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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) 329-5151

Securities registered pursuant to Section 12(b) of the Act: None

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 non-affiliates as of July 3, 2004 was approximately $53.0 million, based on the average of the closing bid and ask price of the Class A common stock on the Over-the-Counter Bulletin Board. Solely for the purposes of the foregoing calculation, affiliates are considered to be Directors, Executive Officers and greater than 10% beneficial owners of the Registrant's common equity. As of March 11, 2005, there were 10,203,043 shares of Class A common stock, 188,182 shares of Class B common stock and 33,402 shares of Class C common stock outstanding. No shares of Class D or Class E common stock were outstanding as of such date. The par value for each class of common stock is $.01 per share.

Documents Incorporated By Reference

Portions of the Registrant's Notice of 2005 Annual Meeting of Stockholders and Proxy Statement—Part III

POLYMER GROUP, INC.
FORM 10-K
For the Fiscal Year Ended January 1, 2005
INDEX

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IMPORTANT INFORMATION REGARDING THIS FORM 10-K

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

Fresh Start Accounting

        In connection with the Company's Chapter 11 reorganization, the Company has applied fresh start reporting to its Consolidated Balance Sheet as of March 1, 2003 in accordance with Statement of Position No. 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" as promulgated by the AICPA (Reference Item 1 in the Business section for additional information regarding the Company's Chapter 11 reorganization). Under fresh start reporting, a new reporting entity is considered to be created and the recorded amounts of assets and liabilities are adjusted to reflect their estimated fair values at the date fresh start reporting is applied. On March 5, 2003, the Company emerged from Chapter 11. For financial reporting purposes, March 1, 2003 is considered the emergence date and the effects of the reorganization have been reflected in the accompanying financial statements as if the emergence occurred on that date. As a result of the application of fresh start reporting, the financial statements of the Successor Company (as defined herein) are not comparable to the Predecessor Company's (as defined herein) financial statements.

Safe Harbor-Forward-Looking Statements

        From time to time, the Company may publish forward-looking statements relative to matters such as, including, without limitation, anticipated financial performance, business prospects, technological developments, new product introductions, cost savings, research and development activities and similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. Forward-looking statements are generally accompanied by words such as "estimate," "project," "predict," "believe," "expect," "anticipate" or other words that convey the uncertainty of future events or outcomes.

        Various statements contained in this report, including those that express a belief, expectation or intention, as well as those that are not statements of historical fact are, or may be deemed to be, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements speak only as of the date of this report. Unless required by law, the Company does not undertake any obligation to update these statements and cautions against any undue reliance on them. These forward-looking statements are based on current expectations and assumptions about future events. While management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond the Company's control. There can be no assurance that these events will occur or that the Company's results will be as estimated.

        Important factors that could cause actual results to differ materially from those discussed in such forward-looking statements include:

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general economic factors including, but not limited to, changes in interest rates, foreign currency translation rates, consumer confidence, trends in disposable income, changes in consumer demand for goods produced, and cyclical or other downturns;



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substantial debt levels and potential inability to maintain sufficient liquidity to finance the Company's operations and make necessary capital expenditures;



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inability to meet existing debt covenants;



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information and technological advances;



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changes in environmental laws and regulations;

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•

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



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domestic and foreign competition;



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reliance on major customers and suppliers; and



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risks related to operations in foreign jurisdictions.

Fiscal Year-End

        The Company's fiscal year ends on the Saturday nearest to December 31. Fiscal 2004 ended January 1, 2005 and included the results of operations for a fifty-two week period. Fiscal 2003 ended January 3, 2004 and included the results of operations for a fifty-three week period, which as described in Item 1 to this Annual Report on Form 10-K is comprised of a two month period ended March 1, 2003 (9 weeks) and a ten month period ended January 3, 2004 (44 weeks). Fiscal 2002 ended on December 28, 2002 and included the results of operations for a fifty-two week period. References herein to "2004," "2003," and "2002" generally refer to fiscal 2004, fiscal 2003 and fiscal 2002, unless the context indicates otherwise.

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PART I

ITEM 1.    BUSINESS

        Polymer Group, Inc. (the "Company" or "Polymer Group") was originally incorporated in the State of Delaware on June 16, 1994 and is a global manufacturer and marketer of nonwoven and oriented polyolefin products.

        The Company and each of its domestic subsidiaries filed voluntary petitions for Chapter 11 reorganization under the United States Bankruptcy Code in the United States Bankruptcy Court for the District of South Carolina (the "Bankruptcy Court") on May 11, 2002 (April 25, 2002 as to Bonlam (S.C.), Inc.). Upon having its Modified Plan (as defined) approved by the Bankruptcy Court on January 16, 2003, the Company emerged from the Chapter 11 process effective March 5, 2003 (the "Effective Date"). For accounting purposes the Company recognized the emergence on March 1, 2003 and adopted "fresh-start accounting" as of that date. The Company's emergence from Chapter 11 resulted in a new reporting entity, with the reorganization value of the Company allocated to the underlying assets and liabilities based on their respective fair values at the date of emergence. The initial allocation was based on preliminary estimates and has been revised as more recent information was received, as deemed appropriate, under generally accepted accounting principles in the United States. The revisions are reflected in the amounts included herein. References to "Predecessor" refer to the old Polymer Group and its subsidiaries on and prior to March 1, 2003 and references to "Successor" refer to Polymer Group and its subsidiaries on or after March 2, 2003, after giving effect to the implementation of fresh start reporting.

Recent Developments

        The Company has taken major steps in the last two years to strengthen its balance sheet and reaffirm its global leadership position in the industry. These items are discussed in more detail throughout this report, with highlights presented below to assist the reader:

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emerging from the Chapter 11 process effective March 5, 2003 and adopting fresh start accounting;



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refinancing its long-term debt on April 27, 2004, resulting in greater financial flexibility and significant interest cost savings;



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completing the exchange during fiscal 2004 of the Company's originally issued Convertible Subordinated Notes due 2007 (the "Junior Notes") for newly authorized 16% Series A Convertible Pay-in-kind Preferred Shares (the "PIK Preferred Shares") and Class A Common Stock;



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continuing to expand its business in 2004 as it moved to full productive utilization of its new state-of-the-art spunbond line in San Luis Potosi, Mexico in the second quarter of 2004 and initiating construction in September 2004 of a new line in Cali, Colombia and announcing, effective March 22, 2005, that it will install a new spunmelt line in the United States;



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settling arbitration issues on June 28, 2004 with a major customer, and receiving a settlement of $17.0 million. After providing for $3.9 million of costs and expenses associated with the arbitration, the net settlement proceeds were $13.1 million; and



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continuing its efforts to shed non-essential costs from its operations, completing the European restructuring effort that began near the end of 2003 and curtailing some additional lines in the Canadian operation of the Oriented Polymers Division.

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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 allow 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 product manufacturers in the world. The Company has a global presence with an established customer base in both developed and emerging markets. The Company's product offerings are sold principally to converters that manufacture a wide range of end-use products.

        The Company operates twenty-one manufacturing facilities (including its joint venture/partnership-type operations in Argentina and China) located in ten countries. 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 technologies in order to increase capacity, improve quality and develop new high-value fabric 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.

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

Industry Overview

        The Company competes primarily in the worldwide nonwovens market, which is approximately a $14.5 billion market with an average annual sales growth rate of 7% expected over each of the next five years, according to certain industry sources. The nonwovens industry began in the 1950's 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 certain industry sources, that demand in the developed markets of North America, Western Europe and Japan will increase at an average rate of 6% in each of the next five years, while the emerging markets are forecasted to grow at an average rate of 8.5% per annum. In the developed markets, growth will be driven primarily by new applications for nonwovens and higher amounts of nonwovens used per application for such products as diapers, while growth in the emerging markets will be driven primarily by increased penetration of disposable products as per capita income rises. According to certain industry sources, worldwide consumption of nonwovens has grown an average of 7% 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. Additionally, the Company's growth rate may differ from the industry averages depending upon the regions the Company chooses to operate in and the technology available to the Company.

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        Nonwovens are categorized as either disposable (approximately 57% of worldwide industry sales with an average annual growth rate of 7.5%, according to industry sources) or durable (approximately 43% of worldwide industry sales and an average annual growth rate of 6.5%, according to industry sources). The Company primarily competes in disposable products. 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, 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, automotive components, geotextiles, roofing membranes, carpet backing, agricultural fabrics, 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 are 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. The Company also produces structural concrete reinforcement fiber using monofilament technology.

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 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 emerging countries. Over the past ten years, the Company's sales from manufacturing facilities outside the United States have increased from approximately $28.0 million in 1993 to $463.3 million in 2004.

        The Company develops, manufactures and sells a broad array of products. Sales are focused in two operating divisions: "Nonwovens" and "Oriented Polymers" that provide opportunities to leverage the Company's advanced technology and substantial capacity. For financial information by business segment and geographic area, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 18 to the Consolidated Financial Statements included in Item 8 to this Annual Report on Form 10-K.

Nonwovens Division

        The Nonwovens segment develops and sells products in various consumer and industrial markets. Major markets served by this division include the hygiene, industrial, medical and wiping. Sales of products in the Nonwovens division represented approximately 80%, 80% and 81%, or $672.6 million, $624.1 million and $608.2 million, of the Company's consolidated net sales for fiscal 2004, 2003 and 2002, respectively.

        The Company produces a variety of nonwoven materials for use in diapers, training pants, feminine sanitary protection, adult incontinence, baby wipes and consumer wiping products. The Company's broad product offerings provide customers with a full range of specialized components for unique or

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distinctive products, including top sheet, transfer layer, backsheet fabric, leg cuff fabric, sanitary protective facings, absorbent pads for incontinence guard, panty shield, and absorbent core 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 and drapes, face masks and shoe covers.

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

        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 with these customers in the development of next generation products. The Company believes that this technical support helps to ensure that the Company's products will continue to be incorporated into such customers' future product designs.

Oriented Polymers Division

        The Oriented Polymers Division provides flexible packaging products that utilize coated and uncoated oriented polyolefin fabrics. These include concrete fiber, housewrap, lumberwrap, fiberglass packaging tubes, balewrap for synthetic cotton and fibers, steel and aluminum wrap, and coated bags for specialty chemicals and, mineral fibers. Sales of products in the Oriented Polymers Division represented approximately 20%, 20% and 19%, or $172.5 million, $154.2 million and $146.2 million, of the Company's consolidated net sales for fiscal 2004, 2003 and 2002, respectively.

Marketing and Sales

        The Company sells to customers in the domestic and international marketplace. Approximately 45%, 23%, 15%, 13% and 4% of the Company's 2004 net sales were from manufacturing facilities in the United States, Europe, Latin America, Canada and Asia, respectively. The Procter & Gamble Company, which is the Company's largest customer, accounted for 12%, 13% and 12% of the Company's net sales in 2004, 2003 and 2002, respectively. Sales to the Company's top 20 customers represented approximately 45%, 47% and 47% of the Company's net sales in 2004, 2003 and 2002, respectively.

        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 distributors 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 processes 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 encompass capabilities spanning the entire spectrum of nonwoven technologies.

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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 or molten. The dry-laid process utilizes 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. 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 from a manufacturing and cost perspective.

        Web consolidation is the process by which fiber 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 (spunbond-meltblown-spunbond), 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 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 (spunbond-meltblown-meltblown-spunbond) 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.

        Special Films and Composite Structures.    The Company has a proprietary continuous process for manufacturing unique reticulated films. These highly engineered films have unique capabilities due to the way precision holes are imparted during the process of forming the film. Since these films can be composed of two or more layers of different polymers, the functionality can be different on one side versus the other. These films are typically customized for each customer and are especially popular in Asia as a component for premium feminine hygiene products. The Company also manufactures composites which are combinations of different nonwoven and/or film structures where each structure lends its properties or attributes to the end product. An example is house wrap. House wrap is the result of mating an especially strong spunbond fabric with a highly engineered film. The resulting fabric is very strong, economical, and has excellent wind barrier properties while allowing humidity to pass through the fabric.

        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

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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 nonwoven product markets are E.I. du Pont de Nemours & Co., Freudenberg Nonwovens L.P., BBA Group plc, Avgol LTD. and First Quality Enterprises, Inc; and Intertape Polymer Group Inc. and Amoco Fabrics and Fibers Co. for oriented polymer products. Generally, product innovation and performance, quality, service, distribution and cost are the primary competitive factors, with technical support being highly valued by the largest customers.

Raw Materials

        The primary raw materials used to manufacture most of the Company's products are polypropylene resin, polyester fiber, polyethylene resin and, to a lesser extent, rayon, tissue paper and cotton. These primary raw materials are available from multiple sources and the Company purchases such materials from a variety of global suppliers. The prices of polypropylene, polyethylene and polyester 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 and polyester fibers have fluctuated. The Company has historically been able to pass along at least a portion of 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 goods sold would increase and its operating income 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 $2.9 million on an annualized basis in its reported pre-tax operating income. There can be no assurance that the prices of polypropylene, polyethylene and polyester will not increase in the future or that the Company will be able to pass on any increases to its customers not covered by contracts with price escalation clauses. 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" included in Item 7 to this Annual Report on Form 10-K and "Raw Material and Commodity Risks" included in Item 7A to this Annual Report on Form 10-K for additional discussion of the impact of raw material costs on the Company's operations in 2004, 2003 and 2002.

        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 or alternative suppliers were qualified with customers. The Company has not experienced, and does not expect, 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

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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 the Comprehensive Environmental Response, Compensation, and Liability Act ("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.

        The Company does not currently anticipate any material adverse effect on its operations, financial 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 176 registered trademarks and over 128 patents in the United States. We also have approximately 440 patents under application worldwide. 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 January 1, 2005 were $106.3 million, an increase of $9.8 million from inventories of $96.5 million at January 3, 2004. The Company had approximately 54 days of inventory on hand at January 1, 2005 versus 59 days of inventory on hand at January 3, 2004, a decrease of approximately 10%. Unfilled orders as of January 1, 2005 and January 3, 2004 amounted to approximately $49.8 million and $43.4 million, respectively. The level of unfilled orders is affected by many factors, including the timing of orders and the delivery time for the specific products. Consequently, the Company does not consider the amount of unfilled orders a meaningful indicator of levels of future sales.

Research and Development

        The Company's investment in research and development approximated $11.2 million, $12.4 million and $16.3 million during 2004, 2003 and 2002, respectively.

Seasonality

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

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Employees

        As of January 1, 2005, the Company had approximately 3,233 employees. Of this total, approximately 1,399 employees are represented by labor unions or trade councils that have entered into separate collective bargaining agreements with the Company. Approximately 29% of the Company's labor force is covered by collective bargaining agreements that will expire within one year. During 2004 there were no known unionizing attempts. The Company believes that it generally has good relationships with both its union and non-union employees.

Business Restructuring

        The Company initiated a comprehensive business restructuring in the latter half of 2001, involving manufacturing initiatives and workforce reductions which have continued into 2002, 2003 and 2004. In 2004, the restructuring efforts included the completion of the line curtailment and headcount reduction in Europe that had been announced in 2003 and the initiation of a new restructuring effort in the Canadian operations of the Oriented Polymers Division to better balance plant capacity with market demands. In Canada, the Company eliminated several lines and sold certain equipment. Total headcount was reduced by approximately 160 employees. The total pre-tax charge for both programs in 2004 was approximately $1.9 million.

        In 2003, the Company's restructuring efforts resulted in headcount reductions of approximately 170 employees, primarily within the U.S. and European operations of the Nonwovens Division and resulted in a pre-tax charge of approximately $6.8 million. In 2002, 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 and resulted in a pre-tax charge of approximately $1.1 million.

        Cash outlays associated with the Company's business restructuring approximated $5.9 million, $4.3 million and $6.4 million in 2004, 2003 and 2002, respectively.

Recapitalization and Refinancing

        On April 27, 2004, the Company refinanced the then outstanding bank debt with a new Senior Secured Bank Facility (the "Bank Facility"). In addition, the Company, in a series of transactions, exchanged the Junior Notes for PIK Preferred Shares and Class A Common Stock.

        The Bank Facility consists of a $50.0 million secured revolving credit facility, a $300.0 million senior secured first lien term loan and a $125.0 million senior secured second lien term loan. The proceeds therefrom were used to fully repay indebtedness under the Company's previous Restructured Credit Facility and pay related fees and expenses.

        All borrowings under the Bank 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 supported by the pledge of stock of certain non-domestic subsidiaries of the Company. The Bank 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. Commitment fees under the Bank Facility are equal to 0.50% of the daily unused amount of the revolving credit commitment. The Bank Facility contains covenants and events of default customary for financings of this type, including leverage and interest expense coverage covenants. At January 1, 2005, the Company was in compliance with all such covenants and expects to remain in compliance through fiscal 2005. The Bank Facility requires the Company to apply a percentage of proceeds from excess cash flows, as defined by the Bank Facility and determined based on year-end results, to reduce its then outstanding balances under the Bank Facility. Through January 1, 2005, the Company had made mandatory debt repayments of $1.5 million and optional repayments on the first lien term loan of $17.0 million, which amount was

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considered in the calculation of excess cash flow. Due to the optional repayments made during fiscal 2004 and an amendment made to the Bank Facility subsequent to January 1, 2005, no additional payments related to fiscal 2004 are due to be paid within ten days after the required filing date of the Company's annual financial statements.

        The interest rate applicable to borrowings under the Bank Facility is based on three-month LIBOR plus a specified margin. The applicable margin for borrowings under the revolving credit facility is 300 basis points, the margin for the first lien term loan is 325 basis points and the margin for the second lien term loan is 625 basis points. Although not anticipated, the Company may elect to use an alternate base rate for its borrowings under the revolving credit facility ranging from 2.25% to 6.25% with such alternate base rates including a margin based on the Company's total leverage ratio. The Company had no outstanding borrowings at January 1, 2005 under the revolving credit facility. Average borrowings under the revolving credit facility for the period from April 28, 2004 to January 1, 2005 were $4.0 million at an average rate of 5.80%. The revolving portion of the credit facility matures on April 27, 2009. The first lien term loan and the second lien term loan mature on April 27, 2010 and April 27, 2011, respectively.

        In accordance with the terms of the Bank Facility, the Company entered a cash flow hedge agreement, effectively converting $212.5 million of notional principal amount of debt from a variable LIBOR rate to a fixed LIBOR rate of 3.383%. The cash flow hedge agreement terminates on May 8, 2007 and is described more fully in Note 16 to the Consolidated Financial Statements included in Item 8 to this Annual Report on Form 10-K.

        Subject to certain terms and conditions, a maximum of $20.0 million of the Bank Facility may be used for revolving letters of credit. As of January 1, 2005, the Company had $12.5 million of standby letters of credit outstanding under this facility. Approximately $7.1 million was related to the requirements of the short-term borrowing arrangements of the Company's China-based majority owned subsidiary ("Nanhai"). Other letters of credit are in place to provide added assurance for certain raw material vendors and administrative service providers. None of these letters of credit have been drawn on at January 1, 2005.

        In conjunction with the Company's refinancing in April 2004 of the Restructured Credit Facility, the Company's majority shareholder exchanged approximately $42.6 million in aggregate principal amount of the Junior Notes it controlled for 42,633 shares of the Company's PIK Preferred Shares. Also, during 2004, $10.1 million in aggregate principal amount of the Company's Junior Notes were exchanged for 10,083 shares of the Company's PIK Preferred Shares.

        The dividends on the PIK Preferred Shares accrue at an annual rate of 16% and are payable semi-annually in arrears on each January 1 and July 1, commencing July 1, 2004, and are payable at the option of the Company, (i) through the issuance of additional shares of PIK Preferred Stock; (ii) in cash; or (iii) in a combination thereof. Dividends are cumulative and accrue from the most recent dividend payment date to which dividends have been paid or, if no dividends have been paid, from the date of original issuance.

        On June 30, 2012, the Company must redeem all of the PIK Preferred Shares then outstanding at a price equal to $1,000 per share plus $1,000 per share for all unpaid dividends thereon whether or not declared, which amount will be payable by the Company ("mandatory redemption price"), at the option of the Company, (i) in cash; (ii) through the issuance of shares of Class A Common Stock; or (iii) through a combination thereof. If paid in stock, the number of shares to be delivered by the Company will be the mandatory redemption price (as defined earlier) divided by the then market price of a share of Class A Common Stock.

        At any time prior to June 30, 2012, the holders of the PIK Preferred Shares may elect to convert any or all of their PIK Preferred Shares into shares of the Company's Class A Common Stock at a conversion price equal to $7.29 per share. Also, at any time prior to June 30, 2012, provided certain conditions have been met, the Company may elect to redeem the shares, which redemption price may be paid by the Company, at the option of the Company, (i) in cash; (ii) through the issuance of shares of Class A Common Stock; or (iii) through a combination thereof. If paid in stock, the number of shares to be delivered by the Company will be the optional redemption price (as defined by the preferred stock agreement) divided by the then market price of a share of Class A Common Stock. In January 2005, the Company declared a dividend of approximately $5.6 million, payable in the form of additional PIK Preferred Shares to holders of record as of May 15, 2004 and December 15, 2004. Accordingly, the accrued dividends at January 1, 2005 are included as a component of the Company's PIK Preferred Shares in the Consolidated Balance Sheet.

        Additional details of the Company's Chapter 11 process and recapitalization can be found in Notes 3 and 4 to the Consolidated Financial Statements included in Item 8 to this Annual Report on Form 10-K for the fiscal year ended January 1, 2005.

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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 Bank Facility. The Company believes that its facilities are generally well-maintained, in good condition and adequate for its current needs.

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(1)

Leased.

(2)

60% interest in a joint venture/partnership-type arrangement (Dominion Nonwovens Sudamerica S.A.) with Sauler Group.

(3)

80% interest in a joint venture/partnership-type arrangement (Nanhai Nanxin Non-Woven Co. Ltd.) with Nanhai Chemical Fiber Enterprises Co.

        Capacity utilization during 2004 varied by geographic locations and manufacturing capabilities. However, it can be generally stated that the facilities operated moderately below capacity.

ITEM 3.    LEGAL PROCEEDINGS

        On August 18, 2003 an affiliate ("Affiliate") of the former Chief Executive Officer of the Company filed a claim in the Court of Common Pleas for the Ninth Judicial Circuit for the State of South Carolina, seeking damages associated with a lease agreement and an alleged services agreement, between the Company and the Affiliate, associated with the lease by the Company of its former corporate headquarters and the provision of shared administrative services. The damages sought in the complaint total $7.7 million, plus attorney's fees. The claim is currently in the discovery phase and the Company intends to vigorously defend this action and believes that the ultimate outcome will not have a material adverse effect on its financial position or results of operations.

        On April 23, 2002, the Company filed a demand for arbitration against Johnson & Johnson ("J&J"). The primary issue in the arbitration is the Company's assertion that J&J breached a supply agreement when J&J and certain of its affiliates failed to purchase certain products from the Company and to allow the Company a reasonable opportunity to compete for certain sales. On June 28, 2004, the Company entered into a new supply agreement with a subsidiary of J&J. The Company also ended the arbitration and received approximately $17.0 million from J&J as settlement of the arbitration issues. Net settlement proceeds of $13.1 million, after providing for $3.9 million of costs and expenses associated with the arbitration, were included in Arbitration settlement, net in the Consolidated Statement of Operations for the fiscal year ended January 1, 2005.

        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. The Company believes that it is currently in substantial compliance with applicable environmental requirements and does not currently anticipate any material adverse effect on its operations, financial 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, accordingly, there can be no assurance that material environmental liabilities will not arise.

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

        No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2004.

PART II

ITEM 5.    MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
               MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

        Since March 5, 2003, the Company's Class A and Class B common stock has been trading on the over-the-counter electronic bulletin board (the "OTCBB") under the symbols "POLGA" and "POLGB," respectively. 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 and Class B common stock trade on the OTCBB. No shares of Class D or Class E common stock are outstanding. There is no established trading

15

market for the Class C common stock and, as such, no ticker symbol has been assigned to the Class C common stock. The Class B common stock is convertible to Class A common stock and, accordingly, the Class B common stock trades on a comparable basis to the Class A common stock. The following table sets forth for fiscal 2004 and 2003 the high and low market prices of the Company's Class A common stock:

Class A common stock:

        The Company officially emerged from Chapter 11 on March 5, 2003 and was not traded for several weeks after emergence. Hence, there is no high and low information for the first quarter of 2003. The high and low bid prices above reflect inter-dealer prices without markup, markdown or commission and may not necessarily represent actual transactions.

        The Company paid no dividends on its common stock during fiscal years 2004 or 2003. The Bank Facility limits restricted payments, which includes dividends payable in cash, to $5.0 million in the aggregate since the effective date of the Bank Facility.

        As of March 15, 2005, there were seven, 338 and one holders of record of the Company's Class A, Class B and Class C common stock, respectively.

ITEM 6.    SELECTED FINANCIAL DATA

        The following table sets forth certain selected historical consolidated financial information of the Company for periods both before and after emerging from the Chapter 11 process on March 5, 2003. For accounting purposes, the financial statements reflect the reorganization as if it was consummated on March 1, 2003. Therefore, the Consolidated Balance Sheet and related information as of January 1, 2005 and January 3, 2004 and the Consolidated Statement of Operations and related information for the fiscal year ended January 1, 2005 and the ten months ended January 3, 2004 are referred to as "Successor" and reflect the effects of the reorganization and the principles of fresh start accounting. Periods presented prior to March 1, 2003 have been referred to as "Predecessor". See Note 4 to the Company's Consolidated Financial Statements included in Item 8 to this Annual Report on Form 10-K for a discussion of fresh start adjustments. The statement of operations data for each of the five years ended January 1, 2005 and the balance sheet data as of January 1, 2005, January 3, 2004, December 28, 2002, December 29, 2001 and December 30, 2000 have been derived from audited consolidated financial statements, except for the balance sheet data, statement of operations data, per share data and operating and other data "as restated," as of, and for the year ended, December 30, 2000 and the balance sheet data as of March 1, 2003, each of which is unaudited. The table should be read in

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conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Item 7 to this Annual Report on Form 10-K and the Consolidated Financial Statements of the Company and related notes thereto included in Item 8 of this Annual Report on Form 10-K.

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Notes to Selected Consolidated Financial Data

(a)

The selected Statement of Operations data for the ten months ended January 3, 2004, the two months ended March 1, 2003, the fiscal years ended December 28, 2002, December 29, 2001 and December 30, 2000 have been adjusted to reflect the reclassification of certain immaterial rebates, promotional incentives and freight billed to customers from Selling, general and administrative expenses to Net sales.



(b)

The selected financial data for the year ended December 30, 2000 was restated in the Annual Report on Form 10-K for the year ended January 3, 2004 to correct the accounting related to a Joint Development Agreement between the Company and one of its major suppliers. In the year ended December 30, 2000, the Company entered into a Joint Development Agreement and a Supply Agreement with a major supplier that were accounted for by the Predecessor Company as separate arrangements. Payments received of $6.8 million from the Company's supplier under the Joint Development Agreement in fiscal 2000 were recorded as a reduction of previously incurred start-up costs, which were classified within cost of goods sold in the Predecessor Company's consolidated statement of operations.

Certain facts came to the attention of the Successor Company in 2004 that would have altered the accounting for the Joint Development Agreement. Based on the newly discovered facts, the Company concluded that the Joint Development Agreement and the Supply Agreement should have been viewed as jointly negotiated, concurrent transactions, rather than independent of each other. Accordingly, payments received under the Joint Development Agreement in 2000 should not have been recognized in operating income during the year ended December 30, 2000 but should have been deferred, until the earnings process was complete, to correspond with the accounting employed for the Supply Agreement.

Therefore, the Successor Company has adjusted the unaudited selected financial data for the year ended December 30, 2000, which appears under the caption "as restated", to reflect the proper accounting for the jointly negotiated, concurrent transactions, by increasing cost of sales by $6.8 million and the benefit for income taxes by $2.4 million, resulting in a net $4.4 million increase in the previously reported net loss of $4.3 million, which is now restated as a net loss of $8.7 million.

The impact of accounting for the agreements as jointly negotiated, concurrent transactions rather than as independent of each other was not material to the Company's reported financial results for fiscal years ended December 29, 2001 and December 28, 2002 and, therefore, no adjustments have been made to those years.

(c)

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

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 to this Annual Report on Form 10-K. In particular, this discussion should be read in conjunction with Note 3 "Chapter 11 Proceedings and Recapitalization", Note 4 "Fresh Start Accounting" and Note 5 "Business Restructuring and Asset Impairment," 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 and fresh start accounting associated with the Company's emergence from the Chapter 11 process effective March 5, 2003.

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        For accounting purposes, the Company recognized the emergence on March 1, 2003, which was the end of the February 2003 accounting period. Fresh start accounting has been implemented as of March 1, 2003 and, accordingly, at that date, all assets and liabilities were restated to reflect their respective fair value. See Note 4 of the Company's Consolidated Financial Statements included in Item 8 to this Annual Report on Form 10-K for a discussion of the fresh start adjustments. For financial reporting purposes, references to "Predecessor" refer to the Company on and prior to March 1, 2003 and references to "Successor" refer to the Company on and after March 2, 2003, after giving effect to the implementation of fresh start reporting. Successor consolidated financial statements are not comparable to Predecessor consolidated financial statements. However, for purposes of this discussion of results of operations, certain of the data for the ten months ended January 3, 2004 (Successor) have been combined with the two months ended March 1, 2003 (Predecessor) for comparisons with the fiscal years ended January 1, 2005 (Successor) and December 28, 2002 (Predecessor).

Results of Operations

        The following table sets forth the percentage relationships to net sales of certain income statement items for the 2004 periods in comparison to the corresponding 2003 (combined) and 2002 periods.

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Comparison of Successor Year Ended January 1, 2005 and Combined Successor and Predecessor Year Ended January 3, 2004

        The Company's reportable segments consist of its two operating divisions, Nonwovens and Oriented Polymers. For additional information regarding segment data, see Note 18 "Segment Information" to the Consolidated Financial Statements included in Item 8 to this Annual Report on Form 10-K. The following table sets forth components of the Company's net sales and operating income (loss) by operating division for fiscal 2004, the ten months ended January 3, 2004, the two months ended March 1, 2003 and the combined 2003 period and the change from 2003 to 2004 (in millions):

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Net Sales

        Consolidated net sales were $844.7 million in 2004, an increase of $66.9 million or 8.6% over 2003 consolidated net sales of $777.8 million. Net sales for 2004 in the Nonwovens and Oriented Polymers segments improved over comparable 2003 fiscal year results by 7.8% and 11.9%, respectively. Fiscal 2004 consisted of 52 weeks, whereas the combined 2003 fiscal year consisted of 53 weeks. A reconciliation of the change in net sales between 2003 and 2004 is presented in the following table (in millions):

        The increase in net sales during 2004 was due primarily to volume gains, especially in the United States and Latin American markets, and the strengthening of foreign currencies versus the U. S. dollar. Sales dollars were positively impacted in 2004 by the price/mix of sales largely due to increases in sales price in an effort to pass along raw material cost increases to customers. As raw material costs rose during the current year, the Company followed the consistent policy of passing raw material prices along to its customers, where allowable by contract terms and where acceptable based on market conditions. The aforementioned increases in sales were partially offset by decreases associated with businesses sold or exited. Overall, the Company continued to build momentum in the marketplace, following its emergence from the Chapter 11 process on March 5, 2003.

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

        Foreign currencies, predominantly the Euro and the Canadian dollar, were stronger against the U.S. dollar during 2004 compared to 2003 resulting in an increase in net sales of $23.0 million due to the favorable foreign currency translation. Further discussion of foreign currency exchange rate risk is contained in "Quantitative and Qualitative Disclosures About Market Risk" included in Item 7A to this Annual Report on Form 10-K.

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Operating Income

        A reconciliation of the change in operating income between 2003 and 2004 is presented in the following table (in millions):

        Consolidated operating income was $63.3 million in 2004 as compared to $32.6 million in 2003. The improvement in operating income was positively impacted by volume improvements noted above. The $17.0 million arbitration settlement, which was received during the second quarter and reported net of $3.9 million of legal and other associated arbitration costs, also favorably impacted operating income. Other items contributing to the improvement of operating income were cost savings as a result of previous business restructuring efforts and lower asset impairment charges, net of a $1.0 million increase in plant realignment costs. Offsetting these favorable impacts were higher raw material costs which could not be passed along to customers in the form of price increases, higher depreciation and amortization charges and higher selling, general and administrative expenses. The increase in raw material costs was driven by increases in the prices charged by vendors. The expectation for fiscal 2005 is that raw material costs will continue to escalate and the Company will continue its efforts to pass along such increases to its customers. The increase in selling, general and administrative expenses was primarily related to higher sales levels. The increase in depreciation and amortization charges is primarily related to the installation of the new production line in Latin America.

Interest Expense and Other

        Net interest expense decreased $19.4 million, from $59.7 million in 2003 to $40.3 million in 2004. Those totals include $1.8 million and $3.7 million, respectively, of payment in kind in lieu of cash interest on the Junior Notes. The decrease in net interest expense was primarily due to the lower interest rates obtained by refinancing the Company's previous Restructured Credit Facility with the new Bank Facility, effective April 27, 2004. Additionally, in conjunction with the refinancing, the Company's majority shareholder exchanged on April 27, 2004 approximately $42.6 million in aggregate principal amount of the Junior Notes for 42,633 shares of PIK Preferred Shares, which also contributed to lower interest costs during the period. Also subsequent to the refinancing, the remaining $10.1 million of Junior Notes were exchanged for 10,083 shares of the Company's PIK Preferred Shares and 6,719 shares of the Company's Class A Common Stock.

        Foreign currency and other expense increased $0.5 million, from $7.2 million in fiscal 2003 to $7.7 million in fiscal 2004. The 2004 amount includes a charge of $5.0 million for the write-off of the loan acquisition costs related to the refinancing of the Company's previous Restructured Credit Facility, whereas 2003 includes $1.1 million of costs related to an aborted refinancing effort.

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Reorganization Items

        As further described in Note 3 "Chapter 11 Proceedings and Recapitalization" and Note 4 "Fresh Start Accounting" to the Consolidated Financial Statements included in Item 8 to this Annual Report on Form 10-K, the Company recognized a net gain of $540.5 million in reorganization items upon its emergence from Chapter 11 in 2003. These reorganization items primarily included gains on cancellation of prepetition indebtedness of $619.9 million offset by fresh start adjustments of $47.5 million and other costs associated with the reorganization of $31.9 million.

Income Tax Expense (Benefit)

        The Company recorded a net income tax expense of $8.0 million in 2004 on consolidated income before income taxes of $12.7 million for such period. The effective rate in 2004 was in excess of the statutory rate primarily due to withholding taxes on intercompany royalties, interest and dividends, for which the Company is not anticipating the benefit of foreign tax credits, state income taxes in the United States, and no significant income tax benefit recognized for the losses incurred in the United States and certain foreign jurisdictions. During 2003, the Company recorded an income tax expense of $4.6 million, primarily related to taxable income generated by foreign operations. The effective rate in 2003 differed from the statutory rate primarily as a result of the exclusion from taxable income of the gain from the cancellation of indebtedness. Additionally, no income tax benefits were attributed to the 2003 operating losses sustained in the United States and, as a result of its reorganization, all United States tax loss carryforwards expired as of January 4, 2004.

Net Income

        As a result of the above, the Company recognized net income of $4.7 million in fiscal 2004 compared to net income of $499.4 million in 2003.

Accrued Dividends on PIK Preferred Shares

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

Income (Loss) Applicable to Common Shareholders

        As a result of the above, the Company recognized a loss applicable to common shareholders of $0.8 million in fiscal 2004 compared to income applicable to common shareholders of $499.4 million in 2003.

23

Comparison of Combined Successor and Predecessor Year Ended January 3, 2004 and Predecessor Year Ended December 28, 2002

        The following table sets forth components of the Company's net sales and operating income (loss) by operating division for the ten months ended January 3, 2004, the two months ended March 1, 2003, the combined 2003 period and the corresponding change from 2002 (in millions):

Net Sales

        Consolidated net sales were $777.8 million in 2003, an increase of $23.4 million or 3.1% over 2002 consolidated net sales of $754.4 million. The combined 2003 fiscal year consisted of 53 weeks, whereas fiscal 2002 consisted of 52 weeks. A reconciliation of the change in net sales between 2002 and 2003 is presented in the following table (in millions):

        The increase in net sales during 2003 was due primarily to a strengthening of foreign currencies versus the U. S. dollar offset by volume declines and an unfavorable price/mix of products sold. Excluding the favorable effects of foreign currency translation, economic and business issues continued to impact both operating divisions during 2003 as the Company's businesses were unfavorably impacted by general economic conditions in certain regions of the world-wide economy and by the effects of the financial restructuring efforts associated with the Company's Chapter 11 process, including, in some instances, lost sales from existing customers. However upon emergence from the Chapter 11 process on March 5, 2003, the Company was successful in stabilizing the business, and the

24

combined June, September and December quarters of 2003 reflected sales growth of 3.0% over the prior year comparable period.

        Within the Company's nonwovens business, lower sales volume in the U.S. hygiene and medical markets and lower sales volume within the European hygiene and wipes markets were partially offset by volume gains in Latin America and Asia. The 2003 sales were negatively impacted by lower selling price/mix versus 2002 which occurred primarily within the U.S. and European consumer markets, driven by general economic conditions and competitive pricing pressures.

        Foreign currencies, predominantly the Euro and the Canadian dollar, were stronger against the U.S. dollar during 2003 compared to 2002 resulting in an increase in net sales of $42.6 million due to the favorable foreign currency translation. Further discussion of foreign currency exchange rate risk is contained in "Quantitative and Qualitative Disclosures About Market Risk" included in Item 7A to this Annual Report on Form 10-K.

Operating Income (Loss)

        A reconciliation of the change in operating income (loss) between 2002 and 2003 is presented in the following table (in millions):

        Consolidated operating income was $32.6 million in 2003 as compared to a loss of $306.6 million in 2002. The 2002 and 2003 operating income was negatively impacted by charges of $325.2 million and $8.0 million, respectively, for asset impairment, plant realignment and other restructuring costs, or a positive impact for 2003 of $317.2 million. Other items contributing to the improvement of operating income in 2003 were cost savings and other initiatives resulting from plant realignment and business restructuring of $20.6 million, lower depreciation and amortization of approximately $15.9 million, primarily resulting from a lower depreciable fixed asset base produced by asset impairment charges in the fourth quarter of fiscal 2002 and fresh start accounting. Offsetting these favorable impacts were higher raw material costs of $16.2 million, predominantly in the U.S., Canadian, Latin American and Asian businesses, and lower selling price/mix of $9.5 million driven primarily by general economic weakness and competitive pricing pressures in the marketplace.

        As part of the Company's restructuring plan initiated upon emergence from Chapter 11, the Company undertook a broader business restructuring aimed at reducing operating costs at both the manufacturing plant and corporate levels, improved manufacturing productivity and component cost savings through implementation of a global purchasing initiative and business and asset rationalization. Manufacturing and operating cost savings were realized within each business segment in 2003 as a result of these restructuring initiatives.

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        Partially as a result of its cost reduction initiatives, the Company reduced its selling, general and administrative expenses to $94.6 million in the 2003 fiscal year from $100.2 million in fiscal 2002. This $5.6 million reduction (comprised of a $9.6 million cost savings offset by a $4.0 million unfavorable currency impact) in such expenses represented a 5.6% year-over-year improvement.

Asset Impairment, Plant Realignment and Other Charges

        As further discussed in Note 5 "Business Restructuring and Asset Impairment" to the Consolidated Financial Statements included in Item 8 to this Annual Report on Form 10-K, the Company continued its restructuring and realignment efforts in 2003. These involved manufacturing initiatives and workforce reductions, of approximately 164 employees in the U.S. and Europe. As a result of the restructuring and realignment, the Company recorded pre-tax charges of $8.0 million during 2003. The charges consisted of personnel, facility closing costs and asset impairment. During fiscal 2002, the Company recorded a charge of $317.9 million for writedown of production assets and buildings ($234.0 million) and goodwill and other intangibles ($83.9 million). Additionally, during fiscal 2002 the Company reduced its headcount by approximately 54 employees recognizing a charge to operating results of $1.1 million. Also, as part of the Company's financial restructuring, the Company recorded other charges in fiscal 2002 of $6.2 million.

Interest Expense and Other

        Net interest expense decreased $11.8 million, from $71.5 million in 2002 to $59.7 million in 2003, which included $3.7 million of accrued interest on the Junior Notes that was a payment in kind in lieu of a cash payment. The decrease in interest expense is due to significantly lower debt levels in 2003 compared to 2002, although it should be noted that the Company discontinued accruing interest on the Senior Subordinated Notes as of the Petition Date (May 11, 2002) in accordance with SOP 90-7. The lower debt balances were partially offset by higher interest rates in 2003 as interest expense under the Company's Restructured Credit Facility accrued at 12.0% during 2003.

Reorganization Items

        As further described in Note 3 "Chapter 11 Proceedings and Recapitalization" and Note 4 "Fresh Start Accounting" to the Consolidated Financial Statements included in Item 8 to this Annual Report on Form 10-K, the Company recognized a net gain of $540.5 million in reorganization items upon its emergence from Chapter 11. These reorganization items primarily included gains on cancellation of prepetition indebtedness of $619.9 million offset by fresh start adjustments of $47.5 million and other costs associated with the reorganization of $31.9 million.

Income Tax Expense (Benefit)

        The Company recorded a net income tax expense of $4.6 million in 2003 primarily related to taxable income generated by foreign operations. The effective rate in 2003 differed from the statutory rate primarily as a result of the exclusion from taxable income of the gain from the cancellation of indebtedness. Additionally, no income tax benefits were attributed to the 2003 losses sustained in the U.S. as such losses could not be carried back to prior periods and, as a result of the reorganization, all U.S. loss carryforwards expired as of January 4, 2004. During 2002, the Company recorded an income tax benefit of $3.3 million, representing an effective tax benefit rate of 0.8%.

Net Income (Loss)

        As a result of the above, the Company recognized net income of $499.4 million in fiscal 2003 compared to a net loss of $419.6 million in 2002.

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LIQUIDITY AND CAPITAL RESOURCES

        The Company's principal sources of liquidity for operations and expansions are funds generated from operations and borrowing availabilities under the Bank Facility, consisting of a revolving credit facility with aggregate commitments of up to $50.0 million and senior secured first lien term loan of $300.0 million and a senior secured second lien term loan of $125.0 million. The revolving portion of the Bank Facility terminates on April 27, 2009, the first lien term loan is due April 27, 2010 and the second lien term loan is due April 27, 2011. The Bank Facility contains covenants and events of default customary for financings of this type, including total leverage and interest expense coverage. At January 1, 2005, the Company is in compliance with all such covenants. As of January 1, 2005, the Company had no outstanding borrowings under the revolving credit agreement.

Operating Activities

        Net cash provided by operating activities was $69.9 million during 2004, a $49.6 million increase from the $20.3 million provided by operating activities during 2003. The Company's cash generation from operations in 2004 was positively impacted by improved operating results and by the net arbitration settlement proceeds of $13.1 million and a $16.7 million decrease in net interest cash costs, with such positive impacts being partially offset by increases in working capital, primarily due to the growth in sales in 2004.

        The Company had working capital of approximately $187.3 million at January 1, 2005 compared with $119.1 million at January 3, 2004. Excluding the current portion of long-term debt, working capital was $190.8 million at January 1, 2005, compared to $153.1 million at January 3, 2004. Accounts receivable on January 1, 2005 was $112.3 as compared to $121.1 million on January 3, 2004, a decrease of $8.8 million. Accounts receivable represented approximately 46 days of sales outstanding at January 1, 2005, compared to 60 days of sales outstanding at January 3, 2004. The decrease was due to improved efforts in managing the contract sales terms and refinements to the collection process related to receivables, including the sale of certain receivables pursuant to factoring agreements. Inventories at

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January 1, 2005 were approximately $106.3 million, an increase of $9.8 million from inventories at January 3, 2004 of $96.5 million. The Company had inventory representing approximately 54 days of cost of sales on hand at January 1, 2005 versus 59 days of cost of sales on hand at January 3, 2004. Accounts payable at January 1, 2005 was $63.8 million as compared to $57.1 million on January 3, 2004, an increase of $6.7 million. Accounts payable represented 32 days of cost of sales outstanding at January 1, 2005 as compared to 35 days of cost of sales outstanding at the end of fiscal 2003.

        The Company's 2004 and 2003 restructuring activities are discussed in Note 5 "Business Restructuring and Asset Impairment" to the Consolidated Financial Statements included in Item 8 to this Annual Report on Form 10-K.

Investing and Financing Activities

        Cash used for investing activities amounted to $23.1 million and $25.1 million in 2004 and 2003, respectively. Capital expenditures during 2004 totaled $24.8 million, a decrease of $14.9 million from capital spending of $39.7 million in 2003. A significant portion of the capital expenditures in 2004 related to the installation of a state-of-the-art nonwovens production line at the Cali, Colombia manufacturing site, which is expected to become operational by December 2005. Investing activities during 2004 and 2003 included proceeds from the sale of assets of $1.7 million and $14.6 million, respectively.

        Cash used in financing activities amounted to $28.1 million and $25.6 million in 2004 and 2003, respectively. In 2004, the Company repaid, on a net basis, $15.8 million of its debt, whereas the Company repaid, on a net basis, $23.8 million of its debt during 2003. In addition, the Company paid loan acquisition and other financing costs of $12.4 million and $1.8 million during 2004 and 2003, respectively.

Dividends

        The Board of Directors has not declared a dividend on the Company's common stock since the first quarter in 2001. The Bank Facility limits restricted payments to $5.0 million, including cash dividends, in the aggregate since the effective date of the Bank Facility. The Company does not anticipate paying dividends on its common stock in future periods.

        In January 2005, the Company's Board of Directors declared a dividend on the PIK Preferred Shares of approximately $5.6 million, payable in the form of additional PIK Preferred Shares.

Off-Balance Sheet Arrangements

        As of January 1, 2005, the Company has no off-balance sheet arrangements.

Contractual Obligations

        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 $4.0 million, $3.2 million and $5.9 million in 2004, 2003 and 2002, respectively. These expenses are recognized on a straight-line basis, over the life of the lease. Rental income approximated $0.6 million, $0.5 million and $1.9 million in 2004, 2003 and 2002, respectively. 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.

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        A schedule of the required payments under existing debt agreements and the amounts due under operating leases that have initial or non-cancellable lease terms in excess of one year as of January 1, 2005, are presented in tabular form below (in millions):

        Additionally, the Company expects to contribute approximately $6.0 million to its pension plans in 2005. Contributions in subsequent years will be dependent upon various factors, including actual return on plan assets, regulatory requirements and changes in actuarial assumptions such as health care cost trend rate and discount rate.

        As noted in the table above, the Company has approximately $414.0 million of debt outstanding as of January 1, 2005. The Company has fixed the interest rate on approximately 50% of the total debt through May 2007 with the use of a cash flow hedge agreement. Assuming the rate of interest remains unchanged from January 1, 2005, cash interest payments would be approximately $29.1 million, $28.9 million, $28.7 million, $28.6 million and $28.4 million for 2005, 2006, 2007, 2008 and 2009, respectively.

        At January 1, 2005, the Company had commitments of approximately $51.6 million related to the purchase of raw materials, maintenance, converting services and capital projects which are expected to result in cash payments during 2005. In addition, the Company had outstanding letters of credit, including the Nanhai letter of credit, at January 1, 2005 of approximately $12.5 million.

Liquidity Summary

        As discussed more fully in Note 11 to the Consolidated Financial Statements included in Item 8 to this Annual Report on Form 10-K, on April 27, 2004, the Company refinanced its existing bank credit facility and entered a new Bank Facility consisting of a $50.0 million revolving credit facility maturing in 2009, a $300.0 million senior secured first lien term loan that matures in 2010 and a $125.0 million senior secured second-lien term loan maturing in 2011. The proceeds therefrom were used to fully repay indebtedness outstanding under the Company's previous Restructured Credit Facility and pay related fees and expenses. The senior secured first lien term loan requires quarterly payments of $750,000 beginning in September 2004 and accrues interest at LIBOR plus 325 basis points. The senior secured second lien term loan accrues interest at LIBOR plus 625 basis points. The revolving credit facility initially bears interest at LIBOR plus 300 basis points. The Bank Facility provides the Company with increased flexibility in terms of cash availability, less stringent requirements for covenant compliance, extended maturity dates and substantially reduced net cash interest costs.

        The Bank Facility contains covenants and events of default customary in financings of this type, including leverage and interest expense coverage. The Bank Facility requires the Company to use a percentage of proceeds from excess cash flows, as defined by the Bank Facility, to reduce its debt balances. Through January 1, 2005, the Company had made the mandatory debt repayments of $1.5 million and optional repayments on the first lien term loan of $17.0 million, which amount was considered in the calculation of excess cash flow. Additionally, in accordance with the terms of the Bank Facility, the Company entered a cash flow hedge agreement, effectively converting $212.5 million of

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notional principal amount of debt from a variable LIBOR rate to a fixed LIBOR rate of 3.383%. The cash flow hedge agreement terminates on May 8, 2007.

        In conjunction with the Company's refinancing of the Restructured Credit Facility, the Company's majority shareholder exchanged approximately $42.6 million in aggregate principal amount of the Junior Notes it controlled for 42,633 shares of the Company's PIK Preferred Shares. Additionally, in the third quarter of 2004, $10.1 million of aggregate principal amount of the Company's Junior Notes were exchanged for 10,083 shares of the Company's PIK Preferred Shares and 6,719 shares of the Company's Class A Common Stock. The dividends on the PIK Preferred Shares accrue at an annual rate of 16% and are payable semi-annually in arrears on each January 1 and July 1, commencing with July 1, 2004, at the option of the Company, (i) through the issuance of additional PIK Preferred Shares; (ii) in cash; or (iii) in a combination thereof. Dividends are cumulative and accrue from the most recent dividend payment date to which dividends have been paid or, if no dividends have been paid, from the date of original issuance.

        On June 30, 2012, the Company must redeem all of the PIK Preferred Shares then outstanding at a price equal to $1,000 per share plus $1,000 per share for all unpaid dividends thereon whether or not declared, which amount will be payable by the Company, at the option of the Company, (i) in cash; (ii) through the issuance of shares of Class A Common Stock; or (iii) through a combination thereof. If paid in stock, the number of shares to be delivered by the Company will be the mandatory redemption price (as defined earlier) divided by the then market price of a share of Class A Common Stock.

        At any time prior to June 30, 2012, the holders of the PIK Preferred Shares may elect to convert any or all of their PIK Preferred Shares into shares of the Company's Class A Common Stock at a conversion price equal to $7.29 per share. Also, at any time prior to June 30, 2012, provided certain conditions have been met, the Company may elect to redeem the shares, which redemption price may be paid by the Company, (i) in cash; (ii) through the issuance of shares of Class A Common Stock; or (iii) through a combination thereof. If paid in stock, the number of shares to be delivered by the Company will be the optional redemption price (as defined by the preferred stock agreement) divided by the then market price of a share of Class A Common Stock. The Company currently expects to settle the mandatory or optional redemption with the issuance of shares of Class A Common Stock.

        On November 15, 2004, the Company entered into a factoring agreement to sell without recourse, certain receivables to an unrelated third-party financial institution. Under the terms of the factoring agreement, the maximum amount available for the purchase of domestic receivables at any one time is $15.0 million, which limitation is subject to change based on the level of eligible receivables, restrictions on concentrations of receivables and the historical performance of the receivables sold. The sale of these receivables accelerates the collection of the Company's cash, reduces credit exposure and lowers the Company's borrowing costs.

        As discussed in Note 20 to the Consolidated Financial Statements included in Item 8 to this Annual Report on Form 10-K, the Company has committed to several major projects to expand its worldwide capacity, including the installation of a new line in Cali, Colombia, an adhesive bond line in Nanhai, China and line enhancements in Benson, North Carolina. Additionally, the Company announced on March 22, 2005 that it will install a new spunmelt line in the United States. The financial flexibility needed for these and other capital projects was provided in an amendment, dated March 16, 2005, to the Bank Facility.

        Based on the ability to generate positive cash flows from its operations and the improved financial flexibility provided by the Bank Facility, as amended, the Company believes that it has the financial resources necessary to meet its operating needs, fund its capital expenditures and make all necessary contributions to its retirement plans. Additionally, based on the refinancing of its debt and the exchange of its Junior Notes for PIK Preferred Shares and Class A common stock, the Company believes that it has significantly reduced its cash interest costs, improved its financial flexibility and strengthened its financial position.

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Off-Balance Sheet Arrangements

        The Company does not have any off-balance sheet arrangements.

Effect of Inflation

        Inflation generally affects the Company by increasing the costs of labor, overhead, and equipment. The impact of inflation on the Company's financial position and results of operations has been minimal during 2004, 2003 and 2002.

New Accounting Standards

        In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"), and amended it by issuing FIN 46R in December 2003. This interpretation provides guidance on how to identify variable interest entities ("VIEs") and how an enterprise should assess its interest in a VIE in order to determine whether the entity should be consolidated. This interpretation requires existing unconsolidated VIEs to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved. VIEs that effectively disperse risks will not be consolidated unless a single party holds an interest or combination of interest that effectively recombines risks that were previously dispersed. In December 2003, the FASB completed deliberations of proposed modifications to FIN 46 and issued revised interpretations resulting in multiple effective dates based on the nature, as well as the creation date, of the VIE. VIEs created after January 31, 2003, but prior to January 1, 2004, may be accounted for based on either interpretation. VIEs created after January 1, 2004 must be accounted for under the revised interpretations. Special Purpose Entities ("SPEs") created prior to February 1, 2003 may be accounted for based on either interpretation. Non-SPEs created prior to February 1, 2003 should be accounted for under the revised interpretation's provisions. The Company has determined that it does not have any relationships or contracts that constitute a variable interest.

        In May 2004, the FASB issued FASB Staff Position No. 106-2, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003" ("FSP 106-2"). FSP 106-2 permits a sponsor of a postretirement health care plan that provides a prescription drug benefit to make a one-time election to defer accounting for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 ("the Act"), which was signed into law on December 8, 2003. The Act introduced a prescription drug benefit under Medicare and federal subsidies to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to that of Medicare. As permitted under FSP 106-2, the Company made a one-time election to defer accounting for the effect of the Act and as more fully explained in Note 13 to the consolidated financial statements, in December 2004 the Company approved plan amendments curtailing or eliminating various postretirement benefits in the U.S. As a result, the amounts included in the Consolidated Financial Statements related to the Company's postretirement benefit plans do not reflect the effects of the Act.

        In November 2004, the FASB issued SFAS No. 151, "Inventory Costs" ("SFAS No. 151"). This statement amends earlier guidance to require that abnormal freight, handling and spoilage costs be recognized as current-period charges rather than capitalized as an inventory cost. In addition, SFAS No. 151 requires that the allocation of fixed production overhead costs be based on the normal capacity of the production facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company is currently analyzing the new guidance and does not expect it to have a material impact on its financial position or results of operations.

Critical Accounting Policies And Other Matters

        The Company's analysis and discussion of its financial position and results of operations are based upon its consolidated financial statements that have been prepared in accordance with accounting

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principles generally accepted in the United States ("U.S. GAAP"). The preparation of financial statements in conformity with U.S. GAAP requires the appropriate application of certain accounting policies, many of which require management to make estimates and assumptions about future events that may affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. Since future events and their impact cannot be determined with certainty, the actual results will inevitably differ from the estimates. The Company evaluates these estimates and assumptions on an ongoing basis, including but not limited to those related to fresh start accounting, revenue recognition sales returns and allowances and credit risks, inventories, income taxes, and impairment of long-lived assets. Estimates and assumptions are based on historical and other factors believed to be reasonable under the circumstances. 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:

        Fresh Start Accounting:    In connection with the Company's Chapter 11 reorganization, the Company has applied Fresh Start Accounting (as defined herein) to its Consolidated Balance Sheet as of March 1, 2003 in accordance with Statement of Position No. 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" as promulgated by the AICPA. Under Fresh Start Reporting, a new reporting entity is considered to be created and the recorded amounts of assets and liabilities are adjusted to reflect their estimated fair values at the date Fresh Start Accounting is applied. On March 5, 2003, the Company emerged from bankruptcy. For financial reporting purposes, March 1, 2003 is considered the emergence date and the effects of the reorganization have been reflected in the accompanying financial statements as if the emergence occurred on that date.

        The reorganization value of the Company's new common equity at March 1, 2003 of approximately $73.4 million was determined based on an independent valuation by financial specialists after consideration of multiple factors and by using various valuation methodologies and evaluating other relevant industry information. The reorganization value of the Company was allocated to the various assets and liabilities based on their respective fair values pursuant to Fresh Start Accounting principles. The calculated reorganization value of the Company was based on a variety of estimates and assumptions about future circumstances and events. Such estimates and assumptions are inherently subject to significant economic uncertainties.

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

        Accounts Receivable and Concentration of Credit Risks:    Accounts receivable potentially expose the Company to a 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 its customers' financial condition as deemed necessary, but generally does not require collateral to support such receivables. The Company

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also establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. Also, in an effort to reduce its credit exposure to certain customers, as well as accelerate its cash flows, in 2004 the Company sold, on a non-recourse basis, certain of its receivables pursuant to a factoring agreement. At January 1, 2005, a reserve of $10.9 million has been recorded as an allowance against trade accounts receivable. Management believes that the allowance is adequate to cover potential losses resulting from uncollectible accounts receivable and deductions resulting from sales returns and allowances.

        Inventory Reserves:    The Company maintains reserves for inventories valued using the first in, first out (FIFO) method. Such reserves for inventories can be specific to certain inventory or general based on judgments about the overall condition of the inventory. General reserves are established based on percentage write-downs applied to inventories aged for certain time periods. Specific reserves are established based on a determination of the obsolescence of the inventory and whether the inventory value exceeds amounts to be recovered through expected sales price, less selling costs. Estimating sales prices, establishing markdown percentages and evaluating the condition of the inventories require judgments and estimates, which may impact the inventory valuation and gross margins. Management believes based on its prior experience of managing and evaluating the recoverability of its slow moving or obsolete inventory that such established reserves are materially adequate.

        Impairment of Long-Lived Assets:    Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. For assets held and used, an impairment may occur if projected undiscounted cash flows are not adequate to cover the carrying value of the assets. In such cases, additional analysis is conducted to determine the amount of the loss to be recognized. The impairment loss is determined by the difference between the carrying amount of the asset and the fair value measured by future discounted cash flows. The analysis, when conducted, requires estimates of the amount and timing of projected cash flows and, where applicable, judgments associated with, among other factors, the appropriate discount rate. Such estimates are critical in determining whether any impairment charge should be recorded and the amount of such charge if an impairment loss is deemed to be necessary. In addition, future events impacting cash flows for existing assets could render a writedown necessary that previously required no writedown.

        For assets held for disposal, an impairment charge is recognized if the carrying value of the assets exceeds the fair value less costs to sell. Estimates are required of fair value, disposal costs and the time period to dispose of the assets. Such estimates are critical in determining whether any impairment charge should be recorded and the amount of such charge if an impairment loss is deemed to be necessary. Actual cash flows received or paid could differ from those used in estimating the impairment loss, which would impact the impairment charge ultimately recognized and the Company's cash flows.

        Income Taxes:    The Company records an income tax valuation allowance when the realization of certain deferred tax assets, including net operating losses and capital loss carry forwards 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.

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. The Company believes that it is currently in substantial compliance with applicable environmental requirements and does not currently anticipate any material adverse effect on its operations, financial or competitive position as a result of its efforts to comply with environmental requirements. Some risk of environmental liability is inherent, however, in the

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nature of the Company's business and, accordingly, there can be no assurance that material environmental liabilities will not arise.

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

        The Company is exposed to market risks for changes in foreign currency rates and interest rates and has exposure to commodity price risks, including prices of its primary raw materials. The overall objective of the Company's financial risk management program is to seek a reduction in the potential negative earnings impact of changes in interest rates, foreign exchange and raw material pricing arising in our business activities. The Company manages these financial exposures, where possible, through operational means and by using various financial instruments. These practices may change as economic conditions change.

Long-Term Debt and Interest Rate Market Risk

        The Company's long-term borrowings are variable interest rate debt. As such, the Company's interest expense will increase as interest rates rise and decrease as interest rates fall. It is the Company's policy to enter into interest rate derivative transactions only to meet its stated overall objective. The Company does not enter into these transactions for speculative purposes. To that end, as further described in Note 16 to the Consolidated Financial Statements included in Item 8 to this Annual Report on Form 10-K, the Company entered into an interest rate swap contract to effectively convert $212.5 million of its variable-rate debt to fixed-rate debt. Hypothetically, a 1% change in the interest rate affecting all of the Company's financial instruments not protected by the interest rate swap contract would change interest expense by approximately $2.0 million.

        The estimated fair value of the Company's debt at January 1, 2005 was approximately $421.5 million, which approximated its carrying value. Fair market values were determined from estimates made by investment bankers.

Foreign Currency Exchange Rate Risk

        The Company manufactures, markets and distributes certain of its products in Europe, Canada, Latin America and Asia. As a result, the Company's financial statements could be significantly affected by factors such as changes in foreign currency rates in the foreign markets in which the Company maintains a manufacturing or distribution presence. However, such currency fluctuations have much less effect on local operating results because the Company, to a significant extent, sells its products within the countries in which they are manufactured. During 2004 and 2003, certain currencies of countries in which the Company conducts foreign currency denominated business strengthened 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" included in Item 7 to this Annual Report on Form 10-K.

        The Company has not historically hedged its exposure to foreign currency risk, although it has mitigated its risk of currency losses on foreign monetary assets by sometimes borrowing in foreign currencies as a natural hedge. The Company is also subject to political risk in certain of its foreign operations.

Raw Material and Commodity Risks

        The primary raw materials used in the manufacture of most of the Company's products are polypropylene resin, polyester fiber, polyethylene resin, and, to a lesser extent, rayon, tissue paper and cotton. The prices of polypropylene, polyethylene and polyester are a function of, among other things, manufacturing capacity, demand and the price of crude oil and natural gas liquids. The Company has not historically hedged its exposure to raw material increases, but has attempted to move more customer programs to contracts, which would allow the Company to pass-through any cost increases in raw

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materials. Raw material prices as a percentage of sales have increased from 46.9% in 2003 to 48.6% for 2004.

        To the extent the Company is not able to pass along price increases of raw materials, or to the extent any such price increases are delayed, the Company's cost of goods sold would increase and its operating profit 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 $2.9 million, on an annualized basis, in its reported operating income. 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" included in Item 7 to this Annual Report on Form 10-K.

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ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders
Polymer Group, Inc.

        We have audited the accompanying consolidated balance sheets of Polymer Group, Inc. as of January 1, 2005 and January 3, 2004 and the related consolidated statements of operations, changes in shareholders' equity (deficit) and comprehensive income (loss), and cash flows for the fiscal year ended January 1, 2005, the ten months ended January 3, 2004, the two months ended March 1, 2003 (Predecessor Company and date of reorganization for accounting purposes) and the fiscal year ended December 28, 2002 (Predecessor Company). 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 the standards of the Public Company Accounting Oversight Board (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. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also 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 January 1, 2005 and January 3, 2004, and the consolidated results of their operations and their cash flows for the fiscal year ended January 1, 2005, the ten months ended January 3, 2004, the two months ended March 1, 2003 (date of reorganization for accounting purposes) and the fiscal year 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 more fully described in Note 2 to the consolidated financial statements, effective March 5, 2003, the Company emerged from protection under Chapter 11 of the U.S. Bankruptcy Court pursuant to a Modified Reorganization Plan that was confirmed by the Bankruptcy Court on January 16, 2003. In accordance with AICPA Statement of Position 90-7, the Company adopted "fresh start" accounting whereby its assets, liabilities and new capital structure were adjusted to reflect estimated fair value at March 1, 2003 (the date of reorganization for accounting purposes). As a result, the consolidated financial statements for the period subsequent to March 1, 2003 reflect the Successor Company's new basis of accounting and are not comparable to the Predecessor Company's pre-reorganization consolidated financial statements.

        Additionally, 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.

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POLYMER GROUP, INC.

CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)