GEORGIA BONDED FIBERS INC, 10-K/A, 1996-10-09

GEORGIA BONDED FIBERS INC
10-K/A, 1996-10-09
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-K/A

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year Commission File
ended June 30, 1996 Number 0-5200

GEORGIA BONDED FIBERS, INC.
Exact name of Registrant as specified in its charter

NEW JERSEY 22-1427551
State of Incorporation IRS Employer No.

ONE BONTEX DRIVE, BUENA VISTA, VIRGINIA 24416-0751
Address of principal executive offices Zip code

Registrant's telephone number (540) 261-2181

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

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

Title of Class
$.10 par value common stock

Indicate by check mark whether the Registrant (1) has filed all annual,
quarterly and other reports required to be filed with the Commission, and
(2) has been subject to the filing requirements for at least the past 90
days: ( x ) Yes ( ) No

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

Aggregated market value of the voting stock held by non-affiliates of the
Registrant: $2,648,082 at August 29, 1996

On August 29, 1996, the Registrant had 1,572,824 shares of $.10 par value
common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

(1) Portions of the registrant's Annual Report to Stockholders are
incorporated by reference into Parts I and II hereof.

(2) Portions of the registrant's Proxy Statement dated October 4, 1996
issued in connection with the annual meeting of shareholders to be held
November 7, 1996 are incorporated by reference into Parts III hereof.

<PAGE>
TABLE OF CONTENTS

PART I

ITEM DESCRIPTION PAGE

1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . ..8
3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . 9
4. Submission of Matters to a Vote of Security Holders. . . . . . . . 9

PART II

5. Market for the Registrant's Common Equity and Related
Stockholder Matters. . . . . . . . . . . . . . . . . . . . . . .11
6. Selected Financial Data. . . . . . . . . . . . . . . . . . . . . .11
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . . . .11
8. Financial Statements and Supplementary Data. . . . . . . . . . . .11
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures . . . . . . . . . . . . . .11

PART III

10. Directors and Executives of the Registrant . . . . . . . . . . . .12
11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . .12
12. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . . . . . . .12
13. Certain Relationships and Related Transactions . . . . . . . . . .12

PART IV

14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K. . . . . . . . . . . . . . . . . . . . . . . . . . .12
<PAGE>
PART I

ITEM 1. BUSINESS

GENERAL BUSINESS
- ----------------
Georgia Bonded Fibers, Inc. (All references hereinafter to the
"Registrant," "Company" or "Bontex" refer collectively to Georgia Bonded
Fibers, Inc. and its wholly-owned subsidiaries unless otherwise indicated by
context) was incorporated in June 1946 under the laws of the State of New
Jersey. The Company originally began as a leather processing operation, and
today, Bontex is a leading worldwide manufacturer and distributor of uncoated
and coated elastomeric wet web impregnated fiberboard products. The
Company's products are generally described by the trademark BONTEX, and are
marketed to various industries, including footwear, headwear, luggage,
leathergoods, allied, belt backing, gasketing, furniture, electronic
integrated component packaging, and automotive industries. Bontex is a
market leader in many of the areas in which the Company competes.

The Company's Board of Directors has approved a proposal whereby the
Company's state of incorporation would be changed from New Jersey to
Virginia. The reorganization would not result in any changes in the
business, management, assets, liabilities or net worth of the Company. The
reorganization is subject to approval by the stockholders of Georgia Bonded
Fibers, Inc. at the Annual Meeting of Shareholders to be held on November 7,
1996, and is described in more detail in the Proxy Statement dated October 4,
1996.

ORGANIZATION
- ------------
The Company maintains corporate headquarters, sales offices, and a
warehouse facility in Newark, New Jersey; a wholly-owned manufacturing
facility at Bontex USA, Buena Vista, Virginia; a wholly-owned manufacturing
subsidiary, Bontex S.A., Stembert, Belgium; a wholly-owned distribution and
converting subsidiary, Bontex Italia s.r.l., Villafranca, Verona, Italy; and
a wholly-owned distribution subsidiary, Bontex de Mexico, S.A. de C.V., Leon,
Mexico. The Company utilizes a wholly-owned foreign sales corporation,
Bontex Inc., organized and existing under the laws of the Virgin Islands to
facilitate export sales. Additionally, Bontex maintains a network of liaison
offices -- Bontex Canada, Bontex Korea, Bontex Taiwan, Bontex Hong Kong,
Bontex China, Bontex Indonesia, Bontex Philippines, and Bontex Australia --
to service Asian markets.

The Company employs 94 full-time and 2 part-time people in Buena Vista,
Virginia; 3 full-time employees and 2 part-time employees in Newark, New
Jersey; 81 full-time and 2 part-time employees in Belgium; 9 employees in
Italy; and 1 full-time and 1 part-time employee in Mexico. Revenue per
employee was approximately $249,000 and $253,000 in fiscal years 1996 and
1995, respectively.

There is no labor union at the United States operations and management
knows of no union activity at the present time. There are labor unions at
the Company's European operations. Although the Company believes that
relations with its employees are positive, there can be no assurance that the
Company will not experience work stoppages in the future.

PRODUCTS
- --------
BONTEX elastomeric wet web fiberboard materials are primarily used as
an insole material in footwear, as well as visorboard in headwear, dielectric
<PAGE>
sealing base in automotive door panels, backing substrate, stiffener and
laminating base in luggage, leathergoods, and allied products. All BONTEX
fiberboard products are designed to be "environmentally-friendly," because
Bontex uses recycled and primary cellulose fibers originally derived from
trees, a renewable resource. Bontex has the American Podiatric Medical
Association (APMA) Seal of Acceptance for BONTEX elastomeric wet web
products, BONFOAM, SUREFOAM, and MAXXON, cushion insole materials. BONFOAM,
SUREFOAM, and MAXXON trademarks are the sole property of the Registrant. The
podiatric seal of acceptance is granted after stringent clinical and
laboratory tests have been carried out on approved products which demonstrate
conformity to APMA guidelines, and assist in foot health, and comfort. The
APMA Seal of Acceptance for approved BONTEX products should enhance product
acceptance in the marketplace.

Bontex USA manufactures uncoated and coated BONTEX fiberboard products;
PVC breathable (moisture vapor transmission) cushion foams, that are marketed
under trademarks BON-FOAM, MAXXON and SURE-FOAM, and are sold in a variety of
grades for use as shock absorbing insole material; BONTEX 200 RECYCLED and
BONTEX 300 RECYCLED, which are produced from 100 percent recovered paper with
a minimum 80 percent "post-consumer waste" for use in footwear, visorboard in
headwear, a backing substrate, stiffener pieces and laminating base; BON-PEL,
a wet web nonwoven substrate, which is exceptionally strong and flexible;
BONTEX 48 MA, an uncoated visorboard for use in military headwear, which has
been approved by NATICK military laboratory. Bontex USA also combines
certain products, such as foams, fabrics, and PVCs, to BONTEX fiberboard.
Additionally, Bontex USA is the exclusive distributor globally to the
footwear industry of an expanded polyurethane material manufactured by E.A.R.
Specialty Composites, a division of Cabot Safety Corporation, under the
trademarks MAXXON LS and CONFOR. MAXXON LS and CONFOR have moisture vapor
transmission characteristics and are used for sock-linings and cushion
insoles in various types of footwear. CONFOR is a trademark of E.A.R.
Specialty Composites.

Bontex S.A., Stembert, Belgium, manufactures uncoated BONTEX products.
Bontex Italia, s.r.l. is a distribution company and operates converting
equipment primarily servicing the Italian market.

The Company's converting facilities continue to show increased volume
and open new market areas in coated and composite items converted on BONTEX
substrates. The Company's marketing emphasis is to capitalize on the
positive performance of these products. Management believes that Bontex is
well positioned for growth due to the high quality and market acceptance of
our products, as well as our significant market penetration in developed and
developing markets.

RESEARCH AND DEVELOPMENT
- ------------------------
The Company's research efforts are directed primarily toward developing
new products, processing techniques, and improving product performance, often
in close association with customers.

During 1996, the Company was assigned a patent by the United States
Patent Office for Leather-Like Hoof Pad of Composite Material. The product
is a hoof pad adapted for attachment between the hoof of a horse and a
horseshoe. Presently, the product is not marketable, but may be at a future
time.

The Company has also dedicated much of its efforts to customizing many
composite products with BONTEX fiberboard products. These products have
increased sales of combination packages, primarily designed to take advantage
<PAGE>
of the current increased emphasis on comfort in footwear products. A series
of dual-density (two-layer) foam packages have been designed, and sales of
these products have been positive since their introduction.

Bontex has embarked on the implementation of the International
Organization for Standardization quality assurance system ISO 9000 at both
the United States and Belgium manufacturing facilities. Bontex SA was
certified ISO 9001 during 1996, and Bontex USA is striving for registration
of ISO 9000 during 1997. The immediate impact of ISO 9000 on sales is
anticipated to be minimal; however, management regards ISO 9000 with
significant importance in maintaining a competitive edge in quality globally.

COMPETITION
- -----------
The industry in which the Company operates is highly competitive.
Participants in the industry compete through quality and price, including the
ability to control costs, risk management, innovation, and customer service.
Presently, it is management's opinion that the Company offers superior
product quality and customer service in major markets globally. In the
United States, there is one other manufacturer of BONTEX type material. There
are, however, other materials which may be substituted for the same
applications. The Company estimates that during the last fiscal year, its
products were in approximately 45 to 50 percent of non-rubber footwear
manufactured in the United States. This estimate is based on Footwear
Industries of America (FIA) data as to total sales.

There are manufacturers who purchase BONTEX type materials for coating,
laminating, and converting into innersoles for footwear, visors for headwear,
and dielectric sealing base in automotive door panels. There is more
competition in these segments, and no comparative market statistics are
available.

In Europe, there are four major manufacturers of material similar to
BONTEX. These competitors are located in Germany, Italy, Finland, and the
former USSR. The Company estimates that it sells approximately 45 percent of
the BONTEX type materials sold in the European Union. These estimates are
based on SATRA Common Market statistics as to total sales, and other
generally available industry information.

There are a number of manufacturers of elastomeric fiberboard materials
in Asia; however, there are four major competitors operating in Taiwan and
the Peoples Republic of China, which has a tendency to impact selling prices.

There is a 5 percent duty on BONTEX products going into Taiwan. The Company
has petitioned the US trade representatives to eliminate these duties.
Bontex has received notification that the Republic of China (R.O.C.) has
agreed to reduce and phase-out these duties, but no definitive time-frame has
been announced.

As there are many customers globally who purchase BONTEX and convert it
into innersoles and other application components, the actual total worldwide
market penetration is difficult to estimate.

RISK MANAGEMENT PROGRAM
- -----------------------
The Company is exposed to the inherent risks associated with conducting
business globally. These risks include export duties, quotas, restrictions
on the transfer of funds, political instability, and foreign currency
exchange rate fluctuations. The Company closely monitors its method of
operating in each country and adopts strategies responsive to changing
economic and political environments.
<PAGE>
During fiscal 1995, the Company experienced extreme volatility in the
foreign currency markets. The foreign currency exchange losses in fiscal
1995 totaled approximately $1.5 million, of which approximately $500,000 was
recovered during fiscal 1996. The higher than normal exchange losses were
the result of the large decreases in the value of the US dollar, Italian
lire, and Mexican peso. During the twelve months leading up to June 30,
1995, the Italian lire and US dollar decreased in value relative to the
Belgian franc by 13 and 12 percent, respectively, and the Mexican peso
reduced in value by more than 100 percent relative to the US dollar. The
largest portion of these exchange losses occurred at Bontex S.A., the Belgium
subsidiary. A significant portion of the Belgium subsidiary's sales are
denominated in US dollars and Italian lire, and consequently, subject to the
risk of foreign exchange rate fluctuations.

Management has implemented a revised Risk Management Program (RMP) as a
coordinated approach to managing the Company's exposure to foreign currency
exchange rate fluctuations. The overall policy of the RMP is to match
currency denominations of assets with liabilities, in a manner intended to
reduce the Company's foreign currency exposure. Additionally, Bontex S.A.
has utilized forward exchange contracts and other approved hedging
instruments to manage currency risks. Since the full implementation of the
revised RMP, the effects of exchange volatility have been ameliorated.
Management cannot predict the likelihood of such developments occurring again
in the future. All transactions denominated in foreign currencies are not
hedged (i.e., Mexican peso, Canadian dollar, etc.) since the volume of such
transactions is limited and therefore the cost to hedge is considered
prohibitive. These international markets are regarded as excellent
opportunities for future growth and profits, and management will continue to
monitor the situation and evaluate various alternatives to manage exposure to
such risks.

The Company also manages interest rate risk to protect the Company's
margins and financial position from future rate increases by participating in
interest rate swaps. The interest rate swap arrangements provide for the
payment of interest based on fixed rates of interest rather than variable
rates. The Company seeks to mitigate the possible impact of interest rate
fluctuations on its short-term variable rate debt.

At June 30, 1995 and 1994, the total notional amount of the Company's
foreign currency exchange contracts totaled $5.0 million and $4.0 million,
respectively. At June 30, 1996, the Company did not have any such foreign
currency exchange contracts. The total notional amount of the Company's
interest rate swap contracts totaled $2.9 million and $2.8 million at June
30, 1996 and 1995, respectively. The notional amount of these contracts does
not represent the direct credit exposure. Rather, credit exposure may be
defined as the market value of the contract and the ability of the counter-
party to perform its payment obligations under the agreement. The Company's
interest rate swap agreements require the Company to pay a fixed rate.
Therefore, this risk is reduced in a declining interest rate environment as
the Company is generally in a payable position, and this risk is increased in
rising interest rate environment as the Company is generally in a receivable
position. The Company seeks to control the credit risk of its interest rate
swap agreements and other financial instruments through credit exposure
limits and monitoring procedures. The Company may be exposed to a credit loss
in the event of nonperformance by the other party to an interest rate swap
agreement. All interest rate swaps and foreign exchange contracts are with
established banks, and the Company does not anticipate such nonperformance.
<PAGE>
TRADEMARKS
- ----------
Georgia Bonded Fibers utilizes trademarks on nearly all of its
products, and believes having such distinctive trademarks which are readily
identifiable is an important factor in creating and maintaining a market for
its goods and services. This further serves to identify the Company and
distinguish its goods from goods of others. The Company considers its BONTEX
trademark and other trademarks to be among its most valuable assets, and has
registered these trademarks in over 70 countries. Georgia Bonded Fibers
continues to vigorously protect its trademarks against infringement. The
Company's operations are not dependent to any significant extent upon any
single or related group of patents, licenses or concessions.

PRODUCTION AND SALES
- --------------------
Refer to Note 3 of Notes to the Consolidated Financial Statements in
the Company's Annual Report to Stockholders wherein information is provided
regarding foreign and domestic operations and export sales for the last three
fiscal years. Such information is incorporated herein by reference, pursuant
to General Instruction G(2).

Historically, Bontex has had a significant global presence, and one of
its major strategic objectives is to continue to expand this presence. The
Company's sales are diversified among a large customer base, as well as
numerous geographic regions. The Company has one of the largest customer
bases in the industries we serve. The Company offers a wide range of
elastomeric products for use in a variety of applications. However, the
majority of the Company's sales are to the footwear industry. The Company
intends to continue its strategy of developing and broadening non-footwear
sales.

Credit terms offered by the Company to meet competition have been
longer than terms normally available to the Company from its vendors. Some
seasonality exists in that the second half of each fiscal year is usually
more productive and consequently more profitable than the first half. This
seasonality is largely because of customers' buying cycles with scheduled
vacations, shutdowns, and holidays, which normally occur during the first
half of each fiscal year. Substantially all sales to Asia are negotiation of
letters of credit and sight drafts, and are covered by foreign credit
insurance. A leading athletic footwear company, who specified BONTEX to
sourcing contractors globally, accounted for approximately 9.2 percent of the
Company's consolidated sales during fiscal 1996 (14.6% and 13.7% in 1995 and
1994, respectively).

Foreign operations, principally in Belgium and Italy, constitute a
significant portion of the Company's business. Production of BONTEX
fiberboard products is allocated between the United States and Belgium
manufacturing facilities based on such factors as availability of capacity,
production efficiencies, logistical considerations, and foreign currency
exchange rates. The Company is currently operating moderately near full
capacity. During the past three fiscal years, approximately 40 percent of
total production was manufactured in the United States. The backlog of firm
orders in the United States at the end of the fiscal year was about five
weeks production or approximately $1.8 million in sales. The current backlog
at Bontex USA is approximately four weeks. In Europe, the backlog at the end
of the fiscal year was four weeks production or approximately $2.0 million in
sales. The present backlog at Bontex S.A. is four weeks. The Company
expects all the orders in the backlog will be manufactured and shipped during
the next fiscal year.
<PAGE>
The Company sells most of its products directly to customers through
its own sales force and commissioned sales representatives throughout the
United States. The Company also sells products through distributors, and
other intermediaries who may convert and resell these products to others.
Bontex USA mainly services North and South America, as well as certain Asian
markets. Over the past three years, Bontex USA's export sales to markets
outside of the United States have increased from 43% to over 51%. This
primarily reflects the decline of the domestic market and increased emphasis
on overseas markets. Bontex USA maintains leased bonded warehouses in St.
Louis, Missouri; Leon, Mexico; Cambridge, Ontario, Canada; and Montreal,
Quebec, Canada. The Company established Bontex de Mexico, S.A. de C.V., as a
marketing distribution company in Leon, Mexico to directly facilitate sales
in Mexico. Currently, sales in Mexico are not significant and have not grown
as planned due to the 1994 devaluation of the peso. Bontex continues to view
the Mexican market with guarded optimism for future growth.

Bontex S.A. markets its products through distributors and sales
representatives in most countries in Europe, Central and Eastern Europe,
Africa, the Middle East, as well as certain Asian markets. The Company's
wholly-owned subsidiary, Bontex Italia s.r.l., services the Italian market
directly, and through localized converters and commissioned representatives.

The Company maintains six Bontex liaison offices in select Asian
markets, a network of sales representatives in various countries where BONTEX
is marketed, as well as leased bonded warehouses in Korea, Taiwan, and the
Peoples Republic of China. For certain of its foreign markets, the Company
uses individual distributors. One distributor represents approximately 13.5
percent of the Company's net consolidated sales, and the Company believes
that it is well positioned to replace any of these distributors without
materially impacting the Company's marketing or financial operations. The
Bontex liaison office in Australia continues to perform well through the
coordination of Asian operations covering, among others, Japan, Korea,
Taiwan, Hong Kong, Philippines, Indonesia, New Zealand, Australia, Singapore
and Malaysia. The Company is in the process of establishing a sales
subsidiary in Hong Kong, to replace a distributor for Hong Kong and the PRC
New Territories.

STATUS OF PROPOSED PROJECT
- --------------------------
On July 27, 1994, the Company's Board of Directors authorized
management to investigate the establishment of a manufacturing facility in
Malaysia. The Company's plans to establish a manufacturing facility in Asia
remains an important priority. Bontex Sdn Bhd was incorporated during fiscal
1996, and is being considered not only as a way of enabling the Company to
strengthen its presence in Asia, but also to expand its global manufacturing
network. The project was delayed so that management could focus on immediate
issues and return the Company to profitability. Construction and completion
of the proposed project are subject to a number of significant conditions,
including the profitability of the Company, final approval by the Company's
Board of Directors, procurement of capital, and Malaysian regulatory
approvals. Management projects that the proposed costs for Bontex Sdn Bhd is
estimated to be in the order of magnitude of $10 million. At the time of
this filing, management cannot provide a more definitive schedule or
projected financial information for the proposed project with confidence and
accuracy, since such timing and projections may vary significantly based on
ultimate circumstances.
<PAGE>
MATERIALS AND SUPPLIES
- ----------------------
The Company purchases a broad range of raw materials sourced throughout
the world in connection with manufacturing activities. More than one
supplier is available for all major raw materials. Bontex S.A. appears to
have available and receives adequate quantities of water for processing. The
manufacturing facility in the United States has an adequate supply of
processing water from wells and river sources.

The Company attempts to minimize the effects of cyclical changes in raw
material costs through purchase contracts, forward purchasing, and the
application of technologies to improve process efficiencies. Principal cost
factors include the cost of raw materials, specifically pulp and latex, two
primary raw materials for the Company's products. The price of pulp and
latex increased by approximately 100 percent and 56 percent, respectively,
during the eighteen months leading up to December 31, 1995. Management has
implemented various measures in an attempt to manage the situation, including
raising selling prices, capital enhancements to improve production
efficiencies and several cost control measures through better utilization of
existing resources. Management intends to continue to prudently apply
technology to manufacture high quality products while attempting to reduce
costs in all areas of operations in an effort to maintain competitive selling
prices. There can be no assurance, however, that increased raw material
prices will not continue to have an adverse effect on the Company's
operations or competitive position in the future.

Bontex USA maintains a limited private fleet of tractors and trailers
for long haul delivery of its products to customers throughout the United
States and Canada and to east coast ports for export shipments, in addition
to back-hauling of certain raw materials to reduce operating costs. The
Company also participates in numerous equipment interchange agreements for
containers with steamship lines to facilitate exports.

REGULATORY AND ENVIRONMENTAL MATTERS
- ------------------------------------
As with all related manufacturers, the Company is subject to
regulations by various federal, state, foreign and local agencies concerning
compliance with environmental control statutes. These regulations impose
limitations on the discharge of effluent and emissions into the environment,
and establish standards for solid and hazardous waste disposal, treatment,
and storage, as well as require the Company to obtain and operate in
compliance with the conditions of environmental permit. The Company believes
that it is in substantial compliance with such existing domestic and foreign
environmental statutes and regulations. Failure to comply with applicable
environmental control standards could result in interruption of operations or
could require additional expenditures at these facilities.

The Company has made and intends to continue to make capital
investments, operating expenditures, and production adjustments in connection
with compliance to environmental laws and regulations. Since the Company is
essentially comprised of two fiberboard plants, water quality discharge
remains a primary environmental concern. A private water quality consulting
firm has completed an extensive analysis and plans for compliance at both
plants have been implemented.

On July 22, 1994, the Company entered into a Special Consent Order with
the Virginia Department of Environmental Quality (DEQ) committing the Company
to construct a waste water treatment facility to address certain effluent
limitations in its Virginia Pollution Discharge Elimination Permit.
Construction of the USA waste treatment facility was completed during fiscal
<PAGE>
1996 at an aggregate cost of almost $2.0 million. The waste water treatment
plant appears to be operating within compliance of applicable environmental
requirements.

The Belgium government has imposed new regulations requiring a formal
water treatment plant to be installed at Bontex S.A. The first phase of the
waste water treatment facility in Belgium is under construction and is
anticipated to be completed in 1997 at an estimated cost of $1.5 million.

The facility in the USA is also impacted by regulations concerning air
emissions relating to the operation of certain coating and converting
equipment. The Company has entered into a Consent Order with DEQ to which
the Company has committed to take appropriate corrective action with respect
to air quality emissions and to achieve compliance by September 30, 1997. An
air quality consultant has completed an extensive analysis to characterize
and verify mill wide air emissions. The Company is developing and
implementing certain air emission controls. The cost of the air control
technologies based on current information is expected to be approximately
$250,000.

Estimates of the costs of future environmental compliance may differ
from projected costs due to, among other things, continued emergence of new
environmental laws and regulations and improving efficiencies in
environmental control or process technology developments. At the present
time, based on preliminary estimates, the Company anticipates that
consolidated capital expenditures for environmental compliance in fiscal 1997
will aggregate approximately $2.0 million; however, this estimate could
change due to ultimate circumstances.

ITEM 2. PROPERTIES

For information about interest and security interests held by banks in
the Company's properties, see Note 4 of Notes to Consolidated Financial
Statements contained in the Company's 1996 Annual Report to Stockholders.
Such information is incorporated herein by reference, pursuant to General
Instruction G(2).

The properties of the Company consist primarily of wholly-owned plant
and equipment to manufacture and distribute the Company's products. In
Newark, New Jersey, the Company owns an office building and warehouse.
Corporate headquarters and sales office are maintained at the Newark
building, and the warehouse is used for the distribution of the Company's
products in the northeastern region of the United States. The Newark
facility is located in an area where the potential of being acquired as part
of a revitalization development project has increased. At the time of this
filing, the Registrant is unable to determine the ultimate impact, if any, of
this situation on the Company's operations.

The Company's manufacturing and converting facility in Buena Vista,
Virginia continues to be modernized, upgraded, and expanded. In Stembert,
Belgium, the subsidiary's plant is one of the most modern in the world for
producing BONTEX type products, and the Company continues to invest in new
equipment to maintain its level of efficiency. Bontex Italia s.r.l.
operates from a modern distribution facility with new converting equipment.
During fiscal 1996, the Company spent approximately $1,600,000, $400,000 and
$54,000 to refurbish, upgrade and install equipment at Bontex USA, Bontex
S.A., and Bontex Italia s.r.l., respectively.
<PAGE>
The total cost of capital expenditures, including the capital
expenditures planned for environmental regulations at both Bontex USA and
Bontex S.A. as discussed in the previous section regarding regulations, is
estimated not to exceed $2.5 million for fiscal year 1997. The Company
believes that cash generated from operations and current credit facilities
will be sufficient to meet these capital requirements.

The Company continues to manage the utilization of its assets in order
to meet global growth objectives, marketplace forces, productivity and
technology changes, while at the same time, attempting to ensure that these
assets are generating economic value for the shareholder. The Company
considers all its properties well maintained, in good operating condition,
and adequate for present and future requirements.

RECENT PRONOUNCEMENT
- --------------------
In June 1996, the Financial Accounting Standards Board issued SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." This statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. This standard is effective for transactions
occurring after December 31, 1996 and shall be applied prospectively. Based
on management's review, the adoption of SFAS No. 125 is not expected to have
a material impact, if any, on the Company's financial position and results of
operations.

ITEM 3. LEGAL PROCEEDINGS

To the Company's knowledge, there are no legal proceedings, lawsuits,
and other claims pending against or involving the Company which, in the
opinion of management, will have a material adverse impact upon the results
of operations or financial condition of the Company.

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

No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.

Executives of the Registrant:

Pursuant to General Instruction G(3) of Form 10-K, the following list
is included as an unnumbered Item in Part I of this report in lieu of being
included in the Proxy Statement for the Annual Meeting of Stockholders to be
held on November 7, 1996.

The names, ages and positions of the executives of the Company as of
September 19, 1996 are listed below with their business experience with the
Company for the past five years. Executive officers are appointed annually
by the Board of Directors at the annual meeting of stockholders. There is no
agreement or understanding between any executive and any other pursuant to
which the executive was selected. Mr. James C. Kostelni is the brother-in-
law to Mrs. Patricia S. Tischio. Mr. Jeffrey C. Kostelni and Mr. Charles W.
J. Kostelni are the sons of Mr. James C. Kostelni.
<PAGE>
Previous and present duties and responsibilities:

Position and Business
Name and Age Experience for Past Five Years
- ------------ ------------------------------

James C. Kostelni, 61 Chairman of the Board, President,
and Chief Executive Officer of the
Company (since 1994), President and
Chief Operating Officer (since
1971). Mr. Kostelni has a Bachelor
of Science Degree in Business
Administration

Jeffrey C. Kostelni, 30 Chief Financial Officer and
Treasurer (since 1994); General
Sales Manager of Bontex S.A., a
subsidiary of the Company (since
1995) and Assistant Controller
(1993-1994) of the Company; prior
thereto, Senior Auditor, Deloitte
& Touche, Washington, D.C. Mr.
Kostelni has a Bachelor of Science
Degree in Accountancy and is a
Certified Public Accountant.

Charles W. J. Kostelni, 32 Corporate Controller (since 1996);
prior thereto Assistant Controller
(since 1994); prior thereto,
Assistant Vice President, Union
Bank of Switzerland, New York and
Associate Investment Banker, Chase
Manhattan Bank, New York. Mr.
Kostelni has a Bachelor of Science
Degree in Accountancy and is a
Certified Public Accountant.

David A. Dugan, 49 Controller (since 1988) and
Corporate Secretary (since 1993) of
the Company; prior thereto,
Assistant Corporate Secretary of
the Company (1991-93). Mr. Dugan
has a Masters in Business
Administration and is a Certified
Public Accountant.

Patricia S. Tischio, 57 Assistant Corporate Secretary
(since 1994) and Corporate Office
Manager (since 1989) of the
Company. Mrs. Tischio has a
Bachelor of Arts Degree in English.

Larry E. Morris, 50 Technical Director (since 1983) and
Sales Director (since 1993); prior
thereto, Manufacturing Director of
the Company (1983-1993). Mr.
Morris has a Bachelor of Science
Degree in Chemical Engineering.
<PAGE>
Michael J. Breton, 56 Corporate Director of International
Operations of the Company (since
1993), and General Manager of
Bontex S.A., a Subsidiary of the
Company (since 1987); prior
thereto, Director of European
Operations (1987-1993). Mr. Breton
has a Bachelor of Science Degree in
Paper Technology.

PART II

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

The information set forth under the caption "Common Stock and Dividend
Data" on page 5 of the Company's 1996 Annual Report to Stockholders is
incorporated herein by reference, pursuant to General Instruction G(2).

ITEM 6. SELECTED FINANCIAL DATA

"Summary of Selected Five Year Data" on page 5 of the Company's 1996
Annual Report to Stockholders is incorporated herein by reference, pursuant
to General Instruction G(2).

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

"Management's Discussion and Analysis of Results of Operations and
Financial Condition" on pages 6 through 10 of the Company's 1996 Annual
Report to Stockholders are incorporated herein by reference, pursuant to
General Instruction G(2).

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following consolidated financial statements of the Registrant and
the independent auditors' report included on pages 11 through 25 of the 1996
Annual Report to Stockholders, are herein incorporated by reference, pursuant
to General Instruction G(2):

1. Consolidated Statements of Income (Loss) for the Years Ended
June 30, 1996, 1995 and 1994

2. Consolidated Statements of Changes in Stockholders' Equity for
the Years Ended June 30, 1996, 1995, and 1994

3. Consolidated Balance Sheets as of June 30, 1996 and 1995

4. Consolidated Statements of Cash Flows for the Years Ended
June 30, 1996, 1995, and 1994

5. Notes to Consolidated Financial Statements

6. Independent Auditors' Report
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

There have been no changes in independent auditors and no disagreements
with independent auditors on any matter of accounting principles or
practices, financial statement disclosure, or auditor's scope or procedure.

PART III

ITEM 10. DIRECTORS AND EXECUTIVES OF THE REGISTRANT

For information with respect to the executives of the Registrant, see
"Executives of the Registrant" at the end of Part I of this Report. For
information with respect to the Directors of the Registrant, see "Election of
Directors" at pages 4 through 6 of the Proxy Statement for the Annual Meeting
of Stockholders to be held November 7, 1996, which information is
incorporated herein by reference. The information with respect to compliance
with Section 16(a) of the Exchange Act, which is set forth under the caption
"Section 16(a) Beneficial Ownership Compliance" at page 14 of the Proxy
Statement for the Annual Meeting of Stockholders to be held November 7, 1996,
is incorporated herein by reference pursuant to General Instruction G(3).

ITEM 11. EXECUTIVE COMPENSATION

The information set forth under the captions "Executive Compensation,"
"Compensation Committee Report on Executive Compensation," "Compensation
Committee Interlocks and Insider Participation," and "Stock Performance" at
pages 7 through 14 of the Proxy Statement for the Annual Meeting of
Stockholders to be held November 7, 1996, is incorporated herein by reference
pursuant to General Instruction G(3).

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information pertaining to stockholders beneficially owning more
than five percent of the Registrant's common stock and the security ownership
of management, which is set forth under the captions "Stock Ownership of
Certain Beneficial Owners" and "Stock Ownership of Management" on pages 2
through 3 of the Proxy Statement for the Annual Meeting of Stockholders to be
held on November 7, 1996, is incorporated herein by reference pursuant to
General Instruction G(3).

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information set forth under the caption "Related Transactions" on
page 13 of the Proxy Statement for the Annual Meeting of Stockholders to be
held on November 7, 1996 is incorporated herein by reference.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT, SCHEDULES AND REPORTS ON FORM 8-K

(a) List of documents filed as part of this report:

1. Financial Statements: All financial statements of the
Registrant as set forth under Item 8 of this Report on Form 10-K.
<PAGE>
2. Financial statement schedules and the location in this Form
10-K are as follows:

SCHEDULE
NUMBER DESCRIPTION PAGE

(a) Independent Auditors' Report
on Financial Statement
Schedule as of June 30, 1996,
1995 and 1994 and for the
years then ended 17

(d) II Valuation and Qualifying Accounts 18

All other schedules are omitted, as the required information is
inapplicable, or the information is presented in the consolidated
financial statements or related notes.

3. Exhibits to this Form 10-K are as follows:

EXHIBIT
NUMBER DESCRIPTION

3 (i) Certificate of Incorporation of the Company, as amended
(incorporated herein by reference to Exhibit No. 3(i) of
Form 10-K for the fiscal year ended June 30, 1994)

3 (ii) Bylaws of the Company, as amended (incorporated herein by
reference to Exhibit No. 3(ii) of Form 10-K for the fiscal
year ended June 30, 1994)

10 (i) *Executive Compensation Agreement dated June 29, 1989,
between Georgia Bonded Fibers, Inc. and James C. Kostelni
(incorporated herein by reference to Exhibit 10.1 of Form
10-Q for quarter ended September 30, 1993)

10 (ii) *Life Insurance Agreement between Georgia Bonded Fibers,
Inc. and James C. Kostelni (incorporated herein by
reference to Exhibit 10.4 of Form 10-Q for quarter ended
December 31, 1993)

10 (iii) *Bontex S.A. Pension Plan (incorporated herein by reference
to Exhibit No. 10(iv) of Form 10-K for the fiscal year
ended June 30, 1994)

10 (iv) *Georgia Bonded Fibers, Inc. Annual Incentive Plan
(incorporated herein by reference to Exhibit No. 10(v) of
Form 10-K for the fiscal year ended June 30, 1994)

10 (v) *Supplemental Executive Compensation Agreement dated May
26, 1994, between Georgia Bonded Fibers, Inc. and James C.
Kostelni (incorporated herein by reference to Exhibit No.
10(vi) of Form 10-K for the fiscal year ended June 30,
1994)
<PAGE>
10 (vi) Special Consent Order between the Company and the State
Water Control Board dated July 22, 1994 (incorporated
herein by reference to Exhibit No. 10(vii) of Form 10-K for
the fiscal year ended June 30, 1994)

10 (vii) Consent Order between the Company and the Commonwealth of
Virginia, Department of Environmental Quality dated May 20,
1996.

10 (viii) *Georgia Bonded Fibers, Inc. 1995-1996 Senior Management
Incentive Plan

13 1996 Annual Report to Stockholders (such report, except to
the extent incorporated herein by reference, is being
furnished for the information of the Commission only and is
not to be deemed filed as part of this Report on Form 10-K)

21 Subsidiaries of the Company

27 Financial Data Schedule
- ----------------

* Management contract or compensatory plan or agreement required to be
filed as an Exhibit to this Form 10-K pursuant to Item 14 (c).

(b) Reports on Form 8-K:

None

(d) Financial statement schedules required by Regulation S-X are
submitted as separate section of this report.
<PAGE>
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by undersigned, hereunto duly authorized on this 24th day of
September, 1996.

GEORGIA BONDED FIBERS, INC.

by /s/ James C. Kostelni
---------------------------
Chairman of the Board

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.

Date

/s/James C. Kostelni September 24, 1996
- -------------------------------- ------------------
James C. Kostelni
Chairman of the Board, President
Chief Executive Officer
Director

/s/Jeffrey C. Kostelni September 24, 1996
- -------------------------------- ------------------
Jeffrey C. Kostelni
Treasurer
Chief Financial Officer
Director

/s/David A. Dugan September 24, 1996
- -------------------------------- ------------------
David A. Dugan
Controller and Corporate Secretary

/s/Michael J. Breton September 24, 1996
- -------------------------------- ------------------
Michael J. Breton
Corporate Director of International
Operations and General Manager, Bontex
S.A.
Director

/s/Larry E. Morris September 24, 1996
- -------------------------------- ------------------
Larry E. Morris
Technical Director and Director of
Marketing/Sales
Director

<PAGE>
/s/Patricia S. Tischio September 24, 1996
- -------------------------------- ------------------
Patricia S. Tischio
Assistant Corporate Secretary
Director

/s/William J. Binnie September 24, 1996
- -------------------------------- ------------------
William J. Binnie
Director

/s/William B. D'Surney September 24, 1996
- -------------------------------- ------------------
William B. D'Surney
Director

/s/Frank Mayorshi September 24, 1996
- -------------------------------- ------------------
Frank Mayorshi
Director

/s/Joseph F.Raffetto September 24, 1996
- -------------------------------- ------------------
Joseph F. Raffetto
Director

/s/Robert J. Weeks September 24, 1996
- -------------------------------- ------------------
Robert J. Weeks
Director
<PAGE>

INDEPENDENT AUDITORS' REPORT
- ----------------------------

The Board of Directors and Stockholders
of Georgia Bonded Fibers, Inc.:

Under date of August 9, 1996, we reported on the consolidated balance sheets
of Georgia Bonded Fibers, Inc. and subsidiaries as of June 30, 1996 and 1995,
and the related consolidated statements of income (loss), changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended June 30, 1996, as contained in the 1996 annual report to
stockholders. These consolidated financial statements and our report thereon
are incorporated by reference in the annual report on Form 10-K for the year
1996. In connection with our audits of the aforementioned consolidated
financial statements, we also audited the related consolidated financial
statement schedule as set fourth under Item 14(a)2 on page 12 of the
accompanying annual report on Form 10-K for the year 1996. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement schedule
based on our audits.

In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.

s/KPMG Peat Marwick LLP

Roanoke, Virginia
August 9, 1996
<PAGE>
<TABLE>
<CAPTION>

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
GEORGIA BONDED FIBERS, INC., AND SUBSIDIARIES

Balance at Charges to Charged to Balance at
Beginning Costs and Other End of
Description of Period Expenses Accounts* Deductions** Period
- ----------- ---------- ----------- ---------- ------------ ------
<S> <C> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 1996
Reserves and allowances
deducted from asset accounts:
Allowances for doubtful accounts $156,000 $66,000 ($6,000) $82,000 $134,000

YEAR ENDED JUNE 30, 1995
Reserves and allowances
deducted from asset accounts:
Allowances for doubtful accounts $183,000 $42,000 $12,000 $81,000 $156,000

YEAR ENDED JUNE 30, 1994
Reserves and allowances
deducted from asset accounts:
Allowances for doubtful accounts $175,000 $34,000 $4,000 $30,000 $183,000
</TABLE>

*Foreign currency translation gain (loss)
**Uncollectable accounts written off, net of recoveries
<PAGE>

Exhibit Index
-------------

3 (i) Certificate of Incorporation of the Company, as amended
(incorporated herein by reference to Exhibit No. 3(i) of
Form 10-K for the fiscal year ended June 30, 1994)

3 (ii) Bylaws of the Company, as amended (incorporated herein by
reference to Exhibit No. 3(ii) of Form 10-K for the fiscal
year ended June 30, 1994)

10 (ii) *Life Insurance Agreement between Georgia Bonded Fibers,
Inc. and James C. Kostelni (incorporated herein by
reference to Exhibit 10.4 of Form 10-Q for quarter ended
December 31, 1993)

10 (iii) *Bontex S.A. Pension Plan (incorporated herein by reference
to Exhibit No. 10(iv) of Form 10-K for the fiscal year
ended June 30, 1994)

10 (iv) *Georgia Bonded Fibers, Inc. Annual Incentive Plan
(incorporated herein by reference to Exhibit No. 10(v) of
Form 10-K for the fiscal year ended June 30, 1994)

10 (vi) Special Consent Order between the Company and the State
Water Control Board dated July 22, 1994 (incorporated
herein by reference to Exhibit No. 10(vii) of Form 10-K for
the fiscal year ended June 30, 1994)

10 (vii) Consent Order between the Company and the Commonwealth of
Virginia Department of Environmental Quality dated May 20,
1996.

10 (viii) *Georgia Bonded Fibers, Inc. 1995-1996 Senior Management
Incentive Plan

21 Subsidiaries of the Company

27 Financial Data Schedule
- ---------------
* Management contract or compensatory plan or agreement required to be
filed as an Exhibit to this Form 10-K pursuant to Item 14 (c).
<PAGE>

Exhibit 10 (vii)

(Seal of Commonwealth of Virginia Department of Environmental Quality)

COMMONWEALTH of VIRGINIA
DEPARTMENT OF ENVIRONMENTAL QUALITY

CONSENT ORDER
-------------

WITH
----

GEORGIA BONDED FIBERS, INC.,
d/b/a BONTEX
One Bontex Drive
BUENA VISTA, VIRGINIA 24416
Registration No. 20342

SECTION A: Purpose
- ------------------

To establish a plan of corrective action for Georgia Bonded Fibers,
Inc., d/b/a Bontex, to comply with State Air Pollution Control Board
Regulations for the Control and Abatement of Air Pollution and applicable
conditions of Bontex's Stationary Source Permit.

SECTION B: References
- ---------------------

Unless the context indicates otherwise, the following words and terms
have the meanings assigned to them below:

1. "Va. Code" means the Code of Virginia (1950), as amended.

2. "Board" or "SAPCB" means the State Air Pollution Control Board, a
Citizens' Board of the Commonwealth of Virginia described in Va.
Code Section 10.1-1301 and Section 10.1-1184. Particular powers
and duties of the Board are referred to in Section C of this
document.

3. "Order" means this Consent Order.

4. "SAPCB Regulations" means the "State Air Pollution Control Board
Regulations for the Control and Abatement of Air Pollution," VR
120-01-01 et seq.

5. "Department" means the Department of Environmental Quality, an
agency of the Commonwealth described in Va. Code
Section 10.1-1183.

6. "Director" means the Director of the Department, whose powers and
duties are prescribed in Va. Code Section 10.11185.

7. "Bontex" refers to Georgia Bonded Fibers, Inc., One Bontex Drive,
Buena Vista, Virginia 24416, a fiberboard plant located in
Rockbridge County, Virginia.

8. "DEQ staff" refers to the Department of Environmental Quality -
Regional Office staff.

9. "The Permit" means the Stationary Source Permit to Relocate and
Operate two Keeler gas and/or distillate oil-fired boilers issued
by DEQ staff to Bontex on April 29, 1993.
<PAGE>
Agreement with Bontex
Registration No. 20342
Page 2

SECTION C: Authority
- ---------------------
1. Chapter 13 of Title 10.1 of the Code creates the Board and vests
in it the authority to supervise and control various aspects of
air pollution in the Commonwealth. Among the Board's powers are
the authority to promulgate regulations "abating, controlling and
prohibiting" air pollution, found in Va. Code Section 10.1-1308
and Section 10.1-1184, and the power to issue permits for
stationary air pollution sources, found at Va. Code
Section 10.1-1322.

2. Pursuant to its authority, the Board has promulgated the SAPCB
Regulations, VR 120-01-01 et seq., which first took effect
March 17, 1972, and have been amended.

3. Pursuant to Va. Code Sections 10.1-1307(D), 10.1-1309, and
10.1-1184, the Board has the authority to issue orders to
diminish or abate the causes of air pollution and to enforce its
rules and regulations. Orders of the Board are enforceable
pursuant to Va. Code Section 10.1-1316.

4. The Director is the executive officer of the Board. Under Va.
Code Section 10.1-1185, the Director performs those duties
required of him by the Board. Those powers and duties conferred
and imposed upon the Director under Va. Code Section 10.1-1307.3
are continued under Va. Code Section 10.1-1185. Va. Code
Section 10.1-1187 states:

The conditions, requirements, provisions, contents,
powers, and duties of any section, article, or
chapter of the Code in effect on March 31, 1993,
relating to those agencies consolidated in this act
shall apply to the Department of Environmental
Quality until superseded by new legislation.

5. Under Va. Code Section 10.1-1307.3, the Director is authorized to
supervise, administer and enforce the provisions of Chapter 13 of
Title 10.1 of the Code, as well as the rules, regulations, and
orders of the Board. Additionally, the Director has such powers
as are conferred upon him by the Board. The SAPCB Regulations
Appendix F contains the Delegation of Authority from the Board to
the Director. In Paragraph II (A) of Appendix F, the Director is
given the authority to act to abate or control air pollution,
approve consent agreements and consent orders, and perform other
duties as prescribed by law or regulation and, as required, to
carry out the policies and directives of the Board.

SECTION D: Findings
- --------------------
1. Part IV of the SAPCB Regulations sets emissions standards for
visible emissions and fugitive dust/emissions.
Section ###-##-#### prohibits the discharge of visible emissions
with greater than 20% opacity, except for one 6-minute period in
any one hour of not more than 60% opacity.

2. On February 26, 1991, State Air Pollution Control Board staff
issued a Notice of Exceedence to Georgia Bonded Fibers for a
violation of the opacity standard observed on February 7, 1991,
at the boiler stack.
<PAGE>
Agreement with Bontex
Registration No. 20342
Page 3

3. On April 29, 1993, the Department of Environmental Quality issued
a Stationary Source Permit to Relocate and Operate two Keeler gas
and/or distillate oil-fired boilers serving the plant. Condition
5 of the Permit limits visible emissions from the boiler stack.
Such emissions shall not exceed 10% opacity except during one
6-minute period in any one hour in which visible emissions shall
not exceed 20% opacity.

4. Since issuance of the Permit, DEQ staff have observed emissions
of 100% opacity from the boiler stack on at least 2 occasions.
Bontex believed the apparent violation observed by DEQ staff on
October 19, 1993, was caused by a malfunctioning oil-fired
burner, and the company was in the process of replacing the
burner with a gas-fired burner. The second apparent violation,
documented by DEQ staff on April 5, 1994, occurred while Bontex
was developing corrective action measures to decrease visible
emissions from the coating process. DEQ staff have met with
Bontex to discuss these recurring violations, and issued a Letter
of Admonition to the company on January 24, 1996.

5. Bontex submitted a corrective action plan on November 29, 1995,
for resolving the opacity problem caused by the PVC process on
the coating line. DEQ staff have reviewed and approved the plan,
which has been incorporated into Appendix A of this Consent
Order.

SECTION E: Agreement and Order
- -------------------------------
Accordingly, the Board orders and Bontex agrees that:

1. As part of its ongoing effort to minimize visible emissions,
Bontex shall implement the 18-month schedule of compliance set
out in Appendix A of this Order.

2. For periods when the PVC foam process is run on the PVC coating
line, Bontex take all actions practicable to minimize visible
emissions from the boiler stack. At all other times, Bontex
shall meet the visible emissions requirement of the permit for
the boiler stack.

3. This Order shall not relieve Bontex of its obligation to comply
with all other terms and conditions of the Permit.

4. The Department may modify, rewrite, or amend this Order with the
consent of Bontex, for good cause shown by Bontex, or on its own
motion after notice and an opportunity for a hearing.

5. So long as this Order remains in effect, Bontex waives the right
to any hearing pursuant to Va. Code Section 10.1-1309 and to
judicial review of any issue of fact or law contained herein.
Nothing herein, however, shall be construed as a waiver of the
right to a hearing or to judicial review of any action taken by
the Board to enforce this Order.
<PAGE>
Agreement with Bontex
Registration No. 20342
Page 4

6. Failure by Bontex to comply with any of the terms of this Order
shall constitute a violation of an Order of the Board. Nothing
herein shall waive the initiation of appropriate enforcement
actions or the issuance of additional Orders as appropriate by
the Board as a result of such violations. Nothing herein shall
affect appropriate enforcement actions by any other federal,
state, or local regulatory authority.

7. Bontex shall not be responsible for failure to comply with any of
the terms and conditions of this Order if such non-compliance is
caused by earthquake, flood, or other act of God, fire, war,
riot, strike, failure of material or services to be delivered as
contracted, or other occurrence resulting in impossibility of
compliance where Bontex shows that such occurrence and
non-compliance were beyond its control and were not due to a lack
of good faith or diligence on the part of Bontex, and if, within
fifteen (15) days of any event listed above, which Bontex intends
to assert will result in the impossibility of compliance, Bontex
notifies DEQ of the occurrence of such event.

8. Bontex declares it has received fair and due process under the
Administrative Process Act (Va. Code Section 9-6.14:1 et seq.),
as affected by Va. Code Section 10.1-1309.

9. This Order shall become effective upon execution by both parties
and shall continue in effect until:

(a) Completion of all tasks outlined in the attached Appendix
A; and

(b) Bontex achieves compliance with the visible emission
limitation of the Permit.

The foregoing Consent Order has been executed on behalf of the Department of
Environmental Quality and on behalf of Bontex, each by its duly authorized
representatives, on the dates indicated below.

DEPARTMENT OF ENVIRONMENTAL QUALITY OF
THE COMMONWEALTH OF VIRGINIA

May 20, 1996 BY: s/R. Bradley Chewning
- --------------------------- ---------------------------------
(date) Peter W. Schmidt
Director

GEORGIA BONDED FIBERS, INC.,
d/b/a BONTEX

5/14/96 BY: s/Harmonson H. Floyd, Jr.
- --------------------------- ---------------------------------
(date)

TITLE: Dir. of Mfg/Chief Engineer
--------------------------------

<PAGE>
Agreement with Bontex
Registration No. 20342
Page 5

STATE OF VIRGINIA

COUNTY OF Rockbridge
----------

The foregoing instrument was acknowledged before me this 14th day of May,
---- ---
1996, by Harmonson H. Floyd, Jr, who is Dir. of Mfg/Chief Engineer on behalf
---------------------- --------------------------
of Georgia Bonded Fibers, Inc., d/b/a Bontex.

s/Charles Armstrong
----------------------------------
Notary Public

My commission expires March 31, 1999
---------------------------------------
<PAGE>
Agreement with Bontex
Registration No. 20342
Page 6

APPENDIX A

In order to comply with the provisions of the State Air Pollution Control
Law, SAPCB regulations, and the Permit, Bontex agrees to the following
schedule of compliance:

1. Verify the PVC Line emission profile by evaluating
potential emissions and by quantifying and speciating VOC
and particulate emissions by June 30, 1996.

2. Evaluate the available technologies to reduce visible
emissions from the boiler stack and select the appropriate
control technology by September 30, 1996.

3. Build and/or have delivered the appropriate control
equipment and related materials by March 31, 1997.

4. Install the control equipment by May 31, 1997.

5. Achieve final compliance with the visible emissions
limitation of the Permit by September 30, 1997. A Visible
Emission Evaluation (VEE) shall be conducted prior to this
date in accordance with 40 CFR Part 60, Appendix A,
Method 9, to demonstrate compliance. Bontex agrees to
notify DEQ's Valley Regional Office, in writing, at least
seven (7) days prior to the VEE to allow DEQ staff to be
present during the test.

6. No later than 14 days following a date identified in the
above schedule of compliance, Bontex shall submit to DEQ's
Valley Regional Office a written notice of compliance or
non-compliance with the scheduled item. In the case of
noncompliance, the notice shall include the cause of
noncompliance, any remedial actions taken, and the
probability of meeting the next scheduled item.
<PAGE>

Exhibit 10 (viii)

GEORGIA BONDED FIBERS, INC.

1995 - 1996 SENIOR MANAGEMENT INCENTIVE PLAN

The 1995-1996 Senior Management Incentive Plan is designed to promote the
interests of Georgia Bonded Fibers, Inc. (GBF), by providing an incentive to
Senior Managers whose decisions and actions significantly affect the growth
and profitability of GBF.

1. PARTICIPANTS
------------

Participation in the plan will be limited to Senior Managers of GBF
whose decisions and actions significantly affect the Company's growth,
new product development, expanded markets, cost containment, and
profitability.

Each year the Compensation Committee shall recommend, forapproval by
the Board, all employees selected for participation, including the
amount of their maximum incentive award.

2. AWARD AND OBJECTIVES FOR 1995 - 1996
------------------------------------

A. For the year ending June 30, 1996, Georgia Bonded Fibers, Inc.
will pay a bonus to James C. Kostelni, CEO; Jeffrey Kostelni, CFO;
David A. Dugan, Controller/Corporate Secretary; Patricia Tischio,
Assistant Corporate Secretary; Charles Kostelni, Assistant Controller;
Larry Morris, Technical/Sales Director; Harmonson Floyd, Chief
Engineer/Director of Manufacturing; Mike Breton, Director of
International Operations Bontex SA; Pierre Pallage, Technical/Plant
Manager Bontex SA; Hadelin Mothet, Financial Director/Assistant General
Manager Bontex SA; Tarcisio Pasquali, General Manager Bontex Italia
s.r.l., should earnings of Georgia Bonded Fibers, Inc. exceed specified
amounts for the year ending June 30, 1996. The amounts of earnings for
the year 1995 - 1996 will earn for the participant a percentage of
their base salary. The levels of bonus payments are established as
follows:

PRE-TAX EARNINGS
- -----------------------------------------------------------------
FLOOR TARGET CEILING
----- ------ -------
$1,650,000 $2,000,000 $3,000,000

EARNS 10% OF EARNS 20% OF EARNS 30% OF
BASE SALARY BASE SALARY BASE SALARY

B. If the pre-tax earnings in (a) above are met, the participants
will be eligible to double their bonus earnings in (a), should GBF
sales increase by 6% or more over the 1994 - 1995 sales.

Earnings which fall between floor and target or target and ceiling will
be interpolated between these plateaus and the bonus will be increased
to reflect the increased performance. Should earnings not meet the
floor, a bonus will not be paid.

3. MISCELLANEOUS
-------------
A. In the first quarter of the plan year, each selected participant
will be notified, in writing, of the amount and terms of the incentive
awards. The plan year begins the 1st of July and ends the 30th of June
of the following year.

B. Payment of each participant's award will be made as soon as
possible after the end of the plan year, preferably by end of the first
quarter. Incentive awards will be paid in dollars, and paid to the
participants no later than ninety (90) days of the end of the fiscal
year.

C. Each participant may earn their award based on an evaluation of
the individual's performance against specific objectives. The base
salary will be the annual amount paid the participant as of July 1,
1995.

D. In the event of death, retirement, or termination (except for
cause), a pro rata share of the participant's award, if earned, will be
based on an evaluation of the period of actual participation. Only the
Board of Directors, with the recommendation from the Compensation
Committee, may approve payment before the end of the plan year.

E. At the end of the plan year, the Compensation Committee will make
the determination of the appropriate payment, or lack thereof. The
Committee will recommend to the Board of Directors an amount considered
appropriate; and that the Board of Directors authorize the payment of
the additional compensation. It may recommend to the Board of
Directors an increase or decrease in the amount of any or all incentive
awards if, in its sole judgment, extraordinary or unanticipated
circumstances warrant such action.

F. This plan may be terminated at any time, effective July 1 of the
following year. This plan may be altered or amended at any time, with
the recommendation of the Compensation Committee and the approval of
the entire Board, as long as such revisions do not impair the rights of
any participant granted an award.

G. The terms of this plan do not constitute a contract or employment
for a defined period, and all participants continue as employees at
will.
<PAGE>

CONSOLIDATED 1996 ANNUAL REPORT
- ---------------------------------------------------------------------------

BONTEX (registered trademark)

For Fiscal Year Ended
June 30, 1996

(Picture of soccer player and soccer ball - athletic shoes)
<PAGE>
Skyway
Bontex

Skyway

(Picture of luggage) Skyway Luggage Company and Bontex have linked
to produce superior Skyway designed luggage.
Over the years, Skyway has enjoyed great
success with Bontex products, so when it came
time to design and build Forte, Skyway's newest
U.S. produced upright luggage line, it was only
natural they turn to Bontex.

With over 100 years of combined experience and
technology behind them, two global leaders,
Bontex and Skyway, have produced an outstanding
luggage line, Forte professional luggage.

Bontex elastomeric wet web impregnated
substrates are Mori-Fresh Treated to resist
mold type growth which can cause odor in
luggage. Bontex substrates are not only light,
flexible, durable, tough and versatile but all
Bontex products are designed to be
environmentally friendly. Bontex uses recycled
and primary cellulose fibers originally derived
from trees, a renewable resource.

BONTEX (registered trademark)

A Winning Combination for Luggage

Bontex, One Bontex Drive, Buena Vista, VA 24416-0751. a member of
(540) 261-2181. Fax: 540-261-3784. Manufactured: BONTEX SATRA
(registered trademark) Buena Vista, VA 24416-0741. Footwear Technology
http://www.bontex.com. E-Mail: [email protected] Center
Bontex S.A. Belgium. Distributed and converted by BONTEX
(registered trademark) Italy, S.R.L., Villafranca, Verona,
Italy. Bontex (registered trademark) de Mexico, Leon,
Mexico
<PAGE>
BONTEX (registered trademark)
GEORGIA BONDED FIBERS, INC.
Consolidated 1996 Annual Report

- ----------------------------------------------------------------------------
BONTEX

MISSION STATEMENT:

Our Mission is to be the global leader in the markets we serve, by providing
customers with world class quality products and service.

- ----------------------------------------------------------------------------

CONTENTS

2 Corporate and Product Profile
3 Message to Shareholders
5 Financial Highlights
6 Management's Discussion and Analysis
11 Financial Statements
25 Independent Auditors' Report

<PAGE>
CORPORATE PROFILE

Georgia Bonded Fibers, Inc. was founded in June 1946 under the laws of
the State of New Jersey. The Company originally began as a leather
processing operation, and today, Bontex is a leading worldwide manufacturer
and distributor of uncoated and coated elastomeric wet web impregnated
fiberboard products, generally described by the trademark BONTEX (registered
trademark). BONTEX (registered trademark) is primarily used as an insole
material in footwear, as well as visorboard in headwear, dielectric sealing
base in automotive door panels, backing substrate, stiffener and laminating
base in luggage, leathergoods, and allied products. All BONTEX (registered
trademark) fiberboard products are designed to be "environmentally-friendly,"
because Bontex uses recycled and primary cellulose fibers originally derived
from trees, a renewable resource.

The Company maintains its corporate headquarters in Newark, New Jersey;
manufacturing facilities at Bontex USA, One Bontex Drive, Buena Vista,
Virginia and at Bontex S.A., Stembert, Belgium; a distribution and converting
operation at Bontex Italia s.r.l., Villafranca, Verona, Italy; and a
distribution subsidiary, Bontex de Mexico, S.A. de C.V., in Leon, Mexico.
Bontex also maintains a network of liaison offices and distributors globally
to market Bontex products.

PRODUCT PROFILE

Bontex manufactures uncoated and coated BONTEX (registered trademark)
fiberboard products; PVC breathable cushion foams, that are marketed under
trademarks BON-FOAM (registered trademark), MAXXON (registered trademark) and
SURE-FOAM (registered trademark), and are sold in a variety of grades for use
as shock absorbing insole material; BON-PEL (registered trademark), a wet web
nonwoven substrate, which is exceptionally strong and flexible; BONTEX
(registered trademark) 48 MA, an uncoated visorboard for use in military
headwear, which has been approved by NATICK military laboratory. Bontex also
combines certain products, such as foams, fabrics, and PVC's, with BONTEX
(registered trademark) fiberboard. Additionally, Bontex is the exclusive
distributor globally to the footwear industry of an expanded polyurethane
material manufactured by E.A.R. Specialty Composites, a division of Cabot
Safety Corporation, trademarked MAXXON (registered trademark) LS and CONFOR
(registered trademark). Registered trademarks the Company markets products
include:

BONTEX (registered trademark) SUPERTEX (registered trademark)
BON-PEL (registered trademark) MORI-FLEX (registered trademark)
nonwoven
BON-FOAM (registered trademark) BON-STITCH (registered trademark)
cushion
MAXXON (registered trademark) VINTEX (registered trademark)
cushion
SUR-V-LON (registered trademark) BON-DOE (registered trademark)
vinyl coated Bontex
SIR-PEL (registered trademark) BONTEX (registered trademark) 200
RECYCLED
MORIMER (registered trademark) BONTEX (registered trademark) 300
RECYCLED
SURTEX (registered trademark)

E-mail: [email protected] http://www.bontex.com
(Graphic of a Satra ISO 9000 Seal)
<PAGE>
BONTEX (registered trademark)

Georgia Bonded Fibers, Inc.

Message to Shareholders

DEAR FELLOW SHAREHOLDER:

Before the start of 1996, we expected it to be a year of exceptional
challenges in our efforts to return the Company to profitability. During the
second half of fiscal 1996, Georgia Bonded Fibers, Inc. and its wholly-owned
subsidiaries (Bontex) generated consolidated operating profits of $1.5
million, despite a 6.3 percent decline in sales. The decline in sales was
principally due to a decrease in retail sales. These positive operating
results were not enough to offset the operating losses incurred during the
first six months, and consequently, the Company posted a consolidated net
loss of $602,000 or $.38 per share for the year ended June 30, 1996. This
represents an improvement of $856,000 over last year's net loss of $1.5
million or $.93 per share. Consolidated net sales for the year totaled $47.6
million, as compared to last year's record consolidated net sales of almost
$51 million.

The twelve months preceding December 31, 1995 were undoubtedly one of
the most challenging periods in the history of the Company. We were
confronted with unprecedented upward spiraling raw material costs, extreme
volatility in foreign exchange markets and a decline in sales. We
implemented several key measures that laid the foundation for our Company to
address these external conditions. Significant progress was made in several
of these critical areas, including the successful implementation of selling
price increases, capital improvements designed to enhance production
efficiencies, a revised Risk Management Program to hedge the Company's
exposure to foreign currency volatility, as well as various cost control
measures. The positive impact of the preceding measures contributed to the
Company's return to profitability during the second half of the fiscal year,
and accordingly, we believe that the Company is well positioned as we enter
into our new fiscal year.

The decrease in sales primarily reflects a global slowdown in retail
sales of the various industries Bontex serves. The Company's overall market
position remains positive, and our market penetration in several key areas
continues to improve. Consistent with our strategic plan, our Company will
continue to take measures to respond to competitive pressures. Management is
aggressively pursuing an action plan within our strategic objectives focused
on maintaining our position as a primary leader in the global market. A key
element in our strategy for future success is, of course, the development of
new and innovative products, as well as continued expansion of our customer
base.

The improvement in operating conditions compared to the prior year was
most evident during the final quarter of fiscal 1996. Prices for raw
materials and foreign currency exchange markets have stabilized. We believe
that our revised Risk Management Program continues to be effective in
managing our Company's exposure to foreign currencies, and accordingly,
exchange gains or losses should not be material in the future. The Company
continues to minimize as much as possible the effects of cyclical changes in
costs through certain purchase contracts, and the application of new
technologies to improve both product quality and process efficiencies. Over
the past five years, consolidated capital investments aggregated
approximately $8.7 million. Such capital investments represent a commitment
by the Company in our future, and these investments have contributed
positively to the Company's operating efficiencies.

Fiscal year 1997 represents our fiftieth anniversary. Since the
founding of our Company by Mr. Hugo Surmonte, Bontex has developed into a
primary global manufacturer and distributor of elastomeric wet web fiberboard
products. Our mission to be the global leader in our industry by providing
our customers with high quality Bontex products and service has remained
unchanged. The Company's plan to establish a manufacturing subsidiary in
Asia remains an important priority in improving our access to the world's
largest market for Bontex products. Bontex Sdn. Bhd. was incorporated during
fiscal 1996; however, the project in Asia was delayed so that management
could focus on immediate issues and return the Company to profitability. We
must remain focused on our efforts by providing superior value by utilizing
modern technologies, and remain committed to our shared partnership with our
customers, employees, suppliers and shareholders. We realize that there are
many challenges that lie ahead of us; however, we are confident that our
greatest achievements will be in the future, as derived from the foundation
developed over the past half century.

Management has implemented a financial plan to improve the Company's
financial condition. This plan includes a number of important measures to
increase working capital, reduce debt, invest judiciously in essential
capital projects, and reinvest earnings. These budgetary and financial
controls should contribute to improving our Company's financial position and
enhance shareholders' value.

Additionally, our Company's Board of Directors has proposed, subject to
shareholder approval, that the Company change its situs from New Jersey to
Virginia and simultaneously make various important changes to the Company's
Certificate/Articles of Incorporation. These proposed changes will be
accomplished by merging the Company into a wholly-owned Virginia subsidiary.
The reorganization would not result in any change in business, management,
net worth, assets or liabilities of the Company. Furthermore, the transaction
is generally intended to qualify as a tax-free reorganization. The only
purpose of the merger is to effectuate these proposed changes. The Company's
Board of Directors believes that these proposals, which will be voted on at
the upcoming annual meeting of shareholders, are essential to our long-term
success and will inure to our Company's benefit as we enter the twenty-first
century.

We are pleased to announce that Bontex has developed a web site on the
Internet located at http://www.bontex.com. The Bontex web site reflects our
commitment to continual improvement in marketing Bontex products and
enhancing customer service. The Bontex web pages are tailored to customers by
providing useful product specification information, as well as enhanced
communication via e-mail. Please visit our web site and leave us your
comments. Bontex is a forward-looking company utilizing available
technologies to service the global market.

We are proud of the fact it has been our Company's policy to protect
the environment in which we all work and live. It is an important
responsibility to which the Company has dedicated significant resources over
the years. The majority of these environmental expenditures relate to the
design and construction of waste water treatment plants at our Company's
manufacturing facilities in the USA and Belgium. The waste water treatment
plant in Buena Vista, Virginia, USA, was completed during fiscal 1996, and
utilizes state of the art, cost effective processes adapting innovative
technologies. A facility designed to meet Belgian regulatory requirements is
under construction and is scheduled to be completed during 1997. Bontex is
committed to continuing to conduct business in a fashion that will respect
and preserve the environment.

We are very proud of all our employees, representatives and
distributors globally for their outstanding teamwork. We are particularly
grateful to all our customers for their trust in us, and we thank you, our
shareholders, for your continued support of the Company and its management.
We believe that the current management team has the experience and skills to
lead our Company into the twenty-first century in achieving our mission.

Sincerely,

s/James C. Kostelni
James C. Kostelni
Chairman of the Board and
Chief Executive Officer

Bontex, One Bontex Drive, Buena Vista, VA 24416-0751
Telephone: 540-261-2181 Fax: 540-261-3784 E-Mail: [email protected]
http://www.bontex.com
Bontex S.A. Belgium, Bontex S.R.L. Italy, Bontex De Mexico, Bontex Hong Kong
<PAGE>
<TABLE>
<CAPTION>

GEORGIA BONDED FIBERS, INC. AND SUBSIDIARIES
Summary of Selected Five Year Data
(In Thousands, Except Per Share Data)

Years ended June 30,
--------------------------------------------------------
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Net sales $47,618 $50,998 $47,729 $46,710 $46,534
======= ======= ======= ======= =======
Income (loss) before cumulative effect of
change in accounting principle $ (602) $(1,458) $ 935 $ 193 $ 942
Cumulative effect of change in
accounting principle - - 400 - -
------- ------- ------- ------- -------
Net income (loss) $ (602) $(1,458) $ 1,335 $ 193 $ 942
======= ======= ======= ======= =======

Income (loss) per share:
Before cumulative effect of
change in accounting principle $ (.38) $ (.93) $ .60 $ .12 $ .60
Cumulative effect of change
in accounting principle - - .25 - -
------- ------- ------- ------- -------
Net income (loss) $ (.38) $ (.93) $ .85 $ .12 $ .60
======= ======= ======= ======= =======

Total assets $33,181 $39,527 $31,032 $28,840 $28,669
Capital expenditures $ 2,157 $ 1,704 $ 1,868 $ 1,226 $ 1,787
Long-term debt $ 2,330 $ 1,364 $ 1,511 $ 1,056 $ 1,493
Book value per share $ 6.55 $ 7.11 $ 7.68 $ 6.69 $ 6.88
Cash dividends declared per
common share* $ - $ - $ - $ .05 $ -
- ---------------
</TABLE>
*A cash dividend of $.05 was paid during the second quarter of 1993.

Common Stock and Dividend Data

The stock of Georgia Bonded Fibers, Inc. is traded over the counter on
the NASDAQ National Market under the symbol BOTX.

At August 30, 1996, there were approximately 639 shareholders of
record. No cash dividends have been declared or paid during fiscal years
1996 and 1995.

<TABLE>
<CAPTION>
Range of Bid Prices
-------------------
<S> <C> <C>
Fiscal Year Ended High Low
June 30,
1996
First Quarter $ 4.25 $ 2.75
Second Quarter 3.875 2.375
Third Quarter 3.25 2.375
Fourth Quarter 4.375 2.875

1995
First Quarter $ 6.00 $ 5.00
Second Quarter 6.50 5.50
Third Quarter 5.50 3.50
Fourth Quarter 4.125 2.984
</TABLE>
<PAGE>
GEORGIA BONDED FIBERS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS

General

During fiscal year 1996, the Company was confronted with challenging
operating conditions. In spite of the difficult situation that existed in
the market place, our Company returned to profitability and generated
positive operating results during the second half of the year. However,
these positive results were not sufficient to offset the losses incurred
during the first half of the year. Operating conditions have improved with
more stable raw material costs, the benefits of which were mostly evident
during the fourth quarter. The Company's operating margins remain under
constant pressure from, among other things, increasing environmental related
costs and higher prices for raw materials.

Except for the historical data set forth herein, the following
discussion contains certain forward-looking information. The Company's
actual results may differ materially from these projected results. Factors
that could cause or contribute to such differences include, but are not
limited to, level of sales to key customers, actions by competitors, and
fluctuations in the price of primary raw materials and foreign currency
exchange rates.

Results of Operations

Consolidated net sales for 1996 totaled $47.6 million, a decline of
$3.4 million or 6.6 percent as compared to the prior year's record level of
$51 million. The decline in sales reflects a general global slowdown in
retail sales of the various industries the Company serves. The Company
recorded a consolidated net loss of $602,000 or $.38 per share for fiscal
1996, as compared to the net loss of $1,458,000 or $.93 per share during the
prior year. These operating losses were primarily due to high raw material
costs. During fiscal 1994, the Company recorded consolidated sales of $47.7
million and net income of $1.3 million or $.85 per share. The record net
income earned during 1994 reflects the positive impact of stable foreign
currency exchange rates and raw material prices, as well the impact of a one-
time gain of $400,000 resulting from the cumulative effect of adopting FASB
109, "Accounting for Income Taxes."

Cost of sales as a percent of net sales was 77.1 percent in 1996; 77.3
percent in 1995; and 73.1 percent in 1994. The higher costs of sales during
1996 and 1995 largely reflect the significant increase in raw material costs,
particularly with pulp. The lower cost of sales in 1994 was primarily the
result of more stable raw material prices and efficiency gains realized from
expanded volume.

The Company's goal is to mitigate effects of cyclical changes in costs
through purchase contracts, forward purchasing, and application of
technologies to improve process efficiencies. Cost trends leading up to
December 31, 1995 indicated increased inflationary pressures. The cost of
pulp and latex, two primary raw materials for the Company's products,
increased by more than 100 percent and 56 percent, respectively, during the
eighteen months leading up to December 31, 1995. Furthermore, costs relating
to environmental controls continue to increase, resulting in continued
pressure on the Company's operating margins. The adverse fluctuation in raw
material costs reduced the Company's profitability by approximately $1.5
million during the first six months of fiscal 1996. Management has
implemented various measures in an attempt to manage the situation, including
raising selling prices, capital enhancements to improve production
efficiencies, a revised Risk Management Program and various cost control
measures. The impact of the preceding measures contributed to the Company's
return to profitability during the third quarter of fiscal year 1996.

Operating conditions have improved since December 31, 1995, the impact
of which was mostly evident during the final quarter of fiscal 1996.
Management currently believes that the Company is well positioned as it
enters the next fiscal year. Management intends to continue to prudently
apply technology to manufacture high quality products while working to reduce
costs in all areas of operations in an effort to maintain competitive selling
prices. There can be no assurance, however, that increased raw material
prices will not have an adverse effect on the Company's operations or
competitive position in the future. It is difficult to predict future raw
material costs, as well as to implement timely selling price increases for
the Company's finished goods due to the globally competitive environment in
which the Company operates.

The Company's United States operations uses the last-in, first-out
(LIFO) method of inventory accounting; however, for comparison purposes with
other companies, if the first-in, first-out (FIFO) method of accounting had
been used, reported gross profit would have been lower by $147,000 in 1996;
higher by $342,000 in 1995; and lower by $23,000 in 1994. Net income would
have been lower by $95,000 or $.06 per share in 1996 and higher by $212,000
or $.13 per share in 1995 and lower by $14,000 or $.01 per share for 1994.

As a percent of net sales, selling, general and administrative (SG&A)
expenses over the previous three years were relatively stable at 23.1 percent
in 1996; 23.4 percent in 1995; and 22.8 percent in 1994. The decrease in
SG&A costs from 1995 to 1996 was due largely to various cost control measures
and the decline in sales. The increase in the 1995 SG&A percentage as
compared to 1994 was mainly due to certain marketing related expenses
increasing at a higher rate than sales. SG&A costs were reduced by $159,000
during fiscal 1996, relating to the reversal of an accrual as described in
Note 6 of the Notes to the Consolidated Financial Statements.

The increase in interest expense over the past three years is mainly
due to higher interest rates and increased borrowings. Proceeds from
expanded credit facilities were utilized for planned capital additions, such
as the mandated environmental projects, as well as funding of operations. A
large portion of the Company's debt consists of short-term credit facilities
with floating interest rates. To protect the Company's financial position
from future interest rate increases, the Company entered into a number of
interest rate swap agreements, to provide for fixed interest payments and
stable cash outflows. These agreements are described in Note 7 of the Notes
to the Consolidated Financial Statements.

The consolidated effective income tax rate for the Company was 23
percent in 1996; 37.9 percent in 1995; and 43 percent in 1994. The income
tax benefit in 1996 and 1995 was attributed to the operating losses,
reflecting $317,000 and $781,000, respectively, in tax benefits from net
operating loss carryforwards. The higher effective tax rate in 1994 was
principally due to higher taxable income, particularly at the Company's
European subsidiaries where income tax rates are higher. Refer to Note 5 of
the Notes to Consolidated Financial Statements for further details regarding
income taxes.

International Sales & Operations

The Company's international sales continue to be the largest portion of
sales, reflecting management's strategic emphasis on developing international
markets and the contraction of the US market for Bontex (registered
trademark) products. The Company's international subsidiaries represented
approximately 60 percent of consolidated net sales over the past three years.
Export sales from the US in 1996, 1995 and 1994 were $9.8 million, $9.2
million and $8.8 million, respectively. US export sales are generally
denominated in US dollars.

Foreign currency exchange rates have different effects from year to
year on the translation of the income statement and balance sheet. Income
statements of foreign subsidiaries are translated using the weighted average
currency exchange rate in effect during the year, and the balance sheet is
translated using the currency exchange rate in effect at year end. The
impact of the rate decrease from 1995 to 1996 and 1994 to 1995 resulted in
net sales being higher by approximately $600,000 and $3.2 million,
respectively. The fluctuation in foreign currency exchange from 1993 to 1994
resulted in net sales being lower by approximately $3.6 million. On the
balance sheet, foreign currency exchange rates at June 30, 1996 were higher
than the currency exchange rates at June 30, 1995, which resulted in a
translation decrease of approximately $1.5 million in total assets, as
compared to the translation increase of approximately $3 million last year.

International operations are subject to certain inherent risks,
including currency fluctuations, export duties, restrictions on transfer of
funds and political instability. Management continually monitors and assesses
these inherent risks, and evaluates various alternatives to manage exposure
to such risks. The exposure to foreign currency exchange losses represents
the risk that eventual net cash flows resulting from a sale or purchase will
be adversely affected by changes in exchange rates. During 1995, the Company
experienced extreme volatility in the foreign exchange markets. This unusual
volatility resulted in larger than normal currency exchange losses, and
accordingly, management revised its Risk Management Program (RMP). The
revised RMP is a coordinated approach in the management of foreign currency
risks: The overall policy of the RMP is to match currency denominations of
the Company's assets with those of its liabilities, in a manner intended to
reduce the Company's foreign currency exposure.

The revised RMP appears to be effectively managing the Company's
exposure to foreign currencies, and accordingly, foreign currency exchange
gains and losses in the future are not expected to be material. However,
prior to full implementation of our revised RMP, total foreign currency
exchange gains and losses were a gain of $496,000 in 1996; a loss in 1995 of
$1.5 million; and a gain of $247,000 for 1994. The exchange gain in 1996
represents a recovery of a portion of the exchange losses incurred during the
prior year. The higher than normal exchange losses in 1995 are mainly the
result of the decrease in value of the US dollar, Italian lire and Mexican
peso. During the twelve months leading up to June 30, 1995, the Italian lire
and US dollar decreased in value relative to the Belgian franc by 13 percent
and 12 percent, respectively, and the Mexican peso reduced in value by more
than 100 percent relative to the US dollar. The revised RMP should greatly
reduce these exchange losses; however, management cannot assure that such
exchange losses will not occur again in the future. All transactions
denominated in foreign currencies are not hedged (i.e., Mexican peso,
Canadian dollar, etc.) since the volume of such transactions is limited and
therefore the cost to hedge is considered prohibitive. The Company regards
these international markets as excellent opportunities for future growth in
revenues and profits, and will continue to attempt to manage these risks in
the most cost-effective manner.

Foreign exchange contracts were utilized during fiscal 1994 to manage
the exposure of sales denominated in U.S. dollars at Bontex SA. Forward
exchange contracts were valued at market value at fiscal year end, and the
resulting unrealized foreign currency gain of $267,000 was recorded in 1994.
The favorable valuation of these contracts was largely due to the contract
exchange rate being higher than the market rate. Refer to Note 7 of the
Notes to Consolidated Financial Statements for further details regarding
foreign exchange contracts.

Liquidity and Capital Resources

The Company's capital structure (total assets less current liabilities)
continues to finance short- and long-range business objectives, and at June
30, 1996, and 1995 totaled $12.6 million and $12.7 million, respectively.
The Company's capital structure primarily consists of shareholders' equity,
and over the past two years, long-term debt represented approximately 18.4
and 11 percent of capital structure for 1996 and 1995, respectively. The
Company's requirements for capital during the previous two fiscal years have
principally been for capital related expenditures and funding operations.
Cash flows provided by operations totaled $1.2 million in 1996 and used in
operations totaled $2.1 million in 1995. Cash flows from operations in 1994
totaled $1.1 million. Cash flows used in investing activities mainly
represent acquisition of property, plant and equipment. These capital
investments totaled $2.2 million, $1.7 million and $1.9 million in 1996, 1995
and 1994, respectively. Net cash flows used in financing activities totaled
$2.3 million in 1996, and net cash flows from financing activities were $5.7
million and $149,000 in 1995 and 1994, respectively.

Cash and cash equivalents decreased by $3.7 million to $715,000,
largely due to funding of operations, planned capital additions, and the net
decrease in short-term borrowings. Last year's cash balances were larger
than normal because the Company was holding certain deposits in anticipation
of improved foreign currency exchange rates.

Trade accounts receivable decreased approximately $1.2 million to $14.1
million at June 30, 1996, as compared to last year, primarily because of
lower sales volume and currency translation adjustments. Other receivables
primarily consist of value added taxes (VAT) the Company's European
subsidiaries have paid for which the Company will receive a refund.
Inventory balances at June 30, 1996 were $5.5 million, down from $7.7 million
the prior year. The decrease in inventory is mainly because of the
consumption of higher priced inventories. Management continues to implement
controls over finished goods and raw material inventories to control costs
through the reduction of stock, seconds, and scrap.

The increase in deferred income tax assets primarily reflects the
recorded income tax benefit from net operating losses. At June 30, 1996, the
Company had approximately $3.0 million in net operating loss carryforwards to
offset future taxable income, of which approximately $600,000 and $400,000
expire in 2010 and 2011, respectively. Approximately $2.0 million of the net
operating loss carryforwards do not expire. The ultimate realization of the
deferred tax assets is dependent upon the Company generating $3.7 million in
future taxable income during the tax carryforward period. Certain factors
beyond management's control can affect future levels of taxable income,
including prices for primary raw materials. Management is confident that it
is more likely than not that the Company will realize these deferred tax
assets, reflecting, as previously discussed, improved operating conditions
during the last six months of the fiscal year 1996 and the benefits from the
various measures implemented by management, as well as based upon the level
of anticipated future taxable income. Additionally, management believes the
existing net deductible temporary differences will reverse during the periods
in which the Company generates net taxable income. The Company's historical
earnings further support this position: During fiscal 1994, which was the
last year the Company had similar operating conditions with regard to the
price of pulp, the Company generated income before income taxes and
nonrecurring items of $1.6 million. Accordingly, no allowances are provided
for deferred tax assets. Refer to Note 5 of the Notes to Consolidated
Financial Statements for further details regarding income taxes.

The plant and equipment additions mainly represent capital expenditures
for mandated environmental controls, and various capital improvements to
enhance the productivity of manufacturing and converting facilities in the
United States, Belgium, and Italy. Capital expenditures for 1997 are
projected not to exceed $2.5 million.

Accounts payable decreased $2.3 million to $8.0 million at June 30,
1996, as compared to the prior year. The payable balances last year were
higher than normal mainly because of accruals relating to capital additions
and higher raw material inventory balances. Short-term borrowing decreased
$2.3 million to $9.4 million at June 30, 1996 and primarily corresponds to
the decrease in cash and inventories.

The increase in long-term debt was primarily due to the funding of
capital additions. Subsequent to June 30, 1996, the Company entered into
financing agreements whereby the Company secured and expanded existing credit
facilities. These secured credit facilities contain various loan covenants,
including the maintenance of certain minimum financial ratios and borrowing
base requirements. The Company was in compliance with the applicable debt
covenants subsequent to June 30, 1996. As a result of the decrease in
various financial ratios, $1.8 million of the long-term debt was classified
as current at June 30, 1995. The Company subsequently obtained a waiver from
such requirements at June 30, 1995. During fiscal year 1996, the Company
obtained a modified secured debt agreement. The Company was in compliance
with the applicable amended covenants at June 30, 1996, and accordingly, such
debt was classified as long-term. Refer to Note 4 of the Notes to
Consolidated Financial Statements for further details regarding Long-term
Debt and Financing Agreements. The Company believes current credit
facilities combined with cash flows from operations will be sufficient to
meet future operating and capital requirements for the foreseeable future.

The Company's ratio of current assets to current liabilities declined
from 1.07 to 1.05 at June 30, 1996, reflecting the $738,000 decrease in
working capital. These changes are primarily attributed to capital additions
and operating losses. The ratio of total liabilities to equity improved at
fiscal year end to 2.22 from 2.53 the prior year. Management has implemented
a financial plan to improve the Company's financial condition. This
financial plan includes measures to increase working capital, reduce debt,
invest in essential capital projects and reinvest earnings for future
expansion and operations.

Environment

As with all related manufacturers, the Company is subject to regulation
by various federal, state, foreign and local agencies concerning compliance
with environmental control statutes. These regulations impose limitations on
the discharge of effluent and emissions into the environment, and establish
standards for treatment, storage and disposal of hazardous wastes, as well as
require the Company to obtain and operate in compliance with the conditions
of permits and other governmental authorizations.

During fiscal 1996, the Company completed the construction of the waste
water treatment plant in the USA at an aggregate cost over the past three
years of almost $2 million. The waste water treatment plant in Belgium is
under construction and is scheduled to be completed during 1997. The Belgian
treatment plant is expected to cost approximately $1.5 million. The Company
in the USA is developing and implementing certain air emission controls. The
cost of the air control technologies based on current information is
projected to be approximately $250,000.

The Company has made and intends to continue to make substantial
capital investments and operating expenditures, as well as production
adjustments, in connection with compliance with environmental laws and
regulations. Estimates of future costs for environmental compliance may
differ from final costs due to, among other things, continued emergence of
new environmental laws and regulations, as well as technological
developments. Refer to Note 8 of the Notes to the Consolidated Financial
Statements for further details regarding environmental matters.

Accounting Change

In February 1992, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 109 "Accounting for
Income Taxes." The Company changed its method of accounting for income taxes
effective July 1, 1993, to adopt the new accounting standard. The cumulative
effect of the change in accounting principle increased net income by $400,000
or $.25 per share, as reported separately in the statement of income for the
year ended June 30, 1994, as described in Notes 1 and 5 of Notes to the
Consolidated Financial Statements.

In March 1995, the Financial Accounting Standards Board issued SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets to be Disposed of."
This statement establishes the accounting standards for the impairment of
long-lived assets and certain identifiable intangibles to be disposed of.
This standard is effective for financial statements beginning after
December 15, 1995, which for the Company would be fiscal 1997. Based on
management's review, the adoption of SFAS No. 121 is not expected to have a
material impact, if any, on the Company's financial position and results of
operations.

In June 1996, the Financial Accounting Standards board issued SFAS
No. 125. "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." This statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. This standard is effective for transactions
occurring after December 31, 1996 and shall be applied prospectively. Based
on management's review, the adoption of SFAS No. 125 is not expected to have
a material impact, if any, on the Company's financial position and results of
operations.
<PAGE>
<TABLE>
<CAPTION>
GEORGIA BONDED FIBERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS) and
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended June 30, 1996, 1995 and 1994
(In Thousands, Except Per Share Data)

Consolidated Statements of Income (Loss):
1996 1995 1994
<S> <C> <C> <C>
NET SALES $47,618 $50,998 $47,729
COST OF SALES 36,736 39,398 34,886
------- ------- -------
Gross Profit 10,882 11,600 12,843
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 10,979 11,913 10,865
------- ------- -------
Operating income (loss) (97) (313) 1,978
------- ------- -------
OTHER (INCOME) EXPENSES:
Interest expense 1,288 984 668
Interest income (93) (219) (47)
Foreign currency exchange (gain) loss (496) 1,477 (247)
Other - net (14) (209) (35)
------- ------- -------
685 2,033 339
INCOME (LOSS) BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (782) (2,346) 1,639
INCOME TAXES (180) (888) 704
------- ------- -------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE (602) (1,458) 935
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
FOR INCOME TAXES - - 400
------- ------- -------
Net income (loss) $ (602) $(1,458) $ 1,335
======= ======= =======
INCOME (LOSS) PER SHARE:
Before cumulative effect of change
in accounting principle $ (.38) $ (.93) $.60
Cumulative effect of change in accounting
for income taxes -- -- .25
------- ------- -------
Net income (loss) $ (.38) $ (.93) $ .85
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Consolidated Statements of Changes in Stockholders' Equity:
1996 1995 1994
<S> <C> <C> <C>
Stockholders' Equity, beginning balance $11,186 $12,080 $10,521
Retained earnings (602) (1,458) 1,335
Foreign currency translation adjustment (276) 564 224
------- ------- -------

Stockholders' Equity, ending balance $10,308 $11,186 $12,080
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
GEORGIA BONDED FIBERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1996 and 1995
(In Thousands, Except Per Share Data)

ASSETS 1996 1995
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 715 $ 4,379
Trade accounts receivable, less allowance for doubtful
accounts of $134 ($156 at 1995) 14,078 15,300
Other receivables 527 490
Inventories 5,495 7,650
Deferred income taxes 676 449
Income taxes refundable 14 145
Other current assets 116 227
------- -------
Total current assets 21,621 28,640
------- -------
PROPERTY, PLANT AND EQUIPMENT:
Land 298 271
Building and building improvements 4,785 4,383
Machinery, furniture and equipment 15,755 14,256
Construction in progress 782 1,578
------- -------
21,620 20,488
Less accumulated depreciation and amortization 11,165 10,621
------- -------
Net property, plant and equipment 10,455 9,867

Deferred income taxes 442 333
Other assets 663 687
------- -------
Total assets $33,181 $39,527
======= =======

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $ 9,416 $11,674
Accounts payable 8,047 10,339
Accrued expenses 2,345 2,622
Income taxes payable 169 -
Long-term debt due currently 566 2,189

------- -------
Total current liabilities 20,543 26,824
Long-term debt 2,330 1,364
Other long-term liabilities - 153
------- -------
Total liabilities 22,873 28,341
------- -------
STOCKHOLDERS' EQUITY:
Common stock of $.10 par value. Authorized 3,000,000
shares; issued and outstanding 1,572,824 shares 157 157
Additional capital 1,551 1,551
Retained earnings 7,611 8,213
Foreign currency translation adjustment 989 1,265
------- -------
Total stockholders' equity 10,308 11,186
------- -------
Total liabilities and stockholders' equity $33,181 $39,527
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
GEORGIA BONDED FIBERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 1996, 1995 and 1994
(In Thousands)

1996 1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Cash received from customers $50,552 $50,133 $46,595
Cash paid to suppliers and employees (48,226) (51,227) (44,091)
Interest received 98 212 47
Interest paid, net of amount capitalized (1,330) (986) (674)
Income taxes paid, net of refunds 86 (205) (799)
------- ------- -------
Net cash provided by (used in) operating activities 1,180 (2,073) 1,078
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments - - (123)
Proceeds from maturities of short-term investments - 123 419
Proceeds from sales of property, plant and equipment 75 39 22
Acquisition of property, plant and equipment (2,157) (1,704) (1,868)
------- ------- -------
Net cash used in investing activities (2,082) (1,542) (1,550)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in short-term borrowings, net (1,740) 4,288 (265)
Long-term debt incurred 115 2,000 701
Principal payments on long-term debt and capital
lease obligations (694) (569) (287)
------- ------- -------
Net cash provided by (used in) financing activities (2,319) 5,719 149
------- ------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (443) 913 24
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,664) 3,017 (299)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 4,379 1,362 1,661
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 715 $ 4,379 $ 1,362
======= ======= =======
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income (loss) $ (602) $(1,458) $ 1,335
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Cumulative effect of change in accounting principle - - (400)
Depreciation and amortization 1,100 1,072 821
(Gain) loss on sale of property, plant and equipment 13 (15) (14)
Provision for bad debts 66 42 34
Deferred income taxes (387) (885) 220
Donated property - (82) -
Change in assets and liabilities:
(Increase) decrease in trade accounts and other
receivables 660 471 (1,996)
(Increase) decrease in inventories 2,123 (2,360) 575
(Increase) decrease in other assets 22 70 (550)
Increase (decrease) in accounts payable and
accrued expenses (1,940) 1,493 1,144
Increase (decrease) in income taxes 273 (159) 113
Increase (decrease) in other liabilities (148) (262) (204)
------- ------- -------
Net cash provided by (used in) operating
activities $ 1,180 $(2,073) $ 1,078
======= ======= =======

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Donated property $ - $ 82 $ -
======= ======= =======
Construction in progress accrued in payables $ 76 $ 178 $ 75
======= ======= =======

</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
GEORGIA BONDED FIBERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
(All amounts in thousands except share data)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Consolidation - The accounts of Georgia Bonded Fibers, Inc. and its wholly-
owned subsidiaries, Bontex S.A., Belgium, Bontex Italia, s.r.l., Italy and
Bontex de Mexico C.V., Mexico, (the Company) are included in the consolidated
financial statements after elimination of significant intercompany accounts
and transactions.

Foreign Currency Translation - Assets and liabilities of the Company's
foreign operations are translated from foreign currencies into U.S. dollars
at exchange rates in effect as of the close of the year and income statement
amounts are translated at the weighted average currency exchange rates in
effect during the year. Adjustments from financial statement translation are
shown as a separate component of stockholders' equity. Gains and losses
resulting from foreign currency transactions are included in net income.

Cash Equivalents - Cash equivalents of $791 at June 30, 1995, consist of
collateralized overnight repurchase agreements. For purposes of the
statements of cash flows, the Company considers all highly liquid debt
instruments with original maturities of three months or less to be cash
equivalents.

Inventories - Inventories are stated at the lower of cost or market. Cost of
inventories maintained in North America is determined on the last-in, first-
out (LIFO) and in Europe on the first-in, first-out (FIFO) and weighted
average bases.

Property, Plant and Equipment - Property, plant and equipment are stated at
cost. Machinery and equipment held under capital leases are stated at the
present value of minimum lease payments at the inception of the lease. The
Company capitalizes interest cost as a component of the cost of major
construction in progress. Capitalized interest during the years ended June
30, 1996 and 1995 totaled $142 and $8, respectively.

Depreciation and Amortization - Depreciation is provided by the straight-line
method over the estimated useful lives of the related assets. Estimated
useful lives are 10 to 40 years for buildings and building improvements, and
3 to 25 years for machinery, furniture and equipment. Machinery and equipment
held under capital leases are amortized by the straight-line method over the
shorter of the lease term or estimated useful life of the asset.
Amortization of assets held under capital leases is included in depreciation
and amortization of property, plant and equipment.

Other Assets - Other assets consist principally of deferred loan costs,
trademarks, prepaid pension costs and various deposits. The deferred loan
costs are amortized over the life of the loans. Trademark costs are
amortized on a straight-line basis over five years.

Financial Instruments - The Company enters into interest rate swap
transactions to manage its interest rate exposure. Income or expense arising
from these transactions is accounted for as an adjustment to interest expense
over the life of the agreements. The Company also enters into forward
foreign exchange contracts to manage the exposure of sales by Bontex S.A.
which are denominated in U.S. dollars to changes in foreign currency exchange
rates. The contracts mature at various dates, are valued at market and the
resulting gain or loss is recorded in the income statement.

Revenue Recognition - Sales and cost of sales are recognized at the time of
product shipment or delivery to the customer, based on shipping terms.

Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.

Change in Accounting Principle - The Company adopted the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," effective July 1, 1993. Among other provisions, this standard
requires the Company to record deferred income taxes using the enacted
corporate income tax rates for the years in which the taxes will be paid.
Because corporate income tax rates at July 1, 1993, were lower than the rates
that existed when the deferred taxes were originally recorded, the cumulative
effect of the adoption of the new standard increased net income by $400, and
is reported separately in the consolidated statement of income for the year
ended June 30, 1994. Apart from this benefit, the new accounting principle
had no material effect on net income in 1994 and did not affect cash flows.

Income Per Share - Income per share has been computed on the basis of the
number of shares outstanding during each year (1,572,824 shares).

2. INVENTORIES

Cost of inventories of approximately $1,716 in 1996, and $1,881 in 1995, is
determined by the last-in, first-out method (LIFO). Inventories of
approximately $3,779 in 1996, and $5,769 in 1995, are determined by the
first-in, first-out (FIFO) and weighted average bases.

Inventories are summarized as follows:
1996 1995
<S> <C> <C>
Finished goods $ 3,731 $ 3,644
Raw materials 1,791 4,148
Supplies 603 635
------- -------
Inventories at FIFO 6,125 8,427
LIFO reserves 630 777
------- -------
$ 5,495 $ 7,650
======= =======
</TABLE>

During 1996, 1995 and 1994, LIFO layers were reduced resulting in charging
lower inventory costs to cost of sales of $91, $173 and $131, respectively.

3. BUSINESS SEGMENT INFORMATION AND INTERNATIONAL OPERATIONS

Georgia Bonded Fibers, Inc. (Bontex) and its wholly-owned subsidiaries are
predominantly engaged in the manufacturing and distribution of uncoated and
coated BONTEX (registered trademark) elastomeric fiberboard products. BONTEX
(registered trademark) products are primarily used as an insole material in
footwear, as well as visorboard in headwear, stiffener and laminating base
for luggage, leathergoods and allied industries globally.

Export sales for Georgia Bonded Fibers, Inc. totaled $9,761, $9,161 and
$8,827 in 1996, 1995 and 1994, respectively. Sales to Asian countries
represent approximately 84 percent of total export sales for Georgia Bonded
Fibers, Inc. during the past three years.

For the past three years, sales to one customer ranged from approximately 9
percent to 15 percent of consolidated net sales.
Information related to the domestic and foreign operations follows:
<PAGE>
<TABLE>
<CAPTION>
United States European
Operations Operations Eliminations Consolidated
<S> <C> <C> <C> <C>
1996:
Total assets $15,110 $20,412 $(2,341) $33,181
Total liabilities 6,540 17,090 (757) 22,873
Net sales 18,486 29,507 (375) 47,618
Loss before income taxes (188) (585) (9) (782)
Net loss (60) (531) (11) (602)

1995:
Total assets $14,311 $27,426 $(2,210) $ 39,527
Total liabilities 5,785 23,310 (754) 28,341
Net sales 19,735 31,541 (278) 50,998
Loss before income taxes (933) (1,424) 11 (2,346)
Net Loss (615) (854) 11 (1,458)

1994:
Total assets $13,318 $19,808 $(2,094) $ 31,032
Total liabilities 4,177 15,413 (638) 18,952
Net sales 20,635 27,341 (247) 47,729
Income before income taxes
and cumulative effect of
change in accounting principle 26 1456 157 1,639
Net income 394 784 157 1,335
</TABLE>

Retained earnings of foreign operations not available for distribution
amounted to approximately $579 and $808 at June 30, 1996 and 1995,
respectively.
<PAGE>

4. LONG-TERM DEBT AND FINANCING AGREEMENTS

The following long-term debt was outstanding as of June 30, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
10.50% loan payable to a bank in the
United States in quarterly installments
of $77 through June 2001; collateralized
by accounts receivable, inventory and
other noncurrent assets in the U.S. and
subject to various loan covenants $1,538 $1,846

7.72% loan payable to an agency of the
Belgian government in ten annual
installments beginning May 15, 1992.
Five annual installments of $89
are outstanding at June 30, 1996 447 590

9.73% loan payable to an agency of the
Belgian government in one remaining
annual installment due in July 1995 - 58

7.72% loan payable to an agency of the
Belgian government in ten annual
installments beginning September 1995.
Nine annual installments of $80 are
outstanding at June 30, 1996 718 878

6.15% loan payable to an agency of the
Belgian government in ten annual
installments of $10 beginning 1997 104 -

12.25% loan payable to a bank in Italy
in monthly installments of $10 through
March 1997; collateralized by plant and
equipment in Italy 89 181
------ ------
2,896 3,553
Less long-term debt due currently 566 2,189
------ ------
Long-term debt $2,330 $1,364
====== ======
</TABLE>

The principal payments of long-term debt are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 566
1998 581
1999 477
2000 477
2001 475
Thereafter 320
Total $ 2,896
</TABLE>

The loans payable to an agency of the Belgian government provide the lender
the right to request a first mortgage on Bontex S.A.'s property, plant and
equipment.
<PAGE>
European operations have short-term credit facilities totaling approximately
$8,429 and $11,424 at June 30, 1996 and 1995, respectively. As of June 30,
borrowings under these facilities were as follows:

<TABLE>
<CAPTION>
1996 1995

<S> <C> <C>
Short-term bank loans with various interest
rates between 4.35% and 9.88% $ 8,187 $11,274
Overdrafts 242 150
------- -------
$ 8,429 $11,424
======= =======
</TABLE>

As of June 30, 1996 and 1995, one of the bankers under these facilities had
the right to request a security interest. Subsequent to June 30, 1996, the
Company renegotiated its credit facilities in Belgium with five banks sharing
a security interest in most of the assets of Bontex S.A. for half the amount
of the credit facilities granted, and the right to request a security
interest in the amount of the other half of the credit facilities granted.

Georgia Bonded Fibers, Inc. has an unsecured line of credit arrangement with
a bank whereby Georgia Bonded Fibers, Inc. may borrow up to $250 at the prime
rate of interest. Georgia Bonded Fibers, Inc. has a secured line of credit
arrangement with another bank whereby Georgia Bonded Fibers, Inc. may borrow
up to $1,000 at the prime rate or London Inter Bank Offered Rate (LIBOR) plus
a prime margin ranging from 50 to 100 basis points or a LIBOR margin ranging
from 240 to 290 basis points, depending on which rate is utilized and certain
financial ratios. At June 30, 1996 and 1995, Georgia Bonded Fibers, Inc. had
borrowings of $987 and $250, respectively, outstanding under these lines of
credit. Subsequent to June 30, 1996, Georgia Bonded Fibers, Inc. renegotiated
its lines of credit whereby the Company may borrow up to $1,500. The new
secured line of credit is collateralized by the same security as the
refinanced long-term debt discussed below.

Consolidated weighted average interest rates on short-term borrowings at
June 30, 1996 and 1995 are 8.0 and 7.5 percent, respectively.

Georgia Bonded Fibers, Inc. is subject to various loan covenants under the
secured debt agreement and has pledged certain current and noncurrent assets
as security. As a result of the decrease in various financial ratios, $1.8
million of the long-term debt was classified as current at June 30, 1995. The
Company later obtained a waiver from such requirements at June 30, 1995.
During fiscal year 1996, the Company obtained a modified secured debt
agreement. The Company was in compliance with the applicable amended
covenants at June 30, 1996, and accordingly, such debt was classified as
long-term. Subsequent to June 30, 1996, the Company refinanced this debt. The
new secured debt agreement also contains various loan covenants, including
the maintenance of certain minimum financial ratios and borrowing base
requirements, as well as a lower interest rate of 8.5 percent. Additionally,
the refinancing resulted in a $38 write-off of deferred financing costs
related to the early extinguishment of debt to be recognized during fiscal
1997.

5. INCOME TAXES

As discussed in note 1, the Company adopted Statement of Financial Accounting
Standards No. 109 as of July 1, 1993. The cumulative effect of this change
in accounting for income taxes is $400, and is reported separately in the
statement of income for the year ended June 30, 1994.

The U.S. and foreign components of the provision (benefit) for income taxes
are presented as follows:

<TABLE>
<CAPTION>
Current Deferred Total
<S> <C> <C> <C>
1996:
Federal $ (91) $ (49) $(140)
State - (5) (5)
Foreign 298 (333) (35)
----- ----- -----
$ 207 $(387) $(180)
===== ===== =====
1995:
Federal $(136) $(174) $(310)
State (1) (7) (8)
Foreign 134 (704) (570)
----- ----- -----
$ (3) $(885) $(888)
===== ===== =====
1994:
Federal $ 6 $ 34 $ 40
State (13) 5 (8)
Foreign 491 181 672
----- ----- -----
$ 484 $ 220 $ 704
===== ===== =====
</TABLE>

The provision (benefit) for income taxes differs from the expected tax
expense (benefit), computed by applying the U.S. Federal corporate rate to
income or loss before income taxes and cumulative effect of change in
accounting principle, as follows:

1996 1995 1994
<S> <C> <C> <C>
Federal income tax at statutory rate $ (265) $ (798) $ 557
Increase (reduction) in income taxes resulting from:
Foreign Sales Corporation - (23) (75)
Foreign income (loss) at other than U.S. rates 64 (115) 161
State and local taxes, net of federal income tax benefit (3) (5) (12)
Other differences, net 24 53 73
------ ------ ------
Provision (benefit) for income taxes $ (180) $(888) $ 704
====== ====== ======
Effective income tax rate 23% 38% 43%
====== ====== ======
U.S. Federal statutory income tax rate 34% 34% 34%
====== ====== ======
</TABLE>

<PAGE>
The components of deferred tax assets and liabilities at June 30, 1996 and
1995 are presented below:

1996 1995
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to allowance
for doubtful accounts $ 25 $ 29
Inventories, principally due to additional costs
capitalized for tax purposes 97 94
Other assets, due to difference in amortization of
trademarks 118 100
Accrued pension and retirement benefits 144 205
Net operating loss carryforwards 1,130 813
Alternative minimum tax credit carryforwards 90 99
Other 90 5
------ ------
Total gross deferred tax assets 1,694 1,345
------ ------
Deferred tax liabilities:
Plant and equipment, principally due to differences
in depreciation and capital gain recognition (554) (542)
Other (22) (21)
------ ------
Total gross deferred tax liabilities (576) (563)
------ ------
Net deferred tax asset $1,118 $ 782
====== ======
</TABLE>
The U.S. and foreign components of the net deferred tax asset at June 30,
1996 and 1995 are presented below:

Current Noncurrent Total
<S> <C> <C> <C>
1996:
Bontex USA $ 91 $ 266 $ 357
Bontex S.A. 585 176 761
------ ------ ------
$ 676 $ 442 $1,118
====== ====== ======

1995:
Bontex USA $ 277 $ 26 $ 303
Bontex S.A. 148 307 455
Bontex Italia 24 - 24
------ ------ ------
$ 449 $ 333 $ 782
====== ====== ======
</TABLE>

At June 30, 1996, in addition to the alternative minimum tax credit
carryforward of $90 at Bontex USA, the Company had approximately $3,000
($1,000 at Bontex USA and $2,000 at Bontex S.A.) in net operating loss
carryforwards to offset future taxable income, of which approximately $600
and $400 at Bontex USA expire in 2010 and 2011, respectively. The net
operating loss carryforwards at Bontex S.A. have no expiration date. The
Bontex S.A. carryforwards are limited to the larger of $638 or 50 percent of
income before tax each year, except the fiscal 1996 loss carryforward, which
is not limited during fiscal 1997.

Deferred tax assets at June 30, 1996 include $451 related to the alternative
minimum tax credit and net operating loss carryforwards at Bontex USA, and
$769 related to operating loss carryforwards at Bontex S.A. For the past two
years the Company has experienced losses before income taxes of approximately
$782 and $2,346 in 1996 and 1995, respectively. The Company will need to
generate future taxable income of approximately $1,700 at Bontex USA and
$2,000 at Bontex S.A. during the tax carryforward periods to realize the
deferred tax assets.

In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Based upon
the level of historical taxable income, anticipation of future taxable income
over the periods which the deferred tax assets are deductible, reversal of
the temporary differences and available tax planning strategies, management
believes it is more likely than not the Company will realize these deferred
tax assets.

At June 30, 1996, the Company has not recognized a deferred tax liability of
$43 for the cumulative amount of undistributed income of its foreign
subsidiaries, because there are no plans to pay dividends in the foreseeable
future. As of June 30, 1996, undistributed income of the foreign
subsidiaries was approximately $853, of which approximately $579 is not
available for distribution.

6. PENSION PLANS

The Company has pension plans covering substantially all full-time domestic
employees and certain foreign employees. The benefits from the Company's
domestic defined benefit plan are based upon years of service and the
employee's average earnings for the five highest consecutive years of
compensation during the ten years immediately preceding retirement. The
Company's funding policy is to contribute amounts to the plan sufficient to
meet the minimum funding requirements set forth in the Employee Retirement
Income Security Act of 1974, and any such additional amounts as the Company
may determine to be appropriate from time to time. Annual provisions for
accrued pension costs are based on independent actuarial valuations.

The Plan's funded status and amounts recognized in the Company's consolidated
financial statements at June 30 for its United States pension plan are as
follows:

<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including
vested benefits (1996, $4,021 and 1995, $3,610) $ (4,044) $ (3,649)
-------- --------
Projected benefit obligation for service rendered to date $ (5,217) $ (4,882)
Plan assets 4,346 4,138
-------- --------
Plan assets less than projected benefit obligation (871) (744)
Unrecognized prior service cost 177 192
Unrecognized net loss from past experience different from
that assumed 429 435
Unrecognized net asset at July 1, 1986, net of amortization (131) (148)
-------- --------
Accrued pension cost $ (396) $ (265)
======== ========
</TABLE>
<PAGE>
The Company's net pension cost for the years ended June 30, 1996, 1995 and
1994 include the following components:

<TABLE>
<CAPTION>
1996 1995 1994

<S> <C> <C> <C>
Service cost-benefits earned during the period $ 200 $ 243 $ 233
Interest cost on projected benefit obligation 366 344 345
Net amortization and deferral 2 180 (162)
----- ----- -----
568 767 416
Less actual return on assets and employee contributions 407 530 176
----- ----- -----
Net pension cost $ 161 $ 237 $ 240
===== ===== =====
</TABLE>

The weighted average discount rates used in determining the actuarial present
value of the projected benefit obligations were 7.75 percent for 1996 and
1995 and 7.0 percent for 1994. The rate of increase for future compensation
levels used in determining the obligation was 4.5 percent for 1996 and 5.5
for 1995 and 1994. The expected long-term rate of return on plan assets in
1996, 1995 and 1994 was 9.0 percent.

Pension assets are held under a group annuity contract with an insurance
company. Certain amounts are commingled with the general assets of the
insurance company, at contract value, and the remainder is invested in
separate accounts, which include domestic equity, domestic government,
corporate and private placement bonds and domestic real estate equity, of the
insurance company, at fair value.

The pension expense relating to the foreign subsidiary's insured pension and
disability plan amounted to $86, $76 and $69 in 1996, 1995 and 1994,
respectively. Benefits are based on years of service and the average of the
last five years annual earnings.

The Company provides certain supplemental retirement benefits to the
President. Expenses related to these benefits were approximately $143 in
1996 and $132 in 1995 and 1994. The agreement contains a change in control
provision that would accelerate the payment of these benefits. The maximum
liability under this agreement, in such event, would be approximately $600.

On October 3, 1994, the Board of Directors adopted a deferred compensation
agreement, with Hugo N. Surmonte, Chairman of the Board of Directors. The
deferred compensation agreement requires the Company pay Mr. Surmonte $150
per year, after his retirement from the Company and during his lifetime, and
if Mr. Surmonte's death precedes his spouse's death, that such amounts shall
be paid to his spouse for the remainder of her life. On October 5, 1994, Mr.
Surmonte retired from the Company. On October 10, 1994, Mr. Surmonte died
and per the agreement his widow, Marie G. Surmonte, received the benefit
until her death on June 2, 1996. During fiscal year 1996, the Company paid
$138 to Mrs. Surmonte, and reversed the remaining balance of $159 for this
accrued liability.

7. FINANCIAL INSTRUMENTS

The Company uses various financial instruments in the normal course of
business. By their nature, all such instruments involve risk, and the
Company's maximum potential loss may exceed amounts recorded in the balance
sheet. As is customary for these types of instruments, the Company does not
require collateral or other security from other parties to these instruments.
However, because the Company manages exposure to credit risk through credit
approvals, credit limits and monitoring procedures, the Company believes that
reserves for losses are adequate.

Foreign Exchange Contracts - Bontex S.A. entered into a $5,000 option
contract during 1995, to manage the exposure of sales denominated in U.S.
dollars to changes in foreign currency exchange rates. The contract matured
in 1996. The Company entered into no new foreign exchange contracts during
1996.

Interest Rate Swaps - At June 30, 1996, the Company had three outstanding
interest rate swap agreements with banks having an aggregate notional amount
of $2,892, of which $797, $500 and $1,595 will terminate on June 18, 1997,
January 20, 1998 and June 15, 1999, respectively. These swap agreements
provide for the payment of interest based on fixed rates ranging from 5.80
percent to 6.55 percent, and remain unchanged over the term of the
agreements. The floating rates of the debt agreements are based on the
Brussels Inter Bank Offering Rate (BIBOR) or the London Inter Bank Offered
Rate (LIBOR) and are reset every 90 days based on market conditions. The
nature of the swap agreements changes certain variable rate debt to fixed
rate debt. Interest rate differentials paid or received under these swaps
are recognized over the life of the contracts as adjustments are made to the
effective yield of the underlying debt. An interest premium of $34 and $20
was paid during 1996 and 1995, respectively. In the event of lowering BIBOR
or LIBOR rates, the Company is exposed to the higher fixed rates.
Furthermore, the Company may be exposed to credit loss in the event of
nonperformance by the other party to the interest rate swap agreement.
However, the Company does not anticipate such nonperformance.

Fair Value of Financial Instruments - The following assumptions were used by
the Company to estimate the fair value of its financial instruments: The
carrying amounts reported in the balance sheet for cash, cash equivalents,
trade accounts receivable, other receivables, short-term borrowings, accounts
payable and accrued expenses approximate fair value because of the short
maturity of these instruments. The fair value of long-term debt is estimated
using discounted cash flows based on the Company's incremental borrowing
rates, and approximates the carrying amount in the balance sheets.
Unrealized gains or losses on the fair value of foreign exchange contracts
and interest rate swap agreements are estimated based on current interest and
foreign exchange rates.

The contract or notional amounts and estimated fair value of the Company's
material off balance sheet financial instruments at June 30, 1996 and 1995
are as follows:

<TABLE>
<CAPTION>
1996 1995

Contract or Contract or
Notional Amount Fair Value Notional Amount Fair Value
<S> <C> <C> <C> <C>
Interest rate swaps $2,892 $ (108) $2,782 $(57)
Purchased option contract - - $5,000 $ 68
</TABLE>
<PAGE>

8. COMMITMENTS AND CONTINGENCIES

Regulatory and Environmental Matters - As with all related manufacturers, the
Company is subject to regulations by various federal, state, foreign and
local agencies concerning compliance with environmental control statutes.
These regulations impose limitations on the discharge of effluent and
emissions into the environment, and establish standards for solid and
hazardous waste disposal, treatment, and storage, as well as require the
Company to obtain and operate in compliance with the conditions of
environmental permit. The Company believes that it is in substantial
compliance with such existing domestic and foreign environmental statues and
regulations. Failure to comply with applicable environmental control
standards could result in interruption of operations or could require
additional expenditures at these facilities.

The Company has made and intends to continue to make capital investments,
operating expenditures, and production adjustments in connection with
compliance to environmental laws and regulations. Since the Company is
essentially comprised of two fiberboard plants, water quality discharge
remains the primary environmental concern. A private water quality
consulting firm has completed an extensive analysis and plans for compliance
at both plants have been implemented.

On July 22, 1994, the Company entered into a Special Consent Order with the
Virginia Department of Environmental Quality (DEQ) committing the Company to
construct a waste water treatment facility to address certain effluent
limitations in its Virginia Pollution Discharge Elimination Permit.
Construction of the USA waste treatment facility was completed during fiscal
1996 at an aggregate cost of almost $2.0 million. The waste water treatment
plant appears to be operating within compliance of applicable environmental
requirements.

The Belgium government has imposed new regulations requiring a formal water
treatment plant to be installed at Bontex S.A. The first phase of the waste
water treatment facility in Belgium is under construction and is anticipated
to be completed in 1997 at an estimated cost of $1.5 million.

The facility in the USA is also impacted by regulations concerning air
emissions relating to the operation of certain coating and converting
equipment. The Company has entered into a Consent Order with DEQ to which
the Company has committed to take appropriate corrective action with respect
to air quality emissions and to achieve compliance by September 30, 1997. An
air quality consultant has completed an extensive analysis to characterize
and verify mill air emissions. The Company is developing and implementing
certain air emission controls. The cost of the air control technologies
based on current information is expected to be approximately $250.

Estimates of the costs of future environmental compliance are unaudited and
may differ from projected costs due to, among other things, continued
emergence of newer environmental laws and regulations and improving
efficiencies in environmental control or process technology developments. At
the present time, based on preliminary estimates, the Company anticipates
that consolidated capital expenditures for environmental compliance in fiscal
1997 will aggregate approximately $2.0 million; however, this estimate could
change due to ultimate circumstances.

Litigation - In the normal course of business, the Company is subject to
proceedings, lawsuits and other claims. Such matters are subject to many
uncertainties, and outcomes are not predictable with assurance. There are no
legal proceedings, lawsuits or other claims pending against or involving the
Company which, in the opinion of management, will have a material adverse
impact upon the consolidated results of operations or financial condition of
the Company.

Leases - Rental expenses for all operating leases amounted to $131, $112 and
$84 in 1996, 1995 and 1994, respectively.
<PAGE>
(KPMG PEAT MARWICK LETTERHEAD)

KPMG PEAT MARWICK LLP
213 South Jefferson Street
Roanoke, VA 24011

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
of Georgia Bonded Fibers, Inc.:

We have audited the accompanying consolidated balance sheets of Georgia
Bonded Fibers, Inc. and subsidiaries as of June 30, 1996 and 1995, and the
related consolidated statements of income (loss), changes in stockholders'
equity, and cash flows for each of the years in the three-year period ended
June 30, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Georgia
Bonded Fibers, Inc. and subsidiaries as of June 30, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended June 30, 1996, in conformity with generally accepted
accounting principles.

As discussed in notes 1 and 5 to the consolidated financial statements, the
Company changed its method of accounting for income taxes on July 1, 1993 to
adopt the provisions of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes."

s/KPMG Peat Marwick LLP

Roanoke, Virginia
August 9, 1996
<PAGE>
- --------------------------------
DIRECTORS, EXECUTIVES & OFFICERS
- --------------------------------

James C. Kostelni ^ Chairman of the Board, President,
Chief Executive Officer, Director

William J. Binnie * Director

Michael J. Breton Corporate Director of International
Operations, Director

William B. D'Surney Director

David A. Dugan Controller and Corporate Secretary

Charles W. J. Kostelni Corporate Controller

Jeffrey C. Kostelni Treasurer and Chief Financial Officer,
Director

Frank B. Mayorshi ^* Director

Larry E. Morris Technical and Sales Director,
Director

Dr. Joseph F. Raffetto Director

Patricia S. Tischio Assistant Corporate Secretary,
Director

Robert J. Weeks ^* Director

^ Member of Executive Committee
* Member of Audit Committee

-------
COUNCIL
-------

Woods, Rogers & Hazlegrove, P.L.C. Roanoke, Virginia
Attorneys at Law

--------------------
INDEPENDENT AUDITORS
--------------------

KPMG Peat Marwick LLP Roanoke, Virginia
Certified Public Accountants

--------------
TRANSFER AGENT
--------------

Registrar & Transfer Company Roanoke, Virginia

<PAGE>

BONTEX (registered trademark) On
The Environment

(Two soles having a conversation)

Have you Yes!
heard about How about
BONTEX (registered trademark) 200 BONTEX (registered trademark) 300
recycled? recycled?

BONTEX (registered trademark) through be used in any type of footwear,
significant R&D efforts has perfected including GOODYEAR WELT applic-
BONTEX (registered trademark) 200 ations without a full sockliner.
RECYCLED and BONTEX (registered trade-
mark) 300 RECYCLED insole materials BONTEX (registered trademark)
from 100% recovered paper, with a 200 RECYCLED and BONTEX
minimum 80% "post-consumer waste." (registered trademark) 300
RECYCLED cut and skive easily
BONTEX (registered trademark) 200 and can be used in handbags,
RECYCLED and BONTEX (registered trade- luggage, leathergoods, backing
mark) 300 RECYCLED have high performance stiffener, laminating base,
qualities such as internal bond, plumper stock, and headwear
perspiration resistance, flexibility, visorboard, brims and sizebands.
resistance to aging, stability in hot,
cold or wet conditions. BONTEX (registered trademark)
products are distributed
All BONTEX (registered trademark) globally through representatives
products are MORI-FRESH (registered and distributors in 72 markets.
trademark) treated to resist mold-type Liaison offices: BONTEX
growth related to bacteria and fungi. (registered trademark) Korea-
Pusan, Korea; BONTEX (registered
BONFOAM (registered trademark), trademark) Taiwan - Taipei,
SUREFOAM (registered trademark), MAXXON Taiwan; BONTEX (registered
(registered trademark) cushion insole trademark) Philippines - Metro
products can be combined to any BONTEX Manila, Philippines; BONTEX
(registered trademark) product. (registered trademark)
Indonesia - Jakarta, Indonesia;
BONTEX (registered trademark) 200 BONTEX (registered trademark)
RECYCLED has been designed for all types Thailand - Bangkok, Thailand;
of light and medium durability footwear BONTEX (registered trademark)
while BONTEX (registered trademark) 300 Hong Kong - Central District,
RECYCLED has been designed for high Hong Kong.
performance footwear such as men's,
women's, children's athletic outdoor and Please call, write or fax
heavy duty footwear. BONTEX (registered BONTEX (registered trademark)
trademark) 300 can for samples.

BONTEX (registered trademark)

accepted a member of Bontex, One Bontex Drive, Buena Vista, VA
American SATRA 24416-0751. (540) 261-2181. Fax: 540-261-3784.
Podiatric Footwear Manufactured: BONTEX (registered trademark)
Medical Technology Buena Vista, VA 24416-0741.
Association Center http://www.bontex.com. E-Mail:
[email protected] Bontex S.A. Belgium.
Distributed and converted by BONTEX
(registered trademark) Italy, S.R.L.,
Villafranca, Verona, Italy. Bontex (registered
trademark) de Mexico, Leon, Mexico
<PAGE>
SHAREHOLDERS'
LOCATIONS INFORMATION
- --------------------------------------- ----------------------------------
United States Manufacturing Corporate Headquarters, Sales
Bontex and Distribution Center
One Bontex Drive Georgia Bonded Fibers, Inc.
Buena Vista, Virginia 24416-0751 15 Nuttman Street
800-733-4234 Newark, New Jersey 07103
E-mail: Bontex @ bontex.com
Annual Meeting
European Headquarters and Manufacturing 10:30 a.m. November 7, 1996
Bontex S. A. Best Western Inn at Hunt Ridge
Rue Slar Willow Springs Drive
4801 Stembert, Belgium Lexington, Virginia 24450
ATT Mail: Bontex S.A.
Independent Auditors
Sales and Distribution Centers KPMG Peat Marwick LLP
Bontex Italia s.r.l. 213 South Jefferson Street
Via Francia Roanoke, Virginia 24011
37069 Villafranca (Verona)
Italy Registrar and Transfer Agent
Registrar and Transfer Company
Bontex De Mexico, S. A. De C. V. 10 Commerce Drive
Boulevard Mariano Excobedo #801 Post Office Box 1010
Colonia Andrade, C. P. 37370 Cranford, New Jersey 07106
Leon, Guanajuato
Mexico
Form 10-K
International Liaison Offices A copy of the Company's 10-K filed
Bontex Australia with the Securities and Exchange 20
Munro Street Commission is available without
Macleod VIC 3085 charge to any shareholder.
Australia Requests should be sent to the
attention of:
Bontex Hong Kong
Flat B3, 12/F, Paterson Bldg. Controller
7 Great George Street Bontex
Causeway Bay, Hong Kong One Bontex Drive
Buena Vista, Virginia 24416-0751
Bontex Korea
Rm. 601, Songnam Bldg. ----------------------------------
76-1, 4Ga, Chung Angdong
Chung-Gu, Busan, Korea BONTEX (registered trademark)
Georgia Bonded Fibers, Inc.
Bontex Taiwan
8F1, No. 52, Sec. 2 The Bontex (registered trademark)
Chung Shan N. Rd. is a registered trademark of
Taipei, 10419, Taiwan Georgia Bonded Fibers, Inc.

North American Warehouse Facilities Georgia Bonded Fibers, Inc, is an
Newark, New Jersey equal opportunity employer
Franklin, Tennessee
St. Louis, Missouri ----------------------------------
Cambridge, Ontario, Canada
Montreal, Quebec, Canada (Recycle Symbol) Recycled Paper
Village Huron, Quebec, Canada
<PAGE>
[Q.] WHAT IS COSSETTING?
[A.] CONSUMERS CALL IT COMFORTABLE!

BONTEX (registered trademark) 244W
BONFOAM (registered trademark) CUSHION HEEL PAD
DUAL DENSITY BONFOAM (registered trademark) CUSHION
FABRIC HEEL PAD COVER
CONTOUR (registered trademark)-MAXXON (registered trademark) CUSHION
FABRIC COVER

(GRAPHIC OF CUSHIONED INNER SOLE)

BONFOAM (registered trademark)/CONTOUR (registered trademark)-MAXXON
(registered trademark)

BONFOAM (registered trademark)/ The dynamic interaction between
CONTOUR (registered trademark)-MAXXON the foot and weight transfer is
(registered trademark) DUAL DENSITY accommodated and high pressure
CUSHION INSOLES from BONTEX points are minimized. Also
(registered trademark) meets the BONFOAM (registered trademark)-
challenge of providing comfort MAXXON (registered trademark)
and protecting feet from harsh CUSHION INSOLES have moisture
environmental discomforts. Whether vapor transmission properties.
the footwear you manufacture is bound
for hard ground, wet and cold With BONFOAM (registered trade-
conditions, high impact and abrasive mark)/CONTOUR (registered trade-
conditions or just leisure wear. mark)-MAXXON (registered trade-
BONFOAM (registered trademark)/CONTOUR mark) DUAL DENSITY CUSHION
(registered trademark)-MAXXON INSOLES combined with BONTEX
(registered trademark) DUAL DENSITY (registered trademark) consumers
(registered trademark) CUSHION will see and feel comfort at the
INSOLES combined with point of purchase when trying on
BONTEX (registered trademark) your footwear in the store.
reduces internal shoe discomforts
and provides cossetting. BONTEX (registered trademark)
has created materials for hand-
BONFOAM (registered trademark)/ bags, luggage and headwear, too.
CONTOUR (registered trademark)-MAXXON BONTEX (registered trademark)
registered trademark) DUAL DENSITY products are designed to be
CUSHION INSOLES combined with BONTEX "environmentally friendly."
registered trademark) enables the BONTEX (registered trademark)
shoe bottom to conform elastically uses recycled and primary
to the shape of the foot and cellulose fibers originally
distribute pressure during any derived from trees, a renewable
activity. resource.

Please call, write or fax
BONTEX (registered trademark) for
samples.

BONTEX (registered trademark)

A WORLD CLASS
TAG
TEAM.

(Graphic of tag) When you tag your products (Graphic of tag)
with BONTEX (registered trade-
mark), BONFOAM (registered trade-
mark), MAXXON (registered trade-
mark), or SUR-V-LON (registered
trademark), you have a world class
tag team in your corner.

BONTEX (registered trademark)
products are tough, durable, light
and flexible. Every BONTEX
(registered trademark) product is
designed to be "environmentally
friendly."

All BONTEX (registered trade-
mark) products are MORI-FRESH
(registered trademark) treated to
resist mold-type growth related to
bacteria and fungi.
(Graphic of tag) (Graphic of tag)
BONTEX (registered trademark)
uses primary and recycled cellulose
fibers originally derived from trees,
a renewable natural resource.

Please call, write or fax BONTEX
(registered trademark) today for
samples.

BONTEX (registered trademark)

(Graphic of tag)

<PAGE>

EXHIBIT 21
----------

LISTING OF SUBSIDIARIES

There are six active subsidiaries of the Company:
<TABLE>
<CAPTION>
Name Under which
Name of Subsidiary Jurisdiction of Incorporation Subsidiary Does Business
------------------ ----------------------------- ------------------------
<S> <C> <C>
Bontex S.A. Belgium Same

Bontex Italia s.r.l. Italy Same

Bontex, Inc. Virgin Islands Same

Bontex de Mexico Mexico Same

Bontex Canada Canada Same

Bontex Sdn Bhd Malaysia Same
</TABLE>
<PAGE>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GEORGIA
BONDED FIBERS, INC.'S AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR
ENDED JUNE 30, 1996, AS SET FORTH IN THE COMPANY'S ANNUAL REPORT TO SHAREHOLDERS
AND ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 715
<SECURITIES> 0
<RECEIVABLES> 14,212
<ALLOWANCES> 134
<INVENTORY> 5,495
<CURRENT-ASSETS> 21,621
<PP&E> 21,620
<DEPRECIATION> 11,165
<TOTAL-ASSETS> 33,181
<CURRENT-LIABILITIES> 20,543
<BONDS> 2,330
0
0
<COMMON> 157
<OTHER-SE> 10,151
<TOTAL-LIABILITY-AND-EQUITY> 33,181
<SALES> 47,618
<TOTAL-REVENUES> 47,618
<CGS> 36,736
<TOTAL-COSTS> 47,715
<OTHER-EXPENSES> 685
<LOSS-PROVISION> 66
<INTEREST-EXPENSE> 1,288
<INCOME-PRETAX> (782)
<INCOME-TAX> (180)
<INCOME-CONTINUING> (602)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (602)
<EPS-PRIMARY> (.38)
<EPS-DILUTED> (.38)

</TABLE>