<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 0-14450
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AEP INDUSTRIES INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 22-1916107
(State or other jurisdicton of (IRS Employer Identification No.)
incorporation or organizaiton)
125 PHILLIPS AVENUE 07606
South Hackensack, New Jersey (zip code)
(Address of principal executive offices)
</TABLE>
(201) 641-5600
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report)
------------------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
SHARES
OUTSTANDING AT
CLASS OF COMMON STOCK SEPTEMBER 3, 1999
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<S> <C>
$.01 Par Value 7,392,475
</TABLE>
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<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AEP INDUSTRIES INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 31,
1998
JULY 31, --------------
1999
--------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents...................................................... $ 3,177,000 $ 3,994,000
Accounts receivable, less allowance of $5,668,000 in 1999 and $4,686,000 in
1998 for doubtful accounts................................................... 100,921,000 98,656,000
Inventories, net............................................................... 86,064,000 80,836,000
Net assets of discontinued operations.......................................... 4,550,000 45,146,000
Other current assets........................................................... 15,868,000 16,458,000
-------------- --------------
Total current assets......................................................... 210,580,000 245,090,000
-------------- --------------
PROPERTY, PLANT AND EQUIPMENT, at cost, less
accumulated depreciation and amortization of $119,683,000 in 1999 and
$110,515,000 in 1998......................................................... 236,421,000 250,032,000
GOODWILL, less accumulated amortization of $3,590,000 in 1999 and $2,629,000 in
1998........................................................................... 41,485,000 40,817,000
INVESTMENT IN JOINT VENTURE...................................................... 15,776,000 15,597,000
OTHER ASSETS..................................................................... 52,839,000 40,950,000
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TOTAL ASSETS................................................................. $ 557,101,000 $ 592,486,000
-------------- --------------
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings.......................................................... $ 28,820,000 $ 30,968,000
Accounts payable............................................................... 86,904,000 87,893,000
Accrued expenses............................................................... 38,026,000 44,621,000
-------------- --------------
Total current liabilities.................................................... 153,750,000 163,482,000
LONG-TERM DEBT................................................................... 287,072,000 301,817,000
OTHER LONG TERM LIABILITIES...................................................... 6,657,000 6,440,000
DEFERRED INCOME TAXES............................................................ 35,517,000 34,446,000
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Total liabilities............................................................ 482,996,000 506,185,000
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SHAREHOLDERS' EQUITY:
Preferred stock--$1.00 par value, 1,000,000 shares authorized; none
outstanding.................................................................. --
Common stock--$.01 par value, 30,000,000 shares authorized; 10,082,923 and
10,022,301 shares, issued in 1999 and 1998, respectively..................... 101,000 100,000
Additional paid-in capital..................................................... 92,125,000 91,324,000
Treasury stock--common stock; at cost, 2,696,380 and 2,744,600 shares in 1999
and 1998, respectively....................................................... (59,892,000) (60,963,000)
Retained earnings.............................................................. 67,490,000 78,942,000
Accumulated other comprehensive income......................................... (25,719,000) (23,102,000)
-------------- --------------
Total shareholders' equity................................................... 74,105,000 86,301,000
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................................... $ 557,101,000 $ 592,486,000
-------------- --------------
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</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
2
<PAGE>
AEP INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS AND
COMPREHENSIVE INCOME (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
JULY 31, JULY 31
---------------------------- ------------------------------
1999 1998 1999 1998
------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
NET SALES................................................ $ 172,786,000 $ 164,857,000 $490,438,000 $502,902,000
COST OF SALES............................................ 130,314,000 125,452,000 368,322,000 387,115,000
RESTRUCTURING CHARGE..................................... -- -- 1,457,000 --
------------- ------------- -------------- --------------
Gross profit......................................... 42,472,000 39,405,000 120,659,000 115,787,000
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OPERATING EXPENSES
Delivery and Warehousing............................... 12,612,000 12,504,000 36,503,000 34,617,000
Selling................................................ 9,964,000 9,349,000 29,126,000 28,224,000
General and Administrative............................. 7,312,000 6,866,000 20,893,000 20,901,000
------------- ------------- -------------- --------------
Total operating expenses............................. 29,888,000 28,719,000 86,522,000 83,742,000
------------- ------------- -------------- --------------
Income from operations............................... 12,584,000 10,686,000 34,137,000 32,045,000
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OTHER INCOME (EXPENSE):
Interest expense, net.................................. (7,853,000) (8,391,000) (24,121,000) (24,976,000)
Other, net............................................. 358,000 241,000 1,554,000 496,000
------------- ------------- -------------- --------------
(7,495,000) (8,150,000) (22,567,000) (24,480,000)
------------- ------------- -------------- --------------
Income before provision for income taxes............. 5,089,000 2,536,000 11,570,000 7,565,000
PROVISION FOR INCOME TAXES............................... 2,053,000 992,000 4,628,000 2,950,000
------------- ------------- -------------- --------------
Income from continuing operations.................... 3,036,000 1,544,000 6,942,000 4,615,000
DISCONTINUED OPERATIONS
(Loss) from operation of discontinued businesses (less
applicable income tax benefit of $1,097,000 for the
three months ended July 31, 1998 and $770,000 and
$2,476,000 for the nine months ended July 31, 1999
and 1998)............................................ -- (1,836,000) (1,205,000) (4,223,000)
Loss on disposal of discontinued businesses, including
provision for operating losses through disposal date,
( less applicable income tax benefit of $10,989,000
and $106,000 for the nine months ended July 31, 1999
and 1998)............................................ -- (196,000) (17,189,000) (196,000)
------------- ------------- -------------- --------------
Loss from discontinued operations.................... -- (2,032,000) (18,394,000) (4,419,000)
Net income (loss)...................................... 3,036,000 (488,000) (11,452,000) 196,000
Retained earnings, beginning of period................. 64,454,000 79,363,000 78,942,000 78,679,000
------------- ------------- -------------- --------------
Retained earnings, end of period....................... $ 67,490,000 $ 78,875,000 $ 67,490,000 $ 78,875,000
------------- ------------- -------------- --------------
------------- ------------- -------------- --------------
EARNINGS PER SHARE--Basic:
Income from continuing operations...................... $ 0.41 $ 0.21 $ 0.95 $ 0.64
Loss from discontinued operations...................... $ -- $ (0.28) $ (2.52) $ (0.61)
------------- ------------- -------------- --------------
Basic net income (loss).............................. $ 0.41 $ (0.07) $ (1.57) $ 0.03
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EARNINGS PER SHARE--Diluted:
Income from continuing operations...................... $ 0.40 $ 0.21 $ 0.92 $ 0.64
Loss from discontinued operations...................... $ -- $ (0.28) $ (2.52) $ (0.61)
------------- ------------- -------------- --------------
Diluted net income (loss)............................ $ 0.40 $ (0.07) $ (1.60) $ 0.03
------------- ------------- -------------- --------------
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Consolidated Statements of Comprehensive Income
Net Income (Loss)........................................ $ 3,036,000 $ (488,000) $ (11,452,000) $ 196,000
Other comprehensive income:
Unrealized foreign currency translation adjustments.. (233,000) (2,892,000) (2,617,000) (6,001,000)
------------- ------------- -------------- --------------
Comprehensive (loss) income............................ $ 2,803,000 $ (3,380,000) $ (14,069,000) $ (5,805,000)
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</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
3
<PAGE>
AEP INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED JULY 31,
------------------------------
<S> <C> <C>
1999 1998
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................................... $ (11,452,000) $ 196,000
Adjustments to reconcile net income to net
cash provided by operating activities--
Loss from discontinued operations........................................... 1,205,000 4,223,000
Estimated loss on disposal.................................................. 17,189,000 196,000
Depreciation and amortization............................................... 23,372,000 22,586,000
Net (gain) loss on sale of equipment........................................ (304,000) 73,000
Provision for losses on accounts receivable................................. 1,424,000 1,512,000
Joint venture income........................................................ (179,000) (169,000)
Decrease (Increase) in accounts receivable.................................. (3,458,000) 3,430,000
Decrease (Increase) in inventories.......................................... (5,459,000) 179,000
Decrease (Increase) in other current assets................................. 590,000 (1,971,000)
Decrease (Increase) in net assets of discontinued operations................ 8,886,000 (2,599,000)
Decrease (Increase) in other assets......................................... (11,889,000) (10,978,000)
Increase (decrease) in accounts payable..................................... (989,000) 646,000
Increase (decrease) in accrued expenses..................................... (5,623,000) (2,905,000)
Increase (decrease) in other long term liabilities.......................... 1,288,000 3,952,000
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Net cash provided by operating activities................................. 14,601,000 18,371,000
-------------- --------------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Capital expenditures............................................................ (15,580,000) (18,790,000)
Sales and retirements of property, plant and equipment, net..................... 488,000 2,875,000
Acquisition of BUSINESS......................................................... (1,948,000) --
Proceeds from sale of businesses................................................ 13,316,000 14,107,000
-------------- --------------
Net cash (used in) investing activities................................... (3,724,000) (1,808,000)
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CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Proceeds from issuance of Subordinated Notes.................................... -- 198,500,000
Repayments of Term Loan......................................................... -- (196,591,000)
Net borrowings (repayments)..................................................... (16,893,000) (17,401,000)
Proceeds from issuance of common stock.......................................... 901,000 593,000
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Net cash (used in) financing activities................................... (15,992,000) (14,899,000)
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EFFECTS OF EXCHANGE RATE CHANGES ON CASH.......................................... 4,298,000 (4,270,000)
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NET INCREASE (DECREASE) IN CASH:.................................................. (817,000) (2,606,000)
CASH AT BEGINNING OF PERIOD:...................................................... 3,994,000 4,143,000
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CASH AT END OF PERIOD:............................................................ $ 3,177,000 $ 1,537,000
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for--interest....................................... $ 27,609,000 $ 23,050,000
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Cash paid during the period for--income taxes................................... $ 3,724,000 $ 3,952,000
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</TABLE>
The accompanying notes to financial statement are an integral part of these
statements.
4
<PAGE>
AEP INDUSTRIES INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial information included herein has been prepared by the Company
without audit, for filing with the Securities and Exchange Commission pursuant
to the rules and regulations of The Commission. The financial information
presented herein, while not necessarily indicative of results to be expected for
the year, reflects all adjustments (which include only normal recurring
adjustments) which in the opinion of the Company are necessary for a fair
presentation of the results for the periods indicated.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted. It is suggested that these financial statements be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report to Shareholders for the fiscal year ended October 31,
1998.
Certain prior period amounts have been reclassified in order to conform with
the current quarter's presentation.
(2) NET INCOME PER SHARE OF COMMON STOCK
Basic Earnings Per Share is calculated by dividing income available to
common shareholders by the weighted average number of shares of common stock
outstanding during the period. The number of shares used in such computation for
the three months ended July 31, 1999 and 1998, were 7,363,249 and 7,272,728,
respectively. The number of shares used in such computation for the nine months
ended July 31, 1999 and 1998, were 7,313,437 and 7,243,090, respectively.
Diluted Earnings Per Share is calculated by dividing income available to common
shareholders by the weighted average number of common shares outstanding,
adjusted to reflect potentially dilutive securities (options). The number of
shares used in such computation for the three months ended July 31, 1999, and
1998 were 7,621,374 and 7,386,002, respectively. The number of shares used in
such computation for the nine months ended July 31, 1999, and 1998 were
7,571,562 and 7,401,810, respectively. The computation excludes 76,600 anti
dilutive options for the three months and nine months ended July 31, 1999.
(3) INVENTORIES
Inventories, stated at the lower of cost (last-in, first-out (LIFO) method
for domestic operations and first-in, first-out (FIFO) method for foreign
operations and for supplies) or market, include material, labor and
manufacturing overhead costs and are comprised of the following:
<TABLE>
<CAPTION>
OCTOBER 31,
JULY 31, 1999 1998
------------- ---------------
<S> <C> <C>
Raw Materials.................................................................... $ 22,552,000 $ 19,684,000
Finished Goods................................................................... 60,552,000 57,952,000
Supplies......................................................................... 4,342,000 4,618,000
------------- ---------------
87,446,000 82,254,000
Less: Inventory Reserve.......................................................... (1,382,000) (1,418,000)
------------- ---------------
Total Inventories, Net......................................................... $ 86,064,000 $ 80,836,000
------------- ---------------
------------- ---------------
</TABLE>
The (LIFO) method was used for determining the cost of approximately 54% and
47% of total inventories at July 31, 1999 and October 31, 1998, respectively.
5
<PAGE>
AEP INDUSTRIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(4) DISCONTINUED OPERATIONS
In February 1999, the Company's management, with the concurrence of its
Board of Directors, approved a formal plan to dispose of its Proponite business.
On April 30, 1999, the Company sold certain assets of the Proponite business to
Applied Extrusion Technologies Inc. pursuant to a sales agreement dated March 4,
1999. The Company will wind down this non-core business during the current
fiscal year.
The disposal of the Proponite business has been accounted for as a
discontinued operation and, accordingly, its net assets (liabilities) have been
segregated from continuing operations in the accompanying consolidated balance
sheets, and its operating results are segregated and reported as discontinued
operations in the accompanying consolidated statements of income and cash flows.
The estimated loss on disposal includes the writedown of property, plant and
equipment, inventory and other assets, closedown expenses, and losses of the
Proponite business through the date of disposal. The total loss on disposal of
the Proponite operations for the nine months ended July 31, 1999 was $17,189,000
net of tax benefits.
Condensed financial information relating to the discontinued operations of
Proponite is as follows:
<TABLE>
<CAPTION>
JULY 31,
1999 OCTOBER 31,1998
------------ ---------------
<S> <C> <C>
Net assets of discontinued operations:
Current assets................................................................... $2,442,000 $ 13,882,000
Property, plant & equipment--net................................................. 6,555,000 34,976,000
------------ ---------------
Total assets................................................................... 8,997,000 48,858,000
Current liabilities (including provision for disposal in 1999)..................... 4,447,000 3,712,000
------------ ---------------
Net assets of discontinued operations.............................................. $4,550,000 $ 45,146,000
------------ ---------------
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</TABLE>
<TABLE>
<CAPTION>
FOR THE NINE FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED MONTHS ENDED
JULY 31, 1999 JULY 31, 1998 JULY 31, 1998
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<S> <C> <C> <C>
Results of Operations:
Net sales........................................................ $ 6,633,000 $ 8,168,000 $ 27,472,000
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Gross profit (loss).............................................. (873,000) (167,000) 1,944,000
------------- ------------- --------------
Net loss......................................................... $(1,205,000) $(1,034,000) $ (1,586,000)
------------- ------------- --------------
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</TABLE>
At the time of the Company's acquisition of Borden Global Packaging (BGP),
management decided not to retain the Rigids' businesses of BGP. The Rigids'
businesses manufactured, marketed and distributed wet food containers, dry food
trays and disposable food service products. These businesses were not core and
were sold by the Company in the prior fiscal year. Beginning November 1, 1997,
the Company began recording these businesses as discontinued operations and for
the three months and nine months ended July 31, 1998 recorded a net loss from
these discontinued operations of $998,000 and $2,833,000, respectively.
6
<PAGE>
AEP INDUSTRIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(5) RESTRUCTURING CHARGE
During the second quarter of Fiscal 1999, management and the Belgian
Workers' Council approved a plan to eliminate 17 manufacturing positions in the
Company's Belgium operations. As a result, a restructuring charge of $1,457,0000
for severance was recorded in the cost of sales section of the income statement.
At July 31, 1999, approximately $1,300,000 had been paid in termination benefits
with the Company anticipating the remaining $200,000 to be fully paid by October
31, 1999.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THREE MONTHS ENDED JULY 31, 1999 AS COMPARED TO THREE MONTHS ENDED JULY 31,1998
NET SALES AND GROSS PROFIT
Net sales for the three months ended July 31, 1999 increased by $7.9
million, or 4.8%, to $172.8 million from $164.9 million for the three months
ended July 31, 1998. Net sales in North America increased to $107.9 million
during the 1999 period from $96.9 million during the 1998 period. This increase
of 11.4% was primarily due to a 3.7% increase in per unit selling prices as a
result of a change in product mix, higher raw material costs which were passed
through to our customers and a 7.4% increase in sales volume. Net sales in
Europe decreased 8.7% to $46.2 million for the third quarter of fiscal 1999 from
$50.6 million for the same period in fiscal 1998 primarily due to an 18.6%
decrease in average selling prices attributable the competitive market place.
This decrease in selling prices was partially offset by a 12.2% volume increase.
Net sales in Asia/Pacific increased 7.4% to $18.7 million during the 1999 period
from $17.4 million for the 1998 period, primarily due to a 13.9% sales volume
increase offset by a decrease of 5.7% in average selling prices which resulted
from the economic pressures of the region.
Gross profit for the three months ended July 31, 1999 was $42.5 million
compared to $39.5 million for the three months ended July 31, 1998. Gross profit
in North America increased 18.7% to $31.0 million for the three months ended
July 31, 1999 due to increased sales volume, which lowered fixed overhead costs
per unit, and a change in product mix. Gross profit in Europe decreased 19.2% to
$8.8 million for the three months ended July 31, 1999 primarily due to the
continuing general economic pressures of the region, which resulted in lower
average selling prices and the inability to pass through rising resin prices to
customers, which resulted in lower margins. Asia/Pacific gross profit for the
three months ended July 31, 1999 increased by $267,000 or 11.0%, due to a 13.9%
increase in volume and some benefits being realized in the consolidation of
plant facilities in Australia which were offset by lower average per unit
selling prices of the region.
OPERATING EXPENSES
Operating expenses for the three months ended July 31, 1999 increased $1.2
million, or 4.1%, to $29.9 million from $28.7 million for the three months ended
July 31, 1998. This increase is attributable to a worldwide increase in sales
volume of 8.9%, which increased warehousing, delivery costs and selling
expenses, primarily commissions by $723,000 General and administrative costs
increased $446,000 for the period with no major increase in one area.
INTEREST EXPENSE
Interest expense for the three months ended July 31, 1999 was $7.9 million
compared to $8.4 million for the three months ended July 31, 1998. This decrease
in interest expense resulted from lower average debt outstanding for the period.
OTHER INCOME (EXPENSE)
Other income (expense) for the three months ended July 31, 1999 amounted to
$358,000. This amount included foreign currency exchange gains realized during
the period, gains on sales of machinery and equipment, interest income earned
for the period and income from investment in a joint venture.
NET INCOME FROM CONTINUING OPERATIONS
Net income from continuing operations for the three months ended July 31,
1999 increased 96.6% to $3.0 million from $1.5 million for the three months
ended July 31, 1998. This increase was due to increased sales volume and an
overall increase in gross profit margins.
8
<PAGE>
DISCONTINUED OPERATIONS
The loss from discontinued operations for the three months ended July 31,
1998 of $2.0 million includes the net losses of the Proponite business of $1.0
million and net losses of the Rigids businesses of $1.0 million. The sale of the
Rigids businesses was completed by October 31, 1998.
NINE MONTHS ENDED JULY 31, 1999 AS COMPARED TO NINE MONTHS ENDED JULY 31, 1998
NET SALES AND GROSS PROFIT
Net sales for the nine months ended July 31, 1999 decreased by $12.5
million, or 2.5%, to $490.4 million from $502.9 million for the nine months
ended July 31, 1998. Net sales in North America increased by less than 1% to
$294.6 million during the 1999 period from $294.1 million during the 1998
period. This slight increase was primarily due to a 5.4% increase in sales
volume offset by a 5.0% decrease in per unit selling prices which resulted from
lower average raw material costs which were passed through to customers. Net
sales in Europe decreased 6.6% to $139.3 million for the first nine months of
fiscal 1999 from $149.0 million for the first nine months of fiscal 1998
primarily due to a 17.0% decrease in average selling prices, offset by a 12.6%
volume increase. Net sales in Asia/Pacific decreased 5.3% to $56.6 million
during the 1999 period from $59.7 million for the 1998 period, primarily due to
a 5.4% decrease in average selling prices which resulted from the economic
pressures of the region.
Gross profit for the nine months ended July 31, 1999 was $120.7 million
compared to $115.8 million for the nine months ended July 31, 1998. Gross profit
in North America increased 12.4% to $85.5 million for the nine months ended July
31, 1999 due to increased sales volume, which lowered fixed overhead costs per
unit, a change in product mix and reduced raw material costs. Gross profit in
Europe decreased 11.4% to $27.0 million for the nine months ended July 31, 1999
primarily due to a restructuring charge at our Belgian operations of
approximately $1.5 million relating to employee severance This charge was
partially offset by additional gross profit realized from the 13% increase in
sales volume in spite of continuing general economic pressures in Eastern
Europe, which resulted in lower average selling prices and lower margins.
Asia/Pacific gross profit for the nine months ended July 31, 1999 decreased by
$1.1 million, or 12.0%, due to a 5.4% decrease in average per unit selling
prices which resulted from the economic pressures of the region. In addition to
certain costs associated with the shut down and consolidation of a plant in
Australia.
OPERATING EXPENSES
Operating expenses for the nine months ended July 31, 1999 increased $2.8
million, or 3%, to $86.5 million from $83.7 million for nine months ended July
31, 1998. This increase is attributable to a worldwide increase in sales volume
of 6.5% that increased warehousing and delivery costs by $1.9 million and
increased selling expenses by $902,000. Selling expenses related primarily to
commissions.
INTEREST EXPENSE
Interest expense for the nine months ended July 31, 1999 was $24.1 million
compared to $25.0 million for the nine months ended July 31, 1998. This decrease
in interest expense resulted from lower average debt outstanding for the period,
slightly offset by higher interest rates paid in the first quarter of Fiscal
1999.
OTHER INCOME (EXPENSE)
Other income (expense) for the nine months ended July 31, 1999 increased
213% to $1.6 million from $496,000 for the period ended July 31, 1998. This
amount included foreign currency exchange gains realized during the period,
gains on sales of machinery and equipment, interest income earned for the period
and income from investment in a joint venture.
9
<PAGE>
DISCONTINUED OPERATIONS
The loss from discontinued operations for the nine months ended July 31,
1999 of $18.4 million includes the net losses of the Proponite business of $1.2
million for the period ended January 31, 1999. This loss also consists of an
after tax charge of $17.2 million, established to write down property, plant and
equipment, inventory and other assets and to provide for closedown expenses and
the net losses for the period ended July 31, 1999.
The loss from discontinued operations for the nine months ended July 31,
1998 of $4.4 million includes the net losses of the Proponite business of $1.6
million and net losses of the Rigids businesses of $2.8 million. The sale of the
Rigids businesses was completed by October 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed 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 was $64.3 million at July 31, 1999, compared
to $81.6 million at October 31, 1998. This decrease of $24.8 million in working
capital is primarily the result of a non-cash provision for disposal of net
assets of the discontinued Proponite business, including a reserve for operating
losses through the disposal date of $28.2 million, and the strengthening of the
United States dollar during fiscal 1999 which further reduced translated working
capital balances. The remaining increases and decreases in components of the
Company's financial position reflect normal operating activity.
On October 11, 1996, we entered into the Credit Agreement with the Morgan
Guaranty Trust Company, as Agent. The Credit Agreement provided us with two
credit facilities consisting of a term credit facility in the amount of $350.0
million and a revolving credit facility for an amount up to $100.0 million. The
proceeds borrowed under the Credit Agreement were used to pay the $263.0 million
cash portion of the purchase price for the Borden packaging acquisition, to
repay the $95.4 million balance under the then existing term credit and
revolving credit obligations and to pay the expenses and related costs of the
acquisition. After the initial drawdown, no further borrowings are permitted
under the term loan. As of July31, 1999, there was $100.8 million outstanding
under the term credit facility which bears interest at a rate of 6.63% per
annum. There are no outstanding borrowings under the revolving credit facility.
On November 19, 1997, we completed an offering of 9.875% Senior Subordinated
Notes due November 15, 2007 in the aggregate principal amount of $200.0 million.
The net proceeds from the Notes were used to repay a portion of the indebtedness
then outstanding under our Credit Agreement.
The Credit Agreement, as amended, contains financial covenants, the most
significant of which are a cash flow ratio and a fixed charge coverage ratio.
For the period from August 1, 1999 through October 31, 1999, the cash flow ratio
may not exceed 4.25:1. The fixed charge coverage ratio may not be less than
1.65:1 for the same period. The Indenture pursuant to which the 9.875% Senior
Subordinated Notes were issued also contains customary covenants including
limitations on the incurrence of debt, the disposition of assets and the making
of restricted payments. We are currently in compliance with all of these
covenants. We do not foresee any problems in the near future in remaining in
compliance with these covenants.
We also have a $10.0 million unsecured revolving credit facility available
for working capital purposes. As of July 31, 1999, there was $1.0 million
outstanding under this credit facility.
We maintain various unsecured short-term credit facilities at our foreign
subsidiaries. At July 31, 1999, our aggregate amount outstanding under these
facilities was approximately $8.9 million and approximately
10
<PAGE>
$58.0 million was available for borrowing. Borrowings from these facilities are
used to support operations at such subsidiaries and are generally serviced by
cash flow from operations at such subsidiaries.
Our cash and cash equivalents were $3.2 million at July 31, 1999, as
compared to $4.0 million at October 31, 1998. Net cash provided by operating
activities during the nine months ended July 31, 1999, was $14.6 million,
primarily due to depreciation and amortization expense of $23.3 million and net
income from continuing operations of $6.9 million, offset by a reduction in
trade accounts payable and accrued expenses of $6.6 million and additional
investment in accounts receivable and inventories of $8.9 million. In each
period, the net decreases in other operating assets and liabilities reflect
normal operating activity.
Net cash used in investing activities during the nine months ended July 31,
1999 was $3.7 million, resulting primarily from the net investment in capital
expenditures of $15.6 million and the acquisition of the Thermofilm subsidiary
for $1.9 million, which was offset by proceeds received from the net proceeds
from sale of the Proponite business of $13.3 million and from other sales of
machinery and equipment in the period of $488,000.
In March 1999, we announced that we would discontinue operations at our
Proponite facility and entered into an agreement to sell certain assets of this
division. The sale was closed on April 30, 1999 and we received payment of $13.3
million for these assets. We estimate that net proceeds of approximately $4.5
million should be realized during the final wind down of this non-core business.
Net cash used in financing activities for the nine months ended July 31,
1999 was $16.0million, reflecting net repayments of $16.9 million on current
credit facilities and proceeds from stock issuances of $900,000.
The remaining increases and decreases in the components of our financial
position reflect normal operating activity.
We believe that our cash flow from operations, combined with the
availability of funds under the Credit Agreement and credit lines available to
our foreign subsidiaries for local currency borrowings, will be sufficient to
meet our working capital, capital expenditure and debt service requirements for
the foreseeable future.
EFFECTS OF INFLATION
Inflation is not expected to have significant impact on our business.
YEAR 2000
We are currently undertaking a systems readiness review that will help
mitigate the risks associated with the Year 2000 issue. The Year 2000 issue
refers to 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. These programs are unable to properly distinguish between the year
1900 and the year 2000. Our review addresses: (a) our 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, we initiated programs to upgrade and enhance our
domestic and international business systems in order to replace aging
technologies and provide infrastructural support to these businesses. In
connection with these upgrades and enhancements, we have installed new systems,
which are designed to be Year 2000 compliant in most of our facilities, and we
are in the process of finalizing these installations. The domestic businesses
application software and hardware have been inventoried, modified or upgraded,
and where appropriate, replaced, to assure Year 2000 compliance. We expect to
complete all systems installations in our international facilities by September
1999 to assure compliance.
We have completed our inventories and assessments in regard to embedded
technology, such as microcontrollers in our production equipment, at each of our
worldwide businesses. All required upgrades
11
<PAGE>
have been completed at our domestic facilities and will be completed by
October31, 1999 at our international facilities.
In evaluating the impact on us of Year 2000 compliance by significant third
parties, each of our business locations has identified and contacted each
significant third party to ascertain such third party's Year 2000 readiness. All
critical suppliers will be continued to be contacted telephonically to ascertain
any changes in their Year 2000 projects. Key customers have been identified and
contacted. The failure of any one customer to complete a sale as a result of its
failure to be Year 2000 compliant will not have an adverse effect on the
financial condition of the Company.
We consider the reasonable worst case scenario to be a disruption in the
resin supply for our PVC business. In order to avoid such problems we intend to
maintain larger than normal inventories of raw materials and commodity
manufactured products at our various facilities. In addition, should the
electricity supply be disrupted we will be prepared to transfer production from
a facility that may be affected by such a power disruption to a facility that is
operational. This should enable us to substantially maintain production and
sales.
Once Year 2000 compliance areas are reviewed and necessary upgrades are
completed, we plan to test systems to verify that compliance has been achieved.
The target completion date for system testing is October 31, 1999. We estimate
the total cost associated with Year 2000 compliance activities, including
upgrades of the international business systems will be approximately $7.8
million, of which $7.0 million has been incurred through July 31, 1999. Cash
flow from operations has funded this project to date and 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 our 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, we
are unable to determine at this time whether the consequences of Year 2000
failures will have a material impact on our 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 prospects for the future, such as our ability to generate
sufficient working capital, our ability to continue to maintain sales and
profits of our operations and our ability to generate sufficient funds to meet
our cash requirements. We wish to caution readers that the assumptions which
form the basis for forward-looking statements with respect to, or that may
impact earnings for, the year ending October 31, 1999, include many factors that
are beyond the our ability to control or estimate precisely. These risks and
uncertainties include, but are not limited to, availability of raw materials,
ability to pass raw material price increases to customers in a timely fashion,
the potential of technological changes which would adversely affect the need for
our products, price fluctuations which could adversely impact the our inventory,
our assessment of Year 2000 compliance by us and significant third parties 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 report.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C> <C>
AEP INDUSTRIES INC.
-----------------------------------------
</TABLE>
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ J. BRENDAN BARBA Chairman of the Board, September 13, 1999
- ------------------------------ President and Chief
J. Brendan Barba Executive Officer
/s/ PAUL M. FEENEY Executive Vice President September 13, 1999
- ------------------------------ Principal Financial and
Paul M. Feeney Accounting Officer
</TABLE>
13
<PAGE>
AEP INDUSTRIES INC.
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in routine litigation in the normal course of its
business. The proceedings are not expected to have a material adverse impact on
the Company's results of operations or financial position.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 11--Computation of weighted average number of shares
outstanding. Page 15-16
(b) The Company filed a Report on Form 8-K on June 4, 1999 to announce
the disposal of its Proponite business and that it has been accounted
for as a discontinued operation and, accordingly, the Company has
reclassified the Financial Statements and Management's Discussion and
Analysis of Financial Condition and Results of Operations included in
its Annual Report filed on Form 10-K filed with the Securities and
Exchange Commission for the Fiscal Year ended October 31, 1998.
14
<PAGE>
EXHIBIT 11
AEP INDUSTRIES INC.
COMPUTATION OF THE WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
FOR THE THREE AND NINE MONTHS ENDED JULY 31, 1999
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
FOR THE THREE MONTHS ENDED JULY 31, JULY 31,
-------------------------------------------------- ----------------------------
WEIGHTED
SHARES OF NUMBER OF AVERAGE NUMBER OF
COMMON DAYS DAYS IN NUMBER OF SHARES DAYS DAYS IN
1999 STOCK OUTSTANDING PERIOD OUTSTANDING OUTSTANDING PERIOD
- ------------------------- -------------- ----------------- ------------- ---------------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
November 1-October 31.... 7,277,701 7,277,701
Shares Issued:
November 4, 1998......... 400 92 92 400 270 273
November 18, 1998........ 1,800 92 92 1,800 256 273
January 4, 1999.......... 10,187 92 92 10,187 209 273
January 29, 1999......... 600 92 92 600 184 273
March 5, 1999............ 1,800 92 92 1,800 149 273
April 19, 1999........... 900 92 92 900 104 273
April 23, 1999........... 1,400 92 92 1,400 100 273
April 27, 1999........... 200 92 92 200 96 273
April 28, 1999........... 48,420 92 92 48,420 95 273
April 29, 1999........... 200 92 92 200 94 273
April 29, 1999........... 400 92 92 400 94 273
May 4, 1999.............. 3,700 89 92 3,579 89 273
May 7, 1999.............. 400 86 92 374 86 273
May 10, 1999............. 400 83 92 361 83 273
May 12, 1999............. 2,200 81 92 1,937 81 273
May 17, 1999............. 180 76 92 149 76 273
May 18, 1999............. 400 75 92 326 75 273
May 19, 1999............. 1,200 74 92 965 74 273
May 21, 1999............. 200 72 92 157 72 273
May 25, 1999............. 400 68 92 296 68 273
May 26, 1999............. 400 67 92 291 67 273
May 28, 1999............. 2,400 65 92 1,696 65 273
June 2, 1999............. 1,300 60 92 848 60 273
June 11, 1999............ 3,900 51 92 2,162 51 273
June 17, 1999............ 200 45 92 98 45 273
June 18, 1999............ 400 44 92 191 44 273
July 1, 1999............. 8,283 31 92 2,791 31 273
July 8, 1999............. 1,200 24 92 313 24 273
July 9, 1999............. 8,372 23 92 2,093 23 273
July 12, 1999............ 600 20 92 130 20 273
July 13, 1999............ 200 19 92 41 19 273
July 16, 1999............ 200 16 92 35 16 273
July 19, 1999............ 600 13 92 85 13 273
July 20, 1999............ 1,000 12 92 130 12 273
July 21, 1999............ 200 11 92 24 11 273
July 26, 1999............ 200 6 92 13 6 273
July 27, 1999............ 1,200 5 92 65 5 273
July 29, 1999............ 2,800 3 92 91 3 273
-------------- ----------------
Total Weighted Average
Shares................. 7,386,543 7,363,249
Total Dilutive Stock
options................ -- 258,125
-------------- ----------------
Total Shares........... 7,386,543 7,621,374
-------------- ----------------
-------------- ----------------
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF SHARES
1999 OUTSTANDING
- ------------------------- ----------------
<S> <C>
November 1-October 31.... 7,277,701
Shares Issued:
November 4, 1998......... 396
November 18, 1998........ 1,688
January 4, 1999.......... 7,799
January 29, 1999......... 404
March 5, 1999............ 982
April 19, 1999........... 343
April 23, 1999........... 513
April 27, 1999........... 70
April 28, 1999........... 16,849
April 29, 1999........... 69
April 29, 1999........... 138
May 4, 1999.............. 1,206
May 7, 1999.............. 126
May 10, 1999............. 122
May 12, 1999............. 653
May 17, 1999............. 50
May 18, 1999............. 110
May 19, 1999............. 325
May 21, 1999............. 53
May 25, 1999............. 100
May 26, 1999............. 98
May 28, 1999............. 571
June 2, 1999............. 286
June 11, 1999............ 729
June 17, 1999............ 33
June 18, 1999............ 64
July 1, 1999............. 941
July 8, 1999............. 105
July 9, 1999............. 705
July 12, 1999............ 44
July 13, 1999............ 14
July 16, 1999............ 12
July 19, 1999............ 29
July 20, 1999............ 44
July 21, 1999............ 8
July 26, 1999............ 4
July 27, 1999............ 22
July 29, 1999............ 31
----------------
Total Weighted Average
Shares................. 7,313,437
Total Dilutive Stock
options................ 258,125
----------------
Total Shares........... 7,571,562
----------------
----------------
</TABLE>
15
<PAGE>
EXHIBIT 11
AEP INDUSTRIES INC.
COMPUTATION OF THE WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
FOR THE THREE AND NINE MONTHS ENDED JULY 31, 1998
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
FOR THE THREE MONTHS ENDED JULY 31, JULY 31,
-------------------------------------------------- ----------------------------
WEIGHTED
SHARES OF NUMBER OF AVERAGE NUMBER OF
COMMON DAYS DAYS IN NUMBER OF SHARES DAYS DAYS IN
1998 STOCK OUTSTANDING PERIOD OUTSTANDING OUTSTANDING PERIOD
- ------------------------- -------------- ----------------- ------------- ---------------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
November 1-October 31.... 7,206,787 7,206,787
Shares Issued:
November 18, 1997........ 60 92 92 60 256 273
December 3, 1997......... 400 92 92 400 241 273
December 9, 1997......... 100 92 92 100 235 273
December 15, 1997........ 200 92 92 200 229 273
December 18, 1997........ 1,900 92 92 1,900 226 273
December 19, 1997........ 1,000 92 92 1,000 225 273
January 16, 1998......... 800 92 92 800 197 273
January 20, 1998......... 200 92 92 200 193 273
January 27, 1998......... 600 92 92 600 186 273
January 30, 1998......... 6,950 92 92 6,950 183 273
February 6, 1998......... 200 92 92 200 176 273
February 9, 1998......... 200 92 92 200 173 273
February 11, 1998........ 2,000 92 92 2,000 171 273
February 12, 1998........ 4,500 92 92 4,500 170 273
February 19, 1998........ 2,900 92 92 2,900 163 273
February 19, 1998........ (861) 92 92 (861) 163 273
February 26, 1998........ 217 92 92 217 156 273
March 5, 1998............ 36,071 92 92 36,071 149 273
March 26, 1998........... 200 92 92 200 128 273
April 1, 1998............ 400 92 92 400 122 273
April 6, 1998............ 400 92 92 400 117 273
April 20, 1998........... 200 92 92 200 103 273
April 21, 1998........... 200 92 92 200 102 273
April 23, 1998........... 600 92 92 600 100 273
April 29, 1998........... 200 92 92 200 100 273
May 4, 1998.............. 200 89 92 193 89 273
May 5, 1998.............. 200 88 92 191 88 273
May 6, 1998.............. 200 87 92 189 87 273
May 22, 1998............. 400 71 92 309 71 273
June 9, 1998............. 400 53 92 230 53 273
June 10, 1998............ 872 52 92 493 52 273
July 14, 1998............ 9,005 48 92 4,698 48 273
-------------- ----------------
Total Weighted Average
Shares................. 7,277,701 7,272,728
Total Dilutive Stock
options................ -- 113,274
-------------- ----------------
Total Shares........... 7,277,701 7,386,002
-------------- ----------------
-------------- ----------------
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF SHARES
1998 OUTSTANDING
- ------------------------- ----------------
<S> <C>
November 1-October 31.... 7,206,787
Shares Issued:
November 18, 1997........ 56
December 3, 1997......... 353
December 9, 1997......... 86
December 15, 1997........ 168
December 18, 1997........ 1,573
December 19, 1997........ 824
January 16, 1998......... 577
January 20, 1998......... 141
January 27, 1998......... 409
January 30, 1998......... 4,659
February 6, 1998......... 129
February 9, 1998......... 127
February 11, 1998........ 1,253
February 12, 1998........ 2,802
February 19, 1998........ 1,732
February 19, 1998........ (514)
February 26, 1998........ 124
March 5, 1998............ 19,687
March 26, 1998........... 94
April 1, 1998............ 179
April 6, 1998............ 171
April 20, 1998........... 75
April 21, 1998........... 75
April 23, 1998........... 220
April 29, 1998........... 73
May 4, 1998.............. 63
May 5, 1998.............. 62
May 6, 1998.............. 60
May 22, 1998............. 80
June 9, 1998............. 45
June 10, 1998............ 94
July 14, 1998............ 826
----------------
Total Weighted Average
Shares................. 7,243,090
Total Dilutive Stock
options................ 158,720
----------------
Total Shares........... 7,401,810
----------------
----------------
</TABLE>
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AEP
INDUSTRIES INC. FORM 10-Q FOR THE THREE MONTHS ENDED JULY 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> JUL-31-1999
<CASH> 3,177
<SECURITIES> 0
<RECEIVABLES> 106,589
<ALLOWANCES> 5,668
<INVENTORY> 86,064
<CURRENT-ASSETS> 210,580
<PP&E> 356,104
<DEPRECIATION> 119,683
<TOTAL-ASSETS> 557,101
<CURRENT-LIABILITIES> 153,750
<BONDS> 0
101
0
<COMMON> 0
<OTHER-SE> 74,004
<TOTAL-LIABILITY-AND-EQUITY> 557,101
<SALES> 490,438
<TOTAL-REVENUES> 491,992
<CGS> 368,322
<TOTAL-COSTS> 369,779
<OTHER-EXPENSES> 85,098
<LOSS-PROVISION> 1,424
<INTEREST-EXPENSE> 24,121
<INCOME-PRETAX> 11,570
<INCOME-TAX> 4,628
<INCOME-CONTINUING> 6,942
<DISCONTINUED> (18,394)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,452)
<EPS-BASIC> (1.57)
<EPS-DILUTED> (1.60)
</TABLE>
