Martinrea International Inc. For the year ending December 31, 2004

Transcription

1 Martinrea International Inc. For the year ending December 31, 2004 TSX/S&P Industry Class = Annual Revenue = Canadian $582.7 million 2004 Year End Assets = Canadian $637.7 million Web Page (October, 2005) = Financial Reporting In Canada Survey Company Number 116

2 KPMG LLP Chartered Accountants Telephone (416) Yonge Corporate Centre Telefax (416) Yonge Street Suite Toronto ON M2P 2H3 AUDITORS REPORT TO THE SHAREHOLDERS We have audited the consolidated balance sheets of Martinrea International Inc. as at December 31, 2004 and 2003 and the consolidated statements of operations, 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 consolidated 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 Toronto, Canada March 15, 2005 KPMG LLP, a Canadian owned limited liability partnership established under the laws of Ontario, is a member firm of KPMG International, a Swiss association.

3 Consolidated Balance Sheets As at December 31, 2004 with comparative figures for December 31, 2003 (in thousands of dollars) Assets Current assets: Accounts receivable 84, ,923 Other receivables 5,709 7,893 Income taxes recoverable 2,756 6,570 Inventories (note 2) 40,949 49,980 Prepaid expenses and deposits 7,804 4, , ,754 Future income tax asset (note 7) 19,132 18,560 Capital assets (note 3 and 6) 218, ,388 Goodwill (note 1(g)) 230, ,558 Intangible assets (note 1(h) and 4) 27,496 30,958 $ 637,675 $ 664,218 Liabilities and Shareholders' Equity Current liabilities: Bank indebtedness (note 5) $ 10,525 $ 16,567 Accounts payable and accrued liabilities 88, ,674 Current portion of long-term debt (note 6) 15,362 15, , ,208 Long-term debt (note 6) 55,327 62,437 Future income tax liability (note 7) 18,563 15,500 Non-controlling interest Shareholders' equity: Share capital (note 8) 444, ,014 Notes receivable for share capital (note 8) (15,750) (15,750) Contributed Surplus (note 9) 19,668 - Cumulative translation adjustment (10,974) (6,254) Retained earnings 12,120 20, , ,673 Guarantees and Commitments (note 14) See accompanying notes to the consolidated financial statements. $ 637,675 $ 664,218 On behalf of the Board: "Fred Jaekel" "Robert Wildeboer" Director Director

4 Consolidated Statements of Operations Sales $ 582,744 $ 608,139 Cost of sales 488, ,449 Gross profit 94,072 92,690 Expenses: Selling, administrative and general 43,555 42,571 Foreign exchange 256 (2,658) Amortization - capital assets (note 3) 23,093 18,043 Amortization - intangible assets (note 4) 3,462 3,462 Interest on long term debt 4,848 5,182 Other interest expense (income), net 1, Loss on disposal of capital assets ,424 68,154 Earnings before income taxes and non-controlling interest 17,648 24,536 Income taxes (note 7) Current 3, Future 2,491 8,464 6,387 9,196 Earnings before non-controlling interest 11,261 15,340 Non-controlling interest 298 (67) Net earnings $ 10,963 $ 15,407 Earnings per common share (note 10) Basic $ 0.20 $ 0.28 Diluted $ 0.19 $ 0.27 Retained earnings, beginning of year $ 20,663 $ 5,256 Adjustment to reflect change in accounting for stock-based compensation (notes 1(i) and 9) (19,506) - Retained earnings as restated, beginning of year 1,157 5,256 Net earnings 10,963 15,407 Retained earnings, end of year $ 12,120 $ 20,663 See accompanying notes to the consolidated financial statements.

5 Consolidated Statements of Cash Flows (in thousands of dollars) Cash provided by (used in): Operating activities: Net earnings $ 10,963 $ 15,407 Items not requiring cash: Amortization - capital assets (note 3) 23,093 18,043 Amortization - intangible assets (note 4) 3,462 3,462 Future income taxes 2,491 8,464 Non-controlling interest 298 (67) Loss on disposal of capital assets Stock-based compensation ,637 45,979 Changes in non-cash working capital items: Accounts and other receivables 20,412 (41,266) Accounts payable and accrued liabilities (22,585) 3,321 Income taxes recoverable 3, Inventories 9,031 6,902 Prepaid expenses and deposits (3,416) (88) 47,893 15,625 Financing activities: Issue of share capital (net of issue costs) Increase in long-term debt 15,792 63,662 Repayment of long-term debt (23,319) (61,299) Increase/(decrease) in bank indebtedness (6,042) 16,567 (13,536) 19,357 Investing activities: Purchase of capital assets (37,798) (55,487) Proceeds on disposal of capital assets 5,039 5,253 (32,759) (50,234) Effect of exchange rate changes on cash and cash equivalents (1,598) (5,453) Decrease in cash and cash equivalents - (20,705) Cash and cash equivalents, beginning of year - 20,705 Cash and cash equivalents, end of year $ - $ - Supplemental cash flow information: Cash paid for interest, net $ 5,890 $ 6,059 Cash paid (refunded) for income taxes 571 (2,268) See accompanying notes to the consolidated financial statements.

6 The Company was incorporated under the Ontario Business Corporations Act on February 10, It designs, engineers, manufactures and sells quality metal parts, assemblies and fluid management systems and is focused on the automotive sector. Note 1: Summary of significant accounting policies: (a) Basis of Presentation: The consolidated financial statements of Martinrea International Inc. ("Martinrea") have been prepared in accordance with Canadian generally accepted accounting principles. (b) Principles of consolidation: These consolidated financial statements include the accounts of the Company and those of its subsidiaries. The results of subsidiaries are consolidated from their respective dates of acquisition. All inter-company transactions and balances have been eliminated on consolidation. (c) Revenue recognition: Revenue from the sale of manufactured products is recognized when measurable, upon shipment to, or receipt by customers (depending on contractual terms) and acceptance by customers. Appropriate provisions are made to reflect all related risks and rewards pertaining to such transactions. Revenue from fixed tooling contracts is recognized using the completed contract method. (d) Inventories: Inventories are valued at the lower of cost and replacement cost for raw materials, and lower of cost and net realizable value for work in progress, tooling work in progress and finished goods, with cost being determined substantially on a first-in, first-out basis. In determining the net realizable value, the Company considers factors such as yield, turnover, expected future demand and past experience. Cost includes the cost of materials plus direct labour and the applicable share of manufacturing overhead, excluding the amortization of manufacturing and stamping equipment. (e ) Capital assets: Capital assets are recorded at cost net of related investment tax credits, less accumulated amortization. Interest costs relating to major capital expenditures are capitalized when interest costs are incurred before the capital asset is placed into productive use. Amortization is provided for over the estimated useful lives of the capital assets at the following rates and bases: Basis Rate Building and improvements Declining balance 4% Leasehold improvements Straight line Lease term Manufacturing equipment Declining balance 15% Stamping equipment Straight line 7-10% Tooling and fixtures Straight line Life of program Motor and delivery vehicles Declining balance 30% Office and computer equipment Declining balance 20% Amortization of construction in progress does not commence until the related assets are placed into productive use. Capital assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset.

7 Note 1: Summary of significant accounting policies: (continued) (f) Research and development costs: Research costs, including costs of market research and new product prototyping during the marketing stage, are expensed in the year in which they are incurred. Development costs are expensed in the year incurred, unless such costs meet the criteria under Canadian generally accepted accounting principles for deferral and amortization. No amounts have been capitalized in the past two years. (g) Goodwill Goodwill is the residual amount that results when the purchase price of an acquired business exceeds the sum of the amounts allocated to the assets acquired, less liabilities assumed, based on their fair values. Goodwill is allocated as of the date of the business combination to the Company's reporting units that are expected to benefit from the synergies of the business combination. Goodwill is not amortized and is tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test is carried out in two steps. In the first step, the carrying amount of the reporting unit is compared with its fair value. When the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not to be impaired and the second step of the impairment test is unnecessary. The second step is carried out when the carrying amount of a reporting unit exceeds its fair value, in which case the implied fair value of the reporting unit's goodwill is compared with its carrying amount to measure the amount of the impairment loss, if any. The implied fair value of goodwill is determined in the same manner as the value of goodwill is determined in a business combination described above by allocating the fair value of the reporting unit in a manner similar to a purchase allocation. When the carrying amount of reporting unit goodwill exceeds the implied fair value of the goodwill, an impairment loss is recognized in an amount equal to the excess and is presented as a separate line item in the statement of earnings before extraordinary items and discontinued operations. The Company completed the annual impairment assessment and no impairment loss has been recorded in the year ended December 31, (h) Intangible assets The Company's intangible assets are comprised of customer contracts acquired in acquisitions and have a definite life. The Company regularly evaluates existing intangible assets including estimates of remaining useful lives. Customer contracts are amortized over their estimated economic life of approximately 10 years on a pro-rata basis consistent with the relative contract value initially established. (i) Stock based compensation In October 2003, the Canadian Institute of Chartered Accountants amended Section 3870 "Stock-based compensation and Other Stock-based Payments", requiring the use of the fair value-based method to account for employee stock options beginning January 1, Under the fair value method, compensation cost is measured at the fair value at the date of grant and is expensed over the award's vesting period. In accordance with one of the transitional options under amended Section 3870, the Company has retroactively applied the fair value based method to all employee stock options granted on or after January 1, Prior periods have not been restated and an adjustment was made to the opening balance of retained earnings in the current period to reflect the cumulative effect of the change on prior periods. The effect of retroactively adopting the fair value based method is to decrease retained earnings by $19,506 and to increase contributed surplus by $19,506 as at December 31, Compensation expense in 2004 amounted to $162, relating primarily to the amortization of options previously granted. (j) Foreign currency translation: The monetary assets and liabilities of the Company which are denominated in foreign currencies are translated at the year end exchange rate. Revenues and expenses denominated in foreign currencies are translated at rates of exchange prevailing on transaction dates, with any exchange gain or loss being recorded in current earnings. The accounts of the Company's self-sustaining foreign subsidiaries are translated using the current rate method, whereby assets and liabilities are translated using the year-end exchange rates and revenues and expenses are translated at average exchange rates for the year. The resulting unrealized exchange gains and losses are deferred and recorded as a separate component of shareholders' equity.

8 Note 1: Summary of significant accounting policies: (continued) (k) Financial instruments: The Company utilizes certain financial instruments, principally interest rate swap contracts and forward currency exchange contracts to manage the risk associated with fluctuations in interest rates and currency exchange rates. The Company's policy is not to utilize financial instruments for trading or speculative purposes. Interest rate swap contracts are used to reduce the im pact of fluctuating interest rates on the Company's long-term debt. These swap agreements require the periodic exchange of payments without the exchange of the notional principal amount on which the payments are based. Forward currency exchange contracts are used to reduce the impact of fluctuating exchange rates on the Company's purchases of materials and equipment. Payments and receipts under interest rate swap contracts are recognized as adjustments to interest expense on long-term debt. Gains and losses on forward foreign exchange contracts are reflected in the consolidated financial statements in the same period as the hedged item. In the event that a hedged item is sold or cancelled prior to the termination of the related hedging item, any unrealized gain or loss on the hedging item is immediately recognized in income. (l) Future income taxes: The Company applies the asset and liability method whereby future tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Future income tax assets and liabilities are measured using enacted or substantively enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on future income tax assets and liabilities of a change in tax laws and rates is recognized in income in the period that includes the enactment date. The ultimate realization of future income tax assets is dependent upon the generation of future taxable income during the period in which the temporary differences and loss carryforwards become deductible. Future tax assets are evaluated and if their realizability is not "more likely than not", a valuation allowance is provided. (m) Earnings per share: Basic earnings per share are computed by dividing net earnings by the weighted average number of shares outstanding during the reporting period. Diluted earnings per share are computed similar to basic earnings per share, except that the weighted average number of shares outstanding are increased to include additional shares from the assumed exercise of stock options and warrants, if dilutive. The number of additional shares are calculated by assuming that outstanding stock options were exercised and that the proceeds from such exercises were used to acquire shares of common stock at the average market price during the reporting period. (n) Use of estimates: The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the period. Actual results could differ from those estimates and assumptions. Significant areas requiring the use of management estimates include the net realizable values of inventories, the fair value of goodwill and the determination of impairment thereon, the economic lives of intangible assets, recoverability of future income tax assets, the determination of fair values of financial instruments, as well as the determination of stock based compensation.

9 Note 1: Summary of significant accounting policies: (continued) (o) Hedging relationships In November 2001, the CICA issued Accounting Guideline 13, "Hedging Relationships" ("AcG 13"). AcG 13 established new criteria for hedge accounting effective for the Company's 2004 fiscal year. The Company reassessed all hedging relationships to determine whether the criteria were met and has applied the new guidance on a prospective basis. To qualify for hedge accounting, the hedging relationship must be appropriately documented at the inception of the hedge and there must be reasonable assurance, both at the inception and throughout the term of the hedge, that the hedging relationship will be effective. Effectiveness requires a high degree of correlation of changes in fair values or cash flows between the hedged item and the hedge. Management has documented these hedge relationships where applicable in accordance with the guidance commencing January 1, (p) Asset retirement obligations Effective January 1, 2004, the Company adopted the new CICA accounting standard for asset retirement obligations ("Section 3110"). The standard addressed the recognition and measurement of legal obligations associated with the retirement of property and equipment when those obligations result from the acquisitions, construction, development or normal operation of the asset. This standard is effective on a retroactive basis with restatement of prior periods. The standard requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The fair value is added to the carrying amount of the associated asset. Following the initial recognition of an asset retirement obligation, the carrying amount of the obligation is increased for the passage of time and adjusted for revisions to the amount or timing of the underlying cash flows needed to settle the obligation. The cost is amortized into income subsequently on the same basis as the related asset. The impact of the adoption of this new standard in the year ended December 31, 2004 is not significant to the Company's financial statements. (q) Guarantees Effective for the year ended December 31, 2004, the Company adopted Accounting Guideline 14, "Disclosure of Guarantees", issued by the CICA in February This guideline expands on previously issued accounting guidance and requires additional disclosure by a guarantor in its financial statements. This guideline defines a guarantee to be a contract (including indemnity) that contingently requires the Company to make payments to the guaranteed party based on: (i) changes in an underlying interest rate, foreign exchange rate, equity or commodity instrument, index or other variable, that is related to an asset, liability or an equity security of the counterparty, (ii) failure of another party to perform under an obligating agreement or (iii) failure of a third party to pay indebtedness when due. See note 14. (r ) Generally Accepted Accounting Principles Effective January 1, 2004, the CICA issued Handbook Section 1100, "Generally Accepted Accounting Principles" ("GAAP"). The recommendations in this section clarify the hierarchy of GAAP and codify the sources of GAAP to more clearly establish the authority of GAAP outside the CICA Handbook. As a result, the Company changed its method of recording rental expense relating to its leased properties. The Company has adopted the straight-line method of recognizing rental expense whereby the total amount of rental expense to be paid for all leases is accounted for on a straight-line basis over the term of the related leases. Previously the Company recorded the rental expense as it was paid. The difference between the rental expense recognized and the amount contractually due under the lease agreements is set up as a liability. The Company included an additional $500 in rental expense for the year ended December 31, 2004 as a result of this new policy. (s) Prior period comparatives: Certain prior period comparatives have been reclassified to conform with the basis of presentation adopted in the current year.

10 Note 2: Inventories Raw materials $ 18,160 $ 22,939 Work in progress 8,590 7,852 Finished goods 8,539 10,113 Tooling work in progress 5,660 9,076 $ 40,949 $ 49,980 Note 3: Capital assets At December 31, 2004: Accumulated Net book Cost Amortization Value Land $ 8,228 $ - $ 8,228 Buildings and improvements 40,673 7,598 33,075 Leasehold improvements 11,198 4,127 7,071 Manufacturing equipment 213,251 99, ,638 Metal forming equipment 35,795 6,200 29,595 Tooling and fixtures 14,812 5,162 9,650 Motor and delivery vehicles 1,389 1, Office and computer equipment 16,189 12,023 4,166 Construction in progress 12,941-12,941 $ 354,476 $ 135,900 $ 218,576 At December 31, 2003: Accumulated Net book Cost Amortization Value Land $ 9,069 $ - $ 9,069 Buildings and improvements 44,524 7,992 36,532 Leasehold improvements 8,487 3,426 5,061 Manufacturing equipment 196,299 90, ,514 Stamping equipment 33,679 4,104 29,575 Tooling and fixtures 12,996 4,188 8,808 Motor and delivery vehicles 1,398 1, Office and computer equipment 16,550 10,864 5,686 Construction in progress 11,948-11,948 $ 334,950 $ 122,562 $ 212,388 Assets included in construction in progress are expected to be placed into productive use during Construction in progress consists of equipment under construction of $12,941 ( $11,948). Note 4: Intangible Assets Customer contracts $ 34,620 $ 34,620 Accumulated amortization 7,124 3,662 $ 27,496 $ 30,958 Note 5: Bank Indebtedness The Company has available a $50 million operating line of credit, with an interest rate ranging from bankers acceptance plus 1.5% to 2.5% on Canadian dollar amounts, and prime to prime plus 1.5% on U.S. dollar amounts, depending on the Company's funded debt to earnings before interest, taxes, and amortization ratio. The operating line of credit also entails registered general security agreements and a first charge on the assets of the Company. The indenture requires the maintenance of certain financial ratios.

11 The $50 million line of credit is comprised of a $38 million revolving credit line, a $5 million Canadian dollar swing line, and a $5 million USD swing line.

12 Note 6: Long-term debt Three year commercial term loan secured by a registered general security agreement and a first charge on the assets of all the Company's material subsidiaries, with interest payable at a fixed rate of 5.67% ( %) on $24,375 ( $30,000) and at a floating rate of bankers acceptance ("BA") plus 1.5% to 2.5% on Canadian dollar amounts, and prime to prime plus 1.5% on U.S. dollar amounts on the remaining amount. The floating rate varies depending on the Company's funded debt to earnings before interest, taxes, and amortization ratio. As at December 31, 2004, the floating rate was at 4.62% ( %). The actual rate payable will be dependent upon certain financial ratios. On August 14, 2004, the Company amended its original credit agreement dated June 27, Under the amended agreement, the three year commercial term loan was reduced by $10 million, with a corresponding increase in the Company s line of credit. Commencing September 30, 2004, equal quarterly payments were reduced to $2,000 from $3,750, with full repayment of all outstanding amounts on the maturity date of June 30, The term loan requires the maintenance of certain financial ratios. Fixed rate equipment loans with interest thereon payable monthly with fixed rates ranging from 4.5% to 8% per annum, payable in aggregate monthly payments of $126 (principal and interest) and maturing April 2005 to August These loans are secured by the underlying equipment. US dollar equipment loans in the amount of $309 US with interest thereon payable monthly with fixed rates of 4.5% per annum, payable in aggregate monthly payments of $15 US (principal and interest), and maturing in June These loans are secured by the underlying equipment. US dollar equipment loans in the amount of $5,884 US with semi annual principal and interest payments, fixed rates of 5.8% to 6.2% per annum, payable in aggregate semi-annual principle payments of $654 US, maturing from January 2005 to May These loans are secured by the underlying equipment. Note payable on the purchase of SCS International Inc. with interest thereon payable annually at 3% per annum and semi-annual payments of $500 to July Four to seven year equipment loans with interest thereon payable monthly at a floating rate of BA plus 2.25%, with a one-time option to fix the variable rate, and maturing from March 2009 to April Interest on advances made before commencement of the loan is calculated at prime plus 1.75%. The actual rate payable will be dependent upon certain financial rates. These loans are secured by the underlying equipment. $ 42,000 $ 60,000 1,085 2, ,442 9,325 1,000 2,000 18,790 3,641 70,689 78,404 Less current portion 15,362 15,967 $ 55,327 $ 62,437 Future minimum annual payments required are as follows: 2005 $ 15, , , , ,489 Thereafter $ 1,329 70,689

13 Note 7: Income taxes (a) Income taxes attributable to earnings differs from the amounts computed by applying statutory rates to pretax income as a result of the items listed in the following table. (b) Basic statutory rates applied to earnings before income taxes $ 6,374 $ 8,985 Increase (decrease) in income taxes resulting from: Tax rate changes - 99 Intangibles 1,181 1,147 Manufacturing and processing profits deduction (353) (647) Large corporations tax Decrease due to deductible expenses incurred in foreign jurisdictions (1,291) (985) Other Income taxes $ 6,387 $ 9,196 The tax effects of temporary differences that give rise to significant portions of future income tax assets and future income tax liabilities are presented below: Future income tax assets: Share issue costs $ 2,105 $ 3,193 Stock appreciation rights Investment tax credits 636 1,444 Provincial minimum tax 1,230 1,686 Non-capital loss carryforwards 25,099 21,064 Reserves 4,159 4,958 33,445 32,713 Valuation allowance (14,313) (14,153) Total future income tax assets 19,132 18,560 Future income tax liabilities: Capital assets (18,563) (15,500) Net future income tax asset $ 569 $ 3,060 The ultimate realization of the future income tax assets is dependent upon the generation of future taxable income during the periods in which the temporary differences become deductible. The valuation allowance for future taxes as at December 31, 2004 was $14,313 ( $14,153). The increase in the valuation allowance is due to exchange differences on tax loss carryforwards relating to the Company's division in the Netherlands. In assessing the realizability of future tax assets, management considers whether it is more likely than not that some portion or all of the future tax assets will be realized. The ultimate realization of future tax assets is dependent upon the generation of future taxable income during the periods in which these temporary differences and loss carry forwards are deductible. (c ) The Company has accumulated approximately $73.3 million in non-capital tax losses that are available to reduce taxable income in future years. If unused these losses will expire as follows: Year Amount , , , ,310 Indefinite 34,869 73,323

14 Note 8: Share Capital Common Shares Authorized - unlimited number of common shares Number Amount Issued and outstanding: Balance, December 31, ,690,226 $ 437,434 Issued on exercise of employee options 95, Share issue costs (net of future tax recovery of $4) (11) Balance, December 31, ,785,276 $ 437,850 Issued on Director's compensation 5,075 $ 33 Balance, December 31, ,790,351 $ 437,883 Warrants Issued and outstanding: Balance, December 31, 2003 and ,533,333 $ 6,164 Share Capital, December 31, 2004 $ 444,047 Notes receivable for share capital Notes receivable represents 10 year, non-interest bearing notes issued to three senior officers in 2001 and 2002 in order to enable them to acquire an aggregate of 2,500,000 shares of the Company at a price of $4.50 and $9.00 per common share. These notes are secured by the acquired common shares and have been included as a component of shareholder's equity for presentation purposes. Warrants As part of a private placement on December 12, 2002, the Company sold 10,000,000 subscription receipts at a price of $8.00 per subscription receipt, resulting in aggregate gross proceeds of $80 million. Each subscription receipt entitled the holder to subscribe for one common share of the Company and one-third of a common share purchase warrant (a "warrant"), without payment of any consideration in addition to the issue price of such subscription receipt. Each whole warrant entitles the holder to subscribe for one common share of the Company for a period of three years from the date of issue at a subscription price of $10.00 per share. On April 29, 2002, the Company issued 200,000 warrants to its financial advisors. Each warrant will entitle the holder to purchase one common share of the Company at a price of $11.85 on or before April 29, 2007.

15 Note 8: Share Capital (continued) Stock options The Company has one stock option plan for key employees. Under the plan, the Company may grant options to its key employees for up to 4,762,000 shares of common stock. The Company has, in the past, also granted options to officers and employees of Rea and Pilot in connection with the acquisitions thereof. Such options were granted outside the stock option plan. Under the plan, the exercise price of each option equals the market price of the Company's stock on the date of grant and the options have a maximum term of 10 years. Options are granted throughout the year and vest between 0 and 4 years. The following summary sets out the activity in outstanding common share purchase options: Options Weighted Options Weighted average average exercise price exercise price Beginning of year 4,194,000 $ ,561,550 $ 9.61 Granted 30, , Exercised - - (95,050) 4.49 Cancelled (120,000) 8.00 (606,500) 9.71 End of year 4,104,000 $ ,194,000 $ 9.54 Options exercisable, end of year 4,051,500 $ ,942,750 $ 9.65 The following is a summary of common share purchase options issued and outstanding under the Company's stock option plan: Range of exercise Number outstanding at Date of grant Expiry Vesting period price per share December 31, , Fully vested , Fully vested , Fully vested , to 4 years , Fully vested ,225, Fully vested , Fully vested , Fully vested , Fully vested 4,104,000

16 Note 9: Contributed Surplus Contributed surplus represents the use of the fair value-based method for stock-based compensation arrangements. The Company recorded an adjustment of $19,506 on January 1, 2004 to reflect the adoption of CICA Handbook section 3870 as described in note 1(i) and expensed a further $162 during 2004 to reflect current year compensation expense, as derived using the Black-Scholes option valuation model. The table below shows the assumptions used in determining stock based compensation expense under the Black-Scholes option pricing model: Assumptions Risk fee interest rate 4.5% 4.00% Expected life (years) 4 4 Expected volatility 25% 25% Weighted average fair value of options granted 1.73 $ 1.96 The Black-Scholes option valuation model used by the Company to determine fair values was developed for use in estimating the fair value of freely traded options, which are fully transferable and have no vesting restrictions. The Company's stock options are not transferable, cannot be traded and are subject to vesting restrictions and exercise restrictions under the Company's black-out policy which would tend to reduce the fair value of the Company's stock options. Changes to subjective input assumptions used in the model can cause a significant variation in the estimate of the fair value of the options. Note 10: Earnings per common share Basic and diluted earnings per common share have been calculated using the weighted average and maximum dilutive number of shares, using the treasury stock method. Weighed average Per common Weighed average Per common number of share amount number of share amount common shares common shares Basic 55,287,841 $ ,262,104 $ 0.28 Effect of dilutive securities -Shares secured by notes receivable 2,500, ,500, Stock options 19,743-44, Warrants ,519,743 $ ,544,583 $ 0.01 Diluted 57,807,584 $ ,806,687 $ 0.27 The dilutive effect of stock options and warrants excludes the effect of 3,974,000 (2003-3,930,000) options whose strike price is higher than the average market price for the period, as they are anti-dilutive.

17 Note 11: Financial instruments: (a) Fair values of financial instruments: The fair values of accounts receivable, other receivables, deposits, bank indebtedness, accounts payable and accrued liabilities as recorded in the consolidated balance sheets approximate their carrying amounts due to the short-term maturities of these instruments. The fair value of the note payable on the purchase of SCS International Inc. is not readily determinable. The Company does not have plans to sell this financial instrument to a third party and will realize or settle it in the normal course of business. No quoted market prices exists for this instrument because it is not traded in an active and liquid market and, accordingly, the fair value is not readily determinable. The Company has entered into interest rate swap agreements to manage its interest rate exposure on floating rate debt. As at December 31, 2004, the Company has $24,375 ( $30,000) of floating rate bank debt swapped against fixed rate debt with an interest rate of 3.67% ( %), plus applicable stamping fees. This agreement expires on June 30, The fair value of all long term debt approximates its carrying value as the terms and conditions of the borrowing arrangements are comparable to current market terms and conditions for similar loans. Fair value has been calculated using the future cash flows (principal and interest) of the actual outstanding debt instruments, discounted at current market rates available to the Company for the same or similar instruments. Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. (b) Derivative financial instruments: The Company utilizes forward foreign exchange contracts and interest rate swaps to reduce exposure to fluctuations in foreign currency exchange rates and interest rates. The Company does not purchase or hold derivative financial instruments for speculative purposes. As at December 31, 2004, the Company has committed to purchase a total of US$6,408 at an average exchange rate of 1.29 and a total of 800 Euros at an average exchange rate of 1.57, with maturity dates ranging from January 2005 to April At December 31, 2004, unrecognized losses totaled $503 ( $315). (c) Interest rate risk: The Company has interest bearing loans on which general interest rate fluctuations apply. Part of this risk has been mitigated through interest rate contracts on $24,375 of the Company's term debt. (d) Concentration of credit risk: The Company primarily sells to the North American automotive industry. The exposure to credit risk associated with the non-performance of these customers can be directly impacted by a decline in economic conditions which would impair the customers' ability to satisfy their obligations to the Company. In order to reduce this economic risk, the Company has credit procedures in place whereby analyses are performed to control the granting of credit to any high risk customer. The Company believes that there is no significant risk associated with the collection of these amounts. (e) Foreign currency risk: The Company undertakes revenue and purchase transactions in foreign currencies, and therefore is subject to gains and losses due to fluctuations in foreign currency exchange rates. A portion of this risk has been mitigated through foreign exchange contracts, as described in (b) above. Note 12: Related party transactions During 2004, the Company paid rent of US$1,039 ( $1,039) relating to leased premises for two divisions acquired as part of the purchase of Pilot Industries Inc. on December 31, Both of these divisions were subsequently closed. These premises are co-owned by an employee of the Company. Refer also to note 14. During 2003, the Company repaid the mortgage payable to a relative of the President of the Company, used to complete the purchase of Pilot Industries Inc. on December 31, 2002.

18 Note 13: Segmented information: The Company focuses its operations on the production of goods for the automotive industry. Revenues by geographic region are summarized as follows: Year ended, December 31, 2004 Canada US Other Total Canada 158,711 $ 187,220 $ 10, ,083 Export sales: US 16, ,279 3, ,699 Other ,024 30,776 92, , ,523 $ 44,622 $ 582,744 Year ended, December 31, 2003 Canada US Other Total Canada 120,740 $ 214,209 $ 14, ,523 Export sales: US 19, , ,230 Other - 46,830 42,556 89, , ,226 $ 57,807 $ 608,139 Approximately 68% ( %) of the Company's revenues are derived from four ( four) customers. Assets by geographic region are summarized as follows: At December 31, 2004: Current assets Capital Assets Goodwill and Total Other assets Canada 84, , ,349 $ 444,447 US 35,783 27,091 58, ,992 Mexico 12,636 14,293 14,499 41,428 Europe 8,706 9,882 12,220 30,808 $ 141,913 $ 218,576 $ 277,186 $ 637,675 At December 31, 2003: Current assets Capital Assets Goodwill and Total Other assets Canada $ 119,371 $ 161,608 $ 198,541 $ 479,520 US 32,742 30,238 56, ,595 Mexico 12,846 9,878 13,856 36,580 Europe 6,795 10,664 11,064 28,523 $ 171,754 $ 212,388 $ 280,076 $ 664,218

19 Note 14: Guarantees and Commitments The Company leases manufacturing premises, office equipment, vehicles and facilities under long term operating leases. The aggregate minimum annual lease payments are as follows: 2005 $ 6, , , , ,051 Thereafter 8,295 $ 35,121 Of the above amount US$3,400 are under an arrangement with a company in which an employee of the Company's U.S. subsidiary has a financial interest. These leases were negotiated prior to the acquisition of Pilot Industries Inc. by the Company and are at fair market value. As at December 31, 2004, the Company has two letters of credit outstanding for a total of $1,550 ( $720). These letters of credit were issued to the City of Brampton to guarantee various projects. Commitments in capital expenditures totaled $679 as at December 31, 2004 ( $190). The Company also entered into foreign exchange contracts to purchase US $6,408, with maturity dates ranging from January 2005 to April 2008 and 800 Euros, with maturity dates ranging from January 2005 to June Total settlement value amounts to approximately $9,492. The Company is a guarantor under a tool financing program. The tool financing program involves a third party that provides tooling suppliers with financing subject to a Company guarantee. Payments from the third party to the tooling supplier are approved by the Company prior to the funds being advanced. The amounts loaned to tooling suppliers through this financing arrangement do not appear on the Company's balance sheet. At December 31, 2004, the amount of program financing was $11.9 million. The maximum amount of undiscounted future payments the Company could be required to make under the guarantee is $11.9 million. The Company would be required to perform under the guarantee in cases where a tooling supplier could not meet its obligation to the third party. Since the amount advanced to the tooling supplier is required to be repaid generally when the Company receives reimbursement from the final customer, and at this point the Company will in turn repay the tooling supplier, the Company views the likelihood of tooling supplier default as remote. Moreover, if such an instance were to occur, the Company would obtain the tool inventory as collateral. The term of the guarantee will vary from program to program, but typically ranges between 6-18 months. From time to time, the Company is involved in various claims, legal proceedings, and complaints arising in the course of business. The Company cannot determine whether these claims, legal proceedings, and complaints will, individually or collectively, have a material adverse effect on the business, results of operations and financial condition of the Company. Note 15: Subsequent Event On February 17, 2005, the Company completed the acquisition of the assets of a metal forming plant in Corydon, Indiana for approximately US$9,200 plus the assumption of operating leases with an outstanding obligation to maturity of approximately US$1,600. The purchase price was funded through a combination of asset-based financing and cash. The assets purchased include the land and the building, and all equipment necessary for the production of the programs at the facility. Subsequent to year end, the Company entered into lease agreements totalling approximately $346 per annum, which relate primarily to additional leased premises for two of the Company's divisions.