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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES AND EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1998, OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 0-14550
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AEP INDUSTRIES INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-1916107
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
125 PHILLIPS AVENUE 07606-1546
SOUTH HACKENSACK, NEW JERSEY (zip code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (201) 641-6600
Securities registered pursuant to Section 12(b) of the Act:
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<CAPTION>
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
- ------------------------------ ------------------------------
<S> <C>
None
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
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<CAPTION>
COMMON STOCK, $.01 PAR VALUE
- --------------------------------
<S> <C>
(Title of class)
</TABLE>
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirement for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The aggregate market value of the shares of the voting stock held by
nonaffiliates of the Registrant was approximately $75,280,000 based upon the
average of the bid and asked prices of the stock, which was $21.75 on December
31, 1998.
The number of shares of the Registrant's $.01 par value common stock
outstanding as of December 31, 1998, was 7,279,901.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the documents, all or portions of which are incorporated by
reference herein and the Part of the Form 10-K into which the document is
incorporated:
Proxy Statement to be filed with respect to the Registrants Annual Meeting
of Stockholders to be held on April 13, 1999--Part III.(*)
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* As stated under various items of this Annual Report, only certain specified
portions of such document are incorporated by reference herein.
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PART I
ITEM 1. BUSINESS
GENERAL
AEP Industries Inc. ("AEP" or the "Company") is a worldwide manufacturer of
plastic packaging films. Incorporating both cast and blown film technologies the
Company manufactures an extensive range of specialty and standard flexible
packaging products for use in the packaging, transportation, beverage, food,
automotive, pharmaceuticals, chemical, electronics, construction, agricultural
and textile industries. The Company currently has manufacturing operations
located in 11 countries in North America, Europe and the Asia/Pacific region.
In October 1996, in order to establish a worldwide market presence,
diversify its product lines and strengthen market share in certain of its
existing businesses, the Company acquired the global packaging operations of
Borden, Inc. ("Borden") in exchange for approximately $280 million (including
the assumption of certain indebtedness and other purchase price adjustments) and
2.4 million shares of the Common Stock of the Company. The addition of Borden's
global packaging operations (the "Borden Acquisition") broadened the Company's
product portfolio, established the Company as the largest manufacturer of
polyvinyl chloride food wrap and polyethylene stretch film in North America, and
positioned the Company as a leader in a number of other markets, including
processed cheese films and twist wrap.
RECENT DEVELOPMENTS
During the fiscal year ended October 31, 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.
At the time of the Borden Acquisition management decided not to retain the
Rigids' businesses of Borden. The Rigids' businesses manufacture, market and
distribute wet food containers, dry food trays and disposable food service
products. These businesses 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
Consolidated Balance Sheet at October 31, 1997, and the results of the Rigids'
businesses have not been included in the Company's results of operations for the
fiscal year ended October 31, 1997 ("Fiscal 1997"). The results of operations
for the fiscal year ended October 31, 1998 ("Fiscal 1998") for these Rigids'
businesses have been reported as discontinued operations.
On November 19, 1997, the Company sold in a private placement $200,000,000
of 9.875% Senior Subordinated Notes ("Notes") due 2007 at an issue price of
99.224% resulting in an effective yield of 10%. The discount to the initial
purchasers was 2.75%, resulting in proceeds to the Company of $192,948,000. The
initial purchasers were J.P. Morgan Securities Inc., Morgan Stanley & Co.,
Incorporated and Salomon Brothers Inc. The net proceeds of the sale were used to
repay a portion of indebtedness outstanding under the Company's existing Credit
Agreement. In May 1998, the Company completed the exchange of the Notes for
notes which were registered under the Securities Act of 1933, as amended (the
"Registered Notes"). The Registered Notes are identical in all respects to the
Notes.
In January 1998, the Company completed the sale of its operations in South
Africa to local management for $1,000,000 plus the settlement of all
intercompany items.
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PRODUCTS
The Company manufactures and markets an extensive and diverse line of
polyethylene, polyvinyl chloride and polypropylene flexible packaging products,
with consumer, industrial and agricultural applications. Flexible packaging and
film products are thin, ductile bags, sacks, labels and films for food and
non-food consumer, agricultural and industrial items. Flexible packaging
containers not only protect their contents, they are also cost-effective,
space-saving, lightweight, tamper-evident, convenient and often recyclable. The
flexible packaging and film products manufactured by the Company are used in a
variety of industries, including the packaging, transportation, beverage, food,
automotive, pharmaceuticals, chemical, electronics, construction, agricultural
and textile industries.
The following table summarizes the Company's product lines:
<TABLE>
<CAPTION>
PRODUCT LOCATION MATERIAL USES
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<S> <C> <C> <C>
Polyvinyl chloride wrap North America, Europe, Polyvinyl chloride Meat and food wrap;
Asia/Pacific, institutional films, twist
wrap
Stretch (pallet) wrap North America, Europe Polyethylene Pallet wrap
Asia/Pacific,
Industrial films United States, Asia/ Polyethylene Drum, box, carton, and pail
Pacific liners; bags for furniture
and mattresses; films to
cover high value products;
agricultural films
Printed and converted Europe, Asia/Pacific Primarily polyethylene Printed, laminated and/ or
converted films providing
flexible
Films packaging to consumer
markets
Polypropylene and barrier North America, Europe Polypropylene Polyethylene Packaging of baked goods,
films cheese, candies, and salted
snacks; used in tape,
diaper tabs, box windows
and graphic arts
Other products and North America, Europe, Various thermoplastics and Manufactured and resale
specialty films Asia/Pacific machinery items used in packaging
</TABLE>
NORTH AMERICAN OPERATIONS
RESINITE (POLYVINYL CHLORIDE)
The Company manufactures polyvinyl chloride food wrap for the supermarket,
consumer, institutional and industrial markets in North America, offering a
broad range of products with approximately 45 different formulations. These
films are used for packaging of fresh red meats, poultry, fish, fruits and
vegetables, and bakery products.
The Company's Resinite facility also manufactures dispenser (cutter) boxes
containing polyvinyl chloride food wrap for sales to consumers and to
institutions, including restaurants, schools, hospitals and
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penitentiaries. The Company's most popular branded institutional polyvinyl
chloride food wrap is marketed under the SEAL WRAP name. A substantial part of
this product is sold to large paper and food distributors, with the rest sold
directly to supermarket chains.
The Company also has exclusive rights to an innovative separate slide
cutter, which the Company believes is safer than regular cutters. The Company
has introduced the slide cutter into the market, and believes that this new
product has had a positive impact on cutter box sales.
STRETCH WRAP
The Company manufactures a family of high performance stretch wrap for
wrapping and securing palletized products for shipping. The Company markets a
wide variety of stretch wrap designed for commodity and specialty uses and sells
approximately 90% of its stretch wrap through distributors, while the remainder
of its output is sold directly to customers on a national account basis.
In connection with the Borden Acquisition, the Company identified and shut
down less efficient stretch wrap operations, thereby reducing its stretch wrap
capacity by approximately 58 million pounds. In addition, as a result of
industry-wide overcapacity in the stretch wrap market, the Company has reduced
its stretch wrap capacity by an additional 45 million pounds. Collectively, the
Company has reduced its stretch wrap capacity by an aggregate of approximately
103 million pounds to an aggregate of 255 million pounds through a combination
of permanently eliminating, temporarily idling and reallocating its capacity.
INDUSTRIAL FILMS
The Company manufactures a broad range of industrial films, generally
custom-tailored, including sheeting, tubing and bags which are cut, rolled, or
perforated; drum, box, carton and pail liners; and bags to package specialty
items such as furniture and mattresses. The Company also manufactures films to
protect items stored outdoors or in transit (such as boats and cars) and a wide
array of shrink films and overwrap films. The Company sells the majority of its
industrial film output directly to customers on a national account basis, with
approximately 20% sold through distributors.
Most of the industrial films manufactured by the Company, which may number
as many as 22,000 separate and distinct products in any given year, are custom
designed to meet the specific needs of its customers.
The Company believes that the strength of its industrial film operations
lies in its technologically superior products, high quality control standards,
well-trained and knowledgeable sales force, and commitment to customer service.
The Company's sales force, consisting of experts in packaging systems, provides
technical support to the Company's distribution network and focuses on product
knowledge and customer relations.
The industrial films market is comprised of a large number of smaller
manufacturers who together constitute approximately two-thirds of all sales,
with the remainder of the market represented by a few large manufacturers. The
Company believes that its research and development team, which continually
improves applications and creates new industrial film products, has helped
establish the Company as one of the largest producers in this fragmented market.
The Company believes it can continue to expand its share of the industrial films
market through its ability to offer a broad range of industrial as well as other
packaging films (including stretch wrap), thereby offering its customers
one-stop shopping.
PROFORMANCE
The Company manufactures and markets oriented polypropylene films
(characterized by their inelasticity) and, through Pro-Ex, co-extruded (layered)
barrier and non-barrier films. Barrier films either encourage or restrict the
passage of moisture, oxygen, light and gases (depending upon the desired
properties), and are puncture resistant. A substantial portion of the Company's
oriented polypropylene
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films (including metallized films) are used in packaging items such as salted
snacks, confectionery, cookies, crackers, baked goods, and cheese. Industrial
applications, such as diaper tabs, box windows, tape and graphic arts, account
for the remaining oriented polypropylene films manufactured by the Company.
The Company sells the majority of its oriented polypropylene films to
printers and converters for further processing before reaching end-users.
The oriented polypropylene films market is dominated by a few large
manufacturers, each with a substantial market share. The Company believes it is
a niche supplier in this market. As a result, the Company has repositioned its
efforts and adopted a niche strategy, de-emphasizing some of the lower margin
commodity films such as tape and diaper tabs in favor of higher margin films
such as films for packaging reduced fat and fat-free foods, which, because of
the absence of fat (which serves as a preservative), require more sophisticated
technology. The Company has several patents and patent applications relating to
its cold seal and barrier films, and has a patent application pending for a
barrier film useful for flavor retention for packaging of reduced fat and
fat-free foods.
INTERNATIONAL OPERATIONS
EUROPEAN RESINITE (POLYVINYL CHLORIDE)
The Company manufactures polyvinyl chloride food wrap in cutter boxes and
perforated rolls which are primarily sold to restaurants and food service
establishments. European Resinite sells films across Europe (with the exception
of Italy, which is covered by FIAP) and sells most of its film directly to
end-users.
The market for polyvinyl chloride food wrap is relatively mature in Northern
Europe, with intense competition. The Company expects that growth in Europe will
be driven by developing catering, food service and volume feeding markets in
Eastern Europe and by developing food distribution markets in Southern and
Eastern Europe. In certain European markets, a tax is levied on packaging
materials based on weight which has led to a demand for thinner but stronger
meat films. The Company has the technology to deliver films with such properties
at a low price and believes it maintains a competitive advantage over packaging
entities without such technology.
EUROPEAN FLEXIBLES
The Company manufactures flexible packaging and converted films used in the
food processing and pharmaceutical industries, including freezer film, processed
cheese innerwrap and tamper evident seals. European Flexibles also manufactures
and sells polyethylene-based stretch wrap for wrapping and securing pallet
loads. European Flexibles sells 55% of its stretch wrap to distributors, and 45%
directly to end-users.
FIAP
The Company, through Fabbrica Italiana Articoli Plastici (FIAP),
manufactures polyvinyl chloride food wrap, unplasticized polyvinyl chloride
twist wrap, and converted and printed films. FIAP is known as a specialist in
unplasticized polyvinyl chloride twist wrap, which is used to wrap candles,
candies, and similar products. This product, which has similar performance
characteristics as cellophane, is emerging as a low cost substitute and, as a
result, may continue to replace cellophane in the future. The Company believes
unplasticized polyvinyl chloride, because of its performance characteristics,
has significant growth potential opportunities as a replacement for cellophane
and believes opportunities are developing for new uses for such wrap, such as
battery covers and credit card laminates.
Films manufactured by FIAP are sold in the United States, Europe, and the
Middle East, mostly through an internal sales force directly to end-users.
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ASIA/PACIFIC REGION
The Company is a major manufacturer of industrial films and flexible
packaging and converted films in Australia and New Zealand. The Company's
operations in the Asia/Pacific region resemble its North American and European
operations with the same variety of films. Additionally, the Company acquired
certain assets of ICI's Visqueen operations in August 1997 which strengthened
its position as a significant supplier of industrial packaging films in
Australia.
The Company sells the majority of the products it manufactures in Australia
and New Zealand to end users and the remainder to distributors.
The markets for plastic packaging products in Australia and New Zealand are
relatively small, offering limited growth opportunities. However, since New
Zealand and Australia are significant exporters of high protein products, the
Company expects to participate in the growing market for packaging materials for
protein rich products for exports to China and Southeast Asia.
The Company also has a 50% joint venture in Japan with Hitachi Chemical,
which supplies polyvinyl chloride food wrap to the Japanese market. The Company
accounts for the joint venture on an equity basis.
MANUFACTURING AND PRODUCTION
MANUFACTURING OPERATIONS
The Company manufactures both industrial grade products, which are
manufactured to an industry specification or for distribution from stock, and
specialty products, which are manufactured under more exacting standards to
assure that their chemical and physical properties meet the particular
requirements of the customer or the specialized application appropriate to its
intended market. Specialty products generally sell at higher margins than
industrial grade products.
Prior to the Borden Acquisition, polyvinyl chloride food wrap was
manufactured in North Andover, Massachusetts and Griffin, Georgia. In order to
streamline operations, the Company has closed and sold this Massachusetts plant
and expanded and consolidated its domestic polyvinyl chloride food wrap
manufacturing operations at the Georgia plant. The Company also manufactures
polyvinyl chloride food wrap in plants strategically located in Spain, France,
England, Australia and New Zealand.
The Company manufactures stretch wrap and industrial films at several large
geographically dispersed, integrated extrusion facilities located throughout
North America, which also have the ability to produce other products. The size
and location of those facilities, as well as their capacity to manufacture
multiple types of films or re-orient equipment as market conditions warrant,
enable the Company to achieve savings and minimize overhead and transportation
costs. The Company also manufactures pallet wrap in Holland, Australia and New
Zealand.
The Company manufactures polypropylene films at its remaining plant in North
Andover, Massachusetts. The Company has cast polypropylene capacity available in
its North Carolina plant and has added new capacity for five layer blown
co-extruded film at its Wright Township, Pennsylvania facility.
At the FIAP facility located in Turate, Italy, the Company manufactures
polyvinyl chloride food wrap, unplasticized polyvinyl chloride twist wrap, and
converted and printed films. The Company manufactures flexible packaging and
converted films in Europe at facilities strategically located in Holland and
Belgium. The Company has completed its installation of new, efficient pallet
wrap equipment at its Holland facility, which the Company believes will increase
its market presence in Europe in this product. The Company also manufactures
industrial films, PVC food films and printed converted products at its
facilities located in Australia and New Zealand.
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PRODUCTION
In the film manufacturing process, resins (primarily polyethylene, polyvinyl
chloride, and polypropylene) with various properties are blended with chemicals
and other concentrates (including coloring, where appropriate) to achieve a wide
range of specified product characteristics, such as color, clarity, tensile
strength, toughness, thickness, shrinkability, surface friction, transparency,
sealability and permeability. The gauges of the Company's products range from
less than one mil (.001 inches) to more than 20 mils. The Company's extrusion
equipment can produce printed products and film up to 40 feet wide. The blending
of various kinds of resin combined with chemical and color additives is computer
controlled to avoid waste and to maximize product consistency. The blended
mixture is melted by a combination of applied heat and friction under pressure,
and then is mechanically mixed. The mixture is then forced (extruded) through a
die, at which point it is expanded into a flat sheet (cast) or a vertical
tubular column (blown) of film and is cooled. The cooled film can then be
shipped to a customer or can be further processed and then shipped. Generally,
the Company's manufacturing plants operate 24 hours a day, seven days a week,
except for plants located in areas where hours of operation are limited by law,
local custom or in cases when 24 hour operations are not economically
advantageous.
The Company's domestic equipment has several processing features, including
the capability to print "in-line" and to cut tubular film at either end to
produce "bags" or to cut the side of the tubes to produce "sheeting." This
sheeting can then be sold or further processed by metallizing, perforating
and/or heat sealing it into a variety of products according to customer
specifications.
The Company's foreign operations have the capability of further processing
the sheeting using the Company's flexographic or rotogravure printing
capabilities. The printed sheet is then laminated, slit and/or converted into a
form desired by the customer. Sale to the customer can occur after any process
or combination of processes.
The Company has regularly upgraded or replaced older equipment in order to
keep abreast of technological advances and to maximize production efficiencies
by reducing labor costs, waste and production time. During the past five fiscal
years, the Company made several capital improvements, which included the
construction of new manufacturing, warehouse and sales facilities in Alsip,
Illinois and Wright Township, Pennsylvania, the purchase of new state-of-the-art
extrusion equipment and the upgrading of older equipment. The Company is in the
process of shifting production among its plants to improve efficiency and cost
savings and is upgrading and replacing equipment at certain of these facilities
in order to increase production capacity and enhance efficiency. The Company
will continue to upgrade or replace equipment, as it deems appropriate.
QUALITY CONTROL
The Company believes that maintaining the highest standards of quality in
all aspects of its manufacturing operations plays an important part in its
ability to maintain its competitive position. To that end, the Company has
adopted strict quality control systems and procedures designed to test the
mechanical properties of its products (such as strength, puncture resistance,
elasticity, abrasion characteristics and sealability), which it regularly
reviews, updates and modifies as appropriate.
RAW MATERIALS
The Company manufactures film products primarily from polyethylene,
polypropylene and polyvinyl chloride resins, all of which are available from a
number of domestic and foreign suppliers. The Company selects its suppliers
based on the price, quality and characteristics of the resins they produce. The
Company has been able to achieve economies of scale by reason of increased
purchasing power for its North American requirements. Most of the Company's
purchases of resin in Fiscal 1998 have been from 18 of the
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20 international resin suppliers, none of which accounted for more than 16% of
the Company's requirements. The Company believes that the loss of any resin
supplier would not have a materially adverse effect on the Company.
The resins used by the Company are produced from petroleum and natural gas.
Instability in the world markets for petroleum and natural gas could adversely
affect the prices of the Company's raw materials and their general availability,
and this could have an adverse effect on the Company's profitability if the
increased costs could not be passed on to customers or if the supply is limited.
The cost of resin typically comprises approximately 60% of a manufacturer's cost
of goods sold. With limited exceptions, the Company has historically been able
to pass on substantially all of the price increases in raw materials to its
customers on a penny for penny basis, although there can be no assurance that
the Company will be able to do so in the future. The Company generally maintains
a resin inventory of less than one month's supply and has not experienced any
difficulty in maintaining its supply. Other raw materials, principally chemical
colorings and other concentrates, are available from many sources.
MARKETING AND SALES
The Company believes that its ability to continue to provide superior
customer service will be critical to the Company's success. Even in those
markets where the Company's products are considered commodities and price is the
single most important factor, the Company believes that its sales and marketing
capabilities and its ability to timely deliver products can be a competitive
advantage. To that end, the Company has established good relations with its
suppliers, and has long-standing relationships with most of its customers, which
it attributes to its ability to consistently manufacture high-quality products
and provide timely delivery and superior customer service.
The Company believes that its research and development efforts, its high
efficiency equipment (which is both automated and microprocessor-controlled) and
the technical training given to its sales personnel enhance the ability of the
Company to expand its sales in all of its product lines. An important component
of the Company's marketing philosophy is the ability of its sales personnel to
provide technical assistance to customers. The Company's sales force regularly
consults with customers with respect to performance of its products and the
customers' particular needs and communicates with appropriate research and
development staff regarding these matters. In conjunction with the research and
development staff, sales personnel are often able to recommend a product or
suggest a resin blend to produce the product with the characteristics/properties
which best suit the customers' requirements.
The Company markets its polyethylene products in North America principally
through its own sales force under the supervision of national and regional
managers. The Company generally sells either directly to customers who are
end-users of the products or to distributors for resale to end-users.
The Company markets its polyvinyl chloride products in North America
primarily through large distributors. Sales of polypropylene in North America
are made by the Company's sales force primarily to packaging converters. The
Company has restructured its Proponite sales force into the newly formed
PROformance division to use its preexisting relationships to sell its barrier
films, cast polypropylene films and other specialty products into the existing
market place. Because the Company has expanded and continues to expand its
product lines, sales persons are able to offer a much broader line of products
than they could previously offer.
During Fiscal 1997 and Fiscal 1998, approximately 35% and 40%, respectively,
of the sales by the Company in North America were directly to end-users with the
balance representing sales to distributors or representatives. The Company
serves approximately 15,000 customers world wide, none of which account for more
than 5% of the Company's net sales.
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Sales and marketing efforts in Europe and in the Asia/Pacific region are
primarily by the Company's sales force to end-users, although distributors are
used in cases where the distributor adds value to the customer.
DISTRIBUTION
The Company believes that the timely delivery to customers of its products
is a critical factor in the Company's ability to maintain its market position.
Domestically, in order to ensure timely delivery, the Company uses both internal
and external sources of distribution. The Company maintains a fleet of 28
trucks, most of which it leases, for the delivery to customers of approximately
15% of the Company's products, and it uses dedicated service haulers, contract
carriers and common carriers where appropriate for the remainder of its
deliveries. This combination enables the Company to control the distribution
process and thereby insure priority handling and direct transportation of
products to its customers, thus improving the speed, reliability and efficiency
of delivery.
Because of the geographic dispersion of the Company's plants, the Company is
able to deliver most of its products within a 500 mile radius of its plants.
This enables the Company to reduce its use of warehouses to store product.
However, the Company also ships products great distances when necessary and
exports to other countries.
Internationally, the Company uses common and contract carriers to deliver
most of its products, both in the country of origin and for export. The Company
does not deliver its own products to an appreciable degree.
RESEARCH AND DEVELOPMENT
The Company has a research and development department with a staff of
approximately 18 persons. In addition, other members of management and
supervisory personnel, from time to time, devote substantial amounts of time to
research and development activities. The principal efforts of the research and
development department are directed to maintaining and improving quality control
in the Company's manufacturing operations, assisting sales personnel in
designing specialty products to meet individual customer's needs, developing new
products and reformulating existing products to improve quality and/or reduce
production costs. During Fiscal 1998, the Company has focused a significant
portion of its research and development efforts on co-extruded (layered), cold
seal, high barrier and MAPAC-TM-(modified atmosphere packaging, designed to
either contain gases or allow the migration thereof) technologies.
The Company's research and development department has developed a number of
products with unique properties which the Company considers proprietary, certain
of which are protected by patent.
During Fiscal 1998, the Company spent $1,602,000 for research and
development activities. For Fiscal 1997 and the fiscal year ended October 31,
1996 ("Fiscal 1996") the Company incurred expenses for research and development
activities of $2,192,000 and $635,000, respectively.
PROPRIETARY RIGHTS
The Company owns or has rights to 8 issued patents and has filed 12
additional patent applications. The Company also owns a number of trademarks
throughout the world and is in the process of applying for additional
trademarks. The Company does not consider that any of these intellectual
property rights are material to its overall business.
COMPETITION
The business of supplying plastic packaging products is extremely
competitive and the Company faces competition from a substantial number of
companies engaged in similar and alternative packaging
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products businesses. Some of the Company's competitors are subsidiaries or
divisions of large international, diversified companies with extensive
production facilities, well developed sales and marketing staffs and
substantially greater financial resources than the Company.
The Company competes principally with (i) local manufacturers, who compete
with the Company in specific geographic areas, generally within a 500 mile
radius of its plants, (ii) companies which specialize in the extrusion of a
limited group of products which they market nationally, and (iii) a limited
number of manufacturers of flexible packaging products who offer a broad range
of products and maintain production and marketing facilities domestically and
internationally.
Because many of the Company's products are available from a number of local
and national manufacturers, competition is highly price sensitive and margins
are relatively low. The Company believes that all of its products require
efficient, low cost and high speed production to remain competitive. The Company
believes it also competes on the basis of quality, service (including its
ability to supply customers in a timely fashion) and product differentiation.
The Company believes that there are few barriers to entry into many of the
Company's markets, enabling new and existing competitors to rapidly affect
market conditions. As a result, the Company may experience increased competition
resulting from the introduction of products by new manufacturers. In addition,
in several of the Company's markets, products are generally regarded as a
commodity. As a result, competition in such markets is based almost entirely on
price and service.
BACKLOG
The Company estimates that the total dollar volume of its backlog as of the
end of Fiscal 1998 and Fiscal 1997 was approximately $47,000,000 and
$58,000,000, respectively. These backlogs represent approximately 21 days of
production in Fiscal 1998 and 27 days in Fiscal 1997. The Company believes that
because the great majority of its production is based upon purchase orders
rather than long term contracts, the amount of its backlog is not an important
indicator of future sales.
ENVIRONMENTAL MATTERS
The Company's operations are subject to various foreign, Federal, state and
local environmental laws and regulations, including, but not limited to, those
governing discharges into the air and water, the storage, handling and disposal
of solid and hazardous wastes, the remediation of soil and groundwater
contaminated by petroleum products or hazardous substances or wastes, and the
health and safety of employees. Compliance with environmental laws, stricter
interpretations of or amendments to such laws, or more vigorous enforcement
policies by regulatory agencies may require material expenditures by the
Company. The nature of the Company's current and former operations and the
history of industrial uses at some of its facilities expose the Company to the
risk of liabilities or claims with respect to environmental and worker health
and safety matters.
In addition, under certain environmental laws, a current or previous owner
or operator of property may be jointly and severally liable for the costs of
investigation, removal or remediation of certain substances on, under or in such
property, without regard to negligence or fault. The presence of, or failure to
remediate properly such substances may adversely affect the ability to sell or
rent such property or to borrow using such property as collateral. In addition,
persons who generate, arrange for the disposal or treatment of, or dispose of
hazardous substances may be jointly and severally liable for the costs of
investigation, remediation or removal of such hazardous substances at or from
the disposal or treatment facility, regardless of whether the facility is owned
or operated by such person. Responsible parties also may be subject to common
law claims by third parties based on damages and costs resulting from
environmental contamination emanating from a site. The Company believes that
there are no current environmental matters that would have a material adverse
effect on the Company's financial position or results of operations.
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EMPLOYEES
At October 31, 1998, the Company had approximately 3,300 employees
worldwide, including officers and administrative personnel. In North America,
the Company has three collective bargaining agreements, the earliest of which
expires in March 1999, covering approximately 275 employees. Further, the
Company has collective bargaining agreements at 16 international facilities
(excluding Canada) covering substantially all of the hourly employees at such
international facilities. As is common in many foreign jurisdictions,
substantially all of the Company's employees in such foreign jurisdictions are
covered by country-wide collective bargaining agreements. While the Company
believes that its relations with its employees are satisfactory, a dispute
between the Company and its employees could have a material adverse effect on
the Company.
MANAGEMENT
The officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------ --------- --------------------------------------------------------------------
<S> <C> <C>
J. Brendan Barba.................... 57 Chairman of the Board, President and Director
Paul M. Feeney...................... 56 Executive Vice President and Director
John J. Powers...................... 34 Executive Vice President--Sales and Marketing
David J. Cron....................... 44 Executive Vice President--Manufacturing
Lawrence R. Noll.................... 50 Vice President Controller and Director
James B. Rafferty................... 46 Vice President and Treasurer
Jean L'Allier....................... 43 Vice President General Counsel and Secretary
Edgar Reich......................... 56 Vice President--International Operations
Kenneth Avia........................ 56 Director
William H. Carter................... 45 Director
Paul E. Gelbard..................... 68 Director
C. Robert Kidder.................... 54 Director
Clifton C. Robbins.................. 40 Director
Lee C. Stewart...................... 50 Director
Scott M. Stuart..................... 39 Director
</TABLE>
J. BRENDAN BARBA is one of the founders of the Company and has been its
President and a director since its organization in January 1970. In November
1985, Mr. Barba assumed the additional title of Chairman of the Board of
Directors of the Company.
PAUL M. FEENEY has been an Executive Vice President and a director of the
Company since December 1988. From 1980 to 1988 Mr. Feeney was Vice President and
Treasurer of Witco Corporation.
JOHN J. POWERS was elected Executive Vice President--Sales and Marketing in
May 1996. Prior thereto, he was Vice President--Industrial Products of the
Company.
DAVID J. CRON has been Executive Vice President--Manufacturing since July,
1997 Prior thereto he was Vice President--Manufacturing, a plant manager and
held various other positions since 1976.
LAWRENCE R. NOLL has been a Vice President and a director of the Company
since September 1993. For more than 13 years prior thereto, he was the
Controller of the Company, and he was re-elected Controller in October 1996. He
was the Secretary of the Company from September 1993 through April 1998.
JAMES B. RAFFERTY has been Vice President and Treasurer of the Company since
October 1996. Prior thereto, he was Assistant Treasurer since July 1996. From
1989 to 1995, Mr. Rafferty was Director of Treasury Operations at Borden, Inc.
11
<PAGE>
JEAN L'ALLIER has been employed by the Company as general counsel since
April 1997. He was elected Vice President and General Counsel in November 1997
and elected Secretary of the Company in April 1998. For more than five years
prior to April 1997 he was engaged in the private practice of law as a sole
practitioner in New York City.
EDGAR REICH was employed by the Company since July 1998 as director of
European operations. He was elected Vice President--International Operations in
November 1998. Prior to July 1998 he held various international management
positions with Witco Corporation.
KENNETH AVIA has served as a director of the Company since 1980. Mr Avia has
been Executive Vice President of First Data Merchant Services (a merchant credit
card processing company) since 1993 and served as Divisional Vice President of
Automatic Data Processing, Inc. from 1984 to 1993.
WILLIAM H. CARTER has served as a director of the Company since October
1996. Mr. Carter has served as Executive Vice President, Chief Financial Officer
and a director of Borden, Inc. since 1995, and was employed by Price Waterhouse
& Co. from 1975 to 1994, most recently as a partner.
PAUL E. GELBARD has served as a director of the Company since 1991. Mr.
Gelbard has been Of Counsel to Bachner, Tally, Polevoy & Misher LLP, counsel to
the Company, since January 1997 and was a Partner of such firm from 1974 to
1996.
ROBERT KIDDER has served as a director of the Company since October 1996.
Mr. Kidder has been Chairman of the Board and Chief Executive Officer of Borden,
Inc. since 1995 and Chairman and Chief Executive Officer of Duracell
International, Inc. from 1991 to 1995. Mr. Kidder also serves as a member of the
Board of Directors of Borden, Inc., Electronic Data Systems Corporation and Dean
Witter, Discover & Co.
CLIFTON S. ROBBINS has served as a director of the Company since October
1996. Mr. Robbins has been a member of KKR & Co., LLC since 1996; a general
partner of Kohlberg Kravis Roberts & Co., L.P. in 1995; and an executive of
Kohlberg Kravis Roberts & Co., from 1987 to 1994. Mr. Robbins also serves as a
member of the Board of Directors of Borden, Inc., Borden Chemicals & Plastics,
IDEX Corporation, Kindercare Learning Centers, Inc., Newsquest Capital PLC,
Newsquest Media Group, Ltd. and Glenisla Group Ltd. (U.K.).
LEE C. STEWART has served as a director of the Company since December 1996.
Mr. Stewart has been Vice President of Union Carbide Corporation since 1996, and
was an investment banker with Bear Stearns & Co. Inc. for more than nine years
prior thereto.
SCOTT M. STUART has served as a director of the Company since October 1996.
Mr. Stuart has been a Member of KKR & Co., LLC since 1996; general partner of
Kohlberg Kravis Roberts & Co., L.P. in 1995; and an executive of Kohlberg Kravis
Roberts & Co. from 1986 to 1994. Mr. Stuart also serves as a member of the Board
of Directors of Borden, Inc., Newsquest Capital PLC, World Color Press, Inc.,
Glenisla Group Ltd. (U.K.), KC Cable, KSL Golf Holdings, Inc., KSL Land
Corporation, KSL Recreation Corporation and Newsquest Media Group, Ltd.
GOVERNANCE AGREEMENT
In connection with the Borden Acquisition, Borden and the Company entered
into a Governance Agreement, dated as of June 20, 1996 (the "Governance
Agreement"), with respect to certain matters relating to the corporate
governance of the Company. The Governance Agreement provides that the Company's
Board of Directors shall initially consist of ten members. Borden is entitled to
designate four persons to serve on the Board, subject to reduction in the event
that Borden's stockholdings are reduced below 25% of the outstanding common
stock of the Company (the "Shares"), and to participate in the selection of one
independent director so long as Borden's stockholdings remain above 10%.
12
<PAGE>
The Governance Agreement also provides that Borden will have certain rights
to designate directors to serve on specified committees, that the approval of a
number of directors that represent at least 66 2/3% of the total number of
directors will be required on certain specific Board actions, and that, as long
as Borden owns in excess of 25% of Shares, a Borden-designated director must be
part of the 66 2/3% majority. The Governance Agreement also provides Borden with
preemptive rights to purchase additional Shares in order to maintain its
percentage ownership of the Shares and that Borden may not acquire Shares such
that for the three-year period following the closing of the Borden Acquisition
its percentage ownership of Shares would increase beyond the number of Shares it
acquired pursuant to the Borden Acquisition and that Borden is subject to
certain additional standstill provisions for the three-year period.
ITEM 2. PROPERTIES
The Company's principal executive and administrative offices are located in
a leased building in South Hackensack, New Jersey.
The Company owns and leases numerous properties in the ordinary course of
business. Currently such properties consist of ten manufacturing facilities in
the United States and Canada, twelve in Europe, three in Australia, four in New
Zealand and one in Japan, pursuant to a joint venture with Hitachi. Sales
offices are assigned to each of the Company's plants.
In addition, as part of the Borden Acquisition, the Company acquired ten
leaseholds for warehouse and office facilities, nine in the United States and
one in Canada. The leases expire at various times through 2018. Some of these
leases provide renewal options.
The Company is in the process of divesting itself of certain of these
facilities, including those located at Moonachie, New Jersey; Scarborough,
Ontario, Canada; Les Ulis, France; and Remschied, Germany.
The following chart sets forth the properties owned and operated by the
Company:
<TABLE>
<CAPTION>
APPROXIMATE
LOCATION(1) SQUARE FOOTAGE
- -------------------------------------------------------------------------------------------------- --------------
<S> <C>
NORTH AMERICA.....................................................................................
Griffin, Georgia.................................................................................. 330,000
Wright Township, Pennsylvania..................................................................... 328,000
North Andover, Massachusetts...................................................................... 250,000
Matthews, North Carolina.......................................................................... 242,000
Gainesville, Texas................................................................................ 220,000
Alsip, Illinois................................................................................... 182,000
West Hill, Ontario, Canada........................................................................ 117,000
Chino, California................................................................................. 115,000
Waxahachie, Texas................................................................................. 100,000
Edmonton, Alberta, Canada......................................................................... 15,000
ASIA/PACIFIC
Auckland, New Zealand............................................................................. 154,000
Christchurch, New Zealand......................................................................... 128,000
Shimodate, Japan.................................................................................. 69,000
Sydney, Australia................................................................................. 180,000
Melbourne, Australia.............................................................................. 45,000
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE
LOCATION(1) SQUARE FOOTAGE
- -------------------------------------------------------------------------------------------------- --------------
<S> <C>
EUROPE
Apeldoorn, Holland................................................................................ 267,000
Ghlin, Belgium.................................................................................... 223,000
Turate, Italy..................................................................................... 220,000
Fecamp, France.................................................................................... 105,000
Southampton, England.............................................................................. 61,000
Alicante, Spain................................................................................... 52,000
Barbezieux, France................................................................................ 25,000
</TABLE>
- ------------------------
1) Where the Company maintains multiple facilities at any particular location,
the square footage has been aggregated. All facilities are owned by the
Company except for the following facilities, subject to leasehold interests,
which begin expiring in 1999: Auckland, New Zealand (both facilities);
Christchurch, New Zealand (one of two facilities); Sydney, Australia (one of
three facilities); and Melbourne, Australia.
The Company believes that all of its properties are well maintained and in
good condition, and that the current operating facilities are adequate for its
present and immediate future business needs. However, the Company is in the
process of increasing capacity and automating some manufacturing operations in
Europe and relocating and consolidating some manufacturing operations in North
America.
At November 1, 1996, the Company had two separate manufacturing operations
in North Andover, Massachusetts. The Company closed and sold one of these
facilities and transferred the operations and equipment to other Company
manufacturing facilities. In addition, as part of the Borden Acquisition, the
Company acquired ten leaseholds for warehouse and office facilities, nine in the
United States and one in Canada. The Company has closed down many of these
facilities and transferred warehouse and office operations to existing Company
facilities.
In aggregate, the Company currently utilizes approximately 4 million square
feet of manufacturing, office and warehouse space excluding the North Andover
facility being closed. Sales offices are assigned to each of the Company plants.
As of October 31, 1998, the Company's manufacturing facilities had a combined
average annual production capacity exceeding 1 billion pounds.
ITEM 3. LEGAL PROCEEDINGS
The Company is, from time to time, a party to litigation arising in the
normal course of its business. The Company believes that there are currently no
material legal proceedings the outcome of which would have a material adverse
effect on the Company's financial position or its results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
14
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
AEP's Common Stock is quoted on the Nasdaq National Market ("NNM") under the
symbol "AEPI." The high and low closing prices for the Company's Common Stock,
as reported in NNM, for the Company's two fiscal years ended October 31, 1998,
are as follows:
<TABLE>
<CAPTION>
PRICE RANGE
--------------------
FISCAL YEAR AND PERIOD HIGH LOW
- ----------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
1998
First quarter................................................................................ $ 35.00 $ 27.00
Second quarter............................................................................... 38.50 31.50
Third quarter................................................................................ 34.50 19.88
Fourth quarter............................................................................... 22.00 14.88
1997
First quarter................................................................................ $ 58.00 $ 46.00
Second quarter............................................................................... 60.75 41.75
Third quarter................................................................................ 50.00 22.00
Fourth quarter............................................................................... 39.13 24.00
</TABLE>
On December 31, 1998, the closing price for a share of the Company's Common
Stock, as reported by NNM, was $21.75.
As of December 31, 1998, the Company's Common Stock was held by
approximately 1,700 stockholders of record or through nominee or street name
accounts with brokers.
No dividends were paid to stockholders during the periods presented. The
Company paid cash dividends to its stockholders each fiscal quarter commencing
with the quarter ended July 31, 1993, through the quarter ended October 31,
1995. The Board of Directors announced in December 1995 the suspension of future
dividends and that the funds would be reinvested into the Company. The
restoration of future dividends is within the discretion of the Board of
Directors and will depend upon business conditions, earnings, the financial
condition of the Company and other relevant factors. The Company is subject to a
number of covenants under the term loan and revolving credit facility and the
indenture pursuant to which the 9.875% Senior Subordinated Notes were issued,
including restrictions on the amount of dividends that may be paid.
On October 11, 1996 the Company issued 2,412,818 shares of Common Stock to
Borden in partial payment of the Purchase Price for the Acquisition.
15
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Net sales............................................ $ 701,239 $ 759,123 $ 270,534 $ 242,886 $ 184,669
Operating profit..................................... $ 37,695 $ 39,852 $ 15,538 $ 25,224 $ 19,734
Income before provision for income taxes............. $ 5,462 $ 13,266 $ 4,411 $ 22,399 $ 18,801
Income from continuing operations and before
extraordinary item................................. $ 3,167 $ 8,571 $ 2,553 $ 13,676 $ 11,404
(Loss) from discontinued operations.................. $ (2,904) -- -- -- --
Net income........................................... $ 263 $ 8,571 $ 2,553 $ 13,486 $ 11,404
Earning per share:
Basic income from continuing operations and before
extraordinary item............................... $ .44 $ 1.19 $ 0.52 $ 1.99 $ 1.55
Basic loss from discontinued operations and before
extraordinary item............................... $ (.40) -- -- -- --
Basic net income..................................... $ .04 $ 1.19 $ 0.52 $ 1.96 $ 1.55
Diluted income from continuing operations and before
extraordinary item................................. $ .43 $ 1.15 $ 0.50 $ 1.94 $ 1.53
Diluted loss from discontinued operations and before
extraordinary item................................. $ (.40) -- -- -- --
Diluted net income................................... $ .03 $ 1.15 $ 0.50 $ 1.92 $ 1.53
Dividends declared and paid per common share (a)..... $ 0.00 $ 0.00 $ 0.00 $ 0.10 $ 0.08
BALANCE SHEET DATA
Total assets......................................... $ 596,198 $ 613,083 $ 611,665 $ 143,287 $ 118,496
Long-term debt....................................... $ 301,817 $ 311,522 $ 325,438 $ 82,523 $ 23,500
Shareholders' Equity................................. $ 86,301 $ 87,982 $ 95,133 $ 16,808 $ 61,789
</TABLE>
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
16
<PAGE>
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.
RESULTS OF OPERATIONS
YEAR ENDED OCTOBER 31, 1998 AS COMPARED TO YEAR ENDED OCTOBER 31, 1997
Net sales in Fiscal 1998, were $701,239,000, a decrease of $57,884,000 or
7.6% from Fiscal 1997. Net sales in North America decreased to $430,985,000 in
Fiscal 1998 from $469,631,000 for Fiscal 1997, or 8%, primarily due to a 9%
decrease in per unit selling prices as a result of lower raw material costs
which were passed though to customers. This decrease in selling prices was
partially offset by an increase in sales volume of 2% in North America. Net
sales in Europe decreased to $192,248,000 in Fiscal 1998 from $194,108,000 in
Fiscal 1997, or 1%, primarily due to an 7% decrease in selling prices (local
currency) partially offset by a 6% increase in sales volume. Net sales in
Asia/Pacific decreased to $78,006,000 in Fiscal 1998 from $80,586,000 in Fiscal
1997, or 3%. The Asia/Pacific region had a 22% sales volume increase as a result
of the Company's acquisition of certain businesses during the prior year offset
by a decrease of 21% in average selling prices (local currency), because of the
change in the product mix as a result of the aforementioned acquisitions, which
the acquired business had average lower selling prices, and from economic
pressures in the region. The Company's net sales for Fiscal 1997 included net
sales of $14,798,000 from its South African operation, which was sold November
1, 1997.
Gross profit for Fiscal 1998 amounted to $156,811,000 compared to
$159,732,000, in Fiscal 1997, a decrease of $2,921,000. North America
experienced an increase in gross profit of $3,191,000 or 3% for Fiscal 1998 as a
result of increased utilization of plant facilities, increased sales volume, and
from 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 facilities. Gross profit for the Asia/Pacific region decreased $2,744,000 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% as compared to the prior year, and
reduced plant utilization for the first half of Fiscal 1998. The Company's gross
profit for Fiscal 1997 included $3,850,000 from its South African operation,
which was sold November 1, 1997.
Operating expenses for Fiscal 1998 were $119,116,000 as compared to
$119,880,000 in Fiscal 1997. This net decrease of $764,000 can be attributed to
a reduction in selling expenses of $2,173,000 as a result of the realignment of
the Company's worldwide sales force implemented at the beginning of Fiscal 1998.
This reduction in selling expenses was offset by an increase of $4,145,000 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. The Company's general and administrative expenses for Fiscal
1998 also increased by $1,191,000, which had no major increase in any one area.
The operating expenses for the year ended October 31, 1997 included $3,927,000
related to its South African operation, which was sold November 1, 1997.
Interest expense for Fiscal 1998, amounted to $33,780,000, an increase of
$3,719,000 from the prior year. This increase in interest expense is due to the
Company's issuance of $200,000,000 of 9.875% Senior
17
<PAGE>
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 $1,547,000, which includes foreign
currency exchange and hedge gains of $778,000 realized during the fiscal year,
$419,000 in interest income, 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 $208,000 in rental income and other miscellaneous net
expenses of $243,000 for the period.
Net income from continuing operations for Fiscal 1998 decreased by 64% to
$3,167,000 from $8,571,000 in Fiscal 1997. This decrease was due primarily to
the reduction in gross profit realized in the Company's Asia/Pacific market
place, as well as increased interest expense and a reduction in other income
from the prior year.
YEAR ENDED OCTOBER 31, 1997 AS COMPARED TO YEAR ENDED OCTOBER 31, 1996
Net sales for Fiscal 1997 increased by 181% to $759,123,000 from
$270,534,000 during Fiscal 1996. This increase in net sales reflects the Borden
Acquisition which resulted in increased net sales in North America of
$199,097,000, in Europe of $208,906,000 and in the Asia/Pacific region of
$80,586,000. The Company believes that sales during Fiscal 1997 were negatively
impacted as a result of volume and price declines in the overall North America
stretch wrap business due to overcapacity which was partially offset by volume
increases in the Company's other product lines. Europe and Asia/Pacific had an
increase in sales volume which was offset by a decrease in average selling
prices when compared to the proforma results in the prior year.
Gross profit for Fiscal 1997 increased by 167% to $159,732,000 from
$59,770,000 during the same period in Fiscal 1996. This increase in gross profit
resulted from the Borden Acquisition and consisted of increased gross profit in
of $43,564,000 North America, of $41,777,000 in Europe and of $14,621,000 in the
Asia/Pacific region. Gross profit as a percentage of sales during 1997 declined
to 21.0% from 22.1% during Fiscal 1996 primarily as a result of overcapacity and
intense competition in the North America stretch wrap business, which was
partially offset by cost savings associated with the Borden Acquisition. This
overcapacity resulted in reduced sales volume and underutilization of plant
facilities, each of which negatively impacted margins as labor and other fixed
costs were spread over fewer sales. Europe had a slight increase in gross
margins due to increased sales volumes, which lowered production costs by
increasing plant efficiencies. Asia/Pacific had decreased gross profit margins
primarily due to the deterioration of economic conditions in the regions which
resulted in lower average selling prices.
Operating expenses for Fiscal 1997 increased 171% to $119,880,000 from
$44,232,000 during Fiscal 1996. This increase of $75,648,000 in operating
expenses can be attributed to the businesses acquired from Borden and the
operating expenses associated with them. Operating expenses as a percentage of
sales during Fiscal 1997 decreased slightly to 15.8% from 16.3% during Fiscal
1996. Operating expenses in Fiscal 1997 reflect certain synergies achieved as a
result of the Borden Acquisition through the consolidation of administrative and
sales personnel and warehouse facilities, partially offset by higher than
expected costs associated with closing operations at a North Andover plant and
relocating certain of those operations to the Griffin, Georgia plant. The
Company incurred increased warehouse and delivery costs during the current
period due to the installation of new delivery systems to accommodate this
consolidation.
Interest expense for Fiscal 1997 increased by 161% to $30,061,000 from
$11,517,000 during Fiscal 1996. This increase in interest expense is primarily
due to increased borrowings used to finance the Borden Acquisition and an
additional charge of $3,330,000 for loan origination fees applicable to
amendments to the current credit facility in connection with the Company's
issuance of its $200,000,000 of 9.875% Senior Subordinated Notes. A decline in
interest rates during Fiscal 1997 partially offset this increase for the period
18
<PAGE>
Other income for Fiscal 1997 increased to $3,475,000 from $390,000 in Fiscal
1996. The amount for the Fiscal 1997 includes $1,278,000 in interest income,
$198,000 in foreign currency exchange gains realized during the period, $416,000
in gain from the sale of securities and income from investment in a joint
venture of $317,000. Also included in other income were $256,000 in gains on
sales of machinery and equipment, $121,000 in rental income and other
miscellaneous income earned for the period.
Net income for Fiscal 1997 increased by 236% to $8,571,000 from $2,553,000
in Fiscal 1996. This increase was due primarily to additional sales volume
attributable to the Borden Acquisition, offset by the aforementioned
overcapacity in the stretch wrap business, as well as increased interest
expense.
YEAR ENDED OCTOBER 31, 1996 AS COMPARED TO YEAR ENDED OCTOBER 31, 1995
Net sales for Fiscal 1996 increased by 11% to $270,534,000 from $242,886,000
during the Company's fiscal year ended October 31, 1995 ("Fiscal 1995"). This
increase can be attributed to the additional sales revenue generated from the
Borden Acquisition. The business of the Company excluding Borden had an increase
in sales volume of 19%, which was offset by an 18% decrease in per unit selling
prices, which decrease was primarily due to corresponding reductions in market
prices for resins.
Gross profit for Fiscal 1996 decreased by 1% to $59,770,000 from $60,373,000
in Fiscal 1995. The Fiscal 1996 gross profit was adversely impacted by
approximately $7,300,000 because the Company absorbed inventory valuation
charges of $5,600,000 related to the acquisition of Borden inventory and an
additional charge during the fourth quarter of Fiscal 1996 of $1,700,000
incurred in the build up of Company inventory levels. These charges were
primarily a result of the Company's consistent costing of its inventories using
the last-in, first-out (LIFO) method. Gross profit as a percentage of sales
during Fiscal 1996 declined to 22.1% from 24.9% during Fiscal 1995, primarily as
a result of the aforementioned inventory charges which more than offset the
increases in gross profit margin attributable to the increase in sales volume
net of the reduction in per unit sales prices.
Operating expenses for Fiscal 1996 increased by 26% to $44,232,000 from
$35,149,000 in Fiscal 1995. Approximately $5,200,000 of the Fiscal 1996 amount
can be attributed directly to the additional expenses absorbed by the Company
for the 20 day period of operations following the Borden Acquisition. The AEP
business had an increase of $2,200,000, or 13%, in shipping and warehousing
costs and an increase of $1,500,000, or 12%, in selling expenses which were
directly attributable to the 19% increase in sales volume. Operating expenses as
a percentage of sales during Fiscal 1996 increased to 16.3% from 14.5% during
Fiscal 1995, primarily as a result of the 18% decrease in per unit selling
prices partially offset by the increase in sales volume.
Interest expense for Fiscal 1996 increased by 259% to $11,517,000 from
$3,209,000 in Fiscal 1995. This increase can be attributed to new credit
facilities and increased borrowings during Fiscal 1996. In Fiscal 1996, the
Company incurred interest expense associated with the credit facility that was
put in place during the fourth quarter of Fiscal 1995, which financed the
Company's purchase of shares of the Company's Common Stock (the "Stock
Repurchase") for its treasury from its stockholders and chief executive officer.
In October 1996, the Company replaced that credit facility with the Credit
Agreement used to finance the Borden Acquisition and retire the then existing
credit facility. The Company absorbed an additional charge to interest expense
in Fiscal 1996 of $2,900,000 for loan origination fees applicable to the old
credit facility. Interest expense as a percentage of sales increased to 4.3%
during Fiscal 1996 from 1.3% during Fiscal 1995, primarily as a result of the
additional debt incurred as a result of the Stock Repurchase and the Borden
Acquisition.
Other income in Fiscal 1996 amounted to $390,000, which consisted primarily
of interest and 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.
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<PAGE>
Net income for Fiscal 1996 decreased by 81% to $2,553,000 from $13,486,000
in Fiscal 1995. This decrease was due primarily to the aforementioned charges
totaling $7,300,000 related to valuation of inventories and increased interest
expense incurred during the period, including the charge of $2,900,000 for loan
origination fees on the old credit facility.
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 $46,632,000 at October 31, 1998,
compared to $56,045,000 at October 31, 1997. This decrease of $9,413,000 in
working capital is primarily a result of 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 facilities, consisting of a term
credit facility in the amount of $350,000,000 and a revolving credit facility
for an amount up to $100,000,000. The proceeds borrowed under the Credit
Agreement were used to pay the $263,000,000 cash portion of the purchase price
for the Borden Acquisition, to repay the $95,400,000 balance under the then
existing term credit and revolving credit obligations and to pay the expenses
and related costs of the Borden Acquisition and the borrowing under the Credit
Agreement. The term loan commitment expired on the date of the closing of the
Credit Agreement and the borrowing of the term loan thereunder. Amounts repaid
or prepaid with respect to the term loan may not be reborrowed. As of October
31, 1998, there was $112,000,000 outstanding under the term credit facility and
no outstanding borrowings under the revolving credit facility.
As a result of the Company's high degree of leverage and the effect on net
sales that occurred as a result of overcapacity in the domestic stretch wrap
industry, the Company believed there was a substantial likelihood that it would
fail to maintain certain financial ratios, including minimum fixed charge
coverage and leverage ratios, at the levels required by the Credit Agreement.
The Company received a waiver relating to such ratios and entered into an
amendment to the Credit Agreement.
The amendment, among other things, modifies the financial covenants to
require maintenance of such ratios at levels which the Company believes it can
achieve, although there can be no assurance in this regard.
On November 19, 1997, the Company completed an offering of $200,000,000 in
aggregate principal amount of 9.875% Senior Subordinated Notes due November 15,
2007. The issue price was 99.224% resulting in an effective yield of 10%. The
net proceeds from the Notes have been used to repay a portion of the
indebtedness outstanding under the Company's outstanding Credit Agreement. After
giving retroactive effect to the sale of the Notes on November 19, 1997, and the
application of the net proceeds therefrom, at October 31, 1997, the Company
would have had $128,000,000 outstanding under the term credit facility, no
outstanding borrowings under the revolving credit facility, and $200,000,000
Notes due November 2007 outstanding.
The Company also has a $10,000,000 unsecured revolving credit facility
available for working capital purposes. At October 31, 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
20
<PAGE>
$16,300,000 and approximately $52,000,000 was available for borrowing.
Borrowings from these facilities are used to support operations at such
subsidiaries and are generally serviced by cash flow from operations at such
subsidiaries. Approximately $7,000,000 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 $7,924,000 during Fiscal 1997. Net cash
provided by operating activities during Fiscal 1998 was $60,791,000 primarily
due to depreciation and amortization expense of $34,292,000, net income from
continuing operations of $3,167,000, and net increases in other operating assets
and liabilities of $23,054,000. In each period, the net decreases in other
operating assets and liabilities reflect normal operating activity.
Net cash used in investing activities during Fiscal 1998 was $9,321,000,
resulting primarily from the net investment in capital expenditures of
$25,727,000 which was offset by proceeds received from the sale of the Company's
rigids businesses for $10,940,000 and the sale of the Company's South African
subsidiary of $2,284,000. The Company also had $3,182,000 in sales of machinery
and equipment for Fiscal 1998.
Net cash used by financing activities during Fiscal 1998 was $42,188,000,
reflecting net borrowings of $198,500,000 from the issuance of the Company's
Subordinated Notes and proceeds from stock issuance's of $857,000, offset by a
repayment of $196,591,000 on the term loan and net repayments made under
worldwide bank loan agreements of $44,954,000. The remaining increases and
decreases in the components of the Company's financial position reflect normal
operating activity.
The Company anticipates that in its fiscal year ending October 31, 1999
("Fiscal 1999") capital expenditures will be approximately $33,000,000, of which
approximately $10,200,000 has been committed and approximately $8,000,000 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 $47,000,000, including scheduled principal payments of $15,000,000
and interest expense of approximately $32,000,000. The Company also has
approximately $16,000,000 of foreign bank borrowings due to be paid in Fiscal
1999, which the Company expects will be refinanced.
The Company believes that its cash flow from operations, combined with the
availability of funds under the Credit Agreement and credit lines available to
the Company's foreign subsidiaries for local currency borrowings, will be
sufficient to meet the Company's working capital, capital expenditure and debt
service requirements for the foreseeable future.
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
21
<PAGE>
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.
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.
22
<PAGE>
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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For information concerning this item, see "Item 1. Business--Executive
Officers of the Company" of Part I hereof and the table and text under the
caption "Name of Nominee and Certain Biographical Information" in the Proxy
Statement to be filed with respect to the Annual Meeting of Shareholders to be
held on April 13, 1999 (the "Proxy Statement"), which information is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
For information concerning this item, see the text and table under the
caption "Compensation of Executive Officers" in the Proxy Statement, which
information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
For information concerning this item, see the table and text under the
caption "Information Concerning Certain Shareholders" in the Proxy Statement,
which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information concerning this item, see the text under the caption "Other
Information Concerning Directors, Officers and Shareholders" in the Proxy
Statement, which information is incorporated herein by reference.
23
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements:
The financial statements of the Company filed in this Annual Report on Form
10-K are listed in Item 8.
2. Financial Statement Schedules:
The financial statement schedules of the Company filed in this Annual Report
on Form 10-K are listed in the attached Index to Financial Statement Schedules.
3. Exhibits:
The exhibits required to be filed as part of this Annual Report on Form 10-K
are listed in the attached Index to Exhibits.
(b) Current Reports on Form 8-K:
None
24
<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
December 17, 1998
25
<PAGE>
AEP INDUSTRIES INC.
CONSOLIDATED BALANCE SHEETS AS OF OCTOBER 31, 1998 AND 1997
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................................... $ 3,994 $ 4,143
Accounts receivable, less allowance of $5,497 and $5,226 in 1998 and 1997, respectively,
for doubtful accounts................................................................. 101,393 112,219
Inventories, net........................................................................ 91,930 92,021
Net assets held for sale................................................................ -- 15,000
Other current assets.................................................................... 16,509 12,978
---------- ----------
Total current assets................................................................ 213,826 236,361
PROPERTY, PLANT AND EQUIPMENT, at cost, less accumulated depreciation and amortization.... 285,008 292,743
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
OTHER ASSETS.............................................................................. 19,545 8,552
---------- ----------
Total assets........................................................................ $ 596,198 $ 613,083
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of debt................................................................. $ 30,968 $ 65,484
Accounts payable........................................................................ 90,455 74,720
Accrued expenses........................................................................ 45,771 40,112
---------- ----------
Total current liabilities........................................................... 167,194 180,316
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.......................................... $ 596,198 $ 613,083
---------- ----------
---------- ----------
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
26
<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.................................................................. $ 701,239 $ 759,123 $ 270,534
COST OF SALES.............................................................. 544,428 599,391 210,764
---------- ---------- ----------
Gross profit......................................................... 156,811 159,732 59,770
OPERATING EXPENSES:
Delivery and warehousing................................................. 49,480 46,492 20,825
Selling.................................................................. 39,604 43,363 15,701
General and administrative............................................... 30,032 30,025 7,706
---------- ---------- ----------
Total operating expenses............................................. 119,116 119,880 44,232
---------- ---------- ----------
Income from operations............................................... 37,695 39,852 15,538
OTHER INCOME (EXPENSE):
Interest expense......................................................... (33,780) (30,061) (11,517)
Other, net............................................................... 1,547 3,475 390
---------- ---------- ----------
(32,233) (26,586) (11,127)
Income from continuing operations before provision for income
taxes.............................................................. 5,462 13,266 4,411
---------- ---------- ----------
PROVISION FOR INCOME TAXES................................................. 2,295 4,695 1,858
---------- ---------- ----------
Income from continuing operations.................................... 3,167 8,571 2,553
DISCONTINUED OPERATIONS
(Loss) from operations of discontinued Rigids businesses (less applicable
income tax benefit of $1,571).......................................... (2,779) -- --
(Loss) on disposal of Rigids businesses (less applicable income tax
benefit of $932)....................................................... (125) -- --
---------- ---------- ----------
Net Income............................................................... $ 263 $ 8,571 $ 2,553
---------- ---------- ----------
---------- ---------- ----------
EARNINGS PER SHARE:
Basic income from continuing operations.................................. $ 0.44 $ 1.19 $ 0.52
Basic loss from discontinued operations.................................. (0.40) -- --
---------- ---------- ----------
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................................ $ 0.43 $ 1.15 $ 0.49
Diluted loss from discontinued operations................................ (0.40) -- --
---------- ---------- ----------
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.
27
<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
SHARES AMOUNT SHARES AMOUNT CAPITAL ADJUSTMENT GAIN
--------- ----------- ----------- --------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT OCTOBER 31, 1995............ 7,437 $ 74 2,633 $ (58,304) $ 7,483 $ -- $ --
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............................ -- -- -- -- -- -- --
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
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............................ -- -- -- -- -- -- --
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) --
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............................ -- -- -- -- -- -- --
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) --
--------- ----- ----------- --------- ----------- ----------- -------
--------- ----- ----------- --------- ----------- ----------- -------
<CAPTION>
RETAINED
EARNINGS
-----------
<S> <C>
BALANCES AT OCTOBER 31, 1995............ $ 67,555
Issuance of common stock upon exercise
of stock options.................... --
Issuance of common stock pursuant to
stock purchase plan................. --
Issuance of common stock pursuant to
acquisition of Borden Global
Packaging........................... --
Net income............................ 2,553
Purchase of treasury stock............ --
Translation adjustments............... --
Net unrealized investment gain........ --
-----------
BALANCES AT OCTOBER 31, 1996............ 70,108
Issuance of common stock upon exercise
of stock options.................... --
Issuance of common stock pursuant to
stock purchase plan................. --
Tax benefit from stock option
exercises...........................
Net Income............................ 8,571
ESOP contribution..................... --
Sale of securities.................... --
Translation adjustments............... --
-----------
BALANCES AT OCTOBER 31, 1997............ 78,679
Issuance of common stock upon Exercise
of stock options.................... --
Issuance of common stock pursuant to
stock purchase plan................. --
Tax benefit from stock option
exercises........................... --
Net Income............................ 263
ESOP contribution..................... --
Translation adjustments............... --
-----------
BALANCES AT OCTOBER 31, 1998............ $ 78,942
-----------
-----------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
28
<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 from discontinued operations................................................ 2,779 -- --
Loss from disposal of Rigids..................................................... 125 -- --
Depreciation and amortization.................................................... 34,292 32,651 12,534
ESOP contribution................................................................ 1,313 1,031 --
Other............................................................................ (320) (989) --
Provision for losses on accounts receivable and inventory........................ 2,496 2,605 527
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................................................ 5,453 (9,561) (4,383)
(Increase) decrease in inventories............................................... (2,274) 1,354 4,393
(Increase) decrease in other current assets...................................... (3,899) 2,749 (1,573)
(Increase) decrease in other assets.............................................. (12,826) (18,868) 11,332
Decrease in goodwill............................................................. 1,088 8,423 --
Increase (decrease) in accounts payable.......................................... 17,315 6,393 (8,576)
Increase (decrease) in accrued expenses.......................................... 6,418 (9,020) (9,759)
Increase in other long term liabilities.......................................... 7,992 7,943 --
--------- --------- ---------
Net cash provided by operating activities.................................... 60,791 39,316 7,336
--------- --------- ---------
--------- --------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Acquisition of Borden Global Packaging, net of cash acquired..................... -- -- (254,939)
Capital expenditures............................................................. (25,727) (39,352) (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........................................ (9,321) (43,536) (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............................................. (9,431) (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>
29
<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 the time of disposition. The cost of maintenance and
repairs is charged to expense as incurred.
30
<PAGE>
AEP INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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 $1,602,000, $2,192,000, and $635,000 for 1998, 1997 and 1996,
respectively, was incurred for such research and development.
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 period of expected benefit. 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.
31
<PAGE>
AEP INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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.
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
32
<PAGE>
AEP INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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 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.
33
<PAGE>
AEP INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) ACQUISITION OF BUSINESS: (CONTINUED)
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.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
OCTOBER 31, 1996
------------------
<S> <C>
(UNAUDITED)
<CAPTION>
(IN THOUSANDS,
EXCEPT
PER SHARE AMOUNTS)
<S> <C>
Net Sales................................................................. $ 765,449
Operating Income.......................................................... 42,227
Net Income................................................................ 10,019
Earnings per Share........................................................ $ 1.36
</TABLE>
These pro forma results have been prepared for comparative purposes only.
They do not purport to be indicative of the results of the operations which
actually would have resulted had the combination been in effect on November 1,
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--
<TABLE>
<CAPTION>
OCTOBER 31,
--------------------
<S> <C> <C>
1998 1997
--------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Raw materials........................................................... $ 21,319 $ 22,212
Finished goods.......................................................... 67,255 67,246
Supplies................................................................ 4,774 4,060
--------- ---------
93,348 93,518
Less: Inventory reserve................................................. 1,418 1,497
--------- ---------
Inventories, net...................................................... $ 91,930 $ 92,021
--------- ---------
--------- ---------
</TABLE>
The last-in, first-out (LIFO) method was used for determining the cost of
approximately 58% and 50% of total inventories at October 31, 1998 and 1997,
respectively. Inventories would have been decreased by $4,897,000 and increased
by $2,330,000 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.
34
<PAGE>
AEP INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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
1998 1997 USEFUL LIVES
---------- ---------- ------------------
<S> <C> <C> <C>
(IN THOUSANDS)
Land.............................................. $ 14,447 $ 15,164
Buildings......................................... 74,452 76,601 15 to 31.5 years
Machinery and equipment........................... 289,326 260,327 3 to 16 years
Furniture and fixtures............................ 8,259 7,461 9 years
Leasehold improvements............................ 2,027 2,293 6 to 25 years
Motor vehicles.................................... 954 3,924 3 years
Construction in progress.......................... 14,014 16,471
---------- ----------
403,479 382,241
Less--Accumulated depreciation and amortization... 118,471 89,498
---------- ----------
$ 285,008 $ 292,743
---------- ----------
---------- ----------
</TABLE>
Maintenance and repairs expense was approximately $13,545,000, $13,500,000,
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--
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Payroll and employee related............................................ $ 13,957 $ 15,147
Interest................................................................ 10,425 3,293
Taxes (other than income)............................................... 3,692 4,325
Customer rebates........................................................ 4,603 6,994
Insurance related....................................................... 2,951 2,558
Other................................................................... 10,143 7,795
--------- ---------
$ 45,771 $ 40,112
--------- ---------
--------- ---------
</TABLE>
35
<PAGE>
AEP INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) DEBT:
A summary of the components of debt is as follows--
<TABLE>
<CAPTION>
OCTOBER 31,
----------------------
<S> <C> <C>
1998 1997
---------- ----------
<CAPTION>
(AMOUNTS IN TABLE
STATED IN THOUSANDS)
<S> <C> <C>
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
---------- ----------
---------- ----------
</TABLE>
- ------------------------
(a) On October 11, 1996, to facilitate the acquisition of BGP, the Company
entered into a long term credit agreement (the "Credit Agreement") with a
consortium of banks arranged by Morgan Guaranty Trust Company of New York.
The Credit Agreement provided the Company with two credit facilities
consisting of (1) a six year amortizing term loan facility in the amount of
$350,000,000 ($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
36
<PAGE>
AEP INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) DEBT: (CONTINUED)
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 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--
<TABLE>
<CAPTION>
(AMOUNTS IN TABLE
STATED IN
THOUSANDS)
<S> <C>
1999..................................................................... 30,968
2000..................................................................... 21,100
2001..................................................................... 25,374
2002..................................................................... 52,374
2003..................................................................... 374
Thereafter............................................................... 203,992
--------
$ 334,182
--------
--------
</TABLE>
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
37
<PAGE>
AEP INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) DEBT: (CONTINUED)
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:
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
38
<PAGE>
AEP INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) SHAREHOLDERS' EQUITY: (CONTINUED)
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 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--
<TABLE>
<CAPTION>
PURCHASE
NUMBER OF PRICE
SHARES PER SHARE
----------- -----------
<S> <C> <C>
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
-----------
-----------
</TABLE>
39
<PAGE>
AEP INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) SHAREHOLDERS' EQUITY: (CONTINUED)
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:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Risk-Free Interest Rates................................................ 5.83% 6.56% 6.23%
Expected Lives.......................................................... 7.5 7.2 6.5
Expected Volatility..................................................... 58.5% 41% 43%
</TABLE>
40
<PAGE>
AEP INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) SHAREHOLDERS' EQUITY: (CONTINUED)
The following table summarizes information about stock options outstanding
at October 31, 1998:
<TABLE>
<CAPTION>
NUMBER OF NUMBER
OPTIONS WEIGHTED WEIGHTED EXERCISABLE WEIGHTED
OUTSTANDING AT AVERAGE AVERAGE AT AVERAGE
RANGE OF OCTOBER 31, REMAINING EXERCISE OCTOBER 31, EXERCISE
EXERCISE PRICE 1998 CONTRACTUAL LIFE PRICE 1998 PRICE
- ----------------------------------------------- --------------- ------------------- ----------- --------------- -----------
<S> <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 been determined in accordance with SFAS No.
123, the Company's net income and income (loss) per share would have been as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C> <C>
Net Income (Loss): As Reported $ 263 $ 8,571 $ 2,553
(in thousands) Pro Forma (842) 7,560 2,419
Basic earnings (loss) As Reported $ 0.04 $ 1.19 $ 0.52
per share: Pro Forma (0.12) 1.05 0.50
Diluted earnings (loss) As Reported... $ 0.04 $ 1.15 $ 0.49
per share: Pro Forma (0.12) 1.01 0.47
</TABLE>
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to awards prior to
fiscal 1996 and additional awards in future years are anticipated.
(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 $3,489,000,
$3,030,500 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
41
<PAGE>
AEP INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) PENSIONS AND RETIREMENT SAVINGS PLAN: (CONTINUED)
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:
<TABLE>
<CAPTION>
OCTOBER 31, OCTOBER 31,
1998 1997
----------- -----------
<S> <C> <C>
(IN THOUSANDS)
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)
----------- -----------
----------- -----------
</TABLE>
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:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
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
--------- ---------
--------- ---------
</TABLE>
As BGP was acquired on October 11, 1996, the 1996 net periodic pension costs
for the foreign defined benefit plans were immaterial.
42
<PAGE>
AEP INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) PENSIONS AND RETIREMENT SAVINGS PLAN: (CONTINUED)
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:
<TABLE>
<CAPTION>
OCTOBER 31, OCTOBER 31,
1998 1997
--------------- -----------------
<S> <C> <C>
Discount rate....................................................... 6% 7%
Salary progression rate............................................. 4% 4%
Long term rate of return............................................ 6.5% 6%
</TABLE>
(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 1998, 1997 and 1996, respectively. These
amounts are included in other income.
(12) INCOME TAXES:
The provision for income taxes is summarized as follows--
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-------------------------------
<S> <C> <C> <C>
1998 1997 1996
--------- --------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Current
Federal........................................................ $ -- $ -- $ 976
State and Local................................................ -- -- 416
Foreign........................................................ 1,719 1,991 178
--------- --------- ---------
1,719 1,991 1,570
--------- --------- ---------
Deferred:
Federal and State.............................................. 885 $ 1,101 $ 728
Foreign........................................................ (309) 1,603 (440)
--------- --------- ---------
576 2,704 288
--------- --------- ---------
Total provision for income taxes............................... $ 2,295 $ 4,695 $ 1,858
--------- --------- ---------
--------- --------- ---------
</TABLE>
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.
43
<PAGE>
AEP INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) INCOME TAXES: (CONTINUED)
The tax effects of significant temporary differences which comprise the
deferred tax assets (liabilities) at October 31, 1998 and 1997 are as follows--
<TABLE>
<CAPTION>
OCTOBER 31,
--------------------
<S> <C> <C>
1998 1997
--------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
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
--------- ---------
--------- ---------
</TABLE>
Deferred tax assets are recorded in other current assets and other long term
assets.
<TABLE>
<CAPTION>
OCTOBER 31,
----------------------
<S> <C> <C>
1998 1997
---------- ----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Deferred tax liability
Depreciation........................................................ $ (32,439) $ (26,119)
Other............................................................... (2,007) (866)
---------- ----------
Deferred tax liability............................................ $ (34,446) $ (26,985)
---------- ----------
---------- ----------
</TABLE>
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.
44
<PAGE>
AEP INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) INCOME TAXES: (CONTINUED)
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-
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-------------------------------
<S> <C> <C> <C>
1998 1997 1996
--------- --------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Provision at statutory rate...................................... $ 1,857 $ 4,510 $ 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....................................................... 241 (110) 156
--------- --------- ---------
$ 2,295 $ 4,695 $ 1,858
--------- --------- ---------
--------- --------- ---------
</TABLE>
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 $5,483,000, $5,710,000, 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-
<TABLE>
<CAPTION>
(IN
THOUSANDS)
<S> <C>
1999........................................................................... $ 5,804
2000........................................................................... 4,827
2001........................................................................... 4,022
2002........................................................................... 3,418
2003........................................................................... 3,159
Thereafter..................................................................... 11,397
-------------
$ 32,627
-------------
-------------
</TABLE>
(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
45
<PAGE>
AEP INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(14) COMMITMENTS AND CONTINGENCIES: (CONTINUED)
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>
JANUARY 31, APRIL 30, JULY 31, OCTOBER 31,
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1998
Net sales...................................................... $ 178,292 $ 179,056 $ 173,025 $ 170,866
Gross profit................................................... 39,747 38,746 39,238 39,080
Income from continuing operations.............................. 1,857 662 510 138
Net income (loss).............................................. 1,254 (570) (448) 67
Earnings Per Share:
Basic income from continuing operations...................... $ 0.25 $ 0.09 $ 0.07 $ 0.02
Basic loss from discontinued operations...................... (0.08) (0.17) (0.14) (0.01)
----------- ---------- ---------- -----------
Basic net income........................................... $ 0.17 $ (0.08) $ (0.07) $ 0.01
----------- ---------- ---------- -----------
Diluted income from continuing operations.................... $ 0.25 $ 0.09 $ 0.07 $ 0.02
Diluted loss from discontinued operations.................... (0.08) (0.17) (0.14) (0.01)
----------- ---------- ---------- -----------
Diluted net income......................................... $ 0.17 $ (0.08) $ (0.07) $ 0.01
----------- ---------- ---------- -----------
1997
Net sales...................................................... $ 181,686 $ 190,302 $ 198,031 $ 189,104
Gross profit................................................... 39,475 39,065 39,708 41,484
Net income (loss).............................................. 4,056 1,991 2,214 310
Earnings Per Share:
Basic income from continuing operations...................... $ 0.57 $ 0.28 $ 0.31 $ 0.04
Basic loss from discontinued operations...................... -- -- -- --
----------- ---------- ---------- -----------
Basic net income........................................... $ 0.57 $ 0.28 $ 0.31 $ 0.04
----------- ---------- ---------- -----------
Diluted income from continuing operations.................... $ 0.54 $ 0.27 $ 0.30 $ 0.04
Diluted loss from discontinued operations.................... -- -- -- --
----------- ---------- ---------- -----------
Diluted net income......................................... $ 0.54 $ 0.27 $ 0.30 $ 0.04
----------- ---------- ---------- -----------
</TABLE>
Earnings per share are computed independently for each of the quarters
presented.
46
<PAGE>
AEP INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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>
DEPRECIATION
NET OPERATING CAPITAL AND IDENTIFIABLE
SALES INCOME EXPENDITURES AMORTIZATION ASSETS
---------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
1998
North America................................... $ 430,985 $ 28,659 $ 11,113 $ 23,019 $ 352,813
Europe.......................................... 192,248 7,208 8,645 7,715 172,153
Asia/Pacific.................................... 78,006 1,828 5,969 3,558 55,635
Corporate....................................... -- -- -- -- 15,597
---------- ----------- ------------ ------------ -----------
Total......................................... $ 701,239 $ 37,695 $ 25,727 $ 34,292 $ 596,198
---------- ----------- ------------ ------------ -----------
---------- ----------- ------------ ------------ -----------
1997
North America................................... $ 469,631 $ 28,170 $ 22,628 $ 22,862 $ 353,570
Europe/South Africa............................. 208,906 4,785 9,891 5,867 169,418
Asia/Pacific.................................... 80,586 4,965 6,833 3,922 59,750
Corporate....................................... -- 1,932 -- -- 30,345
---------- ----------- ------------ ------------ -----------
Total......................................... $ 759,123 $ 39,852 $ 39,352 $ 32,651 $ 613,083
---------- ----------- ------------ ------------ -----------
---------- ----------- ------------ ------------ -----------
</TABLE>
Included in Corporate assets are the investment in joint venture and the net
assets held for sale. Included in the Corporate operating income are the income
from joint venture and all elimination and adjusting entries.
As the acquisition of BGP occurred on October 11, 1996, segment information
is not material as of and for the year ending October 31, 1996 and not
applicable prior to the acquisition.
Intersegment sales and export sales are not material. Operating income
includes all costs and expenses directly related to the geographical area.
Identifiable assets are those used in each segment's operations, except net
assets held for sale which represents the fair market value of those assets.
No single customer accounted for more than 10% of sales in any year.
In June 1997, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standards No. 131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 requires disclosures
for each business segment that are similar to current requirements, with the
addition of quarterly disclosures and more detailed geographic disclosures. The
Company is not required to adopt SFAS 131 until the year ending October 31,
1999. SFAS 131 relates solely to disclosure provisions, and therefore will not
have any effect on the results of operations, financial position and cash flows
of the Company.
47
<PAGE>
AEP INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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 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.
48
<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.
49
<PAGE>
AEP INDUSTRIES INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED OCTOBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED DEDUCTIONS BALANCE
BEGINNING 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.............................. $ 5,226 $ 1,871 $ 1,301 $ (299) $ 5,497
----------- ----------- ----------- --------- ---------
----------- ----------- ----------- --------- ---------
Inventory.................................................... $ 1,497 $ 625 $ 888 $ 184 $ 1,418
----------- ----------- ----------- --------- ---------
----------- ----------- ----------- --------- ---------
YEAR ENDED OCTOBER 31, 1997:
Allowance for doubtful accounts.............................. $ 5,097 $ 1,644 $ 1,768 $ 253 $ 5,226
----------- ----------- ----------- --------- ---------
----------- ----------- ----------- --------- ---------
Inventory.................................................... $ 1,810 $ 961 $ 1,106 $ (168) $ 1,497
----------- ----------- ----------- --------- ---------
----------- ----------- ----------- --------- ---------
YEAR ENDED OCTOBER 31, 1996:
Allowance for doubtful accounts.............................. $ 1,421 $ 527 $ 390 $ 3,539A. $ 5,097
----------- ----------- ----------- --------- ---------
----------- ----------- ----------- --------- ---------
Inventory.................................................... $ 0 $ 253 $ -- $ 1,557A. $ 1,810
</TABLE>
- ------------------------
Note A: Amounts were obtained through the purchase of Borden Global Packaging.
50
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report, dated December 17, 1998, included in this Form 10-K, into the
Company's previously filed Registration Statement File Nos. 33-58747 and
33-58743 on Form S-8.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
January 28, 1999
51
<PAGE>
POWER OF ATTORNEY
The registrant and each person whose signature appears below hereby appoint
J. Brendan Barba and Paul M. Feeney as attorneys-in-fact with full power of
substitution, severally, and to execute in the name and on behalf of the
registrant and each such person, individually and in each capacity stated below,
one or more amendments to this annual report which amendments may make such
changes in the report as the attorney-in-fact acting in the premises deems
appropriate and to file any such amendment to the report with the Securities and
Exchange Commission.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
<TABLE>
<S> <C> <C>
Dated: Janujary 29, 1999 AEP INDUSTRIES INC.
By: /s/ J. BRENDAN BARBA
-----------------------------------------
J. Brendan Barba
Chairman of the Board, President and
Principal Executive Officer
</TABLE>
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
Dated: January 29, 1999 AEP INDUSTRIES INC.
By: /s/ J. BRENDAN BARBA
-----------------------------------------
J. Brendan Barba
Chairman of the Board, President and
Principal Executive Officer
Dated: January 29, 1999
By: /s/ PAUL M. FEENEY
-----------------------------------------
Paul M. Feeney
Executive Vice President,
Principal Financial Officer and Director
Dated: January 29, 1999
By: /s/ LAWRENCE R. NOLL
-----------------------------------------
Lawrence R. Noll
Controller, Principal Accounting Officer
and Director
Dated: January 29, 1999
By: /s/ J. KENNETH AVIA
-----------------------------------------
Kenneth Avia
Director
</TABLE>
52
<PAGE>
<TABLE>
<S> <C> <C>
Dated: January 29, 1999
By: /s/ WILLIAM CARTER
-----------------------------------------
William Carter
Director
Dated: January 29, 1999
By: /s/ PAUL E. GELBARD
-----------------------------------------
Paul E. Gelbard
Director
Dated: January 29, 1999
By: /s/ C. ROBERT KIDDER
-----------------------------------------
C. Robert Kidder
Director
Dated: January 29, 1999
By: /s/ CLIFTON S. ROBBINS
-----------------------------------------
Clifton S. Robbins
Director
Dated: January 29, 1999
By: /s/ LEE STEWART
-----------------------------------------
Lee Stewart
Director
Dated: January 29, 1999
By: /s/ SCOTT A. STUART
-----------------------------------------
Scott A. Stuart
Director
</TABLE>
53
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT PAGE
- ------------------- ---------------------------------------------------------------------------- -----------
<C> <S> <C>
3(a) Restated Certificate of Incorporation of the Company as filed April 11, 1997
(incorporated by reference to Exhibit 3(a) to the Quarterly Report on 10-Q
for the quarter ended July 31, 1997)
3(b) Amended and Restated By-Laws of the Company (incorporated by reference to
Exhibit 4 to Registrant's report on Form 8-K, dated October 11, 1996)
10(a) 1985 Stock Option Plan of the Company (incorporated by reference to Exhibit
10(mm) to Amendment No. 2 to Registration Statement on Form S-1 No. 33-2242)
10(b) The Employee Profit Sharing and 401(k) Retirement Plan and Trust as adopted
March 3, 1993 (incorporated by reference to Exhibit 10(g) to Registrant's
Quarterly Report on Form 10-Q for the period ended January 31, 1993)
10(c) 1995 Stock Option Plan of the Company (incorporated by reference to Exhibit
4 to the Registration Statement No. 33-58747 on Form S-8)
10(d) 1995 Employee Stock Purchase Plan of the Company (incorporated by reference
to Exhibit 4 to the Registration Statement No. 33-58743 on Form S-8)
10(e) Lease dated as of March 20, 1990, between the Company and Phillips and
Huyler Assoc., L.P. (incorporated by reference to Exhibit 10(aa) to the
Annual Report on Form 10-K for the year ended October 31, 1990)
10(f)(1) Credit Agreement, dated as of October 11, 1996, among the Company, the
Morgan Guaranty Trust Company, as Agent, and the banks party thereto
(incorporated by reference to Exhibit 3 to Registrant's report on Form 8-K,
dated October 11, 1996)
10(f)(2) Amendment No. 1, dated as of October 24, 1997, to the Credit Agreement dated
as of October 11, 1996, among the Company, the Morgan Guaranty Trust Company
as Agent and the Bank's party thereto
10(g) Tender Offer to Purchase, dated as of August 10, 1995, (incorporated by
reference to Exhibit (a)(1) as filed on August 10, 1995, with Schedule
13E-4)
10(h) Stock Purchase Agreement, dated as of August 2, 1995, between the Company
and J. Brendan Barba (incorporated by reference to Exhibit (c) as filed on
August 10, 1995 with Schedule 13E-4)
10(i)(1) Purchase Agreement, dated as of June 20, 1996, without exhibits, between the
Company and Borden Inc. (incorporated by reference to Exhibit C-1 to
Registrant's report on Form 8-K, dated June 20, 1996)
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT PAGE
- ------------------- ---------------------------------------------------------------------------- -----------
<C> <S> <C>
10(i)(2) Amendment No. 1, dated as of October 11, 1996, to the Purchase Agreement,
dated as of June 20, 1996, between the Company and Borden, Inc.
(incorporated by reference to Exhibit 1(b) to Registrant's report on Form
8-K, dated October 11, 1996)
10(i)(3) Combined Financial Statements of Borden Global Packaging Operations as of
December 31, 1995 and 1994 and for each of the three years in the period
ended December 31, 1995 (incorporated by reference to Annex F to
Registrant's Proxy Statement, dated September 11, 1996)
10(j)(1) Governance Agreement, dated as of June 20, 1996, without exhibits, between
the Company and Borden, Inc. (incorporated by reference to Exhibit C-2 to
Registrant's report on Form 8-K, dated June 20, 1996)
10(j)(2) Amendment No. 1, dated as of October 11, 1996, to the Governance Agreement
dated as of June 20, 1996, between the Company and Borden, Inc.
(incorporated by reference to Exhibit 2(b) to Registrant's report on Form
8-K, dated October 11, 1996)
10(k) Employment Agreement, dated as of October 11, 1996, between the Company and
J. Brendan Barba
10(l) Employment Agreement, dated as of October 11, 1996, between the Company and
Paul M. Feeney
10(m) Purchase Agreement, dated November 14, 1997, among Registrant and J.P.
Morgan Securities, Inc., Morgan Stanley & Co. Incorporated and Salomon
Brothers Inc (incorporated by reference to Exhibit 1 to Registrant's report
on Form 8-K, dated November 19, 1997)
10(n) Registration Rights Agreement, dated as of November 19, 1997, among
Registrant and J.P. Morgan Securities, Inc., Morgan Stanley & Co.
Incorporated and Salomon Brothers, Inc (incorporated by reference to Exhibit
1 to Registrant's report on Form 8-K, dated November 19, 1997)
10(o) Indenture, dated as of November 19, 1997, between the Registrant and The
Bank of New York, as Trustee (incorporated by reference to Exhibit 1 to
Registrant's report on Form 8-K, dated November 19, 1997)
10(p) Agreement for Sale of Business, dated July 18, 1997, between ICI Australia
Limited and ICI Australia Operations PTY Limited as Seller, and Registrant's
subsidiary AEP Industries (Australia) PTY Limited, as Purchaser
(incorporated by Reference to Exhibit 10(p) to the Annual Report on Form
10-K for the year ended October 31, 1997)
23 Consent of Arthur Andersen LLP 51
24 Power of Attorney (see "Power of Attorney" on signature page) 52-53
</TABLE>
55
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AEP
INDUSTRIES INC. FORM 10-K FOR THE YEAR ENDED OCT 31-1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> OCT-31-1998
<CASH> 3,994
<SECURITIES> 0
<RECEIVABLES> 106,890
<ALLOWANCES> 5,497
<INVENTORY> 91,930
<CURRENT-ASSETS> 213,826
<PP&E> 403,479
<DEPRECIATION> 118,471
<TOTAL-ASSETS> 596,198
<CURRENT-LIABILITIES> 167,194
<BONDS> 0
0
0
<COMMON> 100
<OTHER-SE> 86,301
<TOTAL-LIABILITY-AND-EQUITY> 596,198
<SALES> 701,239
<TOTAL-REVENUES> 702,786
<CGS> 544,428
<TOTAL-COSTS> 544,428
<OTHER-EXPENSES> 116,620
<LOSS-PROVISION> 2,496
<INTEREST-EXPENSE> 33,780
<INCOME-PRETAX> 5,462
<INCOME-TAX> 2,295
<INCOME-CONTINUING> 3,167
<DISCONTINUED> (2,904)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 263
<EPS-PRIMARY> .04
<EPS-DILUTED> .03
</TABLE>
