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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended July 31, 2002

OR

For the transition period from                              to                             

Commission file number 0-14450

AEP Industries Inc.
(Exact name of registrant as specified in its charter)

(201) 641-6600
(Registrant's telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Item 1. Financial Statements

AEP INDUSTRIES INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

The accompanying notes to consolidated financial statements are an integral part of these statements.

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AEP INDUSTRIES INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
AND OTHER COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)
(in thousands, except per share data)

The accompanying notes to consolidated financial statements are an integral part of these statements.

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AEP INDUSTRIES INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)
(in thousands)

The accompanying notes to consolidated financial statements are an integral part of these statements.

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AEP INDUSTRIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1)    Summary of Significant Accounting Policies

        The consolidated financial information included herein has been prepared by the Company without audit, for filing with the Securities and Exchange Commission pursuant to the rules and regulations of the Commission.

        The consolidated financial statements include the accounts of AEP Industries Inc. and its majority-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. In management's opinion, all adjustments (consisting only of normal recurring accruals) necessary for the fair presentation of the consolidated financial position as of July 31, 2002, and the results of operations for the three and nine months ended July 31, 2002 and 2001, have been made. The consolidated statements of income for the three and nine months ended July 31, 2002, are not necessarily indicative of the results to be expected for the full year.

        Certain prior period amounts have been reclassified to conform to the current period's presentation.

        Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report to Shareholders for the fiscal year ended October 31, 2001.

(2)    Earnings Per Share (EPS)

        Basic EPS is calculated by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. The number of shares used in such computation for the three months ended July 31, 2002 and 2001, are 7,869,750 and 7,777,524, respectively. The number of shares used in such computation for the nine months ended July 31, 2002 and 2001, were 7,839,731 and 7,690,931, respectively. Diluted EPS is calculated by dividing net income (loss) by the weighted average number of common shares outstanding, adjusted to reflect potentially dilutive securities (options). The number of shares used in such computation for the three months ended July 31, 2002 and 2001, are 7,869,750 and 7,777,524 respectively. The number of shares used in such computation for the nine months ended July 31, 2002 and 2001, are 7,883,855, and 7,690,931, respectively. The computation of diluted EPS includes 44,124 incremental shares for options outstanding for the nine months ended July 31, 2002. As a result of the loss incurred for the three months ended July 31, 2002 and 2001, and the nine months ended July 31, 2001, no equivalent shares attributable to options were considered in computing diluted EPS, as such options would be anti-dilutive.

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(3)    Inventories

        Inventories are stated at the lower of cost (last-in, first-out method for domestic operations and first-in, first-out method for foreign operations and for supplies) or market, include material, labor and manufacturing overhead costs and are comprised of the following:

        The last-in, first-out (LIFO) method was used for determining the cost of approximately 47% and 56% of total inventories at July 31, 2002 and October 31, 2001, respectively. Inventories would have been increased by $1.0 million and decreased by $2.1 million at July 31, 2002 and October 31, 2001, respectively, if the FIFO method had been used exclusively. Because of the Company's continuous manufacturing process, there is no significant work in process at any point in time.

(4)    Other Income (Expense)

        For the three and nine months ended July 31, 2002 and 2001, other income (expense) consists of the following:

(5)    Segment Information

        The Company's operations are conducted within one business segment, the production, manufacture and distribution of plastic packaging products, primarily for the food/beverage, industrial and agricultural markets. The Company operates in three geographical regions, North America, Europe and Asia/Pacific.

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        Information about the Company's operations by geographical area for the three and nine months ended July 31, 2002 and 2001, respectively, is as follows:

(6)    Restructuring Charge

        In July 2000, the Board of Directors of the Company approved a restructuring plan designed to improve the operating efficiencies of its European operations and enhance its competitiveness in that market. The plan involves the closure of the North Baddesley, England manufacturing facility, cleanup and demolition of the manufacturing site and severance and other benefits for 33 employees. The restructuring charges of approximately $1.8 million and $1.9 million were recorded as cost of sales in the consolidated statements of operations for the years ended October 31, 2001 and 2000, respectively. These charges relate to severance costs ($1.5 million reserved in fiscal 2000 with all amounts having been paid as of July 31, 2002), actual cash expenditures made related to environmental costs, legal costs and the non-cash write-off of certain assets. The Company recorded zero and $51,000 in restructuring charges during the three months and nine months ended July 31, 2002, respectively, and expects to incur approximately $150,000 in additional charges, before recording any gains related to sale of property related to this restructuring plan and will record these charges in the appropriate periods in accordance with the requirements of Emerging Issues Task Force Pronouncement 94-3 and Staff Accounting Bulletin (SAB) No. 100. The Company expects the restructuring plan and all related costs including the sale of its property to be substantially completed by the end of 2002.

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(7)    Derivative Instruments

        In November 2000, the Company adopted Statement of Financial Accounting standard (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"). FAS 133 requires that all derivative financial instruments such as interest rate swap contracts and foreign exchange contracts, be recognized in the financial statements and measured at fair value regardless of the purpose or intent for holding them. At July 31, 2002, the net fair value of derivative financial instruments designated as cash flow hedges by the Company was $1.4 million, which is included in accrued expenses and in shareholders' equity as a component of accumulated other comprehensive income.

(8)    Acquisition of Businesses

        On November 2, 2001, the Company acquired for approximately $8.8 million US dollars (after working capital adjustments), all the shares of the New Zealand and Australian flexible packaging businesses of Visypak Operations PTY Limited ("Visypak") in order to expand market share in the Asia/Pacific region. The accompanying consolidated statements of operations include the results of these transactions beginning November 2, 2001. Immediately following the transaction, the Company combined its Liquipac (bag-in-a-box) business with the liquibag systems business, which were part of the businesses it had acquired from Visypak, and sold 49.9 percent of the resulting venture to DS Smith (UK) Limited, a wholly-owned subsidiary of DS Smith, Plc., for approximately $8.9 million, resulting in a net gain of $6.8 million. The venture will be operated in coordination with DS Smith's worldwide "Rapak" enterprise. The Company does not have an effective controlling voting interest in this venture and as a result will be accounting for its investment under the equity method of accounting.

        A summary of the transactions is outlined below:

        The acquisition was accounted for using the purchase method of accounting in accordance with SFAS No. 141 "Business Combinations" and, accordingly, the purchase price was allocated to the assets acquired and the liabilities assumed based upon the estimated fair values at the date of the acquisition. The above acquisition resulted in negative goodwill of $3.1 million which was allocated as a reduction of acquired property, plant and equipment. The purchase price allocation is preliminary and further refinements are likely to be made based upon completion of final valuation studies and restructuring programs. Such refinements may increase or decrease property plant and equipment and the gain on the Rapak transaction above. At July 31, 2002, there was approximately $2.6 million remaining in accrued expenses related to severance ($1.5 million reserved at time of acquisition and $.5 million paid to date) and costs to close down acquired plants ($3.0 million reserved and $1.4 million paid to date).

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        The following unaudited pro forma information presents a summary of consolidated results of operations of the Company as if the acquisition, sale of Liquipac (excluding the one-time gain upon sale), and the formation of Rapak occurred at the beginning of fiscal 2001:

        Pro Forma information:

(9)    Goodwill and Other Intangible Assets

        In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations" and No. 142, "Goodwill and Other Intangibles". SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Under the provisions of SFAS No. 142, goodwill and intangible assets with indefinite lives are not amortized, but tested annually for impairment or whenever there is an impairment indicator. In addition, upon adoption of SFAS No. 142, all goodwill must be assigned to reporting units for purposes of impairment testing and is no longer subject to amortization.

        The Company elected to adopt the provisions of SFAS No. 142 on November 1, 2001. As required by SFAS No. 142, the Company performed an assessment of whether there was an indication that goodwill was impaired at the date of adoption. In connection therewith, the Company determined that its operations represented one reporting unit and determined the reporting unit's fair value and compared it to the reporting unit's book value. As of November 1, 2001, the Company's reporting unit's fair value exceeded its carrying amounts. Accordingly, the Company was not required to perform any further transitional impairment tests. The Company plans to perform its impairment test each September 30 in the future.

        The Company had unamortized goodwill in the amount of $34.8 million at July 31, 2002 and October 31, 2001, subject to the provisions of SFAS Nos. 141 and 142. Substantially all of the unamortized goodwill is a result of the Company's acquisition of certain assets of the Global Packaging Business ("BGP") of Borden, Inc. in October 1996.

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        The following table sets forth the reconciliation of basic and diluted earnings per common share computations for the three and nine months ended July 31, 2001 as if SFAS No. 142 was adopted as of November 1, 2000:

        As a result of the loss incurred for the three and nine months ended July 31, 2001, no equivalent shares attributable to options were considered in computing diluted EPS, as such options would be anti-dilutive.

(10)    Commitment and Contingencies

        The Company is involved in routine litigation in the normal course of its business. Such proceedings are not expected to have a material adverse impact on the Company's results of operations, financial position or liquidity.

        The Company's Holland subsidiary has been served by the European Commission with a notice to produce various documents and other evidence relating to its investigation of a possible violation of European Competition Law by the subsidiary. The Company is cooperating with the European Commission in its investigation. At this time, no litigation is pending against the Company involving this matter and the Company is not in a position to evaluate the outcome of this investigation. However, there can be no assurance that, in the event the European Commission serves a Statement of Objections instituting a proceeding against the Company's Holland subsidiary which results in a fine being assessed, that the amount of the fine would not be material.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Three Months Ended July 31, 2002, as Compared to Three Months Ended July 31, 2001

Net Sales and Gross Profit

        Net sales for the three months ended July 31, 2002, increased by $16.1 million, or 10.2% to $173.7 million from $157.6 million for the three months ended July 31, 2001. Net sales in North America increased to $106.1 million during the 2002 period from $102.7 million during the 2001 period, primarily due to an 18.4% increase in sales volume. These volume increases were partially offset by lower per unit average selling prices, when compared to the same period in the prior fiscal year. Net sales in Europe increased 8.9% to $42.6 million for the third quarter of fiscal 2002 from $39.2 million for the same period in fiscal 2001, primarily due to a 6.2% increase in average selling prices attributable to higher raw material costs, primarily resin, which were partially passed through to our customers because of the competitive market place and an increase of 2.5% in volume sold. Net sales in Asia/Pacific increased 59.0% to $24.9 million during the 2002 period from $15.7 million for the 2001 period, primarily due to the acquisition of the Visypak film and laminating businesses located in New Zealand and Australia, which increased sales volume by 39.7% and average selling prices by 13.8%.

        Gross profit for the three months ended July 31, 2002, was $30.2 million compared to $26.9 million for the three months ended July 31, 2001. Gross profit in North America increased .6% to $22.0 million for the three months ended July 31, 2002, as a result of the 18.4% increase in volume which lowered fixed overhead costs per unit due to higher plant utilization rates for the period which were partially offset by higher raw material costs, primarily resin, which were not fully passed through to our customers. Gross profit in Europe increased 38.7% to $5.9 million for the three months ended July 31, 2002 from $4.2 million for the three months ended July 31,2001. This increase can be attributed to the combined increase in sales volume of 2.5% and per unit selling prices of 6.2%. During the same period in fiscal 2001, the European region incurred additional costs of $1.2 million relating to its shutdown of the UK manufacturing facility and set up costs on the transfer of the UK manufacturing equipment to Spain. Asia/Pacific gross profit for the three months ended July 31, 2002, increased to $2.3 million from $825,000 when compared to the like period in the prior fiscal year. This increase was a result of the acquisition of the Visypak film and laminates businesses which increased sales volume of higher gross margin products in the region. This also served to partially offset lower average per unit selling prices of other products that are highly competitive and were effected by the general economic pressures in the region. Gross profit for the three months ended July 31, 2001 included $276,000 of restructuring charges recorded for the shut down of the Melbourne, Australia facility.

Operating Expenses

        Operating expenses for the three months ended July 31, 2002, were $26.9 million or $2.4 million higher than the $24.5 million for the same period in the prior fiscal year. Delivery expenses increased by $1.5 million in the current period to $9.6 million, primarily due to an overall 16.3% increase in volume sold, partially offset by decreases in world wide fuel costs. Selling and general and administrative expenses increased by $800,000 to $17.3 million from $16.5 million in the same period in the prior fiscal year. This increase can be primarily attributed to commissions paid on the increased sales volume on units sold during the period offset in part by $313,000 of goodwill amortization in fiscal 2001, which goodwill amortization is no longer applicable in 2002 due to the adoption of FASB Statement No. 142.

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Interest Expense

        Interest expense for the three months ended July 31, 2002, was $6.2 million compared to $6.6 million for the three months ended July 31, 2001. This decrease in interest expense resulted from lower average interest rates paid during the current period.

Other Income (Expense)

        Net other expense for the three months ended July 31, 2002, amounted to $935,000 versus net income of $3.3 million for the comparable prior year period. This amount included foreign currency exchange losses realized during the period, gains on sales of building and equipment, which included a $2.5 million gain on the sale of its former New Jersey operating facility in the prior year, and other miscellaneous income and expenses.

Nine Months Ended July 31, 2002, as Compared to Nine Months Ended July 31, 2001

Net Sales and Gross Profit

        Net sales for the nine months ended July 31, 2002, increased by $4.6 million, or 1.0%, to $483.2 million from $478.6 million for the nine months ended July 31, 2001. Net sales in North America decreased to $295.7 million during the 2002 period from $309.3 million during the 2001 period, primarily due to a 12.4% decrease in per unit selling prices from fiscal 2001, which resulted from lower raw material costs, primarily resin, which were partially passed through to our customers, offset by a 9.2% increase in sales volume. Net sales in Europe decreased $4.7 million or 3.9% to $115.4 million for the nine months ended July 31, 2002 from $120.1 million for the same period in fiscal 2001. This decrease was primarily due to a 4.1% decrease in average selling prices attributable to lower raw material costs, primarily resin, which were partially passed through to our customers as a result of competitive market place in the region. Net sales in Asia/Pacific increased 46.7% to $72.1 million during the 2002 period from $49.1 million for the 2001 period, primarily due to the acquisition of the Visypak film and laminating businesses located in New Zealand and Australia, which increased sales volume by 35.7% and average selling prices by 8.1%.

        Gross profit for the nine months ended July 31, 2002, was $97.1 million compared to $88.6 million for the nine months ended July 31, 2001. Gross profit in North America increased $5.7 million or 8.5% to $72.4 million for the nine months ended July 31, 2002, as a result of lower raw material costs and lower fixed overhead costs per unit as a result of higher plant utilization rates for the period. Gross profit in Europe increased 2.9% to $18.0 million for the nine months ended July 31, 2002, primarily due to the continuing general economic pressures of the region and the competitive marketplace, which resulted in lower average selling prices. During the same period in fiscal 2001, the European region incurred additional costs of $1.7 million relating to its shutdown of the UK manufacturing facility and set up costs on the transfer of the UK manufacturing equipment to Spain. Asia/Pacific gross profit for the nine months ended July 31, 2002, increased by 55.4% to $6.7 million, as a result of the acquisition of the Visypak film and laminates businesses, which increased sales volume of higher gross margin products in the region, which offset lower average per unit selling prices of other products. The general economic pressures and highly competitive marketplace in the region negatively effected the Asia/Pacific margins. Gross profit for the nine months ended July 31, 2001 included $1.1 million of restructuring charges recorded for the shut down of the Melbourne, Australia facility.

Operating Expenses

        Operating expenses for the nine months ended July 31, 2002, were $75.6 million, an increase of $2.8 or 4.0% from $72.8 million for the same period in the prior fiscal year. Delivery expenses increased to $26.2 million in the current period from $24.8 million in the prior fiscal year, primarily due to the 9.1% increase in world-wide sales volume. Selling and general and administrative expenses

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increased by $1.5 million to $49.5 million from $48.0 million in the same period in the prior fiscal year. This increase can be primarily attributed to commissions paid on the increased sales volume sold during the period offset by $1.1 million of goodwill amortization in fiscal 2001, which goodwill amortization is no longer applicable in 2002 due to the adoption of FASB Statement No. 142.

Interest Expense

        Interest expense for the nine months ended July 31, 2002, was $18.9 million compared to $21.8 million for the nine months ended July 31, 2001. This decrease in interest expense resulted from lower average debt outstanding for the period and lower average interest rates paid during the current period.

Gain on Sale of Interest in Subsidiary

        On November 2, 2001, the Company acquired all of the shares of the New Zealand and Australian flexible packaging businesses of Visypak Operations PTY Limited ("Visypak") for approximately $8.8 million US dollars. Immediately following the acquisition, the Company combined its Liquipac (bag-in-a-box) business with the liquibag systems business it had acquired from Visypak and sold 49.9% of the new company to DS Smith (UK) Limited, a wholly-owned subsidiary of DS Smith, Plc., for $8.9 million, resulting in a gain of $6.8 million.

Other Income (Expense)

        Net other income (expense) for the nine months ended July 31, 2002, amounted to a $1.6 million loss versus net income of $4.6 million for the comparable prior year period. This amount included foreign currency exchange losses of $1.3 million realized during the current period versus gains of $663,000 in the prior year. The Company also had gains on sales of building and equipment of $109,000 versus $3.9 million in the prior year, which included a $2.5 million gain on the sale of its former New Jersey operating facility, and other miscellaneous income and expenses.

Liquidity and Capital Resources

        We have historically financed our operations through cash flow generated from operations and borrowings by us and our subsidiaries under various credit facilities. Our principal uses of cash have been to fund working capital, including operating expenses, debt service and capital expenditures.

        Our working capital amounted to $39.1 million at July 31, 2002, compared to $39.0 million at October 31, 2001. This nominal increase in working capital is primarily the result of our acquisition of Visypak in Asia/Pacific, which increased net working capital, and our increased investment in our worldwide inventories of $15.3 million. These increases were offset by increased short term borrowings of our foreign subsidiaries due to the weakening of the United States dollar during the nine months ended July 31, 2002, and the marking of our derivatives to market in accordance with FASB 133, which resulted in an unrealized loss of $2.4 million on our derivative financial instruments held by us during the nine months ended July 31, 2002. The remaining increases and decreases in components of our financial position reflect normal operating activity.

        On November 20, 2001, we entered into a Loan and Security Agreement with Congress Financial Corporation, as agent, and the financial institutions named in the agreement, as Lenders. Under this new credit facility the Lenders provided a maximum credit facility of $85 million, including a letter of credit facility of up to $20 million. Amounts available for borrowing are based upon the sum of eligible domestic values of buildings and equipment at the closing date and eligible accounts receivable and inventories on a monthly basis. The new credit facility is secured by mortgages and liens on our domestic assets and on 66% of our equity interest in certain foreign subsidiaries. The agreement contains customary covenants, including limitations on the incurrence of debt, the disposition of assets,

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the making of restricted payments, and minimum EBITDA requirements if the loan's excess availability is less than $20.0 million. At the closing, we borrowed the sum of $52.1 million, of which $51.8 million was used to pay off and terminate the existing term loan and revolving credit facility. Rates under the new facility are comparable to those under the prior facility. As of July 31, 2002, there was $35.0 million outstanding under this credit facility with additional availability of $38.4 million. This credit facility expires in November 2006 and is expected to be refinanced at that time.

        We maintain various unsecured short-term credit facilities at our foreign subsidiaries. At July 31, 2002, the aggregate amount outstanding under such facilities was $18.0 million, and $15.0 million was available for borrowing. Borrowings with these facilities are used to support operations at such subsidiaries and are generally serviced by local cash flow from operations.

        Our cash and cash equivalents were $1.7 million at July 31, 2002, as compared to $3.2 million at October 31, 2001. Net cash provided in operating activities during the nine months ended July 31, 2002, was $7.5 million, primarily due to $5.3 million of net income, depreciation and amortization of $22.0 million and decreases in other assets of $800,000 offset by increases in accounts receivable and inventories (net of provision for losses) of $15.6 million, the net gain of $6.8 million on the sale of a business, increases in other current assets of $1.7 million and reductions in accounts payable, accrued expenses and long-term liabilities of $3.6 million. In each period, the net decreases in other operating assets and liabilities reflect normal operating activity.

        Net cash used in investing activities during the nine months ended July 31, 2002, was $13.1 million, resulting primarily from the acquisition of the Visypak business for $8.8 million and net investment in capital expenditures of $13.5 million offset by the sales of a business, which resulted in net proceeds of $8.9 million and sales of equipment for approximately $242,000.

        Net cash provided by financing activities during the six months ended July 31, 2002, was $9.9 million, reflecting net borrowings of $9.4 million under available credit facilities and proceeds from stock issuances of $526,000.

        The remaining increases and decreases in the components of our financial position reflect normal operating activity.

        The Company's aggregate commitments under its Loan and Security Agreement, Senior Subordinated Debentures, foreign borrowings and noncancelable operating lease agreements as of July 31, 2002 are as follows:

(1)

The Company expects to refinance this debt during fiscal year 2007.

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        The Company knows of no current or pending demands or commitments that will materially affect its liquidity.

        We believe that our cash flow from operations, combined with the availability of funds under the Company's new credit facility and credit lines available to our foreign subsidiaries for local currency borrowings will be sufficient to meet our working capital, capital expenditure and debt service requirements for the foreseeable future.

Effects of Inflation

        Inflation is not expected to have a significant impact on our business.

Contingencies

        The Company's Holland subsidiary has been served by the European Commission with a notice to produce various documents and other evidence relating to its investigation of a possible violation of European Competition Law by the subsidiary. The Company is cooperating with the European Commission in its investigation. At this time, no litigation is pending against the Company involving this matter and the Company is not in a position to evaluate the outcome of this investigation. However, there can be no assurance that, in the event the European Commission serves a Statement of Objections instituting a proceeding against the Company's Holland subsidiary which results in a fine being assessed, that the amount of the fine would not be material.

Market Risk

        The Company is exposed to market risk from changes in interest rates and foreign currency exchange rates, which may adversely affect its results of operations and financial condition. The Company seeks to minimize these risks through operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. The Company does not purchase, hold or sell derivative financial instruments for trading purposes.

Interest Rates

        The Company may use interest rate swaps, collars and options to manage its exposure to fluctuations in interest rates. At July 31, 2002, the Company was not a party to any interest rate swaps, collars or options.

        The fair value of the Company's fixed interest rate debt varies with changes in interest rates. Generally, the fair value of fixed rate debt will increase as interest rates fall and decrease as interest rates rise. At July 31, 2002, the carrying value of the Company's total debt was $255.9 million of which approximately $202.8 million was fixed rate debt. At October 31, 2001, the carrying value of the Company's total debt was $244.8 million of which $203.9 million was fixed rate debt.

        As of July 31, 2002, the estimated fair value of the Company's total debt, which includes the cost of replacing the Company's fixed rate debt with borrowings at current market rates, was approximately $200.0 million compared to $194.7 million at October 31, 2001. The increase in the fair value estimate was primarily due to current market changes in the trading prices of the Company's 9.875% Senior Subordinated Debentures due on November 15, 2007.

Foreign Exchange

        The Company enters into foreign exchange forward contracts (principally against the Euro, Canadian dollar, Australian dollar and New Zealand dollar) primarily to hedge forecasted intercompany transactions and trade sales and purchases. Foreign currency forward contracts reduce the Company's exposure to the risk that the eventual cash inflows and outflows, resulting from these

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intercompany and third party trade transactions denominated in a currency other than the functional currency, will be adversely affected by changes in exchange rates.

        As of July 31, 2002, the Company had foreign exchange forward contracts outstanding with a notional contract amount of $110.6 million, all of which have a maturity of less than one year. At July 31, 2002, the net fair value of derivative financial instruments designated as cash flow hedges by the Company were $1.4 million, which are included in accrued expenses and in shareholders' equity as a component of accumulated other comprehensive income. At October 31, 2001, the net fair value of derivative financial instruments designated as cash flow hedges by the Company was $956,000, which was included in other current assets and in shareholders' equity as a component of accumulated other comprehensive.

        The Company's foreign subsidiaries had third party outstanding debt of approximately $18.0 million and $1.5 million on July 31, 2002 and October 31, 2001, respectively. Such debt is generally denominated in the functional currency of the borrowing subsidiary. The Company believes that this enables it to better match operating cash flows with debt service requirements and to better match foreign currency-denominated assets and liabilities, thereby reducing its need to enter into foreign exchange contracts.

Commodities

        The Company uses various commodity raw materials and energy products in conjunction with its manufacturing process. Generally, the Company acquires such components at market prices and does not use financial instruments to hedge commodity prices. As a result, the Company is exposed to market risks related to changes in commodity prices in connection with these components.

Recently Issued Statements of Financial Accounting Standards

        In June 2001, The FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations ("SFAS No. 143"). SFAS No. 143 requires the Company to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from acquisitions, construction, development and/or normal use of assets. The Company also records a corresponding asset, which is depreciated over the life of the asset. Subsequent to the initial measurement of the asset retirement obligation, the obligation will be adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. The Company is required to adopt SFAS No. 143 on November 1, 2002. The Company does not expect that the adoption of SFAS No. 143 will have a material effect on the Company's financial position or results of operations.

        In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This Statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. SFAS No. 144 requires companies to separately report discontinued operations and extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in a distribution to owners) or is classified as held for sale. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. The Company will adopt SFAS No. 144 on November 1, 2002. The Company does not expect the adoption of the Statement to have a material impact on its results of operations.

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        In April 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS No. 145") was issued. SFAS No. 145 rescinds SFAS No. 4 and No. 64, which required gains, and losses from extinguishment of debt to be classified as extraordinary items. SFAS also rescinds SFAS No. 44 since the provisions of the Motor Carrier Act of 1980 are complete. SFAS No.145 also amends SFAS No. 13 eliminating inconsistencies in certain sale-leaseback transactions. The provisions of SFAS No. 145 are effective for the Company beginning after November 1, 2002. Any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods presented shall be reclassified. The Company does not expect that the adoption of SFAS No. 145 will have a material effect on the Company's financial position or results of operations.

        In July 2002, the FASB issued FASB No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" which nullifies EITF Issue No. 94-3. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, whereas EITF No. 94-3 had recognized the liability at the commitment date to an exit plan. The Company is required to adopt the provisions of SFAS No. 146 effective for exit or disposal activities initiated after December 31, 2002. The Company does not expect that the adoption of SFAS No. 146 will have a material effect on the Company's financial position or results of operations although it will effect the timing of the recognition of the changes to operations for future restructuring programs, if any.

Critical Accounting Policies

        Management's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to customer incentives, product returns, doubtful accounts, inventories, investments, intangible assets, income taxes, financing operations, retirement benefits, and contingencies and litigation. Management bases its estimates and judgements on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgements about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies affect its more significant judgements and estimates used in preparation of its consolidated financial statements.

•

Revenue recognition, including customer rebates, promotions and other incentive programs



•

Estimating valuation allowances and accrued liabilities, specifically the allowance for doubtful accounts, reserves for obsolete or potentially obsolete inventories and litigation accruals



•

Accounting for income taxes



•

Purchase accounting

        The Company recognizes sales and cost of sales at the time the product is shipped to the customer and records estimated reductions to revenue for customer rebates, promotions or other incentive programs. If market conditions were to decline, the Company may take actions to increase customer incentive programs, thus resulting in a reduction of gross sales and profit at the time the incentive is offered.

        Management estimates allowance for doubtful accounts by analyzing accounts receivable balances by age, applying historical trend rates to the most recent 60 months' sales, less account write-offs to

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date. When it is deem probable that a customer account is uncollectable, that balance is added to the calculated reserve. Actual results could differ from these estimates under different assumptions.

        Management's current estimated ranges of liabilities related to pending litigation are based on management's best estimate of future costs. Final resolution of the litigation contingencies could result in amounts different from current accruals and, therefore, have an impact on the Company's consolidated financial results in a future reporting period. The Company is involved in routine litigation in the normal course of its business and these proceedings are not expected to have a material adverse impact on the Company's results of operations or financial position.

        Management accounts for income taxes in accordance SFAS No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). Under SFAS No. 109, an asset and liability approach is required. Such approach results in the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the book carrying amounts and the tax basis of assets and liabilities. As part of the process of preparing the Company's consolidated financial statements, management is require to estimate income taxes in each of the jurisdictions in which the Company operates. This process involves estimating actual current tax expense together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes.

        These differences result in deferred tax assets and liabilities, which are included in the Company's consolidated balance sheet. Management must then assess the likelihood that deferred tax assets will be recovered from future taxable income and to the extent management believes that recovery is not likely, a valuation allowance must be established.

        The acquisition of Visypak in November 2001 was accounted for using the purchase method of accounting and, accordingly, the purchase price was allocated to the assets acquired and the liabilities assumed based upon the estimated fair values at the date of the acquisition. The purchase price allocation is preliminary and further refinements are likely to be made based upon completion of the final valuation studies, which may result in changes to various assets, liabilities and expenses in future periods.

Forward Looking Statements

        Management's Discussion and Analysis of Financial Condition and the Results of Operations and other sections of this report contain "Forward Looking Statements" about prospects for the future, such as our ability to generate sufficient working capital, our ability to continue to maintain sales and profits of our operations and our ability to generate sufficient funds to meet our cash requirements. We wish to caution readers that the assumptions which form the basis for forward-looking statements with respect to, or that may impact earnings for the year ending October 31, 2002, include many factors that are beyond our ability to control or estimate precisely. These risks and uncertainties include, but are not limited to, availability of raw materials, ability to pass raw material price increases to customers in a timely fashion, the potential of technological changes which would adversely affect the need for our products, price fluctuations which could adversely impact our inventory, and changes in United States or international economic or political conditions, such as inflation or fluctuations in interest or foreign exchange rates. Parties are cautioned not to rely on any such forward-looking statements or judgments in this section and in other parts of this report.

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings

        The Company is involved in routine litigation in the normal course of its business. The proceedings are not expected to have a material adverse impact on the Company's results of operations, financial position or liquidity.

Item 6. Exhibits and Reports on Form 8-K

Exhibits

(a)

Exhibit 11—Computation of weighted average number of shares outstanding. Pages 21-23



(b)

Exhibit 99-1—Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 903 of the Sarbanes-Oxley Act of 2002. Pages 24-25



(c)

Exhibit 99-2—Principal Executive Officer and Principal Financial Officer 302 Certification. Pages 26-27

Reports on Form 8-K

The Company filed a Form 8-K on July 17, 2002, under CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 Item 4. Change in Registrant's Certifying Accountant.

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SIGNATURES

        Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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