<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
Date of Report (Date of Earliest Event Reported): June 3, 1999
AEP INDUSTRIES INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE
(State or Other Jurisdiction of Incorporation)
0-14450 22-1916107
(Commission File No.) (I.R.S. Employer Identification No.)
125 Phillips Avenue, South Hackensack, New Jersey 07606
(Address of Principal Executive Offices) (Zip Code)
(201) 641-6600
(Registrant's Telephone Number, Including Area Code)
<PAGE>
ITEM 5. OTHER EVENTS.
A. In February 1999, the Company's management, with the concurrence of its Board
of Directors, approved a formal plan to dispose of its Proponite business. On
April 30,1999, the Company sold certain assets of the Proponite business to
Applied Extrusion Technologies, Inc. pursuant to the sales agreement dated March
4, 1999. The Company will wind down this non-core business during the current
fiscal year.
The disposal of the Proponite business has been accounted for as a
discontinued operation and, accordingly, the Company has reclassified the
Financial Statements and Management's Discussion and Analysis of Financial
Condition and Results of Operations included in its Annual Report filed on Form
10-K with the Securities and Exchange Commission for the Fiscal Year ended
October 31, 1998.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
A. Financial Statements. Reclassified Financial statements included in the
Annual Report filed on Form 10-K for the Fiscal Year Ended October 31,
1998, including Management's Discussion and Analysis of Financial
Condition and Results of Operations.
B. Pro Forma Financial Information. - None.
C. Exhibits. - None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
AEP INDUSTRIES INC.
Date: June 3, 1999 S/A Paul M. Feeney
------------------------------
Paul M. Feeney
Executive VP - Finance
Principal Financial Officer
<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.
At the time of the acquisition, management decided not to retain the Rigids'
businesses of Borden. The Rigids' businesses manufactured, marketed and
distributed wet food containers, dry food trays and disposable food service
products. These businesses were not considered core businesses, and the Company
offered these businesses for sale. Accordingly, the net assets of such
businesses were classified as net assets held for sale in the accompanying 1997
Consolidated Balance Sheet and the results of the Rigids' businesses have not
been included in the Company's results of operations
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.
In February 1999, the Company's management, with the concurrence of its Board of
Directors, approved a formal plan to dispose of its Proponite business. On April
30, 1999, the Company sold certain assets of the Proponite business to Applied
Extrusion Technologies Inc. pusuant to the sales agreement dated March 4, 1999.
The Company will wind down this non-core business during the current fiscal
year. The disposal of the Proponite business has been accounted for as a
discontinued operation and, accordingly, its net assets (liabilities) have been
segregated from continuing operations in the accompanying consolidated balance
sheets at October 31, 1998 and 1997, and its operating results are segregated
and reported as discontinued operations in the accompanying consolidated
statements of income for the years ended October 31, 1998 and 1997. The results
of operations for the year ended October 31, 1996 has not been reclassified, as
they were immaterial to the overall results of operations.
RESULTS OF CONTINUING OPERATIONS
YEAR ENDED OCTOBER 31, 1998 AS COMPARED TO YEAR ENDED OCTOBER 31, 1997
Net sales in fiscal 1998 were $666.6 million, a decrease of $42.5 million, or
6.0%, from fiscal 1997. Net sales in North America decreased to $396.3 million
in fiscal 1998 from $419.5 million for fiscal 1997, or 5.5%, primarily due to a
9% decrease in per unit selling prices as a result of lower raw material costs,
which reductions were passed though to customers. This decrease in selling
prices was partially offset by an increase in sales volume of 4.0% in North
<PAGE>
America. Net sales in Europe decreased to $192.2 million in fiscal 1998 from
$194.1 million in fiscal 1997, or 1.0%, primarily due to an 7.0% decrease in
selling prices (local currency) partially offset by a 6.4% increase in sales
volume. Net sales in Asia/Pacific decreased to $78.0 million in fiscal 1998 from
$80.6 million in fiscal 1997, or 3.2%. The Asia/Pacific region had a 22.2% sales
volume increase as a result of our acquisition of certain businesses during the
prior year, offset by a decrease of 20.8% in average selling prices (local
currency) because of the change in the product mix as a result of the
acquisitions described above, average lower selling prices and economic
pressures in the region. Our net sales for fiscal 1997 included net sales of
$14.8 million from our South African operation, which was sold November 1, 1997.
Gross profit for fiscal 1998 was $155.6 million, as compared to $152.5 million
in fiscal 1997, a decrease of $3.1 million. North America experienced an
increase in gross profit of $9.2 million, or 9.6%, for fiscal 1998 as a result
of increased utilization of plant facilities, increased sales volume and reduced
raw material costs. Gross profit in Europe increased by $482,000 for fiscal 1998
when compared to fiscal 1997. This increase was primarily due to increased sales
volume in spite of market conditions which prevented the timely passing through
of increased raw material costs to customers during the first six months of
fiscal 1998. This volume increase also helped increase utilization of
manufacturing facilities. Gross profit for the Asia/Pacific region decreased
$2.7 million in fiscal 1998 when compared to fiscal 1997. This decrease in gross
profit is a result of economic pressures in the Asia/Pacific region, which
caused depressed unit selling prices, of approximately 20.8% as compared to the
prior year, and reduced plant utilization for the first half of fiscal 1998. Our
gross profit for fiscal 1997 included $3.8 million from our South African
operation, which was sold November 1, 1997.
Operating expenses for fiscal 1998 were $113.6 million, as compared to $114.5
million in fiscal 1997. This net decrease of $895,000 is attributable to a
reduction in selling expenses of $2.0 million as a result of the realignment of
our worldwide sales force at the beginning of fiscal 1998. This reduction in
selling expenses was offset by an increase of $4.4 million in warehousing and
delivery costs resulting from increased sales volume and increased costs
incurred in the implementation of new delivery systems during the fiscal year.
Our general and administrative expenses for fiscal 1998 increased by $601,000
with no major increase in any one area. The operating expenses for fiscal 1997
included $3.9 million related to our South African operation, which was sold
November 1, 1997.
Interest expense for fiscal 1998 was $33.8 million, an increase of $3.7 million
from the prior year. This increase in interest expense resulted from our
issuance of $200.0 million of 9.875% Senior Subordinated Notes in November 1997,
which resulted in higher average interest rates for the fiscal year, partially
offset by lower average debt outstanding for fiscal 1998.
Other income for fiscal 1998 amounted to $1.5 million, which includes foreign
currency exchange and hedge gains of $778,000, interest income of $419,000 and
income from investment in a joint venture of $252,000. Also included in other
income were $133,000 in gains on sales of machinery and equipment, $325,000 in
rental income and $243,000 in other miscellaneous net expenses.
Net income from continuing operations for fiscal 1998 decreased by 21.3% to $5.8
million from $7.3 million in fiscal 1997. This decrease was due primarily to the
reduction in gross profit realized in our Asia/Pacific market place, as well as
increased interest expense and a reduction in other income from the prior year.
<PAGE>
YEAR ENDED OCTOBER 31, 1997 AS COMPARED TO YEAR ENDED OCTOBER 31, 1996
Net sales for fiscal 1997 increased by 162.1% to $709.1 million from $270.5
million during fiscal 1996. This increase in net sales reflects the Borden
packaging acquisition, which resulted in increased net sales in North America of
$149.1 million, in Europe of $208.9 million and in the Asia/Pacific region of
$80.6 million. Sales during fiscal 1997 were negatively impacted by volume and
price reductions in the overall North America stretch wrap business due to
overcapacity, which was partially offset by volume increases in our other
product lines. Europe and Asia/Pacific had an increase in sales volume, which
was offset by a decrease in average selling prices.
Gross profit for fiscal 1997 increased by 155.0% to $152.5 million from $59.8
million during the same period in fiscal 1996. This increase in gross profit
resulted from the Borden packaging acquisition and consisted of increased gross
profit in North America of $36.3 million, in Europe of $41.8 million and in the
Asia/Pacific region of $14.6 million. Gross profit as a percentage of sales
during fiscal 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 packaging 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 because of the general economic conditions in the
regions, which resulted in lower average selling prices.
Operating expenses for fiscal 1997 increased 159.0% to $114.5 million from $44.2
million during fiscal 1996. This increase of $70.3 million in operating expenses
is attributable 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 packaging 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 our Griffin, Georgia plant. We
incurred increased warehouse and delivery costs during fiscal 1997 due to the
installation of new delivery systems to accommodate this consolidation.
Interest expense for fiscal 1997 increased by 161.7% to $30.1 million from $11.5
million during fiscal 1996. This increase in interest expense is primarily due
to increased borrowings used to finance the Borden packaging acquisition, loan
origination fees applicable to the credit facility amendment and additional
interest expense arising from the issuance of $200.0 million of 9.875% Senior
Subordinated Notes. This was partially offset by a decline in interest rates
during fiscal 1997. Interest expense as a percentage of sales during the fiscal
1997 decreased slightly to 4.0% from 4.3% during fiscal 1996.
Other income for fiscal 1997 increased to $3.3 million from $390,000 in fiscal
1996. The amount for fiscal 1997 includes $1.3 million in interest income,
$198,000 in foreign currency exchange gains realized during the period, $416,000
in gain from sale of securities and $317,000 in income from an investment in a
joint venture. Also included in other income for fiscal 1997 were $243,000 in
gains on sales of machinery and equipment and $121,000 in rental income and
other miscellaneous income earned for the period.
Net income from continuing operations for fiscal 1997 increased by 180.8% to
$7.3 million from $2.6 million in fiscal 1996. This increase was due primarily
to additional sales volume attributable to the Borden packaging 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 in fiscal 1996 were $270.5 million, an increase of $27.6 million, or
11.4%, from 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 19.2%, which was offset by
an 18.4% decrease in per unit selling prices, which decrease was primarily due
to corresponding reductions in market prices for resins.
<PAGE>
Gross profit for fiscal 1996 was $59.8 million, as compared to $60.4 million in
fiscal 1995, a decrease of $.6 million. The fiscal 1996 gross profit was
adversely impacted by approximately $7.3 million because the Company absorbed
inventory valuation charges of $5.6 million related to the acquisition of Borden
inventory and an additional charge during the fourth quarter of fiscal 1996 of
$1.7 million 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 $9.1 million, or 25.8%, to $44.2
million from $35.1 million in fiscal 1995. Approximately $5.2 million 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 $2.2 million, or 12.8%, in
shipping and warehousing costs and an increase of $1.5 million, or 12.1%, in
selling expenses which were directly attributable to the 19.2% 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 17.6%
decrease in per unit selling prices partially offset by the increase in sales
volume.
Interest expense for fiscal 1996 was $11.5 million, an increase of $8.3 million,
or 258.9%, from $3.2 million 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 $2.9 million 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 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 81.1% to $2.6 million from $13.5 million
in fiscal 1995. This decrease was due primarily to the aforementioned charges
totaling $7.3 million related to valuation of inventories and increased interest
expense incurred during the period, including the charge of $2.9 million for
loan origination fees on the old credit facility.
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 $81.6 million at October 31, 1998,
compared to $56.0 million at October 31, 1997. This increase of $25.6 million in
working capital is primarily a result of the reclassification of net assets of
discontinued operations, partially offset by net repayments of short term
borrowings from proceeds received from the sale of the Company's five rigids
businesses in fiscal 1998 and the strengthening of the United States dollar
during fiscal 1998, 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
<PAGE>
facilities, consisting of a term credit facility in the amount of $350 million
and a revolving credit facility for an amount up to $100 million. The proceeds
borrowed under the Credit Agreement were used to pay the $263 million cash
portion of the purchase price for the Borden Acquisition, to repay the $95.4
million 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, 1998, there was $112.0 million 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 million 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.
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 million outstanding under the term credit facility,
no outstanding borrowings under the revolving credit facility, and $200 million
Notes due November 2007 outstanding.
The Company also has a $10 million unsecured revolving credit facility available
for working capital purposes. At October 31, 1998, 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, 1998, the aggregate amount outstanding
under such facilities was approximately $16.0 million and approximately $52.0
million 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 $7.0 million of such
indebtedness is guaranteed by the Company.
The Company's cash and cash equivalents decreased by $149,000 during fiscal
1998, as compared to a decrease of $7.9 million during fiscal 1997. Net cash
provided by operating activities during fiscal 1998 was $59.2 million primarily
due to depreciation and amortization expense of $30.4 million, net income from
continuing operations of $5.8 million, and net increases in other operating
assets and liabilities of $23.1million. In each period, the net decreases in
other operating assets and liabilities reflect normal operating activity.
Net cash used in investing activities during fiscal 1998 was $8.0 million,
resulting primarily from the net investment in capital expenditures of $24.4
million which was offset by proceeds received from the sale of the Company's
rigids businesses of $10.9 million and the sale of the Company's South African
subsidiary of $2.3 million. The Company also had $3.2 million in sales of
machinery and equipment for fiscal 1998.
Net cash used by financing activities during fiscal 1998 was $42.2 million,
reflecting net borrowings of $198.5 million from the issuance of the Company's
Subordinated Notes and proceeds from stock issuance's of $.9 million, offset by
a repayment of $196.6 million on the term loan and net repayments made under
worldwide bank loan agreements of $45.0 million. The remaining increases and
decreases in the components of the Company's financial position reflect normal
operating activity.
<PAGE>
The Company anticipates that in its fiscal year ending October 31, 1999 ("fiscal
1999") capital expenditures will be approximately $33.0 million, of which
approximately $10.2 million has been committed and approximately $8.0 million is
expected to be utilized for general maintenance of machinery and equipment. This
investment in capital expenditures is expected to be used to expand the
Company's product lines and increase capacity of existing machinery and
equipment.
The Company anticipates that in fiscal 1999 its debt service will approximate
$47.0 million, including scheduled principal payments of $15.0 million and
interest expense of approximately $32.0 million. The Company also has
approximately $16.0 million of foreign bank borrowings due to be paid in fiscal
1999, which the Company expects will be refinanced.
The Company believes that net proceeds from the sale and wind down of the
Proponite operations and its cash flow from operations combined with the
availability of funds under the Credit Agreement and credit lines available to
foreign subsidiaries for local currency borrowings, will be sufficient to meet
working capital, capital expenditure and debt service requirements for the
foreseeable future.
Effects of Inflation
Inflation is not expected to have significant impact on the Company's business.
Year 2000
The Company is currently undertaking a systems readiness review that will help
mitigate the risks associated with the Year 2000 issue, that is, computer
programs that were written to store only two digits of the year portion of
date-related information in order to more efficiently handle and store data.
Thus, the programs were unable to properly distinguish between the year 1900 and
the year 2000. The Company's review addresses: (a) the Company's application
software and hardware and related operating systems; (b) embedded technology in
production equipment; and (c) Year 2000 compliance by third parties, principally
suppliers and customers. In Fiscal 1997, the Company initiated programs to
upgrade and enhance its international business systems in order to replace aging
technologies and provide infrastructure to support these businesses. In
connection with these upgrades and enhancements, the Company is in the process
of installing these new systems which are designed to be Year 2000 compliant.
The domestic businesses application software and hardware have been inventoried
and are in the process of being modified or being upgraded to be Year 2000
compliant.
The Company is in the process of completing its inventories and assessments in
regard to embedded technology, such as microcontrollers in its production
equipment, at each of its worldwide businesses. This process is expected to be
completed in the first quarter of 1999. Until the inventories and assessments
are completed, it is not possible to determine what action, if any, will be
required to be taken.
In evaluating the impact on the Company of Year 2000 compliance by significant
third parties, each Company's business location is in the process of identifing
and contacting each significant third party to ascertain such third party's Year
2000 readiness. It is expected that this process will be completed in the first
quarter of 1999. Until this process is completed, it is not possible to
determine which third parties will not be Year 2000 compliant and the effect of
such failure on the Company.
Once Year 2000 compliance areas are reviewed and necessary upgrades are
completed, the Company plans to test systems to verify that compliance has been
achieved. The target completion date for system testing is October 31, 1999. The
Company estimates the total cost associated with Year 2000 compliance
activities, including upgrades in the international business systems will be
approximately $6.5 million of which $5 million has been incurred through October
31, 1998. Cash flow from operations is expected to fund the balance of the
project.
<PAGE>
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity, and financial condition. Because of the
general uncertainty inherent in the Year 2000 problem, resulting in part from
the uncertainty of Year 2000 readiness of third party suppliers and customers,
the Company is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the Company's results of
operations, liquidity, and financial condition.
Forward Looking Statements
Management's Discussion and Analysis of Financial Condition and the Results of
Operations and other sections of this report contain "Forward Looking
Statements" about 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 operations and its ability to generate sufficient funds to
meet its cash requirements. The Company wishes to caution readers that the
assumptions which form the basis for forward-looking statements with respect to
or that may impact earnings for the year ending October 31, 1999, include many
factors that are beyond the Company's ability to control or estimate precisely.
These risks and uncertainties include, but are not limited to, availability of
raw materials, ability to pass raw material price increases to customers in a
timely fashion, the potential of technological changes which would adversely
affect the need for the Company's products, price fluctuations which could
adversely impact the Company's inventory and changes in United States or
international economic or political conditions, such as inflation or
fluctuations in interest or foreign exchange rates. Parties are cautioned not to
rely on any such forward looking benefits or judgments in this section and in
other parts of this Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index:
Report of Independent Public Accountants
Financial Statements:
Consolidated Balance Sheets as of October 31, 1998 and 1997
Consolidated Statements of Income -- For the years ended
October 31, 1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity -- For the
years ended October 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows -- For the years
ended October 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
Financial Statement Schedules:
Schedules included are set forth in Item 14.
<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, 1998 and 1997, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended October 31, 1998. 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, 1998 and 1997, and the results of their operations and their
cash flows for each of the three years in the period ended October 31, 1998 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
June 3, 1999
<PAGE>
AEP INDUSTRIES INC.
CONSOLIDATED BALANCE SHEETS AS OF OCTOBER 31, 1998 AND 1997
(in thousands, except share amounts)
<TABLE>
<CAPTION>
ASSETS 1998 1997
------ ---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,994 $ 4,143
Accounts receivable, less allowance of
$4,686 and $4,863 in 1998 and
1997, respectively, for doubtful accounts 98,656 107,288
Inventories, net 80,836 84,431
Net current assets of discontinued operations 45,146 23,746
Other current assets 16,458 12,949
----------------------
Total current assets 245,090 232,557
PROPERTY, PLANT AND EQUIPMENT, at cost,
less accumulated depreciation and
amortization 250,032 255,135
GOODWILL less accumulated amortization
of $2,629 and $1,351 in 1998 and 1997,
respectively 40,817 43,183
INVESTMENT IN JOINT VENTURE 15,597 15,345
DEFERRED TAX ASSET 21,405 16,899
NET ASSETS OF DISCONTINUED OPERATIONS -- 37,609
OTHER ASSETS 19,545 8,552
----------------------
Total assets $592,486 $609,280
======================
<CAPTION>
LIABILITIES AND
SHAREHOLDERS' EQUITY 1998 1997
-------------------- -------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of debt $ 30,968 $ 65,484
Accounts payable 87,893 72,084
Accrued expenses 44,621 38,945
-------------------------
Total current liabilities 163,482 176,513
LONG-TERM DEBT 301,817 311,522
OTHER LONG TERM LIABILITIES 6,440 6,278
DEFERRED INCOME TAXES 34,446 26,985
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 authorized; 10,022,301 and 9,988,330
shares issued in 1998 and 1997, respectively 100 100
Additional paid-in capital 91,324 89,974
Treasury stock - common stock; at cost,
2,744,600 and 2,781,543 shares in 1998 and
1997, respectively (60,963) (61,783)
Retained earnings 78,942 78,679
Cumulative translation adjustment (23,102) (18,988)
-------------------------
Total shareholders' equity 86,301 87,982
-------------------------
Total liabilities and shareholders'
equity $ 592,486 $ 609,280
=========================
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
<PAGE>
AEP INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED OCTOBER 31, 1998, 1997 AND 1996
(in thousands, except per share data)
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
NET SALES $ 666,556 $ 709,072 $ 270,534
COST OF SALES 510,927 556,589 210,764
----------- ----------- -----------
Gross profit 155,629 152,483 59,770
OPERATING EXPENSES:
Delivery and warehousing 47,323 44,017 20,825
Selling 37,811 41,429 15,701
General and administrative 28,448 29,031 7,706
----------- ----------- -----------
Total operating expenses 113,582 114,477 44,232
----------- ----------- -----------
Income from operations 42,047 38,006 15,538
OTHER INCOME (EXPENSE):
Interest expense (33,780) (30,061) (11,517)
Other, net 1,465 3,285 390
----------- ----------- -----------
(32,315) (26,776) (11,127)
Income from continuing operations before
provision for income taxes 9,732 11,230 4,411
----------- ----------- -----------
PROVISION FOR INCOME TAXES 3,961 3,901 1,858
----------- ----------- -----------
Income from continuing operations 5,771 7,329 2,553
DISCONTINUED OPERATIONS
(Loss) Income from operations of discontinued businesses
(less applicable income tax benefit of $3,237
for 1998 and income taxes of $794 for 1997) (5,383) 1,242 --
(Loss) on disposal of Rigids businesses (less applicable
income tax benefit of $932) (125) -- --
----------- ----------- -----------
(Loss) Income from discontinued operations (5,508) 1,242 --
----------- ----------- -----------
Net Income 263 8,571 2,553
----------- ----------- -----------
EARNINGS PER SHARE:
Basic income from continuing operations $ 0.79 $ 1.02 $ 0.52
Basic loss from discontinued operations (0.75) 0.17 --
----------- ----------- -----------
Basic net income $ 0.04 $ 1.19 $ 0.52
=========== =========== ===========
Total basic shares 7,266,888 7,172,790 4,868,001
Diluted income from continuing operations $ 0.78 $ 0.98 $ 0.49
Diluted loss from discontinued operations (0.75) 0.17 --
----------- ----------- -----------
Diluted net income $ 0.03 $ 1.15 $ 0.49
=========== =========== ===========
Total diluted shares 7,401,431 7,452,393 5,193,290
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
<PAGE>
AEP INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED OCTOBER 31, 1998, 1997 AND 1996
(in thousands)
<TABLE>
<CAPTION>
Net
Common Stock Treasury Stock Additional Cumulative Unrealized
--------------------------------------- Paid-in Translation Investment Retained
Shares Amount Shares Amount Capital Adjustment Gain Earnings
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT OCTOBER 31, 1995 7,437 $ 74 2,633 $(58,304) $ 7,483 $ -- $ -- $ 67,555
Issuance of common stock upon
exercise of stock options 66 1 -- -- 308 -- -- --
Issuance of common stock pursuant
to stock purchase plan 15 -- -- -- 285 -- -- --
Issuance of common stock pursuant
to acquisition of Borden Global
Packaging 2,413 24 -- -- 79,976 -- -- --
Net income -- -- -- -- -- -- -- 2,553
Purchase of treasury stock -- -- 168 (3,838) -- -- -- --
Translation adjustments -- -- -- -- -- (1,283) -- --
Net unrealized investment gain -- -- -- -- -- -- 299 --
---------------------------------------------------------------------------------------
BALANCES AT OCTOBER 31, 1996 9,931 99 2,801 (62,142) 88,052 (1,283) 299 70,108
Issuance of common stock upon
exercise of stock options 46 1 -- -- 727 -- -- --
Issuance of common stock pursuant
to stock purchase plan 11 -- -- -- 363 -- -- --
Tax benefit from stock option
exercises -- -- -- -- 160 -- --
Net Income -- -- -- -- -- -- -- 8,571
ESOP contribution -- -- (19) 359 672 -- -- --
Sale of securities -- -- -- -- -- -- (299) --
Translation adjustments -- -- -- -- -- (17,705) -- --
---------------------------------------------------------------------------------------
BALANCES AT OCTOBER 31, 1997 9,988 100 2,782 (61,783) 89,974 (18,988) -- 78,679
Issuance of common stock upon
Exercise of stock options 18 -- -- -- 231 -- -- --
Issuance of common stock pursuant
to stock purchase plan 16 -- -- -- 348 -- -- --
Tax benefit from stock option exercises -- -- -- -- 295 -- -- --
Net Income -- -- -- -- -- -- -- 263
ESOP contribution -- -- (37) 820 476 -- -- --
Translation adjustments -- -- -- -- -- (4,114) -- --
---------------------------------------------------------------------------------------
BALANCES AT OCTOBER 31, 1998 10,022 $ 100 2,745 $(60,963) $ 91,324 $(23,102) -- $ 78,942
=======================================================================================
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
<PAGE>
AEP INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31, 1998, 1997 AND 1996
(in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 263 $ 8,571 $ 2,553
Adjustments to reconcile net income to
net cash provided by operating activities-
Loss (Income) from discontinued operations 5,383 (1,242) --
Loss from disposal of Rigids 125 -- --
Depreciation and amortization 30,378 28,810 12,534
ESOP contribution 1,057 827 --
Other (320) (989) --
Provision for losses on accounts receivable and inventory 2,048 2,342 527
Write-off of debt issuance costs -- 3,330 --
Deferred income taxes 576 2,704 288
Changes in operating assets and liabilities, net of
acquisition of business
(Increase) in accounts receivable 3,707 (8,372) (4,383)
(Increase) decrease in inventories 1,231 1,535 4,393
(Increase) decrease in other current assets (3,877) 2,789 (1,573)
(Increase) decrease in other assets (12,826) (18,868) 11,332
(Increase) decrease in net assets of discontinued
operations (1,442) 1,338 --
Decrease in goodwill 1,088 8,423 --
Increase (decrease) in accounts payable 17,392 8,080 (8,576)
Increase (decrease) in accrued expenses 6,435 (9,643) (9,759)
Increase in other long term liabilities 7,992 7,943 --
--------- --------- ---------
Net cash provided by operating
activities 59,210 37,578 7,336
--------- --------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Acquisition of Borden Global Packaging, net of cash acquired -- -- (254,939)
Capital expenditures (24,444) (37,614) (14,040)
Sales and retirements of property, plant and equipment, net 3,182 2,088 14
Acquisition of assets in Australia -- (8,758) --
(Purchases) Sales of marketable securities -- 2,486 (53)
Net proceeds from sale of Rigids and South Africa 13,224 -- --
--------- --------- ---------
Net cash used in investing activities (8,038) (41,798) (269,018)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Subordinated Debentures 198,500 -- --
(Repayments) borrowings of Term Loan (196,591) -- 370,300
Net (repayments) borrowings (44,954) 549 (92,353)
Proceeds from issuance of common stock 857 1,091 594
Purchase of treasury stock -- -- (3,838)
--------- --------- ---------
Net cash (used in) provided by financing
activities (42,188) 1,640 274,703
--------- --------- ---------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH (9,133) (5,344) (1,283)
--------- --------- ---------
Net increase (decrease) in cash (149) (7,924) 11,738
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 4,143 12,067 329
========= ========= =========
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 3,994 $ 4,143 $ 12,067
========= ========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH OPERATING AND INVESTING ACTIVITIES
Long term note received from sale of portion of Rigids' business $ 3,004 -- --
========= ========= =========
</TABLE>
<PAGE>
AEP INDUSTRIES INC.
NOTES TO CONSOLIDATED 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 generally recognized when products are shipped to
customers.
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.
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 is 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 is removed from the accounts upon the retirement or
disposal of such assets and the resulting gain or loss is recognized
at
<PAGE>
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.
Translation adjustments are recorded as a separate component of
shareholders' equity and transaction adjustments are recorded in
other income and expense.
Research and Development Costs -
Research and development costs are charged to expense as incurred.
Approximately $1,524,000, $1,908,000, and $635,000 for 1998, 1997
and 1996, respectively, was incurred for such research and
development for continuing operations.
Income Taxes -
Income taxes are accounted for in accordance with Statement of
Financial Accounting Standards ("SFAS") 109, "Accounting for Income
Taxes" ("SFAS No. 109"). 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 -
The Company operates internationally, giving rise to exposure to
market risks from changes in interest rates and foreign exchange
rates. Derivative financial instruments are utilized by the Company
to reduce these 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 or speculative purposes.
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
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 render 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 and hedge contracts is discussed in Notes 7 and 8,
respectively.
<PAGE>
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.
Earnings Per Share -
SFAS No. 128, "Earnings per Share", which became effective for the
Company's fiscal year beginning November 1, 1997, established new
standards for computing and presenting earnings per share ("EPS").
The standard requires the presentation of basic EPS and diluted EPS
and the restatement of previously reported EPS amounts. 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 (stock options).
Stock Based Compensation -
The Company accounts for its stock-based compensation awards to
employees and directors under the accounting prescribed by APB
Opinion No. 25 , "Accounting for Stock Issued to Employees" and
provides the disclosures required by SFAS No.123 "Accounting for
Stock-Based Compensation" (See Note 9).
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.
New Accounting Standards -
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
<PAGE>
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 1999 fiscal
year. The Company will make the appropriate disclosures, 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.
In 1998, the Financial Accounting Standards Board issued SFAS No.
132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits". This standard replaces the disclosure requirements of
SFAS 87, "Employers' Accounting for Pensions". The measurement and
recognition of pension reserves and provisions are unchanged. This
standard is effective for the Company's 1999 fiscal year. The
Company will make the necessary disclosures and as this statement
relates solely to disclosure provisions, believes that the adoption
of this standard will have no material effect on its financial
position or results of operations.
In 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities"
("SFAS 133"). This standard establishes accounting and reporting
standards for derivative instruments and hedging activities. This
standard is effective for the Company's 2000 fiscal year. The
Company has not yet determined the effects SFAS 133 will have on its
financial position or results of operations.
Reclassifications -
Certain prior year amounts have been reclassified in order to
conform with the 1998 presentation.
(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. The acquisition resulted in goodwill of approximately
$53 million which is being amortized on a straight line basis over
thirty-five years.
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company and BGP, without the
Rigids' businesses (See Note 17), as if the acquisition had occurred at
the beginning of fiscal 1996, 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.
For the Year Ended
(in thousands, except per share amounts) October 31, 1996
----------------
(unaudited)
Net Sales $765,449
Operating Income 42,227
Net Income 10,019
Earnings per Share $ 1.36
These pro forma results have been prepared for comparative purposes only.
They do not purport to be
<PAGE>
indicative of the results of the operations which actually would have
resulted had the combination been in effect on November 1, 1995 or of the
future results of operations of the Company.
(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-
October 31,
------------------------
1998 1997
------- -------
(in thousands)
Raw materials $19,676 $20,806
Finished goods 57,952 61,198
Supplies 4,626 3,924
------- -------
82,254 85,928
Less: Inventory reserve 1,418 1,497
------- -------
Inventories, net $80,836 $84,431
======= =======
The last-in, first-out (LIFO) method was used for determining the cost of
approximately 52.2% and 45.5% of total inventories at October 31, 1998 and
1997, respectively. Inventories would have been decreased by $4,019,000
and increased by $2,142,000 at October 31, 1998 and 1997, 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) 1998 1997 Useful Lives
------------ ---------- ----------------
<S> <C> <C> <C>
Land $ 13,607 $ 14,324
Buildings 68,227 70,376 15 to 31.5 years
Machinery and equipment 256,377 227,930 3 to 16 years
Furniture and fixtures 7,948 7,244 9 years
Leasehold improvements 2,027 2,293 6 to 25 years
Motor vehicles 856 3,826 3 years
Construction in progress 11,505 14,600
------------ ----------
360,547 340,593
Less- Accumulated depreciation
and amortization 110,515 85,458
------------ ----------
$ 250,032 $ 255,135
============ ==========
</TABLE>
Maintenance and repairs expense was approximately $11,323,000,
$11,293,000, and $1,845,000 for the years ended October 31, 1998, 1997 and
1996, respectively.
(6) ACCRUED EXPENSES
At October 31, 1998 and 1997, accrued expenses consisted of the following-
(in thousands) 1998 1997
------- -------
Payroll and employee related $13,307 $14,586
Interest 10,425 3,293
Taxes (other than income) 3,692 4,325
Customer rebates 4,406 6,547
Insurance related 2,685 2,413
Other 10,106 7,781
------- -------
$44,621 $38,945
======= =======
<PAGE>
(7) DEBT:
A summary of the components of debt is as follows-
October 31,
----------------------
(Amounts in table stated in thousands) 1998 1997
-------- --------
Term loan facility (a) 112,000 $320,000
Senior Subordinated Debentures, less
unamortized discount of $1,397 (b) 198,603 --
Pennsylvania Industrial Loans (c) 5,862 5,981
Foreign bank borrowings (d) 16,320 51,025
-------- --------
Total Debt 332,785 377,006
Less- Current portion 30,968 65,484
-------- --------
Long-Term Debt $301,817 $311,522
======== ========
(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 ($30 million was
repaid in quarterly installments in 1997) and (2) a six year
revolving credit facility in the amount of $100,000,000. The Company
also has a $10,000,000 unsecured revolving credit facility for
working capital purposes. At October 31, 1998 and 1997, there were
no outstanding borrowings under either revolving credit facility.
In October 1997, the Company received a waiver relating to certain
financial ratios contained in the Credit Agreement and entered into
an amendment to the Credit Agreement (the "Amendment"). The
principle 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 increased as follows: the margin
applicable to Base Rate loans (formerly 0%) increased to a range
from 0% to .75% and the margin applicable to LIBOR Rate loans
(formerly .25% to .625%) increased to a range from .45% to 1.75%.
The required amortization payments in respect of the term loan were
reduced so that, instead of amortizing the full principal during the
term of the loan, a balloon payment equal to the remaining
outstanding principle balance of the term loan will be due at
maturity (October 11, 2002). As a result of the Amendment, the
Company had written-off in fiscal 1997 the unamortized prior debt
issuance costs of $3,330,000 and had capitalized $1,050,000 of
amendment fees. Loan principal of $15,000,000 was repaid in 1998
related to the revised amortization schedule under the Amendment.
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) In November of 1997, the Company completed an offering of $200
million in aggregate principal amount of 9.875% Senior Subordinated
Debentures due November 15, 2007 (the "Debentures"). The issue price
was 99.224% resulting in an effective yield of 10%. The net proceeds
(approximately $193 million) from the Debentures were used to repay
a portion of the indebtedness outstanding under the Company's
outstanding Credit Agreement.
The Debentures contain certain customary representations,
warranties, covenants and conditions
<PAGE>
such as, but not limited to, cash flow ratio and certain
restrictions on, and not limited to, dividends, consolidations and
certain asset sales and additional indebtedness.
(c) The Company has in place 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;
$1,000,000 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 $369,000 and $355,000 of these borrowings
during 1998 and 1997, respectively.
(d) In addition to the amounts available under the revolving credit
facilities, the Company also maintains unsecured short-term credit
facilities at its foreign subsidiaries. At October 31, 1998 and
1997, the aggregate amount outstanding under such facilities was
$15,485,000 and $49,970,000 and is contained within the foreign bank
borrowings amount. Interest rates on these borrowings range from
4.45% to 12.36%. There was approximately $52,600,000 and $20,000,000
available for borrowing at October 31, 1998 and 1997, respectively.
Foreign borrowings also consist of long term foreign borrowings of
$835,000 (of which $206,000 is due within one year) and $1,055,000
(of which $237,000 was due within one year) in 1998 and 1997,
respectively. In 1998, the long term debt was held in Australia and
Italy with average interest rates of 8.35% and 6.32%, 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-
(Amounts in table stated in thousands)
1999 30,968
2000 21,100
2001 25,374
2002 52,374
2003 374
Thereafter 203,992
----------
$334,182
==========
Cash paid for interest during 1998, 1997 and 1996 was $26,648,000,
$22,178,000, and $7,546,000, respectively.
The Company was contingently liable for debt of certain of its foreign
subsidiaries and equipment guarantees aggregating to approximately $18.5
million at October 31, 1998. Contained within this amount is approximately
$11.2 million of off-balance sheet guarantees related to equipment. The
Company knows of no event of default that would require it to satisfy
these guarantees.
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 fair
value of the Debentures at October 31, 1998 was $188 million which
management believes was attributable to the conditions of the bond market.
The Company believes that the stated values of the Company's remaining
debt instruments represent the estimated fair values.
(8) FINANCIAL INSTRUMENTS:
<PAGE>
The Company enters into foreign currency forward contracts (principally
against the Dutch guilder, Belgium franc, French franc, Italian lira,
Spanish peseta, Canadian dollar and New Zealand dollar) to hedge the net
receivable/payable position arising from trade sales and purchases and
intercompany transactions. Foreign currency forward contracts reduce the
Company's exposure to the risk that the eventual net cash inflows and
outflows resulting from the sales of products and the purchases from
suppliers denominated in a currency other than the functional currency
will be adversely affected by changes in exchange rates. Gains and losses
from such transactions are recognized when realized.
The Company had twenty-nine (29) contracts outstanding at October 31, 1998
with a total notional contract amount of $134.2 million and maturities of
less than one year. These contracts had a fair market value of $131.9
million at October 31, 1998.
(9) 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 million.
Pursuant to a self tender offering commencing in August 1995, to its
shareholders, the Company purchased and placed into treasury during 1996,
168,000 shares of the Company's stock at $22.75 per share. The purchases
of treasury stock were accounted for under the cost method. During 1998
and 1997, the Company issued 36,943 and 19,457 shares, respectively from
treasury to fund the Company's ESOP.
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.
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 granting 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 1998, 1997 and 1996, 173,440,
125,900 and 2,000 options, respectively, under the 1995 Option Plan were
canceled. As of October 31, 1998, 1997 and 1996, 99,710, 164,020 and
171,000 options respectively, were available for grant.
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,
1998, 1997 and 1996, 15,972, 10,682 and 15,176 shares, respectively, had
been issued under the 1995 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, 1998,
1997 and 1996, 17,260, 44,695 and 79,075 options, respectively, had been
exercised and 322,900, 353,290 and 420,425 options were outstanding.
During
<PAGE>
1998, 1997 and 1996, 13,130, 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-
Number of Purchase Price
Shares Per Share
----------- --------------
Available at October 31, 1995 348,437
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
Purchased (15,972) $21.81
-----------
Available October 31, 1998 258,170
===========
<PAGE>
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/Cancelled (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/Cancelled (148,340) $11.33 - 57.50 $ 42.97
-------- --------
Outstanding at October 31, 1997 689,270 $5.09 - 51.15 $ 26.61
Granted 239,350 $20.88 - 46.50 $ 34.95
Exercised (18,860) $6.00 - 24.93 $ 13.97
Forfeited/Cancelled (186,570) $6.00 - 51.15 $ 42.86
-------- --------
Outstanding at October 31, 1998 723,190 $5.09 - 46.50 $ 25.51
======== ========
</TABLE>
The weighted average fair values of options granted in 1998, 1997 and 1996
at prices above market value were $0, $0 and $11.89, respectively. The
weighted average fair values of options granted in 1998, 1997 and 1996 at
prices at market value were $16.29, $19.77 and $24.09, respectively. The
weighted average exercise price of options granted in 1998, 1997 and 1996
at prices above market value were $0, $0 and $33.68, respectively. The
weighted average exercise price of options granted in 1998, 1997 and 1996
at prices at market value were $34.95, $36.64 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:
1998 1997 1996
------ ------ ------
Risk-Free Interest Rates 5.83% 6.56% 6.23%
Expected Lives 7.5 7.2 6.5
Expected Volatility 58.5% 41% 43%
The following table summarizes information about stock options outstanding
at October 31, 1998:
<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, 1998 Contractual Life Price October 31, 1998 Price
- -------- -------------- ---------------- ---------------- ----- ---------------- -----
<S> <C> <C> <C> <C> <C> <C>
$ 5.09 $ 7.36 32,550 3.14 $ 5.73 32,550 $ 5.73
7.37 10.64 27,400 1.70 9.17 27,400 9.17
10.65 15.39 12,600 4.82 11.33 12,600 11.33
15.40 22.26 183,500 8.46 22.71 109,760 17.92
22.27 32.18 290,290 7.46 27.27 96,338 25.05
32.19 46.50 176,850 9.16 37.49 1,200 43.83
------- ------- ------- ------- -------
$ 5.09 $ 46.50 723,190 7.12 $ 25.51 279,848 $ 17.92
</TABLE>
Had compensation expense, net of taxes, for all stock option grants in
fiscal years 1998, 1997 and 1996
<PAGE>
been determined in accordance with SFAS No. 123, the Company's net income
and income (loss) per share would have been as follows:
1998 1997 1996
------ ------ ------
Net Income (Loss): As Reported $263 $8,571 $2,553
(in thousands) Pro Forma (842) 7,560 2,419
Basic earnings (loss)
per share: As Reported $0.04 $1.19 $0.52
Pro Forma (0.12) 1.05 0.50
Diluted earnings (loss) per
share: As Reported $0.03 $1.15 $0.49
Pro Forma (0.12) 1.01 0.47
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.
(10) PENSIONS AND RETIREMENT SAVINGS PLAN:
The Company sponsors various post retirement plans for most full-time
employees. Total pension expense for 1998, 1997 and 1996 was $3,233,000,
$2,826,500 and $814,000, respectively. The Company sponsors a defined
contribution plan in the United States and defined benefit and defined
contribution plans in its foreign locations.
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 uses 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 1998, 1997 and 1996, 36,943, 19,457 and 0 shares,
respectively, were issued. The Company has expensed approximately
$1,313,000, $1,031,000 and $814,000 in 1998, 1997 and 1996, respectively,
related to this Plan.
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 1998 and 1997 totaled
approximately $622,000 and $224,500, respectively.
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:
<PAGE>
(in thousands) October 31, October 31,
1998 1997
---------- ----------
Vested benefit obligation $ (15,144) $ (13,644)
Accumulated benefit obligation (16,632) (15,055)
Projected benefit obligation (20,932) (19,295)
Plan assets at fair value 14,916 14,602
Unrecognized net gain 54 123
---------- ----------
Plan assets less than projected
benefit obligation $ (5,962) $ (4,570)
========== ==========
The above amounts are included in other long term liabilities.
The components of net periodic pension costs for the foreign defined
benefit pension plans are as follows:
(in thousands)
1998 1997
------- -------
Service costs of benefits
earned during the year $ 1,851 $ 2,034
Interest cost of projected
benefit obligation 1,237 1,325
Actual return (gain)
on assets (977) (1,152)
Employee contributions (562) (504)
Amortization of unrecognized
net gains 5 --
------- -------
Net Pension Expense $ 1,554 $ 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, 1998 and October
31, 1997, were as follows:
October 31, October 31,
1998 1997
---- ----
Discount rate 6% 7%
Salary progression rate 4% 4%
Long term rate of return 6.5% 6%
(11) 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 $252,000, $317,000 and $28,000 in
<PAGE>
1998, 1997 and 1996, respectively. These amounts are included in other
income.
(12) INCOME TAXES:
The provision for income taxes for continuing operations is summarized as
follows-
Year Ended October 31,
-------------------------------
(in thousands) 1998 1997 1996
-------- -------- --------
Current
Federal $ -- $ -- $ 976
State and Local -- -- 416
Foreign 1,719 1,991 178
-------- -------- --------
1,719 1,991 1,570
-------- -------- --------
Deferred:
Federal and State 2,551 $ 307 $ 728
Foreign (309) 1,603 (440)
-------- -------- --------
2,242 1,910 288
-------- -------- --------
Total provision for income taxes $ 3,961 $ 3,901 $ 1,858
======== ======== ========
Undistributed earnings of the Company's foreign subsidiaries of
approximately $2.2 million and $5.8 million for 1998 and 1997,
respectively, 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, 1998 and 1997 are as
follows-
October 31,
(in thousands) 1998 1997
-------- --------
Deferred tax asset-
Net operating loss carryforwards $ 27,684 $ 27,919
Fixed assets 3,218 3,620
Bad debt expense 834 463
Alternative minimum tax 830 1,262
Other 2,192 365
-------- --------
Gross deferred tax asset 34,758 33,629
Valuation Allowance (11,362) (14,739)
-------- --------
Net deferred tax asset $ 23,396 $ 18,890
======== ========
Deferred tax assets are recorded in other current assets and other long
term assets.
October 31,
(in thousands) 1998 1997
-------- --------
Deferred tax liability
Depreciation $(32,439) $(26,119)
Other (2,007) (866)
-------- --------
Deferred tax liability $(34,446) $(26,985)
======== ========
<PAGE>
During 1998 and 1997, the Company reduced goodwill by approximately $1.1
and $8.4 million, respectively relating to the deferred tax assets
established as a result of the acquisition of BGP.
Approximately $79.3 million of total net operating losses remained at
October 31, 1998, $70.3 million of which expire in the years 1999 through
2003, and $9.0 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.
Included in the $70.3 million above are approximately $43.6 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 from continuing
operations to that which would be computed at the statutory rate of 34% in
1998, 1997 and 1996 is as follows-
Year Ended October 31,
--------------------------
(in thousands) 1998 1997 1996
------ ------- -------
Provision at statutory rate $3,309 $ 3,810 $ 1,500
State tax provision, net
of Federal tax benefit -- 153 275
Effect of non U.S. operations taxed at rates
different than U.S Federal statutory rate 197 142 (73)
Other, net 455 (204) 156
------ ------- -------
$3,961 $ 3,901 $ 1,858
====== ======= =======
United States income tax returns for fiscal years 1993 to 1997 are
currently under examination by the Internal Revenue Service. Assessments,
if any, are not expected to have a material adverse effect on the
Company's financial position or results of operations.
Cash paid for income taxes during 1998, 1997 and 1996 was approximately
$3,136,000, $2,633,000, and $3,990,000, respectively.
(13) LEASE COMMITMENTS:
The Company has lease agreements for several of its facilities and certain
equipment expiring at various dates through October 31, 2015. Rental
expense under all leases was $5,187,000, $5,481,000, and $2,366,000 for
1998, 1997 and 1996, 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)
1999 $5,804
2000 4,827
2001 4,022
2002 3,418
2003 3,159
Thereafter 11,397
----------
$32,627
==========
<PAGE>
(14) 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 operation
(15) QUARTERLY FINANCIAL DATA (UNAUDITED):
<TABLE>
<CAPTION>
(in thousands, except per share data) January 31, April 30, July 31, October 31,
----------- ----------- ----------- -----------
1998
<S> <C> <C> <C> <C>
Net sales $ 168,378 $ 169,667 $ 164,857 $ 163,655
Gross profit 38,418 37,964 39,406 39,841
Income from continuing operations 1,884 1,187 1,544 1,156
Loss from discontinued operations (630) (1,757) (2,032) (1,089)
Net income (loss) 1,254 (570) (488) 67
Earnings Per Share:
Basic income from continuing operations $ 0.26 $ 0.16 $ 0.21 $ 0.16
Basic loss from discontinued operations (0.09) (0.24) (0.28) (0.15)
----------- ----------- ----------- -----------
Basic net income (loss) $ 0.17 $ (0.08) $ (0.07) $ 0.01
----------- ----------- ----------- -----------
Diluted income from continuing operations $ 0.26 $ 0.16 $ 0.21 $ 0.16
Diluted loss from discontinued operations (0.09) (0.24) (0.28) (0.15)
----------- ----------- ----------- -----------
Diluted net income (loss) $ 0.17 $ (0.08) $ (0.07) $ 0.01
----------- ----------- ----------- -----------
<CAPTION>
1997
<S> <C> <C> <C> <C>
Net sales $ 169,052 $ 178,682 $ 185,421 $ 175,917
Gross profit 37,974 36,935 37,873 39,700
Income from continuing operations 3,935 1,430 1,840 123
Income from discontinued operations 121 561 374 187
Net income (loss) 4,056 1,991 2,214 310
Earnings Per Share:
Basic income from continuing operations $ 0.55 $ 0.20 $ 0.26 $ 0.02
Basic income from discontinued operations $ 0.02 $ 0.08 $ 0.05 $ 0.02
----------- ----------- ----------- -----------
Basic net income $ 0.57 $ 0.28 $ 0.31 $ 0.04
----------- ----------- ----------- -----------
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Diluted income from continuing operations $ 0.52 $ 0.19 $ 0.25 $ 0.02
Diluted income from discontinued operations $ 0.02 $ 0.08 $ 0.05 $ 0.02
----------- ----------- ----------- -----------
Diluted net income $ 0.54 $ 0.27 $ 0.30 $ 0.04
----------- ----------- ----------- -----------
</TABLE>
Earnings per share are computed independently for each of the quarters
presented.
(16) 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.
Information about the Company's operations by geographical area as of and
for the years ended October 31, 1998 and 1997, respectively is as follows:
<TABLE>
<CAPTION>
(in thousands) Depreciation
Net Operating Capital and Identifiable
1998 Sales Income Expenditures Amortization Assets
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
North America $ 396,302 $ 33,011 $ 9,830 $ 19,105 $ 303,955
Europe 192,248 7,208 8,645 7,715 172,153
Asia/Pacific 78,006 1,828 5,969 3,558 55,635
Corporate -- -- -- -- 60,743
-----------------------------------------------------------------------------
Total $ 666,556 $ 42,047 $ 24,444 $ 30,378 $ 592,486
=============================================================================
<CAPTION>
(in thousands) Depreciation
Net Operating Capital and Identifiable
1997 Sales Income Expenditures Amortization Assets
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
North America $ 419,580 $ 26,324 $ 20,890 $ 19,021 $ 303,412
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 -- -- 76,700
-----------------------------------------------------------------------------
Total $ 709,072 $ 38,006 $ 37,614 $ 28,810 $ 609,280
=============================================================================
</TABLE>
Included in Corporate assets are the investment in joint venture,
net assets held for sale and net assets of discontinued operations.
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.
<PAGE>
(17) DISCONTINUED OPERATIONS:
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 were not considered core
businesses and the Company had 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 had 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. Beginning November 1,
1997, the Company began recording these businesses as discontinued
operations.
During 1998, the Company sold all five of its Rigids' businesses to three
separate parties. Gross proceeds for the sales were approximately $16.4
million. After giving effect to working capital adjustments and payment of
professional fees, net proceeds amounted to approximately $13.9 million.
(18) SALE OF SOUTH AFRICA:
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. The sale did not result in any gain or loss.
(19) RELATED PARTY TRANSACTIONS:
In connection with the acquisition of BGP, Borden, Inc. and the Company
entered into a Governance Agreement, dated as of June 20, 1996 with
respect to certain matters relating to the corporate governance of the
Company. For the years ending October 31, 1998 and 1997, the Company
purchased resin from BCP in the amount of $27.6 million and $24.9 million,
respectively. BCP is a limited partnership in which BCP Management Inc., a
wholly owned subsidiary of Borden Inc., is general partner.
(20) SUBSEQUENT EVENT - DISCONTINUED OPERATION:
In February 1999, the Company's management, with the concurrence of its
Board of Directors, approved a formal plan to dispose of its Proponite
business. On April 30, 1999, the Company sold certain assets of the
Proponite business to Applied Extrusion Technologies, Inc. pusuant to the
sales agreement dated March 4, 1999. The Company will wind down this
non-core business during 1999. The disposal of the Proponite business has
been accounted for as a discontinued operation and, accordingly, its net
assets (liabilities) have been segregated from continuing operations in
the accompanying consolidated balance sheets at October 31, 1998 and 1997,
and its operating results are segregated and reported as discontinued
operations in the accompanying consolidated statements of income for the
years ended October 31, 1998 and 1997. The results of operations for the
year ended October 31, 1996 has not been reclassified, as they were
immaterial to the overall results of operations.
<PAGE>
Condensed financial information relating to the discontinued operations of
Proponite is as follows:
October 31, 1998 October 31, 1997
---------------- ----------------
Net assets of discontinued operations:
Current assets $ 13,882,000 $ 12,549,000
Property, plant & equipment-net 34,976,000 37,609,000
---------------- ----------------
Total assets 48,858,000 50,158,000
Current liabilities 3,712,000 3,803,000
---------------- ----------------
Net assets of discontinued operations $ 45,146,000 $ 46,355,,000
================ ================
For the year For the year
ended ended
October 31, 1998 October 31, 1997
---------------- ----------------
Results of Operations:
Net sales $ 34,683,000 $ 50,051,000
---------------- ----------------
Gross profit 1,182,000 7,249,000
---------------- ----------------
Net income (loss) $ (2,604,000) $ 1,242,000
================ ================
The results of operations for the year ended October 31, 1996 has not been
reclassified, as they were immaterial to the overall results of operations.
<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.
<PAGE>
SCHEDULE II
AEP INDUSTRIES INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED OCTOBER 31, 1998
(in thousands)
<TABLE>
<CAPTION>
Balance at Additions Deductions Balance
Beginning Charged to From at End
of Year Earnings Reserves Other of Year
----------- ----------- ---------- ------- -------
<S> <C> <C> <C> <C> <C>
YEAR ENDED
OCTOBER 31, 1998:
Allowance for doubtful
accounts $ 4,863 $ 1,423 $ 1,301 $ (299) $ 4,686
=========== =========== ========== ======= =======
Inventory $ 1,497 $ 625 $ 888 $ 184 $ 1,418
=========== =========== ========== ======= =======
YEAR ENDED
OCTOBER 31, 1997:
Allowance for doubtful
accounts $ 4,997 $ 1,381 $ 1,768 $ 253 $ 4,863
=========== =========== ========== ======= =======
Inventory $ 1,810 $ 961 $ 1,106 $ (168) $ 1,497
=========== =========== ========== ======= =======
YEAR ENDED
OCTOBER 31, 1996:
Allowance for doubtful
accounts $ 1,421 $ 527 $ 390 $ 3,439 A. $ 4,997
=========== =========== ========== ======= =======
Inventory $ 0 $ 253 $ -- $ 1,557 A. $ 1,810
</TABLE>
Note A: Amounts were obtained through the purchase of Borden Global Packaging.
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report, dated June 3, 1999, included in this Form 8-K, into the Company's
previously filed Registration Statement File Nos. 33-58747 and 33-58743 on Form
S-8. Our report dated December 17, 1998, included in the Company's Form 10-K for
the year ended October 31, 1998 is no longer appropriate since reclassified
financial statements have been presented giving effect to the discontinued
operations of the Proponite business.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
June 3, 1999
