SecProbe.io

CORRESP
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August 9, 2005

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:

Polymer Group, Inc.
(“PGI”) hereby submits this response to comments received from the Staff of the
Securities and Exchange Commission (the “Commission” or “Staff”) 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”).   The Staff delivered its original comments by
letter dated May 18, 2005 from George F. Ohsiek, Jr., Branch Chief,
to James L. Schaeffer, Chief Executive Officer of PGI, to which 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”).  The Staff provided additional comments by
letter dated June 23, 2005 addressed to Mr. Schaeffer and signed by Mr. Ohsiek
(the “Second Comment Letter”), to which PGI responded by letter dated July 18,
2005 from Mr. Harmon (the “Second Response Letter”).  On August 1, 2005, Andrew Blume and Robyn
Manuel of the Division of Corporation Finance, representatives of Ernst &
Young LLP and the undersigned participated in a telephone conference call
discussion of the Staff’s comments and PGI’s prior responses (the “Conference
Call”).  This letter supplements our
Original Response Letter and Second Response Letter and responds to and
clarifies certain accounting topics discussed with the Staff in the Conference
Call.

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.

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

Note 11.
Debt, page 61

1.                                       The Company has continued
to evaluate the accounting for the exchanges of its Junior Notes for PIK
Preferred Shares and has also considered the impact of those items discussed
with the Staff on Monday, August 1, 2005.
The following information is intended to supplement the Company’s prior responses
and to provide further clarification for the Staff in evaluating the Company’s
accounting for the exchanges.

Mandatory Redemption Price

At the dates of exchange of the Junior Notes
for the PIK Preferred Shares, the mandatory redemption price of the two
instruments are identical; each amounting to approximately $52.7 million.  There was no increase in the redemption price
under the PIK Preferred Shares at the dates of exchange over that which already
existed under the Junior Notes.  To
clarify this point, the third paragraph of Note 15 to the Company’s Form 10-K
should be modified to state “On June 30, 2012, the Company must redeem all
of the PIK Preferred Shares then outstanding at a price equal to $1,000 per
share plus any other accrued and unpaid dividends whether or not declared,
which amount will be payable by the Company (“Mandatory Redemption Price”) ….”.  This clarification will be made in the
Company’s next filing.

Accounting for the exchange of Junior Notes
to PIK Preferred Shares

As a result of the discussions with the
Staff, and further consideration of the applicable literature, the Company reaffirms
its assessment that, as presented in its Second Response Letter, the exchanges
were, in substance, capital transactions directed by the Company’s majority
shareholder and involving other common shareholders, which related parties
represented approximately 93% of the value of the Junior Notes and PIK
Preferred Shares exchanged, and approximately 76% of the Company’s common
stock, on an if-converted basis, and that no gain or loss, or other deduction
from income applicable to common shareholders, should have been recognized as a
result of the exchange.

The following are the journal entries that
the Company believes are appropriate to account for the substance of the
exchanges of the Junior Notes for the PIK Preferred Shares, and the relevant
accounting literature supporting the accounting:

Journal
Entry # 1 (in millions), at dates of exchange

  Dr. Junior Notes

  $

  52.7

  Dr. APIC

  $

  50.8

  Cr. PIK Preferred Shares (Mezzanine Equity)

  $

  103.5

2

This entry reflects the exchange of the
Junior Notes for the PIK Preferred Shares, and is based on the guidance
provided by Accounting Principles Board Opinion (“APB”) No. 26, including
the footnote reference in paragraph 20 of that Opinion, which footnote provides
that “…extinguishment transactions between related parties may be in essence
capital transactions”.  Additionally,
this accounting is consistent with the provisions of Emerging Issues Task Force
(“EITF”) Topic D-98 (“D-98”) which provides that the initial carrying amount of
redeemable preferred stock should be at its fair value at the date of issue. As
further explained in the Second Response Letter, as the exchange was between
related parties, including the majority shareholder, it has been accounted for
as a capital transaction and, accordingly, the difference between the
reacquisition price, represented by the estimated fair value of the PIK
Preferred Shares, and the carrying amount of the Junior Notes surrendered, has
been charged to APIC as opposed to being recognized currently in income.

As further evidence of the fact that no gain
or loss, or other deduction from income applicable to common shareholders,
should be recognized, there were no securities or assets given up in excess of
those that the Company was previously obligated to issue or pay (the conversion
price of $7.29 per share was identical in both instruments).  The fair value of the Junior Notes
surrendered was approximately equal to the fair value of the PIK Preferred
Shares received.  The changed features on
the PIK Preferred Shares (higher interest rate, longer maturity, lower priority
of claim and loss of collateral/guarantee) were intended to be fair value
neutral on a net basis.

Based on the consensus reached in EITF 00-27,
Issue #1, the effective conversion price, based on the proceeds received for or
allocated to the convertible instrument should be used to compute the intrinsic
value, if any, of the embedded conversion option.  The estimated fair value of the PIK Preferred
Shares at the date of exchange is considered as the “proceeds received” under
EITF 00-27, Issue #1 and such amount approximated the then-fair value of the
underlying common shares into which the PIK Preferred Shares could be converted.
Therefore, the effective conversion price at the date of exchange would
approximate the then-fair value of the common stock and, accordingly, there was
no beneficial conversion feature at the date of exchange.

Journal
Entry # 2 (in millions), at dates of exchange

  Dr. Preferred Shares (Mezzanine
  Equity)

  $

  50.8

  Cr. APIC

  $

  50.8

Consistent with the guidance provided in D-98
and Accounting Series Release (“ASR”) 268, the PIK Preferred Shares should
be classified outside of permanent shareholders’ equity as of the date of the
exchange (as reflected in journal entry #1 above).  At that point, the carrying value of the PIK
Preferred Shares exceeded the mandatory redemption amount. Therefore, journal entry
#2 reflects the necessary adjustment of the carrying value of the PIK Preferred
Shares to their mandatory redemption amount at that time.

3

This journal entry, when considered with
journal entry #1 above, results in the reporting of the PIK Preferred Shares at
their required mandatory redemption amount ($52.7 million), as mezzanine
equity, which equates to the cash obligation that the Company would incur to “optionally
redeem or call” the PIK Preferred Shares at the date of exchange.  It should be noted that at the date of
exchange, the PIK Preferred Shares were immediately callable by the Company,
based on the terms of the PIK Preferred Share instrument.

The effects of this entry are consistent with
the intent of ASR 268, as well as D-98 and Staff Accounting Bulletin No. 64
(“SAB 64”).  EITF Topic D-98 and SAB 64
provide that the initial carrying amount of redeemable preferred stock should
be its fair value at the date of issue.
Subsequent accounting is dependent on the instrument’s redemption
provisions.  For instruments that are
currently redeemable (callable) the security should be adjusted to its
redemption amount at each balance sheet date.
Ordinarily, increases in the carrying amount of the redeemable security
are affected by charges against retained earnings that are treated for
calculations of earnings per share as dividends on non-redeemable preferred
stock (i.e., a reduction of earnings applicable to common stockholders). In
this case, the carrying value of the security must be decreased to mandatory
redemption amount at the balance sheet date.
Journal entry #2 effects this provision of the relevant literature by
crediting APIC, rather than retained earnings.
The Company does not believe any increases in net income available to
common shareholders are appropriate in these circumstances. There was a
specific event, a transaction with a shareholder, which triggered an accounting
entry that required fair value.  The
transaction did not represent any transfer of additional fair value to the debt
holder/shareholder, and likewise, the Company did not pay a “premium” for the
instrument.  Under APB 26, the Company
did not recognize a loss on the transaction with the shareholder, and it is
counter-intuitive (and the Company believes not representationally faithful)
that it then generate future income available to common shareholders from the
transaction through subsequent adjustment to the amount recognized in
mezzanine, other than for the periodic increases in the redemption amount
represented by dividends accrued on the PIK Preferred Shares.  The Company has also concluded that the PIK
Preferred Shares classified in mezzanine should be immediately adjusted to
their mandatory redemption amount, rather than amortizing the difference over
the remaining term of the PIK Preferred Shares.

The net effects of the journal entries
described above have been reflected in the financial statements included in the
Company’s Form 10-K.  The PIK
Preferred Shares at January 1, 2005 are reported at the mandatory
redemption amount of $58.3 million, which includes the aforementioned $52.7
million, plus $5.6 million of accrued and unpaid dividends through such date.  Accordingly, the Company does not believe any
adjustments need to be made to the balance sheet or the statement of operations
as of and for the year ended January 1, 2005 to reflect the exchange of
the Junior Notes for PIK Preferred Shares, nor is any revision required to the
presentation of dividends on the PIK Preferred Shares in arriving at income
available to common shareholders for the year then ended.

4

Accounting for dividends on PIK Preferred
Shares

Subsequent to discussions with the Staff on August 1,
2005, the Company focused on the provisions of EITF 00-27, Issue 10 (“Issue 10”),
with respect to the accounting for the accrual and payment of dividends on its
PIK Preferred Shares.

As disclosed in the Form 10-K, the
dividends on the PIK Preferred Shares accrue at an annual rate of 16%, are
payable semi-annually in arrears on each January 1st and July 1st,
and are payable at the option of the Company, (i) through the issuance of
additional shares of PIK Preferred Stock; (ii) in cash; or (iii) in a
combination thereof.  The dividends are
cumulative and accrue (whether or not earned or declared), and the mandatory
redemption price specifically includes “other accrued and unpaid dividends
whether or not declared”.  Therefore, consistent
with the provisions of the PIK Preferred instrument, the Company has reflected
the accretion of dividends, at the stated rate of 16%, in its Statements of
Operations for the fiscal year ended January 1, 2005 as a reduction of
income applicable to common shareholders.
This accounting is consistent with the provisions of Issue 10 as, at the
end of the 2004 year, the decision to make the payment of the dividends in cash,
additional shares, or a combination thereof had not been determined or declared
by the Company’s Board of Directors.

On January 14, 2005, the Company’s Board
of Directors declared that dividends accrued on the PIK Preferred Shares from
the dates of issuance through January 1, 2005, in the amount of
approximately $5.6 million, would be paid in the form of additional PIK
Preferred Shares.  On such date, the last
sale price of the Company’s common stock on the Over-the-Counter Bulletin Board
was $18.50 per share.

The consensus reached in Issue 10 is that for
dividends paid in-kind on certain instruments, the fair value of the underlying
issuer stock at the declaration date should be used to measure the intrinsic
value of the conversion option embedded in the PIK instrument.

As the PIK Preferred instrument provides that
the Company can exercise its discretion as to whether the dividends will be
settled in cash or by the issuance of additional PIK Preferred Shares, the
Company believes it to be appropriate to record the value, if any, of such additional
shares at such time as the Company’s Board of Directors declares that such
accrued dividends will be paid in the form of additional PIK Preferred Shares,
rather than in cash.  Additionally, in
computing the value of the dividend paid-in-kind as a result of the
declaration, the Company will consider the date of such declaration by the
Board of Directors as the Commitment Date. (In applying the guidance in Issue
10 of EITF Consensus 00-27, we note that if the payment of interest or
dividends in-kind is discretionary, the Commitment Date for the convertible
instruments issued as paid-in-kind interest or dividends is the date that the
interest or the dividends are paid-in-kind, and the fair value of the
underlying issuer stock at the recognition or declaration date should be used
to measure the intrinsic value of the conversion option embedded in the
paid-in-kind instruments.  However,
because in this circumstance the Company believes that the PIK dividend must be
measured at the PIK instruments’ fair value on the date of the commitment to
pay in-kind, there is no beneficial conversion feature to account for
separately.)

5

Accordingly, the Company believes that the
dividend paid-in-kind on PIK Preferred Shares should have been recorded at the
value of the PIK Preferred Shares as of the dividend declaration date, reduced
by the amount of dividends previously accrued at the stated dividend rate.  Based on the fact that the PIK conversion
price is deep in-the-money, and that the Company’s Board of Directors has
resolved to exercise its right to redeem the PIK Preferred Shares (see “Recent
Actions by the Company’s Board of Directors” below), the fair value of the
underlying common shares has been considered to approximate the fair value of
the PIK Preferred Shares.

Using the last sale price of the Company’s
common stock on January 14, 2005 (the declaration date) of $18.50 per
share, the fair value of the 5,540 PIK Preferred Shares issued in lieu of cash
payment was approximately $14.1 million (5,540 PIK Preferred Shares x  $1,000 face value per PIK Preferred Share /  $7.29 conversion price = 759,945 common
equivalent shares, x  common stock price
of $18.50 per share = $14,059,000) which exceeded the amount accrued, based
upon the stated rate of $5.6 million, by approximately $8.5 million.  Recording the additional $8.5 million
dividend at the date of declaration would also result in a decrease in income
applicable to common shareholders and retained earnings with a corresponding
inc