<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended Commission File No.
March 31, 1998 0-19188
APPLIED EXTRUSION TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 51-0295865
(State of Incorporation) (I.R.S. Employer
Identification No.)
3 Centennial Drive
Peabody, Massachusetts 01960
(Address of principal executive offices)
(978) 538-1500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 12, 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 the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date: 10,990,659 shares of Common
Stock, $.01 par value per share, as of May 8, 1998.
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PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
APPLIED EXTRUSION TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1998 1997
--------- -------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 5,733 $ 3,054
Accounts receivable, net of allowance for doubtful accounts of $660
on March 31, 1998 and $745 on September 30, 1997 40,238 38,513
Inventory 38,698 34,619
Prepaid expenses and deferred taxes 7,196 7,804
-------- --------
Total current assets 91,865 83,990
Property, plant and equipment, net 288,211 284,430
Intangibles and deferred finance charges, net 4,386 4,691
Long-term note receivable and other assets 2,580 3,382
-------- --------
$387,042 $376,493
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Current liabilities:
Accounts payable $ 20,407 $ 15,807
Accrued interest 9,059 9,430
Accrued expenses and other current liabilities 22,915 21,153
Current portion of long-term debt 4,000
-------- --------
Total current liabilities 52,381 50,390
Long-term debt 186,875 196,500
Deferred taxes and other liabilities 33,098 17,420
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; authorized, 1,000 shares,
no shares outstanding
Common Stock, $.01 par value:
Voting -- authorized, 14,805 shares; issued 11,250 at
March 31, 1998 and 10,807 shares at September 30, 1997 112 108
Additional paid-in capital 95,132 92,401
Retained earnings 23,260 22,840
Cumulative translation adjustments (844) (154)
-------- --------
117,660 115,195
Treasury stock and other, 326 shares at March 31, 1998
and 325 shares at September 30, 1997 (2,972) (3,012)
-------- --------
Total stockholders' equity 114,688 112,183
-------- --------
$387,042 $376,493
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
1
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APPLIED EXTRUSION TECHNOLOGIES, INC.
CONSOLIDATED INCOME STATEMENTS
Three Months Ended March 31, 1998 and 1997
(In thousands, except per share amounts)
(Unaudited)
1998 1997
------- -------
SALES $62,439 $68,492
Cost of sales 51,025 53,215
------- -------
GROSS PROFIT 11,414 15,277
OPERATING EXPENSES:
Selling, general and administrative 6,054 5,966
Research and development 1,801 2,132
------- -------
Total operating expenses 7,855 8,098
OPERATING PROFIT 3,559 7,179
NON-OPERATING EXPENSES:
Interest expense, net 3,161 4,264
------- -------
Total non-operating expenses 3,161 4,264
Income before income taxes 398 2,915
Income tax expense 159 1,165
------- -------
NET INCOME $ 239 $ 1,750
======= =======
EARNINGS PER COMMON SHARE: $ .02 $ .15
======= =======
AVERAGE COMMOn and common equivalent shares
outstanding: 11,119 11,384
======= =======
See notes to condensed consolidated financial statements.
2
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APPLIED EXTRUSION TECHNOLOGIES, INC.
CONSOLIDATED INCOME STATEMENTS
SIX MONTHS ENDED MARCH 31, 1998 AND 1997
(In thousands, except per share amounts)
(Unaudited)
1998 1997
-------- --------
SALES $118,855 $127,937
Cost of sales 95,594 99,184
-------- --------
GROSS PROFIT 23,261 28,753
OPERATING EXPENSES:
Selling, general and administrative 11,870 11,368
Research and development 3,499 4,123
-------- --------
Total operating expenses 15,369 15,491
OPERATING PROFIT 7,892 13,262
NON-OPERATING EXPENSES:
Interest expense, net 7,193 8,585
-------- --------
Total non-operating expenses 7,193 8,585
Income before income taxes 699 4,677
Income tax expense 279 1,870
-------- --------
NET INCOME $ 420 $ 2,807
======== ========
EARNINGS PER COMMON SHARE: $ .04 $ .25
======== ========
AVERAGE COMMON AND COMMON EQUIVALENT SHARES
OUTSTANDING: 10,900 11,144
======== ========
See notes to condensed consolidated financial statements.
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APPLIED EXTRUSION TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED MARCH 31, 1998 AND 1997
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 420 $ 2,807
Adjustment to reconcile net income to net cash
provided by (used in) operating activities:
Provision for doubtful accounts 209 144
Depreciation and amortization 9,101 8,629
Deferred income taxes 159 2,248
Changes in assets and liabilities which provided (used) cash:
Prepaid expenses and other current assets 1,410 1,460
Accounts payable and accrued expenses (6,027) (2,226)
Accounts receivable and inventory (6,013) (12,174)
-------- --------
Net cash (used in) provided by operating activities (741) 888
INVESTING ACTIVITIES:
Additions to property, plant and equipment (29,625) (23,462)
-------- --------
Net cash used in investing activities (29,625) (23,462)
FINANCING ACTIVITIES:
Borrowings (repayments) under bank credit facility, net (13,625) 24,000
Proceeds from sale/leaseback transaction 44,625
Proceeds from issuance of stock, net 2,735 2,216
-------- --------
Net cash provided by financing activities 33,735 26,216
Effect of exchange rate changes on cash (690) (12)
-------- --------
Increase in cash and cash equivalents, net 2,679 3,630
Cash and cash equivalents, beginning 3,054 3,266
-------- --------
Cash and cash equivalents, ending $ 5,733 $ 6,896
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest, net of capitalized interest of $4,020 and $2,134, respectively 7,268 $ 7,712
Income taxes 3,000 2
</TABLE>
See notes to condensed consolidated financial statements.
4
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APPLIED EXTRUSION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED MARCH 31, 1998 AND 1997
(In thousands, except per share amounts)
(Unaudited)
1. BASIS OF PRESENTATION
The information set forth in these statements is unaudited and may be subject to
normal year-end adjustments. The information reflects all adjustments that, in
the opinion of management, are necessary to present a fair statement of the
results of operations of Applied Extrusion Technologies, Inc. (the "Company" or
"AET") for the periods indicated. Results of operations for the interim period
ended March 31, 1998 are not necessarily indicative of the results of operations
for the full fiscal year.
Certain information in footnote disclosures normally included in financial
statements has been condensed or omitted in accordance with the rules and
regulations of the Securities and Exchange Commission. These statements should
be read in conjunction with the Company's Annual Report for the year ended
September 30, 1997, filed on Form 10-K with the Securities and Exchange
Commission.
2. INVENTORIES
Inventories are valued at the lower of cost or market, using the weighted
average cost method. Inventories on March 31, 1998 and September 30, 1997
consisted of the following:
MARCH SEPTEMBER
1998 1997
------- ---------
Raw materials $ 8,241 $ 8,259
Finished goods 30,457 26,360
------- -------
Total $38,698 $34,619
======= =======
3. COMMITMENTS AND FOREIGN EXCHANGE CONTRACTS
In connection with certain capital projects and the plant expansion project,
management had entered into commitments for future capital expenditures of
approximately $3,329 at March 31, 1998. In connection therewith, the Company had
entered into foreign exchange contracts, the last of which expires in May 1998,
to hedge firm equipment purchase commitments denominated in Pounds Sterling and
German Marks. Gains or losses on the foreign exchange contracts which result
from market risk associated with changes in the market values of the underlying
currency are deferred and reported as part of the cost of the capitalized asset.
At March 31, 1998, the Company had outstanding foreign exchange contracts with a
U.S. dollar equivalent value of $3,329. These contracts had no carrying value
and a net unrealized loss of $474 as of March 31, 1998. The Company does not
enter into foreign exchange contracts for trading purposes.
4. BANK CREDIT AGREEMENT AND SENIOR NOTES PAYABLE
In conjunction with the 1994 Acquisition of the OPP films business from
Hercules, Incorporated (the "Acquisition"), the Company entered into a Credit
Agreement with a group of lenders to provide the Company with senior bank
financing. In January 1998, the Company amended and restated this Credit
Agreement and combined the revolving facility and revolving term facility
thereunder into a $70,000 revolving credit facility (the "Credit Facility") with
a final maturity of the earlier of (i) November 1, 2001, if the Company's Senior
Notes are not refinanced prior to such date, or (ii) January 29, 2003. The
Credit Facility is secured by all the
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assets of the Company and includes covenants which limit borrowings based on
certain asset levels; require the Company to maintain a minimum tangible net
worth, and specified interest coverage and leverage ratios; establishes maximum
capital expenditure levels; and contains other covenants customary in documents
relating to transactions of this type. In addition to the Credit Facility, in
1994, the Company issued $150,000 in Senior Notes to finance, in part, the
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.
5. SALE/LEASEBACK TRANSACTION
The Company completed a sale and leaseback transaction on January 2, 1998
whereby it sold certain items of equipment and other tangible personal property
(collectively the "Equipment") for gross proceeds of $45,000, and leased the
property back from the purchaser pursuant to an operating lease agreement dated
as of December 29, 1997 (the "Lease Agreement"). The Company received net
proceeds of $39,559 during the quarter ended December 31, 1997 and an additional
$5,066 was received in January 1998, both of which were utilized to pay down
outstanding borrowings under its existing Bank Credit Agreement (the "Credit
Agreement").
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMPARATIVE RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED MARCH 31,
1998 WITH THE SIX MONTHS ENDED MARCH 31, 1997
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 1994, the Company
acquired its 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 three month periods ended
March 31, 1998 and 1997 are referred to as the second quarters of 1998 and 1997,
respectively.
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 statement:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
---------------------- ---------------------
1998 1997 1998 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
Sales ................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales ......................... 81.7 77.7 80.4 77.5
Gross profit .......................... 18.3 22.3 19.6 22.5
Selling, general and administrative ... 9.7 8.7 10.0 8.9
Research and development .............. 2.9 3.1 2.9 3.2
Operating profit ...................... 5.7 10.5 6.6 10.4
Interest expense ...................... 5.1 6.2 6.1 6.7
Net income ............................ 0.4 2.6 0.4 2.2
</TABLE>
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Sales for the second quarter of 1998 were $62,439 versus $68,492 for the
comparable period of fiscal 1997. The $6,053, or 8.8 percent, decrease is due
primarily to lower average selling prices. Lower capacity utilization levels
throughout the OPP films industry continued during the quarter as new capacity
has come on stream, and additional capacity is scheduled to be completed during
the next several months. For the six months ended March 31, 1998, the Company
reported sales of $118,855 versus prior period sales of $127,937 for the six
months ended March 31, 1997. This comparative decrease in sales versus the prior
year was also due primarily to lower average selling prices. For the six months
ended March 31, 1998 foreign sales and foreign operating profit were 11% and
13%, respectively, of total sales and operating profit. For the six months ended
March 31, 1997, foreign sales were 11% of total sales and foreign operating
profit was 12% of total operating profit.
The Company reported gross profit of $11,414 for the second quarter of 1998 and
$23,261 for the six months ended March 31, 1998, versus $15,277 and $28,753 for
the comparable periods of fiscal 1997. Gross profit as a percentage of total
sales for the second quarter and six months ended March 31, 1998 was 18.3% and
19.6%, respectively versus 22.3% and 22.5%, respectively, for the same periods
of 1997. The decreases in gross profit in 1998 versus 1997 were primarily the
result of lower average selling prices.
Total operating expenses of $7,855 and $15,369 for the three and six months
ended March 31, 1998, respectively, were $243 and $122 lower than the comparable
1997 levels. Most of the incremental investments in the Company's ongoing
initiatives to enhance its product offerings and expand the reach of the sales
and marketing organization were previously made in fiscal 1997. 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 remain at comparable levels year over
year, and will support the growth associated with the capacity expansion
completed in the quarter.
Net interest expense was $3,161 and $7,193 for the quarter and six months ended
March 31, 1998, respectively, versus $4,264 and $8,585 for the same periods of
1997. The decreases year over year are due to the impact of lower outstanding
debt balances.
Income taxes of $159 and $279 for the second quarter and six months of fiscal
1998, respectively, were lower than 1997, due to lower pre-tax earnings. Income
tax as a percent of before-tax income remained constant for the quarter and six
months ended March 31, 1998 and 1997.
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
January 1998, the Company amended and restated this Credit Agreement and
combined the revolving facility and revolving term facility thereunder into a
$70,000 revolving credit facility (the "Credit Facility") with a final maturity
of the earlier of (i) November 1, 2001, if the Company's Senior Notes are not
refinanced prior to such date, or (ii) January 29, 2003. The Credit Facility is
secured by all the assets of the Company and includes covenants which limit
borrowings based on certain asset levels; require the Company to maintain a
minimum tangible net worth, and specified interest coverage and leverage ratios;
establishes maximum capital expenditure levels; and contains other covenants
customary in documents relating to transactions of this type. At March 31, 1998,
the Company had $27,965 available under this new Revolving Facility.
In addition to the Credit Facility, in 1994, the Company issued $150,000 in
Senior Notes to finance, in part, the 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.
The Company generated $2,679 of cash and equivalents during the first six months
of fiscal 1998. Operating activities utilized $741 of cash, which was the result
of $9,889 provided by net income before depreciation, amortization and other
non-cash items offset by a $10,630 net decrease in working capital accounts. The
net working capital decrease was primarily the result of decreases in accounts
payable and accrued expenses of
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$6,027, increases in inventory and accounts receivable of $6,013 offset by a
decrease in prepaid expenses and other assets of $1,410. The decrease in
accounts payable is due primarily to the timing of certain raw material
purchases as well as the utilization of certain restructuring reserves. The
Company completed a sale/leaseback transaction and received $39,559 of proceeds
during the first fiscal 1998 quarter and an additional $5,066 during the second
quarter of 1998. The proceeds were utilized to pay down revolving debt under the
Company's Credit Facility. Interest paid during the six months of 1998, which
included the payment of semi-annual bond interest, amounted to $11,288.
Borrowings under the Company's Credit Agreement, discussed above, were utilized
to fund capital expenditures of $29,625.
INFLATION
Management reviews the prices charged for its products on a regular basis. When
market conditions allow, adjustments are made to reflect changes in product
costs due to fluctuations in the cost of materials and labor as well as
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.
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 in Exhibit 99 of the Company's Annual Report on Form 10-K for the year
ended September 30, 1997 and from time to time in the Company's other reports
filed with the Securities and Exchange Commission.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of the Company was held on January 28, 1998
(the "Annual Meeting"). Proxies for the Annual meeting were solicited pursuant
to Regulation 14A under the Securities Exchange Act of 1934, as amended. A total
of 8,984,518 shares of common stock were represented at the meeting by proxy.
At the Annual Meeting, Messrs. Richard G. Hamermesh and Joseph J. O'Donnell
were elected as Class III directors of the Company for a term of three years
expiring at the Company's 2001 Annual Meeting. In the case of Mr. Hamermesh,
7,929,046 shares were voted in favor of his election and 1,055,111 votes were
withheld. In the case of Mr. O'Donnell, 7,930,206 were voted in his favor and
1,054,311 were withheld.
At the Annual Meeting, the number of option shares available for grant under
the Company's 1994 Stock Option Plan (the "Option Plan") were increased by
500,000 shares. The voting for the amendment to the Option Plan was as follows:
5,721,631 in favor; 3,152,896 opposed; 6,524 abstained; and 48,466 did not vote.
The following directors' terms continued after the 1998 Annual Meeting: Nader
Golestaneh, Paul W. Marshall, Mark M. Harmerling, Amin J. Khoury and Thomas E.
Williams.
ITEM 6. REPORT ON FORM 8-K
A report on Form 8-K was filed on January 2, 1998 to report the sale and
leaseback transaction discussed in this report.
A report on Form 8-K was filed on March 2, 1998 to report the declaration of a
Rights Dividend by the Company, the terms of which are set forth in a Rights
Agreement between the Company and BankBoston, N.A., as Rights Agent, a copy of
which was filed therewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
APPLIED EXTRUSION TECHNOLOGIES, INC.
(Registrant)
By: /s/ Anthony J. Allott
-----------------------------------
Vice President and
Chief Financial Officer
May 15, 1998
9
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 5,733
<SECURITIES> 0
<RECEIVABLES> 40,898
<ALLOWANCES> 660
<INVENTORY> 38,698
<CURRENT-ASSETS> 91,865
<PP&E> 352,870
<DEPRECIATION> 64,659
<TOTAL-ASSETS> 387,042
<CURRENT-LIABILITIES> 52,381
<BONDS> 219,973
0
0
<COMMON> 112
<OTHER-SE> 117,548
<TOTAL-LIABILITY-AND-EQUITY> 387,042
<SALES> 118,855
<TOTAL-REVENUES> 118,855
<CGS> 95,594
<TOTAL-COSTS> 95,594
<OTHER-EXPENSES> 15,160
<LOSS-PROVISION> 209
<INTEREST-EXPENSE> 7,193
<INCOME-PRETAX> 699
<INCOME-TAX> 279
<INCOME-CONTINUING> 420
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 420
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
