<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 June 30, 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 12,112,236
shares ($.01 par value) as of June 30, 1996.
-1-
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q FILING
FOR THE THIRTEEN WEEK PERIOD ENDED JUNE 30, 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 7-17
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 18-23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 24
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 25
Item 5. Other Information (not applicable)
Item 6. Exhibits and Reports on Form 8-K 25
Signature Page 26
Exhibit Index 27
Exhibits 28
</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 Twenty-Six Weeks Ended
-----------------------------------------------------------
June 30, 1996 June 25, 1995 June 30, 1996 June 25, 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Sales, net of discounts and allowances $ 150,717 $ 127,283 $ 287,931 $ 253,844
Cost of sales 113,071 109,393 225,832 221,132
--------- --------- --------- ---------
Gross profit 37,646 17,890 62,099 32,712
Selling, general and administrative
expense 27,218 16,385 51,172 33,957
Research and development expense 906 952 1,837 1,830
Restructuring - - - 8,059
--------- --------- --------- ---------
Operating profit (loss) 9,522 553 9,090 (11,134)
Equity in earnings of unconsolidated
subsidiary 49 - 141 -
Other expense, net 943 1,135 1,627 4,544
--------- --------- --------- ---------
Earnings (loss) before income taxes 8,628 (582) 7,604 (15,678)
Provision for (benefit from) income
taxes 3,260 (223) 2,836 (5,959)
--------- --------- --------- ---------
Net earnings (loss) $ 5,368 $ (359) $ 4,768 $ (9,719)
========= ========= ========= =========
Primary earnings (loss) per common
share $ .44 $(.03) $.40 $(.83)
========= ========= ========= =========
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>
June 30, 1996 December 31, 1995
------------- -----------------
ASSETS
<S> <C> <C>
Cash and short-term investments $ 6,242 $ 11,890
Receivables 54,254 43,704
Inventories 36,673 40,939
Current portion of deferred income taxes 14,172 7,980
Prepaid expenses 1,240 629
-------- --------
Total current assets 112,581 105,142
Property and equipment 93,440 94,038
Construction in progress 37,584 15,562
Assets held for sale 22,659 17,756
Patents and trademarks 929 827
Deferred income taxes 29,265 28,284
Investment in unconsolidated subsidiary, at cost 16,531 -
Investment in and advances to unconsolidated
subsidiary, at equity 7,698 -
Goodwill 37,576 -
Other assets 1,188 5,055
-------- --------
Total assets $359,451 $266,664
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term borrowings $ 10,873 $ 1,760
Checks issued but not cleared 8,497 10,232
Accounts payable 38,108 37,291
Accrued liabilities 44,173 25,481
-------- --------
Total current liabilities 101,651 74,764
Long-term debt 50,000 -
Other long-term liabilities 318 211
-------- --------
Total liabilities 151,969 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 12,313,043 and 11,851,504,
$.01 par value 123 119
Capital surplus 143,093 132,722
Foreign currency translation adjustment (666) (661)
Retained earnings 67,987 63,219
Less: Treasury stock, 200,807 and 245,322
shares, at cost (3,055) (3,710)
-------- --------
Total shareholders' equity 207,482 191,689
-------- --------
Total liabilities and shareholders' equity $359,451 $266,664
======== ========
</TABLE>
See Accompanying Notes to Financial Statements.
-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................. - - - 4,768 -
Issue common stock........... 4 10,371 - - 655
Translation adjustment....... - - (5) - -
----- -------- ------- ------- -------
BALANCE, June 30, 1996.......... $123 $143,093 $(666) $67,987 $(3,055)
==== ========= ======= ======= =======
</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>
Twenty-Six Weeks Ended
------------------------------
June 30, 1996 June 25, 1995
------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss).............................. $ 4,768 $ (9,719)
Non-cash charges (benefits) to earnings:
Depreciation and amortization ................... 20,689 19,308
Deferred income taxes ........................... (7,173) (3,006)
Write-down of assets ............................ 2 5,045
Changes in working capital:
Accounts receivable ............................. (10,550) 2,046
Inventories and prepaid expenses ................ 15,920 4,488
Accounts payable................................. 817 1,436
Checks issued but not cleared ................... (1,735) (2,062)
Accrued liabilities.............................. 17,191 3,394
Other............................................ 266 26
--------- --------
Net cash provided by operating
activities................................ 40,195 20,956
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property and equipment.......... (27,149) (7,568)
Proceeds from sale of property and
equipment........................................ 41 57
Acquire assets - Pope & Talbot Disposable
Diaper Business............................... (57,205) -
Investment in Grupo P.I. Mabe, S.A. de C.V. ..... (15,908) -
Investment in and advances to unconsolidated
subsidiary, at equity ........................ (3,885) -
Other............................................ (850) 122
--------- --------
Net cash used by investing
activities.................................... (104,956) (7,389)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in short-term
borrowings ............................... 9,113 (4,940)
Proceeds from U.S. bank credit facility ......... 55,000 2,000
Repayments of U.S. bank credit facility ......... (5,000) (8,000)
--------- --------
Net cash provided (used) by financing
activities................................ 59,113 (10,940)
--------- --------
NET INCREASE (DECREASE) IN CASH.................. (5,648) 2,627
Cash at beginning of period ..................... 11,890 2,684
--------- --------
Cash at end of period ........................... $ 6,242 $ 5,311
========= ========
Cash paid (refunded) during the period for:
Interest, net of amounts capitalized............. $ 2,088 $ 322
========= ========
Income taxes..................................... $ 7,407 $ (514)
========= ========
</TABLE>
See Accompanying Notes to Financial Statements.
-6-
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
FOR THE THIRTEEN AND TWENTY-SIX WEEK PERIODS ENDED JUNE 30, 1996 AND JUNE 25,
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 twenty-six week
period ending June 30, 1996 was $8.3 million, net of the effect of income taxes.
The results of operations for the twenty-six week period ending June 30, 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
twenty-six week period ended June 30, 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 twenty-six week periods ended June 30, 1996 was $574
and $774, 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 twenty-six week periods ended June 30, 1996 and June 25, 1995, the
Company issued 100,672 and 217,878 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 $2,445 and
$2,824, 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 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
<S> <C> <C>
Receivables consist of the following:
June 30, 1996 December 31, 1995
--------------- -----------------
Accounts receivable-trade ........... $55,680 $42,645
Other receivables ................... 6,332 6,925
--------------- -----------------
62,012 49,570
Less: allowance for doubtful accounts (7,758) (5,866)
--------------- -----------------
Net receivables $54,254 $43,704
=============== =================
NOTE 3: INVENTORIES
Inventories consist of the following:
June 30, 1996 December 31, 1995
--------------- -----------------
LIFO:
Raw materials - pulp ............ $ 321 $ 4,345
Finished goods .................. 14,687 15,032
FIFO:
Raw materials - other............ 8,099 5,984
Materials and supplies........... 19,867 20,629
---------------- -----------------
42,974 45,990
Reserve for excess and
obsolete items .............. (6,301) (5,051)
---------------- ------------------
Net inventories $36,673 $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 Twenty-Six Weeks Ended
----------------------------- -----------------------------
June 30, 1996 June 25, 1995 June 30, 1996 June 25, 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Federal:
Current........ $ 6,410 $ (2,479) $ 7,965 $ (2,315)
Deferred....... (4,673) 2,333 (7,299) (2,354)
--------- --------- --------- ---------
1,737 (146) 666 (4,669)
--------- --------- --------- ---------
State:
Current........ 895 (546) 1,374 (646)
Deferred....... (586) 520 (1,330) (387)
--------- --------- --------- ---------
309 (26) 44 (1,033)
--------- --------- --------- ---------
Foreign:
Current........ 1,214 8 2,126 8
Deferred....... - (59) - (265)
--------- --------- --------- ---------
1,214 (51) 2,126 (257)
--------- --------- --------- ---------
$ 3,260 $ (223) $ 2,836 $(5,959)
========= ========= ========= =========
</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 twenty-six week periods ended June 30, 1996 and June 25,
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.
The deferred tax asset at June 30, 1996 was $43,437, net of a valuation
allowance of $336. Net deferred income taxes are attributable to the following
temporary differences:
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
------------- -----------------
<S> <C> <C>
Depreciation/amortization.............. $12,798 $10,833
Goodwill............................... 11,315 12,062
Reserves not currently deductible...... 14,556 7,725
Package design costs................... 1,989 2,154
Land................................... 1,760 1,791
All other, net......................... 1,355 2,058
Valuation allowance.................... (336) (359)
---------- ----------
Net deferred tax asset.............. $43,437 $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>
June 30, 1996 December 31, 1995
------------- -----------------
<S> <C> <C>
Land..................................... $ 5,198 $ 4,218
Buildings and improvements............... 32,115 30,557
Machinery and equipment.................. 189,644 172,836
--------- ---------
226,957 207,611
Less: allowance for depreciation......... (133,517) (113,573)
--------- ---------
Net property and equipment................ $ 93,440 $ 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>
June 30, 1996 December 31, 1995
------------- ----------------
<S> <C> <C>
La Puente plant closure................... $18,039 $17,756
Closure of P&T disposable diaper
operations................................ 4,620 -
--------- ---------
Net property and equipment................ $22,659 $17,756
========= =========
NOTE 6: ACCRUED LIABILITIES
Accrued liabilities are as follows:
June 30, 1996 December 31, 1995
------------- -----------------
Payroll-wages and salaries,
incentive awards, retirement,
vacation and severance pay............... $10,566 $ 9,838
Coupons outstanding....................... 12,242 6,458
Restructuring (Note 12)................... 165 767
Income taxes payable - current............ 4,044 271
Other..................................... 17,156 8,147
--------- --------
$44,173 $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
twenty-six week periods ending June 30, 1996 and June 25, 1995. For the
thirteen and twenty-six week periods ended June 30, 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 Twenty-Six Weeks Ended
---------------------------- ----------------------------
June 30, 1996 June 25, 1995 June 30, 1996 June 25, 1995
------------- ------------- ------------- -------------
Primary
- -------
<S> <C> <C> <C> <C>
Net earnings (loss).................. $ 5,368 $ (359) $ 4,768 $(9,719)
Weighted average common and
common equivalent shares
outstanding (000's)................. 12,087 11,838 11,984 11,779
Net earnings (loss) per
common share........................ $ .44 $ (.03) $ .40 $ (.83)
Fully diluted
- -------------
Net earnings (loss)................. $ 5,368 $ (359) $ 4,768 $(9,719)
Weighted average common and
common equivalent shares
outstanding (000's)................. 12,204 11,856 12,108 11,792
Net earnings (loss) per
common share fully diluted........... $ .44 $ (.03) $ .39 $ (.82)
</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 also 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 issued at a
discounted value 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 twenty-six week period ended June 30,
1996, there were 30,000 shares of common stock issued under the 1996 plan as
restricted shares. During the twenty-six week periods ended June 30, 1996 and
June 25, 1995, there were 26,157 and 78,689 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 June 30, 1996 and June 25, 1995, the following is
provided:
<TABLE>
<CAPTION>
June 30, 1996 June 25, 1995
------------- -------------
<S> <C> <C>
During the period:
Options granted 16,000 26,000
Options exercised 5,857 -
Options canceled 5,250 18,244
At end of period:
Options outstanding 759,932 688,178
Options exercisable 367,529 236,225
Average price per share:
Options granted $ 24.26 $ 15.63
Options outstanding 20.87 20.91
Options exercisable 21.59 22.37
</TABLE>
The following summarizes transactions involving SARs granted to key management
during the thirteen week period ended June 30, 1996:
<TABLE>
<CAPTION>
<S> <C>
During the period:
SARs granted -
SARs exercised -
At end of period:
SARs outstanding 101,330
SARs exercisable -
Average price per share:
SARs granted 24.875
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 twenty-six week periods ended June 30, 1996 and
June 25, 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 14,881 and 20,802 shares of common stock for the thirteen week periods ended
June 30, 1996 and June 25, 1995, respectively.
-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 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.
The Company currently anticipates that P&G will file two motions for summary
judgment with respect to the Company's patent infringement counterclaim in early
September 1996. 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 products of two K-C patents relating to inner-leg gathers. The
lawsuit seeks injunctive and unspecified monetary relief and attorney's 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 is scheduled for October 1997. 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 is currently scheduled
to file a motion for summary judgment in mid-August 1996.
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 any ultimate liability resulting
from any legal proceeding or dispute, including those discussed above, or all of
them combined, will not have a material adverse effect on its financial
condition or results of operations.
NOTE 10: BANK CREDIT FACILITIES
At June 30, 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 June 30, 1996, borrowings under this credit facility totaled $50,000. 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 June 30, 1996, Paragon Trade Brands (Canada) Inc. maintained a $5,000 Cdn
revolving term credit facility, guaranteed by the Company, available through
October 1996. Paragon Trade Brands (Canada) Inc. had $173 and $1,760
outstanding under this credit facility at June 30, 1996 and December 31, 1995,
respectively. 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 June 30, 1996, the Company had approximately
$50,000 in uncommitted lines of credit. There were no
-14-
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
borrowings against these lines of credit at December 31, 1995. At June 30,
1996, the Company had borrowings against these lines of $10,700. Borrowings
under these lines are reflected as short-term debt in the accompanying balance
sheet.
For the twenty-six week periods ended June 30, 1996 and June 25, 1995, interest
expense, net of amounts capitalized, was $1,903 and $472, respectively. No
interest was capitalized during the twenty-six week period ended June 30, 1996.
For the twenty-six week period ended June 25, 1995, capitalized interest totaled
$214. 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 June 30, 1996
and June 25, 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 June 30, 1996, the building
facility and related production equipment are reflected as assets held for sale
in the accompanying balance sheets. For the twenty-six week period ended June
25, 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 June 30, 1996, $165 of this
amount remained in accrued liabilities.
The following is provided with respect to amounts accrued and costs incurred for
the year ended December 31, 1995 and the twenty-six week period ended June 30,
1996:
<TABLE>
<CAPTION>
Amount Costs Incurred Balance
Accrued June 30, 1996 Remaining
------- -------------- ---------
<S> <C> <C> <C>
Employee severance and related items $3,359 $3,673 $(314)
Equipment disposal and write-downs 2,600 2,602 (2)
Facility disposal and carrying costs 1,850 1,496 354
All other 250 123 127
------ ------ ------
$8,059 $7,894 $ 165
====== ====== ======
</TABLE>
At June 30, 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 June 30, 1996, commitments for capital expenditures are $11,787.
-15-
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
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.
<TABLE>
<CAPTION>
Twenty-Six Weeks Ended June 25, 1995
---------------------------------------------------
Pro Forma Adjustments
-----------------------
Paragon P&T Adjustments Pro-forma
--------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Net sales............................... $253,844 $ 75,308 $ $ 329,152
Cost of sales........................... 221,132 75,250 (2,900) /3/ 293,482
-------- -------- --------- ----------
Gross profit............................ 32,712 58 2,900 35,670
Selling, general and administrative
expense.............................. 33,957 8,120 959 /1/ 43,035
Research and development expense........ 1,830 1,830
Restructuring........................... 8,059 8,059
-------- -------- --------- ----------
Operating (loss) profit................. (11,134) (8,062) 1,941 (17,254)
Other expense, net...................... 4,544 2,083 /2/ 6,627
-------- -------- --------- ----------
Loss before income taxes................ (15,678) (8,062) (142) (23,881)
Benefit from income taxes............... (5,959) (3,064) (54) /4/ (9,076)
-------- -------- --------- ----------
Net loss................................ $ (9,719) $(4,998) $ (88) $ (14,805) /5/
======== ======== ========= ==========
Net loss per common share............... $(.83) $(1.22) /5/
Weighted average common shares
outstanding.......................... 11,779 12,167 /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.
-16-
<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>
Twenty-Six Weeks Ended June 30, 1996
-----------------------------------------
Paragon Adjustments Pro-forma
--------- ----------- ----------
<S> <C> <C> <C>
Net sales ................................... $ 287,931 $ 11,391 /1/ $ 299,322
Cost of sales ............................... 225,832 8,718 /1/ 234,550
--------- --------- ---------
Gross profit ................................ 62,099 2,673 64,772
Selling, general and administrative expense.. 51,172 445 /2/ 51,617
Research and development expense............. 1,837 1,837
Restructuring ............................... - -
--------- --------- ---------
Operating profit (loss)...................... 9,090 2,228 11,318
Equity in Earnings of Sub.................... 141 141
Other expense, net........................... 1,627 398 /3/ 2,025
--------- --------- ---------
Earnings (loss) before income taxes.......... 7,604 1,830 9,434
Provision for (benefit from) income taxes ... 2,836 690 /4/ 3,526
--------- --------- ---------
Net Earnings (loss).......................... $ 4,768 $ 1,140 $ 5,908
========= ========= =========
Net Earnings (loss) per common share......... $.40 $.49
Weighted average common shares
outstanding ................................ 11,984 12,049 /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.
-17-
<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 JUNE 30, 1996 COMPARED TO THIRTEEN WEEKS ENDED JUNE 25,
1995
RESULTS OF OPERATIONS
Net earnings were $5.4 million in the second quarter of 1996, compared with a
net loss of $.4 million for the second quarter of 1995. Included in the results
for the second quarter of 1996 were charges of $2.6 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 second
quarter of 1996 was $8.0 million compared to a net loss for the second quarter
of 1995 of $.4 million. The profit in the second 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 second quarter of 1995. The increase in volume and
lower costs was partially offset by an increase in trade merchandising expenses
primarily related to increased consumer couponing.
Net earnings per share in the second quarter of 1996 were $.44 compared to a
net loss per share of $.03 in the second quarter of 1995. Net earnings per
share were $.65 in the second quarter of 1996, excluding the relocation charges.
REVENUES
Net sales were $150.7 million for the second quarter of 1996, an 18.4 percent
increase from the $127.3 million reported in the second quarter of 1995. Unit
sales increased 14.7 percent, to 970 million diapers in the second quarter of
1996 from 846 million diapers in the second 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 second quarter of 1996. Volume, however, would have been lower in
the second 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
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 second quarter of 1996 decreased approximately
1.0 percent compared to the second 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.
Net sales in Canada increased significantly during the second quarter of 1996
compared to the same period of 1995. The increase was primarily due to
increased unit volumes. Volumes were 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 second quarter of 1996 was $113.1 million compared to
$109.4 million for the second quarter of 1995, a 3.4 percent increase. As a
percentage of net sales, cost of sales was 75.0 percent in 1996 compared to 85.9
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.
-18-
<PAGE>
Pulp prices were approximately 39 percent lower in the second quarter of 1996
compared to the same period in 1995. Pulp prices, which had increased during
1995, decreased significantly during the first half of 1996 and are expected to
be at lower levels than 1995 for the remainder of 1996. Super absorbent polymer
costs dropped significantly in the first half of 1996 compared to the same
period in 1995 and are expected to stay at similar levels throughout 1996.
Packaging costs were also lower during the second quarter of 1996 compared to
the second quarter of 1995. Other raw material prices were generally at
slightly lower price levels in the second quarter of 1996 compared to 1995.
Labor costs were at similar levels in the second quarter of 1996 compared to
the same period of 1995. On an absolute basis, plant overhead costs were at
similar levels in the second quarter of 1996 compared to 1995. These costs
included the costs of the P&T plants that were acquired in February 1996 that
remained open. As a percentage of cost of goods sold, plant overhead costs were
lower due to increased volume.
Depreciation costs were at slightly higher levels in the second quarter of 1996
compared to the same period of 1995. The higher costs were primarily due to P&T
facilities acquired in February 1996 that remained open.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
SG&A expenses were $27.2 million for the second quarter of 1996 compared to
$16.4 million for the second quarter of 1995. As a percentage of net sales
these expenses were 18.1 percent in 1996 compared to 12.9 percent for the same
period in 1995. Included in the second quarter of 1996 were charges of $4.0
million primarily for the corporate headquarters relocation to Atlanta. These
costs included the costs for relocation of personnel and equipment, increased
travel and costs to staff and train personnel in Atlanta.
Excluding charges for the relocation to Atlanta, SG&A expenses were $23.2
million in the second quarter of 1996 compared to $16.4 million in the second
quarter of 1995. As a percentage of net sales these expenses, excluding the
relocation charges, were 15.4 percent in the second quarter of 1996 compared to
12.9 percent in the second quarter of 1995. The increase is attributable to a
significant increase in trade merchandising expenses and the costs associated
with the feminine care business. The increase in trade merchandising expenses
was a result of heavy consumer coupon activity during the second 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 remainder of 1996. Costs were also higher due to the
amortization of goodwill associated with the P&T acquisition. These cost
increases were partially offset by a decrease in legal expenses. The 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 remainder
of 1996, will include costs associated with the move of the corporate
headquarters to Atlanta. These costs will primarily be recognized during the
third quarter of 1996.
RESEARCH AND DEVELOPMENT
Research and development expenses remained relatively flat at $.9 million for
the second quarter of 1996 compared to $1.0 million for the second quarter of
1995.
OTHER EXPENSE
Other expense was $.9 million in the second quarter of 1996 compared to $1.1
million in the second quarter of 1995. Excluding the costs of the cancellation
of capital projects in the second quarter of 1995, 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.
-19-
<PAGE>
TWENTY-SIX WEEKS ENDED JUNE 30, 1996 COMPARED TO THIRTEEN WEEKS ENDED JUNE 25,
1995
RESULTS OF OPERATIONS
Net earnings were $4.8 million during the first half of 1996, compared with a
net loss of $9.7 million for the first half of 1995. Included in the results
for the first half of 1996 were charges of $8.3 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 half 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 half of 1996 was $13.1
million compared to a net loss for the first half of 1995 of $.9 million. The
profit in the first half 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 half of 1995.
Net earnings per share in the first half of 1996 were $.40 compared to a net
loss per share of $.83 in the first half of 1995. Net earnings per share were
$1.08 in the first half of 1996 compared to a net loss per share of $.08 in the
first half of 1995, excluding the restructuring and other charges for both
periods.
REVENUES
Net sales were $287.9 million for the first half of 1996, a 13.4 percent
increase from the $253.8 million reported in the first half of 1995. Unit sales
increased 11.7 percent to 1,859 million diapers in the first half of 1996 from
1,664 million diapers in the first half 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 half 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 price during the first half of 1996 decreased approximately 1.5
percent compared to the first half of 1995, excluding the effect of a favorable
mix. The decrease in price 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 for the remainder of 1996.
Net sales in Canada increased significantly during the first half of 1996
compared to the same period of 1995. The increase was primarily due to
increased unit volumes. Volumes were 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 half of 1996 was $225.8 million compared to $221.1
million for the first half of 1995, a 2.1 percent increase. As a percentage of
net sales, cost of sales was 78.4 percent in 1996 compared to 87.1 percent in
the comparable 1995 period. The first half of 1996 included $3.8 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 half 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
77.1 percent in the first half of 1996 compared to 86.9 percent in the first
half of 1995. As discussed above, the lower costs were primarily as a result of
lower raw material costs including pulp, super absorbent polymer and packaging.
Pulp prices were approximately 22 percent lower in the first half of 1996
compared to the same period in 1995. Pulp prices, which had increased during
1995, decreased significantly during the first half of 1996 and are expected to
be at lower levels than 1995 for the remainder of 1996. Super absorbent polymer
costs dropped significantly in the first half of 1996 compared to the same
period in 1995 and are expected to stay at similar levels throughout 1996.
-20-
<PAGE>
Packaging costs were also lower in the first half of 1996 compared to the same
period of 1995. Other raw material prices were generally at similar price
levels in the first half 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 at similar levels during the
first half of 1996 compared to the first half of 1995. Costs were lower in the
first half of 1996 due to the La Puente plant closure at the end of February
1995. The lower costs were offset by increases in plant overhead from the P&T
manufacturing facilities acquired in February 1996 that remained in production.
During the first half of 1996, $1.9 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 half 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 half 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 $51.2 million for the first half of 1996 compared to $34.0
million for the first half of 1995. As a percentage of net sales, these
expenses were 17.8 percent in 1996 compared to 13.4 percent for the same period
in 1995. Included in the first half of 1996 were charges of $9.7 million.
These charges included $6.7 million for the corporate headquarters relocation to
Atlanta, including severance, outplacement and relocation expenses. The charges
also included $3.0 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 half 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 $41.5 million in the first half of
1996 compared to $31.8 million in the first half of 1995. As a percentage of
net sales these expenses, excluding the charges discussed above, were 14.4
percent in the first half of 1996 compared to 12.5 percent in the first half of
1995. As discussed above, the increase in expenses is primarily attributable to
an increase in trade merchandising expenses and the cost 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. These increases were partially offset by a decrease in legal
expenses. The 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 remainder of 1996, will include costs associated with the
move of the corporate headquarters to Atlanta. These costs will primarily be
recognized during the third quarter of 1996.
RESEARCH AND DEVELOPMENT
Research and development ("R&D")expenses remained flat at $1.8 million for the
first half of 1996 and 1995. R&D expenses increased due to the feminine care
business but were offset by lower activity during the second quarter 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 half of 1995.
OTHER EXPENSE
Other expense was $1.6 million in the first half of 1996 compared to $4.5
million in the first half of 1995. The first half of 1995 included $3.4 million
in charges due to the cancellation of capital projects and legal settlement
costs. Excluding these charges in the first half 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.
-21-
<PAGE>
RESTRUCTURING
First half 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 June 30, 1996, the equipment is being held for sale to PMI and
the building is being actively marketed 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. Of the remaining $5.9 million in charges, $5.7 million has been
paid to date. The remaining $.2 million is primarily dependent on the sale of
the building.
LIQUIDITY AND CAPITAL RESOURCES
During the first half of 1996, cash flow from earnings and non-cash charges to
earnings was $18.3 million compared to $6.6 million for the same period in 1995.
The increase in cash flow was primarily due to improved operating results.
During the first half of 1996, working capital, exclusive of cash, short-term
borrowings, and current deferred taxes decreased $21.9 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 in pulp inventories from a special purchase made during the fourth
quarter of 1995. Inventory levels have also dropped due to reductions in costs
of raw materials. Although inventory levels increased due to the P&T
acquisition, cash flows were favorably impacted as inventories were
approximately $10 million less than at the date of the P&T acquisition.
The increase in accrued liabilities primarily reflects the reserves taken for
P&T integration and Atlanta relocation charges in the first half of 1996 and
increases in coupon-related liabilities. These liabilities are expected to
decrease during 1996 as the liabilities are paid. Cash flow was also favorably
impacted by $2.4 million as the Company issued treasury stock to settle certain
payroll liabilities.
The cash produced from operations supported capital expenditures of $27.1
million in the first half of 1996 compared to $7.6 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 $13.5
million in pre-tax charges during the first half of 1996. Of this $13.5
million, $3.4 million were non-cash charges. Of the remaining $10.1 million,
$5.0 million was paid during the first half 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 second
quarter there was $50.0 million in debt outstanding against the credit
facilities and $10.9 million debt outstanding under the uncommitted lines of
-22-
<PAGE>
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 completed on
January 26, 1996. The Company had $6.2 million in cash and short-term
investments at the end of the second 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
probably be incurred during the fourth quarter of 1996 and the first half 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.
-23-
<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 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.
The Company currently anticipates that P&G will file two motions for summary
judgment with respect to the Company's patent infringement counterclaim in early
September 1996. 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 products of two K-C patents relating to inner-leg gathers. The
lawsuit seeks injunctive and unspecified monetary relief and attorney's 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.
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 is currently scheduled
to file a motion for summary judgment in mid-August 1996.
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 any ultimate liability resulting
from any legal proceeding or dispute, including those discussed above, or all of
them combined, will not have a material adverse effect on its financial
condition or results of operations.
-24-
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Stockholders of the Company was held on May 20, 1996.
(b) Messrs. Adrian D. P. Bellamy and Robert L. Schuyler were elected as
directors at the Annual Meeting for a three-year term expiring in 1999.
Messrs. Thomas B. Boklund and Bobby V. Abraham continued in office as
directors after the meeting.
(c) The first item of business at the meeting was the election of Adrian D. P.
Bellamy as a director. Votes were tabulated as follows:
Votes For: 9,972,972
Votes Withheld: 217,562
Abstentions: 0
Broker Nonvotes: 0
The second item of business the meeting was the election of Robert L.
Schuyler as a director. Votes were tabulated as follows:
Votes For: 9,974,189
Votes Withheld: 216,345
Abstentions: 0
Broker Nonvotes: 0
(d) Not applicable.
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 Financial Data Schedule
-25-
<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
August 12, 1996
-26-
<PAGE>
EXHIBIT INDEX
Exhibit
Number Document Page
- -------- --------------------------------------------- --------
11 Computation of Per Share Earnings
(See Note 7 to Notes to Financial Statements) 11
27 Financial Data Schedule 27
-27-
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<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
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-29-1996
<PERIOD-START> JAN-1-1996
<PERIOD-END> JUN-30-1996
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0
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