<PAGE>
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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 MARCH 30, 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 May 10, 1996 there were: 5,359,615 Class A-1 Common Shares; 698,883 Class
A-2 Common Shares; 2,296,330 Class A-3 Common Shares; and 10,727,437 Class B
Common Shares outstanding. Such share amounts give effect to the approximate
19.97 to 1 stock split to be effective upon consummation of the Offering (as
defined), but not to the Reclassification (as defined).
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<PAGE>
POLYMER GROUP, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements.............................................. 1
Item 2. Management's Discussion and Analysis of Financial Condition and
Result of Operations................................................ 10
PART II--OTHER INFORMATION
Item 6. Exhibits.......................................................... 15
Signatures................................................................ 16
Exhibit Index............................................................. 17
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
POLYMER GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
SHAREHOLDERS'
EQUITY
DECEMBER 30, MARCH 30, MARCH 30,
1995 1996 1996 (NOTE 9)
------------ ----------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and equivalents.................. $ 18,088 $ 20,902
Marketable securities................. 4,861 7,693
Accounts receivable, net.............. 58,288 62,702
Inventories........................... 47,882 47,659
Other................................. 14,035 15,350
-------- --------
Total current assets................ 143,154 154,306
Property, plant and equipment, net...... 380,338 376,595
Intangibles, loan acquisition and
organization costs, net................ 95,753 93,626
Other................................... 5,480 4,100
-------- --------
Total assets........................ $624,725 $628,627
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses. $ 44,001 $ 42,107
Accrued interest payable.............. 8,898 4,116
Accrued salaries, wages and other
fringe benefits...................... 5,924 6,968
Income taxes payable.................. 4,295 2,489
Current portion of accrued
restructuring costs.................. 7,540 6,637
Current portion long-term debt........ 10,938 13,417
-------- --------
Total current liabilities........... 81,596 75,734
Accrued restructuring costs, less
current portion........................ 7,913 7,820
Accrued postretirement benefit
obligations............................ 3,493 3,785
Long-term debt, less current portion.... 439,940 442,133
Deferred income taxes................... 33,882 33,065
Redeemable preferred stock, 13%
cumulative............................. -- 10,293
Mandatory redeemable preferred stock,
13% cumulative......................... 44,339 46,150
SHAREHOLDERS' EQUITY
Class A common stock.................... 4 4 --
Class B common stock.................... 6 6 --
Class C common stock.................... -- -- --
Common stock............................ -- -- 191
Additional paid-in capital.............. 53,134 53,134 52,953
Deficit................................. (52,653) (55,240) (55,240)
Cumulative translation adjustment....... 12,729 11,831 11,831
Unrealized holding gain (loss) on
marketable securities.................. 342 (88) (88)
-------- -------- ---------
13,562 9,647 9,647
-------- -------- ---------
Total liabilities and shareholders'
equity............................. $624,725 $628,627 $ --
======== ======== =========
</TABLE>
See accompanying notes.
1
<PAGE>
POLYMER GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
------------------
APRIL 1, MARCH
1995 30, 1996
-------- --------
<S> <C> <C>
Net sales.................................................. $ 66,012 $122,715
Cost of goods sold......................................... 50,013 93,320
-------- --------
Gross profit............................................... 15,999 29,395
Selling, general and administrative expenses............... 8,242 18,111
-------- --------
Operating income........................................... 7,757 11,284
Other expense:
Interest expense......................................... 6,530 10,579
Foreign currency transaction losses, net................. 10,815 1,332
-------- --------
17,345 11,911
-------- --------
(Loss) before income taxes................................. (9,588) (627)
Income taxes (benefit)..................................... 1,716 (144)
-------- --------
Net (loss)................................................. (11,304) (483)
Redeemable preferred stock dividends and accretion......... (200) (2,104)
-------- --------
Net (loss) applicable to common stock...................... $(11,504) $ (2,587)
======== ========
Net (loss) applicable to common stock per share............ $ (0.56) $ (0.13)
======== ========
Weighted average number of shares.......................... 20,500 20,500
======== ========
</TABLE>
See accompanying notes.
2
<PAGE>
POLYMER GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------
APRIL 1, MARCH 30,
1995 1996
--------- ---------
<S> <C> <C>
Operating activities
Net (loss).............................................. $ (11,304) $ (483)
Adjustments to reconcile net (loss) to net cash provided
by operating activities:
Depreciation and amortization expense................. 3,849 9,271
Foreign currency transaction losses, net.............. 10,815 1,332
Provision for losses on accounts receivable and price
concessions.......................................... 310 2,111
Changes in operating assets and liabilities, net of
effects of business acquisition:
Accounts receivable................................... (6,001) (6,525)
Inventories........................................... (3,542) 223
Accounts payable and accrued expenses................. (390) (5,340)
Other, net............................................ 736 (3,721)
--------- -------
Net cash (used in) operating activities............. (5,527) (3,132)
--------- -------
Investing activities
Purchases of property, plant and equipment.............. (5,371) (5,905)
Purchases of marketable securities...................... (325) (8,582)
Proceeds from sales of marketable securities............ 325 6,300
Acquisition of business, net of cash acquired........... (281,358) --
Organization costs...................................... -- (34)
--------- -------
Net cash (used in) investing activities............. (286,729) (8,221)
--------- -------
Financing activities
Issuance of common stock................................ 30,000 --
Proceeds from debt...................................... 222,500 7,400
Payments of debt........................................ -- (2,734)
Issuance of redeemable preferred stock.................. 40,000 10,000
Loan acquisition costs.................................. -- (200)
--------- -------
Net cash provided by financing activities........... 292,500 14,466
--------- -------
Effect of exchange rate changes on cash................... 5,163 (299)
--------- -------
Net increase in cash and equivalents................ 5,407 2,814
Cash and equivalents at beginning of period......... 13,828 18,088
--------- -------
Cash and equivalents at end of period............... $ 19,235 $20,902
========= =======
Noncash financing activities
Cumulative dividends on redeemable preferred stock...... $ 200 $ 2,104
Acquisition of business
Fair value of assets acquired........................... 358,814 --
Liabilities assumed and incurred........................ 77,456 --
Cash paid............................................... 281,358 --
</TABLE>
See accompanying notes.
3
<PAGE>
POLYMER GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
DESCRIPTION OF BUSINESS
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.
BASIS OF PRESENTATION
The accompanying unaudited condensed 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 condensed
consolidated financial statements contain all adjustments of a normal
recurring nature necessary for a fair presentation. Operating results for the
three months ended March 30, 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.
NOTE 2. ORGANIZATION
The Company is a Delaware corporation incorporated on June 16, 1994. On June
24, 1994, the Company: issued $150,000 in 12 1/4% Senior Notes ("Senior Notes"
or the "Notes") due 2002 in a private placement, in accordance with Rule 144A
of the Securities Act of 1933; acquired two affiliated companies, PGI Polymer,
Inc. ("PGI") and Fabrene Inc. ("Fabrene"); and acquired Bonlam, S.A. de C.V.
("Bonlam"). Following these transactions, PGI, Fabrene and Bonlam became
wholly owned subsidiaries of the Company. PGI, a holding company, was acquired
by exchanging 1,522,370 shares of the Company's common stock and approximately
$13,300 in cash for all of the outstanding shares of common stock and
preferred stock of PGI, and accrued dividends thereon. The acquisition was
considered to be between entities under common control and was accounted for
at historical cost in a manner similar to a pooling of interests. The net
assets of PGI on a historical cost basis were approximately $16,300 at the
time of the acquisition.
Prior to the acquisitions of PGI and Fabrene by the Company, PGI owned 27%
of Fabrene, a Canadian-based manufacturer and marketer of woven polyolefin
fabrics. This equity interest was acquired indirectly by the Company in
connection with the acquisition of PGI. The remaining 73% was acquired by the
Company in a transaction accounted for by the purchase method of accounting.
To effect the transaction, Fabrene acquired shares of its common stock and
warrants from a shareholder, and repaid a subordinated loan to the shareholder
for $12,500 in cash. The remaining shareholders of Fabrene exchanged their
common stock and common stock warrants for 128,220 shares of common stock of
the Company and approximately $830 in cash. The Company's total cost of
acquiring the ownership not previously owned by PGI was approximately $7,000.
The Company also acquired all the outstanding common stock of Bonlam, a
Mexican-based manufacturer and marketer of spunbond nonwoven products, for
approximately $40,700 in a transaction accounted for by the purchase method of
accounting.
4
<PAGE>
POLYMER GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
On March 15, 1995, the Company completed the acquisition (the "Chicopee
Acquisition") of Johnson & Johnson Advanced Materials Company and Chicopee
B.V. (collectively, "Chicopee") from Johnson & Johnson ("J&J") for an
aggregate consideration of $290,000 (including $15,000 of fees and expenses).
The Company financed the Chicopee Acquisition with the following sources of
funds: (i) borrowings by Chicopee under a six-year $125,000 amortizing term
loan, an eight-year $85,000 amortizing term loan and initial borrowings of
$4,500 under a $30,000 revolving credit facility provided by a group of banks;
(ii) the issuance by Chicopee to J&J of a $5,000 subordinated promissory note,
which was repaid at closing; (iii) a $30,000 common equity contribution from
the Company; and (iv) the issuance of $40,000 redeemable preferred stock due
2004 of Chicopee with warrants to acquire shares of Class C common stock of
the Company. The acquisitions of Fabrene, Bonlam and Chicopee were accounted
for using the purchase method of accounting.
In connection with the Chicopee Acquisition, management of the Company
adopted a plan (the "Plan") to relocate manufacturing equipment from
Chicopee's Canadian operation to certain other manufacturing sites within the
United States. The Plan also provides for relocation of Chicopee's corporate
offices, including certain equipment used in its North American research and
development activities, to other sites within the United States. As of March
15, 1995, the Company provided for accrued restructuring costs of
approximately $17,859 in connection with the allocation of the purchase price
to the fair value of assets acquired and liabilities assumed. During the three
month period ended March 30, 1996, the Company charged approximately $996
against the liability related to asset relocation and other miscellaneous
costs. At March 30, 1996, the Company's accrued restructuring costs associated
with the Plan was $14,457. Management currently estimates that approximately
$6,637 of the total accrued restructuring costs will be expended over the next
twelve month period; therefore, this portion of the total accrual has been
recognized as a current liability in the accompanying condensed consolidated
balance sheet.
NOTE 3. INVENTORIES
Inventories are stated at the lower of cost or market using the first-in,
first-out method of accounting. Supply inventories not expected to be utilized
within one year are classified as other non-current assets. Inventories,
classified as current assets, as of December 30, 1995 and March 30, 1996,
consist of the following:
<TABLE>
<CAPTION>
DECEMBER 30, MARCH 30,
1995 1996
------------ ---------
<S> <C> <C>
Finished goods..................................... $22,476 $24,462
Work in process and stores and maintenance......... 4,010 3,826
Raw materials...................................... 21,396 19,371
------- -------
Total.......................................... $47,882 $47,659
======= =======
</TABLE>
NOTE 4. 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") and PGI
(collectively, the "Guarantors"), wholly owned subsidiaries of the Company.
Separate financial statements of the Guarantors are not presented
5
<PAGE>
POLYMER GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
because management has determined that they would not be material to investors.
Selected unaudited financial data of the Guarantors are presented in the
following tables:
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS DATA
---------------------------------------------------
THREE MONTHS THREE MONTHS
ENDED APRIL 1, 1995 ENDED MARCH 30, 1996
------------------------- -------------------------
FIBERTECH PGI FIBERTECH PGI
GROUP, INC. POLYMER, INC. GROUP, INC. POLYMER, INC.
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Net sales.................. $ 34,742 $ -- $ 28,825 $ --
Operating income (loss).... 3,540 (26) 31 (71)
Income (loss) before income
taxes..................... 4,482 (12) (2,652) (271)
Net income (loss).......... $ 3,747 $ (12) $ (2,052) $ (402)
<CAPTION>
BALANCE SHEET DATA (AT END OF PERIOD)
---------------------------------------------------
DECEMBER 30, 1995 MARCH 30, 1996
------------------------- -------------------------
FIBERTECH PGI FIBERTECH PGI
GROUP, INC. POLYMER, INC. GROUP, INC. POLYMER, INC.
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Working capital (deficit).. $ 22,525 $ (2,383) $ 24,338 $ (1,660)
Total assets............... 154,118 103,673 152,923 113,510
Total debt................. 71,600 -- 74,500 --
Shareholder's equity....... $ 58,638 $ 62,956 $ 56,457 $ 62,845
</TABLE>
6
<PAGE>
POLYMER GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 5. NET (LOSS) PER SHARE
Net (loss) per common share is determined by dividing net (loss) applicable
to common stock by the average number of shares outstanding during the period.
In accordance with Staff Accounting Bulletin No. 83 of the Securities and
Exchange Commission, all issuances of the Company's common stock and warrants
at prices below the expected offering price during the twelve month period
preceding the planned Offering (as defined) have been included as common stock
equivalents for purposes of calculating net (loss) per common share as if they
had been issued at the Company's inception. Furthermore, the calculation of net
(loss) per common share gives effect to the approximate 19.97 to 1 stock split
to be effective upon consummation of the Offering.
NOTE 6. RELATED PARTY TRANSACTION
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., ("ConX II") an entity affiliated with the Company, for
$10,000.
NOTE 7. OTHER MATTERS
OFFERING
On March 14, 1996, the Company filed a Registration Statement with the SEC in
connection with the offering by the Company of 11,500,000 shares of its common
stock for sale to the public (the "Offering"). Pursuant to the Recapitalization
Agreement dated May 6, 1996, all of the warrants to acquire shares of Class C
common stock will be 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 will be converted (the "Reclassification") into a single
class of common stock concurrently with and contingent upon the Offering. The
Company's Board of Directors has approved an approximate 19.97 to 1 stock split
to be effective upon consummation of the Offering.
NEW CREDIT FACILITY
In connection with the Offering, the Company intends to consummate the
following transactions (together with the Offering, the Reclassification and
the approximate 19.97 to 1 stock split, the "Recapitalization"): (i)
effectively repay all outstanding indebtedness under the FiberTech Credit
Facility (the "1994 Credit Facility") and Chicopee Credit Facility (the "1995
Credit Facility") (collectively, the "Facilities") and terminate the
Facilities; (ii) redeem $50,000 principal amount of the Senior Notes at a
premium of 112.25%; (iii) redeem the preferred stock of Chicopee at a price
equal to $1,000 per share plus accrued but unpaid dividends; (iv) redeem the
Company Preferred Stock at a price of $1,000 per share plus accrued but unpaid
dividends; and (v) enter into a new credit facility ("New Credit Facility") as
more fully described below.
The Company has entered into a definitive commitment letter, dated March 7,
1996, with The Chase Manhattan Bank, N.A. to provide, subject to customary
conditions, the financing for the New Credit Facility. The New Credit Facility
will consist of a $200,000 term loan and a $125,000 revolving facility. The New
Credit Facility will be secured by all of the assets of the Company and by a
guarantee by each of the Company's domestic subsidiaries, which guarantee will
be 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.
7
<PAGE>
POLYMER GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
In order to enter into the New Credit Facility with the terms and conditions
described above, the Company is 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 has solicited and received the
Required Consents, and, accordingly, the Company and the Trustee have executed
a Third Supplemental Indenture dated as of April 9, 1996, to be effective upon
the consummation of the Offerings, that will allow the Company to enter into
the New Credit Facility.
1996 KEY EMPLOYEE STOCK OPTION PLAN
In connection with the Offering, the Company has adopted the 1996 Key
Employee Stock Option Plan (the "1996 Plan"). The 1996 Plan will be
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 per share of common stock
will be granted at a price per share equal to the initial public offering
price per share of common stock. Such options will vest over a five-year
period and will expire three years from the date of vesting.
PREFERRED STOCK
Concurrently with the Offering, the Company's Certificate of Incorporation
will be 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. Satisfaction of any dividend
preferences of outstanding shares of preferred stock would reduce the amount
of funds available for payment of dividends on shares of common stock. Holders
of shares may be entitled to receive a preference payment in the event of any
liquidation, dissolution or winding up of the Company before any payment is
made to the holders of shares of common stock. 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.
Upon consummation of the Offering, there will be 100,000 shares of junior
preferred stock 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.
RIGHTS
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. The holders of any additional common stock issued subsequent to such
date and before the earliest of the distribution date (determined in
accordance with the Rights Agreement), the redemption of the Rights, the
exchange of the Rights or the expiration of the Rights also will be entitled
to one Right for each such additional share. Each Right will entitle 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.
8
<PAGE>
POLYMER GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 months ended March
30, 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 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. UNAUDITED PRO FORMA SHAREHOLDERS' EQUITY
Unaudited pro forma shareholders' equity at March 30, 1996 gives effect to
the approximate 19.97 to 1 stock split to be effective upon consummation of
the Offering and the Reclassification as discussed in Note 7--Other Matters.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following discussion and analysis provides information which management
believes is relevant for 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. The
following table sets forth the percentage relationships to net sales of
certain income statement items.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
-------------------
APRIL 1, MARCH 30,
1995 1996
-------- ---------
<S> <C> <C>
Net sales................................................... 100.0% 100.0%
Raw material costs........................................ 50.1 46.7
Labor costs............................................... 6.4 7.3
Overhead costs............................................ 19.3 22.0
----- -----
Total cost of goods sold.................................... 75.8 76.0
----- -----
Gross profit.............................................. 24.2 24.0
Selling, general and administrative expenses................ 12.5 14.8
----- -----
Operating income.......................................... 11.7 9.2
Interest expense............................................ 9.9 8.6
Foreign currency transaction losses, net.................... 16.4 1.1
----- -----
(Loss) before income taxes (benefit)........................ (14.6) (.5)
Income taxes (benefit)...................................... 2.5 (.1)
----- -----
Net (loss).................................................. (17.1)% (.4)%
===== =====
</TABLE>
COMPARISON OF QUARTER ENDED MARCH 30, 1996 AND APRIL 1, 1995
NET SALES
Consolidated net sales increased $56.7 million, or 85.9%, from $66.0 million
in the first quarter of 1995 to $122.7 million in the first quarter of 1996,
primarily due to the Chicopee Acquisition, which resulted in the inclusion of
a full quarter of Chicopee net sales in 1996, compared to Chicopee net sales
for 15 days in the 1995 quarter. Chicopee contributed $73.1 million in net
sales in the first quarter of 1996 versus $14.3 million in the first quarter
of 1995.
Several unusual factors are reflected in the first quarter results and the
year-over-year comparison. First, the first quarter of 1995 reflected
unusually high shipment volumes, which were later offset by lower shipment
volumes in the second quarter of 1995. This shipment pattern resulted in a
difficult comparison with the first quarter of 1996, which reflected a more
typical shipment pattern for the Company. Second, the anticipated introduction
of cloth-like diaper backsheet by the industry has shifted from Spring to Fall
1996, resulting in lower-than-expected volumes for this product in the first
quarter. Finally, the unusually severe winter weather and the strike at
General Motors Corporation adversely affected industrial packaging and
construction-related product sales.
10
<PAGE>
Net sales of Chicopee increased from the first quarter of 1995 to the first
quarter of 1996, primarily as a result of increased volume for the Company's
medical and wiping products in the United States and Canada, offset by
fluctuations in the exchange rate for the Dutch guilder.
GROSS PROFIT
Gross profit as a percentage of net sales was 24.0% in the first quarter of
1996 as compared to 24.2% in the first quarter of 1995, primarily as a result
of diversification in the product mix from the acquired businesses and the
integration of the two most recent acquisitions, Chicopee and Bonlam, which is
expected to be completed in 1997. While improving during the transition,
margins in these businesses are being held back in the near term, as expected,
by actions to rationalize production between these and the Company's other
plants. Gross profit increased by $13.4 million, from $16.0 million in the
first quarter of 1995 to $29.4 million in the first quarter of 1996, primarily
due to the Chicopee Acquisition and increased production in Mexico. Raw
material expenses decreased from 50.1% of net sales in the first quarter of
1995 to 46.7% of net sales in the first quarter of 1996, reflecting a mix of
less expensive raw materials associated with Chicopee and a reduction in
material usage. Labor expenses were 7.3% of sales in the first quarter, up
from the previous year's first quarter of 6.4%, due to the mix of wiping and
medical products from the acquired business. Overhead expenses increased from
19.3% of net sales in the first quarter of 1995 to 22.0% of net sales in the
first quarter of 1996 as a result of higher depreciation on completed capital
expenditures and the higher transitional overhead expenses of Chicopee.
The Company's margins in the first quarter of 1996 for hygiene products
improved as a result of improved product mix which included a higher
percentage of value-added products, such as leg cuff fabric and Reticulon(R)
facings for feminine hygiene protection products. The redirection of products
to the Mexico facility in the first quarter of 1996 yielded an average
production cost savings of approximately 40% for such products, resulting from
design and technology advancements implemented by the Company's engineers.
Offsetting these positive factors in the first quarter of 1996 was the effect
of lower volume in industrial and specialty products (as discussed above). The
recently improved building material markets should improve demand for
industrial and specialty products in the second quarter.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased $9.9 million from
$8.2 million in the first quarter of 1995 to $18.1 million in the first
quarter of 1996 primarily as a result of the acquired business. Additionally,
the Company has increased its sales and marketing capacity to support the
development of its new products and expansion into new geographic markets. As
a result, selling expenses as a percentage of net sales increased from 2.6% in
the first quarter of 1995 to 3.8% in the first quarter of 1996. The inclusion
of the wipes product line acquired with Chicopee also increased sales expense
as a percentage of sales due to the higher cost of promotion and distribution
associated with this product category.
OTHER EXPENSES
Interest expense increased $4.1 million from $6.5 million in the first
quarter of 1995 to $10.6 million in the first quarter of 1996. Interest
expense as a percentage of net sales decreased from 9.9% in the first quarter
of 1995 to 8.6% in the first quarter of 1996. The increase in interest expense
is principally due to a higher average amount of indebtedness outstanding in
the first quarter of 1996 resulting from the Chicopee Acquisition.
Net foreign currency transaction losses were $1.3 million, or 1.1% of sales,
in the first quarter 1996 as compared with the previous year's first quarter
net foreign currency transaction loss of $10.8
11
<PAGE>
million, or 16.4% of sales. The Company's Mexico operation incurred net
foreign currency transaction gains of $1.9 million, offset by its European
operations, which recorded a $3.2 million net foreign currency transaction
loss. These gains and losses principally have no cash impact and occur upon
the remeasurement of U.S. dollar denominated intercompany indebtedness
applicable to the Company's foreign operations. The Recapitalization will
eliminate the majority of the intercompany debt, effectively reducing the
Company's exposure to net foreign currency transaction gains or losses.
NET INCOME (LOSS)
Net loss (excluding cumulative dividends on redeemable preferred stock)
improved by $10.8 million, from a net loss of $11.3 million in the first
quarter of 1995 to a net loss of $0.5 million in the first quarter of 1996,
primarily as a result of a decrease in net foreign currency transaction
losses, offset by an increase in interest expense of $4.1 million due to a
higher average amount of indebtedness outstanding in the first quarter of 1996
resulting from the Chicopee Acquisition. Increasing the Company's net loss in
the first quarter of 1995 was a high effective tax rate resulting from foreign
losses, which did not give rise to a corresponding tax benefit. Net loss was
decreased during the first quarter of 1996 as a result of increased gross
profit of $13.4 million, attributable primarily to the Chicopee Acquisition.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
Net cash used in operating activities decreased $2.4 million, or 43.3%, from
$5.5 million in the first quarter of 1995 to $3.1 million in the first quarter
of 1996. The decrease in net cash used in operating activities resulted
primarily from (i) a lower net loss during first quarter 1996 and (ii) non-
cash charges of $9.3 million for depreciation and amortization expense, $1.3
million for net foreign currency transaction losses and $2.1 million in
provisions for losses on accounts receivable and price concessions.
INVESTING AND FINANCING
The 1994 Credit Facility, which would mature on June 30, 1998, has two
tranches, a $50.0 million facility available for working capital and general
corporate purposes and a $25.0 million facility available solely to fund the
development and construction of pre-determined capital projects for FiberTech,
Fabrene and Bonlam. The 1995 Credit Facility consists of a six-year $125.0
million amortizing term loan, an eight-year $85.0 million amortizing term loan
and a $30.0 million revolving credit facility. The 1994 Credit Facility and
the 1995 Credit Facility each contain various restrictive covenants, including
limitations on incurrence of indebtedness, the making of restricted payments,
transactions with affiliates, the existence of liens, mergers and acquisitions
and sales of assets. In connection with the Recapitalization, all outstanding
amounts under the 1994 Credit Facility and the 1995 Credit Facility
effectively will be repaid, and the 1994 Credit Facility and the 1995 Credit
Facility will be terminated. As of March 30, 1996, the Company was in
compliance with all of the covenants contained in the 1994 Credit Facility and
the 1995 Credit Facility.
In connection with the Offerings, the Company and its subsidiaries intend to
enter into the New Credit Facility with a group of lenders with The Chase
Manhattan Bank, N.A. ("Chase Bank"), as Administrative Agent, and Chemical
Bank, as Operations Agent. The commitment of such lenders is subject to
customary conditions and is also subject to the condition that the Company
receive gross proceeds of at least $175.0 million from the Offerings. The New
Credit Facility will consist of a $200.0 million term loan and a $125.0
million revolving facility. Initial borrowings under the New Credit Facility
will be effected by rolling over existing loans outstanding under the 1994
Credit Facility and the 1995 Credit Facility. Upon consummation of the
Offering, a portion of the proceeds therefrom will be applied
12
<PAGE>
to reduce the outstanding revolving loans under the New Credit Facility. The
New Credit Facility will be secured by all of the assets of the Company and by
a guarantee by each of the Company's domestic subsidiaries, which guarantee
will be 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 PGI, a wholly owned subsidiary of
the Company, with such borrowings being evidenced by a note pledged to the
lenders. The term loan will have required annual principal repayments in the
aggregate of $19.25 million in 1997, $26.5 million in 1998, $36.5 million in
1999, $46.5 million in 2000, $56.5 million in 2001 and $14.75 million in 2002.
The term loan will have a final maturity date of March 31, 2002. The revolving
facility may also be used to provide letter of credit support from the
Company.
The New Credit Facility will contain various restrictive covenants customary
for financings of this type, including limitations on incurrence of debt, the
making of restricted payments, transactions with affiliates, the existence of
liens, mergers, acquisitions and sales of assets. The revolving facility will
mature in 2002, with a provision for two one-year extensions at the request of
the Company, subject to the consent of all of the lenders.
The ability of the Company to enter into the New Credit Facility with the
terms and conditions described above is subject to the affirmative consent
(the "Required Consents") of holders of a majority of the outstanding
principal amount of the Notes. Pursuant to a Consent Solicitation Statement
dated March 14, 1996, the Company has solicited and received the Required
Consents, and, accordingly, the Company and the Trustee have executed a Third
Supplemental Indenture dated as of April 9, 1996, to be effective upon the
consummation of the Offerings, that will allow the Company to enter into the
New Credit Facility.
On January 11, 1996, the Company authorized and issued 10.0 million shares
of Company Preferred Stock to ConX II for $10.0 million.
OTHER
In connection with the Chicopee Acquisition, management of the Company
adopted a plan (the "Plan") to relocate manufacturing equipment from
Chicopee's Canadian operation to certain other manufacturing sites within the
United States. The Plan also provides for relocation of Chicopee's corporate
offices, including certain equipment used in its North American research and
development activities, to other sites within the United States. As of March
15, 1995, the Company provided for accrued restructuring costs of
approximately $17.9 million in connection with the allocation of the purchase
price to the fair value of assets acquired and liabilities assumed. During
1995, the Company charged approximately $2.4 million against the liability
associated with the Plan, including $1.4 million related to asset and
personnel relocation and foreign import duties and approximately $1.1 million
associated with an unfavorable manufacturing contract that existed at the
acquisition date and other miscellaneous costs. During the three month period
ended March 30, 1996, the Company charged approximately $1.0 million against
the liability related to asset relocation and other miscellaneous costs. At
March 30, 1996, the Company's accrued restructuring costs associated with the
Plan approximated $14.5 million. Management currently estimates that
approximately $6.5 million of the total accrued restructuring costs will be
expended during the remainder of 1996.
The Company uses derivative financial instruments to manage well-defined
interest rate risk and does not use them for trading purposes. On April 25,
1995, the Company (through Chicopee) entered into an interest rate cap
agreement (the "Agreement") for an initial premium (cash) of $0.4 million and
quarterly installments of $0.1 million through March 31, 1998. Premiums paid
for the Agreement, including quarterly installments, are amortized to interest
expense over the term of the Agreement. The Agreement provides for an initial
principal notional amount of $105.0 million on April 25, 1995, which declines
to $90.0 million on December 31, 1997. If the London Interbank Bid Offer Rate
("LIBOR") exceeds 8% on each quarterly reset date (as defined in the
Agreement), the Company shall be due the amount by which LIBOR exceeds 8%.
LIBOR did not exceed 8% during the three month period ended March 30, 1996.
13
<PAGE>
The Company estimates that it will fund approximately $19.8 million in
capital expenditures during the remainder of 1996 to, among other things,
implement FASE II technology (a new proprietary web formation process), upgrade
the Mexican and Vancouver facilities and increase its spunlace and through-air
bonding capacity. 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.
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.
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 over the last three years.
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 remeasurement 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.
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 months ended March
30, 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.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no legal proceedings other than those matters described in the
Company's 1995 Form 10-K as filed with the Securities and Exchange Commission
on March 30, 1996.
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 by
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.
There were no reports on Form 8-K filed during the three months ended March
30, 1996.
15
<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)
May 10, 1996
16
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQ
NUMBER EXHIBITS PAGE
------- -------- ----
<C> <S> <C>
11 Computation of Per Share Earnings (Filed herewith).
27 Financial Data Schedule (Filed herewith).
</TABLE>
17
<PAGE>
POLYMER GROUP, INC.
EXHIBIT 11--STATEMENT OF COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
-------------------
APRIL 1, MARCH 30,
NOTES 1995 1996
-------- -------- ---------
<S> <C> <C> <C>
PRIMARY (LOSS) PER COMMON SHARE
Net (loss) available to common stock.......... (A) $(11,504) $(2,587)
======== =======
Common shares
Weighted average shares outstanding.............. 1,521 956
Adjustments:
Common share equivalents........................ (B) 17,561 18,126
Warrants to purchase common shares............. (B) 1,418 1,418
-------- -------
Weighted average number of shares outstanding.... (B), (C) 20,500 20,500
Primary (loss) per common share............... $ (.56) $ (.13)
======== =======
(LOSS) PER COMMON SHARE ASSUMING FULL DILUTION
Net (loss) available to common stock.......... (A) $(11,504) $(2,587)
======== =======
Common shares
Weighted average shares outstanding.............. 1,521 956
Adjustments:
Common share equivalents........................ (B) 17,561 18,126
Warrants to purchase common shares............. (B) 1,418 1,418
-------- -------
Weighted average number of shares outstanding.... (B), (C) 20,500 20,500
(Loss) per common share assuming full
dilution..................................... $ (.56) $ (.13)
======== =======
</TABLE>
- --------
NOTE REFERENCE:
(A) Adjusted for cumulative dividends on redeemable preferred stock.
(B) In accordance with Staff Accounting Bulletin No. 83 of the Securities and
Exchange Commission, all issuances of the Company's common stock and
warrants prior to the Offering at prices below the expected offering price
during the twelve month period preceding the planned Offering, have been
included as common stock equivalents for purposes of calculating net
(loss) per common share as if they had been issued at the Company's
inception.
(C) The calculation of weighted average shares outstanding gives effect to the
approximate 19.97 to 1 stock split which was approved by the Company's
Board of Directors.
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
the financial statements of Polymer Group, Inc. for the quarter ended March 30,
1996 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-28-1996
<PERIOD-START> DEC-31-1995
<PERIOD-END> MAR-30-1996
<EXCHANGE-RATE> 1
<CASH> 20,902
<SECURITIES> 7,693
<RECEIVABLES> 65,451
<ALLOWANCES> 2,749
<INVENTORY> 47,659
<CURRENT-ASSETS> 154,306
<PP&E> 422,255
<DEPRECIATION> 45,660
<TOTAL-ASSETS> 628,627
<CURRENT-LIABILITIES> 75,734
<BONDS> 442,133
<COMMON> 10
46,150
10,293
<OTHER-SE> 9,637
<TOTAL-LIABILITY-AND-EQUITY> 628,627
<SALES> 122,715
<TOTAL-REVENUES> 122,715
<CGS> 93,320
<TOTAL-COSTS> 93,320
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,579
<INCOME-PRETAX> (627)
<INCOME-TAX> (144)
<INCOME-CONTINUING> (483)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (483)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> (.13)
</TABLE>
