Infineon
Annual Report 2005

Plain-text annual report

Annual Report 2005 Committed to Excellence À la recherche de l'excellence 2005 Rapport Annuel C o R p o R A t e p R o F I l e AnnuAl RepoRt – 2005 Imaflex Inc. (the “Company”) and its wholly owned subsidiary Imaflex USA, Inc. (“Imaflex USA”) specialize 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 Inc. employs approximately 70 people in its manufacturing facility, located in Montréal, Québec. Imaflex USA employs approximately 5 people in its manufacturing facility, located in Thomasville, North Carolina. Imaflex recycles 00% of its own waste, the majority in-house, thereby enhancing cost efficiency. Canslit Inc. (“Canslit”), 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 and numerous other industries. Canslit employs approximately 35 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 OUR KNOWS, UNDERSTANDS AND LIVES BY THESE PILLARS OF BUSINESS FUNDAMENTALS. TEAM  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 – 2005 Year ended Year ended December 31, December 3, 004 2005 Eleven month Year ended period ended Current year vs. December 3, December 3, December 3, Year ended % Change prior year 003 00 00 (*) Operating Summary Sales Net Income Earnings Per Share EBIT () EBITDA () EBITDA Per Share Financial Position Working Capital Capital Assets Total Assets Total Long-Term Debt (including Capital Leases) Shareholders’ Equity $49,817,827 3,793,209 0.110 5,544,803 7,571,931 0.220 $39,084,30 ,586,568 0.083 3,87,80 5,774,550 0.86 7.5% 46.7% 3.5% 43.% 3.% 8.3% $36,33,09 ,478,570 0.048 ,467,380 4,35,456 0.36 $9,84,83 $4,366,70 7,363 0.00 837,378 ,90,48 0.06 739,785 0.04 ,58,559 ,888,08 0.093 9,744,879 16,078,546 36,843,340 3,980,763 0,44,8 5,3,86 44.8% 58.5% 46.6% ,98,793 ,464,75 0,99,08 ,5,989 0,039,595 7,49,69 863,3 7,98,79 5,633,974 9,738,481 18,317,395 5,535,378 9,3,636 75.9% 00.6% 7,39,309 6,539,068 6,434,957 5,060,498 5,05,737 4,30,73 () Earnings before interest and taxes () Earnings before interest, taxes, depreciation and amortization (*) Change in year-end A B C Represents year ended January 3. Represents eleven month period ended December 3. Represents year ended December 3. A A A A A B C C C C  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 – 2005 IntRoDuCtIon The Company’s results include those of Imaflex Inc. and its wholly owned subsidiaries, Imaflex USA and Canslit. FInAnCIAl ReSultS The year ended December 3, 005 was one of continued growth in sales, with a significant increase in net income. Net income for the year ended December 3, 005 was $3,793,09, or $0. per share, an increase of 46.7% compared with net income of $,586,568, or $0.083 per share, for the same period in 004. The overall improvement was driven primarily by a particularly strong first quarter and solid second and third quarters due to sales growth in the Canadian and US markets, by a continuing emphasis on more profitable product segments, and improved manufacturing productivity. Imaflex’s extrusion operations generated net income of $,67,87 for the year ended December 3, 005 as compared to $,447,30 for the same period in 004. Canslit’s metallizing operations generated net income of $,65,38 for the year ended December 3, 005 as compared to $39,438 for the same period in 004. Sales for the year ended December 3, 005 totaled $49,87,87 compared with $39,084,30 for the same period in 004, an increase of $0,733,597 or 7.5%. Imaflex’s sales increased by $4,57,57 to $36,5,95 as a result of stronger sales volume in the first quarter of 005 and selling price increases in the fourth quarter necessitated by a higher cost of raw materials. Canslit’s sales increased by $6,6,06 to $3,305,876, as a result of progressively stronger quarterly sales volume in the US. MAnAGeMent outlooK As had been anticipated by management, the Company reported record sales and profitability for the year ended December 3, 005, with both Imaflex’s extrusion operations and Canslit’s metallizing operations contributing to the strong growth in shareholder value. Having explored future growth through suitable acquisitions over past years, it became apparent to management that long-term growth could best be 3 achieved by the Company establishing its own manufacturing facility in the US. Accordingly, the Company established a manufacturing facility in Thomasville, North Carolina and acquired approximately $,000,000 of production assets, which was paid for by the proceeds of a private placement completed in July 005 of $6,03,500 and through long-term debt financing. The facility is expected to be fully operational by the end of the second quarter of 006. The first quarter of 006 has been a particularly difficult one for the Company’s operations due to significant pricing pressures resulting from reduced demand and excess supply. In 006, although management will take every action possible, it will be a challenge for Imaflex’s Canadian extrusion operations to generate the same level of earnings as in 005, as a result of the slowdown incurred in the first quarter of 006 and continued competitive pressures. Canslit’s metallizing operations are expected to continue their growth through additional sales volume, which should counter the expected continuing decline in the US dollar, and result in continued profitability. Imaflex’s US extrusion operations are expected to incur operating losses in the first half of 006 as a result of start up costs and the weak market conditions experienced in the first quarter of 006. Nevertheless management anticipates that, based on an expected improvement in market conditions, Imaflex’s US extrusion operations on a full year basis will break even or show marginal profitability. Given the market conditions expected in the first half of the year, it will be very difficult to repeat the Company’s performance of 005. Nevertheless, management believes that 006 will still be a reasonably good year although not at the same level as in 005. 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 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 – 2005 SALES 005 004 NET INCOME 005 004 First Quarter $ ,858,94 $ 8,909,08 $ 98,959 $ 408,047 Second Quarter Third Quarter ,460,4 ,564,94 9,647,398 9,958,509 85,57 ,07,458 588,79 55,77 Fourth Quarter 3,934,07 0,569,95 93, ,063,958 $ 49,87,87 $ 39,084,30 $ 3,793,09 $ ,586,568 EBITDA 005 004 EARNINGS PER SHARE 005 004 First Quarter $ ,946,693 $ ,5,940 $ 0.03 $ 0.03 Second Quarter Third Quarter Fourth Quarter ,606,654 ,97,746 ,00,838 ,378,50 ,84,3 ,958,778 0.06 0.09 0.03 0.09 0.07 0.034 $ 7,57,93 $ 5,774,550 $ 0.0 $ 0.083 4 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 – 2005 IntRoDuCtIon volume, which further decreased gross profit percentage. The following discussion and analysis should be read in conjunction with the Company’s consolidated financial statements and accompanying notes. The Company’s results include those of Imaflex Inc. and its wholly owned subsidiaries, Imaflex USA and Canslit. InCoMe StAteMent Net income for the year ended December 3, 005 was $3,793,09, or $0. per share, an increase of 46.7% compared with net income of $,586,568, or $0.083 per share, for the same period in 004. The overall improvement was driven primarily by a particularly strong first quarter and solid second and third quarters due to sales growth in the Canadian and US markets, by a continuing emphasis on more profitable product segments, and improved manufacturing productivity. Imaflex’s extrusion operations generated net income of $,67,87 for the year ended December 3, 005 as compared to $,447,30 for the same period in 004. Canslit’s metallizing operations generated net income of $,65,38 for the year ended December 3, 005 as compared to $39,438 for the same period in 004. Sales for the year ended December 3, 005 totaled $49,87,87 compared with $39,084,30 for the same period in 004, an increase of $0,733,597 or 7.5%. Imaflex’s sales increased by $4,57,57 to $36,5,95 as a result of stronger sales volume in the first quarter of 005 and selling price increases in the fourth quarter necessitated by a higher cost of raw materials. Canslit’s sales increased by $6,6,06 to $3,305,876, as a result of progressively stronger quarterly sales volume in the US. Gross profit for the year ended December 3, 005 amounted to $0,7,349 or .5% of sales, compared with $8,568,99 or .9% of sales for same period in 004. The increase in gross profit was due to higher sales volume. The decrease in gross profit percentage was due to competitive pressures and to the impact of rising raw material costs in the fourth quarter of 005. The Company increased selling prices to counter raw material cost increases. This did not result in a commensurate increase in the contribution on this sales 5 Selling and administrative expenses increased for the year ended December 3, 005 by $50,70 over the same period in 004, as a result of the Company’s expanded sales efforts in the US market, including Imaflex’s US and Canslit operations, which resulted in increased US sales. Selling and administrative expenses represent 6.5% of sales in fiscal 005, as compared to 6.9% of sales in fiscal 004. Amortization of capital assets increased for the year ended December 3, 005 by $4,388 over the same period in 004, from the acquisition of additional manufacturing equipment at Canslit and Imaflex’s Canadian facility, which became operational in the second quarter of 005 Interest expense decreased for the year ended December 3, 005 by $39,766 from the same period in 004. Though higher levels of long-term debt necessitated by the acquisition of additional manufacturing equipment at Imaflex, Imaflex USA, and Canslit resulted in increased interest expense, this was offset by savings on long-term debt issued prior to 004, with higher rates but declining balances and incidental interest revenues on short term securities, as a result of funds generated in July 005 through the underwritten private placement with Acumen Capital Finance Partners Limited (“Acumen”). Furthermore, in the fourth quarter of 005, the Company received an interest refund adjustment from a long-term debt holder of $65,48. The foreign exchange translation of Imaflex USA resulted in a gain of $75,965 for the year ended December 3, 005. The translation gain is related to the period end US / Canadian exchange rate differential between September , 005 (Imaflex USA’s commencement of operations) and December 3, 005. Based on the period end rates the US dollar has weakened .0%. The effective tax rate for the year ended December 3, 005 increased to 8.7% from 6.% for the same period in 004. The income tax provision reflects the taxes on the income generated by the Company’s Canadian operations. There was an unfavourable future income tax adjustment of $98,000, as a result of increased Quebec tax rates in the fourth quarter of 005. 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 – 2005 Current liabilities decreased by $,6,86 to $9,547,863 as at December 3, 005 compared with $0,774,679 at December 3, 004, as a result of the following: • Decrease in bank indebtedness as a result of net income earned in 005 and funds received pursuant to the private placement with Acumen; partially offset by • Increase in the current portion of long-term debt, as a result of increased financing for the expansion of the Company’s manufacturing capacity in 005. Long-term debt increased by $4,03,03 to $9,738,48 as at December 3, 005 compared to $5,535,378 at December 3, 004, as a result of the financing for the expansion of the Company’s manufacturing capacity in 005. Shareholders’ equity increased by $9,85,759 to $8,37,395 as at December 3, 005 compared with $9,3,636 at December 3, 004 as a result of the following: • Increase in share capital pursuant to the private placement with Acumen; • Increase in contributed surplus as a result of compensation options issued to Acumen; and • Net income generated in 005, less dividends paid in the second quarter of 005. BAlAnCe SHeet December 31, 2005 versus December 31, 2004 Total assets increased by $,7,54 to $36,843,340 as at December 3, 005 compared with $5,3,86 at December 3, 004. Current assets increased by $4,537,300 to $9,9,74 as at December 3, 005 compared with $4,755,44 at December 3, 004, as a result of the following: • Increase in cash as a result of net income earned in 005 and funds received pursuant to the private placement with Acumen; and • Increase in accounts receivable as a result of the increase in sales. Days sales outstanding were 80 days during the current year as compared to 77 days in the prior year, reflecting the difficult economic climate for credit in North America. Deposits for capital assets increased by $,40,489 to $,47,05 as at December 3, 005 compared with $3,563 at December 3, 004, due to additional manufacturing equipment for Imaflex USA expected to be operational in the second quarter of 006. Capital assets increased by $5,933,75 to $6,078,546 as at December 3, 005 compared with $0,44,8 at December 3, 004, primarily from the acquisition of manufacturing equipment at Imaflex and Canslit, which became operational in the second quarter of 005 and manufacturing equipment received at Imaflex USA in the fourth quarter of 005. Total liabilities increased by $,55,755 to $8,55,945 as at December 3, 005 compared to $6,000,90 at December 3, 004. 6 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 – 2005 CASH FloWS FACtoRS AFFeCtInG tHe BuSIneSS Cash Flows from operating activities During the year ended December 3, 005, the Company generated $5,994,998 in cash flow from operating activities before changes in non-cash working capital items, an increase of $,439,453, or 3.6%, over the same period in 004. This increase was related to increased amortization and net income as described earlier in this report. The decrease in non-cash operating working capital of $,447,08 was primarily attributable to a significant increase in accounts receivable, due to higher sales in 005. The reduction in non-cash operating working capital of $3,856,065 in 004 was primarily attributable to a notable increase in accounts receivable, due to higher sales in 004, a significant increase in inventory levels, necessitated by an expected increase in resin costs, partially offset by an increase in accounts payable. Cash Flows from financing activities During the year ended December 3, 005, the Company generated net cash inflows of $7,749,67 compared to net cash outflows of $06,393 for the same period in 004. The increased cash flow from operating activities was used to reduce bank indebtedness by $,67,538, make scheduled long-term debt repayments of $,44,705, and pay dividends of $3,500, which was more than offset by the issuance of long-term debt of $6,674,75 for the current year’s capital asset requirements and the issuance of shares for $5,50,085. In 004, the significant decrease in non-cash working capital resulted in increased bank indebtedness of $,67,538, while the Company made scheduled long-term debt repayments of $,783,93. Cash Flows from investing activities During the year ended December 3, 005, the Company required a net cash outflow of $9,6,5 compared to $755,536 for the same period in 004. The considerable amount in 005 was required to purchase manufacturing equipment for Canslit, receive additional manufacturing equipment for Imaflex’s extrusion operations in Canada and its US facility in Thomasville, North Carolina. In 004, Imaflex added auxiliary equipment to its manufacturing operations. 7 The Company 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, the Company continues to improve its operational, financial and management information systems, and procedures and controls. The Company’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; the availability and costs of raw material costs; changes in the Company’s relationship with its suppliers; and interest rate fluctuations and other changes in borrowing costs. SAFe HARBoR StAteMent Certain statements and information included in this annual report constitute “forward-looking statements”. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied in such forward-looking statements. Additional discussions of factors could cause actual results to differ materially from management’s projections, estimates and expectations. The Company undertakes no duty to update its forward-looking statements, including its earnings outlook. M A n A G e M e n t ’ S 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 S t A t e M e n t S AnnuAl RepoRt – 2005 The accompanying 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 properly accounted for and 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. These consolidated financial statements have been examined by the auditors appointed by the shareholders, KPMG - LLP, Chartered Accountants and their report is presented hereafter. Joseph Abbandonato President and Chief Executive Officer Roberto Longo, CA Corporate Controller Montréal, Canada February , 006 8 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 – 2005 We have audited the consolidated balance sheets of Imaflex Inc. as at December 3, 005 and 004 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 3, 005 and 004 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 , 006 9 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 3, 005 and 004 AnnuAl RepoRt – 2005 Assets Current assets: Cash Accounts receivable (note ) Inventories (note 3) Prepaid expenses Deposits for capital assets Capital assets (note 4) Liabilities and Shareholders’ Equity Current liabilities: Bank indebtedness (note 5) Accounts payable and accrued liabilities Income taxes payable Current portion of long-term debt (note 6) Long-term debt (note 6) Future income taxes (note 7) Shareholders’ equity: Share capital (note 8) Contributed surplus (note 8) Retained earnings Commitments (note 0) Contingency (note ) See accompanying notes to consolidated financial statements. On behalf of the Board, Director 0 Director 2005 004 $ 2,103,088 10,886,317 6,221,720 81,617 19,292,742 1,472,052 16,078,546 $ – 8,50,5 6,484,000 0,90 4,755,44 3,563 0,44,8 $ 36,843,340 $ 5,3,86 $ – 6,396,021 731,561 2,420,281 9,547,863 $ ,67,538 6,349,84 747,88 ,006,039 0,774,679 7,318,200 1,659,882 3,59,339 ,696,7 7,366,665 285,000 10,665,730 18,317,395 ,946,65 – 7,85,0 9,3,636 $ 36,843,340 $ 5,3,86 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 3, 005 and 004 AnnuAl RepoRt – 2005 Sales Cost of sales Gross profit Expenses: Selling and administrative Amortization of capital assets Interest Foreign exchange gain on translation of integrated subsidiary Other 2005 004 $ 49,817,827 39,096,478 10,721,349 $ 39,084,30 30,56,03 8,568,99 3,216,662 2,027,128 224,866 (75,965) 8,721 5,401,412 ,75,49 ,90,740 364,63 – 78,57 5,06,0 Income before income taxes 5,319,937 3,507,78 Provision for income taxes (note 7) 1,526,728 90,60 Net income 3,793,209 ,586,568 Retained earnings, beginning of year 7,185,021 4,598,453 Dividends (312,500) – Retained earnings, end of year $ 10,665,730 $ 7,85,0 Basic and diluted earnings per share See accompanying notes to consolidated financial statements. $ 0.110 $ 0.083  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 3, 005 and 004 AnnuAl RepoRt – 2005 Cash flows from operating activities: Net income Adjustments for: Amortization of capital assets Future income taxes Other Net change in non-cash operating working capital (note ) Cash flows from financing activities: (Decrease) increase in bank indebtedness Issuance of long-term debt Repayment of long-term debt Issuance of share capital Dividends Cash flows from investing activities: Purchase of capital assets Increase in deposits for capital assets 2005 004 $ 3,793,209 $ ,586,568 2,027,128 166,675 7,986 (2,447,208) 3,547,790 (1,671,538) 6,674,275 (2,442,705) 5,502,085 (312,500) 7,749,617 (7,689,470) (1,472,052) (9,161,522) ,90,740 66,37 – (3,856,065) 699,480 ,67,538 – (,783,93) 6,000 – (06,393) (564,80) (90,76) (755,536) Effect of exchange rate differences on cash (32,797) – Net increase (decrease) in cash 2,103,088 (6,449) 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 Issuance of compensation options Conversion of deposits for capital assets to capital asset additions See accompanying notes to consolidated financial statements. – 6,449 $ 2,103,088 259,856 $ 1,390,000 145,320 285,000 231,563 $ $ – 363,489 467,80 05,500 – –  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 3, 005 and 004 AnnuAl RepoRt – 2005 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. 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 subsidiaries, Canslit Inc. (“Canslit”) and Imaflex USA, Inc. (“Imaflex USA”). All significant intercompany balances and transactions have been eliminated. (c) Revenue recognition: Sales are recognized at the time of shipment of the products and collection is reasonably assured. (d) 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. (e) Capital assets: Capital assets are recorded at cost. Amortization is provided using the following methods, rates and/or periods and net of an estimated salvage value on certain assets: Asset Production equipment Office equipment Computer equipment Basis Period Straight-line Straight-line Straight-line  to 0 years 5 years 3 years Leasehold improvements are amortized on a straight-line basis over the terms of the leases, to a maximum of 5 years. (f) Foreign exchange: Monetary assets and liabilities denominated in foreign currencies are translated at the rates of exchange at the balance sheet date. Other balance sheet items denominated in foreign currencies are translated at the rates prevailing at the respective transaction dates. Income and expenses denominated in foreign currencies are translated at average rates prevailing during the year. Gains or losses on foreign exchange are recorded in the statement of income. The foreign subsidiary is considered to be an integrated foreign operation and its accounts have been translated using the temporal method with translation gains and losses included in the statement of income. 3 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 ) Years ended December 3, 005 and 004 AnnuAl RepoRt – 2005 1. Significant accounting policies (continued): (g) 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. (h) Cash and cash equivalents: Cash and cash equivalents consist of short-term, highly liquid investments with a maturity of ninety days or less. (i) 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 year. Actual results could differ from those estimates. (j) 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 , 004. 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. For awards granted before January , 004, the Company did not record compensation cost, and any consideration paid by employees on exercise of stock options was recorded as share capital. (k) 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. 2. Accounts receivable: Accounts receivable consist of: Trade receivables, net of allowance for doubtful accounts Other $ 9,882,409 1,003,908 $ 8,45,59 4,930 $ 10,886,317 $ 8,50,5 2005 004 4 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 3, 005 and 004 AnnuAl RepoRt – 2005 3. Inventories: Inventories consist of: Raw materials and supplies Reprocessed raw materials Work in process Finished goods 4. Capital assets: Capital assets consist of: 2005 004 $ 4,883,742 61,000 80,000 1,196,978 $ 5,44,000 3,000 70,000 84,000 $ 6,221,720 $ 6,484,000 2005 004 Cost Accumulated amortization Net book value Net book value Production equipment Office equipment Leasehold improvements $ 5,606,964 6,578 505,44 $ 9,755,957 833 93,350 $ 15,851,007 15,745 211,794 $ 0,04,400 – 0,4 $ 6,8,686 $ 0,050,40 $ 16,078,546 $ 0,44,8 5. Bank indebtedness: The Company has operating lines of credit with its bankers to a maximum of $7,500,000, bearing interest at rates ranging between prime plus 0.5% to prime plus 0.50%. The lines of credit are secured by accounts receivable, inventories and capital assets. At December 3, 005, the Company had drawn $3,354,000 (004 - $,649,000) on its lines of credit. The Company has a demand loan with its bankers to a maximum of $,300,000, bearing interest at prime. The demand loan was repaid on February 5, 006, and was secured by a term deposit expiring on the same date. The Company has met all applicable covenants as at December 3, 005. 5 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 3, 005 and 004 AnnuAl RepoRt – 2005 6. Long-term debt: Long-term debt consists of: 2005 004 Loan, bearing interest at prime plus 0.75%, repayable in monthly principal installments of $3,000 to June 00, secured by production equipment $ 1,674,000 $ ,046,000 Quebec Government Immigrant Investor loan, bearing interest at prime plus 0.50%, repayable in monthly principal installments of $0,833 up to October 003 and $36,458 up to October 007 (a) 802,083 ,39,583 Loan bearing interest at prime plus .5%, repayable in monthly principal installments of $,500 up to November 008. 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 787,500 ,057,500 Loan, bearing interest at prime plus %, repayable in monthly principal installments of $6,667 up to March 007 and a final principal installment of $5,756 in April 007, secured by production equipment 265,756 465,756 Loan (US$,790,893), bearing interest at 30-day LIBOR plus .00%, repayable in blended monthly installments of CA$54,4 (US$46,530) up to December 0. The loan is secured by production equipment and a corporate guarantee from the Company. The interest on the loan is to be adjusted monthly to the floating rate. 3,245,809 Loan, bearing interest at prime plus 0.50%, repayable in monthly principal installments of $38,333 to March 00, secured by production equipment 1,955,000 Loan, bearing interest at prime plus 0.50%, repayable in monthly principal installments of $8,333 to July 00, secured by production equipment 1,008,333 – – – Loan, bearing interest at the Royal Bank of Canada’s 30-day banker acceptance rate plus .80%, repayable in blended monthly installments of $3,834 up to September 005 and a final blended installment of $366,660 in October 005, secured by production equipment Loan, bearing interest at prime plus 0.50%, repayable in monthly principal installments of $8,333 up to December 005 Current portion of long-term debt 6 – 66,539 – 9,738,481 2,420,281 $ 7,318,200 00,000 5,535,378 ,006,039 $ 3,59,339 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 3, 005 and 004 AnnuAl RepoRt – 2005 6. Long-term debt (continued): (a) In 00, the Company received loans under the Quebec Immigrant Investor Program (‘’QIIP’’) in the amount of $,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 $,49,740 and maturing in five years on October 3, 007 at an amount of $,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. Interest on long-term debt amounted to $59,84 for the year ended December 3, 005 (004 - $365,578). The aggregate maturities of long-term debt for each of the five years subsequent to December 3, 005 and thereafter are as follows: 006 007 008 009 00 Thereafter 7. Income taxes: $ ,40,8 ,4,563 ,8,049 ,606,874 ,09,66 68,05 $ 9,738,48 The provision for income taxes differs from the amount computed by applying the Canadian and United States federal, provincial and state rates to income before income taxes. The reasons for the difference and the related tax effects are as follows: Income before income taxes $ 5,319,937 $ 3,507,78 2005 004 Expected rate Expected income taxes Adjustments: Non-deductible items Utilization of non-capital losses carried forward Translation gain of a foreign subsidiary Unrecognized benefit of Imaflex USA Inc.’s losses Other Future income tax adjustments due to rate enactments Deduction for new investment in Québec 7 30.92% 3.5% 1,644,925 ,09,486 24,817 (287,800) (29,246) 91,934 (116,263) 198,361 – 6,00 (64,500) – – (73,676) – (49,900) $ 1,526,728 $ 90,60 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 3, 005 and 004 AnnuAl RepoRt – 2005 7. Income taxes (continued): Represented by: Current Future Income tax expense The detail of the future income taxes is as follows: Assets: Losses carried forward Capital assets Valuation allowance Liabilities: Capital assets Share issue costs 2005 004 $ ,360,053 66,675 $ 854,373 66,37 $ 1,526,728 $ 90,60 2005 004 $ 91,934 – (91,934) $ 0,000 49,000 (69,000) $ – $ – $ 1,821,263 (161,381) $ ,696,7 – Net future income tax liability $ 1,659,882 $ ,696,7 The Company’s subsidiary, Imaflex USA, has non-capital losses available to carry forward to reduce future taxable income of approximately $39,000 that expire in 00. 8 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 3, 005 and 004 AnnuAl RepoRt – 2005 8. Share capital: Share capital consists of: 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; and unlimited number of Class B Series  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 0% of the total issued and outstanding Class A shares A summary of shares outstanding is presented below: 2005 004 Shares Book value Shares Book value Issued and outstanding: Class A shares, beginning of year Exercise of options Issuance of shares by private 31,055,002 195,000 $ 1,946,615 62,550 3,035,00 0,000 $ ,940,65 6,000 placement 6,350,000 6,032,500 Share issue costs, net of future income taxes of $0,965 Issuance of 444,500 compensation options – – (390,000) (285,000) – – – – – – 37,600,002 $ 7,366,665 3,055,00 $ ,946,65 Basic earnings per share have been calculated on the basis of the weighted average number of shares outstanding during the year of 34,36,50 (004 - 3,046,669). Diluted earnings per share have been calculated on the basis of the weighted average number of shares outstanding during the year of 34,437,58 (004 - 3,,430). During the year, the Company issued 6,350,000 Class A shares pursuant to an underwritten private placement with Acumen Capital Finance Partners Limited (“Acumen”) for a cash consideration of $6,03,500. Issue expenses of $59,965 less future income taxes of $0,965 have been applied against the proceeds. Furthermore, 444,500 compensation options were issued to Acumen as part of the private placement. The compensation options have an exercise price of $0.95 per share for the first  months subsequent to the issuance and a price of $.05 for an additional period of 6 months. No compensation options were exercised in 005. The cost of $85,000 relating to the compensation options was calculated using the Black-Scholes option pricing model with the following assumptions; expected option life of 8 months, a risk-free interest rate of .5% and an expected volatility of 77%. 9 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 3, 005 and 004 AnnuAl RepoRt – 2005 8. Share capital (continued): Stock Option Plan: Pursuant to the Stock Option Plan (the “Plan”) of the Company, ten percent (0%) 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. As at December 3, 005, there are no outstanding options under the plan. A summary of the options outstanding is presented below: 2005 Weighted average exercise price Options (000’s) Stock option plan: Outstanding, beginning of year Granted Exercised 195 – (195) $ 0.32 – 0.32 Outstanding, end of year – $ – Compensation option: Granted and outstanding, end of year 444.5 $ 0.95 Exercisable, end of year 444.5 $ 0.95 004 Weighted average exercise price $ 0.3 – 0.30 $ 0.3 $ – $ – Options (000’s) 5 – (0) 95 – – During the year, 95,000 options were exercised for cash proceeds of $6,550. The following table summarizes information about the options outstanding as of December 3, 005: Options outstanding Options exercisable Weighted average remaining contractual life (years) Number outstanding (000’s) Exercise price Options (000’s) Weighted average exercise price 444.5 . $ 0.95 444.5 $ 0.95 Exercise price $0.95 0 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 3, 005 and 004 AnnuAl RepoRt – 2005 9. Related party transactions: During the year, in the normal course of business, the Company had routine transactions with related parties owned by shareholders of the Company. 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 10. Commitments: 2005 004 $ 132,805 – – 548,736 $ 33,405 3,000 40,000 470,44 The Company’s future minimum lease payments under operating leases for facilities leased from a related party are approximately as follows: 006 007 008 009 00 Thereafter $ 639,300 65,300 65,300 650,300 664,00 3,739,800 $ 6,996,00 In addition, the Company entered into commitments to purchase production equipment for approximately $5,397,870, of which $,47,05 was paid as a deposit at year-end.  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 3, 005 and 004 AnnuAl RepoRt – 2005 11. Contingency: On March 9, 00, the Company acquired 00% of the outstanding shares of Canslit for an initial consideration of $6,50 payable by the issuance of 750,000 Class A shares of the Company, of which 50,000 Class A shares were placed in escrow and were to be released from escrow based on representations and warranties being satisfied by the vendor. The share purchase agreement included a contingent consideration clause based on the future results of Canslit for the years ending December 3, 00, 003 and 004, 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 3, 00, 003 and 004, no additional Class A shares of the Company will be issued. In 003, 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 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. 12. 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 2005 004 $ (2,638,209) 256,983 (61,540) 11,814 (16,256) $ (,583,359) (3,90,000) (0,09) ,9,35 409,034 $ (2,447,208) $ (3,856,065)  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 3, 005 and 004 AnnuAl RepoRt – 2005 13. Financial instruments: (a) Foreign currency risk management: 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 foreign exchange losses of $505,000 (004 - gain of $35,000) 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. (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. 14. Segmented information: The Company operates in one reportable operating segment being the design, manufacture and sale of packaging materials. The Company operates primarily in Canada. Sales to the United States totaled $,588,54 for the year ended December 3, 005 (004 - $0,38,899). Capital assets in the United States totaled $4,986,894 as at December 3, 005 (004 - nil). 15. Comparative figures: Certain figures previously reported on for the year ended December 3, 004 have been reclassified to conform to the current year’s presentation. 3 C o R p o R A t e I n F o R M A t I o n AnnuAl RepoRt – 2005 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. 570 Notre Dame West Montréal, Québec, Canada H4C V (54) 935 – 570 (54) 935 – 064 info@imaflex.com www.imaflex.com ANNUAL MEETING OF SHAREHOLDERS The Annual Meeting of Shareholders will be held on Tuesday, May 3, 006 at 5:00 p.m. at Fairmont - The Queen Elizabeth, Salon Chaudiere, 900 René Lévesque West, Montréal, Québec, H3B 4A5. Joseph Abbandonato, President and Chief Executive Officer 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 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. the Company. 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 4 AnnuAl RepoRt – 2005 5 

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