UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

ofFor the ~~Securities~~Quarterly ~~Exchange~~Period ~~Act~~Ended ~~of 1934~~December 31, 2004

For the Quarterly Period Ended June 30, 2004

Commission File No. 0-19188

APPLIED EXTRUSION TECHNOLOGIES, INC.

(Exact Name of Registrant as Specified in Its Charter)

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

15 Read’s Way

New Castle, DE 19720

(Address of Principal Executive Offices, Including Zip Code)

(302) 326 - 5500

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ý NO o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES ý NO o

The number of shares of the Registrant’s Common Stock, $.01 par value per share, outstanding as of ~~August 10~~February 28, ~~2004~~2005 was 12,833,532.

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

APPLIED EXTRUSION TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands)

	June 30, 2004			September 30, 2003
	December 31, 2004			September 30, 2004
ASSETS
Current assets:
Cash and cash equivalents	$	~~268~~3,083		$	~~2,835~~784
Accounts receivable, net of allowance for doubtful accounts of $1,421 at June 30, 2004 and $1,864 at September 30, 2003	43,672			33,407
Accounts receivable, net of allowance for doubtful accounts of $1,478 at December 31, 2004 and $1,615 at September 30, 2004	42,690			46,163
Inventory	5763,~~531~~252			5258,~~517~~724
Prepaid expenses and other current assets	313,~~307~~779			214,~~995~~315
Total current assets	~~104~~122,~~778~~804			91119,~~754~~986
Property, plant and equipment, net	~~283~~282,~~379~~838			~~281~~284,~~384~~274
Goodwill	—			9,874
Other intangible assets, net	723			840
Other intangible assets	10,403			10,505
Other assets	3,757			2,396
Other assets	1,524			14,178
Total assets	$	410,122		$	407,496
Total assets	$	400,084		$	407,695
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Senior notes	$	272,~~101~~308		$	—272,204
Current portion of long-term debt	4570,~~313~~000			—43,750
Revolving debt	4125,~~337~~933			2846,~~670~~307
Accounts payable	917,~~048~~726			9,~~485~~294
Accrued expenses and other current liabilities	1215,~~339~~511			1816,~~008~~529
Accrued interest	1530,~~518~~002			723,~~544~~705
Total current liabilities	~~395~~431,~~656~~480			63411,~~707~~789
Long-term debt	—			271,790
Long-term liabilities	1,104			1,499
Long-term liabilities	1,708			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 stock outstanding
Preferred stock, $.01 par value; authorized, 1,000 shares, of which 300 are designated Junior Preferred Stock; no stock issued and outstanding
Common stock, $.01 par value; 30,000 shares authorized; 13,016 shares issued at June 30, 2004 and September 30, 2003	130			130
Common stock, $.01 par value; 30,000 shares authorized; 13,016 shares issued at December 31, 2004 and September 30, 2004	130			130
Additional paid-in capital	103,317			103,~~204~~317
Accumulated deficit	(~~106~~139,~~640~~961		)	(73120,~~742~~495		)
Accumulated comprehensive income	716,~~960~~099			713,~~018~~303
	4,767			36,610
	(20,415		)	(3,745		)
Treasury stock, at cost, 183 shares at June 30, 2004 and September 30, 2003	(2,047		)	(2,253		)
Treasury stock, at cost, 183 shares at December 31, 2004 and September 30, 2004	(2,047		)	(2,047		)
Total stockholders’ equity	2(22,~~720~~618		)	34(5,~~357~~792		)
Total liabilities and stockholders’ equity	$	~~400~~410,~~084~~122		$	407,~~695~~496

See notes to condensed consolidated financial statements.

APPLIED EXTRUSION TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Three Months Ended ~~June~~ 30December 31, 2004 and 2003

(Unaudited)

(In thousands, except per share data)

	2004			2003
Net Sales	$	6967,~~247~~405		$	6757,~~012~~575
Cost of sales	6163,~~738~~849			5448,~~750~~042
Gross profit	73,~~509~~556			129,~~262~~533
Operating expenses:
Selling, general and administrative	5,~~095~~456			45,~~601~~478
Research and development	1,~~749~~787			1,~~477~~666
Restructuring expenses	~~695~~3,753			—¾
Goodwill impairment	9,874			—
Total operating expenses	10,996			7,144
Total operating expenses	17,413			6,078
Operating profit (loss)	(7,440		)	2,389
Operating profit (loss)	(9,904		)	6,184
Interest expense, net:
Interest expense	8(12,~~741~~026		)	710,~~445~~606
Net loss	$	(1819,~~645~~466	)	$	(18,~~261~~217	)
Basic and diluted loss per common share	$	(1.4552	)	$	(.1064	)
Weighted average shares outstanding:
Basic and diluted	12,833			12,833

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Three Months Ended ~~June~~ 30December 31, 2004 and 2003

(Unaudited)

(In thousands, except per share data)

Net loss	$	(1819,~~645~~466	)	$	(18,~~261~~217	)
Exchange rate changes	(12,~~888~~796		)	83,~~014~~082
Comprehensive income (loss)	$	(20,533	)	$	6,753
Comprehensive loss	$	(16,670	)	$	(5,135	)

See notes to condensed consolidated financial statements.

APPLIED EXTRUSION TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Nine Months Ended June 30, 2004 and 2003

(Unaudited)

(In thousands, except per share data)

	2004			2003
Net Sales	$	197,100		$	189,223
Cost of sales	170,145			152,061
Gross profit	26,955			37,162
Operating expenses:
Selling, general and administrative	16,369			16,912
Research and development	5,131			5,442
Restructuring expenses	695			—
Goodwill impairment	9,874			—
Total operating expenses	32,069			22,354
Operating profit (loss)	(5,114		)	14,808
Interest expense, net:
Interest expense	27,784			22,519
Interest income	—			(80		)
Interest expense, net	27,784			22,439
Net loss	$	(32,898	)	$	(7,631	)
Basic and diluted loss per common share	$	(2.56	)	$	(.60	)
Weighted average shares outstanding:
Basic and diluted	12,833			12,718

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Nine Months Ended June 30, 2004 and 2003

(Unaudited)

(In thousands, except per share data)

Net loss	$	(32,898	)	$	(7,631	)
Exchange rate changes	942			13,066
Comprehensive income (loss)	$	(31,956	)	$	5,435

See notes to condensed consolidated financial statements.

APPLIED EXTRUSION TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

~~Nine~~Three Months Ended ~~June~~ 30December 31, 2004 and 2003

(In thousands)

	2004			2003
OPERATING ACTIVITIES:
Net loss	$	(3219,~~898~~466	)	$	(78,~~631~~217	)
Adjustments to reconcile net loss to net cash from operating activities:
Provision for doubtful accounts	~~450~~150			~~450~~150
Depreciation and amortization	217,~~845~~423			187,~~483~~234
Amortization of sale-leaseback gains	~~(69~~¾		)	(~~3,712~~69		)
Stock compensation	113			—
Stock issued for retirement plans, share incentive, and other compensation	¾			113
Gain on sale of assets	~~(168~~¾		)	—(168		)
Goodwill impairment	9,874			—
Write-off of deferred debt issuance costs included in interest expense	2,636			1,265
Changes in assets and liabilities, net of assets acquired and divested:
Accounts receivable	~~(10~~3,~~663~~529		)	~~1,424~~(820		)
Inventory	(43,~~931~~993		)	(198,~~182~~726		)
Prepaid expenses and other current assets	13(2,~~224~~196		)	(~~236~~1,187		)
Accounts payable and accrued expenses	113,~~958~~144			~~333~~9,950
Other	(142,~~253~~099		)	~~617~~212
Net cash used in operating activities	(~~15,518~~872		)	(~~9,454~~263		)
INVESTING ACTIVITIES:
Additions to property, plant and equipment	(~~5,946~~984		)	(132,~~495~~412		)
Proceeds from sale of property, plant and equipment	~~203~~¾			~~2,110~~203
Repurchase of leased assets	~~(36,961~~¾		)	—(36,961		)
Net cash used in investing activities	(~~42,704~~984		)	(1139,~~385~~170		)
FINANCING ACTIVITIES:
Debt issuance costs	(21,~~345~~774		)	(~~899~~1,664		)
Proceeds from term loan	5070,000			—50,000
Borrowings under line of credit agreement, net	12,667			4,662
Payments under line of credit agreement, net	(20,374		)	(9,158		)
Principal payment on term loan	(443,~~688~~750		)	—(1,563		)
Net cash from financing activities	554,~~634~~102			337,~~763~~615
Effect of exchange rate changes on cash	2153			7512
Change in cash and cash equivalents, net	(2,~~567~~299		)	(171,~~001~~806		)
Cash and cash equivalents, beginning	~~2,835~~784			172,~~558~~835
Cash and cash equivalents, ending	$	~~268~~3,083		$	~~557~~1,029
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest, including capitalized interest	$	182,~~588~~643		$	151,~~295~~457
Income taxes	—¾			—¾

See notes to condensed consolidated financial statements.

APPLIED EXTRUSION TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three ~~and Nine~~ Months Ended ~~June 30~~December 31, 2004 and 2003

(In thousands, except share and per share data)

1. Basis of Presentation

These unaudited condensed consolidated interim financial statements (“Financial Statements”) have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the Securities and Exchange Commission. These Financial Statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s ~~2003~~2004 Annual Report on Form 10-K for the year ended September 30, ~~2003~~2004 filed with the Securities and Exchange Commission.

These Financial Statements do not include all of the information and footnotes required for complete financial statements. In management’s opinion, these Financial Statements reflect all adjustments, which are of a normal, recurring nature, necessary for a fair presentation of the results for the interim periods presented. Results for these interim periods are not necessarily indicative of results to be expected for the full year.

2. Future Operations

On July 30, 2004 the Company announced that it had reached an agreement in principle with six bondholders holding over 70% percent in aggregate outstanding ~~principal~~ principal amount of the Company’s 10¾% percent senior notes to recapitalize the senior notes. Pursuant to the agreement in principle, the Company ~~will~~did not pay the interest on the senior notes that became due on July 1, 2004 and January 2, 2005.

The recapitalization will be accomplished through a prepackaged ~~chapter~~Chapter 11 plan of reorganization and will involve an exchange of the Company’'s 10¾% 3/4 percent senior notes. ~~pursuant to~~As ~~which~~originally ~~the~~proposed, the noteholders ~~will~~of ~~receive~~$500,000 or more in principal amount ("large" beneficial holders) would have received 100% percent of the common equity of the reorganized private Company and new senior notes to be issued by the reorganized ~~Company. The~~private ~~new senior notes will have an aggregate principal amount of $50 million~~Company, ~~a seven-year term~~ and ~~will be redeemable after~~ the ~~first~~other ~~year~~noteholders atwould ~~declining~~have ~~premiums. Interest~~received ~~will accrue at a rate of 12% per annum, and may be paid in~~ cash or in ~~kind, unless certain minimum financial~~an ~~requirements~~amount ~~are~~equal ~~achieved,~~to ~~in which case~~ the ~~interest~~fair ~~must~~market bevalue ~~paid~~of ~~in cash~~their notes. All of the Company’'s ~~existing~~ existing stock ~~will~~would behave been canceled and the existing stockholders ~~will~~would have ~~receive~~received a ratable portion of $2.5 million in cash. ~~Under~~The ~~the~~proposed ~~prepackaged~~plan ~~chapter~~also provided 11that ~~plan,~~ the Company ~~will~~would pay its trade creditors in full on a current basis. In addition, the reorganized Company is expected to become a non-reporting company pursuant to the U.S. securities laws; as a result, it is anticipated that there will be restrictions on trading the securities of the reorganized Company.

The ~~Company expects to commence the~~ solicitation ~~of votes from the~~ ~~holders~~ of ~~its senior notes before the middle of September. If sufficient~~ votes for athe prepackaged ~~chapter~~ Chapter 11 plan ~~are~~commenced ~~obtained~~on ~~from the holders of its senior notes~~November 1, ~~the Company~~2004 ~~will file a chapter 11 petition~~ and ~~seek~~was toconcluded ~~have~~on ~~the~~November 24, ~~plan~~2004 ~~confirmed~~with by95 ~~the bankruptcy~~percent ~~court. The~~of ~~Company does not anticipate being subject to~~ the ~~bankruptcy proceeding for more than sixty days. Under U.S. bankruptcy law, at least one-half~~dollar ~~in number and two-thirds in principal~~ amount of an“large” ~~impaired~~beneficial ~~class entitled to vote on a chapter 11 plan~~holders, ~~in both cases~~ counting only those claims that actually ~~voting on the plan~~voted, ~~must~~voting ~~vote~~ in favor of the plan. ~~Although~~ ~~the~~“Small” note holders ofholding atless ~~least 70% of the aggregate outstanding~~than ~~principal~~$500,000 ~~amount of the senior notes have indicated that they would agree to vote~~ in ~~favor of the plan, there can be no assurance that sufficient votes of holders of senior notes, with respect to both the number and~~ principal amount ~~requirements,~~ ~~will~~voted ~~be obtained~~ to ~~confirm~~reject ~~a prepackaged chapter 11 plan. In addition, consummation of~~ the ~~recapitalization is subject to the completion of definitive documentation and the satisfaction of customary conditions. The Company expects the prepackaged chapter 11~~ plan ~~to be confirmed by the bankruptcy court and consummated in mid- to late-fall of this year~~. In the event the prepackaged chapter 11 plan is not consummated the Company would then need to secure additional financing in order to satisfy the outstanding interest on its senior notes, or pursue a conventional chapter 11 plan of reorganization.

~~The~~On December 1, 2004, the Company ~~has~~filed ~~received~~its ~~financing~~voluntary, ~~proposals~~prepackaged ~~from~~plan ~~various~~of ~~lenders,~~reorganization under ~~including~~Chapter GE11 ~~Capital~~of ~~Finance,~~the ~~for~~U.S. ~~financing~~Bankruptcy ~~during~~Code in the ~~chapter~~U.S. 11Bankruptcy ~~case~~Court ~~and~~ for the ~~exit~~District ~~financing~~of Delaware. ~~The~~In ~~Company~~order ~~expects~~ to ~~have~~fund ~~commitments~~normal ~~with~~operations ~~respect~~during tothe ~~such~~bankruptcy ~~financings~~proceedings, ~~prior to~~ the ~~time~~Company itentered ~~commences~~into ~~the~~an ~~solicitation~~agreement ofwith ~~votes~~GE onCommercial ~~its plan~~Finance, ~~from~~which ~~the~~provided ~~holders~~$125 million of ~~its~~debtor-in-possession ~~senior notes~~financing. The financing Infacility ~~addition,~~was ~~the~~fully ~~Company’s~~syndicated ~~bank~~on ~~group~~December 27, ~~led~~2004. byThe GEplan ~~Capital Finance, has~~and ~~agreed~~debtor-in-possession tofinancing ~~waive~~facility ~~any~~provides ~~event~~sufficient ofliquidity ~~default~~during the ~~arising~~bankruptcy proceedings.

6On January 24, 2004 the Company announced that the U.S. Bankruptcy Court for the District of Delaware had approved its prepackaged recapitalization plan. The Company 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 contemplated to be distributed to the Company’s existing shareholders, who are not entitled to any distribution under the plan. The Company expects that its existing shareholders now will receive approximately 15% to 30% less than that amount, depending upon the number of “small” noteholders that elect to receive cash. Trade

under its current credit facility with respect to the non-payment of interest on its senior notes through September 1, 2004, which date may be extended by the lenders. There can be no assurance that the lenders will extend this date, and the Company does not anticipate that the solicitation of votes will be completed by this date.5

~~The~~creditors ~~Company’s~~will ~~liquidity generally~~be ~~depends~~paid onin ~~cash~~full ~~provided~~pursuant byto ~~operating~~the ~~activities and our GE Capital Finance credit facility~~plan. ~~The~~ ~~ability~~Subsequent ofto ~~the~~amending ~~Company~~its ~~to continue as a going concern depends~~plan, ~~among other things, on: (i)~~ the Company’s ~~ability~~reached toan ~~maintain adequate~~agreement ~~cash~~with onIngalls ~~hand;~~& ~~(ii)~~Snyder LLC, ~~the~~a ~~Company’s~~representative ~~ability~~of toa ~~generate~~significant ~~cash~~number ~~from operations; (iii) the duration and outcome~~ of the ~~recapitalization~~“small” ~~process;~~noteholders ~~and (iv) the~~that ~~Company’s~~had ~~ability~~previously voted to ~~achieve~~reject ~~profitability~~the ~~following a recapitalization. The Company~~plan, in ~~conjunction~~satisfaction ~~with~~of its ~~advisors,~~ isobjection ~~working~~ to ~~design and implement strategies to provide adequate~~ ~~liquidity for~~ the ~~Company~~plan. ~~However, there can be no assurance as to the success of such efforts.~~

The new securities of the reorganized company, which will be issued to “large” noteholders and the “small” noteholders not electing cash, will consist of new senior notes and all of the common stock of the company. The new senior notes will have an aggregate principal amount of $50 million, a seven-year term and will be redeemable after the first year at declining premiums. Interest will accrue at a rate of 12 percent per annum, and may be paid in cash or in kind, unless certain minimum financial requirements are achieved, in which case the interest must be paid in cash. The reorganized company will not be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended.

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

The Company’s liquidity generally depends on cash provided by operating activities and our GE Commercial Finance credit facility. The ability of the Company to continue as a going concern depends, among other things, on: (i) the Company’s ability to maintain adequate cash on hand; (ii) the Company’s ability to generate cash from operations; (iii) the duration and outcome of the recapitalization process; and (iv) the Company’s ability to achieve profitability following a recapitalization. Such conditions raise substantial doubt about the Company’s ability to continue as a going concern. The Company, in conjunction with its advisors, is implementing strategies to provide adequate liquidity for the Company. However, there can be no assurance as to the success of such efforts.

3. Inventories

Inventories are valued at the lower of cost or market, with cost determined using an average-cost method. Inventories consisted of the following on ~~June 30, 2004, March~~ December 31, 2004, ~~December 31, 2003~~ and September 30, ~~2003~~ 2004:

June 2004

March 2004

December 2003

September 2003

December 2004

September 2004

Raw materials

810,~~299~~942

10,~~945~~447

~~8,788~~

~~7,412~~

Finished goods

4952,~~232~~310

4948,~~706~~277

~~52,685~~

~~45,105~~

Total

5763,~~531~~252

6058,~~650~~724

~~61,473~~

~~52,517~~

4. Long Term Debt

On June 19, 2001 the Company issued $275,000 of 10¾% percent senior notes due 2011 (the “Senior Notes”). The Senior Notes are unsecured obligations of AET. The indenture for the senior notes contains customary covenants and related provisions including a cross default provision based on the acceleration of debt under other ~~significant~~ significant debt instruments. The issue price of each senior note was $984.94 per $1,000 principal amount at maturity. The bond discount is being amortized ~~over~~ over the life of the notes. Interest on the senior notes is paid semi-annually on January 2 and July 1. Pursuant to the agreement in principle and recapitalization plan discussed in further detail in Note 2 to the condensed consolidated financial statements, the Company will 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, the entire balance of the senior notes as of June 30, 2004 of $272,101 has been classified as a current liability.

OnInterest ~~October~~on ~~3, 2003~~ the ~~Company~~ ~~entered~~senior ~~into~~notes ais ~~five~~paid semi-~~year~~annually ~~$100,000~~on ~~credit~~January 2 ~~facility~~and ~~with~~July 1. GEPursuant to ~~Capital~~the ~~Finance. The~~recapitalization ~~credit~~plan ~~facility~~discussed ~~originally~~in ~~consisted~~further ~~of a~~detail ~~$50,000~~in ~~term~~Note ~~loan~~2 ~~and~~to athe condensed ~~$50,000~~consolidated ~~revolving~~financial ~~line~~statements, ofthe ~~credit. The~~ Company ~~amended~~did ~~this~~not ~~credit~~pay ~~facility~~the interest on ~~March~~ ~~23,~~the ~~2004. This~~senior ~~amended~~notes ~~credit facility~~that ~~increased~~became ~~the~~due ~~Company’s~~on ~~revolving~~July 1, ~~line~~2004 ofand ~~credit from the original $50~~January 2,~~000~~ 2005. toIn ~~$60~~addition,~~000~~ ~~and~~as ~~reduced~~a ~~the~~result ~~EBITDA~~of ~~covenant~~this ~~through~~and the ~~third~~intended ~~quarter~~recapitalization, ofthe ~~fiscal~~entire ~~2005. The~~balance ~~amended~~of ~~EBITDA requirement~~the issenior ~~$43,072~~notes ~~and~~as ~~$62~~December 31,~~000~~ ~~for~~2004 ~~the~~of ~~12-month periods ended September 30~~$272,308 has ~~2004~~been ~~and~~classified ~~September~~as ~~30,~~a ~~2005~~current liability.

On ~~June 30~~October 3, 2003 ~~2004~~ the Company ~~amended~~ ~~its~~entered into a five-year $100,000 credit facility with GE Commercial ~~Capital~~ Finance. ~~to,~~The ~~among~~credit ~~other~~facility ~~things, restate~~originally ~~its~~consisted ~~minimum EBITDA covenant for the third quarter~~ of ~~fiscal~~a ~~2004 from approximately~~ $3550,000 toterm loan and a $3050,000 ~~and~~revolving ~~its~~line ~~minimum~~of ~~fixed charge coverage ratio from 0~~credit.70 toThe ~~0.55. This~~Company ~~amendment~~amended ~~also~~this credit ~~restricted~~facility ~~the~~on ~~Company~~March 23, ~~from~~2004. ~~paying~~This ~~interest~~amended ~~due~~credit onfacility ~~the~~increased ~~senior notes unless~~ the Company’s ~~had~~revolving ~~excess~~line ~~availability~~of ~~under~~credit from the ~~current~~original ~~credit~~$50,000 ~~facility~~to of $2060,000 and ~~after~~reduced ~~giving~~the ~~effect~~EBITDA tocovenant ~~such~~through ~~interest~~the ~~payment~~third quarter of fiscal 2005.

InOn ~~conjunction~~June 30, 2004 the Company amended its credit facility with ~~the announced~~GE ~~plans~~Commercial Finance to, among ~~recapitalize~~other ~~the~~things, ~~senior~~restate ~~notes,~~its ~~the~~minimum ~~Company’s~~EBITDA ~~bank~~covenant ~~group~~for ~~led~~the third quarter byof GEfiscal ~~Capital~~2004 ~~Finance,~~from ~~has~~approximately ~~agreed~~$35,000 to ~~waive~~$30,000 ~~any~~and ~~event~~its ofminimum ~~default~~fixed charge ~~arising~~coverage ratio from 0.70 to 0.55. On October 1, 2004, the ~~current~~Company once again amended its credit facility ~~with~~to ~~respect~~lower toits minimum EBITDA covenant for the ~~non~~fourth ~~payment~~quarter of ~~interest~~fiscal on2004 ~~the senior~~from ~~notes. As~~approximately ~~this~~43,000 ~~waiver~~to ~~initially~~28,500 and its ~~extends~~minimum ~~only~~fixed charge coverage ratio from .85 to ~~September~~.55. 1,Both ~~2004,~~of these amendments restricted the ~~entire~~Company ~~balances~~from paying interest due on the ~~revolving line~~senior ofnotes ~~credit~~unless ofthe Company ~~$41,337~~had ~~and~~excess ~~term~~availability ~~loan~~under ofthe ~~$45,313~~current ascredit facility of ~~June 30~~$20,000 after ~~2004~~giving ~~have been~~effect ~~classified~~to assuch ~~current~~interest ~~liabilities~~payment.

7In conjunction with the announced plans to recapitalize the senior notes, the Company’s bank group, led by GE Commercial Finance, agreed to waive any event of default arising from the current credit facility with respect to the non payment of interest on the senior notes.

In the quarter ended December 31, 2004 the Company entered into a super-priority debtor in possession loan agreement (the “DIP Credit Facility”) with GE Commercial Finance. The DIP Credit Facility consists of a Revolving Credit Facility of up to $55,000, a Term Loan of up to $50,000 and a last out Term Loan of up to $20,000. The proceeds from the term loans of $70,000 were used to pay-off the existing term loan and a portion of the revolving debt with GE Commercial Finance. The DIP Credit Facility will be replaced with the exit financing referred to in Note 2 to the condensed consolidated financial statements upon the Company’s emergence from Chapter 11 in the first calendar quarter of fiscal 2005. As a result, the entire balances due on the existing revolving line of credit of $25,933 and term loan of $70,000 as of December 31, 2004 have been classified as current liabilities.

5. New Accounting Pronouncements

InA ~~January~~summary ~~2003,~~of the ~~FASB~~ ~~issued~~impact ~~Interpretation No. 46 “Consolidation~~ of Variable Interest Entities (“FIN 46”), which was subsequently modified and reissued in December 2003. FIN 46 establishes accounting and disclosure requirements for ownership interests in entities that have certain ~~financial~~new ~~or ownership characteristics. FIN 46, as revised, is generally applicable for the first fiscal year or interim~~ accounting ~~period~~pronouncements ~~ending after March 15, 2004. The adoption of the provisions of FIN 46 has not had a material effect~~ on the Company’s ~~consolidated financial statements~~business follows.

In December 2004, the FASB issued SFAS 123(R), “Share-Based Payment” SFAS No. 123(R) revises SFAS 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. SFAS 123(R) will require compensation costs related to share-based payment transactions to be recognized in the financial statements. The amount of compensation cost will be measured based on the grant-date fair value of the equity or liability instruments issued. Compensation cost will be recognized over the period that an employee provides service in exchange for the award. This statement is effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. The Company is currently evaluating the impact from this standard on its results of operations and financial 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 interest entities. The FASB then issued FIN 46R, “Consolidation of Variable Interest Entities,” which replaced FIN 46. Application of FIN 46R is required in financial statements of public entities that have interests in variable interest entities or potential variable interest entities commonly referred to as special-purpose entities for periods ending after December 15, 2003. Application by public entities for all other types of entities is required in financial statements for periods ending after March 15, 2004. The Company has adopted both FIN 46 and FIN 46R, and their adoption had no impact on the Company’s financial position or results of operations.

In May 2003, the FASB issued SFAS 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company adopted the provisions of SFAS 150, including the deferral of certain effective dates as a result of the provisions of FASB Staff Position 150-3, “Effective Date, Disclosures, and Transition for Mandatory Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatory Redeemable Noncontrolling Interests Under FASB Statement No. 150, ‘Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.’” The Company does not have any significant financial instruments with characteristics of both liabilities and equity as of December 31, 2004.

6. Restructuring

In the quarter ended ~~June 30~~December 31, 2004, the Company incurred restructuring expenses of $~~695 consisting~~3,753 consisting primarily of professional fees paid in connection with the ~~agreement in principle for the~~ recapitalization of the Company’s senior notes as detailed in Note 2 to the condensed consolidated financial statements.

In September 2003, the Company recorded a $639 restructuring reserve as a result of the elimination of 40 full-time positions. ~~The~~As ~~Company made payments~~ of ~~$90 related to this restructuring in fiscal year 2003 and an additional $466 in the nine months ended June 30~~December 31, 2004~~. The~~ ~~balance~~all inpayments required under this restructuring ~~reserve~~program ~~as of~~had ~~June~~been ~~30, 2004 is $83, of which $65 is included in accrued expenses and other current liabilities and $18 is in long-term liabilities~~made.

In September 2002, the Company recorded a $9,002 restructuring reserve associated with the Company’s decision to close the Boston-based corporate office, realign the Company’s business units and reorganize key roles and responsibilities. The reorganization eliminated 50 full-time positions. The following is a summary of this restructuring reserve as of ~~June 30~~December 31, 2004 and 2003, of which $238 and $~~1,172~~ 291 are included in accrued expenses and other current liabilities and $~~551~~475 and $~~1,139~~639 are included in long-term liabilities respectively.

	Employee Severance Costs			Facility Closure Costs			Other Costs		Total
Balance as of September 30, 2003	$	150		$	936		$	—	$	1,086
Payments/utilization for the period	(140		)	(157		)	—		(297		)
Balance as of June 30, 2004	$	10		$	779		$	—	$	789

	Employee Severance Costs			Facility Closure Costs			~~Other Costs~~Total			~~Total~~
Balance as of September 30, 2002	$	4,221		$	1,983		$	510		$	6,714
Balance as of September 30, 2004	$	—		$	729		$	729
Payments/utilization for the period	~~(3,831~~—		)	(~~463~~16		)	(~~109~~16		)	~~(4,403~~		)
Balance as of June 30, 2003	$	390		$	1,520		$	401		$	2,311
Balance as of December 31, 2004	$	—		$	713		$	713
	Employee Severance Costs			Facility Closure Costs			Total
Balance as of September 30, 2003	$	150		$	936		$	1,086
Payments/utilization for the period	(73		)	(83		)	(156		)
Balance as of December 31, 2003	$	77		$	853		$	930

The Company announced a major restructuring of its Covington, Virginia manufacturing facility in 1998. The restructuring included the shutdown of certain assets and the elimination of approximately 200 full-time manufacturing and plant administrative positions. In the fourth quarter of 1998, the Company recorded a charge of $14,980 comprised of approximately $8,207 for ongoing operating lease commitments related to idled lease equipment, $4,100 in severance and outplacement costs, and $2,673 in other charges. As of September 30, 2003, the restructuring reserve had a balance of $2,629 related entirely to operating lease commitments. In the quarter ended December 31, 2003, the Company repurchased the assets covered under these lease commitments and utilized the balance in the restructuring reserve as an offset to the purchase price of these assets.

7. Stock Options

The Company maintains common stock option plans for key employees, directors and consultants under which the exercise price is generally not less than the fair value of the shares at the date of grant. The options generally vest at a rate of 25% per year. Vested employee options generally expire within three months of employment termination or one year after the death of the employee. Vested director options generally expire within three months of the resignation or within six months of the death of a director. All options expire upon the occurrence of the tenth anniversary of the grant date or upon other termination events specified in the plans.

or one year after the death of the employee. Vested director options generally expire within three months of the resignation or within six months of the death of a director. All options expire upon the occurrence of the tenth anniversary of the grant date or upon other termination events specified in the plans.

The Company accounts for stock-based compensation to employees using the intrinsic value method. Accordingly, no compensation cost has been recognized for fixed stock option grants since the options granted to date have exercise prices per share of not less than the fair value of the Company’s common stock at the date of the grant.

If compensation cost for stock option grants and the Company’s Employee Stock Purchase Plan had been determined based on the fair value of the grant for the three ~~and nine~~ months ended ~~June 30~~December 31, 2004 and 2003, the effect on the Company’s net loss and loss per share on a pro forma basis would have been as follows:

	Three Months Ended						~~Nine Months Ended~~
	June 30, 2004			June 30, 2003			June 30, 2004			June 30, 2003
	December 31, 2004			December 31, 2003
Net Loss:	$	(19,466	)	$	(8,217	)
As reported	$	~~(18,645~~	)	$	~~(1,261~~	)	$	~~(32,898~~	)	$	~~(7,631~~	)
Less: stock based compensation expense determined under fair value based method for all awards	~~262~~142			~~325~~259			~~782~~			~~975~~
Pro forma	(1819,~~907~~608		)	(18,~~586~~476		)	~~(33,680~~		)	~~(8,606~~		)
Basic and Diluted Loss per Share:
As reported	(1.4552		)	(.1064		)	~~(2.56~~		)	~~(.60~~		)
Pro forma	(1.4753		)	(.1266		)	~~(2.62~~		)	~~(.68~~		)

The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option pricing model. The weighted-average grant date fair value of options granted during the nine months ended June 30, 2004 was $1.41.8

AnThe ~~aggregate~~fair value of each ~~3,439,250~~option ~~and~~grant ~~3,117,562~~is ~~potential~~estimated ~~common~~on ~~shares~~the ~~related~~date ~~to all stock options outstanding as~~ of ~~June~~the ~~30,~~grant ~~2004~~using ~~and~~the ~~2003,~~Black-Scholes option ~~respectively,~~pricing ~~have~~model. There ~~been~~were ~~excluded from~~no ~~the~~options ~~computation~~granted ofduring ~~diluted~~the ~~earnings~~three ~~per~~months ~~share~~ended ~~because~~December 31, ~~they are anti-dilutive~~2004.

An aggregate of 3,194,000 and 3,481,375 potential common shares related to all stock options outstanding as of December 31, 2004 and 2003, respectively, have been excluded from the computation of diluted earnings per share because they are anti-dilutive.

8. Company Benefit Plans

Pursuant to the terms of the Supplemental Retirement Plans that were established for 41 members of the management of the Company, the proceeds in the rabbi trusts, of which they were beneficiaries, were distributed to the participants. This distribution, which totaled approximately $13.4 million and was funded through investments set aside in the aforementioned rabbi trusts, took place in the second quarter ~~ended March~~of ~~31,~~fiscal 2004 and had no effect on the cash, net loss or stockholders’ equity of the Company.

9ITEM 2. ~~Goodwill~~ ~~Impairment~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

~~A Goodwill impairment loss of $9,874 was recognized in~~FORWARD-LOOKING ~~the quarter ended June 30, 2004 due to the decline in the Company’s market value as a result of the circumstances detailed in Note 2 to the condensed consolidated financial statements.~~STATEMENTS

~~ITEM~~Certain information 2contained in this report should be considered “forward-looking statements” as defined by the Private Securities Litigation Reform Act of 1995. These ~~MANAGEMENT’S~~statements ~~DISCUSSION~~represent, ~~AND~~among other ~~ANALYSIS~~things, OFthe ~~FINANCIAL~~expectations, ~~CONDITION~~beliefs, plans and objectives of management with respect to future financial performance or operations and/or assumptions underlying or judgments concerning matters discussed in this document. The words “believe,” “estimate,” “intend,” “anticipate,” “project,” and “expect” and similar expressions are intended to identify forward-looking statements. All forward-looking statements involve certain risks, estimates, assumptions, and uncertainties with respect to future revenues, cash flows, expenses and the cost of capital, among other things.

~~AND~~You should ~~RESULTS~~consider OFthe ~~OPERATIONS~~risks set forth in Item 7 and Exhibit 99.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2004 and elsewhere in the Company’s filings with the Securities and Exchange Commission. The Company undertakes no obligation to revise the forward-looking statements included in this Quarterly Report to reflect any future events or circumstances.

~~FORWARD-LOOKING~~COMPARATIVE RESULTS OF ~~STATEMENTS~~OPERATIONS FOR THE QUARTER ENDED DECEMBER 31, 2004 WITH THE QUARTER ENDED DECEMBER 31, 2003

Certain information contained in this report should be considered “forward-looking statements” 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 performance or operations and/or assumptions underlying or judgments concerning matters discussed in this document. The words “believe,” “estimate,” “intend,” “anticipate,” “project,” and “expect” and similar expressions are intended to identify forward-Introduction

9The Company derives its revenues, earnings and cash flows primarily from the sale of oriented polypropylene films, referred to as OPP films, used in consumer product labeling, flexible packaging and overwrap applications. The Company has a leading position in substantially all of the major high-end OPP films end-use product categories in North America, and offers one of the most extensive product lines in the OPP films industry, ranging from high-margin, specialized label and high barrier films to basic heat sealable lower barrier films.

~~looking~~End ~~statements. All~~users ~~forward-looking~~of ~~statements~~AET’s ~~involve~~films ~~certain~~are ~~risks,~~consumer ~~estimates,~~product ~~assumptions,~~companies whose labels and ~~uncertainties~~packages ~~with~~require ~~respect~~special toattributes ~~future~~such ~~revenues~~as vivid graphics, ~~cash~~exceptional ~~flows~~clarity and moisture barriers to preserve freshness. AET’s OPP films product line is classified into two categories—the Core Business, which is comprised primarily of labels ~~expenses~~and packaging films, and the ~~cost~~High Value Business, which consists of ~~capital~~the Company’s TOppCure® and Platinum films. AET’s film products are utilized by end users such as Coca-Cola®, Pepsi-Cola®, ~~among~~Frito-Lay®, ~~other~~Nabisco®, ~~things~~Kellogg’s®, Hershey Foods®, Sony® and Lipton®.

~~You~~For ~~should consider~~ the ~~risks set~~purposes ~~forth~~of inthis ~~Item~~discussion 7 and ~~Exhibit 99.1 to the Company’s Annual Report on Form~~ ~~10-K~~analysis, ~~for~~ the ~~fiscal~~periods ~~year~~ ended ~~September 30~~December 31, ~~2003~~2004 and ~~elsewhere~~2003 inare ~~the~~referred to as ~~Company’s~~the ~~filings~~first ~~with~~quarters ~~the~~of ~~Securities~~fiscal 2005 and ~~Exchange~~2004, ~~Commission~~respectively. ~~The~~All ~~Company~~dollar ~~undertakes~~amounts noare ~~obligation to revise the forward-looking statements included~~ in ~~this Quarterly Report to reflect any future events or circumstances~~thousands.

~~COMPARATIVE RESULTS OF OPERATIONS FOR THE QUARTER AND NINE MONTHS ENDED JUNE 30, 2004 WITH THE QUARTER AND NINE MONTHS ENDED JUNE 30, 2003~~9

~~Introduction~~Results of Operations

The Company derives its revenues, earnings and cash flows primarily from the sale of oriented polypropylene films, referred to as OPP films, used in consumer product labeling, flexible packaging and overwrap applications. The Company has a leading position in substantially all of the major high-end OPP films end-use product categories in North America, and offers one of the most extensive product lines in the OPP films industry, ranging from high-margin, specialized label and high barrier films to basic heat sealable lower barrier films.

	Three months ended December 31,
	2005		2004
	%		%
Sales	100.0	%	100.0	%
Cost of sales	94.7		83.4
Gross profit	5.3		16.6
Selling, general and administrative	8.1		9.5
Research and development	2.6		2.9
Restructuring expenses	5.6		—
Operating profit (loss)	-11.0		4.1
Interest expense, net	17.9		18.4
Net income (loss)	-28.9		-14.3

~~End users~~First ofQuarter ~~AET’s~~2005 films are consumer product companies whose labels and packages require special attributes such as vivid graphics, exceptional clarity and moisture barriers to preserve freshness. AET’s OPP films product line is classified into two categories – the Core Business, which is comprised 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 users such as Coca-Cola®, Pepsi-Cola®, Frito-Lay®, Nabisco®, Kellogg’s®, Hershey Foods®, Sony® and Lipton®.Results

~~For~~Sales for the ~~purposes~~first quarter of ~~this discussion~~fiscal ~~and~~2005 ~~analysis~~of $67,405 were $9,830, or 17 percent higher compared with the ~~periods~~first ~~ended~~quarter ~~June~~of ~~30,~~fiscal 2004. The ~~and~~majority ~~2003~~of ~~are~~this ~~referred~~increase is attributable to asa 15.5 percent increase in overall unit volume. Net selling prices increased approximately 1.5 percent in the ~~third~~first ~~quarters~~quarter of fiscal 2005 compared to the same quarter in fiscal 2004. ~~and~~The ~~2003~~average selling price reflects a unit price increase of approximately six percent, ~~respectively. All~~which ~~dollar~~was ~~amounts~~largely ~~are~~offset inby ~~thousands~~a less favorable sales mix.

~~Results~~Sales outside the United States were 18.5 percent of ~~Operations~~sales for the first quarter of fiscal 2005 and 19.2 percent of sales for the first quarter of fiscal 2004. Sales outside the United States generated an operating loss of $506 in the first quarter of fiscal 2005 compared with an operating profit of $589 in the first quarter of fiscal 2004.

	Three months ended June 30,				Nine Months ended June 30,
	2004		2003		2004		2003
	%		%		%		%
Sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales	89.2		81.7		86.3		80.4
Gross profit	10.8		18.3		13.7		19.6
Selling, general and administrative	7.4		6.9		8.3		8.9
Research and development	2.5		2.2		2.6		2.9
Restructuring expenses	1.0		—		.3		—
Goodwill impairment	14.2		—		5.0		—
Operating profit (loss)	-14.3		9.2		-2.6		7.8
Interest expense, net	12.6		11.1		14.1		11.9
Net income (loss)	-26.9		-1.9		-16.7		-4.1

Gross profit for the first quarter of fiscal 2005 of $3,556, was $5,977, or 62.7 percent, lower than the first quarter of fiscal 2004. The reduction in gross profit is principally due to a 15 percent increase in unit cost driven by increased raw material costs of approximately 40 percent. Gross margin for the quarter was 5.3 percent versus 16.6 percent in fiscal 2004.

~~THIRD~~Selling, general and administrative expense were $5,456, or 8.1 percent ~~QUARTER~~of ~~2004~~sales, ~~RESULTS~~for the first quarter of fiscal 2005 compared with $5,478, or 9.5 percent of sales, for the same period in fiscal 2004.

~~Sales~~Research ~~for~~and ~~the~~development ~~third~~expense ~~quarter~~was ~~of fiscal 2004 of~~ $691,~~247 were $2~~787,~~235,~~ or ~~3%,~~2.6 ~~higher~~percent ~~compared~~of ~~with~~sales for the ~~third~~ first quarter of fiscal ~~2003.~~2005 ~~The~~versus 3%$1,666, ~~increase~~or ~~in sales was driven by a~~ 2.9% ~~increase~~percent ~~in unit~~of ~~volume~~sales, for ~~which~~the ~~was~~first ~~offset~~quarter byof afiscal ~~5% decrease in average selling price~~2004. ~~The~~ ~~decline~~The inCompany ~~average~~expects ~~selling~~to ~~price~~continue ~~reflects~~to aspend ~~significant~~approximately ~~increase~~3 inpercent ~~the~~of ~~volume~~its ofsales ~~lower~~on ~~price~~the ~~films,~~development ~~which~~of ~~was~~new inhigh ~~part~~value ~~caused by the Company’s inventory reduction initiatives~~films.

10The Company incurred $3,753 in restructuring expenses in the first quarter of fiscal 2005 consisting primarily of professional fees paid in connection with the recapitalization of the Company’s senior notes (see Note 2 to the condensed consolidated financial statements).

~~Sales~~Interest ~~outside~~expense for the ~~United~~first ~~States were~~quarter ~~20%~~of fiscal 2005 of ~~sales~~$12,026 ~~for~~was $1,420 higher than the ~~third~~first ~~Quarter~~quarter of fiscal 2004,. The ~~and~~increase ~~22%~~is primarily due to higher average debt balances in combination with a rise in interest rates. Interest expense for the ~~third~~first quarter of of fiscal ~~2003~~2005 includes approximately $2,600 ~~and~~of ~~generated~~write-offs anof ~~operating~~deferred ~~profit~~debt expenses necessitated by the replacement of ~~$1,704~~the Company’s existing debt with debtor in ~~the~~possession ~~third~~financing. In the first quarter of fiscal 2004 asinterest-expense ~~compared~~included toapproximately an$2,200 ~~operating profit~~ of nonrecurring ~~$678~~expenses ~~during~~associated with the ~~same~~ ~~period~~Company’s inrefinancing ~~fiscal~~on October 3, 2003.

~~Gross~~The ~~profit~~net loss for the ~~third~~ first quarter of ~~$7,509~~fiscal 2005 was $419,~~753~~466, or ~~39%~~$1.52 per share, ~~lower~~compared ~~than~~with ~~the~~a ~~third~~net ~~quarter~~loss of ~~fiscal 2003. Gross margin of 10.~~$8%,217, inor ~~the third fiscal quarter of 2004 was 7~~$.~~5 percentage~~64 ~~points~~per ~~lower~~share, asfor ~~compared to gross margin of 18.3% during~~ the ~~same~~first ~~period~~quarter inof fiscal ~~2003~~2004. ~~The decline in gross margin resulted principally from the impact of lower average selling prices, as indicated above, and substantially higher raw material cost.~~

~~Selling, general and administrative expenses were $5,095, or 7.4% of sales, for the third quarter of fiscal 2004 compared with $4,601, or 6.9% of sales, for the same period in fiscal 2003.~~10

~~Research~~The ~~and~~effective ~~development expense~~income ~~was~~tax ~~$1,749,~~rate ~~or 2.5 percent of sales,~~ for the ~~third~~first ~~quarter~~quarters of fiscal 2005 and 2004, ~~compared~~was ~~with $1,477, or 2~~zero.~~2 percent of sales, for the same period in fiscal 2003.~~

~~Restructuring~~Liquidity ~~expenses~~and ofCapital $695 incurred in the third quarter of fiscal 2004 were comprised primarily of professional fees paid in conjunction with the recapitalization of the Company’s senior notes. A goodwill impairment charge of $9,874 was also recognized in the third quarter of fiscal 2004.Resources

~~Interest~~The ~~expense~~Company entered ofinto a five-year $8100,~~741~~000 incredit facility with GE Commercial Finance on ~~the~~October 3, ~~third~~2003. The ~~fiscal~~credit facility ~~quarter~~originally consisted of ~~2004~~a ~~was~~ $150,~~296~~000 ~~higher~~term ~~than~~loan ~~the~~and ~~third~~a ~~quarter~~$50,000 ofrevolving ~~fiscal~~line ~~2003~~of credit. The Company amended this credit facility on March 23, 2004. This isamendment ~~due~~increased tothe aCompany’s ~~higher~~revolving ~~average~~line ~~debt~~of ~~balance~~credit by $10 million to $60 million and ~~lower~~reduced ~~capitalized~~the EBITDA covenant through the third ~~interest~~quarter of fiscal 2005.

~~The~~On ~~net~~July 30, 2004 ~~loss~~the ~~for~~Company ~~the~~announced ~~third quarter~~that ofit ~~fiscal~~had ~~2004~~reached ~~was~~an ~~$18,645,~~agreement orin ~~$1.45~~principle ~~per~~with six ~~share,~~bondholders ~~compared~~holding ~~with~~over a70 ~~net~~percent in aggregate outstanding principal ~~loss~~amount of ~~$1,261,or~~the $.Company’s 10¾ ~~per~~percent ~~share~~senior notes to recapitalize the senior notes. Pursuant to the agreement in principle, ~~for~~the Company did not pay the interest ~~third~~on ~~quarter~~the ofsenior ~~fiscal~~notes ~~2003~~that became due on July 1, 2004 and January 2, 2005.

~~The~~On ~~effective~~December 1, 2004, ~~income~~the ~~tax~~Company ~~rate~~filed its voluntary, prepackaged plan of reorganization under ~~for~~Chapter 11 of the ~~third~~U.S. ~~quarter~~Bankruptcy Code in the U.S. Bankruptcy Court for the District of ~~fiscal~~Delaware. In ~~2004~~order ~~and~~to fund normal operations during the ~~third~~bankruptcy ~~quarter~~proceedings, the Company entered into an agreement with GE Commercial Finance, which provides $125 million of debtor-in-possession ~~fiscal~~financing ~~2003~~during ~~was~~the Chapter 11 period. The plan and debtor-in-possession financing ~~zero~~facility provides sufficient liquidity during the bankruptcy proceedings.

~~NINE~~The recapitalization ~~MONTHS~~plan, ~~2004~~as ~~RESULTS~~amended and confirmed on January 24, 2005, will involve an exchange of the Company’s 10¾ percent senior notes pursuant to which the noteholders will receive 100 percent of the common equity of the reorganized private Company and new senior notes to be issued by the reorganized private Company. The amended plan provides noteholders of less than $500,000 in principal amount (“small” beneficial holders) 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 contemplated to be distributed to the Company’s existing shareholders, who are not entitled to any distribution under the plan. The Company expects that its existing shareholders now will receive approximately 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 $50 million, a seven-year term and will be redeemable after the first year at declining premiums. Interest will accrue at a rate of 12 percent per annum, and may be paid in cash or in kind, unless certain minimum financial requirements are achieved, in which case the interest must be paid in cash. All of the Company’s existing stock will be canceled. Under the prepackaged Chapter 11 plan, the Company will pay its trade creditors in full on a current basis.

~~Sales~~The ~~for the first nine months~~Company ofexpects ~~fiscal~~to ~~2004~~emerge offrom ~~$197,100~~Chapter ~~were~~11 ~~$7,877,~~before orthe ~~4%,~~end ~~higher~~of ~~compared with~~ the first ~~nine~~ ~~months~~calendar quarter of ~~fiscal 2003~~2005. Subject ~~The~~to 4%certain ~~increase in sales was driven by a 7%~~closing ~~increase in unit volume~~conditions, ~~which~~GE ~~was~~Commercial ~~offset~~Finance byhas aalso 3%committed ~~decrease~~to inprovide ~~average~~$125 ~~selling~~million of ~~price.~~exit ~~The~~financing, ~~decline~~of inwhich ~~average~~$55 ~~selling~~million ~~price~~will ~~principally~~be ~~reflects~~ a ~~significant increase~~revolving incredit ~~the~~facility, ~~volume~~upon consummation of ~~lower price films, which was in part caused by~~ the ~~Company’s~~ ~~inventory~~Chapter ~~reduction~~11 ~~initiatives~~cases.

~~Sales~~The ~~outside~~Company’s liquidity ~~the~~generally ~~United~~depends ~~States~~on cash provided by operating activities and our GE ~~were~~Commercial ~~21%~~Finance ofcredit ~~sales~~facility. ~~for~~The ability of the ~~first~~Company ~~nine~~to ~~months~~continue ofas ~~fiscal~~a going ~~2004~~concern depends, ~~and~~among ~~20%~~other ~~for~~things, on: (i) the Company’s ability to ~~first~~maintain ~~nine~~adequate ~~months~~cash ofon ~~fiscal~~hand; ~~2003,~~(ii) ~~and~~the ~~generated~~Company’s ~~operating~~ability ~~profit~~to generate cash from operations; (iii) the duration and outcome of ~~$4,298~~the recapitalization process; and (iv) the Company’s ability to achieve profitability following a $1recapitalization. Such conditions raise substantial doubt about the Company’s ability to continue as a going concern. The Company,~~153~~ in conjunction with its advisors, is implementing strategies to provide adequate liquidity for the Company. ~~first~~However, ~~nine~~there ~~months~~can ofbe ~~fiscal~~no ~~2004~~assurance ~~and~~as ~~2003~~to ~~respectively~~the success of such efforts.

GrossOperating profit for the first nine months of $26,955 was $10,207, or 27%, lower than the first nine months of fiscal 2003. Gross margin of 13.7% in the first nine months of 2004 was 5.9 percentage points lower as compared to gross margin of 19.6% during the same period in fiscal 2003. The decline in gross margin resulted principally from the impact of lower average selling prices, as indicated above, and substantially higher raw material cost.Activities

~~Selling,~~Operating ~~general~~activities ~~and~~for the first three ~~administrative~~months ~~expenses~~of ~~were~~fiscal ~~$16,369,~~2005 orused ~~8.3%~~$872 of ~~sales~~cash, ~~for~~which was the ~~first~~result ~~nine~~of a net loss ~~months~~before ofdepreciation ~~fiscal~~and ~~2004~~other ~~compared~~non-cash ~~with~~charges of $169,~~912~~257, orpartially offset by cash provided by changes in working capital of $8,385.9% ofThe ~~sales~~most significant contributor to the positive working capital movement was the $13,144 ~~for~~increase in accounts payable and accrued expenses. This increase is due to a combination of factors such as the re-establishment ~~same~~of credit terms with major suppliers, bankruptcy court orders ~~period~~delaying the payment of pre-petition debt and an increase in ~~fiscal~~accrued ~~2003~~interest on the Company’s senior debt.

~~Research and development expense was $5,131, or 2.6% of sales, for the first nine months of fiscal 2004, compared with $5,442, or 2.9% of sales, for the same period in fiscal 2003.~~11

RestructuringInvesting expenses of $695 incurred in the third quarter of fiscal 2004 were comprised primarily of professional fees paid in conjunction with the recapitalization of the Company’s senior notes. A goodwill impairment charge of $9,874 was also recognized in the third quarter of fiscal 2004.Activities

11In the first three months of fiscal 2005, investing activities used $984 of cash for additions to property, plant and equipment.

InterestFinancing expense of $27,784 in the first nine months of fiscal 2004 was $5,265 higher than the first nine months of fiscal 2003. This increase reflects approximately $2,200 of nonrecurring expenses, principally the write-off of deferred financing charges associated with the Company’s prior credit facility, which was refinanced with GE Capital Finance on October 3, 2003. The remaining increase of $3,065 is due to a higher average debt balance and lower capitalized interest.Activities

~~The~~In ~~net~~the ~~loss~~three ~~for~~months ~~the~~ended ~~first~~December 31, ~~nine~~2004 financing activities ~~months~~generated $5,039 of ~~fiscal~~cash ~~2004~~due ~~was~~to $3270,~~898,~~000 orof ~~$2.56~~proceeds ~~per~~received ~~share,~~under ~~compared~~the ~~with~~term loans aprovided ~~net~~as ~~loss~~part of the debtor-in-possession financing package offset by the repayment of the $743,~~631~~750 principal balance on the previous term loan, payment orof $~~.60~~1,774 ~~per~~in ~~share,~~debt ~~for~~issuance ~~the~~costs ~~same~~and ~~period~~a net reduction of ~~fiscal~~$20,374 ~~2003~~in revolving debt.

TheContractual effective income tax rate for the first nine months of fiscal 2004 and the first nine months of fiscal 2003 was zero.Obligations

~~Liquidity~~Below is a summarized list of the Company’s contractual obligations relating to debt and ~~Capital~~non-cancelable ~~Resources~~operating leases, employment and severance agreements at December 31, 2004.

See further discussion of liquidity and capital resources included in Note 2, “Future Operations”, to the financials.

	Total		Less than 1 year		1-3 years		4-5 years		Thereafter

Contractual Obligations (payments due by period):
Term loans (including interest)	$	70,000	$	70,000	$	—	$	—	$	—
Operating leases	3,324		1,424		1,461		439		—
Employment agreements	2,187		1,876		311		—		—
Total Contractual Obligations	$	75,511	$	73,300	$	1,772	$	439	$	—

The ~~Company~~entire ~~entered~~balance ~~into~~of ~~a five-year~~the term loans of $~~100~~70,000 ~~credit~~will ~~facility~~be ~~with~~paid GEoff ~~Capital Finance on October 3,~~as ~~2003. The~~part ~~credit facility originally consisted~~ of athe ~~$50,000~~exit ~~term~~financing ~~loan~~package ~~and~~that awill ~~$50,000~~be ~~revolving~~provided ~~line~~by ofGE ~~credit. The~~Commercial Finance ~~Company~~upon ~~amended~~emergence ~~this~~from ~~credit~~Chapter ~~facility on March 23, 2004~~11. ~~This amendment~~ ~~increased~~The ~~the~~ Company’s ~~revolving~~expects ~~line of credit by $10 million~~ to ~~$60~~emerge ~~million and~~from ~~reduced~~Chapter ~~the~~11 ~~EBITDA~~in ~~covenant through~~ the ~~third~~first calendar quarter of fiscal 2005. ~~The~~ In ~~amended EBITDA requirement~~addition, asno future ~~defined~~contractual ~~in the~~obligation ~~Credit~~amounts ~~Agreement,~~have isbeen ~~$43,072~~listed ~~and~~with ~~$62,000~~respect ~~for~~to the Company’s ~~12-month~~senior ~~periods~~notes ~~ending September~~due ~~30,~~to ~~2004~~the ~~and~~expected ~~September~~recapitalization ~~30,~~of ~~2005,~~these ~~respectively~~notes in fiscal 2005.

On June 16, 2004, the Company announced that it had lowered its earnings expectations for the second half of it its fiscal year 2004. The lower earnings expectations were due primarily to lower than expected volume of shipments and an unexpected significant increase in the cost polypropylene resin, the Company’s primary raw material, compared with the first half of fiscal year 2004 due to the rapid unforeseen escalations in costs of petroleum. Recent price increases have offset a portion of these additional costs; however, market demand has not been sufficient to enable all of the cost increases to be passed on to the Company’s customers. Due to the impact of adverse economic conditions facing the Company’s industry, GE Capital Finance agreed to an amendment to the credit facility on June 30, 2004, to among other things, restate the Company’s minimum EBITDA covenant for the third fiscal quarter 2004 from approximately $35,000 to $30,000. GE Capital Finance subsequently agreed to another amendment to the credit facility on July 30, 2004 to among other things waive any event of default with respect to the non-payment of interest on its senior notes through September 1, 2004, which date may be extended by the lenders. At June 30, 2004, the Company had borrowings of $41,337 pursuant to its revolving line of credit. Unused availability under this revolving credit facility at the end of the third fiscal quarter 2004 was approximately $7,000. Net debt (total debt less cash) at June 30, 2004 was $358,751, representing 99% of total capitalization.

On July 20, 2004 the Company announced that it had received notice from the NASDAQ Listing Qualifications Staff that the Company’s common stock has closed below the minimum $1.00 per share requirement for continued inclusion under Marketplace Rule 4450(a)(5). If the Company cannot demonstrate compliance with the minimum bid price requirement rule or meet certain other requirements on or before January 18, 2005, the NASDAQ Listing Qualifications Staff will provide written notice that the Company’s common stock will be delisted or moved to The NASDAQ SmallCap Market.

Additionally, on August 13, 2004 the Company received notice from the NASDAQ Listing Qualifications Staff that the Company's common stock has not maintained a minimum market value of publicly held shares ("MVPHS") of five million dollars as required for continued inclusion under Marketplace Rule 4450(e)(1). If the Company cannot demonstrate compliance with the minimum market value rule or meet certain other requirements on or before November 11, 2004, the NASDAQ Listing Qualifications Staff will provide written notice that the Company's common stock will be delisted. The Company may apply to transfer its securities to The NASDAQ SmallCap Market. To transfer, the Company must satisfy the continued inclusion requirements for that market.

The Company has $275,000 of 10¾% senior notes due 2011 (the “Senior Notes”) outstanding. The senior notes are unsecured obligations of the Company. The senior notes contain customary covenants and related provisions, including a default provision based on non-payment of interest on the acceleration of debt under other significant debt instruments.

On July 30, 2004 the Company announced that it had reached an agreement in principle with six bondholders holding over 70% in aggregate outstanding principal amount of the Company’s 10¾% senior notes to recapitalize the senior notes. Pursuant to the agreement in principle, the Company will not pay the interest on the senior notes that became due on July 1, 2004.

The recapitalization will be accomplished through a prepackaged chapter 11 plan of reorganization and will involve the exchange of the Company’s 10¾% senior notes pursuant to which the noteholders will receive 100% of the common equity of the reorganized Company and new senior notes to be issued by the reorganized Company. The new senior notes will have an aggregate principal amount of $50 million, a seven-year term and will be redeemable after the first year at declining premiums. Interest will accrue at a rate of 12% per annum, and may be paid in cash or

in kind, unless certain minimum financial requirements are achieved, in which case the interest must be paid in cash. All of the Company’s existing stock will be canceled and the existing stockholders will receive a ratable 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. In addition, the reorganized Company is expected to become a non-reporting company pursuant to the U.S. securities laws; as a result, it is anticipated that there will be restrictions on trading the securities of the reorganized Company.

The Company expects to commence the solicitation of votes from the holders of its senior notes before the end of August. If sufficient votes for a prepackaged chapter 11 plan are obtained from the holders of its senior notes, the Company will file a chapter 11 petition and seek to have the plan confirmed by the bankruptcy court. The Company does not anticipate being subject to the bankruptcy proceeding for more than sixty days. Under U.S. bankruptcy law, at least one-half in number and two-thirds in principal amount of an impaired class entitled to vote on a chapter 11 plan, in both cases counting only those claims actually voting on the plan, must vote in favor of the plan. Although the holders of at least 70% of the aggregate outstanding principal amount of the senior notes have indicated that they would agree to vote in favor of the plan, there can be no assurance that sufficient votes of holders of senior notes, with respect to both the number and principal amount requirements, will be obtained to confirm a prepackaged chapter 11 plan. In addition, consummation of the recapitalization is subject to the completion of definitive documentation and the satisfaction of customary conditions. The Company expects the prepackaged chapter 11 plan to be confirmed by the bankruptcy court and consummated in mid- to late-fall of this year. In the event the prepackaged chapter 11 plan is not consummated the Company would then need to secure additional financing in order to satisfy the outstanding interest on its senior notes, or pursue a conventional chapter 11 plan of reorganization.

The Company has received financing proposals from various lenders, including GE Capital Finance, for financing during the chapter 11 case and for exit financing. The Company expects to have commitments with respect to such financings prior to the time it commences the solicitation of votes on its plan from the holders of its senior notes. In addition, as indicated above, the Company’s bank group, led by GE Capital Finance, has agreed to waive any event of default arising under its current credit facility with respect to the non-payment of interest on its senior notes through September 1, 2004, which date may be extended by the lenders. There can be no assurance that the lenders will extend this date, and the Company does not anticipate that the solicitation of votes will be completed by this date.

The Company’s liquidity generally depends on cash provided by operating activities and our GE Capital Finance credit facility. The ability of the Company to continue as a going concern depends, among other things, on: (i) the Company’s ability to maintain adequate cash on hand; (ii) the Company’s ability to generate cash from operations; (iii) the duration and outcome of the recapitalization process; and (iv) the Company’s ability to achieve profitability following a recapitalization. The Company, in conjunction with its advisors, is working to design and implement strategies to provide adequate liquidity for the Company. However, there can be no assurance as to the success of such efforts.

Operating Activities

Operating activities for the first nine months of fiscal 2004 used $15,518 of cash, which was the result of a net loss before depreciation and other non-cash charges of $853, and cash used from changes in working capital of $14,665. Accounts Receivable increased by $10,663 due to the significant increase in revenues during the third quarter. Inventory at June 30, 2004 increased $4,931 from September 30, 2003. Prepaid expenses and other current assets decreased by $13,224 primarily due to the distribution of funds held in the Supplemental Retirement Plans. This distribution was also the largest contributor to the $14,253 reduction in other liabilities in the nine months ended June 30, 2004.

Investing Activities

In the first nine months of fiscal 2004, investing activities used $42,704 of cash for additions to property, plant and equipment. This includes the repurchase of leased assets of $36,961 in addition to normal capital expenditures of $5,743.

Financing Activities

In the first nine months of fiscal 2004, financing activities generated $55,634 of cash due to $50,000 in borrowings under the term loan facility less debt issuance costs of $2,345, repayment of principal on the term loan of $4,688, and an increase of revolver debt of $12,667.

Contractual Obligations

Below is a summarized list of the Company’s contractual obligations relating to debt and non-cancelable operating leases, employment and severance agreements at June 30, 2004.

	Total		Less than 1 year		1-3 years		4-5 years		Thereafter
Contractual Obligations (payments due by period):
Term loan (including interest)	$	45,313	$	45,313	$	—	$	—	$	—
Operating leases	2,986		1,181		1,211		555		39
Employment agreements	3,285		2,278		1,077
Severance agreements	93		75		18
Total Contractual Obligations	$	51,677	$	48,847	$	2,306	$	555	$	39

Debt obligations include annual principal payments of $6.25 million through September 2008 together with a final payment of $18.75 million due in October 2008 on the term loan. The entire balance due on the term loan has been classified as current as discussed in Note 4 to the condensed consolidated financial statements. See Note 4 to the Condensed Consolidated Financial Statement as it relates to the senior notes.

Inflation

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

In fiscal 2004 and the first quarter of fiscal 2005, the Company has been unsuccessful in passing through price increases to its customers sufficient to offset all of the increases in the prices of its raw materials.

Seasonal Nature of Some OPP Films Markets

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

New Accounting Pronouncements

A summary of the impact of certain new accounting pronouncements on the Company’s business is discussed as follows:

In ~~January 2003~~ December 2004, the ~~FASB~~Financial ~~issued~~Accounting ~~Interpretation No.~~Standards 46Board ~~“Consolidation of Variable Interest Entities~~ (“~~FIN 46~~FASB”), ~~which was~~issued ~~subsequently~~SFAS modified and reissued in December 2003. FIN 46 establishes accounting and disclosure requirements for ownership interests in entities that have certain financial or ownership characteristics. FIN 46123(R), as revised, is generally applicable for the first fiscal year or interim accounting period ending after March 15, 2004. The adoption of the provisions of FIN 46 has not had a material effect on the Company’s consolidated financial statements.“Share-Based

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Payment”. SFAS No. 123(R) revises SFAS 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. SFAS 123(R) will require compensation costs related to share-based payment transactions to be recognized in the financial statements (with limited exceptions). The amount of compensation cost will be measured based on the grant-date fair value of the equity or liability instruments issued. Compensation cost will be recognized over the period that an employee provides service in exchange for the award. This statement is effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. The Company is currently evaluating the impact from this standard on its results of operations and financial 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 by business enterprises of variable interest entities. The FASB then issued FIN 46R, “Consolidation of Variable Interest Entities,” which replaced FIN 46. Application of FIN 46R is required in financial statements of public entities that have interests in variable interest entities or potential variable interest entities commonly referred to as special-purpose entities for periods ending after December 15, 2003. Application by public entities for all other types of entities is required in financial statements for periods ending after March 15, 2004. The Company has adopted both FIN 46 and FIN 46R, and their adoption had no impact on the Company’s financial position or results of operations.

In May 2003, the FASB issued SFAS 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company adopted the provisions of SFAS 150, including the deferral of certain effective dates as a result of the provisions of FASB Staff Position 150-3, “Effective Date, Disclosures, and Transition for Mandatory Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatory Redeemable Non-controlling Interests Under FASB Statement No. 150, ‘Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.’” The Company does not have any significant financial instruments with characteristics of both liabilities and equity as of December 31, 2004.

Critical Accounting Policies

The Company’s discussion and analysis of its financial condition and results of operations are based upon the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities and the reported amounts of revenues and expenses. On an ongoing basis, the Company evaluates its estimates and judgments, including those related to revenue recognition, bad debts, inventories, and intangible assets. Estimates and judgments are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. The Company believes the following critical accounting policies affect its more significant estimates and judgments used in preparation of its consolidated financial statements.

Revenue Recognition. Revenue is recognized on product sales at the point in time when persuasive evidence of an arrangement exists, the price is fixed and determinable, delivery has occurred and there is reasonable assurance of collection of the sales proceeds. The Company generally obtains purchase authorizations from its customers for a specified amount of product at a specified price with delivery terms at the point of shipment. While the Company does provide its customers with a right of return, revenue is not deferred. Rather, a reserve for sales returns is provided in accordance with SFAS No. 48 based on significant historical experience. Shipping and handling costs are treated as a reduction of sales in determining net sales.

Asset Valuation. Asset valuation includes assessing the recorded value of certain assets, including accounts receivable, inventories, property, plant and equipment, goodwill, and intangible assets. Asset valuation is governed by various accounting principles, including SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”, SFAS No. 141 “Business Combinations”, SFAS No. 142 “Goodwill and Other Intangible Assets” and Accounting Research Bulletin No. 43, among others. Management uses a variety of factors to assess valuation depending on the asset. For example, accounts receivable are evaluated based upon an aging schedule. The recoverability of ~~inventories~~ inventories is based primarily upon the age of inventory held and market conditions. Property, plant and equipment, intangible and other assets are evaluated utilizing various factors, including the expected ~~period the asset will be utilized and forecasted cash flows. Changes in judgments on any of these factors could impact the value of the asset.~~

Concentrations of Credit Risk. Financial instruments that are exposed to concentrations of credit risk consist primarily of trade receivables. 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 primarily upon historical bad debt experience and current market conditions. Over the past four years, annual bad debt expense has averaged approximately $750 and ranged from $400 in fiscal 2001 to $1,713 in fiscal 2002. The significant financial deterioration of any significant customers, including a filing for bankruptcy, could impact their ability to satisfy their receivables with the Company. While we believe our allowance for bad debts at June 30, 2004 of $1,421 is adequate, an unanticipated increase in customer bankruptcies or other financial difficulties would require the Company to increase its provision for bad debts and ultimately increase its allowance for future bad debts.13

period the asset will be utilized and forecasted cash flows. Changes in judgments on any of these factors could impact the value of the asset. Due to the decline in the Company’s market value as a result of the prepackaged Chapter 11 filing, a full impairment of goodwill of $9,874 was recognized in fiscal 2004.

Concentrations of Credit Risk. Financial instruments that are exposed to concentrations of credit risk consist primarily of trade receivables. 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 primarily upon historical bad debt experience and current market conditions. Over the past five years, annual bad debt expense has averaged approximately $750 and ranged from $400 in fiscal 2001 to $1,713 in fiscal 2002. The significant financial deterioration of any significant customers, including a filing for bankruptcy, could impact their ability to satisfy their receivables with the Company. While we believe our allowance for bad debts at December 31, 2004 of $1,478 is adequate, an unanticipated increase in customer bankruptcies or other financial difficulties would require the Company to increase its provision for bad debts and ultimately increase its allowance for future bad debts.

Inventories. Inventories, which include material, labor and manufacturing overhead, are stated at the lower of cost or market with cost determined using a weighted average-cost method. The Company determines the market value of its raw ingredients, finished product and packaging inventories based upon references to current market prices for such items as of the end of each reporting period and records a write down of inventory cost to market, when applicable. Polypropylene, the Company’s major raw material, is petroleum based, and prices can fluctuate significantly; and, as discussed above, increases in raw material prices cannot always be passed on to customers. Additionally, from time to time, the Company has been able to utilize secondary markets to liquidate excess inventories. If raw material prices were to increase and the Company were unable to raise its prices or if the Company’s ability to liquidate excess inventories was significantly diminished, additional inventory write-downs may be necessary.

Excess of Cost Over Fair Value of Net Assets Acquired. The excess of cost over fair value of net assets acquired (goodwill) is evaluated annually for impairment in accordance with SFAS 142. We have one reporting unit and estimate fair value based on a variety of market factors, including discounted cash flow analysis, market capitalization, and other market-based data. As indicated in Note 89 to the condensed consolidated financial statements, a full impairment of our goodwill balance of $9,874 was recognized in fiscal 2004. This impairment was necessitated by the circumstances surrounding the Company’s plan to recapitalize its senior notes through a prepackaged Chapter 11 plan of reorganization as detailed in Note 2 to the condensed consolidated financial statements.

statements, a full impairment of our goodwill balance of $9,874 was recognized in the quarter ended June 30, 2004. This impairment was necessitated by the circumstances surrounding the Company’s plan to recapitalize its senior notes through a prepackaged chapter 11 plan of reorganization as detailed in Note 2 to the condensed consolidated financial statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company’s market risks, and the ways it manages them, are summarized in the Management’s Discussion and Analysis of Financial Condition and Results of Operations as of September 30, ~~2003~~ 2004, included in the Company’s Form 10-K for the fiscal year ended September 30, ~~2003~~2004. There have been no material changes in the first ~~third~~ quarter of fiscal ~~2004~~2005 to such risks or the Company’s management of such risks.

ITEM 4. CONTROLS AND PROCEDURES

The Company’s principal executive officer and its principal financial officer undertook an evaluation of the Company’s disclosure controls and procedures (as defined in Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of ~~June 30~~ December 31, 2004 and concluded that the Company’s controls and procedures relating to the processing of routine and non-routine transactions were effective to ensure that information required to be disclosed by the Company in its reports filed under the Securities Exchange Act of 1934 is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

~~On June 1, 2004, Brian P. Crescenzo became the Chief Financial Officer of the Company, in addition to acting as the Secretary and Treasurer of the Company.~~ There were no significant changes in the Company’s internal control over financial reporting or in other factors that could significantly affect the Company’s disclosure controls and procedures subsequent to the date of their evaluation. ~~The~~ The Company is committed to ongoing periodic reviews and enhancements of its controls and their effectiveness and will report to the Company’s shareholders on these reviews and enhancements in the Company’s annual and quarterly reports ~~filed~~ filed under the Securities Exchange Act of 1934.

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PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On December 1, 2004, the Company filed its 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 (see Note 2 to the condensed consolidated financial statements).

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

ITEM 4. Submission of Matters is Vote of Security Holders.

On November 1, 2004, the Company Commenced a Solicitation of Votes for the Company’s prepackaged Chapter 11 plan of reorganization (the “Plan”) in order to recapitalize the Company’s 10 3/4 Series B Notes due 2011 (the “Senior Notes”). The Company selected the votes of two groups of bondholders: "large" beneficial holders of $500,000 or more in principal amount of Senior Notes and "small" beneficial holders of less than $500,000 in principal amount of Senior Notes. The solicitation of votes for the prepackaged Chapter 11 plan was concluded on November 24, 2004 with 95 percent of the dollar amount of “large” beneficial holders, counting only those claims that actually voted, voting in favor of the plan. “Small” note holders holding less than $500,000 in principal amount voted to reject the plan. The vote of the “large” beneficial holders was sufficient to approve the filing of the Plan. See note 2 to the condensed consolidated financial statements.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

A. Exhibits

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.

10.1(a)		Sixth Amendment to Credit Agreement, dated as of October 1, 2004
10.2(a)		Second Amendment to the Restructuring Agreement, dated as of October 1, 2004
10.3(b)		Third Amendment to the Restructuring Agreement dated as of October 18, 2004
10.4(c)		Fourth Amendment to the Restructuring Agreement dated as of October 25, 2004
10.5(d)		Seventh Amendment to the Credit Agreement, dated as of October 29, 2004
10.6(e)		Fifth Amendment to the Restructuring Agreement dated as of November 4, 2004
10.7(f)		DIP Credit Agreement with GE Commercial Finance, as agent, dated as of December 2, 2004
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(g)		Cautionary Statement for Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995.

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(a) Cautionary Statement for Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995.

* Filed herewith.

(a) Filed as an exhibit to the Registrant’s Form 8-K filed on October 6, 2004. (b) Filed as an exhibit to the Registrant’s Form 8-K filed on October 20, 2004. (c) Filed as an exhibit to the Registrant’s Form 8-K filed on October 24, 2004. (d) Filed as an exhibit to the Registrant’s Form 8-K filed on November 1, 2004. (e) Filed as an exhibit to the Registrant’s Form 8-K filed on November 18, 2004. (f) Filed as an exhibit to the Registrant’s Form 8-K filed on December 7, 2004. (g) Contained in Exhibits to the Registrant’s Form 10-K for the fiscal year ended September 30, ~~2003~~2004.

The above referenced exhibits are, as indicated, either filed herewith or have heretofore been filed with the Securities and Exchange Commission under the Securities Act of 1933 and the Securities Exchange Act of 1934 and are referred to and incorporated herein by reference to such filings.

B. Reports on Form 8-K

Current Report on Form 8-K, filed with the Securities and Exchange Commission on June 18, 2004, announcing the Company had lowered its earnings expectations for the second half of its fiscal year ended September 30, 2004.

Current Report on Form 8-K, furnished to the Securities and Exchange Commission on April 29, 2004, presenting the Company’s press release announcing financial results for its second fiscal quarter ended March 31, 2004.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	APPLIED EXTRUSION TECHNOLOGIES, INC.
	(Registrant)
	By:	/s/ Brian P. Crescenzo
		Brian P. Crescenzo
		Vice President, Secretary and Chief Financial Officer
		August 16, 2004
		February 28, 2005

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Filing Compare · APPLIED EXTRUSION TECHNOLOGIES INC /DE