**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**FORM 10-Q/A**

**(AmendmentNo. 1)**
| **x**      | ** **                                             | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**  |
|------------|--------------------------------------------------------|--------------------------------------------------------------------------------------------------------------|
| ** ** | **For  the quarterly period ended April 2, 2005** |
| **o**      | ** **                                             | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |

 

**Forthe transition periodfrom               to**

**Commissionfile number: 1-14330**

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POLYMER GROUP, INC.

**(Exactname of registrant as specified in its charter)**
| **Delaware**                                                                 | **57-1003983**                        |
|------------------------------------------------------------------------------|---------------------------------------|
| (State or other  jurisdiction of   incorporation or organization)            | (I.R.S. Employer  Identification No.) |
| **4055 Faber Place Drive, Suite 201  North Charleston, South Carolina** | **29405**                             |
| (Address of  principal executive offices)                                    | (Zip Code)                            |

 

Registrant’s telephone number, including area code: **(843) 329-5151**

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to the filing requirementsfor the past 90 days.   Yes x   No o

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act)   Yes o   No x

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).   Yes o   No x

Indicate by check markwhether the registrant has filed all documents and reports required to be filedby Section 12, 13 or 15(d) of the Securities ExchangeAct of 1934 subsequent to the distribution of securities under a plan confirmedby a court.   Yes x   No o

On May 13, 2005 therewere 10,228,471 shares of Class A common stock, 162,754 shares of Class Bcommon stock and 33,402 shares of Class C common stock outstanding.No shares of Class D or Class E common stock were outstanding as ofsuch date. The par value for each class of common shares is $.01 pershare.

 

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**POLYMER GROUP, INC.**

**INDEXTO FORM 10-Q/A**
|                                                       | ** ** | ** **                                                                                   | ** ** | **Page** |
|-------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|----------|
| EXPLANATORY NOTE                                      |       | 2                                                                                            |
| IMPORTANT INFORMATION REGARDING THIS FORM 10-Q/A |       | 2                                                                                            |
| **PART I.  FINANCIAL INFORMATION**               |       |                                                                                         |
| Item 1.                                               |       | Financial Statements                                                                         |       | 4        |
| Item 2.                                               |       | Management’s  Discussion and Analysis of Financial Condition  and Results of Operations |       | 24       |
| Item 3.                                               |       | Quantitative  and Qualitative Disclosures About Market Risk                                  |       | 35       |
| Item 4.                                               |       | Controls and  Procedures                                                                     |       | 36       |
| **PART II.  OTHER INFORMATION**                  |       |                                                                                         |
| Item 1.                                               |       | Legal Proceedings                                                                            |       | 37       |
| Item 2.                                               |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                 |       | 37       |
| Item 3.                                               |       | Defaults Upon  Senior Securities                                                             |       | 37       |
| Item 4.                                               |       | Submission of  Matters To a Vote of Security Holders                                         |       | 37       |
| Item 5.                                               |       | Other Information                                                                            |       | 37       |
| Item  6.                                              |       | Exhibits                                                                                     |       | 37       |
| Signatures                                            |       | 38                                                                                           |

 

1

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**EXPLANATORY NOTE**

This Amendment No. 1 on Form 10-Q/A (“Form 10-Q/A”)to the Company’s Quarterly Report on Form 10-Q for the quarterlyperiod ended April 2, 2005, originally filed with the Securities andExchange Commission (the “SEC”) on May 16, 2005, is being filed to reflecta restatement of its Consolidated Financial Statements as of, and for the threemonths ended, April 2, 2005, as discussed in Note 1 to the Consolidated FinancialStatements, included in Item 1 to this Form 10-Q/A.

On August 8, 2005, the Audit Committee of theBoard of Directors of the Company, in consultation with management of theCompany and the Company’s independent registered public accounting firm,concluded that this Form 10-Q/A should be filed to correct the accountingfor dividends paid-in-kind on the Company’s 16% Series A ConvertiblePay-in-kind Preferred Stock (the “PIK Preferred Shares”). Accordingly, theCompany is herein restating its unaudited quarterly financial statements forthe three months ended April 2, 2005. The effect of this correction reflectsdividends paid-in-kind on the PIK Preferred Shares at their estimated fairvalue at the date of the dividend declaration by the Company’s Board ofDirectors, in excess of dividends previously accrued at the stated rate of16.0%, resulting in the recording of an additional $8.5 million non-cashdividend, which reduced the amount of income applicable to common shareholdersand retained earnings by such amount, with a corresponding increase toadditional paid-in capital. The Company believes that this revised presentationis consistent with accounting principles generally accepted in the UnitedStates. This restatement does not affect previously reported net income, cashflows or total shareholders’ equity as of, and for the three months ended April 2,2005, nor will it have any impact on future results of operations.

Except for the foregoingamended information, this Form 10-Q/A continues to describeconditions as of the date of the original filing, and any disclosures toreflect events that occurred at a later date have not been updated. Otherevents occurring after the original filing or other disclosures necessary toreflect subsequent events have been, or will be, addressed in reports filedwith the SEC subsequent to the date of the original filing. In accordance withthe rules of the SEC, the affected items of the original Form 10-Q,Items 1, 2 and 4 of Part I are being amended and restated in theirentirety. Except as described above, no other amendments are being made to the originalQuarterly Report on Form 10-Q. This Form 10-Q/A does notreflect events occurring after the original filing, or substantively modify orupdate the disclosure contained in the original Form 10-Q in any wayother than as required to reflect the amendments described above. In addition,pursuant to the rules of the SEC, currently-dated certifications from ourChief Executive Officer and Chief Financial Officer are attached to this Form 10-Q/Aas Exhibits 31.1, 31.2, 32.1 and 32.2, respectively.

**IMPORTANT INFORMATION REGARDING THIS FORM 10-Q/A**

Readers should considerthe following information as they review this Form 10-Q/A:

**SafeHarbor-Forward-Looking Statements**

From time to time, the Company may publish forward-lookingstatements relative to matters such as, including without limitation,anticipated financial performance, business prospects, technologicaldevelopments, new products, research and development activities and similarmatters. The Private Securities Litigation Reform Act of 1995 provides a safeharbor for forward-looking statements. Forward-looking statementsare generally accompanied by words such as “estimate,” “project,” “predict,” “believe,”“expect,” “anticipate” or other words that convey the uncertainty of futureevents or outcomes.

Various statements contained in this report, includingthose that express a belief, expectation or intention, as well as those thatare not statements of historical fact are, or may be deemed to be, forward-lookingstatements within the meaning of Section 27A of the Securities Act of1933, as amended, and Section 21E of the Securities Exchange Act of 1934,as amended. These forward-looking statements 

2

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speak only as of the dateof this report. Unless required by law, the Company does not undertake anyobligation to update these statements and cautions against any undue relianceon them. These forward-looking statements are based on currentexpectations and assumptions about future events. While management considersthese expectations and assumptions to be reasonable, they are inherentlysubject to significant business, economic, competitive, regulatory and otherrisks, contingencies and uncertainties, most of which are difficult to predictand many of which are beyond the Company’s control. There can be no assurancesthat these events will occur or that the Company’s results will be asestimated.

Important factorsthat could cause actual results to differ materially from those discussed insuch forward-looking statements include:

·       uncertaintyregarding the effect or outcome of the Company’s decision to explore strategicalternatives;

·       generaleconomic factors including, but not limited to, changes in interest rates,foreign currency translation rates, consumer confidence, trends in disposableincome, changes in consumer demand for goods produced, and cyclical or otherdownturns;

·       substantialdebt levels and potential inability to maintain sufficient liquidity to financethe Company’s operations and make necessary capital expenditures;

·       inabilityto meet existing debt covenants;

·       informationand technological advances;

·       changesin environmental laws and regulations;

·       costand availability of raw materials, labor and natural and other resources andthe inability to pass raw material cost increases along to customers;

·       domesticand foreign competition;

·       relianceon major customers and suppliers; and

·       risksrelating to operations in foreign jurisdictions.

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**ITEM 1.**                FINANCIALSTATEMENTS

**POLYMER GROUP, INC.CONSOLIDATED BALANCE SHEETS (Unaudited)(In Thousands, Except Share Data)**
| ** **                                                                                                                                                       | ** ** | **Restated**            | ** ** | ** **                | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|---------------------------|------------|
| ** **                                                                                                                                                       | ** ** | **April 2,  2005** | ** ** | **January 1,  2005** | ** ** |
| **ASSETS**                                                                                                                                                       |       |                    |       |                      |       |   |   |   |   |
| Current assets:                                                                                                                                                  |       |                    |       |                      |       |   |   |   |   |
| Cash and cash equivalents                                                                                                                                        |       |                    | $          | 21,618                    |       |   |   | $ | 41,296 |   |   |
| Accounts receivable, net                                                                                                                                         |       |                    | 132,893    |                      |       |   | 112,286 |   |   |
| Inventories                                                                                                                                                      |       |                    | 112,466    |                      |       |   | 106,349 |   |   |
| Deferred income taxes                                                                                                                                            |       |                    | 233        |                      |       |   | 226 |   |   |
| Other current assets                                                                                                                                             |       |                    | 39,995     |                      |       |   | 37,140 |   |   |
| Total current assets                                                                                                                                             |       |                    | 307,205    |                      |       |   | 297,297 |   |   |
| Property, plant  and equipment, net                                                                                                                              |       |                    | 395,858    |                      |       |   | 402,603 |   |   |
| Intangibles and  loan acquisition costs, net                                                                                                                     |       |                    | 47,340     |                      |       |   | 48,819 |   |   |
| Deferred income  taxes                                                                                                                                           |       |                    | 1,470      |                      |       |   | 1,489 |   |   |
| Other assets                                                                                                                                                     |       |                    | 5,083      |                      |       |   | 3,145 |   |   |
| Total assets                                                                                                                                                     |       |                    | $          | 756,956                   |       |   |   | $ | 753,353 |   |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                   |       |                    |       |                      |       |   |   |   |   |
| Current liabilities:                                                                                                                                             |       |                    |       |                      |       |   |   |   |   |
| Short-term borrowings                                                                                                                                            |       |                    | $          | 6,574                     |       |   |   | $ | 6,981 |   |   |
| Accounts payable                                                                                                                                                 |       |                    | 61,683     |                      |       |   | 63,773 |   |   |
| Accrued liabilities                                                                                                                                              |       |                    | 38,983     |                      |       |   | 33,365 |   |   |
| Income taxes payable                                                                                                                                             |       |                    | 6,992      |                      |       |   | 2,427 |   |   |
| Current portion of long-term debt                                                                                                                                |       |                    | 3,019      |                      |       |   | 3,413 |   |   |
| Total current liabilities                                                                                                                                        |       |                    | 117,251    |                      |       |   | 109,959 |   |   |
| Long-term debt                                                                                                                                                   |       |                    | 402,806    |                      |       |   | 403,560 |   |   |
| Deferred income  taxes                                                                                                                                           |       |                    | 64,546     |                      |       |   | 65,468 |   |   |
| Other noncurrent  liabilities                                                                                                                                    |       |                    | 21,537     |                      |       |   | 27,319 |   |   |
| Total liabilities                                                                                                                                                |       |                    | 606,140    |                      |       |   | 606,306 |   |   |
| Minority interests                                                                                                                                               |       |                    | 15,557     |                      |       |   | 14,912 |   |   |
| 16% Series A  convertible pay-in-kind preferred shares—58,251 and 52,716 shares issued and  outstanding at April 2, 2005 and January 1, 2005 |       |                    | 60,639     |                      |       |   | 58,286 |   |   |
| Shareholders’ equity:                                                                                                                                       |       |                    |       |                      |       |   |   |   |   |
| Class A common stock—10,214,399 and 10,130,477  shares issued and outstanding at April 2, 2005 and January 1, 2005,  respectively            |       |                    | 101        |                      |       |   | 101 |   |   |
| Class B convertible common stock—176,826 and  193,390 shares issued and outstanding at April 2, 2005 and  January 1, 2005, respectively      |       |                    | 2          |                      |       |   | 2 |   |   |
| Class C convertible common stock—33,402 and  54,194 shares issued and outstanding at April 2, 2005 and  January 1, 2005, respectively        |       |                    | 1          |                      |       |   | 1 |   |   |
| Class D convertible common stock—0 shares issued  and outstanding                                                                                      |       |                    | —     |                      |       |   | — |   |   |
| Class E convertible common stock—0 shares issued  and outstanding                                                                                      |       |                    | —     |                      |       |   | — |   |   |
| Additional paid-in capital                                                                                                                                       |       |                    | 86,128     |                      |       |   | 77,219 |   |   |
| Retained earnings (deficit)                                                                                                                                      |       |                    | (39,505    | )                         |       |   | (33,820 | ) |   |
| Accumulated other comprehensive income                                                                                                                           |       |                    | 27,893     |                      |       |   | 30,346 |   |   |
| Total shareholders’ equity                                                                                                                                  |       |                    | 74,620     |                      |       |   | 73,849 |   |   |
| Total liabilities  and shareholders’ equity                                                                                                                 |       |                    | $          | 756,956                   |       |   |   | $ | 753,353 |   |   |

 

See Accompanying Notes.

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**POLYMER GROUP, INC.CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)Three Months Ended April 2, 2005 and April 3, 2004(In Thousands, Except Per Share Data)**
| ** **                                                  | ** ** | **Restated**                                          | ** ** | ** **                                            | ** ** |
|-------------------------------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                  | ** ** | **Three Months  Ended  April 2, 2005** | ** ** | **Three Months  Ended  April 3, 2004** | ** ** |
| Net sales                                                   |       |                                                  | $          | 244,361                                               |       |   |   | $ | 206,242 |   |   |
| Cost of goods  sold                                         |       |                                                  | 200,444    |                                                  |       |   | 168,266 |   |   |
| Gross profit                                                |       |                                                  | 43,917     |                                                  |       |   | 37,976 |   |   |
| Selling, general  and administrative expenses               |       |                                                  | 27,467     |                                                  |       |   | 26,633 |   |   |
| Plant realignment  costs                                    |       |                                                  | 4          |                                                  |       |   | 584 |   |   |
| Operating income                                            |       |                                                  | 16,446     |                                                  |       |   | 10,759 |   |   |
| Other expense (income):                                     |       |                                                  |       |                                                  |       |   |   |   |   |
| Interest expense, net                                       |       |                                                  | 7,866      |                                                  |       |   | 15,177 |   |   |
| Minority interests                                          |       |                                                  | 934        |                                                  |       |   | 482 |   |   |
| Foreign currency and other                                  |       |                                                  | (315       | )                                                     |       |   | 1,385 |   |   |
| Income (loss)  before income tax expense                    |       |                                                  | 7,961      |                                                  |       |   | (6,285 | ) |   |
| Income tax  expense                                         |       |                                                  | 2,795      |                                                  |       |   | 2,485 |   |   |
| Net income (loss)                                           |       |                                                  | 5,166      |                                                  |       |   | (8,770 | ) |   |
| Accrued and  paid-in-kind dividends on PIK preferred shares |       |                                                  | 10,851     |                                                  |       |   | — |   |   |
| Loss applicable  to common shareholders                     |       |                                                  | $          | (5,685                                                | )          |   |   | $ | (8,770 | ) |   |
| Loss per common share:                                      |       |                                                  |       |                                                  |       |   |   |   |   |
| Basic                                                       |       |                                                  | $          | (0.55                                                 | )          |   |   | $ | (1.00 | ) |   |
| Diluted                                                     |       |                                                  | $          | (0.55                                                 | )          |   |   | $ | (1.00 | ) |   |

 

See Accompanying Notes.

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**POLYMER GROUP, INC.**

**CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’EQUITY AND COMPREHENSIVE INCOME (LOSS) (Unaudited)**

**For the Three Months Ended April 2, 2005**

**(In Thousands)**
| ** **                                                            | ** ** | **Common  Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Retained  Earnings/  (Deficit)** | ** ** | **Accumulated  Other  Comprehensive  Income/  (Loss)** | ** ** | **Total** | ** ** | **Comprehensive  Income/(Loss)** | ** ** |
|-----------------------------------------------------------------------|------------|-------------------|------------|----------------------------------|------------|------------------------------------|------------|--------------------------------------------------------|------------|-----------|------------|----------------------------------|------------|
| Balance,  January 1, 2005, audited                               |       |              | $          | 104                              |       |                               |       | $                                                      | 77,219     |      |       | $                                | (33,820    | ) |   | $ | 30,346 |   |   | $ | 73,849 |   |   |   |   |   |   |   |
| Net income                                                            |       |              | —     |                             |       |                               | —     |                                                   |       | 5,166     |       |                             | —     |   |   | 5,166 |   |   |   |   | $ | 5,166 |   |   |
| Accrued and  paid-in-kind dividends on PIK preferred shares           |       |              | —     |                             |       |                               | 8,493      |                                                   |       | (10,851   | )          |                             | —     |   |   | (2,358 | ) |   |   |   | — |   |   |
| Currency  translation adjustment                                      |       |              | —     |                             |       |                               | —     |                                                   |       | —    |       |                             | (4,123     | ) |   | (4,123 | ) |   |   |   | (4,123 | ) |   |
| Cash flow hedge  adjustment, net of reclassification adjustment       |       |              | —     |                             |       |                               | —     |                                                   |       | —    |       |                             | 1,670      |   |   | 1,670 |   |   |   |   | 1,670 |   |   |
| Compensation  recognized on stock options and restricted stock grants |       |              | —     |                             |       |                               | 411        |                                                   |       | —    |       |                             | —     |   |   | 411 |   |   |   |   | — |   |   |
| Conversion of PIK  preferred shares to Class A common stock      |       |              | —     |                             |       |                               | 5          |                                                   |       | —    |       |                             | —     |   |   | 5 |   |   |   |   | — |   |   |
| Balance, April 2,  2005, as restated                             |       |              | $          | 104                              |       |                               |       | $                                                      | 86,128     |      |       | $                                | (39,505    | ) |   | $ | 27,893 |   |   | $ | 74,620 |   |   |   |   | $ | 2,713 |   |   |

 

See Accompanying Notes.

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**POLYMER GROUP, INC.CONSOLIDATED STATEMENTS OF CASH FLOW (Unaudited)(In Thousands)**
| ** **                                                                                           | ** ** | **Three Months  Ended  April 2, 2005** | ** ** | **Three Months  Ended  April 3, 2004** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------|------------|
| Operating activities:                                                                                |       |                                                  |       |                                                  |       |   |   |   |   |
| Net income (loss)                                                                                    |       |                                                  | $          | 5,166                                                 |       |   |   | $ | (8,770 | ) |   |
| Adjustments to  reconcile net income (loss) to net cash provided by (used in) operating  activities: |       |                                                  |       |                                                  |       |   |   |   |   |
| Deferred income taxes                                                                                |       |                                                  | 1,545      |                                                  |       |   | (1,729 | ) |   |
| Depreciation and amortization                                                                        |       |                                                  | 13,663     |                                                  |       |   | 13,155 |   |   |
| Noncash interest and compensation                                                                    |       |                                                  | 411        |                                                  |       |   | 1,104 |   |   |
| Changes in  operating assets and liabilities:                                                        |       |                                                  |       |                                                  |       |   |   |   |   |
| Accounts receivable, net                                                                             |       |                                                  | (22,592    | )                                                     |       |   | (7,193 | ) |   |
| Inventories                                                                                          |       |                                                  | (7,725     | )                                                     |       |   | (6,835 | ) |   |
| Other current assets                                                                                 |       |                                                  | (3,210     | )                                                     |       |   | (163 | ) |   |
| Accounts payable and accrued liabilities                                                             |       |                                                  | 1,950      |                                                  |       |   | 2,737 |   |   |
| Other, net                                                                                           |       |                                                  | 2,770      |                                                  |       |   | 650 |   |   |
| Net cash provided by (used in)  operating activities                                                 |       |                                                  | (8,022     | )                                                     |       |   | (7,044 | ) |   |
| Investing activities:                                                                                |       |                                                  |       |                                                  |       |   |   |   |   |
| Purchases of property, plant and equipment                                                           |       |                                                  | (10,095    | )                                                     |       |   | (4,504 | ) |   |
| Proceeds from sale of assets                                                                         |       |                                                  | 354        |                                                  |       |   | 783 |   |   |
| Net cash provided by (used in) investing activities                                                  |       |                                                  | (9,741     | )                                                     |       |   | (3,721 | ) |   |
| Financing activities:                                                                                |       |                                                  |       |                                                  |       |   |   |   |   |
| Proceeds from issuance of debt                                                                       |       |                                                  | 744        |                                                  |       |   | 18,500 |   |   |
| Repayment of debt                                                                                    |       |                                                  | (2,299     | )                                                     |       |   | (13,803 | ) |   |
| Loan acquisition costs and other                                                                     |       |                                                  | (15        | )                                                     |       |   | — |   |   |
| Net cash provided by (used in) financing  activities                                                 |       |                                                  | (1,570     | )                                                     |       |   | 4,697 |   |   |
| Effect of  exchange rate changes on cash                                                             |       |                                                  | (345       | )                                                     |       |   | (102 | ) |   |
| Net increase  (decrease) in cash and cash equivalents                                                |       |                                                  | (19,678    | )                                                     |       |   | (6,170 | ) |   |
| Cash and cash  equivalents at beginning of period                                                    |       |                                                  | 41,296     |                                                  |       |   | 21,336 |   |   |
| Cash and cash  equivalents at end of period                                                          |       |                                                  | $          | 21,618                                                |       |   |   | $ | 15,166 |   |   |

 

See Accompanying Notes.

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**POLYMER GROUP, INC. Notes to Consolidated Financial Statements**

**Note 1.**   Principles ofConsolidation and Financial Statement Information

*Principles of Consolidation*

Polymer Group, Inc. (the “Company”)is a publicly-traded, multinational manufacturer, marketer and seller ofnonwoven and oriented polyolefin products. The Company’s main sources ofrevenue are the sales of primary and intermediate products to the medical,hygiene, wipes and industrial and specialty markets.

The accompanying ConsolidatedFinancial Statements include the accounts of Polymer Group, Inc. and allmajority-owned subsidiaries after elimination of all significant intercompanyaccounts and transactions. The accounts of all foreign subsidiaries have beenincluded on the basis of fiscal periods ended three months or less prior to thedates of the consolidated balance sheets. All amounts are presented in U.S.dollars, unless otherwise noted.

Theaccompanying unaudited interim Consolidated Financial Statements and relatednotes should be read in conjunction with the Consolidated Financial Statementsof the Company and related notes as contained in the Annual Report on Form 10-Kfor the period ended January 1, 2005. In the judgment of management, theseunaudited interim Consolidated Financial Statements include all adjustments ofa normal recurring nature and accruals necessary for a fair presentation ofsuch statements. The Consolidated Balance Sheet data included herein as of January 1,2005 has been derived from the audited financial statements included in theCompany’s Annual Report on Form 10-K.

*Restatement of Results for theThree Months Ended April 2, 2005*

On January 14, 2005,pursuant to the terms of the Company’s PIK Preferred Shares, PGI’s Board ofDirectors declared a dividend payable in the form of 5,540 PIK Preferred Shares.The dividends were paid on January 21, 2005 to holders of record as of May 15,2004 and December 15, 2004, for accrued and unpaid dividends from thedates of issuance of the PIK Preferred Shares through December 31, 2004. Thestated amount of the dividend at 16% annually was accrued by the Company during2004.

The Audit Committee of the Boardof Directors, in consultation with management of the Company and the Company’sindependent registered public accounting firm, has recently concluded that itsConsolidated Statement of Operations for the three months ended April 2,2005 should be restated to reflect the dividend paid-in-kind through theissuance of 5,540 PIK Preferred Shares at the estimated fair value of theshares issued rather than the stated amount of the dividend. The estimated fairvalue of the shares issued exceeded the stated amount that was previouslyaccrued.

The PIK Preferred Shares allow holders to convert thoseshares into the Company’s Class A Common Stock at an initial conversionrate of 137.14286 Class A Common Shares per PIK Preferred Share whichapproximates an initial conversion price of $7.29 per share. As the 5,540 PIKPreferred Shares were convertible into Class A Common Stock with anestimated value of $14.1 million (based on the closing stock price of $18.50per share on the date the dividends were declared), the results for the firstquarter are herein restated to reflect an additional dividend charge equal tothe difference between the $14.1 million estimated fair value and the $5.6million of dividends previously accrued and charged to retained earnings. Theeffect of the restatement on the Consolidated Statement of Operations increasesthe charge for dividends on PIK Preferred Shares and reduces income applicableto common shareholders by approximately $8.5 million. As a result of theissuance of such additional 

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**POLYMER GROUP, INC. Notes to Consolidated Financial Statements (Continued)**

PIK Preferred Shares, the Companyhas restated herein its Consolidated Statement of Operations for the threemonths ended April 2, 2005 to reflect the paid-in-kind dividends at the estimatedfair value of the underlying securities in excess of the amounts previouslyaccrued, with such excess amounting to approximately $8.5 million. Amountsoriginally reported for the three months ended April 2, 2005, and therelated restated amounts, are as follows (in thousands, except per shareamounts):
|                                                       | ** ** | **Three Months Ended April 2, 2005** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                 | ** ** | **Originally Reported**                                  | ** ** | **As Restated** | ** ** |
| Net income                                                 |       |                                                          | $          | 5,166 |   |   |   | $ | 5,166 |   |   |
| Accrued and paid-in-kind dividends on PIK preferred shares |       |                                                          | 2,358      |   |   |   | 10,851 |   |   |
| Income (loss) applicable to common shareholders            |       |                                                          | 2,808      |   |   |   | (5,685 | ) |   |
| Income (loss) per common share:                            |       |                                                          |       |   |   |   |   |   |   |
| Basic                                                      |       |                                                          | 0.27       |   |   |   | (0.55 | ) |   |
| Diluted                                                    |       |                                                          | 0.27       |   |   |   | (0.55 | ) |   |
| Additional paid-in capital                                 |       |                                                          | 77,635     |   |   |   | 86,128 |   |   |
| Retained earnings (deficit)                                |       |                                                          | (31,012    | ) |   |   | (39,505 | ) |   |
| Total  shareholders’ equity                           |       |                                                          | 74,620     |   |   |   | 74,620 |   |   |

 

*Reclassification*

Certainamounts previously presented in the Consolidated Financial Statements for priorperiods have been reclassified to conform with current period classification.

*RevenueRecognition*

Revenuefrom product sales is recognized when title and risks of ownership pass to thecustomer. This is generally on the date of shipment to the customer, or upondelivery to a place named by the customer, dependent upon contract terms andwhen collectibility is reasonably assured and pricing is fixed or determinable.Revenue includes amounts billed to customers for shipping and handling.Provision for rebates, promotions, product returns and discounts to customersis recorded as a reduction in determining revenue in the same period that therevenue is recognized.

*AccumulatedOther Comprehensive Income*

Accumulatedother comprehensive income of $27.9 million at April 2, 2005 consisted of$25.4 million of currency translation gains, $2.0 million of cash flow hedgegains and $0.5 million in minimum pension liability gains, all net of tax.Accumulated other comprehensive income of $30.3 million at January 1, 2005consisted of $29.5 million of currency translation gains, $0.3 million of cashflow hedge gains and $0.5 million in minimum pension liability gains, all netof tax.

*NewAccounting Pronouncements*

In May 2004, the FASB issuedFASB Staff Position No. 106-2, “Accounting and Disclosure RequirementsRelated to the Medicare Prescription Drug, Improvement and Modernization Act of2003” (“FSP 106-2”). FSP 106-2 permits a sponsor of a postretirementhealth care plan that provides a prescription drug benefit to make a one-timeelection to defer accounting for the effects of the Medicare Prescription Drug,Improvement and Modernization Act of 2003 (the “Act”), which was 

9

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**POLYMER GROUP, INC. Notes to Consolidated Financial Statements (Continued)**

signedinto law on December 8, 2003. The Act introduced a prescription drugbenefit under Medicare and federal subsidies to sponsors of retiree health carebenefit plans that provide a benefit that is at least actuarially equivalent tothat of Medicare. As permitted under FSP 106-2, the Company made a one-timeelection to defer accounting for the effect of the Act and as more fullyexplained in Note 9 to the Consolidated Financial Statements, in December 2004the Company approved plan amendments curtailing or eliminating variouspostretirement benefits in the U.S. As a result, the amounts included in theConsolidated Financial Statements related to the Company’s postretirementbenefit plans do not reflect the effects of the Act.

In November 2004, the FASBissued SFAS No. 151, “Inventory Costs” (“SFAS No. 151”). Thisstatement amends earlier guidance to require that abnormal freight, handlingand spoilage costs be recognized as current-period charges rather thancapitalized as an inventory cost. In addition, SFAS No. 151 requires thatthe allocation of fixed production overhead costs be based on the normalcapacity of the production facilities. SFAS No. 151 is effective forinventory costs incurred during fiscal years beginning after June 15,2005. The Company is currently analyzing the new guidance and does not expectit to have a material impact on its financial position or results ofoperations.

In December 2004,the FASB issued a revision to SFAS No. 123, “Accounting for Stock-BasedCompensation.” The revision, entitled SFAS No. 123R, “Share-Based Payment,”is effective for all awards granted, modified, repurchased or canceled after June 15,2005 and requires a public entity to initially measure the cost of employeeservices received in exchange for an award of equity instruments based on thegrant-date fair value of the award and to remeasure the fair value of thataward subsequently at each reporting date. Changes in the fair value during therequisite service period will be recognized as compensation cost over theperiod. The grant date fair value is to be estimated using option-pricingmodels adjusted for the unique characteristics of those instruments.

**Note 2.**   Concentration ofCredit Risks and Accounts Receivable Securitization Agreements

Accounts receivable potentiallyexpose the Company to concentration of credit risk, as defined by SFAS No. 105,“Disclosure of Information about Financial Instruments with Off-Balance SheetRisk and Financial Instruments with Concentration of Credit Risk.” Sales to theProcter & Gamble Company (“P&G”) accounted for approximately 12%of the Company’s sales in the first quarter of both 2005 and 2004. The Companyprovides credit in the normal course of business and performs ongoing creditevaluations on its customers’ financial condition as deemed necessary, butgenerally does not require collateral to support such receivables. Customerbalances are considered past due based on contractual terms and the Companydoes not accrue interest on the past due balances. The allowance for doubtfulaccounts was approximately $10.4 million and $10.9 million at April 2,2005 and January 1, 2005, respectively, which management believes isadequate to provide for credit loss in the normal course of business, as wellas losses for customers who have filed for protection under bankruptcy laws.Once management determines that the receivables are not recoverable, theamounts are removed from the financial records along with the correspondingreserve balance.

On November 15,2004, the Company entered into a factoring agreement to sell without recourse,certain receivables to an unrelated third-party financial institution. Underthe terms of the factoring agreement, the maximum amount of outstandingadvances for the purchase of domestic receivables at any one time is$15.0 million, which limitation is subject to change based on the level ofeligible receivables, restrictions on concentrations of receivables and thehistorical performance of the receivables sold. During the first quarter of2005, approximately $31.4 million of receivables had been 

10

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**POLYMER GROUP, INC. Notes to Consolidated Financial Statements (Continued)**

sold under the terms of the factoring agreement. The saleof these receivables accelerated the collection of the Company’s cash, reducedcredit exposure and lowered the Company’s net borrowing costs. Sales ofaccounts receivable are reflected as a reduction of *Accounts receivable, net* in the Consolidated Balance Sheetsand a gain or loss is reflected in the Consolidated Statements of Operations onsuch sale, as they meet the applicable criteria of SFAS No. 140, “Accountingfor Transfers and Servicing of Financial Assets and Extinguishment ofLiabilities” (“SFAS No. 140”). The amount due from the factoring company,net of advances received from the factoring company, was $5.6 million and$7.4 million at April 2, 2005 and January 1, 2005, respectively, andis shown in *Other current assets*in the Consolidated Balance Sheets. The Company pays factoring fees associatedwith the sale of receivables based on the dollar value of the receivables sold.Costs related to this program for the first quarter of 2005 were$0.2 million and are included in *Otherexpense, net* in the Consolidated Statement of Operations.

**Note 3.**   Business Restructuring

The Company continued itsrestructuring initiatives in 2004 by curtailing production of certain of itsEuropean assets and eliminating several production lines in the Canadianoperations of its Oriented Polymers Division. The European and Canadianrestructuring efforts in 2004 included the reduction of approximately 160positions.

Accrued costs for restructuring efforts are included in *Accrued liabilities* in the Consolidated Balance Sheets. Asummary of the business restructuring activity during the first three months offiscal 2005 is presented in the following table (in thousands):
| Balance accrued at beginning of year |   | $    | 561    |   |
|--------------------------------------|--------|------|--------|--------|
| 2005 plant realignment costs         |   | 4    |   |
| Cash payments                        |   | (322 | )      |
| Adjustments                          |   | (3   | )      |
| Balance  accrued at end of period    |   | $    | 240    |   |

 

**Note 4.**   Inventories

Inventories are stated at the lower of cost or marketprimarily using the first-in, first-out method of accounting and consist of thefollowing (in thousands):
| ** **      | ** ** | **April 2,  2005** | ** ** | **January 1,  2005** | ** ** |
|-----------------|------------|-------------------------|------------|---------------------------|------------|
| Finished goods  |       |                    | $          | 50,639                    |       |   | $ | 48,891 |   |
| Work in process |       |                    | 19,001     |                      |       | 15,612 |   |
| Raw materials   |       |                    | 42,826     |                      |       | 41,846 |   |
|            |       |                    | $          | 112,466                   |       |   | $ | 106,349 |   |

 

11

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**POLYMER GROUP, INC. Notes to Consolidated Financial Statements (Continued)**

**Note 5.**   Intangibles andLoan Acquisition Costs

Intangibles and loan acquisition costs consist of thefollowing (in thousands):
| ** **                       | ** ** | **April 2,** | ** ** | **January 1,** | ** ** |
|----------------------------------|------------|-------------------|------------|---------------------|------------|
| ** **                       | ** ** | **2005**          | ** ** | **2005**            | ** ** |
| Cost:                            |       |              |       |                |       |   |   |
| Proprietary technology           |       | $                 | 26,604     |                |       | $ | 26,604 |   |   |
| Goodwill                         |       | 15,632            |       |                | 15,632     |   |   |
| Loan acquisition costs and other |       | 18,842            |       |                | 18,759     |   |   |
|                             |       | 61,078            |       |                | 60,995     |   |   |
| Less accumulated amortization    |       | (13,738           | )          |                | (12,176    | ) |   |
|                             |       | $                 | 47,340     |                |       | $ | 48,819 |   |   |

 

Components of amortization expense are shown in the tablebelow (in thousands):
| ** **                                                                               | ** ** | **Three  Month  Ended  April 2,  2005** | ** ** | **Three  Month  Ended  April 3,  2004** | ** ** |
|------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| Amortization  of:                                                                        |       |                                         |       |                                         |       |
| Intangibles with finite lives,  included in selling, general and administrative expenses |       | $                                            | 1,058      |                                         | $          | 1,453 |   |
| Loan acquisition costs included  in interest expense, net                                |       | 504                                          |       | 472                                          |       |
| Total amortization expense                                                               |       | $                                            | 1,562      |                                         | $          | 1,925 |   |

 

Intangibles are amortized overperiods ranging from 2 to 7 years. Loan acquisition costs are amortizedover the life of the related debt.

**Note 6.**   Accrued Liabilities

Accrued liabilities in theConsolidated Balance Sheets include salaries, wages and other fringe benefitsof $19.3 million and $20.4 million as of April 2, 2005 and January 1,2005, respectively.

12

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**POLYMER GROUP, INC. Notes to Consolidated Financial Statements (Continued)**

**Note 7.   Debt**

Long-termdebt consists of the following (in thousands):
| ** **                                                                                                                                                                        | ** ** | **April 2,** | ** ** | **January 1,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|---------------------|------------|
| ** **                                                                                                                                                                        | ** ** | **2005**          | ** ** | **2005**            | ** ** |
| Senior  Secured Bank Facility, interest rates for U.S. dollar borrowings are based on  a specified base plus a specified margin and are subject to certain terms and  conditions: |       |              |       |                |       |   |   |
| First Lien Term Loan—interest at  6.34% as of April 2, 2005; due in quarterly payments of  $750.0 thousand, with the balance due April 27, 2010               |       |              | $          | 280,750             |       |   | $ | 281,500 |   |
| Second Lien Term Loan—interest  at 9.34% as of April 2, 2005; due April 27, 2011                                                                                   |       |              | 125,000    |                |       | 125,000 |   |
| Other                                                                                                                                                                             |       |              | 75         |                |       | 473 |   |
|                                                                                                                                                                              |       |              | 405,825    |                |       | 406,973 |   |
| Less: Current maturities                                                                                                                                                          |       |              | (3,019     | )                   |       | (3,413 | ) |
|                                                                                                                                                                              |       |              | $          | 402,806             |       |   | $ | 403,560 |   |

 

*Senior Secured Bank Facility*

TheCompany’s Senior Secured Bank Facility (the “Bank Facility”), which was enteredinto on April 27, 2004, consists of a $50.0 million secured revolvingcredit facility, a $300.0 million senior secured first lien term loan anda $125.0 million senior secured second lien term loan. The proceedstherefrom were used to fully repay indebtedness under the Company’s previousRestructured Credit Facility and pay related fees and expenses.

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**POLYMER GROUP, INC. Notes to Consolidated Financial Statements (Continued)**

All borrowings under the BankFacility are U.S. dollar denominated and are guaranteed, on a joint and severalbasis, by each and all of the direct and indirect domestic subsidiaries of theCompany and supported by the pledge of stock of certain non-domesticsubsidiaries of the Company. The Bank Facility and the related guarantees aresecured by: (i) a lien on substantially all of the assets of the Company,its domestic subsidiaries and certain of its non-domestic subsidiaries; (ii) apledge of all or a portion of the stock of the domestic subsidiaries of theCompany and of certain non-domestic subsidiaries of the Company; and (iii) apledge of certain secured intercompany notes. Commitment fees under the BankFacility are equal to 0.50% of the daily unused amount of the revolving creditcommitment. The Bank Facility limits restricted payments to $5.0 million,including cash dividends on all securities, in the aggregate since theeffective date of the Bank Facility. The Bank Facility contains covenants andevents of default customary for financings of this type, including leverage andinterest expense coverage covenants. At April 2, 2005, the Company was incompliance with all such covenants and expects to remain in compliance throughfiscal 2005. 

The loan requires theCompany to apply a percentage of proceeds from excess cash flows, as defined bythe Bank Facility and determined based on year-end results, to reduce its thenoutstanding balances under the Bank Facility. Excess cash flows required to beapplied to the repayment of the Bank Facility are generally calculated as 50.0%of the net amount of the Company’s available cash generated from operationsadjusted for the cash effects of interest, taxes, capital expenditures, changesin working capital and other certain items. Since the amounts of excess cashflows for future periods are based on year-end data not determinable, only themandatory payments of $750.0 thousand per quarter have been classified as acurrent liability. Additionally, no excess cash flow payment was required to bemade with respect to fiscal 2004 and, due to the planned magnitude of the majorcapital expenditures for 2005, any excess cash flow requirement with respect to2005 is not expected to be significant.

The interest rate applicable toborrowings under the Bank Facility is based on three-month LIBOR plus aspecified margin. The applicable margin for borrowings under the revolvingcredit facility is 300 basis points, the margin for the first lien term loan is325 basis points and the margin for the second-lien term loan is 625 basispoints. Although not anticipated, the Company may elect to use an alternatebase rate for its borrowings under the revolving credit facility ranging from2.25% to 6.25% with such alternate base rates including a margin based on theCompany’s total leverage ratio. The Company had no outstanding borrowings underthe revolving credit facility at either April 2, 2005 or January 1,2005. The revolving portion of the Bank Facility matures on April 27,2009.

As required by the termsof the Bank Facility, the Company entered into a cash flow hedge agreement,effectively converting $212.5 million of notional principal amount of debtfrom a variable LIBOR rate to a fixed LIBOR rate of 3.383%. The cash flow hedgeagreement terminates on May 8, 2007 and is described more fully inNote 12 to the Consolidated Financial Statements.

Subject to certain terms andconditions, a maximum of $20.0 million of the Bank Facility may be usedfor revolving letters of credit. As of April 2, 2005, the Company had$13.5 million of standby and documentary letters of credit outstandingunder this facility. Approximately $7.1 million was related to therequirements of the short-term borrowing arrangements of the Company’s China-basedmajority owned subsidiary (“Nanhai”). Other letters of credit are in place toprovide added assurance for certain raw material vendors and administrativeservice providers. None of these letters of credit had been drawn on at April 2,2005.

*RestructuredCredit Facility*

Until it was refinanced on April 27,2004, the Company’s Restructured Credit Facility consisted of secured revolvingcredit borrowings with aggregate commitments of up to $50.0 million andaggregate term loans and 

14

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**POLYMER GROUP, INC. Notes to Consolidated Financial Statements (Continued)**

term letters of credit of $435.3 million. Allborrowings under the Restructured Credit Facility were U.S. dollar denominatedand were guaranteed, on a joint and several basis, by each and all of thedirect and indirect domestic subsidiaries of the Company and certainnon-domestic subsidiaries of the Company. The Restructured Credit Facilitycontained covenants and events of default customary for financings of thistype, including leverage, senior leverage, interest coverage and adjustedinterest coverage. The interest rate applicable to borrowings under theRestructured Credit Facility was based on a specified base rate or a specifiedEurodollar base rate, at the Company’s option, plus a specified margin. Theeffective rate on the term loans was 12.00%, which was the cap on the sum ofthe interest payable in respect of term loans or term letters of credit plusthe senior leverage ratio fee. The Company’s average borrowings under therevolving credit agreement, which had an effective interest rate of 6.75%, were$5.5 million for the period from January 4, 2004 to April 3,2004.

*SubsidiaryIndebtedness*

Nanhai has a short-term creditfacility (denominated in U.S. dollars and Chinese rmb) with a financialinstitution in China which is scheduled to mature in June 2005. The amountof outstanding indebtedness under the facility was $5.8 million (at anannual average rate of approximately 4.49%) at April 2, 2005 and January 1,2005. The Nanhai indebtedness is guaranteed 100% by the Company and to supportthis guarantee, a letter of credit has been issued by the Company’s agent bankin the amount of $7.1 million. In addition, Nanhai had outstanding bankers’acceptances totaling $0.7 million and $1.2 million at April 2, 2005and January 1, 2005, respectively. These notes, which are denominated inChinese rmb, mature within three months and are subject to a 0.5% transactionfee. These borrowings are shown as *Short-termborrowings* in the Consolidated Balance Sheets.

At January 1, 2005, theCompany’s Argentina-based majority owned subsidiary had a credit facilitydenominated in U.S. dollars totaling approximately $0.4 million (all withcurrent maturities). These borrowings were fully repaid in the first quarter of2005.

**Note8.**   Income Taxes

The Company recognized income taxexpense of $2.8 million for the three months ended April 2, 2005 onconsolidated income before income taxes of $8.0 million. This income taxexpense approximates the U.S. federal statutory rate. However, the net incometax is impacted by foreign withholding taxes, for which tax credits are notanticipated, U.S. state income taxes and foreign taxes calculated at statutoryrates less than the U.S. federal statutory rate.

During the three months ended April 3,2004, the Company recognized an income tax expense of $2.5 million on aconsolidated pre-tax loss of $6.3 million. The income tax expense was primarilydue to foreign withholding taxes, for which tax credits are not anticipated,U.S. state income taxes, and no significant income tax benefit recognized forlosses incurred in the U.S. and certain foreign jurisdictions.

Income tax refunds receivablewere $13.9 million and $15.4 million at April 2, 2005 and January 1,2005, respectively and are largely comprised of amounts due from European taxjurisdictions. These amounts are included in *Othercurrent assets* on the Consolidated Balance Sheets.

**Note 9.**   Pension Benefits and Postretirement Plans

The Company and its subsidiariessponsor multiple defined benefit plans and other postretirement benefits thatcover certain employees. Benefits are primarily based on years of service andthe employee’s compensation. It is the Company’s policy to fund such plans inaccordance with applicable laws and regulations.

15

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**POLYMER GROUP, INC. Notes to Consolidated Financial Statements (Continued)**

Components of net periodicbenefit costs for the three months ended April 2, 2005 and April 3,2004 are as follows (in thousands):
| ** **                                                | ** ** | **Pension  Benefits** | ** ** | **Postretirement  Benefits** | ** ** |
|-----------------------------------------------------------|------------|-----------------------|------------|------------------------------|------------|
| ** **                                                | ** ** | **2005**              | ** ** | **2004**                     | ** ** | **2005** | ** ** | **2004** | ** ** |
| Current service  costs                                    |       | $                     | 656        |                         | $          | 590 |   | $ | 45 |   | $ | 101 |   |
| Interest costs on  projected benefit obligation and other |       | 1,408                 |       | 1,253                        |       | 122 |   | 215 |   |
| Return on plan  assets                                    |       | (1,542                | )          | (1,334                       | )          | — |   | — |   |
| Amortization of  transition obligation and other          |       | 6                     |       | (3                           | )          | (28 | ) | — |   |
| Periodic benefit cost,  net                               |       | $                     | 528        |                         | $          | 506 |   | $ | 139 |   | $ | 316 |   |

 

As of April 2, 2005, theCompany contributed $3.6 million to its pension plans for the 2005 benefityear. The Company presently anticipates contributing an additional $2.4 millionto fund its pension plans in 2005 for a total of $6.0 million.

On December 8, 2003, theMedicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”)was enacted and introduced a prescription drug benefit under Medicare as wellas a subsidy to sponsors of retiree health care benefit plans. As permittedunder FSP 106-1, the Company made a one-time election to defer accountingfor the effect of the Act until the authoritative guidance on the accountingfor the federal subsidy under the Act is issued. Given that the Companycurtailed most of its U.S. postretirement benefit plans in 2004, it will likelynot be eligible to receive the federal subsidy under the Act. Accordingly, anymeasures of the periodic benefit cost, benefit obligation and relateddisclosures for the U.S. and other postretirement benefit plans do not reflectthe effect of the Act.

**Note 10.**   Stock Option and Restricted Stock Plans

*StockOption Plan*

On December 11, 2003, theCompany awarded the initial non-qualified stock options available under the2003 Stock Option Plan (the “2003 Plan”). The 2003 Plan was approved by theCompany’s Board of Directors and shareholders and is administered by theCompensation Committee of the Board of Directors. The options have a ten-yearlife and vest, based on the achievement of various service and financialperformance criteria, over a four-year period beginning January 4, 2004.As of April 2, 2005, 400,000 shares of the Company’s Class A commonstock were reserved for issuance under the 2003 Plan, of which 174,687 stockoptions are available for future grants.

The Company has elected toaccount for the 2003 Plan in accordance with the intrinsic value method asprescribed by APB No. 25. All options granted under the 2003 Plan had anexercise price equal to the market value of the underlying common stock on thedate of grant. However, as a percentage of the options vest based onachievement of financial performance criteria, compensation costs arerecognized over the performance period when it becomes probable that suchperformance criteria will be achieved.

The compensation cost related tothe 2003 Plan for the three months ended April 2, 2005 and April 3,2004 were $0.4 million and $0.1 million, respectively, and were included in *Selling, general and administrative expenses*in the Consolidated Statements of Operations. Had the compensation expensemethodology defined in SFAS No. 123R, “Accounting for Stock-BasedCompensation” (SFAS No. 123R”) been applied, the Company’s net earningsand earnings per common share would have been approximately equivalent underboth methodologies.

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**POLYMER GROUP, INC. Notes to Consolidated Financial Statements (Continued)**

*RestrictedStock Plan*

In May 2004, the Company’sshareholders approved the 2004 Restricted Stock Plan for Directors (the “RestrictedPlan”), which expires in 2014, for issuance of restricted shares to Directorsof the Company, as defined in the Restricted Plan. The Restricted Plan approvedfor issuance 200,000 restricted shares and is administered by a committee ofthe Company’s Board of Directors not eligible to receive restricted sharesunder the Restricted Plan. In the first quarter of 2005 and Fiscal 2004, theCompany awarded 492 and 18,720 restricted shares, respectively, to members ofthe Company’s Board of Directors for their Board service to the Company. Thecost associated with the restricted stock grants totaled $10,000 for the firstquarter of fiscal 2005 and 2004 and was included in *Selling, general and administrative expenses* in theConsolidated Statements of Operations. As of April 2, 2005, 155,788 sharesof the Company’s Class A common stock are available for future grants.

**Note11.**   16% Series AConvertible Pay-in-kind Preferred Shares

In conjunction with the Company’srefinancing in April 2004 of the Restructured Credit Facility, the Company’smajority shareholder exchanged approximately $42.6 million in aggregateprincipal amount of 10.0% Convertible Subordinated Notes due 2007 (the “JuniorNotes”) it controlled for 42,633 shares of the Company’s PIK Preferred Shares.Also, during the third quarter of fiscal 2004, $10.1 million in aggregateprincipal amount of the Company’s Junior Notes were exchanged for 10,083 sharesof the Company’s PIK Preferred Shares and 6,719 shares of the Company’s Class ACommon Stock. Such Junior Notes were subordinated indebtedness of the Companyand provided for interest at an annual rate of 10.0%, which interest, at theoption of the holder, could be received in additional principal amounts of theJunior Notes or in cash. The Junior Notes could be converted, at the option ofthe holder, into shares of Class A Common Stock on the same terms asincluded in the PIK Preferred Shares (a conversion rate based on an initial conversionprice of approximately $7.29 per share). As the aforementioned exchanges were acomponent of the recapitalization of the Company involving the majorityshareholder and other common shareholders of the Company and the exchange bythe majority shareholder was a requirement of the Bank Facility, the exchangeshave been accounted for as a capital transaction and, accordingly, no gain orloss was recognized.

The dividends on the PIKPreferred Shares accrue at an annual rate of 16% and are payable semi-annuallyin arrears on each January 1 and July 1, commencing with July 1,2004, and are payable at the option of the Company; (i) through theissuance of additional shares of PIK Preferred Stock; (ii) in cash; or (iii) ina combination thereof. Dividends are cumulative and accrue from the most recentdividend payment date to which dividends have been paid or, if no dividendshave been paid, from the date of original issuance. Accordingly, the Companyaccrues dividends at the stated rate of 16.0% until such time as the form ofthe dividend is declared by the Company’s Board of Directors. If the dividendis paid-in-kind through the issuance of additional shares, the Companyrecognizes the dividend at the estimated fair value of the shares issued inexcess of the amounts previously accrued.

On June 30, 2012, theCompany must redeem all of the PIK Preferred Shares then outstanding at a priceequal to $1,000 per share plus any other accrued and unpaid dividends thereonwhether or not declared, which amount will be payable by the Company (“mandatoryredemption price”), at the option of the Company, (i) in cash; (ii) throughthe issuance of shares of Class A Common Stock; or (iii) through acombination thereof. If paid in stock, the number of shares to be delivered bythe Company will be the mandatory redemption price (as defined earlier) dividedby the then current market price of a share of Class A Common Stock.

Atany time prior to June 30, 2012, the holders of the PIK Preferred Sharesmay elect to convert any or all of their PIK Preferred Shares into shares of theCompany’s Class A Common Stock at an initial conversion rate of137.14286 shares of Class A Common Stock per share of PIK PreferredShares, which approximates an initial 

17

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**POLYMER GROUP, INC. Notes to Consolidated Financial Statements (Continued)**

conversion price equal to $7.29per share. Also, at any time prior to June 30, 2012, provided certainconditions have been met, the Company may elect to redeem the shares at a priceequal to $1,000 per share plus any other accrued and unpaid dividends thereonwhether or not declared, which redemption price may be paid by the Company, atthe option of the Company; (i) in cash; (ii) through the issuance ofshares of Class A Common Stock; or (iii) through a combinationthereof. If paid in stock, the number of shares to be delivered by the Companywill be the optional redemption price (as defined by the preferred stockagreement) divided by the then current market price of a share of Class ACommon Stock.

On January 14,2005, the Company’s Board of Directors declared that dividends accrued on thePIK Preferred Shares from the date of issuance through December 31, 2004,in the amount of $5.6 million, would be paid in the form of PIK PreferredShares. On such date, the closing price of the Company’s Class A CommonStock on the Over-the-Counter Bulletin Board was $18.50 per share.

TheCompany herein has restated its first quarter results to record the value ofthe additional PIK Preferred Shares declared as a dividend on January 14,2005, the date the Board of Directors declared that the accrued dividends wereto be paid in the form of additional PIK Preferred Shares, rather than cash,reduced by the amount of dividends previously recorded at the stated 16.0%rate. Using the market value of the Company’s Class A Common Stock on January 14,2005 of $18.50 per share, the fair value of the 5,540 additional PIK PreferredShares issued in lieu of cash payment was approximately $14.1 million, whichexceeded the amount previously accrued by the Company of $5.6 million, basedupon the stated rate of 16.0%, by approximately $8.5 million. Recording theadditional $8.5 million dividend at the date of declaration has resulted in areduction in the amount of income applicable to common shareholders andretained earnings, with a corresponding increase in Additional Paid-in Capital. See Note 1, *Restatementof Results for the Three Months Ended April 2, 2005*,  to the Consolidated Financial Statements.

**Note 12.**   Derivative and Other Financial Instruments andHedging Activities

TheCompany uses derivative financial instruments to manage market risks and reduceits exposure from fluctuations in interest rates. All hedging transactions areauthorized and executed under clearly defined policies and procedures, whichprohibit the use of financial instruments for trading purposes. SFASNo. 133, “Accounting for Derivative Instruments and Hedging Activities,”as amended by SFAS No. 138, “Accounting for Certain Derivative Instrumentsand Certain Hedging Activities (an Amendment of SFAS No. 133)” requiresthe Company to recognize all derivatives on the balance sheet at fair value andestablish criteria for designation and effectiveness of hedging relationships.

TheCompany uses interest-rate derivative instruments to manage its exposure on itsdebt instruments. As indicated in Note 7 to the Consolidated FinancialStatements, to mitigate its interest rate exposure as required by the BankFacility, the Company entered into a pay-fixed, receive-variable interest rateswap, thus effectively converting the interest payments associated withapproximately 50% of the debt to fixed amounts at a LIBOR rate of 3.383%. As ofApril 2, 2005, the notional amount of these contracts, which expire onMay 8, 2007, was $212.5 million. Cash settlements are made quarterly andthe floating rate is reset quarterly, coinciding with the reset dates of theBank Facility debt.

Inaccordance with SFAS No. 133, the Company designated the swap as a cashflow hedge of the variability of interest payments under the senior securedterm loans and applied the shortcut method of assessing effectiveness. Theagreement’s terms ensure complete effectiveness in offsetting the interestcomponent associated with the Bank Facility. As such, there is noineffectiveness and changes in the fair value of the swap are recorded toaccumulated other comprehensive income (loss). The fair value of the interestrate swap of 

18

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**POLYMER GROUP, INC. Notes to Consolidated Financial Statements (Continued)**

$3.1 million as ofApril 2, 2005 and $0.3 million as of January 1, 2005 was based oncurrent settlement values and was included in *Othernoncurrent assets* in the Consolidated Balance Sheets.

The impact of these swaps on *Interest expense, net*for the three months endedApril 2, 2005 was an increase of $0.4 million. The Company did not haveany interest rate swap agreements during the first quarter of 2004.

**Note 13.**   Earnings Per Share and Shareholders’ Equity

A reconciliation of basic incomeper common share to diluted income per common share has not been presented forthe three months ended April 2, 2005 or April 3, 2004 as the impactof such calculations are anti-dilutive. Average shares outstanding for thethree months ended April 2, 2005 and April 3, 2004 were 10,418,457and 8,786,997, respectively.

As of April 2,2005, the Company’s authorized capital stock consisted of the following classesof stock:
| **Type**                               | ** ** | ** ** | ** ** | **Par Value** | ** ** | **Authorized Shares** | ** ** |
|----------------------------------------|------------|------------|------------|--------------------|------------|----------------------------|------------|
| PIK Preferred stock                    |       |       | $          | .01                |       |                       |       | 173,000 |   |   |
| Class A common  stock             |       |       | $          | .01                |       |                       |       | 39,200,000 |   |   |
| Class B convertible  common stock |       |       | $          | .01                |       |                       |       | 800,000 |   |   |
| Class C convertible  common stock |       |       | $          | .01                |       |                       |       | 118,453 |   |   |
| Class D convertible  common stock |       |       | $          | .01                |       |                       |       | 498,688 |   |   |
| Class E convertible common stock  |       |       | $          | .01                |       |                       |       | 523,557 |   |   |

 

All classes of the common stock have similar votingrights. In accordance with the Amended and Restated Certificate ofIncorporation, Class C common stock has special rights to annual dividendsand all shares of Class B, C, D and E Common Stock may be converted intoan equal number of shares of Class A common stock. See Note 11 to theConsolidated Financial Statements, for additional information related to theCompany’s PIK Preferred Shares.

In April 2004,the United States Bankruptcy Court for the District of South Carolina resolvedcertain pending claims filed against the Company in connection with theModified Plan and, as a result, approved the issuance of 1,327,177 shares ofthe Company’s Class A Common Stock and 19,359 shares of the Company’s Class CCommon Stock which were issued on a pro rata basis to holders of common stockof the old Polymer Group Inc.’s Class 4 General Unsecured Claims per thethe old Polymer Group Inc.’s Chapter 11 Plan of Reorganization. If these shareshad been outstanding for all periods presented, the pro forma earnings (losses)available per common share would be $(0.87) (basic and diluted) for the threemonths ended April 3, 2004.

As ofApril 2, 2005, the PIK Preferred Shares were convertible at the option ofthe holders into approximately 8,318,107 shares of the Company’s Class ACommon Stock.

**Note 14.**   Segment Information

The Company’s reportablesegments consist of its primary operating divisions—Nonwovens and OrientedPolymers. This reflects how the overall business is managed on a regular basisby the Company’s senior management and the Board of Directors. Each of thesebusinesses sells to different end-use markets, such as hygiene, medical, wipesand industrial and specialty markets. Sales to P&G accounted for more than10% of the Company’s sales in each of the periods presented. Sales to thiscustomer are reported primarily in the Nonwovens segment and the loss of thesesales would have a material adverse effect on this segment. The Companyrecorded charges and/or income in the Consolidated Statements of Operationsduring the three months ended April 2, 2005 and the three months ended April 3,2004 relating to plant realignment costs which have not been allocated to thesegment data.

19

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**POLYMER GROUP, INC. Notes to Consolidated Financial Statements (Continued)**

Financialdata by segment is as follows (in thousands):
| ** **                                                              | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                              | ** ** | **April  2,  2005**    | ** ** | **April 3,  2004** | ** ** |
| **Net sales**                                                           |       |                             |       |   |   |
| Nonwovens                                                               |       | $                                | 194,536    |   | $ | 163,713 |   |
| Oriented Polymers                                                       |       | 49,825                           |       | 42,529 |   |
| Eliminations                                                            |       | —                           |       | — |   |
|                                                                    |       | $                                | 244,361    |   | $ | 206,242 |   |
| **Operating income (loss)**                                             |       |                             |       |   |   |
| Nonwovens                                                               |       | $                                | 16,723     |   | $ | 11,935 |   |
| Oriented Polymers                                                       |       | 5,263                            |       | 3,538 |   |
| Unallocated  Corporate                                                  |       | (5,601                           | )          | (4,476 | ) |
| Eliminations                                                            |       | 65                               |       | 346 |   |
|                                                                    |       | 16,450                           |       | 11,343 |   |
| Plant realignment  costs                                                |       | (4                               | )          | (584 | ) |
|                                                                    |       | $                                | 16,446     |   | $ | 10,759 |   |
| **Depreciation and amortization  expense included in operating income** |       |                             |       |   |   |
| Nonwovens                                                               |       | $                                | 11,098     |   | $ | 10,572 |   |
| Oriented Polymers                                                       |       | 2,102                            |       | 2,074 |   |
| Unallocated  Corporate                                                  |       | (42                              | )          | 30 |   |
| Depreciation and  amortization expense included in operating income     |       | 13,158                           |       | 12,676 |   |
| Amortization of  loan acquisition costs                                 |       | 505                              |       | 479 |   |
|                                                                    |       | $                                | 13,663     |   | $ | 13,155 |   |
| **Capital spending**                                                    |       |                             |       |   |   |
| Nonwovens                                                               |       | $                                | 9,998      |   | $ | 4,354 |   |
| Oriented Polymers                                                       |       | 97                               |       | 150 |   |
| Corporate                                                               |       | —                           |       | — |   |
|                                                                    |       | $                                | 10,095     |   | $ | 4,504 |   |

 
| ** **           | ** ** | **April 2,  2005** | ** ** | **January 1,  2005** | ** ** |
|----------------------|------------|-------------------------|------------|---------------------------|------------|
| **Division  assets** | ** ** | ** **              | ** ** | ** **                | ** ** |
| Nonwovens            |       | $                       | 700,960    |                      | $          | 716,532 |   |
| Oriented Polymers    |       | 155,348                 |       | 148,188                   |       |
| Corporate            |       | 18,744                  |       | 16,191                    |       |
| Eliminations         |       | (118,096                | )          | (127,558                  | )          |
|                 |       | $                       | 756,956    |                      | $          | 753,353 |   |

 

20

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**POLYMER GROUP, INC. Notes to Consolidated Financial Statements (Continued)**

Geographic Data:

Geographic data for theCompany’s operations, based on the geographic region from which the sale ismade is presented in the following table (in thousands):
| ** **                                                               | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                               | ** ** | **April 2,  2005**          | ** ** | **April 3,  2004** | ** ** |
| **Net sales:**                                                      |       |                             |       |   |   |
| United States                                                            |       | $                                | 113,422    |   | $ | 92,144 |   |
| Canada                                                                   |       | 30,968                           |       | 28,592 |   |
| Europe                                                                   |       | 50,684                           |       | 50,384 |   |
| Asia                                                                     |       | 11,010                           |       | 6,818 |   |
| Latin America                                                            |       | 38,277                           |       | 28,304 |   |
|                                                                     |       | $                                | 244,361    |   | $ | 206,242 |   |
| **Operating income (loss):**                                             |       |                             |       |   |   |
| United States                                                            |       | $                                | 699        |   | $ | (777 | ) |
| Canada                                                                   |       | 3,131                            |       | 1,925 |   |
| Europe                                                                   |       | 4,269                            |       | 4,445 |   |
| Asia                                                                     |       | 865                              |       | 544 |   |
| Latin America                                                            |       | 7,486                            |       | 5,206 |   |
|                                                                     |       | 16,450                           |       | 11,343 |   |
| Plant realignment costs                                                  |       | (4                               | )          | (584 | ) |
|                                                                     |       | $                                | 16,446     |   | $ | 10,759 |   |
| **Depreciation and amortization  expense included in operating income:** |       |                             |       |   |   |
| United States                                                            |       | $                                | 6,062      |   | $ | 5,823 |   |
| Canada                                                                   |       | 1,558                            |       | 1,503 |   |
| Europe                                                                   |       | 2,500                            |       | 2,343 |   |
| Asia                                                                     |       | 997                              |       | 994 |   |
| Latin America                                                            |       | 2,041                            |       | 2,013 |   |
| Depreciation and amortization expense included in  operating income      |       | 13,158                           |       | 12,676 |   |
| Amortization of loan acquisition costs                                   |       | 505                              |       | 479 |   |
|                                                                     |       | $                                | 13,663     |   | $ | 13,155 |   |

 
| ** **          | ** ** | **April 2,  2005** | ** ** | **January 1,  2005** | ** ** |
|---------------------|------------|-------------------------|------------|---------------------------|------------|
| **Region  assets:** |       |                    |       |                      |       |
| United States       |       | $                       | 218,223    |                      | $          | 165,264 |   |
| Canada              |       | 97,268                  |       | 99,382                    |       |
| Europe              |       | 249,844                 |       | 294,811                   |       |
| Asia                |       | 35,115                  |       | 35,996                    |       |
| Latin America       |       | 156,506                 |       | 157,900                   |       |
|                |       | $                       | 756,956    |                      | $          | 753,353 |   |

 

21

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**POLYMER GROUP, INC. Notes to Consolidated Financial Statements (Continued)**

**Note 15.**   Foreign Currency and Other

Components of foreign currency and other are shown inthe table below (in thousands):
| ** **                    | ** ** | **Three Months Ended  April 2, 2005** | ** ** | **Three Months Ended  April 3, 2004** | ** ** |
|-------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| Foreign currency  loss (gain) |       |                                                      | $          | (422                                                      | )          |   |   | $ | 1,276 |   |   |
| Other, net                    |       |                                                      | 107        |                                                      |       |   | 109 |   |   |
|                          |       |                                                      | $          | (315                                                      | )          |   |   | $ | 1,385 |   |   |

 

**Note 16.**   Legal Proceedings and Commitments

On August 18,2003, The Intertech Group, Inc. (“TIG”), an affiliate of Jerry Zucker, theformer Chief Executive Officer of the Company, filed a claim seeking damagesassociated with a lease agreement and an alleged services agreement, betweenthe Company and TIG, associated with the lease by the Company of its formercorporate headquarters and the provision of shared administrative services. Thedamages sought in the complaint totaled $7.7 million, plus attorney’sfees. See Note 18 to the Consolidated Financial Statements for details relatedto the settlement of this legal proceeding.

As part of its efforts to enhancethe business, the Company has made commitments to expand its worldwidecapacity. Currently, the Company has several major committed capital projects,including the construction of a new spunmelt manufacturing plant in Suzhou,China and the installation of new spunmelt lines in the facilities in Cali,Colombia and Mooresville, North Carolina, as well as the installation ofadditional capacity in Nanhai, China. Remaining payments due related to theseplanned expansions as of April 2, 2005 totaled approximately $99.3 millionand are expected to be expended over the remainder of fiscal 2005 and fiscal2006.

**Note 17.**   Supplemental Cash Flow Information

Noncashtransactions in the first three months of 2005 included: (i) theconversion of 5 shares of the Company’s PIK Preferred Shares into approximately686 shares of the Company’s Class A Common Stock, and (ii) theissuance of 5,540 PIK Preferred Shares as payment-in-kind, in lieu of cashpayment, of approximately $5.6 million of dividends on the Company’s PIKPreferred Shares, which resulted in an additional non-cash dividend charge ofapproximately $8.5 million in excess of the amounts accrued at the stateddividend rate on the PIK Preferred Shares.

Noncash transactions in the firstthree months of 2004 included: (i) the payment-in-kind in lieu of cashpayment of $1.0 million of interest expense on the Junior Notes, and (ii) theconversion of $2.7 million of the Company’s Junior Notes into approximately371,382 shares of the Company’s Class A Common Stock.

**Note 18.**   Subsequent Events

On April 29,2005, the Company entered into a Settlement Agreement, Receipt and Release (the“Settlement Agreement”) with Jerry Zucker, TIG and ZS Associates LLC (anaffiliate of Mr. Zucker). Pursuant to the Settlement Agreement, theCompany paid TIG $3.1 million as full and final settlement. In addition, theSettlement Agreement contains mutual general releases of any and all claims byand among the parties thereto, and a requirement that the Company and TIG filea joint stipulation dismissing, with prejudice, TIG’s lawsuit against theCompany, which has been appropriately filed on May 2, 2005. The settlementwas 

22

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**POLYMER GROUP, INC. Notes to Consolidated Financial Statements (Continued)**

approximatelyequal to amounts previously accrued and included in the Consolidated BalanceSheets at April 2, 2005 and January 1, 2005.

On May 3,2005, the Company announced that it retained JP Morgan Securities Inc. as itsfinancial advisor to assist the Company in evaluating various strategicalternatives in order to maximize shareholder value, which could include, amongother things, the sale or recapitalization of the Company. The Company expectsto complete its review of strategic alternatives in the near future. However,there can be no assurance that this process will result in any transaction ortransactions taking place or being completed.

23

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**ITEM2.**                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion andanalysis provides information which management believes is relevant to anassessment and understanding of the Company’s consolidated results ofoperations and financial condition. The discussion should be read inconjunction with the consolidated financial statements and notes theretocontained in this Quarterly Report on Form 10-Q and the Annual Report on Form 10-Kfor the period ended January 1, 2005.

**Restatementof Results for the Three Months Ended April 2, 2005**

On January 14, 2005, pursuant to the termsof the Company’s PIK Preferred Shares, PGI’s Board of Directors declared adividend payable in the form of 5,540 PIK Preferred Shares. The dividends werepaid on January 21, 2005 to holders of record as of May 15, 2004 and December 15,2004, for accrued and unpaid dividends from the dates of issuance of the PIKPreferred Shares through December 31, 2004. The stated amount of thedividend at 16% annually was accrued by the company during 2004.

The Audit Committee of the Board of Directors of theCompany, in consultation with management of the Company and the Company’sindependent registered public accounting firm, has recently concluded that itsConsolidated Statement of Operations for the three months ended April 2,2005 should be restated to reflect the dividend paid-in-kind through theissuance of 5,540 PIK Preferred Shares at the estimated fair value of theshares issued rather than the stated amount of the dividend. The fair value ofthe shares issued exceeded the stated amount that was previously accrued.

The PIK Preferred Sharesallow holders to convert those shares into the Company’s Class A Common Stockat an initial conversion rate of 137.14286 Class A Common Shares per PIKPreferred Share which approximates an initial conversion price of $7.29 pershare. As the 5,540 PIK Preferred Shares were convertible into Class ACommon Stock with an estimated value of $14.1 million (based on the closingstock price of $18.50 per share on the date the dividends were declared), theresults for the first quarter are herein restated to reflect an additionaldividend charge equal to the difference between the $14.1 million estimatedfair value and the $5.6 million of dividends previously accrued and charged toretained earnings. The effect of the restatement on the Consolidated Statementof Operations increases the charge for dividends on PIK Preferred Shares andreduces income applicable to common shareholders by approximately $8.5 million.As a result of the issuance of such additional PIK Preferred Shares, the Companyhas restated herein its Consolidated Statement of Operations for the threemonths ended April 2, 2005 to reflect the paid-in-kind dividends at the estimatedfair value of the underlying securities in excess of the amounts previouslyaccrued, with such excess amounting to approximately $8.5 million. Amountsoriginally reported for the three months ended April 2, 2005, and therelated restated amounts, are as follows (in thousands, except per shareamounts):
| ** **                                                 | ** ** | **Three Months Ended  April 2, 2005** | ** ** |
|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                 | ** ** | **Originally   Reported**                            | ** ** | **As Restated** | ** ** |
| Net income                                                 |       |                                                      | $          | 5,166 |   |   |   | $ | 5,166 |   |   |
| Accrued and paid-in-kind dividends on PIK preferred shares |       |                                                      | 2,358      |   |   |   | 10,851 |   |   |
| Income (loss) applicable to common shareholders            |       |                                                      | 2,808      |   |   |   | (5,685 | ) |   |
| Income (loss) per  common share:                           |       |                                                      |       |   |   |   |   |   |   |
| Basic                                                      |       |                                                      | 0.27       |   |   |   | (0.55 | ) |   |
| Diluted                                                    |       |                                                      | 0.27       |   |   |   | (0.55 | ) |   |
| Additional  paid-in capital                                |       |                                                      | 77,635     |   |   |   | 86,128 |   |   |
| Retained earnings  (deficit)                               |       |                                                      | (31,012    | ) |   |   | (39,505 | ) |   |
| Total shareholders’  equity                           |       |                                                      | 74,620     |   |   |   | 74,620 |   |   |

 

24

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**Resultsof Operations**

The following table setsforth the percentage relationships to net sales of certain statement ofoperations items.
| ** **                                                  | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                  | ** ** | **April 2,  2005**          | ** ** | **April 3,  2004** | ** ** |
| Net sales                                                   |       |                             | 100.0      | % |   |   | 100.0 | % |   |
| Cost of goods  sold                                         |       |                             |       |   |   |   |   |   |   |
| Materials                                                   |       |                             | 50.8       |   |   |   | 46.6 |   |   |
| Labor                                                       |       |                             | 8.6        |   |   |   | 10.0 |   |   |
| Overhead                                                    |       |                             | 22.6       |   |   |   | 25.0 |   |   |
|                                                        |       |                             | 82.0       |   |   |   | 81.6 |   |   |
| Gross profit                                                |       |                             | 18.0       |   |   |   | 18.4 |   |   |
| Selling, general  and administrative expenses               |       |                             | 11.3       |   |   |   | 12.9 |   |   |
| Plant realignment  costs                                    |       |                             | 0.0        |   |   |   | 0.3 |   |   |
| Operating income                                            |       |                             | 6.7        |   |   |   | 5.2 |   |   |
| Other expense  (income):                                    |       |                             |       |   |   |   |   |   |   |
| Interest expense, net                                       |       |                             | 3.2        |   |   |   | 7.3 |   |   |
| Minority interests                                          |       |                             | 0.4        |   |   |   | 0.2 |   |   |
| Foreign currency and other                                  |       |                             | (0.1       | ) |   |   | 0.7 |   |   |
| Income (loss)  before income tax expense                    |       |                             | 3.2        |   |   |   | (3.0 | ) |   |
| Income tax  expense                                         |       |                             | 1.1        |   |   |   | 1.2 |   |   |
| Net income (loss)                                           |       |                             | 2.1        |   |   |   | (4.2 | ) |   |
| Accrued and  paid-in-kind dividends on PIK preferred shares |       |                             | 4.4        |   |   |   | — |   |   |
| Loss applicable to  common shareholders                     |       |                             | (2.3       | )% |   |   | (4.2 | )% |   |

 

**Comparisonof Three Months Ended April 2, 2005 and April 3, 2004**

TheCompany’s reportable segments consist of its two operating divisions, Nonwovensand Oriented Polymers. For additional information regarding segment data, see Note 14“Segment Information” to the Consolidated Financial Statements included in thisQuarterly Report on Form 10-Q. The following table sets forth componentsof the Company’s net sales and operating income (loss) by operating divisionfor the three months ended April 2, 2005, the three months ended April 3,2004 and the corresponding change (in millions):
| ** **                                 | ** ** | **Three Months  Ended  April 2, 2005** | ** ** | **Three Months  Ended  April 3, 2004** | ** ** | **Change** | ** ** |
|--------------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------|------------|------------|------------|
| Net sales                                  |       |                                                  |       |                                                  |       |       |       |   |   |   |   |   |   |
| Nonwovens                                  |       |                                                  | $          | 194.5                                                 |       |       |       | $ | 163.7 |   |   |   | $ | 30.8 |   |   |
| Oriented Polymers                          |       |                                                  | 50.0       |                                                  |       |       | 42.6       |   |   |   | 7.4 |   |   |
| Eliminations                               |       |                                                  | (0.1       | )                                                     |       |       | (0.1       | ) |   |   | — |   |   |
|                                       |       |                                                  | $          | 244.4                                                 |       |       |       | $ | 206.2 |   |   |   | $ | 38.2 |   |   |
| Operating income                           |       |                                                  |       |                                                  |       |       |       |   |   |   |   |   |   |
| Nonwovens                                  |       |                                                  | $          | 16.7                                                  |       |       |       | $ | 11.9 |   |   |   | $ | 4.8 |   |   |
| Oriented Polymers                          |       |                                                  | 5.3        |                                                  |       |       | 3.6        |   |   |   | 1.7 |   |   |
| Unallocated Corporate, net of eliminations |       |                                                  | (5.5       | )                                                     |       |       | (4.1       | ) |   |   | (1.4 | ) |   |
|                                       |       |                                                  | 16.5       |                                                  |       |       | 11.4       |   |   |   | 5.1 |   |   |
| Plant realignment  costs                   |       |                                                  | —     |                                                  |       |       | (0.6       | ) |   |   | 0.6 |   |   |
|                                       |       |                                                  | $          | 16.5                                                  |       |       |       | $ | 10.8 |   |   |   | $ | 5.7 |   |   |

 

25

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The amounts for plant realignment costs have not beenallocated to the Company’s reportable business divisions because the Company’smanagement does not evaluate such charges on a division-by-division basis.Division operating performance is measured and evaluated before unusual orspecial items.

**NetSales**

Consolidated net saleswere $244.4 million in 2005, an increase of $38.2 million or 18.5%over 2004 consolidated net sales of $206.2 million. Net sales for 2005 inthe Nonwovens and Oriented Polymers segments improved over comparable 2004fiscal year results by 18.8% and 17.4%, respectively. A reconciliation of thechange in net sales between the three months ended April 3, 2004 and thethree months ended April 2, 2005 is presented in the following table (inmillions):
| Net sales—three  months ended April 3, 2004 |   | $      | 206.2  |   |
|-------------------------------------------------------|--------|--------|--------|--------|
| Change in sales  due to:                              |   |   |   |
| Price/mix                                             |   | 20.2   |   |
| Volume                                                |   | 14.1   |   |
| Foreign currency                                      |   | 3.9    |   |
| Net sales—three months  ended April 2, 2005 |   | $      | 244.4  |   |

 

The increase in net sales during the first quarter of2005 was due primarily to price/mix improvements and volume gains. Theprice/mix improvement reflects continued enhancements of the Company’s productofferings as well as the increases in sales price in an effort to pass alongraw material cost increases to customers. As raw material costs rose during thecurrent quarter and prior year, the Company followed the consistent policy ofattempting to pass raw material prices along to its customers, where allowableby contract terms and where acceptable based on market conditions. Volumegains, notably in the United States, Latin American and Asian markets,contributed approximately $14.1 million to the increase in net sales over thesame period of the prior year.

A significant component ofthe $14.1 million increase in sales in the first quarter of 2005 due tovolume growth was generated in the Latin American region. Although the San LuisPotosi, Mexico capacity expansion was completed in late 2003, it didn’t reachfull productive capacity until the second quarter of 2004. The Latin Americaregion’s sales improvement was paced by significant year-over-year increases inhygiene sales. In the Company’s U.S. nonwovens business, the hygiene, consumerand industrial markets contributed to the double-digit increases from2004 as new products were introduced into the markets and new customerrelationships generated substantial sales increases. Nonwoven sales volumesdecreased slightly in Europe. Oriented Polymers’ increase in sales was due to acombination of price/mix improvement and increased volume driven by theagricultural and construction end-use markets.

Foreign currencies, predominantly the Euro and theCanadian dollar, were stronger against the U.S. dollar during the firstquarter of 2005 compared to 2004 resulting in an increase in net sales of$3.9 million due to the favorable foreign currency translation. Furtherdiscussion of foreign currency exchange rate risk is contained in “Quantitativeand Qualitative Disclosures About Market Risk” included in Item 3 to thisQuarterly Report on Form 10-Q.

26

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**OperatingIncome**

A reconciliation of thechange in operating income between the three months ended April 3, 2004and the three months ended April 2, 2005 is presented in the followingtable (in millions):
| Operating  income—three months ended April 3, 2004 |   | $      | 10.8   |   |
|--------------------------------------------------------------|--------|--------|--------|--------|
| Change in operating  income due to:                          |   |   |   |
| Price/mix                                                    |   | 20.2   |   |
| Higher raw material costs                                    |   | (20.4  | )      |
| Volume                                                       |   | 4.3    |   |
| Lower manufacturing costs                                    |   | 1.4    |   |
| Lower plant realignment costs, net                           |   | 0.6    |   |
| Foreign currency                                             |   | 0.3    |   |
| Higher depreciation and amortization expense                 |   | (0.5   | )      |
| All other, primarily higher SG&A costs                   |   | (0.2   | )      |
| Operating income—three  months ended April 2, 2005 |   | $      | 16.5   |   |

 

Consolidated operating income was $16.5 millionin 2005 as compared to $10.8 million in 2004. The financial effect ofprice/mix improvements and higher raw material costs essentially offset eachother, reflecting the benefits of the Company’s new product introductions andongoing efforts to pass through any cost increases in raw materials. The netimprovement in operating income was positively impacted by the volume gainsnoted in the net sales discussion above. Other items contributing to theimprovement of operating income were lower manufacturing costs of $1.4 millionand lower plant realignment costs, net of $0.6 million. Offsetting these favorableimpacts were higher depreciation and amortization charges and higher selling,general and administrative expenses. The increase in depreciation andamortization charges is primarily related to the installation of the newproduction line in Latin America.

**InterestExpense and Other**

Netinterest expense decreased $7.3 million, from $15.2 million duringthe three months ended April 3, 2004 to $7.9 million during the threemonths ended April 2, 2005. The 2004 amount includes $1.0 million ofpayment-in-kind in lieu of cash interest on the Junior Notes. The decrease innet interest expense was primarily due to the lower interest rates obtained byrefinancing the Company’s previous Restructured Credit Facility with the newBank Facility, effective April 27, 2004, and the elimination of interestexpense on the Junior Notes due to their conversion to PIK Preferred Shares andClass A Common Stock. On April 27, 2004, in conjunction with therefinancing, the Company’s majority shareholder exchanged approximately$42.6 million in aggregate principal amount of the Junior Notes for 42,633shares of PIK Preferred Shares, which also contributed to lower interest costsduring the period. Also subsequent to the refinancing, the remaining$10.1 million of Junior Notes were exchanged for 10,083 shares of theCompany’s PIK Preferred Shares and 6,719 shares of the Company’s Class ACommon Stock.

Foreign currency and other expense improved by$1.7 million, from an expense of $1.4 million in the first quarter offiscal 2004 to income of $0.3 million in the first quarter of fiscal 2005.

**IncomeTax Expense**

The Company recognized income tax expense of$2.8 million for the three months ended April 2, 2005 on consolidatedincome before income taxes of $8.0 million for such period. The tax expenseapproximates the U.S. federal statutory tax rate. However, the net income taxis impacted by foreign withholding taxes, for which tax credits are notanticipated, U.S. state income taxes and foreign taxes calculated at statutoryrates less than the U.S. federal statutory rate. The Company recorded a netincome tax expense of $2.5 million for the three months ended April 3,2004 on a consolidated pre-tax loss of $6.3 million for such 

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period.The tax expense was primarily due to withholding taxes, for which tax creditsare not anticipated, U.S. state income taxes, and no significant income taxbenefit recognized for the losses incurred in the United States and certainforeign jurisdictions.

**NetIncome**

As a result of the above, the Company recognized netincome of $5.2 million during the three months ended April 2, 2005compared to a net loss of $8.8 million during the three months ended April 3,2004.

**Accruedand Paid-in-Kind Dividends on PIK Preferred Shares**

The Company accrued dividends at the stated rate of16.0% on its PIK Preferred Shares during the three months ended April 2,2005 in the amount of $2.4 million. In addition, the Company recorded an$8.5 million dividend charge to reflect the declaration by the Company’s Boardof Directors on January 14, 2005 of the issuance of 5,540 PIK PreferredShares as payment-in-kind for dividends from the dates of issuance through December 31,2004 at the fair value of the underlying securities issued in excess of theamount of the dividends previously accrued at the stated rate.

**Income(Loss) Applicable to Common Shareholders**

As a result of the above, the Company recognized aloss applicable to common shareholders of $5.7 million, or ($0.55) pershare, for the three months ended April 2, 2005 compared to a lossapplicable to common shareholders of $8.8 million, or ($1.00) per share,for the three months ended April 3, 2004.

**LIQUIDITYAND CAPITAL RESOURCES**

The Company’s principalsources of liquidity for operations and expansions are funds generated fromoperations and borrowing availabilities under the Bank Facility, consisting ofa revolving credit facility with aggregate commitments of up to$50.0 million and senior secured first lien term loan of$300.0 million and a senior secured second lien term loan of $125.0 million.The revolving portion of the Bank Facility terminates on April 27, 2009,the first lien term loan is due April 27, 2010 and the second lien termloan is due April 27, 2011. The Bank Facility contains covenants andevents of default customary for financings of this type, including leverage andinterest expense coverage covenants. At April 2, 2005, the Company was incompliance with all such covenants. As of April 2, 2005, the Company hadno outstanding borrowings under the revolving credit agreement.
| ** **                                                                | ** ** | **April 2,  2005** | ** ** | **January 1,  2005** | ** ** |
|---------------------------------------------------------------------------|------------|-------------------------|------------|---------------------------|------------|
| ** **                                                                | ** ** | **(In Millions)**  | ** ** |
| **Balance  sheet data:**                                                  |       |                    |       |                      |       |   |   |   |   |
| Cash and cash equivalents                                                 |       |                    | $          | 21.6                      |       |   |   | $ | 41.3 |   |   |
| Working capital                                                           |       |                    | 190.0      |                      |       |   | 187.3 |   |   |
| Total assets                                                              |       |                    | 757.0      |                      |       |   | 753.4 |   |   |
| Total debt                                                                |       |                    | 412.4      |                      |       |   | 414.0 |   |   |
| PIK Preferred Shares, expected to be settled with  shares of common stock |       |                    | 60.6       |                      |       |   | 58.3 |   |   |
| Total  shareholders’ equity                                          |       |                    | 74.6       |                      |       |   | 73.8 |   |   |
|                                                                           |            |                         |            |                           |            |  |  |  |  |  |  |

 
| ** **                                           | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                           | ** ** | **April 2, 2005**      | ** ** | **April 3, 2004** | ** ** |
| ** **                                           | ** ** | **(In Millions)**           | ** ** |
| **Cash flow data:**                                  |       |                             |       |   |   |   |   |   |   |
| Net cash used in operating activities                |       |                             | $          | (8.0 | ) |   |   | $ | (7.0 | ) |   |
| Net cash used in investing activities                |       |                             | (9.7       | ) |   |   | (3.7 | ) |   |
| Net cash provided  by (used in) financing activities |       |                             | (1.6       | ) |   |   | 4.7 |   |   |
|                                                      |            |                                  |            |  |  |  |  |  |  |  |  |

 

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**OperatingActivities**

Net cash used in operatingactivities was $8.0 million during 2005, a $1.0 million change fromthe $7.0 million used in operating activities during 2004. Despite theimprovement in operating performance during the first quarter of 2005, theincrease in cash used in operations was attributed primarily to investments inaccounts receivable and inventories, largely resulting from increased quarterover quarter net sales and higher raw material costs.

Workingcapital at April 2, 2005 did not change significantly from that at January 1,2005 as increases in trade receivables and inventory were generally offset byan increase in accrued liabilities and a decrease in cash, primarily resultingfrom the Company’s funding of substantial capital expenditures during the firstthree months of 2005. Accounts receivable at April 2, 2005 was $132.9million as compared to $112.3 million on January 1, 2005, an increase of$20.6 million. Accounts receivable represented approximately 50 daysof sales outstanding at April 2, 2005, compared to 46 days of salesoutstanding at January 1, 2005. The increase was partially attributable tothe growth in net sales in foreign locations, which often have extended paymentterms as compared to domestic terms of sale. Inventories at April 2, 2005were $112.5 million, an increase of $6.1 million from inventories at January 1,2005 of $106.4 million. The Company had inventory representingapproximately 51 days of cost of sales on hand at April 2, 2005versus 54 days of cost of sales on hand at January 1, 2005. Accountspayable at April 2, 2005 was $61.7 million as compared to$63.8 million at January 1, 2005, a decrease of $2.1 million.Accounts payable represented approximately 28 days of cost of salesoutstanding at April 2, 2005 as compared to 32 days of cost of salesoutstanding at January 1, 2005.

**Investing andFinancing Activities**

Cash used in investing activitiesamounted to $9.7 million and $3.7 million for the first three months of 2005and 2004, respectively. Capital expenditures during the three months ended April 2,2005 totaled $10.1 million, an increase of $5.6 million from capitalspending of $4.5 million in the three months ended April 3, 2004. Asignificant portion of the capital expenditures in 2005 related to theinstallation of a state-of-the-art nonwovens production line at the Cali,Colombia manufacturing site, which is expected to become operational during thefourth quarter of fiscal 2005. Investing activities during the first threemonths of 2005 and 2004 included proceeds from the sale of assets of$0.4 million and $0.8 million, respectively.

Cash used in financingactivities amounted to $1.6 million for the first three months of 2005, ascompared to $4.7 million being provided by financing activities for the firstthree months of 2004. In the first quarter of 2005, the Company repaid, on anet basis, $1.6 million of its debt, whereas the Company borrowed additionaldebt, on a net basis, of $4.7 million during the first three months of 2004.

**Dividends**

The Board of Directors has not declared a dividend onthe Company’s common stock since the first quarter of 2001. The Bank Facilitylimits restricted payments, which include cash dividends on all securities, to$5.0 million in the aggregate since the effective date of the BankFacility. The Company does not anticipate paying dividends on its common stockin future periods.

On January 14, 2005,the Company’s Board of Directors declared that dividends accrued on the PIKPreferred Shares from the date of issuance through December 31, 2004, inthe amount of $5.6 million, would be paid in the form of PIK Preferred Shares.On such date, the closing price of the Company’s Class A Common Stock onthe Over-the-Counter Bulletin Board was $18.50 per share.

The Company herein hasrestated its first quarter results to record the estimated fair value of theadditional PIK Preferred Shares declared as a dividend as of January 14,2005, the date the Board of Directors declared that the accrued dividends wereto be paid in the form of additional PIK Preferred Shares, rather than cash,reduced by the amount of dividends previously recorded at the stated rate of 

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16.0%.Using the market value of the Company’s Class A Common Stock on January 14,2005 of $18.50 per share, the estimated fair value of the 5,540 additional PIKPreferred Shares issued in lieu of cash payment was approximately $14.1million, which exceeded the amount accrued of $5.6 million, based upon thestated rate, by approximately $8.5 million. Recording the additional $8.5million dividend at the date of declaration has resulted in a reduction in theamount of income applicable to common shareholders and retained earnings, witha corresponding  increase in additional paid-incapital. See Note 1, *Restatement of Results forthe Three Months Ended April 2, 2005*,  to the unaudited Consolidated FinancialStatements included in Item 1 to this Quarterly Report on Form 10-Q/A.

**Liquidity Summary**

As discussed more fully in Note 7 to the ConsolidatedFinancial Statements included in Item 1 to this Quarterly Report on Form 10-Q/A,on April 27, 2004, the Company refinanced its existing bank creditfacility and entered into a new Bank Facility consisting of a$50.0 million revolving credit facility maturing in 2009, a$300.0 million senior secured first lien term loan that matures in 2010and a $125.0 million senior secured second-lien term loan maturing in2011. The proceeds therefrom were used to fully repay indebtedness outstandingunder the Company’s previous Restructured Credit Facility and pay related feesand expenses. The senior secured first lien term loan requires quarterlypayments of $750.0 thousand and accrues interest at LIBOR plus 325 basispoints. The senior secured second lien term loan accrues interest at LIBOR plus625 basis points. The revolving credit facility initially bears interest atLIBOR plus 300 basis points. The Bank Facility provides the Company withincreased flexibility in terms of cash availability, less stringentrequirements for covenant compliance, extended maturity dates and substantiallyreduced net cash interest costs as compared to the prior bank credit facility.

The Bank Facility containscovenants and events of default customary in financings of this type, includingleverage and interest expense coverage covenants. The Bank Facility requiresthe Company to use a percentage of proceeds from excess cash flows, as definedby the Bank Facility and determined based on year-end results, to reduceits then outstanding balances under the Bank Facility.  Excess cash flow required to be applied tothe repayment of the Bank Facility is generally calculated as 50.0% of theCompany’s available cash generated from operations adjusted for the casheffects of interest, taxes, capital expenditures, changes in working capitaland certain other items.  Since theamounts of excess cash flow for future periods are based on year-end data andnot determinable, only the mandatory payments of $750.0 thousand per quarterhave been classified as a current liability. Additionally, no excess cash flow payment was made with respect tofiscal 2004 and, due to the magnitude of the planned major capital expendituresfor fiscal 2005, any excess cash flow requirement is not expected to besignificant. Additionally, as required bythe terms of the Bank Facility, the Company entered into a cash flow hedgeagreement, effectively converting $212.5 million of notional principalamount of debt from a variable LIBOR rate to a fixed LIBOR rate of 3.383%. Thecash flow hedge agreement terminates on May 8, 2007.

In conjunction with the Company’s refinancing of theRestructured Credit Facility, the Company’s majority shareholder exchangedapproximately $42.6 million in aggregate principal amount of the JuniorNotes it controlled for 42,633 shares of the Company’s PIK Preferred Shares.Additionally, in the third quarter of 2004, $10.1 million of aggregateprincipal amount of the Company’s Junior Notes were exchanged for 10,083 sharesof the Company’s PIK Preferred Shares and 6,719 shares of the Company’s Class ACommon Stock. The dividends on the PIK Preferred Shares accrue at an annualrate of 16% and are payable semi-annually in arrears on each January 1 andJuly 1, commencing with July 1, 2004, at the option of the Company; (i) throughthe issuance of additional PIK Preferred Shares; (ii) in cash; or (iii) ina combination thereof. Dividends are cumulative and accrue from the most recentdividend payment date to which dividends have been paid or, if no dividendshave been paid, from the date of original issuance.

On June 30, 2012, theCompany must redeem all of the PIK Preferred Shares then outstanding at a priceequal to $1,000 per share plus any other accrued and unpaid dividends thereonwhether or not declared, 

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whichamount will be payable by the Company (“mandatory redemption price”) at theoption of the Company; (i) in cash; (ii) through the issuance ofshares of Class A Common Stock; or (iii) through a combinationthereof. If paid in stock, the number of shares to be delivered by the Companywill be the mandatory redemption price (as defined earlier) divided by the thenmarket price of a share of Class A Common Stock.

At any time prior to June 30, 2012, the holdersof the PIK Preferred Shares may elect to convert any or all of their PIKPreferred Shares into shares of the Company’s Class A Common Stock at aninitial conversion rate of 137.14286 shares of Class A Common Stockper share of PIK Preferred Shares, which approximates an initial conversion priceequal to $7.29 per share. Also, at any time prior to June 30, 2012,provided certain conditions have been met, the Company may elect to redeem theshares at a price equal to $1,000 per share plus any other accrued and unpaiddividends thereon whether or not declared, which redemption price may be paidby the Company, (i) in cash; (ii) through the issuance of shares of Class ACommon Stock; or (iii) through a combination thereof. If paid in stock,the number of shares to be delivered by the Company will be the optionalredemption price (as defined by the preferred stock agreement) divided by thethen market price of a share of Class A Common Stock. The Companycurrently expects to settle the mandatory or optional redemption with theissuance of shares of Class A Common Stock.

On November 15, 2004, the Company entered into afactoring agreement to sell without recourse, certain receivables to anunrelated third-party financial institution. Under the terms of thefactoring agreement, the maximum amount available for the purchase of domesticreceivables at any one time is $15.0 million, which limitation is subjectto change based on the level of eligible receivables, restrictions onconcentrations of receivables and the historical performance of the receivablessold. The sale of receivables under the ongoing factoring agreement acceleratesthe collection of the Company’s cash, reduces credit exposure and lowers theCompany’s borrowing costs.

As discussed in Note 16 tothe Consolidated Financial Statements included in Item 1 to this QuarterlyReport on Form 10-Q/A, the Company has committed to several majorcapital projects to expand its worldwide capacity, including the constructionof a new spunmelt manufacturing plant in Suzhou, China and the installation ofnew spunmelt lines in its current facilities in Cali, Colombia and Mooresville,North Carolina, as well as the installation of additional capacity in Nanhai,China. Remaining payments due related to these planned expansions as of April 2,2005 totaled approximately $99.3 million and are expected to be expendedover the remainder of fiscal 2005 and fiscal 2006. The financial flexibilityneeded for these and other capital projects was provided in an amendment, datedMarch 16, 2005, to the Bank Facility.

On May 3, 2005, the Company announced that itretained JP Morgan Securities Inc. as a financial advisor to assist the Companyin evaluating various strategic alternatives in order to maximize shareholdervalue, which could include, among other things, the sale or recapitalization ofthe Company. The Company expects to complete its review of strategicalternatives in the near future. However, there can be no assurance that thisprocess will result in any transaction or transactions taking place or beingcompleted.

Based on the ability togenerate positive cash flows from its operations and the financial flexibilityprovided by the Bank Facility, as amended, the Company believes that it has thefinancial resources necessary to meet its operating needs, fund its capitalexpenditures and make all necessary contributions to its retirement plans.

**Off-Balance SheetArrangements**

The Company does not haveany off-balance sheet arrangements.

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**Effect of Inflation**

Inflation generallyaffects the Company by increasing the costs of labor, overhead, and equipment.The impact of inflation on the Company’s financial position and results ofoperations was minimal during the first quarter of both 2005 and 2004. However,the Company continues to be impacted by rising raw material costs. See “Quantitativeand Qualitative Disclosures About Market Risk’’ included in Item 3 of thisQuarterly Report on Form 10-Q/A.

**New AccountingStandards**

In May 2004, the FASB issued FASB Staff Position No. 106-2,“Accounting and Disclosure Requirements Related to the Medicare PrescriptionDrug, Improvement and Modernization Act of 2003” (“FSP 106-2”). FSP106-2 permits a sponsor of a postretirement health care plan thatprovides a prescription drug benefit to make a one-time election to deferaccounting for the effects of the Medicare Prescription Drug, Improvement andModernization Act of 2003 (the “Act”), which was signed into law on December 8,2003. The Act introduced a prescription drug benefit under Medicare and federalsubsidies to sponsors of retiree health care benefit plans that provide abenefit that is at least actuarially equivalent to that of Medicare. Aspermitted under FSP 106-2, the Company made a one-time election todefer accounting for the effect of the Act and as more fully explained inNote 9 to the consolidated financial statements, in December 2004 theCompany approved plan amendments curtailing or eliminating variouspostretirement benefits in the U.S. As a result, the amounts included in theConsolidated Financial Statements related to the Company’s postretirementbenefit plans do not reflect the effects of the Act.

In November 2004, the FASB issued SFAS No. 151,“Inventory Costs” (“SFAS No. 151”). This statement amends earlier guidanceto require that abnormal freight, handling and spoilage costs be recognized ascurrent-period charges rather than capitalized as an inventory cost. Inaddition, SFAS No. 151 requires that the allocation of fixed productionoverhead costs be based on the normal capacity of the production facilities.SFAS No. 151 is effective for inventory costs incurred during fiscal yearsbeginning after June 15, 2005. The Company is currently analyzing the newguidance and does not expect it to have a material impact on its financialposition or results of operations.

In December 2004, theFASB issued a revision to SFAS No. 123, “Accounting for Stock-BasedCompensation.” The revision, entitled SFAS No. 123R, “Share-Based Payment,”is effective for all awards granted, modified, repurchased or canceled after June 15,2005 and requires a public entity to initially measure the cost of employeeservices received in exchange for an award of equity instruments based on thegrant-date fair value of the award and to remeasure the fair value of thataward subsequently at each reporting date. Changes in the fair value during therequisite service period will be recognized as compensation cost over thatperiod. The grant date fair value is to be estimated using option-pricingmodels adjusted for the unique characteristics of those instruments.

**Critical AccountingPolicies And Other Matters**

The Company’s analysis and discussion of its financialposition and results of operations are based upon its consolidated financialstatements that have been prepared in accordance with accounting principlesgenerally accepted in the United States (“U.S. GAAP”). The preparation offinancial statements in conformity with U.S. GAAP requires the appropriateapplication of certain accounting policies, many of which require management tomake estimates and assumptions about future events that may affect the reportedamounts of assets, liabilities, revenues and expenses, and the disclosure ofcontingent assets and liabilities. Since future events and their impact cannotbe determined with certainty, the actual results will inevitably differ fromthe estimates. The Company evaluates these estimates and assumptions on anongoing basis, including but not limited to those related to fresh startaccounting, revenue recognition, sales returns and allowances and credit risks,inventories, income taxes, convertible securities and 

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impairment of long-livedassets. Estimates and assumptions are based on historical and other factorsbelieved to be reasonable under the circumstances. The impact and anyassociated risks related to estimates, assumptions, and accounting policies arediscussed within “Management’s Discussion and Analysis of Financial Conditionand Results of Operations,” as well as in the Notes to the ConsolidatedFinancial Statements, if applicable, where such estimates, assumptions, andaccounting policies affect the Company’s reported and expected results.

The Company believes the following accounting policiesare critical to its business operations and the understanding of results ofoperations and affect the more significant judgments and estimates used in thepreparation of its consolidated financial statements:

*Fresh Start Accounting:  *Inconnection with the Company’s Chapter 11 reorganization, the Company hasapplied Fresh Start Accounting to its Consolidated Balance Sheet as of March 1,2003 in accordance with Statement of Position No. 90-7, “FinancialReporting by Entities in Reorganization Under the Bankruptcy Code” aspromulgated by the AICPA. Under Fresh Start Accounting, a new reporting entityis considered to be created and the recorded amounts of assets and liabilitiesare adjusted to reflect their estimated fair values at the date Fresh StartAccounting is applied. On March 5, 2003, the Company emerged frombankruptcy. For financial reporting purposes, March 1, 2003 is consideredthe emergence date and the effects of the reorganization have been reflected inthe accompanying financial statements as if the emergence occurred on thatdate.

Fresh-start accounting requires that thereorganization value of the Company be allocated to its assets and liabilitiesin conformity with SFAS No. 141, “Business Combinations.” Such allocationshave been reflected in the Company’s Consolidated Financial Statements. Basedon the consideration of many factors and various valuation methods, the Companyand its financial advisors estimated the reorganization value of the Company’snew common equity at approximately $73.4 million as of March 1, 2003.The factors and valuation methodologies included the review of comparablecompany market valuations and the recent acquisition values of comparablecompany transactions as well as discounted cash flow models. The discountedcash flow models utilized projected free cash flows for four future years, withsuch projected free cash flows discounted at rates approximating the expectedweighted average cost of capital (11.0% - 13.0%) plus the present value of theCompany’s terminal value computed using comparable company exit multiples.Projected free cash flows were estimated based on projected cash flows fromoperations, adjusted for the effects of income taxes at an effective tax rateof 39.0%, estimated capital expenditures and estimated changes in workingcapital. The calculation of the reorganization value of the Company was basedon a variety of estimates and assumptions about future circumstances andevents. Such estimates and assumptions are inherently subject to significanteconomic uncertainties. While the Company believes its judgments, estimates andvaluation methodologies were reasonable, different assumptions could havematerially changed the estimated reorganization value of the Company as ofMarch 1, 2003.

*RevenueRecognition:  *Revenuefrom product sales is recognized when title and risks of ownership pass to thecustomer. This is generally on the date of shipment to the customer, or upondelivery to a place named by the customer, dependent upon contract terms andwhen collectibility is reasonably assured and pricing is fixed or determinable.Revenue includes amounts billed to customers for shipping and handling.Provision for rebates, promotions, product returns and discounts to customersis recorded as a reduction in determining revenue in the same period that therevenue is recognized. Management bases its estimate of the expense to berecorded each period on historical returns and allowance levels. Managementdoes not believe the likelihood is significant that materially higher deductionlevels will result based on prior experience.

*Convertible Securities:  *TheCompany records the accretion of dividends on the convertible securities basedon the stated rate in the securities. If the Company’s Board of Directors, atthe date of any dividend declaration, elects to satisfy the dividend obligationby payment-in-kind, the Company will recognize an additional dividend chargefor the excess, if any, of the fair value of the securities issued, at thedividend 

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declaration date, over theamounts previously accrued at the stated rate. As the Company’s convertiblesecurities are not traded on an active market, determination of the fair valueof the securities, at the date of dividend declaration, requires estimates andjudgments, which may impact the valuation of the dividend paid-in-kind.Based onthe fact that the convertible securities are deep-in-the-money, the Company hasestimated the fair value of the convertible security using the number of sharesof the Company’s Common Stock into which the security is convertible at thethen-current share price.  While theCompany believes its estimates of the fair value of the convertible securityare reasonable, the utilization of different assumptions could producematerially different fair value estimates.

*Accounts Receivable andConcentration of Credit Risks:  *Accounts receivablepotentially expose the Company to a concentration of credit risk, as defined byStatement of Financial Accounting Standards No. 105, “Disclosure ofInformation about Financial Instruments with Off-Balance Sheet Risk andFinancial Instruments with Concentration of Credit Risk.” The Company providescredit in the normal course of business and performs ongoing credit evaluationson its customers’ financial condition as deemed necessary, but generally doesnot require collateral to support such receivables. The Company alsoestablishes an allowance for doubtful accounts based upon factors surroundingthe credit risk of specific customers, historical trends and other information.Also, in an effort to reduce its credit exposure to certain customers, as wellas accelerate its cash flows, in 2004 the Company sold, on a non-recoursebasis, certain of its receivables pursuant to a factoring agreement. At April 2,2005, a reserve of $10.4 million has been recorded as an allowance againsttrade accounts receivable. Management believes that the allowance is adequateto cover potential losses resulting from uncollectible accounts receivable anddeductions resulting from sales returns and allowances. While the Company’scredit losses have historically been within its calculated estimates, it ispossible that future credit losses could differ significantly from theseestimates.

*Inventory Reserves:  *TheCompany maintains reserves for inventories valued primarily using the first in,first out (FIFO) method. Such reserves for inventories can be specific tocertain inventory or general based on judgments about the overall condition ofthe inventory. General reserves are established primarily based on percentagewrite-downs applied to inventories aged for certain time periods.Specific reserves are established based on a determination of the obsolescenceof the inventory and whether the inventory value exceeds amounts to berecovered through expected sales price, less selling costs. Estimating salesprices, establishing markdown percentages and evaluating the condition of theinventories require judgments and estimates, which may impact the inventoryvaluation and gross margins. The actual amount of obsolete or unmarketableinventory has been materially consistent with previously established reserves. Managementbelieves based on its prior experience of managing and evaluating therecoverability of its slow-moving or obsolete inventory that such establishedreserves are materially adequate. However, if actual market conditions andproduct sales were less favorable than we have projected, additional inventorywritedowns may be necessary.

*Impairment of Long-Lived Assets:  *Long-livedassets are reviewed for impairment whenever events or changes in circumstancesindicate that the carrying amounts may not be recoverable. For assets held andused, an impairment may occur if projected undiscounted cash flows are notadequate to cover the carrying value of the assets. In such cases, additionalanalysis is conducted to determine the amount of the loss to be recognized. Theimpairment loss is determined by the difference between the carrying amount ofthe asset and the fair value measured by future discounted cash flows. Theanalysis, when conducted, requires estimates of the amount and timing ofprojected future cash flows and, where applicable, judgments associated with,among other factors, the appropriate discount rate. Such estimates are criticalin determining whether any impairment charge should be recorded and the amountof such charge if an impairment loss is deemed to be necessary. In addition,future events impacting cash flows for existing assets could render a writedownnecessary that previously required no writedown.

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For assets held for disposal, an impairment charge isrecognized if the carrying value of the assets exceeds the fair value lesscosts to sell. Estimates are required of fair value, disposal costs and thetime period to dispose of the assets. Such estimates are critical indetermining whether any impairment charge should be recorded and the amount ofsuch charge if an impairment loss is deemed to be necessary. Actual cash flowsreceived or paid could differ from those used in estimating the impairment loss,which would impact the impairment charge ultimately recognized and the Company’scash flows. As of April 2, 2005, based on the Company’s current operatingperformance, as well as future expectations for the business, the Company doesnot anticipate any material writedowns for asset impairments in the foreseeablefuture.  However, should current businessconditions or expectations of future performance deteriorate, this may impactour future cash flow estimates, resulting in an impairment charge that could havea material effect on the Company’s Consolidated Financial Statements.

*IncomeTaxes:  *The Company records an income tax valuationallowance when, based on the weight of the evidence, it is more likely than notthat some portion, or all, of the deferred tax asset will not be realized. Theultimate realization of the deferred tax asset depends on the ability of theCompany to generate sufficient taxable income of the appropriate character inthe future and in the appropriate taxing jurisdictions. In assessing therealization of the deferred tax assets, consideration is given to, among otherfactors, the trend of historical and projected future taxable income, thescheduled reversal of deferred tax liabilities, the carryforward period for netoperating losses and tax credits, as well as tax planning strategies availableto the Company. Additionally, the Company has not provided U.S. income taxesfor undistributed earnings of foreign subsidiaries that are considered to beretained indefinitely for reinvestment. Certain judgments, assumptions andestimates are required in assessing such factors and significant changes insuch judgments and estimates may materially affect the carrying value of thevaluation allowance and deferred income tax expense or benefit recognized inthe Company’s Consolidated Financial Statements.

**Environmental**

The Company is subject toa broad range of federal, foreign, state and local laws and regulationsrelating to the pollution and protection of the environment. The Companybelieves that it is currently in substantial compliance with applicableenvironmental requirements and does not currently anticipate any materialadverse effect on its operations, financial or competitive position as a resultof its efforts to comply with environmental requirements. Some risk ofenvironmental liability is inherent, however, in the nature of the Company’sbusiness and, accordingly, there can be no assurance that materialenvironmental liabilities will not arise.

**ITEM 3.**                QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The overall objective ofthe Company’s financial risk management program is to seek a reduction in thepotential negative earnings impact of changes in interest rates, foreignexchange and raw material pricing arising in our business activities. TheCompany manages these financial exposures through operational means and byusing various financial instruments. These practices may change as economicconditions change.

**Long-Term Debt andInterest Rate Market Risk**

The Company’s long-termborrowings are variable interest rate debt. As such, the Company’s interestexpense will increase as interest rates rise and decrease as interest ratesfall. It is the Company’s policy to enter into interest rate derivativetransactions only to meet its stated overall objective. The Company does notenter into these transactions for speculative purposes. To that end, asrequired by the terms of its Bank Facility, the Company entered into aninterest rate swap contract to convert $212.5 million of its variable-rate debtto fixed-rate debt. In addition, the Company includes short-term borrowings inits debt portfolio, 

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especiallyin foreign countries, in an effort to minimize interest rate risk.Hypothetically, a 1% change in the interest rate affecting all of the Company’sfinancial instruments not protected by the interest rate swap contract wouldchange interest expense by approximately $2.0 million per year.

**Foreign CurrencyExchange Rate Risk**

The Company manufactures, markets and distributescertain of its products in Europe, Canada, Latin America and the Far East. As aresult, the Company’s financial statements could be significantly affected byfactors such as changes in foreign currency rates in the foreign markets inwhich the Company maintains a manufacturing or distribution presence. However,such currency fluctuations have much less effect on local operating resultsbecause the Company, to a significant extent, sells its products within thecountries in which they are manufactured. During the first three months of 2004and 2005, certain currencies of countries in which the Company conducts foreigncurrency denominated business strengthened against the U.S. dollar and had asignificant impact on sales and operating income. See “Management’s Discussionand Analysis of Financial Condition and Results of Operations” included in Item2 of Part 1 of this Quarterly Report on Form 10-Q/A.

The Company has nothistorically hedged its exposure to foreign currency risk, although it hasmitigated its risk of currency losses on foreign monetary assets by sometimesborrowing in foreign currencies as a natural hedge. The Company is also subjectto political risk in certain of its foreign operations.

**Raw Material andCommodity Risks**

The primary raw materials used in the manufacture ofmost of the Company’s products are polypropylene resin, polyester fiber,polyethylene resin, and, to a lesser extent, rayon, tissue paper and cotton.The prices of polypropylene, polyethylene and polyester are a function of,among other things, manufacturing capacity, demand and the price of crude oiland natural gas liquids. The Company has not historically hedged its exposureto raw material increases, but has attempted to move more customer programs tocost-plus type contracts, which would allow the Company to pass-through anycost increases in raw materials. Raw material prices as a percentage of saleshave increased from 46.6% in the first three months of 2004 to 50.8% for thecomparable period of 2005.

To the extent the Companyis not able to pass along price increases of raw materials, or to the extentany such price increases are delayed, the Company’s cost of goods sold wouldincrease and its operating profit would correspondingly decrease. By way ofexample, if the price of polypropylene were to rise $.01 per pound, and theCompany was not able to pass along any of such increase to its customers, theCompany would realize a decrease of approximately $2.9 million, on anannualized basis, in its reported operating income. Material increases in rawmaterial prices that cannot be passed on to customers could have a materialadverse effect on the Company’s results of operations and financial condition.See “Management’s Discussion and Analysis of Financial Condition and Results ofOperations” included in Item 2 of Part 1 of this Quarterly Report on Form 10-Q/A.

**ITEM 4.**                CONTROLSAND PROCEDURES

Under the direction of our Chief Executive Officer andChief Financial Officer, the Company evaluated its disclosure controls andprocedures as of the end of the period covered by this report. Based on thatevaluation, the Chief Executive Officer and Chief Financial Officer haveconcluded that these disclosure controls and procedures were effective, as of April 2,2005.

There were no changes inthe Company’s internal control over financial reporting during the quarterended April 2, 2005 that have materially affected, or are reasonablylikely to materially affect, the Company’s internal control over financialreporting.

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**PART II. OTHERINFORMATION**

**ITEM 1.**                LEGALPROCEEDINGS

Other than as reported in the Company’s Form 10-Kfor the period ended January 1, 2005 under the caption “Item 3. LegalProceedings,” the Company is not currently a party to any material pendinglegal proceedings other than routine litigation incidental to the business ofthe Company. See Note 18 to the Consolidated Financial Statements included inItem 1 to this Quarterly Report of Form 10-Q/A for additional details.

**ITEM 2.**                UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During the first quarter of fiscal 2005, 5 sharesof the Company’s PIK Preferred Shares, 16,564 shares of the Company’s Class BCommon Stock, and 20,792 shares of the Company’s Class C Common Stock,were converted into a total of 38,042 shares of the Company’s Class ACommon Stock. These conversions were exempt from registration based on sections3(a)(7) and 3(a)(9) of the Securities Exchange Act of 1933.

**ITEM 3.**                DEFAULTSUPON SENIOR SECURITIES

Not applicable.

**ITEM 4.**                SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

**ITEM 5.**                OTHERINFORMATION

Not applicable.

**ITEM 6.**                EXHIBITS

Exhibits required to befiled with this Form 10-Q are listed below:
| Exhibit  Number | ** ** | **Document Description**                                                                                                                                                                                                                                                                                                  |
|-----------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.1             |       | Amended and Restated By-Laws of the Polymer  Group, Inc.(1)                                                                                                                                                                                                                                                          |
| 10.1            |       | Settlement Agreement, Receipt and Release, dated as  of April 29, 2005 by and among Polymer Group, Inc., Jerry Zucker,  The Intertech Group, Inc., ZS Associates LLC and MatlinPatterson Global Advisors  LLC (on behalf of itself and various affiliated entities named in the  Settlement Agreement).(2) |
| 31.1            |       | Certification of Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                  |
| 31.2            |       | Certification of Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                  |
| 32.1            |       | Certification by the Chief Executive Officer  pursuant to 18 U.S.C. Section 1350                                                                                                                                                                                                                                     |
| 32.2            |       | Certification by the Chief Financial Officer  pursuant to 18 U.S.C. Section 1350                                                                                                                                                                                                                                     |

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(1)   Incorporatedby reference to Exhibit 4.1 of the Company’s Quarterly Report on Form 10-Qfiled with the SEC on May 16, 2005 (the “First Quarter 2005 10-Q”).

(2)   Incorporated by reference toExhibit 10.1 of the First Quarter 2005 10-Q.

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**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.
|                             |     | POLYMER GROUP, INC. |
|-----------------------------|----------|--------------------------|
| Date: August 22,  2005 |     | By:                      |   | /s/  JAMES L. SCHAEFFER |
| * *                    | * * | * *                 |   | James L.  Schaeffer*   Chief Executive Officer* |
| Date: August 22,  2005 |     | By:                      |   | /s/  WILLIS C. MOORE, III |
| * *                    | * * | * *                 |   | Willis C.  Moore, III*   Chief Financial Officer* |

 

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