POLYMER GROUP INC - 10-Q Quarterly Report

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

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

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Securities 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes o 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 November 4, 2002 there were 32,004,200 Common Shares, $.01 par value, outstanding.


Part I. Financial Information		3
	Item 1.		Financial Statements	3
	Item 2.		Management's Discussion and Analysis of Financial Condition and Results of Operations	29
	Item 3.		Quantitative and Qualitative Disclosures About Market Risk	45
Part II. Other Information		48
Signatures		49
Certification of Chief Executive Officer		50
Certification of Chief Financial Officer		51
Exhibit Index		52

POLYMER GROUP, INC.

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

POLYMER GROUP, INC.

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

POLYMER GROUP, INC.

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

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.

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 September 28, 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 nine months ended September 28, 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.

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.

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 $13.7 million and $12.0 million at September 28, 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 are stated at the lower of cost or market using the first-in, first-out method of accounting and, as of September 28, 2002 and December 29, 2001 consist of the following (in thousands):

	September 28, 2002		December 29, 2001
	(Unaudited)

Finished goods	$	49,748	$	50,440
Work in process		17,316		19,172
Raw materials		39,208		46,341

	$	106,272	$	115,953

For all applicable 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 projected 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 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.

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 of 9% is exceeded on the reset date, as defined in the agreement, the Company is entitled to receive a dollar amount by which the rate cap exceeds 9%. Over the term of the agreement, such amounts have not exceeded 9%.

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.

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 $4.6 million and $4.1 million of research and development expense during the three months ended September 28, 2002 and September 29, 2001, respectively. Year to date research and development expenses approximated $12.3 million in 2002 and $13.3 million in 2001.

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 $4.8 million and $5.2 million of shipping and handling costs, during the three months ended September 28, 2002 and September 29, 2001, respectively. Year to date shipping and handling costs approximated $15.1 million in 2002 and $16.7 million in 2001.

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 $6.8 million and $7.0 million of selling and advertising costs, during the three months ended September 28, 2002 and September 29, 2001, respectively. Year to date selling and advertising costs approximated $22.9 million in 2002 and $22.2 million in 2001.

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. 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, devalued significantly against the U.S. dollar during 2002 due primarily to the economic uncertainty within this region. As a result of the Argentine peso devaluation, the Company has recognized a foreign currency loss of approximately $2.5 million during the nine months ended September 28, 2002, net of minority interest adjustments, related to its Argentina majority-owned subsidiary.

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 (loss) approximated $(32.3) million and $(4.4) million for the three months ended September 28, 2002 and September 29, 2001, respectively. Year to date comprehensive (loss) approximated $(57.2) million in 2002 and $(46.8) million in 2001.

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 September 28, 2002 and September 29, 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 nine 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 nine months ended September 28, 2002 and September 29, 2001 is presented in the following table (in thousands, except per share data):

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.

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.

In evaluating the various restructuring options, the Company decided to maintain negotiations with MatlinPatterson Global Opportunities Partners, L.P. (f/k/a 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 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 as 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.

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 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 had 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 was to pay GOF a fee of $500,000 for acting as standby purchaser in connection with the new investment.

At a hearing, which took place on August 15, 2002, and concluded on August 20, 2002, the South Carolina Bankruptcy Court approved the Company's Disclosure Statement relating to the Plan of Reorganization, as amended and filed on August 21, 2002, over the Committee's objection. On August 30, 2002, the Committee filed a motion requesting the South Carolina Bankruptcy Court appoint an examiner pursuant to section 1103(b) of the Bankruptcy Code. On October 8, 2002, the South Carolina Bankruptcy Court appointed Benjamin C. Ackerly, Sr. as the examiner. The examiner must submit his report to the South Carolina Bankruptcy Court no later than December 2, 2002. Refer to Note 18, "Subsequent Events" for a discussion of certain other events that occurred after September 28, 2002.

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 and bank financing fees, between the fourth quarter of 2001 and the third quarter of 2002 have been approximately $17.4 million.

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.

Property, plant and equipment as of September 28, 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 as of September 28, 2002 and December 29, 2001, consist of the following (in thousands):

		September 28, 2002			December 29, 2001
		(Unaudited)
Cost:
	Goodwill	$	120,306		$	124,756
	Proprietary technology		29,325			29,325
	Loan acquisition costs and other		47,832			42,918

			197,463			196,999
Less accumulated amortization			(63,721	)		(61,004	)

		$	133,742		$	135,995

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 Company's consolidated financial position. Amortization expense for the three months and nine months ended September 28, 2002 and September 29, 2001 is presented in the following table (in thousands):

Accrued liabilities as of September 28, 2002 and December 29, 2001, consist of the following:

		September 28, 2002		December 29, 2001
		(Unaudited)
Not Subject to Compromise:
	Interest payable	$	3,557	$	24,454
	Salaries, wages and other fringe benefits		13,661		11,573
	Other		25,575		24,240

		$	42,793	$	60,267

Accrued interest at December 29, 2001 included interest of approximately $23.5 million on the Senior Subordinated Notes. Accrued interest at September 28, 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."

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 third quarter of 2002, thus the Company recorded a pre-tax charge of $0.4 million in the third quarter of 2002 and $0.9 million during

the nine months ended September 28, 2002 consisting predominantly of personnel related costs that 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):

Plant realignment liability as of December 29, 2001		$	6,242
2002 plant realignment charge:
	First Quarter		176
	Second Quarter		381
	Third Quarter		356
2002 cash payments and adjustments:
	First Quarter		(1,425	)
	Second Quarter		(1,164	)
	Third Quarter		(1,562	)

Plant realignment liability as of September 28, 2002		$	3,004

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.

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 September 28, 2002 are identified below (in thousands):

9% Senior Subordinated Notes, net of unamortized debt discount	$	390,982
8³/4% Senior Subordinated Notes		196,500
Interest accrued on senior subordinated notes		42,186
Accounts payable		14,183
Accrued expenses and other		9,054

Total liabilities subject to compromise	$	652,905

Short-term borrowings, which are not subject to compromise, amounted to approximately $10.1 million and $12.4 million at September 28, 2002 and December 29, 2001, respectively. These

amounts are composed of U.S. loans and local borrowings, principally by international subsidiaries. Debt, excluding short-term borrowings, as of September 28, 2002 and December 29, 2001, consists of the following (in thousands):

	September 28, 2002		December 29, 2001
	(Unaudited)
Subject to Compromise:
Senior subordinated notes, net of unamortized debt discount of $4,018 at September 28, 2002 and $4,232 at December 29, 2001, due July 2007	$	390,982	$	390,768
Senior subordinated notes, due March 2008		196,500		196,500
Not Subject to Compromise:
Revolving Credit Facility, due June 2003		216,379		216,325
Term loans, including current portion, due December 2005 and 2006		268,060		268,060
Other		11,432		15,166

	$	1,083,353	$	1,086,819

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 have been no borrowings under the DIP Facility to date.

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 $13.9 million was outstanding on September 28, 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 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 September 28, 2002 and December 29, 2001 (in thousands):

				September 28, 2002		December 29, 2001
Revolving Credit (Excluding Letters of Credit):
	Revolving Credit A (U.S. and Dutch borrowings)			$	210,000	$	210,000
	Revolving Credit B (Canadian borrowings)(1)				6,379		6,325

		Total Revolving Credit			216,379		216,325
Term Loans (all US borrowings):
	Term Loan B				121,000		121,000
	Term Loan B-1				48,560		48,560
	Term Loan C				98,500		98,500

		Total Term Loans			268,060		268,060

			Total amounts outstanding under Prepetition Credit Facility	$	484,439	$	484,385

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 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 September 28, 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 September 28, 2002. At September 28, 2002, Nanhai had cash and cash equivalents on hand of approximately $2.0 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 September 28, 2002.

The Company's Argentina-based majority owned subsidiary ("DNS") has two bank facilities denominated in U.S. dollars of approximately $8.1 million at September 28, 2002 with current maturities of approximately $3.8 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 September 28, 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 September 28, 2002, DNS had cash and cash equivalents on hand of approximately $0.2 million and working capital of $5.8 million, excluding current debt. Including current debt, DNS working capital was approximately $2.0 million at September 28, 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 and July 2, 2002 to the holders of the 9% Senior Subordinated Notes and the interest payment due on March 1, 2002 and September 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 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 18. "Subsequent Events" for further discussion of the Company's financial restructuring.

Payment of the Company's senior subordinated notes is guaranteed jointly and severally on a senior subordinated basis by certain of the Company's direct and indirect wholly owned 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 September 28, 2002

	Combined Guarantor Subsidiaries			The Company	Reclassifications and Eliminations		Consolidated
Working capital (deficit)	$	90,967	$	133,118	$	(457,241	)	$	(2,391	)	$	(235,547	)
Total assets		2,568,110		683,700		1,127,406			(3,178,207	)		1,201,009
Total debt		1,509		26,424		1,065,542			—			1,093,475
Shareholders' equity (deficit)		1,297,400		320,980		(106,039	)		(1,618,380	)		(106,039	)

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

	Combined Guarantor Subsidiaries			The Company	Reclassifications and Eliminations		Consolidated
Working capital (deficit)	$	73,588	$	113,548	$	(1,107,400	)	$	47,928		$	(872,336	)
Total assets		2,065,267		646,405		1,090,204			(2,569,662	)		1,232,214
Total debt		1,558		30,018		1,067,654			—			1,099,230
Shareholders' equity (deficit)		896,276		298,673		(48,862	)		(1,194,949	)		(48,862	)

Condensed Consolidating Statement of Operations Selected Financial Data
For the Nine Months Ended September 28, 2002

	Combined Guarantor Subsidiaries		Combined Non-Guarantor Subsidiaries		The Company	Reclassifications and Eliminations		Consolidated
Net sales	$	300,814		$	304,471	$	—		$	(29,276	)	$	576,009
Operating income (loss)		(17,103	)		34,600		(4,777	)		44			12,764
Interest expense, income taxes and other, net		(22,568	)		29,918		65,163			10,191			82,704
Net income (loss)		5,465			4,682		(69,940	)		(10,147	)		(69,940	)

Condensed Consolidating Statement of Operations Selected Financial Data
For the Nine Months Ended September 29, 2001

	Combined Guarantor Subsidiaries		Combined Non-Guarantor Subsidiaries		The Company	Reclassifications and Eliminations		Consolidated
Net sales	$	340,564		$	300,034	$	—		$	(22,574	)	$	618,024
Operating income (loss)		(14,085	)		33,269		245			243			19,672
Interest expense, income taxes and other, net		(24,247	)		28,940		43,412			14,734			62,839
Net income (loss)		10,162			4,329		(43,167	)		(14,491	)		(43,167	)

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 nonwoven 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 nine 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 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):

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

Foreign currency and other for the three months and nine months ended September 28, 2002 and September 29, 2001 consist of the following (in thousands):

During the first quarter of fiscal 2001, the Company exercised an option to obtain a 45% minority position in a start-up nonwovens production line in Saudi Arabia (the "Saudi Line"). Over the course of 2001, the Company funded approximately $4.4 million, which represented its pro-rata share, of the construction costs of the Saudi Line. The Company was not permitted to acquire more than a 45% interest in the Saudi Line pursuant to Amendment No. 6. Prior to the third quarter of 2002, the Company's equity stake in the Saudi Line was under review pending finalization of the Investment Approval Application between and the Company and its partner which was required to be submitted for approval to the Saudi Arabian government. However, during the third quarter of 2002, it became apparent that an agreement could not be reached between the Company and its partner concerning ownership and operation of the Saudi Line and accordingly, the Company recorded a $4.4 million charge to earnings for the write-down of its investment in the Saudi Line during the three months ended September 28, 2002. The Company is exploring its legal and other options and intends to aggressively pursue recovering its investment in the Saudi Line.

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 $0.9 million or $0.03 per diluted share during the nine months ended September 28, 2002. At September 28, 2002, 994,813 shares were exercisable and

966,696 shares were available for future grant. The following table summarizes transactions of the Company's stock option plans for the nine-month period ended September 28, 2002:

		Number of Shares	Weighted Average Exercise Price
Unexercised options outstanding—December 29, 2001		2,120,576	$	2.09
	Granted	—		—
	Exercised	—		—
	Forfeited	87,272		1.89
	Expired/canceled	—		—

Unexercised options outstanding—September 28, 2002		2,033,304		2.10

During the third quarter of 2002, the Company's 40% minority shareholder in DNS exercised an option under the Purchase and Option Agreement dated July 1, 2000 whereby the Company or the minority shareholder could elect to sell their respective ownership share of DNS to the other party. The completion of the purchase of shares under the option is subject to approval of the Company's lenders, which has not been obtained. In addition, the Company and the minority shareholder have not agreed to an acquisition price for such additional investment. The Company has not received any approval from the U.S. Bankruptcy Court to engage in such transaction.

The Company acquired an 80% majority ownership position in Vateks Teksil Sanayi ve Ticaret AS ("Vateks") during fiscal 1999. The acquisition agreement contained a purchase price adjustment based upon the achievement of certain operating targets within an agreed-upon period after the acquisition date. Vateks did not achieve the operating targets and thus the Company sought to recover the short fall as calculated pursuant to the provisions of the acquisition agreement. The Company and former shareholder did not agree on such amount and therefore, the settlement proceeded to arbitration. The independent arbitrator concurred that the Company was entitled to receive an adjustment of the purchase price pursuant to the agreement. Accordingly, the Company and former shareholder agreed to a settlement of approximately $1.8 million payable in installments between fiscal 2002 and 2004. The Company has received approximately $0.6 million to date during fiscal 2002 representing the first settlement installment. Such amount has been accounted for as an adjustment to the purchase price of Vateks pursuant to the provisions of APB No. 16.

The Company's corporate headquarters are housed in space leased by a shareholder of the Company from an affiliate of the shareholder at an annual rate of approximately $0.2 million. Shared expenses, primarily allocated and occupancy support costs, are charged to the Company and approximated $0.5 million during the nine months ended September 28, 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 $0.2 million during the nine months ended September 28, 2002.

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 September 28, 2002, the amounts due from Galey for the first nine months of 2002 shared cash activity pursuant to the MSA, including amounts associated with statutory tax payments, approximated $1.4 million (the "Galey Receivable"). The Company has fully reserved the Galey Receivable at September 28, 2002 due to the uncertainty of collectibility at such date. All shared cash activity prior to the first quarter of 2002 relative to the MSA has been collected from Galey.

On April 23, 2002, the Company filed a demand for arbitration against Johnson & Johnson ("J&J"). The primary issue in the arbitration is the Company's assertion that J&J breached a supply agreement when: (i) J&J and its affiliates in the U.S., Canada and Europe failed both to purchase certain products from the Company and to allow the Company a reasonable opportunity to compete for certain sales; and (ii) J&J failed to encourage its affiliates in other parts of the world to buy the Company's products. The arbitration is currently pending in the State of New York.

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.

As part of the acquisition of Dominion and through its wholly-owned subsidiary, DTA, the Company acquired a 50% equity interest in a Canadian-based manufacturer of home furnishing products. The Company's equity ownership of this entity is a 50% shared investment with Galey pursuant to the MSA; therefore, the Company's effective ownership approximates 25%. Thus the results of this entity are not consolidated with those of the Company. At September 28, 2002, the Company's investment in this entity approximated $0.2 million. The Company received no dividends from this entity during the nine months ended September 28, 2002 nor has the Company guaranteed any of this entity's obligations. Summarized unaudited financial information of this entity is presented below (in thousands):

	As of September 28, 2002
Current assets	$	2,794
Property, plant and equipment, net		2,081
Current liabilities		2,403
Shareholders' equity		2,472

	Nine Months Ended September 28, 2002
Net sales	$	12,908
Gross profit		835
Net (loss)		(159	)

GOF, the Committee and the individual members of the Committee (the "Plan Parties") have agreed to support a modified plan of reorganization (the "Modified Plan").

The Modified Plan generally proposes that (i) the restructuring of the Prepetition Credit Facility, including a payment (the "Secured Lender Payment") of $50.0 million on the Effective Date to the agent for the benefit of the Existing Senior Secured Lenders under the Prepetition Credit Facility, which Secured Lender Payment shall be exclusive of the proceeds (the "Chicopee Sale Proceeds") of a contemplated sale of the South Brunswick facility owned by Chicopee, Inc., (ii) 100% of the Chicopee Sale Proceeds, (iii) a minimum $5.0 million additional prepayment out of existing cash-on-hand, (iv) the retirement of in excess of $591.5 million of the Debtors' obligations under the Senior Subordinated Notes, wherein each Holder of the Senior Subordinated Notes and other general unsecured creditors (other than the Critical Vendor Claims and the Intercompany Claims) (together constituting the "Class 4 Claims") shall have the right to receive on, or as soon as practicable after the Effective Date, (x) its pro rata share of Class A Common Stock in exchange for each $1,000 of its allowed claim or (y) at the election of each Holder who is a Qualified Institutional Buyer (as defined in the Plan and the 1933 Securities Act), its Pro Rata share of Class C Common Stock, (v) the Critical Vendor Claims and Intercompany Claims will not be impaired, (vi) each Holder of an Allowed Class 4 Claim that elects to receive Class A Common Stock will be given the option to take part in the New Investment by checking the appropriate box on the New Investment Election Form to exercise its subscription rights (the "Subscription Rights") thereto, which New Investment of $50 million shall be made in exchange for 10% subordinated convertible notes due 2006 (the "Convertible Notes"), (vii) GOF will issue, or cause to be issued, letters of credit in the aggregated amount of $25 million (the "Exit Letters of Credit") in favor of the Postpetition Agent under the Restructured Facilities pursuant to the Bank Term Sheet, for which GOF will be entitled to 10% senior subordinated notes due 2006 (the "New Senior Subordinated Notes")

equal to the amount (if any) drawn against the Exit Letters of Credit (plus any advances made by GOF solely in lieu of drawings under the Exit Letters of Credit), (viii) Holders of the Company's Old Common Stock ("Old Polymer Common Stock") will receive 100% of the Class B Common Stock (which will not be diluted by any conversions of the Convertible Notes) in exchange for their Old Polymer Common Stock interests; such Holders will also receive pro rata shares of the Series A and Series B Warrants (as discussed below).

Under the Modified Plan, all common stock of the reorganized Company (the "New Polymer Common Stock") will be the same class (the "Class A Common Stock"), with the exception of (i) separate classes (the "Class D Common Stock" and "Class E Common Stock") to be issued upon exercise of the Series A and Series B Warrants (as defined below), (ii) the 4% of New Polymer Common Stock designated as "Class B Common Stock" to be issued to the Holders of Old Polymer Common Stock, and (iii) a small percentage (the "Class C Common Stock") that will be issued to Class 4 Holders, who may contribute such stock to the SPE. The Class C Common Stock shall pay a dividend payable equal to the lesser of (i) 1% per annum of the SPE Notes or (ii) $1.0 million per annum. The Modified Plan intends that the Class A Common Stock (including the stock to be issuable upon conversion of the Convertible Notes or conversion of any other shares of New Polymer Common Stock), the Class C Common Stock, if any, and the Convertible Notes shall be freely tradable either by law or by registration. Shares of New Polymer Common Stock (other than Class A Common Stock) shall be convertible into shares of Class A Common Stock on a one-for-one basis.

The Holders of Old Polymer Common Stock will receive two series of warrants, the Series A Warrants and Series B Warrants, which shall have (i) customary adjustments for stock splits, stock dividends, and consolidations, (ii) anti-dilution protection for sales of securities by the reorganized Company ("New Polymer") at a price below the fair market value of such securities if offered to all New Polymer Common Stock Holders and (iii) anti-dilution protection for sales of securities by New Polymer at a discount that exceeds 25% of the fair market value of such securities and which will not terminate upon a transaction with GOF or an affiliate of GOF. Except as set forth in the preceding sentence, the Series A and Series B Warrants shall not have anti-dilution provisions. In addition, the cash dividend payment by New Polymer described above in connection with the Class C Common Stock shall be excluded from the calculation of cumulative distributions for all purposes relating to the Series A Warrants, the Series B Warrants, the Class D Common Stock and the Class E Common Stock. The New Polymer Common Stock received by the Holders of Class 4 Claims and the Holders of Old Polymer Common Stock and which will be issued upon conversion of the Convertible Notes is subject to dilution upon the exercise of the Series A Warrants and Series B Warrants.

The Modified Plan also provides that, on the Effective Date, in consideration of GOF acting as Standby Purchaser for the New Investment, and in consideration of GOF's role in facilitating a consensual resolution of the disputes among the Plan Parties, New Polymer shall pay GOF a Standby Purchaser fee of $2.0 million and an arrangement and plan facilitation fee of $2.0 million.

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" and Note 18. "Subsequent Event" 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 and the related financial restructuring.

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

The following table sets forth components of the Company's net sales and operating income (loss) by segment for the three months ended September 28, 2002 and the corresponding decrease over the comparable period in the prior year:

A reconciliation of the change in net sales between third quarter 2001 and third quarter 2002 is presented in the following table (in thousands):

Net sales		$	202,381
Change in sales due to:
	Volume		(15,385	)
	Price/mix		385
	Foreign currency		(3,333	)

Net sales		$	184,048

Consolidated net sales were $184.0 million for the third quarter of 2002, a decrease of $(18.3) million or (9.1)% over the third quarter 2001 sales of $202.4 million. The decrease in net sales was due primarily to lower sales volume and unfavorable foreign currencies versus the U.S. dollar. Sales volume decreased by $15.4 million and foreign currency had a negative impact on net sales of $3.3 million. On a consolidated basis, price / mix was approximately $0.4 million higher in the third quarter of 2002 versus the same period in 2001.

Similar economic and business issues negatively impacted both the Consumer and Industrial and Specialty segments during the third quarter of fiscal 2002 as the Company's world-wide business continues to be unfavorably impacted by the financial restructuring efforts of the Chapter 11 process, including lost sales from existing customers. In addition, certain factors that contributed to lower than anticipated net sales in fiscal 2001 continued to negatively affect net sales in the third quarter of 2002. Within the Company's Nonwovens business, lower sales volume, predominantly in the U.S. hygiene, industrial and medical markets and lower sales volume within the European hygiene markets, offset volume gains in Latin America. The increase in net sales attributable to favorable pricing quarter over quarter resulted primarily from higher selling prices in Argentina of $5.8 million offset by lower selling prices in the U.S. and Europe of approximately $5.4 million. Additionally, Industrial and Specialty segment sales volume was lower quarter over quarter within the Oriented Polymers Canadian businesses.

Foreign currencies, predominantly in Argentina, were weaker against the U.S. dollar during the third quarter of 2002 compared to the third quarter of 2001. Further discussion of the effect of the devaluation of the Argentine peso on the Company's results of operations is contained in the Investing and Financing Activities portion of "Liquidity and Capital Resources" in this Quarterly Report on Form 10-Q.

A reconciliation of the change in operating income between third quarter 2001 and third quarter 2002 is presented in the following table (in thousands):

		Including Unusual Items			Excluding Unusual Items
Operating income		$	10,813		$	10,813
	Unusual items—plant realignment and special charges		(356	)		—
	Volume		(6,358	)		(6,358	)
	Cost savings and other initiatives related to plant realignment and business restructuring		8,284			8,284
	Lower depreciation and amortization expense		3,785			3,785
	Price / mix		385			385
	Foreign currency		(1,675	)		(1,675	)
	Higher administrative costs associated with historic Dominion entities		(432	)		(432	)
	All other		(9,308	)		(9,308	)

Operating income		$	5,138		$	5,494

Consolidated operating income was $5.1 million for the third quarter of 2002. Excluding unusual items, which consist of plant realignment and special charges, consolidated operating income was approximately $5.5 million for the third quarter of 2002, a decrease of $(5.3) million or (49.2)%, over operating income before unusual items of $10.8 million for the third quarter of 2001. The decrease in operating income before unusual items was due to volume declines of $6.4 million predominantly within the Nonwovens U.S. hygiene, industrial and medical markets and European hygiene markets, weaker foreign currencies versus the U.S. dollar of $1.7 million and other items consisting of higher raw material and manufacturing cost of $9.3 million within the Nonwovens and Oriented Polymers business offset by cost savings and other initiatives related to plant realignment and business restructuring of $8.3 million, lower depreciation and amortization charges of $3.8 million and higher net selling prices of $0.4 million. In addition, administrative costs associated with historic Dominion entities were approximately $0.4 million higher in the third quarter of 2002 as compared to the same period in 2001. Refer to Note 15. "Certain Matters" for a discussion of the MSA between the Company and Galey. Such costs are quantified as a component in the Industrial and Specialty segment.

As discussed in Note 3. "Chapter 11 Proceedings" and Note 6. "Business Restructuring," the Company undertook a comprehensive financial and business restructuring of its operations in the latter part of fiscal 2001 in response to a confluence of negative economic and business factors. The restructuring has continued into the third quarter of 2002. Accordingly, the cash component of the restructuring during the third quarter of 2002 has included workforce reductions and plant realignment predominantly in certain of the Oriented Polymers U.S. Industrial and Specialty business. Manufacturing and operating cost savings were realized within each business segment in the third quarter of 2002 as a result of the restructuring initiatives. However, volume declines and higher operating cost predominantly in the U.S. and weak foreign currency translation rates versus the U.S. dollar in Argentina, offset the cost savings achieved in the third quarter of 2002 within the Nonwovens Consumer and Industrial and Specialty segments. Additionally, the Oriented Polymers business within the Industrial and Specialty segment produced lower operating earnings in the third quarter of 2002 versus the comparable prior year period due predominantly to lower sales volume and higher raw material and manufacturing costs.

The restructuring program previously discussed also entailed the write down of long-lived assets, thus, non-cash depreciation and amortization expenses were lower in the third quarter of 2002 versus the same period in 2001 due to a lower depreciable fixed asset base in the U.S. and Europe and to the adoption of FAS 142 which requires that goodwill and intangibles with indefinite lives no longer be systematically amortized, but tested for impairment on at least an annual basis.

The Company recorded a pre-tax charge of $0.4 million during the three months ended September 28, 2002 related to the continuation of the plant realignment and business restructuring program. The total charge in the third quarter consisted primarily of personnel costs within the Company's Oriented Polymers business.

The restructuring related charges have not been allocated to the Company's reportable business segments because the Company's management does not evaluate such charges on a segment-by-segment basis. Segment operating performance is measured and evaluated before unusual or special items.

As of the Petition Date and in accordance with SOP 90-7, the Company discontinued accruing interest on the Senior Subordinated Notes and, as a result, interest expense decreased $(12.1) million from $25.6 million in the third quarter of 2001 to $13.5 million in the third quarter of 2002. Interest on the Prepetition Credit Facility and other debt increased slightly due to debt remaining level quarter over quarter. The Company's effective borrowing rates during 2001 decreased, however, on April 11, 2001 and August 15, 2001, the Company's interest rate on its outstanding borrowings under the Prepetition Credit Facility increased by 50 basis points at each date. Additionally, the Company's effective borrowing rate for 2002 increased by an additional 200 basis points as a result of the default under the Prepetition Credit Facility.

Foreign currency and other losses increased $5.2 million, from $1.3 million in the third quarter of 2001 to $6.4 million in the third quarter of 2002 due primarily to the write-down of the Company's investment in the Saudi Line as discussed more fully in Note 11. "Foreign Currency and Other."

The Company incurred Chapter 11 reorganization expenses of $6.1 million during the third quarter of 2002. Such costs, consisting of professional and other related services and compensation costs related the Company's key employee retention program pursuant to Chapter 11, are expensed as incurred and are directly related to the Company's Chapter 11 reorganization efforts in accordance with SOP 90-7. Prior to the Petition Date, debt restructuring costs were expensed as incurred and classified as "Special charges" in the Consolidated Statement of Operations.

The Company incurred a pre-tax loss of $20.9 million during the three months ended September 28, 2002 that produced a potential U.S. tax benefit of $5.9 million. However, due to the uncertainty of the Company's ability to realize the asset associated with the tax benefit, a valuation allowance in the amount of $5.9 million was recorded during the three months ended September 28, 2002. Additionally, the Company recognized income tax expense of $1.7 million in the third quarter of 2002 relating to income generated within its international operations. During the three months ended September 29, 2001, the Company recorded an income tax benefit of $4.5 million, representing an effective benefit rate of approximately 28%. The effective benefit rate differed from the statutory rate during the third quarter of 2001 due primarily to non-deductible charges, predominantly goodwill and to an increase in the Company's tax valuation allowance.

Net loss increased $11.1 million from a loss of $(11.5) million, or $(0.36) per diluted share, in the third quarter of 2001 to a loss of $(22.6) million, or $(0.71) per diluted share, in the third quarter of 2002 as a result of the above mentioned factors.

The following table sets forth components of the Company's net sales and operating income (loss) by segment for the nine months ended September 28, 2002 and the corresponding increase/(decrease) over the comparable period in the prior year:

A reconciliation of the change in net sales between the nine months ended September 29, 2001 and the nine months ended September 28, 2002 is presented in the following table (in thousands):

Net sales		$	618,024
Change in sales due to:
	Volume		(21,940	)
	Price/mix		(5,421	)
	Foreign currency		(14,654	)

Net sales		$	576,009

Consolidated net sales were approximately $576.0 million for the nine months ended September 28, 2002, a decrease of $(42.0) million or (6.8)% over sales of $618.0 million during the same period in 2001. The decrease in net sales was due to a decrease in sales volume, weak foreign currencies versus the U.S. dollar and pricing pressure and product mix issues. Sales volume decreased by $21.9 million and foreign currency had a negative impact on net sales of $14.7 million. Pricing pressure and product mix issues, predominantly in the U.S., negatively affected net sales by approximately $5.4 million during the nine months ended September 28, 2002 versus the same period in 2001.

medical markets, offset consolidated volume gains in Europe, Latin America and Asia. The decrease in net sales due to lower selling prices and product mix issues resulted from continued pricing pressure within the Consumer markets. Additionally, Industrial and Specialty segment sales volume increases were achieved on a year to date basis within the Oriented Polymers agriculture and specialty and coating fabric markets, but were offset by lower volumes and selling prices in other industrial sectors.

Foreign currencies, predominantly in Europe, Canada and Argentina, were weaker against the U.S. dollar during the first nine months of 2002 compared to the comparable period in 2001. Further discussion of the effect of the devaluation of the Argentine peso on the Company's results of operations is contained in the Investing and Financing Activities portion of "Liquidity and Capital Resources" in this Quarterly Report on Form 10-Q.

A reconciliation of the change in operating income between the nine months ended September 29, 2001 and the nine months ended September 28, 2002 is presented in the following table (in thousands):

		Including Unusual Items			Excluding Unusual Items
Operating income		$	19,672		$	21,332
	Unusual items-plant realignment and special charges		(2,887	)		—
	Volume		(10,559	)		(10,559	)
	Cost savings and other initiatives related to plant realignment and business restructuring		23,414			23,414
	Lower depreciation and amortization expense		11,985			11,985
	Price / mix		(5,421	)		(5,421	)
	Foreign currency		(5,097	)		(5,097	)
	Higher administrative costs associated with historic Dominion entities		(1,274	)		(1,274	)
	All other		(17,069	)		(17,069	)

Operating income		$	12,764		$	17,311

Consolidated operating income was $12.8 million for the nine months ended September 28, 2002. Excluding unusual items, which consist of plant realignment and special charges, consolidated operating income was approximately $17.3 million, a decrease of $(4.0) million or (18.8)%, over operating income before unusual items of $21.3 million for the comparable period in 2001. The decrease in operating income before unusual items was due to volume declines of $10.6 million predominantly within the Nonwovens U.S. hygiene, industrial and medical markets, unfavorable foreign currencies versus the U.S. dollar of $5.1 million, other items consisting of higher raw material and manufacturing cost of $17.1 million within the Nonwovens and Oriented Polymers business and lower price / mix of $5.4 million offset by cost savings and other initiatives related to plant realignment and business restructuring of $23.4 million and lower depreciation and amortization charges of approximately $12.0 million. In addition, administrative costs associated with historic Dominion entities were approximately $1.3 million higher in 2002 as compared to the same period in 2001. Refer to Note 15. "Certain Matters" for a discussion of the MSA between the Company and Galey. Such costs are quantified as a component in the Industrial and Specialty segment.

translation rates versus the U.S. dollar in Europe, Canada and Argentina, offset the cost savings achieved during 2002 within the Nonwovens Consumer and Industrial and Specialty segments. Additionally, the Oriented Polymers business within the Industrial and Specialty segment produced lower operating earnings during the first nine months 2002 versus the comparable prior year period.

The restructuring program previously discussed also entailed the write down of long-lived assets, thus, non-cash depreciation and amortization expenses were lower during the nine months ended September 28, 2002 versus the comparable period in 2001 due to a lower depreciable fixed asset base in the U.S. and Europe and to the adoption of FAS 142 which requires that goodwill and intangibles with indefinite lives no longer be systematically amortized, but tested for impairment on at least an annual basis.

The Company recorded a pre-tax charge of $0.9 million during the nine months ended September 28, 2002 related to the continuation of the plant realignment and business restructuring program. The total charge during 2002 consisted primarily of personnel costs.

As part of the Company's financial restructuring, approximately $3.6 million of expenses were incurred during the nine months ended September 28, 2002 related to professional and other related services provided in connection with the Company's restructuring efforts.

As of the Petition Date and in accordance with SOP 90-7, the Company discontinued accruing interest on the Senior Subordinated Notes and, as a result, interest expense decreased $19.1 million from $76.3 million for the nine months ended September 29, 2001 to $57.2 million during the comparable period in 2002. Interest on the Prepetition Credit Facility and other debt increased slightly due to debt remaining level quarter over quarter. The Company's effective borrowing rates during 2001 decreased, however, on April 11, 2001 and August 15, 2001, the Company's interest rate on its outstanding borrowings under the Prepetition Credit Facility increased by 50 basis points at each date. Additionally, the Company's effective borrowing rate for 2002 increased by an additional 200 basis points as a result of the default under the Prepetition Credit Facility.

Foreign currency and other losses increased $11.1 million, from $3.3 million for the nine months ended September 29, 2001 to approximately $14.4 million during the comparable 2002 period as a result of the Argentine peso devaluation, related to the remeasurement of U.S. dollar denominated debt at its Argentine majority-owned subsidiary and foreign currency remeasurement losses and other charges in Europe, Canada and Asia. In addition, the Company incurred a charge to earnings of $4.4 million during the third quarter of 2002 for the write down of its investment in the Saudi Line as discussed more fully in Note 11. "Foreign Currency and Other."

The Company incurred Chapter 11 reorganization expenses of $7.0 million during the nine months ended September 28, 2002. Such costs, consisting of professional and other related services and compensation costs related to the Company's key employee retention program pursuant to Chapter 11, are expensed as incurred and are directly related to the Company's Chapter 11 reorganization efforts in accordance with SOP 90-7. Prior to the Petition Date, debt restructuring costs were expensed as incurred and classified as "Special charges" in the Consolidated Statement of Operations.

The Company incurred a pre-tax loss of $(65.9) million during the nine months ended September 28, 2002 that produced a potential U.S. tax benefit of $18.4 million. However, due to the uncertainty of the Company's ability to realize the asset associated with the tax benefit, a valuation allowance in the amount of $18.4 million has been recorded during the nine months ended September 28, 2002. Additionally, the Company recognized income tax expense of $4.1 million during the first nine months of 2002 relating to income generated within its international operations. During the nine months ended September 29, 2001, the Company recorded an income tax benefit of $16.8 million, representing an effective benefit rate of approximately 28%. The effective benefit rate differed from the statutory rate during the third quarter of 2001 due primarily to non-deductible charges, predominantly goodwill and to an increase in the Company's tax valuation allowance.

Net loss increased $26.8 million from a loss of $(43.2) million, or $(1.35) per diluted share, for the nine months ended September 29, 2001 to a loss of $(69.9) million, or $(2.2) per diluted share, for the comparable period in 2002 as a result of the above mentioned factors.

		September 28, 2002			December 29, 2001
		(In Thousands)
Balance sheet data:
	Cash and short-term investments	$	70,568		$	46,453
	Working capital (deficit), excluding liabilities subject to compromise		(235,547	)		(872,336	)
	Working capital, excluding current portion of long-term debt and liabilities subject to compromise		253,547			204,681
	Total assets		1,201,009			1,232,214
	Total debt		1,093,475			1,099,230
	Shareholders' (deficit)		(106,039	)		(48,862	)

		Nine Months Ended
		September 28, 2002			September 29, 2001
		(In Thousands)
Cash flow data:
	Net cash provided by (used in) operating activities	$	36,234		$	(3,439	)
	Net cash (used in) investing activities		(1,196	)		(16,613	)
	Net cash (used in) provided by financing activities		(14,077	)		22,721

The Company generated cash from operations of $36.2 million during the nine months ended September 28, 2002, an approximate $39.7 million increase from cash used in operations of $(3.4) million during the same period in 2001. Cash used for operations was negatively impacted during the first nine months of 2002 and 2001 by continuing operating losses; however, as discussed more fully below, due to the Company's Senior Secured Lenders exercising their right to block interest payments to holders of the Company's 9% Senior Subordinated Notes and 8³/4% Senior Subordinated Notes, respectively, cash payments for interest were approximately $52.8 million lower in the first nine months of 2002 versus 2001.

The Company had a working capital (deficit) of approximately $(235.5) million at September 28, 2002 due primarily to the reclassification of all amounts outstanding under the Company's Credit Facility to a current liability Not Subject to Compromise. Excluding the current portion of indebtedness, working capital was $253.5 million at September 28, 2002, compared to working capital, excluding current potion of indebtedness, at December 29, 2001 of $204.7 million. Accounts receivable on September 28, 2002 was $121.3 million as compared to $125.6 million on December 29, 2001, a decrease of $4.3 million or approximately 3.4%. Accounts receivable represented approximately 57 days of sales outstanding at September 28, 2002 as compared to 56 days outstanding on December 29, 2001, an increase of approximately 1.8%. Inventories at September 28, 2002 were approximately $106.3 million, a decrease of $9.7 million over inventories at December 29, 2001 of $116.0 million due primarily to a $7.1 million decrease in consolidated raw materials, a $1.9 million decrease in consolidated work in process, and a $0.7 million decrease in consolidated finished goods. The Company had approximately 60 days of inventory on hand at September 28, 2002 and December 29, 2001. Accounts payable, including payables subject to compromise, at September 28, 2002 was $46.0 million as compared to $46.4 million on December 29, 2001, a decrease of $0.4 million or approximately 0.8%. Accounts payable represented 26 days of payables outstanding at September 28, 2002 compared to 25 days of payables outstanding on December 29, 2001. As a result of the Company's financial condition, certain suppliers have requested alternative payment provisions. However, such alternative payment provisions have not currently had a significant negative impact on the Company's liquidity.

Capital expenditures for the nine months ended September 28, 2002 totaled $5.9 million, a decrease of $10.7 million from capital spending of $16.6 million in the comparable period of 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.

In evaluating the various restructuring options, the Company decided to maintain negotiations with MatlinPatterson Global Opportunities Partners, L.P. (f/k/a CSFB Global Opportunities Investment Partners, L.P.) ("GOF"), the holder of approximately 67% of the 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.

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 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.

On June 14, 2002, the Company filed the Plan with the South Carolina Bankruptcy Court. The Plan generally proposed (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 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 had 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 was to pay GOF a fee of $500,000 for acting as standby purchaser in connection with the new investment.

At a hearing, which took place on August 15, 2002, and concluded on August 20, 2002, the South Carolina Bankruptcy Court approved the Company's Disclosure Statement relating to the Plan of Reorganization, as amended and filed on August 21, 2002, over the Committee's objection. On August 30, 2002, the Committee filed a motion requesting the South Carolina Bankruptcy Court appoint an examiner pursuant to the section 1103(b) of the Bankruptcy Code. On October 8, 2002, the South Carolina Bankruptcy Court appointed Benjamin C. Ackerly, Sr. as the examiner. The examiner must submit his report to the South Carolina Bankruptcy Court no later than December 2, 2002.

GOF and the Committee and the individual members of the Committee (the "Plan Parties") have agreed to support a modified plan of reorganization (the "Modified Plan").

The Modified Plan generally proposes that (i) the restructuring of the Prepetition Credit Facility, including a payment (the "Secured Lender Payment") of $50.0 million on the Effective Date to the agent for the benefit of the Existing Senior Secured Lenders under the Prepetition Credit Facility, which Secured Lender Payment shall be exclusive of the proceeds (the "Chicopee Sale Proceeds") of a contemplated sale of the South Brunswick facility owned by Chicopee, Inc., (ii) 100% of the Chicopee Sale Proceeds, (iii) a minimum $5.0 million additional prepayment out of existing cash-on-hand and (iv) the retirement of in excess of $591.5 million of the Debtors' obligations under the Senior Subordinated Notes, wherein each Holder of the Senior Subordinated Notes and other general unsecured creditors (other than the Critical Vendor Claims and the Intercompany Claims) (together constituting the "Class 4 Claims") shall have the right to receive on, or as soon as practicable after the Effective Date, (x) its pro rata share of Class A Common Stock in exchange for each $1,000 of its allowed claim or (y) at the election of each Holder who is a Qualified Institutional Buyer (as defined in the Plan and the 1933 Securities Act), its Pro Rata share of Class C Common Stock, (v) the Critical Vendor Claims and Intercompany Claims will not be impaired, (vi) each Holder of an Allowed Class 4 Claim that elects to receive Class A Common Stock will be given the option to take part in the New Investment by checking the appropriate box on the New Investment Election Form to exercise its subscription rights (the "Subscription Rights") thereto, which New Investment of $50 million shall be made in exchange for 10% subordinated convertible notes due 2006 (the "Convertible Notes"), (vii) GOF will issue, or cause to be issued, letters of credit in the aggregated amount of $25 million (the "Exit Letters of Credit") in favor of the Postpetition Agent under the Restructured Facilities pursuant to the Bank Term Sheet, for which GOF will be entitled to 10% senior subordinated notes due 2006 (the "New Senior Subordinated Notes") equal to the amount (if any) drawn against the Exit Letters of Credit (plus any advances made by GOF solely in lieu of drawings under the Exit Letters of Credit), (viii) Holders of the Company's Old Common Stock ("Old Polymer Common Stock") will receive 100% of the Class B Common Stock (which will not be diluted by any conversions of the Convertible Notes) in exchange for their Old Polymer Common Stock interests; such Holders will also receive pro rata shares of the Series A and Series B Warrants (as discussed below).

In order to support working capital requirements at Vateks, the Company has deposited approximately $6.4 million with a member of its European bank syndicate who in turn has funded an approximate equivalent amount to Vateks.

Nanhai has a bank facility with a financial institution in China. The facility was refinanced in July 2002 is scheduled to mature during January 2003. At September 28, 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 September 28, 2002. At September 28, 2002, Nanhai had cash and cash equivalents on hand of approximately $2.0 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 September 28, 2002.

DNS has two bank facilities denominated in U.S. dollars of approximately $8.1 million at September 28, 2002 with current maturities of approximately $3.8 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 September 28, 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. As a result, the Company recognized foreign currency losses of approximately $2.5 million for the nine months ended September 28, 2002, net of minority interest adjustments, related to the DNS U.S. dollar debt because of the Argentine peso devaluation. At September 28, 2002, DNS had cash and cash equivalents on hand of approximately $0.2 million and working capital of $5.8 million, excluding current debt. Including current debt, DNS working capital was approximately $2.0 million September 28, 2002.

During the first quarter of fiscal 2001, the Company exercised an option to obtain a 45% minority position in a start-up nonwovens production line in Saudi Arabia (the "Saudi Line"). Over the course of 2001, the Company funded approximately $4.4 million which represented its pro-rata share, of the construction costs of the Saudi Line. The Company was not permitted to acquire more than a 45% interest in the Saudi Line pursuant to Amendment No. 6. Prior to the third quarter of 2002, the Company's equity stake in the Saudi Line was under review pending finalization of the Investment Approval Application between and the Company and its partner which was required to be submitted for approval to the Saudi Arabian government. However, during the third quarter of 2002, it became apparent that an agreement could not be reached between the Company and its partner concerning ownership and operation of the Saudi Line and accordingly, the Company recorded a $4.4 million charge to earnings for the write-down of its investment in the Saudi Line during the three months ended September 28, 2002. The Company is exploring its legal and other options and intends to aggressively pursue recovering its investment in the Saudi Line.

On December 19, 1997, DTA acquired substantially all of the outstanding common and first preferred shares of 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 and the Company acquired the nonwovens and industrial fabrics operations. The Company and Galey finalized the acquisition cash settlement during 2000 pursuant to 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 September 28, 2002, the amounts due from Galey for the first nine months of 2002 shared cash activity pursuant to the MSA, including amounts associated with statutory tax payments, approximated $1.4 million. The Company has fully reserved this balance at September 28, 2002 due to the uncertainty of collectibility at such date. All shared cash activity prior to the first quarter of 2002 relative to the MSA has been collected from Galey.

The Board of Directors declared a quarterly dividend of $0.02 per share during the first quarter in 2001. Amendment No. 6 to the Credit Facility prevented the Company from paying dividends on its Common Stock.

Inflation generally affects the Company by increasing the cost of labor, equipment and raw materials. For a discussion of certain raw material price increases during 2001, see "Quantitative and Qualitative Disclosures About Market Risk—Raw Material and Commodity Risks."

The Company's substantial foreign operations expose it to the risk of foreign currency exchange rate fluctuations. If foreign currency denominated revenues are greater than costs, the translation of foreign currency denominated costs and revenues into U.S. dollars will improve profitability when the foreign currency strengthens against the U.S. dollar and will reduce profitability when the foreign currency weakens. For a discussion of certain adverse foreign currency exchange rate fluctuations during the third quarter of 2002 and 2001, see "Quantitative and Qualitative Disclosures About Market Risk—Foreign Currency Exchange Rate Risk."

The Company's analysis and discussion of its financial condition and results of operations are based upon its consolidated financial statements that have been prepared in accordance with generally accepted accounting principles in the United States ("U.S. GAAP"). The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. The Company evaluates these estimates and assumptions on an ongoing basis, including but not limited to those related to inventories, bad debts, income taxes, intangible assets, restructuring related adjustments, pension and other post retirement benefits and contingencies. Estimates and assumptions are based on historical and other factors believed to be reasonable under the circumstances. The results of these estimates may form the basis of the carrying value of certain assets and liabilities. Actual results, under conditions and circumstances different from those assumed, may differ from estimates. The impact and any associated risks related 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, if applicable, where such estimates, assumptions, and accounting policies affect the Company's reported and expected results.

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

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 accordance with Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 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.

Foreign Currency Translation: The Company accounts for and reports translation of foreign currency transactions and foreign currency financial statements in accordance with SFAS No. 52, "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. 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.

Business Combinations, Goodwill and Other Intangible Assets: In July 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141 "Business Combinations" ("FAS 141") and No. 142, "Goodwill and Other Intangible Assets" ("FAS 142"). FAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Use of the pooling-of-interests method is no longer permitted. FAS 141 also includes guidance on the initial recognition and measurement of goodwill and intangible assets acquired in a business combination that is completed after June 30, 2001. 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 will be effective for fiscal years beginning after December 15, 2001. The effect of adoption was not material to the Company's results of operations during the second quarter of 2002.

Impairment of Long-Lived Assets: For all applicable 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 projected 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. 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 Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("FAS 121"). It 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 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 effect of adoption was not material to the Company's results of operations during the third quarter of 2002.

Accounts Receivable and Concentration of Credit Risks: Accounts receivable potentially expose the Company to concentration of credit risk, as defined by Statement of Financial Accounting Standards No. 105, "Disclosure of Information about Financial Instruments with Off-Balance Sheet Risk and Financial Instruments with Concentration of Credit Risk." 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.

Income Taxes: The Company records an income tax valuation allowance when the realization of certain deferred tax assets, net operating losses and capital loss carryforwards is not likely. These deferred tax items represent expenses recognized for financial reporting purposes, which will result in tax deductions over varying future periods. The Company has not provided U.S. income taxes for undistributed earnings of foreign subsidiaries that are considered to be retained indefinitely for reinvestment. Certain judgements, assumptions and estimates may affect the carrying value of the valuation allowance and deferred income tax expense in the Company's consolidated financial statements.

The Company is subject to a broad range of federal, foreign, state and local laws governing regulations relating to the pollution and protection of the environment. The Company believes that it is currently in substantial compliance with environmental requirements and does not currently anticipate any material adverse effect on its operations, financial condition or competitive position as a result of its efforts to comply with environmental requirements. Some risk of environmental liability is inherent, however, in the nature of the Company's business, and there can be no assurance that material environmental liabilities will not arise.

On January 1, 1999, member countries of the European Monetary Union began a three-year transition from their national currencies to a new common currency, the "euro". Permanent rates of exchange between members' national currency and the euro have been established and monetary, capital, foreign exchange, and interbank markets have been converted to the euro. National currencies will continue to exist as legal tender and may continue to be used in commercial transactions. Euro currency has been issued and effective July 2002, the respective national currencies were withdrawn. The Company has operations in three of the participating countries and has successfully transitioned to using both the euro and local currencies for commercial transactions. Costs of the euro conversion have not had a material impact on the results of operations or the financial condition of the Company.

The Credit Facility permited the Company to borrow up to $600.0 million, subject in the case of borrowings under the revolving portion to the satisfaction of certain conditions, a portion of which may be denominated in Dutch guilders and in Canadian dollars. Amendment No. 6 currently limits amounts outstanding under the revolving portion of the Credit Facility (together with outstanding letters of credit) to $260 million. The variable interest rate applicable to borrowings under the Credit Facility is based on, in the case of U.S. dollar denominated loans, the base rate referred to therein or the Eurocurrency rate referred to therein for U.S. dollars, at the Company's option, plus a specified margin. In the event that a portion of the Credit Facility is denominated in Dutch guilders, the applicable interest rate is based on the applicable Eurocurrency base rate referred to therein for Dutch guilders, plus a specified margin. In the event that a portion of the Credit Facility is denominated in Canadian dollars, the applicable interest rate is based on the Canadian base rate referred to therein, plus a specified margin, of the Bankers' Acceptance discount rate referred to therein, at the Company's option. Under the Forbearance Agreement with the Senior Secured Lenders all borrowings are required to be made at the base rate. At September 28, 2002, the Company had borrowings under the Credit Facility of $484.4 million that were subject to interest rate risk. Each hypothetical 1.0% increase in interest rates would impact pretax earnings by $4.8 million. The Company has an interest rate cap agreement which limits the amount of interest expense on $100 million of this debt to a rate of 9%. The Company does not use these products for trading purposes.

The fair market value of the Company's long-term fixed interest rate debt is also subject to interest rate risk. Generally, the fair market value of fixed interest rate debt will increase as interest rates fall and decrease as interest rates rise. The estimated fair value of the Company's long-term fixed-rate debt at September 28, 2002 was approximately $118.3 million, which was less than its carrying value by approximately $473.2 million. A 100 basis points decrease in the prevailing interest rates at September 28, 2002 would result in an increase in the fair value of fixed rate debt by approximately $2.6 million.

A 100 basis points increase in the prevailing interest rates at September 28, 2002 would result in a decrease in fair value of total fixed rate debt by approximately $2.6 million. Fair market values were determined from quoted market prices or based on estimates made by investment bankers.

The Company manufactures, markets and distributes certain of its products in Europe, Canada, Latin America and the Far East. As a result, the Company's financial results could be significantly affected by factors such as changes in foreign currency rates or weak economic conditions in the foreign markets in which the Company maintains a manufacturing or distribution presence. If foreign currency denominated revenues are greater than costs, the translation of foreign currency denominated costs and revenues into U.S. dollars will improve profitability when the foreign currency strengthens against the U.S. dollar and will reduce profitability when the foreign currency weakens. For example, during the 2002 certain currencies of countries in which the Company conducts foreign currency denominated business weakened against the U.S. dollar and had a significant impact on sales and operating income. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."

For the three months ended September 28, 2002, the result of a uniform 10% strengthening in the value of the dollar relative to the currencies in which the Company's sales are denominated would have decreased operating income by approximately $1.1 million. This calculation assumes that each exchange rate would change in the same direction relative to the U.S. dollar. In addition to the direct effects of changes in exchange rates, which are a changed dollar value of the resulting sales, changes in exchange rates also affect the volume of sales or the foreign currency sales price as competitors' products become more or less attractive. The Company's sensitivity analysis of the effects of changes in foreign currency exchange rates does not factor in a potential change in sales levels or local currency prices.

The Argentine peso, which serves as the functional currency of an Argentine majority-owned subsidiary of the Company, has devalued significantly against the U.S. dollar since the end of fiscal 2001 due primarily to the economic uncertainty within this region. As a result of the Argentine peso devaluation, the Company has recognized a foreign currency loss of approximately $2.5 million, net of minority interest adjustments, for the nine months ended September 28, 2002.

The primary raw materials used in the manufacture of most of the Company's products are polypropylene and polyester fiber, polyethylene and polypropylene resin, and, to a lesser extent, rayon, tissue paper and cotton. The prices of polypropylene and polyethylene are a function of, among other things, manufacturing capacity, demand and the price of crude oil and natural gas liquids. Raw material prices as a percentage of sales have remained level during 2002 as compared to 2001. A significant increase in the prices of polyolefin resins that cannot be passed on to customers could have a material adverse effect on the Company's results of operations and financial condition.

This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. In addition, from time to time, the Company or its representatives have made or may make forward-looking statements orally or in writing. Such forward-looking statements may be included in, but not limited to, various filings made by the Company with the Securities and Exchange Commission, press releases or oral statements made with the approval of an authorized executive officer of the Company. Actual results could differ materially from those projected or suggested in any forward-looking statements as a result of a variety of factors and conditions which include, but are not limited to: the filing by the Company and its domestic subsidiaries of voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code, adverse economic conditions, demand for the

Company's products, competition in the Company's markets, dependence on key customers, increases in raw material costs, the amount of capital expenditures, fluctuations in foreign currency exchange rates, the Company's substantial leverage position, the existing defaults in the Company's outstanding long-term indebtedness, and other risks detailed in documents filed by the Company with the Securities and Exchange Commission.

The Company's principal executive officer and its principal financial officer, after evaluating the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14), have concluded that the Company's disclosure controls and procedures were adequate and effective to ensure that material information relating to the Company and its consolidated subsidiaries would be made known to them by others within those entities.

There were no significant changes in the Company's internal controls or in other factors that could significantly affect the Company's disclosure controls and procedures subsequent to the date of their evaluation, nor were there any significant deficiencies or material weaknesses in the Company's internal controls. As a result, no corrective actions were required or undertaken.

As of December 29, 2001, the Company was in default under the 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 constituted an event of default under such notes. As of September 28, 2002, accrued and unpaid interest was $30.4 million and $11.8 million on the 9% Senior Subordinated Notes and 8³/4% Senior Subordinated Notes, respectively.

Exhibits required to be filed with this report on Form 10-Q are listed in the following Exhibit Index.

On August 1, 2002, the Company filed a Form 8-K announcing that as part of the process for having the Company's Plan of Reorganization confirmed by the U.S. Bankruptcy Court in Columbia, South Carolina (the "Court"), the Company had filed a Disclosure Statement with the Court. The Company also filed certain projected financial information with the Court on August 1, 2002.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 28, 2002
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Delaware		57-1003983
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
4838 Jenkins Avenue North Charleston, South Carolina		29405
(Address of principal executive offices)		(Zip Code)

			September 28, 2002			December 29, 2001
			(Unaudited)
A S S E T S
Current assets:
	Cash and equivalents		$	59,562		$	28,231
	Short-term investments			11,006			18,222
	Accounts receivable, net			121,345			125,649
	Inventories			106,272			115,953
	Other			42,102			37,824

		Total current assets		340,287			325,879
Property, plant and equipment, net				670,568			711,567
Intangibles and loan acquisition costs, net				133,742			135,995
Other				56,412			58,773

		Total assets	$	1,201,009		$	1,232,214

L I A B I L I T I E S A N D S H A R E H O L D E R S' (D E F I C I T)
Liabilities Not Subject to Compromise
Current liabilities:
	Accounts payable		$	31,837		$	46,384
	Accrued liabilities and other			44,781			62,403
	Short-term borrowings			10,122			12,411
	Current portion of long-term debt			489,094			1,077,017

		Total current liabilities		575,834			1,198,215
Long-term debt, less current portion				5,268			9,802
Deferred income taxes				54,049			53,106
Other non-current liabilities				18,992			19,953

Total liabilities not subject to compromise				654,143			1,281,076
Liabilities Subject to Compromise				652,905			—

		Total liabilities		1,307,048			1,281,076
Shareholders' (deficit):
	Series preferred stock—$.01 par value, 10,000,000 shares authorized, 0 shares issued and outstanding			—			—
	Common stock—$.01 par value, 100,000,000 shares authorized, 32,004,200 shares issued and outstanding at September 28, 2002 and December 29, 2001			320			320
	Non-voting common stock—$.01 par value, 3,000,000 shares authorized, 0 shares issued and outstanding			—			—
	Additional paid-in capital			243,722			243,722
	(Deficit)			(311,875	)		(241,935	)
	Accumulated other comprehensive (loss)			(38,206	)		(50,969	)

				(106,039	)		(48,862	)

		Total liabilities and shareholders' (deficit)	$	1,201,009		$	1,232,214

			Three Months Ended						Nine Months Ended
			September 28, 2002			September 29, 2001			September 28, 2002			September 29, 2001
Net sales			$	184,048		$	202,381		$	576,009		$	618,024
Cost of goods sold				153,842			165,319			480,453			513,563

Gross profit				30,206			37,062			95,556			104,461
Selling, general and administrative expenses				24,712			26,249			78,245			83,129
Special charges				—			—			3,634			—
Plant realignment costs				356			—			913			1,660

Operating income				5,138			10,813			12,764			19,672
Other expense:
	Interest expense, net (contractual interest of $27,835 and $81,417 for the three months and nine months ended September 28, 2002, respectively)			13,511			25,581			57,198			76,292
	Foreign currency and other			6,433			1,271			14,407			3,334

				19,944			26,852			71,605			79,626

Loss before Chapter 11 reorganization expenses and income tax expense (benefit)				(14,806	)		(16,039	)		(58,841	)		(59,954	)
Chapter 11 reorganization expenses				6,124			—			7,009			—

Loss before income tax expense (benefit)				(20,930	)		(16,039	)		(65,850	)		(59,954	)
Income tax expense (benefit)				1,668			(4,491	)		4,090			(16,787	)

Net loss			$	(22,598	)	$	(11,548	)	$	(69,940	)	$	(43,167	)

Net loss per common share:
	Basic:
		Average common shares outstanding		32,004			32,004			32,004			32,004
		Net loss per common share	$	(0.71	)	$	(0.36	)	$	(2.19	)	$	(1.35	)

	Diluted:
		Average common shares outstanding		32,004			32,004			32,004			32,004
		Net loss per common share	$	(0.71	)	$	(0.36	)	$	(2.19	)	$	(1.35	)

Cash dividends per share			$	—		$	—		$	—		$	0.02

				Nine Months Ended
				September 28, 2002			September 29, 2001
Operating activities
	Net loss			$	(69,940	)	$	(43,167	)
	Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
		Depreciation and amortization expense			47,686			59,672
		Foreign currency and other			14,407			3,334
	Changes in operating assets and liabilities:
		Accounts receivable			4,304			(4,493	)
		Inventories			9,681			5,178
		Accounts payable and accrued expenses			29,429			(6,460	)
	Other, net				667			(17,503	)

			Net cash provided by (used in) operating activities		36,234			(3,439	)

Investing activities
	Purchases of property, plant and equipment				(5,924	)		(16,649	)
	Proceeds from sales of marketable securities				4,762			—
	Other				(34	)		36

			Net cash (used in) investing activities		(1,196	)		(16,613	)

Financing activities
	Proceeds from debt				660			67,366
	Payment of debt				(7,001	)		(35,898	)
	Dividends to shareholders				—			(640	)
	Loan acquisition costs and other, net				(7,736	)		(8,107	)

			Net cash (used in) provided by financing activities		(14,077	)		22,721

Effect of exchange rate changes on cash					10,370			1,429

Net increase in cash and equivalents					31,331			4,098
Cash and equivalents at beginning of period					28,231			12,276

Cash and equivalents at end of period				$	59,562		$	16,374

		September 28, 2002			December 29, 2001
		(Unaudited)
Cost:
	Land	$	15,585		$	15,287
	Buildings and land improvements		157,257			154,709
	Machinery, equipment and other		817,627			800,384
	Construction in progress		6,951			15,132

			997,420			985,512
Less accumulated depreciation			(326,852	)		(273,945	)

		$	670,568		$	711,567

		September 28, 2002		December 29, 2001
Identifiable assets:
	Consumer	$	607,415	$	634,642
	Industrial and Specialty		499,720		482,994
	Corporate(1)		93,874		114,578

		$	1,201,009	$	1,232,214

		September 28, 2002		December 29, 2001
Identifiable assets:
	United States	$	626,427	$	728,688
	Canada		168,355		138,809
	Europe		227,148		188,960
	Asia		49,089		41,427
	Latin America		129,990		134,330

		$	1,201,009	$	1,232,214

			Three Months Ended
			September 28, 2002			September 29, 2001		Decrease			% Decrease
			(Dollars in thousands)
Net sales:
	Consumer		$	100,537		$	116,238	$	(15,701	)	(13.5	)%
	Industrial and Specialty			83,511			86,143		(2,632	)	(3.1	)

			$	184,048		$	202,381	$	(18,333	)	(9.1	)%

Operating income (loss):
	Consumer		$	3,545		$	8,133	$	(4,588	)	(56.4	)%
	Industrial and Specialty			1,949			2,680		(731	)	(27.3	)

				5,494			10,813		(5,319	)	(49.2	)
	Plant realignment costs			(356	)		—		(356	)	—
	Special charges			—			—		—		—

		Operating income	$	5,138		$	10,813	$	(5,675	)	(52.5	)%

			Nine Months Ended
			September 28, 2002			September 29, 2001			Increase/ (Decrease)			% Increase (Decrease)
			(Dollars in thousands)
Net sales:
	Consumer		$	316,016		$	347,768		$	(31,752	)	(9.1	)%
	Industrial and Specialty			259,993			270,256			(10,263	)	(3.8	)

			$	576,009		$	618,024		$	(42,015	)	(6.8	)%

Operating income (loss):
	Consumer		$	20,157		$	20,579		$	(422	)	(2.1	)%
	Industrial and Specialty			(2,846	)		753			(3,599	)	(478.0	)

				17,311			21,332			(4,021	)	(18.8	)
	Plant realignment costs			(913	)		(1,660	)		747		(45.1	)
	Special charges			(3,634	)		—			(3,634	)	—

		Operating income	$	12,764		$	19,672		$	(6,908	)	(35.1	)%

		POLYMER GROUP, INC.
		By:	/s/ JERRY ZUCKER Jerry Zucker Chairman, President, Chief Executive Officer and Director (Principal Executive Officer)
		By:	/s/ JAMES G. BOYD James G. Boyd Executive Vice President, Chief Financial Officer, Treasurer and Director (Principal Financial Officer)