Back to GetFilings.com
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 1, 2000
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-14330
POLYMER GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 57-1003983
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4838 Jenkins Avenue 29405
North Charleston, South Carolina (Zip Code)
(Address of principal executive
offices)
Registrant's telephone number, including area code: (843) 566-7293
Securities registered pursuant to Section 12(b) of the Act:
Title of each Name of each exchange
class of stock: on which registered:
--------------- -----------------------
Common Stock, par value $.01 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether 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 such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the last 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the Company's voting stock held by
nonaffiliates as of March 22, 2000 was $143,504,556. As of March 22, 2000,
there were 32,004,200 shares of common stock, par value $.01 per share
outstanding.
Documents Incorporated By Reference
Notice of 2000 Annual Meeting of Stockholders and Proxy Statement--Part III
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
PART I
ITEM 1. BUSINESS
General
Polymer Group, Inc. (the "Company") is a leading worldwide manufacturer and
marketer of a broad range of nonwoven and oriented polyolefin products. The
Company's principal lines of business include disposable and reusable wiping,
medical, hygiene and industrial and specialty products. Each of these lines of
business include the Company's new family of Miratec(R) products. The Company
believes it is the third largest producer of nonwovens, as well as one of the
largest producers of spunbond and spunmelt products in the world, and employs
the most extensive range of nonwovens technologies which allows it to supply
products tailored to customers' needs at competitive prices. Nonwovens provide
certain qualities similar to those of textiles at a significantly lower cost.
The Company supplies nonwovens to a number of the largest consumer and
industrial products manufacturers in the world and specifically targets market
niches with high margin, high value-added products. The Company has a global
presence with an established customer base in the three major developed
markets of North America, Europe and Japan, as well as in developing markets
such as South America and China. The Company's product offerings are sold
principally to converters that manufacture a wide range of end-use products.
The Company operates twenty-five manufacturing facilities (including its
joint ventures in Argentina, China and Turkey) located in twelve countries and
is currently the only nonwovens producer that utilizes essentially all of the
established nonwovens process technologies. The Company believes that the
quality of its manufacturing operations and the breadth of its nonwovens
process technologies give it a competitive advantage in meeting the current
and future needs of its customers and in leading the development of an
expanded range of applications for nonwovens. The Company continues to make
significant investments in advanced technology in order to increase capacity,
improve quality and develop new low-cost, high-value structures. In December
1998 the Company completed construction and began commercial production on its
first full-scale APEX(TM) line in Benson, NC. In addition, two APEX(TM) lines
are under construction in North Little Rock, Arkansas, with commercialization
anticipated during the second half of 2000. The Company believes that its
broad technological base gives it the capability to design and manufacture
products with optimal cost and functionality. The Company also believes that
its new Miratec(R) products open up significant growth opportunities to the
Company. Working as a developmental partner with its major customers, the
Company utilizes its technological capabilities and depth of research and
development resources to develop and manufacture new products to specifically
meet their needs.
Management has built the Company through a series of capital expansions and
strategic business acquisitions that have broadened the Company's technology
base, increased its product lines and expanded its global presence. The
Company's strategic acquisitions have helped it to establish strong positions
in both the nonwoven and oriented polyolefin markets. Moreover, the Company's
consolidated resources have enabled it to better meet the needs of existing
customers, to reach emerging geographic markets and to exploit niche market
opportunities through customer-driven product development.
History of the Company
The Company was organized on June 16, 1994 and, effective June 24, 1994,
acquired a 100% ownership interest in PGI Polymer, Inc. ("PGI Polymer"). PGI
Polymer was incorporated in September 1992 by The InterTech Group, Inc.
("InterTech") and Golder, Thoma, Cressey, Rauner, Inc. ("Golder, Thoma") to
act as a holding company for entities engaged in the development,
manufacturing and marketing of polyolefin products. Prior to acquisition by
the Company, PGI Polymer acquired from
2
InterTech approximately 27% of the issued and outstanding shares of stock of
Fabrene, Inc. ("Fabrene"), a leading manufacturer of industrial and commercial
oriented polyolefins. In addition, in October 1992, through its wholly-owned
subsidiary FiberTech Group, Inc. ("FiberTech"), PGI Polymer acquired the
Nonwoven Products Division (the "Predecessor") of Scott Paper Company, a major
supplier of nonwovens for diapers and other hygiene products. Together,
Fabrene and FiberTech offered substantial representation in both the nonwoven
and oriented polyolefin markets.
In connection with the Company's formation (at which point it became the
100% parent owner of PGI Polymer), the Company purchased from Cydsa, S.A. all
of the outstanding shares of Bonlam, S.A. de C.V. ("Bonlam"), the largest
manufacturer of spunbond nonwoven fabrics in Mexico (the "Bonlam
Acquisition"). In addition, the Company purchased the remaining 73% interest
in Fabrene from InterTech. The Bonlam Acquisition not only presented the
opportunity to meet existing customers' needs in Mexico, but also provided the
Company with the additional nonwoven capacity necessary to meet growing demand
in North American and Latin American markets. In March 1995, the Company
purchased the Johnson & Johnson Advanced Material Company and Chicopee B.V.
(collectively, "Chicopee"), leading manufacturers and marketers of nonwoven
roll and converted products in North America and Europe (the "Chicopee
Acquisition"), and consummated certain other restructuring and financing
transactions. Through the Chicopee Acquisition, the Company gained substantial
manufacturing and technological resources, consumer market recognition of
certain of Chicopee's branded product lines and a significant presence in the
nonwovens markets for wipes and medical products.
In May 1996, the Company completed its initial public offering (the "IPO")
of 11.5 million shares of Common Stock at a price of $18.00 per share. The
Company also refinanced its outstanding indebtedness by retiring a portion of
its 12 1/4% Senior Notes due 2002 issued in 1994 and establishing its credit
facility with The Chase Manhattan Bank ("Chase Bank"). In August 1996, the
Company completed its acquisition of the business of PNA Corp. and its wholly-
owned subsidiary, FNA Polymer Corp., a North Carolina based nonwovens
producer. The acquisition strengthened the Company's strategic position in the
hygiene materials market and broadened its offering of medical and
agricultural materials.
On December 19, 1997, DT Acquisition Inc., a special purpose subsidiary of
the Company, completed the purchase of approximately 98% of the outstanding
common shares of Dominion Textiles Inc. ("Dominion") for Cdn $14.50 per share
and 96% of the outstanding preferred shares for Cdn $150 per share. On January
29, 1998, DT Acquisition Inc. acquired all remaining common and preferred
shares of Dominion. Concurrently, the apparel fabrics business of Dominion was
sold to Galey & Lord, Inc., pursuant to a Purchase Agreement dated October 27,
1997, for approximately $464.5 million and the Company acquired the assets and
liabilities which comprised the nonwovens and industrial fabrics operations
for approximately $351.6 million.
During 1999, the Company acquired an 80% interest in Vateks Tekstil Sanayi
ve Ticaret AS, a corporation based in Turkey and Nanhai Nanxin Nonwoven Co.
Ltd., a China based company. The Company also acquired the assets of Molnlycke
Health Care AB, a Sweden based corporation. These entities manufacture and
market nonwoven products for predominant use in consumer and industrial
applications. The combined purchase price for these acquisitions, including
assets acquired during 1999 for which separate disclosure is not considered
significant, totaled $19.3 million.
Industry Overview
The Company competes primarily in the worldwide market for nonwovens, which
is approximately a $9.8 billion market with an average annual sales growth
rate of 8% expected over each of the next five years, according to industry
sources. The nonwovens industry began in the 1950s when paper, textile and
chemical technologies were combined to produce new fabrics and products with
the attributes of textiles but at a significantly lower cost. Today, nonwovens
are used in a wide variety of consumer and industrial products as a result of
their superior functionality and relatively low cost.
3
The nonwovens industry has benefitted from substantial improvements in
technology over the past several years, which have increased the number of new
applications for nonwovens, and therefore increased demand. The Company
believes, based on industry sources, that demand in the developed markets of
North America, Western Europe and Japan will increase 7-8% in each of the next
five years, while the emerging markets are forecasted to grow at a rate of 10%
per annum. In the developed markets, growth will be driven primarily by new
applications for nonwovens and price increases driven by raw material price
increases, while growth in the emerging markets will be volume driven as per
capita income rises in these countries. According to industry sources,
worldwide consumption of nonwovens has grown an average of 8% per year over
the last ten years. The Company believes that future growth will depend upon
the continuation of improvements in raw materials and technology, which should
result in the development of high-performance nonwovens, leading to new uses
and markets at a lower cost than alternative materials.
Nonwovens are categorized as either disposable (approximately 55% of
worldwide industry sales with an average annual growth rate of 8.3%, according
to industry sources), which is the category in which the Company primarily
competes, or durable (approximately 45% of worldwide industry sales and an
average annual growth rate of 7.8%, according to industry sources). The
largest end uses for disposable nonwovens are for hygiene applications,
including disposable diapers, feminine sanitary protection, baby wipes, adult
incontinence products, and healthcare applications, including surgical gowns
and drapes and woundcare sponges and dressings. Other disposable end uses
include wipes, filtration media, protective apparel and fabric softener
sheets. Durable end uses include apparel interlinings, furniture and bedding
construction sheeting, cable wrap, electrical insulation, alkaline battery
cell separators, automotive components, geotextiles, roofing membranes, carpet
backing, agricultural fabrics, durable papers and coated and laminated
structures for wallcoverings, upholstery, shoes and luggage.
The Company also competes in the North American market for oriented
polyolefin products. Chemical polyolefin products include woven, slit-film
fabrics produced by weaving narrow tapes of slit film and characterized by
high strength-to-weight ratios, and also include twisted slit film or
monofilament strands. While the broad uncoated oriented polyolefin market is
primarily focused on carpet backing fabric and, to a lesser extent,
geotextiles and bags, the markets in which the Company primarily competes are
made up of a large number of specialized products manufactured for niche
applications. These markets include demanding industrial packaging
applications such as lumberwrap, steel wrap and fiberglass packaging, as well
as high-strength protective coverings and specialized components that are
integrated into a variety of industrial and consumer products.
With its development of the Miratec(R) fabrics using the Company's
proprietary APEX(TM) manufacturing process, the Company can access new markets
for its products. Products that incorporate fabric woven or knitted using the
majority of traditional fibers are potential markets for Miratec(R).
Miratec(R) production requires substantially less labor than traditional
textile manufacturing, requires less capital investment per unit of output,
offers greater design flexibility, and provides enhanced turnaround times for
the end-use customer. Furthermore, the APEX(TM) process can create unique
products which cannot be manufactured through traditional processes.
Competitive Strengths
The Company believes that it has a strong competitive position attributable
to a number of factors, including the following:
Technological Leadership. The Company believes it is a technological
leader in developing and manufacturing nonwovens and oriented polyolefin
products. The Company is currently the only nonwovens producer that
utilizes all of the commercially available nonwoven process technologies
and holds multiple patents on yield and efficiency-enhancing manufacturing
processes. In addition, the Company enjoys exclusive use of the proprietary
APEX(TM) structural
4
web technology. The depth and expertise of the Company's research and
development staff have enabled the Company to develop innovative products,
frequently in response to specific customer needs. In addition, the Company
focuses its research and development efforts on increasing its production
capacity and improving its production processes, developing innovative
products for new markets based on the Company's existing technologies, and
developing new process technologies to enhance existing business and to
enter new markets. The Company's multinational presence enables it to
globally coordinate advanced production initiatives and to co-develop new
products directly with international customers. In 1998, the Company
established the Advanced Materials Center in Mooresville, NC. The center
brings together scientists, engineers, and project managers to develop
products based on customers' needs and emerging market demands.
State-of-the-Art Manufacturing Capabilities. The Company believes that it
has state-of-the-art manufacturing capabilities in both its nonwovens and
oriented polyolefin product lines. As a result, the Company is one of the
lowest cost producers in the markets in which it participates. The Company
continues to enhance its production lines with internally developed,
proprietary manufacturing technologies and has the capability of using
multiple polymer/resin streams. The December 1998 completion of the first
full-scale commercial APEX(TM) line in Benson, North Carolina and the
current construction of two APEX(TM) lines in North Little Rock, Arkansas
demonstrates the Company's commitment to maintaining and developing state-
of-the-art manufacturing capabilities.
Significant Market Share in Primary Markets. The Company has developed
significant market share in its primary markets. For example, the Company
believes that it has a significant share of the noncaptive hygiene, wipes
and cable wrap markets and that it is the leading North American
manufacturer of lumberwrap and oriented uncoated material used for
lamination to paper for the steel wrap market. The Company believes it has
been able to secure and maintain its position in these markets as a result
of its commitment to, and reputation for, innovation and quality.
Experienced and Committed Management Team. The Company's senior
management team has significant experience in the manufacturing and
marketing of polyolefin products, with an average of 14 years of experience
in this industry. Management's experience includes acquiring and employing
assets at a low cost as well as increasing asset utilization and
productivity. Management also has a successful track record of acquiring,
improving and integrating complementary businesses into the Company.
Key Customer Relationships. The Company has successfully cultivated long-
term relationships with key customers, such as Johnson & Johnson and The
Procter & Gamble Company ("Procter & Gamble"), who are market leaders in
their industries. The Company currently works closely as a partner with
Procter & Gamble and other customers to develop advanced components for
next generation disposable diapers, consumer wipes and other consumer
products.
By focusing on the Company's competitive strengths, management has
positioned the Company to address the current and future needs of the
nonwovens and oriented polyolefin markets by providing high value, low cost
products to converters and end-use customers in specialty niche application
markets on a global basis.
Business Strategy
The Company's goals are to continue to grow its core businesses while
developing new technologies to capitalize on a broad range of new high-margin
product opportunities and expanded geographic markets. The Company intends to
be the leading supplier in its chosen markets by delivering high-quality
products and services at competitive prices. To achieve these goals, the
Company's primary strategy focuses on:
5
Strategic Acquisitions. The Company continuously evaluates opportunities
to make acquisitions which complement and expand its core businesses or
which have the potential to increase market share and distribution
capability in high-margin complementary products.
Continuous Improvement Aimed at Increasing Product Value and Reducing
Costs. The Company is committed to continuous improvements throughout its
business to increase product value and lower costs. The Company's product
design teams continuously seek to incorporate new materials and operating
capabilities that enhance or maintain performance specifications while
lowering the cost of raw materials used in the products. State-of-the-art
equipment, much of which has been developed internally and is proprietary
to the Company, has been designed and installed to continuously measure
process parameters and maintain very narrow tolerances, resulting in higher
levels of product consistency and reduced waste. The Company also holds
multiple patents protecting yield and efficiency-enhancing manufacturing
processes developed by its research and development staff. As a result, the
Company's manufacturing processes utilize less material and produce a
higher quality finished product than many of its competitors.
Development of New Products. Through the use of the proprietary APEX(TM)
technology, the Company is developing a market for its Miratec(R) products
as a "textile replacement." Miratec(R) fabrics have the look, feel, stength
and durability of traditional woven or knit textiles, but are manufactured
with substantially less labor at significantly faster speeds, and with far
greater design capability. This combination of characteristics has led to
several announced agreements with leading manufacturers, among them
Guilford of Maine (a division of Interface, Inc.), The Pillow Factory,
WestPoint Stevens, Inc., Hunter-Douglas, Sommers, Inc. and CMI Enterprises.
End-use applications include home furnishings, floor coverings, home
fashion/decorating, automotive interior fabrics, apparel, medical,
industrial and specialty uses. The Company's strategy for Miratec(R) is one
of aggressive expansion. The Company installed its first full-scale
commercial Miratec(R) line in 1998, and installation began on two
additional lines in 1999. Commercialization of the two additional lines is
anticipated during the second half of 2000 and will result in additional
joint development and supply agreements with a wide variety of leading
manufacturers.
Entrance into New Markets. The Company believes that it has significant
additional market opportunities for its existing products. The Company is
actively expanding its capabilities to take advantage of the penetration
and growth of its core products internationally, particularly in developing
countries. Over the past six years, the Company's sales from manufacturing
facilities outside the United States have increased from approximately $28
million in 1993 to approximately $400 million in 1999.
Expansion of Capacity through Capital Projects. The Company continuously
evaluates opportunities to expand its existing production capacity and
enhance production technologies. Since 1992, the Company has invested in
capital improvements to debottleneck existing operations and to add new
capabilities and capacity.
Through the implementation of its business strategy, management has achieved
an increase in net sales from $165.3 million in 1994 to $889.8 million in
1999. Management also achieved an increase in gross margins from 21.9% in 1994
to 26.9% in 1999, and an increase in earnings before interest, taxes,
depreciation and amortization ("EBITDA") from $23.9 million in 1994 to
approximately $186.8 million in 1999.
Products
The Company develops, manufactures and sells a broad array of nonwovens,
oriented polyolefin products, conulated/apertured (perforated) films,
laminated composite structures, converted wipes and sorbent products. Sales
are focused in four general product categories that provide opportunities to
leverage the Company's advanced technology and substantial capacity. These
product categories
6
include industrial and specialty, wiping, medical and hygiene products. (See
Note 13 "Segments and Geographic Information" in the accompanying financial
statements.)
Marketing and research and development teams are committed to constant
product innovation in conjunction with the Company's customers. Close long-
term relationships with end-use customers enable the Company to better
understand its customers' needs and have been a significant factor in the
Company's success. In addition, the research and development teams seek to
develop high value-added specialty products using existing assets in order to
leverage the Company's capabilities to produce high-margin products.
Industrial and Specialty Products
The industrial and specialty products category represented approximately
36%, 35% and 21% or $317.7 million, $283.5 million and $111.5 million, of the
Company's net sales for 1999, 1998 and 1997, respectively. Demand for this
product category is distributed among hundreds of end-use applications. The
Company's strength in engineering and extensive range of process technologies
are well-suited to meet the specialized functionality requirements in this
category. Customers typically have very specific performance and quality
requirements that demand efficient design and process conditions, both of
which are strategic strengths of the Company.
The Company produces a broad range of industrial and specialty products
which includes alkaline battery cell separators, cable wrap, electrical
insulation, electronic clean room wipes, manufactured housing bottom board
fabric (used to enclose the underside of a manufactured home), home furnishing
dust covers, mattress pads, window coverings, protective apparel, protective
coverings (such as golf green covers), pool covers, salt pile covers, landfill
covers and athletic field covers. The Company also produces a variety of
flexible packaging products utilizing coated and uncoated oriented polyolefin
fabrics such as: Arbrene(R) and Lumber Guard(R) lumberwrap, which are used to
cover high-quality kiln dried lumber for shipping and storage; fiberglass
packaging tubes, which hold batts of insulation under compression for
efficient storage and shipping; balewrap for synthetic and cotton fibers;
steel and aluminum wrap, which are used to cover mill rolls; and coated
oriented bags for animal feed, specialty chemicals and mineral fibers. The
Company is a leading supplier of several of these products, including wetlaid
alkaline battery cell separators, oriented lumberwrap, fiberglass packaging
and bottom board fabric and cable wrap.
The Company's industrial and specialty products are produced primarily using
wetlaid, adhesive bond, through-air fusible fiber bond, spunbond, oriented
polyolefin, lamination and APEX(TM) technologies. The Company sells its
industrial products primarily to converters/distributors, except for alkaline
battery cell separators, fiberglass packaging, cable wrap, electrical
insulation, and lumberwrap in the U.S. Pacific Northwest, which are sold by
the Company's sales team.
Wiping Products
The wiping products category represented approximately 17%, 13% and 20%, or
$147.4 million, $107.6 million and $105.2 million, of the Company's net sales
for 1999, 1998 and 1997, respectively. The Company has a complete line of
wiping products used for food service, institutional, light industrial,
janitorial and consumer markets. Wiping products are categorized as either
"premoistened/wet wipes" or "dry wipes." The Company primarily participates in
the "dry wipes" portion of the market, which the Company believes to have
greater potential for growth and to contain more opportunities for value-
added, specialty products. Within the "dry wipes" category, the three general
end-use products are food service wipes, consumer household wipes and
industrial and specialty wipes. The Company maintains a significant market
share in the food service and consumer categories and is a leading producer
for the industrial category. Industry sources estimate that the global sales
growth for wiping products will be approximately 9.5% per year through 2004.
7
Products within this category include branded and unbranded, light to
heavyweight, cloth wipes, towels and aprons marketed under the Chix(R), Chix
Plus(R), Chifonet(TM) and Lerette(TM) trademarks. Medium to heavyweight open
weave towels are marketed under the Fresh Guy(R) trademark and dry,
pretreated, water activated cleaning and sanitizing wipes for the food service
industry are marketed under the Quix(TM) trademark. Products for the
industrial, janitorial and institutional markets include light to heavy-duty
towels and cloths sold under a variety of trademarks including Worxwell(R),
Durawipe(R), Masslinn(R) and Stretch 'N Dust(R). Specialty wipes consist of
products designed to meet specialized customer requirements and specifications
and include clean room wipes used in the electronics, pharmaceutical and
office equipment cleaning industries, tack cloth used by automotive paint
shops, and aerospace wipes for solvent and sealant wiping, surface preparation
and general purposes. The Company produces multi-use kitchen wipes, including
The Clorox Company's Handiwipes(R) brand pursuant to a long-term supply
agreement. The Company also markets a line of catering products in Europe,
including banquet rolls, table napkins and tablecloths.
The Company utilizes primarily dry form resin bonded and spunlace
technologies to manufacture its wiping products and also maintains dedicated
converting and packaging equipment. The Company is a leading manufacturer and
marketer of wiping products as a result of its wide range of products,
aggressive sales and marketing team, wide distribution base of dealers and
food service distributors, and reputation for excellent customer and technical
support, including the ability to meet specific customer requirements.
Medical Products
The medical products category represented approximately 12%, 12% and 16%, or
$108.4 million, $92.7 million and $86.7 million, of the Company's net sales
for 1999, 1998 and 1997, respectively. The Company's medical products are used
in the production of wound care sponges and dressings, disposable surgical
packs, apparel such as operating room gowns, drapes for operating rooms and
face masks, shoe covers and head wear.
Johnson & Johnson is the Company's primary customer for medical products
pursuant to a supply agreement. The supply agreement grants the Company the
exclusive right through 2005 to supply Johnson & Johnson with all of its
nonwoven fabric requirements, including those for its entire line of medical
products as well as for other disposable hygiene and wiping applications,
provided that the Company's prices remain competitive with the market place.
The Company believes, based on industry sources, that the global growth rate
for nonwovens in medical applications will be approximately 5-6% per annum
through 2004, with much of the growth coming from the expansion of traditional
product lines. Industry sources expect that the Occupational Safety and Health
Administration rules will continue to stimulate demand for protective
applications for workers, including those in funeral homes, linen services and
law enforcement agencies in addition to healthcare workers.
Surgical gowns and drapes containing a protective barrier against fluid
strike-through are the largest and fastest growing applications for nonwoven
fabrics in the medical products category. The Company produces Duralace(R)
spunlace fabric for this product group and treats the surface of the fabric to
give it high fluid repellency required for this application. The sponge and
dressing products are produced using spunlace apertured technologies.
8
Hygiene Products
The hygiene products category represented approximately 36%, 40% and 43%, or
$316.3 million, $319.1 million and $231.9 million, of the Company's net sales
for 1999, 1998 and 1997, respectively. The Company produces a variety of
nonwoven materials for use in the production of diapers, training pants,
feminine sanitary protection, baby wet wipes and adult incontinence products.
The Company believes that it has a significant share of the noncaptive North
American topsheet market. Industry sources estimate that the global growth
rate for SMS and spunbond nonwovens in hygiene applications will average 7-8%
through 2004, primarily due to an increase in the amount of nonwoven fabric
per diaper, increased unit demand from developing countries and the rise in
use of adult incontinence products.
The Company has a broad product offering and provides customers with a full
range of specialized components for unique or distinctive products, including
the Isolite(TM) topsheet, Multi-Strike(TM) transfer layer, Soft Touch(TM)
backsheet fabric, Dry-Fit(TM) leg cuff fabric, Reticulon(R) sanitary
protection facings, absorbent pads for the Serenity(R) incontinence guard and
Carefree(R) panty shield and Ensorb(TM) absorbent cores. The Company produces
a spunlace "wet wipe" product for baby wipe applications in Europe. This
product fills the gap between standard nonwoven wipes and a quality cloth wipe
and has improved thickness and softness over standard airlaid pulp products.
The Company is the only supplier capable of providing all of the thermal bond,
adhesive bond, spunbond, SMS, coextruded apertured films, through-air bond,
spunlace and ultrasonic bond technologies which are required in the
manufacture of these products.
The Company has a significant relationship with Procter & Gamble and
supplies a full range of products to Procter & Gamble on a global basis. The
Company's marketing and research and development teams work closely as
partners with Procter & Gamble and other customers in the development of next
generation products. The Company believes that this technical support ensures
that the Company's products will continue to be incorporated into such
customers' future product designs. The Company also has significant
relationships with private-label producers of diaper products and is the
primary supplier to Johnson & Johnson Personal Products for its nonwoven
requirements for sanitary protection and adult incontinence products.
New Product Development
The Company continually develops new products that incorporate the Company's
wide variety of technologies. The Company's research and development efforts
have been focused on increasing its production capacity and improving its
production processes, developing products based on the Company's existing
technologies for new markets and developing new process technologies to
enhance existing businesses and allow entry into new businesses. The depth and
expertise of the Company's research and development staff, who work closely
with manufacturing and marketing personnel, have enabled the Company to
develop innovative products, frequently in response to specific customer
needs. In addition, the Company frequently enters into collaborative
partnerships with its customers to develop and manufacture next-generation
products in response to its customers' changing needs. The Company believes
that these developmental partnerships enhance customer relationships by
ensuring that the Company's products will continue to be incorporated into its
customers' future products.
APEX(TM), a new surface-forming technology, has the potential to displace
traditional woven textile, knitted and composite products in many applications
because of its favorable price to value ratio. The advanced APEX(TM)
structural web process produces textile replacement fabrics with intricate,
three-dimensional structures marketed under the name Miratec(R). This
technology, which can be applied to
9
most sheet structures fabricated from fibers or films, enhances the Company's
ability to gain competitive advantages by increasing manufacturing efficiency
and product differentiation. Pursuant to an agreement with Johnson & Johnson,
products for healthcare applications that are manufactured utilizing the
APEX(TM) structural web technology may only be sold to Johnson & Johnson. In
all other markets, such as automotive headliners, home furnishings, apparel
and filtration products, the Company may manufacture and freely market
products utilizing the APEX(TM) structural web technology.
Marketing and Sales
The Company sells to over 1,000 customers in the domestic and international
marketplace. Approximately 55%, 27%, 12%, 5% and 1% of the Company's 1999 net
sales were from manufacturing facilities in the United States, Europe, Canada,
Latin America and Asia respectively. Procter & Gamble and Johnson & Johnson,
the Company's largest customers, accounted for 21% and 16% respectively of the
Company's 1999 net sales. Sales to the Company's top 20 customers represented
approximately 55% of the Company's 1999 net sales.
The Company employs direct sales representatives, a number of whom are
engineers and each of whom has advanced technical knowledge of the Company's
products and the applications for which they are used. The Company's sales
representatives are active in the Company's new product development efforts
and are strategically located in the major geographic regions in which the
Company's products are utilized. The oriented polyolefin products are sold
primarily through a well-established network of converters and distributors.
Converters add incremental value to the Company's products and service the
small order size requirements typical of many end users.
In certain new high-margin niche markets, the Company has maintained control
over distribution by dealing directly with the end-use customer through its
sales representatives. The Company offers a broad range of high-quality
products, utilizing multiple technologies and materials, allowing its sales
force to offer customers what the Company believes is the widest range and
variety of nonwoven and oriented polyolefin products available to meet
customers' requirements from a single source.
Manufacturing Processes
General. The Company's competitive strengths include low-cost, high-quality
manufacturing processes and a broad range of process technologies, which allow
the Company to offer its customers the best-suited product for each respective
application. Additionally, the Company has made significant capital
investments in modern technology and has developed proprietary equipment and
manufacturing techniques. The Company believes that it exceeds industry
standards in productivity, reduction of variability and delivery lead time.
The Company has a wide range of manufacturing capabilities (many of which are
patented) that allow it to produce specialized products which, in certain
cases, cannot be reproduced in the market. Substantially all of the Company's
manufacturing sites have plant-wide real time control and monitoring systems
that constantly monitor key process variables using a sophisticated closed
loop system of computers, sensors and custom software.
Nonwovens. The Company believes that it has the most comprehensive array of
nonwoven manufacturing technologies in the industry. The Company has
capabilities spanning the entire spectrum of nonwoven technologies, including
the following manufacturing processes: spunbond/
meltblown/spunbond, ("SMS"), spunbond/meltblown/meltblown/spunbond, ("SMMS"),
thermal and adhesive bond, spunlace, wet-laid, dry-laid, film extrusion and
aperturing, through-air bond and ultrasonic bond among other processes.
10
Nonwoven rollgoods typically have three process steps: web formation, web
consolidation or bonding and finishing. Web formation is the process by which
previously prepared fibers, filaments or films are arranged into loosely held
networks called webs, batts or sheets. In each process, the fiber material is
laid onto a forming or conveying surface, which may be dry, wet or molten. The
dry-laid process utilizes textile fiber processing equipment, called "cards,"
that have been specifically designed for high-capacity nonwoven production.
The carding process converts bales of entangled fibers into uniform oriented
webs that then feed into the bonding process. The wet-laid process utilizes
papermaking technology in which the fibers are suspended in a water slurry and
deposited onto a moving screen, allowing the water to pass through and the
fibers to collect. In a molten polymer-laid process, extrusion technology is
used to transform polymer pellets into filaments, which are laid on a
conveying screen and interlocked by thermal fusion. In this process, the fiber
formation, web formation and web consolidation are generally performed as a
continuous simultaneous operation, making this method very efficient.
Web consolidation is the process by which the fibers or film are bonded
together using either mechanical, thermal, chemical or solvent means. The
bonding method greatly influences the end products' strength, softness, loft
and utility. The principal bonding processes are thermal bond, resin or
adhesive bond, hydroentanglement or spunlace, binder fiber or through-air
bond, calender, spunbond, meltblown, SMS, ultrasonic bond and needlepunch.
Thermal bond utilizes heated calender rolls with embossed patterns to point
bond or fuse the fibers together. In the resin bond process, an adhesive,
typically latex, is pad rolled onto the web to achieve a bond. Spunlace, or
hydroentanglement, uses high pressure water jets to mechanically entangle the
fibers. Through-air bonding takes place through the fusion of bi-component
fibers in a blown hot air drum. Spunbond and meltblown take advantage of the
melt properties of the resins and may use thermal fusion with the aid of
calender rolls. SMS and SMMS are integrated processes of combining spunbond
and meltblown sheets in a laminated structure, creating very strong,
lightweight and uniform fabrics. Ultrasonic bonding utilizes high-frequency
sound waves that heat the bonding sites. Needlepunch is a mechanical process
in which beds of needles are punched through the web, entangling the fibers.
Finishing, or post-treatment, adds value and functionality to the product
and typically includes surface treatments for fluid repellency, aperturing,
embossing, laminating, printing and slitting. Spunlace and resin bond systems
also have a post-treatment drying or curing step. Certain products also go
through an aperturing process in which holes are opened in the fabric,
improving absorbency.
Oriented Polyolefins. The oriented/film process begins with plastic resin,
which is extruded into a thin plastic film or into monofilament strands. The
film is slit into narrow tapes. The slit tapes or monofilament strands are
then stretched or "oriented," the process through which it derives its high
strength. The tapes are wound onto spools which feed weaving machines or
twisters. In the finishing process, the product is coated for water or
chemical resistance, ultraviolet stabilization and protection, flame
retardancy, color and other specialized characteristics. In the twisting
process, either oriented slit tapes or monofilament strands are twisted and
packaged on tightly spooled balls for distribution as agricultural and
commercial twine. The Company operates coating lines that have been equipped
with the latest technology for gauge control, print treating, lamination,
anti-slip finishes and perforation. At its Portland, Oregon facility, the
Company laminates oriented products to paper and has the additional capability
of printing up to four colors on one of the widest printing presses in North
America.
Outside Converting. The Company has a long-term manufacturing and
distribution contract with BMR through August 2003. The agreement provides for
BMR to convert, warehouse and distribute a wide range of wiping products.
Under the agreement, the Company sells base fabrics produced at its Benson,
North Carolina manufacturing facility to BMR. BMR then cuts, folds and
packages the fabric
11
using Company-owned machinery in a dedicated facility on behalf of the Company
in accordance with specifications. BMR distributes the products directly to
the Company's customers, while marketing, sales and order processing are the
responsibility of the Company.
Competition
The Company's primary competitors in its industrial and specialty product
markets are: E.l. du Pont de Nemours & Co. ("DuPont"), Freudenberg Nonwovens
L.P. ("Freudenberg"), Kimberly-Clark Corporation ("Kimberly-Clark"), Dexter
Corp., Kuraray Co., Ltd., BBA Group plc, Lohmann GmbH & Company and Lantor
International (an operating unit of IPT Group) for nonwoven products; and
Intertape Polymer Group Inc. and Amoco Fabrics and Fibers Co. for oriented
polymer products. Generally, product innovation and performance, quality,
service and cost are the primary competitive factors, with technical support
being highly valued by the largest customers.
The Company's primary competitors in its wiping product markets are DuPont
in nonwovens and paper producers such as Fort James Corporation ("Fort
James"), Atlantic Mills Inc. and Kimberly-Clark. Generally, cost, distribution
and utility are the principal factors considered in food service and
janitorial end uses, while product innovation, performance and technical
support are the most important factors for specialty and industrial wiping
products.
The Company's primary competitors in its medical product markets are DuPont,
BBA Group plc and Dexter Corp. in the United States and DuPont and Dexter
Corp. in Europe. Price, distribution, variety of product offerings and
performance are the chief competitive factors in this product category.
The Company's primary competitors in its hygiene product categories are BBA
Group plc in North America, BBA Group plc and J.W. Suominen O.Y. in Europe and
Uni-Charm Corp. in Japan. Generally, product cost, technical capacity and
innovation and customer relationships are the most important competitive
factors in these markets.
A number of the Company's niche product applications are sold into select
specialized markets, and the Company believes that the size of such markets,
relative to the amount of capital required for entry, as well as the advanced
manufacturing processes and technical support required to service them,
present barriers to entry. There can be no assurance, however, that these
specialized markets, particularly as niche product applications become
standardized over time, will not attract additional competitors that could
have greater financial, technological, manufacturing and marketing resources
than the Company.
Raw Materials
The primary raw materials used in the manufacture of most of the Company's
products are polypropylene and polyester fiber, polyethylene and polypropylene
resin, and, to a lesser extent, rayon, tissue paper and cotton. The prices of
polypropylene and polyethylene are a function of, among other things,
manufacturing capacity, demand and the price of crude oil and natural gas
liquids. Historically, the prices of polypropylene and polyethylene resins
have fluctuated, such as in late 1994 and early 1995 when resin prices
increased by approximately 60%. The sharp increase was primarily due to short-
term interruptions in production capacity and increased demand as a result of
an expanding economy. By mid-1995, supply had increased, thereby reducing
prices. In general, prices declined during 1996, 1997, 1998 and 1999. See
Recent Developments within this Annual Report on Form 10-K.
There can be no assurance that the prices of polypropylene and polyethylene
will not increase in the future or that the Company will be able to pass on
such increases to its customers as it has generally been able to do in the
past. A significant increase in the prices of polyolefin resins that cannot be
passed on to customers could have a material adverse effect on the Company's
results of operations and financial condition.
12
The Company's major supplier of polypropylene fiber is FiberVisions L.L.C.,
and its major supplier of polyethylene is Novacor Chemicals Inc. The Company's
major suppliers of rayon fiber are Lenzing Fibers Corp. and Courtaulds Fibers,
Inc., and its major suppliers of polyester are Wellman, Inc. and DuPont. The
Company primarily purchases its polypropylene resin from Indelpro, S.A. de
C.V., Montell North America Inc. and Exxon Chemical Company, and purchases its
tissue paper from Crown Vantage Inc. The Company is also a purchaser of
polyolefin films from Huntsman Packaging Corporation, polyester fiber from
Swicofil A.G. Textile Services and Du Pont, and polyacrylate powder (SAP) from
Elf Atochem.
The Company believes that the loss of any one or more of its suppliers would
not have a long-term material adverse effect on the Company because other
manufacturers with whom the Company conducts business would be able to fulfill
the Company's requirements. However, the loss of certain of the Company's
suppliers could, in the short term, adversely affect the Company's business
until alternative supply arrangements were secured. In addition, there can be
no assurance that any new supply arrangements entered into by the Company will
have terms as favorable as those contained in current supply arrangements. The
Company has not experienced any significant disruptions in supply as a result
of shortages in raw materials.
Environmental
The Company is subject to a broad range of federal, foreign, state and local
laws and regulations relating to the pollution and protection of the
environment. Among the many environmental requirements applicable to the
Company are laws relating to air emissions, wastewater discharges and the
handling, disposal and release of solid and hazardous substances and wastes.
Based on continuing internal review and advice from independent consultants,
the Company believes that it is currently in substantial compliance with
applicable environmental requirements.
The Company is also subject to laws, such as CERCLA, that may impose
liability retroactively and without fault for releases or threatened releases
of hazardous substances at on-site or off-site locations. The Company is not
aware of any releases for which it may be liable under CERCLA or any analogous
provision.
Actions by federal, state and local governments in the United States and
abroad concerning environmental matters could result in laws or regulations
that could increase the cost of producing the products manufactured by the
Company or otherwise adversely affect demand for its products. For example,
certain local governments have adopted ordinances prohibiting or restricting
the use or disposal of certain plastic products, such as certain of the
plastic wrapping materials which are produced by the Company. Widespread
adoption of such prohibitions or restrictions could adversely affect demand
for the Company's products and thereby have a material adverse effect upon the
Company. In addition, a decline in consumer preference for plastic products
due to environmental considerations could have a material adverse effect upon
the Company.
The Company does not currently anticipate any material adverse effect on its
operations, financial condition or competitive position as a result of its
efforts to comply with environmental requirements. Some risk of environmental
liability is inherent, however, in the nature of the Company's business, and
there can be no assurance that material environmental liabilities will not
arise. It is also possible that future developments in environmental
regulation could lead to material environmental compliance or cleanup costs.
Patents and Trademarks
The Company considers its patents and trademarks, in the aggregate, to be
important to its business and seeks to protect this proprietary know-how in
part through United States and foreign
13
patent and trademark registrations. The Company maintains over 100 registered
trademarks and over 150 patents in the United States. In addition, the Company
maintains certain trade secrets for which, in order to maintain the
confidentiality of such trade secrets, it has not sought patent protection.
From time to time, the Company enters into transactions whereby technology is
licensed or made available to developmental partners within the industry.
Inventory and Backlogs
Unfilled orders as of January 1, 2000 and January 2, 1999 amounted to
approximately $106.6 million and $103.1 million, respectively.
Research and Development
The Company continually invests in research and development, focusing its
efforts on increasing production capacity, improving production processes, and
developing new product and process technologies. The Company expanded its
research and development capability by opening its Advanced Material Center in
Mooresville, NC in September 1998. The Company spent approximately $17.2,
$13.2 and $9.6 million in research and development during 1999, 1998 and 1997,
respectively.
Seasonality
Use and consumption of the Company's products exhibits some seasonality,
with lighter volumes generally experienced in the first quarter of the fiscal
year.
Employees
As of January 1, 2000, the Company employed approximately 4,500 persons. Of
this total, approximately 1,700 employees are represented by labor unions or
trade councils that have entered into separate collective bargaining
agreements with the Company. Approximately 12% of the Company's labor force
are covered by collective bargaining agreements that will expire in 2000. From
time to time the Company experiences new unionizing efforts, however, the
Company considers its employee relations to be very good.
Recent Developments
On March 14, 2000, the Company issued a press release announcing that, based
upon preliminary estimates, the Company expects first quarter earnings per
diluted share to be between $.06 and $.08 and full year earnings per diluted
share to be in the range of $.90 and $1.10 per diluted share versus $1.04 per
diluted share in fiscal year 1999. Additionally, the Company expects first
quarter EBITDA to be approximately $40 million. The Company identified factors
affecting first quarter earnings, including (i) changes and delays in orders
for selected high margin products from certain consumer products customers;
(ii) timing variances between raw material price increases and the pass-
through of those increases to customers; and (iii) period expenses associated
with two new APEX(TM) lines.
14
DESCRIPTION OF CERTAIN INDEBTEDNESS
Amended Credit Facility
General. In connection with the Company's acquisition of Dominion on January
29, 1998 (the "Nonwovens Acquisition"), the Company, the other "Borrowers"
named therein and the "Domestic Non-Borrower Guarantors" named therein amended
its credit facility with a group of lenders (the "Lenders") and with Chase
Bank, as Agent. On April 9, 1999, the Company further amended its credit
facility to add an additional term loan in the amount of $50.0 million. The
Company borrowed the entire amount of the additional term loan and used the
proceeds to reduce amounts outstanding under the revolving portion of the
credit facility. The Company's Credit Facility (as amended, the "Amended
Credit Facility") currently provides for secured revolving credit borrowings
with aggregate commitments of up to $325.0 million and aggregate term loans of
$175.0 million.
Subject to certain terms and conditions set forth in the Amended Credit
Facility, a portion of the Amended Credit Facility may be used for letters of
credit. A portion of the Amended Credit Facility may be denominated in Dutch
guilders and in Canadian dollars. All indebtedness under the Amended Credit
Facility (including any hedging arrangements provided by a Lender) is
guaranteed, on a joint and several basis, by each and all of the direct and
indirect domestic subsidiaries of the Company.
Security. The Amended Credit Facility and the related guarantees are secured
by (i) a lien on substantially all of the assets of the Company and its
domestic subsidiaries, (ii) a pledge of all or a portion of the stock of the
domestic subsidiaries of the Company and of certain non-domestic subsidiaries
of the Company, (iii) a lien on substantially all of the assets of direct
foreign borrowers (to secure direct borrowings by such borrowers), and (iv) a
pledge of certain secured intercompany notes issued to the Company or one of
its subsidiaries by non-domestic subsidiaries.
Maturity; Prepayment. The revolving credit portion of the Amended Credit
Facility terminates in June 2003. The term loan portion terminates in December
2005. The loans will be subject to mandatory prepayment out of proceeds
received in connection with certain casualty events, asset sales and debt
issuances.
Interest Rates. The interest rate applicable to borrowings under the Amended
Credit Facility shall be based on, in the case of U.S. dollar denominated
loans, the Base Rate referred to therein or the Eurocurrency Base Rate
referred to therein for U.S. dollars, at the Company's option, plus a
specified margin. In the event that a portion of the Amended Credit Facility
is denominated in Dutch guilders, the applicable interest rate shall be based
on the applicable Eurocurrency Base Rate referred to therein for Dutch
guilders, plus a specified margin. In the event that a portion of the Amended
Credit Facility is denominated in Canadian dollars, the applicable interest
rate shall be based on the Canadian Base Rate referred to therein (plus a
specified margin) or the Bankers' Acceptance Discount Rate referred to therein
at the Company's option. The applicable margin for loans bearing interest
based on the Base Rate or Canadian Base Rate will range from 0% to 1.25% and
for loans bearing interest on a Eurocurrency Rate will range from 0.75% to
2.50%, based on the Company's ratio of total consolidated indebtedness to
consolidated EBITDA calculated on a rolling four quarter basis.
Covenants; Events of Default. The Amended Credit Facility contains covenants
and events of default customary for financings of this type.
8 3/4% Notes
On March 5, 1998, the Company issued $200 million of the 8 3/4% Senior
Subordinated Notes due 2008 (the "8 3/4% Notes") to Chase Securities Inc.
("Chase") in a transaction not registered under the
15
Securities Act in reliance upon an exemption under the Securities Act pursuant
to an indenture dated as of March 1, 1998 among the Company, the guarantors
named therein and Harris Trust & Savings Bank, as trustee. Chase subsequently
placed the 8 3/4% Notes with qualified institutional buyers in reliance on
Rule 144A under the Securities Act. The 8 3/4% Notes accrued interest from
their original issuance date at a rate of 8 3/4% per annum, and had customary
provisions regarding redemption, changes in control, ranking, asset sales and
other restrictive covenants. The 8 3/4% Notes were unsecured senior
subordinated indebtedness of the Company and are subordinated in right of
payment to all existing and future senior indebtedness of the Company.
On July 1, 1998, pursuant to its Registration Statement on Form S-4 (Reg.
No. 333-55863) filed with the Commission on June 2, 1998 and declared
effective on July 1, 1998, the Company offered to exchange $1,000 principal
amount of its 8 3/4% Senior Subordinated Notes due 2008, Series B (the "March
1998 Notes") for each $1,000 principal amount outstanding of the 8 3/4% Notes
(the "July 1998 Exchange Offer"). The July 1998 Exchange Offer was undertaken
to comply with certain Registration Rights granted to holders of the 8 3/4%
Notes in connection with the initial offering pursuant to the Registration
Rights Agreement dated February 27, 1998. The form and terms of the March 1998
Notes exchanged in the July 1998 Exchange Offer are the same as the form and
terms of the 8 3/4% Notes (which they replaced) except that (i) the March 1998
Notes bear a Series B designation, (ii) the March 1998 Notes have been
registered under the Securities Act and, therefore, do not bear legends
restricting the transfer thereof, and (iii) the holders of the March 1998
Notes are not entitled to any registration rights. The July 1998 Exchange
Offer was consummated on August 7, 1998, with all $200 million principal
amount of 8 3/4% Notes being tendered for exchange. As a result, the Company
currently has $200 million of March 1998 Notes outstanding; no 8 3/4% Notes
remain outstanding.
The March 1998 Notes Indenture contains several covenants, including:
limitations on indebtedness; limitations on certain restricted payments;
limitations on transactions with affiliates; restrictions on the disposition
of proceeds of asset sales; limitations on liens; limitations on dividend and
other payment restrictions affecting certain subsidiaries; limitations on
guarantees by certain subsidiaries; and limitations on certain transactions
including mergers and sales of assets.
9% Notes
On July 3, 1997, the Company issued $400 million of the 9% Senior
Subordinated Notes due 2007 (the "9% Notes") to Chase in a transaction not
registered under the Securities Act in reliance upon an exemption under the
Securities Act pursuant to an indenture dated as of July 1, 1997 among the
Company, the guarantors named therein and Harris Trust & Savings Bank, as
trustee. Chase subsequently placed the 9% Notes with qualified institutional
buyers in reliance on Rule 144A under the Securities Act. The 9% Notes accrued
interest from their original issuance date at the rate of 9% per annum, and
had substantially similar provisions as the March 1998 Notes with respect to
redemption, changes in control, ranking, asset sales and other restrictive
covenants. The 9% Notes were unsecured senior subordinated obligations of the
Company and were subordinated in right of payment to all existing and future
senior indebtedness of the Company.
On September 3, 1997, pursuant to Registration Statement on Form S-4 (Reg.
No. 333-32605) filed with the Commission on August 1, 1997 and declared
effective on September 3, 1997, the Company offered to exchange $1,000
principal amount of its 9% Senior Subordinated Notes due 2007, Series B (the
"September 1997 Notes") for each $1,000 principal amount outstanding of the 9%
Notes (the "September 1997 Exchange Offer"). The September 1997 Exchange Offer
was undertaken to comply with certain Registration Rights granted to holders
of the 9% Notes in connection with the initial offering pursuant to the
Registration Rights Agreement dated July 3, 1997. The form and terms of the
September 1997 Notes offered in the September Exchange Offer are the same as
the form and terms of the 9% Notes (which they replaced) except that (i) the
September 1997 Notes bear a Series B
16
designation, (ii) the September 1997 Notes have been registered under the
Securities Act and, therefore, do not bear legends restricting the transfer
thereof, and (iii) the holders of the September 1997 Notes are not entitled to
any registration rights. The September Exchange Offer was consummated on
October 3, 1997, with all $400 million principal amount of 9% Notes being
tendered for exchange. As a result, the Company currently has $400 million of
September 1997 Notes outstanding; no 9% Notes remain outstanding.
The September 1997 Notes Indenture contains several covenants, including:
limitations on indebtedness; limitations on certain restricted payments;
limitations on transactions with affiliates; restrictions on the disposition
of proceeds of asset sales; limitations on liens; limitations on dividend and
other payment restrictions affecting certain subsidiaries; limitations on
guarantees by certain subsidiaries; and limitations on certain transactions
including mergers and sales of assets.
2003 Notes and 2006 Notes
On November 1, 1993, Dominion Textile (USA) Inc. ("DT USA"), a subsidiary of
Dominion, had issued $150.0 million of 8 7/8% Guaranteed Senior Notes due 2003
(the "2003 Notes") pursuant to an indenture, dated as of November 1, 1993,
among DT USA, Dominion, as the parent guarantor, and First Union National
Bank, as successor trustee (the "2003 Notes Indenture"). On April 1, 1996, DT
USA had issued an additional $125.0 million of 9 1/4% Guaranteed Senior Notes
due 2006 (the "2006 Notes") pursuant to an indenture, dated as of April 1,
1996, among DT USA, Dominion and First Union National Bank, as successor
trustee (the "2006 Notes Indenture"). Both the 2003 Notes and 2006 Notes are
senior Indebtedness of DT USA and are guaranteed on a joint and several basis
by DT USA and Dominion. DT USA became a wholly-owned subsidiary of the Company
in connection with the Nonwovens Acquisition.
On December 23, 1997, following the Company's initial take-up of Dominion
shares in its tender offer for Dominion Stock, DT USA made tender offers to
purchase any and all outstanding 2003 Notes and 2006 Notes (the "2003 Tender
Offer" and "2006 Tender Offer," respectively), and solicited consents to
certain proposed amendments to the 2003 Notes Indenture and 2006 Notes
Indenture. The tender of notes in the 2003 Tender Offer and 2006 Tender Offer
was contingent upon such holder's consent to the proposed amendments to the
2003 Notes Indenture and the 2006 Notes Indenture, until, in each case, such
time that the requisite number of consents to approve the proposed amendments
had been obtained and a supplemental indenture relating thereto had been
executed. The proposed amendments eliminated substantially all of the
protective covenants in each of the 2003 Notes Indenture and the 2006 Notes
Indenture.
On January 16, 1998, DT USA made a separate, unconditional offer to purchase
any and all outstanding 2003 Notes at a price equal to 101% of their aggregate
principal amount (the "Change of Control Offer"). The Change of Control Offer
was made solely for the purpose of satisfying certain provisions of the 2003
Indenture, which required such an offer to be made within 30 days of a change
in control of DT USA or Dominion.
On January 28, 1998, the expiration date for the 2003 Tender Offer and the
2006 Tender Offer, DT USA accepted for repurchase $145.6 million of 2003 Notes
and $124.5 million of 2006 Notes. DT USA accepted for repurchase $25,000 of
the remaining 2003 Notes in the Change of Control Offer. As of January 1,
2000, DT USA had $4.4 million aggregate principal amount of 2003 Notes and
$0.3 million aggregate principal amount of 2006 Notes outstanding.
Safe Harbor Statement
This Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as
17
amended. In addition, from time to time, the Company or its representatives
have made or may make forward-looking statements orally or in writing. Such
forward-looking statements may be included in, but not limited to, various
filings made by the Company with the Securities and Exchange Commission, press
releases or oral statements made with the approval of an authorized executive
officer of the Company. Actual results could differ materially from those
projected or suggested in any forward-looking statements as a result of a
variety of factors and conditions, including: adverse economic conditions,
competition in the Company's markets, fluctuations in raw material costs, and
other risks detailed in documents filed by the Company with the Securities and
Exchange Commission.
ITEM 2. PROPERTIES
The Company and its subsidiaries operate the following principal
manufacturing plants and other facilities, all of which are owned, except as
noted. All of the Company's owned properties are subject to liens in favor of
the lenders under the Company's credit facilities.
18
Total
Location Square Feet Principal Function
-------- ----------- --------------------------------------------------------
North Little Rock,
Arkansas (Plant 1).... 415,000 Manufacturing and Warehousing
North Little Rock,
Arkansas (Plant 2).... 119,000 Manufacturing and Warehousing
Rogers, Arkansas....... 126,000 Manufacturing
Rogers, Arkansas....... 15,000(1) Warehousing
Gainesville, Georgia... 121,000(1) Manufacturing and Warehousing
Kingman, Kansas........ 182,000 Manufacturing, Marketing, Warehousing and Administration
Dayton, New Jersey..... 30,000(2) Administration
Landisville, New
Jersey................ 245,000 Manufacturing, Sales, Marketing and Research and
Development
Vineland, New Jersey... 83,500(3) Manufacturing
Albany, New York....... 60,000 Manufacturing and Warehousing
Benson, North Carolina. 469,000 Manufacturing, Sales, Marketing and Warehousing
Raleigh, North
Carolina.............. 5,300(1) Administration
Mooresville, North
Carolina.............. 114,300 Manufacturing, Sales, Marketing, Research and
Development and Warehousing
Mooresville, North
Carolina.............. 8,200(1) Administration, Sales and Marketing
Mooresville, North
Carolina.............. 356,000 Manufacturing, Warehousing and Administration
Portland (Clackamas),
Oregon................ 30,000 Manufacturing
North Charleston, South
Carolina.............. 16,500(3) Corporate
Clearfield, Utah....... 100,000 Manufacturing and Warehousing
Waynesboro, Virginia... 175,000 Manufacturing, Warehousing, Marketing
and Research and Development
Waynesboro, Virginia... 125,500 Warehousing
Mississauga, Ontario... 2,900(1) Sales and Marketing
North Bay, Ontario..... 350,000 Manufacturing
North Bay, Ontario..... 80,000(1) Warehousing
Magog, Quebec.......... 990,100 Manufacturing, Marketing, Warehousing and Administration
Sherbrooke, Quebec..... 16,823 Warehousing
Montreal, Quebec....... 68,500(1) Administration
Bailleul, France....... 305,584 Manufacturing, Marketing, Warehousing and Administration
Neunkirchen, Germany... 108,000 Manufacturing, Sales and Marketing
Cuijk, The Netherlands. 364,000 Manufacturing, Sales, Marketing, Warehousing and
Research and Development
Nijmegan, The
Netherlands........... 3,200 Administration
Tilburg, The
Netherlands........... 29,052 Manufacturing, Marketing, Warehousing and Administration
Buenos Aires,
Argentina............. 79,000(4) Manufacturing, Marketing, Warehousing and Administration
Guadalajara, Mexico.... 6,200(1) Sales, Marketing and Warehousing
Cali, Colombia......... 68,000 Manufacturing, Marketing, Warehousing and Administration
Monterrey, Mexico...... 2,325(1) Sales, Marketing and Warehousing
Mexico City, Mexico.... 9,850(1) Sales, Marketing and Warehousing
19
San Luis Potosi, Mexico. 100,000 Manufacturing, Warehousing and Marketing
Istanbul, Turkey........ 113,700(5) Manufacturing, Marketing, Warehousing and Administration
Nanhai, China........... 213,050(6) Manufacturing, Marketing, Warehousing and Administration
- --------
(1) Leased.
(2) The Company owns this 239,200 square foot facility, leases it to an
unaffiliated tenant, and subleases 30,000 square feet from such tenant.
The tenant can terminate the Company's sublease upon 12 months' notice.
(3) Leased from entities affiliated with one of the Company's stockholders.
See "Certain Relationships and Related Transactions."
(4) 50% interest joint venture (DNS) with Sauler Group.
(5) 80% interest joint venture (Vateks) with Erol Tezman. The sales, marketing
and administrative offices are in a 15,000 square foot leased facility.
(6) 80% interest joint venture (Nanhai Nanxin Non-Woven Co. Ltd.) with Nanhai
Chemical Fiber Enterprises Co.
ITEM 3. LEGAL PROCEEDINGS
The Company is currently a party to various claims and legal actions which
arise in the ordinary course of business. The Company believes such claims and
legal actions, individually and in the aggregate, will not have a material
adverse effect on the business, financial condition or results of operations
of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on the New York Stock Exchange, symbol
PGI. The Company paid a $.02 per share cash dividend during the fourth quarter
of 1999. The Company currently contemplates that it will continue to pay
comparable quarterly cash dividends. The following table sets forth for the
calendar periods indicating the high and low market prices of the Company's
common stock.
1999
------------
High Low
------ -----
First Quarter................................................. $12.69 $8.75
Second Quarter................................................ 12.69 9.63
Third Quarter................................................. 15.75 10.88
Fourth Quarter................................................ 20.50 14.50
1998
------------
High Low
------ -----
First Quarter................................................. $13.63 $9.69
Second Quarter................................................ 12.88 10.38
Third Quarter................................................. 12.19 7.75
Fourth Quarter................................................ 11.50 7.50
As of March 29, 2000, there were 392 holders of record.
20
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain historical financial information of
the Company. The statement of operations data for each of the five years ended
and the balance sheet data as of January 1, 2000, January 2, 1999, January 3,
1998, December 28, 1996 and December 30, 1995 have been derived from audited
financial statements. The table should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the financial statements of the Company and related notes thereto
and other information included elsewhere in this Annual Report on Form 10-K.
Year Ended
-------------------------------------------------------------
January 1, January 2, January 3, December 28, December 30,
2000 1999 1998 1996 1995
---------- ---------- ---------- ------------ ------------
(In Thousands, Except Per Share Data)
Statement of Operations:
Net sales............... $ 889,795 $ 802,948 $ 535,267 $521,368 $ 437,638
Cost of goods sold...... 650,185 599,894 402,058 389,013 333,606
--------- --------- --------- -------- ---------
Gross profit........... 239,610 203,054 133,209 132,355 104,032
Selling, general and
administrative
expenses............... 119,385 97,499 74,600 70,207 61,744
--------- --------- --------- -------- ---------
Operating income....... 120,225 105,555 58,609 62,148 42,288
Other (income) expense:
Interest expense, net.. 71,882 67,444 30,499 33,641 37,868
Investment income--
(gain) on marketable
securities, net....... (2,942) (795) (11,880) -- --
Foreign currency and
other................. (739) 806 (452) 2,955 22,811
Income taxes........... 18,584 14,157 13,009 10,730 5,216
--------- --------- --------- -------- ---------
Income (loss) before
extraordinary item and
cumulative effect of
change in accounting
principle............. 33,440 23,943 27,433 14,822 (23,607)
Extraordinary item, net
of income tax benefit.. -- (2,728) (12,005) (13,932) --
Cumulative effect of
change in accounting
principle, net of
income tax benefit..... -- (1,511) -- -- --
--------- --------- --------- -------- ---------
Net income (loss)....... 33,440 19,704 15,428 890 (23,607)
Redeemable preferred
stock dividends and
accretion.............. -- -- -- (3,020) (4,839)
--------- --------- --------- -------- ---------
Net income (loss)
applicable to common
stock.................. $ 33,440 $ 19,704 $ 15,428 $ (2,130) $ (28,446)
========= ========= ========= ======== =========
Per Share Data:
Income (loss) before
extraordinary item and
cumulative effect of
change in accounting
principle per common
share--basic........... $ 1.05 $ 0.75 $ 0.86 $ 0.43 $ (1.39)
========= ========= ========= ======== =========
Income (loss) before
extraordinary item and
cumulative effect of
change in accounting
principle per common
share--diluted......... $ 1.04 $ 0.75 $ 0.86 $ 0.43 $ (1.39)
========= ========= ========= ======== =========
Cash dividends.......... $ .02 $ -- $ -- $ -- $ --
========= ========= ========= ======== =========
Operating and other
data:
Cash provided by
operating activities... $ 107,400 $ 74,074 $ 18,362 $ 36,097 $ 11,556
Cash (used in) provided
by investing
activities............. (224,620) 131,343 (491,901) (86,422) (333,208)
Cash provided by (used
in) financing
activities............. 106,766 (194,440) 485,953 64,391 327,636
Gross margin (a)........ 26.9% 25.3% 24.9% 25.4% 23.8%
EBITDA (b).............. $ 186,771 $ 164,880 $ 98,921 $ 98,915 $ 72,122
EBITDA margin (c)....... 21.0% 20.5% 18.5% 19.0% 16.5%
Depreciation and
amortization........... $ 66,546 $ 59,325 $ 40,312 $ 36,767 $ 29,834
Capital expenditures.... 189,996 90,096 60,144 26,739 47,842
Balance sheet data (at
end of period):
Cash and equivalents and
short-term investments. $ 56,295 $ 58,308 $ 50,190 $ 37,587 $ 18,088
Working capital......... 188,905 212,456 220,025 93,154 61,558
Total assets............ 1,466,246 1,282,967 1,627,753 708,115 637,981
Total debt, excluding
short-term bridge
financing.............. 987,092 866,499 745,136 382,242 450,878
Minority interest....... -- -- 54,730 -- --
Redeemable preferred
stock, dividends and
accretion.............. -- -- -- -- 44,339
Shareholders' equity.... 242,284 220,125 199,090 195,918 13,752
See Notes to Selected Consolidated Financial Data.
21
Notes to Selected Consolidated Financial Data
(a) Gross margin represents gross profit as a percentage of net sales.
(b) EBITDA is defined as operating income plus depreciation, amortization and
Mexican statutory employee profit sharing and is presented because it is
generally accepted as providing useful information regarding a company's
ability to service and/or incur debt. EBITDA should not be considered in
isolation from or as a substitute for net income, cash flows from
operating activities and other consolidated income or cash flow statement
data prepared in accordance with generally accepted accounting principles
or as a measure of profitability or liquidity.
(c) EBITDA margin represents EBITDA as a percentage of net sales.
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
The following table sets forth the percentage relationships to net sales of
certain income statement items.
Fiscal Year Ended
--------------------------------
January 1, January 2, January 3,
2000 1999 1998
---------- ---------- ----------
Net sales:
Hygiene..................................... 35.5% 39.8% 43.3%
Medical..................................... 12.2 11.5 16.2
Wiping...................................... 16.6 13.4 19.7
Industrial and specialty.................... 35.7 35.3 20.8
----- ----- -----
100.0 100.0 100.0
Cost of goods sold:
Material.................................... 37.9 41.2 44.1
Labor....................................... 8.9 8.1 7.9
Overhead.................................... 26.3 25.4 23.1
----- ----- -----
73.1 74.7 75.1
----- ----- -----
Gross profit................................ 26.9 25.3 24.9
Selling, general and administrative expenses. 13.4 12.1 13.9
----- ----- -----
Operating income............................. 13.5 13.2 11.0
Other (income) expense:
Interest expense, net....................... 8.1 8.4 5.7
Investment income, (gain) on marketable
securities, net............................ (0.3) (0.1) (2.2)
Foreign currency and other.................. (0.1) 0.1 (0.1)
----- ----- -----
Income before income taxes, extraordinary
item and cumulative effect of change in
accounting principle........................ 5.8 4.8 7.6
Income taxes................................. 2.1 1.8 2.5
----- ----- -----
Income before extraordinary item and
cumulative effect of change in accounting
principle................................... 3.7 3.0 5.1
Extraordinary item, net of income tax
benefit..................................... -- (0.3) (2.2)
Cumulative effect of change in accounting
principle, net of income tax benefit........ -- (0.2) --
----- ----- -----
Net income................................... 3.7% 2.5% 2.9%
===== ===== =====
Comparison of Year Ended January 1, 2000 and January 2, 1999
The following table sets forth components of the Company's net sales and
operating income by segment for 1999 and the corresponding increase/(decrease)
over 1998:
Fiscal Year
------------- Increase/ % Increase/
1999 1998 (Decrease) (Decrease)
------ ------ ---------- -----------
(Dollars in thousands)
Net sales:
Hygiene.................................. $316.3 $319.1 $(2.8) (0.9)%
Medical.................................. 108.4 92.7 15.7 17.0
Wiping................................... 147.4 107.6 39.8 37.0
Industrial and specialty................. 317.7 283.5 34.2 12.1
------ ------ -----
$889.8 $802.9 $86.9 10.8 %
====== ====== =====
Operating income:
Hygiene.................................. $ 52.1 $ 44.5 $ 7.6 17.1 %
Medical.................................. 21.5 15.8 5.7 36.3
Wiping................................... 23.1 15.7 7.4 47.4
Industrial and specialty................. 23.5 29.6 (6.1) (20.6)
------ ------ -----
$120.2 $105.6 $14.6 13.8 %
====== ====== =====
23
Net Sales
The increase in net sales of 10.8% for fiscal 1999 versus 1998 was due
primarily to organic growth, including new product introductions, and
international expansion.
Hygiene sales decreased 0.9% year over year as a result of increased
competition and pricing pressure in the North American spunmelt markets.
Medical sales increased 17.0% year over year as a result of new products and
increased demand from several leading customers. Wipes sales increased 37.0%
year over year due to the release of new products and new programs introduced
by leading customers. Industrial and specialty sales increased 12.1% as a
result of organic growth within non-agricultural product lines, new product
introductions and sales growth in international markets.
Operating Income
The increase in operating income of 13.8% for fiscal 1999 versus 1998 was
due to increased sales from both existing and new products and lower raw
material costs as a percentage of sales due primarily to increased sales of
higher margin products. As a percentage of sales, overhead costs and selling,
general and administrative costs increased over 1998 due primarily to the
introduction of new products. In addition, certain new products are more labor
intensive, resulting in a trend of slightly increased labor costs over 1998.
Hygiene operating income increased 17.1% year over year as a result of a
better product mix that included higher margin products, offset by increased
competition and pricing pressure surrounding certain technologies, and
increased manufacturing costs associated with capital expansions. Medical
operating income increased 36.3% year over year as a result of increased
sales. Wiping operating income increased 47.4% year over year as a result of
new product introductions. Industrial and specialty operating income decreased
20.6% year over year, despite higher sales, as a result of incremental costs
associated with new manufacturing programs and increased research and
development and customer service costs stemming from new products. In
addition, certain agricultural products within the industrial and specialty
segment were negatively impacted by the weak farm economy.
Other
Interest expense increased $4.4 million, from $67.4 million in 1998 to $71.9
million in 1999. The increase in interest expense is principally due to a
higher average amount of indebtedness outstanding. Interest expense as a
percentage of sales decreased year over year.
The Company recognized gains on marketable securities of $2.9 million in
1999 compared to gains of $0.8 million in 1998. In addition, foreign currency
and other gains were approximately $0.7 million in 1999 compared to losses of
approximately $0.8 million in 1998.
The Company provided for income taxes of $18.6 million in 1999, representing
an effective tax rate of 35.7%. During 1998 the Company provided for income
taxes of $14.2 million, representing an effective tax rate of 37.2% before
extraordinary item and cumulative effect of accounting change. The provision
for income taxes at the Company's effective rate during 1999 and 1998 differed
from the provision for income taxes at the statutory rate due primarily to
higher tax rates in foreign jurisdictions. During the third quarter of 1999,
the Company completed the tax-efficient realignment of its European operations
that resulted in a slightly lower effective income tax rate during 1999 versus
1998.
Income Before Extraordinary Item and Cumulative Effect of Change in Accounting
Principle
Income before extraordinary item and cumulative effect of change in
accounting principle increased $9.5 million from $23.9 million, or $0.75 per
diluted share, for fiscal 1998 to $33.4 million, or $1.04 per diluted share,
for fiscal 1999.
24
Extraordinary Item and Cumulative Effect of Change in Accounting Principle
The Company recorded one-time charges of $2.7 million for the write-off of
previously capitalized deferred financing costs during the first quarter of
1998.
In April 1998, the American Institute of Certified Public Accountants issued
SOP 98-5, "Reporting the Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5
was effective beginning on January 1, 1999, and required that start-
up/organization costs capitalized prior to January 1, 1999 be written-off and
any future start-up costs to be expensed as incurred. During the fourth
quarter of 1998, the Company elected early adoption and wrote off the net book
value of start-up costs as a cumulative effect of an accounting change, as
permitted by SOP 98-5. The after-tax charge for this write-off approximated
$1.5 million.
Comparison of Year Ended January 2, 1999 and January 3, 1998
The following table sets forth components of the Company's net sales and
operating income by segment for 1998 and the corresponding increase over 1997:
Fiscal Year
-------------
1998 1997 Increase % Increase
------ ------ -------- ----------
(Dollars in thousands)
Net sales:
Hygiene..................................... $319.1 $231.9 $ 87.2 37.6%
Medical..................................... 92.7 86.7 6.0 6.9
Wiping...................................... 107.6 105.2 2.4 2.3
Industrial and specialty.................... 283.5 111.5 172.0 154.3
------ ------ ------
$802.9 $535.3 $267.6 50.0%
====== ====== ======
Operating income:
Hygiene..................................... $ 44.5 $ 18.5 $ 26.0 140.5%
Medical..................................... 15.8 11.4 4.4 38.6
Wiping...................................... 15.7 15.7 0.0 0.0
Industrial and specialty.................... 29.6 13.0 16.6 127.7
------ ------ ------
$105.6 $ 58.6 $ 47.0 80.2%
====== ====== ======
Net Sales
The increase in net sales of 50% for fiscal 1998 versus 1997 was due to
acquisition and organic growth offset by raw material cost reductions passed
through to customers and unfavorable foreign currency rates.
Hygiene sales increased 37.6% year over year primarily as a result of
acquisition growth. Medical and wiping sales increased 6.9% and 2.3%
respectively, year over year due primarily to organic growth. Industrial and
specialty sales increased 154.3% year over year as a result of acquisition and
organic growth.
Operating Income
The increase in operating income of 80.2% for fiscal 1998 versus 1997 was a
result of acquisition and organic growth and lower raw material costs as a
percentage of sales. In addition, selling, general and administrative costs
declined as a percentage of sales due to synergies identified since the recent
acquisitions. Overhead costs as a percentage of sales increased during fiscal
1998 as a result of acquisition activity.
25
Hygiene operating income increased 140.5% as a result of higher margin
products associated with recent acquisitions and reduced selling, general and
administrative costs. Medical operating income increased 38.6% as a result of
organic growth and new product introductions. Wiping operating income remained
level year over year. Industrial and specialty operating income increased
127.7% as a result of acquisition and organic growth.
Other
Interest expense increased $36.9 million, from $30.5 million in 1997 to
$67.4 million in 1998. The increase in interest expense is due to higher
indebtedness outstanding during 1998 primarily as a result of the recent
acquisitions.
The Company recognized gains on marketable securities of $0.8 million in
1998 compared to gains of $11.9 million in 1997. In addition, foreign currency
and other losses were approximately $0.8 million in 1998 compared to gains of
approximately $0.5 million in 1997.
The Company provided for income taxes of approximately $14.2 million in
1998, representing an effective tax rate of 37.2% before extraordinary item
and cumulative effect of accounting change. The Company provided for income
taxes of approximately $13.0 million in 1997, representing an effective tax
rate of 32.2% before extraordinary item. The provision for income taxes at the
Company's effective rate differed from the provision for income taxes at the
statutory rate due primarily to higher tax rates in foreign jurisdictions and
to an increase in non-deductible goodwill amortization in 1998.
Income Before Extraordinary Item and Cumulative Effect of Accounting Change
The Company's income before extraordinary item and cumulative effect of
change in accounting principle was $23.9 million, or $.75 per diluted share in
1998. The approximate $3.5 million decline between 1998 and 1997 is
attributable to net investment income gains of $11.9 million in 1997 and
higher interest costs recognized in 1998.
Extraordinary Item and Cumulative Effect of Change in Accounting Principle
The Company recorded one-time charges of $12.0 million for the write-off of
previously capitalized debt issue costs and premiums paid in connection with
the refinancing of its indebtedness in June of 1997.
During the fourth quarter of 1998, the Company elected early adoption of SOP
98-5 and wrote off the net book value of start-up costs as a cumulative effect
of an accounting change. The after-tax charge for this write-off approximated
$1.5 million.
26
Liquidity and Capital Resources
Operating Activities
During 1999, the Company's operations generated $107.4 million of cash. The
Company's working capital, including cash and equivalents and short term
investments, decreased as a result of increased capital expenditures.
Investing and Financing Activities
Capital expenditures for 1999 totaled approximately $190.0, an increase of
$99.9 million over 1998, relating primarily to margin-enhancing projects. For
fiscal 2000, the Company anticipates spending $80.0 million to $85.0 million
relating to margin enhancing and sustaining capital projects. However, the
Company continues to review additional opportunities and will make
determinations on these projects on a case by case basis.
On July 3, 1997, the Company issued $400 million of 9% Senior Subordinated
Notes due 2007. In addition, on March 5, 1998 the Company issued $200 million
of 8 3/4% Senior Subordinated Notes due 2008. These senior subordinated notes
are unsecured obligations subordinate in right of payment to all existing and
future senior indebtedness of the Company and have customary provisions
regarding redemption and changes in control. The indentures for the $400
million senior subordinated notes and $200 million senior subordinated notes
contain covenants including limitations on indebtedness, certain restricted
payments, transactions with affiliates, disposition of proceeds of asset
sales, liens, dividends and other payment restrictions affecting certain
subsidiaries, guarantees by certain subsidiaries, mergers and asset sales. At
January 1, 2000 the Company was in compliance with such covenants.
On April 9, 1999, the Company amended its credit facility to add an
additional term loan in the amount of $50.0 million. The Company borrowed the
entire amount of the additional term loan and used the proceeds to reduce
amounts outstanding under the revolving portion of the credit facility. The
Amended Credit Facility currently provides for secured revolving credit
borrowings with aggregate commitments of up to $325.0 million and aggregate
term loans of $175.0 million. Subject to certain terms and conditions, a
portion of the Amended Credit Facility may be used for letters of credit. The
Company had outstanding letters of credit of approximately $13.0 million and
unused commitments of approximately $123.9 million under the Amended Credit
Facility as of January 1, 2000. The Amended Credit Facility contains covenants
and events of default customary for financings of this type, including
leverage, fixed charge coverage and net worth covenants. At January 1, 2000
the Company was in compliance with such covenants.
During 1999, the Company acquired an 80% interest in Vateks Tekstil Sanayi
ve Ticaret AS ("Vateks") and Nanhai Nanxin Non-Woven Co. Ltd. ("Nanhai"). The
Company also acquired the assets of Molnlycke Health Care AB ("Sweden").
Vateks, Nanhai and Sweden manufacture and market nonwoven products for
predominant use in consumer and industrial applications. The Company does not
anticipate these transactions, as a whole, will have a material impact on
liquidity.
Based on current levels of operations and anticipated growth, the Company
believes its cash from operations and other available sources of liquidity
(including but not limited to borrowings under its amended credit facility)
will be adequate over the next several years to fund required debt and
interest payments, anticipated capital expenditures and working capital
requirements.
Effect of Inflation
Inflation generally affects the Company by increasing the cost of labor,
equipment and new materials. The Company does not believe that inflation has
had any material effect on the Company's business during fiscal years 1999 and
1998.
27
Foreign Currency
The Company accounts for and reports translation of foreign currency
transactions and foreign currency financial statements in accordance with SFAS
No. 52, "Foreign Currency Translation." The remeasurement of foreign currency
denominated assets and liabilities into dollars gives rise to foreign exchange
gains and losses which are included in the determination of net income.
Derivatives
The Company does not use derivative financial instruments for trading
purposes and may enter into financial instruments, limited in duration and
scope, to manage its exposure to fluctuations of foreign currency rates.
Premiums paid for purchased interest rate cap agreements are charged to
expense over the rate cap period. The Company's London Interbank Offered Rate-
based interest rate cap agreement provides for a notional amount of $100.0
million which declines ratably over the rate cap term. If the rate cap exceeds
9% on each quarterly reset date, as defined in the agreement, the Company is
entitled to receive an amount by which the rate cap exceeds 9%. Over the term
of the agreement in 1999, such amount did not exceed 9%. Charges to income in
1999, 1998 and 1997 related to derivative products and hedging activities were
not significant.
Recent Accounting Standards
In 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("FAS 133") as
amended which is effective for fiscal years beginning after June 15, 2000. FAS
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and
measure those instruments at fair value. FAS 133 contains disclosure
requirements based on the type of hedge and the type of market risk that is
being hedged. The Company has elected to defer the adoption of FAS 133 until
fiscal year 2001. Currently, the Company does not anticipate FAS 133 to have a
material financial or operational impact on the Company. However, the Company
has not completed a detailed analysis of areas of risk at this time.
In April 1998, the American Institute of Certified Public Accountants issued
SOP 98-5 which was effective beginning on January 1, 1999, and required that
start-up/organization costs capitalized prior to January 1, 1999 be written-
off and any future start-up be expensed as incurred. During the fourth quarter
of 1998, the Company elected early adoption and wrote off the net book value
of start-up costs as a cumulative effect of an accounting change, as permitted
by the SOP 98-5.
28
Environmental
The Company is subject to a broad range of federal, foreign, state and local
laws governing regulations relating to the pollution and protection of the
environment. The Company believes that it is currently in substantial
compliance with environmental requirements and does not currently anticipate
any material adverse effect on its operations, financial condition or
competitive position as a result of its efforts to comply with environmental
requirements. Some risk of environmental liability is inherent, however, in
the nature of the Company's business, and there can be no assurance that
material environmental liabilities will not arise.
Year 2000
During 1999 the Company performed and completed a global project to limit
potential risks associated with the Year 2000. As a result of these efforts,
the Company experienced no significant disruptions in information technology,
process systems and third party vendors and believes all systems successfully
responded to the Year 2000 date change. The Company incurred approximately
$2.1 million in costs related to the Year 2000 project and does not anticipate
further significant costs relating to Year 2000.
Euro Conversion
On January 1, 1999, member countries of the European Monetary Union began a
three-year transition from their national currencies to a new common currency,
the "euro". Permanent rates of exchange between members' national currency and
the euro have been established and monetary, capital, foreign exchange, and
interbank markets have been converted to the euro. National currencies will
continue to exist as legal tender and may continue to be used in commercial
transactions. By January 2002, euro currency will be issued and by July 2002,
the respective national currencies will be withdrawn. The Company has
operations in three of the participating countries and has successfully
transitioned to using both the euro and local currencies for commercial
transactions. The Company continues to address the euro's impact on
information systems, currency exchange rate risk, taxation and pricing. Costs
of the euro conversion have not been material and management believes the
future costs of the euro conversion will not have a material impact on the
results of operations or the financial condition of the Company.
Recent Developments
On March 14, 2000, the Company issued a press release announcing that, based
upon preliminary estimates, the Company expects first quarter earnings per
diluted share to be between $.06 and $.08 and full year earnings per diluted
share to be in the range of $.90 and $1.10 per diluted share versus $1.04 per
diluted share in fiscal year 1999. Additionally, the Company expects first
quarter EBITDA to be approximately $40 million. The Company identified certain
factors affecting first quarter earnings, including (i) changes and delays in
orders for selected high margin products from certain consumer products
customers; (ii) timing variances between raw material price increases and the
pass-through of those increases to customers; and (iii) period expenses
associated with two new APEX(TM) lines.
29
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
Long-Term Debt and Interest Rate Market Risk
Variable Rate Debt
The Amended Credit Facility permits the Company to borrow up to $500
million, a portion of which may be denominated in Dutch guilders and in
Canadian dollars. The variable interest rate applicable to borrowings under
the Amended Credit Facility is based on, in the case of U.S. dollar
denominated loans, the Base Rate referred to therein or the Eurocurrency Base
Rate referred to therein for U.S. dollars, at the Company's option, plus a
specified margin. In the event that a portion of the Amended Credit Facility
is denominated in Dutch guilders, the applicable interest rate is based on the
applicable Eurocurrency Base Rate referred to therein for Dutch guilders, plus
a specified margin. In the event that a portion of the Amended Credit Facility
is denominated in Canadian dollars, the applicable interest rate is based on
the Canadian Base Rate referred to therein (plus a specified margin) of the
Bankers' Acceptance Discount Rate referred to therein, at the Company's
option. At January 1, 2000, the Company had borrowings under the Amended
Credit Facility of $360.6 million that were subject to interest rate risk.
Each hypothetical 1.0% increase in interest rates would impact pretax earnings
by $3.6 million. The Company has an interest rate cap agreement that limits
the amount of interest expense on $100 million of this debt to a rate of 9%.
The Company does not use these products for trading purposes.
Fixed Rate Debt
The fair market value of the Company's long-term fixed interest rate debt is
also subject to interest rate risk. Generally, the fair market value of fixed
interest rate debt will increase as interest rates fall and decrease as
interest rates rise. The estimated fair value of the Company's total long-term
fixed-rate debt at January 1, 2000 was approximately $579.3 million, which was
less than its carrying value by approximately $20.0 million. A 100 basis
points decrease in the prevailing interest rates at January 1, 2000 would
result in an increase in fair value of total fixed rate debt by approximately
$30.1 million. A 100 basis points increase in the prevailing interest rates at
January 1, 2000 would result in a decrease in fair value of total fixed rate
debt by approximately $30.4 million. Fair market values were determined from
quoted market prices or based on estimates made by investment bankers.
Foreign Currency Exchange Rate Risk
The Company manufactures, markets and distributes certain of its products in
Europe, Canada, Latin America and the Far East. As a result, the Company's
financial results could be significantly affected by factors such as changes
in foreign currency exchange rates or weak economic conditions in the foreign
markets in which the Company maintains a manufacturing or distribution
presence. If foreign currency denominated revenues are greater than costs, the
translation of foreign currency denominated costs and revenues into U.S.
dollars will improve profitability when the foreign currency strengthens
against the U.S. dollar and will reduce profitability when the foreign
currency weakens. For the year ending January 1, 2000, the result of a uniform
10% strengthening in the value of the dollar relative to the currencies in
which the Company's sales are denominated would have decreased operating
income by approximately $4.0 million. This calculation assumes that each
exchange rate would change in the same direction relative to the U.S. dollar.
In addition to the direct effects of changes in exchange rates, which are a
changed dollar value of the resulting sales, changes in exchange rates also
affect the volume of sales or the foreign currency sales price as competitors'
products become more or less attractive. The Company's sensitivity analysis of
the effects of changes in foreign currency exchange rates does not factor in a
potential change in sales levels or local currency prices.
30
The Company may enter into financial instruments which are limited in
duration and scope to manage its exposure to fluctuations of foreign currency
rates. These instruments are used for hedging purposes and are used in
connection with an underlying asset, liability, firm commitment or anticipated
transaction. Charges to expense in 1999, 1998 and 1997 related to these
instruments, which are not used for trading purposes, were not significant.
Raw Material and Commodity Risks
The primary raw materials used in the manufacture of most of the Company's
products are polypropylene and polyester fiber, polyethylene and polypropylene
resin, and, to a lesser extent, rayon, tissue paper and cotton. The prices of
polypropylene and polyethylene are a function of, among other things,
manufacturing capacity, demand and the price of crude oil and natural gas
liquids. Historically, the prices of polyethylene and polypropylene resin have
fluctuated, such as in late 1994 and early 1995 when resin prices increased by
approximately 60%. The sharp increase was primarily due to short-term
interruptions in production capacity and increased demand as a result of an
expanding economy. By mid-1995, supply had increased, thereby reducing prices.
In general, prices declined between 1996 and 1999. A significant increase in
the prices of polyolefin resins that cannot be passed on to customers could
have a material adverse effect on the Company's results of operations and
financial condition. See Recent Developments in this Annual Report on Form 10-
K. At January 1, 2000, the Company had commitments related to raw materials of
approximately $64.0 million.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Ernst & Young LLP, Independent Auditors.......................... 32
Consolidated Balance Sheets as of January 1, 2000 and January 2, 1999...... 33
Consolidated Statements of Operations for the fiscal years ended January 1,
2000, January 2, 1999 and January 3, 1998................................. 34
Consolidated Statements of Shareholders' Equity for the fiscal years ended
January 1, 2000, January 2, 1999 and January 3, 1998...................... 35
Consolidated Statements of Cash Flows for the fiscal years ended January 1,
2000, January 2, 1999 and January 3, 1998................................. 36
Notes to Consolidated Financial Statements for the fiscal years ended
January 1, 2000, January 2, 1999 and January 3, 1998...................... 37
31
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Polymer Group, Inc.
We have audited the accompanying consolidated balance sheets of Polymer
Group, Inc. as of January 1, 2000 and January 2, 1999 and the related
consolidated statements of operations, shareholders' equity, and cash flows
for each of the three years in the period ended January 1, 2000. Our audits
also included the financial statement schedule listed in the Index at Item
14(a). These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Polymer
Group, Inc. at January 1, 2000 and January 2, 1999 and the consolidated
results of its operations and its cash flows for each of the three years in
the period ended January 1, 2000 in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
As discussed in Note 1 to the financial statements, in 1998 the Company
changed its method of accounting for the costs of start-up activities.
/s/ Ernst & Young LLP
Greenville, South Carolina
February 15, 2000
32
POLYMER GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
January 1, January 2,
ASSETS 2000 1999
------ ---------- ----------
Current assets:
Cash and equivalents................................. $ 37,180 $ 58,308
Short-term investments............................... 19,115 --
Accounts receivable, net............................. 133,249 103,958
Inventories.......................................... 113,229 98,820
Deferred income taxes................................ 9,315 7,179
Other................................................ 36,897 42,466
---------- ----------
Total current assets............................... 348,985 310,731
Property, plant and equipment, net..................... 823,349 685,009
Intangibles and loan acquisition costs, net............ 246,403 253,094
Deferred income taxes.................................. 19,238 7,496
Other.................................................. 28,271 26,637
---------- ----------
Total assets....................................... $1,466,246 $1,282,967
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable..................................... $ 80,476 $ 53,056
Accrued liabilities.................................. 49,892 37,258
Income taxes payable................................. 5,300 4,469
Deferred income taxes................................ 497 422
Short-term borrowings................................ 19,073 --
Current portion of long-term debt.................... 4,842 3,070
---------- ----------
Total current liabilities.......................... 160,080 98,275
Long-term debt, less current portion................... 963,177 863,429
Deferred income taxes.................................. 83,424 82,876
Other noncurrent liabilities........................... 17,281 18,262
Shareholders' equity:
Series preferred stock-$.01 par value, 10,000,000
shares authorized at 1999 and 1998; 0 shares issued
and outstanding at 1999 and 1998.................... -- --
Common stock--$.01 par value, 100,000,000 shares
authorized at 1999 and 1998; 32,001,800 shares
issued and outstanding at 1999; 32,000,000 shares
issued and outstanding at 1998...................... 320 320
Non-voting common stock--$.01 par value; 3,000,000
shares authorized at 1999 and 1998; 0 shares issued
and outstanding at 1999 and 1998.................... -- --
Additional paid-in capital........................... 243,688 243,662
Retained earnings/(deficit).......................... 13,149 (19,651)
Accumulated other comprehensive (loss)............... (14,873) (4,206)
---------- ----------
242,284 220,125
---------- ----------
Total liabilities and shareholders' equity......... $1,466,246 $1,282,967
========== ==========
See accompanying notes.
33
POLYMER GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
For the Fiscal Years Ended
--------------------------------
January 1, January 2, January 3,
2000 1999 1998
---------- ---------- ----------
Net sales..................................... $889,795 $802,948 $535,267
Cost of goods sold............................ 650,185 599,894 402,058
-------- -------- --------
Gross profit.................................. 239,610 203,054 133,209
Selling, general and administrative expenses.. 119,385 97,499 74,600
-------- -------- --------
Operating income.............................. 120,225 105,555 58,609
Other (income) expense:
Interest expense, net....................... 71,882 67,444 30,499
Investment income--(gain) on marketable
securities, net............................ (2,942) (795) (11,880)
Foreign currency and other.................. (739) 806 (452)
-------- -------- --------
68,201 67,455 18,167
-------- -------- --------
Income before income taxes, extraordinary item
and cumulative effect of change in accounting
principle.................................... 52,024 38,100 40,442
Income taxes.................................. 18,584 14,157 13,009
-------- -------- --------
Income before extraordinary item and
cumulative effect of change in accounting
principle.................................... 33,440 23,943 27,433
Extraordinary item, net of income tax benefit
of $0 in 1998, and $5,959 in 1997............ -- (2,728) (12,005)
Cumulative effect of change in accounting
principle, net of income tax benefit of $907. -- (1,511) --
-------- -------- --------
Net income.................................... $ 33,440 $ 19,704 $ 15,428
======== ======== ========
Net income per common share:
Basic:
Average common shares outstanding......... 32,000 32,000 32,000
Income before extraordinary item and
cumulative effect of change in accounting
principle................................ $ 1.05 $ .75 $ .86
Extraordinary item, net of tax............ -- (.08) (.38)
Cumulative effect of change in accounting
principle, net of tax.................... -- (.05) --
-------- -------- --------
Net income per common share--basic........ $ 1.05 $ .62 $ .48
======== ======== ========
Diluted:
Average common shares outstanding......... 32,089 32,000 32,000
Income before extraordinary item and
cumulative effect of change in accounting
principle................................ $ 1.04 $ .75 $ .86
Extraordinary item, net of tax............ -- (.08) (.38)
Cumulative effect of change in accounting
principle, net of tax.................... -- (.05) --
-------- -------- --------
Net income per common share--diluted...... $ 1.04 $ .62 $ .48
======== ======== ========
See accompanying notes.
34
POLYMER GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Fiscal Years Ended January 1, 2000, January 2, 1999 and January 3, 1998
(In Thousands, Except Share Data)
Accumulated
Common Stock Additional Retained Other
----------------- Paid-in Earnings/ Comprehensive Comprehensive
Shares Amount Capital (Deficit) Income (Loss) Total Income
---------- ------ ---------- --------- ------------- -------- -------------
Balance--December 28, 1996................... 32,000,000 $320 $243,662 $(54,783) $ 6,719 $195,918
Net income................................... -- -- -- 15,428 -- 15,428 $ 15,428
Foreign currency translation adjustments, net
of income tax benefit of $1,467............. -- -- -- -- (12,334) (12,334) (12,334)
Unrealized holding gain on marketable
securities, net of income taxes of ($37).... -- -- -- -- 78 78 78
---------- ---- -------- -------- -------- -------- --------
Balance--January 3, 1998..................... 32,000,000 320 243,662 (39,355) (5,537) 199,090
Comprehensive income for the year ended
January 3,1998.............................. $ 3,172
========
Net income................................... -- -- -- 19,704 -- 19,704 $ 19,704
Foreign currency translation adjustments, net
of income taxes of $(800)................... -- -- -- -- 1,338 1,338 1,338
Unrealized holding (loss) on marketable
securities, net of income tax benefit of $0. -- -- -- -- (7) (7) (7)
---------- ---- -------- -------- -------- -------- --------
Balance--January 2, 1999..................... 32,000,000 320 243,662 (19,651) (4,206) 220,125
Comprehensive income for the year ended
January 2, 1999............................. $ 21,035
========
Net income................................... -- -- -- 33,440 -- 33,440 $ 33,440
Foreign currency translation adjustments, net
of income tax benefit of $10,739............ -- -- -- -- (7,816) (7,816) (7,816)
Unrealized holding (loss) on marketable
securities, net of income tax benefit of
$529........................................ -- -- -- -- (2,851) (2,851) (2,851)
Dividends paid............................... -- -- -- (640) -- (640) --
Exercise of stock options.................... 1,800 -- 26 -- -- 26 --
---------- ---- -------- -------- -------- -------- --------
Balance--January 1, 2000..................... 32,001,800 $320 $243,688 $ 13,149 $(14,873) $242,284
========== ==== ======== ======== ======== ========
Comprehensive income for the year ended
January 1, 2000............................. $ 22,773
========
See accompanying notes.
35
POLYMER GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
For the Fiscal Years Ended
----------------------------------
January 1, January 2, January 3,
2000 1999 1998
---------- ---------- ----------
Operating activities
Net income................................... $ 33,440 $ 19,704 $ 15,428
Adjustments to reconcile net income to net
cash provided by operating activities:
Extraordinary item, net of income tax
benefit..................................... -- 2,728 12,005
Cumulative effect of change in accounting
principle, net of income tax benefit........ -- 1,511 --
Depreciation and amortization expense........ 66,546 59,325 40,312
Foreign currency and other................... (739) 806 (452)
Gain on marketable securities classified as
trading, net................................ -- -- (11,880)
Provision for losses on accounts receivable
and price concessions....................... 5,638 6,860 7,337
Provision for deferred income taxes.......... 3,612 (585) 5,985
Changes in operating assets and liabilities,
net of effect of acquisitions:
Accounts receivable........................ (29,255) 4,760 (19,157)
Inventories................................ (10,938) 697 (6,453)
Accounts payable and accrued expenses...... 28,060 (16,098) (4,304)
Other, net................................. 11,036 (5,634) (20,459)
--------- --------- ---------
Net cash provided by operating
activities.............................. 107,400 74,074 18,362
Investing activities
Purchases of property, plant and equipment... (189,996) (90,096) (60,144)
Purchases of marketable securities
classified as available for sale............ (23,530) (16,672) (15,251)
Proceeds from sales of marketable securities
classified as available for sale............ -- 24,485 17,003
Acquisition of businesses, net of cash
acquired.................................... (19,251) (47,423) (429,559)
Proceeds from sale of assets, net of
canceled subordinated advance............... -- 323,524 --
Minority interest............................ -- (54,730) --
Other, net................................... 8,157 (7,745) (3,950)
--------- --------- ---------
Net cash (used in) provided by investing
activities.............................. (224,620) 131,343 (491,901)
Financing activities
Proceeds from debt........................... 196,194 621,481 906,791
Payments of debt............................. (85,293) (804,361) (402,282)
Dividends to shareholders.................... (640) -- --
Exercise of stock options.................... 26 -- --
Loan acquisition costs and other, net........ (3,521) (11,560) (18,556)
--------- --------- ---------
Net cash provided by (used in) financing
activities.............................. 106,766 (194,440) 485,953
Effect of exchange rate changes on cash....... (10,674) (2,859) 189
--------- --------- ---------
Net (decrease) increase in cash and
equivalents............................. (21,128) 8,118 12,603
Cash and equivalents at beginning of
year.................................... 58,308 50,190 37,587
--------- --------- ---------
Cash and equivalents at end of year...... $ 37,180 $ 58,308 $ 50,190
========= ========= =========
Noncash investing and financing activities
Cancellation of subordinated advance......... $ -- $ 141,000 $ --
Supplemental information
Cash paid for interest, net of amounts
capitalized................................. 52,783 68,725 39,120
Cash paid for income taxes................... 19,396 13,498 7,419
Acquisition of businesses
Fair value of assets acquired................ 39,657 48,453 391,920
Fair value of assets acquired--held for
disposition................................. -- -- 464,524
Liabilities assumed and incurred............. (20,406) (1,030) (426,885)
Acquisition of businesses, net of cash
acquired.................................... 19,251 47,423 429,559
See accompanying notes.
36
POLYMER GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
Description of Business
Polymer Group, Inc. (the "Company"), a global manufacturer and marketer of
nonwoven and oriented polyolefin products, currently operates in four business
segments which include hygiene, medical, wiping and industrial and specialty
products. The Company's fiscal year end is the Saturday closest to the last
day in December. There were 52 weeks in fiscal 1999 and 1998 and 53 weeks in
fiscal 1997.
Basis of Presentation and Use of Estimates
The accompanying consolidated financial statements of the Company are
prepared on the basis of generally accepted accounting principles in the
United States and include the accounts of the Company and its subsidiaries.
All material intercompany accounts are eliminated in consolidation. Certain
amounts previously presented in the consolidated financial statements for
prior periods have been reclassified to conform to current classification. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates. Investments in 20% to
50% owned affiliates are accounted for on the equity method.
Revenue Recognition
Revenue from product sales is recognized at the time ownership of goods
transfers to the customer and the earnings process is complete.
Cash Equivalents and Interest Income
Investment securities that mature in three months or less from the date of
purchase are considered cash equivalents. Interest and other income
approximated $3.5, $5.1 and $2.4 million during 1999, 1998 and 1997,
respectively, and consists primarily of income from highly liquid investment
sources. Interest expense in the consolidated statements of operations is net
of interest and other income and capitalized interest.
Short-Term Investments
The Company accounts for its investments using Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("FAS 115") which requires that certain debt and equity
securities be adjusted to market value at the end of each accounting period.
Market value gains and losses are charged to earnings if the securities are
traded for short-term profit. Otherwise, such gains and losses are charged or
credited to the comprehensive income component of shareholders' equity.
Management determines the proper classifications of investments at the time of
purchase and reevaluates such designation as of each balance sheet date.
Realized gains and losses on sales of investments, as determined on the
specific identification basis, are included in the determination of net
income. As of January 1, 2000, the Company's marketable securities were
invested in equity securities with a market value of approximately $19.1
million, and were designated as available for sale.
Accounts Receivable and Concentration of Credit Risks
Accounts receivable potentially expose the Company to concentration of
credit risk, as defined by Statement of Financial Accounting Standards No.
105, "Disclosure of Information about Financial
37
POLYMER GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Instruments with Off-Balance Sheet Risk and Financial Instruments with
Concentration of Credit Risk." The Company provides credit in the normal
course of business and performs ongoing credit evaluations on certain of its
customers' financial condition, but generally does not require collateral to
support such receivables. The Company also establishes an allowance for
doubtful accounts based upon factors surrounding the credit risk of specific
customers, historical trends and other information. The allowance for doubtful
accounts was $10.6 and $7.6 million at January 1, 2000 and January 2, 1999,
respectively, which management believes is adequate to provide for credit loss
in the normal course of business, as well as losses for customers who have
filed for protection under the bankruptcy law. In 1999, Johnson & Johnson
("J&J") and The Procter & Gamble Company ("P&G") accounted for approximately
15.5% and 21.0%, respectively, of the Company's sales. J&J and P&G each
accounted for approximately 17% of the Company's sales in 1998. In 1997, J&J
and P&G accounted for approximately 26% and 16%, respectively, of the
Company's sales.
Inventories
Inventories are stated at the lower of cost or market using the first-in,
first-out method of accounting and, as of January 1, 2000 and January 2, 1999
consist of the following:
1999 1998
-------- -------
(In Thousands)
Finished goods.......................................... $ 51,588 $51,595
Work in process and stores and maintenance parts........ 16,753 12,126
Raw materials........................................... 44,888 35,099
-------- -------
$113,229 $98,820
======== =======
Long-Lived Assets
Property, plant and equipment are stated at cost less accumulated
depreciation. Depreciation is computed for financial reporting purposes on the
straight-line method over the estimated useful lives of the related assets.
The estimated useful lives established for building and land improvements
range from 18 to 33 years, and the estimated useful lives established for
machinery, equipment and other fixed assets range from 3 to 15 years. Costs of
the construction of certain long-term assets include capitalized interest that
is amortized over the estimated useful life of the related asset. The Company
capitalized approximately $8.4, $4.2 and $1.6 million of interest costs during
1999, 1998 and 1997, respectively.
Intangible assets are amortized using the straight-line method over periods
ranging from 5 to 40 years. Loan acquisition costs, which approximated $3.0
million and $11.6 million in 1999 and 1998 respectively, are amortized over
the term of the related debt.
The Company continually reviews the recoverability of the carrying value of
long-lived assets in accordance with Statement of Financial Accounting
Standard No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Assets to be Disposed Of" ("FAS 121"). The Company also reviews long-lived
assets for impairment whenever events or changes in circumstances indicate the
carrying amount of such assets may not be recoverable. When the future
undiscounted cash flows of the operation to which the assets relate do not
exceed the carrying value of the asset, the intangible assets are written
down, followed by the other long-lived assets, to fair value. FAS 121 write-
downs have not been material to the Company's financial condition or results
of operations.
38
POLYMER GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Derivatives
The Company does not use derivative financial instruments for trading
purposes. Such products are used to manage interest rate and foreign currency
risks. Premiums paid for purchased interest rate cap agreements are charged to
expense over the rate cap period. The Company maintains a London Interbank
Offered Rate ("LIBOR")-based interest rate cap agreement which provides for a
notional amount of $100.0 million. The notional amount declines ratably over
the rate cap term and if the rate cap exceeds 9% on each quarterly reset date,
as defined in the agreement, the Company is entitled to receive an amount by
which the rate cap exceeds 9%. Over the term of the agreement in 1999, such
amount did not exceed 9%.
The Company may enter into financial instruments, which are limited in
duration and scope, to manage its exposure to fluctuations of foreign currency
rates. These instruments are used for hedging purposes and are employed in
connection with an underlying asset, liability, firm commitment or anticipated
transaction. Gains and losses on hedges of existing assets and liabilities are
included in the carrying amounts of those assets or liabilities and are
ultimately recognized in income as part of those carrying amounts. Gains and
losses related to qualifying hedges of firm commitments or anticipated
transactions are also deferred and recognized in income or as adjustments of
carrying amounts when the hedged transaction occurs. Gains and losses, if any,
on financial instruments that do not qualify as hedges for accounting purposes
are recognized in the determination of net income. Charges to expense in 1999,
1998 and 1997 related to derivative products were not significant.
In 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("FAS 133") as
amended, which is effective for fiscal years beginning after June 15, 2000.
FAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires an entity to recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. FAS 133 contains
disclosure requirements based on the type of hedge and the type of market risk
that is being hedged. The Company has elected to defer the adoption of FAS 133
until fiscal year 2001. Currently, the Company does not anticipate FAS 133 to
have a material financial or operational impact on the Company. However, the
Company has not completed a detailed analysis of areas of risk at this time.
Fair Value of Financial Instruments
The Company has estimated the fair value amounts of financial instruments
as required by Statement of Financial Accounting Standards No. 107,
"Disclosures about Fair Value of Financial Instruments", using available
market information and appropriate valuation methodologies. However,
considerable judgment is required in interpreting market data to develop the
estimates of fair value. Accordingly, such estimates are not necessarily
indicative of the amounts that the Company would realize in a current market
exchange. The carrying amount of cash and equivalents, short term investments,
accounts receivable, other assets, accounts payable and derivative financial
instruments are reasonable estimates of their fair values. The contract
amounts of outstanding letters of credit approximate their fair value. Fair
value of the Company's long-term debt was estimated using interest rates at
those dates for issuance of such financial instruments with similar terms and
remaining maturities and other independent valuation methodologies. The
estimated fair value of debt, based on appropriate valuation methodologies, at
January 1, 2000 and January 2, 1999 was $967.1 million and $860.0 million,
respectively.
39
POLYMER GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Income Taxes
The provision for income taxes and corresponding balance sheet accounts are
determined in accordance with Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" ("FAS 109"). Under FAS 109, the deferred
tax liabilities and assets are determined based upon temporary differences
between the basis of certain assets and liabilities for income tax and
financial reporting purposes. A valuation allowance is recognized if it is
likely that some portion of a deferred tax asset will not be realized in the
future.
Research and Development
The cost of research and development is charged to expense as incurred and
is included in selling, general and administrative expense in the consolidated
statement of operations. The Company incurred approximately $17.2, $13.2 and
$9.6 million of research and development expense during 1999, 1998 and 1997,
respectively.
Foreign Currency Translation
All assets and liabilities in the balance sheets of foreign subsidiaries
whose functional currency is other than the U.S. dollar are translated at
year-end exchange rates. Translation gains and losses are not included in
determining net income but are accumulated as a separate component of
shareholders' equity. However, subsidiaries considered to be operating in
highly inflationary countries use the U.S. dollar as the functional currency
and translation gains and losses are included in determining net income. In
addition, foreign currency transaction gains and losses are included in
determining net income.
Comprehensive Income
Comprehensive income is reported in accordance with the Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS
130"). FAS 130 establishes rules for the reporting and display of
comprehensive income and its components. FAS 130 requires unrealized gains or
losses on the Company's available-for-sale securities and the foreign currency
translation adjustments, which prior to adoption were reported separately in
shareholders' equity, to be included in other comprehensive income. Cumulative
foreign currency translation adjustments and unrealized gain (loss) on
marketable securities are as follows:
1999 1998 1997
-------- ------- -------
(In Thousands)
Cumulative foreign currency translation
adjustments................................. $(12,022) $(4,206) $(5,544)
Cumulative unrealized (loss) gain on
marketable securities....................... (2,851) -- 7
-------- ------- -------
Accumulated other comprehensive (loss)....... $(14,873) $(4,206) $(5,537)
======== ======= =======
Start-Up Activities
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting the Costs of Start-Up
Activities" ("SOP 98-5"). SOP 98-5 was effective beginning January 1, 1999,
and required that start-up/organization costs capitalized prior to January 1,
1999 be written-off and any future start-up cost be expensed as incurred.
During the fourth quarter of 1998, the Company elected early adoption and
wrote off the net book value of start-up costs as a cumulative effect of an
accounting change, as permitted by SOP 98-5.
40
POLYMER GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Net Income Per Share
The Company discloses earnings per share in accordance with SFAS No. 128,
"Earnings Per Share." Basic earnings per share excludes any dilutive effects
of options, warrants and convertible securities and is computed using the
number of common shares outstanding for the period. Diluted earnings per share
reflects the potential dilution that could occur if stock options were
exercised and is based upon the weighted average number of common and common
equivalent shares outstanding for the period. Common equivalent shares are
represented by shares under option. The numerator for both basic and diluted
earnings per share is net income applicable to common stock.
Note 2. Acquisitions
On December 19, 1997, DT Acquisition Inc. ("DTA"), a special-purpose
subsidiary of the Company, completed the purchase of approximately 98% of the
outstanding common shares of Dominion Textiles Inc. ("Dominion") for Cdn$14.50
per share and approximately 96% of the outstanding first preferred shares of
Dominion for Cdn$150 per share. The acquisition was accounted for in 1997
using the purchase method of accounting. On January 29, 1998, DTA acquired all
remaining common and preferred shares, at which time Dominion underwent a
"winding-up." All assets and liabilities of Dominion were transferred to DTA
and all outstanding common and first preferred shares held by DTA were
redeemed. Immediately thereafter, pursuant to a purchase agreement dated
October 27, 1997, the apparel fabrics business of Dominion was sold, at no
gain or loss, to Galey & Lord, Inc. for approximately $464.5 million, and the
Company acquired the nonwovens and industrial fabrics operations for
approximately $351.6 million, including fees and expenses.
On March 16, 1998, the Company acquired a leading North American
manufacturer of polypropylene-based commercial twine and polyethylene-based
specialty knitted products for approximately $47.4 million in a transaction
accounted for by the purchase method of accounting.
During 1999, the Company acquired an 80% interest in Vateks Tekstil Sanayi
ve Ticaret AS ("Vateks") and Nanhai Nanxin Non-Woven Co. Ltd. ("Nanhai"). The
Company also acquired the assets of Molnlycke Health Care AB ("Sweden").
Vateks, Nanhai and Sweden manufacture and market nonwoven products for
predominant use in consumer and industrial applications. These transactions
have been accounted for using the purchase method of accounting and results of
operations for each of these entities are included in the Company's results
since the date of acquisition. The acquisition price for each business has
been allocated to the underlying assets acquired and liabilities assumed based
on their fair value at the date of purchase. Such allocation may be revised at
a later date. The combined purchase price for these acquisitions, including
assets acquired by the Company during 1999 for which separate disclosure is
not considered significant, totaled $19.3 million. Supplemental pro forma
information has not been presented as it is not material to the consolidated
results of operations.
41
POLYMER GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 3. Property, Plant and Equipment
Property, plant and equipment as of January 1, 2000 and January 2, 1999,
consist of the following:
1999 1998
--------- --------
(In Thousands)
Cost:
Land............................................... $ 13,263 $ 11,687
Buildings and land improvements.................... 145,806 131,453
Machinery, equipment and other..................... 698,884 618,366
Construction in progress........................... 146,190 59,412
--------- --------
1,004,143 820,918
Less accumulated depreciation........................ (180,794) (135,909)
--------- --------
$823,349 $685,009
========= ========
Depreciation charged to expense was $55.3, $47.8 and $31.2 million during
1999, 1998 and 1997, respectively.
Note 4. Intangibles and Loan Acquisition Costs
Intangibles and loan acquisition costs as of January 1, 2000 and January 2,
1999 consist of the following:
1999 1998
-------- --------
(In Thousands)
Cost:
Goodwill............................................ $221,507 $217,980
Supply agreement.................................... 13,431 13,431
Proprietary technology.............................. 24,100 24,100
Loan acquisition costs and other.................... 34,151 30,159
-------- --------
293,189 285,670
Less accumulated amortization......................... (46,786) (32,576)
-------- --------
$246,403 $253,094
======== ========
Amortization charged to expense was $11.2, $11.5 and $9.1 million during
1999, 1998 and 1997, respectively.
Note 5. Accrued Liabilities
Accrued liabilities as of January 1, 2000 and January 2, 1999, consist of
the following:
1999 1998
-------- -------
(In Thousands)
Interest payable...................................... $ 25,780 $ 6,769
Salaries, wages and other fringe benefits............. 11,417 13,965
Other................................................. 12,695 16,524
-------- -------
$ 49,892 $37,258
======== =======
42
POLYMER GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 6. Commitments and Contingencies
Leases
The Company leases certain manufacturing, warehousing and other facilities
and equipment under operating leases. The leases on most of the properties
contain renewal provisions. Rent expense (net of sub-lease income), including
incidental leases, approximated $6.0, $4.7 and $1.7 million in 1999, 1998 and
1997, respectively. The Company leases a building under a non-cancelable lease
expiring in June 2012 to an unrelated party. Rental income approximated $1.9,
$1.7 and $0.6 million in 1999, 1998 and 1997, respectively. The approximate
net minimum rental payments required under operating leases that have initial
or remaining non-cancelable lease terms in excess of one year at January 1,
2000 are:
Gross Lease Net
Minimum and Sub- Minimum
Rental Lease Rental
Payments (Income) Payments
-------- -------- --------
(In Thousands)
2000........................................ $ 6,467 $ (2,094) $4,373
2001........................................ 5,713 (2,159) 3,554
2002........................................ 4,665 (1,985) 2,680
2003........................................ 3,889 (1,893) 1,996
2004........................................ 2,542 (1,768) 774
Thereafter.................................. 496 (9,685) (9,189)
------- -------- ------
$23,772 $(19,584) $4,188
======= ======== ======
Purchase Commitments
At January 1, 2000, the Company had commitments of approximately $68.0
million related to the purchase of raw materials, maintenance and converting
services and approximately $83.0 million related to capital projects.
Collective Bargaining Agreements
At January 1, 2000, the Company had a total of approximately 4,500
employees worldwide. Approximately 1,700 employees are represented by labor
unions or trade councils which have entered into separate collective
bargaining agreements with the Company. Approximately 12% of the Company's
labor force are covered by collective bargaining agreements that will expire
within one year.
Environmental
The Company is subject to a broad range of federal, foreign, state and
local laws governing regulations relating to the pollution and protection of
the environment. The Company believes that it is currently in substantial
compliance with environmental requirements and does not currently anticipate
any material adverse effect on its operations, financial condition or
competitive position as a result of its efforts to comply with environmental
requirements. Some risk of environmental liability is inherent, however, in
the nature of the Company's business, and there can be no assurance that
material environmental liabilities will not arise.
43
POLYMER GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 7. Debt
Short-term borrowings amounted to $19.1 million at the end of 1999 and are
composed of $9.6 million in U.S. loans with a weighted average interest rate
of 7 5/8% and $9.5 million of local borrowings, principally by international
subsidiaries. There were no short-term borrowings outstanding at the end of
1998. Long-term debt as of January 1, 2000 and January 2, 1999, consists of
the following (in thousands):
1999 1998
======== ========
Senior subordinated notes, due July 2007, interest rate 9%,
subject to redemption at any time on or after July 1, 2002
at the option of the Company based on certain redemption
prices (a)................................................ $400,000 $400,000
Senior subordinated notes, due March 2008, interest rate
8.75%, subject to redemption on or after March 1, 2003 at
the option of the Company based on certain redemption
prices (a)................................................ 200,000 200,000
Revolving credit facility, due June 2003, interest at rates
ranging from 8.75% to 9.5%, interest rates for U.S. dollar
loans are based on LIBOR or prime; Canadian dollar loans
are based on Canadian base rates and Dutch guilder loans
are based on Eurocurrency rates (b)....................... 188,085 136,064
Term loan, due December 2005, interest rate 9.0% (b)....... 172,520 124,000
Other (c).................................................. 12,736 12,233
-------- --------
973,341 872,297
Less: Unamortized debt discount............................ (5,322) (5,798)
-------- --------
968,019 866,499
Less: Current maturities................................... (4,842) (3,070)
-------- --------
$963,177 $863,429
======== ========
- --------
(a) The senior subordinated notes are unsecured obligations subordinate in
right of payment to all existing and future senior indebtedness of the
Company and have customary provisions regarding redemption and changes in
control. The indentures for the $400 million senior subordinated notes and
$200 million senior subordinated notes contain covenants including
limitations on indebtedness, certain restricted payments, transactions
with affiliates, disposition of proceeds of asset sales, liens, dividends
and other payment restrictions affecting certain subsidiaries, guarantees
by certain subsidiaries, mergers and asset sales. At January 1, 2000 the
Company was in compliance with such covenants.
(b) On April 9, 1999, the Company amended its credit facility to add an
additional term loan in the amount of $50.0 million. The Company borrowed
the entire amount of the additional term loan and used the proceeds to
reduce amounts outstanding under the revolving portion of the credit
facility. The amended credit facility provides for secured revolving
credit borrowings with aggregate commitments of up to $325.0 million and
aggregate term loans of $175.0 million. Subject to certain terms and
conditions, a portion of the credit facility may be used for letters of
credit. The Company had outstanding letters of credit of approximately
$13.0 million and unused commitments of approximately $123.9 million under
the credit facility as of January 1, 2000. Commitment fees under the
credit facility are generally equal to a percentage of the daily unused
amount of such commitment. The credit facility contains covenants and
events of default customary for financings of this type, to include
leverage, fixed charge coverage and net worth. At January 1, 2000 the
Company was in compliance with such covenants.
44
POLYMER GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The amended credit facility and the related guarantees are secured by (i) a
lien on substantially all of the assets of the Company and its domestic
subsidiaries, (ii) a pledge of all or a portion of the stock of the
domestic subsidiaries of the Company and of certain non-domestic
subsidiaries of the Company, (iii) a lien on substantially all of the
assets of direct foreign borrowers (to secure direct borrowings by such
borrowers), and (iv) a pledge of certain secured intercompany notes issued
to the Company or one of its subsidiaries by non-domestic subsidiaries.
(c) In connection with the transactions consummated on January 29, 1998, as
discussed in Note 2. Acquisitions, Dominion Textile (USA) Inc. ("DT USA"),
a wholly-owned subsidiary of Dominion, purchased approximately $145.6
million of its $150.0 million outstanding Guaranteed Senior Notes due 2003
and, at the same time, purchased approximately $124.5 million of its
$125.0 million outstanding Guaranteed Senior Notes due 2006. Approximately
$4.7 million of the DT USA notes remain outstanding at January 1, 2000.
Restricted cash, which approximates the outstanding balance of the DT USA
notes, has been classified as other assets on the consolidated balance
sheet at January 1, 2000 and January 2, 1999.
Long-term debt maturities consist of the following (in thousands):
2000.............................................................. $ 4,842
2001.............................................................. 3,533
2002.............................................................. 2,311
2003.............................................................. 144,571
2004.............................................................. 25,947
Thereafter........................................................ 786,815
45
POLYMER GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 8. Condensed Consolidating Financial Statements
Payment of the Company's senior subordinated notes is unconditionally
guaranteed, jointly and severally, on a senior subordinated basis by certain
of the Company's wholly-owned subsidiaries. Management has determined that
separate complete financial statements of the guarantor entities would not be
material to users of the financial statements; therefore, the following sets
forth condensed consolidating financial statements (in thousands):
Condensed Consolidating Balance Sheet
As of January 1, 2000
Combined
Combined Non-
Guarantor Guarantor The Reclassifications
ASSETS Subsidiaries Subsidiaries Company and Eliminations Consolidated
------ ------------ ------------ ---------- ----------------- ------------
Cash and equivalents.... $ 15,929 $ 20,253 $ 998 $ -- $ 37,180
Short-term investments.. -- -- 19,115 -- 19,115
Accounts receivable,
net.................... 66,264 66,985 -- -- 133,249
Inventories............. 50,879 62,751 -- (401) 113,229
Other................... 21,933 14,234 9,475 570 46,212
---------- -------- ---------- ----------- ----------
Total current assets.. 155,005 164,223 29,588 169 348,985
Due from affiliates..... 1,160,912 65,245 237,145 (1,463,302) --
Investment in
subsidiaries........... 689,932 -- 802,348 (1,492,280) --
Property, plant and
equipment, net......... 519,846 284,834 18,528 141 823,349
Intangibles and loan
acquisition costs, net. 145,723 68,655 26,309 5,716 246,403
Other................... 12,233 21,440 13,836 -- 47,509
---------- -------- ---------- ----------- ----------
Total assets.......... $2,683,651 $604,397 $1,127,754 $(2,949,556) $1,466,246
========== ======== ========== =========== ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
--------------------
Accounts payable,
accrued liabilities and
other.................. $ 58,185 $ 51,841 $ 25,318 $ 821 $ 136,165
Short-term borrowings... -- 9,505 9,568 -- 19,073
Current portion of long-
term debt.............. -- 3,362 1,480 -- 4,842
---------- -------- ---------- ----------- ----------
Total current
liabilities.......... 58,185 64,708 36,366 821 160,080
Due to affiliates....... 1,189,945 231,627 39,313 (1,460,885) --
Long-term debt, less
current portion........ 4,667 34,292 924,218 -- 963,177
Deferred income taxes
and other.............. 47,764 44,216 8,963 (238) 100,705
Shareholders' equity.... 1,383,090 229,554 118,894 (1,489,254) 242,284
---------- -------- ---------- ----------- ----------
Total liabilities and
shareholders' equity. $2,683,651 $604,397 $1,127,754 $(2,949,556) $1,466,246
========== ======== ========== =========== ==========
46
POLYMER GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Condensed Consolidating Balance Sheet
As of January 2, 1999
Combined
Combined Non-
Guarantor Guarantor The Reclassifications
ASSETS Subsidiaries Subsidiaries Company and Eliminations Consolidated
------ ------------ ------------ ---------- ----------------- ------------
Cash and equivalents.... $ 19,476 $ 31,066 $ 7,766 $ -- $ 58,308
Accounts receivable,
net.................... 52,118 51,840 -- -- 103,958
Inventories............. 47,433 50,568 -- 819 98,820
Other................... 26,684 9,215 13,746 -- 49,645
---------- -------- ---------- ----------- ----------
Total current assets.. 145,711 142,689 21,512 819 310,731
Due from affiliates..... 823,183 8,021 210,560 (1,041,764) --
Investment in
subsidiaries........... 420,485 75,133 777,009 (1,272,627) --
Property, plant and
equipment, net......... 476,341 208,346 322 -- 685,009
Intangibles and loan
acquisition costs, net. 156,516 66,861 26,426 3,291 253,094
Other................... 12,600 19,772 2,061 (300) 34,133
---------- -------- ---------- ----------- ----------
Total assets.......... $2,034,836 $520,822 $1,037,890 $(2,310,581) $1,282,967
========== ======== ========== =========== ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
--------------------
Accounts payable,
accrued liabilities and
other.................. $ 50,110 $ 39,106 $ 6,240 $ (251) $ 95,205
Current portion of long-
term debt.............. 899 1,171 1,000 -- 3,070
---------- -------- ---------- ----------- ----------
Total current
liabilities.......... 51,009 40,277 7,240 (251) 98,275
Due to affiliates....... 841,138 171,767 28,543 (1,041,448) --
Long-term debt, less
current portion........ 4,842 33,076 825,511 -- 863,429
Deferred income taxes
and other.............. 53,566 40,596 6,679 297 101,138
Shareholders' equity.... 1,084,281 235,106 169,917 (1,269,179) 220,125
---------- -------- ---------- ----------- ----------
Total liabilities and
shareholders' equity. $2,034,836 $520,822 $1,037,890 $(2,310,581) $1,282,967
========== ======== ========== =========== ==========
47
POLYMER GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Condensed Consolidating Statement of Operations
For the Fiscal Year Ended January 1, 2000
Combined
Combined Non-
Guarantor Guarantor The Reclassifications
Subsidiaries Subsidiaries Company and Eliminations Consolidated
------------ ------------ ------- ----------------- ------------
Net sales............... $532,789 $399,756 $ -- $(42,750) $889,795
Cost of goods sold...... 396,329 295,988 -- (42,132) 650,185
-------- -------- ------- -------- --------
Gross profit.......... 136,460 103,768 -- (618) 239,610
Selling, general and
administrative
expenses............... 69,015 52,001 (1,631) -- 119,385
-------- -------- ------- -------- --------
Operating income...... 67,445 51,767 1,631 (618) 120,225
Other expense, net...... 1,660 13,239 53,302 -- 68,201
-------- -------- ------- -------- --------
Income (loss) before
income taxes......... 65,785 38,528 (51,671) (618) 52,024
Income taxes............ 481 9,395 8,708 -- 18,584
Equity in earnings of
subsidiaries........... -- -- 93,819 (93,819) --
-------- -------- ------- -------- --------
Net income.............. $ 65,304 $ 29,133 $33,440 $(94,437) $ 33,440
======== ======== ======= ======== ========
Condensed Consolidating Statement of Operations
For the Fiscal Year Ended January 2, 1999
Combined
Combined Non-
Guarantor Guarantor The Reclassifications
Subsidiaries Subsidiaries Company and Eliminations Consolidated
------------ ------------ ------- ----------------- ------------
Net sales............... $513,057 $305,485 $ -- $(15,594) $802,948
Cost of goods sold...... 390,752 224,906 -- (15,764) 599,894
-------- -------- ------- -------- --------
Gross profit.......... 122,305 80,579 -- 170 203,054
Selling, general and
administrative
expenses............... 58,882 44,141 (5,646) 122 97,499
-------- -------- ------- -------- --------
Operating income...... 63,423 36,438 5,646 48 105,555
Other expense, net...... 7,320 16,198 44,082 (145) 67,455
-------- -------- ------- -------- --------
Income (loss) before
income taxes,
extraordinary item
and cumulative effect
of change in
accounting principle. 56,103 20,240 (38,436) 193 38,100
Income taxes............ 6,060 7,465 540 92 14,157
-------- -------- ------- -------- --------
Income (loss) before
extraordinary item and
cumulative effect of
change in accounting
principle.............. 50,043 12,775 (38,976) 101 23,943
Extraordinary item...... -- (2,728) -- -- (2,728)
Cumulative effect of
change in accounting
principle.............. (2,072) 151 410 -- (1,511)
Equity in earnings of
subsidiaries........... -- -- 58,270 (58,270) --
-------- -------- ------- -------- --------
Net income.............. $ 47,971 $ 10,198 $19,704 $(58,169) $ 19,704
======== ======== ======= ======== ========
48
POLYMER GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Condensed Consolidating Statement of Operations
For the Fiscal Year Ended January 3, 1998
Combined
Combined Non-
Guarantor Guarantor The Reclassifications
Subsidiaries Subsidiaries Company and Eliminations Consolidated
------------ ------------ ------- ----------------- ------------
Net sales............... $354,206 $195,465 $ -- $(14,404) $535,267
Cost of goods sold...... 280,112 136,315 35 (14,404) 402,058
-------- -------- ------- -------- --------
Gross profit.......... 74,094 59,150 (35) -- 133,209
Selling, general and
administrative
expenses............... 47,700 32,967 (6,067) -- 74,600
-------- -------- ------- -------- --------
Operating income...... 26,394 26,183 6,032 -- 58,609
Other (income) expense,
net.................... 13,941 7,212 (2,986) -- 18,167
-------- -------- ------- -------- --------
Income before income
taxes and
extraordinary item .. 12,453 18,971 9,018 -- 40,442
Income taxes (benefit).. (785) 3,101 10,693 -- 13,009
-------- -------- ------- -------- --------
Income (loss) before
extraordinary item... 13,238 15,870 (1,675) -- 27,433
Extraordinary item...... (4,587) (839) (6,579) -- (12,005)
Equity in earnings of
subsidiaries........... -- -- 23,682 (23,682) --
-------- -------- ------- -------- --------
Net income.............. $ 8,651 $ 15,031 $15,428 $(23,682) $ 15,428
======== ======== ======= ======== ========
49
POLYMER GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Condensed Consolidating Statement of Cash Flows
For the Fiscal Year Ended January 1, 2000
Combined Combined
Guarantor Non-Guarantor The Reclassifications
Subsidiaries Subsidiaries Company and Eliminations Consolidated
------------ ------------- -------- ----------------- ------------
Net cash provided by
(used by) operating
activities............. $ 95,842 $ 33,383 $(41,807) $ 19,982 $ 107,400
Investing activities
Purchases of property,
plant and equipment.. (103,962) (67,664) (18,260) (110) (189,996)
Purchases of
marketable securities
classified as
available for sale... -- -- (23,530) -- (23,530)
Acquisition of
business, net of cash
acquired............. (3,133) (16,118) -- -- (19,251)
Intercompany
transactions, net.... (78,659) (37,164) (41,154) 156,977 --
Other, net............ 87,439 55,878 41,760 (176,920) 8,157
--------- -------- -------- --------- ---------
Net cash (used in)
provided by investing
activities............. (98,315) (65,068) (41,184) (20,053) (224,620)
Financing activities
Proceeds from debt.... 56 15,571 180,567 -- 196,194
Payments of debt...... (1,130) (11,876) (72,287) -- (85,293)
Dividends to
shareholders......... -- -- (640) -- (640)
Exercise of stock
options.............. -- -- 26 -- 26
Loan acquisition
costs, net........... -- -- (3,521) -- (3,521)
--------- -------- -------- --------- ---------
Net cash (used in)
provided by financing
activities............. (1,074) 3,695 104,145 -- 106,766
Effect of exchange rate
changes on cash........ -- 17,177 (27,922) 71 (10,674)
--------- -------- -------- --------- ---------
Net (decrease) in cash
and equivalents........ (3,547) (10,813) (6,768) -- (21,128)
Cash and equivalents at
beginning of year...... 19,476 31,066 7,766 -- 58,308
--------- -------- -------- --------- ---------
Cash and equivalents at
end of year............ $ 15,929 $ 20,253 $ 998 $ -- $ 37,180
========= ======== ======== ========= =========
50
POLYMER GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Condensed Consolidating Statement of Cash Flows
For the Fiscal Year Ended January 2, 1999
Combined
Combined Non- Reclassifications
Guarantor Guarantor The and
Subsidiaries Subsidiaries Company Eliminations Consolidated
------------ ------------ --------- ----------------- ------------
Net cash provided by
(used by) operating
activities............. $ 120,057 $(18,608) $ (42,744) $ 15,369 $ 74,074
Investing activities
Purchases of property,
plant and equipment.. (55,990) (34,106) -- -- (90,096)
Purchases of
marketable securities
classified as
available for sale... -- -- (16,672) -- (16,672)
Proceeds from sales of
marketable securities
classified as
available for sale... -- -- 24,485 -- 24,485
Proceeds from sale of
assets, net of
canceled subordinated
advance.............. -- 323,524 -- -- 323,524
Minority interest..... -- (54,730) -- -- (54,730)
Acquisition of
business, net of cash
acquired............. (47,423) -- -- -- (47,423)
Intercompany
transactions, net.... (207,033) (20,662) (347,282) 574,977 --
Other, net............ 220,516 366,430 (3,803) (590,888) (7,745)
--------- -------- --------- --------- --------
Net cash (used in)
provided by investing
activities............. (89,930) 580,456 (343,272) (15,911) 131,343
Financing activities
Proceeds from debt.... 281,339 4,674 616,808 (281,340) 621,481
Payments of debt...... (298,179) (571,022) (216,500) 281,340 (804,361)
Loan acquisition
costs, net........... -- -- (11,560) -- (11,560)
--------- -------- --------- --------- --------
Net cash (used in)
provided by financing
activities............. (16,840) (566,348) 388,748 -- (194,440)
Effect of exchange rate
changes on cash........ (2,532) (2,186) 1,317 542 (2,859)
--------- -------- --------- --------- --------
Net increase (decrease)
in cash and
equivalents............ 10,755 (6,686) 4,049 -- 8,118
Cash and equivalents at
beginning of year...... 8,721 37,752 3,717 -- 50,190
--------- -------- --------- --------- --------
Cash and equivalents at
end of year............ $ 19,476 $ 31,066 $ 7,766 $ -- $ 58,308
========= ======== ========= ========= ========
51
POLYMER GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Condensed Consolidating Statement of Cash Flows
For the Fiscal Year Ended January 3, 1998
Combined
Combined Non-
Guarantor Guarantor The Reclassifications
Subsidiaries Subsidiaries Company and Eliminations Consolidated
------------ ------------ -------- ----------------- ------------
Net cash provided by
operating activities... $ 52,917 $ 29,290 $ 18,763 $(82,608) $ 18,362
Investing activities
Purchases of property,
plant and equipment... (50,933) (9,208) (3) -- (60,144)
Purchases of marketable
securities classified
as available for sale. -- -- (15,251) -- (15,251)
Proceeds from sales of
marketable securities
classified as
available for sale.... -- -- 17,003 -- 17,003
Acquisition of
business, net of cash
acquired.............. -- (424,645) (4,914) -- (429,559)
Other, net............. -- (3,554) (396) -- (3,950)
-------- --------- -------- -------- --------
Net cash (used in)
investing activities... (50,933) (437,407) (3,561) -- (491,901)
Financing activities
Proceeds from debt..... 19,675 28,478 432,693 -- 480,846
Proceeds from short-
term bridge financing. -- 425,945 -- -- 425,945
Payments of debt....... (160,675) (69,682) (171,925) -- (402,282)
Intercompany
transactions, net..... 131,425 46,496 (260,529) 82,608 --
Loan acquisition costs,
net................... (17) (3,622) (14,917) -- (18,556)
-------- --------- -------- -------- --------
Net cash (used in)
provided by financing
activities............. (9,592) 427,615 (14,678) 82,608 485,953
Effect of exchange rate
changes on cash........ -- -- 189 -- 189
-------- --------- -------- -------- --------
Net (decrease) increase
in cash and
equivalents............ (7,608) 19,498 713 -- 12,603
Cash and equivalents at
beginning of year...... 16,329 18,254 3,004 -- 37,587
-------- --------- -------- -------- --------
Cash and equivalents at
end of year............ $ 8,721 $ 37,752 $ 3,717 $ -- $ 50,190
======== ========= ======== ======== ========
52
POLYMER GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 9. Income Taxes
Significant components of the provision for income taxes are as follows:
Fiscal Year
-------------------------
1999 1998 1997
------- ------- -------
(In Thousands)
Current:
Federal and state............................ $ 6,878 $ 8,864 $ 315
Foreign...................................... 8,094 5,878 6,709
Deferred:
Federal and state............................ (80) (1,464) 7,108
Foreign...................................... 3,692 879 (1,123)
------- ------- -------
Income tax before extraordinary item and
cumulative effect of change in accounting
principle..................................... 18,584 14,157 13,009
Income tax benefit from:
Cumulative effect of change in accounting
principle................................... -- (907) --
Extraordinary item, loss from early
extinguishment of debt ..................... -- -- (5,959)
------- ------- -------
Total income tax expense................... $18,584 $13,250 $ 7,050
======= ======= =======
At January 1, 2000, the Company had: (i) operating loss carryforwards of
approximately $0.7 million for federal income tax purposes expiring in the
years 2003-2010; (ii) German operating loss carryforwards of approximately
$3.1 million with no expiration date; and (iii) Canadian capital loss
carryforwards of approximately $3.7 million with no expiration date. No
accounting recognition has been given to the potential income tax benefit
related to the U.S. and Canadian loss carryforwards. The Company has not
provided U.S. income taxes for undistributed earnings of foreign subsidiaries
that are considered to be retained indefinitely for reinvestment. The
distribution of these earnings would result in additional foreign withholding
taxes and additional U.S. federal income taxes to the extent they are not
offset by foreign tax credits, but it is not practicable to estimate the total
liability that would be incurred upon such a distribution. Significant
components of the Company's deferred tax assets and liabilities as of January
1, 2000 and January 2, 1999 are as follows:
1999 1998
------ ------
(In
Thousands)
Deferred tax assets:
Provision for bad debts................................... $3,109 $1,968
Inventory capitalization and allowances................... 3,715 3,383
Net operating loss and capital loss carryforwards......... 2,905 3,046
Tax credits (primarily alternative minimum tax credits)... 6,192 6,354
Foreign currency translation adjustment................... 10,739 800
Foreign tax credits....................................... 10,474 4,552
Other..................................................... 8,690 5,117
------ ------
Total deferred tax assets............................... 45,824 25,220
53
POLYMER GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1999 1998
-------- --------
(In Thousands)
Valuation allowance....................................... (9,996) (4,848)
-------- --------
Net deferred tax assets.................................... 35,828 20,372
Deferred tax liabilities:
Fixed assets and intangibles, net......................... (83,302) (79,756)
Other, net................................................ (7,892) (9,239)
-------- --------
Total deferred tax liabilities........................... (91,194) (88,995)
-------- --------
Net deferred tax liabilities............................. $(55,366) $(68,623)
======== ========
Taxes on income are based on earnings before taxes as follows:
Fiscal Year
-----------------------
1999 1998 1997
------- ------- -------
(In Thousands)
Domestic................................................ $12,458 $16,233 $18,688
Foreign................................................. 39,566 21,867 21,754
------- ------- -------
$52,024 $38,100 $40,442
======= ======= =======
The provision for income taxes at the Company's effective tax rate differed
from the provision for income taxes at the statutory rate as follows:
Fiscal Year
-------------------------
1999 1998 1997
------- ------- -------
(In Thousands)
Computed tax expense at statutory rate......... $18,208 $13,335 $14,155
Goodwill and other............................. 596 2,307 --
Valuation allowance............................ -- (1,999) (2,387)
Withholding taxes.............................. -- -- 471
Effect of foreign operations, net.............. (2,063) 173 314
Other, net..................................... 1,843 341 456
------- ------- -------
Provision for income taxes before extraordinary
item and cumulative effect of change in
accounting principle.......................... 18,584 14,157 13,009
Income tax benefit related to cumulative effect
of change in accounting principle and
extraordinary item............................ -- (907) (5,959)
------- ------- -------
Provision for income taxes..................... $18,584 $13,250 $ 7,050
======= ======= =======
Note 10. Stock Option and Employee Stock Purchase Plans
Stock Option Plan
The Company's 1996 Key Employee Stock Option Plan is administered by the
Stock Option Committee, which is composed of non-management members of the
Company's Board of Directors. Any person who is a full-time, salaried employee
(excluding non-management directors) is eligible to
54
POLYMER GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
participate in the plan. The Stock Option Committee selects the participants
and determines the terms and conditions of the options. The plan provides for
the issuance of options covering 1.5 million shares of common stock, subject
to certain adjustments reflecting changes in the Company's capitalization.
Options granted under the plan may be either incentive stock options ("ISOs")
or such other forms of non-qualified stock options ("NQOs") as the Stock
Option Committee may determine. Option prices shall not be less than the fair
value of the shares at the date of grant and options vest in equal 20%
increments over five years. Options expire over a three or ten year period.
The following table summarizes the transactions of the plan for the three year
period ended January 1, 2000:
Weighted
Average
Number of Exercise
Shares Price
--------- --------
Unexercised options outstanding--December 28, 1996.......... 130,330 $18.00
Granted................................................... 595,000 14.25
Exercised................................................. -- --
Forfeited................................................. (5,555) 18.00
Expired/canceled.......................................... -- --
--------- ------
Unexercised options outstanding--January 3, 1998............ 719,775 14.90
Granted................................................... -- --
Exercised................................................. -- --
Forfeited................................................. (65,555) 14.91
Expired/canceled.......................................... -- --
--------- ------
Unexercised options outstanding--January 2, 1999............ 654,220 14.90
Granted................................................... 636,000 12.00
Exercised................................................. (1,800) 14.25
Forfeited................................................. (9,700) 14.60
Expired/canceled.......................................... -- --
--------- ------
Unexercised options outstanding--January 1, 2000............ 1,278,720 $13.46
========= ======
Exercisable options:
January 3, 1998........................................... 143,955 $14.90
January 2, 1999........................................... 261,688 14.90
January 1, 2000........................................... 280,520 15.13
Shares available for future grant........................... 221,280
At January 1, 2000, the exercise price of the outstanding options ranges
from $12.00 to $18.00 and the weighted average remaining contractual life of
the outstanding options is approximately seven years.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("FAS 123") establishes financial accounting and reporting
standards for stock-based compensation plans. As permitted by FAS 123, the
Company elected to account for stock-based compensation awards in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees." Accordingly, no compensation cost has been recognized in the
Company's financial statements for the plan. The fair value for each option
grant was determined by using the Black-Scholes option-pricing model with the
following weighted average assumptions used for 1999, 1998 and 1997; dividend
yield of 1.0% in 1999 and 0.0% in 1998 and 1997; expected volatility of 0.44
in 1999 and 0.56 in 1998 and 1997; risk-free interest rate of 6.1% in 1999,
1998 and 1997; and weighted average expected lives of five years in 1999, 1998
and 1997. Had compensation
55
POLYMER GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
cost been determined based on the fair value at the grant date for such awards
in 1999, 1998 and 1997, respectively, consistent with the provisions of FAS
123, the Company's net income and net income per share would have been reduced
to the pro forma amounts indicated below.
Fiscal year
-----------------------
1999 1998 1997
------- ------- -------
(In Thousands, Except
Per Share Data)
Net income:
As reported.......................................... $33,440 $19,704 $15,428
Pro forma............................................ 32,579 19,033 15,075
Net income per common share--basic:
As reported.......................................... $ 1.05 $ .62 $ .48
Pro forma............................................ 1.02 .59 .47
Net income per common share--diluted:
As reported.......................................... $ 1.04 $ .62 $ .48
Pro forma............................................ 1.02 .59 .47
Weighted average fair value per option granted......... $ 5.19 $ -- $ 7.79
The pro forma impact of these options is not likely to be representative of
the effects on reported net income for future years.
Employee Stock Purchase Plan
The Company sponsors a stock purchase plan that allows employee participants
to purchase common stock of the Company through payroll deductions. Purchases
of shares are made by a third party administrator at the fair value of the
Company's common stock on the transaction date. The cost of the stock purchase
plan was not significant during 1999, 1998 or 1997.
Note 11. Shareholders' Equity
The Company's authorized capital stock consists of 100,000,000 shares of
common stock, par value $0.01 per share, 3,000,000 shares of non-voting common
stock, par value $0.01 per share, and 10,000,000 shares of preferred stock,
par value $0.01 per share. Subject to certain regulatory limitations, the non-
voting common stock is convertible on a one-for-one basis into common stock at
the option of the holder. The Company's Board of Directors may, without
further action by the shareholders, direct the issuance of shares of preferred
stock and may determine the rights, preferences, conversion features, dividend
rate (including whether such dividend shall be cumulative or noncumulative)
and limitations of each issue. Satisfaction of any dividend preferences of
outstanding shares of preferred stock would reduce the amount of funds
available for common dividends. Holders of shares of preferred stock may be
entitled to receive a preference before any payment is made to common
shareholders.
On April 15, 1996, the Company's Board of Directors declared a dividend of
one right for each share of common stock outstanding at the close of business
on June 3, 1996. The holders of additional common stock issued subsequent to
such date and before the occurrence of certain events are entitled to one
right for each additional share. Each right entitles the registered holder
under certain circumstances to purchase from the Company one-thousandth of a
share of Series A junior preferred stock at a price of $80 per one-thousandth
share of junior preferred stock, subject to adjustment. The Company may redeem
the rights at $.01 per right prior to the occurrence of certain events. Prior
to exercise of a right, the holder will have no rights as a stockholder of the
Company, including, without
56
POLYMER GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
limitation, the right to vote or to receive dividends or distributions. In
addition, the rights have certain anti-takeover effects. The rights are not
issued in separate form and may not be traded other than with the shares to
which they attach. If unexercised, the rights expire on June 3, 2006. 100,000
shares of junior preferred stock are reserved for issuance under this plan.
Note 12. Pension Benefits and Postretirement Plans
The Company and its subsidiaries sponsor multiple defined benefit plans and
other postretirement benefit plans that cover substantially all of their non-
union employees. Benefits are based on years of service and the employee's
compensation. It is the Company's policy to fund such plans in accordance with
applicable laws and regulations.
Postretirement
Pension Benefits Plans
------------------ ----------------
1999 1998 1999 1998
-------- -------- ------- -------
(In Thousands)
Benefit obligation at beginning of year.. $(47,864) $(42,928) $(6,267) $(5,561)
Service costs............................ (2,116) (1,827) (77) (72)
Interest costs........................... (2,926) (3,098) (365) (360)
Participant contributions................ -- 250 -- --
Plan amendments.......................... -- (1,920) -- --
Actuarial (loss)/gain.................... (2,749) (1,907) 941 (868)
Currency translation adjustment and
other................................... 2,684 (665) (152) 181
Benefit payments......................... 1,501 5,663 509 413
Curtailments............................. 509 -- -- --
Settlements.............................. -- (1,432) -- --
-------- -------- ------- -------
Benefit obligation at end of year........ $(50,961) $(47,864) $(5,411) $(6,267)
-------- -------- ------- -------
Fair value of plan assets at beginning of
year.................................... $ 54,576 $ 57,683 $ -- $ --
Actual return on plan assets............. 4,525 2,214 -- --
Employer contribution.................... 3,317 2,303 509 413
Plan participants' contributions......... -- 250 -- --
Plan amendments.......................... (53) -- -- --
Benefit payments......................... (1,521) (7,763) (509) (413)
Currency translation adjustment and
other................................... (3,247) 561 -- --
Divestitures and settlements............. -- (672) -- --
-------- -------- ------- -------
Fair value of plan assets at end of year. $ 57,597 $ 54,576 $ -- $ --
-------- -------- ------- -------
Funded status at year-end................ $ 6,636 $ 6,712 $(5,411) $(6,267)
Unrecognized transition net (liability).. (477) (60) -- --
Unrecognized transition net gain/(loss).. 3,150 2,814 (695) 264
Unrecognized prior service cost.......... 309 417 -- --
Currency translation adjustment and
other................................... 1,486 1,221 (10) --
-------- -------- ------- -------
Prepaid (accrued) benefit cost........... $ 11,104 $ 11,104 $(6,116) $(6,003)
======== ======== ======= =======
57
POLYMER GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pension Benefits Postretirement Plans
--------------------------- ------------------------
1999 1998 1997 1999 1998 1997
-------- -------- ------- ------- --------- ----
(In Thousands, Except Percent Data)
Components of net
periodic benefit cost:
Current service costs. $ 2,116 $ 1,827 $ 1,566 $ 77 $ 72 $107
Interest costs on
projected benefit
obligation and other. 2,926 3,098 1,813 366 360 203
(Return) on plan
assets............... (3,622) (2,943) (2,659) -- -- --
Net amortization of
transition obligation
and other............ (320) (1,512) (26) -- -- --
-------- -------- ------- ------- --------- ----
Periodic benefit cost,
net.................. $ 1,100 $ 470 $ 694 $ 443 $ 432 $310
======== ======== ======= ======= ========= ====
Weighted average
assumption rates:
Return on plan assets. 6.5-9.0% 6.5-9.0% 6.5-9.0% -- -- --
Discount rate on
projected benefit
obligations.......... 6.25-7.5% 5.25-9.0% 6.0-8.5% 6.5-7.5% 5.75-7.75% 6.5%
Salary and wage
escalation rate...... 3.0-5.0% 2.5-6.5% 3.0-6.5% -- -- --
The assumed annual composite rate of increase in the per capita cost of
Company provided health care benefits are reflected in the following table:
Composite Rate of
Year Increase
---- -----------------
1997................................................... 9.0
1998................................................... 7.0-9.0
1999................................................... 6.0-10.0
2000................................................... 5.5-10.0
2001................................................... 5.0-8.0
2002................................................... 4.5-8.0
2003................................................... 4.5-6.0
2004 and thereafter.................................... 4.5-6.0
A one-percentage point change in assumed health care cost trend rates would
have the following effects:
1-Percentage 1-Percentage
Point Increase Point Decrease
-------------- --------------
(In Thousands)
Effect on total of service and interest cost
components...................................... $ 65 $ (51)
Effect on postretirement benefit obligation...... 572 (445)
The Company sponsors several defined contribution plans through its domestic
subsidiaries covering employees who meet certain service requirements. The
Company makes contributions to the plans based upon a percentage of the
employees' contribution in the case of its 401(k) plans or upon a percentage
of the employees' salary or hourly wages in the case of its noncontributory
money purchase plans. The cost of the plans was $3.5, $2.9 and $1.7 million
for 1999, 1998 and 1997, respectively.
58
POLYMER GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 13. Segments and Geographic Information
The Company discloses information about segments and geographic data in
accordance with SFAS 131, "Disclosures about Segments of an Enterprise and
Related Information." Operating segments are defined as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and assessing performance. The Company defines operating
segments around market sectors. Sales to P&G are reported primarily within the
hygiene and wipes segment. Sales to J&J are reported primarily in the hygiene
and medical segments. The loss of these sales would have a material adverse
effect on these segments. Generally, the Company's products can be
manufactured on more than one type of asset. Accordingly, certain costs and
assets attributed to each segment of the business were determined on an
allocation basis. Production times have a similar relationship to net sales,
thus the Company believes a reasonable basis for allocating segment assets and
certain costs is the percent of net sales method. Financial data by segment is
as follows (in thousands):
Fiscal Year
--------------------------------
1999 1998 1997
---------- ---------- ----------
Net sales to unaffiliated customers
Hygiene................................ $ 316,257 $ 319,142 $ 231,866
Medical................................ 108,383 92,664 86,745
Wipes.................................. 147,435 107,614 105,195
Industrial and specialty............... 317,720 283,528 111,461
---------- ---------- ----------
$ 889,795 $ 802,948 $ 535,267
========== ========== ==========
Operating income
Hygiene................................ $ 52,100 $ 44,479 $ 18,492
Medical................................ 21,489 15,769 11,426
Wipes.................................. 23,098 15,667 15,672
Industrial and specialty............... 23,538 29,640 13,019
---------- ---------- ----------
$ 120,225 $ 105,555 $ 58,609
========== ========== ==========
Depreciation and amortization
Hygiene................................ $ 27,909 $ 27,263 $ 17,346
Medical................................ 8,046 7,340 6,992
Wipes.................................. 8,375 6,794 6,498
Industrial and specialty............... 22,216 17,928 9,476
---------- ---------- ----------
$ 66,546 $ 59,325 $ 40,312
========== ========== ==========
Identifiable assets
Hygiene................................ $ 486,878 $ 479,773 $ 460,297
Medical................................ 166,856 139,304 172,205
Wipes.................................. 226,975 161,779 208,832
Industrial and specialty............... 489,132 418,530 259,228
Assets held for disposition, net....... -- -- 464,524
Corporate (1).......................... 96,405 83,581 62,667
---------- ---------- ----------
Total................................. $1,466,246 $1,282,967 $1,627,753
========== ========== ==========
Capital spending
Hygiene................................ $ 65,974 $ 36,589 $ 33,493
Medical................................ 30,153 2,335 1,665
Wipes.................................. 41,408 2,712 2,300
Industrial and specialty............... 52,461 48,460 22,686
---------- ---------- ----------
$ 189,996 $ 90,096 $ 60,144
========== ========== ==========
(1) Consists primarily of cash, short-term investments, loan acquisition costs
and other corporate related assets.
59
POLYMER GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Geographic data for the Company's operations are presented in the following
table. Export sales from the Company's United States operations to
unaffiliated customers approximated $110.0, $93.9 and $83.0 million during
1999, 1998 and 1997, respectively
Fiscal Year
--------------------------------
1999 1998 1997
---------- ---------- ----------
(In Thousands)
Net sales to unaffiliated customers
United States.......................... $ 490,039 $ 467,836 $ 311,923
Canada................................. 106,253 104,518 61,747
Europe................................. 241,669 186,656 109,714
Asia................................... 8,302 -- --
Latin America.......................... 43,532 43,938 51,883
---------- ---------- ----------
$ 889,795 $ 802,948 $ 535,267
========== ========== ==========
Identifiable assets
United States.......................... $ 908,306 $ 801,791 $ 683,489
Canada................................. 155,208 154,070 177,999
Europe................................. 262,137 240,004 226,117
Asia................................... 50,101 10,425 --
Latin America.......................... 90,494 76,677 75,624
Assets held for disposition, net....... -- -- 464,524
---------- ---------- ----------
$1,466,246 $1,282,967 $1,627,753
========== ========== ==========
60
POLYMER GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 14. Quarterly Results of Operations (Unaudited)
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
(In Thousands)
Fiscal year ended January 1, 2000
Net sales................................ $210,147 $223,819 $222,486 $233,343
Gross profit............................. 53,268 61,920 60,820 63,602
Net income............................... 5,832 8,645 8,203 10,760
Net income per common share--basic....... $ .18 $ .27 $ .26 $ .34
Net income per common share--diluted..... $ .18 $ .27 $ .26 $ .33
Fiscal year ended January 2, 1999
Net sales................................ $193,336 $206,111 $201,603 $201,898
Gross profit............................. 46,278 51,884 52,541 52,351
Income before extraordinary item and
cumulative effect of change in
accounting principle.................... 2,295 6,240 6,243 9,166
Extraordinary item....................... (2,728) -- -- --
Cumulative effect of change in accounting
principle, net of tax................... -- -- -- (1,511)
Net income (loss)........................ (433) 6,240 6,243 7,655
Net income (loss) per common share--basic
and diluted:
Income before extraordinary item and
cumulative effect of change in
accounting principle.................... $ .07 $ .20 $ .20 $ .29
Extraordinary item....................... (.09) -- -- --
Cumulative effect of change in accounting
principle, net of tax................... -- -- -- (.05)
-------- -------- -------- --------
Net income (loss) per common share--basic
and diluted............................. $ (.02) $ .20 $ .20 $ .24
======== ======== ======== ========
During the first quarter of 1998, the Company recorded an extraordinary item
of $2.7 million for the write-off of previously capitalized debt issue costs
related to the acquisition of Dominion. In addition, during the fourth quarter
of 1998, the Company elected early adoption of SOP 98-5, and wrote-off the net
book value ($1.5 million, after tax) of start-up costs as a cumulative effect
of an accounting change.
Note 15. Certain Matters
From time to time, the Company enters into transactions whereby technology
is licensed or made available to developmental partners within the industry.
There were no technology transfers made during 1999 or 1997. Amounts
recognized for technology transfers during 1998 were not material when
compared to consolidated net sales.
The Company's corporate headquarters are housed in space leased by a
shareholder of the Company from an affiliate of the shareholder. A portion of
the payments and other expenses, primarily insurance and allocated costs, are
charged to the Company. Such amounts approximated $2.7, $1.8, and $1.8 million
in 1999, 1998 and 1997, respectively. The Company leases a manufacturing
facility from an affiliated entity that the Company believes is comparable to
similar properties in the area. Annual rent expense relating to this lease
approximated $0.2 million in 1999, 1998 and 1997.
61
POLYMER GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As part of the acquisition of Dominion, $69.0 million was received from ZB
Holdings, Inc. ("ZB Holdings"), an entity affiliated with the Company. This
amount, including interest of approximately $0.6 million, was repaid during
January 1998. In connection with this transaction, ZB Holdings requested
consideration from the Company in return for providing a portion of the
financing required to complete the tender offer for the outstanding shares of
Dominion. Independent members of the Board of Directors engaged outside legal
counsel and an independent banking firm to evaluate this request. Pursuant to
the review, ZB Holdings received $5.3 million during 1998 from the Company
that was capitalized as part of the cost of the acquisition.
62
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
In connection with the Nonwovens Acquisition on January 29, 1998, the
Company appointed Ernst & Young LLP, independent auditors, as independent
accountants for the subsidiaries comprising the nonwovens and industrial
fabrics business of Dominion to replace Deloitte & Touche LLP ("Deloitte &
Touche"), chartered accountants, whom the Company dismissed as of January 29,
1998.
Deloitte & Touche has been provided with a copy of this disclosure and
requested by the Company to furnish a letter addressed to the Commission
stating whether they agree with the above statements. A copy of Deloitte &
Touche's letter to the Commission is filed as an exhibit to this Annual Report
on Form 10-K.
PART III
ITEM 10. MANAGEMENT
Information required under this item is incorporated by reference from the
Proxy Statement under the captions "Election of Directors" and "Executive
Compensation."
ITEM 11. EXECUTIVE COMPENSATION
Information required under this Item is incorporated by reference from the
Proxy Statement under the caption "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP
Information required under this Item is incorporated by reference from the
Proxy Statement under the caption "Security Ownership."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required under this Item is incorporated by reference from the
Proxy Statement under the caption "Certain Relationships and Related
Transactions."
63
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Financial Statements and Schedules
(a) The following financial statements and independent auditors report
required by this Item are filed herewith under Item 8.
(i)Report of Ernst & Young LLP, Independent Auditors.
(ii)Consolidated Balance Sheets.
(iii)Consolidated Statements of Operations.
(iv)Consolidated Statements of Shareholders' Equity.
(v)Consolidated Statements of Cash Flows.
(vi)Notes to Consolidated Financial Statements.
(b) Schedule II--Valuation and Qualifying Accounts ("Schedule II").
Supplemental schedules other than Schedule II are omitted because of the
absence of conditions under which they are required or because the required
information is included in the consolidated financial statements or in the
notes thereto.
Exhibits
Exhibits required to be filed with this Form 10-K are listed in the
following Exhibit Index.
Form 8-K
The Company filed no reports on Form 8-K during the fourth quarter of 1999.
64
POLYMER GROUP, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ------------ ---------------- ---------- -------------
ADDITIONS
----------------
Balance at Charged to
Beginning of Costs and Deductions Balance at
Description Period Expenses Other (Describe) End of Period
----------- ------------ ---------- ----- ---------- -------------
Year ended January 1,
2000
Allowance for doubtful
accounts............... $ 7,603 5,638 -- 2,654(1) $10,587
Valuation allowance for
deferred tax assets.... $ 4,848 5,148 -- -- $ 9,996
Year ended January 2,
1999
Allowance for doubtful
accounts............... $ 5,503 6,860 100(2) 4,860(1) $ 7,603
Valuation allowance for
deferred tax assets.... $ 5,927 -- -- 1,079(3) $ 4,848
Restructuring costs..... $ 5,484 -- -- 5,484(3) $ --
Year ended January 3,
1998
Allowance for doubtful
accounts............... $ 3,848 7,337 503(2) 6,185(1) $ 5,503
Valuation allowance for
deferred tax assets.... $14,149 -- -- 8,222(3) $ 5,927
Restructuring costs..... $12,009 -- -- 6,525(3) $ 5,484
- --------
(1) Uncollectible accounts written-off and price concessions.
(2)Reserve established as part of business acquisition.
(3)Charges to reserve.
65
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Polymer Group, Inc.
By: /s/ Jerry Zucker
___________________________________
Jerry Zucker
Chairman, President and Chief
Executive Officer
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this Report has been signed below by the following
persons on behalf of the registrant in the capacities indicated on March 31,
2000.
Signature Title
--------- -----
/s/ Jerry Zucker Chairman, Chief Executive Officer,
___________________________________________ President and Director (principal
Jerry Zucker executive officer)
/s/ James G. Boyd Executive Vice President, Chief Financial
___________________________________________ Officer, Treasurer and Director (principal
James G. Boyd financial officer and principal accounting
officer)
/s/ Bruce V. Rauner Director
___________________________________________
Bruce V. Rauner
/s/ Michael J. McGovern Director
___________________________________________
Michael J. McGovern
/s/ David A. Donnini Director
___________________________________________
David A. Donnini
/s/ L. Glenn Orr, Jr. Director
___________________________________________
L. Glenn Orr, Jr.
/s/ Duncan M. O'Brien, Jr. Director
___________________________________________
Duncan M. O'Brien
66
EXHIBIT INDEX
Exhibit
Number Document Description
------- -------------------- ---
2.1 Agreement dated October 27, 1997, among Polymer Group, Inc.,
Galey & Lord, Inc. and DT Acquisition Inc.(1)
2.2 Letter Agreement, dated October 27, 1997, among Polymer Group,
Inc., Galey & Lord, Inc. and DT Acquisition Inc.(2)
2.3 Operating Agreement, dated December 19, 1997, among Polymer
Group, Inc., Galey & Lord, Inc. and DT Acquisition Inc.(1)
2.4 DT Acquisition Inc. Offers to Purchase Statement for all
outstanding Common Shares and all outstanding First Preferred
Shares of Dominion Textile Inc., dated October 29, 1997.(2)
2.5 Notice of Extension and Variation by DT Acquisition Inc. in
respect of its Offers to Purchase, dated November 18, 1997.(2)
2.6 Notice of Extension by DT Acquisition Inc. in respect of its
Offers to Purchase, dated December 2, 1997.(2)
2.7 Notice of Extension and Variation by DT Acquisition Inc. in
respect of its Offers to Purchase, dated December 8, 1997.(2)
2.8 Notice of Extension by DT Acquisition Inc. in respect of its
Offers to Purchase, dated December 17, 1997.(2)
2.9 Letter Agreement between DT Acquisition Inc., PGI and DTI dated
November 16, 1997.(2)
2.10 Notice of Redemption pursuant to the provisions of Section 206
of the Canada Business Corporations Act in regard to holders of
Common Shares of Dominion Textile Inc., dated December 30,
1997.(2)
2.11 Notice of Redemption pursuant to the provisions of Section 206
of the Canada Business Corporations Act in regard to holders of
First Preferred Shares of Dominion Textile Inc., dated December
30, 1997.(2)
2.12 Notice of Redemption in regard to holders of Second Preferred
Shares, Series D of Dominion Textile Inc., dated December 23,
1997.(2)
2.13 Notice of Redemption in regard to holders of Second Preferred
Shares, Series E of Dominion Textile Inc., dated December 23,
1997.(2)
2.14 Indenture, winding up Dominion Textile Inc. pursuant to the
Canada Business Corporations Act, dated January 29, 1998.(2)
2.15 Master Separation Agreement, among Polymer Group, Inc., Galey &
Lord, Inc. and DT Acquisition Inc., dated January 29, 1998.(3)*
3.1(i) Form of Amended and Restated Certificate of Incorporation of the
Company.(4)
3.1(ii) Certificate of Designation of the Company.(7)
3.2 Amended and Restated By-laws of the Company.(4)
4.1 Indenture dated as of July 1, 1997 among the Company, the
Guarantors and Harris Trust and Savings Bank, as trustee. (7)
4.2 Forms of Series A and Series B 9% Senior Subordinated Notes due
2007.(5)
4.3 Form of Guarantee.(5)
4.4 Registration Rights Agreement dated as of July 3, 1997 among the
Company, the Guarantors and Chase Securities Inc.(7)
4.5 Indenture, dated as of March 1, 1998 among Polymer Group, Inc.,
the Guarantors named therein and Harris Trust and Savings Bank,
as trustee.(5)
1
Exhibit
Number Document Description
------- -------------------- ---
4.6 Forms of Series A and Series B 8 3/4% Senior Subordinated Notes
due 2008.(5)
4.7 Form of Guarantee.(5)
4.8 Registration Rights Agreement dated as of March 5, 1998, among
Polymer Group, Inc., the Guarantors named therein and Chase
Securities Inc.(6)
4.9 Amended and Restated Credit Agreement dated July 3, 1997 by and
among the Company, the Guarantors named therein, the lenders
named therein and The Chase Manhattan Bank, as agent.(7)
The Registrant will furnish to the Commission, upon request,
each instrument defining the rights of holders of long-term debt
of the Registrant and its subsidiaries where the amount of such
debt does not exceed 10 percent of the total assets of the
Registrant and its subsidiaries on a consolidated basis.
4.10 First Supplemental Indenture, dated October 27, 1997, between
Polymer Group Inc., Harris Trust and Savings Bank and Loretex
Corporation.(2)
4.11 Second Supplemental Indenture dated January 29, 1998, to
indenture dated June 30, 1997, among Polymer Group, Inc.,
Dominion Textile (USA) Inc., with respect to the 9% Senior
Subordinated Notes due 2008.(2)
10.1 Purchase Agreement, dated February 27, 1998, by and among
Polymer Group, Inc., the Guarantors named herein and Chase
Securities Inc., as Initial Purchaser, with respect to the 8
3/4% Senior Subordinated Notes due 2008.(6)
10.2 Amendment No. 2, dated January 29, 1998, to the Amended,
Restated and Consolidated Credit Agreement dated July 3, 1997 by
and among Polymer Group, Inc., the Guarantors named therein, the
lenders named therein and The Chase Manhattan Bank, as agent.(6)
10.3 Amendment No. 3, dated April 9, 1999, to the Amended, Restated
and Consolidated Credit Agreement dated July 3, 1997 by and
among Polymer Group, Inc., the Guarantors named therein, the
lenders named therein and the Chase Manhattan Bank, as agent.(9)
11 Statement of Computation of Per Share Earnings.
16 Letter of Deloitte & Touche regarding a change in certified
accountants.(2)
21 Subsidiaries of the Company.
23 Consent of Ernst & Young LLP.
27 Financial Data Schedule.
99.1 Press release dated March 14, 2000.(8)
- --------
* Certain portions of the Agreement have been omitted and filed separately
with the Commission pursuant to an Application for Confidential Treatment.
(1) Incorporated by reference to the respective exhibit to the Company's Form
8-K, dated February 13, 1998.
(2) Incorporated by reference to the respective exhibit to the Company's Form
10-K, dated April 3, 1998, for the fiscal year ended January 3, 1998.
(3) Incorporated by reference to the respective exhibit to the Company's Form
8-K/A, dated April 14, 1998.
(4) Incorporated by reference to the respective exhibit to the Company's
Registration Statement on Form S-1 (Reg. No. 333-2424).
2
(5) Incorporated by reference to the respective exhibit to the Company's
Registration Statement on Form S-4 (Reg. No. 333-55863).
(6) Incorporated by reference to the respective exhibit to the Company's Form
10-Q, dated May 19, 1998, for the fiscal quarter ended April 4, 1998.
(7) Incorporated by reference to the respective exhibits to the Company's
Registration Statement on Form S-4 (Reg. No. 333-32605).
(8) Incorporated by reference to the respective exhibit to the Company's Form
8-K, dated March 14, 2000.
(9) Incorporated by reference to the respective exhibit to the Company's Form
10-Q, dated August 17, 1999 for the fiscal quarter ended July 3, 1999.
3