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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

For the transition period from                              to                             

Commission file number 1-14330

POLYMER GROUP, INC.
(Exact name of registrant as specified in its charter)

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

Securities registered pursuant to Section 12(g) of the Act

        Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter 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 ý No o

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2) Yes o No ý

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

        The aggregate market value of the Company's voting stock held by nonaffiliates as of April 8, 2003 was approximately $24.7 million (based on the average of the closing bid and ask price of the Class A common stock on the OTC Bulletin Board). As of April 8, 2003, there were 8,125,869 shares of Class A common stock, 399,978 shares of Class B common stock and 118,449 shares of Class C common stock outstanding. No shares of Class D or Class E were outstanding as of such date. The par value for each class of common stock is $.01 per share.

Documents Incorporated By Reference

Notice of 2003 Annual Meeting of Stockholders and Proxy Statement—Part III

PART I

ITEM 1. BUSINESS

        Polymer Group, Inc. (the "Company"), a global manufacturer and marketer of nonwoven and oriented polyolefin products, currently operates in two business segments that include Consumer and Industrial and Specialty. The Company incurred net losses of $419.6 million, $247.6 million and $4.3 million during fiscal 2002, 2001 and 2000, respectively. As a result, a comprehensive financial and business restructuring was undertaken beginning in 2001 and continuing into 2002. After extensive reorganization efforts, the Company and each of its domestic subsidiaries filed voluntary petitions for Chapter 11 reorganization under the United States Bankruptcy Code in the South Carolina Bankruptcy Court on May 11, 2002 (April 25, 2002 as to Bonlam (S.C.), Inc.). The Company and these subsidiaries have operated under the jurisdiction of the Bankruptcy Court since such filing. In its efforts to emerge from Chapter 11, the Company filed a Modified Plan (as defined) on November 27, 2002 that was approved by the Bankruptcy Court on January 16, 2003 and accordingly, the Company emerged from Chapter 11 effective March 5, 2003 (the "Effective Date").

        The Modified Plan generally resulted in the: (i) restructuring of the Company's Prepetition Credit Facility by entering into a Restructured Credit Facility (each as defined); (ii) retirement of in excess of $591.5 million of the Company's obligations under the Senior Subordinated Notes; (iii) payment in full of virtually all Critical Business Relations Claims (as defined); and (iv) cancellation of the Company's old common stock and issuance of new common stock and warrants. The Company entered into Amendment No. 1 to the Restructured Credit Facility ("Amendment No. 1"), effective as of March 29, 2003, to provide the Company with additional flexibility in meeting the financial covenants under terms of the Restructured Credit Facility. A complete discussion of Amendment No. 1 and certain other matters is contained in "Recent Developments" within this Annual Report on Form 10-K.

General

        The Company is one of the largest producers of spunmelt and spunlace products in the world, and employs the most extensive range of nonwovens technologies that allows it to supply products tailored to customers' needs at competitive prices. Nonwovens provide certain qualities similar to those of textiles at a significantly lower cost.

        The Company supplies engineered materials to a number of the largest consumer and industrial products manufacturers in the world. The Company has a global presence with an established customer base in both developed and developing markets. The Company's product offerings are sold principally to converters that manufacture a wide range of end-use products.

        The Company operates twenty-five manufacturing facilities (including its joint ventures in Argentina, China and Turkey) located in eleven countries and is currently the only nonwovens producer that utilizes essentially all of the established nonwovens process technologies. The Company believes that the quality of its manufacturing operations and the breadth of its nonwovens process technologies give it a competitive advantage in meeting the needs of its customers and in leading the development of an expanded range of applications. The Company has invested in advanced technology in order to increase capacity, improve quality and develop new high-value structures. Working as a developmental partner with its major customers, the Company utilizes its technological capabilities and depth of research and development resources to develop and manufacture new products to specifically meet their needs.

        Management has built the Company through a series of capital expansions and business acquisitions that have broadened the Company's technology base, increased its product lines and expanded its global presence. Moreover, the Company's worldwide resources have enabled it to better meet the

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needs of existing customers, to serve emerging geographic markets, and to exploit niche market opportunities through customer-driven product development.

        See "Chapter 11 Proceedings" and "Recapitalization" in this Annual Report on Form 10-K for a comprehensive discussion of the Company's financial restructuring undertaken in fiscal 2002.

Industry Overview

        The Company competes primarily in the worldwide market for nonwovens, which is an approximately $11.6 billion market with an average annual sales growth rate of 7% - 8% expected over each of the next five years, according to industry sources. The nonwovens industry began in the 1950s when paper, textile and chemical technologies were combined to produce new fabrics and products with the attributes of textiles but at a significantly lower cost. Today, nonwovens are used in a wide variety of consumer and industrial products as a result of their superior functionality and relatively low cost.

        The nonwovens industry has benefited from substantial improvements in technology over the past several years, which have increased the number of new applications for nonwovens and, therefore increased demand. The Company believes, based on industry sources, that demand in the developed markets of North America, Western Europe and Japan will increase at an average rate of 6.5% - 7.5% in each of the next five years, while the emerging markets are forecasted to grow at an average rate of 8.5% - 9.5% per annum. In the developed markets, growth will be driven primarily by new applications for nonwovens, while growth in the emerging markets will be volume driven as per capita income rises in these countries. According to industry sources, worldwide consumption of nonwovens has grown an average of 7.0% per year over the last ten years. The Company believes that future growth will depend upon the continuation of improvements in raw materials and technology, which should result in the development of high-performance nonwovens, leading to new uses and markets at a lower cost than alternative materials.

        Nonwovens are categorized as either disposable (approximately 55% of worldwide industry sales with an average annual growth rate of 7% - 8%, according to industry sources), which is the category in which the Company primarily competes, or durable (approximately 45% of worldwide industry sales and an average annual growth rate of 7% - 8%, according to industry sources). The largest end uses for disposable nonwovens are for applications that include disposable diapers, feminine sanitary protection, baby wipes, adult incontinence products, and healthcare applications, including surgical gowns and drapes and wound care sponges and dressings. Other disposable end uses include wipes, filtration media, protective apparel and fabric softener sheets. Durable end uses include apparel interlinings, furniture and bedding construction sheeting, cable wrap, electrical insulation, alkaline battery cell separators, automotive components, geotextiles, roofing membranes, carpet backing, agricultural fabrics, durable papers and coated and laminated structures for wall coverings and upholstery.

        The Company also competes in the North American market for oriented polyolefin products. Chemical polyolefin products include woven, slit-film fabrics produced by weaving narrow tapes of slit film and characterized by high strength-to-weight ratios, and also include twisted slit film or monofilament strands. While the broad uncoated oriented polyolefin market is primarily focused on carpet backing fabric and, to a lesser extent, geotextiles and bags, the markets in which the Company primarily competes are made up of a large number of specialized products manufactured for niche applications. These markets include industrial packaging applications such as lumberwrap, steel wrap and fiberglass packaging, as well as high-strength protective coverings and specialized components that are integrated into a variety of industrial and consumer products.

Business Strategy

        The Company's goals are to grow its core businesses while developing new technologies to capitalize on new product opportunities and expanded geographic markets. The Company strives to be

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a leading supplier in its chosen markets by delivering high-quality products and services at competitive prices. The Company is committed to continuous improvements throughout its business to increase product value by incorporating new materials and operating capabilities that enhance or maintain performance specifications. The Company seeks to expand its capabilities to take advantage of the penetration and growth of its core products internationally, particularly in developing countries. Over the past nine years, the Company's sales from manufacturing facilities outside the United States have increased from approximately $28.0 million in 1993 to approximately $404.6 million in 2002.

Products

        The Company develops, manufactures and sells a broad array of nonwovens and oriented polyolefin products. Sales are focused in two product segments that provide opportunities to leverage the Company's advanced technology and substantial capacity. These product segments include Consumer and Industrial and Specialty. (See Note 18. "Segment Information" and Note 19. "Geographic Information.")

Consumer Segment

        The Consumer segment includes products within the hygiene, consumer wiping and medical categories. Sales of products in the Consumer segment represented approximately 55%, 57% and 56%, or $417.9 million, $463.6 million and $486.3 million, of the Company's consolidated net sales for 2002, 2001 and 2000, respectively.

        The Company produces a variety of nonwoven materials for use in diapers, training pants, feminine sanitary protection, adult incontinence, baby wet wipes and consumer wiping products. The Company's broad product offerings provide customers with a full range of specialized components for unique or distinctive products, including top sheet, transfer layer, backsheet fabric, leg cuff fabric, sanitary protective facings, absorbent pads for incontinence guard, panty shield, and absorbent cores applications. In addition, the Company's medical products are used in wound care sponges and dressings, disposable surgical packs, apparel such as operating room gowns, drapes for operating rooms, face masks and shoe covers.

        The Company has significant relationships with several large consumer product companies and supplies a full range of products to these customers on a global basis. The Company's marketing and research and development teams work closely as partners with these customers in the development of next generation products. The Company believes that this technical support ensures that the Company's products will continue to be incorporated into such customers' future product designs.

Industrial and Specialty Segment

        The Industrial and Specialty segment includes products such as cable wrap, house wrap, furniture and bedding applications, landscape and agriculture products, protective apparel, automotive, filtration, flexible packaging, and industrial wiping products used in clean room, food service, institutional and janitorial applications. Sales of products in the Industrial and Specialty segment represented approximately 45%, 43% and 44%, or $337.8, $352.0 million and $375.7 million, of the Company's consolidated net sales for 2002, 2001 and 2000, respectively.

        The Company's flexible packaging products utilize coated and uncoated oriented polyolefin fabrics that are used as lumberwrap, fiberglass packaging tubes, balewrap for synthetic cotton and fibers, steel and aluminum wrap, and coated bags for specialty chemicals and mineral fibers. Industrial wiping products include: (i) branded and unbranded, light to heavyweight, cloth wipes, towels and aprons; (ii) medium to heavyweight open weave towels; and (iii) cleaning and sanitizing wipes. Products for the industrial, janitorial and institutional markets include light to heavy-duty towels and cloths sold under a

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variety of trademarks. Specialty wipes consist of products designed to meet customer requirements and specifications.

Marketing and Sales

        The Company sells to customers in the domestic and international marketplace. Approximately 47%, 24%, 13%, 13% and 3% of the Company's 2002 net sales were from manufacturing facilities in the United States, Europe, Canada, Latin America and Asia, respectively. The Procter & Gamble Company, which is the Company's largest customer, accounted for 12.4% of the Company's 2002 net sales. Sales to the Company's top 20 customers represented approximately 47% of the Company's 2002 net sales.

        The Company employs direct sales representatives who are active in the Company's new product development efforts and are strategically located in the major geographic regions in which the Company's products are utilized. The oriented polyolefin products are sold primarily through a well-established network of converters and distributors. Converters add incremental value to the Company's products and service the small order size requirements typical of many end users.

Manufacturing Processes

        General.    The Company's competitive strengths include high-quality manufacturing processes and a broad range of process technologies, which allow the Company to offer its customers the best-suited product for each respective application. Additionally, the Company has made significant capital investments in modern technology and has developed proprietary equipment and manufacturing techniques. The Company believes that it exceeds industry standards in productivity, reduction of variability and delivery lead-time. The Company has a wide range of manufacturing capabilities that allow it to produce specialized products that, in certain cases, cannot be reproduced in the market. Substantially all of the Company's manufacturing sites have plant-wide real time control and monitoring systems that constantly monitor key process variables using a sophisticated closed loop system of computers, sensors and custom software.

        Nonwovens.    The Company believes that it has a comprehensive array of nonwoven manufacturing technologies that encompasses capabilities spanning the entire spectrum of nonwoven technologies. Nonwoven rollgoods typically have three process steps: web formation, web consolidation or bonding, and finishing. Web formation is the process by which previously prepared fibers, filaments or films are arranged into loosely held networks called webs, batts or sheets. In each process, the fiber material is laid onto a forming or conveying surface, which may be dry, wet or molten. The dry-laid process utilizes textile fiber processing equipment, called "cards," that have been specifically designed for high-capacity nonwoven production. The carding process converts bales of entangled fibers into uniform oriented webs that then feed into the bonding process. The wet-laid process utilizes papermaking technology in which the fibers are suspended in a water slurry and deposited onto a moving screen, allowing the water to pass through and the fibers to collect. In a molten polymer-laid process, extrusion technology is used to transform polymer pellets into filaments, which are laid on a conveying screen and interlocked by thermal fusion. In this process, the fiber formation, web formation and web consolidation are generally performed as a continuous simultaneous operation, making this method very efficient.

        Web consolidation is the process by which the fibers or film 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 or adhesive bond, hydroentanglement or spunlace, binder fiber or through-air bond, calender, spunbond, meltblown, SMS, ultrasonic bond and needlepunch. Thermal bond utilizes heated calender rolls with embossed patterns to point bond or fuse the fibers together. In the resin bond process, an adhesive, typically latex, is pad rolled onto the web to achieve a bond. Spunlace, or hydroentanglement, uses high pressure water jets to mechanically entangle the fibers. Through-air bonding takes place through the fusion of

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bi-component fibers in a blown hot air drum. Spunbond and meltblown take advantage of the melt properties of the resins and may use thermal fusion with the aid of calender rolls. SMS and SMMS are integrated processes of combining spunbond and meltblown sheets in a laminated structure, creating very strong, lightweight and uniform fabrics. Ultrasonic bonding utilizes high-frequency sound waves that heat the bonding sites. Needlepunch is a mechanical process in which beds of needles are punched through the web, entangling the fibers.

        Finishing, or post-treatment, adds value and functionality to the product and typically includes surface treatments for fluid repellency, aperturing, embossing, laminating, printing and slitting. Spunlace and resin bond systems also have a post-treatment drying or curing step. Certain products also 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 extruded into a thin plastic film or into monofilament strands. The film is slit into narrow tapes. The slit tapes or monofilament strands are then stretched or "oriented," the process through which it derives its high strength. The tapes are wound onto spools that feed weaving machines or twisters. In the finishing process, the product is coated for water or chemical resistance, ultraviolet stabilization and protection, flame retardancy, color and other specialized characteristics. In the twisting process, either oriented slit tapes or monofilament strands are twisted and packaged on tightly spooled balls for distribution as agricultural and commercial twine. The Company operates coating lines that have been equipped with the latest technology for gauge control, print treating, lamination, anti-slip finishes and perforation. The Company also laminates oriented products to paper and has the additional capability of printing multiple colors on a wide-width printing press located in North America.

Competition

        The Company's primary competitors in its industrial and specialty product markets are: E.l. du Pont de Nemours & Co. ("DuPont"), Freudenberg Nonwovens L.P. ("Freudenberg") and BBA Group plc ("BBA") for nonwoven products; and Intertape Polymer Group Inc. and Amoco Fabrics and Fibers Co. for oriented polymer products. Generally, product innovation and performance, quality, service and cost are the primary competitive factors, with technical support being highly valued by the largest customers.

        The Company's primary competitors in its consumer product markets are DuPont, BBA and Kimberly—Clark Corporation and First Quality Enterprises, Inc. Generally, cost, distribution, utility, variety and innovation of product offerings, and technical capacity are the principal factors considered in consumer product end uses.

Raw Materials

        The primary raw materials used to manufacture most of the Company's products are polypropylene resin, polyester and polyester fiber, polyethylene and, to a lesser extent, rayon, tissue paper and cotton. The prices of polypropylene and polyethylene are a function of, among other things, manufacturing capacity, demand and the price of crude oil and natural gas liquids. Historically, the prices of polypropylene and polyethylene resins have fluctuated. During 2000, resin prices increased significantly resulting in increased raw material prices. This adversely affected the Company's results of operations because soft demand prevented the Company from passing such increased costs to its customers.

        During January 2003, several suppliers of key raw materials, including polypropylene and polyethylene, announced price increases to take effect beginning as early as February 2003. The Company has historically been able to pass along at least a portion of such raw material price increases to some of its customers, particularly those with contracts containing raw material price escalation clauses, although often with a delay between the time the Company is required to pay the increased raw material price and the time the Company is able to pass the increase on to its customers. To the extent the Company is not able to pass along all or a portion of such increased prices of raw materials, the Company's cost of

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goods sold would increase and its earnings before interest, taxes, depreciation and amortization ("EBITDA") would correspondingly decrease. By way of example, if the price of polypropylene were to rise $.01 per pound, and the Company was not able to pass along any of such increase to its customers, the Company would realize a decrease of approximately $2.0 million on an annualized basis in its reported EBITDA. There can be no assurance that the prices of polypropylene and polyethylene will not continue to increase in the future or that the Company will be able to pass on any increases to its customers. Material increases in raw material prices that cannot be passed on to customers could have a material adverse effect on the Company's results of operations and financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Raw Material and Commodity Risks" within this Annual Report on Form 10-K for additional discussion of the impact of higher raw material costs on the Company's operations in 2002 and 2001.

        The Company primarily purchases its polypropylene resin from Indelpro, S.A. de C.V. and Exxon Mobil Chemical Company with smaller quantities purchased from Arco Polypropylene LLC and Sunoco, Inc. The Company's major suppliers of polyester and polyester fiber is Wellman, Inc. Novacor Chemicals Inc. is the Company's major supplier for polyethylene, and Crown Vantage Inc. is the major supplier of its tissue paper. The Company's major supplier of polypropylene fiber is FiberVisions L.L.C.

        The Company believes that the loss of any one or more of its suppliers would not have a long-term material adverse effect on the Company because other manufacturers with whom the Company conducts 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 arrangements were secured. As a result of the Company's financial condition, certain suppliers requested alternative payment provisions. However, such alternative payment provisions have not currently had a significant negative impact on the Company's liquidity. In addition, there can be no assurance that any new supply arrangements entered into by the Company will have terms as favorable as those contained in current supply arrangements. The Company has not experienced any significant disruptions in 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 and protection of the environment. Among the many environmental requirements applicable to the Company are laws relating to air emissions, wastewater discharges and the handling, disposal and release of solid and hazardous substances and wastes. Based on continuing internal review, the Company believes that it is currently in substantial compliance with applicable environmental requirements.

        The Company is also subject to laws, such as CERCLA, that may impose liability retroactively and without fault for releases or threatened releases of hazardous substances at on-site or off-site locations. The Company is not aware of any releases for which it may be liable under CERCLA or any analogous provision.

        Actions by federal, state and local governments in the United States and abroad concerning environmental matters could result in laws or regulations that could increase the cost of producing the products manufactured by the Company or otherwise adversely affect demand for its products. For example, certain local governments have adopted ordinances prohibiting or restricting the use or disposal of certain plastic products, such as certain of the plastic wrapping materials, which are produced by the Company. Widespread adoption of such prohibitions or restrictions could adversely affect demand for the Company's products and thereby have a material adverse effect upon the Company. In addition, a decline in consumer preference for plastic products due to environmental considerations could have a material adverse effect upon the Company.

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        The Company does not currently anticipate any material adverse effect on its operations, financial condition or competitive position as a result of its efforts to comply with environmental requirements. Some risk of environmental liability is inherent, however, in the nature of the Company's business, and there can be no assurance that material environmental liabilities will not arise. It is also possible that future developments in environmental regulation could lead to material environmental compliance or cleanup costs.

Patents and Trademarks

        The Company considers its patents and trademarks, in the aggregate, to be important to its business and seeks to protect this proprietary know-how in part through United States and foreign patent and trademark registrations. The Company maintains over 100 registered trademarks and over 150 patents in the United States. In addition, the Company maintains certain trade secrets for which, in order to maintain the confidentiality of such trade secrets, it has not sought patent protection.

Inventory and Backlogs

        Inventories at December 28, 2002 were approximately $115.7 million, a decrease of $0.3 million over inventories at December 29, 2001 of $116.0 million. The Company had approximately 66 days of inventory on hand at December 28, 2002 versus 63 days of inventory on hand at December 29, 2001, an increase of approximately 5%. Unfilled orders as of December 28, 2002 and December 29, 2001 amounted to approximately $44.6 million and $48.0 million, respectively. The decline in unfilled orders at the end of 2002 versus 2001 is due primarily to lower sales volume.

Research and Development

        The Company's investment in research and development approximated $16.3 million, $17.0 million and $18.9 million during 2002, 2001 and 2000, respectively.

Seasonality

        Use and consumption of the Company's products does not fluctuate significantly due to seasonality.

Employees

        As of December 28, 2002, the Company employed approximately 3,772 persons. Of this total, approximately 1,528 employees are represented by labor unions or trade councils that have entered into separate collective bargaining agreements with the Company. Approximately 11.8% of the Company's labor force is covered by collective bargaining agreements that will expire in 2003. During 2002 there were no unionizing attempts. The Company considers its employee relations to be good.

Business Restructuring

        During the first quarter of 2001, the Company announced that its operating results would be substantially below previous expectation due to a number of factors that were a carry-over from 2000. First, demand for certain high margin products did not return to forecasted levels resulting in certain specialized manufacturing assets remaining underutilized. Second, the commercialization periods for certain APEX® programs were longer than anticipated, and the expected ramp-up of APEX® products failed to materialize in 2001. Third, raw material prices did not decline as anticipated, and soft demand prevented the Company from passing the increased raw material costs along to customers. Fourth, pricing pressure and margin erosion within the spunmelt technologies continued to impact results of operations and the company experienced order reductions and an unfavorable shift in product mix due to certain customers' adjustments, and demand for certain consumer products failed to accelerate as

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originally expected. Finally, the Company experienced increased interest costs as a result of failing to comply with the covenants in the Prepetition Credit Facility

        The Company anticipated that the confluence of negative economic and business factors would generally subside during the latter half of 2001, particularly in the fourth quarter. However, the anticipated recovery within the Company's business did not develop as planned in the latter half of 2001; therefore, the Company undertook a comprehensive business restructuring involving manufacturing initiatives and workforce reductions, including voluntary attrition, of approximately 160 employees in the U.S. and approximately 190 employees in Europe. As a result of the realignment, the Company recorded a pre-tax charge of $5.8 million during the fourth quarter of 2001. The total charge in the fourth quarter of 2001 consisted of personnel and facility closing costs. In addition, during mid-2001, the Company undertook a smaller restructuring of its operations in order to reduce costs, predominantly in the U.S. that primarily involved headcount reductions of approximately 90 employees. Accordingly, the Company recorded a pre-tax charge of $1.7 million during the second quarter of 2001. Each of the plant realignment programs in 2001 occurred predominantly within the Nonwovens Division.

        The Company's restructuring program continued into 2002 on a smaller scale than that which was undertaken in 2001. Such restructurings included reductions in headcount of approximately 54 employees and facility closing costs in the U.S. as business processes were rationalized in the Oriented Polymers Division. The total plant realignment charge in 2002 and 2001 related to the restructuring approximated $8.5 million. Cash outlays in 2002 and 2001 associated the Company's business restructuring approximated $7.6 million.

Chapter 11 Proceedings

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

        Because the Company was unable to reduce amounts outstanding under the Prepetition Credit Facility through asset dispositions on acceptable terms, the services of Miller, Buckfire & Lewis (f/k/a Dresdner Kleinwort Wasserstein, Inc.) were retained on October 2, 2001 as the financial advisor to assist in exploring various restructuring options. From November of 2001 through February of 2002, the Company conducted extensive negotiations with several potential investors and various other constituents in an effort to establish viable restructuring options. During this same time period, some of these potential investors conducted due diligence investigations of the Company and its operations.

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        In evaluating the various restructuring options, the Company decided to maintain negotiations with MatlinPatterson Global Opportunities Partners L.P. (f/k/a CSFB Global Opportunities Investment Partners, L.P.) ("GOF"), the holder of approximately 67% of the outstanding Senior Subordinated Notes (as defined herein). The Company determined that GOF afforded the highest probability of a transaction being completed with terms that provided an overall acceptable level of value to the various stakeholders. Members of the Company's senior management, GOF and their respective advisors held discussions concerning the terms of a proposed recapitalization transaction. The discussions focused primarily on the overall level of investment in the Company and the nature of that ownership. As a result of these extensive negotiations, the Company executed a term sheet with GOF on March 15, 2002 setting forth the proposed terms of a recapitalization plan, including a financial restructuring.

        The material elements of the financial restructuring included: (i) GOF contributing $50 million in cash and $394.4 million of the Senior Subordinated Notes 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 under an amended credit facility, all in exchange for approximately 22.4 million newly issued shares of common stock of the Company (after taking into account a 1-for-10 reverse common stock split), representing 87.5% ownership of the Company; (ii) the holders of at least 95% of the aggregate principle amount of the Senior Subordinated Notes not owned by GOF exchanging their notes for either new senior subordinated notes or new senior subordinated discount notes; and (iii) the Company entering into an amended credit facility with its Senior Secured Lenders (collectively, the "Exchange Offer").

        On March 25, 2002, during the pendency of the Exchange Offer, without any prior notice, a group of creditors (the "Petitioning Creditors") holding approximately $41.3 million of the Company's outstanding Senior Subordinated Notes filed an involuntary bankruptcy petition (the "Involuntary Petition") against the Company in the United States Bankruptcy Court for the District of South Carolina (the "South Carolina Bankruptcy Court"). On April 2, 2002, the Company reached an agreement (the "Dismissal Agreement") with the Petitioning Creditors, which provided for the South Carolina Bankruptcy Court to dismiss the involuntary petition (the "Dismissal Order") subject to a twenty-day period during which parties-in-interest could object to that dismissal. The twenty-day period commenced on April 5, 2002, the day on which notice of the dismissal was published in the national edition of the Wall Street Journal. On April 26, 2002, the South Carolina Bankruptcy Court entered the Dismissal Order.

        The Dismissal Agreement also provided that the Company would seek an amendment of the Prepetition Credit Facility to permit it to file a voluntary petition for one of its wholly owned, South Carolina—registered subsidiaries in the South Carolina Bankruptcy Court. Pursuant to Amendment No. 7, dated as of April 4, 2002, the Senior Secured Lenders agreed to amend the Prepetition Credit Facility to permit this filing. On April 23, 2002, the Debtors filed a voluntary petition for Bonlam (S.C.), Inc. ("Bonlam (S.C.)"), in the South Carolina Bankruptcy Court. The Dismissal Agreement further provided that the Company would extend the expiration of the Exchange Offer through May 15, 2002. The Company and GOF also agreed to forbear through, and including, May 15, 2002, from implementing any modifications to the Senior Subordinated Notes and the indentures governing them. The Petitioning Creditors agreed to forbear through and including, May 12, 2002 (the "Forbearance Period"), from exercising any and all remedies under the applicable indentures, the Senior Subordinated Notes or any applicable law, including any filing of an involuntary petition against any of the Debtors. During the Forbearance Period, the Company agreed (i) not to file a voluntary petition for relief under the Bankruptcy Code in a jurisdiction other than Columbia, South Carolina, and (ii) to contest any involuntary petition under the Bankruptcy Code filed in any such other jurisdiction, in each case, without the prior written consent of the Petitioning Creditors. GOF and the Petitioning Creditors agreed not to file an involuntary petition against the Company in any venue other than the South Carolina Bankruptcy Court.

        The Company, GOF and the Petitioning Creditors intended that the Dismissal Agreement would provide a framework for the Company and other parties, including the Petitioning Creditors, to continue

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to negotiate the terms of a potential restructuring of the Company through May 12, 2002. Negotiations proceeded, but the Company and Petitioning Creditors did not reach an agreement on a consensual restructuring. Meanwhile, the uncertainty created by the Involuntary Petition caused further deterioration in the Company's businesses. The Company determined that it was in the best interest of its creditors and other constituencies to seek the protections afforded by filing voluntary petitions for protection under Chapter 11 of the United States Code (the "Bankruptcy Code"). Accordingly, on May 11, 2002 (the "Filing Date" or "Petition Date"), the Company and each of its domestic subsidiaries (together with the Company, the "Debtors") filed voluntary petitions for "pre-negotiated" reorganization (the "Chapter 11 Filings" or the "Filings") under the Bankruptcy Code in the South Carolina Bankruptcy Court. The Chapter 11 Filings were being jointly administered for procedural purposes only. The Company's direct and indirect foreign subsidiaries and foreign joint venture entities did not file petitions under Chapter 11 and were not the subject of any bankruptcy proceedings. To facilitate stabilizing operations during the Chapter 11 Filings, the Debtors secured a $125 million commitment (the "Commitment") for debtor-in-possession financing (the "DIP Facility") from a group of financial institutions, some of which were Senior Secured Lenders (the "DIP Lenders") that provided the Debtors sufficient liquidity to operate during the Chapter 11 Filings. JPMorgan Chase Bank was the Agent for the DIP Lenders under the DIP Facility. Pursuant to the DIP Facility, the Debtors paid certain fees to the DIP Lenders, including a structuring fee of 0.85% of the Commitment, an underwriting fee of 1.65% of the Commitment as well as certain other fees.

        To enhance the Debtors' ability to implement a restructuring and to emerge from Chapter 11 as efficiently as possible with an improved debt structure, the Debtors (a) obtained the requisite approval from a substantial majority of the Senior Lenders (the "Supporting Senior Lenders") to restructure the Prepetition Credit Facility and (b) executed the Support Agreement, dated as of May 10, 2002, with GOF, pursuant to which GOF agreed to support a joint plan of reorganization. The Debtors paid a commitment fee to the Supporting Senior Lenders of approximately $4.3 million in consideration of their agreeing to the terms contained in the bank term sheet. The Debtors agreed to file by May 24, 2002, a Chapter 11 plan of reorganization (the "Plan") and disclosure statement that were consistent with the term sheets agreed upon with each of the Supporting Senior Secured Lenders and GOF. With the support of these substantial creditors, the Debtors were seeking to emerge from Chapter 11 in an expeditious manner. Beginning on May 23, 2002 and on other subsequent dates, GOF agreed to extend the deadline for filing such Plan and disclosure statement until June 14, 2002.

        On June 14, 2002, the Company filed the Plan with the South Carolina Bankruptcy Court. The Plan generally proposed (i) the restructuring of the Prepetition Credit Facility, including a $50 million principal reduction, (ii) the retirement of in excess of $591.5 million of the Debtors' obligations under the Senior Subordinated Notes, in exchange for the right of the holders of such Notes to receive either (x) their pro rata share of 100% of the newly issued Class A Common Stock of the reorganized Company (prior to the conversion of the preferred stock or new senior notes, each referred to below) (which would be diluted by any conversion of the New Preferred Stock), (y) for each $1,000 in principal of Senior Subordinated Notes held, $120 in principal of New Junior Subordinated Notes bearing interest at 11% payable in cash or (z) for each $1,000 in principal amount of existing Senior Subordinated Notes held, $150 in principal amount of new Junior Subordinated PIK Notes, with interest at 7.5% payable in kind and 3.5% payable in cash, (iii) no impairment of the Debtors' other unsecured creditors, (iv) a $50 million investment by GOF and eligible electing holders of Senior Subordinated Notes in exchange for convertible preferred stock convertible into 44% of the newly issued common stock of the reorganized Company (after giving effect to the conversion thereof and excluding PIK dividends thereon) (the "New Preferred Stock"), (v) the issuance by GOF and eligible electing holders of Senior Subordinated Notes of a $25 million letter of credit to secure the Debtors' proposed amortization payments to the Senior Lenders (which if drawn, would be evidenced by New Senior Subordinated Notes) and (vi) the retention by existing shareholders of 100% of the newly issued Class B Common Stock (which would not be diluted by any conversion of

11

the New Preferred Stock) and certain warrants for up to an additional 9.5% of the reorganized Company's common stock, as of the effective date of reorganization (which would be subject to dilution by conversion of the New Preferred Stock), exercisable at specified value targets for the Company. In connection with the new investment, GOF had agreed to act as a standby purchaser to ensure that all of the shares of New Preferred Stock offered by the Company were purchased and that the new investment generated gross proceeds of $50.0 million in cash and resulted in $25.0 million of exit letters of credit in place. The Company was to pay GOF a fee of $500,000 for acting as standby purchaser in connection with the new investment.

        At a hearing, which took place on August 15, 2002, and concluded on August 20, 2002, the South Carolina Bankruptcy Court approved the Company's Disclosure Statement relating to the Plan of Reorganization, as amended and filed on August 21, 2002, over the Committee's objection. The Plan was not confirmed and thus the Company filed the Modified Plan as more fully discussed below and in Note 28. "Recapitalization."

Chapter 11 Costs and Financial Restructuring Expenses

        Prior to the Petition Date, the Company classified expenses related to its financial restructuring efforts as "Special charges" in the consolidated statement of operations. Such charges consist of professional and other related services that have been expensed as incurred. After the Petition Date, costs related to the Company's reorganization activities are also expensed as incurred and have been classified as "Chapter 11 reorganization expenses" in accordance with SOP 90-7. The cumulative amount of costs and expenses related to the Company's financial restructuring efforts, including bank financing fees, through fiscal 2002 have been approximately $26.0 million.

Recapitalization

        On November 27, 2002, the Company filed the Joint Amended Modified Plan of Reorganization (the "Modified Plan"). The Modified Plan consisted of: (i) the restructuring of the Prepetition Credit Facility, including a payment (the "Secured Lender Payment") of $50.0 million on the Effective Date to the agent for the benefit of the Senior Secured Lenders under the Prepetition Credit Facility, which Secured Lender Payment was exclusive of the proceeds (the "Chicopee Sale Proceeds") from the sale of the South Brunswick facility owned by Chicopee, Inc., (ii) payment of 100% of the Chicopee Sale Proceeds to the agent for the benefit of the Senior Secured Lenders, (iii) a minimum $5.0 million additional prepayment out of existing cash-on-hand, (iv) the retirement of in excess of $591.5 million of the Debtors' obligations under the Senior Subordinated Notes, wherein each Holder of the Senior Subordinated Notes and other general unsecured creditors (other than claims of certain vendors who supplied goods and services to the Debtors during the bankruptcy and with whom the Debtors intended to do business after emerging from bankruptcy ("Critical Vendor Claims") and claims held by non-debtor subsidiaires of the Company ("Intercompany Claims")) (together constituting the "Class 4 Claims") had the right to receive on, or as soon as practicable after the Effective Date, (x) its pro rata share of Class A Common Stock in exchange for each $1,000 of its allowed claim or (y) at the election of each holder who was a Qualified Institutional Buyer (as defined in the Modified Plan and the 1933 Securities Act), its pro rata share of Class C Common Stock, (v) the Critical Vendor Claims and Intercompany Claims were not impaired, (vi) each holder of an allowed Class 4 Claim that elected to receive Class A Common Stock was given the option to take part in the new investment in the Convertible Notes (the "New Investment") by choosing 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) GOF issued, 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 the Restructured Credit Facilities pursuant to a bank term sheet, for which GOF was entitled to 10% senior subordinated notes due 2007 (the "New Senior Subordinated Notes") equal to the amount (if any) drawn against the Exit Letters of Credit (plus any

12

advances made by GOF solely in lieu of drawings under the Exit Letters of Credit), (viii) holders of the Company's existing common stock ("Old Polymer Common Stock") received 100% of the Class B Common Stock (which will not be diluted by any conversions of the Convertible Notes) in exchange for their Old Polymer Common Stock interests; such holders also received pro rata shares of the new Series A and Series B Warrants (as discussed below).

        Under the Modified Plan, all common stock of the reorganized Company (the "New Polymer Common Stock") was the same class (the "Class A Common Stock"), with the exception of (i) separate classes (the "Class D Common Stock" and "Class E Common Stock") to be issued upon exercise of the Series A and Series B Warrants (as defined below), (ii) the 4% of New Polymer Common Stock designated as "Class B Common Stock" issued to the holders of Old Polymer Common Stock, and (iii) a small percentage (the "Class C Common Stock") issued to holders of Class 4 Claims, who contributed such stock to the Special Purpose Entity ("SPE"). The Class C Common Stock shall pay a dividend payable equal to the lesser of (i) 1% per annum of the principal amount of the promissory notes issued by the SPE or (ii) $1.0 million per annum. Shares of New Polymer Common Stock (other than Class A Common Stock) are convertible into shares of Class A Common Stock on a one-for-one basis.

        The holders of Old Polymer Common Stock received two series 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 of securities by the reorganized Company ("New Polymer") at a price below the fair market value of such securities if offered to all New Polymer common stock holders and (iii) specified anti-dilution protection for sales of securities by New Polymer at a discount that exceeds 25% of the fair market value of such securities and which will not terminate upon a transaction with GOF or an affiliate of GOF. Except as set forth in the preceding sentence, the Series A and Series B Warrants do not have anti-dilution provisions. In addition, the cash dividend payment by New Polymer described above in connection with the Class C Common Stock is excluded from the calculation of cumulative distributions for all purposes relating to the Series A Warrants, the Series B Warrants, the Class D Common Stock and the Class E Common Stock. The New Polymer Common Stock received by the holders of Class 4 Claims and the Holders of Old Polymer Common Stock and which will be issued upon conversion of the Convertible Notes is subject to dilution upon the exercise of the Series A Warrants and Series B Warrants.

        The Modified Plan also provided that, on the Effective Date, in consideration of GOF acting as the standby purchaser for the New Investment, and in consideration of GOF's role in facilitating a consensual resolution of the disputes among the parties involved in the negotiation of the Modified Plan, New Polymer paid GOF a Standby Purchaser fee of $2.0 million and an arrangement and plan facilitation fee of $2.0 million.

        Refer to "Certain Indebtedness" for a discussion of the Senior Subordinated Note Purchase Agreement (as defined) and the Convertible Subordinated Notes (as defined) pursuant to the Modified Plan.

Recent Developments

        On March 11, 2003, the Company's Chief Executive Officer was replaced by James L. Schaeffer. The Company and its former Chief Executive Officer are currently involved in a dispute with respect to the amount and timing of certain severance payments to be made to its former Chief Executive Officer, as well as other matters.

        On April 11, 2003, GOF entered into an agreement with the Company (the "GOF Agreement") pursuant to which GOF agreed to undertake certain actions solely for the purpose of assisting the Company in maintaining compliance with the financial covenants contained in the Restructured Credit Facility during the period beginning on March 6, 2003, and ending on January 4, 2004 as follows. GOF has agreed to amend the New Senior Subordinated Note (as defined) and the Junior Notes (as defined) it beneficially owns or controls (approximately $38 million aggregate principal amount) to provide that

13

interest that accrues from March 6, 2003 until January 31, 2005 on the New Senior Subordinated Note and from March 6, 2003 until January 5, 2004 on the Junior Notes, may be paid by the Company issuing additional aggregate principal amount of debt securities rather than paying such interest in cash. In the event the Company is unable to meet the senior leverage covenant, interest covenant or adjusted interest covenant contained in the Restructured Credit Facility, the Company is permitted to instruct the Agent under the Restructured Credit Agreement to make a drawing under the Exit Letter of Credit and apply the amount of the drawing to repay indebtedness under the Restructured Credit Facility. GOF also has agreed that, in the event the Company is unable to comply with the leverage covenant under the Restructured Credit Facility, GOF will convert such amount of its Junior Notes into Class A Common Stock. Finally, in the event the Company has undertaken all the actions described above and is unable to meet the interest covenant solely for the 12-month period ending on the last day of the Company's third fiscal quarter of 2003, GOF will purchase up to $10 million aggregate principal amount of additional senior subordinated notes (with interest payable in additional principal amount of senior subordinated notes) or equity securities (the "New Investment") in order to allow the Company to repay indebtedness under the Restructured Credit Facility to meet such covenant. GOF's obligation to take any of these steps is conditioned on Amendment No. 1 remaining in full force and effect.

        As of March 29, 2003, the Company and the Senior Secured Lenders under the Restructured Credit Facility, entered into Amendment No. 1. Amendment No. 1 permitted the Company to take the actions described in the GOF Agreement, and also provides that in the event the Company repays indebtedness under the Restructured Credit Facility using the proceeds from the Exit Letter of Credit or New Investment, for purposes of the interest and adjusted interest covenants, the interest savings to the Company is calculated on a pro forma basis as if the cash pay indebtedness had been repaid as of March 6, 2003.

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DESCRIPTION OF CERTAIN INDEBTEDNESS

        DIP Facility—On May 13, 2002, the Debtors filed a motion seeking authority for the Company to enter into a credit facility of up to $125 million in debtor-in-possession financing with JPMorgan Chase Bank as administrative agent, which was approved by the Bankruptcy Court on May 29, 2002. Under such terms, the Company, as borrower, was permitted to make revolving credit borrowings in an amount not exceeding the lesser of $125 million or the Borrowing Base (as defined in the DIP Facility). The DIP Facility was to terminate and the borrowings thereunder were to be due and payable upon the earliest of (i) the maturity date (i.e. May 30, 2003), (ii) the date of the substantial consummation of a plan of reorganization that was confirmed pursuant to an order by the Bankruptcy Court and (iii) the acceleration of the revolving credit loans made by any of the banks who were a party to the DIP Facility and the termination of the total commitment under the DIP Facility. The interest rate applicable to borrowings under the DIP Facility and financial covenants were customary for financings of this type. Borrowings under the DIP Facility were guaranteed by each of the Company's direct and indirect domestic subsidiaries. There were no borrowings under the DIP Facility. The DIP Facility was terminated concurrently with the Company's emergence from Chapter 11.

        Prepetition Credit Facility—The Company's Credit Facility (as amended through and including Amendment No. 7 the "Prepetition Credit Facility") provided for secured revolving credit borrowings with aggregate commitments of up to $325.0 million and aggregate term loans of $275.0 million. Subject to certain terms and conditions, a portion of the Prepetition Credit Facility could be used for letters of credit of which approximately $13.9 million was outstanding on December 28, 2002. Amendment No. 6 imposed a limit of $260.0 million under the revolving portion of the Prepetition Credit Facility for borrowings and outstanding letters of credit, with not more than $15.0 million of such revolving borrowings permitted to be outstanding in Canadian dollar equivalent borrowings. Each and all of the direct and indirect domestic subsidiaries of the Company guaranteed all indebtedness under the Prepetition Credit Facility, on a joint and several basis. The Prepetition Credit Facility and the related guarantees were secured by (i) a lien on substantially all of the assets of the Company and its domestic subsidiaries, (ii) a pledge of all or a portion of the stock of the domestic subsidiaries of the Company and of certain non-domestic subsidiaries of the Company, (iii) a lien on substantially all of the assets of direct foreign borrowers (to secure direct borrowings by such borrowers), and (iv) a pledge of certain secured intercompany notes issued to the Company or one or more of its subsidiaries by non-domestic subsidiaries. Commitment fees under the Prepetition Credit Facility were generally equal to a percentage of the daily-unused amount of such commitment. The Prepetition Credit Facility contained covenants and events of default customary for financings of this type, to include leverage, fixed charge coverage and net worth. The revolving portion of the Prepetition Credit Facility was to terminate in June 2003. The term loan portion was to terminate in December 2005 and December 2006. The loans were subject to mandatory prepayment out of proceeds received in connection with certain casualty events, asset sales and debt issuances.

        The interest rate applicable to borrowings under the Prepetition Credit Facility was based on, in the case of U.S. dollar denominated loans, a specified base rate or a specified Eurocurrency base rate for U.S. dollars, at the Company's option, plus a specified margin. In the event that a portion of the Prepetition Credit Facility was denominated in Dutch guilders, the applicable interest rate was to be based on the specified Eurocurrency base rate for Dutch guilders, plus a specified margin. In the event that a portion of the Prepetition Credit Facility was to be denominated in Canadian dollars, the applicable interest rate is based on the specified Canadian base rate plus a specified margin or the bankers' acceptance discount rate at the Company's option.

        Under the terms of the Forbearance Agreement with the Senior Secured Lenders, the Company was prevented from making any additional borrowings under the Prepetition Credit Facility in excess of the amounts outstanding on December 30, 2001. In addition, all borrowings under the Prepetition Credit

15

Facility were required to be made under the base rate option. The Prepetition Credit Facility was restructured concurrently with the Company's emergence from Chapter 11.

        Senior Subordinated Notes—In March 1998, the Company issued $200 million of 8³/4% Senior Subordinated Notes due 2008 (the "March 1998 Notes") in a private placement transaction pursuant to an indenture dated as of March 1, 1998. In August 1998, the Company completed its exchange of $200 million of the March 1998 Notes, Series B (the "8³/4% Senior Subordinated Notes") which have been registered for public trading for all outstanding March 1998 Notes. In July 1997, the Company issued $400 million of 9% Senior Subordinated Notes due 2007 (the "July 1997 Notes") in a private placement transaction pursuant to an indenture dated as of July 1, 1997. In October 1997, the Company completed its exchange of the $400 million of July 1997 Notes, Series B (the "9% Senior Subordinated Notes"), which were registered for public trading for all the outstanding July 1997 Notes. The 8³/4% Senior Subordinated Notes and the 9% Senior Subordinated Notes (collectively, the "Senior Subordinated Notes") were unsecured senior subordinated indebtedness of the Company and were subordinated in right of payment to all existing and future senior indebtedness of the Company. The Senior Subordinated Notes were restructured concurrently with the Company's emergence from Chapter 11.

        Subsidiary Indebtedness—The Company's China-based majority owned subsidiary ("Nanhai") has a bank facility with a financial institution in China which is scheduled to mature in April 2004. At December 28, 2002, the approximate amount of outstanding indebtedness under the facility was $9.5 million. The Nanhai indebtedness is guaranteed 100% by the Company and to support this guarantee, a letter of credit has been issued by the Company's agent bank in the amount of $10.0 million. As a result of the Company's 80% majority ownership of Nanhai and full guarantee of the Nanhai bank debt, all amounts outstanding under the Nanhai bank facility are reflected in the Company's consolidated balance sheet. The Company's Argentina-based majority owned subsidiary ("DNS") has two bank facilities denominated in U.S. dollars of approximately $7.1 million at December 28, 2002 with current maturities of approximately $3.7 million. The facilities are scheduled to mature in 2004 and 2005 respectively. The full amount of such indebtedness is reflected on the Company's consolidated balance sheet at December 28, 2002 as a result of the Company's 60% majority ownership of this subsidiary; however, the minority shareholder guarantees 40% of such indebtedness. In order to support working capital requirements at Vateks Tekstil Sayani ve Ticaret AS ("Vateks"), an 80% majority owned subsidiary in Istanbul, Turkey, the Company has deposited through the European parent company of Vateks, approximately $6.5 million with a member of its European bank group who in turn has funded an approximate equivalent amount to Vateks. This deposit secures the amount owed by Vateks to the bank member.

        Restructured Credit Facility—As part of the Company's emergence from Chapter 11, the Prepetition Credit Facility was restructured into the Third Amended, Restated and Consolidated Credit Agreement dated as of March 5, 2003 (the "Restructured Credit Facility"). The Restructured Credit Facility provides for secured revolving credit borrowings with aggregate commitments of up to $50.0 million and aggregate term loans and term letters of credit of $435.3 million. Subject to certain terms and conditions, a portion of the Restructured Credit Facility may be used for revolving letters of credit. All borrowings under the Restructured Credit Facility are U.S. dollar denominated and are guaranteed, on a joint and several basis, by each and all of the direct and indirect domestic subsidiaries of the Company and certain non-domestic subsidiaries of the Company. The Restructured Credit Facility and the related guarantees are secured by (i) a lien on substantially all of the assets of the Company, its domestic subsidiaries and certain of its non-domestic subsidiaries, (ii) a pledge of all or a portion of the stock of the domestic subsidiaries of the Company and of certain non-domestic subsidiaries of the Company, and (iii) a pledge of certain secured intercompany notes issued to the Company or one or more of its subsidiaries by non-domestic subsidiaries. Commitment fees under the Restructured Credit Facility are equal to 0.75% of the daily unused amount of the revolving credit commitment. The Restructured Credit Facility contains covenants and events of default customary for financings of this type, including

16

leverage, senior leverage, interest coverage and adjusted interest coverage. The Restructured Credit Facility terminates on December 31, 2006. The loans are subject to mandatory prepayment out of proceeds received in connection with certain casualty events, asset sales and debt and equity issuances and from excess cash flow.

        The interest rate applicable to borrowings under the Restructured Credit Facility is based on a specified base rate or a specified Eurodollar base rate, at the Company's option, plus a specified margin. The applicable margin for revolving credit loans bearing interest based on the base rate is 2.75%, and the margin for revolving credit loans bearing interest on a Eurodollar rate is 3.75%. The applicable margin for term loans bearing interest based on the base rate will range from 4.00% to 8.00%, and the margin for term loans bearing interest on a Eurodollar rate will range from 5.00% to 9.00%, in each case based on the Company's ratio of senior consolidated indebtedness to consolidated EBITDA calculated on a rolling four quarter basis. In addition, if the Company's ratio of senior consolidated indebtedness to consolidated EBITDA calculated on a rolling four quarter basis exceeds 5.00 to 1, the Company is required to pay to the term loan lenders and the term letter of credit lenders a fee of 1.00% on the outstanding balance under the term loans and the term letters of credit.

        Senior Subordinated Note Purchase Agreement—In order to facilitate the issuance of a New Senior Subordinated Note in the amount of any drawing under the Exit Letter of Credit, MatlinPatterson Global Partners LLC, ("Matlin Global Partners") a limited liability company organized under the laws of Delaware, the Company and its domestic subsidiaries, as guarantors, entered into a Senior Subordinated Note Purchase Agreement (the "Senior Subordinated Note Purchase Agreement"), dated as of March 5, 2003, and pursuant thereto, the Company issued to Matlin Global Partners a New Senior Subordinated Note. The Senior Subordinated Note Purchase Agreement and Senior Subordinated Note provide that upon any drawing under the Exit Letter of Credit, the principal amount due under the New Senior Subordinated Note will automatically increase by the amount of such drawing. The Company is required to pay interest on any amount outstanding under the New Senior Subordinated Note semi-annually in arrears on January 1 and June 1 of each year, commencing on June 1, 2003, at a rate of 10% per annum, and default interest in an amount of 2% per annum will be payable on the principal amount in addition to the existing 10% rate. The Company shall, to the extent lawful, pay interest at a rate of 12% per annum on overdue interest. The Company's obligations under the Senior Subordinated Note Purchase Agreement and Senior Subordinated Note are guaranteed by the Company's domestic subsidiaries. Both the Company's obligations under the Senior Subordinated Note and the guarantees thereof are subordinate to the indebtedness outstanding under the Company's Restructured Credit Facility. The Senior Subordinated Note Purchase Agreement contains customary representations and warranties and standard default terms. Additionally, the Senior Subordinated Note Purchase Agreement contains affirmative and negative covenants of the Company with respect to (a) delivery of information, (b) transactions with affiliates, (c) limitation on indebtedness, (d) disposition of proceeds of asset sales, (e) limitation on restricted payments, (f) corporate existence, (g) limitation on liens, (h) future domestic subsidiary guarantors, (i) designation of unrestricted subsidiaries, and (j) mergers and similar transactions involving the Company or the guarantors.

        Convertible Subordinated Notes—In connection with the emergence from Chapter 11, the Company issued $50 million of 10% Convertible Subordinated Notes due 2007 (the "Junior Notes") pursuant to an indenture dated as of March 5, 2003 (the "Junior Indenture"). The Junior Notes are unsecured subordinated indebtedness of the Company and are subordinated in right of payment to all existing and future indebtedness of the Company which is not, by its terms, expressly junior to, or pari passu with, the Junior Notes. The Junior Notes are convertible into shares of Class A Common Stock, at an initial conversion price equal to $7.29 per share. The Junior Indenture contains several covenants, including limitations on: (i) indebtedness; certain restricted payments; liens; transactions with affiliates; dividend and other

17

payment restrictions affecting certain subsidiaries; guarantees by certain subsidiaries; certain transactions including merger and asset sales; and (ii) certain restrictions regarding the disposition of proceeds of asset sales.

Safe Harbor Statement

        This Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. In addition, from time to time, the Company or its representatives have made or may make forward-looking statements orally or in writing. Such forward-looking statements may be included in, but not limited to, various filings made by the Company with the Securities and Exchange Commission, press releases or oral statements made with the approval of an authorized executive officer of the Company. Actual results could differ materially from those projected or suggested in any forward-looking statements as a result of a variety of factors and conditions which include, but are not limited to: the emergence by the Company and its domestic subsidiaries from Chapter 11 of the United States Bankruptcy Code, adverse economic conditions, demand for the Company's products, competition in the Company's markets, dependence on key customers, increases in raw material costs, the amount of capital expenditures, fluctuations in foreign currency exchange rates, the Company's substantial leverage position, potential defaults in the Company's outstanding indebtedness, and other risks detailed in documents filed by the Company with the Securities and Exchange Commission.

ITEM 2. PROPERTIES

        The Company and its subsidiaries operate the following principal manufacturing plants and other facilities, all of which are owned, except as noted. All of the Company's owned properties are subject to liens in favor of the lenders under the Company's credit facilities.

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(1)

Leased.

(2)

Prior to December 2002, the Company owned this 239,200 square foot facility ("South Brunswick"), leased it to an unaffiliated tenant, and subleased 23,000 square feet from such tenant. During December 2002, the Company sold its South Brunswick facility for approximately $10.2 million, net of expenses of $0.4 million, at no material gain or loss. Proceeds from the sale were used to reduce amounts outstanding under the Restructured Credit Facility in 2003. Simultaneously, the Company entered into a lease arrangement for approximately 23,000 square feet of this facility to provide administrative office space within the Nonwovens Division.

(3)

Leased from an entity affiliated with one of the Company's stockholders. During January 2003, this lease was terminated at no cost to the Company.

(4)

60% interest joint venture with Sauler Group. During fiscal 2000, the Company acquired an additional 10% interest in DNS that brought its total ownership interest to 60%.

(5)

80% interest joint venture (Vateks) with Erol Tezman. The sales, marketing and administrative offices are in a 15,000 square foot leased facility.

(6)

80% interest joint venture (Nanhai Nanxin Non-Woven Co. Ltd.) with Nanhai Chemical Fiber Enterprises Co.

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(7)

Leased from an entity affiliated with one of the Company's stockholders.

ITEM 3. LEGAL PROCEEDINGS

        The Company is currently a party to various claims and legal actions that arise in the ordinary course of business. The Company currently believes such claims and legal actions, individually and in the aggregate, will not have a material adverse effect on the business, financial condition or results of operations of the Company.

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

        On November 27, 2002, the Company distributed its Modified Plan to its security holders which was voted on and approved by such holders as of January 16, 2003.

PART II

ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

        The following table sets forth for the calendar periods the high and low market price of the Company's common stock. Prior to March 5, 2003, all of the Company's common stock 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, Class B and Class C common stock will trade on the OTC Bulletin Board. As of March 5, 2003, 8,125,869 shares of Class A, 399,978 shares of Class B and 118,449 shares of Class C common stock were outstanding. An additional 1,355,480 shares of Class A common stock has been reserved for issuance pending the outcome of certain claims against the Company in connection with the Modified Plan. No shares of Class D or Class E common stock were outstanding as of such date. The Restructured Credit Facility prevents payments of dividends on all classes of common stock, except for Class C. Dividends on the Class C common stock are limited to an aggregate amount not exceeding $1.0 million in any fiscal year. The ticker symbols for the Class A and Class B common stock are POLGA and POLGB, respectively. No ticker symbol has been assigned to the Class C common stock.

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ITEM 6. SELECTED FINANCIAL DATA

        The following table sets forth certain historical financial information of the Company. The statement of operations data for each of the five years ended and the balance sheet data as of December 28, 2002, December 29, 2001, December 30, 2000, January 1, 2000 and January 2, 1999 have been derived from audited financial statements. The table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," the financial statements of the Company and related notes thereto and other information included elsewhere in this Annual Report on Form 10-K.

See Notes to Selected Consolidated Financial Data

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Notes to Selected Consolidated Financial Data

(a)

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



(b)

EBITDA is defined as operating income (loss) plus depreciation, amortization and Mexican statutory employee profit sharing and excludes unusual items consisting of asset impairment, plant realignment, special charges and other unusual items. EBITDA is presented because it is generally accepted as providing useful information regarding a company's ability to service and/or incur debt. EBITDA should not be considered in isolation from or as a substitute for net income, cash flows from operating activities and other consolidated income or cash flow statement data prepared in accordance with generally accepted accounting principles or as a measure of profitability or liquidity. The method of calculating EBITDA may not be consistent with the methodology used by other companies. This measure is presented because it is used in the Company's covenant calculations.



(c)

EBITDA margin represents EBITDA as a percentage of net sales.



(d)

Minority interest is included in other noncurrent liabilities in the consolidated balance sheet.

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ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of the Company's consolidated results of operations and financial condition. The discussion should be read in conjunction with the consolidated financial statements and notes thereto contained in Item 8 of this report on Form 10-K. In particular, this discussion should be read in conjunction with Note 3. "Chapter 11 Proceedings" and Note 28. "Recapitalization", which describe the filing by the Company and its domestic subsidiaries of voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code on May 11, 2002 and the financial restructuring associated with the Company's emergence from Chapter 11 effective March 5, 2003.

Results of Operations

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

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Comparison of Year Ended December 28, 2002 and December 29, 2001

        The following table sets forth components of the Company's net sales and operating income (loss) by market segment and operating division for 2002 and the corresponding decrease from 2001:

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Net Sales

        A reconciliation of the change in net sales between 2002 and 2001 is presented in the following table (in thousands):

        Consolidated net sales were $755.7 million for 2002, a decrease of $(59.9) million or (7.3)% over 2001 net sales of $815.6 million. The decrease in net sales was due primarily to lower sales volume and unfavorable foreign currencies versus the U.S. dollar. Sales volume decreased by $40.3 million and foreign currency had a negative impact on net sales of $14.6 million. On a consolidated basis, price / mix was approximately $5.0 million lower in 2002 versus 2001.

        Similar economic and business issues negatively impacted both the Consumer and Industrial and Specialty segments during 2002 as the Company's world-wide business continued to be unfavorably impacted by the financial restructuring efforts of the Chapter 11 process, including lost sales from existing customers. In addition, certain factors that contributed to lower than anticipated net sales in fiscal 2001 continued to negatively affect net sales in 2002. Within the Company's Nonwovens business, lower sales volume, predominantly in the U.S. hygiene, industrial and medical markets and lower sales volume within the European hygiene markets, offset volume gains in Latin America. Higher selling prices of $16.2 million were achieved in Argentina, but were offset by lower pricing in the U.S., Europe and Mexico / Colombia of approximately $21.2 million. Additionally, Industrial and Specialty segment sales volume was lower year over year within the Oriented Polymers Canadian businesses.

        Foreign currencies, predominantly in Argentina, were weaker against the U.S. dollar during 2002 compared to 2001. Further discussion of the effect of the devaluation of the Argentine peso on the Company's results of operations is contained in the Investing and Financing Activities portion of "Foreign Currency Exchange Rate Risk" in this Annual Report on Form 10-K.

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Operating Income (Loss)

        A reconciliation of the change in operating income between 2002 and 2001 is presented in the following table (in thousands):

        Consolidated operating loss was $(306.6) million in 2002. Excluding unusual items, which consist of asset impairment, plant realignment, special charges and other unusual items, consolidated operating income was approximately $18.6 million in 2002, a decrease of $(8.6) million or (31.7)%, over operating income before unusual items of $27.2 million in 2001. The decrease in operating income before unusual items was due to volume declines of $17.5 million predominantly within the Nonwovens U.S. hygiene, industrial and medical markets and European hygiene markets, weaker foreign currencies versus the U.S. dollar of $5.2 million, higher raw material costs of $11.1 million, lower price / mix of $5.0 million and all other, including higher manufacturing cost of $13.2 million offset by cost savings and other initiatives related to plant realignment and business restructuring of $30.6 million and lower depreciation and amortization charges of $13.9 million. In addition, administrative costs associated with historic Dominion entities were approximately $1.1 million higher in 2002 as compared to 2001. Refer to Note 23. "Certain Matters" for a discussion of the MSA between the Company and Galey. Such costs are quantified as a component in the Industrial and Specialty segment.

        Geographically, selling prices increased $16.2 million in the Company's Argentina business, but were offset by lower pricing in the U.S., Europe and Mexico / Colombia of approximately $21.2 million. Raw material costs increased approximately $7.8 million in Argentina which somewhat offset the favorable pricing achieved year over year within this geographic region.

        As discussed in Note 3. "Chapter 11 Proceedings" and Note 9. "Business Restructuring," the Company undertook a comprehensive financial and business restructuring of its operations in the latter part of fiscal 2001 in response to a confluence of negative economic and business factors. The restructuring has continued on a smaller scale through 2002. Accordingly, the cash component of the restructuring during 2002 has included workforce reductions and plant realignment predominantly in certain of the Oriented Polymers U.S. Industrial and Specialty business. Manufacturing and operating cost savings were realized within each business segment in 2002 as a result of the restructuring initiatives. However, volume declines and higher operating cost predominantly in the U.S. and weak foreign currency translation rates versus the U.S. dollar in Argentina, offset the cost savings achieved in 2002 within the Nonwovens Consumer and Industrial and Specialty segments. Additionally, the Oriented Polymers business within the Industrial and Specialty segment produced lower operating earnings in 2002 versus prior year due predominantly to lower sales volume and higher raw material and manufacturing costs. The restructuring program previously discussed also entailed the write down of long-lived assets, thus,

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non-cash depreciation and amortization expenses were lower in 2002 versus 2001 due to a lower depreciable fixed asset base in the U.S. and Europe and to the adoption of FAS 142 which requires that goodwill and intangibles with indefinite lives no longer be systematically amortized, but tested for impairment on at least an annual basis.

Asset Impairment, Plant Realignment and Other Unusual Charges

        Based on further reviews of the Company's long-lived assets and the continued decline in operating profits over the course of 2002, the Company recorded a non-cash charge in 2002 of approximately $317.9 million, consisting of the write-down of goodwill and other intangibles ($83.9 million) and machinery, equipment and buildings ($234.0 million) related predominantly to production assets within the U.S. and European Nonwovens business in accordance with FAS 142 and FAS 144. Approximately $1.1 million in charges were recognized in 2002 related to the continuation of the plant realignment and business restructuring program. The total charge consisted primarily of personnel costs within the Company's Oriented Polymers business. During 2002, the Company recorded non-cash charges of $2.6 million related to pension and post-retirement benefit costs pursuant to Galey's contemplated rejection of the MSA. Such costs consist of retiree benefits associated with certain Canadian benefit plans of Dominion that were previously shared with Galey. The Company classified these non-cash costs under the caption "Other unusual items" in the consolidated statement of operations for 2002.

        The restructuring related charges have not been allocated to the Company's reportable business segments, for reporting purposes, because the Company's management does not evaluate such charges on a segment-by-segment basis. Segment operating performance is measured and evaluated before unusual or special items.

Interest Expense and Other

        As of the Petition Date and in accordance with SOP 90-7, the Company discontinued accruing interest on the Senior Subordinated Notes and, as a result, interest expense decreased $27.9 million from $99.4 million in 2001 to $71.5 million in 2002. Interest on the Prepetition Credit Facility and other debt increased slightly due to debt remaining level quarter over quarter. The Company's effective borrowing rates during 2001 decreased; however, on April 11, 2001 and August 15, 2001, the Company's interest rate on its outstanding borrowings under the Prepetition Credit Facility increased by 50 basis points at each date. Additionally, the Company's effective borrowing rate for 2002 increased by an additional 200 basis points as a result of the default under the Prepetition Credit Facility.

        During 2002 the Company recognized investment losses of $1.8 million resulting predominantly from an unrealized, non-cash valuation loss on short term investments in accordance with Emerging Issues Task Force Topic D-44 "Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value." Such losses were previously classified as a component of Other Comprehensive Income (Loss) in the equity section of the balance sheet. The Company monetized its short-term investment portfolio in connection with the Modified Plan during the first quarter of 2003. Foreign currency and other losses increased $10.0 million, from $5.4 million in 2001 to $15.4 million in 2002 due primarily to the write-down of the Company's investment in the Saudi Line as discussed more fully in Note 20. "Foreign Currency and Other" and minority interest adjustments.

Chapter 11 Reorganization Expenses and Special Charges

        The Company incurred Chapter 11 reorganization expenses, including special charges, of $18.5 million during 2002. Such costs, consisting of professional and other related services and compensation costs related the Company's key employee retention program pursuant to Chapter 11, are expensed as incurred and are directly related to the Company's Chapter 11 reorganization efforts in

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accordance with SOP 90-7. Prior to the Petition Date, debt restructuring costs were expensed as incurred and classified as "Special charges" in the consolidated statement of operations.

Income Taxes (Benefit)

        The Company recorded an income tax benefit of $3.3 million in 2002, representing an effective tax benefit rate of 0.8%. The effective benefit rate differed from the statutory benefit rate as a of result of an increase in the Company's valuation allowance between 2002 and 2001, recorded primarily to provide reserves for net operating losses substantially generated during 2002 and to the non-deductible impairment charges recorded in fiscal 2002. During 2001, the Company recorded an income tax benefit of $25.8 million, representing an effective benefit rate of approximately 9.4%. The effective benefit rate differed from the statutory rate during 2001 due primarily to non-deductible charges, predominantly goodwill and to an increase in the Company's tax valuation allowance.

        Implementation of the Modified Plan will result in the Company recognizing cancellation of indebtedness income ("CODI"). All of the CODI will be excluded from taxable income. However, the Company will be required to reduce certain of its tax attributes, including net operating loss carryforwards ("NOLs"), by an amount not to exceed the CODI it realized. In general, tax attributes will be reduced at the close of the 2003 tax year in the following order: (i) net operating loss carryforwards; (ii) tax credits and capital loss carryforwards; and (iii) tax basis in assets. The Company is currently in the process of determining the amount of CODI and the corresponding reduction of its tax attributes and/or asset basis. It is anticipated that the Company's net operating loss carryforwards will be entirely eliminated in 2003 as a result of the reorganization under the Modified Plan.

Cumulative Effect of Change in Accounting Principle

        The Company recognized a cumulative effect of a change in accounting principle related to goodwill of approximately $12.8 million during fiscal 2002 pursuant to FAS 142.

Net Loss

        Net loss increased $172.1 million from a loss of $(247.6) million, or $(7.74) per diluted share, in 2001 to a loss of $(419.6) million, or $(13.11) per diluted share, in 2002 as a result of the above mentioned factors.

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Comparison of Year Ended December 29, 2001 and December 30, 2000

        The following table sets forth components of the Company's net sales and operating income (loss) by market segment and operating division for 2001 and the corresponding decrease from 2000:

Net Sales

        Consolidated net sales were $815.6 million in 2001, a decrease of $46.4 million or 5.4% over 2000 consolidated net sales of $862.0 million. The decrease in net sales was due primarily to lower sales volume of $19.4 million that is discussed in more detail below. Foreign currency had a negative impact

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on sales of $10.7 million and pricing pressure and product mix issues resulted in a decline in sales of $16.3 million.

        Consumer net sales were $463.6 million in 2001 compared to $486.3 million in 2000, a decrease of $22.7 million or 4.7%. Certain specialized manufacturing assets continued to be underutilized due to certain high margin consumer products not returning to historical sales levels. Competitive pricing pressure continued within the spunmelt market resulting in lower selling prices. Foreign currencies, predominantly in Europe and Canada were weaker against the U.S. dollar during 2001 compared to 2000. The reductions in sales have been partially offset by an increase in medical supplies sales that had been declining.

        Industrial and Specialty net sales were $352.0 million in 2001 compared to $375.7 million in 2000, a decrease of $23.7 million or 6.3%. The Company continued to experience product mix issues resulting in sales of lower margin products and lower selling prices. In addition, longer than anticipated commercialization periods for new products developed using the APEX® technology resulted in delayed sales. Sales also decreased as a result of weaker foreign currencies, predominantly in Europe and Canada, against the U.S. dollar in 2001 compared to 2000.

Operating Income (Loss)

        The consolidated operating loss for fiscal 2001 was $(163.3) million due primarily to unusual charges recorded during the fourth quarter that included asset impairment, plant realignment and special charges as discussed below. Excluding the unusual items, consolidated operating income was $27.2 million in 2001, a decrease of $57.4 million or 67.8% from 2000 consolidated operating income of $84.6 million due to lower operating results in each business segment. Consumer operating income before unusual charges was $29.1 million in 2001 compared to $62.2 million in 2000, a decrease of $33.1 million or 53.3%. Certain specialized manufacturing assets continued to be underutilized due to certain high margin consumer products not returning to historical sales levels. Competitive pricing pressure continued within the spunmelt technology resulting in lower selling prices. Foreign currencies, predominantly in Europe and Canada, were weaker against the U.S. dollar during 2001 compared to 2000. The cost of raw material inputs did not decrease as expected, and these costs could not be passed along to customers due to soft demand. Total consolidated energy costs have increased from 2000 to 2001 by approximately $4.4 million. Selling, general and administrative costs increased approximately $2.1 million as a result of the Company acquiring a majority share in its joint venture in Argentina during mid-2000 (See Note 4. "Acquisition").

        Industrial and Specialty operating loss before unusual charges was $(1.9) million in 2001 compared to $22.4 million in 2000, a decrease of $24.3 million or 108.5%. During 2001 the Company continued to experience product mix issues resulting in sales of lower margin products and lower selling prices. Commercialization periods for certain products developed using the APEX® technology were longer than anticipated, and expected ramp-up of APEX® products failed to materialize during 2001 resulting in increased APEX® costs over year 2000. In 2001 there was increased depreciation relating to the ramp up of the third APEX® line. Certain foreign currencies, predominantly in Europe and Canada, were weaker against the U.S. dollar in 2001 versus 2000. Raw material inputs did not decrease as expected and these costs could not be passed along to customers due to soft demand. In addition, selling, general and administrative costs were negatively affected by higher provisions for bad debt within certain businesses during fiscal 2001.

Asset Impairment, Plant Realignment and Special Charges

        The Company anticipated that the confluence of negative factors would generally subside during the latter part of 2001, particularly during the fourth quarter. However, the anticipated recovery within the Company's businesses did not develop as planned in the latter half of 2001; therefore, the Company

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undertook a comprehensive business restructuring involving manufacturing initiatives and workforce reductions, including voluntary attrition, of approximately 70 employees in the U.S. and approximately 190 employees in Europe. As a result of the realignment, the Company recorded a pre-tax charge of $5.8 million during the three months ended December 29, 2001. The total charge in the fourth quarter consisted of personnel and facility closing costs. In addition, during mid-2001, the Company undertook a smaller restructuring of its operations in order to reduce costs, predominantly in the U.S., that primarily involved headcount reductions of approximately 90 employees. Accordingly, the Company recorded a pre-tax charge of $1.7 million during the three months ended June 30, 2001.

        In connection with the restructuring undertaken in the fourth quarter of 2001, and based upon a comprehensive review of the Company's long-lived assets, the Company recorded a non-cash charge of approximately $181.2 million for the write-down of goodwill and contract intangibles ($100.4 million) and machinery and equipment ($80.8 million) related primarily to production assets within the U.S. and European nonwovens business. After careful assessment of various factors relevant to these assets, including the continuation of those factors previously described, combined with lower than expected operating results, particularly in the fourth quarter, and in connection with the comprehensive business realignment previously discussed, the Company wrote-down the value of such assets to their estimated fair market value based on estimated discounted future cash flows or third party appraisals. As part of the Company's restructuring, approximately $1.9 million of expenses were incurred in the fourth quarter of 2001 related to professional and other related services provided in connection with the restructuring.

        These charges have not been allocated to the Company's reportable business segments because the Company's management does not evaluate such charges on a segment-by-segment basis. Segment operating performance is measured and evaluated before unusual or special items.

Interest Expense and Other

        Interest expense increased $7.6 million, from $91.8 million in 2000 to $99.4 million in 2001. The increase in interest expense is due to a higher average amount of indebtedness outstanding resulting from increased capital spending related to the Company's APEX® expansion, primarily during fiscal 2000. The increased interest expense period over period was partially offset by a decrease in the Company's effective borrowing rates during 2001. However, on April 11, 2001 and August 15, 2001, the Company's interest rate on its outstanding borrowings under the Prepetition Credit Facility increased by an additional 50 basis point.

        During the fourth quarter of 2001 the Company recognized investment losses of $5.3 million resulting from an unrealized, non-cash valuation loss on short term investments deemed to be "other than temporary" under Staff Accounting Bulletin No. 59. Such losses were previously classified as a component of Other Comprehensive Income (Loss) in the equity section of the balance sheet. Foreign currency losses increased to $5.4 million in 2001 from $0.5 million in 2000. As a result of the Argentine peso devaluation, the Company recognized a foreign currency loss of approximately $2.7 million during December 2001, net of minority interest adjustments, related to its Argentina majority-owned subsidiary. During the second quarter of 2000, the Company recorded a gain from the extinguishment of debt of $0.7 million, net of $0.4 million in taxes. Such gain was recorded as an extraordinary item in fiscal 2000.

        As a result of Amendment No. 6, the Company incurred a charge to continuing operations of approximately $0.4 million for the write-off of previously capitalized loan acquisition costs in accordance with the Emerging Issues Task Force No. 98-14, "Debtors Accounting for Changes in Line-of-Credit or Revolving-Debt Arrangements."

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Income Taxes (Benefit)

        The Company recorded an income tax benefit of $25.8 million in 2001, representing an effective tax benefit rate of 9.4%. Excluding the unusual items recorded during fiscal 2001, as previously discussed, the Company's effective tax benefit rate was approximately 28%. The effective benefit rate differed from the statutory benefit rate as a result of non-deductible charges, predominantly goodwill, and to an increase in the Company's valuation allowance between fiscal 2001 and 2000, recorded primarily to provide reserves for net operating losses substantially generated during 2001. During 2000 the Company recorded an income tax benefit of $2.7 million, representing an effective tax benefit rate of 35.0% before extraordinary item.

Net Income (Loss)

        Net income (loss) decreased $243.2 million from a loss of $(4.3) million, or $(0.13) per diluted share, in 2000 to a loss of $(247.6) million, or $(7.74) per diluted share, in 2001 as a result of the above mentioned factors.

Liquidity and Capital Resources

Operating Activities

        Net cash provided by operating activities was $35.3 million during 2002, an approximate $24.8 million increase from $10.5 million during 2001. The Company's cash generation from operations in 2002 was positively impacted in an amount equal to $43.2 million, which is the amount of accrued interest on the Senior Subordinated Notes that was reclassified to Liabilities Subject to Compromise. Cash used for operations was negatively impacted during 2002 and 2001 by continuing operating losses; however, as discussed more fully below, due to the Company's Senior Secured Lenders exercising their right to block interest payments to holders of the Company's Senior Subordinated Notes, cash payments for interest were approximately $51.3 million lower in 2002 versus 2001.

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        The Company had working capital of approximately $219.9 million at December 28, 2002. Excluding the current portion of indebtedness, working capital was $244.5 million at December 28, 2002, compared to working capital, excluding current potion of indebtedness, at December 29, 2001 of $204.7 million. Accounts receivable on December 28, 2002 was $117.4 million as compared to $125.6 million on December 29, 2001, a decrease of $8.2 million or approximately 6.5%. Accounts receivable represented approximately 57 days of sales outstanding at December 28, 2002 as compared to 56 days outstanding on December 29, 2001. Inventories at December 28, 2002 were approximately $115.7 million, a decrease of $0.3 million over inventories at December 29, 2001 of $116.0 million. The Company had approximately 66 days of inventory on hand at December 28, 2002 versus 63 days of inventory on hand at December 29, 2001, an increase of 4.8%. Accounts payable at December 28, 2002 was $46.1 million as compared to $46.4 million on December 29, 2001, a decrease of $0.3 million or approximately 1.0%. Accounts payable represented 26 days of payables outstanding at December 28, 2002 compared to 25 days of payables outstanding on December 29, 2001.

        Prior to the Petition Date, the Company classified expenses related to its financial restructuring efforts as "Special charges" in the consolidated statement of operations. Such charges consist of professional and other related services that have been expensed as incurred. After the Petition Date, costs related to the Company's reorganization activities are also expensed as incurred and have been classified as "Chapter 11 reorganization expenses" in accordance with SOP 90-7. The cumulative amount of costs and expenses related to the Company's financial restructuring efforts, including bank financing fees, through fiscal 2002 have been approximately $26.0 million.

        As a result of the Company's financial condition, certain suppliers have requested alternative payment provisions. However, such alternative payment provisions have not currently had a significant negative impact on the Company's liquidity.

Investing and Financing Activities

        Capital expenditures during 2002 totaled $15.4 million, a decrease of $6.1 million from capital spending of $21.4 million in 2001. During the fourth quarter of 2002, the Company entered into an agreement with Reifenhauser & Co. GmbH for the purchase and installation of a Reicofil 3.1 SSXS nonwovens production line ("Line 5") at its San Luis Potosi, Mexico manufacturing site. The total commitment for Line 5 approximates $22.0 million, of which approximately $4.0 million was funded during the fourth quarter of 2002. The remaining portion of the total commitment is expected to be funded during fiscal 2003 and 2004. The Company is evaluating certain financing alternatives for Line 5.

        A complete description of the Company's DIP Facility, Prepetition Credit Facility, Senior Subordinated Notes and Subsidiary Indebtedness is contained in Note 12. "Debt." The Company's Restructured Credit Facility is described below. In addition, the Company's emergence from Chapter 11 is described in Note 28. "Recapitalization."

        The Company's Restructured Credit Facility provides for secured revolving credit borrowings with aggregate commitments of up to $50.0 million and aggregate term loans and term letters of credit of $435.3 million. Subject to certain terms and conditions, a portion of the Restructured Credit Facility may be used for revolving letters of credit. All borrowings under the Restructured Credit Facility are U.S. dollar denominated and are guaranteed, on a joint and several basis, by each and all of the direct and indirect domestic subsidiaries of the Company and certain non-domestic subsidiaries of the Company. The Restructured Credit Facility and the related guarantees are secured by (i) a lien on substantially all of the assets of the Company, its domestic subsidiaries and certain of its non-domestic subsidiaries, (ii) a pledge of all or a portion of the stock of the domestic subsidiaries of the Company and of certain non-domestic subsidiaries of the Company, and (iii) a pledge of certain secured intercompany notes issued to the Company or one or more of its subsidiaries by non-domestic subsidiaries. Commitment fees under the Restructured Credit Facility are equal to 0.75% of the daily unused amount of the

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revolving credit commitment. The Restructured Credit Facility contains covenants and events of default customary for financings of this type, including leverage, senior leverage, interest coverage and adjusted interest coverage. The Restructured Credit Facility terminates on December 31, 2006. The loans are subject to mandatory prepayment out of proceeds received in connection with certain casualty events, asset sales and debt and equity issuances and from excess cash flow.

        The interest rate applicable to borrowings under the Restructured Credit Facility is based on a specified base rate or a specified Eurodollar base rate, at the Company's option, plus a specified margin. The applicable margin for revolving credit loans bearing interest based on the base rate is 2.75%, and the margin for revolving credit loans bearing interest on a Eurodollar rate is 3.75%. The applicable margin for term loans bearing interest based on the base rate will range from 4.00% to 8.00%, and the margin for term loans bearing interest on a Eurodollar rate will range from 5.00% to 9.00%, in each case based on the Company's ratio of senior consolidated indebtedness to consolidated EBITDA calculated on a rolling four quarter basis. In addition, if the Company's ratio of senior consolidated indebtedness to consolidated EBITDA calculated on a rolling four quarter basis exceeds 5.00 to 1, the Company is required to pay to the term loan lenders and the term letter of credit lenders a fee of 1.00% on the outstanding balance under the term loans and the term letters of credit.

        During the first quarter of fiscal 2001, the Company exercised an option to obtain a 45% minority position in a start-up nonwovens production line in Saudi Arabia (the "Saudi Line"). Over the course of 2001, the Company funded approximately $4.4 million which represented its pro-rata share, of the construction costs of the Saudi Line. The Company was not permitted to acquire more than a 45% interest in the Saudi Line pursuant to Amendment No. 6. Prior to the third quarter of 2002, the Company's equity stake in the Saudi Line was under review pending finalization of the Investment Approval Application between and the Company and its partner which was required to be submitted for approval to the Saudi Arabian government. However, during the third quarter of 2002, it became apparent that an agreement could not be reached between the Company and its partner concerning ownership and operation of the Saudi Line and accordingly, the Company recorded a $4.4 million charge to earnings for the write-down of its investment in the Saudi Line during 2002. The Company is exploring its legal and other options and intends to aggressively pursue recovering its investment in the Saudi Line.

        On December 19, 1997, DTA acquired substantially all of the outstanding common and first preferred shares of Dominion, and on January 29, 1998, DTA acquired all remaining common and first preferred shares, at which time Dominion underwent a "winding-up." All assets and liabilities of Dominion were transferred to DTA and all outstanding common shares and first preferred shares held by DTA were redeemed. Immediately thereafter, pursuant to a purchase agreement, dated October 27, 1997, the apparel fabrics business of Dominion was sold, at no gain or loss, to Galey and the Company acquired the nonwovens and industrial fabrics operations. The Company and Galey finalized the acquisition cash settlement during 2000 pursuant to the MSA dated January 29, 1998. The result of such settlement was not material to the Company's financial condition. Under the MSA, the Company and Galey are required to share in the payment of certain on-going costs, including taxes, for historical Dominion entities as required by the MSA. Because the Company originally acquired Dominion, the Company generally makes the payments and is reimbursed by Galey. On February 19, 2002, Galey and its U.S. operating subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code and began operating their businesses as debtors-in-possession. During March 2002, Galey informed the Company of its intention to reject the MSA as part of its bankruptcy proceedings. If approved by the Bankruptcy Court, Galey's contemplated rejection of the MSA would result in the Company being required to fund expenditures that should be allocated to, and paid by, Galey, which could potentially have a material adverse effect on the Company. At December 28, 2002, the amounts due from Galey for 2002 shared cash activity pursuant to the MSA, including amounts associated with statutory tax payments, approximated $1.4 million. The Company has fully reserved this balance at

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December 28, 2002 due to the uncertainty of collectibility at such date. All shared cash activity prior to the first quarter of 2002 relative to the MSA has been collected from Galey.

        The Board of Directors declared a quarterly dividend of $0.02 per share during the first quarter in 2001. Amendment No. 6 to the Prepetition Credit Facility prevented the Company from paying dividends on its common stock. The Restructured Credit Facility prevents payments of dividends on all classes of common stock, except for Class C. Dividends on the Class C common stock are limited to an aggregate amount not exceeding $1.0 million in any fiscal year. The Company does not anticipate paying dividends on its common stock in future periods.

Commitments

        The Company leases certain manufacturing, warehousing and other facilities and equipment under operating leases. The leases on most of the properties contain renewal provisions. Rent expense (net of sub-lease income), including incidental leases, approximated $5.9, $4.5 and $5.9 million in 2002, 2001 and 2000, respectively. Rental income approximated $1.9, $2.4 and $2.3 million in 2002, 2001 and 2000, respectively. As discussed in Note 5. "Property, Plant and Equipment," the Company sold its South Brunswick facility in December 2002. Prior to this transaction, the Company leased the entire facility to a non-affiliated third party ("Medicia") and then sub-leased a portion of the facility back from Medicia for use as administrative office space within the Nonwovens Division. As a result of the South Brunswick facility sale, the Company's rental income in future periods will be substantially less than that recognized in prior years. The approximate net minimum rental payments required or due under operating leases that have initial or non-cancelable lease terms in excess of one year as of December 28, 2002 are presented in the following table. The Company's corporate headquarters are housed in space leased by a shareholder of the Company from an affiliate of the shareholder for an approximate annual rental charge of $0.2 million. Additionally, the Company leased a manufacturing facility from an affiliated entity that the Company believed was comparable to similar properties in the area. The lease was terminated in January 2003 at no cost to the Company. Annual rent expense relating to this terminated lease approximated $0.2 million in 2001, 2000 and 1999, respectively.

        At December 28, 2002, the Company had commitments of approximately $41.9 million related to the purchase of raw materials, maintenance and converting services and approximately $23.2 million related to capital projects, including Line 5. In addition, the Company had outstanding letters of credit, including the Nanhai letter of credit, at December 28, 2002 of approximately $13.9 million. A schedule of the Company's contractual and commercial commitments at December 28, 2002 is presented in tabular form below (in thousands):

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Effect of Inflation and Foreign Currency

        Inflation generally affects the Company by increasing the cost of labor, equipment and raw materials. The Company's substantial foreign operations expose it to the risk of foreign currency exchange rate fluctuations. If foreign currency denominated revenues are greater than costs, the translation of foreign currency denominated costs and revenues into U.S. dollars will improve profitability when the foreign currency strengthens against the U.S. dollar and will reduce profitability when the foreign currency weakens. For a discussion of raw materials and certain adverse foreign currency exchange rate fluctuations during 2002 and 2001, see "Quantitative and Qualitative Disclosures About Market Risk."

New Accounting Standards

        Refer to Note 24. "New Accounting Standards" for a complete discussion of recently issued standards and their anticipated effect on the Company's results of operations.

Critical Accounting Policies And Other Matters

        The Company's analysis and discussion of its financial condition and results of operations are based upon its consolidated financial statements that have been prepared in accordance with generally accepted accounting principles in the United States ("U.S. GAAP"). The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. The Company evaluates these estimates and assumptions on an ongoing basis, including but not limited to those related to inventories, bad debts, income taxes, intangible assets, restructuring related adjustments, pension and other post retirement benefits and contingencies. Estimates and assumptions are based on historical and other factors believed to be reasonable under the circumstances. The results of these estimates may form the basis of the carrying value of certain assets and liabilities. Actual results, under conditions and circumstances different from those assumed, may differ from estimates. The impact and any associated risks related to estimates, assumptions, and accounting policies are discussed within Management's Discussion and Analysis of Operations and Financial Condition, as well as in the Notes to the Consolidated Financial Statements, if applicable, where such estimates, assumptions, and accounting policies affect the Company's reported and expected results.

        The Company believes the following accounting policies are critical to its business operations and the understanding of results of operations and affect the more significant judgments and estimates used in the preparation of its consolidated financial statements:

        Revenue Recognition:    Revenue from product sales is recognized at the time ownership of goods transfers to the customer and the earnings process is complete in accordance with Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 specifies how existing rules should be applied to transactions in the absence of authoritative literature. Based on the guidelines of current accounting rules and SAB 101, revenue should not be recognized until it is realized or realizable and earned.

        Foreign Currency Translation:    The Company accounts for and reports translation of foreign currency transactions and foreign currency financial statements in accordance with SFAS No. 52, "Foreign Currency Translation." All assets and liabilities in the balance sheets of foreign subsidiaries whose functional currency is other than the U.S. dollar are translated at quarter-end exchange rates. Translation gains and losses are not included in determining net income but are accumulated as a separate component of shareholders' equity. However, subsidiaries considered to be operating in highly inflationary countries use the U.S. dollar as the functional currency and translation gains and losses are included in determining net income. In addition, foreign currency transaction gains and losses are included in determining net income.

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        Business Combinations, Goodwill and Other Intangible Assets:    In July 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141 "Business Combinations" ("FAS 141") and No. 142, "Goodwill and Other Intangible Assets" ("FAS 142"). FAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Use of the pooling-of-interests method is no longer permitted. FAS 141 also includes guidance on the initial recognition and measurement of goodwill and intangible assets acquired in a business combination that is completed after June 30, 2001. FAS 142 supersedes Accounting Principles Bulletin No. 17, "Intangible Assets." FAS 142 primarily addresses the accounting for goodwill and intangible assets subsequent to their acquisition. The most significant changes made by FAS 142 are: (1) goodwill and indefinite lived intangible assets will no longer be amortized, (2) goodwill will be tested for impairment at least annually, (3) intangible assets deemed to have an indefinite life will be tested for impairment at least annually and (4) the amortization period of intangible assets with finite lives will no longer be limited to forty years. FAS 142 is effective for fiscal years beginning after December 15, 2001. The Company recognized a non-cash charge of $96.7 million, of which approximately $12.8 million was recognized as a cumulative effect of a change in accounting principle, for the write-down of goodwill and other intangibles in accordance with FAS 142 during fiscal 2002.

        Impairment of Long-Lived Assets:    For all applicable periods through December 29, 2001, the Company reviewed the recoverability of the carrying value of long-lived assets in accordance with Statement of Financial Standard No. 121, "Accounting for the Impairment of Long-Lived Assets and for Assets to be Disposed Of" ("FAS 121"). The Company also reviewed long-lived assets for impairment whenever events or changes in circumstances indicated that the carrying amount of such assets might not be recoverable. When the projected future undiscounted cash flows of the operations to which the assets relate did not exceed the carrying value of the asset, the intangible assets were written down, followed by the other long-lived assets, to fair value. In October 2001, the Financial Accounting Standards Board issued Statement No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS 144"). FAS 144 provides accounting guidance for financial accounting and reporting for the impairment or disposal of long-lived assets. The statement supersedes Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("FAS 121"). It also supersedes the accounting and reporting provisions of APB Opinion No. 30 "Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" related to the disposal of a segment of a business. The statement is effective for fiscal years beginning after December 15, 2001. The company recognized a non-cash charge of $234.0 million for the write-down of property, plant and equipment in accordance with FAS 144 during fiscal 2002.

        Accounts Receivable and Concentration of Credit Risks:    Accounts receivable potentially expose the Company to concentration of credit risk, as defined by Statement of Financial Accounting Standards No. 105, "Disclosure of Information about Financial Instruments with Off-Balance Sheet Risk and Financial Instruments with Concentration of Credit Risk." The Company provides credit in the normal course of business and performs ongoing credit evaluations on certain of its customers' financial condition, but generally does not require collateral to support such receivables. The Company also establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information.

        Income Taxes:    The Company records an income tax valuation allowance when the realization of certain deferred tax assets, net operating losses and capital loss carryforwards is not likely. These deferred tax items represent expenses recognized for financial reporting purposes, which will result in tax deductions over varying future periods. The Company has not provided U.S. income taxes for undistributed earnings of foreign subsidiaries that are considered to be retained indefinitely for reinvestment. Certain judgments, assumptions and estimates may affect the carrying value of the valuation allowance and deferred income tax expense in the Company's consolidated financial statements.

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Environmental

        The Company is subject to a broad range of federal, foreign, state and local laws governing regulations relating to the pollution and protection of the environment. The Company believes that it is currently in substantial compliance with environmental requirements and does not currently anticipate any material adverse effect on its operations, financial condition or competitive position as a result of its efforts to comply with environmental requirements. Some risk of environmental liability is inherent, however, in the nature of the Company's business, and there can be no assurance that material environmental liabilities will not arise.

Euro Conversion

        On January 1, 1999, member countries of the European Monetary Union began a three-year transition from their national currencies to a new common currency, the "euro". Permanent rates of exchange between members' national currency and the euro have been established and monetary, capital, foreign exchange, and interbank markets have been converted to the euro. Euro currency has been issued and effective July 2002, the respective national currencies were withdrawn. The Company has operations in three of the participating countries and has successfully transitioned to using both the euro and local currencies for commercial transactions. Costs of the euro conversion have not had a material impact on the results of operations or the financial condition of the Company.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Long-Term Debt and Interest Rate Market Risk

Variable Rate Debt

        The variable interest rate applicable to borrowings under the Prepetition Credit Facility was based on, in the case of U.S. dollar denominated loans, the base rate referred to therein or the Eurocurrency rate referred to therein for U.S. dollars, at the Company's option, plus a specified margin. In the event that a portion of the Prepetition Credit Facility was denominated in Dutch guilders, the applicable interest rate was based on the applicable Eurocurrency base rate referred to therein for Dutch guilders, plus a specified margin. In the event that a portion of the Prepetition Credit Facility was denominated in Canadian dollars, the applicable interest rate was based on the Canadian base rate referred to therein, plus a specified margin, of the Bankers' Acceptance discount rate referred to therein, at the Company's option. Under the Forbearance Agreement with the Senior Secured Lenders all borrowings were required to be made at the base rate. At December 28, 2002, the Company had borrowings under the Prepetition Credit Facility of $484.4 million that were subject to interest rate risk. Each hypothetical 1.0% increase in interest rates would have impacted pretax earnings by $4.8 million. The Company's Prepetition Credit Facility was restructured as part of the Modified Plan.

Fixed Rate Debt

        The fair market value of the Company's long-term fixed interest rate debt was also subject to interest rate risk. Generally, the fair market value of fixed interest rate debt will increase as interest rates fall and decrease as interest rates rise. The estimated fair value of the Company's long-term fixed-rate debt at December 28, 2002 was approximately $118.3 million, which was less than its carrying value by approximately $473.2 million. A 100 basis points decrease in the prevailing interest rates at December 28, 2002 would have resulted in an increase in the fair value of fixed rate debt by approximately $2.6 million. A 100 basis points increase in the prevailing interest rates at December 28, 2002 would have resulted in a decrease in fair value of total fixed rate debt by approximately $2.6 million. Fair market values were determined from quoted market prices or based on estimates made by investment bankers. The Company's fixed rate debt was canceled as part of the Modified Plan.

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Foreign Currency Exchange Rate Risk

        The Company manufactures, markets and distributes certain of its products in Europe, Canada, Latin America and the Far East. As a result, the Company's financial results could be significantly affected by factors such as changes in foreign currency rates or weak economic conditions in the foreign markets in which the Company maintains a manufacturing or distribution presence. If foreign currency denominated revenues are greater than costs, the translation of foreign currency denominated costs and revenues into U.S. dollars will improve profitability when the foreign currency strengthens against the U.S. dollar and will reduce profitability when the foreign currency weakens. For example, during 2002 certain currencies of countries in which the Company conducts foreign currency denominated business weakened against the U.S. dollar and had a significant impact on sales and operating income. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."

        For the year ended December 28, 2002, the result of a uniform 10% strengthening in the value of the dollar relative to the currencies in which the Company's sales are denominated would have decreased operating income, before special items, by approximately $4.1 million. This calculation assumes that each exchange rate would change in the same direction relative to the U.S. dollar. In addition to the direct effects of changes in exchange rates, which are a changed dollar value of the resulting sales, changes in exchange rates also affect the volume of sales or the foreign currency sales price as competitors' products become more or less attractive. The Company's sensitivity analysis of the effects of changes in foreign currency exchange rates does not factor in a potential change in sales levels or local currency prices.

        The Argentine peso, which serves as the functional currency of an Argentine majority-owned subsidiary of the Company, has devalued significantly against the U.S. dollar since the end of fiscal 2001 due primarily to the economic uncertainty within this region. As a result of the Argentine peso devaluation, the Company has recognized a foreign currency loss of approximately $3.0 million, net of minority interest adjustments, for the year ended December 28, 2002.

Raw Material and Commodity Risks

        The primary raw materials used in the manufacture of most of the Company's products are polypropylene and polyester fiber, polyethylene and polypropylene resin, and, to a lesser extent, rayon, tissue paper and cotton. The prices of polypropylene and polyethylene are a function of, among other things, manufacturing capacity, demand and the price of crude oil and natural gas liquids. Raw material prices as a percentage of sales increased from 41.0% in 2000 to 43.9% in 2001 to 44.8% in 2002. The increase in raw material cost has had a negative impact on operating income because all of the increase could not be passed along to customers.

        During January 2003, several suppliers of key raw materials, including polypropylene and polyethylene, announced price increases to take effect beginning as early as February 2003. To the extent the Company is not able to pass along all or a portion of such increased prices of raw materials, the Company's cost of goods sold would increase and its EBITDA would correspondingly decrease. By way of example, if the price of polypropylene were to rise $.01 per pound, and the Company was not able to pass along any of such increase to its customers, the Company would realize a decrease of approximately $2.0 million on an annualized basis in its reported EBITDA. There can be no assurance that the prices of polypropylene and polyethylene will not continue to increase in the future or that the Company will be able to pass on any increases to its customers. Material increases in raw material prices that cannot be passed on to customers could have a material adverse effect on the Company's results of operations and financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" within this Annual Report on Form 10-K.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Shareholders
Polymer Group, Inc.

        We have audited the accompanying consolidated balance sheets of Polymer Group, Inc. as of December 28, 2002 and December 29, 2001 and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 28, 2002. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

        We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Polymer Group, Inc. at December 28, 2002 and December 29, 2001 and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 28, 2002 in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

        As discussed in Note 2 to the Consolidated Financial Statements, in 2002 the Company changed its method of accounting for goodwill and other intangible assets.

/s/ Ernst & Young LLP                

Greenville, South Carolina
March 21, 2003, except
for Note 30, as to
which the date is
April 11, 2003

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POLYMER GROUP, INC.

CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)