**UNITED STATES**SECURITIES AND EXCHANGE COMMISSIONWashington, 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 3,2004**

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

 

**For the transition period from               to             **

**Commissionfile number: 1-14330**

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POLYMER GROUP, INC.(Exact name of registrant as specified in its charter)

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

** **

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

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

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

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

Indicate the number of sharesoutstanding of each of the issuer’s classes of common stock, as of the latestpracticable date.

On May 11, 2004 there were 10,042,195shares of Class A common stock, 274,896 shares of Class B commonstock and 54,251 shares of Class C common stock outstanding. Noshares of Class D or Class E were outstanding as of such date. Thepar value for each class of common shares is $.01 per share.

 

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**POLYMER GROUP, 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 |       |     | 19         |   |   |
| Item 3.                                              |       | Quantitative  and Qualitative Disclosures About Market Risk                                 |       |     | 26         |   |   |
| Item 4.                                              |       | Controls and Procedures                                                                     |       |     | 27         |   |   |
| **PART II. OTHER  INFORMATION**                 |       |                                                                                        |       |     |       |
| Item 1.                                              |       | Legal Proceedings                                                                           |       |     | 27         |   |   |
| Item 2.                                              |       | Changes in Securities                                                                       |       |     | 28         |   |   |
| Item 3.                                              |       | Defaults Upon  Senior Securities                                                            |       |     | 28         |   |   |
| Item 4.                                              |       | Submission  of Matters To a Vote of Security Holders                                        |       |     | 28         |   |   |
| Item 5.                                              |       | Other Information                                                                           |       |     | 28         |   |   |
| Item 6.                                              |       | Exhibits  and Reports on Form 8-K                                                      |       |     | 28         |   |   |
| Signatures                                           |       |                                                                                        | 29         |     |       |
|                                                      |            |                                                                                             |            |          |            |  |  |  |  |

 

1

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

Readers should consider thefollowing information as they review this Form 10-Q:

**Safe Harbor-Forward-Looking Statements**

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

Various statements contained in this report, includingthose that express a belief, expectation or intention, as well as those thatare not statements of historical fact are, or may be deemed to be, forward-lookingstatements within the meaning of Section 27A of the Securities Act of 1933and Section 21E of the Securities Exchange Act of 1934. These forward-lookingstatements speak only as of the date of this report. Unless required by law,the Company does not undertake any obligation to update these statements andcautions against any undue reliance on them. These forward-lookingstatements are based on current expectations and assumptions about futureevents. While management considers these expectations and assumptions to bereasonable, they are inherently subject to significant business, economic,competitive, regulatory and other risks, contingencies and uncertainties, mostof which are difficult to predict and many of which are beyond the Company’scontrol.

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;

·       costand availability of raw materials, labor and natural and other resources;

·       domesticand foreign competition; and

·       relianceon major customers and suppliers.

2

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**ITEM 1. FINANCIAL STATEMENTS**

**POLYMER GROUP, INC.**

**CONSOLIDATED BALANCESHEETS(In Thousands, Except Share Data)**
| ** **                                                                                                                                         | ** ** | **April 3,  2004** | ** ** | **January 3,  2004** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|---------------------------|------------|
| ** **                                                                                                                                         | ** ** | **(Unaudited)**         | ** ** | ** **                | ** ** |
| **ASSETS**                                                                                                                                         |       |                    |       |                      |       |   |   |   |   |
| Current assets:                                                                                                                                    |       |                    |       |                      |       |   |   |   |   |
| Cash and cash equivalents                                                                                                                          |       |                    | $          | 15,166                    |       |   |   | $ | 21,336 |   |   |
| Accounts receivable, net                                                                                                                           |       |                    | 127,378    |                      |       |   | 121,146 |   |   |
| Inventories                                                                                                                                        |       |                    | 102,443    |                      |       |   | 96,513 |   |   |
| Deferred income taxes                                                                                                                              |       |                    | 206        |                      |       |   | 143 |   |   |
| Other current assets                                                                                                                               |       |                    | 23,606     |                      |       |   | 20,554 |   |   |
| Total current assets                                                                                                                               |       |                    | 268,799    |                      |       |   | 259,692 |   |   |
| Property, plant and  equipment, net                                                                                                                |       |                    | 406,557    |                      |       |   | 416,508 |   |   |
| Intangibles and loan  acquisition costs, net                                                                                                       |       |                    | 31,634     |                      |       |   | 33,560 |   |   |
| Deferred income taxes                                                                                                                              |       |                    | 2,332      |                      |       |   | 2,335 |   |   |
| Other assets                                                                                                                                       |       |                    | 6,324      |                      |       |   | 9,215 |   |   |
| Total assets                                                                                                                                       |       |                    | $          | 715,646                   |       |   |   | $ | 721,310 |   |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                      |       |                    |       |                      |       |   |   |   |   |
| Current liabilities:                                                                                                                               |       |                    |       |                      |       |   |   |   |   |
| Short-term borrowings                                                                                                                              |       |                    | $          | 6,884                     |       |   |   | $ | 8,454 |   |   |
| Accounts payable                                                                                                                                   |       |                    | 60,799     |                      |       |   | 57,091 |   |   |
| Accrued liabilities                                                                                                                                |       |                    | 41,160     |                      |       |   | 39,850 |   |   |
| Income taxes payable                                                                                                                               |       |                    | 1,636      |                      |       |   | 1,190 |   |   |
| Current portion of long-term debt                                                                                                                  |       |                    | 5,513      |                      |       |   | 34,001 |   |   |
| Total current liabilities                                                                                                                          |       |                    | 115,992    |                      |       |   | 140,586 |   |   |
| Long-term debt, less  current portion                                                                                                              |       |                    | 473,039    |                      |       |   | 440,992 |   |   |
| Deferred income taxes                                                                                                                              |       |                    | 27,042     |                      |       |   | 28,711 |   |   |
| Other noncurrent  liabilities                                                                                                                      |       |                    | 33,837     |                      |       |   | 37,670 |   |   |
| Total liabilities                                                                                                                                  |       |                    | 649,910    |                      |       |   | 647,959 |   |   |
| Minority interests                                                                                                                                 |       |                    | 14,633     |                      |       |   | 14,151 |   |   |
| Shareholders’ equity:                                                                                                                         |       |                    |       |                      |       |   |   |   |   |
| Preferred stock—0 shares issued and outstanding                                                                                               |       |                    | —     |                      |       |   | — |   |   |
| Class A common stock—8,708,862 and 8,228,425 shares issued and  outstanding at April 3, 2004 and January 3, 2004, respectively |       |                    | 87         |                      |       |   | 82 |   |   |
| Class B common stock—281,052 and 389,977 shares issued and  outstanding at April 3, 2004 and January 3, 2004, respectively     |       |                    | 3          |                      |       |   | 4 |   |   |
| Class C common stock—34,892 shares issued and outstanding at  April 3, 2004 and January 3, 2004                                |       |                    | —     |                      |       |   | — |   |   |
| Class D common stock—0 shares issued and outstanding                                                                                     |       |                    | —     |                      |       |   | — |   |   |
| Class E common stock—0 shares issued and outstanding                                                                                     |       |                    | —     |                      |       |   | — |   |   |
| Additional paid in capital                                                                                                                         |       |                    | 76,008     |                      |       |   | 73,304 |   |   |
| Retained earnings (deficit)                                                                                                                        |       |                    | (41,756    | )                         |       |   | (32,986 | ) |   |
| Accumulated other comprehensive income                                                                                                             |       |                    | 16,761     |                      |       |   | 18,796 |   |   |
| Total shareholders’ equity                                                                                                                    |       |                    | 51,103     |                      |       |   | 59,200 |   |   |
| Total liabilities and  shareholders’ equity                                                                                                   |       |                    | $          | 715,646                   |       |   |   | $ | 721,310 |   |   |

 

SeeAccompanying Notes.

3

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**POLYMERGROUP, INC.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS (Unaudited)(In Thousands, Except Per Share Data)**
| ** **                                                                                           | ** ** | **Successor**                                         | ** ** | **Predecessor**                                   | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                           | ** ** | **Three Months  Ended  April 3, 2004** | ** ** | **One MonthEnded  March 29, 2003** | ** ** | **Two Months  Ended  March 1, 2003** | ** ** |
| Net sales                                                                                            |       |                                                  | $          | 206,742                                           |       |   |   | $ | 64,067 |   |   |   | $ | 132,909 |   |   |
| Cost of goods sold                                                                                   |       |                                                  | 168,263    |                                              |       |   | 52,629 |   |   |   | 111,075 |   |   |
| Gross profit                                                                                         |       |                                                  | 38,479     |                                              |       |   | 11,438 |   |   |   | 21,834 |   |   |
| Selling, general and  administrative expenses                                                        |       |                                                  | 27,136     |                                              |       |   | 8,179 |   |   |   | 16,004 |   |   |
| Plant realignment costs                                                                              |       |                                                  | 584        |                                              |       |   | 8 |   |   |   | 4 |   |   |
| Operating income                                                                                     |       |                                                  | 10,759     |                                              |       |   | 3,251 |   |   |   | 5,826 |   |   |
| Other expense (income):                                                                              |       |                                                  |       |                                              |       |   |   |   |   |   |   |   |   |
| Interest expense, net (contractual interest of $20,306 for the two  months ended March 1, 2003) |       |                                                  | 15,177     |                                              |       |   | 3,760 |   |   |   | 10,665 |   |   |
| Investment gain, net                                                                                 |       |                                                  | —     |                                              |       |   | — |   |   |   | (291 | ) |   |
| Minority interests                                                                                   |       |                                                  | 482        |                                              |       |   | 200 |   |   |   | 441 |   |   |
| Foreign currency and other                                                                           |       |                                                  | 1,385      |                                              |       |   | (231 | ) |   |   | 1,434 |   |   |
|                                                                                                      |       |                                                  | 17,044     |                                              |       |   | 3,729 |   |   |   | 12,249 |   |   |
| Loss before  reorganization items and income taxes                                                   |       |                                                  | (6,285     | )                                                 |       |   | (478 | ) |   |   | (6,423 | ) |   |
| Reorganization items,  net gain                                                                      |       |                                                  | —     |                                              |       |   | — |   |   |   | (540,479 | ) |   |
| Income (loss) before  income tax expense                                                             |       |                                                  | (6,285     | )                                                 |       |   | (478 | ) |   |   | 534,056 |   |   |
| Income tax expense                                                                                   |       |                                                  | 2,485      |                                              |       |   | 871 |   |   |   | 1,692 |   |   |
| Net income (loss)                                                                                    |       |                                                  | $          | (8,770                                            | )          |   |   | $ | (1,349 | ) |   |   | $ | 532,364 |   |   |
| Net income (loss) per common share—basic  and diluted:                                          |       |                                                  |       |                                              |       |   |   |   |   |   |   |   |   |
| Average shares outstanding                                                                           |       |                                                  | 8,787      |                                              |       |   | 8,645 |   |   |   | 32,004 |   |   |
| Net income (loss) per  common share                                                                  |       |                                                  | $          | (1.00                                             | )          |   |   | $ | (0.16 | ) |   |   | $ | 16.63 |   |   |

 

SeeAccompanying Notes.

4

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**POLYMERGROUP, INC.**

**CONSOLIDATEDSTATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS) (Unaudited)For the Three Months Ended April 3, 2004(In Thousands)**
| ** **                                               | ** ** | ** ** | ** ** | ** **     | ** ** | ** **    | ** ** | **Accumulated**   | ** ** | ** ** |   |   | ** **        | ** ** |
|----------------------------------------------------------|------------|------------|------------|----------------|------------|---------------|------------|-------------------|------------|------------|--------|--------|-------------------|------------|
| ** **                                               | ** ** | ** ** | ** ** | ** **     | ** ** | ** **    | ** ** | **Other**         | ** ** | ** ** |   |   |              | ** ** |
| ** **                                               | ** ** | ** ** | ** ** | **Additional** | ** ** | **Retained**  | ** ** | **Comprehensive** | ** ** | ** ** |   |   |              | ** ** |
| ** **                                               | ** ** | **Common** | ** ** | **Paid-in**    | ** ** | **Earnings/** | ** ** | **Income/**       | ** ** | ** ** |   |   | **Comprehensive** | ** ** |
| ** **                                               | ** ** | **Stock**  | ** ** | **Capital**    | ** ** | **(Deficit)** | ** ** | **(Loss)**        | ** ** | **Total**  |   |   | **Income/(Loss)** | ** ** |
| Balance, January 3, 2004, audited                   |       |       | $          | 86             |       |          |       | $                 | 73,304     |       |   |   | $                 | (32,986    | ) |   |   | $ | 18,796 |   |   | $ | 59,200 |   |   |   |   |   |   |
| Net loss                                                 |       |       | —     |           |       |          | —     |              |       |       | (8,770 | )      |              |       | — |   |   | (8,770 | ) |   |   | $ | (8,770 | ) |   |
| Currency translation adjustment                          |       |       | —     |           |       |          | —     |              |       |       | — |   |              |       | (2,035 | ) |   | (2,035 | ) |   |   | (2,035 | ) |   |
| Conversion of junior notes to Class A common  stock |       |       | 4          |           |       |          | 2,704      |              |       |       |   |   |              |       |   |   |   | 2,708 |   |   |   |   |   |   |
| Balance, April 3,  2004                             |       |       | $          | 90             |       |          |       | $                 | 76,008     |       |   |   | $                 | (41,756    | ) |   |   | $ | 16,761 |   |   | $ | 51,103 |   |   |   | $ | (10,805 | ) |   |

 

SeeAccompanying Notes.

5

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**POLYMER GROUP, INC.**

**CONSOLIDATED STATEMENTS OFCASH FLOW (Unaudited)(In Thousands)**
| ** **                                                                                          | ** ** | **Successor**                                         | ** ** | **Predecessor**                                     | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                          | ** ** | **Three Months  Ended  April 3, 2004** | ** ** | **One Month  Ended  March 29, 2003** | ** ** | **Two Months  Ended  March 1, 2003** | ** ** |
| Operating activities                                                                                |       |                                                  |       |                                                |       |   |   |   |   |   |   |   |   |
| Net income (loss)                                                                                   |       |                                                  | $          | (8,770                                              | )          |   |   | $ | (1,349 | ) |   |   | $ | 532,364 |   |   |
| Adjustments to reconcile  net income (loss) to net cash provided by (used in) operating activities: |       |                                                  |       |                                                |       |   |   |   |   |   |   |   |   |
| Gain on investments                                                                                 |       |                                                  | —     |                                                |       |   | — |   |   |   | (291 | ) |   |
| Gain on cancellation of prepetition indebtedness                                                    |       |                                                  | —     |                                                |       |   | — |   |   |   | (619,913 | ) |   |
| Deferred income taxes                                                                               |       |                                                  | (1,729     | )                                                   |       |   | — |   |   |   | 3,010 |   |   |
| Fresh start adjustments                                                                             |       |                                                  | —     |                                                |       |   | — |   |   |   | 47,460 |   |   |
| Write-off of loan acquisition costs                                                                 |       |                                                  | —     |                                                |       |   | — |   |   |   | 10,217 |   |   |
| Depreciation and amortization                                                                       |       |                                                  | 13,149     |                                                |       |   | 4,029 |   |   |   | 8,812 |   |   |
| Noncash interest and compensation                                                                   |       |                                                  | 1,104      |                                                |       |   | — |   |   |   | — |   |   |
| Changes in operating  assets and liabilities, net of effect of acquisitions:                        |       |                                                  |       |                                                |       |   |   |   |   |   |   |   |   |
| Accounts receivable                                                                                 |       |                                                  | (7,193     | )                                                   |       |   | (6,268 | ) |   |   | (8,195 | ) |   |
| Inventories                                                                                         |       |                                                  | (6,835     | )                                                   |       |   | 935 |   |   |   | (887 | ) |   |
| Current and other assets                                                                            |       |                                                  | (163       | )                                                   |       |   | 2,346 |   |   |   | 6,675 |   |   |
| Accounts payable and accrued expenses                                                               |       |                                                  | 2,737      |                                                |       |   | 1,724 |   |   |   | 13,027 |   |   |
| Other, net                                                                                          |       |                                                  | 656        |                                                |       |   | (343 | ) |   |   | (5,180 | ) |   |
| Net cash provided by (used in) operating activities                                                 |       |                                                  | (7,044     | )                                                   |       |   | 1,074 |   |   |   | (12,901 | ) |   |
| Investing activities                                                                                |       |                                                  |       |                                                |       |   |   |   |   |   |   |   |   |
| Purchases of property, plant and equipment                                                          |       |                                                  | (4,504     | )                                                   |       |   | (2,029 | ) |   |   | (3,062 | ) |   |
| Proceeds from sale of marketable securities                                                         |       |                                                  | —     |                                                |       |   | — |   |   |   | 11,867 |   |   |
| Proceeds from sale of other assets                                                                  |       |                                                  | 783        |                                                |       |   | — |   |   |   | — |   |   |
| Other, net                                                                                          |       |                                                  | —     |                                                |       |   | — |   |   |   | 15 |   |   |
| Net cash provided by (used in) investing activities                                                 |       |                                                  | (3,721     | )                                                   |       |   | (2,029 | ) |   |   | 8,820 |   |   |
| Financing activities                                                                                |       |                                                  |       |                                                |       |   |   |   |   |   |   |   |   |
| Proceeds from issuance of debt                                                                      |       |                                                  | 18,500     |                                                |       |   | — |   |   |   | 535,310 |   |   |
| Repayment of debt                                                                                   |       |                                                  | (13,803    | )                                                   |       |   | (968 | ) |   |   | (549,031 | ) |   |
| Loan acquisition costs and other                                                                    |       |                                                  | —     |                                                |       |   | — |   |   |   | (948 | ) |   |
| Net cash provided by (used in) financing activities                                                 |       |                                                  | 4,697      |                                                |       |   | (968 | ) |   |   | (14,669 | ) |   |
| Effect of exchange rate  change on cash                                                             |       |                                                  | (102       | )                                                   |       |   | 333 |   |   |   | 4,632 |   |   |
| Net increase (decrease)  in cash and cash equivalents                                               |       |                                                  | (6,170     | )                                                   |       |   | (1,590 | ) |   |   | (14,118 | ) |   |
| Cash and cash  equivalents at beginning of period                                                   |       |                                                  | 21,336     |                                                |       |   | 31,783 |   |   |   | 45,901 |   |   |
| Cash and cash equivalents at  end of period                                                         |       |                                                  | $          | 15,166                                              |       |   |   | $ | 30,193 |   |   |   | $ | 31,783 |   |   |

 

SeeAccompanying Notes.

6

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

**Note 1.**   Principles of Consolidation andFinancial Statement Information

*Principles ofConsolidation*

Polymer Group, Inc. (which together with itssubsidiaries is referred to herein as 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 Consumer and Industrial &Specialty segments.

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. Investments in 20% to 50% owned affiliates where theCompany is able to exercise significant influence, but not control, areaccounted for by the equity method and, accordingly, the consolidated resultsof operations include the Company’s share of the affiliates’ income or loss.

The accompanying unauditedinterim consolidated financial statements and related notes should be read inconjunction with the Consolidated Financial Statements of the Company andrelated notes as contained in the Annual Report on Form 10-K for theperiod ended January 3, 2004. In the judgment of management, these unauditedinterim consolidated financial statements include all adjustments of a normalrecurring nature and accruals necessary for a fair presentation of suchstatements.

*Basis of Presentation*

After extensive reorganizationefforts, the Company and each of its domestic subsidiaries filed voluntarypetitions for Chapter 11 reorganization under the United States Bankruptcy Codein the South Carolina Bankruptcy Court on May 11, 2002 (April 25,2002 as to Bonlam (S.C.), Inc.). In its efforts to emerge from Chapter 11,the Company filed a Modified Plan (as defined) on November 27, 2002 thatwas approved by the Bankruptcy Court on January 16, 2003 and, accordingly,the Company emerged from Chapter 11 effective March 5, 2003 (the “EffectiveDate”). For accounting purposes the Company recognized the emergence on March 1,2003, which was the end of the February 2003 accounting period. TheCompany adopted “fresh-start accounting” as of March 1, 2003, andthe Company’s emergence from Chapter 11 resulted in a new reporting entity. Thereorganization value of the Company has been allocated to the underlying assetsand liabilities based on their respective fair values at the date of emergence.References to “Predecessor” refer to the old Polymer Group and its subsidiarieson and prior to March 1, 2003, and references to “Successor” refer toPolymer Group and its subsidiaries as of and subsequent to March 2, 2003,after giving effect to the implementation of fresh start accounting. Inaccordance with financial reporting requirements for companies emerging fromChapter 11, financial information for the three months ended March 29,2003 is not presented in the consolidated financial statements since suchinformation would combine the results of the Predecessor and Successor.

*Reclassification*

Certain amounts previously presented in theconsolidated financial statements for prior periods have been reclassified toconform with current year classification.

7

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

*New AccountingPronouncements*

In 2003, the FASB released Interpretation No. 46,“Consolidation of Variable Interest Entities (revised December 2003)” (“FIN 46”).FIN 46 requires that all primary beneficiaries of variable interest entities(VIEs) consolidate that entity. The provisions of FIN 46 related to VIEscreated or acquired after January 31, 2003 were effective and adopted by theCompany in fiscal year 2003. The provisions of FIN 46 related to VIE’s in whichan enterprise holds an interest it acquired before February 1, 2003 areeffective for the Company in this first quarter of fiscal 2004. The Company hasdetermined that it does not have any relationships or contracts that constitutea variable interest.

**Note 2.**   AccountsReceivable and Concentration of Credit Risks

Accounts receivable potentiallyexpose the Company to concentration of credit risk, as defined by SFAS No. 105,“Disclosure of Information about Financial Instruments with Off-Balance SheetRisk and Financial Instruments with Concentration of Credit Risk.” The Companyprovides credit in the normal course of business and performs ongoing creditevaluations on its customers’ financial condition as deemed necessary, butgenerally does not require collateral to support such receivables. Customerbalances are considered past due based on contractual terms and the Companydoes not accrue interest on the past due balances. Once management determinesthat the receivables are not recoverable, the amounts are removed from thefinancial records along with the corresponding reserve balance. The allowancefor doubtful accounts was approximately $13.6 million at April 3,2004 and January 3, 2004, which management believes is adequate to providefor credit loss in the normal course of business, as well as losses forcustomers who have filed for protection under bankruptcy laws. In the firstquarter of 2004 and 2003, The Procter & Gamble Company (“P&G”)accounted for approximately 12% and 14%, respectively, of the Company’s sales.

**Note 3.**   Inventories

Inventoriesare stated at the lower of cost or market using the first-in, first-out methodof accounting and, as of April 3, 2004 and January 3, 2004 consist ofthe following (in thousands):
| ** **      | ** ** | **April 3,  2004**     | ** ** | ** January 3,   2004** | ** ** |
|-----------------|------------|-----------------------------|------------|---------------------------------------|------------|
| ** **      | ** ** | ** (Unaudited) ** | ** ** | ** **                            | ** ** |
| Finished goods  |       |                        | $          | 48,925                                |       |   |   | $ | 47,288 |   |   |
| Work in process |       |                        | 18,722     |                                  |       |   | 16,579 |   |   |
| Raw materials   |       |                        | 34,796     |                                  |       |   | 32,646 |   |   |
|            |       |                        | $          | 102,443                               |       |   |   | $ | 96,513 |   |   |

 

**Note 4.**   BusinessRestructuring

In 2003, the Company implemented a businessrestructuring initiative. This initiative encompassed a reduction in workingcapital levels and operating cost reductions through: (i) reducingheadcount at both the plant and corporate levels; (ii) improvingmanufacturing productivity and reducing component costs; (iii) implementingglobal purchasing initiatives; and (iv) rationalizing certain assetsand/or businesses. Approximately 230 positions were eliminated in fiscal 2003.

8

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

Accrued costsfor restructuring efforts are included in accrued liabilities in the accompanyingbalance sheet. A summary of the business restructuring activity during thefirst quarter of fiscal 2004 is presented in the following table (inthousands):
| Balance accrued at  beginning of year |   | $      | 4,564  |   |
|---------------------------------------|--------|--------|--------|--------|
| 2004 plant realignment charges        |   | 584    |   |
| Cash payments                         |   | (1,198 | )      |
| Adjustments                           |   | 40     |   |
| Balance accrued at end of  quarter    |   | $      | 3,990  |   |

 

In December 2003, theCompany made the business decision to discontinue one of its production linesin the European operations. Accordingly, in addition to certain costs recordedin 2003, plant realignment costs of $0.6 million, which include severance andother cash costs, were charged to the results of operations in the firstquarter of 2004.

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

Intangiblesand loan acquisition costs as of April 3, 2004 and January 3, 2004,consist of the following (in thousands):
| ** **                       | ** ** | **April 3,** | ** ** | ** January 3, ** | ** ** |
|----------------------------------|------------|-------------------|------------|---------------------------------|------------|
| ** **                       | ** ** | **2004**          | ** ** | **2004**                        | ** ** |
| ** **                       | ** ** | **(Unaudited)**   | ** ** | ** **                      | ** ** |
| Cost:                            |       |              |       |                            |       |   |   |   |   |
| Proprietary technology           |       |              | $          | 26,533                          |       |   |   | $ | 26,533 |   |   |
| Loan acquisition costs and other |       |              | 13,533     |                            |       |   | 13,534 |   |   |
|                             |       |              | 40,066     |                            |       |   | 40,067 |   |   |
| Less accumulated  amortization   |       |              | (8,432     | )                               |       |   | (6,507 | ) |   |
|                             |       |              | $          | 31,634                          |       |   |   | $ | 33,560 |   |   |

 

Components ofamortization expense are shown in the table below (in thousands):
| ** **                                                                               | ** ** | **Successor**                                         | ** ** | **Predecessor**                                     | ** ** |
|------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                               | ** ** | **Three Months  Ended  April 3, 2004** | ** ** | **One Month  Ended  March 29, 2003** | ** ** | **Two Months  Ended  March 1, 2003** | ** ** |
| Amortization of:                                                                         |       |                                                  |       |                                                |       |   |   |   |   |   |   |   |   |
| Intangibles with finite lives, included in selling, general and  administrative expenses |       |                                                  | $          | 1,453                                               |       |   |   | $ | 527 |   |   |   | $ | 220 |   |   |
| Loan acquisition costs included in interest expense, net                            |       |                                                  | 472        |                                                |       |   | 158 |   |   |   | 1,425 |   |   |
| Total amortization  expense                                                              |       |                                                  | $          | 1,925                                               |       |   |   | $ | 685 |   |   |   | $ | 1,645 |   |   |

 

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

9

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

**Note 6.**   AccruedLiabilities

Accrued liabilities as of April 3,2004 and January 3, 2004 consist of the following (in thousands):
| ** **                           | ** ** | **April 3,** | ** ** | ** January 3, ** | ** ** |
|--------------------------------------|------------|-------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | **2004**          | ** ** | **2004**                        | ** ** |
| ** **                           | ** ** | **(Unaudited)**   | ** ** | ** **                      | ** ** |
| Salaries, wages and  fringe benefits |       |              | $          | 14,755                          |       |   |   | $ | 15,443 |   |   |
| Restructuring                        |       |              | 3,990      |                            |       |   | 4,564 |   |   |
| Interest                             |       |              | 3,403      |                            |       |   | 1,877 |   |   |
| Sales commissions and  promotions    |       |              | 2,856      |                            |       |   | 2,070 |   |   |
| Professional fees                    |       |              | 2,407      |                            |       |   | 4,074 |   |   |
| Other                                |       |              | 13,749     |                            |       |   | 11,822 |   |   |
|                                 |       |              | $          | 41,160                          |       |   |   | $ | 39,850 |   |   |

 

**Note 7.**   Debt

As of April 3, 2004, the Company had outstandingshort-term borrowings denominated in Chinese rmb and U.S. dollars of $6.9million at an annual interest rate of approximately 5.04%.

Long-term debt as of April 3,2004 and January 3, 2004 consists of the following (in thousands):
| ** **                                                                                                                                                                                                                                     | ** ** | **April 3,**           | ** ** | **January 3,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|---------------------|------------|
| ** **                                                                                                                                                                                                                                     | ** ** | **2004**                    | ** ** | **2004**            | ** ** |
| ** **                                                                                                                                                                                                                                     | ** ** | ** (Unaudited) ** | ** ** | ** **          | ** ** |
| Restructured Credit  Facility, interest rates for U.S. dollar borrowings are based on a specified  base plus a specified margin, are capped at 12.00% and are subject to certain  terms and conditions; terminating on December 31, 2006: |       |                        |       |                |       |   |   |
| Term Loans—interest  at 12.00%; due December 31, 2006                                                                                                                                                                                |       |                        | $          | 416,834             |       |   | $ | 416,834 |   |
| Revolving Line of Credit—interest  at 6.75% in 2004; due December 31, 2006                                                                                                                                                           |       |                        | 7,400      |                |       | — |   |
| Junior Notes—interest  at 10.00%; due December 31, 2007                                                                                                                                                                              |       |                        | 51,009     |                |       | 53,717 |   |
| Other                                                                                                                                                                                                                                          |       |                        | 3,309      |                |       | 4,442 |   |
|                                                                                                                                                                                                                                           |       |                        | 478,552    |                |       | 474,993 |   |
| Less: Current maturities                                                                                                                                                                                                                       |       |                        | (5,513     | )                   |       | (34,001 | ) |
|                                                                                                                                                                                                                                           |       |                        | $          | 473,039             |       |   | $ | 440,992 |   |

 

*Description ofRestructured Credit Facility*

The Company’s Restructured CreditFacility provides for secured revolving credit borrowings with aggregatecommitments of up to $50.0 million and aggregate term loans and termletters of credit of $435.3 million. Subject to certain terms andconditions, a portion of the Restructured Credit Facility may be used forrevolving letters of credit. As of April 3, 2004, the Company had $11.1 millionof term letters of credit outstanding (including the $9.0 million Nanhai letterof credit). All borrowings under the Restructured 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 andcertain non-domestic subsidiaries of the Company. The Restructured CreditFacility and the related guarantees are secured by (i) a lien onsubstantially all of the assets of the Company, its domestic subsidiaries and 

10

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

certain of itsnon-domestic subsidiaries, (ii) a pledge of all or a portion of the stockof the domestic subsidiaries of the Company and of certain non-domesticsubsidiaries of the Company, and (iii) a pledge of certain securedintercompany notes issued to the Company or one or more of its subsidiaries bynon-domestic subsidiaries. Commitment fees under the Restructured CreditFacility are equal to 0.75% of the daily unused amount of the revolving creditcommitment. The Restructured Credit Facility contains covenants and events ofdefault customary for financings of this type, including leverage, seniorleverage, interest coverage and adjusted interest coverage. At April 3,2004, the Company is in compliance with all such covenants and expects toremain in compliance through fiscal 2004. The Restructured Credit Facilityterminates on December 31, 2006. The loans are subject to mandatoryprepayment out of proceeds received in connection with certain casualty events,asset sales and debt and equity issuances and from excess cash flow.

The interest rate applicable to borrowings under theRestructured Credit Facility is based on a specified base rate or a specifiedEurodollar base rate, at the Company’s option, plus a specified margin. Theapplicable margin for revolving credit loans bearing interest based on the baserate is 2.75%, and the margin for revolving credit loans bearing interest on aEurodollar rate is 3.75%. The applicable margin for term loans bearing interestbased on the base rate will range from 4.00% to 8.00%, and the margin for termloans bearing interest on a Eurodollar rate will range from 5.00% to 9.00%, ineach case, based on the Company’s ratio of senior consolidated indebtedness toconsolidated EBITDA (as defined by the Company’s Restructured Credit Facility)calculated on a rolling four quarter basis. In addition, if the Company’s ratioof senior consolidated indebtedness to consolidated EBITDA calculated on arolling four quarter basis exceeds 5.00 to 1, the Company is required to pay tothe term loan lenders and the term letter of credit lenders a fee of 1.00% onthe outstanding balance under the term loans and the term letters of credit.The total of the interest payable in respect of term loans or term letters ofcredit plus the senior leverage ratio fee is capped at 12.00%. The effectiverate was 12.00% at April 3, 2004. The Company had outstanding borrowingsof $7.4 million at April 3, 2004 under the revolving credit agreement atan effective rate of 6.75%. Average borrowings under the revolving creditagreement for the period from January 4, 2004 to April 3, 2004 were$5.5 million.

As further discussed in Note 14,the Company refinanced its Restructured Credit Facility through a new seniorsecured bank facility and a portion of its Junior Notes was converted to PreferredStock on April 27, 2004. The amount shown as the current portion oflong-term debt at April 3, 2004 reflects those amounts due within one yearunder the new financing arrangement.

*Description of ConvertibleSubordinated Notes*

In connection with the emergence from Chapter 11, theCompany issued $50 million of 10% Convertible Subordinated Notes due 2007(the “Junior Notes”) pursuant to an indenture dated as of March 5, 2003(the “Junior Indenture”). The Junior Notes are unsecured subordinatedindebtedness of the Company and are subordinated in right of payment to allexisting and future indebtedness of the Company which is not, by its terms,expressly junior to, or *pari passu*with, the Junior Notes. Under the terms of the Junior Notes, the holders mayelect to increase the principal amount of the notes in lieu of receivingsemi-annual interest payments in cash. The Junior Notes are convertible intoshares of Class A Common Stock, at an initial conversion price equal to$7.29 per share. The Junior Indenture contains several covenants, includinglimitations on: (i) indebtedness; certain restricted payments; liens;transactions with affiliates; dividend and other payment restrictions affectingcertain subsidiaries; guarantees by certain subsidiaries; certain transactionsincluding merger and asset sales; and (ii) certain restrictions regardingthe disposition of proceeds of asset sales.

11

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

Duringthe first three months of 2004, $2.7 million of the Company’s Junior Notes wereconverted into approximately 371,500 shares of the Company’s Class ACommon Stock.

*SubsidiaryIndebtedness*

The Company’s China-basedmajority owned subsidiary (“Nanhai”) has a credit facility with a financialinstitution in China which is scheduled to mature in April 2004. Theamount of outstanding indebtedness under the facility was $6.9 million and$8.5 million at April 3, 2004 and January 3, 2004, respectively.The Nanhai indebtedness is guaranteed 100% by the Company and to support thisguarantee, a letter of credit has been issued by the Company’s agent bank inthe amount of $9.0 million.

The Company’s Argentina-basedmajority owned subsidiary (“DNS”) has two credit facilities denominated in U.S.dollars totaling approximately $2.6 million (all with current maturities)at April 3, 2004 and $3.4 million (with current maturities ofapproximately $3.1 million) at January 3, 2004, respectively. Thefacilities are scheduled to mature in 2004 and 2005, respectively.

**Note 8.   Income Taxes**

The Company recognized income taxexpense of $2.5 million for the three months ended April 3, 2004 on aconsolidated loss before income taxes of $6.3 million for such period. This primarilyresulted from income taxes accrued on the earnings generated by foreignoperations as well as state income taxes in the United States, with no federalincome tax benefit being recognized for the combined pre-tax losses incurred inthe United States. During the three months ended March 29, 2003, theCompany recognized an income tax expense of approximately $2.6 million.

**Note 9.**   PensionBenefits and Postretirement Plans

The Company and its subsidiaries sponsor multipledefined benefit plans and other postretirement benefits that cover certainemployees. Benefits are based on years of service and the employee’scompensation. It is the Company’s policy to fund such plans in accordance withapplicable laws and regulations. The following disclosures regarding definedbenefit plans and other postretirement plans for the fiscal 2003 period reflectthe combined data of the Successor for the one month ended March 29, 2003with that of the Predecessor for the two months ended March 1, 2003.

Components ofnet periodic benefit costs for the three months ended April 3, 2004 and March 29,2003 are as follows:
| ** **                                                | ** ** | **Pension  Benefits** | ** ** | **Other  Benefits** | ** ** |
|-----------------------------------------------------------|------------|-----------------------|------------|---------------------|------------|
| ** **                                                | ** ** | **2004**              | ** ** | **2003**            | ** ** | **2004** | ** ** | **2003** | ** ** |
| Current service costs                                     |       | $                     | 590        |                | $          | 620 |   | $ | 101 |   | $ | 98 |   |
| Interest costs on  projected benefit obligation and other |       | 1,253                 |       | 1,234               |       | 215 |   | 228 |   |
| Return on plan assets                                     |       | (1,334                | )          | (1,197              | )          | — |   | — |   |
| Amortization of  transition obligation and other          |       | (3                    | )          | 59                  |       | — |   | — |   |
| Periodic benefit cost, net                                |       | $                     | 506        |                | $          | 716 |   | $ | 316 |   | $ | 326 |   |

 

12

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

As of April 3, 2004, the Company contributed $3.8million to its pension plans for the 2004 benefit year. The Company presentlyanticipates contributing an additional $2.8 million to fund its pension plansin 2004 for a total of $6.6 million.

On December 8, 2003, theMedicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”)was enacted and introduced a prescription drug benefit under Medicare as wellas a subsidy to sponsors of retiree health care benefit plans. The Company haselected to defer the recognition of the Act until the authoritative guidance onthe accounting for the federal subsidy under the Act is issued. When theguidance is issued, the Company could be required to change previously reportedinformation. Any measure of the periodic benefit cost, benefit obligation andrelated disclosures for the U.S. and other postretirement benefit plans do notreflect the effect of the Act.

**Note 10.**   StockOption Plans

On December 11, 2003, the Company awarded theinitial non-qualified stock options under the 2003 Stock Option Plan (the “2003Plan”). The 2003 Plan was approved by the Company’s Board of Directors and isadministered by the Compensation Committee of the Board of Directors. Theoptions have a ten-year life and vest, based on the achievement of variousservice and financial performance criteria, over a five-year period beginning January 1,2004. As of April 3, 2004, 400,000 shares of the Company’s Class Acommon stock were reserved for issuance under the 2003 Plan, of which 160,000shares are available for future grants.

The Company elected to account for the 2003 Plan inaccordance with the intrinsic value method as prescribed by AccountingPrinciples Board Opinion No. 25, “Accounting for Stock Issued to Employees”and permitted under Statement of Financial Accounting Standards No. 123, “Accountingfor Stock-Based Compensation” (“SFAS No. 123”). Compensation costs werenot recorded in net income for stock options, as all options granted under the2003 Plan had an exercise price equal to the market value of the underlyingcommon stock on the date of grant. However, as a percentage of the options vestbased on achievement of financial performance criteria, compensation costs willbe recognized when it becomes probable that such performance criteria will beachieved.

If the Company applied the fairvalue recognition provision of SFAS No. 123 to stock-based compensation asrequired by Statement of Financial Accounting Standard No. 148, “Accountingfor Stock-Based Compensation—Transition and Disclosure” (“SFAS No. 148”),the amount of stock-based compensation would have approximately equaled theamount charged to operations. Therefore, no pro forma calculations of netincome (loss) and earnings (loss) per common share for the first quarter of2004 are included. Since all stock options under plans approved prior to 2003were canceled as part of the Company’s emergence from Chapter 11, no pro formainformation is shown for the first quarter of 2003.

**Note 11.**   Segment Information

The Company’s reportable market segments consist ofConsumer and Industrial & Specialty reflecting the management of theCompany’s business based on product sales. Beginning in fiscal 2003, theCompany was required to report operating data to its senior lenders under theRestructured Credit Facility based upon the Company’s primary operatingdivisions. Therefore, disclosures for the operating divisions have also beenpresented in the following table. Sales to P&G account for more than 10% ofthe Company’s sales in each of the periods presented. Sales to this customerare reported primarily in the Consumer market segment and the loss of thesesales would have a material adverse effect on this segment. Generally, theCompany’s nonwoven products can be manufactured on more 

13

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

than one type of production line.Accordingly, certain costs attributed to each segment of the business weredetermined on an allocation basis. Production times have a similar relationshipto net sales and the Company believes a reasonable basis for allocating certaincosts is the percent of net sales method for market segment data. During thethree months ended April 3, 2004, the one month ended March 29, 2003and the two months ended March 1, 2003, the Company recorded plantrealignment costs which have not been allocated to the segment data.

Financialdata by market segment is as follows (in thousands):
| ** **                                                                | ** ** | **Successor**                                         | ** ** | **Predecessor**                                     | ** ** |
|---------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                | ** ** | **Three Months  Ended  April 3, 2004** | ** ** | **One Month  Ended  March 29, 2003** | ** ** | **Two months  Ended  March 1, 2003** | ** ** |
| **Net sales:**                                                            |       |                                                  |       |                                                |       |   |   |   |   |   |   |   |   |
| Consumer                                                                  |       |                                                  | $          | 110,958                                             |       |   |   | $ | 35,044 |   |   |   | $ | 74,956 |   |   |
| Industrial & specialty                                           |       |                                                  | 95,784     |                                                |       |   | 29,023 |   |   |   | 57,953 |   |   |
|                                                                      |       |                                                  | $          | 206,742                                             |       |   |   | $ | 64,067 |   |   |   | $ | 132,909 |   |   |
| **Operating  income:**                                                    |       |                                                  |       |                                                |       |   |   |   |   |   |   |   |   |
| Consumer                                                                  |       |                                                  | $          | 4,055                                               |       |   |   | $ | 1,670 |   |   |   | $ | 3,105 |   |   |
| Industrial & specialty                                           |       |                                                  | 7,288      |                                                |       |   | 1,589 |   |   |   | 2,725 |   |   |
|                                                                      |       |                                                  | 11,343     |                                                |       |   | 3,259 |   |   |   | 5,830 |   |   |
| Plant realignment costs                                                   |       |                                                  | (584       | )                                                   |       |   | (8 | ) |   |   | (4 | ) |   |
|                                                                      |       |                                                  | $          | 10,759                                              |       |   |   | $ | 3,251 |   |   |   | $ | 5,826 |   |   |
| **Depreciation  and amortization expense  included in operating income:** |       |                                                  |       |                                                |       |   |   |   |   |   |   |   |   |
| Consumer                                                                  |       |                                                  | $          | 7,609                                               |       |   |   | $ | 2,701 |   |   |   | $ | 4,375 |   |   |
| Industrial & specialty                                                |       |                                                  | 5,068      |                                                |       |   | 1,170 |   |   |   | 3,012 |   |   |
|                                                                      |       |                                                  | $          | 12,677                                              |       |   |   | $ | 3,871 |   |   |   | $ | 7,387 |   |   |
|                                                                      |       |                                                  |       |                                                |       |   |   |   |   |   |   |   |   |
| ** **                                                                | ** ** | **April 3, 2004**                           | ** ** | **January 3, 2004**                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Identifiable assets (including intangible  assets):**                   |       |                                                  |       |                                                |       |   |   |   |   |   |   |   |   |
| Consumer                                                                  |       |                                                  | $          | 385,165                                             |       |   |   | $ | 392,419 |   |   |   |   |   |   |
| Industrial & specialty                                           |       |                                                  | 332,492    |                                                |       |   | 321,851 |   |   |   |   |   |   |
| Corporate                                                                 |       |                                                  | (2,011     | )                                                   |       |   | 7,040 |   |   |   |   |   |   |
|                                                                      |       |                                                  | $          | 715,646                                             |       |   |   | $ | 721,310 |   |   |   |   |   |   |

 

14

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

Financial data byoperating division is as follows (in thousands):
| ** **                                                                       | ** ** | **Successor**                                         | ** ** | **Predecessor**                                     | ** ** |
|----------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                       | ** ** | **Three Months  Ended  April 3, 2004** | ** ** | **One Month  Ended  March 29, 2003** | ** ** | **Two months  Ended  March 1, 2003** | ** ** |
| **Net sales:**                                                                   |       |                                                  |       |                                                |       |   |   |   |   |   |   |   |   |
| Nonwovens                                                                        |       |                                                  | $          | 164,214                                             |       |   |   | $ | 50,075 |   |   |   | $ | 108,373 |   |   |
| Oriented Polymers                                                                |       |                                                  | 42,649     |                                                |       |   | 13,992 |   |   |   | 24,536 |   |   |
| Eliminations                                                                     |       |                                                  | (121       | )                                                   |       |   | — |   |   |   | — |   |   |
|                                                                             |       |                                                  | $          | 206,742                                             |       |   |   | $ | 64,067 |   |   |   | $ | 132,909 |   |   |
| **Operating  income (loss):**                                                    |       |                                                  |       |                                                |       |   |   |   |   |   |   |   |   |
| Nonwovens                                                                        |       |                                                  | $          | 11,935                                              |       |   |   | $ | 3,357 |   |   |   | $ | 7,852 |   |   |
| Oriented Polymers                                                                |       |                                                  | 3,538      |                                                |       |   | 1,058 |   |   |   | 1,461 |   |   |
| Unallocated Corporate                                                            |       |                                                  | (4,476     | )                                                   |       |   | (1,028 | ) |   |   | (3,598 | ) |   |
| Eliminations                                                                     |       |                                                  | 346        |                                                |       |   | (128 | ) |   |   | 115 |   |   |
|                                                                             |       |                                                  | 11,343     |                                                |       |   | 3,259 |   |   |   | 5,830 |   |   |
| Plant realignment costs                                                          |       |                                                  | (584       | )                                                   |       |   | (8 | ) |   |   | (4 | ) |   |
|                                                                             |       |                                                  | $          | 10,759                                              |       |   |   | $ | 3,251 |   |   |   | $ | 5,826 |   |   |
| **Depreciation  and amortization expense  included in operating income (loss):** |       |                                                  |       |                                                |       |   |   |   |   |   |   |   |   |
| Nonwovens                                                                        |       |                                                  | $          | 10,572                                              |       |   |   | $ | 3,477 |   |   |   | $ | 5,766 |   |   |
| Oriented Polymers                                                                |       |                                                  | 2,074      |                                                |       |   | 666 |   |   |   | 1,349 |   |   |
| Unallocated Corporate                                                            |       |                                                  | 377        |                                                |       |   | (272 | ) |   |   | 272 |   |   |
| Eliminations                                                                     |       |                                                  | (346       | )                                                   |       |   | — |   |   |   | — |   |   |
|                                                                             |       |                                                  | $          | 12,677                                              |       |   |   | $ | 3,871 |   |   |   | $ | 7,387 |   |   |
| ** **                                                                       |       |                                                  |       |                                                |       |   |   |   |   |   |   |   |   |
| ** **                                                                       | ** ** | **April 3, 2004**                                     | ** ** | **January 3, 2004**                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Identifiable assets (including intangible  assets):**                          |       |                                                  |       |                                                |       |   |   |   |   |   |   |   |   |
| Nonwovens                                                                        |       |                                                  | $          | 693,516                                             |       |   |   | $ | 708,595 |   |   |   |   |   |   |
| Oriented Polymers                                                                |       |                                                  | 150,314    |                                                |       |   | 147,075 |   |   |   |   |   |   |
| Corporate                                                                        |       |                                                  | (2,011     | )                                                   |       |   | 7,040 |   |   |   |   |   |   |
| Eliminations                                                                     |       |                                                  | (126,173   | )                                                   |       |   | (141,400 | ) |   |   |   |   |   |
|                                                                             |       |                                                  | $          | 715,646                                             |       |   |   | $ | 721,310 |   |   |   |   |   |   |

 

15

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

Geographic Data:
| Geographic  data for the Company’s operations is presented in the following table (in  thousands): |
|---------------------------------------------------------------------------------------------------------|

 
| ** **                                                                       | ** ** | **Successor**                                         | ** ** | **Predecessor**                                     | ** ** |
|----------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                       | ** ** | **Three Months  Ended  April 3, 2004** | ** ** | **One Month  Ended  March 29, 2003** | ** ** | **Two months  Ended  March 1, 2003** | ** ** |
| **Net sales:**                                                                   | ** ** |                                                  | ** ** | ** **                                          |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| United States                                                                    |       |                                                  | $          | 90,345                                              | ** ** |   |   | $ | 28,141 | ** ** |   |   | $ | 58,992 | ** ** |   |
| Canada                                                                           |       |                                                  | 28,592     | ** **                                          |       |   | 9,034 | ** ** |   |   | 16,416 | ** ** |   |
| Europe                                                                           |       |                                                  | 51,470     | ** **                                          |       |   | 15,829 | ** ** |   |   | 33,936 | ** ** |   |
| Asia                                                                             |       |                                                  | 6,818      | ** **                                          |       |   | 2,140 | ** ** |   |   | 4,773 | ** ** |   |
| Latin America                                                                    |       |                                                  | 29,517     | ** **                                          |       |   | 8,923 | ** ** |   |   | 18,792 | ** ** |   |
|                                                                             |       |                                                  | $          | 206,742                                             | ** ** |   |   | $ | 64,067 | ** ** |   |   | $ | 132,909 | ** ** |   |
| **Operating  income (loss):**                                                    | ** ** |                                                  | ** ** | ** **                                          |       |   | ** ** |   |   |   | ** ** |   |   |
| United States                                                                    |       |                                                  | $          | (777                                                | )          |   |   | $ | (749 | ) |   |   | $ | (1,582 | ) |   |
| Canada                                                                           |       |                                                  | 1,925      |                                                |       |   | 817 |   |   |   | 1,233 |   |   |
| Europe                                                                           |       |                                                  | 4,445      |                                                |       |   | 1,077 |   |   |   | 2,330 |   |   |
| Asia                                                                             |       |                                                  | 544        |                                                |       |   | 249 |   |   |   | 848 |   |   |
| Latin America                                                                    |       |                                                  | 5,206      |                                                |       |   | 1,865 |   |   |   | 3,001 |   |   |
|                                                                             |       |                                                  | 11,343     |                                                |       |   | 3,259 |   |   |   | 5,830 |   |   |
| Plant realignment costs                                                          |       |                                                  | (584       | )                                                   |       |   | (8 | ) |   |   | (4 | ) |   |
|                                                                             |       |                                                  | $          | 10,759                                              |       |   |   | $ | 3,251 |   |   |   | $ | 5,826 |   |   |
| **Depreciation  and amortization expense  included in operating income (loss):** | ** ** |                                                  | ** ** | ** **                                          |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| United States                                                                    |       |                                                  | $          | 5,824                                               | ** ** |   |   | $ | 1,991 | ** ** |   |   | $ | 3,658 | ** ** |   |
| Canada                                                                           |       |                                                  | 1,503      | ** **                                          |       |   | 468 | ** ** |   |   | 950 | ** ** |   |
| Europe                                                                           |       |                                                  | 2,343      | ** **                                          |       |   | 659 | ** ** |   |   | 1,166 | ** ** |   |
| Asia                                                                             |       |                                                  | 994        | ** **                                          |       |   | 275 | ** ** |   |   | 628 | ** ** |   |
| Latin America                                                                    |       |                                                  | 2,013      | ** **                                          |       |   | 478 | ** ** |   |   | 985 | ** ** |   |
|                                                                             |       |                                                  | $          | 12,677                                              | ** ** |   |   | $ | 3,871 | ** ** |   |   | $ | 7,387 | ** ** |   |
| ** **                                                                       | ** ** |                                                  | ** ** | ** **                                          |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| ** **                                                                       | ** ** | **April 3, 2004**                                     | ** ** | **January 3, 2004**                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Identifiable assets (including intangible  assets):**                          | ** ** |                                                  | ** ** | ** **                                          |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| United States                                                                    |       |                                                  | $          | 163,974                                             | ** ** |   |   | $ | 155,685 | ** ** |   |   |   | ** ** |   |
| Canada                                                                           |       |                                                  | 101,998    | ** **                                          |       |   | 106,428 | ** ** |   |   |   | ** ** |   |
| Europe                                                                           |       |                                                  | 272,376    | ** **                                          |       |   | 279,269 | ** ** |   |   |   | ** ** |   |
| Asia                                                                             |       |                                                  | 38,203     | ** **                                          |       |   | 37,987 | ** ** |   |   |   | ** ** |   |
| Latin America                                                                    |       |                                                  | 139,095    | ** **                                          |       |   | 141,941 | ** ** |   |   |   | ** ** |   |
|                                                                             |       |                                                  | $          | 715,646                                             | ** ** |   |   | $ | 721,310 | ** ** |   |   |   | ** ** |   |

 

**Note 12.**   LegalProceedings

On August 18, 2003 an affiliate (“Affiliate”) ofthe former Chief Executive Officer of the Company filed a claim seeking damagesassociated with a lease agreement and an alleged services agreement, betweenthe Company and the Affiliate, associated with the lease by the Company of itsformer 

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

corporate headquarters and theprovision of shared administrative services. The damages sought in thecomplaint total $7.7 million, plus attorney’s fees. The Company believesthat the ultimate outcome will not have a material adverse effect on itsfinancial position or results of operations.

On April 23, 2002, theCompany filed a demand for arbitration against Johnson & Johnson(J&J). The primary issue in the arbitration is the Company’s assertion thatJ&J breached a supply agreement when J&J and certain of its affiliatesfailed to purchase certain products from the Company and to allow the Company areasonable opportunity to compete for certain sales. The arbitration iscurrently pending in the State of New York.

**Note 13.**   Supplemental Cash FlowInformation

Noncash transactions in the firstquarter of 2004 included the payment in kind in lieu of cash payment of $1.0million of interest expense on the Junior Notes and the conversion of$2.7 million of the Company’s Junior Notes into approximately 371,500shares of the Company’s Class A Common Stock.

**Note 14.**   Subsequent Events

On April 27, 2004, the Company entered into a newsenior secured bank facility consisting of a $50.0 million revolving creditfacility maturing in 2009, a $300.0 million senior secured first-lien term loanthat matures in 2010 and a $125.0 million senior secured second-lien term loanmaturing in 2011. The proceeds therefrom were used to fully repay indebtednessunder the Company’s previous Restructured Credit Facility and pay related feesand expenses. The Company has the remainder of the proceeds available forworking capital needs, if necessary. The senior secured first-lien term loanrequires quarterly payments of $750,000 beginning in September 2004 andaccrues interest at LIBOR plus 325 basis points. The senior secured second-lienterm loan accrues interest at LIBOR plus 625 basis points. The revolving creditfacility initially bears interest at LIBOR plus 300 basis points.

The new credit agreement contains covenants and eventsof default customary in financings of this type, including leverage andinterest expense coverage covenants. The new credit agreement requires theCompany to use a percentage of any proceeds from asset sales and excess cashflows, as defined by the agreement, to reduce its debt balances. Additionally,in accordance with the terms of the new credit agreement, the Company entered acash flow hedge agreement, effectively converting $212.5 million of notionalprincipal amount of debt from a variable LIBOR rate to a fixed rate of 3.383%. Thecash flow hedge agreement terminates on May 8, 2007.

In the second quarter of 2004, the Company willexpense the unamortized balance of $5.2 million of loan acquisition costsrelated to the previous Restructured Credit Facility.

In conjunction with the refinancing, the Company’smajority shareholder exchanged approximately $42.6 million in aggregateprincipal amount of the 10% Convertible Subordinated Notes due 2007 itcontrolled for 42,633 shares of the Company’s 16% Series A ConvertiblePay-in-kind Preferred Stock. The dividends on the new preferred shares arepayable, at the option of the Company, by issuing additional shares ofpreferred stock or paying such dividends in cash. The new preferred shares willhave priority as to dividends over each class of common stock. The newpreferred shares are mandatorily redeemable on June 30, 2012 payable, atthe option of the Company, by paying in cash, by the issuance of Class A CommonStock or by a combination thereof. The Company also has the option to redeemthe shares prior to that date, provided certain conditions have been met.

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

Additionally,subsequent to the end of the March 2004 quarter, the United States BankruptcyCourt for the District of South Carolina resolved certain claims against theCompany in connection with the Modified Plan and approved the issuance of1,327,177 shares of the Company’s Class A Common Stock and 19,359 shares of theCompany’s Class C Common Stock which were issued on a pro rata basis to holdersof the Predecessor Company’s Class 4 General Unsecured Claims per thePredecessor Company’s Chapter 11 Plan of Reorganization.  If these shares had been outstanding for allSuccessor periods presented, the pro forma net loss per common share for thethree months ended April 3, 2004 and the one month ended March 29, 2003 wouldhave been $(0.87) per share and $(0.14) per share, respectively.

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

The following discussion and analysis providesinformation which management believes is relevant to an assessment andunderstanding of the Company’s consolidated results of operations and financialcondition. The discussion should be read in conjunction with the consolidatedfinancial statements and notes thereto contained in this quarterly report on Form 10-Qand the annual report on Form 10-K for the period ended January 3,2004.

For accounting purposes, theCompany recognized the emergence from Chapter 11 on March 1, 2003, whichwas the end of the February accounting period. For purposes of discussionof results of operations, the one month ended March 29, 2003 (Successor)has been combined with two months ended March 1, 2003 (Predecessor).

**Results of Operations**

The followingtable sets forth the percentage relationships to net sales of certain incomestatement items.
| ** **                                         | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------|------------|----------------------------------|------------|
| ** **                                         | ** ** | **April 3,  2004**          | ** ** | **March 29,  2003** | ** ** |
| Net sales                                          |       | 100.0                            | %          |   | 100.0 | % |   |
| Cost of goods sold                                 |       |                             |       |   |   |   |   |
| Materials                                          |       | 46.6                             |       |   | 46.6 |   |   |
| Labor                                              |       | 9.9                              |       |   | 10.3 |   |   |
| Overhead                                           |       | 24.9                             |       |   | 26.2 |   |   |
|                                               |       | 81.4                             |       |   | 83.1 |   |   |
| Gross profit                                       |       | 18.6                             |       |   | 16.9 |   |   |
| Selling, general and  administrative expenses      |       | 13.1                             |       |   | 12.3 |   |   |
| Plant realignment costs                            |       | 0.3                              |       |   | — |   |   |
| Operating income                                   |       | 5.2                              |       |   | 4.6 |   |   |
| Other expense                                      |       |                             |       |   |   |   |   |
| Interest expense, net                              |       | 7.4                              |       |   | 7.3 |   |   |
| Investment gain, net                               |       | —                           |       |   | (0.1 | ) |   |
| Minority interests                                 |       | 0.2                              |       |   | 0.3 |   |   |
| Foreign currency and other                         |       | 0.7                              |       |   | 0.6 |   |   |
|                                               |       | 8.3                              |       |   | 8.1 |   |   |
| Loss before  reorganization items and income taxes |       | (3.1                             | )          |   | (3.5 | ) |   |
| Reorganization items                               |       | —                           |       |   | 274.4 |   |   |
| Income (loss) before  income tax expense           |       | (3.1                             | )          |   | 270.9 |   |   |
| Income tax expense                                 |       | 1.1                              |       |   | 1.3 |   |   |
| Net income (loss)                                  |       | (4.2                             | )%         |   | 269.6 | % |   |

 

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**Comparison of Three MonthsEnded April 3, 2004 and March 29, 2003**

The followingtable sets forth components of the Company’s net sales and operating income(loss) by market segment and operating division for the three months ended April 3,2004 and the corresponding change over the comparable period in 2003 (inmillions):
| ** **                      | ** ** | **Three Months Ended** | ** ** | ** **               | ** ** |
|---------------------------------|------------|----------------------------------|------------|--------------------------|------------|
| ** **                      | ** ** | **April 3,  2004**          | ** ** | **March 29,  2003** | ** ** | **Change** | ** ** |
| Market Segments:                |       |                             |       |                     |       |   |   |   |   |   |   |
| Net Sales                       |       |                             |       |                     |       |   |   |   |   |   |   |
| Consumer                        |       | $                                | 110.9      |                     |       | $ | 110.0 |   |   |   | $ | 0.9 |   |   |
| Industrial & Specialty |       | 95.8                             |       |                     | 87.0       |   |   |   | 8.8 |   |   |
|                            |       | $                                | 206.7      |                     |       | $ | 197.0 |   |   |   | $ | 9.7 |   |   |
| Operating income                |       |                             |       |                     |       |   |   |   |   |   |   |
| Consumer                        |       | $                                | 4.1        |                     |       | $ | 4.8 |   |   |   | $ | (0.7 | ) |   |
| Industrial & Specialty |       | 7.3                              |       |                     | 4.3        |   |   |   | 3.0 |   |   |
|                            |       | 11.4                             |       |                     | 9.1        |   |   |   | 2.3 |   |   |
| Plant realignment costs         |       | (0.6                             | )          |                     | —     |   |   |   | (0.6 | ) |   |
|                            |       | $                                | 10.8       |                     |       | $ | 9.1 |   |   |   | $ | 1.7 |   |   |
| Operating Divisions:            |       |                             |       |                     |       |   |   |   |   |   |   |
| Net Sales                       |       |                             |       |                     |       |   |   |   |   |   |   |
| Nonwovens                       |       | $                                | 164.2      |                     |       | $ | 158.5 |   |   |   | $ | 5.7 |   |   |
| Oriented Polymers               |       | 42.6                             |       |                     | 38.5       |   |   |   | $ | 4.1 |   |   |
| Eliminations                    |       | (0.1                             | )          |                     | —     |   |   |   | (0.1 | ) |   |
|                            |       | $                                | 206.7      |                     |       | $ | 197.0 |   |   |   | $ | 9.7 |   |   |
| Operating income (loss)         |       |                             |       |                     |       |   |   |   |   |   |   |
| Nonwovens                       |       | $                                | 11.9       |                     |       | $ | 11.2 |   |   |   | $ | 0.7 |   |   |
| Oriented Polymers               |       | 3.6                              |       |                     | 2.5        |   |   |   | 1.1 |   |   |
| Unallocated Corporate           |       | (4.5                             | )          |                     | (4.6       | ) |   |   | 0.1 |   |   |
| Eliminations                    |       | 0.4                              |       |                     | —     |   |   |   | 0.4 |   |   |
|                            |       | 11.4                             |       |                     | 9.1        |   |   |   | 2.3 |   |   |
| Plant realignment costs         |       | (0.6                             | )          |                     | —     |   |   |   | (0.6 | ) |   |
|                            |       | $                                | 10.8       |                     |       | $ | 9.1 |   |   |   | $ | 1.7 |   |   |

 

Restructuring related chargeshave not been allocated to the Company’s reportable business segments, forreporting purposes, because the Company’s management does not evaluate suchcharges on a segment-by-segment basis. Segment operating performance ismeasured and evaluated before unusual or special items.

**Net Sales**

Areconciliation of the change in net sales between the three months ended April 3,2004 and the three months ended March 29, 2003 is presented in thefollowing table (in millions):
| Net sales—three months  ended March 29, 2003 |   | $      | 197.0  |   |
|--------------------------------------------------------|--------|--------|--------|--------|
| Change in sales due to:                                |   |   |   |
| Foreign currency                                       |   | 10.9   |   |
| Volume                                                 |   | 2.4    |   |
| Price/mix                                              |   | 0.2    |   |
| Businesses sold/exited                                 |   | (3.8   | )      |
| Net sales—three months ended  April 3, 2004  |   | $      | 206.7  |   |

 

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Consolidated net sales wereapproximately $206.7 million for the three months ended April 3,2004, an increase of $9.7 million or 4.9% over the prior year comparable period.The increase in net sales was due primarily to the strengthening of foreigncurrencies, predominantly the Euro and the Canadian dollar, versus the U.S.dollar and increased sales volume, partially offset by decreases associatedwith businesses exited or sold.

Consumer net sales were$110.9 million in the first three months of 2004 compared to$110.0 million in 2003, an increase of $0.9 million or 0.9%. Thissegment’s sales were positively impacted by foreign currencies, predominantlyin Europe, where the Euro was stronger against the U.S. dollar during 2004compared to 2003. Increased volumes in Latin America and the U.S. were offsetby declines in Europe and China. Industrial & Specialty net sales were$95.8 million in the first three months of 2004 compared to $87.0 millionin the first three months of 2003, an increase of $8.8 million or 10.1%.Most of the year-to-year increase was due to the strengthening of the Euro andthe Canadian dollar compared to the U.S. dollar.

Nonwovens net sales were $164.2million in the first three months of 2004 compared to $158.5 million in 2003,an increase of $5.7 million or 3.6%. Within the nonwovens business, highersales volume in the U.S. hygiene and Latin American medical markets were offsetby volume losses in Asian hygiene and U.S. medical. The 2004 nonwovens saleswere also favorably impacted by the strengthening of the Euro versus the U.S.dollar. Oriented Polymers net sales increased $4.1 million in the quarter-to-quartercomparison and benefited from the strengthening of the Canadian dollar versusthe U.S. dollar.

**Operating Income**

Areconciliation of the change in operating income between the three months endedApril 3, 2004 and March 29, 2003 is presented in the following table(in millions):
| Operating income—three  months ended March 29, 2003 |   | $      | 9.1    |   |
|---------------------------------------------------------------|--------|--------|--------|--------|
| Change in operating income due to:                            |   |   |   |
| Lower manufacturing costs                                     |   | 5.8    |   |
| Foreign currency                                              |   | 1.0    |   |
| Volume                                                        |   | 0.9    |   |
| Price/mix                                                     |   | 0.2    |   |
| Businesses sold/exited                                        |   | 0.1    |   |
| Higher raw material costs                                     |   | (3.3   | )      |
| Higher depreciation and amortization                          |   | (1.4   | )      |
| Plant realignment costs                                       |   | (0.6   | )      |
| All other, primarily SG&A costs                           |   | (1.0   | )      |
| Operating income—three months  ended April 3, 2004  |   | $      | 10.8   |   |

 

Consolidated operating income was$10.8 million in the first three months of 2004 as compared to$9.1 million in the first three months of 2003. The improvement tooperating income due to lower manufacturing costs reflects the benefit of theCompany’s ongoing efforts to reduce spending and improve operating efficiency. Increasedvolumes and the strengthening of foreign currencies versus the U.S. dollar alsocontributed favorably to operating income in 2004. Offsetting these favorableimpacts were higher raw material costs of $3.3 million, predominantly inthe U.S. and Canadian businesses, higher depreciation and amortization chargesdue to the expansion efforts done in 2003, increased selling, general and administrativeexpenses and higher plant realignment charges, primarily in Europe.

**Interest Expense and Other**

Interest expense increased $0.8 million from $14.4 millionduring the three months ended March 29, 2003 to $15.2 million duringthe same period in 2004. The increase is primarily due to the 

21

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higher interestrate associated with the Restructured Credit Facility being in effect for theentire first quarter of 2004, compared to only one month of the first quarterof 2003. Foreign currency and other increased approximately $0.2 million,from $1.2 million during the three months ended March 29, 2003 to$1.4 million for the comparable period in 2004.

**Chapter 11 ReorganizationItems**

The Company recognized a net gainof $540.5 million from reorganization items upon its emergence from Chapter 11in 2003. These reorganization items primarily included gains on cancellation ofprepetition indebtedness of $619.9 million, offset by fresh start adjustmentsof $47.5 million and other costs associated with the reorganization of $31.9million.

**Income Taxes**

The Company recognized income taxexpense of $2.5 million for the three months ended April 3, 2004 on aconsolidated loss before income taxes of $6.3 million for such period. Thisprimarily resulted from income taxes accrued on the earnings generated byforeign operations as well as state income taxes in the United States, with nofederal income tax benefit being recognized for the combined pre-tax lossesincurred in the United States. During the three months ended March 29,2003, the Company recognized an income tax expense of approximately $2.6million.

**Net Income (Loss)**

The Company’s net loss during thethree months ended April 3, 2004 was approximately $8.8 million as aresult of the factors described above, as compared to a net income of$531.0 million during the comparable period in 2003.

**Liquidity and CapitalResources**

The Company’sprincipal sources of liquidity for operations and expansions are fundsgenerated internally and borrowings under the Company’s Restructured CreditFacility which provides for secured revolving credit borrowings with aggregatecommitments of up to $50.0 million and aggregate term loans and term letters ofcredit of $435.3 million. Additionally, as further discussed below, the Companyrefinanced its primary credit facility under more favorable terms in April 2004.
| ** **                                                   | ** ** | **April 3,  2004** | ** ** | **January 3,  2004** | ** ** |
|--------------------------------------------------------------|------------|-------------------------|------------|---------------------------|------------|
| ** **                                                   | ** ** | **(In Millions)**  | ** ** |
| Balance sheet data:                                          |       |                    |       |                      |       |   |   |
| Cash and cash equivalents                                    |       | $                       | 15.2       |                      |       | $ | 21.3 |   |   |
| Working capital                                              |       | 152.8                   |       |                      | 119.1      |   |   |
| Working capital, excluding current portion of long-term debt |       | 158.3                   |       |                      | 153.1      |   |   |
| Total assets                                                 |       | 715.6                   |       |                      | 721.3      |   |   |
| Total debt                                                   |       | 485.4                   |       |                      | 483.4      |   |   |
| Shareholders’ equity                                    |       | 51.1                    |       |                      | 59.2       |   |   |
|                                                              |            |                         |            |                           |            |  |  |  |  |

 
| ** **                                           | ** ** | **Three Months  Ended** | ** ** |
|------------------------------------------------------|------------|------------------------------|------------|
| ** **                                           | ** ** | **April 3,  2004**      | ** ** | **March 29,  2003** | ** ** |
| ** **                                           | ** ** | **(In Millions)**       | ** ** |
| Cash flow data:                                      |       |                         |       |   |   |   |   |
| Net cash used in operating activities                |       | $                            | (7.0       | ) |   | $ | (11.8 | ) |   |
| Net cash provided by (used in) investing activities  |       | (3.7                         | )          |   | 6.8 |   |   |
| Net cash provided by  (used in) financing activities |       | 4.7                          |       |   | (15.6 | ) |   |
|                                                      |            |                              |            |  |  |  |  |  |  |

 

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**Operating Activities**

Net cash used in operatingactivities was $7.0 million during the three months ended April 3,2004, an approximate $4.8 million improvement from the $11.8 million used inoperating activities during the three months ended March 29, 2003. Thedecreased level of net cash used in operating activities reflects the Company’simprovement in its operating profitability. The Company continues to haveaccess to a $50.0 million revolving credit facility to help it to meetshort-term cash requirements. Generally, the Company strives to keep thatborrowing balance at a minimum.

The Company had working capitalof approximately $152.8 million at April 3, 2004, compared with$119.1 million at January 3, 2004. Excluding the current portion oflong-term debt, working capital was $158.3 million at April 3, 2004,compared to $153.1 million at January 3, 2004. Accounts receivable on April 3,2004 were $127.4 million as compared to $121.1 million on January 3,2004, an increase of $6.3 million, primarily due to higher sales. Accountsreceivable represented approximately 56 days of sales outstanding at April 3,2004 versus approximately 60 days outstanding on January 3, 2004.Inventories at April 3, 2004 were approximately $102.4 million, anincrease of $5.9 million from inventories at January 3, 2004 of$96.5 million. The Company had approximately 56 days of inventory onhand at April 3, 2004 versus approximately 59 days on hand at January 3,2004. Accounts payable at April 3, 2004 was $60.8 million as compared to$57.1 million on January 3, 2004, an increase of $3.7 million. Accountspayable represented 33 days of payables outstanding at April 3, 2004,compared to 35 days of payable outstanding on January 3, 2004.

**Investing and FinancingActivities**

Cash used in investing activitiesamounted to $3.7 million during the three months ended April 3, 2004,compared to the $6.8 million provided by investing activities during the threemonths ended March 29, 2003. Capital expenditures during the first threemonths of 2004 totaled $4.5 million, a decrease of $0.6 million fromcapital spending of $5.1 million during the same period in fiscal 2003.Investing activities during the first three months of 2004 and 2003 includedproceeds from the sale of assets of $0.8 million and $11.9 million,respectively.

Cash provided by financingactivities amounted to $4.7 million during the three months ended April 3,2004, compared to the $15.6 million used in financing activities during thethree months ended March 29, 2003. During the first three months of 2004,the Company received net proceeds of $4.7 million under its credit facilities,whereas the Company used $14.7 million of cash to pay down its debt during thecomparable quarter of 2003.

**Liquidity Summary**

As discussed in Note 14 to theConsolidated Financial Statements, on April 27, 2004, the Company enteredinto a new senior secured bank facility consisting of a $50.0 million revolvingcredit facility maturing in 2009, a $300.0 million senior secured first-lienterm loan that matures in 2010 and a $125.0 million senior secured second-lienterm loan maturing in 2011. The proceeds therefrom were used to fully repayindebtedness outstanding under the Company’s previous Restructured Credit Facilityand pay related fees and expenses. The Company has the remainder of theproceeds available for working capital needs, if necessary. The senior securedfirst-lien term loan requires quarterly payments of $750,000 beginning inSeptember 2004 and accrues interest at LIBOR plus 325 basis points. The seniorsecured second-lien term loan accrues interest at LIBOR plus 625 basis points.The revolving credit facility initially bears interest at LIBOR plus 300 basispoints. The new credit facility provides the Company with increased flexibilityin terms of cash availability, less stringent requirements for covenantcompliance, extended maturity dates and substantially reduced net cash interestcosts.

Thenew credit agreement contains covenants and events of default customary infinancings of this type, including leverage and interest expense coveragecovenants. The new credit agreement requires the Company to use a percentage ofany proceeds from asset sales and excess cash flows, as defined by theagreement, to reduce its debt balances. Additionally, in accordance with theterms of the new credit agreement, the Company entered a cash flow hedgeagreement, effectively converting $212.5 million of notional principalamount of debt from a variable LIBOR rate to a fixed rate of 3.383%. The cashflow hedge agreement terminates on May 8, 2007.

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In conjunction with the refinancing, the Company’smajority shareholder exchanged approximately $42.6 million in aggregateprincipal amount of the 10% Convertible Subordinated Notes due 2007 itcontrolled for 42,633 shares of the Company’s 16% Series A ConvertiblePay-in-kind Preferred Stock. The dividends on the new preferred shares arepayable, at the option of the Company, by issuing additional shares ofpreferred stock or paying such dividends in cash. The new preferred shares willhave priority as to dividends over each class of common stock. The newpreferred shares are mandatorily redeemable on June 30, 2012 payable, atthe option of the Company, by paying in cash, by the issuance of Class A CommonStock or by a combination thereof. The Company also has the option to redeemthe shares prior to that date, provided certain conditions have been met.

Based on the ability to generate working capitalthrough its operations and the financial flexibility provided by the new seniorsecured credit facility, the Company believes that it has the financialresources necessary to meet its operating needs, fund its capital expendituresand make all necessary contributions to its retirement plans.

**Effect of Inflation**

Inflation generally affects theCompany by increasing the cost of labor, overhead and equipment. The impact ofinflation on the Company’s financial position and results of operations wasminimal during the first quarters of 2003 and 2004.

**Critical Accounting Policies And Other Matters**

The Company’s analysis and discussion of its financialposition and results of operations are based upon its consolidated financialstatements that have been prepared in accordance with generally acceptedaccounting principles 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, sales returns and allowances and credit risks, inventories, incometaxes, impairment of long-lived assets, pension and other post retirementbenefits and contingencies. Estimates and assumptions are based on historicaland other factors believed to be reasonable under the circumstances. The impactand any associated risks related to estimates, assumptions, and accountingpolicies are discussed within Management’s Discussion and Analysis ofOperations and Financial Condition, as well as in the Notes to the ConsolidatedFinancial Statements, if applicable, where such estimates, assumptions, andaccounting policies affect the Company’s reported and expected results.

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

*Fresh StartAccounting:**  *Inconnection with the Company’s Chapter 11 reorganization, the Company hasapplied Fresh Start Accounting (as defined herein) to its consolidated balancesheet as of March 1, 2003 in accordance with Statement of Position No. 90-7,“Financial Reporting by Entities in Reorganization Under the Bankruptcy Code”as promulgated by the AICPA. Under Fresh Start Reporting, a new reportingentity is considered to be created and the recorded amounts of assets andliabilities are adjusted to reflect their estimated fair values at the dateFresh Start Accounting is applied. On March 5, 2003, the Company emergedfrom bankruptcy. For financial reporting purposes, March 1, 2003 isconsidered the emergence date and the effects of the reorganization have beenreflected in the accompanying financial statements as if the emergence occurredon that date.

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The reorganization value of the Company’s new commonequity at March 1, 2003 of approximately $73.4 million was determinedbased on an independent valuation by financial specialists after considerationof multiple factors and by using various valuation methodologies and evaluatingother relevant industry information. The reorganization value of the Companywas allocated to the various assets and liabilities based on their respectivefair values pursuant to Fresh Start Accounting principles. The calculatedreorganization value of the Company was based on a variety of estimates andassumptions about future circumstances and events. Such estimates andassumptions are inherently subject to significant economic uncertainties.

*RevenueRecognition:**  *Revenuefrom product sales is recognized at the time ownership of goods transfers tothe customer and the earnings process is complete in accordance with StaffAccounting Bulletin No. 101, “Revenue Recognition in Financial Statements”(“SAB 101”). Sales returns and allowances, a component of net sales, arerecorded in the period in which the related sales are recorded. Managementbases its estimate of the expense to be recorded each period on historicalreturns and allowance levels. Management does not believe the likelihood issignificant that materially higher deduction levels will result based on priorexperience.

*AccountsReceivable and Concentration of Credit Risks:**  *Accounts receivable potentiallyexpose the Company to a concentration of credit risk, as defined by Statementof Financial Accounting Standards No. 105, “Disclosure of Informationabout Financial Instruments with Off-Balance Sheet Risk and Financial Instrumentswith Concentration of Credit Risk.” The Company provides credit in the normalcourse of business and performs ongoing credit evaluations on its customers’financial condition as deemed necessary, but generally does not requirecollateral to support such receivables. The Company also establishes anallowance for doubtful accounts based upon factors surrounding the credit riskof specific customers, historical trends and other information. At April 3,2004, a reserve of $13.6 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.

*InventoryReserves:**  *TheCompany maintains reserves for inventories valued using the first in, first out(FIFO) method. Such reserves for inventories can be specific to certaininventory or general based on judgments about the overall condition of theinventory. General reserves are established based on percentage write-downsapplied to inventories aged for certain time periods. Specific reserves areestablished based on a determination of the obsolescence of the inventory andwhether the inventory value exceeds amounts to be recovered through expectedsales price, less selling costs. Estimating sales prices, establishing markdownpercentages and evaluating the condition of the inventories require judgmentsand estimates, which may impact the inventory valuation and gross margins.Management believes based on its prior experience of managing and evaluatingthe recoverability of its slow moving or obsolete inventory that suchestablished reserves are materially adequate.

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

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For assets held for disposal, an impairment charge isrecognized if the carrying value of the assets exceeds the fair value lesscosts to sell. Estimates are required of fair value, disposal costs and thetime period to dispose of the assets. Such estimates are critical indetermining whether any impairment charge should be recorded and the amount ofsuch charge if an impairment loss is deemed to be necessary. Actual cash flowsreceived or paid could differ from those used in estimating the impairmentloss, which would impact the impairment charge ultimately recognized and theCompany’s cash flows.

*BenefitPlans:**  *TheCompany has pension and post retirement costs and obligations which aredependent on assumptions used by actuaries in calculating such amounts. Theseassumptions include discount rates, inflation, salary growth, long-term returnon plan assets, retirement rates, mortality rates and other factors. While theCompany believes that the assumptions used are appropriate, significant differencesin actual experience or significant changes in assumptions would affect itspension costs and obligations.

*Income Taxes:**  *The Company records an income taxvaluation allowance when the realization of certain deferred tax assets, netoperating losses and capital loss carry forwards is not likely. These deferredtax items represent expenses recognized for financial reporting purposes, whichwill result in tax deductions over varying future periods. The Company has notprovided U.S. income taxes for undistributed earnings of foreign subsidiariesthat are considered to be retained indefinitely for reinvestment. Certainjudgments, assumptions and estimates may affect the carrying value of thevaluation allowance and deferred income tax expense in the Company’sconsolidated financial statements.

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK**

The Company is exposed to marketrisks for changes in foreign currency exchange rates and has exposure tocommodity price risks, including prices of primary raw materials. Assubstantially all of the Company’s debt at April 3, 2004 is based on aspecified base rate plus a specified margin and is capped at 12.0%, the Company’sexposure to interest rate inflation is limited. The Company does not hold orissue any financial instruments for trading or speculative purposes.

**Long-Term Debt and Interest Rate Market Risk**

*Fixed Rate Debt*

Generally, the fair market valueof fixed interest rate debt will increase as interest rates fall and decreaseas interest rates rise. The estimated fair value of the Company’s debt, whichis substantially fixed-rate or has a cap on the interest rate, at April 3,2004 approximated its carrying value. Hypothetically, a 1% change in theinterest rate affecting all of the Company’s financial instruments would changeinterest expense by approximately $4.8 million.

**Foreign Currency Exchange Rate Risk**

The Company manufactures, markets and distributescertain of its products in Europe, Canada, Latin America and the Far East. As aresult, the Company’s financial statements could be significantly affected byfactors such as changes in foreign currency rates in the foreign markets inwhich the Company maintains a manufacturing or distribution presence. However,such currency fluctuations have much less effect on local operating resultsbecause the Company, to a significant extent, sells its products within thecountries in which they are manufactured. During 2003 and the first quarter of2004, certain currencies of countries in which the Company conducts foreigncurrency denominated business strengthened against the U.S. dollar and had asignificant impact on sales and operating income. See “Management’s Discussionand Analysis of Financial Condition and Results of Operations” included in Item2 of Part 1 of this Quarterly Report on Form 10-Q.

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The Company has not historicallyhedged its exposure to foreign currency risk, although it has mitigated itsrisk of currency losses on foreign monetary assets by sometimes borrowing inforeign currencies as a natural hedge. The Company is also subject to politicalrisk in certain of its foreign operations.

**Raw Material and Commodity Risks**

The primary raw materials used in the manufacture ofmost of the Company’s products are polypropylene resin, polyester fiber,polyethylene resin, and, to a lesser extent, rayon, tissue paper and cotton.The prices of polypropylene and polyethylene are a function of, among otherthings, manufacturing capacity, demand and the price of crude oil and naturalgas liquids. The Company has not historically hedged its exposure to rawmaterial increases, but has attempted to move more customer programs tocost-plus type contracts, which would allow the Company to pass-throughany cost increases in raw materials. Raw material prices as a percentage ofsales have been relatively stable, amounting to 46.6% in each of the firstquarters of 2003 and 2004.

To the extent the Company is notable to pass along price increases of raw materials, or to the extent any suchprice increases are delayed, the Company’s cost of goods sold would increaseand its operating profit would correspondingly decrease. By way of example, ifthe price of polypropylene were to rise $.01 per pound, and the Company was notable to pass along any of such increase to its customers, the Company wouldrealize a decrease of approximately $2.0 million, on an annualized basis,in its reported operating income. Material increases in raw material pricesthat cannot be passed on to customers could have a material adverse effect onthe Company’s results of operations and financial condition. See “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”included in Item 2 of Part 1 of this Quarterly Report on Form 10-Q.

**ITEM 4. CONTROLS AND PROCEDURES**

Under the direction of our Chief Executive Officer andChief Financial Officer, the Company evaluated its disclosure controls andprocedures as of the end of the period covered by this report. Based on thatevaluation, the Chief Executive Officer and Chief Financial Officer haveconcluded that these disclosure controls and procedures were effective as of April 3,2004.

There were no changes in theCompany’s internal controls over financial reporting during the quarter ended April 3,2004 that have materially affected, or are reasonably likely to materiallyaffect, the Company’s internal controls over financial reporting.

**PART II. OTHER INFORMATION**

**ITEM 1. LEGAL PROCEEDINGS**

On August 18, 2003 an affiliate (“Affiliate”) ofthe former Chief Executive Officer of the Company filed a claim seeking damagesassociated with a lease agreement and an alleged services agreement, betweenthe Company and the Affiliate, associated with the lease by the Company of itsformer corporate headquarters and the provision of shared administrativeservices. The damages sought in the complaint total $7.7 million, plusattorney’s fees. The Company believes that the ultimate outcome will not have amaterial adverse effect on its financial position or results of operations.

On April 23, 2002, theCompany filed a demand for arbitration against J&J. The primary issue inthe arbitration is the Company’s assertion that J&J breached a supplyagreement when J&J and certain of its affiliates failed to purchase certainproducts from the Company and to allow the Company a reasonable opportunity tocompete for certain sales. The arbitration is currently pending in the State ofNew York.

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**ITEM 2. CHANGES IN SECURITIES**

During the first three months of2004, $2.7 million of the Company’s Junior Notes were converted into approximately371,500 shares of the Company’s Class A common stock at the conversionrate of 137.14286 shares per $1,000 of Junior Notes.

**ITEM 3. DEFAULTS UPON SENIOR SECURITIES**

Not applicable.

**ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS**

Not applicable.

**ITEM 5. OTHER INFORMATION**

Not applicable.

**ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K**

**(a)**      Exhibits

Exhibits required to befiled with this Form 10-Q are listed below:
| **Exhibit  Number** | ** ** | **Document Description**                                                                                                                                                                                                                                                                                                                                              | ** ** |
|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| 4.1                 |       | Credit Agreement, dated as of April 27, 2004 among  Polymer Group, Inc., as Borrower, the Lenders referred to therein, Citicorp  North America, Inc., as Administrative Agent, Documentation Agent, First Lien  Collateral Agent, Second Lien Collateral Agent and Syndication Agent, and  Citigroup Global Markets Inc., as Sole Lead Arranger and Sole Bookrunner.* |       |
| 4.2                 |       | Security Agreement by Polymer Group, Inc., and the  domestic subsidiaries party thereto, as Grantors, and Citicorp North America,  Inc., as First Lien Collateral Agent and as Second Lien Collateral Agent,  dated as of April 27, 2004.*                                                                                                                            |       |
| 4.3                 |       | Pledge Agreement by Polymer Group, Inc., and the  domestic subsidiaries party thereto, as pledgors, and Citicorp North America,  Inc., as First Lien Collateral Agent and as Second Lien Collateral Agent,  dated as of April 27, 2004.*                                                                                                                              |       |
| 4.4                 |       | Guarantee Agreement dated as of April 27, 2004,  among each of the subsidiaries listed on Schedule I thereto of Polymer Group,  Inc., and Citicorp North America, Inc., as First Lien Collateral Agent,  Second Lien Collateral Agent and Administrative Agent.*                                                                                                      |       |
| 4.5                 |       | Certificate of Designation, Powers, Preferences and  Rights of 16% Series A Convertible Pay-In-Kind Preferred Stock of Polymer  Group, Inc.*                                                                                                                                                                                                                          |       |
| 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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*      Incorporatedby reference to the Registrant’s Current Report on Form 8-K filed on April 30,2004.

***(b)Reports on Form 8-K During theQuarter Ended April 3, 2004***

On March 30, 2004, the Company filed a report on Form 8-K,which included the press release for the period ended January 3, 2004. Alsoincluded in this filing are the condensed consolidated balance sheet and theconsolidated statement of operations for the fiscal fourth quarter ended January 3,2004, the ten months ended January 3, 2004 and the two months ended March 1,2003.

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**SIGNATURES**

Pursuant tothe requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.
|                    |   | Polymer Group, Inc. |
|-------------------------|--------|--------------------------|
|                    |   |                     |   |   |
|                    |   |                     |   |   |
| Date: May 17, 2004 |   | By:                      |   | /s/ James L. Schaeffer |
|                    |   |                     |   | James L. Schaeffer*Chief Executive Officer* |
|                    |   |                     |   | * * |
|                    |   |                     |   | * * |
| Date: May 17, 2004 |   | By:                      |   | /s/ Willis C. Moore III |
|                    |   |                     |   | Willis C. Moore III*Chief Financial Officer* |
|                    |   |                     |   | * * |

 

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