARBANES-OXLEY ACT OF 2002 The undersigned, Melbourne F. Yull, Chairman of the Board and Chief Executive Officer, and Andrew M. Archibald, C.A., Chief Financial Officer, Secretary, and Vice President Administration, hereby certify that this report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 and that the information contained in this report fairly presents in all material respects the financial condition and results of operations of Intertape Polymer Group Inc. as of and for the periods presented in this report. Date: May 3, 2004 /s/Melbourne F. Yull Melbourne F. Yull, Chairman of the Board and Chief Executive Officer Date: May 3, 2004 /s/Andrew M. Archibald Andrew M. Archibald, C.A., Chief Financial Officer, Secretary and Vice President, Administration -41- CERTIFIED EXTRACT OF RESOLUTIONS OF THE BOARD OF DIRECTOR OF INTERTAPE POLYMER GROUP INC. ADOPTED ON APRIL 26TH, 2004 "APPROVAL OF ANNUAL INFORMATION FORM WHEREAS the Chairman presented to the meeting a draft of an annual information form of the Corporation to be dated May 3, 2004. WHEREAS the Chairman informed the meeting that the Corporation proposes to file the annual information form with the securities commissions and other appropriate regulatory authorities in each of the provinces and territories of Canada in order to permit the Corporation to be able to qualify its securities for distribution through the use of a short form prospectus under National Instrument 44-101 - Short Form Prospectus Distributions. BE IT RESOLVED THAT: 1. the annual information form ("AIF") of the Corporation to be dated May 3, 2004, substantially in the form of the document presented to this meeting, be and the same is hereby approved, subject to such additions, deletions and changes therein as may be consented to by any one director or officer of the Corporation; 2. the Corporation be and it is hereby authorized to file the English and French (when and if available) language versions of the AIF, as the same may be amended from time to time, with the securities commissions and appropriate regulatory authorities in each of the provinces and territories of Canada in order to qualify the Corporation as an eligible issuer under National Instrument 44-101 - Short Form Prospectus Distributions; 3. any one director or officer of the Corporation be, and he is, hereby authorized and directed, for and on behalf of the Corporation, to file or cause to be filed the English and French (when and if available) language versions of the AIF under the securities legislation of any of the provinces and territories of Canada and to file such other documents and to do such other things as he may, in his sole discretion, consider necessary, appropriate or useful in connection with, or to carry out the provisions of this resolution; 4. the Corporation file with the United States Securities and Exchange Commission an Annual Report on Form 40-F (the "Form 40-F") covering the Corporation's fiscal year ended December 31, 2003, such Form 40-F to be substantially in the form of the draft presented to the Board of Directors, together with such changes or modifications as may be deemed necessary or appropriate by any director or officer of the Corporation with and upon the advice of counsel, and any director or officer of the Corporation be, and he is, hereby authorized, empowered and directed to execute in the name and on behalf of the Corporation, to procure all other necessary signatures to, and to file with the United States Securities and Exchange Commission, the Form 40-F and any all amendments or supplements thereto; 5. any director or officer of the Corporation be, and he is, hereby authorized and directed for and on behalf of the Corporation, to execute, whether under the corporate seal of the Corporation or otherwise, and to deliver all such certificates, undertakings and other documents and to do all such other acts and things as he may, in his sole discretion, consider necessary or advisable in connection with or to carry out the provisions of this resolution." I, the undersigned, Andrew M. Archibald, C.A., Chief Financial Officer, Secretary, Vice President, Administration of Intertape Polymer Group Inc. hereby certify that the foregoing resolutions were duly adopted by the Board of Directors of Intertape Polymer Group Inc. on April 26, 2004 and that the said resolutions are, as of the date hereof, in full force and effect and have not been amended. IN WITNESS WHEREOF, I HAVE SIGNED in Bradenton, Florida, this 3rd day of May, 2004. /s/Andrew M. Archibald Andrew M. Archibald, C.A. Chief Financial Officer, Secretary, Vice President, Administration EX-5 2 ipgannualreport2003.txt 2003 ANNUAL REPORT 2003 ANNUAL REPORT INTERTAPE POLYMER GROUP INC. IPG CORPORATE PROFILE Intertape Polymer Group Inc. (IPG) is an acknowledged leader in the packaging industry. Leveraging its advanced manufacturing technologies, extensive R&D capabilities and a comprehensive strategic acquisition program, the Company believes it has assembled the broadest and deepest range of products in the industry. IPG is widely-recognized for its development and manufacture of specialized polyolefin plastic and paper-based packaging products, as well as complementary packaging systems for industrial and retail use. Additionally, IPG is a woven and flexible intermediate bulk container (FIBC) manufacturer. Its performance products, including tapes and cloths, are designed for demanding aerospace, automotive and industrial applications and are sold to a broad range of industrial/specialty distributors, retail stores and large end- users in diverse industries. Through its innovative regional distribution center concept, IPG offers customers an extensive range of products geared to lower their transaction costs and increase inventory turns. This marketing advantage is unmatched in the industry, and has helped IPG establish a market position that clearly differentiates it from its competitors. Established in 1981 and headquartered in Montreal, Quebec and Sarasota/Bradenton, Florida, IPG employs approximately 2,600 employees with operations in 16 locations, including 12 manufacturing facilities in North America and one in Europe. Intertape Polymer Group Inc. is a publicly traded company with its common shares listed on the New York Stock Exchange and the Toronto Stock Exchange under the stock symbol "ITP." TABLE OF CONTENTS Message to Shareholders............................................... 2 Management's Discussion & Analysis: Financial Highlights.......................................... 4 Consolidated Quarterly Statements of Earnings................. 6 Adjusted Consolidated Earnings................................ 8 Our Business.................................................. 9 Results of Operations.........................................10 Off-Balance Sheet Arrangements................................15 Liquidity and Capital Resources...............................15 Critical Accounting Estimates.................................20 Changes in Accounting Policies................................20 Impact of Accounting Pronouncements Not Yet Implemented...........................................21 Subsequent Event..............................................21 Management's Responsibility for Financial Statements..................23 Auditors' Report .....................................................24 Comments by Auditors..................................................24 Financial Statements: Consolidated Earnings ........................................25 Consolidated Retained Earnings ...............................25 Consolidated Cash Flows.......................................26 Consolidated Balance Sheets...................................27 Notes to Consolidated Financial Statements..............28 to 50 Intertape Polymer Group Locations.....................................51 Other Information.....................................................52 CORPORATE HEADQUARTERS 110E Montee de Liesse Montreal, Quebec Canada, H4T 1N4 Investor Relations Tel: 866-202-4713 Fax: 941-727-3798 Web: www.intertapepolymer.com E-mail: itp$info@intertapeipg.com FORWARD-LOOKING STATEMENTS Certain statements and information set forth in this Annual Report, including statements regarding the business and anticipated financial performance of the Company, constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Act of 1934, as amended. Forward-looking statements are subject to the safe harbor created by the Federal Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements include, but are not limited to, statements regarding the Company's cost savings from its consolidation efforts, projected sales and earnings, the success of new products, the Company's product mix, and our future financing plans. Forward-looking statements can be identified in some cases by terms such as "may", "should", "could", "intends", "anticipates", "potential", and similar expressions intended to identify forward-looking statements. These statements, which reflect our current views regarding future events, are based on assumptions and subject to risks and uncertainties. Among the factors that could cause actual results to differ from the forward-looking statements include, but are not limited to, inflation and general economic conditions, changes in the level of demand for the Company's products, competitive pricing pressures, general market trends, failure to achieve planned cost savings associated with consolidation, restrictions and limitations placed on the Company by its debt instruments, international risks including exchange rate fluctuations, trade disruptions, and political instability of foreign markets that we produce in or purchase materials from, and the availability and price of raw materials. Additional discussion of factors that could cause actual results to differ materially from management's projections, estimates and expectations is contained in the Company's SEC filings. These and other factors should be considered carefully and undue reliance should not be placed on forward- looking statements. The Company undertakes no duty to update its forward- looking statements, including its earnings outlook, other than as required under applicable law. 1 MESSAGE TO SHAREHOLDERS Dear Shareholders, The year saw significant improvements for the operations and financial results of the Intertape Polymer Group in 2003. The progress reflects a rapid and accurate response to the changed market conditions we have been facing over the past few years. Given the lackluster performance of the economy in our sectors, our focus was on things that are within our control. We concentrated our efforts on: 1) growing revenues by developing new products and strengthening relationships with some of our key customers, 2) reducing costs, by the optimization of asset usage, productivity increases and waste reduction, and 3) reducing debt. The increase in revenue of 3.3%, compared to 2002, was driven mainly by the Company's sales initiatives, with little help from the economy or foreign exchange rate movements. Our initiatives also had significant impacts in the areas of cost and debt reductions. Notwithstanding raw material cost increases during the year, which we were able to recapture through timely price increases, we realized a 10.1% increase in gross profits. This was reflected in a higher gross margin that went from 21.0% to 22.4% in 2003. As a result of debt reduction during the year, our financial expenses were down 13.1% compared to 2002. The resulting impact on the bottom line in earnings per share (diluted) for 2003 of $0.50, compared to a loss of $1.66 per share (diluted) in 2002. When adjusted for one-time charges, the improvement was substantial as adjusted earnings per share were $0.56 (diluted) in 2003, versus $0.31 per share (diluted) in 2002. We continue to develop products that complement our existing product lines while meeting the needs of our customers. New products were introduced across all product lines during the year. One product that we are particularly proud of is our new Novathene(TM) Haymaster System. This is a unique new woven- coated fabric that is used to protect harvested hay from the ravages of wind, rain and sun. It has been well received and could have a dramatic impact on the American agriculture industry. We also introduced a new fabric structure that is now used to cover outdoor practice fields for professional sports. The Company also began to see benefits from our Merchant Economic Advantage Program developed in 2001. This program is targeted to our industrial channel distributors and involves increased collaboration with them in all processes from sales to supply chain management. Our broad product offering differentiates us from our competitors and enables IPG to provide our customers an opportunity to increase their profits. The Company also increased its presence in Europe. In mid-year we purchased our partner's interest in Fibope, a joint venture in Portugal. It was felt that it would be beneficial to have full control of this platform in order for us to fully control future penetration of the European market. Late in the year we announced the signing of several agreements with tesa tape, inc., of which one is to supply tesa with duct tape and masking tape. We also obtained access to several new major retail accounts in the process. Another benefit of the transaction is that the production of these tapes is being done in our Columbia, South Carolina plant, allowing us to utilize existing capacity while having to purchase only a minimal amount of assets. Late in 2002, the Company announced a program of cost reduction initiatives that once implemented would result in annual cost savings of $17.5 million. It was expected at the time that it would take about two years to implement all of these changes and we are on track to do just that. The first major step was taken with the consolidation of our Flexible Intermediate Bulk Container operations in Mexico in late 2002. Early in 2003, we announced the consolidation of our regional distribution centers into a new regional distribution facility to be built in Danville, Virginia, which would not only reduce costs, but also enhance our supply chain capabilities. This facility is now built and running as of January 2004. We also announced the consolidation of our water-activated tape operations into one plant in Menasha, Wisconsin. This was completed at the end of the year. 2 Finally, with respect to debt and reduction, we reduced our total debt by $55.4 million during the year, using the net proceeds from a common share issue in September and our internally generated free cash flow. This brings the total debt reduction over the past three years to $147.6 million. Our debt to equity ratio now stands at 0.7. We are pleased with the improvement, and will continue to make further reductions. Looking forward, we intend to focus on the three key elements of revenue growth, cost reductions and debt reduction. In 2004, we are targeting revenue growth of about 10%. We expect this increase in sales to come, in part, from the introduction of new products and further strengthening of our customer relationships. For example, building on the success of our Haymaster(R) product, we have developed a product called Aquamaster(TM) that can be used to line ponds and canals. In particular, this can be used to line irrigation canals to control soil erosion, an area of environmental protection where governments are becoming much more demanding. Additional sales growth will come from the acquisition of tesa tape, inc. which will help us to further penetrate the retail market and should add about $22.0 million of sales in 2004. We have a number of new products planned for the retail sector and other initiatives underway with respect to packaging, point-of-sale displays and merchandising for our retail products that we believe will help increase our share in this part of the market. As well, we expect to generate better European revenue growth in 2004. Having assumed full control of Fibope, we will be able to maximize growth opportunities for our advanced technology in shrink films. Fibope also provides us with a solid platform to manufacture and distribute our Company's pressure-sensitive performance products in the European market. From a cost perspective, we expect to realize the remaining $6.0 million of cost reduction from our $17.5 million program announced in 2002. An additional $3.0 million in interest expense savings because of the additional debt reduction achieved in 2003, and about $2.5 million as a result of the consolidation of our water-activated tape operations should also be realized. In total, this represents an additional $11.5 million in savings for 2004 above the initiatives that have already been implemented. Our search for ongoing ways to reduce costs permeates everything we do. Finally, our debt reduction target for the year is $25.0 million to $30.0 million, which we hope to achieve by generating free cash flow. I would like to thank our employees for their efforts and positive attitude through this challenging time as well as our Board members for their guidance. We look forward to further progress in 2004. /s/ Melbourne F. Yull Melbourne F. Yull Chairman and Chief Executive Officer February 16, 2004 3 February 16, 2004 This Management's Discussion and Analysis ("MD&A") supplements the consolidated financial statements and related notes for the year ended December 31, 2003. Except where otherwise indicated, all financial information reflected herein is prepared in accordance with Canadian generally accepted accounting principles ("GAAP") and is expressed in US dollars. FINANCIAL HIGHLIGHTS (In thousands of U.S. dollars except per share data, selected ratios and trading volume information.)
2003 2002 2001 ________________________________________________________________________________ Operations Consolidated sales $621,321 $601,575 $594,905 Net earnings (loss) Cdn GAAP 18,178 (54,454) (12,242) Net earnings (loss) US GAAP 18,178 (54,454) (12,242) Cash flows from operations before changes in non-cash working capital items 38,137 30,281 13,874 ________________________________________________________________________________ Per Common Share Net earnings (loss) Cdn GAAP - basic 0.51 (1.66) (0.43) Net earnings (loss) US GAAP - basic 0.51 (1.66) (0.43) Net earnings (loss) Cdn GAAP - diluted 0.50 (1.66) (0.43) Net earnings (loss) US GAAP - diluted 0.50 (1.66) (0.43) Cash flows from operations before changes in non-cash working capital items 0.93 0.92 0.49 Book value Cdn GAAP 9.22 8.67 10.32 Book value US GAAP 9.05 8.47 10.20 ________________________________________________________________________________ Financial Position Working capital 68,725 61,240 68,075 Total assets Cdn GAAP 739,245 703,344 801,989 Total assets US GAAP 745,902 705,187 802,901 Total long-term debt 251,991 312,766 362,973 Shareholders' equity Cdn GAAP 377,510 293,093 294,090 Shareholders' equity US GAAP 370,434 286,491 290,635 ________________________________________________________________________________ Selected Ratios Working capital 1.54 1.52 1.53 Debt/capital employed Cdn GAAP 0.40 0.52 0.55 Debt/capital employed US GAAP 0.40 0.52 0.56 Return on equity Cdn GAAP 4.8% (18.6)% (4.2)% Return on equity US GAAP 4.9% (19.0)% (4.2)% ________________________________________________________________________________ 4 2003 2002 2001 ________________________________________________________________________________ Stock Information Weighted average shares outstanding (Cdn GAAP) - basic + 35,957 32,829 28,266 Weighted average shares outstanding (US GAAP) - basic + 35,957 32,829 28,266 Weighted average shares outstanding (US GAAP) - diluted + 36,052 32,829 28,266 Weighted average shares outstanding (Cdn GAAP) - diluted + 36,052 32,829 28,266 Shares outstanding as at December 31 40,945 33,821 28,506 ________________________________________________________________________________ The Toronto Stock Exchange (CA$) Market price as at December 31 16.49 6.49 13.25 High: 52 weeks 16.51 20.08 24.00 Low: 52 weeks 4.50 5.50 10.50 Volume: 52 weeks+ 16,542 14,651 20,490 ________________________________________________________________________________ New York Stock Exchange Market price as at December 31 12.73 4.12 8.30 High: 52 weeks 12.73 12.80 15.60 Low: 52 weeks 3.10 3.60 7.00 Volume: 52 weeks+ 14,831 13,705 13,695 ________________________________________________________________________________ The Toronto Stock Exchange(CA$) High Low Close ADV* Q1 8.78 5.30 5.79 73,344 Q2 9.25 4.50 8.00 54,432 Q3 10.54 7.85 9.66 40,700 Q4 16.51 9.69 16.49 92,623 ________________________________________________________________________________ New York Stock Exchange High Low Close ADV* Q1 5.69 3.57 3.90 59,346 Q2 6.82 3.10 5.95 90,810 Q3 7.69 5.65 7.20 42,391 Q4 12.73 7.15 12.73 43,395
* Average daily volume +In thousands 5 CONSOLIDATED QUARTERLY STATEMENTS OF EARNINGS (In thousands of US dollars, except per share amounts)
1st Quarter 2nd Quarter _________________________________ _____________________________________ 2003 2002 2001 2003 2002 2001 _________________________________ _____________________________________ $ $ $ $ $ $ Sales 153,592 146,737 158,863 150,249 153,657 141,265 Cost of sales 119,793 113,321 120,089 116,166 119,713 114,549 ___________________________________________________________ _____________________________________ Gross Profit 33,799 33,416 38,774 34,083 33,944 26,716 Selling, general and administrative expenses 21,982 20,299 21,858 20,830 20,454 20,090 Amortization of goodwill 1,743 1,797 Impairment of goodwill Research and development 894 967 1,168 1,086 796 1,198 Financial expenses 7,700 8,983 8,436 7,825 7,872 7,736 Manufacturing facility closure costs ___________________________________________________________ ____________________________________ 30,576 30,249 33,205 29,741 29,122 30,821 Earnings(loss)before income taxes 3,223 3,167 5,569 4,342 4,822 (4,105) Income taxes (recovery) 322 348 1,392 439 534 (1,392) ___________________________________________________________ ____________________________________ Net earnings (loss) 2,901 2,819 4,177 3,903 4,288 (2,713) ___________________________________________________________ ____________________________________ Earnings(loss)per share Cdn GAAP - Basic - US $ 0.09 0.09 0.15 0.12 0.13 (0.10) Cdn GAAP - Diluted - US $ 0.09 0.09 0.15 0.12 0.13 (0.10) US GAAP - Basic - US $ 0.09 0.09 0.15 0.12 0.13 (0.10) US GAAP - Diluted - US $ 0.09 0.09 0.15 0.12 0.13 (0.10) ___________________________________________________________ ____________________________________ Average number of shares outstanding Cdn GAAP - Basic 33,821,074 30,155,360 27,983,417 33,832,527 33,622,896 28,119,535 Cdn GAAP - Diluted 33,821,497 30,505,692 28,675,701 33,912,232 34,249,454 28,119,535 US GAAP -Basic 33,821,074 30,155,360 27,983,417 33,832,527 33,622,896 28,119,535 US GAAP - Diluted 33,821,497 30,505,692 28,675,701 33,912,232 34,249,454 28,119,535 ___________________________________________________________ ____________________________________
6
3rd Quarter 4th Quarter ________________________________ _____________________________________ 2003 2002 2001 2003 2002 2001 ________________________________ _____________________________________ $ $ $ $ $ $ Sales 159,798 149,920 148,602 157,682 151,261 146,175 Cost of sales 123,489 120,632 122,544 122,975 121,764 118,906 ____________________________________________________________ _____________________________________ Gross Profit 36,309 29,288 26,058 34,707 29,497 27,269 Selling, general and administrative expenses 22,264 21,109 27,837 24,973 23,462 21,558 Amortization of goodwill 1,757 1,717 Impairment of goodwill 70,000 Research and development 1,080 926 884 212 480 932 Financial expenses 7,409 8,297 13,212 5,587 7,621 9,527 Manufacturing facility closure costs 2,100 3,005 ____________________________________________________________ _____________________________________ 30,753 2,432 43,690 33,777 101,563 33,734 Earnings(loss)before income taxes 5,556 (3,144) (17,632) 930 (72,066) (6,465) Income taxes (recovery) (643) (357) (4,937) (4,244) (13,292) (5,455) ____________________________________________________________ _____________________________________ Net earnings (loss) 6,199 (2,787) (12,695) 5,174 (58,774) (1,010) ____________________________________________________________ _____________________________________ Earnings(loss)per share Cdn GAAP - Basic - US $ 0.18 (0.08) (0.45) 0.13 (1.74) (O.03) Cdn GAAP - Diluted - US $ 0.18 (0.08) (0.45) 0.13 (1.74) (0.03) US GAAP - Basic - US $ 0.18 (0.08) (0.45) 0.13 (1.74) (0.03) US GAAP - Diluted - US $ 0.18 (0.08) (0.45) 0.13 (1.74) (0.03) ____________________________________________________________ ____________________________________ Average number of shares outstanding Cdn GAAP - Basic 35,302,174 33,701,307 28,346,102 40,870,426 33,821,074 28,496,884 Cdn GAAP - Diluted 35,397,800 33,701,307 28,346,102 41,225,776 33,821,074 28,496,884 US GAAP -Basic 35,302,174 33,701,307 28,346,102 40,870,426 33,821,074 28,496,884 US GAAP - Diluted 35,397,800 33,701,307 28,346,102 41,225,776 33,821,074 28,496,884 ____________________________________________________________ ____________________________________
7 ADJUSTED CONSOLIDATED EARNINGS Adjustments for non-recurring items and for the change in accounting principle related to the amortization of goodwill* Years Ended December 31, (In millions of US dollars, except per share amounts)
As Reported 2003 2002 2001 __________________________________________ ________ ________ ________ $ $ $ Sales 621.3 601.6 594.9 Cost of sales 482.4 475.4 476.1 __________________________________________ ________ ________ ________ Gross Profit 138.9 126.2 118.8 Selling, general and administrative expenses 90.0 85.3 91.3 Amortization of goodwill 7.0 Impairment of goodwill 70.0 Research and development 3.3 3.2 4.2 Financial expenses 28.5 32.8 38.9 Manufacturing facility closure costs 3.0 2.1 __________________________________________ ________ ________ ________ 124.8 193.4 141.4 Earnings (loss) before income taxes 14.1 (67.2) (22.6) Income taxes (recovery) (4.1) (12.7) (10.4) __________________________________________ ________ ________ ________ Net earnings (loss) 18.2 (54.5) (12.2) __________________________________________ ________ ________ ________ Earnings (loss) per share - As Reported 2003 2002 2001 __________________________________________ ________ ________ ________ Basic 0.51 (1.66) (0.43) Diluted 0.50 (1.66) (0.43) Adjustments for non-recurring items and amortization of goodwill 2003 2002 2001 ___________________________________________ ________ ________ ________ Gross Profit Items Implementation of RDCs 2.3 Additional Reserves Asset writedowns 1.0 Inventory writedowns 3.2 Severance 1.2 ___________________________________________ ________ ________ ________ 7.7 SG&A Items Asset writedowns 0.8 Reserves for bad debts 7.0 Severance 3.0 ___________________________________________ ________ ________ ________ 10.8 Amortization of Goodwill* 7.0 Impairment of Goodwill 70.0 Financial Expenses Deferred refinancing costs 6.7 ___________________________________________ ________ ________ ________
8 ADJUSTED CONSOLIDATED EARNINGS Adjustments for non-recurring items and for the change in accounting principle related to the amortization of goodwill* Years Ended December 31, (In millions of US dollars, except per share amounts)
As Adjusted 2003 2002 2001 __________________________________________ ________ ________ ________ $ $ $ Sales 621.3 601.6 594.9 Cost of sales 482.4 475.4 468.4 __________________________________________ ________ ________ ________ Gross Profit 138.9 126.2 126.5 Selling, general and administrative expenses 90.0 85.3 80.5 Amortization of goodwill Impairment of goodwill Research and development 3.3 3.2 4.2 Financial expenses 28.5 32.8 32.2 Manufacturing facility closure costs 3.0 2.1 __________________________________________ ________ ________ ________ 121.8 123.4 116.9 Earnings before income taxes 14.1 2.8 9.6 Income taxes (recovery) (4.1) (6.0) (0.1) __________________________________________ ________ ________ ________ Net earnings 18.2 8.8 9.7 __________________________________________ ________ ________ ________ Earnings per share - As Adjusted 2003 2002 2001 __________________________________________ ________ ________ ________ Basic 0.51 .27 0.34 Diluted 0.50 .27 0.34
*See note 2 in the 2003 notes to consolidated financial statements Note: These tables reconcile consolidated earnings as reported in the accompanying consolidated financial statements to adjusted consolidated earnings after the elimination of non-recurring items and the amortization of goodwill. In addition to consolidated earnings, these tables also present the impact of eliminating non-recurring items on gross profits, selling, general and administrative expenses, financial expenses and earnings per share. The Company has included these non-GAAP financial measures because it believes the measures permit more meaningful comparisons of its performance between the periods presented. 9 OUR BUSINESS Intertape Polymer Group Inc. ("IPG" or the "Company") was founded in 1981 and has become a recognized leader in the development and manufacture of specialized polyolefin films, paper and film pressure sensitive tapes and complementary packaging systems. The Company's business model and underlying strategies have been evolving since the mid-1990s. The key components to this strategy are as follows: Commencing in the mid-1990s, the Company made a series of strategic acquisitions in order to provide for products demanded by the industrial packaging market that it serves. These products include water-activated tapes, masking tapes, duct tapes, filament tapes and natural rubber adhesive tapes. At the same time, the Company continued to develop new products, including shrink and stretch wrap films. The Company believes that it now offers the broadest range of packaging products in the industry and, as such, is unique amongst all its competitors. As soon as a new product is either acquired or developed internally, the Company devotes research and development ("R&D") capital to further broaden the range of products within each of these product lines. The effect of this part of the strategy is to further expand the product range by ensuring that the scope of product offerings is maximized. In 2000, the Company opened Regional Distribution Centers ("RDCs") as part of an enhanced supply chain management strategy. Each RDC is stocked with a wide range of products in order to afford customers the ability to place one order and receive one shipment regardless of where IPG makes the product. The Company continues to assess and refine its RDC strategy to achieve maximum efficiency. Examples of products sold through distributors are Intertape Brand(TM) pressure-sensitive carton sealing tapes that include hot-melt, acrylic and natural rubber adhesives; water-activated carton sealing tape; paper tapes; duct tapes; Exlfilm(R) brand shrink wrap and StretchFlex(R) brand stretch wrap. Examples of products sold directly to end-users include a wide range of Nova-Thene(R) brand woven polyolefin products, Intertape Brand(TM) flexible intermediate bulk containers ("FIBCs") and electrical specialty tapes. Throughout 2003 the Company continued to execute its strategy related to acquisitions, new product introductions and the breadth and depth of products and how they are distributed. The strategy was further enhanced in the following ways: - - In April 2003 the Company announced the consolidation of three RDCs into a newly constructed facility in Danville, Virginia. This new RDC became operational in January 2004 and should result in lower transactional costs to the Company as well as superior service levels to its customers. - - In June 2003 the Company acquired the remaining 50% common equity interest in Fibope Portuguesa Filmes Biorientados S.A. ("Fibope"). This investment provides a manufacturing and distribution platform from which the Company plans to introduce certain North American made products into the European markets. Currently, these markets are being analyzed and the Company will continue this process during 2004. - - In October 2003 the Company decided to close its Green Bay water activated tape ("WAT") facility. The production from this facility was transferred to the Company's remaining WAT facility located in Menasha, Wisconsin. This consolidation was possible as a result of the Company's investments to increase output and efficiencies which permitted the integration of production into a single facility. A fourth quarter pretax charge of $3.0 million was recorded in relation to this facility closure. The Company continues to review the effectiveness of its manufacturing facilities in light of ongoing capacity requirements. - - In December 2003 the Company announced it had reached an agreement to acquire certain assets of tesa tape, inc. ("tesa") a manufacturer of both masking and duct tapes for the retail market. With this acquisition came access to additional large retail chains previously not serviced by IPG as well as a three year supply agreement. Upon the completion of this acquisition in February 2004, the production of the acquired business was integrated into IPG's Columbia, South Carolina facility. RESULTS OF OPERATIONS Our consolidated financial statements are prepared in accordance with Canadian GAAP with US dollars as the reporting currency. Note 21 to the consolidated financial statements provides a summary of significant differences between Canadian GAAP and US GAAP. 10 The following discussion and analysis of operating results includes adjusted financial results for the three years ended December 31, 2003. A reconciliation from the operating results found in the consolidated financial statements to the adjusted operating results discussed herein, can be found in the tables appearing on pages 8 and 9 of the Annual Report. Included in MD&A are references to events and circumstances which have influenced the Company's quarterly operating results as presented in the table of Consolidated Quarterly Statements of Earnings appearing on pages 6 and 7 of the Annual Report. As discussed in Sales and Gross Profit and Gross Margin sections, the Company's quarterly sales and gross profits are largely influenced by the timing of raw material cost increases and the Company's ability or inability to pass the increases through to customers in the form of higher unit selling prices. Selling, general and administrative expenses are relatively constant as a percentage of sales with the exception of the fourth quarter of 2003 which is discussed in detail under Selling, General and Administrative Expenses. Quarterly financial expenses are most significantly influenced by the levels of Company bank indebtedness and long-term debt. The debt reductions occurring at the end of the first quarter of 2002 and the third quarter of 2003 resulting from two separate common stock equity offerings as discussed in the section titled Capital Stock, have had the most significant impact on quarterly financial expenses. Regular scheduled debt repayments have also decreased quarterly financial expenses over the last several years. Sales IPG's consolidated sales increased by 3.3% to $621.3 million for the year 2003 from $601.6 million for 2002; and 1.1% to $601.6 million for the year 2002 from $594.9 million in 2001. Fluctuating foreign exchange rates did not have a significant impact on the Company's 2003 sales. Like several of its competitors in the North American packaging industry, the Company experienced a unit selling volume decline during the first half of 2003 as compared to the same period in 2002. The Company recovered most of the unit decline during the fourth quarter of 2003. The growth seen in the fourth quarter of 2003 is primarily attributable to the Company's RDC strategy, the breadth of the product offering, improved customer service and an improving economic environment. In 2002, despite a continuing slowdown in the North American economy, unit volume increased as compared to 2001. This contrasts with 2001, when the global economic slowdown, along with low-cost imports and declining consumption in certain industries, drove unit volume down from the prior year. Unit selling prices for most of the Company's product lines increased in 2003 after several years of unit selling price declines. Unit selling prices declined in the first part of 2002, continuing a trend from 2001 and 2000. The unit selling price declines tracked the steady decline in raw material costs during those periods. However, raw material costs began to rise in the third quarter of 2002 and continued to do so during 2003. The Company anticipates a continued growth in revenue for 2004. U.S. GDP is forecast to rise slightly, indicating increased economic activity that should contribute to growth. The Company's revenue growth strategy is composed of a number of inter-related elements, including: - - A continuation of the broad product offering which will include additional introductions of new products and an improved product mix - - Competitive pricing in combination with selective price increases - - Increased retail penetration both as a result of the tesa acquisition as well as IPG's continuing retail channel penetration - - Improved market share in key product lines and other channels of distribution - - New customers, including export opportunities. Gross Profit and Gross Margin Gross profit was $138.9 million in 2003, up 10.1% from 2002. For 2002, gross profit was $126.2 million, up 6.2% from $118.8 million in 2001. Gross profit represented 22.4% of sales in 2003, 21.0% in 2002, and 20.0% in 2001. The Company's gross profit decreased slightly during 2002 to $126.2 million from an adjusted gross profit (see table on page 9) in 2001 of $126.5 million. As a percentage of sales, adjusted gross profit was 21.0% for 2002, comparable to the 2001 figure of 21.3%. There were no adjustments to gross profit for 2003 or 2002. 11 Value-added is the difference between material costs and selling prices, expressed as a percentage of sales. Historically, the Company has been able to maintain value-added percentages within a narrow range of less than 0.75% because it passes on raw materials cost increases to the customer. During 2002, this situation changed as a direct result of a timing lag between raw material cost increases and full implementation of selling price increases, due to continued economic uncertainty. This caused value-added to decline by 3.0% in the third quarter of 2002 and 2.0% in the fourth quarter of 2002. In early 2003, the Company implemented selected price increases aimed at stabilizing value-added levels. Although, raw material costs continued to increase throughout 2003, the Company's successful implementation of a series of unit selling price increases resulted in improved gross margins. In addition to the Company's ability to pass on cost increases, gross margins improved as the result of certain cost reduction programs announced late in 2002 which had an affect on both 2002 and 2003. During 2004, the Company expects to implement the remaining cost reductions of the $17.5 million program announced during 2002. Cost reductions of $5.5 million and $6.0 million were achieved in 2002 and 2003 respectfully The Company expects the 2004 cost reductions under the program to be $6.0 million. The program has been further enhanced by the closure of the Company's Green Bay facility which should provide $2.5 million in additional manufacturing cost containment in 2004, over and above the $6.0 million for 2004 expected from the original cost reduction program. Selling, General and Administrative Expenses For the year ended December 31, 2003, SG&A expenses amounted to $90.0 million, up from $85.3 million for 2002 which were down $6.0 million from $91.3 million in 2001. As a percentage of sales, SG&A expenses were 14.5% 14.2%, and 15.3% for 2003, 2002 and 2001 respectively. On an adjusted basis (see table on page ?), SG&A expenses increased by $4.7 million for 2003 to $90.0 million, and for 2002 had increased $4.8 million to $85.3 million from $80.5 million in 2001. These adjusted SG&A figures represent 14.5% of sales for 2003, 14.2% for 2002, and 13.5% for 2001. Much of the increase for 2003 and 2002 relates to higher unit sales within the retail distribution channel, which carries a larger selling structure than other sales channels. Of the 2003 increase of $4.7 million in SG&A costs, approximately $2.7 million was incurred during the fourth quarter. An amount of $2.2 million of this increase was attributable to items such as higher promotional incentives, a customer bankruptcy, and the early adoption of the fair value method of accounting for stock-based compensation. The remaining $0.5 million increase is the net impact of a $3.0 million credit to SG&A expense for the reversal of a previously recognized potential liability, the provision for which is no longer required, and a series of asset and liability valuation adjustments. The most significant of the valuation adjustments related to a claim receivable related to an earlier acquisition, a provision for incurred but unbilled costs in servicing customers and the value of customer claims. For 2004, the Company expects to incur SG&A costs of between $22.5 million and $23.5 million per quarter based on current volumes and mix including the percent of total sales that is derived from the retail channel. Operating Profit This discussion presents the Company's operating profit and adjusted operating profit for 2003, 2002 and 2001. Operating profit is not a financial measure under GAAP in Canada or the United States. The Company's management uses operating profit to measure and evaluate the profit contributions of the Company's product offerings as well as the contribution by channel of distribution. Because "operating profit" and "adjusted operating profit" are non-GAAP financial measures, companies may present similar titled items determined with differing adjustments. Presented below is a table reconciling this non-GAAP financial measure with the most comparable GAAP measurement. The reader is urged to review this reconciliation. Operating profit is defined by the Company as gross profit less SG&A expenses. Operating Profit Reconciliation (In millions of US dollars) 2003 2002 2001 _____ _____ _____ $ $ $ Gross Profit - As Reported 138.9 126.2 118.8 Less: SG&A Expense - As Reported 90.0 85.3 91.3 _____ _____ _____ Operating Profit 48.9 40.9 27.5 Non-recurring Items* Gross Profit Items* 7.7 SG&A Items* 10.8 ______ _____ _____ Adjusted Operating Profit 48.9 40.9 46.0 ______ _____ _____ *See tables beginning on page 8 for non-recurring items. 12 Operating profit for 2003 amounted to $48.9 million compared to $40.9 million for 2002 and compared to $27.5 million in 2001. When adjusted for the non- recurring items affecting cost of sales and SG&A expenses (see table on page 9), operating profits were $48.9 million or 7.9% of sales for 2003; $40.9 million or 6.8% of sales for 2002; and $46.0 million or 7.7% of sales for 2001. Considered on an adjusted basis, operating profits have fluctuated for a number of reasons. Value-added dollars increased during 2003 but had decreased during 2002. Despite the increase in SG&A expenses discussed above, operating profits for 2003 rose due to the $12.7 million increase in gross profit during the year. The Company's operating profit for the fourth quarter of 2003 was $9.7 million compared to $6.0 million for the fourth quarter of 2002. Most of the improvement in operating profits was the result of the higher gross margins achieved in 2003. The improved margins were the result of the Company being able to recover rising raw material costs through unit selling price increases during 2003 after being unable to do so the last half of 2002. The impact of the 2004 revenue outlook and ongoing cost reduction initiatives should generate further improved operating profits in 2004. Impairment of Goodwill In accordance with the requirements of the Canadian Institute of Chartered Accountants ("CICA"), which are equivalent to the applicable U.S. standards, the Company performs an annual goodwill impairment test as at December 31. For the purposes of the impairment test, based on the specific requirements of the accounting pronouncements, the Company determined that it was a single reporting unit. The Company calculated the fair value of this reporting unit using the discounted cash flow method, and compared it with other methods including multiples of sales and earnings before interest, income taxes, depreciation and amortization ("EBITDA"), and with historical transactions where appropriate. From these approaches, the fair market value was determined. For 2002 an impairment was charged to operating expenses of $70.0 million. This impairment relates to goodwill from acquisition activity of the Company during the period from 1996 through 2000 in light of 2002 economic and market conditions. There was no impairment charge incurred for 2003. Research and Development R&D remains an important function within the Company. Taken as a percentage of sales, R&D was 0.5% for both 2003 and 2002 and was 0.7%, for 2001. The decrease in R&D expenditures is the result of an increased emphasis on applied research, which helps the Company identify opportunities for new products more efficiently as well as the benefit of research and development tax credits recognized in 2003 and 2002. R&D continues to focus on new products, new technology developments, new product processes and formulations. In 2004 the Company expects to have a continuing rollout of new products such as Novathene Haymaster(R), an opaque woven fabric used to protect outside surfaces, and and Aquamaster(TM), a woven coated fabric to be used primarily to line man-made canals to prevent water loss into the ground. EBITDA A reconciliation of the Company's EBITDA, a non-GAAP financial measure, to GAAP net earnings (loss) is set out in the EBITDA reconciliation table below. EBITDA should not be construed as earnings before income taxes, net earnings (loss) or cash from operating activities as determined by generally accepted accounting principles. The Company defines EBITDA as net income (loss) before (i) income taxes; (ii) financial expense; (iii) amortization of goodwill and other intangibles and capitalized software costs; and (iv) depreciation. Other companies in our industry may calculate EBITDA differently than we do. EBITDA is not a measurement of financial performance under GAAP and should not be considered as an alternative to cash flow from operating activities or as an alternative to net income as indicators of our operating performance or any other measures of performance derived in accordance with GAAP. The Company has included this non-GAAP financial measure because it believes that it permits investors to make a more meaningful comparison of IPG's performance between periods presented. In addition, the Company's covenants contained in the loan agreements with its lenders and noteholders require certain debt to EBITDA ratios be maintained, thus EBITDA is used by Management and the Company's lenders and noteholders in evaluating the Company's performance. 13 EBITDA RECONCILIATION TO NET EARNINGS (LOSS) (In millions of US dollars)
2003 2002 2001 ____ _____ _____ $ $ $ Net Earnings (Loss) - As Reported 18.2 (54.5) (12.2) Add Back: Financial Expenses 28.5 32.8 38.9 Income Taxes (4.1) (12.7) (10.4) Depreciation & Amortization 27.6 27.3 33.8 ____ ____ ____ EBITDA 70.2 (7.1) 50.1 Non-recurring Items* Gross Profit Items* 7.7 SG&A Items* 10.8 Other Items** 70.0 ____ ____ ____ Adjusted EBITDA 70.2 62.9 68.6 ____ ____ ____
*See table beginning on page 8 for non-recurring items. **For 2001, the Other non-recurring items related to Financial Expenses and Amortization does not impact Adjusted EBITDA. EBITDA was $70.2 million for 2003, ($7.1) million for 2002 and $50.1 million for 2001. Adjusted EBITDA stood at $70.2 million, $62.9 million, and $68.6 million for the years 2003, 2002 and 2001 respectively. The Company's EBITDA for the fourth quarter of 2003 was $14.6 million compared to $13.7 million for the fourth quarter of 2002. The increase in 2003 compared to 2002 was principally due to the higher gross margins experienced in the fourth quarter of 2003 as compared to the fourth quarter of 2002. The profit improvement in combination with the significant debt reduction, discussed in the Liquidity and Capital Resources section, positively impacted the Company's debt-to-EBITDA ratio, which improved substantially from 7.8 times in 2001 to 3.8 times in 2003. The Company's goal is to regain its NAIC-2 rating (a National Association of Insurance Commissioners rating that is equivalent to a Standard & Poor's BBB rating), which requires it to reach a ratio of 2.5 times. While this may take several years without the benefit of an issuance of common shares from treasury, the Company remains committed to reach a debt-to-EBITDA ratio of approximately 3 times during 2004, given its debt repayment commitments and continuing improvement in operating profit. Financial Expenses The accompanying table shows, on a retrospective basis, the impact of the 225 basis point increase on amounts owing on the Senior Secured Notes that went into effect January 1, 2002, as if that had been in place January 1, 2001. Management believes that this table presents a better comparison of the effect on financial expenses as a result of improved working capital management, and the share issues during 2002 and 2003. Table of Financial Expenses (In millions of US dollars)
2003 2002 2001 ____ ____ ____ $ $ $ Financial Expenses - As Reported 28.5 32.8 38.9 ____ ____ ____ Less: Non-recurring charge 6.7 ____ ____ ____ As adjusted before non-recurring charges 28.5 32.8 32.2 Effect of 225bps increase in year prior to the rate increase (for comparative purposes only) 6.3 ____ ____ ____ Financial expenses if the rate increasehad taken place January 1, 2001 28.5 32.8 38.5 ____ ____ ____
Year over year financial expenses decreased 13.1% to $28.5 million for 2003 and decreased 15.7% in 2002 to $32.8 million as compared to as adjusted $38.5 million in 2001. Financial expenses for 2003 and 2002 reflected the concerted effort placed on managing the balance sheet, generating cash and reducing debt and raising additional equity capital. The reduction in interest expense is particularly significant given that the interest rates applicable to the senior notes were increased by 225 basis points effective January 1, 2002 for the duration of their term. Financial expenses for 2001 include a non-recurring $6.7 million charge to write-off certain deferred costs related to previous financing arrangements that were refinanced at the end of 2001, together with the fees paid to both the noteholders and the banks in relation to the refinancing. 14 Income Taxes The Company's effective income tax rate was (29.4%), 19.0% and 45.9% for the years 2003, 2002 and 2001 respectively. The Company's statutory income tax rate was approximately 43.0% for the same periods. In the past three years, the Company's statutory income tax rate has been impacted primarily by a lower rate on foreign-based income, manufacturing and processing deductions and transactions that resulted in permanent differences partly offset by a change in the valuation allowance. In addition, in 2002, the statutory income tax rate was impacted by the non-taxable portion of the charge for goodwill impairment. At December 31, 2003, the Company has accumulated approximately $61.0 million in Canadian operating loss carry-forwards expiring from 2007 through 2010, and $161.0 million in U.S. federal and state operating losses expiring from 2010 through 2023. In assessing the valuation of future income tax assets, management considers whether it is more likely than not that some portion or all of the future income tax assets will not be realized. Management considers the scheduled reversal of future income tax liabilities, projected future taxable income and tax planning strategies in making this assessment. The Company expects the future income tax assets to be realized, net of the valuation allowance at December 31, 2003, as a result of the reversal of existing taxable temporary differences. Based on management's assessment, a $31.1 million valuation allowance was established as at December 31, 2003, which is $4.8 million higher than the allowance established as at December 31, 2002. Net Earnings - Canadian and U.S. GAAP For fiscal 2003, the Company posted net earnings of $18.2 million as compared to losses of $54.5 million and $12.2 million in 2002 and 2001 respectively. Adjusted net earnings (see table on page 9) amounted to $18.2 million for 2003, $8.8 million for 2002 and $9.7 million for 2001. The Company believes adjusted net earnings provide a better comparison of results for the periods because it removes non-recurring items in each period. The Company's net earnings for the fourth quarter of 2003 were $5.2 million compared to a net loss of $58.8 million in the fourth quarter of 2002. The fourth quarter of 2002 included a charge for goodwill impairment of $63.3 million net of income tax benefit. The fourth quarter of 2002 net earnings excluding the impairment charge was $4.5 million. The higher net earnings for the fourth quarter of 2003 were the result of improved gross margins and reduced financial expenses as compared to the fourth quarter of 2002. The improvement was not more substantial due to the plant facility closure costs incurred in the fourth quarter of 2003 and the larger income tax benefit (excluding the benefit associated with the charge for goodwill impairment) recorded in the fourth quarter of 2002. Canadian GAAP net earnings conform in all material respects to amounts that would have to be reported had the financial statements been prepared under U.S. GAAP. For further details, see note 21 to the consolidated financial statements. In the case of IPG, net earnings are equal to earnings from continuing operations, as the Company had no discontinued operations, extraordinary items, or changes in accounting principles that resulted in a charge against earnings for these periods. Earnings Per Share - Canadian and U.S. GAAP The Company reported earnings per share of $0.51 basic and $0.50 diluted for 2003 as compared to losses per share of $1.66, basic and diluted in 2002, and $0.43, basic and diluted in 2001. The weighted-average number of common shares outstanding for the purpose of the basic EPS calculation was 36.0 million for 2003 (36.1 diluted), 32.8 million basic and diluted for 2002 and 28.3 million basic and diluted for 2001. The increases in the number of shares outstanding in 2003 and 2002 were primarily due to the equity offerings during each fiscal period and the issuance of shares to acquire the remaining 50% common equity interest in Fibope. The adjusted EPS (see table on page 9) for 2003 was $0.51 basic and $0.50 diluted, compared to $0.27 basic and diluted for 2002, and to $0.34 basic and diluted for 2001. OFF-BALANCE SHEET ARRANGEMENTS The Company maintains no off-balance sheet arrangements. 15 LIQUIDITY AND CAPITAL RESOURCES Cash Flow In 2003, the Company generated cash flow from operating activities of $40.4 million compared to $35.2 million in 2002 and $48.1 million in 2001. Cash from operations before changes in non-cash working capital items increased by $7.8 million or 25.7% to $38.1 from $30.3 million; and in 2002 increased by $16.4 million to $30.3 million from $13.9 million in 2001. In 2003, non-cash working capital items generated $2.3 million additional net cash flow. This was driven by an increase in trade payables of $10.5 million less an increase in trade and other receivables of $2.4 million and an increase in inventories of $5.1 million. The increase in inventories was a result of several factors. Firstly, there was a need to increase finished goods inventory in the water activated product line to accommodate the closure of the Green Bay facility at the end of December and insure a smooth transition for our customers. Secondly, masking and duct tape inventories were increased in order to facilitate the February 2004 transfer of customers from tesa to IPG. Lastly, certain finished goods inventories were increased to facilitate the consolidation of three RDC's into the new RDC located in Danville, Virginia which opened in late January 2004. In 2002, non-cash working capital items generated additional net cash flow of approximately $5.0 million. This was in part due to a $5.7 million decrease in receivables largely attributable to a decrease in rebates owed to the Company. IPG also reduced its investment in inventories, declining by $9.9 million from 2001 and by nearly $28.0 million from where they stood at December 31, 2000. This reduction was attributable to the implementation of the RDC strategy and the warehouse management system, which resulted in better supply chain management practices. The cash flow generated by changes in these items was partly offset by a decrease of $11.4 million in accounts payable. Cash flow used in investing activities was $20.6 million for 2003 as compared to $16.9 million for 2002 and $26.5 million for 2001. These activities include a net increase in property, plant and equipment of $13.0 million for 2003, $11.7 million for 2002 and $17.9 million for 2001. In addition, goodwill increased $6.2 million in 2003 as a result of the payment of an additional amount related to a prior acquisition. Other assets increased $1.4 million during 2003, $5.2 million during 2002 and $8.6 million in 2001. Cash flow used in financing activities amounted to $16.4 million in 2003, $20.0 million in 2002 and $20.0 million in 2001. During 2003 the Company issued 5,750,000 shares from the treasury for consideration of $41.3 million. The proceeds were used to pay down short-term bank indebtedness under the line of credit and retire long-term debt. The Company also issued approximately 343,000 shares for consideration of $2.4 million to fund its contributions to various pension funds and for the exercise of employees' stock options. The Company retired long-term debt in the amount of $64.3 million in 2003 through a combination of net cash flows from operations, the proceeds from the equity offering and increased borrowings under the line of credit. During 2002, the Company reduced bank debt by approximately $45.9 million and the amount due to the senior secured noteholders by $24.4 million. In 2002, the Company also issued 5,100,000 common shares from treasury for a consideration of $47.7 million used to reduce long-term and short-term debt and approximately 215,000 shares for consideration of $2.0 million to partially fund its contribution to various pension funds and for the exercise of employee stock options. In 2001, $12.9 million in short-term bank indebtedness was repaid and $86.4 million was transferred to long-term debt as a result of the refinancing completed late in 2001. The Company also reduced its long-term debt by $9.6 million. During the year, the Company issued $3.4 million of common shares related to the exercise of employees' stock options and funding of the U.S. employee stock ownership and retirement savings plan. It also used $0.8 million to purchase and cancel common shares. Management is committed to further debt reductions, and believes this is achievable because of a reduced need for investment in property, plant and equipment, the continued management of working capital items and increases in cash flows from operations. Free cash flow, defined as cash flow from operating activities less property, plant and equipment expenditures and dividends, improved to $27.4 million for 2003 as compared to $23.5 million in 2002 and $22.1 million in 2001. The Company expected free cash flow of $28.0 million in 2003 and materially 16 achieved its target. The Company anticipates having free cash flow of approximately $30.0 million for 2004 which will be used to repay $16.5 million due on the Senior Secured Notes at the end of September 2004 and further reduce long-term debt. Liquidity At year-end 2003, working capital stood at $68.7 million as compared to $61.2 million as at the end of 2002. The Company considers that it has sufficient working capital to meet the requirements of its day-to-day operations, given its operating margins and projected budgets. Quick assets, which are the total current assets excluding prepaid expenses and future income taxes, increased by $14.5 million during 2003 after declining by $12.7 million in 2002. The 2003 increase was driven by the above described need to increase certain finished goods inventories and an increase in trade receivables as a result of higher sales volumes. The 2002 reduction was brought about by the reduction in receivables and improved inventory control. Days outstanding in trade receivables were 52.5 days at the end of 2003 as compared to 52.3 days at the end of 2002. Due to the year-end inventory build, inventory turnover (cost of sales divided by inventories) slipped to 6.9 times in 2003 from 7.8 times in 2002. Currency Risk The Company is subject to currency risk through its Canadian and European operations. Changes in the exchange rates may result in decreases or increases in the foreign exchange gains or losses. The Company does not use derivative instruments to reduce its exposure to foreign currency risk, as historically these risks have not been significant. Capital Expenditures Total net property, plant and equipment expenditures were $13.0 million, $11.7 million and $17.9 million for the years 2003, 2002 and 2001 respectively. Property, plant and equipment expenditures are being maintained at a lower level than in previous years as many capital projects undertaken in recent years have now been completed and the Company is working to reduce its debt. Recent spending has been on machine efficiency projects intended to improve throughput and material usage. Investment in management information systems continued in 2003, with efforts focused on improving system utilization and the continued roll-out of the Company's warehouse management systems. Management is projecting property, plant and equipment expenditures of $17.0 million to $19.0 million for the year 2004 (excluding the capital lease for the Danville RDC discussed in the Long-Term Debt section), which it anticipates funding from cash flows provided by operations. Based on current volume and anticipated market trends, the Company has sufficient capacity available to accommodate increases in unit volumes in most products without additional capital expenditure. Bank Indebtedness and Credit Facilities The Company has a 364 day revolving credit facility in the amount of $50.0 million which is extended annually at the option of the lenders for an additional 364 day period, converting to a two-year revolving term loan if not extended by the lenders. As at the end of 2003, $31.1 million of this line of credit was utilized, compared to $26.8 million utilized as at December 31, 2002. At year-end 2003, the credit facility availability was $18.9 million as compared to $23.2 million at the end of 2002. When combined with on-hand cash and cash equivalents, this provided the Company with total cash and credit availability of $32.6 million as at December 31, 2003. Total cash and credit availability as at December 31, 2002 was $38.6 million. The Company's cash liquidity is influenced by several factors, the most significant of which is the Company's level of inventory investment. The Company will periodically increase its inventory levels when business conditions suggest that it is in the Company's interest to do so. The Company expects its cash and credit availability to decrease from year-end levels as inventory investments are made in support of both strategic initiatives and buying opportunities. The previously discussed consolidation of the WAT facilities, the RDC consolidation into the new facility in Danville and the tesa acquisition are all dictating higher levels of inventory investment for the short term. Additionally, the Company has identified buying opportunities to mitigate the impact of rising raw material costs. The Company does not expect these higher inventory investments to continue indefinitely, but until the circumstances reverse themselves, the Company believes it has adequate cash and credit availability to support these strategies. 17 Long-Term Debt The Company reduced indebtedness associated with long-term debt instruments by $50.2 million during 2002 and a further $64.3 million during 2003. As part of the refinancing completed in late 2001, the balance of the then short-term debt was cancelled and replaced with new facilities, Facility B and Facility C, in the aggregate amount of $95.0 million with two-year and four-year terms. In 2002, the Company repaid and cancelled Facility B, the $35.0 million, two-year term bank facility, which was due to be fully repaid by the end of 2003. During 2003 the Company repaid $60.0 million and cancelled Facility C two years earlier than required. In addition, amounts due under the Senior Secured Notes were reduced by $2.5 million during 2003. The Senior Secured Notes are secured by a fixed charge against all assets and a second lien against receivables and inventory. The Company's bank indebtedness is secured by a first lien against receivables and inventory. In late 2002, the Company's lenders agreed to amend the financial covenants as a result of the Company's progress in reducing debt. They had also confirmed that the goodwill impairment charge taken for 2002 would have no negative repercussions with respect to the financial covenants for 2002 and going forward. Tabular Disclosure of Contractual Obligations Set forth below are the contractual obligations of the Company as of December 31, 2003:
Contractual Obligations Payments Due by Period _______________________________________________________________________________ Less (in millions of US dollars) than 1-3 4-5 After 5 Total 1 year years years years $ $ $ $ $ ______________________________________________________________________________ Long-Term Debt 252.0 16.9 128.4 95.1 11.6 ______________________________________________________________________________ Capital (Finance) Lease Obligations ______________________________________________________________________________ Operating Lease Obligations 18.3 6.6 6.3 3.2 2.2 ______________________________________________________________________________ Purchase Obligations ______________________________________________________________________________ Other Long-Term Liabilities Reflected on Balance Sheet under GAAP of the primary financial statements ______________________________________________________________________________ Total 270.3 23.5 134.7 98.3 13.8 ______________________________________________________________________________
IPG has certain financial covenants it must maintain in order to remain in good standing under its credit agreement, as amended, as well as its long- term debt agreements, as amended. For example, in order to avoid an acceleration of the maturity dates of the loans, IPG's total debt to consolidated total capitalization ratio must not exceed certain limits. Further, the Company is also required to maintain ratios with respect to its fixed charges, consolidated net worth, and total debt to EBITDA during the terms of its loans. The covenants contained in the loan documents, as amended, do not restrict IPG's ability to conduct its daily operations; however, the covenants do contain debt restrictions which place practical limitations on its ability to borrow additional funds without the prior approval of its current bank lenders and noteholders. Of the $29.3 million in installments on long-term debt due in 2003, $25.3 million related to the Facility C that was repaid in full as described above. For 2004, the Company has $16.9 million in scheduled debt repayments of which $16.5 relates to the Senior Secured Notes. The Company does not anticipate having any difficulty in making the 2004 scheduled debt repayments reflected above along with its other 2004 contractual obligations out of cash flows provided by operations. 18 Beginning in 2005, the Company will likely need to secure funds either through issuing new debt or by raising additional equity or a combination of both in order to satisfy currently scheduled debt payments. During the last two years the Company has been successful in reducing its total bank indebtedness and long-term debt by $125 million from internally generated cash and equity offerings. The Company believes that it maintains good relations with its lenders, and consequently believes that it will be able to secure adequate funding to permit it to meet its obligations as they become due. During 2003 the Company entered into a capital lease agreement for the new Danville RDC. The twenty year lease agreement commenced in January 2004. The value of the building and the related capital lease obligation of the Company is approximately $7.0 million. Capital Stock As of February 16, 2004 there are 40,945,376 common shares outstanding. In the third quarter of 2003, the Company issued 5,750,000 common shares at a price of CA$10.00 per share (US$7.18 per share after issue costs) for a cash infusion of US$41.3 million net of the issue costs. In the first quarter of 2002, the Company issued 5,100,000 common shares at a price of CA$15.50 per share (US$9.35 per share after issue costs) providing the Company cash of US$47.7 million net of issue costs. The proceeds from the stock issues were used to reduce short-term bank indebtedness, repay long-term bank indebtedness and repay principal amounts under the Senior Secured Notes. In 2003, 2002, and 2001, employees exercised stock options worth $0.7 million, $0.3 million and $1.1 million respectively. Further, in both 2003 and 2002, $1.7 million worth of shares were issued in relation to funding the Company's U.S. employee stock ownership retirement savings plan. During 2003, in a transaction valued at $7.2 million, 1,030,767 common shares were issued to acquire the remaining 50% common equity interest of Fibope. During 1999, the Company announced that it had registered a Normal Course Issuer Bid (NCIB) in Canada. The NCIB was extended for one-year terms during 2000 and again during 2001, 2002 and 2003. There were no shares purchased for cancellation during either 2002 or 2003. As part of the purchase price for the acquisition of Central Products Company in 1999, the Company issued 300,000 share purchase warrants effective through August 9, 2004 that permitted the holder to purchase common shares of the Company at a price of $29.50 per share. On December 29, 2003, the warrants were cancelled as a result of settling a claim with the holders of the warrants. The recorded value of the warrants has been reclassified to contributed surplus. Business Acquisitions During 2003, the Company acquired the remaining 50% common equity interest in Fibope, a manufacturer and distributor of film products in Portugal. The acquisition has been accounted for using the purchase method of accounting and, accordingly, the purchase price has been allocated to the assets and liabilities based on their estimated fair values as at the date of the acquisition. Previously, the Company had accounted for its investment in Fibope as a joint venture using the proportionate consolidation method. The Company acquired this interest in order to provide a viable platform from which to introduce products made in its various North American facilities into the European markets. The purchase price of $7.2 million was settled by the issuance of 1,030,767 common shares of the Company. The Company acquired assets with a fair value of $11.1 million, including approximately $3.4 million of goodwill, and assumed liabilities of $3.9 million, of which $2.2 million was interest-bearing debt. Pension and Post-Retirement Benefit Plans IPG's pension benefit plans are currently showing an unfunded deficit of $9.9 million at the end of 2003 as compared to $10.9 million at the end of 2002. The Company may need to divert some of its resources this year in order to resolve this funding deficit, or alternatively it may face additional payment or funding obligations in the future. For 2003 the Company contributed $3.8 million to the plans and for 2002 the Company contributed $1.0 million to the plans. The Company expects to meet its pension benefit plan funding obligations in 2004 through cash flows from operations. Dividend on Common Shares No dividends were declared on the Company's stock in 2003, 2002 or 2001. 19 CRITICAL ACCOUNTING ESTIMATES The preparation of financial statements in conformity with Canadian GAAP requires management to make estimates and assumptions that affect the recorded amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the recorded amounts of revenues and expenses during the reporting period. On an on-going basis management reviews its estimates, including those relating to the allowance for doubtful accounts, reserve for slow moving and unmarketable inventories and income taxes based on currently available information. Actual results may differ from those estimates. The allowance for doubtful accounts is based on reserves for specific accounts which management believes may not be fully recoverable combined with an overall reserve reflective of the Company's historical bad debt experience and current economic conditions. Establishing and updating the reserve for slow moving and unmarketable inventories starts with an evaluation of the inventory on hand as compared to historical and expected future sales of the products. For items identified as slow-moving or unmarketable, the cost of products is compared with their estimated net realizable values and a valuation reserve is established when the cost exceeds the estimated net realizable value. In assessing the realizability of future income tax assets, management considers whether it is more likely than not that some portion or all of the future income tax assets will not be realized. Management considers the scheduled reversal of future income tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. CHANGES IN ACCOUNTING POLICIES Effective January 1, 2002, the Company adopted, on a prospective basis, the new CICA recommendations with respect to stock-based compensation and other stock-based payments. This new standard establishes, among other things, financial accounting and reporting standards for stock-based employee compensation plans. Under this method, compensation cost is measured at the grant date based on the fair value of the award, and is recognized over the related service period. An entity that does not adopt the fair value method of accounting for its awards granted to employees is required to include in its financial statements pro forma disclosures of net earnings and earnings per share as if the fair value method of accounting had been applied. In September 2003, the transitional provisions in Handbook Section 3870, Stock-based Compensation and Other Stock-based Payments, were revised to provide the same alternative methods of transition as are provided under US GAAP for voluntary adoption of the fair value based method of accounting. These provisions may be applied retroactively or prospectively. However, the prospective application is only available to enterprises that elect to apply the fair value based method of accounting for fiscal years beginning before January 1, 2004. The Company has chosen to adopt effective as of January 1, 2003 on a prospective basis, the fair value method of accounting for stock options and has recorded an expense of approximately $130,000 for the stock options granted to employees during the year. Prior to 2003, no compensation expense was recognized when stock options were granted. Effective January 1, 2002, the Company adopted the new CICA recommendations with respect to goodwill and other intangible assets. These standards are equivalent to the US standards. Under the new recommendation, goodwill and intangible assets determined to have an indefinite useful life are no longer amortized and are tested for impairment annually or more frequently if events or changes in circumstances indicate that they might be impaired. Under these recommendations, the Company was required to complete a transitional goodwill impairment test as at January 1, 2002. Management completed this test and determined that no adjustment for impairment of goodwill was necessary as a result of the change in accounting policy. Adjusted net earnings and earnings per share for 2001 shown in the tables beginning on page 8 exclude the amortization for goodwill recognized in that period to account for this change in accounting policy. 20 IMPACT OF ACCOUNTING PRONOUNCEMENTS NOT YET IMPLEMENTED In December 2002, the CICA issued Handbook Section 3063, Impairment of Long- lived Assets. This new Section provides guidance on the recognition, measurement and disclosure of the impairment of long-lived assets. It replaces the write-down provisions in Property, Plant and Equipment, Section 3061. The Section requires an impairment loss for a long-lived asset to be held and used be recognized when its carrying amount exceeds the sum of the undiscounted cash flows expected from its use and eventual disposition. An impairment loss for a long-lived asset to be held and used should be measured as the amount by which its carrying amount exceeds its fair value. Section 3063 should be applied prospectively for years beginning on or after April 1, 2003. The Company does not expect any adjustments to the carrying value of its property, plant and equipment as a result of this change in accounting policy. In January 2003, the CICA issued Accounting Guideline No. 15, "Consolidation of Variable Interest Entities" ("AcG-15") which harmonizes Canadian GAAP with the US Financial Accounting Standards Board ("FASB") Interpretation No. 46. This Guideline applies to annual and interim periods beginning on or after November 1, 2004. The Company expects that this pronouncement will not have a material impact on its results of operations and financial condition. SUBSEQUENT EVENT During February 2004, the Company purchased for $5.5 million plus contingent consideration (dependent upon business retention), assets relating to the masking and duct tape operations of tesa. At the same time, the Company finalized a three-year agreement to supply duct tape and masking tape to tesa. The purchase will be accounted for as a business acquisition. ADDITIONAL INFORMATION Additional information relating to IPG, including its Annual Information Form is filed on SEDAR at www.sedar.com in Canada and on EDGAR at www.sec.gov in the US. 21 [LOGO] 22 MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS TO THE SHAREHOLDERS OF INTERTAPE POLYMER GROUP INC. The consolidated financial statements of Intertape Polymer Group Inc. and the other financial information included in this annual report are the responsibility of the Company's Management and have been examined and approved by its Board of Directors. These consolidated financial statements have been prepared by Management in accordance with Canadian generally accepted accounting principles and include some amounts that are based on Management's best estimates and judgements. The selection of accounting principles and methods is Management's responsibility. The Company maintains internal control systems designed to ensure that the financial information produced is relevant and reliable. Management recognizes its responsibility for conducting the Company's affairs in a manner to comply with the requirements of applicable laws and established financial standards and principles, and for maintaining proper standards of conduct in its activities. The Board of Directors assigns its responsibility for the financial statements and other financial information to the Audit Committee, all of whom are non- management and unrelated directors. The Audit Committee's role is to examine the financial statements and annual report and recommend that the Board of Directors approve them, to examine the internal control and information protection systems and all other matters relating to the Company's accounting and finances. In order to do so, the Audit Committee meets periodically with external auditors to review their audit plans and discuss the results of their examination. This committee is responsible for recommending the appointment of the external auditors or the renewal of their engagement. The Company's external auditors, Raymond Chabot Grant Thornton, appointed by the shareholders at the Annual and Special Meeting on June 11, 2003, have audited the Company's financial statements and their report indicating the scope of their audit and their opinion on the financial statements follows. Sarasota/Bradenton, Florida and Montreal, Canada February 16, 2004 /s/ Melbourne F. Yull Melbourne F. Yull Chairman and Chief Executive Officer /s/ Andrew M. Archibald Andrew M. Archibald Chief Financial Officer, Secretary, Vice President, Administration 23 AUDITORS' REPORT TO THE SHAREHOLDERS OF INTERTAPE POLYMER GROUP INC. We have audited the consolidated balance sheets of Intertape Polymer Group Inc. as at December 31, 2003 and 2002 and the consolidated statements of earnings, retained earnings 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 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, 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 accordance with Canadian generally accepted accounting principles. /s/Raymond Chabot Grant Thornton General Partnership Chartered Accountants Montreal, Canada February 16, 2004 COMMENTS BY AUDITORS FOR AMERICAN READERS ON CANADA-U.S. REPORTING DIFFERENCES INTERTAPE POLYMER GROUP INC. In the United States of America, 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 change in accounting for goodwill and other intangible assets as described in note 2 to the consolidated financial statements. Our report to the shareholders dated February 16, 2004 is expressed in accordance with Canadian reporting standards, which do not require a reference to such change in accounting principles in the auditors' report when the change is properly accounted for and adequately disclosed in the consolidated financial statements. /s/Raymond Chabot Grant Thornton General Partnership Chartered Accountants Montreal, Canada February 16, 2004 24
CONSOLIDATED EARNINGS Years Ended December 31, 2003 (in thousands of US dollars, except per share amounts) 2003 2002 2001 ___________ __________ _________ $ $ $ Sales 621,321 601,575 594,905 Cost of sales (Note 4) 482,423 475,430 476,089 ___________ __________ _________ Gross profit 138,898 126,145 118,816 ___________ __________ _________ Selling, general and administrative expenses (Note 4) 90,047 85,324 91,343 Amortization of goodwill 7,014 Impairment of goodwill (Note 13) 70,000 Research and development 3,272 3,169 4,182 Financial expenses (Note 5) 28,521 32,773 38,911 Manufacturing facility closure costs (Note 4) 3,005 2,100 ___________ __________ _________ 124,845 193,366 141,450 ___________ __________ _________ Earnings (loss) before income taxes 14,053 (67,221) (22,634) Income taxes (Note 6) (4,125) (12,767) (10,392) ___________ __________ _________ Net earnings (loss) 18,178 (54,454) (12,242) ___________ __________ _________ Earnings (loss) per share (Note 7) Basic 0.51 (1.66) (0.43) ___________ __________ _________ Diluted 0.50 (1.66) (0.43) ___________ __________ _________
CONSOLIDATED RETAINED EARNINGS and Consolidated Surplus
Years Ended December 31, 2003 (in thousands of US dollars) 2003 2002 2001 ___________ __________ _________ $ $ $ Balance, beginning of year 50,113 104,567 116,966 Net earnings (loss) 18,178 (54,454) (12,242) ___________ __________ _________ 68,291 50,113 104,724 Premium on purchase for cancellation of common shares 157 ___________ __________ _________ Balance, end of year 68,291 50,113 104,567 ___________ __________ _________
The accompanying notes are an integral part of the consolidated financial statements. 25 CONSOLIDATED CASH FLOWS
Years Ended December 31, 2003 (in thousands of US dollars) 2003 2002 2001 __________ __________ __________ $ $ $ OPERATING ACTIVITIES Net earnings (loss) 18,178 (54,454) (12,242) Non-cash items Depreciation and amortization 29,375 28,653 33,831 Impairment of goodwill 70,000 Loss on disposal of property, plant and equipment 1,280 Property, plant and equipment impairment in connection with facility closure 732 Future income taxes (7,148) (15,198) (9,165) Write-off of debt issue expenses 2,165 Other non-cash items (3,000) (715) __________ _________ __________ Cash flows from operations before changes in non-cash working capital items 38,137 30,281 13,874 __________ _________ __________ Changes in non-cash working capital items Trade receivables (741) 475 10,337 Other receivables (1,647) 5,186 (1,287) Inventories (5,139) 9,851 17,690 Parts and supplies (776) (767) (1,626) Prepaid expenses 100 1,567 (3,341) Accounts payable and accrued liabilities 10,465 (11,361) 12,431 __________ _________ _________ 2,262 4,951 34,204 __________ _________ _________ Cash flows from operating activities 40,399 35,232 48,078 __________ _________ _________ INVESTING ACTIVITIES Property, plant and equipment (12,980) (11,716) (25,942) Proceeds on sale of property, plant and equipment 8,000 Goodwill (6,217) Other assets (1,435) (5,213) (8,592) __________ _________ ________ Cash flows from investing activities (20,632) 16,929) (26,534) __________ _________ ________ FINANCING ACTIVITIES Net change in bank indebtedness 4,910 (19,525) (99,261) Issue of long-term debt 86,400 Repayment of long-term debt (64,329) (50,209) (9,634) Issue of common shares 43,009 49,689 3,379 Common shares purchased for cancellation (922) __________ _________ ________ Cash flows from financing activities (16,410) (20,045) (20,038) __________ _________ ________ Net increase (decrease) in cash position 3,357 (1,742) 1,506 Effect of foreign currency translation adjustments (3,357) 1,742 (1,506) __________ _________ ________ Cash position, beginning and end of year - - - __________ _________ ________ SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION Interest paid 29,309 30,428 32,791 Income taxes paid 1,790 413 1,234
The accompanying notes are an integral part of the consolidated financial statements. 26 CONSOLIDATED BALANCE SHEETS
December 31, (In thousands of US dollars) 2003 2002 _______ _______ $ $ ASSETS Current assets Trade receivables (net of allowance for doubtful accounts of $3,911; $3,844 in 2002) 89,297 86,169 Other receivables (Note 9) 11,852 10,201 Inventories (Note 10) 69,956 60,969 Parts and supplies 13,153 12,377 Prepaid expenses 7,924 7,884 Future income taxes (Note 6) 2,682 2,397 _______ _______ 194,864 179,997 Property, plant and equipment (Note 11) 354,627 351,530 Other assets (Note 12) 12,886 13,178 Future income taxes (Note 6) 3,812 Goodwill (Note 13) 173,056 158,639 _______ _______ 739,245 703,344 LIABILITIES Current liabilities Bank indebtedness (Note 14) 13,944 8,573 Accounts payable and accrued liabilities 95,270 80,916 Installments on long-term debt 16,925 29,268 _______ _______ 126,139 118,757 Future income taxes (Note 6) 4,446 Long-term debt (Note 15) 235,066 283,498 Other liabilities (Note 16) 530 3,550 _______ _______ 361,735 410,251 SHAREHOLDERS' EQUITY Capital stock and share purchase warrants(Note 17) 286,841 239,185 Contributed surplus 3,150 Retained earnings 68,291 50,113 Accumulated currency translation adjustments 19,228 3,795 _______ _______ 377,510 293,093 _______ _______ 739,245 703,344
The accompanying notes are an integral part of the consolidated financial statements. On behalf of the Board /s/J. Spencer Lanthier /s/L. Robbie Shaw J. Spencer Lanthier, Director L. Robbie Shaw, Director 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, (In US dollars; tabular amounts in thousands, except per share amounts) 1. GOVERNING STATUTES The Company, incorporated under the Canada Business Corporations Act, is based in Montreal, Canada, and in Sarasota/Bradenton, Florida. The common shares of the Company are listed on the New York Stock Exchange in the United States of America ("United States" or "US") and on the Toronto Stock Exchange in Canada. 2. ACCOUNTING POLICIES The consolidated financial statements are expressed in US dollars and were prepared in accordance with Canadian generally accepted accounting principles ("GAAP"), which, in certain respects, differ from the accounting principles generally accepted in the United States, as shown in note 21. Certain amounts have been reclassified from the prior years to conform to the current year presentation. Accounting Changes Stock-based compensation Effective January 1, 2002, the Company adopted, on a prospective basis, the new recommendations of the Canadian Institute of Chartered Accountants ("CICA") with respect to Section 3870, Stock-based Compensation and Other Stock-based Payments. This new standard establishes, among other things, financial accounting and reporting standards for stock-based employee compensation plans. It defined a fair value method of accounting for its stock-based employee compensation plans. Under this method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the related service period. An entity that does not adopt the fair value method of accounting for its awards granted to employees is required to include in its financial statements pro forma disclosures of net earnings and earnings per share as if the fair value method of accounting had been applied. In September 2003, the transitional provisions in Handbook Section 3870, Stock-Based Compensation and Other Stock-Based Payments, were revised to provide the same alternative methods of transition as are provided under US GAAP for voluntary adoption of the fair value based method of accounting. These provisions may be applied retroactively or prospectively. However, the prospective application is only available to enterprises that elect to apply the fair value based method of accounting for fiscal years beginning before January 1, 2004. Effective as of January 1, 2003, the Company has chosen to adopt, on a prospective basis, the fair value method of accounting for stock options and has recorded an expense of approximately $130,000 for the stock options granted to employees during the year. Prior to 2003, no compensation expense was recognized when stock options were granted. Any consideration paid by employees on exercise of stock options is credited to capital stock. 28 2. ACCOUNTING POLICIES (Continued) Goodwill and Other Intangible Assets Effective January 1, 2002, the Company adopted, on a retroactive basis, the new CICA recommendations with respect to Section 3062, Goodwill and Other Intangible Assets. These standards are equivalent to the US standards. Under the new recommendations, goodwill and intangible assets determined to have an indefinite useful life are no longer amortized and are tested for impairment annually, or more frequently if events or changes in circumstances indicate that they might be impaired. Under these recommendations, the Company was required to complete a transitional goodwill impairment test as at January 1, 2002. Management completed this test and determined no adjustment for impairment of goodwill was necessary as a result of the change in accounting policy. The following table presents a reconciliation of the net earnings (loss) and earnings (loss) per share as reported for the prior years to the corresponding financial information adjusted to exclude the amortization of goodwill recognized in those periods that is no longer taken as a result of applying Section 3062:
2003 2002 2001 ______ _______ _______ $ $ $ Net earnings (loss), as reported 18,178 (54,454) (12,242) Add: Amortization of goodwill (net of $0.7 million of income taxes for 2001) 6,339 ______ _______ _______ Adjusted net earnings (loss) 18,178 (54,454) (5,903) ______ _______ _______ Adjusted basic earnings (loss) per share 0.51 (1.66) (0.21) ______ _______ _______ Adjusted diluted earnings (loss) per share 0.50 (1.66) (0.21) ______ _______ _______
Accounting estimates The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the recorded amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the recorded amounts of revenues and expenses during the reporting period. On an ongoing basis, management reviews its estimates, including those relating to the allowance for doubtful accounts, reserve for slow moving and unmarketable inventories and income taxes based on currently available information. Actual results may differ from those estimates. Principles of consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. All significant intercompany accounts and transactions have been eliminated. Investments in joint ventures have been proportionately consolidated based on the Company's ownership interest. Fair value of financial instruments The fair value of trade receivables, other receivables, bank indebtedness as well as accounts payable and accrued liabilities is equivalent to carrying amounts, given the short maturity period of such financial instruments. The fair value of long-term debt was established as described in note 15. 29 2. ACCOUNTING POLICIES (Continued) Foreign Currency Translation Reporting currency The accounts of the Company's operations having a functional currency other than the US dollar have been translated into the reporting currency using the current rate method as follows: assets and liabilities have been translated at the exchange rate in effect at year-end and revenues and expenses have been translated at the average rate during the year. All translation gains or losses of the Company's net equity investments in these operations have been included in the accumulated currency translation adjustments account in shareholders' equity. Changes in this account for all periods presented result solely from the application of this translation method. Foreign currency translation Transactions denominated in currencies other than the functional currency have been translated into the functional currency as follows: monetary assets and liabilities have been translated at the exchange rate in effect at the end of each year and revenue and expenses have been translated at the average exchange rate for each year, except for depreciation and amortization which are translated at the historical rate; non-monetary assets and liabilities have been translated at the rates prevailing at the transaction dates. Exchange gains and losses arising from such transactions are included in earnings. Revenue recognition Revenue from product sales is recognized when there is persuasive evidence of an arrangement, the amount is fixed or determinable, delivery of the product to the customer has occurred, there are no uncertainties surrounding product acceptance and collection of the amount is considered probable. Title to the product generally passes upon shipment of the product. Sales returns and allowances are treated as reductions to sales and are provided for based on historical experience and current estimates. Earnings per share Basic earnings per share are calculated using the weighted average number of common shares outstanding during the year. The treasury stock method is used to determine the dilutive effect of stock options and warrants. Cash and cash equivalents The Company's policy is to present cash and temporary investments having a term of three months or less with cash and cash equivalents. Accounts receivable Credit is extended based on evaluation of a customer's financial condition and generally, collateral is not required. Accounts receivable are stated at amounts due from customers based on agreed upon payment terms net of an allowance for doubtful accounts. Accounts outstanding longer than the agreed upon payment terms are considered past due. The Company determines its allowance by considering a number of factors, including the length of time trade accounts receivable are past due, the customer's current ability to pay its obligation to the Company, and the condition of the general economy and the industry as a whole. The Company writes off accounts receivable when they are determined to be uncollectible, and any payments subsequently received on such receivable are credited to the allowance for doubtful accounts. 30 2. ACCOUNTING POLICIES (Continued) Inventories and parts and supplies valuation Raw materials are valued at the lower of cost and replacement cost. Work in process and finished goods are valued at the lower of cost and net realizable value. Cost is principally determined by the first in, first out method. The cost of work in process and finished goods includes the cost of raw materials, direct labor and manufacturing overhead. Parts and supplies are valued at the lower of cost and replacement cost. Property, plant and equipment Property, plant and equipment are stated at cost less applicable investment tax credits and government grants earned and are depreciated over their estimated useful lives principally as follows: Methods Rates and periods Buildings Diminishing balance % or 15 to 40 years or straight-line Manufacturing equipment Straight-line 20 years Furniture, office and computer Diminishing balance 20% or 3 to equipment, software and other or straight-line 10 years(i) (i) Effective January 1, 2002, as a result of an extensive review of the useful life of the Company's various software packages, management decided to extend to 10 years the estimated useful life of all enterprise level software. Prior to such revision, these assets were depreciated over a 7 year period. The change in estimated useful life was applied prospectively commencing January 1, 2002 and has resulted in a decrease in depreciation expense and a corresponding increase in earnings before income taxes, net earnings, basic earnings per share and diluted earnings per share of approximately $1.4 million, $0.9 million, $0.04 and $0.04 respectively for the year ended December 31, 2002. The Company follows the policy of capitalizing interest during the construction and preproduction periods as part of the cost of significant property, plant and equipment. Normal repairs and maintenance are expensed as incurred. Expenditures which materially increase values, change capacities or extend useful lives are capitalized. Depreciation is not charged on new property, plant and equipment until they become operative. Deferred charges Debt issue expenses are deferred and amortized on a straight-line basis over the term of the related obligation. Other deferred charges are amortized on a straight-line basis over the period benefited varying from 1 to 5 years. Environmental costs The Company expenses, on a current basis, recurring costs associated with managing hazardous substances and pollution in ongoing operations. The Company also accrues for costs associated with the remediation of environmental pollution when it becomes probable that a liability has been incurred and its share of the amount can be reasonably estimated. Pension plans and other retirement benefits The Company has defined benefit and defined contribution pension plans and other retirement benefit plans for its Canadian and American employees. 31 2. ACCOUNTING POLICIES (Continued) The following policies are used with respect to the accounting for the defined benefit and other retirement benefit plans: - - The cost of pensions and other retirement benefits earned by employees is actuarially determined using the projected benefit method prorated on service and is charged to earnings as services are provided by the employees. The calculations take into account management's best estimate of expected plan investment performance, salary escalation, retirement ages of employees, participants' mortality rates and expected health care costs; - - For the purpose of calculating the expected return on plan assets, those assets are valued at the market-related value for certain plans and, for other plans, at fair value; - - Past service costs from plan amendments are amortized on a straight-line basis over the average remaining service period of employees who are active at the date of amendment; - - The excess of the net actuarial gains (losses) over 10% of the greater of the benefit obligation and the market-related value or the fair value of plan assets is amortized over the average remaining service period of active employees. Income taxes The Company provides for income taxes using the liability method of tax allocation. Under this method, future income tax assets and liabilities are determined based on deductible or taxable temporary differences between the financial statement values and tax values of assets and liabilities, using substantially enacted income tax rates expected to be in effect for the year in which the differences are expected to reverse. A valuation allowance is recognized to the extent the recoverability of future income tax assets is not considered to be more likely than not. New accounting pronouncements In December, 2002, the CICA issued Handbook Section 3063, Impairment of Long-lived Assets. This new Section provides guidance on the recognition, measurement and disclosure of the impairment of long-lived assets. It replaces the write-down provisions in Property, Plant and Equipment, Section 3061. The Section requires an impairment loss for a long-lived asset which is to be held and used be recognized when its carrying amount exceeds the sum of the undiscounted cash flows expected from its use and eventual disposition. An impairment loss for a long-lived asset to be held and used should be measured as the amount by which its carrying amount exceeds its fair value. Section 3063 should be applied prospectively for years beginning on or after April 1, 2003. The Company does not expect any adjustments to the carrying value of its property, plant and equipment as a result of this change in accounting policy. In January 2003, the CICA issued Accounting Guideline No. 15, "Consolidation of Variable Interest Entities" ("AcG-15") which harmonizes Canadian GAAP with the US Financial Accounting Standards Board ("FASB") Interpretation No. 46. This guideline applies to annual and interim periods beginning on or after November 1, 2004. The Company expects that this pronouncement will not have a material impact on its results of operations and financial condition. 32 3. JOINT VENTURE The Company's pro rata share of its joint venture's operations included in the consolidated financial statements is summarized as follows:
2003 (6 Months)(i) 2002 2001 _____________ ________ _________ $ $ $ Earnings Sales 2,298 4,216 3,572 Gross profit 651 797 664 Financial expenses(income) 40 198 (7) Net earnings(loss) 180 (65) 110 Cash flows From operating activities 972 520 1,342 From investing activities (345) (35) 86 From financing activities 82 1,071 (956) Balance sheets Assets Current assets 1,637 1,307 Long-term assets 6,051 6,122 Liabilities Current liabilities 1,459 2,925 Long-term debt 1,574 667
(i) The Company acquired the remaining 50% common equity interest on June 26, 2003. During the six-month period ended June 30, 2003 and the years ended December 31, 2002 and 2001, the Company had no sales to its joint venture. As a result of the acquisition discussed in note 8, the Company had no investment in a joint venture at December 31, 2003. 4. INTEGRATION AND TRANSITION, ASSET WRITE-DOWNS AND OTHER NON-RECURRING ITEMS During 2003, management approved a plan to consolidate the Company's water activated tape operations at its Menasha, Wisconsin plant. The consolidation was completed during 2003. The plan involved closing its Green Bay, Wisconsin facility, and relocating some employees and equipment to its Menasha, Wisconsin facility. 86 employees were terminated and the total charge for this plan amounted to $3.0 million, including $1.7 million of termination related benefits, and is included in manufacturing facility closure costs in the 2003 consolidated earnings. As at December 31, 2003, the balance of $1.9 million was included in accounts payable and accrued liabilities. During 2002, management approved a plan for the consolidation of its operations related to the Flexible Intermediate Bulk Container division to be completed in June 2003. The plan involved the closing of two manufacturing plants and a reduction of 77 employees. The total charge for the restructuring is $2.1 million including $1.8 million of termination related benefits. As at December 31, 2002 the balance of $1.3 million was included in accounts payable and accrued liabilities and nil as at December 31, 2003. For the year ended December 31, 2001, the Company recorded asset write-downs and non-recurrent costs of recent integrations, the start-up of its Regional Distribution Centers, workforce reductions and debt refinancing. The total charge of $25.2 million includes $4.2 million of termination benefits. Cost of sales includes $7.7 million, selling, general and administrative expenses include $10.8 million and financial expenses include $6.7 million of such costs. 33 5. INFORMATION INCLUDED IN THE CONSOLIDATED STATEMENTS OF EARNINGS
2003 2002 2001 ______ ______ ______ $ $ $ Depreciation of property, plant and equipment 26,957 25,337 24,977 Amortization of debt issue expenses and other deferred charges 2,418 3,316 1,840 Financial expenses Interest on long-term debt 26,675 28,559 22,029 Interest on credit facilities 1,804 2,369 11,064 Refinancing costs 6,700 Interest income and other 742 2,310 18 Interest capitalized to property, plant and equipment (700) (465) (900) ______ ______ ______ 28,521 32,773 38,911 ______ ______ ______ Loss on disposal of property, plant and equipment 1,280 Impairment of property, plant and equipment 732 Foreign exchange loss (gain) (1,192) 214 Investment tax credits recorded as a reduction of research and development expenses 800 2,088
6. INCOME TAXES The provision for income taxes consists of the following:
2003 2002 2001 ______ _______ ______ $ $ $ Current 3,023 2,431 (1,227) Future (7,148) (15,198) (9,165) ______ _______ ______ (4,125) (12,767) (10,392) ______ _______ _______
The reconciliation of the combined federal and provincial statutory income tax rate to the Company's effective income tax rate is detailed as follows:
2003 2002 2001 ______ ______ ______ % % % Combined federal and provincial income tax rate 42.5 42.7 42.7 Manufacturing and processing 3.3 (1.6) (8.6) Foreign losses recovered(foreign income taxed) at lower rates 6.3 (1.7) (6.4) Goodwill impairment (33.0) Impact of other differences (92.3) 28.8 86.7 Change in valuation allowance 10.8 (16.2) (68.5) ______ ______ ______ Effective income tax rate (29.4) 19.0 45.9 ______ ______ ______
34 6. INCOME TAXES (Continued) The net future income tax liabilities are detailed as follows:
2003 2002 _______ _______ $ $ Future income tax assets Accounts payable and accrued liabilities 765 2,501 Tax credits and loss carry-forwards 94,719 77,890 Trade and other receivables 1,104 1,335 Other 5,901 7,741 Valuation allowance (31,145) (26,336) _______ _______ 71,344 63,131 _______ _______ Future income tax liabilities Inventories 311 383 Property, plant and equipment 64,539 64,797 _______ _______ 64,850 65,180 _______ _______ Total Net future income tax assets (liabilities) 6,494 (2,049) _______ _______ Net current future income tax assets 2,682 2,397 Net long-term future income tax assets (liabilities) 3,812 (4,446) _______ _______ Total net future income tax assets (liabilities) 6,494 (2,049)
As at December 31, 2003, the Company has $61.0 million of Canadian operating loss carry-forwards expiring 2007 through 2010 and $161.0 million of US federal and state operating losses expiring 2010 through 2023. In assessing the realizability of future income tax assets, management considers whether it is more likely than not that some portion or all of the future income tax assets will not be realized. Management considers the scheduled reversal of future income tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. The Company expects the future income tax assets, net of the valuation allowance, as at December 31, 2003 to be realized as a result of the reversal of existing taxable temporary differences. As part of the above analysis, the valuation allowance was increased by $4.8 million between December 31, 2002 and December 31, 2003. The increase included $1.5 million of valuation allowance reducing the 2003 income tax benefit. The balance of the increase is attributable to foreign currency translation adjustments. 35 7. EARNINGS (LOSS) PER SHARE The following table provides a reconciliation between basic and diluted earnings (loss) per share: 2003 2002 2001 __________ __________ __________ $ $ $ Net earnings (loss) 18,178 (54,454) (12,242) __________ __________ __________ Weighted average number of common shares outstanding 35,956,550 32,829,013 28,265,708 Effect of dilutive stock options and warrants(i) 95,770 __________ __________ __________ Weighted average number of diluted common shares outstanding 36,052,320 32,829,013 28,265,708 __________ __________ __________ Basic earnings (loss) per share 0.51 (1.66) (0.43) Diluted earnings (loss) per share 0.50 (1.66) (0.43) (i) The following number of equity instruments were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive for the periods presented: 2003 2002 2001 __________ __________ __________ Number of Number of Number of Instruments Instruments Instruments __________ __________ __________ Options 2,843,216 2,996,673 2,407,250 Warrants 300,000 300,000 300,000 __________ __________ __________ 3,143,216 3,296,673 2,707,250 8. BUSINESS ACQUISITION On June 26, 2003, the Company acquired the remaining 50% common equity interest in Fibope Portuguesa Filmes Biorientados S. A. (Fibope), a manufacturer and distributor of film products in Portugal. The acquisition has been accounted for using the purchase method of accounting and, accordingly, the purchase price has been allocated to the assets and liabilities based on their estimated fair values as at the date of the acquisition. Previously, the Company had accounted for its investment in Fibope as a joint venture using the proportionate consolidation method. The purchase price of $7.2 million was settled by the issuance of 1,030,767 common shares of the Company. The Company acquired assets with a fair value of $11.1 million, including approximately $3.4 million of goodwill, and assumed liabilities of $3.9 million, of which $2.2 million was interest- bearing debt. The operating results of the acquired business have been included in the consolidated financial statements from the effective date of acquisition. (see note 3) During July 2003, the Company satisfied a contingent consideration arising from the September 1, 2000 acquisition of certain assets of Olympian Tape Sales, Inc. d/b/a United Tape Company (UTC), by making a $6.0 million cash payment to a third party. The cash payment and certain related expenses have been recorded in the third quarter of 2003 as an increase in the goodwill of $6.2 million arising from the UTC acquisition. The Company has additional related expenses that are subject to reimbursement in whole or in part from amounts available under an escrow agreement created at the time of the acquisition. Expenses, if any, not reimbursed will be recorded as additional goodwill upon settlement of the escrow account. 36 9. OTHER RECEIVABLES 2003 2002 _________ _________ $ $ Income and other taxes 7,009 6,199 Rebates receivable 861 363 Sales taxes 863 541 Other 3,119 3,098 _________ _________ 11,852 10,201 _________ _________ 10. INVENTORIES 2003 2002 _________ _________ $ $ Raw materials 18,910 14,998 Work in process 12,583 10,160 Finished goods 38,463 35,811 _________ _________ 69,956 60,969 _________ _________ 11. PROPERTY, PLANT AND EQUIPMENT
2003 _____________________________________________ Cost Accumulated Net depreciation ____________ ____________ ___________ $ $ $ Land 3,045 3,045 Buildings 61,857 23,368 38,489 Manufacturing equipment 424,112 151,383 272,729 Furniture, office and computer equipment, software and other 58,607 25,872 32,735 Manufacturing equipment under construction and software projects under development 7,629 7,629 ____________ ____________ ___________ 555,250 200,623 354,627 ____________ ____________ ___________
2002 _____________________________________________ Cost Accumulated Net depreciation ____________ ____________ ___________ $ $ $ Land 3,021 3,021 Buildings 59,854 17,510 42,344 Manufacturing equipment 385,315 118,066 267,249 Furniture, office and computer equipment, software and other 48,960 22,117 26,843 Manufacturing equipment under construction and software projects under development 12,073 12,073 ____________ ____________ ___________ 509,223 157,693 351,530 ____________ ____________ ___________
Property, plant and equipment is net of investment tax credits of $0.5 million in 2003 and approximately $1.6 million in 2002. 37 12. OTHER ASSETS
2003 2002 ______ ______ $ $ Debt issue expenses and other deferred charges, at amortized cost 10,460 10,397 Loans to officers and directors, including loans regarding the exercise of stock options, without interest, various repayment terms 877 886 Other receivables 271 1,145 Other, at cost 1,278 750 ______ ______ 12,886 13,178 ______ ______
13. ACCOUNTING FOR GOODWILL In accordance with the specific requirements of CICA, Section 3062, Goodwill and Other Intangible Assets, the Company performs an annual impairment test as at December 31. Also in accordance with the specific requirements of the Section, the Company determined that it had one reporting unit. The Company calculated the fair value of this reporting unit using the discounted cash flows method, and compared with other methods including multiples of sales and earnings before interest, taxes, depreciation, and amortization (EBITDA) and, with historical transactions where appropriate. From these approaches, the fair market value was determined. For 2002 an impairment was charged to operating expenses of $70.0 million. This impairment related to the prior acquisition activity of the Company during the period from 1996 through 2000 in light of 2002 economic and market conditions. No impairment charge was required for 2003. The carrying amount of goodwill as at December 31 is detailed as follows:
2003 2002 _______ _______ $ $ Balance as at December 31 243,056 228,639 Accumulated impairment 70,000 70,000 Net balance as at December 31 173,056 158,639 _______ _______
14. BANK INDEBTEDNESS AND CREDIT FACILITIES The bank indebtedness consists of the utilized portion of the short-term revolving bank credit facilities and checks issued which have not been drawn from the facilities and is reduced by any cash and cash equivalent balances. As at December 31, 2003, the Company had bank loans under a US $50.0 million revolving credit facility (Facility A), extendible annually at the option of the lenders, converting to a two-year term loan if not extended by the lenders. The loan bears interest at various interest-rates including U.S. prime rate plus a premium varying between 0 and 275 basis points and LIBOR plus a premium varying between 75 and 350 basis points. As at December 31, 2003, the effective interest rate was approximately 4.34% (6.08% in 2002) and $31.1 million ($26.8 million in 2002) was utilized. An amount of $3.5 million ($2.8 million in 2002) of this credit facility is used for outstanding letters of credit. The credit facility is secured by a first ranking charge on the Company's accounts receivable and inventories. The credit facilities contain certain financial covenants, including limitations on debt as a percentage of tangible net worth above predefined levels and fixed charge coverage ratios. 38 15. LONG-TERM DEBT Long-term debt consists of the following:
2003 2002 _______ _______ $ $ a) US$137,000,000 Series A and B Senior Notes 123,804 125,005 b) US$137,000,000 Senior Notes 123,330 124,616 c) Bank loans under revolving credit facilities 60,000 d) Other debt 4,857 3,145 _______ _______ 251,991 312,766 Less current portion of long-term debt 16,925 29,268 _______ _______ 235,066 283,498
a) Series A & B Senior Notes Series A & B Senior Notes bearing interest at an average rate of 10.03% (10.03% in 2002) payable semi-annually. The Series A US $25.0 million Notes mature on May 31, 2005. The Series B US $112.0 million Notes are repayable in semi-annual installments of US $13.4 million starting in November 2005 and mature on May 31, 2009. The Series A & B Senior Notes are secured by a first ranking charge on all of the tangible and intangible assets of the Company and a second ranking charge on the accounts receivable and inventories. The Series A and B Senior Notes contain the same financial covenants as the credit facilities. b) Senior Notes Senior Notes bearing interest at 9.07% (9.07% in 2002) repayable in semi-annual installments of US $16.5 million starting in September 2004 and maturing on March 31, 2008. Senior Notes are secured by a first ranking charge on all of the tangible and intangible assets of the Company and a second ranking charge on the accounts receivable and inventories. The Senior Notes contain the same financial covenants as the credit facilities. c) Bank loans under revolving credit facilities Revolving reducing term loan (Facility C) was repaid and cancelled in October 2003 (US $60.0 million was utilized in 2002). The interest rate in effect at the time of repayment was 7.20% (5.76% in 2002). d) Other debt Other debt consisting of government loans, mortgage loans and other loans at fixed and variable interest rates ranging from interest-free to 9.03% and requiring periodic principal repayments through 2007. The Company has complied with the maintenance of financial ratios and with other conditions that are stipulated in the covenants pertaining to the various loan agreements. 39 15. LONG-TERM DEBT (Continued) Long-term debt repayments are due as follows: $ _______ 2004 16,925 2005 68,105 2006 60,310 2007 60,237 2008 34,849 Thereafter 11,565 _______ Total 251,991 Fair Value For all debts with fixed interest rates, the fair value has been determined based on the discounted value of cash flows under the existing contracts using rates representing those which the Company could currently obtain for loans with similar terms, conditions and maturity dates. For the debts with floating interest rates, the fair value is closely equivalent to their carrying amounts. The carrying amounts and fair values of the Company's long-term debt as at December 31, 2003 and 2002 are as follows: 2003 2002 ______________________ ______________________ Carrying Carrying Fair value amount Fair value amount __________ __________ __________ __________ $ $ $ $ Long-term debt 270,246 251,991 306,398 312,766 __________ __________ __________ __________ 16. OTHER LIABILITIES 2003 2002 ______ _____ $ $ Provision for future site rehabilitation costs 530 550 Other 3,000 ______ _____ 530 3,550 ______ _____ During 2003, the Company determined that a reserve for acquisition-related contingencies was no longer required and the $3.0 million liability was reversed into the consolidated income statement as a reduction in selling, general and administrative expenses. During the year ended December 31, 2002, the Company reviewed certain provisions, which it had previously established in accounting for prior years' business acquisitions. This process included the obtaining from third parties environmental studies. As a result of the above, the Company reversed against earnings $0.8 million of provisions in 2002 which had been recorded in prior years for specific business acquisitions. A company-wide environmental reserve for on-going operations of $0.8 million was established in 2002. During 2002, $0.2 million in remediation costs were charged against this reserve. 40 17. CAPITAL STOCK AND SHARE PURCHASE WARRANTS a) Capital stock - Authorized Unlimited number of shares without par value Common shares, voting and participating Class "A" preferred shares, issuable in series, ranking in priority to the common shares with respect to dividends and return of capital on dissolution. The Board of Directors is authorized to fix, before issuance, the designation, rights, privileges, restrictions and conditions attached to the shares of each series. b) Capital stock - Issued and fully paid The changes in the number of outstanding common shares and their aggregate stated value from January 1, 2001 to December 31, 2003 were as follows:
2003 2002 2001 Number of Stated Number of Stated Number of Stated Shares Value Shares Value Shares Value __________ _______ __________ _______ __________ _______ $ $ $ Balance, beginning of year 33,821,074 236,035 28,506,110 186,346 28,211,179 183,758 Shares issued for cash in public offering 5,750,000 41,250 5,100,000 47,691 Shares issued for business acquisitions 1,030,767 7,175 Shares issued to the USA Employees' Stock Ownership and Retirement Savings Plan 238,535 1,695 172,976 1,697 248,906 2,240 Shares purchased for cancellation (128,100) (765) Shares issued for cash upon exercise of stock options 104,500 686 41,988 301 174,125 1,113 __________ _______ __________ _______ __________ _______ Balance, end of year 40,944,876 286,841 33,821,074 236,035 28,506,110 186,346 __________ _______ __________ _______ __________ _______
c) Share Purchase warrants 2003 2002 ______ ______ $ $ 300,000 share purchase warrants - 3,150 ______ ______ On December 29, 2003, the warrants were cancelled as a result of settling an outstanding claim with the holders. The recorded value of the warrants has been reclassified to contributed surplus. The warrants, which would have expired on August 9, 2004 permitted holders to purchase common shares of the Company at a price of $29.50 per share. 41 17. CPITAL STOCK AND SHARE PURCHASE WARRANTS (Continued) d) Shareholders' protection rights plan On June 11, 2003, the shareholders approved an amendment and restatement to the shareholders' protection rights plan originally established in 1993. The effect of the rights plan is to require anyone who seeks to acquire 20% or more of the Company's voting shares to make a bid complying with specific provisions. The plan will expire on the date immediately following the date of the Company's annual meeting of shareholders to be held in 2006. e) Stock options Under the Company's amended executive stock option plan, options may be granted to the Company's executives and directors for the purchase of up to 3,361,661 shares of common stock. Options expire no later than 10 years after the date of granting. The plan provides that such options will vest and may be exercisable 25% per year over four years. All options were granted at a price equal to the average closing market values on the day immediately preceding the date the options were granted. The changes in number of options outstanding were as follows:
2003 2002 2001 _____________________ _____________________ _____________________ Weighted Weighted Weighted average average average exercise Number of exercise Number of exercise Number of price options price options price options ________ _________ ________ _________ ________ _________ $ $ $ Balance, beginning of the year 10.02 2,996,673 10.06 2,407,250 12.89 2,797,036 Granted 5.15 498,500 9.88 688,500 9.79 386,000 Exercised 6.56 (104,500) 7.17 (41,988) 6.39 (174,125) Cancelled 7.28 (224,957) 9.19 (57,089) 16.56 (601,661) _________ _________ _________ Balance, end of year 9.52 3,165,716 10.02 2,996,673 10.06 2,407,250 _________ _________ _________ Options exercisable at the end of the year 1,729,951 1,529,894 1,022,214 _________ _________ _________
The following table summarizes information about options outstanding and exercisable at December 31, 2003:
Options Outstanding Options Exercisable _____________________________________ _____________________ Weighted Weighted Weighted average average average contractual exercise exercise Number (in years) price Number price _________ ___________ ________ _________ ________ Range of exercise prices $ $ $3.90 to $4.85 322,500 0.7 3.99 1,250 4.85 $7.05 to $10.25 2,014,657 3.3 8.86 1,109,782 8.61 $10.84 to $14.71 799,559 3.9 12.95 592,919 12.92 $17.19 to $23.01 17,000 4.2 18.90 14,000 19.27 $27.88 12,000 4.6 27.88 12,000 27.88 _________ ___________ ________ _________ ________ 3,165,716 3.2 9.52 1,729,951 10.31 _________ ___________ ________ _________ ________
42 17. CAPITAL STOCK AND SHARE PURCHASE WARRANTS (Continued) On January 10, 2001, the Company repriced 474,163 of unexercised stock options held by employees, other than directors and executive officers. The repriced options had exercise prices ranging from US$16.30 to US$23.26 (CA$26.01 to CA$37.11) and expire in 2003 and 2006. The revised exercise price was set at US$8.28 (CA$13.21), being the average of the closing price on The Toronto Stock Exchange and the New York Stock Exchange on January 9, 2001. All other terms and conditions of the respective options, including the percentage vesting and the vesting and expiry dates, remained unchanged. In January 2003, the Company adopted the fair value method of accounting for stock-based compensation and other stock-based payments. Under transitional provisions prescribed by the CICA, the Company is prospectively applying the recognition provisions to awarded stock options issued in 2003 and thereafter. The transitional provisions of the CICA are similar to those of the FASB. The Company recorded a pre-tax charge of approximately $130,000 in selling, general and administration expenses. To determine the compensation cost, the fair value of stock options is recognized on a straight-line basis over the vesting periods. For stock options granted during the year ended December 31, 2002, the Company is required to make pro forma disclosures of net earnings (loss) and basic and diluted earnings (loss) per share as if the fair value based method of accounting had been applied. Accordingly, the Company's net earnings (loss) and basic and diluted earnings (loss) per share would have been increased to the pro forma amounts indicated in the following table:
2003 2002 ________ ________ $ $ Net earnings (loss) - as reported 18,178 (54,454) Add: Stock-based employee compensation expense included in reported net earnings 130 Total stock-based employee compensation expense determined under fair value based method (884) (515) ________ ________ Pro forma net earnings (loss) 17,424 (54,969) ________ ________ Earnings (loss) per share: Basic - as reported 0.51 (1.66) ________ ________ Basic - pro forma 0.48 (1.67) ________ ________ Diluted - as reported 0.50 (1.66) ________ ________ Diluted - pro forma 0.48 (1.67) ________ ________
The pro forma effect on net earnings and earnings per share is not representative of the pro forma effect on net earnings and earnings per share of future years because it does not take into consideration the pro forma compensation cost related to options awarded prior to January 1, 2002. The fair value of options granted was estimated using the Black-Scholes option-pricing model, taking into account the following weighted average assumptions: 2003 2002 ________ ________ Expected life 5 years 5 years Expected volatility 50% 50% Risk-free interest rate 2.80% 4.57% Expected dividends $0.00 $0.00 2003 2002 ________ ________ The weighted average fair value per share of options granted is: $2.41 $4.38 43 18. COMMITMENTS AND CONTINGENCIES a) Commitments As at December 31, 2003, the Company had commitments aggregating approximately $18.3 million up to 2010 for the rental of offices, warehouse space, manufacturing equipment, automobiles and other. Minimum payments for the next five years are $6.6 million in 2004, $3.7 million in 2005, $2.6 million in 2006, $1.7 million in 2007 and $1.5 million in 2008. During 2003, the Company entered into a twenty year lease agreement for a warehouse facility. The lease commenced in January 2004 and will be accounted for as a capital lease. The value of the building and the related capital lease obligation to be recorded is approximately $7.0 million. b) Contingencies The Company is party to various claims and lawsuits which are being contested. In the opinion of management, the outcome of such claims and lawsuits will not have a material adverse effect on the Company. 19. PENSION AND POST-RETIREMENT BENEFIT PLANS The Company has several defined contribution plans and defined benefit plans for substantially all its employees in both Canada and the United States. These plans are generally contributory in Canada and non-contributory in the United States. Defined Contribution Plans In the United States, the Company maintains a savings retirement plan (401[k] Plan) for the benefit of certain employees who have been employed for at least 90 days. Contribution to these plans is at the discretion of the Company. The Company contributes as well to a multi-employer plan for employees covered by collective bargaining agreements. In Canada, the Company maintains a defined contribution plan for its salaried employees. The Company contributes to the plan amounts equal to 4% of each participant's eligible salary. The Company has expensed $2.4 million for these plans for the year ended December 31, 2003 ($2.6 million and $2.3 million for 2002 and 2001 respectively). Defined Benefit Plans The Company has, in the United States, two defined benefit plans (hourly and salaried). Benefits for employees are based on compensation and years of service for salaried employees and fixed benefits per month for each year of service for hourly employees. In Canada, certain non-union hourly employees of the Company are covered by a plan which provides a fixed benefit of $12.81 ($10.83 and $10.65 in 2002 and 2001 respectively) per month for each year of service. In the United States, the Company provides group health care and life insurance benefits to certain retirees. 44 19. PENSION AND POST-RETIREMENT BENEFIT PLANS (Continued) Information relating to the various plans is as follows:
Pension plans Other plans _______________________ ______________________ 2003 2002 2003 2002 ___________ _________ __________ __________ $ $ $ $ Accrued benefit obligations Balance, beginning of year 24,071 20,572 840 782 Current service cost 574 497 70 11 Interest cost 1,714 1,545 54 Benefits paid (902) (834) (45) (38) Plan amendments 755 1,136 Actuarial losses 3,205 1,140 31 Foreign exchange rate adjustment 456 15 ___________ _________ __________ __________ Balance, end of year 29,873 24,071 865 840 ___________ _________ __________ __________ Plan assets Balance, beginning of year 13,181 15,450 Actual return on plan assets 3,565 (2,439) Employer contributions 3,837 991 Benefits paid (902) (834) Foreign exchange rate adjustment 278 13 ___________ _________ __________ __________ Balance, end of year 19,959 13,181 ___________ _________ __________ __________ Funded status - deficit 9,914 10,890 865 840 Unamortized past service costs (2,603) (1,931) Unamortized net actuarial gain(loss) (11,231) (10,480) 34 83 Unamortized transition assets (obligation) 101 87 (34) (38) ___________ _________ __________ __________ Accrued benefit liability (prepaid benefit) (3,819) (1,434) 865 885 ___________ _________ __________ __________
45 19. PENSION AND POST-RETIREMENT BENEFIT PLANS (Continued) Accrued Benefit Expense
Pension plans Other plans _____________________________ ________________________ 2003 2002 2001 2003 2002 2001 ______ ________ _______ ______ ________ ______ $ $ $ $ $ $ Current service cost 574 497 398 11 11 10 Interest cost 1,714 1,545 1,363 55 54 56 Expected return on plan assets (1,413) (1,568) (1,652) Amortization of past service costs 174 122 52 Amortization of transition obligation (asset) 11 (3) (4) 4 (1) 4 Amortization of unrecognized loss (gain) 460 238 18 (6) ______ ________ _______ ______ ________ ______ Pension expense for the year 1,520 831 175 70 64 64 ______ ________ _______ ______ ________ ______
The average remaining service period of the active employees covered by the pension plans ranges from 11.76 to 26.70 years for 2003 and from 12.05 to 28.50 years for 2002. The significant assumptions which management considers the most likely and which were used to measure its accrued benefit obligations are as follows (weighted average assumptions as at December 31):
Pension plans Other plans _____________________________ ________________________ 2003 2002 2001 2003 2002 2001 ______ ________ _______ ______ ________ ______ $ $ $ $ $ $ Canadian plans Discount rate 6.25% 7.00% 7.25% Expected rate of return on plan assets 7.00% 9.25% 9.25% U.S. plans Discount rate 6.25% 7.00% 7.25% 6.25% 7.00% 7.25% Expected rate of return on plan assets 8.50% 9.25% 9.25%
For measurement purposes, a 5.0% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2003 (5.0% in 2002 and 5.5% in 2001) and deemed to remain constant through 2009. An increase or decrease of 1% of this rate would have the following impact: Increase of 1% Decrease of 1% $ $ Impact on net periodic cost 2 (2) Impact on accrued benefit obligation 38 (33) 46 20. SEGMENT DISCLOSURES The Company manufactures and sells an extensive range of specialized polyolefin plastic packaging products primarily in Canada and in the United States. All products have to be considered part of one reportable segment as they are made from similar extrusion processes and differ only in the final stages of manufacturing. A vast majority of the Company's products, while brought to market through various distribution channels, generally have similar economic characteristics. The following table presents sales by country based on the location of the manufacturing facilities:
2003 2002 2001 _______ _______ _______ $ $ $ Canada 121,544 119,101 127,878 United States 523,282 510,500 500,028 Other 9,148 3,817 3,563 Transfers between geographic areas (32,653) (31,843) (36,564) _______ _______ _______ Total sales 621,321 601,575 594,905 _______ _______ _______
The following table presents property, plant and equipment and goodwill by country based on the locations of assets:
2003 2002 2001 _______ _______ _______ $ $ $ Property, plant and equipment, net Canada 53,049 46,347 48,693 United States 289,136 299,564 312,501 Other 12,442 5,619 5,373 _______ _______ _______ Total property, plant and equipment, net 354,627 351,530 366,567 _______ _______ _______
2003 2002 2001 _______ _______ _______ $ $ $ Goodwill, net Canada 22,688 17,855 22,616 United States 147,001 140,784 205,188 Other 3,367 _______ _______ _______ Total goodwill, net 173,056 158,639 227,804 _______ _______ _______
47 21. DIFFERENCES IN ACCOUNTING BETWEEN THE UNITED STATES OF AMERICA AND CANADA a) Net earnings and earnings per share Net earnings of the Company and earnings per share established under Canadian GAAP conform in all material respects to the amounts that would be reported if the financial statements would have been prepared under US GAAP. b) Consolidated balance sheets Under Canadian GAAP, the financial statements are prepared using the proportionate consolidation method of accounting for joint ventures. Under US GAAP, these investments would be accounted for using the equity method. Note 3 to the consolidated financial statements provides details of the impact of proportionate consolidation on the Company's consolidated financial statements for 2003, 2002 and 2001, including the impact on the consolidated balance sheets for 2002 and 2001. The other differences in presentation that would be required under US GAAP to the consolidated balance sheets, other than as disclosed below, are not viewed as significant enough to require further disclosure. c) Consolidated cash flows Canadian GAAP permits the disclosure of a subtotal of the amount of funds provided by operations before changes in non-cash working capital items to be included in the consolidated statements of cash flows. US GAAP does not permit this subtotal to be presented. d) Accounting for compensation programs Through December 31, 2002, the Company chose to continue to measure compensation costs related to awards of stock options using the intrinsic value based method of accounting. In March 2000, the FASB issued Interpretation No. 44 ("FIN 44"), which became effective on July 1, 2000, requiring that the cancellation of outstanding stock options by the Company and the granting of new options with a lower exercise price (the replacement options) be considered as an indirect reduction of the exercise price of the stock options. Under FIN 44, the replacement options and any repriced options are subject to variable accounting from the cancellation date or date of grant, depending on which stock options were identified as the replacement options. Using variable accounting, the Company is required to recognize, at each reporting date, compensation expense for the excess of the quoted market price of the stock over the exercise prices of the replacement or repriced options until such time as the replacement options are exercised, forfeited or expire. The impact on the Company's financial results will depend on the fluctuations in the Company's stock price and the dates of the exercises, forfeitures or cancellations of the stock options. Depending on these factors, the Company could be required to record significant compensation expense during the life of the options which expire in 2006. In November 2000, 300,000 and 50,000 replacement options were issued at exercise prices of US$10.13 (CA$15.50) and US$14.71 (CA$21.94) respectively, and in May and August 2001, 54,000 and 40,000 replacement options were issued for US$11.92 (CA$18.80) and US$9.00 (CA$13.80), respectively. In addition, in January 2001, 474,163 options were repriced at US$8.28 (CA$12.40) (see note 17). As at December 31, 2003, the Company's quoted market stock price was $12.73 (CA$16.49) per share. For the options subject to variable accounting, the compensation expense for 2003 would be approximately $1.7 million under US GAAP. The compensation expense would not materially impact net loss reported in the consolidated statement of earnings for 2002 and 2001 under US GAAP. 48 21. DIFFERENCES IN ACCOUNTING BETWEEN THE UNITED STATES OF AMERICA AND CANADA (Continued) Under US GAAP, the Company is required to make pro forma disclosures of net earnings (loss), basic earnings (loss) per share and diluted earnings (loss) per share as if the fair value based method of accounting had been applied. The fair value of options granted in 2003, 2002 and 2001 was estimated using the Black-Scholes option-pricing model, taking into account the following weighted average assumptions: 2003 2002 2001 ___________ ________ ______________ Expected life 5 years 5 years 5 years Expected volatility 50% 50% 50% Risk-free interest rate 2.80% 4.57% 4.76% Expected dividends $0.00 $0.00 $0.00 to $0.18 2003 2002 2001 ________ ________ ________ $ $ $ The weighted average fair value per share of options granted is: 2.41 4.38 4.74 Accordingly, the Company's net earnings (loss) and earnings (loss) per share would have been reduced (increased) to the pro forma amounts indicated in the following table: 2003 2002 2001 ________ ________ ________ $ $ $ Net earnings (loss) - as reported 18,178 (54,454) (12,242) Add: Stock-based employee compensation expense included in reported net earnings 130 Deduct: Total stock-based employee compensation expense determined under fair value based method (2,635) (2,367) (4,212) ________ ________ ________ Pro forma net earnings (loss) 15,673 (56,821) (16,454) ________ ________ ________ Earnings (loss) per share: Basic - as reported 0.51 (1.66) (0.43) ________ ________ ________ Basic - pro forma 0.44 (1.73) (0.58) ________ ________ ________ Diluted - as reported 0.50 (1.66) (0.43) ________ ________ ________ Diluted - pro forma 0.43 (1.73) (0.58) e) Accumulated pension benefit obligation Under US GAAP, if the accumulated pension benefit obligation exceeds the fair value of benefit plan assets, a liability must be recognized in the balance sheet that is at least equal to the unfunded accumulated benefit obligation. To the extent that the additional minimum liability is created by a plan improvement, an intangible asset can be established. Any additional minimum liability not covered by an intangible asset will cause a net of tax reduction in accumulated other comprehensive income. 50 The following sets out the adjustments required to the Company's consolidated balance sheets to conform with US GAAP accounting for pension benefit obligations: 2003 2002 2001 ________ ________ ________ $ $ $ Future income tax assets would increase by 4,155 3,878 2,029 Other assets would increase by 2,502 1,843 912 Accounts payable and accrued liabilities would increase by 13,733 12,323 6,396 Shareholders' equity would decrease by (7,076) (6,602) (3,455) f) Consolidated comprehensive income As required under US GAAP, the Company would have reported the following consolidated comprehensive income: 2003 2002 2001 ________ ________ ________ $ $ $ Net earnings (loss) in accordance with US GAAP 18,178 (54,454) (12,242) Currency translation adjustments 15,433 3,768 (5,741) Minimum pension liability adjustment, net of tax (note 21 e)) (474) (3,147) (3,455) Consolidated comprehensive income (loss) 33,137 (53,833) (21,438) 22. SIGNIFICANT NEW ACCOUNTING PRONOUNCEMENTS UNDER US GAAP In January 2003 and December 2003, the Financial Accounting Standards Board ("FASB") issued and revised Interpretation No. 46, "Consolidation of Variable Interest Entities - an Interpretation of ARB No. 51." The Interpretation addresses consolidation of variable interest entities. The Company expects that this pronouncement will not have a material impact on its results of operations and financial condition. 23. SUBSEQUENT EVENT In February 2004, the Company purchased for $5.5 million plus contingent consideration (dependent upon business retention), assets relating to the masking and duct tape operations of tesa tape, inc. ("tesa"). At the same time, the Company finalized its three-year agreement to supply duct tape and masking tape to tesa worldwide. The purchase will be accounted for as a business acquisition. 50 Intertape Polymer Group Locations Corporate Offices Montreal, Quebec, Canada Sarasota/Bradenton, Florida, USA Brighton, Colorado, USA 3 4 Menasha, Wisconsin, USA 3 4 Carbondale, Illinois, USA 3 4 Columbia, South Carolina, USA 3 4 Piedras Negras, Mexico 2 3 4 Cumming, Georgia, USA 3 4 Porto, Portugal 3 4 Danville, Virginia, USA 1 2 3 4 Richmond, Kentucky, USA 3 4 St. Laurent, Quebec, Canada 1 2 3 4 Tremonton, Utah, USA 3 4 Los Angeles, California, USA 1 Truro, Nova Scotia, Canada 2 3 4 Marysville, Michigan, USA 2 3 4 1 Regional Distribution Center 2 ISO Certified 3 Distribution 4 Manufacturing Location Please note: In 2003 the Company announced the closing of the two Regional Distribution Centers (RDCs) in Atlanta and Chicago and the replacement of the existing RDC in Danville with a new facility which opened in January 2004. In early 2004 the Company also consolidated its tape machine manufacturing operation into its St. Laurent, Quebec, Canada location. These changes are reflected in the above presentation. 51 >PAGE> Other Information BOARD OF DIRECTORS Melbourne F. Yull Chairman and Chief Executive Officer L. Robbie Shaw* Former Vice President, Nova Scotia Community College Michael L. Richards Senior Partner, Stikeman Elliott LLP J. Spencer Lanthier* Currently serves as a Member of the Board of Several Publicly Traded Companies Ben J. Davenport, Jr. Chairman, First Piedmont Corporation Chairman and CEO Chatham Oil Company CEO, Piedmont Transportation Inc. Gordon Cunningham* President, Cumberland Asset Management Thomas E. Costello* Currently serves as a Member of the Board of Several Publicly Traded Companies *Member of Audit Committee HONORARY DIRECTORS James A. Motley, Sr. Director, American National Bank & Trust Company American National Bancshares, Inc. Irvine Mermelstein Managing Partner, Market-Tek EXECUTIVE OFFICERS Melbourne F. Yull Chairman and Chief Executive Officer Andrew M. Archibald, C.A. Chief Financial Officer, Secretary, Vice President, Administration Jim Bob Carpenter President, Woven Products, Procurement H. Dale McSween President, Distribution Products Gregory A. Yull President, Film Products M. J. Doc Dougherty President, Retail Burgess H. Hildreth Vice President, Human Resources James A. Jackson Vice President, Chief Information Officer Victor V. DiTommaso, CPA Vice President, Finance Duncan R. Yull Vice President Sales, Distribution Products Piero Greco, C.A. Treasurer TRANSFER AGENT AND REGISTRAR Canada: CIBC Mellon Trust Company 2001 University Street, 16th Floor Montreal, Quebec, Canada H3A 4L8 USA: Mellon Investor Services L.L.C. 85 Challenger Road, 2nd Floor Ridgefield Park, New Jersey, U.S.A. 07660 AUDITORS Raymond Chabot Grant Thornton 600 de la Gauchetiere West, Suite 1900 Montreal, Quebec, Canada H3B 4L8 U.S.A.: Grant Thornton International 130 E. Randolph Street Chicago, Illinois, U.S.A. 60601-6203 INVESTOR INFORMATION Stock and Share Listing Common shares are listed on the New York Stock Exchange and the Toronto Stock Exchange, trading under the symbol ITP. Shareholder and Investor Relations Shareholders and investors having inquiries or wishing to obtain copies of the Company's Annual Report or other US Securities Exchange Commission or Canadian Securities Commissions filings should contact: Mr. Andrew M. Archibald, C.A Chief Financial Officer Intertape Polymer Group Inc. 3647 Cortez Road West Bradenton, Florida 34210 (866) 202-4713 E-mail: itp$info@intertapeipg.com ANNUAL AND SPECIAL MEETING OF SHAREHOLDERS The Annual and Special Meeting of Shareholders will be held Wednesday, June 2, 2004 at 4:00pm at the Hilton Bonaventure, 900 de la Gauchetiere West, Montreal Quebec, Canada. The meeting is to be held in the Westmount conference room. The product display will be in the Mont-Royal room. 52 EX-6 3 ipg2003proxycircular.txt PROXY CIRCULAR AND NOTICE FOR MEETING TO BE HELD ON 6/2/04 INTERTAPE POLYMER GROUP INC. MANAGEMENT PROXY CIRCULAR IN CONNECTION WITH THE ANNUAL AND SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON JUNE 2, 2004 INTERTAPE POLYMER GROUP INC. (TM) MANAGEMENT PROXY CIRCULAR Solicitation of Proxies This Management Proxy Circular (the "Circular"), which is being mailed to shareholders on or about May 3, 2004, is furnished in connection with the solicitation by the management of Intertape Polymer Group Inc. (the "Corporation") of proxies to be used at the Annual and Special Meeting of Shareholders of the Corporation (the "Meeting") to be held on June 2, 2004 at the time and place and for the purposes set forth in the accompanying notice of Annual and Special Meeting of Shareholders, or any adjournment thereof. The solicitation will be primarily by mail but may also be made by telephone or other means of telecommunication by regular employees of the Corporation at nominal cost. The cost of the solicitation will be borne by the Corporation. All dollar amounts set forth in this Circular are in Canadian dollars, except as otherwise indicated. Appointment of Proxyholders and Revocation of Proxies A shareholder may appoint as proxyholder a person other than the directors of the Corporation named in the accompanying form of proxy to attend and vote at the Meeting in his stead, and may do so by inserting the name of such other person, who need not be a shareholder, in the blank space provided in the form of proxy or by completing another proper form of proxy. In order for proxies to be recognized at the Meeting, the completed forms of proxy must be received at the office of the Corporation's Canadian transfer agent, CIBC Mellon Trust Company, 2001 University Street, 16th Floor, Montreal, Quebec, not less than 48 hours prior to the Meeting. A shareholder, or his attorney authorized in writing, who executed a form of proxy may revoke it in any manner permitted by law, including the depositing of an instrument of revocation in writing at the principal place of business of the Corporation, 110E Montee de Liesse, Montreal, Quebec H4T 1N4, at any time up to and including the last business day preceding the day of the Meeting or an adjournment thereof or with the Chairman of the Meeting or an adjournment thereof on the day of the Meeting but prior to the use of the proxy at the Meeting. Non-Registered Holders The information set forth in this section is important to the many shareholders who do not hold their common shares of the Corporation in their own names (the "Non-Registered Holders"). Non-Registered Holders should note that only proxies deposited by shareholders whose names appear on the records of the Corporation as the registered holders of shares can be recognized and acted upon at the Meeting. However, in many cases, common shares of the Corporation beneficially owned by a Non-Registered Holder are registered either: a) in the name of an intermediary (an "Intermediary") that the Non- Registered Holder deals with in respect of the common shares, such as, among others, banks, trust companies, securities dealers or brokers and trustees or administrators of self-administered RRSPs, RRIFs, RESPs and similar plans; or b) in the name of a clearing agency (such as The Canadian Depository for Securities Limited or "CSD") of which the Intermediary is a participant. In accordance with the requirements of National Instrument Policy 54-101 of the Canadian Securities Administrators, the Corporation has distributed copies of the Notice of Meeting, this Management Proxy Circular, the form of proxy and the 2003 Annual Report including management's discussion and analysis (collectively, the "Meeting Materials") to the clearing agencies and Intermediaries for onward distribution to Non-Registered Holders. Intermediaries are required to forward the Meeting Materials to Non- Registered Holders unless a Non-Registered Holder has waived the right to receive them. Very often, Intermediaries will use service companies to forward the Meeting Materials to Non-Registered Holders. Generally, Non-Registered Holders who have not waived the right to receive the Meeting Materials will either: 1. be given a proxy which is signed by the Intermediary (typically by a facsimile, stamped signature) and already sets forth the number of common shares beneficially owned by the Non-Registered Holder but which is otherwise uncompleted. This form of proxy need not be signed by the Non-Registered Holder. The Non-Registered Holder who wishes to submit a proxy should properly complete the form of proxy and deposit it with CIBC Mellon Trust Company as described above; 2. more typically, be given a voting instruction form which must be completed and signed by the Non-Registered Holder in accordance with the directions on the CIBC Mellon Trust Company voting instruction form. The majority of brokers now delegate responsibility for obtaining instructions from clients to ADP Investor Communications Corporation ("ADP" formerly IICC). ADP typically mails a proxy form to the Non-Registered Holders and asks Non-Registered Holders to return the proxy form to ADP (the ADP form also allows completion of the voting instructions form by telephone.) ADP then tabulates the results of all instructions received and provides appropriate instructions respecting the voting of shares to be represented at a shareholders' meeting. A Non-Registered Holder receiving a proxy form from ADP cannot use that proxy to vote shares directly at the Meeting. The proxy must be returned to ADP well in advance of the Meeting in order to have the shares voted. Shares held by brokers or their agents or nominees can be voted for or against resolutions only upon the instructions of the Non-Registered Holder. Without specific instructions, brokers and their agents and nominees are prohibited from voting shares for the broker's clients. The purpose of these procedures is to permit Non-Registered Holders to direct the voting of the common shares they beneficially own. Should a Non-Registered Holder who receives either a proxy or a voting instruction form wish to attend and vote at the Meeting in person (or have another person attend and vote on behalf of the Non-Registered Holder), the Non-Registered Holder should strike out the names of the persons named in the proxy and insert the Non-Registered Holder's (or such other person's) name in the blank space provided, or, in the case of a voting instruction form, follow the corresponding directions on the form. In either case, Non-Registered Holders should carefully follow the instructions of their Intermediaries and their service companies and ensure that instructions respecting the voting of their shares are communicated to the appropriate person. Exercise of Discretion by Proxyholders The persons whose names are printed on the accompanying form of proxy will, on a show of hands or any ballot that may be called for, vote or withhold from voting the shares in respect of which they are appointed in accordance with the direction of the shareholder appointing them. If no choice is specified by the shareholder, the shares will be voted for the election of the nominees for directors set forth in this Circular under the heading "Election of Directors", for the appointment of the auditors set forth in this Circular under the heading "Appointment and Remuneration of Auditors" and in favour of the resolution approving, ratifying and confirming the amendments to the Corporation's Executive Stock Option Plan described in this Circular under the heading "Amendments to the Executive Stock Option Plan". The enclosed form of proxy confers discretionary authority upon the persons named therein with respect to amendments or variations to matters identified in the notice of the Meeting and to other matters which may properly come before the Meeting. As at the date hereof, management knows of no such amendment, variation or other matters to come before the Meeting. If any matters which are not now known should properly come before the Meeting, the persons named in the form of proxy will vote on such matters in accordance with their best judgment. Shareholder Proposals for the 2005 Annual Meeting Shareholder proposals intended to be presented at the Corporation's 2005 Annual Meeting of Shareholders must be submitted for inclusion in the Corporation's proxy materials prior to March 1, 2005. Voting Shares and Principal Holders Thereof As at April 26, 2004, the Corporation had 41,060,001 common shares outstanding, being the only class of shares entitled to be voted at the Meeting. Each holder of such shares is entitled to one vote for each share registered in his name as at the close of business on April 26, 2004, being the date fixed by the Board of Directors of the Corporation for the determination of the registered holders of such shares who are entitled to receive the Notice of Annual and Special Meeting of Shareholders enclosed herewith (the "Record Date"). In the event that such a shareholder transfers the ownership of any of his shares after the Record Date, the transferee of such shares shall be entitled to vote at the Meeting if he produces properly endorsed share certificates or otherwise establishes proof of his ownership of the shares and demands, not later than ten days before the Meeting, that his name be included in the list of shareholders entitled to vote. This list of shareholders will be available for inspection on and after the Record Date during usual business hours at the registered office of the Corporation and at the Meeting. To the knowledge of the directors and officers of the Corporation, no person beneficially owns or exercises control or direction over shares carrying more than ten percent of the voting rights attached to all shares of the Corporation. Election of Directors The Articles of the Corporation stipulate that the Board of Directors shall consist of a minimum of one and a maximum of eleven directors. The entire Board of Directors currently consists of seven members all of whom were members of the Board prior to the last annual shareholders meeting held on June 11, 2003. The following sets out information regarding each of the seven persons proposed by management as nominees for election as directors to hold office until the next succeeding annual meeting of shareholders of the Corporation or until their successors are elected or appointed.
As at April 26, 2004 Control or Direction of the Corporation is Exercised by Means of (1) ____________________________ Name Age Position or office Common Options to with Corporation Director Since Shares Purchase Shares Melbourne F. Yull(4) 63 Director, Chairman of the December 22, 1989(5) 544,519 879,000 Board and Chief Executive Officer Michael L. Richards(2)(4) 65 Director December 22, 1989(5) 77,600 36,000 Ben J. Davenport, Jr.(2)(4) 61 Director June 8, 1994 18,000 36,000 L. Robbie Shaw(2)(3)(4) 62 Director June 8, 1994 5,750 33,500 Gordon R. Cunningham(2)(3)(4) 59 Director May 21, 1998 15,000 29,000 J. Spencer Lanthier(3)(4) 63 Director June 20, 2001 2,000 20,000 Thomas E. Costello(3)(4) 64 Director November 22, 2002 0 12,500 _______ _________ 662,869 1,046,000
__________ (1) This information, not being within the knowledge of the Corporation, was furnished by the respective nominees individually. (2) Member of Compensation Committee. (3) Member of Audit Committee. (4) Member of Nominating & Governance Committee (5) Director of the predecessor company since 1981. Melbourne F. Yull, a resident of Sarasota, Florida was appointed Chairman of the Board and Chief Executive Officer on January 11, 1995, having been the President and a director of the Corporation or a predecessor thereof since 1981. Michael L. Richards, a resident of Westmount, Quebec, is a senior partner in the law firm Stikeman Elliott LLP, Montreal, Quebec. Ben J. Davenport, Jr., a resident of Chatham, Virginia, is the Chief Executive Officer of Chatham Oil Company, a distributor of oil, gasoline and propane. He also serves as Chairman and Chief Executive Officer of First Piedmont Corporation, a waste hauling business. L. Robbie Shaw, a resident of Halifax, Nova Scotia, is the former Vice- President of Nova Scotia Community College and currently acts as a consultant for the College. Gordon R. Cunningham, a resident of Toronto, Ontario, is President of Cumberland Asset Management Corp., a discretionary investment management firm. J. Spencer Lanthier, a resident of Toronto, Ontario currently serves as a member of the board of directors of several publicly traded corporations. From 1993 to 1999, Mr. Lanthier held the position of Chairman and Chief Executive Officer of KPMG Canada and was a member of the KPMG international executive committee and board of directors. Thomas E. Costello, a resident of Longboat Key, Florida, was the Chief Executive Officer, from 1991 to 2002, of xpedx, a wholly-owned subsidiary of the International Paper Company. If any of the above nominees is for any reason unavailable to serve as a director, proxies in favour of management will be voted for another nominee in the discretion of the persons named in the form of proxy unless the shareholder has specified in the proxy that his shares are to be withheld from voting on the election of directors. The Board of Directors recommends a vote in favour of each of the nominees. Executive Compensation 1. Summary Compensation Table The following table sets forth all compensation paid in respect of the individuals who were, at December 31, 2003, the Chief Executive Officer and the other four most highly compensated executive officers of the Corporation (the "named executive officers").
SUMMARY COMPENSATION TABLE Long-Term Compensation Awards Securities Under Other Annual Options Granted Salary Bonus Compensation As At FY-End Name and Principal Position Year $ $ ($)(1) (#) ___________________________ ____ ____________ ____________ ____________ ________________ M.F. Yull 2003 U.S.$490,346 U.S.$ 30,000 U.S.$35,645 879,000 Chairman of the Board and 2002 U.S.$475,000 U.S.$100,000 U.S.$50,190 819,000 Chief Executive Officer 2001 U.S.$475,000 0 Cdn $42,828 668,000 H.D. McSween 2003 U.S.$309,197 U.S.$ 15,000 U.S.$12,683 280,165 President-Distribution 2002 U.S.$299,520 U.S.$ 25,000 U.S.$13,649 285,165 Products 2001 U.S.$300,498 0 U.S.$12,730 205,165 A.M. Archibald 2003 U.S.$268,400 U.S.$ 12,500 U.S.$ 2,240 239,543 Chief Financial Officer, 2002 U.S.$238,796 0 Cdn $ 585 244,543 Secretary, Vice President 2001 Cdn $350,144 0 Cdn $11,283 197,543 Administration J.B. Carpenter 2003 U.S.$225,456 U.S.$ 10,000 U.S.$13,713 120,000 President - 2002 U.S.$218,400 U.S.$ 15,000 U.S.$14,950 90,000 Woven Products 2001 U.S.$220,040 0 U.S.$14,304 35,000 D.R. Yull 2003 U.S.$224,000 U.S.$ 10,000 U.S.$18,220 189,800 Vice-President Sales & 2002 U.S.$193,558 U.S.$ 15,000 U.S.$21,063 159,800 Marketing 2001 U.S.$178,156 0 U.S.$19,959 104,800 Distribution Products
__________ (1) The amounts in this column relate primarily to taxable benefits on employee loans, to the Corporation's contributions to the pension plan and to expenses incurred by the Corporation in connection with automobiles that it puts at the disposal of certain of the named executive officers. The aggregate compensation for all executive officers and directors of the Corporation who are not "named executive officers" for the fiscal year ended December 31, 2003 amounts to U.S.$982,979. 2. Executive Stock Option Plan In 1992, the Corporation established its ongoing Executive Stock Option Plan (the "Plan") in respect of the common shares of the Corporation, such Plan which has been amended from time to time. The Plan is administered by the Board of Directors. The shares offered under the Plan are common shares of the Corporation. The purpose of the Plan is to promote a proprietary interest in the Corporation among the executives, the key employees and the non-management directors of the Corporation and its subsidiaries, in order to both encourage such persons to further the development of the Corporation and to assist the Corporation in attracting and retaining key personnel necessary for the Corporation's long term success. The Board of Directors designates from time to time from the eligible executives those executives to whom options are to be granted and determines the number of shares covered by such options. Generally, participation in the Plan is limited to persons holding positions that can have an impact on the Corporation's long-term results. The number of common shares to which the options relate are determined by taking into account, inter alia, the market price of the common shares and each optionee's base salary. The exercise price payable for each common share covered by an option is determined by the Board of Directors but will not be less than the market value of the underlying common shares on the day preceding the effective date of the grant. The Plan provides that options issued thereunder shall vest 25% per year over four years. Currently the maximum number of common shares that may be issued under the Plan is 3,361,661. In 2003, the named executive officers who were granted stock options were M.F. Yull who was granted 80,000 options, H.D. McSween who was granted 60,000 stock options, A.M. Archibald who was granted 56,000 stock options, J.B. Carpenter who was granted 30,000 stock options and D.R. Yull who was granted 30,000 stock options. The following table sets forth each grant of options to the named executive officers under the Plan during the financial year ended December 31, 2003. OPTION GRANTS DURING THE FINANCIAL YEAR ENDED DECEMBER 31, 2002
% of the Total Number of Options That Were Granted Securities To Employees Under During the Market Value of the Options Financial Year Exercise Price Common Shares on Granted ended Dec. 31, (S/Common The Date of Grant Name (#) 2003 Share) ($/Common Share) Expiration Date ______________ __________ ________________ ______________ ____________________ _______________ M.F. Yull 50,000 10.0% U.S.$ 3.90 U.S.$ 3.90 March 31, 2009 30,000 6.0% U.S.$ 7.05 U.S.$ 7.05 July 29, 2009 H.D. McSween 20,000 4.0% U.S.$ 3.90 U.S.$ 3.90 March 31, 2009 25,000 5.0% U.S.$ 4.28 U.S.$ 4.28 April 28, 2009 15,000 3.0% U.S.$ 7.05 U.S.$ 7.05 July 29, 2009 A.M. Archibald 20,000 4.0% U.S.$ 3.90 U.S.$ 3.90 March 31, 2009 21,000 4.2% U.S.$ 4.28 U.S.$ 4.28 April 28, 2009 15,000 3.0% U.S.$ 7.05 U.S.$ 7.05 July 29, 2009 J.B. Carpenter 18,000 3.6% U.S.$ 3.90 U.S.$ 3.90 March 31, 2009 12,000 2.4% U.S.$ 7.05 U.S.$ 7.05 July 29, 2009 D.R. Yull 18,000 3.6% U.S.$ 3.90 U.S.$ 3.90 March 31, 2009 12,000 2.4% U.S.$ 7.05 U.S.$ 7.05 July 29, 2009
As further highlighted in the table below, in 2003, the named executive officers who exercised options were M.F. Yull who exercised 20,000 options, H.D. McSween who exercised 40,000 options and A.M. Archibald who exercised 40,000 options. AGGREGATED OPTION EXERCISES DURING THE FINANCIAL YEAR ENDED DECEMBER 31, 2003 AND FINANCIAL YEAR-END OPTION VALUES
Value of Unexercised Unexercised Securities Aggregate Options Options Acquired Value at FY-End at FY-End on Exercise Realized (#) (U.S.$) Name (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable _______________ ___________ ____________ _________________________ _________________________ M.F. Yull 20,000 U.S.$129,600 567,750/311,250 6,704,388/2,713,188 H.D. McSween 40,000 U.S.$259,200 130,747/149,418 1,198,675/1,132,981 A.M. Archibald 40,000 U.S.$259,200 124,429/115,114 1,034,582/847,818 J.B. Carpenter 0 0 37,500/82,500 335,181/664,094 D.R. Yull 0 0 79,800/110,000 973,891/982,406
3. Pension Arrangements The Corporation maintains a defined contribution plan through its Canadian subsidiary, Intertape Polymer Inc. ("IPI"), for its salaried employees in Canada. Effective January 1, 2001, the Corporation amended and restated its USA Employees' Retirement Plan to be a combined employee stock ownership plan and 401(k) plan, to change the name of the plan to the "Intertape Polymer Group Inc. USA Employees' Stock Ownership and Retirement Savings Plan" and to bring the plan into compliance with recent legislative changes. The Corporation may make annual discretionary matching contributions equal to a percentage of the contributions made by employees, but in no event shall such contributions exceed six percent of the employee's compensation deposited as elective contributions. A subsidiary of the Corporation contributes to a multi-employer plan for employees covered by collective bargaining agreements. The Corporation's expense for such retirement savings plans for the year ended December 31, 2003, was U.S.$2,446,000 (U.S.$2,585,000 in 2002 and U.S.$2,295,000 in 2001). 4. Executive Employment Contracts and Termination of Employment of Executives The Corporation entered into a new employment agreement with M.F. Yull on January 1, 2004. Pursuant to the terms of the employment agreement (the "Agreement"), M.F. Yull continues to serve as Chairman of the Board and Chief Executive Officer of the Corporation and its subsidiaries. His annual gross salary for the year 2003 was U.S.$491,625. His compensation level is reviewed annually by the Corporation in accordance with its internal policies. M.F. Yull's fixed annual gross salary for the year 2004 was set at U.S.$508,832. The Agreement provides, inter alia, for annual bonuses based on the budgeted objectives of the Corporation. The Agreement also provides for the payment of 36 months of M.F. Yull's remuneration in the event of termination without cause or resignation within six months of a change of control of the Corporation. Further, it provides for all options for the acquisition of common shares of the Corporation previously granted to M.F. Yull to become immediately vested and exercisable in the event of his termination without cause, or his resignation within twelve months of a change of control of the Corporation, or his retirement at any time after his 60th birthday or in the event of his death. In addition to his participation in the pension plan of IPI, the Agreement provides that M.F. Yull will receive, upon his ceasing to be an employee for any reason, a defined benefit supplementary pension annually for life equal to two percent of his average annual gross salary for the final five years of his employment multiplied by his years of service with the Corporation. Furthermore, the Agreement provides that if during the term of M.F. Yull's employment a bona fide offer is made to all shareholders of the Corporation which, if accepted, would result in a change of control of the Corporation, then, subject to any applicable law, all of M.F. Yull's options which have not yet become vested and exercisable shall become vested and exercisable immediately. Upon expiry of such bona fide offer, if it does not result in a change of control of the Corporation, all of M.F. Yull's unexercised options which were not vested prior to such offer, shall immediately revert to their unvested status and to their former provisions with respect to the time of their vesting. The Corporation has also entered into agreements as of January 2001 with each of Messrs. A.M. Archibald, W.A. Barnes, J.B. Carpenter, B.H. Hildreth, J.A. Jackson, G.C. Jones, H.D. McSween, S. Nelson, E. Nugent, K.R. Rogers, D.R. Yull and G.A. Yull, and, as of January 2004 with V. DiTommaso and, as of February 2004, with each of R. Owens, D. Tang, P. Greco and M.J. Dougherty. These agreements provide that if, within a period of six months after a change in control of the Corporation, (a) the executive voluntarily terminates his employment with the Corporation, or (b) the Corporation terminates the executive's employment without cause, such executive will be entitled to a lump sum in the case of his resignation or an indemnity in lieu of notice in a lump sum in the case of his termination, equal to 12 to 24 months of such executive's remuneration at the effective date of such resignation or termination, depending on his seniority. In addition, all options for the acquisition of common shares of the Corporation previously granted to such executive shall become immediately vested and exercisable. Furthermore, these agreements also provide that if during the term of the executive's employment a bona fide offer is made to all shareholders of the Corporation which, if accepted, would result in a change of control of the Corporation, then, subject to any applicable law, all of the executive's options which have not yet become vested and exercisable shall become vested and exercisable immediately. Upon expiry of such bona fide offer, if it does not result in a change of control of the Corporation, all of the executive's unexercised options which were not vested prior to such offer, shall immediately revert to their unvested status and to their former provisions with respect to the time of their vesting. 5. Composition of Compensation Committee and Report on Executive Compensation The overall philosophy of the Corporation as regards compensation is to be competitive with similar manufacturing companies in order to attract and retain high-quality executives with the expertise and skills required in the business of the Corporation. The Compensation Committee is composed of four directors, being Ben J. Davenport, Jr., Michael L. Richards, L. Robbie Shaw and Gordon R. Cunningham. The Compensation Committee is appointed by the Board to discharge the Board's responsibilities relating to compensation of the Corporation's directors and officers. The Compensation Committee has overall responsibility for approving and evaluating the director and officer compensation plans, policies and programs of the Corporation. The Compensation Committee has the sole authority to retain any compensation consultant to be used to assist in the evaluation of director, CEO or senior executive compensation. The Compensation Committee annually reviews and approves the corporate goals and objectives relevant to the CEO's compensation, evaluates the CEO's performance in light of those goals and objectives and recommends to the Board the CEO's compensation level based on this evaluation. In determining the long-term incentive component of CEO compensation, the Compensation Committee will consider the Corporation's performance and relative shareholder return, the value of similar incentive awards to CEOs at comparable companies and the awards given to the CEO in past years. Based on these recommendations, the Board fixes the CEO's compensation. The current CEO, M.F. Yull, does not participate in the Compensation Committee's or the Board of Directors' deliberations as regards to his compensation. The Compensation Committee is also responsible to undertake an annual review and to make recommendations to the Board with respect to the compensation of all other directors, all other officers and key executives of the Corporation, including awards to be granted under the Corporation's Executive Stock Option Plan described above. The recommendation for the granting of stock incentive awards to executive officers are submitted to the Board for approval. In arriving at its decisions, the Compensation Committee reviews industry comparisons for similar sized companies and for other companies in the packaging materials sector. The Compensation Committee also may use surveys from independent consultants from time to time to provide data to review in order to adjust its compensation policies. Three primary components comprise the Corporation's compensation program: basic salary, annual bonuses based on performance and long-term stock options. Each element of compensation fulfills a different role in the attraction, retention and motivation of qualified officers and employees. In accordance with the foregoing, base salaries are established at levels which will enable the Corporation and its subsidiaries to attract, retain and reward executive officers who can effectively contribute to the long-term success and objectives of the Corporation. The annual bonus program is both formula-based measured against pre-determined performance targets, and discretionary. Stock options are granted periodically at the discretion of the Board of Directors and based on the aforementioned recommendations of the Compensation Committee. Options are granted to provide key employees who have responsibility for the management, growth and future success of the Corporation with an opportunity for rewards as a result of stock price increases. The amount and terms of outstanding options are taken into account when determining whether and how many new options will be granted. To encourage continued service, the options granted, if any, become exercisable over a four year period in four equal annual instalments, commencing on the 1st anniversary of the date of the grant. The options have no value if the stock price of the Corporation does not appreciate. It is felt that this approach closely aligns the interests of the executives and the shareholders. The above report has been submitted and approved by the following persons who are the current members of the Corporation's Compensation Committee: Ben J. Davenport, Jr., Michael L. Richards, L. Robbie Shaw and Gordon R. Cunningham Compensation of Directors In 2003, directors of the Corporation, who were not officers of the Corporation, received an annual fee of U.S.$8,500 for their services as directors and a fee of U.S.$750 for each board meeting attended (U.S.$375 for telephone meetings). Furthermore, a total of 55,000 options to purchase common shares of the Corporation were granted to directors of the Corporation who were not officers of the Corporation. 45,000 of those options were granted at an exercise price of U.S.$3.90 and 10,000 of those options were granted at an exercise price of U.S.$7.05. Minimum Stock Ownership Requirements for Directors and Officers Upon recommendations made by the Corporation's Compensation Committee, in the first quarter of 2004 the Board of Directors passed resolutions implementing a policy whereby the officers and directors of the Corporation will be required to maintain ownership of a designated amount of common shares of the Corporation. Set out in the paragraphs below is a summary of such policy. The Chief Executive Officer of the Corporation is required to own that number of common shares that has a value that is equal to five times his or her base salary(1). Senior executive officers of the Corporation are required to own that number of common shares that has a value that is equal to three times their respective base salaries. All other executive officers of the Corporation are required to own that number of common shares that has a value that is equal to their respective base salaries. Directors of the Corporation are required to own that number of common shares that has a value that is equal to the aggregate of five times the total of the annual base retainer fees paid to such directors plus the meeting fees paid to such directors for the four regular quarterly meetings of the Board of Directors. _________________________ (1) The targets mentioned in these paragraphs are based on the salary levels and the market price of the Corporation's common shares as of January 2004. Adjustments will be made, as applicable in accordance with the policy, upon the appointment of a new director or officer or upon the promotion of an officer. Directors and officers of the Corporation have four years from January 2004 to attain the foregoing common share ownership levels. Until such stock ownership levels have been achieved, a specific officer or director must maintain 75% of all common shares that they have received through the exercise of any options that had been granted to them by the Corporation and they must thereafter maintain 25% of all common shares that they have received through the exercise of any options. Failure to attain the required ownership levels within the prescribed time period will call for the holding of one-half of future incentive payments (or directors fees) to be made to such individual until the required ownership level is obtained. Directors and officers may apply to the Corporation's Compensation Committee in order to obtain a waiver from the application of all or a portion of the foregoing policy. The Compensation Committee may recommend that the Board of Directors grant a waiver to a particular director or officer on a case by case basis (the Compensation Committee will consider a specific individual's estate planning needs, necessity to purchase a primary residence, education expenses, charitable contributions and/or other demonstrations of hardship (e.g. illness or divorce)). Indebtedness of Directors and Officers As listed in the table below, certain officers of the Corporation are currently indebted to the Corporation in respect of interest-free loans that are payable on demand by the Corporation. As at April 26, 2004, the aggregate indebtedness of all directors, executive officers and senior officers to the Corporation entered into in connection with such loans was Cdn$606,634 and U.S.$411,128. The following table summarizes the largest amount of such loans outstanding during the year ended December 31, 2003 and the amount outstanding as at April 26, 2004. TABLE OF INDEBTEDNESS OF DIRECTORS, EXECUTIVE OFFICERS AND SENIOR OFFICERS Largest Amount Oustanding Amount Involvement of the During FY-Ended Outstanding as Corporation or its Dec. 31, 2003 at April 26, 2004 Name and Principal Position subsidiaries ($) ($) ___________________________ _____________________________ _______________ _________________ M.F. Yull The Corporation is the Lender U.S.$216,398 U.S.$216,398 Chairman of the Board, Cdn $415,277 Cdn $415,277 Chief Executive Officer and a Director G.A. Yull The Corporation is the Lender U.S.$125,000 U.S.$125,000 President - Film Products A.M. Archibald The Corporation is the Lender Cdn $160,255 Cdn $160,255 Chief Financial Officer, Secretary, Vice President Administration D.R. Yull - The Corporation is the Lender U.S.$ 59,730 U.S.$ 59,730 Vice-President Sales & Marketing - Distribution Products H.D. McSween The Corporation is the Lender Cdn $ 31,102 Cdn $ 31,102 President - Distribution Products J. Jackson The Corporation is the Lender U.S.$ 10,000 U.S.$ 10,000 Chief Information Officer
Directors' and Officers' Insurance The Corporation maintains directors' and officers' liability insurance covering liability, including defense costs, of directors and officers of the Corporation incurred as a result of acting as such directors or officers, provided they acted honestly and in good faith with a view to the best interests of the Corporation. The current limit of insurance is U.S.$25,000,000 and an annual premium of U.S.$290,000 was paid by the Corporation in the last completed financial year with respect to the period from December 2003 to December 2004. Claims payable to the Corporation are subject to a retention of up to U.S.$500,000 per occurrence. Performance Graph The following graphs illustrate changes over the past five year period in cumulative total shareholder return over the five-year period on the Corporation's common shares with the cumulative shareholder returns on the S&P/TSX Total Return Index (1st graph below) and on the S&P 500 (2nd graph below), assuming reinvestment of all dividends. [GRAPH] Appointment and Remuneration of Auditors Raymond Chabot Grant Thornton, Chartered Accountants, who have been the auditors of the Corporation since December 22, 1989 and the auditors of the predecessor company since 1981, have been recommended by the Audit Committee and will be nominated for appointment as the Corporation's auditors to hold office until the next annual meeting of shareholders at such remuneration as may be fixed by the Board of Directors. A majority of the votes of the shareholders present or represented by proxy at the Meeting is required for the approval of such matter. Representatives of Raymond Chabot Grant Thornton will be present at the Meeting and will have an opportunity to make a statement if they desire to do so. They will also be available to respond to appropriate questions. Amendments to the Executive Stock Option Plan In 1992, the Corporation established its ongoing Plan in respect of the common shares of the Corporation. The purpose of the Plan is to promote a proprietary interest in the Corporation among the executives, the key employees and the non-management directors of the Corporation and its subsidiaries, in order to both encourage such persons to further the development of the Corporation and to assist the Corporation in attracting and retaining key personnel necessary for the Corporation's long term success. On April 12, 2004, the Board of Directors passed a resolution amending the Plan in order to limit the aggregate maximum number of common shares that may be issued under the Plan to non-executive directors of the Corporation and its subsidiaries to 1% of the outstanding common shares of the Corporation. On the same date, the Board of Directors also passed a resolution amending the Plan in order to establish that options granted under the Plan may not be subsequently re-priced. The foregoing amendments to the Plan were implemented by the Board of Directors in order to ensure that the terms and provisions of the Plan stays consistent with the terms and provisions of option plans that have been adopted by other publicly-traded companies. Currently, the maximum number of common shares that may be issued under the Plan is 3,361,661, being approximately 10% of the common shares of the Corporation that were outstanding as of March 8, 2002. On February 19, 2004, the Board of Directors adopted a resolution to amend the Plan in order to increase the number of options that may be granted under the Plan from 3,361,661 to 4,094,538, being approximately 10% of the outstanding common shares of the Corporation as of February 19, 2004, the adoption of such resolution being conditional upon the Corporation receiving the required regulatory and shareholder approvals. Effective February 24, 2004, upon the recommendation of the Corporation's Compensation Committee, the Board of Directors approved grants of (i) an aggregate of 154,500 options to various employees of the Corporation and its subsidiaries, (ii) an aggregate of 330,000 options to various executives of the Corporation and its subsidiaries (which number includes a grant of 100,000 options to M.F. Yull), and (iii) an aggregate of 45,000 options to various non-executive directors of the Corporation. Such options have an exercise price of Cdn$14.45 (U.S.$10.87) and will expire on February 24, 2010. The foregoing grants are subject to the approval of the proposed amendment to the Plan whereby the number of options that may be granted under the Plan would be increased from 3,361,661 to 4,094,538. Consequently, the following resolution will be submitted for approval by a majority of shareholders present or represented by proxy at the Meeting. IT IS RESOLVED: "THAT the Executive Stock Option Plan (the "Plan") of the Corporation be amended by deleting the figure "3,361,661 Shares" in Section 4 of the Plan and replacing same with "4,094,538 Shares". Interest of Management and Others in Material Transactions The management of the Corporation is unaware of any material interest of any director or officer of the Corporation, of any management nominee for election as a director of the Corporation or of any person who beneficially owns or exercises control or direction over shares carrying more than ten percent of the voting rights attached to all shares of the Corporation, or any associate or affiliate of any such person, in any transaction since the beginning of the last completed financial year of the Corporation or in any proposed transactions that has materially affected or will materially affect the Corporation or any of its affiliates. STATEMENT OF CORPORATE GOVERNANCE PRACTICES OF THE CORPORATION In 1995, the Toronto Stock Exchange (the "TSX") adopted a requirement that disclosure be made by each listed company of its corporate governance system by making reference to the TSX Guidelines for Corporate Governance (the "Guidelines"). and each listed company is also required to explain where its system of governance differs from the Guidelines. More recently, regulators in both Canada and the United States have brought forth new requirements in terms of corporate governance and accountability in connection with public companies. Heightened expectations on the part of investors and the public in general encouraged governments and regulators in both countries to propose and adopt new rules in these sectors and to revise and amend those rules that were already in effect. The Corporation's Nominating & Governance Committee will continue to follow the progress of these developments with a view to recommending to the Board any changes to the Corporation's governance practices that may become necessary in order that the Corporation complies with the aforementioned requirements as they become effective. The following is a statement of the Corporation's existing corporate governance practices with specific reference to the Guidelines (as indicated in bold below) currently in effect: The board of directors of every corporation should explicitly assume responsibility for the stewardship of the Corporation and adopt a formal mandate setting out the board's stewardship responsibilities, and as part of the overall stewardship responsibility, the board should assume responsibility for the following matters: (a) adoption of a strategic planning process and the approval and review, on at least an annual basis of a strategic plan; (b) the identification of the principal risks of the corporation's business and overseeing the implementation of appropriate systems to manage these risks; (c) succession planning, including appointing, training and monitoring senior management; (d) communications policies for the corporation; and (e) the integrity of the corporation's internal control and management information systems. All the directors presently in office and proposed to be elected at the Meeting have served as directors in good standing of the Corporation since 1994, other than Mr. Cunningham who was elected in 1998, Mr. Lanthier who was elected in 2001 and Thomas E. Costello who was elected on November 22, 2002. Participation of directors is expected at all Board of Directors and Committee meetings. Directors are asked to notify the Corporation if they will be unable to attend and attendance at meetings is duly recorded. All the directors have agreed to contribute to the evaluation of their collective as well as their individual performances. The mandate of the Board of Directors of the Corporation is to supervise the management of the business and affairs of the Corporation, including the development of major policy and strategy and the identification of the risks of the Corporation's business and implementation of the appropriate systems to manage these risks. The Board of Directors of the Corporation has explicitly assumed responsibility for the stewardship of the Corporation and has adopted a formal mandate setting out its stewardship responsibilities. Additionally, the Corporation has adopted a Code of Conduct and Business Ethics that all directors, management personnel and employees of the Corporation are expected to adhere to. All major decisions concerning, among other things, the Corporation's corporate status, capital, debt financing, securities distributions, investments, acquisitions, divestitures and strategic alliances, are subject to approval by the Board of Directors. In particular, capital investments and other outlays of an aggregate monetary amount of one million U.S. dollars or more are subject to the prior approval of the Board of Directors. The Board of Directors meets at least quarterly, and more frequently as required to consider particular issues or conduct specific reviews between quarterly meetings whenever appropriate. The Board of Directors periodically invites senior operating management to attend meetings of the Board of Directors to report on their business responsibilities. Governance responsibilities are undertaken by the Board of Directors as a whole, with certain specific responsibilities delegated to the Audit, the Compensation and the Nominating & Governance Committees as described below. For example, the Board of Directors has mandated the Compensation Committee and the Nominating & Governance Committee to develop a succession planning strategy for the Corporation which will include formalizing the Corporation's procedures related to the appointing, training and monitoring of senior management. The board of directors of every corporation should be constituted with a majority of individuals who qualify as unrelated directors. If the corporation has a significant shareholder, in addition to a majority of unrelated directors, the board should include a number of directors who do not have interests in or relationships with either the corporation or the significant shareholder and which fairly reflects the investment in the corporation by shareholders other than the significant shareholder. The application of the definition of "unrelated director" to the circumstances of each individual director should be the responsibility of the board which will be required to disclose whether the board has a majority of unrelated directors or, in the case of a corporation with a significant shareholder, whether the board is constituted with the appropriate number of directors which are not related to either the corporation or the significant shareholder. The Corporation's Board of Directors currently consists of seven directors, five of whom are unrelated directors in accordance with the definition of an unrelated director in the Guidelines. The Board of Directors has examined its size and determined that seven directors, five of whom are unrelated, is an appropriate number for continued effective decision-making for the Corporation. The Board of Directors is currently chaired by M.F. Yull who is also the Chief Executive Officer of the Corporation. The Board is of the view that this does not impair its ability to act independently of management due, inter alia, to the independence of the remaining members of the Board of Directors and due to the role of the Board of Directors in determining its own policies, procedures and practices, and ensuring that the appropriate information is made available to the Board of Directors. The Corporation does not have a significant shareholder as described in the Guidelines given that no shareholder of the Corporation has the ability to exercise a majority of the votes for the election of the Corporation's Board of Directors. Committees of the board of directors should generally be composed solely of non-management directors, a majority of whom are unrelated directors. The Board of Directors has established three committees, the Audit Committee, the Compensation Committee, and the Nominating & Governance Committee to facilitate the carrying out of its duties and responsibilities and to meet applicable statutory requirements. The Guidelines recommend that the Audit Committee be made up of non-management and unrelated directors only and that other board committees should be comprised generally of non-management directors, a majority of whom should be unrelated directors. The following is a description of the Committees of the Board of Directors and their mandate: - Audit Committee The Audit Committee is presently composed of four directors, being L. Robbie Shaw, Gordon R. Cunningham J. Spencer Lanthier and Thomas E. Costello, all of whom are non-management directors and all of whom are unrelated directors, as such term is understood in reference to the Guidelines. The Audit Committee met eight times during the period from January 1, 2003 to December 31, 2003. The basic mandate of the Audit Committee is to review the annual financial statements of the Corporation and to make recommendations to the Board of Directors in respect thereto. Further, the Committee reviews the nature and scope of the annual audit as proposed by the external auditors and management and, with the external auditors and management, the adequacy of the internal accounting control procedures and systems within the Corporation. During 2002, the Audit Committee formalized its mandate into a written charter document. The charter sets out that, in addition to its basic mandate, the Audit Committee will, on a going-forward basis, have the sole authority to recommend to the Corporation's shareholders the appointment or replacement of the Corporation's external auditors and shall approve all audit engagement fees and terms and all significant non-audit engagements with the external auditors. Further, the Audit Committee will require that the Corporation's external auditors provide a report at least annually regarding, inter alia, the auditors' internal quality-control procedures and all relationships between the external auditors and the Corporation. While the Audit Committee may consult with management on these issues, it shall not delegate its overall responsibility. The charter also sets out that the Audit Committee shall have the authority, to the extent it deems necessary or appropriate, to retain special legal, accounting or other consultants for additional advice as may be required. - Compensation Committee The Compensation Committee is presently composed of four directors, being Ben J. Davenport, Jr., Michael L. Richards, L. Robbie Shaw and Gordon R. Cunningham. The Compensation Committee met six times during the period from January 1, 2003 to December 31, 2003. Michael L. Richards is considered to be a related director given that the law firm Stikeman Elliott LLP, of which Mr. Richards is a senior partner, provides legal services to the Corporation on a regular basis. Nonetheless, given Mr. Richards' broad business experience, the Corporation feels he should continue to serve on the Compensation Committee. Further, the Corporation is of the view that its relationship with Stikeman Elliott LLP does not inhibit Mr. Richards' ability to act impartially, nor his ability to act independently of the views of management of the Corporation. The mandate of the Compensation Committee was described above under the heading "Report on Executive Compensation". - Nominating & Governance Committee The Nominating & Governance Committee is composed of all of the members of the Board, a majority of whom are unrelated directors. The charter of the Nominating & Governance Committee sets out that the committee will, inter alia: (i) assess on an annual basis the effectiveness of the Board as a whole as well as periodically evaluate the contribution of individual members of the Board; (ii) review, on a periodic basis, the size and composition of the Board and ensure that an appropriate number of unrelated directors sit on the Board; (iii) identify individuals qualified to become members of the Board as may be required and recommend to the Board new nominees for appointment; (iv) provide appropriate orientation to any new members of the Board; (v) recommend to the Board corporate governance guidelines and ensure the sufficiency of such guidelines on a periodic basis; and (vi) review and advise the Board at least annually as to corporate governance issues. The board of directors of every corporation should appoint a committee of directors composed exclusively of non-management directors, a majority of whom are unrelated directors, with the responsibility for proposing to the full board new nominees to the board and for assessing directors on an ongoing basis. As aforementioned, this responsibility has been undertaken by the Nominating & Governance Committee of the Board, a majority of whom are unrelated directors, but one of whom is a member of management. Every board of directors should implement a process to be carried out by the nominating committee or other appropriate committee for assessing the effectiveness of the board as a whole, the committees of the board and the contribution of individual directors. As aforementioned, this responsibility has been undertaken by the Nominating & Governance Committee of the Board. Every corporation, as an integral element of the process for appointing new directors, should provide an orientation and education program for new recruits to the board, In addition, every corporation should provide continuing education for all directors. As aforementioned, this responsibility has been undertaken by the Nominating & Governance Committee of the Board. Every board of directors should examine its size and composition and undertake, where appropriate, a program to establish a board comprised of members who facilitate effective decision-making. As aforementioned, this responsibility has been undertaken by the Nominating & Governance Committee of the Board. A committee of the board of directors comprised solely of unrelated directors should review the adequacy and form of the compensation of senior management and directors, with such compensation realistically reflecting the responsibilities and risks of such positions. This responsibility forms part of the mandate of the Compensation Committee, as described above under the heading "Report on Executive Compensation". Every board of directors should expressly assume responsibility for, or assign to a committee of directors the general responsibility for, developing the corporation's approach to governance issues. This committee would, among other things, be responsible for the Corporation's response to these governance guidelines. As aforementioned, this responsibility has been undertaken by the Nominating & Governance Committee of the Board. The board of directors, together with the CEO, should develop position descriptions for the board and for the CEO, involving the definition of the limits to management's responsibilities. In addition, the board should approve or develop the corporate objectives which the CEO is responsible for meeting and assess the CEO against these objectives. The Corporation established written corporate governance guidelines to address the above issues. Such guidelines do not contain formalized position descriptions for the Board and for the CEO, nor do they set out specific objectives which the CEO is responsible for meeting. The Board is of the view that due to its relatively small size, the need for these formalities is diminished because effective communication between the Board and management of the Corporation is otherwise achieved. That being said, the Compensation Committee conducts an annual review of the CEO's performance in order to ensure that the CEO is providing the best leadership for the Corporation in the long and short term. The audit committee should be composed only of unrelated directors. All of the members of the audit committee should be financially literate and at least one member should have accounting or related financial experience. The audit committee should have direct communication channels with the internal and external auditors to discuss and review specific issues as appropriate. The audit committee duties should include oversight responsibility for management reporting on internal control. The Audit Committee of the Corporation, as described previously, meets all of the above criteria. Every board of directors should implement structures and procedures that ensure that the board can function independently of management. The board of directors should implement a system which enables an individual director to engage an external adviser at the expense of the Corporation in appropriate circumstances. The engagement of the external adviser should be subject to the approval of an appropriate committee of the board. Non-management directors meet at least quarterly. Further, the Board and the Audit Committee have the power to hire independent legal, financial or other advisors as they may deem necessary, without consulting or obtaining the approval of any officer of the Corporation in advance. Corporations should have a formalized process in order to communicate as required with shareholders and in order to address their feedback and queries. The fundamental objective of the Corporation's shareholder communication policy is to ensure an open, accessible and timely exchange of information with all shareholders respecting the business, affairs and performance of the Corporation, subject to the requirements of securities legislation in effect and other statutory and contractual obligations limiting the disclosure of such information. In order to facilitate the effective and timely dissemination of information to all of its shareholders, the Corporation releases its disclosed information through news wire services, the general media, telephone conferences with investment analysts and mailings to shareholders. APPROVAL OF DIRECTORS The contents and the sending of this Circular have been approved by the directors of the Corporation. (SIGNED) ANDREW M. ARCHIBALD, C.A. Chief Financial Officer, Secretary, Vice President, Administration Montreal, Quebec - April 26, 2004 EX-7 4 ipg2003meetingnotice.txt PROXY CARD INTERTAPE POLYMER GROUP INC. 110E Montee de Liesse, Montreal, Quebec, H4T 1N4 NOTICE OF THE ANNUAL AND SPECIAL MEETING OF SHAREHOLDERS NOTICE IS HEREBY GIVEN that the Annual and Special Meeting (the "Meeting") of Shareholders of INTERTAPE POLYMER GROUP INC. (the "Corporation") will be held at the Hilton Montreal Bonaventure Hotel, 1 Place Bonaventure, Montreal, Quebec, on June 2, 2004, at 4:00 o'clock in the afternoon, for the purposes of: (1) receiving the consolidated financial statements for the year ended December 31, 2003, together with the auditors' report thereon; (2) electing a board of seven directors to serve until the next annual meeting of shareholders; (3) appointing auditors and authorizing the directors to fix their remuneration; (4) considering and, if deemed advisable, approving, ratifying and confirming amendments to the Corporation's Executive Stock Option Plan; and (5) transacting such other business as may properly be brought before the Meeting. The specific details of all matters proposed to be put before the Meeting are set forth in the accompanying Management Proxy Circular. Only holders of record of common shares of the Corporation at the close of business on April 26, 2004 will be entitled to vote at the Meeting. By Order of the Board of Directors, (signed) ANDREW M. ARCHIBALD, C.A. Chief Financial Officer, Secretary, Vice President, Administration Montreal, Quebec - April 26, 2004 SHAREHOLDERS WHO ARE UNABLE TO BE PRESENT AT THE MEETING ARE REQUESTED TO COMPLETE AND RETURN THE ENCLOSED FORM OF PROXY IN THE ENVELOPE PROVIDED FOR THAT PURPOSE. PROXIES MUST BE RECEIVED AT THE REGISTERED OFFICE OF THE TRANSFER AGENT OF THE CORPORATION NOT LESS THAN 48 HOURS PRIOR TO THE MEETING. -----END PRIVACY-ENHANCED MESSAGE-----