**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

----

**FORM 10-K**
| x      | **ANNUAL REPORT PURSUANT TO SECTION 13 OR  15(d)   OF THE SECURITIES EXCHANGE ACT OF 1934**        |
|--------|---------------------------------------------------------------------------------------------------------|
|   | **For the fiscal year ended December 31,  2005, or**                                               |
| o      | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For the transition period from                  to                   **

**Commission file number 1-14330**

**POLYMERGROUP, 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.) |
| **4055 Faber Place  Drive, Suite 201**   | ** ** | **29405**           |
| **North Charleston, South Carolina**          | ** ** | (Zip Code)          |
| **(Address of principal executive  offices)** |       |                |

 

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

**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 the registrant is awell-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yes o No x

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) ofthe Act. Yes o No x

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

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, andwill not be contained, to the best of the registrant’s knowledge, in definitiveproxy or information statements incorporated by reference in Part III ofthis Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act. Check one:

Large acceleratedfiler o                     Acceleratedfiler x                     Non-acceleratedfiler o

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Act): Yes o No x

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

The aggregate market value of the Company’s votingstock held by non-affiliates as of July 2, 2005 was approximately$97.1 million, based on the average of the closing bid and ask price ofthe Class A common stock on the Over-the-Counter Bulletin Board. Solelyfor the purposes of the foregoing calculation, affiliates are considered to beDirectors, Executive Officers and greater than 10% beneficial owners of theRegistrant’s common equity. As of March 14, 2006, there were 19,153,079 sharesof Class A common stock, 153,549 shares of Class B common stock and 24,319 sharesof Class C common stock outstanding. No shares of Class D or Class Ecommon stock were outstanding as of such date. The par value for each class ofcommon stock is $.01 per share.

**DocumentsIncorporated By Reference**

Portionsof the Registrant’s Notice of 2006 Annual Meeting of Stockholders and ProxyStatement—Part III

 

----

**POLYMERGROUP, INC.**

**FORM 10-K**

**For the Fiscal YearEnded December 31, 2005**

**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                                                                                            |   | 20 |
| Item 7.                                              |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                    |   | 22 |
| Item 7A.                                             |   | Quantitative  and Qualitative Disclosures about Market Risk                                                         |   | 42 |
| Item 8.                                              |   | Financial  Statements and Supplementary Data                                                                        |   | 44 |
| Item 9.                                              |   | Changes in and  Disagreements with Accountants on Accounting and Financial Disclosure                          |   | 97 |
| Item 9A.                                             |   | Controls and  Procedures                                                                                            |   | 97 |
| Item 9B.                                             |   | Other Information                                                                                                   |   | 100 |
| **PART III**                                    |   |                                                                                                                |   |   |
| Item 10.                                             |   | Directors and  Executive Officers of the Registrant                                                                 |   | 100 |
| Item 11.                                             |   | Executive  Compensation                                                                                             |   | 100 |
| Item 12.                                             |   | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                    |   | 100 |
| Item 13.                                             |   | Certain  Relationships and Related Transactions                                                                     |   | 101 |
| Item 14.                                             |   | Principal  Accountant Fees and Services                                                                             |   | 101 |
| **PART IV**                                     |   |                                                                                                                |   |   |
| Item 15.                                             |   | Exhibits and  Financial Statement Schedules                                                                         |   | 102 |
|                                                 |   | Signatures                                                                                                          |   | 107 |

 

2

----

**IMPORTANT INFORMATION REGARDING 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” as promulgated by the AICPA (ReferenceItem 1 in the Business section for additional information regarding the Company’sChapter 11 reorganization). Under fresh start accounting, a new reportingentity is considered to be created and the recorded amounts of assets andliabilities are adjusted to reflect their estimated fair values at the datefresh start reporting is applied. On March 5, 2003, the Company emergedfrom Chapter 11. For financial reporting purposes, March 1, 2003 isconsidered the emergence date and the effects of the reorganization have beenreflected in the accompanying financial statements as if the emergence occurredon that date. As a result of the application of fresh start accounting, thefinancial statements of the Successor Company (as defined herein) are not comparableto the Predecessor Company’s (as defined herein) financial statements.

**SafeHarbor-Forward-Looking Statements**

From time to time, the Company may publish forward-lookingstatements relative to matters such as, including, without limitation, anticipatedfinancial performance, business prospects, technological developments, newproduct introductions, cost savings, research and development activities andsimilar matters. The Private Securities Litigation Reform Act of 1995 providesa 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.

Various statements contained in this report, includingthose that express a belief, expectation or intention, as well as those thatare not statements of historical fact are, or may be deemed to be, forward-lookingstatements within the meaning of Section 27A of the Securities Act of1933, as amended, and Section 21E of the Securities Exchange Act of 1934,as amended. These forward-looking statements speak only as of the date ofthis report. Unless required by law, the Company does not undertake anyobligation to update these statements and cautions against any undue relianceon them. These forward-looking statements are based on currentexpectations and assumptions about future events. While management considersthese expectations and assumptions to be reasonable, they are inherentlysubject to significant business, economic, competitive, regulatory and otherrisks, contingencies and uncertainties, most of which are difficult to predictand many of which are beyond the Company’s control. See Item 1A. “Risk Factors”below. There can be no assurance that these events will occur or that theCompany’s results will be as estimated.

Important factors thatcould cause actual results to differ materially from those discussed in suchforward-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;

3

----

·       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;

·       domesticand foreign competition;

·       relianceon major customers and suppliers; and

·       risks related to operationsin foreign jurisdictions.

**Fiscal Year-End**

The Company’s fiscal year endson the Saturday nearest to December 31. Fiscal 2005 ended December 31,2005 and included the results of operations for a fifty-two week period. Fiscal2004 ended January 1, 2005 and included the results of operations for afifty-two week period. Fiscal 2003 ended January 3, 2004 and included theresults of operations for a fifty-three week period, which as describedin Item 1 to this Annual Report on Form 10-K is comprised of a twomonth period ended March 1, 2003 (9 weeks) and a ten month periodended January 3, 2004 (44 weeks). References herein to “2005,” “2004,”and “2003,” generally refer to fiscal 2005, fiscal 2004 and fiscal 2003, respectively,unless the context indicates otherwise.

**AdditionalInformation**

***The Company’s website is located atwww.polymergroupinc.com. Through the website, the Company makes available, freeof charge, its annual reports on Form 10-K, quarterly reports onForm 10-Q, current reports on Form 8-K, proxy statements and otherreports filed or furnished pursuant to Section 13(a) or 15(d) under theSecurities Exchange Act. These reports are available as soon as reasonablypracticable after they have been electronically filed with the Securities andExchange Commission.***

4

----

**PART I**

**ITEM 1.    BUSINESS**

Polymer Group, Inc. was originally incorporatedin the State of Delaware on June 16, 1994 and is a global manufacturer andmarketer of nonwoven and oriented polyolefin products.

The Company and each of its domestic subsidiaries filedvoluntary petitions for Chapter 11 reorganization under the United StatesBankruptcy Code in the United States Bankruptcy Court for the District of SouthCarolina (the “Bankruptcy Court”) on May 11, 2002 (April 25, 2002 asto Bonlam (S.C.), Inc.). Upon having its Modified Plan, as defined, (the “ModifiedPlan”) approved by the Bankruptcy Court on January 16, 2003, the Companyemerged from the Chapter 11 process effective March 5, 2003 (the “EffectiveDate”). For accounting purposes the Company recognized the emergence on March 1,2003 and adopted “fresh-start accounting” as of that date. The Company’semergence from Chapter 11 resulted in a new reporting entity, with thereorganization value of the Company allocated to the underlying assets andliabilities based on their respective fair values at the date of emergence. Theinitial allocation was based on preliminary estimates and has been revised asmore recent 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.

Additional details of theCompany’s Chapter 11 process and recapitalization can be found in Notes 3and 4 to the Consolidated Financial Statements included in Item 8 to thisAnnual Report on Form 10-K.

**Recent Developments**

In 2005, the Companycontinued its efforts to strengthen its balance sheet and reaffirm its globalleadership position in the industry. These items are discussed in more detailthroughout this report, with highlights presented below to assist the reader:

·       refinancingthe Company’s long-term debt for the second time in nineteen months on November 22,2005, resulting in greater financial flexibility and significant interest costsavings;

·       completingthe redemption and conversion of the Company’s 16% Series A ConvertiblePay-in-kind Preferred Shares (the “PIK Preferred Shares”) for shares of theCompany’s Class A Common Stock; and

·       continuing to expand theCompany’s global business presence as it initiated utilization of its newstate-of-the-art spunbond line in Cali, Colombia as well as initiatingadditional spunmelt expansion projects in China and the United States.

**General**

The Company supplies engineered materials to a numberof the largest consumer and industrial product manufacturers in the world. TheCompany has a global presence with an established customer base in bothdeveloped and emerging markets. The Company’s product offerings are soldprincipally to converters that manufacture a wide range of end-use products. TheCompany is one of the largest producers of spunmelt and spunlace products inthe world, and employs the most extensive range of nonwovens technologies thatallow it to supply products tailored to customers’ needs at competitive prices.

5

----

The Company operates twenty-two manufacturing andconverting facilities (including its joint venture/partnership-typeoperations in Argentina and China) located in ten countries. The Companybelieves that the quality of its manufacturing operations and the breadth ofits nonwovens process technologies give it a competitive advantage in meetingthe needs of its customers and in leading the development of an expanded rangeof applications. The Company has invested in advanced technologies in order toincrease capacity, improve quality and develop new high-value fabricstructures. Working as a developmental partner with its major customers, theCompany 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 primarily in the worldwidenonwovens market, which is approximately a $15.8 billion market with anaverage annual growth rate of 7.0% expected over each of the next five years,according to certain industry sources. The nonwovens industry began in the 1950’swhen paper, textile and chemical technologies were combined to produce newfabrics and products with the attributes of textiles but at a significantlylower cost. Today, nonwovens are used in a wide variety of consumer and industrialproducts as a result of their superior functionality and relatively low cost.

The nonwovens industry has benefited from substantialimprovements in technology over the past several years, which have increasedthe number of new applications for nonwovens and, therefore, increased demand.The Company believes, based on certain industry sources, that demand in thedeveloped markets of North America, Western Europe and Japan willincrease at an average rate of 3.5% in each of the next five years, while theemerging markets are forecasted to grow at an average rate of 14.0% per annum.In the developed markets, growth is expected to be driven primarily by newapplications for nonwovens and by higher amounts of nonwovens used perapplication for such products as diapers. Growth in the emerging markets shouldbe driven primarily by increased penetration of disposable products as percapita income rises, and by higher amounts of nonwovens used per applicationfor such products as diapers, as these products become more sophisticated overtime. According to certain industry sources, worldwide consumption of nonwovenshas grown an average of 7.0% per year over the last ten years. The Companybelieves that future growth will depend upon the continuation of improvementsin raw materials 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 as either disposable(approximately 58.0% of worldwide industry sales with an average annual growthrate of 7.0%, according to industry sources) or durable (approximately 42.0% ofworldwide industry sales and an average annual growth rate of 6.5%, accordingto industry sources). The composition of disposable products in emergingregions is expected to increase over the next five years as the growth rate fordisposable products is expected to exceed that of durable products. The Companyprimarily competes in disposable products. The largest end uses for disposablenonwovens are for applications that include disposable diapers, femininesanitary protection, baby wipes, adult incontinence products, and healthcareapplications, including surgical gowns, drapes and wound care sponges anddressings. Other disposable end uses include wipes, filtration media,protective apparel and fabric softener sheets. Durable end uses 

6

----

include apparel interlinings,furniture and bedding, construction sheeting, cable wrap, electricalinsulation, automotive components, geotextiles, roofing membranes, carpet backing,agricultural fabrics, and coated and laminated structures for wall coveringsand 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. While the broad uncoatedoriented polyolefin market is primarily focused on carpet backing fabric and,to a lesser extent, geotextiles and bags, the markets in which the Companyprimarily competes are made up of a large number of specialized productsmanufactured for niche applications. These markets include industrial packagingapplications such as lumberwrap, steel wrap and fiberglass packaging, as wellas high-strength protective coverings and specialized components that areintegrated into a variety of industrial and consumer products. The Company alsoproduces structural concrete reinforcement fiber using monofilament technology.

**Business Strategy**

The Company’s goals are to grow its core businesseswhile developing new technologies to capitalize on new product opportunitiesand expanded geographic markets. The Company strives to be a leading supplierin its chosen markets by delivering high-quality products and services atcompetitive prices. The Company is committed to continuous improvementsthroughout its business to increase product value by incorporating newmaterials and operating capabilities that enhance or maintain performancespecifications. The Company seeks to expand its capabilities to take advantageof the penetration and growth of its core products internationally,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 18 to the Consolidated FinancialStatements included in Item 8 to this Annual Report on Form 10-K.

*Nonwovens Division*

The Nonwovens division develops and sells products invarious consumer and industrial markets. Major markets served by this divisioninclude hygiene, industrial, medical and wiping. Nonwovens division sales wereapproximately $763.8 million, $672.6 million and $624.1 million forfiscal 2005, 2004 and 2003, respectively, and represented approximately 80% oftotal Company net sales in each of those years.

The Company produces a variety of nonwoven materialsfor use in diapers, training pants, feminine sanitary protection, adultincontinence, baby wipes and consumer wiping products. The Company’s broadproduct offerings provide customers with a full range of specialized componentsfor unique or distinctive products, including top sheet, transfer layer,backsheet fabric, leg cuff fabric, sanitary protective facings, absorbent padsfor incontinence guard, panty shield, and absorbent core applications. Inaddition, the Company’s medical products are used in wound care sponges anddressings, disposable surgical packs, apparel such as operating room gowns anddrapes, face masks and shoe covers.

Among the industrial applications of the productofferings are electrical insulation, housewrap, filtration, cable wrap,furniture and bedding applications and automotive. Wiping applications includeproducts for the consumer as well as institutional and janitorial applications.

7

----

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 PolymersDivision*

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 $185.1 million, $172.5 millionand $154.2 million for fiscal 2005, 2004 and 2003, respectively, andrepresented approximately 20% of total Company net sales in each of thoseyears.

**Marketing and Sales**

The Company sells to customers in the domestic andinternational marketplace. Approximately 47%, 19%, 17%, 12% and 5% of theCompany’s 2005 net sales were from manufacturing facilities in theUnited States, Europe, Latin America, Canada and Asia, respectively.The Procter & Gamble Company, which is the Company’s largest customer,accounted for 14%, 12% and 13% of the Company’s net sales in 2005, 2004 and 2003,respectively. Sales to the Company’s top 20 customers represented approximately51%, 45% and 47% of the Company’s net sales in 2005, 2004 and 2003,respectively.

The Company employs directsales representatives who are active in the Company’s new product developmentefforts and are strategically located in the major geographic regions in whichthe Company’s products are utilized. The oriented polyolefin products are soldprimarily through a well-established network of converters and distributors.Converters add incremental value to the Company’s products and distributorsservice the small order size requirements typical of many end users.

**Manufacturing Processes**

*General.  *The Company’s competitive strengths includehigh-quality manufacturing processes and a broad range of process technologies,which allow the Company to offer its customers the best-suited product for eachrespective application. Additionally, the Company has made significant capitalinvestments in modern technology and has developed proprietary equipmentprocesses and manufacturing techniques. The Company believes that it exceedsindustry standards in productivity, reduction of variability and deliverylead-time. The Company has a wide range of manufacturing capabilities thatallow 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 a comprehensive array of nonwovenmanufacturing technologies that encompass capabilities spanning the entirespectrum of nonwoven technologies. Nonwoven rollgoods typically have threeprocess steps: web formation, web consolidation or bonding, and finishing. Webformation is the process by which previously prepared fibers, filaments orfilms are arranged into loosely held networks called webs, batts or sheets. Ineach process, the fiber material is laid onto a forming or conveying surface,which may be dry or molten. The dry-laid process utilizes fiber processingequipment, called “cards,” that have been specifically designed forhigh-capacity nonwoven production. The carding process converts bales ofentangled fibers into uniform 

8

----

*orientedwebs that then feed into the bonding process. In a molten polymer-laid process,extrusion technology is used to transform polymer pellets into filaments, whichare laid on a conveying screen and interlocked by thermal fusion. In thisprocess, the fiber formation, web formation and web consolidation are generallyperformed as a continuous simultaneous operation, making this method veryefficient from a manufacturing and cost perspective.*

Web consolidation is the process by which fiber orfilm are bonded together using mechanical, thermal, chemical or solvent means.The bonding method greatly influences the end products’ strength, softness,loft and utility. The principal bonding processes are thermal bond, resin oradhesive bond, hydroentanglement or spunlace, binder fiber 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 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.Spunbond and meltblown take advantage of the melt properties of the resinsand may use thermal fusion with the aid of calender rolls. SMS and SMMS(spunbond-meltblown-meltblown-spunbond) are integrated processesof combining spunbond and meltblown sheets in a laminated structure, creatingvery strong, lightweight and uniform fabrics. Ultrasonic bonding utilizeshigh-frequency sound waves that heat the bonding sites. Needlepunch is amechanical process in which beds of needles are punched through the web,entangling the fibers.

*Special Films and CompositeStructures.  *The Companyhas a proprietary continuous process for manufacturing unique reticulatedfilms. These highly engineered films have unique capabilities due to the wayprecision holes are imparted during the process of forming the film. Sincethese films can be composed of two or more layers of different polymers, thefunctionality can be different on one side versus the other. These films aretypically customized for each customer and are especially popular in Asia as acomponent for premium feminine hygiene products. The Company also manufacturescomposites which are combinations of different nonwoven and /or film structureswhere each structure lends its properties or attributes to the end product. Anexample is house wrap. House wrap is the result of mating an especially strongspunbond fabric with a highly engineered film. The resulting fabric is verystrong, economical, and has excellent wind barrier properties while allowinghumidity to pass through the fabric.

Finishing, or post-treatment, adds value and functionalityto the product and typically includes surface treatments for fluid repellency,aperturing, embossing, laminating, printing and slitting. Spunlace and resinbond systems also have a post-treatment drying or curing step. Certain productsalso go through an aperturing process in which holes are opened in the fabric,improving absorbency.

*Oriented Polyolefins.  *The oriented/film process begins with plastic resin, which is extrudedinto a thin plastic film or into monofilament strands. The film is slit intonarrow tapes. The slit tapes or monofilament strands are then stretched or “oriented,”the process through which it derives its high strength. The tapes are woundonto spools that feed weaving machines or twisters. In the finishing process,the product is coated for water or chemical resistance, ultravioletstabilization and protection, flame retardancy, color and other specializedcharacteristics. In the twisting process, either oriented slit tapes ormonofilament strands are twisted and packaged on tightly spooled balls fordistribution as agricultural and commercial twine. The Company operates coatinglines that have been equipped with the latest technology for gauge control,print treating, lamination, anti-slip finishes and perforation. The Companyalso laminates oriented products to paper and has the additional capability ofprinting multiple colors on a wide-width printing press located in NorthAmerica.

9

----

**Competition**

The Company’s primarycompetitors in its nonwoven product markets are E.I. du Pontde Nemours & Co., BBA Group plc, Avgol LTD., FirstQuality Enterprises, Inc., Grupo Providencia and Mitsui Chemicals, Inc. Japanand Intertape Polymer Group Inc. and Amoco Fabrics and Fibers Co. 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.

**Raw Materials**

The primary raw materials used to manufacture most ofthe Company’s products are polypropylene resin, polyester fiber, polyethyleneresin and, to a lesser extent, rayon, tissue paper and cotton. These primaryraw materials are available from multiple sources and the Company purchasessuch materials from a variety of global suppliers. The prices of polypropylene,polyethylene and polyester are a function of, among other things, manufacturingcapacity, demand and the price of crude oil and natural gas liquids.Historically, the prices of polypropylene and polyethylene resins and polyesterfibers have fluctuated. The Company has historically been able to pass along atleast a portion of raw material price increases to some of its customers,particularly those with contracts containing raw material price escalationclauses, although often with a delay between the time the Company is requiredto pay the increased raw material price and the time the Company is able topass the increase on to its customers. To the extent the Company is not able topass along all or a portion of such increased prices of raw materials, theCompany’s cost 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 $3.0 million on an annualized basis in its reported pre-taxoperating income. The prices of raw materials in the North American market rosesubstantially in the fourth quarter of 2005 as a direct result of thehurricanes that impacted the Gulf Coast. The raw material prices in the NorthAmerican markets decreased slightly in late December 2005 and January 2006as the refineries returned to normalized production, but there can be noassurance that the prices of polypropylene, polyethylene and polyester will notincrease in the future or that the Company will be able to pass on anyincreases to its customers not covered by contracts with price escalationclauses. Material increases in raw material prices that cannot be passed on tocustomers could have a material adverse effect on the Company’s results ofoperations and financial condition. See “Management’s Discussion and Analysisof Financial Condition and Results of Operations” included in Item 7 tothis Annual Report on Form 10-K and “Raw Material and CommodityRisks” included in Item 7A to this Annual Report on Form 10-Kfor additional discussion of the impact of raw material costs on the Company’soperations in 2005, 2004 and 2003.

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 a broad range of federal,foreign, state and local laws and regulations relating to the pollution andprotection of the environment. Among the many environmental requirementsapplicable to the Company are laws relating to air emissions, wastewaterdischarges and the handling, disposal and release of solid and hazardoussubstances and wastes. Based on 

10

----

continuing internal review,the Company believes that it is currently in substantial compliance withapplicable environmental requirements.

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 maintains over 185registered trademarks worldwide and over 170 patents in the United States.The Company has approximately 417 patents under application worldwide andmaintains certain trade secrets for which, in order to maintain theconfidentiality of such trade secrets, it has not sought patent protection.

**Inventory and Backlogs**

Inventories at December 31,2005 were $119.7 million, an increase of $13.4 million frominventories of $106.3 million at January 1, 2005. The increase intotal inventory during 2005 versus 2004 primarily relates to the increases inraw material costs during the current year. The Company had approximately54 days of inventory on hand at both December 31, 2005 and January 1,2005. Unfilled orders as of December 31, 2005 and January 1, 2005amounted to approximately $65.4 million and $49.8 million,respectively. The level of unfilled orders is affected by many factors,including the timing of orders and the delivery time for the specific products.Consequently, the Company does not consider the amount of unfilled orders ameaningful indicator of levels of future sales.

**Research and Development**

The Company’s investment inresearch and development approximated $11.5 million, $11.2 million and$12.4 million during 2005, 2004 and 2003, respectively.

**Seasonality**

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

**Employees**

As of December 31, 2005,the Company had approximately 3,331 employees. Of this total, approximately1,399 employees are represented by labor unions or trade councils that haveentered into separate collective bargaining agreements with the Company.Approximately 29% of the Company’s labor force is covered by collectivebargaining agreements that will expire within one year. During 2005 there wereno known unionizing attempts. The Company believes that it generally has goodrelationships with both its union and non-union employees.

**Business Restructuring**

The Company initiated a comprehensive businessrestructuring in the latter half of 2001, involving manufacturing initiativesand workforce reductions which continued into 2002, 2003 and 2004. There wereno significant restructuring efforts in 2005.

11

----

In 2004, the restructuring efforts included thecompletion of the line curtailment and headcount reduction in Europe that hadbeen announced in 2003 and the initiation of a new restructuring effort in theCanadian operations of the Oriented Polymers division to better balance plantcapacity with market demands. In Canada, the Company eliminated several linesand sold certain equipment. Total headcount was reduced by approximately 160employees. The total pre-tax charge for both programs in 2004 was approximately$1.9 million. In 2003, the Company’s restructuring efforts resulted inheadcount reductions of approximately 170 employees, primarily within the U.S.and European operations of the Nonwovens Division and resulted in a pre-taxcharge of approximately $6.8 million.

Cash outlays associated withthe Company’s business restructuring approximated $0.4 million,$5.9 million and $4.3 million in 2005, 2004 and 2003, respectively.

**Recapitalization and Refinancing**

On November 22, 2005, the Company refinanced itsthen outstanding bank debt (the “Bank Facility”) with a new Credit Facility(the “Credit Facility”). In addition, in 2005 the Company converted or redeemedthe PIK Preferred Shares for shares of the Company’s Class A Common Stock,further simplifying the Company’s capital structure.

The Company’s Credit Facility, which was entered intoon November 22, 2005, consists of a $45.0 million secured revolvingcredit facility that matures on November 22, 2010 and a$410.0 million first-lien term loan that matures on November 22,2012. The proceeds therefrom were used to fully repay indebtedness under theCompany’s previous Bank Facility and pay related 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. At December 31, 2005, the Company is in compliance with allsuch covenants and expects to remain in compliance through fiscal 2006. Thefirst-lien term loan requires mandatory payments of approximately $1.0 millionper quarter and, beginning with fiscal 2006, the first-lien term loan requiresthe Company to apply a percentage of proceeds from excess cash flows, asdefined by the Credit Facility and determined based on year-end results, toreduce its then outstanding balances under the Credit Facility.

Excess cash flows required to be applied to therepayment of the Credit Facility are generally calculated as 50.0% of the netamount of the Company’s available cash generated from operations adjusted forthe cash effects of interest, taxes, capital expenditures, changes in workingcapital and certain other items. Since the amounts of excess cash flows forfuture periods are based on year-end data and not determinable, only themandatory payments of approximately $1.0 million per quarter have beenclassified as a current liability. Additionally, no excess cash flow paymentwill be made with respect to fiscal 2005 and, due to the magnitude of the majorcapital expenditure projects, any excess cash flow requirement with respect tofiscal 2006 is not expected to be significant.

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 basis points. TheCompany may, from time to time, elect to use an alternate base rate for itsborrowings under the 

12

----

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. The Company had no outstanding borrowingsat December 31, 2005 under the revolving credit facility. As ofDecember 31, 2005, capacity under the revolving credit facility had beenreserved for outstanding letters of credit in the amount of $11.4 million asdescribed below. Average borrowings under the revolving credit facility for theperiod from November 22, 2005 to December 31, 2005 were $10.4 millionat an average rate of 8.37%.

In accordance with the terms of the Credit Facility,the Company maintained its position in a cash flow hedge agreement originallyentered into in May 2004. This cash flow hedge agreement effectively converts$212.5 million of notional principal amount of debt from a variable LIBORrate to a fixed LIBOR rate of 3.383%. The cash flow hedge agreement terminateson May 8, 2007 and is described more fully in Note 16 to theConsolidated Financial Statements included in Item 8 to this Annual Report on Form 10-K.

Subject to certain terms and conditions, a maximum of$25.0 million of the Credit Facility may be used for letters of credit. Asof December 31, 2005, the Company had $11.4 million of standby anddocumentary letters of credit outstanding under the Credit Facility.Approximately $3.0 million was related to the requirements of theshort-term borrowing arrangements of the Company’s China-based majorityowned subsidiary (“Nanhai”). Other letters of credit are in place to provideadded assurance for certain raw material vendors and administrative serviceproviders. None of these letters of credit have been drawn on at December 31,2005.

On July 28, 2005, the Company’s Board ofDirectors authorized the redemption of all of the Company’s then outstandingPIK Preferred Shares on or before September 30, 2005. On August 16,2005, the Board of Directors set September 15, 2005 as the redemption date(the “Redemption Date”). In accordance with the terms of the PIK PreferredShares, the Company would redeem all PIK Preferred Shares outstanding at theRedemption Date at a redemption rate of 37.26397 shares of Class A CommonStock per PIK Preferred Share. At any time prior to the Redemption Date,holders of PIK Preferred Shares could exercise their right to convert their PIKPreferred Shares into shares of Class A Common Stock at a conversion rateof 137.14286 shares of Class A Common Stock 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 theCompany’s Class A Common Stock. Additionally, 62,916 PIK Preferred Shareshad been converted by holders into 8,628,473 shares of the Company’s Class ACommon Stock. Also, during the first quarter of fiscal 2005, five PIK PreferredShares were converted into 686 shares of the Company’s Class A CommonStock. As a result of these transactions, 8,629,346 additional shares of theCompany’s Class A Common Stock are now issued and outstanding and no PIKPreferred Shares are currently issued or outstanding.

**ITEM 1A.  RISKFACTORS**

Set forth below are some of the risks anduncertainties that, if they were to occur, could materially adversely affect theCompany’s business or that could cause actual results to differ materially fromthe results contemplated by the forward-looking statements contained in thisreport 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.

13

----

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

**TheCompany’s substantial indebtedness could harm its ability to react to changes inbusiness or market developments and prevent the Company from fulfilling itsobligations under its indebtedness.**

As of December 31, 2005,the Company’s consolidated indebtedness outstanding was approximately $415.2million and for fiscal 2005, its interest expense, net was $32.6 million. TheCompany’s substantial level of current indebtedness, as well as any additionalindebtedness the Company may draw under the unused portions of the CreditFacility, combined with a potential downturn in business due to economic orother factors beyond its control, increases the possibility that the Companymay be unable to generate cash sufficient to pay, when due, the principal of,interest on or other amounts due in respect of its indebtedness. The Company’ssubstantial debt could increase its vulnerability to general economic downturnsand adverse competitive and industry conditions by limiting its flexibility toplan for, or to react to, changes in its business and in the industry in whichthe Company operates. This limitation could place the Company at a competitivedisadvantage compared to competitors that have less debt and more cash toinsulate their operations from market downturns and to finance new businessopportunities.

**TheCompany’s variable rate indebtedness subjects the Company to interest raterisk, which could cause its debt service obligations to increase significantly.**

In accordance with the termsof the Credit Facility, the Company has maintained its position in a cash flowhedge agreement to lessen its exposure to interest rate fluctuations. However,approximately 48% of the Company’s exposure to variable interest rates underthe Credit Facility is not hedged and will bear interest at floating rates. Asa result, a modest interest rate increase could result in a substantialincrease in interest expense.

**Toservice its indebtedness, the Company will require a significant amount ofcash. The Company’s ability to generate cash depends on many factors beyond itscontrol.**

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 for avariety 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 ofcash between the Company’s subsidiaries and the parent and many other potentialreasons. If the Company cannot generate sufficient cash to service its debt,the Company will have to take such actions as reducing or delaying capitalinvestments, selling assets, restructuring or refinancing its debt or seekingadditional equity capital. Any of these actions may not be affected oncommercially reasonable terms, or at all. In addition, the credit agreement withrespect to the Credit Facility may restrict the Company from adopting any ofthese alternatives.

**Because asignificant number of its employees are represented by labor unions or tradecouncils and work under collective bargaining agreements, any employee slowdownor strikes or the failure to renew its collective bargaining agreements coulddisrupt the Company’s business.**

As of December 31, 2005,approximately 42% of the Company’s employees are represented by labor unions or trade councils and workunder collective bargaining agreements.  Approximately 29% of the Company’s labor forceis covered by collective bargaining agreements that expire within one year. TheCompany may not be able to maintain constructive relationships with these laborunions or trade councils. The Company may not be able to successfully negotiatenew collective bargaining 

14

----

agreementson satisfactory terms in the future. The loss of a substantial number of theseemployees or a prolonged labor dispute could disrupt the Company’s business. Anysuch disruption could in turn reduce its revenue from sales, increase its coststo bring products to market and result in significant losses.

**The Companygenerates most of its revenue from the sale of manufactured products that areused in a wide variety of consumer and industrial applications and thepotential for product 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.

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.

**TheCompany’s international operations pose risks to its business that are notpresent with its domestic operations.**

The Company’s manufacturingfacilities in the United States accounted for 47% of net sales for fiscal 2005,with facilities in Europe, Latin America, Canada and Asia accounting for 53%. Aspart of its growth strategy, the Company may expand operations in existing orother foreign countries. The Company’s foreign operations are, and any futureforeign operations will be, subject to certain risks that are unique to doingbusiness in foreign countries. These risks include fluctuations in foreigncurrency exchange rates, inflation, economic or political instability, shippingdelays, changes in applicable laws, reduced protection of intellectual propertyin some countries outside of the United States and regulatory policies andvarious trade restrictions. All of these risks could have a negative impact onthe 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.

**TheCompany could incur substantial costs to comply with environmental laws, andviolations of such laws may increase costs or require the Company to changecertain business practices.**

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, 

15

----

includingclean-up costs, fines and sanctions and third-party property damage or personalinjury claims, as a result of violations of environmental laws. Failure tocomply with environmental requirements could also result in enforcement actionsthat materially limit or otherwise affect the operations of the Company’smanufacturing facilities involved. The Company is also subject to laws, such asCERCLA, that may impose liability retroactively and without fault for releasesor threatened releases of hazardous substances at on-site or off-sitelocations.

**If theCompany is unable to adequately protect its intellectual property, the Companycould lose a significant 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 Companymaintains over 185 registered trademarks worldwide and 170 patents in theUnited States and has approximately 417 patents under application worldwide aswell as certain trade secrets, for which patents have not been sought. 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 tothe unique products that the Company produces and the particular industry inwhich the Company operates, the loss of its senior management could disrupt itsbusiness.**

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***

**Becausethe specialized markets in which the Company sell its products are highlycompetitive, the Company may have difficulty growing its business year afteryear.**

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.

16

----

**TheCompany must continue to invest significant resources in developing innovativeproducts in order to maintain a competitive edge in the highly specializedmarkets in which the 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.

**The lossof only a few of the Company’s large volume customers could reduce its revenuesand profits.**

A significant amount of theCompany’s products are sold to a relatively small number of large volumecustomers. Sales to Procter & Gamble Company represented approximately14% of its net sales in fiscal 2005. Sales to its top 20 customersrepresented approximately 51% of the Company’s net sales in fiscal 2005. 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.

**Increasesin prices for raw materials or the unavailability of raw materials could reducethe Company’s profit 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 $3.0 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.

**ITEM 1B.**        UNRESOLVEDSTAFF COMMENTS

None

17

----

**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                     |       | Manufacturing and  Warehousing                                                      |
| Gainesville, Georgia(1)              |       | Manufacturing and  Warehousing                                                      |
| Landisville, New Jersey              |       | Manufacturing and Warehousing                                                       |
| Benson, North Carolina               |       | Manufacturing, Sales, Marketing, Warehousing and  Research and Development          |
| Raleigh, North Carolina(1)           |       | Administration                                                                      |
| Mooresville, North Carolina          |       | Manufacturing and Research and Development                                          |
| Mooresville, North  Carolina(1)      |       | Administration, Sales and Marketing                                                 |
| Mooresville, North Carolina          |       | Warehousing                                                                         |
| 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          |
| Mölnlycke, Sweden(1)            |       | Manufacturing                                                                       |
| *Nonwovens Latin America*            |       |                                                                                |
| Buenos Aires, Argentina(2)           |       | Manufacturing, Sales, Marketing, Warehousing and  Administration                    |
| Guadalajara, Mexico(1)               |       | Sales, Marketing and  Warehousing                                                   |
| Cali, Colombia                       |       | Manufacturing, Sales, Marketing, Warehousing and  Administration                    |
| Monterrey, Mexico(1)                 |       | Sales, Marketing and  Warehousing                                                   |
| Mexico City, Mexico(1)               |       | Sales, Marketing and  Warehousing                                                   |
| San Luis Potosi, Mexico              |       | Manufacturing, Sales, Warehousing, Marketing and  Administration                    |
| *Nonwovens Asia*                     |       |                                                                                |
| Nanhai, China(3)                     |       | 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*                  |       |                                                                                |
| Dayton, New Jersey(1)                |       | Administration                                                                      |
| North Charleston, South  Carolina(1) |       | Corporate                                                                           |

----

(1)            Leased.

18

----

(2)            60% interest in ajoint venture/partnership-type arrangement (Dominion NonwovensSudamerica S.A.) with Guillermo Enrique Kraves and Ives Company Limited.

(3)            80% interest in ajoint venture/partnership-type arrangement (Nanhai Nanxin Non-WovenCo. Ltd.) with Nanhai Chemical Fiber Enterprises Co.

The Company recently announced its intent to relocateits corporate office and several of its administrative functions to Charlotte,North Carolina. This property is expected to be leased and to be occupied inthe third quarter of 2006.

Capacity utilization during2005 varied by geographic locations and manufacturing capabilities. However, itcan be generally stated that the facilities operated moderately below capacity.

**ITEM 3.**                 LEGALPROCEEDINGS

During 2005, the Company received approximately$1.9 million as its portion of class-action settlement agreements withvarious suppliers of raw materials. These recoveries were included in *Selling, general and administrative expenses* in theConsolidated Statement of Operations for fiscal 2005.

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 former customer alleging breach of contract and other charges. The discoveryphase has recently begun and there is not currently enough information toformulate an assessment of the ultimate outcome of the claim. Therefore,management is not able to estimate the amount of such loss, if any, at thistime. The Company intends to vigorously defend this action and believes that ithas reasonable arguments available in its defense. However, there is a possibilitythat resolution of this matter, or others that may arise in the normal courseof business, 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 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 4.**                 SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to avote of security holders during the fourth quarter of fiscal 2005.

19

----

**PART II**

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

**MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES**

Since March 5, 2003, theCompany’s Class A and Class B Common Stock have been trading on theover-the-counter electronic bulletin board (the “OTCBB”) under the symbols “POLGA”and “POLGB,” respectively. Prior to March 5, 2003, all of the Company’s commonstock was in one class. Pursuant to the Modified Plan, on March 5, 2003,the Company’s common stock was divided into five classes: Class A, Class B,Class C, Class D and Class E. The Class A and Class B CommonStock trade on the OTCBB. No shares of Class D or Class E Common Stockare outstanding. There is no established trading market for the Class C CommonStock and, as such, no ticker symbol has been assigned to the Class C CommonStock. The Class B Common Stock is convertible to Class A Common Stockand, accordingly, the Class B Common Stock trades on a comparable basis tothe Class A Common Stock. The following table sets forth for fiscal 2005and 2004 the high and low bids for the Company’s Class A Common Stock:

| ** **     | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------|------------|----------|------------|----------|------------|
| ** **     | ** ** | **High** | ** ** | **Low**  | ** ** | **High** | ** ** | **Low** | ** ** |
| First Quarter  |       | $        | 24.00      |     | $          | 17.20 |   | $ | 14.00 |   | $ | 7.00 |   |
| Second Quarter |       | 25.65    |       | 21.00    |       | 14.50 |   | 12.00 |   |
| Third Quarter  |       | 29.40    |       | 22.35    |       | 13.50 |   | 11.10 |   |
| Fourth Quarter |       | 25.50    |       | 23.25    |       | 19.30 |   | 11.10 |   |
|                |            |          |            |          |            |  |  |  |  |  |  |  |  |

 

The Company paid no dividends on its common stockduring fiscal years 2005 or 2004. The Credit Facility limits restrictedpayments, which includes dividends payable in cash, to $5.0 million in theaggregate since the effective date of the Credit Facility.

As of March 3, 2006,there were 59, 337 and one holders of record of the Company’s Class A, Class Band Class C Common Stock, respectively.

**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 31,2005, January 1, 2005 and January 3, 2004 and the ConsolidatedStatement of Operations and related information for the fiscal years ended December 31,2005, January 1, 2005 and the ten months ended January 3, 2004 arereferred to as “Successor” and reflect the effects of the reorganization andthe principles of fresh start accounting. Periods presented prior to March 1,2003 have been referred to as “Predecessor”. See Note 4 to the Company’sConsolidated Financial Statements included in Item 8 to this Annual Reporton Form 10-K for a discussion of fresh start accounting adjustments.The statement of operations data for each of the periods presented in the fiveyears ended December 31, 2005 and the balance sheet data as of December 31,2005, January 1, 2005, January 3, 2004, December 28, 2002 and December 29,2001 have been derived from audited consolidated financial statements, exceptfor the balance sheet data as of March 1, 2003, which is unaudited. Thetable should be read in conjunction with “Management’s Discussion and Analysisof Financial Condition and Results of Operations” included in Item 7 tothis Annual Report on Form 10-K and the Consolidated FinancialStatements of the Company and related notes thereto included in Item 8 tothis Annual Report on Form 10-K.

20

----

 

| ** **                                                                                                  | ** ** | **Successor**                              | ** ** | **Predecessor**            | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|----------------------------|------------|
| ** **                                                                                                  | ** ** | **Fiscal Year Ended**            | ** ** | **Ten Months  Ended** | ** ** | **Two Months  Ended** | ** ** | **Fiscal Year Ended** | ** ** |
| ** **                                                                                                  | ** ** | **December 31,  2005**                | ** ** | **January 1,  2005**  | ** ** | **January 3,  2004** | ** ** | **March 1,  2003** | ** ** | **December 28,  2002** | ** ** | **December 29,  2001** | ** ** |
| ** **                                                                                                  | ** ** | **(In Thousands, Except Per  Share Data)** | ** ** |
| **Statement of Operations:**                                                                                |       |                                       |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net sales                                                                                                   |       |                                       | $          | 948,848                    |       |   |   | $ | 844,734 |   |   |   | $ | 644,893 |   |   |   | $ | 132,895 |   |   |   | $ | 754,437 |   |   |   | $ | 815,765 |   |   |
| Cost of goods sold                                                                                          |       |                                       | 787,369    |                       |       |   | 691,272 |   |   |   | 531,390 |   |   |   | 111,110 |   |   |   | 635,639 |   |   |   | 676,763 |   |   |
| Gross profit                                                                                                |       |                                       | 161,479    |                       |       |   | 153,462 |   |   |   | 113,503 |   |   |   | 21,785 |   |   |   | 118,798 |   |   |   | 139,002 |   |   |
| Selling, general and  administrative expenses                                                               |       |                                       | 104,545    |                       |       |   | 99,163 |   |   |   | 78,682 |   |   |   | 15,955 |   |   |   | 100,215 |   |   |   | 111,781 |   |   |
| Asset impairment  charges                                                                                   |       |                                       | —     |                       |       |   | 2,253 |   |   |   | 1,207 |   |   |   | — |   |   |   | 317,898 |   |   |   | 181,190 |   |   |
| Plant realignment  costs                                                                                    |       |                                       | 9          |                       |       |   | 1,867 |   |   |   | 6,802 |   |   |   | 4 |   |   |   | 1,054 |   |   |   | 7,441 |   |   |
| Foreign currency loss,  net                                                                                 |       |                                       | 671        |                       |       |   | 2,027 |   |   |   | 2,773 |   |   |   | 1,343 |   |   |   | (1,059 | ) |   |   | 2,318 |   |   |
| Arbitration  settlement, net                                                                                |       |                                       | —     |                       |       |   | (13,112 | ) |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Financial  restructuring expenses                                                                           |       |                                       | —     |                       |       |   | — |   |   |   | — |   |   |   | — |   |   |   | 3,634 |   |   |   | 1,850 |   |   |
| Other retirement costs                                                                                      |       |                                       | —     |                       |       |   | — |   |   |   | — |   |   |   | — |   |   |   | 2,608 |   |   |   | — |   |   |
| Operating income  (loss)                                                                                    |       |                                       | 56,254     |                       |       |   | 61,264 |   |   |   | 24,039 |   |   |   | 4,483 |   |   |   | (305,552 | ) |   |   | (165,578 | ) |   |
| Other expense (income):                                                                                     |       |                                       |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest expense, net                                                                                       |       |                                       | 32,617     |                       |       |   | 40,252 |   |   |   | 49,036 |   |   |   | 10,665 |   |   |   | 71,478 |   |   |   | 99,406 |   |   |
| Investment (gain)  loss, net                                                                                |       |                                       | —     |                       |       |   | — |   |   |   | (3 | ) |   |   | (291 | ) |   |   | 1,806 |   |   |   | 5,290 |   |   |
| Minority interests                                                                                          |       |                                       | 3,784      |                       |       |   | 2,597 |   |   |   | 2,028 |   |   |   | 441 |   |   |   | 1,366 |   |   |   | (2,694 | ) |   |
| Write-off of loan  acquisition costs                                                                        |       |                                       | 4,008      |                       |       |   | 5,022 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Foreign currency and  other (gain) loss, net                                                                |       |                                       | (948       | )                          |       |   | 667 |   |   |   | 3,035 |   |   |   | 91 |   |   |   | 15,078 |   |   |   | 5,784 |   |   |
| Reorganization items,  (gain) loss                                                                          |       |                                       | —     |                       |       |   | — |   |   |   | — |   |   |   | (540,479 | ) |   |   | 14,873 |   |   |   | — |   |   |
| Income (loss) before  income tax expense (benefit)                                                     |       |                                       | 16,793     |                       |       |   | 12,726 |   |   |   | (30,057 | ) |   |   | 534,056 |   |   |   | (410,153 | ) |   |   | (273,364 | ) |   |
| Income tax expense  (benefit)                                                                               |       |                                       | 9,796      |                       |       |   | 7,994 |   |   |   | 2,928 |   |   |   | 1,692 |   |   |   | (3,290 | ) |   |   | (25,803 | ) |   |
| Income (loss) before  cumulative effect of change in accounting principle                                   |       |                                       | 6,997      |                       |       |   | 4,732 |   |   |   | (32,985 | ) |   |   | 532,364 |   |   |   | (406,863 | ) |   |   | (247,561 | ) |   |
| Cumulative effect of  change in accounting principle, net of tax                                            |       |                                       | —     |                       |       |   | — |   |   |   | — |   |   |   | — |   |   |   | 12,774 |   |   |   | — |   |   |
| Net income (loss)                                                                                           |       |                                       | 6,997      |                       |       |   | 4,732 |   |   |   | (32,985 | ) |   |   | 532,364 |   |   |   | (419,637 | ) |   |   | (247,561 | ) |   |
| Accrued and  paid-in-kind dividends on PIK Preferred Shares                                                 |       |                                       | 27,998     |                       |       |   | 5,566 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Income (loss)  applicable to common shareholders                                                       |       |                                       | $          | (21,001                    | )          |   |   | $ | (834 | ) |   |   | $ | (32,985 | ) |   |   | $ | 532,364 |   |   |   | $ | (419,637 | ) |   |   | $ | (247,561 | ) |   |
| **Per Share Data:**                                                                                         |       |                                       |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income (loss) before  cumulative effect of change in accounting principle per common share—basic  |       |                                       | $          | (1.60                      | )          |   |   | $ | (0.09 | ) |   |   | $ | (3.81 | ) |   |   | $ | 16.63 |   |   |   | $ | (12.71 | ) |   |   | $ | (7.74 | ) |   |
| Income (loss) per  share applicable to common shareholders—basic                                       |       |                                       | $          | (1.60                      | )          |   |   | $ | (0.09 | ) |   |   | $ | (3.81 | ) |   |   | $ | 16.63 |   |   |   | $ | (13.11 | ) |   |   | $ | (7.74 | ) |   |
| Income (loss) before  cumulative effect of change in accounting principle per common share—diluted     |       |                                       | $          | (1.60                      | )          |   |   | $ | (0.09 | ) |   |   | $ | (3.81 | ) |   |   | $ | 16.63 |   |   |   | $ | (12.71 | ) |   |   | $ | (7.74 | ) |   |
| Income (loss) per  share applicable to common shareholders—diluted                                     |       |                                       | $          | (1.60                      | )          |   |   | $ | (0.09 | ) |   |   | $ | (3.81 | ) |   |   | $ | 16.63 |   |   |   | $ | (13.11 | ) |   |   | $ | (7.74 | ) |   |
| Cash dividends                                                                                              |       |                                       | $          | —                     |       |   |   | $ | — |   |   |   | $ | — |   |   |   | $ | — |   |   |   | $ | — |   |   |   | $ | 0.02 |   |   |
| **Operating and other data:**                                                                               |       |                                       |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash provided by (used  in) operating activities                                                            |       |                                       | $          | 70,932                     |       |   |   | $ | 69,896 |   |   |   | $ | 33,213 |   |   |   | $ | (12,901 | ) |   |   | $ | 35,343 |   |   |   | $ | 10,496 |   |   |
| Cash provided by (used  in) investing activities                                                            |       |                                       | (77,604    | )                          |       |   | (23,144 | ) |   |   | (33,909 | ) |   |   | 8,820 |   |   |   | (10,554 | ) |   |   | (21,377 | ) |   |
| Cash provided by (used  in) financing activities                                                            |       |                                       | (2,488     | )                          |       |   | (28,133 | ) |   |   | (10,887 | ) |   |   | (14,669 | ) |   |   | (15,367 | ) |   |   | 34,417 |   |   |
| Gross margin (a)                                                                                       |       |                                       | 17.0       | %                          |       |   | 18.2 | % |   |   | 17.6 | % |   |   | 16.4 | % |   |   | 15.7 | % |   |   | 17.0 | % |   |
| Depreciation and  amortization                                                                              |       |                                       | $          | 57,550                     |       |   |   | $ | 53,230 |   |   |   | $ | 42,620 |   |   |   | $ | 8,812 |   |   |   | $ | 71,556 |   |   |   | $ | 83,164 |   |   |
| Capital expenditures                                                                                        |       |                                       | 78,902     |                       |       |   | 24,791 |   |   |   | 36,675 |   |   |   | 3,062 |   |   |   | 15,379 |   |   |   | 21,440 |   |   |
| **Balance sheet data (at end of period):**                                                                  |       |                                       |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents and short-term investments                                                       |       |                                       | $          | 30,963                     |       |   |   | $ | 41,296 |   |   |   | $ | 21,336 |   |   |   | $ | 31,783 |   |   |   | $ | 58,147 |   |   |   | $ | 46,453 |   |   |
| Working capital  (deficit)                                                                                  |       |                                       | 173,447    |                       |       |   | 187,338 |   |   |   | 119,106 |   |   |   | 172,501 |   |   |   | 219,905 |   |   |   | (872,336 | ) |   |
| Total assets                                                                                                |       |                                       | 765,001    |                       |       |   | 754,558 |   |   |   | 719,062 |   |   |   | 745,221 |   |   |   | 811,319 |   |   |   | 1,232,214 |   |   |
| Long-term debt,  less current portion                                                                       |       |                                       | 405,955    |                       |       |   | 403,560 |   |   |   | 440,992 |   |   |   | 480,050 |   |   |   | 478,224 |   |   |   | 9,802 |   |   |
| Minority interests                                                                                          |       |                                       | 16,611     |                       |       |   | 14,912 |   |   |   | 14,151 |   |   |   | 12,123 |   |   |   | 11,682 |   |   |   | 9,896 |   |   |
| 16% Series A  convertible pay-in-kind preferred shares                                                 |       |                                       | —     |                       |       |   | 58,286 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Total shareholders’  equity (deficit)                                                                  |       |                                       | 131,482    |                       |       |   | 73,849 |   |   |   | 59,200 |   |   |   | 73,390 |   |   |   | (465,914 | ) |   |   | (48,862 | ) |   |

 

**Note toSelected Consolidated Financial Data**

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

21

----

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

The following discussion and analysis providesinformation which management believes is relevant to an assessment andunderstanding of the Company’s consolidated results of operations and financialcondition. The discussion should be read in conjunction with the ConsolidatedFinancial Statements and notes thereto contained in Item 8 to this AnnualReport on Form 10-K. In particular, this discussion should be read inconjunction with Note 3 “Chapter 11 Proceedings and Recapitalization,”Note 4 “Fresh Start Accounting” and Note 5 “Business Restructuringand Asset Impairment,” to the Consolidated Financial Statements included in Item 8to this Annual Report on Form 10-K, which describe the filing by theCompany and its domestic subsidiaries of voluntary petitions for reorganizationunder Chapter 11 of the United States Bankruptcy Code on May 11, 2002and the financial restructuring and fresh start accounting associated with theCompany’s emergence from the Chapter 11 process effective March 5,2003.

For accounting purposes, theCompany recognized the emergence on March 1, 2003, which was the end ofthe February 2003 accounting period. Fresh start accounting has been implementedas of March 1, 2003 and, accordingly, at that date, all assets andliabilities were restated to reflect their respective fair value. SeeNote 4 of the Company’s Consolidated Financial Statements included in Item8 to this Annual Report on Form 10-K for a discussion of the freshstart accounting adjustments. For financial reporting purposes, references to “Predecessor”refer to the Company on and prior to March 1, 2003 and references to “Successor”refer to the Company on and after March 2, 2003, after giving effect tothe implementation of fresh start accounting. Successor consolidated financialstatements are not comparable to Predecessor consolidated financial statements.However, for purposes of this discussion of results of operations, certain ofthe data for the ten months ended January 3, 2004 (Successor) have beencombined with the two months ended March 1, 2003 (Predecessor) forcomparisons with the fiscal years ended December 31, 2005 (Successor) and January 1,2005 (Successor).

22

----

**Results of Operations**

Thefollowing table sets forth the percentage relationships to net sales of certainincome statement items for the 2005 periods in comparison to the corresponding2004 and 2003 (combined) periods.

| ** **                                                  | ** ** | **Successor** | ** ** | **Successor** | ** ** | **Combined** | ** ** | **Successor**                                         | ** ** | **Predecessor**                                     | ** ** |
|-------------------------------------------------------------|------------|---------------|------------|---------------|------------|--------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                  | ** ** | **2005**      | ** ** | **2004**      | ** ** | **2003**     | ** ** | **Ten Months  Ended  January 3, 2004** | ** ** | **Two Months  Ended  March 1, 2003** | ** ** |
| Net sales                                                   |       |          | 100.0      | %             |       |         | 100.0      | %                                                     |       |                                                | 100.0      | % |   |   | 100.0 | % |   |   | 100.0 | % |   |
| Cost of goods sold:                                         |       |          |       |          |       |         |       |                                                  |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Material                                                    |       |          | 51.2       |          |       |         | 48.6       |                                                  |       |                                                | 46.9       |   |   |   | 47.0 |   |   |   | 46.6 |   |   |
| Labor                                                       |       |          | 8.5        |          |       |         | 9.6        |                                                  |       |                                                | 10.1       |   |   |   | 10.1 |   |   |   | 10.3 |   |   |
| Overhead                                                    |       |          | 23.3       |          |       |         | 23.6       |                                                  |       |                                                | 25.6       |   |   |   | 25.3 |   |   |   | 26.7 |   |   |
|                                                        |       |          | 83.0       |          |       |         | 81.8       |                                                  |       |                                                | 82.6       |   |   |   | 82.4 |   |   |   | 83.6 |   |   |
| Gross profit                                                |       |          | 17.0       |          |       |         | 18.2       |                                                  |       |                                                | 17.4       |   |   |   | 17.6 |   |   |   | 16.4 |   |   |
| Selling, general and  administrative expenses               |       |          | 11.0       |          |       |         | 11.7       |                                                  |       |                                                | 12.2       |   |   |   | 12.2 |   |   |   | 12.0 |   |   |
| Asset impairment  charges                                   |       |          | —     |          |       |         | 0.3        |                                                  |       |                                                | 0.1        |   |   |   | 0.2 |   |   |   | — |   |   |
| Plant realignment  costs                                    |       |          | —     |          |       |         | 0.2        |                                                  |       |                                                | 0.9        |   |   |   | 1.1 |   |   |   | — |   |   |
| Foreign currency loss,  net                                 |       |          | 0.1        |          |       |         | 0.2        |                                                  |       |                                                | 0.5        |   |   |   | 0.4 |   |   |   | 1.0 |   |   |
| Arbitration  settlement, net                                |       |          | —     |          |       |         | (1.5       | )                                                     |       |                                                | —     |   |   |   | — |   |   |   | — |   |   |
| Operating income                                            |       |          | 5.9        |          |       |         | 7.3        |                                                  |       |                                                | 3.7        |   |   |   | 3.7 |   |   |   | 3.4 |   |   |
| Other expense  (income):                                    |       |          |       |          |       |         |       |                                                  |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Interest expense, net                                       |       |          | 3.4        |          |       |         | 4.8        |                                                  |       |                                                | 7.7        |   |   |   | 7.6 |   |   |   | 8.0 |   |   |
| Investment gain, net                                        |       |          | —     |          |       |         | —     |                                                  |       |                                                | —     |   |   |   | — |   |   |   | (0.2 | ) |   |
| Minority interests                                          |       |          | 0.4        |          |       |         | 0.3        |                                                  |       |                                                | 0.3        |   |   |   | 0.3 |   |   |   | 0.3 |   |   |
| Write-off of loan acquisition costs                         |       |          | 0.4        |          |       |         | 0.6        |                                                  |       |                                                | —     |   |   |   | — |   |   |   | — |   |   |
| Foreign currency and other (gain) loss, net                 |       |          | (0.1       | )             |       |         | 0.1        |                                                  |       |                                                | 0.4        |   |   |   | 0.5 |   |   |   | 0.1 |   |   |
| Reorganization items,  gain (loss)                          |       |          | —     |          |       |         | —     |                                                  |       |                                                | 69.4       |   |   |   | — |   |   |   | 406.6 |   |   |
| Income (loss) before  income tax expense                    |       |          | 1.8        |          |       |         | 1.5        |                                                  |       |                                                | 64.7       |   |   |   | (4.7 | ) |   |   | 401.8 |   |   |
| Income tax expense                                          |       |          | 1.1        |          |       |         | 0.9        |                                                  |       |                                                | 0.6        |   |   |   | 0.4 |   |   |   | 1.3 |   |   |
| Net income (loss)                                           |       |          | 0.7        |          |       |         | 0.6        |                                                  |       |                                                | 64.1       |   |   |   | (5.1 | ) |   |   | 400.5 |   |   |
| Accrued and  paid-in-kind dividends on PIK preferred shares |       |          | 2.9        |          |       |         | 0.7        |                                                  |       |                                                | —     |   |   |   | — |   |   |   | — |   |   |
| Income (loss) applicable to  common shareholders            |       |          | (2.2       | )%            |       |         | (0.1       | )%                                                    |       |                                                | 64.1       | % |   |   | (5.1 | )% |   |   | 400.5 | % |   |

** **

23

----

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

The Company’sreportable segments consist of its two operating divisions, Nonwovens andOriented Polymers. For additional information regarding segment data, seeNote 18 “Segment Information” to the Consolidated Financial Statementsincluded in Item 8 to this Annual Report on Form 10-K. Thefollowing table sets forth components of the Company’s net sales and operatingincome (loss) by operating division for the year ended December 31, 2005,the year ended January 1, 2005 and the corresponding change from 2004 to2005 (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                                  |       | $        | 66.7       |     | $          | 60.4       |       | $ | 6.3 |   |
| Oriented Polymers                          |       | 10.7     |       | 12.7     |       | (2.0       | )          |
| Unallocated Corporate, net of eliminations |       | (20.5    | )          | (18.8    | )          | (1.7       | )          |
|                                       |       | 56.9     |       | 54.3     |       | 2.6        |       |
| Plant realignment costs                    |       | —   |       | (1.9     | )          | 1.9        |       |
| Asset impairment charges                   |       | —   |       | (2.2     | )          | 2.2        |       |
| Foreign currency loss, net                 |       | (0.6     | )          | (2.0     | )          | 1.4        |       |
| Arbitration settlement, net                |       | —   |       | 13.1     |       | (13.1      | )          |
|                                       |       | $        | 56.3       |     | $          | 61.3       |       | $ | (5.0 | ) |

 

The amounts for plantrealignment costs, asset impairment charges, foreign currency loss, net andarbitration settlement, net have not been allocated to the Company’s reportablebusiness divisions because the Company’s management does not evaluate suchcharges on a division-by-division basis. Division operating performance ismeasured 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.

24

----

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/miximprovement, partially offset by lower sales volumes of certain commodity-basedproducts.

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“Quantitative and Qualitative Disclosures About Market Risk” included inItem 7A to this Annual Report on Form 10-K.

**Gross Margin**

***Gross margin in 2005 declined to 17.0%from 18.2% in 2004, despite improved sales volumes and product mix, due to theimpact of the raw material increases during 2005. The raw material component ofthe cost of goods sold as a percentage of net sales increased from 48.6% in2004 to 51.2% in 2005.***

**Operating Income**

A reconciliation of the change in operating incomebetween 2004 and 2005 is presented 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 2004 benefitedfrom the $13.1 million arbitration settlement, net of expenses. Thefinancial 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 

25

----

and administrative expenses.The increase in depreciation and amortization charges was primarily related tothe reduction in the estimated useful lives of certain machinery and equipmentutilized in the Company’s operations to reflect the technological status andmarket conditions of certain aspects of the Company’s business. Selling, generaland administrative expenses were higher primarily due to increased salesvolume, increased non-cash compensation costs related to the Company’s stockoption plan and costs related to the new Sarbanes-Oxley compliance requirements,partially offset by $1.9 million received as its portion of class-actionsettlement agreements with various suppliers of raw materials.

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.

**Interest and Other Expense**

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 foreignsubsidiaries on intercompany loan balances denominated in currencies other thantheir functional 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.

26

----

**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.

**Accruedand Paid-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 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.

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 PreferredShares. The Company recorded the value of the additional PIK Preferred Sharesdeclared as a dividend on August 3, 2005, the date the Board of 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 $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 infiscal years 2005 and 2004, respectively.

**LossApplicable to Common Shareholders**

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

**Comparisonof Successor Year Ended January 1, 2005 and Combined Successor and PredecessorYear Ended January 3, 2004**

TheCompany’s reportable segments consist of its two operating divisions, Nonwovensand Oriented Polymers. For additional information regarding segment data, seeNote 18 “Segment 

27

----

Information” to the Consolidated Financial Statementsincluded in Item 8 to this Annual Report on Form 10-K. Thefollowing table sets forth components of the Company’s net sales and operatingincome (loss) by operating division for fiscal 2004, the ten months ended January 3,2004, the two months ended March 1, 2003 and the combined 2003 period andthe change from 2003 to 2004 (in millions):

| ** **                                  | ** ** | **2004** | ** ** | **Ten Months  Ended  January 3, 2004** | ** ** | **Two Months  Ended  March 1, 2003** | ** ** | **Combined  2003** | ** ** | **Change** | ** ** |
|---------------------------------------------|------------|----------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|--------------------|------------|------------|------------|
| Net sales                                   |       |     |       |                                                  |       |                                                |       |               |       |       |       |   |   |   |   |   |   |   |   |
| Nonwovens                                   |       | $        | 672.6      |                                                  |       | $                                                   | 515.7      |               |       |       | $          | 108.4 |   |   |   | $ | 624.1 |   |   |   | $ | 48.5 |   |   |
| Oriented Polymers                           |       | 172.5    |       |                                                  | 129.7      |                                                |       |               | 24.5       |       |       |   | 154.2 |   |   |   | 18.3 |   |   |
| Eliminations                                |       | (0.4     | )          |                                                  | (0.5       | )                                                   |       |               | —     |       |       |   | (0.5 | ) |   |   | 0.1 |   |   |
|                                        |       | $        | 844.7      |                                                  |       | $                                                   | 644.9      |               |       |       | $          | 132.9 |   |   |   | $ | 777.8 |   |   |   | $ | 66.9 |   |   |
| Operating income                            |       |     |       |                                                  |       |                                                |       |               |       |       |       |   |   |   |   |   |   |   |   |
| Nonwovens                                   |       | $        | 60.4       |                                                  |       | $                                                   | 38.9       |               |       |       | $          | 7.8 |   |   |   | $ | 46.7 |   |   |   | $ | 13.7 |   |   |
| Oriented Polymers                           |       | 12.7     |       |                                                  | 8.5        |                                                |       |               | 1.5        |       |       |   | 10.0 |   |   |   | 2.7 |   |   |
| Unallocated Corporate, net  of eliminations |       | (18.8    | )          |                                                  | (12.6      | )                                                   |       |               | (3.5       | )          |       |   | (16.1 | ) |   |   | (2.7 | ) |   |
|                                        |       | 54.3     |       |                                                  | 34.8       |                                                |       |               | 5.8        |       |       |   | 40.6 |   |   |   | 13.7 |   |   |
| Plant realignment costs                     |       | (1.9     | )          |                                                  | (6.8       | )                                                   |       |               | —     |       |       |   | (6.8 | ) |   |   | 4.9 |   |   |
| Asset impairment charges                    |       | (2.2     | )          |                                                  | (1.2       | )                                                   |       |               | —     |       |       |   | (1.2 | ) |   |   | (1.0 | ) |   |
| Foreign currency loss, net                  |       | (2.0     | )          |                                                  | (2.8       | )                                                   |       |               | (1.3       | )          |       |   | (4.1 | ) |   |   | 2.1 |   |   |
| Arbitration settlement, net                 |       | 13.1     |       |                                                  | —     |                                                |       |               | —     |       |       |   | — |   |   |   | 13.1 |   |   |
|                                        |       | $        | 61.3       |                                                  |       | $                                                   | 24.0       |               |       |       | $          | 4.5 |   |   |   | $ | 28.5 |   |   |   | $ | 32.8 |   |   |

 

**Net Sales**

Consolidatednet sales were $844.7 million in 2004, an increase of $66.9 millionor 8.6% over 2003 consolidated net sales of $777.8 million. Net sales for2004 in the Nonwovens and Oriented Polymers divisions improved over comparable2003 fiscal year results by 7.8% and 11.9%, respectively. Fiscal 2004 consistedof 52 weeks, whereas the combined 2003 fiscal year consisted of53 weeks. A reconciliation of the change in net sales between 2003 and2004 is presented in the following table (in millions):

| Net sales—2003     |   | $      | 777.8  |   |
|-------------------------|--------|--------|--------|--------|
| Change in sales due to: |   |   |   |
| Volume                  |   | 36.3   |   |
| Foreign currency        |   | 23.0   |   |
| Price/mix               |   | 17.8   |   |
| Businesses sold/exited  |   | (10.2  | )      |
| Net sales—2004     |   | $      | 844.7  |   |

 

The increase in net sales during 2004 was dueprimarily to volume gains, especially in the United States and Latin Americanmarkets, and the strengthening of foreign currencies versus theU.S. dollar. Sales dollars were positively impacted in 2004 by theprice/mix of sales largely due to increases in sales price in an effort to passalong raw material cost increases to customers. As raw material costs roseduring the current year, the Company followed the consistent policy of passingraw material prices along to its customers, where allowable by contract termsand where acceptable based on market conditions. The aforementioned increasesin sales were partially offset by decreases 

28

----

associated with businessessold or exited. Overall, the Company continued to build momentum in themarketplace following its emergence from the Chapter 11 process on March 5,2003.

A significant component of the $36.3 millionincrease in sales due to volume growth was generated in the Latin Americanregion as the San Luis Potosi, Mexico capacity expansion completed in late 2003reached full productive capacity in the second quarter of 2004. The LatinAmerica region’s sales improvement was paced by significant year-over-yearincreases in hygiene sales. In the Company’s U.S. nonwovens sales business, thehygiene and consumer markets recorded double-digit increases from 2003 asnew products were accepted by the markets and the economy improved during 2004.Nonwoven sales volumes improved slightly in Asia and decreased in Europe.

Foreign currencies,predominantly the Euro and the Canadian dollar, were stronger against theU.S. dollar during 2004 compared to 2003 resulting in an increase in netsales of $23.0 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 to thisAnnual Report on Form 10-K.

**Gross Margin**

***Gross margin in 2004 increased to 18.2% from 17.6% in 2003, driven byvolume increases and lower manufacturing costs, offset by the effect of rawmaterial increases during 2004. The raw material component of the cost of goodssold as a percentage of net sales increased from 46.9% in 2003 to 48.6% in2004.***

**Operating Income**

Areconciliation of the change in operating income between 2003 and 2004 ispresented in the following table (in millions):

| Operating income—2003                                       |   | $      | 28.5   |   |
|------------------------------------------------------------------|--------|--------|--------|--------|
| Change in operating income due to:                               |   |   |   |
| Price/mix                                                        |   | 17.8   |   |
| Higher raw material costs                                        |   | (24.1  | )      |
| Volume                                                           |   | 13.2   |   |
| Arbitration settlement, net                                      |   | 13.1   |   |
| Lower manufacturing costs                                        |   | 5.3    |   |
| Lower asset impairment  charges and plant realignment costs, net |   | 3.9    |   |
| Postretirement benefit plan  curtailments and other, net         |   | 3.6    |   |
| Foreign currency translation                                     |   | 1.9    |   |
| Businesses sold/exited                                           |   | 0.5    |   |
| Higher depreciation and  amortization expense                    |   | (2.8   | )      |
| All other, primarily higher  SG&A costs                      |   | 0.4    |   |
| Operating income—2004                                       |   | $      | 61.3   |   |

 

Consolidated operating incomewas $61.3 million in 2004 as compared to $28.5 million in 2003. Theimprovement in operating income was positively impacted by the price/mix and volumeimprovements noted above. The $17.0 million arbitration settlement, whichwas received during the second quarter and reported net of $3.9 million oflegal and other associated arbitration costs, also favorably impacted operatingincome. Other items contributing to the improvement of operating income werecost savings as a result of previous business restructuring efforts and lowerasset 

29

----

impairmentcharges, net of a $1.0 million increase in plant realignment costs.Offsetting these favorable impacts were higher raw material costs which couldnot be passed along to customers in the form of price increases, higherdepreciation and amortization charges and higher selling, general andadministrative expenses. The increase in raw material costs was driven byincreases in the prices charged by vendors. The expectation for fiscal 2005 isthat raw material costs will continue to escalate and the Company will continueits efforts to pass along such increases to its customers. The increase inselling, general and administrative expenses was primarily related to highersales levels and is net of $2.6 million of accounts receivable reserveadjustments. The increase in depreciation and amortization charges is primarilyrelated to the installation of the new production line in Latin America.

**Interest and Other Expense**

Net interest expense decreased $19.4 million,from $59.7 million in 2003 to $40.3 million in 2004. Those totalsinclude $1.8 million and $3.7 million, respectively, of payments inkind in lieu of cash interest on the Junior Notes. The decrease in net interestexpense was primarily due to the lower interest rates obtained by refinancingthe Company’s Restructured Credit Facility with the Bank Facility, effective April 27,2004. Additionally, in conjunction with the refinancing, the Company’s majorityshareholder exchanged on April 27, 2004 approximately $42.6 millionin aggregate principal amount of the Junior Notes for 42,633 shares of PIKPreferred Shares, which also contributed to lower interest costs during theperiod. Also subsequent to the refinancing, the remaining $10.1 million ofJunior Notes were exchanged for 10,083 shares of the Company’s PIKPreferred Shares and 6,719 shares of the Company’s Class A CommonStock.

The Consolidated Statement ofOperations for 2004 included a charge of $5.0 million for the write-off ofunamortized loan acquisition costs related to the refinanced debt. Foreigncurrency and other (gain) loss, netdecreased $2.4 million, from a loss of $3.1 million in fiscal 2003 toa loss of $0.7 million in fiscal 2004, as fiscal 2003 included$1.1 million of costs related to an aborted refinancing effort.

**Reorganization Items**

As further described inNote 3 “Chapter 11 Proceedings and Recapitalization” and Note 4 “FreshStart Accounting” to the Consolidated Financial Statements included in Item 8to this Annual Report on Form 10-K, the Company recognized a netgain of $540.5 million in reorganization items upon its emergence fromChapter 11 in 2003. These reorganization items primarily included gains oncancellation of prepetition indebtedness of $619.9 million offset by freshstart adjustments of $47.5 million and other costs associated with thereorganization of $31.9 million.

**Income Tax Expense**

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 rate in 2004was in excess of the statutory rate primarily due to withholding taxes onintercompany royalties, interest and dividends, for which the Company is notanticipating the benefit of foreign tax credits, state income taxes in theUnited States, and no significant income tax benefit recognized for the lossesincurred in the United States and certain foreign jurisdictions. During 2003,the Company recorded an income tax expense of $4.6 million, primarilyrelated to taxable income generated by foreign operations. The effective ratein 2003 differed from the statutory rate primarily as a result of the exclusionfrom taxable income of the gain from the cancellation of indebtedness.Additionally, no income tax benefits were attributed to the 2003 operatinglosses sustained in the United States and, as a result of its reorganization,all United States tax loss carryforwards expired as of January 4, 2004.

30

----

**Net Income**

**As a resultof the above, the Company recognized net income of $4.7 million in fiscal2004 compared to net income of $499.4 million in 2003.**

**AccruedDividends on PIK Preferred Shares**

The Company accrued dividendsat 16% on its PIK Preferred Shares from the date of their issuance throughJanuary 1, 2005 in the amount of $5.6 million. In January 2005,the Company declared a dividend of approximately $5.6 million payable inthe form of additional PIK Preferred Shares. As a result of the PIK PreferredShares being initially issued in April 2004, no such dividends wereaccrued in fiscal 2003.

**Income(Loss) Applicable to Common Shareholders**

As a result of the above, the Company recognized aloss applicable to common shareholders of $0.8 million, or $(0.09) pershare on a basic and diluted basis, in fiscal 2004 compared to incomeapplicable to common shareholders of $499.4 million in 2003.

31

----

**LIQUIDITY AND CAPITAL RESOURCES**

TheCompany’s principal sources of liquidity for operations and expansions arefunds generated from operations and borrowing availabilities under the CreditFacility, consisting of a revolving credit facility with aggregate commitmentsof $45.0 million and a first-lien term loan of $410.0 million. Therevolving credit portion of the Bank Facility terminates on November 22,2010 and the remaining balance (after mandatory annual payments of $4.1 millionand additional payments, if any, under the excess cash flow provision of theCredit Facility) of the first-lien term loan is due November 22, 2012. TheCredit Facility contains covenants and events of default customary forfinancings of this type, including leverage and interest expense coveragecovenants. At December 31, 2005, the Company was in compliance with allsuch covenants. Additionally, as of December 31, 2005, the Company had nooutstanding borrowings under the revolving credit facility. As ofDecember 31, 2005, capacity under the revolving credit facility had beenreserved for outstanding letters of credit in the amount of $11.4 million.

| ** **                       | ** ** | **December 31,  2005** | ** ** | **January 1,  2005** | ** ** |
|----------------------------------|------------|-----------------------------|------------|---------------------------|------------|
| ** **                       | ** ** | **(In Millions)**      | ** ** |
| **Balance sheet data:**          |       |                        |       |                      |       |   |   |   |   |
| Cash and cash equivalents        |       |                        | $          | 31.0                      |       |   |   | $ | 41.3 |   |   |
| Working capital                  |       |                        | 173.4      |                      |       |   | 187.3 |   |   |
| Total assets                     |       |                        | 765.0      |                      |       |   | 754.6 |   |   |
| Total debt                       |       |                        | 415.2      |                      |       |   | 414.0 |   |   |
| PIK Preferred Shares             |       |                        | —     |                      |       |   | 58.3 |   |   |
| Total shareholders’  equity |       |                        | 131.5      |                      |       |   | 73.8 |   |   |
|                                  |            |                             |            |                           |            |  |  |  |  |  |  |

 

| ** **                                | ** ** | **Fiscal Year Ended** | ** ** |
|-------------------------------------------|------------|---------------------------------|------------|
| ** **                                | ** ** | **December 31,  2005**     | ** ** | **January 1,   2005** | ** ** |
| ** **                                | ** ** | **(In Millions)**          | ** ** |
| **Cash flow data:**                       |       |                            |       |   |   |   |   |   |   |
| Net cash provided by operating activities |       |                            | $          | 70.9 |   |   |   | $ | 69.9 |   |   |
| Net cash used in investing activities     |       |                            | (77.6      | ) |   |   | (23.1 | ) |   |
| Net cash used in  financing activities    |       |                            | (2.5       | ) |   |   | (28.1 | ) |   |
|                                           |            |                                 |            |  |  |  |  |  |  |  |  |

 

**Operating Activities**

Net cash provided by operating activities was$70.9 million during 2005, a $1.0 million increase from the$69.9 million provided by operating activities during 2004, which includeda $13.1 million net cash inflow from an arbitration settlement. The Company wasable to generate substantially the same cash flows from operations in 2005versus 2004, despite the arbitration settlement benefit in 2004, primarily dueto improved cash flows from product sales in 2005.

The Company had working capital of approximately$173.4 million at December 31, 2005 compared with $187.3 million at January 1,2005. Accounts receivable at December 31, 2005 was $120.7 million ascompared to $113.5 million on January 1, 2005, an increase of$7.2 million. Accounts receivable represented approximately 46 daysof sales outstanding at both December 31, 2005 and January 1, 2005.Inventories at December 31, 2005 were $119.7 million, an increase of$13.4 million from inventories at January 1, 2005 of$106.3 million. The Company had inventory representing approximately54 days of cost of sales on hand at both December 31, 2005 and January 1,2005. Accounts payable at December 31, 2005 was $82.4 million as comparedto $63.8 million at January 1, 2005, an increase of$18.6 million. Accounts payable represented approximately 37 days ofcost of sales outstanding at December 31, 2005 as compared to 32 daysof cost of sales outstanding at January 1, 2005. The dollar increases inaccounts receivable, inventories 

32

----

and accounts payable in 2005versus 2004 were primarily related to the increases in raw material prices.

The Company’s restructuringactivities are discussed in Note 5 “Business Restructuring and AssetImpairment” to the Consolidated Financial Statements included in Item 8 to thisAnnual Report on Form 10-K.

**Investing and Financing Activities**

Cash used for investing activities amounted to$77.6 million and $23.1 million in 2005 and 2004, respectively.Capital expenditures during 2005 totaled $78.9 million, an increase of$54.1 million from capital spending of $24.8 million in 2004. Asignificant portion of the capital expenditures in 2005 related to theconstruction of new spunmelt manufacturing facilities in Suzhou, China; Cali,Colombia and Mooresville, North Carolina, as well as the installation ofadditional capacity in Nanhai, China. Investing activities during 2005 and 2004included proceeds from the sale of assets of $1.3 million and$1.7 million, respectively.

Cash used in financingactivities amounted to $2.5 million and $28.1 million in 2005 and 2004,respectively. In 2005, the Company borrowed, on a net basis, $1.2 million ofits debt whereas the Company repaid, on a net basis, $15.8 million of itsdebt during 2004. In addition, the Company paid loan acquisition and otherfinancing costs of $3.7 million and $12.4 million during 2005 and 2004,respectively.

**Dividends**

The Board of Directors has not declared a dividend onthe Company’s common stock since the first quarter of 2001. The Credit Facilitylimits restricted payments to $5.0 million, including cash dividends, inthe aggregate since the effective date of the Credit Facility. The Company doesnot currently anticipate paying dividends on its common stock in futureperiods.

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 

33

----

paid-in-kinddividends amounted to $28.0 million and $5.6 million in fiscal years 2005 and2004, respectively.

**Contractual Obligations**

A scheduleof the required payments under existing debt agreements and the amounts dueunder operating leases that have initial or non-cancellable lease terms inexcess of one year as of December 31, 2005 and purchase commitments as ofDecember 31, 2005, are presented in tabular form below (in millions):

| ** **                             | ** ** | **Payments Due by Period** | ** ** |
|----------------------------------------|------------|-------------------------------------------|------------|
| **Contractual Obligations**       | ** ** | ** **                                | ** ** | **Total** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **Thereafter** | ** ** |
| Debt, including short-term  borrowings |       | $                                         | 415.2      |   | $ | 9.2 |   | $ | 4.1 |   | $ | 4.1 |   | $ | 4.1 |   | $ | 4.1 |   |   | $ | 389.6 |   |   |
| Operating leases:                      |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Third party/nonaffiliate lease expense |       | $                                         | 7.3        |   | $ | 2.5 |   | $ | 1.8 |   | $ | 1.4 |   | $ | 1.1 |   | $ | 0.5 |   |   | — |   |   |
| Less: sub-lease income                 |       | (0.1                                      | )          | (0.1 | ) | — |   | — |   | — |   | — |   |   | — |   |   |
|                                   |       | $                                         | 7.2        |   | $ | 2.4 |   | $ | 1.8 |   | $ | 1.4 |   | $ | 1.1 |   | $ | 0.5 |   |   | $ | — |   |   |
| Purchase commitments (see  below)      |       | $                                         | 82.2       |   | $ | 82.2 |   | — |   | — |   | — |   | — |   |   | — |   |   |
|                                        |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Additionally, the Company expects to contributeapproximately $7.1 million to its pension plans in 2006. Contributions insubsequent years will be dependent upon various factors, including actualreturn on plan assets, regulatory requirements and changes in actuarialassumptions such as health care cost trend rate and discount rate.

As noted in the table above, the Company hasapproximately $415.2 million of debt outstanding as of December 31,2005. 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 hedgeagreement. Assuming the rate of interest remains unchanged from December 31,2005, cash interest payments would be approximately $28.0 million,$27.5 million, $27.2 million, $26.9 million and$26.6 million for 2006, 2007, 2008, 2009 and 2010, 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, capital expenditures,changes in working capital and certain other items. Since the amounts of excesscash flows for future periods are based on year-end data and not determinable,only the mandatory payments of approximately $4.1 million (“mandatory payments”)per year have been classified, in the table above, as annual debt paymentsunder the Credit Facility. Additionally, no excess cash flow payment wasrequired to be made with respect to fiscal 2005 due to the magnitude of themajor capital expenditures and any cash flow requirement with respect to fiscal2006 is not expected to be significant.

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 $3.3 million,$4.0 million and $3.2 million in 2005, 2004 and 2003, respectively.For the Successor ten month period and the Predecessor two month period of2003, the rental expense was $2.6 million and $0.6 million,respectively. Rental income approximated $0.2 million, $0.6 million and$0.5 million in 2005, 2004 and 2003, respectively. The expenses arerecognized on a straight-line basis over the life of the lease.

34

----

At December 31, 2005, theCompany had commitments of approximately $82.2 million related to thepurchase of raw materials, maintenance, converting services and capitalprojects which are expected to result in cash payments during 2006. Inaddition, the Company had outstanding letters of credit, including the Nanhailetter of credit, at December 31, 2005 of approximately $11.4 million.

**Liquidity Summary**

As discussed more fully inNote 11 to the Consolidated Financial Statements included in Item 8 tothis Annual Report on Form 10-K, on November 22, 2005, theCompany refinanced its existing Bank Facility with  a new Credit Facility consisting of a$45.0 million secured revolving credit facility maturing in 2010 and a$410.0 million first-lien term loan that matures in 2012. The proceedstherefrom were used to fully repay indebtedness outstanding under the Company’sprevious Bank Facility and pay related fees and expenses.

All borrowings under the CreditFacility are U.S. dollar denominated and are guaranteed, on a joint andseveral basis, by each and all of the direct and indirect domestic subsidiariesof the Company. The Credit Facility and the related guarantees are secured by(i) a lien 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. At December 31, 2005, the Companyis in compliance with all such covenants and expects to remain in compliancethrough fiscal 2006. The first-lien term loan requires mandatory payments ofapproximately $1.0 million per quarter and, beginning with fiscal 2006,the first-lien term loan requires the Company to use a percentage of proceedsfrom excess cash flows, as defined by the Credit Facility, and determined basedon year-end results, to reduce its then outstanding balances under the CreditFacility. 

Excess cash flows required to be applied to therepayment of the Credit Facility are generally calculated as 50.0% of the netamount of the Company’s available cash generated from operations adjusted forthe cash effects of interest, taxes, capital expenditures, changes in workingcapital and certain other items. Since the amounts of excess cash flows forfuture periods are based on year-end results and not determinable, only themandatory payments of approximately $1.0 million per quarter have beenclassified as a current liability in the Consolidated Balance Sheet included inItem 8 to this Annual Report on Form 10-K. Additionally, no excess cashflow payment was required to be made with respect to fiscal 2005 due to themagnitude of the major capital expenditure projects and any excess cash flowrequirement with respect to fiscal 2006 is not expected to be significant.

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 the first-lienterm loan and the revolving credit facility is 225 basis points. TheCompany may, from time to time, elect to use an alternate base rate for itsborrowings under the revolving credit facility based on the bank’s base rateplus a margin of 75 to 125 basis points based on the Company’s totalleverage ratio. The Company had no outstanding borrowings at December 31,2005 under the revolving credit facility. As of December 31, 2005,capacity under the revolving credit facility had been reserved for outstandingletters of credit in the amount of $11.4 million. None of these letters ofcredit have been drawn on at December 31, 2005. Average borrowings underthe revolving credit facility, which were largely alternate base rate borrowings,for the period of November 22, 2005 to December 31, 2005 were $10.4 millionat an average rate of 8.37%.

35

----

Additionally, in accordancewith the terms of the Credit Facility, the Company maintained its position in acash flow hedge agreement, effectively converting $212.5 million ofnotional principal amount of debt from a variable LIBOR rate to a fixed LIBORrate of 3.383%. The cash flow hedge agreement has been maintained in accordancewith the terms of the Credit Facility and it terminates on May 8, 2007.

In conjunction with theCompany’s refinancing in fiscal 2004, the Company’s majority shareholderexchanged approximately $42.6 million in aggregate principal amount of theJunior Notes it controlled for 42,633 shares of the Company’s PIK PreferredShares. Additionally, in the third quarter of 2004, $10.1 million ofaggregate principal amount of the Company’s Junior Notes were exchanged for10,083 shares of the Company’s PIK Preferred Shares and 6,719 shares of theCompany’s Class A Common Stock. The dividends on the PIK Preferred Sharesaccrued at an annual rate of 16% and were payable semi-annually in arrears oneach January 1 and July 1, commencing with July 1, 2004, at theoption of the Company, (i) through the issuance of additional PIKPreferred Shares; (ii) in cash; or (iii) in a combination thereof.Dividends were cumulative and accrued from the most recent dividend paymentdate to which dividends had been paid or, if no dividends had been paid, fromthe date of original issuance. As the aforementioned exchanges were a componentof the recapitalization of the Company, involving the majority shareholder andother common shareholders of the Company and the 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 PreferredShares accrued at an annual rate of 16.0% and were payable semi-annually inarrears on each January 1 and July 1, commencing with July 1,2004. Such dividends were payable at the option of the Company; (i) throughthe issuance of additional shares of PIK Preferred Stock; (ii) in cash; or(iii) in a combination thereof. Accordingly, the Company accrued dividendsat the stated rate of 16.0% until such time as the form of the dividend wasdeclared by the Company’s Board of Directors. If the dividend was paid-in-kindthrough the issuance of additional shares of PIK Preferred Stock, the Companyrecognized the dividend at the estimated fair value of the shares issued inexcess of the amounts previously accrued. At any time prior to June 30,2012, the holders of the PIK Preferred Shares could have elected to convert anyor all of their PIK Preferred Shares into shares of the Company’s Class ACommon Stock 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, 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 

36

----

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, as described below. Accordingly, totalaccrued and paid-in-kind dividends amounted to $28.0 million and $5.6 millionin fiscal years 2005 and 2004, respectively.

Also, on July 28, 2005,the Company’s Board of Directors authorized the redemption of all of theCompany’s PIK Preferred Shares on or before September 30, 2005. On August 16,2005, the Board of Directors set September 15, 2005 as the redemption date(the “Redemption Date”). In accordance with the terms of the PIK PreferredShares, the Company would redeem all PIK Preferred Shares outstanding at theRedemption Date at a redemption rate of 37.26397 shares of Class A CommonStock per PIK Preferred Share. At any time prior to the Redemption Date,holders of PIK Preferred Shares could exercise their right to convert their PIKPreferred Shares into shares of Class A Common Stock at a conversion rateof 137.14286 shares of Class A Common Stock 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, during thefirst quarter of fiscal 2005, five PIK Preferred Shares were converted into 686shares of Class A Common Stock. As a result of these transactions,8,629,346 additional shares of Class A Common Stock are now issued andoutstanding and no PIK Preferred Shares are currently issued or outstanding.

The Company has entered intofactoring agreements to sell without recourse, certain U.S. and non-U.S.company-based receivables to unrelated third party financial institutions.Under the terms of the factoring agreement related to the sale of U.S.company-based receivables, the maximum amount of outstanding advances at anyone time is $15.0 million, which limitation is subject to change based onthe level of eligible receivables, restrictions on concentrations ofreceivables and the historical performance of the receivables sold. Under theterms of the factoring agreement related to the sale of non-U.S. company-basedreceivables, the maximum amount of outstanding advances at any one time is$10.0 million, which limitation is subject to change based on the level ofeligible receivables, restrictions on concentrations of receivables and thehistorical performance of the receivables sold. The sale of these receivablesaccelerated the collection of the Company’s cash, reduced credit exposure andlowered the Company’s net borrowing costs. The Credit Facility entered intoduring November 2005 provides the Company the availability to increase thesale of U.S. based receivables and non-U.S. based receivables, underfactoring agreements, to $20.0 million and $20.0 million,respectively.

As discussed in Note 20to the Consolidated Financial Statements included in Item 8 to this AnnualReport on Form 10-K,the Company has committed to several major projects to expand its worldwidecapacity, including the construction of new spunmelt manufacturing facilitiesin Suzhou, China; Cali, Colombia and Mooresville, North Carolina, as well asthe installation of additional capacity in Nanhai, China. Remaining paymentsdue related to these planned expansions as of December 31, 2005 totaledapproximately $45.6 million and are expected to be expended during fiscal 2006.

Based on the ability togenerate positive cash flows from its operations and the additional financialflexibility and reduced cash interest costs provided by the Credit Facility,the Company believes that it has the financial resources necessary to meet itsoperating needs, fund its capital expenditures and make all necessary contributionsto its retirement plans. Additionally, based on the Credit Facility and theredemption and conversion of its PIK Preferred Shares for shares of Class A

37

----

CommonStock, the Company believes that it has significantly reduced its cash interestcosts, improved its financial flexibility, simplified its capital structure andstrengthened its financial position.

**Off-BalanceSheet Arrangements**

**The Companydoes not have any off-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 2005, 2004 and 2003. However, the Companycontinues to be impacted by rising raw material costs. See “Quantitative andQualitative Disclosures About Market Risk” included in Item 7A of thisAnnual Report on Form 10-K.

**New AccountingStandards**

In May 2004, the FASBissued FASB Staff Position No. 106-2, “Accounting and DisclosureRequirements Related to the Medicare Prescription Drug, Improvement andModernization Act of 2003” (“FSP 106-2”). FSP 106-2permits a sponsor of a postretirement health care plan that provides aprescription drug benefit to make a one-time election to defer accounting forthe effects of the Medicare Prescription Drug, Improvement and ModernizationAct of 2003 (the “Act”), which was signed into law on December 8, 2003.The Act introduced a prescription drug benefit under Medicare and federal subsidiesto sponsors of retiree health care benefit plans that provide a benefit that isat least actuarially equivalent to that of Medicare. As permitted underFSP 106-2, the Company made a one-time election to defer accountingfor the effect of the Act and as more fully explained in Note 9 to theConsolidated Financial Statements included in Item 8 to this Annual Reporton Form 10-K, in December 2004 the Company approved plan amendmentscurtailing or eliminating various postretirement benefits in the U.S. As aresult, the amounts included in the Consolidated Financial Statements relatedto the Company’s postretirement benefit plans appropriately do not reflect theeffects of the Act.

In November 2004, theFASB issued SFAS No. 151, “Inventory Costs” (“SFAS No. 151”). Thisstatement amends earlier guidance to require that abnormal freight, handlingand spoilage costs be recognized as current-period charges rather thancapitalized as an inventory cost. In addition, SFAS No. 151 requiresthat the allocation of fixed production overhead costs be based on the normalcapacity of the production facilities. SFAS No. 151 is effective forinventory costs incurred during fiscal years beginning after June 15, 2005and is required to be adopted by the Company in the first quarter of fiscalyear 2006. The Company has completed its evaluation of the impact that theadoption of SFAS No. 151 could have and has concluded that such impactwill not be significant to its financial position or results of operations.

In December 2004, theFASB issued a revision to SFAS No. 123, “Accounting for Stock-BasedCompensation.” The revision, entitled SFAS No. 123R, “Share-Based Payment”(“SFAS No. 123R”), is effective for all awards granted, modified,repurchased or canceled after June 15, 2005 and requires a public entityto measure the cost of employee services received in exchange for an award ofequity instruments based on the grant-date fair value of the award. The grantdate fair value is to be estimated using option-pricing models adjusted for theunique characteristics of those instruments. In April 2005, the Securitiesand Exchange Commission issued a final rule that registrants must adopt

38

----

SFAS No. 123R’s fairvalue method of accounting no later than the beginning of the fiscal yearbeginning after June 15, 2005. Accordingly, the Company will adopt SFAS No. 123Rin the first quarter of fiscal 2006, using the modified prospective transitionmethod. Under the modified prospective transition method, all new grants andany unvested portion of prior awards will be measured based on thefair-value-based method of accounting. The impact of adopting SFAS No. 123Ris expected to be consistent with the impact in the pro forma disclosure presentedin Note 2 to the Consolidated Financial Statements included in Item 8 to thisAnnual Report on Form 10-K, resulting in lower compensation coststhan previously recognized under the Company’s historically used accountingprinciples.

In May 2005, the FASBissued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS No. 154”).This statement amends earlier guidance and requires retrospective applicationto prior periods’ financial statements of a voluntary change in accountingprinciple unless it is impracticable to determine either the period-specificeffects or the cumulative effects of the change. In addition, SFAS No. 154requires that a change in the method of depreciation or amortization for along-lived, non-financial asset be accounted for as a change in accountingestimate that is affected by a change in accounting principle. SFAS No. 154is effective for accounting changes and corrections of errors made in fiscalyears beginning after December 15, 2005. The Company does not expect thenew guidance to have a significant impact on its financial position or resultsof operations.

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.

**CriticalAccounting Policies And Other Matters**

The Company’s analysis anddiscussion of its financial position and results of operations are based uponits consolidated financial statements that have been prepared in accordancewith accounting principles generally accepted in the United States (“U.S. GAAP”).The preparation of financial statements in conformity with U.S. GAAP requiresthe appropriate application of certain accounting policies, many of whichrequire management to make estimates and assumptions about future events thatmay affect the reported amounts of assets, liabilities, revenues and expenses,and the disclosure of contingent assets and liabilities. Since future eventsand their impact cannot be determined with certainty, the actual results willinevitably differ from the estimates. The Company evaluates these estimates andassumptions on an ongoing basis, including but not limited to those related tofresh start accounting, revenue recognition, including the effects of salesreturns and allowances and credit risks, convertible securities, inventories,income taxes, and impairment of long-lived assets. Estimates and assumptionsare based on historical and other factors believed to be reasonable under thecircumstances. The impact and any associated risks related to estimates, assumptions,and accounting policies are discussed within “Management’s Discussion andAnalysis of 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 thefollowing accounting policies are critical to its business operations and theunderstanding of results of operations and affect the more significantjudgments and estimates used in the preparation of its Consolidated Financial Statements:

*Fresh Start Accounting:*   Inconnection with the Company’s Chapter 11 reorganization, the Company hasapplied fresh start accounting to its Consolidated Balance Sheet as of March 1,2003 in accordance with Statement of Position No. 90-7, “FinancialReporting by Entities in Reorganization Under the Bankruptcy Code” aspromulgated by the AICPA. Under fresh start accounting, a new 

39

----

reporting entity isconsidered to be created and the recorded amounts of assets and liabilities areadjusted to reflect their estimated fair values at the date fresh startaccounting is applied. On March 5, 2003, the Company emerged frombankruptcy. For financial reporting purposes, March 1, 2003 is consideredthe emergence date and the effects of the reorganization have been reflected inthe accompanying financial statements as if the emergence occurred on thatdate.

Fresh-start accountingrequires that the reorganization value of the Company be allocated to itsassets and liabilities in conformity with SFAS No. 141, “BusinessCombinations”. Such allocations have been reflected in the amounts included inNote 4 to the Consolidated Financial Statements included in Item 8 to thisAnnual Report on Form 10-K. Based on the consideration of manyfactors and various valuation methods, the Company and its financial advisorsdetermined the reorganization value of the Company to be approximately$73.4 million, as described in the Modified Plan. The factors andvaluation methodologies included the review of comparable company marketvaluations 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’sterminal value computed using comparable company exit multiples. Projected freecash flows were estimated based on projected cash flows from operations,adjusted for the effects of income taxes at an effective rate of 39.0%,estimated capital expenditures and estimated changes in working capital. Thecalculation of reorganization value of the Company was based on a variety ofestimates and assumptions about future circumstances and events. Such estimatesand assumptions are inherently subject to significant economic uncertainties.While the Company believes its judgments, estimates and valuation methodologieswere reasonable, different assumptions could have materially changed theestimated reorganization value of the Company as of March 1, 2003.

*Revenue Recognition:*   Revenuefrom product sales is recognized when title and risks of ownership pass to thecustomer. This is generally on the date of shipment to the customer, or upondelivery to a place named by the customer, dependent upon contract terms andwhen collectibility is reasonably assured and pricing is fixed or determinable.Revenue includes amounts billed to customers for shipping and handling.Provision for rebates, promotions, product returns and discounts to customersis recorded as a reduction in determining revenue in the same period that therevenue is recognized. Management bases its estimate of the expense to berecorded each period on historical returns and allowance levels. Managementdoes not believe the likelihood is significant that materially higher deductionlevels will result based on prior experience.

*Accounts Receivable andConcentration 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, beginning in 2004, sold, on a non-recoursebasis, certain of its receivables pursuant to factoring agreements. At December 31,2005, a reserve of $9.6 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.

40

----

*Convertible Securities:*   TheCompany recorded the accretion of dividends on the PIK Preferred Shares basedon the stated rate of 16.0%. If the Company’s Board of Directors, at the dateof any dividend declaration, elected to satisfy the dividend obligation bypayment-in-kind, the Company recognized an additional dividend charge for theexcess, if any, of the fair value of the additional PIK Preferred Sharesissued, at the dividend declaration date, over the amounts previously accruedat the stated rate. As the Company’s PIK Preferred Shares were not traded on anactive market, determination of the fair value of the securities, at the dateof dividend declaration, required estimates and judgments, which may haveimpacted the valuation of the dividend paid-in-kind. Based on thefact that the PIK Preferred Shares were deep-in-the money, the Companyestimated the fair value of the PIK Preferred Shares using the number of sharesof the Company’s Class A Common Stock into which the PIK Preferred Shareswere convertible at the then-current share price of the Company’s Class ACommon Stock. While the Company believes its estimates of the fair value of thePIK Preferred Shares are reasonable, the utilization of different assumptionscould produce materially different fair value estimates.

*Inventory Reserves:*   TheCompany maintains reserves for inventories valued using the first in, first out(FIFO) method. Such reserves for inventories can be specific to certaininventory or general based on judgments about the overall condition of theinventory. General reserves are established based on percentage write-downsapplied to inventories aged for certain time periods, or for inventories thatare slow-moving. Specific reserves are established based on a determination ofthe obsolescence of the inventory and whether the inventory value exceedsamounts to be recovered through the expected sales price of such inventories,less selling costs. Estimating sales prices, establishing markdown percentagesand evaluating the condition of the inventories require judgments andestimates, which may impact the inventory valuation and gross profits. Theactual amount of obsolete or unmarketable inventory has been materiallyconsistent with previously established reserves. Management believes, based onits prior experience of managing and evaluating the recoverability of its slowmoving or obsolete inventory, that such established reserves are materiallyadequate. If actual market conditions and product sales were less favorablethan we have projected, additional inventory writedowns may be necessary.

*Income Taxes:*   TheCompany records an income tax valuation allowance when, based on the weight ofthe evidence, it is more likely than not that some portion, or all, of thedeferred tax asset will not be realized. The ultimate realization of thedeferred tax asset depends on the ability of the Company to generate sufficienttaxable income of the appropriate character in the future and in theappropriate taxing jurisdictions. In assessing the realization of the deferredtax assets, consideration is given to, among other factors, the trend ofhistorical and projected future taxable income, the scheduled reversal ofdeferred tax liabilities, the carryforward period for net operating losses andtax credits, as well as tax planning strategies available to the Company.Additionally, the Company has not provided U.S. income taxes for undistributedearnings of certain foreign subsidiaries that are considered to be retainedindefinitely for reinvestment. Certain judgments, assumptions and estimates arerequired in assessing such factors and significant changes in such judgmentsand estimates may materially affect the carrying value of the valuationallowance and deferred income tax expense or benefit recognized in the Company’sConsolidated Financial Statements.

*Impairment of Long-LivedAssets:*   Long-lived assets, excluding goodwill,are reviewed for impairment whenever events or changes in circumstancesindicate that the carrying amounts may not be recoverable. Goodwill is reviewedannually. 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 value measuredby future discounted cash flows. The analysis, when conducted, requiresestimates of the amount and timing of projected cash flows and, whereapplicable, judgments associated with, 

41

----

among other factors,the appropriate discount rate. Such estimates are critical in determiningwhether any impairment charge should be recorded and the amount of such chargeif an impairment loss is deemed to be necessary. In addition, future eventsimpacting cash flows for existing assets could render a writedown necessarythat previously 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.Actual cash flows received or paid could differ from those used in estimatingthe impairment loss, which would impact the impairment charge ultimatelyrecognized. As of December 31, 2005, 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 assetimpairments, including goodwill, in the foreseeable future. However, shouldcurrent conditions deteriorate, this may impact our future cash flow estimates,resulting in an impairment charge that could have a material effect on theCompany’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.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.**

The Company is exposed tomarket risks for changes in foreign currency rates and interest rates and hasexposure to commodity price risks, including prices of its primary rawmaterials. The overall objective of the Company’s financial risk managementprogram is to seek a reduction in the potential negative earnings impact ofchanges in interest rates, foreign exchange and raw material pricing arising inour business activities. The Company manages these financial exposures, wherepossible, through operational means and by using various financial instruments.These practices may change as economic conditions change.

**Long-TermDebt and Interest Rate Market Risk**

The Company’s long-termborrowings under the Credit Facility are variable interest rate debt. As such,the Company’s interest expense will increase as interest rates rise anddecrease as interest rates fall. It is the Company’s policy to enter intointerest rate derivative transactions only to meet its stated overallobjective. The Company does not enter into these transactions for speculativepurposes. To that end, as further described in Notes 11 and 16 to theConsolidated Financial Statements included in Item 8 to this Annual Reporton Form 10-K, the Company entered into an interest rate swapcontract to effectively convert $212.5 million of its variable-rate debtto fixed-rate debt. The interest rate swap contract matures on May 8,2007. Hypothetically, a 1% change in the interest rate affecting all of theCompany’s financial instruments not protected by the interest rate swapcontract would change interest expense by approximately $2.0 million.

The estimated fair value ofthe Company’s debt at December 31, 2005 was approximately$415.2 million, which approximated its carrying value.

42

----

**ForeignCurrency Exchange Rate Risk**

The Company manufactures,markets and distributes certain of its products in Europe, Canada, LatinAmerica and Asia. As a result, the Company’s financial statements could besignificantly affected by factors such as changes in foreign currency rates inthe foreign markets in which the Company maintains a manufacturing ordistribution presence. However, such currency fluctuations have much lesseffect on local operating results because the Company, to a significant extent,sells its products within the countries in which they are manufactured. During2005 and 2004, certain currencies of countries in which the Company conductsforeign 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 to this Annual Report on Form 10-K.

The Company has nothistorically hedged its exposure to foreign currency risk, although it hasmitigated its risk of currency losses on foreign monetary assets. Also, in mostforeign operations, there is a natural currency hedge due to similar amounts ofcosts of materials and production as revenues in such local currencies. Inaddition, the Company, in May 2005, entered into foreign currency forwardcontracts to manage (effectively fixing) its U.S. dollar exposure on certainEuro-based obligations for firm commitments related to certain capitalexpenditure projects. The Company is also subject to political risk in certainof its foreign operations and has utilized insurance programs in certaincircumstances to mitigate its political risk.

**RawMaterial and Commodity Risks**

The primary raw materials usedin the manufacture of most of the Company’s products are polypropylene resin,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. The Company has not historically hedgedits exposure to raw material increases, but has attempted to move more customerprograms to contracts with price escalation provisions which would allow theCompany to pass-through any cost increases in raw materials, although there isoften a delay 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 from48.6% in 2004 to 51.2% for 2005.

In August and September of 2005, HurricanesKatrina and Rita hit the Gulf Coast area, temporarily shutting down a number ofrefineries and chemical processing sites of certain raw material suppliers forthe Company’s North and South American operations. As a result, while supplieswere tight in the fourth quarter of 2005, raw materials continued to beavailable to the Company, but at significantly higher prices. The Company,where allowable based on contract terms, has attempted to raise its sellingprices to mitigate the sharp increase in raw materials. Raw material pricesdecreased slightly since late December 2005 as the refineries and chemicalprocessing sites returned to more normal production levels, but there can be noassurance that the raw material prices will return to pre-hurricane levels dueto other global economic factors.

To the extent the Company isnot able to pass along price increases of raw materials, or to the extent anysuch price increases are delayed, the Company’s cost of goods sold wouldincrease and its operating profit would correspondingly decrease. By way ofexample, if the price of polypropylene were to rise $.01 per pound, and theCompany was not able to pass along any of such increase to its customers, theCompany would realize a decrease of approximately $3.0 million, on anannualized basis, in its reported pre-tax operating income. Material increasesin raw material prices that cannot be passed on to customers could have amaterial adverse effect on the Company’s results of operations and financialcondition. See “Management’s Discussion and Analysis of Financial Condition andResults of Operations” included in Item 7 to this Annual Report on Form 10-K.

43

----

**ITEM 8.   FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

| Report of Grant Thornton  LLP, Independent Registered Public Accounting Firm                                                                                                                                                                                         |   | 45 |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----|--------|
| Report of Ernst & Young LLP, Independent Registered Public  Accounting Firm                                                                                                                                                                                 |   | 46 |   |
| Consolidated Balance Sheets  as of December 31, 2005 and January 1, 2005                                                                                                                                                                                   |   | 47 |   |
| Consolidated Statements of Operations for the fiscal years ended  December 31, 2005 and January 1, 2005, the ten months ended  January 3, 2004 and the two months ended March 1, 2003                                                            |   | 48 |   |
| Consolidated Statements of  Changes in Shareholders’ Equity and Comprehensive Income (Loss) for the  fiscal years ended December 31, 2005 and January 1, 2005, the ten  months ended January 3, 2004 and the two months ended March 1, 2003 |   | 49 |   |
| Consolidated Statements of  Cash Flows for the fiscal years ended December 31, 2005 and  January 1, 2005, the ten months ended January 3, 2004 and the two  months ended March 1, 2003                                                           |   | 50 |   |
| Notes to Consolidated Financial  Statements for the fiscal years ended December 31, 2005 and  January 1, 2005, the ten months ended January 3, 2004 and the two  months ended March 1, 2003                                                      |   | 51 |   |

 

44

----

**Report of GrantThornton LLP, Independent Registered Public Accounting Firm**

Board of Directors and Shareholders ofPolymer Group, Inc.

We have audited the accompanying consolidated balancesheet of Polymer Group, Inc. (a Delaware corporation) as of December 31, 2005,and the related consolidated statements of operations, changes in shareholders’equity and comprehensive income (loss) and cash flows for the fiscal year endedDecember 31, 2005. These financial statements are the responsibility of theCompany's management. Our responsibility is to express an opinion on thesefinancial statements based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation.  We believe that our auditprovides a reasonable basis for our opinion.

In our opinion, the financial statements referred toabove present fairly, in all material respects, the financial position ofPolymer Group, Inc. as of December 31, 2005, and the results of itsoperations and its cash flows for the fiscal year ended December 31, 2005in conformity with accounting principles generally accepted in the UnitedStates of America. 

Our audit was conducted for the purpose of forming anopinion on the basic consolidated financial statements taken as a whole. Theschedule titled “Schedule II—Valuation and Qualifying Accounts” is presentedfor purposes of additional analysis and is not a required part of the basicfinancial statements. The amounts on this schedule for the fiscal year endedDecember 31, 2005, have been subjected to the auditing procedures appliedin the audit of the basic financial statements and, in our opinion, is fairlystated in all material respects in relation to the basic financial statementstaken as a whole.

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of Polymer Group, Inc.’s internal controlover financial reporting as of December 31, 2005, based on criteriaestablished in Internal Control—Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission (COSO) and our report datedMarch 15, 2006 expressed an unqualified opinion on management’s assessmentof the effectiveness of the Company’s internal control over financial reportingand an unqualified opinion on the effectiveness of the Company’s internal controlover financial reporting.

/s/ GRANT THORNTON LLP

Columbia, South CarolinaMarch 15, 2006

45

----

**Report of Ernst & Young LLP, IndependentRegistered Public Accounting Firm**

The Board of Directors and ShareholdersPolymer Group, Inc.

We have audited the accompanying consolidated balance sheet of PolymerGroup, Inc. as of January 1, 2005, and the related consolidatedstatements of operations, changes in shareholders' equity and comprehensiveincome (loss), and cash flows for the year ended January 1, 2005, the tenmonths ended January 3, 2004, and the two months ended March 1, 2003(Predecessor Company and date of reorganization for accounting purposes). Ouraudits also included the data related to the periods referenced in thepreceding sentence included in the financial statement schedule listed in theIndex at Item 15(a). These financial statements and schedule are theresponsibility of the Company's management. Our responsibility is to express anopinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement. We were not engagedto perform an audit of the Company’s internal control over financial reporting.Our audit included consideration of internal control over financial reportingas a basis for designing audit procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on the effectivenessof the Company’s internal control over financial reporting. Accordingly, weexpress no such opinion. An audit also includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. Anaudit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

In our opinion, the financial statements referred to above presentfairly, in all material respects, the consolidated financial position ofPolymer Group, Inc. at January 1, 2005 and the consolidated results oftheir operations and their cash flows for the year ended January 1, 2005,the ten months ended January 3, 2004, and the two months ended March 1,2003 (the Predecessor Company) in conformity with  accounting principles generally accepted inthe United States. Also, in our opinion, the related financial statementschedule, when considered in relation to the basic financial statements takenas a whole, presents fairly in all material respects the information set forththerein.

As more fully described inNote 3 to the consolidated financial statements, effective March 5, 2003,the Company emerged from protection under Chapter 11 of the U.S.Bankruptcy Court pursuant to a Modified Reorganization Plan that was confirmedby the Bankruptcy Court on January 16, 2003. In accordance with AICPAStatement of Position 90-7, the Company adopted “fresh start” accountingwhereby its assets, liabilities and new capital structure were adjusted toreflect estimated fair value at March 1, 2003 (the date of reorganizationfor accounting purposes). As a result, the consolidated financial statementsfor periods subsequent to March 1, 2003 reflect the Successor Company’snew basis of accounting and are not comparable to the Predecessor Company’spre-reorganization consolidated financial statements.

/s/ Ernst & Young, LLP

Greenville, South CarolinaMarch 23, 2005

46

----

**POLYMER GROUP, INC.**

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

| ** **                                                                                                                                                                     | ** ** | **December 31,  2005** | ** ** | **January 1,  2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------|------------|
| **A S S E T S**                                                                                                                                                                | ** ** |                        | ** ** | ** **                |       | ** ** | ** ** |
| Current assets:                                                                                                                                                                |       |                        |       |                      |       |   |   |
| Cash and cash equivalents                                                                                                                                                      |       |                        | $          | 30,963                    |       |   | $ | 41,296 |   |
| Accounts receivable, net                                                                                                                                                       |       |                        | 120,668    |                      |       | 113,491 |   |
| Inventories                                                                                                                                                                    |       |                        | 119,663    |                      |       | 106,349 |   |
| Deferred income taxes                                                                                                                                                          |       |                        | 4,364      |                      |       | 226 |   |
| Other current assets                                                                                                                                                           |       |                        | 23,094     |                      |       | 37,140 |   |
| Total current assets                                                                                                                                                           |       |                        | 298,752    |                      |       | 298,502 |   |
| Property, plant and  equipment, net                                                                                                                                            |       |                        | 421,997    |                      |       | 402,603 |   |
| Intangibles and loan  acquisition costs, net                                                                                                                                   |       |                        | 37,329     |                      |       | 48,819 |   |
| Deferred income taxes                                                                                                                                                          |       |                        | 433        |                      |       | 1,489 |   |
| Other assets                                                                                                                                                                   |       |                        | 6,490      |                      |       | 3,145 |   |
| Total assets                                                                                                                                                                   |       |                        | $          | 765,001                   |       |   | $ | 754,558 |   |
| **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                                                                                                                                                          |       |                        | $          | 5,101                     |       |   | $ | 6,981 |   |
| Accounts payable                                                                                                                                                               |       |                        | 82,371     |                      |       | 63,773 |   |
| Accrued liabilities                                                                                                                                                            |       |                        | 32,235     |                      |       | 34,570 |   |
| Income taxes payable                                                                                                                                                           |       |                        | 1,456      |                      |       | 2,427 |   |
| Current portion of long-term  debt                                                                                                                                             |       |                        | 4,142      |                      |       | 3,413 |   |
| Total current liabilities                                                                                                                                                      |       |                        | 125,305    |                      |       | 111,164 |   |
| Long-term debt                                                                                                                                                                 |       |                        | 405,955    |                      |       | 403,560 |   |
| Deferred income taxes                                                                                                                                                          |       |                        | 64,692     |                      |       | 65,468 |   |
| Other noncurrent  liabilities                                                                                                                                                  |       |                        | 20,956     |                      |       | 27,319 |   |
| Total liabilities                                                                                                                                                              |       |                        | 616,908    |                      |       | 607,511 |   |
| Minority interests                                                                                                                                                             |       |                        | 16,611     |                      |       | 14,912 |   |
| 16% Series A  convertible pay-in-kind preferred shares—0 and 52,716 shares  issued and outstanding at December 31, 2005 and January 1, 2005,  respectively |       |                        | —     |                      |       | 58,286 |   |
| Shareholders’ equity:                                                                                                                                                     |       |                        |       |                      |       |   |   |
| Class A common  stock—18,868,607 and 10,130,477 shares issued and outstanding at  December 31, 2005 and January 1, 2005, respectively                 |       |                        | 188        |                      |       | 101 |   |
| Class B convertible  common stock—153,549 and 193,390 shares issued and outstanding at  December 31, 2005 and January 1, 2005, respectively                |       |                        | 2          |                      |       | 2 |   |
| Class C convertible  common stock—31,131 and 54,194 shares issued and outstanding at  December 31, 2005 and January 1, 2005, respectively                  |       |                        | —     |                      |       | 1 |   |
| Class D convertible  common stock—0 shares issued and outstanding                                                                                                    |       |                        | —     |                      |       | — |   |
| Class E convertible  common stock—0 shares issued and outstanding                                                                                                    |       |                        | —     |                      |       | — |   |
| Additional paid-in  capital                                                                                                                                                    |       |                        | 165,652    |                      |       | 77,219 |   |
| Retained earnings (deficit)                                                                                                                                                    |       |                        | (54,820    | )                         |       | (33,819 | ) |
| Accumulated other  comprehensive income                                                                                                                                        |       |                        | 20,460     |                      |       | 30,345 |   |
| Total shareholders’ equity                                                                                                                                                |       |                        | 131,482    |                      |       | 73,849 |   |
| Total liabilities and shareholders’ equity                                                                                                                                |       |                        | $          | 765,001                   |       |   | $ | 754,558 |   |

 

See accompanying notes, including Note 2 describing the Successor and Predecessor companies.

47

----

**POLYMER GROUP, INC.**

**CONSOLIDATED STATEMENTS OFOPERATIONS(In Thousands, Except Per Share Data)**

| ** **                                                                                           | ** ** | **Successor**                                        | ** ** | **Predecessor**                                    | ** ** |
|------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                                           | ** ** | **Fiscal  Year Ended  December 31,  2005** | ** ** | **Fiscal  Year Ended  January 1,  2005** | ** ** | **Ten Months  Ended  January 3,  2004** | ** ** | **Two Months  Ended  March 1,  2003** | ** ** |
| Net sales                                                                                            |       |                                                 | $          | 948,848                                            |       |   |   | $ | 844,734 |   |   |   | $ | 644,893 |   |   |   | $ | 132,895 |   |   |
| Cost of goods sold                                                                                   |       |                                                 | 787,369    |                                               |       |   | 691,272 |   |   |   | 531,390 |   |   |   | 111,110 |   |   |
| Gross profit                                                                                         |       |                                                 | 161,479    |                                               |       |   | 153,462 |   |   |   | 113,503 |   |   |   | 21,785 |   |   |
| Selling, general and  administrative expenses                                                        |       |                                                 | 104,545    |                                               |       |   | 99,163 |   |   |   | 78,682 |   |   |   | 15,955 |   |   |
| Asset impairment  charges                                                                            |       |                                                 | —     |                                               |       |   | 2,253 |   |   |   | 1,207 |   |   |   | — |   |   |
| Plant realignment  costs                                                                             |       |                                                 | 9          |                                               |       |   | 1,867 |   |   |   | 6,802 |   |   |   | 4 |   |   |
| Foreign currency loss,  net                                                                          |       |                                                 | 671        |                                               |       |   | 2,027 |   |   |   | 2,773 |   |   |   | 1,343 |   |   |
| Arbitration  settlement, net                                                                         |       |                                                 | —     |                                               |       |   | (13,112 | ) |   |   | — |   |   |   | — |   |   |
| Operating income                                                                                     |       |                                                 | 56,254     |                                               |       |   | 61,264 |   |   |   | 24,039 |   |   |   | 4,483 |   |   |
| Other expense (income):                                                                              |       |                                                 |       |                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest expense, net (contractual interest of $20,306 for the two  months ended March 1, 2003) |       |                                                 | 32,617     |                                               |       |   | 40,252 |   |   |   | 49,036 |   |   |   | 10,665 |   |   |
| Investment gain, net                                                                                 |       |                                                 | —     |                                               |       |   | — |   |   |   | (3 | ) |   |   | (291 | ) |   |
| Minority interests                                                                                   |       |                                                 | 3,784      |                                               |       |   | 2,597 |   |   |   | 2,028 |   |   |   | 441 |   |   |
| Write-off of loan acquisition costs                                                                  |       |                                                 | 4,008      |                                               |       |   | 5,022 |   |   |   | — |   |   |   | — |   |   |
| Foreign currency and other (gain) loss, net                                                          |       |                                                 | (948       | )                                                  |       |   | 667 |   |   |   | 3,035 |   |   |   | 91 |   |   |
| Reorganization items, (gain) loss:                                                                   |       |                                                 |       |                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Gain on cancellation of prepetition indebtedness                                                     |       |                                                 | —     |                                               |       |   | — |   |   |   | — |   |   |   | (619,913 | ) |   |
| Fresh start adjustments                                                                              |       |                                                 | —     |                                               |       |   | — |   |   |   | — |   |   |   | 47,460 |   |   |
| Chapter 11 reorganization expenses                                                                   |       |                                                 | —     |                                               |       |   | — |   |   |   | — |   |   |   | 12,579 |   |   |
| Other                                                                                                |       |                                                 | —     |                                               |       |   | — |   |   |   | — |   |   |   | 19,395 |   |   |
| Income (loss) before  income tax expense                                                             |       |                                                 | 16,793     |                                               |       |   | 12,726 |   |   |   | (30,057 | ) |   |   | 534,056 |   |   |
| Income tax expense                                                                                   |       |                                                 | 9,796      |                                               |       |   | 7,994 |   |   |   | 2,928 |   |   |   | 1,692 |   |   |
| Net income (loss)                                                                                    |       |                                                 | 6,997      |                                               |       |   | 4,732 |   |   |   | (32,985 | ) |   |   | 532,364 |   |   |
| Accrued and  paid-in-kind dividends on PIK preferred shares                                          |       |                                                 | 27,998     |                                               |       |   | 5,566 |   |   |   | — |   |   |   | — |   |   |
| Income (loss)  applicable to common shareholders                                                |       |                                                 | $          | (21,001                                            | )          |   |   | $ | (834 | ) |   |   | $ | (32,985 | ) |   |   | $ | 532,364 |   |   |
| Income (loss) per common share—Basic:                                                           |       |                                                 |       |                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Average common shares outstanding                                                                    |       |                                                 | 13,098     |                                               |       |   | 9,840 |   |   |   | 8,650 |   |   |   | 32,004 |   |   |
| Income (loss) per common share                                                                       |       |                                                 | $          | (1.60                                              | )          |   |   | $ | (0.09 | ) |   |   | $ | (3.81 | ) |   |   | $ | 16.63 |   |   |
| Income (loss) per  common share—Diluted:                                                        |       |                                                 |       |                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Average common shares outstanding                                                                    |       |                                                 | 13,098     |                                               |       |   | 9,840 |   |   |   | 8,650 |   |   |   | 32,004 |   |   |
| Income (loss) per  common share                                                                      |       |                                                 | $          | (1.60                                              | )          |   |   | $ | (0.09 | ) |   |   | $ | (3.81 | ) |   |   | $ | 16.63 |   |   |

 

See accompanying notes, including Note 2 describing the Successor and Predecessor companies.

48

----

**POLYMER GROUP, INC.**

**CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’EQUITYAND COMPREHENSIVE INCOME (LOSS)For the Fiscal Years Ended December 31, 2005 and January 1, 2005,the Ten Months Ended January 3, 2004 and the Two Months EndedMarch 1, 2003(In Thousands)**

| ** **                                                                                        | ** ** | ** **            | ** ** | ** **  | ** ** | ** **     | ** ** | ** **    | ** ** | **Accumulated**   | ** ** | ** ** | ** ** | ** **        | ** ** | ** **             | ** ** |     |
|---------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------|------------|----------------|------------|---------------|------------|-------------------|------------|------------|------------|-------------------|------------|------------------------|------------|----------|
| ** **                                                                                        | ** ** | ** **            | ** ** | ** **  | ** ** | ** **     | ** ** | ** **    | ** ** | **Other**         | ** ** | ** ** | ** ** | ** **        | ** ** | ** **             | ** ** |     |
| ** **                                                                                        | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional** | ** ** | **Retained**  | ** ** | **Comprehensive** | ** ** | ** ** | ** ** | ** **        | ** ** | ** **             | ** ** |
| ** **                                                                                        | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Earnings**   | ** ** | **Income**    | ** ** | ** **        | ** ** | ** ** | ** ** | **Comprehensive** | ** ** |
| ** **                                                                                        | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **(Deficit)** | ** ** | **(Loss)**        | ** ** | **Total**  | ** ** | ** **        | ** ** | **Income (Loss)** | ** ** |
| **Predecessor:**                                                                                  |       |                  |       |        |       |           |       |          |       |              |       |       |       |              |       |                   |       |     |   |   |   |   |   |   |   |   |
| Balance—December 28,  2002                                                              |       | 32,004                |       |        | $          | 320            |       |          |       | $                 | 243,722    |       |       | $                 | (661,572   | )                      |       | $        | (48,384 | ) |   | $ | (465,914 | ) |   |   |   |   |   |   |   |
| Net loss, excluding  effects of reorganization items                                              |       |                  |       |        | —     |           |       |          | —     |              |       | (8,115     | )          |              | —     |                   |       | (8,115   | ) |   |   |   | $ | (8,115 | ) |   |   |
| Currency translation  adjustments                                                                 |       |                  |       |        | —     |           |       |          | —     |              |       | —     |       |              | 6,784      |                   |       | 6,784    |   |   |   |   | 6,784 |   |   |   |
| Unrealized holding  loss on marketable securities                                                 |       |                  |       |        | —     |           |       |          | —     |              |       | —     |       |              | (655       | )                      |       | (655     | ) |   |   |   | (655 | ) |   |   |
| Minimum pension  liability, net of tax                                                            |       |                  |       |        | —     |           |       |          | —     |              |       | —     |       |              | (460       | )                      |       | (460     | ) |   |   |   | (460 | ) |   |   |
| Effect of reorganization  items:                                                                  |       |                  |       |        |       |           |       |          |       |              |       |       |       |              |       |                   |       |     |   |   |   |   |   |   |   |   |
| Cancellation of  Predecessor stock                                                                |       | (32,004               | )          |        | (320       | )              |       |          | (243,722   | )                 |       | —     |       |              | —     |                   |       | (244,042 | ) |   |   |   | (244,042 | ) |   |   |
| Issuance of Successor  stock                                                                      |       | 8,644                 |       |        | 86         |           |       |          | 73,304     |              |       |       |       |              |       |                   |       | 73,390   |   |   |   |   | 73,390 |   |   |   |
| Other fresh start  adjustments                                                                    |       |                  |       |        | —     |           |       |          | —     |              |       | 669,687    |       |              | 42,715     |                   |       | 712,402  |   |   |   |   | 712,402 |   |   |   |
| **Successor:**                                                                                    |       |                  |       |        |       |           |       |          |       |              |       |       |       |              |       |                   |       |     |   |   |   |   |   |   |   |   |
| Balance—March 1,  2003                                                                  |       | 8,644                 |       |        | 86         |           |       |          | 73,304     |              |       | —     |       |              | —     |                   |       | 73,390   |   |   |   |   | $ | 539,304 |   |   |   |
| Net loss                                                                                          |       |                  |       |        | —     |           |       |          | —     |              |       | (32,985    | )          |              | —     |                   |       | (32,985  | ) |   |   |   | $ | (32,985 | ) |   |   |
| Issuance of Successor  stock                                                                      |       | 9                     |       |        | —     |           |       |          | —     |              |       | —     |       |              | —     |                   |       | —   |   |   |   |   | — |   |   |   |
| Currency translation  adjustments                                                                 |       |                  |       |        | —     |           |       |          | —     |              |       | —     |       |              | 18,795     |                   |       | 18,795   |   |   |   |   | 18,795 |   |   |   |
| Balance—January 3,  2004                                                                |       | 8,653                 |       |        | 86         |           |       |          | 73,304     |              |       | (32,985    | )          |              | 18,795     |                   |       | 59,200   |   |   |   |   | $ | (14,190 | ) |   |   |
| 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 stock options and restricted stock grants                             |       |                  |       |        | —     |           |       |          | 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 and  paid-in-kind 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 stock options and restricted stock grants                             |       |                  |       |        | —     |           |       |          | 2,243      |              |       | —     |       |              | —     |                   |       | 2,243    |   |   |   |   | — |   |   |   |
| Conversion and  redemption of PIK preferred shares to Class A common stock                   |       | 8,629                 |       |        | 86         |           |       |          | 62,841     |              |       | —     |       |              | —     |                   |       | 62,927   |   |   |   |   | — |   |   |   |
| Shares issued/sold                                                                                |       | 46                    |       |        | —     |           |       |          | —     |              |       | —     |       |              | —     |                   |       | —   |   |   |   |   | — |   |   |   |
| 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 | ) |   |   |
|                                                                                                   |            |                       |            |             |            |                |            |               |            |                   |            |            |            |                   |            |                        |            |          |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

See accompanying notes, including Note 2 describing the Successor and Predecessor companies.

49

----

**POLYMER GROUP, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS(In Thousands)**

| ** **                                                                                           | ** ** | **Successor**                                            | ** ** | **Predecessor**                                        | ** ** |
|------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                                                           | ** ** | **Fiscal Year Ended  December 31,  2005** | ** ** | **Fiscal Year  Ended  January 1, 2005** | ** ** | **Ten Months  Ended  January 3, 2004** | ** ** | **Two Months  Ended  March 1, 2003** | ** ** |
| Operating activities:                                                                                |       |                                                     |       |                                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income (loss)                                                                                    |       |                                                     | $          | 6,997                                                  |       |   |   | $ | 4,732 |   |   |   | $ | (32,985 | ) |   |   | $ | 532,364 |   |   |
| Adjustments to  reconcile net income (loss) to net cash provided by (used in) operating  activities: |       |                                                     |       |                                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Asset impairment charges                                                                             |       |                                                     | —     |                                                   |       |   | 2,253 |   |   |   | 1,207 |   |   |   | — |   |   |
| Investment and other gains                                                                           |       |                                                     | (1,298     | )                                                      |       |   | (50 | ) |   |   | (3 | ) |   |   | (291 | ) |   |
| Cancellation of prepetition indebtedness                                                             |       |                                                     | —     |                                                   |       |   | — |   |   |   | — |   |   |   | (619,913 | ) |   |
| Postretirement benefit curtailments and other, net                                                   |       |                                                     | —     |                                                   |       |   | (3,558 | ) |   |   | — |   |   |   | — |   |   |
| Deferred income taxes                                                                                |       |                                                     | 7,228      |                                                   |       |   | 2,397 |   |   |   | 2,928 |   |   |   | 3,010 |   |   |
| Fresh start adjustments                                                                              |       |                                                     | —     |                                                   |       |   | — |   |   |   | — |   |   |   | 47,460 |   |   |
| Write-off of loan acquisition costs                                                                  |       |                                                     | 4,008      |                                                   |       |   | 5,022 |   |   |   | — |   |   |   | 10,217 |   |   |
| Depreciation and amortization                                                                        |       |                                                     | 57,550     |                                                   |       |   | 53,230 |   |   |   | 42,620 |   |   |   | 8,812 |   |   |
| Noncash interest and compensation                                                               |       |                                                     | 2,243      |                                                   |       |   | 2,936 |   |   |   | 3,717 |   |   |   | — |   |   |
| Changes  in operating assets and liabilities:                                                        |       |                                                     |       |                                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Accounts receivable, net                                                                             |       |                                                     | (11,632    | )                                                      |       |   | 5,136 |   |   |   | 2,752 |   |   |   | (8,195 | ) |   |
| Inventories                                                                                          |       |                                                     | (16,413    | )                                                      |       |   | (6,954 | ) |   |   | 17,703 |   |   |   | (887 | ) |   |
| Other current assets                                                                                 |       |                                                     | 15,383     |                                                   |       |   | 4,155 |   |   |   | 11,997 |   |   |   | 6,675 |   |   |
| Accounts payable and accrued liabilities                                                             |       |                                                     | 16,767     |                                                   |       |   | 440 |   |   |   | (17,561 | ) |   |   | 13,027 |   |   |
| Other, net                                                                                           |       |                                                     | (9,901     | )                                                      |       |   | 157 |   |   |   | 838 |   |   |   | (5,180 | ) |   |
| Net cash provided by (used in) operating activities                                                  |       |                                                     | 70,932     |                                                   |       |   | 69,896 |   |   |   | 33,213 |   |   |   | (12,901 | ) |   |
| Investing activities:                                                                                |       |                                                     |       |                                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Purchases of property, plant and equipment                                                           |       |                                                     | (78,902    | )                                                      |       |   | (24,791 | ) |   |   | (36,675 | ) |   |   | (3,062 | ) |   |
| Proceeds from sale of marketable securities                                                          |       |                                                     | —     |                                                   |       |   | — |   |   |   | — |   |   |   | 11,867 |   |   |
| Proceeds from sale of assets                                                                         |       |                                                     | 1,298      |                                                   |       |   | 1,660 |   |   |   | 2,766 |   |   |   | — |   |   |
| Other, net                                                                                           |       |                                                     | —     |                                                   |       |   | (13 | ) |   |   | — |   |   |   | 15 |   |   |
| Net cash provided by (used in) investing activities                                                  |       |                                                     | (77,604    | )                                                      |       |   | (23,144 | ) |   |   | (33,909 | ) |   |   | 8,820 |   |   |
| Financing activities:                                                                                |       |                                                     |       |                                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Proceeds from issuance of debt                                                                       |       |                                                     | 471,824    |                                                   |       |   | 486,396 |   |   |   | 16,718 |   |   |   | 535,310 |   |   |
| Repayment of debt                                                                                    |       |                                                     | (470,575   | )                                                      |       |   | (502,158 | ) |   |   | (26,773 | ) |   |   | (549,031 | ) |   |
| Loan acquisition costs and other                                                                     |       |                                                     | (3,737     | )                                                      |       |   | (12,371 | ) |   |   | (832 | ) |   |   | (948 | ) |   |
| Net cash used in financing activities                                                                |       |                                                     | (2,488     | )                                                      |       |   | (28,133 | ) |   |   | (10,887 | ) |   |   | (14,669 | ) |   |
| Effect of exchange rate changes on cash                                                              |       |                                                     | (1,173     | )                                                      |       |   | 1,341 |   |   |   | 1,136 |   |   |   | 4,632 |   |   |
| Net increase (decrease) in cash and cash equivalents                                                 |       |                                                     | (10,333    | )                                                      |       |   | 19,960 |   |   |   | (10,447 | ) |   |   | (14,118 | ) |   |
| Cash and cash equivalents at beginning of period                                                     |       |                                                     | 41,296     |                                                   |       |   | 21,336 |   |   |   | 31,783 |   |   |   | 45,901 |   |   |
| Cash  and cash equivalents at end of period                                                          |       |                                                     | $          | 30,963                                                 |       |   |   | $ | 41,296 |   |   |   | $ | 21,336 |   |   |   | $ | 31,783 |   |   |

 

See accompanying notes, including Note 2 describing the Successor and Predecessor companies.

50

----

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

**Note 1. Principles of Consolidation**

Polymer Group, Inc. (the “Company”) is a publicly-traded,multinational manufacturer, marketer and seller of nonwoven and orientedpolyolefin products. The Company’s main sources of revenue are the sales ofprimary and intermediate products to the medical, hygiene, wipes, industrialand specialty markets.

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 three months or less prior to thedates of the Consolidated Balance Sheets. All amounts are presented in U.S.dollars, unless otherwise noted.

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

*Basis of Presentation*

The Company, upon having its Modified Plan, asdefined, (the “Modified Plan”) approved by the Bankruptcy Court on January 16,2003, emerged from Chapter 11 bankruptcy proceedings effective March 5,2003 (the “Effective Date”). For accounting purposes the Company recognized theemergence on March 1, 2003, which was the end of the February 2003accounting period. The Company adopted “fresh-start accounting” as of March 1,2003, and the Company’s emergence from Chapter 11 resulted in a new reportingentity. The reorganization value of the Company has been allocated to theunderlying assets and liabilities based on their respective fair values at thedate of emergence. References to “Predecessor” refer to the old Polymer Groupand its subsidiaries on and prior to March 1, 2003 and references to “Successor”refer to Polymer Group and its subsidiaries as of and subsequent to March 2,2003 after giving effect to the implementation of fresh-start accounting.Accordingly, in accordance with financial reporting requirements for companiesemerging from Chapter 11, financial information for the twelve months ended January 3,2004 is not presented in the Consolidated Financial Statements since suchinformation would combine the results of the Predecessor and Successor.

In accordance with AICPAStatement of Position 90-7, “Financial Reporting by Entities inReorganization under the Bankruptcy Code,” (“SOP 90-7”), prior to theCompany’s emergence from Chapter 11 bankruptcy proceedings, revenues, expenses,realized gains and losses, and provisions for costs resulting from thereorganization are reported separately as reorganization items in theConsolidated Statements of Operations.

*Fiscal Year*

The Company’s fiscal year endson the Saturday nearest to December 31. Fiscal 2005 ended December 31,2005 and included the results of operations for a fifty-two week period. Fiscal2004 ended January 1, 2005 and included the results of operations for afifty-two week period. Fiscal 2003 ended January 3, 2004 and included theresults of operations for a fifty-three week period, which is comprisedof a two month Predecessor period ended March 1, 2003 (9 weeks) and a tenmonth Successor period ended January 3, 2004 (44 weeks).

51

----

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

*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 the amounts reportedin the financial statements and accompanying notes. Actual results could differfrom those estimates.

The reorganization value of the Company’s commonequity of approximately $73.4 million at March 1, 2003, as furtherdescribed in Note 4 to the Consolidated Financial Statements, 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, excluding goodwill, which isreviewed annually, are reviewed for impairment whenever events or changes incircumstances indicate that the carrying amounts may not be recoverable. Forassets held and used, an impairment may occur if projected undiscounted cashflows are not adequate to cover the carrying value of the assets. In suchcases, additional analysis is conducted to determine the amount of the loss tobe recognized. The impairment loss is determined by the difference between thecarrying amount of the asset and the fair value measured by future discountedcash flows. The analysis, when conducted, requires estimates of the amount andtiming of projected cash flows and, where applicable, judgments associatedwith, among other factors, the appropriate discount rate. 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. 

52

----

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

In addition, future eventsimpacting cash flows for existing assets could render a writedown necessarythat previously required no writedown.

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.

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 are 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 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 andcredit ratings and remaining maturities and other independent valuationmethodologies. The estimated fair value of debt, based on appropriate valuationmethodologies, at December 31, 2005 and January 1, 2005 was $415.2million and $414.0 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 $3.4 million for theyear ended December 31, 2005.

53

----

**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 isrecognized.

*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 ofOperations and consists primarily of income from highly liquid investmentsources. Interest income approximated $1.0 million, $0.2 million and$0.7 million during 2005, 2004 and 2003, 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 entered into duringfiscal years 2004 and 2005. The provision for losses on uncollectible accountsis determined principally on the basis of past collection experience applied toongoing evaluations of our receivables and evaluations of the risk ofrepayment. The allowance for doubtful accounts was approximately $9.6 millionand $9.7 million at December 31, 2005 and January 1, 2005,respectively, which management believes is adequate to provide for credit lossesin the normal course of business, as well as losses for customers who havefiled for protection under bankruptcy laws. Once management determines that thereceivables are not recoverable, the amounts are removed from the financialrecords along with the corresponding reserve balance. In 2005, 2004 and 2003,The Procter & Gamble Company (“P&G”) accounted for 14%, 12% and13%, respectively, of the Company’s net sales.

*Inventories*

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

*Long-Lived Assets*

Property, plant and equipment is stated at cost lessaccumulated depreciation. Depreciation is computed for financial reportingpurposes on the straight-line method over the estimated useful lives of therelated assets. The estimated useful lives established for building andimprovements range from 18 to 31 years, and the estimated useful livesestablished for machinery, equipment and other fixed 

54

----

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

assets range from 2 to15 years. Costs of repairs and maintenance are charged to expense asincurred. Costs of the construction of certain long-term assets includecapitalized interest that is amortized over the estimated useful life of therelated asset. The Company capitalized approximately $2.2 million,$0.4 million and $0.8 million of interest costs during 2005, 2004 and2003, respectively.

SFAS No. 142, “Goodwilland Other Intangible Assets” (“SFAS 142”) provides that amortization ofgoodwill and indefinite-lived assets is no longer permitted. SFAS No. 142requires that these assets be reviewed for impairment upon adoption andannually thereafter, unless special circumstances indicate that a more timelyreview is warranted.

*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 16 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 aredesignated as cash flow hedges of variable rate debt obligations or fair valuehedges of foreign currency-denominated transactions.

The Company documents all relationships betweenhedging instruments and hedged items, as well as the risk-management objectiveand strategy for undertaking various hedge transactions and the methodologiesthat will 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 ratepayments are 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.

*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 

55

----

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

taxable items included in theConsolidated Statements of Operations regardless of the period for which suchitems are reported for tax purposes. Additionally, federal income taxes areprovided on that portion of the income of foreign subsidiaries that is expectedto be remitted to the United States (“U.S.”) and be taxable. Deferred taxliabilities and assets are determined based upon temporary differences betweenthe basis of certain assets and liabilities for income tax and financialreporting purposes. A valuation allowance is established when it is more likelythan not that some portion of a deferred tax asset will not be realized in thefuture. Valuation allowances are reviewed each period on a tax jurisdiction byjurisdiction basis to analyze whether a change in circumstances has occurred toprovide enough evidence to support a change in the judgment about therealization of the related deferred tax asset in future years.

Implementation of the ModifiedPlan, as further described in Note 3 to the Consolidated FinancialStatements, resulted in the Company recognizing cancellation of indebtednessincome (“CODI”) in the two month period ended March 1, 2003. All of theCODI was excluded from taxable income. However, at January 4, 2004 theCompany has reduced certain of its tax attributes by an amount not exceedingthe CODI it realized. In general, tax attributes have been reduced at the closeof the 2003 tax year in the following order: (i) net operating losscarryforwards; (ii) general business credits and capital losscarryforwards; and (iii) tax basis in assets.

*Stock-BasedCompensation*

The Company has elected to account for stock-basedcompensation related to its employee stock option plan in accordance with theintrinsic value method as prescribed by Accounting Principles Board Opinion No. 25,“Accounting for Stock Issued to Employees” (“APB No. 25”). For optionsthat vest based on the achievement of certain performance criteria,compensation cost is measured as the amount by which the quoted market value ofthe shares of the Company’s stock covered by the grant exceeds the option pricethat the employee must pay to acquire the stock and such compensation cost ischarged to expense over the period of employee service.

On December 16, 2004, the FASB issued a revisionto SFAS No. 123, “Accounting for Stock-Based Compensation.” Therevision, entitled SFAS No. 123R, “Share-Based Payment,” (“SFAS No. 123R”)is effective for all awards granted, modified, repurchased or canceled after June 15,2005 and requires a public entity to measure the cost of employee servicesreceived in exchange for an award of equity instruments based on the grant-datefair value of the award. The grant date fair value is to be estimated usingoption-pricing models adjusted for the unique characteristics of thoseinstruments. In calculating the impact for options granted, the Company hasestimated the fair value of each option grant (225,313 options awarded in2003 and 174,687 awarded in 2005) by using the Black-Scholes option-pricingmodel. Assumptions are evaluated and revised, as necessary, to reflect marketconditions and experience and included the following: expected dividend yieldof 0%; expected volatility of 37%; risk-free interest rate of 3.2%-3.9%; andweighted average expected lives of five years. Had compensation cost beendetermined based on the fair value-based method, the 

56

----

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

Company’snet income (loss), income (loss) applicable to common shareholders and income(loss) per share would have changed to the pro forma amounts indicated below(in thousands, except per share data):

| ** **                                                                             | ** ** | **Successor** | ** ** | **Predecessor** | ** ** |
|----------------------------------------------------------------------------------------|------------|---------------|------------|-----------------|------------|
| ** **                                                                             | ** ** | **2005**      | ** ** | **2004**        | ** ** | **Ten Months  Ended  January 3, 2004** | ** ** | **Two Months  Ended  March 1, 2003** | ** ** |
| Net income (loss):                                                                     |       |          |       |            |       |   |   |   |   |   |   |   |   |
| As reported                                                                            |       | $             | 6,997      |            | $          | 4,732 |   |   | $ | (32,985 | ) |   |   | $ | 532,364 |   |   |
| Add: stock-based employee  compensation expense included in reported net income (loss) |       | 2,202         |       | 614             |       |   | — |   |   |   | — |   |   |
| Deduct: stock-based employee  compensation expense determined under SFAS No. 123  |       | (975          | )          | (192            | )          |   | — |   |   |   | — |   |   |
| Pro forma                                                                              |       | $             | 8,224      |            | $          | 5,154 |   |   | $ | (32,985 | ) |   |   | $ | 532,364 |   |   |
| Income (loss) applicable to  common shareholders:                                      |       |          |       |            |       |   |   |   |   |   |   |   |   |
| As reported                                                                            |       | $             | (21,001    | )               | $          | (834 | ) |   | $ | (32,985 | ) |   |   | $ | 532,364 |   |   |
| Add: stock-based employee  compensation expense included in reported net income (loss) |       | 2,202         |       | 614             |       |   | — |   |   |   | — |   |   |
| Deduct: stock-based employee  compensation expense determined under SFAS No. 123  |       | (975          | )          | (192            | )          |   | — |   |   |   | — |   |   |
| Pro forma                                                                              |       | $             | (19,774    | )               | $          | (412 | ) |   | $ | (32,985 | ) |   |   | $ | 532,364 |   |   |
| Income (loss) per share  applicable to common shareholders—basic:                 |       |          |       |            |       |   |   |   |   |   |   |   |   |
| As reported                                                                            |       | $             | (1.60      | )               | $          | (0.09 | ) |   | $ | (3.81 | ) |   |   | $ | 16.63 |   |   |
| Pro forma                                                                              |       | (1.51         | )          | (0.04           | )          |   | (3.81 | ) |   |   | 16.63 |   |   |
| Income (loss) per share  applicable to common shareholders—diluted:               |       |          |       |            |       |   |   |   |   |   |   |   |   |
| As reported                                                                            |       | $             | (1.60      | )               | $          | (0.09 | ) |   | $ | (3.81 | ) |   |   | $ | 16.63 |   |   |
| Pro forma                                                                              |       | (1.51         | )          | (0.04           | )          |   | (3.81 | ) |   |   | 16.63 |   |   |
| Weighted average exercise  price per option granted.                                   |       | $             | 6.00       |            | $          | 6.00 |   |   | $ | 6.00 |   |   |   | $ | — |   |   |
| Weighted average fair value  per option granted                                        |       | $             | 17.95      |            | $          | 3.41 |   |   | $ | 6.00 |   |   |   | $ | — |   |   |

 

The U.S. stock-based compensation expense has not beentax-effected due to continuing tax losses in the U.S. and the recognition of avaluation allowance against the entire balance of U.S. net deferred tax assets.

The initial vesting period for stock options issuedunder the 2003 Stock Option Plan started January 4, 2004; accordingly, nopro forma compensation expense has been reflected with respect to fiscal 2003.All stock options previously awarded under the stock option plans of thePredecessor were canceled as part of the Company’s emergence from Chapter 11.

57

----

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

In April 2005, theSecurities and Exchange Commission issued a final rule that registrantsmust adopt SFAS No. 123R’s fair value method of accounting no later thanthe beginning of the fiscal year beginning after June 15, 2005. The Companywill adopt SFAS No. 123R in the first quarter of fiscal 2006, using themodified prospective transition method. Under the modified prospectivetransition method, all new grants and any unvested portion of prior awards willbe measured based on the fair-value-based method of accounting. The impact ofadopting SFAS No. 123R is expected to be consistent with the impact in thepro forma disclosures in the table above, resulting in lower compensation coststhan previously recognized under the Company’s historically used accountingprinciples.

*Research andDevelopment Costs*

The cost of research and development is charged toexpense as incurred and is included in *Selling,general and administrative expense* in the Consolidated Statements ofOperations. The Company incurred approximately $11.5 million,$11.2 million, $9.9 million and $2.5 million of research anddevelopment expense during fiscal year 2005, fiscal year 2004, the ten monthsended January 3, 2004 and the two months ended March 1, 2003, 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 administrativeexpense* in the Consolidated Statements of Operations. The Companyincurred $24.7 million, $23.4 million, $17.3 million and$3.7 million of shipping and handling costs during fiscal year 2005, fiscalyear 2004, the ten months ended January 3, 2004 and the two months ended March 1,2003, 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$20.5 million at December 31, 2005 consisted of $18.2 million ofcurrency translation gains, $1.6 million of minimum pension liability and$3.9 million in cash flow hedge gains, all net of tax. Accumulated othercomprehensive income of $30.3 million at January 1, 2005 consisted of$30.0 million of currency 

58

----

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

translationgains and $0.3 million in cash flow hedge gains, all net of tax. Withrespect to the aforementioned changes in the components of accumulated othercomprehensive income during fiscal 2005, the Company reduced its net deferredtax liability by approximately $6.2 million.

*Income (Loss) PerCommon Share*

Basicearnings per share exclude any dilutive effects of options and convertiblesecurities and are computed by dividing income (loss) applicable to commonshareholders by the weighted-average number of common shares outstandingfor the period. Diluted earnings per share reflect the potential dilution fromcommon shares potentially issuable through stock options, convertible notes andPIK Preferred Shares and is computed by dividing income (loss) applicable tocommon shareholders, as adjusted for the effects of the conversion to commonstock, by the weighted-average number of common and common equivalentshares outstanding for the period. Shares under option represent commonequivalent shares if the average market price for the reporting period exceedsthe strike price of the option. A reconciliation of the amounts included in thecomputation of income (loss) per share for fiscal 2005, 2004 and 2003 ispresented in the following table (in thousands):

| ** **                                                                                    | ** ** | **Successor** | ** ** | **Predecessor** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|---------------|------------|-----------------|------------|
| ** **                                                                                    | ** ** | **2005**      | ** ** | **2004**        | ** ** | **Ten Months  Ended  January 3,  2004** | ** ** | **Two Months  Ended  March 1,  2003** | ** ** |
| Income (loss):                                                                                |       |          |       |            |       |   |   |   |   |   |   |   |   |
| Net income (loss)                                                                             |       | $             | 6,997      |            | $          | 4,732 |   |   | $ | (32,985 | ) |   |   | $ | 532,364 |   |   |
| Less: dividends on PIK Preferred Shares                                                       |       | 27,998        |       | 5,566           |       |   | — |   |   |   | — |   |   |
| Income (loss) applicable to common shareholders                                          |       | (21,001       | )          | (834            | )          |   | (32,985 | ) |   |   | 532,364 |   |   |
| Effect of dilutive securities—convertible notes, PIK Preferred Shares  and stock options |       | —        |       | —          |       |   | — |   |   |   | — |   |   |
| Income (loss)  applicable to common shareholders with assumed conversions                     |       | $             | (21,001    | )               | $          | (834 | ) |   | $ | (32,985 | ) |   |   | $ | 532,364 |   |   |
| Outstanding shares:                                                                           |       |          |       |            |       |   |   |   |   |   |   |   |   |
| Weighted average common shares outstanding                                                    |       | 13,098        |       | 9,840           |       |   | 8,650 |   |   |   | 32,004 |   |   |
| Effect of dilutive securities—convertible notes, PIK Preferred Shares  and stock options |       | —        |       | —          |       |   | — |   |   |   | — |   |   |
| Weighted average  common shares outstanding—assuming dilution                            |       | 13,098        |       | 9,840           |       |   | 8,650 |   |   |   | 32,004 |   |   |

 

For fiscal year 2005, fiscalyear 2004 and the ten months ended January 3, 2004, the effect ofpotentially dilutive securities such as convertible notes, PIK Preferred Sharesand stock options are not considered in the above table as the effects areanti-dilutive. As of December 31, 2005, the potential dilutive effectrelated to the exchange of stock options to Class A Common Stock of theCompany would amount to 117,369 shares.

*Recent AccountingStandards*

In May 2004, the FASB issued FASB Staff Position No. 106-2,“Accounting and Disclosure Requirements Related to the Medicare PrescriptionDrug, Improvement and Modernization Act of 2003” (“FSP 106-2”).FSP 106-2 permits a sponsor of a postretirement health care planthat provides a 

59

----

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

prescription drug benefit tomake a one-time election to defer accounting for the effects of the MedicarePrescription Drug, Improvement and Modernization Act of 2003 (the “Act”), whichwas signed into law on December 8, 2003. The Act introduced a prescriptiondrug benefit under Medicare and federal subsidies to sponsors of retiree healthcare benefit plans that provide a benefit that is at least actuariallyequivalent to that of Medicare. As permitted under FSP 106-2, theCompany made a one-time election to defer accounting for the effect of the Actand as more fully explained in Note 13 to the Consolidated FinancialStatements, in December 2004 the Company approved plan amendmentscurtailing or eliminating various postretirement benefits in the U.S. As aresult, the amounts included in the Consolidated Financial Statements relatedto the Company’s postretirement benefit plans appropriately do not reflect theeffects of the Act.

In November 2004, the FASB issued SFAS No. 151,“Inventory Costs” (“SFAS No. 151”). This statement amends earlier guidanceto require that abnormal freight, handling and spoilage costs be recognized ascurrent-period charges rather than capitalized as an inventory cost. Inaddition, SFAS No. 151 requires that the allocation of fixedproduction overhead costs be based on the normal capacity of the productionfacilities. SFAS No. 151 is effective for inventory costs incurred duringfiscal years beginning after June 15, 2005 and is required to be adoptedby the Company in the first quarter of fiscal year 2006. The Company hascompleted its evaluation of the impact that the adoption of SFAS No. 151could have and has concluded that such impact will not be significant to itsfinancial position or results of operations.

In December 2004, the FASB issued a revision toSFAS No. 123, “Accounting for Stock-Based Compensation.” The revision,entitled SFAS No. 123R, “Share-Based Payment” (“SFAS No. 123R”), iseffective for all awards granted, modified, repurchased or canceled after June 15,2005 and requires a public entity to measure the cost of employee servicesreceived in exchange for an award of equity instruments based on the grant-datefair value of the award. The grant date fair value is to be estimated usingoption-pricing models adjusted for the unique characteristics of thoseinstruments. In April 2005, the Securities and Exchange Commission issueda final rule that registrants must adopt SFAS No. 123R’s fairvalue method of accounting no later than the beginning of the fiscal yearbeginning after June 15, 2005. Accordingly, the Company will adopt SFAS No. 123Rin the first quarter of fiscal year 2006, using the modified prospectivetransition method. Under the modified prospective transition method, all newgrants and any unvested portion of prior awards will be measured based on thefair-value-based method of accounting. The impact of adopting SFAS No. 123Rwill be consistent with the impact in the pro forma disclosure presentedearlier in this note, resulting in lower compensation costs than previouslyrecognized under the Company’s historically used accounting principles.

In May 2005, the FASBissued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS No. 154”).This statement amends earlier guidance and requires retrospective applicationto prior periods’ financial statements of a voluntary change in accountingprinciple unless it is impracticable to determine either the period-specificeffects or the cumulative effects of the change. In addition, SFAS No. 154requires that a change in the method of depreciation or amortization for along-lived, non-financial asset be accounted for as a change in accountingestimate that is affected by a change in accounting principle. SFAS No. 154is effective for accounting changes and corrections of errors made in fiscalyears beginning after December 15, 2005. The Company does not expect thenew guidance to have a significant impact on its financial position or resultsof operations.

60

----

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

**Note 3.Chapter 11 Proceedings and Recapitalization**

*Description of Chapter11 Proceedings and Financial Restructuring*

Due to the financial impact of economic and businessfactors upon the Company’s business, the inability to complete assetdispositions on acceptable terms and the expiration of the waiver with respectto the failure to meet the leverage covenant, the Company was in default underthe Prepetition Credit Facility (as defined herein) as of December 29,2001. Because of this default, the lenders under the Prepetition CreditFacility (the “Senior Secured Lenders”) exercised their right to block thepayment of interest due on January 2, 2002 to the holders of the 9% SeniorSubordinated Notes due 2007. These Lenders subsequently blocked the interestpayment due on March 1, 2002 to the holders of 8 3¤4% Senior Subordinated Notes due2008. On December 30, 2001, the Company and certain subsidiaries enteredinto a Forbearance Agreement with the Senior Secured Lenders (the “ForbearanceAgreement”). The Senior Secured Lenders agreed not to exercise certain remediesavailable to them under the Prepetition Credit Facility as a result of theexisting covenant defaults during the forbearance period. If certain eventswere to occur, the Senior Secured Lenders would have been able to exercisetheir remedies available to them, which included the right to declare allamounts outstanding under the Prepetition Credit Facility immediately due andpayable. The Forbearance Agreement, as extended on March 15, 2002, wasscheduled to end on May 15, 2002 and prevented the Company from making anyadditional borrowings in excess of the amounts outstanding under the revolvingportion of the Prepetition Credit Facility as of December 30, 2001. Withthe Company unable to reduce amounts outstanding under the prepetition creditfacility through asset dispositions on acceptable terms, the Company ultimatelyentered into a recapitalization transaction with MatlinPatterson GlobalOpportunities Partners L.P. (f/k/a CSFB Global Opportunities InvestmentPartners, L.P.) (“GOF”), the holder of approximately 67% of the outstandingSenior Subordinated Notes (as defined herein) and executed a term sheet withGOF on March 15, 2002, setting forth the proposed terms of a recapitalizationplan, including a financial restructuring.

The material elements of the financial restructuringincluded: (i) GOF contributing $50 million in cash and$394.4 million of the Senior Subordinated Notes then owned by GOF(including accrued, but unpaid interest) and agreeing to provide a$25 million letter of credit in favor of the Senior Secured Lenders underan amended credit facility, all in exchange for approximately 22.4 millionnewly issued shares of common stock of the Company (after taking into account a1-for-10 reverse common stock split), representing 87.5% ownershipof the Company; (ii) the holders of at least 95% of the aggregateprincipal amount of the Senior Subordinated Notes not owned by GOF exchangingtheir notes for either new senior subordinated notes or new senior subordinateddiscount notes; and (iii) the Company entering into an amended creditfacility with its Senior Secured Lenders (collectively, the “Exchange Offer”).

On March 25, 2002, during the pendency of theExchange Offer, without any prior notice, a group of creditors (the “PetitioningCreditors”) holding approximately $41.3 million of the Company’soutstanding Senior Subordinated Notes filed an involuntary bankruptcy petition(the “Involuntary Petition”) against the Company in the United StatesBankruptcy Court for the District of South Carolina (the “South CarolinaBankruptcy Court”). On April 2, 2002, the Company reached an agreement(the “Dismissal Agreement”) with the Petitioning Creditors, which provided forthe South Carolina Bankruptcy Court to dismiss the involuntary petition (the “DismissalOrder”) subject to a twenty-day period during which parties-in-interest couldobject to that dismissal. The twenty-day period commenced on April 5,2002, the day on which notice of the dismissal was published in the national 

61

----

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

edition of the *Wall Street Journal*. On April 26,2002, the South Carolina Bankruptcy Court entered the Dismissal Order.

The Dismissal Agreement also provided that the Companywould seek an amendment of the Prepetition Credit Facility to permit it tofile a voluntary petition for one of its wholly owned, South Carolina-registeredsubsidiaries in the South Carolina Bankruptcy Court. Pursuant to Amendment No. 7,dated as of April 4, 2002, the Senior Secured Lenders agreed to amend thePrepetition Credit Facility to permit this filing. On April 23, 2002, theDebtors filed a voluntary petition for Bonlam (S.C.), Inc. (“Bonlam (S.C.)”),in the South Carolina Bankruptcy Court. The Dismissal Agreement further providedthat the Company would extend the expiration of the Exchange Offer through May 15,2002. The Company and GOF also agreed to forbear through, and including, May 15,2002, from implementing any modifications to the Senior Subordinated Notes andthe indentures governing them. The Petitioning Creditors agreed to forbearthrough and including, May 12, 2002 (the “Forbearance Period”), fromexercising any and all remedies under the applicable indentures, the SeniorSubordinated Notes or any applicable law, including any filing of aninvoluntary petition against any of the Debtors. During the Forbearance Period,the Company agreed (i) not to file a voluntary petition for reliefunder the Bankruptcy Code in a jurisdiction other than Columbia, SouthCarolina, and (ii) to contest any involuntary petition under theBankruptcy Code filed in any such other jurisdiction, in each case, without theprior written consent of the Petitioning Creditors. GOF and the PetitioningCreditors agreed not to file an involuntary petition against the Company in anyvenue other than the South Carolina Bankruptcy Court.

The Company, GOF and the Petitioning Creditorsintended that the Dismissal Agreement would provide a framework for the Companyand other parties, including the Petitioning Creditors, to continue tonegotiate the terms of a potential restructuring of the Company through May 12,2002. Given that negotiations were not reaching an agreement and given the factthat the uncertainty created by the Involuntary Petition was causing furtherdeterioration in the Company’s businesses, the Company determined that it wasin the best interest of its creditors and other constituencies to seek theprotections afforded by filing voluntary petitions for protection under Chapter11 of the United States Code (the “Bankruptcy Code”). Accordingly, on May 11,2002 (the “Filing Date” or “Petition Date”), the Company and each of itsdomestic subsidiaries (together with the Company, the “Debtors”) filedvoluntary petitions for “pre-negotiated” reorganization (the “Chapter 11Filings” or the “Filings”) under the Bankruptcy Code in the South CarolinaBankruptcy Court. The Chapter 11 Filings were being jointly administered forprocedural purposes only. The Company’s direct and indirect foreign subsidiariesand foreign joint venture entities did not file petitions under Chapter 11 andwere not the subject of any bankruptcy proceedings. To facilitate stabilizingoperations during the Chapter 11 Filings, the Debtors secured a$125 million commitment (the “Commitment”) for debtor-in-possessionfinancing (the “DIP Facility”) from a group of financial institutions, some ofwhich were Senior Secured Lenders (the “DIP Lenders”) that provided the Debtorssufficient liquidity to operate during the Chapter 11 Filings. With therequisite approval from a substantial majority of the Senior Lenders (the “SupportingSenior Lenders”) to restructure the Prepetition Credit Facility and theexecution of the Support Agreement, dated as of May 10, 2002, with GOF,pursuant to which GOF agreed to support a joint plan of reorganization, theDebtors agreed to file by May 24, 2002, a Chapter 11 plan ofreorganization (the “Plan”) and disclosure statement that were consistent withthe term sheets agreed upon with each of the Supporting Senior Secured Lendersand GOF. Beginning on May 23, 2002 and on other subsequent dates, GOFagreed to extend the deadline for filing such Plan and disclosure statementuntil June 14, 2002.

62

----

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

On June 14, 2002, the Company filed the Plan withthe South Carolina Bankruptcy Court. The Plan generally proposed (i) therestructuring of the Prepetition Credit Facility, including a $50 millionprincipal reduction, (ii) the retirement of in excess of$591.5 million of the Debtors’ obligations under the Senior SubordinatedNotes, in exchange for the right of the holders of such Notes to receive either(x) their pro rata share of 100% of the newly issued Class A CommonStock of the reorganized Company prior to the conversion of the preferred stockor new senior notes, each referred to below (which would be diluted by anyconversion of the New Preferred Stock), (y) for each $1,000 in principalof Senior Subordinated Notes held, $120 in principal of new Junior SubordinatedNotes bearing interest at 11% payable in cash or (z) for each $1,000 inprincipal amount of existing Senior Subordinated Notes held, $150 in principalamount of New Junior Subordinated PIK Notes, with interest at 7.5% payable inkind (“PIK”) and 3.5% payable in cash, (iii) no impairment of the Debtors’other unsecured creditors, (iv) a $50 million investment by GOF andeligible electing holders of Senior Subordinated Notes in exchange forconvertible preferred stock convertible into 44% of the newly issued commonstock of the reorganized Company (after giving effect to the conversion thereofand excluding PIK dividends thereon) (the “New Preferred Stock”), (v) theissuance by GOF and eligible electing holders of Senior Subordinated Notes of a$25 million letter of credit to secure the Debtors’ proposed amortizationpayments to the Senior Lenders (which if drawn, would be evidenced by NewSenior Subordinated Notes) and (vi) the retention by existing shareholdersof 100% of the newly issued Class B Common Stock (which would not bediluted by any conversion of the New Preferred Stock) and certain warrants forup to an additional 9.5% of the reorganized Company’s common stock, as of theeffective date of reorganization (which would be subject to dilution byconversion of the New Preferred Stock), exercisable at specified value targetsfor the Company. In connection with the new investment, GOF had agreed to actas a standby purchaser to ensure that all of the shares of New Preferred Stockoffered by the Company were purchased and that the new investment generated grossproceeds of $50.0 million in cash and resulted in $25.0 million ofexit letters of credit in place. The Company was to pay GOF a fee of$0.5 million for acting as standby purchaser in connection with the newinvestment.

At a hearing, which took placeon August 15, 2002, and concluded on August 20, 2002, the SouthCarolina Bankruptcy Court approved the Company’s Disclosure Statement relatingto a Plan of Reorganization, as amended, and filed on August 21, 2002.Because the committee of unsecured creditors objected to the Plan, the Plan wasnot confirmed and thus the Company filed the Modified Plan as more fullydisclosed in “*Description of Modified Plan*,”below.

*Description of Modified Plan*

On November 27, 2002, theCompany filed the Joint Amended Modified Plan of Reorganization with the SouthCarolina Bankruptcy Court, with respect to its Chapter 11 plan ofreorganization. The Modified Plan consisted of: (i) the restructuring ofthe Prepetition Credit Facility, including a payment (the “Secured Lender Payment”)of $50.0 million on the Effective Date to the agent for the benefit of theSenior Secured Lenders under the Prepetition Credit Facility, which SecuredLender Payment was exclusive of the proceeds (the “Chicopee Sale Proceeds”) ofthe sale of the South Brunswick facility owned by Chicopee, Inc., (ii) paymentof 100% of the Chicopee Sale Proceeds to the agent for the benefit of theSenior Secured Lenders, (iii) a minimum $5.0 million additionalprepayment out of existing cash-on-hand, (iv) the retirement of$587.4 million of the Debtors’ obligations under the Senior SubordinatedNotes, wherein each Holder of the Senior Subordinated Notes and other generalunsecured creditors (other than claims of certain vendors who supplied goodsand services to the 

63

----

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

Debtorsduring the bankruptcy and with whom the Debtors intended to do business afteremerging from bankruptcy (“Critical Vendor Claims”) and claims held bynon-debtor subsidiaries of the Company (“Intercompany Claims”) (togetherconstituting the “Class 4 Claims”) had the right to receive on, or as soonas practicable after the Effective Date, (x) its pro rata share of Class ACommon Stock in exchange for each $1,000 of its allowed claim or (y) atthe election of each holder who was a Qualified Institutional Buyer (as definedin the Modified Plan and the 1933 Securities Act), its pro rata share of Class CCommon Stock, (v) the Critical Vendor Claims and Intercompany Claims werenot impaired, (vi) each holder of an allowed Class 4 Claim thatelected to receive Class A Common Stock was given the option to take partin the new investment in the Convertible Notes (the “New Investment”) bychoosing to exercise its subscription rights (the “Subscription Rights”)thereto, which New Investment of $50 million was made in exchange for 10%subordinated convertible notes due 2006 (the “Convertible Notes”), (vii) GOFissued, or caused to be issued, letters of credit in the aggregated amount of$25 million (the “Exit Letters of Credit”) in favor of the agent under theRestructured Credit Facilities pursuant to a bank term sheet, for which GOF wasentitled to 10% senior subordinated notes due 2007 (the “New SeniorSubordinated Notes”) equal to the amount (if any) drawn against the ExitLetters of Credit (plus any advances made by GOF solely in lieu of drawingsunder the Exit Letters of Credit), (viii) holders of the Company’sexisting common stock (“Old Polymer Common Stock”) received 100% of the Class BCommon Stock (which would not be diluted by any conversions of the ConvertibleNotes) in exchange for their Old Polymer Common Stock interests; such Holdersalso received pro rata shares of the new Series A and Series BWarrants (as discussed below).

Under the Modified Plan, allcommon stock of the reorganized Company (the “New Polymer Common Stock”) wasthe same class (the “Class A Common Stock”), with the exception of(i) separate classes (the “Class D Common Stock” and “Class ECommon Stock”) to be issued upon exercise of the Series A and Series BWarrants (as defined below), (ii) the 4% of New Polymer Common Stockdesignated as “Class B Common Stock” issued to the holders of Old PolymerCommon Stock, and (iii) a small percentage (the “Class C CommonStock”) issued to holders of Class 4 Claims, who contributed such stock tothe SPE. The Class C Common Stock shall pay a dividend payable equal tothe lesser of (i) 1% per annum of the principal amount of the promissorynotes issued by the SPE or (ii) $1.0 million per annum. Shares of NewPolymer Common Stock (other than Class A Common Stock) are convertibleinto shares of Class A Common Stock on a one-for-one basis.

The holders of Old Polymer Common Stock received twoseries of warrants, the Series A Warrants and Series B Warrants,which have (i) customary adjustments for stock splits, stock dividends,and consolidations, (ii) specified anti-dilution protection for sales ofsecurities by the reorganized Company (“New Polymer”) at a price below the fairmarket value of such securities if offered to all New Polymer common stock holdersand (iii) specified anti-dilution protection for sales of securities byNew Polymer at a discount that exceeds 25% of the fair market value of suchsecurities and which will not terminate upon a transaction with GOF or anaffiliate of GOF. Except as set forth in the preceding sentence, theSeries A and Series B Warrants do not have anti-dilution provisions.In addition, the cash dividend payment by New Polymer described above inconnection with the Class C Common Stock is excluded from the calculation ofcumulative distributions for all purposes relating to the Series AWarrants, the Series B Warrants, the Class D Common Stock and theClass E Common Stock. The New Polymer Common Stock received by the holdersof Class 4 Claims and the Holders of Old Polymer Common Stock and whichwill be issued upon conversion of the Convertible Notes is subject to dilutionupon the exercise of the Series A Warrants and Series B Warrants.

64

----

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

The Modified Plan also provided that, on the EffectiveDate, in consideration of GOF acting as the standby purchaser for the NewInvestment, and in consideration of GOF’s role in facilitating a consensualresolution of the disputes among the parties involved in the negotiation of theModified Plan, New Polymer paid GOF a Standby Purchaser fee of$2.0 million, an arrangement and plan facilitation fee of$2.0 million and a posting fee of $0.5 million.

In order to facilitate the issuance of a new seniorsubordinated note (“New Senior Subordinated Note”) in the amount of any drawingunder the Exit Letter of Credit, MatlinPatterson Global Partners LLC, (“MatlinGlobal Partners”) a limited liability company organized under the laws ofDelaware, the Company and its domestic subsidiaries, as guarantors, enteredinto a Senior Subordinated Note Purchase Agreement (the “Senior SubordinatedNote Purchase Agreement”), dated as of March 5, 2003, and pursuantthereto, the Company issued to Matlin Global Partners a New Senior SubordinatedNote.

The Senior Subordinated NotePurchase Agreement and Senior Subordinated Note provided that upon any drawingunder the Exit Letter of Credit, the principal amount due under the New SeniorSubordinated Note would automatically increase by the amount of such drawing.The Company was required to pay interest on any amount outstanding under theNew Senior Subordinated Note semi-annually in arrears on January 1 and June 1of each year, commencing on June 1, 2003, at a rate of 10% per annum. TheCompany’s obligations under the Senior Subordinated Note Purchase Agreement andSenior Subordinated Note were guaranteed by the Company’s domesticsubsidiaries. Both the Company’s obligations under the Senior Subordinated Noteand the guarantees thereof were subordinate to the indebtedness outstandingunder the Company’s Restructured Credit Facility. The Senior Subordinated NotePurchase Agreement and the Senior Subordinated Note Purchase containedcustomary representations and warranties, standard default terms andaffirmative and negative covenants of the Company similar to those found inmost such agreements.

**Note 4. Fresh Start Accounting**

The Company officially emerged from theChapter 11 bankruptcy process on March 5, 2003, but for accountingpurposes the Company recognized the emergence on March 1, 2003, which wasthe end of the February 2003 accounting period. In accordance with SOP 90-7,the Company adopted fresh-start accounting as of March 1, 2003, andthe Company’s emergence from Chapter 11 resulted in a new reporting entity.

Fresh-start accounting requires that thereorganization value of the Company be allocated to its assets and liabilitiesin conformity with SFAS No. 141, “Business Combinations.’’ Suchallocations have been reflected in the amounts included herein. Based on theconsideration of many factors and various valuation methods, the Company andits financial advisors determined the reorganization value of the Company asdescribed in the Modified Plan. The factors and valuation methodologiesincluded the review of comparable company market valuations and the recentacquisition values of comparable company transactions as well as discountedcash flow models. The discounted cash flow models utilized projected free cashflows for four future years, with such projected free cash flows discounted atrates approximating the expected weighted average cost of capital (11.0% to13.0%) plus the present value of the Company’s 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 

65

----

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

was based on a variety ofestimates and assumptions about future circumstances and events. Such estimatesand assumptions are inherently subject to significant economic uncertainties.

As part ofthe Modified Plan, the Company’s common stock was divided into five classes: Class A,Class B, Class C, Class D and Class E. As of the EffectiveDate, 8,125,869 shares of Class A, 399,978 shares of Class B and118,449 shares of Class C Common Stock were outstanding. An additional1,327,177 shares of Class A Common Stock and 19,359 shares of Class CCommon Stock were reserved at the emergence date and were subsequently issuedon May 11, 2004 in accordance with a ruling by the United StatesBankruptcy Court for the District of South Carolina in satisfaction of certainclaims against the Company in connection with the Modified Plan. No shares of Class Dor Class E Common Stock were outstanding as of the Effective Date. Thefollowing table reflects the reorganization adjustments to old Polymer Group’sConsolidated Balance Sheet as of March 1, 2003 (in thousands):

| ** **                                                           | ** ** | **Predecessor** | ** ** | **Modified Plan of  Reorganization** | ** ** | **Fresh Start  Adjustments** | ** ** | **Successor** | ** ** |
|----------------------------------------------------------------------|------------|-----------------|------------|------------------------------------------------|------------|-----------------------------------|------------|---------------|------------|
| **Assets**                                                           |       |            |       |                                           |       |                              |       |          |       |   |   |   |   |   |   |   |   |
| Current assets                                                       |       |            | $          | 306,438                                        |       |                              |       | $             | —     |   |   |   | $ | (9,722 | )(g) |   |   | $ | 296,716 |   |   |
| Property, plant and  equipment                                       |       |            | 431,384    |                                           |       |                              | (36,372    | )(f)          |       |   | 4,231 | (g) |   |   | 399,243 |   |   |
| Intangibles and loan  acquisition costs, net                         |       |            | 38,261     |                                           |       |                              | (26,341    | )(e)(f)       |       |   | 27,352 | (h) |   |   | 39,272 |   |   |
| Other assets                                                         |       |            | 13,295     |                                           |       |                              | —     |          |       |   | (3,305 | )(g) |   |   | 9,990 |   |   |
| Total assets                                                         |       |            | $          | 789,378                                        |       |                              |       | $             | (62,713    | ) |   |   | $ | 18,556 |   |   |   | $ | 745,221 |   |   |
| **Liabilities and Shareholders’ Equity Deficit)**               |       |            |       |                                           |       |                              |       |          |       |   |   |   |   |   |   |   |   |
| Liabilities not subject to compromise                                |       |            |       |                                           |       |                              |       |          |       |   |   |   |   |   |   |   |   |
| Accounts payable,  accrued liabilities and other current liabilities |       |            | $          | 94,355                                         |       |                              |       | $        | 7,069      | (a) |   |   | $  | 13,019 | (g) |   |   | $ | 114,443 |   |   |
| Short-term  borrowings                                               |       |            | 223        |                                           |       |                              | —     |          |       |   | — |   |   |   | 223 |   |   |
| Long-term  debt—Prepetition Credit Facility                     |       |            | 484,877    |                                           |       |                              | (484,877   | )(b)          |       |   | — |   |   |   | — |   |   |
| Long-term  debt—Restructured Credit Facility and Other          |       |            | 18,165     |                                           |       |                              | 421,434    | (c)           |       |   | — |   |   |   | 439,599 |   |   |
| Long term debt—Junior  Notes                                    |       |            | —     |                                           |       |                              | 50,000     | (d)           |       |   | — |   |   |   | 50,000 |   |   |
| Noncurrent liabilities                                               |       |            | 48,133     |                                           |       |                              | —     |          |       |   | 19,433 | (g) |   |   | 67,566 |   |   |
| Total liabilities not  subject to compromise                         |       |            | 645,753    |                                           |       |                              | (6,374     | )             |       |   | 32,452 |   |   |   | 671,831 |   |   |
| Liabilities Subject to  Compromise                                   |       |            | 637,122    |                                           |       |                              | (637,122   | )(e)          |       |   | — |   |   |   | — |   |   |
| Total liabilities                                                    |       |            | 1,282,875  |                                           |       |                              | (643,496   | )             |       |   | 32,452 |   |   |   | 671,831 |   |   |
| Shareholders’ equity  (deficit)                                 |       |            | (493,497   | )                                              |       |                              | 580,783    | (f)           |       |   | (13,896 | )(i) |   |   | 73,390 |   |   |
| Total liabilities and  shareholders’ equity (deficit)      |       |            | $          | 789,378                                        |       |                              |       | $             | (62,713    | ) |   |   | $ | 18,556 |   |   |   | $ | 745,221 |   |   |

----

(a)            To record certainprepetition liabilities to be settled in cash.

(b)           To record theelimination of the Prepetition Credit Facility.

(c)            To record theRestructured Credit Facility.

(d)           To record the JuniorNotes.

(e)            To record theelimination of pre-petition liabilites that were cancelled, which include theold senior subordinated notes, accrued interest, and loan acquisition costs.

66

----

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

(f)                To record theissuance of securities, the cancellation of prepetition liabilities andreorganization value.

(g)           Toreflect assets and liabilities at fair value.

(h)            Towrite-off goodwill and adjust certain intangibles to fair value.

(i)                To write-off Predecessor’ssecurities, accumulated deficit and accumulated other comprehensive loss.

Additionally, in January 2005the Company completed a tax basis study, as of the Effective Date, related toits investment in subsidiaries and the effects of the cancellation ofindebtedness on the tax basis of such investments. Based on the tax basis studyand further reviews of the carrying values of certain foreign investments as ofthe Effective Date, the Company adjusted, in its 2004 Consolidated FinancialStatements, net deferred tax liabilities and goodwill from the amountspreviously recorded at March 1, 2003 by $19.1 million. Also, asfurther discussed in Note 12 to the Consolidated Financial Statements, theCompany decreased goodwill by $5.4 million in fiscal 2005 through therealization of deferred tax assets, for which a valuation allowance wasestablished as of the Effective Date.

**Note 5.Business Restructuring and Asset Impairment**

The Company continued its restructuring initiatives in2004 by curtailing production of certain of its European assets and eliminatingseveral production lines in the Canadian operations of its Oriented PolymersDivision. The European and Canadian restructuring efforts in 2004 included thereduction of approximately 160 positions, resulting in a charge ofapproximately $1.9 million for severance and other plant realignmentcosts.

In 2003, the Company implemented a businessrestructuring initiative intended to yield a reduction in working capitallevels and operating cost reductions through: (i) reducing headcount atboth the plant and corporate levels; (ii) improving manufacturingproductivity and reducing component costs; (iii) implementing globalpurchasing initiatives; and (iv) rationalizing certain assets and/orbusinesses. Approximately 170 positions were eliminated in fiscal 2003.

Accruedcosts for restructuring efforts are included in accrued liabilities in theaccompanying Consolidated Balance Sheets. A summary of the businessrestructuring activity during fiscal 2005, 2004 and 2003 is presented in thefollowing table (in thousands):

| ** **                            | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Balance accrued at  beginning of year |       | $        | 561        |     | $          | 4,564    |       | $ | 893 |   |
| Plant realignment costs:              |       |     |       |     |       |     |       |
| First Quarter                         |       | 4        |       | 584      |       | 12       |       |
| Second Quarter                        |       | 5        |       | 657      |       | 2,408    |       |
| Third Quarter                         |       | —   |       | 222      |       | 1,235    |       |
| Fourth Quarter                        |       | —   |       | 404      |       | 3,151    |       |
| Total(1)                              |       | 9        |       | 1,867    |       | 6,806    |       |
| Cash payments                         |       | (375     | )          | (5,909   | )          | (4,293   | )          |
| Adjustments                           |       | (32      | )          | 39       |       | 1,158    |       |
| Balance accrued at end of  year       |       | $        | 163        |     | $          | 561      |       | $ | 4,564 |   |

----

(1)            Includes $4 during thetwo months ended March 1, 2003.

67

----

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

In fiscal 2004, the Company recorded a non-cash assetimpairment charge of $2.3 million, primarily related to the write-down ofmachinery and equipment to net realizable value, for production assets inCanada removed from service and held for sale and the write-off of certainforeign investments.

The Company made the business decision in December 2003to discontinue production on certain of its European assets and, accordingly,recognized an asset impairment charge of approximately $1.2 million.

A summaryof asset impairment charges during fiscal 2005, 2004 and 2003 is presented inthe following table (in thousands):

| ** **                    | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Asset impairment charges:     |       |     |       |     |       |     |       |   |   |
| Property, plant and equipment |       |     | $          | —   |       |     | $          | 1,719 |   | $ | 1,207 |   |
| Other                         |       |     | —     |     |       | 534      |       | — |   |
| Total impairment  charges     |       |     | $          | —   |       |     | $          | 2,253 |   | $ | 1,207 |   |

 

**Note 6.Accounts Receivable Factoring Agreements**

On November 15, 2004, the Company entered into afactoring agreement to sell without recourse, certain U.S. company-basedreceivables to an unrelated third party financial institution. Under the termsof the factoring agreement, the maximum amount of outstanding advances at anyone time is $15.0 million, which limitation is subject to change based onthe level of eligible receivables, restrictions on concentrations ofreceivables and the historical performance of the receivables sold. Duringfiscal 2005, approximately $124.6 million of receivables had been sold underthe terms of the factoring agreement, compared to approximately$31.0 million during fiscal 2004. The sale of these receivablesaccelerated the collection of the Company’s cash, reduced credit exposure andlowered the Company’s net borrowing costs. Sales of accounts receivable arereflected as a reduction of *Accountsreceivable, net* in the Consolidated Balance Sheets and a loss isreflected in the Consolidated Statements of Operations on such sale, as theymeet the applicable criteria of SFAS No. 140, “Accounting for Transfersand Servicing of Financial Assets and Extinguishment of Liabilities” (“SFASNo.140”). The amount due from the factoring company, net of advances receivedfrom the factoring company, was $4.8 million and $7.4 million at December 31,2005 and January 1, 2005, respectively, and is shown in *Other current assets* in the ConsolidatedBalance Sheets. The Company pays factoring fees associated with the sale ofreceivables based on the dollar value of the receivables sold. Costs related tothis program for fiscal 2005 and 2004 were $0.4 million and$0.1 million, respectively, and are included in *Other expense (income)* in the Consolidated Statement ofOperations.

On November 7, 2005, the Company’s Latin Americanoperations entered into a factoring agreement to sell without recourse, certainnon-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. Through December 31, 2005, approximately $5.4 million ofreceivables had been sold under the terms of the factoring agreement. Such saleof receivables meets the applicable criteria of SFAS No. 140 and has beenaccounted for on a basis consistent with the 

68

----

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

methodology described in thepreceding paragraph. The amount due from the factoring company, net of advancesreceived from the factoring company, was $1.4 million at December 31, 2005and is shown in *Other current assets*in the Consolidated Balance Sheets. The Company pays factoring fees associatedwith the sale of receivables based on the dollar value of the receivables sold.

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 7. Inventories**

Inventoriesconsist of the following (in thousands):

| ** **                  | ** ** | **December 31,  2005** | ** ** | **January 1,  2005** | ** ** |
|-----------------------------|------------|-----------------------------|------------|---------------------------|------------|
| Finished goods              |       |                        | $          | 60,545                    |       |   | $ | 50,482 |   |
| Work in process             |       |                        | 17,724     |                      |       | 15,612 |   |
| Raw materials and  supplies |       |                        | 41,394     |                      |       | 40,255 |   |
|                        |       |                        | $          | 119,663                   |       |   | $ | 106,349 |   |

 

Inventories are net ofreserves, primarily for obsolete and slow-moving inventories, of approximately$9.7 million and $10.6 million at December 31, 2005 and January 1,2005, respectively. Management believes that the reserves are adequate toprovide for losses in the normal course of business.

**Note 8. Property, Plant and Equipment**

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

| ** **                       | ** ** | **December 31,  2005** | ** ** | **January 1,  2005** | ** ** |
|----------------------------------|------------|-----------------------------|------------|---------------------------|------------|
| Land                             |       |                        | $          | 13,409                    |       |   | $ | 13,548 |   |
| Buildings and land  improvements |       |                        | 95,817     |                      |       | 98,356 |   |
| Machinery, equipment  and other  |       |                        | 393,000    |                      |       | 356,510 |   |
| Construction in  progress        |       |                        | 52,219     |                      |       | 18,856 |   |
|                             |       |                        | 554,445    |                      |       | 487,270 |   |
| Less accumulated  depreciation   |       |                        | (132,448   | )                         |       | (84,667 | ) |
|                             |       |                        | $          | 421,997                   |       |   | $ | 402,603 |   |

 

Depreciation charged to expense was $51.3 million forfiscal year 2005, $45.5 million for fiscal year 2004, $36.1 millionfor the ten months ended January 3, 2004 and $7.2 million for the twomonths ended March 1, 2003. As discussed more fully in Note 5 to theConsolidated Financial Statements, the Company recorded impairment chargesduring fiscal years 2004 and 2003.

During fiscal 2005, the estimated useful lives of certainmachinery and equipment utilized in the Company’s operations were reduced toreflect the technological status and market conditions of certain aspects ofthe Company’s business. These changes in estimates resulted in increaseddepreciation charges of $3.4 million for fiscal year ended December 31,2005.

69

----

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

The significant increase inconstruction in progress during fiscal 2005 compared to fiscal 2004 was due toongoing capital expansion projects under construction at December 31,2005, including the construction of new spunmelt manufacturing facilities inSuzhou, China and Mooresville, North Carolina as well as the installation ofadditional capacity in Nanhai, China.

**Note 9.Intangibles and Loan Acquisition Costs**

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

| ** **                       | ** ** | **December 31,  2005** | ** ** | **January 1,  2005** | ** ** |
|----------------------------------|------------|-----------------------------|------------|---------------------------|------------|
| Cost:                            |       |                        |       |                      |       |   |   |   |   |
| Proprietary technology           |       |                        | $          | 30,251                    |       |   |   | $ | 29,852 |   |   |
| Goodwill                         |       |                        | 10,243     |                      |       |   | 15,632 |   |   |
| Loan acquisition costs and other |       |                        | 12,045     |                      |       |   | 15,511 |   |   |
|                             |       |                        | 52,539     |                      |       |   | 60,995 |   |   |
| Less accumulated  amortization   |       |                        | (15,210    | )                         |       |   | (12,176 | ) |   |
|                             |       |                        | $          | 37,329                    |       |   |   | $ | 48,819 |   |   |

 

As further described in Notes 4 and 12 to theConsolidated Financial Statements, during fiscal 2004 the Company recordedgoodwill of $15.6 million related to the allocation of the reorganizationvalue to the underlying assets and liabilities as of the Effective Date. Also,as further discussed in Notes 4 and 12 to the Consolidated FinancialStatements, the Company decreased goodwill by $5.4 million during 2005 as aresult of the realization of deferred tax assets during fiscal 2005, for whicha valuation allowance was established as of the Effective Date. Such goodwillis not amortizable, but is subject to the tests of impairment which must beperformed at least annually.

In connection with the refinancing of the Company’sthen outstanding Bank Facility in November 2005, a portion of the unamortizedloan acquisition costs associated with the April 2004 refinancing were written-off,in the amount of $3.0 million, and expensed in the Consolidated Statement ofOperations. Additionally, $1.0 million of third-party costs incurred inconnection with the 2005 refinancing were also charged to expense. The Companyalso incurred $2.7 million of new loan acquisition costs related to theissuance of the Credit Facility, consisting primarily of bank fees, which havebeen capitalized, and which, together with $5.9 million of remaining unamortizedfees incurred as part of the April 2004 refinancing, will be amortized over theterm 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 “Bank Facility”), theCompany capitalized approximately $12.1 million of related loan acquisitioncosts, which were primarily bank arrangement and legal fees. Such costs wereamortized over the term of the related debt.

70

----

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

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

| ** **                                                                              | ** ** | **Successor** | ** ** | **Predecessor** | ** ** |
|-----------------------------------------------------------------------------------------|------------|---------------|------------|-----------------|------------|
| ** **                                                                              | ** ** | **2005**      | ** ** | **2004**        | ** ** | **Ten Months  Ended  January 3, 2004** | ** ** | **Two Months  Ended  March 1, 2003** | ** ** |
| Amortization of:                                                                        |       |          |       |            |       |   |   |   |   |   |   |   |   |
| Intangibles with finite lives, included in selling, general and  administrative expense |       | $             | 4,252      |            | $          | 5,759 |   |   | $ | 4,935 |   |   |   | $ | 220 |   |   |
| Loan acquisition costs, included in interest expense, net                               |       | 1,977         |       | 1,970           |       |   | 1,572 |   |   |   | 1,425 |   |   |
| Total amortization  expense                                                             |       | $             | 6,229      |            | $          | 7,729 |   |   | $ | 6,507 |   |   |   | $ | 1,645 |   |   |

 

Aggregate amortization expensefor each of the next five years is expected to be as follows: 2006,$5.6 million; 2007, $5.6 million; 2008, $5.6 million; 2009,$5.5 million; 2010, $2.4 million; and thereafter, $2.4 million.Intangibles are amortized over periods ranging from 5 to 17 years. Loanacquisition costs are amortized over the life of the related debt.

**Note 10. Accrued Liabilities**

Accrued liabilities in theConsolidated Balance Sheets include salaries, wages and other fringe benefitsof $17.0 million and $20.4 million as of December 31, 2005 and January 1,2005, respectively.

**Note 11. Debt**

Long-termdebt consists of the following:

| ** **                                                                                                                                                                                                                                                                                                                 | ** ** | **December 31,  2005** | ** ** | **January 1,  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 6.77% and 5.78% as of  December 31, 2005 and January 1, 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 |       |                        | $          | 410,000                   |       |   | $ | 281,500 |   |
| Second Lien Term Loan—interest at 8.78% as of January 1, 2005                                                                                                                                                                                                                                                    |       |                        | —     |                      |       | 125,000 |   |
| Other                                                                                                                                                                                                                                                                                                                      |       |                        | 97         |                      |       | 473 |   |
|                                                                                                                                                                                                                                                                                                                       |       |                        | 410,097    |                      |       | 406,973 |   |
| Less: Current  maturities                                                                                                                                                                                                                                                                                                  |       |                        | (4,142     | )                         |       | (3,413 | ) |
|                                                                                                                                                                                                                                                                                                                       |       |                        | $          | 405,955                   |       |   | $ | 403,560 |   |

 

71

----

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

*Scheduled Maturities*

Thescheduled maturities of long-term debt at December 31, 2005 are as follows(in thousands):

| 2006       |   | $       | 4,142   |   |
|------------|--------|---------|---------|--------|
| 2007       |   | 4,146   |    |
| 2008       |   | 4,109   |    |
| 2009       |   | 4,100   |    |
| 2010       |   | 4,100   |    |
| Thereafter |   | 389,500 |    |
| Total      |   | $       | 410,097 |   |

 

*Credit Facility*

The Company’s Credit Facility (the “Credit Facility”),which was entered into on November 22, 2005, consists of a$45.0 million secured revolving credit facility and a $410.0 millionfirst-lien term loan. The proceeds therefrom were used to fully repay indebtednessunder the Company’s previous Bank Facility and pay related 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. At December 31, 2005, the Company is in compliance with all suchcovenants and expects to remain in compliance through fiscal 2006. Thefirst-lien term loan requires mandatory payments of approximately $1.0 millionper quarter and, beginning with fiscal 2006, the first-lien term loan requiresthe Company to apply a percentage of proceeds from excess cash flows, asdefined by the Credit Facility and determined based on year-end results, toreduce its then outstanding balances under the Credit Facility. Since theamounts of excess cash flows for future periods are not determinable, only themandatory payments of approximately $1.0 million per quarter were considered inthe fiscal years 2006 through 2010 in the scheduled maturities table.

Excess cash flows required to be applied to therepayment of the Credit Facility are generally calculated as 50.0% of the netamount of the Company’s available cash generated from operations adjusted forthe cash effects of interest, taxes, capital expenditures, changes in workingcapital and certain other items. Since the amounts of excess cash flows forfuture periods are based on year-end results and not determinable, only themandatory payments of approximately $1.0 million per quarter have beenclassified as a current liability. Additionally, no excess cash flow paymentwas required to be made with respect to fiscal 2005 due to the magnitude of themajor capital expenditure projects and any excess cash flow requirement withrespect to fiscal 2006 is not expected to be significant.

72

----

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

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 basis points. TheCompany may, from time to time, elect to use an alternate base rate for itsborrowings under the revolving credit facility based on the bank’s base rateplus a margin of 75 to 125 basis points based on the Company’s total leverageratio. The Company had no outstanding borrowings at December 31, 2005under the revolving credit facility. As of December 31, 2005, capacity underthe revolving credit facility had been reserved for outstanding letters ofcredit in the amount of $11.4 million, as described below. Average borrowingsunder the 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%. The revolving creditportion of the Credit Facility matures on November 22, 2010.

In accordance with the terms of the Credit Facility,the Company maintained its position in a cash flow hedge agreement originallyentered into in May, 2004. This cash flow hedge agreement effectively converts$212.5 million of notional principal amount of debt from a variable LIBORrate to a fixed LIBOR rate of 3.383%. The cash flow hedge agreement terminateson May 8, 2007 and is described more fully in Note 16 to theConsolidated Financial Statements.

Subject to certain terms andconditions, a maximum of $25.0 million of the Credit Facility may be usedfor revolving letters of credit. As of December 31, 2005, the Company had$11.4 million of standby and documentary letters of credit outstandingunder the Credit Facility. Approximately $3.0 million was related to therequirements of the short-term borrowing arrangements of the Company’s China-basedmajority owned subsidiary (“Nanhai”). Other letters of credit are in place toprovide added assurance for certain raw material vendors and administrativeservice providers. None of these letters of credit have been drawn on at December 31,2005.

*Bank Facility*

Until it was refinanced on November 22,2005, the Company’s Bank Facility, which was entered into on April 27,2004, consisted of a $50.0 million secured revolving credit facility, a$300.0 million senior secured first lien term loan and a $125.0 millionsenior secured second lien term loan. All borrowings under the Bank Facilitywere U.S. dollar denominated and were guaranteed, on a joint and severalbasis, by each and all of the direct and indirect domestic subsidiaries of theCompany and supported by the pledge of stock of certain non-domesticsubsidiaries of the Company. The Bank Facility contained covenants and eventsof default customary for financings of this type, including leverage andinterest expense coverage covenants. The interest rate applicable to borrowingsunder the Bank Facility was based on three-month LIBOR plus a specified margin.The applicable margin for borrowings under the revolving credit facility was300 basis points, the margin for the first lien term loan was 325 basis pointsand the margin for the second lien term loan was 625 basis points. For theperiod from January 2, 2005 to November 21, 2005, the Company’saverage borrowings under the revolving credit agreement, which had an effectiveinterest rate of 8.23%, were $8.7 million. For the period from April 28,2004 to January 1, 2005, the Company’s average borrowings under therevolving credit facility, which had an effective interest rate of 5.80%, were$4.0 million. In addition, the Company had average borrowings under arevolving credit facility related to previous debt arrangements of $4.8 millionfor the period from January 4, 2004 to April 27, 2004, at an averageinterest rate of 6.75%.

73

----

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

*Subsidiary Indebtedness*

Nanhai has a short-term credit facility (denominatedin U.S. dollars and Chinese renminbi) with a financial institution in Chinawhich is scheduled to mature in June 2006. The amount of outstandingindebtedness under the facility was $5.0 million and $5.8 million atDecember 31, 2005 and January 1, 2005, respectively. The annualaverage rate on the facility was approximately 4.44% and 4.49% atDecember 31, 2005 and January 1, 2005, respectively. The Nanhaiindebtedness is supported by a letter of credit issued by the Company’s agentbank and additional collateral was granted through the pledge of the Nanhaiassets. In addition, Nanhai had outstanding bankers’ acceptances totaling $0.1 millionand $1.2 million at December 31, 2005 and January 1, 2005,respectively. These notes, which are denominated in Chinese renminbi, mature onJanuary 5, 2006 and are subject to a 0.5% transaction fee. Theseborrowings are shown as *Short-termborrowings* in the Consolidated Balance Sheets.

At January 1, 2005, theCompany’s Argentina-based majority owned subsidiary had a credit facilitydenominated in U.S. dollars totaling approximately $0.4 million (all withcurrent maturities). These borrowings were fully repaid in the first quarter of2005.

**Note 12. Income Taxes**

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

| ** ** | ** ** | **Successor** | ** ** | **Predecessor** | ** ** |
|------------|------------|---------------|------------|-----------------|------------|
| ** ** | ** ** | **2005**      | ** ** | **2004**        | ** ** | **Ten Months  Ended  January 3, 2004** | ** ** | **Two Months  Ended  March 1, 2003** | ** ** |
| Domestic   |       | $             | (9,002     | )               | $          | (2,701 | ) |   | $ | (30,576 | ) |   |   | $ | 546,740 |   |   |
| Foreign    |       | 25,795        |       | 15,427          |       |   | 519 |   |   |   | (12,684 | ) |   |
|       |       | $             | 16,793     |            | $          | 12,726 |   |   | $ | (30,057 | ) |   |   | $ | 534,056 |   |   |

 

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

| ** **         | ** ** | **Successor** | ** ** | **Predecessor** | ** ** |
|--------------------|------------|---------------|------------|-----------------|------------|
| ** **         | ** ** | **2005**      | ** ** | **2004**        | ** ** | **Ten Months  Ended  January 3, 2004** | ** ** | **Two Months  Ended  March 1, 2003** | ** ** |
| Current:           |       |          |       |            |       |   |   |   |   |   |   |   |   |
| Federal and state  |       | $             | (783       | )               | $          | 1,319 |   |   | $ | — |   |   |   | $ | — |   |   |
| Foreign            |       | 3,351         |       | 4,278           |       |   | — |   |   |   | (1,318 | ) |   |
| Deferred:          |       |          |       |            |       |   |   |   |   |   |   |   |   |
| Federal and state  |       | 359           |       | 520             |       |   | — |   |   |   | — |   |   |
| Foreign            |       | 6,869         |       | 1,877           |       |   | 2,928 |   |   |   | 3,010 |   |   |
| Income tax expense |       | $             | 9,796      |            | $          | 7,994 |   |   | $ | 2,928 |   |   |   | $ | 1,692 |   |   |

 

Provision has been made for U.S. and additionalforeign taxes for the anticipated repatriation of earnings of certain foreignsubsidiaries of the Company, primarily Argentina. The Company considers theundistributed earnings of its foreign subsidiaries above the amount alreadyprovided to be indefinitely reinvested. These additional foreign earnings couldbecome subject to additional tax if remitted, or deemed remitted, as adividend. However the determination of the additional amount of tax that wouldbe incurred is not practicable because of the complexities associated with its 

74

----

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

hypothetical calculation. At December 31,2005, the unremitted earnings of its foreign subsidiaries for which U.S. taxeshave not been provided amounted to approximately $26.0 million. Also, inthe event of additional tax, unrecognized tax credits may be available toreduce some portion of any U.S. income tax liability.

Management judgment is required in determining tax provisionsand evaluating tax positions. Although management believes its tax positionsand related provisions reflected in the Consolidated Financial Statements arefully supportable, it recognizes that these tax positions and relatedprovisions may be challenged by various tax authorities. These tax positionsand related provisions are reviewed on an ongoing basis and are adjusted asadditional facts and information becomes available, including progress on taxaudits, changes in interpretations of tax laws, developments in case law andclosing of statute of limitations. The Company’s tax provision includes theimpact of recording reserves and any changes thereto. As of December 31,2005, the Company has a number of tax audits in process and have open tax yearswith various taxing jurisdictions that range from 2001 to 2005. Although theresults of current tax audits and reviews related to open tax years have notbeen finalized, management believes that the ultimate outcomes will not have amaterial adverse effect on the Company’s financial position, results ofoperations or cash flows.

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

| ** **                                               | ** ** | **Successor** | ** ** | **Predecessor** | ** ** |
|----------------------------------------------------------|------------|---------------|------------|-----------------|------------|
| ** **                                               | ** ** | **2005**      | ** ** | **2004**        | ** ** | **Ten Months  Ended  January 3, 2004** | ** ** | **Two Months  Ended  March 1, 2003** | ** ** |
| Computed income tax  expense (benefit) at statutory rate |       | $             | 5,878      |            | $          | 4,454 |   |   | $ | (10,520 | ) |   |   | $ | 186,920 |   |   |
| State income taxes,  net of federal tax benefit          |       | 535           |       | 858             |       |   | — |   |   |   | — |   |   |
| Gain on cancellation  of indebtedness                    |       | —        |       | —          |       |   | — |   |   |   | (216,970 | ) |   |
| Other reorganization  expenses                           |       | —        |       | —          |       |   | — |   |   |   | 6,788 |   |   |
| Utilization of  post-emergence NOL’s                |       | (354          | )          | —          |       |   | — |   |   |   | — |   |   |
| Valuation allowance                                      |       | 282           |       | 3,103           |       |   | 10,651 |   |   |   | 5,699 |   |   |
| Withholding taxes and  tax credits                       |       | 1,290         |       | 927             |       |   | — |   |   |   | — |   |   |
| Effect of foreign  operations, net                       |       | (381          | )          | (1,489          | )          |   | — |   |   |   | — |   |   |
| Chapter 11  reorganization costs                         |       | —        |       | —          |       |   | — |   |   |   | 4,277 |   |   |
| Fresh start  adjustments                                 |       | —        |       | —          |       |   | 95 |   |   |   | 11,336 |   |   |
| Effect of foreign  earnings on U.S. taxes and other, net |       | 2,546         |       | 141             |       |   | 2,702 |   |   |   | 3,642 |   |   |
| Income tax expense                                       |       | $             | 9,796      |            | $          | 7,994 |   |   | $ | 2,928 |   |   |   | $ | 1,692 |   |   |

 

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 amountsof such 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 

75

----

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

recognition period.Additionally, the $137.0 million of U.S. federal net operating losscarryforwards that existed at January 3, 2004 were reduced to zero at January 4,2004.

At December 31,2005, the Company had the following significant net operating losscarryforwards for income tax purposes (in thousands):

| **Country**             | ** ** | ** ** | ** ** | **Amount** | ** **     | **Year of Expiration** | ** ** |
|-------------------------|------------|------------|------------|------------|----------------|----------------------------------|------------|
| Mexico                  |       | $          | 3,610      |       |           | 2006–2013                   |       |   |
| Canada                  |       | 5,267      |       |       | 2006–2013 |                             |       |
| Netherlands             |       | 18,865     |       |       | Indefinite     |                             |       |
| Germany                 |       | 39,408     |       |       | Indefinite     |                             |       |
| France                  |       | 5,655      |       |       | Indefinite     |                             |       |
| China                   |       | 217        |       |       | 2010           |                             |       |
| United States (State)   |       | 37,617     |       |       | Various        |                             |       |
| United States (Federal) |       | 31,979     |       |       | 2023–2025 |                             |       |
|                         |            |            |            |            |                |                                  |            |  |  |  |

 

Inaddition, the Company had the following credits for income tax purposes as ofDecember 31, 2005 (in thousands):

| **Country**   | ** ** | ** **              | ** ** | **Type of Credit** | ** ** | **Amount** | ** **     | **Year of Expiration** | ** ** |
|---------------|------------|-------------------------|------------|------------------------------|------------|------------|----------------|----------------------------------|------------|
| Mexico        |       | Asset  Tax              |       | $                            | 7,244      |       |           | 2006–2015                   |       |   |
| Canada        |       | Investment  Tax         |       | 506                          |       |       | 2006–2016 |                             |       |
| United States |       | Foreign  Tax Credit     |       | 15,169                       |       |       | 2009           |                             |       |
| United States |       | Alternative Minimum Tax |       | 666                          |       |       | Indefinite     |                             |       |
|               |            |                         |            |                              |            |            |                |                                  |            |  |  |  |

 

The Company conducts business in foreign jurisdictionswhich grant a holiday from income taxes for a specified period. During 2005,the Company recognized a tax benefit of $0.8 million as a result of a taxholiday in China on profits attributable to its ongoing operations. Thatholiday expired at the end of December 2005. In addition, the Company willreceive a holiday with respect to profits, if any, from operations currentlybeing constructed in China. That holiday will begin with the commencement ofcommercial operations and last two years. The Company also recognized approximately$1.0 million of tax benefits during 2005 related to the export activitiesand capital investments in Cali, Colombia. Such export activities will becomesubject to a 15% tax beginning in 2007.

 

76

----

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

Deferred income taxes reflectthe net tax effects of temporary differences between the carrying amounts ofassets and liabilities for financial reporting purposes and the amounts usedfor income tax purposes, as well as net operating loss and other tax creditcarryforwards. Significant components of the Company’s net deferred tax assetsand liabilities are as follows (in thousands):

| ** **                                          | ** ** | **December 31,  2005** | ** ** | **January 1,  2005** | ** ** |
|-----------------------------------------------------|------------|-----------------------------|------------|---------------------------|------------|
| Deferred tax assets:                                |       |                        |       |                      |       |   |   |
| Provision for bad debts                             |       |                        | $          | 2,684                     |       |   | $ | 2,660 |   |
| Inventory capitalization and  allowances            |       |                        | 2,734      |                      |       | 3,358 |   |
| Net operating loss and  capital loss carryforwards  |       |                        | 50,375     |                      |       | 51,500 |   |
| Tax credits                                         |       |                        | 8,416      |                      |       | 9,066 |   |
| Foreign tax credits                                 |       |                        | 15,169     |                      |       | 15,169 |   |
| Property, plant and  equipment and intangibles, net |       |                        | 32,475     |                      |       | 37,415 |   |
| Other                                               |       |                        | 18,314     |                      |       | 11,868 |   |
| Total deferred tax assets                           |       |                        | 130,167    |                      |       | 131,036 |   |
| Valuation allowance                                 |       |                        | (98,536    | )                         |       | (103,854 | ) |
| Net deferred tax assets                             |       |                        | 31,631     |                      |       | 27,182 |   |
| Deferred tax liabilities:                           |       |                        |       |                      |       |   |   |
| Property, plant and  equipment and intangibles, net |       |                        | (31,630    | )                         |       | (31,442 | ) |
| Stock basis of subsidiaries                         |       |                        | (33,780    | )                         |       | (33,780 | ) |
| Other, net                                          |       |                        | (26,116    | )                         |       | (25,713 | ) |
| Total deferred tax  liabilities                     |       |                        | (91,526    | )                         |       | (90,935 | ) |
| Net deferred tax liabilities                        |       |                        | $          | (59,895                   | )          |   | $ | (63,753 | ) |

 

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 three 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 $98.5 million and $103.9 million are appropriate as of December 31,2005 and January 1, 2005, respectively. If the Company recognizes futuretax benefits through the use of any of the deferred tax assets, for which avaluation allowance is provided, that existed at the Effective Date, thebenefit of such utilization, unless such utilization results from a change intax laws or regulations, will be recorded as a reduction of goodwill or otherintangible assets and, thereafter, as a reduction of income tax expense. TheCompany has at December 31, 2005, deferred tax assets with valuationallowances as of the Effective Date, which to the extent realized, aresufficient to eliminate the Company’s carrying value of goodwill and otherintangibles.

In 2005, the Company reduced goodwill in the amount of$5.4 million as a result of the realization of deferred tax assets, for which,valuation allowances had been established as of the Effective Date and otheradjustments as of the Effective Date.

Incometax refunds receivable were $1.6 million and $15.4 million at December 31,2005 and January 1, 2005, respectively with the receivable at January 1,2005 largely comprised of amounts due from European tax jurisdictions. Theseamounts are included in *Other current assets*on the Consolidated Balance Sheets.

77

----

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

**Note 13. Pensionand Postretirement Benefit Plans**

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 following disclosures regarding defined benefit plans andother postretirement benefit plans for the fiscal 2003 period reflect thecombined data of the Successor for the ten months ended January 3, 2004with that of the Predecessor for the two months ended March 1, 2003. Thebenefit obligations and related assets under these plans with respect to the2005 and 2004 disclosures have been measured as of December 31, 2005 and January 1,2005, respectively.

| ** **                                         | ** ** | **U.S. Plans  Pension Benefits** | ** ** | **Non-U.S. Plans  Pension Benefits** | ** ** |
|----------------------------------------------------|------------|--------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                         | ** ** | **2005**                                   | ** ** | **2004**                                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                         | ** ** | **(In Thousands)**                    | ** ** |
| *Change in Projected Benefit Obligation:*          |       |                                       |       |                                           |       |   |   |   |   |
| Projected benefit  obligation at beginning of year |       | $                                          | (12,504    | )                                              | $          | (12,482 | ) | $ | (94,768 | ) | $ | (76,932 | ) |
| Additional benefit  obligations                    |       | —                                     |       | —                                         |       | (2,852 | ) | — |   |
| Service costs                                      |       | —                                     |       | —                                         |       | (2,633 | ) | (2,361 | ) |
| Interest costs                                     |       | (724                                       | )          | (784                                           | )          | (5,117 | ) | (4,231 | ) |
| Participant  contributions                         |       | —                                     |       | —                                         |       | (498 | ) | (496 | ) |
| Plan amendments                                    |       | —                                     |       | —                                         |       | (1,232 | ) | — |   |
| Actuarial (loss)/gain                              |       | (714                                       | )          | (1,098                                         | )          | (17,923 | ) | (7,080 | ) |
| Currency translation  adjustment and other         |       | —                                     |       | —                                         |       | 7,211 |   | (6,211 | ) |
| Benefit payments                                   |       | 996                                        |       | 1,925                                          |       | 5,233 |   | 2,543 |   |
| Curtailment                                        |       | —                                     |       | (65                                            | )          | — |   | — |   |
| Projected benefit  obligation at end of year       |       | $                                          | (12,946    | )                                              | $          | (12,504 | ) | $ | (112,579 | ) | $ | (94,768 | ) |
| *Change in Plan Assets:*                           |       |                                       |       |                                           |       |   |   |   |   |
| Fair value of plan  assets at beginning of year    |       | $                                          | 9,324      |                                           | $          | 9,121 |   | $ | 84,225 |   | $ | 71,141 |   |
| Actual return on and  additional plan assets       |       | 961                                        |       | 881                                            |       | 13,450 |   | 3,705 |   |
| Employer and plan  participant contributions       |       | 970                                        |       | 1,247                                          |       | 6,284 |   | 6,447 |   |
| Plan amendments                                    |       | —                                     |       | —                                         |       | — |   | — |   |
| Actuarial (loss)/gain                              |       | —                                     |       | —                                         |       | — |   | — |   |
| Benefit payments                                   |       | (996                                       | )          | (1,925                                         | )          | (5,233 | ) | (2,543 | ) |
| Currency translation  adjustment and other         |       | —                                     |       | —                                         |       | (6,378 | ) | 5,475 |   |
| Fair value of plan  assets at end of year          |       | $                                          | 10,259     |                                           | $          | 9,324 |   | $ | 92,348 |   | $ | 84,225 |   |
| *Funded Status:*                                   |       |                                       |       |                                           |       |   |   |   |   |
| Funded status at year-end                          |       | $                                          | (2,687     | )                                              | $          | (3,180 | ) | $ | (20,231 | ) | $ | (10,543 | ) |
| Unrecognized actuarial  net (gain) loss            |       | (28                                        | )          | (493                                           | )          | 15,827 |   | 4,573 |   |
| Unrecognized  transition net (liability)           |       | —                                     |       | —                                         |       | — |   | — |   |
| Unrecognized net  (gain) loss                      |       | —                                     |       | —                                         |       | — |   | — |   |
| Unrecognized prior  service cost                   |       | —                                     |       | —                                         |       | 1,232 |   | — |   |
| Currency translation  adjustment and other         |       | —                                     |       | —                                         |       | (10 | ) | 106 |   |
| Accrued benefit cost  recognized                   |       | $                                          | (2,715     | )                                              | $          | (3,673 | ) | $ | (3,182 | ) | $ | (5,864 | ) |
| Accumulated benefit  obligation                    |       | $                                          | 12,946     |                                           | $          | 12,504 |   | $ | 97,118 |   | $ | 85,357 |   |

 

78

----

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

TheCompany has plans whose fair value of plan assets exceeds the benefitobligation. In 2005 and 2004, the total amount netted in the funded statusabove for such plans approximates $2.2 million and $0.5 million, respectively.The total amount of prepaid benefit cost included in the net prepaid (accrued)benefit cost recognized related to these plans approximates $2.2 million in2005 and $0.5 million in 2004.

| ** **                                         | ** ** | **U.S.  Postretirement  Benefit Plans** | ** ** | **Non-U.S.  Postretirement  Benefit Plans** | ** ** |
|----------------------------------------------------|------------|----------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                         | ** ** | **2005**                                     | ** ** | **2004**                                         | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                         | ** ** | **(In Thousands)**                      | ** ** |
| *Change in Projected Benefit  Obligation:*         |       |                                         |       |                                             |       |   |   |   |   |
| Projected benefit  obligation at beginning of year |       | $                                            | (3,472     | )                                                | $          | (7,754 | ) | $ | (5,282 | ) | $ | (6,389 | ) |
| Additional benefit  obligations                    |       | —                                       |       | —                                           |       | (1,192 | ) | — |   |
| Service costs                                      |       | (132                                         | )          | (372                                             | )          | (80 | ) | (45 | ) |
| Interest costs                                     |       | (190                                         | )          | (496                                             | )          | (376 | ) | (287 | ) |
| Participant  contributions                         |       | (71                                          | )          | (52                                              | )          | — |   | — |   |
| Plan amendments                                    |       | —                                       |       | 164                                              |       | — |   | — |   |
| Actuarial (loss)/gain                              |       | 358                                          |       | 101                                              |       | (498 | ) | 1,431 |   |
| Currency translation  adjustment and other         |       | —                                       |       | —                                           |       | (226 | ) | (386 | ) |
| Curtailments                                       |       | —                                       |       | 4,623                                            |       | — |   | — |   |
| Benefit payments                                   |       | 486                                          |       | 314                                              |       | 453 |   | 394 |   |
| Projected benefit  obligation at end of year       |       | $                                            | (3,021     | )                                                | $          | (3,472 | ) | $ | (7,201 | ) | $ | (5,282 | ) |
| *Change  in Plan Assets:*                          |       |                                         |       |                                             |       |   |   |   |   |
| Fair value of plan  assets at beginning of year    |       | $                                            | —     |                                             | $          | — |   | $ | — |   | $ | — |   |
| Actual return on plan  assets                      |       | —                                       |       | —                                           |       | — |   | — |   |
| Acquisition                                        |       | —                                       |       | —                                           |       | — |   | — |   |
| Employer and plan  participant contributions       |       | 415                                          |       | 262                                              |       | 453 |   | 393 |   |
| Plan amendments                                    |       | 71                                           |       | 52                                               |       | — |   | — |   |
| Benefit payments                                   |       | (486                                         | )          | (314                                             | )          | (453 | ) | (393 | ) |
| Currency translation  adjustment and other         |       | —                                       |       | —                                           |       | — |   | — |   |
| Fair value of plan  assets at end of year          |       | $                                            | —     |                                             | $          | — |   | $ | — |   | $ | — |   |
| *Funded  Status:*                                  |       |                                         |       |                                             |       |   |   |   |   |
| Funded status at year-end                          |       | $                                            | (3,021     | )                                                | $          | (3,472 | ) | $ | (7,201 | ) | $ | (5,282 | ) |
| Unrecognized  actuarial net (gain) loss            |       | —                                       |       | —                                           |       | — |   | — |   |
| Unrecognized  transition net (liability)           |       | —                                       |       | —                                           |       | 11 |   | — |   |
| Unrecognized net  (gain) loss                      |       | (400                                         | )          | (550                                             | )          | (569 | ) | (1,210 | ) |
| Unrecognized prior  service cost                   |       | (149                                         | )          | (164                                             | )          | — |   | — |   |
| Currency translation  adjustment and other         |       | (173                                         | )          | —                                           |       | (145 | ) | (100 | ) |
| Accrued benefit cost  recognized                   |       | $                                            | (3,743     | )                                                | $          | (4,186 | ) | $ | (7,904 | ) | $ | (6,592 | ) |

 

79

----

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

 

| ** **                                               | ** ** | **U.S. Plans  Pension Benefits**                  | ** ** | **Non-U.S. Plans  Pension Benefits** | ** ** |
|----------------------------------------------------------|------------|-------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                               | ** ** | **2005**                                                    | ** ** | **2004**                                       | ** ** | **2003** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                               | ** ** | **(In Thousands, Except Percent Data)** | ** ** |
| *Components  of net periodic benefit cost:*              |       |                                                        |       |                                           |       |   |   |   |   |   |   |   |   |
| Current service costs                                    |       | $                                                           | —     |                                           | $          | — |   | $ | 280 |   | $ | 2,633 |   | $ | 2,362 |   | $ | 1,904 |   |
| Interest costs on projected benefit obligation and other |       | 724                                                         |       | 783                                            |       | 841 |   | 5,117 |   | 4,231 |   | 3,492 |   |
| Return on plan assets                                    |       | (961                                                        | )          | (881                                           | )          | (1,222 | ) | (11,917 | ) | (3,705 | ) | (1,972 | ) |
| Net amortization of transition obligation and other      |       | 250                                                         |       | 299                                            |       | (103 | ) | 6,668 |   | (939 | ) | (1,470 | ) |
| Periodic benefit cost, net                               |       | $                                                           | 13         |                                           | $          | 201 |   | $ | (204 | ) | $ | 2,501 |   | $ | 1,949 |   | $ | 1,954 |   |
| *Weighted average assumption rates:*                     |       |                                                        |       |                                           |       |   |   |   |   |   |   |   |   |
| Return on plan assets                                    |       | 8.0                                                         | %          | 8.0                                            | %          | 8.0 | % | 6.5-7.5% |   | 6.5-7.5% |   | 6.5-8.0 | % |
| Discount rate on projected benefit obligations           |       | 5.75                                                        |       | 6.0                                            |       | 6.5 |   | 4.25-5.25 |   | 5.25-6.1 |   | 5.7-6.5 |   |
| Salary and wage  escalation rate                         |       | N/A                                                         |       | N/A                                            |       | 4.0 |   | 2.0-3.0 |   | 2.0-3.0 |   | 2.5-3.0 |   |

 

| ** **                                                       | ** ** | **U.S. Postretirement  Benefit Plans**            | ** ** | **Non-U.S.  Postretirement  Benefit Plans** | ** ** |
|------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                       | ** ** | **2005**                                                    | ** ** | **2004**                                         | ** ** | **2003** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                       | ** ** | **(In Thousands, Except Percent Data)** | ** ** |
| *Components  of net periodic benefit cost:*                      |       |                                                        |       |                                             |       |   |   |   |   |   |   |   |   |
| Current service costs                                            |       | $                                                           | 132        |                                             | $          | 372 |   | $ | 301 |   | $ | 81 |   | $ | 45 |   | $ | 27 |   |
| Interest costs on projected benefit obligation and other         |       | 190                                                         |       | 496                                              |       | 428 |   | 376 |   | 287 |   | 362 |   |
| Plan amendment                                                   |       | —                                                      |       | —                                           |       | — |   | — |   | — |   | — |   |
| Net amortization of transition obligation, curtailment and other |       | (37                                                         | )          | (4,445                                           | )          | (72 | ) | 1,020 |   | (188 | ) | — |   |
| Periodic benefit cost, net                                       |       | $                                                           | 285        |                                             | $          | (3,577 | ) | $ | 657 |   | $ | 1,477 |   | $ | 144 |   | $ | 389 |   |
| *Weighted average assumption rates:*                             |       |                                                        |       |                                             |       |   |   |   |   |   |   |   |   |
| Discount rate on  projected benefit obligations                  |       | 5.75                                                        | %          | 6.0                                              | %          | 6.5 | % | 5.25%-5.75 | % | 6.0 | % | 6.0 | % |

 

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** | ** ** |
|---------------------|------------|------------|------------|---------------------------------------|------------|
| 2006                |       |       | 10         | %                                     |       |
| 2007                |       |       | 10         | %                                     |       |
| 2008                |       |       | 8          | %                                     |       |
| 2009                |       |       | 8          | %                                     |       |
| 2010 and thereafter |       |       | 6          | %                                     |       |

 

80

----

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

A one-percentage point increase in the assumed healthcare cost trend rate would have increased aggregate service and interest costin 2005 by $0.6 million and the accumulated postretirement benefitobligation as of December 31, 2005 by $0.1 million. A one-percentagepoint decrease in the assumed health care cost trend rate would have decreasedaggregate service and interest cost in 2005 by $0.5 million and theaccumulated postretirement benefit obligation as of December 31, 2005 by$0.1 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:

| ** **        | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------|------------|----------|------------|----------|------------|
| Equity Securities |       |     | 46         | %        |       |   | 44 | % |   |
| Debt Securities   |       |     | 52         |     |       |   | 53 |   |   |
| Other             |       |     | 2          |     |       |   | 3 |   |   |
| 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 cash equivalents.The Investment Manager selects investment fund managers with demonstratedexperience and expertise, and funds with demonstrated historical performance,for the implementation of the Plans’ investment strategy. The InvestmentManager will consider both actively and passively managed investment strategiesand will allocate funds across the asset classes to develop an efficientinvestment structure.

It is the responsibility of the Trustee to administerthe investments of the Trust within reasonable costs, being careful to avoidsacrificing quality. These costs include, but are not limited to, managementand custodial fees, consulting fees, transaction costs and other administrativecosts 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 2006 are expected to approximate $7.1 million.

81

----

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

*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.

Theexpected level of payments to, or on the behalf of, participants is as follows(in thousands):

| ** ** | ** ** | **Pension** | ** ** | **Postretirement** | ** ** |
|------------|------------|-------------|------------|--------------------|------------|
| 2006       |       | $           | 4,165      |               |       | $ | 1,855 |   |   |
| 2007       |       | 4,185       |       |               | 1,854      |   |   |
| 2008       |       | 4,557       |       |               | 1,376      |   |   |
| 2009       |       | 4,531       |       |               | 1,286      |   |   |
| 2010       |       | 4,505       |       |               | 1,232      |   |   |
| 2011-2015  |       | 24,199      |       |               | 6,011      |   |   |
|            |            |             |            |                    |            |  |  |  |  |

 

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 “EmployersAccounting for Postretirement Benefits Other Than Pensions” (as amended), thegain on the plan curtailments was recognized upon the adoption of the planamendments. The gain of $3.6 million was reported as a component of *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.

On December 8, 2003, the Medicare PrescriptionDrug, Improvement and Modernization Act of 2003 (the “Act”) was enacted andintroduced a prescription drug benefit under Medicare as well as a subsidy tosponsors of retiree health care benefit plans. As permitted under FSP 106-1,the Company made a one-time election to defer accounting for the effect of theAct until the authoritative guidance on the accounting for the federal subsidyunder the Act is issued. Given that the Company curtailed most of its U.S.postretirement plans in 2004, it will likely not be eligible to receive thefederal subsidy under the Act. Accordingly, any measures of the periodicbenefit cost, benefit obligation and related disclosures for the U.S. and otherpostretirement benefit plans appropriately do not reflect the effect of theAct.

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 $2.3 million, $1.9 million and $3.0 million for fiscal 2005,2004 and 2003, respectively.

82

----

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

**Note 14. StockOption and Restricted Stock Plans**

*Stock Option Plans*

The 2003 Stock Option Plan (the “2003 Plan”) wasapproved by the Company’s Board of Directors and shareholders and isadministered by the Compensation Committee of the Board of Directors. The stockoptions have a five-year life and vest, based on the achievement of variousservice and financial performance criteria, over a four-year period, with theinitial awards beginning their vesting terms as of January 4, 2004. As of December 31,2005, the Company had awarded grants of non-qualified stock options to purchase400,000 shares of the Company’s Class A Common Stock. The awardsrepresented the entire amount reserved for issuance under the 2003 Plan and noadditional stock options are available for future grants under the 2003 Plan.

The Company has elected to account for the 2003 Planin accordance with the intrinsic value method as prescribed by APB No. 25,which measures compensation cost as the excess, if any, of the quoted marketprice of the stock at the date of grant over the amount an employee must pay toacquire the stock. Additionally, as a percentage of the options vest based onachievement of financial performance criteria, compensation costs arerecognized over the performance period when it becomes probable that suchperformance criteria will be achieved. Vesting of the stock options is acceleratedon the occurrence of a change in control.

The compensation costs related to the 2003 Plan were$2.2 million and $0.6 million for the years ended December 31,2005 and January 1, 2005, respectively, and were included in *Selling, general and administrative expenses*in the Consolidated Statements of Operations. Had the compensation expensemethodology defined in SFAS No. 123R been applied, the Company’s netearnings and earnings per common share would have been impacted as summarizedin the discussion of the Company’s stock-based compensation accountingpolicy in Note 2 to the Consolidated Financial Statements, resulting inlower compensation costs than recognized under the Company’s historically usedaccounting principles.

The 2005 Stock Option Plan (the “2005 Plan”) wasapproved by the Company’s Board of Directors and shareholders and isadministered by the Compensation Committee of the Board of Directors. The stockoptions will only vest and become exercisable on the occurrence of a change incontrol, and only after certain target thresholds tied to the cash received byMatlinPatterson Global Opportunities Fund, L.P. and its affiliates are reachedin the change in control transaction, or from the conversion of securitiesreceived in the change in control transaction into cash within one yearfollowing the change in control. The term of each stock option shall end on June 30,2008, unless the stock option has been exercised, with a provision to extendthe date of exercise by up to one year following a change in control in whichsecurities are issued as part of the consideration of the transaction. TheCompany may award grants of non-qualified stock options to purchase up to200,000 shares of the Company’s Class A Common Stock. As of December 31,2005, no awards have been granted under the 2005 Plan and it is expected thatthe 2005 Plan will be eliminated, subject to formal approval by theshareholders of the Company’s 2005 Employee Restricted Stock Plan, which willbe presented at the 2006 Annual Shareholders’ Meeting scheduled for May 2006.

83

----

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

Thefollowing table summarizes the option activity related to the 2003 Plan for theyears ended December 31, 2005 and January 1, 2005 and the ten monthsended January 3, 2004:

| ** **                                                | ** ** | **2005** | ** ** | **2004** | ** ** | **Ten months Ended  January 3, 2004** | ** ** |
|-----------------------------------------------------------|------------|----------|------------|----------|------------|-----------------------------------------------------------|------------|
| Unexercised options  outstanding—beginning of period |       | 225,313  |       | 240,000  |       |                                                      | —     |   |   |
| Granted                                                   |       | 174,687  |       | —   |       |                                                      | 240,000    |   |   |
| Exercised                                                 |       | —   |       | —   |       |                                                      | —     |   |   |
| Forfeited                                                 |       | —   |       | 14,687   |       |                                                      | —     |   |   |
| Expired/canceled                                          |       | —   |       | —   |       |                                                      | —     |   |   |
| Unexercised options  outstanding—end of period       |       | 400,000  |       | 225,313  |       |                                                      | 240,000    |   |   |
| Exercisable options:                                      |       |     |       |     |       |                                                      |       |   |   |
| Vested options as of year-end                             |       | 156,328  |       | 48,000   |       |                                                      | —     |   |   |
| Exercisable options as of year-end                        |       | —   |       | —   |       |                                                      | —     |   |   |
| Shares available for future grant as of year-end          |       | —   |       | 174,687  |       |                                                      | 160,000    |   |   |
| Weighted average exercise  price per share                |       | $        | 6.00       |     | $          | 6.00                                                      |       |   | $ | 6.00 |   |   |
|                                                           |            |          |            |          |            |                                                           |            |  |  |  |  |  |

 

*Restricted Stock Plans*

In May 2004, the Company’s shareholders approvedthe 2004 Restricted Stock Plan for Directors (the “Restricted Plan”), whichexpires in 2014, for the issuance of restricted shares to Directors of theCompany, as defined in the Restricted Plan. The Restricted Plan approved forissuance 200,000 restricted shares and is administered by a committee of theCompany’s Board of Directors not eligible to receive restricted shares under theRestricted Plan. In 2005, the Company awarded approximately 1,728 restrictedshares to members of the Company’s Board of Directors for their Board serviceto the Company. In fiscal 2005, the Company charged compensation costs of $0.1 millionto *Selling, general and administrativeexpenses* in the Consolidated Statement of Operations for therestricted shares awarded under the Restricted Plan.

In 2004, the Company awarded approximately 18,720restricted shares to members of the Company’s Board of Directors for theirBoard service to the Company and, as further described in Note 21 to theConsolidated Financial Statements, an additional 25,000 restricted shares wereawarded to the Company’s Chairman of the Board of Directors for consultingservices. In fiscal 2004, the Company charged compensation costs of $0.6 millionto *Selling, general and administrativeexpenses* in the Consolidated Statement of Operations for therestricted shares awarded under the Restricted Plan.

As of December 31, 2005, 154,552 shares ofthe Company’s Class A common stock are available for future grants underthe Restricted Plan.

In December 2005, theCompany’s 2005 Employee Restricted Stock Plan (the “2005 Stock Plan”) wasapproved by the Company’s Board of Directors and is administered by theCompensation Committee of the Company’s Board of Directors. The 2005 StockPlan, which expires in 2015, approved for issuance 482,000 restricted shares,of which, 272,000 restricted shares were awarded to certain employees of theCompany as of January 20, 2006. The Compensation Committee may, from timeto time, grant shares of restricted stock under the 2005 Stock Plan to suchemployees and in such amounts and with specified restrictions as it determinesappropriate in the circumstances. Vesting of the restricted shares isaccelerated on the occurrence of a change in control. No shares 

84

----

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

were awardedas of December 31, 2005. The awards of restricted shares granted on January 20,2006 pursuant to the 2005 Stock Plan are subject to formal approval by theshareholders, which will be presented at the Annual Shareholders’ Meetingscheduled for May 2006.

**Note 15. 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 exchange bythe majority shareholder was a requirement of the then new Bank Facility, theexchanges have been accounted for as a capital transaction and, accordingly, nogain or loss was 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. The Company recorded thevalue of the additional PIK Preferred Shares declared as a dividend on January 14,2005, 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 $18.50 per share, the fair value of the 5,540 additional PIK PreferredShares issued in lieu of cash payment was approximately $14.1 million,which exceeded the amount previously accrued by the Company of $5.6 million,based on the stated rate of 16.0%, by approximately $8.5 million. On August 3,2005, the Company’s Board of Directors declared that dividends accrued on thePIK Preferred Shares from January 1, 2005 through June 30, 2005, inthe amount of $4.7 million, would be paid in the form of PIK 

85

----

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

Preferred Shares. The Companyrecorded the value of the additional PIK Preferred Shares declared as adividend on August 3, 2005, the date the Board of Directors declared that theaccrued dividends were to be paid in the form of additional PIK PreferredShares, rather than cash, reduced by the amount of dividends previouslyrecorded at the stated 16.0% rate. Using the estimated market value of theCompany’s Class A Common Stock of $27.70 per share, the fair value of the4,660 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, as described below.Accordingly, total accrued and paid-in-kind dividends amounted to $28.0 millionand $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 Shares could exercise their right to convert their PIK PreferredShares into shares of Class A Common Stock at a conversion rate of137.14286 shares of Class A Common Stock 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, during thefirst quarter of fiscal 2005, five PIK Preferred Shares were converted into 686 sharesof Class A Common Stock. As a result of these transactions, 8,629,346additional shares of Class A Common Stock are now issued and outstandingand no PIK Preferred Shares are currently issued or outstanding.

**Note 16. 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. SFAS No. 133 requires theCompany to recognize all derivatives on the balance sheet at fair value andestablish criteria for designation and effectiveness of hedging relationships.

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 11 to the ConsolidatedFinancial Statements, to mitigate its interest rate exposure as required by theBank Facility and the Credit Facility, the Company entered into a pay-fixed,receive-variable interest rate swap, thus effectively converting thevariable LIBOR-based interest payments associated with $212.5 million ofthe debt to fixed amounts at a LIBOR rate of 3.383%. The notional amount ofthis contract, which expires on May 8, 2007, was $212.5 million atboth December 31, 2005 and January 1, 2005. Cash settlements are madequarterly and the floating rate is reset quarterly, coinciding with the resetdates of the current Credit Facility.

86

----

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

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-lien termloan debt. As such, there is no ineffectiveness and changes in the fair valueof the swap are recorded to accumulated other comprehensive income (loss) inthe Consolidated Balance Sheets. The fair value of the interest rate swap,based on current settlement values, was $3.8 million and $0.3 millionas of December 31, 2005 and January 1, 2005, respectively. Thoseamounts were included in *Other noncurrentassets* in the Consolidated Balance Sheets.

The impact of this swap on *Interest expense, net* in the Consolidated Statements ofOperations was a increase of $0.2 million for fiscal 2005 and an increaseof $2.4 million for fiscal 2004. There were no interest rate swapagreements in effect during fiscal 2003.

In May 2005, the Company entered into a series offoreign exchange forward contracts to manage its U.S.-dollar exposure onEuro-based obligations for firm commitments related to certain capitalexpenditure projects. In accordance with SFAS No. 133, the Companydesignated the forward contracts as a fair value hedge. In addition, theforward contracts, which mature through September 15, 2006, are completelyeffective in hedging the Company’s specifically-covered firm commitments,meaning that any change in the foreign currency is offset by a similar changein the firm commitment. At December 31, 2005, the Company hadapproximately $30.1 million of notional amount in outstanding contractswith a third party financial institution.

During the fourth quarter of2004, the Company used foreign currency options to establish a predictablerange for the movements of the Euro in an effort to protect its Europeanoperations from the impact of a sudden change in the Euro. Approximately $0.3 millionof expense was included in *Foreign currencyand other(gain) loss, net* in the Consolidated Statements ofOperations for fiscal 2004. The fair market value of the outstanding foreign currencyoption as of January 1, 2005 of $0.1 million was based on the actualsettlement value and was included in *Othercurrent liabilities* in the Consolidated Balance Sheets.

**Note 17. Shareholders’ Equity**

As of December 31,2005 and January 1, 2005, the Company’s authorized capital stock consistedof the following classes of stock:

| **Type**                               | ** ** | **Par Value** | ** ** | **Authorized Shares** | ** ** |
|----------------------------------------|------------|--------------------|------------|----------------------------|------------|
| PIK 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 common stock have similar votingrights. In accordance with the Amended and Restated Certificate ofIncorporation, Class C Common Stock has special rights to annualdividends, which are not significant, and all shares of Class B, C, D andE Common Stock may be converted into an equal number of shares of Class A CommonStock. The shares of preferred stock may be issued 

87

----

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

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. See Note 15 to theConsolidated Financial Statements for additional information related to theCompany’s PIK Preferred Shares.

In April 2004, the UnitedStates Bankruptcy Court for the District of South Carolina resolved certainpending claims filed against the Company in connection with the Modified Planand, as a result, approved the issuance of 1,327,177 shares of the Company’sClass A Common Stock and 19,359 shares of the Company’s Class CCommon Stock which were issued on a pro rata basis to holders of thePredecessor Company’s Class 4 General Unsecured Claims per the PredecessorCompany’s Chapter 11 Plan of Reorganization. If these shares had beenoutstanding for all Successor periods presented, the pro forma net loss percommon share (basic and diluted) for the year ended January 1, 2005 andthe ten months ended January 3, 2004 would have been $(0.08) per share and$(3.30) per share, respectively.

**Note 18. Segment Information**

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 2005 and 2004,the ten months ended January 3, 2004 and the two months ended March 1,2003 relating to asset impairment charges, plant realignment costs, foreigncurrency losses, net and arbitration settlement, net that have not beenallocated to the segment data.

88

----

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

Financialdata by segment is as follows (in thousands):

| ** **                                                                 | ** ** | **Successor** | ** ** | **Predecessor** | ** ** |
|----------------------------------------------------------------------------|------------|---------------|------------|-----------------|------------|
| ** **                                                                 | ** ** | **2005**      | ** ** | **2004**        | ** ** | **Ten Months Ended  January 3, 2004** | ** ** | **Two Months Ended  March 1, 2003** | ** ** |
| Net sales                                                                  |       |          |       |            |       |   |   |   |   |   |   |   |   |
| Nonwovens                                                                  |       | $             | 763,777    |            | $          | 672,600 |   |   | $ | 515,735 |   |   |   | $ | 108,359 |   |   |
| Oriented Polymers                                                          |       | 185,071       |       | 172,541         |       |   | 129,683 |   |   |   | 24,536 |   |   |
| Eliminations                                                               |       | —        |       | (407            | )          |   | (525 | ) |   |   | — |   |   |
|                                                                       |       | $             | 948,848    |            | $          | 844,734 |   |   | $ | 644,893 |   |   |   | $ | 132,895 |   |   |
| Operating income                                                           |       |          |       |            |       |   |   |   |   |   |   |   |   |
| Nonwovens                                                                  |       | $             | 66,744     |            | $          | 60,356 |   |   | $ | 38,856 |   |   |   | $ | 7,759 |   |   |
| Oriented Polymers                                                          |       | 10,677        |       | 12,699          |       |   | 8,489 |   |   |   | 1,465 |   |   |
| Unallocated Corporate                                                      |       | (20,746       | )          | (18,958         | )          |   | (12,648 | ) |   |   | (3,509 | ) |   |
| Eliminations                                                               |       | 259           |       | 202             |       |   | 124 |   |   |   | 115 |   |   |
|                                                                       |       | 56,934        |       | 54,299          |       |   | 34,821 |   |   |   | 5,830 |   |   |
| Asset impairment charges                                                   |       | —        |       | (2,253          | )          |   | (1,207 | ) |   |   | — |   |   |
| Plant realignment costs                                                    |       | (9            | )          | (1,867          | )          |   | (6,802 | ) |   |   | (4 | ) |   |
| Foreign currency loss, net                                                 |       | (671          | )          | (2,027          | )          |   | (2,773 | ) |   |   | (1,343 | ) |   |
| Arbitration settlement, net                                                |       | —        |       | 13,112          |       |   | — |   |   |   | — |   |   |
|                                                                       |       | $             | 56,254     |            | $          | 61,264 |   |   | $ | 24,039 |   |   |   | $ | 4,483 |   |   |
| Depreciation and  amortization expense included in operating income (loss) |       |          |       |            |       |   |   |   |   |   |   |   |   |
| Nonwovens                                                                  |       | $             | 45,083     |            | $          | 41,923 |   |   | $ | 34,283 |   |   |   | $ | 5,766 |   |   |
| Oriented Polymers                                                          |       | 10,643        |       | 8,217           |       |   | 6,912 |   |   |   | 1,349 |   |   |
| Unallocated Corporate                                                      |       | 106           |       | 1,120           |       |   | (272 | ) |   |   | 272 |   |   |
| Eliminations                                                               |       | (259          | )          | —          |       |   | 125 |   |   |   | — |   |   |
| Depreciation and amortization expense included in operating  income   |       | 55,573        |       | 51,260          |       |   | 41,048 |   |   |   | 7,387 |   |   |
| Amortization of loan acquisition costs                                     |       | 1,977         |       | 1,970           |       |   | 1,572 |   |   |   | 1,425 |   |   |
|                                                                       |       | $             | 57,550     |            | $          | 53,230 |   |   | $ | 42,620 |   |   |   | $ | 8,812 |   |   |
| Capital spending                                                           |       |          |       |            |       |   |   |   |   |   |   |   |   |
| Nonwovens                                                                  |       | $             | 77,088     |            | $          | 23,766 |   |   | $ | 32,836 |   |   |   | $ | 2,732 |   |   |
| Oriented Polymers                                                          |       | 1,814         |       | 1,025           |       |   | 3,828 |   |   |   | 330 |   |   |
| Corporate                                                                  |       | —        |       | —          |       |   | 11 |   |   |   | — |   |   |
|                                                                       |       | $             | 78,902     |            | $          | 24,791 |   |   | $ | 36,675 |   |   |   | $ | 3,062 |   |   |
| Division assets                                                            |       |          |       |            |       |   |   |   |   |   |   |   |   |
| Nonwovens                                                                  |       | $             | 715,977    |            | $          | 732,163 |   |   | $ | 706,347 |   |   |   |   |   |   |
| Oriented Polymers                                                          |       | 144,477       |       | 149,393         |       |   | 147,075 |   |   |   |   |   |   |
| Corporate                                                                  |       | 2,096         |       | 560             |       |   | 7,039 |   |   |   |   |   |   |
| Eliminations                                                               |       | (97,549       | )          | (127,558        | )          |   | (141,399 | ) |   |   |   |   |   |
|                                                                       |       | $             | 765,001    |            | $          | 754,558 |   |   | $ | 719,062 |   |   |   |   |   |   |

 

89

----

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

GeographicData:

Export sales from theCompany’s United States operations to unaffiliated customers approximated $60.6 million,$60.2 million and $61.5 million during fiscal 2005, 2004 and 2003,respectively. Geographic data for the Company’s operations, based on thegeographic region that the sale is made from, are presented in the followingtable (in thousands):

| ** **                                                                 | ** ** | **Successor** | ** ** | **Predecessor** | ** ** |
|----------------------------------------------------------------------------|------------|---------------|------------|-----------------|------------|
| ** **                                                                 | ** ** | **2005**      | ** ** | **2004**        | ** ** | **Ten Months Ended  January 3, 2004** | ** ** | **Two Months Ended  March 1, 2003** | ** ** |
| Net sales                                                                  |       |          |       |            |       |   |   |   |   |   |   |   |   |
| United States                                                              |       | $             | 444,968    |            | $          | 381,421 |   |   | $ | 289,064 |   |   |   | $ | 60,219 |   |   |
| Canada                                                                     |       | 116,158       |       | 111,591         |       |   | 88,088 |   |   |   | 16,416 |   |   |
| Europe                                                                     |       | 184,743       |       | 190,470         |       |   | 152,608 |   |   |   | 33,631 |   |   |
| Asia                                                                       |       | 44,297        |       | 32,384          |       |   | 26,730 |   |   |   | 4,773 |   |   |
| Latin America                                                              |       | 158,682       |       | 128,868         |       |   | 88,403 |   |   |   | 17,856 |   |   |
|                                                                       |       | $             | 948,848    |            | $          | 844,734 |   |   | $ | 644,893 |   |   |   | $ | 132,895 |   |   |
| Operating income                                                           |       |          |       |            |       |   |   |   |   |   |   |   |   |
| United States                                                              |       | $             | 3,366      |            | $          | 3,402 |   |   | $ | 895 |   |   |   | $ | (1,582 | ) |   |
| Canada                                                                     |       | 3,205         |       | 5,491           |       |   | 4,152 |   |   |   | 1,233 |   |   |
| Europe                                                                     |       | 15,770        |       | 17,384          |       |   | 12,176 |   |   |   | 2,330 |   |   |
| Asia                                                                       |       | 5,583         |       | 3,442           |       |   | 3,075 |   |   |   | 848 |   |   |
| Latin America                                                              |       | 29,010        |       | 24,580          |       |   | 14,523 |   |   |   | 3,001 |   |   |
|                                                                       |       | 56,934        |       | 54,299          |       |   | 34,821 |   |   |   | 5,830 |   |   |
| Asset impairment  charges                                                  |       | —        |       | (2,253          | )          |   | (1,207 | ) |   |   | — |   |   |
| Plant realignment  costs                                                   |       | (9            | )          | (1,867          | )          |   | (6,802 | ) |   |   | (4 | ) |   |
| Foreign currency loss,  net                                                |       | (671          | )          | (2,027          | )          |   | (2,773 | ) |   |   | (1,343 | ) |   |
| Arbitration  settlement, net                                               |       | —        |       | 13,112          |       |   | — |   |   |   | — |   |   |
|                                                                       |       | $             | 56,254     |            | $          | 61,264 |   |   | $ | 24,039 |   |   |   | $ | 4,483 |   |   |
| Depreciation and amortization expense included in  operating income (loss) |       |          |       |            |       |   |   |   |   |   |   |   |   |
| United States                                                              |       | $             | 24,891     |            | $          | 24,240 |   |   | $ | 20,882 |   |   |   | $ | 3,658 |   |   |
| Canada                                                                     |       | 8,429         |       | 6,015           |       |   | 5,045 |   |   |   | 950 |   |   |
| Europe                                                                     |       | 9,286         |       | 8,862           |       |   | 6,991 |   |   |   | 1,166 |   |   |
| Asia                                                                       |       | 4,149         |       | 4,014           |       |   | 3,141 |   |   |   | 628 |   |   |
| Latin America                                                              |       | 8,818         |       | 8,129           |       |   | 4,989 |   |   |   | 985 |   |   |
| Depreciation and  amortization expense included in operating income        |       | 55,573        |       | 51,260          |       |   | 41,048 |   |   |   | 7,387 |   |   |
| Amortization of loan  acquisition costs                                    |       | 1,977         |       | 1,970           |       |   | 1,572 |   |   |   | 1,425 |   |   |
|                                                                       |       | $             | 57,550     |            | $          | 53,230 |   |   | $ | 42,620 |   |   |   | $ | 8,812 |   |   |
| Identifiable assets (including intangible assets)                          |       |          |       |            |       |   |   |   |   |   |   |   |   |
| United States                                                              |       | $             | 323,596    |            | $          | 294,042 |   |   | $ | 286,277 |   |   |   |   |   |   |
| Canada                                                                     |       | 94,531        |       | 99,382          |       |   | 106,428 |   |   |   |   |   |   |
| Europe                                                                     |       | 202,324       |       | 294,811         |       |   | 279,269 |   |   |   |   |   |   |
| Asia                                                                       |       | 60,267        |       | 35,996          |       |   | 37,987 |   |   |   |   |   |   |
| Latin America                                                              |       | 181,834       |       | 157,900         |       |   | 141,941 |   |   |   |   |   |   |
| Eliminations                                                               |       | (97,551       | )          | (127,573        | )          |   | (132,840 | ) |   |   |   |   |   |
|                                                                       |       | $             | 765,001    |            | $          | 754,558 |   |   | $ | 719,062 |   |   |   |   |   |   |

 

90

----

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

 

**Note 19. Foreign Currency Loss, Net**

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

| ** **                          | ** ** | **Successor** | ** ** | **Predecessor** | ** ** |
|-------------------------------------|------------|---------------|------------|-----------------|------------|
| ** **                          | ** ** | **2005**      | ** ** | **2004**        | ** ** | **Ten Months Ended  January 3, 2004** | ** ** | **Two Months Ended  March 1, 2003** | ** ** |
| Included in operating  income       |       | $             | 671        |            | $          | 2,027 |   |   | $ | 2,773 |   |   |   | $ | 1,343 |   |   |
| Included in other expense  (income) |       | (280          | )          | 1,046           |       |   | 972 |   |   |   | 471 |   |   |
|                                |       | $             | 391        |            | $          | 3,073 |   |   | $ | 3,745 |   |   |   | $ | 1,814 |   |   |

 

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 Statement 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*.

91

----

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

**Note 20.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 $3.3 million, $4.0 million and $3.2 millionin 2005, 2004 and 2003, respectively. For the Successor ten month period andthe Predecessor two month period of 2003, the rental expense was $2.6 millionand $0.6 million, respectively. Rental income approximated $0.2 million,$0.6 million and $0.5 million in 2005, 2004 and 2003,respectively. The expenses are recognized on a straight-line basis overthe life of the lease. The approximate net minimum rental payments requiredunder non-affiliate operating leases that have initial or remainingnon-cancelable lease terms in excess of one year at December 31, 2005 arepresented in the following table. See Note 21 to the ConsolidatedFinancial Statements for a discussion of leases between the Company andaffiliated entities.

| ** ** | ** ** | **Gross Minimum  Rental Payments** | ** ** | **Lease and Sub-Lease  (Income)** | ** ** | **Net Minimum  Rental Payments** | ** ** |
|------------|------------|----------------------------------------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|
| ** ** | ** ** | **(In Thousands)**                      | ** ** |
| 2006       |       |                                         | $          | 2,481                                       |       |                                       |       | $ | (26 | ) |   |   | $ | 2,455 |   |   |
| 2007       |       |                                         | 1,846      |                                        |       |                                       | —     |   |   |   | 1,846 |   |   |
| 2008       |       |                                         | 1,406      |                                        |       |                                       | —     |   |   |   | 1,406 |   |   |
| 2009       |       |                                         | 1,066      |                                        |       |                                       | —     |   |   |   | 1,066 |   |   |
| 2010       |       |                                         | 475        |                                        |       |                                       | —     |   |   |   | 475 |   |   |
|       |       |                                         | $          | 7,274                                       |       |                                       |       | $ | (26 | ) |   |   | $ | 7,248 |   |   |

 

*Purchase Commitments*

At December 31, 2005, theCompany had commitments of approximately $36.6 million related to thepurchase of raw materials, maintenance and converting services. Additionally,as part of its efforts to enhance the business, the Company has madecommitments to expand its worldwide capacity. Currently, the Company hasseveral major committed projects, including the construction of new spunmeltmanufacturing facilities in Suzhou, China and Mooresville, North Carolina, aswell as the installation of additional capacity in Nanhai, China. Remainingpayments due related to these planned expansions as of December 31, 2005totaled approximately $45.6 million and are expected to be expended duringfiscal year 2006.

*Collective BargainingAgreements*

At December 31, 2005, theCompany had approximately 3,331 employees worldwide. Approximately 1,399employees are represented by labor unions or trade councils, which have enteredinto separate collective bargaining agreements with the Company. Approximately29% 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 

92

----

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

any materialadverse effect on its operations, financial or competitive position as a resultof its efforts to comply with environmental requirements.

*Litigation*

On August 18, 2003, The Intertech Group, Inc.(“TIG”), an affiliate of Jerry Zucker, the former Chief Executive Officer ofthe Company, filed a claim seeking damages associated with a lease agreementand an alleged services agreement, between the Company and TIG, associated withthe lease by the Company of its former corporate headquarters and the provisionof shared administrative services. On April 29, 2005, the Company enteredinto a Settlement Agreement, Receipt and Release (the “Settlement Agreement”)with Jerry Zucker, TIG and ZS Associates LLC (an affiliate of Mr. Zucker).Pursuant to the Settlement Agreement, the Company paid TIG $3.1 million asfull and final settlement. In addition, the Settlement Agreement containsmutual general releases of any and all claims by and among the parties thereto,and a requirement that the Company and TIG file a joint stipulation dismissing,with prejudice, TIG’s lawsuit against the Company, which was appropriatelyfiled on May 2, 2005. The settlement amount was approximately equal toamounts previously accrued and, accordingly, there was no gain or lossrecognized in fiscal 2005.

During 2005, the Company received approximately $1.9 millionas its portion of class-action settlement agreements with various suppliers ofraw materials. These recoveries were included in *Selling,general and administrative expenses* in the Consolidated Statement ofOperations for fiscal 2005.

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 former customer alleging breach of contract and other charges. The discoveryphase has recently begun and there is not currently enough information toformulate an assessment of the ultimate outcome of the claim. Therefore,management is not able to estimate the amount of such loss at this time. TheCompany intends to vigorously defend this action and believes that it hasreasonable arguments available in its defense. However, there is a possibilitythat resolution of this matter, or others that may arise in the normal courseof business, could result in a loss in excess of established reserves, if any.

During 2004, the Companysettled an issue under arbitration and received approximately $17.0 millionfrom Johnson & Johnson 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 *Arbitration settlement, net* in theConsolidated Statement of Operations for the fiscal year ended January 1,2005.

**Note 21. Related Party Transactions**

The Company leased office space, previously serving asthe Company’s corporate headquarters, from an affiliate of the former ChiefExecutive Officer of the Company through August 31, 2003 at an approximateannual rental charge of $0.2 million. Shared service costs were charged tothe Company and approximated $0.6 million in 2003. In fiscal 2005, theCompany settled all outstanding litigation issues with the aforementionedaffiliate of the former Chief Executive Officer with respect to the lease andshared services. See Note 20 to the Consolidated Financial Statements foradditional details.

93

----

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

The Company executed aconsulting agreement in December 2004 with the Chairman of the Board ofDirectors to provide certain consulting services as an independent contractoron a month-to-month basis. The consulting agreement provided for a one-timeissuance of 25,000 shares of the Company’s restricted shares authorizedpursuant to the Restricted Plan and payment of $20,000 per month. Compensationexpense recognized with respect to the consulting agreement during 2005 and2004 totaled $0.2 million and $0.4 million, respectively, and isincluded in *Selling, general andadministrative expenses* in the Consolidated Statements ofOperations. Effective December 31, 2005, the Company and the Chairman ofthe Board of Directors terminated the consulting agreement.

**Note 22. QuarterlyResults of Operations (Unaudited)**

Quarterly financial data forthe fiscal year ended December 31, 2005 and the fiscal year ended January 1,2005 is presented below (amounts in thousands, except for per share data). All2005 and 2004 fiscal quarters were comprised of 13 weeks.

*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 | ) |   |

 

During the fourth quarter of 2005, the Companyreceived approximately $1.1 million as its portion of class-actionsettlement agreements with various suppliers of raw materials. The Company alsoreceived approximately $0.9 million as settlement of a supply arrangementwith a raw material provider.

During the fourth quarter of2005, the Company recognized an income tax expense of $0.5 million on apre-tax loss of $1.9 million. The effective tax rate for the quarter wasunfavorably impacted by losses in the U.S. and other jurisdictions for which notax benefit has been realized, as well as an adjustment to tax accrualsrecorded through the previous three quarters.

94

----

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

*Quarterly data for fiscal 2004:*

| ** **                                       | ** ** | **Fourth Quarter  Ended  January 1, 2005** | ** ** | **Third Quarter  Ended  October 2, 2004** | ** ** | **Second Quarter  Ended  July 3, 2004** | ** ** | **First Quarter  Ended  April 3, 2004** | ** ** |
|--------------------------------------------------|------------|-----------------------------------------------------------|------------|----------------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|
| *Operating data:*                                |       |                                                      |       |                                                     |       |                                                   |       |                                                   |       |   |   |   |   |   |   |   |   |
| Net sales                                        |       |                                                      | $          | 223,535                                                  |       |                                                   |       | $                                                      | 204,554    |   |   |   | $ | 210,403 |   |   |   | $ | 206,242 |   |   |
| Gross profit                                     |       |                                                      | 43,173     |                                                     |       |                                                   | 35,534     |                                                   |       |   | 36,779 |   |   |   | 37,976 |   |   |
| Net income (loss)                                |       |                                                      | 8,375      |                                                     |       |                                                   | (596       | )                                                      |       |   | 5,723 |   |   |   | (8,770 | ) |   |
| Accrued dividends on  PIK Preferred Shares       |       |                                                      | 2,342      |                                                     |       |                                                   | 1,953      |                                                   |       |   | 1,271 |   |   |   | — |   |   |
| Income (loss)  applicable to common shareholders |       |                                                      | 6,033      |                                                     |       |                                                   | (2,549     | )                                                      |       |   | 4,452 |   |   |   | (8,770 | ) |   |
| Income (loss) per  common share—basic       |       |                                                      | $          | 0.58                                                     |       |                                                   |       | $                                                      | (0.25      | ) |   |   | $ | 0.45 |   |   |   | $ | (1.00 | ) |   |
| Income (loss) per common  share—diluted     |       |                                                      | $          | 0.46                                                     |       |                                                   |       | $                                                      | (0.25      | ) |   |   | $ | 0.36 |   |   |   | $ | (1.00 | ) |   |

 

The fourth quarter of 2004 included a curtailment gainof $3.6 million related to amendments to various postretirement benefitplans as described in Note 13 to the Consolidated Financial Statements.

During the fourth quarter of2004, the Company recognized an income tax benefit of $0.2 million. Theeffective tax rate for the quarter was favorably impacted by profits generatedin certain jurisdictions which experienced losses in previous periods for whichno tax benefit had been realized, as well as an adjustment for excess taxaccruals in previous quarters.

**Note 23. SupplementalCash Flow Information**

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

| ** **                                               | ** ** | **Successor** | ** ** | **Predecessor** | ** ** |
|----------------------------------------------------------|------------|---------------|------------|-----------------|------------|
| ** **                                               | ** ** | **2005**      | ** ** | **2004**        | ** ** | **Ten Months Ended  January 3, 2004** | ** ** | **Two Months Ended  March 1, 2003** | ** ** |
| Cash payments of  interest, net of amounts capitalized   |       | $             | 34,139     |            | $          | 37,764 |   |   | $ | 42,066 |   |   |   | $ | 12,409 |   |   |
| Cash payments (refunds) of  income taxes, net of refunds |       | (9,705        | )          | 6,827           |       |   | 6,102 |   |   |   | 1,120 |   |   |
|                                                          |            |               |            |                 |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Noncash transactions in 2005 included: (i) theconversion or redemption of 62,926 shares of the Company’s PIK Preferred Sharesinto approximately 8,629,346 shares of the Company’s Class A CommonStock, (ii) the issuance of 10,200 PIK Preferred Shares aspayment-in-kind, in lieu of cash payment, of approximately $10.3 millionof dividends on the Company’s PIK Preferred Shares, which resulted in anadditional non-cash dividend charge of approximately $21.5 million inexcess of the amounts accrued at the stated dividend rate of 16.0% on the PIKPreferred Shares and (iii) the accrual of $1.8 million of dividendson the PIK Preferred Shares from the date of the last dividend declaration dateto the date the PIK Preferred Stock were redeemed or converted to Class ACommon Stock.

95

----

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

Noncash transactions in 2004 included (i) theissuance of 1,327,177 shares of the Company’s Class A Common Stockand 19,359 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 millionof dividends on the PIK Preferred Shares.

Noncash transactions in 2003 included the payment inkind in lieu of cash payment of $3.7 million of interest expense on theJunior Notes.

96

----

**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 31,2005.

*Management’s Report onInternal Control over Financial Reporting*

Management is responsible for establishing andmaintaining adequate internal control over financial reporting for the Company assuch term is defined in Rule 13a-15(f) of the Exchange Act. Internalcontrol over financial reporting is a process designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with accounting principlesgenerally accepted in the United States and includes those policies andprocedures that (i) pertain to the maintenance of records that inreasonable detail accurately and fairly reflect the transactions anddispositions of the Company’s assets; (ii) provide reasonable assurancethat transactions are recorded as necessary to permit preparation of financialstatements in accordance with accounting principles generally accepted in theUnited States, and that receipts and expenditures of the Company are being madeonly in accordance with authorizations of the Company’s management anddirectors; and (iii) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use or disposition of the Company’sassets that could have a material 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.

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 31, 2005. 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 31,2005. 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.

97

----

*Changes in InternalControl over Financial Reporting*

There were no changes in theCompany’s internal control over financial reporting in the fourth quarter of2005 that have materially affected, or are reasonably likely to materiallyaffect, the Company’s internal control over financial reporting.

**Report of Independent Registered Public AccountingFirm**

Board of Directors and Shareholders ofPolymer 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) maintainedeffective internal control over financial reporting as of December 31, 2005,based on criteria established in Internal Control—Integrated Framework issuedby the Committee of Sponsoring Organizations of the Treadway Commission (COSO).Polymer Group, Inc.'s management is responsible for maintaining effectiveinternal control over financial reporting and for its assessment of theeffectiveness of internal control over financial reporting. Our responsibilityis to express an opinion on management's assessment and an opinion on theeffectiveness of the company's internal control over financial reporting basedon our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards 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. Acompany's internal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, in reasonabledetail, accurately and fairly reflect the transactions and dispositions of theassets of the company; (2) provide reasonable assurance that transactions arerecorded as necessary to permit preparation of financial statements inaccordance with generally accepted accounting principles, and that receipts andexpenditures of the company are being made only in accordance withauthorizations 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. maintained effective internal control over financial reporting asof December 31, 2005, is fairly stated, in all material respects, based on COSOas described in the introductory paragraph. Also in our opinion, Polymer Group,Inc. maintained, in all material respects, effective internal control overfinancial reporting as of December 31, 2005, based on COSO as described in theintroductory paragraph.

98

----

We also have audited, in accordance with the standardsof the Public Company Accounting Oversight Board (United States), theconsolidated balance sheet of Polymer Group, Inc. as of December 31, 2005, andthe related consolidated statements of operations, changes in shareholders’equity and comprehensive income (loss) and cash flows for the fiscal year endedDecember 31, 2005 and our report dated March 15, 2006 expressed an unqualifiedopinion on those financial statements.

/s/ GRANT THORNTON LLP

Columbia, South CarolinaMarch 15, 2006

99

----

**ITEM 9B.**        OTHERINFORMATION

None.

**PART III**

**ITEM 10.**          DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT

Information required by this Item is set forth under the captions “Electionof Directors” and “Management” in the definitive proxy materials of theCompany, which information is incorporated herein by reference.

Information on the beneficial ownership reporting for the Company’sdirectors and executive officers is contained under the caption “Section 16(a) BeneficialOwnership Reporting Compliance” in the definitive proxy materials of theCompany, which information is incorporated herein by reference.

Information on the Company’s Audit Committee and Audit CommitteeFinancial Expert is set forth under the caption “Information About the Board ofDirectors” in the definitive proxy materials of the Company, which informationis incorporated herein by reference.

The Company has a Code of Conduct that applies to allofficers and employees, including the Company’s Chief Executive Officer, ChiefFinancial Officer and other key financial and accounting officers. The Code ofConduct can be found 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 is set forthunder the captions “Executive Compensation” and “Compensation of Directors” inthe definitive proxy materials of the Company, which information isincorporated herein by reference.

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

Information required under this Item is set forth under the caption “SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters” in the definitive proxy materials of the Company, which information isincorporated herein by reference.

The following table provides certain information as ofDecember 31, 2005 with respect to our equity compensation 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 |       |                                                                                                                                                      | 400,000    |                                                                                                             |       |                                                                                                                                                                                                                  | $          | 6.00 |   |   |   | — |   |   |
| Total                                                   |       |                                                                                                                                                      | 400,000    |                                                                                                             |       |                                                                                                                                                                                                                  | $          | 6.00 |   |   |   | — |   |   |

 

100

----

**ITEM 13.**          CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS

Information required underthis Item is set forth under the caption “Certain Relationships and RelatedTransactions” in the definitive proxy materials of the Company, whichinformation is incorporated herein by reference.

**ITEM 14.**          PRINCIPALACCOUNTANT FEES AND SERVICES

Information required under this Item is set forthunder the caption “Fees Paid to Grant Thornton LLP and Ernst & YoungLLP” in the definitive proxy materials of the Company, which information isincorporated herein by reference.

101

----

**PART IV**

**ITEM 15. EXHIBITS AND FINANCIAL STATEMENTSCHEDULES**

**(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.

·  Report of Ernst & Young LLP, IndependentRegistered Public Accounting Firm.

·       ConsolidatedBalance Sheets as of December 31, 2005 and January 1, 2005.

·       ConsolidatedStatements of Operations for the fiscal years ended December 31, 2005 and January 1,2005, the ten months ended January 3, 2004 and the two months ended March 1,2003.

·       ConsolidatedStatements of Changes in Shareholders’ Equity and Comprehensive Income (Loss)for the fiscal years ended December 31, 2005, January 1, 2005, theten months ended January 3, 2004 and the two months ended March 1,2003.

·       ConsolidatedStatements of Cash Flows for the fiscal years ended December 31, 2005, January 1,2005, the ten months ended January 3, 2004 and the two months ended March 1,2003.

·       Notes to ConsolidatedFinancial Statements for the fiscal years ended December 31, 2005, January 1,2005, the ten months ended January 3, 2004 and the two months ended March 1,2003.

**(a)   2.**   FinancialStatement Schedules

Schedule II—Valuationand Qualifying 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 inconnection with this Annual Report on Form 10-K are listed below. Certainexhibits are incorporated by reference to other documents on file with the Securitiesand Exchange Commission, with which they are physically filed, to be a part ofthis report as of their respective dates.

102

----

 

| Exhibit Number | ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                       | **Document   Description** | ** ** |
|----------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------|------------|
| 2.1            |       | Joint Second Amended  Modified Plan of Reorganization of Polymer Group, Inc. and its Affiliated  Debtors dated November 25, 2002.(1)                                                                                                                                                                                                                                                                                  |
| 2.2            |       | Confirmation Order entered  by the United States Bankruptcy Court for the District of South Carolina  dated January 16, 2003.(2)                                                                                                                                                                                                                                                                                      |
| 3.1            |       | Amended and Restated  Certificate of Incorporation of the Company.(3)                                                                                                                                                                                                                                                                                                                                                 |
| 3.2            |       | Amended and Restated By-laws  of the Company.(4)                                                                                                                                                                                                                                                                                                                                                                      |
| 4.1            |       | Shareholders Agreement dated  as of March 5, 2003.(5)                                                                                                                                                                                                                                                                                                                                                                 |
| 4.2            |       | Amendment No. 1 to  Shareholders Agreement, dated as of December 20, 2004 (6)                                                                                                                                                                                                                                                                                                                                         |
| 10.1           |       | Credit Agreement, dated as  of April 27, 2004 among Polymer Group, Inc. as Borrower, the Lenders referred  to therein, Citicorp North America, Inc. as Administrative Agent, Documentation  Agent, First Lien Collateral Agent, Second Lien Collateral Agent and  Syndication Agent, and Citigroup Global Markets Inc., as Sole Lead Arranger  and Sole Bookrunner (the “2004 Credit Agreement’’).(7)* |
| 10.2           |       | Security Agreement, by  Polymer Group, Inc., and the domestic subsidiaries party thereto, as  Grantors, and Citicorp North America, Inc. as First Lien Collateral Agent and  Second Lien Collateral Agent, dated as of April 27, 2004.(8)*                                                                                                                                                                            |
| 10.3           |       | Pledge Agreement, by Polymer  Group, Inc., and the domestic subsidiaries party thereto, as pledgors, and  Citicorp North America, Inc. as First Lien Collateral Agent and Second Lien  Collateral Agent, dated as of April 27, 2004.(9)*                                                                                                                                                                              |
| 10.4           |       | Guarantee Agreement, dated  as of April 27, 2004 among each of the subsidiaries listed on Schedule I  thereto of Polymer Group, Inc.and Citicorp North America, Inc. as First Lien  Collateral Agent, Second Lien Collateral Agent and Administrative Agent.  (10)*                                                                                                                                                   |
| 10.5           |       | Letter Agreement, dated  April 11, 2003, between Polymer Group, Inc. and Matlin Patterson Global  Opportunities Partners L.P.(11)                                                                                                                                                                                                                                                                                     |
| 10.6           |       | Master Separation Agreement  among Polymer Group, Inc., Galey & Lord, Inc. and DT Acquisition Inc.,  dated January 29, 1998.(12)                                                                                                                                                                                                                                                                                  |
| 10.7           |       | Consulting Agreement  executed on December 15, 2004 between Polymer Group, Inc. and William B.  Hewitt (effective December 9, 2004).(13)*                                                                                                                                                                                                                                                                             |
| 10.8           |       | Amendment No. 2 to the 2004  Credit Agreement Credit Agreement.(14)*                                                                                                                                                                                                                                                                                                                                                  |
| 10.9           |       | 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.                                                                                               |
| 10.10          |       | 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.                                                                                                                                                                                                                         |
| 10.11          |       | 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.                                                                                                                                                                                                                           |
| 10.12          |       | 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.                                                                                                                                                                                                  |
| 10.13          |       | 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). (15)                                                                                                |

103

----

 

| 10.14 |   | Executive Employment Agreement dated March 30, 2004  between Polymer Group, Inc. and James L. Schaeffer. (16)**            |
|-------|--------|----------------------------------------------------------------------------------------------------------------------------|
| 10.15 |   | Executive Employment  Agreement dated as of October 27, 2003 between Polymer Group, Inc. and Willis  C. Moore, III. (17)** |
| 10.16 |   | Polymer Group, Inc. 2003  Stock Option Plan. (18)**                                                                        |
| 10.17 |   | Polymer Group, Inc. 2003  Stock Option Plan Amendments. (19)**                                                             |
| 10.18 |   | Polymer Group, Inc. 2004  Restricted Stock Plan. (20)**                                                                    |
| 10.19 |   | Polymer Group, Inc. 2005  Stock Option Plan. (21)**                                                                        |
| 10.20 |   | Form of Stock Option  Agreement for 2003 Plan. (22)**                                                                      |
| 10.21 |   | Polymer Group, Inc.  Short-Term Incentive Compensation Plan. (23)**                                                        |
| 21    |   | List of Subsidiaries of the  Company.                                                                                      |
| 23.1  |   | Consent of Grant Thornton  LLP, Independent Registered Public Accounting Firm.                                             |
| 23.2  |   | Consent of Ernst & Young  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.                                              |

----

(1)   Incorporatedby reference to Exhibit 2.1 of the Company’s Annual Report on Form 10-K filedwith the SEC on March 31, 2004.

(2)   Incorporatedby reference to Exhibit 2.2 of the Company’s Annual Report on Form 10-K filedwith the SEC on March 31, 2004.

(3)   Incorporatedby reference to Exhibit 99.1 of the Company’s Quarterly Report on Form 10-Qfiled with the SEC on November 12, 2003.

(4)   Incorporatedby reference to Exhibit 4.1 of the Company’s Quarterly Report on Form 10-Qfiled with the SEC on May 16, 2005.

(5)   Incorporatedby reference to Exhibit 10.3 of the Company’s Quarterly Report on Form 10-Qfiled with the SEC on May 19, 2003.

(6)   Incorporatedby reference to Exhibit 4.7 of the Company’s Annual Report on Form 10-K filedwith the SEC on March 29, 2005.

(7)   Incorporatedby reference to Exhibit 99.1 of the Company’s Current Report on Form 8-K filedwith the SEC on April 30, 2004.

(8)   Incorporatedby reference to Exhibit 99.2 of the Company’s Current Report on Form 8-K filedwith the SEC on April 30, 2004.

(9)   Incorporatedby reference to Exhibit 99.3 of the Company’s Current Report on Form 8-K filedwith the SEC on April 30, 2004.

(10) Incorporatedby reference to Exhibit 99.4 of the Company’s Current Report on Form 8-K filedwith the SEC on April 30, 2004.

(11) Incorporatedby reference to Exhibit 10.4 of the Company’s Quarterly Report on Form 10-Qfiled with the SEC on May 19, 2003.

(12) Incorporatedby reference to Exhibit 4.3 of the Company’s Current Report on Form 8-K/A filedwith the SEC on April 14, 1998.

104

----

(13) Incorporatedby reference to Exhibit 99.1 of the Company’s Current Report on Form 8-K filedwith the SEC on December 17, 2004.

(14) Incorporatedby reference to Exhibit 99.1 of the Company’s Current Report on Form 8-K filedwith the SEC on March 21, 2005.

(15) Incorporatedby reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Qfiled with the SEC on May 16, 2005.

(16) Incorporatedby reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Qfiled with the SEC on August 22, 2005.

(17) Incorporatedby reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Qfiled with the SEC on August 22, 2005.

(18) Incorporatedby reference to Exhibit 4.3 of the Company’s Registration Statement on Form S-8filed with the SEC on December 14, 2004.

(19) Incorporatedby reference to Annex I of the Company’s Definitive Proxy Statement on Schedule14A filed with the SEC on April 15, 2005.

(20) Incorporatedby reference to Exhibit 4.3 of the Company’s Registration Statement on Form S-8filed with the SEC on December 14, 2004.

(21) Incorporatedby reference to Annex III of the Company’s Definitive Proxy Statement onSchedule 14A filed with the SEC on April 15, 2005.

(22) Incorporatedby reference to Exhibit 4.4 of the Company’s Registration Statement on Form S-8filed with the SEC on December 14, 2004.

(23) Incorporatedby reference to Annex II of the Company’s Definitive Proxy Statement onSchedule 14A filed with the SEC on April 15, 2005.

*     Theseagreements have been terminated and there are no remaining obligations pursuantthereto. These documents are filed as exhibits to this Annual Report on Form10-K pursuant 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.

 

105

----

**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** | ** ** |
| Successor:                                    |       |                                           |       |                                          |       |                                                 |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Fiscal Year ended  December 31, 2005** |       |                                           |       |                                          |       |                                                 |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Allowance for doubtful  accounts              |       |                                           | $          | 9,725                                         |       |                                                 |       | 1,350             |       |   |   | 48 | (4) |   |   | 1,537 | (2) |   |   | $ | 9,586 |   |   |
| Valuation allowance for deferred tax assets   |       |                                           | 103,854    |                                          |       |                                                 | 2,681      |              |       |   | — |   |   |   | 7,999 | (4)(7) |   |   | 98,536 |   |   |
| Plant realignment                             |       |                                           | 561        |                                          |       |                                                 | 9          |              |       |   | (32 | ) |   |   | 375 | (3) |   |   | 163 |   |   |
| **Fiscal  Year ended January 1, 2005**   |       |                                           |       |                                          |       |                                                 |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Allowance for doubtful  accounts              |       |                                           | $          | 13,570                                        |       |                                                 |       | (1,427            | )(1)       |   |   | 869 | (4) |   |   | 3,287 | (2) |   |   | $ | 9,725 |   |   |
| Valuation allowance for deferred tax assets   |       |                                           | 100,751    |                                          |       |                                                 | 3,103      |              |       |   | — |   |   |   | — |   |   |   | 103,854 |   |   |
| Plant realignment                             |       |                                           | 4,564      |                                          |       |                                                 | 1,867      |              |       |   | 39 |   |   |   | 5,909 | (3) |   |   | 561 |   |   |
| **Ten  months ended January 3, 2004**    |       |                                           |       |                                          |       |                                                 |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Allowance for doubtful  accounts              |       |                                           | $          | 13,394                                        |       |                                                 |       | 1,670             |       |   |   | 408 | (4) |   |   | 1,902 | (2) |   |   | $ | 13,570 |   |   |
| Valuation allowance for deferred tax assets   |       |                                           | 85,677     |                                          |       |                                                 | 10,651     |              |       |   | — |   |   |   | (4,423 | )(4)(6) |   |   | 100,751 |   |   |
| Plant realignment                             |       |                                           | 785        |                                          |       |                                                 | 6,802      |              |       |   | — |   |   |   | 3,023 | (3) |   |   | 4,564 |   |   |
| Predecessor:                                  |       |                                           |       |                                          |       |                                                 |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Two  months ended March 1, 2003**      |       |                                           |       |                                          |       |                                                 |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Allowance for doubtful  accounts              |       |                                           | 12,945     |                                          |       |                                                 | 507        |              |       |   | 120 | (4) |   |   | 178 | (2) |   |   | 13,394 |   |   |
| Valuation allowance for deferred tax assets   |       |                                           | 160,614    |                                          |       |                                                 | 5,699      |              |       |   | — |   |   |   | 80,636 | (5) |   |   | 85,677 |   |   |
| Plant realignment                             |       |                                           | 893        |                                          |       |                                                 | 4          |              |       |   | 1,158 | (5) |   |   | 1,270 | (3) |   |   | 785 |   |   |

----

(1)            Reserve adjustments of $2,577, net of current yearprovision of $1,150.

(2)            Uncollectible accounts written-off and priceconcessions.

(3)            Cash payments and adjustments.

(4)            Foreign currency translation adjustments.

(5)            Fresh start adjustment.

(6)            Basis study adjustment.

(7)    Netreductions due to realizations of deferred tax assets.

106

----

**SIGNATURES**

**Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized.**

|                            | POLYMER GROUP, INC. |
|----------------------------|--------------------------|
|                       | By:                      |   | /s/ WILLIS C. MOORE, III |
| Date: March 16,  2006 |                     |   | Willis C. Moore, III*Chief Financial Officer* |

 

**Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below by the followingpersons on behalf of the registrant in the capacities indicated on March 16,2006.**

|                            | **Signature** | ** **                            | ** ** |  | **Title** | ** ** | ** ** |
|----------------------------|---------------|---------------------------------------|------------|--|-----------|------------|------------|
|                       |          |                                  |       |
| /s/ JAMES L.  SCHAEFFER    |          | Chief Executive Officer and  Director |       |
| James L. Schaeffer         |          |                                  |       |
| /s/ WILLIS C. MOORE, III   |          | Chief Financial  Officer              |       |
| Willis C. Moore, III       |          |                                  |       |
| /s/ WILLIAM B. HEWITT |          | Chairman of the Board  of Directors   |       |
| William B. Hewitt          |          |                                  |       |
| /s/ PEDRO A. ARIAS    |          | Director                              |       |
| Pedro A. Arias             |          |                                  |       |
| /s/ RAMON BETOLAZA         |          | Director                              |       |
| Ramon Betolaza             |          |                                  |       |
|                       |          | Director                              |       |
| Lap Wai Chan               |          |                                  |       |
| /s/ EUGENE LINDEN     |          | Director                              |       |
| Eugene Linden              |          |                                  |       |
| /s/ JAMES A. OVENDEN  |          | Director                              |       |
| James A. Ovenden           |          |                                  |       |
| /s/ MICHAEL WATZKY    |          | Director                              |       |
| Michael Watzky             |          |                                  |       |

 

 

107

----