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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1999, OR
</TABLE>
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES ACT OF 1934 (NO FEE REQUIRED)
</TABLE>
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)
<TABLE>
<S> <C>
DELAWARE 22-1916107
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
125 PHILLIPS AVENUE, SOUTH HACKENSACK, NEW JERSEY 07606-1546
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(Address of principal executive offices) (zip code)
</TABLE>
Registrant's telephone number, including area code: (201) 641-6600
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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<S> <C>
None --
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
<TABLE>
<CAPTION>
COMMON STOCK, $.01 PAR VALUE
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<S> <C>
(Title of class)
</TABLE>
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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 $92,444,000 based upon the
closing price of the stock, which was $25.75 on December 31, 1999.
The number of shares of the Registrant's shares of common stock outstanding
as of December 31, 1999, was 7,442,161.
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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 Registrant's Annual Meeting
of Stockholders to be held on April 11, 2000--Part III.
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PART I
ITEM 1. BUSINESS
GENERAL
AEP Industries Inc. is a leading worldwide manufacturer of plastic packaging
films. We manufacture both commodity films, which are made to general
specifications, and specialty films, which are made to customer specifications.
The films are used in the packaging, transportation, beverage, food, automotive,
pharmaceutical, chemical, electronics, construction, agriculture and textile
industries. Our manufacturing operations are located in 11 countries in North
America, Europe and the Asia/ Pacific Region.
RECENT DEVELOPMENTS
In October 1996 we substantially expanded our business operations through
the acquisition from Borden, Inc. of its packaging business.
In fiscal 1998 we sold the South Africa and the rigids businesses acquired
from Borden.
In fiscal 1999, we sold the Proponite business acquired from Borden. Gross
proceeds from the sale were approximately $13.3 million. Net losses from the
Proponite business are reflected in discontinued operations. Remaining assets in
such business are expected to sold or otherwise converted to cash.
PRODUCTS
We are a leading worldwide manufacturer of plastic packaging films. We
manufacture and market 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 us are used in a variety of industries, including the
packaging, transportation, beverage, food, automotive, pharmaceutical, chemical,
electronics, construction, agricultural and textile industries.
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The following table summarizes our product lines:
<TABLE>
<CAPTION>
PRODUCT LOCATION MATERIAL USES
- --------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C>
polyvinyl chloride North America, polyvinyl chloride meat and food wrap,
wrap Europe, Asia/Pacific, institutional films
and twist wrap
industrial films United States, Europe polyethylene drum, box, carton,
Asia/Pacific polypropylene and pail liners; bags
for furniture and
mattresses; films to
cover high value
products; barrier
films; cheese films
and freezer wraps
stretch (pallet) wrap North America, Europe polyethylene pallet wrap
Asia/Pacific,
printed and converted Europe, Asia/Pacific primarily printed, laminated
films polyethylene and/ or converted
films providing
flexible packaging to
consumer markets
other products and North America, various manufactured and
specialty films Europe, Asia/Pacific, thermoplastics and resale items used in
machinery packaging
</TABLE>
We currently have manufacturing operations located in 11 countries. We
divide our operations geographically into three principal regions, North
America, Europe and Asia/Pacific. During 1999, North America, Europe and
Asia/Pacific represented 61%, 28% and 11%, respectively, of our sales.
NORTH AMERICAN OPERATIONS
RESINITE (POLYVINYL CHLORIDE)
We manufacture 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.
Our resinite facility also manufactures dispenser (cutter) boxes containing
polyvinyl chloride food wrap for sales to consumers and institutions, including
restaurants, schools, hospitals and penitentiaries. Our 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.
INDUSTRIAL FILMS
We manufacture a broad range of industrial films, generally custom designed,
including sheeting, tubing and bags. Bags are usually cut, rolled or perforated,
drum, box, carton and pail liners. These bags can be used to package specialty
items such as furniture and mattresses. We also manufacture films to protect
items stored outdoors or in transit, such as boats and cars, and a wide array of
shrink films, barrier films and overwrap films. We sell the majority of our
industrial film output directly to customers on a national account basis, with
approximately 20% sold through distributors.
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Most of the industrial films manufactured by us, which may be as many as
20,000 separate and distinct products in any given year, are custom designed to
meet the specific needs of our customers.
We believe that the strength of our industrial film operations lies in our
technologically superior products, high quality control standards, well-trained
and knowledgeable sales force and commitment to customer service. Our sales
force has expertise in packaging systems, provides technical support to our
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. Our
research and development team continually improves applications and creates new
industrial film products. This has helped establish us as one of the largest
producers in this fragmented market. We believe we can continue to expand our
share of the industrial films market through our ability to offer a broad range
of industrial as well as other packaging films (including stretch wrap), thereby
offering our customers one-stop shopping.
STRETCH WRAP
We manufacture a family of high performance stretch wrap for wrapping and
securing palletized products for shipping. We also market a wide variety of
stretch wrap designed for commodity and specialty uses. We sell approximately
90% of our stretch wrap through distributors. The remainder of our output is
sold directly to customers on a national account basis.
We have reduced our stretch wrap capacity to an aggregate of 252 million
pounds through a combination of permanently eliminating, temporarily idling and
reallocating our capacity. In connection with the Borden packaging acquisition,
we identified and consolidated less efficient stretch wrap operations, thereby
reducing our stretch wrap capacity by approximately 58 million pounds. In
addition, as a result of industry-wide overcapacity in the stretch wrap market,
we reduced our stretch wrap capacity by an additional 45 million pounds. Our
capacity reductions coupled with sales force rationalization, consolidation of
distribution activities and reformulation of certain stretch products have
enabled us to realize significant cost reductions
EUROPEAN OPERATIONS
EUROPEAN RESINITE (POLYVINYL CHLORIDE)
Through our European Resinite division, we manufacture 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 Fabbrica
Italiana Articoli Plastici, or FIAP) and sells most of its film directly to
end-users. We are rationalizing our labor force and believe that this will have
a positive impact on our operating results.
The market for polyvinyl chloride food wrap is relatively mature in Northern
Europe and is intensely competitive. We expect 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. We have the technology to deliver films with such properties at a
low price. We believe this to be a competitive advantage.
EUROPEAN FLEXIBLES
Our European Flexibles division manufactures flexible packaging and
converted films used in the food processing and pharmaceutical industries,
including freezer film, processed cheese innerwrap and tamper-
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evident seals. European Flexibles also manufactures and sells polyethylene-based
stretch wrap for wrapping and securing pallet loads. European Flexibles sells
52% of its stretch wrap to distributors, and 48% directly to end-users.
FIAP
Through FIAP, we manufacture 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 has similar performance
characteristics as cellophane and is emerging as a low cost substitute. We
believe unplasticized polyvinyl chloride, because of its performance
characteristics, has significant growth potential opportunities as a replacement
for cellophane. In addition, we believe opportunities are developing for new
uses for such wrap, such as battery covers and credit card laminates.
Films manufactured by FIAP are sold in the United States, Europe, Africa,
and the Middle East, mostly through an internal sales force directly to
end-users.
ASIA/PACIFIC OPERATIONS
We are a major manufacturer of industrial films, PVC films and printed and
converted films in Australia and New Zealand. Our operations in the Asia/Pacific
region resemble our North American and European operations with the same variety
of films.
We sell the majority of the products we manufacture 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, we
expect to participate in the growing market for packaging materials for protein
rich products for export to China and Southeast Asia.
We also have a 50% joint venture in Japan with Hitachi Chemical Co., Ltd.
The joint venture, known as Hitichi Chemical Filtee, Inc., supplies polyvinyl
chloride food wrap to the Japanese market. We account for the joint venture on
an equity basis.
MANUFACTURING
We manufacture 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.
We manufacture polyvinyl chloride food wrap in Griffin, Georgia, in Europe
at three Resinite plants strategically located in Spain, France and England and
in Australia and in New Zealand.
We manufacture stretch wrap and industrial films at several large
geographically dispersed, integrated extrusion facilities located throughout the
world, 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 flexible packaging products and to re-orient equipment as market
conditions warrant, enable us to achieve savings and minimize overhead and
transportation costs.
At the FIAP facility in Italy, we manufacture polyvinyl chloride food wrap,
unplasticized polyvinyl chloride twist wrap, and converted and printed films. We
manufacture flexible packaging and converted films in Europe at facilities
strategically located in Holland and Belgium. We have installed new, efficient
pallet wrap equipment at these facilities which we believe will increase our
market presence in Europe in
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this product. We also manufacture industrial films and flexible packaging and
converted films at our facilities in Australia and New Zealand.
PRODUCTION
In the film manufacturing process, resins with various properties are
blended with chemicals and other concentrates 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 our products range from less than one mil (.001
inches) to more than 20 mils. Our 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 through a die, at which point it
is expanded into a flat sheet or a vertical tubular column of film and cooled.
The cooled film can then be shipped to a customer or can be further processed
and then shipped. Generally, our 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.
We have 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, we made significant capital improvements, which included the construction
of new manufacturing, warehouse and sales facilities, the purchase and lease of
new state-of-the-art extrusion equipment and the upgrading of older equipment.
We have shifted production among our plants to improve efficiency and cost
savings and are upgrading and replacing equipment at certain of these facilities
in order to increase production capacity and enhance efficiency. We will
continue to upgrade or replace equipment as we deem appropriate.
QUALITY CONTROL
We believe that maintaining the highest standards of quality in all aspects
of our manufacturing operations plays an important part in our ability to
maintain our competitive position. To that end, we have adopted strict quality
control systems and procedures designed to test the mechanical properties of our
products, such as strength, puncture resistance, elasticity, abrasion
characteristics and sealability, which we regularly review and update, and
modify as appropriate.
RAW MATERIALS
We manufacture film products primarily from polyethylene, polypropylene and
polyvinyl chloride resins, all of which are available from a number of domestic
and foreign suppliers. We select our suppliers based on the price, quality and
characteristics of the resins they produce. Most of our purchases of resin in
fiscal 1999 have been from 18 of the 20 international resin suppliers, none of
which accounted for more than 18% of our requirements. We believe that the loss
of any resin supplier would not have a materially adverse effect on us.
The resins used by us are produced from petroleum and natural gas.
Instability in the world markets for petroleum and natural gas could adversely
affect the prices of our raw materials and their general availability, and this
could have an adverse effect on our profitability if the increased costs could
not be passed on to customers. The cost of resin typically comprises
approximately 59% of a manufacturer's cost of goods sold. With limited
exceptions, we have historically been able to pass on substantially all of the
price increases in raw materials to our customers on a penny for penny basis,
although there can be no assurance that we will be able to do so in the future.
During fiscal 1999, as a result of the frequent increases in resin prices,
customer resistance and competitive pressure, we have not been able to pass on a
large part of these increases, and this adversely affected our revenue, gross
profit and earnings.
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We generally maintain a resin inventory of less than one month's supply and
have not experienced any difficulty in maintaining our supplies. Other raw
materials, principally chemical colorings and other concentrates, are available
from many sources.
MARKETING AND SALES
We believe that our ability to continue to provide superior customer service
will be critical to our success. Even in those markets where our products are
considered commodities and price is the single most important factor, we believe
that our sales and marketing capabilities and our ability to timely deliver
products can be a competitive advantage. To that end, we have established good
relations with our suppliers and have long-standing relationships with most of
our customers, which we attribute to our ability to consistently manufacture
high-quality products and provide timely delivery and superior customer service.
We believe that our research and development efforts, our high efficiency
equipment, which is both automated and microprocessor-controlled, and the
technical training given to our sales personnel enhance our ability to expand
our sales in all of our product lines. An important component of our marketing
philosophy is the ability of our sales personnel to provide technical assistance
to customers. Our sales force regularly consults with customers with respect to
performance of our 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.
We market our polyethylene products in North America principally through our
own sales force under the supervision of national and regional managers. We
generally sell either directly to customers who are end-users of our products or
to distributors for resale to end-users.
We market our polyvinyl chloride and our stretch film products in North
America primarily through large distributors. Because we have expanded and
continue to expand our product lines, sales persons are able to offer a broad
line of products to our customers.
During fiscal 1998 and fiscal 1999, approximately 38% and 37%, respectively,
of our sales in North America were directly to end-users with the balance
representing sales to distributors or representatives. We serve approximately
16,000 customers, none of which account for more than 5% of our net sales.
Sales and marketing efforts in Europe and in the Asia/Pacific region are
primarily by our sales force to end-users, although distributors are used in
cases where the distributor adds value to the customer. Sales offices are
assigned to each of our plants.
DISTRIBUTION
We believe that the timely delivery to customers of our products is a
critical factor in our ability to maintain our market position. Domestically, in
order to ensure timely delivery, we use both internal and external sources of
distribution. We maintain a fleet of 28 trucks, most of which we lease, for the
delivery to customers of approximately 11% of our products. We use dedicated
service haulers, contract carriers and common carriers for the remainder of our
deliveries. This combination enables us to control the distribution process and
thereby insure priority handling and direct transportation of products to our
customers, thus improving the speed, reliability and efficiency of delivery.
Because of the geographic dispersion of our plants, we are able to deliver
most of our products within a 500-mile radius of our plants. This enables us to
reduce our use of warehouses to store products. However, we also ship products
great distances when necessary and export from the United States and Canada.
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Internationally, we use common and contract carriers to deliver most of our
products, both in the country of origin and for export. We do not deliver our
own products to an appreciable degree.
RESEARCH AND DEVELOPMENT
We have a research and development department with a staff of approximately
20 persons. In addition, other members of management and supervisory personnel,
from time to time, devote substantial amounts of time to research and
development activities. The principal efforts of our research and development
department are directed to maintaining and improving quality control in our
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 1999, we focused a significant portion of our research and
development efforts on co-extruded, high barrier and MAPAC-TM-(modified
atmosphere packaging, designed to either contain gases or allow the migration
thereof) technologies.
Our research and development department has developed a number of products
with unique properties, which we consider proprietary, certain of which are
protected by patent. In fiscal 1999, 1998 and 1997, we spent approximately
$1.6 million, $1.5 million and $1.9 million, respectively for research and
development activities for continuing operations.
COMPETITION
The business of supplying plastic packaging products is extremely
competitive, and we face competition from a substantial number of companies,
which sell similar and substitute packaging products. Some of our competitors
are subsidiaries or divisions of large, international, diversified companies
with extensive production facilities, well-developed sales and marketing staffs
and substantial financial resources.
We compete principally with (i) local manufacturers, who compete with us in
specific geographic areas, generally within a 500 mile radius of their 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. We believe
we also compete on the basis of quality, service and product differentiation.
Because many of our products are available from a number of local and
national manufacturers, competition is highly price-sensitive and margins are
relatively low. We believe that all of our products require efficient, low cost
and high-speed production to remain competitive.
We believe that there are few barriers to entry into many of our markets,
enabling new and existing competitors to rapidly affect market conditions. As a
result, we may experience increased competition resulting from the introduction
of products by new manufacturers. In addition, in several of our 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 1999 and fiscal 1998 was approximately $46 million and $47
million, respectively. These backlogs represent approximately 15 days of
production in fiscal 1999 and 21 days in fiscal 1998. 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.
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ENVIRONMENTAL MATTERS
Our operations are subject to various federal, state and local environmental
laws and regulations, which govern 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 may require material expenditures by us. The nature of our current and
former operations and the history of industrial uses at some of our facilities
expose us 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 or arrange for the disposal or treatment 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. We believe that there are no current
environmental matters, which would have a material adverse effect on our
financial position or results of operations.
EMPLOYEES
At October 31, 1999, we had approximately 3,200 employees worldwide,
including officers and administrative personnel. In North America, we have three
collective bargaining agreements covering approximately 300 employees. Two of
these agreements expire in February 2001 and, and the other one expires in
February 2002. Further, we have collective bargaining agreements at 16
international facilities, covering substantially all of the hourly employees at
these facilities. As is common in many foreign jurisdictions, substantially all
of our employees in these foreign jurisdictions are covered by countrywide
collective bargaining agreements. While we believe that our relations with our
employees are satisfactory, a dispute between our employees and us could have a
material adverse effect on our business.
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MANAGEMENT
At January 28, 2000, our directors and executive officers are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
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<S> <C> <C>
J. Brendan Barba.................. 58 Chairman of the Board, President
and CEO
Paul M. Feeney.................... 57 Executive Vice President, Finance
and CFO and Director
John J. Powers.................... 35 Executive Vice President, Sales
and Marketing
David J. Cron..................... 45 Executive Vice President,
Manufacturing
Edgar Reich....................... 57 Executive Vice President,
International Operations
Paul C. Vegliante................. 34 Executive Vice President,
Operations
Lawrence R. Noll.................. 51 Vice President, Controller and
Director
James B. Rafferty................. 47 Vice President and Treasurer
Jean L'Allier..................... 44 Vice President, Secretary, and
General Counsel
Kenneth Avia...................... 57 Director
William H. Carter................. 46 Director
Adam H. Clamer.................... 29 Director
Paul E. Gelbard................... 69 Director
Lee C. Stewart.................... 51 Director
William F. Stoll Jr............... 51 Director
Scott M. Stuart................... 40 Director
</TABLE>
In accordance with a Governance Agreement with Borden, Inc.,
Messrs. Carter, Clamer, Stoll and Stuart are directors designated by Borden.
J. BRENDAN BARBA is one of the founders of our company and has been our
President, CEO and a director since our organization in January 1970. In
November 1985, Mr. Barba assumed the additional title of Chairman of the Board
of Directors.
PAUL M. FEENEY has been an Executive Vice President, Finance, CFO and a
director of our 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 our
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.
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EDGAR REICH has been employed by our company since July 1998 as director of
European operations. He was elected Vice President, International Operations in
November 1998 and Executive Vice President, International Operations in
December 1999. Prior to July 1998 he held various international management
positions with Witco Corporation.
PAUL G. VEGLIANTE was elected Executive Vice President, Operations in
December 1999. Prior thereto he was Vice President, Operations since June 1997
and held various other positions with our company during the previous three
years.
LAWRENCE R. NOLL has been a Vice President and a director of our company
since September 1993. For more than 13 years prior thereto, he was the
Controller of our company, and he was re-elected Controller in October 1996. He
was the Secretary of our company from September 1993 through April 1998.
JAMES B. RAFFERTY has been Vice President and Treasurer of our 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.
JEAN L'ALLIER has been employed by our company as general counsel since
April 1997. He was elected Vice President and General Counsel in November 1997
and elected Secretary in April 1998. For more than five years prior to
April 1997 Mr. L'Allier was engaged in the private practice of law as a sole
practitioner in New York City.
KENNETH AVIA has served as a director of our 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 our company since
October 1996. Mr. Carter has been 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.
ADAM H. CLAMER has served as a director of our company since
September 1999. Mr. Clamer has been an executive of Kohlberg Kravis Roberts &
Co. from 1996 and was employed by Morgan Stanley & Co. from 1992 to 1995 as an
investment banker.
PAUL E. GELBARD has served as a director of our company since 1991.
Mr. Gelbard, has been Of Counsel to Warshaw Burstein Cohen Schlesinger & Kuh
LLP, counsel to our company, since January 1, 2000. He was Of Counsel to Bachner
Tally & Polevoy LLP, prior counsel to our company, from January 1997 to
December 1999 and was a partner of such firm from 1974 to 1996.
LEE C. STEWART has served as a director of our company since December 1996.
Mr. Stewart has been a 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.
WILLIAM F. STOLL JR has served as a director of our company since
December 1999. Mr. Stoll has been a Senior Vice President and General Counsel to
Borden, Inc. since April 1998 and is a partner of Borden Capital Management
Partners and Chairman of Wise Foods, Inc., affiliates of Borden, Inc. Prior
thereto he was employed as a counsel to Westinghouse Electric Corporation for
more than 20 years, his most recent position being Vice President and Deputy
General Counsel since 1993.
SCOTT M. STUART has served as a director of our 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.
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GOVERNANCE AGREEMENT
In connection with the Borden packaging acquisition, we entered into a
Governance Agreement with Borden, dated as of June 20, 1996, with respect to
certain matters relating to the corporate governance of our company. The
Governance Agreement provides that our 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 our company, and to
participate in the selection of one independent director so long as Borden's
stockholdings remain at 10%.
The Governance Agreement also provides that Borden will have certain rights
to designate directors to serve on specified committees, that the approval of a
number of directors that represent at least 66 2/3% of the total number of
directors will be required on certain specific board actions, and that, as long
as Borden owns in excess of 25% of our outstanding 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 our outstanding shares so long as Borden
stockholdings are 20%.
ITEM 2. PROPERTIES
Our principal executive and administrative offices are located in a leased
building in South Hackensack, New Jersey.
We own all of our manufacturing facilities except for certain facilities in
Australia and New Zealand. Sales offices are located at each of our plants.
We are in the process of selling certain of these facilities, including
those located at Moonachie, New Jersey; North Andover, Massachusetts; Les Ulis,
France; and Scarborough, Ontario, Canada.
13
<PAGE>
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
Matthews, North Carolina.................................. 242,000
Gainesville, Texas........................................ 220,000
Alsip, Illinois........................................... 182,000
West Hill, Ontario, Canada................................ 117,000
Chino, California......................................... 115,000
Waxahachie, Texas......................................... 100,000
Edmonton, Alberta, Canada................................. 15,000
ASIA/PACIFIC
Auckland, New Zealand..................................... 154,000
Christchurch, New Zealand................................. 128,000
Shimodate, Japan.......................................... 69,000
Sydney, Australia......................................... 180,000
Melbourne, Australia...................................... 45,000
EUROPE
Apeldoorn, Holland........................................ 267,000
Ghlin, Belgium............................................ 223,000
Turate, Italy............................................. 220,000
Seano, Italy.............................................. 38,000
Fecamp, France............................................ 105,000
Southampton, England...................................... 61,000
Alicante, Spain........................................... 52,000
Barbezieux, France........................................ 25,000
</TABLE>
- ------------------------
(1) Where we maintain multiple facilities at any particular location, the square
footage has been aggregated. All facilities are owned by us, except for the
following facilities, subject to leasehold interests, which begin expiring
in 2000: Auckland, New Zealand; Sydney, Australia (one of three facilities);
and Melbourne, Australia.
We believe that all of our properties are well maintained and in good
condition, and that the current operating facilities are adequate for present
and immediate future business needs. However, we are in the process of
increasing capacity and automating some manufacturing operations in Europe and
relocating and consolidating some manufacturing operations in North America.
In fiscal 1999 we closed our Proponite facility in North Andover and are
holding it for sale. In aggregate, we currently use approximately 4 million
square feet of manufacturing, office and warehouse space excluding the closed
North Andover facility. Sales offices are assigned to each of our plants. As of
October 31, 1999, our manufacturing facilities had a combined average annual
production capacity exceeding 1 billion pounds.
ITEM 3. LEGAL PROCEEDINGS
We are, from time to time, a party to litigation arising in the normal
course of its business. We believe that there are currently no material legal
proceedings the outcome of which would have a material adverse effect on our
financial position or our results of operations.
14
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our Common Stock is quoted on the Nasdaq National Market under the symbol
"AEPI." The high and low sale prices for our Common Stock, as reported by Nasdaq
Stock Market, Inc., for the two fiscal years ended October 31, 1999, are as
follows:
<TABLE>
<CAPTION>
PRICE RANGE
-------------------
FISCAL YEAR AND PERIOD HIGH LOW
- ---------------------- -------- --------
<S> <C> <C>
1998
First quarter ended (Nov.-Jan.)......................... $35.000 $27.000
Second quarter ended (Feb.-Apr.)........................ 38.500 31.500
Third quarter ended (May-July).......................... 34.500 19.875
Fourth quarter ended (Aug.-Oct.)........................ 22.000 14.875
1999
First quarter ended (Nov.-Jan.)......................... $24.500 $19.375
Second quarter ended (Feb.-Apr.)........................ 31.500 17.875
Third quarter ended (May-July).......................... 38.125 24.750
Fourth quarter ended (Aug.-Oct.)........................ 39.000 29.000
</TABLE>
On December 31, 1999, the closing price for a share of our common stock, as
reported by Nasdaq, was $25.75.
As of December 31, 1999, our common stock was held by approximately 1,800
stockholders of record or through nominee or street name accounts with brokers.
No dividends have been paid to stockholders since December 1995. We paid
cash dividends to our stockholders each fiscal quarter during the period from
May 1, 1993, through October 31, 1995. In December 1995 our board of directors
announced that future dividends would be suspended and that otherwise available
funds would be reinvested in our business. The payment of future dividends is
within the discretion of the board of directors and will depend upon business
conditions, our earnings and financial condition and other relevant factors. We
are subject to a number of covenants under the term loan and revolving credit
facility and the Indenture pursuant to which our 9.875% Senior Subordinated
Notes were issued, including restrictions on the amount of dividends that may be
paid.
15
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
----------------------------------------------------
1995 1996 1997* 1998* 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
IN THOUSANDS EXCEPT PER SHARE
STATEMENT OF OPERATIONS DATA:
Net sales................................. $242,886 $270,534 $709,072 $666,556 $670,052
Gross profit.............................. 56,114 54,853 145,037 146,835 142,005
Income from operations.................... 25,224 15,538 38,006 42,047 37,212
Interest (expense)........................ (3,209) (11,517) (30,061) (33,780) (31,489)
Other income (expense).................... 384 390 3,285 1,465 2,163
-------- -------- -------- -------- --------
Pre-tax income............................ 22,399 4,411 11,230 9,732 7,886
Income tax provision...................... 8,723 1,858 3,901 3,961 3,413
-------- -------- -------- -------- --------
Income from continuing operations......... 13,676 2,553 7,329 5,771 4,473
Income (loss) from discontinued
operations.............................. 1,242 (5,508) (18,971)
Extraordinary (loss)...................... (190)
-------- -------- -------- -------- --------
Net Income (Loss)......................... 13,486 $ 2,553 $ 8,571 $ 263 $(14,498)
-------- -------- -------- -------- --------
Basic net income (loss) per share:
Basic income from continuing operations... $ 1.99 $ 0.52 $ 1.02 $ 0.79 $ 0.61
Basic income (loss) from discontinued
operations and extraordinary (loss)..... (0.03) -- 0.17 (0.75) (2.59)
-------- -------- -------- -------- --------
Basic net income (loss)................... $ 1.96 $ 0.52 $ 1.19 $ 0.04 $ (1.98)
-------- -------- -------- -------- --------
Diluted net income (loss) per share:
Diluted income from continuing
operations.............................. $ 1.95 $ 0.49 $ 0.98 $ 0.78 $ 0.60
Diluted income (loss) from discontinued
operations and extraordinary (loss)..... (0.03) -- 0.17 (0.75) (2.59)
-------- -------- -------- -------- --------
Diluted net income (loss)................. 1.92 $ 0.49 $ 1.15 $ 0.03 $ (1.99)
-------- -------- -------- -------- --------
BALANCE SHEET DATA:
Total assets.............................. $143,287 $611,665 $609,280 $569,090 $514,991
Total debt (including current portion).... 86,000 377,545 377,006 332,785 308,605
Stockholders' equity...................... 16,808 95,133 87,982 86,301 66,838
</TABLE>
- ------------------------
* Selected consolidated financial data for the years ended October 31, 1997
and 1998 have been restated to record the disposal of the Proponite
division, which has been accounted for as a discontinued operation.
16
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Our primary business is the manufacture and marketing of plastic films for
use in the packaging, transportation, beverage, food, automotive,
pharmaceutical, chemical, electronics, construction, agricultural and textile
industries. We currently have manufacturing operations located in 11 countries
in North America, Europe, and the Asia/Pacific region. We manufacture plastic
films principally from resins blended with other raw materials, using both cast
and blown extrusion processes. We may either sell the film after the extrusion
processes or further process the film by metallizing, printing, laminating,
slitting or converting it. Our processing technologies enable us to create a
variety of value-added products according to the specifications of our
customers.
Resin costs generally constitute approximately 59% of the cost of goods
sold. Since resin costs typically fluctuate, selling prices are generally
determined as a "spread" over resin costs, usually expressed as cents per pound.
Accordingly, costs and profits are most often expressed in cents per pound, and,
with certain exceptions, the historical increases and decreases in resin costs
have generally been reflected over a period of time in the sales prices of the
products on a penny for penny basis. Assuming a constant volume of sales, an
increase in resin costs should therefore result in increased sales revenues but
lower gross profit as a percentage of sales or gross profit margin, while a
decrease in resin costs should result in lower sales revenues with higher gross
profit margins.
On October 11, 1996, we acquired the global packaging operations of
Borden, Inc., which we sometimes refer to as the Borden packaging acquisition.
The purchase price was approximately $280.0 million, including the assumption of
certain indebtedness and other purchase price adjustments, and 2.4 million
shares of our common stock.
During fiscal 1998 we sold our South African and all five of the rigids
businesses we acquired from Borden. After giving effect to working capital
adjustments and costs, net proceeds amounted to approximately $13.9 million. Net
losses from the rigids businesses are reflected in discontinued operations.
During fiscal 1999, we sold the Proponite business acquired from Borden and
some of its assets. The proceeds of these sales amounted to approximately
$13.3 million. Net losses from the Proponite business are reflected in
discontinued operations. Remaining assets in such business are, land and
building, and are being held for sale.
RESULTS OF OPERATIONS
YEAR ENDED OCTOBER 31, 1999, AS COMPARED TO YEAR ENDED OCTOBER 31, 1998
CONTINUING OPERATIONS
Net sales for the year ended October 31, 1999, increased by $3.5 million to
$670.1 million from $666.6 million in the same period in the prior year. Net
sales in North America increased to $408.2 million during fiscal 1999 from
$396.3 million in fiscal 1998, or 3.0%, primarily due to a 5.9% increase in
sales volume offset by a 2.2% decrease in per unit selling prices. Net sales in
Europe decreased to $186.1 million for fiscal 1999 from $192.2 million in fiscal
1998, or 3.2%, primarily due to a 14.3% decrease in average selling prices
(local currency) offset by a 12.9% volume increase. Net sales in Asia/Pacific
decreased to $75.7 million in the current fiscal year from $78.0 million in the
prior year, or 2.9%, primarily due to a 3.5% decrease in average selling prices
(local currency) offset by an increase in sales volume of less than 1%.
Gross profit for fiscal 1999 amounted to $142.0 million compared to
$146.8 million for fiscal 1998. North America experienced a decrease in gross
profit of $1.0 million for the year ended October 31, 1999 due to increased raw
material costs, primarily resin, which could not be passed through to our
customers in
17
<PAGE>
the fourth quarter as a result of the competitive market place. These increased
costs were offset in part by the 5.9% increase in sales volume. Gross profit in
Europe decreased $2.4 million or 6.5% from the prior year primarily due to a
restructuring charge at our Belgian operations of approximately $1.8 million
relating to employee severance. In addition, there were changes in product mix,
higher raw material costs (resin), as well as the general economic pressures in
Eastern Europe which resulted in lower average selling prices and lower margins.
Asia/Pacific gross profit for fiscal 1999 decreased by $1.4 million or 11.8%
from the prior year due to lower average per unit selling prices and higher raw
material costs that could not be passed through our to customers which was a
result of the economic pressures of the region. In addition, Australia incurred
certain costs associated with the shut down and consolidation of a plant.
Operating expenses for the year ended October 31, 1999 were $104.8 million,
the same as in the prior fiscal year. Selling expenses increased by
$1.5 million in fiscal 1999 to $39.3 million due to increased expenses as a
result of increased sales volume offset by the realignment of staffing. Such
realignment also resulted in reduction of worldwide general and administrative
expenses of $1.4 million.
Interest expense for fiscal 1999, amounted to $31.5 million a decrease of
$2.3 million from the prior year. This decrease in interest expense resulted
from lower average debt outstanding for fiscal 1999.
Other income (expense) for fiscal 1999 amounted to $2.2 million. This amount
includes foreign currency exchange gains realized during the period, interest
income earned for the period and income from investment in joint venture.
Net income from continuing operations for fiscal 1999 decreased by 22.5% to
$4.5 million from $5.8 million in fiscal 1998. This decrease was due primarily
to the reduction in gross profit realized in our world-wide market place due to
increased raw material costs which could not entirely be passed through, as well
as the $1.8 million restructuring charge incurred at our Belgian operations.
DISCONTINUED OPERATIONS
The loss from discontinued operations for fiscal 1999 of $19.0 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 October 31, 1999. The rigids businesses also had an
additional net charge of $577,000.
The loss from discontinued operations for fiscal 1998 of $5.5 million
includes the net losses of the Proponite business of $2.7 million and net losses
of the rigids businesses of $2.8 million. The sale of the rigids businesses was
completed by October 31, 1998.
YEAR ENDED OCTOBER 31, 1998, AS COMPARED TO YEAR ENDED OCTOBER 31, 1997
CONTINUING OPERATIONS
Net sales in fiscal 1998 were $666.6 million, a decrease of $42.5 million,
or 6.0%, from fiscal 1997. Net sales in North America decreased to
$396.3 million in fiscal 1998 from $419.5 million for fiscal 1997, or 5.5%,
primarily due to a 9% decrease in per unit selling prices as a result of lower
raw material costs, which reductions were passed though to customers. This
decrease in selling prices was partially offset by an increase in sales volume
of 4.0% in North America. Net sales in Europe decreased to $192.2 million in
fiscal 1998 from $194.1 million in fiscal 1997, or 1.0%, primarily due to an
7.0% decrease in selling prices (local currency) partially offset by a 6.4%
increase in sales volume. Net sales in Asia/Pacific decreased to $78.0 million
in fiscal 1998 from $80.6 million in fiscal 1997, or 3.2%. The Asia/Pacific
region had a 22.2% sales volume increase as a result of our acquisition of
certain businesses during the prior year, offset by a decrease of 20.8% in
average selling prices (local currency) because of the change in the product mix
as a result of the acquisitions described above, average lower selling prices
and economic pressures in the
18
<PAGE>
region. Our net sales for fiscal 1997 included net sales of $14.8 million from
our South African operation, which was sold November 1, 1997.
Gross profit for fiscal 1998 was $146.8 million, as compared to
$145.0 million in fiscal 1997, an increase of $1.8 million. North America
experienced an increase in gross profit of $8.7 million, or 9.8%, for fiscal
1998 as a result of increased utilization of plant facilities, increased sales
volume and reduced raw material costs. Gross profit in Europe decreased by
$699,000 for fiscal 1998 when compared to fiscal 1997. This decrease was
primarily due to market conditions which prevented the timely passing through of
increased raw material costs to customers during the first six months of fiscal
1998 offset by increased sales volume. This volume increase also helped increase
utilization of manufacturing facilities. Gross profit for the Asia/Pacific
region decreased $2.9 million in fiscal 1998 when compared to fiscal 1997. This
decrease in gross profit is a result of economic pressures in the Asia/Pacific
region, which caused depressed unit selling prices, of approximately 20.8% as
compared to the prior year, and reduced plant utilization for the first half of
fiscal 1998. Our gross profit for fiscal 1997 included $3.3 million from our
South African operation, which was sold November 1, 1997.
Operating expenses for fiscal 1998 were $104.8 million, as compared to
$107.0 million in fiscal 1997. This net decrease of $2.2 million is attributable
to a reduction in selling expenses of $2.0 million as a result of the
realignment of our worldwide sales force at the beginning of fiscal 1998. This
reduction in selling expenses was offset by an increase of $2.6 million in
delivery costs resulting from increased sales volume and increased costs
incurred in the implementation of new delivery systems during the fiscal year.
Our general and administrative expenses for fiscal 1998 increased by $615,000
with no major increase in any one area. The operating expenses for fiscal 1997
included $3.4 million related to our South African operation, which was sold
November 1, 1997.
Interest expense for fiscal 1998 was $33.8 million, an increase of
$3.7 million from the prior year. This increase in interest expense resulted
from our issuance of $200.0 million of 9.875% Senior Subordinated Notes in
November 1997, which resulted in higher average interest rates for the fiscal
year, partially offset by lower average debt outstanding for fiscal 1998.
Other income for fiscal 1998 amounted to $1.5 million, which includes
foreign transaction gains, interest income and income from investment in a joint
venture.
Net income from continuing operations for fiscal 1998 decreased by 21.3% to
$5.8 million from $7.3 million in fiscal 1997. This decrease was due primarily
to the reduction in gross profit realized in our Asia/Pacific market place, as
well as increased interest expense and a reduction in other income from the
prior year.
DISCONTINUED OPERATIONS
The loss from discontinued operations for fiscal 1998 of $5.5 million
includes the net losses of the Proponite business of $2.7 million and net losses
of the rigids businesses of $2.8 million. The sale of the rigids businesses was
completed by October 31, 1998. In fiscal 1997, the Proponite business had net
income of $1.2 million.
YEAR ENDED OCTOBER 31, 1997, AS COMPARED TO YEAR ENDED OCTOBER 31, 1996
Net sales for fiscal 1997 increased by 162.1% to $709.1 million from
$270.5 million during fiscal 1996. This increase in net sales reflects the
Borden packaging acquisition, which resulted in increased net sales in North
America of $149.1 million, in Europe of $208.9 million and in the Asia/Pacific
region of $80.6 million. Sales during fiscal 1997 were negatively impacted by
volume and price reductions in the overall North America stretch wrap business
due to overcapacity, which was partially offset by volume increases in our other
product lines. Europe and Asia/Pacific had an increase in sales volume, which
was offset by a decrease in average selling prices.
19
<PAGE>
Gross profit for fiscal 1997 increased by 164.4% to $145.0 million from
$54.9 million during the same period in fiscal 1996. This increase in gross
profit resulted from the Borden packaging acquisition and consisted of increased
gross profit in North America of $34.7 million, in Europe of $41.7 million and
in the Asia/Pacific region of $14.3 million. Gross profit as a percentage of
sales during fiscal 1997 increased to 20.5% from 20.3% during fiscal 1996,
primarily as a result of cost savings associated with the Borden packaging
acquisition which was offset by the overcapacity and intense competition in the
North America stretch wrap business,. This overcapacity resulted in reduced
sales volume and underutilization of plant facilities, each of which negatively
impacted margins as labor and other fixed costs were spread over fewer sales.
Europe had a slight increase in gross margins, due to increased sales volumes,
which lowered production costs by increasing plant efficiencies. Asia/Pacific
had decreased gross profit margins because of the general economic conditions in
the regions, which resulted in lower average selling prices.
Operating expenses for fiscal 1997 increased 159.0% to $107.0 million from
$39.3 million during fiscal 1996. This increase of $67.7 million in operating
expenses is attributable to the businesses acquired from Borden and the
operating expenses associated with them. Operating expenses as a percentage of
sales during fiscal 1997 increased slightly to 15.1% from 14.5% during fiscal
1996. Operating expenses in fiscal 1997 reflect higher than expected costs
associated with closing certain operations at a North Andover plant and
relocating certain of those operations to our Griffin, Georgia plant partially
offset by certain synergies achieved as a result of the Borden packaging
acquisition through the consolidation of administrative and sales personnel and
warehouse facilities. We incurred increased delivery costs during fiscal 1997
due to the installation of new delivery systems to accommodate this
consolidation.
Interest expense for fiscal 1997 increased by 161.7% to $30.1 million from
$11.5 million during fiscal 1996. This increase in interest expense is primarily
due to increased borrowings used to finance the Borden packaging acquisition,
loan origination fees applicable to the credit facility amendment and additional
interest expense arising from the issuance of $200.0 million of 9.875% Senior
Subordinated Notes. This was partially offset by a decline in interest rates
during fiscal 1997. Interest expense as a percentage of sales during the fiscal
1997 decreased slightly to 4.0% from 4.3% during fiscal 1996.
Other income for fiscal 1997 amounted to $3.3 million. This amount for
fiscal 1997 includes interest income, foreign transaction gains, gain from sale
of securities and income from an investment in a joint venture.
Net income from continuing operations for fiscal 1997 increased by 180.8% to
$7.3 million from $2.6 million in fiscal 1996. This increase was due primarily
to additional sales volume attributable to the Borden packaging acquisition,
offset by the aforementioned overcapacity in the stretch wrap business, as well
as increased interest expense.
LIQUIDITY AND CAPITAL RESOURCES
We have historically financed our operations through cash flow generated
from operations and borrowings by us or our subsidiaries under various credit
facilities. Our principal uses of cash have been to fund working capital,
including operating expenses, debt service, and capital expenditures.
Our working capital amounted to $44.4 million at October 31, 1999, compared
to $79.6 million at October 31, 1998. This decrease of $35.2 million in working
capital is primarily the result of a non-cash provision for disposal of net
assets of the discontinued operations, including a reserve for operating losses
through the disposal date of $29.1 million and the strengthening of the United
States dollar during fiscal 1999 which further reduced translated working
capital balances of foreign subsidiaries. The remaining increases and decreases
in components of our 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
20
<PAGE>
$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
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 October 31, 1999, there was $97 million
outstanding under the term credit facility and no outstanding borrowings under
the revolving credit facility.
We are currently in compliance with all of these covenants. We do not
foresee any problems in remaining in compliance with these covenants.
On November 19, 1997, we completed an offering of 9.875% Senior Subordinated
Notes due November 15, 2007 in aggregate principal amount of $200.0 million. 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 then
outstanding under our outstanding Credit Agreement.
We also have a $10.0 million unsecured revolving credit facility available
for working capital purposes. As of October 31, 1999, there was no outstanding
borrowing under this credit facility.
We maintain various unsecured short-term credit facilities at our foreign
subsidiaries. At October 31, 1999, the aggregate amount outstanding under such
facilities was approximately $7.1 million and approximately $41.8 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.
Our cash and cash equivalents were $3.1 million at October 31,1999, as
compared to $4.0 million at the same date in the prior year. Net cash provided
by operating activities during fiscal 1999, was $30.7 million, primarily due to
depreciation and amortization expense of $31.6 million, reduction of inventories
by $5.8 million, net income from continuing operations of $4.5 million, offset
by net investment in accounts receivable of $12.2 million and net increases in
other operating assets and liabilities. In each period, the net decreases in
other operating assets and liabilities reflect normal operating activity.
On April 30, 1999, we completed the sale of our Proponite business and
certain of its assets for $13.3 million. We expect to receive net proceeds of
approximately $4.2 million from the disposition of the remaining business
assets.
Net cash used in investing activities during fiscal 1999, was
$10.1 million, resulting primarily from the net investment in capital
expenditures of $22.2 million and the acquisition of the Thermofilm subsidiary
for $1.9 million, which was partially offset by proceeds received from the sale
of the Proponite business of $13.3 million and from the sales of machinery and
equipment of $744,000.
Net cash used in financing activities for fiscal 1999 was $23.1million,
reflecting net repayments of $24.2 million on outstanding credit facilities and
proceeds from stock issuances of $1.0 million.
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.
21
<PAGE>
YEAR 2000
We undertook systems readiness review that mitigated 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
addressed: (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. All business application
software and hardware have been inventoried, modified or upgraded, and where
appropriate replaced, to assure Year 2000 compliance of all systems
installations in our worldwide businesses.
We have completed our inventories and assessments in regard to embedded
technology, such as microcontrollers in our production equipment and upgraded
those that were found non-compliant at each of our worldwide businesses.
We evaluated the impact on us of Year 2000 compliance by significant third
parties and each of our business locations has identified and contacted each
significant third party to ascertain such third party's Year 2000 readiness. We
experienced no Year 2000 delays in shipment of our production supplies with any
of our critical suppliers. Key customers were identified and contacted. We
experienced no failures in connection with Year 2000 compliance.
Our total cost associated with Year 2000 compliance activities, including
upgrades of the international business systems was approximately $7.8 million.
Cash flow from operations has funded this project.
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K contains certain forward-looking statements
that involve risks and uncertainties. These statements relate to our future
plans, objectives, expectations and intentions. Such statements are subject to
certain risks and uncertainties, which could cause actual results to differ
materially from those projected in this Annual Report. These statements may be
identified by the use of words such as "expects," "anticipates," "intends,"
"plans" and similar expressions. Our actual results could differ materially from
those discussed in these statements. Factors that could contribute to such
differences include, but are not limited to, those discussed above and elsewhere
in this Annual Report.
22
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<S> <C> <C> <C>
Index:
Report of Independent Public Accountants
Financial Statements:
Consolidated Balance Sheets as of October 31, 1999 and 1998
Consolidated Statements of Income--For the years ended
October 31, 1999, 1998 and 1997
Consolidated Statements of Shareholders' Equity--For the
years ended October 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows--For the years ended
October 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
Financial Statement Schedules:
Schedules included are set forth in Item 14.
</TABLE>
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--Management" 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 Stockholders to be held on April 11, 2000 (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, 1999 and 1998, and
the related consolidated statements of income, shareholders' equity and cash
flows for each of the three years in the period ended October 31, 1999. 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
October 31, 1999 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
January 3, 2000
25
<PAGE>
AEP INDUSTRIES INC.
CONSOLIDATED BALANCE SHEETS AS OF OCTOBER 31, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
1999 1998
ASSETS -------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 3,103 $ 3,994
Accounts receivable, less allowance of $5,342 and $4,686
in 1999 and 1998, respectively, for doubtful accounts... 110,848 98,656
Inventories, net.......................................... 74,260 80,836
Net assets of discontinued operations..................... 4,249 45,146
Other current assets...................................... 11,309 14,467
-------- --------
Total current assets................................ 203,769 243,099
-------- --------
PROPERTY, PLANT AND EQUIPMENT, at cost, less accumulated
depreciation and amortization............................. 232,421 250,032
-------- --------
GOODWILL less accumulated amortization of $3,858 and $2,629
in 1999 and 1998, respectively............................ 40,064 40,817
INVESTMENT IN JOINT VENTURE................................. 15,722 15,597
DEFERRED TAX ASSET, net..................................... 3,728 --
OTHER ASSETS................................................ 19,287 19,545
-------- --------
Total assets........................................ $514,991 $569,090
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of debt................................... $ 27,433 $ 30,968
Accounts payable.......................................... 89,459 87,893
Accrued expenses.......................................... 42,454 44,621
-------- --------
Total current liabilities........................... 159,346 163,482
-------- --------
LONG-TERM DEBT.............................................. 281,172 301,817
OTHER LONG TERM LIABILITIES................................. 7,635 6,440
DEFERRED INCOME TAXES, net.................................. -- 11,050
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; 10,093,793 and 10,022,301 shares issued in
1999 and 1998, respectively............................. 101 100
Additional paid-in capital................................ 92,992 91,324
Treasury stock--common stock; at cost, 2,696,380 and
2,744,600 shares in 1999 and 1998, respectively......... (59,892) (60,963)
Retained earnings......................................... 64,444 78,942
Accumulated other comprehensive loss...................... (30,807) (23,102)
-------- --------
Total shareholders' equity.......................... 66,838 86,301
-------- --------
Total liabilities and shareholders' equity.......... $514,991 $569,090
======== ========
</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, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
NET SALES................................................... $ 670,052 $ 666,556 $ 709,072
COST OF SALES............................................... 526,218 519,721 564,035
RESTRUCTURING CHARGE........................................ 1,829 -- --
--------- --------- ---------
Gross profit.......................................... 142,005 146,835 145,037
OPERATING EXPENSES:
Delivery.................................................. 38,427 38,529 36,571
Selling................................................... 39,350 37,811 41,429
General and administrative................................ 27,016 28,448 29,031
--------- --------- ---------
Total operating expenses.............................. 104,793 104,788 107,031
--------- --------- ---------
Income from operations................................ 37,212 42,047 38,006
OTHER INCOME (EXPENSE):
Interest expense.......................................... (31,489) (33,780) (30,061)
Other, net................................................ 2,163 1,465 3,285
--------- --------- ---------
(29,326) (32,315) (26,776)
Income from continuing operations before provision for
income taxes........................................ 7,886 9,732 11,230
PROVISION FOR INCOME TAXES.................................. 3,413 3,961 3,901
--------- --------- ---------
Income from continuing operations..................... 4,473 5,771 7,329
DISCONTINUED OPERATIONS:
(Loss) Income from operations of discontinued businesses
(less applicable income tax benefit of $770 and $3,237
for 1999 and 1998, respectively and income taxes of $794
for 1997)............................................... (1,205) (5,383) 1,242
(Loss) on disposal of discontinued businesses (less
applicable income tax benefit of $11,299 and $932 for
1999 and 1998, respectively)............................ (17,766) (125) --
--------- --------- ---------
(Loss) Income from discontinued operations................ (18,971) (5,508) 1,242
--------- --------- ---------
Net Income (Loss)......................................... $ (14,498) $ 263 $ 8,571
========= ========= =========
EARNINGS PER SHARE:
Basic income from continuing operations................... $ 0.61 $ 0.79 $ 1.02
Basic loss from discontinued operations................... (2.59) (0.75) 0.17
--------- --------- ---------
Basic net income (loss)................................. $ (1.98) $ 0.04 $ 1.19
========= ========= =========
Total basic shares........................................ 7,333,670 7,266,888 7,172,790
========= ========= =========
Diluted income from continuing operations................. $ 0.60 $ 0.78 $ 0.98
Diluted loss from discontinued operations................. (2.59) (0.75) 0.17
--------- --------- ---------
Diluted net income (loss)............................... $ (1.99) $ 0.03 $ 1.15
========= ========= =========
Total diluted shares...................................... 7,509,672 7,401,431 7,452,393
========= ========= =========
</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, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK TREASURY STOCK ADDITIONAL OTHER TOTAL
------------------- ------------------- PAID-IN COMPREHENSIVE RETAINED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL (LOSS) EARNINGS INCOME (LOSS)
-------- -------- -------- -------- ---------- -------------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT OCTOBER 31,
1996...................... 9,931 $ 99 2,801 $(62,142) $88,052 $ (984) $70,108
Issuance of common stock
upon exercise of stock
options................. 46 1 -- -- 727 -- --
Issuance of common stock
pursuant to stock
purchase plan........... 11 -- -- -- 363 -- --
Tax benefit from stock
option exercises........ -- -- -- -- 160 --
ESOP contribution......... -- -- (19) 359 672 -- --
Net income................ -- -- -- -- -- -- 8,571 $ 8,571
Sale of securities........ -- -- -- -- -- (299) -- (299)
Translation adjustments... -- -- -- -- -- (17,705) -- (17,705)
--------
Comprehensive Income
(loss):............... $(22,203)
-------- ----- ----- -------- ------- -------- ------- ========
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 -- --
ESOP contribution......... -- -- (37) 820 476 -- --
Net Income................ -- -- -- -- -- -- 263 263
Translation adjustments... -- -- -- -- -- (4,114) -- (4,114)
--------
Comprehensive Income
(loss):............... $(22,203)
-------- ----- ----- -------- ------- -------- ------- ========
BALANCES AT OCTOBER 31,
1998...................... 10,022 100 2,745 (60,963) 91,324 (23,102) 78,942
Issuance of common stock
upon exercise of stock
options................. 53 1 -- -- 769 -- --
Issuance of common stock
pursuant to stock
purchase plan........... 18 -- -- 341 -- --
Tax benefit from stock
option exercises........ -- -- -- -- 657 -- --
ESOP contribution......... -- -- (49) 1,071 (99) -- --
Comprehensive Income
(loss):.................
Net Loss.................. -- -- -- -- -- -- (14,498) (14,498)
Translation adjustments... -- -- -- -- -- (7,705) -- (7,705)
--------
Comprehensive Income
(loss):............... $(22,203)
-------- ----- ----- -------- ------- -------- ------- ========
BALANCES AT OCTOBER 31,
1999...................... 10,093 $ 101 2,696 $(59,892) $92,992 $(30,807) $64,444
======== ===== ===== ======== ======= ======== =======
</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, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $(14,498) $ 263 $ 8,571
Adjustments to reconcile net income to net cash provided
by operating activities--
Loss from discontinued operations....................... 1,205 5,383 (1,242)
Loss from disposal of discontinued businesses........... 17,766 125 --
Depreciation and amortization........................... 31,554 30,378 28,810
ESOP contribution....................................... 972 1,057 827
Other................................................... (654) (320) (989)
Provision for losses on accounts receivable and
inventory.............................................. 2,353 2,048 2,342
Write-off of debt issuance costs........................ -- -- 3,330
Provision for deferred income taxes..................... 563 2,242 1,910
Changes in operating assets and liabilities, net of
acquisition of business
(Increase) decrease in accounts receivable.............. (13,581) 3,707 (8,372)
Decrease in inventories................................. 5,764 1,231 1,535
(Increase) decrease in other current assets............. 3,162 (3,877) 2,789
(Increase) in other assets.............................. (2,968) (12,826) (18,868)
(Increase) decrease in net assets held for sale......... (1,882) (3,108) 2,132
Decrease in goodwill.................................... 1,153 1,088 8,423
Increase in accounts payable............................ 1,476 17,392 8,080
Increase (decrease) in accrued expenses................. (2,122) 6,435 (9,643)
Increase in other long term liabilities................. 434 7,992 7,943
-------- -------- -------
Net cash provided by operating activities........... 30,697 59,210 37,578
-------- -------- -------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures...................................... (22,235) (24,444) (37,614)
Sales and retirements of property, plant and equipment,
net..................................................... 744 3,182 2,088
Acquisition of subsidiary................................. (1,948) -- (8,758)
Sales of marketable securities............................ -- -- 2,486
Net proceeds from sale of subsidiaries.................... 13,316 13,224 --
-------- -------- -------
Net cash used in investing activities............... (10,123) (8,038) (41,798)
-------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Subordinated Debentures......... -- 198,500 --
Repayments of Term Loan................................... -- (196,591) --
Net (repayments) borrowings............................... (24,180) (44,954) 549
Proceeds from issuance of common stock.................... 1,039 857 1,091
-------- -------- -------
Net cash (used in) provided by financing
activities.......................................... (23,141) (42,188) 1,640
-------- -------- -------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH.................... 1,676 (9,133) (5,344)
-------- -------- -------
Net decrease in cash................................ (891) (149) (7,924)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.............. 3,994 4,143 12,067
-------- -------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $ 3,103 $ 3,994 $ 4,143
======== ======== =======
SUPPLEMENTAL SCHEDULE OF NONCASH OPERATING AND INVESTING ACTIVITIES
LONG TERM NOTE RECEIVED FROM SALE OF PORTION OF RIGIDS'
BUSINESSES................................................ -- $ 3,004 --
======== ======== =======
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
29
<PAGE>
AEP INDUSTRIES INC.
NOTES TO FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION:
AEP Industries Inc. (the "Company") is an international manufacturer of a
wide range of plastic film products. The Company's products are used in a number
of industrial, commercial, food and agricultural applications and are sold
worldwide, including North America, Western Europe and the Asia/Pacific regions.
(2) SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION--
The consolidated financial statements include the accounts of all
majority-owned subsidiaries. All significant intercompany transactions have been
eliminated.
REVENUE RECOGNITION--
Revenues are recognized when products are shipped 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 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. Cumulative translation losses of approximately
$30.8 million, $23.1 million and $19.0 million have been included as a component
of accumulated other comprehensive loss for the years ending October 31, 1999,
1998 and 1997, respectively.
RESEARCH AND DEVELOPMENT COSTS--
Research and development costs are charged to expense as incurred.
Approximately $1,608,000, $1,524,000 and $1,908,000, for 1999, 1998 and 1997,
respectively, were incurred for such research and development.
INCOME TAXES--
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards 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 acquired entities, is being amortized on a straight line
basis over the period of expected benefit of thirty-five (35) years. The Company
evaluates whether changes have occurred that would require revision of the
remaining estimated useful life of the assigned goodwill or render the goodwill
not recoverable.
31
<PAGE>
AEP INDUSTRIES INC.
NOTES TO 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 6 and 7, 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 (EPS)--
Basic EPS is calculated by dividing income available to common shareholders
by the weighted average number of shares of common stock outstanding during the
period. Diluted EPS is calculated by dividing income available to common
shareholders by the weighted average number of common shares outstanding,
adjusted to reflect potentially dilutive securities (stock options). The
computation of diluted EPS includes 176,002, 134,543 and 279,603 options
outstanding and excludes 156,310, 309,590 and 155,000 anti dilutive options for
the year ended October 31, 1999, 1998 and 1997, respectively.
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 and provides
the disclosures required by SFAS No.123 "Accounting for Stock-Based
Compensation" (See Note 8).
LONG-LIVED ASSETS--
Long-lived assets and certain identifiable intangibles held and used by the
Company are reviewed for impairment whenever events or changes in circumstances
indicate the carrying amount of an asset may not be recovered. Assets to be
disposed of are reported at the lower of the carrying value or the fair market
value less costs to sell.
32
<PAGE>
AEP INDUSTRIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
NEW ACCOUNTING STANDARDS--
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. In 1999, the Financial Accounting Standards Board issued
SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133". This
standard deferred the effective date of SFAS 133. SFAS 133 is now effective for
the Company's 2001 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 1999 presentation.
(3) 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,
-------------------
1999 1998
-------- --------
<S> <C> <C>
(IN THOUSANDS)
Raw materials............................................. $18,095 $19,676
Finished goods............................................ 52,941 57,952
Supplies.................................................. 4,543 4,626
------- -------
75,579 82,254
Less: Inventory Reserve................................... 1,319 1,418
------- -------
Inventories, net...................................... $74,260 $80,836
======= =======
</TABLE>
The last-in, first-out (LIFO) method was used for determining the cost of
approximately 50% and 52% of total inventories at October 31, 1999 and 1998,
respectively. Inventories would have been increased by $4,502,000 and decreased
by $4,019,000 at October 31, 1999 and 1998, 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.
33
<PAGE>
AEP INDUSTRIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(4) 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
1999 1998 USEFUL LIVES
(AMOUNTS IN THOUSANDS) -------- -------- ----------------
<S> <C> <C> <C>
Land............................................ $ 12,943 $ 13,607
Buildings....................................... 68,278 68,227 15 to 31.5 years
Machinery and equipment......................... 259,327 256,377 3 to 16 years
Furniture and fixtures.......................... 5,528 5,160 9 years
Leasehold improvements.......................... 2,856 2,027 6 to 25 years
Motor vehicles.................................. 3,888 3,644 3 years
Construction in progress........................ 11,921 11,505
-------- --------
364,741 360,547
Less--Accumulated depreciation and
amortization.................................. 132,320 110,515
-------- --------
$232,421 $250,032
======== ========
</TABLE>
Maintenance and repairs expense was approximately $12,900,000, $11,323,000
and $11,293,000 for the years ended October 31, 1999, 1998 and 1997,
respectively.
(5) ACCRUED EXPENSES:
At October 31, 1999 and 1998, accrued expenses consisted of the following-
<TABLE>
<CAPTION>
1999 1998
(AMOUNTS IN THOUSANDS) -------- --------
<S> <C> <C>
Payroll and employee related................................ $14,604 $13,307
Interest.................................................... 10,425 10,425
Taxes (other than income)................................... 2,607 3,692
Customer rebates............................................ 4,286 4,406
Insurance related........................................... 2,025 2,685
Other....................................................... 8,507 10,106
------- -------
$42,454 $44,621
======= =======
</TABLE>
34
<PAGE>
AEP INDUSTRIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(6) DEBT:
A summary of the components of debt is as follows--
<TABLE>
<CAPTION>
OCTOBER 31,
-------------------
1999 1998
(AMOUNTS IN THOUSANDS) -------- --------
<S> <C> <C>
Term loan facility (a)...................................... $ 97,000 $112,000
Senior Subordinated Debentures, less unamortized discount of
$1,035
and $1,397, respectively (b).............................. 198,965 198,603
Pennsylvania Industrial Loans (c)........................... 5,484 5,862
Foreign bank borrowings (d)................................. 7,156 16,320
-------- --------
Total Debt.............................................. 308,605 332,785
Less--Current portion....................................... 27,433 30,968
-------- --------
Long-Term Debt.............................................. $281,172 $301,817
======== ========
</TABLE>
- ------------------------
(a) In October 1996, 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 million and (2) a six year revolving credit
facility in the amount of $100 million. The Company also has a $10 million
unsecured revolving credit facility for working capital purposes. At
October 31, 1999 and 1998, there were no outstanding borrowings under either
of the revolving credit facilities.
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 principal effects of the
Amendment relate to the interest rate applicable to the Credit Agreement and
the amortization schedule with respect to the term loan made thereunder. The
interest rate margins which determine the interest rates applicable to the
loans under the Credit Agreement 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 wrote off in fiscal 1997 the unamortized prior
debt issuance costs of approximately $3.3 million and capitalized
$1.1 million of amendment fees in accordance with EITF 96-19. Loan principal
of $15 million was repaid in each of 1999 and 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.
The Company was in compliance with all the covenants of the Amendment at
October 31, 1999.
(b) In November 1997, the Company completed an offering of $200 million in
aggregate principal amount of 9.875% Senior Subordinated Debentures due
November 15, 2007 (the "Debentures"). The issue
35
<PAGE>
AEP INDUSTRIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(6) DEBT: (CONTINUED)
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.
The Company was in compliance with all the covenants of the Debentures at
October 31, 1999.
(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 $378,000 and $369,000 of these borrowings during 1999
and 1998, respectively.
These financing arrangements are secured by the real and personal property
of our manufacturing facility located in Wright Township, Pennsylvania.
(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, 1999 and 1998, the aggregate amount
outstanding under such facilities was approximately $7.2 million and
$15.5 million respectively and is contained within the foreign bank
borrowings amount. Interest rates on these borrowings range from 4.45% to
8.625%. There was approximately $41.8 million and $52.6 million available
for borrowing at October 31, 1999 and 1998, respectively.
Foreign bank borrowings at October 31, 1998 include $835,000 of long term
foreign debt (of which $206,000 was due within one year). This debt was held
in Australia and Italy with average interest rates of 8.35% and 6.32%,
respectively.
Payments required on all debt during each of the next five fiscal years are as
follows--
<TABLE>
<S> <C>
(AMOUNTS IN TABLE STATED IN THOUSANDS)
2000................................................ $ 27,433
2001................................................ 25,487
2002................................................ 53,382
2003................................................ 375
2004................................................ 325
Thereafter.......................................... 202,638
--------
$309,640
========
</TABLE>
36
<PAGE>
AEP INDUSTRIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(6) DEBT: (CONTINUED)
Cash paid for interest during 1999, 1998 and 1997 was approximately
$29.5 million, $26.7 million and $22.2 million, respectively.
The Company was contingently liable for debt of certain of its foreign
subsidiaries and equipment guarantees aggregating to approximately $14.0 and
$18.5 million at October 31, 1999 and 1998, respectively. Contained within this
amount is approximately $8.7 million and $11.2 million, respectively, 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, 1999 and 1998 was $192 million and $188 million,
respectively 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.
(7) FINANCIAL INSTRUMENTS:
The Company enters into foreign currency forward contracts (principally
against the Euro, Canadian dollar, Australian 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-five (25) and twenty-nine (29) contracts outstanding
at October 31, 1999 and 1998, respectively with a total notional contract amount
of $109.2 million $134.2 million respectively and maturities of less than one
year. These contracts had a fair market value of $107.5 million and
$131.9 million at October 31, 1999 and 1998, respectively.
(8) SHAREHOLDERS' EQUITY:
The Company has three stock plans: two stock option plans which provide for
the granting of options to key employees of the Company, including officers and
directors; and an employee stock purchase plan.
The Company had reserved 500,000 shares of Common Stock for the granting of
options related to The 1995 Stock Option Plan ("1995 Option Plan"). In 1999, an
amendment to the Plan was approved increasing the number of shares available for
grant under the Plan from 500,000 to 1,000,000 shares. The 1995 Option Plan
became effective January 1, 1995, and will terminate December 31, 2004. The 1995
Option Plan, provides for the granting of incentive stock options ("ISOs") which
may be exercised over a period of ten years, issuance of SARS, restricted stock,
performance shares and nonqualified stock options, including fixed annual
grants, to nonemployee directors. Under the 1995 Option Plan, options have been
granted to key employees and outside directors for terms of up to ten years, at
an exercise price not less than the fair value at the date of grant, with the
exception of participants who were granted ISOs at 110% of the fair value
because they possessed more than 10% of the voting rights of the Company's
outstanding common stock at the time of grant, which options are exercisable in
whole or in part at stated times from the date of grant up to five years from
the date of grant. The Stock Option Committee is made up entirely
37
<PAGE>
AEP INDUSTRIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(8) SHAREHOLDERS' EQUITY: (CONTINUED)
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. As of October 31, 1999, 1998 and 1997,
463,850, 99,710 and 164,020 options respectively, were available for grant.
Under the 1985 Option Plan, 772,500 options were granted to key employees of
the Company, including directors and officers. At October 31, 1999, 1998 and
1997, 45,318, 17,260 and 44,695 options, respectively, had been exercised and
273,982, 322,900 and 353,290 options were outstanding. During 1999, 1998 and
1997, 3,600, 13,130 and 22,440 options respectively, under the 1985 Option Plan
were canceled. The 1985 Option Plan expired on October 31, 1995.
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.
Transactions under the Purchase Plans were as follows--
<TABLE>
<CAPTION>
NUMBER OF PURCHASE PRICE
SHARES PER SHARE
--------- --------------
<S> <C> <C>
Available at October 31, 1996......... 284,824
Purchased............................. (10,682) $34.00
------- ------
Available at October 31, 1997......... 274,142
Purchased............................. (15,972) $21.81
------- ------
Available at October 31, 1998......... 258,170
Purchased............................. (18,470) $18.49
------- ------
Available at October 31, 1999......... 239,700
=======
</TABLE>
38
<PAGE>
AEP INDUSTRIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(8) SHAREHOLDERS' EQUITY: (CONTINUED)
Transactions under the Option Plans were as follows--
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE WEIGHTED AVERAGE
SHARES PER SHARE EXERCISE PRICE
--------- ------------------- ----------------
<S> <C> <C> <C>
Outstanding at October 31, 1996 (166,360 options
exercisable)....................................... 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 (245,396 options
exercisable)....................................... 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 (262,900 options
exercisable)....................................... 723,190 $ 5.09-46.50 $25.51
Granted.............................................. 183,500 $ 20.88-36.56 $26.87
Exercised............................................ (56,618) $ 5.09-33.00 $15.97
Forfeited/Cancelled.................................. (39,940) $ 18.75-46.00 $30.11
-------- ------
Outstanding at October 31, 1999 (350,686 options
exercisable)....................................... 810,132 $ 5.09-46.50 $26.26
======== ======
</TABLE>
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Weighted average fair value of options granted at prices
above market value........................................ $0 $0 $0
Weighted average fair value of options granted at prices
at market value........................................... $15.14 $16.29 $19.77
Weighted average exercise price of options granted at prices
above market value........................................ $0 $0 $0
Weighted average exercise price of options granted at prices
at market value........................................... $26.87 $34.95 $36.64
</TABLE>
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>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Risk-Free Interest Rates................................... 5.14% 5.83% 6.56%
Expected Lives............................................. 7.5 7.5 7.2
Expected Volatility........................................ 44.8% 58.5% 41%
</TABLE>
39
<PAGE>
AEP INDUSTRIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(8) SHAREHOLDERS' EQUITY: (CONTINUED)
The following table summarizes information about stock options outstanding
at October 31, 1999:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED WEIGHTED NUMBER WEIGHTED
OPTIONS AVERAGE AVERAGE EXERCISABLE AVERAGE
OUTSTANDING AT REMAINING EXERCISE AT EXERCISE
RANGE OF EXERCISE PRICE OCTOBER 31, 1999 CONTRACTUAL LIFE PRICE OCTOBER 31, 1999 PRICE
- -------- -------------- ---------------- ---------------- -------- ---------------- --------
<S> <C> <C> <C> <C> <C> <C>
$ 5.09 $ 7.36 23,962 2.51 $ 5.93 23,962 $ 5.93
7.37 10.64 15,250 1.33 8.83 15,250 8.83
10.65 15.39 7,500 3.82 11.33 7,500 11.33
15.40 22.26 169,200 5.31 18.11 133,380 17.95
22.27 32.18 430,410 7.62 27.10 136,752 25.98
32.19 46.50 163,810 8.15 37.75 33,842 37.94
------ ------ ------- ---- ------ ------- ------
$ 5.09 $46.50 810,132 6.94 $26.26 350,686 $21.65
</TABLE>
Had compensation expense, net of taxes, for all stock option grants in
fiscal years 1999, 1998 and 1997 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>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C> <C>
Net Income (loss):
(IN THOUSANDS) As Reported $(14,498) $ 263) $8,571
Pro Forma $(15,326) $(409 7,560
Basic earnings (loss) per share:
As Reported $ (1.98) $ 0.04 $ 1.19
Pro Forma $ (2.09) $(0.06) 1.05
Diluted earnings (loss)
per share: As Reported $ (1.99) $ 0.03 $ 1.15
Pro Forma $ (2.10) $(0.06) 1.01
</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. Additional awards in future years are anticipated.
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 common stock at $22.75 per share. The purchases of
treasury stock were accounted for under the cost method. During 1999, 1998 and
1997, the Company issued 48,220, 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.
(9) PENSIONS AND RETIREMENT SAVINGS PLAN
The Company sponsors various post retirement plans for most full-time
employees. Total pension expense for 1999, 1998 and 1997 was $3,635,000,
$2,885,000 and $2,755,000, respectively. The Company
40
<PAGE>
AEP INDUSTRIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(9) PENSIONS AND RETIREMENT SAVINGS PLAN (CONTINUED)
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 United States 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 common stock will be valued for the first
ten business days of the month of February following the close of any Plan year.
In 1999, 1998 and 1997, 48,220, 36,943 and 19,457 shares, respectively, were
contributed. The Company has expensed approximately $972,000, $1,057,000 and
$827,000 in 1999, 1998 and 1997, respectively, related to this Plan.
The Company also sponsors defined contribution plans at selected foreign
locations. 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 1999, 1998
and 1997 totaled approximately $1,142,000, $622,000 and $225,000, respectively.
The Company also has defined benefit plans in certain of its foreign
locations. 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.
41
<PAGE>
AEP INDUSTRIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(9) PENSIONS AND RETIREMENT SAVINGS PLAN (CONTINUED)
The following table . . .
<TABLE>
<CAPTION>
OCTOBER 31, OCTOBER 31,
1999 1998
(IN THOUSANDS) ----------- -----------
<S> <C> <C>
CHANGES IN BENEFIT OBLIGATIONS
Projected benefit obligations at beginning of year.......... $(18,376) $(17,230)
Service Cost................................................ (1,199) (919)
Interest Cost............................................... (985) (1,107)
Plan participant's contributions............................ (312) (310)
Benefits Paid............................................... 1,556 1,490
Actuarial gain (losses)..................................... (552) 176
Amendments.................................................. (184) --
Foreign currency changes.................................... 1,877 (476)
-------- --------
Benefit obligations at end of year.......................... $(18,175) $(18,376)
======== ========
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 31, OCTOBER 31,
1999 1998
----------- -----------
<S> <C> <C>
CHANGES IN PLAN ASSETS
Fair value of plan assets at beginning of year.............. $11,887 $11,628
Employer contributions...................................... 499 568
Employee contributions...................................... 312 310
Actual return on plan assets................................ (464) 458
Actual distributions........................................ (1,363) (1,317)
Foreign Currency Changes.................................... (1,000) 240
------- -------
Fair value of plan assets at end of year.................... $ 9,871 $11,887
======= =======
Funded status: Surplus (deficit)............................ $(8,304) $(6,489)
Unrecognized net actuarial (gains) losses................... 2,169 590
Unrecognized prior service cost............................. 183 --
------- -------
Prepaid (accrued) benefit cost.............................. $(5,952) $(5,899)
======= =======
</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>
1999 1998 1997
(IN THOUSANDS) -------- -------- --------
<S> <C> <C> <C>
Service costs of benefits earned during the year............ $1,533 $1,365 $2,034
Interest cost of projected benefit obligation............... 985 1,116 1,325
Actual return (gain) on assets.............................. (691) (842) (1,152)
Employee contributions...................................... (297) (438) (504)
Amortization of unrecognized net gains...................... (9) 5 --
------ ------ ------
Net Pension Expense......................................... $1,521 $1,206 $1,703
====== ====== ======
</TABLE>
42
<PAGE>
AEP INDUSTRIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(9) 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, 1999 and October 31, 1998,
were as follows:
<TABLE>
<CAPTION>
OCTOBER 31, OCTOBER 31,
1999 1998
----------- -----------
<S> <C> <C>
Discount rate............................................... 6% 6%
Salary progression rate..................................... 3% 4%
Long term rate of return.................................... 6% 6.5%
</TABLE>
(10) OTHER INCOME (EXPENSE)
For the years ended October 31, 1999, 1998 and 1997, other income (expense)
consisted of the following--
<TABLE>
<CAPTION>
1999 1998 1997
(AMOUNTS IN THOUSANDS) -------- -------- --------
<S> <C> <C> <C>
Foreign currency exchange gains, net........................ $1,374 $ 712 $ 198
Interest income............................................. 437 419 1,278
Joint venture income........................................ 428 252 317
Gain on sale of securities.................................. -- -- 416
Other, net.................................................. (76) 82 1,076
------ ------ ------
Total................................................... $2,163 $1,465 $3,285
====== ====== ======
</TABLE>
43
<PAGE>
AEP INDUSTRIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(11) INCOME TAXES:
The provision for income taxes for continuing operations is summarized as
follows--
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------------
1999 1998 1997
(IN THOUSANDS) -------- -------- --------
<S> <C> <C> <C>
Current
Federal and State................................. $ -- $ -- $ --
Foreign........................................... 2,850 1,719 1,991
------ ------ ------
2,850 1,719 1,991
------ ------ ------
Deferred:
Federal and State................................. 2,446 2,551 307
Foreign........................................... (1,883) (309) 1,603
------ ------ ------
563 2,242 1,910
------ ------ ------
Total provision for income taxes.................... $3,413 $3,961 $3,901
====== ====== ======
</TABLE>
Undistributed earnings of the Company's foreign subsidiaries of
approximately $.5 million, $2.2 million and $5.8 million for 1999, 1998 and
1997, respectively, are considered permanently invested outside the United
States, and as a result, the Company has not provided federal income taxes on
the unremitted earnings. A determination of the deferred tax liability from a
distribution of foreign earnings has not been made as such determination is not
practicable.
The tax effects of significant temporary differences that comprise the
deferred tax assets (liabilities) at October 31, 1999 and 1998 are as follows--
<TABLE>
<CAPTION>
OCTOBER 31,
-------------------
1999 1998
(IN THOUSANDS) -------- --------
<S> <C> <C>
Deferred tax asset--
Net operating loss carryforwards...................... $ 38,449 $ 27,684
Allowance for doubtful accounts....................... 882 834
Alternative minimum tax............................... 825 830
Other................................................. 2,513 2,192
-------- --------
Gross deferred tax asset............................ 42,669 31,540
Valuation Allowance................................... (13,230) (11,362)
-------- --------
Net deferred tax asset.............................. $ 29,439 $ 20,178
======== ========
<CAPTION>
OCTOBER 31,
-------------------
1999 1998
(IN THOUSANDS) -------- --------
<S> <C> <C>
Deferred tax liability
Depreciation.......................................... $(24,705) $(29,221)
Other................................................. (1,006) (2,007)
-------- --------
Deferred tax liability............................ $(25,711) $(31,228)
======== ========
Net deferred tax asset (liability)...................... $ 3,728 $(11,050)
-------- --------
</TABLE>
44
<PAGE>
AEP INDUSTRIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(11) INCOME TAXES: (CONTINUED)
Included in the net operating loss carryforwards at October 31, 1999, are
approximately $11.8 million of tax benefits recognized as a result of the loss
on the disposal of a discontinued operation in the United States (see Note 16).
During each of 1999 and 1998, the Company reduced goodwill by approximately
$1.1 million, respectively, relating to the deferred tax assets established as a
result of the acquisition of Borden Global Packaging.
Approximately $102.7 million of total net operating losses remained at
October 31, 1999, $18.3 million of which expire in the years 2000 through 2004,
$59.7 million of which expire in 2019 and $24.7 million of which can be carried
forward indefinitely. The benefits of these carryforwards are dependent on the
taxable income in those 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
$102.7 million above are approximately $59.7 million of federal net operating
losses in the United States available to be carried forward, which will expire
in the year 2019.
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 1999,
1998 and 1997 is as follows--
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------------
1999 1998 1997
(IN THOUSANDS) -------- -------- --------
<S> <C> <C> <C>
Provision at statutory rate......................... $2,681 $3,309 $3,810
State tax provision, net of Federal tax benefit..... 254 92 153
Effect of non U.S. operations taxed at rates
different than U.S federal statutory rate......... 465 197 142
Other, net.......................................... 13 363 (204)
------ ------ ------
$3,413 $3,961 $3,901
====== ====== ======
</TABLE>
United States income tax returns for fiscal years 1993 through 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 1999, 1998 and 1997 was approximately
$3,361,000, $3,136,000 and $2,633,000, respectively.
(12) 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 $6,706,000, $5,187,000 and $5,481,000 for 1999, 1998 and
1997, 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--
45
<PAGE>
AEP INDUSTRIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(12) LEASE COMMITMENTS: (CONTINUED)
(IN THOUSANDS)
<TABLE>
<S> <C>
2000......................... $ 6,693
2001......................... 6,133
2002......................... 5,583
2003......................... 5,225
2004......................... 3,727
Thereafter................... 11,255
-------
$38,616
=======
</TABLE>
(13) COMMITMENTS AND CONTINGENCIES
EMPLOYMENT CONTRACTS--
On October 11, 1996, the Company entered into employment agreements with the
Chairman of the Board, President and Chief Executive Officer and with the
Executive Vice President and Chief Financial Officer of the Company. Each
contract has a term of five years with a base salary of $500,000 for the
Chairman and $240,000 for the Executive Vice President. The base salary is
increased each year by a percentage equal to the percentage increase, if any, in
the consumer price index. The employment agreements provide that each individual
may be terminated without cause prior to the expiration of the agreement, and in
such case, such person would be entitled to severance payments equal to two
times the sum of the annual base salary then in effect plus the bonus earned for
the immediate preceding year, payable over a two year period.
CLAIMS AND LAWSUITS--
The Company and its subsidiaries are subject to claims and lawsuits which
arise in the ordinary course of business. On the basis of information presently
available and advice received from counsel representing the Company and its
subsidiaries, it is the opinion of management that the disposition or ultimate
determination of such claims and lawsuits against the Company will not have a
material adverse effect on the Company's financial position or results of
operations.
46
<PAGE>
AEP INDUSTRIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(14) QUARTERLY FINANCIAL DATA (UNAUDITED):
<TABLE>
<CAPTION>
JANUARY 31, APRIL 30, JULY 31, OCTOBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA) ----------- --------- -------- -----------
<S> <C> <C> <C> <C>
1999
Net sales.......................................... $151,898 $165,754 $172,786 $179,614
Gross profit....................................... 34,835 38,101 39,609 29,460
Income (loss) from continuing operations........... 1,835 2,071 3,036 (2,469)
Loss from discontinued operations.................. (17,601) (793) -- (577)
Net income (loss).................................. (15,766) 1,278 3,036 (3,046)
Earnings Per Share:
Basic income (loss) from continuing operations... $ 0.25 $ 0.28 $ 0.41 $ (0.33)
Basic loss from discontinued operations.......... (2.42) (0.11) -- (0.08)
-------- -------- -------- --------
Basic net income (loss)........................ $ (2.17) $ 0.17 $ 0.41 $ (0.41)
======== ======== ======== ========
Diluted income (loss) from continuing
operations..................................... $ 0.25 $ 0.28 $ 0.40 $ (0.33)
Diluted loss from discontinued operations........ (2.42) (0.11) -- (0.08)
-------- -------- -------- --------
Diluted net income (loss)...................... $ (2.17) $ 0.17 $ 0.40 $ (0.41)
======== ======== ======== ========
1998
Net sales.......................................... $168,378 $169,667 $164,857 $163,654
Gross profit....................................... 36,305 35,832 37,076 37,621
Income from continuing operations.................. 1,884 1,187 1,544 1,156
Loss from discontinued operations.................. (630) (1,757) (2,032) (1,089)
Net income (loss).................................. 1,254 (570) (488) 67
Earnings Per Share:
Basic income from continuing operations.......... $ 0.26 $ 0.16 $ 0.21 $ 0.16
Basic loss from discontinued operations.......... (0.09) (0.24) (0.28) (0.15)
-------- -------- -------- --------
Basic net income (loss)........................ $ 0.17 $ (0.08) $ (0.07) $ 0.01
======== ======== ======== ========
Diluted income from continuing operations........ $ 0.26 $ 0.16 $ 0.21 $ 0.16
Diluted loss from discontinued operations........ (0.09) (0.24) (0.28) (0.15)
-------- -------- -------- --------
Diluted net income (loss)...................... $ 0.17 $ (0.08) $ (0.07) $ 0.01
======== ======== ======== ========
</TABLE>
Earnings per share are computed independently for each of the quarters
presented.
(15) SEGMENT INFORMATION:
The Company's operations are conducted within one business segment, the
production, manufacture and distribution of plastic packaging products,
primarily for the food/beverage, industrial and agricultural markets. The
Company operates in three geographical regions, North America, Europe and
Asia/Pacific.
47
<PAGE>
AEP INDUSTRIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(15) SEGMENT INFORMATION: (CONTINUED)
Information about the Company's operations by geographical area as of and
for the years ended October 31, 1999, 1998 and 1997, respectively is as follows:
<TABLE>
<CAPTION>
UNITED
1999 STATES CANADA EUROPE PACIFIC CORPORATE TOTAL
(IN THOUSANDS) -------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Sales--external customers.......................... $370,571 $37,634 $186,098 $75,749 $ -- $670,052
Intersegment sales................................. 13,505 8,655 3,246 -- -- 25,406
Income from operations............................. 26,944 6,064 3,507 697 -- 37,212
Interest income.................................... 391 -- 28 18 -- 437
Interest expense................................... 29,077 565 1,419 428 -- 31,489
Depreciation and Amortization...................... 17,782 1,432 8,488 3,852 -- 31,554
Provision for income taxes......................... 2,275 1,675 (406) (302) 171 3,413
Income (loss) from continuing operations........... 3,707 2,945 (1,882) (554) 257 4,473
Provision for losses on accounts receivable and
inventory........................................ 905 94 1,241 113 -- 2,353
Segment assets..................................... 255,469 30,759 157,512 55,529 15,722 514,991
Capital expenditures............................... $ 11,208 $ 544 $ 4,842 $ 5,641 $ -- $ 22,235
</TABLE>
<TABLE>
<CAPTION>
UNITED
1998 STATES CANADA EUROPE PACIFIC CORPORATE TOTAL
(IN THOUSANDS) -------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Sales--external customers.......................... $359,243 $37,059 $192,248 $78,006 $ -- $666,556
Intersegment sales................................. 14,372 8,586 5,784 -- -- 28,742
Income from operations............................. 27,041 5,970 7,230 1,806 -- 42,047
Interest income.................................... 218 -- 197 4 -- 419
Interest expense................................... 29,967 798 2,341 674 -- 33,780
Depreciation and Amortization...................... 17,767 1,338 7,715 3,558 -- 30,378
Provision for income taxes......................... 2,356 1,434 36 34 101 3,961
Income (loss) from continuing operations........... 2,843 2,548 166 63 151 5,771
Provision for losses on accounts receivable and
inventory........................................ 456 -- 1,483 109 -- 2,048
Segment assets..................................... 253,923 30,628 168,998 54,798 60,743 569,090
Capital expenditures............................... $ 9,455 $ 375 $ 8,645 $ 5,969 $ -- $ 24,444
</TABLE>
<TABLE>
<CAPTION>
UNITED
1997 STATES CANADA EUROPE PACIFIC CORPORATE TOTAL
(IN THOUSANDS) -------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Sales--external customers.......................... $391,197 $28,383 $208,906 $80,586 $ -- $709,072
Intersegment sales................................. 3,792 8,297 -- -- -- 12,089
Income from operations............................. 19,884 6,535 6,895 4,692 -- 38,006
Interest income.................................... 157 13 1,057 51 -- 1,278
Interest expense................................... 26,756 766 1,845 694 -- 30,061
Depreciation and Amortization...................... 18,074 947 5,867 3,922 -- 28,810
Provision for income taxes......................... 188 1,747 797 1,050 119 3,901
Income (loss) from continuing operations........... 571 3,351 1,209 2,000 198 7,329
Provision for losses on accounts receivable and
inventory........................................ 477 111 1,686 68 -- 2,342
Segment assets..................................... 270,967 32,445 169,418 59,750 76,700 609,280
Capital expenditures............................... $ 19,694 $ 1,196 $ 9,891 $ 6,833 $ -- $ 37,614
</TABLE>
Included in Corporate assets are the investment in joint venture and the net
assets held for sale.
48
<PAGE>
AEP INDUSTRIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(15) SEGMENT INFORMATION: (CONTINUED)
Income from operations 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.
(16) 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
pursuant to a sales agreement dated March 4, 1999.
The disposal of the Proponite business has been accounted for as a
discontinued operation and, accordingly, the Proponite net assets and
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 twelve months ended October 31, 1999 was
$17,189,000 net of tax benefits.
Condensed financial information relating to the discontinued operations of
Proponite is as follows:
AMOUNTS IN THOUSANDS
Net assets of discontinued operations:
<TABLE>
<CAPTION>
OCTOBER 31, 1999 OCTOBER 31, 1998
---------------- ----------------
<S> <C> <C>
Current assets.............................................. $ 785 $13,882
Property, plant and equipment-net........................... 6,555 34,976
------ -------
Total assets............................................ 7,340 48,858
Current liabilities (including provision for disposal in
1999)..................................................... 3,091 3,712
------ -------
Net assets held for sale.................................... $4,249 $45,146
====== =======
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED
OCTOBER 31, 1999 OCTOBER 31, 1998 OCTOBER 31, 1997
Results of Operations: ------------------ ------------------ ------------------
<S> <C> <C> <C>
Net sales.................................. $ 6,633 $34,683 $50,051
------- ------- -------
Gross profit (loss)........................ (873) 1,182 7,249
------- ------- -------
Net income (loss).......................... $(1,205) $(2,603) $ 1,242
======= ======= =======
</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 fiscal 1999. Beginning November 1, 1997, the Company
began recording these businesses as discontinued operations.
49
<PAGE>
AEP INDUSTRIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(16) DISCONTINUED OPERATIONS: (CONTINUED)
During 1998, the Company sold all five of its Rigids' businesses to three
separate parties. Losses from these operations were approximately $2,780,000 for
the year ending October 31, 1999. Gross proceeds from the sales of these
operations 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.
(17) 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 $1,829,000
was recorded in the cost of sales section of the income statement for the year
ending October 31, 1999. This amount related to severance, professional fees and
the repayment of government subsidies. The amount had been fully paid to all
respective parties by October 31, 1999.
(18) SALE OF SOUTH AFRICA:
In January 1998, the Company completed the sale of its operations in South
Africa to local management for $1 million plus the settlement of all
intercompany items. The sale did not result in any gain or loss.
(19) RELATED PARTY TRANSACTIONS:
In connection with the acquisition of BGP, Borden, Inc. and the Company
entered into a Governance Agreement, dated as of June 20, 1996 with respect to
certain matters relating to the corporate governance of the Company. For the
years ending October 31, 1999, 1998 and 1997, the Company purchased resin from
BCP in the amount of $19.7 million $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.
50
<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.
51
<PAGE>
SCHEDULE II
AEP INDUSTRIES INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED OCTOBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS BALANCE
BEGINNING OF CHARGED TO DEDUCTIONS AT END
YEAR EARNINGS FROM RESERVES OTHER OF YEAR
------------ ---------- ------------- -------- --------
<S> <C> <C> <C> <C> <C>
YEAR ENDED OCTOBER 31, 1999:
Allowance for doubtful accounts......... $4,686 $1,389 $ 623 $(110) $5,342
====== ====== ====== ===== ======
Inventory............................... $1,418 $ 964 $ 938 $(125) $1,319
====== ====== ====== ===== ======
YEAR ENDED OCTOBER 31, 1998:
Allowance for doubtful accounts......... $4,863 $1,423 $1,301 $(299) $4,686
====== ====== ====== ===== ======
Inventory............................... $1,497 $ 625 $ 888 $ 184 $1,418
====== ====== ====== ===== ======
YEAR ENDED OCTOBER 31, 1997:
Allowance for doubtful accounts......... $4,997 $1,381 $1,768 $ 253 $4,863
====== ====== ====== ===== ======
Inventory............................... $1,810 $ 961 $1,106 $(168) $1,497
====== ====== ====== ===== ======
</TABLE>
52
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report, dated January 3, 2000, included in this Form 10-K, into the
Company's previously filed Registration Statements, on Form S-8 File Nos.
33-58747 and 33-58743, and on Form S-3, File no. 333-79947.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
January 27, 2000
53
<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
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: January 31, 2000 AEP INDUSTRIES INC.
By: /s/ J. BRENDAN BARBA
-----------------------------------------
J. Brendan Barba
CHAIRMAN OF THE BOARD, PRESIDENT AND
PRINCIPAL EXECUTIVE OFFICER
</TABLE>
54
<PAGE>
Pursuant to the requirements of the Securities 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 31, 2000 AEP INDUSTRIES INC.
By: /s/ J. BRENDAN BARBA
-----------------------------------------
J. Brendan Barba
CHAIRMAN OF THE BOARD, PRESIDENT AND
PRINCIPAL EXECUTIVE OFFICER
Dated: January 31, 2000
By: /s/ PAUL M. FEENEY
-----------------------------------------
Paul M. Feeney
EXECUTIVE VICE PRESIDENT, PRINCIPAL
FINANCIAL OFFICER AND DIRECTOR
Dated: January 31, 2000
By: /s/ LAWRENCE R. NOLL
-----------------------------------------
Lawrence R. Noll
CONTROLLER, PRINCIPAL ACCOUNTING OFFICER
AND DIRECTOR
Dated: January 31, 2000
By: /s/ KENNETH AVIA
-----------------------------------------
Kenneth Avia
DIRECTOR
Dated: January 31, 2000
By: /s/ WILLIAM H. CARTER
-----------------------------------------
William H. Carter
DIRECTOR
Dated: January 31, 2000
By: /s/ ADAM H. CLAMER
-----------------------------------------
Adam H. Clamer
DIRECTOR
Dated: January 31, 2000
By: /s/ LEE C. STEWART
-----------------------------------------
Lee C. Stewart
DIRECTOR
Dated: January 31, 2000
By: /s/ PAUL E. GELBARD
-----------------------------------------
Paul E. Gelbard
DIRECTOR
Dated: January 31, 2000
By: /s/ WILLIAM F. STOLL
-----------------------------------------
William F. Stoll
DIRECTOR
Dated: January 31, 2000
By: /s/ SCOTT M. STUART
-----------------------------------------
Scott M. Stuart
DIRECTOR
</TABLE>
55
<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 Registrants 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 Current 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 quarter ended January 31, 1993)
10(c) 1995 Stock Option Plan of the Company (incorporated by
reference to Exhibit 4 to the Registration Statement on Form
S-8 No. 33-58747)
10(d) 1995 Employee Stock Purchase Plan of the Company
(incorporated by reference to Exhibit 4 to the Registration
Statement on Form S-8 No. 33-58743)
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 Registrant's 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 Current 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 (incorporated by reference to Exhibit 10(f)(2)
to Registrant's Annual Report on Form 10-K for the year
ended October 31, 1997)
10(g) Tender Offer to Purchase, dated as of August 10, 1995,
(incorporated by reference to Exhibit (a)(1) to Schedule
13E-4, as filed on August 10, 1995)
10(h) Stock Purchase Agreement, dated as of August 2, 1995,
between the Company and J. Brendan Barba (incorporated by
reference to Exhibit (c) to Schedule 13E-4 as filed on
August 10, 1995)
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 Current Report
on Form 8-K, dated June 20, 1996)
10(i)(2) Amendment No. 1, dated as of October 11, 1996, to the
Purchase Agreement, dated as of June 20, 1996, between the
Company and Borden, Inc. (incorporated by reference to
Exhibit 1(b) to Registrant's Current 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 Current Report
on Form 8-K, dated June 20, 1996)
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT PAGE
- -------------- ------------------------------------------------------------ --------
<C> <S> <C>
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 Current 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 (incorporated by reference
to Exhibit 10(k) to Registrant's Annual Report on Form 10-K
for the year ended October 31, 1996)
10(l) Employment Agreement, dated as of October 11, 1996, between
the Company and Paul M. Feeney (incorporated by reference to
Exhibit 10(l) to Registrant's Annual Report on Form 10-K for
the year ended October 31, 1996)
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 Current 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
Current 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
Current 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 53
24 Power of Attorney (see "Power of Attorney" on signature 54-55
page)
</TABLE>
57
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
AEP INDUSTRIES INC. FORM 10-K FOR THE YEAR ENDED OCT 31-1999
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-1-1998
<PERIOD-END> OCT-31-1999
<CASH> 3,103
<SECURITIES> 0
<RECEIVABLES> 116,190
<ALLOWANCES> 5,342
<INVENTORY> 74,260
<CURRENT-ASSETS> 203,769
<PP&E> 364,741
<DEPRECIATION> 132,320
<TOTAL-ASSETS> 514,991
<CURRENT-LIABILITIES> 159,346
<BONDS> 0
0
0
<COMMON> 101
<OTHER-SE> 66,737
<TOTAL-LIABILITY-AND-EQUITY> 514,991
<SALES> 670,052
<TOTAL-REVENUES> 672,215
<CGS> 526,218
<TOTAL-COSTS> 528,047
<OTHER-EXPENSES> 102,440
<LOSS-PROVISION> 2,353
<INTEREST-EXPENSE> 31,469
<INCOME-PRETAX> 7,886
<INCOME-TAX> 3,413
<INCOME-CONTINUING> 4,473
<DISCONTINUED> (18,971)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,498)
<EPS-BASIC> (1.98)
<EPS-DILUTED> (1.99)
</TABLE>
