<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (THE "ACT")
APPLIED EXTRUSION TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
COMMISSION FILE NO. 0-19188
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997
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<S> <C>
DELAWARE 51-0295865
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
3 CENTENNIAL DRIVE, PEABODY, MASSACHUSETTS 01960
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (978) 538-1500
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- ---------------------
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of Class: COMMON STOCK ($.01 PAR VALUE)
--------------
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 (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements 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 the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K [ ].
The aggregate market value of the Registrant's voting stock held by
non-affiliates was approximately $75,119,388 on December 9, 1997, based on the
closing sales price of the Registrant's common stock, $.01 par value (the
"Common Stock"), as reported on the Nasdaq National Market System as of such
date.
The number of shares of the Registrant's Common Stock outstanding as of December
9, 1997, was 10,543,072 shares.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated herein by reference:
Part III Proxy Statement to be filed with the Securities and Exchange Commission
in connection with the 1997 Annual Meeting of Stockholders.
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FORM 10-K INDEX
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PART I
Item 1. Business.......................................................................................1
Item 2. Properties.....................................................................................5
Item 3. Legal Proceedings..............................................................................5
Item 4. Submission of Matters to a Vote of Security Holders............................................5
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters .....................5
Item 6. Selected Financial Data........................................................................6
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................................7
Item 8. Financial Statements and Supplementary Data...................................................10
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...................................................................10
PART III
Item 10. Directors and Executive Officers of the Registrant............................................10
Item 11. Executive Compensation........................................................................12
Item 12. Security Ownership of Certain Beneficial Owners and Management................................12
Item 13. Certain Relationships and Related Transactions................................................12
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..............................12
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(i)
<PAGE> 3
PART 1
ITEM 1. BUSINESS
GENERAL
Applied Extrusion Technologies, Inc. ("AET" or the "Company") is a leading
developer and manufacturer of highly specialized, single and multilayer oriented
polypropylene ("OPP") films for use in consumer product labeling and packaging
applications. The Company believes that OPP films have emerged as the premier
specialty films, particularly in higher margin, niche product applications, due
to technological advantages that satisfy customer demand for enhanced
performance attributes and lower costs. End users of AET's films are consumer
product companies whose labels and packages require special attributes such as
vivid graphics, exceptional clarity or oxygen and moisture barriers to preserve
freshness. Based upon internal market data, the Company believes it has
significant market shares of the plastic soft drink bottle label, snack food and
candy packaging and overwrap markets. Labeling applications for AET's OPP films
include labels for Pepsi-Cola (R) and Coca-Cola (R) plastic bottles, Nestles (R)
Sweet Success (TM), General Foods Tang (TM) and aerosol cans for products such
as S.C. Johnson Wax Glade (TM) Air Freshener. Packaging applications for AET's
OPP films include packaging for Frito-Lay (R) snacks, and M&M/Mars (R) and
Hershey (R) candies.
AET is the second largest manufacturer of OPP films in North America, and one of
only two broad line suppliers of such products. Approximately 81 percent of the
Company's sales in fiscal 1997 were generated by the sale of its OPP film
products. The Company also develops, manufactures and sells oriented, apertured
films, or nets, for health care and other markets. Such products are used in
finger bandages, surgical dressings, tracheotomy pads and other controlled
porosity applications. Certain of the end-use markets for the Company's OPP
films are seasonal. For example, demand in the snack food, soft drink and candy
markets is generally higher in the spring and summer. As a result, sales and net
income are generally higher in the spring and summer.
BUSINESS STRATEGY
The Company's business strategy is to build a high quality organization to offer
a broad line of high-quality, specialized products for niche consumer product
labeling and packaging applications while remaining one of the lowest cost
producers of such products. Elements of the Company's business strategy include:
(i) expand production capacity; (ii) expand the product line through the
development of additional innovative, high-value products and continue the
enhancement of existing products; (iii) broaden sales reach to new markets and
geographic regions; and (iv) achieve lowest cost producer of value-added films.
During fiscal 1996, AET brought its new eight-meter tenter line on-stream, which
represents the first of two new expansion projects that will position the
Company as the largest OPP films supplier in North America. The Company's
ten-meter tenter line is scheduled for start-up in April 1998. Upon completion,
these two projects will represent a 60 percent increase in AET's OPP films
manufacturing capacity over a two year period. The Company has been positioning
itself for several years to sell this capacity. The Company embarked on a
focused strategic initiative in 1996 to supply bottle label, tobacco overwrap
and other value-added flexible packaging films to Latin American and European
converters and other end users. AET's global expansion program has realized
recent strategic successes and has begun to yield substantial growth
opportunities in the high-end segment of the industry.
During fiscal 1997, the Company announced its intention to divest certain of its
non-film operations and to reinvest the proceeds in its OPP films business.
INDUSTRY OVERVIEW
The Company competes principally in the specialty film segment of the
approximately $17 billion flexible packaging industry. In addition to
polypropylene, specialty films are manufactured from polyester, cellophane,
nylon, polystyrene and certain polyolefin compounds. The overall North American
specialty film segment of the flexible packaging industry approximated $3.0
billion in shipments in calendar year 1996, of which the largest single
component, OPP films, accounted for an estimated $800 million of shipments.
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North American demand for OPP films used in specialty applications grew at an
average annual rate of approximately 6 percent from 1989 through 1996. The
Company believes that this growth is driven by a number of factors, including:
(i) the shift from glass to plastic beverage containers that use OPP film
labels; (ii) the shift from rigid containers to flexible packaging; (iii) the
growth in the snack food and confectionary industries; and (iv) the substitution
of specialized OPP films with greater barrier and graphics properties for
traditional consumer product labels and packaging.
COMPETITIVE STRENGTHS
AET is currently the second largest manufacturer of OPP films in North America
with an approximate 26 percent market share based on volume and 24 percent of
the high-end product segment. AET focuses on serving niche consumer product
markets in which competition is largely based on superior product attributes and
performance. The Company believes its strong competitive position is
attributable to a number of factors, including its technological leadership,
modern and efficient manufacturing capability, broad product lines, a
technically skilled sales force and an experienced management team.
PRODUCTS
The Company's primary OPP packaging film products can be classified into three
broad categories: barrier, clear/slip and opaque films.
Barrier OPP films serve as the inner layer of flexible packaging laminates and
provide enhanced protection from moisture, light and gas to preserve the
freshness and flavor of a wide range of food, tobacco and other products. The
Company offers metallized, polyvinyliden chloride ("saran") coated and polymer
modified barrier OPP films as well as clear barrier overwraps. Metallized
barrier film provides a high performance, visible and ultraviolet light barrier
for the packaging of snacks and confections; saran coated barrier films offer an
outstanding oxygen and moisture barrier for the packaging of cheese, nuts,
coffee and tea, in addition to snacks and confections; and polymer modified
barrier films are used as overwraps for tobacco products, baked goods and other
products due to their ease of machinability and excellent clarity.
Clear/Slip OPP films provide the printable outer layer of the flexible package
and are generally bonded with barrier film to form a complete packaging
application. Slip films may be single or multilayer and heat sealable or
nonsealable, and offer a low coefficient of friction for improved machinability.
Principal applications include snack, confection, condiment and baked goods
packaging.
Opaque OPP films provide a barrier to visible and ultraviolet light or a print
surface for superior graphics and are used primarily in bottle labeling and
confection and snack food packaging. The Company's opaque OPP film products are
used as the label for approximately 85 percent of the plastic soda bottles sold
in the United States and Canada. For snack food packaging, AET manufactures and
sells metallized, sealable, composite and saran coated versions of opaque OPP
film. End users in confectionery markets often choose opaque packaging for
marketing and manufacturing purposes. The Company's opaque OPP films permit
rapid machine speeds and provide superior printability.
The Company also manufactures other OPP films that are targeted at certain
specialized markets, such as its shrink label films. These films shrink to the
contour of the container, permit superior graphics and offer maximum labeling
flexibility for rigid contoured containers, such as beverage and aerosol cans
and glass and polyester bottles, which increases the marketing appeal of such
containers and eliminates the need for printing directly on the container.
In addition to OPP films, AET develops, manufactures and sells a broad range of
oriented apertured films, or "nets," for a number of markets, including health
care. AET's Delnet(R) product is used widely in health care markets as a porous
facing material for bandages. By permitting one-way fluid flow and two-way
airflow without adhering to the wound, Delnet material enhances the healing
process. In the United States, most finger bandages, including Johnson & Johnson
BAND-AIDS (R), use Delnet facing.
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MARKETING AND CUSTOMERS
The Company maintains a sales and marketing force of highly skilled
professionals, including individuals with considerable technical expertise whose
principal role is to provide customer support. AET's marketing activities have
historically been focused primarily in North America. During 1996, AET announced
its intent to enter into the Latin American and European OPP films market as
part of its long-term globalization strategy, and to continue penetration into
Asia Pacific. AET has expanded its sales and marketing organization to include
sales directors for Latin America, Europe and the Asia Pacific regions. AET's
OPP film products are sold primarily through its internal sales organization
whereby employees interface with customers and the Company's research and
development technicians to create new films as well as new applications for OPP
films.
The Company's OPP film sales are predominantly to converters, who print and
laminate films before selling to end users, including one such converter that
accounted for approximately 16 percent of sales in fiscal 1997 and 1996. The
Company considers it an important part of its marketing effort to maintain
direct relations with major end users, who generally provide detailed
specifications to converters as to the performance characteristics of the film
to be used in their labeling and packaging materials. The Company also sells OPP
films directly to end users.
MANUFACTURING, TECHNOLOGY, RESEARCH AND DEVELOPMENT
OPP films are manufactured and processed through two techniques, the tenter and
the tubular processes. In the tenter process, molten resin is extruded from a
flat die into a thick film and chilled, after which it is stretched lengthwise
in the machine direction, and heated and stretched widthwise. This dual
stretching process is known as "biaxial orientation." In addition to a number of
smaller tenter lines, the Company currently operates two eight-meter tenter
production lines, including its newest line which was completed in 1996. The
Company has initiated construction of the world's first ten-meter tenter line,
which is expected to be operational in mid fiscal 1998, and is designed to
produce an estimated 50 million pounds of OPP films annually. These two new
lines, which the Company believes will be among the most efficient in the
industry, will comprise a 60 percent increase in AET's capacity over a two year
period.
In the tubular process, molten resin is extruded from a circular die to form a
thick tube which is stretched lengthwise and widthwise with air pressure and
gravity at controlled temperatures. Tubular processed films offer "balanced
biaxial orientation," resulting in improved stability and a more uniform
thickness in thinner films, while the tenter process provides better operating
economies with thicker films. AET believes that its tubular manufacturing
capacity enables it to "downgauge" or manufacture thinner films, preserving
machinability and other performance characteristics of thicker film while using
less material, thereby improving performance relative to cost. AET is the only
North American OPP film producer that utilizes both the tubular and tenter
manufacturing processes.
Delnet and other apertured film products are produced by a proprietary process
similar to the tenter process, in which film is forced through high-precision
embossing rollers prior to being biaxially oriented.
The Company conducts product and process research and development through a
staff of approximately 70 chemists, engineers and technicians. Consistent with
AET's strategy to fill the Company's new manufacturing capacity with high-end
films, the research and development group introduced twelve new or enhanced
products during fiscal 1996 and eight more in fiscal 1997, responding to
evolving customer and end user requirements for attributes such as barrier,
clarity and machinability. During fiscal 1997 and 1996, the Company spent
approximately $8.2 million and $7.4 million, respectively, on research and
development.
POLYPROPYLENE AND OTHER RAW MATERIALS
The Company's principal products are manufactured primarily from polypropylene
resin. The relatively low density and low cost of polypropylene resins allow OPP
films to provide a cost-efficient material for applications such as packaging.
In addition, polypropylene possesses superior clarity and natural barrier
qualities and can be modified to add other qualities or features such as
metallization, which make it a higher performance and more cost-efficient
material than other plastic resins. The majority of the Company's resin
requirements is obtained from four suppliers; however, these materials are
generally available from a large number of suppliers in sufficient quantities to
meet ongoing requirements. The Company's other raw materials, which are used in
the manufacture of its netting and other products, are generally available from
a large number of suppliers in sufficient quantities to meet current
requirements. The Company has historically not experienced any significant
disruptions in supply as a result of shortages in raw materials.
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Polypropylene resin represents a significant percentage of the Company's cost of
sales and these resin costs have historically fluctuated. The prices of OPP
films have tended to rise in periods when resin costs increase and, conversely,
have tended to decrease in times of declining resin costs. There is no direct
correlation between resin cost fluctuations and OPP films pricing, and there can
be no assurance that future market conditions will support a direct correlation.
COMPETITION
The Company competes with manufacturers of OPP and other specialty films, such
as cellophane and polyester, as well as with producers of traditional packaging
materials, such as paper and foil, and rigid packaging materials, such as glass,
metal and other containers. The flexible packaging industry is very competitive
and many of the Company's competitors have significantly greater financial,
technological, manufacturing and marketing resources than the Company. The
Company believes that Mobil Corporation, which is the largest OPP film
manufacturer in North America, is the only other broad-line OPP packaging film
supplier based in North America. There are a number of other North American
manufacturers of OPP film; however, only Mobil Corporation and AET have a
greater than 20 percent market share. Competition in OPP films markets is based
primarily on product performance characteristics, machinability, quality,
reliability and price.
With respect to its netting products, the Company competes with the diverse
markets these products serve primarily on the basis of quality, performance and
price. Delnet(R) products compete in certain markets with woven, nonwoven and
knit fabrics, as well as other plastic netting products. The Company generally
competes with these other products by stressing the technological superiority of
its Delnet(R) products.
The Company believes that there are significant factors which provide the
Company with a competitive advantage. These factors relate to the markets into
which the Company sells certain high margin, value-added products, and include:
(i) the advanced proprietary manufacturing processes required to produce a
varied range of such products; (ii) proprietary OPP film product formulations;
(iii) the research and development expertise required to sustain product
innovation; and (iv) the cost to customers of switching product manufacturers.
There can be no assurance, however, that the markets into which the Company
sells its products will not attract additional competitors that could have
significantly greater financial, technological, manufacturing and marketing
resources than the Company.
PATENTS AND TRADEMARKS
The Company currently holds approximately 120 active patents and applications
covering certain of its OPP films and netting products and methods of making
them, of which 90 relate to international patents and applications. The Company
also has, or it is in the process of obtaining, federal trademark registration
related to a number of its products. From time to time the Company may engage in
the process of obtaining patents and trademarks covering various other products.
The termination, expiration or infringement of one or more patents or trademarks
would not have a material adverse effect on the business of the Company.
GOVERNMENT REGULATION
Due to the nature of the Company's business, its operations are subject to a
variety of federal, state and local laws, regulations and licensing
requirements. The Company believes that its operations are in substantial
compliance with those laws, regulations and requirements. Compliance with
federal, state and local requirements relating to the protection of the
environment has not had and is not expected to have a material effect on the
capital expenditures, financial condition, results of operations or competitive
position of the Company.
EMPLOYEES
AET employs approximately 1,360 full-time employees. The United Paper Workers
International Union, Local 884, represents approximately 230 production and
maintenance employees at the Company's Covington, Virginia facility under a
collective bargaining agreement that expires in June, 2000. The Company
considers all employee relations to be satisfactory.
Information with respect to the Executive Officers of the Company may be found
in Item 10 of this report.
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ITEM 2. PROPERTIES
The following table provides information with respect to AET's facilities:
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Location Square Feet Owned/Leased
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Films Terre Haute, Indiana 821,000 owned
Covington, Virginia 517,000 owned
Varennes, Quebec, Canada 108,000 owned
New Castle, Delaware:
Administration and
Research Center 50,000 leased
Specialty Nets & Profiles Salem, Massachusetts 170,000 owned
Middletown, Delaware 145,000 owned
Corporate Peabody, Massachusetts 7,600 leased
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All of the Company's owned real property secures the Company's obligations under
its $81,600,000 bank credit agreement. The Company entered into a lease
agreement effective April 1997 for approximately 50,000 square feet of
office/research space in the Wilmington, Delaware area. The Company believes
that its facilities are suitable for its present intended purposes and adequate
for the Company's level of operations.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to legal proceedings and claims which have arisen in the
ordinary course of its business and have not been fully adjudicated. These
actions, when ultimately concluded and determined, will not, in the opinion of
management, have a material adverse effect upon the financial position or
results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
AET did not submit any matters during the fourth quarter of the fiscal year
covered by this report to a vote of the security holders through the
solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock has been quoted on the Nasdaq National Market System
since June 6, 1991 under the symbol "AETC." Before June 6, 1991, no established
public trading market existed for the Company's Common Stock. Below is the range
of high and low sales information for the Common Stock for the two most recently
completed fiscal years, as quoted on the Nasdaq National Market System:
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<CAPTION>
Fiscal Year 1996 Fiscal Year 1997
High Low High Low
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Quarter ended December 31 18 3/8 11 1/8 12 8 3/8
Quarter ended March 31 13 7/8 10 1/2 13 7/8 10
Quarter ended June 30 14 5/8 10 5/8 12 1/4 9 5/8
Quarter ended September 30 12 3/4 8 12 8 5/16
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The Company has not paid any cash dividends on its Common Stock, and the
Company's Board of Directors intends, for the foreseeable future, to retain any
earnings to finance the future growth of the Company. As of December 10, 1997,
there were approximately 140 holders of record and more than 2,500 beneficial
holders of the Company's Common Stock.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data of the Company is qualified by reference
to, and should be read in conjunction with, the consolidated financial
statements, including the notes thereto, and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this report. On April 7, 1994 the Company purchased the packaging films business
of Hercules, Incorporated. The following information is in thousands, except per
share amounts:
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<CAPTION>
YEAR ENDED SEPTEMBER 30,
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INCOME STATEMENT DATA:
1997 1996 1995 1994 1993
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Sales $262,271 $234,490 $233,935 $131,594 $41,268
Cost of sales 205,037 181,899 168,664 97,128 30,295
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Gross profit 57,234 52,591 65,271 34,466 10,973
Selling, general and administrative expenses 23,819 20,144 20,219 15,415 8,334
Research and development expenses 8,221 7,414 6,352 3,242 655
Restructuring charges 4,500
Write-off of intangible assets 3,305
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Operating profit 20,694 25,033 38,700 12,504 1,984
Interest, net 16,868 13,927 18,609 10,123 591
Acquisition costs 1,500
Litigation settlement 1,400
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Income before income taxes 2,326 11,106 18,691 2,381 1,393
Provision for income tax 930 4,442 7,476 954 558
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Net income $ 1,396 $ 6,664 $ 11,215 $ 1,427 $ 835
======== ========= ======== ======== =======
EARNINGS PER SHARE:
Primary $ .13 $ .61 $ 1.45 $ .24 $ .14
Fully diluted .13 .61 1.39 .21 .14
BALANCE SHEET DATA:
Working capital $ 33,600 $ 35,911 $ 55,441 $ 32,187 $ 8,401
Total assets 376,493 331,704 318,519 263,977 50,233
Current maturities of long-term debt 4,000 4,000
Long-term debt 196,500 165,500 156,500 175,500 6,500
Stockholders' equity 112,183 108,335 99,058 36,519 34,332
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
AET is a leading developer and manufacturer of highly specialized plastic films
used in consumer product labeling, flexible packaging, health care and other
applications. AET was organized in 1986 to acquire a business which develops,
manufactures and sells oriented apertured films, or nets, as well as non-net
thermoplastic products for a number of markets. In April of 1994, the Company
acquired the OPP films business from Hercules Incorporated (the "Acquisition").
Certain of the end use markets for the Company's OPP films are seasonal. For
example, demand in the snack food, soft drink and candy markets is generally
higher in the spring and summer. As a result, sales and net income are generally
higher in the spring and summer.
For the purposes of this discussion and analysis, the fiscal years ended
September 30, 1997, 1996 and 1995, are referred to as 1997, 1996 and 1995,
respectively. All amounts indicated are in thousands.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentages of
the Company's sales represented by certain income and expense items in its
income statements:
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<CAPTION>
YEARS ENDED SEPTEMBER 30,
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1997 1996 1995
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Sales............................................100.0% 100.0% 100.0%
Cost of sales.....................................78.2 77.6 72.1
Gross profit..................................... 21.8 22.4 27.9
Selling, general and administrative 9.1 8.6 8.6
Research and development...........................3.1 3.2 2.7
Operating profit...................................7.9 10.7 16.5
Interest expense, net..............................6.4 5.9 8.0
Net income.........................................0.5 2.8 4.8
</TABLE>
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
Sales for fiscal 1997 of $262,271 were $27,781, or 12 percent, higher than sales
in 1996 reflecting a 15 percent increase in unit volume sales of OPP films. This
sales revenue growth was facilitated by new capacity brought on stream during
the third quarter of fiscal 1996, investments in new product development and an
expanded sales and marketing organization. This increase in volume was offset in
part by lower average selling prices, particularly in the fourth quarter, due to
competitive pressures precipitated by lower capacity utilization in the OPP
films industry. This lower capacity utilization is the result of the new
capacity additions by AET and four of its competitors which are either currently
on-line or scheduled to start-up in fiscal 1998. The lower average selling
prices for the Company during 1997 also resulted from a less than favorable
sales mix, impacted by a higher percentage of secondary material production due
in part to the manufacture of a number of new products. Approximately 40 percent
of fiscal 1997 sales were from new or enhanced products introduced by the
Company within the past three years. Foreign sales comprised 10 percent of total
1997 sales and foreign operating profit was 13 percent of total operating
profit.
Gross profit of $57,234 for 1997 increased by $4,643, or 9 percent, over the
1996 period. As a percentage of sales, gross margin was 21.8 percent in 1997
versus 22.4 percent in 1996. This decrease was due in part to the previously
discussed lower average prices throughout the industry during 1997, as well as
the impact of certain production inefficiencies related to process equipment
downtime and the manufacture of a number of new products.
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Selling, general and administrative expenses of $23,819 for 1997 were $3,675
higher than 1996. Research and development expenses in 1997 of $8,221 exceeded
1996 levels by $807. The higher expense levels were attributable to the ongoing
initiatives of the Company to enhance its product offerings and expand the reach
of the sales and marketing organization. These investments are integral parts of
the Company's strategy to support the investment in a 60 percent increase in its
production capacity over a two year period. These expenses are expected to
increase only nominally to support the second phase of this expansion which will
be completed in fiscal 1998.
The Company implemented a restructuring plan in the fourth quarter of 1997,
which includes headcount reductions in certain manufacturing operations,
divestiture of certain non-core businesses and certain other organizational
changes and therefore recorded a $4,500 restructuring charge, $2,700 after
taxes. These reserves represent estimated costs which will be incurred by the
Company related to severance, voluntary retirement programs and other
employment-related costs, as well as costs associated with Company-wide plant
restructuring efforts. The Company sold its dry adhesive web and injection
molding businesses, which collectively comprised less than 5 percent of total
Company revenues at the time of divestiture. Proceeds from the sale were
utilized to paydown debt and to reinvest in the Company's core OPP films and
apertured films businesses.
Net interest expense increased $2,941 over 1996 due to higher levels of
outstanding debt primarily related to borrowings in connection with the first of
the two new capacity expansion projects.
In the third quarter of fiscal 1997, the Company recorded a one-time charge of
$1,500, or $900 after taxes, representing costs incurred in connection with
acquisition due diligence and negotiations which were terminated during the
quarter.
Income taxes of $930 for 1997 were lower than 1996, due to lower pre-tax
earnings. Income tax as a percent of before-tax income remained constant for
1997 and 1996.
FISCAL YEAR 1996 COMPARED TO FISCAL 1995
Sales for 1996 of $234,490 were slightly greater than the 1995 level of
$233,935. While unit volume sales of OPP films increased by 3 percent, revenues
were flat due to insufficient price realization throughout the industry. This
depressed pricing situation was precipitated by an inventory correction on the
part of customers and end-users of OPP films during the first half of 1996, as
they reduced inventory levels and consequently demand in anticipation of lower
films prices. Demand surged late in the second quarter, and the industry was
once again operating at a very high rate of capacity utilization. Overall demand
for the Company's products was strong as reflected by continued growth in
labeling and flexible packaging applications for consumer products such as
beverages, salty snacks and confectionery. For 1996, foreign operations
accounted for approximately 10 percent of total sales and approximately 11
percent of total operating profit.
Gross profit as a percent of sales decreased to 22.4 percent in 1996 versus 27.9
percent in 1995 due almost entirely to the previously discussed competitive
pricing situation throughout the industry at a time of rising resin costs. Resin
costs increased 24 percent from April to September 1996 without improvement in
OPP films selling prices. The new capacity brought on stream by the Company
during the third quarter of fiscal 1996 exceeded all internal production plans
and resulted in reduced production costs in the fourth quarter.
Selling, general and administrative expenses remained flat as a percentage of
sales in 1996 versus 1995. Investments in research and development, however,
were increased another 17 percent over the prior year and aggregated 3.2 percent
of sales. The increased research and development expenditures contributed
significantly to the development of twelve new or enhanced products during 1996.
The sales and marketing organization was expanded to support the Company's
growth in North America as well as its announced initiatives in Europe, Latin
America and the Pacific Rim. The aforementioned increases in operating expenses
were partially offset by reductions during 1996 in general and administrative
expenses of $1,652, primarily as a result of reduced incentive-related
compensation.
Net interest expense for fiscal 1996 decreased $4,682 as compared to fiscal
1995. This decrease was due to increased capitalized interest on the two new
lines under construction. Capitalized interest during 1996 was $5,106 as
compared to $1,668 in fiscal 1995.
Income taxes of $4,442 for the year ended September 30, 1996 were less than the
comparable 1995 period, due to lower pre-tax earnings. Income tax as a percent
of before-tax earnings remained constant for fiscal 1996. Earnings per share
decreased from 1995 proportionately more than net income due to the 35 percent
increase in shares outstanding resulting from the stock issuance in 1995.
-8-
<PAGE> 11
LIQUIDITY AND CAPITAL RESOURCES
In conjunction with the Acquisition, the Company entered into a Credit Agreement
with a group of lenders to provide the Company with senior bank financing in an
amount up to $81,660. The Credit Agreement provided for a $25,000 Term Loan
Facility, a $50,000 Revolving Credit Facility, and a $6,660 standby letter of
credit in support of the Company's currently outstanding industrial revenue
bond, each of which has a final maturity in 1999 and is secured by all of the
assets of the Company. This Revolving Term Loan Facility provides for reductions
in the maximum borrowing equal to $1,000 per quarter for 19 consecutive
quarters, and a final reduction of $6,000. At September 30, 1997, the Company
had $17,000 available under its Revolving Credit Facility. As a result of the
one-time charge in connection with due diligence and negotiations for a
terminated acquisition during the third fiscal quarter and the restructuring
charges recorded in the fourth fiscal quarter, the Company's interest and fixed
charge coverage ratios were below those required by the terms of the Credit
Agreement. The Company has received a waiver of the applicable covenants from
the lending group.
In addition to the Credit Agreement, the Company issued $150,000 in Senior Notes
to finance the 1994 Acquisition. The Senior Notes, which bear interest at 11.5
percent payable semiannually, do not require periodic principal payments and
mature, in full, in 2002.
Operating activities in 1997 provided $17,416 in cash, which was the result of
$19,859 of net income before depreciation and amortization and other non-cash
expenditures, less a $2,443 net increase in other working capital items. The net
increase in working capital resulted from a $4,037 increase in inventory, a
$3,861 increase in accounts receivable, and a $328 decrease in prepaid and other
charges, offset by increases in accounts payable and accrued expenses of $5,127.
Interest paid during 1997 amounted to $20,545. Additions to property, plant and
equipment were $54,963 and included expenditures related to the two capacity
expansions. These capital expenditures were funded in part by $35,000 of net
borrowings pursuant to the Credit Agreement with the balance funded by available
cash and cash flow. During the fourth quarter of 1997, the Company sold assets
related to its dry adhesive net and injection molding businesses. Net proceeds
from these sales of $6,700 approximated book value and were utilized to paydown
borrowings under the Company's Revolving Credit Facility.
The Company is in the process of increasing its OPP films production capacity by
approximately 90 million pounds with the installation of two new production
lines, one eight meters wide and the other ten meters wide. The eight-meter line
was completed in fiscal 1996 and the ten-meter line is scheduled to be
operational in the middle of fiscal 1998. The total cost of the second new line
is estimated to be approximately $57,000. As of September 30, 1997 the Company
had funded approximately $43,000 of this cost and anticipates approximately
$14,000 of additional expenditures during fiscal 1998. In connection with
certain of these commitments and other capital expenditures, the Company has
entered into foreign exchange contracts with nominal amounts of $5,746 to hedge
purchases denominated in foreign currencies. Gains and losses on these contracts
result from market risk associated with changes in the market values of the
underlying currencies which would affect the capitalized value of the asset. The
Company does not enter into foreign exchange contracts for trading purposes. The
Company believes that available cash and equivalents, cash flow from the
business, proceeds from the announced divestitures of non-core business segments
and borrowing availability under the Credit Agreement will provide adequate
funds over at least the next 24 months to accommodate its working capital needs,
capital expenditures and debt service obligation.
INFLATION
Management reviews the prices charged for its products on a regular basis. When
market conditions allow, adjustments are made to reflect changes in demand or
product costs due to fluctuations in the cost of materials, labor and inflation.
Raw materials make up a significant portion of the Company's costs and have
historically fluctuated. There can be no assurance, however, that future market
conditions will support a direct correlation between raw material cost
fluctuations and finished product films pricing.
NEW ACCOUNTING PRONOUNCEMENTS
Information related to new accounting pronouncements is included in the
footnotes to the consolidated financial statements.
-9-
<PAGE> 12
Except for the historical information contained herein, the matters discussed in
this report are forward-looking statements that involve risks and uncertainties
which could cause actual results to differ materially from those in the
forward-looking statements, including those related to the timely development
and acceptance of new products, fluctuations in raw materials and other
production costs, the loss of one or more significant customers, the impact of
competitive products and pricing, the timely completion of capital projects, the
success of the Company's efforts to expand into new markets and other risks
detailed herein, in the Company's prospectuses dated August 16, 1995 and May 20,
1994 and from time to time in the Company's other reports filed with the
Securities and Exchange Commission.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required under this Item 8 is set forth on pages F-1 through
F-16 of this Report.
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
The directors and executive officers of AET are as follows:
<TABLE>
<CAPTION>
OFFICER
DIRECTOR/EXECUTIVE
NAME AGE POSITION SINCE
<S> <C> <C> <C>
Amin J. Khoury 58 Chairman of the Board(1) October 1986
Thomas E. Williams 51 President, Chief Executive Officer
and Director(2) December 1992
Robert H. Beeby 64 Director October 1994
Nader A. Golestaneh+ 37 Director October 1986
Richard G. Hamermesh* 49 Director October 1986
Mark M.Harmeling+ 44 Director October 1986
Paul W. Marshall 55 Director October 1986
Joseph J. O'Donnell* 53 Director October 1986
David N. Terhune 51 Executive Vice President and Chief Operating Officer(3) February 1994
Mark S. Abrahams 46 Vice President and General Manager, Specialty
Nets & Profiles Division(4) December 1993
Anthony J. Allott 33 Vice President, Chief Financial Officer and Treasurer July 1994
Gerald M. Haines II 34 General Counsel and Secretary September 1995
</TABLE>
- -----------------
* Member Audit Committee
+ Member Stock Option and Compensation Committee
(1) The Company has entered into a five-year Employment Agreement dated as
of April 26, 1994 with Mr. Khoury pursuant to which he currently serves
as Chairman of the Board of the Company.
(2) The Company has entered into a five-year Employment Agreement dated as
of April 26, 1994 with Mr. Williams pursuant to which he currently
serves as Chief Executive Officer and President of the Company.
-10-
<PAGE> 13
(3) The Company has entered into a three-year Employment Agreement with Mr.
Terhune dated February 1, 1996 pursuant to which he currently serves as
Executive Vice President and Chief Operating Officer of the Company.
(4) The Company has entered into a three-year Employment Agreement dated as
of June 1, 1996 with Mr. Abrahams pursuant to which he currently serves
as Vice President and General Manager of the Company's Specialty Nets &
Profiles Division.
All directors hold office until the next annual meeting of stockholders or until
their successors are duly elected and qualified. The executive officers of the
Company are elected annually by the Board of Directors following the annual
meeting of stockholders and serve at the discretion of the Board of Directors.
BUSINESS EXPERIENCE OF DIRECTORS AND EXECUTIVE OFFICERS
Amin J. Khoury -- Founder and Chairman of the Board of Directors of the Company
since October 1986; from October 1986 to August 1993, Chief Executive Officer of
the Company; President of the Company from August 1988 through November 1992;
Founder and Chairman of the Board of Directors of BE Aerospace, Inc., a
manufacturer of cabin interior products for commercial aircraft; Director of
Brooks Automation, Inc., a leading worldwide independent supplier of vacuum
substrate handling robots, modules and cluster tool platforms for semiconductor
and flat panel display manufacturing.
Thomas E. Williams -- Director, President and Chief Operating Officer of the
Company since December 1992; Chief Executive Officer of the Company since August
1993; from 1988 until 1992, President and Chief Executive Officer of Home
Innovations, Inc., a home furnishings company; from 1980 until 1988, held a
number of executive positions with PepsiCo, Inc.
Robert H. Beeby --Director of the Company; From 1989 to June 1991, President and
Chief Executive Officer of Frito-Lay, Inc., a United States manufacturer and
distributor of snack foods; from 1984 to 1988, President and Chief Executive
Officer of Pepsi-Cola International, an international soft drink manufacturer
and distributor; Director of Church & Dwight, a manufacturer of consumer
products and specialty chemicals, the A.C. Nielsen Company, an international
market research company, and The Columbia Gas System, Inc., a producer,
transmitter and distributor of natural gas in the eastern United States.
Nader A. Golestaneh -- Director of the Company; since 1990, President of
Centremark Properties, Inc., a real estate management and development company;
since 1986, attorney in private practice in Boston, Massachusetts.
Richard G. Hamermesh -- Director of the Company; since August 1987, Managing
Partner, Center for Executive Development, an independent executive education
and training firm; Director of BE Aerospace, Inc., a manufacturer of cabin
interior products for commercial aircraft.
Mark M. Harmeling -- Director of the Company since 1986; since 1997, an
executive of The A.G. Spanos Corporation, a leading developer of multi-family
residential complexes; since 1991, President of Bay State Reality Advisors, a
real estate consulting firm; from 1985 to 1991, President of Intercontinental
Real Estate Corporation, a real estate holding and development corporation;
Director of Universal Holding Corporation, an insurance holding company.
Paul W. Marshall -- Director of the Company; since 1996, Professor of
Management, Harvard Business School; from 1992 to 1997, Chairman of the Board
and Chief Executive Officer of Rochester Shoe Tree Company, Inc., a manufacturer
and distributor of cedar shoe trees and other cedar and shoe care products; from
1989 to 1991, Chairman of Industrial Economics Company, a management consulting
firm; from 1989 to 1992, Adjunct Professor, Harvard Business School; Director of
Raymond James Financial Corporation, a regional brokerage firm.
Joseph J. O'Donnell -- Director of the Company; since 1978, Chairman of the
Board and Chief Executive Officer of Boston Concessions Group, Inc., a company
that manages food service operations in ski areas, amusement parks, restaurants
and theaters.
-11-
<PAGE> 14
David N. Terhune -- Executive Vice President and Chief Operating Officer of AET
since July 1996. From February 1994 to June 1996 he was Senior Vice President
and Chief Financial Officer of AET. From 1992 to 1993, Mr. Terhune was the Chief
Financial Officer of Ground Round Restaurants, Inc., an operator and franchiser
of full-service family restaurants. From 1990 to 1992, Mr. Terhune was Chief
Financial Officer of Daka International, Inc., a holding company serving the
food service management and restaurant businesses.
Mark S. Abrahams -- Vice President and General Manager of Specialty Nets and
Profiles since December 1993. From November 1990 through July 1993, Mr. Abrahams
was the President of the Cybex Division of Lumex Corporation, a manufacturer and
distributor of physical therapy and fitness equipment. From November 1988
through October 1990, Mr. Abrahams was the Chief Operating Officer of Cambridge
Medical Instruments, a manufacturer of diagnostic medical equipment.
Anthony J. Allott -- Vice President, Chief Financial Officer and Treasurer of
the Company since July 1996. From May 1995 to June 1996, he served as Vice
President and Treasurer of the Company and from July 1994 to April 1995, he was
the Treasurer of the Company. From December 1992 through July 1994, Mr. Allott
was the Corporate Controller with Ground Round Restaurants, Inc., an operator
and franchiser of full-service family restaurants, and from 1986 through 1992 he
was with Deloitte & Touche LLP, an independent auditing firm, most recently as
audit manager.
Gerald M. Haines II -- General Counsel and Secretary of the Company since
September 1995. From September 1990 to August 1995, Mr. Haines was an attorney
with the law firm of Choate, Hall & Stewart.
"Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy
Statement, dated December 24, 1996, is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
"Executive Compensation" in the Proxy Statement dated December 29, 1997 is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
"Beneficial Ownership of Shares" in the Proxy Statement dated December 29, 1997
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
"Certain Transactions" in the Proxy Statement dated December 29, 1997 is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following documents are filed as part of this report:
A. FINANCIAL STATEMENTS
Consolidated Balance Sheets, September 30, 1997 and 1996
Consolidated Income Statements for the Years Ended September 30, 1997,
1996 and 1995
Consolidated Statements of Stockholders' Equity for the Years Ended
September 30, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
FINANCIAL STATEMENT SCHEDULES
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted as the required information is not
applicable or is included in the financial statements or related notes.
-12-
<PAGE> 15
B. EXHIBITS
3.1(a) Amended and Restated Certificate of Incorporation.
3.2(a) Amended and Restated By-Laws.
4.1(d) Indenture dated as of April 7,1995 between the Registrant and United
States Trust Company of New York, Trustee.
4.2(d) Form of 11 1/2 percent Senior Note due 2002 (included in
Exhibit 4.2).
4.3(a) Specimen Common Stock Certificate.
10.1(d) Credit Agreement dated as of April 7, 1994 by and between the
Registrant and The Chase Manhattan Bank (National Association),
as agent.
10.1.1 Amendments dated December 30, 1994, July 10, 1995 and June 28, 1996
to the Credit Agreement dated as of April 7, 1994 by and between
the Registrant and The Chase Manhattan Bank (National
Association), as agent.
10.1.2* Amendment dated as of March 31, 1997 to the Credit Agreement dated as
of April 7, 1994 by and between the Registrant and The Chase
Manhattan Bank (National Association),as agent.
10.1.3* Waiver dated as of August 7, 1997 to the Credit Agreement dated as
of April 7, 1994 by and between the Registrant and The Chase
Manhattan Bank (National Association),as agent.
10.2(b) 1986 Stock Option Plan, as amended.
10.3(c) 1991 Stock Option Plan, as amended.
10.4(e) 1991 Stock Option Plan for Directors, as amended.
10.5(d) 1994 Stock Option Plan, as amended.
10.6(g) Employment Agreement dated as of June 1, 1996 between the Registrant
and Mark S. Abrahams.
10.7(g) Employment Agreement dated as of February 1, 1996 between the
Registrant and David N. Terhune, as amended.
10.8* Agreement dated as of August 22, 1997 between the Registrant and
Anthony J. Allott.
10.9(g) Employment Agreement dated as of April 26, 1994 between the
Registrant and Amin J. Khoury, as amended.
10.10(g) Employment Agreement dated as of April 26, 1994 between the
Registrant and Thomas E. Williams, as amended.
10.11(f) Executive Deferred Compensation Plan dated as of September 1, 1994.
21.1(d) Subsidiaries of the Registrant.
23.1* Consent of Deloitte & Touche LLP
24.1* Powers of Attorney
27* Financial Data Schedule
99* Cautionary Statement for Purposes of the "Safe Harbor" Provisions of
the Private Securities Litigation Reform Act of 1995.
- ---------------
* Filed herewith
(a) Contained in Exhibits to Registrant's Registration Statement on Form S-1,
as amended (No. 33-40145), filed with the Commission on April 24,
1991.
(b) Contained in Exhibits to the Registrant's Registration Statement on Form
S-8 (No. 33-44449), filed with the Commission on December 18, 1991.
(c) Contained in Exhibits to the Registrant's Registration Statement on Form
S-8 (No. 33-48841), filed with the Commission on June 25, 1992.
(d) Contained in Exhibits to the Registrant's Registration Statement on Form
S-4 (No. 33-78006), filed with the Commission on April 21, 1994.
(e) Contained in Exhibits to the Registrant's Form 10-K for the fiscal year
ended September 30, 1992.
(f) Contained in Exhibits to the Registrant's Form 10-K for the fiscal year
ended September 30, 1994.
(g) Contained in Exhibits to the Registrant's Form 10-K for the fiscal year
ended September 30, 1996.
The above reference exhibits are, as indicated, either filed herewith or have
heretofore been filed with the Commission under the Securities Act and the
Exchange Act and are referred to and incorporated herein by reference to such
filings.
C. REPORTS ON FORM 8-K
No Current Reports on Form 8-K were filed during the fourth quarter of 1997.
-13-
<PAGE> 16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
APPLIED EXTRUSION TECHNOLOGIES, INC.
By: /s/ Anthony J. Allott
------------------------------------
Anthony J. Allott, Vice President and
Chief Financial Officer
December 18, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons in the capacities and on the
dates indicated:
<TABLE>
<S> <C>
/s/ Amin J. Khoury /s/ Thomas E. Williams
- ------------------------------------- --------------------------------------------
Amin J. Khoury, Chairman of the Board Thomas E. Williams, Chief Executive Officer,
December 18, 1997 President and Director
December 18, 1997
/s/ Robert H. Beeby /s/ Paul W. Marshall
- ------------------------------------- --------------------------------------------
Robert H. Beeby, Director Paul W. Marshall, Director
December 18, 1997 December 18, 1997
/s/ Nader A. Golestaneh /s/ Joseph J. O'Donnell
- ------------------------------------- --------------------------------------------
Nader A. Golestaneh, Director Joseph J. O'Donnell, Director
December 18, 1997 December 18, 1997
/s/ Richard G. Hamermesh /s/ Anthony J. Allott
- ------------------------------------- --------------------------------------------
Richard G. Hamermesh, Director Anthony J. Allott, Vice President and
December 18, 1997 and Chief Financial Officer
December 18, 1997
/s/ Mark M. Harmeling
- -------------------------------------
Mark M. Harmeling, Director
December 18, 1997
</TABLE>
-14-
<PAGE> 17
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets, September 30, 1997 and 1996 F-2
Consolidated Income Statements for the Years Ended
September 30, 1997, 1996 and 1995 F-3
Consolidated Statements of Stockholders' Equity for the Years
Ended September 30, 1997, 1996 and 1995 F-4
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1997, 1996 and 1995 F-5
Notes to Consolidated Financial Statements F-6
FINANCIAL STATEMENT SCHEDULES:
Schedule II - Valuation and Qualifying Accounts for the Years Ended
September 30, 1997, 1996 and 1995 F-16
INDEPENDENT AUDITORS' REPORT F-17
F-1
<PAGE> 18
APPLIED EXTRUSION TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND 1996
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,054 $ 3,266
Accounts receivable, net of allowance for doubtful accounts of $745
and $750 at September 30, 1997 and 1996, respectively 38,513 34,937
Inventory 34,619 30,582
Prepaid expenses and deferred taxes 7,804 9,407
-------- --------
Total current assets 83,990 78,192
Property, plant and equipment, net 284,430 245,546
Intangibles and deferred finance charges, net 4,691 5,860
Long-term note receivable and other assets 3,382 2,106
-------- --------
$376,493 $331,704
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Current liabilities:
Accounts payable $ 15,807 $ 16,294
Accrued interest 9,430 8,978
Accrued expenses 21,153 17,009
Current portion of long-term debt 4,000
-------- --------
Total current liabilities 50,390 42,281
Long-term debt 196,500 165,500
Deferred taxes and other credits 17,420 15,588
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; authorized, 1,000 shares,
no shares outstanding
Common stock, $.01 par value:
Voting -- authorized, 14,865 shares; issued, 10,807 and 10,529
shares at September 30, 1997 and 1996, respectively 108 105
Additional paid-in capital 92,401 89,638
Retained earnings 22,840 21,444
Cumulative translation adjustments (154) 277
-------- --------
115,195 111,464
Treasury stock, at cost and other -- 325 and 320 shares at
September 30, 1997 and 1996, respectively (3,012) (3,129)
-------- --------
Total stockholders' equity 112,183 108,335
-------- --------
$376,493 $331,704
======== ========
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE> 19
APPLIED EXTRUSION TECHNOLOGIES, INC.
CONSOLIDATED INCOME STATEMENTS
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
SALES $262,271 $234,490 $233,935
COST OF SALES 205,037 181,899 168,664
-------- -------- --------
GROSS PROFIT 57,234 52,591 65,271
OPERATING EXPENSES:
Selling, general and administrative 23,819 20,144 20,219
Research and development 8,221 7,414 6,352
Restructuring charges 4,500
-------- -------- --------
Total operating expenses 36,540 27,558 26,571
-------- -------- --------
OPERATING PROFIT 20,694 25,033 38,700
NON-OPERATING EXPENSES:
Interest expense, net 16,868 13,927 18,609
Acquisition costs 1,500
Litigation settlement 1,400
-------- -------- --------
Total non-operating expenses 18,368 13,927 20,009
-------- -------- --------
Income before income taxes 2,326 11,106 18,691
Income tax expense 930 4,442 7,476
-------- -------- --------
NET INCOME $ 1,396 $ 6,664 $ 11,215
======== ======== ========
EARNINGS PER COMMON SHARE:
Primary $ .13 $ .61 $ 1.45
Fully diluted .13 .61 1.39
AVERAGE COMMON AND COMMON EQUIVALENT SHARES
OUTSTANDING:
Primary 11,130 10,866 7,717
Fully diluted 11,101 10,892 8,066
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 20
APPLIED EXTRUSION TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended September 30, 1997, 1996 and 1995
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
VOTING NONVOTING ADDITIONAL CUMULATIVE TREASURY
COMMON STOCK COMMON STOCK PAID-IN RETAINED TRANSLATION STOCK AND
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT OTHER
------ ------ ------ ------ ------- -------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1994 6,031 $ 60 135 $ 1 $32,970 $ 3,565 $ 599 $ (676)
Net income 11,215
Treasury shares (471)
Profit sharing contribution 70 1 777
Issuance of common stock 3,450 35 47,758
Exercise of stock options, net 435 4 3,318
Exchange rate changes (98)
------ ---- ---- --- ------- ------ ----- -------
BALANCE, SEPTEMBER 30, 1995 9,986 100 135 1 84,823 14,780 501 (1,147)
Net income 6,664
Profit sharing contribution 145 1 1,681
Conversion of non-voting common stock 135 1 (135) (1)
Stock issued for employee purchase plan 18 1 173
Treasury shares and other (1,982)
Exercise of stock options, net 245 2 1,552
Tax benefits--stock option plan 1,409
Exchange rate changes (224)
------ ---- ---- --- ------- ------ ----- -------
BALANCE, SEPTEMBER 30, 1996 10,529 105 89,638 21,444 277 (3,129)
Net income 1,396
Profit sharing contribution 175 2 1,863
Stock issued for employee purchase plan 75 1 674
Treasury shares and other 117
Exercise of stock options, net 28 173
Exchange rate changes (431)
Tax benefits--stock option plan 53
------ ---- ---- --- ------- ------ ----- -------
BALANCE, SEPTEMBER 30, 1997 10,807 $108 $ $92,401 $22,840 $(154) $(3,012)
====== ==== ==== === ======= ======= ===== =======
</TABLE>
No Preferred Stock was issued or outstanding during any period presented.
See notes to consolidated financial statements.
F-4
<PAGE> 21
APPLIED EXTRUSION TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
(In thousands)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,396 $ 6,664 $ 11,215
Adjustment to reconcile net income to net cash provided by
operating activities:
Provision for doubtful accounts 285 373 206
Accretion of discount on investment securities (171) (83)
Depreciation and amortization 17,248 13,991 12,400
Deferred income taxes 930 4,442 6,113
Changes in assets and liabilities which provided (used) cash:
Prepaid expenses and other assets 328 (410) (4,298)
Accounts payable and accrued expenses 5,127 (6,895) 7,885
Accounts receivable and inventory (7,898) (4,819) (6,854)
-------- -------- --------
Net cash provided by operating activities 17,416 13,175 26,584
INVESTING ACTIVITIES:
Purchases of investment securities (4,055) (15,977)
Proceeds from maturities of investment securities 16,270 4,016
Additions to property, plant and equipment, net (54,963) (51,573) (35,656)
Other 34
-------- -------- --------
Net cash used in investing activities (54,963) (39,358) (47,583)
FINANCING ACTIVITIES:
Borrowings (repayments) under bank credit agreement, net 35,000 9,000 (23,000)
Proceeds from issuance of stock, net 2,766 198 50,645
-------- -------- --------
Net cash provided by financing activities 37,766 9,198 27,645
Effect of exchange rate changes on cash (431) (224) (98)
-------- -------- --------
Increase (decrease) in cash and cash equivalents, net (212) (17,209) 6,548
Cash and cash equivalents, beginning 3,266 20,475 13,927
-------- -------- --------
Cash and cash equivalents, ending $ 3,054 $ 3,266 $ 20,475
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest, net of capitalized interest of $5,132, $5,106 and
$1,668, respectively $ 15,413 $ 13,079 $ 18,001
Income taxes 2 1,669 3,125
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 22
APPLIED EXTRUSION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
(In thousands, except share and per share amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Applied Extrusion Technologies, Inc. and its subsidiaries (collectively AET or
the Company) develop, manufacture and sell a broad range of extruded
thermoplastic products utilizing proprietary manufacturing technologies. The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries. All material intercompany accounts and transactions
have been eliminated.
ACCOUNTING ESTIMATES were made in connection with the preparation of the
Company's consolidated financial statements in conformity with generally
accepted accounting principles. These estimates affect reported amounts and
disclosure of revenues and expenses during the reporting period. Actual results
could differ from these estimates.
CASH AND CASH EQUIVALENTS consist of cash and highly liquid debt instruments
such as commercial paper and money market accounts purchased with an original
maturity date of less than three months.
FINANCIAL INSTRUMENTS are recorded in accordance with Statement of Financial
Accounting Standards (SFAS) No. 107, Disclosures about Fair Value of Financial
Instruments, which requires disclosure about fair value for all financial
instruments, whether recognized or not in the balance sheet, for which it is
practicable to estimate that value. A financial instrument is defined as cash,
evidence of an ownership interest in an entity, and certain contracts to
exchange cash or other financial instruments. For financial instruments, such as
accounts receivable, accounts payable and accrued expenses, which reprice or
mature within three months of the reporting date, carrying amount approximates
fair value. At September 30, 1997 and 1996, the carrying amounts of long-term
debt approximate their fair values. SFAS No. 107 excludes from its scope certain
financial instruments and all nonfinancial instruments including inventory,
property, plant and equipment, retirement benefit obligations, deferred
compensation agreements and leases. Accordingly, the aggregate fair value
amounts presented do not represent the underlying fair value of the Company. The
carrying amount of cash and equivalents approximates fair value.
INVENTORY is stated at the lower of cost or market with cost determined using an
average-cost method.
PROPERTY, PLANT AND EQUIPMENT are stated at cost. For financial reporting
purposes, depreciation is provided using the straight-line method over estimated
useful lives. Estimated useful lives are 30 years for building and improvements
and 5 to 15 years for machinery and equipment. Costs associated with the
start-up of new production lines are capitalized and amortized over 18 months.
Assets held are recorded at the lesser of carrying value or fair value less
estimated costs to dispose of the respective assets.
INTANGIBLES AND DEFERRED FINANCE CHARGES include intellectual property, patents,
licenses, organization costs, covenants not to compete and costs associated with
the issuance of debt. Amortization of intangibles is being recognized using the
straight-line method based upon the economic useful lives of the assets,
principally over ten years. Deferred finance charges are recognized using the
straight-line method over the term of the related debt, and are included in net
interest expense. On an ongoing basis, the Company evaluates the carrying value
of intangible assets versus the cash benefit expected to be realized from the
performance of the underlying operations and adjusts for any impairment in
value.
INCOME TAXES are recorded under the provisions of SFAS No. 109, Accounting for
Income Taxes. SFAS No. 109 requires an asset and liability approach that
recognizes deferred tax assets and liabilities for the differences between the
financial statement carrying amount and the tax basis of existing assets and
liabilities. These differences arise principally from the use of accelerated
depreciation methods for income tax reporting purposes and the straight-line
method for financial statement purposes. Deferred tax assets and liabilities are
measured using enacted tax rates in effect for the year in which these temporary
differences are expected to be recovered or settled. Under SFAS No. 109, the
effect of a change in tax rates on deferred tax assets and liabilities is
recognized in the period that includes the enactment date.
SALES are recognized upon shipment of products to customers, when title and risk
of loss have passed to the customer.
F-6
<PAGE> 23
FOREIGN OPERATIONS are reported in accordance with SFAS No. 52, Accounting for
the Translation of Foreign Currency Transactions and Foreign Currency Financial
Statements. The Company periodically enters into foreign currency exchange
contracts to hedge firm purchase commitments denominated in foreign currencies.
Gains or losses are deferred until the period in which the related transactions
occur.
NET EARNINGS PER SHARE is computed using the weighted-average number of shares
outstanding during each year, including common stock equivalents.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123, "Accounting for Stock-Based
Compensation" requires certain disclosures with respect to the Company's
stock-based compensation programs. The information related to these required
disclosures is included in footnote 9 to the consolidated financial statements.
CERTAIN NEW ACCOUNTING PRONOUNCEMENTS were recently issued which are not
effective for fiscal year ended September 30, 1997. In February 1997, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings per Share," which will be effective during
the fourth calendar quarter of 1997. SFAS No. 128 will require the Company to
restate all previously reported earnings per share information to conform with
the new pronouncement's requirements. The Company will adopt SFAS No. 128 in the
first fiscal quarter of 1998. Pro forma disclosures are included in footnote 10
to the consolidated financial statements.
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards (SFAS) No.130 "Reporting Comprehensive Income" and SFAS No.
131 "Disclosures about Segments of an Enterprise and Related Information." SFAS
No. 130 requires that all items that are required to be recognized under
accounting standards as components of comprehensive income (revenues, expenses,
gains and losses) be reported in a financial statement that is displayed with
the same prominence as other financial statements. The provisions of this
statement are effective for fiscal years beginning after December 15, 1997.
Management believes that changes made to comply with this statement will not
affect the Company's consolidated financial position or net income as previously
reported.
SFAS NO. 131 requires public business enterprises to report financial and
descriptive information about its operating segments. The provisions of this
statement are effective for periods beginning after December 15, 1997.
Management believes that implementation of this statement will not affect the
Company's consolidated financial position or results of operations as previously
reported, but may impact the level of disclosure of its segment information.
2. INVENTORY
Inventory consisted of the following at September 30:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Raw materials $ 8,259 $11,693
Finished goods 26,360 18,889
------- -------
$34,619 $30,582
======= =======
</TABLE>
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at September 30:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Land $ 3,101 $ 2,915
Buildings and improvements 38,396 36,207
Machinery and equipment 224,947 201,708
Machinery and equipment in progress 69,661 42,193
-------- --------
336,105 283,023
Less accumulated depreciation 51,675 37,477
-------- --------
$284,430 $245,546
======== ========
</TABLE>
F-7
<PAGE> 24
Depreciation expense for the years ended September 30, 1997, 1996 and 1995 was
$16,079, $12,770 and $11,124, respectively. During the fourth quarter of 1997,
the Company sold assets related to its dry adhesive net and injection molding
businesses. Net proceeds from these sales of $6,700 approximated book value, and
were utilized to paydown borrowings under the Company's Revolving Credit
Facility. The Company is also in the process of divesting certain other non-core
business units with a net book value of assets of approximately $22,000.
Revenues from these business units were approximately $24,000, $23,600 and
$22,300 for fiscal years ended September 30, 1997, 1996 and 1995, respectively.
The Company leases certain property and equipment under agreements generally
with terms of five years and certain renewal options. Rental expense for the
years ended September 30, 1997, 1996 and 1995 was approximately $622, $857 and
$972, respectively. The minimum annual rental commitments under noncancelable
operating leases are as follows for each of the five years subsequent to
September 30, 1997:
1998 $ 986
1999 999
2000 928
2001 797
2002 729
------
$4,439
======
4. INTANGIBLES AND DEFERRED FINANCE CHARGES
Intangibles and deferred finance charges consisted of the following at September
30:
1997 1996
---- ----
Patents and licenses $ 1,072 $ 1,072
Organization costs 418 418
Covenants not to compete 109 109
Deferred financing charges 7,305 7,305
Intellectual property 1,611 1,611
------- -------
10,515 10,515
Less accumulated amortization 5,824 4,655
------- -------
$ 4,691 $ 5,860
======= =======
F-8
<PAGE> 25
5. LONG-TERM DEBT
<TABLE>
<CAPTION>
Long-term debt consisted of the following on September 30: 1997 1996
---- ----
<S> <C> <C>
Industrial Revenue Bond payable November 4, 2004 at ARBI plus .25% (5.25%
effective rate at September 30, 1997). $ 6,500 $ 6,500
Senior Notes payable on April 7, 2002 at 11.5% interest due semi-annually
on October 1 and April 1. 150,000 150,000
Five-year Revolving Term Facility with availability of $11,000 at September
30, 1997 and $15,000 at September 30, 1996: balance due on March 31,
1999. Interest is due quarterly at LIBOR plus 2.75% or at prime on
outstanding portion and .5% on unused commitments. Outstanding
LIBOR-based tranches and effective interest rates at September 30, 1997
were $2,000 at 8.44% and $9,000 at 8.69%. 11,000 9,000
Revolving Credit Facility of $50,000 bearing interest at LIBOR plus 2.75%
or prime plus 1.25% on utilized portions and .5% for unused
commitments. Outstanding LIBOR-based tranches and effective interest
rates at September 30, 1997 were: $4,000 at 8.13%; $8,000 at 8.63%;
$3,000 at 8.60%; $4,000 at 8.44%; $3,000 at 8.35%; $3,000 at 8.38%; and
$4,000 at 8.32%. Prime-based borrowings were $4,000 at an effective
interest rate of 9.75%. 33,000
-------- --------
200,500 165,500
Less current portion 4,000
-------- --------
Total long-term debt $196,500 $165,500
======== ========
</TABLE>
In conjunction with the acquisition of the Packaging Films Business of Hercules
Incorporated (the "Acquisition") on April 7, 1994, the Company entered into a
bank credit agreement ("Credit Agreement") with a group of lenders to provide
the Company with senior bank financing in an amount up to $81,600. The Credit
Agreement provides for a $25,000 Revolving Term Loan Facility, a $50,000
Revolving Credit Facility and a $6,600 standby letter of credit in support of
the Company's currently outstanding industrial revenue bond, each of which has a
final maturity in 1999 and is secured by all assets of the Company. At September
30, 1997, $17,000 of the Revolving Credit was available to the Company. The
Credit Agreement contains covenants which limit borrowings based on certain
asset levels and require the Company to maintain a minimum tangible net worth,
minimum specified fixed charge and interest coverage ratios, and establishes
maximum capital expenditure levels. As a result of the one-time charge in
connection with terminated acquisition negotiations during the third fiscal
quarter and the restructuring charges recorded in the fourth fiscal quarter
discussed above, the Company's interest and fixed charge coverage ratios for the
year ended September 30, 1997 were below those required by the terms of the
Credit Agreement. The Company has received a waiver from the lending group.
The aggregate amount of long-term debt maturing in years subsequent to September
30, 1997 is as follows:
1998 $ 33,000
1999 7,000
2000
2001
2002 150,000
Thereafter 6,500
--------
$196,500
========
F-9
<PAGE> 26
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accrued expenses consisted of the following at September 30:
1997 1996
---- ----
Payroll and benefits $ 7,166 $ 6,513
Market development 5,115 3,739
Taxes and other 8,872 6,757
------- -------
$21,153 $17,009
======= =======
Included in accounts payable are outstanding checks of $3,554 and $7,547 at
September 30, 1997 and 1996, respectively.
7. INCOME TAXES
The provision for income taxes consisted of the following for the years ended
September 30:
1997 1996 1995
---- ---- ----
Current:
U.S. Federal $1,361
Deferred:
U.S. Federal $791 $3,887 5,297
State 139 555 818
---- ------ ------
Total deferred 930 4,442 6,115
---- ------ ------
Total $930 $4,442 $7,476
==== ====== ======
The components of the net deferred liability were as follows at September 30:
1997 1996 1995
---- ---- ----
Deferred Tax Assets:
Accounts receivable $ 246 $ 326 $ 284
Inventory 2,347 2,265 623
Other assets 1,237 979 1,067
Other liabilities 3,193 3,776 4,325
Tax credits and loss
carryforwards 21,379 15,918 11,124
Valuation allowance (435) (435) (435)
------- ------- -------
Total 27,967 22,829 16,988
------- ------- -------
Deferred Tax Liabilities:
Property, plant and
equipment 38,539 32,595 23,744
Other assets 197 235 211
------- ------- -------
Total 38,736 32,830 23,955
------ ------- -------
Total net tax liability $10,769 $10,001 $ 6,967
======= ======= =======
A valuation allowance has been established for certain state deferred tax assets
resulting from temporary differences for which the potential to realize the tax
benefit was not considered more likely than not.
At September 30, 1997, the Company has, for income tax reporting purposes, a
federal net operating loss carryforward of $44,973 (expiration commencing in
2005) and state net operating loss carryforwards of $43,573 (limited by certain
state tax statutes and expiration). The Company also has research and
development credit carryforwards of $325, alternative minimum tax credit
carryforward of $2,672 and state investment tax credits of $311 (expiration
commencing in 2005).
F-10
<PAGE> 27
A reconciliation of the statutory federal income tax rate to the effective rate
of the provisions for income taxes for the years ended September 30, 1997, 1996
and 1995 was as follows:
1997 1996 1995
---- ---- ----
Statutory tax rate 35.0% 35.0% 35.0%
State income taxes, net of
federal tax benefits 4.1% 3.6% 4.9%
Other, net .9% 1.4% .1%
---- ---- ----
40.0% 40.0% 40.0%
==== ==== ====
8. STOCKHOLDERS' EQUITY
In August 1995, the Company issued 3,450,000 shares of common stock in a public
offering at $15.00 per share. Issuance costs associated with the offering amount
to $3,957. The Company has used the net proceeds of approximately $48,000 from
the offering to fund a portion of its planned capacity expansion projects.
During fiscal 1996, treasury shares were issued in connection with the exercise
of certain employee stock options. A total of 54,156 shares were purchased into
treasury under the deferred compensation plan. Tax benefits resulting from
compensation expense allowable for U.S. Federal income tax purposes in excess of
the expense recorded in the consolidated income statement have been credited to
additional paid-in capital in the accompanying consolidated statements of
stockholders' equity. In fiscal 1996, the Company implemented an employee stock
purchase plan, under which employees can defer a portion of their compensation
and purchase AET shares at a discount. A total of 18,000 and 75,000 shares were
purchased under this plan in fiscal 1997 and 1996, respectively.
9. STOCK OPTIONS
The Company maintains common stock option plans for key employees, directors and
consultants under which the exercise price is generally not less than the fair
value of the shares at the date of grant. The options generally vest at a rate
of 25 percent per year. Vested employee options generally terminate within three
months of employment termination or three years after the death of the employee.
Vested director options generally terminate within three months of the
resignation or within six months of the death of a director. All options
terminate upon the occurrence of the tenth anniversary of the grant date or upon
other termination events specified in the plans. During fiscal 1996, the Company
repriced 762,500 outstanding employee stock options to $8.25, the closing market
price on the date of repricing. The revised option prices have been reflected
for all applicable years in the stock option schedule to follow. The repricing
affected only those stock options originally granted with an exercise price in
excess of the closing price of the Company's common stock on the date of
repricing. As of September 30, 1997, an aggregate of approximately 2,734,000
shares had been reserved for issuance under the plans.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," which is effective for fiscal 1997. As permitted by SFAS No.
123, the Company continues to account for stock-based compensation under the
provisions of Accounting Principles Board (APB) Opinion No. 25. Accordingly, no
compensation cost has been recognized for fixed stock option grants since the
options have exercise prices per share of not less than the fair value of the
Company's common stock at the date of the grant.
F-11
<PAGE> 28
If compensation cost for stock option grants and the Company's Employee Stock
Purchase Plan had been determined based on the fair value at the grant for 1997
and 1996 consistent with the method prescribed by SFAS No. 123, the Company's
fiscal 1997 and 1996 net income and earnings per share on a pro forma basis
would have been as follows:
1997 1996
---- ----
Net Earnings:
As reported $1,396 $6,664
Pro forma 1,247 6,629
Primary Earnings per Share:
As reported .13 .61
Pro forma .10 .60
Fully Diluted Earnings per Share:
As reported .13 .61
Pro forma .10 .60
Under SFAS No. 123, the fair value of each option grant is estimated on the date
of the grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1997 and 1996: expected
volatility of 54 percent, risk-free interest rate of 6 percent and expected
lives of 7 to 10 years.
Information concerning the Company's option plans are as follows:
<TABLE>
<CAPTION>
SHARES UNDER OPTION
OPTION PRICES EXERCISABLE
------------ ------------- -----------
<S> <C> <C> <C>
As of September 30, 1994 2,141,000 $ 1.00-8.25 692,250
=========
Granted 816,000 8.25
Exercised (435,989) 1.00-9.50
Canceled (192,875) 5.50-8.25
---------
As of September 30, 1995 2,328,136 1.00-8.25 789,886
=========
Granted 166,500 8.25-8.375
Exercised (243,386) 5.125-8.25
Canceled (32,000) 1.00-14.875
---------
As of September 30, 1996 2,219,250 1.00-8.375 948,000
=========
Granted 214,500 8.375-12.00
Exercised (28,000) 5.5-8.25
Canceled (71,500) 5.75-14.875
---------
As of September 30, 1997 2,334,250 1,247,625
========= =========
</TABLE>
A summary of the status of fixed stock option grants under the Company's
stock-based compensation plan as of September 30, 1997 and changes during the
year then ended is presented below:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
------- ----------------
<S> <C> <C>
Outstanding at beginning of year 2,219,250 $ 7.42
Granted 214,500 9.85
Exercised (28,000) 6.22
Forfeited or canceled (71,500) 10.15
--------- ------
Outstanding at end of year 2,334,250 $ 7.61
========= ======
Options exercisable at year end 1,247,625 $ 6.87
========= ======
Weighted average fair value of
options granted $ 6.23
======
</TABLE>
The following table summarizes information regarding stock options outstanding
at September 30, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------- ---------------------------
WEIGHTED-
AVERAGE WEIGHTED-
RANGE OF OUTSTANDING REMAINING EXERCISABLE AVERAGE
EXERCISE AS OF CONTRACTUAL AS OF EXERCISE
PRICES 09/30/97 LIFE IN YEARS 09/30/97 PRICE
-------- ----------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
$ 1.00- 5.00 182,000 6.06 162,000 $ 4.76
5.01 7.50 951,500 5.49 788,250 6.53
7.51-10.00 1,071,250 7.54 274,875 8.74
10.01-12.50 69,500 9.58
12.51-15.00 60,000 8.28 22,500 14.24
--------- ---- --------- ------
2,334,250 6.86 1,247,625 $ 6.87
========= ==== ========= ======
</TABLE>
Under the terms of the Company's 1997 Employee Stock Purchase Plan, eligible
employees may purchase shares of the Company's common stock through payroll
deductions. The purchase price for shares purchased under the Plan is 85 percent
of the lower of fair market value of the stock on the first or last day of the
purchasing period. Purchases through payroll deductions are made on a
semi-annual basis. At September 30, 1997, 87,000 shares were purchased under
this Plan and another 413,000 shares were available under the Plan for future
purchases.
F-12
<PAGE> 29
10. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share," which will
be effective during the fourth calendar quarter of 1997. SFAS No. 128 will
require the Company to restate all previously reported earnings per share
information to conform with the new pronouncement's requirements. The Company
will adopt SFAS No. 128 in the first fiscal quarter of 1998.
Had SFAS No. 128 been effective for the fiscal years ended September 30, 1997,
1996 and 1995, reported earnings per share on a pro forma basis would have been
as follows:
1997 1996 1995
---- ---- ----
Basic $.13 $.63 $1.66
Diluted .13 .61 1.51
11. RELATED-PARTY TRANSACTIONS
In 1989, the Company entered into a supply agreement with an affiliated company,
BE Aerospace, Inc., pursuant to which the Company agreed to sell to the
affiliate its requirements of certain components through March 31, 1998. The
Company had sales resulting from this agreement of $1,715, $1,649 and $952
during the years ended September 30, 1997, 1996 and 1995, respectively. This
supply agreement was terminated effective September 16, 1997 concurrent with the
sale of related manufacturing assets by the Company. Total receivables from
affiliated companies as of September 30, 1997, 1996 and 1995 were $564, $578 and
$653, respectively.
The Company has entered into employment agreements extending for periods of up
to five years with certain key officers of the Company. These officers, who in
some cases also serve on the Board of Directors and are stockholders of the
Company, are also eligible for performance bonuses.
12. COMMITMENTS AND FOREIGN EXCHANGE CONTRACTS
In connection with a plant expansion project, the Company has entered into
commitments of future capital expenditures of approximately $6,000 at September
30, 1997 and anticipates approximately $8,000 of additional expenditures over
the next year.
The Company has entered into foreign exchange contracts, the last of which
expires in January 1998, to hedge firm purchase commitments for the purchase of
equipment denominated in German Marks, Pounds Sterling and Japanese Yen. Gains
and losses on the contracts which result from market risk associated with
changes in the market values of the underlying currencies are deferred and
reported as part of the capitalized asset. In entering into these contracts, the
Company has assumed the risk which might arise from the possible inability of
counterparties to meet the terms of their contracts. The Company does not expect
any losses as a result of counterparty defaults. At September 30, 1997 and 1996,
the Company had outstanding foreign exchange contracts with notional values of
$5,746 and $2,415, respectively. These contracts had no carrying value and a net
unrealized loss of $498 and $36 as of September 30, 1997 and 1996, respectively.
The Company does not enter into foreign exchange contracts for trading purposes.
The Company implemented a restructuring plan in the fourth quarter of 1997 and
recorded charges of $4,500 primarily related to personnel reductions and the
discontinuation of certain product lines. This restructuring program includes
the separation of approximately 50 hourly employees comprised of production line
operators; maintenance employees and other plant personnel at one Company
facility, and approximately 20 hourly personnel related to the closure of
certain manufacturing assets of another facility, as well as costs related to
other salaried personnel changes. At September 30, 1997, approximately $1,500 of
these restructuring costs had been incurred. The Company anticipates that the
remaining restructuring costs will be paid during the first two quarters of
fiscal 1998.
F-13
<PAGE> 30
13. EMPLOYEE BENEFIT PLANS
Substantially all employees with more than three months of service (as defined)
are eligible to participate in a Company savings and profit sharing plan. The
plan provides for board-approved matching contributions in varying amounts based
on employee contribution percentages up to 3.5 percent of gross salary in
Company stock or cash. The plan also provides for profit sharing contributions
at the discretion of the Board of Directors. The plan allows for funding of
profit sharing and matching contributions in either Company stock or cash and is
fully accrued in the accompanying consolidated financial statements. Aggregate
contributions were made with Company stock in the amount of $1,865, $1,682 and
$778 in 1997,1996, and 1995, respectively.
The Company also has a non-qualified deferred compensation plan for certain
executive employees. This plan allows these employees to defer all or a portion
of their salary and bonus until retirement or termination of their employment.
14. LITIGATION SETTLEMENT
In addition to routine legal proceedings incidental to the conduct of its
business, which are not material in the aggregate, AET was named in a
consolidated action in 1992 related to its initial public offering as well as
subsequent periodic reports, press releases and public statements. The Company's
portion of the settlement is shown as a non-operating expense of $1,400 in the
accompanying 1995 consolidated income statement. While the Company believes the
litigation was without merit, management believes it was in the best interest of
the Company to settle the matter.
15. CONCENTRATION OF CREDIT RISK AND EXPORT SALES
The Company sells its products under normal credit terms to a diverse base of
customers in the packaging film conversion, environmental and health care
markets, as well as other industries. The Company performs on-going credit
evaluations of its customers and generally does not require collateral, although
letters of credit may be required on certain foreign sales. A significant amount
of sales were to converters of packaging films for end users in the beverage,
candy and snack food industries. One converter customer accounted for
approximately 16 percent of sales in fiscal 1997 and 1996 and 19 percent of
sales in 1995, with no other customer accounting for more than 10 percent of
sales in 1997, 1996, or 1995.
Information by geographic location was as follows for the years ended
September 30:
1997 1996 1995
---- ---- ----
Sales:
United States $236,514 $211,768 $201,442
Foreign 25,757 22,722 32,493
-------- -------- ---------
$262,271 $234,490 $233,935
======== ======== ========
Operating Profit:
United States $ 18,074 $ 22,338 $ 36,053
Foreign 2,620 2,695 2,647
-------- -------- --------
$ 20,694 $ 25,033 $ 38,700
======== ======== ========
F-14
<PAGE> 31
16. SELECTED QUARTERLY DATA (UNAUDITED)
Summarized quarterly financial data for fiscal 1997, 1996 and 1995 were as
follows:
NET
NET INCOME
NET GROSS INCOME (LOSS)
SALES PROFIT (LOSS) PER SHARE
----- ------ ------ ---------
September 30, 1997
1st quarter $59,445 $13,476 $ 1,057 $ .10
2nd quarter 68,492 15,277 1,750 .15
3rd quarter 70,076 15,345 745 .07
4th quarter 64,258 13,136 (2,156) (.19)
September 30, 1996
1st quarter 50,251 11,345 1,403 .13
2nd quarter 62,565 12,478 1,504 .14
3rd quarter 61,043 13,818 1,981 .18
4th quarter 60,631 14,950 1,776 .17
September 30, 1995
1st quarter 50,742 14,456 1,327 .19
2nd quarter 58,105 17,025 3,065 .43
3rd quarter 64,143 18,036 3,615 .48
4th quarter 60,945 15,754 3,208 .34
The Company implemented a restructuring plan in the fourth quarter of 1997 and
recorded charges of $4,500 before taxes. This restructuring program is discussed
more fully in the Note 12.
F-15
<PAGE> 32
APPLIED EXTRUSION TECHNOLOGIES, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
(In thousands)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND BALANCE AT
DESCRIPTION PERIOD EXPENSES DEDUCTIONS END OF PERIOD
----------- ------ -------- ---------- -------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
1997 $750 $285 $290 $745
1996 784 373 407 750
1995 806 206 228 784
</TABLE>
F-16
<PAGE> 33
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Applied Extrusion Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of Applied
Extrusion Technologies, Inc. and its subsidiaries as of September 30, 1997 and
1996, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the three years in the period ended September 30,
1997. Our audits also included the financial statement schedule listed in Item
14A. These financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the consolidated financial statements and the financial statement
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, such consolidated financial statements present fairly, in all
material respects, the financial position of Applied Extrusion Technologies,
Inc. and its subsidiaries at September 30, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended September 30, 1997, in conformity with generally accepted accounting
principles. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information shown therein.
Deloitte & Touche LLP
/s/ Deloitte and Touche LLP
- --------------------------------
Boston, Massachusetts
November 25, 1997
F-17
<PAGE> 1
Exhibit 10.1.2
[CONFORMED COPY]
AMENDMENT NO. 4
AMENDMENT NO. 4 (the "AMENDMENT") dated as of March 31, 1997 among: APPLIED
EXTRUSION TECHNOLOGIES, INC. (the "COMPANY") and the LENDERS listed on the
signature pages hereof (the "LENDERS").
WITNESSETH:
WHEREAS, the parties hereto and The Chase Manhattan Bank, as Administrative
Agent (the "ADMINISTRATIVE AGENT"), have heretofore entered into a Credit
Agreement dated as of April 7, 1994 (as amended by Amendment No. 1 thereto dated
as of December 30, 1994, Waiver and Amendment No. 2 dated as of July 10, 1995
and Amendment No. 3 dated as of June 28, 1996 (the "AGREEMENT"); and
WHEREAS, the Company and the Lenders have agreed (i) to amend the interest
coverage ratio covenant for the periods ended on or after March 31, 1997 and
(ii) to amend certain reporting requirements;
NOW, THEREFORE, the parties hereto agree as follows:
SECTION 1. Definitions; References. Unless otherwise specifically defined in
the recitals above, each term used herein which is defined in the Agreement
shall have the meaning assigned to such term in the Agreement.
SECTION 2. Amendment of Section 9.01 of the Agreement. Section
9.01(b)(iv) is amended and restated to read in its entirety as follows:
"(iv) a summary of aging of receivables and a summary of
aging of accounts payable;".
SECTION 3. Amendment of Section 9.10 of the Agreement. Section 9.10 is
amended to replace the table set forth therein with the following table:
<PAGE> 2
PERIOD RATIO
1994 1.75:1
1995 2.00:1
January 1, 1996-
March 31, 1996 2.25:1
April 1, 1996-
December 31, 1997 2.00:1
January 1, 1998 -
September 30, 1998 2.25:1
October 1, 1998 and thereafter 2.50:1
SECTION 4. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
SECTION 5. Counterparts; Effectiveness. This Amendment may be signed in any
number of counterparts, each of which shall be an original, with the same effect
as if the signatures thereto and hereto were upon the same instrument. This
Amendment shall become effective as of the date first above written when the
Administrative Agent shall have received (i) for the account of each Lender, an
amendment fee equal to .10% of such Lender's pro rata share of the aggregate
amount of Loans, Letter of Credit Liabilities and unused Commitments, and (ii)
counterparts of this Amendment executed and delivered by or on behalf of the
Majority Lenders and the Company (or, in the case of any Lender as to which the
Administrative Agent shall not have received such a counterpart, the
Administrative Agent shall have received evidence satisfactory to it of the
execution and delivery by such Lender of a counterpart hereof).
2
<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly
executed as of the date first above written.
APPLIED EXTRUSION TECHNOLOGIES, INC.
By /s/ Anthony J. Allott
---------------------------------
Title: Vice President & CFO
THE CHASE MANHATTAN BANK
By /s/ Peter A. Dedousis
---------------------------------
Title: Managing Director
LASALLE BUSINESS CREDIT, INC.
By /s/ J. David Kommalan
---------------------------------
Title: First Vice President
PNC BANK, N.A.
By /s/ Craig Sheetz
---------------------------------
Title: Vice President
FLEET NATIONAL BANK
By /s/ Joseph Becks
---------------------------------
Title: Vice President
3
<PAGE> 4
SIGNET BANK/VIRGINIA
By /s/ Lyla Haab
---------------------------------
Title: Assistant Vice President
4
<PAGE> 1
Exhibit 10.1.3
CONFORMED COPY
WAIVER
WAIVER (the "WAIVER") dated as of August 7, 1997 among: APPLIED EXTRUSION
TECHNOLOGIES, INC. (the "COMPANY") and the LENDERS listed on the signature pages
hereof (the "LENDERS").
WITNESSETH:
WHEREAS, the parties hereto and The Chase Manhattan Bank, as Administrative
Agent (the "ADMINISTRATIVE AGENT"), have heretofore entered into a Credit
Agreement dated as of April 7, 1994 (as amended by Amendment No. 1 dated as of
December 30, 1994, Waiver and Amendment No. 2 dated as of July 10, 1995,
Amendment No. 3 dated as of June 28, 1996 and Amendment No. 4 dated as of March
31, 1997, the "AGREEMENT"); and
WHEREAS, the Company and the Lenders have agreed to waive compliance with
the fixed charge coverage ratio covenant for the period ended on June 30, 1997;
NOW, THEREFORE, the parties hereto agree as follows:
SECTION 1. Definitions; References. Unless otherwise specifically
defined in the recitals above, each term used herein which is defined in the
Agreement shall have the meaning assigned to such term in the Agreement.
SECTION 2. Waiver of Section 9.11 of the Agreement. The Lenders hereby waive
compliance with Section 9.11 of the Agreement for the period (and only for the
period) ended on June 30, 1997.
SECTION 3. GOVERNING LAW. THIS WAIVER SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
SECTION 4. Counterparts; Effectiveness. This Waiver may be signed in
any number of counterparts, each of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This
<PAGE> 2
Waiver shall become effective as of the date first above written when the
Administrative Agent shall have received counterparts of this Waiver executed
and delivered by or on behalf of the Majority Lenders and the Company (or, in
the case of any Lender as to which the Administrative Agent shall not have
received such a counterpart, the Administrative Agent shall have received
evidence satisfactory to it of the execution and delivery by such Lender of a
counterpart hereof).
2
<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have caused this Waiver to
be duly executed as of the date first above written.
APPLIED EXTRUSION TECHNOLOGIES, INC.
By /s/ Anthony J. Allott
---------------------------------
Title: Vice President & CFO
THE CHASE MANHATTAN BANK
By /s/ Robert T. Sacks
---------------------------------
Title: Managing Director
LASALLE BUSINESS CREDIT, INC.
By /s/ Mark A. Kauffman
---------------------------------
Title: Vice President
PNC BANK, N.A.
By /s/ Craig T. Sheetz
---------------------------------
Title: Vice President
3
<PAGE> 4
FLEET NATIONAL BANK
By /s/ H. Ellery Perkinson
---------------------------------
Title: Assistant Vice President
SIGNET BANK
By /s/ Lyla Haab
---------------------------------
Title: Assistant Vice President
4
<PAGE> 1
Exhibit 10.8
SEVERANCE AGREEMENT
This Agreement is dated as of August 22, 1997 by and between Applied
Extrusion Technologies, Inc., a Delaware corporation (the "Company"), and
Anthony J. Allott, an individual residing at 18 Washington Street, Marblehead,
Massachusetts, 01945 ("Employee").
For and in consideration of the mutual promises, terms, provisions and
conditions contained in this Agreement, the Company and Employee hereby agree as
follows:
1. TERMINATION AND TERMINATION BENEFITS. In the event that Employee's
employment with the Company is terminated by the Company at any time, the
following provisions shall apply with respect to such termination:
(A) TERMINATION BY THE COMPANY FOR CAUSE. In the event that the Company
terminates Employee's employment hereunder for cause, the Company shall have no
further obligation to Employee other than for base salary earned up to the date
of termination. Any such termination for cause shall be given by written notice
to Employee setting forth in reasonable detail the nature of such cause. As used
herein, the term "cause" shall mean:
(i) Employee's willful and material failure to perform (except
by reason of disability or death), or willful and material
negligence in the performance of, his duties and
responsibilities;
(ii) other material breach by Employee of any provision of this
Agreement; or
(iii) other conduct by Employee that is materially harmful to the
business or interests of the Company;
as determined by the Company in its reasonable judgment.
(B) TERMINATION BY THE COMPANY OTHER THAN FOR CAUSE. In the event that
the Company terminates Employee's employment hereunder at any time other than
for cause, (i) the Company shall continue to pay Employee his base salary at the
rate in effect at the date of termination, payable at such times and in such
amounts as Employee would have received if his employment hereunder had not been
terminated, until the earliest of (a) the date on which Employee commences other
comparable full-time employment, and (b) eighteen months from the date of
termination; and (ii) Employee may, subject to applicable employee contribution,
continue participation in the Company's group medical and dental insurance
plans. Employee agrees to use his best reasonable efforts to find other
comparable full-time employment as referenced in the preceding sentence.
2. EFFECT OF TERMINATION. Payment by the Company of any amount that it may
be required to pay Employee pursuant to Section 1 upon termination of his
employment hereunder shall constitute the entire obligation of the Company to
Employee, and performance by the Company shall constitute full settlement of any
claim that Employee might otherwise assert against the Company or
<PAGE> 2
any director, officer or employee of the Company as a result of or in connection
with such termination. The provisions of Sections 2, 3, and 4 of this Agreement
shall survive termination.
3. NONDISCLOSURE AND NONUSE OF CONFIDENTIAL INFORMATION. Employee shall not
disclose to any other person (except as required by applicable law or in
connection with the performance of his duties and responsibilities hereunder),
or use for his own benefit or gain, any Confidential Information (as defined
below) relating to the business conducted or proposed to be conducted by the
Company. Employee understands that this restriction shall continue to apply
after Employee's employment terminates, regardless of the reason for such
termination. "Confidential Information" includes, without limitation,
information relating to (i) the development, research, testing, manufacturing,
marketing and financial activities of the Company, (ii) the products
manufactured, sold or distributed by the Company, (iii) the costs, sources of
supply and strategic plans of the Company, (iv) the identity and special needs
of the customers of the Company, and (v) people and organizations with whom the
Company has business relationships and the existence or nature of those
relationships. Confidential Information also includes comparable information
that the Company may receive or has received belonging to customers or others
who do business with the Company.
4. RESTRICTED ACTIVITIES. Employee agrees that some restrictions on his
activities during and after his employment with the Company are necessary to
protect the goodwill, Confidential Information and other legitimate business
interests of the Company. In recognition thereof, while he is employed by the
Company and for a period of one year immediately following termination of his
employment with the Company (the "Restricted Period"), Employee shall not (i)
directly or indirectly, whether as owner, partner, investor, consultant, agent,
employee, co-venturer or otherwise, compete with the Company, or (ii) solicit
any individual who is or has been within the prior six months employed by the
Company to leave the employment of the Company or to become associated, whether
as an owner, partner, investor, consultant, agent, employee, co-venturer or
otherwise, with any individual or entity selling products which compete with the
products sold by the Company. Specifically, but without limiting the foregoing,
Employee agrees not to engage in any manner in any activity that is directly or
indirectly competitive or potentially competitive with the business of the
Company as conducted at any time during his employment by the Company. The
foregoing restrictions shall not prevent Employee from owning 5% or less of the
equity securities of any publicly traded company or from accepting employment
from or providing consulting services to any person who does not compete with
the Company.
IN WITNESS WHEREOF, this Agreement has been executed as a sealed instrument
by the Company, by its duly authorized officer, and by Employee, as of the date
first above written.
EMPLOYEE: APPLIED EXTRUSION TECHNOLOGIES, INC.
/s/ Anthony J. Allott By: /s/ Thomas E. Williams
- ---------------------------- -----------------------------------------
Anthony J. Allott Thomas E. Williams,
President and Chief Executive Officer
2
<PAGE> 1
Exhibit 23.1
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-44449, 33-48841, 33-64656 and 33-80804 of Applied Extrusion Technologies,
Inc. on Form S-8 of our report dated November 14, 1996, appearing in this Annual
Report on Form 10-K of Applied Extrusion Technologies, Inc. for the year ended
September 30, 1997.
/s/ Deloitte & Touche LLP
- -----------------------------
Boston, Massachusetts
December 18, 1997
<PAGE> 1
POWER OF ATTORNEY
The undersigned, each being a Director of Applied Extrusion Technologies, Inc.
("AET"), does hereby constitute and appoint Thomas E. Williams his true and
lawful attorney and agent, with power of substitution or resubstitution, to do
any and all acts and things and to execute any and all instruments that said
attorney and agent may deem necessary or advisable or which may required to
enable AET to comply with the Securities Exchange Act of 1934, as amended (the
"Act"), and any rules, regulations or requirements of the Securities and
Exchange Commission in respect thereof, in connection with the filing of AET's
Annual Report on Form 10-K for the fiscal year ended September 30, 1997,
including specifically without limiting the generality of the foregoing, the
power and authority to sign in the name of and on behalf of the undersigned as a
Director of AET. The undersigned does hereby ratify and confirm all that
said attorney and agent shall do or cause to be done by virtue thereof.
Signature Title Date
- --------- ----- ----
/s/ Amin J. Khoury Chairman of the Board 12/2/97
- -------------------------
Amin J. Khoury
/s/ Paul W. Marshall Director 12/2/97
- -------------------------
Paul W. Marshall
/s/ Richard G. Hamermesh Director 12/2/97
- -------------------------
Richard G. Hamermesh
/s/ Mark M. Harmeling Director 12/2/97
- -------------------------
Mark M. Harmeling
/s/ Nader A. Golestaneh Director 12/2/97
- -------------------------
Nader A. Golestaneh
/s/ Joseph J. O'Donnell Director 12/2/97
- -------------------------
Joseph J. O'Donnell
/s/ Robert H. Beeby Director 12/2/97
- -------------------------
Robert H. Beeby
<PAGE> 1
Exhibit 99
EXHIBIT 99. CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
IMPORTANT FACTORS REGARDING
FORWARD-LOOKING STATEMENTS
The following factors, among others, could cause actual results to differ
materially from those contained in forward-looking statements made in this
report and presented elsewhere by management from time to time.
THE COMPANY FACES SIGNIFICANT COMPETITIVE PRESSURE AND OPERATES IN A
CONSOLIDATING INDUSTRY
AET competes with manufacturers of OPP and other specialty films, such as
polyethylene, cellophane, polystyrene and polyester, as well as with producers
of traditional flexible packaging materials, such as paper and foil, and of
rigid packaging materials, such as glass, metal, plastic, cardboard and other
containers. Quality, performance and price are the primary competitive factors
in the markets in which the Company competes. Many of these markets are very
competitive and a number of the Company's competitors have significantly greater
financial, manufacturing, marketing and distribution resources than the Company.
Competitive forces could substantially impact the Company's operating results
and financial condition.
The Company continuously evaluates opportunities to make strategic
acquisitions in the specialty film industry, which is currently experiencing a
period of consolidation. In the event that the Company makes a strategic
acquisition, merges with another entity, or otherwise undertakes to combine its
assets or operations with those of another party, there can be no assurance that
such a transaction will produce positive financial results, that the Company
will effectively integrate any such acquired business into its existing
operations, or that the Company will thereafter achieve any of its other
strategic objectives. In addition, the consummation of a business combination
transaction between two or more competitors of the Company could have a material
adverse effect on the Company.
THE COMPANY'S PRODUCTS MUST UNDERGO CONSTANT TECHNOLOGICAL CHANGE
The Company's business depends to a large extent upon its ability to
continue identifying, developing and commercializing innovative products to
address new customer requirements or replace existing products, the margins of
which tend to decline as a result of the entry of competitive products into
existing specialized markets. There can be no assurance that the Company will be
able to achieve or maintain this required level of innovation. There also can be
no assurance that the Company's research and development efforts will yield
successful, timely, cost effective, or commercially viable results.
In addition, the Company or its competitors may introduce new products, or
enhancements to existing products, embodying new technologies, industry
standards, or customer requirements, and having the potential to replace or
provide lower cost alternatives to the Company's existing or future offerings.
The introduction of such new or enhanced products could render existing or
future products of the Company's obsolete and unmarketable. Some of the
Company's competitors have substantially greater financial resources which could
be devoted to research and development, and could place the
<PAGE> 2
Company at a competitive disadvantage.
THE COMPANY IS HIGHLY LEVERAGED AND SOME OF THIS DEBT BEARS VARIABLE RATES OF
INTEREST
The Company incurred substantial indebtedness in connection with the
acquisition of its Films Division and its subsequent capital expansion program,
and may incur additional indebtedness in the future to fund operations, finance
acquisitions or for other purposes. As of September 30, 1997, the ratio of the
Company's debt to total debt and stockholders' equity was 64%. The Company's
indebtedness contains financial and restrictive covenants, the failure to comply
with which may result in an event of default, which, if not cured or waived,
could result in the acceleration of this indebtedness and otherwise have a
material adverse effect on the Company.
The degree to which the Company is leveraged could have important
consequences, including the following: (i) the Company's ability to obtain
additional financing for working capital or other purposes in the future may be
limited; (ii) a substantial portion of the Company's cash flow from operations
will be dedicated to the payment of the principal and interest on its
indebtedness, thereby reducing funds available for other purposes; (iii) the
Company may be more vulnerable to economic downturns and competitive pressures;
(iv) certain of the Company's borrowings are and will continue to be at variable
rates of interest, which could result in higher interest expense in the event of
increases in interest rates; and (v) the Company's ability to refinance or
replace existing indebtedness could subject the Company to interest rates and
other terms which are materially different from those embodied in the Company's
current indebtedness.
The Company's ability to make scheduled payments of the principal of or
interest on, or to refinance, its indebtedness will depend on its future
operating performance and cash flow, which are subject to prevailing economic
conditions, prevailing interest rate levels and the other risks outlined in this
Exhibit.
COMPANY IS SUBJECT TO VOLATILITY IN THE PRICE AND SUPPLY OF POLYPROPYLENE
Polypropylene, which is a petroleum derivative, is the basic raw material
used in the manufacture of most of the Company's products, and polypropylene
resin represents a significant percentage of the Company's cost of sales. The
price of polypropylene resin is a function of, among other things, manufacturing
capacity, demand, and the price of petrochemical feedstocks, including crude oil
and natural gas liquids, and resin costs have historically fluctuated. There is
not a direct correlation between resin cost fluctuations and OPP films pricing
and there can be no assurance that future market conditions will ever support a
direct correlation. There can be no assurance that the Company will be able to
effectively manage pricing of its products relative to resin costs over the long
term, and the Company's ability to do this could be adversely affected in the
future by competitive pressures, customer buying patterns, technological changes
and other factors. A significant or prolonged narrowing of the spread between
the price of polypropylene and the prices paid for the Company's products by its
customers could have a material adverse effect on the Company.
Although polypropylene resins are generally available from a large number of
suppliers in sufficient quantities to meet ongoing requirements, the Company
relies on four primary suppliers for the majority of its resin requirements.
There can be no assurance that the Company will be able to
<PAGE> 3
maintain good relationships with its suppliers or that the Company will continue
to receive an adequate supply of raw materials at competitive prices. Any
significant disruption in the supply of raw materials used in the manufacture of
the Company's products could also have a material adverse effect on the Company.
ANTITAKEOVER PROVISIONS COULD NEGATIVELY IMPACT THE SALE OR SALE PRICE OF THE
COMPANY
The Company's Certificate of Incorporation and Bylaws contain provisions
that could prevent or delay the acquisition of the Company by means of a tender
offer, a proxy contest or otherwise in which stockholders might receive a
premium over the then current market price of the Company's stock. These
provisions include advance notice procedures for stockholders to submit
proposals for consideration at stockholders' meetings or to nominate persons for
election as directors and provide for a staggered Board of Directors.
In addition, the Company is subject to Section 203 of the Delaware General
Corporation Law, which limits transactions between a publicly held company and
"interested stockholders" (generally, those stockholders who, together with
their affiliates and associates, own 15% or more of the company's outstanding
capital stock). The Company is also subject to an indenture relating to its
Senior Notes issued in connection with the acquisition of its Films division,
which provides that upon the occurrence of a change in control (as defined in
the indenture), the Company will be obligated to make an offer to purchase all
of its then outstanding Senior Notes at a purchase price equal to 101% of the
principal amount thereof plus accrued and unpaid interest, if any. There can be
no assurance that the Company would have or be able to obtain sufficient funds
to effect such a purchase of its Senior Notes if it were required to do so.
THE COMPANY SELLS A LARGE AMOUNT OF ITS PRODUCTS TO A SMALL NUMBER OF CUSTOMERS
A significant portion of the Company's net sales (approximately 35% in
fiscal 1997) consisted of sales to five converters, which primarily print,
laminate and resell OPP films to end users. Substantially all of the converted
products are resold by the converters to a relatively small number of large
consumer products companies. There can be no assurance that the Company will be
able to maintain good relationships with its customers or the end-users of its
products, or that the Company will continue to supply its customers at current
sales volumes. Unless replaced, the loss of a significant purchaser or end-user
of the Company's products, or a change in the buying patterns of any such
customer or end user, could have a material adverse effect on the Company.
THE COMPANY IS DEPENDENT UPON KEY PERSONNEL AND HAS A NEED TO HIRE AND TRAIN
ADDITIONAL QUALIFIED PERSONNEL
The Company believes that its future success depends in part upon its
ability to attract and retain skilled senior management and technical,
professional, marketing, and sales personnel. The Company, along with other
technology-oriented manufacturing companies, faces competition in hiring and
retaining skilled technical, professional, marketing, and sales personnel. In
certain areas, such as chemical and process engineering, and sales and
marketing, the supply of such people is limited. The process of locating
personnel with the combination of skills and attributes required to carry out
the Company's strategy is often lengthy. The Company's employees may voluntarily
terminate their
<PAGE> 4
employment with the Company at any time. The loss of service of key personnel,
or the inability to attract additional qualified personnel, could have a
material adverse effect on the Company.
A LARGE PART OF THE COMPANY'S PRODUCTION OCCURS AT A SINGLE LOCATION
The Company's largest manufacturing facility, which accounts for
approximately 75% of the Company's overall OPP films production capacity, is
located in Terre Haute, Indiana. The Company also has significant manufacturing
capacity at other facilities. A fire, flood or other force majeure could cause a
significant disruption in the Company's ability to manufacture at or near its
capacity. While the Company believes it is adequately insured against the
short-term impact of losses and business interruptions of this kind, any such
disruption could have a material adverse effect on the Company.
PERIOD TO PERIOD BUSINESS FLUCTUATIONS HAVE A SUBSTANTIAL IMPACT ON THE COMPANY
The Company's operating results may fluctuate for a number of reasons.
Certain of the Company's products experience seasonal sales volume fluctuations
related to the end uses of those products, and the Company's results have
typically followed a similar seasonal pattern, with stronger operating
performance in the third and fourth fiscal quarters. In addition, because the
company plans its operating expenses, many of which are relatively fixed in the
short term, on the basis that its revenues will continue to grow, even a
relatively small revenue shortfall may cause a period's results to be
substantially below expectations. Such a revenue shortfall could arise from any
number of factors including, but not limited to, lower than expected demand,
price pressures, supply constraints, delays in the availability of new products,
transit interruptions, overall economic conditions or natural disasters. Margins
are heavily influenced by product sales mix considerations, any significant or
unexpected change of which could have a material adverse effect on the Company.
Additionally, the OPP films industry has traditionally been subject to
cyclicality related to the dynamics of supply and demand. While demand for OPP
films has historically increased at the rate of approximately 6% per year, the
industry typically experiences periods of more rapid increases manufacturing
capacity followed by periods of little or no increase. This pattern leads to
periods of excess capacity and lower utilization rates while the rapid increases
in industry capacity temporarily outstrip the more steady but smaller increases
in demand, resulting in more intense industry competition during periods of
expansion. Such periods of more intense competition, and the capital
expenditures associated with capacity increases by the Company, could have a
material adverse effect on the Company.
THE COMPANY RELIES ON THE PROTECTION OF PATENTS AND PROPRIETARY TECHNOLOGY
Certain aspects of the Company's business depend on its trade secrets,
know-how, and other proprietary information as well as intellectual property
rights including various patents and trademarks. The Company generally has a
number of new patent applications pending at any given time relating to product
enhancements and new product developments. No assurance can be given that the
Company's patent applications will issue as patents or that any patents that
have been or may be issued will provide the Company with adequate protection for
the covered products, technology, or target markets. Additionally, there can be
no assurance that the Company's confidentiality agreements will adequately
protect its trade secrets, know-how or other proprietary information. Further,
there can be no assurance
<PAGE> 5
that the Company's activities will not infringe on the patents or proprietary
rights of others or that the Company will be able to obtain licenses to any
technology that it may require to conduct or expand its business or that, if
obtainable, such technology can be licensed at a reasonable cost.
THERE ARE SIGNIFICANT RISKS ASSOCIATED WITH THE COMPANY'S CAPITAL EXPANSION
PROJECT
The Company is in the process of constructing a new ten-meter OPP films
production line which will significantly increase the Company's aggregate
manufacturing capacity and is currently scheduled to begin commercial production
in the spring of 1998. The completion and successful commercial operation of
this new line is subject to a variety of factors, some of which are beyond the
Company's control, including successful implementation of an advancement of
existing technology, timely completion of the project by the equipment
manufacturer, and satisfactory testing. There can be no assurance that this
project will be completed on time or be commercially successful.
This new line will begin production during a period of other capacity
increases in the industry, and the Company must successfully generate enough
customer demand for its products to successfully sell the incremental increase
in OPP films volume which the new line is expected to produce. There can be no
assurance that the Company will succeed in these efforts.
LABOR RELATIONS
The Company employs approximately 230 production and maintenance workers at
its Covington, Virginia facility who are represented by the United Paper Workers
International Union. The Company entered into a collective bargaining agreement
with the Union which is scheduled to expire in June of the year 2000. While the
Company believes that its employee relations are satisfactory, there can be no
assurance that this will remain the case or that the operations of any of its
facilities would not be the subject of a strike, lock-out or other labor-related
disruption which could have a negative impact of the Company's ability to
manufacture and distribute certain of its products, which in turn could have a
material adverse effect on the Company.
THE COMPANY IS EXPANDING IN FOREIGN MARKETS
Although the Company has historically sold its products worldwide, as part
of its long term strategy the Company has initiated an expansion program
focusing on a variety of markets outside of North America, including Europe,
South and Central America, and the Pacific Rim, which expansion may occur
through acquisitions or other business combinations, or through internal growth
and capital expansion. Foreign markets pose a variety of risks and challenges
relating to local laws and regulations, cultural differences, fluctuations in
currency exchange rates, and other matters. There can be no assurance that the
Company will succeed with its plans for international expansion or that any such
expansion will produce positive financial results. Any failure in its efforts to
develop international sales and operations, or otherwise achieve its strategic
objectives for international growth, could have a material adverse effect on the
Company.
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<PERIOD-START> OCT-01-1996
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<CASH> 3,054
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<RECEIVABLES> 39,258
<ALLOWANCES> 745
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