**Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

 

Basis of Presentation of Financial Information

 

The amounts described below are based on theCompany’s consolidated financial statements, which are prepared in accordancewith Canadian GAAP. The significant differences between Canadian and UnitedStates GAAP are detailed in Note 23 to the consolidated financial statements.The following Management’s Discussion and Analysis should be read inconjunction with the consolidated financial statements, including “SignificantAccounting Policies – Principles of Consolidation”. This Management’sDiscussion and Analysis was prepared as of February 17, 2004.

 

Overview

 

The Company is a global full service supplier ofautomotive interior and closure components, systems and modules whose principalproducts include interior systems, such as seating systems, cockpit systems,sidewall systems, cargo management systems and overhead, floor and acousticsystems and related components; and closure systems, including latchingsystems, glass moving systems, power sliding doors and liftgates, wiper systemsand door modules. The Company directly supplies most of the major automobilemanufacturers in the world and employs approximately 24,000 employees at 71manufacturing facilities, 17 product development, engineering and testingcentres and 13 sales offices in North America, Europe, Brazil and Asia Pacific.The Company’s top five customers, based on consolidated 2003 sales, areDaimlerChrysler (27%), Ford (23%), General Motors (16%), BMW (9%) andVolkswagen (6%).

 

The Company’s operations consist of two businesssegments, the Interior and Closure businesses, which are generally aligned on aproduct basis with the corresponding purchasing and engineering groups of theCompany’s customers. Effective January 2003, the Company’s Closureoperations underwent an organizational structure change, effectively changingmanagement’s reporting and assessment of operating results for resourceallocation decisions and performance assessment to be on a global basis.Consistent with these changes in the Company’s business operations, the ClosureSystems segment, beginning January 2003 is reported on a global basis. Asa result, the Company has presented the Closure business as one reportablebusiness segment to reflect the new global approach for segment wide growth.The Company’s Interior Systems segment continues to be segregated between NorthAmerica and Europe. In 2003, the Company’s Interior Systems segment accountedfor approximately 79% and 68% of the Company’s consolidated sales and operatingincome, and the Company’s Closure segment accounted for approximately 21% and32% of the Company’s consolidated sales and operating income.

 

The following are highlights of the Company’sfinancial performance in 2003:

 

•        Total sales increased $0.8 billion, or 21% to$4.7 billion compared to $3.9 billion in 2002;

 

•        Average dollar content on North Americanproduced vehicles in 2003 increased by $29 to $164 as compared to $135 in 2002.In addition, Western European average dollar content per vehicle increased $20to $94 during 2003 compared to $74 in 2002. The growth in content in both NorthAmerica and Europe was attributable to increased market penetration and thepositive impact of foreign exchange translation on sales;

 

 

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•        New products launched during 2003 included thecomplete seats for the Chrysler Pacifica, the complete seats, overhead systemand interior trim for the Ford Freestar and the Mercury Monterey, theintegration of the complete interior, excluding seats, for the Cadillac SRX,the seat mechanisms for the Honda Accord and Pilot, the door panels for theChevrolet Malibu, the window regulators for DaimlerChrysler minivans and thecockpit module and seat tracks for the Chevrolet Colorado and the GMC Canyon inNorth America and the complete interior, excluding seats, for the BMW 6 Series,the cargo management system and other interior trim for the BMW X3 and the completeseats for the Volkswagen Caddy in Europe;

 

•        Higher start-up costs were incurred at bothnew and existing facilities launching new products during 2003 and during 2004.In addition to the products launched during 2003, new products launching over thenext 12 months include the complete seats, headliner and instrument panel forthe Chevrolet Equinox, the second and third row STOW ‘N GO**TM**(a trademark of DaimlerChryslerCorporation) seats for DaimlerChrysler minivans, the interior integration,overhead system, instrument panel and door panels for the Cadillac STS and thecomplete seats for the Chevrolet Cobalt in North America and door panels forthe BMW 1 Series, latches for Audi and the interior trim, carpet and cargomanagement for the Mercedes A-class in Europe;

 

•        During 2003, the Company closed threeunder-performing facilities in Europe;

 

•        North American light vehicle production of15.9 million units during 2003 was 3% lower than production levels in 2002.2003 Western European vehicle production was 16.4 million units, representing a1% increase from 2002;

 

•        The OEMs in both North America and Europecontinue to offer various price and financing incentives to their customers. Asa result, the Company’s pricing to its OEM customers has been under pressureresulting in higher price reductions in 2003 compared to the prior year; and

 

•        Operating income increased by 12% to $136.4million from $121.7 million in 2002.

 

**INDUSTRY RISKS AND TRENDS**

 

The following are some of the more significant risksand trends relating to the automotive industry that could affect the Company inachieving its results:

 

•        An economic downturn could reduce or eliminatethe Company’s profitability. The global automotive industry is cyclical and issensitive to changes in economic conditions such as interest rates, consumerdemand, oil and energy prices and international conflicts.

 

•        Increasing price reduction pressures from theCompany’s customers could reduce profit margins. In the past, the Companyentered into, and will continue to enter into, long-term supply arrangementswith automobile manufacturers, which provide for, among other things, priceconcessions over the supply term. To date, these concessions have been largelyoffset by cost reductions arising principally from product and processimprovements and price reductions from the Company’s suppliers. However, thecompetitive automotive industry environment in both North America and Europehas caused these pricing pressures to intensify. A number of the Company’s customerscontinue to demand additional price reductions beyond existing

 

 

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contractual commitments, which could have an adverseimpact on the Company’s future profit margins. To the extent that these price reductionsare not offset through cost reductions, the Company’s future profit marginswould be adversely affected.

 

•        The Company is under increasing pressure toabsorb more costs related to product design and engineering and tooling as wellas other items previously paid for directly by automobile manufacturers. Inparticular, some automobile manufacturers have requested that the Company payfor design and engineering and tooling costs that are incurred up to the startof production and recover these costs through increasing the unit price of theparticular products. If estimated production volumes are not achieved, thedesign and engineering and tooling costs incurred by the Company may not befully recovered.

 

•        Although the Company supplies parts to most ofthe leading automobile manufacturers for a wide variety of vehicles produced inNorth America and Europe, the Company does not supply parts for all vehiclesproduced, nor is the number or value of parts evenly distributed among thevehicles for which the Company does supply parts. Shifts in market share amongvehicles could have an adverse effect on the Company’s sales and profitmargins. For example, the Company is affected by the sales mix betweenpassenger cars, SUVs, minivans and other light trucks as the product contentand profit margin vary among these types of vehicles.

 

•        Although the Company’s financial results arereported in U.S. dollars, a significant portion of the Company’s sales andoperating costs are realized in Canadian dollars, euros, British pounds andother currencies. The Company’s profitability is affected by movements of theU.S. dollar against the Canadian dollar, the British pound, the euro or othercurrencies in which the Company generates its revenues.

 

•        In order to retain its global competitivenesswith its customers, the Company is under increasing pressure to move operationsto lower cost jurisdictions like Mexico, China and Eastern Europe. The impactto the Company could include higher costs associated with the impairment ofredundant assets and labour in certain higher cost jurisdictions in which theCompany currently carries on business, relocation and start-up costs, all ofwhich would adversely impact profit in the short term. The Company could alsobe exposed to foreign exchange and liquidity risks in the long term.

 

•        The Company’s customers are increasinglyrequesting that each of their suppliers bear the cost of the repair andreplacement of defective products which are either covered under automobilemanufacturer’s warranty or are the subject of a recall by the customer andwhich were improperly designed, manufactured or assembled by their suppliers.The obligation to repair or replace such parts could have a negative impact onthe Company’s results. The Company is also subject to the risk of exposure toproduct liability claims in the event that the failure of the Company’sproducts results in bodily injury and/or property damage. The Company mayexperience material product liability losses in the future and may incursignificant costs to defend such claims. Currently, the Company has productliability coverage under insurance policies. This coverage will continue untilAugust 2004, subject to renewal on an annual basis. In addition, some ofthe Company’s European subsidiaries maintain product recall insurance, which isrequired by law in certain jurisdictions. A successful claim brought againstthe Company in excess of its available insurance coverage may have an adverseeffect on the Company’s operations and financial condition.

 

Critical Accounting Policies

 

The Company’s discussion and analysis of its resultsof operations and financial position is based upon the consolidated financialstatements, which have been prepared in accordance with Canadian GAAP. Note 23to the Company’s consolidated financial statements sets out the materialdifferences between Canadian and United States GAAP. The preparation of theconsolidated financial statements requires management to make estimates andjudgements that affect the reported amounts of assets, liabilities, revenuesand expenses, and the related disclosure of contingent assets and liabilities.On an ongoing basis, the Company evaluates its estimates. The Company bases itsestimates on historical experience and various other assumptions that arebelieved to be reasonable in the circumstances, the results of which form thebasis for making judgements about the carrying value of assets and liabilities.Actual results may differ from these estimates under different assumptions orconditions.

 

The Company believes the following criticalaccounting policies affect its more significant judgements and estimates usedin the preparation of its consolidated financial statements. Management hasdiscussed the development and selection of the following critical accountingpolicies with the Audit Committee of the Board of Directors and the AuditCommittee has reviewed the Company’s disclosure relating to critical accountingpolicies in this MD&A.

 

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**REVENUE RECOGNITION**

 

*Separately Priced Tooling Contracts*With respect to itscontracts with OEMs for particular vehicle programs, the Company performsmultiple revenue-generating activities. The most common arrangement is where,in addition to contracting for the production and sale of parts, the Companyalso has a separately priced contract with the OEM for related tooling costs.Under these arrangements, the Company either constructs the tools at itsin-house tool shop or contracts with third party tooling vendors to constructand supply tooling to be used by the Company in the production of parts for theOEM. On completion of tooling build, and upon acceptance of the tooling by theOEM, the Company sells the separately priced tooling to the OEM pursuant to aseparate tooling purchase order.

 

Revenues and cost of sales from separately pricedtooling contracts are presented on a gross basis in the consolidated statementsof income when the Company is acting as principal and is subject to significantrisks and rewards in connection with the process of bringing the tool to itsfinal state and in the post-sale dealings with its customers. Otherwise,components of revenue and related costs are presented on a net basis. To date,revenues and cost of sales on separately priced tooling contracts have beenreported on a gross basis.

 

Revenues from separately priced tooling contracts arerecognized substantially on a completed contract basis. The completed contractmethod recognizes revenue and cost of sales only when the contract is completedand the tool is accepted by the customer. All costs net of customer advancesare reported in tooling inventory in the Company’s consolidated balance sheetuntil that time.

 

Tooling contract prices are generally fixed; however,price changes, change orders and program cancellations may affect the ultimateamount of revenue recorded with respect to a contract. Contract costs areestimated at the time of signing the contract and are reviewed at eachreporting date. Adjustments to the original estimates of total costs are oftenrequired as work progresses under the contract and as experience is gained,even though the scope of the work under the contract may not change. When thecurrent estimates of total contract revenue and total contract costs indicate aloss, a provision for the entire loss on the contract is made. Factors that areconsidered in arriving at the forecasted loss on a contract include, amongothers, cost over-runs, non-reimbursable costs, change orders and potentialprice changes.

 

For United States GAAP purposes, the Company reportsa United States GAAP difference with respect to separately priced toolingcontracts manufactured at the Company’s in-house tooling division when suchtools will be used by the Company to service a subsequent parts productionprogram. Revenues from design and engineering services provided to customersunder certain long-term contracts are recognized on a percentage of completionbasis.

 

Given the potential for profit on tooling manufacturedin-house and based on the detailed requirements of the United States Securitiesand Exchange Commission’s Staff Accounting Bulletin No.101, the Companyconcluded that revenues and cost of sales on such tooling should be deferredand amortized on a gross basis over the subsequent parts production program forUnited States GAAP purposes.

 

The Emerging Issues Task Force recently issuedAbstract 00-21, “Accounting for Revenue Arrangements With MultipleDeliverables” (“EITF 00-21”). In addition, the CICA recently issued EmergingIssues Committee Abstract No.142, “Revenue Arrangements with MultipleDeliverables” (“EIC-142”). These Abstracts provide guidance on accounting by avendor for arrangements involving multiple deliverables. They specificallyaddress how a vendor determines whether an arrangement involving multipledeliverables contains more than one unit of accounting and they also addresshow consideration should be measured and allocated to the separate units ofaccounting in the arrangement. These Abstracts are effective for revenuearrangements entered into by the Company on or after January 1, 2004. Theimpact of these pronouncements on the Company’s consolidated financialstatements has not been determined.

 

*Integrator Contracts*The Company acts as the vehicle interiorintegrator on various programs in which the Company manufactures a portion ofthe integrated products but also collects components from various sub-suppliersfor assembly and sale of an integrated product to the customer. Judgement isrequired in assessing whether these integrator contracts should be reported ona gross (reporting sales and cost of sales gross) or net (netting cost of salesagainst sales) basis. Some of the factors the Company considers in arriving atits conclusion to record sales on a gross versus net basis include whether theCompany has the primary responsibility for providing the integrated product tothe customer, exposure to inventory risk on

 

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sub-supplier parts, responsibility for design andspecifications, latitude in establishing sub-supplier pricing, exposure towarranty and exposure to credit risk for sale of the integrated product to thecustomer. The method of revenue recognition is reviewed on a component bycomponent basis. To date, all vehicle interior integrator supply contracts havebeen recorded on a gross basis.

 

**AMORTIZED ENGINEERING AND CUSTOMEROWNED TOOLING ARRANGEMENTS**

 

The Company incurs pre-production engineering,design, research and development (“ER&D”) costs related to the products itproduces for its customers under long-term supply agreements. The Companyexpenses ER&D costs which are paid for as part of subsequent related partsproduction piece-price amounts as incurred unless a contractual guarantee forreimbursements exists, in which case the costs would be capitalized. Inaddition, the Company expenses all costs as incurred related to the design anddevelopment of moulds, dies and other tools that the Company will not own andthat will be used in, and reimbursed as part of the piece-price amount forsubsequent related parts production. Such costs are capitalized only when thesupply agreement provides the Company with a contractual guarantee forreimbursement of costs or the non-cancellable right to use the moulds, dies andother tools during the supply agreement.

 

ER&D and customer owned tooling costs capitalizedin “Other assets” are amortized on a units of production basis over the relatedparts production long-term supply agreement. As at December 31, 2003 and2002, total net ER&D and customer owned tooling costs capitalized in otherassets amounted to $10.7 million and $4.0 million, respectively. A change inthe commercial arrangement affecting any of the Company’s significant programsthat would require the Company to expense ER&D or customer owned toolingcosts that are currently capitalized would have a negative impact on theCompany’s reported results of operations.

 

**GOODWILL AND LONG-LIVED ASSETIMPAIRMENT**

 

*Goodwill*Effective January 1, 2002, the Companyadopted new rules governing the accounting for goodwill for Canadian GAAPreporting purposes (see “Depreciation and Amortization” and “Other Charges”).Under the new rules, the Company’s goodwill is no longer amortized and is subjectto an annual impairment test.

 

Goodwill impairment is assessed based on a comparisonof the fair value of an individual reporting unit to the underlying carryingvalue of the reporting unit’s net assets including goodwill. When the carryingvalue of the reporting unit exceeds its fair value, the fair value of thereporting unit’s goodwill should be compared with its carrying value to measurethe amount of the impairment loss, if any. The fair value of goodwill isdetermined using the estimated discounted future cash flows of the reportingunit.

 

The goodwill of a reporting unit must be tested forimpairment on an annual basis or between the annual tests when an event orcircumstance occurs that more likely than not reduces the fair value of areporting unit below its carrying value.

 

The Company completed its annual goodwill impairmentanalysis in the fourth quarter of 2003 after the annual business plan processhad been completed. The result of this analysis indicated no impairment ofgoodwill for 2003.

 

*Long-Lived Assets*Effective January 1, 2002, the Companyadopted new rules governing the accounting for impairment of long-lived assets(see “Other Charges”). The Company evaluates long-lived assets for impairmentwhenever indicators of impairment exist. Indicators of impairment includeprolonged operating losses, goodwill impairment or a decision to dispose of, orotherwise change the use of, an existing long-lived asset.

 

An impairment loss is recognized when the carryingvalue of an asset to be held and used exceeds the sum of the undiscounted cashflows expected from its use and eventual disposition. An impairment loss ismeasured as the amount by which the asset’s carrying value exceeds its fairvalue. Discounted cash flows are used to determine fair value.

 

The Company believes that accounting estimatesrelated to both goodwill and long-lived asset impairment assessments are“critical accounting estimates” because (i) they are subject to significantmeasurement uncertainty and are susceptible to change as management is requiredto make forward looking assumptions regarding the impact of improvement planson current operations, insourcing and other new business opportunities, programprice and cost assumptions on current and future business, the timing of newprogram launches and future forecasted production volumes; and (ii) anyresulting impairment loss could have a material impact on the Company’sconsolidated net income and on the amount of goodwill and long-lived assetsreported on the Company’s consolidated balance sheet.

 

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**FUTURE INCOME TAX ASSETS AND FUTUREINCOME TAX LIABILITIES**

 

Under both Canadian and United States GAAP, theCompany uses the liability method of tax allocation for accounting for incometaxes. Under the liability method of tax allocation, future tax assets andliabilities are determined based on differences between the financial reportingcarrying value and tax cost bases of assets and liabilities. Future tax assetsare reduced by a valuation allowance if it is more likely than not that some orall of the future tax asset will not be realized.

 

At December 31, 2003 and 2002, the Company hadrecorded net future tax assets (net of related liabilities and valuationallowances) of $26.6 million and $37.5 million, respectively, consistingprimarily of the benefit of loss carryforwards. Future tax assets atDecember 31, 2003 related primarily to the Company’s German and U.S.operations.

 

The Company evaluates quarterly the carrying value ofits future tax assets by assessing its valuation allowance and by adjusting theamount of such allowance, if necessary. The factors used to assess thelikelihood of realization are the Company’s forecast of future taxable incomeand available tax planning strategies that could be implemented to realize thefuture tax assets.

 

At December 31, 2003, the Company had income taxloss carryforwards of approximately $143 million, which relate primarily tooperations in Europe, the tax benefits of which have not been recognized in theconsolidated financial statements. Of the total tax loss carryforwards, $119million expire between 2004 and 2018 and the remainder have no expiry dates. Ifoperations improve to profitable levels in these jurisdictions, and such improvementsare sustained for a prolonged period of time, the Company’s earnings willbenefit from these tax loss carryforwards.

 

**EMPLOYEE DEFINED BENEFIT PLANS**

 

The Company has a number of arrangements in Canada,the United States, the United Kingdom and Europe which provide pension and postretirement benefits to its retired and current employees. Pension arrangementsinclude statutory pension plans as well as similar arrangements, which providepension benefits as required by statute.

 

The determination of the obligation and expense fordefined benefit pension and other post retirement benefits, such as retireehealth care and medical benefits, is dependent on the selection of certainassumptions used by actuaries in calculating such amounts. Those assumptionsare included in Note 12 to the Company’s consolidated financial statements andinclude, among others, the discount rate, expected long-term rate of return onplan assets and rates of increase in compensation and health care costs. Actualresults that differ from the assumptions used are accumulated and amortizedover future periods and, therefore, impact the recognized expense and recordedobligation in future periods.

 

At December 31, 2003, the Company hadobligations under its defined benefit pension plans and other statutory plansof $84.2 million. The defined benefit plans have assets of $40.4 million andunfunded unrecognized net actuarial losses of $18.3 million. All pension plansand similar arrangements are funded to the minimum legal funding requirement.In certain plans, there is no legal requirement to fund the obligation untilsuch time as they are actually incurred, and as a result these arrangements areunfunded. In addition to the registered plan assets, certain subsidiaries hold$1.5 million of guaranteed securities with respect to their unfundedtermination and long service obligations. In addition, the Company hasobligations with respect to post retirement medical benefits of $18.7 million.The Company’s pension and post retirement medical benefit expense was $10.7million, $6.5 million and $5.3 million in 2003, 2002 and 2001, respectively.Unfunded unrecognized net actuarial losses are amortized and charged toearnings over the average remaining service period of active employees. Wherethere are no active employees, unfunded unrecognized net actuarial losses areamortized and charged to earnings over the average remaining life expectancy ofthe plan participants.

 

**FOREIGN EXCHANGE CONTRACTS**

 

The Company uses foreign exchange contracts to manageforeign exchange risk from its underlying customer and supplier contracts. Inparticular, the Company uses foreign exchange forward contracts for the solepurpose of hedging certain of the Company’s future committed foreign currencyoutflows and inflows. These derivatives qualify for hedge accounting underCanadian GAAP. The Company does not enter into foreign exchange contracts forspeculative purposes.

 

The Company determines the fair value of thederivatives based on market values provided by independent parties based oncontracts with similar remaining terms to maturity. The values of the foreignexchange contracts will change over time as interest rates, currency rates andmarket conditions change.

 

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While these contracts expose the Company to creditlosses in the event of non-performance by counterparties to the agreements, theCompany minimizes the risk of non-performance by only entering into contractswith financially sound counterparties and by limiting its exposure with any onefinancial institution.

 

The Company’s use of foreign exchange contracts isdependent on forecasted future foreign currency outflows and inflows. If suchcash flows were no longer probable of occurring, the foreign exchange contractswould cease to be effective as a hedge. For example, if projected net foreigncurrency cash inflows or outflows declined significantly, previouslyunrecognized gains or losses pertaining to the portion of the hedgingtransactions in excess of projected foreign currency denominated cash flowswould be recognized in income at the time this condition was identified. AtDecember 31, 2003, the amount of losses not recognized in the Company’sreported net income related to significant derivative financial instrumentcontracts is approximately $12.2 million.

 

Under United States GAAP, effective January 1,2002, the Company’s foreign exchange forward contracts qualify for hedgeaccounting. As of January 1, 2002, the Company implemented a new treasurymanagement system that complies with documentation requirements that allowhedge accounting. Changes to fair value of the Company’s forward exchangecontracts are recorded in other comprehensive income. Prior to January 1,2002, for United States GAAP purposes, changes in the market value of theCompany’s foreign exchange forward contracts were recorded in earnings. If theCompany’s forward exchange contracts ceased to be effective as hedges, forexample, if projected net foreign cash inflows declined significantly,previously unrecognized gains or losses pertaining to the portion of thehedging transactions in excess of projected foreign denominated cash flow wouldbe recognized in income at the time this condition was identified.

 

**WARRANTY, PRODUCT LIABILITY ANDRECALL OBLIGATIONS**

 

In certain circumstances, the Company is at risk forwarranty costs, including product liability and recall costs. Product liabilityprovisions are established based on the Company’s best estimate of the amountsnecessary to settle existing claims on product default issues. Recall costs arecosts incurred when the Company and/or the customer decide, either voluntarilyor involuntarily, to recall a product due to a known or suspected performanceissue. Costs typically include the cost of the product being replaced, customercost of the recall and labour to remove and replace the defective part. When adecision to recall a product has been made or is probable, the Company’sestimated cost of the recall is recorded as a charge to net earnings in thatperiod. In making this estimate, judgement is required as to the number ofunits that may be returned as a result of the recall, the total cost of therecall campaign, the ultimate negotiated sharing of the cost between theCompany and the customer and, in some cases, the extent to which a supplier tothe Company will share the recall cost. Due to the nature of the costs, theCompany makes its best estimate of the expected future costs; however, theultimate amount of such costs could be materially different.

 

Given the nature of the Company’s products, to date,the Company has not experienced significant warranty, including productliability and recall costs. However, the Company continues to experienceincreased customer pressure to assume greater warranty responsibility.Currently, the Company only accounts for existing or probable claims; however,a significant increase in warranty responsibility could require the Company toconsider accounting for possible future claims.

 

**CONTINGENCIES**

 

In the ordinary course of business activities, theCompany may be contingently liable for litigation and potential claims withcustomers, suppliers and former employees. In addition, the Company may be, orcould become, liable to incur environmental remediation costs to bringenvironmental contamination levels back within acceptable legal limits. On anongoing basis, the Company assesses the likelihood of any adverse judgements oroutcomes to these matters as well as potential ranges of probable costs andlosses. A determination of the provision required, if any, for thesecontingencies is made after analysis of each individual issue. The requiredprovision may change in the future due to new developments in each matter orchanges in approach such as a change in settlement strategy in dealing withthese matters.

 

To date, contingent liabilities recognized in theCompany’s consolidated financial statements are not significant.

 

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**STOCK-BASED COMPENSATION**

 

Effective January 1, 2003, the Companyprospectively adopted the fair value method for recognizing compensationexpense for stock options granted under its Incentive Stock Option Plan (the“Option Plan”). Under the prospective method of adoption, compensation expenseis recognized for fixed price stock options granted, modified, or settled afterJanuary 1, 2003, assuming compensation expense for the stock option planhad been determined based upon the fair value of the options at the grant date.

 

The fair value of stock options is estimated at thegrant date using the Black-Scholes option pricing model. This model requiresthe input of a number of assumptions, including dividend yields, expected stockprice volatility, expected time until exercise and risk free interest rates.Although the assumptions used reflect management’s best estimates, they involveinherent uncertainties based on market conditions generally outside of thecontrol of the Company. If other assumptions are used, stock-based compensationexpense could be significantly impacted.

 

Compensation expense is recognized over the vestingperiod of the options granted, and is recorded in selling, general andadministrative expenses in the consolidated statement of income and contributedsurplus in the consolidated balance sheet. The Company’s stock-basedcompensation expense was $0.6 million in 2003. On the exercise of stockoptions, the consideration received and the accumulated contributed surplusamount is credited to capital stock.

 

For stock option awards prior to January 1,2003, no compensation expense was recognized. Pro forma net income and earningsper share disclosure showing the impact of fair value accounting for stockoptions granted prior to January 1, 2003 is included in Note 15 to the consolidatedfinancial statements.

 

Results of Operations and Financial Position for theYear 2003 Compared to 2002

 
| **Years ended December 31**      |   | **2003**   |   | **2002** |   | **Change** |   |
|---------------------------------------|--------|------------|--------|----------|--------|------------|--------|
|                                  |   |       |   |     |   |       |   |
| 1 Canadian dollar equals U.S. dollars |   | **0.7159** |   | 0.6372   |   | 12.4       | %      |
| 1 Euro equals U.S. dollars            |   | **1.1320** |   | 0.9456   |   | 19.7       | %      |
| 1 British pound equals U.S. dollars   |   | **1.6349** |   | 1.5025   |   | 8.8        | %      |

 

The Company’s results are directly affected by theaverage exchange rate used to translate the results of its operations having afunctional currency other than the U.S. dollar into U.S. dollars. The precedingtable reflects the average foreign exchange rates between the primarycurrencies in which the Company conducts business and the Company’s U.S. dollarreporting currency. As a result of the significant strengthening in thefunctional currencies noted above, 2003 sales and operating income haveincreased by approximately $368 million and $5 million respectively from 2002.Throughout this MD&A, reference is made to the impact of foreign exchangeon reported U.S. dollar amounts where relevant.

 

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**SALES**

 
| **Years ended December 31****(in millions, except average dollar content per vehicle)** |   | **2003**    |        | **2002** |   |
|----------------------------------------------------------------------------------------------|--------|-------------|-------------|----------|--------|
|                                                                                         |   |        |        |     |   |
| Vehicle production volumes                                                                   |   |        |        |     |   |
| North America                                                                                |   | **15.9**    |        | 16.3     |   |
| Europe                                                                                       |   | **16.4**    |        | 16.3     |   |
|                                                                                         |   |        |        |     |   |
| Average dollar content per vehicle                                                           |   |        |        |     |   |
| North America                                                                                |   | **$**       | **164**     |     | $      | 135 |   |
| Europe                                                                                       |   | **$**       | **94**      |     | $      | 74 |   |
|                                                                                         |   |        |        |     |   |
| Production sales – Interior Systems                                                     |   |        |        |     |   |
| North America                                                                                |   | **$**       | **1,831.8** |     | $      | 1,572.8 |   |
| Europe                                                                                       |   | **1,375.5** |        | 1,078.2  |   |
| Production sales – Closure Systems                                                      |   | **945.0**   |        | 773.7    |   |
|                                                                                         |   | **4,152.3** |        | 3,424.7  |   |
| Tooling and engineering sales                                                                |   | **502.3**   |        | 436.9    |   |
| Total sales                                                                                  |   | **$**       | **4,654.6** |     | $      | 3,861.6 |   |

 

**PRODUCTION SALES – INTERIOR SYSTEMS**

 

*North America:*North American production sales for theInterior business increased 16.5% to $1,831.8 million for 2003 compared to$1,572.8 million for 2002. This growth was primarily the result of an increasein average dollar content per vehicle and the strengthening of the Canadiandollar relative to the U.S. dollar. The increase in average dollar content pervehicle was attributable to new product launches during the second half of 2002including the complete seats for the Saturn ION and new product launches during2003 including the complete seats for the Chrysler Pacifica, the completeseats, overhead system and interior trim for the Ford Freestar and the MercuryMonterey, the integration of the complete interior, excluding seats, for theCadillac SRX, the seat mechanisms for the Honda Accord and Pilot, the doorpanels for the Chevrolet Malibu and the cockpit module and seat tracks for theChevrolet Colorado and the GMC Canyon. The increase in production sales waspartially offset by a 3% decrease in North American light vehicle productionvolumes, including lower vehicle volumes on certain of the Company’s highcontent programs and by customer price reductions.

 

*Europe:*European production sales for the Interiorbusiness increased 27.6% to $1,375.5 million for 2003 compared to $1,078.2million for 2002. This growth was primarily attributable to the strengtheningof the euro and the British pound relative to the U.S. dollar and to anincrease in average dollar content per vehicle, which was positively impactedby new product launches during the second half of 2002 including the instrumentpanel and door panels for the Jaguar XJ, the door panels for the Toyota Avensisand the cockpit module for the Nissan Micra and product launches during 2003including the complete interior, excluding seats, for the BMW 6 Series, thecargo management system and other interior trim for the BMW X3 and the completeseats for the Volkswagen Caddy and also due to a 1% increase in WesternEuropean vehicle production volumes.

 

**PRODUCTION SALES – CLOSURE SYSTEMS**

 

Production sales for the Closure business increased22.1% to $945.0 million for 2003 from $773.7 million for 2002. This growth wasprimarily due to the strengthening of the Canadian dollar and euro relative tothe U.S. dollar and increased average dollar content per vehicle as a result ofnew products launched including window regulators for DaimlerChrysler minivansand other new products launched during 2003 and in late 2002. These increaseswere partially offset by a 3% decrease in North American vehicle productionvolumes including lower volumes on certain of the Company’s high contentprograms and by customer price reductions.

 

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**TOOLING AND ENGINEERING SALES**

 

The Company’s consolidated tooling and engineeringsales for 2003 increased 15.0% to $502.3 million from $436.9 million for 2002.Tooling and engineering sales increased by $56.3 million to $448.7 million inthe Interior business and increased by $9.1 million to $53.6 million in theClosure business for 2003 compared to 2002. These increases in tooling andengineering sales are due to the Company’s increased involvement in newincremental programs and the strengthening of the Canadian dollar, euro andBritish pound relative to the U.S. dollar.

 

**GROSS MARGIN**

 
| **Years ended December 31**            |   | **2003** |      | **2002** |   |
|---------------------------------------------|--------|----------|-----------|----------|--------|
|                                        |   |     |      |     |   |
| Gross margin                                |   | **$**    | **536.8** |     | $      | 486.7 |   |
| Gross margin as a percentage of total sales |   | **11.5** | **%**     | 12.6     | %      |
|                                             |        |          |           |          |        |  |  |

 

Gross margin as a percentage of sales decreased from12.6% to 11.5% primarily as a result of customer price reductions, higher costsassociated with new and existing facilities launching new products during 2003and in early 2004, lower vehicle production volumes on certain of the Company’shigh content programs, costs associated with the closure of divisions, theimpact of labour strikes in eastern Germany in June 2003 and highertooling sales. These decreases have been partially offset by sales from newproducts launched during 2003. In addition, in the fourth quarter of 2002, theCompany recorded a $2.8 million charge relating to the downsizing of one of theCompany’s under-performing divisions.

 

**OPERATING INCOME**

 
| **Years ended December 31**                                             |   | **2003**   |      | **2002** |   |
|------------------------------------------------------------------------------|--------|------------|-----------|----------|--------|
|                                                                         |   |       |      |     |   |
| Gross margin                                                                 |   | **$**      | **536.8** |     | $      | 486.7 |   |
| Less:                                                                        |   |       |      |     |   |
| Depreciation and amortization                                                |   | **99.5**   |      | 88.5     |   |
| Selling, general and administrative                                          |   | **238.3**  |      | 197.6    |   |
| Affiliation and social fees                                                  |   | **62.6**   |      | 55.3     |   |
| Other charges                                                                |   | **—** |      | 23.6     |   |
| Operating income                                                             |   | **$**      | **136.4** |     | $      | 121.7 |   |
| Depreciation and amortization as a percentage of total sales                 |   | **2.1**    | **%**     | 2.3      | %      |
| Selling, general and administrative expenses as a percentage of total  sales |   | **5.1**    | **%**     | 5.1      | %      |

 

*Depreciation and amortization:*Depreciation and amortization expenseincreased by $11.0 million to $99.5 million for 2003 from $88.5 million for2002. The increase is attributable to additional depreciation expense as aresult of the Company’s continuing investment in capital equipment to supportnew production programs and facilities, and the strengthening of the Canadiandollar, euro and British pound relative to the U.S. dollar which had the effectof increasing U.S. dollar reported depreciation and amortization expense in2003 compared to 2002. These increases were partially offset by lowerdepreciation expense as a result of the impairment loss on long-lived assetsrecognized in the fourth quarter of 2002.

 

*Selling, general andadministrative:*Selling,general and administrative (“SG&A”) costs increased by $40.7 million to$238.3 million for 2003 from $197.6 million for 2002. The increase in SG&Ais primarily a result of the strengthening of the Canadian dollar, euro andBritish pound relative to the U.S. dollar which had the effect of increasingU.S. dollar reported SG&A expense, costs associated with start-upfacilities in North America and Europe and the incremental costs associatedwith the increase in production sales. As a percentage of total sales, SG&Aremained unchanged at 5.1%.

 

*Affiliation and social fees:*The Company pays fees to Magna InternationalInc. (“Magna”) for certain rights provided under the terms of the Company’saffiliation agreements and contributes a portion of its social commitmentobligation under its Corporate Constitution pursuant to social commitmentagreements with Magna. These fees and social commitment contributions are basedon the Company’s sales and pre-tax profits. The fees and contributions to Magnaexpensed during 2003 were $62.6 million reflecting an increase of $7.3 millioncompared to the $55.3 million expensed in 2002. The increase in fees isreflective of the increase in sales and pre-tax profits in 2003 compared to2002.

 

10

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*Other charges:*The Company’s 2003 annual goodwill impairmenttest concluded that there was no goodwill impairment and no other chargesduring 2003. In 2002, the Company recognized a $3.5 million charge forimpairment of goodwill relating to one reporting unit in its Interiors Europereporting segment. There was no tax recovery recorded on this charge. Inconjunction with the 2002 annual impairment test for goodwill, a long-livedassets recoverability test was also performed on the same reporting unit whichresulted in recognition of additional impairment losses of $20.1 million,reducing the carrying value of machinery and equipment, leasehold improvementsand buildings by $17.6 million, $1.4 million and $1.1 million respectively. Nettax assets of $1.5 million associated with these operations were charged toincome tax expense in 2002.

 

**OPERATING INCOME (LOSS)**

 
| **Years ended December 31** |   | **2003** |      | **2002** |   |
|----------------------------------|--------|----------|-----------|----------|--------|
|                             |   |     |      |     |   |
| Interior Systems                 |   |     |      |     |   |
| North America                    |   | **$**    | **87.5**  |     | $      | 108.4 |   |
| Europe                           |   | **5.0**  |      | (23.3    | )      |
| Closure Systems                  |   | **43.8** |      | 34.4     |   |
| Corporate                        |   | **0.1**  |      | 2.2      |   |
| Operating income                 |   | **$**    | **136.4** |     | $      | 121.7 |   |

 

**OPERATING INCOME – INTERIOR SYSTEMS**

 

*North America:*Operating income for the North AmericanInterior business decreased by $20.9 million to $87.5 million for 2003 from$108.4 million for 2002. The decrease in operating income was primarily aresult of customer price reductions, higher costs associated with new andexisting facilities launching new products during 2003 and in early 2004, a 3%decrease in North American light vehicle production volumes including lowervolumes on certain of the Company’s high content programs, operatinginefficiencies at one of the Company’s North American divisions, increaseddepreciation and amortization expense resulting from the Company’s continuinginvestment in capital equipment to support new production programs andfacilities and increased SG&A costs and affiliation fees associated withthe increase in sales. These decreases have been partially offset by increasedproduction sales from new product launches and the strengthening of theCanadian dollar relative to the U.S. dollar.

 

*Europe:*Operating income for the European Interiorbusiness increased by $28.3 million from an operating loss of $23.3 million for2002 to operating income of $5.0 million for 2003. Increased operating incomein Europe results primarily from the 2002 recognition of a $3.5 millionwritedown of goodwill, a $20.1 million writedown of long-lived assets (see “OtherCharges”) and a $2.8 million charge relating to the downsizing of one of theCompany’s under-performing divisions. In addition, European operating incomefor 2003 was positively impacted by continuing operating efficiencies atcertain divisions, the strengthening of the euro and British pound relative tothe U.S. dollar which had the effect of increasing U.S. dollar reportedoperating income at certain divisions and a 1% increase in Western Europeanvehicle production volumes. These positive impacts have been negativelyaffected by higher than expected costs associated with the launch of certainnew products, costs associated with the closure of certain of the Company’sdivisions, operating inefficiencies at one of the Company’s Europeanfacilities, the impact of labour strikes in eastern Germany in June 2003,increased depreciation and amortization expense resulting from the Company’scontinuing investment in capital to support new production programs andfacilities, increased SG&A costs and affiliation fees associated with theincrease in sales and also by the strengthening of the euro relative to theU.S. dollar which magnified operating losses at certain European operations onthe translation to the Company’s U.S. dollar reporting currency.

 

**OPERATING INCOME – CLOSURE SYSTEMS**

 

Operating income for the Closure business increasedby $9.4 million to $43.8 million for 2003 from $34.4 million for 2002.Operating income was positively impacted by increased content from new productlaunches, the strengthening of the Canadian dollar and euro relative to theU.S. dollar and operating improvements at certain European operations. Theseincreases were partially offset by a 3% decline in North American light vehiclevolumes, including lower vehicle volumes on certain of the Company’s highcontent programs, customer price reductions, increased costs associated withthe launch of new products during 2003, increased depreciation and amortizationexpense resulting from the Company’s continuing investment in capital to supportnew production programs and facilities, increased SG&A costs andaffiliation fees associated with the increase in sales and the

 

11

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strengthening of the euro relative to the U.S. dollarwhich magnified operating losses at certain European operations on thetranslation to the Company’s U.S. dollar reporting currency.

 

*Operating income – Corporate:*Operating income for Corporate for 2003 was$0.1 million compared to operating income of $2.2 million for 2002 as a resultof additional corporate costs being charged to the Company’s operatingsegments.

 

**OTHER ITEMS**

 
| **Years ended December 31**                                          |   | **2003**  |      | **2002** |   |
|---------------------------------------------------------------------------|--------|-----------|-----------|----------|--------|
|                                                                      |   |      |      |     |   |
| Operating income                                                          |   | **$**     | **136.4** |     | $      | 121.7 |   |
| Interest expense (income), net                                            |   | **1.6**   |      | (1.5     | )      |
| Amortization of discount on Convertible Series Preferred Shares           |   | **12.4**  |      | 11.6     |   |
| Equity income                                                             |   | **(0.4**  | **)**     | (0.6     | )      |
| Income before income taxes and minority interest                          |   | **122.8** |      | 112.2    |   |
| Income taxes                                                              |   | **60.3**  |      | 64.5     |   |
| Minority interest                                                         |   | **0.2**   |      | (0.9     | )      |
| Net income                                                                |   | **62.3**  |      | 48.6     |   |
| Financing charge on Convertible Series Preferred Shares                   |   | **1.1**   |      | 1.9      |   |
| Net income attributable to Class A Subordinate Voting and Class B  Shares |   | **$**     | **61.2**  |     | $      | 46.7 |   |

 

*Interest expense (income), net:*The Company’s interest expense, net ofinterest income, increased by $3.1 million to $1.6 million of interest expensefor 2003 from $1.5 million interest income for 2002. The increase was a resultof charges on bank indebtedness and long-term debt balances, lower interestearned on cash balances and interest income earned in 2002 on a tax refund andon other assets.

 

*Amortization of discount onConvertible Series Preferred Shares:*As part of the Reorganization of the Company in August 2001, $225million of Convertible Series Preferred Shares were issued to Magna. As a result,a $12.4 million charge relating to the Company’s amortization of the discounton the Convertible Series Preferred Shares classified as debt was incurredduring 2003 compared to $11.6 million in 2002.

 

*Income taxes:*The effective tax rate on income before incometaxes and minority interest was 49.1% for 2003 as compared to 57.5% for 2002.Excluding the impact of tax losses not benefited, the non-deductibleamortization of discount on Convertible Series Preferred Shares and the 2002impact of “Other Charges”, the effective tax rate was 36% for 2003 compared toa rate of 35% for 2002.

 

*Net income:*Net income for 2003 was $62.3 million ascompared to $48.6 million for 2002. The increased net income results primarilyfrom the 2002 impairment charges for goodwill and long-lived assets of $23.6million and the related tax impact of $1.5 million (see “Other Charges”).Excluding the impact of the impairment charges, net income for 2003 was $11.4million lower than 2002 decreasing from $73.7 million in 2002 to $62.3 millionin 2003. The decrease in net income was primarily attributable to loweroperating income resulting from customer price reductions, higher costsassociated with new and existing facilities launching new products during 2003and in early 2004, a 3% reduction in North American light vehicle productionvolumes, including lower vehicle volumes on certain of the Company’s highcontent programs, operating inefficiencies at certain facilities, the impact ofeastern Germany labour strikes in June 2003, costs associated with theclosure of certain of the Company’s European divisions, the strengthening ofthe euro and British pound relative to the U.S. dollar which had the effect ofincreasing operating losses at certain European operations, increased depreciationand amortization expense resulting from the Company’s continuing investment incapital equipment to support new production programs and facilities, increasedSG&A costs and affiliation fees associated with the increase in sales,higher interest expense and increased amortization of discount on ConvertibleSeries Preferred Shares. These negative impacts were partially offset byincreased sales from new product launches, improved operating efficiencies atcertain divisions, lower tax expense and the strengthening of the Canadiandollar relative to the U.S. dollar which had the effect of increasing U.S.dollar reported net income. In addition, 2002 included a $2.8 million charge inthe fourth quarter relating to the downsizing of one of the Company’s under-performingdivisions.

 

12

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*Financing Charge:*The deduction from net income of dividendsdeclared and paid on the Convertible Series Preferred Shares (net of return ofcapital) was $1.1 million for 2003 compared to $1.9 million for 2002.

 

**EARNINGS PER SHARE**

 
| **Years ended December 31**                                                             |   | **2003** |     | **2002** |   |
|----------------------------------------------------------------------------------------------|--------|----------|----------|----------|--------|
|                                                                                         |   |     |     |     |   |
| Earnings per Class A Subordinate Voting or  Class B Share *(U.S. $)*                         |   |     |     |     |   |
| Basic                                                                                        |   | **$**    | **1.26** |     | $      | 0.97 |   |
| Diluted                                                                                      |   | **$**    | **1.18** |     | $      | 0.95 |   |
| Average number of Class A Subordinate Voting  and Class B Shares outstanding *(in millions)* |   |     |     |     |   |
| Basic                                                                                        |   | **48.6** |     | 48.2     |   |
| Diluted                                                                                      |   | **63.5** |     | 63.6     |   |

 

Diluted earnings per Class A Subordinate Voting orClass B Share for 2003 was $1.18 compared to $0.95 for 2002. Diluted earningsper Class A Subordinate Voting or Class B Share for 2002 included a $0.39 lossper share associated with the “Other Charges” of $23.6 million and the relatedincome tax charge of $1.5 million. Excluding the impact of $0.39 loss per shareassociated with “Other Charges”, Diluted earnings per Class A SubordinateVoting or Class B Share for 2003 is lower than 2002 Diluted earnings per ClassA Subordinate Voting or Class B Share as a result of lower net income.

 

On August 25, 2003, Magna exercised its right toconvert 39,500 Series 1 Convertible Preferred Shares into Class A SubordinateVoting Shares of the Company. The Convertible Series Preferred Shares areconvertible by Magna at a fixed conversion price of U.S.$15.09 per Class ASubordinate Voting Share and accordingly, Magna received 261,762 Class ASubordinate Voting Shares of the Company. The conversion had no impact on thediluted earnings per Class A Subordinate Voting or Class B Share.

 

During the year ended December 31, 2003, theCompany issued 681,108 Class A Subordinate Voting Shares to fund the Company’sEmployee Equity and Profit Participation Program.

 

Summary of Quarterly Results

 

The following table summarizes certain unauditedconsolidated financial data of the Company for the eight most recent quarters. Theinformation has been extracted from the unaudited consolidated financialstatements of the Company that have been prepared following the accountingpolicies as set out in the 2002 annual financial statements included in theCompany’s 2002 Annual Report to shareholders. In the opinion of management, theunaudited interim consolidated financial statements reflect all adjustments,which consist only of normal and recurring adjustments, necessary to presentfairly the financial data provided in the following table:

 

13

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| **Three month period ended**          |   | **December 31,  2003** |        | **September 30,  2003** |       | **June 30,  2003** |       | **March 31,  2003** |        |
|---------------------------------------|--------|-----------------------------|-------------|------------------------------|------------|-------------------------|------------|--------------------------|-------------|
|                                  |   |                        |        |                         |       |                    |       |                     |        |
| **Operational data**                  |   |                        |        |                         |       |                    |       |                     |        |
| Total sales                           |   | **$**                       | **1,421.7** | ** **                   | **$**      | **1,069.1**             | ** ** | **$**                    | **1,132.2** | ** ** | **$** | **1,031.6** |   |
| Net income                            |   | **$**                       | **20.5**    | ** **                   | **$**      | **8.3**                 | ** ** | **$**                    | **19.7**    | ** ** | **$** | **13.8** |   |
| Basic earnings per share              |   | **$**                       | **0.41**    | ** **                   | **$**      | **0.16**                | ** ** | **$**                    | **0.40**    | ** ** | **$** | **0.28** |   |
| Diluted earnings per share            |   | **$**                       | **0.37**    | ** **                   | **$**      | **0.16**                | ** ** | **$**                    | **0.36**    | ** ** | **$** | **0.27** |   |
|                                  |   |                        |        |                         |       |                    |       |                     |        |
| **Financial Position**                |   |                        | ** **  |                         | ** ** |                    | ** ** |                     |        |
| Total assets                          |   | **$**                       | **2,142.1** | ** **                   | **$**      | **2,072.7**             | ** ** | **$**                    | **2,026.9** | ** ** | **$** | **1,914.2** |   |
| Long-term financial liabilities *(i)* |   | **$**                       | **280.3**   | ** **                   | **$**      | **276.0**               | ** ** | **$**                    | **275.1**   | ** ** | **$** | **268.4** |   |

 
| **Three month period ended**          |   | **December 31,  2002** | ** ** | **September 30,  2002** | ** ** | **June 30,  2002** | ** ** | **March 31,  2002** |    |
|---------------------------------------|--------|-----------------------------|------------|------------------------------|------------|-------------------------|------------|--------------------------|---------|
|                                  |   |                        | ** ** |                         | ** ** |                    | ** ** |                     |    |
| **Operational data**                  |   |                        |       |                         |       |                    |       |                     |    |
| Total sales                           |   | $                           | 1,054.7    |                         | $          | 931.6                   |       | $                        | 996.4   |   | $ | 878.9 |   |
| Net (loss) income                     |   | $                           | (3.7       | )                            | $          | 12.9                    |       | $                        | 26.4    |   | $ | 13.0 |   |
| Basic (loss) earnings per share       |   | $                           | (0.09      | )                            | $          | 0.26                    |       | $                        | 0.54    |   | $ | 0.26 |   |
| Diluted (loss) earnings per share     |   | $                           | (0.09      | )                            | $          | 0.25                    |       | $                        | 0.46    |   | $ | 0.25 |   |
|                                  |   |                        |       |                         |       |                    |       |                     |    |
| **Financial Position**                |   |                        |       |                         |       |                    |       |                     |    |
| Total assets                          |   | $                           | 1,781.8    |                         | $          | 1,806.8                 |       | $                        | 1,747.0 |   | $ | 1,620.1 |   |
| Long-term financial liabilities *(i)* |   | $                           | 263.6      |                         | $          | 260.8                   |       | $                        | 258.9   |   | $ | 251.5 |   |

 

----

*(i)**    **Includes Long-term debt(excluding debt due within one year), liability portion of the ConvertibleSeries Preferred Shares and Other long-term liabilities.*

 

**QUARTERLY INFORMATION**

 

Sales increased $367.0 million to $1,421.7 millionfor the three month period ended December 31, 2003 compared to $1,054.7million in the three month period ended December 31, 2002. Approximately$126 million or 34% of this increase is due to the positive impact of foreignexchange translation related to the strengthening Canadian dollar, euro andBritish pound relative to the U.S. dollar.

 

North American production sales grew to $795.8million in the fourth quarter of 2003 compared to $551.5 million in the fourthquarter of 2002 as a result of the positive impact of higher North Americanaverage dollar content per vehicle and the strengthening of the Canadiandollar. North American light vehicle production volumes for the three monthperiod ended December 31, 2003 were 3.9 million units, representing a 1%increase as compared to the three month period ended December 31, 2002.North American average dollar content per vehicle increased 43% to $204 for thefourth quarter of 2003 compared to $143 for the fourth quarter of 2002. Newproducts that contributed to this increase included the cockpit module and seattracks for the Chevrolet Colorado and the GMC Canyon, launched in the fourthquarter of 2003, the complete seats, overhead system and interior trim for theFord Freestar and the Mercury Monterey, the integration of the completeinterior, excluding seats, for the Cadillac SRX, the window regulators forDaimlerChrysler minivans, the seat mechanisms for the Honda Accord and Pilot,the door panels for the Chevrolet Malibu, launched in the third quarter of 2003and the complete seats for the Chrysler Pacifica launched in the first quarterof 2003.

 

European production sales increased to $416.2 millionfor the fourth quarter of 2003 compared to $327.2 million for the fourthquarter of 2002 as a result of growth in the European average dollar contentper vehicle and the positive impact related to the strengthening of the euroand British pound. Western European vehicle production volumes for the threemonth period ended December 31, 2003 were 4.2 million units representing a1% decrease as compared to the three month period ended December 31, 2002.European average dollar content per vehicle increased 28% to $100 for thefourth quarter of 2003 compared to $78 for the fourth quarter of 2002. Newproducts that contributed to this increase included the Company’s completeseats for the Volkswagen Caddy and the cargo management system and otherinterior trim for the BMW X3, launched in the fourth quarter of 2003, and thecomplete interior, excluding seats, for the BMW 6 Series launched in the thirdquarter of 2003.

 

14

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Consolidated tooling and engineering sales for thethree month period ended December 31, 2003 increased by 19% to $209.7million from $176.0 million for the three month period ended December 31,2002.

 

Operating income for the fourth quarter of 2003increased to $46.3 million compared to $15.3 million for the fourth quarter of2002. Fourth quarter 2002 operating income included a $23.6 million non-cashimpairment charge. Excluding this impact, operating income increased by $7.4million in 2003 compared to 2002 primarily due to increased sales from newproduct launches.

 

Cash generated from operations before changes inworking capital during the fourth quarter of fiscal 2003 was $73.2 million. Anadditional $40.3 million of cash was generated from working capital resultingin total cash from operating activities of $113.5 million. Investmentactivities during the fourth quarter of 2003 were $42.9 million resulting infree cash before financing activities of $70.6 million for the quarter.

 

Diluted earnings per share was $0.37 for the threemonth period ended December 31, 2003, compared to diluted loss per shareof $0.09 for the three month period ended December 31, 2002. Diluted lossper share for the three month period ended December 31, 2002 included a$0.47 loss per share related to the non-cash impairment charge of $23.6 millionand the related $1.5 million income tax charge.

 

Financial Condition, Liquidity and Capital Resources

 

**CASH FROM OPERATING ACTIVITIES**

 
| **Years ended December 31**       |   | **2003**  |      | **2002** |   |
|----------------------------------------|--------|-----------|-----------|----------|--------|
|                                   |   |      |      |     |   |
| Net income                             |   | **$**     | **62.3**  |     | $      | 48.6 |   |
| Items not involving current cash flows |   | **150.0** |      | 155.5    |   |
|                                   |   | **212.3** |      | 204.1    |   |
| Change in non-cash working capital     |   | **(59.0** | **)**     | 111.4    |   |
|                                   |   | **$**     | **153.3** |     | $      | 315.5 |   |

 

During 2003, cash from operations before changes inworking capital increased by $8.2 million to $212.3 million from $204.1 millionin 2002. The increase was a result of an increase in net income of $13.7million offset by a decrease in non-cash items of $5.5 million representinglower future tax expense and the 2002 impairment charges for goodwill andlong-lived assets offset by higher depreciation and amortization, higherpension and post retirement benefit expense and higher other non-cash charges.The $59.0 million of cash invested in working capital during 2003 is the resultof a $148.2 million increase in accounts receivable, a $7.2 million increase ininventories and a $5.1 million increase in prepaids and other assets offset bya $101.5 million increase in accounts payable and accrued liabilities. The increasein accounts receivable and accounts payable and accrued liabilities is due tonew programs launched during 2003.

 

**INVESTMENT ACTIVITIES**

 
| **Years ended December 31**                      |   | **2003**  |       | **2002** |   |
|-------------------------------------------------------|--------|-----------|------------|----------|--------|
|                                                  |   |      |       |     |   |
| Capital asset additions                               |   | **$**     | **(129.6** | **)**    | $      | (136.8 | ) |
| Investments and other asset additions                 |   | **(11.6** | **)**      | (3.1     | )      |
| Proceeds from disposition of capital assets and other |   | **1.2**   |       | 4.8      |   |
|                                                  |   | **$**     | **(140.0** | **)**    | $      | (135.1 | ) |

 

15

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Cash used for capital assets and investment and otherasset spending was $141.2 million and $139.9 million for 2003 and 2002,respectively. This use of funds was partially offset by cash received fromnormal course fixed and other asset dispositions of $1.2 million and $4.8million during 2003 and 2002, respectively.

 

**FINANCING ACTIVITIES**

 
| **Years ended December 31**                             |   | **2003**  |      | **2002** |   |
|--------------------------------------------------------------|--------|-----------|-----------|----------|--------|
|                                                         |   |      |      |     |   |
| (Decrease) increase in bank indebtedness                     |   | **$**     | **(26.1** | **)**    | $      | 0.6 |   |
| Repayments of long-term debt and other long-term liabilities |   | **(10.9** | **)**     | (4.6     | )      |
| Issue of Class A Subordinate Voting Shares, net              |   | **10.2**  |      | 0.1      |   |
| Dividends on Class A Subordinate Voting and Class B Shares   |   | **(17.3** | **)**     | (9.7     | )      |
| Dividends on Convertible Series Preferred Shares             |   | **(11.1** | **)**     | (8.4     | )      |
|                                                         |   | **$**     | **(55.2** | **)**    | $      | (22.0 | ) |

 

Cash used for financing activities was $55.2 millionin 2003 compared to $22.0 million in 2002. Cash used for financing activitiesin 2003 included net repayments of debt (including bank indebtedness andlong-term debt and other long-term liabilities) of $37.0 million compared tonet repayments of debt of $4.0 million in 2002. Dividends paid during 2003 were$0.35 per Class A Subordinate Voting and Class B Share totalling $17.3 million,compared to $0.20 per Class A Subordinate Voting and Class B Share during 2002,totalling $9.7 million. Dividends paid on Convertible Series Preferred Sharesfor 2003 were $11.1 million, compared to $8.4 million for 2002. In addition,681,108 Class A Subordinate Voting Shares were issued for total proceeds of$10.1 million in respect of the Company’s Employee Equity and ProfitParticipation Program during 2003. The remainder of the proceeds from the issueof Class A Subordinate Voting Shares relates to the exercise of options grantedunder the Company’s Incentive Stock Option Plan.

 

**CONSOLIDATED CAPITALIZATION**

 

The Company’s net debt (including bank indebtedness,long-term debt including current portion, and the liability portion of theConvertible Series Preferred Shares, less cash and cash equivalents) to totalcapitalization (including net debt and shareholders’ equity), was 8% atDecember 31, 2003 compared to 7% at December 31, 2002.

 

The above net debt to total capitalization figurestreat the liability portion ($214.7 million as at December 31, 2003) ofthe Convertible Series Preferred Shares as debt. The Series 1 ConvertiblePreferred Shares are retractable by Magna on or after December 31, 2003and the Series 2 Convertible Preferred Shares are retractable by Magna afterDecember 31, 2004. These instruments are also convertible into IntierClass A Subordinate Voting Shares at a fixed conversion price of $15.09.

 

**UNUSED AND AVAILABLE FINANCINGRESOURCES**

 

Cash on hand decreased to $216.7 million atDecember 31, 2003 from $241.3 million at December 31, 2002. AtDecember 31, 2003, the Company had credit facilities of $507.0 million, ofwhich $423.0 million are unused and available. $353.3 million of the unused andavailable facilities represent the unused and available portion of theCompany’s $385 million three year revolving credit facility which expiresSeptember 27, 2004. The credit facility includes customary commercialterms and bears interest at variable rates not exceeding the prime rate ofinterest. The credit facility contains negative and affirmative financial andoperating convenants and events of default customary for credit facilities ofthis nature, including requirements that the Company maintain certain financialratios and restrictions on its ability to incur or guarantee additionalindebtedness or to dispose of assets as well as the right of the lenders todeclare all outstanding indebtedness to be immediately due and payable upon theoccurrence of an event of default. The primary purpose of the facility is toprovide funding for general corporate purposes, including working capital andinvestments. The Company has plans to replace the three year revolving creditfacility with a similar facility during 2004.

 

In addition to the above unused and availablefinancing resources, the Company and certain of its North American subsidiariessponsor a tooling finance program for tooling suppliers to finance toolingunder construction. Under this program, the facility provider orders toolingfrom tooling suppliers and subsequently sells such tooling to the sponsor orits designee. The facility provider makes advances to tooling suppliers basedon tool build milestones approved by the sponsor or its designee. On completionof the tooling, the facility provider sells the tooling to the sponsor or itsdesignee for an amount equal to cumulative advances including carrying costs.In the event of tooling supplier default, the sponsor will purchase in progresstooling for an

 

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amount approximating cumulative advances. A number ofMagna affiliated companies are also sponsors under this facility. The maximumfacility amount is $100 million and is available to individual sponsors on anuncommitted demand basis subject to individual sponsor sub-limits. TheCompany’s sub-limit is $100 million, subject to prior utilization of thisfacility by other Magna affiliated sponsors. As at December 31, 2003,$44.1 million compared to $29.3 million as at December 31, 2002, had beenadvanced to tooling suppliers under the Company’s portion of this facility.These amounts are included in accounts payable on the Company’sDecember 31, 2003 and 2002 consolidated balance sheets.

 

The Company typically receives a contract orproduction purchase order from an automobile manufacturer to produce acomponent, assembly, module or system for one or more vehicle model years. Aspart of these contracts, the Company may be required to absorb costs relatingto product design and engineering and tooling costs and recover these costs byincreasing the unit price of the related products. If estimated productionvolumes are not achieved, the Company may not fully recover these costs. In2004, it is expected the Company will continue to incur increasing amounts ofdesign and engineering and tooling costs, primarily related to newly awardedproduction contracts with production starting 2004 through to 2006.

 

Capital spending for existing businesses and projectsis expected to range between $130 million and $150 million for 2004. Themajority of capital spending in 2004 relates to the award of new productioncontracts and includes spending for new machinery and equipment, new productionfacilities, maintenance improvements and planned efficiency enhancements.Management believes the Company is in a position to meet all of its 2004planned cash requirements from its cash balances on hand, existing credit facilitiesand cash provided from operations. A decrease in estimated vehicle productionvolumes or a change in customer or supplier payment terms could adverselyimpact cash provided from operating activities in 2004. Cash provided fromoperating activities totalled $153.3 million and $315.5 million for 2003 and2002, respectively.

 

**OFF BALANCE SHEET FINANCING**

 

The Company’s off balance sheet financingarrangements are limited to operating lease contracts.

 

A number of the Company’s facilities are subject to operatingleases with a related party, MI Developments Inc., (“MID”) and with thirdparties. As at December 31, 2003, operating lease commitments forfacilities are $33.2 million for 2004, including $12.5 million under leasearrangements with MID. For 2008, operating lease commitments for facilities are$27.9 million, including $10.9 million under lease arrangements with MID.

 

The Company also has operating lease commitments forequipment. These leases are generally for shorter duration. As atDecember 31, 2003, operating lease commitments for equipment are $17.1million for 2004. For 2008, operating lease commitments for equipment are $5.6million.

 

Although the Company’s consolidated contractualannual lease commitments decline year by year, existing leases will either berenewed or replaced resulting in lease commitments being sustained at orincreasing from current levels or the Company will incur capital expendituresto acquire equivalent capacity.

 

During the year ended December 31, 2003, theCompany entered into an operating lease agreement for vehicle parts tooling(“tooling”). The lease facility provides for the funding of the tooling costsin tranches prior to December 31, 2003 with a commitment to fund up toapproximately $39 million of tooling with lease payments being paid monthlyover the lease term expiring in August 2008. The lease commenced when alltooling costs were funded which was prior to December 31, 2003.

 

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The following table summarizes certain of theCompany’s contractual obligations as at December 31, 2003:

 
|                                   |   | **Payments  due by period** |   |
|----------------------------------------|--------|-----------------------------|--------|
|                                   |   | **Total**                   |   | **Less than  1 year** |   | **2 - 3  years** |   | **4 - 5  years** |   | **After 5  years** |   |
|                                   |   |                        |   |   |   |   |   |   |   |   |   |
| Bank indebtedness                      |   | $                           | 29.7   |   | $ | 29.7 |   | $ | — |   | $ | — |   | $ | — |   |
| Long-term debt                         |   | 13.8                        |   | 3.2 |   | 5.9 |   | 4.7 |   | — |   |
| Capital leases                         |   | 35.8                        |   | 3.5 |   | 7.0 |   | 7.1 |   | 18.2 |   |
| Operating leases                       |   | 298.8                       |   | 50.3 |   | 86.1 |   | 73.2 |   | 89.2 |   |
| Convertible Series Preferred Shares*** |   | 214.7                       |   | 108.6 |   | 106.1 |   | — |   | — |   |
|                                   |   | $                           | 592.8  |   | $ | 195.3 |   | $ | 205.1 |   | $ | 85.0 |   | $ | 107.4 |   |

 

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**These instruments are convertibleinto the Company’s Class A Subordinate Voting Shares at a fixed conversionprice of $15.09.*

 

**GUARANTEES**

 

The Company has guarantees to third parties thatinclude future rent, utility costs, workers compensation claims underdevelopment, commitments linked to maintaining specific employment, customsduties and obligations linked to performance of specific vehicle programs. Theamount of these guarantees is not individually or in aggregate significant.

 

**QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

The Company operates globally and as such is exposedto diverse regional factors that could have an adverse impact on its financialcondition and liquidity. Such factors include, but are not limited to, fluctuationsin foreign exchange rates, interest rates and general economic conditions.

 

The Company’s North American operations negotiatesales contracts with North American automobile manufacturers for payment inboth U.S. and Canadian dollars. Materials and equipment are purchased invarious currencies depending upon competitive factors, including relativecurrency values. The Company’s North American operations, material, equipmentand labour are paid for in both U.S. and Canadian dollars.

 

The Company’s European operations negotiate salescontracts with European automobile manufacturers for payment principally ineuros and British pounds. The Company’s European operations’ material,equipment and labour are paid for in the same currencies.

 

The Company’s manufacturing facilities sometimes makecommitments to sell product for which the selling price has been determined incurrencies different from the currency required to pay for the necessarylabour, materials and equipment to perform the sale contracts. Thesecommitments represent contractual obligations by the Company to deliver productover the life of the related program, which normally spans a number of years.In order to manage the foreign currency exposure which results from theseactivities, when necessary, the Company employs hedging programs which consistlargely of purchasing foreign exchange forward contracts. Anticipatedproduction volumes, program costs and the timing of product delivery scheduleseach impact the amount and timing of the forward contracts. Despite thesemeasures, significant long-term fluctuations in relative currency values couldaffect the Company’s results of operations.

 

The Company has outstanding foreign exchange forwardcontracts representing commitments to buy and sell foreign currencies primarilyin exchange for Canadian dollars. The table that follows provides informationabout the Company’s significant derivative financial instruments by functionalcurrency and presents that information in U.S. dollar and euro equivalents. Thetable summarizes information on instruments and transactions that are sensitiveto foreign currency exchange rates, including foreign currency forward exchangeagreements. The table presents the notional amounts and weighted averageexchange rates by expected maturity or transaction dates. These notionalamounts generally are used to calculate the contractual payments to beexchanged under the contract.

 

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**FORWARD EXCHANGE AGREEMENTS**

 
|                           |   | **2004** |   | **2005** |   | **2006** |   | **2007** |   | **2008** |   | **Total** |   | **Fair Value** |   |
|--------------------------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|-----------|--------|----------------|--------|
|                           |   |     |   |     |   |     |   |     |   |     |   |      |   |           |   |
| *(U.S.$ millions)*             |   |     |   |     |   |     |   |     |   |     |   |      |   |           |   |
| Buy U.S.$/Pay Cdn.$            |   |     |   |     |   |     |   |     |   |     |   |      |   |           |   |
| Contract amount                |   | 182.2    |   | 113.8    |   | 82.4     |   | 49.0     |   | 15.0     |   | 442.4     |   | 23.7           |   |
| Weighted average exchange rate |   | 1.4587   |   | 1.3831   |   | 1.3827   |   | 1.3618   |   | 1.3699   |   |      |   |           |   |
| Sell U.S.$/Receive Cdn.$       |   |     |   |     |   |     |   |     |   |     |   |      |   |           |   |
| Contract amount                |   | 47.7     |   | 85.6     |   | 16.1     |   | —   |   | —   |   | 149.4     |   | (36.0          | )      |
| Weighted average exchange rate |   | 1.6265   |   | 1.4717   |   | 1.3862   |   | —   |   | —   |   |      |   |           |   |
|                           |   |     |   |     |   |     |   |     |   |     |   |      |   |           |   |
| *(euro millions)*              |   |     |   |     |   |     |   |     |   |     |   |      |   |           |   |
| Buy euro/Pay Cdn.$             |   |     |   |     |   |     |   |     |   |     |   |      |   |           |   |
| Contract amount                |   | 7.7      |   | 2.9      |   | —   |   | —   |   | —   |   | 10.6      |   | 1.6            |   |
| Weighted average exchange rate |   | 1.4333   |   | 1.4435   |   | —   |   | —   |   | —   |   |      |   |           |   |

 

In addition to transactional foreign currencyexposure, the Company’s reported results will be impacted by fluctuations inrelative currency values, particularly those of the Canadian dollar, the euroand the British pound, on translation of local operating results into theCompany’s reporting currency, the U.S. dollar.

 

**CREDIT RISK**

 

Financial assets that are exposed to credit riskconsist primarily of cash and cash equivalents, accounts receivable and forwardexchange contracts. Cash and cash equivalents, which consist of short-terminvestments, including commercial paper, are only invested in governments andcorporations with an investment grade credit rating. Credit risk is furtherreduced by limiting the amount that is invested in any one government orcorporation. In the normal course of business, the Company is exposed to creditrisk from its customers, substantially all of which are in the automotiveindustry. The Company is also exposed to credit risk from the potential defaultby any of its counterparties on the Company’s foreign exchange forward contracts.The Company mitigates this credit risk by dealing with counterparties that aremajor financial institutions which it anticipates will satisfy theirobligations under the contracts.

 

**INTEREST RATE RISK**

 

Where the maturity of monetary assets and liabilitiesare short term, the Company is not exposed to interest rate risk. In the caseof monetary liabilities and operating lease commitments with longer-termmaturities, the Company may enter into swap arrangements to manage this risk.

 

The following table summarizes the Company’s interestrate risk as at December 31, 2003:

 
|                                                             |   | **Floating  rate** |   | **Fixed  rate** |   | **Non-interest  bearing** |   | **Total** |   |
|------------------------------------------------------------------|--------|--------------------|--------|-----------------|--------|---------------------------|--------|-----------|--------|
|                                                             |   |               |   |            |   |                      |   |      |   |
| Financial Assets:                                                |   |               |   |            |   |                      |   |      |   |
| Cash and cash equivalents                                        |   | $                  | 216.7  |            | $      | —                    |   | $         | — |   | $ | 216.7 |   |
| Accounts receivable                                              |   | —             |   | —          |   | 810.7                     |   | 810.7     |   |
| Financial liabilities:                                           |   |               |   |            |   |                      |   |      |   |
| Bank indebtedness                                                |   | (29.7              | )      | —          |   | —                    |   | (29.7     | )      |
| Accounts payable and all other accrued  liabilities and payables |   | —             |   | —          |   | (1,010.0                  | )      | (1,010.0  | )      |
| Long-term debt due within one year                               |   | —             |   | (4.4            | )      | —                    |   | (4.4      | )      |
| Long-term debt                                                   |   | —             |   | (33.0           | )      | —                    |   | (33.0     | )      |
| Convertible Series Preferred Shares                              |   | —             |   | (214.7          | )      | —                    |   | (214.7    | )      |
| Other long-term liabilities                                      |   | (32.6              | )      | —          |   | —                    |   | (32.6     | )      |
|                                                             |   | $                  | 154.4  |            | $      | (252.1                    | )      | $         | (199.3 | ) | $ | (297.0 | ) |
| Average fixed rate of long-term debt                             |   |               |   | 5.0             | %      |                      |   |      |   |

 

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The Company has entered into interest rate swapcontracts to manage interest rate risk on certain of its operating leases.These contracts swap floating interest rate payments to fixed interest ratepayments or vice versa. Outstanding swap contracts have remaining terms equalto maturity of the operating leases that they are matched against.

 

The following table provides a summary of interestrate swap contracts and their aggregated weighted average rates atDecember 31:

 
|                           |   | **2003** |     | **2002**   |   |
|--------------------------------|--------|----------|----------|------------|--------|
|                           |   |     |     |       |   |
| Interest rate swap:            |   |     |     |       |   |
| Notional amount                |   | **$**    | **39.7** | ** ** | $      | — |   |
| Average fixed rate paid        |   | **4.02** | **%**    | —     |   |
| Average floating rate received |   | **2.77** | **%**    | —     |   |
|                                |        |          |          |            |        |  |  |

 

**ELECTRICITY SWAPS**

 

The Company uses electricity swap contracts to managethe cash flow risk for a portion of its forecast electricity purchases inOntario over the period to April 2005. Swaps outstanding atDecember 31, 2003 have an annual notional energy volume of 50,700 megawatthours (“MWh”) under which it pays a weighted average fixed price of $54.53 perMWh and receives a floating average price per MWh based on the hourly Ontarioenergy price. The net settlements under the electricity swap contracts arerecognized in the same period as, and as part of, the hedged transaction. TheCompany does not enter into electricity swap contracts for speculativepurposes.

 

The Company estimates the fair value of theseelectricity contracts as at December 31, 2003 is $0.2 million,representing a financial benefit to the Company. In 2002, the Ontariogovernment passed legislation, which fixes the electricity price for low volumeand designated customers. Although the Company is not directly affected by thelegislation, this has disrupted the forward market for Ontario electricity contractsand significantly reduced liquidity. The Company has estimated fair value basedon available broker quotes but given the current illiquidity of the market, thefair value is subject to significant measurement uncertainty.

 

Transactions with Related Parties

 
| **Years ended December 31**                                |   | **2003** |     | **2002** |   | **2001** |   |
|-----------------------------------------------------------------|--------|----------|----------|----------|--------|----------|--------|
|                                                            |   |     |     |     |   |     |   |
| **Charges by Magna and other related parties**                  |   |     |     |     |   |     |   |
| Interest expense, net                                           |   | **$**    | **1.5**  |     | $      | 2.1      |   | $ | 17.7 |   |
| Amortization of discount on Convertible Series Preferred Shares |   | **$**    | **12.4** |     | $      | 11.6     |   | $ | 4.8 |   |
| Financing charge on Convertible Series Preferred Shares         |   | **$**    | **1.1**  |     | $      | 1.9      |   | $ | 0.9 |   |
| Management and administrative services                          |   | **$**    | **3.6**  |     | $      | 1.9      |   | $ | 4.7 |   |
| Affiliation and social fees                                     |   | **$**    | **62.6** |     | $      | 55.3     |   | $ | 48.8 |   |
| Rent                                                            |   | **$**    | **12.5** |     | $      | 10.8     |   | $ | 6.1 |   |
| Depreciation of assets under capital lease                      |   | **$**    | **1.6**  |     | $      | 1.8      |   | $ | 1.7 |   |
| Sales of materials to Magna and other related parties           |   | **$**    | **14.5** |     | $      | 13.9     |   | $ | 13.7 |   |
| Purchases of materials from Magna and other related parties     |   | **$**    | **21.8** |     | $      | 22.8     |   | $ | 28.6 |   |

 

On December 19, 2003, the Company entered into apurchase and sale agreement with Magna, whereby the Company agreed to acquirethe capital assets for a new line of business for $2.1 million. Inconsideration of the Company purchasing the business and incurring costs inconnection with the relocation of the acquired assets and revalidating thebusiness, Magna agreed to pay the Company $7.4 million for these incrementalcosts.

 

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During 2001, the Company entered into new or amendedexisting affiliation agreements with Magna that were effective January 1,2001. The affiliation agreements provide for the payment by the Company toMagna of an affiliation fee. The affiliation agreements:

 

•        provide the Company with the right to identifyitself as part of the Magna group of companies by granting the Company anonexclusive, worldwide licence to use trademarks which identify Magna and itsgoods, services and activities in order to identify the Company and its goods,services and activities as being affiliated with Magna;

 

•        provide the Company with access to Magna’score operating principles and to new policies and programs adopted by Magnafrom time to time;

 

•        provide the Company with access to Magna’ssenior management and make available to the Company details of any newmanagement techniques and incentive programs as well as marketing materials tothe extent they are made available generally to Magna’s other affiliates; and

 

•        grant the Company a sole and exclusiveworldwide licence (except as described in the next sentence) to use the Intiertrade name and certain other trademarks. The Company may not sublicense suchtrade name and trademarks other than to its subsidiaries.

 

Pursuant to the Company’s affiliation agreements withMagna, the affiliation fees payable by the Company to Magna in respect of eachfiscal year will be an aggregate amount equal to:

 

•        1.5% of the first $3 billion of consolidatednet sales for that year;

 

•        1.0% of the next $3 billion of consolidatednet sales for that year; and

 

•        0.75% of consolidated net sales exceeding $6billion.

 

Sales from acquired businesses will not be subject toa fee until January 1 of the year following the date of acquisition, andwill be subject to a fee equal to 50% of the fee with respect to the acquiredbusiness’ sales in the calendar year following the date of the acquisition, andto the full fee in the second calendar year following the date of theacquisition and thereafter.

 

The Company’s Corporate Constitution provides that amaximum of 2% of its pre-tax profits in each fiscal year shall be allocated tothe promotion of social objectives. Of this maximum, the social commitmentagreement the Company entered into with Magna during the year endedDecember 31, 2001, effective January 1, 2001, requires the Company tocontribute 1.5% of its pre-tax profits in each fiscal year to social andcharitable programs coordinated by Magna or other charitable or non-profitorganizations on behalf of Magna and other related parties, including Intier.

 

Magna provides certain management and administrativeservices to the Company, including legal, environmental, immigration,administrative, tax, internal audit, treasury, information systems and employeerelations’ services, in return for a specific amount negotiated between theCompany and Magna.

 

Various land and buildings used in the Company’soperations are leased from MID under operating and capital lease agreements(see Note11 to the consolidated financial statements).

 

Transactions with Magna and other related parties areeffected on normal commercial terms.

 

Contingencies

 

On August 16, 2002, the Company was served witha complaint issued in the United States District Court, District ofMassachusetts by Stoneridge Control Devices, Inc. which was a supplier ofadjunct actuators to the Company. After months of unsuccessful pricingnegotiations, the Company advised Stoneridge that it would not be extending itslong-term agreement which expired on July 31, 2002, and that such adjunctactuators would thereafter be manufactured by the Company. In this actionStoneridge is alleging that the Company:

 

•        breached certain agreements with Stoneridgewhich obliged the Company to purchase all of its adjunct actuator requirementsfrom Stoneridge for the life of certain customer programs;

 

•        made certain misrepresentations to Stoneridgethat it was not developing and producing adjunct actuators itself and that itintended to purchase Stoneridge’s adjunct actuator for the life of theprograms;

 

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•        unlawfully used Stoneridge’s trade secrets andproprietary information; and

 

•        violated Massachusetts General Laws c93A, theMassachusetts unfair business practices legislation.

 

Stoneridge’s Initial Disclosure datedNovember 17, 2003, claims that Stoneridge’s damages are over $25 million.The Company disputes the allegations contained in the complaint and does notbelieve it has any liability for these claims, although the Company cannotprovide any assurance that this will be the case.

 

In the ordinary course of business activities, theCompany may be contingently liable for litigation and claims with customers,suppliers and former employees and for environmental remediation costs.Management believes that adequate provisions have been recorded in the accountswhere required. Although it is not possible to estimate the extent of potentialcosts and losses, if any, management believes, but can provide no assurancethat the ultimate resolution of such contingencies would not have a materialadverse effect on the financial position and results of operations of theCompany. Please refer to Note 22 “Contingencies” in the 2003 auditedconsolidated financial statements included in the Company’s 2003 Annual Report.

 

The Company has a number of arrangements in Canada,the United States, the United Kingdom and Europe which provide pension and postretirement benefits to its retired and current employees. Pension arrangementsinclude statutory pension plans as well as similar arrangements, which providepension benefits as required by statute. The Company has obligations under itsdefined benefit pension plans and other statutory plans. Unfunded unrecognizednet actuarial gains and losses are amortized and charged to earnings over theaverage remaining service period of active employees. All pension plans andsimilar arrangements are funded to the minimum legal funding requirement. Incertain plans, there is no legal requirement to fund the obligation until suchtime as they are actually incurred and as a result these arrangements areunfunded. In the event that any of these plans are terminated or wound up, animmediate payment of unfunded amounts may be required and these amounts couldmaterially exceed the current unfunded position.

 

Accounting Changes

 

In accordance with the Canadian Institute ofChartered Accountants (“CICA”) amended Handbook Section 3870 “Stock-BasedCompensation and Other Stock-Based Payments” (“CICA 3870”), effectiveJanuary 1, 2003, the Company prospectively adopted without restatement ofany comparable period the fair value method for recognizing compensationexpense for fixed price stock options. As a result, for the year endedDecember 31, 2003, the Company recognized compensation expense of $0.6million. For awards granted prior to January 1, 2003, the Companycontinues to use the intrinsic value method.

 

New Accounting Pronouncements

 

**CANADIAN GAAP STANDARDS**

 

In 2003, the CICA issued Emerging Issues CommitteeAbstract No. 142, “Revenue Arrangements with Multiple Deliverables”(“EIC-142”), which provides guidance on accounting by a vendor for arrangementsinvolving multiple deliverables. It specifically addresses how a vendordetermines whether an arrangement involving multiple deliverables contains morethan one unit of accounting and also addresses how consideration should bemeasured and allocated to the separate units of accounting in the arrangement.The guidance in EIC-142 is applicable for revenue arrangements with multipledeliverables entered into by the Company on or after January 1, 2004.Although the Company is currently reviewing EIC-142, the impact of thisAbstract, if any, on the Company’s consolidated financial statements has notbeen determined.

 

In 2003, the CICA issued Handbook Section 3110,“Asset Retirement Obligations”, which establishes standards for therecognition, measurement and disclosure of asset retirement obligations and therelated asset retirement costs. This new Section is effective for theCompany’s 2004 fiscal year and harmonizes Canadian requirements with existingU.S. GAAP. The adoption of this Section on January 1, 2004 isexpected to result in the cumulative effect of an accounting change of $4.1million being recognized as a charge to opening retained earnings, the recognitionof a liability of $10.0 million, the recognition of an other asset of $4.8million and the recognition of a future tax asset of $1.1 million.

 

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In 2003, the CICA issued Accounting Guideline AcG-15,“Consolidation of Variable Interest Entities” to provide guidance for applyingthe principles in Handbook Section 1590, “Subsidiaries”, to certainentities. Although the CICA is contemplating amendments to the Guideline, it isexpected to be effective for the Company’s 2005 fiscal year. Although theCompany is currently reviewing AcG-15, the impact of the Guideline, if any, onthe Company’s consolidated financial statements has not been determined.

 

In 2003, the CICA finalized amendments to AccountingGuideline AcG-13, “Hedging Relationships”, that clarified certain of therequirements in AcG-13 and provided additional application guidance. AcG-13 isapplicable for the Company’s 2004 fiscal year. The Company does not expect theadoption of this Guideline to have a material impact on its consolidatedfinancial statements.

 

**U.S. GAAP STANDARDS**

 

In 2003, the Financial Accounting Standards Board(“FASB”) finalized Emerging Issues Task Force Abstract No. 00-21 (“EITF00-21”), “Revenue Arrangements with Multiple Deliverables”. The guidance inthis Abstract is consistent with the guidance in EIC-142, which was recentlyissued by CICA. The guidance in EITF 00-21 is applicable for revenuearrangements with multiple deliverables that the Company enters into on orafter January 1, 2004.

 

In 2003, the FASB amended Interpretation No. 46,“Consolidation of Variable Interest Entities” (“FIN 46R”). FIN 46R requiresthat a variable interest entity (“VIE”) be consolidated by a company if thatcompany is subject to a majority of the risk of loss from the VIE’s activitiesand/or is entitled to receive a majority of the VIE’s residual returns. For theCompany, the requirements of FIN 46R apply in 2003 for all VIEs created afterJanuary 31, 2003. For VIEs created before January 31, 2003, the requirementsof FIN 46 apply as of December 31, 2004 for a VIE that does not meet thedefinition of a special-purpose entity (“SPE”) and as of January 1, 2004for a VIE that is an SPE.

 

Although the Company is currently reviewing EITF00-21 and FIN 46R, the impact, if any, of these pronouncements on the Company’sconsolidated financial statements has not been determined.

 

Subsequent Events

 

Subsequent to December 31, 2003, the Companysold one of its manufacturing facilities reported in the European Interior Systemssegment. The impact to the Company will be a charge to operating income and netincome of approximately $4 million and $6 million, respectively.

 

Maximum Number of Shares

 

The following table presents the maximum number ofClass A Subordinate Voting and Class B Shares that would be outstanding if allof the outstanding options and Convertible Series Preferred Shares issued andoutstanding as at January 31, 2004 were exercised or converted:

 
|                                                                  |   | **Number of  Shares** |   |
|-----------------------------------------------------------------------|--------|-----------------------|--------|
|                                                                  |   |                  |   |
| Class A Subordinate Voting Shares  outstanding                        |   | 6,444,961             |   |
| Class B Shares outstanding                                            |   | 42,751,938            |   |
| Options to purchase Class A Subordinate  Voting Shares                |   | 3,545,600             |   |
| Convertible Series Preferred Shares,  convertible at $15.09 per share |   | 14,648,775            |   |
|                                                                  |   | 67,391,274            |   |

 

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Additional Information

 

Additional information relating to the Company,including the Company’s Annual Information Form is available on SEDAR atwww.sedar.com.

 

Forward-Looking Statements

 

The previous discussion contains statementswhich, to the extent that they are not recitations of historical facts,constitute “forward-looking statements” within the meaning of Section 21E ofthe Securities Exchange Act of 1934. The words “estimate”, “anticipate”,“believe”, “expect”, and similar expressions are intended to identifyforward-looking statements. Such forward-looking information involves importantrisks and uncertainties that could materially alter results in the future fromthose expressed in any forward-looking statements made by, or on behalf of theCompany. These risks and uncertainties include, but are not limited to industrycyclicality, trade costs, dependence on certain vehicles and major OEMcustomers, program launch delays, foreign exchange rate and currency exposure,failure in implementing Company strategy, technological developments by theCompany’s competitors, government and regulatory policies and changes in thecompetitive environment in which the Company operates. Persons reading thisreport are cautioned that such statements are only predictions and that actualevents or results may differ materially. In evaluating such forward-lookingstatements readers should specifically consider the various factors which couldcause actual events or results to differ materially from those indicated bysuch forward-looking statements. The Company expressly disclaims any intentionand undertakes no obligation to update or revise any forward-looking statementscontained in this report to reflect subsequent information, events orcircumstances or otherwise.

 

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