-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Hhinj3P1m56TztNxLV7z5BevOSMbXMxhX65ptZStE/5/oPNGLNXpRvIOq0oF72hD tb7pzavn0wudAKMt1beSJw== 0000950131-00-002331.txt : 20000403 0000950131-00-002331.hdr.sgml : 20000403 ACCESSION NUMBER: 0000950131-00-002331 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20000101 FILED AS OF DATE: 20000331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: POLYMER GROUP INC CENTRAL INDEX KEY: 0000927417 STANDARD INDUSTRIAL CLASSIFICATION: BROADWOVEN FABRIC MILS, MAN MADE FIBER & SILK [2221] IRS NUMBER: 571003983 STATE OF INCORPORATION: DE FISCAL YEAR END: 0103 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-14330 FILM NUMBER: 590889 BUSINESS ADDRESS: STREET 1: 4838 JENKINS AVE CITY: NORTH CHARLESTON STATE: SC ZIP: 29405 BUSINESS PHONE: 8037445174 MAIL ADDRESS: STREET 1: 4838 JENKINS AVENUE CITY: NORTH CHARLESTON STATE: SC ZIP: 29405 10-K 1 FORM 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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 EX-11 2 COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11 POLYMER GROUP, INC. COMPUTATION OF PER SHARE EARNINGS (In Thousands, Except Per Share Data)
Fiscal Year ----------------------- 1999 1998 1997 ------- ------- ------- Basic: Net income........................................... $33,440 $19,704 $15,428 Average common shares outstanding.................... 32,000 32,000 32,000 Net income per common share--basic................... $ 1.05 $ 0.62 $ 0.48 Diluted: Net income........................................... $33,440 $19,704 $15,428 Average common shares outstanding.................... 32,089 32,000 32,000 Net income per common share--diluted................. $ 1.04 $ 0.62 $ 0.48
EX-21 3 SUBSIDIARIES OF POLYER GROUP EXHIBIT 21 Polymer Group, Inc. Subsidiaries of Polymer Group, Inc., as of 3/20/00
Jurisdiction of Subsidiary Incorporation - ---------- --------------- PGI Polymer, Inc................................................ Delaware PGI Europe, Inc................................................. Delaware Chicopee, Inc................................................... Delaware Chicopee Holdings B.V........................................... The Netherlands PGI Nonwovens BV................................................ The Netherlands FiberTech Group, Inc............................................ Delaware PGI Nonwovens GmbH.............................................. Germany Technetics Group, Inc........................................... Delaware Fibergol Corporation............................................ Delaware Bonlam S.A. de C.V.............................................. Mexico Bonlam Holdings BV.............................................. The Netherlands Bonlam Andina Ltd............................................... Colombia Fabrene Group, Inc.............................................. Canada Fabrene Inc..................................................... Canada Fabrene Corp.................................................... Delaware Fabrene L.L.C................................................... Delaware PNA Corp........................................................ North Carolina FNA Polymer Corp................................................ North Carolina FNA Acquisition, Inc............................................ Delaware DT Acquisition Inc.............................................. Canada Loretex Corporation............................................. New York Dominion Textile (USA) Inc...................................... Delaware Dominion Textile Mauritius...................................... Mauritius Nordlys S.A..................................................... France Nordlys UK Ltd.................................................. United Kingdom Geca Tapes B.V.................................................. The Netherlands Albuma S.A...................................................... France DomTex Industries Inc........................................... New York Poly-Bond Inc................................................... Delaware 3427790 Canada Limited.......................................... Canada FabPro Oriented Polymers, Inc................................... Delaware PemTech Builders................................................ Canada PGI Nonwovens (Mauritius)....................................... Mauritius Vateks Tekstil Sanayi ve Ticaret A.S............................ Turkey Nanhai Nanxin Non-Woven Co. Ltd. ............................... China PGI Nonwovens A.B............................................... Sweden
EX-23 4 CONSENT OF ERNST & YOUNG LLP Exhibit 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-04969) pertaining to the 1996 Key Employee Stock Option Plan of our report dated February 15, 2000, with respect to the consolidated financial statements and schedule of Polymer Group, Inc. included in this Annual Report (Form 10-K) for the year ended January 1, 2000. /s/ Ernst & Young LLP Greenville, South Carolina March 31, 2000 EX-27.1 5 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from Polymer Group, Inc.'s Form 10-K for the fiscal year ended January 1, 2000 and is qualified in its entirety by reference to such financial statements. 1,000 YEAR JAN-01-2000 JAN-03-1999 JAN-01-2000 37,180 19,115 143,836 10,587 113,229 348,985 1,004,143 180,794 1,466,246 160,080 600,000 0 0 320 241,964 1,466,246 889,795 889,795 650,185 650,185 0 0 71,882 52,024 18,584 33,440 0 0 0 33,440 1.05 1.04
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