UNITED STATES SECURITIES AND EXCHANGE
COMMISSION Washington,
D.C. 20549 
 FORM 10-Q  x
  
  QUARTERLY REPORT PURSUANT TO
  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
  1934For the
  quarterly period ended June 28, 2003o
  
  TRANSITION REPORT PURSUANT TO
  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
  1934For the
  transition period from  toCommission
  file number: 1-14330 
 POLYMER GROUP, INC. (Exact name of registrant as specified in its charter)  Delaware
  (State or other jurisdiction of
  incorporation or organization)
  
  57-1003983
  (I.R.S. Employer Identification No.)4055 Faber Place Drive, Suite 201North Charleston, South
  Carolina
  (Address of principal executive offices)
  
  29405
  (Zip Code)Registrants
  telephone number, including area code: (843) 329-5151
 
 Indicate by check mark whether
the registrant (1) has filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter periods that the registrant was required to
file such reports), and (2) has been subject to the filing requirements
for the past 90 days. Yesx      No o Indicate by check mark whether
the registrant is an accelerated filer (as defined in Rule 12b-2 of the
Exchange Act) Yeso      No x Indicate by check mark whether
the registrant has filed all documents and reports required to be filed by
Securities 12, 13 or 15(d) of the Securities Exchange Act of 1934
subsequent to the distribution of securities under a plan confirmed by a court.
Yesx      No o Indicate the number of shares
outstanding of each of the issuers classes of common stock, as of the latest
practicable date. On August 5, 2003 there
were 8,162,599 shares of Class A common stock, 399,978 shares of Class B
common stock and 90,587 shares of Class C common stock outstanding.
No shares of Class D or Class E were outstanding as of such date. The
par value for each class of common shares is $.01 per share.


---

POLYMER GROUP, INC. INDEX TO FORM 10-Q PagePart I.   Financial
  Information
  
  3Item 1.
  
  Financial Statements
  
  3Item 2.
  
  Managements
  Discussion and Analysis of Financial Condition and Results of Operations
  
  30Item 3.
  
  Quantitative
  and Qualitative Disclosures About Market Risk
  
  42Part II. Other Information
  
  44Signatures
  
  45Exhibit Index
  
  46  2


---

ITEM 1. FINANCIAL
STATEMENTS POLYMER GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data) Successor
  
  PredecessorJune 28,
  2003
  
  December 28,
  2002(Unaudited)ASSETSCurrent assets:Cash and equivalents
  
  
  $
  26,068
  
  
  
  $
  45,901Short-term investments
  
  
  
  
  
  
  12,246Accounts receivable, net
  
  
  134,919
  
  
  
  117,420Inventories
  
  
  114,065
  
  
  
  115,696Other
  
  
  31,884
  
  
  
  45,236Total current assets
  
  
  306,936
  
  
  
  336,499Property, plant and equipment
  
  
  375,304
  
  
  
  429,528Intangibles and loan
  acquisition costs, net
  
  
  33,888
  
  
  
  33,357Other
  
  
  11,475
  
  
  
  11,935Total assets
  
  
  $
  727,603
  
  
  
  $
  811,319LIABILITIES
  AND SHAREHOLDERS EQUITY (DEFICIT)Liabilities Not Subject to CompromiseCurrent liabilities:Accounts payable
  
  
  $
  42,836
  
  
  
  $
  46,068Accrued liabilities and other
  
  
  70,872
  
  
  
  45,376Short-term borrowings
  
  
  9,837
  
  
  
  534Current portion of long-term
  debt
  
  
  24,329
  
  
  
  24,616Total current liabilities
  
  
  147,874
  
  
  
  116,594Long-term debt, less
  current portion
  
  
  453,612
  
  
  
  478,224Other non-current
  liabilities
  
  
  50,900
  
  
  
  45,309Total liabilities not subject
  to compromise
  
  
  652,386
  
  
  
  640,127Liabilities Subject to Compromise
  
  
  
  
  
  
  637,106Total liabilities
  
  
  652,386
  
  
  
  1,277,233Shareholders equity
  (deficit):Successor Class A common
  stock$.01 par value, 19,279,388 shares authorized, 8,162,250 shares issued
  and outstanding at June 28, 2003
  
  
  81
  
  
  
  Successor Class B common
  stock$.01 par value, 800,000 shares authorized, 399,978 shares issued and
  outstanding at June 28, 2003
  
  
  4
  
  
  
  Successor Class C common
  stock$.01 par value, 118,453 shares authorized, 90,936 shares issued and
  outstanding at June 28, 2003
  
  
  1
  
  
  
  Predecessor series preferred
  stock$.01 par value, 10,000,000 shares authorized, 0 shares issued and
  outstanding at December 28, 2002
  
  
  
  
  
  
  Predecessor common stock$.01
  par value, 100,000,000 shares authorized, 32,004,200 shares issued and
  outstanding at December 28, 2002
  
  
  
  
  
  
  320Predecessor non-voting
  convertible common stock$.01 par value, 3,000,000 shares authorized, 0
  shares issued and outstanding at December 28, 2002
  
  
  
  
  
  
  Additional paid in capital
  
  
  73,304
  
  
  
  243,722(Deficit)
  
  
  (13,116
  )
  
  
  (661,572
  )Accumulated other
  comprehensive income (loss)
  
  
  14,943
  
  
  
  (48,384
  )75,217
  
  
  
  (465,914
  )Total liabilities and shareholders equity (deficit)
  
  
  $
  727,603
  
  
  
  $
  811,319  See Accompanying Notes. 3


---

POLYMER
GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended June 28, 2003 and June 29, 2002
(In Thousands, Except Per Share Data) Successor
  
  PredecessorThree Months
  Ended
  June 28, 2003
  
  Three Months
  Ended
  June 29, 2002Net sales
  
  
  $
  198,757
  
  
  
  $
  200,781Cost of goods sold
  
  
  164,595
  
  
  
  163,900Gross profit
  
  
  34,162
  
  
  
  36,881Selling, general and administrative expenses
  
  
  24,897
  
  
  
  26,909Special charges
  
  
  
  
  
  
  1,466Plant realignment
  
  
  3,159
  
  
  
  381Operating income
  
  
  6,106
  
  
  
  8,125Other (income)
  expense:Interest expense, net (contractual interest of
  $27,201 for the three months ended June 29, 2002)
  
  
  14,962
  
  
  
  17,933Investment (gain), net
  
  
  
  
  
  
  (332
  )Foreign currency and other
  
  
  (80
  )
  
  
  4,98614,882
  
  
  
  22,587Loss before
  reorganization items and income taxes
  
  
  (8,776
  )
  
  
  (14,462
  )Reorganization items:Chapter 11 reorganization expenses
  
  
  
  
  
  
  885
  
  
  
  885Loss before income taxes
  
  
  (8,776
  )
  
  
  (15,347
  )Income taxes
  
  
  2,855
  
  
  
  2,422Net loss
  
  
  $
  (11,631
  )
  
  
  $
  (17,769
  )Net loss per common sharebasic and dilutedAverage shares outstanding
  
  
  8,646
  
  
  
  32,004Net loss
  
  
  $
  (1.35
  )
  
  
  $
  (0.56
  )  See Accompanying Notes. 4


---

POLYMER
GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Four Months Ended June 28, 2003,Two Months Ended March 1, 2003 and
Six Months Ended June 29, 2002
(In Thousands, Except Per Share Data) Successor
  
  PredecessorFour Months
  Ended
  June 28, 2003
  
  Two MonthsEnded
  March 1, 2003
  
  (Restated)*
  Six Months
  Ended
  June 29, 2002Net sales
  
  
  $
  262,824
  
  
  
  $
  132,909
  
  
  
  $
  391,961Cost of goods sold
  
  
  217,289
  
  
  
  111,075
  
  
  
  326,611Gross profit
  
  
  45,535
  
  
  
  21,834
  
  
  
  65,350Selling, general and
  administrative expenses
  
  
  33,147
  
  
  
  16,218
  
  
  
  53,533Special charges
  
  
  
  
  
  
  
  
  
  
  3,634Plant realignment
  
  
  3,167
  
  
  
  4
  
  
  
  557Operating income
  
  
  9,221
  
  
  
  5,612
  
  
  
  7,626Other (income) expense:Interest expense, net (contractual
  interest of $20,306 for the two months ended March 1, 2003 and $53,582
  for the six months ended June 29, 2002)
  
  
  18,722
  
  
  
  10,665
  
  
  
  43,686Investment (gain) loss, net
  
  
  
  
  
  
  (291
  )
  
  
  264Foreign currency and other
  
  
  (111
  )
  
  
  1,875
  
  
  
  7,71118,611
  
  
  
  12,249
  
  
  
  51,661Loss before reorganization
  items, income taxes and cumulative effect of change in accounting principle
  
  
  (9,390
  )
  
  
  (6,637
  )
  
  
  (44,035
  )Reorganization items:Gain on cancellation of
  prepetition indebtedness
  
  
  
  
  
  
  (619,913
  )
  
  
  Fresh start adjustments
  
  
  
  
  
  
  47,460
  
  
  
  Chapter 11 reorganization
  expenses
  
  
  
  
  
  
  10,448
  
  
  
  885Other
  
  
  
  
  
  
  19,395
  
  
  
  
  
  
  
  (542,610
  )
  
  
  885(Loss) income before income
  taxes and cumulative effect of change in accounting principle
  
  
  (9,390
  )
  
  
  535,973
  
  
  
  (44,920
  )Income taxes
  
  
  3,726
  
  
  
  1,692
  
  
  
  2,422(Loss) income before
  cumulative effect of change in accounting principle
  
  
  (13,116
  )
  
  
  534,281
  
  
  
  (47,342
  )Cumulative effect of change
  in accounting principle
  
  
  
  
  
  
  
  
  
  
  12,774Net (loss) income
  
  
  $
  (13,116
  )
  
  
  $
  534,281
  
  
  
  $
  (60,116
  )Net (loss) income per common
  sharebasic and dilutedAverage shares outstanding
  
  
  8,645
  
  
  
  32,004
  
  
  
  32,004(Loss) income before cumulative
  effect of change in accounting principle
  
  
  $
  (1.52
  )
  
  
  $
  16.69
  
  
  
  $
  (1.48
  )Cumulative effect of change
  in accounting principle
  
  
  
  
  
  
  
  
  
  
  0.40Net (loss) income
  
  
  $
  (1.52
  )
  
  
  $
  16.69
  
  
  
  $
  (1.88
  ) 
 *       As part of the Companys adoption of FAS 142 the Company
completed a transitional impairment test in the fourth quarter of 2002, as
permitted by the standard. The Companys transitional impairment test resulted
in a charge of $12.8 million which was reported as a cumulative effect of
a change in accounting principle in the Companys annual results for fiscal
2002 and has been allocated to the first fiscal quarter of 2002 for reporting
purposes. See Accompanying Notes. 5


---

POLYMER GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY (Unaudited)
For the Two Months Ended March 1, 2003 and Four Months Ended June 28,
2003
(In Thousands, Except Share Data) AccumulatedOtherAdditional
  
  Retained
  
  ComprehensiveCommon
  
  Paid-in
  
  Earnings/
  
  Income/
  
  
  
  
  ComprehensiveStock
  
  Capital
  
  (Deficit)
  
  (Loss)
  
  Total
  
  
  Income/(Loss)Predecessor:BalanceDecember 28, 2002
  
  
  $
  320
  
  
  $
  243,722
  
  $
  (661,572
  )
  
  $
  (48,384
  )
  
  $
  (465,914
  )Comprehensive (loss) for the year ended
  December 28, 2002
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  $
  (417,052
  )Net loss excluding effects of plan of reorganization and fresh start adjustments
  
  
  
  
  
  
  
  (8,329
  )
  
  
  
  
  (8,329
  )
  
  
  $
  (8,329
  )Currency translation adjustment
  
  
  
  
  
  
  
  
  
  
  6,784
  
  
  6,784
  
  
  
  6,784Marketable securities valuation
  
  
  
  
  
  
  
  
  
  
  (655
  )
  
  (655
  )
  
  
  (655
  )Minimum pension liability
  
  
  
  
  
  
  
  
  
  
  (460
  )
  
  (460
  )
  
  
  (460
  )Effect of plan of
  reorganization and fresh start adjustments:Cancellation of old common stock
  
  
  (320
  )
  
  (243,722
  )
  
  
  
  
  
  
  (244,042
  )
  
  
  Issuance of new common stock
  
  
  86
  
  
  73,304
  
  
  
  
  
  
  
  73,390
  
  
  
  Other fresh start adjustments
  
  
  
  
  
  
  
  669,901
  
  
  42,715
  
  
  712,616
  
  
  
  Comprehensive (loss) for the two months ended March 1, 2003
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  $
  (2,660
  )Successor:BalanceMarch 1, 2003
  
  
  86
  
  
  73,304
  
  
  
  
  
  
  
  73,390Net loss
  
  
  
  
  
  
  
  (13,116
  )
  
  
  
  
  (13,116
  )
  
  
  $
  (13,116
  )Currency translation adjustment
  
  
  
  
  
  
  
  
  
  
  14,943
  
  
  14,943
  
  
  
  14,943BalanceJune 28, 2003
  
  
  $
  86
  
  
  $
  73,304
  
  $
  (13,116
  )
  
  $
  14,943
  
  
  $
  75,217Comprehensive income
  for the four months ended June 28, 2003
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  $
  1,827  See Accompanying Notes. 6


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POLYMER GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW (Unaudited)
(In Thousands) Successor
  
  PredecessorFour Months
  Ended
  June 28, 2003
  
  Two Months
  Ended
  March 1, 2003
  
  (Restated)
  Six Months
  Ended
  June 29, 2002Operating ActivitiesNet income (loss)
  
  
  $
  (13,116
  )
  
  
  $
  534,281
  
  
  
  $
  (60,116
  )Adjustments to
  reconcile net income (loss) to net cash provided by (used in) operating
  activities:Cumulative effect of change in accounting principle
  
  
  
  
  
  
  
  
  
  
  12,774Gain on cancellation of prepetition indebtedness
  
  
  
  
  
  
  (619,913
  )
  
  
  Fresh start adjustments
  
  
  
  
  
  
  47,460
  
  
  
  Depreciation and amortization
  
  
  14,098
  
  
  
  7,398
  
  
  
  31,771Foreign currency and other
  
  
  (111
  )
  
  
  1,875
  
  
  
  7,975Changes in operating
  assets and liabilities, net of effects of fresh start adjustments:Accounts receivable
  
  
  (9,122
  )
  
  
  (8,377
  )
  
  
  (243
  )Inventories
  
  
  2,683
  
  
  
  (1,052
  )
  
  
  3,492Accounts payable and accrued expenses
  
  
  3,728
  
  
  
  13,138
  
  
  
  29,843Other, net
  
  
  6,401
  
  
  
  12,289
  
  
  
  (4,000
  )Net cash provided by (used in) operating activities
  
  
  4,561
  
  
  
  (12,901
  )
  
  
  21,496Investing ActivitiesPurchases of property, plant and equipment
  
  
  (11,542
  )
  
  
  (3,062
  )
  
  
  (4,428
  )Proceeds from sale of marketable securities
  classified as available for sale
  
  
  
  
  
  
  11,867
  
  
  
  4,762Other
  
  
  
  
  
  
  15
  
  
  
  (34
  )Net cash (used in) provided by investing activities
  
  
  (11,542
  )
  
  
  8,820
  
  
  
  300Financing ActivitiesProceeds from debt
  
  
  
  
  
  
  535,310
  
  
  
  Payments of debt
  
  
  (1,308
  )
  
  
  (549,031
  )
  
  
  (4,719
  )Loan acquisition costs
  
  
  (743
  )
  
  
  (948
  )
  
  
  (7,736
  )Net cash (used in) financing activities
  
  
  (2,051
  )
  
  
  (14,669
  )
  
  
  (12,455
  )Effect of exchange rate change on cash
  
  
  3,317
  
  
  
  4,632
  
  
  
  10,212Net (decrease) increase in cash and equivalents
  
  
  (5,715
  )
  
  
  (14,118
  )
  
  
  19,553Cash and equivalents at beginning of period
  
  
  31,783
  
  
  
  45,901
  
  
  
  28,231Cash and equivalents
  at end of period
  
  
  $
  26,068
  
  
  
  $
  31,783
  
  
  
  $
  47,784  See Accompanying Notes. 7


---

Polymer Group, Inc. Notes to Consolidated Financial Statements Note 1.   Nature of
Operations Polymer Group, Inc. (the Company or Polymer
Group), a global manufacturer and marketer of nonwoven and oriented polyolefin
products, currently operates in two market segments that include consumer and
industrial and specialty. The Company undertook a comprehensive financial and
business restructuring beginning in fiscal 2001 that continued into 2002. After
extensive reorganization efforts, the Company and each of its domestic
subsidiaries filed voluntary petitions for Chapter 11 reorganization under the
United States Bankruptcy Code in the South Carolina Bankruptcy Court on May 11,
2002 (April 25, 2002 as to Bonlam (S.C.), Inc.). In its efforts to
emerge from Chapter 11, the Company filed a Modified Plan (as defined) on November 27,
2002 that was approved by the Bankruptcy Court on January 16, 2003 and
accordingly the Company emerged from Chapter 11 effective March 5, 2003
(the Effective Date). For accounting purposes the Company recognized the
emergence on March 1, 2003, which was the end of the February accounting
period. The Company adopted fresh-start accounting as of March 1,
2003, and the Companys emergence from Chapter 11 resulted in a new
reporting entity. The reorganization value of the Company has been allocated to
the underlying assets based on their respective fair values at the date of
emergence. Such allocation has been based on preliminary estimates which may be
revised at a later date as additional information becomes available. References
to Predecessor refer to the old Polymer Group and its subsidiaries on and
prior to March 1, 2003 and references to Successor refer to Polymer
Group and its subsidiaries from March 2, 2003 through June 28, 2003,
after giving effect to the implementation of fresh start reporting. The Modified Plan generally resulted in the: (i) restructuring
of the Companys bank debt by entering into the Restructured Credit Facility
(as defined): (ii) retirement of in excess of $591.5 million of the
Companys obligations under the senior subordinated notes; (iii) payment
in full of virtually all critical business relations claims (as defined in the
Modified Plan); and (iv) cancellation of the Companys old common stock
and issuance of new common stock and warrants. The Company entered into
Amendment No. 1 to the Restructured Credit Facility (Amendment No. 1),
effective as of March 29, 2003, to provide the Company with additional
flexibility in meeting the financial covenants under terms of the Restructured
Credit Facility. Note 2.   Significant
Accounting Policies Basis of Presentation and Use
of Estimates The accompanying consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States for interim financial information and include the accounts
of the Company and its subsidiaries. The preparation of such financial
statements assumes continuity of operations and realization of assets and
satisfaction of liabilities in the ordinary course of business. In accordance
with Statement of Position 90-7, Financial Reporting by Entities in
Reorganization under the Bankruptcy Code, (SOP 90-7), all liabilities
subject to compromise have been segregated in the consolidated balance sheets
and classified as Liabilities Subject to Compromise, at the estimated amount of
allowable claims. Liabilities Not Subject to Compromise are separately
classified as current and non-current. Revenues, expenses, realized gains and
losses, and provisions for costs resulting from the reorganization are reported
separately as reorganization items in the consolidated statements of
operations. The unaudited consolidated financial statements of the
Company do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial 8 Polymer Group, Inc. Notes to Consolidated Financial Statements (Continued) Note 2.   Significant Accounting
Policies (Continued) statements. The Condensed
Consolidated Balance Sheets as of June 28, 2003 and December 28, 2002
contain summarized information; as a result, such data does not include the
same detail provided in the Companys Annual Report on Form 10-K for the
year ended December 28, 2002. In the opinion of management, these
unaudited consolidated financial statements contain all adjustments of a normal
recurring nature necessary for a fair presentation. Operating results for the
two months ended March 1, 2003 and four months ended June 28, 2003
are not necessarily indicative of the results that may be expected for fiscal
2003. Because of the application of fresh start accounting the results for the
four months ended June 28, 2003 are not comparable to the results for the
two months ended March 1, 2003. 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 amounts could differ
from those estimates. Investments in 20% to 50% owned affiliates are accounted
for on the equity method. Revenue Recognition Revenue from product sales is recognized at the time ownership
of goods transfers to the customer and the earnings process is complete in
accordance with Staff Accounting Bulletin No. 101 (SAB 101). Accounts Receivable and
Concentration of Credit Risks The Company establishes an allowance for doubtful accounts
based upon factors surrounding the credit risk of specific customers,
historical trends and other information. The Company identifies delinquent
accounts based on specific customer terms and typically does not accrue
interest charges on customer balances. The recorded values are separately
maintained, even those balances that are fully reserved. Once management
determines that the receivables are not recoverable, the amounts are removed
from the financial records along with the corresponding reserve balance. The
allowance for doubtful accounts was approximately $14.1 million and
$12.9 million at June 28, 2003 and December 28, 2002,
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. 9 Polymer Group, Inc. Notes to Consolidated Financial Statements (Continued) Note 2.   Significant
Accounting Policies (Continued) Inventories Inventories are stated
at the lower of cost or market using the first-in, first-out method of
accounting and, as of June 28, 2003 and December 28, 2002 consist of
the following (in thousands): Successor
  June 28, 2003
  
  Predecessor
  December 28, 2002(Unaudited)Finished goods
  
  
  $
  53,312
  
  
  
  $
  56,126Work in process
  
  
  19,701
  
  
  
  17,515Raw materials
  
  
  41,052
  
  
  
  42,055$
  114,065
  
  
  
  $
  115,696  Long-Lived Assets The Company reviews the recoverability of the carrying
value of long-lived assets in accordance with Statement of Financial Accounting
Standard No.144 Accounting for the Impairment or Disposal of Long-Lived Assets
(FAS 144) and Statement of Financial Accounting Standard No 142 Goodwill
and Other Intangible Assets (FAS 142). As more fully discussed in
Note 6. Business Restructuring and Impairment, the Company recorded a
non-cash asset impairment charge in fiscal 2002 of approximately
$317.9 million related to the write-down of goodwill and other intangibles
and property, plant and equipment in accordance with FAS 142 and
FAS 144. As part of the Companys adoption of FAS 142 the Company
completed a transitional impairment test in the fourth quarter of 2002, as
permitted by the standard. The Companys transitional impairment test resulted
in a charge of $12.8 million which was reported as a cumulative effect of
a change in accounting principle in the Companys annual results for fiscal
2002 and has been allocated to the first fiscal quarter of 2002 for reporting
purposes. The following table reconciles reported results to
restated results for the six months ended June 29, 2002 (in thousands,
except per share data): As Reported
  
  RestatedNet sales
  
  $
  391,961
  
  $
  391,961Gross profit
  
  65,350
  
  65,350Loss before
  cumulative effect of change in accounting principle
  
  (47,342
  )
  (47,342
  )Cumulative effect of
  change in accounting principle
  
  
  
  12,774Net loss
  
  $
  (47,342
  )
  $
  (60,116
  )Per sharebasic and
  diluted:Loss before cumulative effect of change in
  accounting principle
  
  $
  (1.48
  )
  $
  (1.48
  )Cumulative effect of change in accounting principle
  
  
  
  0.40Net loss
  
  $
  (1.48
  )
  $
  (1.88
  )(Deficit)
  
  $
  (289,277
  )
  $
  (302,051
  )  10 Polymer Group, Inc. Notes to Consolidated Financial Statements (Continued) Note 2.   Significant
Accounting Policies (Continued) Under the provisions of
FAS 142, goodwill and indefinite lived intangible assets are no longer
amortized, but will be tested for impairment on at least an annual basis.
Amortization expense is presented in the following table (in thousands): Three Months Ended
  
  Successor
  
  PredecessorSuccessor June 28, 2003
  
  Predecessor June 29, 2002
  
  Four Months
  Ended
  June 28, 2003
  
  Two Months
  Ended
  March 1, 2003
  
  Six Months
  Ended
  June 29, 2002Amortization of:Goodwill
  
  
  $
  
  
  
  
  $
  
  
  
  
  $
  
  
  
  
  $
  
  
  
  
  $
  Intangibles with
  finite lives
  
  
  1,303
  
  
  
  768
  
  
  
  1,783
  
  
  
  220
  
  
  
  1,550Amortization included
  in selling, general and administrative expense
  
  
  1,303
  
  
  
  768
  
  
  
  1,783
  
  
  
  220
  
  
  
  1,550Loan acquisition
  costs included in interest expense, net
  
  
  473
  
  
  
  1,758
  
  
  
  630
  
  
  
  1,426
  
  
  
  3,499Total amortization expense
  
  
  $
  1,776
  
  
  
  $
  2,526
  
  
  
  $
  2,413
  
  
  
  $
  1,646
  
  
  
  $
  5,049  Income Taxes 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. Implementation of the Modified Plan
resulted in the Company recognizing cancellation of indebtedness income (CODI).
All of the CODI is excluded from taxable income. However, the Company is
required to reduce certain of its tax attributes, including net operating loss
carryforwards (NOLs), by an amount not to exceed the CODI it realized. In
general, tax attributes will be reduced at the close of the 2003 tax year in
the following order: (i) net operating loss carryforwards; (ii) tax
credits and capital loss carryforwards; and (iii) tax basis in assets. The
Company is currently in the process of determining the amount of the
corresponding reduction of its tax attributes and/or asset basis. It is
anticipated that the Companys net operating loss carryforwards will be
entirely eliminated in 2003 as a result of the reorganization under the
Modified Plan. 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. 11 Polymer Group, Inc. Notes to Consolidated Financial Statements (Continued) Note 2.   Significant
Accounting Policies (Continued) Net Income (Loss) Per Share Basic earnings per share exclude any dilutive effects
of options, warrants and convertible securities and are 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. All stock options were cancelled under the Modified Plan.
The numerator for both basic and diluted earnings per share is net income
(loss) applicable to common stock. A separate table illustrating the
calculation of earnings per share has not been presented as such amount can be
derived from information contained in the statement of operations. There were
no reconciling items between basic loss per share and diluted loss per share
for the periods presented in this Quarterly Report on Form 10-Q. New Accounting Standards In July 2001, the FASB issued SFAS No. 141, Business
Combinations. SFAS No. 141 requires that the purchase method of
accounting be used for all business combinations completed after June 30,
2001, and specifies criteria for the recognition and reporting of intangible
assets apart from goodwill. On April 30, 2002, the FASB issued SFAS No. 145,
Recission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections. SFAS No. 145 rescinds Statement No. 4,
which required all gains and losses from extinguishments of debt to be
aggregated and, if material, classified as an extraordinary item, net of
related income tax effect. Upon adoption of SFAS No. 145, companies will
be required to apply the criteria in Accounting Principle Board 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 in determining the classification of gains and losses
resulting from the extinguishments of debt. SFAS No. 145 is effective for
fiscal years beginning after May 15, 2002. The provisions of SFAS No.145
have been adopted by the Company in 2003. The gain recognized by the Company on
the cancellation of indebtedness pursuant to the emergence from bankruptcy has
been classified as a reorganization item in the consolidated statements of
operations. On July 30, 2002, the FASB issued SFAS No 146, Accounting
for Costs Associated with Exit or Disposal Activities. SFAS No. 146
requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. The provisions of SFAS No. 146 are effective for
exit or disposal activities that are initiated after December 31, 2002.
The Company will incur cost pursuant to SFAS 146 during 2003 related to
its continued business restructuring efforts. Such cost will be accounted for
in accordance with the standard. Refer to Note 6. Business Restructuring
and Impairment. On December 31, 2002, the FASB issued SFAS No
148, Accounting for Stock-Based CompensationTransition and Disclosure.
SFAS 148 amends SFAS No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for an entity that
changes to the fair value method of accounting for stock-based employee
compensation. In addition, SFAS 148 amends the disclosure provisions of
SFAS 123 to require expanded and more prominent disclosure of the effects
of an entitys accounting policy with respect to stock-based employee
compensation. 12 Polymer Group, Inc. Notes to Consolidated Financial Statements (Continued) Note 2.   Significant
Accounting Policies (Continued) SFAS No. 148 is effective
for fiscal year 2003. SFAS 148 did not have an impact on the Companys results
of operations as a result of the cancellation of all stock options under the
1996 Plan and 2001 Plan pursuant to the Modified Plan. In January 2003, the FASB issued FASB Interpretation
No. 46, Consolidation of Variable Interest Entities (FIN 46).
This interpretation provides guidance on how to identify variable interest
entities and how an enterprise should assess its interest in a variable
interest entity in order to determine whether the entity should be
consolidated. This interpretation requires existing unconsolidated variable
interest entities to be consolidated by their primary beneficiaries if the
entities do not effectively disperse risks among parties involved. Variable
interest entities that effectively disperse risks will not be consolidated
unless a single party holds an interest or combination of interest that
effectively recombines risks that were previously dispersed. This
interpretation applies immediately to variable interest entities created after
January 31, 2003 or to variable interest entities in which an enterprise obtains
an interest after that date. For variable interest entities in which an
enterprise holds a variable interest that it acquired before February 1,
2003, FIN 46 applies in the first fiscal year or interim period beginning
after June 15, 2003. The Company is in the process of evaluating existing relationships
that may be deemed variable interest entities under the provisions of
FIN 46. The Company currently does not anticipate that the adoption of
FIN 46 will have a material effect on the Companys financial position or
results of operations. Note 3.   Chapter 11
Proceedings Description of Chapter 11
Proceedings On May 11, 2002 (the Filing Date or Petition
Date), the Company and each of its domestic subsidiaries (together with the
Company, the Debtors) filed voluntary petitions for pre-negotiated
reorganization (the Chapter 11 Filings or the Filings) under the Bankruptcy
Code in the South Carolina Bankruptcy Court. The Chapter 11 Filings were
jointly administered for procedural purposes only. The Companys direct and
indirect foreign subsidiaries and foreign joint venture entities did not file
petitions under Chapter 11 and were not the subject of any bankruptcy
proceedings. To facilitate stabilizing operations during the Chapter 11
Filings, the Debtors secured a $125 million commitment (the Commitment)
for debtor-in-possession financing (the DIP Facility) from a group of
financial institutions, some of which were Senior Secured Lenders (the DIP
Lenders) in order to provide the Debtors sufficient liquidity, if needed, to
operate during the Chapter 11 Filings. JPMorgan Chase Bank was the Agent for
the DIP Lenders under the DIP Facility. Pursuant to the DIP Facility, the
Debtors paid certain fees to the DIP Lenders, including a structuring fee of 0.85%
of the Commitment, an underwriting fee of 1.65% of the Commitment as well as
certain other fees. At a hearing, which took place on August 15,
2002, and concluded on August 20, 2002, the South Carolina Bankruptcy
Court approved the Companys Disclosure Statement relating to the Plan of
Reorganization, as amended and filed on August 21, 2002, over the
committees objection. The Plan was not confirmed and thus the Company filed
the Modified Plan as more fully discussed in Note 4. Recapitalization. 13 Polymer Group, Inc. Notes to Consolidated Financial Statements (Continued) Note 3.   Chapter 11
Proceedings (Continued) Chapter 11 Costs and Financial
Restructuring Expenses Prior to the Petition Date, the Company classified
expenses related to its financial restructuring efforts as Special charges in
the consolidated statement of operations. Such charges consist of professional
and other related services that were expensed as incurred. After the Petition
Date, costs related to the Companys reorganization activities were expensed as
incurred and have been classified as Chapter 11 reorganization expenses in
accordance with SOP 90-7. The cumulative amount of costs and expenses related
to the Companys financial restructuring efforts, including bank financing fees
have been approximately $45.6 million. Note 4.   Recapitalization On November 27, 2002, the Company filed the Joint
Amended Modified Plan of Reorganization (the Modified Plan). The Modified
Plan consisted of: (i) the restructuring of the Prepetition Credit
Facility, including a payment (the Secured Lender Payment) of
$50.0 million on the Effective Date to the agent for the benefit of the
Senior Secured Lenders under the Prepetition Credit Facility, which Secured
Lender Payment was exclusive of the proceeds (the Chicopee Sale Proceeds) of the
sale of the South Brunswick facility owned by Chicopee, Inc., (ii) payment
of 100% of the Chicopee Sale Proceeds to the agent for the benefit of the
Senior Secured Lenders, (iii) a minimum $5.0 million additional
prepayment out of existing cash-on-hand, (iv) the retirement of in excess
of $591.5 million of the Debtors obligations under the Senior
Subordinated Notes, wherein each Holder of the Senior Subordinated Notes and
other general unsecured creditors (other than claims of certain vendors who
supplied goods and services to the Debtors during the bankruptcy and with whom
the Debtors intended to do business after emerging from bankruptcy (Critical
Vendor Claims) and claims held by non-debtor subsidiaries of the Company (Intercompany
Claims) (together constituting the Class 4 Claims) had the right to
receive on, or as soon as practicable after the Effective Date, (x) its
pro rata share of Class A Common Stock in exchange for each $1,000 of its
allowed claim or (y) at the election of each holder who was a Qualified
Institutional Buyer (as defined in the Modified Plan and the 1933 Securities
Act), its pro rata share of Class C Common Stock, (v) the Critical
Vendor Claims and Intercompany Claims were not impaired, (vi) each holder
of an allowed Class 4 Claim that elected to receive Class A Common
Stock was given the option to take part in the new investment in the
Convertible Notes (the New Investment) by choosing to exercise its
subscription rights (the Subscription Rights) thereto, which New Investment
of $50 million was made in exchange for 10% subordinated convertible notes
due 2006 (the Convertible Notes), (vii) MatlinPatterson Global
Opportunities Partners L.P. (GOF) issued, or caused to be issued,
letters of credit in the aggregated amount of $25 million (the Exit
Letters of Credit) in favor of the agent under the Restructured Credit
Facilities pursuant to a bank term sheet, for which GOF was entitled to 10%
senior subordinated notes due 2007 (the New Senior Subordinated Notes) equal
to the amount (if any) drawn against the Exit Letters of Credit (plus any
advances made by GOF solely in lieu of drawings under the Exit Letters of
Credit), (viii) holders of the Companys existing common stock (Old
Polymer Common Stock) received 100% of the Class B Common Stock (which
will not be diluted by any conversions of the Convertible Notes) in exchange
for their Old Polymer Common Stock interests; such Holders also received pro
rata shares of the new Series A and Series B Warrants (as discussed
below). 14


---

Polymer Group, Inc. Notes to Consolidated Financial Statements (Continued) Note 4.   Recapitalization
(Continued) Under the Modified Plan, all common stock of the
reorganized Company (the New Polymer Common Stock) was the same class (the Class A
Common Stock), with the exception of (i) separate classes (the Class D
Common Stock and Class E Common Stock) to be issued upon exercise of
the Series A and Series B Warrants (as defined below), (ii) the
4% of New Polymer Common Stock designated as Class B Common Stock issued
to the holders of Old Polymer Common Stock, and (iii) a small percentage
(the Class C Common Stock) issued to holders of Class 4 Claims, who
contributed such stock to the Special Purpose Entity (SPE). The Class C
Common Stock shall pay a dividend payable equal to the lesser of (i) 1%
per annum of the principal amount of the promissory notes issued by the SPE or (ii) $1.0 million
per annum. Shares of New Polymer Common Stock (other than Class A Common
Stock) are convertible into shares of Class A Common Stock on a
one-for-one basis. The holders of Old Polymer Common Stock received two
series of warrants, the Series A Warrants and Series B Warrants,
which have (i) customary adjustments for stock splits, stock dividends,
and consolidations, (ii) specified anti-dilution protection for sales of
securities by the reorganized Company (New Polymer) at a price below the fair
market value of such securities if offered to all New Polymer common stock
holders and (iii) specified anti-dilution protection for sales of
securities by New Polymer at a discount that exceeds 25% of the fair market
value of such securities and which will not terminate upon a transaction with
GOF or an affiliate of GOF. Except as set forth in the preceding sentence, the Series A
and Series B Warrants do not have anti-dilution provisions. In addition,
the cash dividend payment by New Polymer described above in connection with the
Class C Common Stock is excluded from the calculation of cumulative
distributions for all purposes relating to the Series A Warrants, the Series B
Warrants, the Class D Common Stock and the Class E Common Stock. The
New Polymer Common Stock received by the holders of Class 4 Claims and the
Holders of Old Polymer Common Stock and which will be issued upon conversion of
the Convertible Notes is subject to dilution upon the exercise of the Series A
Warrants and Series B Warrants. The Modified Plan also provided that, on the Effective
Date, in consideration of GOF acting as the standby purchaser for the New
Investment, and in consideration of GOFs role in facilitating a consensual
resolution of the disputes among the parties involved in the negotiation of the
Modified Plan, New Polymer paid GOF a Standby Purchaser fee of
$2.0 million and an arrangement and plan facilitation fee of
$2.0 million. In order to facilitate the issuance of a new senior
subordinated note (New Senior Subordinated Note) in the amount of any drawing
under the Exit Letter of Credit, MatlinPatterson Global Partners LLC, (Matlin
Global Partners) a limited liability company organized under the laws of Delaware,
the Company and its domestic subsidiaries, as guarantors, entered into a Senior
Subordinated Note Purchase Agreement (the Senior Subordinated Note Purchase
Agreement), dated as of March 5, 2003, and pursuant thereto, the Company
issued to Matlin Global Partners a New Senior Subordinated Note. The Senior Subordinated Note Purchase Agreement and
Senior Subordinated Note provide that upon any drawing under the Exit Letter of
Credit, the principal amount due under the New Senior Subordinated Note will automatically
increase by the amount of such drawing. The Company is required to pay interest
on any amount outstanding under the New Senior Subordinated Note semi-annually
in arrears on January 1 and June 1 of each year, commencing on June 1,
2003, at a rate of 10% per annum, and default interest in an amount of 2% per
annum will be payable on the principal 15 Polymer Group, Inc. Notes to Consolidated Financial Statements (Continued) Note 4.   Recapitalization
(Continued) amount in addition to the
existing 10% rate. The Company shall, to the extent lawful, pay interest at a
rate of 12% per annum on overdue interest. The Companys obligations under the Senior
Subordinated Note Purchase Agreement and Senior Subordinated Note are
guaranteed by the Companys domestic subsidiaries. Both the Companys
obligations under the Senior Subordinated Note and the guarantees thereof are
subordinate to the indebtedness outstanding under the Companys Restructured
Credit Facility. The Senior Subordinated Note Purchase Agreement
contains customary representations and warranties and standard default terms. Additionally,
the Senior Subordinated Note Purchase Agreement contains affirmative and
negative covenants of the Company with respect to (a) delivery of
information, (b) proceeds of asset sales, (c) limitation on
restricted payments, (d) corporate existence, (e) limitation on
liens, (f) future domestic subsidiary guarantors, (g) designation of
unrestricted subsidiaries, and (h) mergers and similar transactions
involving the Company or the guarantors. Note 5.   Fresh Start
Accounting Fresh-start reporting requires that the
reorganization value of the Company be allocated to its assets in conformity
with SFAS No. 141. Such allocation is based on preliminary estimates which
may be revised at a later date as information becomes available. The excess of
the fair value of the specific tangible or identifiable intangible net assets
over the reorganization value, or negative goodwill, is to be allocated to
non-current non-monetary assets on a pro-rata basis. Based on the consideration
of many factors and various valuation methods, the Company and its financial
advisors determined the reorganization value of the Company as described in the
Modified Plan. As part of the Modified Plan, the Companys common stock was
divided into five classes: Class A, Class B, Class C, Class D
and Class E. As of the Effective Date, 8,125,869 shares of Class A,
399,978 shares of Class B and 118,449 shares of Class C common stock
were outstanding. An additional 1,355,480 shares of Class A common stock
has been reserved for issuance pending the outcome of certain claims against
the Company in connections with the Modified Plan. No shares of Class D or
Class E common stock were 16 Polymer Group, Inc. Notes to Consolidated Financial Statements (Continued) Note 5.   Fresh Start
Accounting (Continued) outstanding as of such date. The following table
reflects the reorganization adjustments to old Polymer Groups consolidated
balance sheet as of March 1, 2003 (in thousands): Predecessor
  
  Modified Plan of
  Reorganization
  
  Fresh Start
  Adjustments
  
  SuccessorAssetsCurrent assets
  
  $
  308,411
  
  
  $
  
  
  
  
  
  $
  1,163
  
  (g)
  
  $
  309,574Property, plant and
  equipment
  
  431,384
  
  
  (36,372
  )
  (f)
  
  
  (29,150
  )
  (g)
  
  365,862Intangibles and loan
  acquisition costs, net
  
  38,315
  
  
  (26,341
  )
  (e)(f)
  
  
  23,572
  
  (h)
  
  35,546Other assets
  
  13,296
  
  
  
  
  
  
  
  (2,075
  )
  (g)
  
  11,221Total assets
  
  $
  791,406
  
  
  $
  (62,713
  )
  
  
  
  $
  (6,490
  )
  
  
  $
  722,203Liabilities
  and Shareholders Equity (Deficit)Liabilities not subject to compromiseAccounts payable, accrued liabilities and other
  current
  
  $
  94,466
  
  
  $
  7,069
  
  (a)
  
  
  $
  9,668
  
  (g)
  
  $
  111,203Short term borrowings
  
  223
  
  
  
  
  
  
  
  
  
  
  
  223Long term debtPrepetition Credit Facility
  
  484,877
  
  
  (484,877
  )
  (b)
  
  
  
  
  
  
  Long term debtRestructured Credit Facility and Other
  
  18,165
  
  
  421,434
  
  (c)
  
  
  
  
  
  
  439,599Long term debtJunior Notes
  
  
  
  
  50,000
  
  (d)
  
  
  
  
  
  
  50,000Noncurrent liabilites
  
  48,133
  
  
  
  
  
  
  
  (345
  )
  (g)
  
  47,788Total liabilites not subject to compromise
  
  645,864
  
  
  (6,374
  )
  
  
  
  9,323
  
  
  
  648,813Liabilites Subject to
  Compromise
  
  637,122
  
  
  (637,122
  )
  (e)
  
  
  
  
  
  
  Total liabilities
  
  1,282,986
  
  
  (643,496
  )
  
  
  
  9,323
  
  
  
  648,813Shareholders equity
  (deficit)
  
  (491,580
  )
  
  580,783
  
  (f)
  
  
  (15,813
  )
  (I)
  
  73,390Total liabilities and
  shareholders (deficit)
  
  $
  791,406
  
  
  $
  (62,713
  )
  
  
  
  $
  (6,490
  )
  
  
  $
  722,203 
 (a)To
record certain prepetition liabilities to be settled in cash. (b)To
record the elimination of the Prepetition Credit Facility. (c)To
record the Restructured Credit Facility. (d)To
record the Junior Notes. (e)To
record the elimination of pre-petition liabilites that were cancelled,
which include the old senior subordinated notes, accrued interest, and loan
acquisition costs. (f)To
record the issuance of securities, the cancellation of prepetition liabilities
and negative reorganization value. (g)To
reflect assets and liabilities at fair value. (h)To write-off
goodwill and adjust certain intangibles to fair value. (I)To write-off Predecessors securities,
accumulated deficit and accumulated other comprehensive loss. 17 Polymer Group, Inc. Notes to Consolidated Financial Statements (Continued) Note 6.   Business
Restructuring and Impairment During the second quarter of fiscal 2003, the Company
began implementing its 2003 business restructuring initiative (the 2003
Restructuring). The Company currently plans to reduce working capital levels
by reducing raw material inventory and finished goods inventory within certain
businesses and to return to normalized payment terms on accounts payable
company-wide. Operating cost reductions are expected to be realized through: (i) reducing
headcount at both the plant and corporate levels; (ii) improving
manufacturing productivity and reducing component costs; (iii) implementing
global purchasing initiatives; and (iv) rationalizing certain assets and/or
businesses. Headcount reductions have been implemented in the first and second
quarters of 2003 and will be substantially complete by the end of fiscal 2003. Approximately
127 positions have been eliminated during the six months ended June 28,
2003. The number of future headcount reductions and related costs has not been
finalized. Operating costs reductions are expected to come from improved
productivity, primarily in the United States, and reduced manufacturing costs
such as energy costs and warehouse and logistics cost reductions. Each
manufacturing plant has individual plans and initiatives to achieve this goal. In
addition, the Company is streamlining corporate overhead and evaluating all
major overhead cost categories for further cost reductions. In the second
quarter of 2003 the Company implemented a centralized purchasing strategy to
leverage its global purchasing efforts related to raw materials. The Company is
also rationalizing certain of its assets and businesses which has resulted in
the curtailment of operations at certain U.S. manufacturing locations and has
led to the decision to exit the wet laid nonwovens business. The Companys business restructurings in 2002 included
reductions in headcount of approximately 54 employees and facility closing
costs in the U.S. as business processes were rationalized in the Oriented
Polymers Division. The total plant realignment charge in 2002 and 2001 related
to the restructuring approximated $8.5 million. Cash outlays in 2002 and
2001 associated with the Companys business restructuring approximated
$7.6 million. A summary of the business restructuring activity during
the six months ended June 28, 2003, accounted for in accordance with
FAS 146, is presented in the following table (in thousands): Employee Termination
  and Facility Closing CostsPlant realignment
  liability as of December 28, 2002
  
  
  $
  8932003 plant
  realignment charge
  
  
  3,1712003 cash payments
  and adjustments
  
  
  (1,347
  )Plant realignment liability
  as of June 28, 2003
  
  
  $
  2,717  During the fourth quarter of 2002, based upon further
reviews of the Companys long-lived assets and the continued decline in
operating profits over the course of 2002, the Company recorded a non-cash
charge of approximately $317.9 million, consisting of the write-down of
goodwill and other intangibles ($83.9 million) and machinery, equipment
and buildings ($234.0 million) related predominantly to production assets
within the U.S. and European Nonwovens business in accordance with FAS 142
and FAS 144. 18 Polymer Group, Inc. Notes to Consolidated Financial Statements (Continued) Note 7.   Debt Debt as of June 28,
2003 and December 28, 2002, consists of the following (in thousands): SuccessorJune 28, 2003
  
  Predecessor
  December 28, 2002(Unaudited)Indebtedness, including current portion:Prepetition Credit
  Facility
  
  
  $
  
  
  
  
  $
  484,478Restructured Credit
  Facility
  
  
  421,433
  
  
  
  Senior Subordinated
  Notes
  
  
  
  
  
  
  587,482Junior Notes
  
  
  50,000
  
  
  
  Other
  
  
  16,345
  
  
  
  20,405$
  487,778
  
  
  
  $
  1,092,365  Restructured Credit Facility The Companys Restructured Credit Facility provides
for secured revolving credit borrowings with aggregate commitments of up to $50.0 million
and aggregate term loans and term letters of credit of $435.3 million.
Subject to certain terms and conditions, a portion of the Restructured Credit
Facility may be used for revolving letters of credit. All borrowings under the
Restructured Credit Facility are U.S. dollar denominated and are guaranteed, on
a joint and several basis, by each and all of the direct and indirect domestic
subsidiaries of the Company and certain non-domestic subsidiaries of the
Company. The Restructured Credit Facility and the related guarantees are
secured by (i) a lien on substantially all of the assets of the Company,
its domestic subsidiaries and certain of its non-domestic subsidiaries, (ii) a
pledge of all or a portion of the stock of the domestic subsidiaries of the
Company and of certain non-domestic subsidiaries of the Company, and (iii) a
pledge of certain secured intercompany notes issued to the Company or one or
more of its subsidiaries by non-domestic subsidiaries. Commitment fees under
the Restructured Credit Facility are equal to 0.75% of the daily unused amount
of the revolving credit commitment. The Restructured Credit Facility contains
covenants and events of default customary for financings of this type,
including leverage, senior leverage, interest coverage and adjusted interest
coverage. The Company was in compliance with such financial covenants at June
28, 2003. The Restructured Credit Facility terminates on December 31,
2006. The loans are subject to mandatory prepayment out of proceeds received in
connection with certain casualty events, asset sales and debt and equity
issuances and from excess cash flow. The interest rate applicable to borrowings under the
Restructured Credit Facility is based on a specified base rate or a specified
Eurodollar base rate, at the Companys option, plus a specified margin. The
applicable margin for revolving credit loans bearing interest based on the base
rate is 2.75%, and the margin for revolving credit loans bearing interest on a
Eurodollar rate is 3.75%. The applicable margin for term loans bearing interest
based on the base rate will range from 4.00% to 8.00%, and the margin for term
loans bearing interest on a Eurodollar rate will range from 5.00% to 9.00%, in
each case based on the Companys ratio of senior consolidated indebtedness to
consolidated EBITDA calculated on a rolling four quarter basis. In addition, if
the Companys ratio of senior consolidated indebtedness to consolidated EBITDA
calculated on a rolling four quarter basis exceeds 5.00 to 1, the Company is
required to pay to the term loan lenders and the term letter of credit lenders
a fee of 1.00% on the outstanding balance under the term loans and the term
letters of 19 Polymer Group, Inc. Notes to Consolidated Financial Statements (Continued) Note 7.   Debt
(Continued) credit. The interest rate on
the Restructured Credit Facility is capped at 12%. The Restructured Credit
Facility defines EBITDA as operating income (loss) plus depreciation,
amortization and Mexican statutory employee profit sharing and excludes unusual
items, consisting of asset impairment, plant realignment, special charges and
other unusual items. The Company sold its Dayton, New Jersey (South
Brunswick) facility for approximately $10.2 million, net of expenses of
$0.4 million, during December 2002 at no material gain or loss.
Proceeds from the sale were maintained in an escrow account outside of the
Companys control prior to emergence from Chapter 11 and thus were
classified within Other current assets in the consolidated balance sheet at December 28,
2002. The proceeds from the sale of South Brunswick were used to reduce amounts
outstanding under the Restructured Credit Facility during the first quarter of
2003. On April 11, 2003, GOF entered into an agreement
with the Company (the GOF Agreement) pursuant to which GOF agreed to
undertake certain actions solely for the purpose of assisting the Company in
maintaining compliance with the financial covenants contained in the
Restructured Credit Facility during the period beginning on March 6, 2003,
and ending on January 4, 2004 as follows. GOF has agreed to amend the New
Senior Subordinated Note and the Junior Notes it beneficially owns or controls
(approximately $38 million aggregate principal amount) to provide that
interest that accrues from March 6, 2003 until January 31, 2005 on
the New Senior Subordinated Note and from March 6, 2003 until January 5,
2004 on the Junior Notes, may be paid by the Company issuing additional
aggregate principal amount of debt securities rather than paying such interest
in cash. In the event the Company is unable to meet the senior leverage
covenant, interest covenant or adjusted interest covenant contained in the
Restructured Credit Facility, the Company is permitted to instruct the Agent
under the Restructured Credit Agreement to make a drawing under the Exit Letter
of Credit and apply the amount of the drawing to repay indebtedness under the
Restructured Credit Facility. GOF also has agreed that, in the event the
Company is unable to comply with the leverage covenant under the Restructured
Credit Facility, GOF will convert such amount of its Junior Notes into Class A
Common Stock. Finally, in the event the Company has undertaken all the actions
described above and is unable to meet the interest covenant solely for the
12-month period ending on the last day of the Companys third fiscal quarter of
2003, GOF will purchase up to $10 million aggregate principal amount of
additional senior subordinated notes (with interest payable in additional
principal amount of senior subordinated notes) or equity securities (the New
Investment) in order to allow the Company to repay indebtedness under the
Restructured Credit Facility to meet such covenant. GOFs obligation to take
any of these steps is conditioned on Amendment No. 1 remaining in full
force and effect. As of March 29, 2003, the Company and the Senior
Secured Lenders under the Restructured Credit Facility, entered into Amendment No. 1.
Amendment No. 1 permitted the Company to take the actions described in the
GOF Agreement, and also provides that in the event the Company repays
indebtedness under the Restructured Credit Facility using the proceeds from the
Exit Letter of Credit or New Investment, for purposes of the interest and
adjusted interest covenants, the interest savings to the Company is calculated
on a pro forma basis as if the cash pay indebtedness had been repaid as of March 6,
2003. 20


---

Polymer Group, Inc. Notes to Consolidated Financial Statements (Continued) Note 7.   Debt
(Continued) Convertible Subordinated Notes In connection with the emergence from Chapter 11,
the Company issued $50 million of 10% Convertible Subordinated Notes due
2007 (the Junior Notes) pursuant to an indenture dated as of March 5,
2003 (the Junior Indenture). The Junior Notes are unsecured subordinated
indebtedness of the Company and are subordinated in right of payment to all
existing and future indebtedness of the Company which is not, by its terms,
expressly junior to, or pari passu
with, the Junior Notes. The Junior Notes are convertible into shares of Class A
Common Stock, at an initial conversion price equal to $7.29 per share. The
Junior Indenture contains several covenants, including limitations on:
(i) indebtedness; certain restricted payments; liens; transactions with
affiliates; dividend and other payment restrictions affecting certain
subsidiaries; guarantees by certain subsidiaries; certain transactions
including merger and asset sales; and (ii) certain restrictions regarding the
disposition of proceeds of asset sales. Subsidiary Indebtedness The Companys China-based majority owned
subsidiary (Nanhai) has a bank facility with a financial institution in China
that is scheduled to mature in April 2004. At June 28, 2003, the approximate
amount of outstanding indebtedness under the facility was $9.5 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. At June 28, 2003, Nanhai had cash and cash
equivalents on hand of approximately $3.0 million and working capital of
approximately $1.3 million. The Companys Argentina-based majority owned
subsidiary (DNS) has two bank facilities denominated in U.S. dollars of
approximately $5.1 million at June 28, 2003 with current maturities
of approximately $3.3 million. 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 June 28, 2003 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. At June 28,
2003, DNS had cash and cash equivalents on hand of approximately
$2.3 million and working capital of $7.3 million, excluding current
debt. Including current debt, DNS working capital was approximately
$4.0 million at June 28, 2003. In order to support working capital requirements at
Vateks Tekstil Sayani ve Ticaret AS (Vateks), an 80% majority owned
subsidiary in Istanbul, Turkey, the Company has deposited through the European
parent company of Vateks, approximately Euro $6.8 million with a member of
its European bank group 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. 21 Polymer Group, Inc. Notes to Consolidated Financial Statements (Continued) Note 8.   Condensed
Consolidating Financial Statements Certain of the Companys
wholly-owned subsidiaries unconditionally guarantee payment of the
Companys Junior Notes, jointly and severally, on a senior subordinated basis.
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 Selected Balance Sheet Financial Data
As of June 28, 2003
Successor Combined
  Guarantor
  Subsidiaries
  
  Combined
  Non-Guarantor
  Subsidiaries
  
  The
  Company
  
  Reclassifications
  and Eliminations
  
  ConsolidatedWorking capital
  
  $
  69,501
  
  
  $
  137,918
  
  
  $
  (41,314
  )
  
  $
  (7,043
  )
  
  
  $
  159,062Total assets
  
  2,505,963
  
  
  770,315
  
  
  1,012,060
  
  
  (3,560,735
  )
  
  
  727,603Total debt
  
  
  
  
  16,345
  
  
  471,433
  
  
  
  
  
  
  487,778Shareholders equity
  (deficit)
  
  1,462,129
  
  
  235,484
  
  
  75,217
  
  
  (1,697,613
  )
  
  
  75,217  Condensed
Consolidating Selected Balance Sheet Financial Data
As of December 28, 2002
Predecessor Combined
  Guarantor
  Subsidiaries
  
  Combined
  Non-Guarantor
  Subsidiaries
  
  The
  Company
  
  Reclassifications
  and Eliminations
  
  ConsolidatedWorking capital
  
  $
  94,832
  
  
  $
  131,989
  
  
  $
  556
  
  
  $
  (7,472
  )
  
  
  $
  219,905Total assets
  
  2,342,690
  
  
  615,516
  
  
  1,103,031
  
  
  (3,249,918
  )
  
  
  811,319Total debt
  
  3
  
  
  25,310
  
  
  478,061
  
  
  
  
  
  
  503,374Shareholders equity
  (deficit)
  
  1,045,012
  
  
  234,887
  
  
  (465,914
  )
  
  (1,279,899
  )
  
  
  (465,914
  )  Condensed
Consolidating Statement of Operations Selected Financial Data
For the Four Months Ended June 28, 2003
Successor Combined
  Guarantor
  Subsidiaries
  
  Combined
  Non-Guarantor
  Subsidiaries
  
  The
  Company
  
  Reclassifications
  and Eliminations
  
  ConsolidatedNet sales
  
  $
  127,709
  
  
  $
  150,947
  
  
  $
  
  
  
  $
  (15,832
  )
  
  
  $
  262,824Operating income
  (loss)
  
  (6,208
  )
  
  13,843
  
  
  (378
  )
  
  1,964
  
  
  
  9,221Interest expense,
  income taxes and other expense (income), net
  
  (3,079
  )
  
  20,633
  
  
  12,738
  
  
  (7,955
  )
  
  
  22,337Net income (loss)
  
  (3,129
  )
  
  (6,790
  )
  
  (13,116
  )
  
  9,919
  
  
  
  (13,116
  )  22 Polymer Group, Inc. Notes to Consolidated Financial Statements (Continued) Note 8.   Condensed
Consolidating Financial Statements (Continued) Condensed
Consolidating Statement of Operations Selected Financial Data
For the Two Months Ended March 1, 2003
Predecessor Combined
  Guarantor
  Subsidiaries
  
  Combined
  Non-Guarantor
  Subsidiaries
  
  The
  Company
  
  Reclassifications
  and Eliminations
  
  ConsolidatedNet sales
  
  $
  67,515
  
  
  $
  73,917
  
  
  $
  
  
  
  $
  (8,523
  )
  
  
  $
  132,909Operating income
  (loss)
  
  (1,547
  )
  
  7,203
  
  
  (129
  )
  
  85
  
  
  
  5,612Interest expense,
  income taxes and other expense (income), net
  
  (130,717
  )
  
  7,337
  
  
  (534,410
  )
  
  129,121
  
  
  
  (528,669
  )Net income (loss)
  
  129,170
  
  
  (134
  )
  
  534,281
  
  
  (129,036
  )
  
  
  534,281  Condensed
Consolidating Statement of Operations Selected Financial DataFor
the Six Months Ended June 29, 2002
Predecessor Combined
  Guarantor
  Subsidiaries
  
  Combined
  Non-Guarantor
  Subsidiaries
  
  The
  Company
  
  Reclassifications
  and Eliminations
  
  ConsolidatedNet sales
  
  $
  206,592
  
  
  $
  202,710
  
  
  $
  
  
  
  $
  (17,341
  )
  
  
  $
  391,961Operating income
  (loss)
  
  (11,230
  )
  
  23,302
  
  
  (4,497
  )
  
  51
  
  
  
  7,626Interest expense,
  income taxes and other expense (income), net
  
  (25,256
  )
  
  21,537
  
  
  42,845
  
  
  15,842
  
  
  
  54,968Net income (loss)
  
  14,026
  
  
  1,765
  
  
  (47,342
  )
  
  (15,791
  )
  
  
  (47,342
  )  23


---

Polymer Group, Inc. Notes to Consolidated Financial Statements (Continued) Note 9.   Segment
Information The Companys
reportable market segments consist of Consumer and Industrial &
Specialty and beginning in fiscal 2003, the Company is required to report
operating data to its senior lenders under the Restructured Credit Facility based
upon the Companys primary operating divisions. Therefore, disclosures for the
operating divisions have been presented in the following table. Sales to
P&G account for more than 10% of the Companys sales and are reported
primarily in the Consumer segment. The loss of these sales would have a
material adverse effect on this segment. Generally, the Companys nonwoven
products can be manufactured on more than one type of production line.
Accordingly, certain costs attributed to each segment of the business were
determined on an allocation basis. The Company recorded unusual items during
the first two fiscal quarters of 2003 and 2002 consisting of plant realignment
and special charges. These charges have not been allocated to the segment data
because the Companys management does not evaluate information that is not
considered operating in nature on a segment-by-segment basis. Segment operating
performance is measured and evaluated before unusual or special items. In
addition, divisional assets have been disclosed net of intercompany amounts,
beginning in the second quarter of 2003. Financial data by market segments and
operating divisions follows (in thousands): Three Months Ended
  
  Successor
  
  PredecessorSuccessorJune 28, 2003
  
  Predecessor
  June 29, 2002
  
  Four Months
  EndedJune 28, 2003
  
  Two Months
  ended
  March 1, 2003
  
  Six Months
  Ended
  June 29, 2002Market SegmentsNet salesConsumer
  
  
  $
  108,637
  
  
  
  $
  107,749
  
  
  
  $
  143,681
  
  
  
  $
  74,956
  
  
  
  $
  215,479Industrial and specialty
  
  
  90,120
  
  
  
  93,032
  
  
  
  119,143
  
  
  
  57,953
  
  
  
  176,482$
  198,757
  
  
  
  $
  200,781
  
  
  
  $
  262,824
  
  
  
  $
  132,909
  
  
  
  $
  391,961Operating income
  (loss)Consumer
  
  
  $
  3,639
  
  
  
  $
  11,128
  
  
  
  $
  5,398
  
  
  
  $
  2,891
  
  
  
  $
  16,612Industrial and specialty
  
  
  5,626
  
  
  
  (1,156
  )
  
  
  6,990
  
  
  
  2,725
  
  
  
  (4,795
  )9,265
  
  
  
  9,972
  
  
  
  12,388
  
  
  
  5,616
  
  
  
  11,817Plant realignment
  
  
  (3,159
  )
  
  
  (381
  )
  
  
  (3,167
  )
  
  
  (4
  )
  
  
  (557
  )Special charges
  
  
  
  
  
  
  (1,466
  )
  
  
  
  
  
  
  
  
  
  
  (3,634
  )$
  6,106
  
  
  
  $
  8,125
  
  
  
  $
  9,221
  
  
  
  $
  5,612
  
  
  
  $
  7,626Depreciation
  and amortization expense included in operating income (loss)Consumer
  
  
  $
  6,597
  
  
  
  $
  9,081
  
  
  
  $
  8,996
  
  
  
  $
  4,386
  
  
  
  $
  18,420Industrial and specialty
  
  
  4,157
  
  
  
  6,666
  
  
  
  5,102
  
  
  
  3,012
  
  
  
  13,351$
  10,754
  
  
  
  $
  15,747
  
  
  
  $
  14,098
  
  
  
  $
  7,398
  
  
  
  $
  31,771  24 Polymer Group, Inc. Notes to Consolidated Financial Statements (Continued) Note 9.   Segment
Information (Continued) Successor
  
  PredecessorJune 28, 2003
  
  December 28, 2002Market segment assetsConsumer
  
  
  $
  400,824
  
  
  
  $
  404,220Industrial and specialty
  
  
  324,666
  
  
  
  326,670Corporate
  
  
  2,113
  
  
  
  80,429$
  727,603
  
  
  
  $
  811,319  Three Months Ended
  
  Successor
  
  PredecessorSuccessor
  June 28, 2003
  
  Predecessor
  June 29, 2002
  
  Four Months
  Ended
  June 28, 2003
  
  Two Months
  Ended
  March 1, 2003
  
  Six Months
  Ended
  June 29, 2002Operating DivisionsNet salesNonwovens
  
  
  $
  158,320
  
  
  
  $
  158,667
  
  
  
  $
  208,394
  
  
  
  $
  108,373
  
  
  
  $
  312,243Oriented Polymers
  
  
  40,437
  
  
  
  42,114
  
  
  
  54,430
  
  
  
  24,536
  
  
  
  79,718$
  198,757
  
  
  
  $
  200,781
  
  
  
  $
  262,824
  
  
  
  $
  132,909
  
  
  
  $
  391,961Operating income
  (loss)Nonwovens
  
  
  $
  5,650
  
  
  
  $
  8,534
  
  
  
  $
  7,320
  
  
  
  $
  4,480
  
  
  
  $
  9,599Oriented Polymers
  
  
  2,519
  
  
  
  2,181
  
  
  
  3,521
  
  
  
  1,372
  
  
  
  4,144Unallocated Corporate
  
  
  (416
  )
  
  
  (743
  )
  
  
  (365
  )
  
  
  (351
  )
  
  
  (1,926
  )Eliminations
  
  
  1,512
  
  
  
  
  
  
  
  1,912
  
  
  
  115
  
  
  
  9,265
  
  
  
  9,972
  
  
  
  12,388
  
  
  
  5,616
  
  
  
  11,817Plant realignment
  
  
  (3,159
  )
  
  
  (381
  )
  
  
  (3,167
  )
  
  
  (4
  )
  
  
  (557
  )Special charges
  
  
  
  
  
  
  (1,466
  )
  
  
  
  
  
  
  
  
  
  
  (3,634
  )$
  6,106
  
  
  
  $
  8,125
  
  
  
  $
  9,221
  
  
  
  $
  5,612
  
  
  
  $
  7,626Depreciation
  and amortization expense included in operating income (loss)Nonwovens
  
  
  $
  10,187
  
  
  
  $
  13,641
  
  
  
  $
  13,654
  
  
  
  $
  5,777
  
  
  
  $
  27,586Oriented Polymers
  
  
  2,077
  
  
  
  2,092
  
  
  
  2,743
  
  
  
  1,349
  
  
  
  4,157Unallocated Corporate
  
  
  
  
  
  
  14
  
  
  
  (272
  )
  
  
  272
  
  
  
  28Eliminations
  
  
  (1,510
  )
  
  
  
  
  
  
  (2,027
  )
  
  
  
  
  
  
  $
  10,754
  
  
  
  $
  15,747
  
  
  
  $
  14,098
  
  
  
  $
  7,398
  
  
  
  $
  31,771  25 Polymer Group, Inc. Notes to Consolidated Financial Statements (Continued) Note 9.   Segment
Information (Continued) Successor
  
  PredecessorJune 28, 2003
  
  December 28, 2002Division assetsNonwovens
  
  $
  586,319
  
  
  $
  609,317Oriented Polymers
  
  171,111
  
  
  157,750Corporate
  
  2,111
  
  
  80,363Eliminations
  
  (31,938
  )
  
  (36,111
  )$
  727,603
  
  
  $
  811,319  Note 10. Geographic
Information Geographic data for the
Companys operations are presented in the following table (in thousands): Three Months Ended
  
  Successor
  
  PredecessorSuccessor
  June 28, 2003
  
  Predecessor
  June 29, 2002
  
  Four Months
  Ended
  June 28, 2003
  
  Two Months
  Ended
  March 1, 2003
  
  Six Months
  Ended
  June 29, 2002Net sales to unaffiliated customers:United States
  
  
  $
  83,737
  
  
  
  $
  96,538
  
  
  
  $
  111,876
  
  
  
  58,992
  
  
  
  $
  189,252Canada
  
  
  26,781
  
  
  
  25,228
  
  
  
  35,815
  
  
  
  16,416
  
  
  
  49,432Europe
  
  
  53,348
  
  
  
  46,736
  
  
  
  69,178
  
  
  
  33,936
  
  
  
  91,440Asia
  
  
  7,880
  
  
  
  6,659
  
  
  
  10,021
  
  
  
  4,773
  
  
  
  12,787Latin America
  
  
  27,011
  
  
  
  25,620
  
  
  
  35,934
  
  
  
  18,792
  
  
  
  49,050$
  198,757
  
  
  
  $
  200,781
  
  
  
  $
  262,824
  
  
  
  $
  132,909
  
  
  
  $
  391,961Operating income (loss)United States
  
  
  $
  (1,775
  )
  
  
  $
  (2,018
  )
  
  
  $
  (2,294
  )
  
  
  $
  (1,582
  )
  
  
  $
  (11,483
  )Canada
  
  
  1,280
  
  
  
  1,230
  
  
  
  2,069
  
  
  
  1,019
  
  
  
  3,197Europe
  
  
  5,447
  
  
  
  4,120
  
  
  
  6,488
  
  
  
  2,330
  
  
  
  8,155Asia
  
  
  832
  
  
  
  1,291
  
  
  
  1,080
  
  
  
  848
  
  
  
  2,372Latin America
  
  
  3,481
  
  
  
  5,349
  
  
  
  5,045
  
  
  
  3,001
  
  
  
  9,5769,265
  
  
  
  9,972
  
  
  
  12,388
  
  
  
  5,616
  
  
  
  11,817Plant realignment
  
  
  (3,159
  )
  
  
  (381
  )
  
  
  (3,167
  )
  
  
  (4
  )
  
  
  (557
  )Special charges
  
  
  
  
  
  
  (1,466
  )
  
  
  
  
  
  
  
  
  
  
  (3,634
  )$
  6,106
  
  
  
  $
  8,125
  
  
  
  $
  9,221
  
  
  
  $
  5,612
  
  
  
  $
  7,626Depreciation
  and amortization expense included in operating income (loss)United States
  
  
  $
  4,616
  
  
  
  $
  9,698
  
  
  
  $
  6,068
  
  
  
  $
  3,669
  
  
  
  $
  19,528Canada
  
  
  1,510
  
  
  
  1,361
  
  
  
  1,978
  
  
  
  950
  
  
  
  2,699Europe
  
  
  2,180
  
  
  
  2,270
  
  
  
  2,838
  
  
  
  1,166
  
  
  
  4,617Asia
  
  
  903
  
  
  
  875
  
  
  
  1,179
  
  
  
  628
  
  
  
  1,753Latin America
  
  
  1,545
  
  
  
  1,543
  
  
  
  2,035
  
  
  
  985
  
  
  
  3,174$
  10,754
  
  
  
  $
  15,747
  
  
  
  $
  14,098
  
  
  
  $
  7,398
  
  
  
  $
  31,771  26


---

Polymer Group, Inc. Notes to Consolidated Financial Statements (Continued) Note 10. Geographic
Information (Continued) Successor
  
  PredecessorJune 28, 2003
  
  December 28, 2002Geographic assetsUnited States
  
  
  $
  138,768
  
  
  
  $
  374,705Canada
  
  
  123,096
  
  
  
  110,181Europe
  
  
  298,186
  
  
  
  159,637Asia
  
  
  39,766
  
  
  
  39,643Latin America
  
  
  127,787
  
  
  
  127,153$
  727,603
  
  
  
  $
  811,319  Note 11.   Purchase
Option and Subsidiary Matters During the third quarter of
2002, the Companys 40% minority shareholder in DNS exercised an option under
the Purchase and Option Agreement dated July 1, 2000 whereby the Company
or the minority shareholder could elect to sell their respective ownership
share of DNS to the other party. The completion of the purchase of shares under
the option is subject to approval of the Companys lenders, which has not been
obtained. In addition, the Company and the minority shareholder have not agreed
to an acquisition price for such additional investment. The Company did not
receive any approval from the U.S. Bankruptcy Court to engage in such
transaction. The Company acquired an
80% majority ownership position in Vateks during fiscal 1999. The acquisition
agreement contained a purchase price adjustment based upon the achievement of
certain operating targets within an agreed-upon period after the acquisition
date. Vateks did not achieve the operating targets and thus the Company sought
to recover the short fall as calculated pursuant to the provisions of the
acquisition agreement. The Company and former majority shareholder did not
agree on such amount and therefore, the settlement proceeded to arbitration.
The independent arbitrator concurred that the Company was entitled to receive
an adjustment of the purchase price pursuant to the agreement. Accordingly, the
Company and former shareholder agreed to a settlement of approximately
$1.8 million payable in installments between fiscal 2002 and 2004. The
Company received approximately $0.6 million during fiscal 2002
representing the first settlement installment. Such amount was accounted for as
an adjustment to the purchase price of Vateks pursuant to the provisions of APB
No. 16. Subsequent installment payments, in accordance with the settlement
agreement, have not been paid to the Company by the former majority
shareholder. Accordingly, the Company is pursuing its alternatives relative to
this matter. Note 12.   Related
Party Transactions The Company currently leases
office space from an affiliate of a shareholder of the Company at an
approximate annual rental charge of $0.2 million. This facility previously
served as the Companys corporate headquarters. Shared service costs are
charged to the Company and approximated $0.2 million and $0.4 million during
the three and six months ended June 28, 2003, respectively. The Company
also entered into a Joint Development Agreement dated as of April 17, 2002
and a Supply Agreement dated April 30, 2002, with a third party affiliated
with certain of the Companys stockholders. During the six months ended June 28,
2003, no payments were made under either of these agreements. The Company is
currently reviewing these agreements, including the status of the lease and
shared service costs, to determine their enforceability and the Companys
rights, including the right to terminate, under these agreements.Certain of the
Companys key employees provide services for an entity that is a shareholder of
the Company (InterTech). InterTech and its affiliates pay such employees
directly for these services. The Company is currently reviewing this
relationship. 27 Polymer Group, Inc. Notes to Consolidated Financial Statements (Continued) Note 13.   Certain
Matters 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. 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. On April 23, 2002,
the Company filed a demand for arbitration against Johnson & Johnson (J&J).
The primary issue in the arbitration is the Companys assertion that J&J
breached a supply agreement when J&J and certain of its affiliates failed to
purchase certain products from the Company and to allow the Company a
reasonable opportunity to compete for certain sales. The arbitration is
currently pending in the State of New York. Note 14.   Investment
in Partially-Owned Equity Affiliate As part of the
acquisition of Dominion and through its wholly-owned subsidiary, DTA, the
Company acquired a 50% equity interest in a Canadian-based manufacturer
of home furnishing products. The Companys equity ownership of this entity is a
50% shared investment with Galey pursuant to the MSA; therefore, the Companys
effective ownership approximates 25%. Thus the results of this entity are not
consolidated with those of the Company. At June 28, 2003, the Companys
investment in this entity approximated $0.3 million. The Company received
no dividends from this entity during the three and six months ended June 28,
2003 nor has the Company guaranteed any of this entitys obligations. 28 Polymer Group, Inc. Notes to Consolidated Financial Statements (Continued) Note 15.   Supplemental
Financial Data The cost of research and development, shipping and handling, and
selling and advertising is charged to expense as incurred and is included in
selling, general and administrative expense in the consolidated statement of
operations. A summary of these expenses is presented in the following table (in
thousands): Three Months Ended
  
  Successor
  
  PredecessorSuccessor
  June 28, 2003
  
  Predecessor
  June 29, 2002
  
  Four Months
  EndedJune 28, 2003
  
  Two Months
  Ended
  March 1, 2003
  
  Six Months
  Ended
  June 29, 2002Research and
  development
  
  
  $
  2,371
  
  
  
  $
  3,767
  
  
  
  $
  3,415
  
  
  
  $
  2,483
  
  
  
  $
  7,654Shipping and handling
  
  
  5,304
  
  
  
  4,982
  
  
  
  7,013
  
  
  
  3,411
  
  
  
  10,309Selling and advertising
  
  
  7,306
  
  
  
  8,479
  
  
  
  9,566
  
  
  
  4,904
  
  
  
  16,040  Note 16.   Other
Developments During July 2003, the Company settled
certain matters with its former Chief Executive Officer which resulted in a gross
settlement payment in the amount of $3.7 million which has been accounted
for in the second quarter of 2003 as an adjustment to the Companys
reorganization value. Under terms of the agreement certain other matters remain
subject to resolution. 29


---

ITEM 2. MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following
discussion and analysis provides information which management believes is
relevant to an assessment and understanding of the Companys consolidated
results of operations and financial condition. The discussion should be read in
conjunction with the consolidated financial statements and notes thereto
contained in this quarterly report on Form 10-Q. In particular, this
discussion should be read in conjunction with Note 3. Chapter 11
Proceedings and Note 4. Recapitalization, which describe the filing by
the Company and its domestic subsidiaries of voluntary petitions for
reorganization under Chapter 11 of the United States Bankruptcy Code on May 11,
2002 and the financial restructuring associated with the Companys emergence
from Chapter 11 effective March 5, 2003. In addition, a description of the
2003 Restructuring is outlined in Note 6, Business Restructuring and
Impairment. For accounting purposes the Company recognized the
emergence on March 1, 2003, which was the end of the February accounting
period. For purposes of discussion of results of operations, the four months
ended June 28, 2003 (Successor) has been combined with two months ended March 1,
2003 (Predecessor). Results of Operations The following table sets forth the percentage
relationships to net sales of certain income statement items. Three Months Ended
  
  Six Months EndedJune 28,
  2003
  
  June 29,
  2002
  
  June 28,
  2003
  
  June 29,
  2002Net sales
  
  
  100.0
  %
  
  
  100.0
  %
  
  
  100.0
  %
  
  
  100.0
  %Cost of goods soldMaterials
  
  
  47.4
  
  
  
  44.2
  
  
  
  47.2
  
  
  
  44.3Labor
  
  
  10.1
  
  
  
  8.8
  
  
  
  10.2
  
  
  
  8.7Overhead
  
  
  25.3
  
  
  
  28.6
  
  
  
  25.6
  
  
  
  30.382.8
  
  
  
  81.6
  
  
  
  83.0
  
  
  
  83.3Gross profit
  
  
  17.2
  
  
  
  18.4
  
  
  
  17.0
  
  
  
  16.7Selling, general and
  administrative expense
  
  
  12.5
  
  
  
  13.4
  
  
  
  12.5
  
  
  
  13.7Plant realignment costs
  
  
  1.6
  
  
  
  0.2
  
  
  
  0.8
  
  
  
  0.1Special charges
  
  
  
  
  
  
  0.7
  
  
  
  
  
  
  
  0.9Operating income (loss)
  
  
  3.1
  
  
  
  4.1
  
  
  
  3.7
  
  
  
  2.0Other expenseInterest expense, net
  
  
  7.5
  
  
  
  8.9
  
  
  
  7.4
  
  
  
  11.2Foreign currency and other
  
  
  
  
  
  
  2.4
  
  
  
  0.3
  
  
  
  2.17.5
  
  
  
  11.3
  
  
  
  7.7
  
  
  
  13.3Loss before reorganization
  items, income taxes and cumulative effect of change in accounting principle
  
  
  (4.4
  )
  
  
  (7.2
  )
  
  
  (4.0
  )
  
  
  (11.3
  )Reorganization items
  
  
  
  
  
  
  0.4
  
  
  
  137.1
  
  
  
  0.2Income (loss) before income
  taxes and cumulative effect of change in accounting principle
  
  
  (4.4
  )
  
  
  (7.6
  )
  
  
  133.1
  
  
  
  (11.5
  )Income taxes
  
  
  1.4
  
  
  
  1.2
  
  
  
  1.4
  
  
  
  0.6Income (loss) before
  cumulative effect of change in accounting principle
  
  
  (5.8
  )
  
  
  (8.8
  )
  
  
  131.7
  
  
  
  (12.1
  )Cumulative effect of change
  in a accounting principle
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  6.7Net income (loss)
  
  
  (5.8
  )%
  
  
  (8.8
  )%
  
  
  131.7
  %
  
  
  (18.8
  )%  30 Comparison of Three Months
Ended June 28, 2003 and June 29, 2002 The following table sets forth components of the
Companys net sales and operating income (loss) by market segment and operating
division for the three months ended June 28, 2003 and the corresponding
change over the comparable period in 2002 (in thousands, except percent data). Three Months EndedJune 28,
  2003
  
  June 29,
  2002
  
  Change
  
  % ChangeMarket SegmentsNet SalesConsumer
  
  $
  108,637
  
  $
  107,749
  
  $
  888
  
  
  0.8
  %Industrial & Specialty
  
  90,120
  
  93,032
  
  (2,912
  )
  
  (3.1
  )$
  198,757
  
  $
  200,781
  
  $
  (2,024
  )
  
  (1.0
  )Operating income (loss)Consumer
  
  $
  3,639
  
  $
  11,128
  
  $
  (7,489
  )
  
  (67.3
  )Industrial & Specialty
  
  5,626
  
  (1,156
  )
  6,782
  
  
  (586.7
  )9,265
  
  9,972
  
  (707
  )
  
  (7.1
  )Plant realignment costs
  
  (3,159
  )
  (381
  )
  (2,778
  )
  
  729.1Special charges and other unusual items
  
  
  
  (1,466
  )
  1,466
  
  
  100.0$
  6,106
  
  $
  8,125
  
  $
  (2,019
  )
  
  (24.8
  )Operating DivisionNet SalesNonwovens
  
  $
  158,320
  
  $
  158,667
  
  $
  (347
  )
  
  (0.2
  )Oriented Polymers
  
  40,437
  
  42,114
  
  (1,677
  )
  
  (4.0
  )$
  198,757
  
  $
  200,781
  
  $
  (2,024
  )
  
  (1.0
  )Operating income (loss)Nonwovens
  
  $
  5,650
  
  $
  8,534
  
  $
  (2,884
  )
  
  (33.8
  )Oriented Polymers
  
  2,519
  
  2,181
  
  338
  
  
  15.5Unallocated Corporate
  
  (416
  )
  (743
  )
  327
  
  
  (44.0
  )Eliminations
  
  1,512
  
  
  
  1,512
  
  
  9,265
  
  9,972
  
  (707
  )
  
  (7.1
  )Plant realignment costs
  
  (3,159
  )
  (381
  )
  (2,778
  )
  
  729.1Special charges and other unusual items
  
  
  
  (1,466
  )
  1,466
  
  
  100.0$
  6,106
  
  $
  8,125
  
  $
  (2,019
  )
  
  (24.8
  )  Net Sales A reconciliation of the change in net sales between
the three months ended June 28, 2003 and the three months ended June 29,
2002 is presented in the following table (in thousands): Net salesthree
  months ended June 29, 2002
  
  $
  200,781Change in sales due
  to:Volume
  
  (14,360
  )Price/mix
  
  (945
  )Foreign currency
  
  13,281Net salesthree months ended
  June 28, 2003
  
  $
  198,757  31


---

Consolidated net sales were approximately
$198.8 million for the three months ended June 28, 2003, a decrease
of $2.0 million or 1.0% over net sales of $200.8 million for the same
fiscal period in 2002. Net sales was favorably impacted during the second
quarter of 2003 versus the comparable period in 2002 by stronger foreign
currencies versus the U.S. dollar which were substantially offset by volume
declines and unfavorable price / mix. Excluding the favorable effects of
foreign currency translation, similar economic and business issues continued to
impact both the Consumer and Industrial and Specialty market segments during
the second quarter of 2003 as compared to the second quarter of 2002. The
Companys businesses were unfavorably impacted by general economic conditions
in certain regions of the world-wide economy and by the effects of the
financial restructuring efforts associated with the Companys emergence from
Chapter 11, including, in some instances, lost sales from existing customers.
In addition, certain factors contributed to lower net sales during the three
months ended June 28, 2003 as compared to the three months ended June 29,
2002. Lower sales volume in the U.S. hygiene markets and lower sales volume
predominantly within the European hygiene and wipes markets, offset volume
gains in certain regions of the Latin American business. Price / mix was lower
in the second quarter of 2003 versus the comparable period of 2002 within the
U.S. and European consumer markets but were offset somewhat by favorable
pricing with certain industrial sectors. Foreign currencies were stronger against the U.S.
dollar during the three months ended June 28, 2003 versus the same period
in 2002 in the majority of the international regions in which the Company conducts
business. The increase in net sales between the three months ended June 28,
2003 and June 29, 2002 due to favorable foreign currency translation in
Europe, Canada and certain regions of Latin America was approximately $13.3
million. Further discussion of foreign currency exchange rate risk is contained
in Item 3. Quantitative and Qualitative Disclosures About Market Risk. Operating Income A reconciliation of the change in operating income
between the three months ended June 29, 2002 and June 28, 2003 is
presented in the following table (in thousands): Operating incomethree
  months ended June 29, 2002
  
  $
  8,125Change in operating
  income due to:Plant realignment and special charges
  
  (1,312
  )Volume
  
  (3,758
  )Cost savings and other initiatives related to plant
  realignment and business restructuring
  
  2,327Lower depreciation and amortization
  
  4,993Price/mix
  
  (945
  )Raw materials
  
  (8,331
  )Foreign currency
  
  1,352Higher administrative costs associated with historic
  Dominion entities
  
  (12
  )All other
  
  3,667Operating incomethree
  months ended June 28, 2003
  
  $
  6,106  Consolidated operating income was $6.1 million
for the three months ended June 28, 2003. Excluding unusual items, which
consist of plant realignment and special charges, consolidated operating income
decreased $0.7 million over operating income before unusual items of
$10.0 million during the second quarter of fiscal 2002. During the second
quarter of 2003, operating income before unusual items was favorably impacted
by cost savings and other initiatives related to plant realignment and business
restructuring of $2.3 million, lower depreciation and amortization of
approximately $5.0 million resulting from a lower depreciable fixed asset
base produced by asset 32 impairment charges in the
fourth quarter of fiscal 2002 and to the application of fresh start accounting,
and all other of $5.0 million consisting of lower spending and favorable
foreign currency translation. Offsetting these favorable impacts were higher
raw material costs of $8.3 million predominantly in the Consumer U.S. and European
businesses and lower price/mix of $0.9 million. As part of the Companys operational restructuring
plan initiated in the second quarter of 2003, the Company undertook a broader
business restructuring aimed at operating cost reductions involving reduced
headcounts at the manufacturing plant and corporate levels, improved
manufacturing productivity and component costs reductions, implementation of a
global purchasing initiative and business and asset rationalization. This
business restructuring is expected to continue throughout the balance of 2003. Restructuring related charges have not been allocated
to the Companys reportable business segments, for reporting purposes, 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 decreased approximately $2.9 million
from $17.9 million during the three months ended June 29, 2002 to
$15.0 million during the same period in 2003. As of the Petition Date in
2002 and in accordance with SOP 90-7, the Company discontinued accruing
interest on the previously outstanding senior subordinated notes. Refer to
Note 7. Debt for further discussion of the Restructured Credit Facility.
Foreign currency and other decreased approximately $5.1 million, from a
loss of approximately $5.0 million during the three months ended June 29,
2002 to a gain of approximately $0.1 million for the same period in 2003. Income Tax Expense The Company recorded income taxes of $2.9 million
during the three months ended June 28, 2003 predominantly from
international jurisdictions. Implementation of the Modified Plan resulted in
the Company recognizing CODI (as defined in Note 2. Significant Accounting
Policies). All of the CODI is excluded from taxable income. However, the
Company is required to reduce certain of its tax attributes, including net
operating loss carryforwards (NOLs), by an amount not to exceed the CODI it
realized. In general, tax attributes will be reduced at the close of the 2003
tax year in the following order: (i) net operating loss carryforwards; (ii) tax
credits and capital loss carryforwards; and (iii) tax basis in assets. The
Company is currently in the process of determining the amount of the
corresponding reduction of its tax attributes and/or asset basis. It is
anticipated that the Companys net operating loss carryforwards will be
entirely eliminated in 2003 as a result of the reoganization under the Modified
Plan. During the three months ended June 29, 2002 the Company recognized
income tax expense of approximately $2.4 million. Net Income (Loss) The Companys net loss during the three months ended June 28,
2003 was approximately $11.6 million as a result of the factors described
above, as compared to a net loss of $17.8 million during the comparable
period in 2002. 33 Comparison of Six Months Ended
June 28, 2003 and June 29, 2002 The following table
sets forth components of the Companys net sales and operating income (loss) by
market segment and operating division for the six months ended June 28,
2003 and the corresponding change over the comparable period in 2002 (in
thousands, except percent data). Six Months EndedJune 28,
  2003
  
  June 29,
  2002
  
  Change
  
  % ChangeMarket SegmentsNet SalesConsumer
  
  $
  218,637
  
  $
  215,479
  
  $
  3,158
  
  
  1.5
  %Industrial & Specialty
  
  177,096
  
  176,482
  
  614
  
  
  0.3$
  395,733
  
  $
  391,961
  
  $
  3,772
  
  
  1.0Operating income (loss)Consumer
  
  $
  8,289
  
  $
  16,612
  
  $
  (8,323
  )
  
  (50.1
  )Industrial & Specialty
  
  9,715
  
  (4,795
  )
  14,510
  
  
  (302.6
  )18,004
  
  11,817
  
  6,187
  
  
  52.4Plant realignment costs
  
  (3,171
  )
  (557
  )
  (2,614
  )
  
  469.3Special charges and other unusual items
  
  
  
  (3,634
  )
  3,634
  
  
  (100.0
  )$
  14,833
  
  $
  7,626
  
  $
  7,207
  
  
  94.5Operating DivisionNet SalesNonwovens
  
  $
  316,767
  
  $
  312,243
  
  $
  4,524
  
  
  1.4
  %Oriented Polymers
  
  78,966
  
  79,718
  
  (752
  )
  
  (0.9
  )$
  395,733
  
  $
  391,961
  
  $
  3,772
  
  
  1.0Operating income (loss)Nonwovens
  
  $
  11,800
  
  $
  9,599
  
  $
  2,201
  
  
  22.9
  %Oriented Polymers
  
  4,893
  
  4,144
  
  749
  
  
  18.1Unallocated Corporate
  
  (716
  )
  (1,926
  )
  1,210
  
  
  (62.8
  )Eliminations
  
  2,027
  
  
  
  2,027
  
  
  18,004
  
  11,817
  
  6,187
  
  
  52.4Plant realignment costs
  
  (3,171
  )
  (557
  )
  (2,614
  )
  
  469.3Special charges and other unusual items
  
  
  
  (3,634
  )
  3,634
  
  
  (100.0
  )$
  14,833
  
  $
  7,626
  
  $
  7,207
  
  
  94.5  Net Sales A reconciliation of the change in net sales between
the six months ended June 28, 2003 and the six months ended June 29,
2002 is presented in the following table (in thousands): Net salessix months
  ended June 29, 2002
  
  $
  391,961Change in sales due
  to:Volume
  
  (14,526
  )Price/mix
  
  (3,490
  )Foreign currency
  
  21,788Net salessix months ended
  June 28, 2003
  
  $
  395,733  Consolidated net sales were approximately $395.7
million for the six months ended June 28, 2003, an increase of
$3.8 million or approximately 1.0% over net sales of $392.0 million
for the same fiscal period in 2002. The increase in net sales was due primarily
to favorable foreign currencies 34 versus the U.S. dollar offset
by volume declines and unfavorable price / mix.  Excluding the favorable effects of foreign
currency translation, similar economic and business issues continued to impact
both the Consumer and Industrial and Specialty market segments during the
second quarter year to date period of 2003 as compared to the second quarter
year to date period of 2002. The Companys businesses were unfavorably impacted
by general economic conditions in certain regions of the world-wide economy and
by the effects of the financial restructuring efforts associated with the
Companys emergence from Chapter 11, including, in some instances, lost sales
from existing customers. In addition, certain factors that have historically
contributed to lower than anticipated net sales continued to negatively affect
net sales during the six months ended June 28, 2003. Lower sales volume in
the U.S. hygiene and medical markets and lower sales volume predominantly
within the European hygiene and wipes markets, offset volume gains in certain
regions of the Latin American business. Price / mix was lower in the second
quarter year to date period of 2003 versus the comparable period of 2002 within
the U.S. and European consumer markets but were offset somewhat by favorable
pricing with certain industrial sectors. Foreign currencies, predominantly in Europe and
Canada, were stronger against the U.S. dollar during the six months ended June 28,
2003 versus the same period in 2002. The increase in net sales between the six
months ended June 28, 2003 and June 29, 2002 due to favorable foreign
currency translation in Europe and Canada was approximately $23.0 million
offset by the decline of the Argentine peso of $1.2 million. Further
discussion of foreign currency exchange rate risk is contained in Item 3.
Quantitative and Qualitative Disclosures About Market Risk. Operating Income A reconciliation of the change in operating income
between the six months ended June 29, 2002 and June 28, 2003 is
presented in the following table (in thousands): Operating incomesix
  months ended June 29, 2002
  
  $
  7,626Change in operating
  income due to:Plant realignment and special charges
  
  1,020Volume
  
  (3,145
  )Cost savings and other initiatives related to plant
  realignment and business restructuring
  
  6,341Lower depreciation and amortization
  
  10,275Price/mix
  
  (3,490
  )Raw materials
  
  (12,151
  )Foreign currency
  
  1,550Lower administrative costs associated with historic
  Dominion entities
  
  630All other
  
  6,177Operating incomesix months
  ended June 28, 2003
  
  $
  14,833  35


---

Consolidated operating income was $14.8 million
for the six months ended June 28, 2003. Excluding unusual items, which
consist of plant realignment and special charges, consolidated operating income
increased $6.2 million over operating income before unusual items of
$11.8 million during the six months ended June 29, 2002. The increase
in operating income before unusual items was due to cost savings and other
initiatives related to plant realignment and business restructuring of
$6.3 million, lower depreciation and amortization of approximately $10.3
million resulting from a lower depreciable fixed asset base produced by asset
impairment charges in the fourth quarter of fiscal 2002 and to the application
of fresh start accounting, lower administrative costs associated with historic
Dominion entities of $0.6 million and all other of $7.7 million consisting
of lower spending and favorable foreign currency translation. Offsetting these
favorable impacts were higher raw material costs of $12.2 million predominantly
in the Consumer U.S., European and Latin American businesses and lower
price/mix of $3.5 million. As part of the Companys operational restructuring
plan initiated in the second quarter of 2003, the Company undertook a broader
business restructuring aimed at operating cost reductions involving reduced
headcounts at the manufacturing plant and corporate levels, improved
manufacturing productivity and component costs reductions, implementation of a
global purchasing initiative and business and asset rationalization. This
business restructuring is expected to continue throughout the balance of 2003. Restructuring related charges have not been allocated
to the Companys reportable business segments, for reporting purposes, 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 As of the Petition Date and in accordance with SOP
90-7, the Company discontinued accruing interest on the senior subordinated
notes and, as a result, interest expense decreased $14.3 million from
$43.7 million during the six months ended June 29, 2002 to
$29.4 million during the same period in 2003. Refer to Note 7. Debt
for further discussion of the Restructured Credit Facility. Foreign currency
and other losses decreased approximately $5.9 million, from $7.7 million
during the six months ended June 29, 2002 to $1.8 million for the
same period in 2003. Reorganization Items Reorganization gains of $542.6 million were
recognized in the six months ended June 28, 2003. The gains were due to
the gain on cancellation of prepetition indebtedness, offset by fresh start
accounting adjustments and chapter 11 reorganization and other expenses. Income Tax Expense The Company recorded income taxes of $5.4 million
during the six months ended June 28, 2003 predominantly from international
jurisdictions. Implementation of the Modified Plan resulted in the Company
recognizing CODI (as defined in Note 2. Significant Accounting Policies). All
of the CODI is excluded from taxable income. However, the Company is required
to reduce certain of its tax attributes, including net operating loss
carryforwards (NOLs), by an amount not to exceed the CODI it realized. In
general, tax attributes will be reduced at the close of the 2003 tax year in
the following order: (i) net operating loss carryforwards; (ii) tax
credits and capital loss carryforwards; and (iii) tax basis in assets. The
Company is currently in the process of determining the amount of the
corresponding reduction of its tax attributes and/or asset basis. It is
anticipated that the Companys net operating loss carryforwards will be
entirely eliminated in 2003 as a result of the reoganization 36 under the Modified Plan.
During the six months ended June 29, 2002 the Company recognized income
tax expense of approximately $2.4 million. Cumulative Effect of Change in
Accounting Principle As part of the Companys adoption of FAS 142, the
Company completed a transitional impairment test in the fourth quarter of 2002,
as permitted by the standard. The Companys transitional impairment test
resulted in a charge of $12.8 million that was reported as a cumulative
effect of a change in accounting principle in the Companys annual results for
fiscal 2002 and has been allocated to the first fiscal quarter of 2002 for
reporting purposes. Net Income (Loss) The Companys net income during the six months ended June 28,
2003 was approximately $521.2 million as a result of the factors described
above, as compared to a net loss of $60.1 million, as restated, during the
comparable period in 2002. Liquidity and Capital
Resouces June 28,
  2003
  
  December 28,
  2002(In Thousands)Balance sheet data:Cash and short-term investments
  
  $
  26,068
  
  $
  58,147Working capital
  
  159,062
  
  219,905Working capital, excluding current portion of long-term
  debt and liabilities subject to compromise
  
  193,228
  
  244,521Total assets
  
  727,603
  
  811,319Total debt
  
  487,778
  
  1,092,365Shareholders equity
  (deficit)
  
  75,217
  
  (465,914
  )  Six Months EndedJune 28,
  2003
  
  June 29,
  2002(In Thousands)Cash flow data:Net cash (used in) provided by operating activities
  
  $
  (8,340
  )
  $
  21,496Net cash (used in) provided by investing activities
  
  (2,722
  )
  300Net cash (used in)
  financing activities
  
  (16,720
  )
  (12,455
  )  Operating Activities Net cash used in operating activities was
$8.3 million during the six months ended June 28, 2003 compared to
cash provided by operating activities of $21.5 million during the six months
ended June 29, 2002. The Companys cash generation from operations during
the first six months of 2002 was favorably impacted by the amount of accrued
interest on the previously outstanding senior subordinated debt which was
classified as subject to compromise at June 29, 2002.  During the first six months of 2003, the
Company paid certain liabilities previously classified as subject to compromise
and has since been focused on the efficient management of working capital. Operating
losses, predominantly within the U.S. Nonwovens business, continue to
negatively impact cash flow in 2003. The Company had working capital of
approximately $159.1 million at June 28, 2003. Excluding the current
portion of indebtedness, working capital was $193.2 million at June 28,
2003, compared to working capital, excluding current portion of indebtedness,
at December 28, 2002 of $244.5 million. Accounts receivable on June 28,
2003 was $134.9 million as compared to $117.4 million on 37 December 28, 2002, an
increase of $17.5 million or 14.9%. Accounts receivable represented 62 days
of sales outstanding at June 28, 2003 versus 57 days outstanding on December 28,
2002. The increase in accounts receivable and in days sales outstanding is due
primarily to longer collection cycles  and weaker economic conditions in certain regions
of Latin America during the six months ended June 28, 2003; higher
accounts receivable balances within the agriculture portion of the Oriented
Polymers business attributable to the normal business cycle within this unit; timing
of collections within the U.S. Nonwovens business; and foreign currency
translation in the international businesses. Inventories at June 28, 2003
were approximately $114.1 million, a decrease of $1.6 million over
inventories of $115.7 million at December 28, 2002. The Company had
approximately 63 days of inventory on hand at June 28, 2003 versus 66
days of inventory on hand at December 28, 2002. Accounts payable at June 28,
2003 was $42.8 million, a decrease of $3.3 million, over accounts payable at December 28,
2002 of $46.1 million. Prior to the Petition Date, the Company classified
expenses related to its financial restructuring efforts as Special charges in
the consolidated statement of operations. Such charges consist of professional
and other related services that were expensed as incurred. After the Petition
Date, costs related to the Companys reorganization activities were also
expensed as incurred and have been classified as Chapter 11 reorganization
expenses in accordance with SOP 90-7. The cumulative amount of costs and
expenses related to the Companys financial restructuring efforts, including
bank financing fees, have been approximately $45.6 million. As a result of the Companys financial condition,
certain suppliers have continued to request alternative payment provisions.
However, such alternative payment provisions have not currently had a
significant negative impact on the Companys liquidity. The Companys 2003 Restructuring is discussed in
Note 6. Business Restructuring and Impairment. Investing and Financing
Activities Capital expenditures during the first six months of
2003 totaled $14.6 million, an increase of $10.2 million from capital
spending of $4.4 million during the same period in fiscal 2002. During the
fourth quarter of 2002, the Company entered into an agreement with Reifenhauser &
Co. GmbH for the purchase and installation of a Reicofil 3.1 SSXS nonwovens
production line (Line 5) at its San Luis Potosi, Mexico manufacturing site.
The total commitment for Line 5 approximates $22.0 million. Approximately
$13.1 million has been funded toward Line 5, including building expansion,
through the six months ended June 28, 2003. The remaining portion of the
total commitment for construction of Line 5 is expected to be funded
during fiscal 2003 and 2004. A complete description of the Companys emergence from
Chapter 11 is described in Note 4. Recapitalization. The Companys Restructured Credit Facility provides
for secured revolving credit borrowings with aggregate commitments of up to
$50.0 million and aggregate term loans and term letters of credit of
$435.3 million. Subject to certain terms and conditions, a portion of the
Restructured Credit Facility may be used for revolving letters of credit. As of
June 28, 2003, the Company had availability of $50.0 million under
the revolving portion of the Restructured Credit Facility. All borrowings under
the Restructured Credit Facility are U.S. dollar denominated and are
guaranteed, on a joint and several basis, by each and all of the direct and
indirect domestic subsidiaries of the Company and certain non-domestic
subsidiaries of the Company. The Restructured Credit Facility and the related
guarantees are secured by (i) a lien on substantially all of the assets of
the Company, its domestic subsidiaries and certain of its non-domestic
subsidiaries, (ii) a pledge of all or a portion of the stock of the
domestic subsidiaries of the Company and of certain non-domestic subsidiaries
of the Company, and (iii) a pledge of certain secured intercompany notes
issued to the Company or one or more of its 38 subsidiaries by non-domestic
subsidiaries. Commitment fees under the Restructured Credit Facility are equal
to 0.75% of the daily-unused amount of the revolving credit commitment.
The Restructured Credit Facility contains covenants and events of default
customary for financings of this type, including leverage, senior leverage,
interest coverage and adjusted interest coverage. The Restructured Credit
Facility terminates on December 31, 2006. The loans are subject to
mandatory prepayment out of proceeds received in connection with certain
casualty events, asset sales and debt and equity issuances and from excess cash
flow. The interest rate applicable to borrowings under the
Restructured Credit Facility is based on a specified base rate or a specified
Eurodollar base rate, at the Companys option, plus a specified margin. The
applicable margin for revolving credit loans bearing interest based on the base
rate is 2.75%, and the margin for revolving credit loans bearing interest on a
Eurodollar rate is 3.75%. The applicable margin for term loans bearing interest
based on the base rate will range from 4.00% to 8.00%, and the margin for term
loans bearing interest on a Eurodollar rate will range from 5.00% to 9.00%, in
each case based on the Companys ratio of senior consolidated indebtedness to
consolidated EBITDA calculated on a rolling four quarter basis. In addition, if
the Companys ratio of senior consolidated indebtedness to consolidated EBITDA
calculated on a rolling four quarter basis exceeds 5.00 to 1, the Company is required
to pay to the term loan lenders and the term letter of credit lenders a fee of
1.00% on the outstanding balance under the term loans and the term letters of
credit. The interest rate on the Restructured Credit Facility is capped at 12%.
Amendment No. 1 to the Restructured Credit Facility is discussed in
Note 7. Debt. Refer to Note 13. Certain Matters for a complete
description of the MSA between Galey and the Company.  In addition, refer to Note 16. Other
Developments for a discussion of the settlement agreement between the Company
and its former Chief Executive Officer. Effect of Inflation and
Foreign Currency Inflation generally affects the Company by increasing
the cost of labor, equipment and raw materials. The Companys substantial
foreign operations expose it to the risk of foreign currency exchange rate
fluctuations. If foreign currency denominated revenues is 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. New Accounting Standards Refer to Note 2. Significant Accounting Policies
for a complete discussion of recently issued standards and their anticipated
effect on the Companys results of operations. 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 39 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 is effective for fiscal years beginning after December 15,
2001. The Company recognized a non-cash charge of $96.7 million, of which
approximately $12.8 million was recognized as a cumulative effect of a
change in accounting principle, for the write-down of goodwill and other
intangibles in accordance with FAS 142 during fiscal 2002. 40


---

Impairment of Long-Lived Assets:   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. The company recognized
a non-cash charge of $234.0 million for the write-down of property, plant
and equipment in accordance with FAS 144 during fiscal 2002. 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
judgments, 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. Euro currency has been issued and
effective July 2002, the respective national currencies were 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. 41 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK Foreign
Currency Exchange Rate Risk The Company manufactures,
markets and distributes certain of its products in Europe, Canada, Latin
America and the Far East. As a result, the Companys financial results could be
significantly affected by factors such as changes in foreign currency 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 2002
certain currencies of countries in which the Company conducts foreign currency
denominated business weakened against the U.S. dollar and had a significant
impact on sales and operating income. See Managements Discussion and Analysis
of Financial Condition and Results of Operations within the Companys Annual
Report on Form 10-K for 2002 for additional discussion of the foreign
currency impact on the Companys results of operations. For the three months
and six months ended June 28, 2003, 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,
before special items, by approximately $1.1 million and $2.2 million,
respectively. 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. 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 January 2003,
several suppliers of key raw materials, including polypropylene and
polyethylene, announced price increases to take effect beginning as early as February 2003.
To the extent the Company is not able to pass along all or a portion of such
increased prices of raw materials, the Companys cost of goods sold would
increase and its EBITDA would correspondingly decrease. By way of example, if
the price of polypropylene were to rise $.01 per pound, and the Company was not
able to pass along any of such increase to its customers, the Company would
realize a decrease of approximately $2.0 million on an annualized basis in
its reported EBITDA. 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. Safe
Harbor Statement This Form 10-Q
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 42 forward-looking
statements as a result of a variety of factors and conditions which include,
but are not limited to: the emergence by the Company and its domestic
subsidiaries from Chapter 11 of the United States Bankruptcy Code, 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, potential defaults in the
Companys outstanding indebtedness, and other risks detailed in documents filed
by the Company with the Securities and Exchange Commission. ITEM 4.
CONTROLS AND PROCEDURES Evaluation
of Disclosure Controls and Procedures The Companys principal
executive officer and its principal financial officer, after evaluating the
effectiveness of the Companys disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14), have concluded that the Companys
disclosure controls and procedures were adequate and effective to ensure that
material information relating to the Company and its consolidated subsidiaries
would be made known to them by others within those entities. Changes
in Internal Controls There were no significant
changes in the Companys internal controls or in other factors that could
significantly affect the Companys disclosure controls and procedures
subsequent to the date of their evaluation, nor were there any significant
deficiencies or material weaknesses in the Companys internal controls. As a
result, no corrective actions were required or undertaken. 43


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PART II.
OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Not applicable. ITEM 2. CHANGES IN SECURITITES See Note 4. Recapitalization for a discussion
of the Modified Plan. ITEM 3. DEFAULTS UPON SENIOR
SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO
A VOTE OF SECURITY HOLERS Not applicable. ITEM 5. OTHER INFORMATION Not applicable. ITEM 6. EXHIBITS AND REPORTS
ON FORM 8-K Exhibits Exhibits required to be filed with this report on Form 10-Q
are listed in the following Exhibit Index. Reports on Form 8-K Not applicable. 44


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SIGNATURES Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized. POLYMER GROUP, INC.By:
  /s/James
  L. SchaefferJames L. SchaefferChief Executive Officer and  Acting Principal Financial OfficerAugust 12, 2003  45


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EXHIBIT
INDEX Exhibit Number
  
  
  Document Description4.1
  
  Amendment No. 2 dated as of June 25, 2003,
  between Polymer Group, Inc., the Guarantors, and JPMorgan Chase Bank, as
  administrative agent for the Lenders.31.1
  
  Certification of Chief Executive Officer31.2
  
  Certification of Chief Financial Officer32.1
  
  Certification by the Chief Executive Officer
  pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
  Section 906 of the Sarbanes-Oxley Act of 2002.32.2
  
  Certification by the Acting Chief Financial Officer
  pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
  Section 906 of the Sarbanes-Oxley Act of 2002.99.1
  
  Settlement Agreement dated July 23, 2003,
  between Jerry Zucker and Polymer Group, Inc.  46


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