Note 1. Principles of Consolidation and Financial Statement Information

Principles of Consolidation

        Polymer Group, Inc. (the "Company") is a publicly-traded, leading global innovator, manufacturer and marketer of engineered materials, focused primarily on the production of nonwoven products. The Company has one of the largest global platforms in the industry, with fourteen manufacturing and converting facilities throughout the world, and a presence in nine countries. The Company's main sources of revenue are the sales of primary and intermediate products to the hygiene, medical, wipes and industrial markets.

        The accompanying unaudited interim consolidated financial statements include the accounts of Polymer Group, Inc. and all majority-owned subsidiaries after elimination of all significant intercompany accounts and transactions. The accounts of all foreign subsidiaries have been included on the basis of fiscal periods ended on the same dates as the accompanying unaudited interim consolidated financial statements. All amounts are presented in United States ("U.S.") dollars, unless otherwise noted.

        The accompanying unaudited interim consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements of the Company and related notes contained in the Annual Report on Form 10-K/A for the period ended January 2, 2010. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the U.S. ("U.S. GAAP") have been condensed or omitted pursuant to applicable rules and regulations. In the judgment of management, these unaudited interim consolidated financial statements include all adjustments of a normal recurring nature and accruals necessary for a fair presentation of such statements. The results of operations for the interim period are not necessarily indicative of the results which may be realized for the full year. The Consolidated Balance Sheet data included herein as of January 2, 2010 have been derived from the audited consolidated financial statements included in the Company's Annual Report on Form 10-K/A.

Reclassification

        Certain amounts previously presented in the consolidated financial statements for prior periods have been reclassified to conform with the current period presentation. See Note 5 "Discontinued Operations."

        Additionally, the data presented herein for fiscal 2009 and the first quarter of fiscal 2010 has been restated to reflect the amounts reported in the Company's Annual Report on Form 10-K/A for the fiscal year ended January 2, 2010 and the Company's Quarterly Report on Form 10-Q/A for the quarter ended April 3, 2010.

Revenue Recognition

        Revenue from product sales is recognized when title and risks of ownership pass to the customer, which is on the date of shipment to the customer, or upon delivery to a place named by the customer, depending upon contract terms and when collectability is reasonably assured and pricing is fixed or determinable. Revenue includes amounts billed to customers for shipping and handling. Provision for rebates, promotions, product returns and discounts to customers is recorded as a reduction in determining revenue in the same period that the revenue is recognized.

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POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 1. Principles of Consolidation and Financial Statement Information (Continued)

Use of Estimates

        The preparation of financial statements in conformity with U.S. GAAP and in accordance with the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("Codification" or "ASC") requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the related disclosures within the accompanying notes. The accounting estimates that require management's most significant and subjective judgments include the valuation of allowances for accounts receivable and inventory, the assessment of recoverability of long-lived assets, the recognition and measurement of severance-related liabilities, the recognition and measurement of current and deferred income tax assets and liabilities (including the measurement of uncertain tax positions), the valuation and recognition of share-based compensation, valuation of obligations under the Company's pension and retirement benefit plans and the fair value of financial instruments and non-financial assets and liabilities. Actual results could differ from those estimates. These estimates are reviewed periodically to determine if a change is required.

Stock-Based Compensation

        The Company accounts for stock-based compensation related to its employee share-based plans in accordance with ASC Topic 718, "Compensation—Stock Compensation" ("ASC 718"). The compensation costs recognized are measured based on the grant-date fair value of the award. Consistent with ASC 718, awards are considered granted when all required approvals are obtained and when the participant begins to benefit from, or be adversely affected by, subsequent changes in the price of the underlying shares and, regarding awards containing performance conditions, when the Company and the participant reach a mutual understanding of the key terms of the performance conditions. Additionally, accruals for compensation costs for share-based awards with performance conditions are based on the probability of satisfying the performance conditions. The Company has estimated the fair value of each stock option grant by using the Black-Scholes option-pricing model. Assumptions are evaluated and revised, as necessary, to reflect market conditions and experience.

Special Charges

        The Company records severance-related expenses once they are both probable and estimable in accordance with ASC 712, "Compensation—Nonretirement Postemployment Benefits" ("ASC 712"), for severance provided under an ongoing benefit arrangement. One-time, involuntary benefit arrangements and disposal costs, contract termination costs and other exit costs are accounted in accordance with ASC 420, "Exit or Disposal Cost Obligations" ("ASC 420"). The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying values may not be recoverable from future undiscounted cash flows. If the carrying amounts are not recoverable, the Company, consistent with the provisions of ASC 360, records a non-cash charge associated with the write-down of such assets to estimated fair value. Fair value is estimated based on the present value of expected future cash flows, appraisals and other indicators of value.

Derivatives

        The Company records all derivative instruments as either assets or liabilities on the balance sheet at their fair value in accordance with ASC 815, "Derivatives and Hedging" ("ASC 815"). Changes in the fair value of a derivative are recorded each period in current earnings or other comprehensive income,

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POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 1. Principles of Consolidation and Financial Statement Information (Continued)

depending on whether a derivative is designated as part of a hedge transaction and, if it is, depending on the type of hedge transaction. Ineffective portions, if any, of all hedges are recognized in earnings.

        As more fully described in Note 13 "Derivative and Other Financial Instruments and Hedging Activities" to the consolidated financial statements, the Company, in the normal course of business, periodically enters into derivative financial instruments, principally swaps and forward contracts, with high-quality counterparties as part of its risk management strategy. These financial instruments are limited to non-trading purposes and are used principally to manage market risks and reduce the Company's exposure to fluctuations in foreign currency and interest rates. Most interest rate swaps and foreign exchange forward contracts have been designated as cash flow hedges of the variability in cash flows associated with interest payments to be made on variable rate debt obligations or fair value hedges of foreign currency-denominated transactions.

        The Company documents all relationships between hedging instruments and hedged items, as well as the risk-management objective and strategy for undertaking various hedge transactions and the methodologies that will be used for measuring effectiveness and ineffectiveness. This process includes linking all derivatives that are designated as cash flow or fair value hedges to specific assets and liabilities on the balance sheet or to specific firm commitments. The Company then assesses, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are expected to be highly effective in offsetting changes in fair values or cash flows of hedged items. Such assessments are conducted in accordance with the originally documented risk management strategy and methodology for that particular hedging relationship.

        For cash flow hedges, the effective portion of recognized derivative gains and losses reclassified from other comprehensive income is classified consistent with the classification of the hedged item. For example, derivative gains and losses associated with hedges of interest rate payments are recognized in Interest expense, net in the Consolidated Statements of Operations.

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

Gain on Reacquisition of Debt

        The Company, through its subsidiaries, may make market purchases of its first lien term loan under its Credit Facility (defined in Note 9 "Debt") from its existing lenders at a discount to the carrying value of the debt. Under these agreements, the Company's subsidiary will acquire the rights and obligations of a lender under the Credit Facility, to the extent of the amount of debt acquired, and the selling third-party lender will be released from its obligations under the Credit Facility. The Company accounts for such reacquisition of debt as a transfer of financial assets resulting in a sale and derecognizes such liability in accordance with the authoritative literature and includes such amounts in Gain on Reacquisition of Debt in the Consolidated Statements of Operations.

Accumulated Other Comprehensive Income

        Accumulated other comprehensive income of $29.2 million at July 3, 2010 consisted of $33.8 million of currency translation gains (net of income taxes of $3.5 million), ($2.2) million of transition net assets, gains or losses and prior service costs not recognized as components of net periodic benefit costs and

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POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 1. Principles of Consolidation and Financial Statement Information (Continued)

$(2.4) million of cash flow hedge losses. Accumulated other comprehensive income of $41.6 million at January 2, 2010 consisted of $47.5 million of currency translation gains (net of income taxes of $7.9 million), ($2.6) million of transition net assets, gains or losses and prior service costs not recognized as components of net periodic benefit costs and $(3.3) million of cash flow hedge losses. Comprehensive income for the three months ended July 3, 2010 and July 4, 2009 amounted to a loss of $5.3 million and income of $10.8 million, respectively. Comprehensive income for the six months ended July 3, 2010 and July 4, 2009 amounted to a loss of $13.0 million and income of $16.9 million, respectively.

Recent Accounting Standards

        In June 2009, the FASB issued authoritative guidance which established the ASC as the source of authoritative U.S. GAAP recognized by the FASB to be applied to nongovernmental entities. Under the new guidance, as prescribed by ASC 105, "Generally Accepted Accounting Principles", accounting literature references in consolidated financial statements issued beginning in the third quarter of fiscal 2009 will primarily reference sections of the Codification instead of a specific original accounting pronouncement. The Company adopted the authoritative guidance in the third quarter of fiscal 2009.

        In September 2006, the FASB issued authoritative guidance that amends ASC 820, "Fair Value Measurements and Disclosures" ("ASC 820") by issuing ASC 820-10-65. ASC 820-10-65 provides additional guidance on estimating fair value when the volume and level of activity for an asset or liability have significantly decreased. ASC 820-10-65 also includes guidance on identifying circumstances that indicate a transaction is not orderly, and emphasizes that, regardless of whether the volume and level of activity for an asset or liability have decreased significantly and regardless of which valuation technique was used, the objective of a fair value measurement under ASC 820 remains the same—to estimate the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. ASC 820-10-65 also requires expanded disclosures. ASC 820-10-65 was effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company adopted ASC 820-10-65 as of July 4, 2009 and applied its provisions prospectively by providing the additional disclosures in its unaudited interim consolidated financial statements. See Note 14 "Fair Value of Financial Instruments and Non-Financial Assets and Liabilities" for additional information.

        In April 2009, guidance as prescribed by ASC 825, "Financial Instruments" ("ASC 825") was issued and requires, on an interim basis, disclosures about the fair value of financial instruments for public entities. ASC 825 is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. An entity may early adopt ASC 825 only if it concurrently adopts both ASC 320, "Investments—Debt and Equity Securities" and ASC 820-10-65. The Company adopted ASC 825 effective July 4, 2009.

        In May 2009, the FASB issued authoritative guidance, as prescribed by ASC 855, "Subsequent Events", which established standards of accounting for events that occur after the balance sheet date and disclosures of events that occur after the balance sheet date but before the financial statements are issued. The new guidance introduces new terminology, defines a date through which management must evaluate subsequent events, and lists circumstances under which the Company must recognize and disclose subsequent events or transactions occurring after the balance sheet date. This guidance was effective for interim or annual financial periods ending after June 15, 2009 and was applied by the

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POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 1. Principles of Consolidation and Financial Statement Information (Continued)

Company as of July 4, 2009. In February 2010, the FASB issued Accounting Standards Update ("ASU") 2010-09, "Amendments to Certain Recognition and Disclosure Requirements" ("ASU 2010-09") which is effective as of February 24, 2010. ASU 2010-09 clarified the guidance to indicate that SEC filers are required to evaluate subsequent events through the date financial statements are issued, but are not required to disclose the date through which subsequent events were evaluated.

        In June 2009, the FASB issued authoritative guidance to revise the approach to determine when a variable interest entity ("VIE") should be consolidated. The new consolidation model for VIEs considers whether the Company has the power to direct the activities that most significantly impact the VIEs economic performance and shares in the significant risks and rewards of the entity. The new guidance on VIEs requires companies to continually reassess VIEs to determine if they are required to apply the new criteria, as prescribed by ASC 810, to determine the accounting and reporting requirements related to VIEs. In December 2009, the FASB issued ASU 2009-17, "Amendments to Accounting for Variable Interest Entities," ("ASU 2009-17") to amend ASC 810 to clarify how enterprises should account for and disclose their involvement with VIEs. The Company adopted the revised guidance for the accounting for VIEs, pursuant to ASC 810, effective January 3, 2010. The adoption of the revised accounting guidance for VIEs did not have a significant effect on the Company's consolidated financial statements. See Note 4 "Acquisitions" for additional information.

        In August 2009, the FASB issued ASU 2009-05, "Measuring Liabilities at Fair Value", to amend ASC 820 to clarify how entities should estimate the fair value of liabilities. ASC 820, as amended, includes clarifying guidance for circumstances in which a quoted price in an active market is not available, the effect of the existence of liability transfer restrictions, and the effect of quoted prices for the identical liability, including when the identical liability is traded as an asset. The amended guidance in ASC 820 on measuring liabilities at fair value is effective for the first interim or annual reporting period beginning after August 28, 2009, with earlier application permitted. The Company adopted the amended guidance in ASC 820 beginning July 5, 2009 by providing additional disclosures in its interim consolidated financial statements.

        In October 2009, the FASB issued ASU 2009-13, "Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force", to amend certain guidance in ASC 605, "Revenue Recognition" ("ASC 605"), specifically as related to "Multiple-Element Arrangements" ("ASC 605-25"). The amended guidance in ASC 605-25: (1) modifies the separation criteria by eliminating the criterion that requires objective and reliable evidence of fair value for the undelivered item(s), and (2) eliminates the use of the residual method of allocation and instead requires that arrangement consideration be allocated, at the inception of the arrangement, to all deliverables based on their relative selling price. The amended guidance in ASC 605-25 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early application and retrospective application permitted. The Company prospectively applied the amended guidance in ASC 605-25 beginning January 3, 2010. The adoption of the amendments to ASC 605-25 did not have a significant effect on the Company's consolidated financial statements.

        In January 2010, the FASB issued ASU 2010-06, "Fair Value Measurements and Disclosures (Topic 820)—Improving Disclosures about Fair Value Measurements." This guidance clarifies and requires new disclosures about fair value measurements. The clarifications and requirement to disclose the amounts and reasons for significant transfers between Level 1 and Level 2, as well as significant transfers in and out of Level 3 of the fair value hierarchy established by ASC 820, were adopted by the Company in the

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POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 1. Principles of Consolidation and Financial Statement Information (Continued)

first quarter of fiscal 2010. Note 14, "Fair Value of Financial Instruments and Non-Financial Assets and Liabilities" reflects the amended disclosure requirements. Additionally, the new guidance also requires that purchases, sales, issuance, and settlements be presented gross in the Level 3 reconciliation, which is used to price the hardest to value instruments (the "disaggregation guidance"). The disaggregation guidance will be effective beginning with interim periods in fiscal year 2011. Since this guidance only amends the disclosure requirements, the Company does not anticipate that the adoption of ASU 2010-06 will have a material impact on its consolidated financial statements.

Note 2. Concentration of Credit Risks and Accounts Receivable Factoring Agreements

        Accounts receivable potentially expose the Company to a concentration of credit risk. The Company provides credit in the normal course of business and performs ongoing credit evaluations on its customers' financial condition, as deemed necessary, but generally does not require collateral to support such receivables. Customer balances are considered past due based on contractual terms and the Company does not accrue interest on the past due balances. Also, in an effort to reduce its credit exposure to certain customers, as well as accelerate its cash flows, the Company has sold on a non-recourse basis, certain of its receivables pursuant to factoring agreements. The provision for losses on uncollectible accounts is determined principally on the basis of past collection experience applied to ongoing evaluations of the Company's receivables and evaluations of the risk of repayment. The allowance for doubtful accounts was approximately $8.4 million and $9.1 million at July 3, 2010 and January 2, 2010, respectively, which management believes is adequate to provide for credit losses in the normal course of business, as well as losses for customers who have filed for protection under bankruptcy laws. Once management determines that the receivables are not recoverable, the amounts are removed from the financial records along with the corresponding reserve balance. Sales to the Procter & Gamble Company ("P&G") accounted for 13% and 10% of the Company's sales in the first six months of fiscal 2010 and 2009, respectively.

        The Company has entered into a factoring agreement to sell, without recourse or discount, certain U.S. company-based receivables to an unrelated third-party financial institution. Under the current terms of this factoring agreement, the maximum amount of outstanding advances at any one time is $20.0 million, which limitation is subject to change based on the level of eligible receivables, restrictions on concentrations of receivables and the historical performance of the receivables sold. Additionally, the Company has entered into factoring agreements to sell without recourse or discount, certain non-U.S. company-based receivables to unrelated third-party financial institutions. Under the terms of the Company's senior credit facility agreements, the maximum amount of non-U.S. outstanding advances at any one time is $20.0 million.

        During the first six months of fiscal 2010, approximately $120.6 million of gross receivables have been sold under the terms of these factoring agreements, compared to approximately $97.6 million during the first six months of fiscal 2009. The sale of these receivables accelerated the collection of the Company's cash and reduced credit exposure. Such sales of accounts receivable are reflected as a reduction of Accounts receivable, net in the Consolidated Balance Sheets as they meet the applicable criteria noted in ASC 860, "Transfers and Servicing" ("ASC 860"), for financial instruments. The gross amount of trade receivables sold to the factoring companies and, therefore, excluded from the Company's accounts receivable, was $40.9 million and $35.1 million as of July 3, 2010 and January 2, 2010, respectively. The amount due from the factoring companies, net of advances received from the factoring companies, was $6.4 million and $6.1 million at July 3, 2010 and January 2, 2010, respectively,

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POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 2. Concentration of Credit Risks and Accounts Receivable Factoring Agreements (Continued)

and is shown in Other current assets in the Consolidated Balance Sheets. Net of amounts due from factoring companies, the net outstanding balance of factored receivables was $34.5 million and $29.0 million at July 3, 2010 and January 2, 2010, respectively. The Company pays factoring fees associated with the sale of receivables based on the dollar value of the receivables sold. Such fees, which are considered to be primarily related to the Company's financing activities, are immaterial and are included in Foreign currency and other loss, net in the Consolidated Statements of Operations.

Note 3. Special Charges, Net

        The Company's operating income includes Special charges, net and this amount represents the consequences of corporate-level decisions or Board of Directors actions, principally associated with initiatives attributable to restructuring and realignment of manufacturing operations and management structures and pursuit of certain transaction opportunities. Additionally, the Company evaluates its long-lived assets for impairment whenever events or changes in circumstances, including the aforementioned, indicate that the carrying amounts may not be recoverable. A summary of such charges, net is presented in the following table (in thousands):

Asset impairment charges

        During the second quarter of fiscal 2010, the Company recorded a non-cash impairment charge of $0.7 million related to the write-down of assets held for sale in Neunkirchen, Germany to their estimated fair value less costs to sell.

        During the second quarter of fiscal 2009, the Company recorded a non-cash impairment charge of $1.6 million related to the write-down of certain property and equipment in North Little Rock, Arkansas to their estimated fair value less costs to sell. During the first quarter of fiscal 2009, the Company recorded non-cash impairment charges of $1.6 million related to the write-down of assets held for sale in Neunkirchen, Germany to their estimated fair value less costs to sell. See Note 14 "Fair Value of Financial Instruments and Non-Financial Assets and Liabilities" for the fair value measurement disclosures related to these assets.

Restructuring and plant realignment costs

        Accrued costs for restructuring and plant realignment efforts are included in Accounts payable and accrued liabilities in the Consolidated Balance Sheets. These costs generally arise from restructuring initiatives intended to result in lower working capital levels and improved operating performance and profitability through: (i) reducing headcount at both the plant and corporate levels and the realignment of

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        The restructuring and plant realignment costs in the second quarter of fiscal 2010 are comprised of: (i) $2.5 million of severance and other shut-down costs for restructuring activities in the United States; (ii) $0.3 million of severance and other shut-down costs for restructuring initiatives in Europe and Argentina.

        The restructuring and plant realignment costs in the first six months of fiscal 2010 are comprised of: (i) $6.5 million of severance and other shut-down costs for restructuring activities in the United States; (ii) $0.3 million of severance and other shut-down costs for restructuring initiatives in Europe; and (iii) $0.2 million of severance costs for restructuring initiatives in Argentina.

        On June 9, 2009, the Board of Directors of the Company approved a plan to consolidate its operations in the U.S. In June 2009, the Company communicated a plan to affected employees that it planned to close its North Little Rock, Arkansas manufacturing plant by the end of the first quarter of fiscal 2010 to better align the Company's capabilities with its long-term strategic direction and reduce overall operating costs. The plant closing included the reduction of approximately 140 positions when such efforts are completed. During the second quarter of fiscal 2010, the Company recognized $0.1 million of employee termination costs, $2.3 million for equipment relocation and associated shut-down costs related to the closure of the North Little Rock plant and $0.1 million for shutdown costs related to other plants. During the first six months of fiscal 2010, the Company recognized $0.3 million of employee termination costs, $6.1 million for equipment relocation and associated shut-down costs related to the closure of the North Little Rock plant and $0.1 million for shutdown costs related to other plants. The Company estimates that it will recognize total cash restructuring charges of approximately $18.5 million to $19.2 million during portions of fiscal 2009 and 2010, comprised of approximately $2.0 million related to employee termination expenses and $16.5 million to $17.2 million for equipment relocation and associated shut-down costs. Of the total spending, $17.7 million has been recognized from the commencement in 2009 through the end of the second quarter of fiscal 2010, including $11.2 million recognized in fiscal 2009. The Company expects to recognize the remaining $0.8 million to $1.5 million by the end of fiscal 2010.

        In March 2010, the Company communicated a plan to affected employees that it planned to close and dispose of the coating manufacturing line associated with its Argentina manufacturing operation in the second quarter of fiscal 2010 as part of the region's strategic plan. The closing included the reduction of approximately eighteen positions, of which six occurred in the first quarter and the remaining twelve positions in the second quarter. The Company recognized $0.2 million for employee termination costs in the first six months of fiscal 2010, which related to the terminations that were

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POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 3. Special Charges, Net (Continued)

finalized in both the first and second quarters. The Company closed the manufacturing line in April 2010 and expects to sell the equipment for an amount in excess of its net book value, less costs to sell. Accordingly, no impairment charge was recorded in the first six months of fiscal 2010. The Company expects to use the proceeds to reduce its bank debt in Argentina.

Other costs

        In April 2010, the Company announced that it planned to evaluate strategic alternatives to unlock shareholder value created by the Company's performance in fiscal 2009, its continued growth initiatives and its improved financial flexibility. The strategic alternatives could include, among other things, the sale, merger or recapitalization of the Company. The Company did not set a definitive timetable for the completion of its evaluation and there can be no assurances that the process will result in any transaction being announced or being completed.

        During the second quarter, the Company paid fees of approximately $0.5 million for professional services and incurred additional fees of approximately $1.0 million. The discussions regarding the transactions are still ongoing.

Restructuring in prior periods

        The restructuring and plant realignment costs in the first six months of fiscal 2009 totaled $5.5 million. This was comprised of: (i) $3.2 million of severance and other shut-down costs associated with the previously announced closure of the Neunkirchen, Germany manufacturing plant; (ii) $2.1 million of severance and other shut-down costs related to facilities in the United States; and (iii) $0.2 million of severance costs related to restructuring initiatives in Canada.

Note 4. Acquisitions

Argentina

        On October 30, 2009, the Company announced that it completed the purchase transaction of the remaining 40% stake in Dominion Nonwovens Sudamericana, S.A. from its partner, Guillermo E. Kraves. The purchase price was approximately $4.1 million. In accordance with ASC 810, the Company has accounted for this transaction as an equity transaction, and no gain or loss has been recognized on the transaction. The carrying amount of this noncontrolling interest has been adjusted in the amount of $0.6 million to reflect the change in ownership, and the difference between the purchase price and the amount by which the noncontrolling interest was adjusted resulted in a reduction to paid-in capital of $3.5 million. Additionally, the Company also paid $2.4 million to an affiliate of Mr. Kraves in satisfaction of amounts previously accrued for services.

Spain

        On December 2, 2009, the Company completed the initial phase of the acquisition, from Grupo Corinpa, S.L. ("Grupo Corinpa"), of certain assets and the operations of the nonwovens businesses of Tesalca-99, S.A. and Texnovo, S.A. (together with Tesalca-99, S.L., "Tesalca-Texnovo" or the "Sellers"), which are headquartered in Barcelona, Spain (the "Transaction"). The acquisition was completed by the Company through PGI Spain, which operates as a new wholly owned subsidiary of the Company.

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POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 4. Acquisitions (Continued)

        The acquired assets include the net operating working capital as of November 30, 2009 (defined as current assets less current liabilities excluding financial liabilities associated with the operations) valued at $10.9 million, the customer lists and the current book of business. Concurrent with the Transaction, the Company entered into a seven year lease (beginning December 2, 2009 and ending December 31, 2016) with Tesalca-Texnovo that provides that PGI Spain is entitled to the full and exclusive use of the Sellers' land, building and equipment during the term of the lease (the "Building and Equipment Lease"). PGI Spain is obligated to make total lease payments of approximately €29.0 million to Tesalca-Texnovo during the term of the Building and Equipment Lease agreement. The first lease payment of approximately €1.25 million was made on March 31, 2010 and further quarterly payments of approximately €1.25 million will be due for the first three years of the lease. Further, the quarterly lease payments for the remaining four years will be approximately €0.9 million per quarter. Pursuant to ASC 840, the Building and Equipment Lease agreement has been accounted for as an operating lease. Furthermore, pursuant to ASC 840-20-25-2, PGI Spain will recognize rent expense on a straight-line basis over the lease term in Cost of goods sold in its Consolidated Statements of Operations. See Note 18, "Commitments and Contingencies" for additional information on the Building and Equipment Lease.

        Further, as part of the Transaction, PGI Spain granted the Sellers a put option over the assets underlying the Building and Equipment Lease (the "Phase II Assets") until December 31, 2012 (the "Put Option"). The Sellers right to exercise the Put Option is dependent upon whether the results of the operations of PGI Spain meet the EBITDAR (earnings before interest, taxes, depreciation, amortization and rent, all as defined in the acquisition agreement) performance projection of €7.7 million, excluding lease payments ("EBITDAR Projection"), for either fiscal year 2010 or 2011 (the "Performance Period"). Furthermore, the Sellers granted PGI Spain a call option over the assets underlying the Phase II Assets, which expires on December 31, 2012 (the "Call Option"). If the results of the operations of PGI Spain do not meet the EBITDAR Projection for the Performance Period, then the Sellers' Put Option cannot be exercised and thus would expire at the end of its term. In the event that either the Put Option or Call Option is not exercised, the parties are obligated to continue with the Building and Equipment Lease until December 31, 2016.

        Consideration for the acquired assets consisted of approximately 1.049 million shares of the Company's Class A common stock ("Issued Securities"), which represented approximately 5.0% of the outstanding share capital of the Company on December 2, 2009, taking into account the Issued Securities. The Issued Securities are subject to certain restrictions, including that the Issued Securities are not registered pursuant to the Securities Act of 1933 (see Note 15 "Earnings Per Share and Shareholder's Equity" for further details). On December 2, 2009, the fair value of the Issued Securities approximated $14.5 million.

        During the first six months of fiscal 2010, the Company incurred $1.7 million of acquisition and integration related expenses attributable to the acquisition of Tesalca-Texnovo. These expenses were attributable to accountant, legal and advisory fees of $0.7 million associated with due diligence and the closing of the Transaction. In addition, $0.8 million was incurred for employee termination costs pursuant to a facility restructuring. In January 2010, the Company communicated a plan to affected employees that it planned to restructure its manufacturing operations in Spain during the first quarter of fiscal 2010 to reduce its overall cost structure. The realignment included the reduction of approximately ten positions in the first quarter of fiscal 2010. There were no such expenses during the first quarter of fiscal

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POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 4. Acquisitions (Continued)

2009. In accordance with ASC 805, these expenses are recorded as a period cost in Acquisition and integration expenses in the Company's Consolidated Statements of Operations.

        The Company recorded intangible assets of €0.6 million and €1.8 million associated with customer relationships and goodwill, respectively, in the purchase price allocation. The customer relationships intangible asset has an economic useful life of 5 years.

        The Company has concluded that Tesalca-Texnovo does not meet the criteria to be considered a variable interest entity. The Company reached this conclusion in accordance with its reevaluation of ASC 810, based on both the accounting guidance prior to the revisions that came into effect on January 3, 2010 and the revised accounting guidance that came into effect on January 3, 2010. Accordingly, the Company has concluded that it would not be appropriate to consolidate the financial results of Tesalca-Texnovo within its consolidated financial statements.

Note 5. Discontinued Operations

        During fiscal 2009, the Company determined that, in accordance with ASC 360, the assets of Fabpro Oriented Polymers LLC ("Fabpro") represented assets held for sale. Accordingly, the operations of Fabpro, previously included in the Oriented Polymers segment, have been reported as discontinued operations, as the cash flows of Fabpro are eliminated from the ongoing operations of the Company as a result of the disposal transaction, and the Company will have no continuing involvement in the operations of the business after the disposal transaction. The Company decided to sell this business as part of its continuing effort to evaluate its businesses and product lines for strategic fit within its operations. The Company completed the sale of Fabpro during the third quarter of fiscal 2009.

        As a result, this business has been accounted for as a discontinued operation in accordance with the authoritative guidance for the three and six months ended July 4, 2009. Accordingly, the results of operations of Fabpro have been segregated from continuing operations and included in Income from discontinued operations in the Consolidated Statements of Operations. In accordance with the authoritative guidance related to the reporting of cash flows, the Company elected not to separate the disclosure of cash flows pertaining to discontinued operations. Net cash flows from investing and financing activities of the discontinued operation were not significant.

        The following amounts, which relate to our Oriented Polymers segment, have been segregated from continuing operations and included in Income from discontinued operations (in thousands ) :

        Pre-tax income of discontinued operations includes interest expense allocated to Fabpro resulting from interest on debt that is required to be repaid as a result of the disposal transaction of $0.2 million and $0.4 million for the second quarter and first six months of fiscal 2009, respectively. Income tax

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POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 5. Discontinued Operations (Continued)

expense associated with the income of Fabpro reflects a benefit for the utilization of net operating loss carryforwards, for which a valuation allowance had been previously established.

        Inventories are net of reserves, primarily for obsolete and slow-moving inventories, of approximately $7.5 million and $8.1 million at July 3, 2010 and January 2, 2010, respectively. Management believes that the reserves are adequate to provide for losses in the normal course of business.

        As discussed earlier in Note 4 "Acquisitions", the Company recognized both goodwill and customer relationships in Euros as intangible assets attributable to the Spain acquisition. The customer relationships intangible asset has an economic useful life of 5 years and will be amortized over a 5-year period.

        In accordance with ASC 350, the Company will not amortize the goodwill, but instead will evaluate goodwill for impairment at least on an annual basis beginning with fiscal year 2010. Furthermore, the Company will perform a test for impairment on a more frequent basis should an event occur that indicates the goodwill might be impaired.

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POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 7. Intangibles and Loan Acquisition Costs (Continued)

        In September 2009, the Company amended its Credit Facility, which included a substantial modification to its first lien term loan, which modification has been treated as an extinguishment of debt pursuant to ASC 470-50, "Debt". As a result, a portion of the unamortized loan acquisition costs associated with the November 2005 financing in the amount of $3.5 million were written-off and, together with $1.6 million of third-party costs incurred in connection with the amendment, were included in Loss on extinguishment of debt in the Consolidated Statements of Operations in the third quarter of fiscal 2009. In addition, approximately $2.6 million of financing costs associated with the amendment of the Credit Facility were capitalized in the third quarter of fiscal 2009. Additionally, the Company capitalized approximately $0.2 million of financing costs associated with the conversion of $10.0 million of the Revolving Credit Facility in the second quarter of fiscal 2010. See Note 9 "Debt" for additional disclosures related to the amendment to the Credit Facility.

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

        Intangibles are amortized over periods generally ranging from 4 to 6 years. Loan acquisition costs are amortized over the life of the related debt.

Note 8. Accounts Payable and Accrued Liabilities

         Accounts payable and accrued liabilities in the Consolidated Balance Sheets includes salaries, wages, incentive compensation and other fringe benefits of $20.2 million and $17.9 million as of July 3, 2010 and January 2, 2010, respectively.

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POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 9. Debt (Continued)

Credit Facility

        Prior to the most recent amendment (discussed herein), the Company's credit facility (the "Credit Facility"), which was entered into on November 22, 2005 and amended as of December 8, 2006, consisted of a $410.0 million first-lien term loan (the "Term Loan") and a $45.0 million secured revolving credit facility (the "Revolving Credit Facility") maturing on November 22, 2010. In addition, the interest rate for both the Term Loan and the Revolving Credit Facility was based on a spread over the London Interbank Offered Rate ("LIBOR") of 2.25%, or 1.25% over a defined Alternate Base Rate. The Credit Facility also included customary representations and warranties, covenants and events of default, including, in certain circumstances, acceleration of obligations thereunder upon an event of default.

        On September 17, 2009, the Company entered into Amendment No. 2 (the "Amendment") to the Credit Agreement. As a result of the Amendment, the Company extended the maturity date of approximately $295.7 million of its then-outstanding $317.6 million Term Loan to November 22, 2014. As a result of the Amendment, availability under the Revolving Credit Facility matures in two tranches: $15.0 million (Tranche 1) on November 22, 2010 and $30.0 million (Tranche 2) on November 22, 2013, unless the Tranche 1 Term Loan exceeds $10.0 million on August 24, 2012. If that condition is met, then the Tranche 2 Revolver matures on August 24, 2012. In conjunction with the execution of the Amendment, the Company repaid approximately $24.0 million of net outstanding borrowings under the Term Loan.

        The Amendment also: (i) allows for additional Term Loan tranches that extend the maturity date of the Term Loan to November 22, 2014 at an interest rate of LIBOR plus 4.5% (with a LIBOR floor of 2.5%); (ii) allows for additional Revolving Credit Facility tranches that extend the maturity date of the Revolving Credit Facility to November 22, 2013 at an interest rate of LIBOR plus 4.5% (with a LIBOR floor of 2.5%); (iii) removes the requirement for future step downs or step ups in financial covenants; (iv) establishes price protection for the new tranches requiring matching yields if any future tranches are established at yields at least 25 basis points above the current loan tranches; (v) revised certain definitions and baskets related to permitted investments, acquisitions and assets sales; and (vi) required repayment of $24.0 million of net outstanding borrowings under the Term Loan at the closing. If outstanding borrowings under the original Term Loan tranche that matures November 22, 2012 exceed $10.0 million on August 24, 2012, the new Revolving Credit Facility tranche will mature August 24, 2012.

        As of July 3, 2010, the Term Loan consists of $16.1 million of net outstanding amounts maturing on November 22, 2012 ("Tranche 1 Term Loan") and $272.4 million maturing on November 22, 2014 ("Tranche 2 Term Loan"). Similarly, as of July 3, 2010, the Revolving Credit Facility consisted of $5.0 million of availability maturing on November 22, 2010 ("Tranche 1 Revolver") and $40.0 million of availability maturing on November 22, 2013 ("Tranche 2 Revolver"), under which there were no amounts outstanding as of July 3, 2010. Effective May 4, 2010, the components of the revolving credit facilities reflect the conversion of $10.0 million of its Tranche 1 Revolver commitments to Tranche 2 Revolver commitments. The additional $10.0 million of Tranche 2 Revolver commitments assumed the same maturity date (November 22, 2013) and interest rate (LIBOR plus 4.5%, with a LIBOR floor of 2.5%) as the existing Tranche 2 Revolver. Principal payments of approximately $1.0 million will continue to be due quarterly.

        All borrowings under the Credit Facility are U.S. dollar denominated and are guaranteed, on a joint and several basis, by each and all of the direct and indirect domestic subsidiaries of the Company. The Credit Facility and the related guarantees are secured by (i) a lien on substantially all of the assets of the

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POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 9. Debt (Continued)

Company, its domestic subsidiaries and certain of its non-domestic subsidiaries, (ii) a pledge of all or a portion of the stock of the domestic subsidiaries of the Company and of certain non-domestic subsidiaries of the Company, and (iii) a pledge of certain secured intercompany notes. Commitment fees under the Credit Facility are equal to 0.50% of the daily unused amount of the Tranche 1 Revolver and 0.75% of the daily unused amount of the Tranche 2 Revolver. The Credit Facility limits restricted payments to $5.0 million, including cash dividends, in the aggregate since the effective date of the Credit Facility. The Credit Facility contains covenants and events of default customary for financings of this type, including leverage and interest expense coverage covenants, as well as default provisions related to certain types of defaults by the Company or its subsidiaries in the performance of their obligations regarding borrowings in excess of $10.0 million. The Credit Facility requires that the Company maintain a leverage ratio of not more than 3.50:1.00 as of July 3, 2010 and through the remaining term of the Credit Facility. The interest expense coverage ratio requirement at July 3, 2010 and through the remaining term of the Credit Facility requires that it not be less than 3.00:1.00. The Company was in compliance with the financial covenants under the Credit Facility at July 3, 2010. These ratios are calculated on a trailing four-quarter basis. As a result, any decline in the Company's future operating results will negatively impact its coverage ratios. Although the Company expects to remain in compliance with these covenant requirements, the Company's failure to comply with these financial covenants, without waiver or amendment from its lenders, could have a material adverse effect on its liquidity and operations, including limiting the Company's ability to borrow under the Credit Facility.

        The Term Loan requires mandatory payments of approximately $1.0 million per quarter. Under the Amendment, the Company has the option to either prorate such principal payments across the two tranches or to apply them to the tranche with the earliest maturity date. In addition, the Credit Facility, as amended, requires the Company to use a percentage of proceeds from excess cash flows, as defined by the Credit Facility and determined based on year-end results, to reduce its then outstanding balances under the Credit Facility. Excess cash flows required to be applied to the repayment of the Credit Facility are generally calculated as 50% of the net amount of the Company's available cash generated from operations adjusted for the cash effects of interest, taxes, capital expenditures, changes in working capital and certain other items. The amount of excess cash flows for future periods is based on year-end results. Any such amount would be payable in March 2011 and classified, in addition to the mandatory payments of approximately $1.0 million per quarter, in the Current portion of long-term debt in the Consolidated Balance Sheets as of July 3, 2010. The Company currently estimates that there will not be any additional excess cash flow requirement with respect to fiscal 2010. There was no additional excess cash flow requirement with respect to fiscal 2009. The Company may, at its discretion and based on projected operating cash flows, the current market value of the Term Loan and anticipated cash requirements, elect to make additional repayments of debt under the Credit Facility in excess of the mandatory debt repayments and excess cash flow payments, or may reacquire its debt in conjunction with its debt repurchase program.

        The Company, through its subsidiaries, may make market purchases of the Term Loan under its Credit Facility from its existing lenders at a discount to the carrying value of its debt. Under these agreements, the Company's subsidiary will acquire the rights and obligations of a lender under the Credit Facility to the extent of the amount of debt acquired, and the selling third-party lender will be released from its obligations under the Credit Facility. The Company accounts for such reacquisition of debt as a transfer of financial assets resulting in a sale and derecognizes such liability in accordance with the provisions of ASC 860. During the first quarter of fiscal 2009, the Company reacquired $15.0 million

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POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 9. Debt (Continued)

of principal amount of debt, via cash payment, and recognized a gain on such reacquisition of $2.4 million, net of the write-off of deferred financing fees of $0.2 million, and has included such amount in Gain on Reacquisition of Debt in the Consolidated Statements of Operations.

        The interest rate applicable to borrowings under the Tranche 1 Term Loan and Tranche 1 Revolver is based on the three-month or the one-month LIBOR plus a specified margin. The applicable margin for borrowings under both the Tranche 1 Term Loan and Tranche 1 Revolver is 225 basis points. Further, the Company may, from time to time, elect to use an Alternate Base Rate for its borrowings under the Revolving Credit Facility and Term Loan based on the bank's base rate plus a margin of 75 to 125 basis points based on the Company's total leverage ratio.

        The interest rate applicable to borrowings under the Tranche 2 Term Loan and Tranche 2 Revolver is based on LIBOR plus a margin of 450 basis points, with a LIBOR floor of 250 basis points.

        In accordance with the terms of the Credit Facility, the Company maintained its position in an interest rate swap agreement originally entered into in February 2007. The agreement effectively converted $240.0 million of notional principal amount of debt from a variable LIBOR rate to a fixed LIBOR rate of 5.085% and terminated on June 29, 2009. Additionally, in February 2009, the Company entered into another interest rate swap agreement, which was effective June 30, 2009 and matures on June 30, 2011, and effectively converts $240.0 million of notional principal amount of debt from a variable LIBOR rate to a fixed LIBOR rate of 1.96%. These agreements are more fully described in Note 13, "Derivatives and Other Financial Instruments and Hedging Activities" and Note 14, "Fair Value of Financial Instruments and Non-Financial Assets and Liabilities."

        There were no borrowings under the Revolving Credit Facility as of July 3, 2010 or January 2, 2010. Average daily borrowings under the Revolving Credit Facility, which were primarily LIBOR rate-based borrowings, were $2.9 million at an average interest rate of 5.6% for the period from January 3, 2010 to July 3, 2010. Subject to certain terms and conditions, a maximum of $25.0 million of the Credit Facility may be used for letters of credit. As of July 3, 2010, the Company has effectively reserved capacity under the Revolving Credit Facility in the amount of $16.3 million relating to standby and documentary letters of credit outstanding. These letters of credit are primarily provided to certain administrative service providers and financial institutions. None of these letters of credit had been drawn on at July 3, 2010.

        As of July 3, 2010, the Company also had other outstanding letters of credit in the amount of $4.4 million primarily provided to certain raw material vendors. None of these letters of credit had been drawn on at July 3, 2010.

        In fiscal 2009, the Company entered into short-term credit facilities to finance insurance premium payments. The outstanding indebtedness under these short-term borrowing facilities was $0.4 million and $0.3 million as of July 3, 2010 and January 2, 2010, respectively. These facilities mature at various dates through October 2010. Borrowings under these facilities are included in Short-term borrowings in the Consolidated Balance Sheets.

Subsidiary Indebtedness

        In fiscal 2008, the Company's operations in Argentina entered into short-term credit facilities to finance working capital requirements. The outstanding indebtedness under these short-term borrowing facilities was $8.0 million and $3.4 million as of July 3, 2010 and January 2, 2010, respectively. These facilities mature at various dates through September 2010. As of July 3, 2010, the average interest rate

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POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 9. Debt (Continued)

on these borrowings was 3.21%. Borrowings under these facilities are included in Short-term borrowings in the Consolidated Balance Sheets.

        In January 2007, the Company's subsidiary in Argentina entered into an arrangement with banking institutions in Argentina to finance the installation of a new spunmelt line at the joint venture facility near Buenos Aires, Argentina. The maximum borrowings available under the arrangement, excluding any interest added to principal, amount to 26.5 million Argentine pesos with respect to an Argentine peso-denominated loan and $30.3 million with respect to a U.S. dollar-denominated loan and are secured by pledges covering (i) the subsidiary's existing equipment lines; (ii) the outstanding stock of the subsidiary; and (iii) the new machinery and equipment being purchased, as well as a trust assignment agreement related to a portion of receivables due from certain major customers of the subsidiary. As of July 3, 2010, the outstanding indebtedness was approximately $29.3 million, consisting of $6.9 million of Argentine peso-denominated loans and a $22.4 million U.S. dollar-denominated loan. As of January 2, 2010, the outstanding indebtedness was approximately $34.1 million, consisting of $8.2 million of Argentine peso-denominated loans and a $25.9 million U.S. dollar-denominated loan. Current maturities of this debt amount to $7.2 million as of July 3, 2010. The interest rate applicable to borrowings under these term loans is based on LIBOR plus 290 basis points for the U.S. dollar-denominated loan and Buenos Aires Interbanking Offered Rate plus 475 basis points for the Argentine peso-denominated loan. Principal and interest payments began in July 2008 with the loans maturing as follows: approximately $1.4 million in September 2012, approximately $22.4 million in April 2016 and the balance of $5.5 million maturing in May 2016.

        In April 2009, the Company amended its Argentine Facility to effectively defer $3.8 million of 2009 scheduled payments under the facility for a period of twelve months. Accordingly, the Company has classified such payments, along with scheduled 2010 maturities, as a current portion of long-term debt in its Consolidated Balance Sheets as of July 3, 2010 and January 2, 2010.

        In March 2009, the Company's subsidiary in Mexico entered into a term credit facility (the "Mexico Credit Facility") with a banking institution in Mexico to finance a portion of the installation of a new spunmelt line near San Luis Potosi, Mexico. The maximum borrowings available under the Mexico Credit Facility, excluding any interest added to principal, amount to $14.5 million with respect to a U.S. dollar-denominated loan and is secured by pledges covering (i) the subsidiary's existing equipment lines; and (ii) the new machinery and equipment being purchased. The interest rate applicable to borrowings under the Mexico Credit Facility is based on three-month LIBOR plus 780 basis points. A series of 22 quarterly principal payments commenced on October 1, 2009; interest payments commenced on July 1, 2009. As of July 3, 2010, outstanding indebtedness under the Mexico Credit Facility was approximately $11.9 million.

Note 10. Income Taxes

        During the three and six months ended July 3, 2010, the Company recognized income tax expense of $2.9 million and $5.9 million, respectively, on consolidated income before income taxes from continuing operations of $4.7 million and $5.5 million. During the three and six months ended July 4, 2009, the Company recognized income tax expense of $1.9 million and $9.5 million, respectively, on consolidated income before income taxes from continuing operations of $5.1 million and $18.6 million. The Company's income tax expense in any period is different than such expense determined at the U.S. federal statutory rate primarily due to losses in certain jurisdictions for which no income tax benefits are

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POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 10. Income Taxes (Continued)

anticipated, foreign withholding taxes for which tax credits are not anticipated, institution of a flat tax regime in Mexico, U.S. state income taxes, changes in the amounts recorded for tax uncertainties in accordance with ASC 740-10, "Income Taxes", and foreign taxes calculated at statutory rates different than the U.S. federal statutory rate.

        The total unrecognized tax benefits of $41.3 million as of July 3, 2010 represent the amount of unrecognized tax benefits that, if recognized, would affect the effective income tax rate in future periods. Included in the balance of unrecognized tax benefits as of July 3, 2010 was $27.7 million related to tax positions for which it is reasonably possible that the total amounts could significantly change during the next twelve months. This amount represents a decrease in unrecognized tax benefits comprised of items related to negotiations of the settlement of foreign taxes and the lapse of statutes of limitations.

        During the six months ended July 3, 2010, the Company increased the liability for unrecognized tax benefits by $0.6 million, net of additional interest and penalties of $0.6 million. During the six months ended July 4, 2009, the Company increased the liability for unrecognized tax benefits by $1.1 million, which included interest and penalties of $0.1 million.

        Management judgment is required in determining tax provisions and evaluating tax positions. Although management believes its tax positions and related provisions reflected in the consolidated financial statements are fully supportable, it recognizes that these tax positions and related provisions may be challenged by various tax authorities. These tax positions and related provisions are reviewed on an ongoing basis and are adjusted as additional facts and information become available, including progress on tax audits, changes in interpretations of tax laws, developments in case law and closing of statute of limitations. The Company's tax provision includes the impact of recording reserves and any changes thereto.

        During the second quarter, the Company determined that it may be subject to "Personal Holding Company" ("PHC") tax for past periods. As a result, on August 17, 2010, the Company filed a Form10-K/A (Amendment No.1) for the fiscal year ended January 2, 2010 and Form 10-Q/A (Amendment No.1) for the quarterly period ended April 3, 2010, collectively referred to as the "Amendments". While the circumstances associated with the PHC issue are more fully described in the Amendments, briefly stated, the PHC rules are commonly understood by tax professionals to be focused on penalizing individuals who use holding companies to hold personal investments when the individual tax rates exceed corporate tax rates, and are therefore not typically applicable to public companies, such as the Company, whose primary source of income is from operating activities. As a result of an evaluation of Sections 541 through 547 of the Internal Revenue Code relating to the PHC rules, and based on requested ownership information received from its majority stockholders, however, management determined that a tax liability associated with uncertain tax positions should have been recorded in prior periods in accordance with the provisions set forth in Financial Accounting Standards Board Accounting Standards Codification 740, "Income Taxes" ("ASC 740"). As further described in the Amendments, despite the contingent liability recognized in the financial statements, the Company believes the PHC rules were not intended to apply to its situation.

        In August 2010, the Company began discussions with the IRS to seek a ruling and bring resolution to the PHC issue. However, we cannot be certain of the outcome of discussions with the IRS and whether such outcome will result in an amount of taxes, interest or penalties required to be paid that is materially higher or lower than the liability established on the Company's balance sheet. Additionally, the results of current tax audits and reviews related to open tax years have not been finalized, and management

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POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 10. Income Taxes (Continued)

believes that the ultimate outcomes of these audits and reviews will not have a material adverse effect on the Company's financial position, results of operations or cash flows.

        As of July 3, 2010, the Company has a number of open tax years. The major jurisdictions where the Company files income tax returns include Argentina, Canada, China, Colombia, France, Germany, Mexico, The Netherlands, Spain and the United States. The U.S. federal tax returns have been examined through fiscal 2004 and the foreign jurisdictions generally remain open and subject to examination by the relevant tax authorities for the tax years 2003 through 2009. Although the results of current tax audits and reviews related to open tax years have not been finalized, management believes that the ultimate outcomes will not have a material adverse effect on the Company's financial position, results of operations or cash flows.

        The Company continues to recognize interest and/or penalties related to income taxes as a component of income tax expense. There were income tax refunds receivable of $2.8 million and $3.9 million at July 3, 2010 and January 2, 2010, respectively. These amounts are included in Other current assets in the Consolidated Balance Sheets.

Note 11. Pension and Postretirement Benefit Plans

        The Company and its subsidiaries sponsor multiple defined benefit plans and other postretirement benefits that cover certain employees. Benefits are primarily based on years of service and the employee's compensation. It is the Company's policy to fund such plans in accordance with applicable laws and regulations.

        Components of net periodic benefit costs for the three and six months ended July 3, 2010 and July 4, 2009 are as follows (in thousands):

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        As of July 3, 2010, the Company had contributed $2.2 million to its pension and postretirement benefit plans for the 2010 benefit year. The Company's contributions include amounts required to be funded with respect to a defined benefit pension plan relating to one of the Company's Canadian operations. The Company presently anticipates contributing an additional $3.9 million to fund its plans in 2010, for a total of $6.1 million.

Note 12. Stock Option and Restricted Stock Plans

Stock Option Plan

        The Polymer Group, Inc. 2003 Stock Option Plan (the "2003 Option Plan"), which expires December 3, 2013, was approved by the Company's Board of Directors and shareholders and is administered by the Compensation Committee of the Board of Directors. The 2003 Option Plan approved the issuance of 400,000 non-qualified stock options to acquire shares of the Company's Class A Common Stock. All options awarded provide for an exercise price of $6.00 per share, have a five-year life and vest, based on the achievement of various service and financial performance criteria, over a four-year period, with the initial awards beginning their vesting terms as of January 4, 2004. Vesting of the stock options may be accelerated on the occurrence of a change in control, as defined in the 2003 Option Plan, or other events. With respect to post-vesting restrictions, the 2003 Option Plan provides that each option must be exercised, if at all, upon the earlier to occur of (i) the date that is five years after the award date of the option or (ii) concurrently upon the consummation of a change in control. As of July 3, 2010 and January 2, 2010, the Company had awarded grants of non-qualified stock options to purchase 174,097 shares of the Company's Class A Common Stock. In March 2009, the Board of Directors approved a measure to cease making awards under the 2003 Option Plan.

        The Company accounts for the 2003 Option Plan in accordance with ASC 718. As of July 3, 2010, with respect to the 55,988 options to purchase Class A Common Stock awarded under the 2003 Option Plan, 11,500 are subject to future vesting based on the attainment of future performance targets that have not been established as of July 3, 2010. Accordingly, pursuant to ASC 718, 55,988 options to purchase Class A Common Stock have been considered granted under the 2003 Option Plan as of July 3, 2010. During the first six months of fiscal 2010, 116,109 options were exercised and 2,000 options were forfeited. The compensation costs related to the 2003 Option Plan were not material for the three and six months ended July 3, 2010 and July 4, 2009 and were included in Selling, general and administrative expenses in the Consolidated Statements of Operations.

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        ASC 718 requires the estimation of forfeitures when recognizing compensation expense and that the estimate of forfeiture be adjusted over the requisite service period should actual forfeitures differ from such estimates. Changes in estimated forfeitures, if significant, are recognized through a cumulative adjustment, which is recognized in the period of change and which impacts the amount of unamortized compensation expense to be recognized in future periods.

Restricted Stock Plans

2004 Restricted Stock Plan for Directors

        The Company's shareholders and Board of Directors approved the 2004 Polymer Group, Inc. Restricted Stock Plan for Directors (the "2004 Restricted Plan"), which expires in 2014, for the issuance of restricted shares of the Company's Class A Common Stock to directors of the Company, as defined in the 2004 Restricted Plan. The 2004 Restricted Plan approved for issuance 200,000 restricted shares and is administered by a committee of the Company's Board of Directors not eligible to receive restricted shares under the 2004 Restricted Plan. In May 2009, the Company's shareholders approved an increase in the number of shares reserved for issuance under the 2004 Restricted Plan from 200,000 shares to 300,000 shares.

        In the first six months of fiscal 2010 and fiscal 2009, the Company awarded 23,475 and 52,612 restricted shares, respectively, to members of the Company's Board of Directors for their Board service to the Company. In addition, 5,307 shares were surrendered to satisfy withholding tax requirements in the first six months of fiscal 2010. The cost associated with these restricted stock grants, which vest over periods ranging to twenty-four months, totaled approximately $0.1 million and $0.3 million for the three and six months ended July 3, 2010 and was included in Selling, general and administrative expenses in the Consolidated Statements of Operations. For the three and six months ended July 4, 2009, these costs approximated $0.1 million and $0.2 million, respectively. Compensation cost not yet recognized for awards under the 2004 Directors Plan was approximately $0.2 million and the weighted average period of recognition for such compensation was 1.0 years as of July 3, 2010.

        Additionally, in April 2007, 50,000 restricted shares were issued pursuant to the terms of the Executive Employment Agreement entered into with the Company's Chief Executive Officer. Such shares vest over a four year service period effective April 23, 2007, and such vesting will be accelerated upon a change in control, as defined therein, and the completion of a minimum service period. The compensation costs associated with such restricted shares issued under the terms of the Executive

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POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 12. Stock Option and Restricted Stock Plans (Continued)

Employment Agreement totaled $0.1 million and $0.2 million for the three and six months ended July 3, 2010, respectively and were included in Selling, general and administrative expenses in the Consolidated Statements of Operations. For the three and six months ended July 4, 2009, these costs approximated $0.1 million and $0.2 million, respectively. Compensation cost not yet recognized for such nonvested restricted shares issued under the terms of the Executive Employment Agreement was approximately $0.3 million and the weighted average period of recognition for such compensation was 0.4 years as of July 3, 2010.

        As of July 3, 2010, there remain 69,899 shares of the Company's Class A Common Stock available to be awarded under the 2004 Restricted Plan.

2005 Employee Restricted Stock Plan

        The Polymer Group, Inc. 2005 Employee Restricted Stock Plan (the "2005 Stock Plan") was approved by the Company's Board of Directors and shareholders and is administered by the Compensation Committee of the Company's Board of Directors. The 2005 Stock Plan, which expires in 2015, approved for issuance 482,000 restricted shares to employees of the Company. Other than for certain shares initially awarded and immediately vested on January 20, 2006, March 12, 2008 and April 9, 2009, shares awarded under the 2005 Stock Plan primarily vest 25% on each of the grant's first four anniversary dates based on a combination of service and/or the achievement of certain performance targets. Vesting of the restricted shares, other than those shares issued pursuant to the terms of the Executive Employment Agreement entered into with the Company's Chief Executive Officer, may be accelerated on the occurrence of a change in control, as defined in the 2005 Stock Plan, or other events. Vesting of shares awarded under the Executive Employment Agreement will be accelerated under a change in control, as defined therein, and the completion of a minimum service period.

        In March 2009, the Board of Directors approved a measure to cease making awards under the 2005 Stock Plan. During the first six months of fiscal 2010, 11,309 shares were surrendered by employees to satisfy withholding tax requirements and 5,000 shares were forfeited. During the first six months of fiscal 2009, 32,237 restricted shares were considered re-granted to certain employees of the Company in accordance with ASC 718. In addition, 45,395 shares were surrendered during the first six months of fiscal 2009 by employees to satisfy withholding tax requirements and 60,047 shares were forfeited.

        The compensation costs associated with the 2005 Stock Plan totaled $0.4 million and $0.7 million for the three and six months ended July 3, 2010, respectively, and were included in Selling, general and administrative expenses in the Consolidated Statements of Operations. For the three and six months ended July 4, 2009, these costs approximated $0.5 million and $0.6 million, respectively. As of July 3, 2010, awards of 367,009 shares of the Company's Class A Common Stock were outstanding.

        The Company accounts for the 2005 Stock Plan in accordance with ASC 718. As of July 3, 2010, of the 367,009 shares awarded and outstanding under the 2005 Stock Plan, 20,985 shares are subject to future vesting based on the attainment of future performance targets, which targets had not been established as of July 3, 2010. Accordingly, pursuant to the provisions of ASC 718, 346,024 restricted shares are considered granted under the 2005 Stock Plan as of July 3, 2010. Compensation cost not yet recognized for nonvested restricted shares considered granted under the 2005 Stock Plan was approximately $0.6 million as of July 3, 2010, and the weighted average period of recognition for such compensation was 1.0 years as of July 3, 2010.

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POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 12. Stock Option and Restricted Stock Plans (Continued)

2008 Long-Term Stock Incentive Plan

        The Polymer Group, Inc. 2008 Long-Term Stock Incentive Plan (the "2008 LTI Stock Plan") was approved by the Company's shareholders and Board of Directors and is administered by the Compensation Committee of the Company's Board of Directors. The 2008 LTI Stock Plan, which expires in 2018 unless terminated by the Company's Board of Directors sooner, originally reserved for issuance 425,000 shares of the Company's Class A Common Stock to employees of the Company. In May 2009, the Company's shareholders approved an increase in the number of shares reserved for issuance under the 2008 LTI Stock Plan from 425,000 shares to 1,075,000 shares. The Compensation Committee may, from time to time, award a variety of equity-based incentives under the 2008 LTI Stock Plan to such employees and in such amounts and with specified restrictions as it determines appropriate in the circumstances. Such awards may be granted under the 2008 LTI Stock Plan in the form of either incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock, restricted stock units, stock awards, performance awards or other types of stock awards that involve the issuance of, or that are valued by reference to, shares of the Company's Class A Common Stock. Vesting, which will be determined by the Compensation Committee of the Company's Board of Directors, may be accelerated on the occurrence of a change in control or other events, as defined. All restricted stock units will be settled in the form of restricted shares upon vesting.

        Beginning in fiscal year 2008, various awards were approved and issued to certain employees of the Company under the 2008 LTI Stock Plan. During the first six months of fiscal 2010, the Company awarded 210,470 service-based restricted stock of the Company's Class A Common Stock and 261,619 restricted stock units, of which 247,580 would vest based on the achievement of 2010 performance targets and the completion of requisite service periods. Additionally, 252,728 restricted stock units were converted to restricted stock, of which 83,398 vested upon award, based on the Company achieving the maximum level of the performance targets for fiscal 2009. Also, during the first six months of fiscal 2010, 72,565 shares were surrendered by employees to satisfy withholding tax requirements and 34,437 shares were forfeited.

        During the first six months of fiscal 2009, the Company awarded 297,853 service-based restricted shares of the Company's Class A Common Stock and 144,322 restricted stock units, of which 128,746 would vest based on the achievement of 2009 performance targets and the completion of requisite service periods and 122,512 were performance-based. In addition, 122,512 performance-based restricted stock units were forfeited since the performance criteria were not satisfied and the awards contained no carryforward provisions. Also, 39,136 shares were surrendered to satisfy withholding tax obligations, 5,176 restricted stock units were converted to restricted shares and 1,529 restricted stock units were forfeited.

        As of July 3, 2010, awards of 681,836 restricted shares of the Company's Class A Common Stock, of which 206,288 shares were vested, and 296,188 restricted stock units were outstanding. All restricted stock units will be settled in the form of restricted shares upon vesting. As of July 3, 2010, 96,976 shares are considered available for future grant under the 2008 LTI Stock Plan. The compensation costs associated with the 2008 LTI Stock Plan totaled $0.9 million and $1.7 million for the three and six months ended July 3, 2010, respectively, and were included in Selling, general and administrative expenses in the Consolidated Statements of Operations. For the three and six months ended July 4, 2009, these costs approximated $0.8 million and $0.9 million, respectively. Compensation cost not yet recognized

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POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 12. Stock Option and Restricted Stock Plans (Continued)

for awards under the 2008 LTI Stock Plan was approximately $8.2 million as of July 3, 2010, and the weighted average period of recognition for such compensation was 1.1 years as of July 3, 2010.

Other Compensation Arrangement

        On March 31, 2010, the Company entered into a new employment agreement with its Chief Executive Officer that provides for a one-time award of equity and cash at the expiration date of the agreement (the "Retirement Incentive"). The equity award component is dependent upon an ending stock price at the measurement date, defined in the agreement, and will range between 20,000 shares and 100,000 shares. The cash award will be equal to thirty percent of the future value of the aforementioned equity award component, but will not be less than $250,000 or greater than $1,000,000.

        Management has concluded that the stock award component should be accounted for as a "Equity-classified award" as defined with ASC 718, since the Company intends to issue PGI common shares. In addition, the Company currently intends for the future stock award to be issued under the 2008 LTI Stock Plan. Further, management has concluded that the cash award should be accounted for as a "Liability-classified award" as defined with ASC 718, since the Company intends to pay cash for this compensation component. As of July 3, 2010, the Company anticipates that it will recognize compensation expense of $1.4 million from the period March 31, 2010 through April 2013.

Note 13. Derivative and Other Financial Instruments and Hedging Activities

        The Company is exposed to certain risks arising from business operations and economic factors. The Company uses derivative financial instruments to manage market risks and reduce its exposure to fluctuations in interest rates and foreign currencies. All hedging transactions are authorized and executed under clearly defined policies and procedures, which prohibit the use of financial instruments for trading purposes.

        The Company uses interest-rate derivative instruments to manage its exposure related to movements in interest rates with respect to its debt instruments. On February 12, 2009, as disclosed in Note 9 "Debt," to mitigate its interest rate exposure as required by the Credit Facility, the Company entered into a pay-fixed, receive-variable interest rate swap (the "2009 Swap"), which effectively converts the variable LIBOR-based interest payments associated with $240.0 million of the Term Loan to fixed amounts at a LIBOR rate of 1.96%. This interest rate swap agreement became effective on June 30, 2009 and expires on June 30, 2011. Cash settlements will be made monthly and the floating rate will be reset monthly, coinciding with the reset dates of the Credit Facility.

        In accordance with ASC 815, the Company designated the 2009 Swap as a cash flow hedge of the variability of interest payments with changes in fair value of the 2009 Swap recorded in Accumulated other comprehensive income in the Consolidated Balance Sheets. As of September 17, 2009, in conjunction with the Amendment and in accordance with ASC 815-30, the Company concluded that 92% (which represents the approximate percentage of the Tranche 1 Term Loan debt considered extinguished by the Amendment) of the 2009 Swap was no longer effective; accordingly, 92% of $3.9 million related to the 2009 Swap and included in Accumulated Other Comprehensive Income was frozen and will be reclassified to earnings as future interest payments are made throughout the term of the 2009 Swap. This portion of the notional amount no longer met the criteria for cash flow hedge accounting treatment in accordance with ASC 815. See Note 14 "Fair Value of Financial Instruments and

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POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 13. Derivative and Other Financial Instruments and Hedging Activities (Continued)

Non-Financial Assets and Liabilities" for the fair value measurement disclosures for these assets and liabilities.

        Through June 2009, the Company had a pay-fixed, receive-variable interest rate swap, effectively converting the variable LIBOR-based interest payments associated with $240.0 million of the debt to fixed amounts at a LIBOR rate of 5.085% (the "2007 Swap"). This interest rate swap agreement became effective on May 8, 2007 and expired on June 29, 2009. Cash settlements were made quarterly and the floating rate was reset quarterly, coinciding with the reset dates of the Credit Facility.

        The impact of these swaps on Interest expense, net in the Consolidated Statements of Operations was an increase of $1.0 million and $2.0 million for the three and six months ended July 3, 2010, respectively. For the three and six months ended July 4, 2009, the impact was an increase of 2.3 million and $4.5 million, respectively.

        On February 8, 2010, the Company entered into a series of foreign exchange forward contracts (put options and call options) with a third-party financial institution that provided for a floor and ceiling price on payments related to the Company's new line under construction in Suzhou, China. The objective of the combination foreign exchange forward contracts is to hedge the changes in fair value of a firm commitment to purchase equipment attributable to changes in foreign currency rates between the Euro and U.S. dollar through the date of acceptance of the equipment. The notional amount of the contracts with the third party, which expire on various dates through fiscal 2012, was €25.6 million, which will result in a U.S. dollar equivalent range of $34.6 million to $36.2 million. Cash settlements under the forward contracts coincide with the payment dates on the equipment purchase contract. As of July 3, 2010, the Company has recorded the asset associated with the previously unrecognized firm commitment and the liability associated with the hedging agreement. The following table summarizes the aggregate notional amount and estimated fair value of the Company's derivative instruments as of July 3, 2010 and January 2, 2010 (in thousands):

(1)

Comprised of a $240.0 million notional amount interest rate swap agreement that was executed, became effective on June 20, 2009 and matures on June 30, 2011.

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(1)

Amount of Gain (Loss) (Effective Portion) Reclassified from Accumulated Other Comprehensive Income into Income is located in Interest Expense, net in the Consolidated Statements of Operations. There is no ineffective portion.

(1)

Amount of Gain (Loss) (Effective Portion) Reclassified from Accumulated Other Comprehensive Income into Income is located in Interest Expense, net in the Consolidated Statements of Operations. There is no ineffective portion.

        For the three and six months ended July 3, 2010, the Company recognized $0.4 million in foreign currency and other loss, net for the gain on the firm commitment related to its foreign exchange contract.

        See Note 14, "Fair Value of Financial Instruments and Non-Financial Assets and Liabilities" for additional disclosures related to the Company's derivative instruments.

Note 14. Fair Value of Financial Instruments and Non-Financial Assets and Liabilities

        The Company adopted ASC 820, which outlines a valuation framework and creates a fair value hierarchy that distinguishes between market assumptions based on market data (observable inputs) and a reporting entity's own assumptions about market data (unobservable inputs). The standard increases the consistency and comparability of fair value measurements and related disclosures. Fair value is identified, under the standard, as the price that would be received to sell an asset or paid to transfer a liability at the measurement date (an exit price). The financial derivatives are valued based on

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POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 14. Fair Value of Financial Instruments and Non-Financial Assets and Liabilities (Continued)

the prevailing market yield information on the date of measurement. The guidance establishes three levels of inputs that may be used to measure fair value, as follows:

        Level 1—Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. An active market is defined as a market in which transactions for the assets or liabilities occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

        Level 2—Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active (markets with few transactions), inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or are corroborated by observable market data correlation or other means (market corroborated inputs).

        Level 3—Unobservable inputs, only used to the extent that observable inputs are not available, that reflect the Company's assumptions about the pricing of an asset or liability.

        In accordance with the fair value hierarchy described above, the following table shows the fair value of the Company's financial assets and liabilities that are required to be measured at fair value, on a recurring basis, as of July 3, 2010 and January 2, 2010. The firm commitment identified within the table below is recorded on the Company's Consolidated Balance Sheets within Property, plant and equipment, net and the foreign exchange contract identified within the table below is recorded on the Company's Consolidated Balance Sheets within Accounts payable and accrued liabilities . The interest rate swap agreements that are identified within the table below are recorded on the Company's Consolidated Balance Sheets within Other noncurrent liabilities (in thousands):

        The fair value of the interest rate swap agreements and foreign forward exchange contracts are based on indicative price information obtained via a third-party valuation. The unrealized loss in the interest rate swap's fair value of $0.3 million during the first six months of fiscal 2010 was allocated in accordance with ASC 820, with $0.3 million charged to Interest expense, net in the Consolidated Statement of Operations.

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(1)

In accordance with the provisions of the Impairment or Disposal of Long-Lived Assets Subsections of FASB Codification Subtopic 360-10, long-lived assets held for sale with a carrying amount of $6.8 million, were written down to their fair value of $6.1 million, net of the costs to sell based on current market conditions, resulting in a loss of $0.7 million, which was included in earnings for the period.

(2)

Long-lived assets held for sale in Level 2 Inputs reflect the current sales price at which certain property held for sale is currently being marketed based on local market conditions, less costs to sell. The equipment included in Level 3 assets reflects management's best estimate at which the respective equipment will be sold based on market conditions for used equipment, less costs to sell.

        The Company has estimated the fair values of financial instruments using available market information and appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop estimates of fair value for non-traded financial instruments. Accordingly, such estimates are not necessarily indicative of the amounts that the Company would realize in a current market exchange. The carrying value of cash and cash equivalents, accounts receivable, inventories, other accounts payable and accrued liabilities and short-term borrowings are reasonable estimates of their fair values. The carrying amount and estimated fair value of the Company's long-term debt as of July 3, 2010 and January 2, 2010 is presented in the following table (in thousands):