**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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FORM 10-Q
| x                                                    | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**   |
|------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------|
| **For the quarterly period ended July 2, 2005** |
| o                                                    | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934** |

 

**Forthe transition period from               to               **

**Commissionfile number: 1-14330**

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POLYMER GROUP, INC.

(Exact name of registrantas 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 telephonenumber, including area code: **(843) 329-5151**

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the registrant was required to file such reports), and(2) has been subject to the filing requirements for the past 90 days.Yes x  No o

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

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x

Indicate by check mark whether the registrant hasfiled all documents and reports required to be filed by Section 12, 13 or 15(d) ofthe Securities Exchange Act of 1934 subsequent to the distribution ofsecurities under a plan confirmed by a court. Yes x  No o

On August 10, 2005there were 10,233,492 shares of Class A common stock, 160,004 sharesof Class B common stock and 31,131 shares of Class C commonstock outstanding. No shares of Class D or Class E common stock wereoutstanding as of such date. The par value for each class of common shares is$.01 per share.

 

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**POLYMERGROUP, INC.**

**INDEX TO FORM 10-Q**
|                                                      | ** ** |                                                                                             | **Page** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|----------|------------|
| IMPORTANT  INFORMATION REGARDING THIS FORM 10-Q |       | 2                                                                                           |     |
| **PART I. FINANCIAL  INFORMATION**              |       |                                                                                        |     |
| Item 1.                                              |       | Financial  Statements                                                                       |     | 3          |   |
| Item 2.                                              |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |     | 26         |   |
| Item  3.                                             |       | Quantitative  and Qualitative Disclosures About Market Risk                                 |     | 42         |   |
| Item  4.                                             |       | Controls  and Procedures                                                                    |     | 43         |   |
| **PART II. OTHER INFORMATION**                  |       |                                                                                        |     |
| Item 1.                                              |       | Legal  Proceedings                                                                          |     | 44         |   |
| Item  2.                                             |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                |     | 44         |   |
| Item  3.                                             |       | Defaults  Upon Senior Securities                                                            |     | 44         |   |
| Item  4.                                             |       | Submission  of Matters To a Vote of Security Holders                                        |     | 44         |   |
| Item 5.                                              |       | Other  Information                                                                          |     | 45         |   |
| Item 6.                                              |       | Exhibits                                                                                    |     | 45         |   |
| Signatures                                           |       | 46                                                                                          |     |
|                                                      |            |                                                                                             |          |            |  |  |  |

 

1

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

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

**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 speak only as of the date ofthis report. Unless required by law, the Company does not undertake any obligationto update these statements and cautions against any undue reliance on them.These forward-looking statements are based on current expectations andassumptions about future events. While management considers these expectationsand assumptions to be reasonable, they are inherently subject to significantbusiness, economic, competitive, regulatory and other risks, contingencies anduncertainties, most of which are difficult to predict and many of which arebeyond the Company’s control. There can be no assurances that these events willoccur or that the Company’s results will be as estimated.

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.

2

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**ITEM 1.**                FINANCIALSTATEMENTS

**POLYMER GROUP, INC.**

**CONSOLIDATEDBALANCE SHEETS (Unaudited)**

**(InThousands, Except Share Data)**
| ** **                                                                                                                                                      | ** ** | **July 2,  2005** | ** ** | **January 1,  2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|---------------------------|------------|
| **ASSETS**                                                                                                                                                      |       |                   |       |                      |       |   |   |
| Current assets:                                                                                                                                                 |       |                   |       |                      |       |   |   |
| Cash and cash  equivalents                                                                                                                                      |       |                   | $          | 25,222                    |       |   | $ | 41,296 |   |
| Accounts receivable, net                                                                                                                                        |       |                   | 122,576    |                      |       | 113,491 |   |
| Inventories                                                                                                                                                     |       |                   | 113,630    |                      |       | 106,349 |   |
| Deferred income taxes                                                                                                                                           |       |                   | 240        |                      |       | 226 |   |
| Other current assets                                                                                                                                            |       |                   | 35,054     |                      |       | 37,140 |   |
| Total current assets                                                                                                                                            |       |                   | 296,722    |                      |       | 298,502 |   |
| Property, plant and  equipment, net                                                                                                                             |       |                   | 402,112    |                      |       | 402,603 |   |
| Intangibles and loan  acquisition costs, net                                                                                                                    |       |                   | 45,933     |                      |       | 48,819 |   |
| Deferred income taxes                                                                                                                                           |       |                   | —     |                      |       | 1,489 |   |
| Other assets                                                                                                                                                    |       |                   | 4,537      |                      |       | 3,145 |   |
| Total assets                                                                                                                                                    |       |                   | $          | 749,304                   |       |   | $ | 754,558 |   |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                                                                  |       |                   |       |                      |       |   |   |
| Current liabilities:                                                                                                                                            |       |                   |       |                      |       |   |   |
| Short-term borrowings                                                                                                                                           |       |                   | $          | 6,417                     |       |   | $ | 6,981 |   |
| Accounts payable                                                                                                                                                |       |                   | 64,466     |                      |       | 63,773 |   |
| Accrued liabilities                                                                                                                                             |       |                   | 37,323     |                      |       | 34,570 |   |
| Income taxes payable                                                                                                                                            |       |                   | 2,039      |                      |       | 2,427 |   |
| Current portion of  long-term debt                                                                                                                              |       |                   | 3,034      |                      |       | 3,413 |   |
| Total current  liabilities                                                                                                                                      |       |                   | 113,279    |                      |       | 111,164 |   |
| Long-term debt                                                                                                                                                  |       |                   | 402,083    |                      |       | 403,560 |   |
| Deferred income taxes                                                                                                                                           |       |                   | 64,409     |                      |       | 65,468 |   |
| Other noncurrent  liabilities                                                                                                                                   |       |                   | 20,834     |                      |       | 27,319 |   |
| Total liabilities                                                                                                                                               |       |                   | 600,605    |                      |       | 607,511 |   |
| Minority interests                                                                                                                                              |       |                   | 15,293     |                      |       | 14,912 |   |
| 16% Series A  convertible pay-in-kind preferred shares—58,251 and 52,716 shares issued and  outstanding at July 2, 2005 and January 1, 2005 |       |                   | 62,996     |                      |       | 58,286 |   |
| Shareholders’ equity:                                                                                                                                      |       |                   |       |                      |       |   |   |
| Class A common  stock—10,233,492 and 10,130,477 shares issued and outstanding at July 2,  2005 and January 1, 2005, respectively            |       |                   | 102        |                      |       | 101 |   |
| Class B convertible  common stock—160,004 and 193,390 shares issued and outstanding at  July 2, 2005 and January 1, 2005, respectively      |       |                   | 2          |                      |       | 2 |   |
| Class C convertible  common stock—31,131 and 54,194 shares issued and outstanding at July 2,  2005 and January 1, 2005, respectively        |       |                   | —     |                      |       | 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                                                                                                                                     |       |                   | 87,221     |                      |       | 77,219 |   |
| Retained earnings  (deficit)                                                                                                                                    |       |                   | (37,792    | )                         |       | (33,820 | ) |
| Accumulated other  comprehensive income                                                                                                                         |       |                   | 20,877     |                      |       | 30,346 |   |
| Total shareholders’  equity                                                                                                                                |       |                   | 70,410     |                      |       | 73,849 |   |
| Total liabilities and shareholders’ equity                                                                                                                 |       |                   | $          | 749,304                   |       |   | $ | 754,558 |   |

 

See Accompanying Notes.

3

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**POLYMER GROUP, INC.CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)Three Months Ended July 2, 2005 and July 3, 2004(In Thousands, Except Per Share Data)**
| ** **                                    | ** ** | **Three Months  Ended  July 2, 2005** | ** ** | **Three Months  Ended  July 3, 2004** | ** ** |
|-----------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|
| Net sales                                     |       |                                                 | $          | 235,853                                              |       |   |   | $ | 210,403 |   |   |
| Cost of goods  sold                           |       |                                                 | 193,910    |                                                 |       |   | 173,624 |   |   |
| Gross profit                                  |       |                                                 | 41,943     |                                                 |       |   | 36,779 |   |   |
| Selling, general  and administrative expenses |       |                                                 | 25,862     |                                                 |       |   | 24,441 |   |   |
| Plant realignment  costs                      |       |                                                 | 5          |                                                 |       |   | 656 |   |   |
| Foreign currency  loss                        |       |                                                 | 70         |                                                 |       |   | 432 |   |   |
| Arbitration  settlement, net                  |       |                                                 | —     |                                                 |       |   | (13,394 | ) |   |
| Operating income                              |       |                                                 | 16,006     |                                                 |       |   | 24,644 |   |   |
| Other expense (income):                       |       |                                                 |       |                                                 |       |   |   |   |   |
| Interest expense, net                         |       |                                                 | 8,168      |                                                 |       |   | 9,357 |   |   |
| Minority interests                            |       |                                                 | 1,054      |                                                 |       |   | 624 |   |   |
| Write-off of loan acquisition costs           |       |                                                 | —     |                                                 |       |   | 5,022 |   |   |
| Other, net                                    |       |                                                 | (426       | )                                                    |       |   | 278 |   |   |
| Income before  income tax expense             |       |                                                 | 7,210      |                                                 |       |   | 9,363 |   |   |
| Income tax  expense                           |       |                                                 | 3,140      |                                                 |       |   | 3,640 |   |   |
| Net income                                    |       |                                                 | 4,070      |                                                 |       |   | 5,723 |   |   |
| Accrued dividends  on PIK preferred shares    |       |                                                 | 2,357      |                                                 |       |   | 1,271 |   |   |
| Income applicable  to common shareholders     |       |                                                 | $          | 1,713                                                |       |   |   | $ | 4,452 |   |   |
| Income per common share:                      |       |                                                 |       |                                                 |       |   |   |   |   |
| Basic                                         |       |                                                 | $          | 0.16                                                 |       |   |   | $ | 0.45 |   |   |
| Diluted                                       |       |                                                 | $          | 0.16                                                 |       |   |   | $ | 0.36 |   |   |

 

See Accompanying Notes.

4

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**POLYMER GROUP, INC.CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)Six Months Ended July 2, 2005 and July 3, 2004(In Thousands, Except Per Share Data)**
| ** **                                                  | ** ** | **Six Months  Ended    July 2, 2005  ** | ** ** | **Six Months  Ended    July 3, 2004  ** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|
| Net sales                                                   |       |                                                                       | $          | 480,214                                                                    |       |   |   | $ | 416,645 |   |   |
| Cost of goods  sold                                         |       |                                                                       | 394,354    |                                                                       |       |   | 341,890 |   |   |
| Gross profit                                                |       |                                                                       | 85,860     |                                                                       |       |   | 74,755 |   |   |
| Selling, general  and administrative expenses               |       |                                                                       | 53,329     |                                                                       |       |   | 51,072 |   |   |
| Plant realignment  costs                                    |       |                                                                       | 9          |                                                                       |       |   | 1,241 |   |   |
| Foreign currency  loss                                      |       |                                                                       | 94         |                                                                       |       |   | 988 |   |   |
| Arbitration  settlement, net                                |       |                                                                       | —     |                                                                       |       |   | (13,394 | ) |   |
| Operating income                                            |       |                                                                       | 32,428     |                                                                       |       |   | 34,848 |   |   |
| Other expense (income):                                     |       |                                                                       |       |                                                                       |       |   |   |   |   |
| Interest expense, net                                       |       |                                                                       | 16,034     |                                                                       |       |   | 24,534 |   |   |
| Minority interests                                          |       |                                                                       | 1,988      |                                                                       |       |   | 1,107 |   |   |
| Write-off of loan acquisition costs                         |       |                                                                       | —     |                                                                       |       |   | 5,022 |   |   |
| Other, net                                                  |       |                                                                       | (765       | )                                                                          |       |   | 1,107 |   |   |
| Income before  income tax expense                           |       |                                                                       | 15,171     |                                                                       |       |   | 3,078 |   |   |
| Income tax  expense                                         |       |                                                                       | 5,935      |                                                                       |       |   | 6,125 |   |   |
| Net income (loss)                                           |       |                                                                       | 9,236      |                                                                       |       |   | (3,047 | ) |   |
| Accrued and  paid-in-kind dividends on PIK preferred shares |       |                                                                       | 13,208     |                                                                       |       |   | 1,271 |   |   |
| Loss applicable  to common shareholders                     |       |                                                                       | $          | (3,972                                                                     | )          |   |   | $ | (4,318 | ) |   |
| Loss per common share:                                      |       |                                                                       |       |                                                                       |       |   |   |   |   |
| Basic                                                       |       |                                                                       | $          | (0.38                                                                      | )          |   |   | $ | (0.46 | ) |   |
| Diluted                                                     |       |                                                                       | $          | (0.38                                                                      | )          |   |   | $ | (0.46 | ) |   |

 

See Accompanying Notes.

5

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**POLYMER GROUP, INC.CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’EQUITY AND COMPREHENSIVE INCOME (LOSS) (Unaudited)For the Six Months Ended July 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                                                            |       |              | —     |                                                                                         |       |                               | —     |                                                   |       | 9,236     |       |       | —                           |       |   | 9,236 |   |   |   | $ | 9,236 |   |   |
| Accrued and paid-in-kind  dividends on PIK preferred shares           |       |              | —     |                                                                                         |       |                               | 8,493      |                                                   |       | (13,208   | )          |       | —                           |       |   | (4,715 | ) |   |   | — |   |   |
| Currency  translation adjustment, net of taxes                        |       |              | —     |                                                                                         |       |                               | —     |                                                   |       | —    |       |       | (10,478                          | )          |   | (10,478 | ) |   |   | (10,478 | ) |   |
| Cash flow hedge  adjustment, net of reclassification adjustment       |       |              | —     |                                                                                         |       |                               | —     |                                                   |       | —    |       |       | 1,009                            |       |   | 1,009 |   |   |   | 1,009 |   |   |
| Compensation  recognized on stock options and restricted stock grants |       |              | —     |                                                                                         |       |                               | 1,504      |                                                   |       | —    |       |       | —                           |       |   | 1,504 |   |   |   | — |   |   |
| Conversion of PIK  preferred shares to Class A common stock      |       |              | —     |                                                                                         |       |                               | 5          |                                                   |       | —    |       |       | —                           |       |   | 5 |   |   |   | — |   |   |
| Balance, July 2,  2005                                           |       |              | $          | 104                                                                                          |       |                               |       | $                                                      | 87,221     |      |       | $          | (37,792                          | )          |   | $ | 20,877 |   |   | $ | 70,410 |   |   |   | $ | (233 | ) |   |

 

See Accompanying Notes.

6

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**POLYMER GROUP, INC.CONSOLIDATED STATEMENTSOF CASH FLOW (Unaudited)(In Thousands)**
| ** **                                                                                | ** ** | **Six Months  Ended    July 2, 2005  ** | ** ** | **Six Months  Ended    July 3, 2004  ** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|
| Operating activities:                                                                     |       |                                                                       |       |                                                                       |       |   |   |   |   |
| Net income (loss)                                                                         |       |                                                                       | $          | 9,236                                                                      |       |   |   | $ | (3,047 | ) |   |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities: |       |                                                                       |       |                                                                       |       |   |   |   |   |
| Deferred income taxes                                                                     |       |                                                                       | 2,983      |                                                                       |       |   | (2,634 | ) |   |
| Write-off of loan acquisition costs                                                       |       |                                                                       | —     |                                                                       |       |   | 5,022 |   |   |
| Depreciation and amortization                                                             |       |                                                                       | 27,837     |                                                                       |       |   | 26,467 |   |   |
| Noncash interest and compensation                                                         |       |                                                                       | 1,505      |                                                                       |       |   | 2,104 |   |   |
| Changes in  operating assets and liabilities:                                             |       |                                                                       |       |                                                                       |       |   |   |   |   |
| Accounts receivable, net                                                                  |       |                                                                       | (13,331    | )                                                                          |       |   | (7,409 | ) |   |
| Inventories                                                                               |       |                                                                       | (11,085    | )                                                                          |       |   | (6,268 | ) |   |
| Other current assets                                                                      |       |                                                                       | 1,732      |                                                                       |       |   | (2,579 | ) |   |
| Accounts payable and accrued liabilities                                                  |       |                                                                       | 7,090      |                                                                       |       |   | 1,200 |   |   |
| Other, net                                                                                |       |                                                                       | (4,259     | )                                                                          |       |   | 3,967 |   |   |
| Net cash provided by operating  activities                                                |       |                                                                       | 21,708     |                                                                       |       |   | 16,823 |   |   |
| Investing activities:                                                                     |       |                                                                       |       |                                                                       |       |   |   |   |   |
| Purchases of property, plant and equipment                                                |       |                                                                       | (34,829    | )                                                                          |       |   | (8,854 | ) |   |
| Proceeds from sale of assets                                                              |       |                                                                       | 354        |                                                                       |       |   | 783 |   |   |
| Net cash used in investing activities                                                     |       |                                                                       | (34,475    | )                                                                          |       |   | (8,071 | ) |   |
| Financing activities:                                                                     |       |                                                                       |       |                                                                       |       |   |   |   |   |
| Proceeds from issuance of debt                                                            |       |                                                                       | 20,383     |                                                                       |       |   | 485,217 |   |   |
| Repayment of debt                                                                         |       |                                                                       | (22,803    | )                                                                          |       |   | (481,922 | ) |   |
| Loan acquisition costs and other financing costs                                          |       |                                                                       | (51        | )                                                                          |       |   | (12,306 | ) |   |
| Net cash used in financing  activities                                                    |       |                                                                       | (2,471     | )                                                                          |       |   | (9,011 | ) |   |
| Effect of  exchange rate changes on cash                                                  |       |                                                                       | (836       | )                                                                          |       |   | (225 | ) |   |
| Net decrease in  cash and cash equivalents                                                |       |                                                                       | (16,074    | )                                                                          |       |   | (484 | ) |   |
| Cash and cash  equivalents at beginning of period                                         |       |                                                                       | 41,296     |                                                                       |       |   | 21,336 |   |   |
| Cash and cash  equivalents at end of period                                               |       |                                                                       | $          | 25,222                                                                     |       |   |   | $ | 20,852 |   |   |

 

See Accompanying Notes.

7

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

**Note1.**   Principlesof Consolidation and Financial Statement Information

*Principles of Consolidation*

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

The accompanyingConsolidated Financial Statements include the accounts of Polymer Group, Inc.and all majority-owned subsidiaries after elimination of all significantintercompany accounts and transactions. The accounts of all foreignsubsidiaries have been included on the basis of fiscal periods ended threemonths or less prior to the dates of the consolidated balance sheets. Allamounts are presented in U.S. dollars, unless otherwise noted.

The accompanying unauditedinterim Consolidated Financial Statements and related notes should be read inconjunction with the Consolidated Financial Statements of the Company andrelated notes as contained in the Annual Report on Form 10-K for theperiod 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 the Three Months Ended April 2,2005*

On January 14, 2005,pursuant to the terms of the Company’s 16% Series A ConvertiblePay-in-Kind Preferred Stock (“PIK Preferred Shares”), PGI’s Board of Directorsdeclared a dividend payable in the form of 5,540 PIK Preferred Shares. Thedividends 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 theBoard of Directors, in consultation with management of the Company and theCompany’s independent registered public accounting firm has recently concludedthat its Consolidated 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.

ThePIK Preferred Shares allow holders to convert those shares into the Company’s Class ACommon Stock at an initial conversion rate of 137.14286 Class A CommonShares per PIK Preferred Share which approximates an initial conversion priceof $7.29 per share. As the 5,540 PIK Preferred Shares were convertible into Class ACommon Stock with an estimated value of $14.1 million (based on theclosing stock price of $18.50 per share on the date the dividends weredeclared), the results for the first quarter were restated to reflect anadditional dividend charge equal to the difference between the $14.1 millionestimated fair value and the $5.6 million of dividends previously accruedand charged to retained earnings. The effect of the restatement on the ConsolidatedStatement of Operations increases the charge for dividends on PIK PreferredShares and reduces income applicable to common shareholders by approximately$8.5 million. As a result of the issuance of such additional PIK PreferredShares, the Company has restated its Consolidated Statement of Operations forthe three months ended April 2, 2005 to reflect the paid-in-kind dividendsat the estimated fair value of the underlying securities in excess of the 

8

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

amounts previously accrued, with such excess amountingto approximately $8.5 million. Amounts originally reported for the threemonths ended April 2, 2005, and the related restated amounts, are asfollows (in thousands, except per share amounts):
| ** **                                                  | ** ** | **Three Months Ended  April 2, 2005** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                  | ** ** | **Originally**                                            | ** ** | **As** | ** ** |
| ** **                                                  | ** ** | **   Reported   **          | ** ** | **   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 |   |   |

 

The effects of suchadjustment have been included in the accompanying Consolidated Statement ofOperations for the six months ended July 2, 2005.

*Reclassification*

Certain amounts previouslypresented in the Consolidated Financial Statements for prior periods have beenreclassified to conform with current period classification.

*Revenue Recognition*

Revenue from product salesis recognized when title and risks of ownership pass to the customer. This isgenerally on the date of shipment to the customer, or upon delivery to a placenamed by the customer, dependent upon contract terms and when collectibility isreasonably assured and pricing is fixed or determinable. Revenue includes amountsbilled to customers for shipping and handling. Provision for rebates,promotions, product returns and discounts to customers is recorded as areduction in determining revenue in the same period that the revenue isrecognized.

*Accumulated Other Comprehensive Income*

Accumulated othercomprehensive income of $20.9 million at July 2, 2005 consisted of$19.6 million of currency translation gains and $1.3 million of cashflow hedge gains, all net of applicable income tax. Accumulated othercomprehensive income of $30.3 million at January 1, 2005 consisted of$30.0 million of currency translation gains and $0.3 million of cashflow hedge gains, all net of applicable income tax.

*New Accounting Pronouncements*

In May 2004, the FASBissued FASB Staff Position No. 106-2, “Accounting and DisclosureRequirements Related to the Medicare Prescription Drug, Improvement andModernization Act of 2003” (“FSP 106-2”). FSP 106-2 permits a sponsor of apostretirement health care plan that provides a prescription drug benefit tomake a one-time election to defer accounting for the effects of the MedicarePrescription Drug, Improvement and Modernization Act of 2003 (the “Act”), whichwas signed into law on December 8, 2003. The Act introduced a prescriptiondrug benefit under Medicare and federal subsidies to 

9

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

sponsorsof retiree health care benefit plans that provide a benefit that is at leastactuarially equivalent to that of Medicare. As permitted under FSP 106-2, theCompany made a one-time election to defer accounting for the effect of the Actand as more fully explained in Note 9 to the Consolidated Financial Statements,in December 2004 the Company approved plan amendments curtailing oreliminating various postretirement benefits in the U.S. As a result, theamounts included in the Consolidated Financial Statements related to theCompany’s postretirement benefit plans do not reflect the effects of the Act.

In November 2004, theFASB issued 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, 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 theperiod. The grant date fair value is to be estimated using option-pricingmodels adjusted for the unique characteristics of those instruments. In April2005, the Securities and Exchange Commission issued a final rule thatregistrants must adopt SFAS No. 123R’s fair value method of accounting nolater than the beginning of the fiscal year beginning after June 15, 2005.

In May 2005, the FASBissued SFAS No. 154, “Accounting Changes and Error Corrections.” Thisstatement amends earlier guidance and requires retrospective application toprior periods’ financial statements of a voluntary change in accountingprinciple unless it is impracticable. In addition, SFAS No. 154 requiresthat a change in the method of depreciation or amortization for a long-lived,non-financial asset be accounted for as a change in accounting estimate that isaffected by a change in accounting principle. SFAS No. 154 is effective foraccounting changes and corrections of errors made in fiscal years beginningafter December 15, 2005. The Company is currently analyzing the new guidanceand does not expect it to have a material impact on its financial position orresults of operations.

**Note2.**   Concentrationof Credit Risks and Accounts Receivable Securitization Agreements

Accounts receivablepotentially expose the Company to concentration of credit risk, as defined bySFAS No. 105, “Disclosure of Information about Financial Instruments withOff-Balance Sheet Risk and Financial Instruments with Concentration of CreditRisk.” Sales to the Procter & Gamble Company (“P&G”) accounted forapproximately 14% and 12% of the Company’s sales in the first six months of2005 and 2004, respectively. The Company provides credit in the normal courseof business and performs ongoing credit evaluations on its customers’ financialcondition as deemed necessary, but generally does not require collateral tosupport such receivables. Customer balances are considered past due based oncontractual terms and the Company does not accrue interest on the past duebalances. The allowance for doubtful accounts was approximately $9.7 millionat both July 2, 2005 and January 1, 2005, which management believesis adequate to provide for credit loss in the normal course of business, aswell as losses for customers who have filed for protection under bankruptcylaws. Once management determines 

10

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

that thereceivables are not recoverable, the amounts are removed from the financialrecords along with the corresponding reserve 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 of eligiblereceivables, restrictions on concentrations of receivables and the historicalperformance of the receivables sold. During the first six months of 2005,approximately $61.5 million of receivables had been sold under the termsof the factoring agreement. The sale of these receivables accelerated thecollection of the Company’s cash, reduced credit exposure and lowered theCompany’s net borrowing costs. Sales of accounts receivable are reflected as areduction of *Accounts receivable, net*in the Consolidated Balance Sheets and a gain or loss is reflected in theConsolidated Statements of Operations on such sale, as they meet the applicablecriteria of SFAS No. 140, “Accounting for Transfers and Servicing ofFinancial Assets and Extinguishment of Liabilities” (“SFAS No. 140”). Theamount due from the factoring company, net of advances received from thefactoring company, was $4.4 million and $7.4 million at July 2,2005 and January 1, 2005, respectively, and is shown in *Other current assets* in the ConsolidatedBalance Sheets. The Company pays factoring fees associated with the sale ofreceivables based on the dollar value of the receivables sold. Costs related tothis program for the three and six months ended July 2, 2005 were $0.1 millionand $0.3 million, respectively, and are included in *Other expense, net* in the ConsolidatedStatement 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.

Accruedcosts for restructuring efforts are included in *Accruedliabilities* in the Consolidated Balance Sheets. A summary of thebusiness restructuring activity during the first six months of fiscal 2005 ispresented in the following table (in thousands):
| Balance accrued  at beginning of year |   | $    | 561    |   |
|---------------------------------------|--------|------|--------|--------|
| 2005 plant  realignment costs         |   | 9    |   |
| Cash payments                         |   | (340 | )      |
| Adjustments                           |   | (29  | )      |
| Balance accrued at end  of period     |   | $    | 201    |   |

 

**Note 4.**   Inventories

Inventoriesare stated at the lower of cost or market primarily using the first-in,first-out method of accounting and consist of the following (in thousands):
| ** **      | ** ** | **July 2,  2005** | ** ** | **January 1,  2005** | ** ** |
|-----------------|------------|------------------------|------------|---------------------------|------------|
| Finished goods  |       |                   | $          | 54,701                    |       |   | $ | 50,482 |   |
| Work in process |       |                   | 18,490     |                      |       | 15,612 |   |
| Raw materials   |       |                   | 40,439     |                      |       | 40,255 |   |
|            |       |                   | $          | 113,630                   |       |   | $ | 106,349 |   |

 

11

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

Inventories are net ofreserves of approximately $7.9 million and $8.2 million at July 2,2005 and January 1, 2005, respectively. Such reserves are primarily forobsolete and slow-moving inventories and other valuation allowances. Managementbelieves that the reserves are adequate to provide for losses in the normalcourse of business.

**Note 5.**   Intangibles and Loan Acquisition Costs

Intangiblesand loan acquisition costs consist of the following (in thousands):
| ** **                       | ** ** | **July 2,** | ** ** | **January 1,** | ** ** |
|----------------------------------|------------|------------------|------------|---------------------|------------|
| ** **                       | ** ** | **2005**         | ** ** | **2005**            | ** ** |
| Cost:                            |       |             |       |                |       |   |   |
| Proprietary technology           |       |             | $          | 26,604              |       |   | $ | 26,604 |   |
| Goodwill                         |       |             | 15,632     |                |       | 15,632 |   |
| Loan acquisition costs and other |       |             | 18,998     |                |       | 18,759 |   |
|                             |       |             | 61,234     |                |       | 60,995 |   |
| Less accumulated  amortization   |       |             | (15,301    | )                   |       | (12,176 | ) |
|                             |       |             | $          | 45,933              |       |   | $ | 48,819 |   |

 

Componentsof amortization expense are shown in the table below (in thousands):
| ** **                                                                                    | ** ** | **Three**        | ** ** | **Three**        | ** ** | **Six**          | ** ** | **Six**          | ** ** |
|-----------------------------------------------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                    | ** ** | **Months**       | ** ** | **Months**       | ** ** | **Months**       | ** ** | **Months**       | ** ** |
| ** **                                                                                    | ** ** | **Ended**        | ** ** | **Ended**        | ** ** | **Ended**        | ** ** | **Ended**        | ** ** |
| ** **                                                                                    | ** ** | **July 2,** | ** ** | **July 3,** | ** ** | **July 2,** | ** ** | **July 3,** | ** ** |
| ** **                                                                                    | ** ** | **2005**         | ** ** | **2004**         | ** ** | **2005**         | ** ** | **2004**         | ** ** |
| Amortization of:                                                                              |       |             |       |             |       |             |       |             |       |
| Intangibles with finite lives, included in selling,  general and administrative expenses |       | $                | 1,061      |             | $          | 1,433            |       | $                | 2,118      |   | $ | 2,885 |   |
| Loan acquisition costs included in interest expense,  net                                     |       | 503              |       | 490              |       | 1,007            |       | 969              |       |
| Total  amortization expense                                                                   |       | $                | 1,564      |             | $          | 1,923            |       | $                | 3,125      |   | $ | 3,854 |   |

 

Intangibles are amortizedover periods ranging from 2 to 7 years. Loan acquisition costs areamortized over the life of the related debt.

**Note 6.**   Accrued Liabilities

Accrued liabilities in theConsolidated Balance Sheets included salaries, wages and other fringe benefitsof $18.7 million and $20.4 million as of July 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):
| ** **                                                                                                                                                                             | ** ** | **July 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 6.73% as of  July 2, 2005; due in quarterly payments of  $750.0 thousand, with the balance due April 27, 2010           |       |             | $          | 280,000             |       |   | $ | 281,500 |   |
| Second Lien Term Loan—interest at 9.73% as of July 2,  2005; due April 27, 2011                                                                                    |       |             | 125,000    |                |       | 125,000 |   |
| Other                                                                                                                                                                                  |       |             | 117        |                |       | 473 |   |
|                                                                                                                                                                                   |       |             | 405,117    |                |       | 406,973 |   |
| Less: Current  maturities                                                                                                                                                              |       |             | (3,034     | )                   |       | (3,413 | ) |
|                                                                                                                                                                                   |       |             | $          | 402,083             |       |   | $ | 403,560 |   |

 

*Senior Secured Bank Facility*

The Company’s SeniorSecured Bank Facility (the “Bank Facility”), which was entered into on April 27,2004, consists of a $50.0 million secured revolving credit facility, a$300.0 million senior secured first lien term loan and a $125.0 millionsenior secured second lien term loan. The proceeds therefrom were used to fullyrepay indebtedness under the Company’s previous Restructured Credit Facilityand pay related fees and expenses.

All borrowings under theBank Facility are U.S. dollar denominated and are guaranteed, on a joint andseveral basis, by each and all of the direct and indirect domestic subsidiariesof the Company 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 July 2, 2005, the Company was incompliance with all such covenants and expects to remain in compliance throughthe remainder of fiscal 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 certain other items. Since the amounts of excess cashflows for future periods are based on year-end data and not determinable, onlythe mandatory payments of $750.0 thousand per quarter have been 

13

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

classifiedas a current liability. Additionally, no excess cash flow payment was requiredto be made with respect to fiscal 2004 and, due to the planned magnitude of themajor capital expenditures for 2005, any excess cash flow requirement withrespect to 2005 is not expected to be significant.

The interest rateapplicable to borrowings under the Bank Facility is based on three-monthLIBOR plus a specified margin. The applicable margin for borrowings under therevolving credit facility is 300 basis points, the margin for the first lienterm loan is 325 basis points and the margin for the second-lien term loan is625 basis points. The Company may elect to use an alternate base rate for itsborrowings under the revolving credit facility based on the bank’s base rateplus 200 basis points. The Company had no outstanding borrowings under therevolving credit facility at either July 2, 2005 or January 1, 2005.The Company’s average borrowings under the revolving credit facility, which hadan effective interest rate of approximately 7.84%, were $3.5 million forthe period from January 2, 2005 to July 2, 2005. The revolvingportion 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 termsand conditions, a maximum of $20.0 million of the Bank Facility may beused for revolving letters of credit. As of July 2, 2005, the Company had$15.4 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 July 2,2005.

*Subsidiary Indebtedness*

Nanhai has a short-termcredit facility (denominated in U.S. dollars and Chinese rmb) with a financialinstitution in China which matured in June 2005 and was renegotiated, withsimilar terms and conditions, for an additional twelve-month period expiring inJune 2006. The amount of outstanding indebtedness under the facility was$5.8 million at both July 2, 2005 and January 1, 2005. Theannual average rate on the new facility is approximately 5.43%. Previously, theNanhai indebtedness was fully supported by a $7.1 million letter of creditissued by the Company’s agent bank. Under the new facility, the letter ofcredit was reduced to $3.0 million and additional collateral was grantedthrough the pledge of the Nanhai assets. The Company’s letter of credit for thelower amount was amended in July 2005. In addition, Nanhai had outstandingbankers’ acceptances totaling $0.6 million and $1.2 million at July 2,2005 and January 1, 2005, respectively. These notes, which are denominatedin Chinese rmb, mature within three months and are subject to a 0.5%transaction fee. These borrowings are shown as *Short-termborrowings* in the Consolidated Balance Sheets.

At January 1, 2005,the Company’s Argentina-based majority owned subsidiary had a creditfacility denominated in U.S. dollars totaling approximately $0.4 million(all with current maturities). These borrowings were fully repaid in the firstquarter of 2005.

14

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

**Note 8.**   Income Taxes

The Company recognized income tax expense of $5.9 millionfor the six months ended July 2, 2005 on consolidated income before incometaxes of $15.2 million. This income tax expense is marginally higher thanthe U.S. federal statutory rate partially due to losses in certainjurisdictions for which no income tax benefits were recognized. Additionally,the income tax expense is impacted by foreign withholding taxes, for which taxcredits are not anticipated, U.S. state income taxes and foreign taxescalculated at statutory rates less than the U.S. federal statutory rate.

During the six months ended July 3, 2004, theCompany recognized an income tax expense of $6.1 million on consolidatedincome before income taxes of $3.1 million. The income tax expense wasprimarily due to foreign withholding taxes, for which tax credits are notanticipated, U.S. state income taxes, and no significant income tax benefitrecognized for losses incurred in the U.S. and certain foreign jurisdictions.

Income tax refundsreceivable were $12.8 million and $15.4 million at July 2, 2005and January 1, 2005, respectively, and are largely comprised of amountsdue from European tax jurisdictions. These amounts are included in *Other current assets* on the Consolidated Balance Sheets.

**Note 9.**   PensionBenefits 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.

Componentsof net periodic benefit costs for the three and six months ended July 2,2005 and July 3, 2004 are as follows (in thousands):
| ** **                                                      | ** ** | **Pension Benefit Plans** | ** ** |
|-----------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                      | ** ** | **Three Months Ended**    | ** ** | **Six Months Ended** | ** ** |
| ** **                                                      | ** ** | **July 2,  2005**              | ** ** | **July 3,  2004** | ** ** | **July 2,  2005** | ** ** | **July 3,  2004** | ** ** |
| Current service  costs                                          |       | $                                   | 635        |   | $ | 570 |   | $ | 1,291 |   | $ | 1,160 |   |
| Interest costs on  projected benefit obligation and other  |       | 1,371                               |       | 1,218 |   | 2,779 |   | 2,471 |   |
| Return on plan  assets                                          |       | (1,501                              | )          | (1,295 | ) | (3,043 | ) | (2,629 | ) |
| Amortization of  transition obligation and other                |       | 7                                   |       | (3 | ) | 13 |   | (6 | ) |
| Periodic benefit cost,  net                                     |       | $                                   | 512        |   | $ | 490 |   | $ | 1,040 |   | $ | 996 |   |

 
| ** **                                       | ** ** | **Postretirement Benefit Plans**               | ** ** |
|--------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                       | ** ** | **Three Months Ended**                         | ** ** | **Six Months Ended** | ** ** |
| ** **                                       | ** ** | **July 2,**                                         | ** ** | **July 3,** | ** ** | **July 2,** | ** ** | **July 3,** | ** ** |
| ** **                                       | ** ** | **    2005    ** | ** ** | **    2004    ** | ** ** | **    2005    ** | ** ** | **    2004    ** | ** ** |
| Current service  costs                           |       |                                                     | $          | 45 |   |   |   | $ | 101 |   |   |   | $ | 90 |   |   |   | $ | 202 |   |   |
| Interest costs on  projected benefit obligation  |       |                                                     | 121        |   |   |   | 213 |   |   |   | 243 |   |   |   | 428 |   |   |
| Amortization of  transition obligation and other |       |                                                     | (28        | ) |   |   | — |   |   |   | (56 | ) |   |   | — |   |   |
| Periodic benefit cost,  net                      |       |                                                     | $          | 138 |   |   |   | $ | 314 |   |   |   | $ | 277 |   |   |   | $ | 630 |   |   |

 

15

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

As of July 2, 2005, the Company contributed $3.6 millionto its pension plans for the 2005 benefit year. The Company presentlyanticipates contributing an additional $2.3 million to fund its pensionplans in 2005 for a total of $5.9 million.

On December 8, 2003,the Medicare 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 accounting forthe effect of the Act until the authoritative guidance on the accounting forthe federal subsidy under the Act is issued. Given that the Company curtailedmost of its U.S. postretirement benefit plans in 2004, it will likely not beeligible 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

*Stock Option Plan*

The 2003 Stock Option Plan (the “2003 Plan”) wasapproved by the Company’s Board of Directors and shareholders and is administeredby the Compensation Committee of the Board of Directors. The stock options havea 4-5 year life and vest, based on the achievement of various service andfinancial performance criteria, over a four-year period beginning January 4,2004. As of July 2, 2005, the Company had awarded grants of non-qualifiedstock options to purchase 400,000 shares of the Company’s Class A CommonStock. As of July 2, 2005, 400,000 shares of the Company’s Class ACommon Stock were reserved for issuance under the 2003 Plan and no additionalstock options are available for future grants under the 2003 Plan.

The Company has elected to account for the 2003 Planin accordance with the intrinsic value method as prescribed by APB No. 25,which measures compensation cost as the excess, if any, of the quoted marketprice of the stock at the date of grant over the amount an employee must pay toacquire the stock. Additionally, 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 to the 2003 Plan for thethree and six months ended July 2, 2005 were $1.1 million and $1.5 million,respectively, and were included in *Selling,general and administrative expenses* in the Consolidated Statementsof Operations. For the three and six months ended July 3, 2004, thesecosts were $0.2 million.

On May 18, 2005, theCompany’s shareholders approved the 2005 Stock Option Plan (the “2005 Plan”),which will be administered by the Compensation Committee of the Board ofDirectors. The stock options will only vest and become exercisable on theoccurrence of a change in control, and only after certain target thresholds,tied to the cash received by MatlinPatterson Global Opportunities Fund, L.P. andits affiliates are reached, in the change in control transaction, or from theconversion of securities received in the change in control transaction intocash within one year following the change in control. The term of each stock optionshall end on June 30, 2008, unless the stock option has been exercised,with a provision to extend the date of exercise by up to one year following achange in control in which securities are issued as part of the considerationof the transaction. The Company may award grants of non-qualified 

16

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

stockoptions to purchase up to 200,000 shares of the Company’s Class A commonstock. As of July 2, 2005, no awards have been granted under the 2005Plan.

*Restricted StockPlan*

In May 2004, theCompany’s shareholders approved the 2004 Restricted Stock Plan for Directors(the “Restricted Plan”), which expires in 2014, for issuance of restrictedshares to Directors of the Company, as defined in the Restricted Plan. TheRestricted Plan approved for issuance 200,000 restricted shares and isadministered by a committee of the Company’s Board of Directors not eligible toreceive restricted shares under the Restricted Plan. In the first six months of2005, the Company awarded 944 restricted shares to members of the Company’sBoard of Directors for their Board service to the Company. The cost associatedwith the restricted stock grants totaled $20,000 for the first six months ofboth 2005 and 2004 and was included in *Selling,general and administrative expenses* in the Consolidated Statementsof Operations. As of July 2, 2005, 155,336 shares of the Company’s Class Acommon stock are available for future grants.

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

In conjunction with the Company’s refinancing in April 2004of the Restructured Credit Facility, the Company’s majority shareholderexchanged approximately $42.6 million in aggregate principal amount of 10.0%Convertible Subordinated Notes due 2007 (the “Junior Notes”) it controlled for42,633 shares of the Company’s PIK Preferred Shares. Also, during thethird quarter of fiscal 2004, $10.1 million in aggregate principal amountof the Company’s 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. 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 as includedin 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 new Bank Facility, theexchanges have been accounted for as a capital transaction and, accordingly, nogain or loss was recognized.

The dividends on the PIK Preferred Shares accrue at anannual rate of 16% and are payable semi-annually in arrears on each January 1and July 1, commencing with July 1, 2004, and are payable at theoption of the Company; (i) through the issuance of additional shares ofPIK Preferred Stock; (ii) in cash; or (iii) in a combination thereof.Dividends are cumulative and accrue from the most recent dividend payment dateto which dividends have been paid or, if no dividends have been paid, from thedate of original issuance. Accordingly, the Company accrues dividends at thestated rate of 16.0% until such time as the form of the dividend is declared bythe Company’s Board of Directors. If the dividend is paid-in-kind through theissuance of additional shares, the Company recognizes the dividend at theestimated fair value of the shares issued in excess of the amounts previouslyaccrued.

On June 30, 2012, the Company must redeem all ofthe PIK Preferred Shares then outstanding at a price equal to $1,000 per shareplus any other accrued and unpaid dividends thereon whether or not declared,which amount will be payable by the Company (“mandatory redemption price”), atthe option of 

17

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

the Company, (i) incash; (ii) through the issuance of shares of Class A Common Stock; or(iii) through a combination thereof. If paid in stock, the number ofshares to be delivered by the Company will be the mandatory redemption price(as defined earlier) divided by the then current market price of a share of Class ACommon 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, 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 optional redemption price (as defined by the preferredstock agreement) divided by the then current market price of a share of Class ACommon Stock.

On January 14, 2005, the Company’s Board ofDirectors declared that dividends accrued on the PIK Preferred Shares from thedate of issuance through December 31, 2004, in the amount of $5.6 million,would be paid in the form of PIK Preferred Shares. On such date, the closingprice of the Company’s Class A Common Stock on the Over-the-CounterBulletin Board was $18.50 per share.

The Company has restated its first quarter results torecord the value of the additional PIK Preferred Shares declared as a dividend onJanuary 14, 2005, the date the Board of Directors declared that theaccrued dividends were to be paid in the form of additional PIK PreferredShares, rather than cash, reduced by the amount of dividends previouslyrecorded at the stated 16.0% rate. Using the market value of the Company’s Class ACommon Stock on January 14, 2005 of $18.50 per share, the fair value ofthe 5,540 additional PIK Preferred Shares issued in lieu of cash payment wasapproximately $14.1 million, which exceeded the amount previously accrued bythe Company of $5.6 million, based on the stated rate of 16.0%, byapproximately $8.5 million. Recording the additional $8.5 milliondividend at the date of declaration has resulted in a reduction in the amountof income applicable to common shareholders and retained earnings, with acorresponding increase in Additional Paid-in Capital. See Note 1, *Restatement of Results for the Three Months Ended April 2, 2005*,to the Consolidated Financial Statements.

See Note 18, *Subsequent Events*, to the Consolidated Financial Statementsfor further discussions regarding dividend declarations and redemption of thePIK Preferred Shares.

**Note 12.**   Derivative and Other FinancialInstruments and Hedging Activities

The Company uses derivative financial instruments tomanage market risks and reduce its exposure from fluctuations in interestrates. All hedging transactions are authorized and executed under clearlydefined policies and procedures, which prohibit the use of financialinstruments for trading purposes. SFAS No. 133, “Accounting for DerivativeInstruments and Hedging Activities,” as amended by SFAS No. 138, “Accountingfor Certain Derivative Instruments and Certain Hedging Activities (an Amendmentof SFAS No. 133)” requires the Company to recognize all derivatives on thebalance sheet at fair value and establish criteria for designation andeffectiveness of hedging relationships.

The Company uses interest-rate derivative instrumentsto manage its exposure on its debt instruments. As indicated in Note 7 to theConsolidated Financial Statements, to mitigate its interest rate 

18

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

exposure as required bythe Bank Facility, the Company entered into a pay-fixed, receive-variableinterest rate swap, thus effectively converting the interest paymentsassociated with approximately 50% of the debt to fixed amounts at a LIBOR rateof 3.383%. As of July 2, 2005, the notional amount of these contracts,which expire on May 8, 2007, was $212.5 million. Cash settlements aremade quarterly and the floating rate is reset quarterly, coinciding with thereset dates of the Bank Facility debt.

In accordance with SFAS No. 133, the Companydesignated the swap as a cash flow hedge of the variability of interestpayments under the senior secured term loans and applied the shortcut method ofassessing effectiveness. The agreement’s terms ensure complete effectiveness inoffsetting the interest component associated with the Bank Facility. As such,there is no ineffectiveness and changes in the fair value of the swap arerecorded to accumulated other comprehensive income (loss). The fair value ofthe interest rate swap of $2.0 million as of July 2, 2005 and $0.3 millionas of January 1, 2005 was based on current settlement values and wasincluded in *Other noncurrent assets* in theConsolidated Balance Sheets.

The impact of these swaps on *Interestexpense, net*for the three and six months ended July 2, 2005was an increase of $0.2 million and $0.6 million, respectively. Forthe three and six months ended July 3, 2004, the impact was $0.6 million.

The Company has entered intocertain foreign currency forward contracts to manage its U.S. dollar exposureon Euro-based obligations for firm commitments related to significant capitalprojects. As of July 2, 2005, forward contracts were executed for spunmeltline purchases related to the Suzhou, China plant and Mooresville, NorthCarolina expansion. In accordance with SFAS No. 133, the Companydesignated the option as a fair value hedge of the variability of the fairmarket value of a firm purchase commitment. The agreement’s terms ensurecomplete effectiveness in offsetting the foreign currency variabilityassociated with the firm commitment.

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

Thefollowing is a reconciliation of basic income per common share to diluted incomeper common share for the three months ended July 3, 2004 (in thousands,except per share data):
| ** **                                                                        | ** ** | **Income Applicable  to Common  Shareholders  (EPS Numerator)** | ** ** | **Average Shares  Outstanding  (EPS Denominator)** | ** ** | **Earnings Per  Common Share** | ** ** |
|-----------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|------------------------------------------|------------|
| Basic                                                                             |       |                                                                      | $          | 4,452                                                        |       |                                     |       | 9,824 |   |   |   | $ | 0.45 |   |   |
| Adjustments:                                                                      |       |                                                                      |       |                                                         |       |                                     |       |   |   |   |   |   |   |
| PIK preferred  shares and Junior Notes, including related dividends and interest  |       |                                                                      | 1,754      |                                                         |       |                                     | 7,304      |   |   |   |   |   |   |
| Potential shares  exercisable under stock option and restricted stock grant plans |       |                                                                      |       |                                                         |       |                                     | 242        |   |   |   |   |   |   |
| Less: shares  which could be repurchased under treasury stock method              |       |                                                                      |       |                                                         |       |                                     | (227       | ) |   |   |   |   |   |
| Diluted                                                                           |       |                                                                      | $          | 6,206                                                        |       |                                     |       | 17,143 |   |   |   | $ | 0.36 |   |   |

 

No calculations have been presented for the three andsix months ended July 2, 2005 and the six months ended July 3, 2004,as the impact of such calculations are anti-dilutive. Average sharesoutstanding 

19

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

for the three and sixmonths ended July 2, 2005 were 10,424,627 and 10,421,542, respectively.Average shares outstanding for the six months ended July 3, 2004 were9,305,423.

As of July 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 stockhave similar voting rights. In accordance with the Amended and RestatedCertificate of Incorporation, all shares of Class B, C, D and E Common Stockmay be converted into an equal number of shares of Class A Common Stock.See Note 11 to the Consolidated Financial Statements, for additionalinformation related to the Company’s PIK Preferred Shares.

In April 2004, the UnitedStates Bankruptcy Court for the District of South Carolina resolved certainpending claims filed against the Company in connection with the Modified Planand, as a result, approved the issuance of 1,327,177 shares of the Company’s Class ACommon Stock and 19,359 shares of the Company’s Class C Common Stock whichwere issued on a pro rata basis to holders of common stock of the old PolymerGroup Inc.’s Class 4 General Unsecured Claims per the old Polymer GroupInc.’s Chapter 11 Plan of Reorganization. If these shares had been outstandingfor all periods of fiscal 2004 presented, the pro forma earnings (losses)available per common share would be $0.41 (basic) and $0.34 (diluted) for thethree months ended July 3, 2004 and $(0.42) (basic and diluted) for thesix months ended July 3, 2004.

As ofJuly 2, 2005, the PIK Preferred Shares were convertible at the option ofthe holders into approximately 8,627,805 shares of the Company’s Class ACommon Stock.

**Note 14.**   Segment Information

The Company’s reportable segments consist of itsprimary operating divisions—Nonwovens and Oriented Polymers—reflecting how theoverall business is managed by the Company’s senior management and reviewed bythe Board of Directors. Each of these businesses sells to different end-usemarkets, such as hygiene, medical, wipes and industrial and specialty markets.Sales to P&G accounted for more than 10% of the Company’s sales in each ofthe periods presented. Sales to this customer are reported in the Nonwovenssegment and the loss of these sales would have a material adverse effect onthis segment. The Company recorded charges and/or income in the ConsolidatedStatements of Operations during the three and six months ended July 2,2005 and the three and six months ended July 3, 2004 relating to plantrealignment costs, foreign currency losses and arbitration settlement, netwhich have not been allocated to the segment data.

20

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

Financialdata by segment is as follows (in thousands):
| ** **                                                          | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                          | ** ** | **July 2,  2005**           | ** ** | **July 3,  2004**         | ** ** | **July 2,  2005** | ** ** | **July 3,  2004** | ** ** |
| **Net  sales**                                                      |       |                             |       |                           |       |   |   |   |   |
| Nonwovens                                                           |       | $                                | 192,170    |                           | $          | 164,139 |   | $ | 386,706 |   | $ | 327,853 |   |
| Oriented Polymers                                                   |       | 43,683                           |       | 46,264                         |       | 93,508 |   | 88,792 |   |
|                                                                |       | $                                | 235,853    |                           | $          | 210,403 |   | $ | 480,214 |   | $ | 416,645 |   |
| **Operating income (loss)**                                         |       |                             |       |                           |       |   |   |   |   |
| Nonwovens                                                           |       | $                                | 17,938     |                           | $          | 11,839 |   | $ | 34,661 |   | $ | 23,774 |   |
| Oriented Polymers                                                   |       | 3,582                            |       | 4,688                          |       | 8,846 |   | 8,226 |   |
| Unallocated Corporate                                               |       | (5,439                           | )          | (4,189                         | )          | (10,976 | ) | (8,317 | ) |
|                                                                |       | 16,081                           |       | 12,338                         |       | 32,531 |   | 23,683 |   |
| Plant realignment costs                                             |       | (5                               | )          | (656                           | )          | (9 | ) | (1,241 | ) |
| Foreign currency loss                                               |       | (70                              | )          | (432                           | )          | (94 | ) | (988 | ) |
| Arbitration settlement, net                                         |       | —                           |       | 13,394                         |       | — |   | 13,394 |   |
|                                                                |       | $                                | 16,006     |                           | $          | 24,644 |   | $ | 32,428 |   | $ | 34,848 |   |
| **Depreciation and amortization expense**                           |       |                             |       |                           |       |   |   |   |   |
| Nonwovens                                                           |       | $                                | 11,353     |                           | $          | 10,501 |   | $ | 22,451 |   | $ | 21,073 |   |
| Oriented Polymers                                                   |       | 2,355                            |       | 1,998                          |       | 4,457 |   | 4,072 |   |
| Unallocated Corporate                                               |       | (37                              | )          | 323                            |       | (78 | ) | 353 |   |
| Depreciation and amortization expense included in  operating income |       | 13,671                           |       | 12,822                         |       | 26,830 |   | 25,498 |   |
| Amortization of loan acquisition costs                              |       | 503                              |       | 490                            |       | 1,007 |   | 969 |   |
|                                                                |       | $                                | 14,174     |                           | $          | 13,312 |   | $ | 27,837 |   | $ | 26,467 |   |
| **Capital spending**                                                |       |                             |       |                           |       |   |   |   |   |
| Nonwovens                                                           |       | $                                | 24,618     |                           | $          | 4,099 |   | $ | 34,614 |   | $ | 8,453 |   |
| Oriented Polymers                                                   |       | 117                              |       | 251                            |       | 215 |   | 401 |   |
| Corporate                                                           |       | —                           |       | —                         |       | — |   | — |   |
|                                                                |       | $                                | 24,735     |                           | $          | 4,350 |   | $ | 34,829 |   | $ | 8,854 |   |

 
| ** **           | ** ** | **July 2,   2005** | ** ** | **January 1,  2005** | ** ** |
|----------------------|------------|------------------------------|------------|---------------------------|------------|
| **Division  assets** |       |                         |       |                      |       |
| Nonwovens            |       | $                            | 697,818    |                      | $          | 716,532 |   |
| Oriented Polymers    |       | 144,356                      |       | 149,393                   |       |
| Corporate            |       | 17,289                       |       | 16,191                    |       |
| Eliminations         |       | (110,159                     | )          | (127,558                  | )          |
|                 |       | $                            | 749,304    |                      | $          | 754,558 |   |

 

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

**Geographic Data:**

Geographicdata for the Company’s operations, based on the geographic region from whichthe sale is made is presented in the following table (in thousands):
| ** **                                                          | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                          | ** ** | **July 2,  2005**           | ** ** | **July 3,  2004**         | ** ** | **July 2,  2005** | ** ** | **July 3,  2004** | ** ** |
| **Net  sales**                                                      |       |                             |       |                           |       |   |   |   |   |
| United States                                                       |       | $                                | 107,598    |                           | $          | 95,802 |   | $ | 221,020 |   | $ | 187,946 |   |
| Canada                                                              |       | 27,467                           |       | 27,723                         |       | 58,435 |   | 56,315 |   |
| Europe                                                              |       | 48,623                           |       | 48,774                         |       | 99,307 |   | 99,158 |   |
| Asia                                                                |       | 11,031                           |       | 8,070                          |       | 22,041 |   | 14,888 |   |
| Latin America                                                       |       | 41,134                           |       | 30,034                         |       | 79,411 |   | 58,338 |   |
|                                                                |       | $                                | 235,853    |                           | $          | 210,403 |   | $ | 480,214 |   | $ | 416,645 |   |
| **Operating income (loss)**                                         |       |                             |       |                           |       |   |   |   |   |
| United States                                                       |       | $                                | 1,150      |                           | $          | 126 |   | $ | 1,849 |   | $ | (649 | ) |
| Canada                                                              |       | 1,617                            |       | 2,104                          |       | 4,748 |   | 4,029 |   |
| Europe                                                              |       | 4,535                            |       | 3,965                          |       | 8,804 |   | 8,410 |   |
| Asia                                                                |       | 1,344                            |       | 1,056                          |       | 2,209 |   | 1,600 |   |
| Latin America                                                       |       | 7,435                            |       | 5,087                          |       | 14,921 |   | 10,293 |   |
|                                                                |       | 16,081                           |       | 12,338                         |       | 32,531 |   | 23,683 |   |
| Plant realignment costs                                             |       | (5                               | )          | (656                           | )          | (9 | ) | (1,241 | ) |
| Foreign currency loss                                               |       | (70                              | )          | (432                           | )          | (94 | ) | (988 | ) |
| Arbitration settlement, net                                         |       | —                           |       | 13,394                         |       | — |   | 13,394 |   |
|                                                                |       | $                                | 16,006     |                           | $          | 24,644 |   | $ | 32,428 |   | $ | 34,848 |   |
| **Depreciation and amortization expense**                           |       |                             |       |                           |       |   |   |   |   |
| United States                                                       |       | $                                | 6,398      |                           | $          | 6,093 |   | $ | 12,461 |   | $ | 11,916 |   |
| Canada                                                              |       | 1,799                            |       | 1,454                          |       | 3,357 |   | 2,957 |   |
| Europe                                                              |       | 2,385                            |       | 2,252                          |       | 4,885 |   | 4,595 |   |
| Asia                                                                |       | 986                              |       | 998                            |       | 1,983 |   | 1,992 |   |
| Latin America                                                       |       | 2,103                            |       | 2,025                          |       | 4,144 |   | 4,038 |   |
| Depreciation and amortization expense included in  operating income |       | 13,671                           |       | 12,822                         |       | 26,830 |   | 25,498 |   |
| Amortization of loan acquisition costs                              |       | 503                              |       | 490                            |       | 1,007 |   | 969 |   |
|                                                                |       | $                                | 14,174     |                           | $          | 13,312 |   | $ | 27,837 |   | $ | 26,467 |   |

 
| ** **          | ** ** | **July 2,  2005** | ** ** | **January 1,  2005** | ** ** |
|---------------------|------------|------------------------|------------|---------------------------|------------|
| **Region  assets:** |       |                   |       |                      |       |
| United States       |       | $                      | 217,364    |                      | $          | 166,469 |   |
| Canada              |       | 92,126                 |       | 99,382                    |       |
| Europe              |       | 230,463                |       | 294,811                   |       |
| Asia                |       | 39,904                 |       | 35,996                    |       |
| Latin America       |       | 169,447                |       | 157,900                   |       |
|                |       | $                      | 749,304    |                      | $          | 754,558 |   |

 

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

**Note 15.**   ForeignCurrency (Gain) Loss

Components of foreigncurrency (gain) loss are shown in the table below (in thousands):
| ** **                    | ** ** | **Three Months Ended**               | ** ** | **Six Months Ended**                 | ** ** |
|-------------------------------|------------|------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                    | ** ** | **  July 2,    2005** | ** ** | **  July 3,    2004** | ** ** | **July 2,  2005** | ** ** | **July 3,  2004** | ** ** |
| Included in operating  income |       |                                           | $          | 70                                             |       |   |   | $ | 432 |   |   | $ | 94 |   | $ | 988 |   |
| Included in other, net        |       |                                           | (306       | )                                              |       |   | 308 |   |   | (752 | ) | 1,028 |   |
|                          |       |                                           | $          | (236                                           | )          |   |   | $ | 740 |   |   | $ | (658 | ) | $ | 2,016 |   |

 

For international subsidiaries which have the U.S.dollar as their functional currency, local currency transactions are remeasuredinto U.S. dollars, using current rates of exchange for monetary assets andliabilities. Gains and losses from the remeasurement of such monetary assetsand liabilities are reported in *Foreign currency gain/loss* in the Consolidated Statements of Operations. Likewise, forinternational subsidiaries which have the local currency as their functionalcurrency, gains and losses from the remeasurement of monetary assets andliabilities not denominated in the local currency are reported in *Foreign currency gain/ loss* in the Consolidated Statementsof Operations. Additionally, currency gains and losses have been incurred onintercompany loans between subsidiaries, and to the extent that such loans arenot deemed to be permanently invested, such currency gains and losses are alsoreflected in *Foreign currency gain/ loss* inthe Consolidated Statement of Operations.

The Company includes gainsand losses on receivables, payables and other operating transactions as acomponent of operating income in *foreign currency gain/loss*.Other foreign currency gains and losses, primarily related to intercompanyloans and debt, are included in *Other, net*.

**Note 16.**   Legal Proceedings and Commitments

On August 18, 2003, The Intertech Group, Inc.(“TIG”), an affiliate of Jerry Zucker, the former Chief Executive Officer ofthe Company, filed a claim seeking damages associated with a lease agreementand an alleged services agreement, between the Company and TIG, associated withthe lease by the Company of its former corporate headquarters and the provisionof shared administrative services. On April 29, 2005, the Company enteredinto a Settlement Agreement, Receipt and Release (the “Settlement Agreement”)with Jerry Zucker, TIG and ZS Associates LLC (an affiliate of Mr. Zucker).Pursuant to the Settlement Agreement, the Company paid TIG $3.1 million asfull and final settlement. In addition, the Settlement Agreement containsmutual general releases of any and all claims by and among the parties thereto,and a requirement that the Company and TIG file a joint stipulation dismissing,with prejudice, TIG’s lawsuit against the Company, which was appropriatelyfiled on May 2, 2005. The settlement amount was approximately equal toamounts previously accrued and, accordingly, there was no gain or lossrecognized in the three months ended July 2, 2005.

During the second quarter of 2005, the Companyreceived approximately $0.8 million as its portion of class-actionsettlement agreements with various suppliers of raw materials. These recoverieswere included in *Selling, general and administrative expenses*for the three and six months ended July 2, 2005.

As part of its efforts to enhance the business, theCompany has made commitments to expand its worldwide capacity. Currently, theCompany has several major committed capital projects, including theconstruction of a new spunmelt manufacturing plant in Suzhou, China and theinstallation of new spunmelt 

23

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

lines in the facilities inCali, Colombia and Mooresville, North Carolina, as well as the installation ofadditional capacity in Nanhai, China. Remaining payments due related to theseplanned expansions as of July 2, 2005 totaled approximately $77.8 millionand are expected to be expended over the remainder of fiscal 2005 and fiscal2006.

The Company is continuing its review of strategicalternatives, which could include, among other possibilities, the recapitalizationof the Company and does not currently have a target date established for thecompletion of this review. Additionally, there can be no assurance that thisprocess will result in any transaction or transactions taking place or beingcompleted.

Section 408 of the Sarbanes-OxleyAct of 2002 requires that the staff of the Securities and Exchange Commission(the “SEC Staff”) review the filings of all reporting companies not lessfrequently than once every three years. In accordance with that requirement,the SEC Staff recently completed a review of the Company’s periodic reports andissued a letter (the “Comment Letter”) commenting on certain aspects of theCompany’s Annual Report on Form 10-K for the year ended January 1, 2005and Quarterly Report on Form 10-Q for the quarter ended April 2,2005. The Company believes that all issues raised in the Comment Letter havebeen resolved to the mutual satisfaction of the SEC Staff and the Company, withone exception. In the Comment Letter, the SEC Staff asked the Company to providesupport for its position that no gain or loss should have been recognized inconnection with the exchange in fiscal 2004 of its Junior Notes for PIKPreferred Shares (the “Exchange”). The Company has provided detailed supportfor its position and has advised the SEC Staff that, after careful analysis, itcontinues to believe that the Company’s financial statements properly reflectthe economic substance of the Exchange in accordance with accounting principlesgenerally accepted in the United States. The SEC Staff is evaluating theCompany’s response, and this issue remains unresolved. Although the Companybelieves that it has correctly accounted for the Exchange, the relevantaccounting issues are complex, and there can be no certainty that the SEC Staffultimately will agree with our position. Absent guidance from the SEC Staff, wecannot estimate with any degree of certainty the impact of the SEC Staff’sposition on our historical financial statements, although the Company isconfident that such changes, if any, will not affect previously reportedoperating income, cash flows or compliance with bank covenants.

**Note 17.**   Supplemental Cash Flow Information

Noncash transactions in the first six months of 2005included: (i) the conversion of 5 shares of the Company’s PIK PreferredShares into approximately 686 shares of the Company’s Class A CommonStock, and (ii) the issuance of 5,540 PIK Preferred Shares aspayment-in-kind, in lieu of cash payment, of approximately $5.6 million ofdividends on the Company’s PIK Preferred Shares, which resulted in anadditional non-cash dividend charge of approximately $8.5 million inexcess of the amounts accrued at the stated dividend rate on the PIK PreferredShares.

Noncash transactions inthe first six months of 2004 included: (i) the payment-in-kind in lieu ofcash payment of $1.3 million of interest expense on the Junior Notes; (ii) theconversion of $2.7 million of the Company’s Junior Notes intoapproximately 371,382 shares of the Company’s Class A Common Stock; (iii) theexchange of $42.6 million of the Company’s Junior Notes into approximately42,633 shares of the Company’s PIK Preferred Shares; and (iv) the issuanceof 1,327,177 shares of the Company’s Class A Common Stock and 19,359shares of the Company’s Class C Common Stock in accordance with the rulingof the United States Bankruptcy Court for the District of South Carolina.

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

**Note 18.**   Subsequent Events

On July 28, 2005, the Company’s Board ofDirectors declared a dividend, payable in the form of additional PIK PreferredShares in the amount of approximately $4.7 million, which amount wasaccrued as of July 2, 2005 and included as a component of the Company’sPIK Preferred Shares in the Consolidated Balance Sheet. As a result of suchdeclaration by the Company’s Board of Directors, in the quarter ending October 1,2005, the Company will record additional dividends, and a correspondingincrease in additional paid-in capital, associated with the issuance of theadditional PIK Preferred Shares, in the amount of approximately $12.4 million,representing the estimated fair value of the additional PIK Preferred Sharesissued as of the dividend declaration date, reduced by the dividends previouslyaccrued at the stated dividend rate of 16.0%.

The Company’s Board of Directors, on July 28,2005, authorized the redemption of all of the Company’s PIK Preferred Shares onor before September 30, 2005. The redemption price is expected to be paidthrough the issuance of the Company’s Class A Common Stock. Based on theclosing price of the Class A Common Stock on August 10, 2005, aholder of one PIK Preferred Share would receive 36.29764 shares of Class ACommon Stock. However, the PIK Preferred Shares are convertible at the optionof the holder into 137.14286 shares of Class A Common Stock. As aresult, the Company currently expects that the holders of the PIK PreferredShares will convert their holdings to Class A Common Stock prior to theredemption date.

In the event that the PIK Preferred Shares areconverted to Class A Common Stock, as described in the preceedingparagraph, the proforma adjustment to the Consolidated Balance Sheet as ofJuly 2, 2005 would be an increase in additional paid-in capital and totalshareholders’ equity of $63.0 million, with a corresponding reduction toPIK Preferred Shares.

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**ITEM 2.**                 MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussionand analysis 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. In addition, it should be noted thatthe Company’s gross profit margins may not be comparable to other companiessince some entities classify shipping and handling costs in cost of goods soldand others, including the Company, include such costs in selling, general andadministrative expenses. Similarly, some entities, including the Company,include foreign currency gains and losses resulting from operating activitiesas a component of operating income, and some entities classify all foreigncurrency gains and losses outside of operating income.

**Results of Operations**

Thefollowing table sets forth the percentage relationships to net sales of certainstatement of operations items.
| ** **                                                  | ** ** | **Three Months Ended**                           | ** ** | **Six Months Ended**                             | ** ** |
|-------------------------------------------------------------|------------|------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                                                  | ** ** | **   July 2,     2005** | ** ** | **   July 3,     2004** | ** ** | **   July 2,     2005** | ** ** | **   July 3,     2004** | ** ** |
| Net sales                                                   |       |                                                       | 100.0      | %                                                          |       |   | 100.0 | % |   |   | 100.0 | % |   |   | 100.0 | % |   |
| Cost of goods sold                                          |       |                                                       |       |                                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Materials                                                   |       |                                                       | 50.6       |                                                       |       |   | 48.3 |   |   |   | 50.8 |   |   |   | 47.5 |   |   |
| Labor                                                       |       |                                                       | 8.3        |                                                       |       |   | 9.8 |   |   |   | 8.4 |   |   |   | 9.9 |   |   |
| Overhead                                                    |       |                                                       | 23.3       |                                                       |       |   | 24.4 |   |   |   | 22.9 |   |   |   | 24.7 |   |   |
|                                                        |       |                                                       | 82.2       |                                                       |       |   | 82.5 |   |   |   | 82.1 |   |   |   | 82.1 |   |   |
| Gross profit                                                |       |                                                       | 17.8       |                                                       |       |   | 17.5 |   |   |   | 17.9 |   |   |   | 17.9 |   |   |
| Selling, general  and administrative expenses               |       |                                                       | 11.0       |                                                       |       |   | 11.6 |   |   |   | 11.1 |   |   |   | 12.2 |   |   |
| Plant realignment  costs                                    |       |                                                       | —     |                                                       |       |   | 0.3 |   |   |   | — |   |   |   | 0.3 |   |   |
| Foreign currency loss                                       |       |                                                       | —     |                                                       |       |   | 0.2 |   |   |   | — |   |   |   | 0.2 |   |   |
| Arbitration  settlement, net                                |       |                                                       | —     |                                                       |       |   | (6.3 | ) |   |   | — |   |   |   | (3.2 | ) |   |
| Operating income                                            |       |                                                       | 6.8        |                                                       |       |   | 11.7 |   |   |   | 6.8 |   |   |   | 8.4 |   |   |
| Other expense (income):                                     |       |                                                       |       |                                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest expense, net                                       |       |                                                       | 3.5        |                                                       |       |   | 4.5 |   |   |   | 3.3 |   |   |   | 5.9 |   |   |
| Minority interests                                          |       |                                                       | 0.4        |                                                       |       |   | 0.3 |   |   |   | 0.4 |   |   |   | 0.3 |   |   |
| Other, net                                                  |       |                                                       | (0.1       | )                                                          |       |   | 2.5 |   |   |   | (0.1 | ) |   |   | 1.5 |   |   |
| Income before  income tax expense                           |       |                                                       | 3.0        |                                                       |       |   | 4.4 |   |   |   | 3.2 |   |   |   | 0.7 |   |   |
| Income tax  expense                                         |       |                                                       | 1.3        |                                                       |       |   | 1.7 |   |   |   | 1.2 |   |   |   | 1.4 |   |   |
| Net income (loss)                                           |       |                                                       | 1.7        |                                                       |       |   | 2.7 |   |   |   | 2.0 |   |   |   | (0.7 | ) |   |
| Accrued and paid-in-kind  dividends on PIK preferred shares |       |                                                       | 1.0        |                                                       |       |   | 0.6 |   |   |   | 2.8 |   |   |   | 0.3 |   |   |
| Income (loss) applicable  to common shareholders            |       |                                                       | 0.7        | %                                                          |       |   | 2.1 | % |   |   | (0.8 | )% |   |   | (1.0 | )% |   |

 

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

The Company’s reportablesegments consist of its two operating divisions, Nonwovens and OrientedPolymers. For additional information regarding segment data, see Note 14 “SegmentInformation” 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 July 2, 2005, the three months ended July 3,2004 and the corresponding change (in millions):
| ** **                                 | ** ** | **Three Months  Ended  July 2, 2005** | ** ** | **Three Months  Ended  July 3, 2004** | ** ** | **Change** | ** ** |
|--------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|------------|------------|
| Net sales                                  |       |                                                 |       |                                                 |       |       |       |   |   |   |   |
| Nonwovens                                  |       |                                                 | $          | 192.2                                                |       |       |       | $ | 164.1 |   |   | $ | 28.1 |   |
| Oriented Polymers                          |       |                                                 | 43.7       |                                                 |       |       | 46.3       |   |   | (2.6 | ) |
|                                       |       |                                                 | $          | 235.9                                                |       |       |       | $ | 210.4 |   |   | $ | 25.5 |   |
| Operating income  (loss)                   |       |                                                 |       |                                                 |       |       |       |   |   |   |   |
| Nonwovens                                  |       |                                                 | $          | 17.9                                                 |       |       |       | $ | 11.8 |   |   | $ | 6.1 |   |
| Oriented Polymers                          |       |                                                 | 3.6        |                                                 |       |       | 4.7        |   |   | (1.1 | ) |
| Unallocated Corporate, net of eliminations |       |                                                 | (5.4       | )                                                    |       |       | (4.2       | ) |   | (1.2 | ) |
|                                       |       |                                                 | 16.1       |                                                 |       |       | 12.3       |   |   | 3.8 |   |
| Plant realignment  costs                   |       |                                                 | —     |                                                 |       |       | (0.7       | ) |   | 0.7 |   |
| Foreign currency  loss                     |       |                                                 | (0.1       | )                                                    |       |       | (0.4       | ) |   | 0.3 |   |
| Arbitration  settlement, net               |       |                                                 | —     |                                                 |       |       | 13.4       |   |   | (13.4 | ) |
|                                       |       |                                                 | $          | 16.0                                                 |       |       |       | $ | 24.6 |   |   | $ | (8.6 | ) |

 

The amounts for plantrealignment costs, foreign currency losses and arbitration settlement, net havenot been allocated to the Company’s reportable business divisions because theCompany’s management does not evaluate such charges on a division-by-divisionbasis. Division operating performance is measured and evaluated before unusualor special items.

**Net Sales**

Consolidatednet sales were $235.9 million in the three months ended July 2, 2005,an increase of $25.5 million or 12.1% over the comparable period of 2004consolidated net sales of $210.4 million. Net sales for the three monthsended July 2, 2005 in the Nonwovens segment improved over comparable 2004fiscal year results by 17.1%, while net sales in the Oriented Polymers segmentdeclined 5.6%. A reconciliation of the change in net sales between the threemonths ended July 3, 2004 and the three months ended July 2, 2005 ispresented in the following table (in millions):
| Net sales—three  months ended July 3, 2004 |   | $      | 210.4  |   |
|------------------------------------------------------|--------|--------|--------|--------|
| Change in sales  due to:                             |   |   |   |
| Price/mix                                            |   | 22.2   |   |
| Volume                                               |   | (0.4   | )      |
| Foreign currency translation                         |   | 3.7    |   |
| Net sales—three months  ended July 2, 2005 |   | $      | 235.9  |   |

 

The increase in net sales during the second quarter of2005 was due primarily to price/mix improvements. The price/mix improvementreflects continued enhancements of the Company’s product offerings as well asthe increases in sales price in an effort to pass along raw material cost increasesto customers. During the quarter, the Company continued to follow theconsistent policy of attempting to 

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pass raw material pricesalong to its customers, where allowable by contract terms and where acceptablebased on market conditions. Although down in total, volume gains of $8.4million were reported in the nonwovens business. Volume increases in the Nonwovenssegment were in the United States, Latin American and Asian markets, partiallyoffset by declines in Europe.

A significant component of the nonwovens businessvolume increase of $8.4 million in sales in the second quarter of fiscal 2005was generated in the Latin American region. Although the San Luis Potosi,Mexico capacity expansion was completed in late 2003, it didn’t reach full productivecapacity until the second quarter of fiscal 2004. The Latin America region’ssales improvement was paced by significant year-over-year increases in hygienesales. In the Company’s U.S. nonwovens business, the hygiene, medical, wipesand consumer markets contributed to the double-digit increases from 2004as new products were introduced into the markets and new customer relationshipsgenerated substantial sales increases. Most of Asia’s volume gains were in itsmedical market. Oriented Polymers’ decrease in sales volume was primarily dueto declines in product sales in certain of its businesses, with a significantportion comprised of lower-margin, commodity items.

Foreign currencies,predominantly the Euro and the Canadian dollar, were stronger against theU.S. dollar during the second quarter of fiscal 2005 compared to the samequarter in fiscal 2004, resulting in an increase in net sales of$3.7 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.

**Operating Income**

Areconciliation of the change in operating income between the three months endedJuly 3, 2004 and the three months ended July 2, 2005 is presented inthe following table (in millions):
| Operating  income—three months ended July 3, 2004 |   | $      | 24.6   |   |
|-------------------------------------------------------------|--------|--------|--------|--------|
| Change in operating  income due to:                         |   |   |   |
| Arbitration settlement, net                                 |   | (13.4  | )      |
| Price/mix                                                   |   | 21.8   |   |
| Higher raw material costs                                   |   | (16.2  | )      |
| Volume                                                      |   | (0.1   | )      |
| Lower plant realignment costs, net                          |   | 0.7    |   |
| Foreign currency translation                                |   | 0.3    |   |
| Higher depreciation and amortization expense                |   | (0.8   | )      |
| All other, primarily higher SG&A costs                  |   | (0.9   | )      |
| Operating income—three  months ended July 2, 2005 |   | $      | 16.0   |   |

 

Consolidated operatingincome was $16.0 million in the three months ended July 2, 2005 ascompared to $24.6 million in the comparable period of 2004. Operatingincome in the second quarter of 2004 was benefited by the $13.4 millionarbitration settlement, net of expenses. The financial effect of price/miximprovements more than offset the higher raw material costs, reflecting thebenefits of the Company’s new product introductions and ongoing efforts to passthrough any cost increases in raw materials. Also contributing to theimprovement of operating income were lower plant realignment costs, net of $0.7million. Offsetting these favorable impacts were higher depreciation andamortization charges and higher selling, general and administrative expenses. Selling,general and administrative expenses are higher primarily as a result ofincreased non-cash compensation costs related to the Company’s stock optionplans. The increase in depreciation and amortization charges is primarilyrelated to the installation of the new production line in Latin America.

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**Interest Expense and Other**

Net interest expense decreased $1.2 million, from$9.4 million during the three months ended July 3, 2004 to$8.2 million during the three months ended July 2, 2005. The decreasein net interest expense was primarily due to the lower interest rates obtainedby refinancing the Company’s previous Restructured Credit Facility with the newBank Facility, effective April 27, 2004, and the elimination of interestexpense on the $42.6 million of Junior Notes due to their conversion to PIKPreferred Shares by the Company’s majority shareholder, who exchangedapproximately $42.6 million in aggregate principal amount of the JuniorNotes for 42,633 of the PIK Preferred Shares. The 2004 interest expenseincludes $0.5 million of payment-in-kind in lieu of cash interest on theJunior Notes.

The Consolidated Statementof Operations for the second quarter of 2004 included a charge of $5.0 millionfor the write-off of the remaining loan acquisition costs related to theRestructured Credit Facility. Other, net improved by $0.7 million, from anexpense of $0.3 million in the second quarter of fiscal 2004 to income of$0.4 million in the second quarter of fiscal 2005. The improvement inother, net was primarily due to the foreign currency gains recognized byforeign subsidiaries on intercompany loan balances denominated in currenciesother than their functional currency, generally the U.S. dollar.

**Income Tax Expense**

The Company recognizedincome tax expense of $3.1 million for the three months ended July 2, 2005on consolidated income before income taxes of $7.2 million. This income taxexpense is in excess of the U.S. federal statutory rate partially due to lossesin certain jurisdictions for which no tax income benefits were recognized.Additionally, the income tax expense is impacted by foreign withholding taxes,for which tax credits are not anticipated, U.S. state income taxes and foreigntaxes calculated at statutory rates less than the U.S. federal statutory rate.The Company recorded a net income tax expense of $3.6 million for thethree months ended July 3, 2004 on a consolidated income before incometaxes of $9.4 million for such period. The income tax expense wasprimarily due to withholding taxes, for which tax credits are not anticipated,U.S. state income taxes, and no significant income tax benefit recognized forthe losses incurred in the United States and certain foreign jurisdictions.

**Net Income**

As a result of the above,the Company recognized net income of $4.1 million during the three monthsended July 2, 2005 compared to net income of $5.7 million during thethree months ended July 3, 2004.

**AccruedDividends on PIK Preferred Shares**

The Company accrueddividends at the stated rate of 16.0% on its PIK Preferred Shares during thequarter ended July 2, 2005 in the amount of $2.4 million compared toa partial quarter’s accrued dividend of $1.3 million for the prior year’scomparable period as a result of the PIK Preferred Shares being issued on April27, 2004.

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

As a result of the above, the Company recognizedincome applicable to common shareholders of $1.7 million, or $0.16 pershare on a basic and diluted basis, for the three months ended July 2,2005 compared to income applicable to common shareholders of $4.5 million,or $0.45 per share on a basic basis, for the three months ended July 3,2004. Diluted income per common share for the three months ended July 3,2004 amounted to $0.36 per share.

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**Comparisonof Six Months Ended July 2, 2005 and July 3, 2004**

TheCompany’s reportable segments consist of its two operating divisions, Nonwovensand Oriented Polymers. For additional information regarding segment data, seeNote 14 “Segment Information” to the Consolidated Financial Statementsincluded in this Quarterly Report on Form 10-Q. The following table setsforth components of the Company’s net sales and operating income (loss) byoperating division for the six months ended July 2, 2005, the six monthsended July 3, 2004 and the corresponding change (in millions):
| ** **                                 | ** ** | **Six Months  Ended  July 2, 2005** | ** ** | **Six Months   Ended  July 3, 2004** | ** ** | **Change** | ** ** |
|--------------------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------------------|------------|------------|------------|
| Net sales                                  |       |                                               |       |                                                     |       |       |       |   |   |   |   |
| Nonwovens                                  |       |                                               | $          | 386.7                                                    |       |       |       | $ | 327.8 |   |   | $ | 58.9 |   |
| Oriented Polymers                          |       |                                               | 93.5       |                                                     |       |       | 88.8       |   |   | 4.7 |   |
|                                       |       |                                               | $          | 480.2                                                    |       |       |       | $ | 416.6 |   |   | $ | 63.6 |   |
| Operating income  (loss)                   |       |                                               |       |                                                     |       |       |       |   |   |   |   |
| Nonwovens                                  |       |                                               | $          | 34.7                                                     |       |       |       | $ | 23.8 |   |   | $ | 10.9 |   |
| Oriented Polymers                          |       |                                               | 8.8        |                                                     |       |       | 8.2        |   |   | 0.6 |   |
| Unallocated Corporate, net of eliminations |       |                                               | (11.0      | )                                                        |       |       | (8.3       | ) |   | (2.7 | ) |
|                                       |       |                                               | 32.5       |                                                     |       |       | 23.7       |   |   | 8.8 |   |
| Plant realignment  costs                   |       |                                               | —     |                                                     |       |       | (1.3       | ) |   | 1.3 |   |
| Foreign currency  gain/loss                |       |                                               | (0.1       | )                                                        |       |       | (1.0       | ) |   | 0.9 |   |
| Arbitration  settlement, net               |       |                                               | —     |                                                     |       |       | 13.4       |   |   | (13.4 | ) |
|                                       |       |                                               | $          | 32.4                                                     |       |       |       | $ | 34.8 |   |   | $ | (2.4 | ) |

 

The amounts for plantrealignment costs, foreign currency losses and arbitration settlement, net havenot been allocated to the Company’s reportable business divisions because theCompany’s management does not evaluate such charges on a division-by-divisionbasis. Division operating performance is measured and evaluated before unusualor special items.

**Net Sales**

Consolidatednet sales were $480.2 million in the six months ended July 2, 2005,an increase of $63.6 million or 15.3% over the comparable 2004 period’s consolidatednet sales of $416.6 million. Net sales for the six months endedJuly 2, 2005 in the Nonwovens and Oriented Polymers segments improved overcomparable 2004 fiscal year results by 18.0% and 5.3%, respectively. Areconciliation of the change in net sales between the six months ended July 3,2004 and the six months ended July 2, 2005 is presented in the followingtable (in millions):
| Net sales—six  months ended July 3, 2004 |   | $      | 416.6  |   |
|----------------------------------------------------|--------|--------|--------|--------|
| Change in sales  due to:                           |   |   |   |
| Price/mix                                          |   | 42.4   |   |
| Volume                                             |   | 13.7   |   |
| Foreign currency translation                       |   | 7.5    |   |
| Net sales—six months  ended July 2, 2005 |   | $      | 480.2  |   |

 

The increase in net sales during the first six monthsof 2005 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. The Company has followed theconsistent policy of attempting to pass raw 

30

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material prices along toits customers, where allowable by contract terms and where acceptable based onmarket conditions.

A significant component of the $13.7 millionincrease in sales in the first half of 2005, due to volume growth, was generatedin the Latin American region. Although the San Luis Potosi, Mexico capacityexpansion was completed in late 2003, it didn’t reach full productive capacityuntil the second quarter of 2004. The Latin America region’s sales improvementwas paced by significant year-over-year increases in hygiene sales. In theCompany’s U.S. nonwovens business, the hygiene, consumer and industrial marketscontributed to the double-digit increases over 2004 as new products wereintroduced into the markets and new customer relationships generatedsubstantial sales increases. Nonwoven sales volumes decreased slightly inEurope. Oriented Polymers’ increase in sales was due primarily to a price/miximprovement, partially offset by lower sales volumes of certain commodity-basedproducts.

Foreign currencies,predominantly the Euro and the Canadian dollar, were stronger against theU.S. dollar during the first six months of 2005 compared to 2004,resulting in an increase in net sales of $7.5 million due to the favorableforeign currency translation. Further discussion of foreign currency exchangerate risk is contained in “Quantitative and Qualitative Disclosures AboutMarket Risk” included in Item 3 to this Quarterly Report on Form 10-Q.

**Operating Income**

Areconciliation of the change in operating income between the six months ended July 3,2004 and the six months ended July 2, 2005 is presented in the followingtable (in millions):
| Operating  income—six months ended July 3, 2004 |   | $      | 34.8   |   |
|-----------------------------------------------------------|--------|--------|--------|--------|
| Change in  operating income due to:                       |   |   |   |
| Arbitration settlement, net                               |   | (13.4  | )      |
| Price/mix                                                 |   | 42.7   |   |
| Higher raw material costs                                 |   | (36.5  | )      |
| Volume                                                    |   | 4.2    |   |
| Lower manufacturing costs                                 |   | 1.4    |   |
| Lower plant realignment costs, net                        |   | 1.2    |   |
| Foreign currency translation                              |   | 0.7    |   |
| Higher depreciation and amortization expense              |   | (1.3   | )      |
| All other, primarily higher SG&A costs                |   | (1.4   | )      |
| Operating income—six  months ended July 2, 2005 |   | $      | 32.4   |   |

 

Consolidated operatingincome was $32.4 million in the first six months of 2005 as compared to$34.8 million in the comparable period of 2004. Operating income in thefirst half of 2004 was benefited by the $13.4 million arbitrationsettlement, net of expenses. The financial effect of price/mix improvementsmore than offset the higher raw material costs, reflecting the benefits of theCompany’s new product introductions and ongoing efforts to pass through anycost increases in raw materials. The net improvement in operating income waspositively impacted by the volume gains noted in the net sales discussionabove. Other items contributing to the improvement of operating income werelower manufacturing costs of $1.4 million and lower plant realignment costs,net of $1.2 million. Offsetting these favorable impacts were higherdepreciation and amortization charges and higher selling, general andadministrative expenses. Selling, general and administrative expenses arehigher primarily due to increased sales volume and increased non-cashcompensation costs related to the Company’s stock option plan. The increase indepreciation and amortization charges is primarily related to the installationof the new production line in Latin America.

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**Interest Expense and Other**

Net interest expense decreased $8.5 million, from$24.5 million during the six months ended July 3, 2004 to$16.0 million during the six months ended July 2, 2005. The decreasein net interest expense was primarily due to the lower interest rates obtainedby refinancing the Company’s previous Restructured Credit Facility with the newBank Facility, effective April 27, 2004, and the elimination of interestexpense on $42.6 million of the Junior Notes due to their conversion to PIKPreferred Shares by the Company’s majority shareholder who exchangedapproximately $42.6 million in aggregate principal amount of the JuniorNotes for 42,633 shares of PIK Preferred Shares. The 2004 interest expenseincludes $1.5 million of payment-in-kind in lieu of cash interest on theJunior Notes.

The Consolidated Statementof Operations for the first six months of 2004 included a charge of $5.0 millionfor the write-off of the remaining loan acquisition costs related to the RestructuredCredit Facility. Other, net improved by $1.9 million, from an expense of$1.1 million in the first half of fiscal 2004 to income of $0.8 million inthe first half of fiscal 2005. The improvement in other, net was primarily dueto the foreign currency gains recognized by foreign subsidiaries onintercompany loan balances denominated in currencies other than theirfunctional currency, generally the U.S. dollar.

**Income Tax Expense**

The Company recognizedincome tax expense of $5.9 million for the six months ended July 2, 2005on consolidated income before income taxes of $15.2 million. This income tax expenseis marginally higher than the U.S. federal statutory rate partially due tolosses in certain jurisdictions for which no tax benefits were recognized.Additionally, the income tax expense is impacted by foreign withholding taxes,for which tax credits are not anticipated, U.S. state income taxes and foreigntaxes calculated at statutory rates less than the U.S. federal statutory rate.The Company recorded a net income tax expense of $6.1 million for the sixmonths ended July 3, 2004 on consolidated income before income taxes of$3.1 million for such period. The income tax expense was primarily due towithholding taxes, for which tax credits are not anticipated, U.S. state incometaxes, and no significant income tax benefit recognized for the losses incurredin the United States and certain foreign jurisdictions.

**Net Income**

As a result of the above,the Company recognized net income of $9.2 million during the six monthsended July 2, 2005 compared to a net loss of $3.0 million during thesix months ended July 3, 2004.

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

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

The Company has restatedits first quarter results to record the estimated fair value of the additionalPIK Preferred Shares declared as a dividend on January 14, 2005, the datethe Board of Directors declared that the accrued dividends were to be paid inthe form of additional PIK Preferred Shares, rather than cash, reduced by theamount of dividends previously recorded at the stated 16.0% rate. Using themarket 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$14.1 million, which exceeded the amount accrued of $5.6 million,based upon the stated rate by approximately $8.5 million. Recording theadditional $8.5 million dividend at the date of declaration has resultedin a reduction in the amount of income applicable to common shareholders andretained earnings, with a corresponding increase in additional paid-in capital.

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The Company accrued dividends at the stated rate of 16.0%on its PIK Preferred Shares during the six months ended July 2, 2005 inthe amount of $4.7 million. In addition, the Company recorded an $8.5million dividend charge to reflect the declaration by the Company’s Board ofDirectors on January 14, 2005, of the issuance of 5,540 PIK PreferredShares as payment-in-kind for dividends from the date of issuance through December 31,2004 at the estimated fair value of the underlying securities issued in excessof the amount of the dividends previously accrued at the stated rate of 16.0%.As a result of the PIK Preferred Shares being initially issued on April 27,2004, the Company accrued dividends at the stated rate of 16.0% during thefirst six months of 2004 in the amount of $1.3 million.

On July 28, 2005, the Company’s Board of Directorsdeclared a dividend, payable in the form of additional PIK Preferred Shares inthe amount of approximately $4.7 million, which amount was accrued as ofJuly 2, 2005 and included as a component of the Company’s PIK PreferredShares in the Consolidated Balance Sheet. As a result of such declaration bythe Company’s Board of Directors, in the quarter ending October 1, 2005,the Company will record additional dividends, and a corresponding increase inadditional paid-in capital, associated with the issuance of the additional PIKPreferred Shares in the amount of approximately $12.4 million,representing the estimated fair value of the additional PIK Preferred Sharesissued as of the dividend declaration date, reduced by the dividends previouslyaccrued at the stated dividend rate of 16.0%.

**LossApplicable to Common Shareholders**

As a result of the above,the Company recognized a loss applicable to common shareholders of$4.0 million, or $(0.38) per share on a basic and diluted basis, for thesix months ended July 2, 2005 compared to a loss applicable to commonshareholders of $4.3 million, or ($0.46) per share on a basic and dilutedbasis, for the six months ended July 3, 2004.

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**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 a 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 lienterm loan 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 July 2, 2005, the Company was incompliance with all such covenants. Additionally, as of July 2, 2005, theCompany had no outstanding borrowings under the revolving credit agreement.
| ** **                                                                | ** ** | **July 2,  2005** | ** ** | **January 1,  2005** | ** ** |
|---------------------------------------------------------------------------|------------|------------------------|------------|---------------------------|------------|
| ** **                                                                | ** ** | **(In Millions)** | ** ** |
| **Balance  sheet data:**                                                  |       |                   |       |                      |       |   |   |
| Cash and cash equivalents                                                 |       | $                      | 25.2       |                      |       | $ | 41.3 |   |   |
| Working capital                                                           |       | 183.4                  |       |                      | 187.3      |   |   |
| Total assets                                                              |       | 749.3                  |       |                      | 754.6      |   |   |
| Total debt                                                                |       | 411.5                  |       |                      | 414.0      |   |   |
| PIK Preferred Shares, expected to be settled with  shares of common stock |       | 63.0                   |       |                      | 58.3       |   |   |
| Total shareholders’ equity                                           |       | 70.4                   |       |                      | 73.8       |   |   |
|                                                                           |            |                        |            |                           |            |  |  |  |  |

 
| ** **                                | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------|------------|--------------------------------|------------|
| ** **                                | ** ** | **July 2,  2005**         | ** ** | **  July 3,    2004** | ** ** |
| ** **                                | ** ** | **(In Millions)**         | ** ** |
| **Cash  flow data:**                      |       |                           |       |   |   |   |   |
| Net cash provided by operating activities |       | $                              | 21.7       |   |   | $ | 16.8 |   |   |
| Net cash used in investing activities     |       | (34.5                          | )          |   | (8.1 | ) |   |
| Net cash used in  financing activities    |       | (2.5                           | )          |   | (9.0 | ) |   |
|                                           |            |                                |            |  |  |  |  |  |  |

 

**Operating Activities**

Net cash provided by operating activities was$21.7 million during the first six months of 2005, a $4.9 million increasefrom the $16.8 million provided by operating activities during the firsthalf of 2004, which included a $13.4 million non-recurring net cash inflow froman arbitration settlement. Cash provided by operations increased from thecomparable period of the prior year primarily due to improved operatingresults.

Working capital atJuly 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 trade payables and a decrease in cash, primarily resulting fromthe Company’s funding of substantial capital expenditures during the first sixmonths of 2005. Accounts receivable at July 2, 2005 was $122.6 million ascompared to $113.5 million on January 1, 2005, an increase of$9.1 million. Accounts receivable represented approximately 47 daysof sales outstanding at July 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 July 2, 2005were $113.6 million, an increase of $7.3 million from inventories at January 1,2005 of $106.3 million. The Company had inventory representingapproximately 53 days of cost of sales on hand at July 2, 2005 ascompared to 54 days of cost of sales on hand at January 1, 2005.Accounts payable at July 2, 2005 was $64.5 million as compared to$63.8 million at January 1, 2005, an increase of $0.7 million.Accounts payable represented approximately 

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30 daysof cost of sales outstanding at July 2, 2005 as compared to 32 daysof cost of sales outstanding at January 1, 2005.

**Investing and Financing Activities**

Cash used in investing activities amounted to $34.5million and $8.1 million for the first six months of 2005 and 2004,respectively. Capital expenditures during the six months ended July 2,2005 totaled $34.8 million, an increase of $26.0 million over capitalspending of $8.9 million in the first six months ended July 3, 2004.A significant portion of the capital expenditures in 2005 related to theinstallation of new nonwovens production lines at the Cali, Colombia andMooresville, North Carolina manufacturing sites and at the new site in Suzhou,China. The Cali, Colombia line is expected to become operational during thefourth quarter of fiscal 2005. Investing activities during the first six monthsof 2005 and 2004 included proceeds from the sale of assets of $0.4 millionand $0.8 million, respectively.

Cash used in financingactivities amounted to $2.5 million for the first half of 2005, ascompared to $9.0 million being used in financing activities for the first halfof 2004. In the first six months of 2005, the Company repaid, on a net basis,$2.4 million of its debt, whereas the Company incurred debt, on a net basis, of$3.3 million, and paid $12.3 million of loan acquisition costs in conjunctionwith the refinancing during the first six 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 ofDirectors declared that dividends accrued on the PIK Preferred Shares from thedate of issuance through December 31, 2004, in the amount of $5.6 million,would be paid in the form of PIK Preferred Shares. On such date, the closingprice of the Company’s Class A Common Stock on the Over-the-CounterBulletin Board was $18.50 per share.

The Company has restated its first quarter results torecord the estimated fair value of the additional PIK Preferred Shares declaredas a dividend on January 14, 2005, the date the Board of Directorsdeclared that the accrued dividends were to be paid in the form of additionalPIK Preferred Shares, rather than cash, reduced by the amount of dividendspreviously recorded at the stated rate of 16.0%. Using the market value of theCompany’s Class A Common Stock on January 14, 2005 of $18.50 pershare, the estimated fair value of the 5,540 additional PIK Preferred Sharesissued in lieu of cash payment was approximately $14.1 million, which exceededthe amount accrued of $5.6 million, based upon the stated rate, byapproximately $8.5 million. Recording the additional $8.5 million dividend atthe date of declaration has resulted in a reduction in the amount of incomeapplicable to common shareholders and retained earnings, with acorresponding  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.

Additionally, on July 28, 2005, the Company’sBoard of Directors declared a dividend, payable in the form of additional PIKPreferred Shares, to holders of record of the PIK Preferred Shares as of August 15,2005 in the amount of approximately $4.7 million, which amount was accrued asof July 2, 2005 and included as a component of the Company’s PIK PreferredShares in the Consolidated Balance Sheet. As a result of such declaration bythe Company’s Board of Directors, in the quarter ending October 1, 2005,the Company will record dividends associated with the issuance of theadditional PIK Preferred Shares in the amount of approximately $12.4 million,representing the estimated fair value of the additional PIK 

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Preferred Shares issued asof the dividend declaration date, reduced by the dividends previously accruedat the stated dividend rate of 16.0%.

The Company’s Board ofDirectors, on July 28, 2005, authorized the redemption of all of the Company’sPIK Preferred Shares on or before September 30, 2005. The redemption priceis expected to be paid through the issuance of the Company’s Class A CommonStock. Based on the closing price of the Class A Common Stock on August 10,2005, a holder of one PIK Preferred Share would receive 36.29764 shares of Class ACommon Stock. However, the PIK Preferred Shares are convertible at the optionof the holder into 137.14286 shares of Class A Common Stock. As a result,the Company currently expects that the holders of the PIK Preferred Shares willconvert their holdings to Class A Common Stock prior to the redemptiondate.

**Liquidity Summary**

As discussed more fully in Note 7 to theConsolidated Financial Statements included in Item 1 to this Quarterly Reporton Form 10-Q, on April 27, 2004, the Company refinanced itsexisting bank credit facility and entered into a new Bank Facility consistingof 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 contains covenants and events ofdefault customary in financings of this type, including leverage and interestexpense coverage covenants. The Bank Facility requires the Company to apply apercentage of proceeds from excess cash flows, as defined by the Bank Facilityand determined based on year-end results, to reduce its then outstandingbalances 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 the amounts of excess cash flows for futureperiods are based on year-end data and not determinable, only the mandatorypayments of $750.0 thousand per quarter have been classified as a currentliability. 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 by the terms of the Bank Facility, theCompany entered into a cash flow hedge agreement, effectively converting$212.5 million of notional principal amount of debt from a variable LIBORrate to a fixed LIBOR rate of 3.383%. The cash flow hedge agreement terminateson 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. Inthe third quarter of 2004, $10.1 million of aggregate principal amount ofthe Company’s Junior Notes were exchanged for 10,083 shares of the Company’sPIK Preferred Shares and 6,719 shares of the Company’s Class A CommonStock. The dividends on the PIK Preferred Shares accrue at an annual rate of16% and are payable semi-annually in arrears on each January 1 and July 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.

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On June 30, 2012, the Company must redeem all ofthe PIK Preferred Shares then outstanding at a price equal to $1,000 per shareplus any other accrued and unpaid dividends thereon whether or not declared,which amount will be payable by the Company (“mandatory redemption price”) 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 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 conversionprice equal 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.

The Company’s Board of Directors, on July 28,2005, authorized the redemption of all of the Company’s PIK Preferred Shares onor before September 30, 2005. The redemption price is expected to be paidthrough the issuance of the Company’s Class A Common Stock. Based on theclosing price of the Class A Common Stock on August 10, 2005, aholder of one PIK Preferred Share would receive 36.29764 shares of Class ACommon Stock. However, the PIK Preferred Shares are convertible at the optionof the holder into 137.14286 shares of Class A Common Stock. As aresult, the Company currently expects that the holders of the PIK PreferredShares will convert their holdings to Class A Common Stock prior to theredemption date.

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 to the ConsolidatedFinancial Statements included in Item 1 to this Quarterly Report on Form 10-Q, theCompany has committed to several major capital projects to expand its worldwidecapacity, including the construction of a new spunmelt manufacturing plant inSuzhou, China and the installation of new spunmelt lines in its current facilitiesin Cali, Colombia and Mooresville, North Carolina, as well as the installationof additional capacity in Nanhai, China. Remaining payments due related tothese planned expansions as of July 2, 2005 totaled approximately$77.8 million and are expected to be expended over the remainder of fiscal2005 and fiscal 2006. The financial flexibility needed for these and other minorcapital projects was provided in an amendment, dated March 16, 2005, tothe Bank Facility.

The Company is continuing its review of strategicalternatives which could include, among other things, the recapitalization ofthe Company, and does not currently have a target date established for thecompletion of this review. Additionally, there can be no assurance that thisprocess will result in any transaction or transactions taking place or beingcompleted.

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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 Sheet Arrangements**

The Company does not haveany off-balance sheet arrangements.

**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 six months of both 2005 and 2004.However, the Company continues to be impacted by rising raw material costs. See“Quantitative and Qualitative Disclosures About Market Risk’’ included inItem 3 of this Quarterly Report on Form 10-Q.

**New Accounting Standards**

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 in Note 9to the consolidated financial statements, in December 2004 the Companyapproved plan amendments curtailing or eliminating various postretirementbenefits in the U.S. As a result, the amounts included in the ConsolidatedFinancial Statements related to the Company’s postretirement benefit plans donot 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 fixedproduction overhead costs be based on the normal capacity of the productionfacilities. SFAS No. 151 is effective for inventory costs incurred duringfiscal years beginning after June 15, 2005. The Company is currentlyanalyzing the new guidance and does not expect it to have a material impact onits financial position or results of operations.

In December 2004, the FASB issued a revision toSFAS No. 123, “Accounting for Stock-Based Compensation.” The revision,entitled SFAS No. 123R, “Share-Based Payment,” is effective for all awardsgranted, modified, repurchased or canceled after June 15, 2005 andrequires a public entity to initially measure the cost of employee servicesreceived in exchange for an award of equity instruments based on the grant-datefair value of the award and to remeasure the fair value of that awardsubsequently 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. In April2005, the Securities and Exchange Commission issued a final rule thatregistrants must adopt SFAS No. 123R’s fair value method of accounting nolater than the beginning of the fiscal year beginning after June 15, 2005.

In May 2005, the FASBissued SFAS No. 154, “Accounting Changes and Error Corrections.” Thisstatement amends earlier guidance and requires retrospective application toprior periods’ financial 

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statementsof a voluntary change in accounting principle unless it is impracticable. Inaddition, SFAS No. 154 requires that a change in the method ofdepreciation or amortization for a long-lived, non-financial asset be accountedfor as a change in accounting estimate that is affected by a change inaccounting principle. SFAS No. 154 is effective for accounting changes andcorrections of errors made in fiscal years beginning after December 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.

**CriticalAccounting Policies 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 impairment of long-livedassets. Estimates and assumptions are based on historical and other factorsbelieved to be reasonable under the circumstances. The impact and any associatedrisks related to estimates, assumptions, and accounting policies are discussedwithin “Management’s Discussion and Analysis of Financial Condition and Resultsof Operations,” as well as in the Notes to the Consolidated FinancialStatements, if applicable, where such estimates, assumptions, and accountingpolicies 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 thepresent value of the Company’s terminal value computed using comparable companyexit multiples. Projected free cash flows were estimated based on projectedcash flows from operations, adjusted for the effects of income taxes at aneffective tax rate of 39.0%, estimated capital expenditures 

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and estimated changes inworking capital. The calculation of the reorganization value of the Company wasbased on 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.

*Revenue Recognition:  *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 declaration date, over the amounts previously accrued at the statedrate. As the Company’s convertible securities are not traded on an activemarket, determination of the fair value of the securities, at the date ofdividend declaration, requires estimates and judgments, which may impact thevaluation of the dividend paid-in-kind. Based on the fact that theconvertible securities are deep-in-the money, the Company has estimated thefair value of the convertible security using the number of shares of theCompany’s Common Stock into which the security is convertible at thethen-current share price. While the Company believes its estimates of the fairvalue of the convertible security are reasonable, the utilization of differentassumptions could produce materially 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 of Informationabout Financial Instruments with Off-Balance Sheet Risk and FinancialInstruments with Concentration of Credit Risk.” The Company provides credit inthe normal course of business and performs ongoing credit evaluations on itscustomers’ financial condition as deemed necessary, but generally does notrequire collateral to support such receivables. The Company also establishes anallowance for doubtful accounts based upon factors surrounding the credit riskof specific customers, historical trends and other information. Also, in aneffort to reduce its credit exposure to certain customers, as well asaccelerate its cash flows, in 2004 the Company sold, on a non-recoursebasis, certain of its receivables pursuant to a factoring agreement. At July 2,2005, a reserve of $9.7 million has been recorded as an allowance against tradeaccounts receivable. Management believes that the allowance is adequate tocover 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 

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require judgments andestimates, which may impact the inventory valuation and gross margins. The actualamount of obsolete or unmarketable inventory has been materially consistentwith previously established reserves. Management believes based on its priorexperience of managing and evaluating the recoverability of its slow-moving orobsolete inventory that such established reserves are materially adequate. Ifactual market conditions and product sales were less favorable than we haveprojected, additional inventory writedowns 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.

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 impairmentloss, which would impact the impairment charge ultimately recognized and theCompany’s cash flows. As of July 2, 2005, based on the Company’s currentoperating performance, as well as future expectations for the business, theCompany does not anticipate any material writedowns for asset impairments inthe foreseeable future. However, should current business conditions orexpectations of future performance deteriorate, this may impact our future cashflow estimates, resulting in an impairment charge that could have a materialeffect 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.

**Recent SEC Reviewof Periodic Reports**

Section 408 of theSarbanes-Oxley Act of 2002 requires that the staff of the Securities andExchange Commission (the “SEC Staff”) review the filings of all reportingcompanies not less frequently than once every three years. In accordance withthat requirement, the SEC Staff recently completed a review of the Company’speriodic reports and issued a letter (the “Comment Letter”) commenting oncertain aspects of the Company’s Annual Report on Form 10-K for theyear ended January 1, 2005 and Quarterly Report on 

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Form 10-Qfor the quarter ended April 2, 2005. The Company believes that all issuesraised in the Comment Letter have been resolved to the mutual satisfaction ofthe SEC Staff and the Company, with one exception. In the Comment Letter, theSEC Staff asked the Company to provide support for its position that no gain orloss should have been recognized in connection with the exchange in fiscal 2004of its Junior Notes for PIK Preferred Shares (the “Exchange”). The Company hasprovided detailed support for its position and has advised the SEC Staff that,after careful analysis, it continues to believe that the Company’s financialstatements properly reflect the economic substance of the Exchange inaccordance with accounting principles generally accepted in the United States.The SEC Staff is evaluating the Company’s response, and this issue remainsunresolved. Although the Company believes that it has correctly accounted forthe Exchange, the relevant accounting issues are complex, and there can be nocertainty that the SEC Staff ultimately will agree with our position. Absent guidancefrom the SEC Staff, we cannot estimate with any degree of certainty the impactof the SEC Staff’s position on our historical financial statements, althoughthe Company is confident that such changes, if any, will not affect previouslyreported operating income, cash flows or compliance with bank covenants.

**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 Company is exposed tomarket risks for changes in foreign currency rates and interest rates and hasexposure to commodity price risks, including prices of its primary rawmaterials. The overall objective of the Company’s financial risk managementprogram is to seek a reduction in the potential negative earnings impact ofchanges in interest rates, foreign exchange and raw material pricing arising inour business activities. The Company manages these financial exposures throughoperational means and by using various financial instruments. These practicesmay change as economic conditions change.

**Long-TermDebt and Interest 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, theCompany, as required by the terms of its Bank Facility, 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, especially in foreign countries, in an effort to minimizeinterest rate risk. Hypothetically, a 1% change in the interest rate affectingall of the Company’s financial instruments not protected by the interest rateswap contract would change interest expense by approximately $2.0 millionper year.

**Foreign Currency Exchange Rate Risk**

The Company manufactures, markets and distributescertain of its products in Europe, Canada, Latin America and the Far East. Inthe Far East specifically, the Company has a presence in China, which revaluedits currency, the yuan, in July, 2005. As a result, the Company’s financialstatements could be significantly affected by factors such as changes inforeign currency rates in the foreign markets in which 

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the Company maintains amanufacturing or distribution presence. However, such currency fluctuationshave much less effect on local operating results because the Company, to asignificant extent, sells its products within the countries in which they aremanufactured. During the first six months of 2005, compared to the same periodof the prior fiscal year, certain currencies of countries in which the Companyconducts foreign currency denominated business strengthened against the U.S.dollar and had a significant impact on sales and operating income. See “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”included in Item 2 of Part 1 of this Quarterly Report on Form 10-Q.

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. In addition, the Companyrecently entered foreign currency forward contracts to manage its U.S. dollarexposure on Euro-based obligations for firm commitments related to significantcapital projects. The Company is also subject to political risk in certain ofits foreign operations.

**Raw Material and Commodity 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 47.5% in the first six 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.

**ITEM4.**                CONTROLS ANDPROCEDURES

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 July 2,2005.

There were no changes in the Company’s internalcontrol over financial reporting during the quarter ended July 2, 2005that have materially affected, or are reasonably likely to materially affect,the Company’s internal control over financial reporting.

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**PART II. OTHERINFORMATION**

**ITEM 1.**                LEGALPROCEEDINGS

Other than as reported inthe Company’s Form 10-K for the period ended January 1, 2005 underthe caption “Item 3. Legal Proceedings,” the Company is not currently a partyto any material pending legal proceedings other than routine litigationincidental to the business of the Company. See Note 16 to the ConsolidatedFinancial Statements included in Item 1 to this Quarterly Report of Form 10-Qfor additional details.

**ITEM2.**                UNREGISTERED SALESOF EQUITY SECURITIES AND USE OF PROCEEDS

During the three monthsended July 2, 2005, 16,822 shares of the Company’s Class BCommon Stock, and 2,271 shares of the Company’s Class C Common Stock,were converted into a total of 19,093 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.

**ITEM3.**                DEFAULTS UPONSENIOR SECURITIES

Not applicable.

**ITEM4.**                SUBMISSION OFMATTERS TO A VOTE OF SECURITY HOLDERS

TheShareholders of the Company at their Annual Meeting held on May 18, 2005,considered and voted to adopt and approve the following matters (the numbersbelow represent shares of Class A, B and C Common Stock, and PIK PreferredStock Voting on an “as converted to Class A Common Stock’’ basis, votingas one class):

·       The election of eight (8) directorsfor one-year terms or until their successors are duly elected and qualified thefollowing:
| **Name of Director** | ** ** | ** ** | ** ** | **Votes in Favor** | ** ** | **Votes Withheld** | ** ** |
|--------------------------------|------------|------------|------------|------------------------------|------------|-------------------------|------------|
| Pedro Arias                    |       |       | 17,472,100 |                         |       |                    | 82,068     |   |   |
| Ramon Betolaza                 |       |       | 17,065,284 |                         |       |                    | 488,884    |   |   |
| Lap Wai Chan                   |       |       | 17,065,284 |                         |       |                    | 488,884    |   |   |
| William B. Hewitt              |       |       | 17,065,488 |                         |       |                    | 488,680    |   |   |
| Eugene Linden                  |       |       | 17,472,124 |                         |       |                    | 82,044     |   |   |
| James Ovenden                  |       |       | 17,472,124 |                         |       |                    | 82,044     |   |   |
| James Schaeffer                |       |       | 17,097,778 |                         |       |                    | 456,390    |   |   |
| Michael Watzky                 |       |       | 17,065,284 |                         |       |                    | 488,884    |   |   |

 

·       The proposed amendments tothe 2003 Employee Stock Option Plan. The stock option plan provides for grantsof stock options to eligible officers and other employees of the Company. Thepurpose of the amendments to the stock option plan is to modify the definitionof “Change in Control” to add a change in ownership concept, eliminate certainlimitations on individual award requirements and provide the CompensationCommittee with additional flexibility. In addition, several amendments weredriven by the newly issued deferred compensation rules under Section 409Aof the Internal Revenue Code.
| ** ** | **Votes in Favor** | ** ** | ** ** | **Votes Against** | ** ** | ** ** | **Votes Abstaining** | ** ** | ** ** | **Broker Non Votes** | ** ** |
|------------|------------------------------|------------|------------|------------------------|------------|------------|---------------------------|------------|------------|----------------------|------------|
| 15,174,040 | 854,072                      | 668        | 1,525,388  |

 

·       Theapproval of the Short-Term Incentive Compensation Plan for certain of theCompany’s employees. The short-term incentive compensation plan provides forgrants of performance-based 

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cash awards toeligible employees of the Company. The purpose of the short-term incentivecompensation plan is to provide these individuals with incentives to maximizecorporate performance and shareholder value and otherwise contribute to thesuccess of the Company and to enable the Company to attract, retain and rewardthe best available persons to exert a positive impact on the Company’sfinancial results.
| ** ** | ** ** | **Votes in Favor** | ** ** | **Votes Against** | ** ** | **Votes Abstaining** |
|------------|------------|------------------------------|------------|------------------------|------------|---------------------------|
|       |       | 16,671,157                   |       | 882,278                |       | 733                       |

 

·       The approval of the 2005Stock Option Plan for the Company’s employees. The stock option plan providesfor grants of restricted stock options to eligible employees of the Company.The purpose of the stock option plan is to provide these individuals withincentives to maximize corporate performance and shareholder value andotherwise contribute to the success of the Company and to enable the Company toattract, retain and reward the best available persons for positions ofresponsibility.
| ** ** | **Votes in Favor** | ** ** | ** ** | **Votes Against** | ** ** | ** ** | **Votes Abstaining** | ** ** | ** ** | **Broker Non Votes** | ** ** |
|------------|------------------------------|------------|------------|------------------------|------------|------------|---------------------------|------------|------------|----------------------|------------|
| 8,748,015  | 886,717                      | 443        | 7,918,993  |

 

**ITEM 5.**                OTHERINFORMATION

Not applicable.

**ITEM 6.**                EXHIBITS

Exhibitsrequired to be filed with this Form 10-Q are listed below:
| Exhibit  Number | ** ** | ** **                                                                                                    | ** ** | **Document Description** |
|-----------------|------------|---------------------------------------------------------------------------------------------------------------|------------|--------------------------|
| 10.1            |       | Executive  Employment Agreement dated March 30, 2004 between Polymer Group, Inc. and  James L. Schaeffer.     |
| 10.2            |       | Executive  Employment Agreement dated October 27, 2003 between Polymer Group, Inc. and  Willis C. Moore, III. |
| 10.3            |       | Polymer  Group, Inc. 2003 Stock Option Plan(1)                                                                |
| 10.4            |       | Polymer  Group, Inc. 2003 Stock Option Plan Amendments(2)                                                     |
| 10.5            |       | Polymer  Group, Inc. 2004 Restricted Stock Plan(3)                                                            |
| 10.6            |       | Polymer  Group, Inc. Short-Term Incentive Compensation Plan(4)                                                |
| 10.7            |       | Polymer  Group, Inc. 2005 Stock Option Plan(5)                                                                |
| 10.8            |       | Form  of Stock Option Agreement(6)                                                                            |
| 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)   Incorporated by reference to Annex I of the Company’s DefinitiveProxy Statement on Schedule 14A filed with the SEC on April 15, 2004(the “2004 Proxy Statement”).

(2)   Incorporated by reference to Annex I ofthe Company’s Definitive Proxy Statement on Schedule 14A filed with theSEC on April 15, 2005 (the “2005 Proxy Statement”).

(3)   Incorporated by reference to Annex II ofthe 2004 Proxy Statement

(4)   Incorporated by reference to Annex II ofthe 2005 Proxy Statement.

(5)   Incorporated by reference to Annex IIIof the 2005 Proxy Statement.

(6)   Incorporated by reference to Exhibit 4.4of the Company’s Form S-8 filed with the SEC on December 14,2004.

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly 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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