---

---

UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-Q

|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

For
the transition period from  to

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
incorporation or organization) |  | (I.R.S. Employer
Identification No.)
|4838 Jenkins Avenue
North Charleston, South Carolina           |  | 29405                               
|(Address of principal executive offices)                       |  | (Zip Code)                          

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

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

Indicate
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.

---

---

---



POLYMER GROUP, INC.

INDEX TO FORM 10-Q

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

2

---



ITEM I. FINANCIAL STATEMENTS

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

|                                                                               |                                                                                                                                                  | September 28,
2002 |                                               | December 29,
2001 |  
|------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------ | --------------------------------------------- | ----------------- | -
|
|A S S E T S                                                                    |                                                                                                                                                 
|Current assets:                                                                |                                                                                                                                                  |                    |                                               |                   |  
|                                                                               | Cash and equivalents                                                                                                                             |                    | $                                             | 59,562            |  
|                                                                               | Short-term investments                                                                                                                           |                    |                                               | 11,006            |  
|                                                                               | Accounts receivable, net                                                                                                                         |                    |                                               | 121,345           |  
|                                                                               | Inventories                                                                                                                                      |                    |                                               | 106,272           |  
|                                                                               | Other                                                                                                                                            |                    |                                               | 42,102            |  
|                                                                               |                                                                                                                                                  |                    |                                               |                   |  
|                                                                               |                                                                                                                                                  |                    | Total current assets                          |                   |  
|Property, plant and equipment, net                                             |                                                                                                                                                  |                    | 670,568                                       |                   |  
|Intangibles and loan acquisition costs, net                                    |                                                                                                                                                  |                    | 133,742                                       |                   |  
|Other                                                                          |                                                                                                                                                  |                    | 56,412                                        |                   |  
|                                                                               |                                                                                                                                                  |                    |                                               |                   |  
|                                                                               |                                                                                                                                                  |                    | Total assets                                  |                   | $
|                                                                               |                                                                                                                                                  |                    |                                               |                   |  
|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            |  
|                                                                               | Accrued liabilities and other                                                                                                                    |                    |                                               | 44,781            |  
|                                                                               | Short-term borrowings                                                                                                                            |                    |                                               | 10,122            |  
|                                                                               | Current portion of long-term debt                                                                                                                |                    |                                               | 489,094           |  
|                                                                               |                                                                                                                                                  |                    |                                               |                   |  
|                                                                               |                                                                                                                                                  |                    | Total current liabilities                     |                   |  
|Long-term debt, less current portion                                           |                                                                                                                                                  |                    | 5,268                                         |                   |  
|Deferred income taxes                                                          |                                                                                                                                                  |                    | 54,049                                        |                   |  
|Other non-current liabilities                                                  |                                                                                                                                                  |                    | 18,992                                        |                   |  
|                                                                               |                                                                                                                                                  |                    |                                               |                   |  
|Total liabilities not subject to compromise                                    |                                                                                                                                                  |                    | 654,143                                       |                   |  
|Liabilities Subject to Compromise                                              |                                                                                                                                                  |                    | 652,905                                       |                   |  
|                                                                               |                                                                                                                                                  |                    |                                               |                   |  
|                                                                               |                                                                                                                                                  |                    | Total liabilities                             |                   |  
|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               |  
|                                                                               | Non-voting common stock$.01 par value, 3,000,000 shares authorized, 0 shares issued and outstanding                                             |                    |                                               |                  |  
|                                                                               | Additional paid-in capital                                                                                                                       |                    |                                               | 243,722           |  
|                                                                               | (Deficit)                                                                                                                                        |                    |                                               | (311,875          | )
|                                                                               | Accumulated other comprehensive (loss)                                                                                                           |                    |                                               | (38,206           | )
|                                                                               |                                                                                                                                                  |                    |                                               |                   |  
|                                                                               |                                                                                                                                                  |                    | (106,039                                      | )                 |  
|                                                                               |                                                                                                                                                  |                    |                                               |                   |  
|                                                                               |                                                                                                                                                  |                    | Total liabilities and shareholders' (deficit) |                   | $
|                                                                               |                                                                                                                                                  |                    |                                               |                   |  

See
accompanying notes.

3

---

POLYMER GROUP, INC.        CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)  (In Thousands, Except Per Share Data)

|                                                                                |                                                                                                                                                 | Three Months Ended |                                   | Nine Months Ended |  
|------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------- | ------------------ | --------------------------------- | ----------------- | -
|
|Net sales                                                                       |                                                                                                                                                 | $                  | 184,048                           |                   | $
|Cost of goods sold                                                              |                                                                                                                                                 |                    | 153,842                           |                   |  
|                                                                                |                                                                                                                                                 |                    |                                   |                   |  
|Gross profit                                                                    |                                                                                                                                                 |                    | 30,206                            |                   |  
|Selling, general and administrative expenses                                    |                                                                                                                                                 |                    | 24,712                            |                   |  
|Special charges                                                                 |                                                                                                                                                 |                    |                                  |                   |  
|Plant realignment costs                                                         |                                                                                                                                                 |                    | 356                               |                   |  
|                                                                                |                                                                                                                                                 |                    |                                   |                   |  
|Operating income                                                                |                                                                                                                                                 |                    | 5,138                             |                   |  
|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            |  
|                                                                                | Foreign currency and other                                                                                                                      |                    |                                   | 6,433             |  
|                                                                                |                                                                                                                                                 |                    |                                   |                   |  
|                                                                                |                                                                                                                                                 |                    | 19,944                            |                   |  
|                                                                                |                                                                                                                                                 |                    |                                   |                   |  
|Loss before Chapter 11 reorganization expenses and income tax expense (benefit) |                                                                                                                                                 |                    | (14,806                           | )                 |  
|Chapter 11 reorganization expenses                                              |                                                                                                                                                 |                    | 6,124                             |                   |  
|                                                                                |                                                                                                                                                 |                    |                                   |                   |  
|Loss before income tax expense
(benefit)                                        |                                                                                                                                                 |                    | (20,930                           | )                 |  
|Income tax expense (benefit)                                                    |                                                                                                                                                 |                    | 1,668                             |                   |  
|                                                                                |                                                                                                                                                 |                    |                                   |                   |  
|Net loss                                                                        |                                                                                                                                                 | $                  | (22,598                           | )                 | $
|                                                                                |                                                                                                                                                 |                    |                                   |                   |  
|Net loss per common share:                                                      |                                                                                                                                                 |                    |                                   |                   |  
|                                                                                | Basic:                                                                                                                                          |                    |                                   |                   |  
|                                                                                |                                                                                                                                                 |                    | Average common shares outstanding |                   |  
|                                                                                |                                                                                                                                                 |                    | Net loss per common share         |                   | $
|                                                                                |                                                                                                                                                 |                    |                                   |                   |  
|                                                                                | Diluted:                                                                                                                                        |                    |                                   |                   |  
|                                                                                |                                                                                                                                                 |                    | Average common shares outstanding |                   |  
|                                                                                |                                                                                                                                                 |                    | Net loss per common share         |                   | $
|                                                                                |                                                                                                                                                 |                    |                                   |                   |  
|Cash dividends per share                                                        |                                                                                                                                                 | $                  |                                  |                   | $
|                                                                                |                                                                                                                                                 |                    |                                   |                   |  

See
accompanying notes.

4

---



POLYMER GROUP, INC.        CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)  (In Thousands)

|                                            |                                                                                           | Nine Months Ended |                                      
|------------------------------------------- | ----------------------------------------------------------------------------------------- | ----------------- | -------------------------------------
|
|Operating activities                        |                                                                                           |                   |                                      
|                                            | Net loss                                                                                  |                   | $                                    
|                                            | Adjustments to reconcile net loss to net cash provided by
(used in) operating activities: |                   |                                      
|                                            |                                                                                           |                   | Depreciation and amortization expense
|                                            |                                                                                           |                   | Foreign currency and other           
|                                            | Changes in operating assets and liabilities:                                              |                   |                                      
|                                            |                                                                                           |                   | Accounts receivable                  
|                                            |                                                                                           |                   | Inventories                          
|                                            |                                                                                           |                   | Accounts payable and accrued expenses
|                                            | Other, net                                                                                |                   |                                      
|                                            |                                                                                           |                   |                                      
|                                            |                                                                                           |                   |                                      
|                                            |                                                                                           |                   |                                      
|Investing activities                        |                                                                                           |                   |                                      
|                                            | Purchases of property, plant and equipment                                                |                   |                                      
|                                            | Proceeds from sales of marketable securities                                              |                   |                                      
|                                            | Other                                                                                     |                   |                                      
|                                            |                                                                                           |                   |                                      
|                                            |                                                                                           |                   |                                      
|                                            |                                                                                           |                   |                                      
|Financing activities                        |                                                                                           |                   |                                      
|                                            | Proceeds from debt                                                                        |                   |                                      
|                                            | Payment of debt                                                                           |                   |                                      
|                                            | Dividends to shareholders                                                                 |                   |                                      
|                                            | Loan acquisition costs and other, net                                                     |                   |                                      
|                                            |                                                                                           |                   |                                      
|                                            |                                                                                           |                   |                                      
|                                            |                                                                                           |                   |                                      
|Effect of exchange rate changes on cash     |                                                                                           |                   | 10,370                               
|                                            |                                                                                           |                   |                                      
|Net increase in cash and equivalents        |                                                                                           |                   | 31,331                               
|Cash and equivalents at beginning of period |                                                                                           |                   | 28,231                               
|                                            |                                                                                           |                   |                                      
|Cash and equivalents at end of period       |                                                                                           | $                 | 59,562                               
|                                            |                                                                                           |                   |                                      

See
accompanying notes.

5

---



POLYMER GROUP, INC.        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1.    Nature of Operations

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

Note 2.    Significant Accounting Policies



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.

6

---



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

$
50,440Work in process


17,316


19,172Raw 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

7

---

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

8

---

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

9

---

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):

|                        |                                                      | Three Months Ended |   | Nine Months Ended |  
|----------------------- | ---------------------------------------------------- | ------------------ | - | ----------------- | -
|
|Basic loss per share:   |                                                      |                    |   |                   |  
|                        | Loss available to common shareholders                |                    | $ | (22,598           | )
|                        |                                                      |                    |   |                   |  
|                        | Average common shares outstanding                    |                    |   | 32,004            |  
|                        | Loss per share available to common shareholders      |                    | $ | (0.71             | )
|                        |                                                      |                    |   |                   |  
|Diluted loss per share: |                                                      |                    |   |                   |  
|                        | Loss available to common shareholders                |                    | $ | (22,598           | )
|                        |                                                      |                    |   |                   |  
|                        | Average common shares outstanding                    |                    |   | 32,004            |  
|                        | Effect of dilutive securitiesstock options          |                    |   |                  |  
|                        |                                                      |                    |   |                   |  
|                        | Average common shares outstanding assuming dilution |                    |   | 32,004            |  
|                        |                                                      |                    |   |                   |  
|                        | Loss per share available to common shareholders      |                    | $ | (0.71             | )
|                        |                                                      |                    |   |                   |  

Note 3.    Chapter 11 Proceedings



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

Because
the Company was unable to reduce amounts outstanding under the Prepetition Credit Facility through asset dispositions on acceptable terms, the services of Miller,
Buckfire & Lewis (f/k/a Dresdner Kleinwort Wasserstein, Inc.) were retained on October 2, 2001 as the financial advisor to assist

10

---

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,

11

---

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.

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

12

---

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.

13

---



Note 4.    Long-Lived Assets



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):

|                              |                                 | September 28,
2002 |          | December 29,
2001 |  
|----------------------------- | ------------------------------- | ------------------ | -------- | ----------------- | -
|
|Cost:                         |                                 |                    |          |                   |  
|                              | Land                            |                    | $        | 15,585            |  
|                              | Buildings and land improvements |                    |          | 157,257           |  
|                              | Machinery, equipment and other  |                    |          | 817,627           |  
|                              | Construction in progress        |                    |          | 6,951             |  
|                              |                                 |                    |          |                   |  
|                              |                                 |                    | 997,420  |                   |  
|Less accumulated depreciation |                                 |                    | (326,852 | )                 |  
|                              |                                 |                    |          |                   |  
|                              |                                 | $                  | 670,568  |                   | $
|                              |                                 |                    |          |                   |  

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

$
124,756Proprietary technology


29,325


29,325Loan acquisition costs and other


47,832


42,918197,463


196,999Less 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

14

---

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):

|                 |                                                                      | Three Months Ended |                            | Nine Months Ended
|---------------- | -------------------------------------------------------------------- | ------------------ | -------------------------- | -----------------
|
|Amortization of: |                                                                      |                    |                            |                  
|                 | Goodwill                                                             |                    | $                          |                 
|                 | Intangibles with finite lives                                        |                    |                            | 769              
|                 |                                                                      |                    |                            |                  
|                 | Amortization included in selling, general and administrative expense |                    |                            | 769              
|                 | Loan acquisition costs included in interest expense, net             |                    |                            | 2,043            
|                 |                                                                      |                    |                            |                  
|                 |                                                                      |                    | Total amortization expense |                  
|                 |                                                                      |                    |                            |                  

Note 5.    Accrued Liabilities

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

$
24,454Salaries, wages and other fringe benefits


13,661


11,573Other


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."

Note 6.    Business Restructuring

The Company anticipated that the confluence of negative economic and business factors would generally subside during the latter half of 2001, particularly in the
fourth quarter. However, the anticipated recovery within the Company's business did not develop as planned in the latter half of 2001; therefore, the Company undertook a comprehensive business
restructuring involving manufacturing initiatives and workforce reductions. The restructuring program continued through the 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

15

---

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

$
6,2422002 plant realignment charge:First Quarter


176Second Quarter


381Third Quarter


3562002 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.

Note 7.    Liabilities Subject to Compromise

In the Chapter 11 Filings, substantially all unsecured liabilities as of the Filing Date are subject to compromise or other treatment under the Plan which must be
confirmed by the Bankruptcy Court after submission to any required vote by affected parties. Generally, all actions to enforce or otherwise effect repayment of prepetition liabilities, as well as all
pending litigation against the Debtors, are stayed while the Debtors continue their business operations as debtors-in-possession. The ultimate amount of and settlement terms
for liabilities subject to compromise are subject to the approved Plan and accordingly are not presently determinable. Pursuant to SOP 90-7, interest expense is reported only to the extent
that it will be paid during the Chapter 11 Filings or that it is probable that it will be an allowed claim. Accordingly, no interest has been accrued on the Company's Senior Subordinated Notes after
the Petition Date. The principal categories of obligations classified as liabilities subject to compromise under the Chapter 11 Filings as of September 28, 2002 are identified below (in
thousands):

9% Senior Subordinated Notes, net of unamortized debt discount

$
390,98283/4% Senior Subordinated Notes


196,500Interest accrued on senior subordinated notes


42,186Accounts payable


14,183Accrued expenses and other


9,054Total liabilities subject to compromise

$
652,905


Note 8.    Debt

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

16

---

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

$
390,768Senior subordinated notes, due March 2008


196,500


196,500Not Subject to Compromise:Revolving Credit Facility, due June 2003


216,379


216,325Term loans, including current portion, due December 2005 and 2006


268,060


268,060Other


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

17

---

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,
2001Revolving Credit (Excluding Letters of Credit):Revolving Credit A (U.S. and Dutch borrowings)

$
210,000

$
210,000Revolving Credit B (Canadian borrowings)(1)


6,379


6,325Total Revolving Credit


216,379


216,325Term Loans (all US borrowings):Term Loan B


121,000


121,000Term Loan B-1


48,560


48,560Term Loan C


98,500


98,500Total Term Loans


268,060


268,060Total amounts outstanding under Prepetition Credit Facility

$
484,439

$
484,385


---

18

---

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

19

---

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.

Note 9.    Selected Financial Data of Guarantors

Payment of the Company's senior subordinated notes is guaranteed jointly and severally on a senior subordinated basis by certain of the Company's 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 |           | Combined
Non-Guarantor
Subsidiaries |   | The
Company |  | Reclassifications
and Eliminations |           | Consolidated |  
|------------------------------ |  | ------------------------------- | --------- | ----------------------------------- | - | ----------- |  | ---------------------------------- | --------- | ------------ | -
|Working capital (deficit)      |  | $                               | 90,967    |                                     | $ | 133,118     |  | $                                  | (457,241  | )            | $
|Total assets                   |  |                                 | 2,568,110 |                                     |   | 683,700     |  |                                    | 1,127,406 |              |  
|Total debt                     |  |                                 | 1,509     |                                     |   | 26,424      |  |                                    | 1,065,542 |              |  
|Shareholders' equity (deficit) |  |                                 | 1,297,400 |                                     |   | 320,980     |  |                                    | (106,039  | )            |  

20

---

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

|                               |  | Combined
Guarantor
Subsidiaries |           | Combined
Non-Guarantor
Subsidiaries |   | The
Company |  | Reclassifications
and Eliminations |            | Consolidated |  
|------------------------------ |  | ------------------------------- | --------- | ----------------------------------- | - | ----------- |  | ---------------------------------- | ---------- | ------------ | -
|Working capital (deficit)      |  | $                               | 73,588    |                                     | $ | 113,548     |  | $                                  | (1,107,400 | )            | $
|Total assets                   |  |                                 | 2,065,267 |                                     |   | 646,405     |  |                                    | 1,090,204  |              |  
|Total debt                     |  |                                 | 1,558     |                                     |   | 30,018      |  |                                    | 1,067,654  |              |  
|Shareholders' equity (deficit) |  |                                 | 896,276   |                                     |   | 298,673     |  |                                    | (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     |  | $                                  |        |              | $
|Operating income (loss)                       |  |                                 | (17,103 | )                                   |   | 34,600      |  |                                    | (4,777  | )            |  
|Interest expense, income taxes and other, net |  |                                 | (22,568 | )                                   |   | 29,918      |  |                                    | 65,163  |              |  
|Net income (loss)                             |  |                                 | 5,465   |                                     |   | 4,682       |  |                                    | (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     |  | $                                  |        |              | $
|Operating income (loss)                       |  |                                 | (14,085 | )                                   |   | 33,269      |  |                                    | 245     |              |  
|Interest expense, income taxes and other, net |  |                                 | (24,247 | )                                   |   | 28,940      |  |                                    | 43,412  |              |  
|Net income (loss)                             |  |                                 | 10,162  |                                     |   | 4,329       |  |                                    | (43,167 | )            |  

21

---

Note 10.    Segment and Geographic Information

The Company reports segment information in accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("FAS 131"). Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision
maker in deciding how to allocate resources and assessing performance. Sales to The Procter & Gamble Company account for more than 10% of the Company's sales and are reported primarily in the
Consumer segment. Consequently, the loss of these sales would have a material adverse effect on this segment. Generally, the Company's 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):

|                                     |                          | Three Months Ended |         | Nine Months Ended |  
|------------------------------------ | ------------------------ | ------------------ | ------- | ----------------- | -
|
|Net sales to unaffiliated customers: |                          |                    |         |                   |  
|                                     | Consumer                 |                    | $       | 100,537           |  
|                                     | Industrial and Specialty |                    |         | 83,511            |  
|                                     |                          |                    |         |                   |  
|                                     |                          | $                  | 184,048 |                   | $
|                                     |                          |                    |         |                   |  
|Operating income (loss):             |                          |                    |         |                   |  
|                                     | Consumer                 |                    | $       | 3,545             |  
|                                     | Industrial and Specialty |                    |         | 1,949             |  
|                                     |                          |                    |         |                   |  
|                                     |                          |                    | 5,494   |                   |  
|                                     | Special charges          |                    |         |                  |  
|                                     | Plant realignment costs  |                    |         | (356              | )
|                                     |                          |                    |         |                   |  
|                                     |                          | $                  | 5,138   |                   | $
|                                     |                          |                    |         |                   |  

|                     |                          | September 28,
2002 |           | December 29,
2001
|-------------------- | ------------------------ | ------------------ | --------- | -----------------
|Identifiable assets: |                          |                    |           |                  
|                     | Consumer                 |                    | $         | 607,415          
|                     | Industrial and Specialty |                    |           | 499,720          
|                     | Corporate(1)             |                    |           | 93,874           
|                     |                          |                    |           |                  
|                     |                          | $                  | 1,201,009 |                  
|                     |                          |                    |           |                  

---

22

---

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

|                                                                    |               | Three Months Ended |         | Nine Months Ended |       
|------------------------------------------------------------------- | ------------- | ------------------ | ------- | ----------------- | ------
|
|Net sales to unaffiliated customers:                                |               |                    |         |                   |       
|                                                                    |               | United States      |         | $                 | 82,287
|                                                                    |               | Canada             |         |                   | 24,122
|                                                                    |               | Europe             |         |                   | 45,344
|                                                                    |               | Asia               |         |                   | 5,848 
|                                                                    |               | Latin America      |         |                   | 26,447
|                                                                    |               |                    |         |                   |       
|                                                                    |               | $                  | 184,048 |                   | $     
|                                                                    |               |                    |         |                   |       
|Operating income:                                                   |               |                    |         |                   |       
|                                                                    | United States |                    | $       | (5,675            | )     
|                                                                    | Canada        |                    |         | 1,077             |       
|                                                                    | Europe        |                    |         | 4,515             |       
|                                                                    | Asia          |                    |         | 810               |       
|                                                                    | Latin America |                    |         | 4,767             |       
|                                                                    |               |                    |         |                   |       
|                                                                    |               |                    | 5,494   |                   |       
|Special charges                                                     |               |                    | 356     |                   |       
|Plant realignment costs                                             |               |                    |        |                   |       
|                                                                    |               |                    |         |                   |       
|                                                                    |               | $                  | 5,138   |                   | $     
|                                                                    |               |                    |         |                   |       
|Depreciation and amortization expense included in operating income: |               |                    |         |                   |       
|                                                                    | United States |                    | $       | 10,029            |       
|                                                                    | Canada        |                    |         | 1,355             |       
|                                                                    | Europe        |                    |         | 2,036             |       
|                                                                    | Asia          |                    |         | 908               |       
|                                                                    | Latin America |                    |         | 1,587             |       
|                                                                    |               |                    |         |                   |       
|                                                                    |               | $                  | 15,915  |                   | $     
|                                                                    |               |                    |         |                   |       

|                     |               | September 28,
2002 |           | December 29,
2001
|-------------------- | ------------- | ------------------ | --------- | -----------------
|Identifiable assets: |               |                    |           |                  
|                     | United States |                    | $         | 626,427          
|                     | Canada        |                    |           | 168,355          
|                     | Europe        |                    |           | 227,148          
|                     | Asia          |                    |           | 49,089           
|                     | Latin America |                    |           | 129,990          
|                     |               |                    |           |                  
|                     |               | $                  | 1,201,009 |                  
|                     |               |                    |           |                  

23

---

Note 11.    Foreign Currency and Other

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):

|                            |                                           | Three Months Ended |       | Nine Months Ended
|--------------------------- | ----------------------------------------- | ------------------ | ----- | -----------------
|
|Foreign currency and other: |                                           |                    |       |                  
|                            | Foreign currency losses                   |                    | $     | 580              
|                            | Minority interest and other, net          |                    |       | 1,453            
|                            | Write-down of investment in joint venture |                    |       | 4,400            
|                            |                                           |                    |       |                  
|                            |                                           | $                  | 6,433 |                  
|                            |                                           |                    |       |                  

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.

Note 12.    Stock Option Plans

The Company accounts for stock options in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25")
as permitted by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"). Had compensation cost been determined under the provisions of
FAS 123 rather than APB 25, the Company's net (loss) would have increased by approximately $0.9 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

24

---

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
PriceUnexercised options outstandingDecember 29, 2001

2,120,576

$
2.09Granted




Exercised




Forfeited

87,272


1.89Expired/canceled




Unexercised options outstandingSeptember 28, 2002

2,033,304


2.10


Note 13.    Purchase Option and Subsidiary Matters

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.

Note 14.    Related Party Transactions

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.

25

---

Note 15.    Certain Matters

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.

Note 16.    New Accounting Standards

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

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

26

---

Note 17.    Investment in Partially-Owned Equity Affiliate

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, 2002Current assets

$
2,794Property, plant and equipment, net


2,081Current liabilities


2,403Shareholders' equity


2,472


Nine Months
Ended
September 28, 2002Net sales

$
12,908Gross profit


835Net (loss)


(159
)


Note 18.    Subsequent Event

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")

27

---

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.

28

---



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.

Results of Operations

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

|                                                                                |                            | Three Months Ended |      | Nine Months Ended |     
|------------------------------------------------------------------------------- | -------------------------- | ------------------ | ---- | ----------------- | ----
|
|Net sales by product category:                                                  |                            |                    |      |                   |     
|                                                                                | Consumer                   |                    | 54.6 | %                 | 57.4
|                                                                                | Industrial and Specialty   |                    | 45.4 |                   | 42.6
|                                                                                |                            |                    |      |                   |     
|                                                                                |                            | 100.0              |      | 100.0             |     
|Cost of goods sold:                                                             |                            |                    |      |                   |     
|                                                                                | Material                   |                    | 44.8 |                   | 43.1
|                                                                                | Labor                      |                    | 9.0  |                   | 8.3 
|                                                                                | Overhead                   |                    | 29.8 |                   | 30.3
|                                                                                |                            |                    |      |                   |     
|                                                                                |                            | 83.6               |      | 81.7              |     
|                                                                                |                            |                    |      |                   |     
|                                                                                | Gross profit               |                    | 16.4 |                   | 18.3
|Selling, general and administrative expenses                                    |                            | 13.4               |      | 13.0              |     
|Special charges                                                                 |                            |                   |      |                  |     
|Plant realignment costs                                                         |                            | 0.2                |      |                  |     
|                                                                                |                            |                    |      |                   |     
|Operating income                                                                |                            | 2.8                |      | 5.3               |     
|Other expense:                                                                  |                            |                    |      |                   |     
|                                                                                | Interest expense, net      |                    | 7.3  |                   | 12.6
|                                                                                | Foreign currency and other |                    | 3.5  |                   | 0.6 
|                                                                                |                            |                    |      |                   |     
|                                                                                |                            | 10.8               |      | 13.2              |     
|                                                                                |                            |                    |      |                   |     
|Loss before Chapter 11 reorganization expenses and income tax expense (benefit) |                            | (8.0               | )    | (7.9              | )   
|Chapter 11 reorganization expenses                                              |                            | 3.3                |      |                  |     
|                                                                                |                            |                    |      |                   |     
|Loss before income tax expense (benefit)                                        |                            | (11.3              | )    | (7.9              | )   
|Income tax expense (benefit)                                                    |                            | 0.9                |      | (2.2              | )   
|                                                                                |                            |                    |      |                   |     
|Net loss                                                                        |                            | (12.2              | )%   | (5.7              | )%  
|                                                                                |                            |                    |      |                   |     

29

---

Comparison of Three Months Ended September 28, 2002 and September 29, 2001

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:

|                         |                          | Three Months Ended |                  |         |   |         |        
|------------------------ | ------------------------ | ------------------ | ---------------- | ------- | - | ------- | -------
|
|
|Net sales:               |                          |                    |                  |         |   |         |        
|                         | Consumer                 |                    | $                | 100,537 |   | $       | 116,238
|                         | Industrial and Specialty |                    |                  | 83,511  |   |         | 86,143 
|                         |                          |                    |                  |         |   |         |        
|                         |                          | $                  | 184,048          |         | $ | 202,381 |        
|                         |                          |                    |                  |         |   |         |        
|Operating income (loss): |                          |                    |                  |         |   |         |        
|                         | Consumer                 |                    | $                | 3,545   |   | $       | 8,133  
|                         | Industrial and Specialty |                    |                  | 1,949   |   |         | 2,680  
|                         |                          |                    |                  |         |   |         |        
|                         |                          |                    | 5,494            |         |   | 10,813  |        
|                         | Plant realignment costs  |                    |                  | (356    | ) |         |       
|                         | Special charges          |                    |                  |        |   |         |       
|                         |                          |                    |                  |         |   |         |        
|                         |                          |                    | Operating income |         | $ | 5,138   |        
|                         |                          |                    |                  |         |   |         |        

Net Sales

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

$
202,381Change in sales due to:Volume


(15,385
)Price/mix


385Foreign 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.

30

---

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.

Operating Income

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
ItemsOperating income

$
10,813

$
10,813Unusual 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


8,284Lower depreciation and amortization expense


3,785


3,785Price / mix


385


385Foreign 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.

31

---

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.

Plant Realignment

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.

Interest Expense and Other

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."

Chapter 11 Reorganization Expenses

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.

Income Taxes

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.

32

---

Net Loss

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.

Comparison of Nine Months Ended September 28, 2002 and September 29, 2001

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:

|                         |                          | Nine Months Ended |                  |         |   |         |        
|------------------------ | ------------------------ | ----------------- | ---------------- | ------- | - | ------- | -------
|
|
|Net sales:               |                          |                   |                  |         |   |         |        
|                         | Consumer                 |                   | $                | 316,016 |   | $       | 347,768
|                         | Industrial and Specialty |                   |                  | 259,993 |   |         | 270,256
|                         |                          |                   |                  |         |   |         |        
|                         |                          | $                 | 576,009          |         | $ | 618,024 |        
|                         |                          |                   |                  |         |   |         |        
|Operating income (loss): |                          |                   |                  |         |   |         |        
|                         | Consumer                 |                   | $                | 20,157  |   | $       | 20,579 
|                         | Industrial and Specialty |                   |                  | (2,846  | ) |         | 753    
|                         |                          |                   |                  |         |   |         |        
|                         |                          |                   | 17,311           |         |   | 21,332  |        
|                         | Plant realignment costs  |                   |                  | (913    | ) |         | (1,660 
|                         | Special charges          |                   |                  | (3,634  | ) |         |       
|                         |                          |                   |                  |         |   |         |        
|                         |                          |                   | Operating income |         | $ | 12,764  |        
|                         |                          |                   |                  |         |   |         |        

Net Sales

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

$
618,024Change 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.

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 2002. Within the Company's Nonwovens business, lower sales volume, predominantly in the U.S.
hygiene, industrial and

33

---

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
ItemsOperating income

$
19,672

$
21,332Unusual 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


23,414Lower depreciation and amortization expense


11,985


11,985Price / 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.

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 through the third quarter of 2002. Accordingly,
the cash component of the restructuring has included workforce reductions and plant realignment in the Consumer and Industrial and Specialty businesses, predominantly in the U.S. and Europe.
Manufacturing and operating cost savings were realized within each business segment in the third quarter of 2002 as a result of these initiatives. However, lower selling prices and volume declines
predominantly in the U.S. and weak foreign currency

34

---

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.

Plant Realignment and Special Charges

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.

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.

Interest Expense and Other

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."

Chapter 11 Reorganization Expenses

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.

35

---

Income Taxes

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

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.

Liquidity and Capital Resources

September 28,
2002

December 29,
2001(In Thousands)Balance sheet data:Cash and short-term investments

$
70,568

$
46,453Working 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


204,681Total assets


1,201,009


1,232,214Total debt


1,093,475


1,099,230Shareholders' (deficit)


(106,039
)

(48,862
)


Nine Months EndedSeptember 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


Operating Activities

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.

36

---

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.

Investing and Financing Activities

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.



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.

37

---

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.

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

38

---

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.

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

39

---

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).

40

---

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.



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

41

---

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.

42

---

Effect of Inflation

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."

Foreign Currency

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."

Critical Accounting Policies And Other Matters

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.

43

---

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.

44

---

Environmental

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.

Euro Conversion

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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Long-Term Debt and Interest Rate Market Risk

Variable Rate Debt

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.

Fixed Rate Debt

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.

45

---

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.

Foreign Currency Exchange Rate Risk

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.

Raw Material and Commodity Risks

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.

Safe Harbor Statement

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

46

---

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.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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.

Changes in Internal Controls

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.

47

---



PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Not applicable.

ITEM 2. CHANGES IN SECURITIES

Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

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.

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

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

Reports on Form 8-K

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.

48

---



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.
| |  | -------------------
| |  | By:                
| |  | By:                

November 18,
2002

49

---



CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I,
Jerry Zucker, certify that:



|Date: | November 18, 2002 |  | /s/ Jerry ZuckerJerry Zucker
Chairman, President and Chief Executive
Officer
|----- | ----------------- |  | ----------------------------------------------------------------------------

50

---

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I,
James G. Boyd, certify that:



|Date: | November 18, 2002 |  | /s/ James G. BoydJames G. Boyd
Executive Vice President, Treasurer
and Chief Financial Officer
|----- | ----------------- |  | ----------------------------------------------------------------------------------------------

51

---



EXHIBIT INDEX

|Exhibit
Number |  | Document Description                                                                                        
|-------------- |  | ------------------------------------------------------------------------------------------------------------
|99.1           |  | Certain projected financial information filed with the U.S. Bankruptcy Court in Columbia, South Carolina.(1)

---

52

---

QuickLinks