**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

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**FORM10-K**

 

**ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE**

**SECURITIESEXCHANGE ACT OF 1934 (the “Exchange Act”)**

 

**For the fiscal year ended September 30,2004**

**Commission File No. 0-19188**

 

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**APPLIEDEXTRUSION TECHNOLOGIES, INC.**

(Exactname of registrant as specified in its charter)

 

| **Delaware**                                                    | ** ** | **51-0295865**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State  or other jurisdictionof  incorporation or organization) | ** ** | (I.R.S.  EmployerIdentification  No.) |

 

**15 Read’s Way**

**New Castle, DE 19720**

**(302) 326-5500**

(Address,including zip code and telephone number, of principal executive offices)

 

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

 

| **Title of Each Class** | ** ** | **Name of Each Exchange  On Which Registered** |
|-------------------------|------------|------------------------------------------------|
| None                    |       | None                                           |

 

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

 

**Common Stock ($.01 Par Value)**

**Junior Preferred Stock Purchase Rights**

(Title of Classes)

 

Indicate bycheck mark whether the registrant: (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes ýNo o

 

Indicate bycheck mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to thebest of the Registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of thisForm 10-K. o

 

Indicate bycheck mark whether the Registrant is an accelerated filer (as defined inExchange Act Rule 12b-2). Yes ýNo o

 

The aggregatemarket value of the Registrant’s voting stock held by non-affiliates wasapproximately $2,053,365 on January 28, 2005, based on the closing salesprice of the Registrant’s common stock, $.01 par value (the “Common Stock”), asreported on the OTC  Market System as ofsuch date.

 

The number ofshares of the Registrant’s Common Stock outstanding as of January 28,2005  was 12,833,532 shares. The numberof shares of the Registrant’s Junior Preferred Stock Purchase Rightsoutstanding as of January 28, 2005 was 12,833,532 shares.

 

 

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**FORM10-K INDEX**

 
| **PART I**    |                                                                                       |
|---------------|--------------------------------------------------------------------------------------------|
| Item 1.       | Business                                                                                   |   |
| Item 2.       | Properties                                                                                 |   |
| Item 3.       | Legal Proceedings                                                                          |   |
| Item 4.       | Submission of Matters to a Vote of Security  Holders                                       |   |
|          |                                                                                       |   |
| **PART II**   |                                                                                       |
| Item 5.       | Market for the Registrant’s Common Equity  and Related Stockholder Matters            |   |
| Item 6.       | Selected Financial Data                                                                    |   |
| Item 7.       | Management’s Discussion and Analysis of  Financial Condition and Results of Operation |   |
| Item 7a.      | Quantitative and Qualitative Disclosures  about Market Risk                                |   |
| Item 8.       | Financial Statements and Supplementary Data                                                |   |
| Item 9.       | Changes in and Disagreements with  Accountants on Accounting and Financial Disclosure      |   |
| Item 9a.      | Controls and Procedures                                                                    |   |
| Item 9b.      | Other Information                                                                          |   |
| **PART  III** |                                                                                       |
| Item 10.      | Directors and Executive Officers of the  Registrant                                        |   |
| Item 10a.     | Executive Officers                                                                         |   |
| Item 11.      | Executive Compensation                                                                     |   |
| Item 12.      | Security Ownership of Certain Beneficial  Owners and Management                            |   |
| Item 13.      | Certain Relationships and Related  Transactions                                            |   |
| Item 14.      | Principal Accounting Fees and Services                                                     |   |
| **PART IV**   |                                                                                       |
| Item 15.      | Exhibits, Financial Statement Schedules and  Reports on Form 8K                            |   |
|          | Signatures                                                                                 |   |

 

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**PARTI**

 

# **ITEM 1. BUSINESS**

#  

**Bankruptcy Filing**

 

On December 1, 2004,Applied Extrusion Technologies, Inc. (the “Company” or “AET”) filed a voluntarypetition for reorganization (the “Filing”) under Chapter 11 of the UnitedStates Bankruptcy Code (“Chapter 11”) in the United States BankruptcyCourt for the District of Delaware and was assigned case number 04-13388 (MFW).

 

The Company has significantdebt obligations. Other factors leading to the reorganization include theimpact of adverse economic conditions on the Company’s industry, particularlythe unforeseen escalations in costs of petroleum and associated products suchas propylene and polypropylene resin, the Company’s primary raw material.  Additionally, the Company has not been ableto pass on all of these material cost increases to its customers throughincreased selling prices.  Under Chapter 11,the Company expects to continue to operate its business as debtor-in-possession(“DIP”) under court protection from its creditors and claimants, while usingthe Chapter 11 process to implement its Prepackaged Plan ofReorganization.

 

The Prepackaged Plan of Reorganization, asdescribed more fully in Note 1 to the Consolidated Financial Statements, wasconfirmed on January 24, 2005.  Inorder to fund normal operations during the bankruptcy proceedings, the Companyentered into an agreement with GE Commercial Finance, which provides $125million of debtor-in-possession financing during the Chapter 11 period. Theplan and debtor-in-possession financing facility provides sufficient liquidityduring the bankruptcy proceedings.

 

The Company expects to emerge from Chapter 11before the end of the first calendar quarter of 2005.   Subject to certain closing conditions, GECommercial Finance has also committed to provide $125 million of exitfinancing, of which $55 million will be a revolving credit facility, uponconsummation of the Chapter 11 cases.

 

## **General**

##  

AET is one of the largestNorth American manufacturers and suppliers of oriented polypropylene, or OPP,films, which are used primarily in consumer product labeling, flexiblepackaging and overwrap applications.  AEThas a leading position in most of the major high-end OPP films end-use productcategories in North America and has a market share of approximately 25 percent.

 

AET offers one of themost extensive product lines in the OPP films industry, ranging fromhigh-margin, specialized labels and holographic films to basic heat sealable co-extrudedfilms.  With an experienced technologygroup and state-of-the-art production facilities, the Company works directlywith its customers to develop innovative products to meet their specializedrequirements.  AET believes that itscombination of leadership position, innovative capabilities, strong sales forceand highly efficient manufacturing will allow it to achieve future growth andprofitability.

 

End users of AET’s filmsare consumer product companies whose labels and packages require specialattributes such as vivid graphics, exceptional clarity and moisture barriers topreserve freshness.  AET’s OPP filmsproduct line is classified into two categories—the Core Business, which iscomprised primarily of labels and packaging films, and the High Value Business,which consists of the Company’s TOppCure® and Platinum films.  AET’s film products are utilized by end userssuch as Coca-Cola®, Pepsi-Cola®, Frito-Lay®, Nabisco®, Kellogg’s®, HersheyFoods®, Sony® and Lipton®.

 

## **Business Strategy**

##  

AET’s objective is togenerate sustainable increasing profitability in the cyclical OPP filmsindustry.  The business strategy toachieve this objective is divided into two phases:

 

*PhaseOne*—The first phase covered 1996 - 2001 and was directed atsignificantly enhancing the efficiency of the asset base and creatingsufficient critical mass to support future product development.  The strategic elements of this first phasewere as follows:

 

•                  Achieve critical mass and reduce unit costs by upgrading and expandingcapacity with state-of-the-art manufacturing assets;

 

•                  Develop additional products to fill the new capacity; and

 

•                  Expand the reach of the sales force to sell the new capacity.

 

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During Phase One, AETdoubled its capacity without increasing headcount, thus reducing unit costs,developed over fifty new products, and greatly expanded its presence in LatinAmerica.

 

*PhaseTwo*—The second phase covers 2002 - 2007 and is directed atdriving margin expansion primarily through the development of new high-valuefilms, including products which substitute for other materials, expanding theoverall OPP market.  The strategicelements of the second phase are as follows:

 

•                  Develop and manufacture innovative, proprietary, high-margin products (“PlatinumProducts”) utilizing unique new technology platforms;

 

•                  Maintain leadership in its higher margin Signature Products, asdescribed below; and

 

•                  Enhance the sales mix, thereby expanding margins, through revenuegrowth of its Signature Products consistent with demand growth and through thesubstitution in its revenue mix of new higher-margin Platinum Products forlower end commodity products.

 

AET has developed fournew technology platforms, providing a foundation on which to build innovativeproducts that provide significant value to its customers and expanding marginsfor the Company.  These products arereferred to as AET’s Platinum Products. To put the concept of these new technology platforms in context, therehas not been a single new technology platform introduced into the OPP industryfor over fifteen years other than these new products.  Examples of currently utilized technology platformsare coextrusion, voiding, out-of-line metallizing and coating, surfacetreatment and the use of copolymers and terpolymers.

 

*Innovative Products /Technology Platforms*

* *

The four new technologyplatforms and certain related applications recently developed by AET include:

 

•                  The TOppCure® labeling system for applying clear, opaque or metallizedplastic labels to glass or plastic containers utilizing modified cut-and-stackequipment.  This system providessignificant value to end users with the application of transparent labels toglass or plastic containers at approximately half the cost of pressuresensitive labels.

 

•                  Advanced coating and surface modification technology that enhances filmsurface characteristics.  This technologyspans a wide variety of applications from boardstock lamination and decorationto efficiently introducing special characteristics into film surfaces.

 

•                  Technology that allows the efficient processing of different polymersinto complex structures.  This wouldinclude applications for the graphic arts market for polyester/OPP filmstructures, and high barrier applications for packaging and Syn*Carta*TM, the Company’s synthetic mediaoffering.

 

•                  Technology resulting in an integrated holographic film embossing andprocessing system that will expand the marketplace for high-impact graphicfilms.  The applications for thistechnology include holographic packaging and label decorations.

 

*Maintain MarketLeadership in Signature Products*

* *

AET is a leading supplierto four of the five top end users and five of the top six converters of OPPfilms, which is the result of excellent service coupled with superior productsin selected target markets.  Theseproducts are referred to as AET’s “Signature Products” and include the Company’sroll-fed, cut-and-stack and shrink label films, cold seal release films,non-sealable metallized films, and overwrap films.

 

AET is continuallyimproving and upgrading its Signature Products to ensure it maintains itsstrong market position by setting the standard for these value-addedproducts.  The North American marketshare AET enjoys in the segments in which these products participate rangesfrom 40 percent to 85 percent.

 

*Upgrade Sales Mix*

* *

During Phase One of AET’sBusiness Strategy, a period of rapid capacity expansion, the Company doubledits volume of products produced and sold. However, due to the unprecedented rate of growth in manufacturingcapacity, approximately half of AET’s aggregate growth in volume during thisperiod was in lower margin films.  DuringPhase Two of AET’s Business Strategy, much of this capacity will be redirectedto higher value-added opportunities. While the Company has no plans to add additional

 

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capacity in the foreseeablefuture, an opportunity exists as AET introduces its innovative new PlatinumProducts and expands its Signature Products in place of lower margin films toenhance the overall profit margins of the Company.

 

## **Industry Overview**

##  

OPP films are highlyengineered products developed and manufactured through a complex process ofpolymer design, extrusion, controlled multi-directional stretching, heating andcooling, and surface treatment. Depending on the application, finished products can then be furtherprocessed to be embossed or add high barrier or metallized coatings, and areoften designed to be laminated with other films to provide highly specializedattributes required by end users.

 

Recent advancements infilm extrusion and resin technology have produced new, sophisticated films thatare thinner and stronger and have better barrier and sealant properties thanother materials or predecessor films. These technological advances have allowed many traditional forms ofrigid packaging to be replaced with film-based, flexible packaging that islighter, lower in cost and has enhanced performance characteristics, such asoxygen and moisture barriers, printability and durability.  In addition, flexible packaging is oftenrecyclable.

 

The Company estimatesthat the North American OPP film market grew at an average compound annualgrowth rate of over 6 percent from 1980 through 2000.  However, beginning in 2001 and continuinginto 2002, demand growth in the OPP films industry slowed to near zero dueprimarily to both the recession and inventory de-stocking throughout the supplychain.  Growth in OPP film demand infiscal 2003 and 2004 was approximately 2 percent, based on Company estimates,which was also lower than the historical growth rate.  This relatively sluggish demand growthresulted from the continued economic weakness coupled with lower demand forsnacks and beverages.  The Companyanticipates growth in OPP films of approximately 3 percent or half of thehistorical growth rate.

 

Substitution accountedfor over half of the historical growth rate in OPP films and is still a drivergoing forward due to their superior performance characteristics, such asimproved protection against light, oxygen and moisture, good printability anddurability, and exceptional clarity.  In addition,due to its low density, OPP provides greater coverage at a lower cost than anyother plastic film material.  OPP filmshave replaced much non-OPP plastic film material such as polyester, nylon,cellophane and paper.  Severalfundamental trends continue to foster future growth in OPP films:

 

•                  The continual increase in demand for established end-market consumerproducts, such as snack foods, soft drinks and confectionary products, whichpositively impacts the demand for OPP films; and

 

•                  Continued substitution opportunities due to the movement away fromrigid containers such as jars and boxes towards flexible packaging, such asbags and pouches that utilize OPP film;

 

•                  The continued trend from cans to plastic beverage containers thatutilize OPP film labels; and

 

•                  Substitution opportunities driven by AET’s innovative new products suchas TOppCure®, Syn*Carta*TM andHOTRTM.

 

The OPP films industry inNorth America has suffered from utilization rates that approached 80 percentsince the capacity in the North was increased by more than 35 percent from 1996to 1999.  This decline in capacityutilization led to sharp declines in selling prices of OPP films and severelyimpacted profitability in the OPP films industry.  In the past eighteen months capacity in NorthAmerica was increased another 9 percent, with one production line starting upin the United States in mid 2003 and two production lines recently coming online in Mexico.  Since demand has beenrelatively flat over the past four years, the Company believes the utilizationrate is still approximately 90 percent. At this level the industry is able to pass on some, but not all, of theraw material price increases.  We believethat capacity utilization in the mid-90 percent range is required to achieve reasonablelevels of price realization.

 

According to ChemicalData Inc. (CDI), the price of polypropylene resin has increased from an averageof $0.35 per pound in fiscal 2002 to an average of $0.50 per pound in fiscal2004, representing a 43 percent increase over the two-year period.  Additionally, due to the continued high priceof oil and increased demand for polypropylene resin, polypropylene resin pricesincreased to approximately $0.69 per pound in the last calendar quarter of2004, as reported by CDI.  Althoughcapacity utilization levels remain soft, the industry has had five priceincreases in fiscal 2003 and 2004, but has been unable to recover thesignificant increase in raw material costs.

 

There are currently noannounced new OPP film lines in North America. A substantial capital investment is required to build a new line and asthe industry has experienced low capacity utilization levels and poorprofitability, the Company believes industry participants will be cautiousabout introducing new OPP film lines in the future.  In addition, since at least two years arerequired to design and construct a new OPP film line, with a third year tofully ramp up production, no additional new OPP film lines are expected

 

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to come on stream in theUnited States for at least the next two to three years**.**  With modest growth in demand forecasted overthe next three years, the OPP industry utilization rate should improve.

 

## **Competitive Strengths**

##  

AET is well positioned tocompete successfully in the OPP films market and to increase sales andprofitability due to:

 

•                  *Substantial Industry Presence*—The Company is the largest manufacturerand supplier of OPP films in North America and has a leading market position insubstantially all of the major high-end OPP films end-use product categories inNorth America.

 

•                  *Technological Leadership andSuperior Product Development Capabilities*—The Company has one of the largest technology groupsin the industry with more than 60 chemists, engineers and technicians, and hasinvested approximately $14 million in product research and development over thepast two years.

 

•                  *Efficient, Low Cost ProductionFacilities*—AETbelieves that its cost to produce OPP films is one of the lowest in the NorthAmerican industry and is the lowest for any manufacturer with a full line ofOPP products.

 

•                  *Breadth of Product Line andDiversity of Customer Base*—With more than 80 product groups sold to over 500customers, AET believes that it has the broadest product lines and customerbase of any North American OPP films producer.

 

•                  *Experienced Management*—AET believes that its senior andoperational management team is among the most experienced in the OPP filmsbusiness.

 

## **Products**

##  

*Core Business Products:*

* *

•                  Labels—AET’s OPP film labels are used on containers for soft drinks,beverages, food and other consumer products requiring a high-quality printsurface for superior graphics and properties that permit high speedlabeling.  Examples of end uses includesoft drink containers for Coca-Cola® and Pepsi-Cola®, branded water bottles forAquafina® and Dasani®, and juice containers for Tropicana® and Dole®.  In addition, the Company’s films are used onproducts such as Folgers® and Hills Brothers® coffee cans and aerosol cans forshaving creams and air fresheners.  AET’sfilms are used on products representing over 90 percent of the North Americansoft drink market.

 

•                  Packaging—AET’s OPP films are used in a broad range of packagingapplications, principally for food products, where they provide enhancedprotection against moisture, light and air. The Company’s OPP films are used to make packages for products such asFrito-Lay® snacks, Nabisco®, Kellogg’s®, General Foods® and Hershey Foods®products, individual size condiment pouches, and baked goods packaging.  In applications where barrier is important,AET offers metallized, polyvinylidene chloride, coated and polymer modifiedfilms.  High barrier metallized filmsprovide an enhanced barrier for snacks packaged in nitrogen gas to maintainfreshness and extend shelf life.

 

•                  Overwrap—The Company produces OPP films that are exceptionally clear,thin and strong and provide barriers to protect products.  Examples of end uses include overwrap forboxes of Lipton® tea bags and Schrafft® candies, Sony® and TDK® compact discsand DVDs, and cigarette boxes for British American Tobacco®. End-users of theseproducts require durable films with high barrier properties that also offerexceptional clarity and thinness to maximize visibility of their products. Asignificant portion of these films are sold in narrow widths, 10 to 20 incheswide, for which AET has unique slitting capabilities.

 

*Platinum Products:*

* *

The Company hasdeveloped, and is currently commercializing, the first four innovative newhigh-margin products utilizing its new technology platforms.  These products, including TOppCure®,Holographic and Syn*Carta*TM films,provide higher margins and expand the OPP market by delivering favorable costsand/or performance attributes versus existing materials.  The commercialization of these products hasbeen significantly slower than anticipated, and have failed to provide anycontribution to earnings in fiscal 2004. However, the Company believes that certain of these products willultimately be successfully commercialized and have the potential to providesignificant value to our customers, and the Company’s future financialresults.  AET believes that these newproprietary

 

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technology platformsprovide a strong foundation to develop additional high-margin innovativeproducts.

 

## **Marketing and Customers**

 

AET’s OPP films productsare sold primarily through its direct sales organization. Its highly skilledsales force, whose principal role is to develop sales opportunities and providecustomer support, has considerable technical expertise and industryexperience.  Marketing activities havehistorically been focused primarily in North and South America, although theCompany also has a sales presence in Europe and Asia.  In addition, the Company’s sales force andresearch and development scientists work directly with its customers to createnew films, as well as new applications for existing OPP films.

 

Themajority of AET’s OPP films sales are to converters, who print and laminatefilms before selling to end-users.  Threeconverters each account for between approximately 13 and 16 percentof sales in fiscal 2004. The Company also sells a significant portion ofOPP films directly to end-users, and considers it an important part of itsmarketing effort to maintain direct relations with major end-users, whogenerally direct packaging design efforts and provide detailed specificationsto converters about the films used in their labeling and packagingapplications.  Sales and marketingefforts and customer relationships are enhanced by the numerous requirements ofcustomer-specific technical qualifications that have been secured.  The qualification process typically involvessignificant customer time and effort and results in a strong competitiveposition for qualified products.  Oncequalified, products are often referenced in end-user specifications orqualified product lists.  Thesequalification processes also reinforce the partnership between AET and itscustomers and can lead to additional sales and marketing opportunities.

 

## **Manufacturing and Technology**

##  

OPP films aremanufactured and processed through either the tenter or the tubularprocess.  AET is the only North AmericanOPP films producer that has both tenter and tubular manufacturingcapabilities.  Additionally, OPP filmscan be further processed through value-adding secondary operations.

 

*Tenter Process*

* *

In the tenter process,specifically formulated polypropylene resins are combined and melted, sometimeswith additives, and extruded from a flat die into a thick film containing fromone to five distinct layers, which are then chilled, reheated and stretchedlengthwise in the machine direction and widthwise in the transverse direction whilestill heated.  This dual stretchingprocess is known as “biaxial orientation.” The specific characteristics demanded of each film are controlledthroughout this complex process by a multitude of variables, includingproprietary polymer design, application of unique skin layers, timed variationsof the heating, cooling and stretching processes, alteration of molecularsurface characteristics through the application of flame or high-voltageelectrical discharge and controlled winding tension.  AET has eight tenter lines, ranging from 5.5to 10 meters.

 

*Tubular Process*

* *

In the tubular process,molten resin is extruded from a circular die to form a thick tube, which isstretched lengthwise and widthwise with air pressure and gravity at controlledtemperatures.  Tubular processed filmsoffer “balanced biaxial orientation,” meaning that the film is stretchedequally both widthwise and lengthwise. This process results in improved stability and a more uniform thicknessfor thinner films.  The Company believesthat its tubular manufacturing capacity enables it to manufacture thinnerfilms, while preserving clarity, machinability and other performancecharacteristics of thicker film.  Thesethinner films use fewer materials, thereby improving performance relative tocost.  AET currently operates ninetubular lines.

 

*Secondary Processes*

* *

In addition to the tenterand tubular manufacturing processes, AET also performs operations to coat,metallize, and emboss its films.  In thecoating process, various materials are applied in liquid form to the surface ofthe film, which is then dried in-line. These coatings are applied uniformly at varying thicknesses and layersto impart desired properties.  In themetallization process, the film is run through a vacuum and a thin layer ofaluminum is applied to the surface of the film. The embossing process uniformly modifies the surface of highlyengineered films, through the application of heat and pressure, to producefilms suitable for holographic applications.

 

## **Research and Development**

##  

AET believes that it hasone of the largest and most experienced technology groups in the industry, withmore than 60 chemists, engineers and technicians, and has investedapproximately $14 million in research and development over the past twoyears.  Utilizing extensive laboratoryand film testing facilities, advanced pilot film production lines, and an arrayof end-use packaging and labeling equipment, the Company’s technology group hasintroduced approximately 50 new or enhanced products in the past three

 

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fiscal years.  The Company believes that this strength ininnovation will continue to drive higher growth levels for differentiated,higher margin Platinum Products, and provide an advantage to customers who workwith AET in the development of new labeling, packaging and overwrap productsand applications.  During fiscal 2002,2003 and 2004, the Company spent approximately $6.6 million, $7.2 million and$7.0 million, respectively, on research and development.

 

## **Polypropylene and Other Raw Materials**

##  

AET manufactures itsprincipal products primarily from polypropylene resin.  The relatively low density and low cost ofpolypropylene resins allow OPP films to provide very cost-efficient materialfor packaging applications.  In addition,polypropylene possesses superior clarity and natural barrier qualities, and canbe modified to add other attributes or features such as metallization, whichmake it a higher performing and more cost-efficient material than other plasticresins.

 

Four suppliers providethe majority of the Company’s resin supply requirements.  However, these materials are generallyavailable from a large number of suppliers in sufficient quantities to meetongoing requirements.  Historically,there have not been any significant disruptions in supply as a result ofshortages in raw materials.

 

Historically, the priceof polypropylene has fluctuated, and in recent years the price has increasedsignificantly due to the increased price of crude oil.  As a result of low capacity utilizationlevels, not all of the increases in costs of polypropylene resin over the pasttwo years have been passed on to customers. According to Chemical Data Inc., polypropylene resin prices haveincreased from an average of $0.42 per pound in fiscal 2003 to an average of$0.50 per pound in fiscal 2004.  CDI isprojecting polypropylene resin prices to reach approximately $0.71 per pound inthe first calendar quarter of fiscal 2005. Any major disruption in the supply of oil, including continued unrest inthe Middle East, is likely to cause a significant increase in the cost ofpolypropylene.

 

## **Competition**

##  

AET competes withmanufacturers of OPP films and other specialty films, such as cellophane andpolyester, as well as with producers of traditional packaging materials, suchas paper, foil, metal, glass and other containers.  The flexible packaging industry is verycompetitive, and some competitors are subsidiaries of larger corporations thathave significantly greater financial resources than the Company.  There are approximately six primarymanufacturers in North America producing OPP films for resale.  Out of these six manufacturers, only AET andExxonMobil, the other broad-line producer of OPP films, have a greater than 20percent market share.  Competition in OPPfilms markets is based primarily on customer relationships, product performancecharacteristics such as machinability and quality, reliability and price.  Competition also depends on developing new andenhanced products for customers.  TheCompany also sells products in countries outside North America and, therefore,competes with local OPP manufacturers.

 

The Company believes thatit has various competitive advantages including:

 

•                  Advanced proprietary manufacturing processes and product formulationsrequired to produce a varied range of OPP films products;

 

•                  Experienced, knowledgeable sales force and technical service group;

 

•                  Research and development expertise required to sustain productinnovation; and

 

•                  One of the most efficient manufacturing operations in the NorthAmerican OPP films market.

 

Although this is an assetintensive business and the cost to enter is high, it cannot be assumed that themarkets into which the Company sells its products will not attract additionalcompetitors that could have significantly greater financial, technological,manufacturing and marketing resources than AET.

 

## **Patents and Trademarks**

##  

AET currently holds 43active domestic and international patents and approximately 50 applications arein progress in the United States and various foreign countries.   AET has approximately 15 domestic andinternational trademark registrations and applications.  The termination, expiration or infringementof one or more patents or trademarks would not have a material adverse effecton the business.

 

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## **Government Regulation**

##  

Due to the nature of AET’sbusiness, its operations are subject to a variety of federal, state and locallaws, regulations and licensing requirements. The Company believes that its operations are in substantial compliancewith those laws, regulations and requirements. Compliance with federal, state and local requirements relating to theprotection of the environment has not had and is not expected to have, amaterial effect on capital expenditures, financial condition, results ofoperations or competitive position.

 

## **Environmental, Health and Safety Matters**

##  

AET is subject tostringent environmental, health and safety requirements, including laws andregulations relating to air emissions, wastewater management, the handling anddisposal of waste, and the cleanup of properties affected by hazardoussubstances.  The Company believes thatits operations have been and are in substantial compliance with environmental,health and safety requirements, and that it has no liabilities arising undersuch requirements, except as could not reasonably be expected to have amaterial adverse effect on operations, liquidity or financial condition.

 

In the last five years,the Company has received no requests for information or related correspondencefrom the United States Environmental Protection Agency and other third partiesindicating that it might be responsible under the Comprehensive EnvironmentalResponse, Compensation and Liability Act or other environmental laws for costsassociated with the investigation and cleanup of contaminated sites.  The Company believes that any futureinvolvement in matters arising under various environmental laws will not have amaterial adverse effect on its operations, liquidity or financial condition.

 

## **Employees**

##  

The Company employsapproximately 940 full-time employees. Approximately 100 production and maintenance employees at the Covington,Virginia facility are represented by the Paper Allied Industrial Chemical andEnergy Workers International Union, Local 2-0884 under a collectivebargaining agreement that expires in June 2005.  All employee relations are considered to besatisfactory.

 

## **ITEM2. PROPERTIES**

##  

The following table provides information with respect to AET’sfacilities:

 
| ** **                                               | ** ** | **Location**              | ** ** | **Square Feet** | ** ** | **Owned/  Leased** | ** ** |
|----------------------------------------------------------|------------|---------------------------|------------|-----------------|------------|--------------------|------------|
|                                                     |       |                      |       |            |       |               |       |
| *OPP Films manufacturing and research pilot  facilities* |       | Terre Haute,  Indiana     |       | 821,000         |       | Owned              |       |
|                                                     |       | Covington,  Virginia      |       | 517,000         |       | Owned              |       |
|                                                     |       | Varennes,  Quebec, Canada |       | 163,000         |       | Owned              |       |
|                                                     |       | Newport,  Delaware        |       | 12,825          |       | Leased             |       |
| *Corporate and Research and Development*                 |       | New Castle,  Delaware     |       | 50,000          |       | Leased             |       |

 

All of AET’s owned real property, except for the Covington, Virginiaproperty, is collateral under the Company’s term credit facility. The Companybelieves that its facilities are suitable for their currently intended purposesand adequate for its level of operations.

 

**ITEM 3. LEGAL PROCEEDINGS**

 

The Company is periodically subject to legal proceedings and claims,which have arisen in the ordinary course of business and have not been fullyadjudicated. It is not a party to litigation or other legal proceedings, whichit believes, either singly or in the aggregate, could reasonably be expected tohave a material adverse effect on its business, financial condition and resultsof operations.

 

**ITEM 4. SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

 

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

 

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**PARTII**

 

**ITEM 5. MARKET FOR THE REGISTRANT’S COMMONEQUITY AND RELATED STOCKHOLDER MATTERS**

 

The Company’s Common Stock was quoted on the NASDAQ National MarketSystem from June 6, 1991 to November 24, 2004 under the symbol “AETC.”Before June 6, 1991, no established public trading market existed for theCompany’s Common Stock. Below is the range of high and low sales informationfor the Common Stock for the two most recently completed fiscal years, asquoted on the NASDAQ National Market System:

 

On November 24, 2004, the Company’s stock was delisted from theNASDAQ for failure to comply with NASDAQ Marketplace Rules 4450(a)(2) and4450(a)(3), requiring the Company to maintain minimum levels of market valueand stockholder’s equity, respectively. 

 
| ** **                            | ** ** | **Fiscal Year 2004** | ** ** | **Fiscal Year 2003** | ** ** |
|---------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                            | ** ** | **High**             | ** ** | **Low**              | ** ** | **High** | ** ** | **Low** | ** ** |
|                                  |       |                 |       |                 |       |   |   |   |   |
|  Quarter ended December 31  |       | $                    | 2.75       |                 | $          | 2.23 |   | $ | 3.79 |   | $ | 1.79 |   |
|  Quarter ended March 31     |       | 3.56                 |       | 2.65                 |       | 2.10 |   | 1.51 |   |
|  Quarter ended June 30      |       | 3.02                 |       | .35                  |       | 2.50 |   | 1.84 |   |
|  Quarter ended September 30 |       | .40                  |       | .15                  |       | 2.80 |   | 1.74 |   |
|                                       |            |                      |            |                      |            |  |  |  |  |  |  |  |  |

 

The Company has not paid any cash dividends on its Common Stock, andthe Company’s Board of Directors intends, for the foreseeable future, to retainany earnings to repay debt and finance the future growth of the Company. Inaddition, the Company’s credit facility and the indenture governing its seniornotes restrict the payment of cash dividends. As of December 15, 2004,there were approximately 229 registered holders of record and more than 3,000beneficial holders of the Company’s Common Stock.

 

As part of the Company’s recapitalization plan, it is estimated thatthese shareholders will receive, in the aggregate, between $1.75 million and$2.10 million in exchange for their outstanding shares  upon the effective date of  the plan.

 

**ITEM 6. SELECTED FINANCIAL DATA**

 

The following selected financial data should be read in conjunctionwith the consolidated financial statements, including the notes thereto, and “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”included elsewhere in this report. The following information is in thousands,except per share amounts:

 
| ** **                                  | ** ** | **2004** | ** ** | **2003** | ** ** | **2002(a)** | ** ** | **2001(b)** | ** ** | **2000** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|-------------|------------|-------------|------------|----------|------------|
| **Statement of Operations Data:**           |       |     |       |     |       |        |       |        |       |     |       |
| Sales                                       |       | $        | 265,541    |     | $          | 247,364     |       | $           | 252,092    |     | $          | 279,840 |   | $ | 268,375 |   |
| Cost of sales                               |       | 233,147  |       | 203,154  |       | 208,099     |       | 222,719     |       | 219,546  |       |
| Gross profit                                |       | 32,394   |       | 44,210   |       | 43,993      |       | 57,121      |       | 48,829   |       |
| Operating expenses:                         |       |     |       |     |       |        |       |        |       |     |       |
| Selling, general and administrative         |       | 22,192   |       | 22,989   |       | 32,085      |       | 29,500      |       | 27,152   |       |
| Research and development                    |       | 6,969    |       | 7,209    |       | 6,605       |       | 6,419       |       | 6,759    |       |
| Restructuring and impairment charges        |       | 13,254   |       | —   |       | 9,002       |       | —      |       | —   |       |
| Loss on sale of assets                      |       | —   |       | —   |       | —      |       | 7,054       |       | —   |       |
| QPF acquisition and integration costs       |       | —   |       | —   |       | 950         |       | 2,548       |       | —   |       |
| Operating profit (loss)                     |       | (10,021  | )          | 14,012   |       | (4,649      | )          | 11,600      |       | 14,918   |       |
| Non-operating expenses:                     |       |     |       |     |       |        |       |        |       |     |       |
| Interest expense, net(a)                    |       | 36,732   |       | 29,912   |       | 29,147      |       | 27,748      |       | 21,096   |       |
| Loss before income taxes                    |       | (46,753  | )          | (15,900  | )          | (33,796     | )          | (16,148     | )          | (6,178   | )          |
| Income tax expense (benefit)(a)             |       | —   |       | 1,053    |       | (2,045      | )          | 10,264      |       | (2,223   | )          |
| Net loss                                    |       | $        | (46,753    | )        | $          | (16,953     | )          | $           | (31,751    | )        | $          | (26,412 | ) | $ | (3,955 | ) |
|                                        |       |     |       |     |       |        |       |        |       |     |       |
| **Basic and Diluted Loss per common share** |       | $        | (3.64      | )        | $          | (1.33       | )          | $           | (2.55      | )        | $          | (2.23 | ) | $ | (.33 | ) |

 

8

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| ** **                | ** ** | **2004 (c)** | ** ** | **2003** | ** ** | **2002(a)** | ** ** | **2001(b)** | ** ** | **2000** | ** ** |
|---------------------------|------------|--------------|------------|----------|------------|-------------|------------|-------------|------------|----------|------------|
| **Balance Sheet Data:**   |       |         |       |     |       |        |       |        |       |     |       |
| Working capital           |       | $            | (301,133   | )        | $          | 28,047      |       | $           | 40,987     |     | $          | 75,893 |   | $ | 48,221 |   |
| Total assets              |       | 407,496      |       | 407,695  |       | 405,062     |       | 425,858     |       | 390,754  |       |
| Long-term debt            |       | —       |       | 271,790  |       | 277,876     |       | 277,462     |       | 209,500  |       |
| Stockholders’ equity |       | (5,792       | )          | 34,357   |       | 38,761      |       | 68,822      |       | 97,004   |       |
|                           |            |              |            |          |            |             |            |             |            |          |            |  |  |  |  |  |

 

----

(a)                                  Infiscal 2002, in conjunction with the early adoption of Statement of FinancialAccounting Standards (“SFAS”)  No. 145,the Company reclassified the extraordinary loss on the early extinguishment ofdebt in fiscal 2001 to interest expense and income tax expense.

 

(b)                                 Theseamounts include the operations of the nets and nonwovens business, which wasdivested at the end of fiscal 2001.

 

(c)                                  Theamounts shown for both working capital and long-term debt reflect thereclassification of all debt to current as a result of the impendingrecapitalization of the Company’s senior notes and re-financing of the Company’sterm debt.

 

**ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**Forward-LookingStatements**

 

Certain information contained in this report should be considered “forward-lookingstatements” as defined by the Private Securities Litigation Reform Act of 1995.These statements represent, among other things, the expectations, beliefs,plans and objectives of management with respect to future financial performanceor operations and/or assumptions underlying or judgments concerning mattersdiscussed in this document. The words “believe,” “estimate,” “intend,” “anticipate,”“project,” and “expect” and similar expressions are intended to identifyforward-looking statements. All forward-looking statements involve certainrisks, estimates, assumptions, and uncertainties with respect to futurerevenues, cash flows, expenses and the cost of capital, among other things.

 

Some important risk factors that could cause the Company’s actualresults to differ materially from those expressed in its forward-lookingstatements include, but are not limited to:

 

•                                            Theability of the Company to create, manufacture and market innovative, higher-marginproducts;

 

•                                            Intensifiedcompetition from the Company’s competitors;

 

•                                            Acontinuation of, or an increase in, overcapacity in the OPP films industry;

 

•                                            Anincrease in the cost of polypropylene resin, the Company’s main raw material,and the inability of the Company to increase customer selling prices tosufficiently recover these higher costs;

 

•                                            TheCompany’s high level of debt and ability to make principal and interest paymentson the Company’s debt;

 

•                                            Theoperating and financial restrictions and covenants in the Company’s debtagreements, which could adversely affect the Company’s ability to finance itsoperations and plan for or respond to changes in its business;

 

•                                          TheCompany’s filing of a bankruptcy petition and the publicity attendant theretomay adversely affect the business of the Company. The Company believes that anysuch adverse effects may worsen during the pendency of a protracted bankruptcycase if the Plan is not confirmed as expected. See further discussion of therisks associated with the Company’s bankruptcy filing set forth in the Company’sSolicitation and Disclosure Statement filed as an exhibit to the Company’scurrent report on Form 8-K dated November 1, 2004.

 

In addition to the risk factors set forth above, you should considerthe risks set forth in Exhibit 99.1 to this Annual Report, the “Business” section ofthis Annual Report and elsewhere in the Company’s filings with the Securitiesand Exchange Commission. The Company undertakes no obligation to revise theforward-looking statements included in this Annual Report to reflect any futureevents or circumstances.

 

9

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**Introduction**

 

The Company derives itsrevenues, earnings and cash flows primarily from the sale of orientedpolypropylene films, referred to as OPP films, used in consumer productlabeling, flexible packaging and overwrap applications.  The Company has a leading position insubstantially all of the major high-end OPP films end-use product categories inNorth America, and offers one of the most extensive product lines in the OPPfilms industry, ranging from high-margin, specialized label and high barrierfilms to basic heat sealable lower barrier films.

 

End users of AET’s films areconsumer product companies whose labels and packages require special attributessuch as vivid graphics, exceptional clarity and moisture barriers to preservefreshness.  AET’s OPP films product lineis classified into two categories – the Core Business, which is comprisedprimarily of labels and packaging films, and the High Value Business, whichconsists of the Company’s TOppCure® and Platinum films.  AET’s filmproducts are utilized by end users such as Coca-Cola®, Pepsi-Cola®, Frito-Lay®, Nabisco®, Kellogg’s®, Hershey Foods®, Sony® and Lipton®.

 

**Results of Operations**

 
| ** **                           | ** ** | **Fiscal 2004** | ** ** | **Fiscal 2003**         | ** ** |
|--------------------------------------|------------|-----------------|------------|-------------------------|------------|
| ** **                           | ** ** | **($)**         | ** ** | **(percent of  Sales)** | ** ** | **($)** | ** ** | **(percent of  Sales)** | ** ** |
|                                 |       |            |       |                    |       |   |   |   |   |
| Sales                                |       | $               | 265,541    |                    | 100.0      |   | 247,364 |   | 100.0 |   |
| Cost of sales                        |       | 233,147         |       | 87.8                    |       | 203,154 |   | 82.1 |   |
| Gross profit                         |       | 32,394          |       | 12.2                    |       | 44,210 |   | 17.9 |   |
| Selling, general and administrative  |       | 22,192          |       | 8.4                     |       | 22,989 |   | 9.3 |   |
| Research and development             |       | 6,969           |       | 2.6                     |       | 7,209 |   | 2.9 |   |
| Restructuring and impairment charges |       | 13,254          |       | 5.0                     |       | — |   | — |   |
| Other operating expenses             |       | —          |       | —                  |       | — |   | — |   |
| Operating profit (loss)              |       | (10,021         | )          | (3.8                    | )          | 14,012 |   | 5.7 |   |
| Interest expense, net                |       | 36,732          |       | 13.8                    |       | 29,912 |   | 12.1 |   |
| Income tax expense                   |       | —          |       | —                  |       | 1,053 |   | 0.4 |   |
| Net loss                             |       | $               | (46,753    | )                       | (17.6      | ) | (16,953 | ) | (6.8 | ) |

 

**Fiscal 2004 Comparedwith Fiscal 2003**

 

Sales for fiscal 2004 of $265,541 were $18,177, or 7.3 percent,higher compared with fiscal 2003.  The7.3 percent increase in sales was driven by a 9.3 percent increase in unitvolume, which was offset by a 2 percent decrease in average selling price. Thedecline in average selling price reflects a significant increase in the volumeof lower price films, which was in part caused by the Company’s inventoryreduction initiatives.

 

Sales outside of the United States were $54,137, or 20.4 percentof sales, and $48,717, or 19.7 percent of sales, for fiscal 2004 and 2003,respectively, and generated $732 of operating profit in fiscal 2004 and $4,724of operating profit in fiscal 2003.

 

Gross profit in fiscal 2004 of $32,394 decreased by $11,816 comparedwith fiscal 2003.  Gross margin of 12.2percent in fiscal 2004 was 5.7 percentage points lower as compared to grossmargin of 17.9 percent in fiscal 2003. The decline in gross margin resultedprincipally from the impact of lower average selling prices, as indicatedabove, and substantially higher raw material cost.

 

Selling, general and administrative expenses were $22,192, or8.4 percent of sales, in fiscal 2004, compared with $22,989, or9.3 percent of sales in fiscal 2003. The decrease of $797 reflects ongoingcost reduction efforts.

 

Research and development expense was $6,969, or 2.6 percent ofsales, in fiscal 2004 compared with $7,209, or 2.9 percent of sales infiscal 2003.

 

Restructuring and impairment charges of $13,254 wererecognized in fiscal 2004.  A Goodwillimpairment of $9,874 is included in this amount.  The Goodwill impairment was necessitated bythe decline in the Company’s market value as a result of the impending Chapter11 filing. The balance of the restructuring charge represents professionalsfees paid in connection with the Chapter 11 filing.

 

10

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Interest expense increased $6,820 to $36,732 in fiscal 2004 compared tofiscal 2003 due to a higher average outstanding debt balance on the revolvingline of credit combined with interest due on the term loan with GE CommercialFinance.

 

Income tax expense of $1,053 in fiscal 2003 represents an adjustment tothe valuation allowance against deferred taxes. Aside from this item, the Company’s effective tax rate in fiscal 2004and fiscal 2003 was zero.

 

**Results of Operations**

 
| ** **                          | ** ** | **Fiscal 2003** | ** ** | **Fiscal 2002**         | ** ** |
|-------------------------------------|------------|-----------------|------------|-------------------------|------------|
| ** **                          | ** ** | **($)**         | ** ** | **(percent of  Sales)** | ** ** | **($)** | ** ** | **(percent of  Sales)** | ** ** |
|                                |       |            |       |                    |       |   |   |   |   |
| Sales                               |       | 247,364         |       | 100.0                   |       | 252,092 |   | 100.0 |   |
| Cost of sales                       |       | 203,154         |       | 82.1                    |       | 208,099 |   | 82.5 |   |
| Gross profit                        |       | 44,210          |       | 17.9                    |       | 43,993 |   | 17.5 |   |
| Selling, general and administrative |       | 22,989          |       | 9.3                     |       | 32,085 |   | 12.7 |   |
| Research and development            |       | 7,209           |       | 2.9                     |       | 6,605 |   | 2.6 |   |
| Restructuring charges               |       | —          |       | —                  |       | 9,002 |   | 3.6 |   |
| Other operating expenses            |       | —          |       | —                  |       | 950 |   | 0.4 |   |
| Operating profit (loss)             |       | 14,012          |       | 5.7                     |       | (4,649 | ) | (1.8 | ) |
| Interest expense, net               |       | 29,912          |       | 12.1                    |       | 29,147 |   | 11.6 |   |
| Income tax expense (benefit)        |       | 1,053           |       | 0.4                     |       | (2,045 | ) | (0.8 | ) |
| Net loss                            |       | $               | (16,953    | )                       | (6.8       | ) | (31,751 | ) | (12.6 | ) |
|                                     |            |                 |            |                         |            |  |  |  |  |  |

 

**Fiscal 2003 Comparedwith Fiscal 2002**

 

Sales for fiscal 2003 of $247,364 were $4,728, or 1.9 percent,lower compared with fiscal 2002.  Thepercent decline in volume was partially offset by a 6.0 percent increase inaverage selling price.  The higheraverage selling price was due to both price increases and an improved mix ofproducts sold.

 

Sales outside of the United States were $48,717, or 19.7 percentof sales, and $41,473, or 16.5 percent of sales, for fiscal 2003 and 2002,respectively, and generated $4,724 of operating profit in fiscal 2003 and$3,449 of operating profit in fiscal 2002. Operating profit margins on foreign sales increased in fiscal 2003 dueto improved pricing and a favorable sales mix.

 

Gross profit in fiscal 2003 of $44,210 increased by $217 compared withfiscal 2002.  An increase in averageselling prices of $13,839 as a result of price increases, in addition to animproved mix of products sold, offset the impact of lower sales volumes and a$14,700, or 17 percent, increase in raw material costs.  Gross margin was 17.9 percent in fiscal 2003versus 17.5 percent in fiscal 2002.

 

Selling, general and administrative expenses were $22,989, or9.3 percent of sales, in fiscal 2003, compared with $32,085, or 12.7 percentof sales, in fiscal 2002.  The decreaseof $9,096 reflects the successful implementation of the September 2002restructuring and ongoing cost reduction efforts.

 

Research and development expenses were $7,209, or 2.9 percent ofsales, in fiscal 2003 compared with $6,605, or 2.6 percent of sales infiscal 2002, reflecting the Company’s strategy to develop a number of new,highly differentiated products.  TheCompany expects to continue to invest in research and development in fiscal2004 pursuant to its strategy to increase growth in gross margins primarilythrough the development of new high value firms.

 

Restructuringand impairment charges of $9,002 in fiscal 2002 reflect the costs associatedwith the closure of the corporate office in Peabody, Massachusetts, arealignment of the Company’s business units, and a reorganization of key rolesand responsibilities.  This reorganizationeliminating 50 full time positions, together with other cost reduction efforts,has successfully implemented and provided annual cost savings in excess of$9,000.

 

Other expenses in fiscal 2002 of $950 reflect costs tocomplete the Company’s transition of the assets acquired from QPF, L.L.C. (“QPF”).

 

Interest expense increased $765 to $29,912 in fiscal 2003 as comparedto fiscal 2002 due to a higher average outstanding debt balance.

 

11

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Income tax expense of $1,053 in fiscal 2003 represents an adjustment tothe valuation allowance against deferred taxes. The Company recorded an income tax benefit in fiscal 2002 of $2,045 as aresult of a tax refund received due to the change in the tax law in fiscal 2002increasing the loss carryback period. Aside from these items, the Company’s effective tax rate in fiscal 2003and fiscal 2002 was zero.

 

**Liquidity and CapitalResources**

 

The Companyentered into a five-year $100,000 credit facility with GE Commercial Finance onOctober 3, 2003.  The creditfacility originally consisted of a $50,000 term loan and a $50,000 revolvingline of credit.  The Company amended thiscredit facility on March 23, 2004. This amendment increased the Company’s revolving line of credit by $10million to $60 million and reduced the EBITDA covenant through the thirdquarter of fiscal 2005.

 

On July 30, 2004 the Company announcedthat it had reached an agreement in principle with six bondholders holding over70 percent in aggregate outstanding principal amount of the Company’s 103⁄4percent senior notes to recapitalize the senior notes. Pursuant to the agreementin principle, the Company did not pay the interest on the senior notes thatbecame due on July 1, 2004.

 

On December 1, 2004, the Company filedits voluntary, prepackaged plan of reorganization under Chapter 11 of the U.S.Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware.  In order to fund normal operations during thebankruptcy proceedings, the Company entered into an agreement with GECommercial Finance, which provides $125 million of debtor-in-possessionfinancing during the Chapter 11 period. The plan and debtor-in-possession financing facility provides sufficientliquidity during the bankruptcy proceedings.

 

The recapitalization plan, as amended andconfirmed on January 24, 2005, will involve an exchange of the Company’s103⁄4 percent senior notes pursuant to which the noteholders will receive 100percent of the common equity of the reorganized private Company and new seniornotes to be issued by the reorganized private Company.  The amended plan provides  noteholders of less than $500,000 inprincipal amount (“small” beneficial holders) with the option of receivingeither cash in an amount of $0.51 per $1.00 of their claims or new securitiesof the reorganized Company. For those “small” noteholders that receive cash,the Company has agreed to fund $0.02 of the $0.51 cash payment, with thebalance to be provided by certain of the “large” noteholders, subject to thesatisfaction of certain conditions. The Company’s $0.02 obligation will befunded by a portion of the $2.5 million contemplated to be distributed to theCompany’s existing shareholders, who are not entitled to any distribution underthe plan. The Company expects that its existing shareholders now will receiveapproximately 15% to 30% less than that amount, depending upon the number of “small”noteholders that elect to receive cash. The new senior notes will have an aggregate principal amount of $50million, a seven-year term and will be redeemable after the first year atdeclining premiums.  Interest will accrueat a rate of 12 percent per annum, and may be paid in cash or in kind, unlesscertain minimum financial requirements are achieved, in which case the interestmust be paid in cash.  All of the Company’sexisting stock will be canceled. Under the prepackaged Chapter 11 plan, theCompany will pay its trade creditors in full on a current basis.

 

The Company expects to emerge from Chapter 11before the end of  the first calendarquarter of 2005.   Subject to certainclosing conditions, GE Commercial Finance has also committed to provide $125million of exit financing, of which $55 million will be a revolving creditfacility, upon consummation of the Chapter 11 cases.

 

The Company’sliquidity generally depends on cash provided by operating activities and our GECommercial Finance credit facility. The ability of the Company to continue as agoing concern depends, among other things, on: (i) the Company’s ability tomaintain adequate cash on hand; (ii) the Company’s ability to generate cashfrom operations; (iii) the duration and outcome of the recapitalizationprocess; and (iv) the Company’s ability to achieve profitability following arecapitalization. Such conditions raise substantial doubt about the Company'sability to continue as a going concern. The Company, in conjunction with itsadvisors, is working to design and implement strategies to provide adequateliquidity for the Company. However, there can be no assurance as to the successof such efforts.

12

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**Operating Activities**

 

Operating activities for fiscal 2004 used $16,924 of cash, which wasthe result of net loss before depreciation and other adjustments to reconcilenet loss to net cash from operating activities of $7,705, combined with cashused from changes in working capital of $9,219 due to the following:

 
| Increase in inventory                                  |   | $       | (5,679 | ) |
|--------------------------------------------------------|--------|---------|--------|---|
| Increase in accounts receivable                        |   | (13,044 | )      |
| Decrease in prepaid expenses and other  current assets |   | 9,472   |   |
| Increase in accounts payable and accrued  expenses     |   | 14,062  |   |
| Other                                                  |   | (14,030 | )      |
|                                                   |   |    |   |
| Cash used for working capital                          |   | $       | (9,219 | ) |

 

Inventory increased in fiscal 2004 dueprincipally to the higher cost of raw materials.  A 12 percent reduction in the units offinished goods, or 6.3 million pounds, was more than offset by higher inventorycost per pound due primarily to increased polypropylene costs. AccountsReceivable increased by $13,044 due to the significant increase in revenuesduring the fiscal year, and in the fourth fiscal quarter.  Prepaid expenses and other current assetsdecreased by $9,472 due to the distribution of $12,925 held in the SupplementalRetirement Plans offset by increased vendor deposits. Accounts Payable andaccrued expenses increased by $14,062 due primarily to an increase in accruedinterest expense of $16,161.  Thisincrease includes interest on the Company’s 103⁄4 percent senior notes of$14,781, due on July 1, 2004, which the Company did not pay pursuant toits proposed plan of recapitalization. Other changes in working capital primarily reflect the change in otherliabilities related to the Supplemental Retirement Plan distribution, reportedpreviously.

 

Operating activities for fiscal 2003 used $19,540 of cash, which wasthe result of net profit before depreciation and other adjustments to reconcilenet loss to net cash from operating activities of $3,880, and cash used fromchanges in working capital of $23,420 due to the following:

 
| Increase in inventory                                  |   | $       | (19,224 | ) |
|--------------------------------------------------------|--------|---------|---------|---|
| Decrease in accounts receivable                        |   | 6,332   |    |
| Increase in prepaid expenses and other current  assets |   | (506    | )       |
| Decrease in accounts payable and accrued  expenses     |   | (16,553 | )       |
| Other                                                  |   | 6,531   |    |
|                                                   |   |    |    |
| Cash used for working capital                          |   | $       | (23,420 | ) |

 

Inventory increased in fiscal 2003 due tocontinued soft end use demand in addition to the Company’s volume loss of lowmargin business precipitated by its leadership in raising selling prices tocover escalating raw material prices. End use demand for snacks and beverages was adversely impacted by thecontinued economic weakness and unseasonably cool and wet weather conditionsduring the spring and early summer, particularly on the East Coast of theUnited States.  The Company hasimplemented plans to reduce inventory by shutting down certain productionassets.  Nevertheless, the Companycontinues to carry inventory above historical levels. Accounts receivabledecreased as a result of the reduction in sales from the fourth quarter offiscal 2002.  Prepaid expenses and otherassets increased primarily due to contributions made to the Company’sretirement plans that are described in Note 13 to the consolidated financialstatements.  Accounts payable and accruedexpenses decreased primarily due to utilization of reserves for the 2002restructuring and restatement related expenses. Additionally, accruals for customer rebates were reduced byapproximately $3,600 due to lower sales on these programs.  Approximately $5,000 relates to thereclassification of deferred gains, relating to sale-leaseback transactions, toother liabilities.

 

Operating activities for fiscal 2002 used$4,021 of cash, which was the result of net loss before depreciation and otheradjustments to reconcile net loss to net cash from operating activities of$12,548, and cash generated from changes in working capital of $8,527 due tothe following:

 

13

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| Decrease in inventory                                  |   | $      | 2,358       |   |
|--------------------------------------------------------|--------|--------|-------------|--------|
| Increase in accounts receivable                        |   | (607   | )           |
| Increase in prepaid expenses and other  current assets |   | (856   | )           |
| Increase in accounts payable and accrued  expenses     |   | 5,503  |        |
| Other                                                  |   | 2,129  |        |
|                                                   |   |   |        |
| Cash generated from working capital                    |   | $      |  8,527 |   |

 

Inventory decreased in fiscal 2002 due to temporary plant shutdownstaken in the fourth fiscal quarter specifically aimed at reducing inventorylevels. Prepaid expenses and other assets increased primarily due tocontributions made to the Company’s retirement plans that are described inNote 13 to the consolidated financial statements. Accounts payable andaccrued expenses increased primarily due to the restructuring reserve recordedin September 2002 as described in Note 7 to the consolidatedfinancial statements.

 

**Investing Activities**

 

In fiscal 2004, investing activities used $43,944 of cash as a resultof the following:

 
| Additions to property, plant and equipment,  net      |   | $       | (7,186  | ) |
|-------------------------------------------------------|--------|---------|---------|---|
| Proceeds from sale of property, plant, and  equipment |   | 203     |    |
| Repurchase of leased assets                           |   | (36,961 | )       |
|                                                  |   |    |    |
|                                                  |   | $       | (43,944 | ) |

 

In fiscal 2004 and 2003, the Company expended$7,186 and $17,938 respectively primarily for additions to manufacturingfacilities and related equipment.  TheCompany received $203 and $2,110 in fiscal 2004 and 2003 respectively from thesale of property, plant and equipment.

 

In fiscal 2002, investing activities used cash of $972. In March 2002,the Company purchased certain leased equipment for $17,156. The Company soldand leased back, under a 7 year operating lease, a portion of thatequipment (aggregating $7,989) and realized proceeds of $18,225. In addition tothat equipment, the Company expended $26,756, primarily for additions to its manufacturingfacilities and related equipment and received proceeds of $1,503 from the saleof property, plant and equipment. The net proceeds from the sale of thespecialty nets and nonwovens division in September 2001 of $23,212 werereceived in the first quarter of fiscal 2002.

 

**Financing Activities**

 

In fiscal 2004, financing activities generated $58,759 of cash due tothe proceeds received under the $50,000 term loan and $17,637 net increase inborrowings under the revolving line of credit. These amounts were partially offset by principal payments on the termloan of $6,250 and $2,628 of debt issuance costs paid on the refinancing of theCompany’s credit facility with GE Commercial Finance.

 

In fiscal 2003, financing activities generated $20,483 of cash dueprimarily to borrowings under the revolving credit facility, of which $6,500was used to redeem outstanding industrial revenue bonds. The Company incurreddebt issuance costs of $1,687.

 

In fiscal 2002, financing activities generated $378 of cash. Proceedsof stock options during the year aggregated $993. The Company incurred debtissuance costs of $615.

 

14

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**ContractualObligations**

 

Below is a summarized list of the Company’s contractual obligations relatingto long-term debt and non-cancelable operating leases, employment and severanceagreements at September 30, 2004.

 
| ** **                                         | ** ** | **Total** | ** ** | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **4-5 years** | ** ** | **Thereafter** | ** ** |
|----------------------------------------------------|------------|-----------|------------|-----------------------|------------|---------------|------------|---------------|------------|----------------|------------|
|                                               |       |      |       |                  |       |          |       |          |       |           |       |
| Contractual Obligations (payments due by  period): |       |      |       |                  |       |          |       |          |       |           |       |
| Term Loan                                          |       | $         | 43,750     |                  | $          | 43,750        |       | $             | —     |           | $          | — |   | $ | — |   |
| Operating leases                                   |       | 2,182     |       | 1,123                 |       | 889           |       | 170           |       |           |       |
| Employment agreements                              |       | 2,769     |       | 2,147                 |       | 622           |       | —        |       | —         |       |
| Severance agreements                               |       | 20        |       | 20                    |       | —        |       | —        |       | —         |       |
| Total Contractual Obligations                      |       | $         | 48,721     |                  | $          | 47,040        |       | $             | 1,511      |           | $          | 170 |   | $ | — |   |

 

No future contractual obligation amounts have been listed with respectto the Company’s senior notes due to the expected recapitalization of thesenotes in fiscal 2005.

 

**Inflation**

 

Management regularly reviews the prices charged for its products. Whenmarket conditions allow, price adjustments are made to reflect changes indemand or product costs due to fluctuations in the costs of materials and laborand inflation. The costs of raw materials make up a significant portion of theCompany’s costs and have historically fluctuated. It cannot be assumed,however, that future market conditions will support any correlation between rawmaterial cost fluctuations and finished product films pricing.

 

In fiscal 2004 the Company has been unsuccessful in passing throughprices increases to its customers sufficient to offset all of the increases inraw material costs.

 

**Seasonal Nature ofSome OPP Films Markets**

 

Some of the end-use markets for OPP films are seasonal. For example,demand in the snack food, soft drink and candy markets are generally higher inthe spring and summer. As a result, sales and net income are generally higherin the Company’s second and third fiscal quarters, although actual results canbe influenced by numerous factors, such as raw material costs, competitiveprices and other factors mentioned in this prospectus.

 

**New AccountingPronouncements**

 

A summary of the impact of certain new accounting pronouncements on theCompany’s business follows.

 

In December 2004, the Financial Accounting Standards Board (“FASB”)issued SFAS 123(R), “Share-Based Payment”. SFAS No. 123(R) revises SFAS 123, Accounting for Stock-BasedCompensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued toEmployees, and its related implementation guidance.  SFAS 123(R) will require compensation costsrelated to share-based payment transactions to be recognized in the financialstatements (with limited exceptions). The amount of compensation cost will be measured based on the grant-datefair value of the equity or liability instruments issued.  Compensation cost will be recognized over theperiod that an employee provides service in exchange for the award.  This statement is effective as of thebeginning of the first interim or annual reporting period that begins after June 15,2005.  The Company is currentlyevaluating the impact from this standard on its results of operations andfinancial position.

 

In January 2003, the FASB issued FASB Interpretation No. (“FIN”)46, “Consolidation of Variable Interest Entities an Interpretation of ARB No.51. “  FIN 46 addresses consolidation bybusiness enterprises of variable interest entities.  The FASB then issued FIN 46R, “Consolidationof Variable Interest Entities,” which replaced FIN 46.  Application of FIN 46R is required infinancial statements of public entities that have interests in variableinterest entities or potential variable interest entities commonly referred toas special-purpose entities for periods ending after December 15,2003.  Application by public entities forall other types of entities is required in financial statements for periodsending after March 15, 2004.  TheCompany has adopted both FIN 46 and FIN 46R, and their adoption has no impacton the Company’s financial position or results of operations.

 

In May 2003, the FASB issued SFAS 150, “Accounting for CertainFinancial Instruments with Characteristics of both Liabilities

 

15

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and Equity.”  This Statement establishes standards for howan issuer classifies and measures certain financial instruments withcharacteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that iswithin its scope as a liability (or an asset in some circumstances).  This Statement is effective for financialinstruments entered into or modified after May 31, 2003, and otherwise iseffective at the beginning of the first interim period beginning after June 15,2003.  The Company adopted the provisionsof SFAS 150, including the deferral of certain effective dates as a result ofthe provisions of FASB Staff Position 150-3, “Effective Date, Disclosures, andTransition for Mandatorily Redeemable Financial Instruments of CertainNonpublic Entities and Certain Mandatory Redeemable Noncontrolling InterestsUnder FASB Statement No. 150, ‘Accounting for Certain Financial Instrumentswith Characteristics of Both Liabilities and Equity.’”  The Company does not have any significantfinancial instruments with characteristics of both liabilities and equity as ofSeptember 30, 2004.

 

**Critical AccountingPolicies**

 

The Company’s discussion and analysis of its financial condition andresults of operations are based upon the consolidated financial statements,which have been prepared in accordance with accounting principles generallyaccepted in the United States. The preparation of these financial statementsrequires management to make estimates and judgments that affect the reportedamounts of assets and liabilities, the disclosure of contingent liabilities andthe reported amounts of revenues and expenses. On an ongoing basis, the Companyevaluates its estimates and judgments, including those related to revenuerecognition, bad debts, inventories, and intangible assets. Estimates andjudgments are based on historical experience and on various other assumptionsthat are believed to be reasonable under the circumstances. Actual results maydiffer materially from these estimates under different assumptions orconditions. The Company believes the following critical accounting policiesaffect its more significant estimates and judgments used in preparation of itsconsolidated financial statements.

 

*Revenue Recognition.*  Revenue is recognized on product sales at thepoint in time when persuasive evidence of an arrangement exists, the price isfixed and determinable, delivery has occurred and there is reasonable assuranceof collection of the sales proceeds. The Company generally obtains purchaseauthorizations from its customers for a specified amount of product at aspecified price with delivery terms at the point of shipment. While the Companydoes provide its customers with a right of return, revenue is not deferred.Rather, a reserve for sales returns is provided in accordance with SFASNo. 48 based on significant historical experience.

 

*Asset Valuation.*  Asset valuation includes assessing therecorded value of certain assets, including accounts receivable, inventories,property, plant and equipment, goodwill, and intangible assets. Asset valuationis governed by SFAS No. 144 “Accounting for the Impairment or Disposal ofLong-Lived Assets”, SFAS No. 141, “Business Combinations”, SFASNo. 142 “Goodwill and Other Intangible Assets” and Accounting ResearchBulletin No. 43, among others. Management uses a variety of factors toassess valuation depending on the asset. For example, accounts receivable areevaluated based upon an aging schedule. The recoverability of inventories isbased primarily upon the age of inventory held and market conditions. Property,plant and equipment, intangible and other assets are evaluated utilizingvarious factors, including the expected period the asset will be utilized andforecasted cash flows. Changes in judgments on any of these factors could impactthe value of the asset.  Due to thedecline in the Company’s market value as a result of the prepackaged Chapter 11filing, a full impairment of goodwill of $9,874 was recognized in fiscal 2004.

 

*Concentrations of Credit Risk.*  The Company’s financial instruments that areexposed to concentrations of credit risk consist primarily of tradereceivables. The Company performs ongoing credit evaluations of its customers’financial condition and generally requires no collateral from its customers.The Company’s allowance for doubtful accounts is calculated based primarilyupon historical bad debt experience and current market conditions. Over thepast four years, annual bad debt expense has averaged approximately $900 andranged from $400 in fiscal year 2001 to $1,713 in fiscal 2002. The significantfinancial deterioration of any significant customers, including a filing forbankruptcy, could impact their ability to satisfy their receivables with theCompany. While the Company believes its allowance for bad debts at September 30,2004 of $1,615 is adequate, an unanticipated increase in customer bankruptciesor other financial difficulties would require the Company to increase itsprovision for bad debts and ultimately increase its allowance for future baddebts.

 

*Inventories.*  Inventories, which include material, laborand manufacturing overhead, are stated at the lower of cost or market with costdetermined using a weighted average-cost method. The Company determines themarket value of its raw ingredients, finished product and packaging inventoriesbased upon references to current market prices for such items as of the end ofeach reporting period and record a write down of inventory cost to market, whenapplicable. Polypropylene, the Company’s major raw material, is petroleum basedand prices can fluctuate significantly and, as discussed above, increases inraw material prices cannot always be passed on to customers. Additionally, fromtime to time, the Company has been able to utilize secondary markets to liquidateexcess inventories. If raw material prices were to increase and the Companywere unable to raise its prices or if the Company’s ability to liquidate excessinventories was significantly diminished, additional inventory write-downs maybe necessary.

 

*Excess of Cost Over Fair Value of Net AssetsAcquired.*  Theexcess of cost over fair value of net assets acquired (goodwill) is evaluatedannually for impairment in accordance with SFAS 142. The Company has onereporting unit and estimate fair value based on

 

16

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a variety ofmarket factors, including discounted cash flow analysis, market capitalization,and other market-based data.  Due to thedecline in the Company’s market value as a result of the prepackaged Chapter 11filing, a full impairment of goodwill of $9,874 was recognized in fiscal 2004.

 

**ITEM 7A. QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

**Short-Term andLong-Term Debt**

 

The Company is exposed to interest rate risk primarily through itsborrowing activities. The Company’s policy has been to utilize United Statesdollar denominated borrowings to fund working capital and investment needs.Short-term debt, if required, is used to meet working capital requirements,while long-term debt is generally used to finance long-term investments. Thereis inherent rollover risk for borrowings as they mature and are renewed atcurrent market rates. At September 30, 2004, the Company maintained arevolving credit facility, which bore interest at a variable rate. Averageborrowings under this facility were approximately $23,153 for the year ended September 30,2004. A 10 percent increase in market rates would not have had a materialimpact on fiscal 2004 results of operations. At September 30, 2004, the Companyhad revolving debt of $46,307, term debt of $43,750 and senior debt of $272,204outstanding, all of which was classified as current. The short-term debt bearsinterest at the lender’s variable rate, LIBOR, plus 2.75 percent. The long-termdebt bears interest at a fixed rate of 10.75 percent.

 

On October 3, 2003, the Company replaced its existing revolvingcredit facility with a $100 million credit facility with GE CommercialFinance (GECF) as detailed in Footnote 6 to the Consolidated Financial Statements.

 

The Company does not enter into financial instrument transactions fortrading or other speculative purposes or to manage interest rate exposure.

 

**ITEM 8. FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA**

 

The information required under this item is set forth on pages F-1through F-18 of this Report.

 

**ITEM 9. CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

Not applicable.

 

**ITEM 9A. CONTROLS AND PROCEDURES**

 

Disclosure Controls and Procedure

 

The Company’s principal executive officer and its principal financialofficer undertook an evaluation of the Company’s disclosure controls andprocedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) asof the end of the period covered by this report and concluded that the Company’scontrols and procedures were effective.

 

Internal Control Over Finance Reporting

 

There were no changes in the Company’s internal control over financialreporting during the period covered by this report that materially affected, orare reasonably likely to materially affect, the Company’s internal control overfinancial reporting. The Company is committed to ongoing periodic reviews andenhancements of its controls and their effectiveness and will report to theCompany’s shareholders on these reviews and enhancements in the Company’sannual and quarterly reports filed under the Exchange Act.

 

**ITEM 9B. OTHER INFORMATION**

 

Not applicable.

 

**PART III**

 

**ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OFTHE REGISTRANT**

 

The information required under this Item 10 with respect to ExecutiveOfficers of the Company is set forth in Item 4a on page 7 of this report.

 

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The directors of AET are as follows:

 

 
| **Director Name**         | ** ** | **Age** | ** ** | **Position**           | ** ** | **Since**          | ** ** |
|---------------------------|------------|---------|------------|------------------------|------------|--------------------|------------|
|                      |       |    |       |                   |       |               |       |
| Amin J. Khoury            |       | 65      |       | Chairman of  the Board |       | October 1986  |       |
| Nader A. Golestaneh† |       | 44      |       | Director               |       | October 1986  |       |
| Richard G. Hamermesh*     |       | 56      |       | Director               |       | October 1986  |       |
| Mark M. Harmeling†   |       | 52      |       | Director               |       | October 1986  |       |
| Jim C. Cowart*            |       | 53      |       | Director               |       | December 2003 |       |
| Joseph C. Day*            |       | 59      |       | Director               |       | May 2003           |       |

 

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*              Member Audit Committee

 

†              Member Stock Option andCompensation Committee

 

All directors are elected to serve on a staggered term basis, and holdoffice until the next annual meeting of stockholders or until their successorsare duly elected and qualified.  All ofthe Directors expect to resign from office upon the Company’s emergence frombankruptcy.

 

AET has adopted a code of ethics that applies to its principalexecutive officer, principal financial officer and principal accountingofficer, as well as to its directors, other officers and employees. AET’s Codeof Conduct and Ethics is available on its website at www.aetfilms.com.

 

**Business Experienceof Directors**

 

*Amin J. Khoury*—Founderand Chairman of the Board of Directors of the Company since October 1986.  From October 1986 to August 1993,and since October 2002, Mr. Khoury has been the Chief Executive Officer ofthe Company.  He has been President ofthe Company from August 1988 through November 1992.  Mr. Khoury is also the Founder and Chairmanof the Board of Directors of BE Aerospace, Inc., which is a manufacturerof aircraft cabin interior products.  Heis aDirector of Brooks Automation, Inc., which is a leader insemiconductor tool and factory automation solutions for the globalsemiconductor industry.  Mr. Khoury isalso a Director of Synthes-Stratec, Inc., one of the world’s leadingorthopedic trauma products companies.

 

*Nader A. Golestaneh*—Directorof the Company since 1986.  Since 1990,Mr. Golestaneh has been the President of Centremark Properties, Inc.,which is a real estate management and development company.  In 1986, he was an attorney in a privatepractice in Boston, Massachusetts.

 

*Richard G. Hamermesh*—Directorof the Company since 1986.  Since 2000,Mr. Hamermesh has served as professor of Management Practice at the HarvardBusiness School.  In 1987 he co-foundedand served until 2000 as a Managing Partner for the Center for ExecutiveDevelopment, which is an independent executive education and trainingfirm.  Mr. Hamermesh is also the Directorof BE Aerospace, Inc., which is a manufacturer of aircraft cabin interiorproducts.

 

*Mark M. Harmeling*—Directorof the Company since 1986.  Since 2004,Mr. Harmeling is an independent real estate professional.  From 2001 to 2004, he was a partner of TARealty Associates, a real estate advisory firm. From 1991 to 2000 he was President of Bay State Realty Advisors, which isa real estate consulting firm.  From 1997to 1999, Mr. Harmeling was an executive of the A. G. Spanos Corporation, whichis a leading developer of multifamily residential complexes.  From 1985 to 1991, he was the President ofIntercontinental Real Estate Corporation, which is a real estate holding anddevelopment corporation.  He is theDirector of Universal Holding Corporation, which is an insurance holdingcompany.

 

*Joseph C. Day*—Directorof the Company since 2003.  From 1998 to2002, Mr. Day was a member of the Executive Committee of the Original EquipmentSuppliers Association.  Since 2002, hehas served as a member of the Board of Trustees of Beaumont Hospital.  From 1988 to 2002, he was Chairman, ChiefExecutive Officer, and Director of Freudenberg-NOK General Partnership, whichis a manufacturer of original equipment and after market automotivecomponents.  From 1994 to 2002, Mr. Daywas a member of the Board of Directors of ASC, Incorporated.  From 1984 to 2000, he was the Director orChairman or Chair of Executive Committee of the Wiremold Company.  Since 2003, Mr. Day has served as a Director,Chair of Executive Committee, and Chair of Restructuring Committee of VentureIndustries.

 

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*Jim C. Cowart* —Director since December 2003.  Mr.Cowart is currently Chairman and CEO of Auriga Medical Products GmbH, adistributor of medical implants, and a Principal of Cowart & Co. LLC andAuriga Partners, Inc., private capital firms that provide strategic planning,competitive analysis, financial relations and other services.  From August 1999 to May 2001, he wasChairman of QualPro Corporation, an aerospace components manufacturing company,and from February 1998 to November 2000, Mr. Cowart was Chairman andCEO of E-Com Architects, Inc., a computer software company.  From January 1993 to November 1997,he was the Chairman and CEO of Aurora Electronics Inc. Previously; Mr. Cowartwas a founding general partner of Capital Resource Partners, a privateinvestment capital manager, and he held various positions in investment bankingand venture capital with Lehman Brothers, Shearson Venture Capital and Kidder,Peabody & Co. Mr. Cowart is also a director of BE Aerospace, Inc., amanufacturer of aircraft cabin interior products.

 

**ITEM 10A. EXECUTIVE OFFICERS**

 

The executive officers of AET are as follows:

 
| **Name**           | ** ** | **Age** | ** ** | **Position**                                                          | ** ** | **Since**           | ** ** |
|--------------------|------------|---------|------------|-----------------------------------------------------------------------|------------|---------------------|------------|
|               |       |    |       |                                                                  |       |                |       |
| Amin J. Khoury     |       | 65      |       | Chairman of the Board and Chief Executive  Officer(1)                 |       | October 1986   |       |
|               |       |    |       |                                                                  |       |                |       |
| David N. Terhune   |       | 58      |       | President and Chief Operating Officer(2)                              |       | February 1996  |       |
|               |       |    |       |                                                                  |       |                |       |
| Brian P. Crescenzo |       | 43      |       | Vice President of Finance, Secretary, and  Chief Financial Officer(3) |       | September 1997 |       |
|               |       |    |       |                                                                  |       |                |       |
| Terry E. Smith     |       | 53      |       | Vice President Operations                                             |       | July 1998      |       |

 

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(1)                                  Mr. Khouryhas served as Chairman of the Board of Directors since October 1986 andserved as Chief Executive Officer from October 1986 through August 1993and since October 2002.

 

(2)                                  Mr. Terhunehas served as Chief Operating Officer since February 1996 and has servedas President since October 2002.

 

(3)                                  Mr. Crescenzohas served as Vice President of Finance since September 1997, has servedas Secretary since September 2002 and has served as Chief FinancialOfficer since June 2004.

 

AET’sexecutive officers are elected annually by the Board of Directors and serve atthe discretion of the Board of Directors.

 

**Business Experienceof Executive Officers**

 

*Amin J. Khoury*—Founderand Chairman of the Board of Directors of the Company since 1986; ChiefExecutive Officer of the Company since October 2002; Founder and Chairmanof the Board of Directors of BE Aerospace, Inc., a manufacturer ofaircraft cabin interior products; Director of Brooks Automation, Inc., aleader in semiconductor tool and factory automation solutions for the globalsemiconductor industry; and Director of Synthes-Stratec, one of the world’sleading orthopedic trauma companies.

 

*David N. Terhune*—Presidentof the Company since October 2002, and Chief Operating Officer of theCompany since 1996; Executive Vice President from 1996 to 2002; Senior VicePresident and Chief Financial Officer of the Company from 1994 to 1996; from1972 until 1993, as Chief Operating Officer for seven years and Chief FinancialOfficer for fourteen years for five primarily public companies in thetechnology, banking, real estate, food service and manufacturing industries.

 

*Terry E. Smith*—VicePresident of Operations of the Company since January 2003; Vice Presidentof Manufacturing from July 1998 to January 2003; from 1994 until 1998Vice President of Manufacturing Operations for Sentry Group, a leadingmanufacturer of fire proof safes, files and chests; from 1979 until 1994 heldvarious operational positions including Manager of Manufacturing, SeniorPlanning Associate and Business Manager with Mobil Chemical Company’s PlasticsDivision.

 

*Brian P. Crescenzo*—VicePresident of Finance of the Company since September 1997; Secretary of theCompany since September 2002; Treasurer of the Company since January 2003;Chief Financial Officer of the Company since June 2004; from 1989 until1997, held various controllership positions with Hercules, Inc., aspecialty chemical company based in Wilmington, Delaware, including thecontrollership of the OPP Films Division.

 

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**Code of Ethics**

 

AET hasadopted a code of ethics that applies to its principal executive officer,principal financial officer and principal accounting officer, as well as to itsdirectors, other officers and employees. AET’s Code of Conduct and Ethics isavailable on its website at www.aetfilms.com.

 

**BeneficialOwnership Reporting Compliance**

 

Section 16(a) of theSecurities Exchange Act of 1934, as amended, requires the Company’s directorsand certain of its officers, and persons who own more than ten percent of aregistered class of the Company’s equity securities, to file with theSecurities and Exchange Commission (“SEC”) initial reports of ownership andreports of changes in ownership of Common Stock and other equity securities ofthe Company.  Officers, directors andgreater than ten percent shareholders are required by SEC regulation to furnishthe Company with copies of all Section 16(a) forms they file.

 

To the Company’sknowledge, based solely on a review of the copies of such reports furnished tothe Company and written representations, including written representations ofits directors and officers that no other reports were required, during thefiscal year ended September 30, 2004, all Section 16(a) filingrequirements applicable to its officers, directors and greater than ten percentbeneficial owners were complied with by those parties.

 

**ITEM 11. EXECUTIVE COMPENSATION**

 

**Report of the Stock Option and CompensationCommittee of the Board of Directors**

 

The Stock Option and Compensation Committee(the “Compensation Committee”), which is responsible for review and approval ofcompensation matters relating to executive officers of the Company andadministering the Company’s stock option plans, makes the following report onexecutive compensation for fiscal 2004.

 

The Company’s executive compensation programis designed to recruit, retain, reward and motivate talented executives who arecapable of leading the Company in achieving its strategic and financialobjectives in the competitive and rapidly changing oriented polypropyleneindustry.

 

The Company relies primarily on fourcompensation components to motivate executive performance: annual salary,incentive cash bonuses, retirement benefits, and stock-based incentivecompensation.  Each of the executiveofficers of the Company has an employment agreement that establishes an annualbase salary at a level the Company believes is at least comparable to companiesin its industry and consistent with the range for comparable companies.  To determine salary ranges for itsexecutives, the Company utilizes a variety of compensation surveys generated byone or more independent consulting firms with expertise in compensationmatters, and examines the compensation levels of executives with similarresponsibilities in comparable organizations. Annual base salary of executives is targeted at levels which, togetherwith incentive bonuses, would provide annual cash compensation to individualexecutives that is within the range of prevailing market compensation levels,with a significant portion of the executive’s total cash compensation tied towhether corporate and/or divisional performance for the year in question wasabove, below, or consistent with the Compensation Committee’s expectations.

 

In addition to base salary, each executiveofficer is eligible to receive an incentive cash bonus at the end of eachfiscal year based upon corporate performance, that officer’s individualperformance, and in certain cases group performance.  Corporate performance is measured by theCompany’s strategic and financial performance in that fiscal year, withparticular reference to operating earnings and net income for the year comparedwith targets set forth in the Company’s annual Business Plan approved by theBoard of Directors at the beginning of each fiscal year. Because the CompensationCommittee believes that short-term fluctuations in stock price do notnecessarily reflect the underlying strength or future prospects of the Company,the Compensation Committee does not emphasize year-to-year changes in stockprice in its evaluation of corporate performance for the purpose of determiningexecutive compensation.  Individualperformance is measured by the strategic and financial performance of theparticular officer’s operational responsibility in comparison to targetedperformance criteria.

 

The compensation of Amin J. Khoury, theCompany’s Chief Executive Officer, was determined using the methods describedabove.  Pursuant to his amended andrestated employment agreement. Mr. Khoury’s salary for fiscal year 2004 was$553,000 and he did not receive a bonus. Mr. Khoury received options to purchase 175,000 shares of Common Stock.

 

With respect to the above matters, theCompensation Committee submits this report.

 

STOCK OPTION AND COMPENSATION COMMITTEE

Mark M.Harmeling

Nader A.Golestaneh

 

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The following tables set forthinformation with respect to the compensation of the Named Executive Officersearned during fiscal 2004, 2003 and 2002:

 

**SUMMARY COMPENSATION TABLE**

 
| ** **             | ** ** | ** ** | ** ** | **Annual Compensation** | ** ** | **Long-Term Compensation** | ** ** | ** **          | ** ** |
|------------------------|------------|------------|------------|-------------------------|------------|----------------------------|------------|---------------------|------------|
| **Name and Principal** | ** ** | ** ** | ** ** | ** **              | ** ** | ** **                 | ** ** | **Other Annual**    | ** ** | **Stock** | ** ** | **Restricted** | ** ** | **All Other** | ** ** |
| **Position**           | ** ** | **Year**   | ** ** | **Salary($)(1)**        | ** ** | **Bonus($)(1)**            | ** ** | **Compensation($)** | ** ** | **Options (#)** | ** ** | **Stock Awards** | ** ** | **Compensation ($)** | ** ** |
|                   |       |       |       |                    |       |                       |       |                |       |   |   |   |   |   |   |
| Amin J. Khoury         |       | 2004       |       | 553,500                 |       | —                     |       | —              |       | 175,000 |   | — |   | 3,585,192 | (2) |
| Chairman of the        |       | 2003       |       | 543,000                 |       | —                     |       | —              |       | 100,000 |   | — |   | 15,484 | (2) |
| Board and Chief        |       | 2002       |       | 538,500                 |       | —                     |       | —              |       | — |   | — |   | 15,484 | (2) |
| Executive Officer      |       |       |       |                    |       |                       |       |                |       |   |   |   |   |   |   |
|                   |       |       |       |                    |       |                       |       |                |       |   |   |   |   |   |   |
| David N. Terhune  |       | 2004       |       | 415,000                 |       | —                     |       | —              |       | 175,000 |   | — |   | 2,256,114 | (3) |
| President and Chief    |       | 2003       |       | 407,000                 |       | —                     |       | —              |       | 75,000 |   | — |   | 25,952 | (3) |
| Operating Officer      |       | 2002       |       | 403,750                 |       | —                     |       | —              |       | — |   | — |   | 34, 457 | (3) |
|                   |       |       |       |                    |       |                       |       |                |       |   |   |   |   |   |   |
| Brian P. Crescenzo     |       | 2004       |       | 192,503                 |       | —                     |       | —              |       | 30,000 |   | — |   | 6,574 | (4) |
| Vice President,        |       | 2003       |       | 172,500                 |       | 32,000                     |       | —              |       | 25,000 |   | — |   | 35,654  | (4) |
| Secretary and Chief    |       | 2002       |       | 158,333                 |       | —                     |       | —              |       | — |   | — |   | 30,113 | (4) |
| Financial Officer      |       |       |       |                    |       |                       |       |                |       |   |   |   |   |   |   |
|                   |       |       |       |                    |       |                       |       |                |       |   |   |   |   |   |   |
| Terry E. Smith    |       | 2004       |       | 232,500                 |       | —                     |       | —              |       | 30,000 |   | — |   | 7,000 | (4) |
| Vice President of      |       | 2003       |       | 222,000                 |       | 41,400                     |       | —              |       | 35,000 |   | — |   | 44,785  | (4) |
| Operations             |       | 2002       |       | 205,833                 |       | —                     |       | —              |       | — |   | — |   | 38,263 | (4) |

 

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(1)           Includesamounts earned but deferred by the Executive officer at the election of thoseofficers pursuant to the Company’s 401(K) Savings and Profit Sharing Plan orExecutive Deferred Compensation Plan.

(2)           Includesa distribution of $3,583,136 in fiscal 2004 which relates to the SupplementalExecutive Retirement Plan and the balance of which is from the life insurancepremiums paid by the Company pursuant to the terms of the employment agreementbetween the Company and Mr. Khoury.  Thedistribution of the proceeds from the Supplemental Executive Retirement Plan,which vested over a ten-year period, was made pursuant to the terms of thePlan.

(3)           Includesa distribution of $2,229,114 in fiscal 2004 which relates to the SupplementalExecutive Retirement Plan and the balance of which is from the employercontributions under the Company’s 401(k) Savings and Profit Sharing Plan, and lifeinsurance premiums paid by the Company pursuant to the terms of the employmentagreement between the Company and Mr. Terhune. The distribution of the proceeds from the Supplemental ExecutiveRetirement Plan, which vested over a ten-year period, was made pursuant to theterms of the Plan.

(4)           Includesemployer contributions under the Company’s 401(k) Savings and Profit SharingPlan and Executive Deferred Compensation Plan.

 

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**OPTION GRANTS IN LAST FISCAL YEAR**

 

The following table sets forth the individualgrants of stock options to each of the named executive officers during the 2004fiscal year.  All outstanding stockoptions shall be canceled and deemed terminated upon the effective date of theRecapitalization Plan.

 
| **Individual Grants** | ** ** | **Potential Realizable Value at  Assumed Annual Rates of Stock  Price Appreciation for Option  Term (2)** | ** ** |
|-----------------------|------------|-----------------------------------------------------------------------------------------------------------|------------|
| ** **            | ** ** | ** **                                                                                                | ** ** | **Percent of** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **            | ** ** | ** **                                                                                                | ** ** | **Total Options** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **            | ** ** | **Options**                                                                                               | ** ** | **Granted to** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **10** | ** ** |
| ** **            | ** ** | **Granted**                                                                                               | ** ** | **Employees in** | ** ** | **Exercise** | ** ** | **Expiration** | ** ** | **5 percent** | ** ** | **percent** | ** ** |
| **Name**              | ** ** | **(#)**                                                                                                   | ** ** | **Fiscal Year (1)** | ** ** | **Price** | ** ** | **Date** | ** ** | **($)** | ** ** | **($)** | ** ** |
| ** **            | ** ** | ** **                                                                                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Amin J. Khoury        |       | 175,000                                                                                                   |       | 20 percent |   | $ | 2.33 |   | 12/18/13 |   | 256,432 |   | 649,848 |   |
|                  |       |                                                                                                      |       |   |   |   |   |   |   |   |   |   |   |
| David N. Terhune      |       | 175,000                                                                                                   |       | 20 percent |   | $ | 2.33 |   | 12/18/13 |   | 256,432 |   | 649,848 |   |
|                  |       |                                                                                                      |       |   |   |   |   |   |   |   |   |   |   |
| Brian P. Crescenzo    |       | 30,000                                                                                                    |       | 3 percent |   | $ | 2.33 |   | 12/18/13 |   | 43,960 |   | 111,403 |   |
|                  |       |                                                                                                      |       |   |   |   |   |   |   |   |   |   |   |
| Terry E. Smith        |       | 30,000                                                                                                    |       | 3 percent |   | $ | 2.33 |   | 12/18/13 |   | 43,960 |   | 111,403 |   |

 

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(1)        Options were granted to a total of 56 employeesand directors of the company on four different dates in fiscal 2004.

(2)        These potential realizable values arebased on assumed rates of appreciation required by applicable regulations ofthe U.S. Securities and Exchange Commission. The potential realizablevalues stated are not discounted to their net present value.

 

The following table sets forth the exerciseof stock options by each of the named executive officers during the 2004 fiscalyear and the year-end value of unexercised options.  All outstanding stock options shall becanceled and deemed terminated upon the effective date of the RecapitalizationPlan.

 

**AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR**

**AND FISCAL YEAR-END OPTION VALUES**

 
| **Name**           | ** ** | **Shares  Acquired on  Exercise (#)** | ** ** | **Realized ($)** | ** ** | **Number of  Unexercised  Options  At FY-End (#)  Exercisable/  Unexercisable** | ** ** | **Value of  Unexercised Options  In-the-Money  at FY-End ($ )  Exercisable/  Unexercisable (1)** | ** ** |
|--------------------|------------|---------------------------------------|------------|------------------|------------|---------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------|------------|
|               |       |                                  |       |             |       |                                                                            |       |                                                                                                  |       |
| Amin J. Khoury     |       | —                                |       | —           |       | 512,500 / 287,500                                                               |       | — / —                                                                                       |       |
|               |       |                                  |       |             |       |                                                                            |       |                                                                                                  |       |
| David N. Terhune   |       | —                                |       | —           |       | 441,250 / 268,750                                                               |       | — / —                                                                                       |       |
|               |       |                                  |       |             |       |                                                                            |       |                                                                                                  |       |
| Brian P. Crescenzo |       | —                                |       | —           |       | 25,000 / 55,000                                                                 |       | — / —                                                                                       |       |
|               |       |                                  |       |             |       |                                                                            |       |                                                                                                  |       |
| Terry E. Smith     |       | —                                |       | —           |       | 27,500 / 62,500                                                                 |       | — / —                                                                                       |       |

 

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(1)                                  Theclosing price for the Company’s Common Stock on the NASDAQ National MarketSystem on September 30, 2004, the last trading day of the fiscal year, was$0.15 per share.

 

**Compensationof Directors**

 

Directors of the Companywho are not employees of the Company (the “Eligible Directors”) receivecompensation of $12,500 per quarter, and Eligible Directors who are alsocommittee members receive an additional $2,500 per quarter for each committeeon which they serve. In addition, Eligible Directors are entitled toparticipate in the Company’s 2001 Stock Option Plan for Directors (the “2001Directors’ Plan”).  Under the 2001Directors’ Plan, each Eligible Director is awarded an option covering 10,000shares of Common Stock on June 30 of each year the plan is in effect,provided he or she is an Eligible Director on that date.    In addition, each Eligible Director,excluding those individuals who are currently directors of the Company, isawarded an initial grant covering 25,000 shares of Common Stock as of the dateof his or her first election as a director.

 

As a result of theimpending recapitalization of the Company no options were granted to thedirectors in June 2004.

 

22

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The exercise price of alloptions granted under the 2001 Directors’ Plan may not be less than 100 percentof the fair market value of the Common Stock on the date of the grant.  Options expire 10 years after the date ofgrant and become exercisable, subject to certain conditions which acceleratevesting, as follows: 25 percent on the first anniversary of the date of grantand an additional 25 percent each anniversary thereafter.

 

**ITEM 12.**  **SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**

 

The following table and notes thereto set forth certain informationwith respect to the beneficial ownership of the Company’s Common Stock as of December 15,2004 by (i) each person who is known to the Company to beneficially own morethan 5 percent of the outstanding shares of Common Stock of the Company, (ii)each of the chief executive officers, and the Company’s three other most highlycompensated executive officers at the end of fiscal year 2004, who earned morethan $100,000 (collectively, the “Named Executive Officers”); (iii) eachdirector of the Company, and (iv) all Named Executive Officers and directors ofthe Company as a group.  Except asotherwise indicated, each of the stockholders named below has sole voting andinvestment power with respect to the shares of Common Stock beneficially owned:

 

 
| ** **                                                                            | ** ** | **Common Stock  Beneficially Owned** | ** ** |
|---------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| **Names**                                                                             | ** ** | **Number of  Shares**                | ** ** | **Percent of  Outstanding  Shares (1)** | ** ** |
| Royce & Assoc. Inc  1414 Avenue of the Americas  New York, NY 10019               |       | 1,135,700                            |       | 8.85 | % |
| Goldsmith & Harris, Inc.  80 Pine Street  New York, NY 10005                      |       | 1,013,000                            |       | 7.89 | % |
| T. Rowe Price Associates, Inc.  100 E. Pratt Street  Baltimore, MD 21202              |       | 933,300                              | (2)        | 7.27 | % |
| Ingalls & Snyder  61 Broadway  New York, NY 10006                                 |       | 861,412                              |       | 6.71 | % |
| Dimensional Fund Advisors Inc.  1299 Ocean Avenue, 11th Floor  Santa Monica, CA 90401 |       | 842,051                              |       | 6.56 | % |
| Amin J. Khoury*†                                                                 |       | 697,500                              | (3)        | 5.43 | % |
| David Terhune*                                                                        |       | 598,579                              | (4)        | 4.67 | % |
| Brian Crescenzo*                                                                      |       | 63,668                               | (5)        |   | ** |
|                                                                                  |       |                                 |       |   |   |
| Terry E. Smith*                                                                       |       | 67,136                               | (6)        |   | ** |
| Mark M. Harmeling†                                                               |       | 68,750                               | (7)        |   | ** |
| Richard G. Hamermesh†                                                            |       | 89,625                               | (8)        |   | ** |
| Joseph C. Day†                                                                   |       | 6,250                                | (9)        |   | ** |
| Nader A. Golestaneh†                                                             |       | 68,750                               | (10)       |   | ** |
| Jim C. Cowart†                                                                   |       | 0                                    |       |   | ** |
| All directors and executive officers as a  group (9 persons)                          |       | 1,660,258                            | (11)       | 12.94 | % |

 

----

*                                         NamedExecutive Officer

†                                          Directorof the Company

**                                  Lessthan 1 percent

(1)                                  Forpurposes of determining beneficial ownership, owners of options exercisablewithin sixty days of December 15, 2004 are considered the beneficialowners of the shares of Common Stock for which such options are exercisable,and the reporting herein is based on the assumption (as provided in theapplicable rules of the Securities and Exchange Commission) that only theperson or persons whose ownership is being reported will exercise such optionsfor Common Stock.  As of December 15,2004, there

 

23

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were12,833,532 shares of Common Stock issued and outstanding.

(2)                                  Includesholdings attributable to T. Rowe Associates, Inc. and T. Rowe Price Small-CapValue Fund, Inc.

(3)                                  Includes600,000 shares of Common Stock issuable in connection with outstanding stockoptions exercisable within the next sixty days.

(4)                                  Includes(i) 503,750 shares of Common Stock issuable in connection with outstandingstock options exercisable within the next sixty days, (ii) 11,842 shares heldby the 1996 AET Employee Stock Purchase Plan, and (iii) 5,093 shares held bythe AET Savings and Profit Sharing Plan, in each case for the benefit of Mr.Terhune.

(5)                                  Includes(i) 41,250 shares of Common Stock issuable in connection with outstanding stockoptions exercisable within the next sixty days and (ii) 1,562 shares held bythe AET Savings and Profit Sharing Plan, in each case for the benefit of Mr.Crescenzo.

(6)                                  Includes(i) 46,250 shares of Common Stock issuable in connection with outstanding stockoptions exercisable within the next sixty days, and (ii) 3,724 shares held bythe AET Savings and Profit Sharing Plan, in each case for the benefit of Mr.Smith.

(7)                                  Includes68,750 shares of Common Stock issuable in connection with outstanding stockoptions exercisable within the next sixty days. Excludes 87,057 shares held in trusts for the benefit of Mr. Harmeling’schildren, of which Mr. Harmeling disclaims all beneficial interest.

(8)                                  Includes68,750 shares of Common Stock issuable in connection with outstanding stockoptions exercisable within the next sixty days.

(9)                                  Includes6,250 shares of Common Stock issuable in connection with outstanding stockoptions exercisable within the next sixty days.

(10)                            Includes68,750 shares of Common Stock issuable in connection with outstanding stockoptions exercisable within the next sixty days.

(11)                            Includesand excludes the shares described in notes (3) through (10).

 

**EquityCompensation Plan Information**

 
| **Plan Category**                                               | ** ** | **Number of securities  to be issued upon  exercise of  outstanding options,  warrants and rights** | ** ** | **Weighted-average  exercise price of  outstanding options,  warrants and rights** | ** ** | **Number of securities  remaining available for  future issuance under  equity compensation  plan (excluding  securities reflected in  column (a))** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                                            |       | **(a)**                                                                                             |       | **(b)**                                                                            |       | **(c)**                                                                                                                                              |       |
| Equity  compensation plans approved by security holders (1)     |       | 3,277,000                                                                                           |       | $                                                                                  | 4.72       |                                                                                                                                                 | 750,000    |   |
|                                                            |       |                                                                                                |       |                                                                               |       |                                                                                                                                                 |       |
| Equity  compensation plans not approved by security holders (2) |       | 0                                                                                                   |       | 0                                                                                  |       | 0                                                                                                                                                    | (2)        |
|                                                            |       |                                                                                                |       |                                                                               |       |                                                                                                                                                 |       |
| Total                                                           |       | 3,277,000                                                                                           |       | $                                                                                  | 4.72       |                                                                                                                                                 | 750,000    |   |

 

----

 

(1)                                  Includesthe 1991 Stock Option Plan, the 1991 Stock Option Plan for Directors, the 1994Stock Option Plan, the 2001 Stock Option Plan for Directors, and the 2004 StockOption and Incentive Plan.

(2)                                  The2002 Share Incentive Plan is the only equity compensation plan not approved bysecurity holders.  Under this plan, theCompany issued 594,333 shares of restricted stock in December 1999 to itstop 130 non-executive managers in exchange for approximately 1,200,000 of theirvested and unvested stock options.  Therestricted stock vested in two equal installments of 282,733 shares in January 2002and 279,725 shares in January 2003 and was granted in lieu of annualincentive bonuses for these managers in fiscal years 2000 and 2001.

 

**ITEM 13. CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS**

 

**EmploymentContracts and Termination of Employment Arrangements**

 

*Amin J.Khoury.*  On August 1,2002, Mr. Khoury and the Company entered into an amended and restatedemployment agreement pursuant to which he currently serves as Chairman of theBoard of Directors of the Company. Effective as of September 30, 2002, Mr. Khoury was also elected asthe Chief Executive Officer of the Company. The employment agreement became effective as of April 1, 2002 andextends through March 31, 2005, subject to automatic renewals forconsecutive one-year periods until either party gives the other 90 days’written notice of its intent not to renew. Under the agreement, Mr. Khoury currently receives an annual basesalary of $564,000, and any annual incentive bonus payable to Mr. Khoury isbased on criteria established annually by the Company,

 

24

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with the maximum not toexceed 100 percent of his then current salary. If the Company terminates Mr.Khoury’s employment other than for death, disability or cause (as defined inthe agreement), or if Mr. Khoury terminates his employment for good reason (asdefined in the agreement), the Company will make a lump sum payment to Mr.Khoury in an amount equal to the aggregate amount of salary and average bonus(as defined in the agreement) that would have been payable to Mr. Khourythrough the later of (i) the date that is three years from the date oftermination or (ii) the expiration date of the agreement (the “BenefitsTermination Date”), and provide certain other benefits to Mr. Khoury until suchBenefits Termination Date. If Mr. Khoury is terminated as a result of hisincapacity, he will be entitled to receive health, pension, retirement andcertain other benefits until the Benefits Termination Date. If Mr. Khoury’semployment is terminated by Mr. Khoury for good reason or by the Company forany reason other than for cause, Mr. Khoury will be deemed to have beenemployed through the expiration date of the agreement for purposes of allbenefit and stock option vesting. Upon a change of control (as defined in theagreement) of the Company, all outstanding and unvested options held by Mr.Khoury would immediately vest, and the Company would not be permitted torelocate Mr. Khoury without his consent. Mr. Khoury is prohibited from engagingin any activity that is competitive with the Company without the Company’s writtenconsent for a period of two years following the Benefits Termination Date orthe date of the termination of his employment if he is terminated by theCompany for cause or if he terminates his employment for any reason other thangood reason. If any benefits are subject to the tax imposed by Section 4999of the Internal Revenue Code, the Company will make a lump sum payment to Mr.Khoury in amount to pay such tax on an after-tax basis.

 

On October 4, 2004the Company announced that Mr. Khoury would retire as the Company’s Chairman ofthe Board of Directors and CEO effective upon the consummation of the Company’sprepackaged Chapter 11 plan of reorganization. Pursuant to a Retirement andRelease Agreement, Mr. Khoury agreed to provide consulting and advisoryservices to the board of directors of the reorganized company on terms andconditions to be agreed, and released the Company and certain others fromclaims for severance and benefits under his employment agreement, as well ascertain other matters. The Company and certain others released Mr. Khoury, inturn, from claims related to the payment to him under the Company’s 1999Supplemental Executive Retirement Plan (discussed below), as well as certainother matters. The restrictions on Mr. Khoury’s engaging in any activitycompetitive with the Company continue for two years following his retirement.

 

*David N.Terhune.*On August 1, 2002, Mr. Terhune and the Companyentered into an amended and restated employment agreement that was effective asof April 1, 2002 and extends through March 31, 2005, subject toautomatic renewals for consecutive one-year periods until either party givesthe other 90 days’ written notice of its intent not to renew. Effective as of September 30,2002, Mr. Terhune was promoted to President of the Company. Under theagreement, Mr. Terhune currently receives an annual base salary of $423,000,and any annual incentive bonus payable to Mr. Terhune is based on criteriaestablished annually by the Company, with the maximum not to exceed 100 percentof his then current salary. If the Company terminates Mr. Terhune’s employmentother than for death, disability or cause (as defined in the agreement), or ifMr. Terhune terminates his employment for good reason (as defined in theagreement), the Company will make a lump sum payment to Mr. Terhune in anamount equal to the aggregate amount of salary and average bonus (as defined inthe agreement) that would have been payable to Mr. Terhune through the later of(i) the date that is three years from the date of termination or (ii) theexpiration date of the agreement (the “Benefits Termination Date”), and providecertain other benefits to Mr. Terhune until such Benefits Termination Date. IfMr. Terhune is terminated as a result of his incapacity, he will be entitled toreceive health, pension, retirement and certain other benefits until theBenefits Termination Date. If Mr. Terhune’s employment is terminated by Mr.Terhune for good reason or by the Company for any reason other than for cause,Mr. Terhune will be deemed to have been employed through the expiration date ofthe agreement for purposes of all benefit and stock option vesting. Upon achange of control (as defined in the agreement) of the Company, all outstandingand unvested options held by Mr. Terhune will immediately vest, and the Companywould not be permitted to relocate Mr. Terhune without his consent. Mr. Terhuneis prohibited from engaging in any activity that is competitive with theCompany without the Company’s written consent for a period of two yearsfollowing the Benefits Termination Date or the date of the termination of hisemployment if he is terminated by the Company for cause or if he terminates hisemployment for any reason other than good reason. If any benefits are subjectto the tax imposed by Section 4999 of the Internal Revenue Code, theCompany will make a lump sum payment to Mr. Terhune in amount to pay such taxon an after-tax basis.

 

*BrianP. Crescenzo**.*On April 1,2003, Mr. Crescenzo and the Company entered into an amended and restatedemployment agreement that was effective as of April 1, 2003 and extendsthrough March 31, 2006, subject to automatic renewals for consecutiveone-year periods until either party gives the other 90 days’ written notice ofits intent not to renew. Mr. Crescenzo currently holds the position of VicePresident, Secretary and Chief Financial Officer. Under the agreement, Mr.Crescenzo currently receives an annual base salary of $205,000, and any annualincentive bonus payable to Mr. Crescenzo is based on criteria establishedannually by the Company. If the Company terminates Mr. Crescenzo’s employmentother than for death, disability or cause (as defined in the agreement), or ifMr. Crescenzo terminates his employment for good reason (as defined in theagreement), the Company will make a lump sum payment to Mr. Crescenzo in anamount equal to the aggregate amount of salary that would have been payable toMr. Crescenzo through the expiration date of the agreement (the “BenefitsTermination Date”), and provide certain other benefits to Mr. Crescenzo untilsuch Benefits Termination Date. If Mr. Crescenzo is terminated as a result ofhis incapacity, he will be entitled to receive health, pension, retirement andcertain other benefits until the Benefits Termination Date. If Mr. Crescenzo’semployment is

 

25

----

 

terminated by Mr.Crescenzo for good reason or by the Company for any reason other than forcause, Mr. Crescenzo will be deemed to have been employed through theexpiration date of the agreement for purposes of all benefit and stock optionvesting. Upon a change of control (as defined in the agreement) of the Company,all outstanding and unvested options held by Mr. Crescenzo will immediately vest.Mr. Crescenzo is prohibited from engaging in any activity that is competitivewith the Company without the Company’s written consent for a period of twoyears following the Benefits Termination Date or the date of the termination ofhis employment if he is terminated by the Company for cause or if he terminateshis employment for any reason other than good reason.

 

*TerryE. Smith.***On April 1,2003, Mr. Smith and the Company entered into an amended and restated employmentagreement that was effective as of April 1, 2003 and extends through March 31,2006, subject to automatic renewals for consecutive one-year periods untileither party gives the other 90 days’ written notice of its intent not torenew. Mr. Smith currently holds the position of Vice President Operations. Underthe agreement, Mr. Smith currently receives an annual base salary of $234,000,and any annual incentive bonus payable to Mr. Smith is based on criteriaestablished annually by the Company. If the Company terminates Mr. Smith’semployment other than for death, disability or cause (as defined in theagreement), or if Mr. Smith terminates his employment for good reason (asdefined in the agreement), the Company will make a lump sum payment to Mr.Smith in an amount equal to the aggregate amount of salary that would have beenpayable to Mr. Smith through the expiration date of the agreement (the “BenefitsTermination Date”), and provide certain other benefits to Mr. Smith until suchBenefits Termination Date. If Mr. Smith is terminated as a result of hisincapacity, he will be entitled to receive health, pension, retirement andcertain other benefits until the Benefits Termination Date. If Mr. Smith’semployment is terminated by Mr. Smith for good reason or by the Company for anyreason other than for cause, Mr. Smith will be deemed to have been employedthrough the expiration date of the agreement for purposes of all benefit andstock option vesting. Upon a change of control (as defined in the agreement) ofthe Company, all outstanding and unvested options held by Mr. Smith willimmediately vest. Mr. Smith is prohibited from engaging in any activity that iscompetitive with the Company without the Company’s written consent for a periodof two years following the Benefits Termination Date or the date of thetermination of his employment if he is terminated by the Company for cause orif he terminates his employment for any reason other than good reason.

 

The employment agreementsbetween the Company and each of Messrs. Khoury and Terhune entitle theseexecutives to benefits provided pursuant to the Company’s 1999 SupplementalExecutive Retirement Plan, a nonqualified deferred compensation plan adopted bythe Company’s Board of Directors in 1999. A participant qualified for benefitsunder this plan after having been employed by the Company for at least tenyears, not less than four of which must have occurred after adoption of theplan, or upon termination of employment as a result of death or incapacity. Theaggregate amount of these payments was based on a percentage of the greater ofthe participant’s base salary at the time of termination or averagecompensation over a specified time period (as defined by the plan). Thispercentage, which could not exceed 75%, was based on the performance of theCompany’s Common Stock during the participant’s employment and was equal to53.6% on December 31, 2003. The Company made payments into a trustsufficient to fund accrued and vested benefits under the plan. In addition,under the terms of the plan, the undiscounted aggregate amount of all accruedand vested benefits was required to be paid to participants under certainobjective circumstances, based on the financial condition of the Company. As ofDecember 31, 2003, the Company was so required to make such payments, andMessrs. Khoury and Terhune received payments from the trust’s assets in theamounts of $3,583,136 and $2,229,114, respectively, during 2004.

 

Messrs. Crescenzo andSmith participated in the Company’s Executive Deferred Compensation RetirementPlan, a non-qualified deferred compensation plan that was amended and restatedand adopted by the Board of Directors in 2001. The participants in this planwere selected from among the group of highly compensated or managerialemployees of the Company by a committee appointed by the Chief ExecutiveOfficer. Each participant could elect to defer a designated portion of hisregular salary and any bonus each year. On June 30 of each year, theCompany would credit to such participant’s account an amount equal to 15% foreach participant who was a Senior Vice President or Vice President, and 7.5%for each participant who was not a Senior Vice President or Vice President, ofsuch participant’s salary plus bonus received in the twelve-month period endingon the applicable June 30. Each participant was fully vested in any amountdeferred by such participant and became fully vested in the amounts credited bythe Company after being employed by the Company for five years. The Company made payments into a trust sufficientto fund accrued and vested benefits under the plan. In addition, under theterms of the plan, the undiscounted aggregate amount of all accrued and vestedbenefits was required to be paid to participants under certain objectivecircumstances, based on thefinancial condition of the Company. As of December 31, 2003, the Company was so required to make suchpayments, and Messrs. Crescenzo and Smith received payments from thetrust’s assets in the amounts of $81,212 and $97,135, respectively, during2004.

 

26

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**ITEM 14. PRINCIPAL ACCOUNTING FEES ANDSERVICES**

 

**AUDITMATTERS**

 

Deloitte & Touche LLP(“D&T”) has been selected to audit the financial statements of the Companyfor the fiscal year ending September 30, 2005, and to report the resultsof their examination.

 

The Audit Committeereceived the following information regarding the fees of D&T for the fiscalyear ended September 30, 2004, and have determined that the provision ofthese services is compatible with maintaining the independence of theindependent auditors.

 

**Audit Fees**

 

The aggregate fees billedby D&T for professional services rendered for the audit of the Company’sannual financial statements for the fiscal year ended September 30, 2004and for the review of financial statements included in the Company’s quarterlyreports on Form 10-Q for the fiscal year 2004 were $292,790.

 

**Audit Related Fees**

 

During fiscal year 2004the aggregate fees billed by D&T for audit related services totaled$14,190, which consisted primarily of auditing the Company’s 401(k) Plan.

 

**Tax Fees**

 

Theaggregate fees billed by D&T during fiscal year 2004 for tax relatedservices totaled $22,452.

 

**All Other Fees**

 

Duringfiscal 2004, all other fees paid to D&T totaled $18,087 the majority ofwhich was for services provided in conjunction with the Company’s Chapter 11filing.

 

**Policy on Pre-Approved AuditServices**

 

Ouraudit committee requires pre-approval by the committee of all audit andpermissible non-audit services to be provided by the independent auditor. Ouraudit committee charter authorizes the committee to delegate authority topre-approve audit and permissible non-audit services to a member of thecommittee. Any decision of a committee member under delegated authority must bepresented to the full committee at its next scheduled meeting.

 

**AUDITCOMMITTEE**

 

**Report of the Audit Committee of the Board ofDirectors**

 

During fiscal year ended September 30,2004, the Audit Committee was composed of Messrs. Hammermesh, Day, and Cowart. Eachof the members of the Audit Committee is independent (as defined in the listingstandards of The NASDAQ Stock Market, Inc.).

 

The Audit Committee has reviewed anddiscussed with management the financial statements for fiscal year 2004 auditedby Deloitte & Touche LLP various matters related to the financialstatements, including those matters required to be discussed by SAS 61(Codification of Statements on Auditing Standards, AU 380). The Audit Committeehas also received the written disclosures and the letter from Deloitte &Touche LLP required by Independence Standards Board Standard No. 1(Independence Standards Board Standard No. 1, Independence Discussions withAudit Committees) and has discussed with Deloitte & Touche LLP its independence.

 

Based upon such review and discussions, theAudit Committee recommended to the Board of Directors that the auditedfinancial statements be included in the Company’s Annual Report on Form 10-Kfor the fiscal year ending September 30, 2004 for filing with theSecurities and Exchange Commission.

 

With respect to the above matters, the AuditCommittee submits this report.

 
|   | AUDIT COMMITTEE      |
|--------|----------------------|
|   | Richard G. Hamermesh |
|   | Joseph C. Day        |
|   | Jim C. Cowart        |

 

27

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**PART IV**

 

**ITEM 15. EXHIBITS, FINANCIAL STATEMENTSCHEDULES AND REPORTS ON FORM 8-K**

 

The following documents are filed as part ofthis report:

 

**A.     FinancialStatements**

 

Consolidated Balance Sheets, September 30,2004 and 2003

 

Consolidated Statements of Operations for theYears Ended September 30, 2004, 2003 and 2002

 

Consolidated Statements of Stockholders’Equity for the Years Ended September 30, 2004, 2003, and 2002

 

Consolidated Statements of Cash Flows for theYears Ended September 30, 2004, 2003, and 2002

 

Notes to Consolidated Financial StatementsFinancial Statement Schedules Schedule II—Valuation and QualifyingAccounts for the Years Ended September 30, 2004, 2003, and 2002.

 

**B.    Exhibits**

 
| 3.1(a)     |   | Amended  and Restated Certificate of Incorporation.                                                                                                 |
|------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1.1(s)   |   | Amendment  dated February 26, 1992 to Amended and Restated Certificate of  Incorporation.                                                      |
| 3.1.2(j)   |   | Amendment  dated March 17, 1999 to Amended and Restated Certificate of  Incorporation.                                                         |
| 3.2(s)     |   | Amended  and Restated By-Laws.                                                                                                                      |
| 4.3(a)     |   | Specimen  Common Stock Certificate.                                                                                                                 |
| 4.4(s)     |   | Rights  Agreement dated as of March 2, 1998 between the Company and BankBoston,  N.A., as Rights Agent.                                        |
| 10.1.1(e)  |   | Amendment  No. 4 to the Credit Agreement dated as of March 30, 2002.                                                                           |
| 10.1.2(d)  |   | Amendment  No. 5 to the Credit Agreement dated as of June 30, 2002.                                                                            |
| 10.2(q)    |   | Amended  and Restated Credit Agreement dated as of September 20, 2002 between the  Registrant and JPMorgan Chase Bank as Administrative Agent. |
| 10.2.1(n)  |   | Amended  and Restated Credit Agreement dated as of January 1, 2003 between the  Registrant and JPMorgan Chase Bank as Administrative Agent.    |
| 10.3(o)    |   | Credit  Agreement dated as of October 3, 2003 between the Registrant and General  Electric Capital Corporation as Arranger and Lender.         |
| 10.3.1(t)  |   | First  Amendment to Credit Agreement between the Registrant and General Electric  Capital Corporation dated November 7, 2003.                  |
| 10.3.2(t)  |   | Second  Amendment to Credit Agreement between the Registrant and General Electric  Capital Corporation dated March 23, 2004.                   |
| 10.3.3(u)  |   | Third  Amendment to Credit Agreement between the Registrant and General Electric  Capital Corporation dated June 30, 2004                      |
| 10.3.4(v)  |   | Fourth  Amendment to Credit Agreement between the Registrant and General Electric  Capital Corporation dated July 30, 2004.                    |
| 10.3.5(x)  |   | Fifth  Amendment to Credit Agreement between the Registrant and General Electric  Capital Corporation dated August 30, 2004.                   |
| 10.3.6(y)  |   | Sixth  Amendment to Credit Agreement between the Registrant and General Electric  Capital Corporation dated October 1, 2004.                   |
| 10.3.7(bb) |   | Seventh  Amendment to Credit Agreement between the Registrant and GE Commercial  Finance dated October 29, 2004.                               |
| 10.4(b)    |   | 1986  Stock Option Plan.                                                                                                                            |

 

28

----

 
| 10.4.1(i)  |   | Amendment  dated December 7, 1999 to the 1986 Stock Option Plan.                                                                                                                                                                                                  |
|------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.5(c)    |   | 1991  Stock Option Plan.                                                                                                                                                                                                                                               |
| 10.5.1(i)  |   | Amendment  dated December 7, 1999 to the 1991 Stock Option Plan, as amended.                                                                                                                                                                                      |
| 10.6(b)    |   | 1991  Stock Option Plan for Directors.                                                                                                                                                                                                                                 |
| 10.6.1(i)  |   | Amendment  dated August 4, 1999 to the 1991 Stock Option Plan for Directors.                                                                                                                                                                                      |
| 10.7(r)    |   | 1994  Stock Option Plan.                                                                                                                                                                                                                                               |
| 10.7.1(i)  |   | Amendment  dated December 7, 1999 to the 1994 Stock Option Plan.                                                                                                                                                                                                  |
| 10.8(g)    |   | 2001  Stock Option Plan for Directors.                                                                                                                                                                                                                                 |
| 10.9(l)    |   | 2001  Share Incentive Plan.                                                                                                                                                                                                                                            |
| 10.10(d)   |   | Amended  and Restated Employment Agreement dated as of August 1, 2002 between the  Registrant and David N. Terhune.                                                                                                                                               |
| 10.11(d)   |   | Amended  and Restated Employment Agreement dated as of August 1, 2002 between the  Registrant and Amin J. Khoury.                                                                                                                                                 |
| 10.12(d)   |   | Amended  and Restated Employment Agreement dated as of August 1, 2002 between the  Registrant and Thomas E. Williams.                                                                                                                                             |
| 10.13(q)   |   | Agreement  between Registrant and Thomas E. Williams dated September 30, 2002.                                                                                                                                                                                    |
| 10.13.1(s) |   | Agreement  between Registrant and Thomas E. Williams dated December 11, 2003.                                                                                                                                                                                     |
| 10.14(f)   |   | Amended  and Restated Executive Deferred Compensation Retirement Plan dated August 10,  2001.                                                                                                                                                                     |
| 10.14.1(q) |   | Amendment  to Executive Deferred Compensation Retirement Plan dated December 9,  2002.                                                                                                                                                                            |
| 10.14.2(s) |   | Rabbi  Trust dated December 13, 1996 with respect to the Executive Deferred  Compensation Retirement Plan.                                                                                                                                                        |
| 10.15(e)   |   | Amended  and Restated 1999 Supplemental Executive Retirement Plan dated March 29,  2002.                                                                                                                                                                          |
| 10.15.1(d) |   | Amended  and Restated 1999 Supplemental Executive Retirement Plan dated March 29,  2002, as amended as of August 1, 2002.                                                                                                                                    |
| 10.15.2(q) |   | Amendment  to 1999 Supplemental Executive Retirement Plan dated December 9, 2002.                                                                                                                                                                                 |
| 10.15.3(i) |   | 1999  Deferred Compensation Plan Trust dated November 30, 1999.                                                                                                                                                                                                   |
| 10.16(s)   |   | Equipment  Lease Agreement dated as of December 29, 1997 between Registrant and  LaSalle National Leasing Corporation.                                                                                                                                            |
| 10.16.1(h) |   | Letter  Agreement dated April 28, 1999 amending Equipment Lease Agreement dated  as of December 29, 1997.                                                                                                                                                    |
| 10.16.2(p) |   | Waiver  and Rider No. 5 to Equipment Lease Agreement dated as of January 10,  2003 between the Registrant and Banc of America Leasing & Capital, LLC,  as successor-in-interest to LaSalle National Leasing Corporation and  NationsBanc Leasing Corporation. |
| 10.16.3(p) |   | Waiver  and Rider No. 5 to Equipment Lease Agreement dated as of January 10,  2003 between the Registrant and The CIT Group/Equipment Finance, Inc.                                                                                                               |
| 10.16.4(p) |   | Waiver  and Rider No. 5 to Equipment Lease Agreement dated as of January 10,  2003 between the Registrant and Fifth Third Leasing Corporation.                                                                                                                    |
| 10.16.5(p) |   | Waiver  and Rider No. 5 to Equipment Lease Agreement dated as of January 10,  2003 between the Registrant and First Union Commercial Corporation, as  successor by merger to CoreStates Leasing, Inc., the assignee of Lasalle National  Leasing Corporation.     |
| 10.16.6(p) |   | Waiver  and Rider No. 5 to Equipment Lease Agreement dated as of January 10,  2003 between the Registrant and Key Equipment Finance, f/k/a KeyCorp Leasing.                                                                                                       |
| 10.16.7(p) |   | Waiver  and Rider No. 5 to Equipment Lease Agreement dated as of January 10,  2003 between the Registrant and LaSalle National Leasing Corporation.                                                                                                               |
| 10.16.8(p) |   | Waiver  and Rider No. 5 to Equipment Lease Agreement dated as of January 10,  2003 between the Registrant and PNC Leasing, LLC, successor in interest by  assignment from Lasalle National Leasing Corporation.                                                   |
| 10.17(e)   |   | Master  Lease Agreement dated as of March 27, 2002 between Registrant and  General Electric Capital Corporation.                                                                                                                                                  |
| 10.17.1(p) |   | Waiver  to Master Lease Agreement dated as of January 10, 2003 between the  Registrant and General Electric Capital Corporation. 10.18(m) Form of  Exchange Note due 2001 (filed as an Exhibit to Item 10.22).                                                    |
| 10.19(m)   |   | Indenture  dated as of June 19, 2001 by and among the Registrant, Applied Extrusion  Technologies (Canada), Inc. and the Wells Fargo Bank Minnesota, National  Association, as Trustee.                                                                           |
| 10.20.1(q) |   | Employment  Modification Agreement dated as of June 24, 2002 between the Registrant  and Terry E. Smith                                                                                                                                                           |
| 10.20.2(p) |   | Employment  Agreement dated as of April 1, 2003 between the Registrant and Terry E.  Smith.                                                                                                                                                                       |
| 10.21(p)   |   | Employment  Agreement dated as of April 1, 2003 between the Registrant and Brian P.  Crescenzo.                                                                                                                                                                   |
| 10.22(k)   |   | 1996  Employee Stock Purchase Plan.                                                                                                                                                                                                                                    |

 

29

----

 
| 10.23(w)    |   | Restructuring  Agreement dated August 24, 2004.                                                                                                                                                                                                              |
|-------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.23.1(y)  |   | First  Amendment to the Restructuring Agreement dated September 10, 2004.                                                                                                                                                                                    |
| 10.23.2(y)  |   | Second  Amendment to the Restructuring Agreement dated October 1, 2004.                                                                                                                                                                                      |
| 10.23.3(z)  |   | Third  Amendment to the Restructuring Agreement dated October 18, 2004.                                                                                                                                                                                      |
| 10.23.4(aa) |   | Fourth  Amendment to the Restructuring Agreement dated October 25, 2004.                                                                                                                                                                                     |
| 10.23.5(cc) |   | Fifth  Amendment to the Restructuring Agreement dated November 4, 2004.                                                                                                                                                                                      |
| 10.24(y)    |   | Retirement  and Release Agreement between the Registrant and Amin J. Khoury dated September 17,  2004.                                                                                                                                                       |
| 10.25(dd)   |   | DIP  Credit Agreement between the Registrant and GE Commercial Finance, as agent,  dated as of December 2, 2004.                                                                                                                                             |
| 21*         |   | Subsidiaries  of the Registrant.                                                                                                                                                                                                                                  |
| 23*         |   | Consent  of Independent Registered Public Accounting Firm — Deloitte & Touche LLP.                                                                                                                                                                       |
| 31.1*       |   | Certification  of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) under  the Securities Exchange Act of 1934, as amended.                                                                                                                            |
| 31.2*       |   | Certification of Principal Financial Officer pursuant to Rule  13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended.                                                                                                                         |
| 31.3*       |   | Certification of President pursuant to Rule 13a-14(a)/15d-14(a) under  the Securities Exchange Act of 1934, as amended.                                                                                                                                           |
| 32.1*       |   | Certification  pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of  Amin J. Khoury, Principal Executive Officer of Applied Extrusion  Technologies, Inc.     |
| 32.2*       |   | Certification  pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of  Brian P. Crescenzo, Principal Financial Officer of Applied Extrusion  Technologies, Inc. |
| 99.1*       |   | Cautionary  Statement for Purposes of the “Safe Harbor” Provisions of the Private  Securities Litigation Reform Act of 1995.                                                                                                                            |

 

----

*              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. 33-64656), filed with the Commission on June 18, 1993.           |
| (d)  |   | Contained  in Exhibits to the Registrant’s Form 10-Q for the fiscal quarter ended  June 30, 2002.                                                         |
| (e)  |   | Contained  in Exhibits to the Registrant’s Form 10-Q for the fiscal quarter ended  March 31, 2002.                                                        |
| (f)  |   | Contained  in Exhibits to the Registrant’s Form 10-K for the fiscal year ended  September 30, 2001.                                                       |
| (g)  |   | Contained  in Exhibits to the Registrant’s Registration Statement on Form S-8  (No. 333-61976), filed with the Commission on May 31, 2001.           |
| (h)  |   | Contained  in Exhibits to the Registrant’s Form 10-Q for the fiscal quarter ended  March 31, 1999.                                                        |
| (i)  |   | Contained  in Exhibits to the Registrant’s Form 10-K for the fiscal year ended  September 30, 1999.                                                       |
| (j)  |   | Contained  in Exhibits to the Registrant’s Form 10-Q for the fiscal quarter ended  March 31, 1999.                                                        |
| (k)  |   | Contained  in Exhibits to the Registrant’s Registration Statement on Form S-8  (No. 333-01464), filed with the Commission on February 16, 1996.      |
| (l)  |   | Contained  in Exhibits to the Registrant’s Registration Statement on Form S-8  (No. 333-51354), filed with the Commission on December 6, 2000.       |
| (m)  |   | Contained  in Exhibits to the Registrant’s Registration Statement on Form S-4  (No. 333-65294), filed with the Commission on July 18, 2001.          |
| (n)  |   | Contained  in Exhibits to the Registrant’s Current Report on Form 8-K filed with  the Commission on January 27, 2003.                                     |
| (o)  |   | Contained  in Exhibits to the Registrant’s Current Report on Form 8-K filed with  the Commission on October 7, 2003.                                      |
| (p)  |   | Contained  in Exhibits to the Registrant’s Form 10-Q for the fiscal quarter ended  March 31, 2003.                                                        |
| (q)  |   | Contained  in Exhibits to the Registrant’s Form 10-K for the fiscal quarter ended  September 30, 2002.                                                    |
| (r)  |   | Contained  in Exhibits to the Registrant’s Registration Statement on Form S-8  (No. 333-80804), filed with the Commission on June 29, 1994.          |
| (s)  |   | Contained  in Exhibits to the Registrant’s Form 10-K for fiscal year ended  September 30, 2003.                                                                |
| (t)  |   | Contained  in Exhibits to the Registrant’s Current Report on Form 8-K filed with the  Commission on March 23, 2004.                                            |
| (u)  |   | Contained  in Exhibits to the Registrant’s Current Report on Form 8-K filed with the  Commission on July 1, 2004.                                              |
| (v)  |   | Contained  in Exhibits to the Registrant’s Current Report on Form 8-K filed with the  Commission on August 6, 2004.                                            |
| (w)  |   | Contained  in Exhibits to the Registrant’s Current Report on Form 8-K filed with the  Commission on August 24, 2004.                                           |
| (x)  |   | Contained  in Exhibits to the Registrant’s Current Report on Form 8-K filed with the  Commission on September 3, 2004.                                         |
| (y)  |   | Contained  in Exhibits to the Registrant’s Current Report on Form 8-K filed with the  Commission on October 6, 2004.                                           |
| (z)  |   | Contained  in Exhibits to the Registrant’s Current Report on Form 8-K filed with the  Commission on October 20, 2004.                                          |
| (aa) |   | Contained  in Exhibits to the Registrant’s Current Report on Form 8-K filed with the  Commission on October 25, 2004.                                          |

 

30

----

 
| (bb) |   | Contained  in Exhibits to the Registrant’s Current Report on Form 8-K filed with the  Commission on November 1, 2004.  |
|------|--------|----------------------------------------------------------------------------------------------------------------------------------|
| (cc) |   | Contained  in Exhibits to the Registrant’s Current Report on Form 8-K filed with the  Commission on November 18, 2004. |
| (dd) |   | Contained  in Exhibits to the Registrant’s Current Report on Form 8-K filed with the  Commission on December 6, 2004.  |

 

Theabove-referenced exhibits are, as indicated, either filed herewith or haveheretofore been filed with the Commission under the Securities Act of 1933, asamended and the Exchange Act and are referred to and incorporated herein byreference to such filings.

 

All other schedules are omitted as therequired information is not applicable or is included in the financialstatements or related notes.

 

**SIGNATURES**

 

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

 

 
|   | APPLIED EXTRUSION TECHNOLOGIES, INC. |
|--------|--------------------------------------|
|   |                                 |
|   | By:                                  | /s/ BRIAN P. CRESCENZO |
|   |                                 | Vice President Finance, Secretary and Chief Financial Officer |
|   |                                 | January 31, 2005 |

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, this report has been signed below by thefollowing persons on behalf of the registrant and in the capacities and on thedates indicated.

 
| /s/ AMIN J. KHOURY                                |   | /s/ JIM C. COWART        |
|---------------------------------------------------|--------|--------------------------|
| Amin J. Khoury                                    |   | Jim C. Cowart            |
| Chairman of the Board and Chief Executive Officer |   | Director                 |
| January 31, 2005                             |   | January 31, 2005    |
|                                              |   |                     |
| /s/ MARK M. HARMELING                             |   | /s/ RICHARD G. HAMERMESH |
| Mark M. Harmeling                                 |   | Richard G. Hamermesh     |
| Director                                          |   | Director                 |
| January 31, 2005                             |   | January 31, 2005    |
|                                              |   |                     |
| /s/ NADER A. GOLESTANEH                           |   | /s/ JOSEPH C. DAY        |
| Nader A. Golestaneh                               |   | Joseph C. Day            |
| Director                                          |   | Director                 |
| January 31, 2005                             |   | January 31, 2005    |

 

31

----

 

**INDEXTO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE**

 
| **Consolidated Financial Statements:**                                                                              |   |   |
|---------------------------------------------------------------------------------------------------------------------|--------|--------|
| Consolidated Balance Sheets, September 30, 2004 and 2003                                                       |   |   |
| Consolidated Statements of Operations for  the Years Ended September 30, 2004, 2003 and 2002                   |   |   |
| Consolidated Statements of Stockholders’  Equity for the Years Ended September 30, 2004, 2003 and 2002    |   |   |
| Consolidated Statements of Cash Flows for  the Years Ended September 30, 2004, 2003 and 2002                   |   |   |
| Notes to Consolidated Financial Statements  for the years ended September 30, 2004, 2003 and 2002              |   |   |
| **Financial Statement Schedule:**                                                                                   |   |   |
| Schedule II—Valuation and Qualifying  Accounts for the Years Ended September 30, 2004, 2003 and 2002 |   |   |
| Report of Independent Registered Public Accounting  Firm                                                            |   |   |

 

F-1

----

 

**APPLIEDEXTRUSION TECHNOLOGIES, INC.**

**CONSOLIDATED BALANCE SHEETS**

**September 30,2004 and 2003 (In thousands, except per share amount)**

 
| ** **                                                                                                                           | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                                                                 |       |     |       |     |       |
| **ASSETS**                                                                                                                           |       |     |       |     |       |
| Current assets:                                                                                                                      |       |     |       |     |       |
| Cash and cash equivalents                                                                                                            |       | $        | 784        |     | $          | 2,835 |   |
| Accounts receivable, net of allowance for  doubtful accounts of $1,615 and $1,864 at September 30, 2004 and 2003,  respectively |       | 46,163   |       | 33,407   |       |
| Inventory                                                                                                                            |       | 58,724   |       | 52,517   |       |
| Prepaid expenses and other assets                                                                                                    |       | 14,315   |       | 2,995    |       |
| Total current assets                                                                                                                 |       | 114,986  |       | 91,754   |       |
| Property, plant and equipment, net                                                                                                   |       | 284,274  |       | 281,384  |       |
| Goodwill, net                                                                                                                        |       | —-  |       | 9,874    |       |
| Other intangibles, net                                                                                                               |       | 840      |       | 10,505   |       |
| Other assets                                                                                                                         |       | 2,396    |       | 14,178   |       |
| Total assets                                                                                                                         |       | 407,496  |       | $        | 407,695    |   |
|                                                                                                                                 |       |     |       |     |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                       |       |     |       |     |       |
| Current liabilities:                                                                                                                 |       |     |       |     |       |
| Accounts payable                                                                                                                     |       | $        | 9,294      |     | $          | 9,485 |   |
| Accrued expenses and other current  liabilities                                                                                      |       | 16,529   |       | 18,008   |       |
| Accrued interest                                                                                                                     |       | 23,705   |       | 7,544    |       |
| Current portion of long-term debt                                                                                                    |       | 362,261  |       | 28,670   |       |
| Total current liabilities                                                                                                            |       | 411,789  |       | 63,707   |       |
| Long-term debt                                                                                                                       |       | —   |       | 271,790  |       |
| Long-term liabilities                                                                                                                |       | 1,499    |       | 18,339   |       |
| Deferred gain on sale leaseback  transactions                                                                                        |       | —   |       | 19,502   |       |
| Commitments and contingencies                                                                                                        |       |     |       |     |       |
| **Stockholders’  equity:**                                                                                                      |       |     |       |     |       |
| Preferred stock, $.01 par value;  authorized, 1,000 shares, of which 300 are designated Junior Preferred Stock;  no shares issued    |       |     |       |     |       |
| Common stock, $.01 par value; authorized,  30,000 shares, 13,016 shares issued at September 30, 2004 and 2003                   |       | 130      |       | 130      |       |
| Additional paid-in capital                                                                                                           |       | 103,317  |       | 103,204  |       |
| Accumulated deficit                                                                                                                  |       | (120,495 | )          | (73,742  | )          |
| Accumulated other comprehensive income                                                                                               |       | 13,303   |       | 7,018    |       |
|                                                                                                                                 |       | (3,745)  |       | 36,610   |       |
| Treasury stock, at cost, 183 shares at September 30,  2004 and 2003                                                             |       | (2,047   | )          | (2,253   | )          |
| Total stockholders’ equity                                                                                                      |       | (5,792   | )          | 34,357   |       |
| Total liabilities and stockholders’ equity                                                                                      |       | $        | 407,496    |     | $          | 407,695 |   |

 

See notes toconsolidated financial statements.

 

F-2

----

 

**APPLIEDEXTRUSION TECHNOLOGIES, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**Years Ended September 30,2004, 2003 and 2002**

**(In thousands,except per share amounts)**

 
| ** **                             | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                   |       |     |       |     |       |     |       |
| **Sales**                              |       | $        | 265,541    |     | $          | 247,364  |       | $ | 252,092 |   |
| Cost of sales                          |       | 233,147  |       | 203,154  |       | 208,099  |       |
| **Gross  profit**                      |       | 32,394   |       | 44,210   |       | 43,993   |       |
| **Operating  expenses:**               |       |     |       |     |       |     |       |
| Selling, general and administrative    |       | 22,192   |       | 22,989   |       | 32,085   |       |
| Research and development               |       | 6,969    |       | 7,209    |       | 6,605    |       |
| Restructuring charges                  |       | 3,380    |       | —   |       | 9,002    |       |
| Goodwill impairment                    |       | 9,874    |       | —   |       | —   |       |
| QPF acquisition and integration costs  |       | —-  |       | —   |       | 950      |       |
| Total operating expenses               |       | 42,415   |       | 30,198   |       | 48,642   |       |
| **Operating  profit (loss)**           |       | (10,021  | )          | 14,012   |       | (4,649   | )          |
| **Interest  expense, net:**            |       |     |       |     |       |     |       |
| Interest expense                       |       | 36,732   |       | 29,997   |       | 29,820   |       |
| Interest income                        |       | —   |       | 85       |       | 673      |       |
| Interest expense, net                  |       | 36,732   |       | 29,912   |       | 29,147   |       |
| Loss before income taxes               |       | (46,753  | )          | (15,900  | )          | (33,796  | )          |
| Income tax expense (benefit)           |       | —   |       | 1,053    |       | (2,045   | )          |
| **Net loss**                           |       | $        | (46,753    | )        | $          | (16,953  | )          | $ | (31,751 | ) |
|                                   |       |     |       |     |       |     |       |
| **Loss per  common share**             |       |     |       |     |       |     |       |
| Basic and diluted                      |       | $        | (3.64      | )        | $          | (1.33    | )          | $ | (2.55 | ) |
| **Average  common shares outstanding** |       |     |       |     |       |     |       |
| Basic and diluted                      |       | 12,833   |       | 12,741   |       | 12,465   |       |
|                                        |            |          |            |          |            |          |            |  |  |  |  |

 

See notes toconsolidated financial statements.

 

F-3

----

 

**APPLIEDEXTRUSION TECHNOLOGIES, INC.**

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’EQUITY**

**Years Ended September 30,2004, 2003 and 2002**

**(In thousands)**

 
| ** **                                  | ** ** | **Voting  Common Stock** | ** ** | **Additional** | ** ** | **Retained**        | ** ** | **Accumulated  Other  Comprehensive** | ** ** | **Treasury**       | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|--------------------------|------------|----------------|------------|---------------------|------------|---------------------------------------|------------|--------------------|------------|------------|------------|
| ** **                                  | ** ** | **Shares**               | ** ** | **Amount**     | ** ** | **Paid-in Capital** | ** ** | **Earnings**                          | ** ** | **Income  (Loss)** | ** ** | **Stock**  | ** ** | **Total** | ** ** |
| **Balance, September 30, 2001**        |       | 12,796                   |       | $              | 128        |                | $          | 101,580                               |       | $                  | (25,038    | )          | $          | (5,271 | ) | $ | (2,577 | ) | $ | 68,822 |   |
| Comprehensive  loss:                        |       |                     |       |           |       |                |       |                                  |       |               |       |       |       |   |   |
| Net  loss                                   |       |                     |       |           |       |                |       | (31,751                               | )          |               |       |       |       | (31,751 | ) |
| Other  Comprehensive loss:                  |       |                     |       |           |       |                |       |                                  |       |               |       |       |       |   |   |
| Foreign  currency translation adjustment    |       |                     |       |           |       |                |       |                                  |       | (306               | )          |       |       | (306 | ) |
| Total  comprehensive loss                   |       | —                   |       | —         |       | —              |       | (31,751                               | )          | (306               | )          | —     |       | (32,057 | ) |
| Profit  sharing contribution                |       | 57                       |       |           |       | 427                 |       |                                  |       |               |       |       |       | 427 |   |
| Treasury  shares and other                  |       |                     |       |           |       |                |       |                                  |       |               |       | 324        |       | 324 |   |
| Exercise  of stock options                  |       | 195                      |       | 2              |       | 991                 |       |                                  |       |               |       |       |       | 993 |   |
| Stock  compensation                         |       |                     |       |           |       | 252                 |       |                                  |       |               |       |       |       | 252 |   |
| **Balance, September 30, 2002**        |       | 13,048                   |       | $              | 130        |                | $          | 103,250                               |       | $                  | (56,789    | )          | $          | (5,577 | ) | $ | (2,253 | ) | 38,761 |   |
| Comprehensive  loss:                        |       |                     |       |           |       |                |       |                                  |       |               |       |       |       |   |   |
| Net  loss                                   |       |                     |       |           |       |                |       | (16,953                               | )          |               |       |       |       | (16,953 | ) |
| Other  comprehensive loss:                  |       |                     |       |           |       |                |       |                                  |       |               |       |       |       |   |   |
| Foreign  currency translation adjustment    |       |                     |       |           |       |                |       |                                  |       | 12,595             |       |       |       | 12,595 |   |
| Total  comprehensive loss                   |       | —                   |       | —         |       | —              |       | (16,953                               | )          | 12,595             |       | —     |       | (4,358 | ) |
| Share  incentive plan stock                 |       | (32                      | )          |           |       | (46                 | )          |                                  |       |               |       |       |       | (46 | ) |
| **Balance, September 30, 2003**        |       | 13,016                   |       | $              | 130        |                | $          | 103,204                               |       | $                  | (73,742    | )          | $          | 7,018 |   | $ | (2,253 | ) | $ | 34,357 |   |
| Comprehensive  loss:                        |       |                     |       |           |       |                |       |                                  |       |               |       |       |       |   |   |
| Net  loss                                   |       |                     |       |           |       |                |       | (46,753                               | )          |               |       |       |       | (46,753 | ) |
| Other  comprehensive loss:                  |       |                     |       |           |       |                |       |                                  |       |               |       |       |       |   |   |
| Foreign  currency translation adjustment    |       |                     |       |           |       |                |       |                                  |       | 6,285              |       |       |       | 6,285 |   |
| Total  comprehensive loss                   |       |                     |       |           |       |                |       | (46,753                               | )          | 6,285              |       | —     |       | (40,468 | ) |
| Stock  compensation                         |       |                     |       |           |       | 113                 |       |                                  |       |               |       |       |       | 113 |   |
| Supplemental  retirement plan distributions |       |                     |       |           |       |                |       |                                  |       |               |       | 206        |       | 206 |   |
| **Balance, September 30, 2004**        |       | 13,016                   |       | $              | 130        |                | $          | 103,317                               |       | $                  | (120,495   | )          | $          | 13,303 |   | $ | (2,047 | ) | $ | (5,792 | ) |

 

See notes toconsolidated financial statements.

 

F-4

----

 

**APPLIEDEXTRUSION TECHNOLOGIES, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**Years Ended September 30,2004, 2003 and 2002**

**(In thousands)**

 
| ** **                                                                      | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|---------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                            |       |     |       |     |       |     |       |
| **OPERATING  ACTIVITIES:**                                                      |       |     |       |     |       |     |       |
| Net loss                                                                        |       | $        | (46,753    | )        | $          | (16,953  | )          | $ | (31,751 | ) |
| Adjustments to reconcile net loss to net  cash from operating activities:       |       |     |       |     |       |     |       |
| Provision for doubtful accounts                                                 |       | 600      |       | 900      |       | 1,713    |       |
| Depreciation and amortization                                                   |       | 27,433   |       | 24,928   |       | 21,342   |       |
| Amortization of sale-leaseback gains                                            |       | (69      | )          | (4,949   | )          | (4,855   | )          |
| Impairment of goodwill                                                          |       | 9,874    |       | —   |       | —   |       |
| Stock issued for retirement plans, share  incentive plan and other compensation |       | 113      |       | (46      | )          | 1,003    |       |
| Gain on sale of assets                                                          |       | (168     | )          | —   |       | —   |       |
| Write-off of deferred debt issuance costs  included in interest expense         |       | 1,265    |       | —   |       | —   |       |
| Changes in assets and liabilities, net of  assets acquired and divested:        |       |     |       |     |       |     |       |
| Accounts receivable                                                             |       | (13,044  | )          | 6,332    |       | (607     | )          |
| Inventory                                                                       |       | (5,679   | )          | (19,224  | )          | 2,358    |       |
| Prepaid expenses and other current assets                                       |       | 9,472    |       | (506     | )          | (856     | )          |
| Accounts payable and accrued expenses                                           |       | 14,062   |       | (16,553  | )          | 5,503    |       |
| Other                                                                           |       | (14,030  | )          | 6,531    |       | 2,129    |       |
| Net cash used in operating activities                                           |       | (16,924  | )          | (19,540  | )          | (4,021   | )          |
| **INVESTING  ACTIVITIES:**                                                      |       |     |       |     |       |     |       |
| Additions to property, plant and equipment                                      |       | (7,186   | )          | (17,938  | )          | (26,756  | )          |
| Proceeds from sale of property, plant and  equipment                            |       | 203      |       | 2,110    |       | 1,503    |       |
| Repurchase of leased assets                                                     |       | (36,961  | )          | —   |       | (17,156  | )          |
| Proceeds from sale-leaseback                                                    |       | —   |       | —   |       | 18,225   |       |
| Collection of receivable from sale of  division                                 |       | —   |       | —   |       | 23,212   |       |
| Net cash from investing activities                                              |       | (43,944  | )          | (15,828  | )          | (972     | )          |
| **FINANCING  ACTIVITIES:**                                                      |       |     |       |     |       |     |       |
| Debt issuance costs                                                             |       | (2,628   | )          | (1,687   | )          | (615     | )          |
| Proceeds from term loan                                                         |       | 50,000   |       | —   |       | 993      |       |
| Borrowings under line of credit agreement,  net                                 |       | 17,637   |       | 28,670   |       | —   |       |
| Principal payments on term loan                                                 |       | (6,250   | )          | —   |       | —   |       |
| Redemption of industrial revenue bonds                                          |       | —   |       | (6,500   | )          | —   |       |
| Net cash from financing activities                                              |       | 58,759   |       | 20,483   |       | 378      |       |
| Effect of exchange rate changes on cash                                         |       | 58       |       | 162      |       | (3       | )          |
| Change in cash and cash equivalents, net                                        |       | (2,051   | )          | (14,723  | )          | (4,618   | )          |
| Cash and cash equivalents, beginning                                            |       | 2,835    |       | 17,558   |       | 22,176   |       |
| Cash and cash equivalents, ending                                               |       | $        | 784        |     | $          | 2,835    |       | $ | 17,558 |   |
| **SUPPLEMENTAL  DISCLOSURES OF CASH FLOW INFORMATION:**                         |       |     |       |     |       |     |       |
| Cash paid during the period for:                                                |       |     |       |     |       |     |       |
| Interest, including capitalized interest                                        |       | $        | 19,101     |     | $          | 30,391   |       | $ | 31,518 |   |
| Income taxes                                                                    |       | —   |       | —   |       | —   |       |

 

See notes toconsolidated financial statements.

 

F-5

----

 

**APPLIEDEXTRUSION TECHNOLOGIES, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**Years Ended September 30,2004, 2003 and 2002**

**(In thousands,except per share amounts)**

 

**1****.****             FUTURE OPERATIONS**

 

On July 30, 2004 the Company announced that it had reached anagreement in principle with six bondholders holding over 70 percent inaggregate outstanding principal amount of the Company’s 103⁄4 percent seniornotes to recapitalize the senior notes. Pursuant to the agreement in principle,the Company did not pay the interest on the senior notes that became due on July 1,2004.

 

Therecapitalization will be accomplished through a prepackaged Chapter 11 plan ofreorganization and will involve an exchange of the Company’s 103⁄4 percent senior notes pursuant to which the noteholdersof $500,000 or more in principal amount (“large” beneficial holders) willreceive 100 percent of the common equity of the reorganized private Company andnew senior notes to be issued by the reorganized private Company. The newsenior notes will have an aggregate principal amount of $50 million, aseven-year term and will be redeemable after the first year at decliningpremiums. Interest will accrue at a rate of 12 percent per annum, and may bepaid in cash or in kind, unless certain minimum financial requirements areachieved, in which case the interest must be paid in cash. All of the Company’sexisting stock will be canceled and the existing stockholders will receive aratable portion of $2.5 million in cash. Under the prepackaged Chapter 11 plan,the Company will pay its trade creditors in full on a current basis.

 

The solicitation of votes for the prepackaged Chapter 11 plan commencedon November 1, 2004 and was concluded on November 24, 2004 with 95percent of the dollar amount of “large” beneficial holders, counting only thoseclaims that actually voted, voting in favor of the plan. “Small” note holdersholding less than $500,000 in principal amount voted to reject the plan. However,the Company believes that the plan is nevertheless confirmable.

 

On December 1, 2004, the Company filed its voluntary, prepackagedplan of reorganization under Chapter 11 of the U.S. Bankruptcy Code in the U.S.Bankruptcy Court for the District of Delaware. In order to fund normaloperations during the bankruptcy proceedings, the Company entered into anagreement with GE Commercial Finance, which will provide $110 million ofdebtor-in-possession financing along with a best efforts commitment tosyndicate an additional $15 million of debtor-in-possession financing duringthe Chapter 11 period. The financing facility was fully syndicated on December 27,2005. The plan and debtor-in-possession financing facility provides sufficientliquidity during the bankruptcy proceedings.

 

On January 24, 2004 theCompany announced that the U.S. Bankruptcy Court for the District of Delawarehad approved its prepackaged recapitalization plan, which will significantlyreduce the Company’s debt and cancel 100% of its existing common stock. TheCompany also announced that it had amended its plan to provide all “small”noteholders with the option of receiving either cash in an amount of $0.51 per$1.00 of their claims or new securities of the reorganized Company. For those “small”noteholders that receive cash, the Company has agreed to fund $0.02 of the$0.51 cash payment, with the balance to be provided by certain of the “large”noteholders, subject to the satisfaction of certain conditions. The Company’s$0.02 obligation will be funded by a portion of the $2.5 million contemplatedto be distributed to the Company’s existing shareholders, who are not entitledto any distribution under the plan. The Company expects that its existingshareholders now will receive approximately 15% to 30% less than that amount,depending upon the number of “small” noteholders that elect to receive cash.Trade creditors will be paid in full pursuant to the plan. Subsequent toamending its plan, the Company reached an agreement with Ingalls & SnyderLLC, a representative of a significant number of the “small” noteholders thathad previously voted to reject the plan, in satisfaction of its objection tothe plan.

 

The Company expects to emerge from Chapter 11 during the first calendarquarter of 2005. Subject to certain closing conditions, GE Commercial Financehas also committed to provide $125 million of exit financing, of which $55million will be a revolving credit facility, upon consummation of the Chapter11 cases.

 

TheCompany’s liquidity generally depends on cash provided by operating activitiesand our GE Commercial Finance credit facility. The ability of the Company tocontinue as a going concern depends, among other things, on: (i) the Company’sability to maintain adequate cash on hand; (ii) the Company’s ability togenerate cash from operations; (iii) the duration and outcome of therecapitalization process; and (iv) the Company’s ability to achieveprofitability following a recapitalization. Such conditions raise substantialdoubt about the Company's ability to continue as a going concern. The Company,in conjunction with its advisors, is working to design and implement strategiesto provide adequate liquidity for the Company. However, there can be noassurance as to the success of such efforts.

 

F-6

----

 

**2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

Applied Extrusion Technologies, Inc. andits subsidiaries (collectively “AET” or the “Company”) operate in a singlebusiness segment, which consists of the development and manufacture of orientedpolypropylene (“OPP”) films used in consumer product labeling and flexiblepackaging applications.

 

***Principles ofconsolidation.*** The accompanying consolidatedfinancial statements include the accounts of Applied ExtrusionTechnologies, Inc. and its subsidiaries. All intercompany accounts andtransactions have been eliminated.

 

***Accounting estimates***were made in connection with the preparation of the Company’s consolidatedfinancial statements in conformity with accounting principles generallyaccepted in the United States of America. These estimates affect reportedamounts and disclosure of assets, liabilities, revenues and expenses during thereporting period. Actual results could differ from these estimates.

 

***Cash and cashequivalents*** consist of cash and highly liquid debtinstruments such as commercial paper and money market securities purchased withan original or remaining maturity of less than three months.

 

***MarketableSecurities.*** The Company classified the marketablesecurities held in trusts for its deferred compensation plan and itssupplemental executive retirement plan as “trading” securities under Statementof Financial Accounting Standard (“SFAS”) No. 115. In accordance with theprovisions of this statement, the investment balance was stated at fair marketvalue, based on quoted market prices. Unrealized gains and losses werereflected in earnings; realized gains and losses were computed using thespecific-identification method. As the assets held in the trusts reflectedamounts due to employees or beneficiaries, but available for general creditorsof the Company in the event the Company becomes insolvent, the Company recordedthe investment balances in other assets and established a correspondinglong-term liability. In the quarter ended March 31, 2004 the entireinvestment balance of approximately $13.4 million held in the deferredcompensation and supplemental executive retirement plans was distributed to theparticipants in these plans pursuant to the terms of the plans.

 

Unrealized gains (losses) included inearnings were $126 and $(448) for fiscal 2003 and 2002 respectively.

 

***Fair Value ofFinancial Instruments.*** As of September 30,2004 and 2003 respectively, the fair value of all financial instruments, exceptfor Senior Notes as defined herein, approximate their carrying amounts in theconsolidated balance sheets. This is due to the short-term maturity of suchinstruments and the floating interest rate associated with certain instruments,which have the effect of repricing such instruments regularly. Senior Notespayable, with carrying values of $272,204 and $271,790 at September 30,2004 and 2003 respectively have estimated fair values of $167,750 and $220,000at September 30, 2004 and 2003 respectively.

 

***DerivativeInstruments.*** The Company records all derivativesas either assets or liabilities on the balance sheet at fair value. Gains orlosses resulting from changes in the values of those derivatives would beaccounted for depending on the use of the derivative and whether it qualifiesfor hedge accounting. The Company does not have any derivative instruments at September 30,2004 and 2003.

 

***Inventory***is stated at the lower of cost or market, with cost determined using anaverage-cost method.

 

***Property, plant andequipment*** are stated at cost. For financialreporting purposes, depreciation is provided using the straight-line methodover estimated useful lives. Estimated useful lives are 39 years forbuilding and improvements and 5 to 15 years for machinery and equipment.Leasehold improvements are amortized using the straight-line method over thelesser of the estimated life of the improvement or the remaining lease term.Expenditures for routine maintenance and repairs are charged to expense asincurred. The Company capitalizes interest associated with significantconstruction of property, plant and equipment.

 

***Intangibles anddeferred finance charges*** include intellectualproperty, customer lists, goodwill and costs associated with the issuance ofdebt. Amortization of intangibles is being recognized using the straight-linemethod based upon the economic useful lives of the assets, principally over tenyears. Amortization of deferred finance charges over the term of the relateddebt is included in net interest expense.

 

On October 1, 2001, the Company adoptedSFAS No. 142, “Goodwill and Other Intangible Assets”. SFAS No. 142changes the accounting for goodwill and intangible assets with indefinite livesfrom an amortization method to an impairment approach. Other intangible assetswill continue to be amortized over their estimated useful lives. Amortizationof goodwill, all of which relates to AET’s acquisition of certain assets ofQPF, L.L.C. completed on June 30, 2001, ceased on October 1, 2001. AGoodwill impairment loss of $9,874 was recognized in fiscal 2004 due to thedecline in the Company’s market value as a result of the impending prepackagedChapter 11 filing.

 

F-7

----

 

***Stock BasedCompensation.*** The Company maintains common stockoption plans for key employees, directors and consultants under which theexercise price is generally not less than the fair value of the shares at thedate of grant. The options generally vest at a rate of 25 percent peryear. Vested employee options generally expire within three months ofemployment termination or three years after the death of the employee. Vesteddirector options generally expire within three months of the resignation orwithin six months of the death of a director. All options expire upon theoccurrence of the tenth anniversary of the grant date or upon other terminationevents specified in the plans. As of September 30, 2004, options topurchase 750 shares of Company common stock were available for issuance.

 

The Company accounts for stock-basedcompensation to employees using the intrinsic value method. Accordingly, nocompensation cost has been recognized for fixed stock option grants since theoptions granted to date have exercise prices per share of not less than thefair value of the Company’s common stock at the date of the grant.

 

If compensation cost for stock option grantsand the Company’s Employee Stock Purchase Plan had been determined based on thefair value of the grant for fiscal 2004, 2003 and 2002, the Company’s fiscal2004, 2003 and 2002 net loss and loss per share on a pro forma basis would havebeen as follows:

 
| ** **                        | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                              |       |     |       |     |       |     |       |
| Net Loss:                         |       |     |       |     |       |     |       |
| As reported                       |       | $        | (46,753    | )        | $          | (16,953  | )          | $ | (31,751 | ) |
| Pro forma                         |       | (47,796  | )          | (18,108  | )          | (33,292  | )          |
| Basic and Diluted Loss per Share: |       |     |       |     |       |     |       |
| As reported                       |       | (3.64    | )          | (1.33    | )          | (2.55    | )          |
| Pro forma                         |       | (3.72    | )          | (1.42    | )          | (2.67    | )          |
|                                   |            |          |            |          |            |          |            |  |  |  |

 

***Income Taxes.***The Company recognizes deferred tax liabilities and assets for the expectedfuture tax consequences of temporary differences between the carrying amountsand the tax basis of assets and liabilities using enacted tax rates in effectin the years in which the differences are expected to reverse. Valuationallowances are established when necessary to reduce deferred tax assets to theamount that is more likely than not to be realized.

 

***Revenue Recognition.***Revenue is recognized on product sales at the point in time when persuasiveevidence of an arrangement exists, the price is fixed and determinable,delivery has occurred and there is reasonable assurance of collection of thesales proceeds. The Company generally obtains purchase authorizations from itscustomers for a specified amount of product at a specified price with deliveryterms at the point of shipment. The Company provides its customers with a rightof return. A reserve for sales returns, based on significant historicalexperience, has been recorded.

 

***Foreign Operations.***Assets and liabilities of foreign operations are translated into U.S. dollarsat the exchange rate on the balance sheet date. The results of foreignsubsidiary operations are translated using average rates of exchange duringeach reporting period. Gains and losses upon translation are deferred andreported as a component of other comprehensive income. Foreign currencytransaction gains or losses are recorded directly in the statement ofoperations.

 

***Earnings Per Share.***SFAS No. 128, “Earnings Per Share,” requires two presentations of earningsper share, “basic” and “diluted”. Basic earnings per share are computed bydividing income available to common stockholders (the numerator) by theweighted-average number of common shares outstanding less contingentlyreturnable shares (the denominator) for the period. The computation of dilutedearnings per share is similar to basic earnings per share, except that thedenominator is increased to include the number of additional common shares thatwould have been outstanding if the potentially dilutive common shares had beenissued. Shares used in the calculation of basic and diluted earnings per shareare calculated as follows:

 
| ** **                                                  | ** ** | **September 30,  2004** | ** ** | **September 30,  2003** | ** ** | **September 30,  2002** | ** ** |
|-------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                                  | ** ** | ** **                   | ** ** | ** **                   | ** ** | ** **                   | ** ** |
| Weighted-average shares outstanding                         |       | 12,833                       |       | 12,741                       |       | 12,748                       |       |
| Less:                                                       |       |                         |       |                         |       |                         |       |
| Contingently returnable shares                              |       | —                       |       | —                       |       | 283                          |       |
| Average common shares outstanding — basic  and diluted |       | 12,833                       |       | 12,741                       |       | 12,465                       |       |

 

F-8

----

 

The Company has excluded 3,277, 3,104, and2,785 of outstanding stock options from the computation of diluted earnings pershare in 2004, 2003, and 2002, respectively, as they are anti-dilutive.

 

***Impairment ofLong-lived Assets.*** The Company periodicallyassesses the recoverability of its long-lived assets by comparing theundiscounted cash flows expected to be generated by those assets to theircarrying value. If the sum of the undiscounted cash flows is less than thecarrying value of the assets, an impairment charge is recognized based oncomparison of the fair market value of those assets to the carrying value.

 

***Comprehensive Income(Loss).*** Comprehensive income includes all changesin equity during the period except those resulting from transactions withowners of the Company. The only item that the Company currently records ascomprehensive income or loss, other than net income or loss, is the change inthe cumulative translation adjustment resulting from the changes in exchangerates and the effect of those changes upon translation of the financialstatements of the Company’s foreign operations.

 

**New Accounting Pronouncements**

 

A summary of the impact of certain newaccounting pronouncements on the Company’s business follows.

 

In December 2004, the FASB issued SFAS123(R), “Share-Based Payment”. SFAS No. 123(R) revises SFAS 123, Accounting forStock-Based Compensation, and supersedes APB Opinion No. 25, Accounting forStock Issued to Employees, and its related implementation guidance. SFAS 123(R)will require compensation costs related to share-based payment transactions tobe recognized in the financial statements (with limited exceptions). The amountof compensation cost will be measured based on the grant-date fair value of theequity or liability instruments issued. Compensation cost will be recognizedover the period that an employee provides service in exchange for the award. Thisstatement is effective as of the beginning of the first interim or annualreporting period that begins after June 15, 2005. The Company is currentlyevaluating the impact from this standard on its results of operations andfinancial position.

 

In January 2003, the FASB issued FIN 46,“Consolidation of Variable Interest Entities an Interpretation of ARB No. 51. “FIN 46 addresses consolidation by business enterprises of variable interestentities. The FASB then issued FIN 46R, “Consolidation of Variable InterestEntities,” which replaced FIN 46. Application of FIN 46R is required infinancial statements of public entities that have interests in variableinterest entities or potential variable interest entities commonly referred toas special-purpose entities for periods ending after December 15, 2003. Applicationby public entities for all other types of entities is required in financialstatements for periods ending after March 15, 2004. The Company hasadopted both FIN 46 and FIN 46R, and their adoption has no impact on theCompany’s financial position or results of operations.

 

In May 2003, the FASB issued SFAS 150, “Accountingfor Certain Financial Instruments with Characteristics of both Liabilities andEquity.” This Statement establishes standards for how an issuer classifies andmeasures certain financial instruments with characteristics of both liabilitiesand equity. It requires that an issuer classify a financial instrument that iswithin its scope as a liability (or an asset in some circumstances). ThisStatement is effective for financial instruments entered into or modified afterMay 31, 2003, and otherwise is effective at the beginning of the first interimperiod beginning after June 15, 2003. The Company adopted the provisionsof SFAS 150, including the deferral of certain effective dates as a result ofthe provisions of FASB Staff Position 150-3, “Effective Date, Disclosures, andTransition for Mandatory Redeemable Financial Instruments of Certain NonpublicEntities and Certain Mandatory Redeemable Noncontrolling Interests Under FASBStatement No. 150, ‘Accounting for Certain Financial Instruments withCharacteristics of Both Liabilities and Equity.’” The Company does not have anysignificant financial instruments with characteristics of both liabilities andequity as of September 30, 2004.

 

**3. INVENTORY**

 

Inventory consisted of the following at September 30:

 
| ** **     | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------|------------|----------|------------|----------|------------|
|           |       |     |       |     |       |
| Raw materials  |       | $        | 10,447     |     | $          | 7,412 |   |
| Finished goods |       | 48,277   |       | 45,105   |       |
|           |       | $        | 58,724     |     | $          | 52,517 |   |

 

F-9

----

 

**4. PROPERTY, PLANT, EQUIPMENT AND LEASECOMMITMENTS**

 

Property, plant and equipment consisted ofthe following at September 30:

 
| ** **                    | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|
|                          |       |     |       |     |       |
| Land                          |       | $        | 1,823      |     | $          | 1,712 |   |
| Buildings and improvements    |       | 52,966   |       | 51,770   |       |
| Machinery and equipment       |       | 363,826  |       | 321,581  |       |
|                          |       | 418,615  |       | 375,063  |       |
| Less accumulated depreciation |       | (159,011 | )          | (133,195 | )          |
|                          |       | 259,604  |       | 241,868  |       |
| Construction in progress      |       | 24,670   |       | 39,516   |       |
|                          |       | $        | 284,274    |     | $          | 281,384 |   |

 

Approximately $84,993 of fixed assets arelocated outside of the United States. Depreciation expense for the years ended September 30,2004, 2003 and 2002 was $25,166, $22,731 and $19,759 respectively.

 

The Company leases certain property andequipment under agreements generally with five years or less and may includecertain renewal options. They also include early buyout options. Rental expensefor the years ended September 30, 2004, 2003 and 2002 was approximately$2,116, $13,040 and $13,969 respectively.

 

On October 3, 2003, the Companyrepurchased all of the equipment leased pursuant to sale-leasebacktransactions, which were originally entered into in January 1998 and March 2002.The minimum annual rental commitments under non-cancelable operating leases areas follows for each of the five years subsequent to September 30, 2004:

 
| 2004       |   | $      | 1,524  |   |
|------------|--------|--------|--------|--------|
| 2005       |   | 1,123  |   |
| 2006       |   | 529    |   |
| 2007       |   | 360    |   |
| 2008       |   | 170    |   |
| Thereafter |   | — |   |
|       |   | $      | 3,706  |   |

 

**5. INTANGIBLES AND DEFERRED FINANCE CHARGES**

 

A summary of the components of intangiblesand deferred finance charges are as follows:

 
| ** **                            | ** ** | ** ** | ** ** | **2004**                   | ** ** |
|---------------------------------------|------------|------------|------------|----------------------------|------------|
| **Description**                       | ** ** | **Lives**  | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net Carrying  Amount** | ** ** |
| ** **                            | ** ** | ** ** | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Intangible assets with defined lives: |       |       |       |                       |       |   |   |   |   |
| Customer lists                        |       | 5-15 years |       | $                          | 3,951      |   | $ | 3,111 |   | $ | 840 |   |
| Deferred finance charges              |       | 2-10 years |       | 13,083                     |       | 3,753 |   | 9,330 |   |
| Total                                 |       |       |       | $                          | 17,034     |   | $ | 6,864 |   | $ | 10,170 |   |

 

F-10

----

 
| ** **                               | ** ** | ** ** | ** ** | **2003**                    | ** ** |
|------------------------------------------|------------|------------|------------|-----------------------------|------------|
| **Description**                          | ** ** | **Lives**  | ** ** | **Gross Carrying   Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net Carrying  Amount** | ** ** |
| ** **                               | ** ** | ** ** | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Intangible assets with defined lives:    |       |       |       |                        |       |   |   |   |   |
| Customer lists                           |       | 5-15 years |       | $                           | 3,911      |   | $ | 2,563 |   | $ | 1,348 |   |
| Deferred finance charges                 |       | 2-10 years |       | 11,980                      |       | 2,823 |   | 9,157 |   |
| Intangible assets with indefinite lives: |       |       |       |                        |       |   |   |   |   |
| Goodwill                                 |       |       |       | 9,874                       |       | — |   | 9,874 |   |
| Total                                    |       |       |       | $                           | 25,765     |   | $ | 5,386 |   | $ | 20,379 |   |

 

A goodwill impairment loss of $9,874 wasrecognized in fiscal 2004 due to the decline in the Company’s market value as aresult of the impending prepackaged Chapter 11 filing.

 

In addition, on October 3, 2003, theCompany replaced its existing revolving credit facility as described inNote 6 to the consolidated financial statements. As a result, $909 ofdeferred financing charges related to this previous credit facility wasexpensed in fiscal 2004.

 

Amortization expense in fiscal 2004, 2003 and2002 was $2,095, $2,118 and $1,591, respectively.

 

The estimated annual amortization expense forthe five fiscal years subsequent to September 30, 2004 is as follows:

 
| 2005 |   | $   | 9,798  |   |
|------|--------|-----|--------|--------|
| 2006 |   | 353 |   |
| 2007 |   | 8   |   |
| 2008 |   | 8   |   |
| 2009 |   | 3   |   |

 

In fiscal 2005 the Company expects torecapitalize its existing senior debt and re-finance its term and revolvingdebt. As a result, the remaining balances in deferred financing charges relatedto these facilities will be expensed and the balance in deffered financingcharges of $9,330 as of September 30, 2004 has been classified as current.

 

**6. LONG-TERM DEBT**

 

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

 
| ** **                                                                                                                                                                                      | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                                                                                                                            |       |     |       |     |       |
| Senior Notes payable on June 19, 2011  with 10.75 percent interest due semiannually on January 1 and July 1                                                                      |       | $        | 272,204    |     | $          | 271,790 |   |
| Term note of $50,000 bearing interest at  LIBOR plus 4.00 percent or prime plus 2.5 percent (5.25 percent at September 30,  2004)                                                          |       | 46,307   |       | —   |       |
| Revolving credit facility of $60,000  bearing interest at LIBOR plus 3.00 percent or prime plus 1.5 percent (4.85  percent at September 30, 2004)                                          |       | 43,750   |       | —   |       |
| Revolving credit facility of $50,000  bearing interest at rates ranging from LIBOR plus 2.25 percent to 3.0 percent  or prime plus 1.0 to 1.5 percent (5.25 percent at September 30, 2003) |       | —   |       | 28,670   |       |
|                                                                                                                                                                                            |       | 362,861  |       | 300,460  |       |
| Less current portion                                                                                                                                                                            |       | 362,861  |       | 28,670   |       |
| Total long-term debt                                                                                                                                                                            |       | $        | —     |     | $          | 271,790 |   |

 

On June 19, 2001 the Company issued $275,000 of 103⁄4 percent seniornotes due 2011 (the “Senior Notes”). The Senior Notes are unsecured obligationsof AET. The indenture for the senior notes contains customary covenants andrelated provisions including a cross default provision based on theacceleration of debt under other significant debt instruments. The issue priceof each senior note was $984.94 per $1,000 principal amount at maturity. Thebond discount is being amortized over the life of the notes.

 

F-11

----

 

Interest on the senior notes is paid semi-annually on January 2and July 1. Pursuant to the recapitalization plan discussed in furtherdetail in Note 1 to the condensed consolidated financial statements, theCompany did not pay the interest on the senior notes that became due on July 1,2004. In addition, as a result of this and the intended recapitalization, theentire balance of the senior notes as September 30, 2004 of $272,204 hasbeen classified as a current liability.

 

On October 3, 2003 the Company entered into a five-year $100,000credit facility with GE Commercial Finance. The credit facility originallyconsisted of a $50,000 term loan and a $50,000 revolving line of credit. TheCompany amended this credit facility on March 23, 2004. This amendedcredit facility increased the Company’s revolving line of credit from theoriginal $50,000 to $60,000 and reduced the EBITDA covenant through the thirdquarter of fiscal 2005.

 

On June 30, 2004 the Company amended its credit facility with GECommercial Finance to, among other things, restate its minimum EBITDA covenantfor the third quarter of fiscal 2004 from approximately $35,000 to $30,000 andits minimum fixed charge coverage ratio from 0.70 to 0.55. On October 1,2004, the Company once again amended its credit facility to lower its minimumEBITDA covenant for the fourth quarter of fiscal 2004 from approximately 43,000to 28,500 and its minimum fixed charge coverage ration from .85 to .55. Both ofthese amendments restricted the Company from paying interest due on the seniornotes unless the Company had excess availability under the current creditfacility of $20,000 after giving effect to such interest payment.

 

In conjunction with the announced plans to recapitalize the senior notes,the Company’s bank group led by GE Commercial Finance, agreed to waive anyevent of default arising from the current credit facility with respect to thenon payment of interest on the senior notes. In addition GE Commercial Financehas committed to providing $125 million of debtor in possession (DIP) financingto the Company during the impending Chapter 11 period. As a result, the entirebalances due on the existing revolving line of credit of $46,307 and term loanof $43,750 as of September 30, 2004 have been classified as currentliabilities.

 

**7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES**

 

Accrued expenses consisted of the followingat September 30:

 
| ** **                                      | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|
|                                            |       |     |       |     |       |
| Accrued restructuring                           |       | $        | 251        |     | $          | 838 |   |
| Payroll & benefits                          |       | 1,790    |       | 3,919    |       |
| Market development, primarily customer  rebates |       | 9,836    |       | 3,919    |       |
| Taxes and other                                 |       | 4,652    |       | 9,332    |       |
|                                            |       | $        | 16,529     |     | $          | 18,008 |   |

 

**Restructurings**

 

In fiscal year 2004 the Company incurredrestructuring expenses of $3,380 consisting primarily of professional fees paidin connection with prepackaged Chapter 11 filing.

 

In September 2003, the Company recordeda $639 restructuring charge as a result of the elimination of 40 full-timepositions. The Company made payments related to this restructuring of $529 and$90 in fiscal years 2004 and 2003 respectively resulting in a balance of $20 asof September 30, 2004.

 

In September 2002, the Company recordeda $9,002 restructuring charge associated with the Company’s decision to closethe Boston-based corporate office, a realignment of the Company’s businessunits and the reorganization of key roles and responsibilities. Thereorganization eliminated 50 full-time positions. In 2003, the Company reducedthe estimated costs to be incurred under the 2002 restructuring by $736 toreflect lower than anticipated costs of facility closure and other expenses.The following is a summary of the restructuring reserve as of September 30,2004 of which $231 is included in accrued expenses and other liabilities and$498 is included in long-term liabilities.

 

F-12

----

 
| ** **                            | ** ** | **Employee  Severance  Costs** | ** ** | **Facility  Closure  Costs** | ** ** | **Other  Costs** | ** ** | **Total**  | ** ** |
|---------------------------------------|------------|--------------------------------|------------|------------------------------|------------|------------------|------------|------------|------------|
| ** **                            | ** ** | ** **                     | ** ** | ** **                   | ** ** | ** **       | ** ** | ** ** | ** ** |
| Restructuring Charge                  |       | $                              | 4,221      |                         | $          | 1,983            |       | $          | 510        |   | $ | 6,714 | ** ** |
| Payments/utilization for the period   |       | (4,071                         | )          | (1,047                       | )          | (510             | )          | (5,628     | )          |
| Balance as of September 30, 2003 |       | $                              | 150        |                         | $          | 936              |       | $          | —     |   | $ | 1,086 |   |
| Payments/utilization for the period   |       | (150                           | )          | (207                         | )          | —           |       | (357       | )          |
| Balance as of September 30, 2004 |       | $                              | —     |                         | $          | 729              |       | $          | —     |   | $ | 729 |   |

 

The Company announced a major restructuringof its Covington, Virginia manufacturing facility in 1998. The restructuringincluded the shutdown of certain assets and the elimination of approximately200 full-time manufacturing and plant administrative positions. The Companyrecorded a charge of $14,980 in the fourth quarter of 1998 comprised ofapproximately $8,207 for ongoing operating lease commitments related to idledleased equipment, $4,100 in severance and outplacement costs, and $2,673 inother charges. In the quarter ended December 31, 2003, the Companyrepurchased the assets covered under these lease commitments and utilized thebalance in the restructuring reserve as an offset to the purchase price ofthese assets. The following is a summary of the restructuring reserve as of September 30,2004.

 
| ** **                            | ** ** | **Lease  Commitments** | ** ** |
|---------------------------------------|------------|------------------------|------------|
|                                  |       |                   |       |
| Balance as of September 30, 2002 |       | $                      | 3,248      |   |
| Payments/utilization for the period   |       | (619                   | )          |
| Balance as of September 30, 2003 |       | 2,629                  |       |
| Payments/utilization for the period   |       | (2,629                 | )          |
| Balance as of September 30, 2004 |       | $                      | —     |   |

 

**8. INCOME TAXES**

 

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

 
| ** **          | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|---------------------|------------|----------|------------|----------|------------|----------|------------|
|                |       |     |       |     |       |     |       |
| Current:            |       |     |       |     |       |     |       |
| U.S. Federal        |       | —   |       | —   |       | (2,045   | )          |
| State               |       | —   |       | —   |       | —   |       |
| Total current       |       | $        | —     |     | $          | —   |       | $ | (2,045 | ) |
|                |       |     |       |     |       |     |       |
| Deferred:           |       |     |       |     |       |     |       |
| U.S. Federal        |       | —   |       | —   |       | 2,045    |       |
| State               |       | —   |       | —   |       | —   |       |
| Valuation Allowance |       | —   |       | 1,053    |       | (2,045   | )          |
| Total deferred      |       | —   |       | 1,053    |       | —   |       |
| Total               |       | $        | —     |     | $          | 1,053    |       | $ | (2,045 | ) |

 

F-13

----

 

The components of the net deferred tax asset were as follows at September 30:

 
| ** **                             | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|
|                                   |       |     |       |     |       |
| Current Deferred Tax:                  |       |     |       |     |       |
| Accounts receivable                    |       | $        | 630        |     | $          | 727 |   |
| Inventory                              |       | 2,343    |       | 1,612    |       |
| Other liabilities                      |       | 4,390    |       | 7,055    |       |
| Valuation allowance                    |       | (7,363   | )          | (9,394   | )          |
| Net Current Deferred Tax Asset         |       | $        | 0          |     | $          | 0 |   |
|                                   |       |     |       |     |       |
| Non Current Deferred Tax:              |       |     |       |     |       |
| Property, plant and equipment          |       | (39,519  | )          | (46,702  | )          |
| Other assets                           |       | 4,325    |       | 9,511    |       |
| Tax credits and loss carryforwards     |       | 86,318   |       | 68,173   |       |
| Valuation allowance                    |       | (51,124  | )          | (30,982  | )          |
| Net Non-Current Deferred Tax Liability |       | 0        |       | 0        |       |
| Total Net Deferred Tax Asset           |       | $        | 0          |     | $          | 0 |   |

 

At September 30, 2004, the Company has,for income tax reporting purposes, federal net operating loss carryforwards of$212,162 (expiration commencing in 2006 through 2024) and state net operatingloss carryforwards of $208,868 (limited by certain state tax statutes andexpiration). The Company also has research and development credit carryforwardsof $383, alternative minimum tax credit carryforwards of $2,881 and stateinvestment tax credits of $319 (expiration commencing in 2005).

 

The Company has recorded a full valuationallowance in 2004 and 2003 against the deferred tax assets due to theuncertainty of realizing these assets.

 

The income tax expense of $1,053 in 2003represents an adjustment to the valuation allowance against deferred taxes.

 

A reconciliation of the statutory federalincome tax rate to the effective rate of the provisions for income taxes forthe years ended September 30, 2004, 2003 and 2002 is as follows:

 
| ** **                                       | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                             |       |     |       |     |       |     |       |
| Statutory tax rate                               |       | 35.0     | %          | 35.0     | %          | 35.0     | %          |
| State income taxes, net of federal tax  benefits |       | 4.0      | %          | 4.0      | %          | 4.0      | %          |
| Subtotal                                         |       | 39.0     | %          | 39.0     | %          | 39.0     | %          |
| Valuation allowance                              |       | (39.0    | )%         | (45.6    | )%         | (32.9    | )%         |
| Total                                            |       | —   | %          | (6.6     | )%         | 6.1      | %          |

 

**9. STOCKHOLDERS’ EQUITY**

 

Tax benefits resulting from stockcompensation expense allowable for U.S. federal income tax purposes in excessof the expense recorded in the consolidated statements of operations have beencredited to additional paid-in capital.

 

In March 1998, the Company adopted ashareholder rights plan, and the Board of Directors declared a dividendconsisting of one right, called a “Junior Preferred Stock Purchase Right” (a “Right”)to each share of Common Stock outstanding on March 9, 1998. Each share ofCommon Stock issued after that date will be issued with an attached Right. EachRight entitles the holder, upon the occurrence of certain events, to purchase1/100th of a share of Preferred Stock at an initial exercise price of $36,subject to adjustments for stock dividends, splits and similar events. TheRights are exercisable only if a person or group acquires 20 percent ormore of AET’s Common Stock or announces an intention to commence a tender orexchange offer, the consummation of which would result in ownership by suchperson or group of 20 percent or more of AET’s Common Stock. The Rightsmay be redeemed by the Board of Directors at any time prior to the expirationof the rights plan on March 2, 2008 at a redemption price of $.01 each,and may be amended by the Board at any time prior to becoming exercisable. At September 30,2004, there were 13,016 Junior Preferred Stock Purchase Rights outstanding. TheJunior Preferred Rights and Junior Preferred Stock shall be canceled and deemedterminated upon the effective date of the Recapitalization Plan.

 

14

----

 

**10. STOCK OPTIONS**

 

The fair value of each stock option grant isestimated on the date of the grant using the Black-Scholes option pricing modelwith the following weighted-average assumptions used for grants in 2004, 2003and 2002: expected volatility of approximately 80 percent, risk-freeinterest rates of approximately 3 percent, no distribution of dividends,and expected lives of 5 to 10 years. The weighted-average grant date fairvalue of options granted during the year was $1.41, $1.65 and $3.56 for 2004,2003, and 2002 respectively.

 

Information concerning the Company’s optionplans is as follows:

 
| ** **                    | ** ** | **Shares  Under Option** | ** ** | **Range of Exercise  Prices** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Exercisable** | ** ** |
|-------------------------------|------------|--------------------------|------------|-------------------------------|------------|-----------------------------------------|------------|-----------------|------------|
|                          |       |                     |       |                          |       |                                    |       |            |       |
| As of September 30, 2001 |       | 3,176                    |       | 1.69-14.88                    |       | 6.37                                    |       | 1,655           |       |
|                          |       |                     |       |                          |       |                                    |       |            |       |
| Granted                       |       | 125                      |       | 3.03-7.65                     |       | 5.63                                    |       |            |       |
| Exercised                     |       | (195                     | )          | 2.13-6.75                     |       | 5.10                                    |       |            |       |
| Canceled                      |       | (321                     | )          | 1.69-9.00                     |       | 5.66                                    |       |            |       |
| As of September 30, 2002 |       | 2,785                    |       | 1.69-14.88                    |       | 6.51                                    |       | 1,807           |       |
|                          |       |                     |       |                          |       |                                    |       |            |       |
| Granted                       |       | 560                      |       | 1.70-3.00                     |       | 2.89                                    |       |            |       |
| Exercised                     |       | —                   |       | —                        |       | —                                  |       |            |       |
| Canceled                      |       | (241                     | )          | 1.72-8.38                     |       | 6.46                                    |       |            |       |
| As of September 30, 2003 |       | 3,104                    |       | 1.69-14.88                    |       | 5.86                                    |       | 2,018           |       |
|                          |       |                     |       |                          |       |                                    |       |            |       |
| Granted                       |       | 892                      |       | 2.31-2.99                     |       | 2.35                                    |       |            |       |
| Exercised                     |       | —                   |       | —                        |       | —                                  |       |            |       |
| Canceled                      |       | (719                     | )          | 1.69-9.00                     |       | 6.70                                    |       |            |       |
| As of September 30, 2004 |       | 3,277                    |       | 1.70-14.88                    |       | 4.72                                    |       | 1,748           |       |

 

The following table summarizes informationregarding stock options outstanding at September 30, 2004:

 
| ** **                    | ** ** | **Options Outstanding**          | ** ** | **Options Exercisable**                                      | ** ** |
|-------------------------------|------------|----------------------------------|------------|--------------------------------------------------------------|------------|
| **Range  of Exercise  Price** | ** ** | **Outstanding  as of  09/30/04** | ** ** | **Weighted  Average  Remaining  Contractual Life  in Years** | ** ** | **Weighted-Average Exercise Price** | ** ** | **Exercisable  as of  09/30/04** | ** ** | **Weighted-Average  Exercise Price** | ** ** |
|                          |       |                             |       |                                                         |       |   |   |   |   |   |   |
| $1.00-5.00                    |       | 1,729                            |       | 8.4                                                          |       | $ | 2.51 |   | 354 |   | $ | 2.51 |   |
| 5.01-7.50                     |       | 969                              |       | 5.8                                                          |       | 6.20 |   | 820 |   | 6.20 |   |
| 7.51-10.00                    |       | 501                              |       | 1.8                                                          |       | 8.16 |   | 496 |   | 8.17 |   |
| 10.01-12.50                   |       | 24                               |       | 2.7                                                          |       | 11.75 |   | 24 |   | 11.75 |   |
| 12.51-15.00                   |       | 54                               |       | 1.2                                                          |       | 13.84 |   | 54 |   | 13.84 |   |
|                          |       | 3,277                            |       | 6.5                                                          |       | $ | 4.72 |   | 1,748 |   | $ | 6.32 |   |

 

15

----

 

**11. EMPLOYEE AGREEMENTS**

 

The Company has entered into employmentagreements extending for periods of up to three years with certain key officersof the Company. These officers, who in some cases also serve on the Board ofDirectors and are stockholders of the Company, are also eligible forperformance bonuses. Total amounts payable under these agreements are $2,769.

 

**12. COMMITMENTS AND CONTINGENCIES**

 

From time to time, the Company becomesinvolved in litigation that is incidental to its business. Management does notbelieve that the outcome of currently pending matters, either individually orin the aggregate, will have a material impact on financial position in theresults of operations. See Note 4 for Operating Lease Commitments.

 

**13. EMPLOYEE BENEFIT PLANS**

 

Substantially all employees with more thanthree months of service (as defined) are eligible to participate in a Companysavings and profit sharing plan. The plan provides for Board-approved matchingcontributions in varying amounts based on employee contribution percentages upto 3.5 percent of gross salary in Company common stock or cash, which arefully accrued in the accompanying consolidated financial statements for fiscalperiods 2003 and 2002. As a result of the Company’s deteriorating financialcondition and impending bankruptcy petition, the Board informed the Company inJune, 2004 that it would not approve a Company matching contribution for fiscal2004. Accordingly, the Company has not accrued for this employee benefit infiscal 2004. The plan also provides for profit sharing contributions at thediscretion of the Board of Directors. There were no contributions in 2004, 2003and 2002.

 

The Company had a non-qualified deferredcompensation plan for certain management employees. This plan allowed theseemployees to defer a portion of their salary and bonus until retirement ortermination of their employment. At its election, the Company could makecontributions to this plan representing a percentage of employee compensation.The employee could elect to have their deferred compensation invested inCompany common stock or selected money market and mutual funds. A total of 43shares of Company stock were held in treasury under this plan as of September 30,2003. No company contributions were made to the plan in 2004. Companycontributions made to the plan were $456 and $544 in 2003 and 2002,respectively. The deferred compensation liability was $3,840 and $3,213 as of September 30,2003 and 2002, respectively, which has been included in long-term liabilities.The assets under the plan include Company stock of $107 and $206 as of September 30,2003 and 2002, respectively, which is included as treasury stock andinvestments in money market and mutual funds of $3,733 and $3,007, which isincluded in other assets as of September 30, 2003 and 2002, respectively.

 

In April 1999, the Company implemented aSupplemental Executive Retirement Plan, which has been amended, under whichcertain executive employees will receive benefits monthly or lump sum equal tobetween 50 and 75 percent of the average of their compensation over the threehighest years, which need not be consecutive, for a period of 10 yearsafter retirement. The plan along with the non-qualified deferred compensationplan referred to above includes provisions which require certain minimumtangible net worth and interest coverage ratio levels which, if not achieved,could result in the immediate termination of the plan and distribution of fundsto the participants. In March 2004 these conditions were not mettriggering a full distribution, which totaled approximately $13.4 million, fromthe plans. This distribution had no effect on the cash, net loss orstockholders’ equity of the Company.

 

F-16

----

 

The following table sets forth thesupplemental executive retirement plan’s funded status and obligation as of September 30,2003.

 
| ** **                                             | ** ** | **2003** | ** ** |
|--------------------------------------------------------|------------|----------|------------|
|                                                   |       |     |       |
| Change in benefit obligation:                          |       |     |       |
| Benefit obligation at beginning of year                |       | $        | 7,751      |   |
| Service cost                                           |       | 732      |       |
| Interest cost                                          |       | 247      |       |
| Actuarial loss                                         |       | —   |       |
| Plan distributions                                     |       | 493      |       |
| Benefit obligation at end of year                      |       | 9,223    |       |
|                                                   |       |     |       |
| Funded Status:                                         |       |     |       |
| Projected benefit obligation in excess of  plan assets |       | $        | 9,223      |   |
| Unrecognized actuarial gain (loss)                     |       | (14      | )          |
| Net benefit liability                                  |       | $        | 9,209      |   |

 

The components of net periodic benefit costsfor 2003 and 2002 are as follows:

 
| ** **                       | ** ** | **2003** | ** ** | **2002** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|
|                             |       |     |       |     |       |
| Service cost                     |       | $        | 732        |     | $          | 2,111 |   |
| Interest cost                    |       | 247      |       | 299      |       |
| Recognized actuarial (gain)/loss |       | —   |       | (123     | )          |
| Net periodic benefit cost        |       | $        | 979        |     | $          | 2,287 |   |

 

For measurement purposes, the annual rate ofincrease in compensation costs was assumed to be 0 percent in 2003. Thediscount rate used in determining the periodic benefit obligation was 3 percentin 2003.

 

**14. CONCENTRATION OF CREDIT RISK AND EXPORTSALES**

 

The Company sells its products under normalcredit terms to a diverse base of customers in the packaging film conversionand consumer product markets, as well as other industries. The Company performsongoing credit evaluations of its customers, and generally does not requirecollateral, although letters of credit may be required on certain foreignsales. A significant amount of sales were to converters of packaging films forend users in the beverage, candy and snack food industries. One convertercustomer accounted for approximately 14 percent of sales in fiscal 2004,17 percent of sales in fiscal 2003 and 18 percent of sales in fiscal2002. A second converter customer accounted for approximately 15 percent ofsales in fiscal 2004, 14 percent in fiscal 2003 and 12 percent in fiscal 2002.Finally, a third converter customer accounted for approximately 11 percent ofsales in fiscal 2004, 12 percent in fiscal 2003 but less than 10 percent ofsales in fiscal 2002. No other customer accounted for more than 10 percentof sales in 2004, 2003 and 2002.

 

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

 
| ** **               | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------|------------|----------|------------|----------|------------|----------|------------|
|                     |       |     |       |     |       |     |       |
| Sales:                   |       |     |       |     |       |     |       |
| United States            |       | $        | 211,404    |     | $          | 198,647  |       | $ | 210,619 |   |
| Foreign                  |       | 54,137   |       | 48,717   |       | 41,473   |       |
|                     |       | $        | 265,541    |     | $          | 247,364  |       | $ | 252,092 |   |
|                     |       |     |       |     |       |     |       |
| Operating profit (loss): |       |     |       |     |       |     |       |
| United States            |       | $        | (10,753    | )        | $          | 9,288    |       | $ | (8,098 | ) |
| Foreign                  |       | 732      |       | 4,724    |       | 3,449    |       |
|                     |       | $        | (10,021    | )        | $          | 14,012   |       | $ | (4,649 | ) |

 

F-17

----

 

No individual country, other than the UnitedStates, comprised more than 10 percent of consolidated sales.

 

**15. SELECTED QUARTERLY DATA (UNAUDITED)**

 

Summarized quarterly financial data forfiscal 2004 and 2003 were as follows:

 
| ** **              | ** ** | **Net Sales** | ** ** | **Gross Profit** | ** ** | **Net Loss** | ** ** | **Loss Per Share  Basic** | ** ** | **Loss Per Share  Diluted** | ** ** |
|-------------------------|------------|---------------|------------|------------------|------------|--------------|------------|---------------------------|------------|-----------------------------|------------|
|                    |       |          |       |             |       |         |       |                      |       |                        |       |
| September 30, 2003 |       |          |       |             |       |         |       |                      |       |                        |       |
| 1st quarter             |       | $             | 59,361     |             | $          | 12,182       |       | $                         | (3,258     | )                           | (.26       | ) | (.26 | ) |
| 2nd quarter             |       | 62,850        |       | 12,719           |       | (3,110       | )          | (.24                      | )          | (.24                        | )          |
| 3rd quarter             |       | 67,012        |       | 12,262           |       | (1,261       | )          | (.10                      | )          | (.10                        | )          |
| 4th quarter             |       | 58,141        |       | 7,047            |       | (9,324       | )          | (.73                      | )          | (.73                        | )          |
| September 30, 2004 |       |          |       |             |       |         |       |                      |       |                        |       |
| 1st quarter             |       | 57,575        |       | 9,533            |       | (8,217       | )          | (.64                      | )          | (.64                        | )          |
| 2nd quarter             |       | 70,277        |       | 9,913            |       | (6,035       | )          | (.47                      | )          | (.47                        | )          |
| 3rd quarter             |       | 69,247        |       | 7,509            |       | (18,645      | )          | (1.45                     | )          | (1.45                       | )          |
| 4th quarter             |       | 68,442        |       | 5,439            |       | (13,856      | )          | (1.08                     | )          | (1.08                       | )          |
|                         |            |               |            |                  |            |              |            |                           |            |                             |            |  |  |  |

 

**APPLIEDEXTRUSION TECHNOLOGIES, INC.**

**SCHEDULE II—VALUATION AND QUALIFYINGACCOUNTS**

**Years Ended September 30,2004, 2003 and 2002**

**(In thousands)**

 
| **Description**                  | ** ** | **Balance at  beginning  of period** | ** ** | **Additions  charged  to costs and  expenses** | ** ** | **Deductions** | ** ** | **Balance at  end of  period** | ** ** |
|----------------------------------|------------|--------------------------------------|------------|------------------------------------------------|------------|----------------|------------|--------------------------------|------------|
|                             |       |                                 |       |                                           |       |           |       |                           |       |
| Allowance for doubtful accounts: |       |                                 |       |                                           |       |           |       |                           |       |
| 2004                             |       | $                                    | 1,864      |                                           | $          | 600            |       | $                              | 849        |   | $ | 1,615 |   |
| 2003                             |       | 1,783                                |       | 900                                            |       | 819            |       | 1,864                          |       |
| 2002                             |       | 1,801                                |       | 1,713                                          |       | 1,731          |       | 1,783                          |       |
|                                  |            |                                      |            |                                                |            |                |            |                                |            |  |  |  |  |

 

F-18

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

Tothe Board of Directors and Stockholders ofApplied Extrusion Technologies, Inc.:

 

Wehave audited the accompanying consolidated balance sheets of Applied ExtrusionTechnologies, Inc. and its subsidiaries (the “Company”) as of September 30,2004 and 2003, and the related consolidated statements of operations,stockholders’ equity, and cash flows for each of the three years in the periodended September 30, 2004. Our audits also included the financial statementschedule listed in Item 15A. These financial statements and the financialstatement schedule are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on the financial statements and thefinancial statement schedule based on our audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

 

Inour opinion, such consolidated financial statements present fairly, in allmaterial respects, the financial position of the Company at September 30,2004 and 2003, and the results of its operations and its cash flows for each ofthe three years in the period ended September 30, 2004, in conformity withaccounting principles generally accepted in the United States of America. Also,in our opinion, such financial statement schedule, when considered in relationto the basic consolidated financial statements taken as a whole, presentsfairly in all material respects the information shown therein.

 

Asdiscussed in Note 1, the Company has filed for reorganization under Chapter 11of the Federal Bankruptcy Code. The accompanying financial statements do notpurport to reflect or provide for the consequences of the bankruptcy proceedings.In particular, such financial statements do not purport to show (a) as toassets, their realizable value on a liquidation basis or their availability tosatisfy liabilities; (b) as to prepetition liabilities, the amounts that may beallowed for claims or contingencies, or the status and priority thereof;(c) as to stockholder accounts, the effect of any changes that may be madein the capitalization of the Company; or (d) as to operations, the effect ofany changes that may be made in its business.

 

The accompanying consolidated financial statements forthe year ended September 30, 2004 have been prepared assuming that theCompany will continue as a going concern. As discussed in Notes 1 and 6 to theconsolidated financial statements, the Company is in default under certain ofits outstanding senior redeemable notes and bank credit facilities, whichresulted in all outstanding senior redeemable notes and bank credit facilitiesbeing classified in current liabilities. Accordingly, the Company’s currentliabilities significantly exceed its current assets. As further discussed inNotes 1 and 6 to the consolidated financial statements, the Company willrequire additional funding to continue its operations. However, as alsodiscussed in Note 1 to the consolidated financial statements, the Company’splan of reorganization was confirmed by the Bankruptcy Court on January 24,2005, and the Company has $125 million of committed exit financing. Theconsolidated financial statements do not include any adjustments that mightresult from the outcome of the uncertainties concerning the Company’s future.

 

 

DELOITTE & TOUCHE LLP

 

 

Philadelphia, Pennsylvania

February 1, 2005

 

F-19

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