UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

For the quarterly period ended October 2, 2004

 

For the transition period from               to

Commission file number: 1-14330

POLYMER GROUP, INC.

(Exact name of registrant as specified in its charter)

 

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

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 period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days. Yes x  No o

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

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

On November 5, 2004 there were 10,053,027 shares of Class A common stock, 270,783 shares of Class B common stock and 54,251 shares of Class C common stock outstanding. No shares of Class D or Class E common stock were outstanding as of such date. The par value for each class of common shares is $.01 per share.

 

POLYMER GROUP, INC.
INDEX TO FORM 10-Q

				Page
IMPORTANT INFORMATION REGARDING THIS FORM 10-Q				2
PART I. FINANCIAL INFORMATION
Item 1.		Financial Statements		3
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		24
Item 3.		Quantitative and Qualitative Disclosures About Market Risk		36
Item 4.		Controls and Procedures		37
PART II. OTHER INFORMATION
Item 1.		Legal Proceedings		38
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		38
Item 3.		Defaults Upon Senior Securities		38
Item 4.		Submission of Matters To a Vote of Security Holders		38
Item 5.		Other Information		38
Item 6.		Exhibits		38
Signatures				39

 

1

 

IMPORTANT INFORMATION REGARDING THIS FORM 10-Q

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

Safe Harbor-Forward-Looking Statements

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

Various statements contained in this report, including those that express a belief, expectation or intention, as well as those that are not statements of historical fact are, or may be deemed to be, 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. These forward-looking statements speak only as of the date of this report. Unless required by law, the Company does not undertake any obligation to update these statements and cautions against any undue reliance on them. These forward-looking statements are based on current expectations and assumptions about future events. While management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond the Company’s control.

Important factors that could cause actual results to differ materially from those discussed in such forward-looking statements include:

·                    general economic factors including, but not limited to, changes in interest rates, foreign currency translation rates, consumer confidence, trends in disposable income, changes in consumer demand for goods produced, and cyclical or other downturns;

·                    substantial debt levels and potential inability to maintain sufficient liquidity to finance the Company’s operations and make necessary capital expenditures;

·                    inability to meet existing debt covenants;

·                    information and technological advances;

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

·                    domestic and foreign competition;

·                    reliance on major customers and suppliers; and

·                    risks relating to operations in foreign jurisdictions.

2

ITEM 1. FINANCIAL STATEMENTS

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

		October 2, 2004					January 3,  2004
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents			$	29,553				$	21,336
Accounts receivable, net			128,473					121,146
Inventories			99,797					96,513
Deferred income taxes			266					143
Other current assets			20,187					20,554
Total current assets			278,276					259,692
Property, plant and equipment, net			393,110					416,508
Intangibles and loan acquisition costs, net			57,171					33,560
Deferred income taxes			2,370					2,335
Other assets			3,925					6,967
Total assets			$	734,852				$	719,062
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Short-term borrowings			$	5,831				$	8,454
Accounts payable			58,622					57,091
Accrued liabilities			31,390					39,850
Income taxes payable			1,083					1,190
Current portion of long-term debt			4,045					34,001
Total current liabilities			100,971					140,586
Long-term debt, less current portion			416,301					440,992
Deferred income taxes			55,627					28,711
Other noncurrent liabilities			34,034					35,422
Total liabilities			606,933					645,711
Minority interests			15,610					14,151
16% Series A convertible pay-in-kind preferred shares—52,716 shares issued and outstanding at October 2, 2004			55,944					—
Shareholders’ equity:
Class A common stock—10,053,027 and 8,228,425 shares issued and outstanding at October 2, 2004 and January 3, 2004, respectively			100					82
Class B convertible common stock—270,783 and 389,977 shares issued and outstanding at October 2, 2004 and January 3, 2004, respectively			3					4
Class C convertible common stock—54,251 and 34,892 shares issued and outstanding at October 2, 2004 and January 3, 2004, respectively			1					—
Class D convertible common stock—0 shares issued and outstanding			—					—
Class E convertible common stock—0 shares issued and outstanding			—					—
Additional paid in capital			76,473					73,304
Retained earnings (deficit)			(39,852		)			(32,987		)
Accumulated other comprehensive income			19,640					18,797
Total shareholders’ equity			56,365					59,200
Total liabilities and shareholders’ equity			$	734,852				$	719,062

 

See Accompanying Notes.

3

POLYMER GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended October 2, 2004 and September 27, 2003
(In Thousands, Except Per Share Data)

		Successor
		Three Months Ended October 2, 2004					Three Months Ended September 27, 2003
Net sales			$	205,066				$	185,063
Cost of goods sold			169,018					152,207
Gross profit			36,048					32,856
Selling, general and administrative expenses			23,075					21,479
Plant realignment costs			222					1,235
Asset impairment charges			1,710					—
Arbitration settlement, net			282					—
Operating income			10,759					10,142
Other expense (income):
Interest expense, net			7,783					14,409
Investment gain, net			—					(3		)
Minority interests			415					510
Foreign currency and other			1,105					2,530
			9,303					17,446
Income (loss) before income tax expense			1,456					(7,304		)
Income tax expense (benefit)			2,052					(40		)
Net income (loss)			(596		)			(7,264		)
Accrued dividends on PIK preferred shares			1,953					—
Earnings (losses) applicable to common shareholders			$	(2,549	)			$	(7,264	)
Net earnings (losses) per common share:
Basic			$	(0.25	)			$	(0.84	)
Diluted			$	(0.25	)			$	(0.84	)

 

See Accompanying Notes.

4

POLYMER GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

Nine Months Ended October 2, 2004,
Seven Months Ended September 27, 2003 and
Two Months Ended March 1, 2003

(In Thousands, Except Per Share Data)

		Successor										Predecessor
		Nine Months Ended October 2, 2004					Seven Months Ended September 27, 2003					Two Months Ended March 1, 2003
Net sales			$	622,400				$	447,887				$	132,909
Cost of goods sold			510,905					369,875					111,075
Gross profit			111,495					78,012					21,834
Selling, general and administrative expenses			74,837					54,346					16,004
Plant realignment costs			1,463					3,651					4
Asset impairment charges			1,710					—					—
Arbitration settlement, net			(13,112		)			—					—
Operating income			46,597					20,015					5,826
Other expense (income):
Interest expense, net (contractual interest of $20,306 for the two months ended March 1, 2003)			32,317					33,131					10,665
Investment gain, net			—					(3		)			(291		)
Minority interests			1,522					1,249					441
Foreign currency and other			8,222					1,680					1,434
			42,061					36,057					12,249
Income (loss) before reorganization items and income taxes			4,536					(16,042		)			(6,423		)
Reorganization items, net gain			—					—					(540,479		)
Income (loss) before income tax expense			4,536					(16,042		)			534,056
Income tax expense			8,177					3,686					1,692
Net income (loss)			(3,641		)			(19,728		)			532,364
Accrued dividends on PIK preferred shares			3,224					—					—
Earnings (losses) applicable to common shareholders			$	(6,865	)			$	(19,728	)			$	532,364
Net earnings (losses) per common share:
Basic			$	(0.71	)			$	(2.28	)			$	16.63
Diluted			$	(0.71	)			$	(2.28	)			$	16.63

 

See Accompanying Notes.

5

POLYMER GROUP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’
EQUITY AND COMPREHENSIVE INCOME (LOSS) (Unaudited)
For the Nine Months Ended October 2, 2004
(In Thousands)

													Accumulated
													Other
							Additional			Retained			Comprehensive
		Common					Paid-in			Earnings/			Income/									Comprehensive
		Stock					Capital			(Deficit)			(Loss)					Total				Income/(Loss)
Balance, January 3, 2004, audited			$	86			$	73,304		$	(32,987	)		$	18,797			$	59,200
Net income (loss)			—				—			(3,641		)		—				(3,641		)			$	(3,641	)
Accrued dividends on PIK preferred shares			—				—			(3,224		)		—				(3,224		)			—
Currency translation adjustment			—				—			—				2,368				2,368					2,368
Cash flow hedge adjustment, net of reclassification adjustment			—				—			—				(1,525		)		(1,525		)			(1,525		)
Compensation recognized on stock options and restricted stock grants			—				431			—				—				431					—
Class A and Class C common stock issued under order of United States Bankruptcy Court			14				(14		)	—				—				—					—
Conversion of junior notes to Class A common stock			4				2,752			—				—				2,756					—
Balance, October 2, 2004			$	104			$	76,473		$	(39,852	)		$	19,640			$	56,365				$	(2,798	)

 

See Accompanying Notes.

6

POLYMER GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW (Unaudited)
(In Thousands)

		Successor										Predecessor
		Nine Months Ended October 2, 2004					Seven Months Ended September 27, 2003					Two Months Ended March 1, 2003
Operating activities:
Net income (loss)			$	(3,641	)			$	(19,728	)			$	532,364
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Gain on investments			—					(3		)			(291		)
Gain on cancellation of prepetition indebtedness			—					—					(619,913		)
Deferred income taxes			1,074					—					3,010
Fresh start adjustments			—					—					47,460
Write-off of loan acquisition costs			5,022					—					10,217
Asset impairment charges			1,710					—					—
Depreciation and amortization			39,547					27,676					8,812
Noncash interest and compensation			2,190					1,368					—
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable, net			(7,454		)			7,994					(8,195		)
Inventories			(3,484		)			20,250					(887		)
Other current assets			367					(5,288		)			6,675
Accounts payable and accrued liabilities			(3,525		)			(12,737		)			13,027
Other, net			4,480					3,706					(5,180		)
Net cash provided by (used in) operating activities			36,286					23,238					(12,901		)
Investing activities:
Purchases of property, plant and equipment			(13,206		)			(22,209		)			(3,062		)
Proceeds from sale of marketable securities			—					—					11,867
Proceeds from sale of other assets			783					2,766					—
Other, net			—					3					15
Net cash provided by (used in) investing activities			(12,423		)			(19,440		)			8,820
Financing activities:
Proceeds from issuance of debt			485,217					9,718					535,310
Repayment of debt			(488,770		)			(15,739		)			(549,031		)
Loan acquisition costs and other			(12,051		)			(821		)			(948		)
Net cash provided by (used in) financing activities			(15,604		)			(6,842		)			(14,669		)
Effect of exchange rate change on cash			(42		)			883					4,632
Net increase (decrease) in cash and cash equivalents			8,217					(2,161		)			(14,118		)
Cash and cash equivalents at beginning of period			21,336					31,783					45,901
Cash and cash equivalents at end of period			$	29,553				$	29,622				$	31,783

 

See Accompanying Notes.

7

POLYMER GROUP, INC.
Notes to Consolidated Financial Statements

Note 1.   Principles of Consolidation and Financial Statement Information

Principles of Consolidation

Polymer Group, Inc. (which together with its subsidiaries is referred to herein as the Company) is a publicly-traded, multinational manufacturer, marketer and seller of nonwoven and oriented polyolefin products. The Company’s main sources of revenue are the sales of primary and intermediate products to the Consumer and Industrial & Specialty segments.

The accompanying consolidated financial statements include the accounts of Polymer Group, Inc. and all majority-owned subsidiaries after elimination of all significant intercompany accounts and transactions. The accounts of all foreign subsidiaries have been included on the basis of fiscal periods ended three months or less prior to the dates of the consolidated balance sheets. All amounts are presented in U.S. dollars, unless otherwise noted. Investments in 20% to 50% owned affiliates where the Company is able to exercise significant influence, but not control, are accounted for by the equity method and, accordingly, the consolidated results of operations include the Company’s share of the affiliates’ income or loss.

The accompanying unaudited interim consolidated financial statements and related notes should be read in conjunction with the Consolidated Financial Statements of the Company and related notes as contained in the Annual Report on Form 10-K for the period ended January 3, 2004. In the judgment of management, these unaudited interim consolidated financial statements include all adjustments of a normal recurring nature and accruals necessary for a fair presentation of such statements.

Basis of Presentation

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

Reclassification

Certain amounts previously presented in the consolidated financial statements for prior periods have been reclassified to conform with current period classification.

8

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

New Accounting Pronouncements

In January 2003, the Financial Accounting Standards Board (“FASB”) released Interpretation No. 46, “Consolidation of Variable Interest Entities (revised December 2003)” (“FIN 46”). FIN 46 requires that all primary beneficiaries of variable interest entities (“VIE’s”) consolidate that entity. The provisions of FIN 46 related to VIE’s created or acquired after January 31, 2003 were effective and adopted by the Company in fiscal year 2003. The provisions of FIN 46 related to VIE’s in which an enterprise holds an interest it acquired before February 1, 2003 were effective for the Company in the first quarter of fiscal 2004. The Company has determined that it does not have any relationships or contracts that constitute a variable interest.

In May 2003, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.”  SFAS No. 150 requires that certain financial instruments, which under previous guidance could be accounted for as equity, be classified as liabilities in the statement of financial position. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003. The Company has determined that it does not have any financial instruments that are within the scope of SFAS No. 150.

Note 2.   Accounts Receivable and Concentration of Credit Risks

Accounts receivable potentially expose the Company to concentration of credit risk, as defined by SFAS 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 its customers’ financial condition as deemed necessary, but generally does not require collateral to support such receivables. Customer balances are considered past due based on contractual terms and the Company does not accrue interest on the past due balances. Once management determines that the receivables are not recoverable, the amounts are removed from the financial records along with the corresponding reserve balance. The allowance for doubtful accounts was approximately $12.6 million and $13.6 million at October 2, 2004 and January 3, 2004, 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 bankruptcy laws. Several of the individual customer balances specifically provided for in the allowance for doubtful accounts have improved their payment trend and reported improving financial results. Accordingly, the Company recorded a reduction in the provision for doubtful accounts of $1.0 million during the nine months ended October 2, 2004.

In the first nine months of 2004 and 2003, The Procter & Gamble Company (“P&G”) accounted for approximately 12% and 13%, respectively, of the Company’s sales.

9

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

Note 3.   Inventories

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

		October 2, 2004					January 3, 2004
		(Unaudited)
Finished goods			$	47,827			$	47,288
Work in process			15,420				16,579
Raw materials			36,550				32,646
			$	99,797			$	96,513

 

Note 4.   Business Restructuring

In 2003, the Company implemented a business restructuring initiative. This initiative encompassed a reduction in working capital levels and operating cost reductions through: (i) reducing headcount at both the plant and corporate levels; (ii) improving manufacturing productivity and reducing component costs; (iii) implementing global purchasing initiatives; and (iv) rationalizing certain assets and/or businesses. Approximately 230 positions were eliminated in fiscal 2003.

Accrued costs for restructuring efforts are included in accrued liabilities in the accompanying balance sheet. A summary of the business restructuring activity during the first nine months of fiscal 2004 is presented in the following table (in thousands):

Balance accrued at beginning of year		$	4,564
2004 plant realignment costs		1,463
Cash payments		(4,707		)
Adjustments		39
Balance accrued at end of period		$	1,359

 

In December 2003, the Company made the business decision to discontinue one of its production lines in the European operations. Accordingly, in addition to certain costs recorded in 2003, plant realignment costs of $1.2 million, which include severance and other cash costs, were charged to the results of operations in the first nine months of 2004. Also, the Company decided to close certain lines in its Canadian operations in July 2004 and charged plant realignment costs of $0.3 million for estimated severance and other cash costs. In conjunction with this closing, the Company recorded an asset impairment charge of $1.7 million, which included the writedown of the affected lines to estimated net realizable value.

10

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

Note 5.   Intangibles and Loan Acquisition Costs

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

		October 2,					January 3,
		2004					2004
		(Unaudited)
Cost:
Proprietary technology			$	26,596			$	26,533
Goodwill			22,351				—
Loan acquisition costs and other			18,440				13,534
			67,387				40,067
Less accumulated amortization			(10,216		)		(6,507		)
			$	57,171			$	33,560

 

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

		Successor																				Predecessor
		Three					Three					Nine					Seven					Two
		Months					Months					Months					Months					Months
		Ended					Ended					Ended					Ended					Ended
		October 2,					September 27,					October 2,					September 27,					March 1,
		2004					2003					2004					2003					2003
Amortization of:
Intangibles with finite lives, included in selling, general and administrative expenses			$	1,428				$	1,783				$	4,314				$	3,756				$	220
Loan acquisition costs included in interest expense, net			486					504					1,456					1,135					1,425
Total amortization expense			$	1,914				$	2,287				$	5,770				$	4,891				$	1,645

 

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

As further described in Note 8 of the Consolidated Financial Statements, during the third quarter of fiscal 2004, the Company recorded goodwill of $22.4 million related to the allocation of the reorganization value to the underlying assets and liabilities as of the Effective Date. Such goodwill is not amortizable, but is subject to tests of impairment at least annually.

In conjunction with the refinancing of the Restructured Credit Facility on April 27, 2004, the Company charged the unamortized balance of the loan acquisition costs related to that debt of $5.0 million to Foreign currency and other in April 2004. Additionally, with the issuance of the new Senior Secured Bank Facility, the Company capitalized approximately $12.0 million of loan acquisition costs, which were primarily bank arrangement and legal fees; these fees are being amortized over the related loan term.

11

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

Note 6.   Accrued Liabilities

Accrued liabilities consist of the following (in thousands):

		October 2,					January 3,
		2004					2004
		(Unaudited)
Salaries, wages and fringe benefits			$	15,425				$	15,443
Professional fees			2,294					4,074
Sales commissions and promotions			2,241					2,070
Restructuring			1,359					4,564
Interest			473					1,877
Other			9,598					11,822
			$	31,390				$	39,850

 

Note 7.   Debt

The Company had outstanding short-term borrowings denominated in U.S. dollars and Chinese rmb of $5.8 million (at an average annual interest rate of approximately 4.49%) and $8.5 million (at an average annual interest rate of approximately 5.31%) as of October 2, 2004 and January 3, 2004, respectively.

Long-term debt consists of the following (in thousands):

		October 2,					January 3,
		2004					2004
		(Unaudited)
Senior Secured Bank Facility, interest rates for U.S. dollar borrowings are based on a specified base plus a specified margin and are subject to certain terms and conditions:
First Lien Term Loan—interest at 5.21% as of October 2, 2004; due in quarterly payments of $750 thousand beginning in September 2004 with the balance due April 27, 2010			$	294,250			—
Second Lien Term Loan—interest at 8.21% as of October 2, 2004; due April 27, 2011			125,000				—
Restructured Credit Facility, interest rates for U.S. dollar borrowings are based on a specified base plus a specified margin, are capped at 12.00% and are subject to certain terms and conditions; terminating on December 31, 2006:
Term Loans—interest at 12.00%; due December 31, 2006			—				$	416,834
Junior Notes—interest at 10.00%; due December 31, 2007			—				53,717
Other			1,096				4,442
			420,346				474,993
Less: Current maturities			(4,045		)		(34,001		)
			$	416,301			$	440,992

 

Senior Secured Bank Facility

The Company’s Senior Secured Bank Facility (the “Bank Facility”), which was entered into on April 27, 2004, consists of a $50.0 million secured revolving credit facility, a $300.0 million senior secured first lien term loan and a $125.0 million senior secured second lien term loan. The proceeds therefrom

12

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

were used to fully repay indebtedness under the Company’s previous Restructured Credit Facility and pay related fees and expenses.

All borrowings under the Bank Facility are U.S. dollar denominated and are guaranteed, on a joint and several basis, by each and all of the direct and indirect domestic subsidiaries of the Company and supported by the pledge of stock of certain non-domestic subsidiaries of the Company. The Bank Facility and the related guarantees are secured by (i) a lien on substantially all of the assets of the Company, its domestic subsidiaries and certain of its non-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, and (iii) 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 Bank Facility are equal to 0.50% of the daily unused amount of the revolving credit commitment. The Bank Facility contains covenants and events of default customary for financings of this type, including leverage and interest expense coverage covenants. At October 2, 2004, the Company is in compliance with all such covenants and expects to remain in compliance through fiscal 2004. The loans require the Company to use a percentage of proceeds from excess cash flows, as defined by the agreement and determined based on year-end results, to reduce its debt balances. Since this amount is not yet determinable, only the mandatory payments of $750,000 per quarter have been classified as a current liability. As of October 2, 2004, the Company had made an optional repayment of debt of $5.0 million, which amount will be used to reduce the excess cash flow amount, if any, to be calculated as of January 1, 2005.

The interest rate applicable to borrowings under the Bank Facility is based on three-month LIBOR plus a specified margin. The applicable margin for borrowings under the revolving credit facility is 300 basis points, the margin for the first lien term loan is 325 basis points and the margin for the second-lien term loan is 625 basis points. Although not anticipated, the Company may elect to use an alternate base rate for its borrowings under the revolving credit facility ranging from 2.25% to 6.25% with such alternate base rates including a margin based on the Company’s total leverage ratio. The Company had no outstanding borrowings at October 2, 2004 under the revolving credit facility. Average daily borrowings under the revolving credit facility for the period from April 28, 2004 to October 2, 2004 were $7.3 million at an average rate of 5.80%. The revolving portion of the credit facility matures on April 27, 2009.

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

Subject to certain terms and conditions, a portion of the Bank Facility may be used for revolving letters of credit. As of October 2, 2004, the Company had $10.8 million of letters of credit outstanding under this facility. Approximately $7.1 million was related to the short-term borrowings of the Company’s China-based majority owned subsidiary (“Nanhai”).

Restructured Credit Facility

Until it was refinanced on April 27, 2004, the Company’s Restructured Credit Facility consisted of secured revolving credit borrowings with aggregate commitments of up to $50.0 million and aggregate term loans and term letters of credit of $435.3 million. All borrowings under the Restructured Credit Facility were U.S. dollar denominated and were guaranteed, on a joint and several basis, by each and all of the direct and indirect domestic subsidiaries of the Company and certain non-domestic subsidiaries of the

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

Company. The Restructured Credit Facility contained covenants and events of default customary for financings of this type, including leverage, senior leverage, interest coverage and adjusted interest coverage. The Company was in compliance with all such covenants through the date of the refinancing. The interest rate applicable to borrowings under the Restructured Credit Facility was based on a specified base rate or a specified Eurodollar base rate, at the Company’s option, plus a specified margin. The effective rate on the term loans was 12.00%, which was the cap on the sum of the interest payable in respect of term loans or term letters of credit plus the senior leverage ratio fee. The Company’s average daily borrowings under the revolving credit agreement, which had an effective interest rate of 6.75%, were $8.7 million for the period from January 4, 2004 to April 27, 2004.

Convertible Subordinated Notes

In connection with the emergence from Chapter 11, the Company issued $50.0 million of 10% Convertible Subordinated Notes due 2007 (the “Junior Notes”) pursuant to an indenture dated as of March 5, 2003 (the “Junior Indenture”). The Junior Notes were unsecured subordinated indebtedness of the Company and subordinated in right of payment to all existing and future indebtedness of the Company which is not, by its terms, expressly junior to, or pari passu with, the Junior Notes. Under the terms of the Junior Notes, the holders could elect to increase the principal amount of the notes in lieu of receiving semi-annual interest payments in cash. The Junior Notes were convertible into shares of Class A Common Stock, at an initial conversion price equal to $7.29 per share. The Junior Indenture contained 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.

During the first quarter of 2004, $2.7 million of the Company’s Junior Notes were converted into approximately 371,500 shares of the Company’s Class A Common Stock. During the second quarter of 2004, in conjunction with the refinancing of the Company’s long-term debt, the Company’s majority shareholder exchanged an additional $42.6 million in aggregate principal amount of the Company’s Junior Notes it controlled for 42,633 shares of the Company’s 16% Series A Convertible Pay-in-kind Preferred Stock (the “PIK Preferred Shares”).

During the third quarter of 2004, $10.1 million in aggregate principal amount of the Company’s Junior Notes were exchanged for 10,083 shares of the Company’s PIK Preferred Shares and 6,719 shares of the Company’s Class A Common Stock. As of October 2, 2004, there were no Junior Notes outstanding. For further discussion of the Company’s PIK Preferred Shares, see Note 11 of the Consolidated Financial Statements.

Subsidiary Indebtedness

Nanhai has a credit facility with a financial institution in China which is scheduled to mature in June 2005. The amount of outstanding indebtedness under the facility was $5.8 million and $8.5 million at October 2, 2004 and January 3, 2004, respectively. 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 $7.1 million.

The Company’s Argentina-based majority owned subsidiary (“DNS”) has two credit facilities denominated in U.S. dollars totaling approximately $1.0 million (all with current maturities) at October 2,

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

2004 and $3.4 million (with current maturities of approximately $3.1 million) at January 3, 2004, respectively.

Note 8.   Income Taxes

The Company recognized income tax expense of $2.1 million and $8.2 million for the three and nine months ended October 2, 2004, respectively, on consolidated income before income taxes of $1.5 million and $4.5 million for the three and nine months ended October 2, 2004, respectively. This tax expense in excess of income before income tax expense primarily resulted from income taxes attributable to the earnings generated by certain foreign operations as well as state income taxes in the United States, with no federal income tax benefit being recognized for the pre-tax losses incurred in the United States and certain foreign operations. During the three months and nine months ended September 27, 2003, the Company recognized an income tax benefit of $0.1 million and an income tax expense of $5.4 million, respectively.

During the third quarter of fiscal 2004, the Company filed its initial federal and state income tax returns for periods including and subsequent to its emergence from the Chapter 11 process. In conjunction with filing its returns, the Company reassessed its estimation of the temporary differences related to its investments in domestic subsidiaries that existed at the Effective Date and the effects of the cancellation of indebtedness on the tax basis of such investments, as well as limitations on other tax attributes. The Company has provided deferred income taxes reflecting the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the carrying amounts used for income taxes purposes, and in accordance with EITF 93-7 “Uncertainties Related to Income Taxes in a Business Combination”, recorded an incremental net deferred tax liability of $25.7 million at October 2, 2004. As such increased estimates of deferred tax liabilities affect the allocation of the reorganization value to the underlying assets and liabilities of the Company as of the Effective Date, the Company has recorded a corresponding increase in goodwill. Such deferred tax assets and liabilities may be subsequently adjusted upon the further refinement of any attribute reduction and the impact of tax limitations, if any. Any future changes in the net deferred tax assets and liabilities as of the Effective Date will be adjusted to reorganization value and not through income, also in accordance with EITF 93-7.

The Company is currently evaluating the impact of the American Jobs Creation Act of 2004, enacted October 22, 2004.

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