UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended April 3, 2004

 

o

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 (State or other jurisdiction of incorporation or organization)		57-1003983 (I.R.S. Employer Identification No.)
4055 Faber Place Drive, Suite 201 North Charleston, South Carolina (Address of principal executive offices)		29405 (Zip Code)

 

Registrant’s telephone number, including area code: (843) 329-5151

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act) Yes o    No x

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Securities 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes x  No o

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

On May 11, 2004 there were 10,042,195 shares of Class A common stock, 274,896 shares of Class B common stock and 54,251 shares of Class C common stock outstanding. No shares of Class D or Class E were outstanding as of such date. The par value for each class of common shares is $.01 per share.

 

POLYMER GROUP, INC.

INDEX TO FORM 10-Q

						Page
IMPORTANT INFORMATION REGARDING THIS FORM 10-Q							2
PART I. FINANCIAL INFORMATION
Item 1.			Financial Statements				3
Item 2.			Management’s Discussion and Analysis of Financial Condition and Results of Operations				19
Item 3.			Quantitative and Qualitative Disclosures About Market Risk				26
Item 4.			Controls and Procedures				27
PART II. OTHER INFORMATION
Item 1.			Legal Proceedings				27
Item 2.			Changes in Securities				28
Item 3.			Defaults Upon Senior Securities				28
Item 4.			Submission of Matters To a Vote of Security Holders				28
Item 5.			Other Information				28
Item 6.			Exhibits and Reports on Form 8-K				28
Signatures							29

 

1

 

IMPORTANT INFORMATION REGARDING THIS FORM 10-Q

Readers should consider the following information as they review this Form 10-Q:

Safe Harbor-Forward-Looking Statements

From time to time, the Company may publish forward-looking statements relative to matters such as, including, without limitation, anticipated financial performance, business prospects, technological developments, new products, research and development activities and similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. Forward-looking statements are generally accompanied by words such as “estimate,” “project,” “predict,” “believe,” “expect,” “anticipate” or other words that convey the uncertainty of future events or outcomes.

Various statements contained in this report, including those that express a belief, expectation or intention, as well as those that are not statements of historical fact are, or may be deemed to be, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements speak only as of the date of this report. Unless required by law, the Company does not undertake any obligation to update these statements and cautions against any undue reliance on them. These forward-looking statements are based on current expectations and assumptions about future events. While management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond the Company’s control.

Important factors that could cause actual results to differ materially from those discussed in such forward-looking statements include:

·       general economic factors including, but not limited to, changes in interest rates, foreign currency translation rates, consumer confidence, trends in disposable income, changes in consumer demand for goods produced, and cyclical or other downturns;

·       substantial debt levels and potential inability to maintain sufficient liquidity to finance the Company’s operations and make necessary capital expenditures;

·       inability to meet existing debt covenants;

·       information and technological advances;

·       cost and availability of raw materials, labor and natural and other resources;

·       domestic and foreign competition; and

·       reliance on major customers and suppliers.

2

ITEM 1. FINANCIAL STATEMENTS

POLYMER GROUP, INC.

CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)

		April 3, 2004					January 3, 2004
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents			$	15,166				$	21,336
Accounts receivable, net			127,378					121,146
Inventories			102,443					96,513
Deferred income taxes			206					143
Other current assets			23,606					20,554
Total current assets			268,799					259,692
Property, plant and equipment, net			406,557					416,508
Intangibles and loan acquisition costs, net			31,634					33,560
Deferred income taxes			2,332					2,335
Other assets			6,324					9,215
Total assets			$	715,646				$	721,310
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Short-term borrowings			$	6,884				$	8,454
Accounts payable			60,799					57,091
Accrued liabilities			41,160					39,850
Income taxes payable			1,636					1,190
Current portion of long-term debt			5,513					34,001
Total current liabilities			115,992					140,586
Long-term debt, less current portion			473,039					440,992
Deferred income taxes			27,042					28,711
Other noncurrent liabilities			33,837					37,670
Total liabilities			649,910					647,959
Minority interests			14,633					14,151
Shareholders’ equity:
Preferred stock—0 shares issued and outstanding			—					—
Class A common stock—8,708,862 and 8,228,425 shares issued and outstanding at April 3, 2004 and January 3, 2004, respectively			87					82
Class B common stock—281,052 and 389,977 shares issued and outstanding at April 3, 2004 and January 3, 2004, respectively			3					4
Class C common stock—34,892 shares issued and outstanding at April 3, 2004 and January 3, 2004			—					—
Class D common stock—0 shares issued and outstanding			—					—
Class E common stock—0 shares issued and outstanding			—					—
Additional paid in capital			76,008					73,304
Retained earnings (deficit)			(41,756		)			(32,986		)
Accumulated other comprehensive income			16,761					18,796
Total shareholders’ equity			51,103					59,200
Total liabilities and shareholders’ equity			$	715,646				$	721,310

 

See Accompanying Notes.

3

 

POLYMER GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In Thousands, Except Per Share Data)

		Successor										Predecessor
		Three Months Ended April 3, 2004					One Month Ended March 29, 2003					Two Months Ended March 1, 2003
Net sales			$	206,742				$	64,067				$	132,909
Cost of goods sold			168,263					52,629					111,075
Gross profit			38,479					11,438					21,834
Selling, general and administrative expenses			27,136					8,179					16,004
Plant realignment costs			584					8					4
Operating income			10,759					3,251					5,826
Other expense (income):
Interest expense, net (contractual interest of $20,306 for the two months ended March 1, 2003)			15,177					3,760					10,665
Investment gain, net			—					—					(291		)
Minority interests			482					200					441
Foreign currency and other			1,385					(231		)			1,434
			17,044					3,729					12,249
Loss before reorganization items and income taxes			(6,285		)			(478		)			(6,423		)
Reorganization items, net gain			—					—					(540,479		)
Income (loss) before income tax expense			(6,285		)			(478		)			534,056
Income tax expense			2,485					871					1,692
Net income (loss)			$	(8,770	)			$	(1,349	)			$	532,364
Net income (loss) per common share—basic and diluted:
Average shares outstanding			8,787					8,645					32,004
Net income (loss) per common share			$	(1.00	)			$	(0.16	)			$	16.63

 

See Accompanying Notes.

4

POLYMER GROUP, INC.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’
EQUITY AND COMPREHENSIVE INCOME (LOSS)  (Unaudited)
For the Three Months Ended April 3, 2004
(In Thousands)

																	Accumulated
																	Other
							Additional					Retained					Comprehensive
		Common					Paid-in					Earnings/					Income/									Comprehensive
		Stock					Capital					(Deficit)					(Loss)					Total				Income/(Loss)
Balance, January 3, 2004, audited			$	86				$	73,304				$	(32,986	)			$	18,796			$	59,200
Net loss			—					—					(8,770		)			—				(8,770		)			$	(8,770	)
Currency translation adjustment			—					—					—					(2,035		)		(2,035		)			(2,035		)
Conversion of junior notes to Class A common stock			4					2,704														2,708
Balance, April 3, 2004			$	90				$	76,008				$	(41,756	)			$	16,761			$	51,103				$	(10,805	)

 

See Accompanying Notes.

5

POLYMER GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOW (Unaudited)
(In Thousands)

		Successor										Predecessor
		Three Months Ended April 3, 2004					One Month Ended March 29, 2003					Two Months Ended March 1, 2003
Operating activities
Net income (loss)			$	(8,770	)			$	(1,349	)			$	532,364
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Gain on investments			—					—					(291		)
Gain on cancellation of prepetition indebtedness			—					—					(619,913		)
Deferred income taxes			(1,729		)			—					3,010
Fresh start adjustments			—					—					47,460
Write-off of loan acquisition costs			—					—					10,217
Depreciation and amortization			13,149					4,029					8,812
Noncash interest and compensation			1,104					—					—
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable			(7,193		)			(6,268		)			(8,195		)
Inventories			(6,835		)			935					(887		)
Current and other assets			(163		)			2,346					6,675
Accounts payable and accrued expenses			2,737					1,724					13,027
Other, net			656					(343		)			(5,180		)
Net cash provided by (used in) operating activities			(7,044		)			1,074					(12,901		)
Investing activities
Purchases of property, plant and equipment			(4,504		)			(2,029		)			(3,062		)
Proceeds from sale of marketable securities			—					—					11,867
Proceeds from sale of other assets			783					—					—
Other, net			—					—					15
Net cash provided by (used in) investing activities			(3,721		)			(2,029		)			8,820
Financing activities
Proceeds from issuance of debt			18,500					—					535,310
Repayment of debt			(13,803		)			(968		)			(549,031		)
Loan acquisition costs and other			—					—					(948		)
Net cash provided by (used in) financing activities			4,697					(968		)			(14,669		)
Effect of exchange rate change on cash			(102		)			333					4,632
Net increase (decrease) in cash and cash equivalents			(6,170		)			(1,590		)			(14,118		)
Cash and cash equivalents at beginning of period			21,336					31,783					45,901
Cash and cash equivalents at end of period			$	15,166				$	30,193				$	31,783

 

See Accompanying Notes.

6

POLYMER GROUP, INC.
Notes to Consolidated Financial Statements

Note 1.   Principles of Consolidation and Financial Statement Information

Principles of Consolidation

Polymer Group, Inc. (which together with its subsidiaries is referred to herein as the Company) is a publicly-traded, multinational manufacturer, marketer and seller of nonwoven and oriented polyolefin products. The Company’s main sources of revenue are the sales of primary and intermediate products to the Consumer and Industrial & Specialty segments.

The accompanying consolidated financial statements include the accounts of Polymer Group, Inc. and all majority-owned subsidiaries after elimination of all significant intercompany accounts and transactions. The accounts of all foreign subsidiaries have been included on the basis of fiscal periods ended three months or less prior to the dates of the consolidated balance sheets. All amounts are presented in U.S. dollars, unless otherwise noted. Investments in 20% to 50% owned affiliates where the Company is able to exercise significant influence, but not control, are accounted for by the equity method and, accordingly, the consolidated results of operations include the Company’s share of the affiliates’ income or loss.

The accompanying unaudited interim consolidated financial statements and related notes should be read in conjunction with the Consolidated Financial Statements of the Company and related notes as contained in the Annual Report on Form 10-K for the period ended January 3, 2004. In the judgment of management, these unaudited interim consolidated financial statements include all adjustments of a normal recurring nature and accruals necessary for a fair presentation of such statements.

Basis of Presentation

After extensive reorganization efforts, the Company and each of its domestic subsidiaries filed voluntary petitions for Chapter 11 reorganization under the United States Bankruptcy Code in the South Carolina Bankruptcy Court on May 11, 2002 (April 25, 2002 as to Bonlam (S.C.), Inc.). In its efforts to emerge from Chapter 11, the Company filed a Modified Plan (as defined) on November 27, 2002 that was approved by the Bankruptcy Court on January 16, 2003 and, accordingly, the Company emerged from Chapter 11 effective March 5, 2003 (the “Effective Date”). For accounting purposes the Company recognized the emergence on March 1, 2003, which was the end of the February 2003 accounting period. The Company adopted “fresh-start accounting” as of March 1, 2003, and the Company’s emergence from Chapter 11 resulted in a new reporting entity. The reorganization value of the Company has been allocated to the underlying assets and liabilities based on their respective fair values at the date of emergence. References to “Predecessor” refer to the old Polymer Group and its subsidiaries on and prior to March 1, 2003, and references to “Successor” refer to Polymer Group and its subsidiaries as of and subsequent to March 2, 2003, after giving effect to the implementation of fresh start accounting. In accordance with financial reporting requirements for companies emerging from Chapter 11, financial information for the three months ended March 29, 2003 is not presented in the consolidated financial statements since such information would combine the results of the Predecessor and Successor.

Reclassification

Certain amounts previously presented in the consolidated financial statements for prior periods have been reclassified to conform with current year classification.

7

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POLYMER GROUP, INC.
Notes to Consolidated Financial Statements (Continued)

New Accounting Pronouncements

In 2003, the FASB released Interpretation No. 46, “Consolidation of Variable Interest Entities (revised December 2003)” (“FIN 46”). FIN 46 requires that all primary beneficiaries of variable interest entities (VIEs) consolidate that entity. The provisions of FIN 46 related to VIEs created or acquired after January 31, 2003 were effective and adopted by the Company in fiscal year 2003. The provisions of FIN 46 related to VIE’s in which an enterprise holds an interest it acquired before February 1, 2003 are effective for the Company in this first quarter of fiscal 2004. The Company has determined that it does not have any relationships or contracts that constitute a variable interest.

Note 2.   Accounts Receivable and Concentration of Credit Risks

Accounts receivable potentially expose the Company to concentration of credit risk, as defined by SFAS No. 105, “Disclosure of Information about Financial 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 its customers’ financial condition as deemed necessary, but generally does not require collateral to support such receivables. Customer balances are considered past due based on contractual terms and the Company does not accrue interest on the past due balances. Once management determines that the receivables are not recoverable, the amounts are removed from the financial records along with the corresponding reserve balance. The allowance for doubtful accounts was approximately $13.6 million at April 3, 2004 and January 3, 2004, 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 bankruptcy laws. In the first quarter of 2004 and 2003, The Procter & Gamble Company (“P&G”) accounted for approximately 12% and 14%, respectively, of the Company’s sales.

Note 3.   Inventories

Inventories are stated at the lower of cost or market using the first-in, first-out method of accounting and, as of April 3, 2004 and January 3, 2004 consist of the following (in thousands):

		April 3, 2004					January 3,  2004
		(Unaudited)
Finished goods			$	48,925				$	47,288
Work in process			18,722					16,579
Raw materials			34,796					32,646
			$	102,443				$	96,513

 

Note 4.   Business Restructuring

In 2003, the Company implemented a business restructuring initiative. This initiative encompassed a reduction in working capital levels and operating cost reductions through: (i) reducing headcount at both the plant and corporate levels; (ii) improving manufacturing productivity and reducing component costs; (iii) implementing global purchasing initiatives; and (iv) rationalizing certain assets and/or businesses. Approximately 230 positions were eliminated in fiscal 2003.

8

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POLYMER GROUP, INC.
Notes to Consolidated Financial Statements (Continued)

Accrued costs for restructuring efforts are included in accrued liabilities in the accompanying balance sheet. A summary of the business restructuring activity during the first quarter of fiscal 2004 is presented in the following table (in thousands):

Balance accrued at beginning of year		$	4,564
2004 plant realignment charges		584
Cash payments		(1,198		)
Adjustments		40
Balance accrued at end of quarter		$	3,990

 

In December 2003, the Company made the business decision to discontinue one of its production lines in the European operations. Accordingly, in addition to certain costs recorded in 2003, plant realignment costs of $0.6 million, which include severance and other cash costs, were charged to the results of operations in the first quarter of 2004.

Note 5.   Intangibles and Loan Acquisition Costs

Intangibles and loan acquisition costs as of April 3, 2004 and January 3, 2004, consist of the following (in thousands):

		April 3,					January 3,
		2004					2004
		(Unaudited)
Cost:
Proprietary technology			$	26,533				$	26,533
Loan acquisition costs and other			13,533					13,534
			40,066					40,067
Less accumulated amortization			(8,432		)			(6,507		)
			$	31,634				$	33,560

 

Components of amortization expense are shown in the table below (in thousands):

		Successor										Predecessor
		Three Months Ended April 3, 2004					One Month Ended March 29, 2003					Two Months Ended March 1, 2003
Amortization of:
Intangibles with finite lives, included in selling, general and administrative expenses			$	1,453				$	527				$	220
Loan acquisition costs included in interest expense, net			472					158					1,425
Total amortization expense			$	1,925				$	685				$	1,645

 

Intangibles are amortized over periods ranging from 2 to 7 years. Loan acquisition costs are amortized over the life of the related debt.

9

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POLYMER GROUP, INC.
Notes to Consolidated Financial Statements (Continued)

Note 6.   Accrued Liabilities

Accrued liabilities as of April 3, 2004 and January 3, 2004 consist of the following (in thousands):

		April 3,					January 3,
		2004					2004
		(Unaudited)
Salaries, wages and fringe benefits			$	14,755				$	15,443
Restructuring			3,990					4,564
Interest			3,403					1,877
Sales commissions and promotions			2,856					2,070
Professional fees			2,407					4,074
Other			13,749					11,822
			$	41,160				$	39,850

 

Note 7.   Debt

As of April 3, 2004, the Company had outstanding short-term borrowings denominated in Chinese rmb and U.S. dollars of $6.9 million at an annual interest rate of approximately 5.04%.

Long-term debt as of April 3, 2004 and January 3, 2004 consists of the following (in thousands):

		April 3,					January 3,
		2004					2004
		(Unaudited)
Restructured Credit Facility, interest rates for U.S. dollar borrowings are based on a specified base plus a specified margin, are capped at 12.00% and are subject to certain terms and conditions; terminating on December 31, 2006:
Term Loans—interest at 12.00%; due December 31, 2006			$	416,834			$	416,834
Revolving Line of Credit—interest at 6.75% in 2004; due December 31, 2006			7,400				—
Junior Notes—interest at 10.00%; due December 31, 2007			51,009				53,717
Other			3,309				4,442
			478,552				474,993
Less: Current maturities			(5,513		)		(34,001		)
			$	473,039			$	440,992

 

Description of Restructured Credit Facility

The Company’s Restructured Credit Facility provides for secured revolving credit borrowings with aggregate commitments of up to $50.0 million and aggregate term loans and term letters of credit of $435.3 million. Subject to certain terms and conditions, a portion of the Restructured Credit Facility may be used for revolving letters of credit. As of April 3, 2004, the Company had $11.1 million of term letters of credit outstanding (including the $9.0 million Nanhai letter of credit). All borrowings under the Restructured Credit Facility are U.S. dollar denominated and are guaranteed, on a joint and several basis, by each and all of the direct and indirect domestic subsidiaries of the Company and certain non-domestic subsidiaries of the Company. The Restructured Credit Facility and the related guarantees are secured by (i) a lien on substantially all of the assets of the Company, its domestic subsidiaries and

10

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POLYMER GROUP, INC.
Notes to Consolidated Financial Statements (Continued)

certain of its non-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, and (iii) a pledge of certain secured intercompany notes issued to the Company or one or more of its subsidiaries by non-domestic subsidiaries. Commitment fees under the Restructured Credit Facility are equal to 0.75% of the daily unused amount of the revolving credit commitment. The Restructured Credit Facility contains covenants and events of default customary for financings of this type, including leverage, senior leverage, interest coverage and adjusted interest coverage. At April 3, 2004, the Company is in compliance with all such covenants and expects to remain in compliance through fiscal 2004. The Restructured Credit Facility terminates on December 31, 2006. The loans are subject to mandatory prepayment out of proceeds received in connection with certain casualty events, asset sales and debt and equity issuances and from excess cash flow.

The interest rate applicable to borrowings under the Restructured Credit Facility is based on a specified base rate or a specified Eurodollar base rate, at the Company’s option, plus a specified margin. The applicable margin for revolving credit loans bearing interest based on the base rate is 2.75%, and the margin for revolving credit loans bearing interest on a Eurodollar rate is 3.75%. The applicable margin for term loans bearing interest based on the base rate will range from 4.00% to 8.00%, and the margin for term loans bearing interest on a Eurodollar rate will range from 5.00% to 9.00%, in each case, based on the Company’s ratio of senior consolidated indebtedness to consolidated EBITDA (as defined by the Company’s Restructured Credit Facility) calculated on a rolling four quarter basis. In addition, if the Company’s ratio of senior consolidated indebtedness to consolidated EBITDA calculated on a rolling four quarter basis exceeds 5.00 to 1, the Company is required to pay to the term loan lenders and the term letter of credit lenders a fee of 1.00% on the outstanding balance under the term loans and the term letters of credit. The total of the interest payable in respect of term loans or term letters of credit plus the senior leverage ratio fee is capped at 12.00%. The effective rate was 12.00% at April 3, 2004. The Company had outstanding borrowings of $7.4 million at April 3, 2004 under the revolving credit agreement at an effective rate of 6.75%. Average borrowings under the revolving credit agreement for the period from January 4, 2004 to April 3, 2004 were $5.5 million.

As further discussed in Note 14, the Company refinanced its Restructured Credit Facility through a new senior secured bank facility and a portion of its Junior Notes was converted to Preferred Stock on April 27, 2004. The amount shown as the current portion of long-term debt at April 3, 2004 reflects those amounts due within one year under the new financing arrangement.

Description of Convertible Subordinated Notes

In connection with the emergence from Chapter 11, the Company issued $50 million of 10% Convertible Subordinated Notes due 2007 (the “Junior Notes”) pursuant to an indenture dated as of March 5, 2003 (the “Junior Indenture”). The Junior Notes are unsecured subordinated indebtedness of the Company and are subordinated in right of payment to all existing and future indebtedness of the Company which is not, by its terms, expressly junior to, or pari passu with, the Junior Notes. Under the terms of the Junior Notes, the holders may elect to increase the principal amount of the notes in lieu of receiving semi-annual interest payments in cash. The Junior Notes are convertible into shares of Class A Common Stock, at an initial conversion price equal to $7.29 per share. The Junior Indenture contains several covenants, including limitations on: (i) indebtedness; certain restricted payments; liens; transactions with affiliates; dividend and other payment restrictions affecting certain subsidiaries; guarantees by certain subsidiaries; certain transactions including merger and asset sales; and (ii) certain restrictions regarding the disposition of proceeds of asset sales.

11

POLYMER GROUP, INC.
Notes to Consolidated Financial Statements (Continued)

During the first three months of 2004, $2.7 million of the Company’s Junior Notes were converted into approximately 371,500 shares of the Company’s Class A Common Stock.

Subsidiary Indebtedness

The Company’s China-based majority owned subsidiary (“Nanhai”) has a credit facility with a financial institution in China which is scheduled to mature in April 2004. The amount of outstanding indebtedness under the facility was $6.9 million and $8.5 million at April 3, 2004 and January 3, 2004, respectively. The Nanhai indebtedness is guaranteed 100% by the Company and to support this guarantee, a letter of credit has been issued by the Company’s agent bank in the amount of $9.0 million.

The Company’s Argentina-based majority owned subsidiary (“DNS”) has two credit facilities denominated in U.S. dollars totaling approximately $2.6 million (all with current maturities) at April 3, 2004 and $3.4 million (with current maturities of approximately $3.1 million) at January 3, 2004, respectively. The facilities are scheduled to mature in 2004 and 2005, respectively.

Note 8.   Income Taxes

The Company recognized income tax expense of $2.5 million for the three months ended April 3, 2004 on a consolidated loss before income taxes of $6.3 million for such period. This primarily resulted from income taxes accrued on the earnings generated by foreign operations as well as state income taxes in the United States, with no federal income tax benefit being recognized for the combined pre-tax losses incurred in the United States. During the three months ended March 29, 2003, the Company recognized an income tax expense of approximately $2.6 million.

Note 9.   Pension Benefits and Postretirement Plans

The Company and its subsidiaries sponsor multiple defined benefit plans and other postretirement benefits that cover certain 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. The following disclosures regarding defined benefit plans and other postretirement plans for the fiscal 2003 period reflect the combined data of the Successor for the one month ended March 29, 2003 with that of the Predecessor for the two months ended March 1, 2003.

Components of net periodic benefit costs for the three months ended April 3, 2004 and March 29, 2003 are as follows:

		Pension Benefits						Other Benefits
		2004			2003			2004			2003
Current service costs		$	590		$	620		$	101		$	98
Interest costs on projected benefit obligation and other		1,253			1,234			215			228
Return on plan assets		(1,334		)	(1,197		)	—			—
Amortization of transition obligation and other		(3		)	59			—			—
Periodic benefit cost, net		$	506		$	716		$	316		$	326

 

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POLYMER GROUP, INC.
Notes to Consolidated Financial Statements (Continued)

As of April 3, 2004, the Company contributed $3.8 million to its pension plans for the 2004 benefit year. The Company presently anticipates contributing an additional $2.8 million to fund its pension plans in 2004 for a total of $6.6 million.

On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) was enacted and introduced a prescription drug benefit under Medicare as well as a subsidy to sponsors of retiree health care benefit plans. The Company has elected to defer the recognition of the Act until the authoritative guidance on the accounting for the federal subsidy under the Act is issued. When the guidance is issued, the Company could be required to change previously reported information. Any measure of the periodic benefit cost, benefit obligation and related disclosures for the U.S. and other postretirement benefit plans do not reflect the effect of the Act.

Note 10.   Stock Option Plans

On December 11, 2003, the Company awarded the initial non-qualified stock options under the 2003 Stock Option Plan (the “2003 Plan”). The 2003 Plan was approved by the Company’s Board of Directors and is administered by the Compensation Committee of the Board of Directors. The options have a ten-year life and vest, based on the achievement of various service and financial performance criteria, over a five-year period beginning January 1, 2004. As of April 3, 2004, 400,000 shares of the Company’s Class A common stock were reserved for issuance under the 2003 Plan, of which 160,000 shares are available for future grants.

The Company elected to account for the 2003 Plan in accordance with the intrinsic value method as prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and permitted under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”). Compensation costs were not recorded in net income for stock options, as all options granted under the 2003 Plan had an exercise price equal to the market value of the underlying common stock on the date of grant. However, as a percentage of the options vest based on achievement of financial performance criteria, compensation costs will be recognized when it becomes probable that such performance criteria will be achieved.

If the Company applied the fair value recognition provision of SFAS No. 123 to stock-based compensation as required by Statement of Financial Accounting Standard No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure” (“SFAS No. 148”), the amount of stock-based compensation would have approximately equaled the amount charged to operations. Therefore, no pro forma calculations of net income (loss) and earnings (loss) per common share for the first quarter of 2004 are included. Since all stock options under plans approved prior to 2003 were canceled as part of the Company’s emergence from Chapter 11, no pro forma information is shown for the first quarter of 2003.

Note 11.   Segment Information

The Company’s reportable market segments consist of Consumer and Industrial & Specialty reflecting the management of the Company’s business based on product sales. Beginning in fiscal 2003, the Company was required to report operating data to its senior lenders under the Restructured Credit Facility based upon the Company’s primary operating divisions. Therefore, disclosures for the operating divisions have also been presented in the following table. Sales to P&G account for more than 10% of the Company’s sales in each of the periods presented. Sales to this customer are reported primarily in the Consumer market segment and the loss of these sales would have a material adverse effect on this segment. Generally, the Company’s nonwoven products can be manufactured on more

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POLYMER GROUP, INC.
Notes to Consolidated Financial Statements (Continued)

than one type of production line. Accordingly, certain costs attributed to each segment of the business were determined on an allocation basis. Production times have a similar relationship to net sales and the Company believes a reasonable basis for allocating certain costs is the percent of net sales method for market segment data. During the three months ended April 3, 2004, the one month ended March 29, 2003 and the two months ended March 1, 2003, the Company recorded plant realignment costs which have not been allocated to the segment data.

Financial data by market segment is as follows (in thousands):

		Successor										Predecessor
		Three Months Ended April 3, 2004					One Month Ended March 29, 2003					Two months Ended March 1, 2003
Net sales:
Consumer			$	110,958				$	35,044				$	74,956
Industrial & specialty			95,784					29,023					57,953
			$	206,742				$	64,067				$	132,909
Operating income:
Consumer			$	4,055				$	1,670				$	3,105
Industrial & specialty			7,288					1,589					2,725
			11,343					3,259					5,830
Plant realignment costs			(584		)			(8		)			(4		)
			$	10,759				$	3,251				$	5,826
Depreciation and amortization expense included in operating income:
Consumer			$	7,609				$	2,701				$	4,375
Industrial & specialty			5,068					1,170					3,012
			$	12,677				$	3,871				$	7,387
		April 3, 2004					January 3, 2004
Identifiable assets (including intangible assets):
Consumer			$	385,165				$	392,419
Industrial & specialty			332,492					321,851
Corporate			(2,011		)			7,040
			$	715,646				$	721,310

 

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POLYMER GROUP, INC.
Notes to Consolidated Financial Statements (Continued)

Financial data by operating division is as follows (in thousands):

		Successor										Predecessor
		Three Months Ended April 3, 2004					One Month Ended March 29, 2003					Two months Ended March 1, 2003
Net sales:
Nonwovens			$	164,214				$	50,075				$	108,373
Oriented Polymers			42,649					13,992					24,536
Eliminations			(121		)			—					—
			$	206,742				$	64,067				$	132,909
Operating income (loss):
Nonwovens			$	11,935				$	3,357				$	7,852
Oriented Polymers			3,538					1,058					1,461
Unallocated Corporate			(4,476		)			(1,028		)			(3,598		)
Eliminations			346					(128		)			115
			11,343					3,259					5,830
Plant realignment costs			(584		)			(8		)			(4		)
			$	10,759				$	3,251				$	5,826
Depreciation and amortization expense included in operating income (loss):
Nonwovens			$	10,572				$	3,477				$	5,766
Oriented Polymers			2,074					666					1,349
Unallocated Corporate			377					(272		)			272
Eliminations			(346		)			—					—
			$	12,677				$	3,871				$	7,387
		April 3, 2004					January 3, 2004
Identifiable assets (including intangible assets):
Nonwovens			$	693,516				$	708,595
Oriented Polymers			150,314					147,075
Corporate			(2,011		)			7,040
Eliminations			(126,173		)			(141,400		)
			$	715,646				$	721,310

 

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POLYMER GROUP, INC.
Notes to Consolidated Financial Statements (Continued)

Geographic Data:

Geographic data for the Company’s operations is presented in the following table (in thousands):

 

		Successor										Predecessor
		Three Months Ended April 3, 2004					One Month Ended March 29, 2003					Two months Ended March 1, 2003
Net sales:
United States			$	90,345				$	28,141				$	58,992
Canada			28,592					9,034					16,416
Europe			51,470					15,829					33,936
Asia			6,818					2,140					4,773
Latin America			29,517					8,923					18,792
			$	206,742				$	64,067				$	132,909
Operating income (loss):
United States			$	(777	)			$	(749	)			$	(1,582	)
Canada			1,925					817					1,233
Europe			4,445					1,077					2,330
Asia			544					249					848
Latin America			5,206					1,865					3,001
			11,343					3,259					5,830
Plant realignment costs			(584		)			(8		)			(4		)
			$	10,759				$	3,251				$	5,826
Depreciation and amortization expense included in operating income (loss):
United States			$	5,824				$	1,991				$	3,658
Canada			1,503					468					950
Europe			2,343					659					1,166
Asia			994					275					628
Latin America			2,013					478					985
			$	12,677				$	3,871				$	7,387
		April 3, 2004					January 3, 2004
Identifiable assets (including intangible assets):
United States			$	163,974				$	155,685
Canada			101,998					106,428
Europe			272,376					279,269
Asia			38,203					37,987
Latin America			139,095					141,941
			$	715,646				$	721,310

 

Note 12.   Legal Proceedings

On August 18, 2003 an affiliate (“Affiliate”) of the former Chief Executive Officer of the Company filed a claim seeking damages associated with a lease agreement and an alleged services agreement, between the Company and the Affiliate, associated with the lease by the Company of its former

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POLYMER GROUP, INC.
Notes to Consolidated Financial Statements (Continued)

corporate headquarters and the provision of shared administrative services. The damages sought in the complaint total $7.7 million, plus attorney’s fees. The Company believes that the ultimate outcome will not have a material adverse effect on its financial position or results of operations.

On April 23, 2002, the Company filed a demand for arbitration against Johnson & Johnson (J&J). The primary issue in the arbitration is the Company’s assertion that J&J breached a supply agreement when J&J and certain of its affiliates failed to purchase certain products from the Company and to allow the Company a reasonable opportunity to compete for certain sales. The arbitration is currently pending in the State of New York.

Note 13.   Supplemental Cash Flow Information

Noncash transactions in the first quarter of 2004 included the payment in kind in lieu of cash payment of $1.0 million of interest expense on the Junior Notes and the conversion of $2.7 million of the Company’s Junior Notes into approximately 371,500 shares of the Company’s Class A Common Stock.

Note 14.   Subsequent Events

On April 27, 2004, the Company entered into a new senior secured bank facility consisting of a $50.0 million revolving credit facility maturing in 2009, a $300.0 million senior secured first-lien term loan that matures in 2010 and a $125.0 million senior secured second-lien term loan maturing in 2011. The proceeds therefrom were used to fully repay indebtedness under the Company’s previous Restructured Credit Facility and pay related fees and expenses. The Company has the remainder of the proceeds available for working capital needs, if necessary. The senior secured first-lien term loan requires quarterly payments of $750,000 beginning in September 2004 and accrues interest at LIBOR plus 325 basis points. The senior secured second-lien term loan accrues interest at LIBOR plus 625 basis points. The revolving credit facility initially bears interest at LIBOR plus 300 basis points.

The new credit agreement contains covenants and events of default customary in financings of this type, including leverage and interest expense coverage covenants. The new credit agreement requires the Company to use a percentage of any proceeds from asset sales and excess cash flows, as defined by the agreement, to reduce its debt balances. Additionally, in accordance with the terms of the new credit agreement, the Company entered a cash flow hedge agreement, effectively converting $212.5 million of notional principal amount of debt from a variable LIBOR rate to a fixed rate of 3.383%. The cash flow hedge agreement terminates on May 8, 2007.

In the second quarter of 2004, the Company will expense the unamortized balance of $5.2 million of loan acquisition costs related to the previous Restructured Credit Facility.

In conjunction with the refinancing, the Company’s majority shareholder exchanged approximately $42.6 million in aggregate principal amount of the 10% Convertible Subordinated Notes due 2007 it controlled for 42,633 shares of the Company’s 16% Series A Convertible Pay-in-kind Preferred Stock. The dividends on the new preferred shares are payable, at the option of the Company, by issuing additional shares of preferred stock or paying such dividends in cash. The new preferred shares will have priority as to dividends over each class of common stock. The new preferred shares are mandatorily redeemable on June 30, 2012 payable, at the option of the Company, by paying in cash, by the issuance of Class A Common Stock or by a combination thereof. The Company also has the option to redeem the shares prior to that date, provided certain conditions have been met.

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POLYMER GROUP, INC.
Notes to Consolidated Financial Statements (Continued)

Additionally, subsequent to the end of the March 2004 quarter, the United States Bankruptcy Court for the District of South Carolina resolved certain claims against the Company in connection with the Modified Plan and approved the issuance of 1,327,177 shares of the Company’s Class A Common Stock and 19,359 shares of the Company’s Class C Common Stock which were issued on a pro rata basis to holders of the Predecessor Company’s Class 4 General Unsecured Claims per the Predecessor Company’s Chapter 11 Plan of Reorganization.  If these shares had been outstanding for all Successor periods presented, the pro forma net loss per common share for the three months ended April 3, 2004 and the one month ended March 29, 2003 would have been $(0.87) per share and $(0.14) per share, respectively.

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