POLYMER GROUP INC, 10-Q, 1998-11-16

POLYMER GROUP INC
10-Q, 1998-11-16
BROADWOVEN FABRIC MILLS, MAN MADE FIBER & SILK

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<PAGE>

- - -------------------------------------------------------------------------------
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

----------------

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR QUARTER ENDED OCTOBER 3, 1998

COMMISSION FILE NUMBER 1-14330

POLYMER GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 57-1003983
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

4838 JENKINS AVENUE
NORTH CHARLESTON, SOUTH CAROLINA 29405
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (843) 566-7293

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

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

On November 17, 1998 there were 32,000,000 Common Shares, $.01 par value
outstanding.

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- - -------------------------------------------------------------------------------
<PAGE>

POLYMER GROUP, INC.

INDEX TO FORM 10-Q

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Part I. Financial Information............................................. 3
Item 1. Financial Statements............................................ 3
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 16
Part II. Other Information................................................ 17
Signatures................................................................ 18
Exhibit Index............................................................. 19
</TABLE>

2
<PAGE>

PART I.

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

POLYMER GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
OCTOBER 3, JANUARY 3,
1998 1998
----------- ----------
(UNAUDITED)
ASSETS
------
<S> <C> <C>
Current assets:
Cash and equivalents................................. $ 49,322 $ 50,190
Marketable securities................................ 10,438 7,754
Accounts receivable, net............................. 104,460 107,328
Inventories.......................................... 104,723 94,128
Assets held for disposition, net..................... -- 464,524
Other................................................ 31,203 31,146
---------- ----------
Total current assets............................... 300,146 755,070
Property, plant and equipment, net..................... 665,604 606,260
Intangibles, loan acquisition and organization costs,
net................................................... 256,804 229,391
Other.................................................. 51,413 37,032
---------- ----------
Total assets....................................... $1,273,967 $1,627,753
========== ==========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable, accrued liabilities and other...... $ 110,163 $ 105,824
Short-term bridge financing.......................... -- 425,945
Current portion of long-term debt.................... 3,823 3,276
---------- ----------
Total current liabilities.......................... 113,986 535,045
---------- ----------
Long-term debt, less current portion................... 839,272 741,860
Deferred income taxes.................................. 84,387 82,213
Other noncurrent liabilities........................... 16,761 14,815
Minority interest...................................... -- 54,730
Shareholders' equity:
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, 32,000,000 shares issued and
outstanding......................................... 320 320
Non-voting common stock--$.01 par value, 3,000,000
shares authorized, 0 shares issued and outstanding.. -- --
Additional paid-in capital........................... 243,662 243,662
(Deficit)............................................ (27,304) (39,355)
Other................................................ 2,883 (5,537)
---------- ----------
219,561 199,090
---------- ----------
Total liabilities and shareholders' equity......... $1,273,967 $1,627,753
========== ==========
</TABLE>

See accompanying notes.

3
<PAGE>

POLYMER GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------ ------------------------
OCTOBER 3, SEPTEMBER 27, OCTOBER 3, SEPTEMBER 27,
1998 1997 1998 1997
---------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Net sales................... $201,603 $129,711 $601,050 $390,166
Cost of goods sold.......... 149,062 98,515 450,347 291,669
-------- -------- -------- --------
Gross profit................ 52,541 31,196 150,703 98,497
Selling, general and
administrative expenses.... 25,148 18,609 75,502 56,302
-------- -------- -------- --------
Operating income............ 27,393 12,587 75,201 42,195
Other (income) expense:
Interest expense, net..... 17,098 8,578 50,272 22,110
Unrealized holding (gain)
on marketable
securities............... -- (8,947) -- (8,947)
Foreign currency
transaction (gains)
losses, net.............. 374 (418) 1,536 (743)
-------- -------- -------- --------
17,472 (787) 51,808 12,420
-------- -------- -------- --------
Income before income taxes
and extraordinary item..... 9,921 13,374 23,393 29,775
Income taxes................ 3,678 4,426 8,615 9,853
-------- -------- -------- --------
Income before extraordinary
item....................... 6,243 8,948 14,778 19,922
Extraordinary item, (loss)
from extinguishment of
debt, net of income tax
benefit of $5,959 in 1997.. -- (12,005) (2,728) (12,005)
-------- -------- -------- --------
Net income (loss)..... $ 6,243 $ (3,057) $ 12,050 $ 7,917
======== ======== ======== ========
Net income (loss) per common
share:
Basic:
Average common shares
outstanding............ 32,000 32,000 32,000 32,000
Income before
extraordinary item..... $ 0.20 $ 0.28 $ 0.46 $ 0.62
Extraordinary item,
(loss) from
extinguishment of
debt................... -- (0.38) (0.09) (0.38)
-------- -------- -------- --------
Net income (loss) per
common share--basic.. $ 0.20 $ (0.10) $ 0.38 $ 0.25
======== ======== ======== ========
Diluted:
Average common shares
outstanding............ 32,000 32,000 32,000 32,000
Income before
extraordinary item..... $ 0.20 $ 0.28 $ 0.46 $ 0.62
Extraordinary item,
(loss) from
extinguishment of
debt................... -- (0.38) (0.09) (0.38)
-------- -------- -------- --------
Net income (loss) per
common share--
diluted.............. $ 0.20 $ (0.10) $ 0.38 $ 0.25
======== ======== ======== ========
</TABLE>

See accompanying notes.

4
<PAGE>

POLYMER GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(IN THOUSANDS)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------------
OCTOBER 3, SEPTEMBER 27,
1998 1997
---------- -------------
<S> <C> <C>
Operating activities
Net income.......................................... $ 12,050 $ 7,917
Adjustments to reconcile net income to net cash
provided by operating activities:
Extraordinary item................................ 2,728 12,005
Depreciation and amortization expense............. 45,947 29,815
Foreign currency transaction (gains) losses, net.. 1,536 (743)
Unrealized holding (gain) on marketable securities
classified as trading............................ -- (8,947)
Change in marketable securities classified as
trading.......................................... -- (15,965)
Changes in operating assets and liabilities, net of
effects of business acquisition:
Accounts receivable............................... 2,868 (4,947)
Inventories....................................... (10,595) (6,558)
Accounts payable and other........................ 3,979 6,916
--------- ---------
Net cash provided by operating activities....... 58,513 19,493
--------- ---------
Investing activities
Purchases of property, plant and equipment.......... (55,840) (46,072)
Purchases of marketable securities classified as
available for sale................................. (16,257) (8,852)
Proceeds from sales of marketable securities
classified as available for sale................... 13,521 14,714
Proceeds from sale of assets, net of canceled
subordinated
advance ........................................... 323,524 --
Minority interest................................... (54,730) --
Other, including business acquisition............... (59,309) (14,499)
--------- ---------
Net cash provided by (used in) investing
activities..................................... 150,909 (54,709)
--------- ---------
Financing activities
Proceeds from debt.................................. 598,786 442,245
Payments of debt.................................... (806,006) (374,568)
Loan acquisition costs, net......................... (10,029) (25,891)
--------- ---------
Net cash (used in) provided by financing
activities..................................... (217,249) 41,786
--------- ---------
Effect of exchange rate changes on cash............... 6,959 (3,162)
--------- ---------
Net (decrease) increase in cash and equivalents....... (868) 3,408
Cash and equivalents at beginning of period........... 50,190 37,587
--------- ---------
Cash and equivalents at end of period................. $ 49,322 $ 40,995
========= =========
</TABLE>

See accompanying notes.

5
<PAGE>

POLYMER GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Polymer Group, Inc. ("Polymer Group" or the "Company") is a worldwide
manufacturer of flexible nonwoven and oriented polyolefin fabrics. The
Company's principal lines of business include hygiene, medical, wiping and
industrial and specialty products. The Company operates manufacturing
facilities in the United States, Canada, Mexico, Germany, the Netherlands,
France and England.

The accompanying unaudited consolidated financial statements of the Company
have been prepared in accordance with generally accepted accounting principles
for interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. The Condensed Consolidated Balance Sheet as
of January 3, 1998 contains summarized information; as a result, such data does
not include the same detail provided in the 1997 Annual Report. In the opinion
of the management of Polymer Group, these unaudited consolidated financial
statements contain all adjustments of a normal recurring nature necessary for a
fair presentation. Operating results for the three and nine months ended
October 3, 1998, are not necessarily indicative of the results that may be
expected for fiscal 1998. 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
accordance with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

NOTE 2. 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):

<TABLE>
<CAPTION>
OCTOBER 3, JANUARY 3,
1998 1998
----------- ----------
(UNAUDITED)
<S> <C> <C>
Inventories:
Finished goods................................. $ 50,391 $48,769
Work in process and stores and maintenance
parts......................................... 13,111 11,201
Raw materials.................................. 41,221 34,158
-------- -------
Total........................................ $104,723 $94,128
======== =======
</TABLE>

NOTE 3. NET INCOME (LOSS) PER SHARE

In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings Per Share" ("FAS 128"). FAS 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. The numerator for both basic and diluted earnings per share
is net income (loss) applicable to common stock. The denominator for both basic
and diluted earnings per share is average common shares outstanding.

NOTE 4. ACQUISITIONS

On December 19, 1997, DT Acquisition Inc. ("DTA"), a special-purpose
subsidiary of the Company, completed the purchase of approximately 98% of the
outstanding common shares of

6
<PAGE>

POLYMER GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 4. ACQUISITIONS (CONTINUED)

Dominion Textile Inc. ("Dominion") for Cdn$14.50 per share and approximately
96% of the outstanding first preferred shares of Dominion for Cdn$150 per
share. The acquisition, which was accounted for using the purchase method of
accounting, was financed with $215.9 million of borrowings under DTA's $600.0
million senior secured credit facilities, and subordinated advances of $141.0,
$69.0 and $25.0 million by Galey & Lord, inc. ("Galey"), ZB Holdings, Inc. ("ZB
Holdings") and the Company, respectively. ZB Holdings is a wholly-owned
subsidiary of The InterTech Group, Inc., an affiliate of the Company.

On January 29, 1998, DTA acquired all remaining common and preferred shares,
at which time Dominion underwent a "winding up". All assets of Dominion were
transferred to DTA, all liabilities of Dominion were assumed by 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 to Galey for
approximately $464.5 million, including related fees and expenses, and the
Company acquired (the "Nonwovens Acquisition") the assets and liabilities of
Dominion that comprised the nonwovens and industrial fabrics operations (the
"Nonwovens Business") for approximately $351.6 million, including fees and
expenses. The Nonwovens Business includes a 50% interest in Argentina-based
Dominion Nonwovens Sudamerica S.A. ("DNS"). DNS manufactures and markets
nonwovens to hygiene markets in South America. Concurrently, Dominion Textile
(USA) Inc. ("DT USA"), a wholly-owned subsidiary of Dominion, purchased
approximately $145.6 million of its $150.0 million outstanding 8.875%
Guaranteed Senior Notes due 2003 and, at the same time, purchased approximately
$124.5 million of its $125.0 million outstanding 9.25% Guaranteed Senior Notes
due 2006. Net assets of the apparel fabrics business of Dominion were
classified as assets held for disposition on the Company's consolidated balance
sheet at January 3, 1998. Operating results of the apparel fabrics business of
Dominion have been excluded from the Company's results of operations.

In connection with the Nonwovens Acquisition and related transactions, the
Company also amended its senior secured credit facility to provide for $125.0
million in term loans. The Company used borrowings under the credit facility,
as amended, to finance the purchase of the Nonwovens Business, in part by
retiring amounts outstanding under the DTA $600.0 million credit facility and
repaying the subordinated advance made by ZB Holdings.

On March 5, 1998, the Company issued $200.0 million of 8.75% Senior
Subordinated Notes due 2008 (the "2008 Notes") to qualified institutional
buyers pursuant to Rule 144A under the Securities Act (the "March 1998
Offering"). Proceeds from the sale of the 2008 Notes were used, in part, to
finance the Oriented Polymer Acquisition (as defined below) and to repay
existing revolving obligations. The Company subsequently registered the 2008
Notes with the Securities Exchange Commission pursuant to a Registration
Statement on Form S-4 declared effective July 1, 1998.

On March 16, 1998, the Company completed the acquisition (the "Oriented
Polymer Acquisition") of a leading North American manufacturer of
polypropylene-based commercial twine and polyethylene-based specialty knitted
products for approximately $47.0 million in a transaction accounted for by the
purchase method of accounting. Supplemental pro forma information for the
Oriented Polymer Acquisition is not presented because the acquisition was not
material to the consolidated results of operations.

NOTE 5. SELECTED FINANCIAL DATA OF GUARANTORS

Payment of the 2007 Notes and 2008 Notes is guaranteed jointly and severally
on a senior subordinated basis by certain of the Company's subsidiaries.
Management has determined that separate complete financial statements of the
guarantors are not material to users of the financial

7
<PAGE>

POLYMER GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 5. SELECTED FINANCIAL DATA OF GUARANTORS (CONTINUED)

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 OCTOBER 3, 1998

CONDENSED CONSOLIDATING SELECTED BALANCE SHEET FINANCIAL DATA
AS OF JANUARY 3, 1998

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS SELECTED FINANCIAL DATA
FOR THE NINE MONTHS ENDED OCTOBER 3, 1998

<TABLE>
<CAPTION>
COMBINED COMBINED RECLASSIFICATIONS
GUARANTOR NON-GUARANTOR THE AND
SUBSIDIARIES SUBSIDIARIES COMPANY ELIMINATIONS CONSOLIDATED
------------ ------------- ------- ----------------- ------------
<S> <C> <C> <C> <C> <C>
Net sales............... $384,997 $238,755 $ -- $(22,702) $601,050
Operating income........ 45,454 24,606 4,597 544 75,201
Income before income
taxes and extraordinary
item................... 7,664 10,968 3,770 991 23,393
Income taxes (benefit).. 7,489 6,590 (5,519) 55 8,615
Income before
extraordinary item..... 175 4,378 9,289 936 14,778
Extraordinary item...... -- (2,728) -- -- (2,728)
Equity in earnings of
subsidiaries........... -- -- 1,825 (1,825) --
Net income.............. 175 1,650 11,114 (889) 12,050
</TABLE>

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS SELECTED FINANCIAL DATA
FOR THE NINE MONTHS ENDED SEPTEMBER 27, 1997

<TABLE>
<CAPTION>
COMBINED COMBINED RECLASSIFICATIONS
GUARANTOR NON-GUARANTOR THE AND
SUBSIDIARIES SUBSIDIARIES COMPANY ELIMINATIONS CONSOLIDATED
------------ ------------- ------- ----------------- ------------
<S> <C> <C> <C> <C> <C>
Net sales............... $249,167 $147,633 $ -- $ (6,634) $390,166
Operating income........ 17,103 20,622 4,470 -- 42,195
Income before income
taxes and extraordinary
item................... 10,308 18,099 1,368 -- 29,775
Income taxes (benefit).. (1,223) 2,426 8,650 -- 9,853
Income (loss) before
extraordinary item..... 11,531 15,673 (7,282) -- 19,922
Extraordinary item...... (4,587) (839) (6,579) -- (12,005)
Equity in earnings of
subsidiaries........... -- -- 21,778 (21,778) --
Net income.............. 6,944 14,834 7,917 (21,778) 7,917
</TABLE>

8
<PAGE>

POLYMER GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 6. OTHER
In 1997, the Financial Accounting Standards Board issued Statement No. 130,
"Reporting Comprehensive Income" ("FAS 130") which is effective for fiscal
years beginning after December 15, 1997. FAS 130 establishes new rules for the
reporting and display of comprehensive income and its components. FAS 130
requires unrealized gains or losses on the Company's available-for-sale
securities and the foreign currency translation adjustments, which prior to
adoption were reported separately in shareholders' equity, to be included in
other comprehensive income. The Company's comprehensive income/(loss) for the
three months ended October 3, 1998 and September 27, 1997 approximated $18.7
million and $(4.8) million, respectively. Year to date comprehensive income
approximated $20.5 million in 1998 and $(1.2) million in 1997. The difference
between comprehensive income and consolidated net income is due primarily to
foreign currency translation adjustments.

In 1997, the Financial Accounting Standards Board issued Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("FAS
131") which is effective for years beginning after December 15, 1997. FAS 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. FAS 131 does not require interim disclosures during the initial
year of application; however, the segment information must be reported for
comparative purposes in interim financial statements in the second year of
application. The Company has adopted FAS 131 and will defer reporting segment
information in the interim financial statements until the second year of
application.

In 1998, the Financial Accounting Standards Board issued Statement No. 132,
"Employers' Disclosures about Pensions and Other Post-retirement Benefits"
("FAS 132") which is effective for fiscal years beginning after December 15,
1997. FAS 132 revises and standardizes employers' disclosures for pensions and
other post-retirement benefit plans and it requires additional information
about changes in the benefit obligations and the fair value of plan assets
that are expected to enhance financial analysis. Currently, the Company does
not anticipate FAS 132 to have a financial or operational impact on the
Company.

In 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("FAS 133")
which is effective for fiscal years beginning after June 15, 1999. FAS 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and
measure those instruments at fair value. FAS 133 requires disclosure based on
the type of hedge and the type of market risk that is being hedged. Currently,
the Company does not anticipate FAS 133 to have a financial or operational
impact on the Company.

In April 1998, the American Institute of Certified Public Accountants issued
SOP 98-5, "Reporting the Costs of Start-Up Activities". The SOP is effective
beginning on January 1, 1999, and requires that start-up/organization costs
capitalized prior to January 1, 1999 be written-off and any future start-up
costs to be expensed as incurred. The unamortized balance of start-up costs
will be written off as a cumulative effect of an accounting change. The
Company is currently quantifying the impact of this change and is evaluating
the feasibility of early adoption.

9
<PAGE>

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 January 3,
1998.

RESULTS OF OPERATIONS

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

10
<PAGE>

COMPARISON OF THREE MONTHS ENDED OCTOBER 3, 1998 AND SEPTEMBER 27, 1997

NET SALES

The following table sets forth components of the Company's net sales by
product category for the three months ended October 3, 1998 and the
corresponding increase over the comparable period in the prior year:

<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------
OCTOBER 3, SEPTEMBER 27, %
1998 1997 INCREASE INCREASE
---------- ------------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales by product category:
Hygiene........................... $ 82,695 $ 55,660 $27,035 48.6%
Medical........................... 23,328 22,323 1,005 4.5
Wiping............................ 25,863 24,775 1,088 4.4
Industrial and specialty.......... 69,717 26,953 42,764 158.7
-------- -------- -------
Total net sales................. $201,603 $129,711 $71,892 55.4%
======== ======== =======
</TABLE>

Net sales increased $71.9 million, or approximately 55.4%, from $129.7
million for the three months ended September 27, 1997 to $201.6 million for
the three months ended October 3, 1998. The increase was comprised of $62.5
million in net sales due to the Nonwovens Acquisition and the Oriented Polymer
Acquisition and $9.9 million due to organic growth within each of the four
product groups, offset by a $0.4 million decline in net sales due primarily to
unfavorable Canadian foreign currency translation rates. Additionally, net
sales were negatively impacted by raw material cost reductions passed through
to customers.

GROSS PROFIT

Gross profit increased to $52.5 million, or 26.1% of net sales, for the
third quarter of 1998 versus $31.2 million, or 24.1% of net sales, for the
comparable period of 1997. Raw material costs in the third quarter of 1998
were $81.6 million, or 40.5% of net sales, compared to $58.1 million, or 44.8%
of net sales, for the comparable period in 1997. The decline in raw material
costs as a percentage of net sales reflects the continued trend in lower raw
material costs versus prior periods. Direct labor costs in the third quarter
of 1998 were $15.4 million, or 7.7% of net sales, compared to $9.9 million, or
7.6% of net sales, for the comparable period in 1997. Overhead costs for the
third quarter of 1998 were $52.0 million, up approximately $21.5 million
versus $30.5 million for the same quarter of 1997 due primarily to higher
incremental overhead costs associated with the recent acquisitions.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses decreased from 14.4% of net
sales in the third quarter of 1997 to 12.5% of net sales in the third quarter
of 1998 primarily as a result of synergies identified since the Nonwovens
Acquisition and the Oriented Polymer Acquisition. Selling, general and
administrative expenses for the third quarter of 1998 were $25.1 million, up
approximately $6.5 million versus $18.6 million for the third quarter of 1997
due primarily to additional costs associated with the recent acquisitions.

OTHER

Interest expense increased $8.5 million, from $8.6 million in the third
quarter of 1997 to $17.1 million in the third quarter of 1998. Interest
expense as a percentage of net sales increased from 6.6% in the third quarter
of 1997 to 8.5% in the third quarter of 1998. The increase in interest expense
is due to higher indebtedness outstanding during 1998 primarily as a result of
the recent acquisitions.

11
<PAGE>

Net foreign currency transaction losses were approximately $0.4 million
during the third quarter of 1998 primarily as a result of weak Canadian
currencies.

The Company provided for income taxes of approximately $3.7 million for the
three months ended October 3, 1998, representing an effective tax rate of
37.1%. The provision for income taxes at the Company's effective rate differed
from the provision for income taxes at the statutory rate due primarily to
higher tax rates in foreign jurisdictions and to an increase in non-deductible
goodwill amortization in 1998. The Company provided for income taxes of $4.4
million during the third quarter of 1997, representing an effective tax rate
of 33.1%.

INCOME BEFORE EXTRAORDINARY ITEM

Income before extraordinary item was $6.2 million, or $0.20 per share, in
the third quarter of 1998 as compared to $8.9 million, or $0.28 per share, for
the third quarter of 1997. Third quarter 1997 included an after-tax investment
gain of $6.0 million attributable to marketable securities. Excluding this
non-operating item, the 1997 income before extraordinary item would have been
$3.0 million or $0.09 per share.

EXTRAORDINARY ITEM

As a result of refinancing its outstanding indebtedness on July 3, 1997, the
Company recorded a one-time charge of $12.0 million (net of tax) during the
third quarter of 1997 for the write-off of previously capitalized debt issue
costs and premiums paid in connection with the repurchase of the $100 million
12 1/4% Senior Notes.

COMPARISON OF NINE MONTHS ENDED OCTOBER 3, 1998 AND SEPTEMBER 27, 1997

NET SALES

The following table sets forth components of the Company's net sales by
product category for the nine months ended October 3, 1998 and the
corresponding increase over the comparable fiscal period in the prior year:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------
OCTOBER 3, SEPTEMBER 27, %
1998 1997 INCREASE INCREASE
---------- ------------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales by product category:
Hygiene........................... $242,310 $165,808 $ 76,502 46.1%
Medical........................... 69,277 67,067 2,210 3.3
Wiping............................ 78,034 76,259 1,775 2.3
Industrial and specialty.......... 211,429 81,032 130,397 160.9
-------- -------- --------
Total net sales................. $601,050 $390,166 $210,884 54.0%
======== ======== ========
</TABLE>

Net sales increased $210.9 million, or approximately 54.0%, from $390.2
million for the nine months ended September 27, 1997 to $601.1 million for the
nine months ended October 3, 1998. The increase was comprised of $189.7
million in net sales due to the Nonwovens Acquisition and the Oriented Polymer
Acquisition and $27.6 million due to organic growth within each of the four
product groups, offset by a $6.3 million decline in net sales due primarily to
unfavorable European and Canadian foreign currency translation rates
throughout the majority of the year. Additionally, net sales were negatively
impacted by raw material cost reductions passed through to customers.

GROSS PROFIT

Year to date gross profit increased to $150.7 million, or 25.1% of net
sales, versus $98.5 million, or 25.2% of net sales, for the comparable period
of 1997. Year to date raw material costs were $250.5

12
<PAGE>

million, or 41.7% of net sales, compared to $170.8 million, or 43.8% of net
sales in 1997. The decline in raw material costs as a percentage of net sales
reflects the continued trend in lower raw material costs versus prior periods.
Year to date direct labor costs were $48.8 million, or 8.1% of net sales, as
compared to $30.6 million, or 7.8% of net sales, in 1997. Year to date
overhead costs in 1998 were $151.0 million up approximately $60.7 million
versus $90.3 million for the same period of 1997 due primarily to higher
incremental overhead costs associated with the recent acquisitions.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Year to date selling, general and administrative expenses decreased from
14.4% of net sales in 1997 to 12.6% of net sales in 1998 primarily as a result
of synergies identified since the Nonwovens Acquisition and the Oriented
Polymer Acquisition. Year to date selling, general and administrative expenses
in 1998 were $75.5 million, up approximately $19.2 million versus $56.3
million in 1997 due primarily to additional costs associated with the recent
acquisitions.

OTHER

Year to date interest expense increased $28.2 million, from $22.1 million in
1997 to $50.3 million in 1998. Year to date interest expense as a percentage
of net sales increased from 5.7% in 1997 to 8.4% in 1998. The increase in
interest expense is due to higher indebtedness outstanding during 1998
primarily as a result of the recent acquisitions.

Year to date net foreign currency transaction losses were approximately $1.5
million in 1998 versus gains of $0.7 million in 1997 due to weak European and
Canadian currencies during the majority of the year.

The Company provided for year to date income taxes of approximately $8.6
million in 1998, representing an effective tax rate of 36.8%. The provision
for income taxes at the Company's effective rate differed from the provision
for income taxes at the statutory rate due primarily to higher tax rates in
foreign jurisdictions and to an increase in non-deductible goodwill
amortization in 1998. The Company provided for year to date income taxes of
$9.9 million for the comparable period in 1997, representing an effective tax
rate of 33.1%.

INCOME BEFORE EXTRAORDINARY ITEM

Year to date income before extraordinary item was $14.8 million, or $0.46
per share, in 1998 as compared to $19.9 million, or $0.62 per share, in 1997.
Income before extraordinary item for 1997 included an after-tax investment
gain of $6.0 million attributable to marketable securities. Excluding this
non-operating item, the 1997 income before extraordinary item would have been
$13.9 million or $0.44 per share.

EXTRAORDINARY ITEM

As a result of the Nonwovens Acquisition, the Company recorded a one-time
charge of $2.7 million during the first quarter of 1998 for the write-off of
previously capitalized deferred financing costs.

13
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

<TABLE>
<CAPTION>
OCTOBER 3, JANUARY 3,
1998 1998
---------- -------------
(IN THOUSANDS)
<S> <C> <C>
Balance sheet data:
Cash and equivalents and marketable
securities................................. $ 59,760 $ 57,944
Working capital, excluding assets held for
disposition and short-term bridge
financing.................................. 186,160 181,446
Total assets................................ 1,273,967 1,627,753
Long-term debt, less current portion........ 839,272 741,860
Shareholders' equity........................ 219,561 199,090
<CAPTION>
NINE MONTHS ENDED
-------------------------
OCTOBER 3, SEPTEMBER 27,
1998 1997
---------- -------------
(IN THOUSANDS)
<S> <C> <C>
Cash flow data:
Net cash provided by operating activities... $ 58,513 $ 19,493
Net cash provided by (used in) investing
activities................................. 150,909 (54,709)
Net cash (used in) provided by financing
activities................................. (217,249) 41,786
</TABLE>

OPERATING ACTIVITIES

During the nine months ended October 3, 1998, the Company's operations
generated $58.5 million in cash, as compared to $19.5 million for the
comparable period in 1997. The increase is primarily due to higher operating
income as a result of acquisitions and organic growth.

INVESTING AND FINANCING ACTIVITIES

Capital expenditures for the nine months ended October 3, 1998 totaled $55.8
million, related primarily to margin-enhancing projects and capacity
expansions. For the remainder of fiscal 1998, the Company expects capital
expenditures to approximate $14.2 million.

As discussed in "Note 4. Acquisitions", on December 19, 1997, DTA completed
the purchase of approximately 98% of the outstanding common shares of Dominion
for Cdn$14.50 per share and approximately 96% of the outstanding first
preferred shares of Dominion for Cdn$150 per share. The acquisition, which was
accounted for using the purchase method of accounting, was financed with
$215.9 million of borrowings under DTA's $600.0 million senior secured credit
facilities, and subordinated advances of $141.0, $69.0 and $25.0 million by
Galey, ZB Holdings and the Company, respectively.

On January 29, 1998, DTA acquired all remaining common and preferred shares
of Dominion, at which time Dominion underwent a "winding up". All assets of
Dominion were transferred to DTA, all liabilities of Dominion were assumed by
DTA and all outstanding common shares and 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 to Galey
for approximately $464.5 million, including related fees and expenses, and the
Company acquired the Nonwovens Business for approximately $351.6 million,
including fees and expenses. Concurrently, DT USA purchased approximately
$146.6 million of its $150.0 million outstanding 8.875% Guaranteed Senior
Notes due 2003 and, at the same time, purchased approximately $124.5 million
of its $125.0 million

14
<PAGE>

outstanding 9.25% Guaranteed Senior Notes due 2006. Net assets of the apparel
business of Dominion were classified as assets held for disposition on the
Company's consolidated balance sheet at January 3, 1998. In connection with
the Nonwovens Acquisition and related transactions, the Company also amended
its credit facility to provide for $125.0 million in term loans.

On March 5, 1998, the Company issued $200.0 million of 8.75% Senior
Subordinated Notes due 2008 to qualified institutional buyers pursuant to Rule
144A under the Securities Act.

On March 16, 1998, the Company completed the Oriented Polymer Acquisition
for approximately $47.0 million in a transaction accounted for by the purchase
method of accounting.

During the third quarter of 1998 the Company reduced its total debt by $24.8
million. The Company believes that based on current levels of operations and
anticipated growth, its cash from operations, together with other available
sources of liquidity (including but not limited to borrowings under the
amended credit facility) will be adequate over the next several years to make
required debt payments, including interest thereon, to permit anticipated
capital expenditures and to fund the Company's working capital requirements.

EFFECT OF INFLATION

Inflation generally affects the Company by increasing the cost of labor,
equipment and new materials. The Company believes that inflation had no
material effect on the Company's business during the nine months ended October
3, 1998.

FOREIGN CURRENCY

The Company's substantial foreign operations expose it to the risk of
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.

The Euro currency ("Euro") is scheduled to be introduced on January 1, 1999,
at which time the eleven participating European Monetary Union member
countries will establish irrevocable fixed conversion rates between their
local currencies and the Euro. However, the local currencies in these
countries may continue to be used as legal tender through January 1, 2002.
Thereafter, the local currencies will be canceled and Euro bills and coins
will be used for cash transactions in the participating countries. From
January 1, 1999 to December 31, 2001, companies will be allowed to transact
noncash transactions in either the Euro or the local currency.

The Company, with operations in three of the participating countries, has
evaluated the impact of the Euro conversion and is in the latter stages of
ensuring all information systems are converted to handle multi-currency
transactions. The costs incurred to-date have not been material and management
does not currently expect the total cost of the Euro conversion to be material
to the financial condition of the Company. In addition, management does not
reasonably expect the Euro conversion to have a material impact on current
business, operations or financial condition.

YEAR 2000

The Company has commenced global initiatives to assess the Year 2000 issue.
The project encompasses a review of information systems, personal computers,
process systems and ancillary systems and communications with third party
suppliers, vendors and customers. The objective of the Year 2000 assessment is
to minimize the seriousness of any technical failures in order to reduce the
risk of a material impact on the operations and financial condition of the
Company. The following outlines, by key areas, the status of the Company's
Year 2000 assessment, any reasonably expected risks identified during this
process, costs and contingency plans.

15
<PAGE>

Information Systems and Personal Computers

The majority of information systems and personal computers are Year 2000
ready. The information systems at certain facilities in Canada and Europe are
in the final phases of readiness with anticipated completion dates during the
first half of 1999. Management currently does not expect any material risks to
the operations and financial condition of the Company as a result of
information system and personal computer failures.

Process Systems

The Company has been communicating with vendors and performing physical
tests of the process systems and expects to complete the assessment by the end
of 1998. Management anticipates the assessment to reveal that certain systems
will not be Year 2000 ready. The results of this assessment, plans for the
final phase, and any necessary contingency plans will be disclosed at a later
date.

Third Party Compliance

The Company continues to learn and evaluate the compliance status of
vendors, suppliers and customers with whom it has a material relationship.
Currently, the evaluation has not revealed any material risks to the
operations and financial condition of the Company. The results of this
assessment, plans for the final phase, and any necessary contingency plans
will be disclosed at a later date.

Year 2000 Costs

Costs incurred to date have not been material and currently management does
not expect future costs to be material to the financial condition of the
Company. Costs are being monitored and can be expected to fluctuate during the
final phases of the project.

NEW ACCOUNTING STANDARDS

See "Note 6. Other" of Notes to Consolidated Financial Statements.

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION ACT OF 1995

Except for historical information contained herein, certain matters set
forth within Management's Discussion and Analysis of financial Condition and
Results of Operations of this Form 10-Q are forward looking statements.
Certain risks and uncertainties could cause actual results to differ
materially from those set forth in the forward looking statements. The
following factors could cause actual results to differ materially from
historical results or those anticipated: adverse economic conditions,
competition in the Company's markets, fluctuation in raw material costs, high
leverage, and other risks detailed in documents filed by the Company with the
Securities and Exchange Commission.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable.

16
<PAGE>

PART II.

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Not applicable.

ITEM 2. CHANGES IN SECURITIES

Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

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

On September 10, 1998 the Company filed a report on Form 8-K relating to the
resignation of a member of the Board of Directors. The resignation was for
personal and family reasons, and was not due to any disagreement with the
Company on any matter relating to the Company's operations, policies or
practices.

17
<PAGE>

SIGNATURES

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.

Polymer Group, Inc.

/s/ Jerry Zucker
By: _________________________________
Jerry Zucker
Chairman, President, Chief
Executive Officer and Director
(Principal Executive Officer)

/s/ James G. Boyd
By: _________________________________
James G. Boyd
Executive Vice President, Treasurer
and
Director (Principal Financial
Officer and
Principal Accounting Officer)

November 17, 1998

18
<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S> <C>
2.1 Agreement dated October 27, 1997, among Polymer Group, Inc.,
Galey & Lord, Inc. and DT Acquisition Inc.(1)
2.2 Letter Agreement, dated October 27, 1997, among Polymer Group,
Inc., Galey & Lord, Inc. and DT Acquisition Inc.(2)
2.3 Operating Agreement, dated December 19, 1997, among Polymer
Group, Inc., Galey & Lord, Inc. and DT Acquisition Inc.(1)
2.4 DT Acquisition Inc. Offers to Purchase Statement for all out-
standing Common Shares and all outstanding First Preferred
Shares of Dominion Textile Inc., dated October 29, 1997.(2)
2.5 Notice of Extension and Variation by DT Acquisition Inc. in
respect of its Offers to Purchase, dated November 18, 1997.(2)
2.6 Notice of Extension by DT Acquisition Inc. in respect of its
Offers to Purchase, dated December 2, 1997.(2)
2.7 Notice of Extension and Variation by DT Acquisition Inc. in
respect of its Offers to Purchase, dated December 8, 1997.(2)
2.8 Notice of Extension by DT Acquisition Inc. in respect of its
Offers to Purchase, dated December 17, 1997.(2)
2.9 Letter Agreement between DT Acquisition Inc., Polymer Group,
Inc. and Dominion Textile Inc. dated November 16, 1997.(2)
2.10 Notice of Redemption pursuant to the provisions of Section 206
of the Canada Business Corporations Act in regard to holders
of Common Shares of Dominion Textile Inc., dated December 30,
1997.(2)
2.11 Notice of Redemption pursuant to the provisions of Section 206
of the Canada Business Corporations Act in regard to holders
of First Preferred Shares of Dominion Textile Inc., dated De-
cember 30, 1997.(2)
2.12 Notice of Redemption in regard to holders of Second Preferred
Shares, Series D of Dominion Textile Inc., dated December 23,
1997.(2)
2.13 Notice of Redemption in regard to holders of Second Preferred
Shares, Series E of Dominion Textile Inc., dated December 23,
1997.(2)
2.14 Indenture, winding up Dominion Textile Inc. pursuant to the
Canada Business Corporations Act, dated January 29, 1998.(2)
2.15 Master Separation Agreement, among Polymer Group, Inc., Galey
& Lord, Inc. and DT Acquisition Inc., dated January 29,
1998.(3)*
3.1(i) Form of Amended and Restated Certificate of Incorporation of
the Company.(3)
3.1(ii) Certificate of Designation of the Company.(4)
3.2 Amended and Restated By-laws of the Company.(3)
4.1 Indenture, dated as of March 1, 1998, among Polymer Group,
Inc., the Guarantors named therein and Harris Trust & Savings
Bank, as trustee.(5)
4.2 Forms of Series A and Series B 8 3/4% Senior Subordinated
Notes due 2008 (contained in Exhibit 4.1 as Exhibit A and B
thereto, respectively).(5)
4.3 Form of Guarantee (contained in Exhibit 4.2).(5)
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S> <C>
4.4 Registration Rights Agreement, dated as of March 5, 1998,
among Polymer Group, Inc., the Guarantors named therein and
Chase Securities Inc.(5)
4.5 Second Supplemental Indenture dated January 29, 1998, to In-
denture dated as of June 30, 1997, among Polymer Group, Inc.,
Dominion Textile (USA) Inc., DomTex Industries Inc., Poly-Bond
Inc. and Harris Trust & Savings Bank with respect to the 9%
Senior Subordinated Notes due 2007.(2)
10.1 Purchase Agreement, dated February 27, 1998, by and among Pol-
ymer Group, Inc., the Guarantors named herein and Chase Secu-
rities Inc., as Initial Purchaser, with respect to the 8 3/4%
Senior Subordinated Notes due 2008.(6)
10.2 Amendment No. 2, dated January 29, 1998, to the Amended, Re-
stated and Consolidated Credit Agreement dated July 3, 1997 by
and among Polymer Group, Inc., the Guarantors named therein,
the lenders named therein and The Chase Manhattan Bank, as
agent.(6)
11 Statement of Computation of Per Share Earnings.
27 Financial Data Schedule
</TABLE>
- - --------
(1) Incorporated by reference to the respective exhibit to the Company's Form
8-K, dated February 13, 1998.
(2) Incorporated by reference to the respective exhibit to the Company's Form
10-K, dated April 3, 1998.
(3) Incorporated by reference to the respective exhibit to the Company's Form
8-K/A, dated April 14, 1998.
(4) Incorporated by reference to the respective exhibit to the Company's
Registration Statement on Form S-1 (Reg. No. 333-2424).
(5) Incorporated by reference to the respective exhibit to the Company's
Registration Statement on Form S-4 (Reg. No. 333-55863).
(6) Incorporated by reference to the respective exhibit to the Company's
Quarterly Report on Form 10-Q, dated April 4, 1998.

*Certain portions of this Exhibit have been omitted & filed separately with
the Commission pursuant
to an Application for Confidential Treatment.

<PAGE>

EXHIBIT 11

POLYMER GROUP, INC.

COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------- ----------------
JULY 4, JUNE 28, JULY 4, JUNE 28,
1998 1997 1998 1997
--------- --------- ------- --------
<S> <C> <C> <C> <C>
Basic:
Net income applicable to common stock.... $ 6,240 $ 6,012 $ 5,807 $10,974
Weighted average shares outstanding...... 32,000 32,000 32,000 32,000
Net income per common share--basic....... $ 0.20 $ 0.19 $ 0.18 $ 0.34
Diluted:
Net income applicable to common stock.... $ 6,240 $ 6,012 $ 5,807 $10,974
Weighted average shares outstanding...... 32,000 32,000 32,000 32,000
Net income per common share--diluted..... $ 0.20 $ 0.19 $ 0.18 $ 0.34
</TABLE>

<PAGE>

<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
Polymer Group, Inc.'s Form 10-Q for the quarter ended October 3, 1998 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> JAN-04-1998
<PERIOD-END> OCT-03-1998
<CASH> 49,322
<SECURITIES> 10,438
<RECEIVABLES> 110,935
<ALLOWANCES> 6,475
<INVENTORY> 104,723
<CURRENT-ASSETS> 300,146
<PP&E> 792,841
<DEPRECIATION> 127,237
<TOTAL-ASSETS> 1,273,967
<CURRENT-LIABILITIES> 113,986
<BONDS> 594,090
0
0
<COMMON> 320
<OTHER-SE> 219,241
<TOTAL-LIABILITY-AND-EQUITY> 1,273,967
<SALES> 201,603
<TOTAL-REVENUES> 201,603
<CGS> 149,062
<TOTAL-COSTS> 149,062
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,098
<INCOME-PRETAX> 9,921
<INCOME-TAX> 3,678
<INCOME-CONTINUING> 6,243
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,243
<EPS-PRIMARY> 0.20
<EPS-DILUTED> 0.20

</TABLE>