ITEM 1. BUSINESS
General
Polymer Group, Inc. (the "Company") is a leading worldwide manufacturer and marketer of a broad range of nonwoven and oriented polyolefin products. The Company is one of the largest producers of spunbond and spunmelt products in the world, and employs the most extensive range of nonwovens technologies which allows it to supply products tailored to customers' needs at competitive prices. Nonwovens provide certain qualities similar to those of textiles at a significantly lower cost.
The Company supplies engineered materials to a number of the largest consumer and industrial products manufacturers in the world. The Company has a global presence with an established customer base in both developed and developing markets. The Company's product offerings are sold principally to converters that manufacture a wide range of end-use products.
The Company operates twenty-five manufacturing facilities (including its joint ventures in Argentina, China and Turkey) located in eleven countries and is currently the only nonwovens producer that utilizes essentially all of the established nonwovens process technologies. The Company believes that the quality of its manufacturing operations and the breadth of its nonwovens process technologies give it a competitive advantage in meeting the current and future needs of its customers and in leading the development of an expanded range of applications. The Company has invested in advanced technology in order to increase capacity, improve quality and develop new high-value structures. In December 1998, the Company completed construction and began commercial production on its first full-scale APEX® line in Benson, North Carolina. During 2000, two APEX® lines were completed in North Little Rock, Arkansas, with commercialization during the second half of 2000. The Company believes that its products, produced using APEX® technology, open up growth opportunities to the Company. Working as a developmental partner with its major customers, the Company utilizes its technological capabilities and depth of research and development resources to develop and manufacture new products to specifically meet their needs.
Management has built the Company through a series of capital expansions and strategic business acquisitions that have broadened the Company's technology base, increased its product lines and expanded its global presence. Moreover, the Company's world-wide resources have enabled it to better meet the needs of existing customers, to serve emerging geographic markets, and to exploit niche market opportunities through customer-driven product development.
See "Fiscal 2001 Events and Recent Developments" in this Annual Report on Form-10-K for a comprehensive discussion of the Company's financial and business restructuring undertaken in the latter part of fiscal 2001.
Industry Overview
The Company competes primarily in the worldwide market for nonwovens, which is an approximately $10.9 billion market with an average annual sales growth rate of 8% expected over each of the next five years, according to industry sources. The nonwovens industry began in the 1950s when paper, textile and chemical technologies were combined to produce new fabrics and products with the attributes of textiles but at a significantly lower cost. Today, nonwovens are used in a wide variety of consumer and industrial products as a result of their superior functionality and relatively low cost.
The nonwovens industry has benefited from substantial improvements in technology over the past several years, which have increased the number of new applications for nonwovens, and therefore increased demand. The Company believes, based on industry sources, that demand in the developed
markets of North America, Western Europe and Japan will increase at an average rate of 7.5% in each of the next five years, while the emerging markets are forecasted to grow at an average rate of 9.5% per annum. In the developed markets, growth will be driven primarily by new applications for nonwovens, while growth in the emerging markets will be volume driven as per capita income rises in these countries. According to industry sources, worldwide consumption of nonwovens has grown an average of 8.0% per year over the last ten years. The Company believes that future growth will depend upon the continuation of improvements in raw materials and technology, which should result in the development of high-performance nonwovens, leading to new uses and markets at a lower cost than alternative materials.
Nonwovens are categorized as either disposable (approximately 54% of worldwide industry sales with an average annual growth rate of 8.3%, according to industry sources), which is the category in which the Company primarily competes, or durable (approximately 46% of worldwide industry sales and an average annual growth rate of 7.5%, according to industry sources). The largest end uses for disposable nonwovens are for applications which include disposable diapers, feminine sanitary protection, baby wipes, adult incontinence products, and healthcare applications, including surgical gowns and drapes and woundcare sponges and dressings. Other disposable end uses include wipes, filtration media, protective apparel and fabric softener sheets. Durable end uses include apparel interlinings, furniture and bedding construction sheeting, cable wrap, electrical insulation, alkaline battery cell separators, automotive components, geotextiles, roofing membranes, carpet backing, agricultural fabrics, durable papers and coated and laminated structures for wallcoverings and upholstery.
The Company also competes in the North American market for oriented polyolefin products. Chemical polyolefin products include woven, slit-film fabrics produced by weaving narrow tapes of slit film and characterized by high strength-to-weight ratios, and also include twisted slit film or monofilament strands. While the broad uncoated oriented polyolefin market is primarily focused on carpet backing fabric and, to a lesser extent, geotextiles and bags, the markets in which the Company primarily competes are made up of a large number of specialized products manufactured for niche applications. These markets include industrial packaging applications such as lumberwrap, steel wrap and fiberglass packaging, as well as high-strength protective coverings and specialized components that are integrated into a variety of industrial and consumer products.
With its development of the proprietary APEX® manufacturing process, the Company believes it can access new markets for its products. Products that incorporate fabric woven or knitted using the majority of traditional fibers are potential markets for APEX® products. The APEX® process requires substantially less labor than traditional textile manufacturing, offers greater design flexibility, and provides enhanced turnaround times for the end-use customer. Furthermore, the APEX® process can create unique products which cannot be manufactured through traditional processes.
Competitive Strengths
The Company believes that it has a strong competitive position attributable to a number of factors, including the following:
Technological Leadership and Product Development. The Company believes it is a technological leader in developing and manufacturing nonwovens and oriented polyolefin products. The Company also believes that it is currently the only nonwovens producer that utilizes all of the commercially available nonwoven process technologies, including the exclusive use of its proprietary APEX® structural web technology, and holds multiple patents on yield and efficiency-enhancing manufacturing processes. The Company's research and development efforts are focused primarily on increasing its production capacity and improving its production processes, developing innovative products for new markets based on the Company's existing technologies, and developing new process technologies to enhance existing business and to enter new markets. In addition, the
Company's multinational presence enables it to globally coordinate production initiatives and to co-develop new products directly with international customers.
State-of-the-Art Manufacturing Capabilities. The Company believes that it has state-of-the-art manufacturing capabilities in both its nonwovens and oriented polyolefin product lines. The Company continues to enhance its production lines with internally developed, proprietary manufacturing technologies and has the capability of using multiple polymer/resin streams. The completion of the first full-scale commercial APEX® line in Benson, North Carolina and the completion of two additional APEX® lines in North Little Rock, Arkansas demonstrates the Company's commitment to maintaining and developing state-of-the-art manufacturing capabilities. During 2001, the Company underwent an impairment review of its long-lived assets in connection with its financial and business restructuring and accordingly recorded an asset impairment charge related to non-APEX® property, plant and equipment of $80.8 million. See "2001 Events and Recent Developments" in this Annual Report on Form 10-K for further discussion.
Key Customer Relationships. The Company seeks to cultivate long-term relationships with key customers and works closely with its customers to develop advanced components for next generation products.
Business Strategy
The Company's financial restructuring initiatives are outlined in "Fiscal 2001 Events and Recent Developments" in this Annual Report on Form 10-K. A failure by the Company to complete its financial restructuring would result in a material adverse effect on the Company and also affect its ability to continue as a going concern. The Company's goals are to continue to grow its core businesses while developing new technologies to capitalize on a range of new product opportunities and expanded geographic markets. The Company intends to be a leading supplier in its chosen markets by delivering high-quality products and services at competitive prices. To achieve these goals, the Company's primary strategy focuses on:
Continuous Improvement Aimed at Increasing Product Value. The Company is committed to continuous improvements throughout its business to increase product value. The Company's product design teams continuously seek to incorporate new materials and operating capabilities that enhance or maintain performance specifications. State-of-the-art equipment, much of which has been developed internally and is proprietary to the Company, has been designed and installed to continuously measure process parameters and maintain very narrow tolerances, resulting in higher levels of product consistency and reduced waste. The Company also holds multiple patents protecting yield and efficiency-enhancing manufacturing processes developed by its research and development staff. As a result, the Company's manufacturing processes allow for the production of a higher quality finished product than many of its competitors.
Entrance into New Markets. The Company seeks to expand its capabilities to take advantage of the penetration and growth of its core products internationally, particularly in developing countries. Over the past seven years, the Company's sales from manufacturing facilities outside the United States have increased from approximately $28 million in 1993 to approximately $403.3 million in 2001.
Products
The Company develops, manufactures and sells a broad array of nonwovens and oriented polyolefin products. Sales are focused in two product segments that provide opportunities to leverage the Company's advanced technology and substantial capacity. These product segments include Consumer and Industrial and Specialty. (See Note 14 "Segments and Geographic Information" in the accompanying financial statements within this Annual Report on Form 10-K.)
Consumer Segment
The Consumer segment includes products within the hygiene, consumer wiping and medical categories. Sales of products in the Consumer segment represented approximately 57%, 56% and 57%, or $463.6 million, $486.3 million and $511.2 million, of the Company's consolidated net sales for 2001, 2000 and 1999, respectively.
The Company produces a variety of nonwoven materials for use in diapers, training pants, feminine sanitary protection, adult incontinence, baby wet wipes and consumer wiping products. The Company's broad product offerings provide customers with a full range of specialized components for unique or distinctive products, including top sheet, transfer layer, backsheet fabric, leg cuff fabric, sanitary protective facings, absorbent pads for incontinence guard, panty shield, and absorbent cores applications. In addition, the Company's medical products are used in wound care sponges and dressings, disposable surgical packs, apparel such as operating room gowns, drapes for operating rooms, face masks and shoe covers.
The Company has significant relationships with several large consumer product companies and supplies a full range of products to these customers on a global basis. The Company's marketing and research and development teams work closely as partners with these customers in the development of next generation products. The Company believes that this technical support ensures that the Company's products will continue to be incorporated into such customers' future product designs.
Industrial and Specialty Segment
The Industrial and Specialty segment includes products such as cable wrap, house wrap, furniture and bedding applications, landscape and agriculture products, protective apparel, automotive, filtration, flexible packaging, and industrial wiping products used in clean room, food service, institutional and janitorial applications. Sales of products in the Industrial and Specialty segment represented approximately 43%, 44% and 43%, or $352.0 million, $375.7 million and $378.6 million, of the Company's consolidated net sales for 2001, 2000 and 1999, respectively.
The Company's flexible packaging products utilize coated and uncoated oriented polyolefin fabrics which are used as lumberwrap, fiberglass packaging tubes, balewrap for synthetic cotton and fibers, steel and aluminum wrap, and coated bags for specialty chemicals and mineral fibers. Industrial wiping products include: (i) branded and unbranded, light to heavyweight, cloth wipes, towels and aprons; (ii) medium to heavyweight open weave towels; and (iii) cleaning and sanitizing wipes. Products for the industrial, janitorial and institutional markets include light to heavy-duty towels and cloths sold under a variety of trademarks. Specialty wipes consist of products designed to meet customer requirements and specifications.
Marketing and Sales
The Company sells to customers in the domestic and international marketplace. Approximately 50%, 23%, 12%, 12% and 3% of the Company's 2001 net sales were from manufacturing facilities in the United States, Europe, Canada, Latin America and Asia, respectively. The Procter & Gamble Company and Johnson & Johnson, the Company's largest customers, each accounted for 13% of the Company's 2001 net sales. Sales to the Company's top 20 customers represented approximately 50% of the Company's 2001 net sales.
The Company employs direct sales representatives who are active in the Company's new product development efforts and are strategically located in the major geographic regions in which the Company's products are utilized. The oriented polyolefin products are sold primarily through a well-established network of converters and distributors. Converters add incremental value to the Company's products and service the small order size requirements typical of many end users.
Manufacturing Processes
General. The Company's competitive strengths include high-quality manufacturing processes and a broad range of process technologies, which allow the Company to offer its customers the best-suited product for each respective application. Additionally, the Company has made significant capital investments in modern technology and has developed proprietary equipment and manufacturing techniques. The Company believes that it exceeds industry standards in productivity, reduction of variability and delivery lead time. The Company has a wide range of manufacturing capabilities (many of which are patented) that allow it to produce specialized products which, in certain cases, cannot be reproduced in the market. Substantially all of the Company's manufacturing sites have plant-wide real time control and monitoring systems that constantly monitor key process variables using a sophisticated closed loop system of computers, sensors and custom software.
Nonwovens. The Company believes that it has a comprehensive array of nonwoven manufacturing technologies which encompasses capabilities spanning the entire spectrum of nonwoven technologies. Nonwoven rollgoods typically have three process steps: web formation, web consolidation or bonding, and finishing. Web formation is the process by which previously prepared fibers, filaments or films are arranged into loosely held networks called webs, batts or sheets. In each process, the fiber material is laid onto a forming or conveying surface, which may be dry, wet or molten. The dry-laid process utilizes textile fiber processing equipment, called "cards," that have been specifically designed for high-capacity nonwoven production. The carding process converts bales of entangled fibers into uniform oriented webs that then feed into the bonding process. The wet-laid process utilizes papermaking technology in which the fibers are suspended in a water slurry and deposited onto a moving screen, allowing the water to pass through and the fibers to collect. In a molten polymer-laid process, extrusion technology is used to transform polymer pellets into filaments, which are laid on a conveying screen and interlocked by thermal fusion. In this process, the fiber formation, web formation and web consolidation are generally performed as a continuous simultaneous operation, making this method very efficient.
Web consolidation is the process by which the fibers or film are bonded together using either mechanical, thermal, chemical or solvent means. The bonding method greatly influences the end products' strength, softness, loft and utility. The principal bonding processes are thermal bond, resin or adhesive bond, hydroentanglement or spunlace, binder fiber or through-air bond, calender, spunbond, meltblown, SMS, ultrasonic bond and needlepunch. Thermal bond utilizes heated calender rolls with embossed patterns to point bond or fuse the fibers together. In the resin bond process, an adhesive, typically latex, is pad rolled onto the web to achieve a bond. Spunlace, or hydroentanglement, uses high pressure water jets to mechanically entangle the fibers. Through-air bonding takes place through the fusion of bi-component fibers in a blown hot air drum. Spunbond and meltblown take advantage of the melt properties of the resins and may use thermal fusion with the aid of calender rolls. SMS and SMMS are integrated processes of combining spunbond and meltblown sheets in a laminated structure, creating very strong, lightweight and uniform fabrics. Ultrasonic bonding utilizes high-frequency sound waves that heat the bonding sites. Needlepunch is a mechanical process in which beds of needles are punched through the web, entangling the fibers.
Finishing, or post-treatment, adds value and functionality to the product and typically includes surface treatments for fluid repellency, aperturing, embossing, laminating, printing and slitting. Spunlace and resin bond systems also have a post-treatment drying or curing step. Certain products also go through an aperturing process in which holes are opened in the fabric, improving absorbency.
Oriented Polyolefins. The oriented/film process begins with plastic resin, which is extruded into a thin plastic film or into monofilament strands. The film is slit into narrow tapes. The slit tapes or monofilament strands are then stretched or "oriented," the process through which it derives its high strength. The tapes are wound onto spools which feed weaving machines or twisters. In the finishing process, the product is coated for water or chemical resistance, ultraviolet stabilization and protection,
flame retardancy, color and other specialized characteristics. In the twisting process, either oriented slit tapes or monofilament strands are twisted and packaged on tightly spooled balls for distribution as agricultural and commercial twine. The Company operates coating lines that have been equipped with the latest technology for gauge control, print treating, lamination, anti-slip finishes and perforation. The Company also laminates oriented products to paper and has the additional capability of printing multiple colors on a wide-width printing press located in North America.
Competition
The Company's primary competitors in its industrial and specialty product markets are: E.l. du Pont de Nemours & Co. ("DuPont"), Freudenberg Nonwovens L.P. ("Freudenberg") and BBA Group plc ("BBA") for nonwoven products; and Intertape Polymer Group Inc. and Amoco Fabrics and Fibers Co. for oriented polymer products. Generally, product innovation and performance, quality, service and cost are the primary competitive factors, with technical support being highly valued by the largest customers.
The Company's primary competitors in its consumer product markets are DuPont, BBA and Kimberly-Clark Corporation. Generally, cost, distribution, utility, variety and innovation of product offerings, and technical capacity are the principal factors considered in consumer product end uses.
Raw Materials
The primary raw materials used to manufacture most of the Company's products are polypropylene resin, polyester and polyester fiber, polyethylene and, to a lesser extent, rayon, tissue paper and cotton. The prices of polypropylene and polyethylene are a function of, among other things, manufacturing capacity, demand and the price of crude oil and natural gas liquids. Historically, the prices of polypropylene and polyethylene resins have fluctuated. During 2000, resin prices increased significantly resulting in increased raw material prices. This adversely affected the Company's results of operations for the full year because soft demand prevented the Company from passing such increased costs to its customers. There can be no assurance that the prices of polypropylene and polyethylene will not continue to increase in the future or that the Company will be able to pass on any increases to its customers. Material increases in raw material prices that cannot be passed on to customers could have a material adverse effect on the Company's results of operations and financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 1. "Nature of Operations and Business Conditions" in the accompanying financial statements within this Annual Report on Form 10-K.
The Company primarily purchases its polypropylene resin from Indelpro, S.A. de C.V. and Exxon Mobil Chemical Company with smaller quantities purchased from Arco Polypropylene LLC and Aristech Chemical Corporation. The Company's major suppliers of polyester and polyester fiber are Wellman, Inc. and Dupont. Novacor Chemicals Inc. is the Company's major supplier for polyethylene and Crown Vantage Inc. is the major supplier of its tissue paper. The Company's major supplier of polypropylene fiber is FiberVisions L.L.C. The Company is also a purchaser of polyolefin films from Huntsman Packaging Corporation.
The Company believes that the loss of any one or more of its suppliers would not have a long-term material adverse effect on the Company because other manufacturers with whom the Company conducts business would be able to fulfill the Company's requirements. However, the loss of certain of the Company's suppliers could, in the short term, adversely affect the Company's business until alternative supply arrangements were secured. As a result of the Company's financial condition, certain suppliers have requested alternative payment provisions. However, such alternative payment provisions have not currently had a significant negative impact on the Company's liquidity. In addition, there can be no assurance that any new supply arrangements entered into by the Company will have terms as favorable
as those contained in current supply arrangements. The Company has not experienced any significant disruptions in supply as a result of shortages in raw materials.
Environmental
The Company is subject to a broad range of federal, foreign, state and local laws and regulations relating to the pollution and protection of the environment. Among the many environmental requirements applicable to the Company are laws relating to air emissions, wastewater discharges and the handling, disposal and release of solid and hazardous substances and wastes. Based on continuing internal review, the Company believes that it is currently in substantial compliance with applicable environmental requirements.
The Company is also subject to laws, such as CERCLA, that may impose liability retroactively and without fault for releases or threatened releases of hazardous substances at on-site or off-site locations. The Company is not aware of any releases for which it may be liable under CERCLA or any analogous provision.
Actions by federal, state and local governments in the United States and abroad concerning environmental matters could result in laws or regulations that could increase the cost of producing the products manufactured by the Company or otherwise adversely affect demand for its products. For example, certain local governments have adopted ordinances prohibiting or restricting the use or disposal of certain plastic products, such as certain of the plastic wrapping materials which are produced by the Company. Widespread adoption of such prohibitions or restrictions could adversely affect demand for the Company's products and thereby have a material adverse effect upon the Company. In addition, a decline in consumer preference for plastic products due to environmental considerations could have a material adverse effect upon the Company.
The Company does not currently anticipate any material adverse effect on its operations, financial condition or competitive position as a result of its efforts to comply with environmental requirements. Some risk of environmental liability is inherent, however, in the nature of the Company's business, and there can be no assurance that material environmental liabilities will not arise. It is also possible that future developments in environmental regulation could lead to material environmental compliance or cleanup costs.
Patents and Trademarks
The Company considers its patents and trademarks, in the aggregate, to be important to its business and seeks to protect this proprietary know-how in part through United States and foreign patent and trademark registrations. The Company maintains over 100 registered trademarks and over 150 patents in the United States. In addition, the Company maintains certain trade secrets for which, in order to maintain the confidentiality of such trade secrets, it has not sought patent protection.
Inventory and Backlogs
Inventories at December 29, 2001 were approximately $116.0 million, a decrease of $6.8 million over inventories at December 30, 2000 of $122.8 million due primarily to a $10.5 million decrease in consolidated finished goods, offset partially by a consolidated increase in raw materials of $3.5 million. The Company had approximately 63 days of inventory on hand at December 29, 2001 versus 77 days of inventory on hand at December 30, 2000, a decrease of approximately 9%. Unfilled orders as of December 29, 2001 and December 30, 2000 amounted to approximately $48.0 million and $52.9 million, respectively. The decline in unfilled orders at the end of 2001 versus 2000 is due primarily to lower sales volume.
Research and Development
The Company's investment in research and development approximated $17.0 million, $18.9 million and $17.2 million during 2001, 2000 and 1999, respectively.
Seasonality
Use and consumption of the Company's products does not fluctuate significantly due to seasonality.
Employees
As of December 29, 2001, the Company employed approximately 4,040 persons. Of this total, approximately 1,670 employees are represented by labor unions or trade councils that have entered into separate collective bargaining agreements with the Company. Approximately 18.2% of the Company's labor force are covered by collective bargaining agreements that will expire in 2002. During 2001 there were no unionizing attempts. The Company considers its employee relations to be good.
Fiscal 2001 Events and Recent Developments
Fiscal 2001 Events
Events Leading to Financial and Business Restructuring-During the first quarter of 2001, the Company announced that its operating results would be substantially below prior expectations due to a number of factors that were a carry-over from 2000. First, demand for certain high margin consumer products did not return to forecasted levels resulting in certain specialized manufacturing assets remaining under utilized. Second, the commercialization periods of certain APEX® programs have been longer than anticipated, and the expected ramp-up of APEX® products failed to materialize during 2001. Third, raw material prices did not decline as anticipated, and soft demand prevented the Company from passing the increased raw material costs along to customers. Fourth, pricing pressure and margin erosion within the spunmelt technologies continued to impact results of operations. Fifth, the Company experienced order reductions and an unfavorable shift in product mix due to certain customers' adjustments, and demand for certain consumer products failed to accelerate as originally expected. Finally, the Company incurred increased interest expenses due to a higher average amount of indebtedness outstanding resulting from increased capital spending, primarily during fiscal year 2000, and a failure to comply with the covenants of Amendment No. 6 to the Credit Facility (as defined), as described below.
Due to the impact of these factors on results of operations for fiscal year 2000 and the first quarter of 2001, as of March 31, 2001, the Company was not in compliance with the leverage covenant contained in the Credit Facility and, therefore, was in default thereunder. On April 11, 2001, the Company entered into Amendment No. 6 to the Credit Facility, dated as of April 11, 2001 ("Amendment No. 6"), which waived the leverage covenant default that existed as of March 31, 2001. Amendment No. 6 modified the existing financial covenants relating to the senior leverage ratio, fixed charge coverage ratio and minimum required levels of EBITDA ("Earnings Before Interest, Taxes, Depreciation and Amortization"). Amendment No. 6 also increased the interest rate on the outstanding amounts under the Credit Facility, limited amounts outstanding under the revolving portion of the Credit Facility (together with outstanding letters of credit) to $260.0 million, limited capital expenditures to $35.0 million for fiscal year 2001, restricted the Company from incurring new indebtedness or creating certain liens, restricted the Company from making new investments or acquisitions and prevented the Company from paying dividends on its Common Stock or making other restricted payments. The Company was required to pay a fee to the lenders equal to 1/2 of 1% of the outstanding commitments of the Senior Secured Lenders. The Company also affirmed its intention in the amendment to reduce the amount outstanding under the Credit Facility by not less than $150 million on or before August 15, 2001 through one or more asset
dispositions, including sale-leaseback transactions, synthetic leases or asset securitizations. The Company did not complete any of the above transactions on or before August 15, 2001, and as a result, on August 15, 2001 the Company paid an additional fee of 1/2 of 1% of the outstanding commitments of the lenders. In addition, the interest rate on its outstanding senior debt increased by an additional 50 basis points. As a result of Amendment No. 6, the Company incurred a charge to continuing operations of approximately $0.4 million for the write-off of previously capitalized loan acquisition costs.
Due to the continuing impact of the factors described above on operations, the inability to complete asset dispositions on acceptable terms and the expiration of the waiver with respect to the leverage covenant on December 29, 2001 as provided in Amendment No. 6, as of December 29, 2001 the Company was in default under the Credit Facility. Because of this default, the Senior Secured Lenders exercised their right to block the payment of interest due on January 2, 2002 to the holders of the 9% Senior Subordinated Notes due 2007 and the interest payment due on March 1, 2002 to the holders of 83/4% Senior Subordinated Notes due 2008. On December 30, 2001, the Company and certain subsidiaries entered into a Forbearance Agreement with the Senior Secured Lenders (the "Forbearance Agreement"). The Senior Secured Lenders agreed not to exercise certain remedies available to them under the Credit Facility as a result of the existing covenant defaults during the forbearance period. If certain events occur, the Senior Secured Lenders may exercise their remedies available to them, which include the right to declare all amounts outstanding under the Credit Facility immediately due and payable. The Forbearance Agreement, as extended on March 15, 2002, is scheduled to end on May 15, 2002 and prevents the Company from making any additional borrowings in excess of the amounts outstanding under the revolving portion of the Credit Facility as of December 30, 2001.
Financial Restructuring-Because the Company was unable to reduce amounts outstanding under the Credit Facility through asset dispositions on acceptable terms, Dresdner Kleinwort Wasserstein was retained as financial advisor on October 2, 2001 to assist in exploring various restructuring options. During November and December of 2001 and January and February of 2002, the Company conducted extensive negotiations with several potential investors and various other constituents in an effort to establish viable restructuring options. Beginning in December of 2001 and continuing through February of 2002, some of these potential investors conducted due diligence investigations of the Company and its operations.
In evaluating the various restructuring options, the Company decided to maintain negotiations with CSFB Global Opportunity Partners, L.P. ("GOP"), the principal holder of the Senior Subordinated Notes (as defined). The Company determined that GOP afforded the highest probability of a transaction being completed with terms that provided an overall acceptable level of value to the various stakeholders. GOP informed the Company that it owns approximately 67% of the Senior Subordinated Notes. Members of the Company's senior management, GOP and their respective advisors held discussions concerning the terms of a proposed recapitalization transaction. The discussions focused primarily on the overall level of investment in the Company and the nature of that ownership. As a result of these extensive negotiations, the Company executed a term sheet with GOP on March 15, 2002 setting forth the proposed terms of the recapitalization plan, including the restructuring.
The material elements of the restructuring include: (i) GOP contributing $50 million in cash and $394.4 million of Existing Notes currently owned by GOP (including accrued, but unpaid interest thereon through the date of the transaction) and agreeing to provide a $25 million letter of credit in favor of the Senior Secured Lenders under an amended credit facility, all in exchange for 22,402,904 newly issued shares of common stock of the Company (after taking into account a 1-for-10 reverse common stock split), representing 87.5% ownership of the Company; (ii) the holders of at least 95% of the aggregate principal amount of the Existing Notes not owned by GOP exchanging their notes for either New Senior Subordinated Notes or New Senior Subordinated Discount Notes; and (iii) the Company entering into an amended credit facility with its Senior Secured Lenders. Additional discussion regarding the financial restructuring is continued under "Recent Developments" below.
Business Restructuring-The Company anticipated that the confluence of negative factors described above would generally subside during the latter part of 2001, particularly during the fourth quarter. However, the anticipated recovery within the Company's business did not develop as planned in the latter half of 2001; therefore, the Company undertook a comprehensive business restructuring involving manufacturing initiatives and workforce reductions, including voluntary attrition, of approximately 70 employees in the U.S. and approximately 190 employees in Europe. As a result of the realignment, the Company recorded a pre-tax charge of $5.8 million ($4.2 million, net of tax) during the three months ended December 29, 2001. The total charge in the fourth quarter consisted of personnel and facility closing costs. In addition, during mid-2001, the Company undertook a smaller restructuring of its operations in order to reduce costs, predominantly in the U.S., that primarily involved headcount reductions of approximately 90 employees. Accordingly, the Company recorded a pre-tax charge of $1.7 million ($1.2 million, net of tax) during the three months ended June 30, 2001.
In connection with the restructuring undertaken in the fourth quarter of 2001, and based upon a comprehensive review of the Company's long-lived assets, the Company recorded a non-cash charge of approximately $181.2 million for the write-down of goodwill and contract intangibles ($100.4 million) and machinery and equipment ($80.8 million) related primarily to production assets within the U.S. and European nonwovens business. After careful assessment of various factors relevant to these assets, including the continuation of those factors previously described, combined with lower than expected operating results, particularly in the fourth quarter, and in connection with the comprehensive business realignment previously discussed, the Company wrote-down the value of such assets to their estimated fair market value.
As part of the Company's restructuring, approximately $1.9 million of expenses were incurred in the fourth quarter of 2001 related to professional and other related services provided in connection with the restructuring.
Recent Developments
On March 25, 2002, a group of creditors holding approximately $41.3 million of the Company's outstanding Senior Subordinated Notes filed an involuntary petition under Chapter 11 of the U.S. bankruptcy code in the U.S. Bankruptcy Court for the District of South Carolina. On April 2, 2002, the Company reached an agreement in principal with the petitioning creditors to have the involuntary petition dismissed. The agreement contemplates that the Company will negotiate in good faith with the petitioning creditors over the terms of the Company's announced exchange offer, and provides for the reimbursement by the Company of certain fees and expenses of the petitioning creditors. The agreement also provides that for as long as the Company and the petitioning creditors are continuing to negotiate the terms of the exchange offer until May 12, 2002, such creditors will forbear from exercising any of their rights or remedies as a result of the default by the Company under the Senior Subordinated Notes. In the event the Company is unable to complete the exchange offer on terms acceptable to the Company, or if the Company determines that it is otherwise necessary, the Company may seek to reorganize its business under Chapter 11 of the U.S. bankruptcy laws. Any such action could take place prior to May 12, 2002.
DESCRIPTION OF CERTAIN INDEBTEDNESS
Credit Facility-The Company's Credit Facility provided for secured revolving credit borrowings with aggregate commitments of up to $325.0 million and aggregate term loans of $275.0 million. Subject to certain terms and conditions, a portion of the Credit Facility may be used for letters of credit of which approximately $15.7 million was outstanding on December 29, 2001. Amendment No. 6 imposed a limit of $260.0 million under the revolving portion of the Credit Facility for borrowings and outstanding letters of credit. All indebtedness under the Credit Facility is guaranteed, on a joint and several basis, by each and all of the direct and indirect domestic subsidiaries of the Company. The Credit Facility and the related guarantees are secured by (i) a lien on substantially all of the assets of the Company and its domestic subsidiaries, (ii) a pledge of all or a portion of the stock of the domestic subsidiaries of the Company and of certain non-domestic subsidiaries of the Company, (iii) a lien on substantially all of the assets of direct foreign borrowers (to secure direct borrowings by such borrowers), and (iv) a pledge of certain secured intercompany notes issued to the Company or one or more of its subsidiaries by non-domestic subsidiaries. Commitment fees under the Credit Facility are generally equal to a percentage of the daily unused amount of such commitment. The Credit Facility contained covenants and events of default customary for financings of this type, to include leverage, fixed charge coverage and net worth. The revolving portion of the Credit Facility terminates in June 2003. The term loan portion terminates in December 2005 and December 2006. The loans are subject to mandatory prepayment out of proceeds received in connection with certain casualty events, asset sales and debt issuances.
The interest rate applicable to borrowings under the Credit Facility is based on, in the case of U.S. dollar denominated loans, a specified base rate or a specified Eurocurrency base rate for U.S. dollars, at the Company's option, plus a specified margin. In the event that a portion of the Credit Facility is denominated in Dutch guilders, the applicable interest rate is based on the specified Eurocurrency base rate for Dutch guilders, plus a specified margin. In the event that a portion of the Credit Facility is denominated in Canadian dollars, the applicable interest rate is based on the specified Canadian base rate plus a specified margin or the bankers' acceptance discount rate at the Company's option. The applicable margin for loans bearing interest based on the base rate or Canadian base rate will range from 2.75% to 3.50% and the margin for loans bearing interest on a Eurocurrency rate will range from 3.75% to 4.50%, based on the Company's ratio of total consolidated indebtedness to consolidated EBITDA calculated on a rolling four quarter basis.
Under the terms of the Forbearance Agreement with the Senior Secured Lenders, the Company is prevented from making any additional borrowings under the Credit Facility in excess of the amounts outstanding on December 30, 2001. In addition, all borrowings under the Credit Facility are required to be made under the base rate option.
See "2001 Events and Recent Developments" in this Annual Report on Form 10-K for further discussion of the covenant defaults under the Company's Credit Facility.
Senior Subordinated Notes-In March 1998, the Company issued $200 million of 83/4% Senior Subordinated Notes due 2008 (the "March 1998 Notes") in a private placement transaction pursuant to an indenture dated as of March 1, 1998. In August 1998, the Company completed its exchange of $200 million of the March 1998 Notes, Series B (the "83/4% Senior Subordinated Notes") which have been registered for public trading for all outstanding March 1998 Notes. In July 1997, the Company issued $400 million of 9% Senior Subordinated Notes due 2007 (the "July 1997 Notes") in a private placement transaction pursuant to an indenture dated as of July 1, 1997. In October 1997, the Company completed its exchange of the $400 million of July 1997 Notes, Series B (the "9% Senior Subordinated Notes"), which have been registered for public trading for all the outstanding July 1997 Notes.
The 83/4% Senior Subordinated Notes and the 9% Senior Subordinated Notes (collectively, the "Senior Subordinated Notes") are unsecured senior subordinated indebtedness of the Company and are subordinated in right of payment to all existing and future senior indebtedness of the Company. The
Senior Subordinated Notes indentures contain several covenants, including limitations on: (i) indebtedness; certain restricted payments, liens, transactions with affiliates, dividend and other payment restrictions affecting certain subsidiaries, guarantees by certain subsidiaries, certain transactions including merger and asset sales; and (ii) certain restrictions regarding the disposition of proceeds of asset sales. In addition, in the event of certain defaults under the Credit Facility, the Senior Secured Lenders under the Credit Facility may exercise a right to block any payments of interest or principal on the Senior Subordinated Notes for, in general, up to 179 days during any period of 360 consecutive days. In such event, a failure by the Company to make any such required payment would be an event of default under the Senior Subordinated Notes.
See "Fiscal 2001 Events and Recent Developments" in this Annual Report on Form 10-K for further discussion of the payment defaults under the Senior Subordinated Notes.
During the second quarter of 2000 the Company purchased $5.0 million principal amount of its 9% Senior Subordinated Notes and $3.5 million principal amount of its 83/4% Senior Subordinated Notes. The Company recognized an extraordinary gain of $0.7 million, net of taxes, on the retirement of these Senior Subordinated Notes. Amendment No. 6 prevented the Company from executing further purchase transactions of its outstanding Senior Subordinated Notes.
Safe Harbor Statement
This Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. In addition, from time to time, the Company or its representatives have made or may make forward-looking statements orally or in writing. Such forward-looking statements may be included in, but not limited to, various filings made by the Company with the Securities and Exchange Commission, press releases or oral statements made with the approval of an authorized executive officer of the Company. Actual results could differ materially from those projected or suggested in any forward-looking statements as a result of a variety of factors and conditions which include, but are not limited to: adverse economic conditions, demand for the Company's products, competition in the Company's markets, dependence on key customers, increases in raw material costs, the amount of capital expenditures, fluctuations in foreign currency exchange rates, the Company's substantial leverage position, the existing defaults in the Company's outstanding long-term indebtedness and other risks detailed in documents filed by the Company with the Securities and Exchange Commission.
ITEM 2.
ITEM 2. PROPERTIES
The Company and its subsidiaries operate the following principal manufacturing plants and other facilities, all of which are owned, except as noted. All of the Company's owned properties are subject to liens in favor of the lenders under the Company's credit facilities.
(1)Leased.
(2)The Company owns this 239,200 square foot facility, leases it to an unaffiliated tenant, and subleases 23,000 square feet from such tenant. The tenant can terminate the Company's sublease upon 12 months' notice.
(3)Leased from entities affiliated with one of the Company's stockholders.
(4)60% interest joint venture (DNS) with Sauler Group. During fiscal 2000, the Company acquired an additional 10% interest in Dominion Nonwovens Sudamerica S.A. which brought its total ownership interest to 60%.
(5)80% interest joint venture (Vateks) with Erol Tezman. The sales, marketing and administrative offices are in a 15,000 square foot leased facility.
(6)80% interest joint venture (Nanhai Nanxin Non-Woven Co. Ltd.) with Nanhai Chemical Fiber Enterprises Co.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is currently a party to various claims and legal actions which arise in the ordinary course of business. The Company currently believes such claims and legal actions, individually and in the aggregate, will not have a material adverse effect on the business, financial condition or results of operations of the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the New York Stock Exchange, under the symbol PGI. Amendment No. 6 to the Credit Facility prevents the Company from paying dividends on its common stock. The following table sets forth for the calendar periods the high and low market prices of the Company's common stock.
As of April 1, 2002, there were 152 holders of record.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain historical financial information of the Company. The statement of operations data for each of the five years ended and the balance sheet data as of December 29, 2001, December 30, 2000, January 1, 2000, January 2, 1999 and January 3, 1998 have been derived from audited financial statements. The table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," the financial statements of the Company and related notes thereto and other information included elsewhere in this Annual Report on Form 10-K.
See Notes to Selected Consolidated Financial Data.
Notes to Selected Consolidated Financial Data
(a)Gross margin represents gross profit as a percentage of net sales.
(b)EBITDA is defined as operating income (loss) plus depreciation, amortization and Mexican statutory employee profit sharing and excludes unusual items consisting of asset impairment, plant realignment and special charges. EBITDA is presented because it is generally accepted as providing useful information regarding a company's ability to service and/or incur debt. EBITDA should not be considered in isolation from or as a substitute for net income, cash flows from operating activities and other consolidated income or cash flow statement data prepared in accordance with generally accepted accounting principles or as a measure of profitability or liquidity.
(c)EBITDA margin represents EBITDA (defined above) as a percentage of net sales.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The following table sets forth the percentage relationships to net sales of certain income statement items. Due to a change in the Company's internal reporting structure, continued product diversification and end market expansion, the Company changed its reportable segments during the first quarter of fiscal 2000 to Consumer and Industrial and Specialty and restated prior period segment information to reflect this change.
Comparison of Year Ended December 29, 2001 and December 30, 2000
The following table sets forth components of the Company's net sales and operating income (loss) by segment for 2001 and the corresponding decrease from 2000:
Net Sales
Consolidated net sales were $815.6 million in 2001, a decrease of $46.4 million or 5.4% over 2000 consolidated net sales of $862.0 million. The decrease in net sales was due primarily to lower sales volume of $19.4 that is discussed in more detail below. Foreign currency had a negative impact on sales of $10.7 million and pricing pressure and product mix issues resulted in a decline in sales of $16.3 million.
Consumer net sales were $463.6 million in 2001 compared to $486.3 million in 2000, a decrease of $22.7 million or 4.7%. Certain specialized manufacturing assets continued to be underutilized due to certain high margin consumer products not returning to historical sales levels. Competitive pricing pressure continued within the spunmelt market resulting in lower selling prices. Foreign currencies, predominantly in Europe and Canada were weaker against the U.S. dollar during 2001 compared to 2000. The reductions in sales have been partially offset by an increase in medical supplies sales that had been declining.
Industrial and Specialty net sales were $352.0 million in 2001 compared to $375.7 million in 2000, a decrease of $23.7 million or 6.3%. The Company continued to experience product mix issues resulting in sales of lower margin products and lower selling prices. In addition, longer than anticipated commercialization periods for new products developed using the APEX® technology have resulted in delayed sales. Sales also decreased as a result of weaker foreign currencies, predominantly in Europe and Canada, against the U.S. dollar in 2001 compared to 2000.
Operating Income (Loss)
The consolidated operating loss for fiscal 2001 was $(163.3) million due primarily to unusual charges recorded during the fourth quarter that included asset impairment, plant realignment and special charges as discussed below. Excluding the unusual items, consolidated operating income was $27.2 million in 2001, a decrease of $57.4 million or 67.8% from 2000 consolidated operating income of $84.6 million due to lower operating results in each business segment.
Consumer operating income before unusual charges was $29.1 million in 2001 compared to $62.2 million in 2000, a decrease of $33.1 million or 53.3%. Certain specialized manufacturing assets continued to be underutilized due to certain high margin consumer products not returning to historical sales levels. Competitive pricing pressure continued within the spunmelt technology resulting in lower selling prices. Foreign currencies, predominantly in Europe and Canada, were weaker against the U.S. dollar during 2001 compared to 2000. The cost of raw material inputs did not decrease as expected, and these costs could not be passed along to customers due to soft demand. Total consolidated energy costs have increased from 2000 to 2001 by approximately $4.4 million. Selling, general and administrative costs increased approximately $2.1 million as a result of the Company acquiring a majority share in its joint venture in Argentina during mid-2000 (see Note 3. "Acquisitions" in the accompanying financial statements within this Annual Report on Form 10-K for more detail on the acquisition).
Industrial and Specialty operating loss before unusual charges was $(1.9) million in 2001 compared to $22.4 million in 2000, a decrease of $24.3 million or 108.5%. During 2001 the Company continued to experience product mix issues resulting in sales of lower margin products and lower selling prices. Commercialization periods for certain products developed using the APEX® technology have been longer than anticipated, and expected ramp-up of APEX® products failed to materialize during 2001 resulting in increased APEX® costs over year 2000. In 2001 there was increased depreciation relating to the ramp up of the third APEX® line. Certain foreign currencies, predominantly in Europe and Canada, were weaker against the U.S. dollar in 2001 versus 2000. Raw material inputs did not decrease as expected and these costs could not be passed along to customers due to soft demand. In addition, selling, general and administrative costs were negatively affected by higher provisions for bad debt within certain businesses during fiscal 2001.
Asset Impairment, Plant Realignment and Special Charges
The Company anticipated that the confluence of negative factors described above under "Fiscal 2001 Events and Recent Developments" in this Annual Report on Form 10-K would generally subside during the latter part of 2001, particularly during the fourth quarter. However, the anticipated recovery within the Company's businesses did not develop as planned in the latter half of 2001; therefore, the Company undertook a comprehensive business restructuring involving manufacturing initiatives and workforce reductions, including voluntary attrition, of approximately 70 employees in the U.S. and approximately 190 employees in Europe. As a result of the realignment, the Company recorded a pre-tax charge of $5.8 million ($4.2 million, net of tax) during the three months ended December 29, 2001 in accordance with Emerging Issues Tasks Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)" ("EITF 94-3"). The total charge in the fourth quarter consisted of personnel and facility closing costs. In addition, during mid-2001, the Company undertook a smaller restructuring of its operations in order to reduce costs, predominantly in the U.S., that primarily involved headcount reductions of approximately 90 employees. Accordingly, the Company recorded a pre-tax charge of $1.7 million ($1.2 million, net of tax) during the three months ended June 30, 2001 in accordance with EITF 94-3.
In connection with the restructuring undertaken in the fourth quarter of 2001, and based upon a comprehensive review of the Company's long-lived assets, the Company recorded a non-cash charge of approximately $181.2 million for the write-down of goodwill and contract intangibles ($100.4 million) and machinery and equipment ($80.8 million) related primarily to production assets within the U.S. and European nonwovens business. After careful assessment of various factors relevant to these assets, including the continuation of those factors previously described, combined with lower than expected operating results, particularly in the fourth quarter, and in connection with the comprehensive business realignment previously discussed, the Company wrote-down the value of such assets to their estimated fair market value based on estimated discounted future cash flows or third party appraisals.
As part of the Company's restructuring, approximately $1.9 million of expenses were incurred in the fourth quarter of 2001 related to professional and other related services provided in connection with the restructuring.
These charges have not been allocated to the Company's reportable business segments because the Company's management does not evaluate such charges on a segment-by-segment basis. Segment operating performance is measured and evaluated before unusual or special items.
Interest Expense and Other
Interest expense increased $7.6 million, from $91.8 million in 2000 to $99.4 million in 2001. The increase in interest expense is due to a higher average amount of indebtedness outstanding resulting from increased capital spending related to the Company's APEX® expansion, primarily during fiscal 2000. The increased interest expense period over period was partially offset by a decrease in the Company's effective borrowing rates during 2001. However, on April 11, 2001 and August 15, 2001, the Company's interest rate on its outstanding borrowings under the Credit Facility increased by an additional 50 basis point as described in "Fiscal 2001 Events and Recent Developments" in this Annual Report on Form 10-K.
During the fourth quarter of 2001 the Company recognized investment losses of $5.3 million resulting from an unrealized, non-cash valuation loss on short term investments deemed to be "other than temporary" under Staff Accounting Bulletin No. 59. Such losses were previously classified as a component of Other Comprehensive Income (Loss) in the equity section of the balance sheet. Foreign currency losses increased to $5.4 million in 2001 from $0.5 million in 2000. As a result of the Argentine peso devaluation, the Company recognized a foreign currency loss of approximately $2.7 million during December 2001, net of minority interest adjustments, related to its Argentina majority-owned subsidiary. During the second quarter of 2000, the Company recorded a gain from the extinguishment of debt of $0.7 million, net of $0.4 million in taxes. Such gain was recorded as an extraordinary item in fiscal 2000.
As a result of Amendment No. 6, the Company incurred a charge to continuing operations of approximately $0.4 million for the write-off of previously capitalized loan acquisition costs in accordance with the Emerging Issues Task Force No. 98-14, "Debtors Accounting for Changes in Line-of-Credit or Revolving-Debt Arrangements."
Income Taxes (Benefit)
The Company recorded an income tax benefit of $25.8 million in 2001, representing an effective tax benefit rate of 9.4%. Excluding the unusual items recorded during fiscal 2001, as previously discussed, the Company's effective tax benefit rate was approximately 28%. The effective benefit rate differed from the statutory benefit rate as a result of non-deductible charges, predominantly goodwill, and to an increase in the Company's valuation allowance between fiscal 2001 and 2000, recorded primarily to provide reserves for net operating losses substantially generated during 2001. At December 29, 2001, the Company had: (i) operating loss carryforwards of approximately $144.5 million for federal income tax purposes expiring beginning in the year 2020; (ii) German loss carryforwards of $17.7 million with no expiration date; and (iii) Canadian capital loss carryforwards of approximately $4.6 million with no expiration date. No accounting recognition has been given to the potential income tax benefit related to the loss carryforwards. During 2000 the Company recorded an income tax benefit of $2.7 million, representing an effective tax benefit rate of 35.0% before extraordinary item.
Net Income (Loss)
Net income (loss) decreased $243.2 million from a loss of $(4.3) million, or $(0.13) per diluted share, in 2000 to a loss of $(247.6) million, or $(7.74) per diluted share, in 2001 as a result of the above mentioned factors.
Comparison of Year Ended December 30, 2000 and January 1, 2000
The following table sets forth components of the Company's net sales and operating income by segment for 2000 and the corresponding decrease from 1999:
Net Sales
Consolidated net sales were $862.0 million in 2000, a decrease of $27.8 million or 3.1% over 1999 consolidated net sales of $889.8 million.
Consumer net sales were $486.3 million in 2000 compared to $511.2 million in 1999, a decrease of $24.9 million or 4.9%. This decrease is due to lower sales of certain high margin wiping products to certain customers and overall lower sales to certain consumer products customers during 2000. In addition the trend continued from 1999 of an industry-wide over-capacity position resulting in increased competition and pricing pressure within the spunmelt market. Net sales were also negatively impacted by the weak Euro throughout 2000 and a slower than anticipated ramp-up of sales of products utilizing APEX® technology.
Industrial and Specialty net sales were $375.7 million in 2000 compared to $378.6 million in 1999, a decrease of $2.9 million or 0.8%. Higher volume shipments offset by the continued trend during 2000 of sales of lower margin products and lower than anticipated selling prices resulted in flat growth in this segment during 2000. In addition the weak Euro throughout 2000 negatively impacted sales.
Operating Income
Consolidated operating income was $84.6 million in 2000, a decrease of $35.6 million or 29.6% from 1999 consolidated operating income of $120.2 million.
Consumer operating income was $62.2 million in 2000 compared to $94.0 million in 1999, a decrease of $31.8 million or 33.8%. This decrease is due in part to lower sales of certain high margin wiping products to certain customers during 2000. In addition the trend continues from 1999 of an industry-wide over-capacity position resulting in increased competition and pricing pressure within the spunmelt market. Operating income was also negatively impacted by the weak Euro and continued raw material price increases throughout 2000 that the Company was not able to pass on to customers as a result of lower demand.
Industrial and Specialty operating income was $22.4 million in 2000 compared to $26.2 million in 1999, a decrease of $3.8 million or 14.5%. This decrease was due to higher period expenses associated with the Company's two new APEX® lines, offset in part by the achievement of initiatives designed to mitigate development and product qualification costs. Operating income was also negatively impacted by the weak Euro and continued raw material price increases throughout 2000 that the Company was not able to pass on to customers.
Offsetting the negative impacts to operating income in both segments was a reduction of selling, general and administrative expenses as a percentage of net sales from 13.4% in 1999 to 12.5% in 2000.
Interest Expense, Other and Extraordinary Item
Interest expense increased $19.9 million, from $71.9 million in 1999 to $91.8 million in 2000. The increase in interest expense is primarily due to a higher average amount of indebtedness outstanding resulting from increased capital spending, principally on the Company's two new APEX® lines, and an increase in interest rates resulting from higher outstanding debt balances. The Company recognized gains on marketable securities of $2.9 million in 1999. In addition, foreign currency losses were approximately $0.5 million in 2000 compared to gains of approximately $0.7 million in 1999. During the second quarter of 2000, the Company recorded a gain from the extinguishment of debt of $0.7 million, net of $0.4 million in taxes that was recorded as an extraordinary item.
Income Taxes (Benefit)
The Company recorded an income tax benefit of $2.7 million in 2000, representing an effective tax benefit rate of 35.0% before extraordinary item. During 1999 the Company recorded income taxes of $18.6 million, representing an effective tax rate of 35.7%.
Income (Loss) Before Extraordinary Item and Net Income (Loss)
Income (loss) before extraordinary item decreased $38.5 million from income of $33.4 million, or $1.04 per diluted share, in 1999 to a loss of $(5.1) million, or $(0.16) per diluted share, in 2000. Net income (loss) decreased $37.8 million from income of $33.4 million, or $1.04 per diluted share, in 1999 to a loss of $(4.3) million, or $(0.13) per diluted share, in 2000 as a result of the above mentioned factors.
Liquidity and Capital Resources
Operating Activities
The Company generated cash from operations of $10.5 million in 2001 as compared to $51.5 million in 2000. The decrease in cash generated from operations of $41.0 million in 2001 is primarily a result of a reduction in operating income, excluding asset impairment charges, of $66.6 million. Increased interest expense due to a higher average amount of indebtedness outstanding and a failure to complete certain transactions required under the Credit Facility negatively impacted cash generated from operations as did cash costs associated with the Company's restructuring in the latter part of 2001.
The Company had a working capital deficit of approximately $872.3 million at December 29, 2001 due primarily to the reclassification of all amounts outstanding under the Company's Senior Subordinated Notes and Credit Facility to a current liability at such date due to the Company's covenant default. Excluding the current portion of indebtedness, working capital was $204.7 million at December 29, 2001, relatively unchanged from working capital, excluding current potion of indebtedness, at December 30, 2000 of $204.0 million. Accounts receivable on December 29, 2001 was $125.6 million as compared to $136.7 million on December 30, 2000, a decrease of $11.1 million or approximately 8%. Accounts receivable represented approximately 56 days of sales outstanding at December 29, 2001 as compared to 58 days outstanding on December 30, 2000, an increase of approximately 7%. Inventories at December 29, 2001 were approximately $116.0 million, a decrease of $6.8 million over inventories at December 30, 2000 of $122.8 million due primarily to a $10.5 million decrease in consolidated finished goods, offset partially by a consolidated increase in raw materials of $3.5 million. The Company had approximately 63 days of inventory on hand at December 29, 2001 versus 77 days of inventory on hand at December 30, 2000, a decrease of approximately 9%. Accounts payable at December 29, 2001 was $46.4 million as compared to $61.6 million on December 30, 2000, a decrease of $15.2 million or approximately 25%. Accounts payable represented 25 days of payables outstanding at December 29,
2001 compared to 34 days of payables outstanding on December 30, 2000. As a result of the Company's financial condition, certain suppliers have requested alternative payment provisions. However, such alternative payment provisions have not currently had a significant negative impact on the Company's liquidity.
Investing and Financing Activities
Refer to "Certain Indebtedness" within this Annual Report on Form 10-K for a complete description of the Company's Senior Subordinated Notes and Credit Facility. The following table provides detail on the revolving credit and term loan components of the Company's Credit Facility at December 29, 2001 and December 30, 2000 (in thousands):
Capital expenditures for 2001 totaled $21.4 million, a decrease of $64.6 million from capital spending of $86.0 million in 2000. During 2000 the Company completed the final two APEX® lines and additional lines associated with its international expansion.
As discussed under "Fiscal 2001 Events and Recent Developments" in this Annual Report on Form 10-K, as of March 31, 2001, the Company was in non-compliance with the leverage covenant contained in the Credit Facility and was, therefore, in default thereunder. On April 11, 2001, the Company entered into Amendment No.6 which waived the leverage covenant default that existed as of March 31, 2001 and granted the Company a waiver with respect to the default under the leverage covenant through and including December 29, 2001, at which time the waiver expired. The amendment substantially modified certain provisions of the Credit Facility as previously discussed. Accordingly, the Company was required to pay a fee to the lenders equal to 1/2 of 1% of the outstanding commitments of the Senior Secured Lenders. The Company also affirmed its intention in the amendment to reduce the amount outstanding under the Credit Facility by not less than $150 million on or before August 15, 2001 through the execution of certain transactions. The Company did not complete any of the requisite transactions on or before August 15, 2001, and as a result, on August 15, 2001 the Company paid an additional fee of 1/2 of 1% of the outstanding commitments of the lenders. In addition, the interest rate on its outstanding senior debt increased by an additional 50 basis points.
Due primarily to a competitive economic environment and certain other factors as previously discussed, and the Company's inability to complete asset dispositions on acceptable terms and the expiration of the waiver with respect to the leverage covenant on December 29, 2001 as provided in Amendment No. 6, as of December 29, 2001, the Company was in default under the Credit Facility. Because of this default, the Senior Secured Lenders exercised their right to block the payment of interest due January 2, 2002 to the holders of the 9% Senior Subordinated Notes and the interest payment due
on March 1, 2002 to the holders of the 83/4% Senior Subordinated Notes. The Company's failure to pay interest on the outstanding Senior Subordinated Notes constituted an event of default under such notes.
On December 30, 2001, the Company and certain subsidiaries entered into a Forbearance Agreement, under which the Senior Secured Lenders agreed not to exercise certain remedies available to them under the Credit Facility as a result of the existing covenant defaults during the forbearance period. If certain events occur, the Senior Secured Lenders may exercise their remedies available to them, which include the right to declare all amounts outstanding under the Credit Facility immediately due and payable. The Forbearance Agreement, as extended on March 15, 2002, is scheduled to end on May 15, 2002, and prevents the Company from making any additional borrowings in excess of the amounts outstanding under the revolving portion of the Credit Facility as of December 30, 2001.
As a result of the Company's default under the Credit Facility and Senior Subordinated Notes, all principal amounts outstanding under the Credit Facility and all principal amounts outstanding under the Senior Subordinated Notes at December 29, 2001 have been classified as a current liability in the Company's consolidated balance sheet at such date. Refer to the table in "Leases and Commitments" below for long-term debt maturities.
During the first quarter of fiscal 2001, the Company exercised an option to obtain a 45% minority position in a start-up Saudi Arabian state-of-the-art nonwovens production line (the "Saudi Venture"). Over the course of 2001, the Company funded approximately $4.4 million representing its pro-rata share for the construction costs of this line in Saudi Arabia. The Company is not permitted to acquire more than a 45% interest in the Saudi Venture pursuant to Amendment No. 6. The Saudi Venture and the Company's equity stake are currently under review pending finalization of the Investment Approval Application (the "IAA") between the Company and its partner and the approval of the IAA by the Saudi Arabian government. The Company expects to receive the final outcome of the review during the second quarter of fiscal 2002. However, in the event the Company and its partner are unable to agree on final terms of the Saudi Venture acceptable to the Company, the Saudi Venture would not be able to obtain approval of the IAA from the Saudi Arabia government. Moreover, the Company may not be able to recover its pro-rata share of construction costs funded to date. The Company has not guaranteed any indebtedness of the non-consolidated Saudi Venture.
During 2000, the Company acquired an additional 10% interest in Dominion Nonwovens Sudamerica S.A. ("DNS"), its Argentine joint venture. The 10% acquisition increased the Company's 50% interest in DNS to a 60% interest. DNS manufactures and markets nonwoven products for predominant use in consumer applications. DNS has two bank facilities denominated in U.S. dollars of approximately $11.2 million at December 29, 2001 with current maturities of approximately $4.5 million in 2002. The facilities are scheduled to mature in 2004 and 2005 respectively. The full amount of such indebtedness is reflected on the Company's consolidated balance sheet at December 29, 2001 as a result of the Company's 60% majority ownership of this subsidiary; however, the minority shareholder guarantees 40% of such indebtedness. Because of the Argentine peso devaluation against the U.S. dollar, the Company is exposed to foreign currency remeasurement losses of the U.S. dollar denominated debt at DNS because the functional currency of DNS is the Argentine peso. As a result, the Company recognized foreign currency losses of approximately $2.7 million in December 2001, net of minority interest adjustments, related to the DNS U.S. dollar debt. At December 29, 2001, DNS had cash and cash equivalents on hand of approximately $0.5 million and working capital of $4.8 million, excluding current debt. Including current debt, DNS working capital was approximately $0.3 million at December 29, 2001.
During 1999, the Company acquired an 80% interest in Vateks Tekstil Sanayi ve Ticaret AS ("Vateks") and Nanhai Nanxin Non-Woven Co. Ltd. ("Nanhai"). The Company also acquired the assets of Mölnlycke Health Care AB ("Sweden"). Vateks, Nanhai and Sweden manufacture and market nonwoven products for predominant use in consumer and industrial applications.
In order to support working capital requirements at Vateks, the Company has deposited over time approximately $6.0 million with a member of its European bank syndicate who in turn has funded an approximate equivalent amount to Vateks. The amount owed by Vateks to the bank member is secured by this deposit.
Nanhai has a bank facility with a financial institution based in China. The facility is scheduled to mature in mid-2002 and at December 29, 2001, the approximate amount of outstanding indebtedness under the facility was $9.7 million. The Nanhai indebtedness is guaranteed 100% by the Company and to support this guarantee, a letter of credit has been issued by the Company's agent bank in the amount of $10.0 million. As a result of the Company's 80% majority ownership of Nanhai and full guarantee of the Nanhai bank debt, all amounts outstanding under the Nanhai bank facility are reflected in the Company's consolidated balance sheet as a current liability within the caption "Short term borrowings" at December 29, 2001. The Company currently intends to refinance the Nanhai debt in 2002. At December 29, 2001, Nanhai had cash and cash equivalents on hand of approximately $1.2 million and working capital, excluding current debt, of approximately $6.9 million. Including current debt, the Nanhai working capital (deficit) was $2.8 million at December 29, 2001.
On December 19, 1997, DT Acquisition Inc. ("DTA"), a subsidiary of the Company, acquired substantially all of the outstanding common and first preferred shares of Dominion Textiles Inc., a Company organized under the laws of Canada ("Dominion"), and on January 29, 1998, DTA acquired all remaining common and first preferred shares, at which time Dominion underwent a "winding-up." All assets and liabilities of Dominion were transferred to DTA and all outstanding common shares and first preferred shares held by DTA were redeemed. Immediately thereafter, pursuant to a purchase agreement, dated October 27, 1997, the apparel fabrics business of Dominion was sold, at no gain or loss, to Galey & Lord, Inc., ("Galey") and the Company acquired the nonwovens and industrial fabrics operations. The Company and Galey finalized the acquisition cash settlement during 2000 pursuant to the Master Separation Agreement (the "MSA") dated January 29, 1998. The result of such settlement was not material to the Company's financial condition. Under the MSA, the Company and Galey are required to share in the payment of certain on-going costs, including taxes, for historical Dominion entities as required by the MSA. Because the Company originally acquired Dominion, the Company generally makes the payments and is reimbursed by Galey. During fiscal 2001, such on-going costs, excluding certain statutory employee benefit refunds of approximately $1.3 million, approximated $2.1 million. Net of shared refunds and repatriations, Galey's cash reimbursement to the Company under terms of the MSA was approximately $0.5 million for the fiscal 2001 activity. On February 19, 2002, Galey and its U.S. operating subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code and began operating their businesses as debtors-in-possession. During March 2002, Galey informed the Company of its intention to reject the MSA as part of its bankruptcy proceedings. If approved by the Bankruptcy Court, Galey's contemplated rejection of the MSA would result in the Company being required to fund expenditures that should be allocated to, and paid by, Galey, which could potentially have a material adverse effect on the Company.
As part of the financing of the acquisition of Dominion, the Company received a $69.0 million investment from ZB Holdings, Inc. ("ZB Holdings"), an entity affiliated with the Company. This amount, including interest of approximately $0.6 million, was repaid during January 1998. In connection with this transaction, ZB Holdings requested consideration from the Company in return for providing a portion of the financing required to complete the tender offer for the outstanding shares of Dominion. Independent members of the Board of Directors engaged independent outside legal counsel and an independent banking firm to evaluate this request. Pursuant to the review, ZB Holdings received $5.3 million during 1998 from the Company that was capitalized a part of the cost of the acquisition in 1998.
The Board of Directors declared a quarterly dividend of $0.02 per share each quarter in 2000. Amendment No. 6 to the Credit Facility currently prevents the Company from paying quarterly dividends
on its Common Stock during fiscal 2001, and no dividends were paid following the first quarter. See "Fiscal 2001 Events and Recent Developments" in this Annual Report on Form 10-K.
Leases and Commitments
The Company leases certain manufacturing, warehousing and other facilities and equipment under operating leases in the ordinary course of business. The leases on most of the properties contain renewal provisions. Third party/nonaffiliate rent expense (net of sub-lease income), including incidental leases, approximated $4.5, $5.9 and $6.0 million in 2001, 2000 and 1999, respectively. The Company leases a building under a non-cancelable lease expiring in June 2012 to an unrelated third party. Rental income approximated $2.4, $2.3 and $1.9 million in 2001, 2000 and 1999, respectively. The approximate net minimum rental payments (income) required or due under operating leases that have initial or non-cancelable lease terms in excess of one year at December 29, 2001 is presented in the following table. The Company's corporate headquarters are housed in space leased by a shareholder of the Company from an affiliate of the shareholder for an approximate annual rental charge of $0.2 million. Additionally, the Company leases a manufacturing facility from an affiliated entity that the Company believes is comparable to similar properties in the area. Annual rent expense relating to this lease approximated $0.2 million in 2001, 2000 and 1999, respectively.
At December 29, 2001, the Company had commitments in the ordinary course of business of approximately $45.0 million related to the purchase of raw materials, maintenance and converting services and approximately $0.6 million related to capital projects. The Company had outstanding letters of credit, including the Nanhai letter of credit, at December 29, 2001 of approximately $15.7 million. A schedule of the Company's contractual and commercial commitments at December 29, 2001 is presented in tabular form below (in thousands):
Effect of Inflation
Inflation generally affects the Company by increasing the cost of labor, equipment and raw materials. The Company does not believe that inflation has had any material effect on the Company's business during 1999. For a discussion of certain raw material price increases during 2001, see "Quantitative and Qualitative Disclosures About Market Risk-Raw Material and Commodity Risks."
Foreign Currency
The Company's substantial foreign operations expose it to the risk of foreign currency 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. For a discussion of certain adverse foreign currency exchange rate fluctuations during fiscal years 2001 and 2000, see "Quantitative and Qualitative Disclosures About Market Risk-Foreign Currency Exchange Rate Risk."
Critical Accounting Policies And Other Matters
The Company's analysis and discussion of its financial condition and results of operations are based upon its consolidated financial statements that have been prepared in accordance with generally accepted accounting principles in the United States ("U.S. GAAP"). The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. The Company evaluates these estimates and assumptions on an ongoing basis, including but not limited to those related to inventories, bad debts, income taxes, intangible assets, restructuring related adjustments, pension and other post retirement benefits and contingencies. Estimates and assumptions are based on historical and other factors believed to be reasonable under the circumstances. The results of these estimates may form the basis of the carrying value of certain assets and liabilities. Actual results, under conditions and circumstances different from those assumed, may differ from estimates. The impact and any associated risks related to estimates, assumptions, and accounting policies are discussed within Management's Discussion and Analysis of Operations and Financial Condition, as well as in the Notes to the Consolidated Financial Statements, if applicable, where such estimates, assumptions, and accounting policies affect the Company's reported and expected results.
The Company believes the following accounting policies are critical to its business operations and the understanding of results of operations and affect the more significant judgments and estimates used in the preparation of its consolidated financial statements:
Revenue Recognition: Revenue from product sales is recognized at the time ownership of goods transfers to the customer and the earnings process is complete in accordance with Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 specifies how existing rules should be applied to transactions in the absence of authoritative literature. Based on the guidelines of current accounting rules and SAB 101, revenue should not be recognized until it is realized or realizable and earned.
Foreign Currency Translation: The Company accounts for and reports translation of foreign currency transactions and foreign currency financial statements in accordance with SFAS No. 52, "Foreign Currency Translation." All assets and liabilities in the balance sheets of foreign subsidiaries whose functional currency is other than the U.S. dollar are translated at quarter-end exchange rates. Translation gains and losses are not included in determining net income but are accumulated as a separate component of shareholders' equity. However, subsidiaries considered to be operating in highly inflationary countries use the U.S. dollar as the functional currency and translation gains and losses are included in determining net income. In addition, foreign currency transaction gains and losses are included in determining net income.
Business Combinations, Goodwill and Other Intangible Assets: In July 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141 "Business Combinations" ("FAS 141") and No. 142, "Goodwill and Other Intangible Assets" ("FAS 142"). FAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Use of the pooling-of-interests method is no longer permitted. FAS 141 also includes guidance on the initial recognition and measurement of goodwill and intangible assets acquired in a business combination that is completed after June 30, 2001. FAS 142 supersedes Accounting Principles Bulletin No. 17, "Intangible Assets." FAS 142 primarily addresses the accounting for goodwill and
intangible assets subsequent to their acquisition. The most significant changes made by FAS 142 are: (1) goodwill and indefinite lived intangible assets will no longer be amortized, (2) goodwill will be tested for impairment at least annually, (3) intangible assets deemed to have an indefinite life will be tested for impairment at least annually and (4) the amortization period of intangible assets with finite lives will no longer be limited to forty years. FAS 142 will be effective for fiscal years beginning after December 15, 2001.
Impairment of Long-Lived Assets: For all periods through December 29, 2001, the Company reviewed the recoverability of the carrying value of long-lived assets in accordance with Statement of Financial Standard No. 121, "Accounting for the Impairment of Long-Lived Assets and for Assets to be Disposed Of" ("FAS 121"). The Company also reviewed long-lived assets for impairment whenever events or changes in circumstances indicated that the carrying amount of such assets might not be recoverable. When the future undiscounted cash flows of the operations to which the assets relate did not exceed the carrying value of the asset, the intangible assets were written down, followed by the other long-lived assets, to fair value. In October 2001, the Financial Accounting Standards Board issued Statement No.144 "Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS 144"). FAS 144 provides accounting guidance for financial accounting and reporting for the impairment or disposal of long-lived assets. The statement supersedes Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("FAS 121"). It also supersedes the accounting and reporting provisions of APB Opinion No. 30 "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" related to the disposal of a segment of a business. The statement is effective for fiscal years beginning after December 15, 2001.
Accounts Receivable and Concentration of Credit Risks: Accounts receivable potentially expose the Company to concentration of credit risk, as defined by Statement of Financial Accounting Standards No. 105, "Disclosure of Information about Financial Instruments with Off-Balance Sheet Risk and Financial Instruments with Concentration of Credit Risk." The Company provides credit in the normal course of business and performs ongoing credit evaluations on certain of its customers' financial condition, but generally does not require collateral to support such receivables. The Company also establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information.
Income Taxes: The Company records an income tax valuation allowance when the realization of certain deferred tax assets, net operating losses and capital loss carryforwards is not likely. These deferred tax items represent expenses recognized for financial reporting purposes, which will result in tax deductions over varying future periods. The Company has not provided U.S. income taxes for undistributed earnings of foreign subsidiaries that are considered to be retained indefinitely for reinvestment. Certain judgements, assumptions and estimates may affect the carrying value of the valuation allowance and deferred income tax expense in the Company's consolidated financial statements.
Environmental
The Company is subject to a broad range of federal, foreign, state and local laws governing regulations relating to the pollution and protection of the environment. The Company believes that it is currently in substantial compliance with environmental requirements and does not currently anticipate any material adverse effect on its operations, financial condition or competitive position as a result of its efforts to comply with environmental requirements. Some risk of environmental liability is inherent, however, in the nature of the Company's business, and there can be no assurance that material environmental liabilities will not arise.
Euro Conversion
On January 1, 1999, member countries of the European Monetary Union began a three-year transition from their national currencies to a new common currency, the "euro". Permanent rates of exchange between members' national currency and the euro have been established and monetary, capital, foreign exchange, and interbank markets have been converted to the euro. National currencies will continue to exist as legal tender and may continue to be used in commercial transactions. Euro currency has been issued and by July 2002, the respective national currencies will be withdrawn. The Company has operations in three of the participating countries and has successfully transitioned to using both the euro and local currencies for commercial transactions. Costs of the euro conversion have not had a material impact on the results of operations or the financial condition of the Company.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Long-Term Debt and Interest Rate Market Risk
Variable Rate Debt
The Credit Facility permitted the Company to borrow up to $600 million, subject in the case of borrowings under the revolving portion to the satisfaction of certain conditions, a portion of which may be denominated in Dutch guilders and in Canadian dollars. Under the Forbearance Agreement with the Senior Secured Lenders, the Company is not permitted to borrow any amount under the revolving portion of the Credit Facility in excess of the amount outstanding at December 30, 2001. The variable interest rate applicable to borrowings under the Credit Facility is based on, in the case of U.S. dollar denominated loans, the base rate referred to therein or the Eurocurrency base rate referred to therein for U.S. dollars, at the Company's option, plus a specified margin. In the event that a portion of the Credit Facility is denominated in Dutch guilders, the applicable interest rate is based on the applicable Eurocurrency base rate referred to therein for Dutch guilders, plus a specified margin. In the event that a portion of the Credit Facility is denominated in Canadian dollars, the applicable interest rate is based on the Canadian base rate referred to therein (plus a specified margin) of the Bankers' Acceptance Discount Rate referred to therein, at the Company's option. Under the Forbearance Agreement with the Senior Secured Lenders all borrowings are required to be made at the base rate. At December 29, 2001, the Company had borrowings under the Credit Facility of $484.4 million that were subject to interest rate risk. Each hypothetical 1.0% increase in interest rates would impact pretax earnings by $4.8 million. The Company has an interest rate cap agreement that limits the amount of interest expense on $100 million of this debt to a LIBOR rate of 9%. The Company does not use derivative products for trading purposes.
Fixed Rate Debt
The fair market value of the Company's long-term fixed interest rate debt is also subject to interest rate risk. Generally, the fair market value of fixed interest rate debt will increase as interest rates fall and decrease as interest rates rise. The estimated fair value of the Company's total long-term fixed-rate debt at December 29, 2001 was approximately $175.5 million, which was less than its carrying value by approximately $416.0 million. Both Moody's and Standard & Poors rating agencies have given the Company's fixed rate debt a "D" rating as a result of existing defaults. A 100 basis points decrease in the prevailing interest rates at December 29, 2001 would result in an increase in fair value of total fixed rate debt by approximately $5.3 million. A 100 basis points increase in the prevailing interest rates at December 29, 2001 would result in a decrease in fair value of total fixed rate debt by approximately $4.9 million. Fair market values were determined from quoted market prices or based on estimates made by investment bankers.
Foreign Currency Exchange Rate Risk
The Company manufactures, markets and distributes certain of its products in Europe, Canada, Latin America and Asia. As a result, the Company's financial results could be significantly affected by factors such as changes in foreign currency exchange rates or weak economic conditions in the foreign markets in which the Company maintains a manufacturing or distribution presence. If foreign currency denominated revenues are greater than costs, the translation of foreign currency denominated costs and revenues into U.S. dollars will improve profitability when the foreign currency strengthens against the U.S. dollar and will reduce profitability when the foreign currency weakens. For example, during fiscal 2001 and 2000, certain currencies of countries in which the Company conducts foreign currency denominated business, predominantly in Europe, weakened against the U.S. dollar and had a significant unfavorable impact on sales and operating income. See "Recent Developments" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Annual Report on Form 10-K.
For the year ending December 29, 2001, the result of a uniform 10% strengthening in the value of the dollar relative to the currencies in which the Company's sales are denominated would have decreased operating income by approximately $1.8 million. This calculation assumes that each exchange rate would change in the same direction relative to the U.S. dollar. In addition to the direct effects of changes in exchange rates, which are a changed dollar value of the resulting sales, changes in exchange rates also affect the volume of sales or the foreign currency sales price as competitors' products become more or less attractive. The Company's sensitivity analysis of the effects of changes in foreign currency exchange rates does not factor in a potential change in sales levels or local currency prices.
The Argentine peso, which serves as the functional currency of an Argentine majority-owned subsidiary of the Company, has devalued significantly against the U.S. dollar since the end of fiscal 2001 due primarily to the economic uncertainty within this geographic region. For a brief period of time between the latter part of December 2001 and the first part of January 2002, trading in the Argentine peso was suspended. Thus, the AICPA International Task Force agreed that Emerging Issues Task Force No. D-12, "Foreign Currency Translation-Selection of Exchange Rate When Trading is Temporarily Suspended" ("EITF D-12") applies to the financial statement translation. EITF D-12 notes that in instances where there is a temporary suspension in trading of a foreign currency, the rate in effect when trading is resumed should be utilized. Regarding the Argentine peso, the January 11, 2002 market exchange rate (the floating rate) should be used to translate transactions subsequent to December 20, 2001 for translation of financial statements through the end of fiscal 2001. January 11, 2002 represented the date in which trading in this currency resumed. As a result of the Argentine peso devaluation, the Company recognized a foreign currency loss of approximately $2.7 million during December 2001, net of minority interest adjustments.
Raw Material and Commodity Risks
The primary raw materials used in the manufacture of most of the Company's products are polypropylene and polyester fiber, polyethylene and polypropylene resin, and, to a lesser extent, rayon, tissue paper and cotton. The prices of polypropylene and polyethylene are a function of, among other things, manufacturing capacity, demand and the price of crude oil and natural gas liquids. During 2001 and 2000 raw material prices as a percentage of sales increased significantly from 37.9% of sales in 1999 to 41.0% of sales in 2000 and 43.9% in 2001. The increase in raw material cost had a significant negative impact on operating income because the increase could not be passed on to customers. As in 2001 and 2000, a significant increase in the prices of polyolefin resins that cannot be passed on to customers could have a material adverse effect on the Company's results of operations and financial condition. See "Recent Developments" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Annual Report on Form 10-K. At December 29, 2001, the Company had commitments predominantly related to raw materials of approximately $45.0 million.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Polymer Group, Inc.
We have audited the accompanying consolidated balance sheets of Polymer Group, Inc. as of December 29, 2001 and December 30, 2000 and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 29, 2001. Our audits also included the financial statement schedule listed in the Index at Item 14(b). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Polymer Group, Inc. at December 29, 2001 and December 30, 2000 and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 29, 2001 in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
The accompanying financial statements have been prepared assuming that Polymer Group, Inc. will continue as a going concern. As more fully described in Note 1. "Nature of Operations and Business Conditions" ("Note 1") to the consolidated financial statements, the Company has incurred net losses of $247.6 million and $4.3 million during fiscal 2001 and 2000, respectively. In addition, the Company is in default under its existing Credit Facility and Senior Subordinated Notes. These conditions and their effect on the Company's liquidity may further restrict the Company's use of cash and raise substantial doubts about the Company's ability to continue as a going concern. Management's plans in regard to these matters are described in Note 1 and Note 17. "Subsequent Event." The accompanying financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
/s/ Ernst & Young LLP
Greenville, South Carolina
March 15, 2002, except for Note 17,
as to which the date is April 2, 2002
POLYMER GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
See accompanying notes.
POLYMER GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
See accompanying notes.
POLYMER GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
For the Fiscal Years Ended December 29, 2001, December 30, 2000 and January 1, 2000
(In Thousands, Except Share Data)
See accompanying notes.
POLYMER GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
See accompanying notes.
POLYMER GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Operations and Business Conditions
Polymer Group, Inc. (the "Company"), a global manufacturer and marketer of nonwoven and oriented polyolefin products, currently operates in two business segments that include consumer and industrial and specialty. The Company incurred net losses of $247.6 million and $4.3 million during fiscal 2001 and 2000, respectively, thus, a comprehensive financial and business restructuring was undertaken in the latter part of 2001 as more fully discussed below. Although the Company had approximately $46.5 million of cash, cash equivalents and short-term investments on hand at December 29, 2001, as a result of the factors described below there is substantial doubt about the Company's ability to continue as a going concern. In addition, the Company is not assured of being able to complete the contemplated restructurings on terms and conditions acceptable to the Company. The accompanying financial statements, prepared assuming the Company will continue as a going concern, do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of these uncertainties.
Events Leading to the Financial and Business Restructuring-During the first quarter of 2001, the Company announced that its operating results would be substantially below previous expectation due to a number of factors that were a carry-over from 2000. First, demand for certain high margin consumer products did not return to forecasted levels resulting in certain specialized manufacturing assets remaining under-utilized. Second, the commercialization periods of certain APEX® programs have been longer than anticipated, and the expected ramp-up of APEX® products failed to materialize during 2001. Third, raw material prices did not decline as anticipated, and soft demand has prevented the Company from passing the increased raw material costs along to customers. Fourth, pricing pressure and margin erosion within the spunmelt technologies have continued to impact results of operations. Fifth, the Company experienced order reductions and an unfavorable shift in product mix due to certain customers' adjustments, and demand for certain consumer products failed to accelerate as originally expected. Finally, the Company has incurred increased interest expense due to a higher average amount of indebtedness outstanding resulting from increased capital spending, primarily during fiscal year 2000, and a failure to comply with the covenants of Amendment No. 6 to the Credit Facility (as defined), as described below.
Due to the impact of these factors on results of operations for fiscal year 2000 and the first quarter of 2001, as of March 31, 2001, the Company was in non-compliance with the leverage covenant contained in the Credit Facility and, therefore, in default thereunder. On April 11, 2001, the Company entered into Amendment No. 6 to the Credit Facility, dated as of April 11, 2001 ("Amendment No. 6"), which waived the leverage covenant default that existed as of March 31, 2001. Amendment No. 6 modified the existing financial covenants relating to the senior leverage ratio, fixed charge coverage ratio and minimum required levels of EBITDA ("Earnings Before Interest, Taxes, Depreciation and Amortization"). Amendment No. 6 also increased the interest rate on the outstanding amounts under the Credit Facility, limited amounts outstanding under the revolving portion of the Existing Credit Facility (together with outstanding letters of credit) to $260.0 million, limited capital expenditures to $35.0 million for fiscal year 2001, restricted the Company from incurring new indebtedness or creating certain liens, restricted the Company from making new investments or acquisitions and prevented the Company from paying dividends on its Common Stock or making other restricted payments.
Due to the continuing impact of the factors described above on results of operations, the inability to complete asset dispositions on acceptable terms and the expiration of the waiver with respect to the leverage covenant on December 29, 2001 as provided in Amendment No. 6, as of December 29, 2001 the Company was in default under the Credit Facility. Because of this default, the Senior Secured Lenders exercised their right to block the payment of interest due on January 2, 2002 to the holders of
the 9% Senior Subordinated Notes due 2007 and the interest payment due on March 1, 2002 to the holders of 83/4% Senior Subordinated Notes due 2008. On December 30, 2001, the Company and certain subsidiaries entered into a Forbearance Agreement with the Senior Secured Lenders (the "Forbearance Agreement"). The Senior Secured Lenders agreed not to exercise certain remedies available to them under the Credit Facility as a result of the existing covenant defaults during the forbearance period. If certain events occur, the Senior Secured Lenders may exercise their remedies available to them, which include the right to declare all amounts outstanding under the Credit Facility immediately due and payable. The Forbearance Agreement, as extended on March 15, 2002 is scheduled to end on May 15, 2002, and prevents the Company from making any additional borrowings in excess of the amounts outstanding under the revolving portion of the Credit Facility as of December 30, 2001.
Because the Company was unable to reduce amounts outstanding under the Credit Facility through asset dispositions on acceptable terms, the services of Dresdner Kleinwort Wasserstein were retained on October 2, 2001 as the financial advisor to assist in exploring various restructuring options. During November and December of 2001 and January and February of 2002, the Company conducted extensive negotiations with several potential investors and various other constituents in an effort to establish viable restructuring options. Beginning in December of 2001 and continuing through February of 2002, some of these potential investors conducted due diligence investigations of the Company and its operations.
In evaluating the various restructuring options, the Company decided to maintain negotiations with CSFB Global Opportunity Partners, L.P. ("GOP"), the principal holder of the Senior Subordinated Notes (as defined). The Company determined that GOP afforded the highest probability of a transaction being completed with terms that provided an overall acceptable level of value to the various stakeholders. GOP informed the Company that it owns approximately 67% of the Senior Subordinated Notes. Members of the Company's senior management, GOP and their respective advisors held discussions concerning the terms of a proposed recapitalization transaction. The discussions focused primarily on the overall level of investment in the Company and the nature of that ownership. As a result of these extensive negotiations, the Company executed a term sheet with GOP on March 15, 2002 setting forth the proposed terms of the recapitalization plan, including the restructuring.
Financial Restructuring-The material elements of the restructuring include: (i) GOP contributing $50 million in cash and $394.4 million of Existing Notes currently owned by GOP (including accrued, but unpaid interest thereon through the date of the transaction) and agreeing to provide a $25 million letter of credit in favor of the Senior Secured Lenders under an amended credit facility, all in exchange for 22,402,904 newly issued shares of common stock of the Company (after taking into account a 1-for-10 reverse common stock split), representing 87.5% ownership of the Company; (ii) the holders of at least 95% of the aggregate principal amount of the Existing Notes not owned by GOP exchanging their notes for either New Senior Subordinated Notes or New Senior Subordinated Discount Notes; and (iii) the Company entering into an amended credit facility with its Senior Secured Lenders. Refer to Note 17. "Subsequent Event" for additional discussion involving the Company's financial restructuring.
Business Restructuring-The Company anticipated that the confluence of negative factors described above under "Events Leading to the Financial and Business Restructuring" would generally subside during the latter part of 2001, particularly during the fourth quarter. However, the anticipated economic recovery within the Company's business did not develop as planned in the latter half of 2001; therefore, the Company undertook a comprehensive business restructuring involving manufacturing initiatives and workforce reductions, including voluntary attrition, of approximately 70 employees in the U.S. and approximately 190 employees in Europe. As a result of the realignment, the Company recorded a pre-tax charge of $5.8 million ($4.2 million, net of tax) during the three months ended December 29,
2001 in accordance with Emerging Issues Tasks Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)" ("EITF 94-3"). The total charge in the fourth quarter consisted of personnel and facility closing costs. In addition, during mid-2001, the Company undertook a smaller restructuring of its operations in order to reduce costs, predominantly in the U.S., that primarily involved headcount reductions of approximately 90 employees. Accordingly, the Company recorded a pre-tax charge of $1.7 million ($1.2 million, net of tax) during the three months ended June 30, 2001 in accordance with EITF 94-3.
As discussed in Note 2. "Significant Accounting Policies," the Company reviews the recorded value of its long-lived assets to determine if the future cash flows to be derived from those assets will be sufficient to recover the remaining recorded asset values. In accordance with FAS 121 (as defined) and in connection with the restructuring undertaken in the fourth quarter of 2001, based upon a comprehensive review of the Company's long-lived assets, the Company recorded a noncash charge of approximately $181.2 million, consisting of the write-down of goodwill and contract intangibles ($100.4 million) and machinery and equipment ($80.8 million) related primarily to production assets within the U.S. and European Nonwovens business. After careful assessment of various factors relevant to these assets, including the continuation of those factors previously described combined with lower than expected operating results particularly in the fourth quarter, and in connection with the comprehensive business realignment previously discussed, the Company wrote-down the value of such assets to their estimated fair market value based on estimated discounted future cash flows or third party appraisals, each in accordance with FAS 121.
As part of the Company's restructuring, approximately $1.9 million of expenses were incurred in the fourth quarter of 2001 related to professional and other related services provided in connection with the restructuring effort. Such costs are classified as "Special charges" in the accompanying consolidated statement of operations and are expensed as incurred.
A summary of the restructuring activity during 2001 is presented in the following table (in thousands):
Note 2. Significant Accounting Policies
Basis of Presentation and Use of Estimates
The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States and includes the accounts of the Company and its subsidiaries. All material intercompany accounts are eliminated in consolidation. Certain amounts previously presented in the consolidated financial statements for prior periods have been reclassified to conform to current classification. The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Investments in 20% to 50% owned affiliates are accounted for on the equity method. The Company's fiscal year ends on the Saturday closest to the last day in December. There were 52 weeks in fiscal 2001, 2000 and 1999.
Revenue Recognition
Revenue from product sales is recognized at the time ownership of goods transfers to the customer and the earnings process is complete. In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 did not change existing accounting rules on revenue recognition but specifies how existing rules should be applied to transactions in the absence of authoritative literature. Based on the guidelines of current accounting rules and SAB 101, revenue should not be recognized until it is realized or realizable and earned. The adoption of SAB 101 during the fourth quarter of 2000 had no material impact on the operational results of the Company.
Cash Equivalents and Interest Income
Investment securities that mature in three months or less from the date of purchase are considered cash equivalents. Interest and other income approximated $2.3, $2.4 and $3.5 million during 2001, 2000, and 1999, respectively, and consists primarily of income from highly liquid investment sources. Interest expense in the consolidated statements of operations is net of interest and other income and capitalized interest.
Short-Term Investments
The Company accounts for its investments using Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("FAS 115") which requires that certain debt and equity securities be adjusted to market value at the end of each accounting period. Market value gains and losses are charged to earnings if the securities are traded for short-term profit. Otherwise, such gains and losses are charged or credited to the comprehensive income component of shareholders' equity. During the fourth quarter of 2001, the Company recognized investment losses of $5.3 million resulting from an unrealized, non-cash valuation loss on short term investments deemed to be "other than temporary" under Staff Accounting Bulletin No. 59. Such losses were previously classified as a component of Other Comprehensive Income (Loss) in the equity section of the balance sheet. Management determines the proper classifications of investments at the time of purchase and reevaluates such designation as of each balance sheet date. Realized gains and losses on sales of investments, as determined on the specific identification basis, are included in the determination of net income. As of December 29, 2001, the Company's marketable securities were invested in equity securities with a market value of approximately $18.2 million, and were designated as available for sale.
Accounts Receivable and Concentration of Credit Risks
Accounts receivable potentially expose the Company to concentration of credit risk, as defined by Statement of Financial Accounting Standards No. 105, "Disclosure of Information about Financial Instruments with Off-Balance Sheet Risk and Financial Instruments with Concentration of Credit Risk." The Company provides credit in the normal course of business and performs ongoing credit evaluations on certain of its customers' financial condition, but generally does not require collateral to support such receivables. The Company also establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. The allowance for doubtful accounts was $12.0 and $8.5 million at December 29, 2001 and December 30, 2000, respectively, which management believes is adequate to provide for credit loss in the normal course of business, as well as losses for customers who have filed for protection under the bankruptcy law. In 2001, Johnson & Johnson ("J&J") and The Procter & Gamble Company ("P&G") each accounted for approximately 13% of the Company's sales. In 2000, J&J and P&G accounted for approximately 14% and 17%, respectively, of the Company's sales.
Inventories
Inventories are stated at the lower of cost or market using the first-in, first-out method of accounting and, as of December 29, 2001 and December 30, 2000 consist of the following:
Long-Lived Assets
Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is computed for financial reporting purposes on the straight-line method over the estimated useful lives of the related assets. The estimated useful lives established for building and land improvements range from 18 to 33 years, and the estimated useful lives established for machinery, equipment and other fixed assets range from 3 to 15 years. Costs of the construction of certain long-term assets include capitalized interest that is amortized over the estimated useful life of the related asset. The Company capitalized approximately $1.5, $6.6 and $8.4 million of interest costs during 2001, 2000 and 1999, respectively. Loan acquisition costs, which increased approximately $8.3 million and $4.8 million in 2001 and 2000, respectively, are amortized over the term of the related debt. The net book value of loan acquisition costs at December 29, 2001 and December 30, 2000 approximated $28.5 million and $25.4 million, respectively.
In July 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("FAS 142"). FAS 142 supersedes Accounting Principles Bulletin No. 17, "Intangible Assets." FAS 142 primarily addresses the accounting for goodwill and intangible assets subsequent to their acquisition. The most significant changes made by FAS 142 are: (1) goodwill and indefinite lived intangible assets will no longer be amortized, (2) goodwill will be tested for impairment at least annually, (3) intangible assets deemed to have an indefinite life will be tested for impairment at least annually and (4) the amortization period of intangible assets with finite lives will no longer be limited to forty years. FAS 142 will be effective for fiscal years beginning after December 15, 2001. Amortization of goodwill was approximately $6.1, $5.8 and $5.3 million in 2001, 2000 and 1999, respectively, and amortization of other intangibles was approximately $3.6, $3.9 and $5.9 million in 2001, 2000 and 1999, respectively.
Impairment Evaluation of Long-Lived Assets
For all periods through December 29, 2001, the Company reviewed the recoverability of the carrying value of long-lived assets in accordance with Statement of Financial Standard No. 121, "Accounting for the Impairment of Long-Lived Assets and for Assets to be Disposed Of" ("FAS 121"). The Company also reviewed long-lived assets for impairment whenever events or changes in circumstances indicated that the carrying amount of such assets might not be recoverable. When the future undiscounted cash flows of the operations to which the assets relate did not exceed the carrying value of the asset, the intangible assets were written down, followed by the other long-lived assets, to fair value. As more fully discussed in Note 1. "Nature of Operations and Business Conditions", the Company recorded a non-cash asset
impairment charge in fiscal 2001 of approximately $181.2 million related to the write-down of goodwill and contract intangibles and property, plant and equipment.
In October 2001, the Financial Accounting Standards Board issued Statement No.144 "Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS 144"). FAS 144 provides accounting guidance for financial accounting and reporting for the impairment or disposal of long-lived assets. The statement supersedes FAS 121 and also supersedes the accounting and reporting provisions of APB Opinion No. 30 "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," related to the disposal of a segment of a business. The statement is effective for fiscal years beginning after December 15, 2001. The Company does not expect the adoption of FAS 144 to have a material impact on the financial condition and operating results of the Company.
Derivatives
The Company does not use derivative financial instruments for trading purposes. Premiums paid for purchased interest rate cap agreements are charged to expense over the rate cap period. The Company's London Interbank Offered Rate-based interest rate cap agreement provides for a notional amount of $100.0 million, which declines ratably over the rate cap term. If the rate cap exceeds 9% on each quarterly reset date, as defined in the agreement, the Company is entitled to receive an amount by which the rate cap exceeds 9%. Such amounts have not exceeded 9%.
In 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133") as amended, which the Company adopted effective December 31, 2000. FAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. FAS 133 contains disclosure requirements based on the type of hedge and the type of market risk that is being hedged. The adoption of FAS 133 as of the beginning of fiscal year 2001 had no material impact on the financial condition and operating results of the Company.
Fair Value of Financial Instruments
The Company has estimated the fair value amounts of financial instruments as required by Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments", using available market information and appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, such estimates are not necessarily indicative of the amounts that the Company would realize in a current market exchange. The carrying amount of cash and equivalents, short term investments, accounts receivable, other assets and accounts payable are reasonable estimates of their fair values. The contract amounts of outstanding letters of credit approximate their fair value. Fair value of the Company's debt was estimated using interest rates at those dates for issuance of such financial instruments with similar terms and credit ratings and remaining maturities and other independent valuation methodologies. The estimated fair value of debt, based on appropriate valuation methodologies, at December 29, 2001 and December 30, 2000 was $683.2 and $832.5 million, respectively.
Income Taxes
The provision for income taxes and corresponding balance sheet accounts are determined in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS 109"). Under FAS 109, the deferred tax liabilities and assets are determined based upon temporary differences between the basis of certain assets and liabilities for income tax and financial reporting purposes. A valuation allowance is recognized if it is likely that some portion of a deferred tax asset will not be realized in the future.
Research and Development
The cost of research and development is charged to expense as incurred and is included in selling, general and administrative expense in the consolidated statement of operations. The Company incurred approximately $17.0, $18.9 and $17.2 million of research and development expense during 2001, 2000 and 1999, respectively.
Shipping and Handling Costs
The cost of shipping and handling is charged to expense as incurred and is included in selling, general and administrative expense in the consolidated statement of operations. The Company incurred approximately $22.1, $19.2 and $15.9 million of shipping and handling costs during 2001, 2000 and 1999, respectively.
Selling and Advertising Costs
The cost of selling and advertising is charged to expense as incurred and is included in selling, general and administrative expense in the consolidated statement of operations. The Company incurred approximately $29.4, $29.1 and $29.5 million of selling and advertising costs during 2001, 2000 and 1999, respectively.
Foreign Currency Translation
The Company accounts for and reports translation of foreign currency transactions and foreign currency financial statements in accordance with SFAS No. 52, "Foreign Currency Translation." All assets and liabilities in the balance sheets of foreign subsidiaries whose functional currency is other than the U.S. dollar are translated at year-end exchange rates. Translation gains and losses are not included in determining net income but are accumulated as a separate component of shareholders' equity. However, subsidiaries considered to be operating in highly inflationary countries use the U.S. dollar as the functional currency and translation gains and losses are included in determining net income. In addition, foreign currency transaction gains and losses are included in determining net income.
As more fully discussed in Note 3. "Acquisitions," the Company has a majority-owned subsidiary located in Argentina. The Argentine peso, which serves as the functional currency of this subsidiary, has devalued significantly against the U.S. dollar since the end of fiscal 2001 due primarily to the economic uncertainty within this geographic region. For a brief period of time between the latter part of December 2001 and the first part of January 2002, trading in the Argentine peso was suspended. Thus, the AICPA International Task Force agreed that Emerging Issues Task Force No. D-12, "Foreign Currency Translation-Selection of Exchange Rate When Trading is Temporarily Suspended" ("EITF D-12") applies to the financial statement translation. EITF D-12 notes that in instances where there is a temporary suspension in trading of a foreign currency, the rate in effect when trading is resumed should be utilized.
Regarding the Argentine peso, the January 11, 2002 market exchange rate (the floating rate) should be used to translate transactions subsequent to December 20, 2001 for translation of financial statements through the end of fiscal 2001. January 11, 2002 represented the date when trading in this currency resumed. As a result of the Argentine peso devaluation, the Company recognized a foreign currency loss of approximately $2.7 million during December 2001, net of minority interest adjustments, related to its Argentina majority-owned subsidiary.
Comprehensive Income (Loss)
Comprehensive income (loss) is reported in accordance with the Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS 130"). FAS 130 establishes rules for the reporting and display of comprehensive income and its components. FAS 130 requires unrealized gains or losses on the Company's available for sale securities and the foreign currency translation adjustments, which prior to adoption were reported separately in shareholders' equity, to be included in other comprehensive income. As noted above under "Short Term Investments," the Company reclassified the unrealized non-cash valuation loss in its short term investments from comprehensive income (loss) to the statement of operations under the caption "Other expense (income)" during the fourth quarter of fiscal 2001 as such loss was determined to be other than temporary. Cumulative foreign currency translation adjustments and unrealized (loss) on marketable securities are as follows:
Net Income (Loss) Per Share
The Company discloses earnings per share in accordance with SFAS No. 128, "Earnings Per Share." Basic earnings per share exclude any dilutive effects of options, warrants and convertible securities and is computed using the number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution that could occur if stock options were exercised and is based upon the weighted average number of common and common equivalent shares outstanding for the period. Shares under option represent common equivalent shares. The numerator for both basic and diluted earnings per share is net income (loss) applicable to common stock. During fiscal 2001, the potential exercise of stock options would have an antidilutive effect on the calculation of earnings per share due to losses incurred in the twelve months ended December 29, 2001. Accordingly, there is no difference in the determination of basic and diluted earnings per share for fiscal 2001. A reconciliation of
the amounts included in the computation of income (loss) before extraordinary item per share for fiscal 2001, 2000 and 1999 is presented in the following table (in thousands, except per share data):
Note 3. Acquisitions
During 2000, the Company acquired an additional 10% interest in Dominion Nonwovens Sudamerica S.A. ("DNS"), an Argentine joint venture. DNS manufactures and markets nonwoven products for predominant use in consumer applications. The incremental 10% acquisition increased the Company's 50% interest in DNS, which was previously accounted for using the equity method of accounting, to a 60% majority interest. The transaction was accounted for using the purchase method of accounting and results of operations for DNS have been included in the Company's results since the date of acquisition. The total acquisition price of approximately $18.1 million for the Company's 60% majority interest has been allocated to the underlying assets acquired and liabilities assumed based on their fair value at the date of purchase.
During 1999, the Company acquired an 80% interest in Vateks Tekstil Sanayi ve Ticaret AS ("Vateks") and Nanhai Nanxin Non-Woven Co. Ltd. ("Nanhai"). The Company also acquired the assets of Mölnlycke Health Care AB ("Sweden"). Vateks, Nanhai and Sweden manufacture and market nonwoven products for predominant use in consumer and industrial applications. These transactions have been accounted for using the purchase method of accounting. The combined purchase price for these acquisitions, including assets acquired by the Company during 1999 for which separate disclosure is not considered significant, totaled $19.3 million.
Supplemental pro forma information for the acquisitions consummated in fiscal 2000 and 1999 has not been presented as it is not material to the consolidated results of operations.
Note 4. Property, Plant and Equipment
Property, plant and equipment as of December 29, 2001 and December 30, 2000, consist of the following:
Depreciation charged to expense was $68.5, $62.5, and $55.3 million during 2001, 2000 and 1999, respectively. As discussed more fully under Note 1. "Nature of Operations and Business Conditions", the Company recorded an impairment charge to property, plant and equipment of approximately $80.8 million during 2001.
Note 5. Intangibles and Loan Acquisition Costs
Intangibles and loan acquisition costs as of December 29, 2001 and December 30, 2000 consist of the following:
Amortization charged to expense was $9.7, $9.8 and $11.2 million during 2001, 2000 and 1999, respectively. As discussed more fully under Note 1. "Nature of Operations and Business Conditions", the Company wrote-down goodwill and contract intangibles of approximately $100.4 million during 2001. At December 29, 2001 the net book value of goodwill was $87.3 million.
Note 6. Accrued Liabilities
Accrued liabilities as of December 29, 2001 and December 30, 2000, consist of the following:
The increase in "other" accrued liabilities between 2001 and 2000 resulted from the plant realignment liability of $6.2 million, primarily for employee severance costs, at December 29, 2001 recorded in connection with the Company's restructuring efforts as discussed in Note 1. "Nature of Operations and Business Conditions." The Company currently expects to pay the remaining portion of this liability during 2002.
Note 7. Commitments and Contingencies
Leases
The Company leases certain manufacturing, warehousing and other facilities and equipment under operating leases. The leases on most of the properties contain renewal provisions. Rent expense (net of sub-lease income), including incidental leases, approximated $4.5, $5.9 and $6.0 million in 2001, 2000 and 1999, respectively. The Company leases a building under a non-cancelable lease expiring in June 2012 to an unrelated party. Rental income approximated $2.4, $2.3 and $1.9 million in 2001, 2000 and 1999, respectively. The approximate net minimum rental payments required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year at December 29, 2001 are:
Purchase Commitments
At December 29, 2001, the Company had commitments of approximately $45.0 million related to the purchase of raw materials, maintenance and converting services and approximately $0.6 million related to capital projects.
Collective Bargaining Agreements
At December 29, 2001, the Company had approximately 4,040 employees worldwide. Approximately 1,670 employees are represented by labor unions or trade councils which have entered into separate collective bargaining agreements with the Company. Approximately 18.2% of the Company's labor force are covered by collective bargaining agreements that will expire within one year.
Environmental
The Company is subject to a broad range of federal, foreign, state and local laws governing regulations relating to the pollution and protection of the environment. The Company believes that it is currently in substantial compliance with environmental requirements and does not currently anticipate any material adverse effect on its operations, financial condition or competitive position as a result of its efforts to comply with environmental requirements. Some risk of environmental liability is inherent, however, in the nature of the Company's business, and there can be no assurance that material environmental liabilities will not arise.
Note 8. Debt
Short-term borrowings amounted to $12.4 million at the end of 2001 and are composed of $2.3 million in U.S. loans with a weighted average interest rate of 6.9% and $10.1 million of local borrowings, principally by international subsidiaries. Long-term debt as of December 29, 2001 and December 30, 2000, consists of the following (in thousands):
Credit Facility-The Company's credit facility (as amended through and including Amendment No. 6 as defined below, the "Credit Facility") provided for secured revolving credit borrowings with aggregate commitments of up to $325.0 million and aggregate term loans of $275.0 million. Subject to certain terms and conditions, a portion of the Credit Facility may be used for letters of credit of which approximately $15.7 million was outstanding on December 29, 2001. Amendment No. 6 imposed a limit of $260.0 million under the revolving portion of the Credit Facility for borrowings and outstanding letters of credit, with not more than $15.0 million of such revolving borrowings permitted to be outstanding in Canadian dollar equivalent borrowings as discussed more fully below under "Fiscal 2001 Events and Recent Developments." All indebtedness under the Credit Facility is guaranteed, on a joint and several basis, by each and all of the direct and indirect domestic subsidiaries of the Company. The Credit Facility and the related guarantees are secured by (i) a lien on substantially all of the assets of the Company and its domestic subsidiaries, (ii) a pledge of all or a portion of the stock of the domestic subsidiaries of the Company and of certain non-domestic subsidiaries of the Company, (iii) a lien on substantially all of the assets of direct foreign borrowers (to secure direct borrowings by such borrowers), and (iv) a pledge of certain secured intercompany notes issued to the Company or one or more of its subsidiaries by non-domestic subsidiaries. Commitment fees under the Credit Facility are generally equal to a percentage of the daily unused amount of such commitment. The Credit Facility contained covenants and events of default customary for financings of this type, to include leverage, fixed charge coverage and net worth. The revolving portion of the Credit Facility terminates in June 2003. The term loan portion terminates in December 2005 and December 2006. The loans are subject to mandatory prepayment out of proceeds received in connection with certain casualty events, asset sales and debt issuances.
The interest rate applicable to borrowings under the Credit Facility is based on, in the case of U.S. dollar denominated loans, a specified base rate or a specified Eurocurrency base rate for U.S. dollars, at the Company's option, plus a specified margin. In the event that a portion of the Credit Facility is denominated in Dutch guilders, the applicable interest rate is based on the specified Eurocurrency base rate for Dutch guilders, plus a specified margin. In the event that a portion of the Credit Facility is denominated in Canadian dollars, the applicable interest rate is based on the specified Canadian base rate plus a specified margin or the bankers' acceptance discount rate at the Company's option. The applicable margin for loans bearing interest based on the base rate or Canadian base rate will range from 2.75% to 3.50% and the margin for loans bearing interest on a Eurocurrency rate will range from 3.75% to 4.50%, based on the Company's ratio of total consolidated indebtedness to consolidated EBITDA calculated on a rolling four quarter basis. See "2001 Events and Recent Developments" below for further discussion of the Company's Credit Facility.
Under the terms of the Forbearance Agreement, as discussed below, with the Senior Secured Lenders, the Company is prevented from making any additional borrowings under the Credit Facility in excess of the amounts outstanding on December 30, 2001. In addition, all borrowings under the Credit Facility are required to be made under the base rate option. The following table provides detail on the
revolving credit and term loan components of the Company's Credit Facility at December 29, 2001 and December 30, 2000 (in thousands):
Senior Subordinated Notes-In March 1998, the Company issued $200 million of 83/4% Senior Subordinated Notes due 2008 (the "March 1998 Notes") in a private placement transaction pursuant to an indenture dated as of March 1, 1998. In August 1998, the Company completed its exchange of $200 million of the March 1998 Notes, Series B (the "83/4% Senior Subordinated Notes") which have been registered for public trading for all outstanding March 1998 Notes. In July 1997, the Company issued $400 million of 9% Senior Subordinated Notes due 2007 (the "July 1997 Notes") in a private placement transaction pursuant to an indenture dated as of July 1, 1997. In October 1997, the Company completed its exchange of the $400 million of July 1997 Notes, Series B (the "9% Senior Subordinated Notes"), which have been registered for public trading for all the outstanding July 1997 Notes.
The 83/4% Senior Subordinated Notes and the 9% Senior Subordinated Notes (collectively, the "Senior Subordinated Notes") are unsecured senior subordinated indebtedness of the Company and are subordinated in right of payment to all existing and future senior indebtedness of the Company. The Senior Subordinated Notes indenture contains several covenants, including limitations on: (i) indebtedness, certain restricted payments, liens, transactions with affiliates, dividend and other payment restrictions affecting certain subsidiaries, guarantees by certain subsidiaries, certain transactions including merger and asset sales; and (ii) certain restrictions regarding the disposition of proceeds of asset sales. In addition, in the event of certain defaults under the Credit Facility, the Senior Secured Lenders under the Credit Facility may exercise a right to block any payments of interest or principal on the Senior Subordinated Notes for, in general, up to 179 days during any period of 360 consecutive days. In such event, a failure by the Company to make any such required payment would be an event of default under the Senior Subordinated Notes. See "Fiscal 2001 Events and Recent Developments" below for further discussion of the Senior Subordinated Notes.
During the second quarter of 2000 the Company purchased $5.0 million principal amount of its 9% Senior Subordinated Notes and $3.5 million principal amount of its 83/4% Senior Subordinated Notes. The Company recognized an extraordinary gain of $0.7 million, net of taxes, on the retirement of these Senior Subordinated Notes. Amendment No. 6 prevented the Company from executing purchase transactions of its outstanding Senior Subordinated Notes.
Other-Nanhai has a bank facility with a financial institution based in China. The facility is scheduled to mature in mid-2002 and at December 29, 2001, the approximate amount of outstanding indebtedness under the facility was $9.7 million. The Nanhai indebtedness is guaranteed 100% by the Company and to support this guarantee, a letter of credit has been issued by the Company's agent bank in the amount of $10.0 million. As a result of the Company's 80% majority ownership of Nanhai and full guarantee of the Nanhai bank debt, all amounts outstanding under the Nanhai bank facility are reflected in the Company's consolidated balance sheet as a current liability within the caption "Short term borrowings" at December 29, 2001. The Company currently intends to refinance the Nanhai debt in 2002. At December 29, 2001, Nanhai had cash and cash equivalents on hand of approximately $1.2 million and working capital, excluding current debt, of approximately $6.9 million. Including current debt, the Nanhai working capital (deficit) was $2.8 million at December 29, 2001. DNS has two bank facilities denominated in U.S. dollars of approximately $11.2 million at December 29, 2001 with current maturities of approximately $4.5 million in 2002. The facilities are scheduled to mature in 2004 and 2005 respectively. The full amount of such indebtedness is reflected on the Company's consolidated balance sheet at December 29, 2001 as a result of the Company's 60% majority ownership of this subsidiary; however, the minority shareholder guarantees 40% of such indebtedness. Because of the Argentine peso devaluation against the U.S. dollar, the Company is exposed to foreign currency remeasurement losses of the U.S. dollar denominated debt at DNS because the functional currency of DNS is the Argentine peso. As a result, the Company recognized foreign currency losses of approximately $2.7 million in December 2001, net of minority interest adjustments, related to the DNS U.S. dollar debt. At December 29, 2001, DNS had cash and cash equivalents on hand of approximately $0.5 million and working capital of $4.8 million, excluding current debt. Including current debt, DNS working capital was approximately $0.3 million at December 29, 2001.
Fiscal 2001 Events and Recent Developments-As discussed under "Events Leading to Financial and Business Restructuring" in Note 1. "Nature of Operations and Business Conditions", as of March 31, 2001, the Company was in non-compliance with the leverage covenant contained in the Credit Facility and was, therefore, in default thereunder. On April 11, 2001, the Company entered into Amendment No.6 which waived the leverage covenant default that existed as of March 31, 2001 and granted the Company a waiver with respect to the default under the leverage covenant through and including December 29, 2001, at which time the waiver expired. The amendment modified the existing financial covenants relating to the senior leverage ratio, the fixed charge coverage ratio and the minimum required levels of EBITDA. The amendment also increased the interest rate by 75 basis points on the outstanding amounts under the Credit Facility, limited amounts outstanding under the revolving portion of the Credit Facility (together with outstanding letters of credit) to $260 million, limited capital expenditures to $35 million for fiscal year 2001, restricted the Company from making new investments or acquisitions and prevented the Company from paying dividends on its Common Stock or making other restricted payments. The Company was required to pay a fee to the lenders equal to 1/2 of 1% of the outstanding commitments of the Senior Secured Lenders. The Company also affirmed its intention in the amendment to reduce the amount outstanding under the Credit Facility by not less than $150 million on or before August 15, 2001 through one or more asset dispositions, including sale-leaseback transactions, synthetic leases or asset securitizations. The Company did not complete any of the above transactions on or before August 15, 2001, and as a result, on August 15, 2001 the Company paid an additional fee of 1/2 of 1% of the outstanding commitments of the lenders. In addition, the interest rate on its outstanding senior debt increased by an additional 50 basis points. As a result of Amendment No. 6, the Company incurred a charge to continuing operations of approximately $0.4 million for the write-off of previously capitalized loan acquisition costs in accordance with the Emerging Issues Task Force No. 98-14, "Debtors Accounting for Changes in Line-of-Credit or Revolving-Debt Arrangements." At
December 29, 2001, the net book value of loan acquisition costs related to the Company's Credit Facility was $15.6 million. The Company incurred approximately $8.3 million in loan acquisition costs pursuant to Amendment No. 6 during of 2001.
Due primarily to a competitive economic environment and certain other factors as previously discussed, and the Company's inability to complete asset dispositions on acceptable terms and the expiration of the waiver with respect to the leverage covenant on December 29, 2001 as provided in Amendment No. 6, as of December 29, 2001 the Company was in default under the Credit Facility. Because of this default, the Senior Secured Lenders exercised their right to block the payment of interest due January 2, 2002 to the holders of the 9% Senior Subordinated Notes and the interest payment due on March 1, 2002 to the holders of the 83/4% Senior Subordinated Notes. The Company's failure to pay interest on the outstanding Senior Subordinated Notes prior to the expiration of the 30 day grace period constituted an event of default under such notes.
On December 30, 2001, the Company and certain subsidiaries entered into a Forbearance Agreement pursuant to which the Senior Secured Lenders agreed not to exercise certain remedies available to them under the Credit Facility as a result of the existing covenant defaults during the forbearance period. If certain events occur, the Senior Secured Lenders may exercise their remedies available to them, which include the right to declare all amounts outstanding under the Credit Facility immediately due and payable. The Forbearance Agreement, as extended on March 15, 2002 is scheduled to end on May 15, 2002 and prevents the Company from making any additional borrowings in excess of the amounts outstanding under the revolving portion of the Credit Facility as of December 30, 2001.
As a result of the Company's default under the Credit Facility and Senior Subordinated Notes, all principal amounts outstanding under the Credit Facility and all principal amounts outstanding under the Senior Subordinated Notes at December 29, 2001 have been classified as a current liability in the Company's consolidated balance sheet at such date. Therefore, long-term debt maturities consist of the following (in thousands): 2002 $1,077,017; 2003 $5,352; 2004 $3,715; 2005 $401; 2006 $316; thereafter $18. Refer to Note 17. "Subsequent Event" for further discussion of the Company's financial restructuring.
Note 9. Condensed Consolidating Financial Statements
Payment of the Company's senior subordinated notes is unconditionally guaranteed, jointly and severally, on a senior subordinated basis by certain of the Company's wholly-owned subsidiaries. Management has determined that separate complete financial statements of the guarantor entities would not be material to users of the financial statements; therefore, the following sets forth condensed consolidating financial statements (in thousands):
Condensed Consolidating Balance Sheet
As of December 29, 2001
Condensed Consolidating Balance Sheet
As of December 30, 2000
Condensed Consolidating Statement of Operations
For the Fiscal Year Ended December 29, 2001
Condensed Consolidating Statement of Operations
For the Fiscal Year Ended December 30, 2000
Condensed Consolidating Statement of Operations
For the Fiscal Year Ended January 1, 2000
Condensed Consolidating Statement of Cash Flows
For the Fiscal Year Ended December 29, 2001
Condensed Consolidating Statement of Cash Flows
For the Fiscal Year Ended December 30, 2000
Condensed Consolidating Statement of Cash Flows
For the Fiscal Year Ended January 1, 2000
Note 10. Income Taxes
Significant components of the provision for income taxes are as follows:
At December 29, 2001, the Company had: (i) operating loss carryforwards of approximately $144.5 million for federal income tax purposes expiring beginning in the year 2020; (ii) German operating loss carryforwards of approximately $17.7 million with no expiration date; and (iii) Canadian capital loss carryforwards of approximately $4.6 million with no expiration date. No accounting recognition has been given to the potential income tax benefit related to the loss carryforwards. The Company has not provided U.S. income taxes for undistributed earnings of foreign subsidiaries that are considered to be retained indefinitely for reinvestment. The distribution of these earnings would result in additional foreign withholding taxes and additional U.S. federal income taxes to the extent they are not offset by foreign tax credits, but it is not practicable to estimate the total liability that would be incurred upon such a
distribution. Significant components of the Company's deferred tax assets and liabilities as of December 29, 2001 and January 1, 2000 are as follows:
Taxes on income (loss) are based on earnings as follows:
The provision for income taxes at the Company's effective tax rate differed from the provision for income taxes at the statutory rate as follows:
Note 11. Stock Option and Employee Stock Purchase Plans
Stock Option Plan
The Company's stock option plans include the 1996 Key Employee Stock Option Plan (the "1996 Plan") and the 2001 Polymer Group Stock Option Plan (the "2001 Plan") that was approved by the Company's Board of Directors and shareholders during 2001. The Stock Option Committee of the Company's Board of Directors administers each plan and any person who is a full-time, salaried employee is eligible to participate in each plan. Non-management directors and any Company employee, regardless of employee classification, are allowed to participate in the 2001 Plan. The Stock Option Committee selects the participants and determines the terms and conditions of the options. Each plan provides for the issuance of 1.5 million shares of common stock. Options granted under the plans may be either incentive stock options or such other forms of non-qualified stock options as the Stock Option Committee may determine. Accordingly, option prices shall not be less than the fair market value of the shares at the date of grant. Under each plan, options vest in equal increments over a specified
period of time with expiration generally occurring at the end of a ten-year period. The following table summarizes the transactions of the plans for the three-year period ended December 29, 2001:
At December 29, 2001, the exercise price of the outstanding options ranges from $1.40 to $12.00 and the weighted average remaining contractual life of the outstanding options is approximately ten years.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS 123") establishes financial accounting and reporting standards for stock-based compensation plans. As permitted by FAS 123, the Company elected to account for stock-based compensation awards in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, no compensation cost has been recognized in the Company's financial statements for the plan. The fair value for each option grant was determined by using the Black-Scholes option-pricing model with the following weighted average assumptions used for 2001, 2000 and 1999; dividend yield of 0% in 2001, 1% in 2000 and 1999; expected volatility of 1.84 in 2001, 0.44 in 2000 and 1999; risk-free interest rate of 5% in 2001, 6.1% in 2000 and 1999; and weighted average expected lives of five years in 2001, 2000 and 1999. Had compensation cost been determined based on the fair value at the grant date for such awards in 2001, 2000 and 1999, respectively, consistent with the provisions of
FAS 123, the Company's net income (loss) and net income (loss) per share would have been reduced to the pro forma amounts indicated below.
The pro forma impact of these options is not likely to be representative of the effects on reported net income for future years.
Employee Stock Purchase Plan
The Company sponsors a stock purchase plan that allows employee participants to purchase common stock of the Company through payroll deductions. Purchases of shares are made by a third party administrator at the fair value of the Company's common stock on the transaction date. The cost of the stock purchase plan was not significant during 2001, 2000 or 1999. The Company suspended employee contributions to such plan on December 30, 2001 due to share price volatility, general market conditions, plan administration costs and low employee participation.
Note 12. Shareholders' Equity
The Company's authorized capital stock consists of 100,000,000 shares of common stock, par value $0.01 per share, 3,000,000 shares of non-voting common stock, par value $0.01 per share, and 10,000,000 shares of preferred stock, par value $0.01 per share. Subject to certain regulatory limitations, the non-voting common stock is convertible on a one-for-one basis into common stock at the option of the holder. The Company's Board of Directors may, without further action by the shareholders, direct the issuance of shares of preferred stock and may determine the rights, preferences, conversion features, dividend rate (including whether such dividend shall be cumulative or noncumulative) and limitations of each issue. Satisfaction of any dividend preferences of outstanding shares of preferred stock would reduce the amount of funds available for common dividends. Holders of shares of preferred stock may be entitled to receive a preference before any payment is made to common shareholders.
On April 15, 1996, the Company's Board of Directors declared a dividend of one right for each share of common stock outstanding at the close of business on June 3, 1996. The holders of additional common stock issued subsequent to such date and before the occurrence of certain events are entitled to one right for each additional share. Each right entitles the registered holder under certain circumstances to purchase from the Company one-thousandth of a share of Series A junior preferred stock at a
price of $80 per one-thousandth share of junior preferred stock, subject to adjustment. The Company may redeem the rights at $.01 per right prior to the occurrence of certain events. Prior to exercise of a right, the holder will have no rights as a stockholder of the Company, including, without limitation, the right to vote or to receive dividends or distributions. In addition, the rights have certain anti-takeover effects. The rights are not issued in separate form and may not be traded other than with the shares to which they attach. If unexercised, the rights expire on June 3, 2006. 100,000 shares of junior preferred stock are reserved for issuance under this plan.
Note 13. Pension Benefits and Postretirement Plans
The Company and its subsidiaries sponsor multiple defined benefit plans and other postretirement benefit plans that cover certain employees. Benefits are based on years of service and the employee's compensation. It is the Company's policy to fund such plans in accordance with applicable laws and regulations.
The assumed annual composite rate of increase in the per capita cost of Company provided health care benefits are reflected in the following table:
A one-percentage point change in assumed health care cost trend rates would have the following effects:
The Company sponsors several defined contribution plans through its domestic subsidiaries covering employees who meet certain service requirements. The Company makes contributions to the plans based upon a percentage of the employees' contribution in the case of its 401(k) plans or upon a percentage of the employees' salary or hourly wages in the case of its noncontributory money purchase plans. The cost of the plans was $3.8, $3.9 and $3.5 million for 2001, 2000 and 1999, respectively.
Note 14. Segments and Geographic Information
The Company discloses information about segments and geographic data in accordance with SFAS 131, "Disclosures about Segments of an Enterprise and Related Information." Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and assessing performance. Due to a change in the Company's internal reporting structure, continued product diversification and end market expansion, the Company changed its reportable segments during the first quarter of fiscal 2000 to Consumer and Industrial & Specialty and restated prior period segment information to reflect this change. Sales to P&G and J&J who each account for greater than 10% of the Company's sales, are reported primarily within the Consumer segment. The loss of these sales would have a material adverse effect on this segment. Generally, the Company's products can be manufactured on more than one type of asset. Accordingly, certain costs and assets attributed to each segment of the business were determined on an allocation basis. Production times have a similar relationship to net sales, thus the Company believes a reasonable basis for allocating segment assets and certain costs is the percent of net sales method. As previously discussed in Note 1. "Nature of Operations and Business Conditions," the Company recorded unusual items during fiscal 2001 consisting of asset impairment, plant realignment and special charges. These charges have not been allocated to the Company's reportable business segments because the Company's management does not evaluate such charges on a segment-by-segment basis. Segment operating performance is measured and evaluated before unusual or special items.
Financial data by segment is as follows (in thousands):
(1)Consists primarily of cash, short-term investments, loan acquisition costs and other corporate related assets.
Geographic data for the Company's operations are presented in the following table. Export sales from the Company's United States operations to unaffiliated customers approximated $89.9, $95.8 and $110.0 million during 2001, 2000 and 1999, respectively.
Note 15. Quarterly Results of Operations (Unaudited)
As previously discussed under Note 1. "Nature of Operations and Business Conditions," the Company recorded restructuring related charges in the second and fourth quarters of fiscal 2001. During the second quarter of 2000, the Company recorded a gain from the extinguishment of debt of $0.7 million, net of $0.4 million in taxes.
Note 16. Certain Matters and Affiliate Transactions
Certain Matters
During the first quarter of fiscal 2001, the Company exercised an option to obtain a 45% minority position in a start-up Saudi Arabian state-of-the-art nonwovens production line (the "Saudi Venture"). Over the course of 2001, the Company funded approximately $4.4 million representing its pro-rata share for the construction costs of this line in Saudi Arabia. The Company is not permitted to acquire more than a 45% interest in the Saudi Venture pursuant to Amendment No. 6. The Saudi Venture and the Company's equity stake are currently under review pending finalization of the Investment Approval Application (the "IAA") between the Company and its partner and the approval of the IAA by the Saudi Arabian government. The Company expects to receive the final outcome of the review during the second quarter of fiscal 2002. However, in the event the Company and its partner are unable to agree on final terms of the Saudi Venture acceptable to the Company, the Saudi Venture would not be able to obtain approval of the IAA from the Saudi Arabia government. Moreover, the Company may not be able to recover its pro-rata share of construction costs funded to date. The Company has not guaranteed any indebtedness of the non-consolidated Saudi Venture.
On December 19, 1997, DT Acquisition Inc. ("DTA"), a subsidiary of the Company, acquired substantially all of the outstanding common and first preferred shares of Dominion Textiles Inc., a Company organized under the laws of Canada ("Dominion"), and on January 29, 1998, DTA acquired all remaining common and first preferred shares, at which time Dominion underwent a "winding-up." All assets and liabilities of Dominion were transferred to DTA and all outstanding common shares and first preferred shares held by DTA were redeemed. Immediately thereafter, pursuant to a purchase agreement, dated October 27, 1997, the apparel fabrics business of Dominion was sold, at no gain or loss, to Galey & Lord, Inc., ("Galey") and the Company acquired the nonwovens and industrial fabrics operations. The Company and Galey finalized the acquisition cash settlement during 2000 pursuant to the Master Separation Agreement (the "MSA") dated January 29, 1998. The result of such settlement was not material to the Company's financial condition. Under the MSA, the Company and Galey are required to share in the payment of certain on-going costs, including taxes, for historical Dominion entities as required by the MSA. Because the Company originally acquired Dominion, the Company generally makes the payments and is reimbursed by Galey. During fiscal 2001, such on-going costs, excluding certain statutory employee benefit refunds of approximately $1.3 million, approximated $2.1 million. Net of shared refunds and repatriations, Galey's cash reimbursement to the Company under terms of the MSA was approximately $0.5 million for the fiscal 2001 activity. On February 19, 2002, Galey and its U.S. operating subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code and began operating their businesses as debtors-in-possession. During March 2002, Galey informed the Company of its intention to reject the MSA as part of its bankruptcy proceedings. If approved by the Bankruptcy Court, Galey's contemplated rejection of the MSA would result in the Company being required to fund expenditures that should be allocated to, and paid by, Galey, which could potentially have a material adverse effect on the Company.
Affiliate Transactions
The Company's corporate headquarters are housed in space leased by a shareholder of the Company from an affiliate of the shareholder. A portion of the payments and shared other expenses, primarily insurance and allocated costs, are charged to the Company. Such amounts approximated $2.1, $1.7 and $2.7 million in 2001, 2000 and 1999 respectively. The Company leases a manufacturing facility from an affiliated entity that the Company believes is comparable to similar properties in the area. Annual rent expense relating to this lease approximated $0.2 million in 2001, 2000 and 1999. In addition, during 2000 the Company purchased equipment for approximately $0.3 million from an entity affiliated with the Company. The Company believes that the purchase price for this equipment was comparable to that which would have been paid to an unaffiliated third party.
As part of the financing of the acquisition of Dominion, the Company received a $69.0 million investment from ZB Holdings, Inc. ("ZB Holdings"), an entity affiliated with the Company. This amount, including interest of approximately $0.6 million, was repaid during January 1998. In connection with this transaction, ZB Holdings requested consideration from the Company in return for providing a portion of the financing required to complete the tender offer for the outstanding shares of Dominion. Independent members of the Board of Directors engaged independent outside legal counsel and an independent banking firm to evaluate this request. Pursuant to the review, ZB Holdings received $5.3 million during 1998 from the Company that was capitalized a part of the cost of the acquisition in 1998.
Note 17. Subsequent Event
On March 25, 2002, a group of creditors holding approximately $41.3 million of the Company's outstanding Senior Subordinated Notes filed an involuntary petition under Chapter 11 of the U.S.
bankruptcy code in the U.S. Bankruptcy Court for the District of South Carolina. On April 2, 2002, the Company reached an agreement in principal with the petitioning creditors to have the involuntary petition dismissed. The agreement contemplates that the Company will negotiate in good faith with the petitioning creditors over the terms of the Company's announced exchange offer, and provides for the reimbursement by the Company of certain fees and expenses of the petitioning creditors. The agreement also provides that for as long as the Company and the petitioning creditors are continuing to negotiate the terms of the exchange offer until May 12, 2002, such creditors will forbear from exercising any of their rights or remedies as a result of the default by the Company under the Senior Subordinated Notes. In the event the Company is unable to complete the exchange offer on terms acceptable to the Company, or if the Company determines that it is otherwise necessary, the Company may seek to reorganize its business under Chapter 11 of the U.S. bankruptcy laws. Any such action could take place prior to May 12, 2002.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10.
ITEM 10. MANAGEMENT
Information required under this item is incorporated by reference from the Proxy Statement under the captions "Election of Directors" and "Executive Compensation."
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information required under this Item is incorporated by reference from the Proxy Statement under the caption "Executive Compensation."
ITEM 12.
ITEM 12. SECURITY OWNERSHIP
Information required under this Item is incorporated by reference from the Proxy Statement under the caption "Security Ownership."
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required under this Item is incorporated by reference from the Proxy Statement under the caption "Certain Relationships and Related Transactions."
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Financial Statements and Schedules
(a)The following financial statements and independent auditors report required by this Item are filed herewith under Item 8.
(i)Report of Ernst & Young LLP, Independent Auditors. (ii)Consolidated Balance Sheets. (iii)Consolidated Statements of Operations. (iv)Consolidated Statements of Shareholders' Equity (Deficit). (v)Consolidated Statements of Cash Flows. (vi)Notes to Consolidated Financial Statements.
(b)Schedule II-Valuation and Qualifying Accounts ("Schedule II"). Supplemental schedules other than Schedule II are omitted because of the absence of conditions under which they are required or because the required information is included in the consolidated financial statements or in the notes thereto.
Exhibits
Exhibits required to be filed with this Form 10-K are listed in the following Exhibit Index.
Form 8-K
On December 31, 2001, the Company issued a press release, which was filed on Form 8-K, announcing that the waiver of default under the Company's senior credit facility expired on December 29, 2001, in accordance with its terms, and the Company was in default under its senior credit facility.
On December 31, 2001, the Company issued a press release, which was filed on Form 8-K, announcing, among other things, that it had entered into an agreement with its bank lending group, pursuant to which the Company's senior bank lenders had agreed to a forbearance period during which they had agreed not to exercise certain remedies available to them as a result of an existing covenant default under the Company's senior credit facility.
On January 31, 2002, the Company issued a press release, which was filed on Form 8-K, announcing it was in active negotiations with a third party that could lead to a comprehensive financial restructuring and that the Company would be unable to satisfy, among others, a condition in the Forbearance Agreement dated as of December 30, 2001, requiring the Company to deliver to the senior lenders a complete and comprehensive recapitalization proposal by January 31, 2002.
On February 1, 2002, the Company issued a press release, which was filed on Form 8-K, announcing that it had entered into Amendment No. 1 dated as of January 31, 2002 to the Forbearance Agreement.
On March 26, 2002, the Company issued a press release, which was filed on Form 8-K, announcing it had received notification that an involuntary Chapter 11 petition had been filed against the Company, the Company has commenced discussions with the petitioning creditors on a potential consensual and prompt withdrawal of the petition, and that if the petition is not withdrawn the Company anticipates that the court will dismiss the petition in light of the Company's exchange offer and comprehensive financial restructuring currently in progress.
On March 27, 2002, the Company issued a press release, which was filed on Form 8-K, announcing its earnings for fiscal year 2001.
On March 27, 2002, the Company issued a press release, which was filed on Form 8-K, announcing that it has filed a motion to dismiss the involuntary Chapter 11 filing.
On April 3, 2002, the Company issued a press release announcing the dismissal of the Involuntary Petition filed against the Company on March 25, 2002 in the Federal Court, District of South Carolina.
POLYMER GROUP, INC.
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
(1)Uncollectible accounts written-off and price concessions.
(2)Cash payments and adjustments.
(3)Foreign currency translation adjustments.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
POLYMER GROUP, INC.
By:
/s/ JERRY ZUCKER Jerry Zucker
Chairman, President and
Chief Executive Officer
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant in the capacities indicated on April 9, 2002.
Signature
Title
/s/ JERRY ZUCKER Jerry Zucker
Chairman, Chief Executive Officer, President and Director (principal executive officer)
/s/ JAMES G. BOYD James G. Boyd
Executive Vice President, Chief Financial Officer, Treasurer and Director (principal financial officer and principal accounting officer)
/s/ BRUCE V. RAUNER Bruce V. Rauner
Director
/s/ DAVID A. DONNINI David A. Donnini
Director
/s/ L. GLENN ORR, JR. L. Glenn Orr, Jr.
Director
/s/ DUNCAN M. O'BRIEN, JR. Duncan M. O'Brien, Jr.
Director
EXHIBIT INDEX
Exhibit
Number
Document Description
2.1
Agreement dated October 27, 1997, among Polymer Group, Inc., Galey & Lord, Inc. and DT Acquisition Inc.(1)
2.2
Letter Agreement, dated October 27, 1997, among Polymer Group, Inc., Galey & Lord, Inc. and DT Acquisition Inc.(2)
2.3
Operating Agreement, dated December 19, 1997, among Polymer Group, Inc., Galey & Lord, Inc. and DT Acquisition Inc.(1)
2.4
DT Acquisition Inc. Offers to Purchase Statement for all outstanding Common Shares and all outstanding First Preferred Shares of Dominion Textile Inc., dated October 29, 1997.(2)
2.5
Notice of Extension and Variation by DT Acquisition Inc. in respect of its Offers to Purchase, dated November 18, 1997.(2)
2.6
Notice of Extension by DT Acquisition Inc. in respect of its Offers to Purchase, dated December 2, 1997.(2)
2.7
Notice of Extension and Variation by DT Acquisition Inc. in respect of its Offers to Purchase, dated December 8, 1997.(2)
2.8
Notice of Extension by DT Acquisition Inc. in respect of its Offers to Purchase, dated December 17, 1997.(2)
2.9
Letter Agreement between DT Acquisition Inc., PGI and DTI dated November 16, 1997.(2)
2.10
Notice of Redemption pursuant to the provisions of Section 206 of the Canada Business Corporations Act in regard to holders of Common Shares of Dominion Textile Inc., dated December 30, 1997.(2)
2.11
Notice of Redemption pursuant to the provisions of Section 206 of the Canada Business Corporations Act in regard to holders of First Preferred Shares of Dominion Textile Inc., dated December 30, 1997.(2)
2.12
Notice of Redemption in regard to holders of Second Preferred Shares, Series D of Dominion Textile Inc., dated December 23, 1997.(2)
2.13
Notice of Redemption in regard to holders of Second Preferred Shares, Series E of Dominion Textile Inc., dated December 23, 1997.(2)
2.14
Indenture, winding up Dominion Textile Inc. pursuant to the Canada Business Corporations Act, dated January 29, 1998.(2)
2.15
Master Separation Agreement, among Polymer Group, Inc., Galey & Lord, Inc. and DT Acquisition Inc., dated January 29, 1998.(3)*
3.1(i)
Form of Amended and Restated Certificate of Incorporation of the Company.(4)
3.1(ii)
Certificate of Designation of the Company.(7)
3.2
Amended and Restated By-laws of the Company.(4)
4.1
Indenture dated as of July 1, 1997 among the Company, the Guarantors and Harris Trust and Savings Bank, as trustee.(7)
4.2
Forms of Series A and Series B 9% Senior Subordinated Notes due 2007.(5)
4.3
Form of Guarantee.(5)
4.4
Registration Rights Agreement dated as of July 3, 1997 among the Company, the Guarantors and Chase Securities Inc.(7)
4.5
Indenture, dated as of March 1, 1998 among Polymer Group, Inc., the Guarantors named therein and Harris Trust and Savings Bank, as trustee.(5)
4.6
Forms of Series A and Series B 83/4% Senior Subordinated Notes due 2008.(5)
4.7
Form of Guarantee.(5)
4.8
Registration Rights Agreement dated as of March 5, 1998, among Polymer Group, Inc., the Guarantors named therein and Chase Securities Inc.(6)
4.9
Amended and Restated Credit Agreement dated July 3, 1997 by and among the Company, the Guarantors named therein, the lenders named therein and The Chase Manhattan Bank, as agent.(7)
The Registrant will furnish to the Commission, upon request, each instrument defining the rights of holders of long-term debt of the Registrant and its subsidiaries where the amount of such debt does not exceed 10 percent of the total assets of the Registrant and its subsidiaries on a consolidated basis.
4.10
First Supplemental Indenture, dated October 27, 1997, between Polymer Group Inc., Harris Trust and Savings Bank and Loretex Corporation.(2)
4.11
Second Supplemental Indenture dated January 29, 1998, to indenture dated June 30, 1997, among Polymer Group, Inc., Dominion Textile (USA) Inc., with respect to the 9% Senior Subordinated Notes due 2008.(2)
10.1
Purchase Agreement, dated February 27, 1998, by and among Polymer Group, Inc., the Guarantors named herein and Chase Securities Inc., as Initial Purchaser, with respect to the 83/4% Senior Subordinated Notes due 2008.(6)
10.2
Amendment No. 2, dated January 29, 1998, to the Amended, Restated and Consolidated Credit Agreement dated July 3, 1997 by and among Polymer Group, Inc., the Guarantors named therein, the lenders named therein and The Chase Manhattan Bank, as agent.(6)
10.3
Amendment No. 3, dated April 9, 1999, to the Amended, Restated and Consolidated Credit Agreement dated July 3, 1997 by and among Polymer Group, Inc., the Guarantors named therein, the lenders named therein and the Chase Manhattan Bank, as agent.(9)
10.5
Amendment No. 4, dated March 30, 2000, the Amended, Restated and Consolidated Credit Agreement dated July 3, 1997 by and among Polymer Group, Inc., the Guarantors named therein, the lenders named therein and the Chase Manhattan Bank, as agent.(11)
10.6
Amendment No. 5, dated August 10, 2000, the Amended, Restated and Consolidated Credit Agreement dated July 3, 1997 by and among Polymer Group, Inc., the Guarantors named therein, the lenders named therein and the Chase Manhattan Bank, as agent.(12)
10.7
Amendment No. 6, dated April 11, 2001, the Amended, Restated and Consolidated Credit Agreement dated July 3, 1997 by and among Polymer Group, Inc., the Guarantors named therein, the lenders named therein and the Chase Manhattan Bank, as agent.(13)
10.8
Form of Supplemental Indenture, dated as of April 12, 2001, by and among the New Subsidiary Guarantor named therein, a wholly-owned subsidiary of the Company, and Harris Trust and Savings Bank pursuant to the Indenture dated as of July 1, 1997, among the Company, the Guarantors and Harris Trust and Savings Bank, as trustee.(14)
10.9
Form of Supplemental Indenture, dated as of April 12, 2001, by and among the New Subsidiary Guarantor named therein, a wholly-owned subsidiary of the Company, and Harris Trust and Savings Bank pursuant to the Indenture dated as of March 5, 1998, among the Company, the Guarantors and Harris Trust and Savings Bank, as trustee.(14)
10.10
Form of Subsidiary Guarantee, dated as of April 12, 2001, by the subsidiary guarantor named therein, a wholly-owned subsidiary of the Company, pursuant to the Indenture dated as of July 1, 1997, among the Company, the Guarantors and Harris Trust and Savings Bank, as trustee.(14)
10.11
Form of Subsidiary Guarantee dated as of April 12, 2001, by the subsidiary guarantor named therein, a wholly-owned subsidiary of the Company, pursuant to the Indenture dated as of March 5, 1998, among the Company, the Guarantors and Harris Trust and Savings Bank, as trustee.(14)
Subsidiaries of the Company.
Consent of Ernst & Young LLP.
99.1
Press release dated December 31, 2001.(15)
99.2
Press release dated December 31, 2001.(16)
99.3
Press release dated January 31, 2002.(17)
99.4
Press release dated February 1, 2002.(17)
99.5
Press release dated March 26, 2002.(18)
99.6
Press release dated March 27, 2002.(18)
99.7
Press release dated March 27, 2002.(18)
99.8
Press release dated April 3, 2002.
*Certain portions of the Agreement have been omitted and filed separately with the Commission pursuant to an Application for Confidential Treatment.
(1)Incorporated by reference to the respective exhibit to the Company's Form 8-K, dated February 13, 1998.
(2)Incorporated by reference to the respective exhibit to the Company's Form 10-K, dated April 3, 1998, for the fiscal year ended January 3, 1998.
(3)Incorporated by reference to the respective exhibit to the Company's Form 8-K/A, dated April 14, 1998.
(4)Incorporated by reference to the respective exhibit to the Company's Registration Statement on Form S-1 (Reg. No. 333-2424).
(5)Incorporated by reference to the respective exhibit to the Company's Registration Statement on Form S-4 (Reg. No. 333-55863).
(6)Incorporated by reference to the respective exhibit to the Company's Form 10-Q, dated May 19, 1998, for the fiscal quarter ended April 4, 1998.
(7)Incorporated by reference to the respective exhibits to the Company's Registration Statement on Form S-4 (Reg. No. 333-32605).
(8)Incorporated by reference to the respective exhibit to the Company's Form 10-Q, dated November 14, 2000 for the fiscal quarter ended September 30, 2000.
(9)Incorporated by reference to the respective exhibit to the Company's Form 10-Q, dated August 17, 1999 for the fiscal quarter ended July 3, 1999.
(10)Incorporated by reference to the respective exhibit to the Company's Form 10-Q, dated May 15, 2000 for the fiscal quarter ended April 1, 2000.
(11)Incorporated by reference to the respective exhibit to the Company's Form 10-Q, dated August 14, 2000 for the fiscal quarter ended July 1, 2000.
(12)Incorporated by reference to the respective exhibit to the Company's Form 10-Q, dated November 14, 2000 for the fiscal quarter ended September 30, 2000.
(13)Incorporated by reference to the respective exhibit to the Company's Form 8-K, dated April 16, 2001.
(14)Incorporated by reference to the respective exhibit to the Company's Form 10-Q, dated August 14, 2001, for the fiscal quarter ended June 30, 2001.
(15)Incorporated by reference to the respective exhibit to the Company's Form 8-K, dated December 31, 2001.
(16)Incorporated by reference to the respective exhibit to the Company's Form 8-K, dated January 4, 2002.
(17)Incorporated by reference to the respective exhibit to the Company's Form 8-K, dated February 5, 2002.
(18)Incorporated by reference to the respective exhibit to the Company's Form 8-K, dated March 28, 2002.
PART I
ITEM 1. BUSINESS
DESCRIPTION OF CERTAIN INDEBTEDNESS
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ITEM 6. SELECTED FINANCIAL DATA
Notes to Selected Consolidated Financial Data
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Liquidity and Capital Resources
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
POLYMER GROUP, INC. CONSOLIDATED BALANCE SHEETS (In Thousands, Except Share Data)
POLYMER GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In Thousands, Except Per Share Data)
POLYMER GROUP, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) For the Fiscal Years Ended December 29, 2001, December 30, 2000 and January 1, 2000 (In Thousands, Except Share Data)
POLYMER GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands)
POLYMER GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Balance Sheet As of December 29, 2001
Condensed Consolidating Balance Sheet As of December 30, 2000
Condensed Consolidating Statement of Operations For the Fiscal Year Ended December 29, 2001
Condensed Consolidating Statement of Operations For the Fiscal Year Ended December 30, 2000
Condensed Consolidating Statement of Operations For the Fiscal Year Ended January 1, 2000
Condensed Consolidating Statement of Cash Flows For the Fiscal Year Ended December 29, 2001
Condensed Consolidating Statement of Cash Flows For the Fiscal Year Ended December 30, 2000
Condensed Consolidating Statement of Cash Flows For the Fiscal Year Ended January 1, 2000
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
PART III
ITEM 10. MANAGEMENT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
POLYMER GROUP, INC. SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS (In Thousands)
SIGNATURES
EXHIBIT INDEX