SecProbe.io

CORRESP
1
filename1.htm

Parker Poe Adams & Bernstein L.L.P.

Attorneys and Counselors at Law

  R.
  Douglas Harmon

  July 18, 2005

Partner

Telephone:  704.335.9020

Direct Fax:   704.335.4485

dougharmon@parkerpoe.com

Securities and Exchange Commission

Division of Corporation Finance

450 Fifth Street, N.W.

Washington, DC 20549

Attention: Andrew Blume

  Re:

  Polymer Group, Inc.

  Form 10-K for the fiscal year ended January 1,
  2005

  Form 10-Q for the quarterly period
  ended April 2, 2005

  Filed March 29, 2005 and May 16,
  2005

  File No. 1-14330

Ladies and
Gentlemen:

On behalf of our
client, Polymer Group, Inc. (“PGI” or the “Company”), we are submitting
this response to the additional comments received from the Staff of the
Securities and Exchange Commission (the “Commission”) with regard to PGI’s Annual
Report on Form 10-K for the fiscal year ended January 1, 2005 and
filed with the Commission on March 29, 2005 (the “Form 10-K”) and Form 10-Q
for the quarterly period ended April 2, 2005 and filed with the Commission
on May 16, 2005 (the “Form 10-Q”).
The Staff’s additional comments were delivered by letter dated June 23,
2005 addressed to James L. Schaeffer, Chief Executive Officer of PGI, and
signed by George F. Ohsiek, Jr., Branch Chief (the “Second Comment Letter”).  The Staff delivered its original comments by
letter dated May 18, 2005 from Mr. Ohsiek to Mr. Schaeffer (the “Original
Comment Letter”).  PGI responded by
letter dated June 10, 2005 from R. Douglas Harmon of Parker Poe Adams &
Bernstein, L.L.P., counsel to PGI (the “Original Response Letter”).

We offer the
following responses to the Second Comment Letter.  The numbered paragraphs below correspond to
the numbered paragraphs of the Second Comment Letter and the page numbers
referenced below refer to the page numbers of the Form 10-K.  We note that these responses are being
provided to you on or before July 18, 2005, rather than July 8, 2005
(as requested in the Second Comment Letter), based on approvals granted by
telephone.

  CHARLESTON,
  SC

  COLUMBIA, SC

  RALEIGH, NC

  SPARTANBURG,
  SC

Form 10-K for the Fiscal Year Ended January 1, 2005

Note 11.                 Debt,
page 61

Background

1.             In
connection with the Company’s emergence from Chapter 11, effective March 5,
2003, the Company issued $50.0 million of 10% Convertible Subordinated Notes
(the “Junior Notes”) pursuant to an indenture dated as of March 5, 2003.  The Junior Notes were only eligible to be
subscribed for by each holder of an allowed Class 4 Bankruptcy Claim that
elected to receive Class A Common Stock of the Company.  The Junior Notes were accordingly only issued
to certain Class A Common shareholders of the Company, with the Company’s
majority shareholder beneficially owning or controlling 76% of the aggregate
principle amount of the originally issued Junior Notes.

The Junior Notes were convertible into shares of Class A Common
Stock of the Company at a conversion price equal to $7.29 per share.  The $7.29 conversion price reflected the
Company’s estimate of the fair value of its common stock based on the best information
available in the circumstances, consisting of valuations provided by
professional advisors, and was not intended to transfer any beneficial
conversion feature that was in-the-money to the Junior Note holders at the
commitment date.  During the four-month
period following the emergence from Chapter 11, PGI’s Class A Common Stock
traded at a weighted average price of $6.63 per share, further supporting the
absence of a beneficial conversion feature.

The Company exited Chapter 11 with a Restructured Credit Facility that
provided for secured revolving credit borrowings with aggregate commitments of
up to $50.0 million and aggregate term loans and term letters of credit of
$435.3 million.  The effective rate of
interest on the term loans was 12.00%, the maximum rate allowed under the
Restructured Credit Facility.  The
Restructured Credit Facility contained covenants and events of default
customary for financings of this type, including leverage, senior leverage,
interest coverage and adjusted interest coverage.

Although the Company was able to remain in compliance with the
covenants and events of default, the restrictive nature of the terms of the
Restructured Credit Facility and the relatively high interest rates prompted
the Company and its majority shareholder to pursue a recapitalization of the
Company’s debt structure.

To accomplish a successful debt restructuring and recapitalization it
was necessary, as a requirement imposed upon the Company by its senior lenders
under the new lending group, for the Company, at the direction of its majority shareholder,
to take additional actions, including the exchange of the Junior Notes for the
Company’s proposed Series A Convertible Pay-in-kind Preferred Shares (the “PIK
Preferred Shares”).  It was a requirement
of the new senior lending group that the Junior Notes be moved lower in the
capital structure with limited rights.
The rating agencies also required that the Company’s overall leverage
ratio be reduced in order for the Company to maintain its credit rating in
effect at the time of the recapitalization.

2

The Company’s majority shareholder directed the arms-length negotiations
with another significant holder of the Company’s equity and Junior Notes, regarding
the terms and conditions of the new PIK Preferred Shares that would satisfy the
financial requirements of the Company’s new lending group and the rating
agencies as well as provide an instrument with an equitable and balanced set of
terms acceptable for such an exchange. These related parties, on a combined
basis at the dates of exchange of the Junior Notes for PIK Preferred Shares,
represented approximately 76% of the Company’s common stock, on an if-converted
basis, and approximately 93% of the aggregate principle amount of the Junior
Notes.

The debt restructuring and recapitalization actions were approved by
the Board of Directors of the Company as the transactions were deemed to be in
the best interest of all common shareholders.

Comparison of Instruments (including rate differentials)

To accomplish the exchange of Junior Notes for PIK Preferred Shares,
the conversion rate of $7.29 per share was left unchanged and the dividend rate
on the PIK Preferred Shares was established at an estimated market rate of 16.00%
as a result of the increased risk and uncertainty associated with the PIK
Preferred Shares versus the lower risk Junior Notes.  The increased risk and uncertainty is
evidenced by the following:

1.             Interest
payments on the Junior Notes were payable in cash or additional Junior Notes,
at the option of the holder.
Dividends on the PIK Preferred Shares are payable in additional PIK
Preferred Shares, cash, or a combination thereof, at the option of the
Company (PIK Preferred Shares are the only viable dividend option under the
current Senior Secured Bank Facility);

2.             The
Junior Notes ranked pari passu with
all debt, excluding debt under the Restructured Credit Facility; the PIK
Preferred Shares rank behind all debt;

3.             The
Junior Notes were guaranteed by certain subsidiaries of the Company; there are
no subsidiary guarantors of the PIK Preferred Shares;

4.             In
the event of optional redemption by the Company, the Junior Notes were
redeemable only for cash.  However,
the PIK Preferred Shares are redeemable in shares of Class A Common Stock,
cash, or a combination thereof, at the Company’s option (the PIK
Preferred Shares were callable at the date of exchange, and the only viable
redemption option, under the current Senior Secured Bank Facility, was and is
through conversion to Class A Common Stock);

5.             The
Junior Notes contained certain restrictive covenants regarding limitations on
indebtedness, restricted payments, liens, disposition of proceeds from asset
sales and transactions with affiliates; the PIK Preferred Shares do not contain
these restrictions; and

3

6.             The
Junior Notes were scheduled to mature in December 2007; the PIK Preferred
Shares extended the maturity date approximately five years and contain a
mandatory redemption date of June 2012.

The Company believes that the increased rate of interest was
commensurate with the changes in terms and additional risks and uncertainty between
the Junior Notes and the PIK Preferred Shares described above, in particular
the requirement to forego cash interest/dividends, the loss of security
(guarantee), the risks associated with moving lower in the capital structure,
and that the PIK Preferred Shares were immediately callable in exchange for Class A
Common Stock of the Company.

A fact worth repeating is that an important feature of the exchange, as
noted in item 4 above, is that at the dates of exchange, the Company obtained
the right to call the PIK Preferred Shares and redeem such PIK Preferred Shares
through the issuance of Class A Common Stock.  Such redemption at the dates of exchange would
have resulted in the issuance of approximately 7.2 million shares of Class A
Common Stock, and is equivalent to the number of shares available to the Junior
Note holders had they exercised their conversion privileges under the terms of
the Junior Notes.  Also, the Company can
effectively terminate the payment of dividends by calling the PIK Preferred
Shares.

Moreover, at the dates of exchange, the conditions precedent for the
Company to call the PIK Preferred Shares had been met, and the Company had the right
to call such shares at the then-market price of the Class A Common Stock.

Accordingly, considering the changes in terms of the instruments
(identified in items 1 through 6 above) taken as a whole, the fact that the
value of the conversion privileges to common were identical in both
instruments, and that the Company had the right to call the PIK Preferred
Shares and redeem such PIK Preferred Shares through the issuance of Class A
Common Stock, the Company considers the fair value of the PIK Preferred Shares
to approximate that of the Junior Notes.

With respect to the interest differential, the Company does not believe
it would be appropriate to simply discount the differential between the yield
on the new PIK Preferred Shares and the coupon rate on the Junior Notes to
arrive at a fair value differential, due to qualitative factors, which are very
difficult to quantify in terms of value.
Rather, the intent of the parties was clearly to exchange the Junior
Notes for a new instrument that would satisfy the underwriting requirements of
the senior lenders while preserving the value of the Junior Note holders’
position.  Accordingly, the Company
reiterates its view that the value of the PIK Preferred Shares issued in the exchange
was substantially identical to that of the Junior Notes.

4

Discussion of Referenced Literature

Accounting Principles Board Opinion 26: Early
Extinguishment of Debt (APB 26 or Opinion 26)

Paragraph 20 of APB 26 states that the:

  “…difference
between the reacquisition price and the net carrying amount of the extinguished
debt should be recognized currently in income of the period of extinguishment
as losses or gains and identified as a separate item.”

This guidance is further supplemented by the footnote
reference to paragraph 20 that states: “Moreover, extinguishment transactions
between related entities may be in essence capital transactions.”

As indicated in the “Background” portion of
this response, the majority shareholder of the Company directed the Company’s
actions and actively participated in the debt restructuring and
recapitalization of the Company.  The
exchange of the Junior Notes for PIK Preferred Shares was a requirement of the
new senior lenders and was a major component of that recapitalization.  The recapitalization enabled the Company to
experience significant cash interest savings for the benefit of all the common shareholders
while, concurrently, the majority shareholder agreed to, among other things,
forego the cash interest option under the Junior Notes for accreting PIK
dividends.

As also indicated in the “Background” section of
this response, the negotiation of the exchange was directed by the Company’s
majority shareholder and another shareholder, which related parties, on a
combined basis, controlled approximately 93% of the aggregate principle amount
of the Junior Notes and approximately 76% of the Company’s common stock, on an
if-converted basis and which related parties after the exchange owned
approximately 93% of the PIK Preferred Shares.

Additionally, as the Junior Notes and the PIK Preferred Shares have the
identical conversion option, exercise of such option, under either instrument,
would have resulted in the issuance of the same number of Class A Common Shares
and, accordingly, conversion under the PIK Preferred Shares would result in the
same dilution to common shareholders as conversion under the Junior Notes.

In the exchange of the Junior Notes for the
PIK Preferred Shares, the fair value of the conversion privileges under the
Junior Notes immediately prior to the exchange is identical to the fair value
of the conversion privileges under the PIK Preferred Shares immediately
subsequent to the exchange.  Accordingly,
there has been no incremental consideration given, or performance received, in
the exchange.  Furthermore, since
conversion privileges contained in the Junior Notes and the PIK Preferred Shares
were both deep in-the-money at the dates of exchange (the spread between the
market price of the Class A Common Stock on the dates of exchange and the
conversion price, applied to the number of common shares available for issuance
under the conversion options contained in the Junior Note instrument and the
PIK

5

Preferred instrument,
approximated $50.8 million), the fair value of both instruments at the dates of
exchange were substantially all embodied in the underlying value of the Class A
Common Stock, which was identical for both instruments.

Moreover, at the dates of exchange, the conditions precedent for the
Company to call the PIK Preferred Shares had been met, and the Company had the right
to call such shares at the then-market price of the Class A Common Stock.

The fact that the Junior Notes were deep in-the-money at the dates of
exchange makes it difficult to determine the amount of cash that the Company
would have had to pay to extinguish the Junior Notes.  Had they been called by the Company for their
carrying value, which cash call would violate the terms of the Restructured
Credit Facility, the Junior Note holders would have in all likelihood converted
their holdings to Class A Common Stock of the Company, based on the
conversion terms included in the Junior Notes.

The Company believes that this exchange is,
as referenced in the footnote to paragraph 20, in essence, a capital
transaction and, accordingly, no gain or loss should be recognized.  Additionally, as no securities or assets have
been given up in excess of those that the Company was previously obligated to
issue or pay, the effects of this capital transaction should also not result in
any other deduction from income applicable to common shareholders.

SFAS No. 84 Considerations (“SFAS 84”)

SFAS 84 addresses those situations in which a
debtor induces the conversion of convertible debt by offering additional securities or other consideration, as a “sweetener”,
to debt holders for the purpose of obtaining a prompt conversion of the
convertible debt to equity securities.
Paragraph 2 to SFAS 84 provides that the scope of the Statement applies only
to conversions that both (a) occur as a result of changed conversion
privileges that are exercisable for only a limited amount of time and (b) include
the issuance of all the equity securities issuable pursuant to conversion
privileges included in the terms of the d