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