<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
----------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED JUNE 29, 1996
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
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
4838 JENKINS AVENUE 29405
NORTH CHARLESTON, SOUTH CAROLINA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (803) 566-7293
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to the
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
On August 8, 1996 there were 32,000,000 Common Shares, $.01 par value
outstanding.
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<PAGE>
POLYMER GROUP, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
Part I. Financial Information........................................... 3
Item 1. Financial Statements ........................................... 3
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation............................................ 11
Part II. Other Information............................................... 17
Signatures............................................................... 18
Exhibit Index............................................................ 19
Exhibit.................................................................. 20
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
POLYMER GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 29, DECEMBER 30,
1996 1995
----------- ------------
(UNAUDITED)
ASSETS
- ------
<S> <C> <C>
Current assets:
Cash and equivalents................................ $ 19,343 $ 18,088
Marketable securities............................... 11,746 4,861
Accounts receivable, net............................ 63,527 58,288
Inventories......................................... 51,383 47,882
Other............................................... 13,557 14,035
-------- --------
Total current assets.............................. 159,556 143,154
Property, plant and equipment, net.................... 371,037 380,338
Intangibles, loan acquisition and organization costs,
net.................................................. 80,486 95,753
Other................................................. 4,334 5,480
-------- --------
Total assets...................................... $615,413 $624,725
======== ========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses............... $ 47,145 $ 44,001
Accrued interest payable............................ 6,059 8,898
Accrued salaries, wages and other fringe benefits... 7,664 5,924
Income taxes payable................................ 2,912 4,295
Current portion of accrued restructuring costs...... 7,452 7,540
Current portion of long-term debt................... 9,121 10,938
-------- --------
Total current liabilities......................... 80,353 81,596
-------- --------
Accrued restructuring costs, less current portion..... 6,282 7,913
Accrued postretirement benefit obligations............ 3,847 3,493
Long-term debt, less current portion.................. 313,752 439,940
Deferred income taxes................................. 24,572 33,882
Mandatory redeemable preferred stock, 13% cumulative.. -- 44,339
Shareholders' equity:
Class A common stock................................ -- 4
Class B common stock................................ -- 6
Class C common stock................................ -- --
Preferred stock..................................... -- --
Common stock........................................ 320 --
Additional paid-in capital.......................... 243,662 53,134
Deficit............................................. (67,490) (52,653)
Cumulative translation adjustment................... 10,246 12,729
Unrealized holding gain (loss) on marketable
securities......................................... (131) 342
-------- --------
186,607 13,562
-------- --------
Total liabilities and shareholders' equity........ $615,413 $624,725
======== ========
</TABLE>
See accompanying notes.
3
<PAGE>
POLYMER GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SIX MONTHS ENDED
------------------ ------------------
JUNE 29, JULY 1, JUNE 29, JULY 1,
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales............................. $128,593 $123,041 $251,308 $189,053
Cost of goods sold.................... 96,328 92,185 189,648 142,198
-------- -------- -------- --------
Gross profit.......................... 32,265 30,856 61,660 46,855
Selling, general and administrative
expenses............................. 16,480 16,340 34,591 24,582
-------- -------- -------- --------
Operating income...................... 15,785 14,516 27,069 22,273
Other (income) expenses:
Interest expense, net............... 9,026 10,475 19,605 17,005
Foreign currency transaction (gains)
losses, net........................ 2,241 (4,579) 3,573 6,236
-------- -------- -------- --------
11,267 5,896 23,178 23,241
-------- -------- -------- --------
Income (loss) before income taxes and
extraordinary item................... 4,518 8,620 3,891 (968)
Income taxes.......................... 1,920 1,846 1,776 3,562
-------- -------- -------- --------
Income (loss) before extraordinary
item................................. 2,598 6,774 2,115 (4,530)
Extraordinary item, (loss) from
extinguishment of debt, net of income
tax benefit of $7,492................ (13,932) -- (13,932) --
-------- -------- -------- --------
Net income (loss)..................... (11,334) 6,774 (11,817) (4,530)
Redeemable preferred stock dividends
and accretion........................ (916) (1,398) (3,020) (1,598)
-------- -------- -------- --------
Net income (loss) applicable to common
stock................................ $(12,250) $ 5,376 $(14,837) $ (6,128)
======== ======== ======== ========
Net income (loss) per common share:
Income (loss) before extraordinary
item............................... $ .06 $ .26 $ (.04) $ (.30)
Extraordinary item, (loss) from
extinguishment of debt, net of
income tax benefit................. (.53) -- (.60) --
-------- -------- -------- --------
Net income (loss) applicable to common
stock................................ $ (.47) $ .26 $ (.64) $ (.30)
======== ======== ======== ========
Weighted average number of shares
outstanding.......................... 26,250 20,500 23,375 20,500
======== ======== ======== ========
</TABLE>
See accompanying notes
4
<PAGE>
POLYMER GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------
JUNE 29, JULY 1,
1996 1995
--------- ---------
<S> <C> <C>
Operating activities
Net (loss)............................................. $ (11,817) $ (4,530)
Adjustments to reconcile net (loss) to net cash
provided by operating activities
Extraordinary item, loss from extinguishment of debt,
net of income tax benefit........................... 13,932 --
Depreciation and amortization expense................ 18,264 11,434
Foreign currency transaction losses, net............. 3,573 6,236
Provision for losses on accounts receivable and price
concessions......................................... 3,856 3,855
Changes in operating assets and liabilities, net of
effects of business acquisition:
Accounts receivable.................................. (9,095) (8,980)
Inventories.......................................... (3,501) (9,831)
Accounts payable and accrued liabilities............. 2,399 9,093
Other, net........................................... (1,406) (1,649)
--------- ---------
Net cash provided by operating activities.......... 16,205 5,628
--------- ---------
Investing activities
Purchases of property, plant and equipment............. (10,973) (20,811)
Purchases of marketable securities..................... (15,452) (9,083)
Proceeds from sales of marketable securities........... 8,100 6,693
Acquisition of businesses, net of cash acquired........ -- (281,358)
Organization costs..................................... (49) (481)
--------- ---------
Net cash (used in) investing activities............ (18,374) (305,040)
--------- ---------
Financing activities
Issuance of common stock, net of costs incurred........ 190,838 30,000
Proceeds from debt..................................... 235,400 249,789
Payments of debt....................................... (363,905) (4,713)
Redemption of preferred stock.......................... (57,359) --
Issuance of redeemable preferred stock................. 10,000 40,000
Loan acquisition and debt prepayment costs............. (11,067) (525)
--------- ---------
Net cash provided by financing activities.......... 3,907 314,551
--------- ---------
Effect of exchange rate changes on cash.................. (483) (1,257)
--------- ---------
Net increase in cash and cash equivalents................ 1,255 13,882
Cash and cash equivalents at beginning of period......... 18,088 13,828
--------- ---------
Cash and cash equivalents at end of period............... $ 19,343 $ 27,710
========= =========
Noncash financing activities
Cumulative dividends on redeemable preferred stock..... $ 3,020 $ 1,538
Acquisition of business
Fair value of assets acquired.......................... -- 358,814
Liabilities assumed and incurred....................... -- 77,456
Cash paid.............................................. -- 281,358
</TABLE>
See accompanying notes.
5
<PAGE>
POLYMER GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Polymer Group, Inc. ("Polymer Group" or the "Company") is a world-wide
manufacturer of flexible nonwoven and woven polyolefin fabrics. The Company's
principal lines of business include industrial and specialty products and
disposable wiping medical and hygiene products for consumer applications. The
Company operates twelve manufacturing facilities located in the United States,
Canada, Mexico, Germany and the Netherlands.
The accompanying unaudited consolidated financial statements of the Company
have been prepared in accordance with generally accepted accounting principles
for interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of the management of Polymer
Group, these unaudited consolidated financial statements contain all
adjustments of a normal recurring nature necessary for a fair presentation.
Operating results for the three and six months ended June 29, 1996, are not
necessarily indicative of the results that may be expected for the year ending
December 28, 1996. 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 accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. These financial statements should be read in conjunction with the
consolidated financial statements and notes thereto contained in the Company's
Registration Statement on Form S-1 declared effective on May 9, 1996.
NOTE 2. INITIAL PUBLIC OFFERING
On May 15, 1996, the Company completed an initial public offering of
11,500,000 shares (the "Offering") of its common stock at an offering price of
$18.00 per share. Net proceeds to the Company after underwriting fees and
other related costs were $190,838. Pursuant to the Recapitalization Agreement
dated May 6, 1996, all of the warrants to acquire shares of Class C common
stock were exercised, and the outstanding shares of Class A-1 common stock,
Class A-2 common stock, Class A-3 common stock, Class B common stock and Class
C common stock were converted (the "Reclassification") into a single class of
common stock concurrently with the Offering. In connection with the Offering,
the Company's Board of Directors approved an approximate 19.97 to 1 stock
split.
As part of the Offering, the Company consummated the following transactions
(together with the Offering, the Reclassification and the approximate 19.97 to
1 stock split, the "Recapitalization"): (i) effectively repaid all outstanding
indebtedness under the FiberTech Credit Facility and Chicopee Credit Facility
(collectively, the "Facilities") and terminated the Facilities; (ii) redeemed
$50,000 principal amount of the 12 1/4% Senior Notes (the "Senior Notes") at a
premium of 112.25%; (iii) redeemed the preferred stock of Chicopee, Inc. at a
price equal to $1,000 per share plus accrued but unpaid dividends; (iv)
redeemed the Company Preferred Stock (as defined) at a price of $1,000 per
share plus accrued but unpaid dividends; and (v) entered into a new credit
facility ("New Credit Facility") as more fully described below.
The New Credit Facility consists of a $200,000 term loan and a $125,000
revolving facility. The New Credit Facility is secured by all of the assets of
the Company and by a guarantee by each of the Company's domestic subsidiaries,
which guarantee is secured by the assets of each such subsidiary. The
Company's non-domestic subsidiaries will either borrow directly under the New
Credit Facility on a secured basis or borrow from the Company, with such
borrowings being evidenced by a note pledged to the lenders.
6
<PAGE>
POLYMER GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In order to enter into the New Credit Facility with the terms and conditions
described above, the Company was required to obtain the affirmative consents
(the "Required Consents") of holders of a majority of the outstanding principal
amount of the Senior Notes. Pursuant to a Consent Solicitation Statement dated
March 14, 1996, the Company solicited and received the Required Consents, and,
accordingly, the Company and the Trustee executed a Third Supplemental
Indenture dated as of April 9, 1996 that became effective concurrently with
consummation of the Offering, which allowed the Company to enter into the New
Credit Facility.
In connection with consummation of the Offering, the Company recorded one-
time charges of $13,932, net of income taxes, for the write-off of previously
capitalized debt issue costs and prepayment penalties paid in connection with
the repurchase of a portion of the Senior Notes.
NOTE 3. INVENTORIES
Inventories are stated at the lower of costs or market using the first-in,
first-out method of accounting. Supply inventories not expected to be utilized
within one year are classified with other non-current assets. Inventories,
classified as current assets, as of June 29, 1996 and December 30, 1995,
consist of the following:
<TABLE>
<CAPTION>
JUNE 29, DECEMBER 30,
1996 1995
----------- ------------
(UNAUDITED)
<S> <C> <C>
Inventories:
Finished goods................................. $23,692 $22,476
Work in process and stores and maintenance..... 4,173 4,010
Raw materials.................................. 23,518 21,396
------- -------
Total........................................ $51,383 $47,882
======= =======
</TABLE>
NOTE 4. NET INCOME (LOSS) PER SHARE
Net income (loss) per common share is determined by dividing net income
(loss) applicable to common stock by the average number of shares outstanding
during the period. All issuances of the Company's common stock and warrants at
prices below the offering price during the twelve month period preceding the
Offering have been included as common stock equivalents for purposes of
calculating net income (loss) per common share as if they had been issued at
the Company's inception. The calculation of net income (loss) per common share
also gives effect to the approximate 19.97 to 1 stock split as discussed in
Note 2. Initial Public Offering.
NOTE 5. SHAREHOLDERS' EQUITY
In connection with the Offering, the Company adopted the 1996 Key Employee
Stock Option Plan (the "1996 Plan"). The 1996 Plan is administered by a
committee (the "Committee") composed of non-management members of the Board who
are appointed by the Board. Any person who is a full-time, salaried employee of
the Company (excluding non-management directors) will be eligible to
participate in the 1996 Plan (a "Participant"). The Committee will select the
Participants and determine the terms and conditions of the options. The 1996
Plan provides for the issuance of options to Participants covering 1,500,000
shares of common stock, subject to certain adjustments reflecting changes in
the Company's capitalization. At the time of the Offering, options to acquire a
number of shares of common stock equal to $600 divided by the initial public
offering price
7
<PAGE>
POLYMER GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
per share of common stock were granted at a price per share equal to the
initial public offering price per share of common stock. Such options vest over
a five-year period and expire three years from the date of vesting.
Concurrently with the Offering, the Company's Certificate of Incorporation
was amended to permit the Board, without further action of the Company's
stockholders, from time to time, to direct the issuance of shares of preferred
stock in series and may, at the time of issuance, determine the rights,
preferences and limitations of each series. The Board, without stockholder
approval, may issue shares of preferred stock with voting and conversion rights
which could adversely affect the holders of shares of common stock. As part of
the Offering, 100,000 shares of junior preferred stock were reserved for
issuance in connection with the rights agreement (the "Rights Agreement") as
described in the next paragraph. The Company has no present intention to issue
any shares of preferred stock.
On April 15, 1996, the Board declared a dividend of one right ("Right") for
each share of common stock outstanding at the close of business on June 3,
1996. Each Right entitles the registered holder under certain circumstances to
purchase from the Company one one-thousandth of a share of junior preferred
stock (series A) at a price of $80 per one one-thousandth share of preferred
stock, subject to adjustment.
NOTE 6. CERTAIN MATTERS
On January 11, 1996, the Company authorized and issued 10,000 shares of 13%
Cumulative Redeemable Preferred Stock (the "Company Preferred Stock"), $.01 par
value, to ConX II, Inc., an entity affiliated with the Company, for $10,000.
The Company Preferred Stock was redeemed concurrently with the Offering as
discussed in Note 2. Initial Public Offering.
8
<PAGE>
POLYMER GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7. SELECTED FINANCIAL DATA OF GUARANTORS
Payment of the Senior Notes is unconditionally guaranteed, jointly and
severally, on a senior basis by FiberTech Group, Inc. ("FiberTech"), PGI,
Chicopee Holdings, Inc. and Chicopee, Inc. (collectively, the "Guarantors"),
wholly owned subsidiaries of the Company. Management has determined that
separate complete financial statements of the Guarantors would not be material
to users of the financial statements. The following sets forth selected
financial data of the Guarantors:
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS DATA (UNAUDITED)
-------------------------------------------------------------------------------
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 29, 1996 JULY 1, 1995
--------------------------------------- --------------------------------------
CHICOPEE FIBERTECH PGI CHICOPEE FIBERTECH PGI
HOLDINGS, CHICOPEE GROUP, POLYMER, HOLDINGS, CHICOPEE GROUP, POLYMER,
INC. INC. INC. INC. INC. INC. INC. INC.
--------- -------- --------- -------- --------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $ -- $102,682 $ 61,433 $ -- $ -- $ 56,266 $ 67,001 $ --
Operating income (loss). -- 12,171 1,243 (42) -- 6,629 5,849 64
Income (loss) before
income taxes and
extraordinary item..... 145 4,551 (3,536) 2,245 79 2,208 5,180 67
Income (loss) before
extraordinary item..... 94 2,731 (3,100) 2,115 51 1,303 4,276 68
Extraordinary item,
(loss) from
extinguishment of debt,
net of income tax
benefit................ -- (8,678) (1,462) (605) -- -- -- --
Net income (loss)....... $ 94 $ (5,947) $ (4,562) $ 1,510 $ 51 $ 1,303 $ 4,276 $ 68
<CAPTION>
BALANCE SHEET DATA (AT END OF PERIOD)
-------------------------------------------------------------------------------
JUNE 29, 1996
(UNAUDITED) DECEMBER 30, 1995
--------------------------------------- --------------------------------------
CHICOPEE FIBERTECH PGI CHICOPEE FIBERTECH PGI
HOLDINGS, CHICOPEE GROUP, POLYMER, HOLDINGS, CHICOPEE GROUP, POLYMER,
INC. INC. INC. INC. INC. INC. INC. INC.
--------- -------- --------- -------- --------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Working capital......... $ 6,879 $ 15,961 $ 18,955 $(36,338) $ 7,056 $ 3,842 $ 22,525 $ (2,383)
Total assets............ 36,954 288,198 155,435 418,953 37,056 336,551 154,118 103,673
Total debt.............. -- 91,000 39,500 -- -- 227,363 71,600 --
Shareholders' equity.... $30,285 $ 18,019 $ 53,865 $364,031 $ 30,215 $ 26,521 $ 58,638 $ 62,956
</TABLE>
NOTE 8. ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" ("FAS 121"), which requires impairment
losses to be recorded on long-lived assets used in operations when indicators
of impairment are present and the undiscounted cash flows estimated to be
generated by those assets are less than the assets' carrying amount. FAS 121
also addresses the accounting for long-lived assets that are expected to be
disposed of. FAS 121 is effective for financial statements for fiscal years
beginning after December 15, 1995; therefore, the Company adopted FAS 121 in
the first quarter of 1996. The effect of adoption did not have a material
impact on the Company's results of operations for the three and six three
months ended June 29, 1996.
In October 1995, the FASB issued Statement No. 123, "Accounting for Stock-
Based Compensation" ("FAS 123"). FAS 123 establishes financial accounting and
reporting standards for stock-based employee compensation plans. FAS 123 is
effective for transactions entered into in fiscal years beginning after
December
9
<PAGE>
POLYMER GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
15, 1995. In connection with the Offering, the Company has adopted the 1996
Plan. With adoption of the 1996 Plan, the Company will account for stock-based
compensation awards under the provisions of Accounting Principles Board
Opinion No. 25, as permitted by FAS 123.
NOTE 9. SUBSEQUENT EVENT
The Company announced on July 17, 1996, that it had entered into a
definitive agreement to acquire (the "Acquisition") the stock of Fitesa North
America Corporation ("Fitesa"), a wholly-owned subsidiary of Brazilian-based
Petropar S.A. Fitesa is a manufacturer of spun bonded and
spunbond/meltblown/spunbond nonwoven fabrics used in disposable consumer
products and durable applications such as home furnishings. Fitesa operates
one manufacturing facility located in Mooresville, North Carolina. The
Acquisition is expected to be finalized in the third quarter of 1996.
10
<PAGE>
POLYMER GROUP, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis provides information which management
believes is relevant to an assessment and understanding of the Company's
consolidated results of operations and financial condition. The discussion
should be read in conjunction with the consolidated financial statements and
notes thereto contained in Part I of this report on Form 10-Q and with the
Company's Annual Report on Form 10-K for the year ended December 30, 1995.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationships to net sales of
certain income statement items.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SIX MONTHS ENDED
----------------- -----------------
JUNE 29, JULY 1, JUNE 29, JULY 1,
1996 1995 1996 1995
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Net sales by product category
Hygiene................................... 45.5% 41.3% 44.3% 47.1%
Medical................................... 18.5 18.6 18.9 15.2
Wiping.................................... 17.0 18.8 17.5 14.6
Industrial and specialty.................. 19.0 21.3 19.3 23.1
----- ----- ----- -----
Net sales............................... 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Raw material costs........................ 45.3 46.6 46.0 47.8
Labor costs............................... 7.4 7.5 7.4 7.1
Overhead costs............................ 22.2 20.8 22.1 20.3
----- ----- ----- -----
Total costs of goods sold............... 74.9 74.9 75.5 75.2
Gross profit.............................. 25.1 25.1 24.5 24.8
Selling, general and administrative
expenses................................... 12.8 13.3 13.8 13.0
----- ----- ----- -----
Operating income............................ 12.3 11.8 10.7 11.8
Other (income) expense
Interest expense, net..................... 7.0 8.5 7.8 9.0
Foreign currency transaction (gains)
losses, net.............................. 1.7 (3.7) 1.4 3.3
----- ----- ----- -----
8.7 4.8 9.2 12.3
Income (loss) before income taxes and
extraordinary item......................... 3.5 7.0 1.5 (0.5)
Income taxes................................ 1.5 1.5 0.7 1.9
----- ----- ----- -----
Income (loss) before extraordinary item..... 2.0 5.5 0.8 (2.4)
Extraordinary item, net of income tax
benefit.................................... (10.8) -- (5.5) --
----- ----- ----- -----
Net income (loss)........................... (8.8)% 5.5% (4.7)% (2.4)%
===== ===== ===== =====
</TABLE>
COMPARISON OF THREE MONTHS ENDED JUNE 29, 1996 AND JULY 1, 1995
NET SALES
Consolidated net sales increased $5.6 million, or 4.5% from $123.0 million
in 1995 to $128.6 million in 1996. The increase in net sales reflected strong
demand for hygiene products which were up 15.3% to $58.6 million, compared to
$50.8 million in the second quarter of 1995. The increase in hygiene products
was primarily due to volume growth in new products from the recently installed
spunbond/meltblown/spunbond ("SMS") capacity at the Company's Mexico facility
and higher sales of appetured film for the Asian markets, as well as growth in
adult incontinence and sanitary pad products. Sales in the medical product
category increased 3.6%
11
<PAGE>
POLYMER GROUP, INC.
from $22.9 million in 1995 to $23.8 million in 1996 primarily as a result of
increased volume for medical gowns and drapes offset by the pass through of
lower raw material cost. Wiping product sales were $21.9 million in 1996,
compared to $23.1 million in 1995. Food service wipes in North America were up
approximately 5.0% over last year offset by lower European wipe sales as a
result of currency fluctuations. Sales in the industrial and specialty product
category were $24.4 million in 1996, compared to $26.2 million in 1995. Weaker
construction activity in Canada along with European currency fluctuations
contributed to the lower sales.
GROSS PROFIT
Gross profit was $32.3 million, or 25.1% of net sales in the second quarter
of 1996 compared to $30.9 million, or 25.1% of net sales in 1995. The $1.4
million or 4.6% increase in gross profit reflected higher net sales of hygiene
and medical products combined with a more favorable cost mix from the
increased production in Mexico. Price declines in raw materials, including
pulp and resin prices, lowered raw material cost from 46.6% of net sales in
the second quarter of 1995 to 45.3% of net sales in the current quarter. Labor
expense decreased from 7.5% of net sales last year to 7.4% in 1996 which
reflects improved operating efficiencies and product rationalization. Overhead
expenses increased from 20.8% of net sales in 1995 to 22.2% of net sales in
1996 as a result of higher depreciation on completed capital expenditures and
transitional overhead associated with the integration of value-added
production in the hygiene product category.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were slightly down as a
percentage of net sales year over year as the Company was able to leverage its
resources to support increased net sales. Selling, general and administrative
expenses were $16.5 million, or 12.8% of net sales for the second quarter of
1996 compared to $16.3 million, or 13.3% of net sales in 1995.
OTHER
Interest expense decreased $1.5 million from $10.5 million in the second
quarter of 1995 to $9.0 million in the second quarter of 1996. Interest
expense as a percentage of net sales decreased from 8.5% in the second quarter
of 1995 to 7.0% in the second quarter of 1996. The decrease in interest
expense is principally due to a lower average amount of indebtedness
outstanding in the second quarter of 1996 resulting from the Recapitalizaton.
Net foreign currency transaction losses were $2.2 million, or 1.7% of net
sales, in the second quarter of 1996 as compared with the previous year's
second quarter net foreign currency transaction gains of $4.6 million, or 3.7%
of net sales. During the second quarter of 1996, the Company's Mexico
operation incurred net foreign currency transaction gains of $1.3 million,
offset by its European operations, which recorded $3.2 million in net foreign
currency transaction losses reflecting the continued weakening of European
currencies against the United States dollar during the first half of 1996. The
Recapitalization eliminated the majority of the Company's United States dollar
denominated intercompany debt, effectively reducing the Company's exposure to
foreign currency fluctuations.
INCOME BEFORE NONRECURRING CHARGES
Income (excluding cumulative dividends on redeemable preferred stock) before
nonrecurring charges was $2.6 million in the second quarter of 1996 as
compared to $6.8 million in the second quarter of 1995. Income before
nonrecurring charges was favorably impacted during the second quarter of 1996
as a result of increased gross profit attributable primarily to the continued
redirection of products to the Mexico facility which yields a more favorable
cost mix. Offsetting the effects of improved gross profit were foreign
currency transaction losses of $2.2 million in the second quarter of 1996
versus the previous year's second quarter net foreign currency transaction
gains of $4.6 million. In the second quarter of 1996, the Company's Mexico
operation incurred net
12
<PAGE>
POLYMER GROUP, INC.
foreign currency transaction gains of $1.3 million, offset by its European
operations, which recorded $3.2 million in net foreign currency transaction
losses reflecting the continued weakening of European currencies against the
United States dollar during the first half of 1996. The Company provided for
income taxes before nonrecurring charges of $1.9 million during the second
quarter of 1996, representing an effective tax rate of approximately 42.5%.
NONRECURRING CHARGES
As a result of the Recapitalization in the second quarter of 1996, the
Company recorded nonrecurring charges of approximately $13.9 million, after
income taxes, for the write-off of previously capitalized debt issue costs and
prepayment penalties paid in connection with the repurchase of a portion of
the Senior Notes.
COMPARISON OF SIX MONTHS ENDED JUNE 29, 1996 AND JULY 1, 1995
NET SALES
Year to date consolidated net sales increased to $251.3 million in 1996 from
$189.1 million in 1995, an increase of $62.2 million or 32.9%. Approximately
$61.1 million of this increase resulted from the inclusion of a strategic
business acquisition for a full six months in 1996, compared to three and one
half months in 1995. Hygiene product sales were up 24.9% to $111.3 million,
compared to $89.1 million in 1995. Excluding the increase in net sales of the
acquired business, hygiene products increased by $3.4 million primarily as a
result of the recently installed SMS capacity at the Company's Mexico
facility. Medical product sales were $47.5 million in 1996, compared to $28.7
million in 1995, an increase of 65.7% which primarily reflects the addition of
the acquired business. Wiping product sales were $43.9 million in the first
half of 1996, compared to $27.6 million in 1995. This increase was also due to
the addition of the acquired business. Sales of industrial and specialty
products were $48.6 million in the first six months of 1996, compared to $43.7
million in 1995.
GROSS PROFIT
Gross profit as a percentage of net sales was 24.5% on a year to date basis
in 1996 versus 24.8% in 1995. While comparable to 1995, gross profit as a
percentage of net sales in the second quarter of 1996 increased over first
quarter 1996 reflecting the continued diversification in product mix and the
integration of recent acquisitions. Year to date gross profit increased by
$14.8 million, from $46.9 million in 1995 to $61.7 million in 1996, primarily
due to the inclusion of a strategic business acquisition along with increased
production in Mexico which yields a more favorable cost mix. Raw material
costs decreased from 47.8% of net sales in the 1995 to 46.0% of net sales in
1996, reflecting a mix of less expensive raw materials and a reduction in
material usage. Labor expenses were 7.4% of net sales in 1996, up from the
previous year's results of 7.1%. Overhead expenses increased from 20.3% of net
sales in 1995 to 22.1% of net sales in 1996 as a result of higher depreciation
on completed capital expenditures and transitional overhead associated with
the integration of value-added production in the hygiene product category.
The Company's margins in 1996 for hygiene products continued to improve on a
year to date basis as a result of improved product mix which included a higher
percentage of value-added products. In addition, the redirection of products
to the Mexico facility which began in the first quarter of 1996 continued to
yield production cost savings through the second quarter for such products,
resulting from design and technology advancements implemented by the Company.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Year to date selling, general and administrative expenses were $34.6 million
in 1996 compared to $24.6 million in 1995. This increase arose principally
from an increase in sales and marketing expense to support the development of
its new products, acquired product lines, and expansion into new geographic
markets. Selling, general and administrative expenses as a percent of net
sales were 13.8% in 1996 versus 13.0% in 1995 due primarily to an increase in
amortization expense.
13
<PAGE>
POLYMER GROUP, INC.
OTHER
Interest expense increased $2.6 million from $17.0 million on a year to date
basis in 1995 to $19.6 million in 1996. Although interest expense increased on
a year to date basis over 1995, interest expense decreased approximately $1.6
million between first quarter 1996 and second quarter 1996 as a result of the
Recapitalization. Interest expense as a percentage of net sales decreased from
9.0% in 1995 to 7.8% in of 1996.
Year to date net foreign currency transaction losses were $3.6 million, or
1.4% of net sales, in 1996 versus the previous year's net foreign currency
transaction loss of $6.2 million, or 3.3% of sales. During 1996, the Company's
Mexico operation incurred net foreign currency transaction gains of $3.2
million, offset by its European operations, which recorded $6.6 million in net
foreign currency transaction losses reflecting the continued weakening of
European currencies against the United States dollar during the first half of
1996. The Recapitalization eliminated the majority of the Company's United
States dollar denominated intercompany debt, effectively reducing the
Company's exposure to foreign currency fluctuations.
INCOME BEFORE NONRECURRING CHARGES
Income (excluding cumulative dividends on redeemable preferred stock) before
nonrecurring charges was $2.1 million on a year to date basis in 1996 versus a
loss before nonrecurring charges of $4.5 million in 1995. Income before
nonrecurring charges was favorably impacted during 1996 as a result of
increased gross profit attributable primarily to the continued redirection of
products to the Mexico facility which yields a more favorable cost mix.
Offsetting the effects of improved gross profit were foreign currency
transaction losses of $3.6 million in 1996 versus the previous year's net
foreign currency transaction losses of $6.2 million. In 1996, the Company's
Mexico operation incurred net foreign currency transaction gains of $3.2
million, offset by its European operations, which recorded $6.6 million in net
foreign currency transaction losses reflecting the continued weakening of
European currencies against the United States dollar during the first half of
1996. The Company has provided for income taxes before nonrecurring charges of
$1.8 million during 1996, representing an effective tax rate of approximately
45.6%.
NONRECURRING CHARGES
As a result of the Recapitalization in the second quarter of 1996, the
Company recorded nonrecurring charges of approximately $13.9 million, after
income taxes, for the write-off of previously capitalized debt issue costs and
prepayment penalties paid in connection with the repurchase of a portion of
the Senior Notes.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
During the first six months of 1996, the Company's cash flow from operating
activities was $16.2 million as compared to $5.6 million during the first six
months of 1995, an increase of $10.6 million. This increase arose primarily
from higher depreciation and amortization expense of $6.8 million and from
nonrecurring charges of $13.9 million, after income taxes, for the early
extinguishment of debt recorded in connection with the Recapitalization.
Reducing the effects of this were lower foreign currency transaction losses of
$2.7 million and lower accounts payable and accrued expenses of $6.7 million.
INVESTING AND FINANCING ACTIVITIES
On May 15, 1996, the Company completed an initial public offering of 11.5
million shares of its common stock at an offering price of $18.00 per share.
Net proceeds to the Company after underwriting fees and related costs were
$190.8 million.
14
<PAGE>
POLYMER GROUP, INC.
As part of the Offering, the Company consummated the following transactions:
(i) effectively repaid all outstanding indebtedness under the Facilities and
terminated the Facilities; (ii) redeemed $50.0 million principal amount of the
Senior Notes at a premium of 112.25%; (iii) redeemed the preferred stock of
Chicopee at a price equal to $1,000 per share plus accrued but unpaid
dividends; (iv) redeemed the Company Preferred Stock at a price of $1,000 per
share plus accrued but unpaid dividends; and (v) entered into a New Credit
Facility which consists of a $200.0 million term loan and a $125.0 million
revolving facility. The New Credit Facility is secured by all of the assets of
the Company and by a guarantee by each of the Company's domestic subsidiaries,
which guarantee is secured by the assets of each such subsidiary. The
Company's non-domestic subsidiaries will either borrow directly under the New
Credit Facility on a secured basis or borrow from the Company, with such
borrowings being evidenced by a note pledged to the lenders.
In order to enter into the New Credit Facility with the terms and conditions
described above, the Company was required to obtain the Required Consents of
holders of a majority of the outstanding principal amount of the Senior Notes.
Pursuant to a Consent Solicitation Statement dated March 14, 1996, the Company
solicited and received the Required Consents, and, accordingly, the Company
and the Trustee executed a Third Supplemental Indenture dated as of April 9,
1996 that became effective concurrently with the Offering, which allowed the
Company to enter into the New Credit Facility.
The Company maintains a comprehensive capital expenditure program and
continuously evaluates opportunities to expand its existing production
capacity or enhance production technologies. Capital programs which are
currently in process as well as those planned for the remainder of 1996 are
consistent with the Company's criteria for capital expenditures which includes
projects to debottleneck or expand the highest growth technologies such as
spunbond, spunlace and appetured films. Year to date capital spending in 1996
has approximated $11.0 million. Accordingly, the Company believes that based
on the current levels of operations and anticipated growth, its cash from
operations, together with other available sources of liquidity, including
borrowings under the New Credit Facility, will be adequate over the next
several years to make required debt payments, including interest thereon,
permit anticipated capital expenditures and fund the Company's working capital
requirements.
As previously stated, the Company announced on July 17, 1996, that it had
entered into a definitive agreement to acquire Fitesa. Fitesa is a
manufacturer of spun bonded and spunbond/meltblown/spunbond nonwoven fabrics
used in disposable consumer products and durable applications such as home
furnishings. Fitesa operates one manufacturing facility located in
Mooresville, North Carolina. The Acquisition is expected to be finalized in
the third quarter of 1996.
EFFECT OF INFLATION; FOREIGN CURRENCY EXCHANGE RATES
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.
The Company's substantial foreign operations expose it to the risk of
exchange rate fluctuations. 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. In addition, the re-measurement of foreign
currency denominated assets and liabilities into U.S. dollars gives rise to
foreign exchange gains or losses which are included in the determination of
net income. The Company does not currently participate in hedging transactions
related to foreign currency; however, the Recapitalization eliminated the
majority of the Company's United States dollar denominated intercompany debt,
effectively reducing the Company's exposure to foreign currency fluctuations.
15
<PAGE>
POLYMER GROUP, INC.
ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" ("FAS 121"), which requires impairment
losses to be recorded on long-lived assets used in operations when indicators
of impairment are present and the undiscounted cash flows estimated to be
generated by those assets are less than the assets' carrying amount. FAS 121
also addresses the accounting for long-lived assets that are expected to be
disposed of. FAS 121 is effective for financial statements for fiscal years
beginning after December 15, 1995; therefore, the Company adopted FAS 121 in
the first quarter of 1996. The effect of adoption did not have a material
impact on the Company's results of operations for the three and six months
ended June 29, 1996.
In October 1995, the FASB issued Statement No. 123, "Accounting for Stock-
Based Compensation" ("FAS 123"). FAS 123 establishes financial accounting and
reporting standards for stock-based employee compensation plans. FAS 123 is
effective for transactions entered into in fiscal years beginning after
December 15, 1995. In connection with the Offerings, the Company has adopted
the 1996 Plan (as defined). With adoption of the 1996 Plan, the Company will
account for stock-based compensation awards under the provisions of Accounting
Principles Board Opinion No. 25, as permitted by FAS 123.
16
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities
Not applicable
Item 3. Defaults upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
On April 10, 1996, the Company's stockholders approved the 1996 Key
Employee Stock Option Plan and the Amended and Restated Certificate of
Incorporation via unanimous written consent.
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
Exhibits required to be filed with this report on Form 10-Q are listed in
the following Exhibit Index.
On May 1, 1996, the Company filed a report on Form 8-K relative to the
Stockholders Rights Plan which was authorized by the Company's Board of
Directors on April 15, 1996. No financial statements were filed with this
Form 8-K.
.
17
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
Polymer Group, Inc.
/s/ Jerry Zucker
By: _________________________________
Jerry Zucker
Chairman, President, Chief
Executive Officer and Director
(Principal Executive Officer)
/s/ James G. Boyd
By: _________________________________
James G. Boyd
Executive Vice President,
Treasurer and Director (Principal
Financial Officer and Principal
Accounting Officer)
August 12, 1996
18
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S> <C>
11 Computation of Per Share Earnings (filed herewith)
27 Financial Data Schedule (filed herewith)
</TABLE>
19
<PAGE>
EXHIBIT 11
POLYMER GROUP, INC.
STATEMENT OF COMPUTATION OF PER SHARE EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SIX MONTHS ENDED
----------------- -----------------
JUNE 29, JULY 1, JUNE 29, JULY 1,
1996 1995 1996 1995
-------- ------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C> <C>
Primary income (loss) per common share
Net income (loss) applicable to common
stock.................................... $(12,250) $ 5,376 $(14,837) $(6,128)
-------- ------- -------- -------
Common shares:
Weighted average number of shares
outstanding............................ 26,250 1,027 23,375 1,238
Adjustments:
Common share equivalents(a)........... -- 18,055 -- 17,844
Warrants to purchase common stock(b).. -- 1,418 -- 1,418
-------- ------- -------- -------
Average number of common shares, as
adjusted................................. 26,250 20,500 23,375 20,500
======== ======= ======== =======
Primary income (loss) per common share.... $ (.47) $ .26 $ (.64) $ (.30)
======== ======= ======== =======
Income (loss) per common share assuming
full dilution
Net income (loss) applicable to common
stock.................................... $(12,250) $ 5,376 $(14,837) $(6,128)
======== ======= ======== =======
Common shares:
Weighted average number of shares
outstanding............................ 26,250 1,027 23,375 1,238
Adjustments:
Common share equivalents(a)........... -- 18,055 -- 17,844
Warrants to purchase common stock(b).. -- 1,418 -- 1,418
-------- ------- -------- -------
Average number of common shares, as
adjusted................................. 26,250 20,500 23,375 20,500
======== ======= ======== =======
Income (loss) per common share assuming
full dilution............................ $ (.47) $ .26 $ (.64) $ (.30)
======== ======= ======== =======
</TABLE>
Notes
(a) Reflects the approximate 19.97 to 1 stock split approved by the Company's
Board of Directors concurrently with the Offering.
(b) Reflects exercise of warrants in connection with the Offering.
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
the financial statements of Polymer Group, Inc. for the three and six months
ended June 29, 1996 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-28-1996 DEC-28-1996
<PERIOD-START> MAR-31-1996 DEC-31-1995
<PERIOD-END> JUN-29-1996 JUN-29-1996
<CASH> 19,343 19,343
<SECURITIES> 11,746 11,746
<RECEIVABLES> 65,415 65,415
<ALLOWANCES> 1,888 1,888
<INVENTORY> 51,383 51,383
<CURRENT-ASSETS> 159,556 159,556
<PP&E> 422,999 422,999
<DEPRECIATION> 51,962 51,962
<TOTAL-ASSETS> 615,413 615,413
<CURRENT-LIABILITIES> 80,353 80,353
<BONDS> 313,752 313,752
<COMMON> 320 320
0 0
0 0
<OTHER-SE> 186,287 186,287
<TOTAL-LIABILITY-AND-EQUITY> 615,413 615,413
<SALES> 128,593 251,308
<TOTAL-REVENUES> 128,593 251,308
<CGS> 96,328 189,648
<TOTAL-COSTS> 96,328 189,648
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 9,026 19,605
<INCOME-PRETAX> 4,518 3,891
<INCOME-TAX> 1,920 1,776
<INCOME-CONTINUING> 2,598 2,115
<DISCONTINUED> 0 0
<EXTRAORDINARY> (13,932) (13,932)
<CHANGES> 0 0
<NET-INCOME> (11,334) (11,817)
<EPS-PRIMARY> (.47) (.64)
<EPS-DILUTED> (.47) (.64)
</TABLE>
