<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 29, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-11368
PARAGON TRADE BRANDS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 91-1554663
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
180 TECHNOLOGY PARKWAY
NORCROSS, GEORGIA 30092
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (770) 300-4000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, par value $.01 per share New York Stock Exchange
Series A Participating Cumulative New York Stock Exchange
Preferred Stock Purchase Rights
Securities registered pursuant to Section 12(g) of the Act: None
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
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of February 28, 1997, there were 12,288,293 shares of the Registrant's
Common Stock outstanding, and the aggregate market value of such stock held
by nonaffiliates of the Registrant was $224,261,347 (based on the closing
price on the New York Stock Exchange).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Stockholders for the fiscal
year ended December 29, 1996 have been incorporated by reference into Parts
II and IV of this report. Portions of the Registrant's Proxy Statement
relating to the Annual Meeting of Stockholders to be held May 20, 1997, are
incorporated by reference into Part III of this report.
Exhibit Index on Page 15
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PARAGON TRADE BRANDS, INC.
TABLE OF CONTENTS TO ANNUAL REPORT
ON FORM 10-K
PART I
Page
Item 1: BUSINESS 1
Item 2: PROPERTIES 6
EXECUTIVE OFFICERS 6
Item 3: LEGAL PROCEEDINGS 7
Item 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 8
PART II
Item 5: MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS 8
Item 6: SELECTED FINANCIAL DATA 8
Item 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 8
Item 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 8
Item 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE 8
PART III
Item 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 8
Item 11: EXECUTIVE COMPENSATION 8
Item 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 9
Item 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 9
PART IV
Item 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 9
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PART I
ITEM 1: BUSINESS
GENERAL
Paragon Trade Brands, Inc. (the "Company") is the largest store brand
manufacturer of infant disposable diapers in North America. The Company,
previously a division of Weyerhaeuser Company ("Weyerhaeuser"), became a
publicly-held, independent company as a result of a public offering of stock
completed on February 2, 1993. The Company acquired substantially all the
assets and liabilities of the private label diaper business of Weyerhaeuser
(the "Business") in exchange for 10 million shares of stock and $35 million in
cash. The Company manufactures a line of premium-quality diapers known as
"Ultra," a supreme diaper product, a line of economy diapers that have fewer
features, and a line of training pants. The Company has also recently begun to
manufacture a line of feminine care products. The Company's products are
distributed throughout North America through grocery and food stores, mass
merchandisers, warehouse clubs, toy stores and drug stores that market the
products under their own store brand names.
Weyerhaeuser entered the store brand infant disposable diaper market in 1972.
As part of the general refocusing on its core businesses, Weyerhaeuser decided
to divest its interest in the Business by means of the public offering
completed on February 2, 1993. The Company was incorporated in Delaware in
June 1992 as a wholly-owned subsidiary of Weyerhaeuser.
On February 9, 1996, the Company completed the purchase of substantially all of
the assets of Pope & Talbot, Inc.'s disposable diaper business. The purchase
price of $63.5 million was paid in a combination of cash and stock. The
Company closed all the acquired disposable diaper operations in 1996. The
manufacturing equipment and plants are being held for sale. The Company took
a charge of $8.1 million for the costs of integration and write-downs of
duplicate equipment owned by the Company prior to the purchase transaction.
In 1996, the Company relocated its corporate headquarters from Federal Way,
Washington to Norcross, Georgia.
PRODUCTS
The Company manufactures several diaper product lines: a premium-quality Ultra
line, in both thick and thin versions, an economy line ("Economy"), a Supreme
line and a training pant line. Ultra diaper sales accounted for approximately
78 percent, 76 percent and 77 percent of the Company's total unit sales in
1996, 1995 and 1994, respectively. Economy diaper units represented
approximately 12 percent, 17 percent, and 13 percent of the Company's total
unit sales in fiscal years 1996, 1995 and 1994, respectively. Training pant
sales represented approximately 3 percent of the Company's total unit sales
over the same periods.
The Company's Ultra diaper combines fluff pulp with super-absorbent polymer
("SAP") in the absorbent inner core. SAP is significantly more absorbent and
better able to retain liquids than fluff pulp. To enhance performance and
appearance, the Ultra diaper incorporates a number of product features
comparable to those introduced by the national branded manufacturers. The
Company now produces both its thin and thick versions of the Ultra diaper in
five different sizes which are designed to fit babies better as they grow and
develop. Additionally, the Company continued its agreement with Jim Henson
Productions, Inc., pursuant to which the Company reproduces the Muppet Babies
cartoon characters on the "tape landing zone" of its Ultra diapers. In late
1996, the Company introduced an improved Ultra diaper which incorporates a
cloth-like backsheet and breathable side panels.
The Economy diaper is designed to satisfy the needs of the more cost-conscious
value segment shopper. Its absorbent pad contains fluff pulp and SAP. Its
features include a "tape landing zone" allowing for easy fitting and
re-adjustment after fastening. The Company produces the Economy diaper in
three unisex sizes.
The Company's training pant is designed for use by children primarily during
their transition from diapers. The Company's training pant utilizes an
absorbent core of fluff pulp and SAP and a cloth-like nonwoven outer cover.
The Company produces its training pant in two gender-specific sizes.
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The Company also produces a supreme diaper product with a thin pad and a soft,
cloth-like nonwoven outer cover in response to the Huggies(R) Supreme product
introduced by Kimberly-Clark Corporation ("Kimberly-Clark"). Sales of this
product represented approximately 4 percent of the Company's total unit sales
in fiscal year 1996.
In 1996, The Company began manufacturing a line of feminine care products that
includes ultra thin, maxi and super maxi pads, pantiliners, panty shields and
regular and super absorbent tampons. Sales of feminine care products were
negligible in 1996.
PRODUCT DEVELOPMENT
To enhance the Company's objective of providing its trade customers with
premium-quality store brand disposable diapers and feminine care products, the
Company devotes significant resources to market research and product design and
development to enable it to improve product performance and consumer
acceptance. The Company believes that it has the largest product development
program of any manufacturer in the disposable diaper market, other than the
national branded manufacturers. The Company spent approximately $4.2 million,
$3.6 million and $6.9 million on research and development in fiscal years 1996,
1995 and 1994, respectively.
The Company intends to enter the adult incontinence and baby wipes businesses.
PATENT RIGHTS
Because of the emphasis on product innovations in the disposable diaper and
feminine care markets, patents and other intellectual property rights are an
important competitive factor. The national branded manufacturers have sought
to enforce vigorously their patent rights (see "Legal Proceedings"). To
protect its competitive position, the Company has created an intellectual
property portfolio through development, acquisition and licensing that includes
approximately 300 U.S. and foreign patents relating to disposable diaper and
feminine care product features and manufacturing processes.
MAJOR CUSTOMERS AND FOREIGN OPERATIONS
The Company's net sales to its largest trade customer, Wal-Mart Stores, Inc.,
and Sam's Club, a division of Wal-Mart, represented an aggregate of
approximately 13 percent, 11 percent and 15 percent of total net sales in
fiscal years 1996, 1995 and 1994, respectively. As is customary in the infant
disposable diaper market, the Company does not have long-term contracts with
any of its trade customers. The Company estimates that approximately 9
percent, 6 percent and 5 percent of net sales were to trade customers in Canada
in fiscal years 1996, 1995 and 1994, respectively.
The Company does not sell its disposable diapers directly in Mexico. However,
the Company believes that in fiscal year 1994 approximately 7 percent of its
diapers were sold to trade customers in the United States and used by consumers
in Mexico. As a result of the devaluation of the Mexican peso in December of
1994, these sales were negligible in 1995 and 1996.
On January 26, 1996, the Company completed the purchase of a 15 percent
interest in Grupo P.I. Mabe, S.A. de C.V. ("Mabesa") for $15.3 million in cash
plus additional consideration based on Mabesa's future financial results. The
Company also acquired the option to purchase an additional 34 percent interest
in Mabesa at a contractually determined price. In addition, the Company
acquired a 49 percent share for $1.6 million in cash in Paragon-Mabesa
International ("PMI"), a joint venture that has developed a new manufacturing
facility in Tijuana, Mexico. The Company sold certain assets from a diaper
manufacturing facility it closed in 1995 in La Puente, California to PMI as
part of the development of PMI's manufacturing facility in Tijuana, Mexico.
The Company has assisted in financing the equipment, building construction and
start-up of the Tijuana, Mexico facility which is expected to be completely
operational by mid-1997.
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RAW MATERIALS
The principal raw material components of the Company's products are fluff pulp,
SAP, polyethylene backsheet, polypropylene nonwoven liner, adhesive closure
tape, hotmelt adhesive, elastic and tissue.
The primary raw material used in the production of disposable diapers is fluff
pulp, a product made from wood fibers. The Company entered into a fluff pulp
supply contract with Weyerhaeuser whereby it agreed to purchase its
requirements of bleached chemical fluff pulp through August 31, 1997, at prices
as favorable as those Weyerhaeuser charges other North American disposable
diaper manufacturers for similar grade pulp. In early 1996, the Company
entered into an agreement with Hoechst Celanese Corporation pursuant to which
the Company agreed, subject to certain limitations, to purchase its SAP
requirements from Hoechst Celanese. The Company believes that alternative
sources of each of these raw materials are readily available.
The Company's gross margins are significantly impacted by raw material prices,
especially the price of fluff pulp which can fluctuate dramatically. The
Company's operating results may be adversely affected by increases in these raw
material prices.
COMPETITION-Disposable Diapers
National Branded Manufacturers
The principal bases of competition from the national branded manufacturers are
price, product quality, product innovation and customer service. The U.S.
disposable diaper market is led by the national brands manufactured by The
Procter & Gamble Company ("Procter & Gamble") and Kimberly-Clark. The Company
estimates that, in 1996, the national branded manufacturers accounted for
approximately 75 percent of all U.S. disposable diaper sales. The market
position of these manufacturers, relative to the Company, varies from one
geographic region to another, but due to their substantial financial, technical
and marketing resources, each of these companies has the ability to exert
significant influence on the infant disposable diaper market.
The market for disposable diapers is divided into the premium and value
segments. The premium segment accounts for 59 percent of the unit volume.
Both Kimberly-Clark and Procter & Gamble dominate the premium segment. The
value segment of the industry, which the Company estimates accounted for
approximately 41 percent of unit volume in 1996, is highly competitive. The
Company includes the following products in the value segment: store brands,
control labels, Procter & Gamble's Luvs(R), Drypers(R), Fitti(R), and all other
regional brands.
In total, Procter & Gamble is the dominant manufacturer in the U.S. diaper
market, with approximately 41 percent market share. Procter & Gamble
manufactures two brands: Pampers(R), its premium brand with approximately 26
percent market share, and Luvs, its value brand with 15 percent market share.
Luvs was repositioned from a premium brand to a value brand in April 1993.
Kimberly-Clark manufactures the number one diaper brand, Huggies, with
approximately 33 percent market share. Kimberly-Clark does not offer a value
brand, but supplies some store brand training pants within the value segment.
Price has become the significant variable in the competitive strategy of the
national branded companies in the past three years. Procter & Gamble, in
particular, has been very aggressive in reducing prices in the market in
pursuit of market share. In April 1993, Procter & Gamble reduced prices on
Pampers by 5 percent and on Luvs by 16 percent. In November 1994, Procter &
Gamble announced another major price reduction; prices were effectively reduced
on Pampers by 2.5 percent and on Luvs by 11 percent. Kimberly-Clark responded
with similar pricing actions. All other diaper manufacturers have been forced
to reduce their prices to remain competitive. During 1996, pricing pressures
continued due to a shift of volume to mass merchants who aggressively sold
multi-packs. These multi-packs sell 10 to15 percent below the convenience
count package.
The Company believes that the national branded manufacturers have lower per
unit costs and higher margins than the Company, principally due to their higher
volume, their ability to achieve greater automation and manufacturing speed due
to fewer variations in product and packaging, and their ability to charge
higher prices. In addition, the national branded manufacturers have access to
substantially greater financial resources than the
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Company. As a result, the Company believes that the national branded
manufacturers are capable of competing effectively on the basis of price, even
in the face of rising raw material prices.
Product quality and innovation have also been a critical basis of competition
for the national branded manufacturers. They have substantially larger
research and development budgets than the Company and are able to develop
product innovations more rapidly than the Company and may thereby gain market
share at the Company's expense. The Company estimates that since 1985 the
national branded manufacturers have generally introduced a product innovation
approximately every 12 months.
Kimberly-Clark has been more active than Procter & Gamble in introducing new
products in recent years. Kimberly-Clark was first to market with a disposable
training pant product line and an inner-leg gathers feature. Procter & Gamble
followed Kimberly-Clark with a training pant product almost five years later.
In January 1994, Kimberly-Clark introduced Huggies Supremes, a new line of
"super premium" or supreme diapers with Velcro(R) closures instead of tapes and
a soft nonwoven outer cover, priced at a 20 percent premium per diaper, and in
mid-1995, Kimberly-Clark added a nonwoven backsheet on its Huggies brand
diapers. In September 1994, Procter & Gamble introduced a new stretch waist
feature on its Pampers brand diaper. In 1996, Kimberly-Clark and Procter &
Gamble introduced a breathable diaper.
While in recent years the Company has been able to introduce product
enhancements comparable to those introduced by the national branded
manufacturers, there can be no assurance that the Company will be able to
continue to introduce such product innovations at the pace required to remain
competitive with the national branded manufacturers. Producing comparable
products could adversely affect the Company's gross margins, and to the extent
that the Company is unable to introduce comparable products, it could
experience a decline in net sales and net earnings.
Customer service is another area where the national brands are able to compete.
The Company believes that each of the national branded manufacturers has an
order-delivery cycle that is significantly shorter than the Company's
order-delivery cycle. In addition, the national branded manufacturers devote
substantially greater financial resources than the Company to providing trade
customers with category expertise, customized promotional campaigns and market
support. The national branded manufacturers have sophisticated electronic data
interchange systems that interface directly with their customers' product
information systems. In 1997, the Company will initiate a process improvement
and information technology upgrading project to further enhance its customer
service capabilities.
Value Segment
The Company competes in the value segment of the market with national value
brands and store brand products. The value segment is characterized by excess
capacity and vigorous price competition. The Company's largest competitor in
the value segment is Procter & Gamble with its Luvs brand. The next largest
competitor is Drypers Corp., which consolidated its three regional brands into
one national value brand, Drypers, in 1994. Kimberly-Clark produces store brand
training pants.
The Company seeks to compete against other value segment manufacturers by
emphasizing research and development and maintaining a leading position among
value segment competitors in product quality. Smaller competitors of the
Company are sometimes able to introduce new product features more quickly than
the Company, in part as a result of having fewer diaper machines to convert to
new production processes.
COMPETITION-Feminine Care
The principal bases of competition in the feminine care market are price,
product quality, product innovation and customer service. The U.S. feminine
care market is led by national branded manufacturers including Johnson and
Johnson, Inc., Kimberly-Clark, Playtex Products, Inc., Procter & Gamble and
Tambrands, Inc. The Company estimates that in 1996, the national branded
manufacturers accounted for approximately 90 percent of all U.S. feminine care
sales. The market position of these manufacturers, relative to the Company,
varies from one geographic region to another, but due to their substantial
financial, technical and marketing resources, each of these companies has the
ability to exert significant influence on the feminine care market. A
privately-held
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manufacturer is the dominant supplier of store brand feminine care products.
The Company does not expect its feminine care business to break even until some
time in 1998.
EMPLOYEES
At December 29, 1996, the Company had approximately 1,319 full-time employees,
including 1,129 employees located at its five manufacturing facilities.
ENVIRONMENT
The Company is subject to federal, state, local and foreign laws, regulations
and ordinances that (i) govern activities or operations that may have adverse
environmental effects, such as discharges to air and water as well as handling
and disposal practices for solid and hazardous wastes or (ii) impose liability
for the costs of cleaning up, and certain damages resulting from sites of past
spills and disposals or other releases of hazardous substances (together,
"Environmental Laws").
The Company uses certain substances and generates certain wastes that are
regulated by or may be deemed hazardous under applicable Environmental Laws.
The Company believes that it currently conducts its operations, and in the past
has conducted its operations, in substantial compliance with applicable
Environmental Laws. From time to time, however, the Company's operations have
resulted or may result in certain noncompliance with applicable requirements.
The Company believes, however, that it will not incur compliance or cleanup
costs pursuant to applicable Environmental Laws that would have a material
effect on the Company's results of operations or financial condition.
The Company monitors Environmental Laws and regulations, as well as pending
legislation, in each of the markets in which its products are sold. A number
of states have passed or are considering legislation intended to discourage the
use of disposable products, including disposable diapers, or to encourage the
use of nondisposable or recyclable products. The Company does not believe that
any such laws currently in effect will have a material adverse effect on its
results of operations or financial condition.
IMPORTANT FACTORS REGARDING 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 expressed in the Company's
forward-looking statements. Factors which could affect the Company's financial
results, including but not limited to: increasing raw material prices; new
product and packaging introductions by competitors; increased price and
promotion pressure from competitors; new competitors in the market; and patent
litigation, are described in the preceding paragraphs. Readers are cautioned
not to place undue reliance on the forward-looking statements, which speak only
as of the date hereof. The Company undertakes no obligation to publicly
release the result of any revisions to these forward-looking statements that
may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
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ITEM 2: PROPERTIES
As of December 29, 1996, the Company operated five manufacturing facilities,
with plants located in the United States at Macon, Georgia; Harmony,
Pennsylvania; Gaffney, South Carolina; and Waco, Texas; and in Canada at
Brampton, Ontario. The Company owns four of its manufacturing facilities.
In June 1996, the Company purchased an existing office building and moved its
corporate headquarters to Norcross, Georgia.
The following table summarizes the physical properties that were in use by the
Company in its operations at December 29, 1996:
<TABLE>
<CAPTION>
APPROXIMATE
SIZE NUMBER OF
LOCATION USE (SQ. FEET) OWNED/LEASED MACHINES
- ----------------------- ------------- ----------- ------------ ---------
<S> <C> <C> <C> <C>
Brampton, Ontario Manufacturing 76,000 Owned 3
Federal Way, Washington Held for Sale 88,000 Owned --
Gaffney, South Carolina Manufacturing 155,000 Leased 4
Harmony, Pennsylvania Manufacturing 173,000 Owned 10
Macon, Georgia Manufacturing 308,000 Owned 13
Newnan, Georgia Held for Lease 222,000 Leased --
Norcross, Georgia Headquarters 69,000 Owned --
Oneonta, New York Held for Sale 93,000 Owned --
Porterville, California Held for Sale 69,000 Owned --
Waco, Texas Manufacturing 151,000 Owned 8
</TABLE>
EXECUTIVE OFFICERS
The following table sets forth certain information regarding the Company's
executive officers:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------- ---- ----------------------------------------------------
<S> <C> <C>
Bobby V. Abraham 55 Chief Executive Officer and Chairman of the Board
David W. Cole 48 President and Chief Operating Officer
Alan J. Cyron 44 Executive Vice President and Chief Financial Officer
Catherine O. Hasbrouck 32 Vice President, General Counsel and Secretary
</TABLE>
Bobby V. Abraham has been a director and the Chief Executive Officer of the
Company since its initial public offering in February 1993, has been Chairman
of the Company's Board of Directors since August 1993 and served as the
Company's President from its inception until November 1993. Prior to the
Company's initial public offering in February 1993, Mr. Abraham had been the
President of the Personal Care Products Division of Weyerhaeuser since February
1988. From 1986 until February 1988, Mr. Abraham served as Vice President and
General Manager of the Personal Care Products Division of Weyerhaeuser.
David W. Cole has been the President and Chief Operating Officer of the Company
since his appointment by the Board of Directors on November 1, 1993. Prior to
assuming his current responsibilities, Mr. Cole had since February 1993 served
as Executive Vice President and Chief Operating Officer. Prior to the
Company's initial public offering in February 1993, Mr. Cole had been Vice
President and General Manager of the Personal Care Products Division of
Weyerhaeuser from May 1990 to November 1993, and Executive Vice President of
Sales from 1989 to 1990. Prior to joining Weyerhaeuser in 1989, Mr. Cole
served as Director of Field Sales with Cadbury USA, a division of Cadbury
Schweppes PLC, and its successor, Hershey Chocolate Company.
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Alan J. Cyron has been the Vice President, Chief Financial Officer and
Assistant Secretary of the Company since April 4, 1995, served as its Treasurer
from May through July 1995 and was promoted to Executive Vice President on
February 28, 1997. Prior to joining the Company, Mr. Cyron served as Managing
Director of Chemical Securities, Inc. (January 1992 through March 1995),
Managing Director of Chemical Bank (June 1991 to January 1992), and Managing
Director of Chemical New York Corp. -- USA, Inc. (June 1981 to June 1991), all
subsidiaries of Chemical Banking Corp.
Catherine O. Hasbrouck has been the Vice President, General Counsel and
Secretary of the Company since June 3, 1996. Prior to joining the Company, Ms.
Hasbrouck practiced law as an associate with the law firms of Troutman Sanders
LLP (January 1992 to June 1996) and Winthrop, Stimson, Putnam & Roberts
(September 1989 to January 1992).
ITEM 3: LEGAL PROCEEDINGS
Procter & Gamble filed a claim in the District Court for the District of
Delaware that the Company's disposable baby diaper products infringe two of
Procter & Gamble's inner-leg gather patents. The lawsuit seeks injunctive
relief, lost profit and royalty damages totaling approximately $100 million,
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 Procter & Gamble. In March 1996, the District Court
granted Procter & Gamble's motion for summary judgment to dismiss the Company's
antitrust counterclaim. The Company intends to appeal the District Court's
decision at the appropriate time. In September 1996, Procter & Gamble filed
two motions for summary judgment with respect to the Company's patent
infringement counterclaim. In December 1996, the District Court denied both of
Procter & Gamble's motions for summary judgment. The trial has concluded and
the parties are engaged in post trial briefing. The ultimate outcome cannot be
predicted at this time. Legal fees and costs for this litigation have been
significant. If Procter & Gamble were to prevail on its claims, award of all
or a substantial amount of the relief requested by Procter & Gamble 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 Procter & Gamble's claims are not well founded.
On October 26, 1995, Kimberly-Clark filed a lawsuit against the company in U.S.
District court in Dallas, Texas, alleging infringements by the Company's
products of two Kimberly-Clark 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
Kimberly-Clark. In October 1996, Kimberly-Clark filed a motion for summary
judgment with respect to the Company's antitrust counterclaim along with a
motion to stay discovery pending resolution of such motion for summary
judgment. The Company intends to vigorously defend its claim. In addition,
Kimberly-Clark has notified the Company that it intends to assert against the
Company a third Kimberly-Clark patent recently issued by the U.S. Patent and
Trademark Office. Trial is scheduled for October 1997. Legal fees and costs
in connection with this litigation will be significant. Should Kimberly-Clark
prevail on its claims, award of all or a substantial portion of the relief
requested by Kimberly-Clark 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 has taken the position that the patent
coverage claimed by Kimberly-Clark 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. 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
Procter & Gamble in U.S. District Court in Atlanta seeking a ruling from the
court that certain patents owned by Procter & Gamble are invalid, unenforceable
and not infringed by the Company's feminine care products. Procter & Gamble
has responded asserting infringement by the Company's feminine care products of
six of the patents listed in the Company's complaint. Discovery has 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.
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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 or all legal proceedings or disputes to which it is a party, except for
the Procter & Gamble and Kimberly-Clark matters discussed above, will not have
a material adverse effect on its financial condition or results of operations.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to vote of security holders during the fourth quarter
of the 1996 fiscal year.
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The response to this item is included on the inner back cover of the
Registrant's Annual Report to Stockholders for the year ended December 29,
1996. The required information is hereby incorporated by reference.
ITEM 6: SELECTED FINANCIAL DATA
The response to this item is included on page 1 of the Registrant's Annual
Report to Stockholders for the year ended December 29, 1996. The required
information is hereby incorporated by reference.
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The response to this item is included on pages 12 through 16 of the
Registrant's Annual Report to Stockholders for the year ended December 29,
1996. The required information is hereby incorporated by reference.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is included on pages 17 through 35 of the
Registrant's Annual Report to Stockholders for the year ended December 29,
1996. The required information is hereby incorporated by reference.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information as to the Company's directors appearing under the caption
"Election of Director and Director Information" in the Proxy Statement relating
to the Annual Meeting of Stockholders to be held May 20, 1997 is incorporated
by reference into this report. The information as to the Company's executive
officers is included in Part I hereof under the caption "Executive Officers" in
reliance upon General Instruction G to Form 10-K and Instruction 3 to Item
401(b) of Regulation S-K.
ITEM 11: EXECUTIVE COMPENSATION
The information set forth under the caption "Director Compensation" in the
Proxy Statement relating to the Annual Meeting of Stockholders to be held May
20, 1997, and the information under the caption "Executive Compensation" in
such Proxy Statement relating to executive officers' compensation is
incorporated by reference into this report.
Page 8
<PAGE> 11
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement relating to the Annual
Meeting of Stockholders to be held on May 20, 1997 is incorporated by reference
into this report.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1. FINANCIAL STATEMENTS.
The Registrant's consolidated financial statements to be included in Part II,
Item 8, are incorporated by reference to the Registrant's 1996 Annual Report to
Stockholders, a copy of which is included as an exhibit to this report.
2. FINANCIAL STATEMENT SCHEDULES
Report of Independent Public Accountants as to Schedules (see page 14)
Schedule II: Valuation and Qualifying Accounts (see page 13)
All other schedules are omitted because they are not applicable or not required
or because the required information is included in the consolidated financial
statements or notes thereto.
3. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- ---------------------------------------------------------------------------------------
<S> <C>
3.1 Certificate of Incorporation of Paragon Trade Brands, Inc.(4)
3.2 By-Laws of Paragon Trade Brands, Inc., as amended through July 31, 1995(5)
4.1 Certificate of Incorporation of Paragon Trade Brands, Inc. (see Exhibit 3.1).
10.1 Asset Transfer Agreement, dated as of January 26, 1993, by and between Weyerhaeuser and
Paragon(1)
10.2 Intellectual Property Agreement, dated as of February 2, 1993, between Weyerhaeuser and Paragon(1)
10.3 License, dated as of February 2, 1993, between Weyerhaeuser and Paragon(1)
10.4 Sublicense, dated as of February 2, 1993, between Weyerhaeuser and Paragon(1)
10.5 Technology Agreement, dated as of October 15, 1987, by and between Weyerhaeuser
and Johnson and Johnson, as amended(1)
10.6 Critical Supply Agreement, dated as of February 2, 1993, between Weyerhaeuser and Paragon(1)
</TABLE>
Page 9
<PAGE> 12
<TABLE>
<S> <C>
10.7* Stock Option Plan for Non-Employee Directors(1)
10.8* Annual Incentive Compensation Plan(1)
10.9* 1993 Long-Term Incentive Compensation Plan(1)
10.10* Employment Agreement, dated as of February 2, 1993, between Paragon and Bobby V. Abraham(1)
10.11* Employment Agreement, dated as of February 2, 1993, between Paragon and David W. Cole(1)
10.12* 1995 Incentive Compensation Plan(5)
10.13 Amended and Restated Credit Agreement, dated as of February 6, 1996(7)
10.13.1 Amendment Agreement, dated December 13, 1996, to Amended and Restated
Credit Agreement, dated as of February 6, 1996
10.15 Indemnification Agreements, dated as of February 2, 1993, between Weyerhaeuser
and Bobby V. Abraham and Gary M. Arnts(1)
10.16 Rights Agreement dated December 14, 1994 between Paragon Trade Brands, Inc. and Chemical
Bank, as Rights Agent(3)
10.17 Asset Purchase Agreement dated December 11, 1995 by and among Paragon Trade Brands,
Inc., PTB Acquisition Sub, Inc., Pope & Talbot, Inc. and Pope & Talbot, Wis., Inc.(6)
10.18** Sales Contract, dated as of January 30, 1996, between Hoechst Celanese Corporation and
Paragon Trade Brands, Inc.(7)
10.19 Lease Agreement between Cherokee County, South Carolina and Paragon Trade Brands, Inc.,
dated as of October 1, 1996
11 Computation of Per Share Earnings (see Note 13 of Notes to Financial Statements, incorporated
by reference from the Registrant's Annual Report to Stockholders for the fiscal year ended
December 29, 1996 and filed with this report)
13 Annual Report to Stockholders
21.1 Subsidiaries of the Company(7)
23.1 Consent of Arthur Andersen LLP
27 Financial Data Schedule (for SEC use only).
</TABLE>
*Management contract or compensatory plan or arrangement.
**Confidential treatment has been requested as to a portion of this
document.
(1)Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report
on Form 10-K for the fiscal year ended December 26, 1993.
(2)Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended June 26, 1994.
(3)Incorporated by reference from Paragon Trade Brands, Inc.'s Current
Report on Form 8-K, dated as of December 14, 1994.
(4)Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report
on Form 10-K for the fiscal year ended December 25, 1994.
Page 10
<PAGE> 13
(5)Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended June 25, 1995
(6)Incorporated by reference from Paragon Trade Brands, Inc.'s Current
Report on Form 8-K, dated as of February 8, 1996.
(7)Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report
on Form 10-K for the fiscal year ended December 31, 1995.
(b) The registrant filed no Reports on form 8-K during the fiscal quarter ended
December 29, 1996.
Page 11
<PAGE> 14
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on this 28th day of March,
1997.
PARAGON TRADE BRANDS, INC.
By: /s/ BOBBY V. ABRAHAM
-------------------------------------
Bobby V. Abraham
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on this 28th day of March, 1997.
/s/ BOBBY V. ABRAHAM
----------------------------------------------------
Bobby V. Abraham
Chairman and Chief Executive Officer
/s/ ALAN J. CYRON
----------------------------------------------------
Alan J. Cyron
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ GARY M. ARNTS
----------------------------------------------------
Gary M. Arnts
Vice President and Controller
(Principal Accounting Officer)
/s/ ADRIAN D.P. BELLAMY
----------------------------------------------------
Adrian D.P. Bellamy
Director
/s/ THOMAS B. BOKLUND
----------------------------------------------------
Thomas B. Boklund
Director
/s/ ROBERT L. SCHUYLER
----------------------------------------------------
Robert L. Schuyler
Director
Page 12
<PAGE> 15
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
FOR THE THREE YEARS IN THE PERIOD ENDED DECEMBER 29, 1996
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
Balance at Charged Deductions Balance at
Beginning to from End of
Description of Period Earnings Reserve Period
- --------------------------------------------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Reserve deducted from related assets:
Doubtful accounts - accounts receivable
1996.................................. $5,866 $2,965 $(1,194) $7,637
====== ====== ======= ======
1995.................................. $5,885 $ 958 $ (977) $5,866
====== ====== ======= ======
1994.................................. $5,357 $3,067 $(2,539) $5,885
====== ====== ======= ======
Excess and obsolete items - inventories
1996.................................. $5,051 $6,841 $(4,089) $7,803
====== ====== ======= ======
1995.................................. $5,830 $6,223 $(7,002) $5,051
====== ====== ======= ======
1994.................................. $4,476 $5,602 $(4,248) $5,830
====== ====== ======= ======
</TABLE>
Page 13
<PAGE> 16
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited in accordance with generally accepted auditing standards, the
financial statements included in Paragon Trade Brands, Inc.'s annual report to
shareholders incorporated by reference in this Form 10-K, and have issued our
report thereon dated February 6, 1997. Our audit was made for the purpose of
forming an opinion on those statements taken as a whole. The schedule listed
in the index above is the responsibility of the Company's management and is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Atlanta, Georgia
February 6, 1997
Page 14
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------------- -----------------------------------------------------------------------------------
<S> <C>
3.1 Certificate of Incorporation of Paragon Trade Brands, Inc.(4)
3.2 By-Laws of Paragon Trade Brands, Inc., as amended through July 31, 1995(5)
4.1 Certificate of Incorporation of Paragon Trade Brands, Inc. (see Exhibit 3.1).
10.1 Asset Transfer Agreement, dated as of January 26, 1993, by and between
Weyerhaeuser and Paragon(1)
10.2 Intellectual Property Agreement, dated as of February 2, 1993, between
Weyerhaeuser and Paragon(1)
10.3 License, dated as of February 2, 1993, between Weyerhaeuser and Paragon(1)
10.4 Sublicense, dated as of February 2, 1993, between Weyerhaeuser and Paragon(1)
10.5 Technology Agreement, dated as of October 15, 1987, by and between
Weyerhaeuser and Johnson and Johnson, as amended(1)
10.6 Critical Supply Agreement, dated as of February 2, 1993, between
Weyerhaeuser and Paragon(1)
10.7* Stock Option Plan for Non-Employee Directors(1)
10.8* Annual Incentive Compensation Plan(1)
10.9* 1993 Long-Term Incentive Compensation Plan(1)
10.10* Employment Agreement, dated as of February 2, 1993, between Paragon and
Bobby V. Abraham(1)
10.11* Employment Agreement, dated as of February 2, 1993, between Paragon and David W. Cole(1)
10.12* 1995 Incentive Compensation Plan(5)
10.13 Amended and Restated Credit Agreement, dated as of February 6, 1996(7)
10.13.1 Amendment Agreement, dated December 13, 1996, to Amended and Restated
Credit Agreement, dated as of February 6, 1996
10.14 Revolving Canadian Credit Facility and Parent Guarantee(2)
10.15 Indemnification Agreements, dated as of February 2, 1993, between
Weyerhaeuser and Bobby V. Abraham and Gary M. Arnts(1)
10.16 Rights Agreement dated December 14, 1994 between Paragon Trade Brands, Inc.
and Chemical Bank, as Rights Agent(3)
</TABLE>
Page 15
<PAGE> 18
<TABLE>
<CAPTION>
<S> <C>
10.17 Asset Purchase Agreement dated December 11, 1995 by and among Paragon Trade
Brands, Inc., PTB Acquisition Sub, Inc., Pope & Talbot, Inc. and Pope & Talbot, Wis., Inc.(6)
10.18** Sales Contract, dated as of January 30, 1996, between Hoechst Celanese
Corporation and Paragon Trade Brands, Inc.(7)
10.19 Lease Agreement between Cherokee County, South Carolina and Paragon Trade Brands, Inc.,
dated as of October 1, 1996
11 Computation of Per Share Earnings (see Note 13 of Notes to Financial Statements, incorporated
by reference from the Registrant's Annual Report to Stockholders for the fiscal year ended
December 29, 1996 and filed with this report)
13 Annual Report to Stockholders
21.1 Subsidiaries of the Company(7)
23.1 Consent of Arthur Andersen LLP
27 Financial Data Schedule (for SEC use only).
</TABLE>
*Management contract or compensatory plan or arrangement.
**Confidential treatment has been requested as to a portion of this document.
(1)Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report
on Form 10-K for the fiscal year ended December 26, 1993.
(2)Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended June 26, 1994.
(3)Incorporated by reference from Paragon Trade Brands, Inc.'s Current
Report on Form 8-K, dated as of December 14, 1994.
(4)Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report
on Form 10-K for the fiscal year ended December 25, 1994.
(5)Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended June 25, 1995
(6)Incorporated by reference from Paragon Trade Brands, Inc.'s Current
Report on Form 8-K, dated as of February 8, 1996.
(7)Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report
on Form 10-K for the fiscal year ended December 31, 1995.
Page 16
<PAGE> 1
EXHIBIT 10.13.1
AMENDMENT AGREEMENT
AMENDMENT AGREEMENT, dated as of December 13, 1996 among PARAGON TRADE
BRANDS, INC. (the "Borrower"), a corporation organized and existing under the
laws of Delaware, the financial institutions listed in Schedule I to the Credit
Agreement (as defined below) (individually, a "Bank" and, collectively, the
"Banks") and The Chase Manhattan Bank (the "Agent").
W I T N E S S E T H
WHEREAS, the Borrower, the Banks and Chemical Bank, as Agent (now known as
The Chase Manhattan Bank) entered into an Amended and Restated Credit
Agreement, dated as of February 6, 1996 (the "Credit Agreement");
WHEREAS, the Borrower wishes to enter into a transaction (the
"Transaction") with Cherokee County, South Carolina (the "County") pursuant to
which the County will issue bonds in connection with the financing of the
acquisition and construction of certain property located in Cherokee County,
South Carolina, and will lease such property to the Borrower, as set forth in
(i) the Indenture, dated as of October 1, 1996, between the County and the
Borrower, (ii) the Lease Agreement, dated as of October 1, 1996 (the "Lease
Agreement"), between the County and the Borrower and (iii) the Escrow
Agreement, dated as of October 1, 1996, among Haynsworth, Marion, McKay &
Guerard, L.L.P., the County and the Borrower (collectively, the "Transaction
Documents"); and
WHEREAS, the Borrower, the Banks and the Agent desire to amend the Credit
Agreement as set forth herein;
NOW, THEREFORE, IT IS AGREED:
1. Definitions. Unless otherwise expressly defined herein, all
capitalized terms used herein and defined in the Credit Agreement shall be used
herein as so defined. Unless otherwise expressly stated herein, all Section
references herein shall refer to Sections of the Credit Agreement.
2. Amendments to Credit Agreement.
a. Section 6.19. Any present or future representation or warranty by
the Borrower made pursuant to Section 6.19 is hereby deemed to exclude any
assets now owned or hereafter acquired in connection with or as a result of the
Transaction, and any Default or Event of
-1-
<PAGE> 2
Default which would arise under Section 6.19 as a result of the Transaction but
for this Amendment shall not constitute a Default or Event of Default under the
Credit Agreement.
b. Section 8.01. Any and all Liens upon or with respect to the Leased
Property (as defined in the Lease Agreement) which may be created, incurred,
assumed or suffered to exist by the Borrower or any of its Subsidiaries as a
result of the Transaction are hereby deemed to be excluded from Section 8.01,
and any Default or Event of Default which would arise from any such Lien but
for this Amendment shall not constitute a Default or Event of Default under the
Credit Agreement.
c. Section 8.02. The conveyance, sale, lease or disposal of any assets in
connection with the Transaction shall be deemed to be excluded from Section
8.02, and any Default or Event of Default which would arise from any such
conveyance, sale, lease or disposal but for this Amendment shall not constitute
a Default or Event of Default under the Credit Agreement.
d. Section 11.03. All notices delivered to any party to the Credit
Agreement pursuant to Section 11.03 shall hereafter be delivered to the address
for such party set forth on its respective signature page hereto.
3. Borrower's Representations. The Borrower hereby represents and warrants
that prior to the closing of the Transactions, there will be no changes from
the draft Transaction Documents which would materially adversely affect the
interests of the Banks or the Agent. The Borrower further represents and
warrants that the representations and warranties contained in Section 6 of the
Credit Agreement (as amended hereby) are true and correct as of the date hereof
(except to the extent that such representations and warranties relate to a
prior date) and that no Default or Event of Default has occurred and is
continuing on the date hereof.
4. Effect of Amendment. The parties agree that, except as amended hereby
or hereafter, the Credit Agreement, each Note and any and all other agreements,
documents, certificates and other instruments executed in connection therewith
shall remain in full force and effect in accordance with their terms. Any
reference to the Credit Agreement shall be deemed to be a reference to the
Credit Agreement as amended by this Amendment.
5. Counterparts. This Amendment may be executed in any number of
counterparts, each of which shall
-2-
<PAGE> 3
constitute an original, but all of which when taken together shall constitute
but one instrument.
6. Governing Law. This Amendment shall be governed by and construed in
accordance with the laws of the State of New York.
7. Fees and Expenses. The Borrowers agree to pay all out-of-pocket fees
and expenses of the Agent (including the fees and expenses of its counsel)
incurred in the negotiation, drafting and execution of this Amendment.
IN WITNESS WHEREOF, the Borrower, the Banks and the Agent have caused this
Amendment to be duly executed by their respective authorized officers as of the
day and year first above written.
PARAGON TRADE BRANDS, INC.
By /s/ Kevin P. Higgins
-------------------------------
Name: Kevin P. Higgins
-------------------------
Its: Vice President - Treasurer
--------------------------
Address
- -------
180 Technology Parkway
Norcross, GA 30092
Attention: Kevin P. Higgins
Facsimile: (770) 300-3958/3054
With a Copy to:
- --------------
Cathy O. Hasbrouck
Vice President, General Counsel and Secretary
Facsimile: (770) 300-3959
-3-
<PAGE> 4
THE CHASE MANHATTAN BANK,
Individually and as Agent
By /s/ William J. Caggiano
--------------------------------
Name: William J. Caggiano
---------------------------
Its: Managing Director
---------------------------
Address
- -------
270 Park Avenue
New York, NY 10017
Attention: William Caggiano
Facsimile: (212) 972-0009
ABN AMRO BANK N.V.
By ABN AMRO NORTH AMERICA, INC.,
as Agent
By /s/ Leif H. Olsson
------------------------------
Name: Leif H. Olsson
------------------------------
Its: Group Vice President
------------------------------
and Director
------------------------------
By /s/ Errett E. Hummel
------------------------------
Name: Errett E. Hummel
------------------------------
Its: Vice President & Director
------------------------------
Address
- -------
One Union Square, Ste. 2323
Seattle, WA 98101
Attention: David McGinnis
Facsimile: (206) 682-5641
-4-
<PAGE> 5
THE BANK OF NOVA SCOTIA
By /s/ William E. Zarrett
--------------------------------
Name: William E. Zarrett
--------------------------------
Its: Senior Relationship Manager
--------------------------------
Address
- -------
600 Peachtree Street, N.E.
Suite 2700
Atlanta, GA 30308
Attention: William E. Zarrett
Facsimile: (404) 888-8998
BANK OF AMERICA NW, N.A.
Successor by merger to Seattle
First National Bank
By /s/ Stan Diddams
--------------------------------
Name: Stan Diddams
--------------------------------
Its: Vice President
--------------------------------
Address
- -------
701 5th Avenue
CSC-12
Seattle, WA 98104
Attention: Stan Diddams
Facsimile: (206) 358-3113
-5-
<PAGE> 6
WACHOVIA BANK OF GEORGIA, N.A.
By /s/ John T. Seeds
----------------------------
Name: John T. Seeds
----------------------------
Its: Senior Vice President
----------------------------
Address
- -------
191 Peachtree St. N.E.
Atlanta, GA 30303
Attention: John Whitner
Facsimile: (404) 332-6898
THE BANK OF TOKYO-MITSUBISHI, LTD.
By /s/ David M. Purcell
----------------------------
Name: David M. Purcell
----------------------------
Its: Vice President
----------------------------
Address
- -------
1201 Third Avenue, #1100
Seattle, WA 98101
Attention: Stanley Lance
Facsimile: (206) 382-6067
PNC BANK, NATIONAL ASSOCIATION
By /s/ Rose M. Crump
----------------------------
Name: Rose M. Crump
----------------------------
Its: Vice President
----------------------------
Address
- -------
249 Fifth Avenue
Pittsburgh, PA 15222-2707
Attention: Rose M. Crump
Facsimile: (412) 762-6484
-6-
<PAGE> 7
THE BANK OF NEW YORK
By /s/ Robert Louk
----------------------------
Name: Robert Louk
----------------------------
Its: Vice President
----------------------------
Address
- -------
10990 Wilshire Blvd., #1125
Los Angeles, CA 90024
Attention: Robert J. Louk
Facsimile: (310) 996-8667
WELLS FARGO BANK, N.A.
By /s/ Peter G. Olson
----------------------------
Name: Peter G. Olson
----------------------------
Its: Senior Vice President
----------------------------
Address
- -------
885 Third Avenue
New York, N.Y. 10022-4872
Attention: Sanford E. Horowitz
Facsimile: (212) 593-5238
Acknowledged and Agreed to:
PARAGON TRADE BRANDS (CANADA) INC.
By /s/ Alan J. Cyron
----------------------------
Name: Alan J. Cyron
----------------------------
Its: Assistant Secretary
----------------------------
Address
- -------
1600 Clark Boulevard
Brampton, Ontario L6P 3V7
Attention: Adrienne Stone
Facsimile: (206) 292-3120
-7-
<PAGE> 1
EXHIBIT 10.19
Execution Copy
LEASE AGREEMENT
between
CHEROKEE COUNTY, SOUTH CAROLINA
and
PARAGON TRADE BRANDS, INC.,
a Delaware corporation
Dated as of October 1, 1996
Certain rights of Cherokee County, South Carolina, under this Lease Agreement
have been assigned and pledged to, and are subject to a security interest in
favor of, PARAGON TRADE BRANDS, INC. under the Indenture dated as of October 1,
1996, as amended or supplemented from time to time, between Cherokee County,
South Carolina, as Issuer and Paragon Trade Brands, Inc., as the purchaser of
(i) the not exceeding $60,000,000 Industrial Revenue Bond, Series 1996 (Paragon
Trade Brands, Inc. Project), and (ii) the not exceeding $650,000 Special Source
Revenue Bond of Cherokee County, South Carolina, Series 1996 (Paragon Trade
Brands, Inc. Project). Information concerning such security interests may be
obtained from the Clerk of County Council of Cherokee County, South Carolina.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE I
SECTION 1.01. Definitions 3
............................................................................
SECTION 1.02. References to Lease 8
............................................................................
ARTICLE II
SECTION 2.01. Representations and Covenants of the County 9
............................................................................
SECTION 2.02. Representations and Warranties by Tenant 10
............................................................................
ARTICLE III
SECTION 3.01. Demise of the Leased Property 12
............................................................................
SECTION 3.02. No Warranties of Title by County 12
............................................................................
SECTION 3.03. Limited Covenant of Quiet Possession 12
............................................................................
SECTION 3.04. No Conveyance or Impairment of Title by the County 12
............................................................................
ARTICLE IV
SECTION 4.01. Acquisition by Construction and Purchase of Project 14
............................................................................
SECTION 4.02. Issuance of Industrial Bond 14
............................................................................
SECTION 4.03. Issuance of Special Source Revenue Bond 14
............................................................................
SECTION 4.04. Revision of Plans and Specifications 14
............................................................................
SECTION 4.05. Completion Date 14
............................................................................
SECTION 4.06. Completion of the Project if Bond Proceeds are Insufficient 15
............................................................................
SECTION 4.07. Records and Reports, Non-Disclosure 15
............................................................................
ARTICLE V
SECTION 5.01. Term 17
............................................................................
SECTION 5.02. Basic Rent 17
............................................................................
SECTION 5.03. Additional Rent 17
............................................................................
SECTION 5.04. FILOT Payments Secured by Tax Lien 18
............................................................................
SECTION 5.05. Assignment and Pledge by County to Purchaser 18
............................................................................
SECTION 5.06. Defaulted Payments 18
............................................................................
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C> <C>
ARTICLE VI
SECTION 6.01. Maintenance of Leased Property 19
............................................................................
SECTION 6.02. Modification of Leased Property 19
............................................................................
SECTION 6.03. Payments in Lieu of Taxes 21
............................................................................
SECTION 6.04. Taxes, Utilities and Other Governmental Charges. 22
............................................................................
SECTION 6.05. Insurance. 23
............................................................................
SECTION 6.06. Beneficial Ownership of Tenant. 23
............................................................................
ARTICLE VII
SECTION 7.01. Damage and Destruction 24
............................................................................
SECTION 7.02. Condemnation 24
............................................................................
SECTION 7.03. Payments in Lieu of Taxes in the Event of
Damage and Destruction or Condemnation 24
............................................................................
SECTION 7.04. No Termination or Abatement of Basic Rent
or Additional Rent for Damage or Destruction 24
............................................................................
ARTICLE VIII
SECTION 8.01. Use of Leased Property for Lawful Activities. 26
............................................................................
SECTION 8.02. Right to Inspect 26
............................................................................
SECTION 8.03. Limitation of County's Liability 26
............................................................................
SECTION 8.04. No Liens by Tenant 26
............................................................................
SECTION 8.05. Maintenance of Corporate Existence 27
............................................................................
SECTION 8.06. Indemnification 27
............................................................................
SECTION 8.07. Applications and Licenses 27
............................................................................
SECTION 8.08. Qualification in State 28
............................................................................
SECTION 8.09. No Liability of County's Personnel 28
............................................................................
SECTION 8.10. Environmental Compliance 28
............................................................................
SECTION 8.11. Other Tax Matters 29
............................................................................
ARTICLE IX
SECTION 9.01. Sublet or Assignment 30
............................................................................
SECTION 9.02. Access 30
............................................................................
ARTICLE X
SECTION 10.01. Mandatory Purchase of Leased Property by Tenant 31
............................................................................
SECTION 10.02. Option to Purchase the Leased Property;
Exercise of Option Hereunder 31 31
............................................................................
SECTION 10.03. Purchase Price 31
............................................................................
SECTION 10.04. Status of Title 31
............................................................................
SECTION 10.05. Conveyance; Charges Incident Thereto 32
............................................................................
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C> <C>
ARTICLE XI
SECTION 11.01. Events of Default 33
............................................................................
SECTION 11.02. Remedies on Event of Default 33
............................................................................
SECTION 11.03. Certain Tenant Obligations to Survive Repossession
and Termination 34 34
............................................................................
SECTION 11.04. Application of Moneys Upon Enforcement of Remedies 34
............................................................................
SECTION 11.05. Collection of FILOT Revenues. 34
............................................................................
ARTICLE XII
SECTION 12.03. Rights and Remedies Cumulative 34
............................................................................
SECTION 12.02. Successors and Assigns 35
............................................................................
SECTION 12.03. Notices; Demands; Requests 35
............................................................................
SECTION 12.04. Applicable Law; Entire Understanding 35
............................................................................
SECTION 12.05. Severability 36
............................................................................
SECTION 12.06. Headings and Table of Contents; References 36
............................................................................
SECTION 12.07. Multiple Counterparts 36
............................................................................
SECTION 12.08. Rights of Purchasers 36
............................................................................
SECTION 12.09. Amendments 36
............................................................................
SECTION 12.10. Waiver 36
............................................................................
SECTION 12.11. Business Day. 36
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</TABLE>
EXHIBIT A
EXHIBIT B
SCHEDULE A
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THIS LEASE AGREEMENT (this "Lease") made and entered into as of the first
day of October, 1996, by and between CHEROKEE COUNTY, SOUTH CAROLINA (the
"County"), a body politic and corporate and a political subdivision of the
State of South Carolina, and PARAGON TRADE BRANDS, INC., a corporation duly
organized and existing under the laws of the State of Delaware (the "Tenant").
WITNESSETH:
WHEREAS, Title 4, Chapters 1, 12 and 29, Code of Laws of South Carolina,
1976, as amended (collectively, the "Act"), empowers the several counties of
the State of South Carolina (i) to acquire, enlarge, improve and expand one or
more projects (as defined in the Act); (ii) to enter into a financing agreement
with any industry to construct and thereafter operate, maintain and improve a
project; (iii) to issue industrial revenue bonds and special source revenue
bonds to defray the cost of acquiring, enlarging, improving or expanding such
project by construction and purchase; and (iv) to enter into agreements with
other counties within the State of South Carolina for the purpose of creating
multi-county industrial/business parks; and
WHEREAS, the Tenant considered locating in several states and in several
counties in the State of South Carolina (the "State"); and
WHEREAS, as inducement for the Tenant to locate in the County, the County
has agreed to issue its revenue bonds for the purpose of defraying the cost of
acquiring, and constructing the Project (as hereinafter defined), which is to
be located within the jurisdiction of the County and which consists generally
of (i) a facility for the manufacture of personal hygiene products and (ii)
certain Infrastructure (herein defined) associated with such facility; and
WHEREAS, in reliance thereon the Tenant has decided to locate the Project
in the jurisdiction of the County; and
WHEREAS, in order to provide sources of revenue for the payment of
principal and interest on such revenue bonds, the County has agreed to lease
the Leased Property (as hereinafter defined) to the Tenant in accordance with
the terms and conditions hereinafter set forth; and
WHEREAS, the County by due corporate action has authorized the issuance of
a not exceeding Sixty Million Dollars ($60,000,000) Industrial Revenue Bond,
Series 1996 (Paragon Trade Brands, Inc. Project) (the "Industrial Bond"),
pursuant to the Act in order to defray the costs of acquiring the Project
(other than Infrastructure) to be located in the County and to enter into this
Lease with the Tenant subject to the terms and conditions herein set forth; and
WHEREAS, the County by due corporate action has authorized the issuance of
a not exceeding Six Hundred Fifty Thousand Dollars ($650,000) aggregate
principal amount Special Source Revenue Bond, Series 1996 (Paragon Trade Brands,
Inc. Project) (the "Special Source Revenue Bond"), pursuant to the Act in order
to defray the costs of acquiring the Infrastructure; and
WHEREAS, the Project will be located in the Multi-County
Industrial/Business Park (the "Industrial Park") established by the County and
Chester County, South Carolina (jointly, the "Counties"), pursuant to an
Agreement for Development for a Joint County Industrial/Business Park dated
March 8, 1994 and amended on July 31, 1995, by and
<PAGE> 6
among the Counties;
NOW, THEREFORE, in consideration of the respective representations and
agreements hereinafter contained, the County and the Tenant agree as follows;
PROVIDED that in the performance of the agreements of the County herein
contained, any obligation it may thereby incur for the payment of money shall
not create a pecuniary liability or a charge upon its general credit or taxing
powers but shall be a limited obligation of the County payable solely out of
the revenues derived by it from this Lease and specifically pledged therefor,
consisting of: (i) with respect to the Industrial Bond, the Basic Rent
(hereinafter defined), the proceeds of the Industrial Bond and any sale
proceeds or insurance or condemnation awards respecting the Project (except
that portion of the Project consisting of Infrastructure), including any such
moneys held by the County in the Revenue Fund (hereinafter defined) for the
payment of the principal of and interest on the Industrial Bond and any
investment income thereon; and (ii) with respect to the Special Source Revenue
Bond, the Net FILOT Revenues (hereinafter defined), the proceeds of the Special
Source Revenue Bond and any sale proceeds or insurance or condemnation awards
with respect to the Infrastructure including any such moneys held by the County
in the Revenue Fund for the payment of the principal of and interest on the
Special Source Revenue Bond and any investment income thereon, subject, in each
case, to the further limitations set forth hereinbelow and in the Indenture (as
hereinafter defined):
[Article I follows on next page]
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ARTICLE I
DEFINITIONS
SECTION 1.01. Definitions. In addition to the words and terms elsewhere
defined in this Lease, the following words and terms as used herein and in the
preambles hereto shall have the following meanings unless the context or use
indicates another or different meaning or intent. Furthermore, terms not
defined herein which are defined in the Indenture (defined hereinbelow) shall
have the meaning ascribed to them in the Indenture.
"Act" shall mean, collectively, Title 4, Chapters 1, 12 and 29 of the Code
of Laws of South Carolina, 1976, as amended, and all future acts amendatory
thereof.
"Administration Expenses" shall mean the reasonable and necessary expenses
incurred by the County with respect to the Project, this Lease and the
Indenture and the compensation and expenses paid to or incurred by the
Purchasers, as defined hereinbelow, under this Lease or the Indenture;
provided, however, that no such expense shall be considered an Administration
Expense until the Issuer or either of the Purchasers, as the case may be, has
furnished to the Tenant a statement in writing indicating the amount of such
expense and the reason it has been or will be incurred.
"Advance" shall mean any advance made under one or more Bonds as evidenced
by notations on such Bonds as to such advances, pursuant to Section 3.01 or
3.02 of the Indenture.
"Allocable Percentage" shall mean, in connection with any casualty or
condemnation of a portion of the Leased Property under Article VII hereof or
the Tenant's exercise of its option to purchase a portion of the Leased
Property under Article X hereof, a fraction (i) the numerator of which is the
sum of the Taxable Values of the Leased Property so affected, and (ii) the
denominator of which is the sum of the Taxable Values of all Leased Property
then owned by the County hereunder.
"Authorized County Representative" shall mean the Chairman of County
Council or such other person or persons at the time designated to act on behalf
of the County by written certificate furnished to the Tenant and the Purchasers
containing the specimen signature of such person and signed on behalf of the
County by the Clerk of the County Council.
"Authorized Tenant Representative" shall mean such person or persons at
the time designated to act on behalf of the Tenant by a written certificate
furnished to the County and the Purchasers containing the specimen signature of
each such person and signed on behalf of the Tenant by its President, any Vice
President or Treasurer or Assistant Treasurer or by the chief executive officer
or chief financial officer of any successor-in-interest or assignee of the
Tenant.
"Basic Rent" shall have the meaning ascribed to it in Section 5.02 of this
Lease.
"Bonds" shall mean, collectively, the Industrial Bond and the Special
Source Revenue Bond.
"Code" shall mean the Code of Laws of South Carolina, 1976, as amended.
"Completion Date" shall mean the earlier of (i) the date on which the
acquisition,
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construction and installation of each of the Financed Increments
constituting the Project are completed in their entirety as certified in
accordance with Section 4.05 of this Lease or (ii) December 31 in the fifth
year after the year in which this Lease is executed and delivered, or a later
date (not later than December 31 in the seventh year after the year in which
the Lease is executed and delivered) that the County may designate pursuant to
the 2-year extension provisions of Section 4-12-30(C)(2) of the Act.
"Controlled Group" shall have the meaning assigned to that term in Section
4-12-30((B)(4)(b)(iv) of the Act.
"Cost" or "Cost of the Project" shall mean the cost of acquiring, by
construction and purchase, the Project and shall be deemed to include, whether
incurred prior to or after the date of this Lease: (a) obligations of the
Tenant or the County incurred for labor, materials and other expenses to
contractors, builders and materialmen in connection with the acquisition,
construction and installation of the Project; (b) the cost of contract bonds
and of insurance of all kinds that may be required or necessary during the
course of construction of the Project, which are not paid by the contractor or
contractors or otherwise provided for; (c) the expenses of the Tenant or the
County for test borings, surveys, test and pilot operations, estimates, plans
and specifications and preliminary investigations therefor, and for supervising
construction, as well as for the performance of all other duties required by or
reasonably necessary in connection with the acquisition, construction and
installation of the Project; (d) compensation and expenses of the Purchasers'
legal, accounting, financial and printing expenses, fees and all other expenses
incurred in connection with the execution and delivery of the Bonds; (e) all
other costs which the Tenant or the County shall be required to pay under the
terms of any contract or contracts for the acquisition, construction and
installation of the Project; (f) costs incurred by the Tenant for the
acquisition of a leasehold interest in the land upon which the Project is
located; (g) any sums required to reimburse the Tenant or the County for
advances made by either of them for any of the above items, or for any other
work done and costs incurred by the Tenant or the County which are for the
acquisition of land or property of a character subject to the allowance for
depreciation provided for under Section 167 of the Internal Revenue Code of
1986, as amended, and included in the Project; and (h) any amount for the
payment of interest on the Bonds accruing prior to the Completion Date and for
which a requisition may be made under Section 3.03 of the Indenture.
"County" shall mean Cherokee County, South Carolina, a body politic and
corporate and a political subdivision of the State of South Carolina, and its
successors and assigns.
"County Council" shall mean the governing body of the County and its
constituent members and their respective successors.
"County Minimum" shall mean the payments due under Sections 6.03(a)(1) and
6.03(a)(3) hereof.
"Default" shall mean an event or condition, the occurrence of which would,
with the lapse of time or the giving of notice or both, become an Event of
Default as defined in Section 11.01 hereof.
"Enterprise Zone" shall mean an enterprise zone as created under the South
Carolina Enterprise Zone Act of 1995 as amended.
"Escrow Agent" shall mean the Escrow Agent serving under the Escrow
Agreement, initially, Haynsworth, Marion, McKay & Guerard, LLP.
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"Escrow Agreement" shall mean the Escrow Agreement dated as of October 1,
1996, by and among the County, the Tenant, the Industrial Bond Purchaser, the
Special Source Revenue Bond Purchaser, and the Escrow Agent, as such may be
amended or supplemented from time to time.
"FILOT Revenues" shall mean the payments in lieu of taxes which the Tenant
is obligated to pay to the County pursuant to Section 6.03 hereof.
"Financed Increment Payment" shall have the meaning assigned to such term
in Section 6.03 hereof.
"Financed Increments" shall mean those increments of the Project (i) which
are completed and fit for their intended use as prescribed by Section 12-37-670
of the Code, and (ii) which are financed by Advances under one or more Bonds
pursuant to Section 3.01 or 3.02 of the Indenture, and (iii) as to which title
has been conveyed to the County pursuant to Section 4.01 of this Lease.
"Indemnified Party" shall have the meaning ascribed to it in Section 8.06
of this Lease.
"Indenture" shall mean the Indenture, dated as of October 1, 1996, by and
between the County, the Industrial Bond Purchaser, and the Special Source
Revenue Bond Purchaser, as the same may be amended, modified, or supplemented
in accordance with the provisions thereof.
"Independent Counsel" shall mean an attorney duly admitted to practice law
before the highest court of any state.
"Industrial Bond" shall mean the Cherokee County, South Carolina,
Industrial Revenue Bond, Series 1996 (Paragon Trade Brands, Inc. Project), in
the principal amount of not exceeding $60,000,000, authorized, executed and
delivered by the County under the Indenture, and any bonds executed and
delivered under the Indenture in lieu of or in substitution thereof (including
pursuant to Section 2.01 thereof), the proceeds of which will be applied as
Advances to the Tenant to finance the Project.
"Industrial Bond Purchaser" shall mean Paragon Trade Brands, Inc., and its
permitted successors and assigns, as the initial holder of the Industrial Bond.
"Infrastructure" shall mean all or part of the following property of the
Project to the extent financed with the proceeds of the Special Source Revenue
Bond: (i) land purchase and grading, (ii) the roads, water and sewer facilities
and other utilities serving the Project (to the extent not paid for with state,
local or federal grants), including without limitation any pretreatment
facilities and proposed water retention facilities, also as set forth in the
Plans and Specifications and (iii) all land and machinery, equipment, fixtures
and other personal property ancillary to any of the property described in the
foregoing clauses.
"Lease" shall mean this agreement as originally executed and from time to
time supplemented or amended as permitted herein.
"Leased Equipment" shall mean all machinery, equipment, furnishings,
fixtures and other personal property acquired from the proceeds of the Bonds
and installed on the Leased Land.
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"Leased Land" shall mean the real estate described in Exhibit A attached
hereto as may be supplemented from time to time.
"Leased Property" shall mean the Project, including the Leased Land; the
Leased Equipment; the Infrastructure, the Non-Project Leasehold Improvements,
any Replacement Property and any other property which is, or which may
hereafter become subject to the demise of this Lease.
"Multi-County Fee" shall mean the fee payable by the County to Chester
County, South Carolina or any successor thereto under the Multi-County Park
Agreement.
"Multi-County Industrial Park" shall mean the Multi-County
Industrial/Business Park established pursuant to the Multi-County Park
Agreement, and any multi-county industrial or business park which includes the
Project and which is designated by the County as such pursuant to any agreement
which supersedes or replaces the Multi-County Park Agreement.
"Multi-County Park Agreement" shall mean the Agreement for Development of
a Joint County Industrial Business Park between the County and Chester County,
South Carolina dated March 8, 1994, as amended on July 31, 1995 and as amended,
supplemented or replaced from time to time.
"Net FILOT Revenues" shall mean the FILOT Revenues remaining after payment
of the County Minimum and Multi-County Fee.
"Non-Project Leasehold Improvements" shall mean those buildings,
structures and fixtures on the Leased Land, the costs of acquisition and
construction of which is paid for from sources other than Bond proceeds and
which property does not constitute Replacement Property.
"Payment Date" shall mean each date specified in the Bonds for the payment
of principal or interest thereon.
"Permitted Encumbrances" shall mean as of any particular time, (i) liens
for ad valorem taxes and special assessments not then delinquent; (ii) this
Lease, and the Indenture; (iii) utility, access and other easements and rights
of way, flood rights, leases, subleases, restrictions and exceptions that an
Authorized Tenant Representative certifies will not interfere with or impair
the operations being conducted at the Project (or, if no operations are being
conducted therein, the operations for which the Project was designed or last
modified); (iv) matters of record on the date hereof and such minor defects,
irregularities, encumbrances, easements, rights of way, and clouds on title,
not on record, as normally exist with respect to properties similar in
character to the Project and as do not, according to the written certification
of an Authorized Tenant Representative delivered to the Purchasers, materially
impair the property affected thereby for the purpose for which it was acquired
or is held by the County; (v) mechanic's and materialman's liens in effect on
the date hereof or otherwise provided that any such lien is contested in good
faith and Tenant shall within ninety (90) days of the filing of such lien
remove the lien by placing the appropriate bond with the Office of the Clerk of
Court for Cherokee County, South Carolina; (vi) any mortgage, lease, security
interest or financing in the ordinary course of business with respect to
machinery and equipment not constituting part of the Project to be used or
installed at the Project; and (vii) any other lien, mortgage, easement or
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encumbrance to which the Purchasers consent, provided, however, that the
matters described in foregoing clauses (vi) and (vii) shall be subordinate to
the Reserved Rights of the County hereunder and to the interest of the Special
Source Revenue Bond Purchaser hereunder.
"Person" shall mean and include any individual, association, limited
liability company or partnership, unincorporated organization, corporation,
partnership, joint venture, or government or agency or political subdivision
thereof.
"Plans and Specifications" shall mean the plans and specifications
prepared for the Project, on file at the Tenant's office, as the same may be
implemented and detailed from time to time and as the same may be revised from
time to time prior to the completion of the acquisition, construction and
installation of the Project in accordance with Section 4.04 hereof.
"Pledged Revenues" shall mean: (i) with respect to the Industrial Bond,
the Basic Rent, the proceeds of the Industrial Bond and any sale proceeds or
insurance or condemnation awards respecting the Project (except that portion of
the Project consisting of Infrastructure), including any such moneys held by
the County in the Revenue Fund for the payment of the principal of and interest
on the Industrial Bond and any investment income thereon; and (ii) with respect
to the Special Source Revenue Bond, the Net FILOT Revenues, the proceeds of the
Special Source Revenue Bond and any sale proceeds or insurance or condemnation
awards respecting the Infrastructure, including any such moneys held by the
County in the Revenue Fund for the payment of the principal of and interest on
the Special Source Revenue Bond and any investment income thereon.
"Project" shall mean (i) the Leased Land; (ii) Infrastructure; (iii) all
buildings and appurtenances which are presently under construction or are to be
constructed on the Leased Land from the proceeds of the Bonds, as they may at
any time exist, including any air conditioning and heating system (which shall
be deemed fixtures); (iv) the Leased Equipment and all other machinery,
equipment, other fixtures or personal property, (a) the acquisition of which
was financed in whole or in part from the proceeds of the Bonds, or (b) which
is installed in or on the foregoing buildings or on the Leased Land in
substitution or replacement of all or any part of such equipment; (v) any
personal property acquired hereafter which becomes so attached, integrated or
affixed to any item described in the foregoing clauses that it cannot be
removed without impairing the operating utility of such item as originally
designed or damaging such item, and (vi) to the extent not covered by the
foregoing, anything qualifying as a Project under Sections 4-29-10(3) or
4-12-30 of the Act or as "infrastructure" under Section 4-29-68(A)(2) of the
Act.
"Purchasers" shall mean collectively, the Industrial Bond Purchaser and
the Special Source Revenue Bond Purchaser.
"Reconveyance Documents" shall have the meaning ascribed to it in the
Escrow Agreement.
"Replacement Property" shall mean all property installed on the Leased
Property or in the buildings, improvements and personal property theretofore
constituting part of the Project to the extent that Section 4-12-30(F) of the
Act permits such property to be included in the Project.
"Reserved Rights" shall mean the rights of the County hereunder to receive
notices, to inspect the Leased Property and any books and records relating to
the Leased Property,
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to receive payment of Administration Expenses for costs incurred by the County
pursuant to Section 5.03 of this Lease; to receive the FILOT Revenues pursuant
to Sections 5.03 and 6.03 hereof; to receive so much of Net FILOT Revenues as
shall remain following payment of the principal of and interest on the Special
Source Revenue Bond; and to receive indemnification under Sections 8.06 and 8.10
hereof.
"School District" shall mean the School District of Cherokee County, South
Carolina, and its successors within which the Project is located at any given
point of time.
"Special Source Revenue Bond" shall mean the Cherokee County, South
Carolina, Special Source Revenue Bond, Series 1996 (Paragon Trade Brands, Inc.
Project), in the principal amount of not exceeding $650,000, authorized,
executed, and delivered by the County under the Indenture and any bonds executed
and delivered under an indenture in lieu of or in substitution thereof
(including pursuant to Section 2.02 thereof), the proceeds of which will be
disbursed by Advances to the Tenant to finance a certain portion of the Project
constituting Infrastructure.
"Special Source Revenue Bond Purchaser" shall mean Paragon Trade Brands,
Inc., a Delaware Corporation, as the Holder of the Special Source Revenue Bond,
and its permitted successors and assigns.
"Taxable Value" means, at any time, the value of any item of Leased
Property for South Carolina ad valorem tax purposes, after any allowance for
depreciation of such item.
"Tenant" shall mean Paragon Trade Brands, Inc., a Delaware Corporation,
and any surviving, resulting or transferee entity in any merger, consolidation
or transfer of assets permitted under Section 8.05 hereof; or any other person
or entity which may succeed to the rights and duties of the Tenant hereunder in
accordance with all applicable provisions hereof.
"Term" shall mean the duration of the leasehold estate as set forth in
Section 5.01 hereof.
"Threshold Date" shall mean December 31 of the fifth year after the year
in which this Lease is executed and delivered.
"Transfer Provisions" shall mean the provisions of subsection (M) of
Section 4-12-30 of the Act, as amended or supplemented from time to time.
All terms used herein which are not otherwise defined shall have the
meaning ascribed to them in the Indenture.
SECTION 1.02. References to Lease. The words "hereof", "herein",
"hereunder" and other words of similar import refer to this Lease as a whole.
[End of Article I]
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ARTICLE II
REPRESENTATIONS AND COVENANTS
SECTION 2.01. Representations and Covenants of the County. The County
Council makes the following representations and covenants, on behalf of itself
and on behalf of the County, as the basis for the undertakings of the County
herein contained:
(a) The County is a body politic and corporate and a political subdivision
of the State of South Carolina and is authorized and empowered by the
provisions of the Act to enter into the transactions contemplated by this Lease
and to carry out its obligations hereunder. The Project, financed in part with
the Industrial Bond, constitutes and will constitute a "Project" within the
meaning of the Act, and the portion of the Project financed with the Special
Source Revenue Bond constitutes unimproved land and infrastructure under the
Act. By proper action by the County Council, the County has been duly
authorized to execute and deliver this Lease, the Indenture and has been duly
authorized to issue the Bonds;
(b) The County will accept title to the Project and lease the Project to
the Tenant and sell the Project to the Tenant at the expiration or sooner
termination of the Term of this Lease, if the Tenant shall elect to purchase
the same, all for the purpose of promoting the industrial development,
developing the trade, and utilizing and employing the manpower, agricultural
products and natural resources of the State of South Carolina;
(c) The Tenant has determined that the Cost of the Project, to be financed
from the Industrial Bond, will not exceed $60,000,000 and on that basis the
County will issue the Industrial Bond in the principal amount of not exceeding
$60,000,000, and the Special Source Revenue Bond in the principal amount of not
exceeding $650,000, both of which will be dated, mature and bear interest as
set forth in the Indenture and which will be subject to redemption on the
occasions and at the redemption prices set forth in the Indenture;
(d) Concurrently with the delivery hereof, the County will execute and
deliver the Indenture;
(e) The County is not in default under any of the provisions of the laws
of the State of South Carolina whereby any such default would adversely affect
the issuance, validity or enforceability of the Bonds;
(f) This Lease and the Indenture each constitute valid and binding
commitments of the County and the authorization, execution and delivery of this
Lease and the Indenture, and the performance by the County of its obligations
hereunder and thereunder will not conflict with or constitute a breach of, or a
default under, any existing law, court or administrative regulation, decree,
order or any provision of the Constitution or laws of the State of South
Carolina relating to the establishment of the County or its affairs, or any
material agreement, mortgage, lease or other instrument to which the
County is subject or by which it is bound; and
(g) No actions, suits, proceedings, inquiries or investigations are
pending or threatened against or affecting the County in any court or before
any governmental authority or arbitration board or tribunal, any of which
involve this Lease or which, in any way, would adversely affect the validity or
enforceability of the Bonds, the Indenture or this Lease.
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No representation by the County is hereby made with regard to compliance
by the Project or any Person with laws regulating (i) the construction or
acquisition of the Project, (ii) environmental matters pertaining to the Leased
Property, (iii) the marketability of title to any of the Leased Property, or
(iv) the offer or sale of any securities.
SECTION 2.02. Representations and Warranties by Tenant. The Tenant makes
the following representations and warranties as the basis for the undertakings
on its part herein contained:
(a) The Tenant is a corporation, validly existing and in good standing,
under the laws of the State of Delaware, is duly qualified to do business in
South Carolina, has power to enter into this Lease, and by proper corporate
action has been duly authorized to execute and deliver this Lease.
(b) This Lease constitutes a valid and binding commitment of the Tenant
and the authorization, execution and delivery of this Lease, the Indenture and
the Escrow Agreement, and the performance by the Tenant of its obligations
hereunder or thereunder, will not conflict with or constitute a breach of, or a
default under, (i) any existing law, court or administrative regulation,
decree, or order, or (ii) any material agreement, mortgage, lease or other
instrument, to which the Tenant is subject or by which it or its properties are
bound which would have a material adverse affect on the Tenant's ability to
perform its obligations hereunder. The Tenant has obtained, or will obtain in
due course, all governmental and third party consents, licenses and permits
deemed by the Tenant to be necessary or desirable for the acquisition,
construction and operation of the Project as contemplated hereby, and will
maintain all such consents, permits and licenses in full force and effect.
(c) No event has occurred and no condition currently exists with respect
to the Tenant which would constitute a Default or an "Event of Default" as
defined herein or in the Indenture.
(d) The Tenant intends to operate the Project for the purpose of a
facility for the manufacture of personal hygiene products and for such other
purposes permitted under the Act as the Tenant may deem appropriate. The
Project constitutes a "Project" permitted under the Act, and the Infrastructure
constitutes infrastructure within the meaning of Section 4-29-68(A)(2) of the
Act. The South Carolina Coordinating Council for Economic Development has
approved the Project for benefits under the Enterprise Zone Act.
(e) The acquisition, by construction and purchase, of the Project by the
County through the issuance of the Bonds and the leasing of the Project to the
Tenant has been instrumental in inducing the Tenant to locate within the
Multi-County Industrial Park and enlarge its facilities in the County and in
the State of South Carolina.
(f) The Industrial Bond is being issued in the amount estimated by the
Tenant to be required to pay the Cost of the Project exclusive of the cost of
the Infrastructure. The Special Source Revenue Bond is being issued in the
amount estimated by the Tenant to be required to pay for the Infrastructure.
The Tenant expects that all proceeds of the Bonds will be used for such
purposes no later than the Threshold Date.
(g) To the best of Tenant's knowledge no actions, suits, proceedings,
inquiries or investigations are pending or threatened against or affecting the
Tenant in any
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court or before any governmental authority or arbitration board or tribunal,
any of which involve the possibility of any material and adverse effect upon
the transactions contemplated by this Lease or which, in any way would
adversely materially affect the validity or enforceability of the Bonds, the
Indenture, this Lease or any agreement or instrument to which the Tenant is a
party and which is used or contemplated for use in the consummation of the
transactions contemplated hereby or thereby.
[End of Article II]
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ARTICLE III
DEMISING CLAUSE AND WARRANTY OF TITLE
SECTION 3.01. Demise of the Leased Property. The County demises and
leases to the Tenant, and the Tenant leases from the County, the Leased
Property for the Term and at the rental set forth in Article V hereof and in
accordance with the other provisions of this Lease. The County and the Tenant
agree that this Lease or a memorandum hereof shall be recorded in the office of
the Register of Mesne Conveyances for the County and that all other filings
necessary and appropriate to provide record notice of their respective
interests hereunder shall be made promptly upon the execution and delivery
hereof.
SECTION 3.02. No Warranties of Title by County. The Tenant acknowledges
that it has examined the Leased Land and so much of the other Leased Property
as is in existence on the date of execution and delivery hereof, as well as
title thereto, prior to the making of this Lease and knows the condition and
state thereof as of the day of the execution hereof, and accepts the same in
said condition and state; that no warranties or representations as to the
condition or state thereof have been made by representatives of the County; and
that the Tenant in entering into this Lease is relying solely upon its own
examination thereof and of any Leased Property which shall hereinafter become
subject to the demise hereof. The County makes no warranty, either express or
implied, as to title to any of the Leased Property or the design, capabilities
or condition of the Leased Property or that it will be suitable for the
Tenant's purposes or needs.
Unless the County causes a defect in title to any of the Leased Property
by its acts, the County shall not be liable to the Tenant or any other Person
for any damages resulting from failure of or any defect in the County's title
to the Leased Property which interferes with, prevents or renders burdensome
the use or occupancy of the Leased Property or the compliance by the Tenant
with any of the terms of this Lease, or from any cause whatsoever. No failure
or defect in the County's title to any of the Leased Property shall terminate
this Lease or entitle the Tenant to any abatement, in whole or in part, of any
of the rental or any other sums to be paid by the Tenant pursuant to any of the
terms of this Lease.
SECTION 3.03. Limited Covenant of Quiet Possession. The County does not
make any representation or covenant that the Tenant shall have quiet and
peaceable possession of the Leased Property; provided, however, the County
agrees that it will not take or cause another party to take any action to
interfere with the Tenant's peaceful and quiet enjoyment of the Leased
Property. In the event peaceful and quiet enjoyment of the Leased Property
shall be denied to the Tenant or contested by anyone, the County shall, upon
request of the Tenant, join where necessary in any proceeding to protect and
defend the quiet enjoyment of the Tenant, provided that the Tenant shall pay
the entire cost of any such proceeding and shall reimburse and indemnify and
hold harmless the County from any cost or liability whatsoever resulting
therefrom. The provisions of this Section shall be subject and conditioned
upon the obligations of the Tenant in this Lease.
SECTION 3.04 No Conveyance or impairment of Title by the County. The
County covenants and agrees that, during the Term of this Lease, it will not
sell, lease, mortgage, grant easements or rights of way, grant purchase options
or rights of first refusal to purchase, encumber, lease or otherwise convey or
transfer, the Leased Property or any portion thereof or any interest therein,
or convey, or suffer or permit the conveyance of, or impair or permit the
impairment of (other than Permitted Encumbrances), by any voluntary act or
omission on its part, its title to the Leased Property to any person, firm or
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corporation whatsoever irrespective of whether any such conveyance or attempted
conveyance shall recite that it is expressly subject to the terms of this
Lease; provided, however, that nothing herein shall restrict the conveyance or
transfer of the Leased Property in accordance with any terms or requirements of
this Lease or of the Indenture or as otherwise may be consented to in writing
by the Tenant and the Purchasers.
[End of Article III]
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ARTICLE IV
ACQUISITION BY CONSTRUCTION AND PURCHASE OF PROJECT;
ISSUANCE OF BONDS TO PAY PROJECT COSTS
SECTION 4.01. Acquisition by Construction and Purchase of Project. The
Tenant hereby agrees to acquire the Project by constructing and purchasing the
Project in accordance with the Plans and Specifications and to convey to the
County on or before December 31 of each calendar year through the Completion
Date title to the Financed Increment placed in service during such calendar
year upon payment from the proceeds of the Bonds, of Costs of the Project as
provided in Sections 4.02 and 4.03 of an amount sufficient in each case to
reimburse the Tenant for Cost of such Financed Increment. Such conveyance
shall be made in the manner set forth in the Escrow Agreement. The Tenant
further agrees to use its best efforts to cause such acquisition as promptly as
practicable and to expend upon the acquisition and expansion of the Project not
less than $5,000,000 by the Threshold Date. The Tenant reasonably expects to
invest in excess of $40,000,000 in the Project prior to the Completion Date.
Title to the Project shall be and remain in the name of the County throughout
the Term of this Lease, subject to the Tenant's rights hereunder to purchase
the Project, or portions thereof.
SECTION 4.02. Issuance of Industrial Bond. The County will issue its
Industrial Bond pursuant to the terms of the Indenture and the Act and the
Industrial Bond Purchaser will make Advances under the Industrial Bond in the
amount necessary to reimburse the Tenant for, or otherwise pay, the Cost of
each Financed Increment conveyed to the County by the Tenant pursuant to
Section 4.01 hereof, all in accordance with Article III of the Indenture. The
Industrial Bond will be dated, will mature and bear interest, will be subject
to redemption on the occasions and at the redemption prices and will be payable
as to principal and interest, be secured by and be subject to such terms and
conditions, as are set forth in the Indenture.
SECTION 4.03. Issuance of Special Source Revenue Bond. The County will
issue its Special Source Revenue Bond pursuant to the terms of the Indenture
and the Act and the Special Source Revenue Bond Purchaser will make Advances
under the Special Source Revenue Bond initially issued thereunder in accordance
with Article III of the Indenture in payment of that portion of the Cost of the
Project related to Infrastructure. The Special Source Revenue Bond will be
dated, will mature and bear interest, will be subject to redemption on the
occasions and at the redemption prices and will be payable as to principal and
interest, be secured by and be subject to such terms and conditions, set forth
in the Indenture.
SECTION 4.04. Revision of Plans and Specifications. The Tenant may revise
the Plans and Specifications at any time and from time to time prior to the
Completion Date, provided that no such revision shall alter the design of the
Project in such a fashion as to cause it to cease to be a project as defined in
Section 4-29-10(3) of the Act. In connection with any such revision, the
Tenant shall make available for inspection by the County and the Purchaser upon
reasonable notice and conditions, complete copies of the Plans and
Specifications, as so revised. The Tenant may also supplement Exhibit A from
time to time, with the written consent of the County, which consent will not be
unreasonably withheld, in each case upon reasonable notice and conditions
(including without limitation compliance with the confidentiality provisions of
Sections 4.07 and 8.02).
SECTION 4.05. Completion Date. The completion date of each Financed
Increment shall be evidenced to the Purchasers and the County by a certificate
of an Authorized
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Tenant Representative (which may be in the form of a requisition) certifying
that the acquisition of and construction of such Financed Increment has been
completed in accordance with the Plans and Specifications, certifying the date
of such completion, and stating that payment of the Cost of the Project or
provision therefor has been made except for any items of the Cost of the Project
not then due and payable or the liability for payment of which is being
contested or disputed by the Tenant. Notwithstanding the foregoing, the
certificate of completion may state that it is given without prejudice to any
rights against third parties which exist at the date of such certificate or
which may subsequently come into being.
SECTION 4.06. Completion of the Project if Bond Proceeds are Insufficient.
If the principal of the Bonds available for payment of the Cost of the Project
is insufficient to pay such Cost of the Project in full, the Tenant will
complete or cause to be completed the Project and pay or cause to be paid all
of that portion of the Cost of the Project in excess of the moneys available
therefor under the Bonds. The County does not make any warranty, either
express or implied, that the moneys which will be advanced under the Bonds will
be sufficient to pay the Cost of the Project. If the Tenant shall pay any
portion of the Cost of the Project pursuant to the provisions of this Section
4.06, it shall not be entitled to any reimbursement therefor, nor shall it be
entitled to any diminution in or postponement of the payments required in
Articles V or VI of this Lease to be paid by the Tenant.
SECTION 4.07. Records and Reports, Non-Disclosure. (a) The Tenant
agrees to maintain complete books and records accounting for the acquisition,
financing, construction and operation of the Project. Such books and records
shall:
(i) permit ready identification of the various Financed Increments
and components thereof and shall separately identify all elements which
constitute Infrastructure;
(ii) confirm the dates on which each Financed Increment was placed
in service;
(iii) confirm the amount of each Advance by the Purchaser under the
Bonds with respect to the corresponding Financed Increment, and the
amount of each Advance which relates to a particular item of the Project
which is less than a Financed Increment; and
(iv) include copies of all filings made by the Tenant with the
Cherokee County Auditor or the South Carolina Department of Revenue and
Taxation with respect to property placed in service as part of the Project
(all items in Section 4.07(iv) herein collectively "Filings").
(b) The Tenant shall deliver to the County copies of all Filings
annually during the term of this Lease, not later than thirty (30) days
following delivery thereof to the County Auditor or the South Carolina
Department of Revenue and Taxation, as appropriate in each year.
Notwithstanding any other provision of this Section 4.07, the Tenant may
designate with respect to any Filings delivered to the County segments thereof
that the Tenant believes contain proprietary, confidential or trade secret
matters. Except as required by the South Carolina Freedom of Information Act,
the County Council, the County, its officers and employees and the Purchasers
shall not disclose any such confidential information regarding the Project, the
Leased Premises, the Tenant, Tenant's operations and manufacturing processes,
any other competitively sensitive information which is not information
generally and independently known by the public without, the
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prior written authorization of the Tenant. The County shall notify the Tenant
in the event of the County's receipt of any Freedom of Information Act request
concerning the aforesaid confidential information and, to the extent permitted
by law, will not respond to such request until such time as the Tenant has
reviewed the request and taken any action authorized by law to prevent its
disclosure. If the Tenant fails to act to prevent any disclosure of such
information under the South Carolina Freedom of Information Act within 10 days
after Tenant's receipt of notice of such request, the County may provide such
information as in its judgement is required to comply with such law and the
County will have no liability to the Tenant in connection therewith.
[End of Article IV]
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ARTICLE V
LEASE TERM AND RENT PROVISIONS
SECTION 5.01. Term. Subject to the terms and provisions herein contained,
this Lease shall be and remain in full force and effect for a term commencing
on the date hereof, and ending at midnight twenty (20) years from the
Completion Date, unless sooner terminated as herein permitted; provided that,
if at the expiration of the Term payment of the Bonds or all payments in lieu
of taxes under Section 6.03 relating to the operation of the Project during the
Term have not been made or provided for in accordance with the Indenture, the
Term shall expire on such later date as such payments shall have been made in
full or so provided for.
SECTION 5.02. Basic Rent. The Tenant will pay to the County without
notice or demand, in such lawful money of the United States of America as at
the time of payment shall be legal tender for public and private debts, sums
equal to the amounts required to pay, at the times and places required under
the Indenture, the principal and interest on the Industrial Bond as basic
rental (herein called the "Basic Rent"), which shall be payable on or before
each Payment Date with respect to the Industrial Bond, the sum which will equal
the principal of (whether by maturity, acceleration or redemption) and the
interest on the Industrial Bond on such Payment Date; and
In view of the assignment by the County to the Industrial Bond Purchaser
under Section 5.05 hereof of its right to receive Basic Rent hereunder, the
County hereby authorizes and directs the Tenant to make all payments of Basic
Rent directly to the Industrial Bond Purchaser. As long as the Tenant is the
Holder of the Industrial Bond, the Tenant may offset the obligation to make
payments of Basic Rent hereunder, including without limitation amounts due
pursuant to Section 10.03 hereof, against its right as Industrial Bond
Purchaser to receive payments of the principal of, and interest on, the
Industrial Bond.
SECTION 5.03. Additional Rent. In addition to Basic Rent, the Tenant will
pay on demand, as Additional Rent, all other amounts, liabilities and
obligations which the Tenant assumes or agrees to pay hereunder (hereinafter
collectively called "Additional Rent"), including without limitation, the
Tenant's obligation under Section 6.03 hereof to pay FILOT Revenues. All FILOT
Revenues shall be used by the County, first to satisfy obligations to Chester
County, South Carolina pursuant to the Multi-County Park Agreement; second, to
satisfy the Tenant's obligations to pay to the County amounts corresponding to
the County Minimum which shall be paid to the County Treasurer, third to pay
debt service on the Special Source Revenue Bond, to the Special Source Revenue
Bond Purchaser; and fourth, the remaining balance of the FILOT payments to the
County for distribution under the Multi-County Park Agreement. In view of the
assignment by the County to the Special Source Revenue Bond Purchaser under
Section 5.05 hereof of its right to receive the Net FILOT Revenues hereunder,
the County hereby authorizes and directs the Tenant to make payments from the
Net FILOT Revenues sufficient to pay the principal of, and interest on, the
Special Source Revenue Bond directly to the Special Source Revenue Bond
Purchaser. As long as the Tenant is the Holder of the Special Source Revenue
Bond, the Tenant may offset the obligation to make Net FILOT Payments hereunder,
including without limitation amounts due pursuant to Section 10.03 hereof,
against its right as Special Source Revenue Bond Purchaser to receive payments
of the principal of, and interest on, the Special Source Revenue Bond. Any Net
FILOT Revenues remaining after payment with respect to the Special Source
Revenue Bond shall be paid to the County. In the event of any failure on the
part of the Tenant to pay such Additional
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Rent, the County shall have all rights, powers and remedies provided for herein
or by law or equity or otherwise.
As further Additional Rent hereunder, the Tenant agrees to pay
Administration Expenses to the County and the Special Source Revenue Bond
Purchaser. The Tenant shall pay such Administration Expenses and
indemnification payments pursuant to Sections 8.06 and 8.10 of this Lease when
and as they shall become due, but in no event later than 45 days after
receiving written notice from the County, the Special Source Revenue Bond
Purchaser or the Indemnified Party, as the case may be, specifying the nature
of such expense and requesting payment of same. No payment of the further
Additional Rent described in this paragraph shall reduce either the amount or
the Tenant's duty to pay the County Minimum.
SECTION 5.04. FILOT Payments Secured by Tax Lien. The County's right to
receive FILOT Revenues as Additional Rent hereunder shall have a first priority
lien status pursuant to Section 4-12-30(Q)(5) of the Act and Chapters 4 and 54
of Title 12 of the Code.
SECTION 5.05. Assignment and Pledge by County to Purchaser. It is
understood and agreed that this Lease and all Pledged Revenues are to be
pledged and assigned by the County to the Purchasers pursuant to the Indenture.
The Tenant agrees that this Lease is a net lease and so long as any part of
the Bonds are outstanding and unpaid, the Tenant assents to such pledge and
assignment and agrees that its obligation to make payments required hereunder
to the Purchasers on behalf of the County (except as otherwise provided herein)
shall be absolute and unconditional and shall not be subject to any defense
(other than payment) or any right of set-off (other than the rights and duties
of setoff in connection with debt service on the Bonds, as provided in the
Indenture), counterclaim or recoupment arising out of any breach by the County
of any obligation to the Tenant, whether hereunder or otherwise, or out of any
indebtedness or liability at any time owing to the Tenant by the County.
The County directs the Tenant, and the Tenant agrees, (i) to pay directly
to the Industrial Revenue Bond Purchaser on behalf of the County all payments
payable by the Tenant to the County pursuant to this Lease (except payment of
Administration Expenses pursuant to Section 5.03 hereof, indemnification
payments pursuant to Sections 8.06 and 8.10 hereof, and payment of amounts due
to the County pursuant to Sections 9.01 and 10.02 hereof, and the FILOT
Revenues); and (ii) to pay directly to the Special Source Revenue Bond
Purchaser on behalf of the County so much of the Net FILOT Revenues as may be
necessary to pay the principal of, and interest on, the Special Source Revenue
Bond.
SECTION 5.06. Defaulted Payments. In the event the Tenant should fail to
make any of the payments required in this Article V or in Article VI hereof,
the item or installment so in default shall continue as an obligation of the
Tenant until the amount in default shall have been fully paid, and the Tenant
agrees to pay the same with interest thereon (to the extent permitted by law)
at the rate per annum which is equal to the stated rate of the Industrial Bond
and, in the case of the payments-in-lieu of taxes, subject to the penalties
provided by law until paid.
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ARTICLE VI
MAINTENANCE AND MODIFICATION OF LEASED PROPERTY;
PAYMENTS IN LIEU OF TAXES; TAXES, UTILITIES
AND OTHER CHARGES; INSURANCE
SECTION 6.01. Maintenance of Leased Property. The Tenant at its own
expense during the Term of this Lease will keep and maintain the Leased
Property in good repair and in good operating condition. The Tenant will
promptly make, or cause to be made, all repairs, interior and exterior,
structural and nonstructural, ordinary and extraordinary, foreseen and
unforeseen, necessary to keep the Leased Property in good and lawful order and
in good operating condition, wear and tear from reasonable use excepted,
whether or not such repairs are due to any laws, rules, regulations or
ordinances hereafter enacted which involve a change of policy on the part of
the government body enacting the same.
The County shall not be required to rebuild or to make any repairs,
replacements or renewals of any nature or description to the Leased Property or
to make any expenditure whatsoever in connection with this Lease or to maintain
the Leased Property in any way. The Tenant expressly waives the right
contained in any law now or hereafter in effect to make any repairs at the
expense of the County, as lessor hereunder.
SECTION 6.02. Modification of Leased Property. (a) Subject to the consent
of the Purchasers, and such consent is not to be unreasonably withheld or
delayed, and as long as no Event of Default exists hereunder, the Tenant shall
have the right at any time and from time to time during the Term hereof to
undertake any of the following:
(i) The Tenant may, at its own expense, renovate the Leased Property
and, in connection therewith, make Non-Leasehold Improvements, install
Replacement Property in the Project and add to, and delete from (subject
to the payments due under Section 10.02 hereof), the Leased Property all
such property as the Tenant in its discretion deems useful or desirable.
(ii) In any instance where the Tenant in its discretion determines
that any items of Leased Equipment have become inadequate, obsolete, worn
out, unsuitable, undesirable or unnecessary for operations on the Leased
Land, the Tenant may remove such items of Leased Equipment from the
Leased Land and (on behalf of the County) sell, trade-in, exchange or
otherwise dispose of them (as a whole or in part) without the consent of
the County; provided, however, the cumulative amount of such transfers in
any one calendar year shall not exceed $250,000. If Leased Equipment in
excess of $250,000 shall be transferred in any one calendar year, the
Tenant shall purchase such Leased Property pursuant to Section 10.02
hereof.
(b) The County agrees that so long as no Event of Default exists hereunder
on the part of the Tenant, it will convey fee title, grant easements, rights of
way, licenses, execute party wall agreements or terminate any of the foregoing
or enter into such other similar agreements with respect to the Leased Land,
whether for the benefit of the Leased Property or other land, for the purposes
of providing railroad services; gas, petroleum, water, sewer, drainage,
stormwater runoff or other utility services; roadway or roadway access;
expansion of the Tenant's facilities; reasonable business purposes of the
Tenant; such other similar purposes as may be deemed necessary or desirable by
the Tenant; or any purpose approved by the Purchasers upon receipt of the
following:
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(i) one or more instruments of transfer in the form necessary for
such purpose with an accurate legal description of the real property
proposed to be conveyed;
(ii) a certificate from an Authorized Tenant Representative
requesting the action to be taken and stating that (x) that no Default or
Event of Default of the Tenant has occurred and is then continuing, (y)
the conveyance will not materially interfere with the Tenant's operation
of the Project or impair the character of the Leased Property for the
purpose for which it was last designed or modified and is not detrimental
to the proper conduct of the business of the Tenant at the Leased
Property; and (z) such conveyance will not destroy the means of ingress
or egress to and from the Project of the Tenant on the Leased Property;
and
(iii) unless waived in writing by the Purchasers, an opinion of
Counsel reasonably acceptable to the County and the Purchasers as to form
and content that the proposed conveyance is permitted by the Act and is
not in violation of the terms hereof or of the Indenture.
Upon receipt of the foregoing, the County shall promptly execute and
deliver such conveyance, grant or agreement.
(c) Tenant may require the County to convey title to the Tenant, upon the
Tenant's written request, of any portion of the Leased Land and the
improvements thereon which were not purchased with Bond proceeds, less any
portion of the Leased Land necessary to the continuation and function of the
Leased Property as determined by the County, the Purchasers and the Tenant and
shall be subject to the consent of the Purchasers, provided, that such consent
shall not be unreasonably withheld or delayed. Any such conveyance shall be
delineated by an accurate plat of survey. The County's obligation to convey
any property under this subsection 6.02(c) shall be conditioned upon its prior
receipt of the following:
(i) a legal description of the real property proposed to be
conveyed (which legal description shall be accompanied by a current plat
of survey delineating the Leased Land affected by the proposed
conveyance);
(ii) one or more instruments of transfer in the form necessary for
such purpose;
(iii) a certificate from an Authorized Tenant Representative
requesting the action to be taken and stating that (x) the conveyance
will not materially interfere with the Tenant's operation of the Project
or impair the character of the Leased Property for the purpose for which
it was last designed or modified and is not detrimental to the proper
conduct of the business of the Tenant at the Leased Property; and (y) such
the manufacturing facilities of the Tenant on the Leased Property; and
(iv) unless waived in writing by the Purchasers, an opinion of
Counsel reasonably acceptable to the County and the Purchaser as to form
and content, that the proposed conveyance is permitted by the Act and is
not in violation of the terms hereof or of the Indenture.
No release effected under the provisions of this Section 6.02 shall
entitle the Tenant to any abatement or diminution of the Basic Rent or
Additional Rent payable under Section
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5.02 hereof.
SECTION 6.03. Payments in Lieu of Taxes.
(a) In accordance with the provisions of Section 4-12-30 of the Act,
during the Term of the Lease the Tenant shall make with respect to the Leased
Property annual payments in lieu of taxes in the amounts set forth in this
Section 6.03 at the times and places, and in the same manner and subject to the
same penalty assessments as prescribed by the County or the State Department of
Revenue and Taxation for ad valorem taxes. Such annual payments shall be made
on or before February 1 of the following calendar year for each year during the
Term of this Lease, commencing February 1, 1997. The amounts of such annual
payments in lieu of taxes as provided in Section 4-12-30 of the Act are as
follows:
Each annual payment shall equal the sum of
(1) a payment with respect to any portion of the Leased Property
consisting of undeveloped land equal to the taxes that would otherwise be due
if such property were taxable;
(2) a Financed Increment Payment with respect to each Financed Increment,
including Replacement Property for the Leased Property originally included in
such Financed Increment, calculated as set forth in the next succeeding
paragraph of this Lease for each of twenty consecutive years (except to the
extent that any portion of such Financed Increment ceases to qualify for a
negotiated fee in lieu of taxes under Section 4-12-30 of the Act) commencing
with the year following the year in which the respective Financed Increments
are placed in service; and
(3) a payment with respect to Non-Project Leasehold Improvements equal to
the statutory payments in lieu of ad valorem taxes required by Section 4-12-20
or Section 4-1-170 of the Code, with appropriate reductions similar to the tax
exemption, if any, which would be afforded to the Tenant if it were the owner
of such leasehold improvements.
(b) Each Financed Increment Payment shall be equal to the product which
would result from multiplying a millage rate of 213.0 mills by six percent (6%)
of the fair market value of the improvements to real property and Leased
Equipment included within such Financed Increment. Such fair market value must
be that determined by the State Department of Revenue and Taxation at the time
of payment and must include all Replacement Property and deductions for
depreciation or diminution in value allowed by Section 4-12-30(F) of the Act or
by the tax laws generally and such fair market value must exclude all
applicable ad valorem tax exemptions except the exemption allowed pursuant to
Section 3(g) of Article X of the Constitution of the State of South Carolina
and the exemptions allowed pursuant to Section 12-37-220B(32) and (34) of the
Code. The total annual payment due under Section 6.03(a)(2) shall equal the
sum of the payments due for each Financed Increment.
(c) In the event that the Act and/or the above-described payments in lieu
of taxes or any portion thereof, are declared invalid or unenforceable, in
whole or in part, for any reason, the Tenant and the County express their
intentions that such payments be reformed so as to afford the Tenant the
maximum benefit then permitted by law. If the Project is deemed not to be
eligible for a negotiated fee-in-lieu of tax pursuant to Section 4-12-30 of the
Act in whole or in part, the Tenant and the County agree that the Tenant shall
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pay a fee in lieu of tax pursuant to the Multi-County Industrial Park Agreement
and Section 4-12-20 of the Act (such fee in lieu of tax being a "Multi-County
Fee"). In such event, the Tenant shall be entitled (1) to enjoy the five-year
exemption from ad valorem taxes (or fees in lieu of taxes) provided by South
Carolina Constitution Article X, Section 3, and any other exemption allowed by
law from time to time; (2) to enjoy all allowable depreciation; and (3) to
receive credit, if any be allowed by the applicable law, by reason of the fact
that the School District received larger allocations of funds under the
Education Finance Act of 1977 (Sections 59-20-10 to 59-20-80 of the Code) than
it would have received if the Leased Property had been taxed at the assessment
ratio (presently 10.5% of fair market value), provided such credit shall be
adjusted to take into account any amounts which the School District is required
to pay under the Education Finance Act as a result of the Leased Property
becoming subject to ad valorem taxation.
(d) In the event that the Tenant has not made the minimum necessary
investment in the Project to qualify for a fee in lieu of tax under the Act by
the Threshold Date, the portions of the Project financed under this Lease and
the Indenture shall revert retroactively to the tax treatment required pursuant
to Sections 4-1-170 and 4-12-20 of the Act, calculated as set forth in the
preceding paragraph, and the unpaid fees due thereby, if any, (the
"Deficiency") shall be subject to interest as provided in Section 12-43-305 of
the Code; provided, however, that, to the extent permitted by law, the
Threshold Date shall, in order to permit the Tenant to receive the benefits of
Section 4-12-30 of the Act be extended for as long as circumstances beyond the
control of the Tenant prevent the Tenant from making the required investment.
In the event that the Tenant's investment in the Project based on an income tax
basis without regard to depreciation falls below the requirement of Section
4-12-30 of the Act, the Project shall thereafter be subject to the tax
treatment required pursuant to Sections 4-1-170 and 4-12-20 of the Act,
calculated as set forth in the preceding paragraph. If the Project or any
portion thereof becomes ineligible for negotiated fees in lieu of taxes
pursuant to Section 4-12-30 of the Act due to a transfer of an equity interest
in the Tenant or of the Tenant's rights hereunder or under any fee agreement
related hereto which does not comply with the Transfer Provisions, the Project,
or such portion thereof, shall thereafter be subject to the tax treatment
required pursuant to Sections 4-1-170 and 4-12-20 of the Act, calculated as set
forth in the preceding paragraph.
SECTION 6.04. Taxes, Utilities and Other Governmental Charges. The County
and the Tenant acknowledge that: (a) pursuant to the Act, no part of the Leased
Property owned by the County will be subject to ad valorem taxation in South
Carolina but will be subject to fees in lieu of taxes as provided for in
Section 6.03 of this Lease; and (b) under present law the income and profits
(if any) of the County from the Leased Property are not subject to either
Federal or South Carolina income taxation and under present law there is no tax
imposed upon leasehold estates in South Carolina. However, in addition to the
payments in lieu of taxes referred to in Section 6.03 hereof and any other
taxes and governmental charges that may lawfully be assessed, levied or imposed
against it, the Tenant will pay as Additional Rent as the same respectively
become due: (i) all taxes and governmental charges of any kind whatsoever that
may be lawfully assessed, levied or imposed against the County with respect to
the Leased Property or any machinery, equipment or other property installed or
brought by the Tenant therein or thereon; (ii) all utility and other charges
incurred in the operation, maintenance, use and occupancy of the Leased
Property; and (iii) all assessments and charges lawfully made by any
governmental body for public improvement to the Leased Property. If the Tenant
shall contest any such tax, assessment, lien or charge, excepting the payment
in lieu of taxes referred to in Section 6.03 herein, then, as long as any such
contest does not result in a lien against the Leased Property which has not
been bonded to the reasonable satisfaction of the County and the
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Purchasers (or against the consequences of which lien the Tenant shall not
provide adequate security of such character as may be acceptable to the County
and the Purchasers), such action by the Tenant shall not be considered as a
breach by it of any of its covenants under this Lease while the action to
contest such tax, assessment, lien or charge remains pending; provided, at the
time of the execution of this Lease no tax or charge which is at such time due
and payable as described in (i) hereinabove is known to exist.
SECTION 6.05. Insurance. The Tenant shall maintain public liability
insurance with specific reference to the Leased Property and shall otherwise
keep the Leased Property continuously insured against such risks as are
customarily insured against by businesses of like size and type, paying as the
same become due and payable as Additional Rent hereunder all premiums with
respect thereto. In lieu of separate insurance policies, such insurance may be
in the form of a blanket insurance policy or policies. Insurance policies may
be written with deductible amounts and exceptions and exclusions comparable to
those customarily maintained by Tenant in its business. The insurance
requirements hereunder may be satisfied by the Tenant's providing
self-insurance. All policies of insurance with respect to the Project shall
insure the Tenant and the County, as their respective interest shall appear,
shall name the Purchasers as loss payee and shall be in the form acceptable to
the Purchasers, their approval of which shall not be unreasonably withheld.
All proceeds of insurance against property damage to the Leased Property
shall be made payable as the Tenant and the Purchasers shall specify, and such
proceeds shall be collected and applied as provided in Section 7.01 hereof and
Section 4.05 of the Indenture, and all claims under any insurance policy
referred to in this Lease may be settled by the Tenant only with the written
consent of the Purchasers which shall not be unreasonably withheld or delayed.
SECTION 6.06. Beneficial Ownership of Tenant. Notwithstanding any
contrary provision of this Lease or the Indenture, no provision hereof shall
have the effect of restricting or conditioning the transfer of the capital
stock or other incidents of ownership of the Tenant as a legal entity. All
restrictions contained in this Lease or the Indenture regarding transfers shall
apply only to transfers of the Tenant's interest in the assets constituting the
Project or the Leased Property, as applicable.
[End of Article VI]
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ARTICLE VII
CASUALTY AND CONDEMNATION
SECTION 7.01. Damage and Destruction. If, while any Bonds are
outstanding, all or any part of a Financed Increment shall be destroyed or
damaged, the Tenant shall either repair such Financed Increment or prepay the
Allocable Percentage of the Industrial Bond and of the Special Source Revenue
Bond as the Tenant may elect in its sole discretion. If the Tenant shall
determine to repair the Leased Property, the Tenant shall forthwith proceed
with such rebuilding, repairing or restoring and shall notify the County and
the Purchasers upon the completion thereof. In the event any insurance
proceeds are not sufficient to pay in full the costs of such rebuilding, repair
or restoration, the County shall not have any responsibility to complete the
work thereof or pay that portion of the costs thereof in excess of the amount
of said proceeds. Except as provided in Section 7.03 hereof, the Tenant shall
not, by reason of the payment of any excess costs, be entitled to any
reimbursement from the County or the Purchasers or any abatement or diminution
of the amounts payable under Sections 5.02 or 6.03 hereof. Any insurance
related to such damage or destruction shall be paid as Tenant shall specify.
SECTION 7.02. Condemnation. In the event that title to or the temporary
use of the Leased Property, or any part thereof, shall be taken in condemnation
or by the exercise of the Power of eminent domain, except as provided in
Section 7.03 hereof, there shall be no abatement or reduction in the payments
required under Sections 5.02 or 6.03 hereof to be made by the Tenant.
Immediately after the occurrence of any such taking of the Leased Property, the
Tenant shall notify the County and the Purchasers as to the nature and extent
of such taking and, as soon as practicable thereafter, notify the County and
the Purchasers whether it desires to restore the Leased Property. If the
Tenant shall determine to restore the Leased Property, the Tenant shall
forthwith proceed with such restoration, and shall notify the County and the
Purchasers upon the completion thereof. Any proceeds of any such taking shall
be paid as Tenant shall specify. If the Tenant elects not to restore the
Leased Property taken by condemnation, the Tenant shall prepay the Allocable
Percentage of the Industrial Bond and the Allocable Percentage of the Special
Source Revenue Bond.
SECTION 7.03. Payments in Lieu of Taxes in the Event of Damage and
Destruction or Condemnation. In the event that (i) the Leased Property is
damaged or destroyed or the subject of condemnation proceedings, which damage,
destruction and/or condemnation would substantially impair the operating
ability of the Leased Property, including the Leased Property's collateral
value to secure financing required for operating the Leased Property, and (ii)
the Tenant shall have prepaid the Allocable Portion of the Industrial bond and
of the Special Source Revenue Bond as required by Sections 7.01 and 7.02
hereof, the parties hereto agree that the payments in lieu of taxes required
pursuant to Section 6.03 hereof shall be abated in the same manner and in the
same proportion as would ad valorem taxes if the Leased Property were owned by
the Tenant.
SECTION 7.04. No Termination or Abatement of Basic Rent or Additional Rent
for Damage or Destruction. Except as otherwise expressly provided herein,
including without limitation the circumstances described in Section 7.03
hereof, for so long as any of the Bonds are outstanding, this Lease shall not
terminate, nor shall the Tenant have any right to terminate this Lease or be
entitled to the abatement of any Basic Rent or Additional Rent or any reduction
thereof, nor shall the obligations hereunder of the Tenant be otherwise
affected, by reason of any damage to or the destruction of all or any part of
the
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Leased Property from whatever cause, the loss or theft of the Leased
Property or any part thereof, the taking of the Leased Property or any portion
thereof by condemnation or otherwise, the prohibition, limitation or
restriction of the Tenant's use of the Leased Property or the interference with
such use by any private person, entity or corporation, or by reason of any
eviction by paramount title or otherwise, or for any other cause whether
similar or dissimilar to the foregoing, any present or future law to the
contrary notwithstanding, it being the intention of the parties hereto that the
Basic Rent and Additional Rent and Administration Expenses reserved hereunder
shall continue to be payable in all events and the obligations of the Tenant
hereunder shall be terminated only pursuant to an express provision of this
Lease.
[End of Article VII]
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ARTICLE VIII
PARTICULAR COVENANTS AND AGREEMENTS
SECTION 8.01. Use of Leased Property for Lawful Activities. The Tenant is
hereby granted and shall have the right during the Term of this Lease to occupy
and use the Project for any lawful purpose authorized pursuant to the Act and
the balance of the Leased Property for any lawful purpose. Insofar as it is
practicable under existing conditions from time to time during the Term of this
Lease, the Leased Property shall initially be used primarily as a facility for
the manufacture of personal hygiene products and for office use ancillary
thereto.
SECTION 8.02. Right to Inspect. The Tenant agrees that the County, the
Purchasers and their authorized agents shall have the right at all reasonable
times and upon prior reasonable notice to enter upon and examine and inspect
the Leased Property. The County, the Purchasers and their authorized agents
shall also be permitted, at all reasonable times and upon prior reasonable
notice, to examine the Plans and Specifications of the Tenant with respect to
the Leased Property and to have access to examine and inspect the Tenant's
audited financial statements and South Carolina state tax returns, as filed.
The aforesaid rights of examination and inspection shall be exercised only upon
such reasonable and necessary terms and conditions as the Tenant shall
prescribe, which conditions shall be deemed to include, but not be limited to,
those necessary to protect the Tenant's trade secrets and proprietary rights.
Prior to the exercise of any right to inspect the Leased Property or the Plans
and Specifications and above referenced records of the Leased Property, the
County, the Purchasers and their authorized agents shall sign a nondisclosure
statement substantially in the form shown on Exhibit B attached hereto. In no
way shall this requirement of a nondisclosure statement be deemed to apply to
or restrict the rights of the United States Government and the State of South
Carolina or its political subdivisions in the legitimate exercise of their
respective sovereign duties and powers.
SECTION 8.03. Limitation of County's Liability. Anything herein to the
contrary notwithstanding: (a) any financial obligation the County may incur
hereunder, including for the payment of money shall not be deemed to constitute
a debt or general obligation of the County but shall be payable solely and
exclusively from the Pledged Revenues; (b) the County's obligations under any
contracts which may be assigned to it in furtherance of any provision of this
Lease shall be limited to the Pledged Revenues; (c) the County may require as a
condition to the participation by it with the Tenant in any contests or in
obtaining any license or permits or other legal approvals a deposit by the
Tenant of such amount as reasonably determined by the County to be appropriate
to assure the reimbursement to the County of the costs incurred by it in such
participation, with any amount of such deposit in excess of such costs to be
returned to the Tenant; and (d) the liability of the County for any breach of
any of the representations or warranties by it set forth herein shall be
limited solely and exclusively to the Pledged Revenues; provided, however, that
nothing herein shall prevent the Tenant from enforcing its rights hereunder by
suit for mandamus or specific performance or any other remedy (except for
payment of money by the County from sources other than Pledged Revenues)
available at law or in equity.
SECTION 8.04. No Liens by Tenant. Subject to Sections 6.02 and 9.01 and
Article X hereof and except as consented to in writing by the Purchasers or
otherwise expressly permitted under the terms hereof, the Tenant will not
create or permit to be created or to remain, and will discharge, any lien,
encumbrance or charge (other than Permitted
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Encumbrances) upon the Leased Property or any part thereof.
SECTION 8.05. Maintenance of Corporate Existence. Subject to the
provisions of Section 6.06 hereof, the Tenant agrees that as long as the Bonds
are outstanding it will maintain its separate corporate existence, will not
dissolve or otherwise dispose of all or substantially all of its assets, except
as provided pursuant to Section 9.01, and will not consolidate with or merge
into any other entity or permit one or more other entities to consolidate with
or merge into it without the prior written consent of the Purchasers, which
consent will not be unreasonably withheld; provided, however, that any lien
created by the Tenant in accordance with the provisions of this Lease shall,
absent the County's and the Purchasers' written consent, be subordinate to the
lien of the County with respect to the FILOT Revenues. The Tenant acknowledges
that such a transfer of an equity interest may cause the Project to become
ineligible for negotiated fees in lieu of taxes under Section 4-12-30 of the
Act absent compliance by the Tenant with the Transfer Provisions; provided
that, to the extent provided by law, any financing arrangements entered into by
the Tenant with respect to the Project and any security interests granted by
the Tenant in connection therewith shall not be construed as a transfer for
purposes of the Transfer Provisions. The County and the Purchasers hereby
consent to any transfers by the Tenant to any member of the same Controlled
Group that at such time also has the Tenant as a member. The County further
agrees that it will not unreasonably withhold consent to any other such
transfer.
SECTION 8.06. Indemnification. The Tenant releases the County and the
Purchasers, including the members of the governing body of the County, and the
employees, officers and agents of the County and the Purchasers (herein
collectively referred to as the "Indemnified Parties") from, agrees that
Indemnified Parties shall not be liable for, and agrees to hold Indemnified
Parties harmless against, any loss or damage to property or any injury to or
death of any person that may be occasioned by any cause whatsoever pertaining
to the Leased Property or the use thereof except for that occasioned by acts of
an Indemnified Party which are unrelated to the utilization of the Leased
Property and except for grossly negligent or intentional acts of an Indemnified
Party, provided that the obligation under the indemnity in this sentence shall
be effective only to the extent of any loss that may be sustained by an
Indemnified Party in excess of the net proceeds, if any, received by an
Indemnified Party from any insurance with respect to the loss sustained. The
Tenant further agrees to indemnify and save harmless Indemnified Parties
against and from any and all costs, liabilities, expenses and claims actually
incurred by an Indemnified Party and arising from any breach or default on the
part of the Tenant in the performance of any covenant or agreement on the part
of the Tenant to be performed pursuant to the terms of this Lease or arising
from any act or negligence of, or failure to act by, the Tenant, or any of its
agents, contractors, servants, employees, or licensees, or arising from any
accident, injury or damage whatsoever caused to any Person occurring during the
term of this Lease, in or about the Leased Property, and from and against all
cost, liability and expenses actually incurred in or in connection with any
such claim or action or proceeding brought thereon, and in case any action or
proceeding be brought against an Indemnified Party by reason of any such claim,
the Tenant upon notice from such Indemnified Party covenants to resist or
defend such action or proceedings at the Tenant's expense with counsel
reasonably acceptable to the applicable Indemnified Party.
SECTION 8.07. Applications and Licenses. In the event it may be
necessary, for the proper performance of this Lease, by the County or the
Tenant, that any application or applications for any permit or license to do or
to perform certain things be made to any governmental or other agency by the
Tenant or the County, the Tenant and the County each agree to execute upon the
request of the other such application or applications,
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including among other things the authorization necessary for the County to
perform its obligations under Article X of this Lease.
SECTION 8.08. Qualification in State. The Tenant warrants that it is duly
qualified to do business in the State of South Carolina and covenants that it
will continue to be so qualified so long as it operates the Leased Property.
SECTION 8.09. No Liability of County's Personnel. All covenants,
stipulations, promises, agreements and obligations of the County contained
herein shall be deemed to be covenants, stipulations, promises, agreements and
obligations of the County and shall be binding upon any member of the County
Council or any officer, agent, servant or employee of the County only in his or
her official capacity and not in his or her individual capacity, and no
recourse shall be had for the payment of any moneys hereunder against any
member of the governing body of the County or any officer, agent, servants or
employee of the County and no recourse shall be had against any member of the
County Council or any officer, agent, servant or employee of the County for the
performance of any of the covenants and agreements of the County herein
contained or for any claims based thereon except solely in their official
capacity.
SECTION 8.10. Environmental Compliance. The Tenant warrants and
represents to the Purchasers and the County after thorough investigation that
(a) the Leased Property and the Leased Land is now and at all times hereafter
while operated by the Tenant will continue to be in compliance in all material
respects with all applicable federal, state, and local environmental laws and
regulations, including but not limited to the Comprehensive Environmental
Response, Compensation and Liability Act of 1980 ("CERCLA"), Public Law No.
96-510, 94 Stat. 2767, 42 USC 9601 et seq., and the Superfund Amendments and
Reauthorization Act of 1986 ("SARA"), Public Law No. 99-499, 100 Stat. 1613,
and the Toxic Substance Control Act, 15 USC 2601 et. seq. and (b)(i) as of the
date hereof to Tenant's knowledge and except as reported in the Report of Phase
I Environmental Site Assessment (PESA) of Froehling & Robertson, Inc. dated as
of August 18, 1995 there are no hazardous materials, substances, wastes or
other environmentally regulated substances (including, without limitation,
materials containing PCBs or asbestos) located on, in or under the Project or
Leased Land ("Hazardous Materials"), or (ii) the Tenant has fully disclosed in
writing to each of the Indemnified Parties the existence, extent and nature of
any such materials, each of which the Tenant is legally authorized or permitted
to maintain on, in or under the Project or the Leased Land or use in connection
therewith. The Tenant has obtained and will continuously maintain throughout
the Term of this Lease, all permits, consents, approvals and licenses required
in connection with the storage, transport, handling, use, disposal and
discharge of any hazardous materials, wastes or other environmentally regulated
substances on, in or under the Project or the Leased Land. The Tenant hereby
agrees to transmit to each of the Indemnified Parties copies of any citations,
orders, remediation requests, notices or other material governmental
communication received in connection with or in respect of any hazardous
materials, substances or wastes, used, transported, stored, handled or
discharged on, at or under the Project or the Leased Land. The Tenant hereby
indemnifies and agrees to hold the Indemnified Parties harmless from and
against any damages, fines, charges, remediation costs, expenses, fees,
reasonable attorney fees and costs actually incurred by the Indemnified Parties
in the event any of the Indemnified Parties is hereafter determined to be
responsible for any remediation costs, or portions thereof, or in violation of
any environmental laws, rules or regulations applicable thereto, and this
indemnity shall survive any foreclosure or deed in lieu of foreclosure or
termination of this Lease. The Tenant shall be entitled to manage and control
the defense of or response to any claim, charge, lawsuit or regulatory
proceeding provided for itself or the Indemnified Parties;
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provided that the Tenant shall not be entitled to settle any matter at the
separate expense or liability of any of the Indemnified Parties without the
such Indemnified Party's consent. To the extent that any of the Indemnified
Parties desire to use separate counsel for any reason other than a conflict of
interest, such party shall be responsible for its independent legal fees. This
indemnity includes, but is not limited to, any damages, claims and fees arising
out of any claim for loss or damage to property or persons, contamination of or
adverse effect on the environment, claims for parens patria, or any violation
of statutes, ordinances, orders, rules or regulations of any governmental
agency or entity, caused by or resulting from any hazardous material, substance
or waste previously, now or hereafter in, on, under or released from, the
Leased Property.
SECTION 8.11. Other Tax Matters. The Tenant shall be entitled to all
state and federal investment tax credits, allowances for depreciation and other
similar tax provisions allowable by applicable federal or South Carolina law,
recognizing the Tenant as the owner of the Project for income tax purposes and
the County agrees to do all things reasonably necessary to confirm this right,
provided that the Tenant shall pay all expenses in connection therewith.
[End of Article VIII]
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ARTICLE IX
SUBLEASE OR ASSIGNMENT OF LEASED PROPERTY;
SURVIVAL OF TENANT'S OBLIGATION
SECTION 9.01. Sublet or Assignment. The Tenant may at any time sublet the
Leased Property or any part thereof and may assign or otherwise transfer all of
its rights and interest hereunder to any sublessee or assignee, as the case may
be, selected by the Tenant on such terms as the Tenant may determine in its
sole discretion, provided (a) that no assignment, transfer or sublease shall
affect or reduce any of the obligations of the Tenant hereunder, but all
obligations of the Tenant hereunder shall continue in full force and effect as
the obligations of a principal and not of a guarantor or surety, except that
the Tenant shall be released from its obligations hereunder upon the written
consent and release of the County and the Purchasers, which will not be
unreasonably withheld (and which will only be withheld if the creditworthiness
of the assignee is materially inferior to that of the Tenant and is inadequate
to meet the obligations that it will assume from the Tenant), to any sublease,
assignment or transfer, and (b) that the Tenant or sublessee shall give the
County and the Purchasers written notice of any such assignment, transfer or
sublease and within 30 days thereafter shall furnish or cause to be furnished
to the Purchasers and the County a true and complete copy of any such sublease,
assignment or other transfer which shall include indemnities as provided in
Section 8.06 and 8.10 herein. The Tenant acknowledges that such a transfer of
an interest under this Lease may cause the Project to become ineligible for
negotiated fees in lieu of taxes under Section 4-12-30 of the Act absent
compliance by the Tenant with the Transfer Provisions; provided that, to the
extent permitted by law, any financing arrangements entered into by the Tenant
with respect to the Project and any security interests granted by the Tenant in
connection therewith shall not be construed as a transfer for purposes of the
Transfer Provisions. The County and the Purchasers hereby consent to any
transfers by the Tenant to any member of the same Controlled Group that at such
time also has the Tenant as a member. The County shall, if the Tenant
Requests, acknowledge the receipt and sufficiency of any such notice.
SECTION 9.02. Access. In lieu of and/or in addition to any subleasing by
Tenant pursuant to Section 9.01, Tenant may, without any approval by the
County, grant such rights of access to the Leased Property and the Leased Land
and the buildings thereon as the Tenant may decide in its sole discretion.
[End of Article IX]
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ARTICLE X
PURCHASE AND OPTION TO PURCHASE LEASED PROPERTY;
PURCHASE PRICE
SECTION 10.01. Mandatory Purchase of Leased Property by Tenant. If,
during the Term (a) as a consequence of a defect in title to the Leased Land,
the Tenant and the County shall be denied the use and occupancy of the Leased
Property to the extent of substantial interference with the Tenant' s ability
to operate the Project; (b) a final decree, judgment or order shall be entered
by a court of competent jurisdiction that the Act is invalid, unenforceable or
unconstitutional or that the negotiated payments in lieu of taxes described in
Section 6.03 hereof are invalid, unenforceable or unconstitutional or a change
occurs in the Constitution or other laws and regulations of the State of South
Carolina or the United States of America which would render the payments in
lieu of taxes described herein or any other provision hereof invalid,
unenforceable or unconstitutional; or (c) as a result of any changes in the
Constitution of the State of South Carolina or the Constitution of the United
States of America or of legislative or administrative action (whether state or
federal) or by final decree, judgment or order of any court or administrative
body (whether state or federal) entered after the contest thereof by the Tenant
in good faith, this Lease shall have become void or unenforceable or impossible
to perform in accordance with the intent and purposes of the parties as
expressed in this Lease, then in any such event, so long as any Bonds are
outstanding and unpaid, the Tenant shall purchase the Leased Property at the
purchase price specified in Section 10.03 hereof. Any such purchase provided
for herein shall be made not later than 180 days after such use or occupancy is
denied or such change, decree, judgment or order as the case may be or at such
later date as may be agreeable to the County. Upon such purchase, this Lease
shall terminate.
SECTION 10.02. Option to Purchase the Leased Property; Exercise of Option
Hereunder. The Tenant shall have, and is hereby granted, the option to
purchase all or a portion of the Leased Property prior to the expiration of the
full Term hereof by paying the purchase price set forth in Section 10.03 (such
option to be exercisable whether or not an "Event of Default" has occurred and
is continuing).
This option may be exercised at any time and from time to time upon the
giving of not less than 30 nor more than 60 days' notice to the County (except
that the Tenant may provide 15 days' notice to exercise such option if such
notice is delivered within 60 days prior to the expiration of the Term of this
Lease). Upon payment of the purchase price pursuant to Section 10.03 hereof,
this Lease shall terminate with respect to the portion of the Leased Property
so purchased.
SECTION 10.03. Purchase Price. The purchase price for any purchase of
Leased Property by the Tenant shall be an amount equal to the sum of (i) the
principal of and interest on the Allocable Percentage of the then outstanding
Industrial Bond and Special Source Revenue Bond, less moneys available for such
purposes then held by the Purchaser, plus (ii) any Additional Rent due or to
become due hereunder, with respect to such Leased Property for any period when
such Leased Property was subject to the demise of this Lease, together with
any unpaid fees and expenses of the County or the Purchaser which are then due
or will become due prior to the time that the principal amount and premium, if
any, of Bonds that pertains to the Leased Property has been paid in full, plus
(iii) $1.00. The purchase price for any portion of the Leased Property which
does not constitute a part of the Project shall be determined without reference
to the provisions of clause (i) above.
SECTION 10.04. Status of Title. In the event of any conveyance of the
Leased
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Property or any portion thereof by the County pursuant to any provision
of this Lease, the County shall convey title by quitclaim deed thereto or
quitclaim bill of sale therefor as the case may be, to or to the order of the
Tenant free and clear of the Indenture whether pursuant to the provisions of
the Escrow Agreement as to any Financed Increment or otherwise. The Tenant
shall accept such title, subject, only, to any liens, encumbrances, charges,
exceptions and restrictions not created or caused by the County in violation of
Section 3.04 hereof. The County shall within a reasonable time following
request therefore by the Tenant and at the Tenant's expense deliver or cause to
be delivered to or to the order of the Tenant all instruments and documents
required by the Tenant and necessary to remove from record or otherwise
discharge any liens, encumbrances, charges or restrictions in order that the
County may convey title as aforesaid.
SECTION 10.05. Conveyance; Charges Incident Thereto. Upon the date fixed
for the conveyance of the Leased Property or any portion thereof by the County
to or to the order of the Tenant, the Tenant shall tender the purchase price
therefor and the additional payments required by Section 10.02 of this Lease to
the County or its order, and the County shall certify to the Escrow Agent the
delivery of the deed and/or bill of sale for the Leased Property or such
portion thereof to the Tenant. The Tenant shall pay all expenses of the County
and all other taxes, fees and charges incident to any conveyance, including any
escrow fees, recording fees and any applicable federal, state and local taxes
and the like.
[End of Article X]
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ARTICLE XI
EVENTS OF DEFAULT AND REMEDIES
SECTION 11.01. Events of Default. Any one or more of the following events
(herein called an "Event of Default", or collectively "Events of Default")
shall constitute an Event of Default by the Tenant:
(a) if default shall be made in the due and punctual payment of any
Basic Rent or Additional Rent, which default shall not have been cured
within 30 days following receipt of written notice thereof from the
County or the Purchasers;
(b) if default shall be made by the Tenant in the due performance of
or compliance with any of the terms hereof, including payment, other than
those referred to in the foregoing subdivision (a) and such default shall
(i) continue for 90 days after the County or the Purchasers shall have
given the Tenant written notice of such default, or (ii) in the case of
any such default which can be cured but which cannot with due diligence
be cured within such 90-day period, if the Tenant shall fail to proceed
promptly to cure the same and thereafter prosecute the curing of such
default with due diligence, it being intended in connection with the
default not susceptible of being cured with due diligence within 90 days
that the time of the Tenant within which to cure the same shall be
extended for such period as may be necessary to complete the curing of
the same with all due diligence;
(c) if the Tenant shall file a voluntary petition seeking an order
for relief in bankruptcy, or shall be adjudicated insolvent, or shall
file any petition or answer or commence a case seeking any
reorganization, composition, readjustment, liquidation or similar order
for relief or relief for itself under any present or future statute, law
or regulation, or shall seek or consent to or acquiesce in the
appointment of any trustee, receiver or liquidator of the Tenant or of
the Leased Property, or shall make any general assignment for the benefit
of creditors, or shall admit in writing its inability to pay its debts
generally as they become due;
(d) if a petition shall be filed or a case shall be commenced
against the Tenant seeking an order for relief in bankruptcy or any
reorganization, composition, readjustment, liquidation or similar relief
under any present or future statute, law or regulation, and shall remain
undismissed or unstayed for an aggregate of 180 days (whether or not
consecutive), or if any trustee, receiver or liquidator of the Tenant or
of all or any substantial part of its properties or of the Leased
Property shall be appointed without the consent or acquiescence of the
Tenant and such appointment shall remain unvacated or unstayed for an
aggregate of 180 days (whether or not consecutive); or
(e) if any material representation or warranty made by the Tenant
herein or any statement, certificate or indemnification furnished or
delivered by the Tenant in connection with the execution and delivery of
this Lease, proves untrue in any material respect as of the date of the
issuance or making thereof or knowingly violated or breached, as the
case may be.
SECTION 11.02. Remedies on Event of Default (a) Upon the occurrence of
any Event of Default, the County may upon the written consent of either of the
Purchasers as to defaults other than in connection with the
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County's Reserved Rights, and shall, at the written direction of either
Purchaser as to defaults other than in connection with the County's Reserved
Rights, and subject to the purchase option of the Tenant hereunder: (i) declare
immediately due and payable an amount of Basic Rent equal to the entire unpaid
principal amount of the Industrial Bond, or the Special Source Revenue Bond
according to whichever Purchaser has made demand and all interest accrued or to
be accrued on such Industrial Bond or Special Source Revenue Bond will be paid
plus any Additional Rent due or to become due hereunder; (ii) terminate this
Lease by 30 days' notice in writing specifying the termination date; (iii)
reenter and take possession of the Leased Property, make any necessary repairs
and perform any work that may be necessary by reason of the Tenant's default,
with or without terminating this Lease, and relet the Leased Property; (iv)
have access to and inspect, examine and make copies of, the books, records and
accounts of the Tenant pertaining to construction of, acquisition of or
maintenance to the Leased Property; or (v) take whatever action at law or in
equity as may appear necessary or desirable to collect the rent, including but
not limited to a sale of the property, then due and thereafter to become due or
to enforce observance or performance of any covenant condition or agreement of
the Tenant under this Lease, including without limitation the sale of the
Leased Property pursuant to the equivalent of a tax lien. Notwithstanding the
foregoing, the Tenant shall retain the right to exercise any purchase option
referred to in Section 10.02 hereof during the pendency of any remedies
hereunder and prior to notice of termination of the Lease.
(b) Upon the occurrence of any Event of Default as to the County's
Reserved Rights, it shall have the right to exercise the same remedies provided
in Section (a) hereof.
SECTION 11.03. Certain Tenant Obligations to Survive Repossession and
Termination. No termination of the Term of the Lease or repossession of the
Leased Property pursuant to Section 11.02 hereof shall relieve the Tenant of
its liability and obligations to make the payments required by Sections 6.03,
6.04, 8.06, and 8.10 hereof, all of which shall survive any such termination or
repossession.
SECTION 11.04. Application of Moneys Upon Enforcement of Remedies. Any
moneys received by the County upon enforcement of its rights hereunder shall be
applied as follows: first, to the reasonable costs associated with such
enforcement proceedings; second, to payment of any Administration Expenses then
due and owing; third, to pay the Multi-County Fee payable under the
Multi-County Industrial Park Agreement as provided therein; fourth, to pay the
County to the extent of the County Minimum from the FILOT Revenues; fifth, to
pay the unpaid principal of and interest on the Special Source Revenue Bonds;
sixth, to pay the principal of and interest on the Industrial Revenue Bond;
seventh, to the County for distribution of FILOT Revenues under the
Multi-County Industrial Park Agreement; and eighth, any balance shall be paid
to the Tenant.
SECTION 11.05. Collection of FILOT Revenues. In addition to all other
remedies herein provided, the nonpayment of FILOT Revenues shall constitute a
lien for tax purposes as provided in Section 4-12-30(Q)(2) and (5) of the Act.
[End of Article XI]
ARTICLE XII
MISCELLANEOUS
SECTION 12.01. Rights and Remedies Cumulative. Each right, power and
remedy of the County or of the Tenant provided for in this Lease shall be
cumulative and concurrent and shall be in addition to every other right, power
or remedy provided for in
34
<PAGE> 39
this Lease or now or hereafter existing at law or in equity, in any
jurisdiction where such rights, powers and remedies are sought to be enforced,
and the exercise by the County or by the Tenant of any one or more of the
rights, powers or remedies provided for in this Lease or now or hereafter
existing at law or in equity or by statute or otherwise shall not preclude the
simultaneous or later exercise by the County or by the Tenant of any or all
such other rights, powers or remedies.
SECTION 12.02. Successors and Assigns. The terms and provisions of this
Lease shall be binding upon and inure to the benefit of the parties hereto and
their respective successors and assigns.
SECTION 12.03. Notices; Demands; Requests. Except as provided in this
Section 12.03, all notices, demands and requests to be given or made hereunder
to or by the County, the Tenant or the Purchaser, shall be in writing, and
shall be deemed to be properly given or made if sent by United States first
class mail, postage prepaid addressed as follows or at such other places as may
be designated in writing by such party.
(a) As to the County:
Cherokee County, South Carolina
210 North Limestone Street
Gaffney, South Carolina 29340
Attention: County Administrator
(b) As to the Tenant, the Industrial Bond Purchaser and the
Special Source Revenue Bond Purchaser:
Paragon Trade Brands, Inc.
10 Commerce Drive
Gaffney, South Carolina 29340
Attention: Vice President - Finance
and
Paragon Trade Brands, Inc.
180 Technology Parkway
Norcross, Georgia 30092
Attention: Office of General Counsel
with copy to:
Glass, McCullough, Sherrill & Harrold
1409 Peachtree Street, N.E.
Atlanta, Georgia 30309
Attention: Thomas J. Harrold, Jr., Esquire
SECTION 12.04. Applicable Law; Entire Understanding. This Lease shall be
governed exclusively by the provisions hereof and by the applicable laws of the
State of South Carolina. This Lease expresses the entire understanding and all
agreements of the parties hereto with each other, and neither party hereto has
made or shall be bound by any agreement or any representation to the other
party which is not expressly set forth in this
35
<PAGE> 40
Lease or in certificates delivered in connection with the execution and
delivery hereof.
SECTION 12.05. Severability. In the event that any clause or provision of
this Lease shall be held to be invalid by any court of competent jurisdiction,
the invalidity of such clause or provision shall not affect any of the
remaining provisions hereof.
SECTION 12.06. Headings and Table of Contents; References. The headings
of this Lease and any Table of Contents or Index annexed hereto are for
convenience of reference only and shall not define or limit the provisions
hereof or affect the meaning or interpretation hereof. All references in this
Lease to particular Articles or Sections or subdivisions of this Lease are
references to the designated Articles or Sections or subdivision of this Lease.
SECTION 12.07. Multiple Counterparts. This Lease may be executed in
multiple counterparts, each of which shall be an original but all of which
shall constitute but one and the same instrument.
SECTION 12.08. Rights of Purchasers. The agreements or obligations made
herein by the Tenant to or for the benefit of the Purchasers are intended by
the Tenant to be specifically enforceable by either of the Purchasers, and the
Tenant acknowledges that the acquisition of the Bonds by the Purchasers is
consideration for any such agreements or obligations.
SECTION 12.09. Amendments. This Lease may be amended only by a writing
signed by all of the parties.
SECTION 12.10. Waiver. Either party may waive compliance by the other
party with any term or condition of this Lease only in a writing signed by the
waiving party.
SECTION 12.11. Business Day. In the event that any action, payment or
notice is, by the terms of this Lease, required to be taken, made or given on
any day which is a Saturday, Sunday or a legal holiday in the jurisdiction in
which the person obligated to act is domiciled, such action, payment or notice
may be taken, made or given on the following business day with the same effect
as if given as required hereby, and no interest shall accrue in the interim.
[Execution follows on next page]
IN WITNESS WHEREOF, Cherokee County, South Carolina, has executed this
Lease by causing its name to be hereunto subscribed by the Chairman of its
County Council for the County and to be attested to by the Clerk to the County
Council, and Paragon Trade Brands, Inc. has executed this Lease all being done
as of the day and year first above written.
CHEROKEE COUNTY, SOUTH CAROLINA
By: /s/ L. Hoke Parris
--------------------------------
L. Hoke Parris, Chairman, County
Council, Cherokee County, South
Carolina
(SEAL)
36
<PAGE> 41
ATTEST:
/s/ Doris F. Pearson
- -----------------------------------------
Doris F. Pearson, Clerk to County Council,
Cherokee County, South Carolina
Signed, sealed and delivered
in the presence of:
/s/ Elmer H. Huskey
- -----------------------------------------
/s/ Dolphus C. Medley
- -----------------------------------------
PARAGON TRADE BRANDS, INC.
By: /s/ Robert C. Hirschey
------------------------------
Its: /s/ Vice President, Finance &
Administration
------------------------------
(SEAL)
WITNESSES:
/s/ Anthony Silwanowicz
------------------------------------
/s/ David C. Popejoy
------------------------------------
ATTEST:
By: /s/ Catherine O. Hasbrouck
-----------------------------------
Its: Vice President, General Counsel and
Corporate Secretary
-----------------------------------
37
<PAGE> 42
STATE OF SOUTH CAROLINA )
) PROBATE
COUNTY OF CHEROKEE )
PERSONALLY appeared before me Elmer H. Huskey who on oath says that
(s)he saw the within Cherokee County by L. Hoke Parris, Chairman of the County
Council and Doris F. Pearson, Clerk to the County Council, sign the within
Lease, and the said County, by said officers, did seal said Lease and as its
act and deed deliver the within Lease, and that (s)he with Dolphus C. Medley
the execution thereof.
/s/ Elmer H. Huskey
---------------------------
Witness
SWORN to before me this 17th
day of October , 1996.
/s/ Betty Camp Vernon (L.S.)
- -----------------------------------
Notary Public for South Carolina
My Commission Expires: 7-24-2000
STATE OF GEORGIA )
) PROBATE
COUNTY OF GWINNETT )
PERSONALLY appeared before me Anthony Silwanowicz who on oath says that
(s)he saw the within Paragon Trade Brands, Inc. by Robert C. Hirschey its
Vice President, Finance and Administration sign the within Lease, and the
said Tenant, by said officer, as its act and deed, deliver the within Lease,
and that (s)he with David C. Popejoy witnessed the execution thereof.
/s/ Anthony Silwanowicz
---------------------------
Witness
SWORN to before me this 21st
day of October 1996.
/s/ Melanie Y. Zeller
- -----------------------------
Notary Public for Georgia
My Commission Expires: 10-1-2000
<PAGE> 43
EXHIBIT A
LAND DESCRIPTION
Exhibit A, page 1
<PAGE> 44
EXHIBIT B
FORM OF NON-DISCLOSURE AGREEMENT
CONFIDENTIAL RELATIONSHIP AGREEMENT
One Way Agreement
For and in consideration of the mutual understandings of this Agreement,
Paragon Trade Brands, Inc., 180 Technology Parkway, Norcross, Georgia 30092, or
any of its divisions or majority owned subsidiaries (Paragon), and The
Undersigned agree to the following terms:
1. This Agreement shall have as its Effective Date the date indicated
below and shall be governed and construed in accordance with the laws of the
State of Georgia, USA; and may not be changed except by another writing
referring hereto and signed by both parties. THE PURPOSE OF THIS AGREEMENT IS
TO PROTECT PARAGON'S PROPRIETARY INFORMATION.
2. Paragon's Proprietary information may include, for example, business
plans, customer information, supplier information, data, know-how, formulae,
processes, designs, sketches, photographs, plans, drawings, specifications,
samples, reports, plant arrangements, equipment configuration, studies,
findings, software, biological material, video tape, inventions or ideas, but
is not limited to these items. The Proprietary Information of Paragon relates
to the business, products, processes, equipment, know-how and materials related
to and used in the manufacture of absorbent products.
3. THE UNDERSIGNED AGREES TO MAINTAIN THE CONFIDENTIALITY OR TRADE SECRET
STATUS OF PARAGON'S PROPRIETARY INFORMATION.
4. Paragon shall identify its Proprietary Information by marking its
tangible form "Confidential." "Proprietary" or some similar notice, and oral
notice before disclosure of nontangible Proprietary Information.
5. [Intentionally omitted].
6. The Undersigned shall exercise reasonable care to prevent disclosure of
Paragon's Proprietary Information to any third party, except as may be
authorized in writing by Paragon, and internal dissemination of Paragon's
Proprietary Information by the Undersigned to its employees shall be limited to
those employees whose duties justify their need to know such information. The
Undersigned shall use all reasonable efforts to extend the obligations of this
Agreement to those employees.
7. Except as may be authorized in writing by Paragon, the Undersigned shall
not use the Proprietary Information disclosed by Paragon under this Agreement
for any purpose other than as directed by Paragon.
8. Nothing hereinabove contained shall deprive the Undersigned of the right
to use or disclose any information:
public;
b. which becomes at a later date generally known to the trade or
public through no fault of the Undersigned and then only after said
later date;
c. which is possessed by the Undersigned as evidenced by The
Undersigned's written or other tangible evidence, before receipt
thereof from Paragon;
d. or which is disclosed to the Undersigned in good faith by a
third party who has an independent right to such information.
9. Nothing contained in this Agreement shall be construed as creating an
express or implied license to use any of Paragon's Proprietary Information
other than as provided in Paragraph 7.
10. This Agreement and any amendments hereto may be executed by facsimile
signature and in any number of counterparts, all of which taken together shall
constitute one and the same instrument.
Company Name:
--------------------------------------
Street Address:
------------------------------------
City, State, Zip:
----------------------------------
Agreed to and effective on
-------------------------
(Date)
By: Accepted by Paragon Trade Brands, Inc.
------------------
Signature
By:
- --------------------- -----------------------------------
Please Print Name
<PAGE> 45
SCHEDULE A
Schedule A, page 1
<PAGE> 1
EXHIBIT 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
YEAR (FIFTY-TWO WEEKS) ENDED DECEMBER 29, 1996 VS. YEAR (FIFTY-THREE WEEKS)
ENDED DECEMBER 31, 1995 RESULTS OF OPERATIONS
Net earnings were $21.1 million during 1996 compared with a net loss of $3.4
million in 1995. Included in the results in 1996 were charges of $10.6 million,
net of the effect of income taxes, primarily associated with integrating the
acquisition of Pope & Talbot, Inc.'s ("P&T") disposable diaper business and
costs to relocate the corporate headquarters to Atlanta. Included in the
results in 1995 were restructuring and other 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 effect of
income taxes. Excluding these restructuring and other charges, net earnings in
1996 were $31.7 million compared to net earnings in 1995 of $5.4 million. The
increased profit in 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 1995. These improvements in volume, costs and mix were partially offset by a
substantial increase in trade merchandising expenses, lower sales prices and
the costs to start-up the feminine care business.
Net earnings per share in 1996 were $1.76 compared to a net loss per share of
$.29 in 1995. Net earnings per share were $2.64 in 1996 compared to net
earnings per share of $.46 in 1995, excluding the restructuring and other
charges for both periods.
NET SALES
Net sales were $581.9 million in 1996, a 12.2 percent increase from the $518.8
million reported in 1995. Diaper unit sales increased 11.3 percent to 3,761
million diapers in 1996 from 3,378 million diapers in 1995. The reason for the
increase in unit volume was the P&T acquisition in February 1996. Excluding the
impact of the P&T acquisition, volume would have been lower during 1996
compared to 1995. 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 branded
manufacturers. The Company intends to continue to improve its products during
1997. This should position the Company's products to compete more effectively
with the premium national brands, but volume may remain negatively impacted
until the improvements are added.
Average sales prices decreased approximately 3.5 percent during 1996, including
a decrease in the fourth quarter of approx-imately 6.5 percent compared to
1995, excluding the effect of a more 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 into 1997. Kimberly-Clark
Corporation ("K-C") and The Procter & Gamble Company ("P&G") have recently
announced price increases through package count reductions. The Company may not
realize this price increase due to the entry of a new store brand competitor.
As discussed below, prices, as well as volume, are expected to be negatively
impacted by the items described in "Risks and Uncertainties."
COST OF SALES
Cost of sales in 1996 was $449.9 million compared to $439.8 million in 1995, a
2.3 percent increase. As a percentage of net sales, cost of sales was 77.3
percent in 1996 compared to 84.8 percent in 1995. Results in 1996 included $5.4
million of charges for costs primarily 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 employee relocation costs. Results in 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 76.4 percent in 1996 compared to 84.7 percent in 1995. The lower
costs were primarily a result of lower raw material costs including pulp, super
absorbent polymer and packaging. These lower costs were offset, in part, by
higher costs associated with a more favorable product mix and costs associated
with the feminine care business start-up.
Pulp prices were approximately 33.0 percent lower in 1996 compared to 1995.
Pulp prices, which had increased during 1995, decreased significantly during
1996. Pulp prices are expected to increase modestly in 1997. Super absorbent
polymer costs also dropped significantly in 1996 compared to 1995, but are
expected to increase in 1997. Other raw material prices were generally at
similar price levels in 1996 compared to 1995.
Labor costs were at similar levels in 1996 as compared to 1995, excluding the
feminine care business start-up. Costs were negatively impacted during the
fourth quarter of 1996 by inefficiencies related to a new diaper product
rollout and reduced production levels associated with a planned decrease in
finished goods inventory.
12
<PAGE> 2
Plant overhead costs, excluding the charges discussed below, were higher during
1996 compared to 1995. Costs were lower in 1996 due to the La Puente plant
closure at the end of February 1995, but were offset by increases in plant
overhead resulting from the P&T manufacturing facilities acquired in February
1996 that remained in production and costs related to the feminine care
business start-up. During 1996, $2.9 million of charges were incurred to
support the integration of the P&T acquisition. These charges were primarily
related to the cost of equipment dismantling and movement and employee
relocation discussed above.
Depreciation costs, excluding the charges discussed below, were at slightly
higher levels in 1996 compared to 1995. Depreciation increased due to P&T
facilities acquired in February 1996 that remained open, the feminine care
business start-up and acceleration of depreciation related to new product
enhancements and changes in equipment configuration. These increases were
partially offset by the closure of the La Puente facility at the end of
February 1995. During 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 EXPENSES
Selling, general and administrative expenses ("SG&A") were $92.2 million in
1996 compared to $68.0 million in 1995. As a percentage of net sales, these
expenses were 15.8 percent in 1996 compared to 13.1 percent in 1995. Included
in 1996 were charges of $11.7 million, of which $9.0 million related to 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 1995 were charges of
$2.2 million for the corporate staff reduction and acceleration of software
amortization.
Excluding the charges discussed above, SG&A expenses were $80.5 million in 1996
compared to $65.8 million in 1995, and as a percentage of net sales these
expenses were 13.8 percent in 1996 compared to 12.7 percent in 1995. The
increase in expenses is largely attributable to an increase in trade
merchandising expenses. 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, in some combination with product pricing, is
expected to continue in 1997. Expenses were also higher in 1996 due to the
amortization of goodwill associated with the P&T acquisition, the feminine care
business startup and increased incentive-based compensation. Information system
costs increased in the second half of 1996 and are expected to remain at higher
levels during 1997 as the Company begins installation of a new enterprise
information system. These increases were partially offset by a decrease in
legal expenses. Legal expenses, however, are expected to increase during 1997
due to the P&G and K-C patent litigation matters discussed herein, see "Legal
Proceedings." Packaging related expenses were also lower in 1996 compared to
1995. These expenses are expected to increase in 1997 as a result of product
rollouts and changes in package counts.
RESEARCH AND DEVELOPMENT
Research and development ("R&D") expenses were $4.2 million in 1996 compared to
$3.6 million in 1995. R&D expenses increased due to the feminine care business
start-up and increased product development costs in the fourth quarter of 1996.
INTEREST EXPENSE
Interest expense was $2.9 million in 1996 compared to $1.0 million in 1995. The
increase was due to higher interest costs associated with borrowings to finance
the P&T acquisition and the acquisition of a minority interest in Grupo P.I.
Mabe, S.A. de C.V. ("Mabesa"), which have been partially offset by capitalized
interest.
OTHER INCOME (EXPENSE)
Other income was $.6 million in 1996 compared to other expense of $3.8 million
in 1995. Included in 1995 was $4.2 million in charges due to the cancellation
of capital projects and legal settlement costs.
RESTRUCTURING
Results in 1995 included a restructuring charge of $8.1 million 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 national
branded manufacturers and rising material prices. The closure of the facility
was expected to generate approximately $17.0 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.
13
<PAGE> 3
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 the end of 1996 the equipment and building have
been sold.
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 restructuring charge included $2.2 million in non-cash charges due to asset
write-offs. The remaining $5.9 million has been paid. The restructuring plan is
complete.
YEAR (FIFTY-THREE WEEKS) ENDED DECEMBER 31, 1995 VS. YEAR (FIFTY-TWO WEEKS)
ENDED DECEMBER 25, 1994 RESULTS OF OPERATIONS
A net loss of $3.4 million was incurred during 1995, compared with net earnings
of $25.0 million in 1994. Included in the results in 1995 were costs incurred
in the first quarter for closure of the Company's La Puente, California plant,
corporate headquarters staff reductions, and other charges totaling $8.9
million, net of the effect of income taxes. Excluding these restructuring and
other charges, net earnings in 1995 were $5.4 million. The decrease in net
earnings during 1995, excluding the restructuring and charges, was primarily
due to lower volume and selling prices combined with higher costs, including
raw materials, depreciation and trade merchandising expenses compared to 1994.
These cost increases were partially offset by lower product, manufacturing and
administrative costs.
The net loss per share in 1995 was $.29 compared to net earnings per share of
$2.16 in 1994. Net earnings per share was $.46 in 1995, excluding the
restructuring and other charges.
NET SALES
Net sales were $518.8 million during 1995, a 10.3 percent decrease from the
$578.6 million reported in 1994. Unit sales decreased 6.0 percent, to 3,378
million diapers in 1995 from 3,595 million diapers in 1994. Average selling
prices in 1995 decreased approximately 4.6 percent compared to 1994. The
decrease in selling prices was primarily due to increased discounts and
promotional allowances in response to price reductions and promotions by
branded and value segment manufacturers. Volume was also negatively impacted by
the increased discounts and promotions by branded and value- segment
manufacturers.
Selling price and volume were also negatively impacted by price and package
count reductions implemented in February 1995 by the branded manufacturers.
Volume declines in the existing U.S. customer base were largely offset by new
customers added during the year.
With the devaluation of the Mexican peso in late 1994, sales to U.S. customers
for resale in Mexico, which represented approximately 7 percent of unit volume
in 1994, were negligible in 1995.
COST OF SALES
Cost of sales in 1995 was $439.8 million, a 6.4 percent decrease compared to
$469.8 million in 1994. As a percentage of net sales, cost of sales was 84.8
percent in 1995 compared to 81.2 percent in 1994. On a per unit basis, costs
were slightly lower in 1995 compared to 1994. The reduction in costs was
primarily due to the benefits of restructuring and lower product costs, despite
increases in pulp prices.
Pulp prices were approximately 48 percent higher in 1995 compared to 1994.
Other raw material prices, other than super absorbent polymer, were generally
at slightly higher price levels in 1995 compared to 1994. Super absorbent
polymer costs decreased approximately 14 percent in 1995 compared to 1994.
Product costs were also lower due to design changes made in 1995.
Labor costs decreased in 1995 compared to 1994. The decrease in costs was
primarily due to manufacturing efficiencies, the La Puente plant closure at the
end of February, and reduced downtime costs due to capital installations in
comparison to 1994.
Plant overhead costs were lower in 1995 compared to 1994. The primary reason
for lower costs was the closure of the La Puente plant, which was partially
offset by higher costs of outside warehousing and distribution. Costs in 1994
were also negatively impacted by expenses related to the capital expenditure
program.
Depreciation costs increased $4.2 million in 1995 compared to 1994 and included
a $.4 million charge related to equipment write-downs. The increase in
depreciation was due to the cost of additional capacity, pad modernization and
accelerated depreciation on training pant equipment. The higher costs were
partially offset by the closure of the La Puente facility in February 1995.
14
<PAGE> 4
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses were $68.0 million in 1995 compared to $59.5 million in 1994. As
a percentage of net sales, these expenses were 13.1 percent in 1995 compared to
10.3 percent in 1994. The increase in costs includes $2.2 million of charges
for the corporate staff reduction and acceleration of software amortization.
Excluding the charges, the increase was primarily attributable to an increase
in trade merchandising expenses in 1995 compared to 1994, despite lower volume
levels. The increase in trade merchandising expenses was in reaction to price
reductions and increased promotions by branded and value segment manufacturers.
Legal expenses were also higher in 1995 compared to 1994. The increase in legal
expenses was due to the P&G litigation. The increased trade merchandising and
legal expenses were partially offset by lower expenses including sales
commissions and packaging expenses.
RESEARCH AND DEVELOPMENT
R&D expenses decreased to $3.6 million in 1995 from $6.8 million in 1994. The
decrease in expenses was primarily due to lower facility costs, lower royalties
and reductions in staff. The lower facility costs were due to the move from a
separate R&D facility to the new corporate facility during the first quarter of
1995. Overall facility costs are included in SG&A.
OTHER EXPENSE
Other expense was $3.8 million in 1995 compared to $1.5 million in 1994. The
increase in expenses was due to $4.2 million in charges. These charges included
write-offs due to the cancellation of capital projects and legal settlement
costs.
RESTRUCTURING
As discussed above, 1995 results included a restructuring charge of $8.1
million for the closure of the La Puente, California facility in February of
1995.
LIQUIDITY AND CAPITAL RESOURCES
During 1996, cash flow from earnings and non-cash charges to earnings was $61.7
million compared to $37.9 million in 1995. The increase in cash flow was
primarily due to improved operating results.
During 1996, working capital, exclusive of cash, short-term borrowings and
current deferred taxes, decreased $6.6 million. This was primarily due to an
increase in accrued liabilities and a decrease in inventories which were
partially offset by an increase in accounts receivable.
The increase in receivables partially reflects an increase in overall business
activity due to the P&T acquisition. The receivable increase also includes
refundable income taxes expected to be recovered in the first quarter of 1997.
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 these inventories at year
end were approximately $11.0 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 start-up.
The increase in accrued liabilities primarily reflects reserves provided for
the P&T integration, increases in customer promotional liabilities and
increased incentive-based compensation liabilities. These liabilities are
expected to decrease during the first half of 1997 as the liabilities are paid.
Cash flow was also favorably impacted by $2.9 million as the Company issued
stock to settle certain payroll liabilities.
The cash produced from operations supported capital expenditures of $48.9
million in 1996 compared to $17.4 million in 1995. The expenditures were
primarily in support of the feminine care business start-up and the purchase of
a new corporate headquarters in Atlanta. Capital expenditures to support the
feminine care business start-up were approximately $25.0 million in 1996.
Capital spending in 1997 is anticipated to be approximately $60.0 million. The
spending includes upgrades to diaper packaging technology, a company-wide
information technology upgrade and the investment of capital to support
potential new business initiatives.
As discussed in several places above, the Company incurred a total of $17.0
million in pre-tax charges related to the P&T integration and relocation to
Atlanta during 1996. Of this $17.0 million, $4.1 million were non-cash charges.
Of the remaining $12.9 million, $9.1 million was paid during 1996. The
remaining expenses are expected to be paid from internally generated funds or
from available credit facilities.
15
<PAGE> 5
The Company has access to an unsecured, revolving bank credit facility of
$150.0 million. The Company has an additional Cdn $5.0 million revolving credit
facility available in Canada. In addition to the revolving credit facilities,
the Company has $50.0 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 year
there was $70.0 million in debt outstanding against the credit facilities and
no debt outstanding under the uncommitted lines of credit. The increase in debt
under credit facilities 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 $8.3 million in cash and short-term investments at the end of
the year.
The Company may utilize the credit facilities for expenditures to support
initiatives to enter the adult incontinence business, baby wipes 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.
FUTURE REALIZATION OF DEFERRED TAX ASSET
The Company accounts for income taxes based on the liability method and,
accordingly, deferred income taxes are provided to reflect temporary
differences between financial and tax reporting. The Company currently has a
net deferred tax asset of $34.6 million. Significant components of net deferred
income taxes include temporary differences due to depreciation and amortization
($11.2 million), goodwill ($10.9 million) and reserves not currently deductible
($10.5 million). To realize the full benefit of the deferred tax asset, the
Company needs to generate approximately $65.0 million in future taxable income
taking into consideration carryback periods available. Management believes that
the Company will generate sufficient future taxable income to ensure full
realization of the deferred tax asset.
RISKS AND UNCERTAINTIES
P&G and K-C have recently announced changes to their product and packaging
offerings including price increases through lower package counts. The Company
is currently evaluating its options in response to these changes. Although the
Company's ultimate 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 are expected to be
incurred during 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. The price increase
associated with the package count reduction may not be realized due to the
continued promotions by the branded manufacturers and competition from a new
competitor discussed below.
A privately held manufacturer of store brand feminine care products recently
announced plans to enter the store brand baby diaper business. Although the
overall impact is hard to predict, it is likely that the additional competition
could lead to lower volume 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 and packaging 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.
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. The Company elected to continue following
the provisions of APB Opinion No. 25, "Accounting for Stock Issued to
Employees." The required disclosures have been included in Note 4 of the "Notes
to Financial Statements."
INFLATION
Inflation has not been a significant factor in the Company's results of
operations in recent years due to the modest rate of price increases in the
United States and Canada.
16
<PAGE> 6
CONSOLIDATED EARNINGS (LOSS) STATEMENTS
(Dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended
December 29, 1996 December 31, 1995 December 25, 1994
<S> <C> <C> <C>
Net sales $581,929 $518,776 $578,618
Cost of sales 449,885 439,846 469,837
----------------------------------------------------
Gross profit 132,044 78,930 108,781
Selling, general and administrative expense 92,212 68,037 59,464
Research and development expense 4,163 3,562 6,855
Restructuring _ 8,059 _
----------------------------------------------------
Operating profit (loss) 35,669 (728) 42,462
Equity in earnings of unconsolidated subsidiary 423 _ _
Interest expense 2,864 952 685
Other income (expense), net 581 (3,833) (1,450)
-----------------------------------------------------
Earnings (loss) before income taxes 33,809 (5,513) 40,327
Provision for (benefit from) income taxes 12,687 (2,076) 15,333
----------------------------------------------------
Net earnings (loss) $ 21,122 $ (3,437) $ 24,994
====================================================
Primary earnings (loss) per common share $ 1.76 $ (.29) $ 2.16
====================================================
Dividends paid $ _ $ _ $ _
====================================================
</TABLE>
See accompanying Notes to Financial Statements.
17
<PAGE> 7
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
DECEMBER 29, 1996 DECEMBER 31, 1995
-------------------------------------------
<S> <C> <C>
ASSETS
Cash and short-term investments $8,297 $ 11,890
Receivables 56,888 43,704
Inventories 44,055 40,939
Current portion of deferred income taxes 10,575 7,980
Prepaid expenses 957 629
---------------------------
Total current assets 120,772 105,142
Property and equipment 116,338 94,038
Construction in progress 10,117 15,562
Assets held for sale 14,421 17,756
Patents and trademarks 676 827
Deferred income taxes 26,293 28,284
Investment in unconsolidated subsidiary, at cost 16,531 _
Investment in and advances to unconsolidated subsidiary, at equity 29,484 _
Goodwill 36,658 _
Other assets 1,800 5,055
---------------------------
Total assets $373,090 $266,664
===========================
Liabilities and Shareholders' Equity
Short-term borrowings $ _ $ 1,760
Checks issued but not cleared 10,233 10,232
Accounts payable 37,067 37,291
Accrued liabilities 38,495 25,481
---------------------------
Total current liabilities 85,795 74,764
Long-term debt 70,000 _
Deferred income taxes 2,260 _
Other long-term liabilities 330 211
---------------------------
Total liabilities 158,385 74,975
Commitments and contingencies (Notes 11 and 12)
Shareholders' equity
Preferred stock: authorized 10,000,000 shares, no shares issued, $.01 par value _ _
Common stock: authorized 25,000,000 shares, issued 12,288,293 and
11,851,504, $.01 par value 123 119
Capital surplus 143,205 132,722
Foreign currency translation adjustment (614) (661)
Retained earnings 84,341 63,219
Less: treasury stock, 535,250 and 245,322 shares, at cost (12,350) (3,710)
---------------------------
Total shareholders' equity 214,705 191,689
---------------------------
Total liabilities and shareholders' equity $373,090 $266,664
===========================
</TABLE>
See accompanying Notes to Financial Statements.
18
<PAGE> 8
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Year Ended
December 29, 1996 December 31, 1995 December 25, 1994
------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 21,122 $ (3,437) $ 24,994
Non-cash charges to earnings:
Depreciation and amortization 38,828 35,992 31,119
Deferred income taxes 1,656 515 3,667
Write-down of assets 69 4,788 -
Changes in working capital:
Accounts receivable (12,300) 1,450 1,344
Inventories and prepaid expenses 8,117 (6,184) 1,430
Accounts payable (224) 5,902 (9,728)
Accrued liabilities 11,777 4,646 2,675
Checks issued but not cleared 1 84 (563)
Other (757) (1,196) 258
------------------------------------------------------
Net cash provided by operating activities 68,289 42,560 55,196
------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property and equipment (48,867) (17,433) (74,921)
Proceeds from sale of property and equipment 3,822 111 56
Acquisition of Pope & Talbot, Inc.'s disposable
diaper business assets (56,963) - -
Investment in Grupo P.I. Mabe, S.A. de C.V. (15,908) - -
Investment in and advances to unconsolidated
subsidiary, at equity (11,033) - -
Other (1,731) 173 (574)
------------------------------------------------------
Net cash used by investing activities (130,680) (17,149) (75,439)
------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in short-term borrowings (1,760) (6,382) 8,142
Proceeds from U.S. bank credit facility 85,000 2,000 18,700
Repayments of U.S. bank credit facility (15,000) (8,000) (12,700)
Sale of common stock 641 - -
Purchases of treasury stock (10,083) (3,823) -
------------------------------------------------------
Net cash provided (used) by financing activities 58,798 (16,205) 14,142
------------------------------------------------------
NET INCREASE (DECREASE) IN CASH (3,593) 9,206 (6,101)
Cash at beginning of period 11,890 2,684 8,785
------------------------------------------------------
Cash at end of period $ 8,297 $ 11,890 $ 2,684
------------------------------------------------------
Cash paid (received) during the year for:
Interest (net of amounts capitalized) $ 2,961 $ 586 $ 278
------------------------------------------------------
Income taxes $ 15,189 $ (646) $ 16,823
======================================================
</TABLE>
See accompanying Notes to Financial Statements.
19
<PAGE> 9
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Foreign
Common Capital Currency Retained Treasury
Stock Surplus Translation Earnings Stock
----------------------------------------------------------------
<S> <C>
BALANCE, DECEMBER 26, 1993 $115 $125,733 $(436) $41,662 $ _
Net earnings _ _ _ 24,994 -
Issue common stock 1 4,008 _ _ _
Translation adjustment _ _ (398) _ _
----------------------------------------------------------------
BALANCE, DECEMBER 25, 1994 116 129,741 (834) 66,656 _
Net loss _ _ _ (3,437) _
Issue common stock 3 2,981 _ _ 113
Translation adjustment _ - 173 _ -
Purchase of treasury stock _ - _ _ (3,823)
----------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 119 132,722 (661) 63,219 (3,710)
Net earnings _ _ _ 21,122 _
Issue common stock 4 10,483 _ _ 1,443
Translation adjustment _ _ 47 _ _
Purchase of treasury stock _ _ _ _ (10,083)
---------------------------------------------------------------
BALANCE, DECEMBER 29, 1996 $123 $143,205 $(614) $84,341 $(12,350)
===============================================================
The following summarizes the changes in the number of shares of capital stock:
Common Stock Treasury Stock
-------------------------------
BALANCE, DECEMBER 26, 1993 11,500,000 _
Issue common stock_Long-Term Incentive Compensation Plan 48,615 _
Issue common stock_Profit Sharing and Savings Plan 74,606 _
-------------------------------
BALANCE, DECEMBER 25, 1994 11,623,221 _
Issue common stock_1995 Incentive Compensation Plan 78,744 _
Issue common stock_Profit Sharing and Savings Plan 149,539 (7,578)
Purchase of treasury stock _ 252,900
-------------------------------
BALANCE, DECEMBER 31, 1995 11,851,504 245,322
Issue common stock_pope & talbot, inc.'S disposable diaper business 387,800 _
Issue common stock_1995 incentive Compensation Plan 26,157 (3,000)
Issue common stock_1996 Non-Officer Employee Incentive
Compensation Plan _ (30,000)
Issue common stock_Profit Sharing and Savings Plan _ (54,372)
Issue common stock_Exercise of stock options 22,832 (10,500)
Purchase of treasury stock _ 387,800
-------------------------------
BALANCE, DECEMBER 29, 1996 12,288,293 535,250
===============================
</TABLE>
See accompanying Notes to Financial Statements.
20
<PAGE> 10
NOTES TO FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
NOTE 1: BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING AND
REPORTING POLICIES
BASIS OF PRESENTATION AND RELATED INFORMATION
Paragon Trade Brands, Inc. ("Paragon" or the "Company") is a manufacturer of
store brand infant disposable diapers and feminine care products in the United
States and Canada. The Company's products are distributed throughout the United
States and Canada, through grocery and food stores, mass merchandisers,
warehouse clubs, toy stores and drug stores that market the products under
their own store brand labels.
The consolidated financial statements include the accounts of Paragon Trade
Brands, Inc. and its wholly-owned subsidiaries, Paragon Trade Brands (Canada)
Inc. and Paragon Trade Brands International, Inc. All significant intercompany
transactions and accounts have been eliminated.
The consolidated financial statements were prepared in conformity with
generally accepted accounting principles and necessarily include amounts based
on management's estimates and assumptions. The estimates and assumptions of
management affect the reported amounts of assets, liabilities, revenues and
expenses, including disclosures regarding contingent assets and liabilities.
Actual results may differ from those reported due to these estimates and
assumptions.
The Company uses a 52- to 53-week year. The fiscal years ended December 29,
1996 and December 25, 1994 include 52 weeks. The fiscal year ended December
31, 1995 includes 53 weeks.
CASH AND SHORT-TERM INVESTMENTS
For purposes of cash flow and fair value reporting, short-term investments with
original maturities of 90 days or less are considered cash equivalents.
Short-term investments are stated at cost, which approximates fair value. The
obligation for outstanding checks is reflected as checks issued, but not
cleared.
FINANCIAL INSTRUMENTS
The Company occasionally enters into forward contracts to purchase foreign
currencies at specific rates on preestablished dates. The purpose of these
contracts is to hedge obligations and accounts payable denominated in foreign
currencies. Gains and losses on the forward contracts are deferred and offset
exchange gains and losses on the transactions hedged. The Company's other
off-balance sheet risks are not material.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company estimates that the fair values of its financial instruments
approximate their carrying values. Accordingly, no separate disclosure of fair
value is made.
NONCASH TRANSACTIONS
During the fiscal years ended December 29, 1996 and December 31, 1995, the
Company issued 113,529 and 235,861, respectively, shares of common stock to key
management and employees through the Company's Long-Term Incentive Compensation
Plan and its Profit Sharing and Savings Plan (see Note 4). The balance sheet
effect of issuing these shares of common stock was a decrease in accrued
liabilities of $2,919 and $3,097, respectively, and an increase in equity by an
equal amount without the use of cash.
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. Had the FIFO
method been used to cost the domestic pulp and finished goods inventories, the
amounts at which they are stated would have been $602 and $2,958 greater at
December 29, 1996 and December 31, 1995, respectively. During 1996, the Company
liquidated certain LIFO inventories that were carried at higher costs
prevailing in prior years. The effect of this liquidation was to decrease
earnings before taxes by approximately $1,100.
21
<PAGE> 11
PROPERTY AND EQUIPMENT
Paragon's property accounts are maintained on an individual asset basis.
Betterments and replacements of major units are capitalized. Maintenance,
repairs and minor replacements are expensed. Depreciation is provided on the
straight-line method at rates based upon estimated useful lives as follows:
<TABLE>
<S> <C>
Buildings 20 to 40 years
Building improvements 10 years
Machinery, equipment, furniture and fixtures 3 to 10 years
</TABLE>
The cost and related depreciation of property sold or retired is removed from
the property and allowance for depreciation accounts and the gain or loss is
recorded.
PATENTS AND TRADEMARKS
The Company operates in a commercial field in which patents relating to the
products, processes, apparatus and materials are more numerous than in many
other fields. The Company takes careful steps in designing, producing and
selling its products to avoid infringing any valid patents of its competitors.
However, there can be no assurance that the Company will not be challenged with
respect to patents in the future (see Note 11).
Purchased patents and trademarks are amortized on a straight-line basis over a
five- to ten-year life. Amortization expense was $501 for the year ended
December 29, 1996 and $456 for the years ended December 31, 1995 and December
25, 1994, respectively. Accumulated amortization was $4,847 and $4,346 at
December 29, 1996 and December 31, 1995, respectively.
INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES
The Company completed the purchase of a 15 percent interest in Grupo P.I. Mabe,
S.A. de C.V. ("Mabesa") and related companies on January 26, 1996. The
investment is accounted for using the cost method. The Company also acquired on
January 26, 1996 a 49 percent 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
fiscal year ended December 29, 1996.
GOODWILL
On February 8, 1996, the Company completed the purchase of substantially all of
the assets of Pope & Talbot, Inc.'s ("P&T") disposable diaper business.
Goodwill represents the excess of the cost of these assets over their estimated
fair market 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 year ended December 29, 1996
was $1,735.
TREASURY STOCK
In July 1995, the Board of Directors authorized the repurchase of up to 1.0
million shares of the Company's outstanding common stock. Purchases may be made
periodically in the open market or in privately-negotiated transactions over an
extended period of time, if and when management believes market conditions
warrant. During the fiscal years ended December 29, 1996 and December 31, 1995,
the Company repurchased 387,800 and 252,900 shares at a cost of $10,083 and
$3,823, respectively. The Company reissued 87,322 and 7,578 of these shares
through its Long-Term Incentive and Profit Sharing Plans in the years ended
December 29, 1996 and December 31, 1995, respectively. The Company reissued
10,500 shares for the exercise of stock options in the year ended December 29,
1996 (see Note 4).
SIGNIFICANT SALES
During the years ended December 29, 1996, December 31, 1995 and December 25,
1994, the percentages of net sales to an individual customer whose sales
represent in excess of 10 percent of net sales were 13 percent, 11 percent and
15 percent, respectively.
22
<PAGE> 12
INCOME TAXES
The Company accounts for income taxes based on the liability method and,
accordingly, deferred income taxes are provided to reflect temporary
differences between financial and tax reporting. Deferred tax assets and
liabilities are measured based on enacted tax laws and rates without
anticipation of future changes. Effects on deferred taxes of enacted changes in
tax laws are recognized in income for financial statement purposes in the
period of enactment.
As of December 29, 1996, there were approximately $9,286 of cumulative
undistributed earnings of the Company's foreign subsidiaries and investments
accounted for by the equity method. U.S. taxes have not been provided for on
these earnings. Under existing law, undistributed earnings are not subject to
U.S. tax until distributed as dividends. Any future earnings are intended to be
indefinitely reinvested in these operations. Furthermore, any taxes that are
paid to foreign governments on such future earnings may be used, in whole or in
part, as credits against the U.S. tax on any distributions from such earnings.
Income taxes have been provided for all items included in the consolidated
earnings (loss) statements, regardless of the period when such items will be
deductible for tax purposes. The principal temporary differences between
financial and tax reporting arise from tax-basis goodwill, depreciation and
reserves not currently deductible.
FOREIGN CURRENCY TRANSLATION
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.
PROFIT SHARING AND 401(K) PLANS
Effective February 2, 1993, Paragon adopted both a defined contribution profit
sharing plan and a 401(k) savings plan covering most of its employees. On
October 1, 1993, the two plans were merged, amended and restated into one plan,
the Paragon Trade Brands, Inc. Profit Sharing and Savings Plan. The name of the
plan was changed by resolution of the Board of Directors in December 1995 to
Paragon Retirement Investment Savings Management Plan ("PRISM"). The plan
provides for both employer-matching contributions based on voluntary salary
deferrals of employees and discretionary employer contributions. Plan
participants are fully vested with respect to employer contributions after five
years of service. Employee contributions vest immediately. Contributions to
the plan are based on various levels of employee participation. Plan expense
for the fiscal years ended December 29, 1996, December 31, 1995 and December
25, 1994 was $2,607, $1,475 and $1,785, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS IDENTIFIED FOR DISPOSAL
In March 1995, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of," to be 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.
STOCK-BASED COMPENSATION
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 are included in Note 4.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' financial
statements to conform them to the current year's presentation.
23
<PAGE> 13
NOTE 2: OTHER INCOME (EXPENSE), NET
Other income was $581 in 1996 compared to other expense of $3,833 and $1,450 in
1995 and 1994, respectively. The primary increase in expenses in 1995 was due
to $4,169 in one-time charges, including capital project cancellations and
legal settlement costs.
NOTE 3: INCOME TAXES
Taxes on income are based on earnings before taxes as follows:
<TABLE>
<CAPTION>
December 29, 1996
-----------------
<S> <C>
Domestic $22,035
Foreign 11,774
-------
$33,809
=======
</TABLE>
Provisions for (benefits from) income taxes include the following:
<TABLE>
<CAPTION>
December 29, 1996 December 31, 1995 December 25, 1994
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal:
Current $8,651 $(2,162) $ 9,722
Deferred (1,098) 68 3,227
---------------------------------------------------------------------------
7,553 (2,094) 12,949
---------------------------------------------------------------------------
State:
Current 1,496 (702) 2,552
Deferred (200) 194 680
---------------------------------------------------------------------------
1,296 (508) 3,232
---------------------------------------------------------------------------
Foreign:
Current 1,578 273 (608)
Deferred 2,260 253 (240)
---------------------------------------------------------------------------
3,838 526 (848)
---------------------------------------------------------------------------
$12,687 $(2,076) $15,333
===========================================================================
</TABLE>
A reconciliation between the federal statutory rate and the effective tax rate
follows:
<TABLE>
<CAPTION>
December 29, 1996 December 31, 1995 December 25, 1994
-------------------------------------------------------------------
<S> <C> <C> <C>
Expected provision at the statutory rate $11,833 $(1,930) $14,114
State income taxes, net of federal tax benefit 1,319 (330) 2,101
Research and experimental credit (50) (75) (210)
All other, net (415) 259 (672)
----------------------------------------------------------
$12,687 $(2,076) $15,333
==========================================================
</TABLE>
24
<PAGE> 14
Net deferred tax assets at December 29, 1996 and December 31, 1995 were $34,608
and $36,264, respectively. The amounts recorded primarily reflect the
following: (1) the tax effects of a step-up in the tax basis of the assets of
Paragon as a result of the February 2, 1993 transfer to Paragon of
substantially all the assets and liabilities of the Weyerhaeuser Company's
disposable diaper business and (2) deferred tax assets due to the enactment of
the Omnibus Budget Reconciliation Act of 1993, which allows amortization of
intangibles, including goodwill. Net deferred income taxes are attributable to
the following temporary differences:
<TABLE>
<CAPTION>
December 29, 1996 December 31, 1995
-------------------------------------------
<S> <C> <C>
Intangible assets $(2,260) $ _
----------------------------------
Deferred tax liabilities (2,260) _
----------------------------------
Depreciation/amortization 11,151 10,833
Goodwill 10,851 12,062
Reserves not currently deductible 10,503 7,725
Package design costs 1,970 2,154
Land 407 1,791
All other, net 2,267 2,058
----------------------------------
Deferred tax assets 37,149 36,623
----------------------------------
Deferred tax assets valuation allowance (281) (359)
----------------------------------
Total deferred taxes, net $34,608 $ 36,264
==================================
</TABLE>
NOTE 4: LONG-TERM INCENTIVE, PROFIT SHARING AND PENSION PLANS, INCLUDING 401(K)
LONG-TERM INCENTIVE PLANS
The Company's Long-Term Incentive Compensation Plan ("LTIC Plan") and its 1995
Incentive Compensation Plan ("1995 Plan") are administered by the Compensation
Committee of the Board of Directors. 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 LTIC, 1995 and 1996 Plans are designed to link management
rewards with 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.
RESTRICTED STOCK GRANTS
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 rendered in 1995. Also in 1996, 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 rendered in
1994. During the fiscal year ended December 29, 1996, there were 30,000 shares
of common stock issued under the 1996 Plan as restricted shares. During the
fiscal years ended December 29, 1996 and December 31, 1995, there were 29,157
and 78,744 shares of common stock, respectively, issued under the LTIC Plan and
1995 Plan, as restricted and bonus shares. The restricted shares are non-
transferable for two years. The 1995 and 1996 Plans provide that a maximum of
150,000 and 250,000 shares, respectively, are available for grant thereunder as
restricted shares or other stock based awards. Compensation expense is recorded
for the stock grants at their discounted amounts. Compensation expense recorded
for the fiscal years ended December 29, 1996, December 31, 1995 and December
25, 1994 was $800, $651 and $998, respectively. The weighted average fair value
per share of stock granted was $24.52 and $12.69 for the years ended December
29, 1996 and December 31, 1995, respectively.
STOCK OPTIONS AND SARS
The LTIC, 1995 and 1996 Plans have a maximum of 800,000, 450,000 and 400,000
shares available, respectively, for grant as stock options or SARs. Stock
options are granted to key management at amounts that approximate market value
at the date of the grant. Awards vest 25 percent per year for four years and
have a term of 10 years. The Company also has a maximum of 100,000 shares
available for grant under the Stock Option Plan for Non-Employee Directors
("Director Plan"). Stock options are awarded to directors at amounts that
approximate market value at the date of the grant. Awards vest 100 percent
after one year and have a term of 10 years.
25
<PAGE> 15
The Company applies APB Opinion No. 25 in accounting for stock options granted
under the 1995, 1996, LTIC and Director Plans. Accordingly, no compensation
cost has been recognized for these plans in 1996 or 1995. Had compensation cost
been recognized on the basis of fair value pursuant to FASB Statement No. 123,
net earnings (loss) and earnings (loss) per share would have been affected as
follows:
<TABLE>
<CAPTION>
December 29, 1996 December 31, 1995
-------------------------------------------
<S> <C> <C>
NET EARNINGS (LOSS)
As reported $21,122 $(3,437)
Pro forma $20,486 $(3,808)
PRIMARY EARNINGS (LOSS) PER SHARE
As reported $ 1.76 $ (.29)
Pro forma $ 1.70 $ (.32)
FULLY DILUTED EARNINGS (LOSS) PER SHARE
As reported $ 1.73 $ (.29)
Pro forma $ 1.67 $ (.32)
</TABLE>
The fair value of each option grant was estimated on the date of the grant
using the Black-Scholes multiple option pricing model with the following
assumptions for the years ended December 29, 1996 and December 31, 1995,
respectively: risk-free interest rates ranges of 6.15-6.43 percent and
5.24-5.69 percent; dividend yield of 0 percent for both years; expected lives
of 6 to 9 years; and volatility of 44 percent for both years.
Following is a summary of the status of the 1995, 1996, LTIC and Director Plans
during the years ended December 29, 1996, December 31, 1995 and December 25,
1994.
<TABLE>
<CAPTION>
December 29, 1996 December 31, 1995 December 25, 1994
--------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Shares Price Shares Price Shares Price
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding,
beginning of period 703,678 $20.40 570,770 $23.34 401,500 $20.12
Granted 89,000 $24.78 220,150 $13.73 171,940 $30.88
Exercised 33,332 $19.00 _ _ _ _
Forfeited 23,414 $20.30 87,242 $22.78 2,670 $24.38
Expired _ _ _ _ _ _
--------------------------------------------------------------------
Outstanding,
end of period 735,932 $21.00 703,678 $20.40 570,770 $23.34
======= ======= =======
Options exercisable,
end of period 368,361 $21.53 233,057 $22.27 114,875 $20.39
======= ======= =======
Weighted average fair value of
options granted during
the period $ 14.05 $ 7.63
======= =======
</TABLE>
26
<PAGE> 16
Following is a summary of the status of options granted under the 1995, 1996,
LTIC and Director Plans at December 29, 1996:
<TABLE>
<CAPTION>
Outstanding Options Exercisable Options
----------------------------------------------------------------------------
Weighted Average
Remaining
Exercise Price Contractual Life Weighted Average Weighted Average
Range Number (Years) Exercise Price Number Exercise Price
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$12.69-$19.00 396,070 7.17 $16.36 201,825 $17.73
$22.13-$24.88 200,330 7.47 $23.29 92,664 $22.19
$25.13-$31.13 139,532 7.17 $30.88 73,872 $31.07
- -------------------------------------------------------------------------------------------------------------------
$12.69-$31.13 735,932 7.26 $21.00 368,361 $21.53
</TABLE>
The following summarizes transactions involving SARs granted to key management
during the year ended December 29, 1996:
<TABLE>
<CAPTION>
Number Weighted Average
of SARs Exercise Price
---------------------------
<S> <C> <C>
Outstanding at January 1, 1996 _ _
Granted 121,330 $24.32
Exercised _ _
Forfeited _ _
---------------------------
Outstanding at December 29, 1996 121,330 $24.32
Exercisable at December 29, 1996 _ _
</TABLE>
SARs are granted at amounts that approximate market value at the date of the
grant. Awards vest 25 percent per year for four years and have a term of 10
years. Compensation expense is recorded based on the period-ending stock price
in relation to the SAR exercise price. Compensation expense recorded in 1996
was $220. Redemption of the SARs when exercised will be in cash.
PROFIT SHARING AND 401(K) PLANS
To further encourage the ownership of common stock by all employees, the
Company maintains the PRISM Plan, formerly known as the Profit Sharing and
Savings Plan, that offers both profit sharing and 401(k) features. Profit
sharing contributions made during the fiscal years ended December 29, 1996,
December 31, 1995 and December 25, 1994 consisted of 29,613, 118,387 and 57,415
shares of common stock, respectively. The Company's 401(k) contributions
consisted of 24,759 and 38,730 shares of common stock for the years ended
December 29, 1996 and December 31, 1995, respectively. For the year ended
December 25, 1994, 401(k) contributions consisted of cash and 17,191 shares of
common stock.
PENSION PLAN
The defined benefit retirement plan for hourly employees at the Company's
California plant was terminated effective June 30, 1995 (see Note 16). Paragon
no longer sponsors any defined benefit retirement plans. At December 31, 1995,
substantially all liabilities were settled under the plan through lump sum
distributions or purchased non-participating annuities. The settlement loss
recognized due to termination of the plan was $1,037.
The actuarial cost method used in determining pension expense for the defined
benefit plan was the projected unit credit method. Net pension expense for the
years ended December 31, 1995 and December 25, 1994 was $41 and $240,
respectively.
27
<PAGE> 17
NOTE 5: RECEIVABLES
Receivables consist of the following:
<TABLE>
<CAPTION>
DECEMBER 29, 1996 DECEMBER 31, 1995
---------------------------------------
<S> <C> <C>
Accounts receivable--trade $51,634 $42,645
Other receivables 12,891 6,925
-----------------------------
64,525 49,57
Less: Allowance for doubtful accounts (7,637) (5,866)
-----------------------------
Net receivables $56,888 $43,704
<CAPTION> =============================
NOTE 6: INVENTORIES
Inventories consist of the following:
December 29, 1996 December 31, 1995
---------------------------------------
<S> <C> <C>
LIFO:
Raw materials--pulp $ 407 $ 4,345
Finished goods 21,090 15,032
FIFO:
Raw materials_other 9,131 5,984
Materials and supplies 21,230 20,629
------------------------------
51,858 45,990
Reserve for excess and obsolete items (7,803) (5,051)
------------------------------
Net inventories $ 44,055 $ 40,939
<CAPTION> ==============================
NOTE 7: PROPERTY AND EQUIPMENT
Property and equipment, at cost, are as follows:
December 29, 1996 December 31, 1995
-----------------------------------------------
<S> <C> <C>
Land $ 3,757 $ 4,218
Buildings and improvements 36,702 30,557
Machinery and equipment 229,289 172,836
---------------------------------------
269,748 207,611
Less: Allowance for depreciation (153,410) (113,573)
---------------------------------------
Net property and equipment $116,338 $ 94,038
<CAPTION> =======================================
NOTE 8: ACCRUED LIABILITIES
Accrued liabilities are as follows:
December 29, 1996 December 31, 1995
-----------------------------------------------
<S> <C> <C>
Payroll--wages and salaries, incentive
awards, retirement, vacation and
severance pay $14,975 $ 9,838
Coupons outstanding 6,230 6,458
Restructuring (Note 16) _ 767
Integration/relocation reserves 5,943 _
Income taxes payable--current 1,327 271
Other 10,020 8,147
-------------------------------------
Total $38,495 $25,481
=====================================
</TABLE>
28
<PAGE> 18
NOTE 9: BANK CREDIT FACILITIES
At December 29, 1996, the Company maintained a $150,000 revolving credit
facility with a group of nine financial institutions available through February
2001. At December 29, 1996, borrowings under this credit facility totaled
$70,000. There were no borrowings outstanding under this facility at December
31, 1995. Borrowings under this credit facility are reflected as long-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 is also
required to maintain certain financial covenants under the agreement. At
December 29, 1996, Paragon Trade Brands (Canada) Inc. maintained a Cdn $5,000
revolving term credit facility, guaranteed by the Company, available through
October 1997. There were no borrowings against this facility at December 29,
1996. Paragon Trade Brands (Canada) Inc. had $1,760 outstanding under this
credit facility 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 December 29, 1996, the Company had
approximately $50,000 in uncommitted lines of credit. There were no borrowings
against these lines of credit at December 29, 1996 or December 31, 1995.
For the fiscal years ended December 29, 1996, December 31, 1995 and December
25, 1994, interest expense, net of amounts capitalized, was $2,864, $952 and
$685, respectively. Capitalized interest for the fiscal years ended December
29, 1996, December 31, 1995 and December 25, 1994, totaled $1,064, $218 and
$539, respectively. Interest expense includes interest on borrowings, credit
facility fees and amortization of deferred financing costs.
The Company has determined that the carrying amount of borrowings under the
credit facilities and credit lines described above approximates fair value.
This is based on the frequent updating of the market-based interest rates
charged on these borrowings.
NOTE 10: RELATED PARTY TRANSACTIONS
PMI
Pursuant to the intent and desires of the parties to the Joint Venture
Agreement dated January 26, 1996 whereby the Company acquired a 49 percent
interest in PMI, the Company agreed to sell to PMI certain diaper manufacturing
equipment, finance the construction of a building and purchase a portion of its
diaper needs from PMI. The following is a summary of significant transactions
and balances with PMI for the years ended December 29, 1996 and December 31,
1995:
<TABLE>
<CAPTION>
December 29, 1996 December 31, 1995
-----------------------------------------------
<S> <C> <C>
Sale of equipment $14,650 $2,828
Purchase of diapers from PMI $11,860 -
Due from PMI $27,857 $3,481
</TABLE>
The amounts due from PMI for equipment purchased are secured by
interest-bearing promissory notes and corresponding Purchase Loan and Security
Agreements. Loans due from PMI are evidenced by interest-bearing promissory
notes. The notes bear an interest rate of 10 percent. The Company believes that
this rate represents the fair market rate for comparable loans of similar
terms.
29
<PAGE> 19
NOTE 11: LEGAL PROCEEDINGS
The 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 totaling approximately $100.0 million,
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 Company's 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. In December 1996,
the District Court denied both of P&G's motions for summary judgment. The trial
has concluded and the parties are engaged in post trial briefing. The ultimate
outcome cannot be predicted at this time. Legal fees and costs for this
litigation have been significant. If P&G were to prevail on its claims, award
of all or a substantial amount of the relief requested 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 infringements by
the Company's 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.
In October 1996, K-C filed a motion for summary judgment with respect to the
Company's antitrust counterclaim along with a motion to stay discovery pending
resolution of such motion for summary judgment. The Company intends to
vigorously defend its claim. In addition, K-C has notified the Company that it
intends to assert against the Company a third K-C patent recently issued by the
U.S. Patent and Trademark Office. Trial is scheduled for October 1997. 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 relief
requested by K-C 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 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. 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 six of the patents listed in the
Company's complaint. Discovery has commenced. Based on the advice of patent
counsel, the Company believes that its feminine care products do not infringe
any valid claims of such patents.
The Company is also a party to other legal actions 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 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.
30
<PAGE> 20
NOTE 12: COMMITMENTS
Paragon has operating lease agreements for certain facilities that expire
during the five years 1997 through 2001. Future minimum lease payments
required under noncancelable operating leases are: $169 in 1997, $129 in 1998,
$96 in 1999, $56 in 2000 and $19 in 2001. Rental expense for facilities and
equipment was $2,967, $2,013 and $3,070 for the years December 29, 1996,
December 31, 1995 and December 25, 1994, respectively.
Commitments for capital expenditures as of December 29, 1996 are $20,539. Other
Company commitments include purchase commitments for raw materials at
prevailing market rates. Paragon entered into a fluff pulp supply contract
under which Paragon will purchase its requirements of bleached chemical fluff
pulp through 1997 at prices as favorable to those charged other U.S. or
Canadian diaper producers for a similar grade pulp. Either party may elect, on
specified notice, to reduce the quantity of pulp purchased under the contract
to no less than 80 percent of Paragon's requirements.
NOTE 13: NET EARNINGS PER COMMON SHARE
Net earnings per common share are based on the average number of common and
common equivalent shares outstanding.
<TABLE>
<CAPTION>
DECEMBER 29, 1996 DECEMBER 31, 1995 DECEMBER 25, 1994
-----------------------------------------------------------
<S> <C> <C> <C>
PRIMARY
Net earnings (loss) $21,122 $ (3,437) $24,994
Average common and common
equivalent shares outstanding (000's) 12,022 11,725 11,594
Net earnings (loss) per common share $ 1.76 $ (.29) $ 2.16
FULLY DILUTED
Net earnings (loss) $21,122 $ (3,437) $24,994
Average common and common
equivalent shares outstanding (000's) 12,244 11,845 11,689
Net earnings (loss) per common share fully
diluted $ 1.73 $ (.29) $ 2.14
</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.
31
<PAGE> 21
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 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>
FIFTY-THREE WEEKS ENDED DECEMBER 31, 1995
PRO FORMA ADJUSTMENTS
-------------------------------------------------------
PARAGON P&T ADJUSTMENTS PRO FORMA
<S> <C> <C> <C> <C>
Net sales $518,776 $150,617 $ _ $ 669,393
Cost of sales 439,846 150,500 (5,800)(1) 584,546
--------------------------------------------------------
Gross profit 78,930 117 5,800 84,847
Selling, general and administrative expense 68,037 16,239 1,920 (2) 86,196
Research and development expense 3,562 _ _ 3,562
Restructuring 8,059 _ _ 8,059
--------------------------------------------------------
Operating(loss) profit (728) (16,122) 3,880 (12,970)
Other expense, net 4,785 _ 4,000 (3) 8,785
--------------------------------------------------------
Loss before income taxes (5,513) (16,122) (120) (21,755)
Benefit from income taxes (2,076) (6,127) (45)(4) (8,248)
---------------------------------------------------------
Net loss $ (3,437) $ (9,995) $ (75) $ (13,507)(5)
=========================================================
Net loss per common share $ (.29) $ (1.11)(5)
Weighted average common shares outstanding 11,765 12,153 (6)
</TABLE>
(1) To reflect the reduction in depreciation from the closed facilities.
(2) To reflect the amortization of goodwill over a 20-year period.(3) To
reflect interest on borrowings under the Company's revolving credit
facility. The interest is based on the 1995 average 12-month LIBOR plus .75
percent.
(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 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.
32
<PAGE> 22
The pro forma consolidated earnings statement below has been prepared as if the
transaction occured January 1, 1996. Pro forma adjustments reflect increased
sales, costs, goodwill, amoritization, interest on borrrowings and the income
tax effects of these adjustments for the period of January 1, 1996 to
February 7, 1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 29, 1996
PARAGON ADJUSTMENTS PRO FORMA
------------------------------------------
<S> <C> <C> <C>
Net sales $ 581,929 $11,391(1) $593,320
Cost of sales 449,885 8,718(1) 458,603
---------------------------------------------
Gross profit 132,044 2,673 134,717
Selling, general and administrative expense 92,212 445(2) 92,657
Research and development expense 4,163 _ 4,163
Restructuring _ _ _
---------------------------------------------
Operating profit 35,669 2,228 37,897
Equity in earnings of subsidiary 423 _ 423
Other expense, net 2,283 398(3) 2,681
---------------------------------------------
Earnings before income taxes 33,809 1,830 35,639
Provision for income taxes 12,687 690(4) 13,377
---------------------------------------------
Net earnings $ 21,122 $ 1,140 $ 22,262
=============================================
Net earnings per common share $ 1.76 $ 1.85
Weighted average common shares outstanding 12,022 12,065(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 plus .75 percent for
the period of January 1, 1996 to February 7, 1996.
(3) To reflect the interest on borrowings under the Company's revolving credit
facility. The interest is based on the first quarter 1996 average 12-month
LIBOR plus .75 percent 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.
33
<PAGE> 23
NOTE 15: QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
FISCAL YEAR ENDED DECEMBER 29, 1996
<TABLE>
<CAPTION>
First Second Third Fourth
--------------------------------------------
<S> <C> <C> <C> <C>
Net sales $137,214 $150,717 $151,549 $142,449
Gross profit 24,453 37,646 39,929 30,016
Net earnings (600) 5,368 10,486 5,868
Net earnings (loss) per share of
common stock $ (.05) $ .44 $ .87 $ .49
Price range:
High $ 26.50 $ 25.13 $ 24.00 $ 29.25
Low $ 19.88 $ 20.00 $ 18.38 $ 23.25
</TABLE>
FISCAL YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
First Second Third Fourth
-------------------------------------------
<S> <C> <C> <C> <C>
Net sales $126,561 $127,283 $131,444 $133,488
Gross profit 14,822 17,890 22,548 23,670
Net earnings (loss) (9,360) (359) 2,638 3,644
Net earnings (loss) per share of
common stock $ (.80) $ (.03) $ .22 $.31
Price range:
High $ 14.88 $ 16.58 $ 16.13 $ 23.88
Low $ 12.00 $ 13.13 $ 13.88 $ 14.88
</TABLE>
NOTE 16: 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 and resulted in severing the employment
of approximately 310 employees. At December 29, 1996, there were no remaining
assets on the balance sheet as the facility and related production equipment
have been sold. At December 31, 1995, the building facility and related
production equipment were reflected as assets held for sale in the accompanying
balance sheet. For the year ended December 31, 1995, the consolidated statement
of loss included $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. The following summarizes amounts accrued and costs incurred through
December 29, 1996:
<TABLE>
<CAPTION>
COST INCURRED
AMOUNT THROUGH BALANCE
ACCRUED DECEMBER 29, 1996 ADJUSTMENTS REMAINING
-------------------------------------------------------
<S> <C> <C> <C> <C>
Employee severance and related items $3,359 $3,657 $ 298 $ _
Equipment disposal and write-downs 2,600 2,443 (157) _
Facility disposal and carrying costs 1,850 1,638 (212) _
All other 250 167 (83) _
---------------------------------------------------
$8,059 $7,905 $(154) $ _
===================================================
</TABLE>
At December 29, 1996, the restructuring plan was complete.
34
<PAGE> 24
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Paragon Trade Brands, Inc.:
We have audited the accompanying consolidated balance sheets of Paragon Trade
Brands, Inc., a Delaware Corporation, and Subsidiaries, as of December 29, 1996
and December 31, 1995, and the related consolidated statements of earnings
(loss), changes in shareholders' equity and cash flows for each of the three
years in the period ended December 29, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Paragon Trade Brands, Inc. and
Subsidiaries as of December 29, 1996 and December 31, 1995, and the results of
their operations and their cash flows for each of the three years in the period
ended December 29, 1996, in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
Atlanta, Georgia
February 6, 1997
RESPONSIBILITY FOR FINANCIAL REPORTING
Management is responsible for the preparation of the Company's consolidated
financial statements appearing in this Annual Report. The financial statements
have been prepared in accordance with generally accepted accounting principles
and, in the opinion of management, present fairly the Company's financial
position, results of operations and cash flows.The financial statements
necessarily contain amounts that are based on the best estimates and judgments
of management.
The Company maintains a system of internal controls which management believes
is adequate to provide reasonable assurance as to the integrity and reliability
of the financial statements, the protection of assets from unauthorized use or
disposition and the prevention and detection of fraudulent financial reporting.
The selection and training of qualified personnel, the establishment and
communication of accounting and administrative policies and procedures, and a
program of internal audit are important elements of these control systems.
The Company maintains a strong internal auditing program that independently
assesses the effectiveness of the internal controls and recommends possible
improvements thereto. Management has considered the internal auditors'
recommendations concerning the Company's system of internal controls and has
taken actions that we believe are cost-effective in the circumstances to
respond appropriately to these recommendations.
The Audit Committee of the Board of Directors, comprised entirely of outside
directors, oversees the fulfillment by management of its responsibilities over
financial controls and the preparation of financial statements. The Committee
meets regularly with representatives of management and internal and external
auditors to review accounting, auditing and financial reporting matters.
As part of their audit of the Company's consolidated financial statements,
Arthur Andersen LLP considered the Company's system of internal controls to the
extent they deemed necessary to determine the nature, timing and extent of
their audit tests.
/s/ Alan J. Cyron
Alan J. Cyron
Executive Vice President & Chief Financial Officer
35
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our reports included and incorporated by reference in this Form 10-K
into Paragon Trade Brands, Inc.'s previously filed Registration Statements
form S-8, File Nos. 33-73726, 33-61802, 33-95344 and 33-34626.
Arthur Andersen LLP
Atlanta, Georgia
March 27, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10K
FOR THE YEAR ENDED DECEMBER 29, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-29-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-29-1996
<CASH> 8,297
<SECURITIES> 0
<RECEIVABLES> 64,525
<ALLOWANCES> 7,637
<INVENTORY> 44,055
<CURRENT-ASSETS> 120,772
<PP&E> 269,748
<DEPRECIATION> 153,410
<TOTAL-ASSETS> 373,090
<CURRENT-LIABILITIES> 85,795
<BONDS> 70,000
0
0
<COMMON> 123
<OTHER-SE> 214,582
<TOTAL-LIABILITY-AND-EQUITY> 373,090
<SALES> 581,929
<TOTAL-REVENUES> 581,929
<CGS> 449,885
<TOTAL-COSTS> 449,885
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,864
<INCOME-PRETAX> 33,809
<INCOME-TAX> 12,687
<INCOME-CONTINUING> 21,122
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,122
<EPS-PRIMARY> 1.76
<EPS-DILUTED> 1.73
</TABLE>
