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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")
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999
COMMISSION FILE NO. 0-19188
APPLIED EXTRUSION TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
DELAWARE 51-0295865
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
3 CENTENNIAL DRIVE, PEABODY, MASSACHUSETTS 01960
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (978) 538-1500
</TABLE>
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<S> <C>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- --------------------------------------------- ---------------------------------------------
NONE NONE
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK ($.01 PAR VALUE)
JUNIOR PREFERRED STOCK PURCHASE RIGHTS
(Title of Classes)
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 $63,370,103 on December 15, 1999, 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 15, 1999 was 11,392,378 shares. The number of shares of the
Registrant's Junior Preferred Stock Purchase Rights outstanding as of
December 15, 1999 was 11,392,378 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 2000 Annual Meeting of Stockholders.
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FORM 10-K INDEX
PART I
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Item 1. Business ......................................................................... 3
Item 2. Properties ....................................................................... 8
Item 3. Legal Proceedings ................................................................ 8
Item 4. Submission of Matters to a Vote of Security Holders............................... 8
Item 4a. Executive Officers ............................................................... 9
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters ........ 11
Item 6. Selected Financial Data .......................................................... 12
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation ......................................................... 13
Item 7a. Quantitative and Qualitative Disclosures about Market Risk........................ 17
Item 8. Financial Statements and Supplementary Data....................................... 18
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ......................................................... 18
PART III
Item 10. Directors and Executive Officers of the Registrant................................ 19
Item 11. Executive Compensation ........................................................... 20
Item 12. Security Ownership of Certain Beneficial Owners and Management.................... 20
Item 13. Certain Relationships and Related Transactions.................................... 20
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8K.................... 21
Signatures ....................................................................... 24
</TABLE>
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PART I
ITEM 1. BUSINESS
GENERAL
Applied Extrusion Technologies, Inc. ("AET" or the "Company") is a leader in
developing and manufacturing highly specialized, single and multilayer oriented
polypropylene ("OPP") films used in consumer product labeling, flexible
packaging and overwrap applications worldwide. AET's operations are concentrated
primarily in North America, where it is the largest producer of OPP films, with
an approximate 23 percent share of OPP production volume. AET is also one of the
largest producers of OPP films worldwide, with 230 million pounds of current
annual production capacity, including over 90 million pounds of new high-speed
capacity that has been added within the last three years. AET is the world
leader in films used as labels on plastic soft drink containers and offers a
broad product line for packaging of confectionery, snack food and other
products.
End users of AET's films are consumer product companies whose labels and
packages require special attributes such as vivid graphics, exceptional clarity
and moisture barriers to preserve freshness. Labeling applications for AET's OPP
films include labels for Pepsi-Cola-Registered Trademark- and
Coca-Cola-Registered Trademark- plastic bottles, Nestle's-Registered Trademark-
Sweet Success-TM-, General Foods' Tang-TM- and aerosol cans for products such as
S.C. Johnson Pledge-TM- Wax and Glade-TM- Air Freshener. Packaging applications
for AET's OPP films include packaging for Frito-Lay-Registered Trademark- snacks
and M&M/Mars-Registered Trademark- and Hershey-Registered Trademark- candies.
Overwrap applications for AET's OPP films include clear protective films for
British American Tobacco Products, Lipton-Registered Trademark- tea bags and
compact discs.
Over 90 percent of the Company's sales in fiscal 1999 were generated by the sale
of its OPP films products. In addition to OPP films, AET also manufactures
apertured films for various filtration and medical applications requiring
controlled porosity, such as industrial filters for liquid and air, as well as
sanitary napkins, incontinence pads and finger bandages. AET has historically
focused on developing and selling value-added, higher-margin specialty films,
where competition is largely based on superior product attributes and
performance. AET seeks continually to develop new products and to customize its
existing products by working directly with converters and end users to develop
original packaging or labeling solutions. AET emphasizes customer service and
support, and with sales employees averaging twenty years' experience in the OPP
films industry, AET has built up a strong sales and customer service group with
substantial reach throughout the Americas.
BUSINESS STRATEGY
The Company's business strategy is to increase sales of a broad line of high-end
specialized products for consumer product packaging, labeling and overwrap
applications and to be the lowest cost producer of such products. Elements of
the Company's business strategy include: (i) continuing to develop
differentiated high-end products; (ii) migrating sales mix toward higher margin
products; (iii) maximizing operating efficiencies and continually reducing unit
costs; and (iv) expanding global reach to increase the customer base and enhance
service to current end-users.
At the center of our growth strategy is the addition of new highly-efficient
production capacity. In 1996 we brought on-stream our second eight-meter OPP
tenter line, and in March 1998 brought on our new ten-meter line. These
additions have positioned the Company as the largest OPP films supplier in North
America. The completion of these two projects has resulted in a 60 percent
increase in AET's OPP films manufacturing capacity over a three-year period. The
Company has been positioning itself for several years to sell this capacity. The
Company has made significant investments in technology and new product
development and has built a sales force of industry-experienced sales
professionals. In addition, the Company has built a sales network to supply
bottle label and other value-added flexible packaging films to Latin American,
Asian and
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European converters as well as other end users. AET's global expansion program
has begun to yield substantial growth opportunities in the high-end segment of
the industry.
In 1997 the Board of Directors approved a strategic plan which included
divestiture of certain non-core businesses. In connection therewith, the Company
sold its plastic profiles, strong-nets and utility products manufacturing assets
during the third quarter of 1998. Those businesses, located in Salem,
Massachusetts, generated annual sales in fiscal 1997 and 1998 of approximately
$24 million. The gross proceeds from the transaction of $26.5 million, which
approximated book value for the businesses after considering costs of the
transaction, were utilized to reduce outstanding borrowings incurred in
connection with the Company's major 1996 and 1998 OPP capacity expansions.
INDUSTRY OVERVIEW
The Company competes principally in the $3 billion specialty film segment of the
approximately $18.1 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
billion of shipments in calendar year 1998, of which the largest single
component, OPP films, accounted for an estimated $885 million in shipments.
North American demand for OPP films used in specialty applications grew at an
average annual rate of approximately 6 percent from 1980 through 1999. The
Company believes that this growth is driven by a number of factors, including:
(i) the substitution of specialized OPP films with greater barrier
and graphics properties or lower cost for traditional consumer
product labels and packaging;
(ii) the shift from glass to plastic containers that use OPP film
labels;
(iii) the shift from rigid containers to flexible packaging; and
(iv) the growth in end-use markets such as snack food,
confectionery, beverages and other consumer products.
The Company believes that the industry has recently experienced its lowest
capacity utilization levels resulting from a significant increase in production
capacity over the last two years as several producers have added new lines. This
has driven prices of OPP films downward and put substantial pressure on margins.
The Company believes, however, that no significant capacity is expected to be
added in North America for several years. In addition, the depressed margins in
the industry have resulted in some less efficient capacity being shut down.
Although the company does not expect the industry to achieve normal capacity
utilization levels for about one more year, we do expect demand for OPP films to
continue to grow at its average historical rate, there will be a tightening of
capacity utilization, and overall pricing levels should begin to improve.
COMPETITIVE STRENGTHS
AET is the largest manufacturer of OPP films in North America. While a
broad-based supplier to the industry, AET focuses on serving high-end consumer
product markets in which superior product attributes and performance are
important. The Company believes its strong competitive position is attributable
to a number of factors, including its substantial market presence, technological
leadership, superior product development capabilities, efficient production of
high-quality products, breadth of product line, diversity of customer base and
experienced management.
PRODUCTS
The Company's primary OPP packaging film products can be classified into four
broad categories: barrier, clear/slip, opaque, and shrink films.
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BARRIER - OPP films generally 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 films provide a high performance barrier to visible and
ultraviolet light 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 flexible packages
and are generally bonded with barrier films to form a complete packaging
application. Slip films may be single or multilayer, heat sealable or
non-sealable, 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 and offer
a high-quality print surface for superior graphics. They are used primarily in
bottle labeling, 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 non-sealable versions
of opaque OPP film. End users in confectionery markets often choose opaque
packaging for marketing and manufacturing purposes because they provide superior
printability and accommodate rapid machine speeds.
SHRINK FILMS - Shrink films are typically clear or opaque and are targeted
primarily at the label market. Shrink label 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
polyethylene bottles, which increases the marketing appeal of such containers
and eliminates the need for printing directly on the container.
In addition to OPP films, the Company develops, manufactures and sells a
broad range of oriented apertured films ("nets") and nonwoven media for
applications requiring controlled porosity. The Company's apertured films and
nonwoven products are used in the rapidly growing industrial filtration
market for air and liquids. The Company manufactures the initial filtration
membranes and support material for these filters and has recently entered the
filtration media portion of this market. The Company's Delnet-Registered
Trademark- 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-Registered Trademark- material enhances
the healing process. In the United States, most adhesive bandages, including
Johnson & Johnson BAND-AIDS-Registered Trademark-, use Delnet-Registered
Trademark- facing.
MARKETING AND CUSTOMERS
The Company's OPP films 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 highly skilled sales and marketing
force includes individuals with considerable technical expertise and industry
experience. Their principal role is to develop sales opportunities and provide
customer support. AET's marketing activities for its broad range of OPP films
have historically been focused primarily in North America, while its
higher-value films are marketed in Latin America, Europe and Asia.
The Company's OPP film sales are predominantly to converters, who print and
laminate films before selling to end users. One such converter accounted for
approximately 20 percent of sales in fiscal 1999 and 18 percent of sales in
fiscal 1998. The Company also sells OPP films directly to end users. The Company
considers it an important part of its marketing effort to maintain direct
relations with major end users, who generally direct packaging design efforts
and provide detailed specifications to converters as to the performance
characteristics of the films to be used in their
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labeling and packaging applications. The Company's sales and marketing efforts
and customer relationships are enhanced by the numerous customer-specific
technical approvals the Company has secured. These approvals typically involve
significant customer time and effort and result in a strong competitive position
for qualified products. Once qualified, products are often referenced in
end-user specifications or qualified product lists. These qualification
processes also reinforce the partnership between the Company and its customers
and can lead to additional sales and marketing opportunities.
MANUFACTURING, TECHNOLOGY AND RESEARCH AND DEVELOPMENT
OPP films are manufactured and processed through either the tenter or the
tubular processes. The Company is one of the few OPP films producers that have
capabilities of both the tenter and tubular manufacturing processes.
TENTER PROCESS
In the tenter process, specifically formulated polypropylene resins are combined
and melted, sometimes with additives, and extruded from a flat die into a thick
film containing from one to five distinct layers, which are then chilled,
reheated and stretched lengthwise (in the machine direction) and widthwise while
still heated. This dual stretching process is known as "biaxial orientation."
The specific characteristics demanded of each film are controlled throughout
this complex process by a multitude of variables, including proprietary polymer
design, application of unique skin layers, timed variations of the heating,
cooling and stretching processes, alteration of molecular surface
characteristics through the application of flame or high-voltage electrical
discharge and controlled winding tension. The Company has seven lines, ranging
from 5.5 to 10 meters. The Company currently operates two eight-meter tenter
production lines, as well as the world's only ten-meter OPP tenter line. The
tenter process is a more economical way than the tubular process to manufacture
thicker films.
TUBULAR PROCESS
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" (meaning that the film is stretched equally both widthwise
and lengthwise), resulting in improved stability and a more uniform thickness
for thinner films. The Company believes that its tubular manufacturing capacity
enables it to "downgauge" or manufacture thinner films, preserving clarity,
machinability and other performance characteristics of thicker film while using
less material, thereby improving performance relative to cost. The Company
currently operates eight tubular lines.
APERTURED FILM PROCESS
Delnet-Registered Trademark- 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 oriented
through a stretching process similar to OPP films.
NONWOVEN MEDIA PROCESS
Delpore-Registered Trademark- and other meltblown nonwoven materials are
produced in a high pressure extrusion process, forming the filtration media
used in liquid and air filtration markets. The material is sold either by
itself or in combination with Delnet-Registered Trademark- and other products.
RESEARCH AND DEVELOPMENT
The Company conducts product and process research and development through a
staff of approximately 70 chemists, engineers and technicians. Consistent
with AET's strategy of filling the Company's new manufacturing capacity with
high-end films, the research and development group, responding to evolving
customer and end-user requirements for attributes such as barrier,
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clarity and machinability, introduced over 30 new or enhanced products in the
past three years. During fiscal 1999, 1998, and 1997 the Company spent
approximately $7.1 million, $7.3 million and $8.2 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 packaging
applications. 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 supply requirements are met by 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 manufacturing of its netting and other
products, are also 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.
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;
however, 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, paper, metal and other containers. The flexible packaging
industry is very competitive, and many of the Company's competitors have
significantly greater financial resources than the Company. The Company
believes that Mobil Corporation, which is the second largest OPP films
manufacturer in North America, is the only other broad-line OPP packaging
film supplier based in North America. There are approximately eight North
American manufacturers of OPP films; 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 and nonwoven products, the Company competes in
the diverse markets that these products serve, primarily on the basis of
quality, performance and price. Delnet-Registered Trademark- products compete
in certain markets with woven, non-woven and knit fabrics, as well as with
other plastic netting products. The Company generally competes with these
other products by stressing the technological superiority of its
Delnet-Registered Trademark-products.
The Company believes that it has certain competitive advantages in high
margin, value-added products, which include: (i) the advanced proprietary
manufacturing processes required to produce a varied range of such products;
(ii) proprietary OPP films 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 128 active patents and applications of
which approximately 68 relate to international patents and applications. AET
also has approximately 60 trademark registrations and applications, 10 of which
relate to international registrations and
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applications. These figures include AEP patent and trademark registrations and
applications. 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 1,059 full-time employees. Approximately 113
production and maintenance employees at the Company's Covington, Virginia
facility are represented by the United Paper Workers International Union, Local
884 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 4a. of this Report.
ITEM 2. PROPERTIES
The following table provides information with respect to AET's facilities:
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OWNED/
LOCATION SQUARE FEET LEASED
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<S> <C> <C> <C>
OPP FILMS Terre Haute, Indiana 821,000 Owned
Covington, Virginia 517,000 Owned
Varennes, Quebec, Canada 108,000 Owned
New Castle, Delaware: 50,000 Leased
Administration and Research Center
SPECIALTY NETS & NONWOVENS Middletown, Delaware 145,000 Owned
CORPORATE Peabody, Massachusetts 7,600 Leased
</TABLE>
All of AET's owned real property secures its obligations under its $70,000,000
Credit Facility. The Company believes that its facilities are suitable for their
currently 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 to a vote of the security holders through the
solicitation of proxies or otherwise during the fourth quarter of the fiscal
year covered by this report.
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ITEM 4A. EXECUTIVE OFFICERS
The executive officers of AET are as follows:
EXECUTIVE OFFICER
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NAME AGE POSITION SINCE
---- --- -------- -----
<S> <C> <C> <C>
Amin J. Khoury 60 Chairman of the Board (1) October 1986
Thomas E. Williams 53 President, Chief Executive Officer December 1992
and Director (2)
David N. Terhune 53 Executive Vice President and February 1994
Chief Operating Officer(3)
Mark S. Abrahams 48 Vice President and General Manager, December 1993
Specialty Nets & Nonwovens Division(4)
Anthony J. Allott 35 Vice President, Chief Financial Officer August 1994
and Treasurer(5)
Gerald M. Haines II 36 Vice President, General Counsel September 1995
and Secretary (6)
</TABLE>
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(1) The Company has entered into a four-year Employment Agreement dated as of
April 1, 1999 with Mr. Khoury pursuant to which he currently serves as
Chairman of the Board of the Company.
(2) The Company has entered into a four-year Employment Agreement dated as of
April 1, 1999 with Mr. Williams pursuant to which he currently serves as
President and Chief Executive Officer of the Company.
(3) The Company has entered into a four-year Employment Agreement with Mr.
Terhune dated April 1, 1999 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
April 1, 1999 with Mr. Abrahams pursuant to which he currently serves as
Vice President and General Manager of the Company's Specialty Nets &
Nonwovens Division.
(5) The Company has entered into a three-year Employment Agreement dated April
1, 1999 with Mr. Allott pursuant to which he currently serves as Vice
President, Chief Financial Officer and Treasurer of the Company.
(6) The Company has entered into a three-year Employment Agreement dated April
1, 1999 with Mr. Haines pursuant to which he currently serves as Vice
President, General Counsel and Secretary of the Company.
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 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; Director of Synthes-Stratec, Inc., the
world's leading manufacturer of orthopedic trauma fixation devices.
THOMAS E. WILLIAMS - President, Chief Executive Officer and Director of the
Company since August 1993; Director, President and Chief Operating Officer of
the Company since December 1992; from 1988 until 1992, President and Chief
Executive Officer of Home Innovations, Inc., a
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home furnishings company; from 1980 until 1988, held a number of executive
positions with PepsiCo, Inc.
DAVID N. TERHUNE -- Executive Vice President and Chief Operating Officer of the
Company since July 1996; from February 1994 to June 1996, Senior Vice President
and Chief Financial Officer of the Company; from 1992 to 1993, Chief Financial
Officer of Ground Round Restaurants, Inc., an operator and franchiser of
full-service family restaurants; from 1990 to 1992, 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
Nonwovens since December 1993; from November 1990 through July 1993, President
of the Cybex Division of Lumex Corporation, a manufacturer and distributor of
physical therapy and fitness equipment; from November 1988 through October 1990,
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, Vice President and
Treasurer of the Company, and from August 1994 to April 1995, Treasurer of the
Company; from December 1992 through July 1994, Corporate Controller with Ground
Round Restaurants, Inc., an operator and franchiser of full-service family
restaurants; from 1986 through 1992, with Deloitte & Touche LLP, an independent
auditing firm, most recently as audit manager.
GERALD M. HAINES II -- Vice President, General Counsel and Secretary of the
Company since August 1998; from September 1995 to August 1998, General Counsel
and Secretary of the Company; from September 1990 to August 1995, attorney with
the law firm of Choate, Hall & Stewart. Prior to commencing the practice of law,
Mr. Haines was employed by the Morgan Guaranty Trust Company.
The information presented under the heading, "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Proxy Statement to be filed with the Securities and
Exchange Commission in connection with the 2000 Annual Meeting of Stockholders
is incorporated herein by reference.
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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:
<TABLE>
<CAPTION>
FISCAL YEAR 1999 FISCAL YEAR 1998
HIGH LOW HIGH LOW
------ ------ ------ -----
<S> <C> <C> <C> <C>
Quarter ended December 31 9 5/8 6 3/4 8 5 5/8
Quarter ended March 31 8 7/16 4 13/16 8 3/4 7 3/8
Quarter ended June 30 8 1/2 4 5/16 7 7/8 6
Quarter ended September 30 8 5/8 7 3/16 10 1/4 6 5/8
</TABLE>
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 repay debt and finance the future growth of the Company. As of
December 1, 1999, there were approximately 129 holders of record and more than
3,300 beneficial holders of the Company's Common Stock.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data 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. The following information is in
thousands, except per share amounts:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
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INCOME STATEMENT DATA: 1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Sales $ 237,042 $ 245,334 $ 262,271 $ 234,490 $ 233,935
Cost of sales 188,601 195,174 205,037 181,899 168,664
--------- --------- --------- --------- ---------
Gross profit 48,441 50,160 57,234 52,591 65,271
Operating expenses:
Selling, general and administrative 26,550 23,754 23,819 20,144 20,219
Restructuring and impairment charges -- 21,506 4,500 -- --
Research and development 7,123 7,326 8,221 7,414 6,352
Start-up costs -- 1,539 -- -- --
--------- --------- --------- --------- ---------
Operating profit (loss) 14,768 (3,965) 20,694 25,033 38,700
Non-operating expenses:
Interest expense, net 18,909 15,868 16,868 13,927 18,609
Acquisition costs and other 3,641 250 1,500 -- --
Litigation settlement -- -- -- -- 1,400
--------- --------- --------- --------- ---------
Income (loss) before income taxes
and change in accounting (7,782) (20,083) 2,326 11,106 18,691
Income tax expense (benefit) (3,113) (8,033) 930 4,442 7,476
--------- --------- --------- --------- ---------
Income (loss) before change in
accounting (4,669) (12,050) 1,396 6,664 11,215
Change in accounting, net of related tax
benefits of $568 -- (852) -- -- --
--------- --------- --------- --------- ---------
Net income (loss) $ (4,669) $ (12,902) $ 1,396 $ 6,664 $ 11,215
========= ========= ========= ========= =========
EARNINGS (LOSS) PER COMMON SHARE:
Basic:
Before change in accounting $ (.41) $ (1.11) $ 0.14 $ 0.66 $ 1.67
Change in accounting -- (0.07) -- -- --
--------- --------- --------- --------- ---------
Net income (loss) $ (.41) $ (1.18) $ 0.14 $ 0.66 $ 1.67
========= ========= ========= ========= =========
Diluted:
Before change in accounting $ (.41) $ (1.11) $ 0.13 $ 0.63 $ 1.53
Change in accounting -- (0.07) -- -- --
--------- --------- --------- --------- ---------
Net income (loss) $ (.41) $ (1.18) $ 0.13 $ 0.63 $ 1.53
========= ========= ========= ========= =========
BALANCE SHEET DATA:
Working capital $ 31,745 $ 33,471 $ 33,600 $ 35,911 $ 55,441
Total assets 375,050 370,726 376,493 331,704 318,519
Current portion of long-term debt -- -- 4,000 -- --
Long-term debt, less current portion 182,500 185,500 196,500 165,500 156,500
Stockholders' equity 99,041 100,437 112,183 108,335 99,058
</TABLE>
12
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The Company is the largest producer of OPP films in North America. Consumer
product companies worldwide use our OPP films in labeling, packaging and
overwrap applications that often require special attributes such as high gloss,
vivid graphics, exceptional clarity and barriers to air, light and moisture to
preserve freshness. The Company generally sells its film products to converters,
which are companies specializing in processes such as laminating multiple films
or other materials together and printing text and graphics to form the final
label or packaging material for end users.
For the purposes of the discussion that follows, the fiscal years ended
September 30, 1999, 1998 and 1997 are referred to as 1999, 1998 and 1997,
respectively. All dollar amounts 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:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30
-------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Sales 100.0% 100.0% 100.0%
Cost of sales 79.6 79.6 78.2
Gross profit 20.4 20.4 21.8
Selling, general and administrative 11.2 9.7 9.1
Research and development 3.0 3.0 3.1
Operating profit (loss) 6.2 (1.6) 7.9
Interest expense, net 8.0 6.5 6.4
Net income (loss) (2.0) (5.3) 0.5
</TABLE>
FISCAL YEAR 1999 COMPARED WITH FISCAL YEAR 1998
Sales for fiscal 1999 of $237,042 were $8,292, or 3.4 percent lower than fiscal
1998 sales of $245,334 due to the divestiture of certain non-core businesses in
the third quarter of 1998. Adjusted for these divestitures, sales increased in
fiscal 1999 by $7,924, or 3.5 percent, as compared with fiscal 1998, as a result
of OPP films unit volume growth of 15 percent, offset in part by significantly
lower average selling prices compared with 1998 due to industry overcapacity.
Demand for OPP films continues to grow, while industry overcapacity is expected
to exist for about one more year. Approximately 40 percent of 1999 sales were
from new or enhanced products introduced by the Company within the past four
years. Sales outside the United Sates comprised 18.7 percent of total 1999
sales, and operating profit for sales outside the United States was 19.4 percent
of total operating profit.
Gross profit for 1999 was $51,346, or 21.7 percent of sales, exclusive of $2,905
in plant shutdown costs. Gross profit increased $4,322 or 9.2 percent from the
1998 level of $47,024, or 20.5 percent of sales, adjusted for the aforementioned
divestitures. Despite a dramatic decline in selling prices due to industry
overcapacity, we achieved an increase in gross margin due to extensive
productivity improvement programs and continuing improvement in sales mix
brought about by the effectiveness of our R&D and sales efforts.
Selling, general and administrative expenses increased to $26,550 for 1999 from
$23,754 in 1998, an increase of $2,796, reflecting the Company's investment in
expanded sales reach and the infrastructure necessary to handle over 60 percent
more capacity.
13
<PAGE>
During the first fiscal quarter of 1999, the Company terminated acquisition
discussions with two of the largest European-based worldwide OPP films
producers. We were unable to reach a mutually agreeable price at which the
Company would acquire either of these businesses, given the deterioration in the
European OPP films market caused by the major industry-wide overcapacity in that
region. Costs associated with both of these acquisition projects and related due
diligence efforts were $3,462, or $2,077 after taxes, and were recorded as
non-operating expenses.
In the fourth quarter of 1998, the Company announced a restructuring of its
Covington, Virginia manufacturing operation, including the shutdown of two
older, less efficient production lines and the elimination of approximately 200
full-time manufacturing and plant administrative positions, 160 of which were
hourly and the remainder of which were salaried. The Company recorded an $18,580
charge in the fourth quarter of 1998 for this restructuring, comprised of
approximately $12,090 for costs associated with operating leases related to
idled equipment, $4,100 of severance-related costs and $2,390 in other charges,
primarily related to idling the equipment. Implementation of this plan is
nearing completion, with a total of 181 positions eliminated and the shutdown of
the production lines. Since September 1998 the Company has paid out $900 on
leases related to idled equipment, $4,098 in severance-related costs and $2,223
in other restructuring costs, resulting in an accrued restructuring balance of
$11,359 at September 30, 1999. Of this balance, $11,190 represents lease costs,
the majority of which are classified as long-term liabilities. All aspects of
the plan are expected to be completed early in fiscal 2000.
Net interest expense increased $3,041 to $18,909 in fiscal 1999, from $15,868 in
fiscal 1998, primarily as a result of interest capitalized in 1998 associated
with a capacity expansion project which was completed in March 1998.
Income tax as a percentage of before tax income or loss remained constant for
1999 and 1998.
FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997
Sales for fiscal 1998 of $245,334 were $16,937, or 6.5 percent lower than fiscal
1997 sales of $262,271. This decrease was due to the divestiture of certain
non-core businesses and lower average selling prices for OPP films, offset in
part by increased sales volume of OPP films. In the fourth quarter of 1997, AET
divested its injection molding and adhesive nets businesses, and in the third
quarter of 1998 it divested its industrial extrusion and remaining plastic
netting businesses. The lower average selling prices for OPP films were
attributable to highly competitive market conditions resulting from excess
industry production capacity and characterized by substantial declines in
selling prices, particularly of lower-end commodity products. AET's average
selling prices were impacted by these price reductions as the proportion of
lower-end products in its sales mix increased in connection with the start-up of
the Company's ten-meter production line. Although average selling prices
declined in 1998, unit volume sales of OPP films increased by 9.2 percent due
principally to the successful ramp-up since March 1998 of the ten-meter-wide
production line. The sales volume increase was facilitated by this new capacity
as well as investments made in recent years in new product development and an
expanded sales and marketing organization. Approximately 41 percent of 1998
sales were from new or enhanced products introduced by the Company within the
past three years. Sales outside the United Sates comprised 18.2 percent of total
1998 sales, and operating profit for sales outside the United States was 14.5
percent of total operating profit.
Gross profit was $50,160 for 1998, a decrease of $7,074 or 12.4 percent from the
1997 level of $57,234. As a percentage of sales, gross margin decreased to 20.4
percent in 1998 versus 21.8 percent in 1997. This decrease was due to the
previously discussed lower average selling prices throughout the OPP films
industry during 1998, and the Company's sales mix, offset in part by lower
production costs resulting from new highly efficient assets and lower raw
material costs.
Selling, general and administrative expenses decreased to $23,754 for 1998 from
$23,819 in 1997, a decrease of $65. Research and development expenses decreased
to $7,326 in 1998 from $8,221 in 1997, a decrease of $895. In previous years, as
part of AET's initiatives to enhance product
14
<PAGE>
offerings and expand the reach of the sales and marketing organization, spending
in the selling, marketing and research and development areas was increased. In
1998 spending in these areas leveled off.
In the third quarter of fiscal 1998, the Company elected early adoption of the
Accounting Standards Executive Committee Statement of Position 98-5, "Reporting
on the Costs of Start-up Activities" ("SOP 98-5"). The effect of this change in
accounting was the recognition of $1,539 of expenses related to net start-up
costs incurred during fiscal 1998, and a one-time charge of $852, net of related
income tax benefits of $568, resulting from costs incurred in prior periods.
In the fourth fiscal quarter of 1998, AET began implementing a shutdown of
certain older and less efficient assets in its Covington, Virginia facility and
made certain other organizational changes, including a 15 percent reduction in
total headcount. In connection with the shutdown, the Company recorded a charge
of $18,580 or $11,148 after taxes. AET also wrote down the value of certain
other assets in its Covington, Virginia facility, whose carrying values had been
impaired by an aggregate of $2,926.
Net interest expense decreased to $15,868 in fiscal 1998 from $16,868 in fiscal
1997, a decrease of $1,000, or 5.9 percent. This decrease was due to lower
levels of outstanding debt during 1998 compared to 1997.
Income tax benefit of $8,033 represents the impact of losses resulting from
restructuring and impairment charges and the write off of start-up costs in 1998
versus pre-tax earnings in 1997. Income tax as a percentage of before tax income
or loss remained constant for 1998 and 1997.
LIQUIDITY AND CAPITAL RESOURCES
AET maintains a credit agreement with a group of lenders to provide bank
financing. This credit agreement, as amended and restated, is a $70,000
revolving credit facility (the "Credit Facility") with a final maturity on the
earlier of (i) November 1, 2001, if the AET Senior Notes are not refinanced
prior to such date, or (ii) January 29, 2003. The Credit Facility is secured by
all the assets of AET. It includes covenants which limit borrowings based on
certain asset levels, require AET to maintain a minimum tangible net worth and
specified interest coverage and leverage ratios, restrict payment of cash
dividends to stockholders, and establish maximum capital expenditure levels. It
also contains other covenants customary in transactions of this type. At
September 30, 1999, AET had approximately $29,000 available under its Revolving
Credit Facility. The Company also has $6,500 of Revenue Bonds outstanding, which
are due November 4, 2004.
Operating activities in 1999 provided $10,554 in cash, which was the result of
$7,019 of net income before depreciation and amortization and other non-cash
expenditures, plus a $3,535 net increase in other working capital items, after
giving effect to divestitures. The net increase in working capital resulted from
a $1,005 decrease in inventory, a $393 decrease in accounts receivable, a $1,900
increase in prepaid and other charges, and increases in accounts payable and
accrued expenses of $4,037. Interest paid during 1999 amounted to $21,058,
including capitalized interest. Additions to property, plant and equipment were
$22,781 and were funded in part by borrowings pursuant to the Credit Facility,
with the balance funded by available cash flow.
In April 1999, the Company acquired certain assets of AEP Industries Inc.'s OPP
films business. The net purchase price of approximately $13,316 in cash was
funded with a portion of the proceeds of a sale-leaseback transaction involving
other assets of the Company. This sale-leaseback transaction yielded net
proceeds to the Company of approximately $30,000. The proceeds of the
sale-leaseback transaction, completed in April 1999, in excess of the purchase
price for the AEP assets, were utilized to pay down outstanding borrowings under
the Company's existing Credit Facility.
15
<PAGE>
AET believes that available cash and equivalents, cash flow from the business,
and borrowing availability under the Credit Agreement will provide adequate
funds over the next 12 months to accommodate its working capital needs, capital
expenditures and debt service obligation.
YEAR 2000
AET's Company-wide Year 2000 project, which is addressing the issue of computer
programs and embedded computer chips being unable to distinguish between the
year 1900 and the year 2000 has been completed. The project was comprised of
five major phases: (1) taking inventory of systems potentially impacted by the
Year 2000 issue; (2) assessing the Year 2000 compliance or capability of systems
determined to be material to the Company; (3) repairing or replacing material
systems that are determined not to be Year 2000 compliant or capable; (4)
testing the repaired or replaced systems; and (5) designing and implementing
contingency and business continuation plans.
The largest part of the project was the implementation of a new enterprise-wide
information system which commenced in 1996. The financial, sales, order entry,
electronic data interchange and administrative portions of the implementation
were completed over the past several years. The inventory, shop floor and
related manufacturing portions of the system were implemented on September 29,
1999.
The total cost associated with Year 2000 compliance activities has been
approximately $10,000, of which $8,000 has been spent on the purchase and
implementation of new enterprise-wide systems which offer many other
enhancements in comparison to the previous systems. All costs to complete the
project have been paid. No critical information technology projects have been
deferred due to our Year 2000 compliance efforts.
The failure of the Company or one of its key customers or suppliers to correct a
material Year 2000 problem could result in an interruption in, or a failure of,
certain normal business activities or operations. Such failures could materially
and adversely affect the Company's results of operations, liquidity and
financial condition. A worst case scenario would be the inability of the local
electric utilities to supply power to AET's manufacturing plants, particularly
at our largest plant in Terre Haute, Indiana. Under this scenario, a loss of
electricity would result in a shutdown of our manufacturing equipment. Due to
the amount of electricity needed to operate the equipment, it is not feasible to
utilize most alternative sources of electricity. Therefore AET would be unable
to manufacture products for customers, and thus AET's operations could be
materially impacted. While our customers are reliant on a steady supply of our
OPP films in general, the Company does not have guaranteed supply agreements
with its customers.
The Company's contingency planning process for Year 2000 problems is ongoing.
Contingency plans include arrangements for alternate suppliers when available,
re-running certain processes if errors occur, using manual intervention to
ensure the continuation of operations where possible, and scheduling activity in
December 1999 that would normally occur at the beginning of January 2000. If it
becomes necessary for the Company to take corrective actions, it is uncertain
whether this would result in significant delays in business operations or have
material adverse effect on the Company's results of operations, financial
position or cash flow. AET believes that the completion of the Year 2000 project
as scheduled should substantially reduce the possibility of significant
interruptions of normal operations.
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.
The costs of raw materials make up a significant portion of AET's costs and have
historically fluctuated. There can be no assurance, however, that future market
conditions will support any correlation between raw material cost fluctuations
and finished product films pricing.
16
<PAGE>
SEASONAL NATURE OF CERTAIN OPP MARKETS
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 those periods.
NEW ACCOUNTING PRONOUNCEMENTS
Information related to new accounting pronouncements is included in the
footnotes to the consolidated financial statements.
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 RISKS 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 ACCESS CAPITAL MARKETS ON
SATISFACTORY TERMS, AND TO ACQUIRE, INTEGRATE AND OPERATE NEW BUSINESSES AND
EXPAND INTO NEW MARKETS, AS WELL AS OTHER RISKS DETAILED IN EXHIBIT 99 OF THE
COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30,
1999 AND FROM TIME TO TIME IN THE COMPANY'S OTHER REPORTS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN EXCHANGE CONTRACTS
The Company has entered into foreign exchange contracts, the last of which
expires in January 2000, to hedge firm purchase commitments for the purchase of
equipment denominated in German Marks and Pounds Sterling. 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 that 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, 1999 and 1998, the Company has
outstanding foreign exchange contracts with notional values of $2,344 and
$2,503, respectively. These contracts had no carrying value and a net unrealized
loss of $638 and $246 as of September 30, 1999 and 1998, respectively. The
Company does not enter into foreign exchange contracts for trading purposes.
SHORT-TERM AND LONG-TERM DEBT
The Company is exposed to interest rate risk primarily through its borrowing
activities. The Company's policy has been to utilize United States dollar
denominated borrowings to fund its working capital and investment needs.
Short-term debt, if required, is used to meet working capital requirements,
while long-term debt is generally used to finance long term investments. There
is inherent rollover risk for borrowings as they mature and are renewed at
current market rates. The extent of this risk is not quantifiable or predictable
because of the variability of future interest rates and the Company's future
financing requirements. At September 30, 1999, the Company had no short term
debt outstanding and had long-term debt outstanding of $182.5 million, of which
$26 million was outstanding on its revolving Credit Facility which has a
variable interest rate, based on either LIBOR or prime rates. If interest rates
increased or decreased by 10 percent from the interest rates in place at
September 30, 1999, interest expense incurred on the revolving Credit Facility
would increase or decrease by approximately $205.
The Company does not enter into financial instrument transactions for trading or
other speculative purposes or to manage interest rate exposure.
17
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required under this item is set forth on pages F-1 through F-19
of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
18
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required under this Item 10 with respect to Executive Officers
of the Company is set forth in Item 4a. on pages 9-10 of this report.
The directors of AET are as follows:
<TABLE>
<CAPTION>
DIRECTOR NAME AGE POSITION SINCE
------------- --- -------- -----
<S> <C> <C> <C>
Amin J. Khoury 60 Chairman of the Board (1) October 1986
Thomas E. Williams 53 President, Chief Executive Officer December 1992
and Director (2)
Nader A. Golestaneh+ 39 Director October 1986
Richard G. Hamermesh* 51 Director October 1986
Mark M. Harmeling+ 46 Director October 1986
Paul W. Marshall 57 Director October 1986
Joseph J. O'Donnell* 55 Director October 1986
</TABLE>
- -----------------
* Member Audit Committee
+ Member Stock Option and Compensation Committee
(1) The Company has entered into a four-year Employment Agreement dated as of
April 1, 1999 with Mr. Khoury pursuant to which he currently serves as
Chairman of the Board of the Company.
(2) The Company has entered into a four-year Employment Agreement dated as of
April 1, 1999 with Mr. Williams pursuant to which he currently serves as
President, Chief Executive Officer and Director of the Company.
All directors hold office until the next annual meeting of stockholders or until
their successors are duly elected and qualified.
BUSINESS EXPERIENCE OF DIRECTORS
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. Director of Synthes-Stratec, Inc., the
world's leading manufacturer of orthopedic trauma fixation devices.
THOMAS E. WILLIAMS -- President, Chief Executive Officer and Director of the
Company since August 1993; Director, President and Chief Operating Officer of
the Company since December 1992; 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.
NADER A. GOLESTANEH -- Director of the Company; President of Centremark
Properties, Inc., a real estate management and development company since 1986;
attorney in private practice in Boston, Massachusetts.
19
<PAGE>
RICHARD G. HAMERMESH -- Director of the Company; 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; Director of Vialog Corporation, a provider of audio, visual
and internet conferencing services, since June, 1999.
MARK M. HARMELING -- Director of the Company; since 1991, President of Bay State
Realty Advisors, a real estate consulting firm; from 1997 to 1999 an executive
of The A.G. Spanos Corporation, a leading developer of multi-family residential
complexes; 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; 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; 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.
ITEM 11. EXECUTIVE COMPENSATION
"Executive Compensation" described in the Proxy Statement to be filed with the
Securities and Exchange Commission in connection with the 2000 Annual Meeting of
Stockholders is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
"Beneficial Ownership of Shares" described in the Proxy Statement to be filed
with the Securities and Exchange Commission in connection with the 2000 Annual
Meeting of Stockholders is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
"Certain Transactions" described in the Proxy Statement to be filed with the
Securities and Exchange Commission in connection with the 2000 Annual Meeting of
Stockholders is incorporated herein by reference.
20
<PAGE>
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, 1999 and 1998
Consolidated Statements of Operations for the Years Ended September 30, 1999,
1998 and 1997
Consolidated Statements of Stockholders' Equity for the Years
Ended September 30, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the Years Ended September 30, 1999,
1998 and 1997
Notes to Consolidated Financial Statements
FINANCIAL STATEMENT SCHEDULES
Schedule II - Valuation and Qualifying Accounts for the Years Ended September
30, 1999, 1998 and 1997
All other schedules are omitted as the required information is not applicable
or is included in the financial statements or related notes.
B. EXHIBITS
<TABLE>
<S> <C>
3.1(a) Amended and Restated Certificate of Incorporation.
3.2(i) Amendment dated February 26, 1992 to Amended and Restated Certificate of Incorporation.
3.3(i) Amended and Restated By-Laws.
4.1(d) Indenture dated as of April 7,1994 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 4.1).
4.3(a) Specimen Common Stock Certificate.
4.4(k) Rights Agreement dated as of March 2, 1998 between the Company and
BankBoston, N.A., as Rights Agent.
10.1(i) Amended and Restated Credit Agreement dated as of January 29,1998 by and between the
Registrant and The Chase Manhattan Bank as Administrative Agent and LaSalle Business
Credit, Inc. as Co-Agent.
10.1.1(h) Waiver and Amendment No. 1 dated as of December 16, 1998 to Amended and
Restated Credit Agreement dated as of January 29, 1998 between
the Registrant and The Chase Manhattan Bank as Administrative Agent.
10.1.2(k) Waiver and Amendment No. 2 dated as of December 31, 1998 to Amended
and Restated Credit Agreement dated as of January 29, 1998 between
the Registrant and The Chase Manhattan Bank as Administrative Agent.
10.1.3(l) Amended and Restated Credit Agreement dated as of March 15, 1999
between the Registrant and The Chase Manhattan Bank as Administrative
Agent.
10.1.4(l) Amendment No. 1 dated as of April 23, 1999 to the Amended and restated Credit
Agreement dated as of March 15, 1999.
10.2(b) 1986 Stock Option Plan, as amended.
10.3* Amendment dated December 7, 1999 to the 1986 Stock Option Plan.
10.4(c) 1991 Stock Option Plan, as amended.
10.5* Amendment dated December 7, 1999 to the 1991 Stock Option Plan.
10.6(b) 1991 Stock Option Plan for Directors, as amended.
10.7* Amendment dated August 4, 1999 to the 1991 Stock Option Plan for Directors, as amended.
</TABLE>
21
<PAGE>
<TABLE>
<S> <C>
10.8(d) 1994 Stock Option Plan, as amended.
10.9* Amendment dated December 7, 1999 to the 1994 Stock Option Plan.
10.10(f) Employment Agreement dated as of April 1, 1999 between the Registrant and Mark S. Abrahams.
10.11(f) Employment Agreement dated as of April 1, 1999 between the Registrant and David N. Terhune.
10.12(i) Letter Agreement dated May 18, 1998 between the Registrant and David N. Terhune.
10.13(g) Employment Agreement dated as of August 15, 1998 between the Registrant and Anthony J. Allott.
10.14(i) Letter Agreement dated May 18, 1998 between the Registrant and Anthony J. Allott.
10.15(f) Employment Agreement dated as of April 1, 1999 between the Registrant and Amin J. Khoury.
10.16(i) Letter Agreement dated May 18, 1998 between the Registrant and Amin J. Khoury.
10.17(f) Employment Agreement dated as of April 1, 1999 between the Registrant and Thomas E. Williams.
10.18(i) Letter Agreement dated May 18, 1998 between the Registrant and Thomas E. Williams.
10.19(h) Employment Agreement dated as of April 1, 1999 between the Registrant and Anthony J. Allott.
10.20(h) Employment Agreement dated as of April 1, 1999 between the Registrant and Gerald M. Haines II.
10.21(h) Employment Agreement dated as of September 19, 1998 between the Registrant and Gerald M. Haines II.
10.22(e) Executive Deferred Compensation Plan dated as of September 1, 1994
10.23* 1999 Supplemental Executive Retirement Plan dated November 30, 1999.
10.24* 1999 Deferred Compensation Trust dated November 30, 1999.
10.25.1(j) Equipment Lease Agreement dated as of December 29, 1997 between Registrant and Lasalle National
Leasing Corporation.
10.26(i) Asset Purchase and Sale Agreement dated as of April 6, 1998 between the Registrant and ProNet
Corporation.
21(d) Subsidiaries of the Registrant.
23* Independent Auditors' Consent - Deloitte & Touche LLP.
24* 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.
</TABLE>
- --------------
* 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, 1994.
(f) Contained in Exhibits to the Registrant's Form 10-K for the fiscal year
ended September 30, 1996.
(g) Contained in Exhibits to the Registrant's Form 10-K for the fiscal year
ended September 30, 1997.
(h) Contained in Exhibits to the Registrant's Form 10K for the fiscal year
ended September 30,1998.
(i) Contained in Exhibits to the Registrant's Form 10-Q for the fiscal quarter
ended December 31, 1997.
(j) Contained in Exhibits to the Registrant's Form 10-Q for the fiscal quarter
ended June 30,1998.
22
<PAGE>
(k) Contained in Exhibits to the Registrant's Form 10-Q for the fiscal quarter
ended December 31, 1999.
(l) Contained in Exhibits to the Registrant's Form 10-Q for the fiscal quarter
ended March 31, 1999.
(m) Contained in Exhibits to the Registrant's Form 10-Q for the fiscal quarter
ended June 30, 1999.
(n) Contained in Exhibits to the Registrant's Form 8-K dated January 2, 1998.
(o) Contained in Exhibits to the Registrant's Form 8-K dated March 6, 1998.
The above referenced 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
None.
23
<PAGE>
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,
Chief Financial Officer and Treasurer
December 16, 1999
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:
Amin J. Khoury* Nader A. Golestaneh*
- ------------------------------------- ---------------------------------------
Amin J. Khoury, Chairman of the Board Nader A. Golestaneh, Director
December 16, 1999 December 16, 1999
/s/ Thomas E. Williams Joseph J. O'Donnell*
- ------------------------------------- ---------------------------------------
Thomas E. Williams, President, Joseph J. O'Donnell, Director
Chief Executive Officer and Director December 16, 1999
December 16, 1999
Paul W. Marshall* Richard G. Hamermesh*
- ------------------------------------- ---------------------------------------
Paul W. Marshall, Director Richard G. Hamermesh, Director
December 16, 1999 December 16, 1999
Mark M. Harmeling* /s/ Anthony J. Allott
- ------------------------------------- ---------------------------------------
Mark M. Harmeling, Director Anthony J. Allott, Vice President,
December 16, 1999 Chief Financial Officer and Treasurer
December 16, 1999
*By: /s/ Thomas E. Williams
---------------------------------
Power of Attorney
Date: December 16, 1999
---------------------------------
24
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
<TABLE>
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets, September 30, 1999 and 1998 ............. F-2
Consolidated Statements of Operations for the Years Ended
September 30, 1999, 1998 and 1997 ................................ F-3
Consolidated Statements of Stockholders' Equity for the Years
Ended September 30, 1999, 1998 and 1997 .......................... F-4
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1999, 1998 and 1997 ................................ F-5
Notes to Consolidated Financial Statements ........................... F-6
FINANCIAL STATEMENT SCHEDULE:
Schedule II - Valuation and Qualifying Accounts for the
Years Ended Septemer 30, 1999, 1998 and 1997 ..................... F-18
INDEPENDENT AUDITORS' REPORT ......................................... F-19
</TABLE>
F-1
<PAGE>
APPLIED EXTRUSION TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND 1998
(In thousands)
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,323 $ 2,279
Accounts receivable, net of allowance for doubtful
accounts of $1,554 and $1,056 at September 30,
1999 and 1998, respectively 36,857 38,467
Inventory 38,611 39,192
Prepaid expenses and deferred taxes 6,522 5,063
--------- ---------
Total current assets 87,313 85,001
Property, plant and equipment, net 278,118 278,905
Intangibles and deferred finance charges, net 3,035 3,636
Long-term note receivable and other assets 6,584 3,184
--------- ---------
$ 375,050 $ 370,726
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Current liabilities:
Accounts payable $ 18,144 $ 15,259
Accrued interest 9,113 9,145
Accrued expenses 28,311 27,126
--------- ---------
Total current liabilities 55,568 51,530
Long-term debt 182,500 185,500
Deferred taxes and other credits 37,941 33,259
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 1,000 shares authorized, of which 300 are
designated Junior Preferred Stock; no shares issued or outstanding
Common stock, $.01 par value; 30,000 shares
authorized; 11,575 and 11,357 shares issued
at September 30, 1999 and 1998, respectively 116 114
Additional paid-in capital 97,701 95,867
Retained earnings 5,269 9,938
Accumulated other comprehensive income (loss) (1,528) (2,396)
--------- ---------
101,558 103,523
Treasury stock, at cost, and other - 247 and 327 shares
at September 30, 1999 and 1998, respectively (2,517) (3,086)
--------- ---------
Total stockholders' equity 99,041 100,437
--------- ---------
$ 375,050 $ 370,726
========= =========
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
APPLIED EXTRUSION TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
SALES $ 237,042 $ 245,334 $ 262,271
COST OF SALES 188,601 195,174 205,037
--------- --------- ---------
GROSS PROFIT 48,441 50,160 57,234
OPERATING EXPENSES:
Selling, general and administrative 26,550 23,754 23,819
Restructuring and impairment charges -- 21,506 4,500
Research and development 7,123 7,326 8,221
Start-up costs -- 1,539 --
--------- --------- ---------
Total operating expenses 33,673 54,125 36,540
--------- --------- ---------
OPERATING PROFIT (LOSS) 14,768 (3,965) 20,694
NON-OPERATING EXPENSES:
Interest expense, net 18,909 15,868 16,868
Acquisition costs and other 3,641 250 1,500
--------- --------- ---------
Total non-operating expenses 22,550 16,118 18,368
--------- --------- ---------
Income (loss) before income taxes and change
in accounting (7,782) (20,083) 2,326
Income tax expense (benefit) (3,113) (8,033) 930
--------- --------- ---------
Income (loss) before change in accounting (4,669) (12,050) 1,396
Change in accounting, net of related tax benefits
of $568 -- (852) --
--------- --------- ---------
NET INCOME (LOSS) $ (4,669) $ (12,902) $ 1,396
========== ========== ========
EARNINGS (LOSS) PER COMMON SHARE:
Basic:
Before change in accounting $ (.41) $ (1.11) $ .14
Change in accounting -- (.07) --
--------- --------- ---------
Net income (loss) $ (.41) $ (1.18) $ .14
========== ========== =========
Diluted:
Before change in accounting $ (.41) $ (1.11) $ .13
Change in accounting -- (.07) --
--------- --------- ---------
Net income (loss) $ (.41) $ (1.18) $ .13
========= ========= =========
AVERAGE COMMON AND POTENTIAL COMMON SHARES OUTSTANDING:
Basic 11,282 10,893 10,449
Diluted 11,282 10,893 10,858
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
APPLIED EXTRUSION TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
(In thousands)
<TABLE>
<CAPTION>
VOTING ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
----------------- PAID-IN RETAINED COMPREHENSIVE COMPREHENSIVE TREASURY
SHARES AMOUNT CAPITAL EARNINGS INCOME (LOSS) INCOME (LOSS) STOCK
-------- ------- ---------- -------- ------------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, OCTOBER 1, 1996 10,529 $ 105 $89,638 $21,444 $ 277 $(3,129)
Net income 1,396 $ 1,396
Profit sharing contribution 175 2 1,863
Stock issued for employee
purchases 75 1 674
Treasury shares and other 117
Exercise of stock options 28 173
Exchange rate changes (431) (431)
-------------
Comprehensive income $ 965
=============
Tax benefits of early
disposition of
stock options 53
-------- ------- ---------- -------- ------------- --------
BALANCE, SEPTEMBER 30, 1997 10,807 108 92,401 22,840 (154) (3,012)
Net loss (12,902) $(12,092)
Profit sharing contribution 240 2 1,494
Stock issued for 401(k) match 124 2 772
Stock issued for employee
purchases 95 1 545
Treasury shares and other (74)
Exercise of stock options 91 1 575
Exchange rate changes (2,242) (2,242)
-------------
Comprehensive loss $(14,334)
=============
Tax benefits of early
disposition of
stock options 80
-------- ------- ---------- -------- ------------- --------
BALANCE, SEPTEMBER 30, 1998 11,357 114 95,867 9,938 (2,396) (3,086)
Net loss (4,669) $ (4,669)
Profit sharing contribution 28 229
Stock issued for 401(k) match 73 1 828 456
Stock issued for employee
purchase 64 1 399
Treasury shares and other 113
Exercise of stock options 53 354
Exchange rate changes 868 868
-------------
Comprehensive loss $ (3,801)
=============
Tax benefits of early
disposition of stock options 24
-------- ------- ---------- -------- ------------- --------
BALANCE, SEPTEMBER 30, 1999 11,575 $ 116 $ 97,701 $ 5,269 $ (1,528) $ (2,517)
======== ======= ========= ======== ============= ========
</TABLE>
F-4
<PAGE>
APPLIED EXTRUSION TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
(In thousands)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (4,669) $(12,902) $ 1,396
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 19,484 17,773 17,248
Restructuring charges -- 18,580 4,500
Asset impairments -- 2,926 --
Stock issued for retirement plans 1,513 2,270 1,865
Provision for doubtful accounts 1,217 832 285
Deferred income taxes and other credits (10,526) (25,291) 930
Change in accounting -- 852 --
Changes in assets and liabilities which provided
(used) cash:
Prepaid expenses and other current assets (1,900) (58) 328
Accounts payable and accrued expenses 4,037 (2,797) 627
Accounts receivable and inventory 1,398 (12,549) (7,898)
-------- -------- --------
Net cash provided by (used in)
operating activities 10,554 (10,364) 19,281
INVESTING ACTIVITIES:
Additions to property, plant and equipment, net (22,781) (45,496) (54,963)
Proceeds from sale of assets -- 26,500 --
Proceeds from sale-leaseback transactions 29,940 44,625 --
Acquisition of AEP assets (13,316) -- --
-------- -------- --------
Net cash provided by (used in)
investing activities (6,157) 25,629 (54,963)
FINANCING ACTIVITIES:
Borrowings (repayments) under Credit Facility, net (3,000) (15,000) 35,000
Proceeds from issuance of stock, net 779 1,202 901
-------- -------- --------
Net cash provided by (used in)
financing activities (2,221) (13,798) 35,901
Effect of exchange rate changes on cash 868 (2,242) (431)
-------- -------- --------
Increase (decrease) in cash and cash equivalents, net 3,044 (775) (212)
Cash and cash equivalents, beginning 2,279 3,054 3,266
-------- -------- --------
Cash and cash equivalents, ending $ 5,323 $ 2,279 $ 3,054
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest, including capitalized interest
of $3,050, $6,098 and $5,132, respectively $ 21,058 $ 21,467 $ 20,545
Income taxes -- 3,000 2
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
APPLIED EXTRUSION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997 (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) operate in a single business segment, which consists of the
development and manufacture of highly specialized, single and multilayer
oriented polypropylene ("OPP") films used in consumer product labeling and
flexible packaging applications and oriented, apertured films ("nets") for
health care, filtration and other markets. The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries. All
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 assets, liabilities, 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 securities purchased with an original
or remaining maturity of less than three months.
FINANCIAL INSTRUMENTS are recorded in accordance with generally accepted
accounting principles for each particular instrument. Appropriate disclosure
about fair value is provided for all financial instruments, whether recognized
or not in the balance sheet, for which it is practicable to estimate that value.
For financial instruments such as accounts receivable, accounts payable and
accrued expenses which reprice or mature within three months of the reporting
date, carrying amounts generally approximates fair value. At September 30, 1999
and 1998, the carrying amounts of long-term debt approximate their fair values.
The aggregate fair value amounts presented may not fully represent the
underlying fair value of the Company.
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. Assets held are recorded at the
lesser of carrying value or fair value less estimated costs to dispose of the
respective assets. Leasehold improvements are amortized using the straight-line
method over the lesser of the estimated life of the improvement or the remaining
lease term.
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.
INCOME TAXES are recorded using 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
F-6
<PAGE>
effect for the year in which these temporary differences are expected to be
recovered or settled. 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 when title and risk of loss have
passed to the customer.
FOREIGN OPERATIONS. Assets and liabilities are translated into U.S. dollars at
the exchange rate on the balance sheet date. The results of operations are
translated using average rates of exchange during each reporting period. Gains
and losses upon translation are deferred and reported as a component of
stockholders' equity. 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.
EARNINGS PER SHARE. Basic income (loss) per share is based on the
weighted-average shares outstanding during each reporting period. Diluted income
(loss) per share includes the effect of potential shares from exercise of
options, except where such potential shares would be anti-dilutive. See Note 10.
IMPAIRMENT OF LONG-LIVED ASSETS. The Company periodically assesses the
recoverability of its long-lived assets by comparing the undiscounted cash flows
expected to be generated by those assets to their carrying value. If the sum of
the undiscounted cash flows is less than the carrying value of the assets, an
impairment charge is recognized.
COMPREHENSIVE INCOME. The only item that the Company currently records as
comprehensive income or loss, other than net income or loss, is the change in
the cumulative translation adjustment resulting from the changes in exchange
rates and the effect of those changes upon translation of the financial
statements of the Company's foreign operations. As of September 30, 1999, 1998
and 1997, the cumulative translation adjustment was ($1,528), ($2,396) and
($154), respectively, and comprehensive income (loss) was ($3,801), ($14,334)
and $965, respectively.
CERTAIN NEW ACCOUNTING PRONOUNCEMENTS were recently issued which will be
effective in fiscal years beginning after September 30, 1999. The Financial
Accounting Standards Board (FASB) has issued Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 requires that an entity recognize all derivative
instruments as either assets or liabilities in the balance sheet and measure
those instruments at fair value. The provisions of this statement are effective
for the fiscal year beginning October 1, 2000. Management has not yet evaluated
the effect of SFAS No. 133 on the financial reporting process.
2. INVENTORY
Inventory consisted of the following at September 30:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Raw materials.................. $ 7,191 $ 8,410
Finished goods................. 31,420 30,782
------- --------
$38,611 $ 39,192
======= ========
</TABLE>
F-7
<PAGE>
3. PROPERTY, PLANT, EQUIPMENT AND LEASE COMMITMENTS
Property, plant and equipment consisted of the following at September 30:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Land................................ $ 1,783 $ 1,850
Buildings and improvements.......... 45,437 45,317
Machinery and equipment............. 253,688 255,305
-------- --------
300,908 302,472
Less accumulated depreciation....... 64,158 54,531
-------- --------
236,750 247,941
Machinery and equipment in progress.. 41,368 30,964
-------- --------
$278,118 $278,905
======== ========
</TABLE>
Approximately $16,512 of fixed assets are located outside of the U.S.
Depreciation expense for the years ended September 30, 1999, 1998 and 1997 was
$18,465, $16,718, and $16,079, respectively.
In April 1999, the Company acquired certain assets of AEP Industries Inc.'s OPP
films business. The net purchase price of $13,316 was funded with a portion of
the proceeds of a sale-leaseback transaction involving other assets of the
Company.
In 1997 and 1999, the Company wrote off $1,500 and $3,462, respectively, of
costs associated with terminated acquisition discussions.
The Company sold its plastic profiles, strong-nets and utility products
manufacturing assets during the third quarter of 1998. These businesses, located
in Salem, Massachusetts, generated annual sales in fiscal 1997 and 1998 of
approximately $24,000. The gross proceeds from the transaction of $26,500, which
approximated book value for the businesses after considering costs of the
transaction, were utilized to reduce outstanding borrowings on the Company's
Revolving Credit Facility. 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 reduce borrowings under the Company's Revolving Credit Facility.
The Company completed a sale-leaseback transaction on January 2, 1998 whereby it
sold certain items of equipment and other tangible personal property 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 net book value of the leased equipment immediately prior to its
sale was approximately $18,000. The gain on the sale of the equipment to the
lessor was deferred and will be recognized over the term of the related leases
as a reduction of operating lease expense. In connection with the restructuring
described in Note 14, $8,494 of the deferred gain was offset against the loss
recorded related to lease obligations on idled equipment. The Company received
net proceeds of $44,625, which was utilized to pay down outstanding borrowings
under its existing bank credit agreement (the "Credit Facility").
The Company completed a sale-leaseback transaction in April 1999, whereby it
sold certain equipment for gross proceeds of $29,940, and leased the equipment
back from the purchaser pursuant to a Letter Agreement dated April 28, 1999,
amending the Lease Agreement. The net book value of the equipment immediately
prior to its sale was $18,798. The gain on the sale of the equipment to the
lessor was deferred and is being recognized over the term of the related leases
as a reduction of operating lease expense. The Company utilized a portion of the
net proceeds to fund the purchase of AEP Industries Inc.'s OPP films business
for $13,316; the remainder of the proceeds were utilized to reduce borrowings
under the Company's Revolving Credit Facility.
The Company leases certain property and equipment under agreements generally
with terms of five to seven years and which may include certain renewal options.
Rental expense for the years
F-8
<PAGE>
ended September 30, 1999, 1998 and 1997 was approximately $10,043, $5,343 and
$622, respectively.
The minimum annual rental commitments under noncancellable operating leases are
as follows for each of the five years subsequent to September 30, 1999:
<TABLE>
<S> <C>
2000................................ $13,646
2001................................ 13,456
2002................................ 13,418
2003................................ 8,675
2004................................ 3,952
-------
$53,147
=======
</TABLE>
4. INTANGIBLES AND DEFERRED FINANCE CHARGES
Intangibles and deferred finance charges consisted of the following at September
30:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Deferred financing charges....... $2,307 $2,755
Intellectual property............ 1,611 1,603
------ ------
3,918 4,358
Less accumulated amortization.... 883 722
------ ------
$3,035 $3,636
====== ======
</TABLE>
5. LONG-TERM DEBT
Long-term debt consisted of the following at September 30:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Industrial Revenue Bond payable November 4, 2004 at ARBI
plus .25% (4.16% effective rate at September 30, 1999). $ 6,500 $ 6,500
Senior Notes payable on April 7, 2002 with 11.5% interest
due semiannually on October 1 and April 1. 150,000 150,000
Revolving Credit Facility of $70,000 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,
1999 were: $25,000 at 7.8%. Prime-based borrowings were
$1,000 at an effective interest rate of 9.5%. 26,000 29,000
-------- ---------
182,500 185,500
Less current portion -- --
-------- ---------
Total long-term debt $182,500 $ 185,500
======== =========
</TABLE>
In 1994 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 was further amended in March, 1999.
The Credit Facility is secured by all the assets of the Company. It includes
covenants which limit borrowings based on certain asset levels, require the
Company to maintain a minimum tangible net worth and specified
F-9
<PAGE>
interest coverage and leverage ratios, restrict payment of cash dividends to
stockholders, and establish maximum capital expenditure levels. It also contains
other covenants customary in documents relating to transactions of this type.
The aggregate amount of long-term debt, excluding amounts outstanding under the
Credit Facility, maturing in years subsequent to September 30, 1999 is as
follows:
<TABLE>
<S> <C>
2002...................................... $ 150,000
2003...................................... --
2004 ..................................... --
Thereafter .............................. 6,500
--------
$156,500
========
</TABLE>
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accrued expenses consisted of the following at September 30:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Accrued restructuring........................................ $ 2,834 $ 9,170
Payroll & benefits........................................... 8,528 6,060
Market development........................................... 4,180 4,601
Taxes and other.............................................. 12,769 7,295
------- -------
$ 28,311 $ 27,126
======== ========
</TABLE>
Included in accounts payable are outstanding checks of $5,914 and $982 at
September 30, 1999 and 1998, respectively. In addition, approximately $9,410 of
accrued restructuring costs are included in deferred taxes and other credits at
September 30, 1999 and 1998, respectively, which represents the portion of the
1998 restructuring charge which will be paid out in future years (primarily
lease costs).
7. INCOME TAXES
The provision for income taxes consisted of the following for the years ended
September 30:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Current:
U.S. Federal ....................... $ -- $ 2,623 $ --
State .............................. -- -- --
------- ------- -------
-- 2,623 --
Deferred:
U.S. Federal ....................... (2,724) (9,323) 791
State .............................. (389) (1,333) 139
------- ------- -------
Total .............................. $(3,113) $(8,033) $ 930
======= ======= =======
</TABLE>
Approximately $568 of deferred tax benefit was recognized in fiscal 1998 in
connection with the change in accounting described in Note 11.
F-10
<PAGE>
The components of the net deferred tax asset were as follows at September 30:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Deferred Tax Assets:
Accounts receivable ........................ $ 232 $ 370
Inventory .................................. 2,806 2,221
Other assets ............................... 13,343 21,095
Other liabilities .......................... 2,585 1,052
Tax credits and loss carryforwards ......... 25,966 20,009
Valuation allowance ........................ (435) (435)
-------- --------
Total .................................. 44,497 44,312
-------- --------
Deferred Tax Liabilities:
Property, plant and equipment .............. 40,798 43,700
Other assets ............................... 53 79
-------- --------
Total .................................. 40,851 43,779
-------- --------
Total net deferred tax asset ................... $ 3,646 $ 533
======== ========
</TABLE>
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 likely.
At September 30, 1999, the Company has, for income tax reporting purposes,
federal net operating loss carryforwards of $49,810 (expiration commencing in
2005 through 2019) and state net operating loss carryforwards of $48,411
(limited by certain state tax statutes and expiration). The Company also has
research and development credit carryforwards of $399, alternative minimum tax
credit carryforwards of $4,717 and state investment tax credits of $275
(expiration commencing in 2005).
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, 1999, 1998
and 1997 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Statutory tax rate ............................. 35.0% 35.0% 35.0%
State income taxes, net of federal
tax benefits ................................. 3.8% 4.9% 4.1%
Other, net ..................................... 1.2% .1% .9%
---- ---- ----
40.0% 40.0% 40.0%
==== ==== ====
</TABLE>
8. STOCKHOLDERS' EQUITY
Tax benefits resulting from stock compensation expense allowable for U.S.
federal income tax purposes in excess of the expense recorded in the
consolidated statements of operations have been credited to additional paid-in
capital.
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. 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
semiannual basis. Approximately 64,012 shares were purchased under this Plan in
fiscal 1999, and at September 30, 1999, 246,843 shares were available under the
Plan for future purchases.
F-11
<PAGE>
A total of 63,707 shares are held into treasury under a deferred compensation
plan, in addition to assets of $3,377 at September 30, 1999 (comprised of
participant-directed investments in mutual funds) which are carried in other
assets. The corresponding obligation under the deferred compensation plan is
recorded in accrued expenses.
In March 1998, the Company adopted a shareholder rights plan, and the Board of
Directors declared a dividend consisting of one right, called a "Junior
Preferred Stock Purchase Right," (a "Right") to each share of Common Stock
outstanding on March 9, 1998. Each share of Common Stock issued after that date
will be issued with an attached Right. Each Right entitles the holder, upon the
occurrence of certain events, to purchase 1/100th of a share of Preferred Stock
at an initial exercise price of $36, subject to adjustments for stock dividends,
splits and similar events. The Rights are exercisable only if a person or group
acquires 20 percent or more of AET's Common Stock or announces an intention to
commence a tender or exchange offer, the consummation of which would result in
ownership by such person or group of 20 percent or more of AET's Common Stock.
The Rights may be redeemed by the Board of Directors at any time prior to the
expiration of the rights plan on March 2, 2008 at a redemption price of $.01
each, and may be amended by the Board at any time prior to becoming exercisable.
At September 30, 1999, there were 11,392,096 Junior Preferred Stock Purchase
Rights outstanding.
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 expire within three
months of employment termination or three years after the death of the employee.
Vested director options generally expire within three months of the resignation
or within six months of the death of a director. All options expire upon the
occurrence of the tenth anniversary of the grant date or upon other termination
events specified in the plans. As of September 30, 1999, an aggregate of
approximately 3,417,500 shares were reserved for issuance under the plans.
The Company accounts for stock-based compensation to employees using the
intrinsic value method. Accordingly, no compensation cost has been recognized
for fixed stock option grants since the options granted to date have exercise
prices per share of not less than the fair value of the Company's common stock
at the date of the grant.
If compensation cost for stock option grants and the Company's Employee Stock
Purchase Plan had been determined based on the fair value of the grant for 1999,
1998 and 1997, the Company's fiscal 1999, 1998 and 1997 net income (loss) and
earnings (loss) per share on a pro forma basis would have been as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net Income (Loss):
As reported ............................ $ (4,669) $ (12,902) $ 1,396
Pro forma .............................. (5,889) (13,743) 1,247
Basic Earnings (Loss) per Share:
As reported ............................ (.41) (1.18) .14
Pro forma .............................. (.52) (1.26) .10
Diluted Earnings (Loss) per Share:
As reported ............................ (.41) (1.18) .13
Pro forma .............................. (.52) (1.26) .10
</TABLE>
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 1999, 1998 and 1997: expected volatilities
ranging from 59 to 56 percent, risk-free interest rates of
F-12
<PAGE>
approximately 6 percent and expected lives of 7 to 10 years. The
weighted-average grant date fair value of options granted during the year was
$3.99, $5.60 and $4.37 for 1999, 1998 and 1997 respectively.
Information concerning the Company's option plans is as follows:
<TABLE>
<CAPTION>
WEIGHTED-
SHARES UNDER OPTION AVERAGE
OPTION PRICES EXERCISE PRICE EXERCISABLE
--------- ----------- --------- -------
<S> <C> <C> <C> <C>
As of October 1, 1996 2,219,250 $1.00-8.375 $ 7.42 948,000
=========
Granted 214,500 8.375-12.00 9.85
Exercised (28,000) 5.5-8.25 6.22
Canceled (71,500) 5.75-14.875 10.15
---------
As of September 30, 1997 2,334,250 1.00-14.875 7.61 1,247,625
=========
Granted 520,250 6.75-9.00 7.27
Exercised (91,750) 1.00-8.375 6.28
Canceled (65,125) 1.00-14.875 9.00
---------
As of September 30, 1998 2,697,625 4.63-14.875 7.55 1,923,125
=========
Granted 469,500 5.563-8.063 5.90
Exercised (52,999) 6.625-8.250 6.69
Canceled (10,251) 7.000-8.250 7.51
---------
As of September 30, 1999 3,103,875 $4.63-14.815 $ 7.32 2,130,993
========= =========
</TABLE>
The following table summarizes information regarding stock options outstanding
at September 30, 1999:
<TABLE>
<CAPTION>
OPTIONS
OPTIONS OUTSTANDING EXERCISABLE
------------------------------------------- ---------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
RANGE OF AS OF CONTRACTUAL EXERCISE AS OF EXERCISE
EXERCISE PRICE 09/30/99 LIFE IN YEARS PRICE 09/30/99 PRICE
------------------ -------------- -------------- ------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
$ 1.00-5.00 180,000 4.2 $ 4.7944 180,000 $ 4.7944
5.01-7.50 1,649,500 6.2 6.4379 919,181 6.5925
7.51-10.00 1,160,250 5.8 8.4340 953,437 8.4324
10.01-12.50 60,375 7.4 11.5362 30,875 11.5223
12.51-15.00 53,750 6.2 13.8372 47,500 13.9803
------------- -------------
3,103,875 6.0 $7.3161 2,130,993 $ 7.499
============= =============
</TABLE>
F-13
<PAGE>
10. EARNINGS PER SHARE
A reconciliation of shares used in the computation of basic and diluted income
(loss) per share is as follows for the years ended September 30 (amounts in
thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Shares for basic computation............................ 11,282 10,893 10,449
Potential shares from options............................ -- -- 409
------- ------- -------
Shares for diluted computation......................... 11,282 10,893 10,858
======= ======= ======
</TABLE>
In 1999 and 1998, 150,000 and 145,000 potential shares from options were
excluded from the reconciliation above, as the effect of including these shares
in the calculation would be to decrease the loss per share.
11. CHANGE IN ACCOUNTING
During the third quarter of 1998, the Company elected early adoption of the
American Institute of Certified Public Accountants' Statement of Position 98-5,
"Reporting on the Costs of Start-up Activities" ("SOP 98-5"). Effective with the
adoption of SOP 98-5, the Company changed its method of accounting for start-up
costs on major projects to expense these costs as incurred. Prior to this
accounting change, the Company capitalized these costs, primarily those related
to the start-up of its eight and ten-meter OPP films lines, and amortized them
over a five year period. Amortization of these costs were approximately $929 in
the year ended September 30, 1997. The effect of this change in accounting was
the recognition of $1,539 of costs related to net start-up costs incurred during
fiscal 1998 and a one-time charge of $852, net of related income tax benefits of
$568, resulting from costs incurred in prior periods.
12. RELATED-PARTY TRANSACTIONS
The Company has entered into employment agreements extending for periods of up
to four 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.
In 1997, the Company recognized $1,715 of sales to BE Aerospace, Inc., an
affiliated company. At September 30, 1998, receivables from affiliated companies
were $185.
13. COMMITMENTS AND FOREIGN EXCHANGE CONTRACTS
The Company entered into foreign exchange contracts, the last of which expires
in January 2000, to hedge firm purchase commitments for the purchase of
equipment denominated in German Marks and/or Pounds Sterling. 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 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, 1999 and 1998, the Company had
outstanding foreign exchange contracts with notional values of $2,344 and
$2,503, respectively. These contracts had no carrying value and net unrealized
losses of $638 and $246 as of September 30, 1999 and 1998, respectively. The
Company does not enter into foreign exchange contracts for trading purposes.
F-14
<PAGE>
14. RESTRUCTURING AND ASSET IMPAIRMENT CHARGES
The Company announced a major restructuring of its Covington, Virginia
manufacturing facility in the fourth quarter of 1998. The restructuring, which
was approved in 1998 and primarily implemented in fiscal 1999, included the
shutdown of two older, less efficient production lines,
relocation of certain operations to other locations and the elimination of
approximately 200 full-time manufacturing and plant administrative positions,
160 of which were hourly and the remainder of which were salaried. The Company
recorded a charge of $18,580 in the fourth quarter of 1998 comprised of
approximately $12,090 for ongoing operating leases related to idled equipment,
leased equipment, $4,100 in severance and outplacement costs, and $2,390 in
other charges. At September 30, 1999, approximately $7,221 of these
restructuring costs had been paid.
Implementation of this plan is nearing completion, with a total of 181 positions
eliminated and the shutdown of the production lines now complete. Since
September 1998, the Company has paid out $900 on leases related to idled
equipment, $4,098 in severance or outplacement costs and $2,223 in other
restructuring costs, resulting in an accrued restructuring balance of $11,359 at
September 30, 1999. Of this balance, $11,190 represents lease costs, the
majority of which are classified as a long-term liability.
In the fourth quarter of fiscal 1998, the Company wrote down the value of
certain assets in its Covington, Virginia facility, whose carrying values had
been impaired by an aggregate of $2,926. Of the amounts recorded for impairment,
$1,526 relates to specialized equipment which is no longer used in the
production process, and $1,400 represents an adjustment to the carrying value of
the Covington facility to estimated fair value, resulting from an impairment
caused by the shutdown of the affected production lines.
The Company also 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 included
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. As of September 30, 1999, all costs related to
this restructuring had been paid.
15. 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 valued at $1,058, $2,270 and $1,865
in 1999, 1998, and 1997, 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.
In April 1999, the Company implemented a Supplemental Executive Retirement Plan
under which certain executive employees receive benefits upon retirement. The
amount of benefits is based on achievement of specified performance targets and
years of service.
F-15
<PAGE>
16. LITIGATION
From time to time, the Company becomes involved in litigation which is
incidental to its business. Management does not believe that the outcome of
currently pending matters, either individually or in the aggregate, will have a
material impact on financial position in the results of operations.
17. 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 ongoing 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 20 percent of sales in fiscal 1999, and 18 and 16
percent of sales in 1998 and 1997, with no other customer accounting for more
than 10 percent of sales in 1999, 1998 or 1997.
Information by geographic location was as follows for the years ended September
30:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Sales:
United States........................... $192,627 $200,684 $ 219,467
Foreign.................................. 44,415 44,650 42,807
-------- -------- --------
$237,042 $245,334 $262,271
======== ======== ========
Operating Profit (exclusive of
restructuring and impairment
charges and write off of start-up
costs):
United States........................... $ 11,902 $ 16,313 $ 21,152
Foreign.................................. 2,866 2,767 4,042
-------- -------- --------
$ 14,768 $ 19,080 $ 25,194
======== ======== ========
</TABLE>
No individual country, other than the United States, comprised more than 10
percent of consolidated sales or operating profit.
F-16
<PAGE>
18. SELECTED QUARTERLY DATA (UNAUDITED)
Summarized quarterly financial data for fiscal 1997, 1998 and 1999 were as
follows:
<TABLE>
<CAPTION>
EARNINGS EARNINGS
(LOSS) (LOSS)
NET NET INCOME PER SHARE PER SHARE
SALES GROSS PROFIT (LOSS) BASIC(*) DILUTED(*)
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
September 30, 1997
1st quarter $ 59,445 $ 13,476 $ 1,057 $ .10 $ .10
2nd quarter 68,492 15,277 1,750 .17 .16
3rd quarter 70,076 15,345 745 .07 .07
4th quarter 64,258 13,136 (2,156) (.20) (.20)
September 30, 1998
1st quarter $ 56,416 $ 11,847 $ (753) $ (.07) $ (.07)
2nd quarter 62,439 11,414 (602) (.05) (.05)
3rd quarter 66,535 13,943 2,710 .24 .24
4th quarter 59,954 12,956 (14,257) (1.29) (1.29)
September 30, 1999
1st quarter $ 55,445 $ 7,941 $ (4,735) $ (.43) $ (.43)
2nd quarter 58,979 11,652 (863) (.08) (.08)
3rd quarter 62,269 13,757 194 .02 .02
4th quarter 60,349 15,091 735 .06 .06
</TABLE>
- -----------------------
(*) Earnings (Loss) Per Share is presented before change in accounting
The Company implemented restructuring plans in the fourth quarters of 1998 and
1997 and recorded charges of $18,580 and $4,500, respectively, before taxes. The
Company also wrote down the value of certain assets in its Covington, Virginia
facility, whose carrying values had been impaired by an aggregate of $2,926. The
restructuring and impairment charges are discussed more fully in Note 14.
F-17
<PAGE>
APPLIED EXTRUSION TECHNOLOGIES, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
(In thousands)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO
BEGINNING COSTS AND BALANCE AT
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS END OF PERIOD
----------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
1999 $ 1,056 $ 1,217 $ 719 $ 1,554
1998 745 832 521 1,056
1997 750 285 290 745
</TABLE>
F-18
<PAGE>
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, 1999 and
1998, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended September
30, 1999. 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 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, 1999 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended September 30, 1999, in conformity with generally accepted accounting
principles. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information shown therein.
As discussed in Note 11 to the consolidated financial statements, the Company
changed its method of accounting for certain start-up costs in 1998 to adopt the
American Institute of Certified Public Accountants Statement of Position No.
98-5, "Reporting on the Costs of Start-up Activities."
/s/ DELOITTE AND TOUCHE LLP
- -----------------------------
Deloitte & Touche LLP
Boston, Massachusetts
November 19, 1999
F-19
<PAGE>
Exhibit 10.3
AMENDMENT DATED DECEMBER 7, 1999
to the
APPLIED EXTRUSION TECHNOLOGIES, INC.
1986 STOCK OPTION PLAN
Section 6(f) of the Applied Extrusion Technologies, Inc. 1986 Stock Option Plan
is hereby amended and restated in its entirety to read as follows:
"(f) LIMITED TRANSFERABILITY OF OPTIONS. Except as otherwise
determined by the Committee in the case of nonstatutory options, no
option may be transferred other than by will or by the laws of descent
and distribution and during the participant's lifetime an option may
be exercised only by the participant."
1
<PAGE>
Exhibit 10.5
AMENDMENT DATED DECEMBER 7, 1999
to the
APPLIED EXTRUSION TECHNOLOGIES, INC.
1991 STOCK OPTION PLAN
Section 6(e) of the Applied Extrusion Technologies, Inc. 1991 Stock Option Plan
is hereby amended and restated in its entirety to read as follows:
"(e) LIMITED TRANSFERABILITY OF OPTIONS. Except as otherwise
determined by the Committee in the case of nonstatutory options,
no option may be transferred other than by will or by the laws of
descent and distribution and during the participant's lifetime an
option may be exercised only by the participant."
1
<PAGE>
Exhibit 10.7
AMENDMENT DATED AUGUST 4, 1999
to the
APPLIED EXTRUSION TECHNOLOGIES, INC.
1991 STOCK OPTION PLAN
Section 6(f) of the Applied Extrusion Technologies, Inc. 1991 Stock Option Plan
for Directors is hereby amended and restated in its entirety to read as follows:
"(f) LIMITED TRANSFERABILITY OF OPTIONS. No option
may be transferred, except (i) by will or by the laws of
descent and distribution or (ii) to parties that are eligible
to have such transferred options and the underlying securities
registered on the Plan's existing Form S-8 Registration
Statements, such eligibility to be determined in accordance
with the General Instructions to Form S-8 and other rulings
and pronouncements of the Securities and Exchange Commission
as may be in effect from time to time."
1
<PAGE>
Exhibit 10.9
AMENDMENT DATED DECEMBER 7, 1999
to the
APPLIED EXTRUSION TECHNOLOGIES, INC.
1994 STOCK OPTION PLAN
Section 6(g) of the Applied Extrusion Technologies, Inc. 1994 Stock Option Plan
is hereby amended and restated in its entirety to read as follows:
"(g) LIMITED TRANSFERABILITY OF OPTIONS. Except as otherwise
determined by the Committee in the case of nonstatutory options, no
option may be transferred other than by will or by the laws of descent
and distribution and during the participant's lifetime an option may
be exercised only by the participant."
1
<PAGE>
Exhibit 10.23
APPLIED EXTRUSION TECHNOLOGIES, INC.
1999 SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
-------------------------------------------------------
THIS 1999 SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (the "PLAN") made and
entered into this 30th day of November, 1999 by APPLIED EXTRUSION TECHNOLOGIES,
INC., a corporation organized and existing under the laws of the State of
Delaware (hereinafter referred to as the "COMPANY").
W I T N E S S E T H:
WHEREAS, the Company desires to provide for an unfunded supplemental
executive retirement plan for the benefit of a select group of its management or
highly compensated employees, subject to certain conditions and pursuant to the
terms and provisions specified in this Plan;
NOW, THEREFORE, in consideration of the premises and mutual covenants
set forth herein, the Company hereby establishes the Plan pursuant to the
following terms and provisions.
ARTICLE 1
DEFINITIONS
1.1 "AVERAGE COMPENSATION" shall mean the average Compensation paid by
the Company to the Participant for those three (3) fiscal years (whether or not
consecutive) of the Company ending on or after the Effective Date in which the
Participant earned the highest Compensation (or, if the Participant did not
receive Compensation for at least three (3) fiscal years ending on or after the
Effective Date, then over the number of fiscal years ending on or after the
Effective Date during which the Participant was employed by the Company for the
entire fiscal year); provided, however, that in no event shall the Average
Compensation be less than the Participant's Base Salary for the fiscal year in
which the Participant's Termination Date occurs.
1.2 "BENEFICIARY" shall mean the person or persons designated by a
Participant, upon such forms as shall be provided by the Company, to receive
payments of the Participant's Normal Retirement Benefit after the Participant's
death. If the Participant shall fail to designate a Beneficiary, or if for any
reason such designation shall be ineffective, or if such Beneficiary shall
predecease the Participant or die simultaneously with him, then the Beneficiary
shall be the Participant's estate.
1
<PAGE>
1.3 "BENEFIT PERCENTAGE" shall mean, with respect to a Participant, (a)
twenty-five (25%) if the Performance Target has not been met, and (b) fifty
percent (50%) if the Performance Target has been met; provided, however, that if
the Participant's employment with the Company is terminated pursuant to
subsections 4(b) (Death), 4(c) (Incapacity), 4(e) (Termination by the Employer
Other Than for Death, Incapacity or Cause) or 4(f) (Termination by Executive for
Good Reason) of the Participant's Employment Agreement, the Benefit Percentage
shall be fifty percent (50%).
1.4 "CHANGE IN CONTROL" shall have the same meaning as set forth in
Exhibit A to the Company's 1991 Stock Option Plan for Directors.
1.5 "CODE" shall mean the Internal Revenue Code of 1986, as amended,
and successor tax laws.
1.6 "COMMITTEE" shall mean the persons designated by the Company as the
Administrative Committee for the Plan pursuant to Section 3.1.
1.7 "COMPANY" shall mean APPLIED EXTRUSION TECHNOLOGIES, INC., a
Delaware corporation, its successors and assigns.
1.8 "COMPENSATION" shall mean the Base Salary and Bonuses paid by the
Company to the Participant for the fiscal year of the Company pursuant to
subsections 3(a) and 3(b) of the Participant's Employment Agreement.
1.9 "DISABILITY BENEFIT OFFSET AMOUNT" shall mean the amounts (if any)
that the Participant receives concurrently from any disability insurance policy
paid or reimbursed by the Company for the benefit of the Participant.
1.10 "EFFECTIVE DATE" shall mean April 1, 1999.
1.11 "EMPLOYMENT AGREEMENT" shall mean, with respect to a Participant,
the Employment Agreement entered into by and between the Company and the
Participant on or after the Effective Date, as amended from time to time.
1.12 "NORMAL RETIREMENT BENEFIT" means a monthly benefit, commencing on
the Participant's Retirement Payment Commencement Date and continuing for ten
(10) years thereafter, equal to one twelfth of the amount by which (i) the
product of the Participant's Benefit Percentage multiplied by his or her Average
Compensation, exceeds (ii) the Participant's Disability Benefit Offset Amount,
if any.
1.13 "PARTICIPANT" shall mean the Chief Executive Officer and any other
officer of the Company designated by the Board of Directors or the Stock Option
and Compensation Committee of the Board of Directors of the Company as being
eligible to participate in the Plan. An employee of the Company shall not be
eligible to be a Participant unless he or she is deemed to be among a select
group of management or highly compensated employees of the Company within the
meaning of Section 201(2) of ERISA.
2
<PAGE>
1.14 "PERFORMANCE TARGET" shall have the same meaning as set forth in
subsection 3(f) of the Participant's Employment Agreement.
1.15 "PLAN" shall mean this 1999 Supplemental Executive Retirement Plan
as herein set forth and as it may be amended from time to time.
1.16 "PLAN YEAR" shall mean the twelve month period that begins October
1 and ends September 30.
1.17 "RETIREMENT PAYMENT COMMENCEMENT DATE" shall mean the first day of
the month coincident with or next following the later of (a) the date the
Participant reaches, or would have reached if still living, age sixty (60), and
(b) the Participant's Termination Date.
1.18 "TERMINATION DATE" shall have the same meaning as set forth in
subsection 4(a) of the Participant's Employment Agreement.
1.19 "TRUST" shall mean the Applied Extrusion Technologies, Inc. 1999
Deferred Compensation Trust, dated November 30, 1999, entered into by and
between the Company and Comerica Bank.
1.20 "YEAR OF CREDITED SERVICE" shall mean the number of calendar
months during which a Participant was employed by the Company divided by twelve,
with any remainder rounded up to the next whole year.
ARTICLE 2
RETIREMENT BENEFITS
2.1 NORMAL RETIREMENT BENEFIT.
(a) A Participant who has completed a total of not less than
ten (10) Years of Credited Service (of which at least four (4) Years of Credited
Service have been completed subsequent to the Effective Date of this Plan) shall
be entitled to receive payment of his Normal Retirement Benefit commencing on
his Retirement Payment Commencement Date.
(b) For purposes of determining Years of Credited Service
pursuant to subsection 2.1(a) hereof, if a Participant's employment with the
Company is terminated pursuant to subsections 4(b) (Death), 4(c) (Incapacity),
4(e) (Termination by the Employer Other Than for Death, Incapacity or Cause) or
4(f) (Termination by Executive for Good Reason) of his or her Employment
Agreement, such Participant shall be deemed to have completed those Years of
Credited Service (or a portion thereof) that the Participant would have
completed if the Participant had been continuously employed with the Company
through the Expiration Date, as that term is used under his Employment
Agreement.
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2.2 TERMINATION PRIOR TO COMPLETING REQUISITE YEARS OF CREDITED SERVICE
EMPLOYMENT. If a Participant's employment with the Company terminates for any
reason before the Participant has completed ten (10) Years of Credited Service,
or before he has completed four (4) Years of Credited Service after the
Effective Date of this Plan (in each case taking into account any Years of
Credited Service that the Participant may be deemed to have completed under
Section 2.1(b), hereof), then no benefits shall be paid to the Participant or
any Beneficiary of the Participant pursuant to this Plan.
2.3 DEATH BENEFIT. If the Participant should die before distribution of
his entire Normal Retirement Benefit has been made to him, any remaining amounts
shall be distributed to the Participant's Beneficiary in a lump sum payment,
using a five percent (5%) discount factor per annum, as soon as practicable
after the Participant's death, provided that notwithstanding the foregoing, no
amount shall be payable hereunder until that date on which the deceased
Participant would have reached age sixty (60) if still living.
2.4 CHANGE IN CONTROL. At any time after a Change in Control has
occurred, a Participant may elect to receive his or her Normal Retirement
Benefit (or if payment thereof has already commenced, any remaining payments of
the Participant's Normal Retirement Benefit) as a lump sum payment, using a five
percent (5%) discount factor per annum, commencing upon the later of (a) the
Participant's Retirement Payment Commencement Date, and (b) the date of the
Change in Control.
ARTICLE 3
ADMINISTRATION
3.1 ADMINISTRATIVE COMMITTEE. The Company shall appoint a Committee for
the administration of the Plan consisting of one or more persons. Any Committee
member may, but need not, be an officer or employee of the Company and each
shall serve until his successor shall be appointed in like manner. Any member of
the Committee may resign by delivering his written resignation to the Company.
The Company may remove any member of the Committee at any time.
3.2 POWERS AND DUTIES. The Committee generally shall be responsible
for the discretionary management, operation, interpretation and administration
of the Plan. The Committee shall:
(a) Establish procedures for allocation of
responsibilities of the Plan which are not allocated herein;
(b) Determine the names of those employees of the
Company who are eligible to participate and such other matters as may
be necessary to enable payment under the Plan;
(c) Construe all terms, provisions, conditions and
limitations of the Plan;
(d) Correct any defect, supply any omission or
reconcile any inconsistency that may appear in the Plan;
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(e) Determine the amount, manner and time of payment
of benefits hereunder and prescribe procedures to be followed by
Participants to obtain benefits; and
(f) Perform such other functions and take such other
actions as may be required by the Plan or as may be necessary or
advisable to accomplish the purposes of the Plan.
The Company shall furnish the Committee with all data and information available
which the Committee may reasonably require in order to perform its functions
hereunder. The Committee may rely without question upon any such data or
information furnished by the Company. Any interpretation or other decision made
by the Committee shall be final, binding and conclusive upon all persons in the
absence of clear and convincing evidence that the Committee acted arbitrarily
and capriciously.
3.3 AGENTS. The Committee may appoint a Secretary who may, but need
not, be a member of the Committee, and may employ such agents for clerical and
other services, and such counsel, accountants and other professional advisors as
may be required for the purpose of administering the Plan. The Committee may
rely on all tables, valuations, reports, certificates and opinions furnished by
its agents.
3.4 PROCEDURES. A majority of the Committee members shall constitute a
quorum for the transaction of business. No action shall be taken except upon a
majority vote of the Committee. An individual shall not vote or decide upon any
matter relating solely to himself or vote in any case in which his individual
right or claim to any benefit under the Plan is particularly involved. In any
case in which a Committee member is so disqualified to act, and the remaining
members cannot agree on an issue, the Company shall appoint a temporary
substitute member to exercise all of the powers of the disqualified member
concerning the matter in which he is disqualified.
3.5 CLAIMS PROCEDURE. In the event that any Participant or Beneficiary
claims to be entitled to benefits under the Plan and the Committee determines
that such claim should be denied in whole or in part, the Committee shall, in
writing, notify such claimant within ninety (90) days of receipt of such claim
that his claim has been denied, setting forth the specific reasons for such
denial. Such notification shall be written in a manner reasonably expected to be
understood by such Participant or Beneficiary and shall set forth the pertinent
sections of the Plan relied on, and where appropriate, an explanation of how the
claimant can obtain review of such denial. Within sixty (60) days after the
mailing or delivery by the Committee of such notice, such claimant may request,
by mailing or delivery of written notice to the Committee, a review and/or
hearing by the Committee of the decision denying the claim. If the claimant
fails to request such a review and/or hearing within such sixty (60) day period,
it shall be conclusively determined for all purposes of this Plan that the
denial of such claim by the Committee is correct. If such claimant requests a
hearing within such sixty (60) day period, the Committee shall designate a time
(which time shall not be less than seven (7) nor more than sixty (60) days from
the date of such claimant's notice to the Committee) and a place for such
hearing, and shall promptly notify such claimant of such time and place. A
claimant or his authorized representative shall be entitled to inspect all
pertinent Plan documents and to submit issues and comments in writing. If only a
review is requested, the claimant shall have sixty (60) days after filing a
request for review to submit additional written material in support of the
claim. After such review and/or hearing, the Committee shall promptly
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determine whether such denial of the claim was correct and shall notify such
claimant in writing of its determination with sixty (60) days after such review
and/or hearing or after receipt of any additional information submitted.
3.6 INDEMNIFICATION. The Company shall indemnify each Committee member,
and each employee who assists the Committee in connection with his or her
employment duties against any liability or loss sustained by reason of any act
or failure to act made in good faith, including, but not limited to, those in
reliance on certificates, reports, tables, opinions or other communications from
any company or agents chosen by the Committee in good faith. Such
indemnification shall include attorneys' fees and other costs and expenses
reasonably incurred in defense of any action brought by reason of any such act
or failure to act.
ARTICLE 4
MISCELLANEOUS
4.1 UNFUNDED PLAN. The obligations of the Company under this Plan shall
be paid from the general assets of the Company or from the assets of the Trust.
Participants shall have the status of general unsecured creditors of the
Company, and the Plan constitutes a mere promise by the Company to make benefit
payments in the future. It is intended that this Plan shall constitute an
"unfunded" plan for a select group of management or highly compensated employees
under the Employee Retirement Income Security Act of 1974, as amended. Any
assets acquired by the Company relating to this Plan shall be subject to the
claims of the Company's creditors, and shall not be subject to any claims by any
Participant or Beneficiary. The assets of the Trust also shall be subject to the
Company's creditors in the event of the Company's Insolvency, as defined in the
Trust Agreement establishing the Trust. Nothing contained in this Plan shall be
interpreted to grant to any Participant or Beneficiary, any right, title or
interest in any assets of the Company or the Trust.
4.2 TIMING OF COMPANY CONTRIBUTIONS. For each Plan Year, the Company
shall make contributions to the Trust in an amount that the Committee reasonably
determines to be sufficient to fund the benefits that have accrued and have
become vested under this Plan during that Plan Year. Notwithstanding the
foregoing, in the event of a Change in Control, or if the Committee determines,
in the Committee's view, and notifies the Company that a Change in Control is
imminent, the Company shall make a contribution to the Trust in an amount equal
to the aggregate value of all Participants' benefits hereunder, whether vested
or not.
4.3 IMPACT ON OTHER PARTICIPANT BENEFITS. This Plan shall not be
construed to impact or cause the denial of any benefits to which any Participant
may be entitled under any other welfare or benefit plan of the Company.
4.4 OTHER PLANS. Payments made to Participants under this Plan shall
not be includable as salary or compensation for purposes of determining the
amount of employee benefits under any other retirement, pension, profit-sharing
or welfare benefit plans of the Company.
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4.5 GOVERNING LAW. To the extent not pre-empted by the laws of the
United States, the construction, validity and administration of the Plan shall
be governed by the laws of the State of Delaware without reference to the
principles of conflicts of law therein.
4.6 NO ASSIGNMENT OR OTHER TRANSFER. The right to receive payment of
any benefits under the Plan shall not be subject in any manner to anticipation,
sale, alienation, transfer, assignment, pledge, encumbrance, attachment, or
garnishment by creditors of a Participant or a Participant's Beneficiary.
4.7 TAXES. The Company shall withhold from any payment due under the
Plan any taxes it deems to be required to be withheld under applicable Federal,
state or local tax laws or regulations.
4.8 SEVERABILITY. If any provision of this Plan is found, held or
deemed to be void, unlawful or unenforceable under any applicable statute or
other controlling law, the remainder of the Plan shall continue in full force
and effect.
4.9 HEADINGS AND SUBHEADINGS. The headings and subheadings of the Plan
are for reference only. In the event of a conflict between a heading or
subheading and the content of an article or paragraph, the content shall
control.
4.10 GENDER. The masculine, as used herein, shall be deemed to include
the feminine and the singular to include plural, except where the context
requires a different construction.
4.11 AMENDMENT AND TERMINATION.
(a) This Plan may be amended or terminated in any respect at
any time by the Company; provided, however, that no amendment or termination of
the Plan shall be effective to reduce any benefit that accrues before the
adoption of such amendment or termination without the prior written consent of
the Participants whose benefits would be reduced.
(b) Notwithstanding any provision to the contrary in this
Plan, in the event that as of the last day of any fiscal quarter of the Company
that occurs after the Effective Date, either (i) the Tangible Net Worth of the
Company is less the $25,000,000, or (ii) the Interest Coverage Ratio of the
Company shall be below .9:1, then the Plan immediately shall terminate, and the
Company shall distribute to each Participant his or her Normal Retirement
Benefit, in a lump sum payment, as soon as practicable thereafter. For purposes
of this Plan:
(1) "Tangible Net Worth" shall mean at any date the
consolidated stockholders' equity of the Company and
its subsidiaries determined as of such date, less any
intangible assets included on the balance sheet at
the same date;
(2) "Interest Coverage Ratio" shall mean the Cash
Flow of the Company for the trailing four quarters
divided by the Interest Expense of the Company for
the trailing four quarters;
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(3) "Cash Flow" shall mean for any period, (i) the
sum (without duplication), determined on a
consolidated basis for the Company and its
subsidiaries, of (x) the operating profit of the
Company and its subsidiaries (calculated before
provision for income taxes, interest expense,
extraordinary and non-recurring items and income
attributable to equity in affiliates) for such
period, plus (y) depreciation, amortization and other
non-cash items (to the extent deducted in determining
operating profit) for such period minus (ii) proceeds
received by the Company and its subsidiaries during
such period (to the extent included in determining
operating profit) of any property insurance policy.
(4) "Interest Expense" shall mean for any period, the
sum (determined without duplication) of the aggregate
amount of interest accruing during such period on
indebtedness of the Company and its subsidiaries (on
a consolidated basis), including the interest portion
of payments under capital lease obligations and any
capitalized interest, and excluding amortization of
debt discount and expense.
4.12 NO EMPLOYMENT CONTRACT. This Plan does not constitute a contract
of employment or impose on any Participant or the Company any obligations to
retain the Participant as an employee, to change the status of the Participant's
employment, or to change the Company's policies regarding termination of
employment.
IN WITNESS WHEREOF, the Company has caused the Plan to be executed the
day and year first above written.
APPLIED EXTRUSIONS TECHNOLOGIES, INC.
/s/ Gerald M. Haines II
-------------------------------------------
By: Gerald M. Haines II
Title: Vice President and General Counsel
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Exhibit 10.24
APPLIED EXTRUSION TECHNOLOGIES, INC.
1999 DEFERRED COMPENSATION PLAN TRUST
THIS AGREEMENT made this 30th day of November, 1999, by and between
APPLIED EXTRUSION TECHNOLOGIES, INC. (the "Company") and COMERICA BANK, a
Michigan banking corporation ("Trustee").
RECITALS:
The Company has adopted the nonqualified deferred compensation plan
known as the APPLIED EXTRUSION TECHNOLOGIES, INC. 1999 SUPPLEMENTAL EXECUTIVE
RETIREMENT PLAN, said plan sometimes hereinafter being referred to as the
"Plan."
The Company wishes to establish a grantor trust (hereinafter called the
"Trust") and to contribute to the Trust assets that shall be held therein,
subject to the claims of the Company's creditors in the event of Insolvency, as
herein defined, until paid to participants in the Plan.
It is the intention of the Company to make contributions to the Trust
to provide itself with a source of funds to assist it in the meeting of its
liabilities under the Plan.
NOW, THEREFORE, the parties do hereby establish the Trust pursuant to
the following terms and provisions.
SECTION 1.
ESTABLISHMENT OF TRUST
(a) The Company hereby deposits with the Trustee in trust one hundred
dollars ($100), which shall become the initial principal of the Trust to be
held, administered and disposed of by the Trustee as provided in this Trust
Agreement.
(b) The Trust hereby established shall be irrevocable.
(c) The Trust is intended to be a grantor trust, of which the Company
is the grantor, within the meaning of subpart E, part I, subchapter J, chapter
1, subtitle A of the Internal Revenue Code of 1986, as amended, and shall be
construed accordingly.
(d) The principal of the Trust, and any earnings thereon shall be held
separate and apart from other funds of Company and shall be used exclusively for
the uses and purposes of participants under the Plan and general creditors as
herein set forth. Plan participants and their beneficiaries shall have no
preferred claim on, or any beneficial ownership interest in, any assets of the
Trust. Any rights created under the Plan and this Trust Agreement shall be mere
unsecured
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contractual rights of Plan participants and their beneficiaries against Company.
Any assets held by the Trust will be subject to the claims of Company's general
creditors under federal and state law in the event of Insolvency, as defined in
Section 3(a) herein.
(e) It is the intention of the parties that this Trust shall
constitute an unfunded arrangement and shall not affect the status of the Plan
as an unfunded plan maintained for the purpose of providing deferred
compensation for a select group of management or highly compensated employees
for purposes of Title I of the Employee Retirement Income Security Act of 1974.
(f) It is the intention of Company to make contributions to the Trust
to provide itself with a source of funds to assist it in the meeting of its
liabilities under the Plan.
SECTION 2.
PAYMENTS TO PLAN PARTICIPANTS AND THEIR BENEFICIARIES
(a) The Company shall deliver to the Trustee a schedule (the "Payment
Schedule") that indicates the amounts payable in respect of each participant
(and his or her beneficiaries) under the Plan, that provides a formula or other
instructions acceptable to the Trustee for determining the amounts so payable,
the form in which such amount is to be paid (as provided for or available under
the Plan), and the time of commencement for payment of such amounts. Except as
otherwise provided herein, the Trustee shall make payments to the Plan
participants and their beneficiaries in accordance with such Payment Schedule.
The Company shall make provision for the reporting and withholding of any
federal, state or local taxes that may be required to be withheld with respect
to the payment of benefits pursuant to the terms of the Plan and shall pay
amounts withheld to the appropriate taxing authorities or determine that such
amounts have been reported, withheld and paid by Company.
(b) The entitlement of a Plan participant or his or her beneficiaries
to benefits under the Plan shall be determined by the Company or such party as
it shall designate under the Plan, and any claim for such benefits shall be
considered and reviewed under the procedures set out in the Plan.
(c) The Company may make payment of benefits directly to Plan
participants or their beneficiaries as they become due under the terms of the
Plan. The Company shall notify the Trustee of its decision to make payment of
benefits directly prior to the time amounts are payable to participants or their
beneficiaries. In addition, if the principal of the Trust, and any earnings
thereon, are not sufficient to make payments of benefits in accordance with the
terms of the Plan, the Company shall make the balance of each such payment as it
falls due. The Trustee shall notify the Company where principal and earnings are
not sufficient.
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SECTION 3.
TRUSTEE RESPONSIBILITY REGARDING PAYMENTS
TO TRUST BENEFICIARY WHEN COMPANY IS INSOLVENT
(a) The Trustee shall cease payment of benefits to Plan participants
and their beneficiaries if the Company is Insolvent. The Company shall be
considered "Insolvent" for purposes of this Trust Agreement if (i) the Company
is unable to pay its debts as they become due, or (ii) the Company is subject to
a pending proceeding as a debtor under the United States Bankruptcy Code.
(b) At all times during the continuance of this Trust, as provided in
Section 1(d) hereof, the principal and income of the Trust shall be subject to
claims of general creditors of the Company under federal and state law as set
forth below.
(i) The Board of Directors of the Company shall have
the duty to inform the Trustee in writing of the Company's Insolvency.
If a person claiming to be a creditor of the Company alleges in writing
to the Trustee that the Company has become Insolvent, the Trustee shall
determine whether the Company is Insolvent and, pending such
determination, the Trustee shall discontinue payment of benefits to
Plan participants or their beneficiaries.
(ii) Unless the Trustee has actual knowledge of the
Company's Insolvency, or has received notice from the Company or a
person claiming to be a creditor alleging that the Company is
Insolvent, the Trustee shall have no duty to inquire whether the
Company is Insolvent. The Trustee may in all events rely on such
evidence concerning the Company's solvency as may be furnished to the
Trustee and that provides the Trustee with a reasonable basis for
making a determination concerning the Company's solvency.
(iii) If at any time the Trustee has determined that
the Company is Insolvent, the Trustee shall discontinue payments to
Plan participants or their beneficiaries and shall hold the assets of
the Trust for the benefit of the Company's general creditors. Nothing
in this Trust Agreement shall in any way diminish any rights of Plan
participants or their beneficiaries to pursue their rights as general
creditors of the Company with respect to benefits due under the Plan or
otherwise.
(iv) The Trustee shall resume the payment of
benefits to Plan participants or their beneficiaries in accordance with
Section 2 of this Trust Agreement only after the Trustee has determined
that the Company is not Insolvent (or is no longer Insolvent).
(c) Provided that there are sufficient assets, if the Trustee
discontinues the payment of benefits from the Trust pursuant to Section 3(b)
hereof and subsequently resumes such payments, the first payment following such
discontinuance shall include the aggregate amount of all payments due to Plan
participants or their beneficiaries under the terms of the Plan for the period
of such discontinuance, less the aggregate amount of any payments made to Plan
participants or their beneficiaries by the Company in lieu of the payments
provided for hereunder during any such period of discontinuance.
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SECTION 4.
INVESTMENT AUTHORITY
The Trustee shall invest the assets of the Trust in such manner as
shall be directed by the Committee under the Plan. Notwithstanding the preceding
sentence, the Committee may select an investment manager (or managers) meeting
the definition of an "investment manager" under Section 3(38) of the Employee
Retirement Income Security Act of 1974, which may direct the Trustee to invest
any part of the Trust in any securities or property constituting part of the
Trust, and the Trustee shall act on such recommendation and shall have no
liability for acting in accordance with such recommendation or for the retention
of any securities or property so purchased. The Trustee will be protected in
relying upon any telegram or letter purporting to have been sent by the
investment manager which it believes in good faith to be genuine. In directing
investments, the investment manager shall diversify the investments so as to
minimize the risk of large losses, unless under the circumstances it is the
investment manager's opinion that it is clearly prudent not to do so. The
Trustee shall be fully protected in relying upon the certification of the
Committee with respect to the selection of such investment manager and it shall
not be the responsibility of the Trustee to determine or review investment
instructions given to it by such investment manager. Each investment manager
shall be a fiduciary under the Trust and shall acknowledge that it is a
fiduciary under the Trust in writing delivered to the Trustee and the Committee.
SECTION 5.
DISPOSITION OF INCOME
During the term of this Trust, all income received by the Trust, net of
expenses and taxes, shall be accumulated and reinvested.
SECTION 6.
ACCOUNTING BY TRUSTEE
The Trustee shall keep accurate and detailed records of all
investments, receipts, disbursements, and all other transactions required to be
made, including such specific records as shall be agreed upon in writing between
the Company and the Trustee. Within sixty (60) days following the close of each
calendar year and within thirty (30) days after the removal or resignation of
the Trustee, the Trustee shall deliver to Company a written account of its
administration of the Trust during such year or during the period from the close
of the last preceding year to the date of such removal or resignation, setting
forth all investments receipts, disbursements and other transactions effected by
it, including a description of all securities and investments purchased and sold
with the cost or net proceeds of such purchases or sales (accrued interest paid
or receivable being shown separately), and showing all cash, securities and
other property held in the Trust at the end of such year or as of the date of
such removal or resignation, as the case may be.
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SECTION 7.
RESPONSIBILITY OF TRUSTEE
(a) The Trustee shall act with the care, skill, prudence and diligence
under the circumstances then prevailing that a prudent person acting in like
capacity and familiar with such matters would use in the conduct of an
enterprise of a like character and with like aims, provided, however, that the
Trustee shall incur no liability to any person for any action taken pursuant to
a direction, request or approval given by the Company which is contemplated by,
and in conformity with the terms of the Plan or this Trust and is given in
writing by the Company. In the event of a dispute between the Company and a
party, the Trustee may apply to a court of competent jurisdiction to resolve the
dispute.
(b) If the Trustee undertakes or defends any litigation arising in
connection with this Trust, the Company agrees to indemnify the Trustee against
the Trustee's costs, expenses and liabilities (including without limitation,
attorneys' fees and expenses) relating thereto and to be primarily liable for
such payments. If the Company does not pay such costs, expenses and liabilities
in a reasonably timely manner, the Trustee may obtain payment from the Trust.
(c) The Trustee may consult with legal counsel (who may also be
counsel for the Company generally) with respect to any of its duties or
obligations hereunder.
(d) The Trustee may hire agents, accountants, actuaries investment
advisors, financial consultants or other professionals to assist it in
performing any of its duties or obligations hereunder.
(e) The Trustee shall have, without exclusion, all powers conferred on
the Trustees by applicable law, unless expressly provided otherwise herein,
provided, however, that if an insurance policy is held as an asset of the Trust,
the Trustee shall have no power to name a beneficiary of the policy other than
the Trust, to assign the policy (as distinct from conversion of the policy to a
different form) other than to a successor Trustee, or to loan to any person the
proceeds of any borrowing against such policy.
(f) Notwithstanding the provisions of Section 7(e) above, the Trustee
may loan to the Company the proceeds of any borrowing against an insurance
policy held as an asset of the Trust.
(g) Notwithstanding any powers granted to the Trustee pursuant to this
Trust Agreement or to applicable law, the Trustee shall not have any power that
could give this Trust the objective of carrying on a business and dividing the
gains therefrom, within the meaning of section 301.7701-2 of the Procedure and
Administrative Regulations promulgated pursuant to the Internal Revenue Code.
(h) Without in any way limiting the Trustee's powers described in this
Agreement, the Trustee shall have the power to do any of the following as
directed by the Committee from time to time: (i) place all or part of the
marketable securities of the Trust in a custody account maintained with Paine
Webber Incorporated (hereinafter known as Paine Webber); (ii) engage Paine
Webber
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to act as custodian of the custody account and to act, pursuant to the Trustee's
or an Investment Manager's instructions, as broker or dealer to execute
transactions and to provide other services with respect to the custody account,
including purchasing securities currently distributed, underwritten or issued by
Paine Webber or any of its affiliates; and (iii) pay out of the Trust fund all
reasonable custody charges, brokerage commissions, and other fees and expenses
incurred pursuant to clause (i) or (ii) above.
SECTION 8.
COMPENSATION AND EXPENSES OF TRUSTEE
The Company shall pay all administrative and Trustee's fees and
expenses. If not so paid, the fees and expenses shall be paid from the Trust.
SECTION 9.
RESIGNATION AND REMOVAL OF TRUSTEE
(a) The Trustee may resign at any time by written notice to the
Company, which shall be effective thirty (30) days after receipt of such notice
unless the Company and the Trustee agree otherwise.
(b) The Trustee may be removed by the Company on thirty (30) days
notice or upon shorter notice accepted by the Trustee.
(c) Upon a Change of Control, as defined herein, the Trustee may not
be removed by the Company.
(d) If the Trustee resigns after a Change of Control, as defined
herein, the Company shall apply to a court of competent jurisdiction for the
appointment of a successor the Trustee or for instructions.
(e) Upon resignation or removal of the Trustee and appointment of a
successor Trustee, all assets shall subsequently be transferred to the successor
Trustee. The transfer shall be completed within thirty (30) days after receipt
of notice of resignation, removal or transfer, unless the Company extends the
time limit.
(f) If the Trustee resigns or is removed, a successor shall be
appointed, in accordance with Section 10 hereof, by the effective date or
resignation or removal under paragraphs (a) or (b) of this section. If no such
appointment has been made, the Trustee may apply to a court of competent
jurisdiction for appointment of a successor or for instructions. All expenses of
the Trustee in connection with the proceeding shall be allowed as administrative
expenses of the Trust.
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SECTION 10.
APPOINTMENT OF SUCCESSOR
(a) If the Trustee resigns or is removed in accordance with Section
9(a) or 9(b) hereof, the Company may appoint any third party, such as a bank
trust department or other party that may be granted corporate trustee powers
under state law, as a successor to replace the Trustee upon resignation or
removal. The appointment shall be effective when accepted in writing by the new
Trustee, who shall have all of the rights and powers of the former Trustee,
including ownership rights in the Trust assets. The former Trustee shall execute
any instrument necessary or reasonably requested by Company or the successor
Trustee to evidence the transfer.
(b) The successor Trustee need not examine the records and acts of any
prior Trustee and may retain or dispose of existing Trust assets, subject to
Sections 6 and 7 hereof. The successor Trustee shall not be responsible for and
Company shall indemnify and defend the successor Trustee from any claim or
liability resulting from any action or inaction of any prior Trustee or from any
other past event, or any condition existing at the time it becomes successor
Trustee.
SECTION 11.
AMENDMENT OR TERMINATION
(a) This Trust Agreement may be amended by a written instrument
executed by the Trustee and the Company. Notwithstanding the foregoing, no such
amendment shall conflict with the terms of the Plan or shall make the Trust
revocable, or otherwise authorize the Trustee to transfer the assets of the
Trust to or for the benefit of the Company prior to the time all benefit
payments under the Plan have been made.
(b) The Trust shall not terminate until the date on which Plan
participants and their beneficiaries are no longer entitled to benefits pursuant
to the terms of the Plan. Upon termination of the Trust, any assets remaining in
the Trust shall be returned to the Company.
(c) Upon written approval of participants or beneficiaries entitled to
payment of benefits pursuant to the terms of the Plan, the Company may terminate
this Trust prior to the time all benefit payments under the Plan have been made.
All assets in the Trust at termination shall be returned to Company.
(d) Except as otherwise provided in Section 3 hereof, in the event
that a Change of Control shall occur with respect to the Company, as defined in
the Plan, the Trustees shall use the assets of the Trust to make payment of
benefits to the Plan Participants and their Beneficiaries in accordance with the
terms of the Plan as in effect prior to the Change in Control to the extent such
benefits are not paid by the Company.
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SECTION 12.
MISCELLANEOUS
( a) Any provision of this Trust Agreement prohibited by law shall be
ineffective to the extent of any such prohibition, without invalidating the
remaining provisions hereof.
( b) Benefits payable to Plan participants and their beneficiaries
under this Trust Agreement may not be anticipated, assigned (either at law or in
equity), alienated, pledged, encumbered or subjected to attachment, garnishment,
levy, execution or other legal or equitable process.
( c) This Trust Agreement shall be governed by and construed in
accordance with the laws of Michigan.
SECTION 13.
EFFECTIVE DATE
The effective date of this Trust Agreement shall be December 1, 1999.
APPLIED EXTRUSION TECHNOLOGIES,
INC., a Delaware corporation
/s/ GERALD M. HAINES II
------------------------------------
COMERICA BANK
By:
------------------------------------
8
<PAGE>
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-44449, 33-48841, and 333-78153 on Form S-8 of Applied Extrusion
Technologies, Inc. of our report dated November 19, 1999 (which expresses an
unqualified opinion and includes an explanatory paragraph relating to the
change in the method of accounting for start up costs in the year ended
September 30, 1998) appearing in the Annual Report on Form 10-K of Applied
Extrusion Technologies, Inc. for the year ended September 30, 1999.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
December 7, 1999
<PAGE>
Exhibit 24
POWER OF ATTORNEY
Each person whose signature appears below hereby authorizes and
constitutes Thomas E. Williams, and Anthony J. Allott, and each of them
singly, his true and lawful attorneys with full power to them, and each of
them singly, to sign on his behalf and in his name in the capacities
indicated below the Annual Report on Form 10-K of Applied Extrusion
Technologies, Inc. for the fiscal year ended September 30, 1999, and any and
all amendments to said Annual Report and to file the same, with exhibits
thereto, and other documents in connection therewith, and he hereby ratifies
and confirms his signature as it may be signed by said attorneys, or any of
them, to said Annual Report and any and all amendments thereto.
SIGNATURE CAPACITY IN WHICH SIGNED DATE
/s/ Amin J. Khoury Chairman of the Board and December 7, 1999
- ------------------ Director
Amin J. Khoury
/s/ Thomas E. Williams Director, President, and Chief December 7, 1999
- ---------------------- Executive Officer (principal
Thomas E. Williams executive officer
/s/ Paul W. Marshall Director December 7, 1999
- --------------------
Paul W. Marshall
/s/ Richard G. Hamermesh Director December 7, 1999
- ------------------------
Richard G. Hamermesh
/s/ Mark M. Harmeling Director December 7, 1999
- ---------------------
Mark M. Harmeling
/s/ Nader A. Golestaneh Director December 7, 1999
- -----------------------
Nader A. Golestaneh
/s/ Joseph J. O'Donnell Director December 7, 1999
- -----------------------
Joseph J. O'Donnell
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000874389
<NAME> APPLIED EXTRUSION TECHNOLOGIES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<CASH> 5,323
<SECURITIES> 0
<RECEIVABLES> 38,411
<ALLOWANCES> 1,554
<INVENTORY> 38,611
<CURRENT-ASSETS> 87,313
<PP&E> 342,276
<DEPRECIATION> 64,158
<TOTAL-ASSETS> 375,050
<CURRENT-LIABILITIES> 55,568
<BONDS> 182,500
0
0
<COMMON> 116
<OTHER-SE> 101,442
<TOTAL-LIABILITY-AND-EQUITY> 375,050
<SALES> 237,042
<TOTAL-REVENUES> 237,042
<CGS> 188,601
<TOTAL-COSTS> 188,601
<OTHER-EXPENSES> 36,097
<LOSS-PROVISION> 1,217
<INTEREST-EXPENSE> 18,909
<INCOME-PRETAX> (7,782)
<INCOME-TAX> (3,113)
<INCOME-CONTINUING> (4,669)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,669)
<EPS-BASIC> (.41)
<EPS-DILUTED> (.41)
</TABLE>
<PAGE>
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
<PAGE>
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
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, 1999, the ratio of the
Company's debt to total debt and stockholders' equity was approximately 65%. 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' 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
<PAGE>
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
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 48% in
fiscal 1999) 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
<PAGE>
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 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 87% 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 an average 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.
<PAGE>
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 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.
LABOR RELATIONS
The Company employs approximately 113 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.
