APPLIED EXTRUSION TECHNOLOGIES INC /DE - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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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, 1998

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COMMISSION FILE NO. 0-19188

APPLIED EXTRUSION TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

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DELAWARE 51-0295865
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification
organization) No.)

3 CENTENNIAL DRIVE, PEABODY, MASSACHUSETTS 01960
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (978) 538-1500

Securities registered pursuant to Section 12(b) of the Act:

NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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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)

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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 $95,697,695 on December 15, 1998, based on the
closing sales price of the Registrant's common stock, $.01 par value (the
"Common Stock"), as reported on the NASDAQ National Market System as of such
date.

The number of shares of the Registrant's Common Stock outstanding as of December
15, 1998, was 11,095,385 shares. The number of shares of the Registrant's Junior
Preferred Stock Purchase Rights outstanding as of December 15, 1998 was
11,095,385.

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DOCUMENTS INCORPORATED BY REFERENCE

The following documents are incorporated herein by reference:

Part III Proxy Statement to be filed with the Securities and Exchange Commission
in connection with the 1998 Annual Meeting of Stockholders.

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FORM 10-K INDEX

PART I

Item 1. Business...................................................................... 1

Item 2. Properties.................................................................... 6

Item 3. Legal Proceedings............................................................. 6

Item 4. Submission of Matters to a Vote of Security Holders........................... 7

Item 4a. Executive Officers............................................................ 7

PART II

Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters..... 9

Item 6. Selected Financial Data....................................................... 10

Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................... 11

Item 7a. Quantitative and Qualitative Disclosures about Market Risk.................... 15

Item 8. Financial Statements and Supplementary Data................................... 16

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.................................................................... 16

PART III

Item 10. Directors and Executive Officers of the Registrant............................ 17

Item 11. Executive Compensation........................................................ 18

Item 12. Security Ownership of Certain Beneficial Owners and Management................ 18

Item 13. Certain Relationships and Related Transactions................................ 18

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............... 18

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PART I

ITEM 1. BUSINESS

GENERAL

Applied Extrusion Technologies, Inc. ("AET" or the "Company") is a leading
developer and manufacturer of highly specialized, single and multilayer oriented
polypropylene ("OPP") films used in consumer product labeling, flexible
packaging and overwrap applications. AET's operations are concentrated primarily
in North America, where it is the largest producer of OPP films, with an
approximate 30 percent share of OPP production volume. AET is also one of the
largest producers of OPP films worldwide, with over 200 million pounds of
current annual production capacity, including 90 million pounds of new
high-speed capacity that has been added within the last two years. AET is the
world leader in films used as labels on plastic soft drink containers and offers
a broad product line for packaging of confectionery, snack food and other
products.

End users of AET's films are consumer product companies whose labels and
packages require special attributes such as vivid graphics, exceptional clarity,
and moisture barriers to preserve freshness. Labeling applications for AET's OPP
films include labels for Pepsi-Cola-Registered Trademark- and
Coca-Cola-Registered Trademark- plastic bottles, Nestles-Registered Trademark-
Sweet Success-TM-, General Foods Tang-TM- and aerosol cans for products such as
S.C. Johnson Wax Pledge-TM- and Glade-TM- Air Freshener. Packaging applications
for AET's OPP films include packaging for Frito-Lay-Registered Trademark-
snacks, and M&M/Mars-Registered Trademark- and Hershey-Registered Trademark-
candies. Overwrap applications for AET's OPP films include clear protective
films for British American Tobacco Products, Lipton-Registered Trademark- tea
bags and compact disks.

Approximately 87 percent of the Company's sales in fiscal 1998 were
generated by the sale of its OPP films products. In addition to OPP films, AET
also manufactures a wide range of oriented apertured films for various medical
and filtration applications requiring controlled porosity, such as sanitary
napkins, incontinency pads and finger bandages, and industrial filters for air
and liquids. AET has historically focused on developing and selling value-added,
higher-margin specialty films, where competition is largely based on superior
product attributes and performance. AET seeks continually to develop new
products and to tailor its existing products to the needs of its customers by
working directly with converters and end-users to develop original solutions.
AET emphasizes customer service and support, and with sales employees averaging
twenty years' experience in the OPP films industry, has built up a strong sales
and customer service group with substantial reach throughout the Americas.

BUSINESS STRATEGY

The Company's business strategy is to increase sales of a broad line of
high-end, specialized products for consumer product labeling and packaging
applications, to be one of the lowest cost producers of such products and to
increase profitability. Elements of the Company's business strategy include: (i)
expanding our global reach to increase customer base and enhance sales and
service to our existing customers; (ii) continuing to develop differentiated
high-end products; (iii) migrating sales mix toward higher margin products; and
(iv) maximizing operating efficiencies and decreasing expenses.

In March, 1998, AET brought its new ten-meter line on stream. This addition,
combined with the second eight-meter line brought on stream in fiscal 1996, has
positioned the Company as the largest OPP films supplier in North America. The
completion of these two projects has resulted in a 60 percent increase in AET's
OPP films manufacturing capacity over a two year period. The Company has been
positioning itself for several years to sell this capacity. The Company invested
approximately $23 million in new product development over the past three years,
including hiring 11 new research scientists and technicians. The sales force has
been expanded 36 percent over the past three years through a focused effort of
hiring industry experienced sales professionals. The Company embarked on a
focused strategic initiative in 1996 to supply bottle label and other
value-added flexible packaging films to Latin American and European

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converters and other end users. AET's global expansion program has realized
recent strategic successes and has begun to yield substantial growth
opportunities in the high-end segment of the industry.

In connection with a previously announced restructuring plan which included
divestiture of certain non-core businesses, the Company sold its plastic
profiles, strong-nets and utility products manufacturing assets during the third
quarter of 1998. These businesses, located in Salem, Massachusetts, generated
annual sales in the most recent fiscal year of approximately $24,000. The gross
proceeds from the transaction of $26,500, which approximated book value for the
businesses after considering costs of the transaction, were utilized to reduce
outstanding borrowings on the Company's Revolving Credit Facility.

Additionally, the Company is pursuing an acquisition program designed to
establish the Company as a leading worldwide supplier of OPP films.

INDUSTRY OVERVIEW

The Company competes principally in the specialty film segment of the
approximately $17.5 billion flexible packaging industry. In addition to
polypropylene, specialty films are manufactured from polyester, cellophane,
nylon, polystyrene and certain polyolefin compounds. The overall North American
specialty film segment of the flexible packaging industry approximated $3
billion in shipments in calendar year 1997, of which the largest single
component, OPP films, accounted for an estimated $835 million of shipments.

North American demand for OPP films used in specialty applications grew at
an average annual rate of approximately 6 percent from 1980 through 1997. The
Company believes that this growth is driven by a number of factors, including:
(i) the substitution of specialized OPP films with greater barrier and graphics
properties for traditional consumer product labels and packaging; (ii) the shift
from glass to plastic beverage containers that use OPP film labels; (iii) the
shift from rigid containers to flexible packaging; and (iv) the growth in end
use markets such as snack food, confectionary, beverages and other consumer
products.

The Company believes that the industry is currently at or near a trough of a
period of declining industry utilization levels brought about by a significant
increase in industry production capacity over the last two years as several
producers, including the Company, have added new lines. Substantial economies of
scale have led many producers to expand capacity both internally and through
acquisitions. This has driven prices of OPP films downward and put substantial
pressure on margins. The Company believes, however, that there is no significant
additional capacity expected to be added in North America for several years. In
addition, the OPP films industry is currently going through an extended period
of consolidation, which the Company believes will eventually lead to a slowing
in the net growth of capacity as consolidating producers shut down inefficient
or excess capacity. If demand for OPP films continues to grow at its average
historical rate, there will be a gradual convergence in supply and demand to a
new equilibrium.

COMPETITIVE STRENGTHS

AET is the largest manufacturer of OPP films in North America. AET focuses
on serving high-end consumer product markets in which competition is largely
based on superior product attributes and performance. The Company believes its
strong competitive position is attributable to a number of factors, including
its substantial market presence, technological leadership, superior product
development capabilities, efficient production of high-quality products, breadth
of product line, diversity of customer base and experienced management.

PRODUCTS

The Company's primary OPP packaging film products can be classified into
three broad categories: barrier, clear/slip and opaque, with a fourth
specialized category of shrink films.

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BARRIER OPP films serve as the inner layer of flexible packaging laminates
and provide enhanced protection from moisture, light and gas to preserve the
freshness and flavor of a wide range of food, tobacco and other products. The
Company offers metallized, polyvinyliden chloride ("saran") coated and polymer
modified barrier OPP films as well as clear barrier overwraps. Metallized
barrier film provides a high performance, visible and ultraviolet light barrier
for the packaging of snacks and confections; saran coated barrier films offer an
outstanding oxygen and moisture barrier for the packaging of cheese, nuts,
coffee and tea, in addition to snacks and confections; and polymer modified
barrier films are used as overwraps for tobacco products, baked goods and other
products due to their ease of machinability and excellent clarity.

CLEAR/SLIP OPP films provide the printable outer layer of flexible package
and are generally bonded with barrier film to form a complete packaging
application. Slip films may be single or multilayer and heat sealable or
non-sealable, and offer a low coefficient of friction for improved
machinability. Principal applications include snack, confection, condiment and
baked goods packaging.

OPAQUE OPP films provide a barrier to visible and ultraviolet light and a
high quality print surface for superior graphics. They are used primarily in
bottle labeling and confection and snack food packaging. The Company's opaque
OPP film products are used as the label for approximately 85 percent of the
plastic soda bottles sold in the United States and Canada. For snack food
packaging, AET manufactures and sells metallized, sealable, composite and saran
coated versions of opaque OPP film. End users in confectionery markets often
choose opaque packaging for marketing and manufacturing purposes because they
provide superior printability and accommodate rapid machine speeds.

SHRINK FILMS, which may include the OPP film types listed above, are
targeted at certain specialized markets, such as the shrink label market. The
shrink label films shrink to the contour of the container, permit superior
graphics and offer maximum labeling flexibility for rigid contoured containers,
such as beverage and aerosol cans and glass and polyethylene bottles, which
increases the marketing appeal of such containers and eliminates the need for
printing directly on the container.

In addition to OPP films, the Company develops, manufactures and sells a
broad range of oriented apertured films, or "nets," for applications requiring
controlled porosity. Among other things, the Company's Delnet
- -Registered Trademark- product is used widely in health care markets as a porous
facing material for bandages. By permitting one-way fluid flow and two-way
airflow without adhering to the wound, Delnet material enhances the healing
process. In the United States, most adhesive bandages, including Johnson &
Johnson BAND-AIDS -Registered Trademark-, use Delnet facing. The Company's
apertured film products are also used in the rapidly growing industrial
filtration market for air and liquids. The Company manufactures the initial
filtration membranes and support material for these filters, and will soon enter
the filtration media portion of the market as well.

MARKETING AND CUSTOMERS

The Company's highly skilled sales and marketing force includes individuals
with considerable technical expertise and industry experience. Their principal
role is to provide customer support. The Company's OPP film products are sold
primarily through its internal sales organization whereby employees interface
with customers and the Company's research and development technicians to create
new films as well as new applications for OPP films. AET's marketing activities
have historically been focused primarily in North America. During 1996, AET
announced its intent to enter into the Latin American and European OPP films
market as part of its long-term globalization strategy, and to continue
penetration into Asia Pacific. AET has expanded its sales and marketing
organization to include sales directors for Latin America, Europe and the Asia
Pacific regions. Information with respect to export sales can be found in the
footnotes to the consolidated financial statements.

The Company's OPP film sales are predominantly to converters, who print and
laminate films before selling to end users. One such converter accounted for
approximately 18 percent of sales in fiscal 1998 and

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16 percent of sales in fiscal 1997. The Company also sells OPP films directly to
end users. The Company considers it an important part of its marketing effort to
maintain direct relations with major end users, who generally provide detailed
specifications to converters as to the performance characteristics of the film
to be used in their labeling and packaging materials. The Company's sales and
marketing efforts and customer relationships are enhanced by the numerous
customer-specific technical approvals the Company has secured. These approvals
typically involve significant customer time and effort and result in a strong
competitive position for qualified products. Once qualified, products are often
referenced in customer specifications or qualified product lists. These
qualification processes also reinforce the partnership between the Company and
its customers and can lead to additional sales and marketing opportunities.

MANUFACTURING, TECHNOLOGY AND RESEARCH AND DEVELOPMENT

OPP films are manufactured and processed through the tenter and the tubular
processes. The Company is one of the few OPP film producers that utilize both
the tubular and tenter manufacturing processes.

TENTER PROCESS

In the tenter process, specifically formulated polypropylene resins are
combined and melted, sometimes with additives and extruded from a flat die into
a thick film containing from one to five distinct layers, which are then
chilled, reheated and then stretched lengthwise (in the machine direction) and
widthwise while still heated. This dual stretching process is known as "biaxial
orientation." The specific characteristics demanded of each film are controlled
throughout this complex process by a multitude of variables, including
proprietary polymer design, application of unique skin layers, timed variations
of the heating, cooling and stretching processes, alteration of molecular
surface characteristics through the application of flame or a high-voltage
electrical discharge and controlled winding tension. The Company has seven
tenter lines, ranging from 5.5 to 10 meters. The Company currently operates two
eight-meter tenter production lines, as well as the world's only ten-meter OPP
tenter line, which became operational in the second half of fiscal 1998.

TUBULAR PROCESS

In the tubular process, molten resin is extruded from a circular die to form
a thick tube which is stretched lengthwise and widthwise with air pressure and
gravity at controlled temperatures. Tubular processed films offer "balanced
biaxial orientation" (meaning that the film is stretched equally both widthwise
and lengthwise), resulting in improved stability and a more uniform thickness
for thinner films. The tenter process, on the other hand, is a more economical
way to manufacture thicker films. The Company believes that its tubular
manufacturing capacity enables it to "downgauge" or manufacture thinner films,
preserving clarity, machinability and other performance characteristics of
thicker film while using less material, thereby improving performance relative
to cost.

APERTURED FILM PROCESS

Delnet and other apertured film products are produced by a proprietary
process similar to the tenter process, in which film is forced through
high-precision embossing rollers prior to being oriented through a stretching
process similar to OPP films.

The Company conducts product and process research and development through a
staff of approximately 70 chemists, engineers and technicians. Consistent with
AET's strategy of filling the Company's new manufacturing capacity with high-end
films, the research and development group, responding to evolving customer and
end user requirements for attributes such as barrier, clarity and machinability,
introduced eight new or enhanced products during fiscal 1997 and ten more in
fiscal 1998. During fiscal

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1998, 1997, and 1996 the Company spent approximately $7.3 million, $8.2 million
and $7.4 million, respectively, on research and development.

POLYPROPYLENE AND OTHER RAW MATERIALS

The Company's principal products are manufactured primarily from
polypropylene resin. The relatively low density and low cost of polypropylene
resins allow OPP films to provide a cost-efficient material for applications
such as packaging. In addition, polypropylene possesses superior clarity and
natural barrier qualities and can be modified to add other qualities or features
such as metallization, which make it a higher performance and more
cost-efficient material than other plastic resins. The majority of the Company's
resin supply requirements are met by four suppliers; however, these materials
are generally available from a large number of suppliers in sufficient
quantities to meet ongoing requirements. The Company's other raw materials,
which are used in the manufacturing of its netting and other products, are also
available from a large number of suppliers in sufficient quantities to meet
current requirements. The Company has historically not experienced any
significant disruptions in supply as a result of shortages in raw materials.

Polypropylene resin represents a significant percentage of the Company's
cost of sales, and these resin costs have historically fluctuated. Recently,
resin costs have been declining. The prices of OPP films have tended to rise in
periods when resin costs increase and, conversely, have tended to decrease in
times of declining resin costs; however, there is no direct correlation between
resin cost fluctuations and OPP films pricing, and therefore there can be no
assurance that future market conditions will support a direct correlation.

COMPETITION

The Company competes with manufacturers of OPP and other specialty films,
such as cellophane and polyester, as well as with producers of traditional
packaging materials, such as paper and foil, and rigid packaging materials, such
as glass, paper, metal and other containers. The flexible packaging industry is
very competitive, and many of the Company's competitors have significantly
greater financial resources than the Company. The Company believes that Mobil
Corporation, which is the second largest OPP film manufacturer in North America,
is the only other broad-line OPP packaging film supplier based in North America.
There are approximately 10 North American manufacturers of OPP film; however,
only Mobil Corporation and AET have a greater than 20 percent market share.
Competition in OPP films markets is based primarily on product performance
characteristics, machinability, quality, reliability and price.

With respect to its netting products, the Company competes in the diverse
markets these products serve, primarily on the basis of quality, performance and
price. Delnet-Registered Trademark- products compete in certain markets with
woven, non-woven and knit fabrics, as well as with other plastic netting
products. The Company generally competes with these other products by stressing
the technological superiority of its Delnet-Registered Trademark- products.

The Company believes that it has certain competitive advantages in high
margin, value-added products, which include: (i) the advanced proprietary
manufacturing processes required to produce a varied range of such products;
(ii) proprietary OPP film product formulations; (iii) the research and
development expertise required to sustain product innovation; and (iv) the cost
to customers of switching product manufacturers. There can be no assurance,
however, that the markets into which the Company sells its products will not
attract additional competitors that could have significantly greater financial,
technological, manufacturing and marketing resources than the Company.

PATENTS AND TRADEMARKS

The Company currently holds approximately 70 active patents and applications
covering certain of its OPP films and netting products and methods of making
them, of which approximately 40 relate to

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international patents and applications. The Company also has, or it is in the
process of obtaining, U.S. federal trademark registration related to a number of
its products. From time to time the Company may engage in the process of
obtaining patents and trademarks covering various other products. The
termination, expiration or infringement of one or more patents or trademarks
would not have a material adverse effect on the business of the Company.

GOVERNMENT REGULATION

Due to the nature of the Company's business, its operations are subject to a
variety of federal, state and local laws, regulations and licensing
requirements. The Company believes that its operations are in substantial
compliance with those laws, regulations and requirements. Compliance with
federal, state and local requirements relating to the protection of the
environment has not had and is not expected to have a material effect on the
capital expenditures, financial condition, results of operations or competitive
position of the Company.

EMPLOYEES

AET employs approximately 1,170 full-time employees. The United Paper
Workers International Union, Local 884, represents approximately 230 production
and maintenance employees at the Company's Covington, Virginia facility under a
collective bargaining agreement that expires in June, 2000. As a result of the
restructuring plan announced by the Company in the fourth fiscal quarter of
1998, which is discussed in Management's Discussion and Analysis, the number of
employees covered by this collective bargaining agreement will decrease by 170,
reducing the Company total to 60. The Company considers all employee relations
to be satisfactory.

Information with respect to the Executive Officers of the Company may be
found in Item 4a. of this Report.

ITEM 2. PROPERTIES

The following table provides information with respect to AET's facilities:

LOCATION SQUARE FEET OWNED/LEASED
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OPP FILMS Terre Haute, Indiana 821,000 owned
Covington, Virginia 517,000 owned
Varennes, Quebec, Canada 108,000 owned
New Castle, Delaware:
Administration and Research
Center 50,000 leased
SPECIALTY NETS & NON-WOVENS Middletown, Delaware 145,000 owned
CORPORATE Peabody, Massachusetts 7,600 leased

All of AET's owned real property secures its obligations under its
$70,000,000 Credit Facility. The Company believes that its facilities are
suitable for its present intended purposes and adequate for the Company's level
of operations.

ITEM 3. LEGAL PROCEEDINGS

The Company is subject to legal proceedings and claims which have arisen in
the ordinary course of its business and have not been fully adjudicated. These
actions, when ultimately concluded and determined, will not, in the opinion of
management, have a material adverse effect upon the financial position or
results of operations of the Company.

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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

AET did not submit any matters during the fourth quarter of the fiscal year
covered by this report to a vote of the security holders through the
solicitation of proxies or otherwise.

ITEM 4A. EXECUTIVE OFFICERS

The executive officers of AET are as follows:

EXECUTIVE OFFICER NAME AGE POSITION SINCE
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Amin J. Khoury............................. 59 Chairman of the Board(1) October 1986
Thomas E. Williams......................... 52 President, Chief Executive Officer and December 1992
Director(2)
David N. Terhune........................... 52 Executive Vice President and Chief February 1994
Operating Officer(3)
Mark S. Abrahams........................... 47 Vice President and General Manager, December 1993
Specialty Nets & Non-wovens Division(4)
Anthony J. Allott.......................... 34 Vice President, Chief Financial Officer and July 1994
Treasurer(5)
Gerald M. Haines II........................ 35 Vice President, General Counsel and September 1995
Secretary(6)

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(1) The Company has entered into a five-year Employment Agreement dated as of
April 26, 1994 with Mr. Khoury pursuant to which he currently serves as
Chairman of the Board of the Company.

(2) The Company has entered into a five-year Employment Agreement dated as of
April 26, 1994 with Mr. Williams pursuant to which he currently serves as
Chief Executive Officer and President of the Company.

(3) The Company has entered into a three-year Employment Agreement with Mr.
Terhune dated February 1, 1996 pursuant to which he currently serves as
Executive Vice President and Chief Operating Officer of the Company.

(4) The Company has entered into a three-year Employment Agreement dated as of
June 1, 1996 with Mr. Abrahams pursuant to which he currently serves as Vice
President and General Manager of the Company's Specialty Nets & Non-wovens
Division.

(5) The Company has entered into a three-year Employment Agreement dated August
15, 1998 with Mr. Allott pursuant to which he currently serves as Vice
President, Chief Financial Officer and Treasurer.

(6) The Company has entered into a three-year Employment Agreement dated
September 19, 1998 with Mr. Haines pursuant to which he currently serves as
Vice President, General Counsel and Secretary.

The executive officers of the Company are elected annually by the Board of
Directors following the annual meeting of stockholders and serve at the
discretion of the Board of Directors.

BUSINESS EXPERIENCE OF EXECUTIVE OFFICERS

AMIN J. KHOURY--Founder and Chairman of the Board of Directors of the
Company since October 1986; from October 1986 to August 1993, Chief Executive
Officer of the Company; President of the Company from August 1988 through
November 1992; Founder and Chairman of the Board of Directors of BE Aerospace,
Inc., a manufacturer of cabin interior products for commercial aircraft;
Director of Brooks

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Automation, Inc., a leading worldwide independent supplier of vacuum substrate
handling robots, modules and cluster tool platforms for semiconductor and flat
panel display manufacturing.

THOMAS E. WILLIAMS--Director, President and Chief Executive Officer of the
Company since August 1993; Director, President and Chief Operating Officer of
the Company since December 1992; from 1988 until 1992, President and Chief
Executive Officer of Home Innovations, Inc., a home furnishings company; from
1980 until 1988, held a number of executive positions with PepsiCo, Inc.

DAVID N. TERHUNE--Executive Vice President and Chief Operating Officer of
the Company since July 1996. From February 1994 to June 1996 he was Senior Vice
President and Chief Financial Officer of the Company. From 1992 to 1993, Mr.
Terhune was the Chief Financial Officer of Ground Round Restaurants, Inc., an
operator and franchiser of full-service family restaurants. From 1990 to 1992,
Mr. Terhune was Chief Financial Officer of Daka International, Inc., a holding
company serving the food service management and restaurant businesses.

MARK S. ABRAHAMS--Vice President and General Manager of Specialty Nets and
Non-wovens since December 1993. From November 1990 through July 1993, Mr.
Abrahams was the President of the Cybex Division of Lumex Corporation, a
manufacturer and distributor of physical therapy and fitness equipment. From
November 1988 through October 1990, Mr. Abrahams was the Chief Operating Officer
of Cambridge Medical Instruments, a manufacturer of diagnostic medical
equipment.

ANTHONY J. ALLOTT--Vice President, Chief Financial Officer and Treasurer of
the Company since July 1996. From May 1995 to June 1996, he served as Vice
President and Treasurer of the Company, and from July 1994 to April 1995, he was
the Treasurer of the Company. From December 1992 through July 1994, Mr. Allott
was the Corporate Controller with Ground Round Restaurants, Inc., an operator
and franchiser of full-service family restaurants, and from 1986 through 1992 he
was with Deloitte & Touche LLP, an independent auditing firm, most recently as
audit manager.

GERALD M. HAINES II--Vice President, General Counsel and Secretary of the
Company since August 1998. From September 1995 to August 1998 he served as
General Counsel and Secretary of the Company. From September 1990 to August
1995, Mr. Haines was an attorney with the law firm of Choate, Hall & Stewart.

"Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy
Statement to be filed with the Securities and Exchange Commission in connection
with the 1998 Annual Meeting of Stockholders is incorporated herein by
reference.

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PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS

The Company's Common Stock has been quoted on the NASDAQ National Market
System since June 6, 1991 under the symbol "AETC." Before June 6, 1991, no
established public trading market existed for the Company's Common Stock. Below
is the range of high and low sales information for the Common Stock for the two
most recently completed fiscal years, as quoted on the NASDAQ National Market
System:

FISCAL YEAR FISCAL YEAR
1998 1997
-------------- ---------------
HIGH LOW HIGH LOW
------ ------ ------ -------

Quarter ended December 31............... 8 5 5/8 12 8 3/8
Quarter ended March 31.................. 8 3/4 7 3/8 13 7/8 10
Quarter ended June 30................... 7 7/8 6 12 1/4 9 5/8
Quarter ended September 30.............. 10 1/4 6 5/8 12 8 5/16

The Company has not paid any cash dividends on its Common Stock, and the
Company's Board of Directors intends, for the foreseeable future, to retain any
earnings to finance the future growth of the Company. As of December 14, 1998,
there were approximately 135 holders of record and more than 4,000 beneficial
holders of the Company's Common Stock.

The Company currently intends to hold its 1999 Annual Meeting of
Stockholders on or about March 1, 1999. Proposals of stockholders (including
without limitation nominations for the Board of Directors of the Company)
submitted for consideration at the 1999 Annual Meeting must be received by the
Company no later than January 8, 1999 in order to be included in the Company's
Proxy Statement for the 1999 Annual Meeting. If a stockholder wishes to present
a proposal at the Company's 1999 Annual Meeting that will not be included in the
Company's Proxy Statement and fails to so notify the Company by January 8, 1999,
then the proxies that management solicits for the 1999 Annual Meeting will
include a discretionary authority to vote on the stockholder's proposal in the
event it is properly brought before the Meeting.

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ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data of the Company is qualified by
reference to, and should be read in conjunction with, the consolidated financial
statements, including the notes thereto, and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this report. On April 7, 1994 the Company purchased the packaging films business
of Hercules, Incorporated. The following information is in thousands, except per
share amounts:

YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------

INCOME STATEMENT DATA:
Sales................................................ $ 245,334 $ 262,271 $ 234,490 $ 233,935 $ 131,594
Cost of sales........................................ 195,174 205,037 181,899 168,664 97,128
---------- ---------- ---------- ---------- ----------
Gross profit..................................... 50,160 57,234 52,591 65,271 34,466

Operating expenses:
Selling, general and administrative................ 23,754 23,819 20,144 20,219 15,415
Restructuring and impairment charges............... 21,506 4,500
Research and development........................... 7,326 8,221 7,414 6,352 3,242
Start-up costs..................................... 1,539
Write-off of intangible assets..................... 3,305
---------- ---------- ---------- ---------- ----------
Operating profit (loss).......................... (3,965) 20,694 25,033 38,700 12,504

Non-operating expenses:
Interest expense, net.............................. 15,868 16,868 13,927 18,609 10,123
Acquisition costs and other........................ 250 1,500
Litigation settlement.............................. 1,400
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes and change in
accounting......................................... (20,083) 2,326 11,106 18,691 2,381
Income tax expense (benefit)......................... (8,033) 930 4,442 7,476 954
---------- ---------- ---------- ---------- ----------
Income (loss) before change in accounting............ (12,050) 1,396 6,664 11,215 1,427
Change in accounting, net of related tax benefits of
$568............................................... 852
---------- ---------- ---------- ---------- ----------
Net income (loss).................................... ($ 12,902) $ 1,396 $ 6,664 $ 11,215 $ 1,427
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
EARNINGS (LOSS) PER COMMON SHARE:
Basic:
Before change in accounting........................ $ (1.11) $ 0.14 $ 0.66 $ 1.67 $ 0.24
Change in accounting............................... (0.07)
---------- ---------- ---------- ---------- ----------
Net income (loss).................................. (1.18) 0.14 0.66 1.67 0.24
Diluted:
Before change in accounting........................ (1.11) 0.13 0.63 1.53 0.23
Change in accounting............................... (0.07)
---------- ---------- ---------- ---------- ----------
Net income (loss)................................ (1.18) 0.13 0.63 1.53 0.23

BALANCE SHEET DATA:
Working capital...................................... $ 33,471 $ 33,600 $ 35,911 $ 55,441 $ 32,187
Total assets......................................... 370,726 376,493 331,704 318,519 263,977
Current maturities of long-term debt................. 4,000 4,000
Long-term debt....................................... 185,500 196,500 165,500 156,500 175,500
Stockholders' equity................................. 100,437 112,183 108,335 99,058 36,519

10

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

INTRODUCTION

The Company is the largest producer of OPP films in North America. Consumer
product companies worldwide use our OPP films in labeling, packaging and
overwrap applications that often require special attributes such as high gloss,
vivid graphics, exceptional clarity and barriers to air, light and moisture to
preserve freshness. We generally sell our film products to "converters," which
are companies that specialize in processes such as laminating multiple films or
other materials together and printing text and graphics to form the final label
or packaging material for end-users.

For the purposes of Item 7, the fiscal years ended September 30, 1998, 1997
and 1996, are referred to as 1998, 1997 and 1996, respectively. All amounts
indicated are in thousands.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, the percentages
of the Company's sales represented by certain income and expense items in its
income statements:

YEARS ENDED SEPTEMBER 30
-------------------------------
1998 1997 1996
--------- --------- ---------

Sales........................................................... 100.0% 100.0% 100.0%
Cost of sales................................................... 79.6 78.2 77.6
Gross profit.................................................... 20.4 21.8 22.4
Selling, general and administrative............................. 9.7 9.1 8.6
Research and development........................................ 3.0 3.1 3.2
Operating profit (loss)......................................... (1.6) 7.9 10.7
Interest expense, net........................................... 6.5 6.4 5.9
Net income (loss)............................................... (5.3) 0.5 2.8

FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997

Sales for fiscal 1998 of $245,334 were $16,937, or 6.5 percent lower than
fiscal 1997 sales of $262,271. This decrease was due to the divestiture of
certain non-core business and lower average selling prices for OPP films, offset
in part by increased sales volume of OPP films. In the fourth quarter of 1997,
AET divested its injection molding and adhesive nets businesses, and in the
third quarter of 1998 it divested its industrial extrusion and remaining plastic
netting businesses. The lower average selling prices for OPP films are
attributable to highly competitive market conditions resulting from excess
industry production capacity and characterized by substantial declines in
selling prices, particularly of lower-end commodity products. AET's average
selling prices were impacted by these price reductions as the proportion of
lower-end products in its sales mix increased in connection with the start-up of
the Company's ten-meter production line. Although average selling prices
declined in 1998, unit volume sales of OPP films increased by 9.2 percent due
principally to the successful ramp-up since March 1998 of the ten-meter wide
production line. The sales volume increase was facilitated by this new capacity
as well as investments made in recent years in new product development and an
expanded sales and marketing organization. Approximately 41 percent of 1998
sales were from new or enhanced products introduced by the Company within the
past three years. Sales outside the United Sates comprised 16 percent of total
1998 sales, and operating profit for sales outside the United States was 27
percent of total operating profit.

Gross profit was $50,160 for 1998, a decrease of $7,074 or 12.4 percent from
the 1997 level of $57,234. As a percentage of sales, gross margin decreased to
20.4 percent in 1998 versus 21.8 percent in 1997. This decrease was due to the
previously discussed lower average selling prices throughout the OPP films

11

industry during 1998, and the Company's sales mix, offset in part by lower
production costs resulting from new highly efficient assets and lower raw
material costs.

Selling, general and administrative expenses decreased to $23,754 for 1998
from $23,819 in 1997, a decrease of $65. Research and development expenses
decreased to $7,326 in 1998, from $8,221 in 1997, a decrease of $895. In
previous years, as part of AET's initiatives to enhance product offerings and
expand the reach of the sales and marketing organization, spending in the
selling, marketing and research and development areas was increased. In 1998,
spending in these areas leveled off.

In the third quarter of fiscal 1998, the Company elected early adoption of
the Accounting Standards Executive Committee Statement of Position 98-5,
"Reporting on the Costs of Start-up Activities" ("SOP 98-5"). The effect of this
change in accounting was the recognition of $1,539 of expenses related to net
start-up costs incurred during fiscal 1998, and a one-time charge of $852, net
of related income tax benefits of $568, resulting from costs incurred in prior
periods.

In the fourth fiscal quarter of 1998 AET began implementing a shutdown of
certain older and less efficient assets in its Covington, Virginia facility and
made certain other organizational changes, including a 15 percent reduction in
total headcount. In connection with the shutdown, the Company recorded a charge
of $18,580 or $11,148 after taxes. AET also wrote down the value of certain
other assets in its Covington, Virginia facility, whose carrying values had been
impaired by an aggregate of $2,926.

Net interest expense decreased to $15,868 in fiscal 1998, from $16,868 in
fiscal 1997, a decrease of $1,000, or 5.9 percent. This decrease was due to
lower levels of outstanding debt during 1998 compared to 1997.

Income tax benefit of $8,033 represents the impact of losses resulting from
restructuring and impairment charges and the writeoff of start-up costs in 1998
versus pre-tax earnings in 1997. Income tax as a percentage of before tax income
or loss remained constant for 1998 and 1997.

FISCAL YEAR 1997 COMPARED TO FISCAL 1996

Sales for fiscal 1997 of $262,271 were $27,781, or 11.8 percent higher than
sales in 1996, reflecting a 15 percent increase in unit volume sales of OPP
films. This sales revenue growth was facilitated by new capacity brought on
stream during the third quarter of fiscal 1996, investments in new product
development and an expanded sales and marketing organization. This increase in
volume was offset in part by lower average selling prices, particularly in the
fourth quarter, due to competitive pressures precipitated by lower capacity
utilization in the OPP films industry. This lower capacity utilization was the
result of the new capacity additions by AET and four of its competitors which
were either on line at September 30, 1997 or started up in fiscal 1998. The
lower average selling prices for the Company during 1997 also resulted from a
less favorable sales mix, impacted by a higher percentage of secondary material
production due in part to the manufacture of a number of new products.
Approximately 40 percent of fiscal 1997 sales were from new or enhanced products
introduced by the Company within the past three years. Sales outside the United
States comprised 14 percent of total 1997 sales and operating profit from sales
outside the United States was 22 percent of total operating profit.

Gross profit of $57,234 for 1997 increased by $4,643, or 8.8 percent over
the 1996 level of $52,591. As a percentage of sales, gross margin was 21.8
percent in 1997 versus 22.4 percent in 1996. This decrease was due in part to
the previously discussed lower average prices throughout the industry during
1997, as well as the impact of certain production inefficiencies related to
process equipment downtime and the ramp up time involved in the manufacture of a
number of new products.

Selling, general and administrative expenses for fiscal 1997 increased to
$23,819 from $20,144 in 1996, an increase of $3,675. Research and development
expenses in 1997 of $8,221 exceeded 1996 levels by $807. The higher expense
levels were attributable to the ongoing initiatives of the Company to enhance
its

12

product offerings and expand the reach of the sales and marketing organization
as part of AET's strategy to support a 60 percent increase in its production
capacity over a two year period.

AET implemented a restructuring plan in the fourth quarter of 1997, which
included headcount reductions in certain manufacturing operations, divestiture
of certain non-core businesses and certain other organizational changes and
therefore recorded a $4,500 restructuring charge, or $2,700 after taxes. These
costs were incurred in 1998 and related to severance and other
employment-related costs, as well as costs associated with company-wide plant
restructuring efforts. AET sold its dry adhesive web and injection molding
businesses, which collectively comprised less than 5 percent of AET's total
revenues at the time of divestiture. Proceeds from the sale were utilized to pay
down debt and to reinvest in AET's core OPP films and apertured films
businesses.

Net interest expense increased to $16,868 in fiscal 1997 from $13,927 in
1996, an increase of $2,941. This increase was due to higher levels of
outstanding debt primarily related to borrowings in connection with the first of
the two new capacity expansion projects.

In the third quarter of fiscal 1997, AET recorded a one-time charge of
$1,500, or $900 after taxes, representing costs incurred in connection with
acquisition due diligence and negotiations which were terminated during the
quarter.

Income taxes of $930 for 1997 were lower than 1996, due to lower pre-tax
earnings. Income tax as a percent of before-tax income remained constant for
1998 and 1997.

LIQUIDITY AND CAPITAL RESOURCES

In conjunction with the 1994 acquisition of the OPP films business from
Hercules, Incorporated (the "Hercules Acquisition"), AET entered into a Credit
Agreement with a group of lenders to provide the Company with senior bank
financing. In January 1998, AET amended and restated this Credit Agreement and
combined the revolving facility and revolving term facility thereunder into a
$70,000 revolving credit facility (the "Credit Facility") with a final maturity
of the earlier of (i) November 1, 2001, if the AET Senior Notes are not
refinanced prior to such date, or (ii) January 29, 2003. The Credit Facility is
secured by all the assets of AET. It includes covenants which limit borrowings
based on certain asset levels, requires AET to maintain a minimum tangible net
worth and specified interest coverage and leverage ratios, and establishes
maximum capital expenditure levels. It also contains other covenants customary
in documents relating to transactions of this type. The Company was not in
compliance with one of these covenants at September 30, 1998, and has received a
waiver from the banks. At September 30, 1998, AET had approximately $29,000
available under its Revolving Credit Facility. The Company also has $6,500 of
Revenue Bonds outstanding, which is due November 4, 2004.

Operating activities in 1998 used $10,364 in cash, which was the result of
$5,040 of net income before depreciation and amortization and other non-cash
expenditures, less a $15,404 net decrease in other working capital items, after
giving effect to divestitures. The net decrease in working capital resulted from
a $7,850 increase in inventory, a $4,699 increase in accounts receivable, a $58
increase in prepaid and other charges, and decreases in accounts payable and
accrued expenses of $2,797. Interest paid during 1998 amounted to $21,467,
including capitalized interest. Additions to property, plant and equipment were
$45,496 and included expenditures related to the two capacity expansions. These
capital expenditures were funded in part by borrowings pursuant to the Credit
Agreement, with the balance funded by available cash and cash flow.

AET completed a sale-leaseback transaction in the first half of 1998 whereby
it sold certain items of equipment and other tangible personal property and
leased the property back from the purchaser pursuant to an operating lease
agreement. AET received gross proceeds of $44,625 as a result of the
sale-leaseback transaction, which were utilized to pay down outstanding
borrowings under its existing Credit Agreement. During the third quarter of
1998, AET sold its plastic profiles, specialty netting and utility products

13

manufacturing assets. The gross proceeds from the transaction of $26,500, which
approximated book value for the businesses after considering costs of the
transaction, were utilized to pay down debt and to reinvest in AET's core OPP
films and apertured films businesses.

AET believes that available cash and equivalents, cash flow from the
business, and borrowing availability under the Credit Agreement will provide
adequate funds over the next 24 months to accommodate its working capital needs,
capital expenditures and debt service obligation.

YEAR 2000

AET's company-wide Year 2000 project, which is addressing the issue of
computer programs and embedded computer chips being unable to distinguish
between the year 1900 and the year 2000, is proceeding on schedule. The project
is comprised of five major phases: (1) taking inventory of systems potentially
impacted by the Year 2000 issue; (2) assessing the Year 2000 compliance or
capability of systems determined to be material to the company; (3) repairing or
replacing material systems that are determined not to be Year 2000 compliant or
capable (4) testing the repaired or replaced systems; and (5) designing and
implementing contingency and business continuation plans.

At September 30, 1998, AET had completed the inventory and assessment phases
of the project. Those systems with identified Year 2000 compliance or capability
issues are currently being repaired or replaced, as required. The largest part
of this effort is the continuing implementation of a new enterprise-wide
information system which commenced in 1996. The financial, sales, order entry,
electronic data interchange, and administrative portions of the implementation
are complete. The inventory, shop floor and related manufacturing portions of
the system have been implemented in two production sites, with the remaining two
plants expected to be completed by June 30, 1999.

Once Year 2000 compliance repairs or replacements have been made, AET plans
to test systems to verify that compliance has been achieved. Third parties will
validate the Year 2000 compliance of our manufacturing systems, and internal
resources will validate the compliance of the remainder of our systems. The
target completion date for the systems testing is September 30, 1999.

The total cost associated with Year 2000 compliance activities is estimated
to be $10,000, of which $8,000 will be spent on the new enterprise-wide systems
which offer many other enhancements in comparison to our current systems. Cash
flow from operations is expected to fund the balance of the project. No critical
information technology projects have been deferred due to our Year 2000
compliance efforts.

The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity, and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers and customers,
AET is unable to determine at this time whether the consequences of Year 2000
failures will have a material impact on AET's results of operations, liquidity,
and financial condition. AET believes that with the completion of the project as
scheduled, the possibility of significant interruptions of normal operations
should be substantially reduced.

INFLATION

Management reviews the prices charged for its products on a regular basis.
When market conditions allow, adjustments are made to reflect changes in demand
or product costs due to fluctuations in the cost of materials, labor and
inflation. The costs of raw materials make up a significant portion of AET's
costs and have historically fluctuated. There can be no assurance, however, that
future market conditions will support any correlation between raw material cost
fluctuations and finished product films pricing.

14

SEASONAL NATURE OF CERTAIN OPP MARKETS

Certain of the end-use markets for the Company's OPP films are seasonal. For
example, demand in the snack food, soft drink and candy markets is generally
higher in the spring and summer. As a result, sales and net income are generally
higher in those periods.

NEW ACCOUNTING PRONOUNCEMENTS

Information related to new accounting pronouncements is included in the
footnotes to the consolidated financial statements.

EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS
DISCUSSED IN THIS REPORT ARE FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
IN THE FORWARD-LOOKING STATEMENTS, INCLUDING THOSE RISKS RELATED TO THE TIMELY
DEVELOPMENT AND ACCEPTANCE OF NEW PRODUCTS, FLUCTUATIONS IN RAW MATERIALS AND
OTHER PRODUCTION COSTS, THE LOSS OF ONE OR MORE SIGNIFICANT CUSTOMERS, THE
IMPACT OF COMPETITIVE PRODUCTS AND PRICING, THE TIMELY COMPLETION OF CAPITAL
PROJECTS, THE SUCCESS OF THE COMPANY'S EFFORTS TO ACCESS CAPITAL MARKETS ON
SATISFACTORY TERMS, AND TO ACQUIRE, INTEGRATE, AND OPERATE NEW BUSINESSES AND
EXPAND INTO NEW MARKETS, AS WELL AS OTHER RISKS DETAILED IN EXHIBIT 99 OF THE
COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30,
1997 AND FROM TIME TO TIME IN THE COMPANY'S OTHER REPORTS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

FOREIGN EXCHANGE CONTRACTS

The Company has entered into foreign exchange contracts, the last of which
expires in October 1998, to hedge firm purchase commitments for the purchase of
equipment denominated in German Marks and Pounds Sterling. Gains and losses on
the contracts which result from market risk associated with changes in the
market values of the underlying currencies are deferred and reported as part of
the capitalized asset. In entering into these contracts, the Company has assumed
the risk which might arise from the possible inability of counterparties to meet
the terms of their contracts. The Company does not expect any losses as a result
of counterparty defaults. At September 30, 1998 and 1997, the Company had
outstanding foreign exchange contracts with notional values of $2,503 and
$5,746, respectively. These contracts had no carrying value and a net unrealized
loss of $246 and $498 as of September 30, 1998 and 1997, respectively. The
Company does not enter into foreign exchange contracts for trading purposes.

SHORT-TERM AND LONG-TERM DEBT

The Company is exposed to interest rate risk primarily through its borrowing
activities. The Company's policy has been to utilize United States dollar
denominated borrowings to fund its working capital and investment needs.
Short-term debt, if required, is used to meet working capital requirements,
while long term debt is generally used to finance long term investments. There
is inherent roll-over risk for borrowings as they mature and are renewed at
current market rates. The extent of this risk is not quantifiable or predictable
because of the variability of future interest rates and the Company's future
financing requirements. At September 30,1998, the Company had no short term debt
outstanding and had long term debt outstanding of $185,500, of which $29,000 was
outstanding on its revolving credit facility which has a variable interest rate,
based on either LIBOR or prime rates.

The Company does not enter into financial instruments transactions for
trading or other speculative purposes or to manage interest rate exposure.

With respect to the foreign exchange contracts, an adverse change in the
underlying exchange rates would not have a significant effect on the Company's
reported results as any gain or loss on the contract would be offset by changes
in the value of the firm purchase commitment. A 10% adverse change in

15

interest rates on the portion of the Company's debt bearing interest at variable
rates would result in an increase in interest expense of approximately $260.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required under this Item 8 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.

16

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required under this Item 10 with respect to Executive
Officers of the company is set forth in Item 4a. on pages 7-8 of this report.

The directors of AET are as follows:

DIRECTOR NAME AGE POSITION SINCE
- ------------------------------------------- --- ------------------------------------------- ------------------

Amin J. Khoury............................. 59 Chairman of the Board(1) October 1986
Thomas E. Williams......................... 52 President, Chief Executive Officer and December 1992
Director(2)
Nader A. Golestaneh+....................... 38 Director October 1986
Richard G. Hamermesh*...................... 50 Director October 1986
Mark M. Harmeling+......................... 46 Director October 1986
Paul W. Marshall........................... 57 Director October 1986
Joseph J. O'Donnell*....................... 54 Director October 1986

- ------------------------

* Member Audit Committee

+ Member Stock Option and Compensation Committee

(1) The Company has entered into a five-year Employment Agreement dated as of
April 26, 1994 with Mr. Khoury pursuant to which he currently serves as
Chairman of the Board of the Company.

(2) The Company has entered into a five-year Employment Agreement dated as of
April 26, 1994 with Mr. Williams pursuant to which he currently serves as
Chief Executive Officer and President of the Company.

All directors hold office until the next annual meeting of stockholders or
until their successors are duly elected and qualified.

BUSINESS EXPERIENCE OF DIRECTORS

AMIN J. KHOURY--Founder and Chairman of the Board of Directors of the
Company since October 1986; from October 1986 to August 1993, Chief Executive
Officer of the Company; President of the Company from August 1988 through
November 1992; Founder and Chairman of the Board of Directors of BE Aerospace,
Inc., a manufacturer of cabin interior products for commercial aircraft;
Director of Brooks Automation, Inc., a leading worldwide independent supplier of
vacuum substrate handling robots, modules and cluster tool platforms for
semiconductor and flat panel display manufacturing.

THOMAS E. WILLIAMS--Director, President and Chief Executive Officer of the
Company since August 1993; Director, President and Chief Operating Officer of
the Company since December 1992; from 1988 until 1992, President and Chief
Executive Officer of Home Innovations, Inc., a home furnishings company; from
1980 until 1988, held a number of executive positions with PepsiCo, Inc.

NADER A. GOLESTANEH--Director of the Company since 1990; President of
Centremark Properties, Inc., a real estate management and development company
since 1986; attorney in private practice in Boston, Massachusetts.

RICHARD G. HAMERMESH--Director of the Company since August 1987; Managing
Partner, Center for Executive Development, an independent executive education
and training firm; Director of BE Aerospace, Inc., a manufacturer of cabin
interior products for commercial aircraft.

MARK M. HARMELING--Director of the Company since 1986; since 1997, an
executive of The A.G. Spanos Corporation, a leading developer of multi-family
residential complexes; since 1991, President of

17

Bay State Reality Advisors, a real estate consulting firm; from 1985 to 1991,
President of Intercontinental Real Estate Corporation, a real estate holding and
development corporation; Director of Universal Holding Corporation, an insurance
holding company.

PAUL W. MARSHALL--Director of the Company since 1996; Professor of
Management, Harvard Business School; from 1992 to 1997, Chairman of the Board
and Chief Executive Officer of Rochester Shoe Tree Company, Inc., a manufacturer
and distributor of cedar shoe trees and other cedar and shoe care products; from
1989 to 1991, Chairman of Industrial Economics Company, a management consulting
firm; from 1989 to 1992, Adjunct Professor, Harvard Business School; Director of
Raymond James Financial Corporation, a regional brokerage firm.

JOSEPH J. O'DONNELL--Director of the Company since 1978; Chairman of the
Board and Chief Executive Officer of Boston Concessions Group, Inc., a company
that manages food service operations in ski areas, amusement parks, restaurants
and theaters.

ITEM 11. EXECUTIVE COMPENSATION

"Executive Compensation" in the Proxy Statement to be filed with the
Securities and Exchange Commission in connection with the 1998 Annual Meeting of
Stockholders is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

"Beneficial Ownership of Shares" in the Proxy Statement to be filed with the
Securities and Exchange Commission in connection with the 1998 Annual Meeting of
Stockholders is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

"Certain Transactions" in the Proxy Statement to be filed with the
Securities and Exchange Commission in connection with the 1998 Annual Meeting of
Stockholders is incorporated herein by reference.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

The following documents are filed as part of this report:

A. FINANCIAL STATEMENTS

Consolidated Balance Sheets, September 30, 1998 and 1997

Consolidated Income Statements for the Years Ended September 30, 1998, 1997
and 1996

Consolidated Statements of Stockholders' Equity for the Years Ended
September 30, 1998, 1997 and 1996

Consolidated Statements of Cash Flows for the Years Ended September 30,
1998, 1997 and 1996

Notes to Consolidated Financial Statements

FINANCIAL STATEMENT SCHEDULES

Schedule II--Valuation and Qualifying Accounts for the Years Ended September
30, 1998, 1997 and 1996

All other schedules are omitted as the required information is not
applicable or is included in the financial statements or related notes.

18

B. EXHIBITS

3.1(a) Amended and Restated Certificate of Incorporation.
3.2(i) Amendment dated February 26, 1992 to Amended and Restated Certificate of
Incorporation.
3.3(i) Amended and Restated By-Laws.
4.1(d) Indenture dated as of April 7,1994 between the Registrant and United States Trust
Company of New York, Trustee.
4.2(d) Form of 11 1/2 percent Senior Note due 2002 (included in Exhibit 4.2).
4.3(a) Specimen Common Stock Certificate.
4.4(k) Rights Agreement dated as of March 2, 1998 between the Company and BankBoston,
N.A., as Rights Agent.
10.1(h) Credit Agreement dated as of April 7, 1994 and Amended and Restated as of January
29, 1998 by and between the Registrant and The Chase Manhattan Bank as
Administrative Agent and LaSalle Business Credit, Inc. as Co-Agent.
10.1.1* Waiver and Amendment No. 1 dated as of December 16, 1998 to Amended and Restated
Credit Agreement dated as of January 29, 1998 between the Registrant and The Chase
Manhattan Bank as Administrative Agent.
10.2(b) 1986 Stock Option Plan, as amended.
10.3(c) 1991 Stock Option Plan, as amended.
10.4(b) 1991 Stock Option Plan for Directors, as amended.
10.5(d) 1994 Stock Option Plan, as amended.
10.6(f) Employment Agreement dated as of June 1, 1996 between the Registrant and Mark S.
Abrahams.
10.7(f) Employment Agreement dated as of February 1, 1996 between the Registrant and David
N. Terhune, as amended.
10.8(i) Letter Agreement dated May 18, 1998 between the Registrant and David N. Terhune.
10.9(g) Agreement dated as of August 22, 1997 between the Registrant and Anthony J.
Allott.
10.10(i) Letter Agreement dated May 18, 1998 between the Registrant and Anthony J. Allott.
10.11(f) Employment Agreement dated as of April 26, 1994 between the Registrant and Amin J.
Khoury, as amended.
10.12(i) Letter Agreement dated May 18, 1998 between the Registrant and Amin J. Khoury.
10.13(f) Employment Agreement dated as of April 26, 1994 between the Registrant and Thomas
E. Williams, as amended.
10.14(i) Letter Agreement dated May 18, 1998 between the Registrant and Thomas E. Williams.
10.15* Employment Agreement dated as of August 15, 1998 between the Registrant and
Anthony J. Allott.
10.16* Employment Agreement dated as of September 19, 1998 between the Registrant and
Gerald M. Haines II.
10.17(e) Executive Deferred Compensation Plan dated as of September 1, 1994.
10.18(j) Equipment Lease Agreement dated as of December 29, 1997 between Registrant and
Lasalle National Leasing Corporation.
10.19(i) Asset Purchase and Sale Agreement dated as of April 6, 1998 between the Registrant
and ProNet Corporation.
21(d) Subsidiaries of the Registrant.
23* Independent Auditors' Consent--Deloitte & Touche LLP.
24* Powers of Attorney.
27* Financial Data Schedule.
99(g) Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995.

- ------------------------

19

* Filed herewith

(a) Contained in Exhibits to Registrant's Registration Statement on Form S-1, as
amended (No. 33-40145), filed with the Commission on April 24, 1991.

(b) Contained in Exhibits to the Registrant's Registration Statement on Form S-8
(No. 33-44449), filed with the Commission on December 18, 1991.

(c) Contained in Exhibits to the Registrant's Registration Statement on Form S-8
(No. 33-48841), filed with the Commission on June 25, 1992.

(d) Contained in Exhibits to the Registrant's Registration Statement on Form S-4
(No. 33-78006), filed with the Commission on April 21, 1994.

(e) Contained in Exhibits to the Registrant's Form 10-K for the fiscal year
ended September 30, 1994.

(f) Contained in Exhibits to the Registrant's Form 10-K for the fiscal year
ended September 30, 1996.

(g) Contained in Exhibits to the Registrant's Form 10-K for the fiscal year
ended September 30, 1997.

(h) Contained in Exhibits to the Registrant's Form 10-Q for the fiscal quarter
ended December 31, 1997.

(i) Contained in Exhibits to the Registrant's Form 10-Q for the fiscal quarter
ended June 30, 1998.

(j) Contained in Exhibits to the Registrant's Form 8-K dated January 2, 1998.

(k) Contained in Exhibits to the Registrant's Form 8-K dated March 6, 1998.

The above referenced exhibits are, as indicated, either filed herewith or
have heretofore been filed with the Commission under the Securities Act and the
Exchange Act and are referred to and incorporated herein by reference to such
filings.

C. REPORTS ON FORM 8-K

One report on Form 8-K describing a major restructuring of the Covington,
Virginia manufacturing facility was filed on September 14, 1998.

20

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.

APPLIED EXTRUSION TECHNOLOGIES, INC.

BY: /S/ ANTHONY J. ALLOTT
-----------------------------------------
Anthony J. Allott,
Vice President, Chief Financial Officer
and Treasurer
December 29, 1998

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated:

AMIN J. KHOURY*
- ------------------------------
Amin J. Khoury, Chairman Of
The Board
December 29, 1998

/s/ THOMAS E. WILLIAMS
- ------------------------------
Thomas E. Williams, Chief
Executive Officer,
President and Director
December 29, 1998

PAUL W. MARSHALL*
- ------------------------------
Paul W. Marshall, Director
December 29, 1998

MARK M. HARMELING*
- ------------------------------
Mark M. Harmeling, Director
December 29, 1998

NADER A. GOLESTANEH*
- ------------------------------
Nader A. Golestaneh, Director
December 29, 1998

JOSEPH J. O'DONNELL*
- ------------------------------
Joseph J. O'Donnell, Director
December 29, 1998

RICHARD G. HAMERMESH*
- ------------------------------
Richard G. Hamermesh, Director
December 29, 1998

/s/ ANTHONY J. ALLOTT
- ------------------------------
Anthony J. Allott, Vice
President, Chief Financial
Officer and Treasurer
December 29, 1998

*By: /s/ THOMAS E. WILLIAMS
-----------------------------------
Power of Attorney

Date: December 29, 1998
-----------------------------------

21

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES

CONSOLIDATED FINANCIAL STATEMENTS:

Consolidated Balance Sheets, September 30, 1998 and 1997............................. F-2

Consolidated Income Statements for the Years Ended September 30, 1998, 1997 and
1996............................................................................... F-3

Consolidated Statements of Stockholders' Equity for the Years Ended September 30,
1998, 1997 and 1996................................................................ F-4

Consolidated Statements of Cash Flows for the Years Ended September 30, 1998, 1997
and 1996........................................................................... F-5

Notes to Consolidated Financial Statements........................................... F-6

FINANCIAL STATEMENT SCHEDULES:

Schedule II--Valuation and Qualifying Accounts for the Years Ended September 30,
1998, 1997 and 1996................................................................ F-18

INDEPENDENT AUDITORS' REPORT......................................................... F-19

F-1

APPLIED EXTRUSION TECHNOLOGIES, INC.

CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 1998 AND 1997

(IN THOUSANDS)

1998 1997
---------- ----------

ASSETS
Current assets:
Cash and cash equivalents............................................................... $ 2,279 $ 3,054
Accounts receivable, net of allowance for doubtful accounts of $1,056 and $745 at
September 30, 1998 and 1997, respectively............................................. 38,467 38,513
Inventory............................................................................... 39,192 34,619
Prepaid expenses and deferred taxes..................................................... 5,063 7,804
---------- ----------
Total current assets................................................................ 85,001 83,990
Property, plant and equipment, net........................................................ 278,905 284,430
Intangibles and deferred finance charges, net............................................. 3,636 4,691
Long-term note receivable and other assets................................................ 3,184 3,382
---------- ----------
$ 370,726 $ 376,493
---------- ----------
---------- ----------

LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Current liabilities:
Accounts payable........................................................................ $ 15,259 $ 15,807
Accrued interest........................................................................ 9,145 9,430
Accrued expenses........................................................................ 27,126 21,153
Current portion of long-term debt....................................................... 4,000
---------- ----------
Total current liabilities............................................................. 51,530 50,390

Long-term debt............................................................................ 185,500 196,500
Deferred taxes and other credits.......................................................... 33,259 17,420

Commitments and contingencies

STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; authorized, 1,000 shares, of which 150 are designated
Junior Preferred Stock; no shares outstanding
Common stock, $.01 par value:
Authorized, 15,000 shares; issued, 11,357 and 10,807 shares at September 30, 1998 and
1997, respectively.................................................................... 114 108
Additional paid-in capital................................................................ 95,867 92,401
Retained earnings......................................................................... 9,938 22,840
Cumulative translation adjustments........................................................ (2,396) (154)
---------- ----------
103,523 115,195
Treasury stock, at cost and other--327 and 325 shares at September 30, 1998 and 1997,
respectively............................................................................ (3,086) (3,012)
---------- ----------
Total stockholders' equity............................................................ 100,437 112,183
---------- ----------
$ 370,726 $ 376,493
---------- ----------
---------- ----------

See notes to consolidated financial statements.

F-2

APPLIED EXTRUSION TECHNOLOGIES, INC.

CONSOLIDATED INCOME STATEMENTS

YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

1998 1997 1996
---------- ---------- ----------

SALES........................................................................ $ 245,334 $ 262,271 $ 234,490
COST OF SALES................................................................ 195,174 205,037 181,899
---------- ---------- ----------
GROSS PROFIT................................................................. 50,160 57,234 52,591

OPERATING EXPENSES:
Selling, general and administrative........................................ 23,754 23,819 20,144
Restructuring and impairment charges....................................... 21,506 4,500
Research and development................................................... 7,326 8,221 7,414
Start-up costs............................................................. 1,539
---------- ---------- ----------
Total operating expenses................................................. 54,125 36,540 27,558
---------- ---------- ----------
OPERATING PROFIT (LOSS)...................................................... (3,965) 20,694 25,033

NON-OPERATING EXPENSES:
Interest expense, net...................................................... 15,868 16,868 13,927
Acquisition costs and other................................................ 250 1,500
---------- ---------- ----------
Total non-operating expenses............................................. 16,118 18,368 13,927
---------- ---------- ----------
Income (loss) before income taxes and change in accounting................... (20,083) 2,326 11,106
Income tax expense (benefit)................................................. (8,033) 930 4,442
---------- ---------- ----------
Income (loss) before change in accounting.................................... (12,050) 1,396 6,664
Change in accounting, net of related tax benefits of $568.................... 852
---------- ---------- ----------
NET INCOME (LOSS)............................................................ $ (12,902) $ 1,396 $ 6,664
---------- ---------- ----------
---------- ---------- ----------
EARNINGS (LOSS) PER COMMON SHARE:
Basic:
Before change in accounting................................................ $ (1.11) $ .14 $ .66
Change in accounting....................................................... (.07)
---------- ---------- ----------
Net income (loss).......................................................... (1.18) .14 .66
---------- ---------- ----------
Diluted:
Before change in accounting................................................ (1.11) .13 .63
Change in accounting....................................................... (.07)
---------- ---------- ----------
Net income (loss).......................................................... (1.18) .13 .63
---------- ---------- ----------
AVERAGE COMMON AND POTENTIAL COMMON SHARES OUTSTANDING:
Basic...................................................................... 10,893 10,449 10,170
Diluted.................................................................... 10,893 10,858 10,589

See notes to consolidated financial statements.

F-3

APPLIED EXTRUSION TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996

(IN THOUSANDS)

VOTING NONVOTING
COMMON STOCK COMMON STOCK ADDITIONAL CUMULATIVE
---------------------- ---------------------- PAID-IN RETAINED TRANSLATION
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT
--------- ----------- --------- ----------- ----------- --------- -----------

BALANCE, SEPTEMBER 30, 1995......... 9,986 $ 100 135 $ 1 $ 84,823 $ 14,780 $ 501
Net income........................ 6,664
Profit sharing contribution....... 145 1 1,681
Conversion of non-voting common
stock........................... 135 1 (135) (1)
Stock issued for employee
purchases....................... 18 1 173
Treasury shares and other.........
Exercise of stock options......... 245 2 1,552
Exchange rate changes............. (224)
Tax benefits of early disposition
of stock options................ 1,409
--------- ----- --------- --- ----------- --------- -----------
BALANCE, SEPTEMBER 30, 1996......... 10,529 105 -- -- 89,638 21,444 277
Net income........................ 1,396
Profit sharing contribution....... 175 2 1,863
Stock issued for employee
purchases....................... 75 1 674
Treasury shares and other.........
Exercise of stock options......... 28 173
Exchange rate changes............. (431)
Tax benefits of early disposition
of stock options................ 53
--------- ----- --------- --- ----------- --------- -----------
BALANCE, SEPTEMBER 30, 1997......... 10,807 108 -- -- 92,401 22,840 (154)
Net loss.......................... (12,902)
Profit sharing contribution....... 240 2 1,494
Stock issued for 401(k) match..... 124 2 772
Stock issued for employee
purchases....................... 95 1 545
Treasury shares and other.........
Exercise of stock options......... 91 1 575
Exchange rate changes............. (2,242)
Tax benefits of early disposition
of stock options................ 80
--------- ----- --------- --- ----------- --------- -----------
BALANCE, SEPTEMBER 30, 1998......... $ 11,357 $ 114 -- -- $ 95,867 $ 9,938 $ (2,396)
--------- ----- --------- --- ----------- --------- -----------
--------- ----- --------- --- ----------- --------- -----------

TREASURY
STOCK AND
OTHER
-----------

BALANCE, SEPTEMBER 30, 1995......... $ (1,147)
Net income........................
Profit sharing contribution.......
Conversion of non-voting common
stock...........................
Stock issued for employee
purchases.......................
Treasury shares and other......... (1,982)
Exercise of stock options.........
Exchange rate changes.............
Tax benefits of early disposition
of stock options................
-----------
BALANCE, SEPTEMBER 30, 1996......... (3,129)
Net income........................
Profit sharing contribution.......
Stock issued for employee
purchases.......................
Treasury shares and other......... 117
Exercise of stock options.........
Exchange rate changes.............
Tax benefits of early disposition
of stock options................
-----------
BALANCE, SEPTEMBER 30, 1997......... (3,012)
Net loss..........................
Profit sharing contribution.......
Stock issued for 401(k) match.....
Stock issued for employee
purchases.......................
Treasury shares and other......... (74)
Exercise of stock options.........
Exchange rate changes.............
Tax benefits of early disposition
of stock options................
-----------
BALANCE, SEPTEMBER 30, 1998......... $ (3,086)
-----------
-----------

NO PREFERRED STOCK WAS ISSUED OR OUTSTANDING DURING ANY PERIOD PRESENTED.

See notes to consolidated financial statements.

F-4

APPLIED EXTRUSION TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996

(IN THOUSANDS)

1998 1997 1996
---------- ---------- ----------

OPERATING ACTIVITIES:
Net income (loss)........................................................... $ (12,902) $ 1,396 $ 6,664
Adjustment to reconcile net income to net cash (used in) provided by
operating activities:
Depreciation and amortization............................................. 17,773 17,248 13,991
Restructuring charges..................................................... 18,580 4,500
Asset impairments......................................................... 2,926
Stock issued for retirement plans......................................... 2,270 1,865 1,682
Provision for doubtful accounts........................................... 832 285 373
Discount on investment securities......................................... (171)
Deferred income taxes and other credits................................... (25,291) 930 4,442
Change in accounting...................................................... 852
Changes in assets and liabilities which (used) provided cash:
Prepaid expenses and other assets....................................... (58) 328 (410)
Accounts payable and accrued expenses................................... (2,797) 627 (6,895)
Accounts receivable and inventory....................................... (12,549) (7,898) (4,819)
---------- ---------- ----------
Net cash (used in) provided by operating activities................. (10,364) 19,281 14,857

INVESTING ACTIVITIES:
Purchases of investment securities.......................................... (4,055)
Proceeds from maturities of investment securities........................... 16,270
Additions to property, plant and equipment, net............................. (45,496) (54,963) (51,573)
Proceeds from sale of assets................................................ 26,500
Proceeds from sale-leaseback transaction.................................... 44,625
---------- ---------- ----------
Net cash (used in) provided by investing activities................. 25,629 (54,963) (39,358)

FINANCING ACTIVITIES:
Borrowings (repayments) under bank credit agreement, net.................... (15,000) 35,000 9,000
Proceeds from issuance of stock, net........................................ 1,202 901 (1,484)
---------- ---------- ----------
Net cash (used in) provided by financing activities................. (13,798) 35,901 7,516
Effect of exchange rate changes on cash..................................... (2,242) (431) (224)
---------- ---------- ----------
Decrease in cash and cash equivalents, net.................................. (775) (212) (17,209)
Cash and cash equivalents, beginning........................................ 3,054 3,266 20,475
---------- ---------- ----------
Cash and cash equivalents, ending........................................... $ 2,279 $ 3,054 $ 3,266
---------- ---------- ----------
---------- ---------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest, including capitalized interest of $6,098, $5,132, and $5,106,
respectively............................................................ $ 21,467 $ 20,545 $ 18,185
Income taxes.............................................................. 3,000 2 1,669

See notes to consolidated financial statements.

F-5

APPLIED EXTRUSION TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Applied Extrusion Technologies, Inc. and its subsidiaries (collectively AET
or the Company) develop and manufacture highly specialized, single and
multilayer oriented polypropylene ("OPP") films used in consumer product
labeling and flexible packaging applications. The Company also develops and
manufactures oriented, apertured films, or "nets," for health care, filtration
and other markets. The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All material intercompany
accounts and transactions have been eliminated.

ACCOUNTING ESTIMATES were made in connection with the preparation of the
Company's consolidated financial statements in conformity with
generally-accepted accounting principles. These estimates affect reported
amounts and disclosure of revenues and expenses during the reporting period.
Actual results could differ from these estimates.

CASH AND CASH EQUIVALENTS consist of cash and highly liquid debt instruments
such as commercial paper and money market securities purchased with an original
or remaining maturity of less than three months.

FINANCIAL INSTRUMENTS are recorded in accordance with Statement of Financial
Accounting Standards (SFAS) No. 107, "Disclosures about Fair Value of Financial
Instruments," which requires disclosure about fair value for all financial
instruments, whether recognized or not in the balance sheet, for which it is
practicable to estimate that value. A financial instrument is defined as cash,
evidence of an ownership interest in an entity, and certain contracts to
exchange cash or other financial instruments. For financial instruments, such as
accounts receivable, accounts payable and accrued expenses, which reprice or
mature within three months of the reporting date, carrying amount approximates
fair value. At September 30, 1998 and 1997, the carrying amounts of long-term
debt approximate their fair values. SFAS No. 107 excludes from its scope certain
financial instruments and all nonfinancial instruments including inventory,
property, plant and equipment, retirement benefit obligations, deferred
compensation agreements and leases. Accordingly, the aggregate fair value
amounts presented do not represent the underlying fair value of the Company. The
carrying amount of cash and equivalents approximates fair value. At September
30, 1998 the Company had outstanding foreign exchange contracts with notional
values of $2,503 and $5,746, respectively. These contracts had no carrying value
and a net unrealized loss of $246 and $498 as of September 30, 1998 and 1997,
respectively. The Company does not enter into foreign exchange contracts for
trading purposes.

INVENTORY is stated at the lower of cost or market, with cost determined
using an average-cost method.

PROPERTY, PLANT AND EQUIPMENT are stated at cost. For financial reporting
purposes, depreciation is provided using the straight-line method over estimated
useful lives. Estimated useful lives are 30 years for building and improvements
and 5 to 15 years for machinery and equipment. Assets held are recorded at the
lesser of carrying value or fair value less estimated costs to dispose of the
respective assets.

INTANGIBLES AND DEFERRED FINANCE CHARGES include intellectual property,
patents, licenses, organization costs, covenants not to compete and costs
associated with the issuance of debt. Amortization of intangibles is being
recognized using the straight-line method based upon the economic useful lives
of the assets, principally over ten years. Deferred finance charges are
recognized using the straight-line method over the term of the related debt, and
are included in net interest expense. On an ongoing basis, the Company

F-6

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
evaluates the carrying value of intangible assets versus the cash benefit
expected to be realized from the performance of the underlying operations and
adjusts for any impairment in value.

INCOME TAXES are recorded using an asset and liability approach that
recognizes deferred tax assets and liabilities for the differences between the
financial statement carrying amount and the tax basis of existing assets and
liabilities. These differences arise principally from the use of accelerated
depreciation methods for income tax reporting purposes and the straight-line
method for financial statement purposes. Deferred tax assets and liabilities are
measured using enacted tax rates in effect for the year in which these temporary
differences are expected to be recovered or settled. The effect of a change in
tax rates on deferred tax assets and liabilities is recognized in the period
that includes the enactment date.

SALES are recognized upon shipment of products when title and risk of loss
have passed to the customer.

FOREIGN OPERATIONS. Asset and liabilities are translated into U.S. dollars
at the exchange rate on the balance sheet date. The results of operations are
translated using average rates of exchange during each reporting period. Gains
and losses upon translation are deferred and reported as a component of
stockholders' equity. The Company periodically enters into foreign currency
exchange contracts to hedge firm purchase commitments denominated in foreign
currencies. Gains or losses are deferred until the period in which the related
transactions occur.

EARNINGS PER SHARE. Basic income (loss) per share is based on the weighted
average shares outstanding during each reporting period. Diluted income (loss)
per shares includes the effect of potential shares from exercise of options. See
Note 10.

CERTAIN NEW ACCOUNTING PRONOUNCEMENTS were recently issued which are not
effective for fiscal year ended September 30, 1998. The Financial Accounting
Standards Board (FASB) has issued Statement of Financial Accounting Standards
(SFAS) No.130 "Reporting Comprehensive Income," SFAS No. 131 "Disclosures about
Segments of an Enterprise and Related Information," and SFAS No. 133 "Accounting
for Derivative Instruments and Hedging Activities." SFAS No. 130 requires that
all items that are required to be recognized under accounting standards as
components of comprehensive income (revenues, expenses, gains and losses) be
reported in a financial statement that is displayed with the same prominence as
other financial statements. The provisions of this statement are effective for
fiscal years beginning after December 15, 1998. Changes made to comply with this
statement will not affect the Company's reported consolidated financial position
or net income. SFAS No. 131 requires public business enterprises to report
financial and descriptive information about their operating segments. The
provisions of this statement are effective for periods beginning after December
15, 1998. Management has not yet completed the process of determining its
reportable segments and will begin reporting this information in its 1999 Annual
Report to Shareholders, which will be effective for the Company's fiscal year
2000. Management has not yet evaluated the affect of SFAS No. 133 on the
financial reporting process, but does not expect its hedging activities will be
affected.

2. INVENTORY

Inventory consisted of the following at September 30:

1998 1997
--------- ---------

Raw materials........................................................... $ 8,410 $ 8,259
Finished goods.......................................................... 30,782 26,360
--------- ---------
$ 39,192 $ 34,619
--------- ---------
--------- ---------

F-7

3. PROPERTY, PLANT, EQUIPMENT AND LEASE COMMITMENTS

Property, plant and equipment consisted of the following at September 30:

1998 1997
---------- ----------

Land.................................................................. $ 1,850 $ 3,101
Buildings and improvements............................................ 45,317 38,396
Machinery and equipment............................................... 255,305 224,947
---------- ----------
302,472 266,444
Less accumulated depreciation......................................... 54,531 51,675
---------- ----------
247,941 214,769
Machinery and equipment in progress................................... 30,964 69,661
---------- ----------
$ 278,905 $ 284,430
---------- ----------
---------- ----------

Depreciation expense for the years ended September 30, 1998, 1997 and 1996
was $16,718, 16,079, and $12,770, respectively.

In connection with a previously announced restructuring plan which included
divestiture of certain non-core businesses, the Company sold its plastic
profiles, strong-nets and utility products manufacturing assets during the third
quarter of 1998. These businesses, located in Salem, Massachusetts, generated
annual sales in the most recent fiscal year of approximately $24,000. The gross
proceeds from the transaction of $26,500, which approximated book value for the
businesses after considering costs of the transaction, were utilized to reduce
outstanding borrowings on the Company's Revolving Credit Facility. During the
fourth quarter of 1997, the Company sold assets related to its dry adhesive net
and injection molding businesses. Net proceeds from these sales of $6,700
approximated book value, and were utilized to reduce borrowings under the
Company's Revolving Credit Facility.

The Company 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, 1998, 1997 and 1996 was
approximately $5,343, $622, and $857, respectively. The Company completed a
sale-leaseback transaction on January 2, 1998 whereby it sold certain items of
equipment and other tangible personal property (collectively the "Equipment")
for gross proceeds of $45,000, and leased the property back from the purchaser
pursuant to an operating lease agreement dated as of December 29, 1997 (the
"Lease Agreement"). The net book value of the equipment immediately prior to its
sale was approximately $18,000. The gain on the sale of the equipment to the
lessor was deferred and will be recognized over the term of the related leases
as a reduction of operating lease expense. In connection with the restructuring
described in Note 14, $8,494 of the deferred gain was offset against the loss
recorded related to lease obligations on idled equipment. The Company received
net proceeds of $44,625, which was utilized to pay down outstanding borrowings
under its existing Bank Credit Agreement (the "Credit Agreement"). The minimum
annual rental commitments under noncancellable operating leases, including
payments due under the Lease Agreement, are as follows for each of the five
years subsequent to September 30, 1998:

1999............................................................... $ 7,359
2000............................................................... 7,271
2001............................................................... 7,129
2002............................................................... 7,053
2003............................................................... 7,044
---------
$ 35,856
---------
---------

F-8

4. INTANGIBLES AND DEFERRED FINANCE CHARGES

Intangibles and deferred finance charges consisted of the following at
September 30:

1998 1997
--------- ---------

Deferred financing charges................................................. $ 7,305 $ 7,305
Intellectual property...................................................... 1,611 1,611
--------- ---------
8,916 8,916
Less accumulated amortization.............................................. 5,280 4,225
--------- ---------
$ 3,636 $ 4,691
--------- ---------
--------- ---------

5. LONG-TERM DEBT

Long-term debt consisted of the following on September 30:

1998 1997
---------- ----------

Industrial Revenue Bond payable November 4, 2004 at ARBI plus .25% (5.25% effective rate
at September 30, 1998).................................................................. $ 6,500 $ 6,500

Senior Notes payable on April 7, 2002 with 11.5% interest due semi-annually on October 1
and April 1............................................................................. 150,000 150,000

Five-year Revolving Term Facility with availability of $11,000 at September 30, 1997:
balance due on March 31, 1999. Interest is due quarterly at LIBOR plus 2.75% or at prime
on outstanding portion and .5% on unused commitments. Outstanding LIBOR-based tranches
and effective interest rates at September 30, 1997 were: $2,000 at 8.44% and $9,000 at
8.69%................................................................................... 11,000

Revolving Credit Facility of $50,000 bearing interest at LIBOR plus 2.75% or prime plus
1.25% on utilized portions and .5% for unused commitments. Outstanding LIBOR-based
tranches and effective interest rates at September 30, 1997 were: $4,000 at 8.13%;
$8,000 at 8.63%; $3,000 at 8.60%; $4,000 at 8.44%; $3,000 at 8.35%; $3,000 at 8.38%; and
$4,000 at 8.32%. Prime-based borrowings were $4,000 at an effective interest rate of
9.75%................................................................................... 33,000

Revolving Credit Facility of $70,000 bearing interest at LIBOR plus 2.75% or prime plus
1.25% on utilized portions and .5% for unused commitments. Outstanding LIBOR-based
tranches and effective interest rates at September 30, 1998 were: $14,000 at 8.19% and
$1,000 at 8.16%. Prime-based borrowings were $14,000 at an effective interest rate of
9.75%................................................................................... 29,000
---------- ----------
185,500 200,500
Less current portion.................................................................... 4,000
---------- ----------
Total long-term debt................................................................ $ 185,500 $ 196,500
---------- ----------
---------- ----------

In 1994 the Company entered into a Credit Agreement with a group of lenders
to provide the Company with senior bank financing. In January 1998, the Company
amended and restated this Credit Agreement and combined the revolving facility
and revolving term facility thereunder into a $70,000 revolving credit facility
(the "Credit Facility") with a final maturity of the earlier of (i) November 1,
2001, if the Company's Senior Notes are not refinanced prior to such date, or
(ii) January 29, 2003. The Credit Facility is secured by all the assets of the
Company. It also includes covenants which limit borrowings based on certain
asset levels, require the Company to maintain a minimum tangible net worth and
specified

F-9

5. LONG-TERM DEBT (CONTINUED)
interest coverage and leverage ratios, and establish maximum capital expenditure
levels; and contains other covenants customary in documents relating to
transactions of this type. The Company was not in compliance with the leverage
ratio covenant at September 30, 1998 and has received a waiver from the banks.
In addition to the Credit Facility, in 1994, the Company issued $150,000 in
Senior Notes which bear interest at 11.5 percent payable semiannually, do not
require periodic principal payments and mature, in full, in 2002.

The aggregate amount of long-term debt maturing in years subsequent to
September 30, 1998 is as follows:

1999..............................................................
2000..............................................................
2001..............................................................
2002.............................................................. $ 179,000
2003..............................................................
Thereafter........................................................ 6,500
---------
$ 185,500
---------
---------

6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accrued expenses consisted of the following at September 30:

1998 1997
--------- ---------

Accrued restructuring................................................... $ 9,170 $ 4,500
Payroll and benefits.................................................... 6,060 7,166
Market development...................................................... 4,601 5,115
Taxes and other......................................................... 7,295 4,372
--------- ---------
$ 27,126 $ 21,153
--------- ---------
--------- ---------

Included in accounts payable are outstanding checks of $982 and $3,554 at
September 30, 1998 and 1997, respectively. In addition, approximately $9,410 of
accrued restructuring costs is included in deferred taxes and other credits at
September 30, 1998, which represents the portion of the 1998 restructuring
charge which will be paid out in future years (primarily lease costs).

7. INCOME TAXES

The provision for income taxes consisted of the following for the years
ended September 30:

1998 1997 1996
---------- --------- ---------

Current:
U.S. Federal................................................. $ 2,623 -- --
State........................................................ -- -- --
---------- --------- ---------
2,623 -- --
Deferred:
U.S. Federal................................................. (9,323) $ 791 $ 3,887
State........................................................ (1,333) 139 555
---------- --------- ---------
(10,656) 930 4,442
---------- --------- ---------
Total........................................................ $ (8,033) $ 930 $ 4,442
---------- --------- ---------
---------- --------- ---------

F-10

7. INCOME TAXES (CONTINUED)
Approximately $568 of deferred tax benefit was recognized in fiscal 1998 in
connection with the change in accounting described in Note 11.

The components of the net deferred asset (liability) were as follows at
September 30:

1998 1997 1996
---------- ---------- ----------

Deferred Tax Assets:
Accounts receivable..................................... $ 370 $ 246 $ 326
Inventory............................................... 2,221 2,347 2,265
Other assets............................................ 21,095 1,237 979
Other liabilities....................................... 1,052 3,193 3,776
Tax credits and loss carryforwards...................... 20,009 21,379 15,918
Valuation allowance..................................... (435) (435) (435)
---------- ---------- ----------
Total................................................. 44,312 27,967 22,829
---------- ---------- ----------
Deferred Tax Liabilities:
Property, plant and equipment........................... 43,700 38,539 32,595
Other assets............................................ 79 197 235
---------- ---------- ----------
Total................................................. 43,779 38,736 32,830
---------- ---------- ----------
Total net tax asset (liability)........................... $ 533 $ (10,769) $ (10,001)
---------- ---------- ----------
---------- ---------- ----------

A valuation allowance has been established for certain state deferred tax
assets resulting from temporary differences for which the potential to realize
the tax benefit was not considered more likely than not.

At September 30, 1998, the Company has, for income tax reporting purposes, a
federal net operating loss carryforward of $35,408 (expiration commencing in
2005) and state net operating loss carryforward of $34,009 (limited by certain
state tax statutes and expiration). The Company also has research and
development credit carryforwards of $357, alternative minimum tax credit
carryforwards of $5,210 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, 1998,
1997 and 1996 was as follows:

1998 1997 1996
--------- --------- ---------

Statutory tax rate............................................... 35.0% 35.0% 35.0%
State income taxes, net of federal tax benefits.................. 4.9% 4.1% 3.6%
Other, net....................................................... .1% .9% 1.4%
--------- --------- ---------
40.0% 40.0% 40.0%
--------- --------- ---------
--------- --------- ---------

F-11

8. STOCKHOLDERS' EQUITY

During fiscal 1996, treasury shares were issued in connection with the
exercise of certain employee stock options. A total of 1,989 shares are held
into treasury under the deferred compensation plan. Tax benefits resulting from
compensation expense allowable for U.S. federal income tax purposes in excess of
the expense recorded in the consolidated income statement have been credited to
additional paid-in capital in the accompanying consolidated statements of
stockholders' equity. In fiscal 1996, the Company implemented an employee stock
purchase plan, under which employees can defer a portion of their compensation
and purchase AET shares at a discount. Approximately 95,000 and 75,000 shares
were purchased under this plan in fiscal 1998 and 1997, respectively.

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") for 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 the redemption price of $.01
each, and may be amended by the Board at any time prior to becoming exercisable.
At September 30, 1998 there were 11,095,385 Junior Preferred Stock Purchase
Rights outstanding.

9. STOCK OPTIONS

The Company maintains common stock option plans for key employees, directors
and consultants under which the exercise price is generally not less than the
fair value of the shares at the date of grant. The options generally vest at a
rate of 25 percent per year. Vested employee options generally expire within
three months of employment termination or three years after the death of the
employee. Vested director options generally expire within three months of the
resignation or within six months of the death of a director. All options expire
upon the occurrence of the tenth anniversary of the grant date or upon other
termination events specified in the plans. During fiscal 1996, the Company
repriced 762,500 outstanding employee stock options to $8.25, the closing market
price on the date of repricing. The revised option prices have been reflected
for all applicable years in the stock option schedule to follow. The repricing
affected only those stock options originally granted with an exercise price in
excess of the closing price of the Company's common stock on the date of
repricing. As of September 30, 1998, an aggregate of approximately 2,970,500
shares were reserved for issuance under the plans.

In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," which was effective beginning in fiscal 1997. As permitted by
SFAS No. 123, the Company continues to account for stock-based compensation
under the provisions of Accounting Principles Board (APB) Opinion No. 25.
Accordingly, no compensation cost has been recognized for fixed stock option
grants since the options have exercise prices per share of not less than the
fair value of the Company's common stock at the date of the grant.

If compensation cost for stock option grants and the Company's Employee
Stock Purchase Plan had been determined based on the fair value at the grant for
1998, 1997 and 1996 consistent with the method

F-12

prescribed by SFAS No. 123, the Company's fiscal 1998, 1997 and 1996 net income
(loss) and earnings (loss) per share on a pro forma basis would have been as
follows:

1998 1997 1996
---------- --------- ---------

Net Earnings (Loss):
As reported............................................................ $ (12,902) $ 1,396 $ 6,664
Pro forma.............................................................. (13,743) 1,247 6,629
Basic Earnings (Loss) per Share:
As reported............................................................ (1.18) .14 .66
Pro forma.............................................................. (1.26) .10 .60
Diluted Earnings (Loss) per Share:
As reported............................................................ (1.18) .13 .63
Pro forma.............................................................. (1.26) .10 .60

Under SFAS No. 123, the fair value of each option grant is estimated on the
date of the grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in 1998, 1997 and 1996:
expected volatility of 54 percent, risk-free interest rate of 6 percent and
expected lives of 7 to 10 years. The weighted average fair value of options
granted during 1998, 1997 and 1996 was approximately $5.60, $4.37 and $4.14 per
share.

Information concerning the Company's option plans are as follows:

WEIGHTED-
SHARES AVERAGE
UNDER OPTION EXERCISE
OPTION PRICES PRICE EXERCISABLE
---------- ------------- ------------- ----------

As of October 1, 1995............................. 2,328,136 $ 1.00-8.25 $ 7.19 789,886
----------
----------
Granted......................................... 166,500 8.25-8.375 9.21
Exercised....................................... (243,386) 5.125-8.25 6.39
Canceled........................................ (32,000) 1.00-14.875 7.31
----------
As of September 30, 1996.......................... 2,219,250 1.00-8.375 7.42 948,000
----------
----------
Granted......................................... 214,500 8.375-12.00 9.85
Exercised....................................... (28,000) 5.5-8.25 6.22
Canceled........................................ (71,500) 5.75-14.875 10.15
----------
As of September 30, 1997.......................... 2,334,250 1.00-14.875 7.61 1,247,625
----------
----------
Granted......................................... 520,250 6.75-9.00 7.27
Exercised....................................... (91,750) 1.00-8.375 6.28
Canceled........................................ (65,125) 1.00-14.875 9.00
----------
As of September 30, 1998.......................... 2,697,625 4.63-14.875 7.55 1,923,125
---------- ----------
---------- ----------

F-13

The following table summarizes information regarding stock options
outstanding at September 30, 1998:

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ ------------------------------------
RANGE OF OUTSTANDING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE
EXERCISE AS OF REMAINING CONTRACTUAL AS OF EXERCISE
PRICE 09/30/98 LIFE IN YEARS 09/30/98 PRICE
- ------------- ------------------- --------------------- ------------------ ----------------

$1.00-5.00.... 180,000 5.2 180,000 4.7944
5.01-7.50.... 1,290,000 6.1 864,250 6.5447
7.51-10.00... 1,113,500 6.7 827,750 8.4252
10.01-12.50.. 60,375 8.4 16,125 11.4961
12.51-15.00.. 53,750 7.2 35,000 14.0402
---------- ---------- ---------- -------
2,697,625 6.3 1,923,125 7.3682
---------- ---------- ---------- -------
---------- ---------- ---------- -------

Under the terms of the Company's 1996 Employee Stock Purchase Plan, eligible
employees may purchase shares of the Company's common stock through payroll
deductions. The purchase price for shares purchased under the Plan is 85 percent
of the lower of fair market value of the stock on the first or last day of the
purchasing period. Purchases through payroll deductions are made on a
semi-annual basis. At September 30, 1998, 180,298 shares were purchased under
this Plan, and another 319,702 shares were available under the Plan for future
purchases.

10. EARNINGS PER SHARE

A reconciliation of shares used in the computation of basic and diluted
income (loss) per share is as follows for the years ended September 30 (amounts
in thousands):

1998 1997 1996
--------- --------- ---------

Shares for basic computation............................................... 10,893 10,449 10,170
Potential shares from options.............................................. -- 409 419
--------- --------- ---------
Shares for diluted computation............................................. 10,893 10,858 10,589
--------- --------- ---------
--------- --------- ---------

In 1998, 145,000 potential shares from options were excluded from the
reconciliation above, as the effect of including these shares in the calculation
would be to decrease the loss per share.

11. CHANGE IN ACCOUNTING

During the third quarter of 1998, the Company elected early adoption of the
American Institute of Certified Public Accountants' Statement of Position 98-5,
"Reporting on the Costs of Start-up Activities" ("SOP 98-5"). Effective with the
adoption of SOP 98-5, the Company changed its method of accounting for start-up
costs on major projects to expense these costs as incurred. Prior to this
accounting change, the Company capitalized these costs, primarily those related
to the start-up of its eight and ten-meter OPP films lines, and amortized them
over a five year period. Amortization of these costs were approximately $929 in
the year ended September 30, 1997. The effect of this change in accounting was
the recognition of $1,539 of costs related to net start-up costs incurred during
fiscal 1998 and a one-time charge of $852, net of related income tax benefits of
$568, resulting from costs incurred in prior periods.

12. RELATED-PARTY TRANSACTIONS

In 1989, the Company entered into a supply agreement with an affiliated
company, BE Aerospace, Inc., pursuant to which the Company agreed to sell to the
affiliate its requirements of certain components through March 31, 1998. The
Company had sales resulting from this agreement of $1,715, and $1,649 during the
years ended September 30, 1997 and 1996, respectively. This supply agreement was

F-14

terminated effective September 16, 1997 concurrent with the sale of related
manufacturing assets by the Company. Total receivables from affiliated companies
as of September 30, 1998, 1997 and 1996 were $185, $564, and $578, respectively.

The Company has entered into employment agreements extending for periods of
up to five years with certain key officers of the Company. These officers, who
in some cases also serve on the Board of Directors and are stockholders of the
Company, are also eligible for performance bonuses.

13. COMMITMENTS AND FOREIGN EXCHANGE CONTRACTS

The Company has entered into foreign exchange contracts, the last of which
expires in October, 1998, to hedge firm purchase commitments for the purchase of
equipment denominated in German Marks and Pounds Sterling. Gains and losses on
the contracts which result from market risk associated with changes in the
market values of the underlying currencies are deferred and reported as part of
the capitalized asset. In entering into these contracts, the Company has assumed
the risk which might arise from the possible inability of counterparties to meet
the terms of their contracts. The Company does not expect any losses as a result
of counterparty defaults. At September 30, 1998 and 1997, the Company had
outstanding foreign exchange contracts with notional values of $2,503 and
$5,746, respectively. These contracts had no carrying value and a net unrealized
loss of $246 and $498 as of September 30, 1998 and 1997, respectively. The
Company does not enter into foreign exchange contracts for trading purposes.

14. RESTRUCTURING AND ASSET IMPAIRMENT CHARGES

The Company announced a major restructuring of its Covington, Virginia
manufacturing facility in the fourth quarter of 1998. The restructuring, which
will be fully implemented by March 1999, includes the shutdown of two older,
less efficient production lines, relocation of certain operations to other
locations and the elimination of approximately 200 full-time positions. As a
result of the announcement of this restructuring, the Company recorded a charge
of $18,580 in the fourth quarter of 1998. This charge includes approximately
$12,090 for leased equipment, $4,100 in employment related costs, and $2,390 in
other charges.

In the fourth quarter of fiscal 1998, the Company wrote down the value of
certain assets in its Covington, Virginia facility, whose carrying values had
been impaired by an aggregate of $2,926. Of the amounts recorded for impairment,
$1,526 relates to specialized equipment which is no longer used in the
production process and $1,400 represents an adjustment to the carrying value of
the Covington facility to estimated fair value, resulting from an impairment
caused by the shutdown of the affected production lines.

The Company implemented a restructuring plan in the fourth quarter of 1997
and recorded charges of $4,500 primarily related to personnel reductions and the
discontinuation of certain product lines. This restructuring program included
the separation of approximately 50 hourly employees comprised of production line
operators, maintenance employees and other plant personnel at one Company
facility, and approximately 20 hourly personnel related to the closure of
certain manufacturing assets of another facility, as well as costs related to
other salaried personnel changes. As of September 30, 1998, all amounts accrued
in connection with the 1997 restructuring charge had been paid. Approximately
$1,000 of the 1998 restructuring charge had been paid; the employment related
cost were paid during the first quarter of 1999 and the remaining amounts,
principally lease costs, are expected to be paid over the next five years.

15. EMPLOYEE BENEFIT PLANS

Substantially all employees with more than three months of service (as
defined) are eligible to participate in a Company savings and profit sharing
plan. The plan provides for board-approved matching contributions in varying
amounts based on employee contribution percentages up to 3.5 percent of gross
salary in Company stock or cash. The plan also provides for profit sharing
contributions at the discretion of

F-15

the Board of Directors. The plan allows for funding of profit sharing and
matching contributions in either Company stock or cash and is fully accrued in
the accompanying consolidated financial statements. Aggregate contributions were
made with Company stock in the amount of $2,270, $1,865, and $1,682 in 1998,
1997, and 1996, respectively.

The Company also has a non-qualified deferred compensation plan for certain
executive employees. This plan allows these employees to defer all or a portion
of their salary and bonus until retirement or termination of their employment.

16. LITIGATION

From time to time, the Company becomes involved in litigation which is
incidental to its business. Management does not believe that the outcome of
currently pending matters, either individually or in the aggregate, will have a
material impact in financial position in the results of operations.

17. CONCENTRATION OF CREDIT RISK AND EXPORT SALES

The Company sells its products under normal credit terms to a diverse base
of customers in the packaging film conversion, environmental and health care
markets, as well as other industries. The Company performs ongoing credit
evaluations of its customers, and generally does not require collateral,
although letters of credit may be required on certain foreign sales. A
significant amount of sales were to converters of packaging films for end users
in the beverage, candy and snack food industries. One converter customer
accounted for approximately 18 percent of sales in fiscal 1998, and 16 percent
of sales in 1997 and 1996, with no other customer accounting for more than 10
percent of sales in 1998, 1997, or 1996.

Information by geographic location was as follows for the years ended
September 30:

1998 1997 1996
---------- ---------- ----------

Sales:
United States................................................ $ 205,081 $ 225,232 $ 203,645
Foreign...................................................... 40,253 37,039 30,845
---------- ---------- ----------
$ 245,334 $ 262,271 $ 234,490
---------- ---------- ----------
---------- ---------- ----------
Operating Profit (exclusive of restructuring and impairment
charges and writeoff of start-up costs):
United States................................................ $ 13,850 $ 19,763 $ 22,068
Foreign...................................................... 5,230 5,431 2,965
---------- ---------- ----------
$ 19,080 $ 25,194 $ 25,033
---------- ---------- ----------
---------- ---------- ----------

F-16

18. SELECTED QUARTERLY DATA (UNAUDITED)

Summarized quarterly financial data for fiscal 1998, 1997 and 1996 were as
follows:

EARNINGS EARNINGS
NET (LOSS) (LOSS)
NET GROSS INCOME PER SHARE PER SHARE
SALES PROFIT (LOSS) BASIC(*) DILUTED(*)
--------- --------- ---------- ----------- -----------

September 30, 1998
1st quarter......................................... $ 56,416 $ 11,847 $ (753) $ (.07) $ (.07)
2nd quarter......................................... 62,439 11,414 (602) (.05) (.05)
3rd quarter......................................... 66,535 13,943 2,710 .24 .24
4th quarter......................................... 59,954 12,956 (14,257) (1.29) (1.29)
September 30, 1997
1st quarter......................................... 59,445 13,476 1,057 .10 .10
2nd quarter......................................... 68,492 15,277 1,750 .17 .16
3rd quarter......................................... 70,076 15,345 745 .07 .07
4th quarter......................................... 64,258 13,136 (2,156) (.20) (.20)
September 30, 1996
1st quarter......................................... 50,251 11,345 1,403 .14 .13
2nd quarter......................................... 62,565 12,478 1,504 .15 .14
3rd quarter......................................... 61,043 13,818 1,981 .19 .19
4th quarter......................................... 60,631 14,950 1,776 .17 .17

- ------------------------

(*) Earnings (Loss) Per Share is presented before change in accounting

The Company implemented restructuring plans in the fourth quarters of 1998
and 1997 and recorded charges of $18,580 and $4,500, respectively, before taxes.
The Company also wrote down the value of certain assets in its Covington,
Virginia facility, whose carrying values had been impaired by an aggregate of
$2,926. The restructuring and impairment charges are discussed more fully in
Note 14.

F-17

APPLIED EXTRUSION TECHNOLOGIES, INC.

SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS

YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996

(IN THOUSANDS)

ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
- --------------------------------------------------------------- ------------- ------------- ------------- -------------

Allowance for doubtful accounts:
1998..................................................... $ 745 $ 832 $ 521 $ 1,056
1997..................................................... 750 285 290 745
1996..................................................... 784 373 407 750

F-18

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, 1998 and
1997, and the related consolidated income statements, stockholders' equity and
cash flows for each of the three years in the period ended September 30, 1998.
Our audits also included the financial statement schedule listed in Item 14A.
These financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements and the financial statement schedule based
on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Applied Extrusion Technologies,
Inc. and its subsidiaries at September 30, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended September 30, 1998, in conformity with generally accepted accounting
principles. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information shown therein.

As discussed in Note 11 to the consolidated financial statements, the
Company changed its method of accounting for certain start-up costs in 1998 to
adopt the American Institute of Certified Public Accountants Statement of
Position No. 98-5, "Reporting on the Costs of Start-up Activities".

/s/ Deloitte and Touche LLP
- --------------------------------
Deloitte & Touche LLP

Boston, Massachusetts
November 25, 1998

F-19