**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**FORM 10-K/A**

**AmendmentNo. 1 To**

| x      | ** ** | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934**          |
|--------|------------|---------------------------------------------------------------------------------------------------------|
|   |       | For the  fiscal year ended December 30, 2006, or                                                   |
| o      | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

For the transition period from *                 *to *                  *

**Commissionfile number 1-14330**

**POLYMER GROUP, INC.**

(Exact name of registrant asspecified in its charter)

| **Delaware**                                     |   | **57-1003983**      |
|--------------------------------------------------|--------|---------------------|
| (State or other  jurisdiction of                 |   | (I.R.S. Employer    |
| incorporation or  organization)                  |   | Identification No.) |
| **9335  Harris Corners Parkway, Suite 300** |   | **28269**           |
| **Charlotte,  North Carolina**                   |   | (Zip Code)          |
| (Address of principal  executive offices)        |   |                |

 

**Registrant’s telephone number,including area code: (704) 697-5100**

**Securities registered pursuantto Section 12(b) of the Act: None**

**Securitiesregistered pursuant to Section 12(g) of the Act:**

|            | ** ** | **Title of Class**                  | ** ** | ** ** |
|------------|------------|-------------------------------------|------------|------------|
| ** ** |       | Class A common stock |       |       |
|       |       | Class B common stock |       |       |

 

Indicate by check mark if theregistrant is a well-known seasoned issuer, as defined in Rule 405 of theSecurities Act. Yes o No x

Indicate by check mark if theregistrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act. Yes o No x

Indicate by check mark whetherthe registrant: (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to the filing requirementsfor the past 90 days. Yes x No o

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K isnot contained herein, and will not be contained, to the best of the registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment tothis Form 10-K. o

Indicate by check mark whetherthe registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. Check one:

Largeaccelerated filer o                     Acceleratedfiler x                     Non-acceleratedfiler o

Indicate by check mark whetherthe registrant is a shell company (as defined in Rule 12b-2 of theAct): Yes o No x

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

The aggregate market value ofthe Company’s voting stock held by non-affiliates as of July 1, 2006 wasapproximately $140.4 million, based on the average of the closing bid andask price of the Class A common stock on the Over-the-Counter BulletinBoard. Solely for the purposes of the foregoing calculation, affiliates areconsidered to be Directors, Executive Officers and greater than 10% beneficialowners of the Registrant’s common equity. As of March 5, 2007, there were19,128,253 shares of Class A common stock, 130,654 shares of Class Bcommon stock and 24,319 shares of Class C common stock outstanding.No shares of Class D or Class E common stock were outstanding as ofsuch date. The par value for each class of common stock is $.01 per share.

**DocumentsIncorporated By Reference**

Portions of the Registrant’s Notice of 2007 AnnualMeeting of Stockholders and Proxy Statement—Part III

 

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**POLYMERGROUP, INC.**

**FORM 10-K**

**For the Fiscal YearEnded December 30, 2006**

**INDEX**

| IMPORTANT INFORMATION  REGARDING THIS FORM 10-K |   | 3                                                                                                                  |
|------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------|
| **PART I**                                      |   |                                                                                                               |   |   |
| Item 1.                                         |   | Business                                                                                                           |   | 5 |
| Item 1A.                                        |   | Risk Factors                                                                                                       |   | 13 |
| Item 1B.                                        |   | Unresolved Staff Comments                                                                                          |   | 17 |
| Item 2.                                         |   | Properties                                                                                                         |   | 18 |
| Item 3.                                         |   | Legal Proceedings                                                                                                  |   | 19 |
| Item 4.                                         |   | Submission of Matters to a Vote of Security Holders                                                                |   | 19 |
| **PART II**                                     |   |                                                                                                               |   |   |
| Item 5.                                         |   | Market for Registrant’s Common Equity, Related  Stockholder Matters and Issuer Purchases of Equity Securities |   | 20 |
| Item 6.                                         |   | Selected  Financial Data                                                                                           |   | 22 |
| Item 7.                                         |   | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                        |   | 24 |
| Item 7A.                                        |   | Quantitative and Qualitative Disclosures About Market  Risk                                                        |   | 45 |
| Item 8.                                         |   | Financial Statements and Supplementary Data                                                                        |   | 47 |
| Item 9.                                         |   | Changes in and Disagreements With Accountants on  Accounting and Financial Disclosure                              |   | 94 |
| Item 9A.                                        |   | Controls and Procedures                                                                                            |   | 94 |
| Item 9B.                                        |   | Other  Information                                                                                                 |   | 97 |
| **PART III**                                    |   |                                                                                                               |   |   |
| Item 10.                                        |   | Directors,  Executive Officers and Corporate Governance                                                            |   | 97 |
| Item 11.                                        |   | Executive Compensation                                                                                             |   | 97 |
| Item 12.                                        |   | Security Ownership of Certain Beneficial Owners and  Management and Related Stockholder Matters               |   | 97 |
| Item 13.                                        |   | Certain  Relationships and Related Transactions, and Director Independence                                         |   | 98 |
| Item 14.                                        |   | Principal Accountant Fees and Services                                                                             |   | 98 |
| **PART IV**                                     |   |                                                                                                               |   |   |
| Item 15.                                        |   | Exhibits and Financial Statement Schedules                                                                         |   | 99 |
|                                                 |   | Signatures                                                                                                         |   | 103 |

 

**EXPLANATORY NOTE**

Polymer Group, Inc. (the “Company”) is hereby filingthis Amendment No. 1 on Form 10-K/A (“Amendment No. 1”) to its AnnualReport on Form 10-K for the fiscal year ended December 30, 2006 (“Form10-K”), which was originally filed on March 14, 2007, to amend the Reportof Ernst & Young LLP, Independent Registered Public Accounting Firmcontained in Part II, Item 8 of the Form 10-K. For the convenience of thereader, this Form 10-K/A sets forth the originally filed Form 10-K in itsentirety.

Ernst & Young, LLP, the Company’s former independent registeredpublic accounting firm, has previously issued their report dated March 23, 2005on the consolidated balance sheet of Polymer Group, Inc. as of January 1, 2005,and the related consolidated statements operations, changes in shareholders’equity and comprehensive income (loss) and cash flows for the year endedJanuary 1,

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2005, the ten months endedJanuary 3, 2004 and the two months ended March 1, 2003; such report has beenincluded herein.  This Amendment No. 1presents that report in the same format as included in the Company’s AnnualReport on Form 10-K for the fiscal year ended December 31, 2005, because thatreport has not been re-issued by Ernst & Young, LLP for inclusion in theForm10-K for the fiscal year ended December 30, 2006 pending the completion oftheir reissuance procedures.  The reportherein replaces the draft report originally filed with the Company’s Form 10-Kfor the fiscal year ended December 30, 2006, which report mistakenly wasoriginally notated as having been manually signed.  

The Company expects that Ernst & Young, LLP willcomplete such procedures soon and will be in a position to reissue their reporton the Company’s consolidated statements of operations, changes inshareholders’ equity and comprehensive income (loss), and cash flows for thefiscal year ended January 1, 2005.

No other revisions oramendments have been made to any other portion of the Company’s Form 10-K. Thereport of Grant Thornton LLP, the Company’s current independent registeredpublic accounting firm, dated March 13, 2007 on the Company’s consolidatedbalance sheets as of December 30, 2006 and December 31, 2005, and the relatedconsolidated statements of operations, changes in shareholders’ equity andcomprehensive income (loss) and cash flows for the years then ended is includedherein and remains in effect.  ThisAmendment does not reflect events occurring after March 14, 2007, the dateof the original filing of the Company’s Form 10-K, or modify or update thosedisclosures that may have been affected by subsequent events. In addition, newcertifications by our interim Chief Executive Officer and Chief FinancialOfficer have been included as exhibits to this Amendment No. 1 as required byRule 12b-15 under the Securities Exchange Act of 1934, as amended, foramendments to an Annual Report on Form 10-K.

**IMPORTANT INFORMATIONREGARDING THIS FORM 10-K**

Readers should consider thefollowing information as they review this Form 10-K:

**Fresh Start Accounting**

In connection with PolymerGroup, Inc.’s (the “Company” or “Polymer Group”) Chapter 11reorganization, the Company has applied fresh start accounting to itsConsolidated Balance Sheet as of March 1, 2003 in accordance withStatement of Position No. 90-7, “Financial Reporting by Entities inReorganization Under the Bankruptcy Code” (“SOP 90-7”) as promulgated bythe AICPA (Reference Item 1 in the Business section for additional informationregarding the Company’s Chapter 11 reorganization). Under fresh startaccounting, a new reporting entity is considered to be created and the recordedamounts of assets and liabilities are adjusted to reflect their estimated fairvalues at the date fresh start reporting is applied. On March 5, 2003, theCompany emerged from Chapter 11. For financial reporting purposes, March 1,2003 is considered the emergence date and the effects of the reorganization havebeen reflected in the accompanying financial statements as if the emergenceoccurred on that date.

**Safe Harbor-Forward-LookingStatements**

From time to time, the Company may publish forward-lookingstatements relative to matters such as, including, without limitation,anticipated financial performance, business prospects, technologicaldevelopments, new product introductions, cost savings, research and developmentactivities and similar matters. The Private Securities Litigation Reform Act of1995 provides a safe harbor for forward-looking statements. Forward-lookingstatements are generally accompanied by words such as “estimate,” “project,” “predict,”“believe,” “expect,” “anticipate” or other words that convey the uncertainty offuture events or outcomes.

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Various statements containedin this report, including those that express a belief, expectation orintention, as well as those that are not statements of historical fact are, ormay be deemed to be, forward-looking statements within the meaning of Section 27Aof the Securities Act of 1933, as amended, and Section 21E of theSecurities Exchange Act of 1934, as amended. These forward-lookingstatements speak only as of the date of this report. Unless required by law,the Company does not undertake any obligation to update these statements andcautions against any undue reliance on them. These forward-lookingstatements are based on current expectations and assumptions about futureevents. While management considers these expectations and assumptions to bereasonable, they are inherently subject to significant business, economic,competitive, regulatory and other risks, contingencies and uncertainties, mostof which are difficult to predict and many of which are beyond the Company’scontrol. See Item 1A. “Risk Factors” below. There can be no assurance thatthese events will occur or that the Company’s results will be as estimated.

Importantfactors that could cause actual results to differ materially from thosediscussed in such forward-looking statements include:

·       generaleconomic factors including, but not limited to, changes in interest rates,foreign currency translation rates, consumer confidence, trends in disposableincome, changes in consumer demand for goods produced, and cyclical or otherdownturns;

·       substantialdebt levels and potential inability to maintain sufficient liquidity to financethe Company’s operations and make necessary capital expenditures;

·       inabilityto meet existing debt covenants;

·       informationand technological advances;

·       changesin environmental laws and regulations;

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

·       inabilityto achieve successful start-up on new production lines;

·       domesticand foreign competition;

·       delaysor difficulties in finding a suitable new Chief Executive Officer;

·       relianceon major customers and suppliers; and

·       risksrelated to operations in foreign jurisdictions.

**Fiscal Year-End**

The Company’s fiscal year endson the Saturday nearest to December 31. Fiscal 2006 ended December 30,2006 and included the results of operations for a fifty-two week period. Fiscal2005 ended December 31, 2005 and included the results of operations for afifty-two week period. Fiscal 2004 ended January 1, 2005 and included theresults of operations for a fifty-two week period. References herein to “2006,”“2005,” and “2004,” generally refer to fiscal 2006, fiscal 2005 and fiscal2004, respectively, unless the context indicates otherwise.

**Additional Information**

The Company’s website islocated at www.polymergroupinc.com. Through the website, the Company makesavailable, free of charge, its Annual Reports on Form 10-K, QuarterlyReports on Form 10-Q, Current Reports on Form 8-K, proxystatements and other reports filed or furnished pursuant to Section 13(a) or15(d) under the Securities Exchange Act. These reports are available as soon asreasonably practicable after they have been electronically filed with theSecurities and Exchange Commission.

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**PART I**

**ITEM 1.**                 BUSINESS

Polymer Group, Inc. wasoriginally incorporated in the State of Delaware on June 16, 1994 and is aglobal manufacturer and marketer of nonwoven and oriented polyolefin products.

The Company and each of itsdomestic subsidiaries filed voluntary petitions for Chapter 11reorganization under the United States Bankruptcy Code in the United StatesBankruptcy Court for the District of South Carolina (the “Bankruptcy Court”) onMay 11, 2002 (April 25, 2002 as to Bonlam (S.C.), Inc.). Upon havingits Modified Plan, as defined (the “Modified Plan”), approved by the BankruptcyCourt on January 16, 2003, the Company emerged from the Chapter 11process effective March 5, 2003 (the “Effective Date”). For accountingpurposes the Company recognized the emergence on March 1, 2003 and adopted“fresh-start accounting” as of that date. The Company’s emergence fromChapter 11 resulted in a new reporting entity, with the reorganizationvalue of the Company allocated to the underlying assets and liabilities basedon their respective fair values at the date of emergence. The initialallocation was based on preliminary estimates and has been revised as morerecent information was received, as deemed appropriate, under generallyaccepted accounting principles in the United States. The revisions arereflected in the amounts included herein. References to “Predecessor” refer tothe old Polymer Group and its subsidiaries on and prior to March 1, 2003and references to “Successor” refer to Polymer Group and its subsidiaries on orafter March 2, 2003, after giving effect to the implementation of freshstart accounting.

**Recent Developments**

In 2006,the Company continued its efforts to strengthen its balance sheet and reaffirmits global leadership position in the industry. These items are discussed inmore detail throughout this report, with highlights presented below to assistthe reader:

·       continuingto expand the Company’s global business presence as it initiated commercial operationsand ramped up sales from its new state-of-the-art spunbond lines in Cali,Columbia, Suzhou, China and Mooresville, North Carolina as well as announcingan additional spunmelt expansion project in Argentina that is expected to begincommercial operations in late fiscal 2007;

·       initiatingthe restructuring and reorganization of certain of the Company’s operations,especially in the more developed markets of the United States, Europe andCanada to lower operating costs and improve overall financial performance; and

·       securingan amendment to the Company’s long-term debt in December 2006 to provideadditional financial flexibility by amending the total leverage and interestexpense coverage covenants as well as the definition of several terms.

**General**

The Company supplies engineeredmaterials to a number of the largest consumer and industrial productmanufacturers in the world. The Company has a global presence with anestablished customer base in both developed and emerging markets. The Company’sproduct offerings are sold principally to converters that manufacture a widerange of end-use products. The Company is one of the largest producers ofspunmelt and spunlace products in the world, and employs the most extensiverange of nonwovens technologies that allow it to supply products tailored tocustomers’ needs at competitive prices.

The Company operatestwenty-one manufacturing and converting facilities (including its jointventure/partnership-type operations in Argentina and China) located innine countries. The Company believes that the quality of its manufacturingoperations and the breadth of its nonwovens process technologies give it acompetitive advantage in meeting the needs of its customers and in leading thedevelopment of an expanded range of applications. The Company has invested inadvanced 

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technologiesin order to increase capacity, improve quality and develop new high-valuefabric structures. Working as a developmental partner with its major customers,the Company utilizes its technological capabilities and depth of research anddevelopment resources to develop and manufacture new products to specificallymeet their needs.

The Company has been builtthrough a series of capital expansions and business acquisitions that havebroadened the Company’s technology base, increased its product lines andexpanded its global presence. Moreover, the Company’s worldwide resources haveenabled it to better meet the needs of existing customers, to serve emerginggeographic markets, and to exploit niche market opportunities through customer-drivenproduct development.

**Industry Overview**

The Company competes primarilyin the worldwide nonwovens market, which is approximately a $17.0 billionmarket with an average annual growth rate of 7.0-8.0% expected over each of thenext five years, according to certain industry sources. The nonwovens industrybegan in the 1950’s when paper, textile and chemical technologies were combinedto produce new fabrics and products with the attributes of textiles but at asignificantly lower cost. Today, nonwovens are used in a wide variety ofconsumer and industrial products as a result of their superior functionalityand relatively low cost.

The nonwovens industry hasbenefited from substantial improvements in technology over the past severalyears, which have increased the number of new applications for nonwovens and,therefore, increased demand. The Company believes, based on certain industrysources, that demand in the developed markets of North America,Western Europe and Japan will increase at an average rate of 3.0-4.0% ineach of the next five years, while the emerging markets are forecasted to growat an average rate of 13.0-14.0% per annum. In the developed markets, growth isexpected to be driven primarily by new applications for nonwovens and by underlyingmarket growth. Growth in the emerging markets should be driven primarily byincreased penetration of disposable products as per capita income rises, and byhigher amounts of nonwovens used per application for such products as diapers,as these products become more sophisticated over time. The Company believesthat future growth will depend upon the continuation of improvements in rawmaterials and technology, which should result in the development ofhigh-performance nonwovens, leading to new uses and markets at a lower costthan alternative materials. Additionally, the Company’s growth rate may differfrom the industry averages depending upon the regions the Company chooses tooperate in and the technology available to the Company.

Nonwovens are categorized aseither disposable (approximately 58.5% of worldwide industry sales with anaverage annual growth rate of 7.0-8.0%, according to industry sources) ordurable (approximately 41.5% of worldwide industry sales and an average annualgrowth rate of 5.0-6.0%, according to industry sources). The composition ofdisposable products in emerging regions is expected to increase over the nextfive years as the growth rate for disposable products is expected to exceedthat of durable products. The Company primarily competes in disposableproducts. The largest end uses for disposable nonwovens are for applicationsthat include disposable diapers, feminine sanitary protection, baby wipes,adult incontinence products, and healthcare applications, including surgicalgowns, drapes and wound care sponges and dressings. Other disposable end usesinclude wipes, filtration media, protective apparel and fabric softener sheets.Durable end uses include apparel interlinings, furniture and bedding,construction sheeting, cable wrap, electrical insulation, automotivecomponents, geotextiles, roofing membranes, carpet backing, agricultural fabrics,and coated and laminated structures for wall coverings and upholstery.

The Company also competes inthe North American market for oriented polyolefin products. Chemical polyolefinproducts include woven, slit-film fabrics produced by weaving narrow tapes ofslit film and are characterized by high strength-to-weight ratios, and alsoinclude twisted slit film or monofilament strands. The markets in which theCompany primarily competes are made up of a large 

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number ofspecialized products manufactured for niche applications. These markets includeindustrial packaging applications such as lumberwrap, steel wrap and fiberglasspackaging, as well as high-strength protective coverings and specializedcomponents that are integrated into a variety of industrial and consumerproducts. The Company also produces structural concrete reinforcement fiberusing monofilament technology.

**Business Strategy**

The Company’s goals are togrow its core businesses while developing new technologies to capitalize on newproduct opportunities and expand in key geographic markets. The Company strivesto be a leading supplier in its chosen markets by delivering high-qualityproducts and services at competitive prices. The Company is committed tocontinuous improvements throughout its business to increase product value byincorporating new materials and operating capabilities that enhance or maintainperformance specifications. The Company seeks to expand its capabilities totake advantage of the penetration and growth of its core productsinternationally, particularly in emerging countries.

The Company develops,manufactures and sells a broad array of products. Sales are focused in twooperating divisions: “Nonwovens” and “Oriented Polymers” that provideopportunities to leverage the Company’s advanced technology and substantialcapacity. For financial information by business segment and geographic area,see Item 7, “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” and Note 16 to the Consolidated FinancialStatements included in Item 8 of Part II to this Annual Report on Form 10-K.

*Nonwovens Division*

The Nonwovens divisiondevelops and sells products in various consumer and industrial markets. Majormarkets served by this division include hygiene, industrial, medical andwiping. Nonwovens division sales were approximately $848.3 million, $763.7million and $672.6 million, of the Company’s consolidated netsales for fiscal 2006, 2005 and 2004, respectively, and representedapproximately 83%, 80% and 80% of total Company net sales in each of thoseyears.

The Company produces a varietyof nonwoven materials for use in diapers, training pants, feminine sanitaryprotection, adult incontinence, baby wipes and consumer wiping products. TheCompany’s broad product offerings provide customers with a full range ofspecialized components for unique or distinctive products, including top sheet,transfer layer, backsheet fabric, leg cuff fabric, sanitary protective facings,absorbent pads for incontinence guard, panty shield, and absorbent coreapplications. In addition, the Company’s medical products are used in wound caresponges and dressings, disposable surgical packs, apparel such as operatingroom gowns and drapes, face masks and shoe covers.

Among the industrialapplications of the product offerings are electrical insulation, housewrap,filtration, cable wrap, furniture and bedding applications and automotive.Wiping applications include products for the consumer as well as institutionaland janitorial applications.

The Company has significantrelationships with several large consumer product companies and supplies a fullrange of products to these customers on a global basis. The Company’s marketingand research and development teams work closely with these customers in thedevelopment of next generation products. The Company believes that thistechnical support helps to ensure that the Company’s products will continue tobe incorporated into such customers’ future product designs.

*Oriented Polymers Division*

The Oriented Polymers divisionprovides flexible packaging products that utilize coated and uncoated orientedpolyolefin fabrics. These include concrete fiber, housewrap, lumberwrap,fiberglass packaging tubes, balewrap for synthetic cotton and fibers, steel andaluminum wrap, coated bags for specialty chemicals and mineral fibers. OrientedPolymers division sales were approximately $173.3 

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million,$185.1 million and $172.5 million for fiscal 2006, 2005 and 2004,respectively, and represented approximately 17%, 20% and 20% of total Companynet sales in each of those years.

**Marketing and Sales**

The Company sells to customersin the domestic and international marketplace. Approximately 46%, 20%, 18%, 11%and 5% of the Company’s 2006 net sales were from manufacturing facilities inthe United States, Latin America, Europe, Canada and Asia, respectively.The Procter & Gamble Company, which is the Company’s largest customer,accounted for 13%, 14% and 12% of the Company’s net sales in 2006, 2005 and2004, respectively. Sales to the Company’s top 20 customers representedapproximately 51%, 51% and 45% of the Company’s net sales in 2006, 2005 and2004, respectively.

The Company generally employsdirect sales representatives who are active in the Company’s new productdevelopment efforts and are strategically located in the major geographicregions in which the Company’s products are utilized. The oriented polyolefinproducts are sold primarily through a well-established network of convertersand distributors. Converters add incremental value to the Company’s productsand distributors service the small order size requirements typical of many endusers.

**Manufacturing Processes**

*General.*   The Company’s competitivestrengths include high-quality manufacturing processes and a broad range ofprocess technologies, which allow the Company to offer its customers thebest-suited product for each respective application. Additionally, the Companyhas made significant capital investments in modern technology and has developedproprietary processes and manufacturing techniques. The Company believes thatit exceeds industry standards in productivity, reduction of variability anddelivery lead-time. The Company has a wide range of manufacturing capabilitiesthat allow it to produce specialized products that, in certain cases, cannot bereproduced in the market. Substantially all of the Company’s manufacturingsites have plant-wide real time control and monitoring systems that constantlymonitor key process variables using a sophisticated closed loop system ofcomputers, sensors and custom software.

*Nonwovens.*   The Company has acomprehensive array of nonwoven manufacturing technologies that encompasscapabilities spanning the entire spectrum of nonwoven technologies. Nonwovenrollgoods typically have three process steps: web formation, web consolidationor bonding, and finishing. Web formation is the process by which previouslyprepared fibers, filaments or films are arranged into loosely held networkscalled webs, batts or sheets. In each process, the fiber material is laid ontoa forming or conveying surface, which may be dry or molten. The dry-laidprocess utilizes fiber processing equipment, called “cards,” that have beenspecifically designed for high-capacity nonwoven production. The cardingprocess converts bales of entangled fibers into uniform oriented webs that thenfeed into the bonding process. In a molten polymer-laid process, extrusiontechnology is used to transform polymer pellets into filaments, which are laidon a conveying screen and interlocked by thermal fusion. In this process, thefiber formation, web formation and web consolidation are generally performed asa continuous simultaneous operation, making this method very efficient from amanufacturing and cost perspective.

Web consolidation is theprocess by which fiber or film are bonded together using mechanical, thermal,chemical or solvent means. The bonding method greatly influences the endproducts’ strength, softness, loft and utility. The principal bonding processesare thermal bond, resin or adhesive bond, hydroentanglement or spunlace, binderfiber or through-air bond, calender, spunbond, meltblown, SMS (spunbond-meltblown-spunbond),ultrasonic bond and needlepunch. Thermal bond utilizes heated calender rollswith embossed patterns to point bond or fuse the fibers together. In theresin bond process, an adhesive, typically latex, is pad rolled onto the web 

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to achievea bond. Spunlace, or hydroentanglement, uses high pressure water jets tomechanically entangle the fibers. Through-air bonding takes place throughthe fusion of bi-component fibers in a blown hot air drum. Spunbondand meltblown take advantage of the melt properties of the resins andmay use thermal fusion with the aid of calender rolls. SMS and SMMS (spunbond-meltblown-meltblown-spunbond)are integrated processes of combining spunbond and meltblown sheets in alaminated structure, creating very strong, lightweight and uniform fabrics.Ultrasonic bonding utilizes high-frequency sound waves that heat the bondingsites. Needlepunch is a mechanical process in which beds of needles are punchedthrough the web, entangling the fibers.

The Company recently developeda Spinlace® fabric, which is targeted as a high-performance, cost-effectiveengineered material for the wipes and other markets. The fabric is made throughan internally developed process that combines spunbonding, airlaid andhydroentanglement techniques without the use of cards. This nonwoven materialis stronger, more absorbent and can incorporate three-dimensional images atlower weights and with a better value proposition than traditionalmanufacturing methods.

*Special Films and CompositeStructures.*   TheCompany has a proprietary continuous process for manufacturing uniquereticulated films. These highly engineered films have unique capabilities dueto the way precision holes are imparted during the process of forming the film.Since these films can be composed of two or more layers of different polymers,the functionality can be different on one side versus the other. These filmsare typically customized for each customer and are especially popular in Asiaas a component for premium feminine hygiene products. The Company alsomanufactures composites which are combinations of different nonwoven and /orfilm structures where each structure lends its properties or attributes to theend product. An example is house wrap. House wrap is the result of mating anespecially strong spunbond fabric with a highly engineered film. The resultingfabric is very strong, economical, and has excellent wind barrier propertieswhile allowing humidity to pass through the fabric.

Finishing, or post-treatment,adds value and functionality to the product and typically includes surfacetreatments for fluid repellency, aperturing, embossing, laminating, printingand slitting. Spunlace and resin bond systems also have a post-treatment dryingor curing step. Certain products also go through an aperturing process in whichholes are opened in the fabric, improving absorbency.

*Oriented Polyolefins.*   The oriented/film processbegins with plastic resin, which is extruded into a thin plastic film or intomonofilament strands. The film is slit into narrow tapes. The slit tapes ormonofilament strands are then stretched or “oriented,” the process throughwhich it derives its high strength. The tapes are wound onto spools that feedweaving machines or twisters. In the finishing process, the product is coatedfor water or chemical resistance, ultraviolet stabilization and protection,flame retardancy, color and other specialized characteristics. In the twistingprocess, either oriented slit tapes or monofilament strands are twisted andpackaged on tightly spooled balls for distribution as agricultural andcommercial twine. The Company operates coating lines that have been equippedwith the latest technology for gauge control, print treating, lamination,anti-slip finishes and perforation. The Company also laminates orientedproducts to paper and has the additional capability of printing multiple colorson a wide-width printing press located in North America.

**Competition**

The Company’s primarycompetitors in its nonwoven product markets are E.I. du Pontde Nemours & Co., Fiberweb plc, Avgol LTD., First QualityEnterprises, Inc., Grupo Providencia and Mitsui Chemicals, Inc. Japanand Intertape Polymer Group Inc. and Propex Fabrics, Inc. fororiented polymer products. Generally, product innovation and performance,quality, service, distribution and cost are the primary competitive factors,with technical support being highly valued by the largest customers.

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**Raw Materials**

The primary raw materials usedto manufacture most of the Company’s products are polypropylene resin,polyester fiber, polyethylene resin and, to a lesser extent, rayon, tissuepaper and cotton. These primary raw materials are available from multiplesources and the Company purchases such materials from a variety of globalsuppliers. The prices of polypropylene, polyethylene and polyester are afunction of, among other things, manufacturing capacity, demand and the priceof crude oil and natural gas liquids. Historically, the prices of polypropyleneand polyethylene resins and polyester fibers have fluctuated. The Company hasnot historically hedged its exposure to raw material increases, but hasattempted to move more customer programs to contracts containing priceescalation clauses which would allow the Company to pass-through any costincreases in raw materials, although there is often a delay between the timethe Company is required to pay the increased raw material cost and the time theCompany is able to pass the increase on to its customers. To the extent theCompany is not able to pass along all or a portion of such increased prices ofraw materials, the Company’s cost of goods sold would increase and itsoperating income would correspondingly decrease. By way of example, if theprice of polypropylene were to rise $.01 per pound and the Company was not ableto pass along any of such increase to its customers, the Company would realizea decrease of approximately $4.0 million on an annualized basis in itsreported pre-tax operating income. The prices of raw materials in the NorthAmerican market rose substantially in the fourth quarter of 2005 as a directresult of the hurricanes that impacted the Gulf Coast. The raw material pricesin the North American markets have decreased slightly since late December 2005through the end of fiscal 2006 as the refineries and chemical processing sitesreturned to more normal production levels. However, raw material costs in NorthAmerica have not returned to their pre-fourth quarter of fiscal 2005 levels.Additionally, on a global basis, raw material costs continue to fluctuate,although in a much narrower range, in response to certain global economicfactors, including the regional supply versus demand dynamics for the rawmaterials and the volatile price of oil. Nonetheless, there can be no assurancethat the prices of polypropylene, polyethylene and polyester will notsubstantially increase in the future, or that the Company will be able to passon any increases to its customers not covered by contracts with priceescalation clauses. Material increases in raw material costs that cannot bepassed on to customers could have a material adverse effect on the Company’sresults of operations and financial condition. See “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” included inItem 7 of Part II to this Annual Report on Form 10-K and “RawMaterial and Commodity Risks” included in Item 7A of Part II to this AnnualReport on Form 10-K for additional discussion of the impact of rawmaterial costs on the Company’s operations in 2006, 2005 and 2004.

The Company believes that theloss of any one or more of its suppliers would not have a long-term materialadverse effect on the Company because other manufacturers with whom the Companyconducts business would be able to fulfill the Company’s requirements. However,the loss of certain of the Company’s suppliers could, in the short-term,adversely affect the Company’s business until alternative supply arrangementswere secured or alternative suppliers were qualified with customers. TheCompany has not experienced, and does not expect, any significant disruptionsin supply as a result of shortages in raw materials.

**Environmental**

The Company is subject to abroad range of federal, foreign, state and local laws and regulations relatingto the pollution and protection of the environment. Among the manyenvironmental requirements applicable to the Company are laws relating to airemissions, wastewater discharges and the handling, disposal and release ofsolid and hazardous substances and wastes. Based on continuing internal review,the Company believes that it is currently in substantial compliance withapplicable environmental requirements.

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The Company is also subject tolaws, such as the Comprehensive Environmental Response, Compensation, andLiability Act (“CERCLA”), that may impose liability retroactively and withoutfault for releases or threatened releases of hazardous substances at on-site oroff-site locations. The Company is not aware of any releases for which it maybe liable under CERCLA or any analogous provision.

**Patents and Trademarks**

The Company considers itspatents and trademarks, in the aggregate, to be important to its business andseeks to protect this proprietary know-how in part through United States andforeign patent and trademark registrations. The Company has over 185 trademarksworldwide, over 500 patents and pending patent applications worldwide and maintainscertain trade secrets for which, in order to maintain the confidentiality ofsuch trade secrets, it has not sought patent protection.

**Inventory and Backlogs**

Inventories at December 30,2006 were $132.5 million, an increase of $12.8 million from inventoriesof $119.7 million at December 31, 2005. The increase in totalinventory during 2006 versus 2005 primarily relates to the increases in rawmaterial costs, and the growth in sales attributable to the addition of newfacilities, during the current year. The Company had approximately 54 days ofinventory on hand at both December 30, 2006, and at December 31,2005. Unfilled orders as of December 30, 2006 and December 31, 2005amounted to approximately $80.5 million and $65.4 million, respectively.The level of unfilled orders is affected by many factors, including the timingof orders and the delivery time for the specific products. Consequently, theCompany does not consider the amount of unfilled orders a meaningful indicatorof levels of future sales.

**Research and Development**

The Company’s investment inresearch and development approximated $12.5 million, $11.5 million and$11.2 million during 2006, 2005 and 2004, respectively.

**Seasonality**

Use and consumption of theCompany’s products do not fluctuate significantly due to seasonality.

**Employees**

As of December 30, 2006,the Company had approximately 3,471 employees. Of this total, approximately1,314 employees are represented by labor unions or trade councils that haveentered into separate collective bargaining agreements with the Company.Approximately 25% of the Company’s labor force is covered by collectivebargaining agreements that will expire within one year. There were no knownunionizing attempts during fiscal 2006. The Company believes that it generallyhas good relationships with both its union and non-union employees.

**Business Restructuring**

The Company in fiscal 2006initiated business restructuring and reorganization efforts in the UnitedStates, Europe and Canada, involving corporate consolidations, manufacturinginitiatives and workforce reductions.

In 2006, the restructuringefforts were principally associated with (a) the Company’s initial stepsin the restructuring and consolidation plan for Europe, which includedtermination benefits provided to an executive officer of the Company, pursuantto Dutch law, in the amount of $2.1 million and costs associated with theclosure of the Sweden plant, which resulted in the reduction of 19 employeesand a charge of $1.1 million; (b) costs related to the relocation ofthe corporate headquarters to Charlotte, 

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NorthCarolina in the amount of $3.0 million; and (c) downsizing certainCanadian operations resulting in severance costs of $0.6 millionassociated with the reduction of 26 employees.

Additionally, on January 3,2007, the Company approved a plan to close its Rogers, Arkansas andGainesville, Georgia plants in the United States and transfer portions of thebusiness to other locations in North America and Asia. The restructuring planincluded the reduction of approximately 170 production and administrative staffpositions. As a result of this decision, the Company estimates that it willrecognize cash restructuring charges of approximately $5.5 million to $6.0million during fiscal 2007. The consolidation efforts, which are expected to becompleted by the end of the third quarter of fiscal 2007, are expected toresult in improved profitability and a more efficient cost structure, with cashfixed costs expected to be reduced by approximately $4.0 mllion to $6.0 millionon an annualized basis. Additionally, the Company anticipates proceeds ofapproximately $4.0 million to $5.0 million from the sale of idled facilitiesand equipment.

Cash outlays associated withthe Company’s business restructuring and reorganization approximated $5.3million, $0.4 million and $5.9 million in fiscal years 2006, 2005 and2004, respectively.

**Debt Structure and Refinancing**

On November 22, 2005, theCompany refinanced its then outstanding bank debt with a new Credit Facility(the “Credit Facility”) and entered into Amendment No. 1, dated as of December 8,2006, to the Credit Facility, which provided the Company with additionalfinancial flexibility. The Company’s Credit Facility consists of a$45.0 million secured revolving credit facility that matures on November 22,2010 and a $410.0 million first-lien term loan that matures on November 22,2012. See “Liquidity Summary” in “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” included in Item 7 of Part IIto this Annual Report on Form 10-K for additional details.

**Capital Expansion**

During the two year periodended December 30, 2006 the Company has been engaged in a major capitalexpansion program which included adding new spunmelt capacity in Cali,Colombia, in Mooresville, North Carolina and in Suzhou, China. Capitalexpenditures during this period totaled $147.1 million and consisted of theaforementioned three new spunmelt facilities, maintenance capital spending andcertain other smaller projects. The new capacity installations were expected tobe the basis of a significant improvement in sales and profitability and theCompany continues to believe such improvements will be achieved.

The Cali line, which wasinstalled in the latter part of fiscal 2005, experienced several quarters ofsuboptimal manufacturing performance associated with equipment issues whichhindered production output and sales. These issues have been resolved and theCali line performed at expected levels in the second half of fiscal 2006.

The Mooresville line initiated production in thelatter part of the second quarter of fiscal 2006 and has performed withinexpected levels since its start up. The Mooresville line was ramping up andcontinuing the qualification process for new sales programs during the thirdquarter of fiscal 2006 and performed at planned levels from a productivity andprofitability perspective in the fourth quarter of fiscal 2006.

The Suzhou line initiated operations in the latterpart of the third quarter of fiscal 2006 and commenced production without anysignificant manufacturing complications. The line continued to ramp up in thefourth quarter of 2006 and continued the qualification process for high gradefinished medical fabrics. As such, the Suzhou line only contributed marginallyto sales and profitability during the fourth quarter of fiscal 2006. TheCompany expects that these three new spunmelt facilities will be significantcontributors to sales and profitability in fiscal 2007.

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Additionally, the Company hasannounced the construction of a new spunmelt line at the joint venture facilitynear Buenos Aires, Argentina which is expected to initiate operations in thefourth quarter of fiscal 2007.

**ITEM 1A. RISK FACTORS**

Set forth below are some of the risks anduncertainties that, if they were to occur, could materially adversely affectthe Company’s business or that could cause actual results to differ materiallyfrom the results contemplated by the forward-looking statements contained inthis report and other public statements made by the Company.

Shareholders and prospectiveinvestors should carefully consider and evaluate all of the risk factorsdescribed below. These risk factors may change from time to time and may beamended, supplemented, or superceded by updates to the risk factors containedin periodic reports on Form 10-Q and Form 10-K that theCompany files with the Securities and Exchange Commission in the future.

***Risks Related to the Company’s Business***

**The Company’ssubstantial indebtedness could harm its ability to react to changes in businessor market developments and prevent the Company from fulfilling its obligationsunder its indebtedness.**

As of December 30, 2006,the Company’s consolidated indebtedness outstanding was approximately $411.2million and for fiscal 2006, its interest expense, net plus the interest costscapitalized amounted to $32.3 million. The Company’s substantial level ofcurrent indebtedness, as well as any additional indebtedness the Company maydraw under the unused portions of the Credit Facility, combined with apotential downturn in business due to economic or other factors beyond itscontrol, increases the possibility that the Company may be unable to generatecash sufficient to pay, when due, the principal of, interest on or otheramounts due in respect of its indebtedness. The Company’s substantial debtcould increase its vulnerability to general economic downturns and adversecompetitive and industry conditions by limiting its flexibility to plan for, orto react to, changes in its business and in the industry in which the Companyoperates. This limitation could place the Company at a competitive disadvantagecompared to competitors that have less debt and more cash to insulate theiroperations from market downturns and to finance new business opportunities.

**The Company’s variablerate indebtedness subjects the Company to interest rate risk, which could causeits debt service obligations to increase significantly.**

In accordance with the termsof the Credit Facility, the Company has maintained a cash flow hedge to lessenits exposure to interest rate fluctuations. However, approximately 48% of theCompany’s exposure to variable interest rates under the Credit Facility is nothedged and will bear interest at floating rates. As a result, a modest interestrate increase could result in a substantial increase in interest expense.

**To service itsindebtedness and fund its capital expenditures the Company will require asignificant amount of cash. The Company’s ability to generate cash depends onmany factors beyond its control.**

The Company’s ability to makepayments on its indebtedness and to fund its operations and capitalexpenditures will depend on its ability to generate cash in the future.However, its business may not generate sufficient cash flow from operations fora variety of reasons, including general downturns in the economy, delays in thestart-up of expansion projects, changes in the currency exchange rates incountries in which the Company operates, local laws restricting the movement of

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cash betweenthe Company’s subsidiaries and the parent and many other potential reasons. Ifthe Company cannot generate sufficient cash to service its debt, the Companywill have to take such actions as reducing or delaying capital investments,selling assets, restructuring or refinancing its debt or seeking additionalequity capital. Any of these actions may not be affected on commerciallyreasonable terms, or at all. In addition, the credit agreement with respect tothe Credit Facility may restrict the Company from adopting any of these alternatives.

**Non-compliance withcovenants contained in the Credit Facility, without waiver or amendment fromthe lenders of the Credit Facility, could adversely affect our ability toborrow under the Credit Facility.**

The Company’s Credit Facilitycontains certain financial covenants, including a leverage ratio and aninterest expense coverage ratio. The Company may not be able to satisfy theseratios, especially if operating results fall below management’s expectations,which expectations are that the covenants would be met. A breach of any ofthese covenants or the Company’s inability to comply with the requiredfinancial ratios could result in a default under the Credit Facility, unlessthe Company is able to remedy any default within the allotted cure period orobtain the necessary waivers or amendments to the Credit Facility. In the eventof any default not waived, and subject to appropriate cure periods as providedfor in the Credit Agreement, the lenders under the Credit Facility could electto not lend any additional amounts to the Company and could elect to declareall outstanding borrowings, together with accrued interest and other fees, tobe immediately due and payable. If the Company is unable to repay theborrowings with respect to the Credit Facility when due, the lenders couldproceed against their collateral, which consists of (i) a lien onsubstantially all of the assets of the Company, its domestic subsidiaries andcertain of its non-domestic subsidiaries, (ii) a pledge of all or a portionof the stock of the domestic subsidiaries of the Company and of certainnon-domestic subsidiaries of the Company, and (iii) a pledge of certainsecured intercompany notes.

**Because a significantnumber of its employees are represented by labor unions or trade councils andwork under collective bargaining agreements, any employee slowdown or strikesor the failure to renew its collective bargaining agreements could disrupt theCompany’s business.**

As of December 30, 2006,approximately 38% of the Company’s employees are represented by labor unions or trade councils and workunder collective bargaining agreements. Approximately 25% of the Company’slabor force is covered by collective bargaining agreements that expire withinone year. The Company may not be able to maintain constructive relationshipswith these labor unions or trade councils. The Company may not be able tosuccessfully negotiate new collective bargaining agreements on satisfactoryterms in the future. The loss of a substantial number of these employees or aprolonged labor dispute could disrupt the Company’s business. Any suchdisruption could in turn reduce its revenue from sales, increase its costs tobring products to market and result in significant losses.

**The Company generatesmost of its revenue from the sale of manufactured products that are used in awide variety of consumer and industrial applications and the potential forproduct liability exposure could be significant.**

The Company manufactures a wide variety of productsthat are used in consumer and industrial applications, such as disposablediapers, baby wipes, surgical gowns, wound dressings, carpet backing andindustrial packaging. As a result, the Company may face exposure to productliability claims in the event that the failure of its products results, or isalleged to result, in bodily injury and/or death. In addition, if any of itsproducts are, or are alleged to be, defective, the Company may be required tomake warranty payments or to participate in a recall involving those products.

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The future costs associatedwith defending product liability claims or responding to product warrantiescould be material and the Company may experience significant losses in thefuture as a result. A successful product liability claim brought against theCompany in excess of available insurance coverage or a requirement toparticipate in any product recall could substantially reduce the Company’sprofitability and cash generated from operations.

**The Company’sinternational operations pose risks to its business that are not present withits domestic operations.**

The Company’s manufacturingfacilities in the United States accounted for 46% of net sales for fiscal 2006,with facilities in Europe, Latin America, Canada and Asia accounting for 54%.As part of its growth strategy, the Company may expand operations in existingor other foreign countries. The Company’s foreign operations are, and anyfuture foreign operations will be, subject to certain risks that are unique todoing business in foreign countries. These risks include fluctuations inforeign currency exchange rates, inflation, economic or political instability,shipping delays, changes in applicable laws, reduced protection of intellectualproperty in some countries outside of the United States and regulatory policiesand various trade restrictions. All of these risks could have a negative impacton the Company’s ability to deliver products to customers on a competitive andtimely basis. This could reduce or impair the Company’s net sales, profits,cash flows and financial position. The Company has not historically hedged itsexposure to foreign currency risk.

**The Company could incursubstantial costs to comply with environmental laws, and violations of suchlaws may increase costs or require the Company to change certain businesspractices.**

The Company uses and generatesa variety of chemicals in its manufacturing operations. As a result, theCompany is subject to a broad range of federal, state, local and foreignenvironmental laws and regulations. These environmental laws govern, amongother things, air emissions, wastewater discharges and the handling, storageand release of wastes and hazardous substances. The Company regularly incurscosts to comply with environmental requirements, and such costs could increasesignificantly with changes in legal requirements or their interpretation orenforcement. For example, certain local governments have adopted ordinancesprohibiting or restricting the use or disposal of certain plastic products,such as certain of the plastic wrapping materials, which are produced by theCompany. Widespread adoption of such prohibitions or restrictions couldadversely affect demand for the Company’s products and thereby have a materialeffect upon the Company. In addition, a decline in consumer preference forplastic products due to environmental considerations could have a materialadverse effect upon the Company. The Company could incur substantial costs,including clean-up costs, fines and sanctions and third-party property damageor personal injury claims, as a result of violations of environmental laws.Failure to comply with environmental requirements could also result inenforcement actions that materially limit or otherwise affect the operations ofthe Company’s manufacturing facilities involved. The Company is also subject tolaws, such as CERCLA, that may impose liability retroactively and without faultfor releases or threatened releases of hazardous substances at on-site oroff-site locations.

**If the Company is unableto adequately protect its intellectual property, the Company could lose asignificant competitive advantage.**

The Company’s success depends,in part, on its ability to protect its unique technologies and products againstcompetitive pressure and to defend its intellectual property rights. If theCompany fails to adequately protect its intellectual property rights,competitors may manufacture and market similar products, which could adverselyaffect the Company’s market share and results of operations. The Companyconsiders its patents and trademarks, in the aggregate, to be important to itsbusiness 

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and seeks toprotect this proprietary know-how in part through United States and foreignpatent and trademark registrations. The Company has over 185 trademarksworldwide, over 500 patents and pending patent applications worldwide andmaintains certain trade secrets for which, in order to maintain theconfidentiality of such trade secrets, it has not sought patent protection. TheCompany may not receive patents for all its patent applications and existing orfuture patents that the Company receives or licenses may not providecompetitive advantages for its products. Its competitors may challenge,invalidate or avoid the application of any existing or future patents,trademarks, or other intellectual property rights that the Company receives orlicenses. In addition, patent rights may not prevent the Company’s competitorsfrom developing, using or selling products that are similar or functionallyequivalent to its products. The loss of protection for the Company’sintellectual property could reduce the market value of its products, reduceproduct sales, lower its profits, and impair its financial condition.

**Due to the uniqueproducts that the Company produces and the particular industry in which theCompany operates, the loss of its senior management could disrupt its business.**

The Company’s seniormanagement is important to the success of its business because there issignificant competition for executive personnel with unique experience in thenonwoven and oriented polyolefin industries. As a result of this unique needand the competition for a limited pool of industry-based executive experience,the Company may not be able to retain its existing senior management. Inaddition, the Company may not be able to fill new positions or vacanciescreated by expansion or turnover or attract additional senior managementpersonnel. The loss of any member of its senior management team withoutretaining a suitable replacement (either from inside or outside its existingmanagement team) could restrict our ability to enhance existing products in atimely manner, sell products to our customers or manage the businesseffectively.

***Risks Related to the Company’s Industries***

**Because the specializedmarkets in which the Company sells its products are highly competitive, theCompany may have difficulty growing its business year after year.**

The markets for the Company’sproducts are highly competitive. The primary competitive factors includetechnical support, product innovation and performance, quality, service,distribution and cost. In addition, the Company competes against a small numberof competitors in each of its markets. However, some of these competitors aremuch larger companies that have greater financial, technological, manufacturingand marketing resources than the Company. As a result, a reduction in overalldemand or increased costs to design and produce its products would likelyfurther increase competition and that increased competition could cause theCompany to reduce its prices, which could lower its profit margins and impairits ability to grow from year to year.

**The Company mustcontinue to invest significant resources in developing innovative products inorder to maintain a competitive edge in the highly specialized markets in whichthe Company operates.**

The Company’s continuedsuccess depends, in part, upon its ability to maintain its technologicalcapabilities and to continue to identify, develop and commercialize innovativeproducts for the nonwoven and oriented polyolefin industries. The Company mustalso protect the intellectual property rights underlying its new products torealize the full benefits of its efforts. If the Company fails to continue todevelop products for its markets or to keep pace with technologicaldevelopments by its competitors, the Company may lose market share, which couldreduce product sales, lower its profits and impair its financial condition.

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**The loss of only a fewof the Company’s large volume customers could reduce its revenues and profits.**

A significant amount of theCompany’s products are sold to a relatively small number of large volumecustomers. Sales to Procter & Gamble Company represented approximately13% of its net sales in fiscal 2006. Sales to its top 20 customersrepresented approximately 51% of the Company’s net sales in fiscal 2006. As aresult, a decrease in business from, or the loss of, any large volume customersuch as Procter & Gamble could materially reduce the Company’s productsales, lower its profits and impair its financial condition.

**Increases in prices forraw materials or the unavailability of raw materials could reduce the Company’sprofit margins.**

The primary raw materials usedto manufacture most of the Company’s products are polypropylene resins,polyester fiber, polyethylene resin and, to a lesser extent, rayon, tissuepaper and cotton. The prices of polypropylene, polyethylene and polyester are afunction of, among other things, manufacturing capacity, demand and the priceof crude oil and natural gas liquids. To the extent that the Company is able topass at least a portion of raw material price increases to some of itscustomers, there is often a delay between the time the Company is required topay the increased raw material price and the time the Company is able to passthe increase on to its customers. To the extent the Company is not able to passalong all or a portion of such increased prices of raw materials, the Company’scost of goods sold would increase and its operating income wouldcorrespondingly decrease. By way of example, if the price of polypropylene wereto rise $.01 per pound and the Company was not able to pass along any of suchincrease to its customers, the Company would realize a decrease ofapproximately $4.0 million on an annualized basis in its reported pre-taxoperating income. There can be no assurance that the prices of polypropylene,polyethylene and polyester will not increase in the future or that the Companywill be able to pass on any increases to its customers not covered by contractswith price escalation clauses. Material increases in raw material prices thatcannot be passed on to customers could have a material adverse effect on theCompany’s profit margins, results of operations and financial condition. Inaddition, the loss of any of its key suppliers in the short-term could disruptits business until the Company secures alternative supply arrangements oralternative suppliers were qualified with customers.

**In response to changing marketconditions the Company may decide to restructure certain of its operationsresulting in additional cash restructuring charges and asset impairment charges**

The Company reviews its business on an ongoing basisrelative to current and expected market conditions, attempting to match itsproduction capacity and cost structure to the demands of the markets in whichit participates, and strives to continuously streamline its manufacturingoperations consistent with world-class standards. Accordingly, in the futurethe Company may or may not decide to undertake certain restructuring efforts toimprove its competitive position, especially in the more mature markets of theU.S., Europe and Canada. In such mature markets, the  prices for commodity roll goods continue tofluctuate based on supply and demand dynamics relative to the assets employedin that geographic region. The Company actively and continuously pursuesinitiatives to prolong the useful life of its long-lived assets through productand process innovation. To the extent further decisions are made to improve theCompany’s long-term performance, such actions could result in the incurrence ofcash restructuring charges and asset impairment charges associated with the consolidation,and such charges could be material.

**ITEM 1B. UNRESOLVEDSTAFF COMMENTS**

**None**

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**ITEM 2. PROPERTIES**

TheCompany and its subsidiaries operate the following principal manufacturingplants and other facilities, all of which are owned, except as noted. All ofthe Company’s owned properties are subject to liens in favor of the lendersunder the Company’s Credit Facility. The Company believes that its facilitiesare generally well-maintained, in good condition and adequate for its currentneeds.

| **Location**                     | ** ** | ** **                                                                          | ** ** | **Principal Function** | ** ** | ** ** |
|----------------------------------|------------|-------------------------------------------------------------------------------------|------------|------------------------|------------|------------|
| *Nonwovens U.S**.*               |       |                                                                                |
| North Little Rock, Arkansas      |       | Manufacturing and  Warehousing                                                      |
| Rogers, Arkansas (2)             |       | Manufacturing and  Warehousing                                                      |
| Gainesville, Georgia(1) (2) |       | Manufacturing and  Warehousing                                                      |
| Landisville, New Jersey          |       | Manufacturing and Warehousing                                                       |
| Benson, North Carolina           |       | Manufacturing, Sales, Marketing, Warehousing and Research and  Development          |
| Mooresville, North Carolina      |       | Manufacturing and Research and Development                                          |
| Waynesboro, Virginia             |       | Manufacturing, Warehousing and Research and Development                             |
| Waynesboro, Virginia(1)          |       | Warehousing                                                                         |
| *Nonwovens Europe*               |       |                                                                                |
| Bailleul, France                 |       | Manufacturing, Marketing, Warehousing, Research and Development and  Administration |
| Neunkirchen, Germany             |       | Manufacturing and Warehousing                                                       |
| Cuijk, The Netherlands           |       | Manufacturing, Sales, Marketing, Warehousing and Research and  Development          |
| *Nonwovens Latin America*        |       |                                                                                |
| Buenos Aires, Argentina(3)       |       | Manufacturing, Sales, Marketing, Warehousing and Administration                     |
| Cali, Colombia                   |       | Manufacturing, Sales, Marketing, Warehousing and Administration                     |
| San Luis Potosi, Mexico          |       | Manufacturing, Sales, Warehousing, Marketing and Administration                     |
| *Nonwovens Asia*                 |       |                                                                                |
| Nanhai, China(4)                 |       | Manufacturing, Sales, Marketing, Warehousing and Administration                     |
| Suzhou, China                    |       | Manufacturing, Sales,  Marketing, Warehousing and Administration                    |
| *Oriented Polymers  Division*    |       |                                                                                |
| Kingman, Kansas                  |       | Manufacturing, Marketing,  Warehousing and Administration                           |
| Guntown, Mississippi(1)          |       | Converting and Warehousing                                                          |
| Portland (Clackamas), Oregon     |       | Manufacturing                                                                       |
| Clearfield, Utah(1)              |       | Manufacturing, Marketing  and Warehousing                                           |
| North Bay, Ontario               |       | Manufacturing, Marketing,  Warehousing and Administration                           |
| Magog, Quebec                    |       | Manufacturing, Marketing,  Warehousing and Administration                           |
| Montreal, Quebec(1)              |       | Sales, Marketing and  Administration                                                |
| *Corporate Offices*              |       |                                                                                |
| Charlotte, North Carolina(1)     |       | Sales, Marketing and  Administration                                                |

 

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(1)            Leased.

(2)            The Company hasannounced its intention to close these facilities, and transfer portions of thebusiness to other locations in its global operations.

(3)            60% interest in ajoint venture/partnership-type arrangement (Dominion NonwovensSudamerica S.A.) with Guillermo Enrique Kraves.

(4)            Primarily an 80%interest in a joint venture/partnership-type arrangement (Nanhai NanxinNon-Woven Co. Ltd.) with Nanhai Chemical Fiber Enterprises Co.

Capacity utilization during2006 varied by geographic locations and manufacturing capabilities. However, itcan be generally stated that most of the facilities operated moderately belowcapacity.

**ITEM 3. LEGALPROCEEDINGS**

The Company is not currently a party to any materialpending legal proceedings other than routine litigation incidental to thebusiness of the Company. During 2005, the Company was served with a lawsuit bya customer alleging breach of contract and other charges. The discovery phaseis continuing and there is not currently enough information to formulate anassessment of the ultimate outcome of the claim. Therefore, management is notable to estimate the amount of such loss, if any, at this time. The Companyintends to vigorously defend this action and believes that it has reasonablearguments available in its defense. However, there is a possibility thatresolution of this matter, or others that may arise in the normal course ofbusiness, could result in a loss in excess of established reserves, if any.

The Company is subject to abroad range of federal, foreign, state and local laws and regulations relatingto pollution and protection of the environment. The Company believes that it iscurrently in substantial compliance with applicable environmental requirementsand does not currently anticipate any material adverse effect on itsoperations, financial or competitive position as a result of its efforts tocomply with environmental requirements. Some risk of environmental liability isinherent, however, in the nature of the Company’s business and, accordingly,there can be no assurance that material environmental liabilities will notarise.

**ITEM 4. SUBMISSION OFMATTERS TO A VOTE OF SECURITY HOLDERS**

No matters were submitted to avote of security holders during the fourth quarter of fiscal 2006.

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**PART II**

**ITEM 5.**                 MARKETFOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER

**MATTERSAND ISSUER PURCHASES OF EQUITY SECURITIES**

Since March 5,2003, the Company’s Class A and Class B Common Stock have beentrading on the over-the-counter electronic bulletin board (the “OTCBB”) underthe symbols “POLGA” and “POLGB,” respectively. The Company’s common stock isdivided into five classes: Class A, Class B, Class C, Class Dand Class E. The Class A and Class B Common Stock trade on theOTCBB. No shares of Class D or Class E Common Stock are outstanding.There is no established trading market for the Class C Common Stock and,as such, no ticker symbol has been assigned to the Class C Common Stock.The Class B Common Stock is convertible to Class A Common Stock and,accordingly, the Class B Common Stock trades on a comparable basis to the Class ACommon Stock. The following table sets forth for fiscal 2006 and 2005 the highand low bids for the Company’s Class A Common Stock:

| ** **     | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------|------------|----------|------------|----------|------------|
| ** **     | ** ** | **High** | ** ** | **Low**  | ** ** | **High** | ** ** | **Low** | ** ** |
| First Quarter  |       | $        | 27.30      |     | $          | 22.25 |   | $ | 24.00 |   | $ | 17.20 |   |
| Second Quarter |       | 28.50    |       | 24.95    |       | 25.65 |   | 21.00 |   |
| Third Quarter  |       | 26.00    |       | 21.06    |       | 29.40 |   | 22.35 |   |
| Fourth Quarter |       | 26.50    |       | 25.30    |       | 25.50 |   | 23.25 |   |
|                |            |          |            |          |            |  |  |  |  |  |  |  |  |

 

The Company did not pay anydividends on its common stock during fiscal years 2006 or 2005. The CreditFacility limits restricted payments, which includes dividends payable in cash,to $5.0 million in the aggregate since the effective date of the CreditFacility.

As of March 5, 2007,there were 60, 334 and one registered holders of record of the Company’s Class A,Class B and Class C Common Stock, respectively.

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**PERFORMANCE GRAPH**

The following graph comparesthe Company’s cumulative total stockholder return since April 2, 2003 (theCompany emerged from bankruptcy on March 5, 2003 and data regarding theCompany’s stock price was not available until April 2, 2003) with theRussell 2000 Index and with selected companies that the Company believes aresimilar to the Company (the “Peer Group”). The Company’s Peer Group iscomprised of the following companies: Intertape Polymer Group, Inc.,Lydall Corporation, Millipore Corporation, Pall Corporation and BuckeyeTechnologies, Inc.

**COMPARISON OF CUMULATIVE TOTAL RETURNAMONG POLYMER GROUP,RUSSELL 2000 INDEX AND PEER GROUP INDEX(1)**

(1)            Assumes$100 invested on April 2, 2003, all dividends reinvested and all fiscal yearsending on December 31.

| ** **         | ** ** | **4/02/2003** | ** ** | **6/30/2003** | ** ** | **9/30/2003** | ** ** | **12/31/2003** | ** ** | **3/31/2004** | ** ** | **6/30/2004** | ** ** |
|--------------------|------------|---------------|------------|---------------|------------|---------------|------------|----------------|------------|---------------|------------|---------------|------------|
| POLYMER GROUP      |       |          | 100.00     |          |       |          | 50.00      |           |       |          | 46.25      |          |       |   | 62.50 |   |   |   | 112.50 |   |   |   | 109.17 |   |   |
| PEER GROUP INDEX   |       |          | 100.00     |          |       |          | 113.97     |           |       |          | 115.48     |          |       |   | 131.96 |   |   |   | 132.30 |   |   |   | 138.45 |   |   |
| RUSSELL 2000 INDEX |       |          | 100.00     |          |       |          | 122.99     |           |       |          | 133.78     |          |       |   | 152.77 |   |   |   | 161.93 |   |   |   | 162.96 |   |   |

 

| ** **         | ** ** | **9/30/2004** | ** ** | **12/31/2004** | ** ** | **3/31/2005** | ** ** | **6/30/2005** | ** ** | **9/30/2005** | ** ** | **12/31/2005** | ** ** |
|--------------------|------------|---------------|------------|----------------|------------|---------------|------------|---------------|------------|---------------|------------|----------------|------------|
| POLYMER GROUP      |       |          | 95.83      |           |       |          | 158.33     |          |       |          | 199.58     |           |       |   | 213.75 |   |   |   | 212.50 |   |   |   | 199.92 |   |   |
| PEER GROUP INDEX   |       |          | 137.73     |           |       |          | 155.98     |          |       |          | 157.64     |           |       |   | 135.78 |   |   |   | 129.32 |   |   |   | 139.84 |   |   |
| RUSSELL 2000 INDEX |       |          | 157.84     |           |       |          | 179.50     |          |       |          | 169.44     |           |       |   | 176.22 |   |   |   | 183.97 |   |   |   | 185.46 |   |   |

 

| ** **         | ** ** | **3/31/2006** | ** ** | **6/30/2006** | ** ** | **9/29/2006** | ** ** | **12/31/2006** | ** ** |
|--------------------|------------|---------------|------------|---------------|------------|---------------|------------|----------------|------------|
| POLYMER GROUP      |       |          | 224.17     |          |       |          | 212.25     |           |       |   | 214.58 |   |   |   | 212.92 |   |   |
| PEER GROUP INDEX   |       |          | 156.81     |          |       |          | 147.80     |           |       |   | 157.83 |   |   |   | 178.30 |   |   |
| RUSSELL 2000 INDEX |       |          | 210.78     |          |       |          | 199.76     |           |       |   | 200.01 |   |   |   | 217.12 |   |   |

 

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**ITEM 6. SELECTEDFINANCIAL DATA**

The following table sets forthcertain selected historical consolidated financial information of the Companyfor periods both before and after emerging from the Chapter 11 process on March 5,2003. For accounting purposes, the financial statements reflect thereorganization as if it was consummated on March 1, 2003. Therefore, theConsolidated Balance Sheets and related information as of December 30,2006, December 31, 2005, January 1, 2005 and January 3, 2004 andthe Consolidated Statement of Operations and related information for the fiscalyears ended December 30, 2006, December 31, 2005, January 1,2005 and the ten months ended January 3, 2004 are referred to as “Successor”and reflect the effects of the reorganization and the principles of fresh startaccounting. Periods presented prior to March 1, 2003 have been referred toas “Predecessor”. The statement of operations data for each of the periodspresented in the five years ended December 30, 2006 and the balance sheetdata as of December 30, 2006, December 31, 2005, January 1,2005, January 3, 2004 and December 28, 2002 have been derived fromaudited consolidated financial statements, except for the balance sheet data asof March 1, 2003, which is unaudited. The table should be read inconjunction with “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” included in Item 7 of Part II to thisAnnual Report on Form 10-K and the Consolidated Financial Statementsof the Company and related notes thereto included in Item 8 of Part IIto this Annual Report on Form 10-K.

22

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| ** **                                                                                              | ** ** | **Successor**                              | ** ** | **Predecessor**       | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                              | ** ** | ** **                                 | ** ** | ** **            | ** ** | ** ** | ** ** | **Ten Months** | ** ** | **Two Months** | ** ** | **Fiscal Year** | ** ** |
| ** **                                                                                              | ** ** | **Fiscal Year Ended**                      | ** ** | **Ended**             | ** ** | **Ended** | ** ** | **Ended** | ** ** |
| ** **                                                                                              | ** ** | **December 30,**                      | ** ** | **December 31,** | ** ** | **January 1,** | ** ** | **January 3,** | ** ** | **March 1,** | ** ** | **December 28,** | ** ** |
| ** **                                                                                              | ** ** | **2006**                                   | ** ** | **2005**              | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                                              | ** ** | **(In Thousands, Except Per  Share Data)** | ** ** |
| **Statement of Operations:**                                                                            |       |                                       |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net sales                                                                                               |       |                                       | $          | 1,021,608             |       |   |   | $ | 948,848 |   |   |   | $ | 844,734 |   |   |   | $ | 644,893 |   |   |   | $ | 132,895 |   |   |   | $ | 754,437 |   |   |
| Cost of goods sold                                                                                      |       |                                       | 865,405    |                  |       |   | 787,369 |   |   |   | 691,272 |   |   |   | 531,390 |   |   |   | 111,110 |   |   |   | 635,639 |   |   |
| Gross profit                                                                                            |       |                                       | 156,203    |                  |       |   | 161,479 |   |   |   | 153,462 |   |   |   | 113,503 |   |   |   | 21,785 |   |   |   | 118,798 |   |   |
| Selling, general and administrative expenses                                                            |       |                                       | 110,406    |                  |       |   | 104,545 |   |   |   | 99,163 |   |   |   | 78,682 |   |   |   | 15,955 |   |   |   | 100,215 |   |   |
| Special charges (credits), net:                                                                         |       |                                       |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Asset impairment charges                                                                                |       |                                       | 26,434     |                  |       |   | — |   |   |   | 2,253 |   |   |   | 1,207 |   |   |   | — |   |   |   | 317,898 |   |   |
| Other                                                                                                   |       |                                       | 12,249     |                  |       |   | 9 |   |   |   | (11,245 | ) |   |   | 6,802 |   |   |   | 4 |   |   |   | 7,296 |   |   |
| Foreign currency (gain) loss, net                                                                       |       |                                       | 1,229      |                  |       |   | 671 |   |   |   | 2,027 |   |   |   | 2,773 |   |   |   | 1,343 |   |   |   | (1,059 | ) |   |
| Operating income (loss)                                                                                 |       |                                       | 5,885      |                  |       |   | 56,254 |   |   |   | 61,264 |   |   |   | 24,039 |   |   |   | 4,483 |   |   |   | (305,552 | ) |   |
| Other expense (income):                                                                                 |       |                                       |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest expense, net                                                                                   |       |                                       | 29,248     |                  |       |   | 32,617 |   |   |   | 40,252 |   |   |   | 49,036 |   |   |   | 10,665 |   |   |   | 71,478 |   |   |
| Investment (gain) loss, net                                                                             |       |                                       | —     |                  |       |   | — |   |   |   | — |   |   |   | (3 | ) |   |   | (291 | ) |   |   | 1,806 |   |   |
| Minority interests                                                                                      |       |                                       | 3,377      |                  |       |   | 3,784 |   |   |   | 2,597 |   |   |   | 2,028 |   |   |   | 441 |   |   |   | 1,366 |   |   |
| Write-off of loan acquisition costs                                                                     |       |                                       | —     |                  |       |   | 4,008 |   |   |   | 5,022 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Foreign currency and other (gain) loss, net                                                             |       |                                       | 517        |                  |       |   | (948 | ) |   |   | 667 |   |   |   | 3,035 |   |   |   | 91 |   |   |   | 15,078 |   |   |
| Reorganization items, (gain) loss                                                                       |       |                                       | —     |                  |       |   | — |   |   |   | — |   |   |   | — |   |   |   | (540,479 | ) |   |   | 14,873 |   |   |
| Income (loss) before income tax expense (benefit)                                                       |       |                                       | (27,257    | )                     |       |   | 16,793 |   |   |   | 12,726 |   |   |   | (30,057 | ) |   |   | 534,056 |   |   |   | (410,153 | ) |   |
| Income tax expense (benefit)                                                                            |       |                                       | 7,275      |                  |       |   | 9,796 |   |   |   | 7,994 |   |   |   | 2,928 |   |   |   | 1,692 |   |   |   | (3,290 | ) |   |
| Income (loss) before cumulative effect of change in  accounting principle                               |       |                                       | (34,532    | )                     |       |   | 6,997 |   |   |   | 4,732 |   |   |   | (32,985 | ) |   |   | 532,364 |   |   |   | (406,863 | ) |   |
| Cumulative effect of change in accounting principle,  net of tax                                        |       |                                       | —     |                  |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 12,774 |   |   |
| Net income (loss)                                                                                       |       |                                       | (34,532    | )                     |       |   | 6,997 |   |   |   | 4,732 |   |   |   | (32,985 | ) |   |   | 532,364 |   |   |   | (419,637 | ) |   |
| Accrued and paid-in-kind dividends on PIK Preferred  Shares                                             |       |                                       | —     |                  |       |   | 27,998 |   |   |   | 5,566 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Income (loss) applicable to common shareholders                                                         |       |                                       | $          | (34,532               | )          |   |   | $ | (21,001 | ) |   |   | $ | (834 | ) |   |   | $ | (32,985 | ) |   |   | $ | 532,364 |   |   |   | $ | (419,637 | ) |   |
| **Per  Share Data:**                                                                                    |       |                                       |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income (loss) before cumulative effect of change in  accounting principle per common share—basic   |       |                                       | $          | (1.79                 | )          |   |   | $ | (1.60 | ) |   |   | $ | (0.09 | ) |   |   | $ | (3.81 | ) |   |   | $ | 16.63 |   |   |   | $ | (12.71 | ) |   |
| Income (loss) per share applicable to common  shareholders—basic                                   |       |                                       | $          | (1.79                 | )          |   |   | $ | (1.60 | ) |   |   | $ | (0.09 | ) |   |   | $ | (3.81 | ) |   |   | $ | 16.63 |   |   |   | $ | (13.11 | ) |   |
| Income (loss) before cumulative effect of change in  accounting principle per common share—diluted |       |                                       | $          | (1.79                 | )          |   |   | $ | (1.60 | ) |   |   | $ | (0.09 | ) |   |   | $ | (3.81 | ) |   |   | $ | 16.63 |   |   |   | $ | (12.71 | ) |   |
| Income (loss) per share applicable to common  shareholders—diluted                                 |       |                                       | $          | (1.79                 | )          |   |   | $ | (1.60 | ) |   |   | $ | (0.09 | ) |   |   | $ | (3.81 | ) |   |   | $ | 16.63 |   |   |   | $ | (13.11 | ) |   |
| Cash dividends                                                                                          |       |                                       | $          | —                |       |   |   | $ | — |   |   |   | $ | — |   |   |   | $ | — |   |   |   | $ | — |   |   |   | $ | — |   |   |
| **Operating  and other data:**                                                                          |       |                                       |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash provided by (used in) operating activities                                                         |       |                                       | $          | 66,760                |       |   |   | $ | 70,932 |   |   |   | $ | 69,896 |   |   |   | $ | 33,213 |   |   |   | $ | (12,901 | ) |   |   | $ | 35,343 |   |   |
| Cash provided by (used in) investing activities                                                         |       |                                       | (64,268    | )                     |       |   | (77,604 | ) |   |   | (23,144 | ) |   |   | (33,909 | ) |   |   | 8,820 |   |   |   | (10,554 | ) |   |
| Cash provided by (used in) financing activities                                                         |       |                                       | (1,934     | )                     |       |   | (2,488 | ) |   |   | (28,133 | ) |   |   | (10,887 | ) |   |   | (14,669 | ) |   |   | (15,367 | ) |   |
| Gross margin (a)                                                                                   |       |                                       | 15.3       | %                     |       |   | 17.0 | % |   |   | 18.2 | % |   |   | 17.6 | % |   |   | 16.4 | % |   |   | 15.7 | % |   |
| Depreciation and amortization                                                                           |       |                                       | $          | 60,663                |       |   |   | $ | 57,550 |   |   |   | $ | 53,230 |   |   |   | $ | 42,620 |   |   |   | $ | 8,812 |   |   |   | $ | 71,556 |   |   |
| Capital expenditures                                                                                    |       |                                       | 68,167     |                  |       |   | 78,902 |   |   |   | 24,791 |   |   |   | 36,675 |   |   |   | 3,062 |   |   |   | 15,379 |   |   |
| **Balance  sheet data (at end of period):**                                                             |       |                                       |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents and short-term  investments                                                   |       |                                       | $          | 32,104                |       |   |   | $ | 30,963 |   |   |   | $ | 41,296 |   |   |   | $ | 21,336 |   |   |   | $ | 31,783 |   |   |   | $ | 58,147 |   |   |
| Working capital                                                                                         |       |                                       | 159,447    |                  |       |   | 173,447 |   |   |   | 187,338 |   |   |   | 119,106 |   |   |   | 172,501 |   |   |   | 219,905 |   |   |
| Total assets                                                                                            |       |                                       | 742,097    |                  |       |   | 765,001 |   |   |   | 754,558 |   |   |   | 719,062 |   |   |   | 745,221 |   |   |   | 811,319 |   |   |
| Long-term debt, less current portion                                                                    |       |                                       | 402,416    |                  |       |   | 405,955 |   |   |   | 403,560 |   |   |   | 440,992 |   |   |   | 480,050 |   |   |   | 478,224 |   |   |
| Minority interests                                                                                      |       |                                       | 16,654     |                  |       |   | 16,611 |   |   |   | 14,912 |   |   |   | 14,151 |   |   |   | 12,123 |   |   |   | 11,682 |   |   |
| 16% Series A convertible pay-in-kind  preferred shares                                             |       |                                       | —     |                  |       |   | — |   |   |   | 58,286 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Total shareholders’  equity (deficit)                                                              |       |                                       | 109,096    |                  |       |   | 131,482 |   |   |   | 73,849 |   |   |   | 59,200 |   |   |   | 73,390 |   |   |   | (465,914 | ) |   |

 

**Note to SelectedConsolidated Financial Data**

(a)   Grossmargin represents gross profit as a percentage of net sales.

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**ITEM 7.**                 MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion andanalysis provides information which management believes is relevant to anassessment and understanding of the Company’s consolidated results ofoperations and financial condition. The discussion should be read in conjunctionwith the Consolidated Financial Statements and notes thereto contained inItem 8 of Part II to this Annual Report on Form 10-K. Inaddition, it should be noted that the Company’s gross profit margins may not becomparable to other companies since some entities classify shipping andhandling costs in cost of goods sold and others, including the Company, includesuch costs in selling, general and administrative expenses. Similarly, someentities, including the Company, include foreign currency gains and lossesresulting from operating activities as a component of operating income, andsome entities classify all foreign currency gains and losses outside ofoperating income.

During the two year periodended December 30, 2006 the Company has been engaged in a major capitalexpansion program which included adding new spunmelt capacity in Cali,Colombia, in Mooresville, North Carolina and in Suzhou, China. Capitalexpenditures during this period totaled $147.1 million and consisted of theaforementioned three new spunmelt facilities, maintenance capital spending andcertain other smaller projects. The new capacity installations were expected tobe the basis of a significant improvement in sales and profitability and theCompany continues to believe such improvements will be achieved.

The Cali line, which wasinstalled in the latter part of fiscal 2005, experienced several quarters ofsuboptimal manufacturing performance associated with equipment issues whichhindered production output and sales. These issues have been resolved and theCali line performed at expected levels in the second half of fiscal 2006.

The Mooresville line initiatedproduction in the latter part of the second quarter of fiscal 2006 and hasperformed within expected levels since its start up. The Mooresville line wasramping up and continuing the qualification process for new sales programsduring the third quarter of fiscal 2006 and performed at planned levels from aproductivity and profitability perspective in the fourth quarter of fiscal2006.

The Suzhou line initiatedoperations in the latter part of the third quarter of fiscal 2006 and commencedproduction without any significant manufacturing complications. The linecontinued to ramp up in the fourth quarter of 2006 and continued thequalification process for high grade finished medical fabrics. As such, theSuzhou line only contributed marginally to sales and profitability during thefourth quarter of fiscal 2006. The Company expects that these three newspunmelt facilities will be significant contributors to sales and profitabilityin fiscal 2007.

Additionally, the Company hasannounced the construction of a new spunmelt line at the joint venture facilitynear Buenos Aires, Argentina which is expected to initiate operations in thefourth quarter of fiscal 2007.

As discussed herein, in fiscal2006 the Company incurred special charges (credits), net, includingrestructuring and plant realignment costs of $7.1 million, abandonedacquisition costs of $4.0 million, non-cash asset impairment charges of $26.4million, primarily associated with the Company’s restructuring initiatives andthe Company’s evaluation of its long-lived assets for recoverability and othercosts of $1.1 million.

The Company reviews itsbusiness on an ongoing basis relative to current and expected marketconditions, attempting to match its production capacity and cost structure tothe demands of the markets in which it participates, and strives tocontinuously streamline its manufacturing operations 

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consistentwith world-class standards. Accordingly, in the future the Company may or maynot decide to undertake certain restructuring efforts to improve itscompetitive position, especially in the more mature markets of the U.S., Europeand Canada. In such mature markets, the prices for commodity roll goods continue to fluctuate based on supply anddemand dynamics relative to the assets employed in that geographic region. TheCompany actively and continuously pursues initiatives to prolong the usefullife of its long-lived assets through product and process innovation. In someinstances the Company may decide, as was the case with its current plans toconsolidate operations in the U.S., as further described in Note 21 to theConsolidated Financial Statements included in Item 8 of Part II to thisAnnual Report on Form 10-K, that its fixed cost structure will be enhancedthrough consolidation. To the extent further decisions are made to improve theCompany’s long-term performance, such actions could result in the incurrence ofcash restructuring charges and asset impairment charges associated with theconsolidation, and such charges could be material.

**Resultsof Operations**

Thefollowing table sets forth the percentage relationships to net sales of certainConsolidated Statement of Operations items for fiscal 2006 in comparison withsuch items for the 2005 and 2004 fiscal years:

| ** **                                                  | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net sales                                                   |       | 100.0    | %          | 100.0    | %          | 100.0    | %          |
| Cost of goods sold:                                         |       |     |       |     |       |     |       |
| Material                                                    |       | 53.9     |       | 51.2     |       | 48.6     |       |
| Labor                                                       |       | 8.1      |       | 8.5      |       | 9.6      |       |
| Overhead                                                    |       | 22.7     |       | 23.3     |       | 23.6     |       |
|                                                        |       | 84.7     |       | 83.0     |       | 81.8     |       |
| Gross profit                                                |       | 15.3     |       | 17.0     |       | 18.2     |       |
| Selling, general and  administrative expenses               |       | 10.8     |       | 11.0     |       | 11.7     |       |
| Special charges (credits),  net                             |       | 3.8      |       | —   |       | (1.0     | )          |
| Foreign currency loss, net                                  |       | 0.1      |       | 0.1      |       | 0.2      |       |
| Operating income                                            |       | 0.6      |       | 5.9      |       | 7.3      |       |
| Other expense (income):                                     |       |     |       |     |       |     |       |
| Interest expense, net                                       |       | 2.9      |       | 3.4      |       | 4.8      |       |
| Minority interests                                          |       | 0.3      |       | 0.4      |       | 0.3      |       |
| Write-off of loan  acquisition costs                        |       | —   |       | 0.4      |       | 0.6      |       |
| Foreign currency and other  (gain) loss, net                |       | 0.1      |       | (0.1     | )          | 0.1      |       |
| Income (loss) before income  tax expense                    |       | (2.7     | )          | 1.8      |       | 1.5      |       |
| Income tax expense                                          |       | 0.7      |       | 1.1      |       | 0.9      |       |
| Net income (loss)                                           |       | (3.4     | )          | 0.7      |       | 0.6      |       |
| Accrued and paid-in-kind  dividends on PIK preferred shares |       | —   |       | 2.9      |       | 0.7      |       |
| Loss applicable to common shareholders                      |       | (3.4     | )%         | (2.2     | )%         | (0.1     | )%         |

 

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**Comparison of Fiscal Years Ended December 30,2006 and December 31, 2005**

TheCompany’s reportable segments consist of its two operating divisions, Nonwovensand Oriented Polymers. For additional information regarding segment data, seeNote 16 “Segment Information” to the Consolidated Financial Statementsincluded in Item 8 of Part II to this Annual Report on Form 10-K.The following table sets forth components of the Company’s net sales andoperating income (loss) by operating division for the fiscal year ended December 30,2006, the fiscal year ended December 31, 2005 and the corresponding changefrom 2005 to 2006 (in millions):

| ** **                                  | ** ** | **2006** | ** ** | **2005** | ** ** | **Change** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|------------|------------|
| Net sales                                   |       |     |       |     |       |       |       |   |   |
| Nonwovens                                   |       | $        | 848.3      |     | $          | 763.7      |       |   | $ | 84.6 |   |   |
| Oriented Polymers                           |       | 173.3    |       | 185.1    |       |       | (11.8      | ) |   |
|                                        |       | $        | 1,021.6    |     | $          | 948.8      |       |   | $ | 72.8 |   |   |
| Operating income (loss)                     |       |     |       |     |       |       |       |   |   |
| Nonwovens                                   |       | $        | 66.6       |     | $          | 66.2       |       |   | $ | 0.4 |   |   |
| Oriented Polymers                           |       | 4.3      |       | 10.6     |       |       | (6.3       | ) |   |
| Unallocated Corporate, net  of eliminations |       | (26.3    | )          | (20.5    | )          |       | (5.8       | ) |   |
|                                        |       | 44.6     |       | 56.3     |       |       | (11.7      | ) |   |
| Special (charges) credits,  net             |       | (38.7    | )          | —   |       |       | (38.7      | ) |   |
|                                        |       | $        | 5.9        |     | $          | 56.3       |       |   | $ | (50.4 | ) |   |

 

The amounts for special charges (credits), net havenot been allocated to the Company’s reportable business divisions because theCompany’s management does not evaluate such special charges, net on adivision-by-division basis. Division operating performance is measured andevaluated before such items.

**Net Sales**

Net saleswere $1,021.6 million in 2006, an increase of $72.8 million, or 7.7%,over net sales for 2005 of $948.8 million. Net sales for 2006 improved in theNonwovens Division over comparable 2005 results by 11.1%, and net sales in 2006in the Oriented Polymers Division decreased 6.4% versus 2005 results. Areconciliation of the change in net sales between 2005 and 2006 is presented inthe following table (in millions):

| Net sales—2005          |   | $      | 948.8   |   |
|------------------------------|--------|--------|---------|--------|
| Change in sales due to:      |   |   |    |
| Volume                       |   | 40.5   |    |
| Price/mix                    |   | 26.6   |    |
| Foreign currency translation |   | 5.7    |    |
| Net sales—2006          |   | $      | 1,021.6 |   |

 

The increase in net salesduring 2006 was due primarily to volume gains and price/mix improvements. Substantiallyall of the volume gains occurred in the United States, Latin American and Asiannonwovens markets. The price/mix improvement primarily reflects increases insales price in an effort to pass along raw material cost increases tocustomers. As raw material costs have increased, the Company has attempted topass raw material costs along to its customers, where allowable by contractterms and where acceptable based on market conditions.

A significant component of the$40.5 million increase in sales in 2006 due to volume growth was generatedin the Latin American region with the addition of the spunmelt line at theCali, Colombia facility, which initiated operations in the fourth quarter offiscal 2005. The Latin America region’s improvement in sales was paced bysignificant year-over-year increases in hygiene and industrial sales. TheCompany’s U.S. nonwovens business was also a contributor to the growth insales, partially attributable to the start-up of the new spunmelt facility atMooresville, North Carolina in the latter part of the second quarter of fiscal2006 and general improvements in the U.S. hygiene and 

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consumermarkets. Nonwoven sales volumes also increased marginally in Asia, with most ofthe increase due to the initial shipments from the Company’s new spunmeltfacility in Suzhou, China, which commenced production in the latter part of thethird quarter of fiscal 2006 as well as productivity improvements experiencedin the Company operations in Nanhai, China. Oriented Polymers’ net sales for2006 decreased $11.8 million from the 2005 amount, as improvements in price/mixof sales and a favorable foreign currency translation impact were more thanoffset by sales volume declines affecting net sales by $24.3 million. OrientedPolymers’ sales volumes have been negatively impacted in fiscal 2006 by reducedhousing starts affecting their industrial business, imported commodity productsaffecting lumberwrap volumes and reduced agricultural sales.

Both the Canadian dollar andthe Euro were stronger against the U.S. dollar during 2006 compared to2005. As a result, net sales increased $5.7 million due to the favorableforeign currency translation. Further discussion of foreign currency exchangerate risk is contained in “Quantitative and Qualitative Disclosures AboutMarket Risk” included in Item 7A of Part II to this Annual Report on Form 10-K.

**Gross Margin**

Gross margin in 2006 declinedto 15.3% from 17.0% in 2005, despite improved sales volumes and product mix,primarily due to the impact of the higher raw materials as a percentage of netsales, the effect of raw material cost increases which were not able to bepassed along to the customer and other increased manufacturing costs includingdepreciation, during 2006. The raw material component of the cost of goods soldas a percentage of net sales increased from 51.2% in 2005 to 53.9% in 2006.Additionally, depreciation expense in 2006 was $3.8 million higher thansuch costs in 2005.

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**Operating Income**

Areconciliation of the change in operating income between the 2005 and 2006 ispresented in the following table (in millions):

| Operating income—2005                                     |   | $      | 56.3   |   |
|----------------------------------------------------------------|--------|--------|--------|--------|
| Change in operating income due to:                             |   |   |   |
| Price/mix                                                      |   | 26.6   |   |
| Higher raw material costs                                      |   | (28.5  | )      |
| Volume                                                         |   | 15.4   |   |
| Increased manufacturing costs                                  |   | (14.4  | )      |
| Foreign currency                                               |   | (0.7   | )      |
| Higher depreciation and amortization expense                   |   | (3.8   | )      |
| Special charges—asset impairment charges                  |   | (26.4  | )      |
| Special charges—restructuring and plant realignment costs |   | (7.1   | )      |
| Special charges—abandoned acquisition costs               |   | (4.0   | )      |
| Special charges—other                                     |   | (1.1   | )      |
| Increased share-based compensation costs                       |   | (2.7   | )      |
| All other, primarily higher SG&A costs                     |   | (3.7   | )      |
| Operating income—2006                                     |   | $      | 5.9    |   |

 

Consolidated operating income was $5.9 million in2006 as compared to $56.3 million in 2005. The Company experienced higherraw material costs that were substantially offset by price/mix improvements.Operating income was positively impacted by the volume gains in the nonwovensmarkets, partially offset by volume declines in the oriented polymers markets,as noted above in the discussion of net sales. The net decline in operatingincome was significantly impacted by higher special charges of $38.7 million primarilyconsisting of asset impairment charges, restructuring and plant realignmentcosts and abandoned acquisition costs. Summary explanations for such items areincluded in the five paragraphs following this paragraph. For further detailson such charges, see Note 3 to the Consolidated Financial Statementsincluded in Item 8 of Part II to this Annual Report on Form 10-K.Other items contributing to the decline in operating income were increasedmanufacturing costs of $14.4 million, affecting both the Nonwoven and OrientedPolymer operating results as well as increased non-cash compensation costs of $2.7 millionattributable to share-based awards made primarily under the Company’srestricted stock plans and higher depreciation and amortization charges of $3.8million. The increased manufacturing costs are primarily attributable to higherenergy costs and start-up costs for certain new lines in the Nonwovens segment,coupled with increased variances in the Oriented Polymers segment resultingfrom volume declines. The increase in depreciation and amortization chargesduring fiscal 2006 is primarily related to the new spunmelt productionfacilities in Latin America and the United States.

The Company has experienced a continued weakening ofearnings and cash flows in certain of its Canadian operations, components ofthe Oriented Polymers segment. As a result, the Company, during the secondquarter of fiscal 2006, evaluated such assets for impairment, consistent withthe provisions of Statement of Financial Accounting Standards No. 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets,” and recorded a non-cashimpairment charge associated with the write-down of such assets to estimatedfair value in the amount of approximately $5.5 million. Additionally,during the second quarter of fiscal 2006, the Company initiated therestructuring and consolidation strategy for the European operations, whichincluded the closure of the facilities in Sweden. Accordingly, the Companyrecognized an impairment charge, with respect to such assets in the amount of$2.3 million, resulting in a total asset impairment charge in the secondquarter of fiscal 2006 of $7.8 million.

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During the fourth quarter of fiscal 2006, the Companyrecorded an impairment charge in the amount of approximately $18.6 millionassociated with the write-down of assets located in certain facilities in theUnited States and Europe to estimated fair values. Of that total, $7.2 million relatedto a manufacturing line located in The Netherlands, which write-down wasattributed to the expected shutdown of the line in fiscal 2007 due to the lossof certain low-margin business platforms which were produced on the assetduring fiscal 2006 as the market price for the products moved to a levelresulting in unacceptable margins. The remaining $11.4 million related to thewrite-down of the assets in the United States, including facilities for whichthe Company has announced closure plans, as further discussed in Note 21 to theConsolidated Financial Statements included in Item 8 of Part II tothis Annual Report on Form 10-K, as well as an impairment chargetaken with respect to another facility, for which projected future cash flowshave been negatively impacted by the loss of a major automotive platform andthe anticipated loss of certain business for which the market prices haverecently declined to a level resulting in such unacceptable returns that theCompany has elected not to participate in such business going forward.

The 2006 restructuring and plant realignment costs of $7.1 millionare principally associated with (a) the Company’s restructuring andconsolidation plan for Europe, which included termination benefits provided toan executive officer of the Company, pursuant to Dutch law, in the amount of$2.1 million and costs associated with the closure of the Sweden plant,which resulted in the reduction of 19 employees and a charge of $1.1 million; (b) costsrelated to the relocation of the corporate headquarters to Charlotte, NorthCarolina in the amount of $3.0 million; (c) downsizing certainCanadian operations resulting in severance costs of $0.6 million associatedwith the reduction of 26 employees; and (d) costs in the amount of $0.3million related to exiting the leased facilities at Gainesville, Georgia forwhich a planned closure has been announced.

During the first five months of fiscal 2006, theCompany actively pursued a potential acquisition. In conjunction with thiseffort, the Company incurred approximately $4.0 million of costs, which areprimarily comprised of third-party professional fees. During the second quarterof fiscal 2006, the negotiations with respect to the potential acquisitionreached an impasse and the Company abandoned its efforts to consummate theacquisition, with such costs charged to operating income in that period.

During June 2006, the Company and an equipmentsupplier negotiated the resolution of a dispute and entered into two settlementagreements, which documented the terms of the resolution. During the second andthird quarters of fiscal 2006, the Company and the Audit Committee of the Boardof Directors of the Company, with assistance from special counsel, conducted aninvestigation which focused on a review of the settlement agreements and therelationship of these agreements with certain equipment purchase contracts andservice agreements, which were negotiated between the Company and the equipmentsupplier in or about the same time frame. As a result of these actions, theCompany concluded that the economic substance of the settlement agreements andthe equipment purchase contracts and service agreements were substantiallyinterdependent. On September 21, 2006, the Board of Directors of theCompany asked the Chief Executive Officer and the Vice President, GlobalPurchasing to resign and, pending receipt of their resignations, relieved themof their duties as officers of the Company. Shortly thereafter, the Companyentered into termination agreements with both executives. As a result of theseevents, the Company has incurred costs with respect to the investigation,termination benefits and ancillary costs in the amount of $1.1 million.

Selling, general andadministrative expenses increased $5.9 million, from $104.5 millionin 2005 to $110.4 million in 2006, primarily due to the non-cashcompensation costs related to the share-based awards made under the Company’srestricted stock plans, as well as increased costs due to higher sales volumes,with such increased costs partially offset by reduced incentive compensation.

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**Interest and OtherExpense**

Net interest expense decreased $3.4 million, from$32.6 million during 2005 to $29.2 million during 2006. The decreasein net interest expense was primarily due to the lower interest rates obtainedby refinancing the Company’s long-term debt in November 2005.Additionally, during 2006, the Company capitalized, with respect to its majorcapital expenditure projects, interest in the amount of $3.1 million,compared to $2.2 million in 2005.

The Consolidated Statement of Operations for 2005included a charge of $4.0 million, with respect to loan acquisition costwrite-offs related to the refinancing of the Company’s debt in November 2005.

Foreign currency and other(gain) loss, net changed by $1.4 million, from a gain of $0.9 millionin 2005 to a loss of $0.5 million in 2006. The change was primarily due toforeign currency movements on intercompany loan balances, at certain of theCompany’s international operations, denominated in currencies other than theirfunctional currency, generally the U.S. dollar.

**Income Tax Expense**

During 2006, the Companyrecognized an income tax expense of $7.3 million on a consolidated pre-taxloss of $27.3 million. The income tax expense is significantly differentthan such expense determined at the U.S. federal statutory rate primarily dueto losses in the U.S. and certain foreign jurisdictions for which no income taxbenefits were recognized. Additionally, the income tax expense was impacted byforeign withholding taxes, for which tax credits are not anticipated, U.S.state income taxes, and foreign taxes calculated at statutory rates less thanthe U.S. federal statutory rate. The Company recognized income tax expense of$9.8 million on consolidated pre-tax income of $16.8 million in 2005. The incometax expense is significantly higher than such expense determined at the U.S.federal statutory tax rate primarily due to losses in the U.S. and certainforeign tax jurisdictions for which no tax benefits were recognized.Additionally, the income tax expense is impacted by foreign withholding taxes,for which tax credits are not anticipated, U.S. state income taxes and foreigntaxes calculated at statutory rates less than the U.S. federal statutory rate.

**Net Income (Loss)**

As a result of the above, theCompany recognized a net loss of $34.5 million during 2006 compared to netincome of $7.0 million in 2005.

**Accrued andPaid-in-Kind Dividends on PIK Preferred Shares**

Dividends on the PIK Preferred Shares accrued at anannual rate of 16.0% and were payable semi-annually in arrears on each January 1and July 1, commencing with July 1, 2004. Such dividends were payableat the option of the Company; (i) through the issuance of additionalshares of PIK Preferred Stock; (ii) in cash; or (iii) in acombination thereof. Accordingly, the Company accrued dividends at the statedrate of 16.0% until such time as the form of the dividend was declared by the Company’sBoard of Directors. If the dividend was paid-in-kind through the issuance ofadditional shares of PIK Preferred Stock, the Company recognized the dividendat the estimated fair value of the shares issued in excess of the amountspreviously accrued.

The Company accrued dividendsat 16% on its PIK Preferred Shares during the quarter ended April 2, 2005in the amount of $2.4 million. Additionally, on January 14, 2005, theCompany’s Board of Directors declared that dividends accrued on the PIK PreferredShares from the date of issuance through December 31, 2004, in the amountof $5.6 million, would be paid in the form of PIK Preferred Shares. TheCompany recorded the value of the additional PIK Preferred Shares declared as adividend on January 14, 2005, the date the Board of Directors declaredthat the accrued dividends 

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were to bepaid in the form of additional PIK Preferred Shares, rather than cash, reducedby the amount of dividends previously recorded at the stated 16.0% rate. Usingthe estimated market value of the Company’s Class A Common Stock of $18.50per share, the fair value of the 5,540 additional PIK Preferred Shares issuedin lieu of cash payment was approximately $14.1 million, which exceededthe amount previously accrued by the Company of $5.6 million, based on thestated rate of 16.0%, by approximately $8.5 million. The Company accrueddividends at 16% on its PIK Preferred Shares during the quarter ended July 2,2005 in the amount of $2.4 million. On August 3, 2005, the Company’sBoard of Directors declared that dividends accrued on the PIK Preferred Sharesfrom January 1, 2005 through June 30, 2005, in the amount of$4.7 million, would be paid in the form of PIK Preferred Shares. TheCompany recorded the value of the additional PIK Preferred Shares declared as adividend on August 3, 2005, the date the Board of Directors declared thatthe accrued dividends were to be paid in the form of additional PIK PreferredShares, rather than cash, reduced by the amount of dividends previously recordedat the stated 16.0% rate. Using the estimated market value of the Company’s Class ACommon Stock of $27.70 per share, the fair value of the 4,660 additional PIKPreferred Shares issued in lieu of cash payment was approximately$17.7 million, which exceeded the amount previously accrued by the Companyof $4.7 million, based on the stated rate of 16.0%, by approximately$13.0 million. In addition, the Company accrued a charge for dividends of$1.8 million for the period from July 2, 2005 through the date thatthe PIK Preferred Shares were redeemed for, or converted to, shares of theCompany’s Class A Common Stock. Accordingly, total accrued andpaid-in-kind dividends amounted to $28.0 million in 2005. As a result ofall of the PIK Preferred Shares being redeemed for or converted to shares ofthe Company’s Class A Common Stock by September 15, 2005, no suchdividends were recorded in 2006.

**Loss Applicable toCommon Shareholders**

As a result of the above, theCompany recognized a loss applicable to common shareholders of$34.5 million, or $1.79 per share, for 2006 compared to a loss applicableto common shareholders of $21.0 million, or $1.60 per share, for 2005.

**Comparison of Fiscal YearsEnded December 31, 2005 and January 1, 2005**

TheCompany’s reportable segments consist of its two operating divisions, Nonwovensand Oriented Polymers. For additional information regarding segment data, seeNote 16 “Segment Information” to the Consolidated Financial Statementsincluded in Item 8 of Part II to this Annual Report on Form 10-K.The following table sets forth components of the Company’s net sales andoperating income (loss) by operating division for the fiscal year ended December 31,2005, the fiscal year ended January 1, 2005 and the corresponding changefrom 2004 to 2005 (in millions):

| ** **                                 | ** ** | **2005** | ** ** | **2004** | ** ** | **Change** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|------------|------------|
| Net sales                                  |       |     |       |     |       |       |       |
| Nonwovens                                  |       | $        | 763.7      |     | $          | 672.6      |       | $ | 91.1 |   |
| Oriented Polymers                          |       | 185.1    |       | 172.5    |       | 12.6       |       |
| Eliminations                               |       | —   |       | (0.4     | )          | 0.4        |       |
|                                       |       | $        | 948.8      |     | $          | 844.7      |       | $ | 104.1 |   |
| Operating income  (loss)                   |       |     |       |     |       |       |       |
| Nonwovens                                  |       | $        | 66.2       |     | $          | 59.2       |       | $ | 7.0 |   |
| Oriented Polymers                          |       | 10.6     |       | 12.1     |       | (1.5       | )          |
| Unallocated Corporate, net of eliminations |       | (20.5    | )          | (19.0    | )          | (1.5       | )          |
|                                       |       | 56.3     |       | 52.3     |       | 4.0        |       |
| Special (charges) credits, net             |       | —   |       | 9.0      |       | (9.0       | )          |
|                                       |       | $        | 56.3       |     | $          | 61.3       |       | $ | (5.0 | ) |

 

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The amounts for specialcharges (credits), net have not been allocated to the Company’s reportablebusiness divisions because the Company’s management does not evaluate suchspecial charges, net on a division-by-division basis. Division operatingperformance is measured and evaluated before such items.

**Net Sales**

Consolidatednet sales were $948.8 million in 2005, an increase of $104.1 millionor 12.3% over 2004 consolidated net sales of $844.7 million. Net sales for 2005in the Nonwovens and Oriented Polymers divisions improved over comparable 2004fiscal year results by 13.5% and 7.3%, respectively. Fiscal 2005 and 2004 eachconsisted of 52 weeks. A reconciliation of the change in net sales between 2004and 2005 is presented in the following table (in millions):

| Net sales—2004          |   | $      | 844.7  |   |
|------------------------------|--------|--------|--------|--------|
| Change in sales due  to:     |   |   |   |
| Price/mix                    |   | 72.4   |   |
| Volume                       |   | 24.2   |   |
| Foreign currency translation |   | 7.5    |   |
| Net sales—2005          |   | $      | 948.8  |   |

 

The increase in net sales during 2005 was dueprimarily to price/mix improvements and volume gains. The price/mix increasereflects continued success in the Company’s ability to improve pricing andprofit composition of its sales. The improvement in the price/mix of sales in2005 over the prior year period was driven primarily by higher pricesimplemented to mitigate raw material costs in all divisions, increasedvalue-added business in Latin America and product shifts in Asia from commodityto specialty applications.

The primary contributors to the $24.2 million increasein sales due to volume growth in 2005 were the U.S. and Latin American regions.In the Company’s U.S. nonwovens business, the consumer and hygiene marketscontributed double-digit increases over 2004 as new products wereintroduced into the markets and new customer relationships generatedsubstantial sales increases. Although the San Luis Potosi, Mexico capacityexpansion was completed in late 2003, it didn’t reach full productive capacityuntil the second quarter of 2004. Accordingly, fiscal 2005 reflected the firstfull-year’s benefit of the additional capacity. The Latin America region’ssales improvement was driven by significant year-over-year increases in hygieneand industrial sales. Nonwoven sales volumes decreased slightly in Europe.Oriented Polymers’ increase in sales was due primarily to price/mix improvement,partially offset by lower sales volumes of certain commodity-based products.

Foreign currencies,predominantly the Euro and the Canadian dollar, were stronger against theU.S. dollar during 2005 compared to 2004, resulting in an increase in netsales of $7.5 million due to the favorable foreign currency translation.Further discussion of foreign currency exchange rate risk is contained in “Quantitativeand Qualitative Disclosures About Market Risk” included in Item 7A in Part IIto this Annual Report on Form 10-K.

**Gross Margin**

Gross margin in 2005 declinedto 17.0% from 18.2% in 2004, despite improved sales volumes and product mix,due to the impact of the raw material increases during 2005. The raw materialcomponent of the cost of goods sold as a percentage of net sales increased from48.6% in 2004 to 51.2% in 2005.

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**Operating Income**

Areconciliation of the change in operating income between 2004 and 2005 ispresented in the following table (in millions):

| Operating income—2004                   |   | $      | 61.3   |   |
|----------------------------------------------|--------|--------|--------|--------|
| Change in operating income due to:           |   |   |   |
| Arbitration settlement, net                  |   | (13.1  | )      |
| Price/mix                                    |   | 72.4   |   |
| Higher raw material costs                    |   | (60.5  | )      |
| Volume                                       |   | 6.9    |   |
| Higher depreciation and amortization expense |   | (4.3   | )      |
| Lower postretirement plan curtailment gains  |   | (3.6   | )      |
| Lower asset impairment charges               |   | 2.2    |   |
| Lower plant realignment costs, net           |   | 1.9    |   |
| Higher manufacturing costs                   |   | (2.6   | )      |
| Foreign currency translation                 |   | 0.5    |   |
| All other, primarily higher SG&A costs   |   | (4.8   | )      |
| Operating income—2005                   |   | $      | 56.3   |   |

 

Consolidated operating income was $56.3 millionin 2005 as compared to $61.3 million in 2004. Operating income in 2004benefited from the $13.1 million arbitration settlement, net of expenses.The financial effect of price/mix improvements more than offset the higher rawmaterial costs, reflecting the benefits of the Company’s new productintroductions and ongoing efforts to manage the impact of higher raw materialcosts. Operating income was positively impacted by the volume gains noted inthe net sales discussion above and the absence of asset impairment charges andlower plant realignment costs in 2005. Offsetting these favorable impacts werehigher depreciation and amortization charges, lower postretirement plancurtailment gains, higher manufacturing costs and higher selling, general andadministrative expenses. The increase in depreciation and amortization chargeswas primarily related to the reduction in the estimated useful lives of certainmachinery and equipment utilized in the Company’s operations to reflect thetechnological status and market conditions of certain aspects of the Company’sbusiness. Selling, general and administrative expenses were higher primarilydue to increased sales volume, increased non-cash compensation costs related tothe Company’s stock option plan and costs related to the new Sarbanes-Oxleycompliance requirements, partially offset by $1.9 million received as itsportion of class-action settlement agreements with various suppliers of rawmaterials.

Hurricanes Katrina and Ritahit the Gulf Coast in the third quarter of 2005, temporarily shutting down anumber of refineries and chemical processing sites of certain raw materialsuppliers for the Company’s North and South American operations. As a result,raw materials continued to be available to the Company, but at significantlyhigher prices. The Company, where allowable based on contract terms, attemptedto raise its selling prices to mitigate the sharp increases in raw materials.The prices of raw materials in the North American markets decreased slightlysince late December 2005 as the refineries returned to normalizedproduction levels, although there are no assurances that the prices will returnto pre-hurricane levels due to other global economic factors.

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**Interest and OtherExpense**

Net interest expense decreased $7.7 million, from$40.3 million in 2004 to $32.6 million in 2005. The decrease in netinterest expense was primarily due to the lower interest rates obtained byrefinancing the Company’s long-term bank debt in April 2004 and November 2005and the elimination of interest expense in mid-2004 on the Junior Notes,as approximately $52.7 million in aggregate principal amount of the JuniorNotes was converted into 52,716 shares of PIK Preferred Shares and 6,719shares of Class A Common Stock. The 2004 interest expense includes$1.8 million of payment-in-kind in lieu of cash interest on the JuniorNotes. Additionally, during 2005 the Company capitalized, with respect to itsmajor capital expenditure projects, interest in the amount of $2.2 million,compared to $0.4 million in 2004.

The Consolidated Statements ofOperations for 2004 and 2005 included a charge of $5.0 million and $4.0million, respectively, with respect to loan acquisition cost write-offs relatedto the refinanced debt. Foreign currency and other, net improved by$1.6 million, from an expense of $0.7 million in 2004 to income of$0.9 million in 2005. The improvement in foreign currency and other, netwas primarily due to the foreign currency gains recognized by foreign subsidiarieson intercompany loan balances denominated in currencies other than theirfunctional currency, generally the U.S. dollar, as well as gains of$1.3 million recognized on the sale of certain assets.

**Income Tax Expense**

The Company recognized incometax expense of $9.8 million in 2005 on consolidated income before income taxesof $16.8 million. This income tax expense is significantly higher than theU.S. federal statutory rate primarily due to losses in the U.S. andcertain foreign jurisdictions for which no tax benefits were recognized.Additionally, the income tax expense is impacted by foreign withholding taxes,for which the Company is not anticipating the benefit of the foreign taxcredits, U.S. state income taxes and foreign taxes calculated at statutoryrates less than the U.S. federal statutory rate. The Company recorded a netincome tax expense of $8.0 million in 2004 on consolidated income beforeincome taxes of $12.7 million for such period. The effective income taxrate was in excess of the statutory rate primarily due to withholding taxes,for which tax credits are not anticipated, U.S. state income taxes, and nosignificant income tax benefit recognized for the losses incurred in the U.S.and certain foreign jurisdictions.

**Net Income**

As a result of the above, theCompany recognized net income of $7.0 million in fiscal 2005 compared tonet income of $4.7 million in 2004.

**Accrued andPaid-in-kind Dividends on PIK Preferred Shares**

Dividends on the PIK Preferred Shares accrued at anannual rate of 16.0% and were payable semi-annually in arrears on each January 1and July 1, commencing with July 1, 2004. Such dividends were payableat the option of the Company; (i) through the issuance of additionalshares of PIK Preferred Stock; (ii) in cash; or (iii) in a combinationthereof. Accordingly, the Company accrued dividends at the stated rate of 16.0%until such time as the form of the dividend was declared by the Company’s Boardof Directors. If the dividend was paid-in-kind through the issuance ofadditional shares of PIK Preferred Stock, the Company recognized the dividendat the estimated fair value of the shares issued in excess of the amountspreviously accrued.

On January 14, 2005, theCompany’s Board of Directors declared that dividends accrued on the PIK PreferredShares from the date of issuance through December 31, 2004, in the amountof $5.6 million, would be paid in the form of PIK Preferred Shares. TheCompany recorded the value of the additional PIK Preferred Shares declared as adividend on January 14, 2005, the date the Board of 

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Directorsdeclared that the accrued dividends were to be paid in the form of additionalPIK Preferred Shares, rather than cash, reduced by the amount of dividendspreviously recorded at the stated 16.0% rate. Using the estimated market valueof the Company’s Class A Common Stock of $18.50 per share, the fair valueof the 5,540 additional PIK Preferred Shares issued in lieu of cash payment wasapproximately $14.1 million, which exceeded the amount previously accruedby the Company of $5.6 million, based on the stated rate of 16.0%, byapproximately $8.5 million. On August 3, 2005, the Company’s Board ofDirectors declared that dividends accrued on the PIK Preferred Shares from January 1,2005 through June 30, 2005, in the amount of $4.7 million, would bepaid in the form of PIK Preferred Shares. The Company recorded the valueof the additional PIK Preferred Shares declared as a dividend on August 3,2005, the date the Board of Directors declared that the accrued dividends wereto be paid in the form of additional PIK Preferred Shares, rather than cash,reduced by the amount of dividends previously recorded at the stated 16.0%rate. Using the estimated market value of the Company’s Class A CommonStock of $27.70 per share, the fair value of the 4,660 additional PIK PreferredShares issued in lieu of cash payment was approximately $17.7 million,which exceeded the amount previously accrued by the Company of$4.7 million, based on the stated rate of 16.0%, by approximately $13.0 million.In addition, the Company accrued a charge for dividends of $1.8 millionfor the period from July 2, 2005 through the date that the PIK PreferredShares were redeemed for, or converted to, shares of the Company’s Class ACommon Stock. Accordingly, total accrued and paid-in-kind dividends amounted to$28.0 million and $5.6 million in fiscal years 2005 and 2004,respectively.

**Loss Applicable toCommon Shareholders**

As a result of the above, the Company recognized aloss applicable to common shareholders of $21.0 million, or $(1.60) pershare on a basic and diluted basis, in fiscal 2005 compared to a lossapplicable to common shareholders of $0.8 million, or $(0.09) per share ona basic and diluted basis, in fiscal 2004.

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**LIQUIDITY AND CAPITALRESOURCES**

TheCompany’s principal sources of liquidity for operations and expansions are currentlyfunds generated from operations and borrowing availabilities under the CreditFacility, consisting of a revolving credit facility of $45.0 million and afirst-lien term loan of $410.0 million. The revolving credit portion ofthe Credit Facility terminates on November 22, 2010 and the remainingbalance (after mandatory annual payments of $4.1 million and additionalpayments, if any, under the excess cash flow provision of the Credit Facility)of the first-lien term loan is due November 22, 2012. The Credit Facility,as amended, contains covenants and events of default customary for financingsof this type, including leverage and interest expense coverage covenants. At December 30,2006, the Company was in compliance with all such covenants. Additionally, asof December 30, 2006, the Company had no outstanding borrowings under therevolving credit facility and capacity under the revolving credit facility hadbeen reserved for outstanding letters of credit in the amount of$12.9 million.

| ** **                       | ** ** | **December 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|----------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                       | ** ** | **(In Millions)**      | ** ** |
| **Balance sheet data:**          |       |                        |       |                        |       |   |   |   |   |
| Cash and cash equivalents        |       |                        | $          | 32.1                        |       |   |   | $ | 31.0 |   |   |
| Working capital                  |       |                        | 159.4      |                        |       |   | 173.4 |   |   |
| Total assets                     |       |                        | 742.1      |                        |       |   | 765.0 |   |   |
| Total debt                       |       |                        | 411.2      |                        |       |   | 415.2 |   |   |
| Total shareholders’  equity |       |                        | 109.1      |                        |       |   | 131.5 |   |   |
|                                  |            |                             |            |                             |            |  |  |  |  |  |  |

 

| ** **                                | ** ** | **Fiscal Year Ended** | ** ** |
|-------------------------------------------|------------|---------------------------------|------------|
| ** **                                | ** ** | **December 30,  2006**     | ** ** | **December 31,   2005** | ** ** |
| ** **                                | ** ** | **(In Millions)**          | ** ** |
| **Cash flow data:**                       |       |                            |       |   |   |   |   |   |   |
| Net cash provided by operating activities |       |                            | $          | 66.8 |   |   |   | $ | 70.9 |   |   |
| Net cash used in investing activities     |       |                            | (64.3      | ) |   |   | (77.6 | ) |   |
| Net cash used in  financing activities    |       |                            | (1.9       | ) |   |   | (2.5 | ) |   |
|                                           |            |                                 |            |  |  |  |  |  |  |  |  |

 

**Operating Activities**

Net cash provided by operating activities was $66.8 millionduring 2006, a $4.1 million decrease from the $70.9 million providedby operating activities during 2005. The net decrease from 2005 to 2006 in cashflows from operating activities was impacted by approximately $10.4 million ofcash expenditures related to special charges that reduced operating incomeduring 2006. Improved working capital management, especially with respect toaccounts receivable and accounts payable, was a contributor to  the cash flows from operations in 2006.

The Company had working capital of approximately$159.4 million at December 30, 2006 compared with $173.4 million at December 31,2005. Accounts receivable at December 30, 2006 was $129.3 million as comparedto $120.7 million on December 31, 2005, an increase of $8.6 million.Accounts receivable represented approximately 45 days of sales outstandingat December 30, 2006 as compared to 46 days of sales outstanding at December 31,2005. Inventories at December 30, 2006 were $132.5 million, an increase of$12.8 million from inventories at December 31, 2005 of$119.7 million. The Company had inventory representing approximately54 days of cost of sales on hand at both December 30, 2006 and December 31,2005. Accounts payable at December 30, 2006 was $102.7 million as comparedto $82.4 million at December 31, 2005, an increase of$20.3 million. Accounts payable represented approximately 42 days ofcost of sales outstanding at December 30, 2006 as compared to 37 daysof cost of sales outstanding at December 31, 2005. The absolute dollar  increases in accounts receivable, inventoriesand accounts payable at December 30, 2006 versus 

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December 31, 2005 wereprimarily related to sales volume increases, increases in raw material pricesand improved vendor terms.

The Company’s restructuring and plant realignmentactivities in 2006 are discussed in Note 3 “Special Charges (Credits), net” tothe Consolidated Financial Statements included in Item 8 of Part II tothis Annual Report on Form 10-K. In 2006 the Company recognized restructuringand plant realignment costs principally associated with (a) the Company’srestructuring and consolidation plan for Europe, which included terminationbenefits provided to an executive officer of the Company, pursuant to Dutchlaw, in the amount of $2.1 million and costs associated with the closure of theSweden plant, which resulted in the reduction of 19 employees and a charge of$1.1 million; (b) costs related to the relocation of the corporateheadquarters to Charlotte, North Carolina in the amount of $3.0 million; (c) downsizingcertain Canadian operations resulting in severance costs of $0.6 millionassociated with the reduction of 26 employees; and (d) costs in the amountof $0.3 million related to exiting the leased facilities at Gainesville,Georgia. Additionally, during the first quarter of fiscal 2006, as partof its restructuring and related cost reduction measures, the Companynegotiated certain changes with the union representing the employees of one ofthe Company’s Canadian operations, including a partial curtailment of a definedbenefit pension plan. No net gain or loss has been incurred as a result of thepartial curtailment. However, based on elections made by plan participantsduring the second quarter of fiscal 2006, and as approved by Canadianregulatory authorities on January 16, 2007, the Company will incur asettlement loss associated with employees who have elected to exit the plan.The loss incurred as a result of the partial settlement of the defined benefitpension plan, in the amount of $4.5 million, will be recognized in thefirst quarter of fiscal 2007 commensurate with governmental approval of the termsof the settlement and upon fulfillment by the Company of its fundingrequirements in the amount of $1.9 million associated with the approvedsettlement, of which, $0.5 million was funded in 2006 and $1.4 million wasfunded in February 2007. Amounts to be paid in fiscal 2007 with respect tothese restructuring activities approximate $3.4 million.

Additionally, on January 3,2007, the Board of Directors of the Company approved a plan that wascommunicated to affected employees that it intended to close its Rogers,Arkansas and Gainesville, Georgia plants in the United States and transferportions of the business to other locations in North America and Asia. Therestructuring plan included the reduction of approximately 170 production andadministrative staff positions. As a result of this decision, the Companyestimates that it will recognize cash restructuring charges of approximately$5.5 million to $6.0 million during fiscal year 2007. The Company anticipatesproceeds of approximately $4.0 million to $5.0 million from the sale of idledfacilities and equipment.

The Company reviews itsbusiness on an ongoing basis relative to current and expected marketconditions, attempting to match its production capacity and cost structure tothe demands of the markets in which it participates, and strives tocontinuously streamline its manufacturing operations consistent withworld-class standards. Accordingly, in the future the Company may or may notdecide to undertake certain restructuring efforts to improve its competitiveposition, especially in the more mature markets of the U.S., Europe and Canada.In such mature markets, the  prices forcommodity roll goods continue to fluctuate based on supply and demand dynamicsrelative to the assets employed in that geographic region. The Company activelyand continuously pursues initiatives to prolong the useful life of itslong-lived assets through product and process innovation. In some instances theCompany may decide, as was the case with its current plans to consolidateoperations in the U.S., as further described in Note 21 to the ConsolidatedFinancial Statements included in Item 8 of Part II to this Annual Reporton Form 10-K, that its fixed cost structure will be enhanced through consolidation.To the extent further decisions are made to improve the Company’s long-termperformance, such actions could result in the incurrence of cash restructuringcharges and asset impairment charges associated with the consolidation, andsuch charges could be material.

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**Investing and FinancingActivities**

Net cash used for investing activities amounted to$64.3 million and $77.6 million in 2006 and 2005, respectively.Capital expenditures during 2006 totaled $68.2 million, a decrease of$10.7 million from capital spending of $78.9 million in 2005. Asignificant portion of the capital expenditures in 2006 related to theconstruction of new spunmelt manufacturing facilities in Suzhou, China andMooresville, North Carolina, as well as the installation of additional capacityin Nanhai, China. Investing activities during 2006 and 2005 included proceedsfrom the sale of assets of $4.3 million and $1.3 million, respectively.

Net cash used in financingactivities amounted to $1.9 million and $2.5 million in 2006 and 2005,respectively. In 2006, the Company repaid, on a net basis, $4.1 million of itsdebt whereas the Company borrowed, on a net basis, $1.2 million of itsdebt during 2005. Additionally in 2006, the Company received a net advance of$2.8 million from an equipment supplier, which advance will be repaid in fiscal2007. Also, the Company paid loan acquisition and other financing costs of $0.6million and $3.7 million million during 2006 and 2005, respectively.

**Dividends**

The Board of Directors has not declared a dividend onthe Company’s common stock since the Effective Date. The Credit Facility limitsrestricted payments to $5.0 million, including cash dividends, in theaggregate since the effective date of the Credit Facility. The Company does notcurrently have any plans to pay dividends on its common stock.

On January 14, 2005, theCompany’s Board of Directors declared that dividends accrued on the PIKPreferred Shares from the date of issuance through December 31, 2004, inthe amount of $5.6 million, would be paid in the form of PIK PreferredShares. The Company recorded the value of the additional PIK Preferred Sharesdeclared as a dividend on January 14, 2005, the date the Board ofDirectors declared that the accrued dividends were to be paid in the form ofadditional PIK Preferred Shares, rather than cash, reduced by the amount ofdividends previously recorded at the stated 16.0% rate. Using the estimatedmarket value of the Company’s Class A Common Stock of $18.50 per share,the fair value of the 5,540 additional PIK Preferred Shares issued in lieu ofcash payment was approximately $14.1 million, which exceeded the amountpreviously accrued by the Company of $5.6 million, based on the statedrate of 16.0%, by approximately $8.5 million. On August 3, 2005, theCompany’s Board of Directors declared that dividends accrued on the PIKPreferred Shares from January 1, 2005 through June 30, 2005, in theamount of $4.7 million, would be paid in the form of PIK Preferred Shares.The Company recorded the value of the additional PIK Preferred Shares declaredas a dividend on August 3, 2005, the date the Board of Directors declaredthat the accrued dividends were to be paid in the form of additional PIKPreferred Shares, rather than cash, reduced by the amount of dividendspreviously recorded at the stated 16.0% rate. Using the estimated market valueof the Company’s Class A Common Stock of $27.70 per share, the fair valueof the 4,660 additional PIK Preferred Shares issued in lieu of cash payment wasapproximately $17.7 million, which exceeded the amount previously accruedby the Company of $4.7 million, based on the stated rate of 16.0%, byapproximately $13.0 million. In addition, the Company accrued a charge fordividends of $1.8 million for the period from July 2, 2005 throughthe date that the PIK Preferred Shares were redeemed for, or converted to,shares of the Company’s Class A Common Stock. Accordingly, total accruedand paid-in-kind dividends amounted to $28.0 million and $5.6 million in fiscalyears 2005 and 2004, respectively.

**Contractual Obligations**

A scheduleof the required payments under existing debt agreements, the amounts due underoperating leases that have initial or non-cancellable lease terms in excess ofone year as of 

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December 30, 2006 and purchase commitments as of December 30,2006, are presented in tabular form below (in millions):

| ** **                                                             | ** ** | **Payments Due by Period** | ** ** |
|------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| **Contractual Obligations**                                       | ** ** | ** **                                | ** ** | **Total** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **Thereafter** | ** ** |
| Debt, including short-term  borrowings                                 |       | $                                         | 411.2      |   | $ | 8.8 |   | $ | 4.7 |   | $ | 4.1 |   | $ | 4.1 |   | $ | 4.1 |   |   | $ | 385.4 |   |   |
| Obligations under  third party/nonaffiliate operating lease agreements |       | $                                         | 11.4       |   | $ | 3.3 |   | $ | 2.7 |   | $ | 1.9 |   | $ | 1.4 |   | $ | 0.7 |   |   | $ | 1.4 |   |   |
| Purchase commitments (see  below)                                      |       | $                                         | 87.3       |   | $ | 87.3 |   | — |   | — |   | — |   | — |   |   | — |   |   |
|                                                                        |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Additionally, the Company expects to contributeapproximately $6.0 million to its pension plans in 2007. Contributions insubsequent years will be dependent upon various factors, including actualreturn on plan assets, regulatory requirements and changes in actuarialassumptions such as the discount rate on projected benefit obligations.

As noted in the table above, the Company hasapproximately $411.2 million of debt outstanding as of December 30,2006. The Company has fixed the interest rate on $212.5 million of theCredit Facility debt through May 2007 through the use of a cash flow hedge.Assuming the rate of interest remains unchanged from December 30, 2006,cash interest payments would be approximately $29.8 million,$30.6 million, $30.3 million, $30.0 million and$29.6 million for 2007, 2008, 2009, 2010 and 2011, respectively.

The first-lien term loan requires the Company to applya percentage of proceeds from excess cash flows, as defined by the CreditFacility and determined based on year-end results, to reduce its thenoutstanding balances under the Credit Facility. Excess cash flows required tobe applied to the repayment of the Credit Facility are generally calculated as50.0% of the net amount of the Company’s available cash generated fromoperations adjusted for the cash effects of interest, taxes, capitalexpenditures, changes in working capital and certain other items. Since theamounts of excess cash flows for future periods are based on year-end data andnot determinable, only the mandatory payments of approximately $4.1 million (“mandatorypayments”) per year have been classified, in the table above, as annual debtpayments under the Credit Facility. Additionally, no excess cash flow paymentwas required to be made with respect to fiscal 2006 due to the magnitude of themajor capital expenditures. The Company currently estimates that the excesscash flow payment with respect to fiscal 2007, which would be payable in March 2008,is expected to be within the range of $10.0 million to $25.0 million.

The Company leases certain manufacturing, warehousingand other facilities and equipment under operating leases. The leases on mostof the properties contain renewal provisions. Rent expense (net of sub-leaseincome), including incidental leases, approximated $3.7 million, $3.3 millionand $4.0 million in 2006, 2005 and 2004, respectively. Rental incomeapproximated $0.2 million and $0.6 million in 2005 and 2004,respectively. There was no rental income in fiscal 2006. The expenses arerecognized on a straight-line basis over the life of the lease.

At December 30, 2006, theCompany had commitments of approximately $87.3 million related to thepurchase of raw materials, maintenance, converting services and capital projectswhich are expected to result in cash payments during 2007. In addition, theCompany had outstanding letters of credit at December 30, 2006  of approximately $12.9 million.

**Liquidity Summary**

As discussed more fully in Note 9 to theConsolidated Financial Statements included in Item 8 of Part II to thisAnnual Report on Form 10-K, the Company has a Credit Facility, whichit entered into on 

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November 22, 2005 andamended as of December 8, 2006, which consists of a $45.0 millionsecured revolving credit facility maturing in 2010 and a $410.0 millionfirst-lien term loan that matures in 2012.

All borrowings under the Credit Facility areU.S. dollar denominated and are guaranteed, on a joint and several basis,by each and all of the direct and indirect domestic subsidiaries of theCompany. The Credit Facility and the related guarantees are secured by (i) alien on substantially all of the assets of the Company, its domesticsubsidiaries and certain of its non-domestic subsidiaries, (ii) a pledgeof all or a portion of the stock of the domestic subsidiaries of the Companyand of certain non-domestic subsidiaries of the Company, and (iii) apledge of certain secured intercompany notes. Commitment fees under the CreditFacility are equal to 0.50% of the daily unused amount of the revolving creditcommitment. The Credit Facility limits restricted payments to$5.0 million, including cash dividends, in the aggregate since theeffective date of the Credit Facility. The Credit Facility contains covenantsand events of default customary for financings of this type, including leverageand interest expense coverage covenants. The Company was in compliance with thedebt covenants under the Credit Facility at December 30, 2006 and expectsto remain in compliance through fiscal 2007.

The first-lien term loan requires mandatory paymentsof approximately $1.0 million per quarter and requires the Company to usea percentage of proceeds from excess cash flows, as defined by the CreditFacility, and determined based on year-end results, to reduce its thenoutstanding balances under the Credit Facility. Excess cash flows required tobe applied to the repayment of the Credit Facility are generally calculated as50.0% of the net amount of the Company’s available cash generated from operationsadjusted for the cash effects of interest, taxes, capital expenditures, changesin working capital and certain other items. Since the amounts of excess cashflows for future periods are based on year-end results and not determinable,only the mandatory payments of approximately $1.0 million per quarter havebeen classified as a current liability in the Consolidated Balance Sheetincluded in Item 8 of Part II to this Annual Report on Form 10-K.Additionally, no excess cash flow payment was required to be made with respectto fiscal 2006 due to the magnitude of the major capital expenditures. TheCompany currently estimates that the excess cash flow payment with respect tofiscal 2007, which would be payable in March 2008, is expected to bewithin the range of $10.0 million to $25.0 million.

The interest rate applicable to borrowings under theCredit Facility is based on three-month London Interbank Offered Rate (“LIBOR”)plus a specified margin. The applicable margin for borrowings under both thefirst-lien term loan and the revolving credit facility is 225 basispoints. The Company may, from time to time, elect to use an alternate base ratefor its borrowings under the revolving credit facility based on the bank’s baserate plus a margin of 75 to 125 basis points based on the Company’s totalleverage ratio. The Company had no outstanding borrowings at December 30,2006 under the revolving credit facility. As of December 30, 2006,capacity under the revolving credit facility had been reserved for outstandingletters of credit in the amount of $12.9 million. None of these letters ofcredit have been drawn on at December 30, 2006. Average borrowings underthe revolving credit facility, which were largely LIBOR-based borrowings, forthe period from January 1, 2006 to December 30, 2006 were$17.6 million at an average rate of 7.85%.

Additionally, in accordance with the terms of theCredit Facility, the Company maintained its position in a cash flow hedge,effectively converting $212.5 million of notional principal amount of debtfrom a variable LIBOR rate to a fixed LIBOR rate of 3.383%. The cash flow hedgeagreement terminates on May 8, 2007. Additionally, in February 2007,the Company entered another cash flow hedge agreement, which is effective May 8,2007, matures June 29, 2009 and effectively converts $240.0 million ofnotional principal amount of debt from a variable LIBOR rate to a fixed LIBORrate of 5.085%.

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The Company has entered into factoring agreements tosell without recourse, certain U.S. and non-U.S. company-based receivables tounrelated third party financial institutions. Under the terms of the factoringagreement related to the sale of U.S. company-based receivables, the maximumamount of outstanding advances at any one time is $20.0 million, whichlimitation is subject to change based on the level of eligible receivables,restrictions on concentrations of receivables and the historical performance ofthe receivables sold. Under the terms of the factoring agreement related to thesale of non-U.S. company-based receivables, the maximum amount of outstandingadvances at any one time is $10.0 million, which limitation is subject tochange based on the level of eligible receivables, restrictions on concentrationsof receivables and the historical performance of the receivables sold. The saleof these receivables accelerated the collection of the Company’s cash, reducedcredit exposure and lowered the Company’s net borrowing costs. The CreditFacility entered into during November 2005 provides the Company theavailability to increase the sale of non-U.S. based receivables, underfactoring agreements, to $20.0 million.

As discussed in Note 18 to the ConsolidatedFinancial Statements included in Item 8 of Part II to this Annual Report on Form 10-K, the Companyhas committed to several major projects to expand its worldwide capacity,including the construction of a new spunmelt line at the joint venture facilitynear Buenos Aires, Argentina. Remaining payments due related to these plannedexpansions as of December 30, 2006 totaled approximately $39.4 million andare expected to be expended during fiscal 2007. The Company has obtained committedlocal financing subsequent to December 30, 2006 to support the capital expansionin Argentina.

Based on the ability togenerate positive cash flows from its operations and the financial flexibilityprovided by the Credit Facility, as amended, the Company believes that it hasthe financial resources necessary to meet its operating needs, fund its capitalexpenditures and make all necessary contributions to its retirement plans.

**Off-Balance SheetArrangements**

The Company does not have anyoff-balance sheet arrangements.

**Effect of Inflation**

Inflation generally affectsthe Company by increasing the costs of labor, overhead, and equipment. Theimpact of inflation on the Company’s financial position and results ofoperations has been minimal during 2006, 2005 and 2004. However, the Companycontinues to be impacted by rising raw material costs. See “Quantitative andQualitative Disclosures About Market Risk” included in Item 7A ofPart II of this Annual Report on Form 10-K.

**New AccountingStandards**

In July 2006, the FASB issued FASB InterpretationNo. 48, “Accounting for Uncertainty in Income Taxes, an interpretation ofFASB Statement No. 109, Accounting for Income Taxes” (“FIN 48”). FIN 48clarifies the accounting for uncertainty in income taxes recognized in anenterprise’s financial statements. This standard prescribes a recognitionthreshold and measurement attribute for the financial statement recognition andmeasurement of a tax position taken, or expected to be taken, in a tax return.FIN 48 also provides guidance on other tax-related issues and is effective forfiscal years beginning after December 15, 2006. Additionally, in February 2007,the FASB issued a Proposed Staff Position No. FIN 48-a, “Definitionof Settlement in FASB Interpretation No. 48,” which implementationguidance, if approved, may impact the timing of certain liability adjustments.Accordingly, such additional guidance may impact the amounts that the Companywould record upon the adoption of FIN 48. The Company continues to evaluate theeffects of this standard.

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In September 2006, the FASB issued SFAS No. 157,“Fair Value Measurements” (“SFAS No. 157”). This standard establishes aframework for measuring fair value and also provides guidance for an expandedset of disclosure requirements related to fair value. The Company expects toadopt SFAS No. 157 effective in the first quarter of fiscal 2008 and hasnot yet assessed the impact of SFAS No. 157 on the Consolidated FinancialStatements.

No other new accountingpronouncement issued or effective during the fiscal year has had or is expectedto have a material impact on the Consolidated Financial Statements. Certainreclassifications of prior years’ amounts have been made in the ConsolidatedFinancial Statements to conform to the current year presentation.

**Critical AccountingPolicies And Other Matters**

The Company’s analysis and discussion of its financialposition and results of operations are based upon its consolidated financialstatements that have been prepared in accordance with accounting principlesgenerally accepted in the United States (“U.S. GAAP”). The preparation offinancial statements in conformity with U.S. GAAP requires the appropriateapplication of certain accounting policies, many of which require management tomake estimates and assumptions about future events that may affect the reportedamounts of assets, liabilities, revenues and expenses, and the disclosure ofcontingent assets and liabilities. Since future events and their impact cannotbe determined with certainty, the actual results will inevitably differ fromthe estimates. The Company evaluates these estimates and assumptions on anongoing basis, including but not limited to those related to fresh startaccounting, revenue recognition, including the effects of sales returns andallowances and credit risks, convertible securities, inventories, income taxes,and impairment of long-lived assets. Estimates and assumptions are based onhistorical and other factors believed to be reasonable under the circumstances.The impact and any associated risks related to estimates, assumptions, andaccounting policies are discussed within “Management’s Discussion and Analysisof Operations and Financial Condition,” as well as in the Notes to theConsolidated Financial Statements, if applicable, where such estimates,assumptions, and accounting policies affect the Company’s reported and expectedresults.

The Company believes the following accounting policiesare critical to its business operations and the understanding of results ofoperations and affect the more significant judgments and estimates used in thepreparation of its Consolidated Financial Statements:

*FreshStart Accounting:*   In connection with the Company’sChapter 11 reorganization, the Company has applied fresh start accounting toits Consolidated Balance Sheet as of March 1, 2003 in accordance with SOP90-7. Under fresh start accounting, a new reporting entity is consideredto be created and the recorded amounts of assets and liabilities are adjustedto reflect their estimated fair values at the date fresh start accounting isapplied. On March 5, 2003, the Company emerged from bankruptcy. Forfinancial reporting purposes, March 1, 2003 is considered the emergencedate and the effects of the reorganization have been reflected in theaccompanying financial statements as if the emergence occurred on that date.

Fresh-start accounting requires that thereorganization value of the Company be allocated to its assets and liabilitiesin conformity with SFAS No. 141, “Business Combinations”. Based on theconsideration of many factors and various valuation methods, the Company andits financial advisors determined the reorganization value of the Company to beapproximately $73.4 million, as described in the Modified Plan. Thefactors and valuation methodologies included the review of comparable companymarket valuations and the recent acquisition values of comparable company transactionsas well as discounted cash flow models. The discounted cash flow modelsutilized projected free cash flows for four future years, with such projectedfree cash flows discounted at rates approximating the expected weighted averagecost of capital (11.0% to 13.0%) plus the present value of the Company’s 

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terminal value computed usingcomparable company exit multiples. Projected free cash flows were estimatedbased on projected cash flows from operations, adjusted for the effects ofincome taxes at an effective rate of 39.0%, estimated capital expenditures andestimated changes in working capital. The calculation of reorganization valueof the Company was based on a variety of estimates and assumptions about futurecircumstances and events. Such estimates and assumptions are inherently subjectto significant economic uncertainties. While the Company believes itsjudgments, estimates and valuation methodologies were reasonable, differentassumptions could have materially changed the estimated reorganization value ofthe Company as of March 1, 2003.

*RevenueRecognition:*   Revenue from product sales isrecognized when title and risks of ownership pass to the customer. This isgenerally on the date of shipment to the customer, or upon delivery to a placenamed by the customer, dependent upon contract terms and when collectibility isreasonably assured and pricing is fixed or determinable. Revenue includesamounts billed to customers for shipping and handling. Provision for rebates,promotions, product returns and discounts to customers is recorded as areduction in determining revenue in the same period that the revenue isrecognized. Management bases its estimate of the expense to be recorded eachperiod on historical returns and allowance levels. Management does not believethe likelihood is significant that materially higher deduction levels willresult based on prior experience.

*AccountsReceivable and Concentration of Credit Risks:*   Accountsreceivable potentially expose the Company to a concentration of credit risk, asdefined by Statement of Financial Accounting Standards No. 105, “Disclosureof Information about Financial Instruments with Off-Balance Sheet Risk andFinancial Instruments with Concentration of Credit Risk.” The Company providescredit in the normal course of business and performs ongoing credit evaluationson its customers’ financial condition as deemed necessary, but generally doesnot require collateral to support such receivables. The Company alsoestablishes an allowance for doubtful accounts based upon factors surroundingthe credit risk of specific customers, historical trends and other information.Also, in an effort to reduce its credit exposure to certain customers, as wellas accelerate its cash flows, the Company sells, on a non-recourse basis,certain of its receivables pursuant to factoring agreements. At December 30,2006, a reserve of $7.6 million has been recorded as an allowance againsttrade accounts receivable. Management believes that the allowance is adequateto cover potential losses resulting from uncollectible accounts receivable anddeductions resulting from sales returns and allowances. While the Company’scredit losses have historically been within its calculated estimates, it ispossible that future losses could differ significantly from these estimates.

*ConvertibleSecurities:*   The Company recorded the accretionof dividends on the PIK Preferred Shares based on the stated rate of 16.0%. Ifthe Company’s Board of Directors, at the date of any dividend declaration,elected to satisfy the dividend obligation by payment-in-kind, the Companyrecognized an additional dividend charge for the excess, if any, of the fairvalue of the additional PIK Preferred Shares issued, at the dividenddeclaration date, over the amounts previously accrued at the stated rate. Asthe Company’s PIK Preferred Shares were not traded on an active market,determination of the fair value of the securities, at the date of dividenddeclaration, required estimates and judgments, which may have impacted thevaluation of the dividend paid-in-kind. Based on the fact that thePIK Preferred Shares were deep-in-the money, the Company estimated the fairvalue of the PIK Preferred Shares using the number of shares of the Company’s Class ACommon Stock into which the PIK Preferred Shares were convertible at thethen-current share price of the Company’s Class A Common Stock. While theCompany believes its estimates of the fair value of the PIK Preferred Sharesare reasonable, the utilization of different assumptions could producematerially different fair value estimates.

*InventoryReserves:*   The Company maintains reserves forinventories valued using the first in, first out (FIFO) method. Such reservesfor inventories can be specific to certain inventory or general based onjudgments about the overall condition of the inventory. General reserves areestablished 

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based on percentage write-downs applied toinventories aged for certain time periods, or for inventories that areslow-moving. Specific reserves are established based on a determination of theobsolescence of the inventory and whether the inventory value exceeds amountsto be recovered through the expected sales price of such inventories, lessselling costs. Estimating sales prices, establishing markdown percentages andevaluating the condition of the inventories require judgments and estimates,which may impact the inventory valuation and gross profits. The actual amountof obsolete or unmarketable inventory has been materially consistent withpreviously established reserves. Management believes, based on its prior experienceof managing and evaluating the recoverability of its slow moving or obsoleteinventory, that such established reserves are materially adequate. If actualmarket conditions and product sales were less favorable than we have projected,additional inventory writedowns may be necessary.

*IncomeTaxes:*   The Company records an income taxvaluation allowance when, based on the weight of the evidence, it is morelikely than not that some portion, or all, of the deferred tax asset will notbe realized. The ultimate realization of the deferred tax asset depends on theability of the Company to generate sufficient taxable income of the appropriatecharacter in the future and in the appropriate taxing jurisdictions. Inassessing the realization of the deferred tax assets, consideration is givento, among other factors, the trend of historical and projected future taxableincome, the scheduled reversal of deferred tax liabilities, the carryforwardperiod for net operating losses and tax credits, as well as tax planningstrategies available to the Company. Additionally, the Company has not providedU.S. income taxes for undistributed earnings of certain foreign subsidiariesthat are considered to be retained indefinitely for reinvestment. Certainjudgments, assumptions and estimates are required in assessing such factors andsignificant changes in such judgments and estimates may materially affect thecarrying value of the valuation allowance and deferred income tax expense orbenefit recognized in the Company’s Consolidated Financial Statements.

Additionally, consistent with the provisions of SOP 90-7,recognition of tax benefits from preconfirmation net operating losscarryforwards and other deductible temporary differences not recognized at theEffective Date will be applied to reduce goodwill to zero, then to reduceintangible assets that existed at the Effective Date with any excess taxbenefits credited directly to *Additional Paid-in Capital*.

*Impairmentof Long-Lived Assets:*   Long-lived assets,excluding goodwill, are reviewed for impairment whenever events or changes incircumstances indicate that the carrying amounts may not be recoverable.Goodwill is reviewed annually. For assets held and used, an impairment mayoccur if projected undiscounted cash flows are not adequate to cover thecarrying value of the assets. In such cases, additional analysis is conductedto determine the amount of the loss to be recognized. The impairment loss isdetermined by the difference between the carrying amount of the asset and thefair value measured by future discounted cash flows. The analysis, whenconducted, requires estimates of the amount and timing of projected cash flowsand, where applicable, judgments associated with, among other factors, theappropriate discount rate. Such estimates are critical in determining whetherany impairment charge should be recorded and the amount of such charge if animpairment loss is deemed to be necessary. In addition, future events impactingcash flows for existing assets could render a writedown necessary thatpreviously required no writedown.

For assets held for disposal,an impairment charge is recognized if the carrying value of the assets exceedsthe fair value less costs to sell. Estimates are required of fair value,disposal costs and the time period to dispose of the assets. Such estimates arecritical in determining whether any impairment charge should be recorded andthe amount of such charge if an impairment loss is deemed to be necessary. Actualcash flows received or paid could differ from those used in estimating theimpairment loss, which would impact the impairment charge ultimatelyrecognized. As of December 30, 2006, based on the Company’s currentoperating performance, as well as future expectations for the business, theCompany does not anticipate any material writedowns for long-lived 

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assetimpairments. However, conditions could deteriorate, which could impact ourfuture cash flow estimates, and there exists the potential for further consolidationand restructuring in the more mature markets of the U.S. and Europe, either ofwhich could result in an impairment charge that could have a material effect onthe Company’s Consolidated Financial Statements.

**Environmental**

The Company is subject to abroad range of federal, foreign, state and local laws and regulations relatingto the pollution and protection of the environment. The Company believes thatit is currently in substantial compliance with applicable environmentalrequirements and does not currently anticipate any material adverse effect onits operations, financial or competitive position as a result of its efforts tocomply with environmental requirements. Some risk of environmental liability isinherent, however, in the nature of the Company’s business and, accordingly,there can be no assurance that material environmental liabilities will notarise.

**ITEM 7A. QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.**

The Company is exposed to market risks for changes inforeign currency rates and interest rates and has exposure to commodity pricerisks, including prices of its primary raw materials. The overall objective ofthe Company’s financial risk management program is to seek a reduction in thepotential negative earnings impact of changes in interest rates, foreignexchange and raw material pricing arising in our business activities. TheCompany manages these financial exposures, where possible, through operationalmeans and by using various financial instruments. These practices may change aseconomic conditions change.

**Long-Term Debt andInterest Rate Market Risk**

The Company’s long-term borrowings under the CreditFacility are variable interest rate debt. As such, the Company’s interestexpense will increase as interest rates rise and decrease as interest ratesfall. It is the Company’s policy to enter into interest rate derivativetransactions only to meet its stated overall objective. The Company does notenter into these transactions for speculative purposes. To that end, as furtherdescribed in Notes 9 and 14 to the Consolidated Financial Statements includedin Item 8 of Part II to this Annual Report on Form 10-K,the Company entered into an interest rate swap contract to effectively convert$212.5 million of its variable-rate debt to fixed-rate debt. The interestrate swap contract matures on May 8, 2007. Hypothetically, a 1% change inthe interest rate affecting all of the Company’s financial instruments notprotected by the interest rate swap contract would change interest expense byapproximately $2.0 million.

Additionally, onFebruary 8, 2007, the Company entered into a similar pay-fixed, receivevariable interest rate swap contract to become effective on May 8, 2007.The notional principal amount of this new contract, which expires onJune 29, 2009, is $240.0 million and effectively fixes the LIBORinterest rate on that amount of debt at 5.085%.

The estimated fair value ofthe Company’s debt at December 30, 2006 was approximately$411.2 million, which approximated its carrying value.

**Foreign CurrencyExchange Rate Risk**

The Company manufactures, markets and distributescertain of its products in Europe, Canada, Latin America and Asia. As a result,the Company’s financial statements could be significantly affected by factorssuch as changes in foreign currency rates in the foreign markets in which theCompany maintains a manufacturing or distribution presence. However, suchcurrency fluctuations have much less effect on local operating results becausethe Company, to a significant extent, sells its products within the countriesin which they are manufactured. During 2006 and 2005, certain currencies of 

45

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countries in which the Companyconducts foreign currency denominated business moved significantly against theU.S. dollar and had a significant impact on sales and operating income.See “Management’s Discussion and Analysis of Financial Condition and Results ofOperations” included in Item 7 of Part II to this Annual Report onForm 10-K.

The Company has nothistorically hedged its exposure to foreign currency risk. However, in mostforeign operations, there is, in part, a natural currency hedge due to similaramounts of costs of materials and production as revenues in such localcurrencies. Also, the Company periodically reviews its hedge strategy withrespect to its U.S. dollar exposure on certain foreign currency-basedobligations such as firm commitments related to certain capital expenditureprojects. The Company is also subject to political risk in certain of itsforeign operations and has utilized insurance programs in certain circumstancesto mitigate its political risk.

**Raw Material andCommodity Risks**

The primary raw materials used in the manufacture ofmost of the Company’s products are polypropylene resin, polyester fiber,polyethylene resin, and, to a lesser extent, rayon, tissue paper and cotton.The prices of polypropylene, polyethylene and polyester are a function of,among other things, manufacturing capacity, demand and the price of crude oiland natural gas liquids. The Company has not historically hedged its exposureto raw material increases, but has attempted to move more customer programs tocontracts with price escalation provisions which would allow the Company topass-through any cost increases in raw materials, although there is often adelay between the time the Company is required to pay the increased rawmaterial price and the time that the Company is able to pass the increase on toits customers. Raw material prices as a percentage of sales have increased from51.2% in 2005 to 53.9% for 2006.

The prices of raw materials in the North Americanmarket rose substantially in the fourth quarter of 2005 as a direct result ofthe hurricanes that impacted the Gulf Coast. The raw material prices in theNorth American markets have decreased slightly since late December 2005through the end of fiscal 2006 as the refineries and chemical processing sitesreturned to more normal production levels. However, raw material costs in NorthAmerica have not returned to their pre-fourth quarter of fiscal 2005 levels.Additionally, on a global basis, raw material costs continue to fluctuate,although in a much narrower range, in response to certain global economicfactors, including the regional supply versus demand dynamics for the rawmaterials and the volatile price of oil.

To the extent the Company is not able to pass alongprice increases of raw materials, or to the extent any such price increases aredelayed, the Company’s cost of goods sold would increase and its operating profitwould correspondingly decrease. By way of example, if the price ofpolypropylene were to rise $.01 per pound, and the Company was not able to passalong any of such increase to its customers, the Company would realize adecrease of approximately $4.0 million, on an annualized basis, in itsreported pre-tax operating income. Material increases in raw material pricesthat cannot be passed on to customers could have a material adverse effect onthe Company’s results of operations and financial condition. See “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”included in Item 7 of Part II to this Annual Report on Form 10-K.

46

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**ITEM 8.**                 FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA

| Report of Grant Thornton  LLP, Independent Registered Public Accounting Firm                                                                                                                          |   | 48 |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----|--------|
| Report of Ernst & Young LLP, Independent Registered Public  Accounting Firm                                                                                                                  |   | 49 |   |
| Consolidated Balance Sheets  as of December 30, 2006 and December 31, 2005                                                                                                                  |   | 50 |   |
| Consolidated Statements of Operations for the fiscal years ended  December 30, 2006, December 31, 2005 and January 1, 2005                                                             |   | 51 |   |
| Consolidated Statements of  Changes in Shareholders’ Equity and Comprehensive Income (Loss) for the  fiscal years ended December 30, 2006, December 31, 2005 and  January 1, 2005 |   | 52 |   |
| Consolidated Statements of  Cash Flows for the fiscal years ended December 30, 2006,  December 31, 2005 and January 1, 2005                                                            |   | 53 |   |
| Notes to Consolidated Financial Statements for the  fiscal years ended December 30, 2006, December 31, 2005 and  January 1, 2005                                                       |   | 54 |   |

 

47

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**REPORT OF GRANT THORNTON LLP, INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

To the Board of Directors and Shareholders ofPolymer Group, Inc.

We have audited the accompanying consolidated balancesheets of Polymer Group, Inc. (a Delaware corporation) and subsidiaries (theCompany) as of December 30, 2006, and December 31, 2005, and the relatedconsolidated statements of operations, changes in shareholders’ equity andcomprehensive income (loss) and cash flows for the years then ended.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audits. 

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board  (United States).  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements.  An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the financialposition of Polymer Group, Inc. and subsidiaries as of December 30, 2006 andDecember 31, 2005, and the results of their operations and their cash flows forthe years then ended in conformity with accounting principles generallyaccepted in the United States of America. 

Our audits were conducted for the purpose of formingan opinion on the basic financial statements taken as a whole.  The schedule titled Schedule II – Valuationand Qualifying Accounts is presented for purposes of additional analysis and isnot a required part of the basic financial statements.  The amounts on this schedule for the yearsended December 30, 2006, and December 31, 2005, have been subjected to the auditingprocedures applied in the audits of the basic financial statements and, in ouropinion, are fairly stated in all material respects in relation to the basicfinancial statements taken as a whole. 

As discussed in Note 2 of the notes to consolidated financialstatements, effective January 1, 2006, the Company adopted the provisions ofFinancial Accounting Standards Board (FASB) Statement No. 123 (revised 2004),“Share-Based Payment” and, effective December 30, 2006, the Company adopted theprovisions of FASB Statement No. 158, “Employers’ Accounting for DefinedBenefit Pension and Other Retirement Plans: an amendment of FASB Statements No.87, 88, 106, and 132(R).” 

We also have audited, in accordance with the standardsof the Public Company Accounting Oversight Board (United States), theeffectiveness of Polymer Group, Inc. and subsidiaries’ internal control overfinancial reporting as of December 30, 2006, based on criteria established inInternal Control – Integrated Framework, issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO), and our report dated March 13,2007, expressed an unqualified opinion on management’s assessment of theeffectiveness of the Company’s internal control over financial reporting and anunqualified opinion on the effectiveness of the Company’s internal control overfinancial reporting. 

 

/s/ GRANT THORNTON LLP

Columbia, South CarolinaMarch 13, 2007

48

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**Report of Ernst &Young LLP, Independent Registered Public Accounting Firm**

The Board of Directors and ShareholdersPolymer Group, Inc.

We have audited the accompanying consolidated balancesheet of Polymer Group, Inc. as of January 1, 2005, and the relatedconsolidated statements of operations, changes in shareholders’ equity andcomprehensive income (loss), and cash flows for the year ended January 1,2005, the ten months ended January 3, 2004, and the two months endedMarch 1, 2003 (Predecessor Company and date of reorganization foraccounting purposes). Our audits also included the data related to the periodsreferenced in the preceding sentence included in the financial statementschedule listed in the Index at Item 15(a). These financial statements andschedule are the responsibility of the Company’s management. Our responsibilityis to express an opinion on these financial statements and schedule based onour audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. We were not engaged to perform an audit of the Company’s internalcontrol over financial reporting. Our audit included consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting. Accordingly, we express no such opinion. An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred toabove present fairly, in all material respects, the consolidated financialposition of Polymer Group, Inc. at January 1, 2005 and the consolidatedresults of their operations and their cash flows for the year endedJanuary 1, 2005, the ten months ended January 3, 2004, and the twomonths ended March 1, 2003 (the Predecessor Company) in conformitywith  accounting principles generallyaccepted in the United States. Also, in our opinion, the related financialstatement schedule, when considered in relation to the basic financialstatements taken as a whole, presents fairly in all material respects theinformation set forth therein.

As more fully described in Note 3 to the consolidatedfinancial statements, effective March 5, 2003, the Company emerged fromprotection under Chapter 11 of the U.S. Bankruptcy Court pursuant to aModified Reorganization Plan that was confirmed by the Bankruptcy Court onJanuary 16, 2003. In accordance with AICPA Statement ofPosition 90-7, the Company adopted “fresh start” accounting whereby itsassets, liabilities and new capital structure were adjusted to reflectestimated fair value at March 1, 2003 (the date of reorganization foraccounting purposes). As a result, the consolidated financial statements forperiods subsequent to March 1, 2003 reflect the Successor Company’s newbasis of accounting and are not comparable to the Predecessor Company’spre-reorganization consolidated financial statements.

/s/ Ernst & Young, LLP

Greenville, South CarolinaMarch 23, 2005

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**POLYMERGROUP, INC.**

**CONSOLIDATEDBALANCE SHEETS(In Thousands, Except Share Data)**

| ** **                                                                                                                                                                                                                                                               | ** ** | **December 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **A S S E T S**                                                                                                                                                                                                                                 | ** ** |                        | ** ** | ** **                  |       |   | ** ** | ** ** |   |
| Current assets:                                                                                                                                                                                                                                                          |       |                        |       |                        |       |   |   |   |   |
| Cash and cash equivalents                                                                                                                                                                                                                                                |       |                        | $          | 32,104                      |       |   |   | $ | 30,963 |   |   |
| Accounts receivable, net                                                                                                                                                                                                                                                 |       |                        | 129,287    |                        |       |   | 120,668 |   |   |
| Inventories                                                                                                                                                                                                                                                              |       |                        | 132,530    |                        |       |   | 119,663 |   |   |
| Deferred income taxes                                                                                                                                                                                                                                                    |       |                        | 2,787      |                        |       |   | 4,364 |   |   |
| Other current assets                                                                                                                                                                                                                                                     |       |                        | 19,531     |                        |       |   | 23,094 |   |   |
| Total current assets                                                                                                                                                                                                                                                     |       |                        | 316,239    |                        |       |   | 298,752 |   |   |
| Property, plant and equipment, net                                                                                                                                                                                                                                       |       |                        | 411,054    |                        |       |   | 421,997 |   |   |
| Intangibles and loan acquisition costs, net                                                                                                                                                                                                                              |       |                        | 10,206     |                        |       |   | 37,329 |   |   |
| Deferred income taxes                                                                                                                                                                                                                                                    |       |                        | 555        |                        |       |   | 433 |   |   |
| Other assets                                                                                                                                                                                                                                                             |       |                        | 4,043      |                        |       |   | 6,490 |   |   |
| Total assets                                                                                                                                                                                                                                                             |       |                        | $          | 742,097                     |       |   |   | $ | 765,001 |   |   |
| **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’   E Q U I T Y** | ** ** |                        | ** ** | ** **                  |       |   | ** ** | ** ** |   |
| Current liabilities:                                                                                                                                                                                                                                                     |       |                        |       |                        |       |   |   |   |   |
| Short-term borrowings                                                                                                                                                                                                                                                    |       |                        | $          | 4,570                       |       |   |   | $ | 5,101 |   |   |
| Accounts payable                                                                                                                                                                                                                                                         |       |                        | 102,675    |                        |       |   | 82,371 |   |   |
| Accrued liabilities                                                                                                                                                                                                                                                      |       |                        | 41,638     |                        |       |   | 32,235 |   |   |
| Income taxes payable                                                                                                                                                                                                                                                     |       |                        | 3,445      |                        |       |   | 1,456 |   |   |
| Deferred income taxes                                                                                                                                                                                                                                                    |       |                        | 294        |                        |       |   | — |   |   |
| Current portion of long-term debt                                                                                                                                                                                                                                        |       |                        | 4,170      |                        |       |   | 4,142 |   |   |
| Total current liabilities                                                                                                                                                                                                                                                |       |                        | 156,792    |                        |       |   | 125,305 |   |   |
| Long-term debt                                                                                                                                                                                                                                                           |       |                        | 402,416    |                        |       |   | 405,955 |   |   |
| Deferred income taxes                                                                                                                                                                                                                                                    |       |                        | 34,616     |                        |       |   | 64,692 |   |   |
| Other noncurrent liabilities                                                                                                                                                                                                                                             |       |                        | 22,523     |                        |       |   | 20,956 |   |   |
| Total liabilities                                                                                                                                                                                                                                                        |       |                        | 616,347    |                        |       |   | 616,908 |   |   |
| Minority interests                                                                                                                                                                                                                                                       |       |                        | 16,654     |                        |       |   | 16,611 |   |   |
| Shareholders’ equity:                                                                                                                                                                                                                                               |       |                        |       |                        |       |   |   |   |   |
| Preferred stock—0 shares issued and outstanding                                                                                                                                                                                                                     |       |                        | —     |                        |       |   | — |   |   |
| Class A common stock—19,133,728 and 18,868,607  shares issued and outstanding at December 30, 2006 and December 31,  2005, respectively                                                                                                              |       |                        | 191        |                        |       |   | 188 |   |   |
| Class B convertible common stock—135,721 and  153,549 shares issued and outstanding at December 30, 2006 and  December 31, 2005, respectively                                                                                                        |       |                        | 2          |                        |       |   | 2 |   |   |
| Class C convertible common stock—24,319 and  31,131 shares issued and outstanding at December 30, 2006 and  December 31, 2005, respectively                                                                                                          |       |                        | —     |                        |       |   | — |   |   |
| Class D convertible common stock—0 shares issued  and outstanding                                                                                                                                                                                              |       |                        | —     |                        |       |   | — |   |   |
| Class E convertible common stock—0 shares issued  and outstanding                                                                                                                                                                                              |       |                        | —     |                        |       |   | — |   |   |
| Additional paid-in capital                                                                                                                                                                                                                                               |       |                        | 173,368    |                        |       |   | 165,652 |   |   |
| Retained earnings (deficit)                                                                                                                                                                                                                                              |       |                        | (89,352    | )                           |       |   | (54,820 | ) |   |
| Accumulated other comprehensive income                                                                                                                                                                                                                                   |       |                        | 24,887     |                        |       |   | 20,460 |   |   |
| Total shareholders’ equity                                                                                                                                                                                                                                          |       |                        | 109,096    |                        |       |   | 131,482 |   |   |
| Total liabilities and  shareholders’ equity                                                                                                                                                                                                                         |       |                        | $          | 742,097                     |       |   |   | $ | 765,001 |   |   |

 

See accompanying notes to Consolidated Financial Statements.

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**POLYMERGROUP, INC.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**(In Thousands, Except Per Share Data)

| ** **                                                  | ** ** | **Fiscal Year Ended** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                  | ** ** | **December 30,  2006**     | ** ** | **December 31,  2005** | ** ** | **January 1,  2005** | ** ** |
| Net sales                                                   |       |                            | $          | 1,021,608 |   |   |   | $ | 948,848 |   |   | $ | 844,734 |   |
| Cost of goods sold                                          |       |                            | 865,405    |   |   |   | 787,369 |   |   | 691,272 |   |
| Gross profit                                                |       |                            | 156,203    |   |   |   | 161,479 |   |   | 153,462 |   |
| Selling, general and  administrative expenses               |       |                            | 110,406    |   |   |   | 104,545 |   |   | 99,163 |   |
| Special charges  (credits), net                             |       |                            | 38,683     |   |   |   | 9 |   |   | (8,992 | ) |
| Foreign currency  loss, net                                 |       |                            | 1,229      |   |   |   | 671 |   |   | 2,027 |   |
| Operating income                                            |       |                            | 5,885      |   |   |   | 56,254 |   |   | 61,264 |   |
| Other expense  (income):                                    |       |                            |       |   |   |   |   |   |   |   |   |
| Interest expense, net                                       |       |                            | 29,248     |   |   |   | 32,617 |   |   | 40,252 |   |
| Minority interests                                          |       |                            | 3,377      |   |   |   | 3,784 |   |   | 2,597 |   |
| Write-off of loan acquisition costs                         |       |                            | —     |   |   |   | 4,008 |   |   | 5,022 |   |
| Foreign currency and other (gain) loss, net                 |       |                            | 517        |   |   |   | (948 | ) |   | 667 |   |
| Income (loss) before  income tax expense                    |       |                            | (27,257    | ) |   |   | 16,793 |   |   | 12,726 |   |
| Income tax expense                                          |       |                            | 7,275      |   |   |   | 9,796 |   |   | 7,994 |   |
| Net income (loss)                                           |       |                            | (34,532    | ) |   |   | 6,997 |   |   | 4,732 |   |
| Accrued and  paid-in-kind dividends on PIK preferred shares |       |                            | —     |   |   |   | 27,998 |   |   | 5,566 |   |
| Loss applicable to  common shareholders                     |       |                            | $          | (34,532 | ) |   |   | $ | (21,001 | ) |   | $ | (834 | ) |
| Loss per common  share—Basic:                          |       |                            |       |   |   |   |   |   |   |   |   |
| Average common shares outstanding                           |       |                            | 19,295     |   |   |   | 13,098 |   |   | 9,840 |   |
| Loss per common share                                       |       |                            | $          | (1.79 | ) |   |   | $ | (1.60 | ) |   | $ | (0.09 | ) |
| Loss per common  share—Diluted:                        |       |                            |       |   |   |   |   |   |   |   |   |
| Average common shares outstanding                           |       |                            | 19,295     |   |   |   | 13,098 |   |   | 9,840 |   |
| Loss per common share                                       |       |                            | $          | (1.79 | ) |   |   | $ | (1.60 | ) |   | $ | (0.09 | ) |

 

See accompanying notes to Consolidated Financial Statements.

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**POLYMERGROUP, INC.**

**CONSOLIDATEDSTATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITYAND COMPREHENSIVE INCOME (LOSS)For the Fiscal Years Ended December 30, 2006, December 31, 2005 and January 1,2005(In Thousands)**

| ** **                                                                                                                 | ** ** | ** **            | ** ** | ** **  | ** ** | ** **     | ** ** | ** **    | ** ** | **Accumulated**   | ** ** | ** ** | ** ** | ** **        | ** ** | ** **             | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------|------------|----------------|------------|---------------|------------|-------------------|------------|------------|------------|-------------------|------------|------------------------|------------|
| ** **                                                                                                                 | ** ** | ** **            | ** ** | ** **  | ** ** | ** **     | ** ** | ** **    | ** ** | **Other**         | ** ** | ** ** | ** ** | ** **        | ** ** | ** **             | ** ** |
| ** **                                                                                                                 | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional** | ** ** | **Retained**  | ** ** | **Comprehensive** | ** ** | ** ** | ** ** | ** **        | ** ** | ** **             | ** ** |
| ** **                                                                                                                 | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Earnings**   | ** ** | **Income**    | ** ** | ** **        | ** ** | ** ** | ** ** | **Comprehensive** | ** ** |
| ** **                                                                                                                 | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **(Deficit)** | ** ** | **(Loss)**        | ** ** | **Total**  | ** ** | ** **        | ** ** | **Income (Loss)** | ** ** |
| Balance—January 3, 2004                                                                                          |       |                  | 8,653      |        |       |           | $          | 86            |       |              |       | $          | 73,304     |              |       |                   | $          | (32,985 | ) |   |   | $ | 18,795 |   |   | $ | 59,200 |   |   |   |   |   |   |   |   |
| Net income                                                                                                                 |       |                  |       |        |       |           | —     |          |       |              | —     |       |       |              | 4,732      |                   |       |   | — |   |   | 4,732 |   |   |   |   | $ | 4,732 |   |   |   |
| Accrued dividends on PIK preferred shares                                                                                  |       |                  |       |        |       |           | —     |          |       |              | —     |       |       |              | (5,566     | )                      |       |   | — |   |   | (5,566 | ) |   |   |   | — |   |   |   |
| Cash flow hedge adjustment, net of reclassification  adjustment                                                            |       |                  |       |        |       |           | —     |          |       |              | —     |       |       |              | —     |                   |       |   | 320 |   |   | 320 |   |   |   |   | 320 |   |   |   |
| Compensation recognized on share-based awards                                                                              |       |                  |       |        |       |           | —     |          |       |              | 1,177      |       |       |              | —     |                   |       |   | — |   |   | 1,177 |   |   |   |   | — |   |   |   |
| Class A and Class C  common stock issued under order of United States Bankruptcy Court                           |       |                  | 1,347      |        |       |           | 14         |          |       |              | (14        | )          |       |              | —     |                   |       |   | — |   |   | — |   |   |   |   | — |   |   |   |
| Conversion of junior notes to Class A common  stock                                                                   |       |                  | 378        |        |       |           | 4          |          |       |              | 2,752      |       |       |              | —     |                   |       |   | — |   |   | 2,756 |   |   |   |   | — |   |   |   |
| Currency translation adjustments, net of tax                                                                               |       |                  |       |        |       |           | —     |          |       |              | —     |       |       |              | —     |                   |       |   | 11,230 |   |   | 11,230 |   |   |   |   | 11,230 |   |   |   |
| Balance—January 1, 2005                                                                                          |       |                  | 10,378     |        |       |           | 104        |          |       |              | 77,219     |       |       |              | (33,819    | )                      |       |   | 30,345 |   |   | 73,849 |   |   |   |   | $ | 16,282 |   |   |   |
| Net income                                                                                                                 |       |                  |       |        |       |           | —     |          |       |              | —     |       |       |              | 6,997      |                   |       |   | — |   |   | 6,997 |   |   |   |   | $ | 6,997 |   |   |   |
| Accrued dividends on PIK preferred shares                                                                                  |       |                  |       |        |       |           | —     |          |       |              | 23,349     |       |       |              | (27,998    | )                      |       |   | — |   |   | (4,649 | ) |   |   |   | — |   |   |   |
| Cash flow hedge adjustment, net of reclassification  adjustment                                                            |       |                  |       |        |       |           | —     |          |       |              | —     |       |       |              | —     |                   |       |   | 3,545 |   |   | 3,545 |   |   |   |   | 3,545 |   |   |   |
| Compensation recognized on share-based awards                                                                              |       |                  | 46         |        |       |           | —     |          |       |              | 2,243      |       |       |              | —     |                   |       |   | — |   |   | 2,243 |   |   |   |   | — |   |   |   |
| Conversion and redemption of PIK preferred shares to  Class A common stock                                            |       |                  | 8,629      |        |       |           | 86         |          |       |              | 62,841     |       |       |              | —     |                   |       |   | — |   |   | 62,927 |   |   |   |   | — |   |   |   |
| Minimum pension liability, net  of tax                                                                                     |       |                  |       |        |       |           | —     |          |       |              | —     |       |       |              | —     |                   |       |   | (1,592 | ) |   | (1,592 | ) |   |   |   | (1,592 | ) |   |   |
| Currency translation adjustments, net of tax                                                                               |       |                  |       |        |       |           | —     |          |       |              | —     |       |       |              | —     |                   |       |   | (11,838 | ) |   | (11,838 | ) |   |   |   | (11,838 | ) |   |   |
| Balance—December 31, 2005                                                                                        |       |                  | 19,053     |        |       |           | 190        |          |       |              | 165,652    |       |       |              | (54,820    | )                      |       |   | 20,460 |   |   | 131,482 |   |   |   |   | $ | (2,888 | ) |   |   |
| Net loss                                                                                                                   |       |                  |       |        |       |           | —     |          |       |              | —     |       |       |              | (34,532    | )                      |       |   | — |   |   | (34,532 | ) |   |   |   | $ | (34,532 | ) |   |   |
| Cash flow hedge adjustment, net of reclassification  adjustment                                                            |       |                  |       |        |       |           | —     |          |       |              | —     |       |       |              | —     |                   |       |   | (2,370 | ) |   | (2,370 | ) |   |   |   | (2,370 | ) |   |   |
| Compensation recognized on share-based awards                                                                              |       |                  | 289        |        |       |           | 3          |          |       |              | 4,914      |       |       |              | —     |                   |       |   | — |   |   | 4,917 |   |   |   |   | — |   |   |   |
| Surrender of shares to satisfy employee withholding  tax obligations                                                       |       |                  | (48        | )           |       |           | —     |          |       |              | (1,266     | )          |       |              | —     |                   |       |   | — |   |   | (1,266 | ) |   |   |   | — |   |   |   |
| Adjustment to initially apply FASB Statement No. 158,  net of tax                                                     |       |                  |       |        |       |           | —     |          |       |              | —     |       |       |              | —     |                   |       |   | 2,724 |   |   | 2,724 |   |   |   |   | — |   |   |   |
| Minimum pension liability, net  of tax                                                                                     |       |                  |       |        |       |           | —     |          |       |              | —     |       |       |              | —     |                   |       |   | (9,093 | ) |   | (9,093 | ) |   |   |   | (9,093 | ) |   |   |
| Recognition of tax benefits from utilization of  preconfirmation net operating loss carryforwards and other tax attributes |       |                  |       |        |       |           | —     |          |       |              | 4,068      |       |       |              | —     |                   |       |   | — |   |   | 4,068 |   |   |   |   | — |   |   |   |
| Currency translation adjustments, net of tax                                                                               |       |                  |       |        |       |           | —     |          |       |              | —     |       |       |              | —     |                   |       |   | 13,166 |   |   | 13,166 |   |   |   |   | 13,166 |   |   |   |
| Balance—December 30,  2006                                                                                       |       |                  | 19,294     |        |       |           | $          | 193           |       |              |       | $          | 173,368    |              |       |                   | $          | (89,352 | ) |   |   | $ | 24,887 |   |   | $ | 109,096 |   |   |   |   | $ | (32,829 | ) |   |   |

** **

See accompanying notes to Consolidated Financial Statements.

52

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**POLYMERGROUP, INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS(In Thousands)**

| ** **                                                                                | ** ** | **Fiscal Year Ended** | ** ** |
|-------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                | ** ** | **December 30,  2006**     | ** ** | **December 31,  2005** | ** ** | **January 1,  2005** | ** ** |
| Operating activities:                                                                     |       |                            |       |   |   |   |   |   |   |   |   |
| Net income (loss)                                                                         |       |                            | $          | (34,532 | ) |   |   | $ | 6,997 |   |   | $ | 4,732 |   |
| Adjustments to reconcile net income (loss) to net cash provided by  operating activities: |       |                            |       |   |   |   |   |   |   |   |   |
| Asset impairment charges                                                                  |       |                            | 26,434     |   |   |   | — |   |   | 2,253 |   |
| Investment and other gains                                                                |       |                            | (734       | ) |   |   | (1,298 | ) |   | (50 | ) |
| Postretirement benefit curtailments and other, net                                        |       |                            | —     |   |   |   | — |   |   | (3,558 | ) |
| Deferred income taxes                                                                     |       |                            | (1,728     | ) |   |   | 7,228 |   |   | 2,397 |   |
| Write-off of loan acquisition costs                                                       |       |                            | —     |   |   |   | 4,008 |   |   | 5,022 |   |
| Depreciation and amortization                                                             |       |                            | 60,663     |   |   |   | 57,550 |   |   | 53,230 |   |
| Noncash interest and compensation                                                         |       |                            | 4,917      |   |   |   | 2,243 |   |   | 2,936 |   |
| Changes in operating assets and liabilities:                                              |       |                            |       |   |   |   |   |   |   |   |   |
| Accounts receivable, net                                                                  |       |                            | (5,942     | ) |   |   | (11,632 | ) |   | 5,136 |   |
| Inventories                                                                               |       |                            | (10,043    | ) |   |   | (16,413 | ) |   | (6,954 | ) |
| Other current assets                                                                      |       |                            | 3,170      |   |   |   | 15,383 |   |   | 4,155 |   |
| Accounts payable and accrued liabilities                                                  |       |                            | 24,918     |   |   |   | 16,767 |   |   | 440 |   |
| Other, net                                                                                |       |                            | (363       | ) |   |   | (9,901 | ) |   | 157 |   |
| Net cash provided by operating activities                                                 |       |                            | 66,760     |   |   |   | 70,932 |   |   | 69,896 |   |
| Investing activities:                                                                     |       |                            |       |   |   |   |   |   |   |   |   |
| Purchases of property, plant and equipment                                                |       |                            | (68,167    | ) |   |   | (78,902 | ) |   | (24,791 | ) |
| Proceeds from sale of assets                                                              |       |                            | 4,306      |   |   |   | 1,298 |   |   | 1,660 |   |
| Acquisition of intangibles and other                                                      |       |                            | (407       | ) |   |   | — |   |   | (13 | ) |
| Net cash used in investing activities                                                     |       |                            | (64,268    | ) |   |   | (77,604 | ) |   | (23,144 | ) |
| Financing activities:                                                                     |       |                            |       |   |   |   |   |   |   |   |   |
| Proceeds from borrowings                                                                  |       |                            | 67,827     |   |   |   | 471,824 |   |   | 486,396 |   |
| Repayment of borrowings                                                                   |       |                            | (71,952    | ) |   |   | (470,575 | ) |   | (502,158 | ) |
| Advances from equipment supplier, net                                                     |       |                            | 2,792      |   |   |   | — |   |   | — |   |
| Other, net                                                                                |       |                            | (601       | ) |   |   | (3,737 | ) |   | (12,371 | ) |
| Net cash used in financing activities                                                     |       |                            | (1,934     | ) |   |   | (2,488 | ) |   | (28,133 | ) |
| Effect of exchange  rate changes on cash                                                  |       |                            | 583        |   |   |   | (1,173 | ) |   | 1,341 |   |
| Net increase (decrease) in cash and cash equivalents                                      |       |                            | 1,141      |   |   |   | (10,333 | ) |   | 19,960 |   |
| Cash and cash  equivalents at beginning of period                                         |       |                            | 30,963     |   |   |   | 41,296 |   |   | 21,336 |   |
| Cash and cash equivalents at  end of period                                               |       |                            | $          | 32,104 |   |   |   | $ | 30,963 |   |   | $ | 41,296 |   |

 

See accompanying notes to Consolidated Financial Statements.

53

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**POLYMER GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**Note 1. Backgroundand Basis of Consolidation**

*Background*

Polymer Group, Inc. (the “Company”) is a publicly-traded,multinational manufacturer, marketer and seller of nonwoven and orientedpolyolefin products. The Company is one of the world’s leading producers ofnonwovens, and is a global, technology-driven developer, producer and marketerof engineered materials. With the broadest range of process technologies in thenonwovens industry, the Company is a global supplier to leading consumer andindustrial product manufacturers. The Company operates 21 manufacturingfacilities in nine countries throughout the world. The Company’s main sourcesof revenue are the sales of primary and intermediate products to the medical,hygiene, wipes, industrial and specialty markets.

The Company, upon having itsModified Plan, as defined (the “Modified Plan”), approved by the BankruptcyCourt on January 16, 2003, emerged from Chapter 11 bankruptcy proceedingseffective March 5, 2003 (the “Effective Date”). For accounting purposesthe Company recognized the emergence on March 1, 2003, which was the endof the February 2003 accounting period. In accordance with AICPA Statementof Position 90-7, “Financial Reporting of Entities in Reorganizationunder the Bankruptcy Code (“SOP 90-7”), the Company adopted fresh-startaccounting as of March 1, 2003, and the Company’s emergence from Chapter11 resulted in a new reporting entity. The reorganization value of the Companyhas been allocated to the underlying assets and liabilities based on theirrespective fair values at the date of emergence.

*Basis of Consolidation*

The accompanying ConsolidatedFinancial Statements include the accounts of Polymer Group, Inc. and allmajority-owned subsidiaries after elimination of all significant intercompanyaccounts and transactions. The accounts of all foreign subsidiaries have beenincluded on the basis of fiscal periods ended on the same dates as theaccompanying Consolidated Financial Statements. All amounts are presented inU.S. dollars, unless otherwise noted.

**Note 2. AccountingPolicies and Financial Statement Information**

*Fiscal Year*

The Company’s fiscal year endson the Saturday nearest to December 31. Fiscal 2006 ended December 30,2006 and included the results of operations for a fifty-two week period. Fiscal2005 ended December 31, 2005 and included the results of operations for afifty-two week period. Fiscal 2004 ended January 1, 2005 and included theresults of operations for a fifty-two week period.

*Reclassifications*

Certain amounts previouslypresented in the Consolidated Financial Statements for prior periods have beenreclassified to conform with the current year classification.

*Use of Estimates*

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States requiresmanagement to make estimates and assumptions that affect 

54

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**POLYMER GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

the amounts reported in thefinancial statements and accompanying notes. Actual results could differ fromthose estimates.

The reorganization value of the Company’s commonequity of approximately $73.4 million at March 1, 2003 was determinedbased on an independent valuation by financial specialists after considerationof multiple factors and by using various valuation methodologies and evaluatingother relevant industry information. The reorganization value of the Companywas allocated to the various assets and liabilities based on their respectivefair values pursuant to fresh start accounting principles. The calculatedreorganization value of the Company was based on a variety of estimates andassumptions about future circumstances and events. Such estimates andassumptions are inherently subject to significant economic uncertainties.

An allowance for doubtful accounts is established bythe Company based upon factors surrounding the credit risk of specificcustomers, historical trends and other information. Management believes thatthe allowance is adequate to cover potential losses resulting fromuncollectible accounts. Additionally, sales returns and allowances, a componentof net sales, are recorded in the period in which the related sales arerecorded. Management bases its estimate of the expense to be recorded eachperiod on historical return and allowance levels.

The Company maintains reserves for inventories valuedprimarily using the first in, first out (“FIFO”) method. Such reserves forinventories can be specific to certain inventory or general based on judgmentsabout the overall condition of the inventory. General reserves are establishedbased on percentage write-downs applied to inventories aged for certaintime periods or for inventories which are considered slow-moving. Specificreserves are established based on a determination of the obsolescence of theinventory and whether the inventory value exceeds amounts to be recoveredthrough expected sales price, less selling costs. Estimating sales prices,establishing write-down percentages and evaluating the condition of theinventories require judgments and estimates, which may impact the inventoryvaluation and gross profits.

Long-lived assets are reviewed for impairment wheneverevents or changes in circumstances indicate that the carrying amounts may notbe recoverable. For assets held and used, an impairment may occur if projectedundiscounted cash flows are not adequate to cover the carrying value of theassets. In such cases, additional analysis is conducted to determine the amountof the loss to be recognized. The impairment loss is determined by thedifference between the carrying amount of the asset and the fair valueprimarily measured by future discounted cash flows. The analysis, whenconducted, requires estimates of the amount and timing of projected cash flowsand, where applicable, judgments associated with, among other factors, theappropriate discount rate. Such estimates are critical in determining whetherany impairment charge should be recorded and the amount of such charge if animpairment loss is deemed to be necessary. In addition, future events impactingcash flows for existing assets could render a write-down necessary thatpreviously required no write-down.

For assets held for disposal, an impairment charge isrecognized if the carrying value of the assets exceeds the fair value lesscosts to sell. Estimates are required of fair value, disposal costs and thetime period to dispose of the assets. Such estimates are critical indetermining whether any impairment charge should be recorded and the amount ofsuch charge if an impairment loss is deemed to be necessary. Actual cash flowsreceived could differ from those used in estimating the impairment loss, whichwould impact the impairment charge ultimately recognized.

55

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**POLYMER GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

The Company recorded the accretion of dividends on the16% Series A Convertible Pay-in-kind Preferred Shares (the “PIK PreferredShares”) based on the stated rate of 16.0% in the PIK Preferred Shares. If theCompany’s Board of Directors, at the date of any dividend declaration, electedto satisfy the dividend obligation by payment-in-kind, the Company recognizedan additional dividend charge for the excess, if any, of the fair value of theadditional PIK Preferred Shares issued, at the dividend declaration date, overthe amounts previously accrued at the stated rate. As the Company’s PIKPreferred Shares were not traded on an active market, determination of the fairvalue of the securities, at the date of dividend declaration, requiredestimates and judgments, which may have impacted the valuation of the dividendspaid-in-kind. Based on the fact that the PIK Preferred Shares weredeep-in-the money, the Company estimated the fair value of the PIK PreferredShares using the number of shares of the Company’s Class A Common Stockinto which the PIK Preferred Shares were convertible at the then-current shareprice of the Company’s Class A Common Stock. While the Company believesits estimates of the fair value of the PIK Preferred Shares are reasonable, theutilization of different assumptions could produce materially different fairvalue estimates.

The Company has pension and postretirement plans withcosts and obligations which are dependent on assumptions used by actuaries incalculating such amounts. These assumptions include discount rates, inflationrates, salary growth percentages, long-term return on plan assets, retirementrates, mortality rates and other factors. While the Company believes that theassumptions used are appropriate, significant differences in actual experienceor significant changes in assumptions would affect its pension andpostretirement costs and obligations.

The Company estimates the fair value of stock optiongrants for measuring compensation costs using the Black-Scholes option-pricingmodel, which model is dependent on certain assumptions. These assumptionsinclude expected dividend yield, expected volatility, risk-free interest rate,forfeitures and expected lives. Although the Company believes the assumptionsutilized are appropriate, differing assumptions would affect compensationcosts.

The Company has estimated the fair values of financialinstruments as required by Statement of Financial Accounting Standards (“SFAS”)No. 107, “Disclosures about Fair Value of Financial Instruments,” usingavailable market information and appropriate valuation methodologies. However,considerable judgment is required in interpreting market data to developestimates of fair value for non-traded financial instruments. Accordingly, suchestimates are not necessarily indicative of the amounts that the Company wouldrealize in a current market exchange. The carrying amount of cash and cashequivalents, accounts receivable, inventories, other current assets andaccounts payable and accrued liabilities are reasonable estimates of their fairvalues. Fair value of the Company’s debt was estimated using interest rates atthose dates for issuance of such financial instruments with similar terms,credit ratings and remaining maturities and other independent valuationmethodologies. The estimated fair value of debt, based on such valuationmethodologies, at December 30, 2006 and December 31, 2005 was $411.2million and $415.2 million, respectively.

During fiscal 2005, theestimated useful lives of certain machinery and equipment utilized in theCompany’s operations were reduced to reflect the technological status andmarket conditions of certain aspects of the Company’s business. These changesin estimates resulted in increased depreciation charges of approximately $3.4million in each of the fiscal years 2006 and 2005.

56

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**POLYMER GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

*Revenue Recognition*

Revenue from product sales isrecognized when title and risks of ownership pass to the customer. This isgenerally on the date of shipment to the customer, or upon delivery to a placenamed by the customer, dependent upon contract terms and when collectibility isreasonably assured and pricing is fixed or determinable. Revenue includesamounts billed to customers for shipping and handling. Provision for rebates,promotions, product returns and discounts to customers is recorded as areduction in determining revenue in the same period that the revenue is recognized.

*Cash Equivalents*

Cash equivalents are definedas short-term investments having an original maturity of three months or less.Interest income is presented as a reduction of *Interestexpense, net* in the accompanying Consolidated Statements of Operationsand consists primarily of income from highly liquid investment sources.Interest income approximated $0.5 million, $1.0 million and $0.2 millionduring fiscal years 2006, 2005 and 2004, respectively.

*Accounts Receivable andConcentration of Credit Risks*

Accounts receivablepotentially expose the Company to a concentration of credit risk, as defined bySFAS No. 105, “Disclosure of Information about Financial Instruments withOff-Balance Sheet Risk and Financial Instruments with Concentration of CreditRisk.” The Company provides credit in the normal course of business andperforms ongoing credit evaluations on its customers’ financial condition, asdeemed necessary, but generally does not require collateral to support suchreceivables. Customer balances are considered past due based on contractualterms and the Company does not accrue interest on the past due balances. Also,in an effort to reduce its credit exposure to certain customers, as well asaccelerate its cash flows, the Company has sold on a non-recourse basis,certain of its receivables pursuant to factoring agreements. The provision forlosses on uncollectible accounts is determined principally on the basis of pastcollection experience applied to ongoing evaluations of the Company’s receivablesand evaluations of the risk of repayment. The allowance for doubtful accountswas approximately $7.6 million and $9.6 million at December 30, 2006 and December 31,2005, respectively, which management believes is adequate to provide for creditlosses in the normal course of business, as well as losses for customers whohave filed for protection under bankruptcy laws. Once management determinesthat the receivables are not recoverable, the amounts are removed from thefinancial records along with the corresponding reserve balance. Of the $2.0million decrease in the allowance for doubtful accounts from December 31,2005 to December 30, 2006, $1.5 million related to the write-off ofspecifically identified uncollectible accounts receivable and the correspondingreserve balance. In fiscal years 2006, 2005 and 2004, The Procter &Gamble Company (“P&G”) accounted for 13%, 14% and 12%, respectively, of theCompany’s net sales.

*Inventories*

Inventories are stated at thelower of cost or market primarily using the FIFO method of accounting.

57

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**POLYMER GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

*Long-Lived Assets*

Property, plant and equipmentis stated at cost less accumulated depreciation. Depreciation is computed forfinancial reporting purposes on the straight-line method over the estimateduseful lives of the related assets. The estimated useful lives established forbuilding and improvements range from 18 to 31 years, and the estimateduseful lives established for machinery, equipment and other fixed assets rangefrom 2 to 15 years. Costs of repairs and maintenance are charged toexpense as incurred. Costs of the construction of certain long-lived assetsinclude capitalized interest that is amortized over the estimated useful lifeof the related asset. The Company capitalized approximately $3.1 million, $2.2 millionand $0.4 million of interest costs during fiscal years 2006, 2005 and2004, respectively.

*Derivatives*

The Company records all derivative instruments aseither assets or liabilities on the balance sheet at their fair value inaccordance with SFAS No. 133, “Accounting for Derivative FinancialInstruments and Hedging Activities”, as amended (“SFAS No. 133”). Changesin the fair value of a derivative are recorded each period in current earningsor other comprehensive income, depending on whether a derivative is designatedas part of a hedge transaction and, if it is, depending on the type of hedgetransaction. Ineffective portions, if any, of all hedges are recognized incurrent period earnings.

As more fully described in Note 14 to theConsolidated Financial Statements, the Company, in the normal course ofbusiness, periodically enters into derivative financial instruments,principally swaps and forward contracts, with high-quality counterparties aspart of its risk management strategy. These financial instruments are limitedto non-trading purposes and are used principally to manage market risks andreduce the Company’s exposure to fluctuations in foreign currency and interestrates. Most interest rate swaps and foreign exchange forward contracts are designatedas cash flow hedges of variable rate debt obligations or fair value hedges offoreign currency-denominated transactions.

The Company documents all relationships betweenhedging instruments and hedged items, as well as the risk-management objective andstrategy for undertaking various hedge transactions and the methodologies thatwill be used for measuring effectiveness and ineffectiveness. This processincludes linking all derivatives that are designated as cash flow or fair valuehedges to specific assets and liabilities on the balance sheet or to specificfirm commitments. The Company then assesses, both at the hedge’s inception andon an ongoing basis, whether the derivatives that are used in hedgingtransactions are expected to be highly effective in offsetting changes in fairvalues or cash flows of hedged items. Such assessments are conducted inaccordance with the originally documented risk management strategy andmethodology for that particular hedging relationship.

For cash flow hedges, the effective portion ofrecognized derivative gains and losses reclassified from other comprehensiveincome is classified consistent with the classification of the hedged item. Forexample, derivative gains and losses associated with hedges of interest rate paymentsare recognized in *Interest expense, net*in the Consolidated Statements of Operations.

For fair value hedges, changesin the value of the derivatives, along with the offsetting changes in the fairvalue of the underlying hedged exposure are recorded in earnings each period in*Foreign currency and other (gain) loss, net*in the Consolidated Statements of Operations.

58

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**POLYMER GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

*Income Taxes*

The provision for income taxes and correspondingbalance sheet accounts are determined in accordance with the liability method.Tax provisions and credits are recorded at statutory rates for taxable itemsincluded in the Consolidated Statements of Operations regardless of the periodfor which such items are reported for tax purposes. Additionally, federalincome taxes are provided on that portion of the income of foreign subsidiariesthat is expected to be remitted to the United States (“U.S.”) and be taxable.Deferred tax liabilities and assets are determined based upon temporarydifferences between the basis of certain assets and liabilities for income taxand financial reporting purposes. A valuation allowance is established when itis more likely than not that some portion of a deferred tax asset will not berealized in the future. Valuation allowances are reviewed each period on a taxjurisdiction by jurisdiction basis to analyze whether a change in circumstanceshas occurred to provide enough evidence to support a change in the judgmentabout the realization of the related deferred tax asset in future years.Consistent with the provisions of SOP 90-7, recognition of tax benefitsfrom preconfirmation net operating loss carryforwards and deductible temporarydifferences and other tax attributes not recognized at the Effective Date willbe applied to reduce goodwill to zero, then reduce intangible assets thatexisted at the Effective Date with any excess tax benefits credited directly to*Additional Paid-in Capital*.

*Stock-BasedCompensation*

Effective January 1,2006, the Company has elected to account for stock-based compensationrelated to its employee share-based plans in accordance with the methodologydefined in Statement of Financial Accounting Standards No. 123(R), “Share-BasedPayment” (“SFAS No. 123(R)”), using the modified prospective transitionmethod. Under the modified prospective transition method, the compensationcosts related to all new grants and any unvested portion of prior awards aremeasured based on the grant-date fair value of the award. Additionally,accruals for compensation costs for share-based awards with performanceconditions are based on the probable outcome of such performance conditions.Prior to fiscal 2006, the Company elected to account for the share-based plansin accordance with the intrinsic value method as prescribed by AccountingPrinciples Board Opinion No. 25, “Accounting for Stock Issued to Employees”(“APB No. 25”), which generally measured compensation cost as the excess,if any, of the quoted market price of the stock at the date of grant over theamount an employee must pay to acquire the stock. Additionally, as a percentageof the share-based awards vested based on achievement of financial performancecriteria, compensation costs were recognized over the performance period whenit became probable that such performance criteria would be achieved. The proforma effect of utilizing SFAS No. 123(R) on the 

59

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**POLYMER GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

financial results forthe fiscal years ended December 31, 2005 and January 1, 2005 was asfollows (in thousands, except per share data):

| ** **                                                                                            | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Net income (loss):                                                                                    |       |     |       |     |       |
| As reported                                                                                           |       | $        | 6,997      |     | $          | 4,732 |   |
| Add: stock-based employee compensation expense, net of tax, included  in reported net income (loss)   |       | 2,202    |       | 614      |       |
| Deduct: stock-based employee compensation expense, net of tax,  determined under SFAS No. 123(R) |       | (975     | )          | (192     | )          |
| Pro forma                                                                                             |       | $        | 8,224      |     | $          | 5,154 |   |
| Income (loss)  applicable to common shareholders:                                                     |       |     |       |     |       |
| As reported                                                                                           |       | $        | (21,001    | )        | $          | (834 | ) |
| Add: stock-based employee compensation expense, net of tax, included  in reported net income (loss)   |       | 2,202    |       | 614      |       |
| Deduct: stock-based employee compensation expense, net of tax,  determined under SFAS No. 123(R) |       | (975     | )          | (192     | )          |
| Pro forma                                                                                             |       | $        | (19,774    | )        | $          | (412 | ) |
| Loss per common share  applicable to common shareholders—basic:                                  |       |     |       |     |       |
| As reported                                                                                           |       | $        | (1.60      | )        | $          | (0.09 | ) |
| Pro forma                                                                                             |       | (1.51    | )          | (0.04    | )          |
| Loss per common share applicable to common  shareholders—diluted:                                |       |     |       |     |       |
| As reported                                                                                           |       | $        | (1.60      | )        | $          | (0.09 | ) |
| Pro forma                                                                                             |       | (1.51    | )          | (0.04    | )          |
| Weighted average  exercise price per option granted.                                                  |       | $        | 6.00       |     | $          | 6.00 |   |
| Weighted average fair value  per option granted                                                       |       | $        | 17.95      |     | $          | 3.41 |   |

 

The Company has estimated thefair value of each stock option grant by using the Black-Scholes option-pricingmodel. Assumptions are evaluated and revised, as necessary, to reflect marketconditions and experience. The following assumptions were utilized in theaforementioned estimation of grant date fair value pursuant to SFAS No. 123(R):expected dividend yield of 0%; expected volatility of 37%; risk-free interestrate of 3.2%-3.9%; and weighted average expected lives of five years.

*Research andDevelopment Costs*

The cost of research anddevelopment is charged to expense as incurred and is included in *Selling, general and administrative expenses*in the Consolidated Statements of Operations. The Company incurredapproximately $12.5 million, $11.5 million and $11.2 million of researchand development expense during fiscal years 2006, 2005 and 2004, respectively.

*Shipping and HandlingCosts*

Shipping and handling costsinclude costs to store goods prior to shipment, prepare goods for shipment andphysically move goods from the Company’s sites to the customers’ premises. Thecost of shipping and handling is charged to expense as incurred and is includedin *Selling, general and*

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**POLYMER GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

*administrative expenses* in theConsolidated Statements of Operations. The Company incurred $25.6 million,$24.7 million and $23.4 million of shipping and handling costs duringfiscal years 2006, 2005 and 2004, respectively.

*Foreign CurrencyTranslation*

The Company accounts for, andreports, translation of foreign currency transactions and foreign currencyfinancial statements in accordance with SFAS No. 52, “Foreign CurrencyTranslation.” All assets and liabilities in the balance sheets of foreignsubsidiaries whose functional currency is other than the U.S. dollar aretranslated at period-end exchange rates, while income, expenses and cash flowsare translated at average exchange rates during the period. Translation gainsand losses are not included in determining net income, but are presented as aseparate component of accumulated other comprehensive income (loss). Inaddition, foreign currency transaction gains and losses are included in thedetermination of net income (loss).

*Comprehensive Income(Loss)*

Comprehensive income (loss) isreported in accordance with the SFAS No. 130, “Reporting ComprehensiveIncome” (“SFAS No. 130”). SFAS No. 130 requires unrealized gains orlosses on the Company’s available for sale securities, foreign currencytranslation adjustments and minimum pension liabilities which, prior to itsadoption, were reported separately in shareholders’ equity, to be included inother comprehensive income. Accumulated other comprehensive income of$24.9 million at December 30. 2006 consisted of $31.4 million ofcurrency translation gains, $8.0 million of transition net assets, gains orlosses and prior service costs not recognized as components of net periodicbenefit costs and $1.5 million in cash flow hedge gains, all net of tax.Accumulated other comprehensive income of $20.5 million at December 31,2005 consisted of $18.2 million of currency translation gains, $1.6million of minimum pension liability and $3.9 million in cash flow hedgegains, all net of tax.

*Income (Loss) PerCommon Share*

Basic earnings per shareexclude any dilutive effects of share-based awards and convertible securitiesand are computed by dividing income (loss) applicable to common shareholders bythe weighted-average number of common shares outstanding for the period.Diluted earnings per share reflect the potential dilution from common sharespotentially issuable through share-based awards and convertible securities andis computed by dividing income (loss) applicable to common shareholders, asadjusted for the effects of the conversion to common stock, by the weighted-averagenumber of common and common equivalent shares outstanding for the period.Shares issuable pursuant to stock option plans represent common equivalentshares if the average market price for the reporting period exceeds the strikeprice of the option. A reconciliation of the amounts included in 

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**POLYMER GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

the computation ofincome (loss) per share for fiscal years 2006, 2005 and 2004 is presented inthe following table (in thousands):

| ** **                                                                        | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Income (loss):                                                                    |       |     |       |     |       |     |       |
| Net income (loss)                                                                 |       | $        | (34,532    | )        | $          | 6,997    |       | $ | 4,732 |   |
| Less: dividends on PIK Preferred Shares                                           |       | —   |       | 27,998   |       | 5,566    |       |
| Loss applicable to common shareholders                                            |       | (34,532  | )          | (21,001  | )          | (834     | )          |
| Effect of dilutive securities—convertible securities and share-based  awards |       | —   |       | —   |       | —   |       |
| Loss applicable to  common shareholders with assumed conversions                  |       | $        | (34,532    | )        | $          | (21,001  | )          | $ | (834 | ) |
| Outstanding shares:                                                               |       |     |       |     |       |     |       |
| Weighted average common shares outstanding                                        |       | 19,295   |       | 13,098   |       | 9,840    |       |
| Effect of dilutive securities—convertible securities and share-based  awards |       | —   |       | —   |       | —   |       |
| Weighted average  common shares outstanding—assuming dilution                |       | 19,295   |       | 13,098   |       | 9,840    |       |

 

For fiscal years 2006, 2005and 2004, the effect of potentially dilutive securities such as convertiblesecurities and share-based awards are not considered in the above table as theeffects are anti-dilutive. As of December 30, 2006, the potential dilutiveeffect related to the exchange of such potentially dilutive securities wouldamount to 141,739 shares.

*Recent AccountingStandards*

In July 2006, the FASB issued FASB InterpretationNo. 48, “Accounting for Uncertainty in Income Taxes, an interpretation ofFASB Statement No. 109, Accounting for Income Taxes” (“FIN 48”). FIN 48clarifies the accounting for uncertainty in income taxes recognized in anenterprise’s financial statements. This standard prescribes a recognitionthreshold and measurement attribute for the financial statement recognition andmeasurement of a tax position taken, or expected to be taken, in a tax return.FIN 48 also provides guidance on other tax-related issues and is effective forfiscal years beginning after December 15, 2006. Additionally, in February 2007,the FASB issued a Proposed Staff Position No. FIN 48-a, “Definitionof Settlement in FASB Interpretation No. 48,” which implementationguidance, if approved, may impact the timing of certain liability adjustments.Accordingly, such additional guidance may impact the amounts that the Companywould record upon the adoption of FIN 48. The Company continues to evaluate theeffects of this standard.

In September 2006, the Securities and ExchangeCommission (the “SEC”) released Staff Accounting Bulletin 108 (“SAB 108”),which expresses the SEC Staff’s views regarding the process of quantifyingfinancial statement misstatements. The Company has applied the guidance in SAB108 for the fourth quarter ended December 30, 2006.

In September 2006, the FASB issued SFAS No. 157,“Fair Value Measurements” (“SFAS No. 157”). This standard establishes aframework for measuring fair value and also provides guidance for an expandedset of disclosure requirements related to fair value. The Company expects toadopt SFAS No. 157 effective in the first quarter of fiscal 2008 and hasnot yet assessed the impact of SFAS No. 157 on the Consolidated FinancialStatements.

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**POLYMER GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

In September 2006, theFASB issued SFAS No. 158, “Employers’ Accounting for Defined BenefitPension and Other Retirement Plans, an amendment of FASB StatementsNo. 87, 88, 106 and 132(R)” (“SFAS No. 158”). SFAS No. 158required employers to recognize the funded status of defined benefitpostretirement plans in the Consolidated Balance Sheets, with changes in theplan’s funded status recognized as a component of other comprehensive income.This standard also requires that the measurement of a plan’s funded status beas of the date of the employers’ balance sheet. SFAS No. 158 also amendscertain of the previous disclosure requirements related to these plans and iseffective for fiscal years ending after December 15, 2006. In accordancewith SFAS No. 158, the Company recognized the funded status of its benefitplans as of December 30, 2006, resulting in an adjustment to *Accumulated other comprehensive income*in the amount of $2.7million, net of tax, to initially apply the provisions of SFAS No. 158.

**Note 3. SpecialCharges (Credits), Net**

TheCompany’s operating income includes special charges (credits), net resultingfrom corporate-level decisions or Board actions, such as to consolidate andrelocate its corporate offices, restructure certain operations or pursuecertain transaction opportunities. Additionally, the Company evaluates itslong-lived assets for impairment whenever events or changes in circumstances,including those aforementioned, indicate that the carrying amounts may not berecoverable. A summary of such charges (credits), net is presented in thefollowing table (in thousands):

| ** **                                     | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Asset impairment  charges                      |       | $        | 26,434     |     |       | $        | —     |   |   | $ | 2,253 |   |
| Restructuring and  plant realignment costs     |       | 7,135    |       |     | 9          |     |       | 1,867 |   |
| Abandoned acquisition  costs                   |       | 3,971    |       |     | —     |     |       | — |   |
| Investigation and  executive termination costs |       | 1,143    |       |     | —     |     |       | — |   |
| Arbitration  settlement, net                   |       | —   |       |     | —     |     |       | (13,112 | ) |
|                                           |       | $        | 38,683     |     |       | $        | 9          |   |   | $ | (8,992 | ) |

 

*Asset impairmentcharges*

The Company has experienced a continued weakening ofearnings and cash flows in certain of its Canadian operations. As a result, theCompany, during the second quarter of fiscal 2006, evaluated such assets forimpairment, consistent with the provisions of Statement of Financial AccountingStandards No. 144, “Accounting for the Impairment or Disposal ofLong-Lived Assets,” and recorded a non-cash impairment charge associatedwith the write-down of such assets to estimated fair value in the amount ofapproximately $5.5 million. Additionally, during the second quarter offiscal 2006, the Company initiated the restructuring and consolidation strategyfor the European operations, which included the closure of the facilities inSweden. Accordingly, the Company recognized an impairment charge, with respectto such assets in the amount of $2.3 million, resulting in a total assetimpairment charge in the second quarter of fiscal 2006 of $7.8 million.

During the fourth quarter of fiscal 2006, the Companyrecorded an impairment charge in the amount of approximately $18.6 millionassociated with the write-down of assets located in certain facilities in theUnited States and Europe to estimated fair values. Of that total, $7.2 millionrelated to a manufacturing line located in The Netherlands, which write-downwas attributed to the expected shutdown of the line in fiscal 2007 due to theloss of certain low-margin business platforms which were produced on the asset duringfiscal 2006 as the market price for the products moved to a level 

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**POLYMER GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

resulting in unacceptablemargins. The remaining $11.4 million related to the write-down of assets in theUnited States, including facilities for which the Company has announced closureplans, as further discussed in Note 21 to the Consolidated FinancialStatements, as well as an impairment charge taken with respect to anotherfacility, for which projected future cash flows have been negatively impactedby the loss of a major automotive platform and the anticipated loss of certainbusiness for which the market prices have recently declined to a levelresulting in such unacceptable returns that the Company has elected not toparticipate in such business going forward.

In fiscal 2004, the Companyrecorded a non-cash asset impairment charge of $2.3 million, primarilyrelated to the write-down of machinery and equipment to net realizable value,for production assets in Canada removed from service and held for sale, and thewrite-off of certain foreign investments.

*Restructuring and plantrealignment costs*

Accruedcosts for restructuring efforts are included in *Accruedliabilities* in the Consolidated Balance Sheets. These costsgenerally arise from restructuring initiatives intended to result in lowerworking capital levels and improved operating performance and profitabilitythrough: (i) reducing headcount at both the plant and corporate levels;(ii) improving manufacturing productivity and reducing corporate costs;and (iii) rationalizing certain assets and businesses. A summary of thebusiness restructuring activity accounted for in accordance with SFAS StatementNo. 146 “Accounting for Costs Associated with Exit or Disposal Activities”(“SFAS No. 146”) during fiscal 2006, 2005 and 2004 is presented inthe following table (in thousands):

| ** **                                  | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Balance accrued at  beginning of year       |       | $        | 163        |     | $          | 561      |       | $ | 4,564 |   |
| Restructuring and  plant realignment costs: |       |     |       |     |       |     |       |
| First Quarter                               |       | 1,633    |       | 4        |       | 584      |       |
| Second Quarter                              |       | 2,740    |       | 5        |       | 657      |       |
| Third Quarter                               |       | 692      |       | —   |       | 222      |       |
| Fourth Quarter                              |       | 2,070    |       | —   |       | 404      |       |
| Total                                       |       | 7,135    |       | 9        |       | 1,867    |       |
| Cash payments                               |       | (5,284   | )          | (375     | )          | (5,909   | )          |
| Adjustments                                 |       | 30       |       | (32      | )          | 39       |       |
| Balance accrued at end of  year             |       | $        | 2,044      |     | $          | 163      |       | $ | 561 |   |

 

As further described below,the 2006 restructuring and plant realignment costs are principally associatedwith (a) the Company’s restructuring and consolidation plan for Europe,which included termination benefits provided to an executive officer of theCompany, pursuant to Dutch law, in the amount of $2.1 million and costsassociated with the closure of the Sweden plant of $1.1 million;(b) costs related to the relocation of the corporate headquarters toCharlotte, North Carolina in the amount of $3.0 million; (c) downsizingcertain Canadian operations resulting in severance costs of $0.6 million;and (d) costs in the amount of $0.3 million related to exiting the leasedfacilities at Gainesville, Georgia.

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**POLYMER GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

*Corporate headquartersrelocation*

The Company entered into written relocation agreementswith 22 employees who agreed to the relocation and to acceptance ofbenefits offered by the Company. Such relocation benefits charged to operationsof $1.5 million during fiscal 2006 relate primarily to Company obligations forcosts associated with the employee’s real estate sales process, which processhas been completed by the electing employees. Additionally, the Company hasincurred approximately $0.5 million associated with other exit costs.

The Company also incurredapproximately $1.0 million in severance costs relating to 23 employees whohave not been offered or who have declined the opportunity to relocate. As theemployee must remain in the employ of the Company through the date of theirdesignated date for corporate relocation to be eligible for the severance,consistent with the provisions of SFAS No. 146, the Company has accruedthe severance cost ratably over the expected service period.

*European restructuring*

In May 2006, the Company entered into atermination agreement with an executive officer of the Company that provided foran aggregate payment of approximately $2.1 million, which was charged tooperating income in the second quarter of fiscal 2006. Additionally, theCompany and the executive officer entered into certain other consulting andnon-compete agreements, which costs will be charged to operations over futureperiods.

Also during fiscal 2006, basedon the Company’s restructuring and consolidation strategies previously noted,the Company shut down its operation located in Sweden. This included areduction of 19 production and administrative staff positions. The Companyceased these operations during the fourth quarter of fiscal 2006. As a resultof that decision, the Company recorded a $1.1 million operating charge toaccrue for the costs of exiting the facility and severance paid to such terminatedemployees.

*Canadian restructuring*

During the second quarter of fiscal 2006, the Companycommunicated a plan to affected employees that it planned to downsize one ofits facilities located in Canada. The restructuring plan included the reductionof 26 production and administrative staff positions. As a result of thisdecision, the Company recorded a $0.6 million charge to operations to cover thecosts of severance pay to these employees.

Additionally, during the firstquarter of fiscal 2006, as part of its restructuring and related cost reductionmeasures, the Company negotiated certain changes with the union representingthe employees of one of the Company’s Canadian operations, including a partialcurtailment of a defined benefit pension plan. No net gain or loss has beenincurred as a result of the partial curtailment. However, based on electionsmade by plan participants during the second quarter of fiscal 2006, and asapproved by Canadian regulatory authorities on January 16, 2007, theCompany will incur a settlement loss associated with employees who have electedto exit the plan. The loss incurred as a result of the partial settlement ofthe defined benefit pension plan, in the amount of $4.5 million, will berecognized in the first quarter of fiscal 2007 commensurate with governmentalapproval of the terms of the settlement and upon fulfillment by the Company ofits funding requirements in the amount of $1.9 million associated with theapproved settlement, which funding obligations were fulfilled in February 2007.

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**POLYMER GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

*Restructuring in priorperiods*

In 2004, the Company continuedthe restructuring initiatives commenced in 2003 by curtailing production ofcertain of its European assets and eliminating several production lines in theCanadian operations of its Oriented Polymers Division. The European andCanadian restructuring efforts in 2004 included the reduction of approximately160 positions, resulting in a charge of approximately $1.9 million forseverance and other plant realignment costs.

*U.S. restructuring*

As further described in Note21 to the Consolidated Financial Statements, in January 2007, the Companycommunicated a plan to affected employees that it plans to close two of itsplants in the United States. Certain exit costs related to one of thefacilities, which is leased, in the amount of $0.3 million, were accruedin fiscal 2006. Other costs related to the plant realignment will be recognizedin fiscal 2007.

*Abandoned acquisitioncosts*

During the first five monthsof fiscal 2006, the Company actively pursued a potential acquisition. Inconjunction with this effort, the Company incurred approximately $4.0 millionof costs, which are primarily comprised of third-party professional fees.During the second quarter of fiscal 2006, the negotiations with respect to thepotential acquisition reached an impasse and the Company abandoned its effortsto consummate the acquisition.

*Investigation andexecutive termination costs*

During June 2006, the Company and an equipmentsupplier negotiated the resolution of a dispute and entered into two settlementagreements, which documented the terms of the resolution. During the second andthird quarters of fiscal 2006, the Company and the Audit Committee of the Boardof Directors of the Company, with assistance from special counsel, conducted aninvestigation which focused on a review of the settlement agreements and therelationship of these agreements with certain equipment purchase contracts andservice agreements, which were negotiated between the Company and the equipmentsupplier in or about the same time frame. As a result of these actions, theCompany concluded that the economic substance of the settlement agreements andthe equipment purchase contracts and service agreements were substantiallyinterdependent. On September 21, 2006, the Board of Directors of theCompany asked the Chief Executive Officer and the Vice President, GlobalPurchasing to resign, pending receipt of their resignations, and relieved themof their duties as officers of the Company. Shortly thereafter, the Companyentered into termination agreements with both executives. As a result of theseevents, the Company has incurred costs with respect to the investigation,termination benefits and ancillary costs in the amount of $1.1 million.

*Arbitration settlement, net*

During 2004, the Companysettled an issue with a major customer through arbitration and receivedapproximately $17.0 million as settlement of the arbitration issues. Netsettlement proceeds of $13.1 million, after providing for $3.9 millionof costs and expenses associated with the arbitration, were included in *Special charges (credits), net* in theConsolidated Statement of Operations for fiscal 2004.

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**POLYMER GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

**Note 4. AccountsReceivable Factoring Agreements**

The Company has entered into a factoring agreement tosell without recourse, certain U.S. company-based receivables to an unrelatedthird-party financial institution. Under the current terms of the factoringagreement, the maximum amount of outstanding advances at any one time is$20.0 million, which limitation was subject to change based on the levelof eligible receivables, restrictions on concentrations of receivables and thehistorical performance of the receivables sold. Additionally, the Company hasentered into a factoring agreement to sell without recourse, certain non-U.S.company-based receivables to an unrelated third-party financialinstitution. Under the terms of the factoring agreement, the maximum amount ofoutstanding advances at any one time is $10.0 million, which limitation issubject to change based on the level of eligible receivables, restrictions onconcentrations of receivables and the historical performance of the receivablessold.

Approximately $190.2 million, $130.0 million and$31.0 million of receivables have been sold under the terms of the factoringagreements during fiscal years 2006, 2005 and 2004, respectively. The sale ofthese receivables accelerated the collection of the Company’s cash, reducedcredit exposure and lowered the Company’s net borrowing costs. Sales ofaccounts receivable are reflected as a reduction of *Accounts receivable, net* in the Consolidated Balance Sheetsand any loss recognized on the sale is reflected in *Foreigncurrency and other (gain) loss, net* in the Consolidated Statementsof Operations on such sales, as they meet the applicable criteria of SFAS No. 140, “Accountingfor Transfers and Servicing of Financial Assets and Extinguishment ofLiabilities” (“SFAS No. 140”). The amount due from the factoringcompanies, net of advances received from the factoring companies, was$6.6 million and $6.1 million at December 30, 2006 and December 31, 2005,respectively, and is shown in *Other currentassets* in the Consolidated Balance Sheets. The Company paysfactoring fees associated with the sale of receivables based on the dollarvalue of the receivables sold. Such fees are immaterial and are included in *Foreign currency and other (gain) loss, net* in theConsolidated Statements of Operations.

In fiscal 2004, the Company’sEuropean operations sold $4.5 million of its trade receivables to afactoring company. Such sale of receivables has been accounted for on a basisconsistent with the methodology described in the preceding paragraphs.

**Note 5. Inventories**

Inventoriesconsist of the following (in thousands):

| ** **                  | ** ** | **December 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Finished goods              |       |                        | $          | 64,897                      |       |   |   | $ | 60,545 |   |   |
| Work in process             |       |                        | 17,462     |                        |       |   | 17,724 |   |   |
| Raw materials and  supplies |       |                        | 50,171     |                        |       |   | 41,394 |   |   |
|                        |       |                        | $          | 132,530                     |       |   |   | $ | 119,663 |   |   |

 

Inventories are net of reserves, primarily forobsolete and slow-moving inventories, of approximately $9.6 million and $9.7million at December 30, 2006 and December 31, 2005, respectively.Management believes that the reserves are adequate to provide for losses in thenormal course of business.

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**POLYMER GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

**Note 6. Property,Plant and Equipment**

Property,plant and equipment consists of the following (in thousands):

| ** **                       | ** ** | **December 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|----------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Land                             |       |                        | $          | 13,735                      |       |   |   | $ | 13,409 |   |   |
| Buildings and land  improvements |       |                        | 119,157    |                        |       |   | 95,817 |   |   |
| Machinery, equipment  and other  |       |                        | 452,383    |                        |       |   | 393,000 |   |   |
| Construction in  progress        |       |                        | 8,286      |                        |       |   | 52,219 |   |   |
|                             |       |                        | 593,561    |                        |       |   | 554,445 |   |   |
| Less accumulated  depreciation   |       |                        | (182,507   | )                           |       |   | (132,448 | ) |   |
|                             |       |                        | $          | 411,054                     |       |   |   | $ | 421,997 |   |   |

 

Depreciation charged to expense was $54.9 million,$51.3 million and $45.5 million for fiscal years 2006, 2005 and 2004,respectively.

The significant decrease inconstruction in progress during fiscal 2006 compared to fiscal 2005 was due tothe completion during fiscal 2006 of capital expansion projects under constructionat December 31, 2005, including the construction of new spunmeltmanufacturing facilities in Suzhou, China and Mooresville, North Carolina aswell as the installation of additional capacity in Nanhai, China.

**Note 7.Intangibles and Loan Acquisition Costs**

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

| ** **                     | ** ** | **December 30,  2006** | ** ** | **December 31,   2005** | ** ** |
|--------------------------------|------------|-----------------------------|------------|-----------------------------------|------------|
| Cost:                          |       |                        |       |                              |       |   |   |   |   |
| Proprietary technology         |       |                        | $          | 1,352                             |       |   |   | $ | 30,251 |   |   |
| Goodwill                       |       |                        | —     |                              |       |   | 10,243 |   |   |
| Loan acquisition costs         |       |                        | 9,191      |                              |       |   | 8,590 |   |   |
| Other                          |       |                        | 1,817      |                              |       |   | 3,455 |   |   |
|                           |       |                        | 12,360     |                              |       |   | 52,539 |   |   |
| Less accumulated  amortization |       |                        | (2,154     | )                                 |       |   | (15,210 | ) |   |
|                           |       |                        | $          | 10,206                            |       |   |   | $ | 37,329 |   |   |

 

As further described in Note 10 to the ConsolidatedFinancial Statements the Company, as of the Effective Date, recorded goodwillrelated to the allocation of the reorganization value to the underlying assetsand liabilities based on their estimated fair values on such date and, inperiods subsequent to the Effective Date, have reduced such goodwill as a resultof the recognition of tax benefits resulting from the utilization of netoperating losses for which a valuation allowance was established as of theEffective Date. During fiscal 2006, the Company recognized additional taxbenefits from the utilization of preconfirmation net operating losscarryforwards; and completed the Internal Revenue Service (“IRS”) examinationsfor fiscal years 2003 and 2004, effectively settling certain tax uncertainties withrespect to those years and; based on the findings of the IRS examination, theCompany modified its basis study, as it related to its investment insubsidiaries. Accordingly, in accordance with SOP 90-7, 

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**POLYMER GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

the Company has recognized thetax benefits with respect to such items in the amount of approximately $27.4million, first, to eliminate goodwill of $10.2 million and; second, toeliminate all remaining intangibles established as of the Effective Date,including proprietary technology and other intangibles, in the amount of $13.1million; with the excess of such tax benefits over the amounts allocable togoodwill and other intangible assets, in the amount of approximately $4.1million, as a credit to *Additional Paid-in Capital*.

In connection with the refinancing of the Company’sthen outstanding Bank Facility in November 2005, a portion of theunamortized loan acquisition costs associated with the April 2004refinancing were written-off, in the amount of $3.0 million, and expensed inthe Consolidated Statement of Operations. Additionally, $1.0 million ofthird-party costs incurred in connection with the 2005 refinancing were alsocharged to expense. The Company also incurred $2.7 million of new loanacquisition costs related to the issuance of the Credit Facility, consistingprimarily of bank fees, which have been capitalized, and which, together with$5.9 million of remaining unamortized fees incurred as part of theApril 2004 refinancing, will be amortized over the term of the remaining debt.

In conjunction with the refinancing in April 2004of the then-outstanding Restructured Credit Facility, the Company charged theunamortized balance of the loan acquisition costs of $5.0 million relatedto that debt to the Consolidated Statement of Operations. Concurrently, withthe issuance of the Senior Secured Bank Facility, the Company capitalizedapproximately $12.1 million of related loan acquisition costs, which wereprimarily bank arrangement and legal fees.

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

| ** **                                                                              | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Amortization of:                                                                        |       |     |       |     |       |     |       |
| Intangibles with finite lives, included in selling, general and  administrative expense |       | $        | 4,438      |     | $          | 4,252    |       | $ | 5,759 |   |
| Loan acquisition costs, included in interest expense, net                               |       | 1,339    |       | 1,977    |       | 1,970    |       |
| Total amortization  expense                                                             |       | $        | 5,777      |     | $          | 6,229    |       | $ | 7,729 |   |

 

Aggregate amortization expensefor each of the next five years is expected to be as follows: 2007,$2.1 million; 2008, $2.1 million; 2009, $2.1 million; 2010,$1.7 million; 2011, $1.5 million; and 2012, $0.7 million.Intangibles are amortized over periods ranging from 5 to 17 years. Loanacquisition costs are amortized over the life of the related debt.

**Note 8. AccruedLiabilities**

Accrued liabilities in theConsolidated Balance Sheets include salaries, wages and other fringe benefitsof $15.6 million and $17.0 million as of December 30, 2006 andDecember 31, 2005, respectively.

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**POLYMER GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

**Note 9. Debt**

Long-termdebt consists of the following:

| ** **                                                                                                                                                                                                                                                                                                                   | ** ** | **December 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                   | ** ** | **(in thousands)**     | ** ** |
| Credit Facility, as defined below, interest rates  for U.S. borrowings are based on a specified base plus a specified margin and  are subject to certain terms and conditions:                                                                                                                                               |       |                        |       |                        |       |   |   |   |   |
| First Lien Term Loan—interest at 7.61% and 6.77% as of December 30,  2006 and December 31, 2005, respectively, due in mandatory quarterly  payments of approximately $1.0 million and subject to additional payments  from annual excess cash flows, as defined, with the balance due  November 22, 2012 |       |                        | $          | 405,900                     |       |   |   | $ | 410,000 |   |   |
| Other                                                                                                                                                                                                                                                                                                                        |       |                        | 686        |                        |       |   | 97 |   |   |
|                                                                                                                                                                                                                                                                                                                         |       |                        | 406,586    |                        |       |   | 410,097 |   |   |
| Less: Current  maturities                                                                                                                                                                                                                                                                                                    |       |                        | (4,170     | )                           |       |   | (4,142 | ) |   |
|                                                                                                                                                                                                                                                                                                                         |       |                        | $          | 402,416                     |       |   |   | $ | 405,955 |   |   |

 

*Scheduled Maturities*

Thescheduled maturities of long-term debt at December 30, 2006 are as follows(in thousands):

| 2007  |   | $       | 4,170   |   |
|-------|--------|---------|---------|--------|
| 2008  |   | 4,716   |    |
| 2009  |   | 4,100   |    |
| 2010  |   | 4,100   |    |
| 2011  |   | 4,100   |    |
| 2012  |   | 385,400 |    |
| Total |   | $       | 406,586 |   |

 

*Credit Facility*

The Company’s Credit Facility (the “Credit Facility”),which was entered into on November 22, 2005 and amended as of December 8,2006, consists of a $45.0 million secured revolving credit facility and a$410.0 million first-lien term loan. The proceeds therefrom were used tofully repay indebtedness under the Company’s previous bank facility and payrelated fees and expenses.

All borrowings under the Credit Facility are U.S.dollar denominated and are guaranteed, on a joint and several basis, by eachand all of the direct and indirect domestic subsidiaries of the Company. TheCredit Facility and the related guarantees are secured by (i) a lien onsubstantially all of the assets of the Company, its domestic subsidiaries andcertain of its non-domestic subsidiaries, (ii) a pledge of all or aportion of the stock of the domestic subsidiaries of the Company and of certainnon-domestic subsidiaries of the Company, and (iii) a pledge of certainsecured intercompany notes. Commitment fees under the Credit Facility are equalto 0.50% of the daily unused amount of the revolving credit commitment. TheCredit Facility limits restricted payments to $5.0 million, including cashdividends, in the aggregate since the effective date of the Credit Facility.The Credit Facility contains covenants and events of default customary forfinancings of this type, including leverage and interest expense coveragecovenants. The Company was in compliance with the debt covenants 

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**POLYMER GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

under the current CreditFacility at December 30, 2006 and expects to remain in compliance throughfiscal 2007.

The first-lien term loanrequires mandatory payments of approximately $1.0 million per quarter andrequires the Company to apply a percentage of proceeds from excess cash flows,as defined by the Credit Facility and determined based on year-end results, toreduce its then outstanding balances under the Credit Facility. Excess cashflows required to be applied to the repayment of the Credit Facility aregenerally calculated as 50.0% of the net amount of the Company’s available cashgenerated from operations adjusted for the cash effects of interest, taxes,capital expenditures, changes in working capital and certain other items. Sincethe amounts of excess cash flows to be applied to the repayment of debt infuture periods are based on year-end results and not currently determinable,only the mandatory payments of approximately $1.0 million per quarter havebeen classified as a current liability. Additionally, no excess cash flowpayment was required to be made with respect to fiscal 2006 due to themagnitude of the major capital expenditure projects. The Company currentlyestimates that the excess cash flow payment with respect to fiscal 2007, whichwould be payable in March 2008, is expected to be in the range of$10.0 million to $25.0 million.

The interest rate applicableto borrowings under the Credit Facility is based on three-month LondonInterbank Offered Rate (“LIBOR”) plus a specified margin. The applicable marginfor borrowings under both the first-lien term loan and the revolving creditfacility is 225 basis points. The Company may, from time to time, elect to usean alternate base rate for its borrowings under the revolving credit facilitybased on the bank’s base rate plus a margin of 75 to 125 basis points based onthe Company’s total leverage ratio. There were no outstanding borrowings underthe revolving credit facility as of December 30, 2006 or December 31,2005. As of December 30, 2006, capacity under the revolving creditfacility had been reserved for outstanding letters of credit in the amount of$12.9 million, as described below. Average daily borrowings under therevolving credit facility, which were largely LIBOR-based borrowings, for theperiod from January 1, 2006 to December 30, 2006 were$17.6 million at an average rate of 7.85%. Average daily borrowings underthe revolving credit facility, which were largely alternate base rateborrowings, for the period from November 22, 2005 to December 31,2005 were $10.4 million at an average rate of 8.37%. In addition, theCompany had average daily borrowings under a revolving credit facility relatedto previous debt arrangements of $8.7 million for the period from January 2,2005 to November 21, 2005 at an average rate of 8.23%. The revolvingcredit portion of the Credit Facility matures on November 22, 2010.

In accordance with the termsof the Credit Facility, the Company maintained its position in a cash flowhedge originally entered into in May 2004. This cash flow hedge agreementeffectively converts $212.5 million of notional principal amount of debtfrom a variable LIBOR rate to a fixed LIBOR rate of 3.383%. The cash flow hedgeagreement terminates on May 8, 2007 and is described more fully inNote 14 to the Consolidated Financial Statements. Additionally, in February 2007,the Company entered another cash flow hedge agreement, which is effective May 8,2007, matures June 29, 2009 and effectively converts $240.0 million ofnotional principal amount of debt from a variable LIBOR rate to a fixed LIBORrate of 5.085%.

Subject to certain terms andconditions, a maximum of $25.0 million of the Credit Facility may be usedfor letters of credit. As of December 30, 2006, the Company had$12.9 million of standby and documentary letters of credit outstandingunder the Credit Facility. Letters of credit are in place to provide addedassurance for certain raw material vendors and administrative serviceproviders. None of these letters of credit had been drawn on at December 30,2006.

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**POLYMER GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

*Subsidiary Indebtedness*

Nanhai Nanxin Non-woven Co., Ltd. (“Nanhai”) has ashort-term credit facility (denominated in U.S. dollars and Chinese renminbi)with a financial institution in China. The amount of outstanding indebtednessunder the facility, collateralized through the pledge of the Nanhai assets, was$5.0 million at December 31, 2005 (at an average annual rate ofapproximately 4.44%). The facility was renewed during 2006, but had nooutstanding borrowings as of December 30, 2006. Additionally, in fiscal2006, the Company’s operations in China have also entered into other short-termcredit facilities denominated in Chinese renminbi with financial institutionsin China. These short-term credit facilities are intended to finance working capitalrequirements. These facilities have an outstanding indebtedness of $4.6 millionat December 30, 2006 and mature at various dates through June 2007.All of these short-term borrowings in China are included in *Short-term borrowings* in the Consolidated Balance Sheets.

In March 2006, one of theCompany’s wholly-owned Canadian subsidiaries entered into a term loan totalingapproximately $0.6 million with an agency of the Canadian government,which agency focuses on generating capital investment in the country. Theprincipal of the term loan is due September 1, 2008. Provided that theterm loan is repaid on September 1, 2008, no interest is due. However, ifthe Company elects not to pay the loan on September 1, 2008, the Company,subsequent to that date, will begin making monthly payments of principal andinterest at 6.25% per year.

**Note 10. IncomeTaxes**

Thecomponents of income (loss) before income taxes are as follows (in thousands):

| ** ** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|
| Domestic   |       | $        | (31,445    | )        | $          | (9,002   | )          | $ | (2,701 | ) |
| Foreign    |       | 4,188    |       | 25,795   |       | 15,427   |       |
|       |       | $        | (27,257    | )        | $          | 16,793   |       | $ | 12,726 |   |

 

Thecomponents of income tax expense (benefit) are as follows (in thousands):

| ** **         | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------|------------|----------|------------|----------|------------|----------|------------|
| Current:           |       |     |       |     |       |     |       |
| Federal and state  |       | $        | 1,020      |     | $          | (783     | )          | $ | 1,319 |   |
| Foreign            |       | 7,983    |       | 3,351    |       | 4,278    |       |
| Deferred:          |       |     |       |     |       |     |       |
| Federal and state  |       | 678      |       | 359      |       | 520      |       |
| Foreign            |       | (2,406   | )          | 6,869    |       | 1,877    |       |
| Income tax expense |       | $        | 7,275      |     | $          | 9,796    |       | $ | 7,994 |   |

 

Provision has been made for U.S. and additionalforeign taxes for the anticipated repatriation of earnings of certain foreignsubsidiaries of the Company. The Company considers the undistributed earningsof its foreign subsidiaries above the amount already provided to beindefinitely reinvested. These additional foreign earnings could become subjectto additional tax if remitted, or deemed remitted, as a dividend. However thedetermination of the additional amount of tax that would be incurred is notpracticable because of the complexities associated with its hypotheticalcalculation. At December 30, 2006, the unremitted earnings of its foreignsubsidiaries for which U.S. taxes have not 

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**POLYMER GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

been provided amounted toapproximately $23.1 million. Also, in the event of additional tax, unrecognizedtax credits may be available to reduce some portion of any U.S. income taxliability.

Management judgment is required in determining taxprovisions and evaluating tax positions. Although management believes its taxpositions and related provisions reflected in the Consolidated FinancialStatements are fully supportable, it recognizes that these tax positions andrelated provisions may be challenged by various tax authorities. These taxpositions and related provisions are reviewed on an ongoing basis and areadjusted as additional facts and information become available, includingprogress on tax audits, changes in interpretations of tax laws, developments incase law and closing of statute of limitations. The Company’s tax provisionincludes the impact of recording reserves and any changes thereto. As ofDecember 30, 2006, the Company has a number of tax audits in process and opentax years with various taxing jurisdictions that range from 1998 to 2006.Although the results of current tax audits and reviews related to open taxyears have not been finalized, management believes that the ultimate outcomeswill not have a material adverse effect on the Company’s financial position,results of operations or cash flows.

Incometaxes computed at the Company’s U.S. federal statutory rate differed from theprovision for income taxes as follows (in thousands):

| ** **                                                      | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Computed income tax  expense (benefit) at statutory rate        |       | $        | (9,540     | )        | $          | 5,878    |       | $ | 4,454 |   |
| State income taxes,  net of federal tax benefit                 |       | 1,623    |       | 535      |       | 858      |       |
| Utilization of  post-emergence net operating loss carryforwards |       | —   |       | (354     | )          | —   |       |
| Valuation allowance                                             |       | 7,738    |       | 282      |       | 3,103    |       |
| Withholding taxes and  tax credits                              |       | 1,339    |       | 1,290    |       | 927      |       |
| Effect of foreign  operations, net                              |       | 777      |       | (381     | )          | (1,489   | )          |
| Effect of foreign  earnings on U.S. taxes and other, net        |       | 5,338    |       | 2,546    |       | 141      |       |
| Income tax expense                                              |       | $        | 7,275      |     | $          | 9,796    |       | $ | 7,994 |   |

 

The Company’s financial reorganization, through theChapter 11 process, caused an ownership change for federal income tax purposes.As a result, future tax deductions related to certain “built-in deductions andlosses” will be limited by Section 382 of the Internal Revenue Code, asamended (“Section 382”) during the five-year period following theownership change (the recognition period). The Company had substantial amounts ofsuch built-in deductions and losses (primarily depreciation deductions)scheduled to be realized during the recognition period. Under Section 382,such built-in losses will be subject to an annual usage limitation ofapproximately $3.4 million during the recognition period.

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**POLYMER GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

AtDecember 30, 2006, the Company had the following significant net operatingloss carryforwards for income tax purposes (in thousands):

| **Country**             | ** ** | ** ** | ** ** | **Amount** | ** **     | **Year of Expiration** | ** ** |
|-------------------------|------------|------------|------------|------------|----------------|----------------------------------|------------|
| Canada                  |       | $          | 9,579      |       |           | 2008–2026                   |       |   |
| China                   |       | 1,505      |       |       | 2010–2011 |                             |       |
| France                  |       | 1,642      |       |       | Indefinite     |                             |       |
| Germany                 |       | 49,156     |       |       | Indefinite     |                             |       |
| Netherlands             |       | 23,639     |       |       | Indefinite     |                             |       |
| Sweden                  |       | 1,604      |       |       | Indefinite     |                             |       |
| United States (State)   |       | 199,000    |       |       | Various        |                             |       |
| United States (Federal) |       | 52,133     |       |       | 2023–2026 |                             |       |
|                         |            |            |            |            |                |                                  |            |  |  |  |

 

Inaddition, the Company had the following credits for income tax purposes as ofDecember 30, 2006 (in thousands):

| **Country**   | ** ** | ** **              | ** ** | **Type of Credit** | ** ** | **Amount** | ** **     | **Year of Expiration** | ** ** |
|---------------|------------|-------------------------|------------|------------------------------|------------|------------|----------------|----------------------------------|------------|
| Canada        |       | Investment  Tax         |       | $                            | 897        |       |           | 2007–2025                   |       |   |
| Mexico        |       | Asset  Tax              |       | 6,557                        |       |       | 2007–2012 |                             |       |
| Netherlands   |       | Foreign  Tax            |       | 156                          |       |       | Indefinite     |                             |       |
| United States |       | Foreign  Tax            |       | 15,169                       |       |       | 2009           |                             |       |
| United States |       | Alternative Minimum Tax |       | 692                          |       |       | Indefinite     |                             |       |
|               |            |                         |            |                              |            |            |                |                                  |            |  |  |  |

 

The Company conducts business in foreign jurisdictionswhich grant holidays from income taxes for a specified period. The Company recognizedapproximately $0.4 million of tax benefits during fiscal 2006 related to theexport activities and capital investments in Cali, Colombia. Such exportactivities will become subject to a 15% tax beginning in 2007.

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**POLYMER GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

Deferredincome taxes reflect the net tax effects of temporary differences between thecarrying amounts of assets and liabilities for financial reporting purposes andthe amounts used for income tax purposes, as well as net operating loss andother tax credit carryforwards. Significant components of the Company’s netdeferred tax assets and liabilities are as follows (in thousands):
|                                                    | ** ** | **December 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|----------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Deferred tax assets:                               |       |                        |       |                        |       |   |   |   |   |
| Provision for bad debts                            |       |                        | $          | 2,525                       |       |   |   | $ | 2,684 |   |   |
| Inventory capitalization and allowances            |       |                        | 2,188      |                        |       |   | 2,734 |   |   |
| Net operating loss and capital loss carryforwards  |       |                        | 65,595     |                        |       |   | 50,375 |   |   |
| Tax credits                                        |       |                        | 8,302      |                        |       |   | 8,416 |   |   |
| Foreign tax credits                                |       |                        | 15,169     |                        |       |   | 15,169 |   |   |
| Property, plant and equipment and intangibles, net |       |                        | 32,705     |                        |       |   | 32,475 |   |   |
| Other                                              |       |                        | 21,384     |                        |       |   | 18,314 |   |   |
| Total deferred tax assets                          |       |                        | 147,868    |                        |       |   | 130,167 |   |   |
| Valuation allowance                                |       |                        | (117,427   | )                           |       |   | (98,536 | ) |   |
| Net deferred tax  assets                           |       |                        | 30,441     |                        |       |   | 31,631 |   |   |
| Deferred tax liabilities:                          |       |                        |       |                        |       |   |   |   |   |
| Property, plant and equipment and intangibles, net |       |                        | (21,865    | )                           |       |   | (31,630 | ) |   |
| Stock basis of subsidiaries                        |       |                        | (7,709     | )                           |       |   | (33,780 | ) |   |
| Other, net                                         |       |                        | (32,435    | )                           |       |   | (26,116 | ) |   |
| Total deferred tax  liabilities                    |       |                        | (62,009    | )                           |       |   | (91,526 | ) |   |
| Net deferred tax liabilities                       |       |                        | $          | (31,568                     | )          |   |   | $ | (59,895 | ) |   |

 

A valuation allowance is recorded when, based on theweight of the evidence, it is more likely than not that some portion, or all,of the deferred tax assets will not be realized. The ultimate realization ofthe deferred tax assets depends on the ability of the Company to generatesufficient taxable income of the appropriate character in the future and in theappropriate taxing jurisdictions. In assessing the realizability of thedeferred tax assets, management considers, among other factors, the trend ofhistorical and projected future taxable income with appropriate considerationgiven to the fact that the Company is less than four years removed from theChapter 11 process, the scheduled reversal of deferred tax liabilities, thecarryforward period for net operating losses and tax credits as well as taxplanning strategies available to the Company. After consideration of all theevidence, both positive and negative, the Company has determined that valuationallowances of $117.4 million and $98.5 million are appropriate as ofDecember 30, 2006 and December 31, 2005, respectively.

During fiscal 2006, the Company: (a) recognizedadditional tax benefits from the utilization of preconfirmation net operating losscarryforwards; (b) completed the Internal Revenue Service (“IRS”)examinations for fiscal years 2003 and 2004, effectively settling certain taxuncertainties with respect to those years; and (c) modified the tax basisof its investment in subsidiaries as a result of completing the IRS examination.In accordance with SOP 90-7, the Company has recognized the tax benefitswith respect to such items which were originally estimated as of the EffectiveDate, in the amount of approximately $27.4 million, first eliminating goodwillof $10.2 million; second, eliminating all remaining intangibles established asof the Effective Date of $13.1 million; with the excess of such tax benefitsover the amounts allocable to goodwill and other intangibles as a credit  to *Additional Paid-in Capital*of $4.1 million.

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**POLYMER GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

There were no significant income tax refundsreceivable at December 30, 2006 and $1.6 million at December 31,2005. These amounts are included in *Othercurrent assets* on the Consolidated Balance Sheets.

**Note 11. Pensionand Postretirement Benefit Plans**

In September 2006, the FASB issued SFAS No. 158,which required employers to recognize the funded status of defined benefitplans and other postretirement benefit plans in the Consolidated BalanceSheets, with changes in the plan’s funded status recognized as a component ofAccumulated Other Comprehensive Income. SFAS No. 158 has been applied bythe Company as of December 30, 2006.

TheCompany and its subsidiaries sponsor multiple defined benefit plans and otherpostretirement benefit plans that cover certain employees. Benefits areprimarily based on years of service and the employee’s compensation. It is theCompany’s policy to fund such plans in accordance with applicable laws andregulations. The benefit obligations and related assets under these plans withrespect to the 2006 and 2005 disclosures have been measured as of December 30,2006 and December 31, 2005, respectively.

| ** **                                         | ** ** | **U.S. Plans  Pension Benefits** | ** ** | **Non-U.S. Plans  Pension Benefits** | ** ** |
|----------------------------------------------------|------------|--------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                         | ** ** | **2006**                                   | ** ** | **2005**                                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                         | ** ** | **(In Thousands)**                    | ** ** |
| *Change in Projected Benefit  Obligation:*         |       |                                       |       |                                           |       |   |   |   |   |
| Projected benefit  obligation at beginning of year |       | $                                          | (12,946    | )                                              | $          | (12,504 | ) | $ | (112,579 | ) | $ | (94,768 | ) |
| Additional benefit  obligations                    |       | —                                     |       | —                                         |       | — |   | (2,852 | ) |
| Service costs                                      |       | —                                     |       | —                                         |       | (2,452 | ) | (2,633 | ) |
| Interest costs                                     |       | (717                                       | )          | (724                                           | )          | (5,245 | ) | (5,117 | ) |
| Participant  contributions                         |       | —                                     |       | —                                         |       | (142 | ) | (498 | ) |
| Plan amendments                                    |       | —                                     |       | —                                         |       | 3,849 |   | (1,232 | ) |
| Actuarial (loss)/gain                              |       | (241                                       | )          | (714                                           | )          | 1,525 |   | (17,923 | ) |
| Currency translation  adjustment and other         |       | —                                     |       | —                                         |       | (8,067 | ) | 7,211 |   |
| Benefit payments                                   |       | 1,024                                      |       | 996                                            |       | 4,924 |   | 5,233 |   |
| Projected benefit  obligation at end of year       |       | $                                          | (12,880    | )                                              | $          | (12,946 | ) | $ | (118,187 | ) | $ | (112,579 | ) |
| *Change  in Plan Assets:*                          |       |                                       |       |                                           |       |   |   |   |   |
| Fair value of plan  assets at beginning of year    |       | $                                          | 10,259     |                                           | $          | 9,324 |   | $ | 92,348 |   | $ | 84,225 |   |
| Actual return on and  additional plan assets       |       | 1,425                                      |       | 961                                            |       | 6,287 |   | 13,450 |   |
| Employer and plan  participant contributions       |       | 1,040                                      |       | 970                                            |       | 6,231 |   | 6,284 |   |
| Plan amendments                                    |       | —                                     |       | —                                         |       | — |   | — |   |
| Actuarial (loss)/gain                              |       | —                                     |       | —                                         |       | — |   | — |   |
| Benefit payments                                   |       | (1,024                                     | )          | (996                                           | )          | (4,924 | ) | (5,233 | ) |
| Currency translation  adjustment and other         |       | —                                     |       | —                                         |       | 6,986 |   | (6,378 | ) |
| Fair value of plan  assets at end of year          |       | $                                          | 11,700     |                                           | $          | 10,259 |   | $ | 106,928 |   | $ | 92,348 |   |
| Funded status                                      |       | $                                          | (1,180     | )                                              | $          | (2,687 | ) | $ | (11,259 | ) | $ | (20,231 | ) |

 

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**POLYMER GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

The Company has plans whosefair value of plan assets exceeds the benefit obligation. In 2006 and 2005, thetotal amount netted in the funded status above for such plans approximates $0.9million and $0.3 million, respectively. The total amount of prepaid benefitcost included in the net prepaid (accrued) benefit cost recognized related tothese plans approximates $0.5 million in 2006 and $0.3 million in 2005.

| ** **                                         | ** ** | **U.S.  Postretirement  Benefit Plans** | ** ** | **Non-U.S.  Postretirement  Benefit Plans** | ** ** |
|----------------------------------------------------|------------|----------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                         | ** ** | **2006**                                     | ** ** | **2005**                                         | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                         | ** ** | **(In Thousands)**                      | ** ** |
| *Change in Projected Benefit Obligation:*          |       |                                         |       |                                             |       |   |   |   |   |   |   |
| Projected benefit obligation  at beginning of year |       |                                         | $          | (3,021                                           | )          |   | $ | (3,472 | ) | $ | (7,201 | ) | $ | (5,282 | ) |
| Additional benefit  obligations                    |       |                                         | —     |                                             |       | — |   | — |   | (1,192 | ) |
| Service costs                                      |       |                                         | (216       | )                                                |       | (132 | ) | (78 | ) | (80 | ) |
| Interest costs                                     |       |                                         | (212       | )                                                |       | (190 | ) | (348 | ) | (376 | ) |
| Participant contributions                          |       |                                         | (96        | )                                                |       | (71 | ) | — |   | — |   |
| Plan amendments                                    |       |                                         | —     |                                             |       | — |   | 591 |   | — |   |
| Actuarial (loss)/gain                              |       |                                         | 13         |                                             |       | 358 |   | 702 |   | (498 | ) |
| Currency translation  adjustment and other         |       |                                         | —     |                                             |       | — |   | (23 | ) | (226 | ) |
| Curtailments                                       |       |                                         | (191       | )                                                |       | — |   | — |   | — |   |
| Benefit payments                                   |       |                                         | 411        |                                             |       | 486 |   | 489 |   | 453 |   |
| Projected benefit obligation  at end of year       |       |                                         | $          | (3,312                                           | )          |   | $ | (3,021 | ) | $ | (5,868 | ) | $ | (7,201 | ) |
| *Change in Plan Assets:*                           |       |                                         |       |                                             |       |   |   |   |   |   |   |
| Fair value of plan assets at  beginning of year    |       |                                         | $          | —                                           |       |   | $ | — |   | $ | — |   | $ | — |   |
| Actual return on plan assets                       |       |                                         | —     |                                             |       | — |   | — |   | — |   |
| Acquisition                                        |       |                                         | —     |                                             |       | — |   | — |   | — |   |
| Employer and plan  participant contributions       |       |                                         | 315        |                                             |       | 415 |   | 489 |   | 453 |   |
| Plan amendments                                    |       |                                         | 96         |                                             |       | 71 |   | — |   | — |   |
| Benefit payments                                   |       |                                         | (411       | )                                                |       | (486 | ) | (489 | ) | (453 | ) |
| Currency translation  adjustment and other         |       |                                         | —     |                                             |       | — |   | — |   | — |   |
| Fair value of plan assets at  end of year          |       |                                         | $          | —                                           |       |   | $ | — |   | $ | — |   | $ | — |   |
| Funded status                                      |       |                                         | $          | (3,312                                           | )          |   | $ | (3,021 | ) | $ | (5,868 | ) | $ | (7,201 | ) |

 

 

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**POLYMER GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

The following table summarizesthe amounts recognized in the Consolidated Balance Sheet as ofDecember 30, 2006 (in thousands):

| ** **                                     | ** ** | **U.S.  Pension  Plans** | ** ** | **Non-U.S.  Pension  Plans** | ** ** | **U.S.**

**Postretirement  Benefit Plans** | ** ** | **Non-U.S.  Postretirement  Benefit Plans** | ** ** |
|------------------------------------------------|------------|--------------------------|------------|------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
| Other assets                                   |       | $                        | —     |                         | $          | 854                                              |       |                                             | $          | — |   |   |   | $ | — |   |   |
| Accrued liabilities                            |       | —                   |       | (47                          | )          |                                             | (676       | )                                                |       |   | (404 | ) |   |
| Other liabilities                              |       | (1,180                   | )          | (12,066                      | )          |                                             | (2,637     | )                                                |       |   | (5,464 | ) |   |
| Accumulated other  comprehensive (income) loss |       | (394                     | )          | 12,628                       |       |                                             | (518       | )                                                |       |   | (1,867 | ) |   |
| Net amounts recognized                         |       | $                        | (1,574     | )                            | $          | 1,369                                            |       |                                             | $          | (3,831 | ) |   |   | $ | (7,735 | ) |   |

 

Thefollowing table summarizes the amounts recorded to *AccumulatedOther Comprehensive (Income) Loss*, before taxes, as ofDecember 30, 2006 (in thousands):

| ** **                 | ** ** | **U.S.  Pension  Plans** | ** ** | **Non-U.S.  Pension  Plans** | ** ** | **U.S.  Postretirement  Benefit Plans** | ** ** | **Non-U.S.  Postretirement   Benefit Plans** | ** ** |
|----------------------------|------------|--------------------------|------------|------------------------------|------------|----------------------------------------------|------------|--------------------------------------------------------|------------|
| Transition net asset       |       |                     | $          | —                       |       |                                         | $          | 107                                                    |       |   | $ | — |   |   |   | $ | — |   |   |
| Net actuarial (gain)  loss |       |                     | (394       | )                            |       | 15,070                                       |       |                                                   | (401       | ) |   |   | (1,331 | ) |   |
| Prior service cost         |       |                     | —     |                         |       | (2,549                                       | )          |                                                   | (117       | ) |   |   | (536 | ) |   |
| Net amounts recognized     |       |                     | $          | (394                         | )          |                                         | $          | 12,628                                                 |       |   | $ | (518 | ) |   |   | $ | (1,867 | ) |   |

 

The followingtable summarizes the funded status as of December 31, 2005 (in thousands):

| ** **                                 | ** ** | **U.S.  Pension  Plans** | ** ** | **Non-U.S.  Pension  Plans** | ** ** | **U.S.  Postretirement  Benefit Plans** | ** ** | **Non-U.S.  Postretirement  Benefit Plans** | ** ** |
|--------------------------------------------|------------|--------------------------|------------|------------------------------|------------|----------------------------------------------|------------|--------------------------------------------------|------------|
| Funded status at  year-end                 |       | $                        | (2,687     | )                            | $          | (20,231                                      | )          |                                             | $          | (3,021 | ) |   |   | $ | (7,201 | ) |   |
| Unrecognized net  (gain) loss              |       | (28                      | )          | 15,827                       |       |                                         | (400       | )                                                |       |   | (569 | ) |   |
| Unrecognized  transition net (liability)   |       | —                   |       | —                       |       |                                         | —     |                                             |       |   | 11 |   |   |
| Unrecognized prior  service cost           |       | —                   |       | 1,232                        |       |                                         | (149       | )                                                |       |   | — |   |   |
| Currency translation  adjustment and other |       | —                   |       | (10                          | )          |                                         | (173       | )                                                |       |   | (145 | ) |   |
| Net amounts recognized                     |       | $                        | (2,715     | )                            | $          | (3,182                                       | )          |                                             | $          | (3,743 | ) |   |   | $ | (7,904 | ) |   |

 

The following table summarizesthe amounts recognized in the Consolidated Balance Sheet as ofDecember 31, 2005 (in thousands):

| ** **                                     | ** ** | **U.S.  Pension  Plans** | ** ** | **Non-U.S.  Pension  Plans** | ** ** | **U.S.  Postretirement  Benefit Plans** | ** ** | **Non-U.S.  Postretirement  Benefit Plans** | ** ** |
|------------------------------------------------|------------|--------------------------|------------|------------------------------|------------|----------------------------------------------|------------|--------------------------------------------------|------------|
| Other assets                                   |       | $                        | —     |                         |       | $                                            | 321        |                                             |       |   | $ | — |   |   |   | $ | — |   |   |
| Other liabilities                              |       | (2,715                   | )          |                         | (6,311     | )                                            |       |                                             | (3,743     | ) |   |   | (7,904 | ) |   |
| Accumulated other  comprehensive (income) loss |       | —                   |       |                         | 2,808      |                                         |       |                                             | —     |   |   |   | — |   |   |
| Net amounts recognized                         |       | $                        | (2,715     | )                            |       | $                                            | (3,182     | )                                                |       |   | $ | (3,743 | ) |   |   | $ | (7,904 | ) |   |

 

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**POLYMER GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

Thefollowing table summarizes the accumulated benefit obligations as ofDecember 31, 2005 (in thousands):

| ** **                      | ** ** | **U.S.  Pension  Plans** | ** ** | **Non-U.S.  Pension  Plans** | ** ** |
|---------------------------------|------------|--------------------------|------------|------------------------------|------------|
| Accumulated benefit  obligation |       | $                        | 12,946     |                         | $          | 97,118 |   |
|                                 |            |                          |            |                              |            |  |  |

 

| ** **                                               | ** ** | **U.S. Plans  Pension Benefits**                  | ** ** | **Non-U.S. Plans  Pension Benefits** | ** ** |
|----------------------------------------------------------|------------|-------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                               | ** ** | **2006**                                                    | ** ** | **2005**                                       | ** ** | **2004** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                               | ** ** | **(In Thousands, Except Percent Data)** | ** ** |
| *Components of net periodic  benefit cost:*              | * *   | * *                                                    | * *   | * *                                       | * *   | * * | * * | * * | * * | * * | * * | * * | * * |
| Current service costs                                    |       | $                                                           | —     |                                           | $          | — |   | $ | — |   | $ | 2,452 |   | $ | 2,633 |   | $ | 2,362 |   |
| Interest costs on projected benefit obligation and other |       | 717                                                         |       | 724                                            |       | 783 |   | 5,245 |   | 5,117 |   | 4,231 |   |
| Return on plan assets                                    |       | (1,425                                                      | )          | (961                                           | )          | (881 | ) | (6,287 | ) | (11,917 | ) | (3,705 | ) |
| Net amortization of transition obligation and other      |       | 607                                                         |       | 250                                            |       | 299 |   | (306 | ) | 6,668 |   | (939 | ) |
| Periodic benefit cost, net                               |       | $                                                           | (101       | )                                              | $          | 13 |   | $ | 201 |   | $ | 1,104 |   | $ | 2,501 |   | $ | 1,949 |   |
| *Weighted  average assumption rates:*                    | * *   | * *                                                    | * *   | * *                                       | * *   | * * | * * | * * | * * | * * | * * | * * | * * |
| Return on plan assets                                    |       | 8.0                                                         | %          | 8.0                                            | %          | 8.0 | % | 2.2-7.5% |   | 6.5-7.5% |   | 6.5-7.5% |   |
| Discount rate on projected benefit obligations           |       | 5.75                                                        |       | 5.75                                           |       | 6.0 |   | 4.50-5.00 |   | 4.25-5.25 |   | 5.25-6.1 |   |
| Salary and wage  escalation rate                         |       | N/A                                                         |       | N/A                                            |       | N/A |   | 2.0-3.0 |   | 2.0-3.0 |   | 2.0-3.0 |   |

 

| ** **                                                       | ** ** | **U.S. Postretirement  Benefit Plans**            | ** ** | **Non-U.S.  Postretirement  Benefit Plans** | ** ** |
|------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                       | ** ** | **2006**                                                    | ** ** | **2005**                                         | ** ** | **2004** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                       | ** ** | **(In Thousands, Except Percent Data)** | ** ** |
| *Components of net periodic  benefit cost:*                      | * *   | * *                                                    | * *   | * *                                         | * *   | * * | * * | * * | * * | * * | * * | * * | * * |
| Current service costs                                            |       | $                                                           | 217        |                                             | $          | 132 |   | $ | 372 |   | $ | 78 |   | $ | 81 |   | $ | 45 |   |
| Interest costs on projected benefit obligation and other         |       | 212                                                         |       | 190                                              |       | 496 |   | 348 |   | 376 |   | 287 |   |
| Plan amendment                                                   |       | —                                                      |       | —                                           |       | — |   | — |   | — |   | — |   |
| Net amortization of transition obligation, curtailment and other |       | (26                                                         | )          | (37                                              | )          | (4,445 | ) | (94 | ) | 1,020 |   | (188 | ) |
| Periodic benefit cost, net                                       |       | $                                                           | 403        |                                             | $          | 285 |   | $ | (3,577 | ) | $ | 332 |   | $ | 1,477 |   | $ | 144 |   |
| *Weighted  average assumption rates:*                            | * *   | * *                                                    | * *   | * *                                         | * *   | * * | * * | * * | * * | * * | * * | * * | * * |
| Discount rate on  projected benefit obligations                  |       | 5.75                                                        | %          | 5.75                                             | %          | 6.0 | % | 5.00-5.25% |   | 5.25-5.75% |   | 6.0 | % |

 

 

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**POLYMER GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

Asdiscussed below, in fiscal 2007 the Company will recognize approximately $4.5 millionof unamortized losses in its Consolidated Statement of Operations associatedwith the partial settlement of a Canadian defined benefit pension plan. Theassumed annual composite rate of increase in the per capita cost of Companyprovided health care benefits are reflected in the following table:

| **Year**            | ** ** | ** ** | ** ** | **Composite  Rate  of Increase** | ** ** |
|---------------------|------------|------------|------------|---------------------------------------|------------|
| 2007                |       |       | 9.0        | %                                     |       |
| 2008                |       |       | 8.0        | %                                     |       |
| 2009                |       |       | 7.5        | %                                     |       |
| 2010                |       |       | 7.0        | %                                     |       |
| 2011                |       |       | 6.5        | %                                     |       |
| 2012                |       |       | 6.0        | %                                     |       |
| 2013 and thereafter |       |       | 5.5        | %                                     |       |

 

A one-percentage point increase in the assumed healthcare cost trend rate would have increased aggregate service and interest costin 2006 by $0.1 million and the accumulated postretirement benefitobligation as of December 30, 2006 by $0.4 million. A one-percentagepoint decrease in the assumed health care cost trend rate would have decreasedaggregate service and interest cost in 2006 by $0.1 million and theaccumulated postretirement benefit obligation as of December 30, 2006 by$0.3 million.

The plan sponsor selects the expected long-termrate-of-return on assets assumption in consultation with their investmentadvisors and actuary. This rate is intended to reflect the average rate ofearnings expected to be earned on the funds invested or to be invested toprovide plan benefits. Historical performance is reviewed, especially withrespect to real rates of return (net of inflation), for the major asset classesheld or anticipated to be held by the trust, and for the trust itself. Undueweight is not given to recent experience, that may not continue over themeasurement period, with higher significance placed on current forecasts offuture long-term economic conditions.

Because assets are held in a qualified trust,anticipated returns are not reduced for taxes. Further, solely for thispurpose, the plans are assumed to continue in force and not terminate duringthe period during which assets are invested. However, consideration is given tothe potential impact of current and future investment policy, cash flow intoand out of the trust, and expenses (both investment and non-investment)typically paid from plan assets (to the extent such expenses are not explicitlyestimated within periodic cost).

The plans’weighted-average asset allocations by asset category are as follows:

| ** **        | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------|------------|----------|------------|----------|------------|
| Equity Securities |       |     | 38         | %        |       |   | 46 | % |   |
| Debt Securities   |       |     | 45         |     |       |   | 52 |   |   |
| Other             |       |     | 17         |     |       |   | 2 |   |   |
| Total             |       |     | 100        | %        |       |   | 100 | % |   |

 

The trust funds are sufficiently diversified tomaintain a reasonable level of risk without imprudently sacrificing return,with an overall targeted asset allocation of 40%-55% fixed income debtsecurities, 40%-55% equity securities and the remainder in cash or cashequivalents. The Investment 

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**POLYMER GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

Managers select investment fundmanagers with demonstrated experience and expertise, and funds withdemonstrated historical performance, for the implementation of the Plans’investment strategy. The Investment Managers will consider both actively andpassively managed investment strategies and will allocate funds across theasset classes to develop an efficient investment structure.

It is the responsibility of the Trustee to administerthe investments of the Trust within reasonable costs. These costs include, butare not limited to, management and custodial fees, consulting fees, transactioncosts and other administrative costs chargeable to the Trust.

The Company’s practice is tofund amounts for its qualified pension plans at least sufficient to meet theminimum requirements set forth in applicable employee benefit laws and localtax laws. Liabilities for amounts in excess of these funding levels areincluded in the Consolidated Balance Sheet. Employer contributions to itspension plans in 2007 are expected to approximate $6.0 million.

*Expected BenefitPayments*

The following table reflects the total benefitsprojected to be paid from the plans, or from the Company’s general assets,under the current actuarial assumptions used for the calculation of theprojected benefit obligations and, therefore, may differ from projected benefitpayments.

The expected level of paymentsto, or on the behalf of, participants is as follows (in thousands):

| ** ** | ** ** | **Pension** | ** ** | **Postretirement** | ** ** |
|------------|------------|-------------|------------|--------------------|------------|
| 2007       |       | $           | 4,864      |               |       | $ | 851 |   |   |
| 2008       |       | 5,348       |       |               | 500        |   |   |
| 2009       |       | 5,414       |       |               | 506        |   |   |
| 2010       |       | 5,432       |       |               | 500        |   |   |
| 2011       |       | 5,951       |       |               | 504        |   |   |
| 2012-2016  |       | 36,012      |       |               | 2,538      |   |   |
|            |            |             |            |                    |            |  |  |  |  |

 

In December 2004, the Company approved amendmentsto various postretirement benefit plans which curtailed or eliminated definedbenefits previously available under the plans. The amendments as adopted willeliminate, by January 1, 2008, the postretirement benefit plans for allU.S. current retirees of the Company and substantially all U.S. activeemployees. The three-year phase-out period was granted to provide currentretirees and other eligible employees an acceptable period to transition toother alternative medical plans. In accordance with SFAS No. 106,“Employers Accounting for Postretirement Benefits Other Than Pensions” (asamended), the gain on the plan curtailments was recognized upon the adoption ofthe plan amendments. The gain of $3.6 million was reported as a componentof *Cost of goods sold* and *Selling, general and administrative expenses*in the Consolidated Statement of Operations for fiscal year 2004 in the amountsof $3.3 million and $0.3 million, respectively.

During the first quarter of fiscal 2006, as part ofits restructuring and related cost reduction measures, the Company negotiatedcertain changes with the union representing the employees of one of theCompany’s Canadian operations, including a partial curtailment of a definedbenefit pension plan. No net gain or loss has been incurred as a result of thepartial curtailment. However, based on elections made by plan participantsduring the second quarter of fiscal 2006, and as approved by Canadianregulatory authorities on January 16, 2007, the Company will incur asettlement loss associated with employees who have elected to exit the plan.The loss incurred as a 

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**POLYMER GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

result of the partialsettlement of the defined benefit pension plan, in the amount of $4.5 million,will be recognized in the first quarter of fiscal 2007 commensurate withgovernmental approval of the terms of the settlement and upon fulfillment bythe Company of its funding requirements in the amount of $1.9 millionassociated with the approved settlement, which funding obligations werefulfilled in February 2007.

The Company sponsors severaldefined contribution plans through its domestic subsidiaries covering employeeswho meet certain service requirements. The Company makes contributions to theplans based upon a percentage of the employees’ contribution in the case of its401(k) plans or upon a percentage of the employees’ salary or hourly wagesin the case of its noncontributory money purchase plans. The cost of the planswas $2.5 million, $2.3 million and $1.9 million for fiscal 2006, 2005and 2004, respectively.

**Note 12. StockOption and Restricted Stock Plans**

*Stock Option Plans*

The 2003 Stock Option Plan (the “2003 Option Plan”)was approved by the Company’s Board of Directors and shareholders and isadministered by the Compensation Committee of the Board of Directors. The stockoptions, representing 400,000 shares, have a five-year life and vest, based onthe achievement of various service and financial performance criteria, over afour-year period, with the initial awards beginning their vesting terms as of January 4,2004. Vesting of the stock options is accelerated on the occurrence of a changein control. As of December 30, 2006 and December 31, 2005, theCompany had awarded non-qualified stock options to purchase 310,500 and400,000 shares of the Company’s Class A Common Stock, respectively.Accordingly, at December 30, 2006, there remain 89,500 stock optionsavailable to be awarded pursuant to the 2003 Option Plan.

Effective January 1, 2006, the Company haselected to account for the 2003 Option Plan in accordance with the methodology defined in SFAS No. 123(R),using the modified prospective transition method. Under the modifiedprospective transition method, the compensation costs related to all new grantsand any unvested portion of prior awards are measured based on the grant-datefair value of the award. Prior to fiscal 2006, the Company elected to accountfor the 2003 Option Plan in accordance with the intrinsic value method asprescribed by APB No. 25. For fiscal 2006, no compensation costs wererecognized for awards under the 2003 Option Plan with performance-based vestingas the performance targets were not achieved, whereas such targets wereachieved in fiscal years 2005 and 2004. The compensation costs related to the2003 Option Plan were $0.2 million, $2.2 million and $0.6 millionduring fiscal years 2006, 2005 and 2004, respectively, and were included in *Selling, general and administrative expenses*in the Consolidated Statements of Operations. Had the compensation expensemethodology defined in SFAS No. 123(R) been applied for all periodspresented, the Company’s net earnings and earnings per common share for fiscalyears 2005 and 2004 would have been impacted as summarized in the discussion ofthe Company’s stock-based compensation accounting policy in Note 2to the Consolidated Financial Statements.

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**POLYMER GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

Thefollowing table summarizes the stock option activity related to the 2003 OptionPlan for the years ended December 30, 2006, December 31, 2005 and January 1,2005:

| ** **                                                | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Unexercised options  outstanding—beginning of period |       | 400,000  |       | 225,313  |       | 240,000  |       |
| Granted                                                   |       | —   |       | 174,687  |       | —   |       |
| Exercised                                                 |       | —   |       | —   |       | —   |       |
| Forfeited                                                 |       | 89,500   |       | —   |       | 14,687   |       |
| Expired/canceled                                          |       | —   |       | —   |       | —   |       |
| Unexercised options  outstanding—end of period       |       | 310,500  |       | 400,000  |       | 225,313  |       |
| Exercisable options:                                      |       |     |       |     |       |     |       |
| Vested options as of year-end                             |       | 174,454  |       | 156,328  |       | 48,000   |       |
| Exercisable options as of year-end                        |       | —   |       | —   |       | —   |       |
| Shares available for future grant as of year-end          |       | 89,500   |       | —   |       | 174,687  |       |
| Weighted average  exercise price per share                |       | $        | 6.00       |     | $          | 6.00     |       | $ | 6.00 |   |
|                                                           |            |          |            |          |            |          |            |  |  |  |

 

The fairvalue of options granted is estimated using a Black-Scholes option pricingmodel using the following assumptions:

|                                            |   | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------|--------|----------|------------|----------|------------|----------|------------|
| Annual dividend yield                           |   | 0.0      | %          | 0.0      | %          | 0.0      | %          |
| Weighted average  expected life (years)         |   | 3.4      |       | 4.4      |       | 5.0      |       |
| Risk-free interest  rate                        |   | 4.3      | %          | 3.9      | %          | 3.2      | %          |
| Expected volatility                             |   | 41.0     | %          | 37.0     | %          | 37.0     | %          |
| Weighted average fair value  per option granted |   | $        | 18.87      |     | $          | 17.95    |       | $ | 3.41 |   |
|                                                 |        |          |            |          |            |          |            |  |  |  |

 

Expected volatility is based primarily on historicalvolatility. Historical volatility was computed using daily price observationsfor the period subsequent to the Effective Date. The Company believes thismethod produces an estimate that is representative of our expectations of thevolatility over the expected life of its options. The Company has no reason tobelieve future volatility over the expected life of these options is likely todiffer materially from historical volatility. The weighted-average expectedlife is based on the mandatory exercise provisions contained in the 2003 OptionPlan. The risk-free interest rate is based on the U.S. treasury security rateestimated for the expected life of the options at the date of grant.

SFAS No. 123(R) requiresthe estimation of forfeitures when recognizing compensation expense and thatthe estimate of forfeiture be adjusted over the requisite service period shouldactual forfeitures differ from such estimates. Changes in estimated forfeituresare recognized through a cumulative adjustment, which is recognized in theperiod of change and which impacts the amount of unamortized compensationexpense to be recognized in future periods.

*Restricted Stock Plans*

The Company’s shareholders approved the 2004Restricted Stock Plan for Directors (the “2004 Restricted Plan”), which expiresin 2014, for the issuance of restricted shares of the Company’s Class ACommon Stock to Directors of the Company, as defined in the 2004 RestrictedPlan. The 2004 Restricted Plan approved for issuance 200,000 restricted sharesand is administered by a 

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**POLYMER GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

committee of the Company’sBoard of Directors not eligible to receive restricted shares under the 2004Restricted Plan. In fiscal 2006 and 2005, the Company awarded 9,313 and 3,240restricted shares, respectively, to members of the Company’s Board of Directorsfor their Board service to the Company. In addition, 12,500 restricted shareswere approved for issuance by the Company’s Board of Directors in September 2006to the Company’s Chairman of the Board as a component of his compensation forserving as interim Chief Executive Officer. The cost associated with theserestricted stock grants, which vest over periods ranging from immediately toeighteen months, totaled approximately $0.5 million and $0.1 million for fiscalyears 2006 and 2005, respectively, and was included in *Selling, general and administrative expenses*in the Consolidated Statements of Operations. As of December 30, 2006,132,307 shares of the Company’s Class A Common Stock are available tobe awarded under the 2004 Restricted Plan.

The Company’s 2005 EmployeeRestricted Stock Plan (the “2005 Stock Plan”) was approved by the Company’sBoard of Directors and shareholders and is administered by the CompensationCommittee of the Company’s Board of Directors. The 2005 Stock Plan, whichexpires in 2015, approved for issuance 482,000 restricted shares to employeesof the Company. The Compensation Committee may, from time to time, award up to384,000 shares of restricted stock under the 2005 Stock Plan to such employeesand in such amounts and with specified restrictions as it determinesappropriate in the circumstances. The award of shares of restricted stock bythe Compensation Committee in excess of the 384,000 shares will also requirethe approval of the Board of Directors of the Company. Vesting of therestricted shares is accelerated on the occurrence of a change in control.During fiscal 2006, 291,500 restricted shares were awarded to certain employeesof the Company. Approximately 108,500 of these shares vested immediately withthe balance vesting 25% on each of the grant’s anniversary dates, beginningwith January 20, 2006 and/or annually based on service and the achievementof certain performance targets. In addition, 47,688 shares have beensurrendered during fiscal 2006 by employees to satisfy withholding requirementsand 25,144 shares have been forfeited. The compensation cost of$4.2 million related to these restricted stock grants for fiscal 2006 wasincluded in *Selling, general andadministrative expenses* in the Consolidated Statements ofOperations. As of December 30, 2006, 263,332 shares of the Company’s Class ACommon Stock are available to be awarded under the 2005 Stock Plan.

**Note 13. Series AConvertible Pay-in-kind Preferred Shares**

In conjunction with the Company’s refinancing in April 2004of the Restructured Credit Facility, the Company’s majority shareholderexchanged approximately $42.6 million in aggregate principal amount of10.0% Convertible Subordinated Notes due 2007 (the “Junior Notes”) itcontrolled for 42,633 shares of the Company’s PIK Preferred Shares. Also,during the third quarter of fiscal 2004, $10.1 million in aggregateprincipal amount of the Company’s Junior Notes were exchanged for10,083 shares of the Company’s PIK Preferred Shares and 6,719 sharesof the Company’s Class A Common Stock. Such Junior Notes were subordinatedindebtedness of the Company and provided for interest at an annual rate of10.0%, which interest, at the option of the holder, could be received inadditional principal amounts of the Junior Notes or in cash. The Junior Notescould be converted, at the option of the holder, into shares of Class ACommon Stock on the same terms as included in the PIK Preferred Shares (aconversion rate of 137.14286 shares of Class A Common Stock per shareof the convertible security, which approximates an initial conversion price ofapproximately $7.29 per share). As the aforementioned exchanges were acomponent of the recapitalization of the Company, involving the majorityshareholder and other common shareholders of the Company and the 

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**POLYMER GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

exchange by the majorityshareholder was a requirement of the then new Bank Facility, the exchanges havebeen accounted for as a capital transaction and, accordingly, no gain or losswas recognized.

Dividends on the PIK Preferred Shares accrued at anannual rate of 16.0% and were payable semi-annually in arrears on each January 1and July 1, commencing with July 1, 2004. Such dividends were payableat the option of the Company; (i) through the issuance of additionalshares of PIK Preferred Stock; (ii) in cash; or (iii) in acombination thereof. Accordingly, the Company accrued dividends at the statedrate of 16.0% until such time as the form of the dividend was declared by theCompany’s Board of Directors. If the dividend was paid-in-kind through theissuance of additional shares of PIK Preferred Stock, the Company recognizedthe dividend at the estimated fair value of the shares issued in excess of theamounts previously accrued. At any time prior to June 30, 2012, theholders of the PIK Preferred Shares could have elected to convert any or all oftheir PIK Preferred Shares into shares of the Company’s Class A CommonStock at an initial conversion rate of 137.14286 shares of Class ACommon Stock per share of PIK Preferred Shares which approximates an initialconversion price equal to $7.29 per share.

On January 14, 2005, the Company’s Board ofDirectors declared that dividends accrued on the PIK Preferred Shares from thedate of issuance through December 31, 2004, in the amount of$5.6 million, would be paid in the form of PIK Preferred Shares. TheCompany recorded the value of the additional PIK Preferred Shares declared as adividend on January 14, 2005, the date the Board of Directors declaredthat the accrued dividends were to be paid in the form of additional PIKPreferred Shares, rather than cash, reduced by the amount of dividendspreviously recorded at the stated 16.0% rate. Using the estimated market valueof the Company’s Class A Common Stock of $18.50 per share, the fair valueof the 5,540 additional PIK Preferred Shares issued in lieu of cash payment wasapproximately $14.1 million, which exceeded the amount previously accruedby the Company of $5.6 million, based on the stated rate of 16.0%, byapproximately $8.5 million. On August 3, 2005, the Company’s Board ofDirectors declared that dividends accrued on the PIK Preferred Shares from January 1,2005 through June 30, 2005, in the amount of $4.7 million, would bepaid in the form of PIK Preferred Shares. The Company recorded the value of theadditional PIK Preferred Shares declared as a dividend on August 3, 2005,the date the Board of Directors declared that the accrued dividends were to bepaid in the form of additional PIK Preferred Shares, rather than cash, reducedby the amount of dividends previously recorded at the stated 16.0% rate. Usingthe estimated market value of the Company’s Class A Common Stock of $27.70per share, the fair value of the 4,660 additional PIK Preferred Shares issuedin lieu of cash payment was approximately $17.7 million, which exceededthe amount previously accrued by the Company of $4.7 million, based on thestated rate of 16.0%, by approximately $13.0 million. In addition, theCompany accrued a charge for dividends of $1.8 million for the period fromJuly 2, 2005 through the date that the PIK Preferred Shares were redeemedfor, or converted to, shares of the Company’s Class A Common Stock, asdescribed below. Accordingly, total accrued and paid-in-kind dividends amountedto $28.0 million and $5.6 million in fiscal years 2005 and 2004,respectively.

Also, on July 28, 2005, the Company’s Board ofDirectors authorized the redemption of all of the Company’s PIK PreferredShares on or before September 30, 2005. On August 16, 2005, the Boardof Directors set September 15, 2005 as the redemption date (the “RedemptionDate”). In accordance with the terms of the PIK Preferred Shares, the Companywould redeem all PIK Preferred Shares outstanding at the Redemption Date at aredemption rate of 37.26397 shares of Class A Common Stock per PIKPreferred Share. At any time prior to the Redemption Date, holders of PIKPreferred 

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**POLYMER GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

Shares could exercise theirright to convert their PIK Preferred Shares into shares of Class A CommonStock at a conversion rate of 137.14286 shares of Class A CommonStock per PIK Preferred Share.

As of the close of business onthe Redemption Date, five PIK Preferred Shares had been redeemed by the Companywith the redemption price being paid by the issuance of 187 shares of Class ACommon Stock. Additionally, 62,916 PIK Preferred Shares had been converted byholders into 8,628,473 shares of Class A Common Stock. Also, duringthe first quarter of fiscal 2005, five PIK Preferred Shares were converted into686 shares of Class A Common Stock. As a result of thesetransactions, 8,629,346 additional shares of Class A Common Stock are nowissued and outstanding and no PIK Preferred Shares are currently issued oroutstanding.

**Note 14. Derivativesand Other Financial Instruments and Hedging Activities**

The Company uses derivative financial instruments tomanage market risks and reduce its exposure to fluctuations in interest ratesand foreign currencies. All hedging transactions are authorized and executedunder clearly defined policies and procedures, which prohibit the use offinancial instruments for trading purposes.

The Company uses interest-rate derivative instrumentsto manage its exposure related to movements in interest rates with respect toits debt instruments. As indicated in Note 9 to the Consolidated FinancialStatements, to mitigate its interest rate exposure as required by the CreditFacility, the Company entered into a pay-fixed, receive-variable interestrate swap, thus effectively converting the variable LIBOR-based interestpayments associated with $212.5 million of the debt to fixed amounts at aLIBOR rate of 3.383%. The notional amount of this contract, which expires on May 8,2007, was $212.5 million. Cash settlements are made quarterly and thefloating rate is reset quarterly, coinciding with the reset dates of thecurrent Credit Facility.

In accordance with SFAS No. 133, the Companydesignated the swap as a cash flow hedge of the variability of interestpayments and applied the shortcut method of assessing effectiveness. Theagreement’s terms ensure complete effectiveness in offsetting the variabilityof the interest component associated with $212.5 million of first-lienterm loan debt. As such, there is no ineffectiveness and changes in the fairvalue of the swap are included in *Accumulated OtherComprehensive Income* in the Consolidated Balance Sheets. The fairvalue of the interest rate swap, based on current settlement values, was $1.5million and $3.8 million as of December 30, 2006 and December 31,2005, respectively. Those amounts were included in *Other noncurrent assets* in the Consolidated Balance Sheets.

The impact of this swap on *Interest expense, net* in the Consolidated Statements ofOperations was a decrease of $3.7 million for fiscal year 2006 and an increaseof $0.2 million and $2.4 million for fiscal years 2005 and 2004,respectively.

Additionally, on February 8, 2007, the Companyentered into a similar pay-fixed, receive-variable interest rate swap contractto become effective on May 8, 2007. The notional principal amount of thisnew contract, which expires on June 29, 2009, is $240.0 million andeffectively fixes the LIBOR interest rate on that amount of debt at 5.085%.

During fiscal years 2006 and2005, the Company used foreign exchange forward contracts to manage itsU.S.-dollar exposure on Euro-based obligations for firm commitments. At December 31,2005, the Company had approximately $30.1 million of notional amount inoutstanding contracts with a third party financial institution. There were nooutstanding contracts at December 30, 2006.

86

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**POLYMER GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

**Note 15. Shareholders’Equity**

As of December 30,2006 and December 31, 2005, the Company’s authorized capital stockconsisted of the following classes of stock:

| **Type**                               | ** ** | **Par Value** | ** ** | **Authorized Shares** | ** ** |
|----------------------------------------|------------|--------------------|------------|----------------------------|------------|
| Preferred stock                        |       |               | $          | .01                        |       |   |   | 173,000 |   |   |
| Class A common  stock             |       |               | $          | .01                        |       |   |   | 39,200,000 |   |   |
| Class B  convertible common stock |       |               | $          | .01                        |       |   |   | 800,000 |   |   |
| Class C convertible  common stock |       |               | $          | .01                        |       |   |   | 118,453 |   |   |
| Class D  convertible common stock |       |               | $          | .01                        |       |   |   | 498,688 |   |   |
| Class E convertible  common stock |       |               | $          | .01                        |       |   |   | 523,557 |   |   |

 

All classes of the commonstock have similar voting rights. In accordance with the Amended and RestatedCertificate of Incorporation, all shares of Class B, C, D and E CommonStock may be converted into an equal number of shares of Class A CommonStock. The shares of preferred stock may be issued from time to time with suchdesignation, preferences, participation rights and optional or special rights(including, but not limited to, dividend rates, voting rights, maturity datesand the like) as determined by the Board of Directors.

**Note 16. SegmentInformation**

The Company’s reportable segments consist of itsprimary operating divisions—Nonwovens and Oriented Polymers. This reflects howthe overall business is managed by the Company’s senior management and reviewedby the Board of Directors. Each of these businesses sells to different end-usemarkets, such as hygiene, medical, wipes, industrial and specialty markets.Sales to P&G accounted for more than 10% of the Company’s sales in each ofthe periods presented. Sales to this customer are reported primarily in theNonwovens segment and the loss of these sales would have a material adverseeffect on this segment. The Company recorded charges and/or income in theConsolidated Statements of Operations during the fiscal years 2006, 2005 and2004 relating to special charges (credits), net that have not been allocated tothe segment data.

87

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**POLYMER GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

Financial data by segment is as follows (inthousands):

| ** **                                                                 | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net sales                                                                  |       |     |       |     |       |     |       |
| Nonwovens                                                                  |       | $        | 848,281    |     | $          | 763,777  |       | $ | 672,600 |   |
| Oriented Polymers                                                          |       | 173,327  |       | 185,071  |       | 172,541  |       |
| Eliminations                                                               |       | —   |       | —   |       | (407     | )          |
|                                                                       |       | $        | 1,021,608  |     | $          | 948,848  |       | $ | 844,734 |   |
| Operating income (loss)                                                    |       |     |       |     |       |     |       |
| Nonwovens                                                                  |       | $        | 66,586     |     | $          | 66,211   |       | $ | 59,218 |   |
| Oriented Polymers                                                          |       | 4,340    |       | 10,586   |       | 12,092   |       |
| Unallocated Corporate                                                      |       | (26,616  | )          | (20,793  | )          | (19,240  | )          |
| Eliminations                                                               |       | 258      |       | 259      |       | 202      |       |
|                                                                       |       | 44,568   |       | 56,263   |       | 52,272   |       |
| Special (charges) credits, net                                             |       | (38,683  | )          | (9       | )          | 8,992    |       |
|                                                                       |       | $        | 5,885      |     | $          | 56,254   |       | $ | 61,264 |   |
| Depreciation and amortization expense included in  operating income (loss) |       |     |       |     |       |     |       |
| Nonwovens                                                                  |       | $        | 48,998     |     | $          | 45,083   |       | $ | 41,923 |   |
| Oriented Polymers                                                          |       | 10,373   |       | 10,643   |       | 8,217    |       |
| Unallocated Corporate                                                      |       | 211      |       | 106      |       | 1,120    |       |
| Eliminations                                                               |       | (258     | )          | (259     | )          | —   |       |
| Depreciation and amortization expense included in operating  income   |       | 59,324   |       | 55,573   |       | 51,260   |       |
| Amortization of loan acquisition costs                                     |       | 1,339    |       | 1,977    |       | 1,970    |       |
|                                                                       |       | $        | 60,663     |     | $          | 57,550   |       | $ | 53,230 |   |
| Capital spending                                                           |       |     |       |     |       |     |       |
| Nonwovens                                                                  |       | $        | 64,952     |     | $          | 77,088   |       | $ | 23,766 |   |
| Oriented Polymers                                                          |       | 2,438    |       | 1,814    |       | 1,025    |       |
| Corporate                                                                  |       | 777      |       | —   |       | —   |       |
|                                                                       |       | $        | 68,167     |     | $          | 78,902   |       | $ | 24,791 |   |
| Division assets                                                            |       |     |       |     |       |     |       |
| Nonwovens                                                                  |       | $        | 737,561    |     | $          | 715,977  |       | $ | 732,163 |   |
| Oriented Polymers                                                          |       | 116,368  |       | 144,477  |       | 149,393  |       |
| Corporate                                                                  |       | 390      |       | 2,096    |       | 560      |       |
| Eliminations                                                               |       | (112,222 | )          | (97,549  | )          | (127,558 | )          |
|                                                                       |       | $        | 742,097    |     | $          | 765,001  |       | $ | 754,558 |   |

 

88

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**POLYMER GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

Geographic Data:

Exportsales from the Company’s United States operations to unaffiliated customersapproximated $66.7 million, $60.6 million and $60.2 million duringfiscal years 2006, 2005 and 2004, respectively. Geographic data for the Company’soperations, based on the geographic region that the sale is made from, arepresented in the following table (in thousands):

| ** **                                                                 | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net sales                                                                  |       |     |       |     |       |     |       |
| United States                                                              |       | $        | 466,956    |     | $          | 444,968  |       | $ | 381,421 |   |
| Canada                                                                     |       | 108,571  |       | 116,158  |       | 111,591  |       |
| Europe                                                                     |       | 185,231  |       | 184,743  |       | 190,470  |       |
| Asia                                                                       |       | 54,474   |       | 44,297   |       | 32,384   |       |
| Latin America                                                              |       | 206,376  |       | 158,682  |       | 128,868  |       |
|                                                                       |       | $        | 1,021,608  |     | $          | 948,848  |       | $ | 844,734 |   |
| Operating income (loss)                                                    |       |     |       |     |       |     |       |
| United States                                                              |       | $        | (8,822     | )        | $          | 3,327    |       | $ | 3,111 |   |
| Canada                                                                     |       | (1,073   | )          | 3,114    |       | 4,884    |       |
| Europe                                                                     |       | 15,422   |       | 15,840   |       | 17,393   |       |
| Asia                                                                       |       | 5,560    |       | 5,445    |       | 3,250    |       |
| Latin America                                                              |       | 33,481   |       | 28,537   |       | 23,634   |       |
|                                                                       |       | 44,568   |       | 56,263   |       | 52,272   |       |
| Special (charges) credits, net                                             |       | (38,683  | )          | (9       | )          | 8,992    |       |
|                                                                       |       | $        | 5,885      |     | $          | 56,254   |       | $ | 61,264 |   |
| Depreciation and amortization expense included in  operating income (loss) |       |     |       |     |       |     |       |
| United States                                                              |       | $        | 25,478     |     | $          | 24,891   |       | $ | 24,240 |   |
| Canada                                                                     |       | 8,139    |       | 8,429    |       | 6,015    |       |
| Europe                                                                     |       | 9,226    |       | 9,286    |       | 8,862    |       |
| Asia                                                                       |       | 5,025    |       | 4,149    |       | 4,014    |       |
| Latin America                                                              |       | 11,456   |       | 8,818    |       | 8,129    |       |
| Depreciation and amortization expense included in operating income         |       | 59,324   |       | 55,573   |       | 51,260   |       |
| Amortization of loan acquisition costs                                     |       | 1,339    |       | 1,977    |       | 1,970    |       |
|                                                                       |       | $        | 60,663     |     | $          | 57,550   |       | $ | 53,230 |   |
| Identifiable assets (including intangible assets)                          |       |     |       |     |       |     |       |
| United States                                                              |       | $        | 303,728    |     | $          | 323,596  |       | $ | 294,042 |   |
| Canada                                                                     |       | 76,170   |       | 94,531   |       | 99,382   |       |
| Europe                                                                     |       | 193,372  |       | 202,324  |       | 294,811  |       |
| Asia                                                                       |       | 91,383   |       | 60,267   |       | 35,996   |       |
| Latin America                                                              |       | 189,669  |       | 181,834  |       | 157,900  |       |
| Eliminations                                                               |       | (112,225 | )          | (97,551  | )          | (127,573 | )          |
|                                                                       |       | $        | 742,097    |     | $          | 765,001  |       | $ | 754,558 |   |

 

89

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**POLYMER GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

**Note 17. ForeignCurrency Loss, Net**

Componentsof foreign currency (gain) loss are shown in the table below (in thousands):

| ** **                          | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Included in operating  income       |       | $        | 1,229      |     | $          | 671      |       | $ | 2,027 |   |
| Included in other  expense (income) |       | 68       |       | (280     | )          | 1,046    |       |
|                                |       | $        | 1,297      |     | $          | 391      |       | $ | 3,073 |   |

 

For international subsidiaries which have the U.S.dollar as their functional currency, local currency transactions are remeasuredinto U.S. dollars, using current rates of exchange for monetary assets andliabilities. Gains and losses from the remeasurement of such monetary assetsand liabilities are reported in *Foreign currency loss, net*in the Consolidated Statements of Operations. Likewise, for internationalsubsidiaries which have the local currency as their functional currency, gainsand losses from the remeasurement of monetary assets and liabilities notdenominated in the local currency are reported in *Foreigncurrency loss, net* in the Consolidated Statements of Operations.Additionally, currency gains and losses have been incurred on intercompanyloans between subsidiaries, and to the extent that such loans are not deemed tobe permanently invested, such currency gains and losses are also reflected in *Foreign currency and other (gain) loss, net* in theConsolidated Statements of Operations.

The Company includes gains andlosses on receivables, payables and other operating transactions as a componentof operating income in *foreign currency loss, net*.Other foreign currency gains and losses, primarily related to intercompanyloans and debt, are included in *Foreign currency and other(gain) loss, net*.

**Note 18.Commitments and Contingencies**

*Non-affiliate Leases*

TheCompany leases certain manufacturing, warehousing and other facilities andequipment under operating leases. The leases on most of the properties containrenewal provisions. Rent expense (net of sub-lease income), includingincidental leases, approximated $3.7 million, $3.3 million and$4.0 million in fiscal years 2006, 2005 and 2004, respectively. Rentalincome approximated $0.2 million and $0.6 million in fiscalyears 2005 and 2004, respectively. There was no rental income in fiscal year2006. The expenses are recognized on a straight-line basis over the lifeof the lease. The approximate net minimum rental payments required undernon-affiliate operating leases that have initial or remaining non-cancelablelease terms in excess of one year at December 30, 2006 are presented inthe following table (in thousands):

| ** ** | ** ** | **Gross Minimum  Rental Payments** | ** ** |
|------------|------------|----------------------------------------------|------------|
| 2007       |       |                                         | $          | 3,325 |   |   |
| 2008       |       |                                         | 2,747      |   |   |
| 2009       |       |                                         | 1,919      |   |   |
| 2010       |       |                                         | 1,352      |   |   |
| 2011       |       |                                         | 723        |   |   |
| Thereafter |       |                                         | 1,374      |   |   |
|       |       |                                         | $          | 11,440 |   |   |

 

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**POLYMER GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

 

*Purchase Commitments*

At December 30, 2006, the Company had commitmentsof approximately $47.9 million related to the purchase of raw materials,maintenance and converting services. Additionally, the Company has severalmajor committed capital projects, including the installment of a new spunmeltline at the joint venture facility near Buenos Aires, Argentina. Remainingpayments due related to these planned capital expansions as of December 30,2006 totaled approximately $39.4 million and are expected to be expendedduring fiscal year 2007. The Company has obtained committed local financingsubsequent to December 30, 2006 to support the capital expansion in Argentina.

In June 2006, one of the Company’s subsidiaries, Fabpro OrientedPolymers, Inc. (“Fabpro”) entered an agreement relating to the sale ofcertain assets for $2.3 million and a supply and marketing rightsagreement (“supply agreement”) with an unrelated third party. Under the termsof the supply agreement, which has an initial term of 10 years, Fabpro hascommitted to purchase a minimum level of product (as defined in the supplyagreement), representing approximately $7.1 million per year, based on currentsales prices, through the year 2012. In the event that Fabpro does not purchasesuch minimum quantities, Fabpro will be obligated to pay a 12.5% penalty on thevalue of the committed amounts not purchased, based on sales prices in effect atthat time.

*Collective BargainingAgreements*

At December 30, 2006, theCompany had approximately 3,471 employees worldwide. Approximately 1,314employees are represented by labor unions or trade councils, which have enteredinto separate collective bargaining agreements with the Company. Approximately25% of the Company’s labor force is covered by collective bargaining agreementsthat will expire within one year.

*Environmental*

The Company is subject to abroad range of federal, foreign, state and local laws and regulations relatingto pollution and protection of the environment. The Company believes that it iscurrently in substantial compliance with applicable environmental requirementsand does not currently anticipate any material adverse effect on its operations,financial or competitive position as a result of its efforts to comply withenvironmental requirements.

*Litigation*

The Company is not currently aparty to any material pending legal proceedings other than routine litigationincidental to the business of the Company. During fiscal 2005, the Company wasserved with a lawsuit by a customer alleging breach of contract and othercharges. The discovery phase is continuing and there is not currently enoughinformation to formulate an assessment of the ultimate outcome of the claim.Accordingly, management is not able to estimate the amount of the loss, if any,at this time. The Company intends to vigorously defend this action and believesthat it has reasonable arguments available in its defense. However, there is apossibility that resolution of this matter, or others that may arise in thenormal course of business, could result in a loss in excess of establishedreserves, if any.

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**POLYMER GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

**Note 19. QuarterlyResults of Operations (Unaudited)**

Quarterly financial data forthe fiscal year ended December 30, 2006 and the fiscal year ended December 31,2005 is presented below (amounts in thousands, except for per share data). All2006 and 2005 fiscal quarters were comprised of 13 weeks.

*Quarterly data for fiscal 2006:*

| ** **                              | ** ** | **Fourth Quarter  Ended  December 30, 2006** | ** ** | **Third Quarter  Ended  September 30, 2006** | ** ** | **Second Quarter  Ended  July 1, 2006** | ** ** | **First Quarter  Ended  April 1, 2006** | ** ** |
|-----------------------------------------|------------|-------------------------------------------------------------|------------|-------------------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|
| *Operating data:*                       |       |                                                        |       |                                                        |       |                                                   |       |                                                   |       |   |   |   |   |   |   |   |   |
| Net sales                               |       |                                                        | $          | 263,875                                                     |       |                                                   |       | $                                                      | 248,586    |   |   |   | $ | 248,706 |   |   |   | $ | 260,441 |   |   |
| Gross profit                            |       |                                                        | 41,416     |                                                        |       |                                                   | 35,130     |                                                   |       |   | 36,453 |   |   |   | 43,204 |   |   |
| Net loss                                |       |                                                        | (18,860    | )                                                           |       |                                                   | (1,515     | )                                                      |       |   | (12,552 | ) |   |   | (1,605 | ) |   |
| Loss applicable to  common shareholders |       |                                                        | (18,860    | )                                                           |       |                                                   | (1,515     | )                                                      |       |   | (12,552 | ) |   |   | (1,605 | ) |   |
| Loss per common  share—basic       |       |                                                        | $          | (0.98                                                       | )          |                                                   |       | $                                                      | (0.08      | ) |   |   | $ | (0.65 | ) |   |   | $ | (0.08 | ) |   |
| Loss per common  share—diluted     |       |                                                        | $          | (0.98                                                       | )          |                                                   |       | $                                                      | (0.08      | ) |   |   | $ | (0.65 | ) |   |   | $ | (0.08 | ) |   |

 

During the fourth quarter offiscal 2006, the Company recorded special charges (credits), net ofapproximately $21.9 million. See Note 3 to the Consolidated FinancialStatements for additional details related to such special charges (credits),net recognized in fiscal 2006. Additionally, the Company recognized an incometax expense of $3.6 million on a pre-tax loss of $15.2 million. Theeffective tax rate for the fourth quarter was unfavorably impacted by losses inthe U.S. and other jurisdictions for which no tax benefit has been recognized,as well as an adjustment to tax accruals recorded through the previousquarters. See Note 10 to the Consolidated Financial Statements for additionaldetails related to the fiscal year 2006 tax provision.

*Quarterly data for fiscal 2005:*

| ** **                                                  | ** ** | **Fourth Quarter  Ended  December 31, 2005** | ** ** | **Third Quarter  Ended  October 1, 2005** | ** ** | **Second Quarter  Ended  July 2, 2005** | ** ** | **First Quarter  Ended  April 2, 2005** | ** ** |
|-------------------------------------------------------------|------------|-------------------------------------------------------------|------------|----------------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|
| *Operating data:*                                           |       |                                                        |       |                                                     |       |                                                   |       |                                                   |       |   |   |   |   |   |   |   |   |
| Net sales                                                   |       |                                                        | $          | 240,414                                                  |       |                                                   |       | $                                                      | 228,220    |   |   |   | $ | 235,853 |   |   |   | $ | 244,361 |   |   |
| Gross profit                                                |       |                                                        | 36,714     |                                                     |       |                                                   | 38,905     |                                                   |       |   | 41,943 |   |   |   | 43,917 |   |   |
| Net income (loss)                                           |       |                                                        | (2,433     | )                                                        |       |                                                   | 194        |                                                   |       |   | 4,070 |   |   |   | 5,166 |   |   |
| Accrued and  paid-in-kind dividends on PIK Preferred Shares |       |                                                        | —     |                                                     |       |                                                   | 14,790     |                                                   |       |   | 2,357 |   |   |   | 10,851 |   |   |
| Income (loss)  applicable to common shareholders            |       |                                                        | (2,433     | )                                                        |       |                                                   | (14,596    | )                                                      |       |   | 1,713 |   |   |   | (5,685 | ) |   |
| Income (loss) per  common share—basic                  |       |                                                        | $          | (0.13                                                    | )          |                                                   |       | $                                                      | (1.17      | ) |   |   | $ | 0.16 |   |   |   | $ | (0.55 | ) |   |
| Income (loss) per common  share—diluted                |       |                                                        | $          | (0.13                                                    | )          |                                                   |       | $                                                      | (1.17      | ) |   |   | $ | 0.16 |   |   |   | $ | (0.55 | ) |   |

 

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**POLYMER GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

**Note 20. SupplementalCash Flow Information**

Cashpayments of interest and taxes consist of the following (in thousands):

| ** **                                             | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Cash payments of  interest, net of amounts capitalized |       | $        | 27,546     |     | $          | 34,139   |       | $ | 37,764 |   |
| Cash payments (refunds) of  income taxes, net          |       | 6,498    |       | (9,705   | )          | 6,827    |       |
|                                                        |            |          |            |          |            |          |            |  |  |  |

 

Noncash investing or financing transactions in fiscal2006 included the surrender of 47,688 shares of the Company’s Class ACommon Stock to the Company by participants in the 2005 Stock Plan in theamount of $1.3 million to satisfy employee withholding tax obligations.

Noncash investing or financing transactions in fiscal2005 included: (i) the conversion or redemption of 62,926 shares ofthe Company’s PIK Preferred Shares into approximately 8,629,346 shares ofthe Company’s Class A Common Stock, (ii) the issuance of 10,200 PIKPreferred Shares as payment-in-kind, in lieu of cash payment, of approximately$10.3 million of dividends on the Company’s PIK Preferred Shares, whichresulted in an additional non-cash dividend charge of approximately$21.5 million in excess of the amounts accrued at the stated dividend rateof 16.0% on the PIK Preferred Shares and (iii) the accrual of $1.8 millionof dividends on the PIK Preferred Shares from the date of the last dividenddeclaration date to the date the PIK Preferred Stock were redeemed or convertedto Class A Common Stock.

Noncash investing or financingtransactions in fiscal 2004 included (i) the issuance of1,327,177 shares of the Company’s Class A Common Stock and19,359 shares of the Company’s Class C Common Stock in accordancewith the ruling of the United States Bankruptcy Court for the District of SouthCarolina, (ii) the conversion of $2.7 million of the Company’s JuniorNotes into approximately 371,382 shares of the Company’s Class ACommon Stock, (iii) the exchange of $42.6 million of the Company’sJunior Notes into approximately 42,633 shares of the Company’s PIKPreferred Shares, (iv) the exchange of $10.1 million of the Company’sJunior Notes into approximately 10,083 shares of the Company’s PIKPreferred Shares and 6,719 shares of the Company’s Class A CommonStock, (v) the payment in kind in lieu of cash payment of $1.8 millionof interest expense on the Junior Notes and (vi) the accrual of$5.6 million of dividends on the PIK Preferred Shares.

**Note 21.**   Subsequent Events

On January 3, 2007, the Board of Directors of theCompany approved a plan to close its Rogers, Arkansas and Gainesville, Georgiaplants in the United States and transfer portions of the business to otherlocations in North America and Asia. The restructuring plan included thereduction of approximately 170 production and administrative staff positions.As a result of this decision, the Company estimates that it will recognize cashrestructuring charges of approximately $5.5 million to $6.0 million duringfiscal year 2007. The Company anticipates proceeds of approximately $4.0million to $5.0 million from the sale of idled facilities and equipment.Additionally, with respect to the planned closure of the aforementionedfacilities in fiscal 2007, the Company recognized an impairment charge of $1.4million in fiscal 2006.

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**ITEM 9.**                 CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

**ITEM 9A.**        CONTROLSAND PROCEDURES

*Evaluation ofDisclosure Controls and Procedures*

The Company maintains disclosure controls andprocedures that are designed to ensure that information required to bedisclosed in Securities and Exchange Commission reports is recorded, processed,summarized and reported within the time periods specified in the Securities andExchange Commission’s rules and forms, and that such information isaccumulated and communicated to the Company’s management, including the ChiefExecutive Officer and Chief Financial Officer, as appropriate, to allow timelydecisions regarding required disclosure.

Under the direction of ourChief Executive Officer and Chief Financial Officer, management has carried outan evaluation of the effectiveness of the Company’s disclosure controls andprocedures as such item is defined in Rule 13a-15(e) under theSecurities Exchange Act of 1934, as amended (the “Exchange Act”). Based on thatevaluation, the Chief Executive Officer and Chief Financial Officer haveconcluded that these disclosure controls and procedures were effective as of December 30,2006.

*Management’s Report onInternal Control over Financial Reporting*

Management is responsible for establishing andmaintaining adequate internal control over financial reporting for the Companyas such term is defined in Rule 13a-15(f) of the Exchange Act.Internal control over financial reporting is a process designed to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withaccounting principles generally accepted in the United States and includesthose policies and procedures that (i) pertain to the maintenance ofrecords that in reasonable detail accurately and fairly reflect thetransactions and dispositions of the Company’s assets; (ii) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with accounting principlesgenerally accepted in the United States, and that receipts and expenditures ofthe Company are being made only in accordance with authorizations of theCompany’s management and directors; and (iii) provide reasonable assuranceregarding prevention or timely detection of unauthorized acquisition, use ordisposition of the Company’s assets that could have a material effect on thefinancial statements.

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

Under the direction of ourChief Executive Officer and Chief Financial Officer, management has assessedthe effectiveness of the Company’s internal control over financial reporting asof December 30, 2006. In making this assessment, management used thecriteria set forth in the *Internal Control—IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission (COSO). Based on this assessment, management concluded thatthe Company’s internal control over financial reporting was effective as of December 30,2006. Grant Thornton LLP, an independent registered public accounting firm, hasissued its report on management’s assessment of the Company’s internal controlover financial reporting which is included herein.

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*Changes in InternalControl over Financial Reporting*

There were no changes in theCompany’s internal control over financial reporting in the fourth quarter offiscal 2006 that have materially affected, or are reasonably likely tomaterially affect, the Company’s internal control over financial reporting.

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directors and Shareholders of 

Polymer Group, Inc.

We have audited management’s assessment, included inthe accompanying Management’s Report on Internal Control over FinancialReporting, that Polymer Group, Inc. (a Delaware corporation) andsubsidiaries maintained effective internal control over financial reporting asof December 30, 2006, based on criteria established in Internal Control—IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO). Polymer Group, Inc.’s management is responsible formaintaining effective internal control over financial reporting and for itsassessment of the effectiveness of internal control over financial reporting.Our responsibility is to express an opinion on management’s assessment and anopinion on the effectiveness of the company’s internal control over financialreporting based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinions.

A company’s internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accounting principles,and that receipts and expenditures of the company are being made only inaccordance with authorizations of management and directors of the company; and (3) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have amaterial effect on the financial statements.

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

In our opinion, management’s assessment that PolymerGroup, Inc. and subsidiaries maintained effective internal control overfinancial reporting as of December 30, 2006, is fairly stated, in allmaterial respects, based on criteria established in Internal Control—IntegratedFramework issued by COSO. Also in our opinion, Polymer Group, Inc. andsubsidiaries maintained, in all material respects, effective internal controlover financial reporting as of December 30, 2006, based on InternalControl—Integrated Framwork issued by COSO.

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We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated balance sheets of Polymer Group, Inc. andsubsidiaries as of December 30, 2006 and December 31, 2005, and therelated consolidated statements of operations, changes in shareholders’ equityand comprehensive income (loss) and cash flows for the years then ended, and ourreport dated March 13, 2007 expressed an unqualified opinion on thosefinancial statements.

/s/ GRANT THORNTON LLP

Columbia,South Carolina

March 13, 2007

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**ITEM 9B.**        OTHERINFORMATION

None.

**PART III**

**ITEM 10.**          DIRECTORS,EXECUTIVE OFFICERS ANDCORPORATE GOVERNANCE

Information required by this Item is set forth under the captions “Nomineesfor Director” and “Executive Officers” in the definitive proxy materials of theCompany, which information is incorporated herein by reference.

Information on the beneficial ownership reporting for the Company’sdirectors, executive officers, and certain beneficial owners is contained underthe caption “Section 16(a) Beneficial Ownership Reporting Compliance”in the definitive proxy materials of the Company, which information isincorporated herein by reference.

Information on stockholder nominations to the Company’s Board of Directors,the Company’s Audit Committee and Audit Committee Financial Expert is set forthunder the caption “Information About the Board of Directors” in the definitiveproxy materials of the Company, which information is incorporated herein byreference.

The Company has a Code ofConduct that applies to all officers and employees, including the Company’s principalexecutive officer, principal financial officer, principal accounting officer,and other key financial and accounting officers. The Code of Conduct can befound on the Investors’ page of the Company’s publicly-availablewebsite (*www.polymergroupinc.com*).The Company will post any amendments to the Code of Conduct, and any waiversthat are required to be disclosed by Securities and Exchange Commissionregulations, on the Company’s website.

**ITEM 11.**          EXECUTIVECOMPENSATION

Information required under this Item relating to executive compensationand director compensation is set forth under the caption “ExecutiveCompensation”  in the definitive proxymaterials of the Company, which information is incorporated herein byreference.

Information required underthis Item relating to Compensation Committee Interlocks and Insider Participationis set forth under the caption “Compensation Committee Interlocks and InsiderParticipation”  in the definitive proxymaterials of the Company, which information is incorporated herein byreference.

The Compensation CommitteeReport required under this Item is set forth under the caption “CompensationCommittee Report” in the definitive proxy materials of the Company, whichinformation is incorporated herein by reference.

**ITEM 12.**          SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS

Information required under this Item is set forthunder the caption “Security Ownership of Certain Beneficial Owners andManagement and Related Stockholder Matters” in the definitive proxy materialsof the Company, which information is incorporated herein by reference.

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The following table providescertain information as of December 30, 2006 with respect to our equitycompensation plans:

| ** **                                               | ** ** | **(a) **

**Number of securities  to be issued upon  exercise of  outstanding options,  warrants and rights** | ** ** | **(b) **

**Weighted-average  exercise price  of outstanding  options,  warrants and rights** | ** ** | **(c)  Number of securities  remaining available  for future issuance under  equity compensation plans  (excluding securities  reflected in column (a))** | ** ** |
|----------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity compensation plans approved by security  holders: |       |                                                                                                                                                            |       |                                                                                                                   |       |                                                                                                                                                                                                                  |       |   |   |   |   |   |   |
| —2003 Stock Option Plan                             |       |                                                                                                                                                            | 310,500    |                                                                                                                   |       |                                                                                                                                                                                                                  | $          | 6.00 |   |   |   | 89,500 |   |   |
| —2004 Restricted Stock Plan for Directors (1)       |       |                                                                                                                                                            | —     |                                                                                                                   |       |                                                                                                                                                                                                                  | —     |   |   |   | 132,307 |   |   |
| —2005 Employee Restricted Stock Plan (2)            |       |                                                                                                                                                            | —     |                                                                                                                   |       |                                                                                                                                                                                                                  | —     |   |   |   | 263,332 |   |   |
| Total                                                    |       |                                                                                                                                                            | 310,500    |                                                                                                                   |       |                                                                                                                                                                                                                  |       |   |   |   | 485,139 |   |   |
|                                                          |            |                                                                                                                                                                 |            |                                                                                                                        |            |                                                                                                                                                                                                                       |            |  |  |  |  |  |  |  |

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(1)            Under the 2004Restricted Stock for Directors, and unless otherwise determined by a committeeof the Company’s Board of Directors not eligible to receive restricted sharesunder the plan, $10,000 of a director’s yearly fee will be payable in shares ofthe Company’s Class A Common Stock. In addition, directors may elect toreceive restricted stock in lieu of cash payments for director’s fees.

(2)            Aportion of shares available for issuance under the 2005 Employee RestrictedStock Plan may be awarded in connection with the Company’s retention of a newChief Executive Officer.

**ITEM 13.**          CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Information required under this Item relating tocertain relationships and related transactions is set forth under the caption“Certain Relationships and Related Transactions” in the definitive proxymaterials of the Company, which information is incorporated herein byreference.

Information required underthis Item relating to director independence is set forth under the caption “InformationAbout the Board of Directors” in the definitive proxy materials of the Company,which information is incorporated herein by reference.

**ITEM 14.**          PRINCIPALACCOUNTANT FEES AND SERVICES

Information required under this Item is set forthunder the caption “Independent Public Accountants” in the definitive proxymaterials of the Company, which information is incorporated herein byreference.

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**PART IV**

**ITEM 15.** EXHIBITSAND FINANCIAL STATEMENT SCHEDULES

**(a)   1.**   FinancialStatements

The followingconsolidated financial statements and reports of Independent Registered PublicAccounting Firms required by this Item are filed herewith under Item 8 ofthis Annual Report on Form 10-K:

·       Reportof Grant Thornton LLP, Independent Registered Public Accounting Firm.

·       Reportof Ernst & Young LLP, Independent Registered Public Accounting Firm.

·       ConsolidatedBalance Sheets as of December 30, 2006 and December 31, 2005.

·       ConsolidatedStatements of Operations for the fiscal years ended December 30, 2006, December 31,2005 and January 1, 2005.

·       ConsolidatedStatements of Changes in Shareholders’ Equity and Comprehensive Income (Loss)for the fiscal years ended December 30, 2006, December 31, 2005 and January 1,2005.

·       ConsolidatedStatements of Cash Flows for the fiscal years ended December 30, 2006, December 31,2005 and January 1, 2005.

·       Notes to ConsolidatedFinancial Statements for the fiscal years ended December 30, 2006, December 31,2005 and January 1, 2005.

**(a)   2.**   FinancialStatement Schedules

Schedule II—Valuation andQualifying Accounts (“Schedule II”). Supplemental schedules other thanSchedule II are omitted because of the absence of conditions under whichthey are required or because the required information is included in theconsolidated financial statements or in the notes thereto.

**(a)   3.**   Exhibits

Exhibits required in connection with this Annual Report on Form 10-Kare listed below. Certain exhibits are incorporated by reference to otherdocuments on file with the Securities and Exchange Commission, with which theyare physically filed, to be a part of this report as of their respective dates.

| Exhibit   Number | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                               | **Document   Description** | ** ** |
|------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------|------------|
| 3.1              |       | Amended and Restated   Certificate of Incorporation of the Company. (1)                                                                                                                                                                                                                                                                                                             |
| 3.2              |       | Amended and Restated   By-laws of the Company. (2)                                                                                                                                                                                                                                                                                                                                  |
| 4.1              |       | Shareholders Agreement   dated as of March 5, 2003. (3)                                                                                                                                                                                                                                                                                                                        |
| 4.2              |       | Amendment No. 1 to   Shareholders Agreement, dated as of December 20, 2004. (4)                                                                                                                                                                                                                                                                                           |
| 10.1             |       | Credit Agreement, dated as   of November 22, 2005 among Polymer Group, Inc. as Borrower, the   Lenders referred to therein, Citicorp North America, Inc. as   Administrative Agent, Document Agent, Collateral Agent and Syndication   Agent, and Citigroup Global Markets Inc., as Sole Lead Arranger and Sole   Bookrunner (the “2005 Credit Agreement”). (5) |
| 10.2             |       | Security Agreement, by Polymer Group, Inc.,   and the domestic subsidiaries party thereto, as Grantors, and Citicorp North   America, Inc. as Collateral Agent, dated as of November 22, 2005. (6)                                                                                                                                                                        |

 

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| Exhibit   Number | ** ** | ** **                                                                                                                                                                                                                                                                                                                      | **Document   Description** | ** ** |
|------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------|------------|
| 10.3             |       | Pledge Agreement, by   Polymer Group, Inc., and the domestic subsidiaries party thereto, as   pledgors, and Citicorp North America, Inc. as Collateral Agent, dated   as of November 22, 2005. (7)                                                                                                               |
| 10.4             |       | Guarantee Agreement, dated   as of November 22, 2005 among each of the subsidiaries listed on   Schedule I thereto of Polymer Group, Inc., Citicorp North   America, Inc. as Collateral Agent and Administrative Agent. (8)                                                                                      |
| 10.5             |       | Settlement Agreement,   Receipt and Release, dated as of April 29, 2005 by and among Polymer   Group, Inc., Jerry Zucker, The Intertech Group, Inc., ZS   Associates LLC and MatlinPatterson Global Advisors LLC (on behalf of itself   and various affiliated entities named in the Settlement Agreement). (9)* |
| 10.6             |       | Amendment No. 1 to the   2005 Credit Agreement, dated as of December 8, 2006.                                                                                                                                                                                                                                         |
| 10.7             |       | Executive Employment   Agreement dated March 24, 2006 between Polymer Group, Inc. and   James L. Schaeffer. (10)**                                                                                                                                                                                                    |
| 10.8             |       | Executive Employment Agreement   dated as of March 24, 2006 between Polymer Group, Inc. and Willis   C. Moore, III. (11)**                                                                                                                                                                                       |
| 10.9             |       | Form of Change in   Control Severance Compensation Agreements. (12)**                                                                                                                                                                                                                                                      |
| 10.10            |       | Polymer Group, Inc.   2003 Stock Option Plan. (13)**                                                                                                                                                                                                                                                                       |
| 10.11            |       | Polymer Group, Inc. 2003   Stock Option Plan Amendments. (14)**                                                                                                                                                                                                                                                            |
| 10.12            |       | Polymer Group, Inc.   2004 Restricted Stock Plan. (15)**                                                                                                                                                                                                                                                                   |
| 10.13            |       | Polymer Group, Inc.   2005 Stock Option Plan. (16)*                                                                                                                                                                                                                                                                        |
| 10.14            |       | Form of Stock Option   Agreement for 2003 Plan. (17)**                                                                                                                                                                                                                                                                     |
| 10.15            |       | Polymer Group, Inc.   Short-Term Incentive Compensation Plan. (18)**                                                                                                                                                                                                                                                       |
| 10.16            |       | Polymer Group, Inc.   2005 Employee Restricted Stock Plan. (19)**                                                                                                                                                                                                                                                          |
| 10.17            |       | Form of Restricted   Stock Award Agreement. (20)**                                                                                                                                                                                                                                                                         |
| 10.18            |       | Termination Agreement dated   May 8, 2006 between PGI Nonwovens B.V. and Mr. R. Altdorf. (21)**                                                                                                                                                                                                             |
| 10.19            |       | Consulting Agreement dated   May 8, 2006 between PGI Nonwovens B.V. and Mr. R. Altdorf. (22)                                                                                                                                                                                                                |
| 10.20            |       | Severance Agreement dated   October 31, 2006 between James L. Schaeffer and Polymer   Group, Inc. (23)**                                                                                                                                                                                                              |
| 10.21            |       | Separation Agreement dated   November 7, 2006 between James Snyder and Polymer Group, Inc.   (24)**                                                                                                                                                                                                                   |
| 21               |       | List of Subsidiaries of the   Company.                                                                                                                                                                                                                                                                                          |
| 23.1             |       | Consent of Grant Thornton   LLP, Independent Registered Public Accounting Firm.                                                                                                                                                                                                                                                 |
| 31.1             |       | Certification of Chief   Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of   2002.                                                                                                                                                                                                                    |
| 31.2             |       | Certification of Chief   Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of   2002.                                                                                                                                                                                                                    |
| 32.1             |       | Certification of Chief   Executive Officer pursuant to 18 U.S.C. Section 1350.                                                                                                                                                                                                                                             |
| 32.2             |       | Certification of Chief Financial Officer pursuant   to 18 U.S.C. Section 1350.                                                                                                                                                                                                                                             |

 

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         (1) Incorporated by reference to Exhibit 99.1of the Company’s Quarterly Report on Form 10-Q filed with the SEC onNovember 12, 2003.

         (2) Incorporated by reference to Exhibit 4.1of the Company’s Quarterly Report on Form 10-Q filed with the SEC onMay 16, 2005.

         (3) Incorporated by reference to Exhibit 10.3of the Company’s Quarterly Report on Form 10-Q filed with the SEC onMay 19, 2003.

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         (4) Incorporated by reference to Exhibit 4.7of the Company’s Annual Report on Form 10-K filed with the SEC on March 29,2005.

         (5) Incorporated by reference to Exhibit 10.9of the Company’s Annual Report on Form 10-K filed with the SEC on March 16,2006.

         (6) Incorporated by reference to Exhibit 10.10of the Company’s Annual Report on Form 10-K filed with the SEC on March 16,2006.

         (7) Incorporated by reference to Exhibit 10.11of the Company’s Annual Report on Form 10-K filed with the SEC on March 16,2006.

         (8) Incorporated by reference to Exhibit 10.12of the Company’s Annual Report on Form 10-K filed with the SEC on March 16,2006.

         (9) Incorporated by reference to Exhibit 10.1of the Company’s Quarterly Report on Form 10-Q filed with the SEC onMay 16, 2005.

  (10) Incorporated by reference to Exhibit 10.1of the Company’s Quarterly Report on Form 10-Q filed with the SEC onMay 11, 2006.

  (11) Incorporated by reference to Exhibit 10.2of the Company’s Quarterly Report on Form 10-Q filed with the SEC onMay 11, 2006.

  (12) Incorporated by reference to Exhibit 10.3of the Company’s Quarterly Report on Form 10-Q filed with the SEC onMay 11, 2006.

  (13) Incorporated by reference to Exhibit 4.3of the Company’s Registration Statement on Form S-8 filed with theSEC on December 14, 2004.

  (14) Incorporated by reference to Annex I of theCompany’s Definitive Proxy Statement on Schedule 14A filed with the SEC on April 15,2005.

  (15) Incorporated by reference to Exhibit 4.3of the Company’s Registration Statement on Form S-8 filed with theSEC on December 14, 2004.

  (16) Incorporated by reference to Annex III of theCompany’s Definitive Proxy Statement on Schedule 14A filed with the SEC on April 15,2005.

  (17) Incorporated by reference to Exhibit 4.4of the Company’s Registration Statement on Form S-8 filed with theSEC on December 14, 2004.

  (18) Incorporated by reference to Annex II of theCompany’s Definitive Proxy Statement on Schedule 14A filed with the SEC on April 15,2005.

  (19) Incorporated by reference to Annex I of theCompany’s Definitive Proxy Statement on Schedule 14A filed with the SEC on April 21,2006.

  (20) Incorporated by reference to Exhibit 10.1of the Company’s Current Report on Form 8-K filed with the SEC on May 30,2006.

  (21) Incorporated by reference to Exhibit 10.1of the Company’s Quarterly Report on Form 10-Q filed with the SEC onAugust 15, 2006.

  (22) Incorporated by reference to Exhibit 10.2of the Company’s Quarterly Report on Form 10-Q filed with the SEC onAugust 15, 2006.

  (23) Incorporated by reference to Exhibit 10.1of the Company’s Quarterly Report on Form 10-Q filed with the SEC onNovember 9, 2006.

  (24) Incorporated by reference to Exhibit 10.2 of the Company’sQuarterly Report on Form 10-Q filed with the SEC on November 9,2006.

*                    Theseagreements have been terminated and there are no remaining obligations pursuantthereto. These documents are filed as exhibits to this Annual Report on Form 10-Kpursuant to Item 601(b)(10) of Regulation S-K which requires the filing ofevery material agreement that was entered into not more than two years beforethe filing of this Annual Report on Form 10-K.

**             Managementcontract or compensatory plan or arrangement.

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**POLYMERGROUP, INC.SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS(In Thousands)**

| **COLUMN A**                             | ** ** | **COLUMN B**                              | ** ** | **COLUMN C**                             | ** ** | **COLUMN D**                                    | ** ** | **COLUMN E** | ** ** |
|-----------------------------------------------|------------|------------------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------------------|------------|-------------------|------------|
| ** **                                    | ** ** | ** **                                     | ** ** | **ADDITIONS**                                 | ** ** | **DEDUCTIONS**                                       | ** ** | ** **        | ** ** |
| **Description**                               | ** ** | **Balance at  beginning  of period** | ** ** | **Charged To  costs and  expenses** | ** ** | **Charged to  other accounts  (Describe)** | ** ** | **(Describe)**    | ** ** | **Balance at  end of period** | ** ** |
| **Fiscal  Year ended December 30, 2006** |       |                                           |       |                                          |       |                                                 |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Allowance for doubtful  accounts              |       |                                           | $          | 9,586                                         |       |                                                 |       | (523              | )(1)       |   |   | 35 | (2) |   |   | 1,518 | (3) |   |   | $ | 7,580 |   |   |
| Valuation allowance for  deferred tax assets  |       |                                           | 98,536     |                                          |       |                                                 | 8,835      |              |       |   | 11,754 | (2)(8) |   |   | 1,698 | (4) |   |   | 117,427 |   |   |
| Plant realignment                             |       |                                           | 163        |                                          |       |                                                 | 7,135      |              |       |   | 30 |   |   |   | 5,284 | (5) |   |   | 2,044 |   |   |
| **Fiscal  Year ended December 31, 2005** |       |                                           |       |                                          |       |                                                 |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Allowance for doubtful  accounts              |       |                                           | $          | 9,725                                         |       |                                                 |       | 1,350             |       |   |   | 48 | (2) |   |   | 1,537 | (3) |   |   | $ | 9,586 |   |   |
| Valuation allowance for  deferred tax assets  |       |                                           | 103,854    |                                          |       |                                                 | 2,681      |              |       |   | — |   |   |   | 7,999 | (2)(6) |   |   | 98,536 |   |   |
| Plant realignment                             |       |                                           | 561        |                                          |       |                                                 | 9          |              |       |   | (32 | ) |   |   | 375 | (5) |   |   | 163 |   |   |
| **Fiscal  Year ended January 1, 2005**   |       |                                           |       |                                          |       |                                                 |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Allowance for doubtful  accounts              |       |                                           | $          | 13,570                                        |       |                                                 |       | (1,427            | )(7)       |   |   | 869 | (2) |   |   | 3,287 | (3) |   |   | $ | 9,725 |   |   |
| Valuation allowance for  deferred tax assets  |       |                                           | 100,751    |                                          |       |                                                 | 3,103      |              |       |   | — |   |   |   | — |   |   |   | 103,854 |   |   |
| Plant realignment                             |       |                                           | 4,564      |                                          |       |                                                 | 1,867      |              |       |   | 39 |   |   |   | 5,909 | (5) |   |   | 561 |   |   |

 

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(1)            Reserve adjustments of$1,232 net of current year provision of $709.

(2)            Foreign currencytranslation adjustments.

(3)            Uncollectible accountswritten-off.

(4)            Net reduction togoodwill.

(5)            Cash payments andadjustments.

(6)            Net reductions due torealizations of deferred tax assets.

(7)            Reserve adjustments of$2,577, net of current year provision of $1,150.

(8)            Recognition ofadditional deferred tax assets and valuation allowances related to temporarydifferences not impacting the Consolidated Statement of Operations and thetrue-up of deferred tax assets.

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**SIGNATURES**

**Pursuant to the requirements of Section 13 or 15(d)of the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned, thereunto dulyauthorized.**
|                            | POLYMER GROUP, INC. |
|----------------------------|--------------------------|
|                       |                     |
|                       |                     |
|                       | By:                      |   | /s/ Willis C.  Moore, III |
| Date: March 29,  2007 |                     |   | Willis C. Moore, III*Chief Financial Officer* |

 

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