<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the thirteen week period ended September 29, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________________ to _____________________
Commission File No. 1-11368
PARAGON TRADE BRANDS, INC.
(Exact name of registrant as specified in its charter)
Delaware 91-1554663
----------------------------------- ------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
180 Technology Parkway
Norcross, Georgia 30092
----------------------------------
(Address of principal executive offices)
(770) 300-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
The number of shares outstanding of the registrant's common stock was 12,316,293
shares ($.01 par value) as of September 29, 1996.
Page 1 of 30
Exhibit Index on Page 28
-1-
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
Index to Form 10-Q Filing
For the Thirteen Week Period Ended September 29, 1996
<TABLE>
<CAPTION>
Page No.
----------------
Part I. Financial Information
Item 1. Financial Statements
<S> <C> <C>
Consolidated Statements of Operations 3
Consolidated Balance Sheets 4
Consolidated Statements of Changes in Shareholders'
Equity 5
Consolidated Statements of Cash Flows 6
Notes to Financial Statements 7-18
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 19-24
Part II. Other Information
Item 1. Legal Proceedings 25
Item 2. Changes in Securities (not applicable)
Item 3. Defaults upon Senior Securities (not applicable)
Item 4. Submission of Matters to a Vote of Security Holders (not applicable)
Item 5. Other Information (not applicable)
Item 6. Exhibits and Reports on Form 8-K 26
Signature Page 27
Exhibit Index 28
Exhibits 29-30
</TABLE>
-2-
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollar amounts in thousands except per share data)
(Note 1)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
------------------------------ ------------------------------
Sept. 29, 1996 Sept. 24, 1995 Sept. 29,1996 Sept. 24, 1995
-------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Sales, net of discounts and allowances $151,549 $131,444 $439,480 $385,288
Cost of sales........................... 111,620 108,896 337,452 330,028
-------------- -------------- ------------- --------------
Gross profit............................ 39,929 22,548 102,028 55,260
Selling, general and administrative
expense............................ 22,796 17,409 73,968 51,366
Research and development expense........ 811 699 2,648 2,529
Restructuring........................... - - - 8,059
-------------- -------------- ------------- --------------
Operating profit (loss)................. 16,322 4,440 25,412 (6,694)
Equity in earnings of unconsolidated
subsidiary............................. 304 - 445 -
Other income (expense), net............. 100 (182) (1,527) (4,726)
-------------- --------------- -------------- ---------------
Earnings (loss) before income taxes..... 16,726 4,258 24,330 (11,420)
Provision for (benefit from) income
taxes.............................. 6,240 1,620 9,076 (4,339)
-------------- --------------- -------------- ---------------
Net earnings (loss)..................... $ 10,486 $ 2,638 $ 15,254 $ (7,081)
============== ============== ============== ================
Primary earnings (loss) per common
share................................ $ $.87 $ .22 $ 1.27 $ (.60)
============== ============== ============== ================
Dividends paid.......................... $ - $ - $ - $ -
============== ============== ============== ================
</TABLE>
See Accompanying Notes to Financial Statements.
-3-
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
(Note 1)
<TABLE>
<CAPTION>
September 29, 1996 December 31, 1995
---------------------- ----------------------
Assets
<S> <C> <C>
Cash and short-term investments............ $ 1,174 $ 11,890
Receivables................................ 50,916 43,704
Inventories................................ 46,349 40,939
Current portion of deferred income taxes... 14,326 7,980
Prepaid expenses........................... 933 629
--------------------- ---------------------
Total current assets...................... 113,698 105,142
Property and equipment..................... 95,186 94,038
Construction in progress................... 39,566 15,562
Assets held for sale....................... 19,505 17,756
Patents and trademarks..................... 802 827
Deferred income taxes...................... 29,703 28,284
Investment in unconsolidated subsidiary, at cost 16,531 -
Investment in and advances to unconsolidated
subsidiary, at equity..................... 9,782 -
Goodwill................................... 37,139 -
Other assets............................... 1,082 5,055
--------------------- ---------------------
Total assets............................ $362,994 $266,664
===================== =====================
Liabilities and Shareholders' Equity
Short-term borrowings...................... $ 17,119 $ 1,760
Checks issued but not cleared.............. 8,099 10,232
Accounts payable........................... 37,037 37,291
Accrued liabilities........................ 39,713 25,481
--------------------- ---------------------
Total current liabilities................. 101,968 74,764
Long-term debt............................. 40,000 -
Deferred income taxes...................... 2,380 -
Other long-term liabilities................ 324 211
--------------------- ---------------------
Total liabilities.......................... 144,672 74,975
Commitments and contingencies (Notes 9 and 13)
Shareholders' equity:
Preferred stock: authorized 10,000,000 shares,
no shares issued, $.01 par value.......... - -
Common stock: authorized 25,000,000 shares,
issued 12,316,293 and 11,851,504,
$.01 par value............................ 123 119
Capital surplus............................ 143,356 132,722
Foreign currency translation adjustment.... (628) (661)
Retained earnings.......................... 78,472 63,219
Less: Treasury stock, 197,175 and 245,322
shares, at cost........................... (3,001) (3,710)
--------------------- ---------------------
Total shareholders' equity................ 218,322 191,689
--------------------- ---------------------
Total liabilities and shareholders' equity $362,994 $266,664
===================== =====================
See Accompanying Notes to Financial Statements.
</TABLE>
-4-
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollar amounts in thousands except share data)
(Note 1)
<TABLE>
<CAPTION>
Foreign
Common Capital Currency Retained Treasury
Stock Surplus Translation Earnings Stock
---------- ------------ -------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995....... $119 $132,722 $(661) $63,219 $(3,710)
Net earnings - - - 15,254 -
Issue common stock 4 10,634 - - 709
Translation adjustment - - 33 - -
---------- ------------- ------------- ------------ ------------
BALANCE, September 29, 1996....... $123 $143,356 $(628) $78,472 $(3,001)
========== ============= ============= ============ ============
</TABLE>
See Accompanying Notes to Financial Statements.
-5-
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
(Note 1)
<TABLE>
<CAPTION>
Thirty-Nine Weeks Ended
---------------------------------------
September 29, 1996 September 24, 1995
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss).................. $ 15,254 $ (7,081)
Non-cash charges (benefits) to
earnings:
Depreciation and amortization.... 29,937 27,736
Deferred income taxes............ (5,384) (1,889)
Write-down of assets............. 2 4,853
Changes in working capital:
Accounts receivable............... (7,212) 746
Inventories and prepaid expenses.. 6,374 (5,077)
Accounts payable.................. (254) 1,781
Checks issued but not cleared..... (2,133) (2,237)
Accrued liabilities............... 13,048 6,183
Other................................ (18) (811)
------------------ ------------------
Net cash provided by operating
activities................... 49,614 24,204
------------------ ------------------
Cash flows from investing activities:
Expenditures for property and
equipment........................... (36,390) (10,245)
Proceeds from sale of property and
equipment........................ 55 71
Acquire assets - Pope & Talbot
Disposable Diaper Business.......... (57,249) -
Investment in Grupo P.I. Mabe, S.A.
de C.V.............................. (15,908) -
Investment in and advances to
unconsolidated subsidiary, at equity (5,347) -
Other................................ (850) 240
------------------ ------------------
Net cash used by investing
activities..................... (115,689) (9,934)
------------------ ------------------
Cash flows from financing activities:
Net increase (decrease) in
short-term borrowings........... 15,359 (4,048)
Proceeds from U.S. bank
credit facility.................. 55,000 2,000
Repayments of U.S. bank
credit facility.................. (15,000) (8,000)
Purchases of treasury
stock............................ - (3,823)
Net cash provided (used) by ------------------ ------------------
financing activities............. 55,359 (13,871)
------------------ ------------------
Net increase (decrease) in cash...... (10,716) 399
Cash at beginning of period.......... 11,890 2,684
------------------ ------------------
Cash at end of period................ $ 1,174 $ 3,083
================== ==================
Cash paid (refunded) during the
period for:
Interest, net of amounts capitalized $ 1,972 $ 440
================== ==================
Income taxes....................... $ 13,970 $ (847)
================== ==================
</TABLE>
See Accompanying Notes to Financial Statements.
-6-
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
For the Thirteen and Thirty-Nine Week Periods Ended September 29, 1996 and
September 24, 1995
(Dollar amounts in thousands except share and per share figures)
Note 1: Basis of Presentation and Summary of Significant Accounting and
Reporting Policies
Basis of Presentation
The consolidated financial statements include the accounts of Paragon Trade
Brands, Inc. ("Paragon" or the "Company") and its wholly-owned subsidiaries,
which include Paragon Trade Brands (Canada) Inc. and Paragon Trade Brands FSC,
Inc. All significant intercompany transactions and accounts are eliminated.
The accompanying consolidated balance sheet as of December 31, 1995, which has
been derived from audited financial statements, and the unaudited interim
consolidated financial statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
note disclosures normally included in annual financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to those rules and regulations, although the Company believes
that the disclosures made are adequate to make the information presented not
misleading. It is suggested that these consolidated financial statements be
read in conjunction with the financial statements and the notes thereto included
in the Company's latest annual report on Form 10-K.
In the opinion of management, all adjustments necessary for a fair statement of
the results of the interim periods have been included. All such interim
adjustments, with the exception of the costs associated with the Pope & Talbot,
Inc. ("P&T") integration and the relocation of the Company's corporate offices
to Atlanta, are of a normal recurring nature. The charge for the P&T
integration and relocation of the corporate offices for the thirty-nine week
period ending September 29, 1996 was $9.5 million, net of the effect of income
taxes. The results of operations for the thirty-nine week period ending
September 29, 1996 should not be regarded as necessarily indicative of the
results that may be expected for the full year.
Cash and Short-Term Investments
For purposes of cash flow reporting, short-term investments with original
maturities of 90 days or less are considered as cash equivalents. Short-term
investments are stated at cost, which approximates market.
Inventories
Inventories are stated at the lower of cost or market. Cost includes labor,
materials and production overhead. The last-in, first-out (LIFO) method is used
to cost domestic pulp and finished goods inventories. The first-in, first-out
(FIFO) method is used to cost all other inventories.
Investments
The Company completed the purchase of a 15% interest in Grupo P.I. Mabe, S.A. de
C.V. ("Mabesa") and related companies on January 26, 1996. The investment is
carried at cost in the accompanying balance sheet.
In addition to acquiring an interest in Mabesa on January 26, 1996, the Company
also acquired a 49% interest in Paragon-Mabesa International, Inc. ("PMI"). The
investment is accounted for using the equity method.
There were no dividend distributions to the Company from Mabesa or PMI for the
thirty-nine week period ended September 29, 1996.
-7-
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)
Goodwill
On February 8, 1996, the Company completed the purchase of substantially all of
the assets of the P&T disposable diaper business. Goodwill represents the
excess of the cost of these assets over their estimated fair value at the date
of acquisition and is amortized on a straight line basis over 20 years.
Management continually evaluates whether events or circumstances have occurred
that indicate the remaining useful life of goodwill may warrant revision or that
the remaining balance of goodwill may not be realizable. Amortization expense
for the thirteen and the thirty-nine week periods ended September 29, 1996 was
$481 and $1,255, respectively.
Fair Value of Financial Instruments
The Company estimates that the fair values of its financial instruments
approximate their carrying values. As such, no separate disclosure of fair
value is made.
Foreign Currency
Non-U.S. assets and liabilities are translated into U.S. dollars using period-
end exchange rates. Revenues and expenses are translated at average rates
during the period.
Plant Closure
On April 16, 1996, the Company announced plans to close the Oneonta, New York
facility acquired from P&T by the end of June 1996. Due to increased demand,
the closure was delayed until the end of 1996.
Noncash Transactions
During the thirty-nine week periods ended September 29, 1996 and September 24,
1995, the Company issued 107,304 and 228,283 shares of Common Stock,
respectively, to key management and employees through the Company's 1995
Incentive Compensation Plan, its Profit Sharing and Savings Plan, and its 1996
Non-Officer Employee Incentive Compensation Plan (see Note 8). The balance
sheet effect of issuing these shares of Common Stock was a decrease in accrued
liabilities of $3,116 and $2,980, respectively, and an increase in equity by an
equal amount without the use of cash.
New Accounting Standards
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets to be Disposed Of,"
effective for fiscal years beginning after December 15, 1995. The adoption of
this statement, as of January 1, 1996, did not have a significant impact on the
Company's financial position or results of operations.
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation," to be effective for fiscal years
beginning after December 15, 1995. This pronouncement sets forth certain pro
forma disclosures for companies electing to continue to measure compensation
cost using APB Opinion No. 25, "Accounting for Stock Issued to Employees." The
Company elected to continue following the provisions of APB Opinion No. 25. The
required disclosures will be included in the Company's annual consolidated
financial statements beginning with the fiscal year that ends December 29, 1996.
-8-
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)
<TABLE>
<CAPTION>
Note 2: Receivables
Receivables consist of the following:
September 29, 1996 December 31, 1995
------------------ -----------------
<S> <C> <C>
Accounts receivable-trade............ $53,595 $42,645
Other receivables.................... 5,977 6,925
------------------ -----------------
59,572 49,570
Less: allowance for doubtful accounts (8,656) (5,866)
------------------ -----------------
Net receivables $50,916 $43,704
================== =================
Note 3: Inventories
Inventories consist of the following:
September 29, 1996 December 31, 1995
------------------ -----------------
<S> <C> <C>
LIFO:
Raw materials - pulp................ $ 325 $ 4,345
Finished goods...................... 21,578 15,032
FIFO:
Raw materials - other............... 9,927 5,984
Materials and supplies.............. 21,724 20,629
------------------- ----------------
53,554 45,990
Reserve for excess and
obsolete items.............. (7,205) (5,051)
------------------- ----------------
Net inventories $46,349 $40,939
=================== ================
</TABLE>
-9-
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)
Note 4: Income Taxes
Provision for (benefit from) income taxes includes the following:
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
-------------------------------- --------------------------------
Sept. 29, 1996 Sept. 24, 1995 Sept. 29, 1996 Sept. 24, 1995
-------------- -------------- -------------- --------------
Federal:
<S> <C> <C> <C> <C>
Current............... $ 3,462 $ 402 $11,427 $(1,913)
Deferred.............. 956 735 (6,343) (1,619)
------------- ------------- ------------- -------------
4,418 1,137 5,084 (3,532)
------------- ------------- ------------- -------------
State:
Current............... 901 93 2,275 (553)
Deferred.............. (92) 155 (1,422) (232)
------------- ------------- ------------- -------------
809 248 853 (785)
------------- ------------- ------------- -------------
Foreign:
Current............... (1,367) (8) 759 -
Deferred.............. 2,380 243 2,380 (22)
------------- ------------- ------------- -------------
1,013 235 3,139 (22)
------------ ------------- ------------- -------------
$ 6,240 $1,620 $ 9,076 (4,339)
============= ============= ============= =============
</TABLE>
Income tax provisions for interim periods are based on the current best estimate
of the effective tax rate expected to be applicable for the full year. The
effective tax rate reflects anticipated tax credits, foreign taxes and other tax
planning alternatives.
For the thirteen and thirty-nine week periods ended September 29, 1996 and
September 24, 1995, provision for (benefit from) income taxes as a percentage of
earnings before income taxes is greater than the 35 percent federal statutory
rate due principally to the effect of state income taxes.
Net deferred income taxes are attributable to the following temporary
differences:
<TABLE>
<CAPTION>
September 29, 1996 December 31, 1995
------------------ -----------------
<S> <C> <C>
Intangible assets............................ $(2,380) $ -
----------------- ----------------
Deferred tax liabilities..................... (2,380) -
----------------- ----------------
Depreciation/amortization.................... 13,649 10,833
Goodwill..................................... 11,036 12,062
Reserves not currently deductible............ 14,278 7,725
Package design costs......................... 1,904 2,154
Land......................................... 1,760 1,791
All other, net............................... 1,738 2,058
----------------- ----------------
Deferred tax assets ...................... 44,365 36,623
Deferred tax assets valuation ----------------- ----------------
allowance................................. (336) (359)
----------------- ----------------
Total deferred taxes, net $41,649 $36,264
================= ================
</TABLE>
-10-
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)
Note 5: Property and Equipment
Property and equipment, at cost, are as follows:
<TABLE>
<CAPTION>
September 29, 1996 December 31, 1995
-------------------- -------------------
<S> <C> <C>
Land............................. $ 5,199 $ 4,218
Buildings and improvements....... 32,120 30,557
Machinery and equipment.......... 205,557 172,836
-------------------- -------------------
242,876 207,611
Less: allowance for depreciation (147,690) (113,573)
-------------------- -------------------
Net property and equipment....... $ 95,186 $ 94,038
==================== ===================
</TABLE>
Assets held for sale include the following as a result of the closure of the La
Puente, California facility (see Note 12) and the closure of the disposable
diaper operations acquired from P&T in Eau Claire, Wisconsin; Porterville,
California; and Shenandoah, Georgia, as announced February 8, 1996:
<TABLE>
<CAPTION>
September 29, 1996 December 31, 1995
-------------------- -------------------
<S> <C> <C>
La Puente plant closure.......... $14,885 $17,756
Closure of P&T disposable diaper
operations................ 4,620 -
-------------------- -------------------
Net property and equipment....... $19,505 $17,756
==================== ===================
Note 6: Accrued Liabilities
<CAPTION>
Accrued liabilities are as follows:
September 29, 1996 December 31, 1995
-------------------- -------------------
<S> <C> <C>
Payroll-wages and salaries,
incentive awards, retirement,
vacation and severance pay... $11,849 $ 9,838
Coupons outstanding.............. 11,013 6,458
Restructuring (Note 12).......... 143 767
Income taxes payable - current... 498 271
Other............................ 16,210 8,147
-------------------- -------------------
$39,713 $25,481
==================== ===================
</TABLE>
Note 7: Net Earnings (Loss) Per Common Share
Net earnings (loss) per common share is based on the weighted average number of
common and common equivalent shares outstanding for each of the thirteen and
thirty-nine week periods ending September 29, 1996 and September 24, 1995. For
the thirteen and thirty-nine week periods ended September 29, 1996, the
calculation assumes that shares issued to P&T, pursuant to the purchase of P&T's
disposable diaper business assets, were issued and outstanding as of February 8,
1996.
-11-
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
---------------------------------- ----------------------------------
Sept. 29, 1996 Sept. 24, 1995 Sept. 29, 1996 Sept. 24, 1995
---------------- ---------------- ---------------- ----------------
Primary
- -------
<S> <C> <C> <C> <C>
Net earnings (loss).......... $10,486 $ 2,638 $15,254 $(7,081)
Weighted average common and
common equivalent shares
outstanding (000's).......... 12,116 11,737 12,028 11,765
Net earnings (loss) per
common share................. $ .87 $ .22 $ 1.27 $ (.60)
Fully diluted
- -------------
Net earnings (loss).......... $10,486 $ 2,638 $15,254 $(7,081)
Weighted average common and
common equivalent shares
outstanding (000's).......... 12,251 11,763 12,164 11,787
Net earnings (loss) per
common share fully diluted... $ .86 $ .22 $ 1.25 $ (.60)
</TABLE>
This calculation is submitted in accordance with Regulation S-K item 601(b)(11),
although not required by footnote 2 to paragraph 14 of APB Opinion No. 15,
because it results in dilution of less than 3 percent.
Note 8: Long-Term Incentive and Profit Sharing Plans, Including 401(k)
In February 1996, the Company adopted its 1996 Non-Officer Employee Incentive
Compensation Plan ("1996 Plan"). The 1996 Plan is administered by an
Administrative Committee appointed by the Board of Directors. The Company's
1995 Incentive Compensation Plan ("1995 Plan") is administered by the
Compensation Committee of the Board of Directors. The 1995 Plan and the 1996
Plan are designed to link management rewards with the long-term interests of
Paragon's shareholders. Currently, long-term incentives are provided through
grants of stock options, Stock Appreciation Rights ("SARs") and restricted
stock. Stock options granted to key management and directors are granted at
amounts that approximate market value at the date of grant and, as a result,
there is no compensation expense related to them. In 1996, restricted shares of
common stock were issued at a discounted value in lieu of all of the cash
bonuses for the Chief Executive Officer, President and Chief Financial Officer
for services in 1995. Restricted shares of common stock were granted to key
employees, not eligible for stock options or SAR grants, as part of the
corporate headquarters relocation to Atlanta. In 1995, restricted shares of
common stock were issued at a discounted value in lieu of a portion of the
management bonuses for services in 1994. Compensation expense is recorded with
respect to the discounted amount. The restricted stock is non-transferable for
two years. During the thirty-nine week period ended September 29, 1996, there
were 30,000 shares of common stock issued under the 1996 plan as restricted
shares. During the thirty-nine week periods ended September 29, 1996 and
September 24, 1995, there were 29,157 and 78,744 shares of common stock,
respectively, issued under the 1995 Plan as restricted and bonus shares.
-12-
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)
With regard to stock options granted to key management and directors during the
thirteen week periods ended September 29, 1996 and September 24, 1995, the
following is provided:
<TABLE>
<CAPTION>
September 29, 1996 September 24, 1995
--------------------- --------------------
<S> <C> <C>
During the period:
Options granted - 32,000
Options exercised 250 -
Options canceled 750 36,998
At end of period:
Options outstanding 758,932 683,178
Options exercisable 380,736 233,057
Average price per share:
Options granted - $ 15.15
Options outstanding 20.88 20.49
Options exercisable 21.41 22.27
</TABLE>
The following summarizes transactions involving SARs granted to key management
during the thirteen week period ended September 29, 1996:
<TABLE>
<CAPTION>
<S> <C>
During the period:
SARs granted 20,000
SARs exercised -
At end of period:
SARs outstanding 121,330
SARs exercisable -
Average price per share:
SARs granted $ 21.50
SARs exercisable -
</TABLE>
To further encourage the ownership of common stock by all employees, the Company
maintains the Paragon Retirement Investment Management Plan ("PRISM"), formerly
known as the Profit Sharing and Savings Plan, that offers both profit sharing
and 401(k) features. During the thirty-nine week periods ended September 29,
1996 and September 24, 1995, the Company's profit sharing contributions
consisted of 29,634 and 118,387 shares of common stock for fiscal years ending
December 31, 1995 and December 25, 1994, respectively. The Company's 401(k)
contributions consisted of 18,513 and 31,152 shares of common stock for the
thirteen week periods ended September 29, 1996 and September 24, 1995,
respectively. The 1996 401(k) contributions also included cash.
-13-
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)
Note 9: Legal Proceedings
Procter & Gamble Company ("P&G") filed a claim in the District Court for the
District of Delaware that the Company's disposable baby diaper products infringe
two of P&G's inner-leg gather patents. The lawsuit seeks injunctive relief,
lost profit and royalty damages, treble damages and attorneys' fees and costs.
The Company has denied liability under the patents and has counterclaimed for
patent infringement and violation of antitrust laws by P&G. In March 1996, the
District Court granted P&G's motion for summary judgment to dismiss the
antitrust counterclaim. The Company intends to appeal the District Court's
decision at the appropriate time. In September 1996, P&G filed two motions for
summary judgment with respect to the Company's patent infringement counterclaim.
The Company filed its response to P&G's motions and P&G has replied to the
Company's response. The Company intends to vigorously defend its claim.
Discovery is proceeding, and trial has been scheduled for February 1997. Legal
fees and costs for this litigation will be significant. If P&G were to prevail
on its claims, award of all or a substantial amount of the damages asserted by
P&G could have a material adverse effect on the Company's financial condition
and its results of operations. Based on the advice of patent counsel, the
Company believes that P&G's claims are not well founded.
On October 26, 1995, Kimberly-Clark Corporation ("K-C") filed a lawsuit against
the Company in U.S. District Court in Dallas, Texas, alleging infringement by
the Company's disposable baby diaper products of two K-C patents relating to
inner-leg gathers. The lawsuit seeks injunctive relief, royalty damages, treble
damages and attorneys' fees and costs. The Company has denied liability under
the patents and has counterclaimed for patent infringement and violation of
antitrust laws by K-C. Discovery is proceeding and trial has been scheduled for
October 1997. In October 1996, K-C filed a motion for summary judgment with
respect to the Company's antitrust counterclaim. The Company intends to
vigorously defend its claim. Legal fees and costs in connection with this
litigation will be significant. Should K-C prevail on its claims, award of all
or a substantial portion of the damages asserted by K-C could have a material
adverse effect on the Company's financial condition and its results of
operation. Based on the advice of patent counsel, the Company has taken the
position that the patent coverage claimed by K-C is not applicable to the
Company's products.
In July 1995, 12 former employees of the Company filed claims in the Court of
Common Pleas, Butler County, Pennsylvania alleging discriminatory and/or
wrongful discharge related to their termination in the July 1993 restructure of
the Company's Harmony, Pennsylvania plant. Similar charges are pending before
the Equal Employment Opportunities Commission, but related National Labor
Relations Board cases have been dismissed. The complaints have been removed to
federal court. Discovery has concluded and the Company filed a motion for
summary judgment in September 1996.
On September 27, 1996, the Company filed a declaratory judgment action against
P&G in U.S. District Court in Atlanta seeking a ruling from the court that
certain patents owned by P&G are invalid, unenforceable and not infringed by the
Company's feminine care products. P&G has responded asserting infringement by
the Company's feminine care products of two of the patents listed in the
Company's complaint. Discovery has not yet commenced. Based on the advice of
patent counsel, the Company believes that its feminine care products do not
infringe any valid claim of such patents.
The Company is also a party to other legal activities generally incidental to
its activities. Although the final outcome of any legal proceeding or dispute
is subject to a great many variables and cannot be predicted with any degree of
certainty, the Company presently believes that the ultimate liability resulting
from any or all legal proceedings or disputes to which it is a party, except for
the P&G and K-C matters discussed above, will not have a material adverse effect
on its financial condition or results of operations.
-14-
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)
Note 10: Bank Credit Facilities
At September 29, 1996, the Company maintained a $150,000 revolving credit
facility with a group of nine financial institutions available for a term of
five years. At September 29, 1996, borrowings under this credit facility
totaled $40,000. There were no borrowings against this facility at December 31,
1995. Interest is at fixed or floating rates based on the financial
institution's cost of funds. The Company is also required to maintain certain
financial covenants under the agreement.
At September 29, 1996, Paragon Trade Brands (Canada) Inc. maintained a $5,000
Cdn revolving term credit facility, guaranteed by the Company, available through
October 1997. Paragon Trade Brands (Canada) Inc. had borrowings of $219 under
this credit facility at September 29, 1996 and $1,760 outstanding at December
31, 1995. Borrowings under this facility are reflected as short-term debt in
the accompanying balance sheets. Interest is at fixed or floating rates based
on the financial institution's cost of funds.
The Company also has access to short-term lines of credit on an uncommitted
basis with several major banks. At September 29, 1996, the Company had
approximately $50,000 in uncommitted lines of credit. There were no borrowings
against these lines of credit at December 31, 1995. At September 29, 1996, the
Company had borrowings against these lines of $16,900. Borrowings under these
lines are reflected as short-term debt in the accompanying balance sheet.
For the thirty-nine week periods ended September 29, 1996 and September 24,
1995, interest expense, net of amounts capitalized, was $1,964 and $703,
respectively. For the thirty-nine week periods ended September 29, 1996 and
September 24, 1995, capitalized interest totaled $938 and $218, respectively.
Interest expense includes interest on borrowings, bank commitment fees, and
amortization of deferred financing costs.
Note 11: Financial Instruments - Foreign Currency Forward Contracts
The Company occasionally enters into forward contracts to hedge certain foreign
currency denominated purchase commitments for periods consistent with the terms
of the underlying transactions. While the forward contracts affect the
Company's results of operations, they do so only in connection with the
underlying transactions. Gains and losses on these contracts are deferred and
offset exchange gains and losses on the transactions hedged. At September 29,
1996 and September 24, 1995, the Company did not have any forward contracts
outstanding.
Note 12: Restructuring
On January 24, 1995, the Company announced it was restructuring its operations
by closing its diaper manufacturing facility in La Puente, California and
reallocating diaper production to its remaining four facilities. The La Puente
plant was closed at the end of February 1995 and resulted in severing the
employment of approximately 310 employees. At September 29, 1996, the building
facility and related production equipment are reflected as assets held for sale
in the accompanying balance sheets. For the thirty-nine week period ended
September 24, 1995, the consolidated statement of operations includes $8,059 of
pretax restructuring charges as a result of the plant closure. These charges
did not include gains, if any, from the sale of assets. At September 29, 1996,
$143 of this amount remained in liabilities.
The following is provided with respect to amounts accrued and costs incurred for
the year ended December 31, 1995 and the thirty-nine week period ended September
29, 1996:
-15-
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)
<TABLE>
<CAPTION>
Amount Costs Incurred Balance
Accrued Sept. 29, 1996 Adjustments Remaining
------- -------------- ----------- ---------
<S> <C> <C> <C> <C>
Employee severance and
related items $3,359 $3,678 $(319) $ -
Equipment disposal and
write-downs 2,600 2,602 (2) -
Facility disposal and
carrying costs 1,850 1,707 - 143
All other 250 164 86 -
------- -------------- ----------- ---------
$8,059 $8,151 $(235) $143
======= ============== =========== =========
</TABLE>
At September 29, 1996, the restructuring plan was substantially complete. Any
remaining costs will be primarily associated with, and dependent upon, the sale
of the building.
Note 13: Commitments
As of September 29, 1996, commitments for capital expenditures are $13,322.
Note 14: Unaudited Pro forma Consolidated Statement of Operations
The following unaudited pro forma consolidated statement of operations has been
prepared to reflect the February 8, 1996 purchase of substantially all of the
assets of P&T's disposable diaper business. The purchase price was
approximately $63.5 million, consisting of cash of $55.3 million and 387,800
shares of the Company's common stock. The Company also announced plans on
February 8, 1996 to close the disposable diaper operations acquired from P&T in
Eau Claire, Wisconsin; Porterville, California; and Shenandoah, Georgia. The
building in Porterville, as well as much of the diaper making equipment at the
closed facilities, will be held for sale. Some of the diaper making equipment
will be utilized in the Company's remaining locations.
The pro forma consolidated statement of operations below has been prepared as if
the transaction occurred December 26, 1994. Pro forma adjustments reflect the
amortization of goodwill, interest on borrowings, reductions in depreciation
from the closed facilities and the income tax effects of these adjustments.
-16-
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)
<TABLE>
<CAPTION>
Thirty-Nine Weeks Ended September 24, 1995
---------------------------------------------------------
Pro Forma Adjustments
--------------------------
Paragon P&T Adjustments Pro-forma
---------- ---------- -------------- -----------------
<S> <C> <C> <C> <C>
Net sales............................ $ 385,288 $ 112,963 $ $ 498,251
Cost of sales........................ 330,028 112,875 (4,350)/3/ 438,553
---------- ---------- -------------- -----------------
Gross profit......................... 55,260 88 4,350 59,698
Selling, general and administrative
expense......................... 51,366 12,179 1,440 /1/ 64,985
Research and development expense..... 2,529 2,529
Restructuring........................ 8,059 8,059
---------- ---------- -------------- -----------------
Operating (loss) profit.............. (6,694) (12,091) 2,910 (15,875)
Other expense, net................... 4,726 3,000 /2/ 7,726
---------- ---------- -------------- -----------------
Loss before income taxes............. (11,420) (12,091) (90) (23,601)
Benefit from income taxes............ (4,339) (4,595) (34)/4/ (8,968)
---------- ---------- -------------- -----------------
Net loss............................. $ (7,081) $ (7,496) $ (56) $ (14,633)/5/
========== ========== ============== =================
Net loss per common share $ (.60) $ (1.20)/5/
Weighted average common shares
outstanding..................... 11,765 12,153 /6/
</TABLE>
- ----------------------
/1/ To reflect the amortization of goodwill over a 20 year period.
/2/ To reflect interest on borrowings under the Company's revolving credit
facility. The interest is based on the first half 1995 average 12 month
LIBOR rate plus .75%.
/3/ To reflect the reduction in depreciation from the closed facilities.
/4/ To provide for the federal, state, and local tax effects of the pro forma
adjustments described in Notes (1), (2), and (3) above.
/5/ The pro forma net loss and pro forma net loss per share do not include the
effects of one-time charges taken in the first quarter of 1996 for
integration of P&T's disposable diaper business into the Company's existing
business. These charges, totaling $6,500 pre-tax, include expenses for
packaging conversion, removal and movement of equipment, establishment of
bad debt reserves consistent with current Company estimates, and write-
downs of duplicate equipment owned by the Company prior to the purchase
transaction.
/6/ Assumes that the 387,800 shares issued for the purchase were issued on
December 26, 1994.
-17-
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)
The pro forma consolidated earnings statement below has been prepared as if the
transaction occurred January 1, 1996. Pro forma adjustments reflect increased
sales, costs, goodwill amortization, interest on borrowings and the income tax
effects of these adjustments for the period of January 1, 1996 to February 7,
1996.
<TABLE>
<CAPTION>
Thirty-Nine Weeks Ended September 29, 1996
------------------------------------------
Paragon Adjustments Pro-forma
------------ ------------- -------------
<S> <C> <C> <C>
Net sales........................... $ 439,480 $ 11,391/1/ $ 450,871
Cost of sales....................... 337,452 8,718/1/ 346,170
----------- ----------- -----------
Gross profit........................ 102,028 2,673 104,701
Selling, general and administrative
expense............................ 73,968 445/2/ 74,413
Research and development expense.... 2,648 2,648
Restructuring....................... - -
----------- ----------- -----------
Operating profit (loss)............. 25,412 2,228 27,640
Equity in Earnings of Sub........... 445 445
Other expense, net.................. 1,527 398/3/ 1,925
------------ ----------- -----------
Earnings (loss) before income taxes. 24,330 1,830 26,160
Provision for (benefit from) income
taxes.............................. 9,076 690/4/ 9,766
------------ ----------- -----------
Net Earnings (loss)................. $ 15,254 $ 1,140 $ 16,394
============ =========== ===========
Net Earnings (loss) per common share $ 1.27 $ 1.36
Weighted average common shares
outstanding..................... 12,028 12,071/5
</TABLE>
/1/ To reflect incremental sales and related costs, including overhead and
depreciation, for the period of January 1, 1996 to February 7, 1996.
/2/ To reflect the incremental costs of goodwill amortization and sales
commissions during the period of January 1, 1996 to February 7, 1996.
Goodwill is being amortized over a 20 year period.
/3/ To reflect interest on borrowings under the Company's revolving credit
facility. The interest is based on the first quarter 1996 average 12 month
LIBOR rate plus .75% for the period of January 1, 1996 to February 7, 1996.
/4/ To provide for the federal, state and local tax effects of the pro forma
adjustments described in Notes (1), (2), and (3).
/5/ Assumes that the 387,800 shares issued for the purchase were issued on
January 1, 1996.
-18-
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
Thirteen Weeks ended September 29, 1996 Compared to Thirteen Weeks ended
September 24, 1995
Results of Operations
Net earnings were $10.5 million in the third quarter of 1996 compared with net
earnings of $2.6 million for the third quarter of 1995. Included in the results
for the third quarter of 1996 were charges of $1.2 million, net of the effect of
income taxes, associated with the costs to relocate the corporate headquarters
to Atlanta. Excluding these charges, net income for the third quarter of 1996
was $11.7 million compared to net earnings for the third quarter of 1995 of $2.6
million. The increased profits in the third quarter of 1996, excluding these
charges, was primarily due to higher volumes as a result of the P&T acquisition,
lower costs, including raw material costs, and a more favorable product mix
compared to the third quarter of 1995. The volume increase and lower costs were
partially offset by an increase in trade merchandising expenses and an increase
in costs associated with the feminine care business startup.
Net earnings per share in the third quarter of 1996 were $.87 compared to net
earnings per share of $.22 in the third quarter of 1995. Net earnings per share
were $.97 in the third quarter of 1996, excluding the relocation charges.
Revenues
Net sales were $151.5 million for the third quarter of 1996, a 15.3 percent
increase from the $131.4 million reported in the third quarter of 1995. Unit
sales increased 15.0 percent to 976 million diapers in the third quarter of 1996
from 849 million diapers in the third quarter of 1995. The primary reason for
the increase in unit volume was the P&T acquisition in February 1996. Volume
was also favorably impacted by increased trade merchandising activity during the
third quarter of 1996. Volume, however, would have been lower in the third
quarter of 1996 compared to 1995 excluding the effects of the P&T acquisition.
Volume has been negatively impacted by increased discounts and promotional
allowances by branded and value segment manufacturers. Volume has been further
negatively impacted by product improvements added by the branded manufacturers.
The Company intends to continue to improve its products during the remainder of
1996 and 1997 to compete more effectively with the premium national brands, but
volume may be negatively impacted until the improvements are added.
Average sales prices during the third quarter of 1996 decreased approximately
3.5 percent compared to the third quarter of 1995, excluding the effect of a
favorable product mix. The decrease in prices was primarily due to the
increased discounts and promotional allowances discussed above. The negative
trend in prices is expected to continue throughout the remainder of 1996 and
into 1997. As discussed below, prices, as well as volume, are expected to be
negatively impacted by the items described in "Risks and Uncertainties."
Net sales in Canada increased significantly during the third quarter of 1996
compared to the same period of 1995. The increase was primarily due to
increased unit volume. Volume was favorably impacted by the P&T acquisition as
well as the addition of new customers during late 1995. Net prices in Canada
were favorably impacted by price increases implemented in the second half of
1995. Prices in Canada, however, started to decrease late in the third quarter
and are expected to continue this trend during the remainder of 1996 and into
1997.
Cost of Sales
Cost of sales for the third quarter of 1996 was $111.6 million compared to
$108.9 million for the third quarter of 1995, a 2.5 percent increase. As a
percentage of net sales, cost of sales was 73.7 percent in 1996 compared to 82.8
percent in the comparable 1995 period. The lower costs were principally caused
by lower raw material prices, especially pulp, super absorbent polymer and
packaging. These lower costs were offset, in part, by higher costs associated
with the favorable product mix, increases in outside warehousing costs and costs
associated with the feminine care business startup.
-19-
<PAGE>
Pulp prices were approximately 42 percent lower in the third quarter of 1996
compared to the same period in 1995. Pulp prices, which had increased during
1995, decreased significantly during the first three quarters of 1996 and are
expected to be at lower levels than 1995 during the fourth quarter of 1996.
Pulp prices, however, have recently started to rise and are expected to increase
in the fourth quarter and in 1997. Super absorbent polymer costs dropped
significantly in the first three quarters of 1996 compared to the same period in
1995 and are expected to stay at similar levels during the fourth quarter of
1996 but increase in 1997. Packaging costs, including bags and corrugated
boxes, were also lower during the third quarter of 1996 compared to the third
quarter of 1995. Other raw material prices were generally at similar price
levels in the third quarter of 1996 compared to 1995.
Labor costs were at similar levels in the third quarter of 1996 compared to the
same period of 1995. Plant overhead costs were higher in the third quarter of
1996 compared to the same period of 1995. The increase in costs was primarily
due to increased outside warehousing costs and the costs of the feminine care
business startup.
Depreciation costs were at slightly higher levels in the third quarter of 1996
compared to the same period of 1995. The increase is primarily due to the
acceleration of depreciation on equipment in anticipation of new product
innovations.
Selling, General and Administrative Expense
SG&A expenses were $22.8 million for the third quarter of 1996 compared to
$17.4 million for the third quarter of 1995. As a percentage of net sales,
these expenses were 15.0 percent in 1996 compared to 13.2 percent for the same
period in 1995. Included in the third quarter of 1996 were charges of $1.6
million primarily for the corporate headquarters relocation to Atlanta. These
costs included the costs for relocation of personnel and equipment to Atlanta.
Remaining relocation expenses are expected to be included in the fourth quarter
and should be lower than previous quarters this year.
Excluding charges for the relocation to Atlanta, SG&A expenses were $21.6
million in the third quarter of 1996 compared to $17.4 million in the third
quarter of 1995. As a percentage of net sales these expenses, excluding the
relocation charges, were 14.0 percent in the third quarter of 1996 compared to
13.2 percent in the third quarter of 1995. The increase in costs is
attributable to a number of factors. The most significant item was an increase
in trade merchandising expenses. The increase in trade merchandising expenses
was a result of consumer coupon activity during the third quarter of 1996 that
had a favorable impact on volume. The increased coupon activity was in response
to product introductions and promotional activity by branded and value segment
competitors. These costs are expected to remain at levels higher than 1995
during the fourth quarter of 1996.
Costs were also higher due to the feminine care business startup and the
amortization of goodwill associated with the P&T acquisition. Legal costs,
which had been lower than 1995 levels in the first half of 1996, increased in
the third quarter due to activity associated with the P&G and K-C litigation.
Other cost increases were associated with incentive-based accruals and higher
information technology costs. These cost increases were partially offset by
lower packaging related costs. Legal expenses are expected to increase during
the fourth quarter due to the P&G and K-C litigation matters. The Company also
expects to increase its expenditures in the information technology in the fourth
quarter of 1996 and throughout 1997.
Research and Development
Research and development expenses remained relatively flat at $.8 million for
the third quarter of 1996 compared to $.7 million for the third quarter of 1995.
Other Income/Expense
Other income was $.1 million in the third quarter of 1996 compared to other
expense of $.2 million in the third quarter of 1995. Excluding capitalization
of interest of $.9 million in the third quarter of 1996, other expense increased
due to higher interest costs associated with borrowings to complete the P&T
acquisition and the acquisition of a minority share of Mabesa.
-20-
<PAGE>
Thirty-Nine Weeks ended September 29, 1996 Compared to Thirty-Nine Weeks ended
September 24, 1995
Results of Operations
Net earnings were $15.3 million during the first three quarters of 1996,
compared with a net loss of $7.1 million for the first three quarters of 1995.
Included in the results for the first three quarters of 1996 were charges of
$9.6 million, net of the effect of income taxes, associated with integrating the
P&T acquisition and costs to relocate the corporate headquarters to Atlanta.
Included in the results for the first three quarters of 1995 were costs related
to the closure of the Company's La Puente, California plant, corporate
headquarters staff reductions, and other charges totaling $8.9 million, net of
the effects of income taxes. Excluding these restructuring and other charges,
net income for the first three quarters of 1996 was $24.8 million compared to
net earnings for the first three quarters of 1995 of $1.7 million. The profit
in the first three quarters of 1996, excluding the P&T integration and Atlanta
relocation charges, was primarily due to higher volumes as a result of the P&T
acquisition, lower raw material costs and a more favorable product mix compared
to the first three quarters of 1995. These improvements in volumes, costs and
mix were partially offset by a substantial increase in trade merchandising
expenses.
Net earnings per share in the first three quarters of 1996 were $1.27 compared
to a net loss per share of $.60 in the first three quarters of 1995. Net
earnings per share were $2.06 in the first three quarters of 1996 compared to
net earnings per share of $.15 in the first three quarters of 1995, excluding
the restructuring and other charges for both periods.
Revenues
Net sales were $439.5 million for the first three quarters of 1996, a 14.1
percent increase from the $385.3 million reported for the first three quarters
of 1995. Unit sales increased 12.9 percent to 2,835 million diapers in the
first three quarters of 1996 from 2,512 million diapers in the first three
quarters of 1995. As discussed above, the volume increase is due to the P&T
acquisition. Excluding the impact of the P&T acquisition, volume would have
been lower during the first three quarters of 1996 compared to 1995. As
discussed above, volume has been negatively impacted by increased discounts,
promotional allowances and product improvements added by the branded and value
segment manufacturers. The Company intends to continue to improve its products
during 1996 and 1997 to compete more effectively with the premium national
brands, but volume may remain negatively impacted until the improvements are
added.
Average sales prices during the first three quarters of 1996 decreased
approximately 3.0 percent compared to the first three quarters of 1995,
excluding the effect of a favorable mix. The decrease in prices was primarily
due to increased discounts and promotional allowances in response to price
reductions and promotions by branded and value segment manufacturers. The
negative trend in prices is expected to continue during the fourth quarter of
1996 and into 1997. As discussed below, prices, as well as volume, are expected
to be negatively impacted by the items described in "Risks and Uncertainties."
Net sales in Canada increased significantly during the first three quarters of
1996 compared to the same period of 1995. The increase was primarily due to
increased unit volume. Volume was favorably impacted by the P&T acquisition as
well as the addition of new customers during late 1995. Net prices in Canada
were favorably impacted by price increases implemented in the second half of
1995.
Cost of Sales
Cost of sales for the first three quarters of 1996 was $337.5 million compared
to $330.0 million for the first three quarters of 1995, a 2.3 percent increase.
As a percentage of net sales, cost of sales was 76.8 percent in 1996 compared to
85.7 percent in the comparable 1995 period. The first three quarters of 1996
included $4.2 million in charges for costs associated with the integration of
the P&T acquisition into the Company's existing business. These charges
included accelerated depreciation of certain existing assets, costs of equipment
dismantling and movement, and relocation of personnel. The first three quarters
of 1995 included $.6 million of costs associated with the
La Puente plant closure and asset write-downs. As a percentage of net sales,
excluding these charges, cost of sales was 75.9 percent in the first three
quarters of 1996 compared to 85.5 percent in the first three quarters of 1995.
As discussed above, the lower costs were primarily a result of lower raw
material costs including pulp, super absorbent polymer and packaging.
-21-
<PAGE>
Pulp prices were approximately 30 percent lower in the first three quarters of
1996 compared to the same period in 1995. Pulp prices, which had increased
during 1995, decreased significantly during the first three quarters of 1996 and
are expected to be at lower levels than 1995 during the fourth quarter of 1996.
As discussed above, pulp prices have started to rise and are expected to
increase in the fourth quarter and in 1997. Super absorbent polymer costs
dropped significantly in the first three quarters of 1996 compared to the same
period in 1995 and are expected to stay at similar levels during the fourth
quarter of 1996, but increase in 1997. Packaging costs were also lower in the
first three quarters of 1996 compared to the same period of 1995. Other raw
material prices were generally at similar price levels in the first three
quarters of 1996 compared to 1995.
Labor costs decreased compared to the same period last year. The decrease in
costs was primarily due to manufacturing efficiency gains and from the La Puente
plant closure at the end of February 1995.
Plant overhead costs, excluding charges, were higher during the first three
quarters of 1996 compared to the first three quarters of 1995. Costs were lower
in the first three quarters of 1996 due to the La Puente plant closure at the
end of February 1995, but were offset by increases in plant overhead from the
P&T manufacturing facilities acquired in February 1996 that remained in
production and costs related to the feminine care business startup. During the
first three quarters of 1996, $2.6 million of charges were incurred to support
the integration of the P&T acquisition into the Company's existing business.
These charges were primarily related to the cost of equipment movement and
employee relocation discussed above.
Depreciation costs, excluding the charges discussed below, were at slightly
higher levels in the first three quarters of 1996 compared to the same period of
1995. Costs were lower primarily due to the closure of the La Puente facility
at the end of February 1995. These costs were partially offset by increased
costs due to acquired P&T facilities in February 1996 that remained open.
During the first three quarters of 1996, $1.6 million of charges were incurred
due to the accelerated depreciation of existing Company equipment that will be
replaced by equipment acquired from P&T.
Selling, General and Administrative Expense
SG&A expenses were $74.0 million for the first three quarters of 1996 compared
to $51.4 million for the first three quarters of 1995. As a percentage of net
sales, these expenses were 16.8 percent in 1996 compared to 13.3 percent for the
same period in 1995. Included in the first three quarters of 1996 were charges
of $11.2 million. These charges included $8.5 million for the corporate
headquarters relocation to Atlanta, including severance, outplacement and
relocation expenses. The charges also included $2.7 million in costs associated
with the integration of the P&T acquisition. These integration costs were
primarily for customer packaging conversion and to establish bad debt reserves
consistent with Company practices. Included in the first three quarters of 1995
were charges of $2.2 million for the corporate staff reduction and acceleration
of software amortization.
Excluding these charges, SG&A expenses were $62.8 million in the first three
quarters of 1996 compared to $49.2 million in the first three quarters of 1995.
As a percentage of net sales these expenses, excluding the charges discussed
above, were 14.3 percent in the first three quarters of 1996 compared to 12.8
percent in the first three quarters of 1995. As discussed above, the increase
in expenses is primarily attributable to an increase in trade merchandising
expenses and the costs associated with the feminine care business. The increase
in trade merchandising expenses was a result of the increased volume due to the
P&T acquisition and increased promotions discussed above and is expected to
continue at similar levels throughout 1996. Expenses were also higher due to
the amortization of goodwill associated with the P&T acquisition. These
increases were partially offset by a decrease in legal expenses. Legal
expenses, however, are expected to increase during the remainder of 1996 due to
the P&G and K-C patent litigation matters. SG&A expenses during the fourth
quarter of 1996 will include the remaining costs associated with the move of the
corporate headquarters to Atlanta, which are expected to be lower than previous
quarters this year.
-22-
<PAGE>
Research and Development
Research and development ("R&D") expenses remained flat at $2.6 million for the
first three quarters of 1996 compared to $2.5 million for the same period of
1995. R&D expenses increased due to the feminine care business but were offset
by lower activity during the third quarters of 1996 due to the relocation of the
corporate headquarters. Costs were also lower in 1996 due to the consolidation
of the R&D operation into the corporate headquarters in the first quarter of
1995.
Other Expense
Other expense was $1.5 million in the first three quarters of 1996 compared to
$4.7 million in the first three quarters of 1995. The first three quarters of
1995 included $4.2 million in charges due to the cancellation of capital
projects and legal settlement costs. Excluding these charges in the first three
quarters of 1995, the increase in other expense is due to higher interest costs
associated with borrowings to complete the P&T acquisition and the acquisition
of a minority share of Mabesa, which have been partially offset by capitalized
interest.
Restructuring
1995 results included a $8.1 million restructuring charge for the closure of
the La Puente, California diaper making facility. The purpose of the closure
was to lower costs to help offset competitive pricing pressures from the
national branded manufacturers and rising material prices. The closure of the
facility was expected to generate approximately $17 million per year in savings
that were partially offset by increased costs of freight and distribution. The
closure of the plant occurred at the end of February 1995.
The restructuring plan included reallocation of production to the remaining
diaper facilities, and the sale of the diaper making equipment and manufacturing
facility. As of September 29, 1996, the equipment is being held for sale to PMI
and the building is under contract for sale.
The primary elements of the restructuring charge were: $3.4 million in
severance and employee related charges for approximately 310 employees; $2.6
million in asset write-downs, primarily diaper making equipment, to estimated
fair market value and removal costs; and $1.9 million in anticipated carrying
costs for the facility. The charges did not include anticipated gains, if any,
from the sale of assets.
The restructuring charge included $2.2 million in non-cash charges due to asset
write-offs. The remaining $5.9 million has been paid. Any further expenses
will be related to holding the building until the sale is complete.
Liquidity and Capital Resources
During the first three quarters of 1996, cash flow from earnings and non-cash
charges to earnings was $32.6 million compared to $18.8 million for the same
period in 1995. The increase in cash flow was primarily due to improved
operating results.
During the first three quarters of 1996, working capital, exclusive of cash,
short-term borrowings, and current deferred taxes decreased $11.9 million. The
primary sources of cash were an increase in accrued liabilities and a decrease
in inventories. The primary use of cash was an increase in accounts receivable.
The increase in receivables reflects an increase in overall business activity
due to the P&T acquisition. The decrease in inventories partially reflects the
reduction from elevated levels of pulp inventories due to a special purchase
made during the fourth quarter of 1995. Also, despite inventory level increases
due to the P&T acquisition, cash flows were favorably impacted as inventories
were approximately $11 million less than at the date of the P&T acquisition.
These decreases have been partially offset by increased inventories due to the
feminine care business startup. Finished good inventories also increased during
the third quarter to meet increased demand and in anticipation of product
rollouts. These inventories are expected to decrease during the fourth quarter.
The increase in accrued liabilities primarily reflects the reserves provided
for the P&T integration and Atlanta relocation in the first three quarters of
1996 and increases in coupon-related liabilities. These liabilities are
expected to decrease during the remainder of 1996 as the liabilities are paid.
Cash flow was also favorably impacted by $3.1 million as the Company issued
treasury stock to settle certain payroll liabilities.
-23-
<PAGE>
The cash produced from operations supported capital expenditures of $36.4
million in the first three quarters of 1996 compared to $10.2 million in the
same period of 1995. The expenditures were primarily in support of the feminine
care business and the purchase of a new corporate headquarters in Atlanta.
Capital expenditures to support the feminine care business will be approximately
$25 million in 1996.
As discussed in several places above, the Company incurred a total of $15.4
million in pre-tax charges related to the Pope & Talbot integration and
relocation to Atlanta during the first three quarters of 1996. Of this $15.4
million, $3.4 million were non-cash charges. Of the remaining $12.0 million,
$8.2 million was paid during the first three quarters of 1996. The remaining
expenses, as well as remaining costs to relocate the corporate headquarters to
Atlanta, are expected to be paid from internally generated funds or from
available credit facilities.
The Company has access to an unsecured, revolving bank credit facility of $150
million. The Company has an additional CDN $5 million revolving credit facility
available in Canada. In addition to the revolving credit facilities, the
Company has $50 million in uncommitted lines of credit with various banks.
Borrowings against these lines bear interest at rates that vary with each
lending bank's base and LIBOR interest rates. As of the end of the third
quarter there was $40.0 million in debt outstanding against the credit
facilities and $16.9 million in debt outstanding under the uncommitted lines of
credit. The increase in debt under credit facilities and uncommitted lines of
credit since the beginning of the year was used primarily to fund the P&T
acquisition and the purchase of a 15 percent interest in Mabesa. The Company
had $1.2 million in cash and short-term investments at the end of the third
quarter.
The Company may utilize the credit facilities for expenditures to support
initiatives to enter the feminine sanitary business, adult incontinence
business, other business ventures and to repurchase stock. The current credit
facilities in combination with internally generated funds are anticipated to be
adequate to finance these needs.
Risks and Uncertainties
P&G and K-C have recently announced changes to their product and packaging
offerings. The Company is currently evaluating options in response to these
changes. Although the final response is unknown, the Company expects to incur
costs associated with new product roll-outs including manufacturing
inefficiencies, packaging design and packaging obsolescence. These costs will
be incurred during the fourth quarter of 1996 and the first three quarters of
1997. It is also possible that selling price and volume will be negatively
impacted as the branded manufacturers roll-out and promote their new product and
packaging offerings.
ICD Confab, Inc., a privately-held manufacturer of feminine sanitary products,
recently announced plans to enter the private label baby diaper business.
Although the overall impacts are hard to predict, it is likely that the
additional competition could lead to lower volumes and selling prices.
Forward-Looking Statements
When used in this discussion the words "believes," "anticipates," "expects" and
similar expressions are intended to identify forward looking statements. Such
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from those projected. Factors which could
affect the Company's financial results, including but not limited to: increasing
raw material prices; new product introductions by competitors; increased price
and promotion pressure from competitors; new competitors in the market; and
patent litigation, are described in the preceding paragraphs and in the
Company's latest Annual Report on Form 10-K filed with the Securities and
Exchange Commission. Readers are cautioned not to place undue reliance on the
forward-looking statements, which speak only as of the date hereof.
-24-
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Procter & Gamble Company ("P&G") filed a claim in the District Court for the
District of Delaware that the Company's disposable baby diaper products infringe
two of P&G's inner-leg gather patents. The lawsuit seeks injunctive relief,
lost profit and royalty damages, treble damages and attorneys' fees and costs.
The Company has denied liability under the patents and has counterclaimed for
patent infringement and violation of antitrust laws by P&G. In March 1996, the
District Court granted P&G's motion for summary judgment to dismiss the
antitrust counterclaim. The Company intends to appeal the District Court's
decision at the appropriate time. In September 1996, P&G filed two motions for
summary judgment with respect to the Company's patent infringement counterclaim.
The Company filed its response to P&G's motions and P&G has replied to the
Company's response. The Company intends to vigorously defend its claim.
Discovery is proceeding, and trial has been scheduled for February 1997. Legal
fees and costs for this litigation will be significant. If P&G were to prevail
on its claims, award of all or a substantial amount of the damages asserted by
P&G could have a material adverse effect on the Company's financial condition
and its results of operations. Based on the advice of patent counsel, the
Company believes that P&G's claims are not well founded.
On October 26, 1995, Kimberly-Clark Corporation ("K-C") filed a lawsuit against
the Company in U.S. District Court in Dallas, Texas, alleging infringement by
the Company's disposable baby diaper products of two K-C patents relating to
inner-leg gathers. The lawsuit seeks injunctive relief, royalty damages, treble
damages and attorneys' fees and costs. The Company has denied liability under
the patents and has counterclaimed for patent infringement and violation of
antitrust laws by K-C. Discovery is proceeding and trial has been scheduled for
October 1997. In October 1996, K-C filed a motion for summary judgment with
respect to the Company's antitrust counterclaim. The Company intends to
vigorously defend its claim. Legal fees and costs in connection with this
litigation will be significant. Should K-C prevail on its claims, award of all
or a substantial portion of the damages asserted by K-C could have a material
adverse effect on the Company's financial condition and its results of
operation. Based on the advice of patent counsel, the Company has taken the
position that the patent coverage claimed by K-C is not applicable to the
Company's products.
In July 1995, 12 former employees of the Company filed claims in the Court of
Common Pleas, Butler County, Pennsylvania alleging discriminatory and/or
wrongful discharge related to their termination in the July 1993 restructure of
the Company's Harmony, Pennsylvania plant. Similar charges are pending before
the Equal Employment Opportunities Commission, but related National Labor
Relations Board cases have been dismissed. The complaints have been removed to
federal court. Discovery has concluded and the Company filed a motion for
summary judgment in September 1996.
On September 27, 1996, the Company filed a declaratory judgment action against
P&G in U.S. District Court in Atlanta seeking a ruling from the court that
certain patents owned by P&G are invalid, unenforceable and not infringed by the
Company's feminine care products. P&G has responded asserting infringement by
the Company's feminine care products of two of the patents listed in the
Company's complaint. Discovery has not yet commenced. Based on the advice of
patent counsel, the Company believes that its feminine care products do not
infringe any valid claim of such patents.
The Company is also a party to other legal activities generally incidental to
its activities. Although the final outcome of any legal proceeding or dispute
is subject to a great many variables and cannot be predicted with any degree of
certainty, the Company presently believes that the ultimate liability resulting
from any or all legal proceedings or disputes to which it is a party, except for
the P&G and K-C matters discussed above, will not have a material adverse effect
on its financial condition or results of operations.
-25-
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 11 Computation of Per Share Earnings
(See Note 7 to Notes to Financial Statements)
Exhibit 27.1 Financial Data Schedule
Exhibit 27.2 Financial Data Schedule - Restated
(b) Reports on Form 8-K.
No reports on Form 8-K were filed on behalf of the Company during
the thirteen week period ended September 29, 1996.
-26-
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PARAGON TRADE BRANDS, INC.
By /s/ Alan J. Cyron
------------------
Alan J. Cyron
Chief Financial Officer
November 12, 1996
-27-
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Page
Number Document
- ---------- ------------------------------------------------ ------
<S> <C> <C>
11 Computation of Per Share Earnings 12
(See Note 7 to Notes to Financial Statements)
27.1 Financial Data Schedule 29
27.2 Financial Data Schedule - Restated 30
</TABLE>
-28-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10Q FOR
THE QUARTER ENDED SEPTEMBER 29, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-29-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-29-1996
<CASH> 1,174
<SECURITIES> 0
<RECEIVABLES> 59,572
<ALLOWANCES> 8,656
<INVENTORY> 46,349
<CURRENT-ASSETS> 113,698
<PP&E> 242,876
<DEPRECIATION> 147,690
<TOTAL-ASSETS> 362,994
<CURRENT-LIABILITIES> 101,968
<BONDS> 40,000
0
0
<COMMON> 123
<OTHER-SE> 218,199
<TOTAL-LIABILITY-AND-EQUITY> 362,994
<SALES> 439,480
<TOTAL-REVENUES> 439,480
<CGS> 337,452
<TOTAL-COSTS> 337,452
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 24,330
<INCOME-TAX> 9,076
<INCOME-CONTINUING> 15,254
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,254
<EPS-PRIMARY> 1.27
<EPS-DILUTED> 1.25
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10Q FOR
THE QUARTER ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-29-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 6,242
<SECURITIES> 0
<RECEIVABLES> 62,012
<ALLOWANCES> 7,758
<INVENTORY> 36,673
<CURRENT-ASSETS> 112,581
<PP&E> 226,957
<DEPRECIATION> 133,517
<TOTAL-ASSETS> 359,451
<CURRENT-LIABILITIES> 101,651
<BONDS> 50,000
0
0
<COMMON> 123
<OTHER-SE> 207,359
<TOTAL-LIABILITY-AND-EQUITY> 359,451
<SALES> 287,931
<TOTAL-REVENUES> 287,931
<CGS> 225,832
<TOTAL-COSTS> 278,841
<OTHER-EXPENSES> 81
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,708
<INCOME-PRETAX> 7,604
<INCOME-TAX> 2,836
<INCOME-CONTINUING> 4,768
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,768
<EPS-PRIMARY> .40
<EPS-DILUTED> .40
</TABLE>
