Without knowing details of the textile business in question, it's hard to say exactly where they sent the used textiles, but such a product is and was often used to make paper. Check with the Crane paper Co. in Dalton, Massachusetts; they've been around since 1770 and have a museum dedicated to preserving papermaking history. I bet their cusomer relations department or museum curator could advise you. www.crane.com 

Such products were also sometimes remanufactured into cheaper clothing or utilitarian textiles for moving blankets or carpet padding and the like. That's why some products are labeled "virgin wool" (or acrylic, etc) to distinguish them from a product made from recovered or reycled used goods.

If you learn more, please post to the list-- I'd love to hear about it.