<PAGE>
Draft 1/22/98
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended October 31, 1997, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _____________________to_______________________
Commission file number 0-14550
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AEP INDUSTRIES INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-1916107
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
125 PHILLIPS AVENUE
SOUTH HACKENSACK, NEW JERSEY 07606-1546
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(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (201) 641-6600
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Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
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(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirement for
the past 90 days. Yes X No _
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
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The aggregate market value of the shares of the voting stock held by
nonaffiliates of the Registrant was approximately $96,000,000 based upon the
average of the bid and asked prices of the stock, which was $30.38 on December
31, 1997.
The number of shares of the Registrant's $.01 par value common stock outstanding
as of December 31, 1997, was 7,210,447.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the documents, all or portions of which are incorporated by
reference herein and the Part of the Form 10-K into which the document is
incorporated:
Proxy Statement to be filed with respect to the Registrants Annual Meeting of
Stockholders to be held on April 14, 1998 -- Part III.*
_______________________
*As stated under various items of this Annual Report, only certain
specified portions of such document are incorporated by reference herein.
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PART I
ITEM 1. BUSINESS
GENERAL
AEP Industries Inc. ("AEP" or the "Company") is a worldwide manufacturer of
plastic packaging films. Incorporating both cast and blown film technologies the
Company manufactures an extensive range of specialty and standard flexible
packaging products for use in the packaging, transportation, beverage, food,
automotive, pharmaceuticals, chemical, electronics, construction, agricultural
and textile industries. The Company currently has manufacturing operations
located in 11 countries in North America, Europe and the Asia/Pacific region.
In October 1996, in order to establish a worldwide market presence, diversify
its product lines and strengthen market share in certain of its existing
businesses, the Company acquired the global packaging operations of Borden, Inc.
("Borden") in exchange for approximately $280 million (including the assumption
of certain indebtedness and other purchase price adjustments) and 2.4 million
shares of the Common Stock of the Company. The addition of Borden's global
packaging operations (the "Borden Acquisition") broadened the Company's product
portfolio, established the Company as the largest manufacturer of polyvinyl
chloride food wrap and polyethylene stretch film in North America, and
positioned the Company as a leader in a number of other markets, including
processed cheese films and twist wrap.
RECENT DEVELOPMENTS
On November 19, 1997, the Company sold in a private placement $200,000,000 of
9.875% Senior Subordinated Notes ("Notes") due 2007 at an issue price of 99.224%
resulting in an effective yield of 10%. The discount to the initial purchasers
was 2.75%, resulting in proceeds to the Company of $192,948,000. The initial
purchasers were J.P. Morgan Securities Inc., Morgan Stanley & Co., Incorporated
and Salomon Brothers Inc. The net proceeds of the sale were used to repay a
portion of indebtedness outstanding under the Company's existing Credit
Agreement.
In January 1998, the Company completed the sale of its operations in South
Africa to local management for $1,000,000 plus the settlement of all
intercompany items
PRODUCTS
The Company manufactures and markets an extensive and diverse line of
polyethylene, polyvinyl chloride and polypropylene flexible packaging products,
with consumer, industrial and agricultural applications. Flexible packaging and
film products are thin, ductile bags, sacks, labels and films for food and
non-food consumer, agricultural and industrial items. Flexible packaging
containers not only protect their contents, they are also cost-effective,
space-saving, lightweight, tamper-evident, convenient and often recyclable. The
flexible packaging and film products manufactured by the Company are used in a
variety of industries, including the packaging, transportation, beverage, food,
automotive, pharmaceuticals, chemical, electronics, construction, agricultural
and textile industries.
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The following table summarizes the Company's product lines:
<TABLE>
<CAPTION>
PRODUCT LOCATION MATERIAL USES
- ------- -------- -------- ----
<S> <C> <C>
Polyvinyl chloride North America, Europe, Polyvinyl chloride Meat and food wrap;
wrap Asia/Pacific, institutional films,
twist wrap
Stretch (pallet) wrap North America, Europe Polyethylene Pallet wrap
Asia/Pacific,
Industrial films United States, Polyethylene Drum, box, carton, and
Asia/Pacific pail liners; bags for
furniture and
mattresses; films to
cover high value
products; agricultural
films
Printed and converted Europe, Asia/Pacific Primarily polyethylene Printed, laminated
films and/or converted films
providing flexible
packaging to consumer
markets
Polypropylene and North America, Europe Polypropylene Packaging of baked
barrier films Polyethylene goods, cheese,
candies, and salted
snacks; used in tape,
diaper tabs, box
windows and graphic
arts
Other products and North America, Europe, Various Manufactured and
specialty films Asia/Pacific, thermoplastics and resale items used in
machinery packaging
</TABLE>
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NORTH AMERICAN OPERATIONS
RESINITE (POLYVINYL CHLORIDE)
The Company manufactures polyvinyl chloride food wrap for the supermarket,
consumer, institutional and industrial markets in North America, offering a
broad range of products with approximately 45 different formulations. These
films are used for packaging of fresh red meats, poultry, fish, fruits and
vegetables, and bakery products.
The Company's Resinite facility also manufactures dispenser (cutter) boxes
containing polyvinyl chloride food wrap for sales to consumers and to
institutions, including restaurants, schools, hospitals and penitentiaries. The
Company's most popular branded institutional polyvinyl chloride food wrap is
marketed under the SEAL WRAP name. A substantial part of this product is sold to
large paper and food distributors, with the rest sold directly to supermarket
chains.
The Company also has exclusive rights to an innovative separate slide cutter,
which the Company believes is safer than regular cutters. The Company has begun
to introduce the slide cutter into the market, and believes that this new
product has had a positive impact on cutter box sales.
STRETCH WRAP
The Company manufactures a family of high performance stretch wrap for wrapping
and securing palletized products for shipping. The Company markets a wide
variety of stretch wrap designed for commodity and specialty uses and sells
approximately 90% of its stretch wrap through distributors, while the remainder
of its output is sold directly to customers on a national account basis.
In connection with the Borden Acquisition, the Company identified and
consolidated certain of the acquired less efficient stretch wrap operations,
thereby reducing its stretch wrap capacity by approximately 58 million pounds.
In addition, as a result of industry-wide overcapacity in the stretch wrap
market, the Company has reduced its stretch wrap capacity by an additional 45
million pounds. Collectively, the Company has reduced its stretch wrap capacity
by an aggregate of approximately 103 million pounds to an aggregate of 230
million pounds through a combination of permanently eliminating, temporarily
idling and reallocating its capacity.
INDUSTRIAL FILMS
The Company manufactures a broad range of industrial films, generally
custom-tailored, including sheeting, tubing and bags which are cut, rolled, or
perforated; drum, box, carton and pail liners; and bags to package specialty
items such as furniture and mattresses. The Company also manufactures films to
protect items stored outdoors or in transit (such as boats and cars) and a wide
array of shrink films and overwrap films. The Company sells the majority of its
industrial film output directly to customers on a national account basis, with
approximately 20% sold through distributors.
Most of the industrial films manufactured by the Company, which may number as
many as 20,000 separate and distinct products in any given year, are custom
designed to meet the specific needs of its customers.
The Company believes that the strength of its industrial film operations lies in
its technologically superior products, high quality control standards,
well-trained and knowledgeable sales force, and commitment to customer service.
The
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Company's sales force, consisting of experts in packaging systems, provides
technical support to the Company's distribution network and focuses on product
knowledge and customer relations.
The industrial films market is comprised of a large number of smaller
manufacturers who together constitute approximately two-thirds of all sales,
with the remainder of the market represented by a few large manufacturers. The
Company believes that its research and development team, which continually
improves applications and creates new industrial film products, has helped
establish the Company as one of the largest producers in this fragmented market.
The Company believes it can continue to expand its share of the industrial films
market through its ability to offer a broad range of industrial as well as other
packaging films (including stretch wrap), thereby offering its customers
one-stop shopping.
PROFORMANCE
The Company manufactures and markets oriented polypropylene films (characterized
by their inelasticity) and, through Pro-Ex, co-extruded (layered) barrier and
non-barrier films. Barrier films either encourage or restrict the passage of
moisture, oxygen, light and gases (depending upon the desired properties), and
are puncture resistant. A substantial portion of the Company's oriented
polypropylene films (including metallized films) are used in packaging items
such as salted snacks, confectionery, cookies, crackers, baked goods, and
cheese. Industrial applications, such as tape, diaper tabs, box windows, tape
and graphic arts, account for the remaining oriented polypropylene films
manufactured by the Company.
The Company sells the majority of its oriented polypropylene films to printers
and converters for further processing before reaching end-users.
The oriented polypropylene films market is dominated by a few large
manufacturers, each with a substantial market share. The Company believes it is
a niche supplier in this market. As a result, the Company has repositioned its
efforts and adopted a niche strategy, de-emphasizing some of the lower margin
commodity films such as tape and diaper tabs in favor of higher margin films
such as films for packaging reduced fat and fat-free foods, which, because of
the absence of fat (which serves as a preservative), require more sophisticated
technology. The Company has several patents and patent applications relating to
its cold seal and barrier films, and has a patent application pending for a
barrier film useful for flavor retention for packaging of reduced fat and
fat-free foods.
INTERNATIONAL OPERATIONS
EUROPEAN RESINITE (POLYVINYL CHLORIDE)
The Company manufactures polyvinyl chloride food wrap in cutter boxes and
perforated rolls which are primarily sold to restaurants and food service
establishments. European Resinite sells films across Europe (with the exception
of Italy, which is covered by FIAP) and sells most of its film directly to
end-users.
The market for polyvinyl chloride food wrap is relatively mature in Northern
Europe, with intense competition. The Company expects that growth in Europe will
be driven by developing catering, food service and volume feeding markets in
Eastern Europe and by developing food distribution markets in Southern and
Eastern Europe. In certain European markets, a tax is levied on packaging
materials based on weight which has led to a demand for thinner but
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stronger meat films. The Company has the technology to deliver films with such
properties at a low price and believes it maintains a competitive advantage over
packaging entities without such technology.
EUROPEAN FLEXIBLES
The Company manufactures flexible packaging and converted films used in the food
processing and pharmaceutical industries, including freezer film, processed
cheese innerwrap and tamper evident seals. European Flexibles also manufactures
and sells polyethylene-based stretch wrap for wrapping and securing pallet
loads.
European Flexibles sells 55% of its stretch wrap to distributors, and 45%
directly to end-users. European Flexibles underwent staff reductions and
equipment rationalizations in the fiscal year ended October 31, 1997 ("Fiscal
1997"), which combined with investments in new equipment, are expected to have a
positive impact on future financial results.
FIAP
The Company, through Fabbrica Italiana Articoli Plastici (FIAP), manufactures
polyvinyl chloride food wrap, unplasticized polyvinyl chloride twist wrap, and
converted and printed films. FIAP is known as a specialist in unplasticized
polyvinyl chloride twist wrap, which is used to wrap candles, candies, and
similar products. This product, which has similar performance characteristics as
cellophane, is emerging as a low cost substitute and, as a result, may continue
to replace cellophane in the future. The Company believes unplasticized
polyvinyl chloride, because of its performance characteristics, has significant
growth potential opportunities as a replacement for cellophane and believes
opportunities are developing for new uses for such wrap, such as battery covers
and credit card laminates.
Films manufactured by FIAP are sold in the United States, Europe, Africa, and
the Middle East, mostly through an internal sales force directly to end-users.
ASIA/PACIFIC REGION
The Company is a major manufacturer of industrial films and flexible packaging
and converted films in Australia and New Zealand. The Company's operations in
the Asia/Pacific region resemble its North American and European operations with
the same variety of films. Additionally, the Company acquired certain assets of
ICI's Visqueen operations in August 1997 which strengthened its position as a
major supplier of industrial packaging films in Australia.
The Company sells the majority of the products it manufactures in Australia and
New Zealand to end users and the remainder to distributors.
The markets for plastic packaging products in Australia and New Zealand are
relatively small, offering limited growth opportunities. However, since New
Zealand and Australia are significant exporters of high protein products, the
Company expects to participate in the growing market for packaging materials for
protein rich products for exports to China and Southeast Asia.
The Company also has a 50% joint venture in Japan with Hitachi Chemical, which
supplies polyvinyl chloride food wrap to the Japanese market. The Company
accounts for the joint venture on an equity basis.
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MANUFACTURING AND PRODUCTION
MANUFACTURING OPERATIONS
The Company manufactures both industrial grade products, which are manufactured
to an industry specification or for distribution from stock, and specialty
products, which are manufactured under more exacting standards to assure that
their chemical and physical properties meet the particular requirements of the
customer or the specialized application appropriate to its intended market.
Specialty products generally sell at higher margins than industrial grade
products.
Prior to the Borden Acquisition, polyvinyl chloride food wrap was manufactured
in North Andover, Massachusetts and Griffin, Georgia. In order to streamline
operations, the Company has closed the Massachusetts plant and expanded and
consolidated its domestic polyvinyl chloride food wrap manufacturing operations
at the Georgia plant. The Company also manufactures polyvinyl chloride food wrap
in Europe at three Resinite plants strategically located in Spain, France and
England.
The Company manufactures stretch wrap and industrial films at several large
geographically dispersed, integrated extrusion facilities located throughout
North America, which also have the ability to produce other products. The size
and location of those facilities, as well as their capacity to manufacture
multiple types of films or re-orient equipment as market conditions warrant,
enable the Company to achieve savings and minimize overhead and transportation
costs.
The Company manufactures polypropylene films at its remaining plant in North
Andover, Massachusetts. The Company has cast polypropylene capacity available in
its North Carolina plant and is adding new capacity for five layer blown
co-extruded film lines at its Wright Township, Pennsylvania facility. These
lines are expected to be commissioned in the fiscal year ending October 31, 1998
("Fiscal 1998").
At the FIAP facility located in Turate, Italy, the Company manufactures
polyvinyl chloride food wrap, unplasticized polyvinyl chloride twist wrap, and
converted and printed films. The Company manufactures flexible packaging and
converted films in Europe at facilities strategically located in Holland and
Belgium. The Company is in the process of installing new, efficient pallet wrap
equipment at these facilities which the Company believes will increase its
market presence in Europe in this product. The Company also manufactures
industrial films and flexible packaging and converted films at its facilities
located in Australia and New Zealand.
PRODUCTION
In the film manufacturing process, resins (primarily polyethylene, polyvinyl
chloride, and polypropylene) with various properties are blended with chemicals
and other concentrates (including coloring, where appropriate) to achieve a wide
range of specified product characteristics, such as color, clarity, tensile
strength, toughness, thickness, shrinkability, surface friction, transparency,
sealability and permeability. The gauges of the Company's products range from
less than one mil (.001 inches) to more than 20 mils. The Company's extrusion
equipment can produce printed products and film up to 40 feet wide. The blending
of various kinds of resin combined with chemical and color additives is computer
controlled to avoid waste and to maximize product consistency. The blended
mixture is melted by a combination of applied heat and friction under pressure,
and then is mechanically mixed. The mixture is then forced (extruded) through a
die, at which point it is expanded into a flat sheet (cast) or a vertical
tubular column (blown) of film and is cooled. The cooled film can then be
shipped to a customer or can be further processed and then shipped. Generally,
the Company's manufacturing plants operate 24 hours a day, seven days a week,
except for plants located in areas where
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hours of operation are limited by law, local custom or in cases when 24 hour
operations are not economically advantageous.
The Company's domestic equipment has several processing features, including the
capability to print "in-line" and to cut tubular film at either end to produce
"bags" or to cut the side of the tubes to produce "sheeting." This sheeting can
then be sold or further processed by metallizing, perforating and/or heat
sealing it into a variety of products according to customer specifications.
The Company's foreign operations have the capability of further processing the
sheeting using the Company's flexographic or rotogravure printing capabilities.
The printed sheet is then laminated, slit and/or converted into a form desired
by the customer. Sale to the customer can occur after any process or combination
of processes.
The Company has regularly upgraded or replaced older equipment in order to keep
abreast of technological advances and to maximize production efficiencies by
reducing labor costs, waste and production time. During the past five fiscal
years, the Company made several capital improvements, which included the
construction of new manufacturing, warehouse and sales facilities in Alsip,
Illinois and Wright Township, Pennsylvania, the purchase of new state-of-the-art
extrusion equipment and the upgrading of older equipment. The Company is in the
process of shifting production among its plants to improve efficiency and cost
savings and is upgrading and replacing equipment at certain of these facilities
in order to increase production capacity and enhance efficiency. The Company
will continue to upgrade or replace equipment as it deems appropriate.
QUALITY CONTROL
The Company believes that maintaining the highest standards of quality in all
aspects of its manufacturing operations plays an important part in its ability
to maintain its competitive position. To that end, the Company has adopted
strict quality control systems and procedures designed to test the mechanical
properties of its products (such as strength, puncture resistance, elasticity,
abrasion characteristics and sealability), which it regularly reviews, updates
and modifies as appropriate. These quality control systems and procedures have
been implemented in the manufacturing facilities acquired as part of the Borden
Acquisition.
RAW MATERIALS
The Company manufactures film products primarily from polyethylene,
polypropylene and polyvinyl chloride resins, all of which are available from a
number of domestic and foreign suppliers. The Company selects its suppliers
based on the price, quality and characteristics of the resins they produce. As a
result of the Borden Acquisition, the Company has been able to achieve economies
of scale by reason of increased purchasing power for its North American
requirements. Most of the Company's purchases of resin in Fiscal 1997 have been
from 15 of the 20 international resin suppliers, none of which accounted for
more than 15% of the Company's requirements. The Company believes that the loss
of any resin supplier would not have a materially adverse effect on the Company.
The resins used by the Company are produced from petroleum and natural gas.
Instability in the world markets for petroleum and natural gas could adversely
affect the prices of the Company's raw materials and their general availability,
and this could have an adverse effect on the Company's profitability if the
increased costs could not be passed on to customers or if the supply is limited.
The cost of resin typically comprises approximately 60% of a manufacturer's cost
of goods sold. With limited exceptions, the Company has historically been able
to pass on
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substantially all of the price increases in raw materials to its customers on a
penny for penny basis, although there can be no assurance that the Company will
be able to do so in the future. The Company generally maintains a resin
inventory of less than one month's supply and has not experienced any difficulty
in maintaining its supply. Other raw materials, principally chemical colorings
and other concentrates, are available from many sources.
MARKETING AND SALES
The Company believes that its ability to continue to provide superior customer
service will be critical to the Company's success. Even in those markets where
the Company's products are considered commodities and price is the single most
important factor, the Company believes that its sales and marketing capabilities
and its ability to timely deliver products can be a competitive advantage. To
that end, the Company has established good relations with its suppliers, and has
long-standing relationships with most of its customers, which it attributes to
its ability to consistently manufacture high-quality products and provide timely
delivery and superior customer service.
The Company believes that its research and development efforts, its high
efficiency equipment (which is both automated and microprocessor-controlled) and
the technical training given to its sales personnel enhance the ability of the
Company to expand its sales in all of its product lines. An important component
of the Company's marketing philosophy is the ability of its sales personnel to
provide technical assistance to customers. The Company's sales force regularly
consults with customers with respect to performance of its products and the
customers' particular needs and communicates with appropriate research and
development staff regarding these matters. In conjunction with the research and
development staff, sales personnel are often able to recommend a product or
suggest a resin blend to produce the product with the characteristics/properties
which best suit the customers' requirements.
The Company markets its polyethylene products in North America principally
through its own sales force under the supervision of national and regional
managers. The Company generally sells either directly to customers who are
end-users of the products or to distributors for resale to end-users.
The Company markets its polyvinyl chloride products in North America primarily
through large distributors. Sales of polypropylene in North America are made by
the Company's sales force primarily to packaging converters. The Company has
restructured its Proponite sales force into the newly formed PROformance
division to use its preexisting relationships to sell its barrier films, cast
polypropylene films and other specialty products into the existing market place.
Because the Company has expanded and continues to expand its product lines,
sales persons are able to offer a much broader line of products than they could
offer prior to the Borden Acquisition.
During Fiscal 1996 and Fiscal 1997, approximately 52% and 35%, respectively, of
the sales by the Company in North America were directly to end-users with the
balance representing sales to distributors or representatives. The Company
serves approximately 16,000 customers, none of which account for more than 5% of
the Company's net sales.
Sales and marketing efforts in Europe and in the Asia/Pacific region are
primarily by the Company's sales force to end-users, although distributors are
used in cases where the distributor adds value to the customer.
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DISTRIBUTION
The Company believes that the timely delivery to customers of its products is a
critical factor in the Company's ability to maintain its market position.
Domestically, in order to ensure timely delivery, the Company uses both internal
and external sources of distribution. The Company maintains a fleet of 36
trucks, most of which it leases, for the delivery to customers of approximately
21% of the Company's products, and it uses dedicated service haulers, contract
carriers and common carriers where appropriate for the remainder of its
deliveries. This combination enables the Company to control the distribution
process and thereby insure priority handling and direct transportation of
products to its customers, thus improving the speed, reliability and efficiency
of delivery.
Because of the geographic dispersion of the Company's plants, the Company is
able to deliver most of its products within a 500 mile radius of its plants.
This enables the Company to reduce its use of warehouses to store product.
However, the Company also ships products great distances when necessary and
exports to other countries.
Internationally, the Company uses common and contract carriers to deliver most
of its products, both in the country of origin and for export. The Company does
not deliver its own products to an appreciable degree.
RESEARCH AND DEVELOPMENT
The Company has a research and development department with a staff of
approximately 20 persons. In addition, other members of management and
supervisory personnel, from time to time, devote substantial amounts of time to
research and development activities. The principal efforts of the research and
development department are directed to maintaining and improving quality control
in the Company's manufacturing operations, assisting sales personnel in
designing specialty products to meet individual customer's needs, developing new
products and reformulating existing products to improve quality and/or reduce
production costs. During Fiscal 1997, the Company has focused a significant
portion of its research and development efforts on co-extruded (layered), cold
seal, high barrier and MAPAC(TM) (modified atmosphere packaging, designed to
either contain gases or allow the migration thereof) technologies.
The Company's research and development department has developed a number of
products with unique properties which the Company considers proprietary, certain
of which are protected by patent.
During Fiscal 1997, the Company spent approximately $2,192,000 for research and
development activities. For the fiscal years ended October 31, 1996 and 1995 the
Company incurred expenses for research and development activities of $635,000
and $698,000, respectively.
PROPRIETARY RIGHTS
The Company owns or has rights to 77 issued patents and has filed 36 additional
patent applications. The Company also owns a number of trademarks throughout the
world and is in the process of applying for additional trademarks. The Company
does not consider that any of these intellectual property rights are material to
its overall business. In connection with the Borden Acquisition, the Company
obtained the right to use the Borden trademark in conjunction with the Company's
trademark until October 1998 as the Borden trademark is phased out.
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COMPETITION
The business of supplying plastic packaging products is extremely competitive,
and the Company faces competition from a substantial number of companies engaged
in similar and alternative packaging products businesses. Some of the Company's
competitors are subsidiaries or divisions of large international, diversified
companies with extensive production facilities, well developed sales and
marketing staffs and substantially greater financial resources than the Company.
The Company competes principally with (i) local manufacturers, who compete with
the Company in specific geographic areas, generally within a 500 mile radius of
its plants, (ii) companies which specialize in the extrusion of a limited group
of products which they market nationally, and (iii) a limited number of
manufacturers of flexible packaging products who offer a broad range of products
and maintain production and marketing facilities domestically and
internationally.
Because many of the Company's products are available from a number of local and
national manufacturers, competition is highly price sensitive and margins are
relatively low. The Company believes that all of its products require efficient,
low cost and high speed production to remain competitive. The Company believes
it also competes on the basis of quality, service (including its ability to
supply customers in a timely fashion) and product differentiation.
The Company believes that there are few barriers to entry into many of the
Company's markets, enabling new and existing competitors to rapidly affect
market conditions. As a result, the Company may experience increased competition
resulting from the introduction of products by new manufacturers. In addition,
in several of the Company's markets, products are generally regarded as a
commodity. As a result, competition in such markets is based almost entirely on
price and service.
BACKLOG
The Company estimates that the total dollar volume of its backlog as of the end
of Fiscal 1997 and Fiscal 1996 was approximately $58,000,000 and $40,000,000,
respectively. These backlogs represent approximately 27 days of production in
Fiscal 1997 and 14 days in Fiscal 1996. The Company believes that because the
great majority of its production is based upon purchase orders rather than long
term contracts, the amount of its backlog is not an important indicator of
future sales.
ENVIRONMENTAL MATTERS
The Company's operations are subject to various foreign, Federal, state and
local environmental laws and regulations, including, but not limited to, those
governing discharges into the air and water, the storage, handling and disposal
of solid and hazardous wastes, the remediation of soil and groundwater
contaminated by petroleum products or hazardous substances or wastes, and the
health and safety of employees. Compliance with environmental laws, stricter
interpretations of or amendments to such laws, or more vigorous enforcement
policies by regulatory agencies may require material expenditures by the
Company. The nature of the Company's current and former operations and the
history of industrial uses at some of its facilities expose the Company to the
risk of liabilities or claims with respect to environmental and worker health
and safety matters.
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In addition, under certain environmental laws, a current or previous owner or
operator of property may be jointly and severally liable for the costs of
investigation, removal or remediation of certain substances on, under or in such
property, without regard to negligence or fault. The presence of, or failure to
remediate properly such substances may adversely affect the ability to sell or
rent such property or to borrow using such property as collateral. In addition,
persons who generate, arrange for the disposal or treatment of, or dispose of
hazardous substances may be jointly and severally liable for the costs of
investigation, remediation or removal of such hazardous substances at or from
the disposal or treatment facility, regardless of whether the facility is owned
or operated by such person. Responsible parties also may be subject to common
law claims by third parties based on damages and costs resulting from
environmental contamination emanating from a site. The Company believes that
there are no current environmental matters that would have a material adverse
effect on the Company's financial position or results operations.
NET ASSETS HELD FOR SALE
At the time of the Company's acquisition of BGP, management decided not to
retain the rigids businesses of BGP. The rigids businesses manufacture, market
and distribute wet food containers, dry food trays and disposable food service
products. These businesses are not considered core businesses, and the Company
has offered these businesses for sale with the intention that they would be sold
within one year from the date of acquisition and it would use the proceeds from
the sale to pay down its debt. The Company is currently negotiating the sale of
these businesses, although there can be no assurance that any transaction will
occur. Following October 31, 1997, such businesses will be accounted for as a
discontinued operations.
EMPLOYEES
At October 31, 1997, the Company had approximately 4,200 employees worldwide,
including employees at its rigids operations and officers and administrative
personnel. In North America, the Company has two collective bargaining
agreements, the earliest of which expires in February 1998, covering
approximately 320 employees. Further, the Company has collective bargaining
agreements at 16 international facilities covering substantially all of the
hourly employees at such international facilities. As is common in many foreign
jurisdictions, substantially all of the Company's employees in such foreign
jurisdictions are covered by country-wide collective bargaining agreements.
While the Company believes that its relations with its employees are
satisfactory, a dispute between the Company and its employees could have a
material adverse effect on the Company.
-13-
<PAGE>
MANAGEMENT
The officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
J. Brendan Barba........... 56 Chairman of the Board, President and Director
Paul M. Feeney............. 55 Executive Vice President and Director
John J. Powers............. 33 Executive Vice President - Sales and Marketing
David J. Cron.............. 43 Executive Vice President - Manufacturing
Lawrence R. Noll........... 49 Vice President, Secretary, Controller and Director
James B. Rafferty.......... 45 Vice President and Treasurer
Robert S. House............ 53 Vice President - Tax
Jean L'Allier.............. 42 Vice President and General Counsel
Robert Seavey.............. 51 Vice President - International Operations
Kenneth Avia............... 55 Director
William H. Carter.......... 44 Director
Paul E. Gelbard............ 67 Director
C. Robert Kidder........... 53 Director
Clifton S. Robbins......... 39 Director
Lee C. Stewart............. 49 Director
Scott M. Stuart............ 38 Director
</TABLE>
-14-
<PAGE>
J. BRENDAN BARBA is one of the founders of the Company and has been its
President and a director since its organization in January 1970. In November
1985 Mr. Barba assumed the additional title of Chairman of the Board of
Directors of the Company.
PAUL M. FEENEY has been an Executive Vice President and a director of the
Company since December 1988. From 1980 to 1988 Mr. Feeney was Vice President and
Treasurer of Witco Corporation.
JOHN J. POWERS was elected Executive Vice President-Sales and Marketing in May
1996. Prior thereto, he was Vice President - Industrial Products of the Company.
DAVID J. CRON has been Executive Vice President - Manufacturing since July, 1997
Prior thereto he was Vice President - Manufacturing, a plant manager and held
various other positions since 1976.
LAWRENCE R. NOLL has been a Vice President, Secretary and a director of the
Company since September 1993. For more than 16 years prior thereto, he was the
Controller of the Company, and he was re-elected Controller in October 1996.
JAMES B. RAFFERTY has been Vice President and Treasurer of the Company since
October 1996. Prior thereto, he was Assistant Treasurer since July 1996. From
1989 to 1995, Mr. Rafferty was Director of Treasury Operations at Borden, Inc.
ROBERT HOUSE has been Vice President - Tax since October 1996. Prior thereto, he
was Manager - International Tax at Avnet Inc. since 1994. Prior thereto, he was
Director of Taxes at Sunoco Products Company.
JEAN L'ALLIER has been employed by the Company as general counsel since April
1997. He was elected Vice President and General Counsel in November 1997. Prior
to April 1997 he was engaged in the practice of law as a sole practitioner.
ROBERT SEAVEY was employed by the Company since December 1996 as director of
European operations He was elected Vice President - International Operations in
November 1997. Prior to December, 1996 he held various management positions with
Mobil Chemicals and Interplast Group/Formosa Plastics.
KENNETH AVIA has served as a director of the Company since 1980. Mr Avia has
been Executive Vice President of First Data Merchant Services (a merchant credit
card processing company) since 1993 and served as Divisional Vice President of
Automatic Data Processing, Inc. from 1984 to 1993.
WILLIAM H. CARTER has served as a director of the Company since October 1996.
Mr. Carter has served as Executive Vice President, Chief Financial Officer and a
director of Borden, Inc. since 1995, and was employed by Price Waterhouse & Co.
from 1975 to 1994, most recently as a partner.
PAUL E. GELBARD has served as a director of the Company since 1991. Mr. Gelbard
has been Of Counsel to Bachner, Tally, Polevoy & Misher LLP, counsel to the
Company, since January 1997 and was a Partner of such firm from 1974 to 1996.
-15-
<PAGE>
C. ROBERT KIDDER has served as a director of the Company since October 1996. Mr.
Kidder has been Chairman of the Board and Chief Executive Officer of Borden,
Inc. since 1995 and Chairman and Chief Executive Officer of Duracell
International, Inc. from 1991 to 1995. Mr. Kidder also serves as a member of the
Board of Directors of Borden, Inc., Electronic Data Systems Corporation and Dean
Witter, Discover & Co.
CLIFTON S. ROBBINS has served as a director of the Company since October 1996.
Mr. Robbins has been a member of KKR & Co., LLC since 1996; a general partner of
Kohlberg Kravis Roberts & Co., L.P. in 1995; and an executive of Kohlberg Kravis
Roberts & Co., from 1987 to 1994. Mr. Robbins also serves as a member of the
Board of Directors of Borden, Inc., Borden Chemicals & Plastics, IDEX
Corporation, Kindercare Learning Centers, Inc., Newsquest Capital PLC, Newsquest
Media Group, Ltd. and Glenisla Group Ltd. (U.K.).
LEE C. STEWART has served as a director of the Company since December 1996. Mr.
Stewart has been Vice President of Union Carbide Corporation since 1996, and was
an investment banker with Bear Stearns & Co. Inc. for more than nine years prior
thereto.
SCOTT M. STUART has served as a director of the Company since October 1996. Mr.
Stuart has been a Member of KKR & Co., LLC since 1996; general partner of
Kohlberg Kravis Roberts & Co., L.P. in 1995; and an executive of Kohlberg Kravis
Roberts & Co. from 1986 to 1994. Mr. Stuart also serves as a member of the Board
of Directors of Borden, Inc., Newsquest Capital PLC, World Color Press, Inc.,
Glenisla Group Ltd. (U.K.), KC Cable, KSL Golf Holdings, Inc., KSL Land
Corporation, KSL Recreation Corporation and Newsquest Media Group, Ltd.
GOVERNANCE AGREEMENT
In connection with the Borden Acquisition, Borden and the Company entered into a
Governance Agreement, dated as of June 20, 1996 (the "Governance Agreement"),
with respect to certain matters relating to the corporate governance of the
Company. The Governance Agreement provides that the Company's Board of Directors
shall initially consist of ten members. Borden is entitled to designate four
persons to serve on the Board, subject to reduction in the event that Borden's
stockholdings are reduced below 25% of the outstanding common stock of the
Company (the "Shares"), and to participate in the selection of one independent
director so long as Borden's stockholdings remain above 10%.
The Governance Agreement also provides that Borden will have certain rights to
designate directors to serve on specified committees, that the approval of a
number of directors that represent at least 66-2/3% of the total number of
directors will be required on certain specific Board actions, and that, as long
as Borden owns in excess of 25% of Shares, a Borden-designated director must be
part of the 66-2/3% majority. The Governance Agreement also provides Borden with
preemptive rights to purchase additional Shares in order to maintain its
percentage ownership of the Shares and that Borden may not acquire Shares such
that for the three-year period following the closing of the Borden Acquisition
its percentage ownership of Shares would increase beyond the number of Shares it
acquired pursuant to the Borden Acquisition and that Borden is subject to
certain additional standstill provisions for the three-year period.
-16-
<PAGE>
FORWARD LOOKING STATEMENTS
Certain statements by the Company in this Annual Report in its description of
the business of the Company, both prior to and subsequent to the Borden
Acquisition, including its contemplated activities with respect to the Borden
packaging business operations which it acquired, its statements as to its
beliefs with respect to its business and its prospects and its statements of
potential changes in the operations of the combined AEP and Borden business,
potential savings and the integration of the Borden operations into the
Company's business and statements about the Company's prospects for the future,
such as its ability to generate sufficient working capital, its ability to
continue to maintain sales to justify capital expenses, and its ability to
generate additional sales and cash flow to meet the added costs incurred by the
Company as a result of the Borden Acquisition and the debt incurred, including
its ability to meet the required payments under the credit agreement pursuant to
which a portion of the purchase price of the Borden Acquisition was financed.
Such statements are subject to certain risks and uncertainties which could cause
actual results to differ materially from those projected, including risks
associated with the ability of the Company's management to integrate the Borden
operations with the AEP operations, the ability of the Company to effect cost
savings in the combined operations of AEP and Borden, the ability of the Company
to manage both operations efficiently, changes in market conditions, inability
to pass on raw material cost increases, and competitive factors.
ITEM 2. PROPERTIES
The Company's principal executive and administrative offices are located in a
leased building in South Hackensack, New Jersey.
The Company owns and leases numerous properties in the ordinary course of
business. Currently such properties consist of ten manufacturing facilities in
the United States and Canada, twelve in Europe, three in Australia, four in New
Zealand and one in Japan, pursuant to a joint venture with Hitachi.
Sales offices are assigned to each of the Company's plants.
In addition, as part of the Borden Acquisition, the Company acquired ten
leaseholds for warehouse and office facilities, nine in the United States and
one in Canada. The leases expire at various times through 2018. Some of these
leases provide renewal options.
The Company is in the process of divesting itself of certain of these
facilities, including those located at: North Andover, Massachusetts; Moonachie,
New Jersey; Scarborough, Ontario, Canada; Les Ulis, France; and Remschied,
Germany.
-17-
<PAGE>
The following chart sets forth the properties owned and operated by the Company:
<TABLE>
<CAPTION>
LOCATION(1) APPROXIMATE
SQUARE FOOTAGE
--------------
NORTH AMERICA
<S> <C>
Griffin, Georgia..............................................................330,000
Wright Township, Pennsylvania.................................................328,000
North Andover, Massachusetts..................................................250,000
Matthews, North Carolina......................................................242,000
Gainesville, Texas............................................................220,000
Alsip, Illinois...............................................................182,000
West Hill, Ontario, Canada....................................................117,000
Chino, California.............................................................115,000
Waxahachie, Texas.............................................................100,000
Edmonton, Alberta, Canada......................................................15,000
ASIA/PACIFIC
Auckland, New Zealand.........................................................154,000
Christchurch, New Zealand.....................................................128,000
Shimodate, Japan...............................................................69,000
Sydney, Australia.............................................................180,000
Melbourne, Australia...........................................................45,000
EUROPE
Apeldoom, Holland.............................................................267,000
Baudour-Lez-Mons, Belgium.....................................................223,000
Turate, Italy.................................................................220,000
Bridgwater, England...........................................................220,000
Beuningen, Holland............................................................122,000
Fecamp, France................................................................105,000
Pithiviers, France............................................................100,000
Venlo, Holland.................................................................68,000
Edinburgh, Scotland............................................................68,000
Southampton, England...........................................................61,000
Alicante, Spain................................................................52,000
Barbezieux, France.............................................................25,000
</TABLE>
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<PAGE>
(1) Where the Company maintains multiple facilities at any particular
location, the square footage has been aggregated. All facilities are
owned by the Company except for the following facilities, subject to
leasehold interests, which begin expiring in 1998: Bridgwater, England;
Venlo, Holland; Auckland, New Zealand (both facilities); Christchurch,
New Zealand (one of two facilities); Sydney, Australia (one of three
facilities); and Melbourne, Australia.
The Company believes that all of its properties are well maintained and in good
condition, and that the current operating facilities are adequate for its
present and immediate future business needs. However, the Company is in the
process of increasing capacity and automating some manufacturing operations in
Europe and relocating and consolidating some manufacturing operations in North
America.
At November 1, 1996, the Company had two separate manufacturing operations in
North Andover, Massachusetts. The Company has closed one of these facilities and
transferred the operations and equipment to other Company manufacturing
facilities. In addition, as part of the Borden Acquisition, the Company acquired
ten leaseholds for warehouse and office facilities, nine in the United States
and one in Canada. The Company has closed down many of these facilities and
transferred warehouse and office operations to existing Company facilities.
In aggregate, the Company currently utilizes approximately 6 million square feet
of manufacturing, office and warehouse space excluding the North Andover
facility being closed. Sales offices are assigned to each of the Company plants.
As of October 31, 1997, the Company's manufacturing facilities had a combined
average annual production capacity exceeding 1 billion pounds.
ITEM 3. LEGAL PROCEEDINGS
The Company is, from time to time, a party to litigation arising in the normal
course of its business. The Company believes that there are currently no
material legal proceedings the outcome of which would have a material adverse
effect on the Company's financial position or its results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
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<PAGE>
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
AEP's Common Stock is quoted on the Nasdaq National Market ("NNM") under the
symbol "AEPI." The high and low closing prices for the Company's Common Stock,
as reported in NNM, for the Company's two fiscal years ended October 31, 1997,
are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR AND PERIOD
- ----------------------
PRICE RANGE
---------------------
HIGH LOW
1997
- ----
<S> <C> <C>
First quarter $58.00 $46.00
Second quarter 60.75 41.75
Third quarter 50.00 22.00
Fourth quarter 39.13 24.00
1996
- ----
First quarter $23.75 $21.50
Second quarter 26.50 22.00
Third quarter 43.50 24.50
Fourth quarter 51.25 36.00
</TABLE>
On December 31, 1997, the closing price for a share of the Company's Common
Stock, as reported by NNM, was $30.875.
As of December 31, 1997, the Company's Common Stock was held by
approximately 1,300 stockholders of record or through nominee or street name
accounts with brokers.
No dividends were paid to stockholders during the periods presented. The
Company paid cash dividends to its stockholders each fiscal quarter
commencing with the quarter ended July 31, 1993, through the quarter ended
October 31, 1995. The Board of Directors announced in December 1995 the
suspension of future dividends and that the funds would be reinvested into
the Company. The restoration of future dividends is within the discretion of
the Board of Directors and will depend upon business conditions, earnings,
the financial condition of the Company and other relevant factors. The
Company is subject to a number of covenants under the term loan and
revolving credit facility and the indenture pursuant to which the 9.875%
Senior Subordinated Notes were issued, including restrictions on the amount
of dividends that may be paid.
On October 11, 1996 the Company issued 2,412,818 shares of Common Stock to
Borden in partial payment of the Purchase Price for the Acquisition.
-20-
<PAGE>
<TABLE>
<CAPTION>
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED OCTOBER 31
---------------------
(in thousands, 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
except per share
amounts)
INCOME
STATEMENT DATA
<S> <C> <C> <C> <C> <C>
Net sales......... $759,123 $270,534 $242,886 $184,669 $153,307
Operating profit.. $39,852 $15,538 $25,224 $19,734 $14,277
Income before $13,266 $4,411 $22,399 $18,801 $11,906
extraordinary
item and
provision for
income taxes......
Income before $8,571 $2,553 $13,676 $11,404 $7,334
extraordinary item
Net income........ $8,571 $2,553 $13,486 $11,404 $6,880
Net income per $1.15 $0.50 $1.99 $1.55 $1.01
common share
before
extraordinary
item (a)..........
Net income per $1.15 $0.50 $1.96 $1.55 $0.95
common share (a) .
Dividends $0.00 $0.00 $0.10 $0.08 $0.03
declared and paid
per common share
(a)...............
BALANCE SHEET
DATA
Total assets...... $613,083 $611,665 $143,287 $118,496 $88,992
Long-term debt.... $311,522 $325,438 $82,523 $23,500 $20,095
Shareholders' $87,982 $95,133 $16,808 $61,789 $50,616
Equity............
</TABLE>
(a) All fiscal years prior to 1994 have been restated to give effect to a
3-for-2 stock split in the form of a dividend declared by the Company's Board of
Directors in December 1993.
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
On October 11, 1996, in order to establish a worldwide market presence,
diversify its product lines and strengthen market share in certain of its
existing businesses, the Company acquired the global packaging operations of
Borden, Inc. ("Borden"). The purchase price for the acquisition (the "Borden
Acquisition") was approximately $280 million (including the assumption of
certain indebtedness and other purchase price adjustments) and 2.4 million
shares of Common Stock of the Company. However, as a result of the assumption by
the Company of certain indebtedness of foreign subsidiaries acquired in the
transaction, as well as certain purchase price adjustments, the actual cash
portion of the purchase price was $263 million, which amount includes
approximately $36 million used to repay certain additional intercompany
indebtedness of such foreign subsidiaries to Borden. The Borden Acquisition was
accounted for using the purchase method of accounting, and the results of
operations of Borden for the 20 day period following the Borden Acquisition are
included in the Company's results of operations for Fiscal 1996.
Management had decided not to retain the rigids businesses of Borden. The rigids
businesses manufacture, market and distribute wet food containers, dry food
trays and disposable food service products. These businesses are not considered
core businesses, and the Company has offered these businesses for sale.
Accordingly, the net assets of such businesses are classified as net assets held
for sale in the accompanying Consolidated Balance Sheets and the results of the
rigids businesses have not been included in the Company's results of operations.
The $15 million carrying value of the rigids businesses represents the Company's
best estimate as to the fair market value based on recent market information.
The Borden Acquisition resulted in a significant increase in the Company's sales
and costs associated therewith. As a result, the results of operations for the
years ended October 31, 1997 and 1996 and, to a lesser extent, for the years
ended October 31, 1996 and 1995, are not comparable from period to period. A
summary of unaudited proforma consolidated results of operations of the Company
as if the Acquisition had occurred at November 1, 1995, has been presented in
Note 3 to the Consolidated Financial Statements.
RESULTS OF OPERATIONS
YEAR ENDED OCTOBER 31, 1997 AS COMPARED TO YEAR ENDED OCTOBER 31, 1996
Net sales for Fiscal 1997 increased by 181% to $759,123,000 from $270,534,000
during Fiscal 1996. This increase in net sales reflects the Borden Acquisition
which resulted in increased net sales in North America of $199,097,000, in
Europe of $208,906,000 and in the Asia/Pacific region of $80,586,000. The
Company believes that sales during Fiscal 1997 were negatively impacted as a
result of volume and price declines in the overall North America stretch wrap
business due to overcapacity which was partially offset by volume increases in
the Company's other product lines, Europe and Asia/Pacific had an increase in
sales volume which was offset by a decrease in average
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<PAGE>
selling prices when compared to the proforma results in the prior year.
Gross profit for Fiscal 1997 increased by 167% to $159,732,000 from $59,770,000
during the same period in Fiscal 1996. This increase in gross profit resulted
from the Borden Acquisition and consisted of increased gross profit in North
America of $43,564,000, Europe of $41,777,000 and the Asia/Pacific region of
$14,621,000. Gross profit as a percentage of sales during 1997 declined to 21.0%
from 22.1% during Fiscal 1996 primarily as a result of overcapacity and intense
competition in the North America stretch wrap business, which was partially
offset by cost savings associated with the Borden Acquisition. This overcapacity
resulted in reduced sales volume and underutilization of plant facilities, each
of which negatively impacted margins as labor and other fixed costs were spread
over fewer sales. Europe had a slight increase in gross margins due to increased
sales volumes, which lowered production costs by increasing plant efficiencies.
Asia/Pacific had decreased gross profit margins primarily due to the
deterioration of economic conditions in the regions which resulted in lower
average selling prices.
Operating expenses for Fiscal 1997 increased 171% to $119,880,000 from
$44,232,000 during Fiscal 1996. This increase of $75,648,000 in operating
expenses can be attributed to the businesses acquired from Borden and the
operating expenses associated with them. Operating expenses as a percentage of
sales during Fiscal 1997 decreased slightly to 15.8% from 16.3% during Fiscal
1996. Operating expenses in Fiscal 1997 reflect certain synergies achieved as a
result of the Borden Acquisition through the consolidation of administrative and
sales personnel and warehouse facilities, partially offset by higher than
expected costs associated with closing operations at a North Andover plant and
relocating certain of those operations to the Griffin, Georgia plant. The
Company incurred increased warehouse and delivery costs during the current
period due to the installation of new delivery systems to accommodate this
consolidation.
Interest expense for Fiscal 1997 increased by 161% to $30,061,000 from
$11,517,000 during Fiscal 1996. This increase in interest expense is primarily
due to increased borrowings used to finance the Borden Acquisition and an
additional charge of $3,330,000 for loan origination fees applicable to
amendments to the current credit facility in connection with the Company's
issuance of its $200,000,000 of 9.875% Senior Subordinated Notes. A decline in
interest rates during Fiscal 1997 partially offset this increase for the period
Other income for Fiscal 1997 increased to $3,475,000 from $390,000 in Fiscal
1996. The amount for the Fiscal 1997 includes $1,278,000 in interest income,
$198,000 in foreign currency exchange gains realized during the period, $416,000
in gain from the sale of securities and income from investment in a joint
venture of $317,000. Also included in other income were $256,000 in gains on
sales of machinery and equipment $121,000 in rental income and other
miscellaneous income earned for the period.
Net income for Fiscal 1997 increased by 236% to $8,571,000 from $2,553,000 in
Fiscal 1996. This
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<PAGE>
increase was due primarily to additional sales volume attributable to the Borden
Acquisition, offset by the aforementioned overcapacity in the stretch wrap
business, as well as increased interest expense.
YEAR ENDED OCTOBER 31, 1996 AS COMPARED TO YEAR ENDED OCTOBER 31, 1995
Net sales for Fiscal 1996 increased by 11% to $270,534,000 from $242,886,000
during the Company's fiscal year ended October 31, 1995 ("Fiscal 1995"). This
increase can be attributed to the additional sales revenue generated from the
Borden Acquisition. The business of the Company excluding Borden had an increase
in sales volume of 19%, which was offset by an 18% decrease in per unit selling
prices, which decrease was primarily due to corresponding reductions in market
prices for resins.
Gross profit for Fiscal 1996 decreased by 1% to $59,770,000 from $60,373,000 in
Fiscal 1995. The Fiscal 1996 gross profit was adversely impacted by
approximately $7,300,000 because the Company absorbed inventory valuation
charges of $5,600,000 related to the acquisition of Borden inventory and an
additional charge during the fourth quarter of Fiscal 1996 of $1,700,000
incurred in the build up of Company inventory levels. These charges were
primarily a result of the Company's consistent costing of its inventories using
the last-in, first-out (LIFO) method. Gross profit as a percentage of sales
during Fiscal 1996 declined to 22.1% from 24.9% during Fiscal 1995, primarily as
a result of the aforementioned inventory charges which more than offset the
increases in gross profit margin attributable to the increase in sales volume
net of the reduction in per unit sales prices.
Operating expenses for Fiscal 1996 increased by 26% to $44,232,000 from
$35,149,000 in Fiscal 1995. Approximately $5,200,000 of the Fiscal 1996 amount
can be attributed directly to the additional expenses absorbed by the Company
for the 20 day period of operations following the Borden Acquisition. The AEP
business had an increase of $2,200,000, or 13%, in shipping and warehousing
costs and an increase of $1,500,000, or 12%, in selling expenses which were
directly attributable to the 19% increase in sales volume. Operating expenses as
a percentage of sales during Fiscal 1996 increased to 16.3% from 14.5% during
Fiscal 1995, primarily as a result of the 18% decrease in per unit selling
prices partially offset by the increase in sales volume.
Interest expense for Fiscal 1996 increased by 259% to $11,517,000 from
$3,209,000 in Fiscal 1995. This increase can be attributed to new credit
facilities and increased borrowings during Fiscal 1996. In Fiscal 1996, the
Company incurred interest expense associated with the credit facility that was
put in place during the fourth quarter of Fiscal 1995, which financed the
Company's purchase of shares of the Company's Common Stock (the "Stock
Repurchase") for its treasury from its stockholders and chief executive officer.
In October 1996, the Company replaced that credit facility with the Credit
Agreement used to finance the Borden Acquisition and retire the then existing
credit facility. The Company absorbed an additional charge to interest expense
in Fiscal 1996 of $2,900,000 for loan origination fees applicable to the old
credit facility. Interest expense as a percentage of sales increased to 4.3%
during Fiscal 1996 from 1.3% during Fiscal 1995, primarily as a result of the
additional debt incurred as a result of the Stock Repurchase and the Borden
Acquisition.
Other income in Fiscal 1996 amounted to $390,000, which consisted primarily of
interest and
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<PAGE>
dividend income of $113,000, net gains on sale of machinery and equipment of
$71,000, foreign currency exchange gains of $135,000, and other miscellaneous
income of $71,000.
Net income for Fiscal 1996 decreased by 81% to $2,553,000 from $13,486,000 in
Fiscal 1995. This decrease was due primarily to the aforementioned charges
totaling $7,300,000 related to valuation of inventories and increased interest
expense incurred during the period, including the charge of $2,900,000 for loan
origination fees on the old credit facility.
YEAR ENDED OCTOBER 31, 1995 AS COMPARED TO YEAR ENDED OCTOBER 31, 1994
Net sales for Fiscal 1995 increased by 32% to $242,886,000 from $184,669,000
during the Company's fiscal year ended October 31, 1994 ("Fiscal 1994"). The
increase was attributable primarily to a 27% increase in average selling prices
combined with a 4% increase in sales volume. The increase in per unit selling
prices was a result of an increase in raw material (resin) costs, which were
passed through to customers.
Gross profit for Fiscal 1995 increased by 12% to $60,373,000 from $54,068,000 in
Fiscal 1994. The increase in gross profit resulted from volume increases and
higher selling prices per unit offset by start-up costs associated with the
implementation of new production lines in the Company's Midwest facility and a
provision of $740,000 related to the 1996 relocation of the Company's New Jersey
manufacturing facility to Pennsylvania. Gross profit as a percentage of sales
during Fiscal 1995 declined to 24.9% from 29.3% during Fiscal 1994, as the
Company maintained its gross profit per unit sold as selling prices per unit
increased as a result of increased resin costs, thereby resulting in lower gross
profit margins.
Operating expenses for Fiscal 1995 increased by 2% to $35,149,000 from
$34,334,000 in Fiscal 1994. This increase in operating expenses can be directly
attributed to the Company's 4% increase in sales volume over the prior year
which increased selling expenses. These increased costs were offset by a
reduction in per unit delivery costs during the year, which can be attributed to
the opening of the Company's Midwest plant. Operating expenses as a percentage
of sales decreased during Fiscal 1995 to 14.5% from 18.6% during Fiscal 1994,
primarily as a result of the increased unit selling prices noted above coupled
with reduced per unit operating expenses.
Interest expense in Fiscal 1995 increased by 120% to $3,209,000 from $1,456,000
in Fiscal 1994. This increase was due to the Company's new credit facility,
which replaced its old credit facility and was used to finance the Stock
Repurchase. These purchases were completed during the fourth quarter of Fiscal
1995. Interest expense as a percentage of sales increased during Fiscal 1995 to
1.3% from 0.8% during Fiscal 1994, primarily as a result of the establishment of
the new credit facility.
Other income in Fiscal 1995 totaled $384,000, which included, among other
things, interest and dividend income of $213,000 and gain on sales of machinery
and equipment of $109,000.
Net income in Fiscal 1995 increased by 18% to $13,486,000 from $11,404,000 in
Fiscal 1994. This
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<PAGE>
increase was a result of the improvement in gross profit due to increased sales
volume and a nominal increase in operating expenses. This improvement was
partially offset by an extraordinary net of tax charge of $190,000 associated
with the prepayment penalty paid when the Company prepaid its 6.59% Senior
Notes.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations through cash flow generated
from operations and borrowings by the Company or its subsidiaries under various
credit facilities. The Company's principal uses of cash have been to fund
working capital, including operating expenses, debt service, and capital
expenditures.
The Company's working capital amounted to $56,045,000 at October 31, 1997,
compared to $75,624,000 at October 31, 1996. This decrease of $19,579,000 in
working capital is primarily attributable to maturities of long term debt and
the strengthening of the United States dollar during Fiscal 1997, thereby
reducing the translation of working capital balances of foreign subsidiaries.
The remaining increases and decreases in components of the Company's financial
position reflect normal operating activity.
On October 11, 1996, the Company entered into the Credit Agreement with the
Morgan Guaranty Trust Company, as Agent, and the banks party thereto. The Credit
Agreement provided the Company with two credit facilities, consisting of a term
credit facility in the amount of $350,000,000 and a revolving credit facility
for an amount up to $100,000,000. The proceeds borrowed under the Credit
Agreement were used to pay the $263,000,000 cash portion of the purchase price
for the Borden Acquisition, to repay the $95,400,000 balance under the then
existing term credit and revolving credit obligations and to pay the expenses
and related costs of the Borden Acquisition and the borrowing under the Credit
Agreement. The term loan commitment expired on the date of the closing of the
Credit Agreement and the borrowing of the term loan thereunder. Amounts repaid
or prepaid with respect to the term loan may not be reborrowed. As of October
31, 1997, there was $320,000,000 outstanding under the term credit facility and
no outstanding borrowings under the revolving credit facility.
As a result of the Company's high degree of leverage and the effect on net sales
that occurred as a result of overcapacity in the domestic stretch wrap industry,
the Company believed there was a substantial likelihood that it would fail to
maintain certain financial ratios, including minimum fixed charge coverage and
leverage ratios, at the levels required by the Credit Agreement. The Company
received a waiver relating to such ratios and entered into an amendment to the
Credit Agreement. The amendment, among other things, modifies the financial
covenants to require maintenance of such ratios at levels which the Company
believes it can achieve, although there can be no assurance in this regard.
On November 19, 1997, the Company completed an offering of $200,000,000 in
aggregate principal amount of 9.875% Senior Subordinated Notes due November 15,
2007. The issue price was 99.224% resulting in an effective yield of 10%. The
net proceeds from the Notes have been used to repay a portion of the
indebtedness outstanding under the Company's outstanding Credit Agreement.
-26-
<PAGE>
After giving retroactive effect to the sale of the Notes on November 19, 1997,
and the application of the net proceeds therefrom, at October 31, 1997, the
Company would have had $128,000,000 outstanding under the term credit facility,
no outstanding borrowings under the revolving credit facility, and $200,000,000
Notes due November 2007 outstanding.
The Company also has a $10,000,000 unsecured revolving credit facility available
for working capital purposes. At October 31, 1997, there were no outstanding
borrowings under this facility.
The Company also maintains various unsecured short-term credit facilities at its
foreign subsidiaries. At October 31, 1997, the aggregate amount outstanding
under such facilities was approximately $51,000,000 and approximately
$20,000,000 was available for borrowing. Borrowings from these facilities are
used to support operations at such subsidiaries and are generally serviced by
cash flow from operations at such subsidiaries. Approximately $42,000,000 of
such indebtedness is guaranteed by the Company.
The Company's cash and cash equivalents decreased by $7,924,000 for Fiscal 1997,
as compared to an increase of $11,738,000 during Fiscal 1996. Net cash provided
by operating activities during Fiscal 1997 was $39,316,000 primarily due to net
income of $8,571,000, depreciation and amortization expense of $32,651,000
offset by net decreases in other operating assets and liabilities of $1,906,000.
Net cash provided by operating activities during Fiscal 1996 was $7,336,000,
which was primarily due to net income of $2,553,000 and depreciation and
amortization expense of $12,534,000, offset by net decreases in other operating
assets and liabilities of $7,751,000. In each period, the net decreases in other
operating assets and liabilities reflect normal operating activity.
Net cash used in investing activities during Fiscal 1997 was $43,536,000,
resulting primarily from the net investment in capital expenditures of
$39,352,000 and certain acquisitions in the Asia/Pacific region of $8,758,000
which were partially offset by the sale of certain marketable securities and
machinery and equipment. Net cash used in investing activities during Fiscal
1996 was $269,018,000, resulting primarily from cash used to consummate the
Borden Acquisition of $254,939,000 (net of cash acquired) and capital
expenditures of $14,040,000.
Net cash provided by financing activities during Fiscal 1997 was $1,640,000,
reflecting net borrowings on long-term debt of $10,549,000 and stock issuances
of $1,091,000, offset by a repayment under the revolving credit portion of the
Credit Agreement of $10,000,000. The remaining increases and decreases in the
components of the Company's financial position reflect normal operating
activity. Net cash provided by financing activities during Fiscal 1996 was
$274,703,000, which reflected $370,300,000 in funds received under the Credit
Agreement (of which $263,000,000 was used to consummate the Borden Acquisition),
offset in part by the repayment of existing long-term debt of $101,710,000.
The Company anticipates that its Fiscal 1998 capital expenditures will be
approximately $32,000,000, of which approximately $16,000,000 has been committed
and approximately $8,000,000 is expected to be utilized for general maintenance
of equipment. This investment in capital expenditures is expected to be used to
expand the Company's product lines and increase capacity of existing equipment.
-27-
<PAGE>
The Company anticipates that in Fiscal 1998 its debt service will approximate
$49,451,000, including scheduled principal payments of $15,451,000 and interest
expense of approximately $34,000,000. The Company also has approximately
$50,000,000 of foreign bank borrowings due to be paid in Fiscal 1998, which
will be refinanced.
The Company believes that its cash flow from operations, combined with the
availability of funds under the Credit Agreement and credit lines available to
the Company's foreign subsidiaries for local currency borrowings, will be
sufficient to meet the Company's working capital, capital expenditure and debt
service requirements for the foreseeable future. The Company may also expects to
receive cash in the event that its rigids businesses are sold.
EFFECTS OF INFLATION
Inflation is not expected to have significant impact on the Company's business.
YEAR 2000
Many existing computer programs use only two digits to identify a year in the
date field. These programs were designed and developed without considering the
impact of the upcoming change in the century. If not corrected, many computer
applications could fail or create erroneous results by or at the Year 2000. The
Company is currently undertaking a systems readiness review which will help
mitigate the risks associated with the Year 2000 issue. The Company has
purchased certain new operating systems during Fiscal 1997 and as a result, the
Year 2000 issues will not have a material effect on its financial position and
results of operations.
FORWARD LOOKING STATEMENTS
Management's Discussion and Analysis of Financial Condition and the Results of
Operations contains "Forward Looking Statements" about the Company's prospects
for the future such as its ability to generate sufficient working capital, its
ability to continue to maintain sales and profits of its combined AEP and Borden
operations and its ability to generate sufficient funds to meet its cash
requirements. Such statements are subject to certain risks and uncertainties
which can cause actual results to differ materially from those projected,
including availability of raw materials, ability to pass raw material price
increases to customers in a timely fashion, the potential of technological
changes which would adversely affect the need for the Company's products and
price fluctuations which could adversely impact the Company's inventory. Parties
are cautioned not to rely on any such forward looking benefits or judgments in
this section and in other parts of this Annual Report.
-28-
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index:
Report of Independent Public Accountants
Financial Statements:
Consolidated Balance Sheets as of October 31, 1997 and 1996
Consolidated Statements of Income -- For the years
ended October 31, 1997, 1996 and 1995
Consolidated Statements of Shareholders' Equity -- For
the years ended October 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows -- For the
years ended October 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
Financial Statement Schedules:
Schedules included are set forth in Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For information concerning this item, see "Item 1. Business - Executive Officers
of the Company" of Part I hereof and the table and text under the caption "Name
of Nominee and Certain Biographical Information" in the Proxy Statement to be
filed with respect to the Annual Meeting of Shareholders to be held on April 14,
1998 (the "Proxy Statement"), which information is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
For information concerning this item, see the text and table under the caption
"Compensation of Executive Officers" in the Proxy Statement, which information
is incorporated herein by reference.
-29-
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
For information concerning this item, see the table and text under the caption
"Information Concerning Certain Shareholders" in the Proxy Statement, which
information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information concerning this item, see the text under the caption "Other
Information Concerning Directors, Officers and Shareholders" in the Proxy
Statement, which information is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements:
The financial statements of the Company filed in this Annual
Report on Form 10-K are listed in Item 8.
2. Financial Statement Schedules:
The financial statement schedules of the Company filed in this
Annual Report on Form 10-K are listed in the attached Index to Financial
Statement Schedules.
3. Exhibits:
The exhibits required to be filed as part of this Annual Report
on Form 10-K are listed in the attached Index to Exhibits.
(b) Current Reports on Form 8-K:
None
-30-
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To AEP Industries Inc.:
We have audited the accompanying consolidated balance sheets of AEP Industries
Inc. (a Delaware corporation) as of October 31, 1997 and 1996, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended October 31, 1997. These consolidated
financial statements and the schedule referred to below are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about 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.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of AEP Industries Inc.
as of October 31, 1997 and 1996, and the results of their operations and their
cash flows for each of the three years in the period ended October 31, 1997 in
conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
financial statement schedules is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
December 23, 1997
-31-
<PAGE>
AEP INDUSTRIES INC.
CONSOLIDATED BALANCE SHEETS AS OF OCTOBER 31, 1997 AND 1996
(in thousands, except share amounts)
<TABLE>
<CAPTION>
ASSETS 1997 1996
------
---------------- ----------------
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $4,143 $12,067
Marketable securities - 2,070
Accounts receivable, less allowance of
$5,226 and $5,097 in 1997 and
1996, respectively, for doubtful accounts 112,219 104,302
Inventories, net 92,021 94,336
Net assets held for sale 15,000 15,000
Other current assets 12,978 16,327
---------------- ----------------
Total current assets 236,361 244,102
PROPERTY, PLANT AND EQUIPMENT, at cost, less
accumulated depreciation
and amortization 292,743 290,316
GOODWILL less accumulated amortization
of $1,351 and $51 in 1997 and 1996, respectively 43,183 52,906
INVESTMENT IN JOINT VENTURE 15,345 15,028
OTHER ASSETS 25,451 9,313
---------------- ----------------
Total assets $613,083 $611,665
================ ================
<CAPTION>
LIABILITIES AND
SHAREHOLDERS' EQUITY 1997 1996
--------------------
--------------- ----------------
CURRENT LIABILITIES:
<C> <C> <C>
Current portion of debt $65,484 $51,019
Accounts payable 74,720 68,327
Accrued expenses 40,112 49,132
--------------- ----------------
Total current liabilities 180,316 168,478
LONG-TERM DEBT 311,522 325,438
OTHER LONG TERM LIABILITIES 6,278 7,041
DEFERRED INCOME TAXES 26,985 15,575
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock -- $1.00 par value; 1,000,000
shares authorized; none issued - -
Common stock -- $.01 par value;
30,000,000 shares and 20,000,000 shares
authorized in 1997
and 1996, respectively; 9,988,330 and
9,931,303 shares issued in 1997 and 1996,
respectively 100 99
Additional paid-in capital 89,974 88,052
Treasury stock - common stock; at cost,
2,781,543 and 2,801,000 shares in 1997
and 1996, respectively (61,783) (62,142)
Retained earnings 78,679 70,108
Cumulative translation adjustment (18,988) (1,283)
Net unrealized investment gain, net of taxes - 299
--------------- ----------------
Total shareholders' equity 87,982 95,133
--------------- ----------------
Total liabilities and shareholders'
equity $613,083 $611,665
=============== ================
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
-32-
<PAGE>
AEP INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995
(in thousands, except per share data)
<TABLE>
<CAPTION>
1997 1996 1995
------------------ ------------------ ------------------
<S> <C> <C> <C>
NET SALES $759,123 $270,534 $242,886
COST OF SALES 599,391 210,764 182,513
------------------ ------------------ ------------------
Gross profit 159,732 59,770 60,373
OPERATING EXPENSES:
Delivery and warehousing 46,492 20,825 16,666
Selling 43,363 15,701 12,940
General and administrative 30,025 7,706 5,543
------------------ ------------------ ------------------
Total operating expenses 119,880 44,232 35,149
------------------ ------------------ ------------------
Income from operations 39,852 15,538 25,224
OTHER INCOME (EXPENSE):
Interest expense (30,061) (11,517) (3,209)
Other, net 3,475 390 384
------------------ ------------------ ------------------
(26,586) (11,127) (2,825)
------------------ ------------------ ------------------
Income before extraordinary
item and provision
for income taxes 13,266 4,411 22,399
------------------ ------------------ ------------------
PROVISION FOR INCOME TAXES 4,695 1,858 8,723
------------------ ------------------ ------------------
Income before
extraordinary item 8,571 2,553 13,676
EXTRAORDINARY ITEM, net of income
tax benefit of $120 in 1995 - - (190)
------------------ ------------------ ------------------
Net income $8,571 $2,553 $13,486
================== ================== ==================
INCOME PER SHARE OF COMMON STOCK:
Before extraordinary item $1.15 $.50 $1.99
Extraordinary item - - (.03)
------------------ ------------------ ------------------
Net income $1.15 $.50 $1.96
================== ================== ==================
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
-33-
<PAGE>
<TABLE>
<CAPTION>
AEP INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995
(in thousands)
Common Stock Treasury Stock
----------------------------------------
Shares Amount Shares Amount
-------------------------------------------
<S> <C> <C> <C> <C>
BALANCES AT OCTOBER 31, 1994 7,368 $ 74
Issuance of common stock upon
exercise of stock options(Note 8) 62
Issuance of common stock pursuant
to stock purchase plan (Note 8) 10
Net income
Cash dividends
Purchase of treasury stock (Note 8) 2,633 $ (58,304)
Other (3)
-------------------------------------------
BALANCES AT OCTOBER 31, 1995 7,437 74 2,633 (58,304)
Issuance of common stock upon
exercise of stock options(Note 8) 66 1
Issuance of common stock pursuant
to stock purchase plan (Note 8) 15
Issuance of common stock pursuant
to acquisition of Borden Global 2,413 24
Packaging (Note 8)
Net income
Purchase of treasury stock (Note 8) 168 (3,838)
Translation adjustments
Net unrealized investment gain
-------------------------------------------
BALANCES AT OCTOBER 31, 1996 9,931 $ 99 2,801 $ (62,142)
Issuance of common stock upon
exercise of stock options(Note 8) 46 1
Issuance of common stock pursuant
to stock purchase plan (Note 8) 11 -
Tax benefit from stock option
exercises
Net Income
ESOP Contribution (19) 359
Sale of securities
Translation adjustments
-------------------------------------------
BALANCES AT OCTOBER 31, 1997 9,988 $100 2,782 $ (61,783)
<CAPTION>
Additional Cumulative Net Unrealized
Paid-in Translation Investment Retained
Capital Adjustment Gain Earnings
----------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCES AT OCTOBER 31, 1994 $ 7,009 $54,706
Issuance of common stock upon
exercise of stock options(Note 8) 470
Issuance of common stock pursuant
to stock purchase plan (Note 8) 66
Net income 13,486
Cash dividends (637)
Purchase of treasury stock (Note 8)
Other (62)
----------------------------------------------------------
BALANCES AT OCTOBER 31, 1995 7,483 67,555
Issuance of common stock upon
exercise of stock options(Note 8) 308
Issuance of common stock pursuant
to stock purchase plan (Note 8) 285
Issuance of common stock pursuant
to acquisition of Borden Global 79,976
Packaging (Note 8)
Net income 2,553
Purchase of treasury stock (Note 8)
Translation adjustments $ (1,283)
Net unrealized investment gain $ 299
----------------------------------------------------------
BALANCES AT OCTOBER 31, 1996 $88,052 $ (1,283) $ 299 $70,108
Issuance of common stock upon
exercise of stock options(Note 8) 727
Issuance of common stock pursuant
to stock purchase plan (Note 8) 363
Tax benefit from stock option
exercises 160
Net Income 8,571
ESOP Contribution 672
Sale of securities (299)
Translation adjustments (17,705)
----------------------------------------------------------
BALANCES AT OCTOBER 31, 1997 $89,974 $(18,988) - $78,679
==================================================================================================
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
-34-
<PAGE>
<TABLE>
<CAPTION>
AEP INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995
(in thousands)
1997 1996 1995
------------------- ----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $8,571 $2,553 $13,486
Adjustments to reconcile net income to
net cash provided by operating activities-
Depreciation and amortization 32,651 12,534 9,822
ESOP contribution 1,031 -
Net (gain)/loss on sale of securities (416) - -
Net (gain)/loss on sale of equipment (256) - -
Provision for losses on accounts receivable and inventory 2,605 527 500
Write-off of debt issuance costs 3,330 - -
Deferred income taxes 2,704 288 1,190
Equity in unremitted earnings of joint venture (317) - -
Changes in operating assets and liabilities, net of
acquisition of business
(Increase) in accounts receivable (9,561) (4,383) (2,750)
(Increase) decrease in inventories 1,354 4,393 (2,323)
(Increase) decrease in other current assets 2,749 (1,573) (684)
(Increase) decrease in other assets (18,868) 11,332 (2,531)
Decrease in goodwill 8,423
Increase (decrease) in accounts payable 6,393 (8,576) 6,047
(Decrease) in accrued expenses (9,020) (9,759) (167)
Increase in deferred income taxes 8,706 - -
(Decrease) in other long term liabilities (763) - -
------------------ ----------------- ------------------
Net cash provided by operating
activities 39,316 7,336 22,590
------------------ ----------------- ------------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Acquisition of Borden Global Packaging, net of cash acquired - (254,939) -
Capital expenditures (39,352) (14,040) (28,402)
Sales and retirements of property, plant and equipment, net 2,088 14 20
Acquisition of assets in Australia (8,758)
Purchases of marketable securities - (53) -
Sales of marketable securities 2,486 - 1,925
------------------ ----------------- ------------------
Net cash used in investing activities (43,536) (269,018) (26,457)
------------------ ----------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under
long-term credit facilities (10,000) 9,357 (2,500)
Net borrowings of debt 10,549 370,300 92,964
Net repayments on long-term debt - (101,710) (28,059)
Proceeds from issuance of common stock 1,091 594 474
Purchase of treasury stock - (3,838) (58,304)
Payment of cash dividends - - (637)
------------------ ----------------- ------------------
Net cash provided by financing
activities 1,640 274,703 3,938
------------------ ----------------- ------------------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH (5,344) (1,283) -
------------------ ----------------- ------------------
Net increase (decrease) in cash (7,924) 11,738 71
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 12,067 329 258
================== ================= ==================
CASH AND CASH EQUIVALENTS AT END OF YEAR $4,143 $12,067 $329
================== ================= ==================
</TABLE>
-35-
<PAGE>
AEP INDUSTRIES INC.
NOTES TO FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION:
AEP Industries Inc. (the "Company") is an international manufacturer of a
wide range of plastic film products. The Company's products are used in a
number of industrial, commercial, food and agricultural applications and
are sold worldwide, including North America, Western Europe and the
Asia/Pacific regions.
(2) SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION -
The consolidated financial statements include the accounts of all
majority-owned subsidiaries.
All significant intercompany transactions have been eliminated.
REVENUE RECOGNITION -
Revenues are recognized when products are shipped.
CASH AND CASH EQUIVALENTS -
The Company considers all highly liquid investments purchased with an
initial maturity of three months or less to be cash equivalents.
MARKETABLE SECURITIES -
Marketable securities classified as available-for-sale securities are
carried at fair market value with unrealized gains and losses excluded
from income and recorded, net of income tax, as a separate component of
shareholders' equity. The Company has no securities classified as
trading or held-to-maturity.
Gains and losses on investment transactions are recognized when
realized based on trade dates. Dividends are recorded in income based
on payment dates. Interest is recognized when earned.
-36-
<PAGE>
USE OF ESTIMATES -
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
PROPERTY, PLANT AND EQUIPMENT -
Property, plant and equipment are stated at cost. Depreciation and
amortization are computed using primarily the straight-line method over
the estimated useful lives of the assets. The cost of property, plant
and equipment and the related accumulated depreciation and amortization
are removed from the accounts upon the retirement or disposal of such
assets and the resulting gain or loss is recognized at the time of
disposition. The cost of maintenance and repairs is charged to expense
as incurred.
FOREIGN CURRENCY TRANSLATION -
Financial statements of international subsidiaries are translated into
U.S. dollars using the exchange rate at each balance sheet date for
assets and liabilities and the weighted average exchange rate for each
period for revenues, expenses, gains and losses. The related
translation adjustments are recorded as a separate component of
shareholders' equity.
RESEARCH AND DEVELOPMENT COSTS -
Research and development costs are charged to expense as incurred.
Approximately $2,192,000, $635,000, and $698,000 for 1997, 1996 and
1995, respectively, was incurred for such research and development.
INCOME TAXES -
Income taxes are accounted for in accordance with SFAS 109, "Accounting
for Income Taxes." Under SFAS 109, an asset and liability approach is
required. Such approach results in the recognition of deferred tax
assets and liabilities for the expected future tax consequences of
temporary differences between the book carrying amounts and the tax
basis of assets and liabilities.
The Company and its subsidiaries file separate foreign, state and local
income tax returns and, accordingly, provide for such income taxes on a
separate company basis.
DERIVATIVES -
Derivative financial instruments are utilized by the Company to reduce
interest rate and foreign exchange risks. The Company has established
policies and procedures for risk assessment and the approval, reporting
and monitoring of derivative financial instrument activities. The
Company does not hold or issue derivative financial instruments for
trading purposes.
-37-
<PAGE>
FOREIGN EXCHANGE CONTRACTS -
Gains and losses on contracts designated as hedges of net investments
in foreign subsidiaries are accrued as exchange rates change and are
recognized in shareholders' equity as cumulative translation
adjustments. Gains and losses on contracts designated as hedges of
identifiable foreign currency firm commitments are deferred and
included in the measurement of the related foreign currency
transaction.
GOODWILL -
Goodwill, representing the excess of the purchase price over the fair
value of the net assets of the acquired entities (Note 3), is being
amortized on a straight line basis over the period of expected benefit
of thirty-five (35) years. The Company evaluates whether changes have
occurred that would require revision of the remaining estimated useful
life of the assigned goodwill or rendered the goodwill not recoverable.
FAIR VALUE OF FINANCIAL INSTRUMENTS -
Cash, accounts receivable, accounts payable and accrued expenses are
reflected in the financial statements at fair value because of the
short term maturity of those instruments. The fair value of the
Company's debt is discussed in Note 7.
CONCENTRATION OF CREDIT RISK -
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash equivalents,
marketable securities, trade receivables and financial instruments used
in hedging activities.
The Company places its cash equivalents and short-term investments with
high-quality-credit institutions and limits the amount of credit
exposure with any one financial institution.
The Company sells its products to a large number of geographically
diverse customers, thus spreading the trade credit risk. The Company
extends credit based on an evaluation of the customer's financial
condition, generally without requiring collateral. The Company monitors
its exposure for credit losses and maintains allowances for anticipated
losses.
The counterparties to the agreements relating to the Company's foreign
exchange and interest rate instruments consist of a number of major,
international financial institutions. The Company does not believe that
there is significant risk of nonperformance by these counterparties as
the Company continually monitors the credit ratings of such
counterparties, and limits the financial exposure and the amount of
agreements entered into with any one institution.
NET INCOME PER SHARE OF COMMON STOCK -
Net income per share of common stock is calculated using the weighted
average number of shares of common stock and (where dilutive) common
stock equivalents (options) outstanding during the period. The number
of shares used in the per share computations was 7,452,393 in 1997,
5,077,725 in 1996, and 6,883,306 in 1995.
During 1995, the Company acquired 2,633,000 shares of its common stock,
the purchase of which has been reflected in the computation of earnings
per share on the basis of the weighted shares outstanding. Had the
shares been purchased at the beginning of fiscal 1995 and had the debt,
the proceeds from which the purchase was made, been outstanding since
that date, earnings per share for 1995 would have been increased by
$.30.
-38-
<PAGE>
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
per Share", which becomes effective for the Company's fiscal year
beginning November 1, 1997, establishes new standards for computing and
presenting earnings per share ("EPS"). The new standard requires the
presentation of basic EPS and diluted EPS. Basic EPS is calculated by
dividing income available to common shareholders by the weighted
average number of shares of common stock outstanding during the period.
Diluted EPS is calculated by dividing income available to common
shareholders by the weighted average number of common shares
outstanding adjusted to reflect potentially dilutive securities.
Previously reported EPS amounts must be restated under the new standard
when it becomes effective. Under the new standard, basic EPS would have
been $1.19, $0.52 and $1.96 in 1997, 1996 and 1995, respectively and
diluted EPS would have been $1.15 and $0.50 in 1997 and 1996,
respectively.
STOCK BASED COMPENSATION -
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, "Accounting for Stock-Based Compensation ." This statement
establishes a fair value based method of accounting for an employee
stock option or similar equity instrument but allows companies to
continue to measure compensation cost for those plans using the
intrinsic value based method of accounting prescribed by APB Opinion
No. 25, "Accounting for Stock Issued to Employees." Companies electing
to continue using the accounting under APB Opinion No. 25 must,
however, make pro forma disclosures of net income and earnings per
share as if the fair value based method of accounting defined in SFAS
No. 123 had been applied. The Company has elected to continue
accounting for its stock-based compensation awards to employees and
directors under the accounting prescribed by APB Opinion No. 25 and to
provide the disclosures required by SFAS No.123 (See Note 8).
LONG-LIVED ASSETS -
Effective November 1, 1996, the Company adopted Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long Lived Assets
and for Long-Lived Assets to be Disposed Of" ("SFAS No. 121"). This
statement requires that long-lived assets and certain identifiable
intangibles held and used by the Company be reviewed for impairment
whenever events or changes in circumstances indicate the carrying
amount of an asset may not be recovered. SFAS No. 121 also requires
that assets to be disposed of be reported at the lower of the carrying
value or the fair market value less costs to sell. Adoption of this
statement did not have a material impact on the Company's financial
position, results of operations or liquidity.
REPORTING COMPREHENSIVE INCOME -
In 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income". This standard establishes
requirements for the reporting and display of comprehensive income and
its components in a full set of general purpose financial statements.
Comprehensive income is the total of net income and all other nonowner
changes in equity. The objective of the Statement is to report a
measure of all changes in equity of a company that result from
transactions and other economic events in the period other than
transactions with owners. This standard is effective for the Company's
fiscal year beginning November 1, 1998. The Company will make the
necessary disclosures, if necessary, when required and as this
statement relates solely to disclosure provisions, believes that the
adoption of this standard will have no effect on its financial position
or results of operations.
RECLASSIFICATIONS -
Certain prior year amounts have been reclassified in order to conform
with the 1997 presentation.
-39-
<PAGE>
(3) ACQUISITION OF BUSINESS
On October 11, 1996, the Company acquired the Global Packaging Business
("BGP") of Borden, Inc. for a combination of cash and shares of Company
common stock. The cash portion of the purchase price was $264,400,000,
after all adjustments, and the stock portion of the purchase price totaled
$80 million and consisted of 2,412,818 shares valued at $33.15625 per
share, representing the average market share price at the time the
acquisition was agreed to and announced. The cash portion of the purchase
price was financed through bank debt.
The acquisition was accounted for using the purchase method of accounting,
and, accordingly, the purchase price has been allocated to the assets
purchased and the liabilities assumed based upon the fair values at the
date of acquisition. Included in accrued expenses are approximately $14
million and $2.5 million at October 31, 1996 and October 31, 1997,
respectively, of additional acquisition costs (Note 6). The acquisition
resulted in goodwill of approximately $53 million which is being amortized
on a straight line basis over thirty-five years.
At the time of the Company's acquisition of BGP, management decided not to
retain the rigids' businesses of BGP. The rigids' businesses manufacture,
market and distribute wet food containers, dry food trays and disposable
food service products. These businesses are not considered core businesses
and the Company has offered these businesses for sale with the intention
that they would be sold within one year from the date of the acquisition
and it would use the proceeds from the sale to pay down its debt.
Accordingly, the Company has classified the net assets of such businesses
as Net assets held for sale in the accompanying Consolidated Balance
Sheets. For the year ending October 31, 1997, the net losses from the
rigids' businesses amounted to approximately $6 million and are not
included in the Company's results of operations. The carrying value of net
assets held for sale represents the Company's best estimate at October 31,
1997 as to the fair market value based on recent market information.
The Company is actively pursuing the sale of these operations and remains
committed to a formal plan of sale and effective November 1, 1997, has
begun recording the rigids' businesses as discontinued operations until
such time as they are sold.
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company and BGP, without the
rigids' businesses, as if the acquisition had occurred at the beginning of
fiscal 1995 and 1996, respectively, with pro forma adjustments to give
effect to amortization of goodwill, interest expense on acquisition debt
and certain other adjustments, together with related income tax effects.
<TABLE>
<CAPTION>
------------------For the Year Ended---------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) OCTOBER 31, 1996 OCTOBER 31, 1995
---------------- ----------------
(unaudited)
<S> <C> <C>
Net Sales $765,449 $804,489
Operating Income 42,227 54,676
Net Income 10,019 20,074
Earnings per Share $1.36 $2.16
</TABLE>
These pro forma results have been prepared for comparative purposes only.
They do not purport to be indicative of the results of the operations which
actually would have resulted had the combination been in effect on November
1, 1994 and 1995 or of the future results of operations of the Company.
-40-
<PAGE>
(4) INVENTORIES:
Inventories, stated at the lower of cost (last-in, first-out method for
domestic operations and first-in, first-out method for foreign operations
and supplies) or market, include material, labor and manufacturing overhead
costs and are comprised of the following-
<TABLE>
<CAPTION>
October 31,
-------------------------------------
1997 1996
----------------- ----------------
(IN THOUSANDS)
<S> <C> <C>
Raw materials $22,212 $27,362
Finished goods 67,246 66,095
Supplies 4,060 2,689
----------------- ----------------
93,518 96,146
Less: Inventory Reserve 1,497 1,810
----------------- ----------------
Total Inventories, net $92,021 $94,336
================= ================
</TABLE>
The last-in, first-out (LIFO) method was used for determining the cost of
approximately 50% and 44% of total inventories at October 31, 1997 and
1996, respectively. Inventories would have been increased by $2,330,000 and
$9,358,000 at October 31, 1997 and 1996, respectively, if the FIFO method
had been used exclusively. Due to the Company's continuous manufacturing
process, there is no significant work in process at any point in time.
(5) PROPERTY, PLANT AND EQUIPMENT:
A summary of the components of property, plant and equipment and their
estimated useful lives is as follows-
<TABLE>
<CAPTION>
October 31, Estimated
-------------------------------------
(IN THOUSANDS) 1997 1996 Useful Lives
----------------- ---------------- --------------------
<S> <C> <C>
Land $15,164 $12,982
Buildings 76,601 72,867 15 to 31.5 years
Machinery and equipment 260,327 242,812 3 to 16 years
Furniture and fixtures 7,461 6,304 9 years
Leasehold improvements 2,293 2,521 6 to 25 years
Motor vehicles 3,924 6,561 3 years
Construction in progress 16,471 12,266
----------------- ----------------
382,241 356,313
Less- Accumulated depreciation
and amortization 89,498 65,997
----------------- ----------------
$292,743 $290,316
================= ================
</TABLE>
Maintenance and repairs expense was approximately $13,500,000, $1,845,000,
and $2,283,000 for the years ended October 31, 1997, 1996 and 1995,
respectively.
-41-
<PAGE>
(6) ACCRUED EXPENSES
At October 31, 1997 and 1996, accrued expenses consisted of the following-
<TABLE>
<CAPTION>
(IN THOUSANDS) 1997 1996
----------------- -----------------
<S> <C> <C>
Payroll and employee benefits $15,147 $12,394
Interest 3,181 1,130
Taxes (other than income) 4,325 4,805
Customer Rebates 6,994 3,811
Acquisition Related:
Severance 2,000 7,800
Professional Fees - 2,200
Relocation of machinery and equipment - 2,800
Other 458 1,527
Other 8,007 12,665
----------------- -----------------
$40,112 $49,132
================= =================
</TABLE>
(7) DEBT:
A summary of the components of debt is as follows-
<TABLE>
<CAPTION>
October 31,
---------------------------------------------------
(IN THOUSANDS) 1997 1996
----------------- -----------------------
<S> <C> <C>
Term loan facility (a) $320,000 $350,000
Revolving credit facility (a) - 10,000
Pennsylvania Industrial Loans (b) 5,981 5,196
Foreign bank borrowings (c) 51,025 11,261
----------------- -----------------------
Total Debt 377,006 376,457
Less- Current portion 65,484 51,019
----------------- -----------------------
Long-Term Debt $311,522 $325,438
================= =======================
</TABLE>
(a) On October 11, 1996, to facilitate the acquisition of BGP, the
Company entered into a long term credit agreement (the "Credit
Agreement") with a consortium of banks arranged by Morgan Guaranty
Trust Company of New York. The Credit Agreement provided the Company
with two credit facilities consisting of (1) a six year amortizing
term loan facility in the amount of $350,000,000 and (2) a six year
revolving credit facility in the amount of $100,000,000. The Company
borrowed under the Credit Agreement: (1) a $5,000,000 prime rate loan
at 8.25% (this was repaid prior to October 31, 1996); (2) $10,000,000
under the revolving credit facility (this was repaid in 1997); and
(3) $350,000,000 term loan with installment payments due quarterly in
1997 and in increasing amounts thereafter ($30 million was repaid in
1997). At October 31, 1996, the interest rates ranged from 5.8875% to
6.075%. Concurrent with the above, the Company repaid its prior
credit facilities totaling $95,356,869.
-42-
<PAGE>
As a result of the Company's high degree of leverage and the effect
on net sales that occurred as a result of overcapacity in the
domestic stretch wrap industry, the Company believed there was a
substantial likelihood that it would fail to maintain certain
financial ratios, including minimum fixed charge coverage and
leverage ratios, at the levels required by the Credit Agreement. The
Company received a waiver relating to such ratios and entered into an
amendment to the Credit Agreement (the "Amendment") in October 1997.
The principal effects of the Amendment relate to the interest rate
applicable to the Credit Agreement and the amortization schedule with
respect to the term loan made thereunder. The interest rate margins
which determine the interest rates applicable to the loans under the
Credit Agreement have been increased as follows: the margin
applicable to Base Rate loans (formerly 0%) has been increased to a
range from 0% to .75% and the margin applicable to LIBOR Rate loans
(formerly .25% to .625%) has been increased to a range from .45% to
1.75%. The required amortization payments in respect of the term loan
have been reduced so that, instead of amortizing the full principal
during the term of the loan, a balloon payment equal to the remaining
outstanding principal balance of the term loan will be due at
maturity (October 11, 2002). As a result of the Amendment, the
Company has written-off the unamortized prior debt issuance costs of
$3,330,000 and has capitalized $1,050,000 of amendment fees. (See
Note 16).
The Amendment contains certain customary representations, warranties,
covenants and conditions such as, but not limited to, cash flow
ratio, fixed charge coverage ratio and certain restrictions on, and
not limited to, dividends, mergers, investments, asset sales and
additional indebtedness.
(b) During 1996, the Company entered into the following financing
arrangements in connection with the construction of its Wright
Township, Pennsylvania manufacturing facility:
$1,600,000 fifteen year fixed rate 2% loan due on August 1, 2011;
$3,300,000 fifteen year fixed rate 2% loan due on July 1, 2011;
$ 400,000 seven year fixed rate 2% loan due on July 1, 2003.
During 1997, the Company also entered into the following financing
arrangements with Wright Township, Pennsylvania:
$750,000 five year fixed rate 1% loan due on February 24, 2002.
$400,000 fifteen year fixed rate 2% loan due on August 1, 2011.
The Company has repaid $355,000 and $114,000 of these borrowings
during 1997 and 1996, respectively.
(c) These amounts consist of short term foreign bank borrowings at an
average interest rate of approximately 6.9% and 6.1% in 1997 and
1996, respectively, and long term debt of $818,000 and $615,000 in
1997 and 1996, respectively. In 1996, the long term debt was held in
Italy and South Africa, with average interest rates of 12.36% and
18.59%, respectively. In 1997, the long term debt was held in
Australia, Italy and South Africa, with average interest rates of
11.47%, 12.36% and 18.59%, respectively.
Payments required on all debt during each of the next five years are as
follows-
(IN THOUSANDS)
1998 $65,484
1999 15,627
2000 20,550
2001 25,548
2002 20,118
Thereafter 229,679
-----------------
$377,006
=================
-43-
<PAGE>
Cash paid for interest during 1997, 1996 and 1995 was $22,178,000,
$7,546,000 and $3,273,000, respectively.
The fair value of the Company's debt is estimated based on the quoted
market prices for the same or similar issues or on the current rates
offered to the Company for debt of the same remaining maturities. The
Company believes that the stated values represent the estimated fair
values of the Company's debt instruments.
(8) SHAREHOLDERS' EQUITY:
On October 11, 1996, in connection with the acquisition of BGP (as
discussed in Note 3), the Company issued 2,412,818 shares of the
Company's common stock at a price of $33.15625 per share or a total of
$80,000,000.
In August 1995, the Company executed a stock purchase agreement with J.
Brendan Barba, the Chairman of the Board, President and Chief Executive
Officer of the Company under which the Company purchased and placed into
treasury 1,550,000 shares of the Company's stock owned by Mr. Barba at
$21.04 per share. Pursuant to a self tender offering commencing in August
1995, to its shareholders, the Company purchased and placed into treasury
during 1996 and 1995 168,000 and 1,083,000 shares, respectively, of the
Company's stock at $22.75 per share. The purchases of treasury stock were
accounted for under the cost method. During 1997, the Company issued
19,457 shares from treasury to fund the Company's ESOP (Note 9).
The Company's Board of Directors may direct the issuance of the Company's
$1.00 par value Preferred Stock in series and may, at the time of
issuance, determine the rights, preferences and limitations of each
series.
In April 1995, the shareholders of the Company approved the Company's
1995 Stock Option Plan and the 1995 Employee Stock Purchase Plan,
previously adopted by the Board of Directors.
The 1995 Stock Option Plan ("1995 Option Plan") has reserved 500,000
shares of Common Stock for the granting of options to key employees of
the Company, including directors and officers. The 1995 Option Plan
became effective January 1, 1995, and will terminate December 31, 2004.
The 1995 Option Plan, provides for the grant of incentive stock options
("ISOs") which may be exercised over a period of ten years, issuance of
SARS, restricted stock, performance shares and nonqualified stock
options, including fixed annual grants, to nonemployee directors. Under
the 1995 Option Plan, options have been granted to key employees and
outside directors for terms of up to ten years, at an exercise price not
less than the fair value at the date of grant, with the exception of
participants who were granted ISOs at 110% of the fair value because they
possessed more than 10% of the voting rights of the Company's outstanding
common stock at the time of grant, which options are exercisable in whole
or in part at stated times from the date of grant up to five years from
the date of grant. The Stock Option Committee is made up entirely of
outside directors who administer the 1995 Option Plan. Under the Plan,
outside directors receive a fixed annual grant of 1,000 options at the
time of the annual meeting of shareholders. During 1997 and 1996, 125,900
and 2,000 options, respectively, under the 1995 Option Plan were
canceled. As of October 31, 1997 and 1996, 164,020 and 171,000 options
respectively, were available for grant.
-44-
<PAGE>
The 1995 Employee Stock Purchase Plan ("1995 Purchase Plan") became
effective July 1, 1995 and will terminate June 30, 2005. The 1995
Purchase Plan has an aggregate of 300,000 shares of common stock which
has been made available for purchase by eligible employees of the
Company, including directors and officers, through payroll deductions
over successive six-month offering periods. The purchase price of the
common stock under the 1995 Purchase Plan is 85% of the lower of the last
sales price per share of common stock in the over-the-counter market on
either the first or last day of each six-month offering period. As of
October 31, 1997 and 1996, 10,682 and 15,176 shares, respectively, had
been issued under the 1995 Purchase Plan.
In November 1985, the Board of Directors and the shareholders of the
Company adopted the Company's 1985 Stock Option Plan (the "1985 Option
Plan") and 1985 Employee Stock Purchase Plan (the "1985 Purchase Plan").
Under the 1985 Option Plan, 772,500 options were granted to key employees
of the Company, including directors and officers. At October 31, 1997 and
1996, 44,695 and 79,075 options, respectively, had been exercised and
353,290 and 420,425 options were outstanding. During 1997 and 1996,
22,440 and 7,500 options respectively, under the 1985 Option Plan were
canceled. The 1985 Option Plan expired on October 31, 1995.
Under the 1985 Purchase Plan, an aggregate of 187,500 shares of common
stock were made available for purchase through December 31, 1995. As of
October 31, 1995, 139,063 shares had been issued under the Purchase Plan
and the 48,437 shares which were available for purchase through December
31, 1995, have expired as of October 31, 1996.
Transactions under the Purchase Plans are as follows-
<TABLE>
<CAPTION>
Number of Number of Purchase
Shares Shares Price
1995 Plan 1985 Plan Per Share
---------------- ---------------- -----------------
<S> <C> <C>
Available at October 31, 1995 300,000 48,437
Expired (48,437)
Purchased (15,176) $18.12
---------------- ----------------
Available October 31, 1996 284,824 -
Purchased (10,682) - $34.00
---------------- ----------------
Available October 31, 1997 274,142 -
================ ================
</TABLE>
Transactions under the Option Plans are as follows-
<TABLE>
<CAPTION>
Number of Option Price Weighted Average
Shares Per Share Exercise Price
--------------- -------------------- ---------------------------
<S> <C> <C> <C>
Outstanding at October 31, 1995 509,000 $5.09-23.13 $15.32
Granted 329,000 $23.75-51.15 $40.96
Exercised (79,075) $5.66-18.75 $9.27
Forfeited (9,500) $5.66-24.93 $9.81
--------------- ---------------------------
Outstanding at October 31, 1996 749,425 $5.09-51.15 $27.28
Granted 136,180 $31.00 - 57.50 $36.64
Exercised (47,995) $6.00 - 24.93 $14.97
Forfeited (148,340) $11.33 - 57.50 $42.97
--------------- ---------------------------
Outstanding at October 31, 1997 689,270 $5.09 - 51.15 $26.61
=============== ===========================
</TABLE>
-45-
<PAGE>
The weighted average fair values of options granted in 1996 at prices
above market value and at market value are $11.89 and $24.09
respectively. The weighted average exercise price of options granted in
1996 at prices above market value and at market value were $33.68 and
$41.99, respectively.
The fair value of each stock option grant is estimated as of the date of
grant using the Black-Scholes option pricing model with the following
weighted average assumptions:
<TABLE>
<CAPTION>
1997 1996
----------------- -------------------
<S> <C> <C>
Risk-Free Interest Rates 6.56% 6.23%
Expected Lives 7.2 6.5
Expected Volatility 41% 43%
</TABLE>
The following table summarizes information about stock options
outstanding at October 31, 1997:
<TABLE>
<CAPTION>
Number of Weighted Weighted Number Weighted
Options Average Average Exercisable Average
Outstanding at Remaining Exercise at Exercise
Range of Exercise Price October 31, 1997 Contractual Life Price October 31, 1997 Price
- --------------- ----------------- ---------------------- ------------------- ------------- -------------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
$5.09 $7.64 38,100 3.8 $5.79 38,100 $5.79
7.65 11.47 46,300 3.6 9.91 43,420 9.82
17.23 25.84 320,590 7.5 20.29 126,876 19.83
25.85 38.77 129,280 8.4 30.18 6,000 27.42
38.78 51.15 155,000 8.6 46.81 30,000 46.83
- --------------- ----------------- ---------------------- ------------------- ------------- -------------------- -----------------
5.09 51.15 689,270 7.5 $26.61 244,396 $19.36
</TABLE>
Had compensation expense for all stock option grants in fiscal years 1997
and 1996 been determined consistent with SFAS No. 123, the Company's net
income and income per share would have been as follows:
<TABLE>
<CAPTION>
1997 1996
------------------ -------------------
<S> <C> <C>
Net Income: As Reported $8,571 $2,553
(IN THOUSANDS) Pro Forma 7,436 2,321
Net Income Per Share: As Reported 1.15 .50
Pro Forma 1.03 .48
</TABLE>
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to awards prior
to fiscal 1996 and additional awards in future years are anticipated.
(9) PENSIONS AND RETIREMENT SAVINGS PLAN
The Company sponsors various post retirement plans for most full-time
employees. Total pension expense for 1997, 1996 and 1995 was
$3,030,500, $814,000, and $166,000, respectively. The Company sponsors
a defined contribution plan in the United States and defined benefit
and defined contribution plans in its foreign locations, obtained
through the acquisition of BGP.
-46-
<PAGE>
Effective January 1, 1996, the Company's United States operations
amended its 401(k) savings plan to become a 401(k) Savings and Employee
Stock Ownership Plan (the "Plan"). Employees of the Company in the U.S.
who have completed one year of service and are over the age of 21 (with
the exception of those employees covered by a collective bargaining
agreement) may participate. The Plan shall be primarily invested in the
common stock of the Company. The Company will use shares currently held
in treasury for contributions to the Plan.
The Company makes a contribution of the Company's common stock equal to
1% of a participant's compensation for the plan year and will match 75%
of a participant's contribution up to 4% of the participant's
compensation. For the purpose of determining the number of shares of
Company common stock to be contributed to the Plan, the Company's stock
will be valued for the first ten business days of the month of February
following the close of any Plan year. In 1997 and 1996, respectively,
19,457 and 0 shares were issued. The Company has expensed approximately
$1,031,000 and $814,000 in 1997 and 1996, respectively, related to this
Plan.
Under the Company's 401(k) savings plan prior to the 1996 amendment (in
the Unites States only), the Company matched 25% of eligible employee
contributions up to 6% of compensation. Costs charged to expense
relating to this plan were $166,000 for the year ended October 31,
1995.
The Company also sponsors defined contribution plans at selected
foreign locations obtained through the BGP acquisition. The plans cover
full time employees and provide for employer contributions of between
3% and 5% of salary or a percentage of employee contributions. The
Company's contributions related to these plans for 1997 totaled
approximately $224,500.
The Company also has defined benefit plans in certain of its foreign
locations, obtained through the BGP acquisition. For most salaried
employees, benefits under these plans generally are based on
compensation and credited service. For most hourly employees, benefits
under these plans are based on specified amounts per year of credited
service. The Company funds these plans in amounts actuarially
determined or with the funding requirements of federal law and
regulations.
The following table presents a reconciliation of the status of the
foreign defined benefit pension plans to accrued pension liability:
<TABLE>
<CAPTION>
(IN THOUSANDS) October 31, October 31,
1997 1996
------------------ -----------------
<S> <C> <C>
Vested benefit obligation $(13,644) $(17,021)
Accumulated benefit obligation (15,055) (18,375)
Projected benefit obligation (19,295) (23,113)
Plan assets at fair value 14,602 16,936
Unrecognized net gain 123 -
------------------ -----------------
Plan assets less than projected
benefit obligation $(4,570) $(6,177)
================== =================
</TABLE>
The above amounts are included in other long term liabilities.
-47-
<PAGE>
The components of net periodic pension costs for the foreign defined benefit
pension plans are as follows:
(IN THOUSANDS)
1997
--------------
Service costs of benefits
earned during the year $2,034
Interest cost of projected
benefit obligation 1,325
Actual return (gain)
on assets (1,152)
Employee contributions (504)
--------------
Net Pension Expense $1,703
==============
As BGP was acquired on October 11, 1996, the 1996 net periodic pension costs for
the foreign defined benefit plans were immaterial.
The assumptions used, shown based on a weighted average, in determining the
status of the foreign pension plans at October 31, 1997 and October 31, 1996,
were as follows:
October 31, October 31,
1997 1996
---- ----
Discount rate 7% 7.5%
Salary progression rate 4% 4.1%
Long term rate of return 6% 8.4%
(10) INVESTMENT IN JOINT VENTURE
In connection with the acquisition of BGP, the Company acquired for
$15 million, fifty percent of Borden Hitachi, a joint venture with
Hitachi. The joint venture manufactures pallet-wrap and polyvinyl
chloride ("PVC") food films for the Japanese industrial, institutional
and consumer markets.
The investment is being accounted for using the equity method of
accounting. The investment account has been increased for income of
the joint venture of $317,000 in 1997 and $28,000 during the period
October 12 to October 31, 1996. These amounts are included in other
income.
-48-
<PAGE>
(11) INCOME TAXES:
The provision for income taxes is summarized as follows-
<TABLE>
<CAPTION>
Year Ended October 31,
----------------------------------------------------------
(IN THOUSANDS) 1997 1996 1995
----------------- ---------------- -----------------
<S> <C> <C> <C>
Current
Federal $ - $976 $6,176
State and Local - 416 1,357
Foreign 1,991 178 -
----------------- ---------------- -----------------
1,991 1,570 7,533
----------------- ---------------- -----------------
Deferred:
Federal and State $1,101 $728 $1,190
Foreign 1,603 (440) -
----------------- ---------------- -----------------
2,704 288 1,190
----------------- ---------------- -----------------
Total provision for income taxes $4,695 $1,858 $8,723
================= ================ =================
</TABLE>
Undistributed earnings of the Company's foreign subsidiaries of approximately
$5.8 million are considered permanently invested outside the United States and
as a result, the Company has not provided federal income taxes on the unremitted
earnings. A determination of the deferred tax liability from a distribution of
foreign earnings has not been made as such determination is not practicable.
The tax effects of significant temporary differences which comprise the deferred
tax assets (liabilities) at October 31, 1997 and 1996 are as follows-
<TABLE>
<CAPTION>
October 31,
(IN THOUSANDS) 1997 1996
----------------- ---------------
<S> <C> <C>
Deferred tax asset-
Bad debt expense $463 $389
Unicap adjustment 351 189
Alternative minimum tax 1,262 1,048
Fixed assets 3,620 -
Net operating loss carryforwards 27,919 -
Other 14 7
----------------- ---------------
Gross deferred tax asset 33,629 1,633
Valuation Allowance (14,739) -
================= ===============
Net deferred tax asset $18,890 $1,633
================= ===============
</TABLE>
Deferred tax assets are recorded in other current assets and other long term
assets.
<TABLE>
Deferred tax liability
<S> <C> <C>
Depreciation $(26,119) $(15,406)
Other (866) (169)
================ ===================
Deferred tax liability $(26,985) $(15,575)
================ ===================
</TABLE>
During the year, the Company reduced goodwill by approximately $8.4 million
relating to the deferred tax assets established as a result of the acquisition
of BGP.
-49-
<PAGE>
Approximately $53.4 million of total net operating losses remained at October
31, 1997, $33.7 million of which expire in the years 1998 through 2002, and $2.3
million of which can be carried forward indefinitely. The benefits of these
carryforwards are dependent on the taxable income in those foreign jurisdictions
in which they arose and accordingly, a valuation allowance has been provided
where management has determined that it is more likely than not that the
carryforwards will not be utilized. In the event that the tax benefits relating
to the valuation allowance are realized, substantially all of such benefits
would reduce goodwill. Additionally, there are approximately $17.4 million of
federal net operating losses in the United States available to be carried
forward, which will expire in the year 2012.
A reconciliation of the provision for taxes on income before extraordinary item
to that which would be computed at the statutory rate of 34%, 34%, and 35% in
1997, 1996 and 1995, respectively is as follows-
<TABLE>
<CAPTION>
Year Ended October 31,
--------------------------------------------------------
(IN THOUSANDS) 1997 1996 1995
----------------- ---------------- ----------------
<S> <C> <C> <C>
Provision at statutory rate $4,510 $1,500 $7,840
State tax provision, net
of Federal tax benefit 153 275 882
Effect of non U.S. operations taxed at rates
different than U.S Federal statutory rate 142 (73) -
Other, net (110) 156 1
----------------- ---------------- ----------------
$4,695 $1,858 $8,723
================= ================ ================
</TABLE>
United States income tax returns for fiscal years 1994, 1995 and 1996 are
currently under examination by the Internal Revenue Service. Assessments, if
any, are not expected to have a material adverse effect on the financial
statements.
Cash paid for income taxes paid during 1997, 1996 and 1995 was approximately
$2,633,000, $3,990,000 and $7,101,000, respectively.
(12) LEASE COMMITMENTS:
The Company has lease agreements for several of its facilities and certain
transportation equipment expiring at various dates through October 31, 2015.
Rental expense under all leases was $5,710,000, $2,366,000 and $2,617,000 for
1997, 1996 and 1995, respectively.
Under the terms of noncancellable operating leases with terms greater than one
year, the minimum rental, excluding the provision for real estate taxes and net
of sublease rentals, is as follows-
(IN THOUSANDS)
1998 $4,000
1999 3,183
2000 2,329
2001 1,821
2002 1,463
Thereafter 9,478
-------------------
$22,274
===================
-50-
<PAGE>
(13) COMMITMENTS AND CONTINGENCIES
Employment Contracts -
On October 11, 1996, the Company entered into employment agreements with
the Chairman of the Board , President and Chief Executive Officer and
with the Executive Vice President of the Company. Each contract has a
term of five years with a base salary of $500,000 for the Chairman and
$240,000 for the Executive Vice President. The base salary is increased
each year by a percentage equal to the percentage increase, if any, in
the consumer price index. The employment agreements provide that each
individual may be terminated without cause prior to the expiration of the
agreement, and in such case, each person would be entitled to severance
payments equal to two times the sum of the annual base salary then in
effect plus the bonus earned for the immediate preceding year, payable
over a two year period.
Claims and Lawsuits -
The Company and its subsidiaries are subject to claims and lawsuits which
arise in the ordinary course of business. On the basis of information
presently available and advice received from counsel representing the
Company and its subsidiaries, it is the opinion of management that the
disposition or ultimate determination of such claims and lawsuits against
the Company will not have a material adverse effect on the Company's
financial position or results of operations.
(14) QUARTERLY FINANCIAL DATA (UNAUDITED):
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA) January 31, April 30, July 31, October 31,
--------------- ---------------- --------------- ----------------
1997
- ----
<S> <C> <C> <C> <C>
Net sales $181,686 $190,302 $198,031 $189,104
Gross profit 39,475 39,065 39,708 41,484
Net income 4,056 1,991 2,214 310
--------------- ---------------- --------------- ----------------
Net income per share of
common stock $0.56 $0.27 $0.30 $0.04
=============== ================ =============== ================
<CAPTION>
1996
<S> <C> <C> <C> <C>
Net sales $54,770 $55,821 $63,907 $96,036
Gross profit 16,235 15,097 15,619 12,819
Net income (loss) 3,205 2,464 2,305 (5,421)
Net income (loss) per share of
common stock $0.64 $0.50 $0.47 ($1.03)
=============== ================ =============== ================
</TABLE>
Earnings per share are computed independently for each of the quarters
presented.
(15) SEGMENT INFORMATION
The Company's operations are conducted within one business segment, the
production, manufacture and distribution of plastic packaging products,
primarily for the food/beverage, industrial and agricultural markets.
It operates in three geographical regions, North America, Europe and
Asia/Pacific.
-51-
<PAGE>
Information about the Company's operations by geographical area as of
and for the year ended October 31, 1997 is as follows:
(IN THOUSANDS)
<TABLE>
<CAPTION>
Depreciation
Net Operating Capital and Identifiable
Sales Income Expenditures Amortization Assets
---------------- ---------------- ------------------- ------------------ -----------------
<S> <C> <C> <C> <C> <C>
North America $469,631 $28,170 $22,628 $22,862 $353,570
Europe/South Africa 208,906 4,785 9,891 5,867 169,418
Asia/Pacific 80,586 4,965 6,833 3,922 59,750
Corporate - 1,932 - - 30,345
================ ================ =================== ================== =================
Total $759,123 $39,852 $39,352 $32,651 $613,083
================ ================ =================== ================== =================
</TABLE>
Included in Corporate assets are the investment in joint venture and
the net assets held for sale. Included in the Corporate operating
income are the income from joint venture and all elimination and
adjusting entries.
As the acquisition of BGP occurred on October 11, 1996, segment
information is not material as of and for the year ending October 31,
1996 and not applicable prior to the acquisition.
Intersegment sales and export sales are not material. Operating income
includes all costs and expenses directly related to the geographical
area. Identifiable assets are those used in each segment's operations,
except net assets held for sale which represents the fair market value
of those assets.
No single customer accounted for more than 10% of sales in any year.
In June 1997, the Financial Accounting Standard Board issued Statement
of Financial Accounting Standards No. 131 "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS 131"). SFAS 131
requires disclosures for each business segment that are similar to
current requirements, with the addition of quarterly disclosures and
more detailed geographic disclosures. The Company is not required to
adopt SFAS 131 until the year ending October 31, 1999. SFAS 131 relates
solely to disclosure provisions, and therefore will not have any effect
on the results of operations, financial position and cash flows of the
Company.
(16) SUBSEQUENT EVENT
On November 19, 1997, the Company completed an offering of $200 million
in aggregate principal amount of 9.875% Senior Subordinated Notes due
November 15, 2007 (the "Notes"). The issue price was 99.224% resulting
in an effective yield of 10%. The net proceeds (approximately $193
million) from the Notes have been used to repay a portion of the
indebtedness outstanding under the Company's outstanding Credit
Agreement (Note 7).
In January 1998, the Company completed the sale of its operations in
South Africa to local management for $1 million plus the settlement of
all intercompany items. As of and for the year ending October 31, 1997,
total assets for this operation amounted to approximately $6.5 million
and net losses amounted to approximately $700,000 respectively. The
sale did not result in any gain or loss.
-52-
<PAGE>
AEP INDUSTRIES INC.
INDEX TO FINANCIAL STATEMENT SCHEDULES
SCHEDULES:
II -- Valuation and Qualifying Accounts
Schedules other than those listed above have been omitted either
because the required information is contained in the financial
statements or notes thereto or because such schedules are not required
or applicable.
-53-
<PAGE>
SCHEDULE II
<TABLE>
<CAPTION>
AEP INDUSTRIES INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED OCTOBER 31, 1996
(in thousands)
Additions
Balance at Charged Deductions Balance
Beginning of to From at End
Year Earnings Reserves Other of Year
-------------- -------------- -------------- ------------ -----------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED
OCTOBER 31, 1997:
Allowance for doubtful
accounts $5,097 $1,644 $ 1,768 $ 253 $5,226
============== ============== ============== ============ =================
Inventory $1,810 $961 $ 1,106 $(168) $1,497
============== ============== ============== ============ =================
YEAR ENDED
OCTOBER 31, 1996:
Allowance for doubtful
accounts $1,421 $527 $ 390 $3,539 A. $5,097
============== ============== ============== ============ =================
Inventory $ 0 $253 $ - $1,557 A. $1,810
============== ============== ============== ============ =================
YEAR ENDED
OCTOBER 31, 1995:
Allowance for doubtful
accounts $1,498 $500 $577 $0 $1,421
============== ============== ============== ============ =================
</TABLE>
Note A: Amounts were obtained through the purchase of Borden Global Packaging.
-54-
<PAGE>
POWER OF ATTORNEY
The registrant and each person whose signature appears below hereby
appoint J. Brendan Barba and Paul M. Feeney as attorneys-in-fact with full power
of substitution, severally, and to execute in the name and on behalf of the
registrant and each such person, individually and in each capacity stated below,
one or more amendments to this annual report which amendments may make such
changes in the report as the attorney-in-fact acting in the premises deems
appropriate and to file any such amendment to the report with the Securities and
Exchange Commission.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
Dated: January 26, 1998 AEP INDUSTRIES INC.
By: /s/ J. Brendan Barba
--------------------------
J. Brendan Barba
Chairman of the Board, President and
Principal Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Dated: January 26, 1998 AEP INDUSTRIES INC.
By: /s/ J. Brendan Barba
--------------------------
J. Brendan Barba
Chairman of the Board, President and
Principal Executive Officer
Dated: January 26, 1998
By: /s/ Paul M. Feeney
--------------------------
Paul M. Feeney
Executive Vice President,
Principal Financial Officer and
Director
-55-
<PAGE>
Dated: January 26, 1998
By: /s/ Lawrence R. Noll
-------------------------------
Lawrence R. Noll
Controller, Principal Accounting
Officer and Director
Dated: January 26, 1998
By: /s/ Kenneth Avia
-------------------------------
Kenneth Avia
Director
Dated: January 26, 1998
By: /s/ William Carter
-------------------------------
William Carter
Director
Dated: January 26, 1998
By: /s/ Paul E. Gelbard
-------------------------------
Paul E. Gelbard
Director
Dated: January 26, 1998
By: /s/ C. Robert Kidder
-------------------------------
C. Robert Kidder
Director
Dated: January 26, 1998
By: /s/ Clifton S. Robins
-------------------------------
Clifton S. Robins
Director
Dated: January 26, 1998
By: /s/ Lee Stewart
-------------------------------
Lee Stewart
Director
-56-
<PAGE>
Dated: January 26, 1998
By: /s/ Scott A. Stuart
-------------------------------
Scott A. Stuart
Director
-57-
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT PAGE
3(a) Restated Certificate of Incorporation of the Company as
filed April 11, 1997 (incorporated by reference to
Exhibit 3(a) to the Quarterly Report on 10-Q for the
quarter ended July 31, 1997)
3(b) Amended and Restated By-Laws of the Company
(incorporated by reference to Exhibit 4 to Registrant's
report on Form 8-K, dated October 11, 1996)
10(a) 1985 Stock Option Plan of the Company (incorporated
by reference to Exhibit 10(mm) to Amendment No. 2
to Registration Statement on Form S-1 No. 33-2242)
10(b) The Employee Profit Sharing and 401(k) Retirement
Plan and Trust as adopted March 3, 1993 (incorporated
by reference to Exhibit 10(g) to Registrant's Quarterly
Report on Form 10-Q for the period ended January 31,
1993)
10(c) 1995 Stock Option Plan of the Company
(incorporated by reference to Exhibit 4 to the
Registration Statement No. 33-58747 on Form S-8)
10(d) 1995 Employee Stock Purchase Plan of the Company
(incorporated by reference to Exhibit 4 to the Registration
Statement No. 33-58743 on Form S-8)
10(e) Lease dated as of March 20, 1990, between the
Company and Phillips and Huyler Assoc., L.P.
(incorporated by reference to Exhibit 10(aa) to the
Annual Report on Form 10-K for the year ended
October 31, 1990)
10(f)(1) Credit Agreement, dated as of October 11, 1996, among
the Company, the Morgan Guaranty Trust Company, as
Agent, and the banks party thereto (incorporated by
reference to Exhibit 3 to Registrant's report on Form 8-K,
dated October 11, 1996)
10(f)(2) Amendment No. 1, dated as of October 24, 1997, to the
Credit Agreement dated as of October 11, 1996, among
the Company, the Morgan Guaranty Trust Company as
Agent and the Bank's party thereto
10(g) Tender Offer to Purchase, dated as of August 10, 1995,
(incorporated by reference to Exhibit (a)(1) as filed
on August 10, 1995, with Schedule 13E-4)
10(h) Stock Purchase Agreement, dated as of August 2, 1995,
between the Company and J. Brendan Barba (incorporated
by reference to Exhibit (c) as filed on August 10, 1995
-58-
<PAGE>
with Schedule 13E-4)
10(i)(1) Purchase Agreement, dated as of June 20, 1996, without
exhibits, between the Company and Borden Inc.
(incorporated by reference to Exhibit C-1 to Registrant's
report on Form 8-K, dated June 20, 1996)
10(i)(2) Amendment No. 1, dated as of October 11, 1996, to
the Purchase Agreement, dated as of June 20, 1996,
between the Company and Borden, Inc. (incorporated
by reference to Exhibit 1(b) to Registrant's report on
Form 8-K, dated October 11, 1996)
10(i)(3) Combined Financial Statements of Borden Global
Packaging Operations as of December 31, 1995 and 1994
and for each of the three years in the period ended
December 31, 1995 (incorporated by reference to Annex F
to Registrant's Proxy Statement, dated September 11,
1996)
10(j)(1) Governance Agreement, dated as of June 20, 1996, without
exhibits, between the Company and Borden, Inc.
(incorporated by reference to Exhibit C-2 to Registrant's
report on Form 8-K, dated June 20, 1996)
10(j)(2) Amendment No. 1, dated as of October 11, 1996, to
the Governance Agreement dated as of June 20, 1996,
between the Company and Borden, Inc. (incorporated
by reference to Exhibit 2(b) to Registrant's report on
Form 8-K, dated October 11, 1996)
10(k) Employment Agreement, dated as of October 11, 1996,
between the Company and J. Brendan Barba
10(l) Employment Agreement, dated as of October 11, 1996,
between the Company and Paul M. Feeney
10(m) Purchase Agreement, dated November 14, 1997, among
Registrant and J.P. Morgan Securities, Inc., Morgan
Stanley & Co. Incorporated and Salomon Brothers Inc
(incorporated by reference to Exhibit 1 to Registrant's
report on Form 8-K, dated November 19, 1997)
10(n) Registration Rights Agreement, dated as of November 19, 1997,
among Registrant and J.P. Morgan Securities, Inc., Morgan
Stanley & Co. Incorporated and Salomon Brothers, Inc
(incorporated by reference to Exhibit 1 to Registrant's
report on Form 8-K, dated November 19, 1997)
10(o) Indenture, dated as of November 19, 1997, between the
Registrant and The Bank of New York, as Trustee
(incorporated by reference to Exhibit 1 to Registrant's
report on Form 8-K, dated November 19, 1997)
-59-
<PAGE>
10(p) Agreement for Sale of Business, dated July 18, 1997,
between ICI Australia Limited and ICI Australia
Operations PTY Limited as Seller, and Registrant's
subsidiary AEP Industries (Australia) PTY Limited, as
Purchaser
23 Consent of Arthur Andersen LLP
24 Power of Attorney (see "Power of Attorney" on signature page)
27 Financial Data Schedule
-60-
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report, dated December 23, 1997, included in this Form 10-K, into the Company's
previously filed Registration Statement File Nos. 33-58747 and 33-58743 on Form
S-8.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
January 23, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AEP
INDUSTRIES INC. FORM 10-Q FOR THE YEAR ENDED OCTOBER 31, 1997.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<CASH> 4,143
<SECURITIES> 0
<RECEIVABLES> 117,445
<ALLOWANCES> 5,226
<INVENTORY> 92,021
<CURRENT-ASSETS> 236,361
<PP&E> 436,942
<DEPRECIATION> 144,199
<TOTAL-ASSETS> 613,083
<CURRENT-LIABILITIES> 180,316
<BONDS> 0
0
0
<COMMON> 100
<OTHER-SE> 87,882
<TOTAL-LIABILITY-AND-EQUITY> 613,083
<SALES> 759,123
<TOTAL-REVENUES> 762,598
<CGS> 599,391
<TOTAL-COSTS> 559,391
<OTHER-EXPENSES> 118,236
<LOSS-PROVISION> 1,644
<INTEREST-EXPENSE> 30,061
<INCOME-PRETAX> 13,266
<INCOME-TAX> 4,695
<INCOME-CONTINUING> 8,571
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,571
<EPS-PRIMARY> 1.15
<EPS-DILUTED> 1.15
</TABLE>
