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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

For the transition period from                              to                             

Commission file number 1-14330

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

Registrant's telephone number, including area code: (843) 566-7293

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

        Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

        On August 9, 2002 there were 32,004,200 Common Shares, $.01 par value, outstanding.

POLYMER GROUP, INC.

INDEX TO FORM 10-Q

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PART I. FINANCIAL INFORMATION

ITEM I. FINANCIAL STATEMENTS

POLYMER GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)

See accompanying notes.

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POLYMER GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In Thousands, Except Per Share Data)

See accompanying notes.

4

POLYMER GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In Thousands)

See accompanying notes.

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POLYMER GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1.    Nature of Operations

        Polymer Group, Inc. (the "Company"), a global manufacturer and marketer of nonwoven and oriented polyolefin products, currently operates in two business segments that include consumer and industrial and specialty. The Company is currently operating under the jurisdiction of Chapter 11 of the Bankruptcy Code and the Bankruptcy Court, and the continuation of the Company as a going concern is contingent upon, among other things, its ability to formulate a Plan which will gain approval of the requisite parties under the Bankruptcy Code and confirmation by the Bankruptcy Court and its ability to comply with the debtor-in-possession financing agreement. These matters raise substantial doubt about the Company's ability to continue as a going concern. The accompanying financial statements, prepared assuming the Company will continue as a going concern, do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of these uncertainties.

Note 2.    Significant Accounting Policies

Basis of Presentation and Use of Estimates

        These interim unaudited Condensed Consolidated Financial Statements have been prepared on a going concern basis, which assumes continuity of operations and realization of assets and satisfaction of liabilities in the ordinary course of business, and in accordance with Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code," ("SOP 90-7"). Accordingly, all pre-petition liabilities subject to compromise have been segregated in the unaudited Condensed Consolidated Balance Sheets and classified as Liabilities Subject to Compromise, at the estimated amount of allowable claims. Liabilities Not Subject to Compromise are separately classified as current and non-current. Revenues, expenses, realized gains and losses, and provisions for losses resulting from the reorganization are reported separately as reorganization items in the unaudited Condensed Consolidated Statements of Operations.

        The accompanying unaudited consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States for interim financial information and include the accounts of the Company and its subsidiaries.

        The consolidated financial statements of the Company do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The Condensed Consolidated Balance Sheets as of June 29, 2002 and December 29, 2001 contain summarized information; as a result, such data does not include the same detail provided in the Company's Annual Report on Form 10-K. In the opinion of management, these unaudited consolidated financial statements contain all adjustments of a normal recurring nature necessary for a fair presentation. Operating results for the three months and six months ended June 29, 2002 are not necessarily indicative of the results that may be expected for fiscal 2002.

        All material intercompany accounts are eliminated in consolidation. Certain amounts previously presented in the consolidated financial statements for prior periods have been reclassified to conform to current classification. The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Investments in 20% to 50% owned affiliates are accounted for on the equity method.

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Revenue Recognition

        Revenue from product sales is recognized at the time ownership of goods transfers to the customer and the earnings process is complete. In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 did not change existing accounting rules on revenue recognition but specifies how existing rules should be applied to transactions in the absence of authoritative literature. Based on the guidelines of current accounting rules and SAB 101, revenue should not be recognized until it is realized or realizable and earned.

Accounts Receivable and Concentration of Credit Risks

        The Company provides credit in the normal course of business and performs ongoing credit evaluations on certain of its customers' financial condition, but generally does not require collateral to support such receivables. The Company also establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. The allowance for doubtful accounts was approximately $13.8 million and $12.0 million at June 29, 2002 and December 29, 2001, respectively which management believes is adequate to provide for credit loss in the normal course of business, as well as losses for customers who have filed for protection under the bankruptcy law.

Inventories

        Inventories are stated at the lower of cost or market using the first-in, first-out method of accounting and, as of June 29, 2002 and December 29, 2001 consist of the following (in thousands):

Impairment Evaluation of Long-Lived Assets

        For all periods through December 29, 2001, the Company reviewed the recoverability of the carrying value of long-lived assets in accordance with Statement of Financial Standard No. 121, "Accounting for the Impairment of Long-Lived Assets and for Assets to be Disposed Of" ("FAS 121"). The Company also reviewed long-lived assets for impairment whenever events or changes in circumstances indicated that the carrying amount of such assets might not be recoverable. When the future undiscounted cash flows of the operations to which the assets relate did not exceed the carrying value of the asset, the intangible assets were written down, followed by the other long-lived assets, to fair value. The Company recorded a non-cash asset impairment charge in fiscal 2001 of approximately $181.2 million related to the write-down of goodwill, contract intangibles and property, plant and equipment.

        In October 2001, the Financial Accounting Standards Board issued Statement No.144 "Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS 144"). FAS 144 provides accounting guidance for financial accounting and reporting for the impairment or disposal of long-lived assets. The statement supersedes FAS 121 and also supersedes the accounting and reporting provisions of APB Opinion No. 30 "Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of

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a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," related to the disposal of a segment of a business. The statement is effective for fiscal years beginning after December 15, 2001. The adoption of FAS 144 did not have a material impact on the financial condition and operating results of the Company.

Derivatives

        The Company does not use derivative financial instruments for trading purposes. Premiums paid for purchased interest rate cap agreements are charged to expense over the rate cap period. The Company's London Interbank Offered Rate-based interest rate cap agreement provides for a notional amount of $100.0 million, which declines ratably over the rate cap term. If the rate cap exceeds 9% on each quarterly reset date, as defined in the agreement, the Company is entitled to receive an amount by which the rate cap exceeds 9%. Over the term of the agreement, such amounts have not exceeded 9%.

Income Taxes

        Deferred tax liabilities and assets are determined based upon temporary differences between the basis of certain assets and liabilities for income tax and financial reporting purposes. A valuation allowance is recognized if it is likely that some portion of a deferred tax asset will not be realized in the future.

Research and Development

        The cost of research and development is charged to expense as incurred and is included in selling, general and administrative expense in the consolidated statement of operations. The Company incurred approximately $3.8 million and $4.5 million of research and development expense during the three months ended June 29, 2002 and June 30, 2001, respectively. Year to date research and development expenses approximated $7.7 million in 2002 and $9.2 million in 2001.

Shipping and Handling Costs

        The cost of shipping and handling is charged to expense as incurred and is included in selling, general and administrative expense in the consolidated statement of operations. The Company incurred approximately $5.0 million and $5.7 million of shipping and handling costs, during the three months ended June 29, 2002 and June 30, 2001, respectively. Year to date shipping and handling costs approximated $10.3 million in 2002 and $11.5 million in 2001.

Selling and Advertising Costs

        The cost of selling and advertising is charged to expense as incurred and is included in selling, general and administrative expense in the consolidated statement of operations. The Company incurred approximately $8.5 million and $6.8 million of selling and advertising costs, during the three months ended June 29, 2002 and June 30, 2001, respectively. Year to date selling and advertising costs approximated $16.0 million in 2002 and $15.2 million in 2001.

Foreign Currency Translation

        All assets and liabilities in the balance sheets of foreign subsidiaries whose functional currency is other than the U.S. dollar are translated at quarter-end exchange rates. Translation gains and losses are not included in determining net income but are accumulated as a separate component of shareholders' equity. However, subsidiaries considered to be operating in highly inflationary countries use the U.S.

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dollar as the functional currency and translation gains and losses are included in determining net income. In addition, foreign currency transaction gains and losses are included in determining net income.

        The Company has a majority-owned subsidiary located in Argentina. The Argentine peso, which serves as the functional currency of this subsidiary, has devalued significantly against the U.S. dollar since the end of fiscal 2001 due primarily to the economic uncertainty within this geographic region. As a result of the Argentine peso devaluation, the Company recognized a foreign currency loss of approximately $0.7 million during the three months ended June 29, 2002 and $2.5 million year to date 2002, net of minority interest adjustments, related to its Argentina majority-owned subsidiary.

Comprehensive Income (Loss)

        Comprehensive income (loss) is reported in accordance with the Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS 130"). FAS 130 establishes rules for the reporting and display of comprehensive income and its components. FAS 130 requires unrealized gains or losses on the Company's available for sale securities and the foreign currency translation adjustments, which prior to adoption were reported separately in shareholders' equity, to be included in other comprehensive income. The Company's comprehensive income (loss) approximated $3.9 million and $(15.2) million for the three months ended June 29, 2002 and June 30, 2001, respectively. Year to date comprehensive loss approximated $(24.8) million in 2002 and $(42.4) million in 2001

Net Income (Loss) Per Share

        Basic earnings per share exclude any dilutive effects of options, warrants and convertible securities and are computed using the number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution that could occur if stock options were exercised and is based upon the weighted average number of common and common equivalent shares outstanding for the period. Shares under option represent common equivalent shares. The numerator for both basic and diluted earnings per share is net income (loss) applicable to common stock. During the quarters ended June 29, 2002 and June 30, 2001, the potential exercise of stock options would have an antidilutive effect on the calculation of earnings per share due to losses incurred during the first six months of 2002 and 2001. Accordingly, there is no difference in the determination of basic and diluted earnings per share. A reconciliation of the amounts included in the computation of loss per share for the three months and six

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months ended June 29, 2002 and June 30, 2001 is presented in the following table (in thousands, except per share data):

Note 3.    Chapter 11 Proceedings

        Due to the financial impact of economic and business factors upon the Company's business, as outlined under "Note 1. Nature of Operations and Business Conditions" in its Annual Report on Form 10-K for fiscal 2001, the inability to complete asset dispositions on acceptable terms and the expiration of the waiver with respect to the leverage covenant, as of December 29, 2001 the Company was in default under the Prepetition Credit Facility (as defined herein). Because of this default, the Senior Secured Lenders exercised their right to block the payment of interest due on January 2, 2002 to the holders of the 9% Senior Subordinated Notes due 2007. These Lenders subsequently blocked the interest payment due on March 1, 2002 to the holders of 8³/4% Senior Subordinated Notes due 2008. On December 30, 2001, the Company and certain subsidiaries entered into a Forbearance Agreement with the Senior Secured Lenders (the "Forbearance Agreement"). The Senior Secured Lenders agreed not to exercise certain remedies available to them under the Prepetition Credit Facility as a result of the existing covenant defaults during the forbearance period. If certain events were to occur, the Senior Secured Lenders would have been able to exercise their remedies available to them, which included the right to declare all amounts outstanding under the Prepetition Credit Facility immediately due and payable. The Forbearance Agreement, as extended on March 15, 2002 was scheduled to end on May 15, 2002, and prevented the Company from making any additional borrowings in excess of the amounts outstanding under the revolving portion of the Prepetition Credit Facility as of December 30, 2001.

        Because the Company was unable to reduce amounts outstanding under the Prepetition Credit Facility through asset dispositions on acceptable terms, the services of Miller, Buckfire & Lewis (f/k/a Dresdner Kleinwort Wasserstein, Inc.) were retained on October 2, 2001 as the financial advisor to assist in exploring various restructuring options. From November of 2001 through February of 2002, the Company conducted extensive negotiations with several potential investors and various other constituents in an effort to establish viable restructuring options. During this same time period, some of these potential investors conducted due diligence investigations of the Company and its operations.

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        In evaluating the various restructuring options, the Company decided to maintain negotiations with CSFB Global Opportunities Investment Partners, L.P. ("GOF"), the holder of approximately 67% of the outstanding Senior Subordinated Notes (as defined herein). The Company determined that GOF afforded the highest probability of a transaction being completed with terms that provided an overall acceptable level of value to the various stakeholders. Members of the Company's senior management, GOF and their respective advisors held discussions concerning the terms of a proposed recapitalization transaction. The discussions focused primarily on the overall level of investment in the Company and the nature of that ownership. As a result of these extensive negotiations, the Company executed a term sheet with GOF on March 15, 2002 setting forth the proposed terms of a recapitalization plan, including a financial restructuring.

        The material elements of the financial restructuring included: (i) GOF contributing $50 million in cash and $394.4 million of the Senior Subordinated Notes (the "Existing Notes") currently owned by GOF (including accrued, but unpaid interest) and agreeing to provide a $25 million letter of credit in favor of the Senior Secured Lenders under an amended credit facility, all in exchange for approximately 22.4 million newly issued shares of common stock of the Company (after taking into account a 1-for-10 reverse common stock split), representing 87.5% ownership of the Company; (ii) the holders of at least 95% of the aggregate principle amount of the Existing Notes not owned by GOF exchanging their notes for either new senior subordinated notes or new senior subordinated discount notes; and (iii) the Company entering into an amended credit facility with its Senior Secured Lenders (collectively, the "Exchange Offer").

        On March 25, 2002, during the pendency of the Exchange Offer, without any prior notice, a group of creditors (the "Petitioning Creditors") holding approximately $41.3 million of the Company's outstanding Senior Subordinated Notes filed an involuntary bankruptcy petition (the "Involuntary Petition") against the Company in the United States Bankruptcy Court for the District of South Carolina (the "South Carolina Bankruptcy Court"). On April 2, 2002, the Company reached an agreement (the "Dismissal Agreement") with the Petitioning Creditors, which provided for the South Carolina Bankruptcy Court to dismiss the involuntary petition (the "Dismissal Order") subject to a twenty-day period during which parties-in-interest could object to that dismissal. The twenty-day period commenced on April 5, 2002, the day on which notice of the dismissal was published in the national edition of the Wall Street Journal. On April 26, 2002, the South Carolina Bankruptcy Court entered the Dismissal Order.

        The Dismissal Agreement also provided that the Company would seek an amendment of the Prepetition Credit Facility to permit it to file a voluntary petition for one of its wholly owned, South Carolina-registered subsidiaries in the South Carolina Bankruptcy Court. Pursuant to Amendment No. 7, dated as of April 4, 2002, the Senior Lenders agreed to amend the Prepetition Credit Facility to permit this filing. On April 23, 2002, the Debtors filed a voluntary petition for Bonlam (S.C.), Inc. ("Bonlam (S.C.)"), in the South Carolina Bankruptcy Court. The Dismissal Agreement further provided that the Company would extend the expiration of the Exchange Offer through May 15, 2002. The Company and GOF also agreed to forbear through, and including, May 15, 2002, from implementing any modifications to the Senior Subordinated Notes and the indentures governing them. The Petitioning Creditors agreed to forbear through and including, May 12, 2002 (the "Forbearance Period"), from exercising any and all remedies under the applicable indentures, the Senior Subordinated Notes or any applicable law, including any filing of an involuntary petition against any of the Debtors. During the Forbearance Period, the Company agreed (i) not to file a voluntary petition for relief under the Bankruptcy Code in a jurisdiction other than Columbia, South Carolina, and (ii) to contest any involuntary petition under the Bankruptcy Code filed in any such other jurisdiction, in each case, without the prior written consent of

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the Petitioning Creditors. GOF and the Petitioning Creditors agreed not to file an involuntary petition against the Company in any venue other than the South Carolina Bankruptcy Court.

        The Company, GOF and the Petitioning Creditors intended that the Dismissal Agreement would provide a framework for the Company and other parties, including the Petitioning Creditors, to continue to negotiate the terms of a potential restructuring of the Company through May 12, 2002. Negotiations proceeded, but the Company and Petitioning Creditors did not reach an agreement on a consensual restructuring. Meanwhile, the uncertainty created by the Involuntary Petition caused further deterioration in the Company's businesses. The Company determined that it was in the best interest of its creditors and other constituencies to seek the protections afforded by filing voluntary petitions for protection under Chapter 11 of the United States Code (the "Bankruptcy Code"). Accordingly, on May 11, 2002 (the "Filing Date" or "Petition Date"), the Company and each of its domestic subsidiaries (together with the Company, the "Debtors") filed voluntary petitions for "pre-negotiated" reorganization (the "Chapter 11 Filings" or the "Filings") under the Bankruptcy Code in the South Carolina Bankruptcy Court. The Chapter 11 Filings are being jointly administered for procedural purposes only. The Company's direct and indirect foreign subsidiaries and foreign joint venture entities did not file petitions under Chapter 11 and are not the subject of any bankruptcy proceedings. To facilitate stabilizing operations during the Chapter 11 Filings, the Debtors have secured a $125 million commitment (the "Commitment") for debtor-in-possession financing (the "DIP Facility") from a group of financial institutions, some of which are Senior Lenders (the "DIP Lenders") that will provide the Debtors sufficient liquidity to operate during the Chapter 11 Filings. JPMorgan Chase Bank is the Agent for the DIP Lenders under the DIP Facility. Pursuant to the DIP Facility, the Debtors paid certain fees to the DIP Lenders, including a structuring fee of 0.85% of the Commitment, an underwriting fee of 1.65% of the Commitment as well as certain other fees.

        To enhance the Debtors' ability to implement a restructuring and to emerge from Chapter 11 as efficiently as possible with an improved debt structure, the Debtors (a) obtained the requisite approval from a substantial majority of the Senior Lenders (the "Supporting Senior Lenders") (in the form of the Bank Term Sheet and discussed below) to restructure the Prepetition Credit Facility and (b) executed the Support Agreement, dated as of May 10, 2002, with GOF, pursuant to which GOF agreed to support a joint plan of reorganization. The Debtors paid a commitment fee to the Supporting Senior Lenders of approximately $4.3 million in consideration of their agreeing to the terms contained in the Bank Term Sheet. The Debtors agreed to file by May 24, 2002, a Chapter 11 plan of reorganization (the "Plan") and disclosure statement that were consistent with the term sheets agreed upon with each of the Supporting Senior Lenders and GOF. With the support of these substantial creditors, the Debtors are seeking to emerge from Chapter 11 in an expeditious manner. Beginning on May 23, 2002 and on other subsequent dates, GOF agreed to extend the deadline for filing such Plan and disclosure statement until June 14, 2002.

        On June 14, 2002, the Company filed the Plan with the South Carolina Bankruptcy Court. The Plan generally proposes (i) the restructuring of the Prepetition Credit Facility, including a $50 million principal reduction, (ii) the retirement of in excess of $591.5 million of the Debtors' obligations under the Senior Subordinated Notes, in exchange for the right of the holders of such Notes to receive either (x) their pro rata share of 100% of the newly issued Class A Common Stock of the reorganized Company (prior to the conversion of the preferred stock or new senior notes, each referred to below) (which shall be diluted by any conversion of the New Preferred Stock), (y) for each $1,000 in principal of existing Notes held, $120 in principal of New Junior Subordinated Notes bearing interest at 11% payable in cash or (z) for each $1,000 in principal amount of existing Senior Subordinated Notes held, $150 in principal amount of New Junior Subordinated PIK Notes, with interest at 7.5% payable in kind and 3.5% payable in cash, (iii) no

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impairment of the Debtors' other unsecured creditors, (iv) a $50 million investment by GOF and eligible electing holders of Senior Subordinated Notes in exchange for convertible preferred stock convertible into 44% of the newly issued common stock of the reorganized Company (after giving effect to the conversion thereof and excluding PIK dividends thereon) (the "New Preferred Stock"), (v) the issuance by GOF and eligible electing holders of Senior Subordinated Notes of a $25 million letter of credit to secure the Debtors' proposed amortization payments to the Senior Lenders (which if drawn, would be evidenced by New Senior Subordinated Notes) and (vi) the retention by existing shareholders of 100% of the newly issued Class B Common Stock (which shall not be diluted by any conversion of the New Preferred Stock) and certain warrants for up to an additional 9.5% of the reorganized Company's common stock, as of the effective date of reorganization (which shall be subject to dilution by conversion of the New Preferred Stock), exercisable at specified value targets for the Company. In connection with the new investment, GOF has agreed to act as a standby purchaser to ensure that all of the shares of New Preferred Stock offered by the Company are purchased and that the new investment generates gross proceeds of $50.0 million in cash and results in $25.0 million of exit letters of credit in place. The Company shall pay GOF a fee of $500,000 for acting as standby purchaser in connection with the new investment.

        Prior to the Petition Date, the Company classified expenses related to its financial restructuring efforts as "Special charges" in the consolidated statement of operations. Such charges consist of professional and other related services that have been expensed as incurred. After the Petition Date, costs related to the Company's reorganization activities are also expensed as incurred and have been classified as "Chapter 11 reorganization expenses" in accordance with SOP 90-7. The cumulative amount of costs and expenses related to the Company's financial restructuring efforts, including pre-funded legal costs, between the fourth quarter of 2001 and the second quarter of 2002 have been approximately $7.1 million.

        Refer to Note 15. "Subsequent Event," for further discussion surrounding the Company's financial restructuring.

Note 4.    Long-Lived Assets

Property, Plant and Equipment

        Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is computed for financial reporting purposes on the straight-line method over the estimated useful lives of the related assets. The estimated useful lives established for building and land improvements range from 18 to 33 years, and the estimated useful lives established for machinery, equipment and other fixed assets range from 3 to 15 years. Costs of the construction of certain long-term assets include capitalized interest that is amortized over the estimated useful life of the related asset.

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        Property, plant and equipment as of June 29, 2002 and December 29, 2001, consist of the following (in thousands):

        As discussed more fully under Note 6. "Business Restructuring," the Company recorded an impairment charge to property, plant and equipment of approximately $80.8 million during 2001.

Intangibles and Loan Acquisition Costs

        Intangibles and loan acquisition costs as of June 29, 2002 and December 29, 2001, consist of the following (in thousands):

        As discussed more fully under Note 6. "Business Restructuring," the Company recorded an impairment charge to goodwill and contract intangibles of approximately $100.4 million during 2001.

        In July 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("FAS 142"). FAS 142 supersedes Accounting Principles Bulletin No. 17, "Intangible Assets." FAS 142 primarily addresses the accounting for goodwill and intangible assets subsequent to their acquisition. The most significant changes made by FAS 142 are: (1) goodwill and indefinite lived intangible assets will no longer be amortized, (2) goodwill will be tested for impairment at least annually, (3) intangible assets deemed to have an indefinite life will be tested for impairment at least annually and (4) the amortization period of intangible assets with finite lives will no longer be limited to forty years. FAS 142 is effective for fiscal years beginning after December 15, 2001. The adoption of FAS 142 did not have a material effect on the

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Company's consolidated financial position. Amortization expense for the three months and six months ended June 29, 2002 and June 30, 2001 is presented in the following table (in thousands):

Note 5.    Accrued Liabilities

        Accrued liabilities as of June 29, 2002 and December 29, 2001, consist of the following:

        Accrued interest at December 29, 2001 included interest of approximately $23.5 million on the Senior Subordinated Notes. Accrued interest at June 29, 2002 of $42.2 million on the Senior Subordinated Notes is classified as "Subject to Compromise" in the consolidated balance sheet. See Note 7. "Liabilities Subject to Compromise."

Note 6.    Business Restructuring

        The Company anticipated that the confluence of negative economic and business factors would generally subside during the latter half of 2001, particularly in the fourth quarter. However, the anticipated recovery within the Company's business did not develop as planned in the latter half of 2001; therefore, the Company undertook a comprehensive business restructuring involving manufacturing initiatives and workforce reductions. The restructuring program continued through the second quarter of 2002, thus the Company recorded a pre-tax charge of $0.4 million in the second quarter of 2002 and $0.6 million during the six months ended June 29, 2002 consisting predominantly of personnel related costs that

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have been classified as "Plant realignment costs" in the consolidated statement of operations. A summary of the plant realignment liability is presented in the following table (in thousands):

        In the fourth quarter of 2001, based on a comprehensive review of the Company's long-lived assets, the Company recorded a non-cash charge of approximately $181.2 million, consisting of the write-down of goodwill and contract intangibles ($100.4 million) and machinery and equipment ($80.8 million) related to production assets within the U.S. and European Nonwovens business. Further asset write-downs may be required as part of the Company's application of "fresh-start" accounting adjustments pursuant to SOP 90-7; however, the extent of such adjustments and the amount of such write-downs is not presently determinable.

Note 7.    Liabilities Subject to Compromise

        In the Chapter 11 Filings, substantially all unsecured liabilities as of the Filing Date are subject to compromise or other treatment under the Plan which must be confirmed by the Bankruptcy Court after submission to any required vote by affected parties. Generally, all actions to enforce or otherwise effect repayment of prepetition liabilities, as well as all pending litigation against the Debtors, are stayed while the Debtors continue their business operations as debtors-in-possession. The ultimate amount of and settlement terms for liabilities subject to compromise are subject to the approved Plan and accordingly are not presently determinable. Pursuant to SOP 90-7, interest expense is reported only to the extent that it will be paid during the Chapter 11 Filings or that it is probable that it will be an allowed claim. Accordingly, no interest has been accrued on the Company's Senior Subordinated Notes after the Petition Date. The principal categories of obligations classified as liabilities subject to compromise under the Chapter 11 Filings as of June 29, 2002 are identified below (in thousands):

Note 8.    Debt

        Short-term borrowings, which are not subject to compromise, amounted to approximately $9.9 million and $12.4 million at June 29, 2002 and December 29, 2001, respectively. These amounts are composed of U.S. loans and local borrowings, principally by international subsidiaries. Debt, excluding

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short-term borrowings, as of June 29, 2002 and December 29, 2001, consists of the following (in thousands):

        DIP Facility—On May 13, 2002, the Debtors filed a motion seeking authority for the Company to enter into a credit facility of up to $125 million in debtor-in-possession financing with JPMorgan Chase Bank as administrative agent which was approved by the Bankruptcy Court on May 29, 2002. Under such terms, the Company, as borrower, may make revolving credit borrowings in an amount not exceeding the lesser of $125 million or the Borrowing Base (as defined in the DIP Facility). The DIP Facility will terminate and the borrowings thereunder will be due and payable upon the earliest of (i) the maturity date (i.e. May 30, 2003), (ii) the date of the substantial consummation of a plan of reorganization that is confirmed pursuant to an order by the Bankruptcy Court and (iii) the acceleration of the revolving credit loans made by any of the banks who are a party to the DIP Facility and the termination of the total commitment under the DIP Facility. The interest rate applicable to borrowings under the DIP Facility and financial covenants are customary for financings of this type. Borrowings under the DIP Facility are guaranteed by each of the Company's direct and indirect domestic subsidiaries. There were no amounts outstanding under the DIP Facility at June 29, 2002.

        Prepetition Credit Facility—The Company's Credit Facility (as amended through and including Amendment No. 6 as defined below, the "Prepetition Credit Facility") provided for secured revolving credit borrowings with aggregate commitments of up to $325.0 million and aggregate term loans of $275.0 million. Subject to certain terms and conditions, a portion of the Prepetition Credit Facility may be used for letters of credit of which approximately $14.9 million was outstanding on June 29, 2002. Amendment No. 6 imposed a limit of $260.0 million under the revolving portion of the Prepetition Credit Facility for borrowings and outstanding letters of credit, with not more than $15.0 million of such revolving borrowings permitted to be outstanding in Canadian dollar equivalent borrowings. All indebtedness under the Prepetition Credit Facility is guaranteed, on a joint and several basis, by each and all of the direct and indirect domestic subsidiaries of the Company. The Prepetition Credit Facility and the related guarantees are secured by (i) a lien on substantially all of the assets of the Company and its domestic subsidiaries, (ii) a pledge of all or a portion of the stock of the domestic subsidiaries of the Company and of certain non-domestic subsidiaries of the Company, (iii) a lien on substantially all of the assets of direct foreign borrowers (to secure direct borrowings by such borrowers), and (iv) a pledge of certain secured intercompany notes issued to the Company or one or more of its subsidiaries by non-domestic subsidiaries. Commitment fees under the Prepetition Credit Facility are generally equal to a percentage of the daily-unused amount of such commitment. The Prepetition Credit Facility contained covenants and events of default customary for financings of this type, to include leverage, fixed charge

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coverage and net worth. The revolving portion of the Prepetition Credit Facility terminates in June 2003. The term loan portion terminates in December 2005 and December 2006. The loans are subject to mandatory prepayment out of proceeds received in connection with certain casualty events, asset sales and debt issuances.

        The interest rate applicable to borrowings under the Prepetition Credit Facility is based on, in the case of U.S. dollar denominated loans, a specified base rate or a specified Eurocurrency base rate for U.S. dollars, at the Company's option, plus a specified margin. In the event that a portion of the Prepetition Credit Facility is denominated in Dutch guilders, the applicable interest rate is based on the specified Eurocurrency base rate for Dutch guilders, plus a specified margin. In the event that a portion of the Prepetition Credit Facility is denominated in Canadian dollars, the applicable interest rate is based on the specified Canadian base rate plus a specified margin or the bankers' acceptance discount rate at the Company's option. The applicable margin for loans bearing interest based on the base rate or Canadian base rate will range from 2.75% to 3.50% and the margin for loans bearing interest on a Eurocurrency rate will range from 3.75% to 4.50%, based on the Company's ratio of total consolidated indebtedness to consolidated EBITDA calculated on a rolling four quarter basis.

        Under the terms of the Forbearance Agreement, as discussed below, with the Senior Secured Lenders, the Company is prevented from making any additional borrowings under the Prepetition Credit Facility in excess of the amounts outstanding on December 30, 2001. In addition, all borrowings under the Prepetition Credit Facility are required to be made under the base rate option. The following table provides detail on the revolving credit and term loan components of the Company's Prepetition Credit Facility at June 29, 2002 and December 29, 2001 (in thousands):

(1)

The change in Revolving Credit B balances at June 29, 2002 over December 29, 2001 results from foreign currency translation rate differences at such dates between the Canadian dollar and U.S. dollar. The Canadian dollar equivalent of the Revolving Credit B borrowings approximates Cdn $10.1 million at June 29, 2002 and December 29, 2001.

        Senior Subordinated Notes—In March 1998, the Company issued $200 million of 8³/4% Senior Subordinated Notes due 2008 (the "March 1998 Notes") in a private placement transaction pursuant to an indenture dated as of March 1, 1998. In August 1998, the Company completed its exchange of $200 million of the March 1998 Notes, Series B (the "8³/4% Senior Subordinated Notes") which have been registered for public trading for all outstanding March 1998 Notes. In July 1997, the Company issued $400 million of 9% Senior Subordinated Notes due 2007 (the "July 1997 Notes") in a private placement transaction pursuant to an indenture dated as of July 1, 1997. In October 1997, the Company

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completed its exchange of the $400 million of July 1997 Notes, Series B (the "9% Senior Subordinated Notes"), which have been registered for public trading for all the outstanding July 1997 Notes.

        The 8³/4% Senior Subordinated Notes and the 9% Senior Subordinated Notes (collectively, the "Senior Subordinated Notes") are unsecured senior subordinated indebtedness of the Company and are subordinated in right of payment to all existing and future senior indebtedness of the Company. The Senior Subordinated Notes indenture contains several covenants, including limitations on: (i) indebtedness, certain restricted payments, liens, transactions with affiliates, dividend and other payment restrictions affecting certain subsidiaries, guarantees by certain subsidiaries, certain transactions including merger and asset sales; and (ii) certain restrictions regarding the disposition of proceeds of asset sales. In addition, in the event of certain defaults under the Prepetition Credit Facility, the Senior Secured Lenders under the Prepetition Credit Facility may exercise a right to block any payments of interest or principal on the Senior Subordinated Notes for, in general, up to 179 days during any period of 360 consecutive days. In such event, a failure by the Company to make any such required payment would be an event of default under the Senior Subordinated Notes. See "Recent Developments" below for further discussion of the Senior Subordinated Notes.

        Other—The Company's China-based majority owned subsidiary ("Nanhai") has a bank facility with a financial institution in China. The facility was refinanced during July 2002 and is scheduled to mature during January 2003. At June 29, 2002, the approximate amount of outstanding indebtedness under the facility was $9.5 million. The Nanhai indebtedness is guaranteed 100% by the Company and to support this guarantee, a letter of credit has been issued by the Company's agent bank in the amount of $10.0 million. As a result of the Company's 80% majority ownership of Nanhai and full guarantee of the Nanhai bank debt, all amounts outstanding under the Nanhai bank facility are reflected in the Company's consolidated balance sheet as a current liability within the caption "Short term borrowings" at June 29, 2002. At June 29, 2002, Nanhai had cash and cash equivalents on hand of approximately $1.9 million and working capital, excluding current debt of approximately $9.3 million. Including current debt, the Nanhai working capital deficit was $0.1 million at June 29, 2002.

        The Company's Argentina-based majority owned subsidiary ("DNS") has two bank facilities denominated in U.S. dollars of approximately $9.9 million at June 29, 2002 with current maturities of approximately $3.9 million. The facilities are scheduled to mature in 2004 and 2005 respectively. The full amount of such indebtedness is reflected on the Company's consolidated balance sheet at June 29, 2002 as a result of the Company's 60% majority ownership of this subsidiary; however, the minority shareholder guarantees 40% of such indebtedness. Because of the Argentine peso devaluation against the U.S. dollar, the Company is exposed to foreign currency remeasurement losses of the U.S. dollar denominated debt at DNS because the functional currency of DNS is the Argentine peso. At June 29, 2002, DNS had cash and cash equivalents on hand of approximately $0.3 million and working capital of $5.5 million, excluding current debt. Including current debt, DNS working capital was approximately $1.6 million June 29, 2002.

        Recent Developments—As of December 29, 2001 the Company was in default under the Prepetition Credit Facility. Because of this default, the Senior Secured Lenders exercised their right to block the payment of interest due January 2, 2002 to the holders of the 9% Senior Subordinated Notes and the interest payment due on March 1, 2002 to the holders of the 8³/4% Senior Subordinated Notes. The Company's failure to pay interest on the outstanding Senior Subordinated Notes prior to the expiration of the 30-day grace period constituted an event of default under such notes.

        On December 30, 2001, the Company and certain subsidiaries entered into a Forbearance Agreement pursuant to which the Senior Secured Lenders agreed not to exercise certain remedies available to them under the Prepetition Credit Facility as a result of the existing covenant defaults during the forbearance period. If certain events were to occur, the Senior Secured Lenders would be able to exercise their remedies available to them, which included the right to declare all amounts outstanding

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under the Prepetition Credit Facility immediately due and payable. The Forbearance Agreement, as extended on March 15, 2002 was scheduled to end on May 15, 2002 and prevented the Company from making any additional borrowings in excess of the amounts outstanding under the revolving portion of the Prepetition Credit Facility as of December 30, 2001.

        On April 4, 2002, the Company entered into Amendment No. 7 to its Prepetition Credit Facility that allowed Bonlam (S.C.) to file a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code without triggering an event of default under the Prepetition Credit Facility. On April 23, 2002, Bonlam (S.C.) filed a voluntary petition as part of the agreement previously reached to dismiss the Involuntary Petition filed against the Company on March 25, 2002.

        Refer to Note 3. "Chapter 11 Proceedings" for a complete description of the events surrounding the Company's Chapter 11 Filing on May 11, 2002. Also, refer to Note 15. "Subsequent Event" for further discussion of the Company's financial restructuring.

Note 9.    Selected Financial Data of Guarantors

        Payment of the Company's senior subordinated notes is guaranteed jointly and severally on a senior subordinated basis by certain of the Company's subsidiaries. Management has determined that separate complete financial statements of the guarantors are not material to users of the financial statements. The following sets forth selected financial data of the guarantor and non-guarantor subsidiaries (in thousands):

Condensed Consolidating Selected Balance Sheet Financial Data
As of June 29, 2002

Condensed Consolidating Selected Balance Sheet Financial Data
As of December 29, 2001

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Condensed Consolidating Statement of Operations Selected Financial Data
For the Six Months Ended June 29, 2002

Condensed Consolidating Statement of Operations Selected Financial Data
For the Six Months Ended June 30, 2001

Note 10.    Segment and Geographic Information

        The Company reports segment information in accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("FAS 131"). Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and assessing performance. Sales to The Procter & Gamble Company account for more than 10% of the Company's sales and are reported primarily in the Consumer segment. Consequently, the loss of these sales would have a material adverse effect on this segment. Generally, the Company's products can be manufactured on more than one type of production line. Accordingly, certain costs and assets attributed to each segment of the business were determined on an allocation basis. Production times have a similar relationship to net sales, thus the Company believes a reasonable basis for allocating certain costs is the percent of net sales method. As previously discussed in Note 3. "Chapter 11 Proceedings," and Note 6. "Business Restructuring," the Company recorded unusual items during the first six months of fiscal 2002 consisting of plant realignment and special charges. These charges have not been allocated to the Company's reportable business segments because the Company's management does not evaluate

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such charges on a segment-by-segment basis. Segment operating performance is measured and evaluated before unusual or special items. Financial data by segments follows (in thousands):

(1)

Consists primarily of cash and equivalents, short-term investments, loan acquisition costs and other corporate related assets.

        Geographic data for the Company's operations are presented in the following table.

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Note 11.    Stock Option Plans

        The Company accounts for stock options in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") as permitted by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"). Had compensation cost been determined under the provisions of FAS 123 rather than APB 25, the Company's net (loss) would have increased by approximately $0.6 million or $0.02 per diluted share during the six months ended June 29, 2002. At June 29, 2002, 769,494 shares were exercisable and 945,307 shares were available for future grant. The following table summarizes transactions of the Company's stock option plans for the six-month period ended June 29, 2002:

Note 12.    Affiliate Transactions

        The Company's corporate headquarters are housed in space leased by a shareholder of the Company from an affiliate of the shareholder. A portion of the payments and shared other expenses, primarily insurance and allocated costs, are charged to the Company. Such amounts approximated $0.3 million during the six months ended June 29, 2002. In addition, the Company leases a manufacturing facility from an affiliated entity that the Company believes is comparable to similar properties in the area. Rent expense relating to this lease approximated $0.1 million during the six months ended June 29, 2002.

Note 13.    Certain Matters

        During the first quarter of fiscal 2001, the Company exercised an option to obtain a 45% minority position in a start-up Saudi Arabian state-of-the-art nonwovens production line (the "Saudi Venture"). Over the course of 2001, the Company funded approximately $4.4 million representing its pro-rata share for the construction costs of this line in Saudi Arabia. The Company is not permitted to acquire more than a 45% interest in the Saudi Venture pursuant to Amendment No. 6. The Saudi Venture and the Company's equity stake are currently under review pending finalization of the Investment Approval Application (the "IAA") between the Company and its partner and the approval of the IAA by the Saudi Arabian government. The Company currently expects to receive the final outcome of the review during the third

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or fourth quarter of fiscal 2002. However, in the event the Company and its partner are unable to agree on final terms of the Saudi Venture acceptable to the Company, the Saudi Venture would not be able to obtain approval of the IAA from the Saudi Arabia government. Moreover, the Company may not be able to recover its pro-rata share of construction costs funded in 2001. The Company has not guaranteed any indebtedness of the non-consolidated Saudi Venture.

        On December 19, 1997, DT Acquisition Inc. ("DTA"), a subsidiary of the Company, acquired substantially all of the outstanding common and first preferred shares of Dominion Textiles Inc., a Company organized under the laws of Canada ("Dominion"), and on January 29, 1998, DTA acquired all remaining common and first preferred shares, at which time Dominion underwent a "winding-up." All assets and liabilities of Dominion were transferred to DTA and all outstanding common shares and first preferred shares held by DTA were redeemed. Immediately thereafter, pursuant to a purchase agreement, dated October 27, 1997, the apparel fabrics business of Dominion was sold, at no gain or loss, to Galey & Lord, Inc., ("Galey") and the Company acquired the nonwovens and industrial fabrics operations. The Company and Galey finalized the acquisition cash settlement during 2000 pursuant to the Master Separation Agreement (the "MSA") dated January 29, 1998. The result of such settlement was not material to the Company's financial condition. Under the MSA, the Company and Galey are required to share in the payment of certain on-going costs, including taxes, for historical Dominion entities as required by the MSA. Because the Company originally acquired Dominion, the Company generally makes the payments and is reimbursed by Galey. On February 19, 2002, Galey and its U.S. operating subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code and began operating their businesses as debtors-in-possession. During March 2002, Galey informed the Company of its intention to reject the MSA as part of its bankruptcy proceedings. If approved by the Bankruptcy Court, Galey's contemplated rejection of the MSA would result in the Company being required to fund expenditures that should be allocated to, and paid by, Galey, which could potentially have a material adverse effect on the Company. At June 29, 2002, the amounts due from Galey for the first six months of 2002 shared cash activity pursuant to the MSA, including amounts associated with statutory tax payments, approximated $1.3 million (the "Galey Receivable"). The Company has fully reserved the Galey Receivable at June 29, 2002 due to the uncertainty of collectibility at such date. All shared cash activity prior to the first six months of 2002 relative to the MSA has been collected from Galey.

Note 14.    New Accounting Standards

        On April 30, 2002, the FASB issued SFAS No. 145, "Recission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 rescinds Statement No. 4, which required all gains and losses from extinguishments of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. Upon adoption of SFAS No. 145, companies will be required to apply the criteria in Accounting Principle Board Opinion No. 30, "Reporting the Results of Operations—reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" in determining the classification of gains and losses resulting from the extinguishments of debt. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002. The Company is currently assessing the impact of this standard on its financial statements.

        On July 30, 2002, the FASB issued SFAS No 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The Company is currently assessing the impact of this standard on its financial statements.

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Note 15.    Subsequent Event

        On August 15, 2002, a hearing was held in the South Carolina Bankruptcy Court to consider, among other things, the approval of the Company's Disclosure Statement relating to the Plan of Reorganization. The judge indicated that he would approve the Disclosure Statement, and directed the parties to meet on statement language, with a hearing date of August 20, 2002, to resolve any remaining differences. The Company currently expects the Disclosure Statement to be approved at this hearing.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of the Company's consolidated results of operations and financial condition. The discussion should be read in conjunction with the consolidated financial statements and notes thereto contained in Part I of this report on Form 10-Q and with the Company's Annual Report on Form 10-K for the fiscal year ended December 29, 2001. In particular, this discussion should be read in conjunction with Note 3. "Chapter 11 Proceedings" in Part 1, which describes the filing by the Company and its domestic subsidiaries of voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code on May 11, 2002.

Results of Operations

        The following table sets forth the percentage relationships to net sales of certain income statement items.

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Comparison of Three Months Ended June 29, 2002 and June 30, 2001

        The following table sets forth components of the Company's net sales and operating income (loss) by segment for the three months ended June 29, 2002 and the corresponding increase/(decrease) over the comparable period in the prior year: