Infineon Annual Report 2004

Plain-text annual report

Annual Report 2004 Committed to Excellence À la recherche de l'excellence 2004 Rapport Annuel C O R P O R A T E P R O F I L E ANNUAL REPORT – 2004 Imaﬂex Inc. specializes in the manufacture and sale of custom-made polyethylene ﬁlms suited for various packaging needs of our customers. These packaging ﬁlms are either used directly by our customers to protect their own products, or by customers who convert our ﬁlm products into plain or printed bags of all types and/or into printed roll stock, in their own converting operations, to satisfy their own customer needs. Imaﬂex employs approximately 70 people in its manufacturing facility, located in Montréal, Québec. Imaﬂex recycles 100% of its own waste, the majority in-house, thereby enhancing cost efﬁciency. Canslit Inc., the wholly owned subsidiary, specializes in the metallization of numerous polymer-based products including polyester, nylon, polypropylene and polyethylene. This is accomplished through the application under vacuum conditions of a ﬁne layer of aluminum vapors to the surface of the polymer-based ﬁlm. Metallized ﬁlms are generally used in the packaging of food products. However, these ﬁlms are also being used in the agricultural, insulation, photography, aerospace and numerous other industries. Canslit employs approximately 30 people at its manufacturing facility in Victoriaville, Québec. IN ALL SUCCESSFUL BUSINESSES THE KEY TO SUCCESS RELIES ON MANAGEMENT’S ABILITY TO MASTER THREE FUNDAMENTALS: > CLEAR VISION OF GOALS > CORRECT TIMING OF ACTIONS > COMMITMENT TO CUSTOMER SENIOR MANAGEMENT KNOWS, OUR UNDERSTANDS AND LIVES BY THESE PILLARS OF BUSINESS FUNDAMENTALS. TEAM 1 F I N A N C I A L H I G H L I G H T S (In dollars except per share data) ANNUAL REPORT – 2004 Year ended December 31, 2004 Year ended December 31, 2003 % Change Current year vs. prior year Operating Summary Sales Net Income Earnings Per Share EBIT (1) EBITDA (2) EBITDA Per Share Financial Position $39,084,230 2,586,568 0.083 3,871,810 5,774,550 0.186 $36,133,109 1,478,570 0.048 2,467,380 4,235,456 0.136 Working Capital Capital Assets Total Assets Total Long-Term Debt (including Capital Leases) Shareholders’ Equity 3,980,763 10,144,821 25,131,826 2,198,793 11,464,751 20,929,028 5,535,378 9,131,636 7,319,309 6,539,068 (1) Earnings before interest and taxes (2) Earnings before interest, taxes, depreciation and amortization (*) Change in year-end 8.2% 74.9% 72.9% 56.9% 36.3% 36.8% 81.0% -11.5% 20.1% -24.4% 39.6% Year ended Eleven month period ended December 31, December 31, 2001 (*) 2002 Year ended January 31, 2001 Year ended January 31, 2000 $29,184,831 739,785 0.024 1,518,559 2,888,028 0.093 $24,366,170 71,363 0.002 837,378 1,910,482 0.062 $20,558,115 $16,320,773 684,424 0.023 1,278,728 1,894,265 0.063 1,033,715 0.034 1,816,018 2,564,143 0.085 1,151,989 10,039,595 17,249,269 863,322 7,981,279 15,633,974 1,231,817 6,149,982 11,639,557 946,787 4,126,607 8,823,434 6,434,957 5,060,498 5,205,737 4,302,713 3,289,014 4,118,850 1,954,393 3,081,149 A B B B B B B B C D D D A B C D Represents seven month period ended January 31. Represents year ended January 31. Represents eleven month period ended December 31. Represents year ended December 31. 2 R E P O R T T O O U R S H A R E H O L D E R S ANNUAL REPORT – 2004 INTRODUCTION MANAGEMENT OUTLOOK The current year’s results include those of Imaﬂex Inc. and its wholly owned subsidiary, Canslit Inc. FINANCIAL RESULTS The year ended December 31, 2004 was one of a moderate growth in sales, with a signiﬁcant increase in net income. Net income for the year ended December 31, 2004 was $2,586,568, or $0.083 per share, an increase of 74.9% compared with net income of $1,478,570, or $0.048 per share, for the same period in 2003. The stronger performance was driven by an optimal product mix towards more proﬁtable product segments, continued sales growth volume in the local and US markets, and improved manufacturing productivity. Imaﬂex’s extrusion operations generated net income of $2,447,130 for the year ended December 31, 2004 as compared to $1,615,059 for the same period in 2003. Canslit’s metallizing operations generated net income of $139,438 for the year ended December 31, 2004 as compared to a net loss of $136,489 for the same period in 2003. Sales for the year ended December 31, 2004 totaled $39,084,230 compared with $36,133,109 for the same period in 2003, an increase of $2,951,121 or 8.2%, which is explained by higher sales volume at Imaﬂex’s operations resulting from increases in both manufacturing capacity and demand and sales growth by Canslit in the US market. Imaﬂex’s sales increased by $1,461,013 to $31,994,380. Canslit’s sales increased by $1,490,108 to $7,089,850. Imaﬂex reported record sales and proﬁtability during 2004 as a result of its continued push into more proﬁtable product segments. Management has countered competitive pressures from the strengthening of the Canadian dollar and increased Asian competition by improving plant productivity, maintaining rigorous cost controls and seeking higher margin business. In order to maintain sales and proﬁtability growth, Imaﬂex continues to explore expansion opportunities in the US. Canslit experienced solid sales growth during 2004 by concentrating its expansion on polyethylene based products, rather than on its traditional polyester based products. Management expects further improvement in Canslit’s proﬁtability in 2005 as a result of increased demand for its metallized polyethylene products. This market segment has provided Canslit with an added value product complementary to Imaﬂex’s existing line of polyethylene ﬁlms. To meet this expanding market segment and enter new markets, Canslit arranged for the delivery of additional manufacturing equipment which is expected to be operational in the second quarter of 2005, enabling both Imaﬂex and Canslit to increase sales and proﬁtability in 2005. We would like to extend our special thanks to our employees for their dedication to the Company’s growth and development, and to our shareholders, customers and suppliers for their continued conﬁdence and support. Joseph Abbandonato President & Chief Executive Ofﬁcer 3 Q U A R T E R L Y F I N A N C I A L I N F O R M A T I O N ANNUAL REPORT – 2004 SALES 2004 2003 NET INCOME 2004 2003 First Quarter $ 8,909,028 $ 9,748,971 $ 408,047 $ 565,029 Second Quarter Third Quarter 9,647,398 9,958,509 Fourth Quarter 10,569,295 9,182,625 7,961,934 9,239,579 588,791 525,772 1,063,958 376,837 213,057 323,647 $ 39,084,230 $ 36,133,109 $ 2,586,568 $ 1,478,570 EBITDA 2004 2003 EARNINGS PER SHARE 2004 2003 First Quarter $ 1,152,940 $ 1,331,821 $ 0.013 $ 0.018 Second Quarter 1,378,520 1,044,969 Third Quarter Fourth Quarter 1,284,312 1,958,778 884,621 974,045 0.019 0.017 0.034 0.012 0.007 0.011 $ 5,774,550 $ 4,235,456 $ 0.083 $ 0.048 4 S E L E C T E D F I N A N C I A L I N F O R M A T I O N ANNUAL REPORT – 2004 Selected Balance Sheet Information IMAFLEX CANSLIT IMAFLEX CONSOLIDATED 2004 2003 2004 2003 2004 2003 Assets Accounts receivable Inventories Capital assets $ 6,500,315 5,760,000 9,395,390 $ 5,303,658 1,765,000 10,436,085 $ 1,750,207 724,000 749,431 $ 1,363,505 818,000 1,028,666 $ 8,250,522 6,484,000 10,144,821 $ 6,667,163 2,583,000 11,464,751 Liabilities Accounts payable and accrued liabilities 6,128,581 Current portion of long-term debt 1,636,039 2,741,839 Long-term debt 4,733,888 1,413,931 4,377,878 220,703 370,000 787,500 368,044 370,000 1,157,500 6,349,284 2,006,039 3,529,339 5,101,932 1,783,931 5,535,378 Selected Statement of Income Information IMAFLEX CANSLIT IMAFLEX CONSOLIDATED 2004 2003 2004 2003 2004 2003 Sales Gross proﬁt ($) Gross proﬁt (%) $ 31,994,380 7,608,719 23.8% $ 30,533,367 6,142,302 20.1% $ 7,089,850 959,480 13.5% $ 5,599,742 599,490 10.7% $ 39,084,230 8,568,199 21.9% $ 36,133,109 6,741,792 18.7% Expenses Selling and administrative Amortization of capital assets Interest Provision for income taxes 2,271,787 1,623,505 243,021 951,666 2,095,835 1,442,482 277,657 628,079 443,705 279,235 121,611 (31,056) 313,252 325,594 114,130 (31,056) 2,715,492 1,902,740 364,632 920,610 2,409,087 1,768,076 391,787 597,023 Net income (loss) 2,447,130 1,615,059 139,438 (136,489) 2,586,568 1,478,570 EBITDA 5,265,322 3,963,277 509,228 272,179 5,774,550 4,235,456 5 M A N A G E M E N T D I S C U S S I O N A N D A N A L Y S I S ANNUAL REPORT – 2004 INTRODUCTION The following discussion and analysis should be read in conjunction with the Company’s consolidated ﬁnancial statements and accompanying notes. The current year’s results include those of Imaﬂex Inc. and its wholly owned subsidiary, Canslit Inc. INCOME STATEMENT Net income for the year ended December 31, 2004 was $2,586,568, or $0.083 per share, an increase of 74.9% compared with net income of $1,478,570, or $0.048 per share, for the same period in 2003. The stronger performance was driven by an optimal product mix towards more proﬁtable product segments, continued sales growth volume in the local and US markets, and improved manufacturing Imaﬂex’s extrusion operations generated productivity. net income of $2,447,130 for the year ended December 31, 2004 as compared to $1,615,059 for the same period in 2003. Canslit’s metallizing operations generated net income of $139,438 for the year ended December 31, 2004 as compared to a net loss of $136,489 for the same period in 2003. Sales for the year ended December 31, 2004 totaled $39,084,230 compared with $36,133,109 for the same period in 2003, an increase of $2,951,121 or 8.2%, which is explained by higher sales volume at Imaﬂex’s operations resulting from increases in both manufacturing capacity and demand and sales growth by Canslit in the US market. Imaﬂex’s sales increased by $1,461,013 to $31,994,380. Canslit’s sales increased by $1,490,108 to $7,089,850. Gross proﬁt for the year ended December 31, 2004 amounted to $8,568,199 or 21.9% of sales, compared with $6,741,792 or 18.7% of sales for same period in 2003. The increase in gross proﬁt and gross proﬁt margin is due to increased sales volume and to changes in product mix. 6 Selling and administrative expenses increased for the year ended December 31, 2004 by $306,405 over the same period in 2003, primarily as a result of the increase in sales at Imaﬂex and Canslit’s higher proﬁle in the US market, which required higher selling efforts. Selling and administrative expenses represent 6.9% of sales in ﬁscal 2004, as compared to 6.7% of sales in ﬁscal 2003. Amortization of capital assets increased for the year ended December 31, 2004 by $134,664 over the same period in 2003, as a result of Imaﬂex’s acquisition of additional manufacturing equipment in the fourth quarter of ﬁscal 2003. Interest expense decreased for the year ended December 31, 2004 by $27,155 from the same period in 2003. Higher levels of long-term debt necessitated by Imaﬂex’s acquisition of its ﬁrst co-extrusion line in 2003 resulted in increased interest costs, which were more than offset by interest savings on long-term debt issued prior to 2003, with higher rates but declining balances. Other expenses represented 0.2% of sales for the year ended December 31, 2004, as compared with 0.3% of sales for the same period in 2003. The effective tax rate for the year ended December 31, 2004 decreased to 26% from 29% for the same period in 2003. The income tax provision reﬂects the taxes on the income generated by Imaﬂex’s operations. Canslit’s income before income tax for the year ended December 31, 2004 was offset by losses incurred in prior periods which are being recognized in the income tax provision at the time Canslit generates income. BALANCE SHEET December 31, 2004 versus December 31, 2003 Total assets increased by $4,202,798 to $25,131,826 as at December 31, 2004 compared with $20,929,028 at December 31, 2003. M A N A G E M E N T D I S C U S S I O N A N D A N A L Y S I S ( c o n t i n u e d ) ANNUAL REPORT – 2004 Long-term debt decreased by $1,783,931 to $5,535,378 as at December 31, 2004 compared to $7,319,309 at December 31, 2003, as a result of scheduled long-term debt repayments. Future income tax liabilities increased by $66,237 to $1,696,172 as at December 31, 2004 compared to $1,629,935 at December 31, 2003, primarily related to accelerated amortization of capital assets for taxation purposes. BALANCE SHEET ( c o n t i n u e d ) Current assets increased by $5,332,002 to $14,755,442 as at December 31, 2004 compared with $9,423,440 at December 31, 2003, as a result of the following: • Increase in accounts receivable as a result of an increase in sales. Days sales outstanding were 77 days during the current year as compared to 67 days in the prior year, reﬂecting the difﬁcult economic climate for credit in North America; and • Increase in inventories, necessitated by an expected increase in level of sales and an expected increase in resin costs. Deposits for capital assets increased by $190,726 to $231,563 as at December 31, 2004 compared with $40,837 at December 31, 2003, due to additional manufacturing equipment for Canslit which is expected to be operational in the second quarter of 2005. Capital assets decreased by $1,319,930 to $10,144,821 as at December 31, 2004 compared with $11,464,751 at December 31, 2003, primarily as a result of amortization incurred during 2004. Total liabilities increased by $1,610,230 to $16,000,190 as at December 31, 2004 compared to $14,389,960 at December 31, 2003. Current liabilities increased by $3,550,032 to $10,774,679 as at December 31, 2004 compared with $7,224,647 at December 31, 2003, as a result of the following: • Increase in bank indebtedness and accounts payable due to a higher level of inventory and expenses; • Increase in income taxes payable, as a result of higher income during 2004; and • Increase in the current portion of long-term debt, as a result of an expected balloon payment to a long-term debt holder in October 2005. 7 M A N A G E M E N T D I S C U S S I O N A N D A N A L Y S I S ( c o n t i n u e d ) ANNUAL REPORT – 2004 CASH FLOWS FACTORS AFFECTING THE BUSINESS Imaﬂex is involved in a competitive industry and marketplace in which there are a number of participants. To accommodate the recent growth and effectively manage future growth, Imaﬂex continues to improve its operational, ﬁnancial and management information systems, and procedures and controls. Imaﬂex’s success is largely the result of the continued contributions of its employees and the Company’s ability to attract and retain qualiﬁed management, sales and operational personnel. The 30 billion dollar market the Company competes in has historically shown resiliency and growth even at the worst economic times. The Company’s customers operate predominantly in the food packaging markets. This fact, coupled with the expanding product lines and reliance on newer and faster equipment should help it weather the potential volatility caused by uncertainty in the North American economic climate. Factors which can impact the Company include and are not limited to: competitive conditions in the businesses in which the Company participates; general economic conditions and normal business uncertainty; product mix; ﬂuctuations in foreign currency exchange rates; variations in raw material costs; changes in the Company’s relationship with its suppliers; and interest rate ﬂuctuations and other changes in borrowing costs. Cash Flows from operating activities During the year ended December 31, 2004, the Company generated $4,555,545 in cash ﬂow from operating activities before changes in non-cash working capital items, an increase of $1,041,877, or 29.7%, over the same period in 2003. This increase was primarily related to increased amortization and net income. The reduction in non-cash operating working capital of $3,856,065 in 2004 was primarily attributable to a notable increase in accounts receivable, due to higher sales in 2004, a signiﬁcant increase in inventory levels, necessitated by an expected increase in resin costs, partially offset by an increase in accounts payable. In 2003, the reduction in non-cash operating working capital was $1,399,373, due primarily to a signiﬁcant increase in accounts receivable due to higher sales in 2003 when compared to 2002. Cash Flows from ﬁnancing activities During the year ended December 31, 2004, the Company required a net cash outﬂow of $106,393 compared to cash inﬂows of $865,132 for the same period in 2003. The signiﬁcant decrease in non-cash working capital resulted in increased bank indebtedness of $1,671,538, while the Company made scheduled long-term debt repayments of $1,783,931. The cash inﬂows in 2003 were primarily generated by the issuance of long-term debt of $2,500,000 to ﬁnance Imaﬂex’s ﬁrst co-extrusion line, partially offset by scheduled long-term debt repayments of $1,494,421 and capital lease repayments of $121,227. Cash Flows from investing activities During the year ended December 31, 2004, the Company required a net cash outﬂow of $755,536 compared to $2,816,978 for the same period in 2003. The considerable amount in 2003 was required for Imaﬂex’s acquisition of its ﬁrst co-extrusion line. In 2004, Imaﬂex added auxiliary equipment to its manufacturing operations. 8 R E S P O N S I B I L I T Y F O R F I N A N C I A L R E P O R T I N G ANNUAL REPORT – 2004 The consolidated ﬁnancial statements and all other information in the Annual Report are the responsibility of the Company’s management and have been approved by its Board of Directors. The consolidated ﬁnancial statements have been prepared in accordance with Canadian generally accepted accounting principles and include amounts that are based on best estimates and judgments. Financial information provided elsewhere in the Annual Report is consistent with that shown in the consolidated ﬁnancial statements. Management maintains accounting and internal control systems that are designed to provide reasonable assurance that accounting records are reliable and assets are safeguarded. The Board of Directors carries out its responsibility for the consolidated ﬁnancial statements included in the present Annual Report, principally through its Audit Committee. The Audit Committee reviews the Company’s annual consolidated ﬁnancial statements and formulates the appropriate recommendations to the Board of Directors. The auditors appointed by the shareholders have full access to the Audit Committee, with and without management being present. The ﬁrm of KPMG – LLP, Chartered Accountants has been given the mandate to audit the present consolidated ﬁnancial statements in accordance with Canadian generally accepted auditing standards. Their audit includes tests and other procedures they deemed necessary under the circumstances. Their independent opinion on the consolidated ﬁnancial statements is presented hereafter. Joseph Abbandonato President and Chief Executive Ofﬁcer Roberto Longo, CA Corporate Controller Montréal, Canada February 18, 2005 9 A U D I T O R S ’ R E P O R T T O T H E S H A R E H O L D E R S ANNUAL REPORT – 2004 We have audited the consolidated balance sheets of Imaﬂex Inc. as at December 31, 2004 and 2003 and the consolidated statements of income and retained earnings and cash ﬂows for the years then ended. These ﬁnancial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these ﬁnancial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the ﬁnancial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the ﬁnancial statements. An audit also includes assessing the accounting principles used and signiﬁcant estimates made by management, as well as evaluating the overall ﬁnancial statement presentation. In our opinion, these consolidated ﬁnancial statements present fairly, in all material respects, the ﬁnancial position of the Company as at December 31, 2004 and 2003 and the results of its operations and its cash ﬂows for the years then ended in accordance with Canadian generally accepted accounting principles. Chartered Accountants Montréal, Canada February 18, 2005 10 2004 2003 – $ 8,250,522 6,484,000 20,920 14,755,442 231,563 10,144,821 162,449 $ 6,667,163 2,583,000 10,828 9,423,440 40,837 11,464,751 $ 25,131,826 $ 20,929,028 $ 1,671,538 6,349,284 747,818 2,006,039 10,774,679 3,529,339 1,696,172 1,946,615 7,185,021 9,131,636 $ – 5,101,932 338,784 1,783,931 7,224,647 5,535,378 1,629,935 1,940,615 4,598,453 6,539,068 $ 25,131,826 $ 20,929,028 C O N S O L I D A T E D B A L A N C E S H E E T S December 31, 2004 and 2003 ANNUAL REPORT – 2004 Assets Current assets: Cash Accounts receivable (note 4) Inventories (note 5) Prepaid expenses Deposits for capital assets Capital assets (note 6) Liabilities and Shareholders’ Equity Current liabilities: Bank indebtedness (note 7) Accounts payable and accrued liabilities Income taxes payable Current portion of long-term debt (note 8) Long-term debt (note 8) Future income taxes (note 9) Shareholders’ equity: Share capital (note 10) Retained earnings Commitments (note 12) Contingency (note 13) See accompanying notes to consolidated ﬁnancial statements. On behalf of the Board: Director Director 11 C O N S O L I D AT E D S TAT E M E N T S O F I N C O M E A N D R E TA I N E D E A R N I N G S Years ended December 31, 2004 and 2003 ANNUAL REPORT – 2004 Sales Cost of sales Gross proﬁt Expenses: Selling and administrative Amortization of capital assets Interest Other 2004 2003 $ 39,084,230 30,516,031 8,568,199 2,715,492 1,902,740 364,632 78,157 5,061,021 $ 36,133,109 29,391,317 6,741,792 2,409,087 1,768,076 391,787 97,249 4,666,199 Income before income taxes 3,507,178 2,075,593 Provision for income taxes (note 9) 920,610 597,023 Net income 2,586,568 1,478,570 Retained earnings, beginning of year 4,598,453 3,119,883 Retained earnings, end of year $ 7,185,021 $ 4,598,453 Basic and diluted earnings per share See accompanying notes to consolidated ﬁnancial statements. $ 0.083 $ 0.048 12 C O N S O L I D A T E D S T A T E M E N T S O F C A S H F L O W S Years ended December 31, 2004 and 2003 ANNUAL REPORT – 2004 Cash ﬂows from operating activities: Net income Adjustments for: Amortization of capital assets Future income taxes Net change in non-cash operating working capital (note 14) Cash ﬂows from ﬁnancing activities: Increase (decrease) in bank indebtedness Issuance of long-term debt Repayment of long-term debt Repayment of obligations under capital leases Issuance of share capital Cash ﬂows from investing activities: Purchase of capital assets Increase in deposits for capital assets Redemption of long-term investment 2004 2003 $ 2,586,568 $ 1,478,570 1,902,740 66,237 (3,856,065) 699,480 1,671,538 – (1,783,931) – 6,000 (106,393) (564,810) (190,726) – (755,536) 1,768,076 267,022 (1,399,373) 2,114,295 (19,220) 2,500,000 (1,494,421) (121,227) – 865,132 (2,929,478) – 112,500 (2,816,978) Net (decrease) increase in cash (162,449) 162,449 Cash, beginning of year Cash, end of year Supplemental cash ﬂow information: Interest paid Income taxes paid Additions to capital assets included in accounts payable Conversion of deposits for capital assets to capital asset additions See accompanying notes to consolidated ﬁnancial statements. 162,449 – $ – $ 162,449 $ 363,489 467,802 105,500 – $ 391,817 188,244 87,500 8,649 13 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S Years ended December 31, 2004 and 2003 ANNUAL REPORT – 2004 Imaﬂex Inc. (the “Company”) is incorporated under the Canada Business Corporations Act. The Company’s principal business activity is the design, manufacture and sale of packaging materials. 1. Change in accounting policy: Stock-based compensation and other stock-based payments: The CICA Accounting Standards Board has amended CICA Handbook Section 3870 “Stock-based Compensation and Other Stock-based Payments” to require entities to account for employee stock options using the fair value based method, beginning January 1, 2004. Under the fair value based method, the compensation cost is measured at fair value at the date of grant and is expensed over the award’s vesting period. In accordance with one of the transitional options permitted under amended Section 3870, the Company prospectively applies the fair value based method to all employee stock options granted during the year. There is no effect in the current year’s net income, and basic or diluted earnings per share, resulting from prospectively adopting the fair value based method. In 2002, the Company granted 20,000 options. Had the Company used the fair value based accounting method (the Black-Scholes model) to measure compensation, pro forma net income and pro forma basic and diluted earnings per share for the year ended December 31, 2004 would have been $2,586,235 (2003 - $1,478,237) and $0.083 (2003 - $0.048), respectively. As permitted by the new recommendations, pro forma amounts exclude the effect of awards granted prior to January 1, 2002. 2. Signiﬁcant accounting policies: (a) Basis of presentation: These consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles. (b) Principles of consolidation: The consolidated ﬁnancial statements include the accounts of the Company and its wholly-owned subsidiary, Canslit Inc. (“Canslit”). All signiﬁcant intercompany balances and transactions have been eliminated. (c) Inventories: Raw materials and supplies are valued at the lower of cost and replacement cost. Finished goods are valued at the lower of cost and net realizable value. Cost is determined by the ﬁrst-in, ﬁrst-out method. (d) Capital assets: Capital assets, other than assets under capital leases, are recorded at cost, including capitalized interest directly attributable to their acquisition, construction and development. Assets under capital leases are recorded at the present value of minimum lease payments at the inception of the lease. Amortization is provided using the following methods, rates and/or periods and net of an estimated salvage value on certain assets: 14 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S , ( p a g e 2 ) Exercices terminés les 31 décembre 2004 et 2003 ANNUAL REPORT – 2004 2. Signiﬁcant accounting policies (continued): Asset Production equipment Ofﬁce equipment Computer equipment Equipment under capital leases Basis Period Straight-line Straight-line Straight-line Straight-line 2 to 10 years 5 years 3 years 10 years Leasehold improvements are amortized on a straight-line basis over the terms of the leases, to a maximum of 5 years. (e) Foreign exchange: Monetary assets and liabilities denominated in foreign currencies are translated at the rate of exchange in effect at the balance sheet date. Sales and expenses are translated at the average rates prevailing during the year. Gains or losses on foreign exchange are included in the determination of income. (f) Income taxes: The asset and liability method is used for determining income taxes. Under this method, future income taxes are recognized for temporary differences between the ﬁnancial statement carrying amounts and their respective income tax bases. Future income tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. The effect on future income tax assets and liabilities of a change in tax rates is included in income in the period in which the change occurs. The amount of future income tax assets recognized is limited to the amount that is more likely than not to be realized. (g) Cash and cash equivalents: Cash and cash equivalents consist of short-term, highly liquid investments with a maturity of ninety days or less. (h) Use of estimates: The preparation of ﬁnancial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the ﬁnancial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. (i) Stock-based compensation plans: The Company follows the fair value based approach for stock option awards and prospectively applied this method of accounting to all awards of employee stock options granted, modiﬁed or settled on or after January 1, 2004, as explained in Note 1 - Change in accounting policy. For awards granted before January 1, 2004, the Company did not record compensation cost, and any consideration paid by employees on exercise of stock options was recorded as share capital. 15 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S , ( p a g e 3 ) Years ended December 31, 2004 and 2003 ANNUAL REPORT – 2004 2. Signiﬁcant accounting policies (continued): (j) Guarantees: The Company recognizes a liability for the fair value of the obligation undertaken in issuing certain guarantees on the date the guarantee is issued or modiﬁed. Where the Company expects to make a payment in respect of a guarantee, a liability is recognized to the extent that it has not yet been recognized. In the normal course of business, the Company enters into various agreements that may contain features that meet the deﬁnition of a guarantee. A guarantee is deﬁned to be a contract (including an indemnity) that contingently requires the Company to make payments to a third party based on (i) changes in an underlying that is related to an asset, a liability or an equity of the guaranteed party or (ii) failure of another party to perform under an obligating agreement. 3. Business acquisition: On March 29, 2001, the Company acquired 100% of the outstanding shares of Canslit for an initial consideration of $162,501 payable by the issuance of 750,000 Class A shares of the Company. The acquisition was accounted for using the purchase method. The share purchase agreement included a contingent consideration clause based on the future results of Canslit for the years ending December 31, 2002, 2003 and 2004, which could have resulted in the issuance of up to an additional 750,000 Class A shares of the Company. As a consequence of Canslit not having attained the minimum contractual level of results for the years ended December 31, 2002, 2003 and 2004, no additional Class A shares of the Company will be issued (note 13). 4. Accounts receivable: Accounts receivable consist of: Trade receivables, net of allowance for doubtful accounts Other 2004 2003 $ 8,245,592 4,930 $ 6,632,814 34,349 $ 8,250,522 $ 6,667,163 16 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S , ( p a g e 4 ) Years ended December 31, 2004 and 2003 ANNUAL REPORT – 2004 5. Inventories: Inventories consist of: Raw materials and supplies Reprocessed raw materials Work in process Finished goods 6. Capital assets: Capital assets consist of: 2004 2003 $ 5,441,000 131,000 70,000 842,000 $ 2,110,000 170,000 – 303,000 $ 6,484,000 $ 2,583,000 2004 2003 Cost Accumulated amortization Net book value Production equipment Ofﬁce equipment Computer equipment Leasehold improvements $ 18,668,132 – – 315,864 $ 8,625,732 – – 213,443 $ 10,042,400 – – 102,421 Net book value $ 11,262,762 25,981 10,413 165,595 $ 18,983,996 $ 8,839,175 $ 10,144,821 $ 11,464,751 7. Bank indebtedness: The Company has operating lines of credit with its bankers to a maximum of $4,350,000, bearing interest at rates ranging between prime plus 0.25% to prime plus 0.75%. The lines of credit are secured by accounts receivable, inventories and capital assets. 17 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S , ( p a g e 5 ) Years ended December 31, 2004 and 2003 ANNUAL REPORT – 2004 8. Long-term debt: Long-term debt consists of: 2004 2003 Loan, bearing interest at prime plus 0.75%, repayable in monthly principal installments of $31,000 to June 2010, secured by production equipment $ 2,046,000 $ 2,418,000 Quebec Government Immigrant Investor loan, bearing interest at prime plus 0.50%, repayable in monthly principal installments of $20,833 up to October 2003 and $36,458 up to October 2007 (a) 1,239,583 1,677,083 Loan, bearing interest at prime plus 1.25%, repayable in monthly principal installments of $22,500 up to November 2008. The loan is secured by a hypothec on all present and future property of the subsidiary, movables and immovables, corporeal and incorporeal, including machinery, equipment, inventory and receivables, ranking second to the bank indebtedness and a corporate guarantee from the Company equal to 50% of the outstanding balance 1,057,500 1,327,500 Loan, bearing interest at the Royal Bank of Canada’s 30-day banker acceptance rate plus 2.80%, repayable in blended monthly installments of $32,834 up to September 2005 and one ﬁnal blended installment of $366,660 in October 2005, secured by production equipment 626,539 951,259 Loan, bearing interest at prime plus 1%, repayable in monthly principal installments of $16,667 up to March 2007 and one ﬁnal principal installment of $15,756 in April 2007, secured by production equipment 465,756 665,756 Loan, bearing interest at prime plus 0.50%, repayable in monthly principal installments of $8,333 up to December 2005 100,000 200,000 Quebec Government Immigrant Investor loan, bearing interest at the Royal Bank of Canada’s 30-day banker acceptance rate plus 1.30%, repayable in blended monthly installments of $13,517 up to June 2004, secured by production equipment – 5,535,378 Current portion of long-term debt 2,006,039 $ 3,529,339 79,711 7,319,309 1,783,931 $ 5,535,378 (a) In 2002, the Company received loans under the Quebec Immigrant Investor Program (‘’QIIP’’) in the amount of $1,750,000. In order to guarantee its obligations towards its creditors for the loans, the Company established a trust, making QIIP its beneﬁciary. The Company also transferred bank notes to the trust, purchased at a discount in the amount of $1,419,740 and maturing in ﬁve years on October 31, 2007 at an amount of $1,750,000. The act creating the trust stipulates that the guaranteed obligations will be settled from the proceeds of the maturity of the bank notes. In addition, the act creating the trust compels the trustee to endorse the notes upon maturity and to use the proceeds of this endorsement in order to settle any obligations created under the trust. 18 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S , ( p a g e 6 ) Years ended December 31, 2004 and 2003 ANNUAL REPORT – 2004 8. Long-term debt (continued): Interest on long-term debt amounted to $365,578 for the year ended December 31, 2004 (2003 - $350,531). The aggregate maturities of long-term debt for each of the ﬁve years subsequent to December 31, 2004 and thereafter are as follows: 2005 2006 2007 2008 2009 Thereafter 9. Income taxes: $ 2,006,039 1,279,500 1,072,339 619,500 372,000 186,000 $ 5,535,378 The provision for income taxes differs from the amount computed by applying the Canadian federal and provincial rates to income before income taxes. The reasons for the difference and the related tax effects are as follows: Income before income taxes $ 3,507,178 $ 2,075,593 2004 2003 Expected rate Expected income taxes Adjustments: Deduction for new investment in Québec Non-deductible expenses Utilization of non-capital losses carried forward Increase in valuation allowance Other Represented by: Current Future Income tax expense 19 31.15% 31.15% 1,092,486 646,547 (49,900) 16,200 (64,500) – (73,676) (64,200) 15,000 – 21,800 (22,124) $ 920,610 $ 597,023 2004 2003 $ 854,373 66,237 $ 330,001 267,022 $ 920,610 $ 597,023 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S , ( p a g e 7 ) Years ended December 31, 2004 and 2003 ANNUAL REPORT – 2004 9. Income taxes (continued): The detail of the future income taxes is as follows: Assets: Losses carried forward Capital assets Valuation allowance Liabilities: Capital assets 2004 2003 $ 120,000 149,000 (269,000) $ 242,000 91,000 (333,000) $ – $ – $ 1,696,172 $ 1,629,935 Net future income tax liability $ 1,696,172 $ 1,629,935 The Company’s subsidiary has non-capital losses available to carry forward to reduce future taxable income of approximately $386,000 that expire as follows: Year of expiry 2008 2009 10. Share capital: Share capital consists of: Amount $ 385,000 1,000 $ 386,000 2004 2003 Authorized: Unlimited number of Class A shares, voting, participating, without par value Unlimited number of Class B shares, non-voting, participating, without par value, issuable at any time and in one or more series Unlimited number of Class B Series 1 shares, convertible at the option of the holder to Class A shares subject to the restriction that the percentage of Class A shares in the hands of public security holders following such conversion must not be less than 20% of the total issued and outstanding Class A shares Issued and outstanding: 31,055,002 Class A shares (2003 - 31,035,002) $ 1,946,615 $ 1,940,615 20 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S , ( p a g e 8 ) Years ended December 31, 2004 and 2003 ANNUAL REPORT – 2004 10. Share capital (continued): Earnings per share have been calculated on the basis of the weighted average number of shares outstanding during the year of 31,046,669 (2003 - 31,035,002). In 2001, the Company issued 750,000 Class A shares pursuant to the acquisition of Canslit. 250,000 Class A shares were placed in escrow on March 29, 2001 and are to be released from escrow based on representations and warranties being satisﬁed by the vendor (note 13). As a result of the reverse takeover transaction that occurred effective December 1, 1998, the legal, tax and book values of share capital are signiﬁcantly different. Stock Option Plan: Pursuant to the Stock Option Plan (the “Plan”) of the Company, ten percent (10%) of the Class A shares issued and outstanding from time to time are reserved for options. The Plan provides that the term of the options shall be ﬁxed by the directors, and only directors, ofﬁcers and employees of the Company or its subsidiaries are eligible to receive options. Options are granted at an exercise price of not less than the fair value of the Company’s shares on the date the options are granted. Options may be exercisable for a period no longer than ﬁve (5) years and the exercise price must be paid in full upon exercise of the option. A summary of the options outstanding under the Plan is presented below: Outstanding, beginning of year Granted Expired Exercised Outstanding, end of year Exercisable, end of year Options (000’s) 215 – – (20) 195 195 2004 Weighted average exercise price $ 0.32 – – 0.30 $ 0.32 2003 Weighted average exercise price $ 0.33 – 0.33 – $ 0.32 Options (000’s) 565 – (350) – 215 180 During the year, 20,000 options were exercised for cash proceeds of $6,000. 21 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S , ( p a g e 9 ) Years ended December 31, 2004 and 2003 ANNUAL REPORT – 2004 10. Share capital (continued): The following table summarizes information about the options outstanding as of December 31, 2004: Options outstanding Options exercisable Weighted average remaining contractual life (years) 0.4 0.4 0.4 Number outstanding (000’s) 20 175 195 Exercise price $ 0.24 0.33 $ 0.32 Options (000’s) 20 175 195 Weighted average exercise price $ 0.24 0.33 $ 0.32 Exercise price $0.24 $0.33 $0.24 to $0.33 11. Related party transactions: During the year, in the normal course of business, the Company had routine transactions with related parties. These transactions are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties. Details of these transactions are as follows: Management fees Commissions Consulting Rent 12. Commitments: 2004 2003 $ 133,405 32,000 40,000 470,244 $ 123,600 96,000 30,000 453,080 The Company’s future minimum lease payments under operating leases for facilities are approximately as follows: 2005 2006 2007 2008 2009 Thereafter $ 423,000 423,000 435,000 435,000 434,000 1,529,000 $ 3,679,000 In addition, the Company entered into a commitment to purchase production equipment for approximately $1,600,000, of which $231,563 was paid as a deposit at year-end. 22 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S , ( p a g e 1 0 ) Years ended December 31, 2004 and 2003 ANNUAL REPORT – 2004 13. Contingency: The Company is contingently liable for outstanding letters of credit of approximately $543,000. In 2003, the Company ﬁled two statements of claim against a former shareholder of Canslit (the “Defendant”). In the ﬁrst action, the Company asserts that a breach of undertakings by the Defendant under a conﬁdentiality and non-competition agreement has caused the Company serious prejudice for which it is seeking reparation. Under the share purchase agreement, the Defendant, as vendor, represented and warranted to the Company, as purchaser, the operating condition of the equipment used in carrying on the business of Canslit. The Company asserts in the second statement of claim that the Defendant’s representations and warranties under the Canslit share purchase agreement were not accurate and is seeking damages in that regard. The Defendant subsequently ﬁled a counterclaim seeking the release and delivery of all shares held in escrow (note 10) and the re-issuance of the shares that the Company has already cancelled following Canslit’s failure to meet the minimum contractual level of results. The Company is vigorously contesting the counterclaim, which, it believes, is without merit. The Company is currently waiting for a trial date in these matters. 14. Statement of cash ﬂows: The detail of the net change in non-cash working capital balances relating to operations is as follows: Accounts receivable Inventories Prepaid expenses Accounts payable and accrued liabilities Income taxes payable 15. Financial instruments: (a) Foreign currency risk management: 2004 2003 $ (1,583,359) (3,901,000) (10,092) 1,229,352 409,034 $ (2,251,855) (187,000) 9,947 828,221 201,314 $ (3,856,065) $ (1,399,373) A portion of the Company’s sales and expenses are denominated in US dollars. The Company does not use forward foreign exchange contracts to reduce foreign exchange exposure since the revenue stream in US dollars acts as a natural hedge to cover expenses denominated in US dollars. The Company’s statement of income includes $35,000 (2003 - $191,000) of foreign exchange gains realized as part of normal operations. (b) Credit risk: The Company’s extension of credit is based on an evaluation of each customer’s ﬁnancial condition and the Company’s ability to obtain credit insurance coverage for that customer. Credit losses are provided for in the ﬁnancial statements. 23 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S , ( p a g e 1 1 ) Years ended December 31, 2004 and 2003 ANNUAL REPORT – 2004 15. Financial instruments (continued): (c) Fair value disclosure: Fair value estimates are made as of a speciﬁc point in time, using available information about the ﬁnancial instrument. These estimates are subjective in nature and often cannot be determined with precision. The Company has determined that the carrying value of its short-term ﬁnancial assets and liabilities approximates their fair values as at the balance sheet date because of the short-term maturity of those instruments. The carrying value of long-term debt approximates its fair value at the balance sheet date. (d) Interest rate risk: The Company’s principal exposure to interest rate ﬂuctuations is with respect to its short-term and long-term ﬁnancing, which bear interest at ﬂoating rates. 16. Segmented information: The Company operates in one reportable operating segment being the design, manufacture and sale of packaging materials. The Company operates exclusively in Canada. Export sales to the United States totaled $10,381,899 for the year ended December 31, 2004 (2003 - $8,812,026). 17. Comparative ﬁgures: Certain ﬁgures previously reported on for the year ended December 31, 2003 have been reclassiﬁed to conform to the current year’s presentation. 24 C O R P O R A T E I N F O R M A T I O N ANNUAL REPORT – 2004 OFFICERS SHAREHOLDER INFORMATION Audit and Compensation Committee: John Wight, FCA, Chairman; Pierre Myrand; Philip Nolan Auditors: KPMG - LLP, Montréal, Québec Legal Counsel: Lavery, de Billy, Montréal, Québec Listing: Imaﬂex Inc. shares are listed as IFX.A on the TSX Venture Exchange Transfer Agent: Computershare Investor Services Head ofﬁce: Telephone: Fax: E-mail: Website: Imaﬂex Inc. 5710 Notre Dame West Montréal, Québec, Canada H4C 1V2 (514) 935 – 5710 (514) 935 – 0264 info@imaﬂex.com www.imaﬂex.com ANNUAL MEETING OF SHAREHOLDERS The Annual Meeting of Shareholders will be held on Tuesday, May 31, 2005 at 5:00 p.m. at Fairmont - The Queen Elizabeth, Salon Bersimis, 900 René Lévesque West, Montréal, Québec, H3B 4A5. Joseph Abbandonato, President and Chief Executive Ofﬁcers Tony Abbandonato, Production Director and Secretary Gerry Phelps, Vice-President – Operations Pierre Senecal, Vice-President – Sales Roberto Longo, CA Corporate Controller BOARD OF DIRECTORS The Board of Directors establishes the objectives and the long-term direction of the Company. The Board meets regularly throughout the year to review progress towards achievement of to recommend the Company’s goals and policies and procedures directed at optimizing performance. Joseph Abbandonato, Chairman and President Tony Abbandonato, Secretary Camillo Lisio, Vice-President and Chief Operating Ofﬁcer – Dorel Industries Inc. Pierre Myrand, President and CEO, SiXtron Advanced Materials Inc. Philip Nolan, Partner, Lavery, de Billy Gerry Phelps, Vice-President John Wight, FCA, Corporate Director 25 ANNUAL REPORT – 2004 26

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