**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 April 1, 2006**

**or**                                          |
| **o**      | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For thetransition period from                to               **

**Commission file number: 1-14330**

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**POLYMER GROUP, INC.**

(Exact name of registrant asspecified in its charter)

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

 

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

Former name, former address and former fiscal year, ifchanged from last report: **None**

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 such filing requirements for the past90 days.   Yes x   No o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the ExchangeAct. (Check one):
| Large accelerated filer o | Accelerated  filer x | Non-accelerated filer  ̈ |
|--------------------------------|---------------------------|-----------------------------------|

 

Indicate by check mark whetherthe registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).   Yes  ̈   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)of the Securities Exchange Act of 1934 subsequent to the distribution ofsecurities under a plan confirmed by a court.   Yes x   No o

On May 8,2006 there were 19,121,952 shares of Class A common stock,147,930 shares of Class B common stock and 24,319 shares of Class Ccommon stock outstanding. No shares of Class D or Class E commonstock were outstanding as of such date. The par value for each class of commonstock 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 |       |     | 25         |   |   |
| Item 3.                                         |       | Quantitative  and Qualitative Disclosures About Market Risk                                 |       |     | 37         |   |   |
| Item 4.                                         |       | Controls and  Procedures                                                                    |       |     | 39         |   |   |
| **PART II.**                                    | ** ** | **OTHER  INFORMATION**                                                                      |       |     |       |   |   |
| Item 1.                                         |       | Legal Proceedings                                                                           |       |     | 40         |   |   |
| Item 1A.                                        |       | Risk Factors                                                                                |       |     | 40         |   |   |
| Item 2.                                         |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                |       |     | 40         |   |   |
| Item 3.                                         |       | Defaults Upon  Senior Securities                                                            |       |     | 40         |   |   |
| Item 4.                                         |       | Submission of  Matters To a Vote of Security Holders                                        |       |     | 40         |   |   |
| Item 5.                                         |       | Other Information                                                                           |       |     | 40         |   |   |
| Item 6.                                         |       | Exhibits                                                                                    |       |     | 41         |   |   |
| Signatures                                           |       |                                                                                        | 42         |     |       |

 

1

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**IMPORTANT INFORMATIONREGARDING THIS FORM 10-Q**

Readers should consider thefollowing 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 product introductions, cost savings, research and developmentactivities and similar matters. The Private Securities Litigation Reform Act of1995 provides a safe harbor for forward-looking statements. Forward-lookingstatements are generally accompanied by words such as “estimate,” “project,” “predict,”“believe,” “expect,” “anticipate” or other words that convey the uncertainty offuture events 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 anyobligation to update these statements and cautions against any undue relianceon them. These forward-looking statements are based on currentexpectations and assumptions about future events. While management considersthese expectations and assumptions to be reasonable, they are inherentlysubject to significant business, economic, competitive, regulatory and otherrisks, contingencies and uncertainties, most of which are difficult to predictand many of which are beyond the Company’s control. See Item 1A. “RiskFactors” in the Company’s Annual Report on Form 10-K. There can beno assurances that these events will occur or that the Company’s results willbe as estimated.

Important factors thatcould cause actual results to differ materially from those discussed in suchforward-looking statements include:

·       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

·       risksrelated to operations in foreign jurisdictions.

2

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**ITEM 1.**                 FINANCIALSTATEMENTS

**POLYMER GROUP, INC.CONSOLIDATED BALANCE SHEETS (Unaudited)(In Thousands, Except Share Data)**

| ** **                                                                                                                                                         | ** ** | **April 1,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                         | ** ** | ** **              | ** ** |                        | ** ** | ** ** |   |
| Current assets:                                                                                                                                                    |       |                    |       |                        |       |   |   |
| Cash and cash equivalents                                                                                                                                          |       | $                       | 23,509     |                        |       | $ | 30,963 |   |   |
| Accounts receivable, net                                                                                                                                           |       | 135,320                 |       |                        | 120,668    |   |   |
| Inventories                                                                                                                                                        |       | 128,546                 |       |                        | 119,663    |   |   |
| Deferred income taxes                                                                                                                                              |       | 3,335                   |       |                        | 4,364      |   |   |
| Other current assets                                                                                                                                               |       | 25,083                  |       |                        | 23,094     |   |   |
| Total current assets                                                                                                                                               |       | 315,793                 |       |                        | 298,752    |   |   |
| Property, plant and equipment, net                                                                                                                                 |       | 439,926                 |       |                        | 421,997    |   |   |
| Intangibles and loan acquisition costs, net                                                                                                                        |       | 36,868                  |       |                        | 37,329     |   |   |
| Deferred income taxes                                                                                                                                              |       | 340                     |       |                        | 433        |   |   |
| Other assets                                                                                                                                                       |       | 8,912                   |       |                        | 6,490      |   |   |
| Total assets                                                                                                                                                       |       | $                       | 801,839    |                        |       | $ | 765,001 |   |   |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                                                                     | ** ** | ** **              | ** ** |                        | ** ** | ** ** |   |
| Current liabilities:                                                                                                                                               |       |                    |       |                        |       |   |   |
| Short-term borrowings                                                                                                                                              |       | $                       | 4,995      |                        |       | $ | 5,101 |   |   |
| Accounts payable                                                                                                                                                   |       | 92,032                  |       |                        | 82,371     |   |   |
| Accrued liabilities                                                                                                                                                |       | 37,034                  |       |                        | 32,235     |   |   |
| Income taxes payable                                                                                                                                               |       | 1,814                   |       |                        | 1,456      |   |   |
| Current portion of long-term debt                                                                                                                                  |       | 4,139                   |       |                        | 4,142      |   |   |
| Total current liabilities                                                                                                                                          |       | 140,014                 |       |                        | 125,305    |   |   |
| Long-term debt                                                                                                                                                     |       | 424,488                 |       |                        | 405,955    |   |   |
| Deferred income taxes                                                                                                                                              |       | 65,878                  |       |                        | 64,692     |   |   |
| Other noncurrent liabilities                                                                                                                                       |       | 20,228                  |       |                        | 20,956     |   |   |
| Total liabilities                                                                                                                                                  |       | 650,608                 |       |                        | 616,908    |   |   |
| Minority interests                                                                                                                                                 |       | 16,022                  |       |                        | 16,611     |   |   |
| 16% Series A convertible pay-in-kind preferred shares—0 shares  issued and outstanding                                                              |       | —                  |       |                        | —     |   |   |
| Shareholders’ equity:                                                                                                                                         |       |                    |       |                        |       |   |   |
| Class A common stock—19,157,948 and  18,868,607 shares issued and outstanding at April 1, 2006 and  December 31, 2005, respectively            |       | 191                     |       |                        | 188        |   |   |
| Class B convertible common  stock—147,930 and 153,549 shares issued and outstanding at April 1,  2006 and December 31, 2005, respectively |       | 2                       |       |                        | 2          |   |   |
| Class C convertible common stock—24,319  and 31,131 shares issued and outstanding at April 1, 2006 and  December 31, 2005, respectively   |       | —                  |       |                        | —     |   |   |
| Class D convertible common stock—0  shares issued and outstanding                                                                                        |       | —                  |       |                        | —     |   |   |
| Class E convertible common stock—0  shares issued and outstanding                                                                                        |       | —                  |       |                        | —     |   |   |
| Additional paid-in capital                                                                                                                                         |       | 169,472                 |       |                        | 165,652    |   |   |
| Retained earnings (deficit)                                                                                                                                        |       | (56,425                 | )          |                        | (54,820    | ) |   |
| Accumulated other comprehensive income                                                                                                                             |       | 21,969                  |       |                        | 20,460     |   |   |
| Total shareholders’ equity                                                                                                                                    |       | 135,209                 |       |                        | 131,482    |   |   |
| Total liabilities and shareholders’ equity                                                                                                                    |       | $                       | 801,839    |                        |       | $ | 765,001 |   |   |

 

See Accompanying Notes.

3

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**POLYMER GROUP, INC.CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)(In Thousands, Except Per Share Data)**

| ** **                                                  | ** ** | **Three Months  Ended  April 1, 2006** | ** ** | **Three Months  Ended  April 2, 2005** | ** ** |
|-------------------------------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------|------------|
| Net sales                                                   |       |                                                  | $          | 260,441                                               |       |   |   | $ | 244,361 |   |   |
| Cost of goods sold                                          |       |                                                  | 217,237    |                                                  |       |   | 200,444 |   |   |
| Gross profit                                                |       |                                                  | 43,204     |                                                  |       |   | 43,917 |   |   |
| Selling, general and  administrative expenses               |       |                                                  | 32,398     |                                                  |       |   | 27,467 |   |   |
| Restructuring and  plant realignment costs                  |       |                                                  | 1,633      |                                                  |       |   | 4 |   |   |
| Foreign currency  loss, net                                 |       |                                                  | 567        |                                                  |       |   | 24 |   |   |
| Operating income                                            |       |                                                  | 8,606      |                                                  |       |   | 16,422 |   |   |
| Other expense (income):                                     |       |                                                  |       |                                                  |       |   |   |   |   |
| Interest expense, net                                       |       |                                                  | 6,518      |                                                  |       |   | 7,866 |   |   |
| Minority interests                                          |       |                                                  | 884        |                                                  |       |   | 934 |   |   |
| Foreign currency and other (gain) loss, net                 |       |                                                  | 491        |                                                  |       |   | (339 | ) |   |
| Income before income  tax expense                           |       |                                                  | 713        |                                                  |       |   | 7,961 |   |   |
| Income tax expense                                          |       |                                                  | 2,318      |                                                  |       |   | 2,795 |   |   |
| Net income (loss)                                           |       |                                                  | (1,605     | )                                                     |       |   | 5,166 |   |   |
| Accrued and  paid-in-kind dividends on PIK preferred shares |       |                                                  | —     |                                                  |       |   | 10,851 |   |   |
| Loss applicable to  common shareholders                     |       |                                                  | $          | (1,605                                                | )          |   |   | $ | (5,685 | ) |   |
| Loss per common share:                                      |       |                                                  |       |                                                  |       |   |   |   |   |
| Basic                                                       |       |                                                  | $          | (0.08                                                 | )          |   |   | $ | (0.55 | ) |   |
| Diluted                                                     |       |                                                  | $          | (0.08                                                 | )          |   |   | $ | (0.55 | ) |   |

 

See Accompanying Notes.

4

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**POLYMERGROUP, INC.CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS) (Unaudited)For the Three Months Ended April 1, 2006(In Thousands)**

| ** **                                                                         | ** ** | **Common  Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Retained  Earnings/  (Deficit)** | ** ** | **Accumulated  Other  Comprehensive  Income/  (Loss)** | ** ** | **Total** | ** ** | ** ** | ** ** | **Comprehensive  Income/(Loss)** | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------|------------|----------------------------------|------------|------------------------------------|------------|--------------------------------------------------------|------------|-----------|------------|------------|------------|----------------------------------|------------|
| Balance,  December 31, 2005                                                   |       |              | $          | 190                              |       |                               | $          | 165,652                                                |       | $         | (54,820    | )          |       | $                                | 20,460     |   |   | $ | 131,482 |   |   |   |   |   |   |   |
| Net loss                                                                           |       |              | —     |                             |       | —                             |       | (1,605                                                 | )          |      | —     |       |       | (1,605                           | )          |   |   |   | $ | (1,605 | ) |   |
| Currency translation  adjustment, net of tax                                       |       |              | —     |                             |       | —                             |       | —                                                 |       |      | 1,229      |       |       | 1,229                            |       |   |   |   | 1,229 |   |   |
| Cash flow hedge  adjustment, net of reclassification adjustment                    |       |              | —     |                             |       | —                             |       | —                                                 |       |      | 280        |       |       | 280                              |       |   |   |   | 280 |   |   |
| Compensation expense recognized on  stock options and restricted stock grants |       |              | 3          |                             |       | 3,820                              |       | —                                                 |       |      | —     |       |       | 3,823                            |       |   |   |   | — |   |   |
| Balance, April 1, 2006                                                        |       |              | $          | 193                              |       |                               | $          | 169,472                                                |       | $         | (56,425    | )          |       | $                                | 21,969     |   |   | $ | 135,209 |   |   |   |   | $ | (96 | ) |   |

 

See Accompanying Notes.

5

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**POLYMERGROUP, INC.CONSOLIDATED STATEMENTS OF CASH FLOW (Unaudited)(In Thousands)**

| ** **                                                                                                | ** ** | **Three Months  Ended  April 1, 2006** | ** ** | **Three Months  Ended  April 2, 2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------|------------|
| Operating activities:                                                                                     |       |                                                  |       |                                                  |       |   |   |   |   |
| Net income (loss)                                                                                         |       |                                                  | $          | (1,605                                                | )          |   |   | $ | 5,166 |   |   |
| Adjustments to  reconcile net income (loss) to net cash provided by (used in) operating  activities: |       |                                                  |       |                                                  |       |   |   |   |   |
| Deferred income taxes                                                                                     |       |                                                  | 1,295      |                                                  |       |   | 1,545 |   |   |
| Gain on sale of assets                                                                                    |       |                                                  | (220       | )                                                     |       |   | — |   |   |
| Depreciation and amortization                                                                             |       |                                                  | 14,763     |                                                  |       |   | 13,663 |   |   |
| Noncash compensation                                                                                      |       |                                                  | 3,823      |                                                  |       |   | 411 |   |   |
| Changes in operating  assets and liabilities, net of effect of acquisitions:                              |       |                                                  |       |                                                  |       |   |   |   |   |
| Accounts receivable, net                                                                                  |       |                                                  | (14,555    | )                                                     |       |   | (22,592 | ) |   |
| Inventories                                                                                               |       |                                                  | (8,424     | )                                                     |       |   | (7,725 | ) |   |
| Other current assets                                                                                      |       |                                                  | (2,382     | )                                                     |       |   | (3,210 | ) |   |
| Accounts payable and accrued liabilities                                                                  |       |                                                  | 13,289     |                                                  |       |   | 1,950 |   |   |
| Other, net                                                                                                |       |                                                  | (1,460     | )                                                     |       |   | 2,770 |   |   |
| Net cash provided by (used in) operating  activities                                                      |       |                                                  | 4,524      |                                                  |       |   | (8,022 | ) |   |
| Investing activities:                                                                                     |       |                                                  |       |                                                  |       |   |   |   |   |
| Purchases of property, plant and equipment                                                                |       |                                                  | (30,845    | )                                                     |       |   | (10,095 | ) |   |
| Acquisition-related costs                                                                                 |       |                                                  | (942       | )                                                     |       |   | — |   |   |
| Proceeds from sale of assets                                                                              |       |                                                  | 1,357      |                                                  |       |   | 354 |   |   |
| Net cash used in investing activities                                                                     |       |                                                  | (30,430    | )                                                     |       |   | (9,741 | ) |   |
| Financing activities:                                                                                     |       |                                                  |       |                                                  |       |   |   |   |   |
| Proceeds from debt                                                                                        |       |                                                  | 32,110     |                                                  |       |   | 744 |   |   |
| Repayment of debt                                                                                         |       |                                                  | (13,686    | )                                                     |       |   | (2,299 | ) |   |
| Other                                                                                                     |       |                                                  | (114       | )                                                     |       |   | (15 | ) |   |
| Net cash provided by (used in) financing  activities                                                      |       |                                                  | 18,310     |                                                  |       |   | (1,570 | ) |   |
| Effect of exchange  rate changes on cash                                                                  |       |                                                  | 142        |                                                  |       |   | (345 | ) |   |
| Net decrease in cash  and cash equivalents                                                                |       |                                                  | (7,454     | )                                                     |       |   | (19,678 | ) |   |
| Cash and cash  equivalents at beginning of period                                                         |       |                                                  | 30,963     |                                                  |       |   | 41,296 |   |   |
| Cash and cash equivalents at  end of period                                                               |       |                                                  | $          | 23,509                                                |       |   |   | $ | 21,618 |   |   |

 

See Accompanying Notes.

6

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

**Note 1.**   Principlesof Consolidation and Financial Statement Information

*Principles ofConsolidation*

Polymer Group, Inc. (the “Company”) is a publicly-traded,multinational manufacturer, marketer and seller of nonwoven and orientedpolyolefin products. The Company’s main sources of revenue are the sales ofprimary and intermediate products to the medical, hygiene, wipes and industrialand specialty markets.

The accompanying Consolidated Financial Statementsinclude the accounts of Polymer Group, Inc. and all majority-ownedsubsidiaries after elimination of all significant intercompany accounts andtransactions. The accounts of all foreign subsidiaries have been included onthe basis of fiscal periods ended three months or less prior to the dates ofthe Consolidated Balance Sheets. All amounts 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 December 31, 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 December 31,2005 has been derived from the audited financial statements included in theCompany’s Annual Report on Form 10-K.

*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 sales isrecognized 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 includesamounts billed 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 is recognized.

*Accumulated OtherComprehensive Income*

Accumulated othercomprehensive income of $22.0 million at April 1, 2006 consisted of$19.4 million of currency translation gains, $1.6 million of minimumpension liability and $4.2 million of cash flow hedge gains, all net of applicableincome tax. Accumulated other comprehensive income of $20.5 million at December 31,2005 consisted of $18.2 million of currency translation gains, $1.6 millionof minimum pension liability and $3.9 million of cash flow hedge gains,all net of applicable income tax.

*Recent AccountingStandards*

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 

7

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

recognized as current-periodcharges rather than capitalized as an inventory cost. In addition, SFAS No. 151requires that the allocation of fixed production overhead costs be based on thenormal capacity of the production facilities. SFAS No. 151 is effectivefor inventory costs incurred during fiscal years beginning after June 15,2005 and is required to be adopted by the Company in the first quarter offiscal year 2006. The Company has adopted the provisions of SFAS No. 151effective January 1, 2006 and the impact has not been significant to itsfinancial 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” (“SFAS No. 123R”), iseffective for all awards granted, modified, repurchased or canceled after June 15,2005 and requires a public entity to measure the cost of employee servicesreceived in exchange for an award of equity instruments based on the grant-datefair value of the award. The grant date fair value is to be estimated usingoption-pricing models adjusted for the unique characteristics of thoseinstruments. In April 2005, the Securities and Exchange Commission issued afinal rule that registrants must adopt SFAS No. 123R’s fair valuemethod of accounting no later than the beginning of the fiscal year beginningafter June 15, 2005. Accordingly, the Company adopted SFAS No. 123R asof January 1, 2006 using the modified prospective transition method. Thegrant date fair value was estimated using the Black-Scholes model. Under themodified prospective transition method, all new grants and any unvested portionof prior awards as of January 1, 2006 have been measured based on thefair-value-based method of accounting. The impact of adopting SFAS No. 123Rhas resulted in marginally lower compensation costs than previously recognizedunder the Company’s historically-used accounting principles. The proformaeffect of utilizing SFAS No. 123R on the financial results for the threemonths ended April 2, 2005 was immaterial.

In May 2005, the FASBissued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS No. 154”).This statement amends earlier guidance and requires retrospective applicationto prior periods’ financial statements of a voluntary change in accountingprinciple unless it is impracticable to determine either the period-specificeffects or the cumulative effects of the change. In addition, SFAS No. 154requires that a change in the method of depreciation or amortization for along-lived, non-financial asset be accounted for as a change in accountingestimate that is affected by a change in accounting principle. SFAS No. 154is effective for accounting changes and corrections of errors made in fiscalyears beginning after December 15, 2005. The Company has completed itsevaluation of the impact that the adoption of SFAS No. 154 could have andhas concluded that such impact is not expected to be significant to itsfinancial position or results of operations.

**Note 2.**   Concentrationof Credit Risks and Accounts Receivable Factoring Agreements

Accounts receivable potentially expose the Company toconcentration of credit risk, as defined by SFAS No. 105, “Disclosure ofInformation about Financial Instruments with Off-Balance Sheet Risk andFinancial Instruments with Concentration of Credit Risk.” The Company providescredit in the normal course of business and performs ongoing credit evaluationson its customers’ financial condition as deemed necessary, but generally does notrequire collateral to support such receivables. Customer balances areconsidered past due based on contractual terms and the Company does not accrueinterest on the past due balances. The provision for losses on uncollectibleaccounts is determined principally on the basis of past collection experienceapplied to ongoing evaluations of receivables and the risk of repayment. Theallowance for doubtful accounts was approximately $9.0 million and $9.6 millionat April 1, 2006 and December 31, 2005, respectively, whichmanagement believes is adequate to provide for credit loss in the normal courseof business, as well 

8

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

as losses for customers whohave filed for protection under bankruptcy laws. Once management determinesthat the receivables are not recoverable, the amounts are removed from thefinancial records along with the corresponding reserve balance. With respect tothe approximate $0.6 million decrease in the allowance for doubtful accounts,approximately $0.5 related to the write-off of specifically identifieduncollectible accounts receivable and the corresponding reserves. Sales to theProcter & Gamble Company (“P&G”) accounted for approximately 14%of the Company’s sales in both the first quarter of 2006 and 2005.

On November 15, 2004, the Company entered into afactoring agreement to sell without recourse, certain U.S. company-basedreceivables to an unrelated third-party financial institution. Under the termsof the factoring agreement, the maximum amount of outstanding advances at anyone time was $15.0 million, which limitation was subject to change basedon the level of eligible receivables, restrictions on concentrations ofreceivables and the historical performance of the receivables sold. In March 2006,the maximum amount of outstanding advances at one time was increased to $20.0 million.During the first quarter of 2006, approximately $39.1 million ofreceivables had been sold under the terms of the factoring agreement, comparedto approximately $31.4 million during the first quarter of fiscal 2005.The sale of these receivables accelerated the collection of the Company’s cash,reduced credit exposure and lowered the Company’s net borrowing costs. Sales ofaccounts receivable are reflected as a reduction of *Accounts receivable, net* in the Consolidated Balance Sheetsand a gain or loss is reflected in the Consolidated Statements of Operations onsuch sale, as they meet the applicable criteria of SFAS No. 140, “Accountingfor Transfers and Servicing of Financial Assets and Extinguishment of Liabilities”(“SFAS No. 140”). The amount due from the factoring company, net ofadvances received from the factoring company, was $4.3 million and $4.8 millionat April 1, 2006 and December 31, 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 first quarter of 2006 and 2005 were $0.1 million and$0.2 million, respectively, and are included in *Other expense, net* in the Consolidated Statement ofOperations.

On November 7, 2005, theCompany’s Latin American operations entered into a factoring agreement to sellwithout recourse, certain non-U.S. company-based receivables to an unrelatedthird-party financial institution. Under the terms of the factoringagreement, the maximum amount of outstanding advances at any one time is $10.0 million,which limitation is subject to change based on the level of eligible receivables,restrictions on concentrations of receivables and the historical performance ofthe receivables sold. During the first quarter of 2006, approximately $3.3 millionof receivables had been sold under the terms of the factoring agreement. Suchsale of receivables meets the applicable criteria of SFAS No. 140 and hasbeen accounted for on a basis consistent with the methodology described in thepreceding paragraph. The amount due from the factoring company, net of advancesreceived from the factoring company, was $2.2 million and $1.4 million,respectively, at April 1, 2006 and December 31, 2005 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.

**Note 3.**   BusinessRestructuring

Accrued costs for restructuring efforts are includedin *Accrued liabilities* in the ConsolidatedBalance Sheets. These costs relate to the corporate relocation, as discussedfurther below, and the European Nonwovens business restructuring initiativesbegun in 2004. A summary of the business 

9

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

restructuring activity during the first three monthsof fiscal 2006 is presented in the following table (in thousands):

| Balance accrued at  beginning of year           |   | $      | 163    |   |
|-------------------------------------------------|--------|--------|--------|--------|
| 2006 restructuring  and plant realignment costs |   | 1,633  |   |
| Cash payments                                   |   | (46    | )      |
| Adjustments                                     |   | — |   |
| Balance accrued at end of  period               |   | $      | 1,750  |   |

 

The 2006 restructuring and plant realignment costs areprincipally associated with the relocation of the corporate office toCharlotte, North Carolina.  Totalestimated costs of the relocation are expected to approximate $2.3 million, andare comprised primarily of employee relocation and severance costs.  The Company is accounting for these costs inaccordance with FASB Statement No. 146 “Accounting for Costs Associated withExit or Disposal Activities” (“SFAS No. 146”).

As of March 10, 2006, the Company has entered intowritten relocation agreements with 28 employees who have agreed to therelocation and to acceptance of benefits offered by the Company.  Such relocation benefits accrued of $1.3million as of April 1, 2006 relate primarily to Company obligations for costsassociated with the employee’s real estate sales process, which process hadbeen substantially initiated by the electing employees prior to April 1, 2006. 

Also in connection with the relocation, the Companyexpects to incur approximately $0.6 million in severance costs relating to 24employees.  Such costs will be incurredprovided that the employee remains in the employ of the Company through thedate of the corporate relocation. Accordingly, consistent with the provisions of SFAS No. 146, the Companyis accruing the severance cost ratably over the expected future service period.

**During the first quarter of fiscal2006, the Company has included such restructuring costs in *Restructuringand plant realignment costs* in the Consolidated Statement ofOperations.  Additional relocation costsare expected to be recognized pursuant to SFAS No. 146 subsequent to April 1,2006 relating to hiring costs and other employee relocation expenses as suchobligations are incurred.**

Additionally, during the firstfiscal quarter of 2006, the Company negotiated certain changes with the unionrepresenting the employees of one of the Company’s Canadian operations,including a curtailment of a defined benefit pension plan. No gain or loss isexpected as a result of the curtailment. However, based on elections which willbe made by plan participants during the second quarter of fiscal 2006, andsubject to approval by Canadian regulatory authorities, the Company may incur settlementlosses associated with any employees who elect to exit the plan. Any lossassociated with the settlement of the defined benefit pension plan will berecognized at such time as the amounts can be reasonably estimated.

10

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

**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):

| ** **      | ** ** | **April 1,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------|------------|-------------------------|------------|-----------------------------|------------|
| Finished goods  |       | $                       | 62,738     |                        |       | $ | 60,545 |   |   |
| Work in process |       | 18,453                  |       |                        | 17,724     |   |   |
| Raw materials   |       | 47,355                  |       |                        | 41,394     |   |   |
|            |       | $                       | 128,546    |                        |       | $ | 119,663 |   |   |

 

Inventories are net ofreserves, primarily for obsolete and slow-moving inventories, of approximately$9.8 million and $9.7 million at April 1, 2006 and December 31,2005, respectively. Management believes that the reserves are adequate toprovide for losses in the normal course of business.

**Note 5.**   Intangiblesand Loan Acquisition Costs

Intangibles and loanacquisition costs consist of the following (in thousands):

| ** **                       | ** ** | **April 1,** | ** ** | **December 31,** | ** ** |
|----------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                       | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| Cost:                            |       |              |       |                  |       |   |   |
| Proprietary technology           |       | $                 | 30,328     |                  |       | $ | 30,251 |   |   |
| Goodwill                         |       | 10,243            |       |                  | 10,243     |   |   |
| Loan acquisition costs and other |       | 12,923            |       |                  | 12,045     |   |   |
|                             |       | 53,494            |       |                  | 52,539     |   |   |
| Less accumulated amortization    |       | (16,626           | )          |                  | (15,210    | ) |   |
|                             |       | $                 | 36,868     |                  |       | $ | 37,329 |   |   |

 

In January 2006, the Company acquired the businessof Advanced Fiber Solutions, Inc (“AFS”). AFS is a regional distributioncompany located in Alabama that markets and sells synthetic concrete fibers tothe ready mix, stucco and precast segments of the construction business,primarily in the southern United States. The aggregate purchase price of $0.8 millionconsisted of $0.4 million paid to the seller at closing and $0.4 millionto be paid on the first anniversary of the transaction, contingent upon thesuccessful transfer of the business to the Company and other factors. Thepurchase consisted primarily of customer lists and a covenant not to competeagreement with the seller, and the Company included the aggregate purchaseprice in *Intangibles and loan acquisition costs*. Suchcosts will be amortized over the term of the covenant not to compete agreement.In addition, the contingent portion of the purchase price is included in *Accrued liabilities* as of April 1, 2006. Net sales andnet income of AFS have been included in the the Company’s ConsolidatedFinancial Statements from the acquisition date of January 9, 2006. Netsales attributable to AFS operations were $0.5 million for the first threemonths of fiscal 2006, compared to $0.4 million for the first three monthsof fiscal 2005. The impact on the Company’s Consolidated Financial Statementsis not material, given the relative size of the acquisition. Therefore, unauditedpro forma data has not been presented in conjunction with this acquisition.

11

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

Componentsof amortization expense are shown in the table below (in thousands):

| ** **                                                                               | ** ** | **Three Months Ended**                                     | ** ** |
|------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                                                               | ** ** | **April 1,**                                                    | ** ** | **April 2,** | ** ** |
| ** **                                                                               | ** ** | **     2006     ** | ** ** | **     2005     ** | ** ** |
| Amortization of:                                                                         |       |                                                                 |       |   |   |   |   |   |   |
| Intangibles with finite  lives, included in selling, general and administrative expenses |       |                                                                 | $          | 1,091 |   |   |   | $ | 1,058 |   |   |
| Loan acquisition costs  included in interest expense, net                                |       |                                                                 | 325        |   |   |   | 504 |   |   |
| Total amortization expense                                                               |       |                                                                 | $          | 1,416 |   |   |   | $ | 1,562 |   |   |

 

Intangibles are amortized overperiods ranging from 5 to 17 years. Loan acquisition costs are amortizedover the life of the related debt.

**Note 6.   AccruedLiabilities**

Accrued liabilities in the Consolidated Balance Sheetsinclude salaries, wages and other fringe benefits of $15.3 million and$17.0 million as of April 1, 2006 and December 31, 2005,respectively.

**Note 7.**   Debt

Long-termdebt consists of the following (in thousands):

| ** **                                                                                                                                                                                                                                                                                                                 | ** ** | **April 1,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                 | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| Credit Facility, as defined below, 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 7.21% and 6.77% as of April 1,  2006 and December 31, 2005, respectively; due in mandatory quarterly  payments of approximately $1.0 million, subject to additional payments  from annual excess cash flows, as defined, with the balance due  November 22, 2012 |       |              | $          | 408,975               |       |   |   | $ | 410,000 |   |   |
| Revolving Credit Facility—interest at 7.32% as of April 1, 2006;  due November 22, 2010                                                                                                                                                                                                                     |       |              | 19,000     |                  |       |   | — |   |   |
| Other                                                                                                                                                                                                                                                                                                                      |       |              | 652        |                  |       |   | 97 |   |   |
|                                                                                                                                                                                                                                                                                                                       |       |              | 428,627    |                  |       |   | 410,097 |   |   |
| Less: Current  maturities                                                                                                                                                                                                                                                                                                  |       |              | (4,139     | )                     |       |   | (4,142 | ) |   |
|                                                                                                                                                                                                                                                                                                                       |       |              | $          | 424,488               |       |   |   | $ | 405,955 |   |   |

 

*Credit Facility*

The Company’s Credit Facility (the “Credit Facility”),which was entered into on November 22, 2005, consists of a $45.0 millionsecured revolving credit facility and a $410.0 million first-lien termloan. The proceeds therefrom were used to fully repay indebtedness under theCompany’s previous Bank Facility (as defined below) and pay related fees andexpenses.

12

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

All borrowings under the Credit Facility are U.S.dollar denominated and are guaranteed, on a joint and several basis, by eachand all of the direct and indirect domestic subsidiaries of the Company. TheCredit Facility and the related guarantees are secured by (i) a lien onsubstantially all of the assets of the Company, its domestic subsidiaries andcertain of its non-domestic subsidiaries, (ii) a pledge of all or aportion of the stock of the domestic subsidiaries of the Company and of certainnon-domestic subsidiaries of the Company, and (iii) a pledge of certainsecured intercompany notes. Commitment fees under the Credit Facility are equalto 0.50% of the daily unused amount of the revolving credit commitment. TheCredit Facility limits restricted payments to $5.0 million, including cashdividends, in the aggregate since the effective date of the Credit Facility.The Credit Facility contains covenants and events of default customary forfinancings of this type, including leverage and interest expense coveragecovenants. The Company was in compliance with all such covenants at April 1,2006 and December 31, 2005 and expects to remain in compliance through theremainder of fiscal 2006. The first-lien term loan requires mandatory paymentsof approximately $1.0 million per quarter and, requires the Company toapply a percentage of proceeds from excess cash flows, as defined by the CreditFacility and determined based on year-end results, to reduce its then outstandingbalances under the Credit Facility.

Excess cash flows required to be applied to therepayment of the Credit Facility are generally calculated as 50.0% of the netamount of the Company’s available cash generated from operations adjusted forthe cash effects of interest, taxes, capital expenditures, changes in workingcapital and certain other items. Since the amounts of excess cash flows forfuture periods are based on year-end results and not currently determinable,only the mandatory payments of approximately $1.0 million per quarter havebeen classified as a current liability. Additionally, no excess cash flowpayment was required to be made with respect to fiscal 2005 due to themagnitude of the major capital expenditure projects and any excess cash flowrequirement with respect to fiscal 2006 is not expected to be significant.

The interest rate applicable to borrowings under theCredit Facility is based on three-month London Interbank Offered Rate (“LIBOR”)plus a specified margin. The applicable margin for borrowings under both thefirst-lien term loan and the revolving credit facility is 225 basis points. TheCompany may, from time to time, elect to use an alternate base rate for itsborrowings under the revolving credit facility based on the bank’s base rateplus a margin of 75 to 125 basis points based on the Company’s total leverageratio. As of April 1, 2006, the Company had $19.0 million ofoutstanding borrowings under the revolving credit facility, and there were nosuch borrowings as of December 31, 2005. As of April 1, 2006,capacity under the revolving credit facility had been reserved for outstandingletters of credit in the amount of $11.8 million, as described below.Average borrowings under the revolving credit facility, which were largelyLIBOR-based borrowings, for the period from January 1, 2006 to April 1,2006 were $19.4 million at an average rate of 7.36%. The revolving creditportion of the Credit Facility matures on November 22, 2010.

In accordance with the terms of the Credit Facility,the Company maintained its position in a cash flow hedge agreement originallyentered into in May 2004. This cash flow hedge agreement effectively converts$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 and is described more fully in Note 12 to theConsolidated Financial Statements.

Subject to certain terms andconditions, a maximum of $25.0 million of the Credit Facility may be usedfor revolving letters of credit. As of April 1, 2006, the Company had$11.8 million of standby and 

13

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

documentaryletters of credit outstanding under the Credit Facility. Approximately $2.0 millionwas related to the requirements of the short-term borrowing arrangements of theCompany’s China-based majority owned subsidiary (“Nanhai”). Other lettersof credit are in place to provide added assurance for certain raw materialvendors and administrative service providers. None of these letters of credit hadbeen drawn on at April 1, 2006.

*Bank Facility*

Until it was refinanced on November 22,2005, the Company’s bank facility, which was entered into on April 27,2004 (the “Bank Facility”), consisted of a $50.0 million secured revolvingcredit facility, a $300.0 million senior secured first lien term loan anda $125.0 million senior secured second lien term loan. All borrowingsunder the Bank Facility were U.S. dollar denominated and were guaranteed,on a joint and several basis, by each and all of the direct and indirectdomestic subsidiaries of the Company and supported by the pledge of stock ofcertain non-domestic subsidiaries of the Company. The Bank Facility containedcovenants and events of default customary for financings of this type, includingleverage and interest expense coverage covenants. The interest rate applicableto borrowings under the Bank Facility was based on three-month LIBOR plus aspecified margin. The applicable margin for borrowings under the revolvingcredit facility was 300 basis points, the margin for the first lien term loanwas 325 basis points and the margin for the second lien term loan was 625 basispoints.

*Subsidiary Indebtedness*

Nanhai has a short-term credit facility (denominatedin U.S. dollars and Chinese renminbi) with a financial institution in Chinawhich is scheduled to mature in June 2006. The amount of outstandingindebtedness under the facility was $5.0 million at April 1, 2006 (atan average annual rate of approximately 5.58%) and December 31, 2005 (atan annual average rate of approximately 4.44%). The Nanhai indebtedness issupported by a letter of credit issued by the Company’s agent bank andadditional collateral was granted through the pledge of the Nanhai assets.These borrowings are shown in *Short-term borrowings*in the Consolidated Balance Sheets.

In March 2006, one of theCompany’s wholly-owned Canadian subsidiaries entered into a term loan totalingapproximately $0.6 million with an agency of the Canadian governmentfocused on generating capital investment in the country. The principal of theterm loan is due September 1, 2008. Provided that the term loan is repaidon September 1, 2008, no interest is due. However, if the Company electsnot to pay the loan on September 1, 2008, the Company will begin makingmonthly payments of principal and interest at 6.25% per year.

**Note 8.**   IncomeTaxes

During the three months ended April 1, 2006, theCompany recognized income tax expense of $2.3 million on consolidatedpre-tax income of $0.7 million. This income tax expense is significantlyhigher than the U.S. federal statutory rate primarily due to losses in the U.S.and certain foreign jurisdictions for which no income tax benefits wererecognized. Additionally, the income tax expense was impacted by foreignwithholding taxes, for which tax credits are not anticipated, U.S. state incometaxes, and foreign taxes calculated at statutory rates less than the U.S.federal statutory rate.

The Company recognized income tax expense of $2.8 millionfor the three months ended April 2, 2005 on consolidated income beforeincome taxes of $8.0 million. This income tax expense 

14

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

approximates the U.S. federalstatutory rate. However, the net income tax was impacted by foreign withholdingtaxes, for which tax credits are not anticipated, U.S. state income taxes andforeign taxes calculated at statutory rates less than the U.S. federalstatutory rate.

Management judgment is required in determining taxprovisions and evaluating tax positions. Although management believes its taxpositions and related provisions reflected in the Consolidated FinancialStatements are fully supportable, it recognizes that these tax positions andrelated provisions may be challenged by various tax authorities. These taxpositions and related provisions are reviewed on an ongoing basis and areadjusted as additional facts and information become available, includingprogress on tax audits, changes in interpretations of tax laws, developments incase law and closing of statute of limitations. The Company’s tax provisionincludes the impact of recording reserves and any changes thereto. As of April 1,2006, the Company has a number of tax audits in process and have open tax yearswith various taxing jurisdictions that range from 2001 to 2005. Although theresults of current tax audits and reviews related to open tax years have notbeen finalized, management believes that the ultimate outcomes will not have amaterial adverse effect on the Company’s financial position, results ofoperations or cash flows.

Income tax refunds receivablewere $1.7 million and $1.6 million at April 1, 2006 and December 31,2005, respectively, and are largely comprised of amounts due from LatinAmerican tax jurisdictions. These amounts are included in *Othercurrent assets* on the Consolidated Balance Sheets.

**Note 9.**   Pensionand Postretirement Benefit Plans

The Company and itssubsidiaries sponsor multiple defined benefit plans and other postretirementbenefits that cover certain employees. Benefits are primarily based on years ofservice and the employee’s compensation. It is the Company’s policy to fundsuch plans in accordance with applicable laws and regulations.

Componentsof net periodic benefit costs for the three months ended April 1, 2006 andApril 2, 2005 are as follows (in thousands):

| ** **                                                | ** ** | **Pension  Benefits** | ** ** | **Postretirement  Benefits** | ** ** |
|-----------------------------------------------------------|------------|-----------------------|------------|------------------------------|------------|
| ** **                                                | ** ** | **2006**              | ** ** | **2005**                     | ** ** | **2006** | ** ** | **2005** | ** ** |
| Current service costs                                     |       | $                     | 913        |                         | $          | 656 |   | $ | 58 |   | $ | 45 |   |
| Interest costs on projected  benefit obligation and other |       | 1,529                 |       | 1,408                        |       | 132 |   | 122 |   |
| Return on plan assets                                     |       | (1,749                | )          | (1,542                       | )          | — |   | — |   |
| Amortization of transition  obligation and other          |       | 110                   |       | 6                            |       | (31 | ) | (28 | ) |
| Periodic benefit cost, net                                |       | $                     | 803        |                         | $          | 528 |   | $ | 159 |   | $ | 139 |   |

 

As of April 1, 2006, theCompany had contributed $2.0 million to its pension and postretirementbenefit plans for the 2006 benefit year. The Company presently anticipatescontributing an additional $4.0 million to fund its plans in 2006, for atotal of $6.0 million.

Additionally, during the firstfiscal quarter of 2006, the Company negotiated certain changes with the unionrepresenting the employees of one of the Company’s Canadian operations,including a curtailment of a defined benefit pension plan. No gain or loss isexpected as a result of the curtailment. However, based on elections which willbe made by plan participants during the second 

15

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

quarter offiscal 2006, and subject to approval by Canadian regulatory authorities, theCompany may incur settlement losses associated with any employees who elect toexit the plan. Any loss associated with the settlement of the defined benefitpension plan will be recognized at such time as the amounts can be reasonablyestimated.

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

*Stock Option Plans*

The 2003 Stock Option Plan(the “2003 Plan”) was approved by the Company’s Board of Directors andshareholders and is administered by the Compensation Committee of the Board ofDirectors. The stock options have a five-year life and vest, based on theachievement of various service and financial performance criteria, over afour-year period, with the initial awards beginning their vesting terms as of January 4,2004. Vesting of the stock options is accelerated on the occurrence of a changein control. As of April 1, 2006 and December 31, 2005, the Companyhad awarded grants of non-qualified stock options to purchase400,000 shares of the Company’s Class A Common Stock. The awardsrepresented the entire amount reserved for issuance under the 2003 Plan and noadditional stock options are available for future grants under the 2003 Plan.

Effective January 1, 2006, the Company accountsfor the 2003 Plan in accordance with the methodology defined in SFAS No. 123R,using the modified prospective transition method. Under the modifiedprospective transition method, the compensation costs related to all new grantsand any unvested portion of prior awards are measured based on the grant-datefair value of the award. Prior to fiscal 2006, the Company elected to accountfor the 2003 Plan in accordance with the intrinsic value method as prescribedby Accounting Principles Board Opinion No. 25, “Accounting for StockIssued to Employees” (“APB No. 25”), which generally measures compensationcost as the excess, if any, of the quoted market price of the stock at the dateof grant over the amount an employee must pay to acquire the stock.Additionally, as a percentage of the options vest based on achievement offinancial performance criteria, compensation costs were recognized over theperformance period when it became probable that such performance criteria willbe achieved. The compensation costs related to the 2003 Plan were $0.2 millionand $0.4 million for the three months ended April 1, 2006 andApril 2, 2005, respectively, and were included in *Selling, general and administrative expenses*in the Consolidated Statements of Operations.

The 2005 Stock Option Plan(the “2005 Plan”) was approved by the Company’s Board of Directors andshareholders and is 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 thresholdstied to the cash received by MatlinPatterson Global Opportunities Fund, L.P.and its affiliates are reached in the change in control transaction, or fromthe conversion of securities received in the change in control transaction intocash within one year following the change in control. The term of each stockoption shall end on June 30, 2008, unless the stock option has beenexercised, with a provision to extend the date of exercise by up to one yearfollowing a change in control in which securities are issued as part of theconsideration in the transaction. The Company may award grants of non-qualifiedstock options to purchase up to 200,000 shares of the Company’sClass A Common Stock. As of April 1, 2006, no awards have beengranted under the 2005 Plan and it is expected that the 2005 Plan will beeliminated, subject to formal approval by the shareholders of the Company’s2005 Employee Restricted Stock Plan, discussed below, which will be presentedat the 2006 Annual Shareholders’ Meeting scheduled for May 23, 2006. Theapproval at the Annual Shareholders’ Meeting is considered only a formality.

16

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

*Restricted Stock Plans*

In May 2004, the Company’sshareholders approved the 2004 Restricted Stock Plan for Directors (the “RestrictedPlan”), which expires in 2014, for the issuance of restricted shares of theCompany’s Class A Common Stock to Directors of the Company, as defined inthe Restricted Plan. The Restricted Plan approved for issuance 200,000restricted shares and is administered by a committee of the Company’s Board ofDirectors not eligible to receive restricted shares under the Restricted Plan.In the first quarter of fiscal years 2006 and 2005, the Company awarded 5,660and 3,240 restricted shares, respectively, to members of the Company’s Board ofDirectors for their Board service to the Company. The cost associated withthese restricted stock grants, which vest over periods ranging from six toeighteen months, totaled approximately $45.0 thousand for each of theperiods noted above and was included in *Selling,general and administrative expenses* in the Consolidated Statement ofOperations. As of April 1, 2006, 148,460 shares of the Company’s Class ACommon Stock are available for future grant under the Restricted Plan.

In December 2005, theCompany’s 2005 Employee Restricted Stock Plan (the “2005 Stock Plan”) wasapproved by the Company’s Board of Directors and is administered by theCompensation Committee of the Company’s Board of Directors. The 2005 StockPlan, which expires in 2015, approved for issuance 482,000 restricted shares toemployees of the Company. The Compensation Committee may, from time to time,grant shares of restricted stock under the 2005 Stock Plan to such employeesand in such amounts and with specified restrictions as it determinesappropriate in the circumstances. Vesting of the restricted shares isaccelerated on the occurrence of a change in control. During the first quarterof fiscal 2006, 272,000 restricted shares were awarded to certain employees ofthe Company. Approximately 100,000 of these shares vested immediately with thebalance vesting 25% on each of the grant’s anniversary dates, beginning with January 20,2006. In addition, 750 restricted shares were forfeited during the firstquarter of 2006. The awards of restricted shares granted on January 20,2006 pursuant to the 2005 Stock Plan are subject to formal approval by theshareholders, which will be presented at the Annual Shareholders’ Meetingscheduled for May 23, 2006. The approval at the Annual Shareholders’Meeting is considered only a formality. The compensation cost of $3.5 millionrelated to these restricted stock grants for the three months ended April 1,2006 was included in *Selling, general andadministrative expenses* in the Consolidated Statement of Operations.As of April 1, 2006, 210,750 shares of the Company’s Class ACommon Stock are available for future grant under the 2005 Stock Plan.

**Note 11.**   16%Series A Convertible Pay-in-kind Preferred Shares

In conjunction with theCompany’s refinancing in April 2004 of its then existing credit facility,the Company’s majority shareholder exchanged approximately $42.6 millionin aggregate principal amount of 10.0% Convertible Subordinated Notes due 2007(the “Junior Notes”) it controlled for 42,633 shares of the Company’s 16%Series A Convertible Pay-in-kind Preferred Shares (the “PIK PreferredShares”). Also, during the third quarter of fiscal 2004, $10.1 million inaggregate principal amount of the Company’s Junior Notes were exchanged for10,083 shares of the Company’s PIK Preferred Shares and 6,719 sharesof the Company’s Class A Common Stock. Such Junior Notes were subordinatedindebtedness of the Company and provided for interest at an annual rate of10.0%, which interest, at the option of the holder, could be received inadditional principal amounts of the Junior Notes or in cash. The Junior Notes couldbe converted, at the option of the holder, into shares of Class A CommonStock on the same terms as included in the PIK Preferred Shares (a conversionrate of 137.14286 shares of Class A Common Stock per share of theconvertible security, which 

17

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

approximatesan initial conversion price of approximately $7.29 per share). As theaforementioned exchanges were a component of the recapitalization of theCompany, involving the majority shareholder and other common shareholders ofthe Company and the exchange by the majority shareholder was a requirement ofthe then new Bank Facility, the exchanges have been accounted for as a capitaltransaction and, accordingly, no gain or loss was recognized.

Dividends on the PIK PreferredShares accrued at an annual rate of 16.0% and were payable semi-annually inarrears on each January 1 and July 1, commencing with July 1,2004. Such dividends were payable at the option of the Company; (i) throughthe issuance of additional shares of PIK Preferred Stock; (ii) in cash; or(iii) in a combination thereof. Accordingly, the Company accrued dividendsat the stated rate of 16.0% until such time as the form of the dividend wasdeclared by the Company’s Board of Directors. If the dividend was paid-in-kindthrough the issuance of additional shares of PIK Preferred Stock, the Companyrecognized the dividend at the estimated fair value of the shares issued inexcess of the amounts previously accrued. At any time prior to June 30,2012, the holders of the PIK Preferred Shares could have elected to convert anyor all of their PIK Preferred Shares into shares of the Company’s Class ACommon Stock at an initial conversion rate of 137.14286 shares of Class ACommon Stock per share of PIK Preferred Shares which approximates an initialconversion price equal to $7.29 per share.

On January 14, 2005, theCompany’s Board of Directors declared that dividends accrued on the PIKPreferred Shares from the date of issuance through December 31, 2004, inthe amount of $5.6 million, would be paid in the form of PIK PreferredShares. The Company recorded the value of the additional PIK Preferred Sharesdeclared as a dividend on January 14, 2005, the date the Board ofDirectors declared that the accrued dividends were to be paid in the form ofadditional PIK Preferred Shares, rather than cash, reduced by the amount ofdividends previously recorded at the stated 16.0% rate. Using the estimatedmarket value of the Company’s Class A Common Stock of $18.50 per share,the fair value of the 5,540 additional PIK Preferred Shares issued in lieu ofcash payment was approximately $14.1 million, which exceeded the amountpreviously accrued by the Company of $5.6 million, based on the statedrate of 16.0%, by approximately $8.5 million. As a result, total accruedand paid-in-kind dividends amounted to approximately $10.9 million in thefirst quarter of fiscal 2005.

On August 3, 2005, theCompany’s Board of Directors declared that dividends accrued on the PIKPreferred Shares from January 1, 2005 through June 30, 2005, in the amountof $4.7 million, would be paid in the form of PIK Preferred Shares. TheCompany recorded the value of the additional PIK Preferred Shares declared as adividend on August 3, 2005, the date the Board of Directors declared thatthe accrued 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 estimated market value of theCompany’s Class A Common Stock of $27.70 per share, the fair value of the4,660 additional PIK Preferred Shares issued in lieu of cash payment wasapproximately $17.7 million, which exceeded the amount previously accruedby the Company of $4.7 million, based on the stated rate of 16.0%, byapproximately $13.0 million. In addition, the Company accrued a charge fordividends of $1.8 million for the period from July 2, 2005 throughthe date that the PIK Preferred Shares were redeemed for, or converted to,shares of the Company’s Class A Common Stock, as described below.

On July 28, 2005, theCompany’s Board of Directors authorized the redemption of all of the Company’sPIK Preferred Shares on or before September 30, 2005. On August 16,2005, the Board of 

18

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

Directorsset September 15, 2005 as the redemption date (the “Redemption Date”). Inaccordance with the terms of the PIK Preferred Shares, the Company would redeemall PIK Preferred Shares outstanding at the Redemption Date at a redemptionrate of 37.26397 shares of Class A Common Stock per PIK Preferred Share.At any time prior to the Redemption Date, holders of PIK Preferred Shares couldexercise their right to convert their PIK Preferred Shares into shares of Class ACommon Stock at a conversion rate of 137.14286 shares of Class ACommon Stock per PIK Preferred Share.

As of the close of business onthe Redemption Date, five PIK Preferred Shares had been redeemed by the Companywith the redemption price being paid by the issuance of 187 shares of Class ACommon Stock. Additionally, 62,916 PIK Preferred Shares had been converted byholders into 8,628,473 shares of Class A Common Stock. Also, duringthe first quarter of fiscal 2005, five PIK Preferred Shares were converted into686 shares of Class A Common Stock. As a result of thesetransactions, 8,629,346 additional shares of Class A Common Stock are nowissued and outstanding and no PIK Preferred Shares are currently issued oroutstanding.

**Note 12.**   Derivativeand Other Financial Instruments and Hedging Activities

The Company uses derivativefinancial instruments to manage market risks and reduce its exposure tofluctuations in interest rates and foreign currencies. All hedging transactionsare authorized and executed under clearly defined policies and procedures,which prohibit the use of financial instruments for trading purposes. FASBStatement No. 133 “Accounting for Derivative Instruments and HedgingActivities” (“SFAS No. 133”) requires the Company to recognize allderivatives on the balance sheet at fair value and establish criteria fordesignation and effectiveness of hedging relationships.

The Company uses interest-ratederivative instruments to manage its exposure related to movements in interestrates with respect to its debt instruments. As indicated in Note 7 to theConsolidated Financial Statements, to mitigate its interest rate exposure asrequired by the Bank Facility and the Credit Facility, the Company entered intoa pay-fixed, receive-variable interest rate swap, thus effectivelyconverting the variable LIBOR-based interest payments associated with $212.5 millionof the debt to fixed amounts at a LIBOR rate of 3.383%. The notional amount ofthis contract, which expires on May 8, 2007, was $212.5 million atboth April 1, 2006 and December 31, 2005. Cash settlements are madequarterly and the floating rate is reset quarterly, coinciding with the resetdates of the current Credit Facility.

In accordance with SFAS No. 133,the Company designated the swap as a cash flow hedge of the variability ofinterest payments and applied the shortcut method of assessing effectiveness.The agreement’s terms ensure complete effectiveness in offsetting thevariability of the interest component associated with $212.5 million offirst-lien term loan debt. As such, there is no ineffectiveness and changes in thefair value of the swap are recorded to accumulated other comprehensive income(loss) in the Consolidated Balance Sheets. The fair value of the interest rateswap, based on current settlement values, was $4.1 million and $3.8 millionas of April 1, 2006 and December 31, 2005, respectively. Thoseamounts are included in *Other noncurrentassets* in the Consolidated Balance Sheets.

The impact of this swap on *Interest expense, net* in the ConsolidatedStatements of Operations was a decrease of $0.6 million for the threemonths ended April 1, 2006 and an increase of $0.4 million for thethree months ended April 2, 2005.

19

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

In May 2005, the Companyentered into a series of foreign exchange forward contracts to manage itsU.S.-dollar exposure on Euro-based obligations for firm commitments related tocertain capital expenditure projects. In accordance with SFAS No. 133, theCompany designated the forward contracts as a fair value hedge. In addition,the forward contracts, which mature through September 15, 2006, are highlyeffective in hedging the Company’s specifically-covered firm commitments,meaning that any change in the foreign currency is offset by a similar changein the firm commitment. At April 1, 2006, the Company had approximately$15.3 million of notional amount in outstanding contracts with a third-partyfinancial institution.

**Note 13.**   EarningsPer Share and Shareholders’ Equity

Calculations have not beenpresented to reconcile basic income per common share to diluted income per commonshare for the three months ended April 1, 2006 or April 2, 2005 asthe impact of such calculations are anti-dilutive. Average shares outstandingfor the three months ended April 1, 2006 and April 2, 2005 were19,272,912 and 10,418,457, respectively.

As of April 1,2006, 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 commonstock have similar voting rights. In accordance with the Amended and RestatedCertificate of Incorporation, Class C Common Stock has special rights toannual dividends and all shares of Class B, C, D and E Common Stock may beconverted into an equal number of shares of Class A Common Stock. Theshares of preferred stock may be issued from time to time with suchdesignation, preferences, participation rights and optional or special rights(including, but not limited to, dividend rates, voting rights, maturity datesand the like) as determined by the Board of Directors. See Note 11 to theConsolidated Financial Statements for additional information related to theCompany’s PIK Preferred Shares.

**Note 14.**   SegmentInformation

The Company’s reportablesegments consist of its primary operating divisions—Nonwovens and OrientedPolymers. This reflects how the overall business is managed on a regular basisby the Company’s senior management and the Board of Directors. Each of thesebusinesses sells to different end-use markets, such as hygiene, medical, wipesand industrial and specialty markets. Sales to P&G accounted for more than10% of the Company’s sales in each of the periods presented. Sales to thiscustomer are reported primarily in the Nonwovens segment and the loss of thesesales would have a material adverse effect on this segment. The Companyrecorded charges and/or income in the Consolidated Statements of Operationsduring the three months ended April 1, 2006 and the three months ended April 2,2005 relating to restructuring and plant realignment costs and foreign currencylosses, net which have not been allocated to the segment data.

20

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

Financial data by segment is as follows (inthousands):

| ** **                                                              | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                              | ** ** | **April 1,  2006**          | ** ** | **April 2,  2005** | ** ** |
| **Net sales**                                                           | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Nonwovens                                                               |       | $                                | 210,652    |   | $ | 194,536 |   |
| Oriented Polymers                                                       |       | 49,789                           |       | 49,825 |   |
| Eliminations                                                            |       | —                           |       | — |   |
|                                                                    |       | $                                | 260,441    |   | $ | 244,361 |   |
| **Operating  income**                                                   | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Nonwovens                                                               |       | $                                | 17,636     |   | $ | 16,723 |   |
| Oriented Polymers                                                       |       | 3,265                            |       | 5,263 |   |
| Unallocated Corporate                                                   |       | (10,160                          | )          | (5,601 | ) |
| Eliminations                                                            |       | 65                               |       | 65 |   |
|                                                                    |       | 10,806                           |       | 16,450 |   |
| Restructuring and plant realignment costs                               |       | (1,633                           | )          | (4 | ) |
| Foreign currency loss, net                                              |       | (567                             | )          | (24 | ) |
|                                                                    |       | $                                | 8,606      |   | $ | 16,422 |   |
| **Depreciation  and amortization expense included in operating income** | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Nonwovens                                                               |       | $                                | 11,702     |   | $ | 11,098 |   |
| Oriented Polymers                                                       |       | 2,745                            |       | 2,102 |   |
| Unallocated Corporate                                                   |       | (9                               | )          | (42 | ) |
| Depreciation and amortization expense included in operating income      |       | 14,438                           |       | 13,158 |   |
| Amortization of loan acquisition costs                                  |       | 325                              |       | 505 |   |
|                                                                    |       | $                                | 14,763     |   | $ | 13,663 |   |
| **Capital  spending**                                                   | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Nonwovens                                                               |       | $                                | 30,295     |   | $ | 9,998 |   |
| Oriented Polymers                                                       |       | 520                              |       | 97 |   |
| Corporate                                                               |       | 30                               |       | — |   |
|                                                                    |       | $                                | 30,845     |   | $ | 10,095 |   |

 

| ** **          | ** ** | **April 1,  2006** | ** ** | **December 31,  2005** | ** ** |
|---------------------|------------|-------------------------|------------|-----------------------------|------------|
| **Division assets** | ** ** | ** **              | ** ** |                        | ** ** | ** ** |   |
| Nonwovens           |       | $                       | 749,972    |                        |       | $ | 715,977 |   |   |
| Oriented Polymers   |       | 150,687                 |       |                        | 144,477    |   |   |
| Corporate           |       | 1,507                   |       |                        | 2,096      |   |   |
| Eliminations        |       | (100,327                | )          |                        | (97,549    | ) |   |
|                |       | $                       | 801,839    |                        |       | $ | 765,001 |   |   |

 

21

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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 that sales aremade from, are presented in the following table (in thousands):

| ** **                                                              | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                              | ** ** | **April 1,  2006**          | ** ** | **April 2,  2005** | ** ** |
| **Net sales**                                                      | ** ** | ** **                       | ** ** | ** ** | ** ** |
| United States                                                           |       | $                                | 121,588    |   | $ | 113,422 |   |
| Canada                                                                  |       | 31,479                           |       | 30,968 |   |
| Europe                                                                  |       | 47,029                           |       | 50,684 |   |
| Asia                                                                    |       | 11,555                           |       | 11,010 |   |
| Latin America                                                           |       | 48,790                           |       | 38,277 |   |
|                                                                    |       | $                                | 260,441    |   | $ | 244,361 |   |
| **Operating  income**                                                   | ** ** | ** **                       | ** ** | ** ** | ** ** |
| United States                                                           |       | $                                | (3,165     | ) | $ | 699 |   |
| Canada                                                                  |       | 938                              |       | 3,131 |   |
| Europe                                                                  |       | 3,968                            |       | 4,269 |   |
| Asia                                                                    |       | 1,385                            |       | 865 |   |
| Latin America                                                           |       | 7,680                            |       | 7,486 |   |
|                                                                    |       | 10,806                           |       | 16,450 |   |
| Restructuring and plant realignment costs                               |       | (1,633                           | )          | (4 | ) |
| Foreign currency loss, net                                              |       | (567                             | )          | (24 | ) |
|                                                                    |       | $                                | 8,606      |   | $ | 16,422 |   |
| **Depreciation  and amortization expense included in operating income** | ** ** | ** **                       | ** ** | ** ** | ** ** |
| United States                                                           |       | $                                | 6,031      |   | $ | 6,062 |   |
| Canada                                                                  |       | 2,193                            |       | 1,558 |   |
| Europe                                                                  |       | 2,372                            |       | 2,500 |   |
| Asia                                                                    |       | 1,056                            |       | 997 |   |
| Latin America                                                           |       | 2,786                            |       | 2,041 |   |
| Depreciation and amortization expense included in operating income      |       | 14,438                           |       | 13,158 |   |
| Amortization of loan acquisition costs                                  |       | 325                              |       | 505 |   |
|                                                                    |       | $                                | 14,763     |   | $ | 13,663 |   |

 

| ** **                                             | ** ** | **April 1,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **Identifiable  assets (including intangible assets)** | ** ** | ** **              | ** ** |                        | ** ** | ** ** |   |
| United States                                          |       | $                       | 344,542    |                        |       | $ | 323,596 |   |   |
| Canada                                                 |       | 95,505                  |       |                        | 94,531     |   |   |
| Europe                                                 |       | 206,586                 |       |                        | 202,324    |   |   |
| Asia                                                   |       | 72,206                  |       |                        | 60,267     |   |   |
| Latin America                                          |       | 183,333                 |       |                        | 181,834    |   |   |
| Eliminations                                           |       | (100,333                | )          |                        | (97,551    | ) |   |
|                                                   |       | $                       | 801,839    |                        |       | $ | 765,001 |   |   |

 

22

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

**Note 15.**   ForeignCurrency Loss, Net

Componentsof foreign currency (gain) loss are shown in the table below (in thousands):

| ** **                          | ** ** | **Three Months Ended  April 1, 2006** | ** ** | **Three Months Ended  April 2, 2005** | ** ** |
|-------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| Included in operating  income       |       |                                                      | $          | 567                                                       |       |   |   | $ | 24 |   |   |
| Included in other  expense (income) |       |                                                      | 376        |                                                      |       |   | (446 | ) |   |
|                                |       |                                                      | $          | 943                                                       |       |   |   | $ | (422 | ) |   |

 

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 loss, net*in the Consolidated Statements of Operations. Likewise, for internationalsubsidiaries which have the local currency as their functional currency, gainsand losses from the remeasurement of monetary assets and liabilities notdenominated in the local currency are reported in *Foreigncurrency loss, net* in the Consolidated Statements of Operations.Additionally, currency gains and losses have been incurred on intercompanyloans between subsidiaries, and to the extent that such loans are not deemed tobe permanently invested, such currency gains and losses are also reflected in *Foreign currency and other (gain) loss, net* in theConsolidated Statement of Operations.

The Company includes gains andlosses on receivables, payables and other operating transactions as a componentof operating income in *Foreign currency loss, net*.Other foreign currency gains and losses, primarily related to intercompanyloans and debt, are included in *Foreign currency and other(gain) loss, net*.

**Note 16.**   LegalProceedings and Commitments

The Company is not currently a party to any materialpending legal proceedings other than routine litigation incidental to thebusiness of the Company. During 2005, the Company was served with a lawsuit bya former customer alleging breach of contract and other charges. The discoveryphase has recently begun and there is not currently enough information toformulate an assessment of the ultimate outcome of the claim. Therefore,management is not able to estimate the amount of such loss at this time. TheCompany intends to vigorously defend this action and believes that it hasreasonable arguments available in its defense. However, there is a possibilitythat resolution of this matter, or others that may arise in the normal courseof business, could result in a loss in excess of established reserves, if any.

As part of its efforts toenhance its business, the Company has made commitments to expand its worldwidecapacity. Currently, the Company has several major committed capital projects,including the construction of a new spunmelt manufacturing plant in Suzhou,China, the installation of a new spunmelt line in Mooresville, North Carolinaand the installation of additional capacity in Nanhai, China. Remainingpayments due related to these planned expansions as of April 1, 2006totaled approximately $24.7 million and are expected to be expended overthe remainder of fiscal 2006.

23

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

**Note 17.**   SupplementalCash Flow Information

There were no noncash investing or financing activities in the firstthree months of 2006.

Noncash investing or financingactivities in the first three months of 2005 included: (i) the conversionof 5 shares of the Company’s PIK Preferred Shares into approximately 686 sharesof the Company’s Class A Common Stock; (ii) the issuance of 5,540 PIKPreferred Shares as payment-in-kind, in lieu of cash payment, of approximately$5.6 million of dividends on the Company’s PIK Preferred Shares, whichresulted in an additional noncash dividend charge of approximately $8.5 millionin excess of the amounts accrued at the stated dividend rate on PIK PreferredShares; and (iii) the accrual of $2.4 million of dividends on the PIKPreferred Shares.

**Note 18.**   SubsequentEvents

Throughout the first quarter of fiscal 2006, the Companyactively pursued a potential acquisition. In conjunction with this effort, theCompany has capitalized approximately $1.6 million of costs, which areprimarily comprised of third-party professional fees. These costs are includedin *Other assets* in the Consolidated BalanceSheet as of April 1, 2006. Subsequent to April 1, 2006, thenegotiations with respect to the potential acquisition broke off. In the eventthat the Company determines that the acquisition cannot be consummated, allcosts with respect to the acquisition, including the aforementioned $1.6 millionand any such costs incurred subsequent to April 1, 2006, will be chargedto expense in the Consolidated Statement of Operations in the quarter in whichsuch acquisition efforts are abandoned by the Company.

In May 2006, the Company entered into atermination agreement with an executive officer of the Company that providesfor an aggregate payment of approximately $2.0 million, which will becharged to expense in the Consolidated Statement of Operations in the secondquarter of fiscal 2006. Additionally, the Company and the executive officerentered certain other consulting and non-compete agreements. See Item 5 ofPart II “Other Information” to this Quarterly Report on Form 10-Q.

24

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

The following discussion andanalysis provides information which management believes is relevant to anassessment and understanding of the Company’s consolidated results ofoperations and financial condition. The discussion should be read inconjunction with the consolidated financial statements and notes theretocontained in this Quarterly Report on Form 10-Q and the AnnualReport on Form 10-K for the fiscal year ended December 31,2005. In addition, it should be noted that the Company’s gross profit marginsmay not be comparable to other companies since some entities classify shippingand handling costs in cost of goods sold and others, including the Company,include such costs in selling, general and administrative expenses. Similarly,some entities, including the Company, include foreign currency gains and lossesresulting from operating activities as a component of operating income, andsome entities classify all foreign currency gains and losses outside ofoperating income.

**Results of Operations**

Thefollowing table sets forth the percentage relationships to net sales of certainconsolidated statement of operations items:

| ** **                                                  | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                  | ** ** | **April 1,  2006**          | ** ** | **April 2,  2005** | ** ** |
| Net sales                                                   |       |                             | 100.0      | % |   |   | 100.0 | % |   |
| Cost of goods sold:                                         |       |                             |       |   |   |   |   |   |   |
| Materials                                                   |       |                             | 52.5       |   |   |   | 50.8 |   |   |
| Labor                                                       |       |                             | 7.9        |   |   |   | 8.6 |   |   |
| Overhead                                                    |       |                             | 23.0       |   |   |   | 22.6 |   |   |
|                                                        |       |                             | 83.4       |   |   |   | 82.0 |   |   |
| Gross profit                                                |       |                             | 16.6       |   |   |   | 18.0 |   |   |
| Selling, general and  administrative expenses               |       |                             | 12.5       |   |   |   | 11.3 |   |   |
| Restructuring and  plant realignment costs                  |       |                             | 0.6        |   |   |   | — |   |   |
| Foreign currency  loss, net                                 |       |                             | 0.2        |   |   |   | — |   |   |
| Operating income                                            |       |                             | 3.3        |   |   |   | 6.7 |   |   |
| Other expense (income):                                     |       |                             |       |   |   |   |   |   |   |
| Interest expense, net                                       |       |                             | 2.5        |   |   |   | 3.2 |   |   |
| Minority interests                                          |       |                             | 0.3        |   |   |   | 0.4 |   |   |
| Foreign currency and other (gain) loss, net                 |       |                             | 0.2        |   |   |   | (0.1 | ) |   |
| Income before income  tax expense                           |       |                             | 0.3        |   |   |   | 3.2 |   |   |
| Income tax expense                                          |       |                             | 0.9        |   |   |   | 1.1 |   |   |
| Net income (loss)                                           |       |                             | (0.6       | ) |   |   | 2.1 |   |   |
| Accrued and  paid-in-kind dividends on PIK preferred shares |       |                             | —     |   |   |   | 4.4 |   |   |
| Loss applicable to common  shareholders                     |       |                             | (0.6       | )% |   |   | (2.3 | )% |   |

 

25

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**Comparison of ThreeMonths Ended April 1, 2006 and April 2, 2005**

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 tablesets forth components of the Company’s net sales and operating income (loss) byoperating division for the three months ended April 1, 2006, the threemonths ended April 2, 2005 and the corresponding change (in millions):

| ** **                                 | ** ** | **Three Months  Ended  April 1, 2006** | ** ** | **Three Months  Ended  April 2, 2005** | ** ** | **Change** | ** ** |
|--------------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------|------------|------------|------------|
| Net sales                                  |       |                                                  |       |                                                  |       |       |       |   |   |   |   |   |   |
| Nonwovens                                  |       |                                                  | $          | 210.6                                                 |       |       |       | $ | 194.5 |   |   |   | $ | 16.1 |   |   |
| Oriented Polymers                          |       |                                                  | 49.8       |                                                  |       |       | 49.9       |   |   |   | (0.1 | ) |   |
| Eliminations                               |       |                                                  | —     |                                                  |       |       | —     |   |   |   | — |   |   |
|                                       |       |                                                  | $          | 260.4                                                 |       |       |       | $ | 244.4 |   |   |   | $ | 16.0 |   |   |
| Operating income                           |       |                                                  |       |                                                  |       |       |       |   |   |   |   |   |   |
| Nonwovens                                  |       |                                                  | $          | 17.6                                                  |       |       |       | $ | 16.7 |   |   |   | $ | 0.9 |   |   |
| Oriented Polymers                          |       |                                                  | 3.3        |                                                  |       |       | 5.3        |   |   |   | (2.0 | ) |   |
| Unallocated Corporate, net of eliminations |       |                                                  | (10.1      | )                                                     |       |       | (5.6       | ) |   |   | (4.5 | ) |   |
|                                       |       |                                                  | 10.8       |                                                  |       |       | 16.4       |   |   |   | (5.6 | ) |   |
| Restructuring and  plant realignment costs |       |                                                  | (1.6       | )                                                     |       |       | —     |   |   |   | (1.6 | ) |   |
| Foreign currency  loss, net                |       |                                                  | (0.6       | )                                                     |       |       | —     |   |   |   | (0.6 | ) |   |
|                                       |       |                                                  | $          | 8.6                                                   |       |       |       | $ | 16.4 |   |   |   | $ | (7.8 | ) |   |

 

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

**Net Sales**

Net saleswere $260.4 million in the first three months of fiscal 2006, an increaseof $16.0 million or 6.5% over first quarter 2005 net sales of $244.4 million.Net sales for 2006 improved in the Nonwovens Division over comparable 2005results by 8.3%, and net sales in 2006 in the Oriented Polymers Divisionapproximated 2005 results. A reconciliation of the change in net sales betweenthe three months ended April 2, 2005 and the three months ended April 1,2006 is presented in the following table (in millions):

| Net sales—three  months ended April 2, 2005 |   | $      | 244.4  |   |
|-------------------------------------------------------|--------|--------|--------|--------|
| Change in sales due  to:                              |   |   |   |
| Volume                                                |   | 9.9    |   |
| Price/mix                                             |   | 8.6    |   |
| Foreign currency translation                          |   | (2.5   | )      |
| Net sales—three months ended  April 1, 2006 |   | $      | 260.4  |   |

 

The increase in net sales during the first quarter of2006 was due primarily to volume gains and price/mix improvements.Substantially all of the volume gains occurred in the United States and LatinAmerican markets. The price/mix improvement reflects continued enhancements ofthe Company’s product offerings as well as the increases in sales price in aneffort to pass along raw material cost increases to customers. As raw materialcosts have increased, the Company has attempted to pass 

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

A significant component of the $9.9 millionincrease in sales in the first quarter of 2006 due to volume growth was generatedin the Latin American region with the addition of the newly-constructedspunmelt line at the Cali, Colombia facility. The Latin America region’s salesimprovement was paced by significant year-over-year increases in hygiene andindustrial sales. In the Company’s U.S. nonwovens business, the hygiene andconsumer markets contributed to the increase from 2005 as new products wereintroduced into the markets. Nonwoven sales volumes increased slightly inEurope and Asia. Oriented Polymers’ net sales were flat during the comparable2006 and 2005 periods as sales volume decreased by $4.6 million, which wasoffset by improvements in price/mix of sales of $2.6 and a favorable foreigncurrency translation impact.

The Euro was weaker againstthe U.S. dollar during the first quarter of 2006 compared to 2005, but theCanadian dollar strengthened against the U.S. dollar during the first quarter.As a result, net sales decreased $2.5 million due to the net unfavorableforeign 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.

**Gross Margin**

Gross margin in the firstquarter of 2006 declined to 16.6% from 18.0% in the first quarter of 2005,despite improved sales volumes and product mix, primarily due to the impact ofthe raw material price increases during 2006. The raw material component of thecost of goods sold as a percentage of net sales increased from 50.8% in 2005 to52.5% in 2006.

**Operating Income**

A reconciliationof the change in operating income between the three months ended April 2, 2005and the three months ended April 1, 2006 is presented in the following table(in millions):

| Operating income—three  months ended April 2, 2005 |   | $      | 16.4   |   |
|--------------------------------------------------------------|--------|--------|--------|--------|
| Change in operating  income due to:                          |   |   |   |
| Price/mix                                                    |   | 8.6    |   |
| Higher raw material costs                                    |   | (8.1   | )      |
| Volume                                                       |   | 2.4    |   |
| Higher manufacturing costs                                   |   | (1.6   | )      |
| Foreign currency                                             |   | (0.6   | )      |
| Higher depreciation and amortization expense                 |   | (1.3   | )      |
| Higher restructuring and plant realignment costs             |   | (1.6   | )      |
| Higher stock compensation costs                              |   | (3.4   | )      |
| All other, primarily higher SG&A costs                   |   | (2.2   | )      |
| Operating income—three  months ended April 1, 2006 |   | $      | 8.6    |   |

 

Consolidated operating income was $8.6 million in2006 as compared to $16.4 million in 2005. The financial effect ofprice/mix improvements and higher raw material costs nearly offset each other,reflecting the benefits of the Company’s new product introductions and ongoingefforts to pass through any cost increases in raw materials. Operating incomewas positively impacted by the volume gains noted above in the net salesdiscussion. The net decline in operating income was impacted by higher noncashcompensation costs of $3.4 million attributable to share-based awards madeunder the Company’s Stock Option and Restricted Stock plans. Other itemscontributing to the decline in operating income were higher manufacturingcosts, higher restructuring and plant realignment costs 

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and higher depreciation andamortization charges. The 2006 restructuring and plant realignment costs areprimarily associated with the costs related to the relocation of the Company’scorporate offices to Charlotte, North Carolina. The increase in depreciationand amortization charges are primarily related to the installation of the newproduction line in Latin America.

Selling, general andadministrative expenses increased $4.9 million, from $27.5 million in2005 to $32.4 million in 2006, primarily due to the noncash compensationcosts described in the previous paragraph, as well as increased sales volumes.Effective January 1, 2006, the Company has elected the modifiedprospective transition method of accounting for share-based awards inaccordance with the provisions of SFAS No. 123R. Adoption of SFAS No. 123Rhas resulted in marginally lower compensation costs, with respect to stockoptions, than previously recognized by the Company under the intrinsic valuemethod as prescribed by APB No. 25.

**Interest and OtherExpense**

Net interest expense decreased $1.4 million, from$7.9 million during the three months ended April 2, 2005 to $6.5 millionduring the three months ended April 1, 2006. The decrease in net interestexpense was primarily due to the lower interest rates obtained by refinancingthe Company’s long-term debt in November 2005. Additionally, during thefirst quarter of 2006, the Company capitalized, with respect to its majorcapital expenditure projects, interest in the amount of $1.1 million,compared to $0.5 million in the first quarter of 2005.

Foreign currency and other(gain) loss, net increased by $0.8 million, from income of $0.3 millionin the first quarter of fiscal 2005 to an expense of $0.5 million in thefirst quarter of fiscal 2006.

**Income Tax Expense**

During the three months ended April 1,2006, the Company recognized an income tax expense of $2.3 million onconsolidated pre-tax income of $0.7 million. This income tax expense issignificantly higher than the U.S. federal statutory rate primarily due tolosses in the U.S. and certain foreign jurisdictions for which no income taxbenefits were recognized. Additionally, the income tax expense was impacted byforeign withholding taxes, for which tax credits are not anticipated, U.S.state income taxes, and foreign taxes calculated at statutory rates less thanthe U.S. federal statutory rate. The Company recognized income tax expense of$2.8 million for the three months ended April 2, 2005 on consolidatedincome before income taxes of $8.0 million for such period. The taxexpense approximates the U.S. federal statutory tax rate. However, the netincome tax is impacted by foreign withholding taxes, for which tax credits arenot anticipated, U.S. state income taxes and foreign taxes calculated atstatutory rates less than the U.S. federal statutory rate.

**Net Income**

As a result of the above, theCompany recognized a net loss of $1.6 million during the three monthsended April 1, 2006 compared to net income of $5.2 million during thethree months ended April 2, 2005.

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**Accrued andPaid-in-Kind Dividends on PIK Preferred Shares**

The Company accrued dividendsat 16% on its PIK Preferred Shares during the quarter ended April 2, 2005in the amount of $2.4 million. Additionally, on January 14, 2005, theCompany’s Board of Directors declared that dividends accrued on the PIKPreferred Shares from the date of issuance through December 31, 2004, inthe amount of $5.6 million, would be paid in the form of PIK PreferredShares. The Company recorded the value of the additional PIK Preferred Sharesdeclared as a dividend on January 14, 2005, the date the Board ofDirectors declared that the accrued dividends were to be paid in the form ofadditional PIK Preferred Shares, rather than cash, reduced by the amount ofdividends previously recorded at the stated 16.0% rate. Using the estimatedmarket value of the Company’s Class A Common Stock of $18.50 per share,the fair value of the 5,540 additional PIK Preferred Shares issued in lieu ofcash payment was approximately $14.1 million, which exceeded the amountpreviously accrued by the Company of $5.6 million, based on the statedrate of 16.0%, by approximately $8.5 million. Accordingly, total accruedand paid-in-kind dividends amounted to $10.9 million in the first quarterof fiscal 2005. As a result of all of the PIK Preferred Shares being redeemedfor or converted to shares of the Company’s Class A Common Stock by September 15,2005, no such dividends were recorded in the first quarter of 2006.

**Loss Applicable toCommon Shareholders**

As a result of the above, the Company recognized aloss applicable to common shareholders of $1.6 million, or $0.08 pershare, for the three months ended April 1, 2006 compared to a lossapplicable to common shareholders of $5.7 million, or $0.55 per share, forthe three months ended April 2, 2005.

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**LIQUIDITY AND CAPITALRESOURCES**

TheCompany’s principal sources of liquidity for operations and expansions arefunds generated from operations and borrowing availabilities under the CreditFacility, consisting of a revolving credit facility with aggregate commitmentsof $45.0 million and a first-lien term loan of $410.0 million. Therevolving credit portion of the Credit Facility terminates on November 22,2010 and the remaining balance (after mandatory annual payments of $4.1 millionand additional payments, if any, under the excess cash flow provision of theCredit Facility) of the first-lien term loan is due November 22, 2012. TheCredit Facility contains covenants and events of default customary forfinancings of this type, including leverage and interest expense coveragecovenants. At April 1, 2006, the Company was in compliance with all suchcovenants. As of April 1, 2006, the Company had $19.0 million ofoutstanding borrowings under the revolving credit facility. Additionally, as ofApril 1, 2006, capacity under the revolving credit facility had beenreserved for outstanding letters of credit in the amount of $11.8 million.

| ** **                       | ** ** | **April 1,  2006** | ** ** | **December 31,  2005** | ** ** |
|----------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                       | ** ** | **(In Millions)**  | ** ** |
| **Balance sheet data:**          | ** ** | ** **              | ** ** |                        | ** ** | ** ** |   |
| Cash and cash equivalents        |       | $                       | 23.5       |                        |       | $ | 31.0 | ** ** |   |
| Working capital                  |       | 175.8                   |       |                        | 173.4      | ** ** |   |
| Total assets                     |       | 801.8                   |       |                        | 765.0      | ** ** |   |
| Total debt                       |       | 433.6                   |       |                        | 415.2      | ** ** |   |
| Total shareholders’  equity |       | 135.2                   |       |                        | 131.5      | ** ** |   |
|                                  |            |                         |            |                             |            |  |  |  |  |

 

| ** **                                           | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                           | ** ** | **April 1,  2006**          | ** ** | **April 2,  2005** | ** ** |
| ** **                                           | ** ** | **(In Millions)**           | ** ** |
| **Cash flow data:**                                  | ** ** | ** **                       | ** ** |   | ** ** | ** ** |   |
| Net cash provided by (used in) operating activities  |       | $                                | 4.5        |   |   | $ | (8.0 | ) |   |
| Net cash used in investing activities                |       | (30.4                            | )          |   | (9.7 | ) |   |
| Net cash provided by  (used in) financing activities |       | 18.3                             |       |   | (1.6 | ) |   |
|                                                      |            |                                  |            |  |  |  |  |  |  |  |

 

**Operating Activities**

Net cash provided by operating activities was $4.5 millionduring 2006, a $12.5 million increase from the $8.0 million used inoperating activities during 2005. The increase in cash provided by operatingactivities was attributable primarily to improvements in working capitalchanges during the first quarter of fiscal 2006 versus the comparable period of2005.

The Company had working capital of approximately$175.8 million at April 1, 2006 compared with $173.4 million at December 31,2005. Accounts receivable at April 1, 2006 was $135.3 million ascompared to $120.7 million at December 31, 2005, an increase of $14.6 million.Accounts receivable represented approximately 47 days of sales outstanding at April 1,2006 compared to 46 days of sales outstanding at December 31, 2005.Inventories at April 1, 2006 were $128.5 million, an increase of $8.8 millionfrom inventories at December 31, 2005 of $119.7 million. The Companyhad inventory representing approximately 54 days of cost of sales on handat both April 1, 2006 and December 31, 2005. Accounts payable at April 1,2006 was $92.0 million as compared to $82.4 million at December 31,2005, an increase of $9.6 million. Accounts payable representedapproximately 39 days of cost of sales outstanding at April 1, 2006compared to 37 days of cost of sales outstanding at December 31,2005. The dollar increases in accounts receivable, inventories and accountspayable in 2006 versus 2005 were primarily related to the increases in rawmaterial prices and higher sales volumes.

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The Company’s restructuringand plant realignment activities, with respect to the relocation of the Company’scorporate headquarters, are discussed in Note 3 “Business Restructuring” to theConsolidated Financial Statements included in Item 1 to this Quarterly Reporton Form 10-Q. Additionally, during the first fiscal quarter of 2006,the Company negotiated certain changes with the union representing theemployees of one of the Company’s Canadian operations, including a curtailmentof a defined benefit pension plan. No gain or loss is expected as a result ofthe curtailment. However, based on elections which will be made by planparticipants during the second quarter of fiscal 2006, and subject toapproval by Canadian regulatory authorities, the Company may incur settlementlosses associated with any employees who elect to exit the plan. Any lossassociated with the settlement of the defined benefit pension plan will berecognized at such time as the amounts can be reasonably estimated.

**Investing and FinancingActivities**

Cash used for investing activities amounted to $30.4 millionand $9.7 million in the first three months of 2006 and 2005, respectively.Capital expenditures during 2006 totaled $30.8 million, an increase of$20.7 million from capital spending of $10.1 million in 2005. Asignificant portion of the capital expenditures in 2006 related to theconstruction of new spunmelt manufacturing facilities in Suzhou, China andMooresville, North Carolina. In addition, investing activities during 2006included $0.9 million for acquisition-related activities. Also, investing activitiesduring 2006 and 2005 included proceeds from the sale of assets of $1.4 millionand $0.4 million, respectively.

Cash provided by financingactivities amounted to $18.3 million in the first three months of 2006,compared to the $1.5 million used in financing activities in the firstthree months of 2005. In 2006, the Company borrowed, on a net basis, $18.4 millionof debt whereas the Company repaid, on a net basis, $1.6 million of debtduring 2005.

**Dividends**

The Board of Directors has not declared a dividend onthe Company’s common stock since the first quarter of 2001. The Credit Facilitylimits restricted payments to $5.0 million, including cash dividends, inthe aggregate since the effective date of the Credit Facility. The Company doesnot currently anticipate paying dividends on its common stock in futureperiods.

On January 14, 2005, theCompany’s Board of Directors declared that dividends accrued on the PIK PreferredShares from the date of issuance through December 31, 2004, in the amountof $5.6 million, would be paid in the form of PIK Preferred Shares. TheCompany recorded the value of the additional PIK Preferred Shares declared as adividend on January 14, 2005, the date the Board of Directors declaredthat the accrued dividends were to be paid in the form of additional PIKPreferred Shares, rather than cash, reduced by the amount of dividendspreviously recorded at the stated 16.0% rate. Using the estimated market valueof the Company’s Class A Common Stock of $18.50 per share, the fair valueof the 5,540 additional PIK Preferred Shares issued in lieu of cash payment wasapproximately $14.1 million, which exceeded the amount previously accruedby the Company of $5.6 million, based on the stated rate of 16.0%, byapproximately $8.5 million. As a result, total accrued and paid-in-kinddividends amounted to approximately $10.9 million in the first quarter offiscal 2005. However, as all PIK Preferred Shares were redeemed for orconverted to shares of the Company’s Class A Common Stock by September 15,2005, no further dividends on the PIK Preferred Shares will be paid.

**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 November 22, 2005, the Company refinanced its thenexisting 

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Bank Facility with a newCredit Facility consisting of a $45.0 million secured revolving creditfacility maturing in 2010 and a $410.0 million first-lien term loan maturingin 2012. The proceeds therefrom were used to fully repay indebtednessoutstanding under the Company’s previous Bank Facility and pay related fees andexpenses.

All borrowings under the Credit Facility areU.S. dollar denominated and are guaranteed, on a joint and several basis,by each and all of the direct and indirect domestic subsidiaries of theCompany. The Credit Facility and the related guarantees are secured by (i) alien on substantially all of the assets of the Company, its domesticsubsidiaries and certain of its non-domestic subsidiaries, (ii) a pledgeof all or a portion of the stock of the domestic subsidiaries of the Companyand of certain non-domestic subsidiaries of the Company, and (iii) apledge of certain secured intercompany notes. Commitment fees under the CreditFacility are equal to 0.50% of the daily unused amount of the revolving creditcommitment. The Credit Facility limits restricted payments to $5.0 million,including cash dividends, in the aggregate since the effective date of theCredit Facility. The Credit Facility contains covenants and events of defaultcustomary for financings of this type, including leverage and interest expensecoverage covenants. At April 1, 2006, the Company was in compliance withall such covenants and expects to remain in compliance through fiscal 2006. Thefirst-lien term loan requires mandatory payments of approximately $1.0 millionper quarter and, beginning with fiscal 2006, the first-lien term loan requiresthe Company to use a percentage of proceeds from excess cash flows, as definedby the Credit Facility, and determined based on year-end results, to reduce itsthen outstanding balances under the Credit Facility.

Excess cash flows required to be applied to therepayment of the Credit Facility are generally calculated as 50.0% of the netamount of the Company’s available cash generated from operations adjusted forthe cash effects of interest, taxes, capital expenditures, changes in workingcapital and certain other items. Since the amounts of excess cash flows forfuture periods are based on year-end results and not determinable, only themandatory payments of approximately $1.0 million per quarter have beenclassified as a current liability in the Consolidated Balance Sheet included inItem 1 to this Quarterly Report on Form 10-Q. Additionally, noexcess cash flow payment was required to be made with respect to fiscal 2005due to the magnitude of the major capital expenditure projects and any excesscash flow requirement with respect to fiscal 2006 is not expected to besignificant.

The interest rate applicable to borrowings under theCredit Facility is based on three-month London Interbank Offered Rate (“LIBOR”)plus a specified margin. The applicable margin for borrowings under both thefirst-lien term loan and the revolving credit facility is 225 basispoints. The Company may, from time to time, elect to use an alternate base ratefor its borrowings under the revolving credit facility based on the bank’s baserate plus a margin of 75 to 125 basis points based on the Company’s totalleverage ratio. The Company had $19.0 million of outstanding borrowings atApril 1, 2006 under the revolving credit facility. As of April 1,2006, capacity under the revolving credit facility had been reserved foroutstanding letters of credit in the amount of $11.8 million. None ofthese letters of credit have been drawn on at April 1, 2006. Averageborrowings under the revolving credit facility, which were largely LIBOR-basedborrowings, for the period of January 1, 2006 to April 1, 2006 were$19.4 million at an average rate of 7.36%.

Additionally, in accordance with the terms of theCredit Facility, the Company maintained its position in a cash flow hedgeagreement, effectively converting $212.5 million of notional principalamount of debt from a variable LIBOR rate to a fixed LIBOR rate of 3.383%. Thecash flow hedge agreement has been maintained in accordance with the terms ofthe Credit Facility and it terminates on May 8, 2007.

The Credit Facility entered into during November 2005provided the Company the ability to increase the sale of U.S. basedreceivables and non-U.S. based receivables, under factoring agreements, to$20.0 million and $20.0 million, respectively. Accordingly, theCompany has entered 

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into factoring agreements tosell without recourse, certain U.S. and non-U.S. company-based receivables tounrelated third-party financial institutions. Under the terms of the factoringagreement related to the sale of U.S. company-based receivables, the maximumamount of outstanding advances at any one time is $20.0 million, whichlimitation is subject to change based on the level of eligible receivables,restrictions on concentrations of receivables and the historical performance ofthe receivables sold. Under the terms of the factoring agreement related to thesale of non-U.S. company-based receivables, the maximum amount of outstandingadvances at any one time is $10.0 million, which limitation is subject tochange based on the level of eligible receivables, restrictions onconcentrations of receivables and the historical performance of the receivablessold. The sale of these receivables accelerated the collection of the Company’scash, reduced credit exposure and lowered the Company’s net borrowing costs. 

As discussed in Note 16 to the ConsolidatedFinancial Statements included in Item 1 to this Quarterly Report on Form 10-Q, the Companyhas committed to several major projects to expand its worldwide capacity,including the construction of new spunmelt manufacturing facilities in Suzhou,China and Mooresville, North Carolina, as well as the installation ofadditional capacity in Nanhai, China. Remaining payments due related to theseplanned expansions as of April 1, 2006 totaled approximately $24.7 millionand are expected to be expended during fiscal 2006.

The Company relies on itsability to generate positive cash flows from its operations and the financialflexibility provided by the Credit Facility to meet its operating needs, fundits capital expenditures and make all necessary contributions to its retirementplans. Although the Company believes that such sources of funds are sufficientto meet its long-term needs, availability of cash under the revolving creditfacility is currently limited primarily due to the required funding of thesignificant capital expenditure programs described in the  preceding paragraph.

**Off-Balance SheetArrangements**

The Company does not have anyoff-balance sheet arrangements.

**Effect of Inflation**

Inflation generally affectsthe Company by increasing the costs of labor, overhead, and equipment. Theimpact of inflation on the Company’s financial position and results of operationswas minimal during the first quarter of both 2006 and 2005. However, theCompany continues to be impacted significantly by raw material costs. See “Quantitativeand Qualitative Disclosures About Market Risk” included in Item 3 of Part Ito this Quarterly Report on Form 10-Q.

**New AccountingStandards**

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 and is required to be adoptedby the Company in the first quarter of fiscal year 2006. The Company adoptedthe provisions of SFAS No. 151 effective January 1, 2006 and theimpact has not been significant to its financial position or results ofoperations.

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” (“SFAS No. 123R”), iseffective for all awards granted, modified, repurchased or canceled after June 15,2005 and requires a public entity to measure the cost of employee servicesreceived in exchange for an award of equity instruments based on the grant-datefair value of the award. The grant date fair value is to be 

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estimated using option-pricingmodels adjusted for the unique characteristics of those instruments. In April 2005,the Securities and Exchange Commission issued a final rule thatregistrants must adopt SFAS No. 123R’s fair value method ofaccounting no later than the beginning of the fiscal year beginning after June 15,2005. Accordingly, the Company adopted SFAS No. 123R in the first quarterof fiscal 2006 using the modified prospective transition method. Under the modifiedprospective transition method, all new grants and any unvested portion of priorawards as of January 1, 2006 have been measured based on thefair-value-based method of accounting. The impact of adopting SFAS No. 123Rhas resulted in marginally lower compensation costs than previously recognizedunder the Company’s historically-used accounting principles.

In May 2005, the FASBissued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS No. 154”).This statement amends earlier guidance and requires retrospective applicationto prior periods’ financial statements of a voluntary change in accountingprinciple unless it is impracticable to determine either the period-specificeffects or the cumulative effects of the change. In addition, SFAS No. 154requires that a change in the method of depreciation or amortization for along-lived, non-financial asset be accounted for as a change in accountingestimate that is affected by a change in accounting principle. SFAS No. 154is effective for accounting changes and corrections of errors made in fiscalyears beginning after December 15, 2005. The Company has completed itsevaluation of the impact that the adoption of SFAS No. 154 could have andhas concluded that such impact is not expected to be significant to itsfinancial position or results of operations.

**Critical AccountingPolicies And Other Matters**

The Company’s analysis and discussion of its financialposition and results of operations are based upon its consolidated financialstatements that have been prepared in accordance with accounting principlesgenerally accepted in the United States (“U.S. GAAP”). The preparation offinancial statements in conformity with U.S. GAAP requires the appropriateapplication of certain accounting policies, many of which require management tomake estimates and assumptions about future events that may affect the reportedamounts of assets, liabilities, revenues and expenses, and the disclosure ofcontingent assets and liabilities. Since future events and their impact cannotbe determined with certainty, the actual results will inevitably differ fromthe estimates. The Company evaluates these estimates and assumptions on anongoing basis, including but not limited to those related to fresh startaccounting, revenue recognition, including the effects of sales returns andallowances and credit risks, convertible securities, inventories, income taxes,and impairment of long-lived assets. Estimates and assumptions are based onhistorical and other factors believed to be reasonable under the circumstances.The impact and any associated risks related to estimates, assumptions, andaccounting policies are discussed within “Management’s Discussion and Analysisof Operations and Financial Condition,” as well as in the Notes to theConsolidated Financial Statements, if applicable, where such estimates,assumptions, and accounting policies affect the Company’s reported and expectedresults.

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:

*FreshStart Accounting:*   In connection with the Company’sChapter 11 reorganization, the Company has applied fresh start accountingto its Consolidated Balance Sheet as of March 1, 2003 in accordance withStatement of Position No. 90-7, “Financial Reporting by Entities inReorganization Under the Bankruptcy Code” as promulgated by the AICPA. Underfresh start accounting, a new reporting entity is considered to be created andthe recorded amounts of assets and liabilities are adjusted to reflect theirestimated fair values at the date fresh start accounting is applied. On March 5,2003, the Company emerged from bankruptcy. For financial reporting purposes, March 1,2003 is 

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considered the emergence date and the effects of thereorganization have been reflected in the accompanying financial statements asif the emergence occurred on that date.

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 amounts included in the Consolidated FinancialStatements. Based on the consideration of many factors and various valuationmethods, the Company and its financial advisors determined the reorganizationvalue of the Company to be approximately $73.4 million, as described inthe Modified Plan. The factors and valuation methodologies included the reviewof comparable company market valuations and the recent acquisition values ofcomparable company transactions as well as discounted cash flow models. Thediscounted cash flow models utilized projected free cash flows for four futureyears, with such projected free cash flows discounted at rates approximatingthe expected weighted average cost of capital (11.0% to 13.0%) plus the presentvalue of the Company’s terminal value computed using comparable company exitmultiples. Projected free cash flows were estimated based on projected cashflows from operations, adjusted for the effects of income taxes at an effectiverate of 39.0%, estimated capital expenditures and estimated changes in workingcapital. The calculation of reorganization value of the Company was based on avariety of estimates and assumptions about future circumstances and events.Such estimates and assumptions are inherently subject to significant economicuncertainties. While the Company believes its judgments, estimates andvaluation methodologies were reasonable, different assumptions could havematerially changed the estimated reorganization value of the Company as of March 1,2003.

*RevenueRecognition:*   Revenue from product sales isrecognized 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 includesamounts billed 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. Management bases its estimate of the expense to be recorded eachperiod on historical returns and allowance levels. Management does not believethe likelihood is significant that materially higher deduction levels willresult based on prior experience.

*AccountsReceivable and Concentration of Credit Risks:*   Accountsreceivable potentially expose the Company to a concentration of credit risk, asdefined by Statement of Financial Accounting Standards No. 105, “Disclosureof Information about Financial Instruments with Off-Balance Sheet Risk andFinancial Instruments with Concentration of Credit Risk.” The Company providescredit in the normal course of business and performs ongoing credit evaluationson its customers’ financial condition as deemed necessary, but generally doesnot require collateral to support such receivables. The Company alsoestablishes an allowance for doubtful accounts based upon factors surroundingthe credit risk of specific customers, historical trends and other information.Also, in an effort to reduce its credit exposure to certain customers, as wellas accelerate its cash flows, the Company, beginning in 2004, sold, on a non-recoursebasis, certain of its receivables pursuant to factoring agreements. At April 1,2006, a reserve of $9.0 million has been recorded as an allowance againsttrade accounts receivable. Management believes that the allowance is adequateto cover potential losses resulting from uncollectible accounts receivable anddeductions resulting from sales returns and allowances. While the Company’scredit losses have historically been within its calculated estimates, it ispossible that future losses could differ significantly from these estimates.

*ConvertibleSecurities:*   The Company recorded the accretionof dividends on the PIK Preferred Shares based on the stated rate of 16.0%. Ifthe Company’s Board of Directors, at the date of any dividend declaration,elected to satisfy the dividend obligation by payment-in-kind, the Companyrecognized an additional dividend charge for the excess, if any, of the fairvalue of the additional PIK Preferred Shares issued, at the dividenddeclaration date, over the amounts previously accrued at the 

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stated rate. As the Company’s PIK Preferred Shareswere not traded on an active market, determination of the fair value of thesecurities, at the date of dividend declaration, required estimates andjudgments, which may have impacted the valuation of the dividend paid-in-kind.Based on the fact that the PIK Preferred Shares were deep-in-the money, theCompany estimated the fair value of the PIK Preferred Shares using the numberof shares of the Company’s Class A Common Stock into which the PIKPreferred Shares were convertible at the then-current share price of theCompany’s Class A Common Stock. While the Company believes its estimatesof the fair value of the PIK Preferred Shares are reasonable, the utilizationof different assumptions could produce materially different fair valueestimates.

*InventoryReserves:*   The Company maintains reserves forinventories valued using the first in, first out (FIFO) method. Such reservesfor inventories can be specific to certain inventory or general based onjudgments about the overall condition of the inventory. General reserves areestablished based on percentage write-downs applied to inventories agedfor certain time periods, or for inventories that are slow-moving. Specificreserves are established based on a determination of the obsolescence of theinventory and whether the inventory value exceeds amounts to be recoveredthrough the expected sales price of such inventories, less selling costs.Estimating sales prices, establishing markdown percentages and evaluating thecondition of the inventories require judgments and estimates, which may impactthe inventory valuation and gross profits. The actual amount of obsolete orunmarketable inventory has been materially consistent with previouslyestablished reserves. Management believes, based on its prior experience ofmanaging and evaluating the recoverability of its slow moving or obsoleteinventory, that such established reserves are materially adequate. If actualmarket conditions and product sales were less favorable than we have projected,additional inventory writedowns may be necessary.

*IncomeTaxes:*   The Company records an income taxvaluation allowance when, based on the weight of the evidence, it is morelikely than not that some portion, or all, of the deferred tax asset will notbe realized. The ultimate realization of the deferred tax asset depends on theability of the Company to generate sufficient taxable income of the appropriatecharacter in the future and in the appropriate taxing jurisdictions. Inassessing the realization of the deferred tax assets, consideration is givento, among other factors, the trend of historical and projected future taxableincome, the scheduled reversal of deferred tax liabilities, the carryforwardperiod for net operating losses and tax credits, as well as tax planningstrategies available to the Company. Additionally, the Company has not providedU.S. income taxes for undistributed earnings of certain foreign subsidiariesthat are considered to be retained indefinitely for reinvestment. Certainjudgments, assumptions and estimates are required in assessing such factors andsignificant changes in such judgments and estimates may materially affect thecarrying value of the valuation allowance and deferred income tax expense orbenefit recognized in the Company’s Consolidated Financial Statements.

*Impairmentof Long-Lived Assets:*   Long-lived assets,excluding goodwill, are reviewed for impairment whenever events or changes incircumstances indicate that the carrying amounts may not be recoverable.Goodwill is reviewed annually. For assets held and used, an impairment mayoccur if projected undiscounted cash flows are not adequate to cover thecarrying value of the assets. In such cases, additional analysis is conductedto determine the amount of the loss to be recognized. The impairment loss isdetermined by the difference between the carrying amount of the asset and thefair value measured by future discounted cash flows. The analysis, whenconducted, requires estimates of the amount and timing of projected cash flowsand, where applicable, judgments associated with, among other factors, theappropriate discount rate. Such estimates are critical in determining whetherany impairment charge should be recorded and the amount of such charge if animpairment loss is deemed to be necessary. In addition, future events impactingcash flows for existing assets could render a writedown necessary thatpreviously required no writedown.

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For assets held for disposal,an impairment charge is recognized if the carrying value of the assets exceedsthe fair value less costs to sell. Estimates are required of fair value,disposal costs and the time period to dispose of the assets. Such estimates arecritical in determining whether any impairment charge should be recorded andthe amount of such charge if an impairment loss is deemed to be necessary.Actual cash flows received or paid could differ from those used in estimatingthe impairment loss, which would impact the impairment charge ultimatelyrecognized. As of April 1, 2006, based on the Company’s current operatingperformance, as well as future expectations for the business, the Company doesnot anticipate any material writedowns for long-lived asset impairments,including goodwill, in the foreseeable future. However, should currentconditions deteriorate, this may impact our future cash flow estimates,resulting in an impairment charge that could have a material effect on theCompany’s Consolidated Financial Statements.

**Environmental**

The Company is subject to abroad range of federal, foreign, state and local laws and regulations relatingto the pollution and protection of the environment. The Company believes thatit is currently in substantial compliance with applicable environmentalrequirements and does not currently anticipate any material adverse effect onits operations, financial or competitive position as a result of its efforts tocomply with environmental requirements. Some risk of environmental liability isinherent, however, in the nature of the Company’s business and, accordingly, therecan be no assurance that material environmental 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 rates and raw material pricingarising in our business activities. The Company manages these financialexposures, where possible, through operational means and by using variousfinancial instruments. These practices may change as economic conditionschange.

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

The Company’s long-termborrowings under the Credit Facility are variable interest rate debt. As such,the Company’s interest expense will increase as interest rates rise anddecrease as interest rates fall. It is the Company’s policy to enter intointerest rate derivative transactions only to meet its stated overallobjective. The Company does not enter into these transactions for speculativepurposes. To that end, as further described in Notes 7 and 12 to theConsolidated Financial Statements included in Item 1 of Part I tothis Quarterly Report on Form 10-Q, the Company entered into aninterest rate swap contract to effectively convert $212.5 million of itsvariable-rate debt to fixed-rate debt. The interest rate swap contract matureson May 8, 2007. 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 $2.2 million.

**Foreign CurrencyExchange Rate Risk**

The Company manufactures, markets and distributescertain of its products in Europe, Canada, Latin America and Asia. As a result,the Company’s results of operations could be significantly affected by factorssuch as changes in foreign currency rates in the foreign markets in which theCompany maintains a manufacturing or distribution presence. However, suchcurrency fluctuations have much less effect on local operating results becausethe Company, to a significant extent, sells its products within the countriesin which they are manufactured. During the first quarter of both 2006 

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and 2005, certain currenciesof countries in which the Company conducts foreign currency denominatedbusiness moved against the U.S. dollar and had an unfavorable impact onsales and operating income. See “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” included in Item 2 of Part Ito this Quarterly Report on Form 10-Q.

The Company has nothistorically hedged its exposure to foreign currency risk. However, in mostforeign operations, there is a natural currency hedge due to similar amounts ofcosts of materials and production as revenues in such local currencies. TheCompany, in May 2005, entered into foreign currency forward contracts tomanage (effectively fixing) its U.S. dollar exposure on certain Euro-basedobligations for firm commitments related to certain capital expenditureprojects. The Company is also subject to political risk in certain of itsforeign operations and has utilized insurance programs in certain circumstancesto mitigate its political risk.

**Raw Material and CommodityRisks**

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 tocontracts with price escalation provisions which would allow the Company topass-through any cost increases in raw materials, although there is often adelay between the time the Company is required to pay the increased rawmaterial price and the time that the Company is able to pass the increase on toits customers. Raw material prices as a percentage of sales have increased from50.8% in the first three months of 2005 to 52.5% in the first three months of2006.

In August and September of 2005, HurricanesKatrina and Rita hit the Gulf Coast area, temporarily shutting down a number ofrefineries and chemical processing sites of certain raw material suppliers forthe Company’s North and South American operations. As a result, while supplieswere tight in the fourth quarter of 2005, raw materials continued to beavailable to the Company, but at significantly higher prices. The Company,where allowable based on contract terms, has attempted to raise its sellingprices to mitigate the sharp increase in raw materials. Raw material pricesdecreased slightly since late December 2005 through the end of the firstquarter of fiscal 2006 as the refineries and chemical processing sites returnedto more normal production levels. However, in April 2006, raw materialprice increases have been announced by various of the Company’s suppliers inresponse to certain global economic factors, including the escalating price ofoil.

To the extent the Company isnot able to pass along price increases of raw materials, or to the extent anysuch 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 $3.0 million, on anannualized basis, in its reported pre-tax operating income. Material increasesin raw material 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 I to this Quarterly Report on Form 10-Q.

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**ITEM 4.**                 CONTROLSAND PROCEDURES

Under the direction ofour Chief Executive Officer and Chief Financial Officer, the Company evaluatedits disclosure controls and procedures as of the end of the period covered bythis report. Based on that evaluation, the Chief Executive Officer and ChiefFinancial Officer have concluded that these disclosure controls and procedureswere effective as of April 1, 2006.

There were no changes in the Company’s internalcontrol over financial reporting during the quarter ended April 1, 2006 thathave materially affected, or are reasonably likely to materially affect, theCompany’s internal control over financial reporting.

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**PART II.OTHER INFORMATION**

**ITEM 1.**                 LEGALPROCEEDINGS

Other than as reported in theCompany’s Form 10-K for the period ended December 31, 2005under the caption “Item 3. Legal Proceedings,” the Company is not currently aparty to any material pending legal proceedings. See Note 16 to theConsolidated Financial Statements included in Item 1 of Part I to thisQuarterly Report of Form 10-Q for additional details.

**ITEM 1A.**        RISKFACTORS

Not applicable.

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

During the first quarter offiscal 2006, 5,619 shares of the Company’s Class B Common Stock and6,812 shares of the Company’s Class C Common Stock were convertedinto 12,431 shares of the Company’s Class A Common Stock. Theseconversions were exempt from registration based on section (3(a)(9) of theSecurities Exchange Act of 1933.

**ITEM 3.**                 DEFAULTSUPON SENIOR SECURITIES

Not applicable.

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

Not applicable.

**ITEM 5.**                 OTHERINFORMATION

PGI Nonwovens B.V., a Dutchsubsidiary of Polymer Group, Inc. (the “Company”), and Rolf Altdorf enteredinto a Termination Agreement, dated May 8, 2006 (the “TerminationAgreement”), pursuant to which Mr. Altdorf will resign, effectiveJune 30, 2006, as Managing Director of PGI Nonwovens B.V. and as Vice President& Managing Director, Europe of the Company. Under the TerminationAgreement, which is governed by Dutch Law, PGI Nonwovens B.V. will pay Mr. Altdorfa one-time aggregate amount equal to one million five hundred fifty-fivethousand euros (EURO 1,555,000). In addition, Mr. Altdorf has agreed notto compete with PGI Nonwovens, the Company or their affiliates for a period of29 months following June 30, 2006.

The Company andMr. Altdorf also have entered into a Consulting Agreement, datedMay 8, 2006 (the “Consulting Agreement”), pursuant to whichMr. Altdorf has agreed to provide certain consulting services to theCompany for a three-year period beginning on July 1, 2006 and ending on June 30,2009, unless earlier terminated in accordance with the terms of the ConsultingAgreement. Under the Consulting Agreement, which is governed by Delaware law,the Company will pay Mr. Altdorf a fixed monthly fee of five thousand threehundred twelve and 50/100 euros (EURO 5,312.50) during the term of theConsulting Agreement, plus a fixed daily fee of one thousand two hundred seventy-fiveeuros (EURO 1,275) for each day over an aggregate of 150 days thatMr. Altdorf provides consulting services. In addition, Mr. Altdorfhas agreed not to compete with the Company or any of its affiliates during theterm of the Consulting Agreement and for a one-year period after itstermination.

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**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 24,  2006 between Polymer Group, Inc. and James L. Schaeffer.        |
| 10.2            |       | Executive Employment Agreement dated March 24,  2006 between Polymer Group, Inc. and Willis C. Moore, III. |
| 10.3            |       | Form of Change in Control Severance Compensation  Agreements.                                                                  |
| 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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**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 thereuntoduly authorized.

|                         |   | POLYMER GROUP, INC. |
|-------------------------|--------|--------------------------|
| Date: May 11, 2006 |   | By:                      |   | /s/ James L.  Schaeffer |
| * *                |   | * *                 |   | James L.  Schaeffer*Chief Executive Officer* |
| Date: May 11, 2006 |   | By:                      |   | /s/ Willis C.  Moore, III |
| * *                |   | * *                 |   | Willis C.  Moore, III*Chief Financial Officer* |

 

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