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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, 2001
Commission File No. 0-19188
APPLIED EXTRUSION TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 51-0295865
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3 Centennial Drive
Peabody, Massachusetts 01960
(978) 538-1500
(Address, including zip code and telephone number, of principal executive
offices)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class On Which Registered
------------------- --------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
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 $94,960,069 on December 3, 2001, 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
3, 2001 was 12,797,853 shares. The number of shares of the Registrant's Junior
Preferred Stock Purchase Rights outstanding as of December 3, 2001 was
12,797,853 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 2002 Annual Meeting of Stockholders
are incorporated by reference into Part III.
FORM 10-K INDEX
PART I
Item 1. Business ...................................................................... 1
Item 2. Properties .................................................................... 9
Item 3. Legal Proceedings ............................................................. 9
Item 4. Submission of Matters to a Vote of Security Holders ........................... 9
Item 4a. Executive Officers ............................................................ 10
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters ..... 12
Item 6. Selected Financial Data ....................................................... 13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation ...................................................... 14
Item 7a. Quantitative and Qualitative Disclosures about Market Risk .................... 17
Item 8. Financial Statements and Supplementary Data ................................... 18
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ...................................................... 18
PART III
Item 10. Directors and Executive Officers of the Registrant ............................ 19
Item 11. Executive Compensation ........................................................ 20
Item 12. Security Ownership of Certain Beneficial Owners and Management ................ 20
Item 13. Certain Relationships and Related Transactions ................................ 20
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8K ................ 21
Signatures .................................................................... 24
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PART I
ITEM 1. BUSINESS
General
Applied Extrusion Technologies, Inc. ("AET" or the "Company") is the largest
North American manufacturer and seller of highly specialized oriented
polypropylene films, or OPP films, which are used primarily in consumer product
labeling, flexible packaging, overwrap and industrial applications. AET has a
leading position in most of the major high-end OPP films end-use product
categories in North America. In addition, the Company believes that it is the
number one or two supplier in North America of OPP films used for labels on
bottles and cans, packaging for confectionery and snack foods, and overwrap for
a number of other consumer products. AET estimates that it currently has the
leading share, at approximately 25 percent, of North American OPP films capacity
and approximately 30 percent of the total sales in this market based on volumes
for 2000, and is one of the largest producers of OPP films worldwide.
AET offers one of the most extensive product lines in the OPP films industry
ranging from high-margin, specialized labels and high barrier films to basic
heat sealable lower barrier films. With an experienced technology group and
state-of-the-art production facilities, the Company works directly with its
customers to develop innovative products to meet their specialized requirements.
AET believes that its combination of leadership position, innovative
capabilities, strong sales force and highly efficient manufacturing will allow
it to achieve future growth and profitability.
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. Our OPP films product line is
classified into four categories - labels, packaging, overwrap and industrial.
Our labels are used on soft drink containers for Coca-Cola(R) and Pepsi-Cola(R).
Our packaging applications are used for food products produced by Frito-Lay(R),
Nabisco(R), Kellogg's(R) and Hershey(R) Foods. Our overwrap products are used by
companies such as Sony(R) and Lipton(R).
Business Strategy
AET's business strategy is to maintain a leadership position in the OPP films
industry and maximize profitability by continuing to:
Focus on Developing Innovative Products
AET intends to continue its extensive research and development efforts and
consistent investment in product and process technologies to create superior
films for both existing packaging and labeling applications and to take
advantage of the industry trend to substitute OPP films for other label and
packaging materials. For example, the Company is developing new films for
pressure sensitive and cut-and-stack labels to be used on products such as beer
and water bottles, food cans, and other products that have traditionally used
other packaging materials. It is also starting to produce films for lamination
to paperboard containers in order to provide enhanced graphic and holographic
capabilities, and has developed films used to package fresh-cut produce that
increase shelf life by allowing vegetables to "breathe" at controlled rates.
Innovations such as these, along with the cost competitive nature of
polypropylene compared to other plastics, have historically driven, and will
continue to drive, the substitution of OPP films for materials ranging from
cellophane, polyester and polyethylene films to paper and printing on cans,
significantly expanding the demand for OPP films.
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Increase Our High-End Product Mix
AET has historically focused on the identification and development of innovative
products that it believes have higher margins. As a result, the majority of the
Company's sales volume has historically been in high-end, high margin markets
with only a minor portion of sales volume in low margin, sealable film products.
With the rapid expansion of our capacity over the past four years, sales of
these low-margin film products have increased to nearly a quarter of sales
volume, as the Company focused on minimizing the price impact of its capacity
expansion efforts in the high end markets. Notwithstanding this, during this
same period, AET's high-end sales grew at a nearly seven percent compounded
annual growth rate. This growth rate, which exceeds the over six percent
compounded annual growth rate experienced by the industry historically, results
from the focus on continuing to expand these high-end applications. The
Company's current strategy is to continue to grow sales in high-end products
without impairing market pricing, and thereby increase the proportion of total
sales represented by these higher margin products.
Take Advantage of Tightening Capacity Utilization
Over the past several years, the North American OPP films industry has
experienced one of its lowest capacity utilization levels and most competitive
pricing dynamics of its over 40-year history. The Company believes that industry
capacity utilization levels are in the process of improving as the growth rate
in demand for OPP films outpaces the announced capacity additions.
As announced in July 2001, the Company acquired certain assets of QPF, LLC, the
OPP films business of Hood Companies, for approximately $22,000,000. On June 29,
2001, Hood Companies permanently closed the QPF production facility, which had
approximately 40 million pounds of OPP film production capacity, thereby further
tightening industry capacity utilization. During the fourth fiscal quarter of
2001 the Company began to sell the inventory acquired from QPF, and plans to
sell the remainder of the inventory over the next six months. We expect the
benefits in operating results from the QPF acquisition to become more evident in
the second half of fiscal 2002.
Maximize Operating Efficiencies and Reduce Costs
AET intends to continue to seek opportunities to reduce costs and enhance
productivity. Since 1995, it has nearly doubled its capacity and now
approximately 140 million pounds, or more than half of its total capacity, is on
new eight and ten meter production lines. The efficiency of these newer and
larger lines is significantly greater than the older lines prevalent in the
industry, manufacturing up to four times as much OPP film without a
proportionate increase in the number of operators, power or other fixed costs.
Since the beginning of fiscal 1998, the Company has pursued a comprehensive
program to improve process and production efficiencies in terms of line speeds,
equipment up-time and material yields. As a result of this new and efficient
capacity and these process improvement programs, a 30 percent reduction in
non-material unit production costs has been achieved since the beginning of
fiscal 1998.
Focus on Industry Leadership
AET has become the largest OPP films manufacturer and seller in North America
and has a leading position in most major high-end OPP films end-use product
categories in North America. It has accomplished this by assembling what the
Company believes is the industry's most experienced and technologically
competent sales force, by developing strong customer and end-user relationships,
and by establishing a reputation for innovative new product development. The
Company's strategy is to utilize this position and these relationships to
continue to identify and develop new value-added packaging, labeling or other
applications for OPP films to meet the complex requirements of its customers.
AET also intends to continue to strengthen relationships with its customers by
making it easier for them to do business with the Company, by, for example,
providing supply chain integration tools such as our new proprietary fully
automated, internet
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accessible, order and logistics tracking system. The Company believes that the
combination of its leadership position, innovative capabilities, strong sales
force and highly efficient manufacturing positions it to achieve future growth
and profitability. As a result of its focus on building its industry leadership
position, AET continually explores opportunities to acquire related technologies
or businesses.
Industry Overview
OPP films are highly specialized films developed and manufactured through a
complex process of polymer design, extrusion, controlled multi-directional
stretching, heating and cooling, and surface treatment. Depending on the
application, finished products can then be further processed to add high barrier
or metallized coatings and are often designed to be laminated with other films
to provide highly specialized attributes required by end-users.
Recent advancements in film extrusion and resin technology have produced new,
sophisticated films that are thinner and stronger and have better barrier and
scalant properties than other materials or predecessor films. These
technological advances have allowed many traditional forms of rigid packaging to
be replaced with film-based, flexible packaging that is lighter, lower in cost
and has enhanced performance characteristics, such as oxygen and moisture
barriers, printability and durability. In addition, flexible packaging is often
recyclable.
According to the Flexible Packaging Association, the size of the North American
flexible packaging industry was estimated at $19.0 billion in 2000, of which the
specialty films segment accounted for approximately $3.7 billion of shipments.
OPP films represent approximately 25 percent of the specialty films segment, or
890 million pounds in 2000, and has grown at a compound annual growth rate of
over six percent from 1980 through 2000, averaging about two times the rate of
growth of the United States Gross Domestic Product over this same time period.
The Company believes that this growth rate can be sustained due to three
fundamental trends:
. the growth in demand for established end-market consumer products, such as
snack foods, soft drinks and confectionary products, which positively
impacts the demand for OPP films;
. the trend away from rigid towards flexible packaging materials that use
OPP films, such as for labels, the trend from cans and glass bottles to
plastic beverage containers, and for packaging materials, the trend from
boxes to stand-up pouches; and
. the use of OPP films in place of other competing flexible materials
because OPP films have superior performance characteristics, such as
improved protection against light, oxygen and moisture, advanced
machinability, printability and durability, and exceptional clarity; in
addition, as the least dense plastic packaging and labeling material,
polypropylene provides greater coverage at a lower cost than any other
plastic film material.
Production capacity in the North American OPP films industry increased by more
than 35 percent from 1996 to 1999. As a result, capacity utilization levels
declined from approximately 95 percent to a low in the mid-80 percent levels.
This decline in capacity utilization led to sharp declines in selling prices of
OPP films and adversely impacted profitability in the OPP films industry. The
adverse effects on profitability were compounded in fiscal 2000 by the rapid,
unforeseen escalation in resin costs, which increased 70 percent in 18 months,
peaking in the last quarter of fiscal 2000, and driven primarily by the
substantial increase in crude oil prices. Most of this increase could not be
passed on to customers in the form of price increases due to this low capacity
utilization level. However, when capacity utilization has reached the mid-90
percent levels, the OPP films industry has historically been able to increase
prices of its products and pass on a significant portion of any increases in the
cost of raw materials to customers. For example, in 1995, when capacity
utilization was at the mid-90 percent level, the industry was able to pass on to
3
customers resin cost increases similar to those experienced in 2000, allowing
the industry to achieve one of its most profitable years.
Capacity utilization in the North American OPP films industry has been
recovering and is currently near 90 percent. As the expected growth in demand
outpaces the announced capacity additions, industry capacity utilization levels
will further improve. Because a substantial capital investment is required to
build a new line and the industry has recently experienced low capacity
utilization levels, the industry will be cautious about introducing new lines.
To the Company's knowledge, only AET and ExxonMobil Corporation, the two largest
North American producers of OPP films, have announced plans for the addition of
production capacity, and these are for two small lines. In addition, since at
least two years are required to design and construct a new OPP films line, and
another year is required to fully ramp up production, supply estimates are
reasonably predictable over the near term.
Competitive Strengths
AET is well positioned to compete successfully in the OPP films market and to
increase sales and profitability due to its:
. Substantial Industry Presence - The Company is the largest manufacturer
and seller of OPP films in North America and has a leading market position
in substantially all of the major high-end OPP films end-use product
categories in North America.
. Technological Leadership and Superior Product Development Capabilities -
The Company has one of the largest technology groups in the industry with
more than 60 chemists, engineers and technicians and has invested over
$20.0 million in product research and development over the past three
years.
. Efficient, Modern Production Facilities - AET believes that its cost to
produce OPP films is one of the lowest in the North American industry and
is the lowest for any manufacturer in this market with a full-breadth
product line.
. Breadth of Product Line and Diversity of Customer Base - With more than 80
product groups sold to over 600 customers, AET believes that it has the
broadest product lines and customer base of any North American OPP films
producer.
. Experienced Management - AET believes that its senior and operational
management team is among the most experienced in the OPP films business.
Products
The Company's OPP films product line is classified into the following four broad
categories:
. Labels - AET's OPP film labels are used on containers for soft drinks,
beverages, food and other consumer products requiring a high-quality print
surface for superior graphics and properties that permit high speed
labeling. Examples of end uses include soft drink containers for
Coca-Cola(R)and Pepsi-Cola(R), branded water bottles for Aquafina(R) and
Dasani(R), and juice containers for Tropicana(R) and Dole(R). In addition,
the Company's films are used on products such as Folgers(R) and Hills
Brothers(R) coffee cans and aerosol cans for shaving creams and air
fresheners. On its unique tubular production assets, the Company
manufactures ultra-thin clear slip films, which are used as the outside
layer of a laminated label by over 85 percent of the North American soft
drink market. AET's opaque products are used as the inside layer of these
laminated labels, and provide a high-quality print surface and excellent
machinability.
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. Packaging - AET's OPP films are used in a broad range of packaging
applications, principally for food products, where they provide enhanced
protection against moisture, light and air. The Company's OPP films are
used to make packages for products such as Frito-Lay(R) snacks,
Nabisco(R), Kellogg's(R), General Foods(R) and Hershey Foods(R) products,
individual size condiment pouches, and baked goods packaging. In
applications where barrier is important, AET offers metallized,
polyvinylide choloride, also known as saran, coated and polymer modified
films. High barrier metallized films provide an enhanced barrier for
snacks packaged in nitrogen gas to maintain freshness and extend shelf
life.
. Overwrap - The Company produces OPP films that are exceptionally clear,
thin and strong and provide barriers to protect products. Examples of end
uses include overwrap for boxes of Lipton(R) tea bags and Schrafft(R)
candies, Sony(R) and TDK(R) compact discs and DVDs, and cigarette boxes
for British American Tobacco(R). End-users of these products require
durable films with high barrier properties that also offer exceptional
clarity and thinness to maximize visibility of their products. A
significant portion of these films are sold in narrow widths, 10 to 20
inches wide, for which AET has unique slitting capabilities.
. Industrial - OPP films are used in a variety of industrial applications,
such as packaging tape, insulation facing, cable wrap, synthetic paper,
ream wrap, and photopolymer processing. AET has focused its industrial OPP
films on applications that are more profitable, such as insulation facing
and cable wrap.
Through the end of fiscal 2001, the Company developed, manufactured and sold a
broad range of oriented apertured films (also known as nets) and nonwoven
materials for specialized filtration and medical applications. On September 28,
2001, the Company entered into an agreement to sell its specialty nets and
nonwovens business to DelStar Technologies, Inc., a Delaware corporation, and
the transaction closed with an effective date of September 30, 2001.
Marketing and Customers
AET's OPP films products are sold primarily through its direct sales
organization. Its highly skilled sales force, whose principal role is to develop
sales opportunities and provide customer support, has considerable technical
expertise and industry experience. Marketing activities have historically been
focused primarily in North and South America, although the Company also has a
sales presence in Europe and Asia. In addition, the sales people, customers,
end-users, and research and development scientists work together to create new
films, as well as new applications for existing OPP films.
AET's OPP films 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 both fiscal 2001 and fiscal 2000. The
Company also sells OPP films directly to end-users, and 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. Sales and marketing efforts and customer relationships
are enhanced by the numerous customer-specific technical approvals that have
been 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 AET and its customers and can lead to additional sales and marketing
opportunities.
5
Acquisition of Assets from QPF, L.L.C.
On June 19, 2001, AET purchased certain assets of QPF, which was the OPP films
business of the Hood Companies, Inc. The acquired assets principally represented
equipment, intellectual property and intangible assets. Included in the purchase
was QPF inventory produced through June 30, 2001, the day on which the QPF
facility was shut down. The Company did not purchase the QPF facility and the
cost to close the facility was borne by Hood. The net purchase price for the QPF
assets, including inventory, was $21.7 million.
Manufacturing and Technology
OPP films are manufactured and processed through either the tenter or the
tubular process. AET is the only North American OPP films producer that has both
tenter and tubular manufacturing capabilities. Additionally, these films can be
further processed through value-adding secondary operations.
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. AET has seven
tenter lines, ranging from 5.5 to 10 meters. The tenter process is a more
economical way than the tubular process to manufacture thicker films.
Tubular Process
In the tubular process, molten resin is extruded from a circular die to form a
thick tube which is stretched lengthwise and widthwise with air pressure and
gravity at controlled temperatures. Tubular processed films offer "balanced
biaxial orientation," meaning that the film is stretched equally both widthwise
and lengthwise. This process results in improved stability and a more uniform
thickness for thinner films. The Company's 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. AET currently operates nine tubular lines.
Secondary Processes
In addition to the tenter and tubular manufacturing processes, AET also performs
operations to apply coatings and metal to its films. In the coating process,
various materials are applied in a liquid form to the surface of a film
structure and then dry the film in-line. These coatings are applied uniformly at
varying thicknesses and layers to impart desired properties of increased
barrier, printing and converting machinability. In the metallization process,
the film is run through a vacuum and a thin layer of aluminum is applied to the
surface of a film structure providing barrier and appearance properties.
Through the end of fiscal 2001, the Company also manufactured apertured films
and nonwoven media. Delnet(R) and other apertured film products were 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. Delpore(R) and other meltblown nonwoven
materials were produced in a high pressure extrusion process, forming the
filtration
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media used in liquid and air filtration markets. These assets were sold in
conjunction with the divestiture of the Company's Specialty Nets and Nonwovens
Division.
Research and Development
AET believes that it has one of the largest and most experienced technology
groups in the industry with more than 60 chemists, engineers and technicians,
and has invested over $20 million in product research and development over the
past three years. Utilizing extensive laboratory and film testing facilities,
advanced pilot film production lines, and an array of end-use packaging and
labeling equipment, the Company's technology group has introduced nearly 50 new
or enhanced products in the past three fiscal years. The Company believes that
this strength in innovation will continue to drive higher growth levels for
differentiated, higher margin products, and provide an advantage to customers
who work with AET in the development of new labeling, packaging and overwrap
products and applications. During fiscal 1999, 2000 and 2001, the Company spent
approximately $7.1 million, $6.8 million and $6.4 million, respectively, on
research and development.
Polypropylene and Other Raw Materials
AET manufactures its principal products 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.
Four suppliers provide the majority of the Company's resin supply requirements.
However, these materials are generally available from a large number of
suppliers in sufficient quantities to meet ongoing requirements. Historically,
there have not been any significant disruptions in supply as a result of
shortages in raw materials, demand and the price of petrochemical raw materials,
including crude oil and natural gas.
Historically, the price of polypropylene has fluctuated, and in recent years the
price has increased significantly due to the increased price of crude oil. As a
result of low capacity utilization levels, AET has not been able to pass through
a significant portion of the increases in the costs of polypropylene raw
materials to end users. Resin prices are declining from the peak experienced
late in fiscal 2000 due to increased capacity in the resin industry and a
decline in polypropylene resin demand caused by the general economic slowdown.
On average, polypropylene resin costs in fiscal 2001 were down $.02 per pound,
or 6.1 percent, over fiscal 2000. According to Chemical Data Inc., polypropylene
resin prices have declined from an average of $0.42 per pound in the fourth
fiscal quarter of 2000 to an average of $0.31 per pound at the end of fiscal
2001.
Competition
AET competes with manufacturers of OPP films 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 some competitors are subsidiaries of
larger corporations that have significantly greater financial resources than the
Company. There are approximately eight primary manufacturers in North America
producing OPP films for resale. Out of these eight manufacturers, only AET and
ExxonMobil Corporation have a greater than 20 percent market share. The Company
believes that ExxonMobil Corporation, which is the second largest OPP films
manufacturer in North America, is the only other broad-line OPP films supplier
based in North America. Competition in OPP films markets is based primarily on
customer relationships, product performance characteristics such as
machinability and quality, reliability and price. Competition also depends on
developing new and enhanced products for customers. The Company also sells
products in countries outside North
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America and may face international competition. Most of AET's customers and end
users have a short lead time for ordering products, so foreign competitors are
at a disadvantage with North American customers because of their longer shipping
times and higher shipping costs.
The Company believes that it has various competitive advantages including:
. advanced proprietary manufacturing processes required to produce a varied
range of OPP films products;
. proprietary OPP films product formulations;
. research and development expertise required to sustain product
innovation; and
. one of the most efficient manufacturing operations in the North American
OPP films market.
Although this is an asset intensive business and the cost to enter is high, it
cannot be assumed 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 AET.
Patents and Trademarks
AET currently holds approximately 85 active domestic and international patents
and applications and has approximately 70 domestic and international trademark
registrations and applications. The termination, expiration or infringement of
one or more patents or trademarks would not have a material adverse effect on
the business.
Government Regulation
Due to the nature of AET'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 capital expenditures, financial
condition, results of operations or competitive position.
Employees
The Company employs approximately 993 full-time employees. Approximately 130
production and maintenance employees at the Covington, Virginia facility are
represented by the Paper Allied Industrial Chemical and Energy Workers
International Union, Local 2-0884 under a collective bargaining agreement that
expires in June, 2005. All employee relations are considered to be satisfactory.
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ITEM 2. PROPERTIES
The following table provides information with respect to AET's facilities:
Owned/
Location Square Feet Leased
-------- ----------- ------
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 7,858 Leased
*On September 28, 2001, the Company entered into an agreement to sell its
Specialty Nets and Nonwovens business to DelStar Technologies, Inc., a Delaware
corporation. This transaction closed with an effective date of September 30,
2001. In connection with this transaction, the Company sold its Middletown,
Delaware facility and amended its bank credit facility accordingly.
All of AET's owned real property is collateral under the Company's revolving
credit facility. The Company believes that its facilities are suitable for their
currently intended purposes and adequate for its level of operations.
Environmental, Health and Safety Matters
AET is subject to stringent environmental, health and safety requirements,
including laws and regulations relating to air emissions, wastewater management,
the handling and disposal of waste and the cleanup of properties affected by
hazardous substances. The Company believes that its operations have been and are
in substantial compliance with environmental, health and safety requirements,
and that it has no liabilities arising under such requirements, except as would
not be expected to have a material adverse effect on operations, financial
condition or competitive position.
In the last four years, the Company has received no requests for information or
related correspondence from the United States Environmental Protection Agency
and other third parties indicating that we might be responsible under the
Comprehensive Environmental Response, Compensation and Liability Act or other
environmental laws for costs associated with the investigation and cleanup of
contaminated sites. The Company believes that any future involvement in matters
arising under various environmental laws will not have a material adverse effect
on its operations, liquidity or financial condition.
ITEM 3. LEGAL PROCEEDINGS
The Company is periodically subject to legal proceedings and claims which have
arisen in the ordinary course of the business and have not been fully
adjudicated. It is not a party to litigation or other legal proceedings which it
believes, either singly or in the aggregate, could reasonably be expected to
have a material adverse effect on the Company's business, financial condition
and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
AET did not submit any matters to a vote of the security holders through the
solicitation of proxies or otherwise during the fourth quarter of the fiscal
year covered by this report.
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ITEM 4a. EXECUTIVE OFFICERS
The executive officers of AET are as follows:
Executive Officer
Name Age Position Since
---- --- -------- ------
Amin J. Khoury 62 Chairman of the Board/(1)/ October 1986
Thomas E. Williams 55 President, Chief Executive Officer December 1992
and Director/(2)/
David N. Terhune 55 Executive Vice President and February 1994
Chief Operating Officer/(3)/
Mark S. Abrahams 50 Vice President and General Manager, December 1993
Specialty Nets & Nonwovens Division/(4)/
Anthony J. Allott 37 Senior Vice President and Chief Financial July 1994
Officer/(5)/
_______________________
(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) Mr. Abrahams' employment with the Company ceased in October 2001 in
connection with the sale of the Company's Specialty Nets and 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 and Chief Financial Officer of the Company.
AET's executive officers 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 aircraft cabin interior products; Member of the Board of
Directors of Brooks Automation, Inc., a leader in semiconductor tool and factory
automation solutions for the global semiconductor industry; Director of
Synthes-Stratec, Inc., one of the world's leading orthopedic trauma companies.
Thomas E. Williams - Director, President and Chief Executive Officer of the
Company since December 1992; Chief Executive Officer of the Company since August
1993; from 1988 until 1992, President and Chief Executive Officer of Home
Innovations, Inc., a home furnishings company; from 1980 until 1988, held a
number of executive positions with PepsiCo, Inc.
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.
10
Mark S. Abrahams - Vice President and General Manager of Specialty Nets and
Nonwovens from December 1993 to October 2001; 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 and Chief Financial Officer of the
Company since July 1996; from July 1994 to January 2001, Treasurer of the
Company; from May 1995 to June 1996, Vice President of AET; from December 1992
to July 1994, Corporate Controller of Ground Round Restaurants, Inc., an
operator and franchiser of full-service family restaurants; from 1986 to 1992,
employed by Deloitte & Touche LLP, an independent auditing firm, most recently
as audit manager.
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.
11
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:
Fiscal Year 2001 Fiscal Year 2000
High Low High Low
---- --- ---- ---
Quarter ended December 31 $3.41 $1.25 $7.88 $5.44
Quarter ended March 31 4.03 2.13 9.25 6.25
Quarter ended June 30 7.47 2.90 8.44 5.25
Quarter ended September 30 8.47 5.98 6.25 3.06
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
November 29, 2001, there were approximately 232 registered holders of record and
more than 3,700 beneficial holders of the Company's Common Stock.
12
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:
Income Statement Data: 2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Sales $ 279,840 $ 268,375 $ 237,042 $ 245,334 $ 262,271
Cost of sales 218,430 215,256 188,601 195,174 205,037
--------- --------- --------- --------- ---------
Gross profit 61,410 53,119 48,441 50,160 57,234
Operating expenses:
Selling, general and administrative 28,639 27,152 26,550 23,754 23,819
Research and development 6,419 6,759 7,123 7,326 8,221
Restructuring and impairment charges - - - 21,506 4,500
Start-up costs - - - 1,539 -
Loss on sale of assets 7,054 - - - -
Share incentive plan 861 - - - -
QPF acquisition costs 2,548 - - - -
--------- --------- --------- --------- ---------
Operating profit (loss) 15,889 19,208 14,768 (3,965) 20,694
Non-operating expenses:
Interest expense, net 24,659 21,096 18,909 15,868 16,868
Acquisition costs and other - - 3,641 250 1,500
--------- --------- --------- --------- ---------
Income (loss) before income taxes
and change in accounting (8,770) (1,888) (7,782) (20,083) 2,326
Income tax expense (benefit) 9,872 (679) (3,113) (8,033) 930
--------- --------- --------- --------- ---------
Income (loss) before change in
accounting and extraordinary item (18,642) (1,209) (4,669) (12,050) 1,396
Change in accounting, net of related tax
benefits of $568 - - - (852) -
Extraordinary loss on early extinguishment
of debt, net of taxes of $1,112 (1,977) - - - -
--------- --------- --------- --------- ---------
Net income (loss) $ (20,619) $ (1,209) $ (4,669) $ (12,902) $ 1,396
========= ========= ========= ========= =========
Earnings (loss) per common share:
Basic:
Before change in accounting or extraordinary
item $ (1.50) $ (.10) $ (.41) $ (1.11) $ 0.14
Change in accounting or extraordinary
item (.16) - - (0.07) -
--------- --------- --------- --------- ---------
Net income (loss) $ (1.66) $ (.10) $ (.41) $ (1.18) $ 0.14
========= ========= ========= ========= =========
Diluted:
Before change in accounting or extraordinary
item $ (1.50) $ (.10) $ (.41) $ (1.11) $ 0.13
Change in accounting or extraordinary
item (.16) - - (0.07) -
--------- --------- --------- --------- ---------
Net income (loss) $ (1.66) $ (.10) $ (.41) $ (1.18) $ 0.13
========= ========= ========= ========= =========
Balance Sheet Data:
Working capital $ 73,892 $ 43,419 $ 27,918 $ 33,471 $ 33,600
Total assets 423,338 389,250 375,050 370,726 376,493
Current portion of long-term debt - - - - 4,000
Long-term debt, less current portion 277,462 209,500 182,500 185,500 196,500
Stockholders' equity 78,777 99,913 99,041 100,437 112,183
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of financial condition and results of
operations is qualified in its entirety by, and should be read in conjunction
with, consolidated financial statements and related notes included elsewhere in
this Annual Report. This discussion contains forward-looking statements that
involve risks and uncertainties. Actual results could differ materially from
those anticipated in the forward-looking statements as a result of factors
including, but not limited to, those discussed in Exhibit 99 to this Annual
Report, "Business" and elsewhere in this Annual Report. The Company disclaims
any obligation to update information contained in any forward-looking statement.
All dollar amounts are in thousands.
Introduction
The Company derives its revenues, earnings and cash flows primarily from the
sale of highly specialized oriented polypropylene films, referred to as OPP
films, used in consumer product labeling, flexible packaging and overwrap
applications. AET has a leading position in substantially all of the major
high-end OPP films end-use product categories in North America, and offers one
of the most extensive product lines in the OPP films industry, ranging from
high-margin, specialized label and high barrier films to basic heat sealable
lower barrier films.
Results of Operations
The following table sets forth, for the periods indicated, the percentages of
AET sales represented by various income and expense items in their income
statements:
Years Ended September 30
------------------------
2001 2000 1999
---- ---- ----
Sales 100.0% 100.0% 100.0%
Cost of sales 78.1 80.2 79.6
Gross profit 21.9 19.8 20.4
Selling, general and administrative 10.2 10.1 11.2
Research and development 2.3 2.5 3.0
Operating profit 5.7 7.2 6.2
Interest expense, net 8.8 7.9 8.0
Net loss (7.4) (0.5) (2.0)
Fiscal 2001 Compared with Fiscal 2000
Sales for fiscal 2001 increased 4.3 percent to $279,840 due to the realization
of higher average selling prices, volume gains and continued improvement in
sales mix. Sales outside the United States were 15.8 and 18.3 percent of sales
for the fiscal year ended September 30, 2001 and 2000, respectively, and
generated operating profit of 12.0 percent and 4.6 percent of total operating
profit in those same periods.
Gross profit increased in fiscal 2001 to $61,410, or 21.9 percent of sales,
compared with $53,119, or 19.8 percent of sales, in the same period of fiscal
2000. The increase in gross profit in fiscal 2001 is due to higher average
selling prices and lower raw material costs, as well as continued improvements
in manufacturing efficiencies. Capacity utilization is expected to continue to
tighten over the next several years due to the continued growth in demand for
OPP films and minimal anticipated capacity additions. Raw material costs
declined throughout fiscal 2001 and are expected to increase only slightly in
fiscal 2002. Although impacted in the short term by the tragic events of
September 11 and the resulting economic weakness, long-term margin expansion is
expected to continue due to further improvement in sales mix, absorption of QPF
sales and further tightening of industry capacity utilization.
14
Total operating expenses for the fiscal year ended September 30, 2001 increased
to $45,521, as compared to $33,911 for the fiscal year ended September 30, 2000
due primarily to $2,548 in costs incurred in conjunction with the acquisition of
QPF, the $861 non-cash charge recorded in the first quarter of fiscal 2001
related to the share incentive plan for non-executive employees, and the $7,054
loss on sale of assets resulting from the sale of the Specialty Nets and
Nonwovens business. Research and development expense was $6,419 in fiscal 2001
compared with $6,759 in fiscal 2000 as the Company continued to invest in new
product development.
Net interest expense in fiscal 2001 of $24,659 was $3,563 higher than interest
expense in fiscal 2000 due primarily to a higher average outstanding debt
balance in fiscal 2001 reflecting the $275,000 Senior Notes issued in June 2001,
offset in part by a lower interest rate on the Senior Notes and interest income
earned on cash and cash equivalents.
Income tax expense (benefit) was $9,872 and ($679) for the fiscal years ended
September 30, 2001 and September 30, 2000, respectively. In fiscal 2001, the
Company recorded a $13,030 valuation allowance for certain state and federal
deferred tax assets resulting from temporary differences for which the potential
to realize the tax benefit given recent results is uncertain in accordance with
Financial Accounting Standards No. 109.
Fiscal 2000 Compared with Fiscal 1999
Sales for fiscal 2000 of $268,375 were $31,333, or 13.2 percent higher, than
fiscal 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. Sales
outside the United States, primarily in Canada, comprised 18.3 percent of total
fiscal 2000 sales compared to 18.7 percent of total 1999 sales and operating
profit for sales outside the United States was 4.6 percent of total operating
profit compared to 19.4 percent in 1999.
Gross profit for 2000 of $53,119 includes $2,400 of temporary plant shutdown
costs. Excluding these costs, gross profit for 2000 was $55,519, an increase of
$4,173 or, 8.1 percent, from the fiscal 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 twelve months ended
September 30, 2000 and 70 percent in the eighteen months ended September 30,
2000, and only a small portion of these resin cost increases were successfully
passed on to customers in the form of price increases, due to the excess
capacity that still existed in the OPP films industry. In addition, the Company
held firm on a price increase in fiscal 2000, losing some sales volume.
Therefore, all OPP films operations were shut down for one week in September,
resulting in $2,400 of unabsorbed fixed costs incurred in the quarter.
Research and development expense decreased by $364 to $6,759, or 2.5 percent of
sales in fiscal 2000, due primarily to differences in timing of research and
development spending between fiscal 1999 and fiscal 2000.
Selling, general and administrative expenses of $27,152 in fiscal 2000
represented 10.1 percent of sales compared with $26,550, or 11.2 percent of
sales in fiscal 1999, as operating expenses were held 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 fiscal
1999 to fiscal 2000.
15
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 bank credit facility in fiscal 2000.
Income tax as a percentage of before tax income was 36 percent for 2000 and 40
percent for fiscal 1999. The lower percentage reflected the benefit of tax
planning.
Liquidity and Capital Resources
AET maintains a credit agreement with a group of lenders whereby it has a
$80,000 revolving credit facility with a final maturity of January 29, 2003. The
bank credit facility is secured by all of the Company's assets. It includes
covenants which limit borrowings based on certain asset levels, requires a
minimum tangible net worth and specified interest coverage and leverage ratios,
restricts payment of cash dividends to stockholders and establishes maximum
capital expenditure levels. It also contains other covenants customary in
transactions of this type. The Company was not in compliance with the net worth
covenant, and has received a waiver from its banks. In June 2001, the Company
paid all amounts outstanding on the bank credit facility, other than $12,435 in
outstanding letters of credit in connection with the issuance of its Senior
Notes. AET also has $6,500 of revenue bonds outstanding which are due November
4, 2004 and which are partially secured by a letter of credit issued under the
bank credit facility.
On June 19, 2001, the Company issued $275,000 of 10-3/4 percent Senior Notes due
2011 (the "Senior Notes"). The Senior Notes are unsecured senior obligations of
AET. The net proceeds, after deducting fees and expenses, from the sale of the
Senior Notes, were approximately $261.1 million. Of those proceeds, $155.2
million was used to fund the redemption of and interest on the 11-1/2 percent
senior notes due 2002, $9.0 million was used to fund the portion of the purchase
price of the acquisition of the assets of QPF, $74.1 million was used to repay
existing indebtedness and interest due under the revolving credit facility, and
the remainder is being held for general corporate purposes and to fund future
growth opportunities.
In conjunction with the redemption of the 11-1/2 percent senior notes due 2002,
the Company recorded a loss on the early extinguishment of debt of $1,977 or
$.15 per share, net of taxes. This amount is comprised of unamortized debt
issuance costs and interest incurred during the 30-day period.
On June 30, 2001, the Company completed its acquisition of certain assets of
QPF, L.L.C. Assets acquired included: machinery and equipment; intellectual
property; intangibles; and inventory of the business. The purchase price for the
QPF assets was $21,744. In conjunction with the QPF acquisition, the Company
incurred certain one-time costs directly related to the acquisition and
transition of the QPF business such as legal, incentive compensation and
accounting costs that were recorded as an operating expense during the third
quarter.
Effective September 30, 2001, the Company sold its specialty nets and nonwovens
business to DelStar Technologies, Inc. The business, located in Middletown,
Delaware, generated annual sales in fiscal 2001 of approximately $20,000 through
the manufacture and sale of nets and nonwoven media. This business was non-core
to the Company. The gross proceeds of the transaction were approximately
$23,000. The Company recorded a loss in the fourth fiscal quarter of 2001 of
$7,054 on the sale of this business, reflecting the difference between the
selling price and the net book value of the specialty nets and nonwovens assets,
as well as transactions costs such as legal, banking, incentive compensation and
accounting costs incurred in connection with the sale of the business.
Operating activities for the fiscal year ended September 30, 2001 generated
$4,425 of cash, which was the result of earnings before depreciation and
amortization and other non-cash expenditures of $8,513, and a decrease in
working capital of $4,088. The net working capital increase was primarily the
result of decreases in accounts payable and accrued expenses of $9,260, a
decrease in inventory of $9,144 and increases in prepaid expenses and other
current assets of $2,226, and
16
accounts receivable of $1,746. Decreases in accounts payable and inventory
primarily reflect the lower cost of polypropylene resin. During the year,
payments against restructuring reserves, representing payments on an operating
lease, reduced such accounts by $900 to a balance of $8,887 at September 30,
2001.
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 costs and have
historically fluctuated. It cannot be assumed, 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 year 2000 when the price of polypropylene resin
significantly increased due to the rising price of crude oil. During that
period, the Company was only able to pass on a portion of the cost increase to
customers due to overcapacity in the OPP films market.
Seasonal Nature of Some OPP Films Markets
Some of the end-use markets for 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 factors mentioned in this
prospectus.
New Accounting Pronouncements
In 2001 the FASB issued SFAS No. 141, 142, 143 and 144. Those statements are
discussed in the footnotes to the consolidated financial statements.
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 resulted from market risk associated with changes in the
market values of the underlying currencies were deferred and reported as part of
capitalized assets. For the fiscal year ended September 30, 2001, the Company
did not enter into foreign exchange contracts for trading or speculative
purposes.
Short-Term and Long-Term Debt
AET 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 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
Company maintains a revolving credit facility which bears interest at LIBOR plus
2.75 percent or Prime plus 1.25 percent. Average borrowings under this facility
were approximately $43,958 for the year ended September 30, 2001. Had market
rates increased 10 percent from the average rate used for each of these periods,
net earnings would have been negatively impacted by approximately $352 for the
year ended September 30, 2001. At September 30, 2001, The Company had no
17
outstanding short-term debt and long-term debt outstanding of $277,462, all of
which was at a fixed interest rate.
The Company does not enter into financial instrument transactions for trading or
other speculative purposes or to manage interest rate exposure.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required under this item is set forth on pages F-1 through F-18
of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
18
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 10-11 of this report.
The directors of AET are as follows:
Director Name Age Position Since
------------- --- -------- -----
Amin J. Khoury 62 Chairman of the Board October 1986
Thomas E. Williams 55 President, Chief Executive Officer December 1992
and Director
Nader A. Golestaneh*+ 41 Director October 1986
Richard G. Hamermesh* 53 Director October 1986
Mark M. Harmeling+ 48 Director October 1986
Joseph J. O'Donnell* 57 Director October 1986
_________________
* 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 aircraft cabin interior products; Member of the Board of
Directors of Brooks Automation, Inc., a leader in semiconductor, tool and
factory automation solutions for the global semiconductor industry; Director of
Synthes-Stratec, Inc., one of the world's leading orthopedic trauma companies.
Thomas E. Williams - Director, President and Chief Executive Officer of the
Company since December 1992; Chief Executive Officer of the Company since 1993;
from 1988 until 1992, President and Chief Executive Officer of Home Innovations,
Inc., a home furnishings company; from 1980 until 1988, held a number of
executive positions with PepsiCo, Inc.
Nader A. Golestaneh - Director of the Company since 1986; since 1990, President
of Centremark Properties, Inc., a real estate management and development
company; since 1986, attorney in private practice in Boston, Massachusetts.
Richard G. Hamermesh - Director of the Company since 1986; since 2000, senior
lecturer at the Harvard Business School; co-founded and served until 2000 as a
Managing Partner for the Center for Executive Development, an independent
executive education and training firm; Director of BE Aerospace, Inc., a
manufacturer of aircraft cabin interior products.
Mark M. Harmeling - Director of the Company since 1986; since 2001, partner of
TA Realty Associates, a real estate advisory firm; from 1991 to 2000, 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 multifamily
residential complexes; from 1985 to 1991, President of
19
Intercontinental Real Estate Corporation, a real estate holding and development
corporation; Director of Universal Holding Corporation, an insurance holding
company.
Joseph J. O'Donnell - Director of the Company since 1986: Chairman of the Board
and Chief Executive Officer of Boston Concessions Group, Inc., a company that
manages food service operations in approximately 40 states in the leisure and
recreation markets.
ITEM 11. EXECUTIVE COMPENSATION
"Executive Compensation" described in the Proxy Statement to be filed with the
Securities and Exchange Commission in connection with the 2002 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 2002 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 2002 Annual Meeting of
Stockholders is incorporated herein by reference.
20
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, 2001 and 2000
Consolidated Statements of Operations for the Years Ended September 30, 2001,
2000 and 1999
Consolidated Statements of Stockholders' Equity for the Years Ended
September 30, 2001, 2000 and 1999
Consolidated Statements of Cash Flows for the Years Ended September 30, 2001,
2000 and 1999
Notes to Consolidated Financial Statements
Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts for the Years Ended September
30, 2001, 2000 and 1999
All other schedules are omitted as the required information is not applicable
or is included in the financial statements or related notes.
B. Exhibits
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.
4.3(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(f) Amended and Restated Credit Agreement dated as of September 30, 2000.
10.1.4(m) Amended and Restated Credit Agreement dated as of April 15, 2001,
between Registrant and the Chase Manhattan Bank, as Administrative
Agent.
10.1.5(m) Waiver and Amendment No. 1 to the Credit Agreement dated as of June
15, 2001.
10.1.6* Amendment No. 2 to the Credit Agreement dated September 28, 2001.
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(1) 2001 Stock Option Plan for Directors.
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.
21
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.
10.15.1(h) Amended and Restated Executive Deferred Compensation Retirement
Plan dated December 31, 1999.
10.15.2* Amended and Restated Executive Deferred Compensation Retirement
Plan dated August 10, 2001.
10.16.1(e) 1999 Supplemental Executive Retirement Plan dated November 30,
1999.
10.16.2* Amended and Restated 1999 Supplemental Executive Retirement Plan
dated August 14, 2001.
10.17.1(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.
10.20(m) Asset Purchase Agreement among Applied Extrusion Technologies,
Inc., QPF, L.L.C. and Hood Companies, Inc., dated as of May 3, 2001
10.20.1(m) Amendment No. 1 to Asset Purchase Agreement by and among Applied
Extrusion Technologies, Inc., QPF, L.L.C. and Hood Companies, Inc.,
dated June 12, 2001.
10.21(m) Form of Exchange Note due 2001 (filed as an Exhibit to Item
10.20.1).
10.22(m) Indenture dated as of June 19, 2001 by and among the Registrant,
Applied Extrusion Technologies (Canada), Inc. and the Wells Fargo
Bank Minnesota, National Association, as Trustee.
10.23(m) Registration Rights Agreement dated as of June 19, 2001 by and
among the Registrant, Merrill Lynch & Co., Merrill Lynch, Pierce,
Fenner & Smith Incorporated, Chase Securities, Inc., Credit Suisse
First Boston Corporation and Deutsche Bank Alex. Brown, Inc.
21(d) Subsidiaries of the Registrant.
23* Independent Auditors' Consent - Deloitte & Touche LLP.
99* Cautionary Statement for Purposes of the "Safe Harbor" Provisions
of the Private Securities Litigation Reform Act of 1995.
_________________
*Filed herewith
**Contained in Exhibits to the Registrant's Registration Statement on
Form S-4 (No. 33365294) filed with the Commission on July 18, 2001.
(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-K for the fiscal year
ended September 30, 2000.
22
(g) Contained in Exhibits to the Registrant's Form 10-Q for the fiscal quarter
ended December 31, 1997.
(h) Contained in Exhibits to the Registrant's Form 10-Q for the fiscal quarter
ended June 30, 1998.
(i) Contained in Exhibits to the Registrant's Form 10-Q for the fiscal quarter
ended December 31, 1999.
(j) Contained in Exhibits to the Registrant's Form 10-Q for the fiscal quarter
ended March 31, 1999.
(k) Contained in Exhibits to the Registrant's Form 10-Q for the fiscal quarter
ended December 31, 1999.
(l) Contained in Exhibits to the Registrant's Form 10-Q for the fiscal quarter
ended March 31, 2001.
(m) Contained in Exhibits to the Registrant's Form 10-Q for the fiscal quarter
ended June 30, 2001.
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
Current Report on Form 8-K reporting the closing of the acquisition of the
assets of QPF, L.L.C. filed on July 3, 2001, and amended on July 19, 2001 and
October 16, 2001.
23
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
and Chief Financial Officer
December 4, 2001
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:
/s/ Amin J. Khoury /s/ Nader A. Golestaneh
- ------------------------------------------- ---------------------------------
Amin J. Khoury, Chairman of the Board Nader A. Golestaneh, Director
December 4, 2001 December 4, 2001
/s/ Thomas E. Williams /s/ Joseph J. O'Donnell
- ------------------------------------------- ---------------------------------
Thomas E. Williams, President Joseph J. O'Donnell, Director
Chief Executive Officer and Director December 4, 2001
December 4, 2001
/s/ Mark M. Harmeling /s/ Richard G. Hamermesh
- ------------------------------------------- ---------------------------------
Mark M. Harmeling, Director Richard G. Hamermesh, Director
December 4, 2001 December 4, 2001
/s/ Anthony J. Allott
- -------------------------------------------
Anthony J. Allott, Senior Vice President
and Chief Financial Officer
December 4, 2001
24
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Consolidated Financial Statements:
Consolidated Balance Sheets, September 30, 2001 and 2000................... F-2
Consolidated Statements of Operations for the Years Ended
September 30, 2001, 2000 and 1999...................................... F-3
Consolidated Statements of Stockholders' Equity for the
Years Ended September 30, 2001, 2000 and 1999.......................... F-4
Consolidated Statements of Cash Flows for the Years
Ended September 30, 2001, 2000 and 1999................................ F-5
Notes to Consolidated Financial Statements................................. F-6
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts for the
Years Ended September 30, 2001, 2000 and 1999.......................... F-17
Independent Auditors' Report............................................... F-18
F-1
APPLIED EXTRUSION TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
September 30, 2001 and 2000
(In thousands, except per share amount)
2001 2000
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 22,176 $ 3,265
Short-term receivable 23,212 -
Accounts receivable, net of allowance for doubtful
accounts of $1,801 and $1,856 at September 30,
2001 and 2000, respectively 41,117 43,131
Inventory 34,889 43,059
Prepaid expenses and other assets 1,495 9,013
--------- ---------
Total current assets 122,889 98,468
Property, plant and equipment, net 265,536 280,300
Intangibles and deferred finance charges, net 23,363 2,372
Other assets 11,550 8,110
--------- ---------
$ 423,338 $ 389,250
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $12,860 $ 17,862
Accrued expenses and other current liabilities 27,552 27,216
Accrued interest 8,585 9,971
--------- ---------
Total current liabilities 48,997 55,049
Long-term debt 277,462 209,500
Long-term liabilities and deferred taxes 18,102 24,788
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; authorized, 1,000 shares, of which 300 are
designated Junior Preferred Stock; no stock outstanding
Common stock, $.01 par value; authorized, 30,000 shares, 12,796 and 12,019
shares issued at September 30, 2001 and 2000, respectively 128 120
Additional paid-in capital 101,580 100,266
Retained earnings (deficit) (16,559) 4,060
Accumulated other comprehensive loss (3,795) (2,277)
--------- ---------
81,354 102,169
Treasury stock, at cost, and other, 250 and 248 shares
at September 30, 2001 and 2000, respectively (2,577) (2,256)
--------- ---------
Total stockholders' equity 78,777 99,913
--------- ---------
$ 423,338 $ 389,250
========= =========
See notes to consolidated financial statements.
F-2
APPLIED EXTRUSION TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended September 30, 2001, 2000 and 1999
(In thousands, except per share amounts)
2001 2000 1999
---- ---- ----
Sales $ 279,840 $ 268,375 $ 237,042
Cost of sales 218,430 215,256 188,601
--------- --------- ---------
Gross profit 61,410 53,119 48,441
Operating expenses:
Selling, general and administrative 28,639 27,152 26,550
Research and development 6,419 6,759 7,123
Loss on sale of assets 7,054 - -
QPF acquisition costs 2,548 - -
Share incentive plan 861 - -
--------- --------- ---------
Total operating expenses 45,521 33,911 33,673
Operating profit 15,889 19,208 14,768
Non-operating expenses:
Interest expense, net 24,659 21,096 18,909
Acquisition costs - - 3,641
--------- --------- ---------
Total non-operating expenses 24,659 21,096 22,550
Loss before income taxes (8,770) (1,888) (7,782)
Income tax expense (benefit) 9,872 (679) (3,113)
--------- --------- ---------
Loss before extraordinary item $ (18,642) $ (1,209) $ (4,669)
Extraordinary loss on early extinguishment
of debt, net of taxes of $1,112 (1,977) - -
--------- --------- ---------
Net loss $ (20,619) $ (1,209) $ (4,669)
========= ========= =========
Loss per common share before extraordinary item
Basic and diluted $ (1.50) $ (0.10) $ (0.41)
Loss per common share
Basic and diluted $ (1.66) $ (0.10) $ (0.41)
Average common shares outstanding
Basic and diluted 12,420 11,829 11,282
See notes to consolidated financial statements.
F-3
APPLIED EXTRUSION TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended September 30, 2001, 2000 and 1999
(In thousands)
Accumlated
Voting Additional Other
Common Stock Paid-in Retained Comprehensive Comprehensive Treasury
Shares Amount Capital Earnings Loss Loss Stock
---------------------------------------------------------------------------------------
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)
Net loss ............................ (20,619) (20,619)
Profit sharing contribution ......... 91 1 170
Stock issued for share incentive plan 593 6 830
Stock issued for employee purchases . 77 1 202
Treasury shares and other ........... (321)
Exercise of stock options ........... 16 109
Exchange rate changes ............... (1,518) (1,518)
Tax benefits of early disposition of
stock options ................... 3
-------- -------- -------- -------- -------- -------- --------
Comprehensive loss .................. $(22,137)
========
Balance, September 30, 2001 ............. 12,796 $ 128 $101,580 $(16,559) $ (3,795) $ (2,577)
======== ======== ======== ======== ======== ========
See notes to consolidated financial statements.
F-4
APPLIED EXTRUSION TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended September 30, 2001, 2000 and 1999
(In thousands)
2001 2000 1999
---------- ---------- ---------
OPERATING ACTIVITIES:
Net loss $ (20,619) $ (1,209) $ (4,669)
Adjustments to reconcile net loss to net cash used
in operating activities:
Provision for doubtful accounts 400 472 1,217
Depreciation and amortization 22,362 21,025 19,484
Deferred taxes and other credits (3,367) (10,306) (10,526)
Stock issued for retirement plans 171 1,861 1,513
Stock issued for share incentive plan 861 -- --
Loss on sale of assets 7,054 -- --
Write-off of deferred debt issuance costs included
in extraordinary loss on early extinguishment of debt 1,651 -- --
Changes in assets and liabilities, net of assets acquired
and divested:
Prepaid expenses and other current assets (2,226) (3,224) (1,900)
Accounts payable and accrued expenses (9,260) (4,345) 4,037
Accounts receivable and inventory 7,398 (11,194) 1,398
--------- --------- ---------
Net cash provided by (used in) operating activities 4,425 (6,920) 10,554
INVESTING ACTIVITIES:
Additions to property, plant and equipment (21,785) (22,096) (22,781)
Proceeds from sale-leaseback transactions -- -- 29,940
Acquisition of assets (21,744) -- (13,316)
--------- --------- ---------
Net cash used in operating activities (43,529) (22,096) (6,157)
FINANCING ACTIVITIES:
Proceeds from issuance of bonds 270,859 -- --
Redemption of $150,000 senior notes (150,000) -- --
Borrowings (repayments) under line of credit agreement, net (53,000) 27,000 (3,000)
Debt issuance costs (9,786) -- --
Proceeds from issuance of stock, net (30) 707 779
--------- --------- ---------
Net cash provided by (used in) financing activities 58,043 27,707 (2,221)
Effect of exchange rate changes on cash (28) (749) 868
--------- --------- ---------
Increase (decrease) in cash and cash equivalents, net 18,911 (2,058) 3,044
Cash and cash equivalents, beginning 3,265 5,323 2,279
--------- --------- ---------
Cash and cash equivalents, ending $ 22,176 $ 3,265 $ 5,323
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest, including capitalized interest of $2,757, $2,442
and $3,050, respectively $ 28,823 $ 21,888 $ 21,058
Income taxes 201 210 --
See notes to consolidated financial statements.
F-5
APPLIED EXTRUSION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 30, 2001, 2000 and 1999
(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.
Principles of consolidation. The accompanying consolidated financial statements
include the accounts of Applied Extrusion Technologies, Inc. and its
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, 2001 and 2000, 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. 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, customer lists, goodwill
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. Amortization of deferred
finance charges is included in net interest expense.
Income taxes are recorded using an asset and liability approach that recognizes
deferred tax assets and liabilities for the differences between the financial
statement carrying amount and the tax basis of existing assets and liabilities.
These differences arise principally from the use of accelerated depreciation
methods for income tax reporting purposes and the straight-line method for
financial statement purposes. Deferred tax assets and liabilities are measured
using enacted tax rates in
F-6
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 of foreign operations are translated
into U.S. dollars at the exchange rate on the balance sheet date. The results of
foreign subsidiary 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 other comprehensive income. The Company has
periodically entered into foreign currency exchange contracts to hedge firm
purchase commitments denominated in foreign currencies.
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.
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.
Certain new accounting pronouncements. In June 1998 the financial Accounting
Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires that all companies record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. Gains or losses resulting from changes in the values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. The company adopted SFAS No. 133, as amended, on
October 1, 2000. The adoption of this standard had no effect on the Company's
operations or financial position.
During fiscal 2001 the Company adopted Securities and Exchange Commission Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition." This SAB was
intended to clarify certain elements of revenue recognition. It has been
supplemented by a "frequently asked questions" document. Adoption of this SAB
did not materially impact the Company's revenue recognition practices.
In July 2001 the FASB issued SFAS No. 141, "Business Combinations," which
supersedes APB Opinion No. 16, "Business Combinations," and SFAS No. 142,
"Goodwill and Intangible Assets," which supersedes APB Opinion No. 17,
"Intangible Assets." SFAS No. 141 eliminates the pooling-of-interests method of
accounting for business combinations and modifies the application of the
purchase accounting method. The elimination of the pooling-of-interests method
is effective for transactions initiated after June 30, 2001. The remaining
provisions of SFAS No. 141 will be effective for transactions accounted for
using the purchase method that are completed after June 30, 2001. SFAS No. 142
eliminates the current requirement to amortize goodwill and indefinite-lived
intangible assets, addresses the amortization of intangible assets with a
defined life and addresses the impairment testing and recognition for goodwill
assets arising from transactions completed before and after the Statement's
effective date. This standard will be adopted by the Company in fiscal 2002.
Upon adoption the company will cease to incur amortization expense on its
indefinite life assets. At September 30, the Company had $13,926 of net goodwill
recorded in
F-7
the financial statements and would avoid approximately $348 of annual
amortization before any impairments.
In June 2001, the FASB issued SFAS 143 "Accounting for Asset Retirement
Obligations." SFAS 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. SFAS 143 is effective for fiscal years
beginning after June 15, 2002. We do not expect the adoption of SFAS 143 to have
a material impact on our financial position or results of operations.
In October 2001, the FASB issued SFAS 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets" which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. SFAS 144
supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," and also supersedes the
accounting and certain reporting provisions of APB Opinion No. 30, "Reporting
the Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," for the disposal of a segment of a business. SFAS 144 is
effective for fiscal years beginning after December 15, 2001, and interim
periods within those fiscal years. The Company is in the process of determining
the impact of this new accounting standard.
2. ACQUISITIONS AND DIVESTITURES
On June 30, 2001, the Company completed its acquisition of certain assets of
QPF, L.L.C. Assets acquired included: machinery and equipment; intellectual
property; intangibles; and inventory of the business. The purchase price for the
QPF assets was $21,744. In conjunction with the QPF acquisition, the Company
incurred certain one-time costs directly related to the acquisition and
transition of the QPF business such as legal, incentive compensation, and
accounting costs that were recorded as an operating expense during the third
quarter.
Effective September 30, 2001, the Company sold its specialty nets and nonwovens
business to DelStar Technologies, Inc. The business, located in Middletown,
Delaware, generated annual sales in fiscal 2001 of approximately $20,000 through
the manufacture and sale of nets and nonwoven media. This business was non-core
to the Company. The gross proceeds of the transaction were approximately
$23,000. The Company recorded a loss in the fourth fiscal quarter of 2001 of
$7,054 on the sale of this business, reflecting the difference between the
selling price and the net book value of the specialty nets and nonwovens assets,
as well as transaction costs such as legal, banking, incentive compensation and
accounting costs incurred in connection with the sale of the business.
3. INVENTORY
Inventory consisted of the following at September 30:
2001 2000
---- ----
Raw materials .............. $ 6,963 $ 9,336
Finished goods ............. 27,926 33,723
------- -------
$34,889 $43,059
======= =======
F-8
4. PROPERTY, PLANT, EQUIPMENT AND LEASE COMMITMENTS
Property, plant and equipment consisted of the following at September 30:
2001 2000
---- ----
Land .................................. $ 1,684 $ 1,778
Buildings and improvements ............ 41,814 45,649
Machinery and equipment ............... 261,366 277,983
-------- --------
304,864 325,410
Less accumulated depreciation ......... 90,505 82,751
-------- --------
214,359 242,659
Machinery and equipment in progress ... 51,177 37,641
-------- --------
$265,536 $280,300
======== ========
Approximately $46,359 of fixed assets are located outside of the United States.
Depreciation expense for the years ended September 30, 2001, 2000 and 1999 was
$20,499, $18,593 and $18,465, respectively.
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, 2001, 2000 and 1999 was
approximately $14,572, $10,487 and $10,043, respectively.
The minimum annual rental commitments under noncancellable operating leases are
as follows for each of the five years subsequent to September 30, 2001:
2002 ............................................... 14,580
2003 ............................................... 14,430
2004 ............................................... 11,867
2005 ............................................... 2,035
2006 ............................................... 234
-------
$43,146
=======
5. INTANGIBLES AND DEFERRED FINANCE CHARGES
Intangibles and deferred finance charges consisted of the following at September
30:
2001 2000
---- ----
Deferred financing charges ............. $ 9,437 $ 1,809
Goodwill ............................... 11,344 --
Other intangible assets ................ 3,911 1,611
------- -------
24,692 3,420
Less accumulated amortization .......... 1,329 1,048
------- -------
$23,363 $ 2,372
======= =======
F-9
6. LONG-TERM DEBT
Long-term debt consisted of the following at September 30:
2001 2000
-------- --------
Industrial Revenue Bond payable November 4, 2004 at
5.25% effective rate at September 30, 2001 $ 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
Senior Notes payable on June 19, 2011 with 10.75% interest
due semiannually on January 1 and July 1 270,962 --
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 -- 53,000
-------- --------
277,462 209,500
Less current portion -- --
-------- --------
Total long-term debt $277,462 $209,500
======== ========
On June 19, 2001 the Company issued $275,000 of 10-3/4 percent Senior Notes due
2011 (the "Senior Notes"). The Senior Notes are unsecured senior obligations of
AET. The issue price of each Senior Note was $984.94 per $1,000 principal amount
at maturity, and each Senior Note carries a yield to maturity of 11 percent. The
bond discount is being amortized to interest expense. The net proceeds to the
Company from the sale of the Senior Notes after deducting discount, fees and
expenses were approximately $261.1 million. Of those proceeds, $155.2 million
was used to fund the redemption of and interest on the 11-1/2 percent senior
notes due 2002 (the "2002 Notes"), $9.0 million was used to fund a portion of
the purchase price of the acquisition of the assets of QPF, L.L.C., $74.1
million was used to repay existing indebtedness and interest due under the
Company's line of credit (the "Credit Facility"), and the remainder is being
held for general corporate purposes and to fund future growth opportunities.
The Senior Notes were issued by the parent company, which has no independent
assets or operations. These notes are fully and unconditionally guaranteed by
one of the Company's wholly-owned subsidiaries. The assets and operations of the
Company's other non-guarantor subsidiary are minor.
In conjunction with the redemption of the 2002 Notes, the Company recorded a
loss on the early extinguishment of debt of $1,977, or $.16 per share, net of
taxes. This amount is comprised of unamortized debt issuance costs and interest
incurred during the 30-day call period.
AET maintains a credit agreement with a group of lenders whereby the Company has
a $80,000 revolving credit facility (the "Credit Facility") with a final
maturity of 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. The Company was not in
compliance with the net worth covenant at September 30, 2001, and has received a
waiver from its banks. The Company also has $6,500 of revenue bonds outstanding,
which are due November 4, 2004 and which are partially secured by a letter of
credit issued under the Credit Facility.
F-10
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accrued expenses consisted of the following at September 30:
2001 2000
---- ----
Accrued restructuring .......................... $ 2,470 $ 2,172
Deferred gain on sale-leaseback ................ 9,424 9,519
Payroll & benefits ............................. 3,166 5,524
Market development ............................. 4,813 4,252
Taxes and other ................................ 7,679 5,749
-------- --------
$ 27,552 $ 27,216
======== ========
Included in accounts payable are outstanding checks of $4,812 and $4,435 at
September 30, 2001 and 2000, respectively. During the year payments against a
restructuring reserve related to lease payments for certain manufacturing
equipment reduced such accounts by $900 to $8,887. Approximately $7,987 and
$7,615 of these restructuring costs are included in deferred taxes and other
credits at September 30, 2001 and 2000, respectively.
8. INCOME TAXES
The provision for income taxes consisted of the following for the years ended
September 30:
2001 2000 1999
---- ---- ----
Deferred:
U.S. Federal ................. (2,719) (642) (2,724)
State ........................ (439) (37) (389)
Valuation Allowance .......... 13,030 -- --
------- ------- --------
Total ........................ $ 9,872 $ (679) $ (3,113)
======= ======= ========
The components of the net deferred tax asset were as follows at September 30:
2001 2000
---- ----
Current Deferred Tax:
Accounts receivable ................................ $ 510 $ 421
Inventory .......................................... 3,219 3,274
Other assets ....................................... (6) (6)
Other liabilities .................................. 4,912 4,944
Valuation allowance ................................ (7,951) (125)
---------- ----------
Net Current Deferred Tax Asset ................. $ 684 $ 8,508
========== ==========
Non Current Deferred Tax:
Property, plant and equipment ...................... (45,246) (40,284)
Other assets ....................................... 5,070 8,004
Other liabilities .................................. 228 145
Tax credits and loss carryforwards ................. 44,777 33,808
Valuation allowance ................................ (5,513) (309)
---------- ----------
Net Non-Current Deferred Tax Asset/(Liability) ... (684) 1,364
---------- ----------
Total Net Deferred Tax Asset ........................... $ 0 $ 9,872
========== ==========
Deferred tax expense reflects adjustments made for previously provided deferred
taxes. In addition, due to recent historical losses, a valuation allowance in
accordance with SFAS No. 109 has been established for certain state and federal
deferred tax assets resulting from temporary differences for which the potential
to realize the tax benefit given recent results is uncertain. The Company
believes, however, that it will be able to utilize the tax benefits in the
future.
F-11
At September 30, 2001, the Company has, for income tax reporting purposes,
federal net operating loss carryforwards of $97,175 (expiration commencing in
2006 through 2020) and state net operating loss carryforwards of $93,881
(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.
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, 2001, 2000
and 1999 is as follows:
2001 2000 1999
---- ---- ----
Statutory tax rate ........................................ 35.3% 35.0% 35.0%
State income taxes, net of federal tax benefits ........... 3.7% 3.4% 3.8%
-------- -------- ---------
Subtotal .............................................. 39.0% 38.4% 38.8%
Valuation allowance ....................................... (77.5%) (2.4%) 1.2%
-------- -------- ---------
Total ................................................. (38.5%) 36.0% 40.0%
======== ======== =========
9. 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.
Until December 2000, the Company had an employee stock purchase plan, under
which employees could defer a portion of their compensation and purchase AET
shares at a discount. Purchases through payroll deductions were made on a
semiannual basis. Approximately 77,233 shares were purchased under this plan in
fiscal 2001, and at September 30, 2001, 76,766 shares were available under the
plan for future purchases.
A total of 67,347 shares are held in treasury under a deferred compensation
plan, which is discussed in further detail in Note 14.
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, 2001, there were 12,796,353 Junior Preferred Stock Purchase
Rights outstanding.
In the first quarter of fiscal 2001, the Company recorded a one-time, non-cash
charge of $861 for shares issued to non-executive employees as part of an
incentive and retention program. Under this program the Company issued
approximately 600,000 shares of stock to its top 125 non-executive managers in
exchange for 1,200,000 of their vested and unvested stock options. These new
shares vest over two years and were granted in lieu of annual incentive bonuses
for these managers for fiscal 2000 and 2001.
F-12
10. 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, 2001, an aggregate of
4,269,918 shares were reserved for issuance under the plans.
The Company accounts for stock-based compensation to employees using the
intrinsic value method. Accordingly, no compensation cost has been recognized
for fixed stock option grants since the options granted to date have exercise
prices per share of not less than the fair value of the Company's common stock
at the date of the grant.
If compensation cost for stock option grants and the Company's Employee Stock
Purchase Plan had been determined based on the fair value of the grant for 2001,
2000 and 1999, the Company's fiscal 2001, 2000 and 1999 net loss and loss per
share on a pro forma basis would have been as follows:
2001 2000 1999
---- ---- ----
Net Loss:
As reported ........................ $ (20,619) $ (1,209) $ (4,669)
Pro forma .......................... (22,030) (2,937) (5,889)
Basic and Diluted Loss per Share:
As reported ........................ (1.66) (.10) (.41)
Pro forma .......................... (1.77) (.25) (.52)
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 2001, 2000 and 1999: expected volatility ranging
from 59 to 56 percent, risk-free interest rates of approximately 4 percent and
expected lives of 7 to 10 years. The weighted-average grant date fair value of
options granted during the year was $2.41, $5.89 and $3.99 for 2001, 2000 and
1999 respectively.
Information concerning the Company's option plans is as follows:
Weighted-
Average
Shares under Option Exercise
Option Prices Price Exercisable
------------ ------ -------- -----------
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
============= ===========
Granted 1,119,625 1.6875-7.34 4.82
Exercised (16,000) 5.6560-7.25 6.80
Canceled (1,520,937) 3.00-12.00 7.61
-------------
As of September 30, 2001 3,202,313 1.6875-14.8750 6.39 1,703,811
============= ===========
F-13
The following table summarizes information regarding stock options outstanding
at September 30, 2001:
Options
Options Outstanding Exercisable
------------------------------------------------------------------------------
Weighted-
Average Weighted- Weighted-
Outstanding Remaining Average Exercisable Average
Range of as of Contractual Exercise as of Exercise
Exercise Price 09/30/01 Life in Years Price 09/30/01 Price
-------------------------------------------------------------------------------------------------
$ 1.00-5.00 555,625 7.0 $ 3.0423 180,750 $ 4.7935
5.01-7.50 1,646,687 7.0 6.1849 701,936 6.2974
7.51-10.00 922,500 4.8 8.2140 743,625 8.2602
10.01-12.50 23,750 5.7 11.7500 23,750 11.7500
12.51-15.00 53,751 4.2 13.8372 53,750 13.8372
--------- --- -------- --------- --------
3,202,313 6.3 $ 6.3939 1,703,811 $ 7.3084
========= === ======== ========= ========
11. EARNINGS PER SHARE
In 2001, 2000 and 1999, 147,000, 129,000 and 150,000 potential shares from
options were excluded from the computation of diluted loss per share, as the
effect of including these shares in the calculation would be anti-dilutive.
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.
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, 2001, 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. 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 $171, and $1,311 of cash in 2001. These contributions
were made with Company stock in 2000 and 1999, valued at $1,861 and $1,058,
respectively.
F-14
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.
At its election, the Company can make contributions to this plan representing a
percentage of employee salary. Contributions made were $448, $502 and $0 in
2001, 2000 and 1999, respectively. Assets of this plan of $3,246 at September
30, 2001 are carried in other assets.
In April 1999, the Company implemented a Supplemental Executive Retirement Plan
under which certain executive employees will receive benefits annually equal to
an average of their compensation for a period of 10 years after retirement. As
of September 30, 2001, the projected benefit obligation under the plan is
$6,600, and during the year the Company recorded $4,900 of net periodic benefit
costs. The plan is unfunded; however, the Company has designated approximately
$6,700 of its cash and cash equivalents to provide for the eventual funding of
the liability, which are carried in other assets.
15. CONCENTRATION OF CREDIT RISK AND EXPORT SALES
The Company sells its products under normal credit terms to a diverse base of
customers in the packaging film conversion 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 2001, 18 percent of
sales in 2000 and 20 percent of sales in 1999, with no other customer accounting
for more than 10 percent of sales in 2001, 2000 or 1999.
Information by geographic location was as follows for the years ended September
30:
2001 2000 1999
---- ---- ----
Sales:
United States................................ $ 235,521 $ 219,295 $ 192,627
Foreign...................................... 44,319 49,080 44,415
---------- ---------- ---------
$ 279,840 $ 268,375 $ 237,042
========== ========== =========
Operating profit:
United States................................ $ 13,989 $ 18,324 $ 11,902
Foreign...................................... 1,900 884 2,866
---------- ---------- ---------
$ 15,889 $ 19,208 $ 14,768
========== ========== =========
No individual country, other than the United States, comprised more than 10
percent of consolidated sales or operating profit.
F-15
16. SELECTED QUARTERLY DATA (UNAUDITED)
Summarized quarterly financial data for fiscal 2001, 2000 and 1999 were as
follows:
Earnings Earnings
(Loss) (Loss)
Net Income Per Share Per Share
Net Sales Gross Profit (Loss)/(a)/ Basic/(a)/ Basic/(a)/
--------- ------------ ---- ----- -----
September 30, 1999
1/st/ quarter $ 55,445 $ 7,941 $ (4,735) $ (.43) $ (.43)
2/nd/ quarter 58,979 11,652 (863) (.08) (.08)
3/rd/ quarter 62,269 13,757 194 .02 .02
4/th/ quarter 60,349 15,091 735 .06 .06
September 30, 2000
1/st/ quarter $ 60,151 $ 14,876 $ 1,158 $ .10 $ .10
2/nd/ quarter 68,745 16,787 1,803 .15 .15
3/rd/ quarter 73,700 14,302 21 .00 .00
4/th/ quarter 65,779 7,154 (4,191) (.35) (.35)
September 30, 2001
1/st/ quarter $ 62,724 $ 11,378 $ (2,144) $ (.18) $ (.18)
2/nd/ quarter 72,989 15,097 633 .05 .05
3/rd/ quarter 72,414 17,306 1,645 .13 .13
4/th/ quarter 71,713 17,629 951 .08 .08
__________________
(a) Excludes $551, net of taxes, of non-cash charges related to the share
incentive plan for non-executive employees in December 2000; $1,631,
net of taxes, of QPF transaction costs and $1,977, net of taxes, of
loss on early extinguishment of debt in June 2001; and $7,054 of loss
on sale of assets and tax valuation allowance of $13,030 in September
2001.
F-16
APPLIED EXTRUSION TECHNOLOGIES, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years Ended September 30, 2001, 2000 and 1999
(In thousands)
Additions
Balance at charged to
beginning costs and Balance at
Description of period expenses Deductions end of period
----------- --------- --------- ---------- -------------
Allowance for doubtful
accounts:
2001 $ 1,856 $ 400 $ 455 $ 1,801
2000 1,554 472 170 1,856
1999 1,056 1,217 719 1,554
F-17
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, 2001 and
2000, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended September
30, 2001. 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, 2001 and 2000, and the results of
their operations and their cash flows for each of the three years in the period
ended September 30, 2001, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, such financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information shown therein.
/s/ Deloitte and Touche LLP
- ---------------------------
Deloitte & Touche LLP
Boston, Massachusetts
November 20, 2001
F-18