EX-4 3 annualreport2002.txt 2002 ANNUAL REPORT 2002 ANNUAL REPORT INTERTAPE POLYMER GROUP INC. [LOGO] IPG CORPORATE PROFILE Intertape Polymer Group Inc. (IPG) is an acknowledged leader in the packaging industry. Leveraging its advanced manufacturing technologies, extensive R&D capabilities and a comprehensive strategic acquisition program, the Company believes it has assembled the broadest and deepest range of products in the industry. IPG is widely-recognized for its development and manufacture of specialized polyolefin plastic and paper-based packaging products, as well as complementary packaging systems for industrial and retail use. Additionally, IPG is a woven and flexible intermediate bulk container (FIBC) manufacturer. Its performance products, including tapes and cloths, are designed for demanding aerospace, automotive and industrial applications and are sold to a broad range of industrial/specialty distributors, retail stores and large end-users in diverse industries. Through its innovative regional distribution center concept, IPG offers customers its extensive range of products with highly competitive distributor- customer transactional costs. This marketing advantage is unmatched in the industry, and has helped IPG establish a market position that clearly differentiates it from its competitors. Established in 1981 and headquartered in Montreal, Quebec and Sarasota/ Bradenton, Florida, IPG employs approximately 2,600 employees with operations in 19 locations, including 15 manufacturing facilities in North America and one in Europe. Intertape Polymer Group Inc. is a publicly traded company with its common shares listed on the New York Stock Exchange and The Toronto Stock Exchange under the stock symbol "ITP." TABLE OF CONTENTS Financial Highlights ......................................... 2 Message to Shareholders ............................ ......... 4 Consolidated Quarterly Statements of Earnings ................. 6 Adjusted Consolidated Earnings................................. 8 Management's Discussion & Analysis ............................10 Management's Responsibility for Financial Statements ..........20 Auditors' Report .................... .......... ..............21 Comments by Auditors ......................................... 21 Financial Statements Consolidated Earnings ..................................... 22 Consolidated Retained Earnings ........................... 22 Consolidated Cash Flows .................................. 23 Consolidated Balance Sheets .............................. 24 Notes to Consolidated Financial Statements ...........25 to 53 Intertape Polymer Group Locations ........................... 54 Other Information ............................................ 55 Notes ........................................................ 56 Corporate Headquarters 11OE Montee de Liesse Montreal, Quebec Canada, H4T 1N4 Investor Relations Tel: 866-202-4713 Fax: 941-727-3798 Web: www.intertapepolymer.com E-mail: itp$info@intertapeipg.com Safe Harbor Statement Certain statements and information set forth in this Annual Report, including statements regarding the business and anticipated financial performance of the Company, constitute "forward-looking statements" within the meaning of the Federal Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied in such forward-looking statements. Some of the factors that could cause such differences include, but are not limited to, inflation and general economic conditions, changes in the level of demand for the Company's products, competitive pricing pressures, and general market trends. Additional discussion of factors that could cause actual results to differ materially from management's projections, estimates and expectations is contained in the Company's SEC filings. These and other factors should be considered carefully and undue reliance should not be placed on forward-looking statements. The Company undertakes no duty to update its forward-looking statements, including its earnings outlook. -1- FINANCIAL HIGHLIGHTS
2002 2001 2000 ____________________________________________________________________________ Operations Consolidated sales $601,575 $594,905 $653,915 Net earnings (loss) Cdn GAAP (54,454) (12,242) 33,422 Net earnings (loss) US GAAP (54,454) (12,242) 33,422 Cash flows from operations before changes In non-cash working capital items 30,281 3,874 57,932 ____________________________________________________________________________ Per Common Share Net earnings (loss) Cdn GAAP (1.66) (0.43) 1.18 Net earnings (loss) US GAAP (1.66) (0.43) 1.18 Cash flows from operations before changes in non-cash working capital items 0.92 0.49 2.05 Book value Cdn GAAP 8.67 10.32 10.98 Book value US GAAP 8.47 10.20 10.98 ____________________________________________________________________________ Financial Position Working capital 61,240 68,075 8,718 Total assets Cdn GAAP 703,344 801,989 845,040 Total assets US GAAP 705,187 802,901 845,040 Total long-term debt 312,766 362,973 286,216 Shareholders equity Cdn GAAP 293,093 294,090 309,642 Shareholders equity US GAAP 286,491 290,635 309,642 ____________________________________________________________________________ Selected ratios Working capital 1.52 1.53 1.04 Debt/capital employed Cdn GAAP 0.52 0.55 0.48 Debt/capital employed US GAAP 0.52 0.56 0.48 Return on equity Cdn GAAP (18.6)% (4.2)% 10.8% Return on equity US GAAP (19.0)% (4.2)% 10.8% ____________________________________________________________________________
-2- Stock Information Weighted average shares o/s (Cdn GAAP)+ 32,829 28,266 28,328 Weighted average shares o/s (US GAAP)+ 32,829 28,266 28,328 ____________________________________________________________________________ The Toronto Stock Exchange (cdn $) Market price at year end 6.49 13.25 11.00 High: 52 weeks 20.08 24.00 41.00 Low: 52 weeks 5.50 10.50 10.90 Volume: 52 weeks+ 14,651 20,490 14,053 ____________________________________________________________________________ New York Stock Exchange Market price at year end 4.12 8.30 7.31 High: 52 weeks 12.80 15.60 28.19 Low: 52 weeks 3.60 7.00 7.19 Volume: 52 weeks+ 13,705 13,695 4,929 ____________________________________________________________________________ The Toronto Stock Exchange (ccln $) High Low Close ADV* Q1 18.70 13.15 18.50 61,846 Q2 20.08 16.50 17.55 41,100 Q3 17.26 11.90 12.01 47,692 Q4 12.26 5.50 6.49 82,251 ____________________________________________________________________________ New York Stock Exchange High Low Close ADV* Q1 11.90 8.21 11.50 69,680 Q2 12.80 10.86 11.61 46,795 Q3 11.70 7.45 7.58 24,598 Q4 7.70 3.60 4.12 77,420
This data should be read in conjunction with the Consolidated Financial Statements of the Company and the Notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations. (In thousands of U.S. dollars except per share data, selected ratios and trading volume information.) * Average daily volume + in thousands -3- MESSAGE TO SHAREHOLDERS Dear Shareholders, Intertape Polymer Group Inc. (IPG or the Company) made significant strides during 2002, despite the weak economy that has affected all industries. While certainly not immune to this environment, management focused on growing the business, improving earnings and cash flows and strengthening the balance sheet. We confronted these macro economic challenges by implementing revenue growth strategies combined with decisive and significant cost reductions in all areas of operations. As a result, we are confident that we have laid the foundation for earnings and shareholder growth in 2003 and beyond. While fiscal 2002 revenues increased by only 1 % to $601.6 million, we were encouraged on two fronts. First, IPG's unit volume increased 6% year over year, double the growth in U.S. GDP in 2002. Despite the continued poor economy, we were able to maintain our gross margins through our strategy of offering the broadest range of products in our market, coupled with innovative new product introductions and cost saving initiatives. Secondly, fourth quarter sales, traditionally some 3% less than the third quarter, were higher than anticipated and came in approximately equal with the previous quarter - an indication that, everything else being equal, our 2003 expectations are unfolding as planned. Before the effect of the non-cash goodwill impairment charge of $70.0 million and related tax recovery, (fully addressed in the Management's Discussion & Analysis section of this report) after-tax earnings showed improvement, increasing to $10.2 million from comparable adjusted earnings of $9.7 million in 2001. There were no new acquisitions in 2002. Rather, we concentrated on consoli- dating and integrating our past acquisitions and on driving earnings through controlled volume and cost controls. We feel we can now generate strong top and bottom line growth by leveraging our full product line and by reaping the benefits of more efficient and cost effective manufacturing and distribution operations. In 2002, we announced annualized restructuring savings totaling $17.5 million pre-tax. The full impact of these reductions will be felt in 2004, although the majority will be realized by the end of the current year. We've completed the $3.0 million annual cuts as a result of the flexible intermediate bulk container (FIBC) consolidation. Operations in Rayne, Louisiana and Edmundston, New Brunswick were closed and centralized at our modern facility in Piedras Negras, Mexico, which has the capacity to integrate these functions and operate at a lower cost. We've also instituted measures to cut selling, general and administrative expenses by an annual $2.5 million. We are continuing to make progress with our aggressive marketing programs. With a solid understanding of our customers' needs, we have been proactive in developing new, breakthrough products that fill unique niches in their respective industries. Examples include our new Nova-Thene(TM) insulation facing and Nova-Wrap(TM) metal wrap. IPG has become known for its product diversity and with this improved product mix, combined with selective price increases, comes enhanced margins. Given our efforts to improve working capital, total debt declined by approximately $70.0 million in 2002. While approximately $46.0 million of this was from the proceeds derived from the stock offering during the second quarter of 2002, all of the bank debt reductions during the third and fourth quarters of 2002 were accomplished through working capital initiatives. In 2002, free cash flow has risen from $22.0 million in 2001 to close to $24.0 million last year, and should reach $30.0 million this year. -4- The Company also succeeded in holding financial expenses virtually steady in 2002 as compared to 2001 charges, adjusted for a non-recurring expense. This is significant given that the interest rate payable to the senior noteholders was increased by 225 basis points in 2001 for the duration of the term. Given our debt repayment commitments and the fact that the bulk of our debt is at a fixed rate, we expect to see these charges begin to decline. While we do not underestimate the challenges that lie ahead, we are proud of the significant operating and financial improvements that we have delivered in 2002. Despite the unknowns facing our world, management believes that 2003 will be a stronger year. Key drivers that should result in an improvement in value-added dollars and increase earnings include, unit volume growth, selling price increases, cost containment and continued balance sheet management. Rapidly changing raw material costs will be a factor at least through the first half of 2003 as they are impacted by the cost of energy, primarily oil and natural gas. We fully intend to pass on these increases in resin, polyethylene and polypropylene as well as focus on other areas to maintain our budgeted value- added dollars. IPG has become an acknowledged leader in the packaging industry. This is clearly the result of the continuing dedication of our valued employees and our ability to meet the needs of our growing customer base. I wish to use this opportunity to sincerely thank both these groups and to extend gratitude to our shareholders and debtholders. Our relationships with our bankers and lenders continue to be strong as evidenced by the support we received from them throughout the year. Today, IPG is a stronger company for all its stakeholders. We are in the enviable position of growing our sales while cutting costs. Our shareholders should benefit from the value creation strategies management has implemented while our debtholders should benefit from significantly enhanced credit quality. Finally, it gives me pleasure to welcome Thomas E. Costello to the Company's Board of Directors. Most recently he served as the CEO of a multinational, multi-billion dollar distributor of packaging and industrial products. Leaving the Board is Irvine Mermelstein who has served diligently for many years. Irv has been asked to undertake a specific mandate on behalf of IPG and in keeping with our corporate governance policy, has relinquished his seat. /s/ Melbourne F. Yull Melbourne F. Yull Chairman and Chief Executive Officer February 21, 2003 -5- CONSOLIDATED QUARTERLY STATEMENTS OF EARNINGS In thousands of US dollars, except per share amounts
1st Quarter ______________________________________ 2002 2001 2000 2002 _____________________________________________________________________________ Sales $146,737 $158,863 $169,358 $153,657 Cost of sales 113,321 120,089 131,117 119,713 Gross Profit 33,416 38,774 38,241 33,944 Selling, general and administrative expenses 20,299 21,858 20,032 20,454 Amortization of goodwill 0 1,743 1,550 0 Impairment of goodwill 0 0 0 0 Research and development 967 1,168 1,325 796 Financial expenses 8,983 8,436 5,995 7,872 _____________________________________________________________________________ 30,249 33,205 28,902 29,122 Gain on sale of interest in joint venture 0 0 (5,500) 0 _____________________________________________________________________________ 30,249 33,205 23.402 29,122 Earnings (loss) before income taxes 3,167 5,569 14,839 4,822 Income taxes (recovery) 348 1,392 4,155 534 _____________________________________________________________________________ Net earnings (loss) 2,819 4,177 10,684 4,288 _____________________________________________________________________________ Earnings (loss) per share Cdn GAAIP - Basic - US $ 0.09 0.15 0.38 0.13 Con GAAP - Diluted - US $ 0.09 0.15 0.37 0.13 US GAAP - Basic - US $ 0.09 0.15 0.38 0.13 US GAAP - Diluted - US $ 0.09 0.15 0.37 0.13 _____________________________________________________________________________ Average number of shares outstanding Cdn GAAP - Basic 30,155,360 27,983,417 28,300,781 33,622,896 Cdn GAAP - Diluted 30,505,692 28,675,701 28.879,770 34,249,454 US GAAP -Basic 30,155,360 27,983,417 28,300,781 33,622,896 US GAAP - Diluted 30,505,692 28,675,701 28,879,770 34,249,454 _____________________________________________________________________________ Note: In the 4th quarter of 2000, Canadian GAAP adopted the US GAAP definition of the diluted earnings per share retroactive.
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2nd Quarter 3rd Quarter 4th Quarter ________________________ __________________________________ ________________________________ 2001 2000 2002 2001 2000 2002 2001 2000 ______________________________________________________________________________________________ $141,265 $167,231 $149,920 $148,602 $166,356 $151,261 $146,175 $150,970 114,549 126,513 121,532 122,544 121,612 121,764 118,906 121,305 ______________________________________________________________________________________________ 26,716 40,718 28,388 26,058 44,744 29,497 27,269 29,665 20,090 17,891 22,309 27,837 21,306 23,462 21,558 23,863 1,797 1,522 0 1,757 1,663 0 1,717 1,805 0 0 0 0 0 70,000 0 0 1,198 1,409 926 884 1,073 480 932 1,302 7,736 6,652 8,297 13,212 7,345 7,621 9,527 7,213 ______________________________________________________________________________________________ 30,821 27,474 31,532 43,690 31,387 101,563 33,734 34,183 0 0 0 0 0 0 0 0 ______________________________________________________________________________________________ 30,821 27,474 31,532 43,690 31,387 101,563 33,734 34,183 (4,105) 13,244 (3,144) (17,632) 13,357 (72,066) (6,465) (4,518) (1,392) 3,707 (357) (4,937) 3,741 (13,292) (5,455) (8,103) ______________________________________________________________________________________________ (2,713) 9,537 (2,787) (12,695) 9,616 (58,774) (1,010) 3,585 ______________________________________________________________________________________________ (0.10) 0.34 (0.08) (0.45) 0.34 (1.74) (0.03) 0.13 (0.10) 0.33 (0.08) (0.45) 0.33 (1.74) (0.03) 0.13 (0.10) 0.34 (0.08) (0.45) 0.34 (1.74) (0.03) 0.13 (0.10) 0.33 (0.08) (0.45) 0.33 (1.74) (0.03) 0.13 ______________________________________________________________________________________________ 28,119,535 28,297,621 33,701,307 28,346,102 28,342,803 33,821,074 28,496,884 28,380,530 28,119,535 28,716,590 33,701,307 28,346,102 28,763,582 33,821,074 28,496,884 28,565,564 28,119,535 28,297,621 33,701,307 28,346,102 28,342,803 33,821,074 28,496,884 28,380,530 28,119,535 28,716,590 33,701,307 28,346,102 28,763,582 33,821,074 28,496,884 28,565,564 ______________________________________________________________________________________________
-7- ADJUSTED CONSOLIDATED EARNINGS Adjustments for Non-Recurring Items and for the Change in Accounting Principle related to the Amortization of Goodwill* Years Ended December 31, (In millions of US dollars, except per share amounts)
As Reported 2002 2001 2000 _____________________________________________________________________________ $ $ $ Sales 601.6 594.9 653.9 Cost of sales 476.3 476.1 500.5 _____________________________________________________________________________ Gross Profit 125.3 118.8 153.4 Selling, general and administrative expenses 86.5 91.3 83.1 Amortization of goodwill 0.0 7.0 6.5 Impairment of goodwill 70.0 0.0 0.0 Research and development 3.2 4.2 5.1 Financial expenses 32.8 38.9 27.3 Gain on sale of interest in joint venture 0.0 0.0 (5.5) _____________________________________________________________________________ 192.5 141.4 116.5 Earnings (loss) before income taxes (67.2) (22.6) 36.9 _____________________________________________________________________________ Income taxes (recovery) (12.7) (10.4) 3.5 _____________________________________________________________________________ Net earnings (loss) (54.5) (12.2) 33.4 _____________________________________________________________________________ Earnings (losses) per share - As Reported 2002 2001 2000 _____________________________________________________________________________ Basic (1.66) (0.43) 1.18 Diluted (1.66) (0.43) 1.16 Adjustments for non-recurring items and amortization of goodwill 20O2 2001 2000 _____________________________________________________________________________ Gross Profit Items Implementation of RDCs 2.3 Additional Reserves 9.5 Asset writedowns 0.1 1.0 Inventory writedowns 0.2 3.2 Severance 0.6 1.2 _____________________________________________________________________________ Subtotal 0.9 7.7 9.5 SG&A Items Asset writedowns 0.8 Reserves for bad debt 7.0 Severance 1.2 3.0 _____________________________________________________________________________ Subtotal 1.2 10.8 Amortization of Goodwill* 7.0 6.5 Impairment of Goodwill 70.0 Financial Expenses Deferred refinancing costs 6.7 _____________________________________________________________________________
-8- ADJUSTED CONSOLIDATED EARNINGS Adjustments for Non-Recurring Items and for the Change in Accounting Principle related to the Amortization of Goodwill* Years Ended December 31, (In millions of US dollars, except per share amounts)
As Adjusted 2002 2001 2000 _____________________________________________________________________________ $ $ $ Sales 601.6 594.9 653.9 Cost of sales 475.4 468.4 491.0 _____________________________________________________________________________ Gross Profit 126.2 126.5 162.9 Selling, general and administrative expenses 85.3 80.5 83.1 Amortization of goodwill 0.0 0.0 0.0 Impairment of goodwill 0.0 0.0 0.0 Research and development 3.2 4.2 5.1 Financial expenses 32.8 32.2 27.3 Gain on sale of interest in joint venture 0.0 0.0 (5.5) _____________________________________________________________________________ 121.3 116.9 110.0 Earnings before income taxes 4.9 9.6 52.9 _____________________________________________________________________________ Income taxes (recovery) (5.3) (0.1) 7.7 _____________________________________________________________________________ Net earnings 10.2 9.7 45.2 _____________________________________________________________________________ Earnings per Share - As Adjusted 2002 2001 2000 _____________________________________________________________________________ Basic 0.31 0.34 1.59 Diluted 0.31 0.34 1.57
*See note 2 in the 2002 Notes to Consolidated Financial Statements Note: These tables reconcile consolidated earnings as reported in the accompanying Consolidated Financial Statements to adjusted consolidated earnings after the elimination of non-recurring terns and the amortization of goodwill. In addition to consolidated earnings, these tables also present the impact of eliminating non-recurring items on gross profits and gross margins, selling, general and administrative expenses, financial expenses and earnings per share. The Company has included these non-GAAP financial measures because it believes the measures permit more meaningful comparisons of its performance between the periods presented. -9- MANAGEMENT'S DISCUSSION & ANALYSIS CORPORATE OVERVIEW Intertape Polymer Group Inc. ("IPG" or "the Company") was founded in 1981 and is a recognized leader in the development and manufacture of specialized polyolefin plastic and paper packaging products and complementary packaging systems. The Company's business model and underlying strategies have been evolving since the mid-1990s. The key components to this strategy are as follows: Commencing in the mid-1990s, the Company made a series of strategic acquisitions in order to provide for products demanded by the industrial packaging market. Products include water-activated tapes, masking tapes, duct tapes, filament tapes and natural rubber adhesive tapes. The Company continued to develop new products, including shrink and stretch wrap films. The Company believes that it now offers the broadest range of packaging products in the industry and, as such, is unique amongst all its competitors. As soon as new products are either acquired or developed internally, the Company devotes research and development (R&D) capital to further broaden the range of products within each of these product lines. The effect of this portion of the strategy is to further strengthen the broadcast area of products by ensuring that the depth of product offerings is maximized. In 2000, the Company opened Regional Distribution Centers (RDCs) as part of an enhanced supply chain management strategy. Each RDC is stocked with a wide range of the Company's product lines in order to afford customers the ability to place one order and receive one shipment regardless of where IPG makes the product. The Company continues to develop and assess its RDC strategy to achieve maximum efficiency. On April 14, 2003, IPG announced that it was consolidating three existing RDCs into a new facility in Danville, Virginia, adjacent to existing manufacturing operations. As a result, stock availability will be higher, cycle times reduced and shipments to customers further consolidated, resulting in greater efficiencies and lower processing costs as well as increased inventory turns. Cost reductions will be generated in a number of areas, including occupancy, staffing, finished goods inventory and logistics. Examples of products sold through distributors are Intertape brand(TM) pressure-sensitive carton sealing tapes that include hot melt, acrylic and natural rubber adhesives; water-activated carton sealing tape; paper tapes; duct tapes; Exlfilm(R) brand shrink wrap and StretchFlex(R) brand stretch wrap. Examples of products sold directly to end-users include a wide range of Nova- Thene(TM) brand woven polyolefin products, Intertape brand(TM) flexible intermediate bulk containers (FIBC) and electrical specialty tapes. RESULTS OF OPERATIONS Sales IPG's consolidated sales increased by 1.1% to $601.6 million for the year 2002 from $594.9 million in 2001. Consolidated sales for 2001 were down 9.0% from sales of $653.9 million in 2000. For comparison purposes, the Company converts its product volume into standardized units, with one unit representing one square meter or pound, depending on the product. In 2002, despite the continuing slowdown in the North American economy, unit volume increased by 6.0% as compared to 2001 figures. At 2001 prices, this increase in unit volume would represent an increase of approximately $35.7 million in revenue. This contrasts with 2001, when the global economic slowdown, along with low-cost imports and declining consumption in certain industries, drove unit volume down by 6.8%, or the equivalent of approximately $44.6 million in revenues. The growth seen in 2002 is primarily attributable to the breadth of the product offering, new products, improved customer service and the Company's RDC strategy. Unit pricing for most of the Company's product lines declined in 2002. Overall, selling prices slipped by approximately 5.0%, which represents a decrease of approximately $29.7 1 million in revenues from 2001 levels. Selling prices declined in the first part of the year, as they had in both 2000 and 2001, as they continued to track a steady decline in raw materials costs. Raw material prices began to climb in the third quarter of 2002. While the Company initiated a number of price increases to counter this, continued economic weakness hampered its efforts to pass on these increases. In the first quarter of 2003, the Company informed its customers in writing and implemented select price increases aimed at normalizing this situation. Overall, the Company experienced negligible price reductions in the first quarter of 2003 of 0.1% while realizing strong non-retail unit growth of 7% compared to the fourth quarter of -10- 2002. The fourth quarter is always the strongest quarter of the year for retail sales. Accordingly, there was a decline in retail sector volumes in the first quarter of 2003 compared to the fourth quarter of 2002. Overall, sales in the first quarter of 2003 exceeded the corresponding period in 2002 by 4.7% due to an 8.2% increase in unit sales, offset by a 3.5% decline in selling prices. For 2003. the Company expects revenue growth of approximately 5%. U.S. GDP is forecast to rise slightly, indicating increased economic activity that should contribute to growth. The Company's revenue growth strategy is composed of a number of inter-related elements, including: - A wide product line including the introduction of high growth new products and an improved product mix - Competitive pricing in combination with selective price increases - Increased retail penetration - Improved market share in key product lines - New customers, including export opportunities GROSS PROFIT AND GROSS MARGIN Gross profit was $125.3 million in 2002, up 5.5% from $118.8 million in 2001, which was in turn 22.6% lower than gross profit of $153.4 million for 2000. Gross profit represented 20.8% of sales in 2002, 20.0% in 2001, and 23.5% in 2000. The Company's adjusted gross profit (see tables beginning on page 8) remained virtually flat during 2002 at $126.2 million compared to a 2001 figure of $126.5 million, which itself was 22.3% less than an adjusted gross profit of $162.9 million in 2000. As a percentage of sales, adjusted gross profit was 21.0% for 2002, virtually identical to the 2001 figure of 21.3%. Adjusted gross profit for 2000 represented 24.9% of sales. Adjusted gross profit for 2002 reflects $0.9 million in non-recurring charges included in cost of sales, including $0.6 million in severance costs. In 2001, the factors that caused gross profit to decline from 2000 levels included lower sales as discussed above. In addition, $7.7 million in non- recurring charges included under cost of sales are excluded from the adjusted gross profit figure, as shown in the tables beginning on page 8. It should also be noted that $18.7 million generated by cost cutting measures taken by management to reduce labor and manufacturing overhead prevented gross profit from declining even further. Adjusted gross profit for 200O excludes $9.5 million in net non-recurring charges consisting of additional accounts receivable and inventory reserves of $15.0 million, less the impact of the reversal against earnings of $5.5 million in provisions established in prior years related to environmental, transfer pricing and employee-related benefits. These provisions were reduced to more appropriate levels based on third party studies. Value-added is the difference between material costs and selling prices, expressed as a percentage of sales. Historically, the Company has been able to maintain value-added percentages within a range of less than 0.75% because it passes on raw materials cost increases to the customer. During 2002, this situation changed as a direct result of a timing lag between raw material cost increases and full implementation of selling price increases, due to continued economic fragility. This caused value-added to decline by 5.0% in the second half of the year. In early 2003, the Company informed its customers in writing and implemented selected price increases aimed at stabilizing value-added levels. In the first quarter of 2003, the Company achieved an increase in gross profit and gross margin when compared to the fourth quarter of 2002. Gross margin improved 2.5 percentage points, from 19.5% to 22.0%. When compared to the first period in 2002, the gross margin was 0.8 percentage points lower. The Company is in the process of returning to the same level of gross margin as last year by increasing value-added and achieving manufacturing efficiencies. Based on information available at the current time, management anticipates that both gross profit and gross margins should increase during 2003. Management's expectations in this regard are based on the following: - The world political uncertainty, a cold winter and poor financial results for most petro-chemical companies in 2002 have combined to create a volatile pricing situation for the Company's raw materials. Polyethylene and poly- propylene producers have announced price increase of approximately 50% for the first six months of 2003. The Company has informed its customers of coming price increases. The Company anticipates that such increases, combined with other initiatives such as sourcing initiatives, formulation changes and waste reduction programs, will enable it to enhance its value- added dollars. -11- - The Company is proceeding with previously announced cost reduction initiatives of $17.5 million. The necessary steps were taken in the fourth quarter of 2002 to eliminate $3.0 million annually as a result of the FIBC consolidation and $2.5 million annually in selling, general and admini- strative (SG&A) expenses. A further $6.0 million in reductions should be accomplished during fiscal 2003, with the remainder anticipated in fiscal 2004. - Based on current volume, the Company has capacity available and therefore can accommodate increases in sales volume without any need for additional capital expansion. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES For the year ended December 31, 2002, SG&A expenses amounted to $86.5 million, down $4.8 million from $91.3 million in 2001. SG&A expenses for 2000 were $83.1 million. As a percentage of sales, SG&A expenses were 14.4%, 15.4% and 12.7% for 2002, 2001 and 200O, respectively. Measures were implemented in 20O2 to reduce SG&A expenses by $2.5 million. These reductions should materialize fully in 2003, resulting in an improvement in these expenses as a percentage of sales. On an adjusted basis (see tables beginning on page 8), SG&A expenses increased by $4.8 million to $85.3 million for 2002 from $80.5 million in 2001. These figures compare to SG&A expenses of $83.1 million for 2000, which did not require adjustment. These adjusted SG&A figures represent 14.2% of sales for 2002, 13.5% for 2001 and 12.7% for 2000. Much of the increase for 2002 relates to higher unit sales within the retail distribution channel, which carries a much larger selling structure than sales that are not retail. Adjusted 2002 SG&A expenses are net of a non-recurring charge of $1.2 million related to severance costs. Adjusted SG&A expenses for 2001 exclude $10.8 million in non-recurring charges consisting of $7.0 million in additional reserves for bad debts due primarily to insufficient reserves related to the systems conversion of Central Products Company (CPC), $3.0 million worth of expense for severance costs and a further $0.8 million related to the required reductions in the value of certain assets. In the first quarter of 2003, the Company began to achieve the SG&A expense reductions initiated in late 2002. SG&A expenses for the first quarter of 2003 were 14.3% of sales compared to 15.5% of sales in the fourth quarter of 2002. The dollar value decrease was $1.5 million, of which $0.7 million was directly related to the SG&A cost reduction program. The balance of the dollar decline was the normal seasonal decline in the retail sector. OPERATING PROFIT This discussion presents the Company's operating profit and adjusted operating profit for 2002, 2001 and 2000. Operating profit is not a financial measure under generally accepted accounting principles (GAAP) in Canada or the United States. The Company has included this non-GAAP financial measure because it believes the measure permits a more meaningful comparison of its performance between the periods presented and because it is used by management in evaluating the Company's performance. Because "operating profit" and "adjusted operating profit" are not GAAP financial measures, companies may present similarly titled items determined with differing adjustments. Accordingly, the "operating profit" and "adjusted operating profit" presented in this discussion should not be used to evaluate the Company's performance by comparison to any similarly titled measures presented by other companies. Presented below is a table reconciling this non-GAAP financial measure with the most comparable GAAP measurement. The reader is urged to review this reconciliation. OPERATING PROFIT RECONCILIATION
(In millions of US dollars) 2002 2001 2000 ____________ __________ __________ $ $ $ Gross Profit - As Reported 125.3 118.8 153.4 Less: SG&A Expense Reported 86.5 91.3 83.1 ____________ __________ __________ Operating Profit 38.5 27.5 70.3 Non-recurring Items* Gross Profit Items* 0.9 7.7 9.5 SG&A Items* 1.2 10.8 ____________ __________ __________ Adjusted Operating Profit 40.9 46.0 79.8 ____________ __________ __________ ____________ __________ __________
*see tables beginning on page 8 for non-recurring items. Operating profit is defined as gross profit less SG&A expenses. Operating profit for 2002 amounted to $38.8 million compared to $27.5 million in 2001 and $70.3 million in 2000. When adjusted for all of the non-recurring items affecting cost of sales and SG&A expenses (see tables beginning on page 8), operating profits were $40.9 million or 6.8% of sales for 2002, $46.0 million or 7.7% of sales for 2001, and $79.8 million or 12.2% of sales for 2000. -12- Viewed on an adjusted basis, operating profits have fallen for a number of reasons. Value-added dollars decreased, although the decline was lessened by certain cost cutting programs. The decrease in operating profits for 2002 was mainly due to the increase in adjusted SG&A expenses discussed above. The pricing action mentioned earlier, combined with product initiatives leading to increased sales and ongoing cost reduction initiatives, should generate improved operating profits in 2003. IMPAIRMENT OF GOODWILL In accordance with the requirements of the Canadian Institute of Chartered Accountants (CICA), which are equivalent to the applicable U.S. standards, the Company performed a goodwill impairment test at December 31, 2002. For the purposes of the impairment test, based on the specific requirements of the accounting pronouncements, the Company determined that it was a single reporting unit. The Company calculated the fair value of this reporting unit using the discounted cash flow method, and compared it with other methods including multiples of sales and EBITDA, and with historical transactions where appropriate. From these approaches, the fair market value was determined, resulting in a $70.0 million charge to operating expenses. This impairment relates to IPG's goodwill from acquisition activity during the period from 1996 through 2000 in light of current economic and market conditions. As this is a non-cash charge relating to past acquisitions, management does not expect this item to impact ongoing operations. RESEARCH AND DEVELOPMENT R&D remains an important function within the Company. Taken as a percentage of sales, R&D was 0.5%, 0.7%, and 0.8% for the years 2002 to 2000 respectively. The decrease in R&D expenditures is the result of an increased emphasis on applied research, which helps identify opportunities for new products more efficiently than prior to 2000. R&D continues to focus on new products, new technology developments, new product processes and formulations. We anticipate fiscal 2003 will see a steady rollout of significant new products into the Company's markets. EBITDA Earnings before interest, taxes, depreciation and amortization (EBITDA) were negative for 2002 at $5.7 million, compared to positive figures of $50.1 million for 2001 and $92.1 million for 2000, Adjusted EBITDA stood at $66.4 million for 2002, $68.6 million for 2001 and $101.6 million for 2000. The operating profit improvement in combination with the significant debt reduction positively impacted the debt-to-EBITDA ratio, which improved from 7.8 times in 2001 to 5.0 times in 2002. The Company's goal is to regain its NAIC-2 rating (a National Association of Insurance Commissioners rating that is equivalent to a Standard & Poor's BBB rating), the Company expects to reach a debt-to-EBITDA ratio of approximately three times during 2004, given its debt repayment commitments and continuing improvement in operating profit. A reconciliation of the Company's EBITDA, a non-GAAP financial measure, to GAAP net earnings (loss) is set out in the EBITDA reconciliation table below. EBITDA should not be construed as earnings before income taxes, net earnings (loss) or cash flows from operating activities as determined by generally accepted accounting principles. The Company has included this non-GAAP financial measure because it believes that it permits a more meaningful comparison of performance between the periods presented and because it is used by management and the Company's lenders in evaluating the Company's performance. EBITDA RECONCILIATION TO NET EARNINGS (LOSS) (In millions of US dollars)
2002 2001 2000 ____________ __________ __________ $ $ $ Net Earnings (Loss) - As Reported (54.5) (12.2) 33.4 Add Back: Financial Expenses 32.8 38.9 27.3 Income Taxes (12.7) (10.4) 3.5 Depreciation & Amortization 28.7 33.8 27.9 ____________ __________ __________ EBITDA (5.7) 50.1 92.1 Non-recurring Items* Gross Profit Items* 0.9 7.7 9.5 SG&A Items* 1.2 10.8 Other Items** 70.0 ____________ __________ __________ Adjusted EBITDA 66.4 68.6 101.6 ____________ __________ __________ ____________ __________ __________
* See tables beginning on page 8 for non-recurring items. ** For years 2000 and 2001 the Other non-recurring items related to Financial Expenses and Amortization does not impact Adjusted EBITDA. -13- FINANCIAL EXPENSES The accompanying table shows, on a retrospective basis, the impact of the 225 basis point (bps) increase on amounts owing to the Senior Secured Notes that came into effect on January 1, 2002 as if they had been in place during the entire three-year period. Management believes that this table provides a better comparison of the effect on financial expenses as a result of improved working capital management and the share issue in the first half of 2002. Table of Financial Expenses (In millions of US dollars)
2002 2001 2000 ____________ __________ __________ $ $ $ Financial Expenses - As Reported 32.8 38.9 27.3 ____________ __________ __________ Less: Non-recurring charge 6.7 As adjusted before ____________ __________ __________ non-recurring charges 32.8 32.2 27.3 Effect of 225bps increase in years prior to the rate increase (for comparative purposes only) 6.3 6.3 ____________ __________ __________ Financial expenses if the rate increase had taken place January 1, 2000 32.8 38.5 33.6 ____________ __________ __________ ____________ __________ __________
Based on the above, year over year financial expenses would have decreased by 14.8% in 2002, to $32.8 million compared to $38.5 million in 2001. In 2000, adjusted financial expenses would have amounted to $33.6 million. Financial expenses for 2001 include a non-recurring $6.7 million charge consisting of the write-off of certain deferred costs related to previous financing arrangements that were refinanced at the end of 2001, together with the fees paid to both the noteholders and the banks in relation to the refinancing. The Company's EBITDA for the first quarter of 2003 was $17.6 million and the EBITDA interest coverage (that is, EBITDA divided by financial expenses) was 2.28 times. INCOME TAX The Company's effective income tax rate was 19.0%, 45.9% and 9.5% for the years 2002, 2001 and 2000 respectively. The Company's statutory income tax rate was approximately 43.0% for the same period. In the past three years, the Company's statutory income tax rate has been impacted primarily by a lower rate on foreign-based income, manufacturing and processing deductions and transactions that resulted in permanent differences partly offset by a change in the valuation allowance. In addition, in 2002, the statutory income tax rate was impacted by the non-taxable portion of the charge for goodwill impairment. At December 31, 2002, the Company had accumulated approximately $44.3 million in Canadian operating loss carry-forwards expiring in 2007 through 2009, and $153.7 million in U.S. federal and state operating losses expiring in 2010 through 2022. In assessing the valuation of future income tax assets, management considers whether it is more likely than not that some or all of the future income tax assets will not be realized. Management considers the scheduled reversal of future income tax liabilities, projected future taxable income and tax planning strategies in making this assessment. The Company expects the future income tax assets to be realized, net of the valuation allowance at December 31, 2002, as a result of the reversal of existing taxable temporary differences. Based on management's assessment, a $26.3 million valuation allowance was established for the year ended December 31, 2002, which is $10.8 million higher than the allowance established in 2001. NET EARNINGS - CANADIAN AND U.S. GAAP For fiscal 2002, the Company posted a net loss of $54.5 million compared to a net loss of $12.2 million in 2001 and net earnings of $33.4 million in 2000. Adjusted net earnings (see tables beginning on page 8) amounted to $10.2 million for 2002 compared to $9.7 million for 2001 and $45.2 million for 2000. The Company reported pre-tax losses of $67.2 million for 2002 and $22.6 million in 2001 and pre-tax earnings of $36.9 million in 2000. The adjusted figures (see tables beginning on page 8) show pre-tax earnings of $4.9 million for 2002, $9.6 million for 2001 and $52.9 million for 2000. Canadian GAAP net earnings conform in all material respects to amounts that would have to be reported had the financial statements been prepared under U.S. GAAP. For further details, see Note 21 to the consolidated financial statements. -14- In the case of IPG, net earnings are equal to earnings from continuing operations, as the Company had no discontinued operations, extraordinary items, or changes in accounting principles that resulted in a charge against earnings for these periods. EARNINGS PER SHARE - CANADIAN AND U.S. GAAP The Company reported losses per share of $1.66 in 2002, basic and diluted, and $0.43 in 2001, basic and diluted. In 2000, the Company had basic earnings per share (EPS) of $1.18 and diluted EPS of $1.16. The weighted-average number of common shares outstanding was 32.8 million shares for 2002, 28.3 million shares for 2001 and 28.3 million shares for 2000 for the purpose of the basic EPS calculation, and 28.7 million shares for the purpose of the diluted EPS calculation for 2000. The increase in the number of shares outstanding in 2002 was primarily due to the equity offering. The adjusted EPS (see tables beginning on page 8) for 2002 amounted to $0.31, basic and diluted, compared to $0.34, basic diluted, for 2001. Adjusted figures for 2000 show basic EPS of $1.59 and diluted EPS of $1.57. LIQUIDITY AND CAPITAL RESOURCES CASH FLOWS In 2002, the Company generated cash flows from operating activities of $35.2 million compared to $48.1 million in 2001 and $40.0 million in 2000. Cash flows from operations before changes in non-cash working capital items increased by $16.4 million to $30.3 million in 2002 from $13.9 million in 2001, primarily due to increased earnings adjusted for the non-cash goodwill impairment charge. In 2002, non-cash working capital items generated additional net cash flows of approximately $5.0 million. This was in part due to a $5.7 million decrease in receivables largely driven by a decrease in rebates owed to the Company. IPG also reduced its investment in inventories, which declined by $9.9 million from last year and by nearly $28.0 million from where they stood two years ago. This reduction is attributable to the implementation of the RDC strategy and the warehouse management system, which have resulted in better supply chain management practices. Cash flows generated by changes in these items were partly offset by a decrease of $11.4 million in accounts payable. In 2001, cash flows from operations before changes in non-cash working capital items decreased by $44.0 million to $13.9 million from $57.9 million in 2000 as a direct result of a decline in sales, which negatively impacted earnings. In spite of the shortfall in sales, the Company's management of certain balance sheet items generated $34.2 million in additional cash flows from changes in non-cash working capital items during 2001. This was a turn-around of $52.1 million compared to 2000, when changes in non-cash working capital items consumed $17.9 million of cash. The change was a direct result of the Company placing less emphasis on its acquisition strategy and more emphasis on completing the integration of its acquired business processes. Cash flows from investing activities were significantly different in 2002 and 2001 than in previous years. In 2002 and 2001, the Company had net property, plant and equipment expenditures of $11.7 million and $17.9 million respectively, and increased other assets by $5.2 million and $8.6 million respectively, for a total use and of cash of $16.9 million and $26.5 million respectively. The Company anticipates net property, plant and equipment expenditures in the range of $13.0 to $15.0 million for 2003. In contrast, the Company invested a net $54.5 million in 2000, consisting of $43.9 million in net property, plant and equipment expenditures and $28.2 million to complete the acquisition of Olympian Tape Sales, Inc. d/b/a United Tape Company (UTC), offset by funds provided by a $17.6 million reduction in other assets. Cash flows used in financing activities amounted to $20.0 million in both 2002 and 2001, the first fiscal periods since the Company embarked on its acquisition strategy in 1995 in which cash flows from operations were used to reduce debt. During 2002, the Company reduced bank debt by approximately $45.9 million and the amount due to the senior secured noteholders by $24.4 million. The Company also issued 5.1 million common shares from treasury for a consideration of $47.7 million and approximately 0.2 million shares totaling $2.0 million to partially fund its contribution to various pension funds and for the exercise of employee stock options. In 2001, $12.9 million in short-term bank indebtedness was repaid and $86.4 million was transferred to long-term debt as a result of the refinancing completed late in 2001. The Company also -15- reduced its long-term debt by $9.6 million. During the year, the Company issued $3.4 million of common shares related to the exercise of employees' stock options and funding of the U.S. employee stock ownership and retirement savings plan. It also used $0.9 million to purchase and cancel common shares. In 2000, financing activities generated cash flow of $17.2 million, primarily from a $26.5 million increase in short-term bank indebtedness, less $2.2 million used to repay long-term debt, $4.2 million used to purchase common shares for cancellation and $3.0 million used to pay dividends. Management is committed to further debt reductions, and believes this is achievable because of a reduced need for investment in property, plant and equipment and the continued management of working capital items. Free cash flows, defined as cash flows from operating activities less property, plant and equipment expenditures and dividends, improved to approximately $23.5 million in 2002 compared to $22.1 million in 2001. The Company expects to have free cash flows of in excess of $30.0 million in 2003. LIQUIDITY At year-end 2002, working capital stood at $61.2 million as compared to $68.1 million at the and of 2001. The Company considers that it has sufficient working capital and liquidity to meet the requirements of its day-to-day operations, given its operating margins and projected budgets. Quick assets, which are the total current assets excluding prepaid expenses and future income taxes, declined by $12.7 million in 2002 relative to 2001. This reflects the reduction in receivables and improved inventory control. Inventory turnover (sales divided by inventories) improved from 8.4 times in 2001 to 9.9 times in 2002. CAPITAL EXPENDITURES Total net property, plant and equipment expenditures were $11.7 million, $17.9 million and $43.9 million for the years 2002 to 2000 respectively. Property, plant and equipment expenditures came down in 2002 as many capital projects undertaken in recent years have now been completed. As of 2002, the focus of spending in this area is on machine efficiency projects to drive improved throughput and material usage. Investment in the management information systems area continued in 2002, with efforts focused on improving system utilization and the continued roll-out of the Company's warehouse management systems. In 2000 and 2001, capital spending on property, plant and equipment included the following projects: - The expansion of the Company's Truro, Nova Scotia, plant. Completed in 2001, this expansion added much needed capacity for production of both traditional and new woven products, such as vinyl replacement products. As well, new printing capacity for woven products was brought on line in 2000. - Installation of a sixth production line at the Company's Danville, Virginia, facility during 2000 and 2001. This enabled the Company to be completely self-sufficient in the production of film for pressure sensitive tapes for both hot-melt and acrylic based adhesives tapes. - Installation of a seventh cast line for the production of stretch films in the Danville, Virginia, location in 2000 brought the Company's capacity in this product line to more than 100 million pounds. - Other expenditures made in order to lower manufacturing costs and improve output of tape production facilities in Columbia, South Carolina, Marysville, Michigan, and Richmond, Kentucky, primarily in the areas of finishing and packaging. - During 2000, the Company started to bring its entire payroll function in house. This was completed in the latter part of 2001. Management is projecting maximum property, plant and equipment expenditures in the range of $13.0 to $15.0 million for the year 2003. -16- BANK INDEBTEDNESS AND CREDIT FACILITIES Bank indebtedness consists of the utilized portion of the short-term revolving credit facilities and cheques issued which have not been drawn from the facilities, and is reduced by any cash and cash equivalent balances. As at December 31, 2002, bank indebtedness was $8.6 million compared to $28.0 million as at December 31, 2001. The Company has a short-term line of credit committed for three years in the amount of $50.0 million. This credit facility, Facility A, was put in place at the end of 2001. At year-end 2002, the credit facility availability was $23.2 million as compared to $11.0 million at the end of 2001. When combined with on- hand cash and cash equivalents, this provided the Company with total cash and credit availability of $41.4 million as at December 31, 2002. LONG-TERM DEBT In 2002, the Company reduced its indebtedness associated with long-term debt instruments by nearly $50.0 million. As part of the refinancing completed in late 2001, the balance of the then short-term debt was cancelled and new facilities, Facility B and Facility C, in the aggregate amount of $95.0 million with two-year and four-year terms were entered into. In 2002, the Company repaid and cancelled Facility B, the $35.0 million, two-year term bank facility which was due to be fully repaid by the end of 2003. At December 31, 2002, $60.0 million was drawn against Facility C compared to $86.4 million drawn against both Facility B and Facility C at the end of 2001. In addition, the amount owing on senior notes was reduced by $24.4 million during 2002 from an aggregate amount of $274.0 million to $249.6 million. The long-term bank debt and the senior noteholder debt are secured by a fixed charge against all assets and a second lien against receivables and inventory. In late 2002, the Company's lenders rewarded its efforts to reduce debt by agreeing to amend its financial covenants. They have also confirmed that the goodwill impairment charge taken for 2002 will have no negative repercussions with respect to the financial covenants for 20O2 and going forward. The Company is scheduled to reduce long-term debt by a further $29.3 million in 20O3. Approximately $4.0 million of this represents cash payments to senior secured noteholders and other non-bank debts. The remainder of approximately $25.3 million represents a reduction in Facility C. Facility C has quarterly reductions of $5.0 million, as wall as an annual excess cash flow repayment of approximately $5.3 million payable on April 30, 2003, based on 2002 excess cash flow calculations. Cash to cover these payments will be internally generated by operations and borrowed under Facility A, The Company does not anticipate having any difficulty in making its debt reduction payments. CAPITAL STOCK In the first quarter of 2002, the Company issued 5,100,000 common shares at a price of CDN $15.50 per share (US $9.71 per share after issue costs) for a cash infusion of US $47.7 million net of issue costs. The proceeds were used to repay long-term bank loans and senior secured noteholder debt. In 2002, 2001, and 2000, employees exercised stock options worth $0.3 million, $1.1 million, and $0.2 million respectively. Further, during 2002 and 2001, $1.7 million and $2.2 million worth of shares were issued in relation to funding the Company's U.S. employee stock ownership retirement savings plan. In 2000, as part of the financing of the purchase of certain assets of UTC, $4.0 million worth of shares were issued at $15.96 per share. During 1999, the Company announced that it had registered a Normal Course Issuer Bid (NCIB) in Canada. The NCIB was extended for one-year terms during 2000 and again during 2001 and 2002. There were no shares purchased for cancellation during 2002. In 2001 and 2000, 128,100 and 353,200 shares were purchased for cancellation. This resulted in a reduction in the stated value of the Company's issued common shares of $0.8 million and $2.4 million for the years 2001 and 2000 respectively. As part of the purchase price for the acquisition of CPC in 1999, the Company issued 300,000 share purchase warrants that permit the holder to purchase common shares of the Company at a price of $29.50 per share. These warrants expire on August 9, 2004. -17- BUSINESS ACQUISITIONS The Company's most recent acquisition was UTC, completed on September 1, 2000. There were no acquisitions in either 2002 or 2001. While acquisitions remain an important component of the strategy to provide the Company with new products and channels of distribution, there were no attractive opportunities presented to the Company during the period that met management's criteria. DIVIDEND ON COMMON SHARES No dividends were declared in either 2002 or 2001. On May 15, 2000, the Company declared an annual dividend of $0.106 per share (CDN $0.16) payable to shareholders of record at May 30, 2000. The dividend was paid on June 8, 2000, and amounted to approximately $3.0 million. CHANGES IN ACCOUNTING POLICIES STOCK-BASED COMPENSATION Effective January 1, 2002, the Company adopted, on a prospective basis, the new CICA recommendations with respect to stock-based compensation and other stock-based payments. This new standard establishes, among other things, financial accounting and reporting standards for stock-based employee compensation plans. Under this method, compensation cost is measured at the grant date based on the fair value of the award, and is recognized over the related service period. An entity that does not adopt the fair value method of accounting for its awards granted to employees is required to include in its financial statements pro forma disclosures of net earnings and earnings per share as if the fair value method of accounting had been applied. The Company has adopted the latter alternative treatment. The supplemental information required by this new recommendation is presented in Note 17 to the consolidated financial statements. GOODWILL AND OTHER INTANGIBLE ASSETS Effective January 1, 2002, the Company adopted the new CICA recommendations with respect to goodwill and other intangible assets. These standards are equivalent to the US standards. Under the new recommendation, goodwill and intangible assets determined to have an indefinite useful life are no longer amortized and are tested for impairment annually, or more frequently if events or changes in circumstances indicate that they might be impaired. Under these recommendations, the Company was required to complete a transitional goodwill impairment test as at January 1, 2002. Management completed this test and determined that no adjustment for impairment of goodwill was necessary as a result of the change in accounting policy. Adjusted net earnings and earnings per share for 2001 and 2000 shown in the tables beginning on page 8 exclude the amortization for goodwill recognized in those periods to account for this change in accounting policy. IMPACT OF ACCOUNTING PRONOUNCEMENTS NOT YET IMPLEMENTED IMPAIRMENT OF LONG-LIVED ASSETS In December 2002, the CICA issued a new handbook section providing guidance on the recognition, measurement and disclosure of the impairment of long-lived assets. This new section is more fully discussed in Note 2 to the consolidated financial statements. The Company does not expect any adjustment to the carrying value of its property, plant and equipment as a result of this change in accounting policy. DISPOSAL OF LONG-LIVED ASSETS In December 2002, the CICA also issued a revision of the hand book section on the disposal of long-lived assets and discontinued operations, which provides guidance on the recognition, measurement and disclosure of the disposal of long-lived assets. Details on this revision are given in Note 2 to the consolidated financial statements. The Company does not expect any significant impact upon adoption of this section. -18- ASSET RETIREMENT OBLIGATIONS In August 2001, the Financial Accounting Standards Board (FASB) issued a statement establishing standards for the recognition and measurement of a liability for an asset retirement obligation and the associated asset retirement cost. This statement is more fully described in Note 22 to the consolidated financial statements. The Company does not expect any significant impact upon adoption of this standard. EXIT OR DISPOSAL ACTIVITIES In June 2002, the FASB issued a statement addressing the recognition, measurement and reporting of costs that are associated with exit and disposal activities. This statement is more fully discussed under Note 22 to the consolidated financial statements. The Company has not yet determined the impact, if any, of this change on any future exit or disposal activity. DISCLOSURES BY A GUARANTOR In November 2002, the FASB issued an interpretation addressing the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. This interpretation is more fully discussed in Note 22 to the consolidated financial statements. The Company is not a guarantor of any third-party, non- affiliated obligations. STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE In December 2002, the FASB issued an amendment providing alternative methods of transition for voluntary change to the fair value based method of accounting for stock-based employee compensation. This amendment is more fully discussed in Note 22 to the consolidated financial statements. The Company believes that this statement will not have a material impact on its financial statements. CONSOLIDATION OF VARIABLE INTEREST ENTITIES In January 2003, the FASB issued an interpretation to provide new guidance with respect to the consolidation of all previously unconsolidated entities, including special purpose entities. Because the Company does not have any unconsolidated subsidiaries, it does not believe that the adoption of the interpretation, required in fiscal 2003, will have any impact on its consolidated financial position or results of operations. -19- MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS TO THE SHAREHOLDERS OF INTERTAPE POLYMER GROUP INC. The consolidated financial statements of Intertape Polymer Group Inc. and the other financial information included in this annual report are the responsibility of the Company's Management and have been examined and approved by its Board of Directors. These consolidated financial statements have been prepared by Management in accordance with Canadian generally accepted accounting principles and include some amounts that are based on Management's best estimates and judgements. The selection of accounting principles and methods is Management's responsibility. The Company maintains internal control systems designed to ensure that the financial information produced is relevant and reliable. Management recognizes its responsibility for conducting the Company's affairs in a manner to comply with the requirements of applicable laws and established financial standards and principles, and for maintaining proper standards of conduct in its activities. The Board of Directors assigns its responsibility for the financial statements and other financial information to the audit committee, the majority of whom are non-management directors. The audit committee's role is to examine the financial statements and annual report and recommend that the Board of Directors approve them, to examine the internal control and information protection systems and all other matters relating to the Company's accounting and finances. In order to do so, the audit committee meets periodically with external auditors, to review their audit plans and discuss the results of their examination. This committee is responsible for recommending the appointment of the external auditors or the renewal of their engagement. The Company's external auditors, Raymond Chabot Grant Thornton, appointed by the shareholders at the Annual and Special Meeting, have audited the Company's financial statements and their report indicating the scope of their audit and their opinion on the financial statements follows. Sarasota, Florida and Montreal, Canada February 21, 2003 /s/ Melbourne F. Yull Melbourne F. Yull Chairman and Chief Executive Officer /s/ Andrew M. Archibald Andrew M. Archibald Chief Financial Officer, Secretary, Vice President, Administration -20- AUDITORS' REPORT TO THE SHAREHOLDERS OF INTERTAPE POLYMER GROUP INC. We have audited the consolidated balance sheets of Intertape Polymer Group Inc. as at December 31, 2002 and 2001 and the consolidated statements of earnings, retained earnings and cash flows for each of the years in the three- year period ended December 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2002 and 2001 and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2002 in accordance with Canadian generally accepted accounting principles. /s/Raymond Chabot Grant Thornton General Partnership Chartered Accountants Montreal February 21, 2003 COMMENTS BY AUDITORS FOR AMERICAN READERS ON CANADA-U.S. REPORTING DIFFERENCES INTERTAPE POLYMER GROUP INC. In the United States of America, reporting standards for auditors require the addition of an explanatory paragraph (following the opinion paragraph) when there is a change in accounting principles that has a material effect on the comparability of the Company's financial statements, such as the change in accounting for goodwill and other intangible assets as described in note 2 to the consolidated financial statements. Our report to the shareholders dated February 21, 2003 is expressed in accordance with Canadian reporting standards which does not require a reference to such change in accounting principles in the auditors' report when the change is properly accounted for and adequately disclosed in the consolidated financial statements. /s/Raymond Chabot Grant Thornton General Partnership Chartered Accountants Montreal February 21, 2003 -21- CONSOLIDATED EARNINGS Years Ended December 31, (in thousands of US dollars, except per share amounts)
2002 2001 2000 _________ _______ ________ $ $ $ Sales 601,575 594,905 653,915 Cost of sales (Note 4) 476,330 476,089 500,547 _________ _______ ________ Gross profit 125,245 118,816 153,368 _________ _______ ________ Selling, general and administrative expenses (Note 4) 86,524 91,343 83,092 Amortization of goodwill 7,014 6,540 Impairment of goodwill (Note 13) 70,000 Research and development 3,169 4,182 5,109 Financial expenses (Note 5) 32,773 38,911 27,205 Gain on sale of interest in joint venture (Note 4) (5,500) _________ _______ ________ 192,466 141,450 116,446 _________ _______ ________ Earnings (loss) before income taxes (67,221) (22,634) 36,922 Income taxes (Note 6) (12,767) (10,392) 3,500 _________ _______ ________ Net earnings (loss) (54,454) (12,242) 33,422 _________ _______ ________ _________ _______ ________ Earnings (loss) per share (Note 7) Basic (1.66) (0.43) 1.18 _________ _______ ________ _________ _______ ________ Diluted (1.66) (0.43) 1.16 _________ _______ ________ _________ _______ ________
CONSOLIDATED RETAINED EARNINGS Years Ended December 31, (in thousands of US dollars)
2002 2001 2000 _________ _______ ________ $ $ $ Balance, beginning of year 104,567 116,966 88,422 Net earnings (loss) (54,454) (12,242) 33,422 _________ _______ ________ 50,113 104,724 121,844 _________ _______ ________ Dividends 3,006 Premium on purchase for cancellation of common shares 157 1,872 _________ _______ ________ 157 4,878 _________ _______ ________ Balance, end of year 50,113 104,567 116,966 _________ _______ ________ _________ _______ ________
The accompanying notes are an integral part of the consolidated financial statements. -22- CONSOLIDATED CASH FLOWS Years Ended December 31, (in thousands of US dollars)
2002 2001 2000 _________ _______ ________ $ $ $ OPERATING ACTIVITIES Net earnings (loss) (54,454) (12,242) 33,422 Non-cash items Depreciation and amortization 28,653 33,831 27,934 Impairment of goodwill 70,000 Loss on disposal of property, plant and equipment 1,280 Future income taxes (15,198) (9,165) 482 Write-off of debt issue expenses 2,165 Write-off of property, plant and equipment 1,594 Other non-cash items (715) (5,500) _________ _______ ________ Cash flows from operations before changes in non-cash working capital items 30,281 13,874 57,932 _________ _______ ________ Changes in non-cash working capital items Trade receivables 475 10,337 (6,897) Other receivables 5,186 (1,287) 3,003 Inventories 9,851 17,690 3,318 Parts and supplies (767) (1,626) 175 Prepaid expenses 1,567 (3,341) (1,809) Accounts payable and accrued liabilities (11,361) 12,431 (15,697) _________ _______ ________ 4,951 34,204 (17,907) _________ _______ ________ Cash flows from operating activities 35,232 48,078 40,025 _________ _______ ________ INVESTING ACTIVITIES Business acquisition (Note 8) (28,195) Property, plant and equipment (11,716) (25,942) (48,142) Proceeds on sale of property, plant and equipment 8,000 4,239 Other assets (5,213) (8,592) 17,637 _________ _______ ________ Cash flows from investing activities (16,929) (26,534) (54,461) _________ _______ ________ FINANCING ACTIVITIES Net change in bank indebtedness (19,525) (99,261) 26,468 Issue of long-term debt 86,400 Repayment of long-term debt (50,209) (9,634) (2,249) Issue of common shares 49,689 3,379 176 Common shares purchased for cancellation (922) (4,194) Dividends paid (3,006) _________ _______ ________ Cash flows from financing activities (20,045) (20,038) 17,195 _________ _______ ________ Net increase (decrease) in cash position (1,742) 1,506 2,759 Effect of currency translation adjustments 1,742 (1,506) (2,759) _________ _______ ________ Cash position, beginning and end of year - - - _________ _______ ________ _________ _______ ________ SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION Interest paid 30,428 32,791 29,319 Income taxes paid 413 1,234 3,118
The accompanying notes are an integral part of the consolidated financial statements. -23- CONSOLIDATED BALANCE SHEETS December 31, (In thousands of US dollars)
2002 2001 _________ ________ $ $ ASSETS Current assets Trade receivables (net of allowance for doubtful accounts of $3,844, $6,670 in 2001) 86,169 86,529 Other receivables (Note 9) 10,201 13,654 Inventories (Note 10) 60,969 70,688 Parts and supplies 12,377 11,592 Prepaid expenses 7,884 9,450 Future income tax assets (Note 6) 2,397 4,025 _________ ________ 179,997 195,938 Property, plant and equipment (Note 11) 351,530 366,567 Other assets (Note 12) 13,178 11,680 Goodwill (Note 13) 158,639 227,804 _________ ________ 703,344 801,989 _________ ________ _________ ________ LIABILITIES Current liabilities Bank indebtedness (Note 14) 8,573 28,046 Accounts payable and accrued liabilities 80,916 91,507 Installments on long-term debt 29,268 8,310 _________ ________ 118,757 127,863 Future income taxes (Note 6) 4,446 21,588 Long-term debt (Note 15) 283,498 354,663 Other liabilities (Note 16) 3,550 3,785 _________ ________ 410,251 507,899 _________ ________ SHAREHOLDERS' EQUITY Capital stock and share purchase warrants (Note 17) 239,185 189,496 Retained earnings 50,113 104,567 Accumulated currency translation adjustments 3,795 27 _________ ________ 293,093 294,090 _________ ________ 703,344 801,989 _________ ________ _________ ________
The accompanying notes are an integral part of the consolidated financial statements. On behalf of the Board /s/J. Spencer Lanthier /s/L. Robbie Shaw J. Spencer Lanthier, Director L. Robbie Shaw, Director -24- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, (In US dollars; tabular amounts in thousands, except per share amounts) 1. GOVERNING STATUTES The Company, incorporated under the Canada Business Corporations Act, is based in Montreal, Canada, and in Sarasota, Florida. The common shares of the Company are listed on the New York Stock Exchange in the United States of America ("United States") and on The Toronto Stock Exchange in Canada. 2. ACCOUNTING POLICIES The consolidated financial statements are expressed in US dollars and were prepared in accordance with Canadian generally accepted accounting principles, which, in certain respects, differ from the accounting principles generally accepted in the United States, as shown in note 21. Accounting changes Stock-based compensation Effective January 1, 2002, the Company adopted, on a prospective basis, the new CICA recommendations with respect to Section 3870, Stock-based Compensation and Other Stock-based Payments. This new standard establishes, among other things, financial accounting and reporting standards for stock- based employee compensation plans. It defines a fair value method of accounting for its stock-based employee compensation plans. Under this method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the related service period. An entity that does not adopt the fair value method of accounting for its award granted to employees is required to include in its financial statements pro forma disclosures of net earnings and earnings per share as if the fair value method of accounting had been applied. The Company has adopted the latter alternative treatment. The supplementary information required by this new recommendation is presented in note 17. The Company has granted stock options as described in note 17. No compensation expense is recognized when stock options are granted. Any consideration paid by employees on exercise of stock options is credited to capital stock. Goodwill and other intangible assets Effective January 1, 2002, the Company adopted, or a retroactive basis, the new CICA recommendations with respect to Section 3062, Goodwill and Other Intangible Assets. These standards are equivalent to the US standards. Under the new recommendations, goodwill and intangible assets determined to have an indefinite useful life are no longer amortized and are tested for impairment annually, or more frequently if events or changes in circumstances indicate that they might be impaired. Under these recommendations, the Company was required to complete a transitional goodwill impairment test as at January 1, 2002. Management completed this test and determined no adjustment for impairment of goodwill was necessary as a result of the change in accounting policy. -25- 2. ACCOUNTING POLICIES (Continued) The following table presents a reconciliation of the net earnings (loss) and earnings (loss) per share as reported for the prior years to the corresponding financial information adjusted to exclude the amortization of goodwill recognized in those periods that is no longer taken as a result of applying Section 3062:
2002 2001 2000 _________ ________ ________ $ $ $ Net earnings (loss), as reported (54,454) (12,242) 33,422 Add: Amortization of goodwill (net of $0.7 and $0.6 million of income taxes for 2001 and 2000 respectively) 6,339 5,911 _________ ________ ________ Adjusted net earnings (loss) (54,454) (5,903) 39,333 _________ ________ ________ _________ ________ ________ Adjusted basic earnings (loss) per share (1.66) (0.21) 1.39 _________ ________ ________ _________ ________ ________ Adjusted diluted earnings (loss) per share (1.66) (0.21) 1.37 _________ ________ ________ _________ ________ ________
Accounting estimates The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the recorded amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the recorded amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. Principles of consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. All significant intercompany accounts and transactions have been eliminated. Investments in joint ventures have been proportionately consolidated based on the Company's ownership interest. Fair value of financial instruments The fair value of trade receivables, other receivables, bank indebtedness as well as accounts payable and accrued liabilities is equivalent to carrying amounts, given the short maturity period of such financial instruments. The fair value of receivables from joint ventures approximates the carrying amounts reported in the consolidated balance sheets. The fair value of long-term debt was established as described in note 15. -26- 2 - ACCOUNTING POLICIES (Continued) Foreign currency translation Reporting currency The accounts of the Company's operations having a functional currency other than the US dollar have been translated into the reporting currency using the current rate method as follows: assets and liabilities have been translated at the exchange rate in effect at year-end and revenues and expenses have been translated at the average rate during the year. All translation gains or losses of the Company's net equity investments in these operations have been included in the accumulated currency translation adjustments account in shareholders' equity. Changes in this account for all periods presented result solely from the application of this translation method. Foreign currency translation Transactions denominated in currencies other than the functional currency have been translated into the functional currency as follows: monetary assets and liabilities have been translated at the exchange rate in effect at the end of each year and revenue and expenses have been translated at the average exchange rate for each year, except for depreciation and amortization which are translated at the historical rate; non-monetary assets and liabilities have been translated at the rates prevailing at the transaction dates. Exchange gains and losses arising from such transactions are included in earnings. Cash and cash equivalents The Company's policy is to present cash and temporary investments having a term of three months or less with cash and cash equivalents. Inventories and parts and supplies valuation Raw materials are valued at the lower of cost and replacement cost. Work in process and finished goods are valued at the lower of cost and net realizable value. Cost is principally determined by the first in, first out method. The cost of work in process and finished goods includes the cost of raw materials, direct labour and manufacturing overhead. Parts and supplies are valued at the lower of cost and replacement cost. Property, plant and equipment Property, plant and equipment are stated at cost less applicable investment tax credits and government grants earned and are depreciated over their estimated useful lives principally as follows:
Methods Rates and periods ___________________________________________________________ Buildings Diminishing balance or straight-line 5% or 15 to 40 years Buildings under capital leases Straight-line 20 years Manufacturing equipment Straight-line 20 years Furniture, office and computer equipment, software and other Diminishing balance or straight-line 20% or 3 to 10 years(i)
(i) Effective January 1, 2002, as a result of an extensive review of the useful lives of the Company's various software, management decided to extend to 10 years the estimated useful lives of all enterprise level software. Prior to such revision, these assets were depreciated over a period of 7 years. The change in estimated useful life was applied prospectively commencing January 1, 2002 and has resulted in a decrease in depreciation expense and a corres- ponding increase in earnings before income taxes, net earnings, basic earnings per share and diluted earnings per share of approximately $1.4 million, $0.9 million, $0.04 and $0.04 respectively for the year ended December 31, 2002. -27- 2 - ACCOUNTING POLICIES (Continued) The Company follows the policy of capitalizing interest during the construc- tion and preproduction periods as part of the cost of significant property, plant and equipment. Normal repairs and maintenance are expensed as incurred, Expenditures which materially increase values, change capacities or extend useful lives are capitalized. Depreciation is not charged on new property, plant and equipment until they become operative. Deferred charges Debt issue expenses are deferred and amortized on a straight-line basis over the term of the related obligation. Other deferred charges are amortized on a straight-line basis over a five-year period. Environmental costs The Company expenses, on a current basis, recurring costs associated with managing hazardous substances and pollution in ongoing operations. The Company also accrues for costs associated with the remediation of environmental pollution when it becomes probable that a liability has been incurred and its share of the amount can be reasonably estimated. Pension plans and other retirement benefits The Company has defined benefit and defined contribution pension plans and other retirement benefit plans for its Canadian and American employees. The following policies are used with respect to the accounting for the defined benefit and other retirement benefit plans: - The cost of pensions and other retirement benefits earned by employees is actuarially determined using the projected benefit method prorated on service and is charged to earnings as services are provided by the employees. The calculations take into account management's best estimate of expected plan investment performance, salary escalation, retirement ages of employees, participants' mortality rates and expected health care costs; - For the purpose of calculating the expected return on plan assets, those assets are valued at the market-related value for certain plans and, for other plans, at fair value; - Past service costs from plan amendments are amortized on a straight-line basis over the average remaining service period of employees active at the date of amendment; - The excess of the net actuarial gains (losses) over 10% of the greater of the benefit obligation and the market-related value or the fair value of plan assets is amortized over the average remaining service period of active employees. Income taxes The Company provides for income taxes using the liability method of tax allocation. Under this method, future income tax assets and liabilities are determined based on deductible or taxable temporary differences between the financial statement values and tax values of assets and liabilities, using substantially enacted income tax rates expected to be in effect for the year in which the differences are expected to reverse. A valuation allowance as recognized to the extent the recoverability of future income tax assets is not considered more likely than not. -28- 2 - ACCOUNTING POLICIES (Continued) Revenue recognition Revenue is recorded when products are shipped to customers. Earnings per share In the year ended December 31, 2000, the Company adopted, on a retroactive basis, the new recommendations of the CICA with respect to Section 3500, Earnings Per Share. Under the new recommendations, the treasury stock method is used, instead of the current imputed earnings approach, for determining the dilutive effect of warrants and options. Previously reported diluted earnings per share amounts have been recalculated in accordance with the new requirements. This change in accounting policy has not resulted in differences in previously reported diluted earnings per share and has not impacted the establishment of the current year's diluted earnings per share. Basic earnings per share are calculated using the weighted average number of common shares outstanding during the year. New accounting pronouncements In December, 2002, the Canadian Institute of Chartered Accountants issued Handbook Section 3063, Impairment of Long-lived Assets. This new Section provides guidance on the recognition, measurement and disclosure of the impairment of long-lived assets. It replaces the write-down provisions in Property, Plant and Equipment, Section 3061. The Section requires an impairment loss for a long-lived asset to be held and used be recognized when its carrying amount exceeds the sum of the undiscounted cash flows expected from its use and eventual disposition. An impairment loss for a long-lived asset to be held and used should be measured as the amount by which its carrying amount exceeds its fair value. Section 3063 should be applied prospectively for years beginning on or after April 1, 2003. The Company does not expect any adjustments to the carrying value of its property, plant and equipment as a result of this change in accounting policy. In December, 2002, the Canadian Institute of Chartered Accountants issued revised Handbook Section 3475, Disposal of Long-lived Assets and Discontinued Operations. This new Section provides guidance on the recognition, measurement and disclosure of the disposal of long-lived assets. This Section should be applied to disposal activities initiated by an enterprise's commitment to a plan on or after May 1. 2003. The Company does not expect any significant impact upon adoption. -29- 3 - JOINT VENTURES The Company's pro rate share of its joint ventures' operations included in the consolidated financial statements is summarized as follows:
2002 2001 2000 __________ ________ ________ Earnings $ $ $ Sales 4,216 3,572 2,671 Gross profit 797 664 383 Financial expenses (income) 198 (7) (320) Net earnings (loss) (65) 110 136 Cash flows From operating activities 520 1,342 643 From investing activities (35) 86 (2,232) From financing activities 1,071 (956) 512 Balance sheets Assets Current assets 1,637 1,307 1,483 Long-term assets 6,051 6,122 7,119 Liabilities Current liabilities 1,459 2,925 2,885 Long-term debt 1,574 667 1,862
During the years ended December 31, 2002 and 2001, the Company had no sales to its joint ventures. The Company had sales of $2.8 million to its joint ventures in 2000. Also, the Company had no interest income from a joint venture for the years ended December 31, 2002 and 2001. The Company had interest income from joint ventures of $0.1 million in 2000. -30- 4 - INTEGRATION AND TRANSITION, ASSET WRITE-DOWNS AND OTHER NON-RECURRING ITEMS During 2002, management approved a plan for the consolidation of its operations related to the Flexible Intermediate Bulk Container division to be completed in June 2003. The plan involves the closing of two manufacturing plants and a reduction of 77 employees. The total charge for the restructuring is $2.1 million, including $1.8 million of termination benefits. Of the total charge, $0.9 million was recorded in the cost of goods sold and $1.2 million in the selling, general and administrative expenses. As at December 31, 20O2 the balance of $1.3 million is in accounts payable and accrued liabilities. For the year ended December 31, 2001, the Company recorded asset write-downs and non-recurring costs as a result of recent integrations, the startup of its Regional Distribution Centers, workforce reductions and debt refinancing. The total charge of $25.2 million includes $4.2 million of termination benefits. Cost of sales includes $7.7 million, selling, general and administrative expenses include $10.8 million and financial expenses include $6.7 million of such costs. During the year ended December 31, 2000, the Company realized a gain of $5.5 million on the sale of its interest in a joint venture. 5 - INFORMATION INCLUDED IN THE CONSOLIDATED STATEMENTS OF EARNINGS
2002 2001 2000 __________ ________ ________ $ $ $ Depreciation of property, plant and equipment 25,337 24,977 20,334 __________ ________ ________ __________ ________ ________ Amortization of debt issue expenses and other deferred charges 3,316 1,840 1,060 __________ ________ ________ __________ ________ ________ Financial expenses Interest on long-term debt 28,559 22,029 20,812 Interest on credit facilities 2,369 11,064 8,747 Refinancing costs 6,700 Interest income and other 2,310 18 (1,116) Interest capitalized to property, plant and equipment (465) (900) (1,238) __________ ________ ________ 32,773 38,911 27,205 __________ ________ ________ __________ ________ ________ Loss on disposal of property, plant and equipment 1,280 __________ ________ ________ __________ ________ ________
-31- 6 - INCOME TAXES The provision for income taxes consists of the following:
2002 2001 2000 __________ ________ ________ $ $ $ Current 2,431 (1,227) 3,018 Future (15,198) (9,165) 482 __________ ________ ________ (12,767) (10,392) 3,500 __________ ________ ________ __________ ________ ________
The reconciliation of the combined federal and provincial statutory income tax rate to the Company's effective tax rate is detailed as follows:
2002 2001 2000 __________ ________ ________ % % % Combined federal and provincial income tax rate 42.7 42.7 43.1 Manufacturing and processing (1.6) (8.6) 2.2 Foreign losses recovered (foreign income taxed) at lower rates (1.7) (6.4) (5.1) Goodwill impairment (33.0) Impact of other differences 28.8 86.7 (30.7) Change in valuation allowance (16.2) (68.5) __________ ________ ________ Effective income tax rate 19.0 45.9 9.5 __________ ________ ________ __________ ________ ________
-32- 6 - INCOME TAXES (Continued) The net future income tax liabilities are detailed as follows:
2002 2001 ________ ________ $ $ Future income tax assets Accounts payable and accrued liabilities 2,501 2,257 Tax credits and loss carry-forwards 77,890 55,372 Trade and other receivables 1,335 2,318 Inventories 296 Other 7,741 25 Valuation allowance (26,336) (15,498) ________ ________ 63,131 44,770 ________ ________ Future income tax liabilities Inventories 383 Property, plant and equipment 64,797 62,333 ________ ________ 65,180 62,333 ________ ________ Net future income tax liabilities 2,049 17,563 Net current future income tax assets 2,397 4,025 ________ ________ Net long-term future income tax liabilities 4,446 21,588 ________ ________ ________ ________
As at December 31, 2002, the Company has $44.3 million of Canadian operating loss carry-forwards expiring 2007 through 2009 and $153.7 million of US federal and state operating losses expiring 2010 through 2022. In assessing the realizability of future income tax assets, management considers whether it is more likely than not that some portion or all of the future income tax assets will not be realized. Management considers the scheduled reversal of future income tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. The Company expects the future income tax assets, net of the valuation allowance, as at December 31, 2002 to be realized as a result of the reversal of existing taxable temporary differences. As part of the above analysis, the valuation allowance was increased by $10.8 million for the year ended December 31, 2002. -33- 7 - EARNINGS (LOSS) PER SHARE The following table provides a reconciliation between basic and diluted earnings (loss) per share:
2002 2001 2000 __________ __________ __________ $ $ $ Net earnings (loss) (54,454) (12,242) 33,422 __________ __________ __________ __________ __________ __________ Weighted average number of common shares outstanding 32,829,013 28,265,708 28,328,114 Effect of dilutive stock options and warrants(i) 387,738 __________ __________ __________ Weighted average number of diluted common shares outstanding 32,829,013 28,265,708 28,715,852 __________ __________ __________ __________ __________ __________ Basic earnings (loss) per share (1.66) (0.43) 1.18 Diluted earnings (loss) per share (1.66) (0.43) 1.16
(i) The following number of equity instruments were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive for the periods presented:
2002 2001 2000 _____________________ _____________________ _____________________ Number of instruments Number of instruments Number of instruments _____________________ _____________________ _____________________ Options 2,996,673 2,407,250 2,409,298 Warrants 300,000 300,000 300,000 _____________________ _____________________ _____________________ 3,296,673 2,707,250 2,709,298 _____________________ _____________________ _____________________ _____________________ _____________________ _____________________
-34- 8 - BUSINESS ACQUISITION Effective as of September 1, 2000, the Company acquired certain assets of Olympian Tape Sales, Inc, d/b/a United Tape Company ("UTC"). UTC was a manufacturer and distributor of certain packaging products into the retail market. UTC was a long-term customer of one particular product line of IPG. The acquisition has been accounted for using the purchase method of accounting and, accordingly, the purchase price was allocated to the assets and liabilities based an their estimated fair value as of the acquisition date. The purchase price was paid for in both cash in the amount of $28.2 million and $4.0 million worth of common shares of Intertape stock from treasury. The terms of the UTC purchase also provide for additional amounts to be paid if certain specific events occur. This contingent consideration is payable in cash and will result in additional goodwill if paid. The Company has not recorded this liability as of December 31, 2002 as the outcome of the contingency is not yet determinable beyond a reasonable doubt. The operating results of the acquired business has been included in the consolidated financial statements from the effective date of acquisition. 9 - OTHER RECEIVABLES
2002 2001 __________ ________ $ $ Rebates receivable 363 3,088 Income and other taxes 6,199 4,903 Sales taxes 541 745 Other 3,098 4,918 __________ __________ 10,201 13,654 __________ __________ __________ __________
10 - INVENTORIES
2002 2001 __________ __________ $ $ Raw materials 14,998 15,520 Work in process 10,160 11,815 Finished goods 35,811 43,353 __________ __________ 60,969 70,688 __________ __________ __________ __________
-35- 11 - PROPERTY, PLANT AND EQUIPMENT
2002 _______ ________________ ___________ Accumulated Cost depreciation Net _______ ________________ ___________ $ $ $ Land 3,021 3,021 Buildings and related capital leases 59,854 17,510 42,344 Manufacturing equipment 385,315 118,066 267,249 Furniture, office and computer equipment, software and other 48,960 22,117 26,843 Manufacturing equipment under construction and software projects under development 12,073 12,073 _______ ________________ ___________ 509,223 157,693 351,530 _______ ________________ ___________ _______ ________________ ___________ 2001 _______ ________________ ___________ Accumulated Cost depreciation Net _______ ________________ ___________ $ $ $ Land 3,317 3,317 Buildings and related capital leases 59,425 15,241 44,184 Manufacturing equipment 370,195 101,609 268,586 Furniture, office and computer equipment, software and other 30,969 15,279 15,690 Manufacturing equipment under construction and software projects under development 34,790 34,790 _______ ________________ ___________ 498,696 132,129 366,567 _______ ________________ ___________ _______ ________________ ___________
-36- 12 - OTHER ASSETS
2002 2001 __________ _________ $ $ Debt issue expenses and other deferred charges, at amortized cost 10,397 8,879 Loans to officers and directors, including loans regarding the exercise of stock options, without interest, various repayment terms 886 1,059 Other receivables 1,145 430 Other, at cost 750 1,312 __________ _________ 13,178 11,680 __________ _________ __________ _________
13 - ACCOUNTING FOR GOODWILL In accordance with the specific requirements of CICA, Section 3062, Goodwill and Other Intangible Assets, the Company performed an impairment test as at December 31, 2002. Also in accordance with the specific requirements of the Section, the Company determined that it had one reporting unit. The Company calculated the fair value of this reporting unit using the discounted cash flows method, and compared with other methods including multiples of sales and earnings before interest, taxes, depreciation, and amortization (EBITDA) and, with historical transactions where appropriate. From these approaches, the fair market value was determined resulting in a charge to operating expenses of $70.0 million. This impairment relates to the prior acquisition activity of Intertape Polymer Group during the period from 1996 through 2000 in light of current economic and market conditions. The carrying amount of goodwill as at December 31, 2002 is detailed as follows:
$ ____________________ Balance as at December 31, 2002 228,639 Impairment 70,000 ____________________ Net balance as at December 31, 2002 158,639 ____________________ ____________________
-37- 14 - BANK INDEBTEDNESS AND CREDIT FACILITIES The bank indebtedness consists of the utilized portion of the short-term revolving bank credit facilities and cheques issued which have not been drawn from the facilities and is reduced by any cash and cash equivalent balances. As at December 31, 2002, the Company had: - Bank loans under a US $50.0 million revolving credit facility (Facility A), extendible annually at the option of the lenders, converting to a two-year term loan if not extended by the lenders. The loan bears interest at various interest rates including US prime rate plus a premium varying between 0 and 275 basis points and LIBOR plus a premium varying between 75 and 350 basis points. As at December 31, 2002, the effective rate was approximately 6.08% (7.95% in 2001) and US$26.8 million (US$39.0 million in 2001) was utilized. - An amount of US$2.8 million (US$5.5 million in 2001) of this credit facility is used for letters of credit. The credit facility is secured by a first ranking charge on the Company's accounts receivable and inventories. The credit facilities contain certain financial covenants, including limitations on debt as a percentage of tangible net worth above predefined levels and fixed charge coverage ratios. 15 - LONG-TERM DEBT Long-term debt consists of the following:
2002 2001 __________ _________ $ $ a) US$137,000,000 Series A and B Senior Notes 125,005 137,000 b) US$137,000,000 Senior Notes 124,616 137,000 c) Bank loans under revolving credit facilities 60,000 86,400 d) Other debt 3,145 2,573 __________ _________ 312,766 362,973 __________ _________ Less current portion of long-term debt 29,268 8,310 __________ _________ 283,498 354,663 __________ _________ __________ _________
-38- 15 - LONG-TERM DEBT (Continued) a) Series A and B Senior Notes Series A and B Senior Notes bearing interest at an average rate of 10.03% (10.03% in 2001) payable semi-annually. The Series A US$25.0 million Notes mature on May 31, 2005. The Series B US$112.0 million Notes are repayable in semi-annual installments of US$13.4 million starting in November 2005 and mature on May 31, 2009. The Series A and B Senior Notes are secured by a first ranking charge on all of the tangible and intangible assets of the Company and a second ranking charge on the accounts receivable and inventories. The Series A and B Senior Notes contain the same financial covenants as the credit facilities. b) Senior Notes Senior Notes bearing interest at 9.07% (9.07% in 2001) payable semi-annually, repayable in semi-annual installments of US$16.5 million starting in September 2004 and maturing on March 31, 2008. Senior Notes are secured by a first ranking charge on all of the tangible and intangible assets of the Company and a second ranking charge on the accounts receivable and inventories. The Senior Notes contain the same financial covenants as the credit facilities. c) Bank loans under revolving credit facilities Revolving reducing term loan (Facility B) was repaid and cancelled in October 2002 (US$26.4 million was utilized in 2001). The interest rate in effect at the time of the repayment was 5.76% (7.95% in 2001). Revolving reducing term loan (Facility C) in the amount of up to $60.0 million, reducing by $5.0 million on the last day of each quarter beginning the earlier of March 31. 2004 or the last day of the quarter following the repayment of Facility B, maturing on December 31, 2005, secured by a first ranking charge on all of the tangible and intangible assets of the Company and a second ranking charge on all the accounts receivable and inventories. The repayment will begin in March 2003. This loan bears interest at US prime rate plus a premium varying between 75 and 320 basis points or LIBOR plus a premium varying between 150 and 395 basis points. As at December 31, 2002, the effective interest rate was approximately 5.80% (7.95% in 2001) and $60.0 million ($60.0 million in 2001) was utilized. d) Other debt Other debt consisting of government loans, mortgage loans in a joint venture, obligations related to capitalized leases and other loans at fixed and variable interest rates ranging from interest-free to 9.03% and requiring periodic principal repayments through 2007. -39- 15 - LONG-TERM DEBT (Continued) The Company has complied with the maintenance of financial ratios and with other conditions that are stipulated in the covenants pertaining to the various loan agreements. Long-term debt repayments are due as follows: $ ____________________ 2003 29,268 20O4 36,922 2005 89,060 2006 60,107 2007 60,108 Thereafter 37,301 ____________________ Total 312,766 ____________________ ____________________ Fair value For all debts with fixed interest rates, the fair value has been determined based on the discounted value of cash flows under the existing contracts using rates representing those which the Company could currently obtain for loans with similar terms, conditions and maturity dates. For the debts with floating interest rates, the fair value is closely equivalent to their carrying interest rates, the fair value is closely equivalent to their carrying amounts. The carrying amounts and fair values of the Company's long-term debt as at December 31, 2002 and 2001 are as follows: 2002 2001 _______________________ _______________________ Carrying Carrying Fair value amount Fair value amount ____________ __________ ____________ __________ $ $ $ $ Long-term debt 306,398 312,766 334,054 362,973 ____________ __________ ____________ __________ ____________ __________ ____________ __________ -40- 16 - OTHER LIABILITIES 2002 2001 __________ __________ $ $ Provision for future site rehabilitation costs 550 785 Other 3,000 3,000 __________ __________ 3,550 3,785 ____________________ ____________________ During the years ended December 31, 2002 and 2001, the Company reviewed certain provisions, which it had previously established in accounting for prior years' business acquisitions. This process included the obtaining from third parties environmental and transfer pricing studies. Furthermore, the Company holds letters of guarantee provided by the vendors against certain future related claims. As a result of the above, the Company reversed against earnings $0.8 million of provisions in 2002 and $0.7 million in 2001, which had been recorded in prior years for specific business acquisitions. A company-wide environmental reserve for on-going operations of $0.8 million was established in 2002. During 2002, $0.2 million in remediation costs were charged against this reserve. -41- 17 - CAPITAL STOCK AND SHARE PURCHASE WARRANTS a) Capital stock - Authorized Unlimited number of shares without par value Common shares, voting and participating Class "A" preferred shares, issuable in series, ranking in priority to the common shares with respect to dividends and return of capital on dissolution. The Board of Directors is authorized to fix, before issuance, the designation, rights, privileges, restrictions and conditions attached to the shares of each series. b) Capital stock - Issued and fully paid The changes in the number of outstanding common shares and their aggregate stated value from January 1, 2000 to December 31, 2002 were as follows:
2002 2001 2000 __________________ ___________________ ___________________ Number Stated Number Stated Number Stated of shares value of shares value of shares value _________ _______ __________ _______ __________ _______ $ $ $ Balance, beginning of year 28,506,110 186,346 28,211,179 183,758 28,296,392 181,941 Shares issued for cash in public offering 5,100,000 47,691 Shares issued for business acquisitions 250,587 4,000 Shares issued to the USA Employees' Stock Ownership and Retirement Savings Plan 172,976 1,697 248,906 2,240 Shares purchased for cancellation (128,100) (765) (353,200) (2,359) Shares issued for cash upon exercise of stock options 41,988 301 174,125 1,113 17,400 176 __________ _______ __________ _______ __________ _______ Balance, end of year 33,821,074 236,035 28,506,110 186,346 28,211,179 183,758 _____________________________________________________________ _____________________________________________________________
-42- 17 - CAPITAL STOCK AND SHARE PURCHASE WARRANTS (Continued) c) Share Purchase warrants 2002 2001 __________ __________ $ $ 300,000 share purchase warrants 3,150 3,150 __________ __________ __________ __________ The warrants, which expire on August 9, 2004, permit holders to purchase common shares of the Company at a price of $29.50 per share. d) Shareholders' protection rights plan On May 21, 1998, the shareholders approved the extension to September 2003 of a shareholders'protection rights plan originally established in 1993. The effect of the rights plan is to require anyone who seeks to acquire 20% or more of the Company's voting shares to make a bid complying with specific provisions. e) Stock options Under the Company's amended executive stock option plan, options may be granted to the Company's executives and directors for up to 3,361,661 shares of common stock. Options expire no later than 10 years after the date of granting. The plan provides that such options will vest and may be exercisable 25% per year over four years. All options were granted at a price equal to the average closing market values on the day immediately preceding the date the options were granted. -43- 17 - CAPITAL STOCK AND SHARE PURCHASE WARRANTS (Continued) The changes in number of options outstanding were as follows:
2002 2001 2000 ____________________ ____________________ ______________________ Weighted Weighted Weighted average average average exercise Number of exercise Number of exercise Number of price options price options price options ________ __________ ________ _________ _________ ___________ $ $ $ Balance, beginning of year 10.06 2,407,250 12.89 2,797,036 15.76 2,217,224 Granted 9.88 688,500 9.79 386,000 10.37 1,183,000 Exercised 7.17 (41,988) 6.39 (174,125) 8.23 (17,400) Cancelled 9.19 (57,089) 16.56 (601,661) 16.84 (585,788) __________ _________ _________ Balance, end of year 10.02 2,996,673 10.06 2,407,250 12.89 2,797,036 __________ _________ _________ __________ _________ _________ Options exercisable at the end of the year 1,529,894 1,022,214 1,267,019 __________ _________ _________ __________ _________ _________
The following table summarizes information about options outstanding and exercisable at December 31, 2002:
Options Options outstanding exercisable ____________________________________ ____________________ Weighted Weighted Weighted average average average contractual exercise exercise Number life (in years) price Number price _________ _______________ ________ _________ _________ Range of exercise prices $ $ $4.30 to $6.41 179,500 1.1 5.67 164,500 5.78 $7.71 to $11.43 2,415,757 3.8 9.44 1,096,007 9.12 $11.92 to $17.19 364,916 3.4 14.63 235,887 15.65 $19.09 to $27.88 36,500 1.4 23.48 33,500 23.09 _________ __________ 2,996,673 3.6 10.02 1,529,894 10.07 _________ __________ _________ __________
-44- 17 - CAPITAL STOCK AND SHARE PURCHASE WARRANTS (Continued) On January 10, 2001, the Company repriced 474,163 of unexercised stock options held by employees, other than directors and executive officers. The repriced options had exercise prices ranging from US$16.30 to US$23.26 (CA$26.01 to CA$37.11) and expire in 2003 and 2006. The revised exercise price was set at US$8.28 (CA$13.21), being the average of the closing price on The Toronto Stock Exchange and the New York Stock Exchange on January 9. 2001. All other terms and conditions of the respective options, including the percentage vesting and the vesting and expiry dates, remain unchanged. For years beginning on or after January 1, 2002, the Company is required to make pro forma disclosures of net earnings (loss), basic earnings (loss) per share and diluted earnings (loss) per share as if the fair value based method of accounting had been applied. The fair value of options granted was estimated using the Black-Scholes option-pricing model, taking into account the following weighted average assumptions: 2002 _____________ Expected life 5 years Expected volatility 50% Risk-free interest rate 4.57% Expected dividends $0.00 2002 _____________ $ The weighted average fair value per share of options granted is: 4.38 Accordingly, the Company's net loss and loss per share would have been increased to the pro forma amounts indicated in the following table: 2002 _____________ $ Net loss - as reported (54,454) Total stock-based employee compensation expense determined under fair value based method(i) 515 _____________ Pro forma net loss (54,969) _____________ Loss per share: Basic - as reported (1.66) _____________ Basic - pro forma (1.67) _____________ Diluted - as reported (1.66) _____________ Diluted - pro forma (1.67) _____________ (i) To determine the compensation cost, the fair value of stock options is recognized on a straight-line basis over the vesting periods. -45- 17 - CAPITAL STOCK AND SHARE PURCHASE WARRANTS (Continued) The pro forma effect on net earnings and earnings per share is not representative of the pro forma effect on net earnings and earnings per share of future years because it does not take into consideration the pro forma compensation cost related to options awarded prior to January 1, 2002. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's amended executive stock option plan has characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. 18 - COMMITMENTS AND CONTINGENCIES a) Commitments As at December 31, 2002, the Company had commitments aggregating approximately $23.5 million up to 2010 for the rental of offices, warehouse space, manufacturing equipment, automobiles and other. Minimum payments for the next five years are $9.0 million in 2003, $4.7 million in 2004, $2.8 million in 2005, $1.8 million in 2006 and $1.5 million in 2007. b) Contingencies The Company is party to various claims and lawsuits which are being contested. In the opinion of management, the outcome of such claims and lawsuits will not have a material adverse effect on the Company. 19 - PENSION AND POST-RETIREMENT BENEFIT PLANS The Company has several defined contribution plans and defined benefit plans for substantially all its employees in both Canada and the United States. These plans are generally contributory in Canada and non-contributory in the United States. Defined contribution plans In the United States, the Company maintains a savings retirement plan (401[k] Plan) for the benefit of certain employees who have been employed for at least 90 days. Contribution to these plans is at the discretion of the Company. The Company contributes as well to a multi-employer plan for employees covered by collective bargaining agreements. In Canada, the Company maintains a defined contribution plan for its salaried employees. The Company contributes to the plan amounts equal to 4% of each participant's eligible salary. The Company has expensed $2.6 million for these plans for the year ended December 31, 2002 ($2.3 million and $2.0 million for 2001 and 2000 respectively). -46- 19 - PENSION AND POST-RETIREMENT BENEFIT PLANS (Continued) Defined benefit plans The Company has, in the United States, two defined benefit plans (hourly and salaried). Benefits for employees are based on compensation and years of service for salaried employees and fixed benefits per month for each year of service for hourly employees. In Canada, certain non-union hourly employees of the Company are covered by a plan which provides a fixed benefit of $10.83 ($10.65 and $9.95 in 2001 and 2000 respectively) per month for each year of service. In the United States, the Company provides group health care and life insurance benefits to certain retirees. Information relating to the various plans is as follows:
Pension plans Other plans _____________________ _________________ 2002 2001 2002 2001 ______ ______ ____ ____ $ $ $ $ Accrued benefit obligations Balance, beginning of year 20,572 18,866 782 785 Current service cost 497 398 11 10 Interest cost 1,545 1,363 54 56 Benefits paid (834) (754) (38) (73) Plan amendments 1,136 340 Actuarial losses 1,140 420 31 4 Foreign exchange rate adjustment 15 (61) ______ ______ ____ ____ Balance, end of year 24,071 20,572 840 782 ------ ------ ---- ---- Plan assets Balance, beginning of year 15,450 16,931 Actual return on plan assets (2,439) (1,742) Employer contributions 991 1,075 Benefits paid (834) (754) Foreign exchange rate adjustment 13 (60) ______ ______ ____ ____ Balance, end of year 13,181 15,450 - - ______ ______ ____ ____ Funded status - deficit 10,890 5,122 840 782 Unamortized past service costs (1,931) (912) Unamorized net actuarial gain (loss) (10,480) (5,573) 83 118 Unamortized transition assets (obligation) 87 90 (38) (41) Accrued benefit liability _______ _______ ____ ____ (prepaid benefit) (1,434) (1,273) 885 859 _______ _______ ____ ____
-47- 19 - PENSION AND POST-RETIREMENT BENEFIT PLANS (Continued) Accrued benefit expense
Pension plans Other plans _________________________ ______________________ 2002 2001 2000 2002 2001 2000 _____ _____ _____ _____ ____ ____ $ $ $ $ $ $ Current service cost 497 398 393 11 10 9 Interest cost 1,545 1,363 1,309 54 56 53 Expected return on plan assets (1,568) (1,652) (1,459) Amortization of past service costs 122 52 53 Amortization of transition obligation (asset) (3) (4) (4) (1) 4 4 Amortization of unrecog- nized loss (gain) 238 18 (21) (6) (14) ______ ______ ______ _____ _____ _____ Pension expense for the year 831 175 271 64 64 52 ______ ______ ______ _____ _____ _____
The significant assumptions which management considers to be the most likely and which were used to measure its accrued benefit obligations are as follows (weighted average assumptions as at December 31):
Pension plans Other plans _________________________________________________ 2002 2001 2000 2002 20O1 2000 _____ ______ _____ _____ _____ ________ Canadian plans Discount rate 7.00% 7.25% 7.50% -- -- -- Expected rate of return on plan assets 9.25% 9.25% 9.00% -- -- -- U.S. plans Discount rate 7.00% 7.25% 7.50% 7.00% 7.25% 7.50% Expected rate of return on plan assets 9.25% 9.25% 8.60% -- -- --
For measurement purposes, a 5.0% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2002 (5.5% in 2001 and 5.0% in 2000) and deemed to remain constant through 2009. An increase or decrease of 1% of this rate would have the following impact: Increase Decrease of 1% of 1% ________ ________ $ $ Impact on net periodic cost 2 (2) Impact on accrued benefit obligation 33 (28) -48- 20 - SEGMENT DISCLOSURES The Company manufactures and sells an extensive range of specialized polyolefin plastic packaging products primarily in Canada and in the United States. All products have to be considered part of one reportable segment as they are made from similar extrusion processes and differ only in the final stages of manufacturing. A vast majority of the Company's products, while brought to market through various distribution channels, generally have similar economic characteristics. The following table presents sales by country based on the location of the manufacturing facilities:
2002 2001 2000 _______ _______ _______ $ $ $ Canada 119,101 127,878 117,799 United States 510,500 500,028 581,723 Other 3,817 3,563 2,443 Transfers between geographic areas (31,843) (36,564) (48,050) _______ _______ _______ Total sales 601,575 594,905 653,915 _______ _______ _______
The following table presents property, plant and equipment and goodwill by country based on the locations of assets:
2002 2001 2000 ________ _______ _______ $ $ $ Property, plant and equipment, net Canada 46,347 48,693 51,388 United States 299,564 312,501 316,900 Other 5,619 5,373 6,465 _______ _______ _______ Total property, plant and equipment, net 351,530 366,567 374,753 _______ _______ _______ Goodwill, net Canada 11,361 16,202 17,955 United States 147,278 211,602 216,302 _______ _______ _______ Total goodwill, net 158,639 227,804 234,257 _______ _______ _______
-49- 21 - DIFFERENCES IN ACCOUNTING BETWEEN THE UNITED STATES OF AMERICA AND CANADA a) Net earnings and earnings per share Net earnings of the Company and earnings per share established under Canadian GAAP conform in all material respects to the amounts that would be reported if the financial statements would have been prepared under US GAAP. b) Consolidated balance sheets. Under Canadian GAAP, the financial statements are prepared using the proportionate consolidation method of accounting for joint ventures. Under US GAAP, these investments would be accounted for using the equity method. Note 3 to the consolidated financial statements provides details of the impact of proportionate consolidation on the Company's consolidated financial statements for 2002, 2001 and 2000, including the impact on the consolidated balance sheets. The other differences in presentation that would be required under US GAAP to the consolidated balance sheets, other than as disclosed below, are not viewed as significant enough to require further disclosure. c) Consolidated cash flows Canadian GAAP permits the disclosure of a subtotal of the amount of funds provided by operations before changes in non-cash working capital items to be included in the consolidated statements of cash flows. US GAAP does not permit this subtotal to be presented. d) Accounting for compensaltion programs The Company has chosen to continue to measure compensation costs related to awards of stock options using the intrinsic value based method of accounting. In March 2000, the Financial Accounting Standards Board issued FASB Interpretation No. 44 (FIN 44), which became effective on July 1, 2000, requiring that the cancellation of outstanding stock options by the Company and the granting of new options with a lower exercise price (the replacement options) be considered as an indirect reduction of the exercise price of the stock options. Under FIN 44, the replacement options and any repriced options are subject to variable accounting from the cancellation date or date of grant, depending on which stock options were identified as the replacement options. Using variable accounting, the Company is required to recognize, at each reporting date, compensation expense for the excess of the quoted market price of the stock over the exercise prices of the replacement or repriced options until such time as the replacement options are exercised, forfeited or expire. The impact on the Company's financial results will depend on the fluctuations in the Company's stock price and the dates of the exercises, forfeitures or cancellations of the stock options. Depending on these factors, the Company could be required to record significant compensation expense during the life of the options which expire in 2006. -50- 21 - DIFFERENCES IN ACCOUNTING BETWEEN THE UNITED STATES OF AMERICA AND CANADA (Continued) In November 2000, 300,000 and 50,000 replacement options were issued at exercise prices of US$10.13 (CA$15.50) and US$14.71 (CA$21.94) respectively, and in May and August 2001, 40,000 and 54,000 replacement options were issued for US$9.00 (CA$13.80) and US$11.92 (CA$18.80) respectively. In addition, in January 2001, 474,163 options were repriced at US$8.28 (CA$12.40) (see note 17). As at December 31, 2002, the Company's quoted market stock price was $4.12 (CA$6.49) per share. For the options subject to variable accounting, the compensation expense would not materially impact net loss reported in the consolidated statement of earnings for 2002 and 2001 under US GAAP. Under US GAAP, the Company is required to make pro forma disclosures of net earnings (loss), basic earnings (loss) per share and diluted earnings (loss) per share as if the fair value based method of accounting had been applied. The fair value of options granted in 2002, 2001 and 2000 was estimated using the Black-Scholes option-pricing model, taking into account the following weighted average assumptions: 2002 2001 2000 _______ ______________ _______ Expected life 5 years 5 years 5 years Expected volatility 50% 50% 45% Risk-free interest rate 4.57% 4.76% 5.96% Expected dividends $0.00 $0.00 to $0.18 $0.11 2002 2001 2000 _______ ______________ _______ $ $ $ The weighted average fair value per share of options granted is: 4.38 4.74 4.42 Accordingly, the Company's net earnings (loss) and earnings (loss) per share would have been reduced (increased) to the pro forma amounts indicated in the following table: 2002 2001 2000 _______ ______________ _______ $ $ $ Net earnings (loss) - as reported (54,454) (12,242) 33,422 Deduct: Total stock-based employee compensation expense determined under fair value based method 2,367 4,212 3,362 _______ ______________ _______ Pro forma net earnings (loss) (56,821) (16,454) 30,060 _______ ______________ _______ Earnings (loss) per share: Basic - as reported (1.66) (0.43) 1.18 _______ ______________ _______ Basic - pro forma (1.73) (0.58) 1.06 _______ ______________ _______ Diluted - as reported (1.66) (0.43) 1.16 _______ ______________ _______ Diluted - pro forma (1.73) (0.58) 1.05 _______ ______________ _______ -51- 21 - DIFFERENCES IN ACCOUNTING BETWEEN THE UNITED STATES OF AMERICA AND CANADA (continued) e) Accumulated pension benefit obligation Under US GAAP, if the accumulated pension benefit obligation exceeds the fair value of benefit plan assets, a liability must be recognized in the balance sheet that is at least equal to the unfunded accumulated benefit obligation. To the extent that the additional minimum liability is created by a plan improvement, an intangible asset can be established. Any additional minimum liability not covered by an intangible asset will cause a net of tax reduction in accumulated other comprehensive income. The following sets out the adjustments required to the Company's consolidated balance sheets to conform with US GAAP accounting for pension benefit obligations:
2002 2001 2000 _________ ___________ ___________ $ $ $ Future income tax assets would increase by 3,878 2,029 - Other assets would increase by 1,843 912 - Accounts payable and accrued liabilities would increase by 12,323 6,396 - Shareholders' equity would decrease by (6,602) (3,455) -
f) Consolidated comprehensive income As required under US GAAP, the Company would have reported the following consolidated comprehensive income: 2002 2001 2000 _________ ___________ ___________ $ $ $ Net earnings (loss) in accordance with US GAAP (54,454) (12,242) 33,422 Currency translation adjustments 3,768 (5,741) (2,722) Minimum pension liability adjustment, net of tax (Note 21 e)) (3,147) (3,455) _________ ___________ ___________ Consolidated comprehensive income (loss) (53,833) (21,438) 30,700 ___________________________________ -52- 22 - SIGNIFICANT NEW ACCOUNTING PRONOUNCEMENTS UNDER US GAAP In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" that established standards for recognition and measurement of a liability for an asset retirement obligation and the associated asset retirement cost. The statement provides for an initial recognition of the fair value of a liability for an asset retirement obligation in the period in which it is incurred when a reasonable estimate of fair value can be made. The asset retirement obligation is recorded as a liability with a corresponding increase to the carrying amount of the related long-lived asset. Subsequently, the asset retirement cost is allocated to expense using a systematic and rational allocation method and is adjusted to reflect period-to-period changes in the liability resulting from passage of time and revisions to either timing or the amount of the original estimate of undiscounted cash flows. The statement is effective for fiscal years beginning after June 15, 2002 and the Company does not expect any significant impact upon adoption of this standard. In June 2002, the FASB issued SFAS No. 146, Accounting for Exit or Disposal Activities ("SFAS 146"). SFAS 146 addresses the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including costs related to terminating a contract that is not a capital lease and termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract. SFAS 146 supersedes Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including certain costs incurred in a Restructuring), and requires liabilities associated with exit and disposal activities of the Company that are initiated after December 31, 2002. The Company has not yet determined the impact, if any, of this change on any future exit or disposal activity. In November 2002, the Financial Accounting Standards Board (FASB) issued Interpretation No. 45, which addresses the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. This interpretation requires a guarantor to recognize, at the inception of the guarantee, a liability for the fair value of the obligation undertaken. The FASB did not prescribe a specific approach for subsequently measuring the guarantor's recognized liability over the term of the related guarantee. This interpretation also incorporates, without change, the guidance in FASB Interpretation No. 34, Disclosure of Indirect Guarantees of Indebtedness of Others, which is being superseded by this document. Certain guarantee arrangements are completely excluded from the scope of the interpretation and others are only excluded from the recognition and measurement provisions. The additional disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The initial recognition and initial measurement provisions of this interpretation are applicable to guarantees issued or modified after December 31, 2002, irrespective of the guarantor's fiscal year-end. The Company is not a guarantor of any third party, non-affiliated obligations. In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123 ("SFAS 148"). This amendment provides alternative methods of transition for voluntary change to the fair value based method of accounting for stock- based employee compensation. Additionally, prominent disclosures in both annual and interim financial statements are required for the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company believes that this statement will not have a material impact on its financial statements. In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" to provide new guidance with respect to the consolidation of all previously unconsolidated entities, including special purpose entities. The Company does not have any unconsolidated subsidiaries, therefore the Company believes that the adoption of the interpretation, required in fiscal 2003, will not have any impact on the Company's consolidated financial position or results of operations. -53- Intertape Polymer Group Locations Corporate Offices Montreal, Quebec, Canada Sarasota, Florida, U.S,A. Brighton, Colorado, U.S,A. 3 4 Menasha, Wisconsin, U.S.A. 3 4 Carbondale, Illinois, U.S,A. 3 4 Ontario, California. U.S,A. 3 4 Columbia, South Carolina, U.S.A. 3 4 Piedras Negras, Mexico 2 3 Cumming, Georgia, U.S.A. 3 4 Porto, Portugal 3 4 Danville, Virginia, U.S.A. 1 2 3 4 Richmond, Kentucky, U.S.A. 3 4 Green Bay, Wisconsin, U.S,A. 3 4 St. Laurent, Quebec, Canada 1 2 3 4 Lachine, Quebec, Canada 3 4 Tremonton, Utah, U,S.A. 3 4 Los Angeles, California, U.S.A 1 Truro, Nova Scotia, Canada 2 3 4 Marysville, Michigan, U.S.A 2 3 4 4 Regional Distribution Center 3 ISO Certified 2 Distribution 1 Manufacturing Location Please note: On April 14, 2003 the Company announced the closing of the two Regional Distribution Centers (RDCs) in Atlanta and Chicago and the replace- ment of the existing RDC in Danville with a new facility. These changes are reflected in the above presentation. -54- Other Information BOARD OF DIRECTORS Duncan R. Yull Vice President Sales, Distribution Products Melbourne F Yull Chairman and Chief Executive Officer Gregory A. Yull President, Film Products L. Robbie Shaw* Vice President, Nova Scotia Piero Greco, C.A. Community College Treasurer Michael L. Richards Senior Partner, Stikeman Elliott LLP TRANSFER AGENT AND REGISTRAR J. Spencer Lanthier* Canada: CIBC Mellon Trust Company Currently serves as a Member of the 2001 University Street, 16th Floor Board of Several Publicly Montreal, Quebec, Canada H3A 4L8 Traded Companies Ben J. Davenport, Jr. USA: Mellon Investor Services L.L.C. Chairman, First Piedmont Corporation 85 Challenger Road, 2nd Floor Chairman and CEO, Chatham Oil Company Ridgefield Park, New Jersey, U.S.A. 07660 Gordon R. Cunningham* President, Cumberland Asset Management AUDITORS Canada: Raymond Chabot Grant Thornton Thomas E. Costello* 600 de la Gauchetlere West, Currently serves as a Member of the Suite 1900 Board of Several Publicly Traded Montreal, Quebec, Canada H3B 4L8 Companies *Member of Audit Committee U.S.A.: Grant Thornton International 130 E. Randolph Street HONORARY DIRECTORS Chicago, Illinois, U.S.A. 60601-6203 James A. Motley, Sr. Director, American National Bank and INVESTOR INFORMATION Trust Company American National Bancshares, Inc. Stock and Share Listing: Irvine Mermelstein Common shares are listed or the New Managing Partner, Market-Tek York Stock Exchange and The Toronto Stock Exchange, trading under the symbol ITP EXECUTIVE OFFICERS Shareholder and Investor Relations Melbourne F. Yull Chairman and Chief Executive Officer Shareholders and investors having inquiries or wishing to obtain copies Andrew M. Archibald, C.A. of the Company's Annual Report or Chief Financial Officer, Secretary, other U.S. Securities Exchange Vice President, Administration Commission filings should contact: Jim Bob Carpenter Mr Andrew M. Archibald, C.A President, Woven Products, Procurement Chief Financial Officer Intertape Polymer Group Inc. Burgess H. Hildreth 3647 Cortez Road West Vice President, Human Resources Bradenton, Florida 34210 (866) 202-4713 James A. Jackson Vice President, Chief Information Officer E-mail: itp$info@intertapeipg.com H. Dale McSween ANNUAL AND SPECIAL MEETING OF President, Distribution Products SHAREHOLDERS Victor DiTommaso, CPA The Annual and Special Meeting of Vice President, Finance Shareholders will be held Wednesday, June 11. 2003 at 4:00pm at the Sofitel Hotel, Picasso Ballroom, 1155 Sherbrooke Street West, Montreal, Quebec, Canada.