**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.20549**

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FORM 10-Q

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

 

**For the transition periodfrom               to               **

**Commissionfile number: 1-14330**

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POLYMER GROUP, INC.

(Exact name of registrantas specified in its charter)

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

 

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

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

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

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

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

 

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**POLYMER GROUP, INC.**

**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 |       | 21       |
| Item  3.                                        |       | Quantitative  and Qualitative Disclosures About Market Risk                                 |       | 31       |
| Item 4.                                         |       | Controls and Procedures                                                                     |       | 32       |
| **PART II.  OTHER INFORMATION**                 |       |                                                                                        |
| Item 1.                                         |       | Legal Proceedings                                                                           |       | 33       |
| Item  2.                                        |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                |       | 33       |
| Item 3.                                         |       | Defaults Upon  Senior Securities                                                            |       | 33       |
| Item  4.                                        |       | Submission  of Matters To a Vote of Security Holders                                        |       | 33       |
| Item 5.                                         |       | Other Information                                                                           |       | 33       |
| Item 6.                                         |       | Exhibits                                                                                    |       | 33       |
| Signatures                                           |       | 34                                                                                          |

 

1

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

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

**SafeHarbor-Forward-Looking Statements**

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

Various statements contained in this report, includingthose that express a belief, expectation or intention, as well as those thatare not statements of historical fact are, or may be deemed to be, forward-lookingstatements within the meaning of Section 27A of the Securities Act of1933, as amended, and Section 21E of the Securities Exchange Act of 1934,as amended. These forward-looking statements speak only as of the date ofthis report. Unless required by law, the Company does not undertake any obligationto update these statements and cautions against any undue reliance on them.These forward-looking statements are based on current expectations andassumptions about future events. While management considers these expectationsand assumptions to be reasonable, they are inherently subject to significantbusiness, economic, competitive, regulatory and other risks, contingencies anduncertainties, most of which are difficult to predict and many of which arebeyond the Company’s control. There can be no assurances that these events willoccur or that the Company’s results will be as estimated.

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

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

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

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

·       inabilityto meet existing debt covenants;

·       informationand technological advances;

·       changesin environmental laws and regulations;

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

·       domesticand foreign competition;

·       relianceon major customers and suppliers; and

·       risksrelating to operations in foreign jurisdictions.

2

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**ITEM 1.**                FINANCIALSTATEMENTS

**POLYMER GROUP, INC.CONSOLIDATED BALANCE SHEETS(In Thousands, Except Share Data)**
| ** **                                                                                                                                                       | ** ** | **April 2,  2005** | ** ** | **January 1,  2005** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|---------------------------|------------|
| ** **                                                                                                                                                       | ** ** | **(Unaudited)**         | ** ** | ** **                | ** ** |
| **ASSETS**                                                                                                                                                       |       |                    |       |                      |       |   |   |
| Current assets:                                                                                                                                                  |       |                    |       |                      |       |   |   |
| Cash and cash  equivalents                                                                                                                                       |       |                    | $          | 21,618                    |       |   | $ | 41,296 |   |
| Accounts receivable, net                                                                                                                                         |       |                    | 132,893    |                      |       | 112,286 |   |
| Inventories                                                                                                                                                      |       |                    | 112,466    |                      |       | 106,349 |   |
| Deferred income taxes                                                                                                                                            |       |                    | 233        |                      |       | 226 |   |
| Other current assets                                                                                                                                             |       |                    | 39,995     |                      |       | 37,140 |   |
| Total current assets                                                                                                                                             |       |                    | 307,205    |                      |       | 297,297 |   |
| Property, plant and  equipment, net                                                                                                                              |       |                    | 395,858    |                      |       | 402,603 |   |
| Intangibles and loan  acquisition costs, net                                                                                                                     |       |                    | 47,340     |                      |       | 48,819 |   |
| Deferred income taxes                                                                                                                                            |       |                    | 1,470      |                      |       | 1,489 |   |
| Other assets                                                                                                                                                     |       |                    | 5,083      |                      |       | 3,145 |   |
| Total assets                                                                                                                                                     |       |                    | $          | 756,956                   |       |   | $ | 753,353 |   |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                                                                   |       |                    |       |                      |       |   |   |
| Current liabilities:                                                                                                                                             |       |                    |       |                      |       |   |   |
| Short-term borrowings                                                                                                                                            |       |                    | $          | 6,574                     |       |   | $ | 6,981 |   |
| Accounts payable                                                                                                                                                 |       |                    | 61,683     |                      |       | 63,773 |   |
| Accrued liabilities                                                                                                                                              |       |                    | 38,983     |                      |       | 33,365 |   |
| Income taxes payable                                                                                                                                             |       |                    | 6,992      |                      |       | 2,427 |   |
| Current portion of  long-term debt                                                                                                                               |       |                    | 3,019      |                      |       | 3,413 |   |
| Total current  liabilities                                                                                                                                       |       |                    | 117,251    |                      |       | 109,959 |   |
| Long-term debt                                                                                                                                                   |       |                    | 402,806    |                      |       | 403,560 |   |
| Deferred income taxes                                                                                                                                            |       |                    | 64,546     |                      |       | 65,468 |   |
| Other noncurrent  liabilities                                                                                                                                    |       |                    | 21,537     |                      |       | 27,319 |   |
| Total liabilities                                                                                                                                                |       |                    | 606,140    |                      |       | 606,306 |   |
| Minority interests                                                                                                                                               |       |                    | 15,557     |                      |       | 14,912 |   |
| 16% Series A  convertible pay-in-kind preferred shares—58,251 and 52,716 shares issued and  outstanding at April 2, 2005 and January 1, 2005 |       |                    | 60,639     |                      |       | 58,286 |   |
| Shareholders’ equity:                                                                                                                                       |       |                    |       |                      |       |   |   |
| Class A common  stock—10,214,399 and 10,130,477 shares issued and outstanding at  April 2, 2005 and January 1, 2005, respectively            |       |                    | 101        |                      |       | 101 |   |
| Class B convertible  common stock—176,826 and 193,390 shares issued and outstanding at  April 2, 2005 and January 1, 2005, respectively      |       |                    | 2          |                      |       | 2 |   |
| Class C convertible  common stock—33,402 and 54,194 shares issued and outstanding at April 2,  2005 and January 1, 2005, respectively        |       |                    | 1          |                      |       | 1 |   |
| Class D convertible  common stock—0 shares issued and outstanding                                                                                      |       |                    | —     |                      |       | — |   |
| Class E convertible  common stock—0 shares issued and outstanding                                                                                      |       |                    | —     |                      |       | — |   |
| Additional paid in capital                                                                                                                                       |       |                    | 77,635     |                      |       | 77,219 |   |
| Retained earnings  (deficit)                                                                                                                                     |       |                    | (31,012    | )                         |       | (33,820 | ) |
| Accumulated other  comprehensive income                                                                                                                          |       |                    | 27,893     |                      |       | 30,346 |   |
| Total shareholders’  equity                                                                                                                                 |       |                    | 74,620     |                      |       | 73,849 |   |
| Total liabilities and shareholders’ equity                                                                                                                  |       |                    | $          | 756,956                   |       |   | $ | 753,353 |   |

 

See Accompanying Notes.

3

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**POLYMER GROUP, INC.CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)Three Months Ended April 2, 2005 and April 3, 2004(In Thousands, Except Per Share Data)**
| ** **                                       | ** ** | **Three Months  Ended  April 2, 2005** | ** ** | **Three Months  Ended  April 3, 2004** | ** ** |
|--------------------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------|------------|
| Net sales                                        |       |                                                  | $          | 244,361                                               |       |   |   | $ | 206,242 |   |   |
| Cost of goods  sold                              |       |                                                  | 200,444    |                                                  |       |   | 168,266 |   |   |
| Gross profit                                     |       |                                                  | 43,917     |                                                  |       |   | 37,976 |   |   |
| Selling, general  and administrative expenses    |       |                                                  | 27,467     |                                                  |       |   | 26,633 |   |   |
| Plant realignment  costs                         |       |                                                  | 4          |                                                  |       |   | 584 |   |   |
| Operating income                                 |       |                                                  | 16,446     |                                                  |       |   | 10,759 |   |   |
| Other expense (income):                          |       |                                                  |       |                                                  |       |   |   |   |   |
| Interest expense, net                            |       |                                                  | 7,866      |                                                  |       |   | 15,177 |   |   |
| Minority interests                               |       |                                                  | 934        |                                                  |       |   | 482 |   |   |
| Foreign currency and other                       |       |                                                  | (315       | )                                                     |       |   | 1,385 |   |   |
|                                             |       |                                                  | 8,485      |                                                  |       |   | 17,044 |   |   |
| Income (loss)  before income tax expense         |       |                                                  | 7,961      |                                                  |       |   | (6,285 | ) |   |
| Income tax  expense                              |       |                                                  | 2,795      |                                                  |       |   | 2,485 |   |   |
| Net income (loss)                                |       |                                                  | 5,166      |                                                  |       |   | (8,770 | ) |   |
| Accrued dividends  on PIK preferred shares       |       |                                                  | 2,358      |                                                  |       |   | — |   |   |
| Income (loss)  applicable to common shareholders |       |                                                  | $          | 2,808                                                 |       |   |   | $ | (8,770 | ) |   |
| Income (loss) per common  share:                 |       |                                                  |       |                                                  |       |   |   |   |   |
| Basic                                            |       |                                                  | $          | 0.27                                                  |       |   |   | $ | (1.00 | ) |   |
| Diluted                                          |       |                                                  | $          | 0.27                                                  |       |   |   | $ | (1.00 | ) |   |

 

See Accompanying Notes.

4

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**POLYMER GROUP, INC.**

**CONSOLIDATEDSTATEMENT OF CHANGES INSHAREHOLDERS’EQUITY AND COMPREHENSIVE INCOME (LOSS) (Unaudited)**

**For the ThreeMonths Ended April 2, 2005**

**(In Thousands)**
| ** **                                                            | ** ** | **Common  Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Retained  Earnings/  (Deficit)** | ** ** | **Accumulated  Other  Comprehensive  Income/  (Loss)** | ** ** | **Total** | ** ** | ** ** | **Comprehensive  Income/(Loss)** | ** ** |
|-----------------------------------------------------------------------|------------|-------------------|------------|----------------------------------|------------|------------------------------------|------------|--------------------------------------------------------|------------|-----------|------------|------------|----------------------------------|------------|
| Balance,  January 1, 2005, audited                               |       |              | $          | 104                              |       |                               | $          | 77,219                                                 |       | $         | (33,820    | )          |                             | $          | 30,346 |   |   | $ | 73,849 |   |   |   |   |   |   |
| Net income                                                            |       |              | —     |                             |       | —                             |       | 5,166                                                  |       |      | —     |       |                             | 5,166      |   |   |   | $ | 5,166 |   |   |
| Accrued dividends  on PIK preferred shares                            |       |              | —     |                             |       | —                             |       | (2,358                                                 | )          |      | —     |       |                             | (2,358     | ) |   |   | — |   |   |
| Currency  translation adjustment                                      |       |              | —     |                             |       | —                             |       | —                                                 |       |      | (4,123     | )          |                             | (4,123     | ) |   |   | (4,123 | ) |   |
| Cash flow hedge  adjustment, net of reclassification adjustment       |       |              | —     |                             |       | —                             |       | —                                                 |       |      | 1,670      |       |                             | 1,670      |   |   |   | 1,670 |   |   |
| Compensation  recognized on stock options and restricted stock grants |       |              | —     |                             |       | 411                                |       | —                                                 |       |      | —     |       |                             | 411        |   |   |   | — |   |   |
| Conversion of PIK  preferred shares to Class A common stock      |       |              | —     |                             |       | 5                                  |       | —                                                 |       |      | —     |       |                             | 5          |   |   |   | — |   |   |
| Balance, April 2,  2005                                          |       |              | $          | 104                              |       |                               | $          | 77,635                                                 |       | $         | (31,012    | )          |                             | $          | 27,893 |   |   | $ | 74,620 |   |   |   | $ | 2,713 |   |   |

 

See Accompanying Notes.

5

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**POLYMER GROUP, INC.CONSOLIDATED STATEMENTS OFCASH FLOW (Unaudited)(In Thousands)**
| ** **                                                                                           | ** ** | **Three Months  Ended  April 2, 2005** | ** ** | **Three Months  Ended  April 3, 2004** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------|------------|
| Operating activities:                                                                                |       |                                                  |       |                                                  |       |   |   |   |   |
| Net income (loss)                                                                                    |       |                                                  | $          | 5,166                                                 |       |   |   | $ | (8,770 | ) |   |
| Adjustments to  reconcile net income (loss) to net cash provided by (used in) operating  activities: |       |                                                  |       |                                                  |       |   |   |   |   |
| Deferred income taxes                                                                                |       |                                                  | 1,545      |                                                  |       |   | (1,729 | ) |   |
| Depreciation and amortization                                                                        |       |                                                  | 13,662     |                                                  |       |   | 13,149 |   |   |
| Noncash interest and compensation                                                                    |       |                                                  | 411        |                                                  |       |   | 1,104 |   |   |
| Changes  in operating assets and liabilities, net of effect of acquisitions:                         |       |                                                  |       |                                                  |       |   |   |   |   |
| Accounts receivable, net                                                                             |       |                                                  | (22,592    | )                                                     |       |   | (7,193 | ) |   |
| Inventories                                                                                          |       |                                                  | (7,725     | )                                                     |       |   | (6,835 | ) |   |
| Other current assets                                                                                 |       |                                                  | (3,210     | )                                                     |       |   | (163 | ) |   |
| Accounts payable and accrued liabilities                                                             |       |                                                  | 1,950      |                                                  |       |   | 2,737 |   |   |
| Other, net                                                                                           |       |                                                  | 2,771      |                                                  |       |   | 656 |   |   |
| Net cash provided by (used in)  operating activities                                                 |       |                                                  | (8,022     | )                                                     |       |   | (7,044 | ) |   |
| Investing activities:                                                                                |       |                                                  |       |                                                  |       |   |   |   |   |
| Purchases of property, plant and equipment                                                           |       |                                                  | (10,095    | )                                                     |       |   | (4,504 | ) |   |
| Proceeds from sale of assets                                                                         |       |                                                  | 354        |                                                  |       |   | 783 |   |   |
| Net cash provided by (used in) investing activities                                                  |       |                                                  | (9,741     | )                                                     |       |   | (3,721 | ) |   |
| Financing activities:                                                                                |       |                                                  |       |                                                  |       |   |   |   |   |
| Proceeds from issuance of debt                                                                       |       |                                                  | 744        |                                                  |       |   | 18,500 |   |   |
| Repayment of debt                                                                                    |       |                                                  | (2,299     | )                                                     |       |   | (13,803 | ) |   |
| Loan acquisition costs and other                                                                     |       |                                                  | (15        | )                                                     |       |   | — |   |   |
| Net cash provided by (used in)  financing activities                                                 |       |                                                  | (1,570     | )                                                     |       |   | 4,697 |   |   |
| Effect of  exchange rate changes on cash                                                             |       |                                                  | (345       | )                                                     |       |   | (102 | ) |   |
| Net increase  (decrease) in cash and cash equivalents                                                |       |                                                  | (19,678    | )                                                     |       |   | (6,170 | ) |   |
| Cash and cash  equivalents at beginning of period                                                    |       |                                                  | 41,296     |                                                  |       |   | 21,336 |   |   |
| Cash and cash  equivalents at end of period                                                          |       |                                                  | $          | 21,618                                                |       |   |   | $ | 15,166 |   |   |

 

See Accompanying Notes.

6

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

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

*Principles ofConsolidation*

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

The accompanying Consolidated Financial Statementsinclude the accounts of Polymer Group, Inc. and all majority-ownedsubsidiaries after elimination of all significant intercompany accounts andtransactions. The accounts of all foreign subsidiaries have been included onthe basis of fiscal periods ended three months or less prior to the dates ofthe consolidated balance sheets. All amounts are presented in U.S. dollars,unless otherwise noted. 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 1, 2005. In the judgment of management, theseunaudited interim Consolidated Financial Statements include all adjustments ofa normal recurring nature and accruals necessary for a fair presentation ofsuch statements. The Consolidated Balance Sheet data included herein as ofJanuary 1, 2005 has been derived from the audited financial statements includedin the Company’s Annual Report on Form 10-K.

*Reclassification*

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

*Revenue Recognition*

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

*Accumulated OtherComprehensive Income*

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

7

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

*New AccountingPronouncements*

In May 2004, the FASB issued FASB Staff Position No. 106-2,“Accounting and Disclosure Requirements Related to the Medicare PrescriptionDrug, Improvement and Modernization Act of 2003” (“FSP 106-2”). FSP 106-2permits a sponsor of a postretirement health care plan that provides aprescription drug benefit to make a one-time election to defer accounting forthe effects of the Medicare Prescription Drug, Improvement and ModernizationAct of 2003 (the “Act”), which was signed into law on December 8, 2003.The Act introduced a prescription drug benefit under Medicare and federalsubsidies to sponsors of retiree health care benefit plans that provide abenefit that is at least actuarially equivalent to that of Medicare. Aspermitted under FSP 106-2, the Company made a one-time election to deferaccounting for the effect of the Act and as more fully explained in Note 9 tothe Consolidated Financial Statements, in December 2004 the Companyapproved plan amendments curtailing or eliminating various postretirementbenefits in the U.S. As a result, the amounts included in the ConsolidatedFinancial Statements related to the Company’s postretirement benefit plans donot reflect the effects of the Act.

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

In December 2004, the FASBissued a revision to SFAS No. 123, “Accounting for Stock-Based Compensation.”The revision, entitled SFAS No. 123R, “Share-Based Payment,” is effective forall awards granted, modified, repurchased or canceled after June 15, 2005 andrequires a public entity to initially measure the cost of employee servicesreceived in exchange for an award of equity instruments based on the grant-datefair value of the award and to remeasure the fair of that award subsequently ateach reporting date. Changes in the fair value during the requisite serviceperiod will be recognized as compensation cost over the period. The grant datefair value is to be estimated using option-pricing models adjusted for theunique characteristics of those instruments.

**Note2.   Concentration of Credit Risks and Accounts Receivable SecuritizationAgreements**

Accounts receivable potentially expose the Company toconcentration of credit risk, as defined by SFAS No. 105, “Disclosure ofInformation about Financial Instruments with Off-Balance Sheet Risk andFinancial Instruments with Concentration of Credit Risk.” Sales to the Procter &Gamble Company (“P&G”) accounted for approximately 12% of the Company’ssales in the first quarter of both 2005 and 2004. The Company provides credit inthe normal course of business and performs ongoing credit evaluations on itscustomers’ financial condition as deemed necessary, but generally does notrequire collateral to support such receivables. Customer balances areconsidered past due based on contractual terms and the Company does not accrueinterest on the past due balances. The allowance for doubtful accounts wasapproximately $10.4 million and $10.9 million at April 2, 2005 and January 1,2005, respectively, which management believes is adequate to provide for creditloss in the normal course of business, as well as losses for customers who havefiled for protection under bankruptcy laws. Once management determines that thereceivables are not recoverable, the amounts are removed from the financialrecords along with the corresponding reserve balance.

8

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

On November 15, 2004,the Company entered into a factoring agreement to sell without recourse,certain receivables to an unrelated third-party financial institution. Underthe terms of the factoring agreement, the maximum amount of outstandingadvances at any one time is $15.0 million, which limitation is subject tochange based on the level of eligible receivables, restrictions onconcentrations of receivables and the historical performance of the receivablessold. During the first quarter of 2005, approximately $31.4 million ofreceivables had been sold under the terms of the factoring agreement. The saleof these receivables accelerated the collection of the Company’s cash, reducedcredit exposure and lowered the Company’s borrowing costs. Sales of accountsreceivable are reflected as a reduction of *Accountsreceivable, net* in the Consolidated Balance Sheets and a gain or lossis reflected in the Consolidated Statements of Operations on such sale, as theymeet the applicable criteria of SFAS No. 140, “Accounting for Transfersand Servicing of Financial Assets and Extinguishment of Liabilities” (“SFAS No. 140”).The amount due from the factoring company, net of advances received from thefactoring company, was $5.6 million and $7.4 million at April 2, 2005and January 1, 2005, respectively, and is shown in *Other current assets* in the ConsolidatedBalance Sheets. The Company pays factoring fees associated with the sale ofreceivables based on the dollar value of the receivables sold. Costs related tothis program for the first quarter of 2005 were $0.2 million and areincluded in *Other expense, net* inthe Consolidated Statement of Operations.

**Note 3.   Business Restructuring**

The Company continued its restructuring initiatives in2004 by curtailing production of certain of its European assets and eliminatingseveral production lines in the Canadian operations of its Oriented PolymersDivision. The European and Canadian restructuring efforts in 2004 included thereduction of approximately 160 positions.

Accruedcosts for restructuring efforts are included in *Accruedliabilities* in the Consolidated Balance Sheets. A summary of thebusiness restructuring activity during the first three months of fiscal 2005 ispresented in the following table (in thousands):
| Balance accrued  at beginning of year |   | $    | 561    |   |
|---------------------------------------|--------|------|--------|--------|
| 2005 plant  realignment costs         |   | 4    |   |
| Cash payments                         |   | (322 | )      |
| Adjustments                           |   | (3   | )      |
| Balance accrued at end  of period     |   | $    | 240    |   |

 

**Note 4.   Inventories**

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

 

9

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

**Note 5.   Intangiblesand Loan Acquisition Costs**

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

 

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

 

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

**Note 6.   Accrued Liabilities**

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

10

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

**Note 7.   Debt**

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

 

*Senior Secured BankFacility*

The Company’s Senior Secured Bank Facility (the “BankFacility”), which was entered into on April 27, 2004, consists of a$50.0 million secured revolving credit facility, a $300.0 millionsenior secured first lien term loan and a $125.0 million senior securedsecond lien term loan. The proceeds therefrom were used to fully repayindebtedness under the Company’s previous Restructured Credit Facility and payrelated fees and expenses.

All borrowings under the Bank Facility are U.S. dollardenominated and are guaranteed, on a joint and several basis, by each and allof the direct and indirect domestic subsidiaries of the Company and supportedby the pledge of stock of certain non-domestic subsidiaries of the Company. TheBank Facility and the related guarantees are secured by: (i) a lien onsubstantially all of the assets of the Company, its domestic subsidiaries andcertain of its non-domestic subsidiaries; (ii) a pledge of all or aportion of the stock of the domestic subsidiaries of the Company and of certainnon-domestic subsidiaries of the Company; and (iii) a pledge of certainsecured intercompany notes. Commitment fees under the Bank Facility are equalto 0.50% of the daily unused amount of the revolving credit commitment. TheBank Facility limits restricted payments to $5.0 million, including cashdividends, in the aggregate since the effective date of the Bank Facility. TheBank Facility contains covenants and events of default customary for financingsof this type, including leverage and interest expense coverage covenants. At April 2,2005, the Company was in compliance with all such covenants and expects toremain in compliance through fiscal 2005. The loan requires the Company toapply a percentage of proceeds from excess cash flows, as defined by the BankFacility and determined based on year-end results, to reduce its thenoutstanding balances under the Bank Facility. Since the amounts of excess cashflows for future periods is not determinable, only the mandatory payments of $750.0thousand per quarter have been classified as a current liability.

11

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

The interest rate applicable to borrowings under theBank Facility is based on three-month LIBOR plus a specified margin. Theapplicable margin for borrowings under the revolving credit facility is 300basis points, the margin for the first lien term loan is 325 basis points andthe margin for the second-lien term loan is 625 basis points. Although notanticipated, the Company may elect to use an alternate base rate for itsborrowings under the revolving credit facility ranging from 2.25% to 6.25% withsuch alternate base rates including a margin based on the Company’s totalleverage ratio. The Company had no outstanding borrowings under the revolvingcredit facility at either April 2, 2005 or January 1, 2005. Therevolving portion of the credit facility matures on April 27, 2009.

In accordance with the terms of the Bank Facility, theCompany entered a cash flow hedge agreement, effectively converting$212.5 million of notional principal amount of debt from a variable LIBORrate to a fixed LIBOR rate of 3.383%. The cash flow hedge agreement terminateson May 8, 2007 and is described more fully in Note 12 to theConsolidated Financial Statements.

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

*Restructured CreditFacility*

Until it was refinanced onApril 27, 2004, the Company’s Restructured Credit Facility consisted ofsecured revolving credit borrowings with aggregate commitments of up to $50.0 millionand aggregate term loans and term letters of credit of $435.3 million. Allborrowings under the Restructured Credit Facility were U.S. dollar denominatedand were guaranteed, on a joint and several basis, by each and all of the directand indirect domestic subsidiaries of the Company and certain non-domesticsubsidiaries of the Company. The Restructured Credit Facility containedcovenants and events of default customary for financings of this type,including leverage, senior leverage, interest coverage and adjusted interestcoverage. The interest rate applicable to borrowings under the RestructuredCredit Facility was based on a specified base rate or a specified Eurodollarbase rate, at the Company’s option, plus a specified margin. The effective rateon the term loans was 12.00%, which was the cap on the sum of the interestpayable in respect of term loans or term letters of credit plus the seniorleverage ratio fee. The Company’s average borrowings under the revolving creditagreement, which had an effective interest rate of 6.75%, were$5.5 million for the period from January 4, 2004 to April 3,2004.

*SubsidiaryIndebtedness*

Nanhai has a short-term credit facility (denominatedin U.S. dollars and Chinese rmb) with a financial institution in China which isscheduled to mature in June 2005. The amount of outstanding indebtednessunder the facility was $5.8 million (at an annual average rate ofapproximately 4.49%) at April 2, 2005 and January 1, 2005. The Nanhaiindebtedness is guaranteed 100% by the Company and to support this guarantee, aletter of credit has been issued by the Company’s agent bank in the amount of$7.1 million. In addition, Nanhai had outstanding bankers’ acceptancestotaling $0.7 million and $1.2 million at April 2, 2005 and January 1,2005, respectively. These notes, which are denominated in Chinese rmb, maturewithin 

12

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

three months and aresubject to a 0.5% transaction fee. These borrowings are shown as *Short-term borrowings* in the ConsolidatedBalance Sheets.

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

**Note 8.**   IncomeTaxes

The Company recognized income tax expense of $2.8million for the three months ended April 2, 2005 on consolidated incomebefore income taxes of $8.0 million. This income tax expense approximates theU.S. federal statutory rate. However, the net income tax is impacted by foreignwithholding taxes, for which tax credits are not anticipated, U.S. state incometaxes and foreign taxes calculated at statutory rates less than the U.S.federal statutory rate.

During the three months ended April 3, 2004, theCompany recognized an income tax expense of $2.5 million on a consolidatedpre-tax loss of $6.3 million. The income tax expense was primarily due to foreignwithholding taxes, for which tax credits are not anticipated, U.S. state incometaxes, and no significant income tax benefit recognized for losses incurred inthe U.S. and certain foreign jurisdictions.

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

**Note9.**   Pension Benefits and PostretirementPlans

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

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

 

As of April 2, 2005, the Company contributed $3.6million to its pension plans for the 2005 benefit year. The Company presentlyanticipates contributing an additional $2.4 million to fund its pension plansin 2005 for a total of $6.0 million.

On December 8, 2003,the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”)was enacted and introduced a prescription drug benefit under Medicare as wellas a subsidy to 

13

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

sponsorsof retiree health care benefit plans. As permitted under FSP 106-1, the Companymade a one-time election to defer accounting for the effect of the Act untilthe authoritative guidance on the accounting for the federal subsidy under theAct is issued. Given that the Company curtailed most of its U.S. postretirementbenefit plans in 2004, it will likely not be eligible to receive the federalsubsidy under the Act. Accordingly, any measures of the periodic benefit cost,benefit obligation and related disclosures for the U.S. and otherpostretirement benefit plans do not reflect the effect of the Act.

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

*Stock Option Plan*

On December 11, 2003, the Company awarded theinitial non-qualified stock options available under the 2003 Stock Option Plan(the “2003 Plan”). The 2003 Plan was approved by the Company’s Board ofDirectors and shareholders and is administered by the Compensation Committee ofthe Board of Directors. The options have a ten-year life and vest, based on theachievement of various service and financial performance criteria, over afour-year period beginning January 4, 2004. As of April 2, 2005,400,000 shares of the Company’s Class A common stock were reserved forissuance under the 2003 Plan, of which 174,687 stock options are available forfuture grants.

The Company has elected to account for the 2003 Planin accordance with the intrinsic value method as prescribed by APB No. 25.All options granted under the 2003 Plan had an exercise price equal to themarket value of the underlying common stock on the date of grant. However, as apercentage of the options vest based on achievement of financial performancecriteria, compensation costs are recognized over the performance period when itbecomes probable that such performance criteria will be achieved.

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

*Restricted StockPlan*

In May 2004, theCompany’s shareholders approved the 2004 Restricted Stock Plan for Directors(the “Restricted Plan”), which expires in 2014, for issuance of restrictedshares to Directors of the Company, as defined in the Restricted Plan. TheRestricted Plan approved for issuance 200,000 restricted shares and isadministered by a committee of the Company’s Board of Directors not eligible toreceive restricted shares under the Restricted Plan. In the first quarter of2005 and Fiscal 2004, the Company awarded 492 and 18,720 restricted shares,respectively, to members of the Company’s Board of Directors for their Boardservice to the Company. The cost associated with the restricted stock grantstotaled $10,000 for the first quarter of fiscal 2005 and 2004 and was includedin *Selling, general and administrative expenses*in the Consolidated Statements of Operations. As of April 2, 2005, 155,788shares of the Company’s Class A common stock are available for futuregrants.

14

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

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

In conjunction with the Company’s refinancing in April 2004of the Restructured Credit Facility, the Company’s majority shareholderexchanged approximately $42.6 million in aggregate principal amount of theJunior Notes it controlled for 42,633 shares of the Company’s 16% Series AConvertible Pay-in-kind Preferred Shares (the “PIK Preferred Shares”). Also,during 2004, $10.1 million in aggregate principal amount of the Company’sJunior Notes were exchanged for 10,083 shares of the Company’s PIK PreferredShares.

The dividends on the PIK Preferred Shares accrue at anannual rate of 16% and are payable semi-annually in arrears on each January 1and July 1, commencing with July 1, 2004, and are payable at theoption of the Company; (i) through the issuance of additional shares ofPIK Preferred Stock; (ii) in cash; or (iii) in a combination thereof.Dividends are cumulative and accrue from the most recent dividend payment dateto which dividends have been paid or, if no dividends have been paid, from thedate of original issuance.

On June 30, 2012, the Company must redeem all ofthe PIK Preferred Shares then outstanding at a price equal to $1,000 per shareplus $1,000 per share for all unpaid dividends thereon whether or not declared,which amount will be payable by the Company (“mandatory redemption price”), atthe option of the Company, (i) in cash; (ii) through the issuance ofshares of Class A Common Stock; or (iii) through a combinationthereof. If paid in stock, the number of shares to be delivered by the Companywill be the mandatory redemption price (as defined earlier) divided by the thencurrent market price of a share of Class A Common Stock.

At any time prior to June 30, 2012, the holdersof the PIK Preferred Shares may elect to convert any or all of their PIK PreferredShares into shares of the Company’s Class A Common Stock at a conversionprice equal to $7.29 per share. Also, at any time prior to June 30, 2012,provided certain conditions have been met, the Company may elect to redeem theshares, which redemption price may be paid by the Company, at the option of theCompany; (i) in cash; (ii) through the issuance of shares of Class ACommon Stock; or (iii) through a combination thereof. If paid in stock,the number of shares to be delivered by the Company will be the optionalredemption price (as defined by the preferred stock agreement) divided by thethen current market price of a share of Class A Common Stock.

In January 2005, theCompany declared a dividend of approximately $5.6 million, issuable in the formof approximately 5,540 additional PIK Preferred Shares to holders of record asof December 15, 2004. For the quarter ended April 2, 2005, theCompany accrued dividends of approximately $2.4 million. The Companyexpects to settle this liability in the form of additional PIK Preferred Sharesand, accordingly, has classified the accrued dividends as a component of theCompany’s PIK Preferred Shares.

**Note12.**   Derivative and Other FinancialInstruments and Hedging Activities

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

15

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

The Company uses interest-rate derivative instrumentsto manage its exposure on its debt instruments. As indicated in Note 7 to theConsolidated Financial Statements, to mitigate its interest rate exposure asrequired by the Bank Facility, the Company entered into a pay-fixed,receive-variable interest rate swap, thus effectively converting the interestpayments associated with approximately 50% of the debt to fixed amounts at aLIBOR rate of 3.383%. As of April 2, 2005, the notional amount of thesecontracts, which expire on May 8, 2007, was $212.5 million. Cashsettlements are made quarterly and the floating rate is reset quarterly,coinciding with the reset dates of the Bank Facility debt.

In accordance with SFAS No. 133, the Companydesignated the swap as a cash flow hedge of the variability of interestpayments under the senior secured term loans and applied the shortcut method ofassessing effectiveness. The agreement’s terms ensure complete effectiveness inoffsetting the interest component associated with the Bank Facility. As such,there is no ineffectiveness and changes in the fair value of the swap arerecorded to accumulated other comprehensive income (loss). The fair value ofthe interest rate swap of $3.1 million as of April 2, 2005 and $0.3million as of January 1, 2005 was based on current settlement values andwas included in *Other noncurrent assets* in theConsolidated Balance Sheets.

The impact of these swapson *Interest expense, net*for the threemonths ended April 2, 2005 was an increase of $0.4 million. The Companydid not have any interest rate swap agreements during the first quarter of2004.

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

Thefollowing is a reconciliation of basic net earnings per common share to dilutednet earnings per common share for the quarter ended April 2, 2005 (inthousands, except per share data):
| ** **                                                                        | ** ** | **Earnings Available  to Common  Shareholders  (EPS Numerator)** | ** ** | **Average Shares  Outstanding  (EPS Denominator)** | ** ** | **Earnings Per  Common Share** | ** ** |
|-----------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|------------------------------------------|------------|
| Basic                                                                             |       |                                                                            | $          | 2,808                                                        |       |                                     |       | 10,419 |   |   |   | $ | 0.27 |   |   |
| Adjustments:                                                                      | ** ** |                                                                            |       |                                                         |       |                                     |       |   |   |   |   |   |   |
| PIK preferred  shares, including accrued dividend                                 |       |                                                                            | 2,358      |                                                         |       |                                     | 8,150      |   |   |   |   |   |   |
| Potential shares  exercisable under stock option and restricted stock grant plans |       |                                                                            |       |                                                         |       |                                     | 225        |   |   |   |   |   |   |
| Less: shares  which could be repurchased under treasury stock method              |       |                                                                            |       |                                                         |       |                                     | (56        | ) |   |   |   |   |   |
| Diluted                                                                           |       |                                                                            | $          | 5,166                                                        |       |                                     |       | 18,738 |   |   |   | $ | 0.27 |   |   |

 

No calculations have been presented for the threemonths ended April 3, 2004 as the impact of such calculations areanti-dilutive. Average shares outstanding for the three months ended April 3,2004 were 8,786,997.

16

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

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

 

All classes of the common stockhave similar voting rights. In accordance with the Amended and RestatedCertificate of Incorporation, Class C common stock has special rights toannual dividends and all shares of Class B, C, D and E common stock may beconverted into an equal number of shares of Class A common stock. See Note11 to the Consolidated Financial Statements, for additional information relatedto the Company’s PIK Preferred Shares.

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

**Note 14.**   Segment Information

The Company’s reportable segments consist of itsprimary operating divisions—Nonwovens and Oriented Polymers. This reflects howthe overall business is managed on a regular basis by the Company’s seniormanagement and the Board of Directors. Each of these businesses sells todifferent end-use markets, such as hygiene, medical, wipes and industrial andspecialty markets. Sales to P&G accounted for more than 10% of the Company’ssales in each of the periods presented. Sales to this customer are reportedprimarily in the Nonwovens segment and the loss of these sales would have amaterial adverse effect on this segment. The Company recorded charges and/orincome in the Consolidated Statements of Operations during the three months endedApril 2, 2005 and the three months ended April 3, 2004 relating toplant realignment costs which have not been allocated to the segment data.

17

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

Financialdata by segment is as follows (in thousands):
| ** **                                                              | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                              | ** ** | **April  2,  2005**    | ** ** | **April 3,  2004** | ** ** |
| **Net  sales**                                                          |       |                             |       |   |   |
| Nonwovens                                                               |       | $                                | 194,536    |   | $ | 163,713 |   |
| Oriented Polymers                                                       |       | 49,825                           |       | 42,529 |   |
| Eliminations                                                            |       | —                           |       | — |   |
|                                                                    |       | $                                | 244,361    |   | $ | 206,242 |   |
| **Operating  income**                                                   |       |                             |       |   |   |
| Nonwovens                                                               |       | $                                | 16,723     |   | $ | 11,935 |   |
| Oriented Polymers                                                       |       | 5,263                            |       | 3,538 |   |
| Unallocated Corporate                                                   |       | (5,601                           | )          | (4,476 | ) |
| Eliminations                                                            |       | 65                               |       | 346 |   |
|                                                                    |       | 16,450                           |       | 11,343 |   |
| Plant realignment costs                                                 |       | (4                               | )          | (584 | ) |
|                                                                    |       | $                                | 16,446     |   | $ | 10,759 |   |
| **Depreciation  and amortization expense included in operating income** |       |                             |       |   |   |
| Nonwovens                                                               |       | $                                | 11,098     |   | $ | 10,573 |   |
| Oriented Polymers                                                       |       | 2,101                            |       | 2,074 |   |
| Unallocated Corporate                                                   |       | 23                               |       | 377 |   |
| Eliminations                                                            |       | (64                              | )          | (347 | ) |
|                                                                    |       | $                                | 13,158     |   | $ | 12,677 |   |
| **Capital  spending**                                                   |       |                             |       |   |   |
| Nonwovens                                                               |       | $                                | 9,998      |   | $ | 4,354 |   |
| Oriented Polymers                                                       |       | 97                               |       | 150 |   |
| Corporate                                                               |       | —                           |       | — |   |
|                                                                    |       | $                                | 10,095     |   | $ | 4,504 |   |
|                                                                         |            |                                  |            |  |  |  |  |  |  |

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

 

18

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

GeographicData:

Geographicdata for the Company’s operations, based on the geographic region from whichthe sale is made is presented in the following table (in thousands):
| ** **                                                               | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                               | ** ** | **April 2,  2005**          | ** ** | **April 3,  2004** | ** ** |
| **Net sales:**                                                      |       |                             |       |   |   |
| United States                                                            |       | $                                | 113,422    |   | $ | 92,144 |   |
| Canada                                                                   |       | 30,968                           |       | 28,592 |   |
| Europe                                                                   |       | 50,684                           |       | 50,384 |   |
| Asia                                                                     |       | 11,010                           |       | 6,818 |   |
| Latin America                                                            |       | 38,277                           |       | 28,304 |   |
|                                                                     |       | $                                | 244,361    |   | $ | 206,242 |   |
| **Operating income (loss):**                                             |       |                             |       |   |   |
| United States                                                            |       | $                                | 699        |   | $ | (777 | ) |
| Canada                                                                   |       | 3,131                            |       | 1,925 |   |
| Europe                                                                   |       | 4,269                            |       | 4,445 |   |
| Asia                                                                     |       | 865                              |       | 544 |   |
| Latin America                                                            |       | 7,486                            |       | 5,206 |   |
|                                                                     |       | 16,450                           |       | 11,343 |   |
| Plant realignment costs                                                  |       | (4                               | )          | (584 | ) |
|                                                                     |       | $                                | 16,446     |   | $ | 10,759 |   |
| **Depreciation and amortization expense included  in operating income:** |       |                             |       |   |   |
| United States                                                            |       | $                                | 6,062      |   | $ | 5,824 |   |
| Canada                                                                   |       | 1,558                            |       | 1,503 |   |
| Europe                                                                   |       | 2,500                            |       | 2,343 |   |
| Asia                                                                     |       | 997                              |       | 994 |   |
| Latin America                                                            |       | 2,041                            |       | 2,013 |   |
|                                                                     |       | $                                | 13,158     |   | $ | 12,677 |   |

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

 

**Note 15.**   Foreign Currency and Other

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

 

19

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

 

**Note 16.**   Legal Proceedings and Commitments

On August 18, 2003, The Intertech Group, Inc.(“TIG”), an affiliate of Jerry Zucker, the former Chief Executive Officer ofthe Company, filed a claim seeking damages associated with a lease agreementand an alleged services agreement, between the Company and TIG, associated withthe lease by the Company of its former corporate headquarters and the provisionof shared administrative services. The damages sought in the complaint totaled$7.7 million, plus attorney’s fees. See Note 18 to the Consolidated FinancialStatements for details related to the settlement of this legal proceeding.

As part of its efforts toenhance the business, the Company has made commitments to expand its worldwidecapacity. Currently, the Company has several major committed capital projects,including the construction of a new spunmelt manufacturing plant in Suzhou,China and the installation of new spunmelt lines in the facilities in Cali,Colombia and Mooresville, North Carolina, as well as the installation ofadditional capacity in Nanhai, China. Remaining payments due related to theseplanned expansions as of April 2, 2005 totaled approximately $99.3 million andare expected to be expended over the remainder of Fiscal 2005 and Fiscal 2006.

**Note 17.**   Supplemental Cash Flow Information

Noncash transactions in the first three months of 2005included: (i) the conversion of 5 shares of the Company’s PIK PreferredShares into approximately 686 shares of the Company’s Class A Common Stock;(ii) the payment-in-kind in lieu of cash payment of $5.6 million ofpreviously accrued dividends declared on the Company’s PIK Preferred Shares throughDecember 31, 2004; and (iii) the accrual of $2.4 million of dividends onthe PIK Preferred Shares.

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

**Note 18.**   Subsequent Events

On April 29, 2005, the Company entered into aSettlement Agreement, Receipt and Release (the “Settlement Agreement”) withJerry Zucker, TIG and ZS Associates LLC (an affiliate of Mr. Zucker).Pursuant to the Settlement Agreement, the Company paid TIG $3.1 million as fulland final settlement. In addition, the Settlement Agreement contains mutualgeneral releases of any and all claims by and among the parties thereto, and arequirement that the Company and TIG file a joint stipulation dismissing, withprejudice, TIG’s lawsuit against the Company, which has been appropriatelyfiled on May 2, 2005. The settlement was approximately equal to amountspreviously accrued and included in the Consolidated Balance Sheets at April 2,2005 and January 1, 2005.

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

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

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

**Results of Operations**

Thefollowing table sets forth the percentage relationships to net sales of certainstatement of operations items.
| ** **                                       | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------|------------|----------------------------------|------------|
| ** **                                       | ** ** | **April 2,  2005**          | ** ** | **April 3,  2004** | ** ** |
| Net sales                                        |       | 100.0                            | %          | 100.0 | % |
| Cost of goods  sold                              |       |                             |       |   |   |
| Materials                                        |       | 50.8                             |       | 46.6 |   |
| Labor                                            |       | 8.6                              |       | 10.0 |   |
| Overhead                                         |       | 22.6                             |       | 25.0 |   |
|                                             |       | 82.0                             |       | 81.6 |   |
| Gross profit                                     |       | 18.0                             |       | 18.4 |   |
| Selling, general  and administrative expenses    |       | 11.3                             |       | 12.9 |   |
| Plant realignment  costs                         |       | 0.0                              |       | 0.3 |   |
| Operating income                                 |       | 6.7                              |       | 5.2 |   |
| Other expense  (income):                         |       |                             |       |   |   |
| Interest expense, net                            |       | 3.2                              |       | 7.3 |   |
| Minority interests                               |       | 0.4                              |       | 0.2 |   |
| Foreign currency and other                       |       | (0.1                             | )          | 0.7 |   |
|                                             |       | 3.5                              |       | 8.2 |   |
| Income (loss)  before income tax expense         |       | 3.2                              |       | (3.0 | ) |
| Income tax  expense                              |       | 1.1                              |       | 1.2 |   |
| Net income (loss)                                |       | 2.1                              |       | (4.2 | ) |
| Accrued dividends  on PIK preferred shares       |       | 1.0                              |       | — |   |
| Income (loss) available  for common shareholders |       | 1.1                              | %          | (4.2 | )% |

 

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

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

 

The amounts for plantrealignment costs have not been allocated to the Company’s reportable businessdivisions because the Company’s management does not evaluate such charges on adivision-by-division basis. Division operating performance is measured and evaluatedbefore unusual or special items.

**NetSales**

Consolidatednet sales were $244.4 million in 2005, an increase of $38.2 millionor 18.5% over 2004 consolidated net sales of $206.2 million. Net sales for2005 in the Nonwovens and Oriented Polymers segments improved over comparable2004 fiscal year results by 18.8% and 17.4%, respectively. A reconciliation ofthe change in net sales between the three months ended April 3, 2004 andthe three months ended April 2, 2005 is presented in the following table(in millions):
| Net sales—three  months ended April 3, 2004 |   | $      | 206.2  |   |
|-------------------------------------------------------|--------|--------|--------|--------|
| Change in sales due to:                               |   |   |   |
| Price/mix                                             |   | 20.2   |   |
| Volume                                                |   | 14.1   |   |
| Foreign currency                                      |   | 3.9    |   |
| Net sales—three months  ended April 2, 2005 |   | $      | 244.4  |   |

 

The increase in net sales during the first quarter of2005 was due primarily to price/mix improvements and volume gains. Theprice/mix improvement reflects continued enhancements of the Company’s productofferings as well as the increases in sales price in an effort to pass alongraw material cost increases to customers. As raw material costs rose during thecurrent quarter and prior year, the Company followed the consistent policy of attemptingto pass raw material prices along to its customers, where allowable by contractterms and where acceptable based on market conditions. Volume gains, notably inthe United 

22

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States, Latin American andAsian markets, contributed approximately $14.1 million to the increase in netsales over the same period of the prior year.

A significant component of the $14.1 millionincrease in sales in the first quarter of 2005 due to volume growth wasgenerated in the Latin American region. Although the San Luis Potosi, Mexicocapacity expansion was completed in late 2003, it didn’t reach full productivecapacity until the second quarter of 2004. The Latin America region’s salesimprovement was paced by significant year-over-year increases in hygiene sales.In the Company’s U.S. nonwovens business, the hygiene, consumer and industrialmarkets contributed to the double-digit increases from 2004 as newproducts were introduced into the markets and new customer relationshipsgenerated substantial sales increases. Nonwoven sales volumes decreasedslightly in Europe. Oriented Polymers’ increase in sales was due to acombination of price/mix improvement and increased volume driven by theagricultural and construction end-use markets.

Foreign currencies,predominantly the Euro and the Canadian dollar, were stronger against theU.S. dollar during the first quarter of 2005 compared to 2004 resulting inan increase in net sales of $3.9 million due to the favorable foreigncurrency translation. Further discussion of foreign currency exchange rate riskis contained in “Quantitative and Qualitative Disclosures About Market Risk”included in Item 3 to this Quarterly Report on Form 10-Q.

**Operating Income**

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

 

Consolidated operatingincome was $16.5 million in 2005 as compared to $10.8 million in2004. The financial effect of price/mix improvements and higher raw materialcosts essentially offset each other, reflecting the benefits of the Company’s newproduct introductions and ongoing efforts to pass through any cost increases inraw materials. The net improvement in operating income was positively impactedby the volume gains noted in the net sales discussion above. Other itemscontributing to the improvement of operating income were lower manufacturingcosts of $1.4 million and lower plant realignment costs, net of $0.6 million.Offsetting these favorable impacts were higher depreciation and amortizationcharges and higher selling, general and administrative expenses. The increasein depreciation and amortization charges is primarily related to theinstallation of the new production line in Latin America.

**Interest Expense and Other**

Net interest expense decreased $7.3 million, from$15.2 million during the three months ended April 3, 2004 to$7.9 million during the three months ended April 2, 2005. The 2004amount includes $1.0 million of payment-in-kind in lieu of cash intereston the Junior Notes. The decrease in net interest expense was primarily due tothe lower interest rates obtained by refinancing the Company’s previous 

23

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Restructured CreditFacility with the new Bank Facility, effective April 27, 2004, and theelimination of interest expense on the Junior Notes due to their conversion to PIKPreferred Shares and Class A Common Stock. On April 27, 2004, in conjunctionwith the refinancing, the Company’s majority shareholder exchanged approximately$42.6 million in aggregate principal amount of the Junior Notes for 42,633shares of PIK Preferred Shares, which also contributed to lower interest costsduring the period. Also subsequent to the refinancing, the remaining$10.1 million of Junior Notes were exchanged for 10,083 shares of theCompany’s PIK Preferred Shares and 6,719 shares of the Company’s Class ACommon Stock.

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

**Income Tax Expense**

The Company recognizedincome tax expense of $2.8 million for the three months ended April 2,2005 on consolidated income before income taxes of $8.0 million for suchperiod. The tax expense approximates the U.S. federal statutory tax rate. However,the net income tax is impacted by foreign withholding taxes, for which taxcredits are not anticipated, U.S. state income taxes and foreign taxescalculated at statutory rates less than the U.S. federal statutory rate. TheCompany recorded a net income tax expense of $2.5 million for the threemonths ended April 3, 2004 on a consolidated pre-tax loss of $6.3 millionfor such period. The tax expense was primarily due to withholding taxes, forwhich tax credits are not anticipated, U.S. state income taxes, and nosignificant income tax benefit recognized for the losses incurred in the UnitedStates and certain foreign jurisdictions.

**NetIncome**

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

**AccruedDividends on PIK Preferred Shares**

The Company accrueddividends at 16% on its PIK Preferred Shares during the quarter ended April 2,2005 in the amount of $2.4 million. As a result of the PIK PreferredShares being initially issued in April 2004, no such dividends wererecorded in the first quarter of 2004.

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

As a result of the above,the Company recognized income applicable to common shareholders of $2.8 million,or $0.27 per share, for the three months ended April 2, 2005 compared to aloss applicable to common shareholders of $8.8 million, or ($1.00) pershare, for the three months ended April 3, 2004.

24

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**LIQUIDITY AND CAPITAL RESOURCES**

TheCompany’s principal sources of liquidity for operations and expansions arefunds generated from operations and borrowing availabilities under the BankFacility, consisting of a revolving credit facility with aggregate commitmentsof up to $50.0 million and senior secured first lien term loan of$300.0 million and a senior secured second lien term loan of$125.0 million. The revolving portion of the Bank Facility terminates on April 27,2009, the first lien term loan is due April 27, 2010 and the second lienterm loan is due April 27, 2011. The Bank Facility contains covenants andevents of default customary for financings of this type, including leverage andinterest expense coverage covenants. At April 2, 2005, the Company was incompliance with all such covenants. As of April 2, 2005, the Company hadno outstanding borrowings under the revolving credit agreement.
| ** **                                                                | ** ** | **April 2,  2005** | ** ** | **January 1,  2005** | ** ** |
|---------------------------------------------------------------------------|------------|-------------------------|------------|---------------------------|------------|
| ** **                                                                | ** ** | **(In Millions)**  | ** ** |
| **Balance  sheet data:**                                                  |       |                    |       |                      |       |   |   |
| Cash and cash equivalents                                                 |       | $                       | 21.6       |                      |       | $ | 41.3 |   |   |
| Working capital                                                           |       | 190.0                   |       |                      | 187.3      |   |   |
| Working capital, excluding cash and debt components                       |       | 177.9                   |       |                      | 156.4      |   |   |
| Total assets                                                              |       | 757.0                   |       |                      | 753.4      |   |   |
| Total debt                                                                |       | 412.4                   |       |                      | 414.0      |   |   |
| PIK Preferred Shares, expected to be settled with  shares of common stock |       | 60.6                    |       |                      | 58.3       |   |   |
| Total  shareholders’ equity                                          |       | 74.6                    |       |                      | 73.8       |   |   |
|                                                                           |            |                         |            |                           |            |  |  |  |  |

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

 

**OperatingActivities**

Net cash used in operatingactivities was $8.0 million during 2005, a $1.0 million change from the$7.0 million used in operating activities during 2004. Despite the improvementin operating performance during the first quarter of 2005, the increase in cashused in operations was attributed primarily to investments in accountsreceivable and inventories, largely resulting from increased quarter overquarter net sales and higher raw material costs.

The Company had workingcapital of $190.0 million at April 2, 2005 compared to $187.3 millionat January 1, 2005. Excluding the cash and debt components, workingcapital was $177.9 million at April 2, 2005 compared to $156.4 millionat January 1, 2005. Accounts receivable at April 2, 2005 was $132.9million as compared to $112.3 million on January 1, 2005, an increase of$20.6 million. Accounts receivable represented approximately 50 daysof sales outstanding at April 2, 2005, compared to 46 days of salesoutstanding at January 1, 2005. The increase was partially attributable tothe growth in net sales in foreign locations, which often have extended paymentterms as compared to domestic terms of sale. Inventories at April 2, 2005were $112.5 million, an increase of $6.1 million from inventories at January 1,2005 of $106.4 million. The Company had inventory representingapproximately 51 days of cost of sales on hand at April 2, 2005versus 54 days of cost of sales on hand at January 1, 2005. Accountspayable at April 2, 2005 was $61.7 million as compared to$63.8 million at January 1, 2005, a decrease of $2.1 million.Accounts payable represented approximately 28 days of cost of salesoutstanding at April 2, 2005 as compared to 32 days of cost of salesoutstanding at January 1, 2005.

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**Investing and Financing Activities**

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

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

**Dividends**

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

In January 2005, theCompany’s Board of Directors declared a dividend on the PIK Preferred Shares ofapproximately $5.6 million, payable in the form of additional PIKPreferred Shares. The Company has accrued an additional $2.4 million ofdividends on the PIK Preferred Shares through April 2, 2005, which areultimately expected to be paid in the form of additional PIK Preferred Shares.

**Liquidity Summary**

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

The Bank Facility contains covenants and events ofdefault customary in financings of this type, including leverage and interestexpense coverage covenants. The Bank Facility requires the Company to use apercentage of proceeds from excess cash flows, as defined by the Bank Facility,to reduce its debt balances. Additionally, in accordance with the terms of theBank Facility, the Company entered a cash flow hedge agreement, effectivelyconverting $212.5 million of notional principal amount of debt from avariable LIBOR rate to a fixed LIBOR rate of 3.383%. The cash flow hedgeagreement terminates on May 8, 2007.

In conjunction with the Company’s refinancing of theRestructured Credit Facility, the Company’s majority shareholder exchangedapproximately $42.6 million in aggregate principal amount of the Junior 

26

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Notes it controlled for42,633 shares of the Company’s PIK Preferred Shares. Additionally, in the thirdquarter of 2004, $10.1 million of aggregate principal amount of theCompany’s Junior Notes were exchanged for 10,083 shares of the Company’s PIKPreferred Shares and 6,719 shares of the Company’s Class A Common Stock.The dividends on the PIK Preferred Shares accrue at an annual rate of 16% andare payable semi-annually in arrears on each January 1 and July 1,commencing with July 1, 2004, at the option of the Company; (i) throughthe issuance of additional PIK Preferred Shares; (ii) in cash; or (iii) ina combination thereof. Dividends are cumulative and accrue from the most recentdividend payment date to which dividends have been paid or, if no dividends havebeen paid, from the date of original issuance.

On June 30, 2012, the Company must redeem all ofthe PIK Preferred Shares then outstanding at a price equal to $1,000 per shareplus $1,000 per share for all unpaid dividends thereon whether or not declared,which amount will be payable by the Company (“mandatory redemption price”) atthe option of the Company; (i) in cash; (ii) through the issuance ofshares of Class A Common Stock; or (iii) through a combinationthereof. If paid in stock, the number of shares to be delivered by the Companywill be the mandatory redemption price (as defined earlier) divided by the thenmarket price of a share of Class A Common Stock.

At any time prior to June 30, 2012, the holdersof the PIK Preferred Shares may elect to convert any or all of their PIKPreferred Shares into shares of the Company’s Class A Common Stock at aconversion price equal to $7.29 per share. Also, at any time prior to June 30,2012, provided certain conditions have been met, the Company may elect to redeemthe shares, which redemption price may be paid by the Company, (i) incash; (ii) through the issuance of shares of Class A Common Stock; or(iii) through a combination thereof. If paid in stock, the number ofshares to be delivered by the Company will be the optional redemption price (asdefined by the preferred stock agreement) divided by the then market price of ashare of Class A Common Stock. The Company currently expects to settle themandatory or optional redemption with the issuance of shares of Class ACommon Stock.

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

As discussed in Note 16 to the ConsolidatedFinancial Statements included in Item 1 to this Quarterly Report on Form 10-Q, theCompany has committed to several major capital projects to expand its worldwidecapacity, including the construction of a new spunmelt manufacturing plant inSuzhou, China and the installation of new spunmelt lines in the facilities inCali, Colombia and Mooresville, North Carolina, as well as the installation ofadditional capacity in Nanhai, China. Remaining payments due related to theseplanned expansions as of April 2, 2005 totaled approximately$99.3 million and are expected to be expended over the remainder of Fiscal2005 and Fiscal 2006. The financial flexibility needed for these and othercapital projects was provided in an amendment, dated March 16, 2005, tothe Bank Facility.

On May 3, 2005, the Company announced that itretained JP Morgan Securities Inc. as its financial advisor to assist theCompany in evaluating various strategic alternatives in order to maximizeshareholder value, which could include, among other things, the sale orrecapitalization of the Company. The Company expects to complete its review ofstrategic alternatives in the near future. However, there can be no assurancethat this process will result in any transaction or transactions taking placeor being completed.

Based on the ability togenerate positive cash flows from its operations and the financial flexibilityprovided by the Bank Facility, as amended, the Company believes that it has thefinancial resources 

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necessaryto meet its operating needs, fund its capital expenditures and make allnecessary contributions to its retirement plans.

**Off-Balance Sheet Arrangements**

The Company does not haveany off-balance sheet arrangements.

**Effect of Inflation**

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

**New Accounting Standards**

In May 2004, the FASB issued FASB Staff Position No. 106-2,“Accounting and Disclosure Requirements Related to the Medicare PrescriptionDrug, Improvement and Modernization Act of 2003” (“FSP 106-2”). FSP 106-2permits a sponsor of a postretirement health care plan that provides aprescription drug benefit to make a one-time election to defer accounting forthe effects of the Medicare Prescription Drug, Improvement and ModernizationAct of 2003 (the “Act”), which was signed into law on December 8, 2003.The Act introduced a prescription drug benefit under Medicare and federalsubsidies to sponsors of retiree health care benefit plans that provide abenefit that is at least actuarially equivalent to that of Medicare. Aspermitted under FSP 106-2, the Company made a one-time election to deferaccounting for the effect of the Act and as more fully explained in Note 9to the consolidated financial statements, in December 2004 the Companyapproved plan amendments curtailing or eliminating various postretirement benefitsin the U.S. As a result, the amounts included in the Consolidated FinancialStatements related to the Company’s postretirement benefit plans do not reflectthe effects of the Act.

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

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

**CriticalAccounting Policies And Other Matters**

The Company’s analysis and discussion of its financialposition and results of operations are based upon its consolidated financialstatements that have been prepared in accordance with accounting principlesgenerally accepted in the United States (“U.S. GAAP”). The preparation offinancial statements in conformity with U.S. GAAP requires the appropriateapplication of certain accounting policies, many of 

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which require managementto make estimates and assumptions about future events that may affect thereported amounts of assets, liabilities, revenues and expenses, and thedisclosure of contingent assets and liabilities. Since future events and theirimpact cannot be determined with certainty, the actual results will inevitablydiffer from the estimates. The Company evaluates these estimates andassumptions on an ongoing basis, including but not limited to those related tofresh start accounting, revenue recognition, sales returns and allowances andcredit risks, inventories, income taxes, and impairment of long-lived assets.Estimates and assumptions are based on historical and other factors believed tobe reasonable under the circumstances. The impact and any associated risksrelated to estimates, assumptions, and accounting policies are discussed within“Management’s Discussion and Analysis of Operations and Financial Condition,”as well as in the Notes to the Consolidated Financial Statements, ifapplicable, where such estimates, assumptions, and accounting policies affectthe Company’s reported and expected results.

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

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

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.

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

*Accounts Receivable andConcentration of Credit Risks:  *Accounts receivablepotentially expose the Company to a concentration of credit risk, as defined byStatement of Financial Accounting Standards No. 105, “Disclosure ofInformation about Financial Instruments with Off-Balance Sheet Risk andFinancial Instruments with Concentration of Credit Risk.” The Company providescredit in the normal course of business and performs ongoing credit evaluationson its customers’ financial condition as deemed necessary, but generally doesnot require collateral to support such receivables. The Company also 

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establishes an allowancefor doubtful accounts based upon factors surrounding the credit risk ofspecific customers, historical trends and other information. Also, in an effortto reduce its credit exposure to certain customers, as well as accelerate itscash flows, in 2004 the Company sold, on a non-recourse basis, certain ofits receivables pursuant to a factoring agreement. At April 2, 2005, areserve of $10.4 million has been recorded as an allowance against tradeaccounts receivable. Management believes that the allowance is adequate tocover potential losses resulting from uncollectible accounts receivable anddeductions resulting from sales returns and allowances.

*Inventory Reserves:  *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.

*Impairment of Long-Lived Assets:  *Long-livedassets are reviewed for impairment whenever events or changes in circumstancesindicate that the carrying amounts may not be recoverable. For assets held andused, an impairment may occur if projected undiscounted cash flows are notadequate to cover the carrying value of the assets. In such cases, additionalanalysis is conducted to determine the amount of the loss to be recognized. Theimpairment loss is determined by the difference between the carrying amount ofthe asset and the fair value measured by future discounted cash flows. Theanalysis, when conducted, requires estimates of the amount and timing ofprojected 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.

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.

*IncomeTaxes:  *The Company records an income tax valuationallowance when the realization of certain deferred tax assets, including 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. Certain judgments,assumptions and estimates may affect the carrying value of the valuationallowance and deferred income tax expense in the Company’s ConsolidatedFinancial Statements.

**Environmental**

The Company is subject toa broad range of federal, foreign, state and local laws and regulationsrelating to the pollution and protection of the environment. The Companybelieves that it is currently in substantial compliance with applicableenvironmental requirements and does not currently anticipate any material adverseeffect on its operations, financial or competitive position as a result of itsefforts to 

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complywith environmental requirements. Some risk of environmental liability isinherent, however, in the nature of the Company’s business and, accordingly,there can be no assurance that material environmental liabilities will notarise.

**ITEM3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

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

**Long-TermDebt and Interest Rate Market Risk**

The Company’s long-termborrowings are variable interest rate debt. As such, the Company’s interestexpense will increase as interest rates rise and decrease as interest ratesfall. It is the Company’s policy to enter into interest rate derivativetransactions only to meet its stated overall objective. The Company does notenter into these transactions for speculative purposes. To that end, theCompany entered into an interest rate swap contract to convert $212.5 millionof its variable-rate debt to fixed-rate debt. In addition, the Company includesshort-term borrowings in its debt portfolio, especially in foreign countries,in an effort to minimize interest rate risk. Hypothetically, a 1% change in theinterest rate affecting all of the Company’s financial instruments notprotected by the interest rate swap contract would change interest expense byapproximately $2.0 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 the first three months of 2004and 2005, certain currencies of countries in which the Company conducts foreigncurrency denominated business strengthened against the U.S. dollar and had asignificant impact on sales and operating income. See “Management’s Discussionand Analysis of Financial Condition and Results of Operations” included in Item2 of Part 1 of this Quarterly Report on Form 10-Q.

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

**Raw Material and Commodity Risks**

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

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To the extent the Companyis not able to pass along price increases of raw materials, or to the extentany such price increases are delayed, the Company’s cost of goods sold wouldincrease and its operating profit would correspondingly decrease. By way ofexample, if the price of polypropylene were to rise $.01 per pound, and theCompany was not able to pass along any of such increase to its customers, theCompany would realize a decrease of approximately $2.9 million, on an annualizedbasis, in its reported operating income. Material increases in raw materialprices that cannot be passed on to customers could have a material adverseeffect on the 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 2,2005.

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

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**PART II. OTHER INFORMATION**

**ITEM 1. LEGAL PROCEEDINGS**

Other than as reported inthe Company’s Form 10-K for the period ended January 1, 2005 under the caption“Item 3. Legal Proceedings,” the Company is not currently a party to anymaterial pending legal proceedings other than routine litigation incidental tothe business of the Company. See Note 18 to the Consolidated FinancialStatements included in Item 1 to this Quarterly Report of Form 10-Q foradditional details.

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

During the first quarterof fiscal 2005, 5 shares of the Company’s PIK Preferred Shares,16,564 shares of the Company’s Class B Common Stock, and 20,792shares of the Company’s Class C Common Stock, were converted into a totalof 38,042 shares of the Company’s Class A Common Stock. Theseconversions were exempt from registration based on sections 3(a)(7) and (3(a)(9)of the Securities Exchange Act of 1933.

**ITEM3. DEFAULTS UPON SENIOR SECURITIES**

Not applicable.

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

Not applicable.

**ITEM 5. OTHER INFORMATION**

Not applicable.

**ITEM 6. EXHIBITS**

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

 

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**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.
|                         |     | POLYMER GROUP, INC. |
|-------------------------|----------|--------------------------|
|                    |     |                     |   |   |
| Date: May 16, 2005 |     | By:                      |   | /s/ JAMES L. SCHAEFFER |
| * *                | * * | * *                 |   | James L.  Schaeffer*Chief Executive Officer* |
| * *                | * * | * *                 | * * | * * |
| Date: May 16, 2005 |     | By:                      |   | /s/ WILLIS C. MOORE, III |
| * *                | * * | * *                 |   | Willis C. Moore,  III*Chief Financial Officer  (Principal Financial and Accounting Officer)* |

 

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