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 28, 1997
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 identification no.)
incorporation or organization)
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. [ ]
As of February 27, 1998, there were 11,921,956 shares of the Registrant's Common
Stock outstanding, and the aggregate market value of such stock held by
nonaffiliates of the Registrant was $60,354,902 (based on the closing price on
the New York Stock Exchange).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement relating to the Annual Meeting of
Stockholders to be held May 11, 1998, are incorporated by reference into Part
III of this report.
Exhibit Index on Page 51
<PAGE>
PARAGON TRADE BRANDS, INC.
TABLE OF CONTENTS TO ANNUAL REPORT
ON FORM 10-K
PART I
PAGE
Item 1: BUSINESS 1
Item 2: PROPERTIES 7
EXECUTIVE OFFICERS 8
Item 3: LEGAL PROCEEDINGS 9
Item 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 10
PART II
Item 5: MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS 10
Item 6: SELECTED FINANCIAL DATA 11
Item 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 12
Item 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 22
Item 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE 46
PART III
Item 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 46
Item 11: EXECUTIVE COMPENSATION 46
Item 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 46
Item 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 47
PART IV
Item 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K 47
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PART I
ITEM 1: BUSINESS
GENERAL
Paragon Trade Brands, Inc., (the "Company") is the leading manufacturer of store
brand infant disposable diapers in the United States and Canada. Paragon
manufactures a line of premium and economy diapers, training pants, feminine
care and adult incontinence products, household cleaners and air freshener
products which are distributed throughout the United States and Canada,
primarily through grocery and food stores, mass merchandisers, warehouse clubs,
toy stores and drug stores that market the Company's products under their own
store brand names. Paragon has also established international joint ventures in
Mexico, Argentina, Brazil and China for the manufacture and sale of infant
disposable diapers and other absorbent personal care products.
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. A major portion of
the manufacturing equipment has been sold. The remaining equipment and plants
are being held for sale. In 1996 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.
REORGANIZATION CASE
The Company has previously disclosed that The Procter & Gamble Company ("P&G")
had filed a claim against it in the United States District Court for the
District of Delaware, alleging that the Company's "Ultra" disposable baby diaper
products infringe two of P&G's inner-leg gather patents. The lawsuit sought
injunctive relief, lost profit and royalty damages, treble damages and
attorneys' fees and costs. The Company denied liability under the patents and
counterclaimed for patent infringement and violation of antitrust laws by P&G.
The Company has also disclosed that 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 results of
operations.
On December 30, 1997, the District Court issued a Judgment and Opinion which
found, in essence, two of P&G's diaper patents to be valid and infringed by the
Company's disposable diaper products, while also rejecting the Company's patent
infringement claims against P&G. The District Court had earlier dismissed the
Company's antitrust counterclaim on summary judgment. The Judgment entitles P&G
to damages based on sales of the Company's diapers containing the inner-leg
gather feature. While the final damages number has not been adjudicated by the
District Court, the Company estimates the liability and associated litigation
costs to be approximately $200 million. The amount of the award resulted in
violation of certain covenants under the Company's bank loan agreements. As a
result, the issuance of the Judgment and the uncertainty it created caused an
immediate and critical liquidity issue for the Company.
On January 6, 1998, the Judgment was entered on the docket in Delaware in such a
manner that P&G would have been able to begin placing liens on the Company's
assets. As a result, the Company filed for relief under Chapter 11 of the
Bankruptcy Code, 11 U.S.C. Section 101 et seq., in the United States Bankruptcy
Court for the Northern District of Georgia (Case No. 98-60390) on January 6,
1998 (the "Chapter 11 filing"). None of the Company's subsidiaries were included
in the Chapter 11 filing. The Chapter 11 filing was designed to prevent P&G from
placing liens on Company property, permit the Company to appeal the Delaware
District Court's decision on the P&G case in an orderly fashion and give the
Company the opportunity to resolve liquidated and unliquidated claims against
the Company, which arose prior to the Chapter 11 filing, thereby protecting all
stakeholders' interests. The Company is currently operating as a debtor in
possession under the Bankruptcy Code.
In connection with the Chapter 11 filing, on January 30, 1998, the Bankruptcy
Court entered a final order approving the Credit Agreement (the "DIP Credit
Facility") as provided under the Revolving Credit and Guarantee Agreement dated
as of January 7, 1998, among the Company, as Borrower, the subsidiaries of the
Company, as guarantors, and a bank group led by The Chase Manhattan Bank
("Chase"). Pursuant to the terms
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of the DIP Credit Facility, Chase has made available to the Company a
revolving credit and letter of credit facility in an aggregate principal amount
of $75 million. The Company's maximum borrowing under the DIP Credit Facility
may not exceed the lesser of $75 million or an available amount as determined by
a borrowing base formulation. The borrowing base formulation is comprised of
certain specified percentages of eligible accounts receivable, eligible
inventory, equipment and personal and real property of the Company. The DIP
Credit Facility has a sublimit of $10 million for the issuance of letters of
credit. The DIP Credit Facility expires on the earlier of July 7, 1999, or the
date of entry of an order by the Bankruptcy Court confirming a plan of
reorganization.
The United States Trustee for the Northern District of Georgia has appointed an
Official Committee of Unsecured Creditors (the "Committee") for the Company's
Chapter 11 filing. The role of the Committee includes, among other things: (i)
consultation with the Company concerning the administration of the Chapter 11
case, and (ii) participation in the formulation of a plan of reorganization. In
discharging these responsibilities, the Committee has standing to raise issues
with the Bankruptcy Court relating to the business of the Company and the
conduct and course of the Chapter 11 case. The Company is required to pay
certain expenses of the Committee, including professional fees, to the extent
allowed by the Bankruptcy Court.
As a result of the Chapter 11 filing, the Company is prohibited from paying any
pre-petition liabilities without Bankruptcy Court approval. The Chapter 11
filing resulted in a default under its pre-petition revolving credit facility.
Pursuant to the Bankruptcy Code, the Company can seek Bankruptcy Court approval
for the rejection of executory contracts or unexpired leases, including real
property leases. Any such rejection may give rise to a pre-petition unsecured
claim for damages arising therefrom.
Substantially all liabilities outstanding as of the date of the Chapter 11
filing are subject to resolution under a plan of reorganization to be voted upon
by the Company's creditors and shareholders and confirmed by the Bankruptcy
Court. Schedules were filed by the Company on March 3, 1998 with the Bankruptcy
Court setting forth the assets and liabilities of the Company as of the date of
the Chapter 11 filing, as shown by the Company's accounting records. The
Bankruptcy Court will set a date by which creditors must file proofs of claims
which arose prior to the Chapter 11 filing.
The ability of the Company to effect a successful reorganization will depend, in
significant part, upon the Company's ability to formulate a plan of
reorganization that is approved by the Bankruptcy Court and meets the standards
for plan confirmation under the Bankruptcy Code. In a Chapter 11 reorganization
plan, the rights of the Company's creditors and shareholders may be altered.
Investment in stock of the Company, therefore, should be regarded as highly
speculative.
The Company is unable to predict at this time when it will emerge from Chapter
11 protection. See "Notes 1, 11 and 13 of Notes to Financial Statements" and
"ITEM 3: LEGAL PROCEEDINGS" herein.
PRODUCTS
The Company manufactures several diaper product lines: a premium-quality Ultra
line, an economy line ("Economy") and a Supreme line. The Company also
manufactures a line of training pants. Ultra diaper sales accounted for
approximately 81 percent, 78 percent and 76 percent of the Company's total unit
sales in 1997, 1996 and 1995, respectively. Economy diaper units represented
approximately 9 percent, 12 percent, and 17 percent of the Company's total unit
sales in fiscal years 1997, 1996 and 1995, respectively. The Supreme product
represented approximately 5 percent, 4 percent, and 2 percent of the Company's
total unit sales in fiscal years 1997, 1996 and 1995, respectively. Training
pant sales represented approximately 4 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 its Ultra diaper in six 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(R)
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cartoon characters on the "tape landing zone" of its Ultra diapers. In late 1996
and 1997, 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.
The Company's Supreme diaper product has a thin pad, a hook and loop closure
system and a soft, cloth-like nonwoven outer cover in response to the Huggies(R)
Supremes product introduced by Kimberly-Clark Corporation ("K-C").
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. In 1997, the Company began manufacturing a
line of adult incontinence products that includes guards, undergarments and
bladder control pads. In 1998, the Company curtailed its tampon manufacturing
operations.
PRODUCT DEVELOPMENT
To enhance the Company's objective of providing its trade customers with
premium-quality store brand disposable diapers and feminine care and adult
incontinence 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 $5.1 million, $4.2 million and $3.6 million on research and
development in fiscal years 1997, 1996 and 1995, respectively.
PATENT RIGHTS
Because of the emphasis on product innovations in the disposable diaper,
feminine care and adult incontinence 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 "ITEM
3: 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, feminine care and adult incontinence product features and
manufacturing processes.
MAJOR CUSTOMERS
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 15 percent, 13 percent and 11 percent of total net sales in fiscal
years 1997, 1996 and 1995, respectively. As is customary in the infant
disposable diaper market, the Company in most cases does not have long-term
contracts with its trade customers. The Company estimates that approximately 7
percent, 9 percent and 6 percent of net sales were to trade customers in Canada
in fiscal years 1997, 1996 and 1995, respectively.
FOREIGN OPERATIONS
On January 26, 1996, the Company through its wholly owned subsidiary PTB
International, Inc. ("PTBI") 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 through
2001. In 1997, based on Mabesa's 1996 financial results, the Company paid
additional consideration of $3.4 million. The Company also acquired the option
to purchase an additional 34 percent interest in Mabesa at a contractually
determined price.
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In addition, PTBI acquired a 49 percent interest 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 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 completely
operational. The Company has signed a Product Supply Agreement with PMI and
purchases basically all of PMI's production for sale to U.S. retail customers.
On August 26, 1997, PTBI purchased a 49 percent interest in Stronger Corporation
S.A. ("Stronger"), a financial investment corporation incorporated under
Uruguayan law. An affiliate of Mabesa owns the remaining 51 percent. Stronger
will be used to establish additional Latin American joint ventures.
On August 26, 1997, Stronger acquired 70 percent of Serenity S.A., the third
largest diaper manufacturer in Argentina, for approximately $11.6 million in
cash plus earn-out payments based on Serenity's future financial results over
the next three years. Stronger also acquired an option to purchase the remaining
30 percent interest in Serenity by 2002 at a contractually determined exercise
price. Serenity manufactures infant disposable diapers, sanitary napkins and
adult incontinence products in two facilities and has an approximate market
share of 13 percent. PTBI advanced $5.7 million to Stronger, its pro-rata share
of the purchase price, and has guaranteed the earn-out payments which are
estimated not to exceed an aggregate of $3.3 million through 2000.
On November 10, 1997, Stronger acquired 100 percent of the disposable diaper
business of MPC Productos para Higiene Ltda. ("MPC") for approximately $10.5
million in cash from Cremer S.A., a Brazilian textile manufacturer. MPC is
engaged in the manufacture, distribution, and sale of disposable diapers, skin
lotions for children and other personal care products. PTBI advanced $5.1
million to Stronger, its pro-rata share of the purchase price.
Paragon recently established Goodbaby Paragon Hygienic Products Co. Ltd., a
manufacturing and marketing joint venture in China with Goodbaby Group of
Kunshan City and First Shanghai Investment of Hong Kong. Paragon purchased a 40
percent interest in the joint venture with Goodbaby Group and First Shanghai
Investment at 30 percent each. Initial registered capital of the venture was
approved at $15 million, to be funded over a two year period. A joint venture
business license was approved by the Chinese government on December 31, 1997.
Groundbreaking for a new factory took place in February 1998 and the Company
anticipates that production and distribution will begin in the second half of
1998.
RAW MATERIALS
The principal raw material components of the Company's products are SAP, fluff
pulp, 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 SAP. In
early 1996, the Company entered into an agreement with Clariant International
Ltd. (successor of Hoechst Celanese Corporation) whereby it agreed, subject to
certain limitations, to purchase 100 percent of its requirements of SAP through
December 31, 1998. Fluff pulp, a product made from wood fibers, is another
primary raw material. The Company extended the fluff pulp supply contract with
Weyerhaeuser Company ("Weyerhaeuser") whereby it agreed to purchase 100 percent
of its requirements of bleached chemical fluff pulp through August 31, 1998, at
prices as favorable as those Weyerhaeuser charges other North American
disposable diaper manufacturers for similar grade pulp. The Company believes
that alternative sources for 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.
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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 P&G and
K-C. The Company estimates that, in 1997, the national branded manufacturers
accounted for approximately 74 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 63 percent of the unit volume. Both
K-C and P&G dominate the premium segment. The value segment of the industry,
which the Company estimates accounted for approximately 37 percent of unit
volume in 1997, is highly competitive. The Company includes the following
products in the value segment: store brands, control labels, P&G's Luvs(R),
Drypers(R), Fitti(R), and all other regional brands.
In total, P&G is the dominant manufacturer in the U.S. diaper market, with
approximately 39 percent market share. P&G manufactures two brands: Pampers(R),
its premium brand with approximately 25 percent market share, and Luvs, its
value brand with 14 percent market share. Luvs was repositioned from a premium
brand to a value brand in November 1994. K-C manufactures the number one diaper
brand, Huggies, with approximately 35 percent market share. K-C 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. P&G, in particular, has been
very aggressive in reducing prices in the market in pursuit of market share. In
November 1994, P&G announced a major price reduction; prices were effectively
reduced on Pampers by 2.5 percent and on Luvs by 11 percent. K-C responded with
similar pricing actions. All other diaper manufacturers have been forced to
reduce their prices to remain competitive. During 1997, pricing pressures
continued due to the existence of a new store brand competitor and a shift of
volume to mass merchants who aggressively sold multi-packs. These multi-packs
sell at prices 10 to 15 percent below the branded 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 Company. As a result, the
Company believes that the national branded manufacturers are capable of
competing effectively on the basis of price, even in an environment 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.
K-C has been more active than P&G in introducing new products in recent years.
K-C was first to market with a disposable training pant product line and an
inner-leg gather feature. P&G followed K-C with a training pant product almost
five years later. In January 1994, K-C 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, K-C added a nonwoven backsheet on its Huggies brand diapers. In
September 1994, P&G introduced a new stretch waist feature on its Pampers brand
diaper. In 1996, K-C and P&G introduced a breathable diaper.
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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 initiated a process improvement and
information technology upgrading project to further enhance its customer service
capabilities. See "ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS."
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 P&G 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. K-C 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 & Adult Incontinence
The principal bases of competition in the feminine care and adult incontinence
market are price, product quality, product innovation and customer service. The
U.S. feminine care and adult incontinence retail market is led by national
branded manufacturers including K-C, P&G, Johnson and Johnson, Inc., and Playtex
Products, Inc. The Company estimates that in 1997, the national branded
manufacturers accounted for approximately 88 percent of all U.S. feminine care
and approximately 70 percent of all U.S. adult incontinence 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 and adult incontinence market.
A privately-held manufacturer is the dominant supplier of store brand feminine
care products. The Company experienced greater than anticipated operating losses
in its feminine care and adult incontinence businesses in 1997 and does not
expect these businesses to break even until some time in 1999.
EMPLOYEES
At December 28, 1997, the Company had approximately 1,102 full-time employees,
including 912 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").
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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
From time to time, information provided by the Company, statements made by its
employees or information included in its filings with the Securities and
Exchange Commission (including the Annual Report on Form 10-K) may include
statements that are not historical facts, so-called "forward-looking
statements." The words "believes," "anticipates," "expects" and similar
expressions are intended to identify such 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: the Company's Chapter 11 filing;
increased raw material prices; new product and packaging introductions by
competitors; increased price and promotion pressure from competitors; new
competitors in the market; year 2000 compliance issues; and patent litigation,
are described herein. Readers are cautioned not to place undue reliance on the
Company's 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.
ITEM 2: PROPERTIES
As of December 28, 1997, 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.
The following table summarizes the physical properties that were in use by the
Company in its operations at December 28, 1997:
<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
Gaffney, South Carolina Manufacturing 213,000 Leased 7
Harmony, Pennsylvania Manufacturing 173,000 Owned 9
Macon, Georgia Manufacturing 308,000 Owned 9
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 7
</TABLE>
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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 56 Chief Executive Officer and Chairman of the Board
David W. Cole 49 President and Chief Operating Officer
Alan J. Cyron 45 Executive Vice President and Chief Financial Officer
Catherine O. Hasbrouck 33 Vice President, General Counsel and Secretary
Arrigo D. Jezzi 50 Executive Vice President - Operations, Technology and
International
Robert E. McClain 48 Executive Vice President - Sales and Marketing
</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.
ALAN J. CYRON has been the Executive Vice President, Chief Financial Officer and
Assistant Secretary of the Company since February 28, 1997. Prior to assuming
his current responsibilities, Mr. Cyron had since April 4, 1995, served as its
Vice President, Chief Financial Officer and as its Treasurer from May through
July 1995. 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).
ARRIGO D. JEZZI was appointed Executive Vice President - Operations, Technology
and International in January 1998. Prior to that time, Mr. Jezzi served as the
Company's Executive Vice President International Business Development from
December 1997 to January 1998. Mr. Jezzi also has served the Company as Senior
Vice President - International Business Development from February 1997 to
December 1997, and as Vice President - Materials and Technology from November
1995 to February 1997. Before joining the Company, Mr. Jezzi was a private
consultant from August 1994 to November 1995, and was the Vice President for
Research Development and Quality Assurance at Confab, Inc.
from January 1993 to August 1994.
ROBERT E. MCCLAIN was appointed Executive Vice President - Sales and Marketing
in January 1998. Prior to that time, Mr. McClain had served the Company as its
President of Sales since March 1997, and as Vice President - Business
Development from September 1996 to March 1997. Before joining the Company, Mr.
McClain was Senior Vice President Sales and Marketing for Nice Pak Products from
1992 to September 1996.
8
<PAGE>
ITEM 3: LEGAL PROCEEDINGS
THE PROCTER & GAMBLE COMPANY V. PARAGON TRADE BRANDS, INC. - P&G filed a claim
in January 1994 in the District Court for the District of Delaware that the
Company's "Ultra" disposable baby diaper products infringe two of P&G's
inner-leg gather patents. The lawsuit sought injunctive relief, lost profit and
royalty damages, treble damages and attorneys' fees and costs. The Company
denied liability under the patents and 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 trial was completed in February 1997, the parties submitted
post-trial briefs and closing arguments were conducted on October 22, 1997.
Legal fees and costs for this litigation have been and will continue to be
significant.
In December 1997, the Delaware District Court issued a Judgment and Opinion
finding that P&G's patents are valid and infringed, while at the same time
finding the Company's patent to be invalid, unenforceable and not infringed by
P&G's products. Judgment was entered on January 6, 1998. While a final damages
number has not been entered by the District Court, the Company estimates the
liability and associated litigation costs to be approximately $200 million. The
Judgment has had a material adverse effect on the Company's financial position
and its results of operations. The Company has filed with the District Court a
motion for a new trial or to alter or amend the Judgment. The Company has also
filed its Notice of Appeal with the Federal Circuit Court of Appeals. The
Company intends to vigorously pursue its motion in the District Court, as well
as the appeal of the District Court's decision.
As a result of the District Court's Judgment, the Company filed for relief under
Chapter 11 of the Bankruptcy Code, 11 U.S.C. Section 101 et seq., in the United
States Bankruptcy Court for the Northern District of Georgia (Case No. 98-60390)
on January 6, 1998. See "--IN RE PARAGON TRADE BRANDS, INC." below.
As a result of the Company's Chapter 11 filing, further proceedings in the P&G
litigation were stayed. By orders entered on January 15, 1998 and February 4,
1998, respectively, the Bankruptcy Court lifted the stay to permit the Company
to pursue its motion for a new trial or to alter or amend the judgment in the
District Court and to pursue its appeal. P&G has filed a motion in the
Bankruptcy Court seeking to have the automatic stay lifted in order to allow P&G
to seek injunctive relief and an accounting for damages. The Company opposed
P&G's motion.
It is possible that the Company may be subject to similar patent claims on its
diaper products sold in other countries. The Company is unable to determine the
amount of any such claims at this time.
KIMBERLY-CLARK CORPORATION V. PARAGON TRADE BRANDS, INC. -- On October 26, 1995,
K-C filed a lawsuit against the Company in U.S. District Court in Dallas, Texas,
alleging infringement by the Company's products of two K-C patents relating to
inner-leg gathers. The lawsuit seeks injunctive 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. On April 18,
1997, K-C filed a motion for summary judgment of noninfringement of two patents
asserted by the Company and a motion for partial summary judgment construing the
claims of one of the K-C patents-in-suit. On November 22, 1996, the Company
filed a motion to amend its antitrust counterclaim and on June 13, 1997 filed a
motion for summary judgment on one of the patents asserted by K-C. In addition,
K-C has sued the Company on another patent issued to K-C which is based upon
further continuation of one of the K-C patents asserted in the case. That action
has been consolidated with the pending action. The Court has appointed a special
master to rule on the various pending motions. Legal fees and costs in
connection with this litigation have been and will be significant.
As a result of the Company's Chapter 11 filing, the proceedings in the K-C
litigation have been stayed. K-C has filed a motion in the Bankruptcy Court
seeking to have the automatic stay lifted in order to permit the proceedings in
Dallas to continue. The Company opposed K-C's motion at a hearing held on
February 11, 1998. The Bankruptcy Court has continued the hearing on K-C's
motion until March 30, 1998. See "--IN RE PARAGON TRADE BRANDS, INC." below.
9
<PAGE>
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 Company's products do not
infringe any valid patent asserted by K-C.
IN RE PARAGON TRADE BRANDS, INC. -- As described above, and as described more
fully under "BUSINESS: REORGANIZATION CASE," on December 30, 1997, the Delaware
District Court issued a Judgment and Opinion in the Company's lawsuit with P&G
which found, in essence, two of P&G's diaper patents to be valid and infringed
by the Company's "Ultra" disposable baby diapers, while also rejecting the
Company's patent infringement claims against P&G. Judgment was entered on
January 6, 1998. While a final damages number has not been adjudicated by the
District Court, the Company estimates the liability and associated litigation
costs to be approximately $200 million. The amount of the award resulted in
violation of certain covenants under the Company's bank loan agreements. As a
result, the entry of the Judgment and the uncertainty it created caused an
immediate and critical liquidity issue for the Company which necessitated the
Chapter 11 filing.
The Chapter 11 filing prevented P&G from placing liens on the Company's assets
and affords the Company the opportunity to resolve liquidated and unliquidated
claims against the Company, which arose prior to the Chapter 11 filing, thereby
protecting all stakeholders' interests. The Company is currently operating as a
debtor in possession under the Bankruptcy Code.
On January 30, 1998, the Company received Bankruptcy Court approval of a $75
million financing facility with The Chase Manhattan Bank. This facility
supplements the Company's cash on hand and operating cash flow and permits the
Company to continue to operate its business in the ordinary course. Legal fees
and costs in connection with the Chapter 11 filing will be significant. See
"BUSINESS: REORGANIZATION CASE" and "Note 11 of the Notes to Financial
Statements."
The Company is unable to predict at this time when it will emerge from Chapter
11 protection.
OTHER -- 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 Chapter 11 filing and the P&G and K-C 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 1997 fiscal year.
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
As of February 27, 1998, there were 274 holders of record of the Company's
common stock. The Company has not paid dividends on its common stock. The Board
of Directors will determine future dividend policy based upon the Company's
results of operations, financial condition, capital requirements and other
circumstances. The Company's common stock is listed on the New York Stock
Exchange, Inc. The Company's DIP facility prohibits the Company from paying cash
dividends. See "Note 16 of Notes to Financial Statements" regarding the
quarterly high and low price range of the Company's common stock. The Company
did not sell any securities of the Company that were not registered under the
Securities Act of 1933, as amended, during the fiscal year ended December 28,
1997.
10
<PAGE>
ITEM 6: SELECTED FINANCIAL DATA
(Dollar amounts in millions, except per share data)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
--------------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
EARNINGS STATEMENT DATA(1)
Net Sales $ 562.0 $ 581.9 $ 518.8 $ 578.6 $ 562.9
EBITDA(2) $ 62.5 $ 91.5 $ 46.2 $ 73.6 $ 71.8
Operating profit (loss) $ (183.8)(3) $ 35.7(4) $ (3.6)(5) $ 42.5 $ 49.3
Net earnings (loss) $ (212.7)(3)(6) $ 21.1(4) $ (3.4)(5) $ 25.0 $ 45.9(7)
PER SHARE DATA(1)
Basic earnings (loss) per share $ (17.86)(3)(6) $ 1.76(4) $ (.29)(5) $ 2.16 $ 3.97(8)
BALANCE SHEET DATA(1)
Total assets $ 376.1 $ 373.1 $ 266.7 $ 275.4 $ 244.2
Long-term debt $ 70.0 $ 70.0 - $ 6.0 -
Shareholders' equity $ 5.0 $ 214.7 $ 191.7 $ 195.7 $ 167.1
OTHER DATA(1)
Capital spending $ 49.4 $ 48.9 $ 17.4 $ 74.9 $ 55.4(8)
Depreciation and amortization $ 35.5 $ 38.8 $ 36.0 $ 31.1 $ 22.5
Units sold (millions) 3,689 3,761 3,378 3,595 3,435
<FN>
(1) See Notes 1 and 2 of Notes to Financial Statements.
(2) Operating profit (loss) before interest, taxes, depreciation and
amortization and non-recurring charges discussed in footnotes 3, 4 and 5 below
("EBITDA").
(3) Includes loss contingency of $200 for the adverse judgment in a patent
litigation with The Procter & Gamble Company and $10.6 of asset impairments and
inventory adjustments related to the write-off of software and consulting costs
and the discontinuation of the Company's tampon manufacturing operation.
(4) Includes costs for the integration of Pope & Talbot, Inc.'s disposable
diaper business purchased in February 1996 and costs related to the relocation
of the corporate headquarters to Atlanta. Excluding these costs, operating
profit would be $52.7, net earnings would be $31.7 and basic earnings per share
would be $2.64.
(5) Includes restructuring and charges taken in the first quarter of 1995 for
the closure of the La Puente, California plant, corporate headquarters staff
reductions, and other charges. Excluding these charges, operating profit would
be $10.1, net earnings would be $5.4 and basic earnings per share would be $.46.
(6) Includes a $100.2 reserve against deferred tax assets.
(7) Reflects the benefit to income of $15.6 relating to deferred taxes due to
the enactment of the Omnibus Budget Reconciliation Act of 1993.
(8) 1993 on a pro forma basis.
</FN>
</TABLE>
11
<PAGE>
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company has previously disclosed that The Procter & Gamble Company ("P&G")
had filed a claim against it in the United States District Court for the
District of Delaware, alleging that the Company's "Ultra" disposable baby diaper
products infringe two of P&G's inner-leg gather patents. The lawsuit sought
injunctive relief, lost profit and royalty damages, treble damages and
attorneys' fees and costs. The Company denied liability under the patents and
counterclaimed for patent infringement and violation of antitrust laws by P&G.
The Company has also disclosed that 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 results of
operations.
On December 30, 1997, the District Court issued a Judgment and Opinion which
found, in essence, two of P&G's diaper patents to be valid and infringed by the
Company's disposable diaper products, while also rejecting the Company's patent
infringement claims against P&G. The District Court had earlier dismissed the
Company's antitrust counterclaim on summary judgment. The Judgment entitles P&G
to damages based on sales of the Company's diapers containing the inner-leg
gather feature. While the final damages number has not been adjudicated by the
District Court, the Company estimates the liability and associated litigation
costs to be approximately $200 million. The amount of the award resulted in
violation of certain covenants under the Company's bank loan agreements. As a
result, the issuance of the Judgment and the uncertainty it created caused an
immediate and critical liquidity issue for the Company.
On January 6, 1998, the Judgment was entered on the docket in Delaware in such a
manner that P&G would have been able to begin placing liens on the Company's
assets. As a result, the Company filed for relief under Chapter 11 of the
Bankruptcy Code, 11 U.S.C. Section 101 et seq., in the United States Bankruptcy
Court for the Northern District of Georgia (Case No. 98-60390) on January 6,
1998 (the "Chapter 11 filing"). None of the Company's subsidiaries were included
in the Chapter 11 filing. The Chapter 11 filing was designed to prevent P&G from
placing liens on Company property, permit the Company to appeal the Delaware
District Court's decision on the P&G case in an orderly fashion and give the
Company the opportunity to resolve liquidated and unliquidated claims against
the Company, which arose prior to the Chapter 11 filing, thereby protecting all
stakeholders' interests. The Company is currently operating as a debtor in
possession under the Bankruptcy Code.
The Company is unable to predict at this time when it will emerge from Chapter
11 protection. See "Notes 1, 11 and 13 of Notes to Financial Statements" and
"ITEM 3: LEGAL PROCEEDINGS" herein.
YEAR ENDED DECEMBER 28, 1997 VS. YEAR ENDED DECEMBER 29, 1996
RESULTS OF OPERATIONS
A net loss of $212.7 million was incurred during 1997 compared with net earnings
of $21.1 million in 1996. Included in the results for 1997 was an accrued loss
contingency of $200.0 million for the P&G patent litigation judgment and
associated litigation costs. See "Notes 1 and 13 of Notes to Financial
Statements" and "ITEM 3: LEGAL PROCEEDINGS" herein. Also included in the results
for 1997 were asset impairments and other write-offs totaling $10.6 million
related to the write-off of software and consulting costs related to the
enterprise-wide information system installation and discontinuation of the
Company's tampon production. The total of the loss contingency and asset
impairments was $129.5 million, net of the effect of income taxes. The results
in 1997 were also negatively impacted by a reserve of $100.2 million taken
against the Company's net deferred tax assets.
Included in the results in 1996 were charges of $10.6 million, net of the effect
of income taxes, associated with integrating the acquisition of Pope & Talbot,
Inc.'s disposable diaper business ("P&T") and costs to relocate the corporate
headquarters to Atlanta. Excluding charges discussed here and in the preceding
paragraph, net earnings in 1997 were $17.0 million compared to $31.7 million in
1996. This decrease in profits in 1997 compared to 1996 was primarily due to
continued price pressure in the baby diaper business, operating losses
12
<PAGE>
associated with the feminine care and adult incontinence businesses, sourcing of
products from Paragon-Mabesa International, S.A. de C.V. ("PMI") under a supply
contract and legal costs associated with patent litigation with P&G and K-C. See
"ITEM 3: LEGAL PROCEEDINGS." These negative impacts were partially offset by
lower overall raw material prices, lower trade merchandising expenses and lower
manufacturing overhead in the baby diaper business.
Basic loss per share in 1997 was $17.86 compared to basic earnings per share of
$1.76 in 1996. Basic earnings per share were $1.43 in 1997 compared to $2.64 in
1996, excluding the charges discussed above for both periods.
Basic earnings per share of $1.43 and $2.64 in 1997 and 1996, respectively,
excluding charges discussed above, included a net loss of $.95 and $.41,
respectively, related to the feminine care and adult incontinence businesses.
The Company experienced greater than anticipated operating losses in the
feminine care and adult incontinence businesses and does not expect these
businesses to break even until sometime in 1999.
NET SALES
Net sales were $562.0 million in 1997, a 3.4 percent decrease from the $581.9
million reported in 1996. Diaper unit sales decreased 1.9 percent from 3,689
million diapers in 1997 compared to 3,761 million diapers in 1996. Volume in the
first half of 1997 was negatively impacted by increased discounts and
promotional allowances by the branded manufacturers and value segment
competitors, especially the use of multi packs. Multi packs represent a package
configuration that provides the consumer 2, 3 or 4 times the amount of diapers
found in a standard convenience count package. Volume was also further
negatively impacted during the same period by product improvements added by the
branded manufacturers. Volume during the second half of 1997 was positively
impacted by the rollout of the Company's breathable baby diaper product which
increased the competitiveness of the Company's products. Volume, however, was
negatively impacted during the second half of the year by the loss of a major
account in Canada to a store brand competitor. In 1998, volume will continue to
be pressured by increased discounts and promotional allowances by the branded
manufacturers and value segment competitors, especially through the use of multi
packs. Volume may also be negatively impacted by uncertainties related to the
Chapter 11 filing.
Excluding the effect of a more favorable product mix, average baby diaper sales
prices during 1997 decreased approximately 5.0 percent compared to 1996, despite
price increases associated with reduced count packages on some of the Company's
products. The decrease in prices was primarily due to the increased discounts
and promotional allowances discussed above, the use of multi packs by the
branded manufacturers and value segment competitors and the existence of a new
competitor to the store brand baby diaper business. The negative trend in prices
is expected to continue throughout 1998 and may be further impacted by the
uncertainties related to the Chapter 11 filing.
See "Risks and Uncertainties."
COST OF SALES
Cost of sales in 1997 was $454.9 million compared to $449.9 million in 1996, a
1.1 percent increase. As a percentage of net sales, cost of sales was 80.9
percent in 1997 compared to 77.3 percent in 1996. Cost of sales in 1996 included
$5.4 million in charges for costs primarily associated with the integration of
the P&T acquisition into the Company's existing business. As a percentage of
sales, excluding such charges, cost of sales was 76.4 percent in 1996. Costs
were higher in 1997 compared to 1996 primarily due to costs associated with the
feminine care and adult businesses, sourcing of products from PMI under a supply
contract, a higher cost product mix and higher product design costs associated
with the breathable baby diaper product introduction. These higher costs were
partially offset by lower overall raw material and packaging costs. Baby diaper
manufacturing costs, including depreciation, were also lower in 1997 compared to
1996.
Pulp prices were approximately 7 percent lower in 1997 compared to 1996. Pulp
prices are expected to remain relatively flat during the first half of 1998 and
increase modestly during the second half of 1998. Packaging costs, including
bags and corrugated boxes, were also lower in 1997 compared to 1996. Other raw
material prices were generally at similar price levels in 1997 compared to 1996,
except for those materials associated with the higher product design costs
associated with the breathable baby diaper product.
13
<PAGE>
Baby diaper labor costs were lower in 1997 compared to 1996. The higher costs of
inefficiencies related to the new product rollouts during the first half of 1997
were more than offset by improved operating results during the second half of
the year. Baby diaper overhead costs, excluding the charges discussed below,
were lower during 1997 compared to 1996 due to the closure during 1996 of the
manufacturing facilities acquired from P&T and cost management efforts. Overall
labor costs were higher in 1997 compared to 1996 due to the costs related to the
feminine care and adult incontinence businesses. Overall overhead costs were
lower in 1997 compared to 1996 as reductions in baby diaper overhead exceeded
the added costs related to the feminine care and adult businesses. During 1996,
$2.9 million of charges were incurred to support the integration of the P&T
acquisition.
Baby diaper depreciation costs, excluding charges discussed below, were lower in
1997 compared to 1996. The decrease is partially due to the closure during 1996
of the acquired P&T facilities. Depreciation costs were higher in 1996 due to
accelerated depreciation attributable to obsolescence caused by product
innovations. The decreased baby diaper depreciation during 1997 was partially
offset by increased depreciation costs associated with the feminine care and
adult incontinence businesses. During 1996, $1.6 million of charges were
incurred due to the accelerated depreciation of existing company equipment that
was to be replaced by equipment acquired from P&T.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("SG&A") were $76.3 million in 1997
compared to $92.2 million in 1996. As a percentage of net sales, these expenses
were 13.6 percent in 1997 compared to 15.8 percent in 1996. 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.
Excluding the charges discussed above, SG&A expenses were $76.3 million in 1997
compared to $80.5 million in 1996. As a percentage of net sales these expenses,
excluding the charges, were 13.6 percent in 1997 compared to 13.8 percent in
1996. The decrease in costs is primarily attributable to a decrease in trade
merchandising expenses, lower incentive-based compensation accruals and lower
bad debt expenses. These decreases were partially offset by an increase in legal
expenses, packaging artwork and design and information system costs. The lower
trade merchandising expenses are primarily related to a decrease in
coupon-related expenses.
The increase in legal expenses is related to the P&G and K-C patent litigation.
While legal expenses, excluding bankruptcy related costs, are expected to
decrease moderately in 1998 from 1997 levels, they are expected to continue at
higher than normal levels until the litigation is resolved. See "ITEM 3: LEGAL
PROCEEDINGS." Information system costs were higher in 1997 compared to 1996 and
are expected to remain at higher levels for the foreseeable future. The Company
expects to begin testing of an enterprise-wide information system in the third
quarter and installation during the fourth quarter of 1998. Packaging artwork
and design costs were higher during 1997 compared to 1996 as a result of product
rollouts and changes in package counts. Lower incentive-based compensation
accruals resulted from lower operating results for 1997 compared to 1996.
RESEARCH AND DEVELOPMENT
Research and development ("R&D") expenses were $5.1 million in 1997 compared to
$4.2 million in 1996. The increase is primarily attributable to a general
increase in baby diaper product development activity and increased feminine care
and adult incontinence business activity.
DIVIDEND INCOME
Dividend income was $1.1 million in 1997. The dividend represented a
distribution from Mabesa, an unconsolidated subsidiary accounted for on the cost
method.
14
<PAGE>
LOSS CONTINGENCY
The loss contingency of $200 million in 1997 represents the accrual of the
estimated liability and associated litigation costs from the adverse judgment in
the Procter & Gamble patent litigation. See "Notes 1 and 13 of Notes to
Financial Statements" and "ITEM 3: LEGAL PROCEEDINGS" herein.
ASSET IMPAIRMENTS
Asset impairments were $9.4 million in 1997. There were no asset impairments in
1996. The asset impairments included a $5.0 million write-off of software and
associated consulting costs related to the Company's enterprise-wide information
system installation. The write-off was due to the inability of the software to
perform as represented during the software selection process. The Company is
currently evaluating its options, including legal action, to recover the costs
of the software and consulting. Also included in 1997 was a write-down of $4.4
million for the shut down of the tampon-related production equipment at the
feminine care products operation. Also included in the shut down of the tampon
manufacturing operation were write-offs of $.9 million for raw material,
finished goods and spare-part inventories which were charged to cost of sales.
INTEREST EXPENSE
Interest expense was $4.7 million in 1997 compared to $2.9 million in 1996. The
increase resulted from higher average borrowings during 1997.
OTHER INCOME
Other income was $1.7 million in 1997 compared to $.6 million in 1996. The
increase reflects higher interest income from loans to PMI, an unconsolidated
subsidiary accounted for on the equity method.
INCOME TAXES
Income tax expense was $27.9 million in 1997 as the Company recorded a reserve
of $100.2 million against its net deferred tax assets. The reserve is necessary
as the utilization of the Company's loss carryforwards is dependent upon
sufficient future taxable income to offset the loss carryforwards. See "Future
Realization of Net Deferred Tax Asset."
YEAR ENDED DECEMBER 31, 1996 VS. YEAR ENDED DECEMBER 25, 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 P&T
acquisition 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 effects 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 volumes, 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.
Basic earnings per share in 1996 were $1.76 compared to a basic loss per share
of $.29 in 1995. Basic earnings per share were $2.64 in 1996 compared to basic
earnings per share of $.46 in 1995, excluding the restructuring and other
charges for both periods.
15
<PAGE>
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 was negatively impacted by increased discounts and promotional
allowances by branded and value segment manufacturers. Volume was further
negatively impacted by product improvements added by branded manufacturers.
Average sales prices decreased approximately 3.5 percent during 1996, excluding
the effect of a more favorable product 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.
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. 1996 results 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. 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 startup.
Pulp prices were approximately 33.0 percent lower in 1996 compared to the same
period in 1995. Pulp prices, which had increased during 1995, decreased
significantly during 1996. Super absorbent polymer costs also dropped
significantly in 1996 compared to 1995. 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 startup. 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.
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
startup. During 1996, $2.9 million of charges were primarily 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 the same period of 1995. Depreciation
increased due to P&T facilities acquired in February 1996 that remained open,
the feminine care business startup 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
SG&A was $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
16
<PAGE>
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. 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 as the Company began installation of
a new enterprise information system. These increases were partially offset by a
decrease in legal expenses. Packaging related expenses were also lower in 1996
compared to 1995.
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.
ASSET IMPAIRMENTS
Asset impairments were $2.9 million in 1995. The charges were primarily due to
the cancellation of capital projects.
OTHER INCOME/EXPENSE
Other income was $.6 million in 1996 compared to expense of $1.0 million in
1995. The income in 1996 was primarily due to interest income from loans to PMI,
a subsidiary accounted for on the equity method. The expense in 1995 is
primarily related to legal settlement costs.
RESTRUCTURING
1995 results 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 million per year in savings that were
partially offset by increased costs of freight and distribution. The closure of
the plant occurred at the end of February 1995.
The restructuring plan included reallocation of production to the remaining
diaper facilities, and the sale of the diaper making equipment and manufacturing
facility. As of the end of 1996 the equipment and building were 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 charges did not include anticipated gains, if any, from the sale
of assets.
The restructuring charge included $2.2 million in non-cash charges due to asset
write-offs. The remaining $5.9 million has been paid. The restructuring plan is
complete.
LIQUIDITY AND CAPITAL RESOURCES
During 1997, cash flow from operations was $54.1 million compared to $68.3
million for 1996. The decrease in cash flow was primarily due to lower operating
results caused by price competition in the baby diaper business and the
operating losses at the feminine care and adult incontinence businesses.
17
<PAGE>
Working capital, exclusive of cash, short-term borrowings, current deferred
taxes and the loss contingency of $200 million, increased $20 million. This was
primarily due to an increase in receivables and inventories combined with a
reduction in accrued liabilities.
The increase in receivables resulted from the sale of equipment to
unconsolidated subsidiaries and an increase in refundable income taxes. The
increase in inventories resulted from an increase in finished goods in the baby
diaper business. The decrease in accrued liabilities primarily reflects a
reduction in incentive-based compensation accruals, coupon related liabilities,
and income taxes payable. Cash flow was also favorably impacted by the Company
issuing stock to settle certain payroll liabilities.
The cash produced from operations supported capital expenditures of $55.0
million, including approximately $5.6 million of computer software and
consulting costs, in 1997 compared to $48.9 million in 1996. The expenditures
were primarily in support of the baby diaper business, specifically new product
enhancements and diaper packaging technology, and to support the entry into the
adult incontinence business. Capital spending is expected to total approximately
$39.0 million during 1998 and will include further expenditures for auto
packaging technology, product enhancement and a company-wide information system
upgrade.
During the third quarter of 1997, the Company utilized its credit facilities
described below to acquire, through Stronger Corporation S.A. ("Stronger"), a 34
percent interest in Serenity, S.A., the third largest disposable diaper
manufacturer in Argentina, for $5.7 million and earn-out payments over the next
three years which are partially based on performance. The Company also made an
additional payment of $3.4 million to Mabesa as an earn-out payment based on
1996 performance. In the fourth quarter of 1997 the Company utilized its credit
facilities to acquire, through Stronger, a 49 percent interest in MPC Hygenic
Products, Ltda., a subsidiary of Cremer, S.A. of Brazil for $5.1 million. The
Company also utilized its credit facilities to fund an increase in loans to PMI
during 1997. The investments were partially offset by $10.3 million in proceeds
from assets held for sale.
At December 28, 1997, the Company maintained a $150 million revolving credit
facility with a group of nine financial institutions available through February
2001. At December 28, 1997, borrowings under this credit facility totaled $70
million. The Company also had access to short-term lines of credit on an
uncommitted basis with several major banks. At December 28, 1997, the Company
had approximately $50 million in uncommitted lines of credit. Borrowings under
these lines of credit totaled $12.8 million at December 28, 1997. As a result of
the Chapter 11 filing, the Company is prohibited from paying any pre-petition
liabilities without Bankruptcy Court approval. The Chapter 11 filing resulted in
a default under its pre-petition revolving credit facility. See "Note 11 of
Notes to Financial Statements."
In connection with the Chapter 11 filing, on January 30, 1998, the Bankruptcy
Court entered a final order approving the Credit Agreement (the "DIP Credit
Facility") as provided under the Revolving Credit and Guarantee Agreement dated
as of January 7, 1998, among the Company, as Borrower, the subsidiaries of the
Company, as guarantors, and a bank group led by The Chase Manhattan Bank
("Chase"). Pursuant to the terms of the DIP Credit Facility, Chase has made
available to the Company a revolving credit and letter of credit facility in an
aggregate principal amount of $75 million. The Company's maximum borrowing under
the DIP Credit Facility may not exceed the lesser of $75 million or an available
amount as determined by a borrowing base formulation. The borrowing base
formulation is comprised of certain specified percentages of eligible accounts
receivable, eligible inventory, equipment and personal and real property of the
Company. The DIP Credit Facility has a sublimit of $10 million for the issuance
of letters of credit. The DIP Credit Facility expires on the earlier of July 7,
1999, or the date of entry of an order by the Bankruptcy Court confirming a plan
of reorganization.
Obligations under the DIP Credit Facility are secured by the security interest,
pledge and lien on substantially all of the Company's assets and properties and
the proceeds thereof, granted pursuant to the Final Order under Sections
364(c)(2) and 364(c)(3) of the Bankruptcy Code. Borrowings under the DIP Credit
Facility may be used to fund working capital and for other general corporate
purposes. The DIP Credit Facility contains restrictive covenants, including
among other things, limitations on the creation of additional liens and
indebtedness, limitations on capital expenditures, limitations on transactions
with affiliates including investments, loans and advances, the sale of assets,
and the maintenance of minimum earnings before interest, taxes, depreciation,
amortization and reorganization items, as well as a prohibition on the payment
of dividends.
18
<PAGE>
The DIP Credit Facility provides that advances made will bear interest at a rate
of 0.5 percent per annum in excess of Chase's Alternative Base Rate, or at the
Company's option, a rate of 1.5 percent per annum in excess of the reserve
adjusted London Interbank Offered Rate for the interest periods of one, two or
three months. The Company pays a commitment fee of 0.5 percent per annum on the
unused portion thereof, a letter of credit fee equal to 1.5 percent per annum of
average outstanding letters of credit and certain other fees.
The Company may utilize, in accordance with certain covenants limits, its credit
facility for continued investments in its foreign subsidiaries. The DIP credit
facility in combination with internally generated funds is anticipated to be
adequate to finance these investments and the Company's 1998 capital
expenditures. See "Note 11 of Notes to Financial Statements."
FUTURE REALIZATION OF NET 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. Significant components of deferred income
taxes include temporary differences due to goodwill ($9.9 million) and reserves
not currently deductible ($85.8 million). To realize the full benefit of the
deferred tax asset, the Company needs to generate approximately $258 million in
future taxable income before considering the availability of carryback periods,
if any. The Company currently has fully reserved its net deferred tax asset of
$99.3 million. See "--Income Taxes"
YEAR 2000
The Company began planning its year 2000 remediation strategy in 1995. Based on
the assessment of the Company's information technology personnel and outside
professionals, the Company determined that it would be necessary to replace a
significant portion of its information technology platform and to modify other
computer and computer-controlled systems and systems with embedded computer
chips (collectively, the Company's "systems") so that its information technology
platform and systems properly utilize date-related data as the year 2000 is
approached and reached. Management presently believes that with the planned
conversion to new software and hardware and the planned modifications to
existing software and hardware, the effects of the year 2000 issue will be
mitigated. However, if such conversions and modifications are not made, or are
not completed on a timely basis, or if software vendor representations as to the
ability of their products to properly handle year 2000 data prove untrue, the
year 2000 issue could have a material impact on the operations of the Company,
which in turn could have a material adverse impact on the Company's results of
operations and financial condition.
The Company is in the process of initiating formal communications with all of
its significant suppliers and is developing a communications plan for its large
customers to determine the extent to which the Company may be vulnerable to
those third parties' failure to remediate their own year 2000 issue. However,
there can be no guarantee that the systems of other organizations on which the
Company's systems rely or the Company's operations depend will be timely
converted, or that a failure to convert by another organization, or a conversion
that is incompatible with the Company's systems, would not have a material
adverse effect on the Company.
The Company's primary vehicle to replace a significant portion of its
information technology platform and systems so that such platform and systems
can properly utilize date-related data prior to, during and beyond the year 2000
is known internally as the APEX Project. As a part of the APEX Project, the
Company has purchased SAP R/3 enterprise resource planning software and is
actively involved in the implementation of the software. This software will
replace current core business transaction systems with the equivalent SAP R/3
functionality. SAP America, Inc. has warranted that the R/3 software can
properly utilize date-related data prior to, during and beyond the year 2000.
The Company plans to utilize both internal and external resources to reprogram
or replace, test and implement software and other components of its systems for
year 2000 modifications. The Company has targeted a completion date for year
2000 work on critical business applications of June 30, 1999. System
applications have been scheduled for replacement and modification based on a
risk-adjusted priority, to ensure critical programs are adequately completed in
time to allow for extended testing. The projected remaining cost of the year
2000 project is currently estimated at approximately $15 million and is being
funded through operating cash flow. As
19
<PAGE>
of December 28, 1997, approximately $4 million had been spent on the assessment
of and initial efforts in connection with the year 2000 project, the purchase of
software and hardware and the development of and initial work on the remediation
plan.
The costs of the project and the date on which the Company plans to complete
year 2000 modifications, however, are based on management's and external
consultants' best estimates, which were derived utilizing numerous assumptions
of future events including the continued availability of certain internal and
external resources, the representations of several software vendors as to the
ability of their products to properly handle year 2000 data, third party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved and the actual results could differ materially
from those plans. Specific factors that might cause such material differences
could include, but are not limited to, the availability and cost of personnel
trained in this area, the ability to locate and replace or correct all relevant
computer codes, the inability to control third party modification plans, and
similar uncertainties.
RISKS AND UNCERTAINTIES
As a result of the adverse judgment in the P&G patent litigation, the Company is
required to modify its current diaper design. Pursuant to an agreement with P&G,
the Company has until July 6, 1998 to complete the conversion to a new diaper
design. At the end of this conversion period, the Company will be required to
pay P&G a 2 percent royalty on net sales of the current diapers manufactured
during the conversion period. This 2 percent royalty will have a material
adverse effect on future results of operations. While the Company has developed
an alternative diaper design which, based on the advice of two independent
patent firms, it believes does not infringe any valid patent, if the Company
were unable to convert to the new design in a timely manner, or if customers do
not accept the alternative design, it could have a material adverse effect on
the operations of the Company, which, in turn, would have a material adverse
effect on the Company's financial condition and results of operations. See "ITEM
3: LEGAL PROCEEDINGS."
The ability of the Company to effect a successful reorganization will depend, in
significant part, upon the Company's ability to formulate a Plan of
Reorganization that is approved by the Bankruptcy Court and meets the standards
for plan confirmation under the Bankruptcy Code. In a Chapter 11 reorganization
plan, the rights of the Company's creditors and shareholders may be altered.
Investment in stock of the Company, therefore, should be regarded as highly
speculative. As a result of the Chapter 11 filing, the Company will incur
significant costs for professional fees as the reorganization plan is developed.
The Company is also required to pay certain expenses of the Official Committee
of Unsecured Creditors, including professional fees, to the extent allowed by
the Bankruptcy Court.
The Company is unable to predict at this time when it will emerge from Chapter
11 protection. See "ITEM 1: BUSINESS: REORGANIZATION CASE."
P&G has recently announced a baby diaper product innovation involving skin care
ingredients. The Company is currently assessing its response to this product
innovation. P&G and K-C have also heavily promoted diapers in the multi pack
configuration. These packages offer a lower unit price to the retailer and
consumer. It is possible that the Company may continue to realize lower selling
prices and/or lower volumes as a result of these initiatives.
FORWARD-LOOKING STATEMENTS
From time to time, information provided by the Company, statements made by its
employees or information included in its filings with the Securities and
Exchange Commission (including the Annual Report on Form 10-K) may include
statements that are not historical facts, so-called "forward-looking
statements." 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: the Company's Chapter 11 filing; increased raw
material prices; new product and packaging introductions by competitors;
increased price and promotion pressure from competitors; new competitors in the
market; year 2000 compliance issues; and patent litigation, are described
herein. Readers are cautioned not to place undue reliance on the forward-looking
statements, which speak only
20
<PAGE>
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.
SUBSEQUENT EVENT
Paragon recently established a manufacturing and marketing joint venture in
China with Goodbaby Group of Kunshan City and First Shanghai Investment of Hong
Kong. Paragon purchased a 40 percent interest in the joint venture with Goodbaby
Group and First Shanghai Investment at 30 percent each. Initial registered
capital of the venture was approved at $15 million, to be funded over a two year
period. A joint venture business license was approved by the Chinese government
on December 31,1997. Groundbreaking for a new factory took place in February
1998 and it is anticipated that production and distribution will begin in the
second half of 1998.
NEW ACCOUNTING STANDARD
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings per Share," effective for fiscal years and interim periods ending
after December 15, 1997. The adoption of this statement did not have a
significant impact on the Company's results of operations.
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.
21
<PAGE>
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES:
PAGE
Responsibility for Financial Reporting 23
Report of Independent Public Accountants 24
Consolidated Earnings (Loss) Statements for the three years in
the period ended December 28, 1997 25
Consolidated Balance Sheets as of December 28,1997 and
December 29, 1996 26
Consolidated Statements of Cash Flows for the three years in
the period ended December 28, 1997 27
Consolidated Statements of Changes in Shareholders' Equity
for the three years in the period ended December 28, 1997 28
Notes to Financial Statements 29
Financial Statement Schedule 46
Schedule II - Valuation and Qualifying Accounts
22
<PAGE>
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 management believes 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, 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.
Alan J. Cyron
Executive Vice President & Chief Financial Officer
23
<PAGE>
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 28, 1997
and December 29, 1996, 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 28, 1997. 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 28, 1997 and December 29, 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended December 28, 1997, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Notes 1 and
13 to the accompanying financial statements, on December 30, 1997, the District
Court for the District of Delaware issued a judgment and opinion finding that
the Company's diaper products infringe certain patents held by The Proctor &
Gamble Company. The Company has recorded estimated damages and legal costs
related to this matter of $200,000,000 in the accompanying financial statements.
After giving effect to this contingency, as of December 28, 1997, the Company
had a working capital deficit of $173,896,000 and total shareholders' equity of
$4,954,000. In addition, as described in Note 1, on January 6, 1998, the Company
filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy
Code. These matters raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters,
including its intent to appeal the judgment referred to above and its intent to
file a plan of reorganization that will be acceptable to the Bankruptcy Court
and the Company's creditors, are also described in Notes 1 and 13. In the event
a plan of reorganization is accepted, continuation of the business thereafter is
dependent on the Company's ability to achieve successful future operations. The
accompanying financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in the index to financial
statements and schedules 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
March 20, 1998
24
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED EARNINGS (LOSS) STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Year Ended
--------------------------------------------------------------
December 28, 1997 December 29, 1996 December 31, 1995
----------------- ----------------- -----------------
<S> <C> <C> <C>
Sales, net of discounts and allowances $ 561,975 $ 581,929 $ 518,776
Cost of sales 454,911 449,885 439,846
----------------- ----------------- -----------------
Gross profit 107,064 132,044 78,930
Selling, general and administrative expense 76,347 92,212 68,037
Research and development expense 5,063 4,163 3,562
Asset impairments 9,442 - 2,875
Restructuring - - 8,059
Loss contingency (Notes 1 and 13) 200,000 - -
----------------- ----------------- -----------------
Operating profit (loss) (183,788) 35,669 (3,603)
Equity in earnings of unconsolidated 953 423 -
subsidiaries
Dividend income from unconsolidated 1,055 - -
subsidiary
Interest expense 4,667 2,864 952
Other income (expense), net 1,664 581 (958)
----------------- ----------------- -----------------
Earnings (loss) before income taxes (184,783) 33,809 (5,513)
Provision for (benefit from) income taxes 27,934 12,687 (2,076)
----------------- ----------------- -----------------
Net earnings (loss) $ (212,717) $ 21,122 $ (3,437)
================= ================= =================
Basic earnings (loss) per common share $ (17.86) $ 1.76 $ (.29)
================= ================= =================
Diluted earnings (loss) per common share $ (17.86) $ 1.74 $ (.29)
================= ================= =================
Dividends paid $ - $ - $ -
================= ================= =================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
25
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
December 28, 1997 December 29, 1996
----------------- -----------------
<S> <C> <C>
ASSETS
Cash and short-term investments $ 991 $ 8,297
Receivables 70,616 56,888
Inventories 48,257 44,055
Current portion of deferred income taxes 1,800 10,575
Prepaid expenses 697 957
------------------ -----------------
Total current assets 122,361 120,772
Property and equipment 118,383 116,338
Construction in progress 11,154 10,117
Assets held for sale 11,073 14,421
Patents and trademarks - 676
Deferred income taxes - 26,293
Investment in unconsolidated subsidiary at cost 19,964 16,531
Investment in and advances to unconsolidated
subsidiaries, at equity 53,844 29,484
Goodwill 34,739 36,658
Other assets 4,624 1,800
------------------ -----------------
Total assets $ 376,142 $ 373,090
================== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term borrowings $ 14,185 $ -
Checks issued but not cleared 9,375 10,233
Accounts payable 40,305 37,067
Accrued liabilities 32,392 38,495
Accrued loss contingency (Notes 1 and 13) 200,000 -
------------------ -----------------
Total current liabilities 296,257 85,795
Long-term debt 70,000 70,000
Deferred compensation 1,275 330
Deferred income taxes 3,656 2,260
------------------ -----------------
Total liabilities 371,188 158,385
Commitments and contingencies (Notes 1, 13 and 14)
Shareholders' equity:
Preferred stock: authorized 10,000,000 shares, no - -
shares issued, $.01 par value
Common stock: authorized 25,000,000 shares,
issued 12,343,324 and 12,288,293, $.01 par 123 123
value
Capital surplus 144,368 143,205
Foreign currency translation adjustment (1,066) (614)
Retained earnings (deficit) (128,376) 84,341
Less: treasury stock, 388,658 and 535,250 shares,
at cost (10,095) (12,350)
------------------ -----------------
Total shareholders' equity 4,954 214,705
------------------ -----------------
Total liabilities and shareholders' equity $ 376,142 $ 373,090
================== =================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
26
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended
--------------------------------------------------------
December 28, 1997 December 29, 1996 December 31, 1995
----------------- ----------------- -----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ (212,717) $ 21,122 $ (3,437)
Non-cash charges to earnings:
Depreciation and amortization 35,514 38,828 35,992
Deferred income taxes 36,464 1,656 515
Write-down of assets 7,967 69 4,788
Changes in working capital:
Accounts receivable (5,430) (12,300) 1,450
Inventories and prepaid expenses (3,997) 8,117 (6,184)
Accounts payable 3,238 (224) 5,902
Accrued liabilities and loss contingency 192,615 11,777 4,646
Checks issued but not cleared (858) 1 84
Other 1,267 (757) (1,196)
----------------- ----------------- -----------------
Net cash provided by operating activities 54,063 68,289 42,560
----------------- ----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property and equipment (49,420) (48,867) (17,433)
Proceeds from sale of property and equipment 10,266 3,822 111
Acquisition of Pope & Talbot, Inc.'s disposable
diaper business assets - (56,963) -
Investment in Grupo P.I. Mabe, S.A. de C.V. (3,433) (15,908) -
Investment in and advances to
unconsolidated subsidiaries, at equity (24,102) (11,033) -
Other (9,104) (1,731) 173
----------------- ----------------- -----------------
Net cash used by investing activities (75,793) (130,680) (17,149)
----------------- ----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in short-term borrowings 14,185 (1,760) (6,382)
Proceeds from U.S. bank credit facility 25,000 85,000 2,000
Repayments of U.S. bank credit facility (25,000) (15,000) (8,000)
Sale of common stock 239 641 -
Purchases of treasury stock - (10,083) (3,823)
----------------- ----------------- -----------------
Net cash provided (used) by financing
activities 14,424 58,798 (16,205)
----------------- ----------------- -----------------
NET INCREASE (DECREASE) IN CASH (7,306) (3,593) 9,206
Cash at beginning of period 8,297 11,890 2,684
----------------- ----------------- -----------------
Cash at end of period $ 991 $ 8,297 $ 11,890
================= ================= =================
Cash paid (received) during the year for:
Interest (net of amounts capitalized) $ 4,259 $ 2,961 $ 586
================= ================= =================
Income taxes $ (4,242) $ 15,189 $ (646)
================= ================= =================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
27
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Foreign Retained
Common Capital Currency Earnings Treasury
Stock Surplus Translation (loss) Stock
---------- ---------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
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)
Net loss - - (212,717) -
Issue common stock - 1,163 - - 2,255
Translation adjustment - - (452) - -
---------- ---------- ------------- ------------ -----------
BALANCE, December 28, 1997 $ 123 $ 144,368 $ (1,066) $(128,376) $ (10,095)
========== ========== ============= ============ ===========
</TABLE>
The following summarizes the changes in the number of shares of capital stock:
<TABLE>
<CAPTION>
Common Stock Treasury Stock
--------------------- --------------------
<S> <C> <C>
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 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
Issue common stock - 1995 Incentive Compensation Plan 36,655 -
Issue common stock - 1996 Non-Officer Employee Incentive
Compensation Plan 12,279 -
Issue common stock - Profit Sharing and Savings Plan 3,597 (135,845)
Issue common stock - Exercise of stock options 2,500 (10,747)
--------------------- --------------------
BALANCE, December 28, 1997 12,343,324 388,658
===================== ====================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
28
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1: CHAPTER 11 PROCEEDINGS
On January 6, 1998 Paragon Trade Brands, Inc. ("Paragon" or the "Company") filed
for relief under Chapter 11 of the United States Bankruptcy Code (the "Chapter
11 filing"), in the United States Bankruptcy Court for the Northern District of
Georgia. The Company is currently operating as a debtor in possession under the
Bankruptcy Code.
The Procter & Gamble Company ("P&G") had filed a claim against the Company in
the United States District Court for the District of Delaware, alleging that the
Company's disposable baby diaper products infringe two of P&G's inner-leg gather
patents. The lawsuit sought injunctive relief, lost profit and royalty damages,
treble damages and attorneys' fees and costs. The Company denied liability under
the patents and counterclaimed for patent infringement and violation of
antitrust laws by P&G.
On December 30, 1997, the District Court issued a Judgment and Opinion which
found, in essence, two of P&G's diaper patents to be valid and infringed by the
Company's disposable diaper products, while also rejecting the Company's patent
infringement claims against P&G. The District Court had earlier dismissed the
Company's antitrust counterclaim on summary judgment. The Judgment entitles P&G
to damages based on sales of the Company's diapers containing the inner-leg
gather feature. While the final damages number has not been adjudicated by the
District Court, the Company estimates the liability and associated litigation
costs to be approximately $200 million. The amount of the award resulted in
violation of certain covenants under the Company's bank loan agreements. As a
result, the issuance of the Judgment and the uncertainty it created caused an
immediate and critical liquidity issue for the Company. The Chapter 11 filing
was designed to prevent P&G from placing liens on Company property, permit the
Company to appeal the Delaware District Court's decision on the P&G case in an
orderly fashion and give the Company the opportunity to resolve liquidated and
unliquidated claims against the Company which arose prior to the Chapter 11
filing.
Substantially all liabilities outstanding as of the date of the Chapter 11
filing are subject to resolution under a plan of reorganization to be voted upon
by the Company's creditors and shareholders and confirmed by the Bankruptcy
Court. Schedules were filed by the Company on March 3, 1998 with the Bankruptcy
Court setting forth the assets and liabilities of the Company as of the date of
the Chapter 11 filing, as shown by the Company's accounting records. The
Bankruptcy Court will set a date by which creditors must file proofs of claims
which arose prior to the Chapter 11 filing.
NOTE 2: BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING AND
REPORTING POLICIES
BASIS OF PRESENTATION AND RELATED INFORMATION
Paragon is the leading manufacturer of store brand infant disposable diapers in
the United States and Canada. Paragon manufactures a line of premium and economy
diapers, training pants, feminine care and adult incontinence products,
household cleaners and air freshener products which are distributed throughout
the United States and Canada, primarily through grocery and food stores, mass
merchandisers, warehouse clubs, toy stores and drug stores that market the
products under their own store brand names. Paragon has also established
international joint ventures in Mexico, Argentina and Brazil for the manufacture
and sale of infant disposable diapers and other absorbent personal care
products.
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. ("PTBI"). 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
29
<PAGE>
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 28, 1997
and December 29, 1996 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 as 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 - FOREIGN CURRENCY FORWARD CONTRACTS
The Company occasionally enters into forward contracts to hedge certain foreign
currency denominated purchase commitments for periods consistent with the terms
of the underlying transactions. While the forward contracts affect the Company's
results of operations, they do so only in connection with the underlying
transactions. Gains and losses on these contracts are deferred and offset
exchange gains and losses on the transactions hedged. At December 28, 1997 and
December 29, 1996, the Company did not have any forward contracts outstanding.
The Company's other off-balance sheet risks are not material.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company estimates that the fair value of its financial instruments
approximate their carrying values as of the balance sheet dates. Accordingly, no
separate disclosure of fair value is made.
NONCASH TRANSACTIONS
During the fiscal years ended December 28, 1997 and December 29, 1996, the
Company issued 188,376 and 113,529, 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 6). The balance sheet
effect of issuing these shares of common stock was a decrease in accrued
liabilities of $3,354 and $2,919, 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 diaper-related 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 $509 and $602
greater at December 28, 1997 and December 29, 1996, 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.
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:
Buildings 20 to 40 years
Building improvements 10 years
Machinery, equipment, furniture and fixtures 2 to 10 years
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.
30
<PAGE>
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 13).
Purchased patents and trademarks are amortized on a straight-line basis over a
five- to ten-year life. In 1997, the Company evaluated the remaining value of
one of the purchased patents and wrote-off the entire amount of $255.
Amortization expense was $676 for the year ended December 28, 1997, including
the write-off. Amortization expense was $501 and $456 for the years ended
December 29, 1996 and December 31, 1995, respectively. Accumulated amortization
was $5,523 and $4,847 at December 28, 1997 and December 29 1996, respectively.
All purchased patents were fully amortized as of December 28, 1997.
INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES
On January 26, 1996, the Company through its wholly owned subsidiary PTB
International, Inc. ("PTBI") completed the purchase of a 15 percent interest in
Grupo P.I. Mabe, S.A. de C.V. ("Mabesa") for $15,300 in cash plus additional
consideration based on Mabesa's future financial results through 2001. In 1997,
based on Mabesa's 1996 financial results, the Company paid additional
consideration of $3,400. The Company also acquired the option to purchase an
additional 34 percent interest in Mabesa at a contractually determined price.
The investment is carried at cost in the accompanying balance sheet.
The Company also owns a 49 percent interest in Paragon-Mabesa International,
S.A. de C.V. ("PMI"). The investment is accounted for using the equity method.
On August 26, 1997, PTBI purchased a 49 percent interest in Stronger Corporation
S.A. ("Stronger"), a financial investment corporation incorporated under
Uruguayan law. An affiliate of Mabesa owns the remaining 51 percent. Stronger
will be used to establish additional Latin American joint ventures. The
investment is accounted for using the equity method.
On August 26, 1997, Stronger acquired 70 percent of Serenity S.A. ("Serenity"),
the third largest diaper manufacturer in Argentina, for approximately $11,600 in
cash plus earn-out payments based on Serenity's future financial results over
the next three years. Stronger also acquired an option to purchase the remaining
30 percent interest in Serenity by 2002 at a contractually determined exercise
price. Serenity manufactures infant disposable diapers, sanitary napkins and
adult incontinence products in two facilities. PTBI advanced $5,700 to Stronger,
its pro-rata share of the purchase price, and has guaranteed earn-out payments
estimated not to exceed $3,300 through 2000.
On November 10, 1997, Stronger acquired 100 percent of the disposable diaper
business of MPC Productos para Higiene Ltda. ("MPC") for approximately $10,500
in cash from Cremer S.A., a Brazilian textile manufacturer. MPC is engaged in
the manufacture, distribution, and sale of disposable diapers, skin lotions for
children and other personal care products. PTBI advanced $5,100 to Stronger, its
pro-rata share of the purchase price.
The investment in Stronger exceeds the underlying net assets by $6,406. The
difference is being amortized over a 40 year life.
There have been no dividend distributions to the Company from PMI or Stronger.
The Company received a dividend distribution of $1,055 from Mabesa in the year
ended December 28, 1997. There was no dividend distribution from Mabesa for the
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
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
31
<PAGE>
useful life of goodwill may warrant revision or that the remaining balance of
goodwill may not be realizable. When factors indicate that goodwill should be
evaluated for possible impairment, the Company compares an estimate of the
related business segment's undiscounted net cash flow over the remaining life of
the related goodwill to determine whether the goodwill is recoverable.
Amortization expense was $1,919 and $1,735 for the years ended December 28, 1997
and December 29, 1996, respectively. Accumulated amortization was $3,654 and
$1,735 as of December 28, 1997 and December 29, 1996, respectively.
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 year ended December 29, 1996, the Company repurchased
387,800 shares at a cost of $10,083. The Company reissued 135,845 and 87,322 of
these shares through its Long-Term Incentive and Profit Sharing Plans in the
years ended December 28, 1997 and December 29, 1996, respectively. The Company
reissued 10,747 and 10,500 shares for the exercise of stock options in the years
ended December 28, 1997 and December 29, 1996, respectively (see Note 6).
SIGNIFICANT SALES
During the years ended December 28, 1997, December 29, 1996 and December 31,
1995, the percentages of net sales to an individual customer whose sales
represent in excess of 10 percent of net sales were 15 percent, 13 percent and
11 percent, respectively.
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 28, 1997, there were approximately $10,077 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 and reserves not
currently deductible.
FOREIGN CURRENCY
Non-U.S. assets and liabilities are translated into U.S. dollars using
period-end exchange rates. Revenues and expenses are translated at average rates
during the period.
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
32
<PAGE>
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 three 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 28, 1997,
December 29, 1996 and December 31, 1995 was $1,141, $2,607 and $1,475,
respectively.
NEW ACCOUNTING STANDARD
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings per Share," effective for fiscal years and interim periods ending
after December 15, 1997. The adoption of this statement did not have a
significant impact on the Company's results of operations.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' financial
statements to conform them to the current year's presentation.
NOTE 3: ASSET IMPAIRMENTS
Asset impairments were $9,442 and $2,875 for the years ended December 28, 1997
and December 31, 1995, respectively. There were no asset impairments for the
year ended December 29, 1996.
The asset impairments for the year ended December 28, 1997 include a $5,000
write-off of software and associated consulting costs related to the Company's
enterprise-wide information system installation. The write-off was due to the
inability of the software to perform as represented during the software
selection process. The asset impairments also include a write-down of $4,442 for
the shutdown of the tampon-related manufacturing equipment at the feminine care
products operation. The equipment has been written down to estimated net selling
price and is categorized as assets held for sale on the balance sheet. Also
included in the shut down of the tampon producing operation were write-offs of
$900 for raw material, finished goods and spare-part inventories which were
charged to cost of sales for the year ended December 28, 1997.
The asset impairments for the year ended December 31, 1995 were primarily due to
the cancellation of capital projects.
NOTE 4: OTHER INCOME (EXPENSE), NET
Other income was $1,664 and $581 in 1997 and 1996, respectively compared to
other expense of $958 in 1995. The primary increase in income in 1997 and 1996
was due to interest income from PMI. The expense in 1995 was due to one-time
charges, including legal settlement costs.
33
<PAGE>
NOTE 5: INCOME TAXES
Taxes on income are based on earnings (losses) before taxes as follows:
<TABLE>
<CAPTION>
December 28, 1997 December 29, 1996 December 31, 1995
------------------- ------------------- -------------------
<S> <C> <C> <C>
Domestic $ (188,784) $ 22,035 $ (7,453)
Foreign 4,001 11,774 1,940
------------------- ------------------- -------------------
$ (184,783) $ 33,809 $ (5,513)
=================== =================== ===================
</TABLE>
Provisions for (benefits from) income taxes include the following:
<TABLE>
<CAPTION>
December 28, 1997 December 29, 1996 December 31, 1995
----------------- ----------------- -----------------
<S> <C> <C> <C>
Federal:
Current $ (6,594) $ 8,651 $ (2,162)
Deferred 33,494 (1,098) 68
----------------- ----------------- -----------------
26,900 7,553 (2,094)
----------------- ----------------- -----------------
State:
Current (1,197) 1,496 (702)
Deferred 833 (200) 194
----------------- ----------------- -----------------
(364) 1,296 (508)
----------------- ----------------- -----------------
Foreign:
Current 1,803 1,578 273
Deferred (405) 2,260 253
----------------- ----------------- -----------------
1,398 3,838 526
----------------- ----------------- -----------------
$ 27,934 $ 12,687 $ (2,076)
================= ================= =================
</TABLE>
A reconciliation between the federal statutory rate and the effective tax rate
follows:
<TABLE>
<CAPTION>
December 28, 1997 December 29, 1996 December 31, 1995
----------------- ----------------- -----------------
<S> <C> <C> <C>
Expected provision at the
statutory rate $ (64,674) $ 11,833 $ (1,930)
State income taxes, net of
federal tax benefit (6,640) 1,319 (330)
Research and experimental credit - (50) (75)
Change in valuation allowance 99,052 (78) (199)
Foreign dividend previously taxed 369 - -
All other, net (173) (337) 458
----------------- ----------------- -----------------
$ 27,934 $ 12,687 $ (2,076)
================= ================= =================
</TABLE>
Net deferred tax assets (liabilities) at December 28, 1997 and December 29, 1996
were $(1,856) and $34,608, 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
34
<PAGE>
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 28, 1997 December 29, 1996
----------------- -----------------
<S> <C> <C>
Intangible Assets $ (2,127) $ (2,260)
----------------- -----------------
Deferred tax liabilities (2,127) (2,260)
----------------- -----------------
Depreciation/amortization 389 11,151
Goodwill 9,902 10,851
Reserves not currently deductible 85,814 10,503
Package design costs 2,099 1,970
Land 393 407
All other, net 1,007 2,267
----------------- -----------------
Deferred tax assets 99,604 37,149
----------------- -----------------
Deferred tax assets valuation allowance (99,333) (281)
----------------- -----------------
Total deferred taxes, net $ (1,856) $ 34,608
================= =================
</TABLE>
The Company has recorded a valuation allowance with respect to its net deferred
tax assets as realization is dependent upon sufficient future taxable income.
NOTE 6: LONG-TERM INCENTIVE, DEFERRED COMPENSATION, 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 the long-term interests of Paragon's shareholders. Currently, long-term
incentives are provided through grants of stock options, stock appreciation
rights ("SARs") and restricted stock. Given the uncertainties related to the
Company's Chapter 11 filing, the Compensation Committee of the Company's Board
of Directors has voted to suspend the grant of stock option awards or SARs until
the Company successfully emerges from Chapter 11.
RESTRICTED STOCK GRANTS
In 1997, restricted shares of common stock were issued at a discounted value in
lieu of some or all of cash bonuses for key employees, at the employee's
discretion. 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. During the fiscal years ended December 28,
1997, and December 29, 1996, there were 12,279 and 30,000 shares of common stock
issued under the 1996 Plan as restricted shares, respectively. During the fiscal
years ended December 28, 1997 and December 29, 1996, there were 36,655 and
29,157 shares of common stock, respectively, issued under the 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 28, 1997, December 29, 1996 and December 31, 1995 was $856, $800
and $651, respectively. The weighted average fair value per share of stock
granted was $17.50 and $24.52 for the years ended December 28, 1997 and December
29, 1996, respectively.
35
<PAGE>
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, when granted to key management, are granted at amounts that approximate
market value at the date of the grant. Awards, when made, 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.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company applies APB Opinion 25 in accounting for stock options granted under
the 1995, LTIC and Director Plans. Accordingly, no compensation cost has been
recognized for these plans in 1997, 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 28, 1997 December 29, 1996 December 31, 1995
----------------- ----------------- -----------------
<S> <C> <C> <C>
NET EARNINGS (LOSS)
As reported $ (212,717) $ 21,122 $ (3,437)
Pro forma $ (213,265) $ 20,486 $ (3,808)
BASIC EARNINGS (LOSS) PER SHARE
As reported $ (17.86) $ 1.76 $ (0.29)
Pro forma $ (17.90) $ 1.70 $ (0.32)
DILUTED EARNINGS (LOSS) PER SHARE
As reported $ (17.86) $ 1.74 $ (0.29)
Pro forma $ (17.90) $ 1.68 $ (0.32)
</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 28, 1997, December 29, 1996 and December 31, 1995:
a range of risk-free interest rates of 6.15 - 6.43 percent was used for the
years ended December 28, 1997, and December 29, 1996; a range of risk-free
interest rates of 5.24 - 5.69 percent was used for the year ended December 31,
1995; a dividend yield of 0.0 percent was used for all three years; and an
estimated volatility of 40 percent was used for the year ended December 28,
1997, and 44 percent was used for the years ended December 29, 1996 and December
31, 1995, respectively.
36
<PAGE>
Following is a summary of the status of the 1995, LTIC and Director Plans during
the years ended December 28, 1997, December 29, 1996 and December 31, 1995.
<TABLE>
<CAPTION>
December 28, 1997 December 29, 1996 December 31, 1995
-------------------------- -------------------------- --------------------------
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 735,932 $21.00 703,678 $20.40 570,770 $23.34
Granted 91,000 16.42 89,000 24.78 220,150 13.73
Exercised 13,247 18.03 33,332 19.00 - -
Forfeited 38,750 22.10 23,414 20.30 87,242 22.78
Expired - - - - - -
----------------------------------------------------------------------------------
Outstanding, end of
period 774,935 $20.46 735,932 $21.00 703,678 $20.40
======= ======= =======
Options exercisable
end of period 518,103 $21.18 368,361 $21.53 233,057 $22.27
======= ======= =======
Weighted average
fair value of options
granted during the
period $ 8.95 $ 14.05 $ 7.63
======= ======= =======
</TABLE>
Following is a summary of the status of options granted under the 1995, LTIC and
Director Plans at December 28, 1997:
<TABLE>
<CAPTION>
Outstanding Options Exercisable Options
----------------------------------------------------- ---------------------------
Weighted Average Weighted
Exercise Price Remaining Contractual Weighted Average Average
Range Number Life (Years) Exercise Price Number Exercise Price
- ---------------- ------ --------------------- ---------------- ------ --------------
<S> <C> <C> <C> <C> <C>
$12.69-$16.44 261,323 7.91 $14.55 95,904 $13.79
$17.13-$24.38 319,830 5.37 $20.25 306,247 $20.19
$24.88-$31.13 193,782 6.87 $28.76 115,952 $29.93
------- -------
$12.69-$31.13 774,935 6.61 $20.46 518,103 $21.18
========= =========
</TABLE>
The following summarizes transactions involving SARs granted to key management
during the years ended:
<TABLE>
<CAPTION>
December 28, 1997 December 29, 1996
------------------------------- ------------------------------
Number Weighted Number Weighted
of Average of Average
SARs Exercise Price SARs Exercise Price
---------- ---------------- --------- ----------------
<S> <C> <C> <C> <C>
Outstanding, beginning of period 121,330 $24.32 - -
Granted 122,330 $16.64 121,330 $24.32
Forfeited 8,000 $23.82 -
----- --------
Outstanding, end of period 235,660 $20.35 121,330 $24.32
Exercisable, end of period 28,585 $24.28 - -
</TABLE>
SARs, when granted, are granted at amounts that approximate market value at the
date of the grant. Awards, when made, 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 1997 and 1996 was $(34) and $220, respectively.
Redemption of the SARs, when exercised, will be in cash.
37
<PAGE>
DEFERRED COMPENSATION PLAN
The Company adopted the Paragon Trade Brands, Inc. Deferred Compensation Plan
("DCP") in April 1997. The DCP is an unfunded, non-qualified deferred
compensation plan under which eligible employees of the Company and members of
the Board of Directors may elect, on a voluntary basis, to defer compensation
until retirement or termination from the Company or the Board. Eligible
participants are selected for participation by a Committee (the "Plan
Committee") which consists of the Board or a committee appointed by the Board.
Eligible participants may elect to defer up to 50 percent of their annual base
salary, up to 100 percent of their annual bonus or, in case of the directors, up
to 100 percent of their director fees. A participant is fully vested in their
elective deferrals. If a participant is employed at the end of the calendar
year, the Company will credit the participant's account 50 percent of their
elective deferrals not to exceed 25 percent of the participants combined base
salary and annual bonus for the calendar year. Participants become fully vested
in the Company contribution after five years of service with the Company.
Participants, at the discretion of the Plan Committee, may request that their
account be invested in one or more Measurement Funds, which are chosen by the
Plan Committee and are based on one or more mutual funds. To the extent that the
request is approved by the Plan Committee, the funds credited to a participant's
account will be adjusted to reflect gain, loss, income and expense as though the
account had actually been invested in such Measurement Funds. In this regard,
the Company also adopted in April 1997 a so called "rabbi trust" known as the
Paragon Trade Brands, Inc. Deferred Compensation Plan Master Trust Agreement
(the "Trust Agreement") with Wachovia Bank, N.A. as Trustee which is intended to
serve as a funding vehicle for the DCP. However, as of December 28, 1997, the
Company had not transferred any funds to the Trustee under the Trust Agreement.
As of December 31, 1997, no further compensation deferrals will be permitted
under the DCP. The expense recorded for the DCP was $247 in the year ended
December 28, 1997.
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 28, 1997, December 29,
1996 and December 31, 1995 consisted of 110,527, 29,613 and 118,387 shares of
common stock, respectively. For the year ended December 28, 1997, the Company's
401(k) contributions consisted of cash and 28,915 shares of common stock. 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.
PENSION PLAN
The defined benefit retirement plan for hourly employees at the Company's
California plant was terminated effective June 30, 1995 (see Note 17). 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
year ended December 31, 1995 was $41.
38
<PAGE>
NOTE 7: RECEIVABLES
Receivables consist of the following:
<TABLE>
<CAPTION>
December 28, 1997 December 29, 1996
----------------- -----------------
<S> <C> <C>
Accounts receivable - trade $ 52,583 $ 51,634
Other receivables 24,568 12,891
----------------- -----------------
77,151 64,525
Less: Allowance for doubtful accounts (6,535) (7,637)
----------------- -----------------
Net receivables $ 70,616 $ 56,888
================= =================
</TABLE>
The increase in other receivables primarily represents the sale of equipment to
unconsolidated subsidiaries (Note 12) and an increase in refundable income
taxes.
NOTE 8: INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
December 28, 1997 December 29, 1996
----------------- -----------------
<S> <C> <C>
LIFO:
Raw materials - pulp $ 381 $ 407
Finished goods 25,770 21,090
FIFO:
Raw materials - other 8,561 9,131
Materials and supplies 20,942 21,230
----------------- -----------------
55,654 51,858
Reserve for excess and obsolete
items (7,397) (7,803)
----------------- -----------------
Net Inventories $ 48,257 $ 44,055
================= =================
</TABLE>
NOTE 9: PROPERTY AND EQUIPMENT
Property and equipment, at cost, are as follows:
<TABLE>
<CAPTION>
December 28, 1997 December 29, 1996
----------------- -----------------
<S> <C> <C>
Land $ 3,741 $ 3,757
Buildings and improvements 40,191 36,702
Machinery and equipment 226,951 229,289
----------------- -----------------
270,883 269,748
Less: Allowance for depreciation (152,500) (153,410)
----------------- -----------------
Net property and equipment $ 118,383 $ 116,338
================= =================
</TABLE>
NOTE 10: ACCRUED LIABILITIES
Accrued liabilities are as follows:
<TABLE>
<CAPTION>
December 28, 1997 December 29, 1996
----------------- -----------------
<S> <C> <C>
Payroll - wages and salaries, incentive
awards, retirement, vacation and
severance pay $ 10,375 $ 14,975
Coupons outstanding 3,824 6,230
Integration/relocation reserves 2,575 5,943
Income taxes payable - current 195 1,327
Other 15,423 10,020
----------------- -----------------
Total $ 32,392 $ 38,495
================= =================
</TABLE>
39
<PAGE>
NOTE 11: BANK CREDIT FACILITIES
At December 28, 1997, the Company maintained a $150,000 revolving credit
facility with a group of nine financial institutions available through February
2001. At December 28, 1997, borrowings under this credit facility totaled
$70,000. 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 28, 1997,
Paragon Trade Brands (Canada) Inc. maintained a Cdn $5,000 revolving term credit
facility, guaranteed by the Company, available through October 1998. At December
28, 1997, borrowings under this credit facility totaled $1,385. Borrowings under
this facility are reflected as short-term borrowings 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 28, 1997, the Company had
approximately $50,000 in uncommitted lines of credit. Borrowings under these
lines of credit totaled $12,800 at December 28, 1997. Borrowings under these
lines of credit are reflected as short-term borrowings in the accompanying
balance sheets.
For the fiscal years ended December 28, 1997, December 29, 1996 and December 31,
1995, interest expense, net of amounts capitalized, was $4,667, $2,864 and $952,
respectively. Capitalized interest for the fiscal years ended December 28, 1997,
December 29, 1996 and December 31, 1995, totaled $784, $1,064 and $218,
respectively. Interest expense includes interest on borrowings, credit facility
fees and amortization of deferred financing costs.
The Company has determined that, as of the balance sheet dates, 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.
The terms of the revolving credit facility, revolving term credit facility and
the short-term lines of credit provide that a voluntary filing of Chapter 11
results in an event of default on such indebtedness. As a result of its Chapter
11 filing, the Company is prohibited from paying any pre-petition liabilities
without Bankruptcy Court approval. Substantially all liabilities outstanding as
of the date of the Chapter 11 filing are subject to resolution under a plan of
reorganization to be voted on by the Company's creditors and shareholders and
confirmed by the Bankruptcy Court.
On January 30, 1998, the Bankruptcy Court entered a final order (the "Final
Order") approving the Credit Agreement (the "DIP Credit Facility") as provided
under the Revolving Credit and Guaranty Agreement dated as of January 7, 1998,
among the Company, as borrower, the subsidiaries of the Company as guarantors,
and The Chase Manhattan Bank, as agent ("Chase"). Pursuant to the terms of the
DIP Credit Facility, Chase has made available to the Company a revolving credit
and letter of credit facility in an aggregate principal amount of $75,000. The
Company's maximum borrowing under the DIP Credit Facility may not exceed the
lesser of $75,000 or an available amount as determined by a borrowing base
formulation. The borrowing base formulation is comprised of certain specified
percentages of eligible accounts receivable, eligible inventory, equipment and
personal and real property of the Company. The DIP Credit Facility has a
sublimit of $10,000 for the issuance of letters of credit. The DIP Credit
Facility expires on the earlier of July 7, 1999, or the date of entry of an
order by the Bankruptcy Court confirming a plan of reorganization
Obligations under the DIP Credit Facility are secured by the security interest,
pledge and lien on substantially all of the Company's assets and properties and
the proceeds thereof, granted pursuant to the Final Order under Sections
364(c)(2) and 364(c)(3) of the Bankruptcy Code. Borrowings under the DIP Credit
Facility may be used to fund working capital and for other general corporate
purposes. The DIP Credit Facility contains restrictive covenants, including
among other things, limitations on the creation of additional liens and
indebtedness, limitations on capital expenditures, limitations on transactions
with affiliates including investments, loans and advances, the sale of assets,
and the maintenance of minimum earnings before interest, taxes, depreciation,
amortization and reorganization items, as well as a prohibition on the payment
of dividends.
The DIP Credit Facility provides that advances made will bear interest at a rate
of 0.5 percent per annum in excess of Chase's Alternative Base Rate, or at the
Company's option, a rate of 1.5 percent per annum in excess
40
<PAGE>
of the reserve adjusted London Interbank Offered Rate for the interest periods
of one, two or three months. The Company pays a commitment fee of 0.5 percent
per annum on the unused portion thereof, a letter of credit fee equal to 1.5
percent per annum of average outstanding letters of credit and certain other
fees.
NOTE 12: RELATED PARTY TRANSACTIONS
The Company has entered into various agreements with its subsidiaries and
affiliates to sell certain diaper making equipment and purchase a portion of its
diaper needs. Prices for the various transactions are established through
negotiations between the related parties. The following is a summary of
significant transactions and balances with its subsidiaries and affiliates for
the years ended December 28, 1997 and December 29, 1996:
PMI
Pursuant 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.
<TABLE>
<CAPTION>
December 28, 1997 December 29, 1996 December 31, 1995
----------------- ----------------- -----------------
<S> <C> <C> <C>
Sale of equipment $ 194 $ 14,650 $ 2,828
Purchase of diapers from PMI $ 40,823 $ 11,860 $ -
Due from PMI $ 39,725 $ 27,857 $ 3,481
Due to PMI $ 5,313 $ - $ -
</TABLE>
The amounts due from PMI are primarily for equipment purchased, the financing of
the building construction and working capital funding. They are evidenced by an
interest-bearing promissory note and corresponding Purchase Loan and Security
Agreements. The amounts due under these agreements are carried as investments in
and advances to unconsolidated subsidiaries, at equity on the balance sheet.
Amounts due to PMI are carried as accounts payable on the balance sheet. Loans
due from PMI are evidenced by interest-bearing promissory notes. The notes bore
an interest rate of 10 percent until December 1, 1997. The notes currently bear
an interest rate of approximately 7 percent. The Company believes that this rate
represents the fair market rate for comparable loans of similar terms.
MABESA
The Company has purchased certain diaper product needs from Mabesa and also sold
excess diaper making equipment to Mabesa.
<TABLE>
<CAPTION>
December 28, 1997 December 29, 1996
----------------- -----------------
<S> <C> <C>
Sale of equipment $4,843 $ -
Purchase of diapers from Mabesa $2,196 $ -
Due from Mabesa $3,623 $ -
Due to Mabesa $ 119 $ -
</TABLE>
The amounts due from Mabesa for equipment purchased are classified as
receivables on the balance sheets. The amounts due to Mabesa are classified as
accounts payable on the balance sheets. Depending on the expected payment terms
under the purchase agreements, certain amounts due bear an interest rate of
approximately 7 percent. The Company believes that this rate represents the fair
market rate for comparable sales with similar terms.
41
<PAGE>
MPC
The Company has sold certain diaper making equipment to MPC.
December 28, 1997
-----------------
Sale of equipment and technology transfer $2,400
Due from MPC $2,000
The amounts due from MPC for equipment purchased are classified as receivables
on the balance sheets. The loan to MPC bears an interest rate of LIBOR plus 4
percent. The Company believes that this rate represents the fair market rate for
comparable sales with similar terms.
At December 28, 1997, the Company had deferred gains on the sales of equipment
of $4,583. These gains will be amortized to income over the depreciable life of
the equipment.
NOTE 13: LEGAL PROCEEDINGS
THE PROCTER & GAMBLE COMPANY V. PARAGON TRADE BRANDS, INC. - P&G filed a claim
in January 1994 in the District Court for the District of Delaware that the
Company's "Ultra" disposable baby diaper products infringe two of P&G's
inner-leg gather patents. The lawsuit sought injunctive relief, lost profit and
royalty damages, treble damages and attorneys' fees and costs. The Company
denied liability under the patents and 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 trial was completed in February 1997, the parties submitted
post-trial briefs and closing arguments were conducted on October 22, 1997.
Legal fees and costs for this litigation have been and will continue to be
significant.
In December 1997, the Delaware District Court issued a Judgment and Opinion
finding that P&G's patents are valid and infringed, while at the same time
finding the Company's patent to be invalid, unenforceable and not infringed by
P&G's products. Judgment was entered on January 6, 1998. While a final damages
number has not been entered by the District Court, the Company estimates the
liability and associated litigation costs to be approximately $200 million. The
Judgment has had a material adverse effect on the Company's financial position
and its results of operations. The Company has filed with the District Court a
motion for a new trial or to alter or amend the Judgment. The Company has also
filed its Notice of Appeal with the Federal Circuit Court of Appeals. The
Company intends to vigorously pursue its motion in the District Court, as well
as the appeal of the District Court's decision.
As a result of the District Court's Judgment, the Company filed for relief under
Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy
Court for the Northern District of Georgia on January 6, 1998.
As a result of the Company's Chapter 11 filing, further proceedings in the P&G
litigation were stayed. By orders entered on January 15, 1998 and February 4,
1998, respectively, the Bankruptcy Court lifted the stay to permit the Company
to pursue its motion for a new trial or to alter or amend the judgment in the
District Court and to pursue its appeal. P&G has filed a motion in the
Bankruptcy Court seeking to have the automatic stay lifted in order to allow P&G
to seek injunctive relief and an accounting for damages. The Company opposed
P&G's motion.
It is possible that the Company may be subject to similar patent claims on its
diaper products sold in other countries. The Company is unable to determine the
amount of any such claims at this time.
KIMBERLY-CLARK CORPORATION V. PARAGON TRADE BRANDS, INC. -- On October 26, 1995,
K-C filed a lawsuit against the Company in U.S. District Court in Dallas, Texas,
alleging infringement by the Company's products of two K-C patents relating to
inner-leg gathers. The lawsuit seeks injunctive 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. On April 18,
1997, K-C filed a motion for summary judgment of
42
<PAGE>
noninfringement of two patents asserted by the Company and a motion for partial
summary judgment construing the claims of one of the K-C patents-in-suit. On
November 22, 1996, the Company filed a motion to amend its antitrust
counterclaim and on June 13, 1997 filed a motion for summary judgment on one of
the patents asserted by K-C. In addition, K-C has sued the Company on another
patent issued to K-C which is based upon further continuation of one of the K-C
patents asserted in the case. That action has been consolidated with the pending
action. The Court has appointed a special master to rule on the various pending
motions. Legal fees and costs in connection with this litigation have been and
will be significant.
As a result of the Company's Chapter 11 filing, the proceedings in the K-C
litigation have been stayed. K-C has filed a motion in the Bankruptcy Court
seeking to have the automatic stay lifted in order to permit the proceedings in
Dallas to continue. The Company opposed K-C's motion at a hearing held on
February 11, 1998. The Bankruptcy Court has continued the hearing on K-C's
motion until March 30, 1998.
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 Company's products do not
infringe any valid patent asserted by K-C.
OTHER -- 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 Chapter 11 filing and the P&G and K-C matters discussed above,
will not have a material adverse effect on its financial condition or results of
operations.
NOTE 14: COMMITMENTS
Paragon has operating lease agreements for certain facilities that expire during
the four years 1998 through 2001. Future minimum lease payments required under
these noncancelable operating leases are: $265 in 1998, $184 in 1999, $63 in
2000 and $19 in 2001. Rental expense for facilities and equipment was $3,015,
$2,967 and $2,013 for the years ended December 28, 1997, December 29, 1996 and
December 31, 1995, respectively.
Commitments for capital expenditures as of December 28, 1997 are $6,105. Other
Company commitments include purchase commitments for raw materials at prevailing
market rates. In early 1996, the Company entered into an agreement with Clariant
International Ltd. (successor of Hoechst Celanese Corporation) whereby it
agreed, subject to certain limitations, to purchase 100 percent of its
requirements of SAP through December 31, 1998. Fluff pulp, a product made from
wood fibers, is another primary raw material. The Company extended the fluff
pulp supply contract with Weyerhaeuser whereby it agreed to purchase 100 percent
of its requirements of bleached chemical fluff pulp through August 31, 1998, at
prices as favorable as those Weyerhaeuser charges other North American
disposable diaper manufacturers for similar grade pulp. The Company believes
that alternative sources for each of these raw materials are readily available.
As a result of the Chapter 11 filing, the Company is prohibited from paying any
pre-petition liabilities. Pursuant to the Bankruptcy Code, the Company can seek
Bankruptcy Court approval for the rejection of executory contracts or unexpired
leases, including real property leases. Any such rejection may give rise to a
pre-petition unsecured claim for damages arising therefrom.
43
<PAGE>
NOTE 15: NET EARNINGS PER COMMON SHARE
Following is a reconciliation of the numerators and denominators of the basic
and diluted earnings (loss) per common share:
<TABLE>
<CAPTION>
Year Ended
--------------------------------------------------------
December 28, 1997 December 29, 1996 December 31, 1995
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net earnings (loss) $(212,717) $ 21,122 $ (3,437)
========== ========= ===========
Weighted average number of common
shares used in basic EPS (000's) 11,913 12,022 11,725
Effect of dilutive securities:
Stock options (000's) - 139 -
----------------- ----------------- -----------------
Weighted number of common shares
and dilutive potential common stock
in diluted EPS (000's) 11,913 12,161 11,725
========= ========= ===========
Basic earnings (loss) per common share $ (17.86) $ 1.76 $ (.29)
========= ========= ===========
Diluted earnings (loss) per common share $ (17.86) $ 1.74 $ (.29)
========= ========= ===========
</TABLE>
Options to purchase 313,612, 223,987 and 517,028 shares of common stock
outstanding during the years ended December 28, 1997, December 29, 1996 and
December 31, 1995, respectively, were not included in the calculation because
the options' exercise price was greater than the average market price of the
common shares.
Diluted and basic earnings per share are the same for the years ended December
28, 1997 and December 31, 1995 because the computation of diluted earnings per
share was anti-dilutive.
NOTE 16: QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
FISCAL YEAR ENDED DECEMBER 28, 1997
<TABLE>
<CAPTION>
First Second Third Fourth
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Net sales $ 135,685 $ 135,819 $ 154,066 $136,405
Gross profit 27,838 23,929 28,601 26,696
Net earnings (loss) 3,802 2,652 5,761 (224,932)
Basic earnings (loss) per share of
common stock $ .32 $ .22 $ .48 $ (18.82)
Diluted earnings (loss) per share of
common stock $ .32 $ .22 $ .48 $ (18.82)
Price Range of the Company's common stock:
High $ 30.00 $ 18.00 $ 19.13 $ 23.50
Low $ 14.88 $ 15.25 $ 15.38 $ 17.50
</TABLE>
44
<PAGE>
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 (loss) (600) 5,368 10,486 5,868
Basic earnings (loss) per share of
common stock $ (.05) $ .44 $ .87 $ .49
Diluted earnings (loss) per share of
common stock $ (.05) $ .44 $ .86 $ .48
Price Range of the Company's common stock:
High $ 26.50 $ 25.13 $ 24.00 $ 29.25
Low $ 19.88 $ 20.00 $ 18.38 $ 23.25
</TABLE>
NOTE 17: 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. 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 from the sale of assets. At
December 29, 1996, the restructuring plan was complete.
NOTE 18: SUBSEQUENT EVENT
On December 31, 1997 the Company completed the acquisition of its share of
Goodbaby Paragon Hygenic Products Ltd., a joint venture in China. The joint
venture partners are Goodbaby Group and First Shanghai Investment of Hong Kong.
Paragon maintains a 40 percent ownership position in the venture with Goodbaby
Group and First Shanghai Investment at 30 percent each. Initial registered
capital of the venture was approved at $15 million, to be funded over a two year
period. For the year ended December 28, 1997 the Company had a receivable of
$2,400 recorded for the sale of equipment to the joint venture. The receivable
was paid in January 1998.
45
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
FOR THE THREE YEARS IN THE PERIOD ENDED DECEMBER 28, 1997
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
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
1997............................ $ 7,637 $ (587) $ (515) $ 6,535
============ =========== ============ ============
1996............................ $ 5,866 $ 2,965 $ (1,194) $ 7,637
============ =========== ============ ============
1995............................ $ 5,885 $ 958 $ (977) $ 5,866
============ =========== ============ ============
Excess and obsolete items - inventories
1997............................ $ 7,803 $ 6,140 $ (6,546) $ 7,397
============ =========== ============ ============
1996............................ $ 5,051 $ 6,841 $ (4,089) $ 7,803
============ =========== ============ ============
1995............................ $ 5,830 $ 6,223 $ (7,002) $ 5,051
============ =========== ============ ============
</TABLE>
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 11, 1998 is incorporated by
reference into this report. The information under the caption "Section 16(a)
Beneficial Ownership Reporting Compliance" with respect to the Company's
directors and executive officers in the Proxy Statement relating to the Annual
Meeting of Stockholders to be held May 11, 1998 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 11,
1998, and the information under the caption "Executive Compensation" in such
Proxy Statement relating to executive officers' compensation is incorporated by
reference into this report.
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 11, 1998 is incorporated by reference
into this report.
46
<PAGE>
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 28,1997 and December 29,
1996
Consolidated Earnings (Loss) Statements for the three years in the
period ended December 28, 1997
Consolidated Statements of Changes in Shareholders' Equity for the
three years in the period ended December 28, 1997
Consolidated Statements of Cash Flows for the three years in the period
ended December 28, 1997
Notes to Financial Statements
Schedule II: Valuation and Qualifying Accounts
(b) The registrant filed no Reports on Form 8-K during the fiscal quarter
ended December 28, 1997.
<TABLE>
<CAPTION>
(c) EXHIBITS
<S> <C>
Exhibit 3.1 Certificate of Incorporation of Paragon Trade Brands, Inc. 4
Exhibit 3.2 By-Laws of Paragon Trade Brands, Inc., as amended through July 31, 1995 5
Exhibit 4.1 Certificate of Incorporation of Paragon Trade Brands, Inc. (see Exhibit
3.1)
Exhibit 10.1 Asset Transfer Agreement, dated as of January 26, 1993, by and between
Weyerhaeuser and Paragon 1
Exhibit 10.2 Intellectual Property Agreement, dated as of February 2, 1993, between
Weyerhaeuser and Paragon 1
Exhibit 10.3 License, dated as of February 2, 1993, between Weyerhaeuser and Paragon 1
Exhibit 10.4 Sublicense, dated as of February 2, 1993, between Weyerhaeuser and Paragon 1
Exhibit 10.5 Technology Agreement, dated as of October 15, 1987, by and between
Weyerhaeuser and Johnson and Johnson, as amended 1
Exhibit 10.6 Critical Supply Agreement, dated as of February 2, 1993, between
Weyerhaeuser and Paragon 1
Exhibit 10.6.1 Letter Supply Agreement between Weyerhaeuser and Paragon dated as of
October 22, 1997
47
<PAGE>
Exhibit 10.7* Stock Option Plan for Non-Employee Directors 1
Exhibit 10.8* Annual Incentive Compensation Plan 1
Exhibit 10.9* 1993 Long-Term Incentive Compensation Plan 1
Exhibit 10.10* Amended and Restated Employment Agreement, dated as of August 5, 1997,
between Paragon and Bobby V. Abraham 9
Exhibit 10.11* Amended and Restated Employment Agreement, dated as of August 5, 1997,
between Paragon and David W. Cole 9
Exhibit 10.12* Employment Agreement, dated as of August 5, 1997, between Paragon and Alan
J. Cyron 9
Exhibit 10.13* Employment Agreement, dated as of August 5, 1997, between Paragon and
Catherine O. Hasbrouck 9
Exhibit 10.14* Employment Agreement, dated as of August 5, 1997, between Paragon and
Stanley L. Bulger 9
Exhibit 10.15* 1995 Incentive Compensation Plan 5
Exhibit 10.16 Amended and Restated Credit Agreement, dated as of February 6, 1996 7
Exhibit 10.16.1 Amendment Agreement, dated December 13, 1996, to Amended and Restated Credit Agreement, dated as of
February 6, 1996 8
Exhibit 10.17 Revolving Canadian Credit Facility and Parent Guarantee 2
Exhibit 10.18 Indemnification Agreements, dated as of February 2, 1993, between
Weyerhaeuser and Bobby V. Abraham and Gary M. Arnts 1
Exhibit 10.19 Rights Agreement dated December 14, 1994 between Paragon Trade Brands,
Inc. and Chemical Bank, as Rights Agent 3
Exhibit 10.20 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
Exhibit 10.21** Sales Contract, dated as of January 30, 1996, between Hoechst Celanese
Corporation and Paragon Trade Brands, Inc. 7
Exhibit 10.22 Lease Agreement between Cherokee County, South Carolina and Paragon Trade
Brands, Inc., dated as of October 1, 1996 8
Exhibit 11 Computation of Per Share Earnings (See Note 15 to Financial Statements)
Exhibit 21.1 Subsidiaries of the Company
Exhibit 23.1 Consent of Independent Public Accountants
Exhibit 27 Financial Data Schedule (for SEC use only)
<FN>
*Management contract or compensatory plan or arrangement.
48
<PAGE>
**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.
8 Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report
on Form 10-K for the fiscal year ended December 29, 1996.
9 Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly Report
on Form 10-Q for the quarter ended September 28, 1997.
</FN>
</TABLE>
49
<PAGE>
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 27th day of March,
1998.
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 27th day of March, 1998.
/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
50
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
------- -----------
<S> <C>
Exhibit 3.1 Certificate of Incorporation of Paragon Trade Brands, Inc. 4
Exhibit 3.2 By-Laws of Paragon Trade Brands, Inc., as amended through July 31, 1995 5
Exhibit 4.1 Certificate of Incorporation of Paragon Trade Brands, Inc. (see Exhibit
3.1)
Exhibit 10.1 Asset Transfer Agreement, dated as of January 26, 1993, by and between
Weyerhaeuser and Paragon 1
Exhibit 10.2 Intellectual Property Agreement, dated as of February 2, 1993, between
Weyerhaeuser and Paragon 1
Exhibit 10.3 License, dated as of February 2, 1993, between Weyerhaeuser and Paragon 1
Exhibit 10.4 Sublicense, dated as of February 2, 1993, between Weyerhaeuser and Paragon 1
Exhibit 10.5 Technology Agreement, dated as of October 15, 1987, by and between
Weyerhaeuser and Johnson and Johnson, as amended 1
Exhibit 10.6 Critical Supply Agreement, dated as of February 2, 1993, between
Weyerhaeuser and Paragon 1
Exhibit 10.6.1 Letter Supply Agreement between Weyerhaeuser and Paragon dated as of
October 22, 1997
Exhibit 10.7* Stock Option Plan for Non-Employee Directors 1
Exhibit 10.8* Annual Incentive Compensation Plan 1
Exhibit 10.9* 1993 Long-Term Incentive Compensation Plan 1
Exhibit 10.10* Amended and Restated Employment Agreement, dated as of August 5, 1997,
between Paragon and Bobby V. Abraham 9
Exhibit 10.11* Amended and Restated Employment Agreement, dated as of August 5, 1997,
between Paragon and David W. Cole 9
Exhibit 10.12* Employment Agreement, dated as of August 5, 1997, between Paragon and Alan
J. Cyron 9
Exhibit 10.13* Employment Agreement, dated as of August 5, 1997, between Paragon and
Catherine O. Hasbrouck 9
Exhibit 10.14* Employment Agreement, dated as of August 5, 1997, between Paragon and
Stanley L. Bulger 9
Exhibit 10.15* 1995 Incentive Compensation Plan 5
Exhibit 10.16 Amended and Restated Credit Agreement, dated as of February 6, 1996 7
Exhibit 10.16.1 Amendment Agreement, dated December 13, 1996, to Amended and Restated Credit Agreement, dated as of
February 6, 1996 8
51
<PAGE>
Exhibit 10.17 Revolving Canadian Credit Facility and Parent Guarantee 2
Exhibit 10.18 Indemnification Agreements, dated as of February 2, 1993, between
Weyerhaeuser and Bobby V. Abraham and Gary M. Arnts 1
Exhibit 10.19 Rights Agreement dated December 14, 1994 between Paragon Trade Brands,
Inc. and Chemical Bank, as Rights Agent 3
Exhibit 10.20 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
Exhibit 10.21** Sales Contract, dated as of January 30, 1996, between Hoechst Celanese
Corporation and Paragon Trade Brands, Inc. 7
Exhibit 10.22 Lease Agreement between Cherokee County, South Carolina and Paragon Trade
Brands, Inc., dated as of October 1, 1996 8
Exhibit 11 Computation of Per Share Earnings (See Note 15 to Financial Statements)
Exhibit 21.1 Subsidiaries of the Company
Exhibit 23.1 Consent of Independent Public Accountants
Exhibit 27 Financial Data Schedule (for SEC use only)
<FN>
*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.
8 Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report
on Form 10-K for the fiscal year ended December 29, 1996.
9 Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly Report
on Form 10-Q for the quarter ended September 28, 1997.
</FN>
</TABLE>
52
Weyerhaeuser Corporate Headquarters
Tacoma WA 98477
Tel (206) 924-2345
September 1, 1997
Mr. A.D. Jezzi
Paragon Trade Brands
180 Technology Parkway
Norcross, GA 30092
Dear Rick:
We would like to take this opportunity to formalize our relationship
with Paragon Trade Brands (PTB) regarding the sale of Weyerhaeuser fluff
pulp.
For the period starting September 1, 1997, and ending August 31, 1998,
Weyerhaeuser agrees to supply and PTB agrees to purchase PTB's full
annual fluff pulp requirements for PTB's North American (Canada, Mexico,
and USA) facilities. Annual requirements will be advised no later than
90 days before the beginning of the calendar year. Both parties agree to
work together to ensure the proper communication necessary to maintain
continuity of shipment and inventories.
In return for purchasing PTB's full annual requirements from
Weyerhaeuser, the price of fluff pulp will be Weyerhaeuser's 'most
favored nations' price (See Attachment I). Any technology changes will
provide the grounds for renegotiation of this agreement (See Attachment
II).
The 'terms and conditions of sale' displayed on the backside of
Weyerhaeuser's Order Acknowledgment govern the relationship between the
Seller and Buyer. This commitment may not be assigned without written
authorization from the Seller.
Assuming this letter fairly represents our understanding, please sign
the two originals and return to Weyerhaeuser.
Sincerely,
S.A. Halligan
General Sales Manager - Fluff
/S/ A.D. JEZZI 10-22-97
------------------------
A.D. Jezzi
Paragon Trade Brands
<PAGE>
ATTACHMENT I
The intent of the 'most favored nations' clause is to make available, at
Paragon Trade Brands' (PTB) choice, Weyerhaeuser's most favorable
pricing alternative for similar grades and volumes of fluff pulp as
offered to other Buyers.
In the spirit of this agreement, Weyerhaeuser and PTB have discussed the
following alternatives - market referenced pricing, firm dollar pricing,
and formula-based pricing. PTB has elected to implement formula-based
pricing.
Formula-based pricing will not track perfectly with other pricing
alternatives and may at any point in the pricing cycle be above or below
other pricing alternatives.
PTB has concluded the value of formula-based pricing outweighs
alternative pricing mechanisms and that pricing to PTB will be
determined exclusively per the agreed upon formula. It is understood
that the percent rebate value will be negotiated based on the existing
market conditions.
<PAGE>
ATTACHMENT II
TECHNOLOGY CHANGES:
If at any time during the term of this Agreement, Buyer notifies Seller
in writing of its intention to convert its manufacturing processes to a
technology which is not compatible with the current form of Seller's
Product, Seller shall have ninety (90) days in which to provide a
compatible product to Buyer. If the parties agree that a compatible
product cannot be developed within a reasonable period of time, Buyer
shall have the right to reduce the quantities of Product that it is
obligated to purchase under this agreement by the quantities of
alternative product that Buyer is able to purchase from other sources
with appropriate communication of timetable.
PARAGON TRADE BRANDS, INC.
SUBSIDIARIES OF THE COMPANY
SUBSIDIARY JURISDICTION OF INCORPORATION
---------- -----------------------------
Paragon Trade Brands (Canada) Inc. Canada
Paragon Trade Brands FSC, Inc. U.S. Virgin Islands
Changing Paradigms, Inc. State of Ohio
PTB International, Inc. State of Delaware
Paragon-Mabesa International, S.A. de C.V. (49%) Mexico
PTB Acquisition Sub, Inc. State of Delaware
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our report included in this Form 10-K into Paragon
Trade Brands, Inc.'s previously filed Registration Statements on Form
S-8, File Nos. 33-73726, 33-61802, 33-95344 and 33-34626.
/S/ ARTHUR ANDERSEN LLP
Arthur Andersen LLP
Atlanta, Georgia
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM FORM 10K FOR THE YEAR ENDED DECEMBER 28, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-START> DEC-30-1996
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-END> DEC-28-1997
<CASH> 991
<SECURITIES> 0
<RECEIVABLES> 77,161
<ALLOWANCES> 6,535
<INVENTORY> 48,257
<CURRENT-ASSETS> 122,361
<PP&E> 270,883
<DEPRECIATION> 152,500
<TOTAL-ASSETS> 376,142
<CURRENT-LIABILITIES> 296,257
<BONDS> 70,000
0
0
<COMMON> 123
<OTHER-SE> 4,831
<TOTAL-LIABILITY-AND-EQUITY> 376,142
<SALES> 561,975
<TOTAL-REVENUES> 561,975
<CGS> 451,911
<TOTAL-COSTS> 451,911
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,667
<INCOME-PRETAX> (184,783)
<INCOME-TAX> 27,934
<INCOME-CONTINUING> (212,717)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (212,717)
<EPS-PRIMARY> (17.86)
<EPS-DILUTED> (17.86)
</TABLE>
