6-K 1 businessacquisitionreport.txt BUSINESS ACQUISITION REPORT RE FLEXIA AND FIB-PAK SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 6-K Report of Foreign Private Issuer Pursuant to Rule 13a-16 or 15d-16 of the Securities Exchange Act of 1934 For the month of December, 2005 Commission File Number 1-10928 INTERTAPE POLYMER GROUP INC. 9999 Cavendish Blvd., 2nd Floor, St. Laurent, Quebec, Canada, H4M 2X5 Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F: Form 20-F Form 40-F X Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): __________ Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): __________ Indicate by check mark whether by furnishing the information contained in this Form, the registrant is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934. Yes No X If "Yes" is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82-______ The Information contained in this Report is incorporated by reference into Registration Statement No. 333-109944 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INTERTAPE POLYMER GROUP INC. Date: December 20, 2005 By: /s/Andrew M. Archibald Andrew M. Archibald, C.A., CFO and Secretary Intertape Polymer Group Inc. Form 51-102 F4 Business Acquisition Report Item 1 Identity of Company 1.1 Name and Address of Company Intertape Polymer Group Inc. (the "Company") 9999 Cavendish Blvd. 2nd Floor Ville St. Laurent, Quebec H4M 2X5 1.2 Executive Officer For further information contact Melbourne F. Yull, Chairman of the Board and Chief Executive Officer of the Company at (941) 739-7505. Item 2 Details of Acquisition 2.1 Nature of Business Acquired On October 5, 2005, the Company's wholly-owned subsidiary, Intertape Polymer Inc., acquired all of the outstanding shares of Flexia Corporation Ltd., being the body corporate that resulted from the amalgamation, on October 4, 2005, of Flexia Corporation ("Flexia") and Fib-Pak Industries Inc. ("Fib-Pak"). Flexia is headquartered in Brantford, Ontario and also has operations in Langley, British Columbia and Cap-de-la-Madeleine, Quebec. Flexia produces a wide range of coated, printed and laminated materials, including fabrics, paper, film and foil, all of which it sells to customers throughout North America. Fib-Pak operates two plants in Hawkesbury, Ontario from which it manufactures woven circular or flat polyethylene scrims and polypropylene fabrics that are sold to manufacturers of flexible intermediate bulk containers (FIBCs), reinforced products and flexible packaging. Fib Pak also manufactures a broad range of FIBCs. 2.2 Date of Acquisition October 5, 2005. 2.3 Consideration The aggregate consideration paid by the Company in connection with the transaction was approximately C$33,500,000: (a) approximately C$14,768,000 of which was advanced by the Company to Flexia and Fib-Pak in order to be used by Flexia and Fib-Pak to repay, in full, their respective indebtedness to the National Bank of Canada and to holders of debentures that had previously been issued by Flexia and Fib-Pak; (b) a portion of the remaining consideration is being held in escrow in order, inter alia, to satisfy post-closing purchase price adjustments which may be required to be made further to the terms and conditions of the share purchase agreement entered into by the parties in connection with the acquisition, such post-closing adjustments which will be based on items related to Flexia and Fib-Pak at the time of the closing of the acquisition, including, without limitation, the actual level of their respective working capital and indebtedness; and (c) the remaining consideration was paid to the shareholders of Flexia and Fib-Pak. To fund the acquisition, the Company used approximately C$6,000,000 of cash on hand and it drew approximately C$27,500,000 on its revolving credit facility. 2.4 Effect on Financial Position The Company completed its acquisition of Flexia Corporation Ltd., being the successor corporate body to Flexia and Fib-Pak, for several reasons, including the expectation that the acquisition would (i) allow the Company to increase its market share in key product groups, (ii) provide the Company with an enhanced geographic proximity to its customers and to its suppliers of raw materials, (iii) lead to procurement savings arising from an improved global sourcing model, (iv) provide the Company with operational synergies, and (v) broaden the Company's existing product offering. Subsequent to the acquisition, on December 20, 2005, the Company announced its intention to pursue a spin-off of substantially all of its engineered coated products and flexible intermediate bulk containers bag import operations (the "Coated Products Operations"), combined with a spin-off of substantially all of the operations of Flexia and Fib-Pak (the Coated Products Operations, Flexia's operations and Fib-Pak's operations being collectively referred to herein as the "Business"). For the 12-month period ended September 30, 2005, the Company's Coated Products Operations generated sales of approximately C$120.0 million and Flexia and Fib-Pak generated sales of approximately C$117.0 million for a combined total of approximately C$237.0 million in sales during such period. The Company intends to proceed with an initial public offering of the Business through an income trust structure. A preliminary prospectus in respect of the offering is expected to be filed by the Company in the first quarter of 2006. Following the closing of the offering, the Company will continue to retain a significant interest in the Business. The amount of cash generated from the offering will be dependent on the pricing and successful completion of the offering. The Company plans to use the cash that it receives as a result of the offering primarily to reduce its outstanding indebtedness with the balance, if any, to be used for general corporate purposes, including working capital. The Company's intention to proceed with the offering is subject to its ability to obtain all required regulatory approvals and third party consents in connection with the offering, as well as the existence of favourable market conditions for such an offering. Please note that the financial statements and other financial information presented as part of this report, including the pro forma financial statements, cover periods during which the Company, Flexia and Fib-Pak were not under the same management and, therefore, may not be indicative of future financial conditions or operating results. 2.5 Prior Valuations No valuation opinions of Flexia Corporation Ltd., Flexia or Fib-Pak were obtained within the last 12 months by the Company, Flexia Corporation Ltd., Flexia or Fib-Pak. 2.6 Parties to the Acquisition Flexia Corporation Ltd., Flexia and Fib-Pak were not, prior to the acquisition, informed persons, associates or affiliates of the Company or Intertape Polymer Inc. 2.7 Date of Report December 20, 2005. Item 3 Financial Statements The following financial statements are included as part of this Business Acquisition Report: Schedule A: a balance sheet of Flexia as at June 30, 2005 and as at June 30, 2004, statements of earnings, retained earnings and cash flows for Flexia for its financial years ended June 30, 2005 and June 30, 2004, as well as notes to the foregoing financial statements and an auditor's report thereon; Schedule B: a balance sheet of Fib-Pak as at June 30, 2005 and as at June 30, 2004, statements of earnings and deficit and cash flows for Fib-Pak for its financial years ended June 30, 2005 and June 30, 2004, as well as notes to the foregoing financial statements and an auditor's report thereon; Schedule C: an unaudited interim balance sheet of Flexia as at September 30, 2005, unaudited interim statements of earnings, retained earnings and cash flows for Flexia for the three months ended September 30, 2005 and September 30, 2004; Schedule D: an unaudited interim balance sheet of Fib-Pak as at September 30, 2005, unaudited interim statements of income, retained earnings and cash flows for Fib-Pak for the three months ended September 30, 2005 and September 30, 2004; and Schedule E: an unaudited pro forma consolidated balance sheet of the Company as at September 30, 2005, unaudited pro forma consolidated statement of earnings of the Company for its financial year ended December 31, 2004 and for the nine months ended September 30, 2005, notes to the pro forma consolidated financial statements of the Company and a compilation report dated December 19, 2005 accompanying the unaudited pro forma consolidated financial statements of the Company. INTERTAPE POYLMER GROUP INC. (signed by): Name: Andrew M. Archibald Title: Chief Financial Officer and Secretary Business Acquisition Report Dated December 20, 2005 Caution Regarding Forward-Looking Information This Business Acquisition Report may contain certain forward looking statements. In some cases, forward-looking statements can be identified by terminology such as "may", "will", "intend", "should", "expect", "plan", "anticipate", "believe", "estimate", "predict", "potential", "continue" or the negative of these terms or other comparable terminology. Such statements constitute "forward-looking statements" within the meaning of the Federal Private Securities Litigation Reform Act of 1995 and are made pursuant to the "safe harbour" provisions of US securities legislation. Forward looking statements involve significant risks and uncertainties and should not be read as guarantees of future performance or results and will not necessarily be accurate indications as to whether or not such results will be achieved. A number of factors could cause actual events or results to differ materially from the results discussed in the forward looking statements. In evaluating these statements, readers should specifically consider various factors mentioned in the Company's public securities filings that could cause actual results to differ materially from management's projections, estimates and expectations. While such forward-looking statements reflect current beliefs of management and are based upon what management believes to be reasonable assumptions, there can be no assurance that actual results will be consistent with these forward looking statements. These forward looking statements are made as at the date of this Business Acquisition Report and the Company does not assume any obligation to update or revise them to reflect new events or circumstances. Schedule A A balance sheet of Flexia as at June 30, 2005 and as at June 30, 2004, statements of earnings, retained earnings and cash flows for Flexia for its financial years ended June 30, 2005 and June 30, 2004, as well as notes to the foregoing financial statements and an auditor's report thereon (Please see attached) Financial Statements of FLEXIA CORPORATION June 30, 2005, June 30, 2004 and June 30, 2003 DELOITTE Deloitte & Touche LLP 1005 Skyview Drive Suite 202 Burlington ON L7P 5B1 Canada Tel: 905 315-6770 Fax: 905 315-6700 www.deloitte.ca AUDITORS' REPORT To the Directors of Flexia Corporation We have audited the balance sheets of Flexia Corporation as at June 30, 2005 and 2004 and the statements of earnings, retained earnings and cash flows for each of the years in the three year period ended June 30, 2005. 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 financial statements present fairly, in all material respects, the financial position of the Company as at June 30, 2005 and 2004 and the results of its operations and its cash flows for each of the years in the three year period ended June 30, 2005 in accordance with Canadian generally accepted accounting principles. /s/Deloitte & Touche LLP Chartered Accountants Burlington, Ontario October 26, 2005 Member of Deloitte Touche Tohmatsu FLEXIA CORPORATION Statements of Earnings For the years ended June 30, 2005, 2004 and 2003 (in thousands of dollars except per share amounts) _______________________________________________________________________________ 2005 2004 2003 ____________ ____________ ______________ NET SALES $ 106,401 $ 98,106 $ 104,523 COST OF SALES 95,748 86,955 91,126 _______________________________________________________________________________ GROSS PROFIT 10,653 11,151 13,397 _______________________________________________________________________________ OTHER EXPENSES (INCOME) Selling and administrative 6,246 6,361 5,814 Amortization of patents and trademarks 83 83 83 Amortization of deferred financing costs 55 161 161 Amortization of deferred gain (Note 15) (132) -- -- Gain on sale of product line (Note 16) (11,886) -- -- _______________________________________________________________________________ (5,634) 6,605 6,058 _______________________________________________________________________________ EARNINGS BEFORE THE UNDERNOTED 16,287 4,546 7,339 Interest expense - long term (Note 8) 1,767 2,195 2,640 - short term 323 438 326 _______________________________________________________________________________ 2,090 2,633 2,966 _______________________________________________________________________________ EARNINGS BEFORE INCOME TAXES 14,197 1,913 4,373 _______________________________________________________________________________ INCOME TAXES (Note 17) Current 3,507 252 503 Future (439) 393 932 _______________________________________________________________________________ 3,068 645 1,435 _______________________________________________________________________________ NET EARNINGS $ 11,129 $ 1,268 $ 2,938 _______________________________________________________________________________ EARNINGS PER SHARE BASIC AND DILUTED $1.11 $0.13 $0.29 _______________________________________________________________________________ FLEXIA CORPORATION Statements of Retained Earnings For the years ended June 30, 2005, 2004 and 2003 (in thousands of dollars) _______________________________________________________________________________ 2005 2004 2003 __________ __________ _________ RETAINED EARNINGS, BEGINNING OF YEAR $ 6,620 $ 5,352 $ 2,414 NET EARNINGS 11,129 1,268 2,938 _______________________________________________________________________________ RETAINED EARNINGS, END OF YEAR $ 17,749 $ 6,620 $ 5,352 _______________________________________________________________________________ FLEXIA CORPORATION Balance Sheets June 30, 2005 and 2004 (in thousands of dollars) _______________________________________________________________________________ 2005 2004 _____________ ____________ ASSETS CURRENT Accounts receivable $ 13,040 $ 15,063 Due from affiliated company (Note 12) 8 - Income taxes receivable - 336 Inventories (Note 4) 17,377 13,701 Prepaid expenses 191 319 _______________________________________________________________________________ 30,616 29,419 LONG-TERM RECEIVABLE (Note 16) 1,517 - PROPERTY, PLANT AND EQUIPMENT (Note 5) 18,291 26,478 ACCRUED PENSION ASSET (Note 13) 1,295 602 OTHER NON-CURRENT ASSETS (Note 6) - 138 _______________________________________________________________________________ $ 51,719 $ 56,637 _______________________________________________________________________________ LIABILITIES CURRENT Bank indebtedness (Note 7) $ 1,687 $ 5,258 Accounts payable and accrued liabilities 10,370 15,654 Income taxes payable 3,021 - Due to affiliated company (Note 12) - 506 Current portion of long-term debt (Note 8) 7,420 20,143 _______________________________________________________________________________ 22,498 41,561 FUTURE INCOME TAXES (Note 17) 2,461 2,900 ACCRUED POST-RETIREMENT BENEFITS OBLIGATION (Note 13) 1,458 1,326 DEFERRED GAIN (Note 15) 3,323 - _______________________________________________________________________________ 29,740 45,787 _______________________________________________________________________________ CONTINGENCIES (Note 9) SHAREHOLDERS' EQUITY Share capital (Note 10) 4,230 4,230 Retained earnings 17,749 6,620 _______________________________________________________________________________ 21,979 10,850 _______________________________________________________________________________ $ 51,719 $ 56,637 APPROVED BY THE BOARD .......................Director .............................Director FLEXIA CORPORATION Statements of Cash Flows For the years ended June 30, 2005, 2004 and 2003 (in thousands of dollars) _______________________________________________________________________________ 2005 2004 2003 ___________ ___________ ___________ NET INFLOW (OUTFLOW) OF CASH RELATED TO THE FOLLOWING ACTIVITIES: OPERATING Net earnings $ 11,l29 $ 1,268 $ 2,938 Items not affecting cash Gain on sale of product line (11,886) - - Amortization of property, plant and equipment 2,455 2,349 2,222 Amortization of deferred gain (132) - - Amortization of patents and trademarks 83 83 83 Amortization of deferred financing costs 55 161 161 Future income taxes (439) 393 932 Pension funding in excess of amounts expensed (693) (540) (238) Post-retirement benefit expense 132 110 96 Other (17) - - _______________________________________________________________________________ 687 3,824 6,194 Changes in non-cash operating working capital items (Note 11) (3,966) 96 (4,400) _______________________________________________________________________________ (3,279) 3,920 1,794 _______________________________________________________________________________ INVESTING Proceeds on sale of product line (Note 16) 10,386 - - Purchase of property, plant and equipment (1,499) (1,828) (2,823) Proceeds on sale of property, plant and equipment (Note 15) 10,686 - - _______________________________________________________________________________ 19,573 (1,828) (2,823) _______________________________________________________________________________ FINANCING (Decrease) increase in bank indebtedness (3,571) 1,435 3,279 Repayment of long-term debt (12,723) (3,527) (2,250) _______________________________________________________________________________ (16,294) (2,092) 1,029 NET CASH INFLOW, CASH AND CASH EQUIVALENTS BEGINNING AND END OF YEAR $ - $ - $ - _______________________________________________________________________________ Supplementary information (Note ll) FLEXIA CORPORATION Notes to the Financial Statements For the years ended June 30, 2005, 2004 and 2003 (amounts in thousands of dollars except per share amounts) 1. DESCRIPTION OF BUSINESS Flexia Corporation (the "Company") is incorporated under the province of Quebec and its principal line of business is the manufacture and distribution of protective barrier products. 2. CHANGES IN ACCOUNTING POLICIES Asset retirement obligations On July 1, 2004, the Company adopted the recommendations of CICA Handbook Section 3110 "Asset retirement obligations". The standard provides guidance for the recognition, measurement and disclosure of liabilities for asset retirement obligations. The liability represents the fair value of the obligations. The corresponding cost is capitalized as part of the related asset and is amortized over the asset's useful life. The new recommendations had no impact on the financial statements. Stock-based compensation and other stock-based payments Effective July 1, 2002 the Company adopted the recommendations in section 3870 of the CICA Handbook, "Stock-based compensation and other stock-based payments". The section sets standards for recognizing, measuring and disclosing stock-based compensation and other stock-based payments made in exchange for goods and services. According to the standard, awards granted to employees which can be settled in cash and other assets, must be recognized in the financial statements based on the intrinsic value of the awards. The Company's employee stock option plan includes cash settlement features in the event an employee leaves the employ of the Company or if there is a change in control. Before July 1, 2002 an expense was not recognized until the date the employee ceased working for the Company. Effective July 1, 2002 the liability is recognized as an expense, amortized over the period that the options vest. At the reporting dates, the liability is measured as the difference between the exercise price and the net book value of the options, which is the settlement value according to the Plan. Impairment of long-lived assets Effective July 1, 2003 the Company prospectively adopted the recommendations in Section 3063 of the CICA Handbook, "Impairment of long-lived assets". These recommendations require that an impairment loss on long-lived assets to be held and used be recognized when their carrying value exceeds the total undiscounted cash flows expected from their use and eventual disposal. The amount of the impairment loss is determined as the excess of the carrying value of the assets over their fair value. The new recommendations had no impact on the financial statements. FLEXIA CORPORATION Notes to the Financial Statements For the years ended June 30, 2005, 2004 and 2003 (amounts in thousands of dollars except per share amounts) _______________________________________________________________________________ 3. ACCOUNTING POLICIES (continued) Use of estimates The financial statements are prepared in accordance with Canadian generally accepted accounting principles (GAAP). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Due to the inherent uncertainty in making estimates, actual results could differ from these estimates. Revenue recognition The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the price to the buyer is fixed or determinable and collection is reasonably assured. Cash and cash equivalents Cash and cash equivalents consist of cash on hand and balances with banks. Inventories Finished goods and work-in-process are valued at the lower of cost and net realizable value. Inventories of raw materials are valued at the lower of average cost determined on a first-in, first-out basis and replacement cost. The cost of work-in-process and finished goods includes the cost of raw materials, direct labour and applicable overhead. Accounts receivable Credit is extended based on evaluation of a customer's financial condition and collateral is usually not requested. Accounts receivable are stated at amounts due from customers based on agreed upon payment terms net of an allowance for doubtful accounts. The Company determines its allowance by considering a number of factors, including the length of time trade accounts receivable are past due and the customer's current ability to pay its obligation to the Company. The Company writes off accounts receivable when they are determined to be uncollectible. Any payments subsequently received on such receivables are credited to the bad debt expense. Property, plant and equipment Property, plant and equipment is recorded at acquisition cost. The Company provides for amortization of capital assets using the straight-line method over the following number of years: Buildings 10 - 25 Machinery and equipment 5- 12.5 Office furniture and equipment 10 Computer equipment 4 Assets under development are recorded at cost until they are completed and then they are transferred into the appropriate property, plant and equipment account. FLEXIA CORPORATION Notes to the Financial Statements For the years ended June 30, 2005, 2004 and 2003 (amounts in thousands of dollars except per share amounts) _______________________________________________________________________________ 3. ACCOUNTING POLICIES (continued) Impairment of long-lived assets Long-lived assets are tested for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. An impairment loss is recognized when their carrying value exceeds the total undiscounted cash flows expected from their use and eventual disposition. The amount of the impairment loss is determined as the excess of the carrying value of the asset over its fair value. Patents and trademarks Patents and trademarks are recorded at acquisition cost less accumulated amortization. Amortization for patents and trademarks is charged on a straight-line basis over six years. Deferred financing costs Financing costs are amortized over the term of the long-term debt to which they relate, namely six years, on a straight-line basis. Environmental costs The Company expenses, on a current basis, recurring costs associated with managing hazardous substances and pollution in ongoing operations. Foreign currency transactions and balances Monetary assets and liabilities are translated at the exchange rates in effect at the balance sheet date. Non-monetary assets and liabilities are translated at historical rates. Revenues and expenses are translated at average rates for the year except for amortization, which is translated at historical rates. Translation gains or losses are included in earnings. Income taxes The Company follows the liability method of accounting for income taxes. Under this method, future income taxes are recognized based on the expected future tax consequences of differences between carrying amount of balance sheet items and their corresponding tax basis, using the enacted or substantively enacted income tax rates for the years in which the differences are expected to reverse. FLEXIA CORPORATION Notes to the Financial Statements For the years ended June 30, 2005, 2004 and 2003 (amounts in thousands of dollars except per share amounts) _______________________________________________________________________________ 3. ACCOUNTING POLICIES (continued) Post-retirement benefits The Company maintains two defined benefit pension plans for unionized employees. The Company contributes to a multi-employer pension plan on behalf of unionized employees at its Langley facility. The Company maintains a defined contribution pension plan for salaried employees. The Company maintains an unfunded defined benefit plan which provides life insurance, and health and dental benefits for eligible retired employees. The Company accrues its obligations under employee benefit plans and the related costs, net of plan assets. The Company has adopted the following policies: - The cost of pensions and other retirement benefits earned by employees is actuarially determined using the projected benefit method prorated on service and management's best estimate of expected plan investment performance, salary escalation, retirement ages of employees and expected health care costs. - For the purpose of calculating the expected return on plan assets, those assets are valued at fair value. - Past service costs from plan amendments are amortized on a straight-line basis over the average remaining service period of employees active at the date of amendment. - The excess of the net actuarial gain (loss) over 10% of the greater of the benefit obligation and the fair value of plan assets is amortized over the average remaining service period of active employees. The average remaining service period of the active employees covered by the pension plan is 18 years (2004 and 2003 - 17 years). The average remaining service period of the active employees covered by the other retirement benefits plan is 12 years (2004 and 2003 - 12 years). - When the restructuring of a benefit plan gives rise to both a curtailment and a settlement of obligations, the curtailment is accounted for prior to the settlement. - Defined contribution plan accounting is applied to a multi-employer defined benefit plan for which the Company has insufficient information to apply defined benefit plan accounting. Deferred gain The deferred gain resulted from the sale and leaseback of land and building (see note 15). The deferred gain is being amortized on a straight line basis over the initial term of the operating lease entered into as part of the sale leaseback transaction (5 years). FLEXIA CORPORATION Notes to the Financial Statements For the years ended June 30, 2005, 2004 and 2003 (amounts in thousands of dollars except per share amounts) _______________________________________________________________________________ 3. ACCOUNTING POLICIES (continued) Stock based compensation plans The Company has a stock based compensation plan, as described in Note 14. Compensation expense is measured as the difference between the net book value per common share and the exercise price and is recognized as the stock options vest to the employee. If the options are settled in cash with the employee, the value is measured at the net book value of the stock at the time of the settlement. Any difference between cash value and the accrued liability is taken as an adjustment to income at the time of the settlement. Any consideration paid by employees on exercise of stock options and purchase of stock is credited to share capital. Earnings per share Basic earnings per share are calculated using the weighted average number of common shares outstanding during the year. Diluted earnings per share are calculated using the treasury stock method. 4. INVENTORIES 2005 2004 _____________ _________________ Raw materials $ 10,709 $ 8,865 Work-in-process 2,391 1,632 Finished goods 4,277 3,204 _______________________________________________________________________________ $ 17,377 $ 13,701 _______________________________________________________________________________ 5. PROPERTY, PLANT AND EQUIPMENT 2005 ______________________________________________ Accumulated Net Book Cost Amortization Value _____________ ____________ _____________ Land $ 594 $ - $ 594 Buildings 2,639 955 1,684 Machinery and equipment 23,949 9,672 14,277 Office furniture and equipment 114 61 53 Computer equipment 787 662 125 Assets under development 1,558 - 1,558 _______________________________________________________________________________ $ 29,641 $ 11,350 $ 18,291 _______________________________________________________________________________ FLEXIA CORPORATION Notes to the Financial Statements For the years ended June 30, 2005, 2004 and 2003 (amounts in thousands of dollars except per share amounts) _______________________________________________________________________________ 5. PROPERTY, PLANT AND EQUIPMENT (continued) 2004 ______________________________________________ Accumulated Net Book Cost Amortization Value _____________ ____________ _____________ Land $ 2,414 $ - $ 2,414 Buildings 9,409 2,094 7,315 Machinery and equipment 22,629 7,744 14,885 Office furniture and equipment 105 50 55 Computer equipment 733 611 122 Assets under development 1,687 - 1,687 _______________________________________________________________________________ $ 36,977 $ 10,499 $ 26,478 _______________________________________________________________________________ 6. OTHER NON-CURRENT ASSETS 2005 ______________________________________________ Accumulated Net Book Cost Amortization Value _____________ ____________ _____________ Deferred financing costs $ 327 $ 327 $ - Patents and trademarks 500 500 - _______________________________________________________________________________ $ 827 $ 827 $ - _______________________________________________________________________________ 2004 ______________________________________________ Accumulated Net Book Cost Amortization Value _____________ ____________ _____________ Deferred financing costs $ 327 $ 272 $ 55 Patents and trademarks 500 417 83 _______________________________________________________________________________ $ 827 $ 689 $ 138 _______________________________________________________________________________ 7. BANK INDEBTEDNESS Under its operating credit facilities, the Company, on a combined basis with Fib-Pak Industries Inc., a related company under common ownership, may draw up to $17,000 (2004 - $15,000). The companies have provided cross-guarantees for amounts drawn on the credit facility. At June 30, 2005, the companies on a combined basis have drawn $2,350 (2004 - $7,050) against the credit facility made up of a revolving line of credit bearing interest averaging at 4.25% (2004-4.1%). FLEXIA CORPORATION Notes to the Financial Statements For the years ended June 30, 2005, 2004 and 2003 (amounts in thousands of dollars except per share amounts) 7. BANK INDEBTEDNESS (continued) An assignment of inventory and accounts receivable has been provided as security for the bank indebtedness under a Credit Agreement dated March 31, 2005 (see Note 9). Accounts receivable and inventory of Fib-Pak Industries Inc. at June 30, 2005 amounted to $4,366 (2004 - $3,903). 8. LONG-TERM DEBT 2005 2004 ____________ ______________ Bankers' acceptances Interest payable in advance for one to six months at the bankers' acceptance rate plus margin dependent on the debt to EBITDA ratio. On a combined basis with Fib-Pak Industries Inc., this debt was repayable in four quarterly principal payments of $500,000 commencing on January 1, 2000, followed by thirteen quarterly instalments of $750,000 and four quarterly instalments of $1,000,000. The outstanding balance was repaid on November 30, 2004. $ - $ 7,700 Debentures Interest at 12.5% payable annually, principal due December 1, 2005 (April 2, 2005 in 2004), collateralized by a general security agreement consisting of a first charge on all assets not pledged to the bank, and a second charge on the assets pledged to the bank. On April 22, 2005 a principal repayment of $5,000,000 was made. 7,420 12,420 Term loans Interest payable monthly at prime rate plus up to 1.5% dependent on debt to EBITDA ratio, due April 1, 2005, collateralized by a security agreement consisting of a first charge on all assets not pledged to the bank and a second charge on the assets pledged to the bank. The term loan was repaid on November 30, 2004. - 23 _______________________________________________________________________________ 7,420 20,143 Current portion 7,420 20,143 _______________________________________________________________________________ $ - $ - _______________________________________________________________________________ Interest expense on the long-term debt was $1,767 (2004 - $2,195; 2003 - $2,640). FLEXIA CORPORATION Notes to the Financial Statements For the years ended June 30, 2005, 2004 and 2003 (amounts in thousands of dollars except per share amounts) _______________________________________________________________________________ 9. COMMITMENTS AND CONTINGENCIES Commitments (a) The future minimum lease payments under operating leases for the rental of space, equipment, automobiles and rail sidings for each of the next five years: 2006 $ 888 2007 847 2008 838 2009 832 2010 684 _______ $ 4,089 (b) Contingencies The Company is party to various claims which are being contested. In the opinion of management, the outcome of such claims will not have a material adverse effect on the Company. Security for the bank indebtedness provides for a cross-guarantee by the Company and Fib-Pak Industries Inc. (a related company) for amounts drawn on the credit facility (see Note 7). The Company believes that this guarantee will not have any significant unfavourable impact on its financial position and consequently no provision has been made in the financial statements. 10. SHARE CAPITAL Authorized Unlimited number of common shares 2005 2004 _____________ _______________ Issued 10,000,000 common shares $ 4,230 $ 4,230 ___________________________________________________________________________ There were no issuance or cancellation of common shares during fiscal 2005 and 2004. FLEXIA CORPORATION Notes to the Financial Statements For the years ended June 30, 2005, 2004 and 2003 (amounts in thousands of dollars except per share amounts) ________________________________________________________________________________ 11. SUPPLEMENTAL CASH FLOW INFORMATION Changes in non-cash operating working capital items 2005 2004 2003 ____________ _____________ ____________ Accounts receivable $ 2,023 $ (1,418) $ 748 Inventories (3,676) (192) (1,105) Income taxes 3,357 (714) 324 Prepaid expenses 128 89 (96) Accounts payable and accrued liabilities (5,284) 2,128 (4,369) Due to/from affiliated company (514) 203 98 _____________________________________________________________________________ $ (3,966) $ 96 $ (4,400) _____________________________________________________________________________ Interest and taxes 2005 2004 2003 ____________ _____________ ____________ Interest paid $ 4,101 $ 2,446 $ 6,406 Income taxes paid 150 625 266 12. RELATED PARTY BALANCES AND TRANSACTIONS 2005 2004 2003 ____________ _____________ ____________ Fib-Pak Industries Inc. - a company under common ownership Purchases of materials $ 2,047 $ 3,547 $ 3,191 Sales of finished goods 37 41 58 These transactions are in the normal course of operations and are measured at the exchange amount, which is the amount of consideration established and agreed by the related parties. The amounts due to and from the affiliated company are non-interest bearing, unsecured and due on demand. FLEXIA CORPORATION Notes to the Financial Statements For the years ended June 30, 2005, 2004 and 2003 (amounts in thousands of dollars except per share amounts) ________________________________________________________________________________ 13. PENSION COSTS AND OBLIGATIONS The Company has three defined benefit plans providing pension, other retirement and post-employment benefits to most of its employees. The Company maintains a defined contribution pension plan for its salaried employees. The Company contributions equal 4% of each participant's eligible salary. One of the Company's divisions participates in a multi-employer defined benefit plan providing both pension and other retirement benefits. This plan is accounted for as a defined contribution plan. The net expense for the Company's benefit plans is as follows: Pension Benefit Plans Other Benefit Plan 2005 2004 2003 2005 2004 2003 Defined benefit plans $401 $457 $413 $152 $126 $117 Defined contribution plans 160 171 182 - - - Contributions to a multi- employer plan 271 262 263 - - - _______________________________________________________________________________ $832 $890 $858 $152 $126 $117 _______________________________________________________________________________ FLEXIA CORPORATION Notes to the Financial Statements For the years ended June 30, 2005, 2004 and 2003 (amounts in thousands of dollars except per share amounts) _______________________________________________________________________________ 13. PENSION COSTS AND OBLIGATIONS (continued) Information about the Company's defined benefit plans as at June 30, in aggregate, is as follows: Pension Benefit Plans Other Benefit Plan 2005 2004 2005 2004 Accrued benefit obligations Balance, beginning of year $ 9,439 $ 8,737 $ 1,510 $ 1,333 Current service cost 284 271 56 41 Interest cost 586 525 93 85 Benefits paid and expenses (312) (281) (20) (14) Employee contributions 179 175 - - Actuarial losses (gains) 1,290 (81) 209 65 Past service cost - 93 - - _______________________________________________________________________________ Balance, end of year 11,466 9,439 1,848 1,510 _______________________________________________________________________________ Plan assets Balance, beginning of year 7,399 5,969 - - Actual return on plan assets 920 540 - - Employer contributions 1,094 997 - - Benefits paid (312) (281) - - Employee contributions 179 175 - - _______________________________________________________________________________ Balance, end of year 9,280 7,400 - - _______________________________________________________________________________ Funded status - deficit 2,186 2,039 1,848 1,510 Unamortized past service costs (165) (176) - - Unamortized net actuarial loss (3,113) (2,246) (390) (184) Unamortized transition obligation (203) (219) - - _______________________________________________________________________________ Accrued benefit (asset) liability $ (1,295) $ (602) $ 1,458 $ 1,326 _______________________________________________________________________________ Both defined benefit pension plans had a plan deficit as at June 30, 2005 and June 30, 2004. FLEXIA CORPORATION Notes to the Financial Statements For the years ended June 30, 2005, 2004 and 2003 (amounts in thousands of dollars except per share amounts) _______________________________________________________________________________ 13. PENSION COSTS AND OBLIGATIONS (continued) Net benefit expense for defined benefit plans: Pension Benefit Plans Other Benefit Plan 2005 2004 2003 2005 2004 2003 Current service cost $ 284 $ 271 $ 267 $ 56 $ 41 $ 38 Interest cost 586 525 484 93 85 79 Actual return on plan assets (920) (540) (72) - - - Actuarial losses (gains) 1,290 (81) 588 209 65 - Difference between expected return and actual return on plan assets for the year 350 77 (332) - - - Difference between actuarial loss recognized for the year and actual actuarial loss on accrued benefit obligation for the year (1,216) 178 (542) (206) (65) - Amortization of past service costs 11 11 4 - - - Amortization of transition obligation 16 16 16 - - - _______________________________________________________________________________ Net benefit expense for the year $ 401 $ 457 $ 413 $ 152 $ 126 $ 117 _______________________________________________________________________________ Approximately 50% of plan assets are invested in Jarislowsky Fraser Balanced Fund and approximately 50% in Standard Life Diversified Fund as at June 30, 2005 and 2004. Both funds employ a target equity weighting varying within the range of 45% to 65%. The dates of the most recent actuarial valuations are as follows: (i) Pension Benefit Plans - December 31, 2004 and December 31, 2002 (ii) Other Benefit Plan - June 30, 2004 FLEXIA CORPORATION Notes to the Financial Statements For the years ended June 30, 2005, 2004 and 2003 (amounts in thousands of dollars except per share amounts) _______________________________________________________________________________ 13. PENSION COSTS AND OBLIGATIONS (continued) The significant actuarial assumptions adopted in measuring the Company's accrued benefit obligations are as follows (weighted-average assumptions as of December 31st). Pension Benefit Plans Other Benefit Plan 2005 2004 2005 2004 ________ _________ ________ ________ Discount rate 5.63% 6.25% 5.63% 6.25% Rate of compensation increase 3.25% 3.25% - - For measurement purposes, an 8% annual rate of increase in the per capita cost of covered health care benefits was assumed for the first ten years of service. The rate was assumed to decrease to 5% thereafter with an increase of these rates by 3% occurring at retirement. For dental benefits, a 3.5% annual rate of increase was assumed. An increase or decrease of 1% of this rate would have the following impact: Increase of 1% Decrease of 1% ______________ ______________ Impact on net benefit expense - increase (decrease) $ 25 $ (20) Impact on accrued benefit obligation - increase (decrease) 215 (171) 14. DIRECTORS AND EMPLOYEES SHARE OPTION PLAN Under the Company's share option plan, options were granted to designated directors and/or employees on or after June 30, 1999. Options provide the right to purchase common shares from the Company at a fixed price in the event of a change in control and are intended to maximize the Company's net worth. When employment has ceased, the vested options are purchased by the Company for cancellation. The price is determined by the Board of Directors and the maximum number of shares that may be issued upon the exercise of options granted under the plan cannot exceed 5% of the outstanding shares of the Company. The options granted under the plan shall vest as follows: a) 25% on the second anniversary of the grant date b) an additional 25% on each of the following anniversary dates. FLEXIA CORPORATION Notes to the Financial Statements For the years ended June 30, 2005, 2004 and 2003 (amounts in thousands of dollars except per share amounts) _______________________________________________________________________________ 14. DIRECTORS AND EMPLOYEES SHARE OPTION PLAN (continued) The share option liability of $723 (2004 - $231) is included in accounts payable and accrued liabilities. Share option expense for the year amounted to $492 (2004 - $74; 2003 - $157).
2005 2004 2003 _________________ _________________ __________________ Weighted Weighted Weighted Average Average Average Shares Exercise Shares Exercise Shares Exercise Price Price Price _______ ________ _______ ________ _______ ________ Outstanding, beginning of year 395,000 $ 0.49 420,000 $ 0.48 380,000 $ 0.49 Granted - - - - 40,000 0.47 Purchased for cancellation - - (25,000) 0.42 - - _____________________________________________________________________________________________ Outstanding, end of year 395,000 $ 0.49 395,000 $ 0.49 420,000 $ 0.48 _____________________________________________________________________________________________ Exercisable 385,000 $ 0.49 336,250 $ 0.48 256,250 $ 0.47 _____________________________________________________________________________________________
The following table summarizes information about share options outstanding and exercisable as at June 30:
2005 2004 2003 ___________________________ ___________________________ __________________________ # of Options # of Options # of Options # of Options # of Options # of Options Exercise Price Outstanding Exercisable Oustanding Exercisable Outstanding Exercisable ____________ ____________ ____________ ____________ ____________ ____________ $0.42 200,000 200,000 200,000 200,000 225,000 168,750 $0.47 40,000 30,000 40,000 20,000 40,000 10,000 $0.58 155,000 155,000 155,000 116,250 155,000 77,500 ______________________________________________________________________________________________________ Total 395,000 385,000 395,000 336,250 420,000 256,250 ______________________________________________________________________________________________________ Weighted average exercise price: $0.49 $0.49 $0.49 $0.48 $0.48 $0.47 ______________________________________________________________________________________________________
15. DEFERRED GAIN ON SALE AND LEASEBACK TRANSACTION On April 22, 2005, the Company sold its land and building located in Langley, British Columbia for net proceeds of $10,686 and simultaneously entered into an operating lease for the entire property. The sale resulted in a gain of $3,454 which has been deferred and amortized over the initial lease term of 5 years. Amortization of the gain amounted to $132 in 2005. FLEXIA CORPORATION Notes to the Financial Statements For the years ended June 30, 2005, 2004 and 2003 (amounts in thousands of dollars except per share amounts) _______________________________________________________________________________ 16. SALE OF PRODUCT LINE On November 30, 2004 the Company sold of the synthetic roof underlayment product line. The sale included all intangible property related to this product line including product formulations, customer relationships, trade names, and goodwill. The Company recorded a pre tax gain of $11,886. The initial proceeds included $1,500 which is being held in escrow (along with accrued interest of $17) until November 30, 2006 to support the representations and warranties made by the Company. The Company may also be entitled to additional proceeds of up to $3,700 contingent on synthetic roof underlayment sales in a particular market for the year ending November 30, 2005. As at June 30, 2005 the Company has not earned or recorded any contingent proceeds. 17. INCOME TAXES The reconciliation of the combined federal and provincial statutory income tax rate to the Company's effective income tax rate is detailed below: 2005 2004 2003 ______ ______ ______ Combined federal and provincial income tax rate 40.65% 38.52% 40.65% Manufacturing and processing allowance (6.33) (7.15) (7.73) Non-taxable portion of gain on sale of product line (14.33) - - Impact of other differences 1.61 2.33 (0.12) ____________________________________________________________________________ Effective income tax rate 21.6% 33.7% 32.8% ____________________________________________________________________________ Net future income tax liabilities (assets) are detailed as follows: 2005 2004 __________ ___________ Property, plant and equipment $ 2,819 $ 2,852 Post-retirement benefit obligations (212) (167) Accrued pension asset 447 209 Deferred gain on sale and leaseback transaction (604) - Other 11 6 _________________________________________________________________________ Future income taxes $ 2,461 $ 2,900 _________________________________________________________________________ FLEXIA CORPORATION Notes to the Financial Statements For the years ended June 30, 2005, 2004 and 2003 (amounts in thousands of dollars except per share amounts) _______________________________________________________________________________ 18. EARNINGS PER SHARE 2005 2004 2003 Net earnings $ 11,129 $ 1,268 $ 2,938 _______________________________________________________________________________ Number of common shares outstanding 10,000,000 10,000,000 10,000,000 _______________________________________________________________________________ Basic earnings per share $ 1.11 $ 0.13 $ 0.29 _______________________________________________________________________________ There were no dilutive instruments outstanding in fiscal 2005, 2004 and 2003. 19. FINANCIAL INSTRUMENTS Financial risk The financial risk is the risk to the Company's earnings that arises from fluctuations in interest rates, foreign exchange rates and the degree of volatility of these rates. The Company is exposed to currency risk as a result of its export to the United States of goods produced in Canada. From time to time the Company uses forward exchange contracts to reduce its exposure to this risk. No such contracts were outstanding as at June 30, 2005, 2004 and 2003. The Company's bank indebtedness has a floating interest rate and therefore is subject to risks associated with fluctuating interest rates. Credit risk The Company is exposed to credit risk from the potential that a counterparty will fail to perform its obligations. The Company is exposed to credit risk from customers. The Company monitors its credit risk associated with amounts receivable. Fair value The fair value of accounts receivable, bank indebtedness, accounts payable and accrued liabilities, income taxes receivable/payable and due from/to affiliated company approximates their carrying values due to their short-term nature. The fair value of the long-term receivable approximates the carrying value as the interest rate is at market rates. The fair value of debentures approximates the carrying value due to their short term to maturity. The fair value of the bankers' acceptances and term loans approximates their carrying values as interest is charged at floating rates. FLEXIA CORPORATION Notes to the Financial Statements For the years ended June 30, 2005, 2004 and 2003 (amounts in thousands of dollars except per share amounts) _______________________________________________________________________________ 20. SEGMENT DISCLOSURES The Company supplies protective barrier products to customers in North America. All products are to be considered part of one reportable segment as they are made from similar manufacturing processes and generally have similar economic characteristics. All capital assets of the Company are located in Canada. The following table presents revenues attributed to countries based on the location of customers: 2005 2004 2003 _________ ________ _________ Canada $ 50,052 $ 47,624 $ 47,707 United States 55,414 50,376 56,641 Other Foreign Countries 935 106 175 _______________________________________________________________________________ Total net sales $ 106,401 $ 98,106 $ 104,523 _______________________________________________________________________________ For the year ended June 30, 2005, a single customer accounted for 13.1% (2004 - 10.7%; 2003 - 12.6%) of total sales, and 12.3% (2004 - 9.9%) of trade accounts receivable as of June 30, 2005. 21. SUBSEQUENT EVENT Flexia Corporation was amalgamated with Fib-Pak Industries Inc. (see Note 12) on October 4, 2005 and all of the shares of the amalgamated corporation were acquired by a new shareholder on October 5, 2005. Schedule B A balance sheet of Fib-Pak as at June 30, 2005 and as at June 30, 2004, statements of earnings and deficit and cash flows for Fib-Pak for its financial years ended June 30, 2005 and June 30, 2004, as well as notes to the foregoing financial statements and an auditor's report thereon. (Please see attached) Financial Statements of FIB-PAK INDUSTRIES INC. June 30, 2005, June 30, 2004 and June 30, 2003 (In Canadian dollars) Deloitte Auditors' Report To the Directors of Fib-Pak Industries Inc. We have audited the balance sheets of Fib-Pak Industries Inc. as at June 30, 2005 and 2004 and the statements of earnings, deficit and cash flows for each of the years in the three year period ended June 30, 2005. 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 financial statements present fairly, in all material respects, the financial position of the Company as at June 30, 2005 and 2004 and the results of its operations and its cash flows for each of the years in the three year period ended June 30, 2005 in accordance with Canadian generally accepted accounting principles. /s/ Deloitte & Touche LLP Chartered Accountants Hawkesbury, Ontario October 28, 2005 FIB-PAK INDUSTRIES INC. Statements of Earnings For the years ended June 30, 2005, 2004 and 2003 (In thousands of dollars except per share amounts) _______________________________________________________________________________ 2005 2004 2003 ____________ ____________ ______________ Sales $ 14,429 $ 12,676 $ 14,145 Cost of Sales 12,845 11,530 12,674 _______________________________________________________________________________ Gross profit 1,584 1,146 1,471 Other expenses Selling and administration 797 1,062 874 Amortization of goodwill - - 97 Amortization of deferred financing costs 8 41 41 Write-off of goodwill (note 6) - 578 - _______________________________________________________________________________ 805 1,681 1,012 _______________________________________________________________________________ Earnings (loss) before the undernoted 779 (535) 459 _______________________________________________________________________________ Interest expenses Long-term (note 9) 202 233 294 Short-term 117 104 51 _______________________________________________________________________________ 319 337 345 _______________________________________________________________________________ Earnings (loss) before income taxes 460 (872) 114 _______________________________________________________________________________ Income taxes Current 214 (2) 161 Future (57) (183) (103) _______________________________________________________________________________ 157 (185) 58 _______________________________________________________________________________ NET EARNINGS (LOSS) $ 303 $ (687) $ 56 _______________________________________________________________________________ EARNINGS (LOSS) PER SHARE - BASIC AND DILUTED $ 0.03 $ (0.068) $ 0.006 _______________________________________________________________________________ FIB-PAK INDUSTRIES INC. Statements of Retained Earnings For the years ended June 30, 2005, 2004 and 2003 (In thousands of dollars) _______________________________________________________________________________ 2005 2004 2003 ____________ ____________ ______________ RETAINED EARNINGS (DEFICIT), BEGINNING OF YEAR $ (401) $ 286 $ 230 NET EARNINGS (LOSS) 303 (687) 56 _______________________________________________________________________________ RETAINED EARNINGS (DEFICIT), END OF YEAR $ (98) $ (401) $ 286 _______________________________________________________________________________ FIB-PAK INDUSTRIES INC. Balance Sheets as at June 30, 2005 and 2004 (In thousands of dollars) _______________________________________________________________________________ 2005 2004 __________ ___________ ASSETS CURRENT Accounts receivable $ 1,871 $ 1,576 Income taxes receivable - 145 Due from affiliated company (note 12) - 506 Inventories (note 3) 2,495 2,327 Prepaid expenses 2 3 _______________________________________________________________________________ 4,368 4,557 PROPERTY, PLANT AND EQUIPMENT (note 4) 1,360 1,615 DEFERRED FINANCING COSTS (note 5) - 8 FUTURE INCOME TAXES (note 14) 176 119 _______________________________________________________________________________ $ 5,904 $ 6,299 _______________________________________________________________________________ LIABILITIES CURRENT Bank indebtedness (note 7) $ 69 $ 54 Bank loan (note 7) 2,350 1,651 Accounts payable and accrued liabilities 1,094 1,501 Due to affiliated company (note 12) 8 - Income taxes payable 208 - Current portion of long-term debt (note 9) 1,380 2,630 _______________________________________________________________________________ 5,109 5,836 ACCRUED POST-RETIREMENT BENEFITS OBLIGATION (note 8) 423 394 _______________________________________________________________________________ 5,532 6,230 _______________________________________________________________________________ SHAREHOLDERS' EQUITY Share capital (note 10) 470 470 Deficit (98) (401) _______________________________________________________________________________ 372 69 _______________________________________________________________________________ $ 5,904 $ 6,299 _______________________________________________________________________________ APPROVED BY THE BOARD: _________________________, Director _________________________, Director FIB-PAK INDUSTRIES INC. Statements of Cash Flows For the years ended June 30, 2005, 2004 and 2003 (In thousands of dollars) _______________________________________________________________________________ 2005 2004 2003 ___________ ___________ ___________ NET INFLOW (OUTFLOW) OF CASH RELATED TO THE FOLLOWING ACTIVITIES: OPERATING Net earnings (loss) $ 303 $ (687) $ 56 Items not affecting cash Amortization of property, plant and equipment 283 377 440 Amortization of deferred financing costs 8 41 41 Amortization of goodwill - - 97 Write-off of goodwill - 578 - Future income taxes (57) (183) (103) Post-retirement benefits expense (recovery) 29 29 (21) ________________________________________________________________________________ 566 155 510 Changes in non-cash operating working capital items (note 11) (2) (561) (482) ________________________________________________________________________________ 564 (406) 28 ________________________________________________________________________________ INVESTING Purchase of property, plant and equipment (28) (62) (92) ________________________________________________________________________________ FINANCING Increase in bank indebtedness 699 564 666 Repayment of long-term debt (1,250) - (750) ________________________________________________________________________________ (551) 564 (84) ________________________________________________________________________________ NET CASH INFLOW (OUTFLOW) (15) 96 (148) BANK INDEDTEDNESS, BEGINNING OF YEAR (54) (150) (2) ________________________________________________________________________________ BANK INDEDTEDNESS, END OF YEAR $ (69) $ (54) $ (150) ________________________________________________________________________________ Supplementary information (note 11) FIB-PAK INDUSTRIES INC. Notes to Financial Statements For the years ended June 30, 2005, 2004 and 2003 (Amounts in thousands of dollars except per share amounts) ________________________________________________________________________________ 1. DESCRIPTION OF BUSINESS The Company was incorporated pursuant to the laws of the Province of Quebec. The Company is primarily engaged in the production of industrial bags and fabrics. 2. ACCOUNTING POLICIES The financial statements have been prepared in accordance with Canadian generally accepted accounting principles and include the following significant accounting policies: Use of estimates The financial statements are prepared in accordance with Canadian generally accepted accounting principles (GAAP). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Due to the inherent uncertainty in making estimates, actual results could differ from these estimates. Revenue recognition The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the price to the buyer is fixed or determinable and collection is reasonably assured. Inventories Inventories of finished goods and work in process are valued at the lower of cost and net realizable value. Inventories of raw materials are valued at the lower of average cost and replacement cost. The cost of finished goods and work in process includes the cost of raw materials, direct labour and applicable overhead. Accounts receivable Credit is extended based on evaluation of a customer's financial condition and collateral is usually not requested. Accounts receivable are stated at amounts due from customers based on agreed upon payment terms net of an allowance for doubtful accounts. The Company determines its allowance by considering a number of factors, including the length of time trade accounts receivable are past due and the customer's current ability to pay its obligation to the Company. The Company writes off accounts receivable when they are determined to be uncollectible. Any payments subsequently received on such receivables are credited to the bad debt expense. FIB-PAK INDUSTRIES INC. Notes to Financial Statements For the years ended June 30, 2005, 2004 and 2003 (Amounts in thousands of dollars except per share amounts) _______________________________________________________________________________ 2. ACCOUNTING POLICIES (continued) Property, plant and equipment Property, plant and equipment are recorded at cost. Amortization is based on their estimated useful life using the straight-line basis method over the following number of years: Buildings 10 - 25 Machinery and equipment 5 - 6 - 12.5 Furniture and fixtures 10 Computer 4 Impairment of long-lived assets Long-lived assets are tested for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. An impairment loss is recognized when their carrying value exceeds the total undiscounted cash flows expected from their use and eventual disposition. The amount of the impairment loss is determined as the excess of the carrying value of the asset over its fair value. Goodwill Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that the assets might be impaired. When the carrying amount exceeds the fair value, an impairment loss is recognized in an amount equal to the excess. Deferred financing costs Deferred financing costs are being amortized over 6 years, which is the term of the financing agreement. Income taxes The Company follows the liability method of accounting for income taxes. Under this method, future income taxes are recognized based on the expected future tax consequences of differences between the carrying amount of balance sheet items and their corresponding tax basis, using the enacted and substantively enacted income tax rates for the years in which the differences are expected to reverse. FIB-PAK INDUSTRIES INC. Notes to Financial Statements For the years ended June 30, 2005, 2004 and 2003 (Amounts in thousands of dollars except per share amounts) _______________________________________________________________________________ 2. ACCOUNTING POLICIES (continued) Post retirement benefits The Company maintains a defined contribution pension plan for salaried employees. The Company maintains an unfunded defined benefit plan which provides life insurance, and health and dental benefits for eligible retired employees. The Company has adopted the following policies: - The cost of pensions and other retirement benefits earned by employees is actuarially determined using the projected benefit method prorated on service and management's best estimate of expected plan investment performance, salary escalation, retirement ages of employees and expected health care costs. - For the purpose of calculating the expected return on plan assets, those assets are valued at fair value. - Past service costs from plan amendments are amortized on a straight- line basis over the average remaining service period of employees active at the date of amendment. - The excess of the net actuarial gain (loss) over 10% of the greater of the benefit obligation and the fair value of plan assets is amortized over the average remaining service period of active employees. The average remaining service period of the active employees covered by the pension plan is 11.8 years (2004 and 2003 - 10 years). - When the restructuring of a benefit plan gives rise to both a curtailment and a settlement of obligations, the curtailment is accounted for prior to the settlement. Earnings (loss) per share Basic earnings per share are calculated using the weighted average number of common shares outstanding during the year. FIB-PAK INDUSTRIES INC. Notes to Financial Statements For the years ended June 30, 2005, 2004 and 2003 (Amounts in thousands of dollars except per share amounts) _______________________________________________________________________________ 3. INVENTORIES 2005 2004 _____________ _________________ Raw materials $ 504 $ 556 Work in process 230 175 Finished goods 1,761 1,596 __________________________________ $ 2,495 $ 2,327 __________________________________ 4. PROPERTY, PLANT AND EQUIPMENT 2005 ______________________________________________ Accumulated Net book Cost depreciation value _____________ ____________ _____________ Land $ 77 $ - $ 77 Buildings 1,475 742 733 Machinery and equipment 2,175 1,633 542 Furniture and fixtures 25 25 -- Computer 71 63 8 ______________________________________________ $ 3,823 $ 2,463 $ 1,360 ______________________________________________ 2004 ______________________________________________ Accumulated Net book Cost depreciation value _____________ ____________ _____________ Land $ 77 $ - $ 77 Buildings 1,475 616 859 Machinery and equipment 2,150 1,480 670 Furniture and fixtures 25 25 - Computer 68 59 9 ______________________________________________ $ 3,795 $ 2,180 $ 1,615 ______________________________________________ FIB-PAK INDUSTRIES INC. Notes to Financial Statements For the years ended June 30, 2005, 2004 and 2003 (Amounts in thousands of dollars except per share amounts) _______________________________________________________________________________ 5. DEFERRED FINANCING COSTS 2005 ______________________________________________ Accumulated Net book Cost depreciation value _____________ ____________ _____________ Financing Costs $ 50 $ 50 $ - ______________________________________________ 2004 ______________________________________________ Accumulated Net book Cost depreciation value _____________ ____________ _____________ Financing Costs $ 50 $ 42 $ 8 ______________________________________________ 6. WRITE-OFF OF GOODWILL It was determined by management that the value of the goodwill should be written off as of June 30, 2004 due to an impairment arising from the loss incurred in 2004. The amount of loss recognized was $ 578. 7. BANK INDEBTEDNESS AND BANK LOAN A general security agreement and a general assignment of inventory and accounts receivable have been provided as collateral for the bank indebtedness under a Credit Agreement dated March 31, 2005. Security for the bank indebtedness provides for a cross-guarantee by the Company and Flexia Corporation for amounts drawn on the credit facility. The Company believes that this guarantee will not have any significant unfavorable impact on its financial position and consequently no provision for loss has been made in the financial statements. Under their credit facilities, the Company, on a combined basis with Flexia Corporation may draw up to $ 17,000 (2004, $ 15,000). At June 30, 2005, the companies, on a combined basis, have drawn $ 2,350 (2004, $ 7,050) against their credit facilities made up of bankers' acceptances and a revolving line of credit bearing interest averaging at 4.25% (2004, 4.1%). Accounts receivable and inventory of Flexia Corporation at June 30, 2005 amounted to $ 30,417 (2004 - $ 28,764) FIB-PAK INDUSTRIES INC. Notes to Financial Statements For the years ended June 30, 2005, 2004 and 2003 (Amounts in thousands of dollars except per share amounts) _______________________________________________________________________________ 8. PENSION COSTS AND OBLIGATIONS The Company provides certain post-employment and post-retirement benefits (other benefit plan) to most of its employees. The unfunded other plan include life insurance, health and dental benefits for eligible retired employees. The Company also maintains a defined contribution pension plan for its salaried employees. The Company contribution equal 4% of each participant's eligible salary. The benefit expense for the Company is as follows: 2005 2004 2003 _________________________ Current service cost $ 15 $ 20 $ 19 Interest cost on accrued benefit obligation 19 17 15 Amortization of net actuarial loss (gain) (5) (8) (10) Curtailment gain - - (45) __________________________ Benefit expense (income) $ 29 $ 29 $ (21) __________________________ Information about the Company's other benefit plans as at June 30, in aggregate, is as follows: The accrued benefit obligation is as follows: 2005 2004 _________________ Balance, beginning of year $ 300 $ 254 Current service cost 15 20 Interest cost 19 17 Actuarial gains 17 9 _________________ Balance, end of year 351 300 Unamortized net actuarial gains 72 94 _________________ $ 423 $ 394 FIB-PAK INDUSTRIES INC. Notes to Financial Statements For the years ended June 30, 2005, 2004 and 2003 (Amounts in thousands of dollars except per share amounts) ________________________________________________________________________________ 8. PENSION COSTS AND OBLIGATIONS (continued) Plans assets The future benefit obligation is currently not funded. The date of the most recent actuarial valuations was June 30, 2004. The next valuation will be performed June 30, 2006. This unfunded defined benefit plan includes life insurance, health and dental benefits for eligible retired employees. The significant actuarial assumptions adopted in measuring the Company's accrued benefit obligations are as follows: 2005 2004 ________ _________ Discount rate 5.75% 6.00% ___________________ Rate of compensation increase 3.25% 3.25% ___________________ Active employees entitled to post-retirement benefit 15 15 ___________________ For measurement purposes, an 8% annual rate of increase in the per capital cost of covered health care benefits were assumed for the first ten years of service. The rate was assumed to decrease to 5% thereafter with an increase of these rates by 3% occurring at retirement. For dental benefit, a 3.5% annual rate of increase was assumed. An increase on decrease of 1% of this rate would have the following impact: Increase Decrease of 1% of 1% _________ ________ Impact on net benefit expense $ 9 $ (7) _______________________ Impact on accrued obligation $ 70 $ (54) _______________________ The employer contributions to the defined contribution pension plan were $ 73, 2004, $ 65 and 2003, $ 62. FIB-PAK INDUSTRIES INC. Notes to Financial Statements For the years ended June 30, 2005, 2004 and 2003 (Amounts in thousands of dollars except per share amounts) _______________________________________________________________________________ 9. LONG-TERM DEBT 2005 2004 ________ ________ Bankers' acceptances, interest payable at the bankers' acceptance rate plus 1% plus margin dependent on the debt to EBITDA ratio; the principal was due on April 1, 2005, the bankers acceptances have terms from 30 to 180 days per the banking agreement $ - $1,250 Debentures due December 1, 2005, interest at 12.5% payable annually, a general security agreement has been provided as collateral 1,380 1,380 _____________________ 1,380 2,630 Current portion 1,380 2,630 _____________________ $ - $ - _____________________ Interest expense on the long-term debt was $ 202 (2004 - $ 233; 2003 - $ 294). 10. SHARE CAPITAL Authorized Unlimited number of common shares, voting, participating 2005 2004 _________ ________ Issued 10,000,000 common shares $470 $470 __________________ There is no issuance or cancellation of common shares during fiscal 2005 and 2004. FIB-PAK INDUSTRIES INC. Notes to Financial Statements For the years ended June 30, 2005, 2004 and 2003 (Amounts in thousands of dollars except per share amounts) ________________________________________________________________________________ 11. SUPPLEMENTAL CASH FLOW INFORMATION Changes in non-cash operating working capital items 2005 2004 2003 ____________ _____________ ____________ Accounts receivable $ (295) $ 85 $ (97) Income taxes 353 (322) 556 Due to/from affiliated company 514 (203) (98) Inventories (168) 57 (443) Prepaid expenses 1 12 10 Accounts payable and accrued liabilities (407) (190) (410) _____________________________________________________________________________ $ (2) $ (561) $ (482) _____________________________________________________________________________ Interest and taxes Interest paid $ 248 $ 265 $ 953 Income taxes paid (recovered) (139) 320 -- 12. RELATED PARTY BALANCES AND TRANSACTIONS 2005 2004 2003 ____________ _____________ ____________ Flexia Corporation - a company with the same shareholders Purchases of materials $ 37 $ 41 $ 58 Sales of finished goods 2,047 3,547 3,191 These transactions are in the normal course of operations and are measured at the exchange amount, which is the amount of consideration established and agreed by the related parties. The due from affiliated company is non-interest bearing, unsecured and due on demand. 13. DIRECTORS AND EMPLOYEES SHARE OPTION PLAN Under the Company's share option plan, options were granted to designated directors and/or employees on or after June 30, 1999. Options provide the right to purchase common shares from the Company at a fixed price in the event of a change in control and are intended to maximize the Company's net worth. When employment has ceased, the vested options are purchased by the Company for cancellation. The price is determined by the Board of Directors and the maximum number of shares that may be issued upon the exercise of options granted under the plan cannot exceed 5% of the outstanding shares of the Company. The options granted under the plan shall vest as follows: a) 25% on the second anniversary of the grant date b) an additional 25% on each of the following anniversary date FIB-PAK INDUSTRIES INC. Notes to Financial Statements For the years ended June 30, 2005, 2004 and 2003 (Amounts in thousands of dollars except per share amounts) _______________________________________________________________________________ 13. DIRECTORS AND EMPLOYEES SHARE OPTION PLAN (continued) As of June 30, 2005, there were 395,000 options outstanding with a total exercise price of $ 32,800. No options were issued or exercised as of June 30, 2005, 2004 and 2003. In August 2003, 25,000 options were forfeited. The share option liability of $ 32,800 (2004 - $ 32,800; 2003 - $ 34,050) was not included in accounts payable and accrued liabilities.
2005 2004 2003 _________________ _________________ __________________ Weighted Weighted Weighted Average Average Average Shares Exercise Shares Exercise Shares Exercise Price Price Price _______ ________ _______ ________ _______ ________ Outstanding, beginning of year 395,000 $ 0.08 420,000 $ 0.08 380,000 $ 0.07 Granted - - - - 40,000 0.14 Purchased for cancellation - - (25,000) 0.05 - - _____________________________________________________________________________________________ Outstanding, end of year 395,000 $ 0.08 395,000 $ 0.08 420,000 $ 0.08 _____________________________________________________________________________________________ Exercisable 385,000 $ 0.08 336,250 $ 0.07 256,250 $ 0.07 _____________________________________________________________________________________________
The following table summarizes information about share options outstanding and exercisable as at June 30:
2005 2004 2003 ___________________________ ___________________________ __________________________ # of Options # of Options # of Options # of Options # of Options # of Options Exercise Price Outstanding Exercisable Oustanding Exercisable Outstanding Exercisable ____________ ____________ ____________ ____________ ____________ ____________ $0.05 200,000 200,000 200,000 200,000 225,000 168,750 $0.10 70,000 70,000 70,000 52,500 70,000 35,000 $0.12 85,000 85,000 85,000 63,750 85,000 42,500 $0.14 40,000 30,000 40,000 20,000 40,000 10,000 ______________________________________________________________________________________________________ Total 395,000 385,000 395,000 336,250 420,000 256,250 ______________________________________________________________________________________________________ Weighted average exercise price: $0.08 $0.08 $0.08 $0.07 $0.08 $0.07 ______________________________________________________________________________________________________
FIB-PAK INDUSTRIES INC. Notes to Financial Statements For the years ended June 30, 2005, 2004 and 2003 (Amounts in thousands of dollars except per share amounts) _______________________________________________________________________________ 14. INCOME TAXES The income tax expense (benefit reported differs from the amount computed by applying the Canadian Statutory Rate to earnings before income taxes). 2005 2004 2003 ______________________________ Tax at the applicable tax rate 34% (34% in 2004 and 2003) $ 156 $ (296) $ 38 Amortization of capital assets 96 128 149 Amortization of goodwill and deferred costs 2 14 47 Interest and penalties 0.5 - - Charitable donations 0.5 1 1 Non-deductible meals and entertainment expenses 2 2 2 Capital cost allowance (48) (52) (61) Financing fees deductible (4) (5) (4) Pension expense (income) 9 9 (7) Write-off of goodwill - 197 - Capital assets adjustments - - (4) ______________________________ Income tax (benefit) expense $ 214 $ (2) $ 161 ______________________________ Net future income tax liability (asset) is detailed as follows: 2005 2004 2003 ______________________________ Building, machinery and equipment and Computer $ (36) $ 11 $ 185 Post-retirement benefits (140) (130) (121) ______________________________ $(176) $(119) $ 64 ______________________________ FIB-PAK INDUSTRIES INC. Notes to Financial Statements For the years ended June 30, 2005, 2004 and 2003 (Amounts in thousands of dollars except per share amounts) ________________________________________________________________________________ 15. FINANCIAL INSTRUMENTS Credit risk The Company provides credit to its customers in the normal course of its operations. It carries out, on a continuing basis, credit checks on its clients and maintains provisions for potential credit losses. The Company minimizes its credit risk by concluding transactions with a large number of clients. Fair value The fair value of accounts receivable, the bank indebtedness, accounts payable and accrued liabilities and debentures is approximately equal to their carrying values due to their short-term maturity. Currency risk The Company realized approximately 39% of its sales in U.S. dollars in 2005 (2004 - 17%) and is thus exposed to foreign exchange fluctuations. The Company does not actively manage this risk except to partially offset with purchases in U.S. dollars. Interest rate risk The Company is subject to interest rate risk due to changes to the prime rate since the majority of its borrowings bear variable interest rates or are short term. 16. EARNINGS (LOSS) PER SHARE 2005 2004 2003 ________ ________ _______ Net earnings (loss) $ 303 $ (687) $ 56 _________________________________ Number of common shares outstanding 10,000 10,000 10,000 _________________________________ Basic earnings (loss) per share $ 0.03 $(0.068) $ 0.006 _________________________________ There were no dilutive instruments outstanding in fiscal 2005, 2004 and 2003. FIB-PAK INDUSTRIES INC. Notes to Financial Statements For the years ended June 30, 2005, 2004 and 2003 (Amounts in thousands of dollars except per share amounts) _______________________________________________________________________________ 17. SEGMENT DISCLOSURES The Company supplies industrial bags and fabrics to customers in North America. All products have to be considered part of one reportable segment as they are made from similar manufacturing processes and generally have similar economic characteristics. All capital assets of the Company are located in Canada. The following table presents revenues attributed to countries based on the location of customers: 2005 2004 2003 ________ ________ ________ Canada $ 8,786 $ 10,458 $ 7,039 United States 5,643 2,218 7,106 ________________________________ Total sales $ 14,429 $ 12,676 $ 14,145 ________________________________ 18. SUBSEQUENT EVENT Fib-Pak Industries Inc. was amalgamated with Flexia Corporation on October 4, 2005 and all of the shares of the amalgamated corporation were acquired by a new shareholder on October 5, 2005. Schedule C An unaudited interim balance sheet of Flexia as at September 30, 2005, unaudited interim statements of earnings, retained earnings and cash flows for Flexia for the three months ended September 30, 2005 and September 30, 2004. (Please see attached) FLEXIA CORPORATION UNAUDITED FINANCIAL STATEMENTS For the Three Months ended September 30, 2005 and 2004 FLEXIA CORPORATION BALANCE SHEETS (In thousands of Canadian dollars) September 30, 2005 June 30, 2005 ______________________________________ $ $ _______________________________________________________________________________ (unaudited) (audited) ASSETS Current assets Accounts receivables 12,421 13,040 Due from affiliated company 135 8 Income taxes receivable 963 Inventories 12,697 17,377 Prepaid expenses 335 191 Future income taxes 126 _______________________________________________________________________________ 26,677 30,616 _______________________________________________________________________________ Long-term receivable 1,610 1,517 Property, plant and equipment 17,722 18,291 Deferred pension expense 1,448 1,295 Future income taxes 447 _______________________________________________________________________________ 47,904 51,719 _______________________________________________________________________________ LIABILITIES Current liabilities Bank indebtedness 3,083 1,687 Accounts payable and accrued liabilities 9,011 10,370 Income taxes payable 3,021 Current portion of long term debt 7,420 7,420 _______________________________________________________________________________ 19,514 22,498 _______________________________________________________________________________ Future income taxes 3,070 2,461 Post retirement benefits obligation 1,500 1,458 Deferred gain 3,151 3,323 _______________________________________________________________________________ 27,235 29,740 _______________________________________________________________________________ SHAREHOLDERS' EQUITY Share capital 4,230 4,230 Retained earnings 16,439 17,749 _______________________________________________________________________________ 20,669 21,979 _______________________________________________________________________________ 47,904 51,719 _______________________________________________________________________________ See accompanying notes FLEXIA CORPORATION STATEMENTS OF EARNINGS (In thousands of Canadian dollars) (Unaudited) Three Months ended September 30, ________________________________________ 2005 2004 $ $ _______________________________________________________________________________ Net sales 21,065 25,287 Cost of sales 20,338 22,530 _______________________________________________________________________________ Gross profit 727 2,757 _______________________________________________________________________________ Selling and administrative expenses 2,579 1,714 Amortization of patents and trademarks --- 21 Amortization of deferred costs --- 14 Amortization of deferred gain (172) --- Gain on sale of intangibles (83) --- Interest expense 287 632 _______________________________________________________________________________ 2,611 2,381 _______________________________________________________________________________ Earnings (loss) before income taxes (1,884) 376 Income taxes (recovery) (574) 143 _______________________________________________________________________________ Net earnings (loss) (1,310) 233 _______________________________________________________________________________ See accompanying notes FLEXIA CORPORATION STATEMENTS OF RETAINED EARNINGS (In thousands of Canadian dollars) (Unaudited) September 30, _____________________________________ 2005 2004 _______________________________________________________________________________ $ $ Retained earnings, beginning of period 17,749 6,620 Net earnings (loss) (1,310) 233 _______________________________________________________________________________ Retained earnings, end of period 16,439 6,853 _______________________________________________________________________________ See accompanying notes FLEXIA CORPORATION STATEMENTS OF CASH FLOWS (In thousands of Canadian dollars) (Unaudited) Three Months ended September 30, ________________________________________ 2005 2004 $ $ _______________________________________________________________________________ OPERATING ACTIVITIES Net earnings (1,310) 233 Items not affecting cash Gain on sale of intangibles (83) Amortization 421 658 Future income taxes 36 Pension funding in excess of amounts expensed (153) (144) Post retirement benefit expense 42 27 _______________________________________________________________________________ Cash flows from operations before changes in non-cash operating capital items (1,047) 774 _______________________________________________________________________________ Changes in non cash operating working capital items (315) (4,981) _______________________________________________________________________________ Cash flows from operating activities (1,362) (4,207) _______________________________________________________________________________ INVESTING ACTIVITIES Long-term receivable (10) Purchase of property, plant and equipment (24) (161) _______________________________________________________________________________ Cash-flow from investing activities (34) (161) _______________________________________________________________________________ FINANCING ACTIVITIES Increase in bank indebtedness 1,396 5,368 Repayment of long-term debt (1,000) _______________________________________________________________________________ Cash flows from financing activities 1,396 4,368 _______________________________________________________________________________ Net change in cash and cash beginning and end of period --- --- _______________________________________________________________________________ See accompanying notes FLEXIA CORPORATION NOTES TO FINANCIAL STATEMENTS (In thousands of Canadian dollars, except as otherwise noted) (Unaudited) 1. BASIS OF PRESENTATION In the opinion of management, the accompanying unaudited interim financial statements, prepared in accordance with Canadian generally accepted accounting principles, contain all adjustments necessary to present fairly Flexia Corporation's (the "Company") financial position as at September 30, 2005 as well as its results of operations and its cash flows for the three months ended September 30, 2005 and 2004. These unaudited interim financial statements and notes should be read in conjunction with the Company's audited annual financial statements. These unaudited interim financial statements and notes follow the same accounting policies as the most recent audited annual financial statements. 2. INFORMATION INCLUDED IN THE INTERIM STATEMENTS OF EARNINGS Three months ended September 30, 2005 2004 _______________ _______________ $ $ Amortization of property, plant and equipment 593 623 _______________ _______________ Board of directors' fees 22 24 _______________ _______________ Expenses of sale of Flexia to Intertape Polymer Group Inc. and other valuation adjustments 1,753 - _______________ _______________ Included in the statement of earnings for the three months ended September 30, 2005 is $1,253 of expense incurred in connection with the sale of the Company to Intertape Polymer Group Inc. in October 2005, $22 of fees and expenses paid to the prior owners of Flexia in their capacity as directors of the Company, as well as a $500 increase in inventory obsolescence for roof underlay products. 3. POST-RETIREMENT BENEFITS Three months ended September 30, 2005 2004 _______________ _______________ $ $ Net periodic benefit cost for defined benefit plans 154 133 _______________ _______________ 4. SUBSEQUENT EVENTS On October 4, 2005, the Company and its sister company (through common ownership) Fib-Pak Industries Inc. were amalgamated into Flexia Corporation Ltd. and, on October 5, 2005, Intertape Polymer Group Inc., through a wholly-owned subsidiary, acquired all of the outstanding stock of Flexia Corporation Ltd. Schedule D An unaudited interim balance sheet of Fib-Pak as at September 30, 2005, unaudited interim statements of income, retained earnings and cash flows for Fib-Pak for the three months ended September 30, 2005 and September 30, 2004. (Please see attached) FIB-PAK INDUSTRIES INC. UNAUDITED FINANCIAL STATEMENTS For the Three Months ended September 30, 2005 and 2004 FIB PAK INDUSTRIES INC. BALANCE SHEETS (In thousands of Canadian dollars) September 30, 2005 June 30, 2005 _________________________________________ $ $ (unaudited) (audited) ______________________________________________________________________________ ASSETS Current assets Accounts receivables 1,929 1,871 Income taxes receivable 6 Due from affiliated company 7 Inventories 2,405 2,495 Prepaid expenses 35 2 ______________________________________________________________________________ 4,375 4,375 ______________________________________________________________________________ Property plant and equipment 1,305 1,360 Future income taxes 191 176 ______________________________________________________________________________ 5,871 5,911 ______________________________________________________________________________ LIABILITIES Current liabilities Bank indebtedness 69 Bank loan 2,570 2,350 Accounts payable and accrued liabilities 1,058 1,094 Due to affiliated company 135 15 Income taxes payable 208 Current portion of long term debt 1,380 1,380 ______________________________________________________________________________ 5,143 5,116 ______________________________________________________________________________ Post retirement benefits obligation 433 423 ______________________________________________________________________________ 5,576 5,539 ______________________________________________________________________________ SHAREHOLDERS' EQUITY Share capital 470 470 Deficit (175) (98) ______________________________________________________________________________ 295 372 ______________________________________________________________________________ 5,871 5,911 ______________________________________________________________________________ See accompanying notes FIB PAK INDUSTRIES INC. STATEMENTS OF EARNINGS AND DEFICIT (In thousands of Canadian dollars) (Unaudited) Three Months ended September 30, _____________________________________ 2005 2004 $ $ (unaudited) (unaudited) Sales 3,011 3,066 Cost of sales 2,593 2,795 ______________________________________________________________________________ Gross profit 418 271 ______________________________________________________________________________ Selling and administrative expenses 394 174 Amortization -- 2 Interest expense 78 80 ______________________________________________________________________________ 472 256 ______________________________________________________________________________ Earning (loss) before income taxes (54) 15 Income taxes 23 5 ______________________________________________________________________________ Net earnings (loss) (77) 10 Deficit, beginning of the period (98) (401) ______________________________________________________________________________ Deficit, end of the period (175) (391) ______________________________________________________________________________ See accompanying notes FIB PAK INDUSTRIES INC. STATEMENTS OF CASH FLOWS (In thousands of Canadian dollars) (Unaudited) Three Months ended September 30, _________________________________ 2005 2004 $ $ ______________________________________________________________________________ OPERATING ACTIVITIES Net earnings (loss) (77) 10 Items not affecting cash Amortization 70 77 Future income taxes (15) Post retirement benefit expense 10 7 ______________________________________________________________________________ Cash flows from operations before changes in non-cash operating working capital items (12) 94 ______________________________________________________________________________ Changes in non cash operating working capital items (124) 462 ______________________________________________________________________________ Cash flows from operating activities (136) 556 ______________________________________________________________________________ INVESTING ACTIVITIES Purchase of property, plant and equipment and cash flows from investing activities (15) (22) ______________________________________________________________________________ FINANCING ACTIVITIES Increase in bank indebtedness and bank loan and cash flows from financing activities 151 (534) ______________________________________________________________________________ Net change in cash and cash beginning and end of period -- -- See accompanying notes FIB-PAK INDUSTRIES NOTES TO FINANCIAL STATEMENTS (In thousands of Canadian dollars, except as otherwise noted) (Unaudited) 1. BASIS OF PRESENTATION In the opinion of management, the accompanying unaudited interim financial statements, prepared in accordance with Canadian generally accepted accounting principles, contain all adjustments necessary to present fairly Fib-Pak Industries Inc.'s (the "Company") financial position as at September 30, 2005 as well as its results of operation and its cash flows for the three months ended September 30, 2005 and 2004. These unaudited interim financial statements and notes should be read in conjunction with the Company's audited annual financial statements. These unaudited interim financial statements and notes follow the same accounting policies as the most recent audited annual financial statements. 2. INFORMATION INCLUDED IN THE INTERIM STATEMENT OF EARNINGS Three months ended September 30, 2005 2004 ______________ ______________ $ $ Amortization of property, plant and equipment 70 75 ______________ ______________ Board of directors' fees 3 3 ______________ ______________ Expenses of sale of Flexia to Intertape Polymer Group Inc. 154 - ______________ ______________ Included in the statement of earnings for the three months ended September 30, 2005 is $154 of expense incurred in connection with the sale of the Company to Intertape Polymer Group Inc. in October 2005 and $3 of fees and expenses paid to the prior owners of Fib-Pak in their capacity as directors of the Company. 3. 3. POST-RETIREMENT BENEFITS Three months ended September 30, 2005 2004 ______________ ______________ $ $ Net periodic benefit cost for defined benefit plans 9 7 ______________ ______________ 4. SUBSEQUENT EVENTS On October 4, 2005, the Company and its sister company (through common ownership) Flexia Corporation were amalgamated into Flexia Corporation Ltd., and on October 5, 2005, Intertape Polymer Group Inc., through a wholly-owned subsidiary, acquired all of the outstanding stock of Flexia Corporation Ltd. Schedule E: An unaudited pro forma consolidated balance sheet of the Company as at September 30, 2005, unaudited pro forma consolidated statement of earnings of the Company for its financial year ended December 31, 2004 and for the nine months ended September 30, 2005, notes to the pro forma consolidated financial statements of the Company and a compilation report dated December 19, 2005 accompanying the unaudited pro forma consolidated financial statements of the Company. (Please see attached) Intertape Polymer Group Inc. Pro Forma Consolidated Financial Statements As at September 30, 2005 and for the nine months then ended and for the year ended December 31, 2004 (Unaudited - See Compilation Report) Compilation Report 2 Consolidated Pro Forma Financial Statements Balance Sheet 4 Statement of Earnings 5 Statement of Earnings 6 Notes to the Pro Forma Consolidated Financial Statements 7 to 13 COMPILATION REPORT ON PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS To the Directors of Intertape Polymer Group Inc. We have read the accompanying unaudited pro forma consolidated balance sheet of Intertape Polymer Group Inc. ("IPG") as at September 30, 2005 and the unaudited pro forma consolidated statements of earnings for the nine months then ended and for the year ended December 31, 2004, and have performed the following procedures: 1. Compared the figures in the columns captioned "IPG" to the corresponding figures in the unaudited financial statements of IPG as at and for the nine months ended September 30, 2005, and the corresponding figures in the audited financial statements for the year ended December 31, 2004 and found them to be in agreement. 2. Compared the figures in the columns captioned "Flexia" to the corresponding figures in the unaudited balance sheet of Flexia Corporation as at September 30, 2005, and found them to be in agreement. 3. Compared the figures in the columns captioned "Fib-Pak" to the corresponding figures in the unaudited balance sheet of Fib-Pak Industries Inc. as at September 30, 2005, and found them to be in agreement. 4. Reperformed the calculations of the columns captioned "Flexia" and "Fib-Pak" in the unaudited pro forma consolidated statements of earnings for the nine months ended September 30, 2005 and for the twelve months ended December 31, 2004. These columns were constructed, as described in Notes 2 and 3, by adding and subtracting relevant periods. We found the columns to be arithmetically correct. 5. Made enquiries of certain officials of the IPG who have responsibility for financial and accounting matters about: (a) the basis for determination of the pro forma adjustments; and (b) whether the unaudited pro forma consolidated financial statements comply as to form in all material respects with the applicable requirements of the applicable securities regulatory authorities in Canada. 6. The officials: (a) described to us the basis for determination of the pro forma adjustments; and (b) stated that the unaudited pro forma consolidated financial statements comply as to form in all material respects with the applicable requirements of applicable securities regulatory authorities in Canada. 7. Read the notes to the unaudited pro forma consolidated financial statements, and found them to be consistent with the basis described to us for determination of the pro forma adjustments. 8. Recalculated the application of the pro forma adjustments to the aggregate of the amounts in the columns captioned "IPG", "Flexia" and "Fib-Pak" as at September 30, 2005 and for the nine months then ended, and for the year ended December 31, 2004, and found the amounts in the column captioned "Pro forma consolidated" to be arithmetically correct. A pro forma financial statement is based on management's assumptions and adjustments, which are inherently subjective. The foregoing procedures are substantially less than either an audit or a review, the objective of which is the expression of assurance with respect to management's assumptions, the pro forma adjustments, and the application of the adjustments to the historical financial information. Accordingly, we express no such assurance. The foregoing procedures would not necessarily reveal matters of significance to the unaudited pro forma consolidated financial statements, and we therefore make no representation about the sufficiency of the procedures for the purposes of a reader of such statements. /s/ Raymond Chabot Grant Thornton LLP Chartered Accountants Montreal, Canada December 19, 2005 Intertape Polymer Group Inc. 4 Pro Forma Consolidated Balance Sheet As at September 30, 2005 (In thousands of U.S. dollars, except as otherwise noted) (Unaudited - See Compilation Report)
Pro forma Pro forma IPG Flexia Fib-Pak Total adjustments Note 4 consolidated $ $ $ $ $ $ ASSETS Current assets Cash 48,759 48,759 (28,368) (b) 20,391 Accounts receivable 122,217 10,594 1,645 134,456 134,456 Due from affiliated company 115 115 (115) (a) Other receivables 10,008 821 5 10,834 10,834 Inventories 92,297 10,829 2,052 105,178 105,178 Parts and supplies 14,271 14,271 14,271 Prepaid expenses 5,444 286 30 5,760 5,760 Future income taxes 1,509 107 1,616 (107) (b) 1,509 _______ ______ _____ _______ ________ _______ 294,505 22,752 3,732 320,989 (28,590) 292,399 Long-term receivable 1,373 1,373 (1,373) (b) Property, plant and equipment 345,417 15,115 1,113 361,645 1,169 (b) 362,814 Other assets 18,815 18,815 18,815 Pension plan prepaid benefit 1,235 1,235 (1,235) (b) Future income taxes 35,323 381 163 35,867 (381) (b) 35,486 Goodwill 181,117 181,117 3,555 (b) 184,672 _______ ______ _____ _______ ________ _______ 875,177 40,856 5,008 921,041 (26,855) 894,186 _______ ______ _____ _______ ________ _______ LIABILITIES Current liabilities Bank indebtedness 28,529 2,629 2,194 33,352 (4,823) (a) 28,529 Accounts payable and accrued liabilities 89,340 7,679 901 97,920 (264) (a) 4,450 (b) 102,106 Due to affiliated company 115 115 (115) (a) Current portion of long-term debt 2,781 6,328 1,177 10,286 (7,505) (a) 2,781 _______ ______ _____ _______ ________ _______ 120,650 16,636 4,387 141,673 (8,257) 133,416 Long-term debt 328,898 328,898 328,898 Deferred gain 2,687 2,687 (2,687) (b) Pension liability 1,390 (b) 1,390 Post retirement benefit 1,279 369 1,648 386 (b) 2,034 Future income taxes 2,618 2,618 (1,761) (b) 857 Other liabilities 435 435 1,962 (b) 2,397 _______ ______ _____ _______ ________ _______ 449,983 23,220 4,756 477,959 (8,967) 468,992 SHAREHOLDERS' EQUITY Capital stock 288,930 3,608 401 292,939 (4,009) (b) 288,930 Contributed surplus 5,749 5,749 5,749 Retained earnings 97,657 14,028 (149) 111,536 (13,879) (b) 97,657 Accumulated currency translation adjustments 32,858 32,858 32,858 _______ ______ _____ _______ ________ _______ 425,194 17,636 252 443,082 (17,888) 425,194 _______ ______ _____ _______ ________ _______ 875,177 40,856 5,008 921,041 (26,855) 894,186 _______ ______ _____ _______ ________ _______
The accompanying notes are an integral part of the pro forma consolidated financial statements Intertape Polymer Group Inc. 5 Pro Forma Consolidated Statement of Earnings Nine months ended September 30, 2005 (In thousands of U.S. dollars, except as otherwise noted) (Unaudited - See Compilation Report)
Pro forma Pro forma IPG Flexia Fib-Pak Total adjustments Note 5 consolidated $ $ $ $ $ $ Sales 579,156 59,151 8,588 646,895 646,895 Cost of sales 458,918 54,834 7,530 521,282 (637) (c) (70) (d) (92) (e) 520,483 _______ ______ _____ _______ ________ _______ Gross profit 120,238 4,317 1,058 125,613 799 126,412 Selling, general and administrative expenses 76,154 3,613 664 80,431 (638) (b) 79,793 Research and development 3,468 3,468 3,468 Financial expenses 17,144 882 189 18,215 (1,089) (a) 1,140 (f) 18,266 Manufacturing facility closure and industrial accident costs 2,191 2,191 2,191 _______ ______ _____ _______ ________ _______ 98,957 4,495 853 104,305 (587) 103,718 _______ ______ _____ _______ ________ _______ Earnings before income taxes 21,281 (178) 205 21,308 1,386 22,694 Income taxes 3,217 (176) 104 3,145 487 (g) 3,632 _______ ______ _____ _______ ________ _______ Net earnings 18,064 (2) 101 18,163 899 19,062 _______ ______ _____ _______ ________ _______ Earnings (loss) per share Basic 0.44 0.46 _______ ______ _____ _______ ________ _______ Diluted 0.44 0.46 _______ ______ _____ _______ ________ _______ Weighted average number of shares outstanding Basic 41,219,329 41,219,329 __________ ______ _____ _______ ________ _______ Diluted 41,362,491 41,362,491 __________ ______ _____ _______ ________ _______
The accompanying notes are an integral part of the pro forma consolidated financial statements. Intertape Polymer Group Inc. Pro Forma Consolidated Statement of Earnings Year ended December 31, 2004 (In thousands of U.S. dollars, except as otherwise noted) (Unaudited - See Compilation Report)
Pro forma Pro forma IPG Flexia Fib-Pak Total adjustments Note 5 consolidated $ $ $ $ $ $ Sales 692,449 82,484 10,702 785,635 785,635 Cost of sales 549,252 72,796 9,582 631,630 (867) (c) (87) (d) (115) (e) 630,561 __________ ______ _____ _______ ________ _______ Gross profit 143,197 9,688 1,120 154,005 1,069 155,074 Selling, general and administrative expenses 95,272 5,918 636 101,826 (800) (b) 101,026 Research and development 4,233 4,233 4,233 Impairment of goodwill 444 444 444 Gain on sale of intangibles (9,132) (9,132) (9,132) Financial expenses 24,253 1,987 260 26,500 (1,847) (a) 1,521 (f) 26,174 Refinancing expense 30,444 30,444 30,444 Manufacturing facility closure costs 7,386 7,386 7,386 __________ ______ _____ _______ ________ _______ 161,588 (1,227) 1,340 161,701 (1,126) 160,575 __________ ______ _____ _______ ________ _______ Earnings before income taxes (18,391) 10,915 (220) (7,696) 2,195 (5,501) Income taxes (29,749) 2,514 (31) (27,266) 778 (g) (26,488) __________ ______ _____ _______ ________ _______ Net earnings 11,358 8,401 (189) 19,570 1,417 20,987 Earnings (loss) per share Basic 0.28 0.51 __________ _______ Diluted 0.27 0.51 __________ _______ Weighted average number of shares outstanding Basic 41,186,143 41,186,143 __________ __________ Diluted 41,445,864 41,445,864 __________ __________
The accompanying notes are an integral part of the pro forma consolidated financial statements. INTERTAPE POLYMER GROUP INC. NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS Nine months ended September 30, 2005 and the year ended December 31, 2004 (In thousands of U.S. dollars, except as otherwise noted) (Unaudited - See Compilation Report) 1. DESCRIPTION OF TRANSACTIONS On October 4, 2005, Flexia Corporation ("Flexia") and Fib-Pak Industries Inc. ("Fib-Pak") amalgamated to form Flexia Corporation Limited ("Flexia Co.") and create a new limited partnership, Flexia L.P. ("Flexia LP"). Nine units were issued upon formation of Flexia LP. Flexia Co. transferred all of its assets to Flexia LP, except for the land, building and equipment located at the Cap-de-la-Madeleine, Quebec facility and assumed the liabilities related to the assets transferred in exchange for 170,000 units of Flexia LP. Effective October 4, 2005, Intertape Polymer Inc. ("IPI"), a wholly owned subsidiary of Intertape Polymer Group Inc. ("IPG") made cash advances to Flexia Co. in order for it to repay its bank indebtedness and long-term debt and the related accrued interest. On October 5, 2005, IPI acquired all of the outstanding share capital of Flexia Co. and subsequently converted the advances into share capital. Effective November 26, 2005, Flexia Co. was liquidated into IPI. 2. BASIS OF PRESENTATION The accompanying unaudited pro forma consolidated balance sheet as at September 30, 2005 and the unaudited pro forma consolidated statements of earnings for the nine months ended September 30, 2005 and for the year ended December 31, 2004 have been prepared by management of IPG. The accounting policies used in the preparation of the unaudited pro forma consolidated financial statements are those disclosed in the annual report of IPG and in the audited annual financial statements of Flexia and Fib-Pak, and are in accordance with Canadian generally accepted accounting principles. The accompanying unaudited pro forma consolidated financial statements should be read in conjunction with the annual report of IPG and the audited annual financial statements of Flexia and Fib-Pak, and the notes thereto. The unaudited pro forma consolidated balance sheet of IPG as at September 30, 2005 has been prepared with the information derived from the unaudited consolidated balance sheet of IPG and the unaudited balance sheets of Flexia and Fib-Pak as at September 30, 2005 and the adjustments and assumptions outlined below. The unaudited pro forma consolidated statement of earnings of IPG for the nine months ended September 30, 2005 has been prepared with the information derived from the unaudited consolidated statement of earnings of IPG for the nine months ended September 30, 2005 and the unaudited statements of earnings of Flexia and Fib-Pak for the nine months ended September 30, 2005, constructed by adding the respective unaudited statements of earnings for the three months INTERTAPE POLYMER GROUP INC. NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS Nine months ended September 30, 2005 and the year ended December 31, 2004 (In thousands of U.S. dollars, except as otherwise noted) (Unaudited - See Compilation Report) ended September 30, 2005 and the unaudited statements of earnings for the six months ended June 30, 2005 as disclosed in Note 3, and the adjustments and assumptions outlined below. The unaudited pro forma consolidated statement of earnings of IPG for the year ended December 31, 2004 has been prepared with the information derived from the audited consolidated statement of earnings of IPG for the year ended December 31, 2004 and the unaudited statements of earnings of Flexia and Fib-Pak for the twelve months ended December 31, 2004, constructed by adding the respective audited statements of earnings for the year ended June 30, 2005 with the unaudited statements of earnings for the six months ended June 30, 2004 and subtracting the unaudited statements of earnings for the six months ended June 30, 2005 as disclosed in Note 3, and the adjustments and assumptions outlined below. The transactions described in Note 1 are reflected in the unaudited pro forma consolidated balance sheet as if they had occurred on September 30, 2005 and in the unaudited pro forma consolidated statements of earnings for the nine months ended September 30, 2005 and for the year ended December 31, 2004 as if they had occurred on January 1, 2004. The acquisition of Flexia and Fib-Pak was accounted for using the purchase method of accounting, under which the purchase price was allocated to the assets acquired and the liabilities assumed based on their estimated fair values at the date of the acquisition. The underlying assumptions for the pro forma adjustments provide a reasonable basis for presenting the significant financial effects directly attributable to the transactions described in Note 1. These pro forma adjustments are tentative and are based on available financial information and certain estimates and assumptions. The actual financial effects of the transactions to the consolidated financial statements of IPG will depend on a number of factors. Therefore, the actual effects of the transactions will differ from those reflected in the pro forma adjustments. Management believes that such assumptions provide a reasonable basis for presenting all of the significant effects of the transactions contemplated and that the pro forma adjustments give appropriate effect to those assumptions and are properly applied in the unaudited pro forma consolidated financial statements. In addition, in preparing the unaudited pro forma consolidated financial statements, no adjustments have been made to reflect the additional costs, savings or synergies that could result from combining IPG, Flexia and Fib-Pak. The unaudited pro forma consolidated financial statements are not intended to reflect the results of operations which would have actually resulted had the acquisition of Flexia and Fib-Pak and other pro forma transactions and adjustments been effected on the dates indicated. Furthermore, the unaudited pro forma consolidated statements of earnings are not necessarily indicative of the results of operations that may be obtained by the IPG in the future. The historical financial statements of Flexia and Fib-Pak have been prepared and presented in Canadian dollars. For the purpose of the preparation of these unaudited pro forma consolidated financial statements, the historical consolidated financial statements of Flexia and Fib-Pak have been translated into U.S. dollars using the exchange rates for the periods, as follows: INTERTAPE POLYMER GROUP INC. NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS Nine months ended September 30, 2005 and the year ended December 31, 2004 (In thousands of U.S. dollars, except as otherwise noted) (Unaudited - See Compilation Report) Nine months As at ended Year ended September September 30, December 30, 2005 2005 31, 2004 _________ _____________ __________ Average rate...................... - 0.8164 0.7682 End of period rate................ 0.8528 - - 3. COMPUTATION OF THE UNAUDITED STATEMENTS OF EARNINGS OF FLEXIA AND FIB PAK Flexia The unaudited statement of earnings of Flexia for the nine months ended September 30, 2005 was constructed by adding the unaudited statement of earnings for the three months ended September 30, 2005 and the unaudited statement of earnings for the six months ended June 30, 2005: Flexia Three months Six months ended Nine months ended September June 30, 2005 ended September 30, 2005 30, 2005 $ $ $ _______________________________________________________________________________ Sales 17,197 41,954 59,151 Cost of sales 16,604 38,230 54,834 _______________________________________________________________________________ Gross profit 593 3,724 4,317 _______________________________________________________________________________ Selling, general and administrative expenses 1,897 1,716 3,613 Financial expenses 235 647 882 _______________________________________________________________________________ 2,132 2,363 4,495 _______________________________________________________________________________ Earnings (loss) before income taxes (1,539) 1,361 (178) Income taxes (recovery) (470) 294 (176) _______________________________________________________________________________ Net earnings (loss) (1,069) 1,067 (2) _______________________________________________________________________________ The unaudited statement of earnings of Flexia for the twelve months ended December 31, 2004, was constructed by adding the audited statement of earnings for the year ended June 30, 2005 and the unaudited statement of earnings for the six months ended June 30, 2004 and subtracting the unaudited statement of earnings for the six months ended June 30, 2005: INTERTAPE POLYMER GROUP INC. NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS Nine months ended September 30, 2005 and the year ended December 31, 2004 (In thousands of U.S. dollars, except as otherwise noted) (Unaudited - See Compilation Report) Flexia Six months Six months Twelve months Year ended ended June 30, ended June 30, ended June 30, 2005 2004 2005 December 31, 2004 $ $ $ $ _______________________________________________________________________________ Sales 81,740 40,222 (39,478) 82,484 Cost of sales 73,556 35,215 (35,945) 72,796 _______________________________________________________________________________ Gross profit 8,184 5,007 (3,503) 9,688 _______________________________________________________________________________ Selling, general and administrative expenses 4,803 2,730 (1,615) 5,918 Gain on sale of intangibles (9,132) -- -- (9,131) Financial expenses 1,605 991 (609) 1,987 _______________________________________________________________________________ (2,724) 3,721 (2,224) (1,227) _______________________________________________________________________________ Earnings before income taxes 10,908 1,286 (1,279) 10,915 Income taxes 2,357 434 (277) 2,514 _______________________________________________________________________________ Net earning 8,551 852 (1,002) 8,401 _______________________________________________________________________________ Fib-Pak The unaudited statement of earnings of Fib-Pak for the nine months ended September 30, 2005 was constructed by adding the unaudited statement of earnings for the three months ended September 30, 2005 and the unaudited statement of earnings for the six months ended June 30, 2005: Fib-Pak Three months Six months ended Nine months ended September June 30, 2005 ended September 30, 2005 30, 2005 $ $ $ _______________________________________________________________________________ Sales 2,458 6,130 8,588 Cost of sales 2,116 5,414 7,530 _______________________________________________________________________________ Gross profit 342 716 1,058 _______________________________________________________________________________ Selling, general and administrative expenses 320 344 664 Financial expenses 65 124 189 _______________________________________________________________________________ 385 468 853 _______________________________________________________________________________ Earnings (loss) before income taxes (43) 248 205 Income taxes 19 85 104 _______________________________________________________________________________ Net earnings (loss) (62) 163 101 _______________________________________________________________________________ The unaudited statement of earnings of Fib-Pak for the twelve months ended December 31, 2004, was constructed by adding the audited statement of earnings for the year ended June 30, 2005 INTERTAPE POLYMER GROUP INC. NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS Nine months ended September 30, 2005 and the year ended December 31, 2004 (In thousands of U.S. dollars, except as otherwise noted) (Unaudited - See Compilation Report) and the unaudited statement of earnings for the six months ended June 30, 2004 and subtracting the unaudited statement of earnings for the six months ended June 30, 2005: Fib-Pak Six months Six months Twelve months Year ended ended June 30, ended June 30, ended June 30, 2005 2004 2005 December 31, 2004 $ $ $ _______________________________________________________________________________ Sales 11,085 5,386 (5,769) 10,702 Cost of sales 9,868 4,793 (5,079) 9,582 _______________________________________________________________________________ Gross profit 1,217 593 (690) 1,120 _______________________________________________________________________________ Selling, general and administrative expenses 618 356 (338) 636 Impairment of goodwill -- 444 -- 444 Financial expenses 245 132 (117) 260 _______________________________________________________________________________ 863 932 (445) 1,340 _______________________________________________________________________________ Earnings (loss) before income taxes 354 (349) (235) (220) Income taxes (recovery) 121 (72) (80) (31) _______________________________________________________________________________ Net earnings (loss) 233 (267) (155) (189) _______________________________________________________________________________ 4. PRO FORMA CONSOLIDATED BALANCE SHEET OF IPG The unaudited pro forma consolidated balance sheet of IPG as at September 30, 2005 is based on the unaudited balance sheet of IPG as at September 30, 2005 and has been prepared as if the acquisition of Flexia and Fib-Pak had occurred on September 30, 2005 and gives effect to the following adjustments: (a) Effective October 4, 2005, IPI made cash advances amounting to $12,592 to Flexia Co. in order for it to repay its bank indebtedness and long-term debt and the related accrued interest. The unaudited pro forma consolidated balance sheet reflects the repayment of bank indebtedness of $4,823, the repayment of long-term debt of $7,505 and of the related accrued interest of $264 included with accounts payable and accrued liabilities. (b) On October 5, 2005, IPI acquired all of the outstanding share capital of Flexia Co. for a cash consideration of $28,368. The acquisition was accounted for using the purchase method. The preliminary allocation of the purchase price is summarized as follows: INTERTAPE POLYMER GROUP INC. NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS Nine months ended September 30, 2005 and the year ended December 31, 2004 (In thousands of U.S. dollars, except as otherwise noted) (Unaudited - See Compilation Report) $ _______________________________________________________________________________ Assets acquired and liabilities assumed: Net working capital 13,496 Property, plant and equipment 17,397 Future income tax assets 163 Goodwill 3,555 Pension and post retirement liability (3,424) Future income taxes liabilities (857) Other liabilities (1,962) _______________________________________________________________________________ 28,368 _______________________________________________________________________________ Consideration: Cash 28,368 _______________________________________________________________________________ The actual calculation and allocation of the purchase price is to be based on the fair values of the assets acquired and liabilities assumed at the effective date of the acquisition and other information at that date to support the allocation of the purchase price. Accordingly, the actual amounts allocated for each of the assets and liabilities will vary from the pro forma amounts and the variations may be material. 5. PRO FORMA CONSOLIDATED STATEMENTS OF EARNINGS OF IPG The unaudited pro forma consolidated statements of earnings of IPG for the nine months ended September 30, 2005 and the year ended December 31, 2004 assume that the acquisition of Flexia and Fib-Pak had occurred on January 1, 2004 and give effect to the following adjustments: (a) As a result of the repayment of bank indebtedness and long-term debt described in Note 4(a), the unaudited pro forma consolidated statements of earnings reflect a decrease in interest expense of $1,089 for the nine months ended September 30, 2005 and of $1,847 for the year ended December 31, 2004. (b) Reduction of salaries and wages amounting to $638 for the nine months ended September 30, 2005 and $800 for the year ended December 31, 2004 relating to the elimination of certain management and staffing positions at Flexia that have occurred. (c) Decrease in the amortization expense of $637 for the nine months ended September 30, 2005 and of $867 for the year ended December 31, 2004 to reflect the adjustment to fair value of the property, plant and equipment. INTERTAPE POLYMER GROUP INC. NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS Nine months ended September 30, 2005 and the year ended December 31, 2004 (In thousands of U.S. dollars, except as otherwise noted) (Unaudited - See Compilation Report) (d) Reduction of the pension expense of $70 for the nine months ended September 30, 2005 and of $87 for the year ended December 31, 2004, to reflect the recording of the post retirement benefit obligations at fair value. (e) Reduction in rental expense of $92 for the nine months ended September 30, 2005 and of $115 for the year ended December 31, 2004 relating to the termination of a lease regarding the rental of warehouse space which has taken place. (f) Increase in interest expense due to bank indebtedness assumed for the purpose of financing the acquisition amounting to $1,140 for the nine months ended September 30, 2005 and $1,521 for the year ended December 31, 2004. (g) Tax effects of the above adjustments at the estimated effective income tax rate of IPG.