<PAGE>
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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, 2000
COMMISSION FILE NO. 0-19188
APPLIED EXTRUSION TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 51-0295865
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3 CENTENNIAL DRIVE, 01960
PEABODY, MASSACHUSETTS
(Address of principal executive (Zip Code)
offices)
</TABLE>
Registrant's telephone number, including area code: (978) 538-1500
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Name of Each Exchange
Title of Each Class On Which Registered
------------------- ---------------------
<S> <C>
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 $29,301,925 on December 6, 2000, 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
6, 2000 was 12,018,837 shares. The number of shares of the Registrant's Junior
Preferred Stock Purchase Rights outstanding as of December 6, 2000 was
12,018,837 shares.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated herein by reference:
Portions of the registrant's Proxy Statement to be filed with the Securities and
Exchange Commission in connection with the 2001 Annual Meeting of Stockholders
are incorporated by reference into Part III.
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<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Applied Extrusion Technologies, Inc. ("AET" or the "Company") is a leading
developer and manufacturer of highly specialized, single and multilayer oriented
polypropylene ("OPP") films 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 24 percent share of OPP production volume. AET is also one of the
largest producers of OPP films worldwide, with 240 million pounds of current
annual production capacity. 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(R) and Coca-Cola(R) plastic bottles,
Nestle's(R) 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(R)
snacks and Mars(R) and Hershey(R) candies. Overwrap applications for AET's OPP
films include clear protective films for British American Tobacco Products,
Lipton(R) tea bags and compact discs.
Over 90 percent of the Company's sales in fiscal 2000 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, 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. During the ramp-up of certain new production
capacity, AET sold a higher-than-normal percentage of price-sensitive products.
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 maximize profitability by continuing to
develop differentiated high-end products, migrating sales mix toward higher
margin products, and maximizing operating efficiencies to continually reduce
unit costs.
DIFFERENTIATED HIGH-END, HIGH MARGIN PRODUCTS
To maximize sales in high-end OPP film applications by aggressively developing a
differentiated product line, the Company consistently invests in developing new
product and process technology. In addition to expanding the size of its
research and development group in the past several years, the Company has
upgraded the capabilities of its pilot lines and laboratories, and established a
strong in-house analytical chemistry capability. The Company believes that a
continued high level of commitment to technology will continue to result in new,
differentiated products which are a significant competitive advantage for AET.
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The Company also actively seeks to increase its market share in existing
applications and to expand the OPP films market by replacing other packaging and
labeling traditional materials with OPP films. For example, the Company is
pursuing use of its label films for new applications such as roll-fed labels for
water bottles, coffee, soup and food cans, as well as pressure sensitive and cut
and stack labels for applications such as juices and personal care products,
which currently use paper or other materials. As the industry continues to shift
from paper to plastics, AET is well-positioned to take advantage of this growth.
MAXIMIZING OPERATING EFFICIENCIES
To become the largest and most efficient producer of a broad line of OPP films
in North America, AET increased capacity more than 60 percent between 1996 and
1998. The Company added its second eight-meter OPP films production line in 1996
and, in the spring of 1998, the Company added the world's first and only
ten-meter OPP films line. These newer and larger lines are significantly more
efficient, manufacturing up to four times as much OPP film as the prevalent
older lines in the industry, without a proportionate increase in number of
operators or power costs. As a result, the Company has significantly increased
its manufacturing capacity while dramatically lowering its costs through both
improved operating efficiencies and increased productivity.
AET operates the largest manufacturing site in the world in Terre Haute,
Indiana. Late in 1997 it reorganized this site and created four separate
operating plants, with separate plant managers directly accountable for the
productivity of the assets under their control. This new structure proved very
successful as operating efficiencies improved and manufacturing costs were
significantly reduced. In addition, in 1999 the Company reduced the operational
headcount of its Covington, Virginia plant, resulting in additional cost
savings.
INDUSTRY OVERVIEW
The Company competes principally in the specialty film segment of the
approximately $19.2 billion flexible packaging industry. In addition to
polypropylene, specialty films are manufactured from polyester, cellophane,
nylon, polystyrene and certain polyolefin compounds. According to the Flexible
Packaging Association, the overall North American specialty film segment of the
flexible packaging industry approximated $3 billion of shipments in calendar
year 1999, of which OPP films accounted for an estimated $940 million in
shipments.
North American demand for OPP films used in specialty applications has grown at
an average annual rate of approximately 6 percent from 1980 through 2000. The
Company believes that this growth is driven by a number of factors, including:
(i) the substitution of OPP films 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 of OPP film use in markets such as snack food,
confectionery, beverages, other consumer products, and carton closing
tape.
The Company believes that the industry has recently experienced one of its
lowest capacity utilization levels resulting from a significant increase in
production capacity from 1996 through 1998, as several major producers added
seven new lines. This has driven prices of OPP films downward and put
substantial pressure on margins. As it takes approximately two years to design
and install a new line, the Company believes that no significant capacity will
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.
The Company expects demand for OPP films to
2
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continue to grow at its average historical rate, resulting in a further
tightening of capacity utilization. As this occurs, 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 valued.
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 the
following four broad categories: barrier, clear/slip, opaque, and shrink films.
BARRIER - OPP films generally serve as the inner layer of flexible packaging
laminates and provide enhanced protection from moisture, light and air 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. High
barrier metallized barrier films provide an enhanced performance barrier for
snacks packaged in nitrogen gas to maintain freshness and extend shelf life.
Metallized films offer protection from light as well as enhanced appearance;
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. AET's unique tubular clear films are used in overwrap
applications for compact discs and DVD's, as well as overlaminate for bottle
labels.
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 80 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 and overwrap markets. Shrink label films shrink to the
contour of the container or box, permit superior graphics and offer maximum
labeling flexibility for cigarette packages and rigid contoured containers, such
as beverage and aerosol cans and glass and polyethylene bottles, increasing the
marketing appeal of such containers and eliminating the need for printing
directly on the container.
3
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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(R) product is used widely in health
care markets as a porous facing material for bandages. By permitting one-way
fluid flow and two-way airflow without adhering to the wound, Delnet(R) material
enhances the healing process. In the United States, most adhesive bandages,
including Johnson & Johnson BAND-AIDS(R), use Delnet(R) facing.
MARKETING AND CUSTOMERS
The Company's OPP films products are sold primarily through its direct sales
organization, whereby sales people, customers, end users, and the Company's
research and development scientists work together to create new films, as well
as new applications for OPP films. The Company's highly skilled sales force has
considerable technical expertise and industry experience. Their principal role
is to develop sales opportunities and provide customer support. AET's marketing
activities have historically been focused primarily in North and South America,
although the Company has a sales network covering 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 18 percent of sales in fiscal 2000 and 20 percent of sales in
fiscal 1999. 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 about the films used in their
labeling and packaging applications. The Company's sales and marketing efforts
and customer relationships are enhanced by the numerous customer-specific
technical approvals ("qualifications") 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
both tenter and tubular manufacturing capabilities.
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 (in
the transverse direction) 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 tenter lines, ranging from 5.5 to 10 meters, including two 8-meter
tenter production lines, as well as the world's only 10-meter OPP tenter line.
The tenter process is a more economical way than the tubular process to
manufacture thicker films.
4
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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 manufacture thinner films, while preserving clarity, machinability
and other performance characteristics of thicker film. These thinner films use
less materials, thereby improving performance relative to cost. The Company
currently operates nine tubular lines.
APERTURED FILM PROCESS
Delnet(R) 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(R) 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(R) and other products.
RESEARCH AND DEVELOPMENT
The Company conducts product and process research and development through a
staff of over 50 chemists, engineers and technicians. Consistent with AET's goal
of filling the Company's new manufacturing capacity with high-end films, the
research and development group introduced over 40 new or enhanced products in
the past three years. During fiscal 2000, 1999 and 1998, the Company spent
approximately $6.8 million, $7.1 million and $7.3 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 very cost-efficient material for packaging applications. In
addition, polypropylene possesses superior clarity and natural barrier
qualities, and can be modified to add other attributes or features such as
metallization, which make it a higher performing 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, as
evidenced by the market dynamics in the second half of fiscal 2000. Due to
industry-wide excess capacity, the increased resin costs were not fully covered
by price increases.
5
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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, foil, metal, glass 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 ExxonMobil Corporation, which is the second largest OPP films
manufacturer in North America, is the only other broad-line OPP film supplier
based in North America. There are approximately eight primary manufacturers of
OPP films in North America producing OPP films for resale; however, only
ExxonMobil 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 utilizing these products, primarily on the basis of quality,
performance and price. Delnet(R) 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(R) products.
The Company believes that it has certain competitive advantages in high margin,
value-added OPP and other 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 125 active patents and applications of
which approximately 62 relate to international patents and applications. AET
also has approximately 70 trademark registrations and applications, 12 of which
relate to international 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 1,100 full-time employees. Approximately 130
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, 2005. 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.
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ITEM 2. PROPERTIES
The following table provides information with respect to AET's facilities:
<TABLE>
<CAPTION>
OWNED/
LOCATION SQUARE FEET LEASED
-------- ----------- ------
<S> <C> <C> <C>
OPP FILMS Terre Haute, Indiana 821,000 Owned
Covington, Virginia 517,000 Owned
Varennes, Quebec, Canada 163,000 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 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 periodically 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.
ITEM 4a. EXECUTIVE OFFICERS
The executive officers of AET are as follows:
<TABLE>
<CAPTION>
EXECUTIVE OFFICER
NAME AGE POSITION SINCE
---- --- -------- -----
<S> <C> <C> <C>
Amin J. Khoury 61 Chairman of the Board (1) October 1986
Thomas E. Williams 54 President, Chief Executive Officer December 1992
and Director (2)
David N. Terhune 54 Executive Vice President and February 1994
Chief Operating Officer(3)
Mark S. Abrahams 49 Vice President and General Manager, December 1993
Specialty Nets & Nonwovens Division(4)
Anthony J. Allott 36 Senior Vice President, Chief Financial August 1994
Officer and Treasurer(5)
</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 Senior Vice
President, Chief Financial Officer and Treasurer 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 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 1972 until 1993, as Chief
Operating Officer for seven years and Chief Financial Officer for fourteen years
for five primarily public companies in the technology, banking, real estate,
food service and manufacturing industries.
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 - Senior 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.
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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 2001 Annual Meeting of Stockholders
is incorporated herein by reference.
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 2000 FISCAL YEAR 1999
HIGH LOW HIGH LOW
<S> <C> <C> <C> <C>
Quarter ended December 31 7 7/8 5 7/16 9 5/8 6 3/4
Quarter ended March 31 9 1/4 6 1/4 8 7/16 4 13/16
Quarter ended June 30 8 7/16 5 1/4 8 1/2 4 5/16
Quarter ended September 30 6 1/4 3 1/16 8 5/8 7 3/16
</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 6, 2000, there were approximately 107 holders of record and more than
3,500 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>
INCOME STATEMENT DATA: 2000 1999 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Sales $ 268,375 $ 237,042 $ 245,334 $ 262,271 $ 234,490
Cost of sales 215,256 188,601 195,174 205,037 181,899
----------- ---------- --------- ---------- ---------
Gross profit 53,119 48,441 50,160 57,234 52,591
Operating expenses:
Selling, general and administrative 27,152 26,550 23,754 23,819 20,144
Restructuring and impairment charges -- -- 21,506 4,500 --
Research and development 6,759 7,123 7,326 8,221 7,414
Start-up costs -- -- 1,539 -- --
----------- ---------- --------- ---------- ---------
Operating profit (loss) 19,208 14,768 (3,965) 20,694 25,033
Non-operating expenses:
Interest expense, net 21,096 18,909 15,868 16,868 13,927
Acquisition costs and other -- 3,641 250 1,500 --
----------- ---------- --------- ---------- ---------
Income (loss) before income taxes
and change in accounting (1,888) (7,782) (20,083) 2,326 11,106
Income tax expense (benefit) (679) (3,113) (8,033) 930 4,442
----------- ---------- --------- ---------- ---------
Income (loss) before change in
Accounting (1,209) (4,669) (12,050) 1,396 6,664
Change in accounting, net of related tax
benefits of $568 -- -- (852) -- --
----------- ---------- --------- ---------- ---------
Net income (loss) $ (1,209) $ (4,669) $ (12,902) $ 1,396 $ 6,664
=========== ========== ========= ========== =========
EARNINGS (LOSS) PER COMMON SHARE:
Basic:
Before change in accounting $ (.10) $ (.41) $ (1.11) $ 0.14 $ 0.66
Change in accounting -- -- (0.07) -- --
----------- ---------- --------- ---------- ---------
Net income (loss) $ (.10) $ (.41) $ (1.18) $ 0.14 $ 0.66
=========== ========== ========= ========== =========
Diluted:
Before change in accounting $ (.10) $ (.41) $ (1.11) $ 0.13 $ 0.63
Change in accounting -- -- (0.07) -- --
----------- ---------- --------- ---------- ---------
Net income (loss) $ (.10) $ (.41) $ (1.18) $ 0.13 $ 0.63
=========== ========== ========= ========== =========
BALANCE SHEET DATA:
Working capital $ 43,419 $ 27,918 $ 33,471 $ 33,600 $ 35,911
Total assets 389,250 375,050 370,726 376,493 331,704
Current portion of long-term debt -- -- -- 4,000 --
Long-term debt, less current portion 209,500 182,500 185,500 196,500 165,500
Stockholders' equity 99,913 99,041 100,437 112,183 108,335
</TABLE>
10
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The Company is the largest producer of oriented polypropylene (OPP) films in
North America. Consumer product companies worldwide use AET's OPP films in
labeling, packaging and overwrap applications that often require special
attributes such as high gloss, vivid graphics, exceptional clarity and barriers
to moisture, light and air 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
graphics and text 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, 2000, 1999 and 1998 are referred to as 2000, 1999 and 1998,
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
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Sales 100.0% 100.0% 100.0%
Cost of sales 80.2 79.6 79.6
Gross profit 19.8 20.4 20.4
Selling, general and administrative 10.1 11.2 9.7
Research and development 2.5 3.0 3.0
Operating profit (loss) 7.2 6.2 (1.6)
Interest expense, net 7.9 8.0 6.5
Net loss (0.5) (2.0) (5.3)
</TABLE>
FISCAL YEAR 2000 COMPARED WITH FISCAL YEAR 1999
Sales for fiscal 2000 of $268,375 were $31,333 or 13.2 percent higher than 1999
sales of $237,042 due to a 12.0 percent increase in OPP films sales volume
combined with higher average selling prices. Fiscal 2000 represents the first
year since 1995 where average selling prices increased, as the industry began
passing on a portion of higher raw material costs and industry overcapacity
continued to ease. Average annual OPP films industry demand growth of
approximately 6.0 percent continued to absorb excess industry capacity and
should encourage more favorable pricing beginning in 2001. Sales outside the
United States comprised 18.3 percent of total 2000 sales, and operating profit
for sales outside the United States was 4.6 percent of total operating profit.
Excluding temporary plant shutdown costs, gross profit for 2000 was $55,519, an
increase of $4,173 or 8.1 percent from the 1999 level of $51,346, while gross
margin declined from 21.7 percent of sales to 20.7 percent of sales due to
significantly higher raw material costs. The cost of polypropylene resin, the
Company's primary raw material, rose unexpectedly as a result of the dramatic
increase in the price of crude oil. Polypropylene resin prices increased over 30
percent in the past twelve months and 70 percent in the past eighteen months,
and only a small portion of these resin cost increases were successfully passed
on to the Company's customers in the form of price increases, due to the excess
capacity that still existed in the OPP films industry. The Company held firm on
a recent price increase, losing some sales volume. Therefore, the Company shut
down all OPP films operations for one week in September, resulting in $2.4
million of unabsorbed fixed costs incurred in the quarter.
11
<PAGE>
Research and development expense decreased by $364 to $6,759, or 2.5 percent of
sales in 2000, due primarily to differences in timing of research and
development spending between 1999 and 2000. The continued development and
commercialization of high-end films is core to the Company's strategy, and the
Company intends to continue investing approximately 2.5 to 3.0 percent of sales
in research and development.
Selling, general and administrative expenses of $27,152 in 2000 represented 10.1
percent of sales compared with $26,550 or 11.2 percent of sales in 1999 as the
Company held operating expenses to relatively constant levels despite
significant increases in volume manufactured and sold during the year. This
resulted in a 30.1 percent increase in operating profit from 1999 to 2000.
Net interest expense increased $2,187 to $21,096 in fiscal 2000, from $18,909 in
fiscal 1999 due to a higher average debt balance and higher interest rates on
the Credit Facility in 2000.
Income tax as a percentage of before tax income was 36 percent for 2000 and 40
percent for 1999. The lower percentage reflects the benefit of tax planning and
is expected to remain at this level for at least the next two years.
FISCAL YEAR 1999 COMPARED WITH FISCAL YEAR 1998
Sales for 1999 of $237,042 were $8,292, or 3.4 percent lower than 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 continued to grow, but industry overcapacity continued to exist in
the marketplace. Sales outside the United States 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, gross margin increased due to extensive productivity improvement
programs and continuing improvement in sales mix brought about by the
effectiveness of the research and development 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.
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.
12
<PAGE>
Implementation of this plan targeted eliminating a total of 200 positions and
the shutdown of the production lines. During 1999 the Company 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 were 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.
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 $90,000
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, 2000, AET had $53,000 outstanding under its Credit Facility and
another $12,435 in Letters of Credit, leaving $12,760 available for borrowing.
The Company also has $6,500 of Revenue Bonds outstanding, which are due November
4, 2004. On September 30, 2000, the Company and its banks amended the Credit
Facility, increasing the total amount available for borrowing from $80,000 to
$90,000, and modifying certain covenant requirements.
The Company plans to refinance the $150,000 Senior Notes which mature on April
7, 2002, in the latter half of fiscal 2001 or early fiscal 2002. If the Notes
are not refinanced by November 1, 2001, the $90,000 Credit Facility matures.
Otherwise, the Credit Facility matures on January 29, 2003. An inability to
refinance the Senior Notes prior to November 1, 2001 would have a materially
adverse effect on the financial condition and liquidity of the Company in fiscal
2002.
Operating activities in 2000 used $6,920 in cash, which was the result of
$11,843 of net income before depreciation and amortization and other non-cash
expenditures, and a $18,763 net increase in other working capital items. The
net increase in working capital resulted primarily from a $4,448 increase in
inventory, an $6,746 increase in accounts receivable, a $3,224 increase in
prepaid expenses and other assets, and decreases in accounts payable and
accrued expenses of $4,345. Interest paid during 2000 amounted to $21,888,
including capitalized interest. Additions to property, plant and equipment
were $22,096 and were funded in part by borrowings under the Credit Facility,
with the balance funded by available cash flow.
INFLATION
Management regularly reviews the prices charged for its products. When market
conditions allow, price 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, as evidenced by the market dynamics in the
second half of fiscal 2000 when the price of polypropylene resin significantly
increased due to the rising price of crude oil. During that period, AET was only
able to pass on a portion of the cost increase to customers due to overcapacity
in the OPP films market.
13
<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, although actual results can be influenced by numerous
factors, such as raw material costs, competitive prices and other matters
discussed in this report.
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,
2000 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 had entered into foreign exchange contracts, the last of which
expired in May 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 were deferred and reported as part of
capitalized assets. At September 30, 2000, the Company had no outstanding
foreign exchange contracts. The Company does not enter into foreign exchange
contracts for trading or speculative 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, 2000, the Company had no short-term
debt outstanding and had long-term debt outstanding of $209,500 million, of
which $53 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, 2000, interest expense incurred on the Revolving Credit Facility
would increase or decrease by approximately $646.
The Company does not enter into financial instrument transactions for trading or
other speculative purposes or to manage interest rate exposure.
14
<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.
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 7-8 of this report.
The directors of AET are as follows:
<TABLE>
<CAPTION>
DIRECTOR NAME AGE POSITION SINCE
------------- --- -------- -----
<S> <C> <C> <C>
Amin J. Khoury 61 Chairman of the Board October 1986
Thomas E. Williams 54 President, Chief Executive Officer December 1992
and Director
Nader A. Golestaneh+ 40 Director October 1986
Richard G. Hamermesh* 52 Director October 1986
Mark M. Harmeling+ 47 Director October 1986
Paul W. Marshall 58 Director October 1986
Joseph J. O'Donnell* 56 Director October 1986
</TABLE>
-----------------
* Member Audit Committee
+ Member Stock Option and Compensation Committee
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.
15
<PAGE>
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.
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 2001 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 2001 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 2001 Annual Meeting of
Stockholders is incorporated herein by reference.
16
<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, 2000 and 1999
Consolidated Statements of Operations for the Years Ended September 30,
2000, 1999 and 1998
Consolidated Statements of Stockholders' Equity for the Years
Ended September 30, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the Years Ended September 30, 2000,
1999 and 1998
Notes to Consolidated Financial Statements
FINANCIAL STATEMENT SCHEDULES
Schedule II - Valuation and Qualifying Accounts for the Years Ended September
30, 2000, 1999 and 1998
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.
3.1.1(f) Amendment dated February 26, 1992 to Amended and Restated Certificate of Incorporation.
3.1.2(h) Amendment dated March 21, 1999 to Amended and Restated Certificate of Incorporation.
3.2(f) 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(h) Rights Agreement dated as of March 2, 1998 between the Company and BankBoston, N.A., as Rights Agent.
10.1(h) Amended and Restated Credit Agreement dated as of March 15, 1999 between the Registrant
and The Chase Manhattan Bank as Administrative Agent.
10.1.1(h) Amendment No. 1 dated as of April 23, 1999 to the Amended and Restated Credit Agreement dated as of March 15, 1999.
10.1.2(j) Amended and Restated Credit Agreement dated as of April 12, 2000.
10.1.3* Amended and Restated Credit Agreement dated as of September 30, 2000.
10.2(b) 1986 Stock Option Plan, as amended.
10.3(e) Amendment dated December 7, 1999 to the 1986 Stock Option Plan.
10.4(c) 1991 Stock Option Plan, as amended.
10.5(e) Amendment dated December 7, 1999 to the 1991 Stock Option Plan.
10.6(b) 1991 Stock Option Plan for Directors, as amended.
10.7(e) Amendment dated August 4, 1999 to the 1991 Stock Option Plan for Directors, as amended.
10.8(d) 1994 Stock Option Plan, as amended.
10.9(e) Amendment dated December 7, 1999 to the 1994 Stock Option Plan.
17
<PAGE>
<S> <C>
10.10(i) Employment Agreement dated as of April 1, 1999 between the Registrant and Mark S. Abrahams.
10.11(i) Employment Agreement dated as of April 1, 1999 between the Registrant and David N. Terhune.
10.12(i) Employment Agreement dated as of April 1, 1999 between the Registrant and Amin J. Khoury.
10.13(i) Employment Agreement dated as of April 1, 1999 between the Registrant and Thomas E. Williams.
10.14(i) Employment Agreement dated as of April 1, 1999 between the Registrant and Anthony J. Allott.
10.15(h) Amended and Restated Executive Deferred Compensation Plan dated December 31, 1999.
10.16(e) 1999 Supplemental Executive Retirement Plan dated November 30, 1999.
10.17(e) 1999 Deferred Compensation Trust dated November 30, 1999.
10.18.1(g) Equipment Lease Agreement dated as of December 29, 1997 between Registrant and Lasalle National Leasing Corporation.
10.18.2(i) Letter Agreement dated April 28,1999 amending Equipment Lease Agreement dated as of December 29,1997.
10.19(g) 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.
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, 1999.
(f) Contained in Exhibits to the Registrant's Form 10-Q for the fiscal quarter
ended December 31, 1997.
(g) Contained in Exhibits to the Registrant's Form 10-Q for the fiscal quarter
ended June 30,1998.
(h) Contained in Exhibits to the Registrant's Form 10-Q for the fiscal quarter
ended December 31, 1999.
(i) Contained in Exhibits to the Registrant's Form 10-Q for the fiscal quarter
ended March 31, 1999.
(j) Contained in Exhibits to the Registrant's Form 10-Q for the fiscal quarter
ended December 31, 1999.
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.
18
<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, Senior Vice President,
Chief Financial Officer and Treasurer
December 6, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons in the capacities and on the
dates indicated:
<TABLE>
<S> <C>>
/s/ Amin J. Khoury /s/ Nader A. Golestaneh
------------------------------------------- -----------------------------------------
Amin J. Khoury, Chairman of the Board Nader A. Golestaneh, Director
December 6, 2000 December 6, 2000
/s/ Thomas E. Williams /s/ Joseph J. O'Donnell
------------------------------------------- -----------------------------------------
Thomas E. Williams, President Joseph J. O'Donnell, Director
Chief Executive Officer and Director December 6, 2000
December 6, 2000
/s/ Paul W. Marshall /s/Richard G. Hamermesh
------------------------------------------- -----------------------------------------
Paul W. Marshall, Director Richard G. Hamermesh, Director
December 6, 2000 December 6, 2000
/s/ Mark M. Harmeling /s/ Anthony J. Allott
------------------------------------------- -----------------------------------------
Mark M. Harmeling, Director Anthony J. Allott, Senior Vice President,
December 6, 2000 Chief Financial Officer and Treasurer
December 6, 2000
</TABLE>
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
<TABLE>
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets, September 30, 2000 and 1999........................ F-2
Consolidated Statements of Operations for the Years Ended
September 30, 2000, 1999 and 1998........................................... F-3
Consolidated Statements of Stockholders' Equity for the
Years Ended September 30, 2000, 1999 and 1998............................... F-4
Consolidated Statements of Cash Flows for the Years
Ended September 30, 2000, 1999 and 1998..................................... F-5
Notes to Consolidated Financial Statements...................................... F-6
FINANCIAL STATEMENT SCHEDULE:
Schedule II - Valuation and Qualifying Accounts for the
Years Ended September 30, 2000, 1999 and 1998............................... F-18
INDEPENDENT AUDITORS' REPORT.................................................... F-19
</TABLE>
F-1
<PAGE>
APPLIED EXTRUSION TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000 AND 1999
(In thousands)
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,265 $ 5,323
Accounts receivable, net of allowance for doubtful
accounts of $1,856 and $1,554 at September 30,
2000 and 1999, respectively 43,131 36,857
Inventory 43,059 38,611
Prepaid expenses 3,124 962
Deferred taxes 5,889 5,560
--------- ----------
Total current assets 98,468 87,313
Property, plant and equipment, net 280,300 278,118
Intangibles and deferred finance charges, net 2,372 3,035
Long-term note receivable and other assets 8,110 6,584
--------- ----------
$ 389,250 $ 375,050
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Current liabilities:
Accounts payable $ 17,862 $ 18,144
Accrued interest 9,971 9,113
Accrued expenses 27,216 32,138
--------- ----------
Total current liabilities 55,049 59,395
Long-term debt 209,500 182,500
Deferred taxes 2,922 1,914
Long-term liabilities and other credits 21,866 32,200
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,
12,019 and 11,575 shares issued at September 30, 2000
and 1999, respectively 120 116
Additional paid-in capital 100,266 97,701
Retained earnings 4,060 5,269
Accumulated other comprehensive loss (2,277) (1,528)
--------- ----------
102,169 101,558
Treasury stock, at cost, and other - 248 and 247 shares
at September 30, 2000 and 1999, respectively (2,256) (2,517)
--------- ----------
Total stockholders' equity 99,913 99,041
--------- ----------
$ 389,250 $ 375,050
========= ==========
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
APPLIED EXTRUSION TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
SALES $ 268,375 $ 237,042 $ 245,334
COST OF SALES 215,256 188,601 195,174
--------- --------- ---------
GROSS PROFIT 53,119 48,441 50,160
OPERATING EXPENSES:
Selling, general and administrative 27,152 26,550 23,754
Research and development 6,759 7,123 7,326
Restructuring and impairment charges -- -- 21,506
Start-up costs -- -- 1,539
--------- --------- ---------
Total operating expenses 33,911 33,673 54,125
--------- --------- ---------
OPERATING PROFIT (LOSS) 19,208 14,768 (3,965)
NON-OPERATING EXPENSES:
Interest expense, net 21,096 18,909 15,868
Acquisition costs and other -- 3,641 250
--------- --------- ---------
Total non-operating expenses 21,096 22,550 16,118
--------- --------- ---------
Loss before income taxes and change
in accounting (1,888) (7,782) (20,083)
Income tax benefit (679) (3,113) (8,033)
--------- --------- ---------
Loss before change in accounting (1,209) (4,669) (12,050)
Change in accounting, net of related tax
benefits of $568 -- -- (852)
--------- --------- ---------
NET LOSS $ (1,209) $ (4,669) $ (12,902)
========= ========= =========
LOSS PER COMMON SHARE:
Basic:
Before change in accounting $ (0.10) $ (0.41) $ (1.11)
Change in accounting -- -- (0.07)
--------- --------- ---------
Net loss $ (0.10) $ (0.41) $ (1.18)
========= ========= =========
Diluted:
Before change in accounting $ (0.10) $ (0.41) $ (1.11)
Change in accounting -- -- (0.07)
--------- --------- ---------
Net loss $ (0.10) $ (0.41) $ (1.18)
========= ========= =========
AVERAGE COMMON AND POTENTIAL COMMON
SHARES OUTSTANDING:
Basic and Diluted 11,700 11,282 10,893
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
APPLIED EXTRUSION TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
(In thousands)
<TABLE>
<CAPTION>
Accumulated
Voting Additional Other
Common Stock Paid-in Retained Comprehensive Comprehensive Treasury
Shares Amount Capital Earnings Income (Loss) Loss Stock
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, OCTOBER 1, 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)
Tax benefits of early
disposition of
stock options 80
-------- ------- --------- --------- --------- ----------- ---------
Comprehensive loss $ (14,334)
===========
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
purchases 64 1 399
Treasury shares and other 113
Exercise of stock options 53 354
Exchange rate changes 868 868
Tax benefits of early
disposition of
stock options 24
-------- ------- --------- --------- --------- ----------- ---------
Comprehensive loss $ (3,801)
===========
BALANCE, SEPTEMBER 30, 1999 11,575 116 97,701 5,269 (1,528) (2,517)
Net loss (1,209) $ (1,209)
Profit sharing contribution 98 1 575
Stock issued for 401(k)
match 216 2 1,286
Stock issued for employee
purchases 93 1 445
Treasury shares and other 261
Exercise of stock options 37 253
Exchange rate changes (749) (749)
Tax benefits of early
disposition of
stock options 6
-------- ------- --------- --------- --------- ----------- ---------
Comprehensive loss $ (1,958)
===========
BALANCE, SEPTEMBER 30, 2000 12,019 $ 120 $ 100,266 $ 4,060 $ (2,277) $ (2,256)
======== ======== ========== ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
APPLIED EXTRUSION TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
(In thousands)
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (1,209) $(4,669) $ (12,902)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization expense 21,025 19,484 17,773
Restructuring charges -- -- 18,580
Asset impairments -- -- 2,926
Stock issued for retirement plans 1,861 1,513 2,270
Provision for doubtful accounts 472 1,217 832
Deferred income taxes and other credits (10,306) (10,526) (25,291)
Change in accounting -- -- 852
Changes in assets and liabilities which provided
(used) cash:
Prepaid expenses and other current assets (3,224) (1,900) (58)
Accounts payable and accrued expenses (4,345) 4,037 (2,797)
Accounts receivable and inventory (11,194) 1,398 (12,549)
--------- ------- ----------
Net cash (used in) provided by operating
activities (6,920) 10,554 (10,364)
INVESTING ACTIVITIES:
Additions to property, plant and equipment, net (22,096) (22,781) (45,496)
Proceeds from sale of assets -- -- 26,500
Proceeds from sale-leaseback transactions -- 29,940 44,625
Acquisition of AEP assets -- (13,316) --
--------- ------- ----------
Net cash (used in) provided by investing
activities (22,096) (6,157) 25,629
FINANCING ACTIVITIES:
Borrowings (repayments) under Credit Facility, net 27,000 (3,000) (15,000)
Proceeds from issuance of stock, net 707 779 1,202
--------- ------- ----------
Net cash provided by (used in) financing
activities 27,707 (2,221) (13,798)
Effect of exchange rate changes on cash (749) 868 (2,242)
--------- ------- ----------
(Decrease) increase in cash and cash equivalents, net (2,058) 3,044 (775)
Cash and cash equivalents, beginning 5,323 2,279 3,054
--------- ------- ----------
Cash and cash equivalents, ending $ 3,265 $ 5,323 $ 2,279
========= ======= ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest, including capitalized interest of
$2,442, $3,050 and $6,098, respectively $ 21,888 $21,058 $ 21,467
Income taxes 210 -- 3,000
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
APPLIED EXTRUSION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
(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.
PRINCIPLES OF CONSOLIDATION. The accompanying consolidated financial statements
include the accounts of Applied Extrusion Technologies, Inc. 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 accounting
principles generally accepted in the United States of America. 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 accounting principles
generally accepted in the United States of America 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
approximate fair value. At September 30, 2000 and 1999, 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 to 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.
F-6
<PAGE>
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 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, and then are recorded as part of capitalized assets.
EARNINGS PER SHARE. Basic loss per share is based on the weighted-average shares
outstanding during each reporting period. Diluted 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 (LOSS). 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, 2000, 1999
and 1998, the cumulative translation adjustment was ($2,277), ($1,528) and
($2,396), respectively, and comprehensive loss was ($1,958), ($3,801), and
($14,334), respectively.
CERTAIN NEW ACCOUNTING PRONOUNCEMENTS were recently issued which will be
effective in fiscal years beginning after September 30, 2000. 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. The Company does not expect
adoption of this statement to have a material impact on the Company's financial
statements.
In December 1999, the Securities and Exchange Commission ("SEC") released Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements," which sets forth the SEC's view on appropriate revenue recognition
practices. The Company believes that its current revenue recognition practices
are in accordance with accounting principles generally accepted in the United
States of America and does not expect any impact when the bulletin becomes
effective.
F-7
<PAGE>
2. INVENTORY
Inventory consisted of the following at September 30:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Raw materials......................... $9,336 $ 7,191
Finished goods........................ 33,723 31,420
------ -------
$43,059 $38,611
</TABLE>
3. PROPERTY, PLANT, EQUIPMENT AND LEASE COMMITMENTS
Property, plant and equipment consisted of the following at September 30:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Land...................................... $ 1,778 $ 1,783
Buildings and improvements................ 45,649 45,437
Machinery and equipment................... 277,983 253,688
-------- --------
325,410 300,908
Less accumulated depreciation............. 82,751 64,158
-------- --------
242,659 236,750
Machinery and equipment in progress....... 37,641 41,368
-------- --------
$280,300 $278,118
======== ========
</TABLE>
Approximately $36,718 of fixed assets are located outside of the United States.
Depreciation expense for the years ended September 30, 2000, 1999 and 1998 was
$18,593, $18,465, and $16,718, 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.
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
Credit Facility.
The Company completed a sale-leaseback transaction in January 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 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
F-8
<PAGE>
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 Credit Facility.
At September 30, 2000 and September 30, 1999, there was $9,424 and $22,770,
respectively, of deferred gain related to sale-leaseback transactions which is
recorded in deferred taxes and other credits.
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 ended September 30, 2000, 1999 and 1998 was
approximately $10,487, $10,043 and $5,343, respectively.
The minimum annual rental commitments under noncancellable operating leases are
as follows for each of the five years subsequent to September 30, 2000:
<TABLE>
<S> <C>
2001.................... $14,419
2002.................... 14,099
2003.................... 13,565
2004.................... 10,488
2005.................... 1,687
-------
$54,258
=======
</TABLE>
4. INTANGIBLES AND DEFERRED FINANCE CHARGES
Intangibles and deferred finance charges consisted of the following at September
30:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Deferred financing charges................. $1,809 $2,307
Intellectual property...................... 1,611 1,611
------ ------
3,420 3,918
Less accumulated amortization................... 1,048 883
------ ------
$2,372 $3,035
====== ======
</TABLE>
5. LONG-TERM DEBT
Long-term debt consisted of the following at September 30:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Industrial Revenue Bond payable November 4, 2004 at
5.25% effective rate at September 30, 2000. $ 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 $80,000 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, 2000 were: $18,000 at 9.57%, $15,000 at 9.60% and $5,000 at
9.69%. Prime-based borrowings were $15,000 at an
effective interest rate of 10.5%. 53,000 26,000
-------- --------
209,500 182,500
Less current portion -- --
======== ========
Total long-term debt $209,500 $182,500
======== ========
</TABLE>
F-9
<PAGE>
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 and
April 2000, at which time the revolving credit facility was increased to
$80,000. In September 2000 the Credit Facility was further amended to increase
the Credit Facility to $90,000 and to modify certain covenant requirements. 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 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, 2000 is as
follows:
<TABLE>
<S> <C>
2001 ........................................................................ $ --
2002 ........................................................................ 150,000
2003 ........................................................................ --
2004 ........................................................................ --
2005 ........................................................................ 6,500
--------
$156,500
========
</TABLE>
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accrued expenses consisted of the following at September 30:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Accrued restructuring.......................................... $ 2,172 $ 2,834
Payroll & benefits.............................................. 5,524 8,528
Market development........................................... 4,252 4,180
Taxes and other................................................ 15,268 16,596
---------- -----------
$ 27,216 $ 32,138
========== ===========
</TABLE>
Included in accounts payable are outstanding checks of $4,435 and $5,914 at
September 30, 2000 and 1999, respectively. In addition, approximately $7,615 and
$9,410 of accrued restructuring costs are included in deferred taxes and other
credits at September 30, 2000 and 1999, respectively, which represents the
portion of the 1998 restructuring charge, consisting primarily of lease costs
which will be paid out in future years.
F-10
<PAGE>
7. INCOME TAXES
The provision for income taxes consisted of the following for the years ended
September 30:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Current:
U.S. Federal.................................... $ -- $ -- $ 2,623
State........................................... -- -- --
------ ------- -------
-- -- 2,623
Deferred:
U.S. Federal.................................... (642) (2,724) (9,323)
State........................................... (37) (389) (1,333)
------ ------- -------
Total........................................... $ (679) $(3,113) $(8,033)
====== ====== =======
</TABLE>
Approximately $568 of deferred tax benefit was recognized in fiscal 1998 in
connection with the change in accounting described in Note 11.
The components of the net deferred tax asset were as follows at September 30:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Current Deferred Tax:
Accounts receivable............................... $ 421 $ 232
Inventory......................................... 3,274 2,806
Other assets...................................... (6) (6)
Other liabilities................................. 2,325 2,654
Valuation allowance............................... (125) (126)
--------- ---------
Net Current Deferred Tax Asset................ 5,889 5,560
--------- ---------
Non Current Deferred Tax:
Property, plant and equipment..................... (42,470) (40,798)
Other assets...................................... 5,904 13,296
Other liabilities................................. 145 (69)
Tax credits and loss carryforwards................ 33,808 25,966
Valuation allowance............................... (309) (309)
-------- ---------
Net Non-Current Deferred Tax Liability........ (2,922) (1,914)
-------- ---------
Total Net Deferred Tax Asset.......................... $ 2,967 $ 3,646
======== =========
</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, 2000, the Company has, for income tax reporting purposes,
federal net operating loss carryforwards of $79,609 (expiration commencing in
2005 through 2019) and state net operating loss carryforwards of $76,314
(limited by certain state tax statutes and expiration). The Company also has
research and development credit carryforwards of $443, alternative minimum tax
credit carryforwards of $4,717 and state investment tax credits of $319
(expiration commencing in 2005).
F-11
<PAGE>
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, 2000, 1999
and 1998 is as follows:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <S> <C> <C>
Statutory tax rate.................................. 35.0% 35.0% 35.0%
State income taxes, net of federal tax benefits..... 3.4% 3.8% 4.9%
Other, net.......................................... (2.4%) 1.2% .1%
----- ---- ----
36.0% 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.
The Company has 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 92,844 shares were purchased under this Plan in fiscal
2000, and at September 30, 2000, 153,999 shares were available under the Plan
for future purchases.
A total of 65,666 shares are held into treasury under a deferred compensation
plan, in addition to participant-directed investments in mutual funds of $4,618
and $3,377 at September 30, 2000 and September 30, 1999, respectively, which are
carried in other assets. The corresponding obligation under the deferred
compensation plan of $4,827 and $3,847 at September 30, 2000 and September 30,
1999, respectively, is recorded in long-term liabilities and other credits.
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, 2000, there were 11,836,036 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, 2000, an aggregate of
approximately 4,136,000 shares were reserved for issuance under the plans.
F-12
<PAGE>
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 2000,
1999 and 1998, the Company's fiscal 2000, 1999 and 1998 net loss and loss per
share on a pro forma basis would have been as follows:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Net Loss:
As reported.............................. $ (1,209) $ (4,669) $(12,902)
Pro forma................................ (2,937) (5,889) (13,743)
Basic Loss per Share:
As reported.............................. (.10) (.41) (1.18)
Pro forma................................ (.25) (.52) (1.26)
Diluted Loss per Share:
As reported.............................. (.10) (.41) (1.18)
Pro forma................................ (.25) (.52) (1.26)
</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 2000, 1999 and 1998: expected volatility ranging
from 59 to 56 percent, risk-free interest rates of 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 $5.89, $3.99 and $5.60 for 2000, 1999 and
1998 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 September 30, 1997 2,334,250 $1.000-14.875 $ 7.61 1,247,625
=========
Granted 520,250 6.750-9.000 7.27
Exercised (91,750) 1.000-8.375 6.28
Canceled (65,125) 1.000-14.875 9.00
-----------
As of September 30, 1998 2,697,625 4.630-14.875 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 4.630-14.815 7.32 2,130,993
=========
Granted 598,750 4.563-8.500 7.74
Exercised (37,250) 6.625-7.250 6.81
Canceled (45,750) 5.563-9.000 6.98
-----------
As of September 30, 2000 3,619,625 $4.563-14.875 $ 7.39 2,442,750
=========== =========
</TABLE>
F-13
<PAGE>
The following table summarizes information regarding stock options outstanding
at September 30, 2000:
<TABLE>
<CAPTION>
OPTIONS
OPTIONS OUTSTANDING EXERCISABLE
------------------------------------------- -------------------------------
WEIGHTED-AVERAGE WEIGHTED-
OUTSTANDING REMAINING AVERAGE EXERCISABLE WEIGHTED-AVERAGE
RANGE OF AS OF CONTRACTUAL EXERCISE AS OF EXERCISE
EXERCISE PRICE 09/30/00 LIFE IN YEARS PRICE 09/30/00 PRICE
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 1.00-5.00 188,000 3.5 $4.7846 180,000 $ 4.7944
5.01-7.50 1,663,625 5.1 6.4201 1,119,375 6.5362
7.51-10.00 1,653,875 6.1 8.3066 1,044,000 8.4373
10.01-12.50 60,375 6.4 11.5362 45,625 11.5315
12.51-15.00 53,750 5.2 13.8372 53,750 13.8372
----------- -----------
3,619,625 5.5 $7.3926 2,442,750 $ 7.4743
=========== ===========
</TABLE>
10. EARNINGS PER SHARE
A reconciliation of shares used in the computation of basic and diluted loss per
share is as follows for the years ended September 30:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Shares for basic computation............................ 11,700,000 11,282,000 10,893,000
Potential shares from options........................... -- -- --
---------- ---------- ----------
Shares for diluted computation.......................... 11,700,000 11,282,000 10,893,000
========== ========== ==========
</TABLE>
In 2000, 1999 and 1998, 129,000, 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 anti-dilutive.
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 was 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.
F-14
<PAGE>
13. COMMITMENTS AND CONTINGENCIES
The Company had entered into foreign exchange contracts, the last of which
expired in May 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 were deferred and included as part of
capitalized assets. At September 30, 2000, the Company had no outstanding
foreign exchange contracts. The Company does not enter into foreign exchange
contracts for trading or speculative purposes.
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.
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 leased equipment, $4,100 in severance and
outplacement costs, and $2,390 in other charges. At September 30, 2000,
approximately $8,793 of these restructuring costs had been paid.
Implementation of this plan is completed, with a total of 181 positions
eliminated and the shutdown of the production lines now complete. Since
September 1998, the Company has paid out $1,800 on leases related to idled
equipment, $4,516 in severance or outplacement costs and $2,477 in other
restructuring costs, resulting in an accrued restructuring balance of $9,787 at
September 30, 2000 which 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.
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 which are fully accrued in the accompanying consolidated
financial statements. The plan also provides for profit sharing contributions at
the discretion of the Board of Directors. Aggregate contributions were made with
Company stock valued at $1,861, $1,058, and $2,270 in 2000, 1999, and 1998,
respectively.
The Company has a non-qualified deferred compensation plan for certain
management 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
F-15
<PAGE>
retirement. Additionally, the Company implemented a plan for certain other
management employees whereby an annual contribution of 7.5 percent of the
employee's prior year compensation is made to the plan. During fiscal 2000,
approximately $500 was contributed to this plan.
16. 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 market, consumer product 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 18 percent of sales in fiscal 2000, 20 percent of
sales in 1999 and 18 percent of sales in 1998, with no other customer accounting
for more than 10 percent of sales in 2000, 1999 or 1998.
Information by geographic location was as follows for the years ended September
30:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Sales:
United States........................................... $219,295 $192,627 $200,684
Foreign................................................ 49,080 44,415 44,650
-------- -------- --------
$268,375 $237,042 $245,334
======== ======== ========
Operating profit (exclusive of restructuring and
impairment charges and write off of start-up costs):
United States.......................................... $ 18,324 $ 11,902 $ 16,313
Foreign................................................ 884 2,866 2,767
-------- -------- --------
$ 19,208 $ 14,768 $ 19,080
======== ======== ========
</TABLE>
No individual country, other than the United States, comprised more than 10
percent of consolidated sales or operating profit.
F-16
<PAGE>
17. SELECTED QUARTERLY DATA (UNAUDITED)
Summarized quarterly financial data for fiscal 2000, 1999 and 1998 were as
follows:
<TABLE>
<CAPTION>
EARNINGS (LOSS) EARNINGS (LOSS)
NET NET INCOME PER SHARE PER SHARE
SALES GROSS PROFIT (LOSS) BASIC(A) DILUTED (A)
------- ------------ ---------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
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(b) 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
September 30, 2000
1st quarter $60,151 $14,876 $ 1,158 $ .10 $ .10
2nd quarter 68,745 16,787 1,803 .15 .15
3rd quarter 73,700 14,302 21 .00 .00
4th quarter 65,779 7,154 (4,191) (.35) (.35)
</TABLE>
------------------------------------------
(a) Earnings (Loss) Per Share is presented before change in accounting.
(b) The Company implemented a restructuring plan in the fourth quarter of 1998
and recorded a charge of $18,580 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, 2000, 1999 AND 1998
(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:
2000 $1,554 $ 472 $ 170 $ 1,856
1999 1,056 1,217 719 1,554
1998 745 832 521 1,056
</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, 2000 and
1999, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended September
30, 2000. 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 auditing standards generally accepted
in the United States of America. 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, 2000 and 1999, and the results of
their operations and their cash flows for each of the three years in the period
ended September 30, 2000, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, such financial
statement schedules, 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 13, 2000
