Back to GetFilings.com

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

FOR THE YEAR ENDED DECEMBER 31, 2004

FOR THE TRANSITION PERIOD FROM              TO             

Commission File Number 333-122829

Propex Fabrics Inc.

(Exact name of registrant as specified in its charter)

260 The Bluffs, Austell, Georgia 30168

(Address of Principal Executive Offices)

(770) 941-1711

(Registrant’s Telephone Number, Including Area Code)

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

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

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 such filing requirements for the past 90 days.    Yes  ¨    No  x

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b2).    Yes  ¨    No  x

The Registrant is a wholly owned subsidiary of Propex Fabrics Holdings Inc., and there is no public market for the Registrant’s common stock.

Number of shares of common stock outstanding at March 30, 2005: 100 shares

Table of Contents

Propex Fabrics Inc.

Table of Contents to Form 10-K

For the Year Ended December 31, 2004

2

Table of Contents

GLOSSARY

The following are definitions of certain terms commonly used in the polypropylene synthetic fabrics industry and this annual report.

“Backing” refers to a reinforcing material for the back layer of carpet.

“Broadloom” refers to a carpet woven on a wide loom to mitigate the need for seams.

“FIBCs” means flexible intermediate bulk containers.

“Fiber” is a unit of matter, synthetic or natural, that forms the basic element of fabrics and other textile structures. Fiber is characterized by a very high ratio of length-to-width. Fiber is typically twisted together to make spun yarn or formed into a batt and bonded to make nonwoven fabric.

“Jute” is a natural fiber used for sacking burlap and twine and as a backing for tufted carpeting.

“Nonwoven” means a fabric consisting of an assembly of textile fibers, oriented in one direction or in a random manner, held together by mechanical interlocking; by fusing of thermoplastic fibers; or by bonding with a rubber, starch, glue, casein, latex, or a cellulose derivative or synthetic resin.

“Polypropylene” is a thermoplastic compound obtained by the polymerization of propylene. The catalysts used in polymerization determine the stereochemical structure of the polymer, yielding a wide product range with highly diverse applications. Polypropylene is a primary component of our woven and nonwoven fabrics and is typically supplied in the form of solid pellets.

“Primary backing” is a woven or nonwoven fabric through which yarn is inserted by tufting needles. Primary backing allows for positioning of the tufts and holds the tufts in place during processing prior to the application of the secondary backing.

“Secondary backing” is a woven or nonwoven fabric reinforcement that is laminated to the back of the carpet to enhance dimensional stability, strength, stretch resistance and stiffness.

“Tufted” means a method of manufacturing carpet. Tufts of fiber are inserted through a carpet backing to create a pile of cut and/or loop ends. Tufts of pile yarn are created by inserting the yarn through primary backing with a needle, forming a loop, then removing the needle. The tufts can then be either cut to form two ends or left as loops.

“Woven” means a fabric which is constructed by weaving interlacing threads or strips of material or other elements into a whole.

3

Table of Contents

PART I

Forward-Looking Statements

This document contains forward-looking statements. These statements are subject to risks and uncertainties and are based on the beliefs and assumptions of management, based on information currently available to management. Forward-looking statements are those that do not relate strictly to historical or current facts, and can be identified by the use of the future tense or other forward-looking words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “should,” “may,” “objective,” “projection,” “forecast,” “management believes,” “continue,” “strategy,” “position” or the negative of those terms or other variations of them or by comparable terminology. In particular, statements, express or implied, concerning future actions, conditions or events, future operating results or the ability to generate sales, income or cash flow are forward-looking statements. Forward-looking statements include the information concerning possible or assumed future results of our operations set forth under “Item 1. Business” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Future actions, conditions or events and future results of operations may differ materially from those expressed in these forward-looking statements. Many of the factors that will determine these results are beyond management’s ability to control or predict. Specific factors that could cause actual results to vary from those in the forward-looking statements include:

You are cautioned not to put undue reliance on any forward-looking statements, and we undertake no obligation to update those statements.

4

Table of Contents

Item 1. BUSINESS

Prior to December 1, 2004, we were owned by BP p.l.c. and operated under the name of Amoco Fabrics and Fibers Company in the U.S. and other names in our international locations (hereafter referred to as the “Predecessor” company during the periods prior to December 1, 2004). We were acquired by an investor group that includes the investment entities affiliated with The Sterling Group, L.P., Genstar Capital, L.P., and Laminar Direct Capital, L.P., which we refer to collectively as the “sponsors,” BNP Paribas Private Capital Group, through Paribas North America Inc., certain members of our senior management and certain other investors on December 1, 2004, and became a stand-alone company operating under the name Propex Fabrics Inc. (hereafter referred to as the “Successor” company during the subsequent period beginning on December 1, 2004).

Throughout the body of this 10-K filing, words such as “we,” “our,” and “us” are used in reference to both the Predecessor and Successor.

Our Company

We are the world’s largest producer of primary and secondary carpet backing, and a leading manufacturer and marketer of polypropylene-based synthetic fabrics used in a variety of other industrial applications. We pioneered the introduction of synthetic woven polypropylene carpet backing as a replacement to jute carpet backing, as well as the development of woven and nonwoven fabrics for other applications. We have been engaged in the textile industry since 1884.

For year ended December 31, 2004, we sold 2.8 billion square yards of fabric on a global basis, generating total revenues of $609.6 million.

We operate globally in the three geographic regions of North America, Europe and Brazil, from which we market our products to over 40 countries. In North America, our largest region, our operations are divided into two product segments: furnishings and industrial fabrics. Our Europe and Brazil regions operate as geographic segments.

We primarily sell our products to leading carpet manufacturers, well-known furniture and bedding manufacturers and distributors of industrial fabrics. We market our products under a variety of brands, including Polybac^® and Actionbac^®, and we believe that many of our products are among the most recognized in the industry and are highly respected for their quality and performance. We have excellent relationships with our over 300 customers, and we have served many of our key customers for over 30 years.

Our Strategy

We seek to increase revenues and cash flows by continuing to be the preferred supplier in our furnishings segment, particularly as a supplier of primary and secondary carpet backing in North America and Europe, while also growing sales in industrial fabrics across our various geographic regions, particularly Brazil.

5

Table of Contents

Capitalize on favorable growth dynamics. We anticipate continued strength in new sales and remodeling of residential and commercial properties across the U.S. housing and commercial construction industries. We expect this to translate into growth in demand for carpet backings. In addition, we believe that relative to traditional building products, our geotextile products are cost-effective and enhance performance in civil engineering projects, and that these synthetic fabrics will continue to displace and supplement traditional construction materials.

Maintain low cost position. We believe our extensive industry experience in furnishings, particularly in carpet backing, and the locations of our manufacturing facilities provide us with a low cost position. We intend to pursue selected opportunities to reduce our cost base by expanding our operations in low cost areas, such as Hungary and Brazil.

Expand our operations in regions with favorable growth dynamics. Our international presence, manufacturing advantage and broad product offering provide us with a competitive advantage across our markets. We believe there is a significant opportunity to increase Brazilian sales by adding additional capacity. Within the European secondary carpet backing business, we see opportunities to increase sales to our existing customers, due to our low cost manufacturing advantage.

Develop new products. We are committed to developing new products that improve upon our existing sales and generate new sources of revenue and profitability. We also intend to focus our efforts on supporting customers in key applications. As an example, we developed LOCBAC XP^® for leading carpet manufacturer Mohawk Industries, Inc., a carpet backing product which is featured on Mohawk’s fashion brands such as Karastan^® and Customweave^®.

Our Products

We manufacture synthetic yarn and fibers, which we use to produce our products for specific applications for our two primary product segments: furnishings and industrial fabrics.

Furnishings

Carpet backing:

Carpet backing is our largest product category. We produce both primary and secondary carpet backing in all of our geographic locations. Primary carpet backing is a tightly woven synthetic fabric into which carpet face fibers are tufted in the manufacture of broadloom floor coverings. Secondary carpet backing forms the base of a carpet and is an open-weave fabric that is adhered to the back of tufted broadloom to ensure both carpet integrity and dimensional stability.

Primary and secondary carpet backing are key components in the manufacturing of carpet and represent approximately 5.7% of the cost to produce carpeting. To meet the needs of our customers, we have a strong track record of successfully commercializing premium carpet backings. Polybac^® is the leading synthetic primary backing in the

6

Table of Contents

industry and is the most recognized product by our customers. It is a highly durable synthetic woven product with moisture and mildew resistance not present in natural fiber alternatives. The majority of our primary carpet backing product revenues result from sales of the following three product lines: Polybac^® fabric, Polybac^® Guideline fabric and Polybac^® FLW. Polybac^® Guideline provides a visual guideline that allows carpet manufacturers to monitor straightness during the manufacturing process. Our customers’ demand for this product has increased steadily since its introduction in 2000. Our Polybac^® FLW and Polybac^® CLW are designed with a layer of nylon fiber that is dyed with the carpet. We developed this multi-layered product to provide additional bulk, allowing carpet manufacturers to improve their cost structure by using less face yarn.

Our secondary carpet backing products primarily consist of a range of woven Actionbac^® fabrics, along with a number of specialty higher value-added secondary fabrics, such as Raschel^™ knitted secondary backing sold in Europe. Actionbac^® fabrics are the industry standard in secondary backing, known in our industry for stability over the life of the carpet. We are the sole provider of the LOCBAC XP^® carpet-backing product, which we developed for leading carpet manufacturer Mohawk Industries, Inc. and which is exclusive to Mohawk.

Furniture and bedding:

Our furniture and bedding line of products is sold primarily in North America. We offer a broad line of synthetic fabric products used primarily in the internal construction of furniture and bedding. Our polypropylene fabrics are tough with lightweight materials utilized as internal construction fabrics in bedding, upholstered furniture and automotive seating. We sell fabrics directly to bedding manufacturers and customers who convert our bulk products to the many different widths, shapes and roll lengths required by their customers.

Industrial Fabrics

Geotextiles:

Our geotextile fabrics are tough, versatile materials that lower the cost, enhance the performance and extend the life of civil engineering projects, with end use applications such as road construction, erosion control, drainage and soil reinforcement. We have a broad range of woven and nonwoven polypropylene geotextile products that meet the specifications for application and design of our customers. The proven chemical stability of polypropylene is a key reason for the widespread use of these fabrics. Woven and nonwoven geotextiles are utilized in drainage channels, shorelines, silt fences, and bridge and pier protection systems to prevent subgrade soil erosion and extend the life of these structures.

Our geotextile fabrics are also used in transportation and construction applications, including paving, reinforcement and stabilization. Geotextiles provide consistent and continuous filtering, reduced excavation, reduced environmental impact, simplified, higher quality construction, and a substantial reduction in material costs

7

Table of Contents

compared to traditional soil filters. In paving applications, nonwoven specialty paving fabrics, such as our Petromat^® paving fabric, and repair membranes are engineered to reduce water infiltration and reflective cracking, thereby saving on costly repaving cycles and extending the life of paved surfaces. In reinforcement applications, geotextiles are utilized as reinforcement in soil wall and slope systems. In stabilization applications, which represent the largest geotextile application, geotextiles are utilized to separate the aggregate base from subgrade soils in roadway and railroad construction. In this application, geotextiles can increase the effective bearing strength of low-strength subgrade soils.

Our geotextile fabrics are sold primarily in North America and Europe.

Packaging and protective coverings:

From North America and Brazil, we sell a wide variety of other industrial synthetic fabrics including protective covers, FIBCs, cotton and synthetic fiber bale covers and other agricultural applications. We market industrial fabrics for the following applications:

Our Markets

North America

In North America, as in all of the geographic regions we serve, we manufacture and produce polypropylene synthetic fabrics. We primarily sell our products to leading carpet manufacturers, well known furniture and bedding manufacturers and distributors of industrial fabrics. Our 2004 sales of $477.6 million to North American carpet backing, furniture and bedding and other industrial customers accounted for 78.3% of our total worldwide sales.

Furnishings

Carpet backing.

Carpet and carpet backing are part of the broader floor covering industry, which includes carpets and rugs, hardwood floors, ceramic floor and wall tiles, vinyl sheet and

8

Table of Contents

floor tile, rubber floor coverings and laminate floorings. Carpet represents the largest product in the overall floor covering market, accounting for approximately 68% of U.S. floor covering sales in 2003. Because of the importance of carpet backing in the production of carpet, the demand for carpet backing is closely linked to the demand for carpet. We sell our products for residential and commercial applications, which we estimate account for approximately 75% and 25% of the North American carpet backing volume demand, respectively.

Carpet sales are driven by the factors that influence the broader market for floor coverings. Floor covering demand is driven largely by home remodeling expenditures, which are frequently related to existing home sales, new housing starts and commercial property construction. These demand drivers are influenced by interest rates, consumer and business income growth and consumer confidence. While carpeting lost some ground to other floor covering products throughout the 1990’s, this trend has slowed recently. We believe carpeting should continue to perform well relative to other types of floor coverings due to carpet manufacturers’ commitment to utilizing new innovative patterns, designs and textures.

The carpet backing business differs regionally. Tufted carpet and rugs account for approximately 90% of all carpets and rugs manufactured in North America and approximately 60% in Europe. Virtually all tufted carpet and rugs utilize primary carpet backing. Secondary carpet backing is used in over 86% of tufted carpet and rugs in North America. Woven synthetic materials account for over 90% of all carpet backing sold in North America and approximately 77% in Europe. A wider range of materials is used in secondary carpet backing than in primary carpet backing. For example, woven synthetic fabrics are used in approximately 41% of all European secondary carpet backing.

We believe we are the largest provider of carpet backing in each of our regions.

Furniture and bedding. We manufacture a variety of needle punched, nonwoven internal construction fabrics for use in furniture and bedding applications in North America. In 2004, approximately 65% of our sales to furniture and bedding customers were attributable to bedding products and 35% to furniture products.

The principal macroeconomic factors influencing furniture and bedding sales are housing turnover, the directional movement of consumer confidence expectations and personal income levels. Despite the beneficial trend in home sales, other factors have adversely impacted furniture sales. Due largely to poor consumer economic confidence, limited discretionary expenditures and the increase of foreign imports into the U.S. furniture market, domestic furniture factory shipments in the United States have decreased at an average rate of 3% per year since 2000.

We believe we are the largest supplier of furniture and bedding construction fabrics in North America.

9

Table of Contents

Industrial fabrics

Geotextiles. We sell geotextile fabrics for civil engineering projects, road construction and landfill applications. Demand for woven and nonwoven polypropylene fabrics utilized in geotextile applications has increased over the past decade. A portion of this growth has come from the continued development of new applications for these products. We believe that demand for geotextiles will continue to grow at rates in excess of GDP driven by expected growth in civil construction activity and increased penetration of geotextiles due to their project life cycle cost advantages, as well as environmental regulations related to improving stormwater management and other drainage enhancements.

We believe we are one of the largest providers of geotextile fabrics in North America.

Packaging and protective coverings. We sell our synthetic fabrics to customers for use in various packaging and protective covering applications. We expect continued growth in the sales of our higher-end products, such as our specialty FIBCs. We believe demand for protective covering products will grow steadily with the U.S. economy as the construction industry continues to learn more about the benefits and applications of these synthetic fabrics.

Europe

In Europe our synthetic fabric is sold primarily to two groups of customers, carpet manufacturers and consumers of geotextiles. Our $93.0 million of sales from Europe accounted for 15.3% of our global sales in 2004.

Carpet backing. Tufted carpeting sales in Western Europe have declined steadily since 1999 due to a weakening economy and consumer preference. However, we believe tufted carpeting has started to regain share in floor coverings as the carpeting industry as a whole has focused on promoting the advantages of tufted carpets, including the added comfort, warmth, design and even safety. We believe there are growth opportunities in Eastern Europe and other countries of the former Soviet Union as these economies develop.

In Europe, alternative secondary backings, such as foam, jute and felt, are sometimes utilized to provide cushioning; however, we believe polypropylene secondary carpet backing offers several advantages such as ease of removal/replacement and enabling faster carpet manufacturing speeds than with natural jute fibers.

We believe we are the leading supplier of carpet backing within Western Europe.

Geotextiles. Use of woven geotextiles in Europe has been roughly flat over the last five years. Similar to the geotextile industry in the United States, there are significant opportunities for increased penetration of these products in the construction industry. We believe we are the leading supplier for the geotextile applications we serve.

10

Table of Contents

Brazil

In Brazil, we manufacture the same types of synthetic fabric products as in our other regions, but the end uses are more diversified. The majority of our products sold in Brazil serve needs in various industrial applications including shipping, packaging and agricultural uses. Our $39.0 million of sales from Brazil accounted for 6.4% of our global sales in 2004.

Due to the growth of agricultural and industrial business in Brazil, we are experiencing strong demand for our industrial fabrics. For example, our fabric is used to make one to two-ton FIBCs, which are replacing smaller sacks and containers. We expect that this product replacement will continue to drive significant growth for our industrial fabrics for the foreseeable future.

Due to regional preference differences, carpeting is much less common in Brazil than in the other parts of the world in which we market our fabrics. We believe we are currently the only domestic producer of carpet backing in the southern portion of South America.

Sales, Marketing and Distribution

As a global producer of synthetic fabrics, we market, sell and distribute all of our products to a broad range of customers. To address the needs of our diverse customer base, we employ a range of marketing, sales and distribution approaches. We believe our multiple marketing, sales and distribution approaches allow us to maximize our ability to serve our diverse customers.

We have three direct sales forces to serve the needs of our carpet backing customers. Our North American sales force is located primarily in Dalton, Georgia, our European sales force is located in Gronau, Germany and our Brazilian sales force is located in Curitiba, Brazil. Each sales force is located near major carpet manufacturing regions in North America and Europe, respectively. In North America, our sales force leverages our long-term relationships to work collaboratively with our carpet backing customers. Our sales people work with our customers at their sites to meet their needs as they evolve, including developing new carpet backing products in conjunction with our customers.

We sell our furniture and bedding fabrics directly to manufacturers of mattresses and upholstered furniture components. We have developed a strategy of aligning our sales and distribution efforts with key customers that are leaders in their respective fields. We work closely with key customers to develop new products and applications to enable them to meet new safety regulations for their products.

We sell our geotextiles primarily to distributors in both North America and Europe. In North America, we have a network of regional distributors and two primary resellers. In Europe, we typically work with one distributor in each country in which we sell our products.

11

Table of Contents

Customers

We derive a significant amount of our revenues from a relatively small number of primary customers. Our top ten customers accounted for 50.3% of our total revenues in 2004. Of those top ten customers, nine were North American customers and six were carpet backing customers.

Our top two customers collectively represented 31.7% of our total sales in 2004. We have been supplying carpet backing to these customers for over 30 years.

We sell most of our furniture and bedding products to two primary customers. We have long-standing relationships with these two key customers, developed over the last 25 years.

Our top ten customers in Europe accounted for 41.4% of our European sales in 2004.

Our top ten customers in Brazil accounted for 58.7% of our Brazilian sales in 2004.

Competition

We believe we are either the largest or a leading producer of our primary products, and we are the only multinational producer of our products. In North America, we compete with a variety of industrial fabric producers, although only one other North American manufacturer offers a variety of products comparable to ours. We compete with a number of other local and regional fabrics producers in other countries.

Raw Materials

Polypropylene, a product of the petrochemical industry, is the base material in all of our products. The cost of manufacturing our products is highly dependent upon polypropylene prices. Generally, we have been able to pass through raw material price increases to our furnishings customers. However, unlike furnishings, it has been more difficult to pass through raw material price fluctuations to customers for our industrial products. During 2004, U.S. polypropylene prices increased by approximately 33%, to some of the highest levels in 25 years.

Major Suppliers

Polypropylene resin for our manufacturing process is supplied primarily by six vendors. Over the last two years, we have transitioned from purchasing most of our required resin from a single source, BP, to now purchasing from six vendors, including BP. We have renewable multi-year contracts. The minimum and maximum volume requirements in all of our contracts correlate to our forecasted polypropylene needs, helping to ensure security of polypropylene supply.

12

Table of Contents

Patents and Trademarks

We own or license several United States and foreign patents and have several patent applications currently under file with the United States and foreign patent offices. We have patented positions used in the manufacture of Matrix^® and Locbac^® carpet backing. We also have several registered trademarks that are well recognized by the customers we serve, such as Polybac^® and Actionbac^® in carpet backing, Petromat^® and Petrotac^® in geotextiles, and Duon^® in furniture fabrics.

Regulations and Environmental Matters

Our business operations, and our ownership and operation of real property, are subject to a broad range of federal, state, local and foreign environmental, health and safety laws and regulations pertaining to the release, emission and discharge of substances, the remediation of contaminated soil and groundwater, the handling and disposition of wastes, the safety and health of employees, or otherwise relating to pollution, preservation, remediation and protection of the environment, natural resources and human health and safety. To address these detailed and increasingly complex requirements, we have developed and integrated a Health, Safety and Environmental Management System that includes periodic reviews of policies, practices, operations and compliance at our manufacturing facilities, as well as procedures to take corrective or preventive action where necessary. We believe that we are currently in material compliance with these laws and regulations, and capital expenditures relating to environmental matters during 2003 and 2004 were not material.

The nature of our current and historical operations and ownership and operation of property also expose us to the risk of claims with respect to such laws and regulations, as well as claims alleging personal injury or property damage as a result of alleged exposure to hazardous substances, and there can be no assurance that material costs or liabilities will not be incurred in the future as a result of such claims. For example, we are subject to the federal Comprehensive Environmental Response, Compensation, and Liability Act of 1980, or “CERCLA,” which may impose strict, joint and several liability retroactively on past and present owners or operators of facilities at, from or to which a release of hazardous substances has occurred, on parties who generated hazardous substances that were released at such facilities and on parties who arranged for the transportation of hazardous substances to such facilities. We are currently alleged to be a responsible party at the Old Hazlehurst Solid Waste Disposal Site, the Old City Landfill, the Decatur County Landfill and the ITL/Cook Site. Pursuant to the terms of the stock purchase agreement with BP p.l.c., we have been indemnified by BP Amoco Chemical Holding Company for environmental liabilities arising from these sites, and for off-site disposal liabilities arising from activities or businesses conducted prior to the closing of the acquisition.

We do not currently anticipate any material adverse effect on our operations, financial condition, capital expenditures or competitive position as a result of our efforts

13

Table of Contents

to comply with environmental, health and safety requirements. Nevertheless, our business inherently has some risk of environmental liability, and we could become subject to material environmental claims in the future. Further, future actions by federal, state, local and foreign governments concerning environmental matters could result in new laws or regulations, changes to existing laws or regulations, new interpretations of existing laws or regulations, or more vigorous enforcement that could materially increase the cost of compliance, cleanup or production activities or otherwise adversely affect demand for our products.

Employees and Labor Relations

As of December 31, 2004, we had 3,736 employees, of whom 2,671 were located in North America, 741 in Europe and 324 in Brazil. 592 of our employees are salaried, and the remainder is hourly. All of our operators and some of our professional employees located in Germany, Mexico, Brazil, and Hungary are subject to collective bargaining agreements.

We are currently conducting negotiations with the German Works Council in an attempt to obtain a more favorable labor agreement, however, it is too early to predict the outcome of these negotiations.

14

Table of Contents

Item 2. PROPERTIES

We conduct manufacturing, distribution, and administrative activities in eleven owned and two leased facilities. We operate ten North American facilities and three abroad. We believe our facilities and equipment are in good condition and are suitable for our needs. Information about our properties in use as of December 31, 2004 is summarized in the following table:

15

Table of Contents

Item 3. LEGAL PROCEEDINGS

From time to time, we are a party to litigation and legal proceedings that we consider generally to be a part of the ordinary course of business. While no assurance can be given, we believe that, taking into account the indemnification by BP Amoco Chemical Holding Company, as discussed below and under “Item 1. Business-Regulations and Environmental Matters,” and current insurance coverage, none of the litigation or legal proceedings in which we are currently involved could reasonably be expected to have a material adverse effect on our business, financial condition or results of operations.

We are subject to potential loss contingencies pursuant to various federal, state, and local environmental laws and regulations. These include possible obligations to remove or mitigate the effects of the environment of the placement, storage, disposal, or release of certain chemical or petroleum substances by us or other parties.

Environmental remediation liabilities amounted to $0.9 million at December 31, 2003. This liability was nil at December 31, 2004 due to indemnification from BP as part of the stock purchase agreement. These liabilities are included within “Other non-current liabilities” in the balance sheet.

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

No matters were submitted to a vote of our security holders during the 2004 calendar year.

16

Table of Contents

PART II

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

We are a wholly owned subsidiary of Propex Fabrics Holdings Inc., and there is no public market for our common stock. See “Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” for a detail of the ownership of our parent’s common equity.

No dividends were declared in 2004, and we did not repurchase any common stock in 2004.

Item 6. SELECTED FINANCIAL DATA

The selected historical consolidated financial information presented below as of and for the one month ended December 31, 2004 is derived from the audited consolidated financial statements of Propex Fabrics Inc. (“Successor”). The selected historical combined financial information presented below as of and for each of the years ended December 31, 2001, 2002, 2003 and for the eleven months ended November 30, 2004 is derived from the audited combined financial statements of the Predecessor company. The selected historical combined financial information presented below for the year ended December 31, 2000 is derived from the historical unaudited combined financial statements of the Predecessor. In the opinion of our management, the unaudited historical combined financial statements include all adjustments necessary for a fair presentation of our financial position and results of operations for such periods. The information presented below should be read in conjunction with “Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the combined and consolidated financial statements and the related notes to those financial statements included under “Item 8. Financial Statements and Supplementary Data.”

Because Propex Fabrics Inc. is a wholly owned subsidiary of Propex Fabrics Holdings Inc. and its stock is not publicly traded, earnings/loss per common share data is excluded from the following presentation of selected financial data.

17

Table of Contents

18

Table of Contents

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the financial statements and the notes to those statements included under “Item 8. Financial Statements and Supplementary Data.” The following discussion presents our historical financial condition and results of operations before and after the consummation of the acquisition discussed below under “Company History.” Accordingly, the discussion of historical periods before December 1, 2004 does not reflect the significant impact that such acquisition had on us.

Overview

We are the world’s largest producer of primary and secondary carpet backing, and a leading manufacturer and marketer of polypropylene synthetic fabrics used in a variety of other industrial applications. We operate globally in the three geographic regions of North America, Europe and Brazil, from which we market our products to over 40 countries. North America is our largest region, comprising 78.3% of our 2004 worldwide net revenue. Within North America, we divide our business between furnishings and industrial fabric products. In our larger furnishings segment (comprising 74.3% of our 2004 North America net revenue and 58.2% of our 2004 worldwide net revenue), we are the largest producer of carpet backing in North America and one of the leading suppliers of furniture and bedding internal construction fabrics. In our industrial fabrics segment, we sell synthetic fabrics for geotextile, packaging and protective covering applications. Net revenue represents gross sales less product returns, customer allowances and various discounts, all generated in the ordinary course of business.

We primarily market carpet backing and industrial fabrics, respectively, in Europe and Brazil, and we are a leading supplier of those products in those regions. Although primarily a regional business in terms of differing customers, competitive issues, economic and other drivers, we have significant overlap of product offerings across the regions. Where product differences exist, we have the ability to take successful products in one region and exploit these new products in our other regions.

Demand for our furnishings products is driven by factors that influence the broader market for floor coverings and furniture and bedding applications. Floor covering demand is driven largely by home remodeling expenditures, frequently related to existing home sales, new housing starts and commercial property construction. The principal macroeconomic factors influencing furniture and bedding sales are housing turnover, the directional movement of consumer confidence expectations and personal income levels. Demand for our industrial fabrics products is driven primarily by civil construction activity, including civil engineering projects and road construction and general economic conditions.

19

Table of Contents

Our primary raw material is polypropylene resin and resin costs comprise approximately 45% of our cost of goods sold. We are one of the world’s largest consumers of polypropylene, buying over 500 million pounds in 2004. We believe our scale affords us attractive pricing on these raw materials relative to our competitors.

However, polypropylene prices fluctuate based on the industry supply and demand balance, the price of crude oil and other factors beyond our control. In 2004, our average monthly cost of polypropylene in the U.S. increased by approximately 33% over the prior year. Generally, we have been able to pass through raw material price increases to our furnishings customers. However, unlike furnishings, it has been more difficult to pass through raw material price fluctuations to customers for our industrial products. Our earnings are affected by the timing and the extent to which we are able to pass through higher polypropylene raw material pricing costs to our customers. See “Risk Factors—Changes in the price of polypropylene resin, our primary raw material, could negatively affect our business and results of operations” below.

In order to maintain our competitiveness, we maintain a comparatively low manufacturing cost structure. Within North America, besides providing certain flexibility benefits, our five U.S. manufacturing locations enable us to efficiently manage our diverse product mix by focusing some plants on running large volume commodity products and focusing other plants on producing smaller volume, more specialty products. Our current management team has developed a culture of continuous cost improvement aimed at monitoring and controlling our conversion and administrative expenses.

Company History

We have been engaged in the textile industry since 1884 and operated primarily under the name Amoco Fabrics and Fibers Company or BP Fabrics and Fibers Business in the U.S. and under other names internationally (“Predecessor”) from 1968 until the closing of the acquisition discussed below, at which time we became Propex Fabrics Inc., referred to as “Successor” below. We pioneered the introduction of synthetic woven polypropylene carpet backing as a replacement to jute backing, as well as the development of woven and nonwoven fabrics for industrial applications.

In 2001, we engaged in restructuring activity in the United States, Europe and Australia in response to the economic downturn that began in 2000. The objective of the restructuring was to reduce costs across our business. As a result, the restructuring led to the elimination of certain management and operating personnel.

In late 2002 and early 2003, we closed our Australian manufacturing operations, ceased our internal sales and marketing activities in Australia and sold the related land and buildings. We continue selling to Australian customers with exported product from the United States and Europe marketed through a third-party distributor. We also restructured the operations of our Seneca, South Carolina plant in 2003, which enabled a reduction in its management and production personnel.

20

Table of Contents

Since we began our restructuring efforts, we have taken steps to sustain our profitability, while growing sales, effectively managing raw material price movements and improving operational efficiencies. Also during this period, we initiated steps to conduct our business more independently from BP p.l.c. with the objective of positioning our business for the planned future sale.

As a division of BP p.l.c.’s chemicals business, an election was made for financial and tax reporting purposes to account for our inventories on a LIFO basis. However, for management and internal reporting purposes, we accounted for and managed our inventories on a FIFO basis. As such, we included a LIFO adjustment as one of the reconciling items rather than allocate it across reporting segments. After the consummation of the acquisition, we now account for our inventories for financial and tax reporting purposes on a FIFO basis.

On October 4, 2004, we entered into a stock purchase agreement with BP Amoco Chemical Holding Company, an indirect subsidiary of BP p.l.c. For purposes of this description, we refer to BP p.l.c. and BP Amoco Chemical Holding Company and certain of its affiliates collectively as “BP.” Pursuant to the stock purchase agreement, BP sold to us all the outstanding capital stock of the entities comprising the fabrics business of BP. BP also sold to us specified assets comprising BP’s Canadian fabrics business and various intellectual property assets and various other assets associated with the fabrics business. The total consideration paid for the business was approximately $340.0 million paid to the sellers and $9.3 million in transaction costs.

At the closing of the acquisition, an investor group including investment entities affiliated with The Sterling Group, L.P., Genstar Capital, L.P. and Laminar Direct Capital, L.P., which we refer to collectively as the “sponsors,” BNP Paribas Private Capital Group, through Paribas North America, Inc., and certain members of our senior management purchased for cash $70.0 million of the common stock of Propex Fabrics Holdings Inc., our parent company. These equity cash proceeds along with our parent’s $25.0 million junior notes payable to BP were contributed to us and used to fund a portion of the purchase price for the acquisition. The balance of the purchase price was paid from our issuance of the $150 million 10% Senior Notes due 2012 and borrowings under a new credit facility consisting of $110.0 million senior term loan and a revolving line of credit of $65.0 million. The 10% Senior Notes and the new credit facility are discussed under “Liquidity and Capital Resources-New Credit Facility” and “10% Senior Notes due 2012” below.

21

Table of Contents

Results of Operations

Because Propex Fabrics Inc. is a wholly owned subsidiary of Propex Fabrics Holdings Inc. and its stock is not publicly traded, earnings/loss per common share data has been excluded from the following table presenting the results of operations.

22

Table of Contents

Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

Net revenue

Total net revenue increased $87.3 million, or 16.7%, from $522.3 million in 2003 to $609.6 million in 2004. This revenue increase is primarily due to an increase in North America furnishings net revenue of $41.1 million, along with net revenue increases of $21.6 million in North America industrial fabrics, $12.7 million in Europe and $13.7 million in Brazil.

North America furnishings net revenue increased 13.1% from $313.6 million in 2003 to $354.7 million in 2004 due, in part, to increased sales volumes in U.S. carpet backing. This volume increase resulted from strong market fundamentals led by increasing strength in consumer confidence and in home sales, coupled with maintaining our sales share. The remaining net revenue increase resulted from higher unit selling prices in the segment, as we increased carpet backing pricing to reflect rising raw material prices.

North America industrial fabrics net revenue increased 21.3% from $101.3 million in 2003 to $122.9 million in 2004 due primarily to significantly higher volumes across many of our industrial fabrics products, particularly our geotextile products. The remaining net revenue increase resulted from higher unit selling prices in geotextile and protective covering products, as we increased prices to cover a portion of rising raw material prices.

Europe net revenue increased 15.8% from $80.3 million in 2003 to $93.0 million in 2004, due, in part, to higher volumes in our carpet backing and geotextile products, as the European economy began to show improvement and new distribution channels to the market were established. The remaining net revenue increase resulted from higher unit selling prices in U.S. dollar terms due to the strengthening of the euro versus the U.S. dollar. In local currency terms, average unit selling prices decreased slightly due to product mix shifts and competitive market conditions.

Brazil net revenue increased 54.2% from $25.3 million in 2003 to $39.0 million in 2004 due, in part, to volume increases where our increased manufacturing capacity

23

Table of Contents

enabled us to take advantage of the increasing demand related to the growing Brazilian economy. The remaining net revenue increase resulted from higher unit selling prices, in both local currency and U.S. dollar terms, as we passed along a portion of our higher raw material costs and due to a product mix shift towards more specialty products. Strengthening of the Brazilian real versus the U.S. dollar resulted in the remaining increase in net revenue.

Cost of sales

Cost of sales increased 19.0% from $454.5 million in 2003 to $540.9 million in 2004. The increase in cost of sales primarily reflects the significant increase in the cost of polypropylene, along with additional variable costs associated with an increase in sales volume, the currency impact of the weaker U.S. dollar versus both the euro and the Brazilian real, significantly higher post-retirement benefit costs for the Predecessor and initial amortization of purchase accounting-related fair value adjustments. As a percentage of net revenue, cost of sales increased from 87.0% in 2003 to 88.7% in 2004, notwithstanding our ability to pass along the majority of the increased resin costs, raw materials still increased as a percentage of our overall cost of sales and revenue.

Selling, general and administrative expenses

Selling, general and administrative expenses decreased from $50.3 million in 2003 to $47.4 million in 2004. As a percentage of net revenue, selling, general and administrative expenses decreased from 9.6% in 2003 to 7.8% in 2004. In North America, selling and corporate service costs declined as a percentage of net revenue due to our increased sales in this region and the relatively fixed nature of these costs. In Australia, $1.0 million of 2003 selling and administrative costs were eliminated with the closure of our Australian internal sales and marketing activities at the beginning of 2003. Included within selling, general and administrative expenses is our research and development expense, which totaled $7.2 million in 2003 and $8.0 million in 2004.

Restructuring and plant closure costs

Restructuring and plant closure costs totaled $0.6 million in 2004, as compared to income of $1.9 million in 2003. The $0.6 million 2004 charge resulted from our restructuring efforts in Europe, while the $1.9 million income in 2003 consisted of a $2.8 million gain on the sales of the land and building associated with our Australian operations, partially offset by a $0.9 million restructuring charge primarily related to restructuring at our Seneca, South Carolina manufacturing facility.

Loss on abandonment of long-lived assets

Loss on abandonment of long-lived assets that management deemed no longer useful totaled $2.2 million in 2004. There was no comparable loss on abandonment of long-lived assets in 2003.

24

Table of Contents

Other income/expense

Other income / (expense) changed from $0.6 million in income in 2003 to $(2.8) million in expense in 2004. This change primarily reflects fluctuations in foreign exchange gains/losses.

Income before interest and taxes

Income before interest and taxes decreased from $20.0 million in 2003 to $15.7 million in 2004. This decrease is primarily due to a segment income decrease of $10.6 million in North American furnishings income before interest and taxes (hereafter “segment income”), which was partially offset by a $4.0 million increase in North American industrial fabrics, a $1.9 million increase in Europe, and a $2.3 million increase in Brazil.

North America furnishings segment income decreased from $39.6 million in 2003 to $29.0 million in 2004 due to delays in passing along the rapidly increasing raw material prices, particularly to our furniture and bedding customers, and $3.8 million higher post-retirement and other benefit costs. Partially offsetting the decrease in furnishings profitability was the additional income from higher carpet backing volumes.

North America industrial fabrics segment income improved from a $12.7 million loss in 2003 to an $8.7 million loss in 2004, primarily due to an improvement in geotextile volumes and partially offset by rising polypropylene prices that outpaced our increases in product pricing during the period. The North American industrial fabrics segment continues to experience significant competition domestically, with certain product lines also experiencing the threat of substitution by natural materials, which are not subject to petroleum-related price volatility, as well as offshore competition.

Europe segment losses narrowed from $2.9 million in 2003 to $1.0 million in 2004. In addition to an increase in volumes, performance improved due to cost reductions resulting from restructuring efforts at our Gronau, Germany facility. Partially offsetting these cost reductions was a $0.6 million restructuring charge in 2004 pertaining to the German restructuring.

Brazil segment income increased from $4.1 million in 2003 to $6.4 million in 2004 reflecting both the significantly higher volumes resulting from our Curitiba, Brazil plant expansion and our improved product mix with a greater focus on higher margin products such as FIBCs and curtain fabrics. Local currency cost of sales increased primarily due to higher volumes, along with higher raw material costs and high inflation.

Australia and other segment income was $2.0 million in 2003. There was no comparable segment income for 2004 due to the closure of our Liverpool, Australia facility. After the Australia closure, income related to ongoing exports to Australia customers are included in the segment which manufactured and exported the product, the 2003 operating income primarily reflects a $2.8 million gain on the sale of the land and buildings associated with our Australian operations.

25

Table of Contents

The LIFO inventory adjustment decreased from $7.1 million in expense for 2003 to $5.9 million in expense for 2004. The parent company overhead expense allocations to the Predecessor increased from $3.0 million in 2003 to $4.1 million in 2004. These allocations related to the former parent’s management overhead costs, primarily in Chicago and London.

Interest expense, net

Interest expense, net increased from $5.4 million in 2003 to $7.4 million in 2004. Prior to December 1, 2004, interest expense was principally related to the affiliate debt payable to BP, which was repaid prior to the acquisition as part of the December 1, 2004 stock purchase agreement. Beginning December 1, 2004, interest expense is principally related to the new credit facility and the 10% Senior Notes due 2012.

Income taxes

The provision for income taxes decreased from $5.5 million in 2003 to $3.3 million in 2004 due to lower operating income and higher interest expense.

Year Ended December 31, 2003 Compared to Year Ended December 31, 2002

Net revenue

Total net revenue increased $56.4 million, or 12.1%, from $465.9 million in 2002 to $522.3 million in 2003. This revenue increase is primarily due to an increase in North America furnishings net revenue of $40.4 million, along with net revenue increases of $12.0 million in North America industrial fabrics, $6.0 million in Europe and $7.0 million in Brazil. Partially offsetting these net revenue increases was a $9.0 million decrease in Australia and other net revenue due to the closure of our manufacturing operations in Australia.

North America furnishings net revenue increased 14.8% from $273.2 million in 2002 to $313.6 million in 2003 due, in part, to higher industry demand and our increased sales share. Partially offsetting the volume effect from carpet backing was a decrease in furniture and bedding volumes due to lower industry demand resulting from soft consumer demand. The remaining net revenue increase resulted from raising prices to our customers, primarily in our carpet backing products, in response to higher raw material prices.

North America industrial fabrics net revenue increased 13.4% from $89.3 million in 2002 to $101.3 million in 2003 due, in part, to volume increases, as sales of geotextile products expanded significantly during the second half of 2003. The remaining net revenue increase resulted from higher selling prices across the industrial fabrics product lines in response to higher raw material costs that we partially passed on to our customers.

Europe net revenue increased 8.1% from $74.3 million in 2002 to $80.3 million in 2003, which is attributed to strengthening of the euro relative to the U.S. dollar. Negatively impacting net revenue was a decrease in volumes due to weakness in the

26

Table of Contents

European economy and residential demand for carpet, and a slight decline in euro-denominated unit selling prices caused an additional decrease. However, the strength of the euro versus the U.S. dollar resulted in an increase in net revenue, more than offsetting both the volume and the euro-pricing effects.

Brazil net revenue increased 38.3% from $18.3 million in 2002 to $25.3 million in 2003 due, in part, to higher volumes, reflecting our manufacturing capacity expansion during 2003, our ability to successfully develop new products and Brazil’s high-growth, developing economy. The remaining net revenue increase resulted from higher unit selling prices, reflecting an improved mix of sales of our higher-margin products. Partially offsetting this strong net revenue growth in Brazil was a strengthening of the U.S. dollar versus the Brazilian real.

Australia and other segment net revenue decreased 83.3% from $10.8 million in 2002 to $1.8 million in 2003. In early 2003, we shifted local Australian sales to North American and European export sales as we moved our sales and marketing activities in Australia to a third party distributor arrangement, in connection with the closure of our Australian manufacturing operations in late 2002.

Cost of sales

Cost of sales increased 13.5% from $400.4 million in 2002 to $454.5 million in 2003. The increase in cost of sales primarily reflected the significant increase in our polypropylene costs, higher volume-related costs and the impact of a strengthened euro versus the U.S. dollar, which were partially offset by a decrease in our euro-denominated cost of sales as part of our ongoing restructuring effort. Cost reductions and efficiency improvements across our manufacturing facilities largely offset inflationary pressures on our cost structure. As a percentage of net revenue, cost of sales increased from 85.9% in 2002 to 87.0% in 2003, reflecting the higher raw material costs as well as higher pricing where we passed along a majority of these raw material costs to our customers.

Selling, general and administrative expenses

Selling, general and administrative expenses decreased 2.5% from $51.6 million in 2002 to $50.3 million in 2003. As a percentage of net revenue, selling, general and administrative expenses decreased from 11.1% in 2002 to 9.6% in 2003. In North America, selling and corporate service costs declined $1.3 million, primarily due to efficiency improvements and our insourcing of information technology support services. In Australia, selling and administrative costs declined by $0.9 million with the closure of our Australian internal sales and marketing activities in early 2003. Research and development costs have remained relatively constant, at $7.2 million in 2003 and $7.3 million in 2002.

Restructuring and plant closure costs

Restructuring and plant closure costs totaled income of $1.9 million in 2003, as compared to a loss of $6.8 million in 2002. The $1.9 million income in 2003 consisted of a $2.8 million gain on the sale of the land and buildings associated with our Australian operations, offset by a $0.9 million restructuring charge primarily related to our Seneca, South Carolina manufacturing facility. The $6.8 million charge in 2002 primarily represents restructuring charges and plant closure costs related to our Australian manufacturing operations.

27

Table of Contents

Other income/expense

Other income/expense decreased slightly from $1.2 million in income in 2002 to $0.6 million in income in 2003, due to fluctuations in foreign exchange gains/losses and other miscellaneous items.

Income before interest and taxes

Income before interest and taxes increased from $8.3 million in 2002 to $20.0 million in 2003. This increase is primarily due to an increase in North America furnishings segment income of $17.4 million, along with a segment income increase in Australia and other of $9.3 million. These gains were partially offset by a $4.1 million decrease in European segment income, a $10.2 million increase in the LIFO inventory adjustment, and a $0.9 million increase in parent company overhead allocations.

North America furnishings segment income increased from $22.2 million in 2002 to $39.6 million in 2003, reflecting higher carpet backing volumes and our ability to achieve higher pricing relative to our polypropylene costs. Higher carpet backing earnings resulted from our ability to implement price increases, which we temporarily delayed in 2002 in order to opportunistically grow sales. Higher furniture and bedding income primarily reflects increased efficiencies from continuing restructuring activities at our Seneca, South Carolina facility.

North America industrial fabrics segment income improved slightly from a $12.8 million loss in 2002 to a $12.7 million loss in 2003. This increase primarily reflects the significant improvement in geotextile volumes, partially offset by higher polypropylene prices.

Europe segment income decreased from income of $1.2 million in 2002 to a loss of $2.9 million in 2003, largely due to the lower industry volumes in carpet backing. Offsetting this volume-driven decrease was a reduction in fixed costs at our Germany facility resulting from a restructuring effort, and a slight increase in geotextile volumes and profitability.

Brazil segment income increased slightly from $4.0 million in 2002 to $4.1 million in 2003. Much of the volume increase from 2002 was offset by higher raw material costs and higher fixed costs resulting from the manufacturing capacity expansion at our Curitiba facility.

Australia and other segment income increased from a loss of $7.3 million in 2002 to a gain of $2.0 million in 2003, attributable primarily to costs related to the closure of our Australian manufacturing operations. 2002 was impacted by a $6.8 million loss related to closing and selling the machinery and equipment associated with our Australian operations, while 2003 benefited from a $2.8 million gain on the sale of the land and buildings associated with the Australian operations.

The LIFO inventory adjustment decreased from $3.1 million in income for 2002 to $7.1 million in expense for 2003. The parent company overhead allocation expense increased from $2.1 million in 2002 to $3.0 million in 2003.

28

Table of Contents

Interest expense, net

Interest expense, net decreased from $7.6 million in 2002 to $5.4 million in 2003, a decrease of 28.9%. Interest expense decreased primarily due to lower interest rates.

Income taxes

The provision for income taxes increased from $4.1 million in 2002 to $5.5 million in 2003 due to an increase in our pre-tax income.

Liquidity and Capital Resources

Our primary cash needs are working capital, capital expenditures, tax distributions and debt service. We have historically financed these cash requirements through internally generated cash flow and funds borrowed from our corporate parent.

Net working capital is comprised of current assets, minus current liabilities, excluding current maturities of long-term debt and accrued interest. We had net working capital of $163.0 million at December 31, 2004 compared to net working capital of $100.8 million at December 31, 2003 and $92.6 million at December 31, 2002.

We generated cash from operations of $24.1 million for the twelve months ended December 31, 2004 compared to $26.9 million for the same period of 2003. Decreases in cash flow were primarily driven by net income decreases of $4.1 million in 2004.

We used cash from investing activities of $338.3 million for the twelve months ended December 31, 2004, which primarily relates to the purchase cost of $349.3 million, compared to $6.1 million for the same period of 2003.

Cash provided by financing activities was $367.6 million for the twelve months ended December 31, 2004 compared to $22.7 million cash used for the same period of 2003. During 2004, $360.0 million in cash flows from financing activities related to the acquisition, as follows: $115.0 million in proceeds from the new credit facility, the $150 million 10% Senior Notes due 2012, $70.0 million in common stock issuance and $25.0 million in junior notes payable to BP that were contributed to us, all consummated as part of the acquisition, comprised substantially all of the $367.6 million in cash provided by financing activities during 2004.

Our credit arrangements with BP were cancelled concurrently with the closing of the acquisition. We replaced our affiliate credit arrangements with a new credit facility described below.

New Credit Facility

We entered into a new credit facility with a syndicate of lenders arranged and agented by BNP Paribas on December 1, 2004. The following description summarizes the material provisions of the new credit facility and does not purport to be complete.

29

Table of Contents

The new credit facility provides for secured facilities consisting of a $110.0 million senior term loan and a $65.0 million revolving line of credit, of which we drew $5.0 million at the closing of the acquisition. The new credit facility also includes a sublimit of $20.0 million for the issuance of letters of credit of which $0.5 million was used and outstanding as of December 31, 2004.

We used the proceeds of borrowings under the new credit facility to finance a portion of the purchase price of the acquisition to pay a portion of the fees and expenses related to the transactions and for working capital and other corporate purposes.

The revolving line of credit and term loan, collectively referred to as the “loans,” may bear interest at the base rate or at LIBOR, in each case plus an applicable margin. The default rate is the sum of the otherwise applicable rate plus 2.00%.

All principal on the revolving line of credit is due on December 1, 2009. All principal on the loans is due on December 1, 2011 and such term loan is subject to quarterly required amortization totaling $5.5 million in 2005, $5.5 million in 2006, $5.5 million in 2007, $5.5 million in 2008, $11.0 million in 2009, $11.0 million in 2010 and $66.0 million in 2011. Furthermore, the loans are subject to various mandatory prepayments.

Accrued interest under base rate loans is due quarterly and on the last day of the selected interest period for LIBOR loans but no less frequently than quarterly. The new credit facility allows voluntary prepayments with notice and reimbursement for various costs and payment of accrued interest.

The new credit facility contains various customary restrictive covenants. Under the new credit facility, we are also required to satisfy various financial covenants, including a specified fixed charge coverage ratio, a specified interest coverage ratio, a minimum EBITDA requirement, a maximum senior secured leverage ratio, and a maximum total leverage ratio. Additionally, the new credit facility contains customary affirmative covenants.

Obligations under the new credit facility are guaranteed by Propex Fabrics Holdings Inc. and our domestic subsidiaries, and are secured by a first priority lien on our capital stock and our subsidiaries’ capital stock and on substantially all of our assets and the assets of our domestic subsidiaries, with pledges of capital stock of foreign subsidiaries limited to 66% of a foreign subsidiary’s issued and outstanding capital stock. The lien on our capital stock was established pursuant to a pledge by Propex Fabrics Holdings Inc.

10% Senior Notes due 2012

On December 1, 2004, we issued an aggregate of $150.0 million of 10% Senior Notes pursuant to an indenture among us, the subsidiary guarantors and Wells Fargo Bank, N.A., as trustee. These notes will mature on December 1, 2012. Interest on these notes accrues at 10% per annum and is payable on June 1 and December 1 of each year. All of our domestic subsidiaries jointly and severally guarantee the 10% Senior Notes. We used the proceeds from the issuance of the 10% Senior Notes to finance a portion of the acquisition.

30

Table of Contents

We may redeem the 10% Senior Notes at any time on or after December 1, 2008, at specified redemption prices. We are not required to make mandatory redemption or sinking fund payments with respect to the 10% Senior Notes. We will be required to offer to repurchase the 10% Senior Notes from holders if we undergo a change of control or sell our assets in specified circumstances.

The indenture governing the 10% Senior Notes restricts, among other things, our ability to pay dividends, redeem capital stock or prepay certain subordinated debt; incur additional debt or issue preferred stock; grant liens; merge, consolidate or transfer substantially all of our assets; enter into certain transactions with affiliates; impose restrictions on any subsidiary’s ability to pay dividends or transfer assets to us; enter into certain sale and leaseback transactions; and permit subsidiaries to guarantee debt.

Contractual Obligations

The following is a summary of our contractual cash obligations as of December 31, 2004:

Recent Accounting Pronouncements and Guidance

In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities, or “FIN 46”. FIN 46 expands consolidated financial statements to include certain variable interest entities, referred to as “VIEs”. VIEs are to be consolidated by a company, which is considered to be the primary beneficiary of that entity, even if the company does not have majority ownership. FIN 46 is immediately effective for VIEs created or acquired after January 31, 2003 and is effective for us for accounting periods ending after March 31, 2004 for VIEs existing at January 31, 2003. Because we do not have any VIEs, the adoption of this standard had no effect on our earnings or financial position.

In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 was enacted in the U.S. This act provides a prescription drug benefit under Medicare as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least equivalent to the benefit provided by Medicare. For the Predecessor, the postretirement benefit obligation at December 31, 2003 and postretirement benefit expense for the year ended December 31, 2003 and eleven months ended November 30, 2004 do not reflect any effects of this act. The FASB is currently considering the accounting for the federal subsidy. Any authoritative guidance issued by the FASB could require certain previously reported financial information to be revised. The Successor modified the program to limit participation in the postretirement medical program to employees within 10 years of retirement eligibility

31

Table of Contents

and curtailed program benefits for retirees when they reach the age of 65. Therefore, the postretirement benefit obligation at December 31, 2004 and postretirement expense for the month ended December 31, 2004 are not affected by this act.

Critical Accounting Policies

The acquisition was accounted for using the purchase method of accounting. As a result, the acquisition will affect our results of operations in future periods in certain significant respects. The purchase price of approximately $349.3 million, including transaction costs, was allocated to the tangible and intangible assets acquired and liabilities assumed based upon their respective fair values as of the date of the acquisition. In addition, due to the effects of the increased borrowings to finance the acquisition, our interest expense will increase significantly in the periods following the acquisition.

In preparing our financial statements in conformity with GAAP, management must make decisions that impact the reported amounts and related disclosures. Such decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which to base estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an on-going basis, our management evaluates its estimates, including those related to retirement benefits, allowance for doubtful accounts, impairment of long-lived assets, impairment of goodwill, income taxes, litigation and contingencies. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes the critical accounting policies described below are the most important to the fair presentation of our financial condition and results or operations because they require management’s more significant judgments and estimates in the preparation of our consolidated financial statements.

Business Combination

On December 1, 2004, the 100% sale of BP Fabrics and Fibers business was completed, and the business became Propex Fabrics Inc. The acquisition was accounted for in accordance with the provisions of SFAS No. 141, “Business Combinations.” Accordingly, our consolidated statement of operations includes our results beginning on December 1, 2004, the date of acquisition. The aggregate purchase price of the acquisition was $349.3 million including $340.0 million paid to the sellers and $9.3 million in transaction costs. This purchase price was allocated to the assets acquired and the liabilities assumed based on their estimated fair values on the acquisition date. Independent appraisals assisted in determining these fair values.

These estimates of fair value have been reflected in our consolidated balance sheet as of December 31, 2004. However, as we continue to evaluate and refine certain estimates, the allocation of their fair value across assets and segments could be adjusted.

Retirement benefits

Pension obligations are actuarially determined and are affected by several assumptions, including discount rate and assumed annual rate of compensation increase for plan employees. Changes in discount rate and differences from actual results for each assumption will affect the amount of pension expense recognized in future periods.

32

Table of Contents

When our Predecessor had its own pension and other postretirement benefit arrangements in place for its employees, the cost of providing pensions was charged to income on a systematic basis. Actuarial gains and losses were amortized over the average expected remaining service lives of current employees. Amounts accrued for both funded and unfunded pension and other postretirement benefit liabilities were included within “Accrued pension and other postretirement benefit liabilities” on the balance sheet.

During 2001, our Predecessor shared pension and other postretirement benefit arrangements with other BP businesses. We have included an allocated charge in the statement of operations to reflect the costs specifically related to our business. The pension and postretirement plans were administered by BP on a consolidated basis and, as such, separate information relating to assets and liabilities were not available for our business. Our Predecessor share of pension and other postretirement liabilities associated with such arrangements is not reflected in these combined financial statements for 2001. Such liabilities are represented as a component of BP parent company investment.

Beginning January 1, 2002, BP began tracking financial information relating to the pension and postretirement plans by individual businesses. As such, beginning in 2002, our Predecessor share of pension and other postretirement liabilities associated with such arrangements is reflected in these combined financial statements for 2002 and beyond. As a result, liabilities totaling $38.6 million ($23.6 million net of tax) were recognized in our Predecessor balance sheet as of January 1, 2002.

The pension and other postretirement benefit costs included in our statement of operations represent the costs specific to the benefit plans operated for our employees, calculated in accordance with GAAP in the United States.

Pension and postretirement obligations were modified as a part of the sale where BP retained certain liabilities and we made certain changes to our postretirement medical benefits effective December 1, 2004.

Allowance for doubtful accounts

Management must make estimates of the uncollectibility of our accounts receivable. Management specifically analyzes accounts receivable and historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. Actual losses for uncollectible accounts have generally been consistent with management’s estimates. However, deteriorating financial conditions of key customers or a significant slow- down in the economy could have a material negative impact on our ability to collect on accounts, in which case additional allowances may be required.

Impairment of long-lived assets

We assess all our long-lived assets, including definite-lived intangibles, for impairment whenever events or circumstances indicate the carrying value may not be recoverable. Management assesses whether there has been impairment by comparing estimated undiscounted future cash flows from operating activities with the carrying value of the asset. The factors considered by management in this assessment include operating results, trends and prospects, as well as the effects of obsolescence, demand, competition and other economic factors. If impairment is deemed to exist, management records an impairment charge equal to the excess of the carrying value over the fair value of the impaired assets.

33

Table of Contents

Impairment of goodwill and indefinite-lived intangibles

We test goodwill and other indefinite-lived intangible assets for impairment on an annual basis by comparing the fair value of our reporting units to their carrying values. Fair value is determined by the assessment of future discounted cash flows. Additionally, goodwill is tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of an entity below its carrying value. These events or circumstances would include a significant change in the business climate, legal factors, operating performance indicators, competition, sale or disposition of a significant portion of the business, or other factors.

As part of the adoption of FAS 142, we performed an initial valuation in 2002 to determine if any impairment of goodwill existed and determined that none existed. In accordance with FAS 142, at year-end 2003, we completed our annual impairment test and determined that there was no impairment of goodwill. As part of the purchase accounting for the sale, which occurred on December 1, 2004, no goodwill was established on our balance sheet.

Income taxes

We account for income taxes using the asset and liability method. We recognize deferred tax assets and liabilities for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and to operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the effective date of enactment. A valuation allowance is established, when necessary, to reduce deferred tax assets to amounts expected to be realized.

As of December 31, 2004, the Company had net operating loss carryforwards of approximately $67.2 million. As of December 31, 2004, $7.6 million related to U.S. federal and state income taxes and $59.6 million related to Mexico and Germany. A full valuation allowance has been placed on the net operating loss carryforwards of Mexico and Germany. The U.S. federal and state net operating loss carryforwards of $7.6 million will expire on various dates through 2024. The net operating loss carryforwards in Mexico of $12.8 million will expire on various dates through 2014; those attributable to the German operations of $46.8 million do not expire. The net operating loss carryforwards in foreign tax jurisdictions may be subject to limitations due to the ownership change; the Company is reviewing this currently. The U.S. net operating loss carryforwards were generated during December 2004.

United States income taxes have not been provided on undistributed earnings of international subsidiaries. For tax purposes, the Company’s intention is to permanently reinvest earnings everywhere with the exception of Germany and Canada.

The American Jobs Creation Act, signed into law in October of 2004, provides the Company an opportunity to repatriate up to $500 million of reinvested foreign earnings and to claim an 85% dividend received deduction against the repatriated amount. The Company is evaluating the effects of the repatriation provision and expects to make a decision on implementation later in 2005.

34

Table of Contents

Litigation and contingent liabilities

From time to time, we are subject to lawsuits, claims, investigations and proceedings, including product liability, personal injury, patent and intellectual property, commercial, contract, environmental, health and safety, and employment matters, all of which are handled and defended in the ordinary course of business. We accrue a liability for such matters when it is probable that a liability has been incurred and the amount can be reasonably estimated. We believe the amounts reserved are adequate for such contingent matters; however, our results of operations could be negatively affected by significant litigation resulting in judgments adverse to us.

Risk Factors

We rely on a small number of customers from whom we receive a significant amount of our revenues.

We primarily sell our products to carpet and other manufacturers and distributors of industrial fabrics. Our top two customers accounted for 31.7% of our total revenues in 2004. We typically do not have long-term sales contracts with our customers. Moreover, our largest customers have the ability to manufacture carpet backing in-house. Shaw Industries and the Beaulieu Group have manufactured a portion of their own carpet backing requirements for many years. In February 2005, Mohawk Industries also obtained in-house manufacturing capacity with its purchase of the assets of Wayn-Tex, Inc., a producer of carpet backing and other industrial fabrics. If any of these customers significantly reduces the amount of product it purchases from us, we may not be able to replace the revenue generated by that customer with sales to other customers. The loss of or significant reduction in business from one or more of these customers could have a material adverse effect on our business.

Sales of our principal products may be affected by cycles in the construction and remodeling industries.

The demand for carpet backing is dependent upon the ability of our customers, the major carpet manufacturers, to sell carpeting, which is dependent, in turn, on the remodeling and construction industries. These industries can be cyclical in nature and may vary by geographic region, and our revenues will be affected by factors that affect those industries. These factors, which include new and used home sales, residential and commercial construction rates, remodeling trends, changes in interest rates, the popularity of alternative flooring materials and general economic conditions, could have an adverse impact on our carpet backing business. These factors have had at times in the past, and may have in the future, a negative impact on our results of operations.

Changes in the price of polypropylene resin, our primary raw material, could negatively affect our business and results of operations.

The price of our primary raw material, polypropylene resin, is volatile and fluctuates based on a number of factors outside our influence, including the overall demand, manufacturing capacity and the price of key feedstocks for polypropylene. As a product of petrochemical processes, polypropylene pricing is also generally impacted by the price of the basic feedstocks, namely crude oil and natural gas. In a rising oil price

35

Table of Contents

environment, polypropylene prices will typically rise correspondingly. For example, in 2004 our average cost of polypropylene resin in the U.S. increased by approximately 33% over the prior year. In that respect, oil prices can impact our business through their effect on polypropylene prices. We do not have any long-term price guarantees with our polypropylene resin suppliers. Our failure to achieve corresponding sales price increases in a timely manner, sales price erosion without a corresponding reduction in raw material costs or failure to renegotiate favorable raw material supply contracts are all factors that could have a material adverse effect on our business and results of operations.

The loss of one or more of our raw material suppliers could adversely affect our operations.

We rely on six primary vendors to supply our polypropylene resin. If the supply from one or more of our vendors was interrupted in any significant manner, we would be forced to secure alternative supply arrangements. We may not be able to do so on terms that would be cost-effective or that would prevent a material adverse impact on our operations and financial condition.

The separation from our former corporate parent requires that we incur certain additional costs to operate as a stand-alone entity.

As a stand-alone entity we have to provide for our own systems, legal and tax advisory services, human resources and administration, employee benefits and business insurance, among other needs. For the Predecessor, these systems and services were provided, at least in part, by our former corporate parent. While our historical results include costs associated with each of these systems and services and our budgeted results include our expectations for costs required to provide those systems and services on a stand-alone basis, the actual costs could exceed our expectations. In addition, the Successor has a different credit profile as a stand-alone entity, which may affect terms and conditions of our purchases and sales. Any amount by which these costs exceed our expectations would negatively affect our business and results of operations.

We operate in highly competitive industries where our growth could be impeded.

With respect to the carpet backing industry, especially in North America, we compete directly with other carpet backing manufacturers. We compete on the basis of performance, durability, service and price. In the past, both we and our competitors have lowered prices in an attempt to gain or regain sales in carpet backing. If, in the future, competitors attempt to employ a similar strategy to gain sales, we may be forced to lower our prices in order to maintain our own sales, which could reduce our profitability. In our industrial fabrics business, customers often require that manufacturers compete on the basis of price. In a particularly challenging pricing environment, it could be difficult to achieve the products sales or margins we normally expect.

Our foreign operations expose us to risks and restrictions not present in our domestic operations.

Our operations outside the United States accounted for 28.0% and 27.1% of our revenue for the years ended December 31, 2004 and 2003, respectively, and we expect our foreign operations to continue to represent a material portion of our business. Foreign operations involve varying degrees of risks and uncertainties inherent in doing business abroad. Such risks include:

36

Table of Contents

Furthermore, customer credit risks are exacerbated in foreign operations because there often is little information available about the credit histories of customers in the foreign countries in which we operate. To the extent that any of the above events occur and we are not able to effectively manage that event, our results could be adversely affected.

Our products expose us to potential product liability, warranty or other claims.

Our products are used across a broad range of applications from residential and commercial floor covering to landfill systems and soil retention on construction projects. It is possible that a customer using our products in any application or a third party could claim that our product was partially responsible for some resulting damage. Any product liability, warranty or other claims against us could exceed our current insurance coverage and the income we derive from the sale of our products. A partially or completely uninsured claim, if successful and of a significant magnitude, could result in substantial losses.

If we are unable to retain our executive officers our growth may be hindered.

Our success depends in part on the performance of and our ability to retain our executive officers, particularly our President, Bradford Mortimer, who, with the other members of our senior management, has been responsible for developing and executing our growth strategy. If we are not successful in retaining our executive officers or replacing them, our business, financial condition or results of operations could be adversely affected. We do not maintain key personnel insurance.

Work stoppages or other labor disruptions at our operations or those of our principal customers could have an adverse effect on our profitability and financial condition.

Substantially all of the employees at our facilities in Brazil, Germany, Hungary and Mexico are represented by labor unions and are subject to collective bargaining agreements. Any work stoppage resulting from a strike or lockout could have a material adverse effect on our financial condition. In addition, many of our customers’ employees are subject to collective bargaining agreements. Any work stoppage or labor disruption at our key customers could slow their demand for our products and adversely affect our profitability.

37

Table of Contents

Liabilities and compliance costs under environmental, health and safety laws and regulations could adversely affect our business.

Our business operations, and our ownership and operation of real property, are subject to federal, state, local and foreign environmental, health and safety laws and regulations pertaining to the emission or discharge of materials into the environment, the handling and disposition of wastes, the safety and health of employees, or otherwise relating to pollution, preservation, remediation and protection of the environment, natural resources and human health and safety. These laws establish a variety of requirements, impose penalties for noncompliance and give rise to potential liability for response costs and damages relating to the spill, disposal or release of hazardous substances. We could incur substantial costs in complying with these laws, or as a result of noncompliance with or liability under these environmental laws. Environmental, health and safety issues relating to us and our operations, including those that could arise from future developments such as stricter laws, regulations, permit conditions or enforcement policies thereunder, may require significant future expenditures.

We have experienced and expect to continue to experience quarterly variations in revenues and gross margins.

Our revenues and gross profit in the fourth quarter have in the past been, and may in the future be, lower than our revenues and gross profit as compared to the first three quarters of the fiscal year. This quarterly variation in our revenues and gross profit is primarily a result of the seasonal nature of several of our key drivers, including homebuilding, civil engineering projects and the agricultural cycle. In addition, quarterly fluctuations in our revenues and gross profit may result from other factors, including the spending patterns of our customers, regional and economic conditions and fluctuations in manufacturing costs.

If we fail to introduce successful new products and product line extensions, our financial performance may be negatively impacted.

We regularly introduce new products and product line extensions. If we are unable to identify emerging consumer and technological trends, maintain and improve the competitiveness of our products and introduce these products that could have a material adverse effect on our business, financial condition and results of operations. Continued product development and marketing efforts have all the risks inherent in the development of new products and line extensions, including development delays, the failure of new products and line extensions to achieve anticipated levels of market acceptance and the cost of failed product introductions.

Our intellectual property may prove inadequate to support our continued success or may diminish in value, and third parties may claim we are infringing on their intellectual property or in breach of intellectual property licenses.

Our future success depends in part on our ability to protect and maintain our intellectual property. Our intellectual property may prove inadequate to assure our continuing success, may be used or misappropriated by others or may diminish in value over time. Competitors may be able to freely make use of our patented technology after

38

Table of Contents

our patents expire, or may challenge the validity or scope of our patents, trademarks, trade secrets or agreements touching on intellectual property. We may fail to recognize opportunities to provide, maintain or enforce intellectual property protection for our existing or future businesses. In general, our ability to protect our intellectual property may be weakened, which may have a material adverse effect on our business, financial condition and results of operations.

In addition, we have in the past received, and may in the future receive, communications from third parties claiming that we or our products infringe upon the intellectual property rights of others. Litigation may be necessary to enforce our intellectual property rights, to determine the validity and scope of third-party rights, or to defend against claims of infringement or invalidity. Such litigation could result in substantial costs and diversion of resources, and could have a material adverse effect on our business, financial condition and results of operations.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES REGARDING MARKET RISK

We are exposed to various market risks such as fluctuating raw material costs, fluctuating interest rates and changes in foreign currency exchange rates. At present, we do not utilize any derivative instruments to manage these risks.

Raw material risk. The cost of our commodity raw materials is volatile and could have a significant impact on our profitability. In particular, our business requires the purchase of large volumes of polypropylene, a petroleum derivative. Increases in the cost of this raw material could materially adversely affect our business, results of operations and financial condition if we are unable to pass these increases through to our customers. Prices of polypropylene increased in 2004 and additional increases have been announced. We believe we will be successful in increasing prices to pass along much of this increase in polypropylene costs consistent with historical experience; however, we may not be able to successfully recover such increases in cost.

In addition, unanticipated termination or interruption of our arrangements with third-party suppliers of polypropylene could have a material adverse effect on us. Polypropylene resin is the principal raw material used in our woven and nonwoven fabrics. Our polypropylene is purchased from multiple suppliers. We believe there are generally adequate sources of polypropylene; however, an unanticipated termination or interruption of our supply arrangements could adversely affect our ability to supply products to our customers and could have an adverse impact on the business. We have contracted with multiple suppliers of polypropylene for up to 120% of our expected raw material needs through 2005, where pricing is determined by a combination of formulas based on market indices and monthly negotiated pricing.

Currency translation. The results of operations of our foreign companies are translated into U.S. dollars at the average exchange rates for each period concerned. This translation has no impact on cash flow. The balance sheets of our foreign companies are translated into U.S. dollars at the closing exchange rates. Any adjustments resulting from the translation are recorded as other comprehensive income. Foreign currency exchange

39

Table of Contents

rate exposure is most significant with respect to the euro. For 2003 and 2004, net revenue was positively impacted primarily by the appreciation of the euro versus the U.S. dollar. In 2002, net revenue was negatively impacted, due to the depreciation of the Brazilian real versus the U.S. dollar, which was partially offset by strengthening of the euro versus the U.S. dollar.

Currency transaction exposure. Currency transaction exposure arises where sales and purchases are made by a company in a currency other than its own functional currency. The majority of our companies (except for Hungary) source raw materials and sell their products within their local markets in their functional currencies and therefore have limited transaction exposure. Hungary sells most of its products in euros to the European market through its German affiliate. As a result, we do incur limited transaction exposure between the euro and the Hungarian forint.

Interest rate risk. We have incurred a significant amount of debt in connection with the acquisition, with a portion being at variable rates. Of our total long-term debt of approximately $260.0 million, approximately $150.0 million bears interest at a fixed rate and the remaining debt bears interest at variable rates. A hypothetical 10.0% increase or decrease in the applicable interest rates as of December 31, 2004 would change the cost of financing on our variable rate debt by $0.5 million. Prior to December 31, 2004, we had $152.8 million of long-term debt obligations to BP outstanding as of December 31, 2003 where $141.3 million bore interest at a variable rate and $11.5 million bore interest at a fixed rate.

Seasonality

We have historically experienced, and expect to continue to experience, seasonal and quarterly fluctuations in net revenue and operating income. Homebuilding, civil engineering projects and the agricultural cycle all are subject to seasonal influences, characterized by strong sales for the spring and summer months. Pre-season inventory builds along with strong sales during this period combine to favorably impact the first and second quarter results. In addition, our European operations typically experience lower third quarter sales due to the traditional late-summer holiday.

Taxes

We are subject to taxation in multiple jurisdictions throughout the world. Our effective tax rate and tax liability will be affected by a number of factors, such as the amount of taxable income in particular jurisdictions, the tax rates in such jurisdictions, tax treaties between jurisdictions, the extent to which we transfer funds between jurisdictions and repatriate income and changes in law.

Inflation

Inflation can affect the costs of goods and services we use. In the more mature economies in which we operate, from either a manufacturing or sales viewpoint, we have experienced relatively low price inflation in recent years. In more emerging economies, such as Brazil and Hungary, we experience more moderate inflation, but in a lower cost environment.

40

Table of Contents

Litigation

From time to time, we are subject to lawsuits, claims, investigations and proceedings, including product liability, personal injury, patent and intellectual property, commercial, contract, environmental, health and safety, and employment matters. In addition, we may occasionally resort to litigation or make claims in order to enforce or protect our property and contract rights. Such litigation, claims, investigations and proceedings are handled and defended in the ordinary course of business. While no assurance can be given, the Company believes that, taking into account the indemnification by BP Amoco Chemical Holding Company, (as discussed below) and our current insurance coverage, none of the litigation or legal proceedings in which the Company is currently involved could reasonably be expected to have a material adverse effect on our business, financial condition or results of operations.

41

Table of Contents

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of Propex Fabrics Inc.

We have audited the accompanying consolidated balance sheets of Propex Fabrics Inc. and Subsidiaries (“the Company”) as of December 31, 2004 and its Predecessor as of December 31, 2003, and the related consolidated statements of income, stockholders’ equity, and cash flows of the Company for the period from inception (December 1, 2004) through December 31, 2004 and of the Predecessor for the period from January 1, 2004 through November 30, 2004 and for each of the two years in the period ended December 31, 2003. Our audits also included the financial statement schedules listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of management of the Company and its Predecessor. Our responsibility is to express an opinion on these financial statements and schedules 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, assessing the accounting principles used and significant estimates made by management, and 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 the Company at December 31, 2004 and its Predecessor at December 31, 2003, and the consolidated results of operations and cash flows of the Company for the period from inception (December 1, 2004) through December 31, 2004 and of its Predecessor for the period from January 1, 2004 through November 30, 2004 and for each of the two years in the period ended December 31, 2003, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.

Ernst & Young LLP

Chicago, Illinois

March 25, 2005

42

Table of Contents

Propex Fabrics Inc.

Consolidated Balance Sheets

(In Millions)