SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the thirteen week period ended June 28, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ______________________ to _____________________
Commission File No. 1-11368
PARAGON TRADE BRANDS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 91-1554663
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
180 Technology Parkway
NORCROSS, GEORGIA 30092
(Address of principal executive offices)
(678) 969-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
The number of shares outstanding of the registrant's common stock was 11,930,430
shares ($.01 par value) as of June 28, 1998.
Page 1
Exhibit Index on Page 29
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q FILING
FOR THE THIRTEEN WEEK PERIOD ENDED JUNE 28, 1998
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Notes to Financial Statements 6-13
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14-22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23-25
Item 2. Changes in Securities (not applicable)
Item 3 Defaults in Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information (not applicable)
Item 6. Exhibits and Reports on Form 8-K 25-27
Signature Page 28
Exhibit Index 29-31
Exhibits 32
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER
SHARE DATA) (NOTE 2)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
-------------------- ----------------------
JUNE 28, 1998 JUNE 29, 1997 JUNE 28, 1998 JUNE 29, 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Sales, net of discounts and $ 126,991 $ 135,819 $ 265,288 $ 271,504
allowances..................
Cost of sales....................... 102,344 111,890 213,143 219,737
---------- ---------- ---------- ----------
Gross profit........................ 24,647 23,929 52,145 51,767
Selling, general and administrative
expense..................... 19,900 17,941 38,952 38,382
Research and development expense.... 1,129 982 2,531 1,906
---------- ---------- ---------- ----------
Operating profit.................... 3,618 5,006 10,662 11,479
Equity in earnings of
unconsolidated subsidiaries. 594 - 1,518 59
Interest expense(1)................. - 1,210 290 2,091
Other income........................ 619 480 1,043 926
---------- ---------- ---------- ----------
Earnings before income taxes and
bankruptcy costs............ 4,831 4,276 12,933 10,373
Bankruptcy costs.................... 1,160 - 2,806 -
Provision for income taxes.......... 302 1,624 752 3,919
---------- ---------- ---------- ----------
Net earnings........................ $ 3,369 $ 2,652 $ 9,375 $ 6,454
========= ========== ========== ==========
Basic earnings per common share..... $ .28 $ .22 $ .79 $ .54
========= ========== ========== ==========
Diluted earnings per common share... $ .28 $ .22 $ .79 $ .54
========= ========== ========== ==========
Dividends paid...................... $ - $ - $ - $ -
========= ========== ========== ==========
(1)Contractual Interest $ 1,349 $ 2,899
========= ===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
3
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
(NOTE 2)
<TABLE>
<CAPTION>
JUNE 28, 1998 DECEMBER 28, 1997
------------- -----------------
<S> <C> <C>
ASSETS
Cash and short-term investments.............. $ 49,598 $ 991
Receivables.................................. 65,374 70,616
Inventories.................................. 42,356 48,257
Current portion of deferred income taxes..... 2,543 1,800
Prepaid expenses............................. 4,034 697
----------------- -----------------
Total current assets................. 163,905 122,361
Property and equipment....................... 105,121 118,383
Construction in progress..................... 13,215 11,154
Assets held for sale......................... 14,314 11,073
Investment in unconsolidated subsidiary, at 22,743 19,964
cost.................................
Investment in and advances to unconsolidated
subsidiaries, at equity.............. 58,537 53,844
Goodwill..................................... 33,779 34,739
Other assets................................. 10,638 4,624
----------------- -----------------
Total assets......................... $ 422,252 $ 376,142
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities not subject to compromise:
Short-term borrowings................ $ - $ 14,185
Checks issued but not cleared........ 8,116 9,375
Accounts payable..................... 30,619 40,305
Accrued liabilities.................. 38,818 32,392
Accrued loss contingency............. - 200,000
----------------- -----------------
Total current liabilities............ 77,553 296,257
Liabilities subject to compromise (Note 8)... 326,979 -
Long-term debt............................... - 70,000
Deferred income taxes........................ 4,341 3,656
Deferred compensation........................ - 1,275
----------------- -----------------
Total liabilities.................... 408,873 371,188
Commitments and contingencies (Notes 1 and 10)
Shareholders' equity:
Preferred stock: Authorized 10,000,000
shares, no shares issued,
$.01 par value....................... - -
Common stock: Authorized 25,000,000 shares,
issued 12,359,507 and 12,343,324
shares, $.01 par value............... 124 123
Capital surplus.............................. 143,865 144,368
Foreign currency translation adjustment...... (1,328) (1,066)
Retained deficit............................. (119,002) (128,376)
Less: Treasury stock, 429,077 and 388,658
shares, at cost...................... (10,280) (10,095)
----------------- -----------------
Total shareholders' equity........... 13,379 4,954
----------------- -----------------
Total liabilities and shareholders'
equity $ 422,252 $ 376,142
================= =================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
4
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
(NOTE 2)
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS ENDED
----------------------
JUNE 28, 1998 JUNE 29, 1997
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings................................. $ 9,375 $ 6,454
Non-cash charges (benefits) to earnings:
Depreciation and amortization........ 16,877 16,971
Deferred income taxes................ (58) 3,373
Equity in (earnings) loss of (870) 641
subsidiaries..................
Changes in operating assets and liabilities:
Accounts receivable.................. 1,851 11,507
Inventories and prepaid expenses..... 2,564 (2,643)
Accounts payable..................... 30,375 5,093
Checks issued but not cleared........ (1,259) (1,245)
Accrued liabilities.................. 9,969 (7,567)
Other ....................................... (2,342) (1,001)
----------------- -----------------
Net cash provided by operating
activities.................... 66,482 31,583
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property and equipment...... (8,425) (29,650)
Proceeds from sale of property and equipment. 3,413 875
Investment in Grupo P.I. Mabe, S. A. de C.V.. (2,779) -
Investment in and advances to unconsolidated
subsidiaries, at equity.............. (2,762) (10,149)
Other ....................................... (4,534) (5,485)
----------------- -----------------
Net cash used by investing activities (15,087) (44,409)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in short-term (921) 6,500
borrowings...........................
Pre-petition debt payment authorized by court (1,867) -
Proceeds from U.S. bank credit facility...... - 15,000
Repayments of U.S. bank credit facility...... - (12,000)
Sale of common stock......................... - 211
----------------- -----------------
Net cash provided (used) by financing
Activities...................... (2,788) 9,711
----------------- -----------------
NET INCREASE (DECREASE) IN CASH.............. 48,607 (3,115)
Cash at beginning of period.................. 991 8,297
----------------- -----------------
Cash at end of period........................ $ 49,598 $ 5,182
================= =================
Cash paid (refunded) during the period for:
Interest, net of amounts capitalized. $ 1,330 $ 1,735
================= =================
Income taxes......................... $ 1,309 $ (2,528)
================= =================
Bankruptcy costs..................... $ 83 $ -
================= =================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
5
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS FOR THE
THIRTEEN WEEK AND TWENTY-SIX PERIODS ENDED JUNE 28, 1998
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT SHARE AND 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. See "Notes 10 and 11 of the Notes to Financial Statements" and
"PART II: OTHER INFORMATION, ITEM 1: LEGAL PROCEEDINGS."
The Company has previously disclosed that 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 "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 previously disclosed that if P&G were to prevail on its
claims, award of all or a substantial amount of the relief requested 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 finding
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 claim 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. Damages of approximately $178.4 million were entered against
Paragon by the District Court on May 28, 1998. At the same time, the District
Court entered injunctive relief agreed upon by P&G and the Company.
The Company had previously filed with the District Court a motion for a new
trial or to alter or amend the Judgment. The District Court denied Paragon's
motion on July 31, 1998. The District Court also denied a motion by P&G seeking
to recover attorneys' fees it expended in defending itself against Paragon's
patent infringement counterclaim. The Company has filed its amended notice of
appeal with the Federal Circuit Court of Appeals and intends to vigorously
pursue its appeal of the Court's decision.
The amount of the Delaware Judgment 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 (i)
prevent P&G from placing liens on Company property; (ii) permit the Company to
appeal the Delaware District Court's decision in the P&G case in an orderly
fashion; and (iii) 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 unaudited, and in some cases estimated, assets and
liabilities of the Company as of the date of the Chapter 11 filing, as shown by
the Company's accounting records. The bar date for the filing of proofs of claim
(apparently excluding administrative claims) by creditors was June 5, 1998. P&G
filed alleged claims ranging from approximately $2.3 billion (without trebling)
to $6.4 billion (with trebling), which included a claim of $178.4 million for
the Delaware judgment. The Company intends to vigorously pursue its appeal of
the Delaware judgment. The remaining claims include claims for alleged patent
infringement by the Company in foreign countries where it has operations. The
Company has reviewed such additional claims and believes them to be without
merit.
6
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
Kimberly-Clark Corporation ("K-C") filed alleged claims ranging from
approximately $893 million (without trebling) to $2.3 billion (with trebling),
including claims related to the litigation in the Dallas District Court
described herein. See "Note 10 of the Notes to Financial Statements" and "PART
II: OTHER INFORMATION, ITEM I: LEGAL PROCEEDINGS." K-C's claims in the
Bankruptcy case include an attempt to recover alleged lost profits for
infringement of the patents asserted in the Dallas District Court, despite the
fact that a lost profits theory of damages was not pursued by K-C in the Dallas
District Court. The Company continues to believe that it does not infringe any
valid claim of the asserted K-C patents. The Company further believes that K-C's
attempt to inflate its bankruptcy claims well beyond its claims in the Dallas
District Court are improper. See "Note 10 of the Notes to Financial Statements."
The Chapter 11 filing did not include the Company's wholly owned subsidiaries
including Paragon Trade Brands (Canada) Inc., Paragon Trade Brands
International, Inc., Paragon Trade Brands FSC, Inc. and Changing Paradigms, Inc.
The following information summarizes the combined results of operations for the
thirteen and twenty-six weeks ended June 28, 1998 and June 29, 1997, as well as
the combined balance sheets as of June 28, 1998 and December 28, 1997 for these
subsidiaries. This information has been prepared on the same basis as the
consolidated financial statements.
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
-------------------- ----------------------
JUNE 28, 1998 JUNE 29, 1997 JUNE 28, 1998 JUNE 29, 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Sales, net of discounts and $ 13,101 $ 14,798 $ 27,903 $ 26,825
allowances...................
Gross profit......................... 2,042 2,505 4,473 4,524
Earnings before income taxes......... 1,166 915 3,314 1,587
Net earnings......................... 903 615 2,567 1,107
</TABLE>
<TABLE>
<CAPTION>
JUNE 28, 1998 DECEMBER 28, 1997
------------- -----------------
<S> <C> <C>
Current assets............................... $ 14,788 $ 14,782
Non-current assets........................... $ 51,444 $ 48,840
Current liabilities.......................... $ 5,233 $ 8,424
Non-current liabilities...................... $ 9,588 $ 8,873
</TABLE>
NOTE 2: BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING AND
REPORTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Paragon Trade
Brands, Inc. and its wholly-owned subsidiaries. All significant intercompany
transactions and accounts are eliminated.
The accompanying consolidated balance sheet as of December 28, 1997, which has
been derived from audited financial statements, and the unaudited interim
consolidated financial statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
note disclosures normally included in annual financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to those rules and regulations, although the Company believes
that the disclosures made are adequate to make the information presented not
misleading. It is suggested that these consolidated financial statements be read
in conjunction with the financial statements and the notes thereto included in
the Company's latest annual report on Form 10-K.
In the opinion of management, all adjustments necessary for a fair statement of
the results of the interim periods have been included. All such interim
adjustments are of a normal recurring nature except for the bankruptcy-related
costs. The results of operations for the thirteen and twenty-six week periods
ended June 28, 1998 should not be regarded as necessarily indicative of the
results that may be expected for the full year.
The financial statements have been prepared on the going concern basis of
accounting, which contemplates continuity of operations and realization of
assets and liquidation of liabilities in the ordinary course of business.
7
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' financial
statements to conform them to the current year's presentation.
NEW ACCOUNTING STANDARD
Effective December 29, 1997, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which requires the display of comprehensive income and
its components in the financial statements. See "Note 5 of the Notes to
Financial Statements."
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," effective for
fiscal years beginning after June 15, 1999. The Statement establishes accounting
and reporting standards requiring that every derivative instrument be recorded
in the balance sheet as either an asset or liability measured at its fair value.
The Statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. The
Company has not determined the timing of or method of adoption of Statement 133.
As the Company currently does not utilize derivatives, adoption of Statement 133
is not expected to have any impact on the financial statements.
NOTE 3: BANKRUPTCY COSTS
Bankruptcy costs were directly associated with the Company's Chapter 11
reorganization proceedings and consisted of the following:
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
-------------------- ----------------------
JUNE 28, 1998 JUNE 28, 1998
------------- -------------
<S> <C> <C>
Professional fees............................ $ 1,224 $ 2,814
Amortization of DIP credit facility deferred
financing costs......................... 399 399
Other ....................................... 22 110
Interest Income.............................. (485) (517)
----------------- -----------------
$ 1,160 $ 2,806
================= =================
</TABLE>
NOTE 4: INCOME TAXES
Income tax expense for the subsidiaries not included in the Chapter 11 filing
and filing separate tax returns was $302 and $752 during the thirteen and
twenty-six week periods ended June 28, 1998, respectively. The Company recorded
income tax expense of approximately $1,000 and $2,800 during the thirteen and
twenty-six week periods ended June 28, 1998, respectively, which was offset by a
reduction in its deferred tax asset valuation allowance.
NOTE 5: COMPREHENSIVE INCOME
The following are the components of comprehensive income:
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
-------------------- ----------------------
JUNE 28, 1998 JUNE 29, 1997 JUNE 28, 1998 JUNE 29, 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income............................ $ 3,369 $ 2,652 $ 9,375 $ 6,454
Foreign currency translation
adjustment (274) (61) (262) (149)
------------- ------------- ------------- --------------
Comprehensive income.................. $ 3,095 $ 2,591 $ 9,113 $ 6,305
============= ============= ============= =============
</TABLE>
8
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
NOTE 6: INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JUNE 28, 1998 DECEMBER 28, 1997
------------- -----------------
<S> <C> <C>
LIFO:
Raw materials - pulp................. $ 323 $ 381
Finished goods....................... 19,929 25,770
FIFO:
Raw materials - other................ 7,463 8,561
Materials and supplies............... 20,584 20,942
----------------- ------------------
48,299 55,654
Reserve for excess and
obsolete items................... (5,943) (7,397)
----------------- ------------------
Net inventories.............................. $ 42,356 $ 48,257
================= ==================
</TABLE>
NOTE 7: ACCRUED LIABILITIES
Accrued liabilities are as follows:
<TABLE>
<CAPTION>
JUNE 28, 1998 DECEMBER 28, 1997
------------- -----------------
<S> <C> <C>
Payroll - wages and salaries, incentive
awards, retirement, vacation and
severance pay........................ $ 15,446 $ 10,375
Coupons outstanding.......................... 3,573 3,824
Royalties payable............................ 5,089 206
Other........................................ 14,710 17,987
---------------- ----------------
Total........................................ $ 38,818 $ 32,392
================ ================
</TABLE>
NOTE 8: LIABILITIES SUBJECT TO COMPROMISE
Liabilities subject to compromise under the Company's reorganization proceedings
include substantially all current and long-term unsecured debt as of the date of
the Chapter 11 filing. Pursuant to the Bankruptcy Code, payment of these
liabilities may not be made except pursuant to a plan of reorganization or
Bankruptcy Court order while the Company continues to operate as a debtor in
possession. The Company has received approval from the Bankruptcy Court to pay
or otherwise honor certain of its pre-petition obligations including a portion
of short-term borrowings and employee wages, benefits and expenses.
Liabilities subject to compromise are comprised of the following:
<TABLE>
<CAPTION>
JUNE 28, 1998 DECEMBER 28, 1997
------------- -----------------
<S> <C> <C>
Accrued loss contingency..................... $ 200,000 $ -
Bank debt.................................... 81,397 -
Accounts payable............................. 40,061 -
Accrued liabilities ......................... 4,231 -
Deferred compensation........................ 1,290 -
---------------- ----------------
$ 326,979 $ -
================ ================
</TABLE>
9
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
NOTE 9: EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
-------------------- ----------------------
JUNE 28, 1998 JUNE 29, 1997 JUNE 28, 1998 JUNE 29, 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net earnings.................. $ 3,369 $ 2,652 $ 9,375 $ 6,454
============ ============ ============ ============
Weighted average number of
common shares used in
basic EPS (000's)......... 11,928 11,935 11,931 11,877
Effect of dilutive securities:
Stock options (000's)..... - 36 - 70
------------ ------------ ------------ ------------
Weighted number of common
shares and dilutive
potential common stock in
dilutive EPS (000's)...... 11,928 11,971 11,931 11,947
============ ============ ============ ============
Basic earnings per common share. $ .28 $ .22 $ .79 $ .54
============ ============ ============ ============
Diluted earnings per common
share..................... $ .28 $ .22 $ .79 $ .54
============ ============ ============ ============
</TABLE>
Options to purchase 731,359 shares of common stock outstanding during the
thirteen and twenty-six week periods ended June 28, 1998, were not included in
the calculation because their effect was anti-dilutive. Options to purchase
513,862 and 313,862 shares of common stock outstanding during the thirteen and
twenty-six week periods ended June 29, 1997, respectively, were not included in
the calculation because their effect was anti-dilutive.
NOTE 10: 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.
On December 30, 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. Damages of
approximately $178.4 million were entered against Paragon by the District Court
on May 28, 1998. At the same time, the District Court entered injunctive relief
agreed upon by P&G and the Company.
The Company had previously filed with the District Court a motion for a new
trial or to alter or amend the Judgment. The District Court denied Paragon's
motion on July 31, 1998. The District Court also denied a motion by P&G seeking
to recover attorneys' fees it expended in defending itself against Paragon's
patent infringement counterclaim. The Company has filed its amended notice of
appeal with the Federal Circuit Court of Appeals and intends to vigorously
pursue its appeal of the Court's decision.
The Judgment has had a material adverse effect on the Company's financial
position and its results of operations. 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.
10
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
P&G has asserted alleged claims against the Company regarding similar patent
claims on diaper products sold in other countries. The Company has reviewed such
claims and believes them to be without merit. See "--IN RE PARAGON TRADE BRANDS,
INC." below.
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 denied liability under the
patents and counterclaimed for patent infringement and violation of antitrust
laws by K-C. Several pre-trial motions were filed by each party, including a
motion for summary judgment filed by K-C with respect to the Company's antitrust
counterclaim and a motion for summary judgment filed by the Company on one of
the patents asserted by K-C. In addition, K-C sued the Company on another patent
issued to K-C which is based upon a further continuation of one of the K-C
patents asserted in the case. That action was consolidated with the pending
action. The Court 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. The Bankruptcy Court issued an order on April 10,
1998 permitting, among other things, a partial lifting of the stay to allow the
issuance of the special master's report on the items under his consideration.
K-C filed with the Bankruptcy Court a motion for reconsideration of the
Bankruptcy Court's April 10 order, which was denied on June 15, 1998. K-C has
appealed this denial of reconsideration to the Federal District Court for the
Northern District of Georgia. Briefing on this matter continues. See "--IN RE
PARAGON TRADE BRANDS, INC." below.
On May 26, 1998, the special master issued his report on the majority of the
motions pending before him. His report included a finding, among other things,
that Paragon, as the successor-in-interest to the disposable diaper business of
Pope & Talbot, Inc. ("Pope & Talbot"), has a fully paid-up license to one of the
three asserted K-C inner-leg gather patents, which license runs from the date of
the acquisition by the Company of Pope & Talbot. Pope & Talbot had previously
obtained the license from K-C. The special master also found that K-C should be
held to the narrow interpretation of its patent applied by Judge Dwyer in the
Western District of Washington in earlier litigation between P&G and K-C on the
patent. In addition, the special master also recommended that the Company's
antitrust counterclaim and any discovery-related matters in connection therewith
be dismissed.
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 believes that the Company's products do not infringe any
valid patent asserted by K-C.
K-C filed alleged claims ranging from approximately $893 million (without
trebling) to $2.3 billion (with trebling). The Company continues to believe that
it does not infringe any valid claim of any K-C patent. The Company further
believes that K-C's attempts to inflate its bankruptcy claims well beyond its
claims in the Dallas District Court are improper. See "--IN RE PARAGON TRADE
BRANDS, Inc.," below.
IN RE PARAGON TRADE BRANDS, INC. -- As described above, 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 claim against P&G. Judgment was
entered on January 6, 1998. While a final damages number was not adjudicated by
the District Court at that time, the Company estimated at that time that the
damages were approximately $200 million. The amount of the damages 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.
Subsequently, damages of approximately $178.4 million were entered against
Paragon by the District Court on May 28, 1998. At the same time, the District
Court entered injunctive relief agreed upon by P&G and the Company. See "--THE
PROCTER & GAMBLE COMPANY V. PARAGON TRADE BRANDS, INC.," above.
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PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
The Company had previously filed with the District Court a motion for a new
trial or to alter or amend the Judgment. The District Court denied Paragon's
motion on July 31, 1998. The District Court also denied a motion by P&G seeking
to recover attorneys' fees it expended in defending itself against Paragon's
patent infringement counterclaim. The Company has filed its amended notice of
appeal with the Federal Circuit Court of Appeals and intends to vigorously
pursue its appeal of the Court's decision.
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. The bar date for the filing of
proofs of claim (apparently excluding administrative claims) by creditors was
June 5, 1998. P&G filed alleged claims ranging from approximately $2.3 billion
(without trebling) to $6.4 billion (with trebling), which included a claim of
$178.4 million for the Delaware judgment. The Company intends to vigorously
pursue its appeal of the Delaware judgment. See "--THE PROCTER & GAMBLE COMPANY
V. PARAGON TRADE BRANDS, INC.," above. The remaining claims include claims for
alleged patent infringement by the Company in foreign countries where it has
operations. The Company has reviewed such additional claims and believes them to
be without merit.
K-C filed alleged claims ranging from approximately $893 million (without
trebling) to $2.3 billion (with trebling), including claims related to the
litigation in the Dallas District Court described above. See "--KIMBERLY-CLARK
CORPORATION V. PARAGON TRADE BRANDS, INC.," above. K-C's claims in the
Bankruptcy case include an attempt to recover alleged lost profits for
infringement of the patents asserted in the Dallas District Court, despite the
fact that a lost profits theory of damages was not pursued by K-C in the Dallas
District Court. The Company continues to believe that it does not infringe any
valid claim of the asserted K-C patents. The Company further believes that K-C's
attempts to inflate its bankruptcy claims well beyond its claims in the Dallas
District Court are improper.
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
"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.
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 sheet at December 28,1997. Interest was at fixed or
floating rates based on the financial institution's cost of funds. The Company
was also required to maintain certain financial covenants under the agreement.
Paragon Trade Brands (Canada) Inc. has guaranteed obligations under this
revolving credit facility.
At December 28, 1997, 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 $50,000 in uncommitted lines of credit. Borrowings
under these lines of credit totaled $12,800 at December 28, 1997. Borrowings
under these lines of credit were reflected as short-term borrowings in the
accompanying balance sheet at December 28, 1997.
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PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
The terms of the revolving credit facility and the short-term lines of credit
described above provide that a voluntary filing of a Chapter 11 petition results
in an event of default on such indebtedness. Amounts outstanding under these
facilities are reflected as Liabilities Subject to Compromise in the accompany
balance sheet as of June 28, 1998. As a result of its Chapter 11 filing, the
Company is prohibited from paying any pre-petition liabilities without
Bankruptcy Court approval. Accordingly, no interest expense has been recorded
with respect to pre-petition debt balances in the accompanying financial
statements for the period subsequent to January 6, 1998.
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. The filing of a Chapter 11 petition by the Company resulted in
an event of default under this revolving credit facility. 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.
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, as amended by the First Amendment dated January 30, 1998,
the Second Amendment dated March 23, 1998 and the Third Amendment dated April
15, 1998, Chase and a syndicate of banks 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 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 has issued a $1,300 standby letter of credit under the DIP Credit
Facility. No loans were outstanding under the DIP Credit Facility at June 28,
1998.
Paragon Trade Brands (Canada) Inc. has entered into a new $3,000 Cdn operating
credit facility with a financial institution. Borrowings under the Canadian
revolving credit facility were repaid in full with the proceeds from borrowings
under the new Canadian operating credit facility. Borrowings under this Canadian
operating credit facility are secured by substantially all of Paragon Trade
Brands (Canada) Inc.'s assets and will bear interest at a rate of 1 percent over
the financial institution's prime rate. The Company does not guaranty borrowings
under the Canadian operating credit facility. The maximum borrowings under the
Canadian operating credit facility are limited to the lesser of $3,000 Cdn or 75
percent of Paragon Trade Brands (Canada) Inc.'s trade accounts receivable. There
were no borrowings outstanding against this facility on June 28, 1998.
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PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
THIRTEEN WEEKS ENDED JUNE 28, 1998
COMPARED TO THIRTEEN WEEKS ENDED JUNE 29, 1997
CHAPTER 11 PROCEEDINGS
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 previously 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 finding
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 claim 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 a final damages number was not adjudicated by the District
Court, the Company estimated at that time that the damages were 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 or affiliates
were included in the Chapter 11 filing. The Chapter 11 filing was designed to
(i) prevent P&G from placing liens on Company property; (ii) permit the Company
to appeal the Delaware District Court's decision on the P&G case in an orderly
fashion; and (iii) 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.
Subsequently, damages of approximately $178.4 million were entered against
Paragon by the District Court on May 28, 1998. At the same time, the District
Court entered injunctive relief agreed upon by P&G and the Company.
The Company had previously filed with the District Court a motion for a new
trial or to alter or amend the Judgment. The District Court denied Paragon's
motion on July 31, 1998. The District Court also denied a motion by P&G seeking
to recover attorneys' fees it expended in defending itself against Paragon's
patent infringement counterclaim. The Company has filed its amended notice of
appeal with the Federal Circuit Court of Appeals and intends to vigorously
pursue its appeal of the Court's decision.
The Company is currently operating as a debtor in possession under the
Bankruptcy Code. The bar date for the filing of proofs of claim (apparently
excluding administrative claims) by creditors was June 5, 1998. P&G filed
alleged claims ranging from approximately $2.3 billion (without trebling) to
$6.4 billion (with trebling), which included a claim of $178.4 million for the
Delaware judgment. The Company intends to vigorously pursue its appeal of the
Delaware judgment. The remaining claims include claims for alleged patent
infringement by the Company in foreign countries where it has operations. The
Company has reviewed such additional claims and believes them to be without
merit.
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Kimberly-Clark Corporation ("K-C") filed alleged claims ranging from
approximately $893 million (without trebling) to $2.3 billion (with trebling),
including claims related to the litigation in the Dallas District Court
described herein. See "PART II: OTHER INFORMATION, ITEM I, LEGAL PROCEEDINGS."
K-C's claims in the Bankruptcy case include an attempt to recover alleged lost
profits for infringement of the patents asserted in the Dallas District Court,
despite the fact that a lost profits theory of damages was not pursued by K-C in
the Dallas District Court. The Company continues to believe that it does not
infringe any valid claim of the asserted K-C patents. The Company further
believes that K-C's attempt to inflate its bankruptcy claims well beyond its
claims in the Dallas District Court are improper.
The Company is unable to predict at this time when it will emerge from Chapter
11 protection. See "Notes 1, 10 and 11 of Notes to Financial Statements" and
"PART II: OTHER INFORMATION, ITEM 1: LEGAL PROCEEDINGS" herein.
RESULTS OF OPERATIONS
Net earnings were $3.4 million in the second quarter of 1998 compared with net
earnings of $2.7 million in the second quarter of 1997. The increase in profits
in the second quarter of 1998 compared to the same period in 1997 was primarily
due to non-operating factors related to lower taxes and lower interest expense.
The second quarter of 1998 was favorably impacted by a reduction in the deferred
tax asset valuation allowance of $1.0 million. There was also no interest
expense in the second quarter of 1998 compared to $1.2 million in the second
quarter of 1997. The decrease resulted from the suspension of interest on the
credit facilities due to the Chapter 11 filing. These benefits were partially
offset by bankruptcy costs of $1.2 million primarily related to professional
fees.
Pre-tax results from operations and equity in earnings of unconsolidated
subsidiaries were $4.2 million in the second quarter of 1998 compared to $5.0
million in the second quarter of 1997. Results were negatively impacted by lower
volumes and prices, higher costs of sourcing products from Paragon-Mabesa
International S.A. de C.V. ("PMI") under a supply contract, royalties payable to
P&G under a product conversion agreement, higher trade merchandising expenses
and higher selling, general and administrative expenses ("SG&A"). These negative
factors were partially offset by improved efficiencies and lower manufacturing
overhead in the baby diaper business, favorable raw material prices, lower
operating losses associated with the feminine care business, lower packaging
artwork expenses and improved results from unconsolidated foreign subsidiaries.
Basic earnings per share in the second quarter of 1998 were $.28 compared to
basic earnings per share of $.22 in the second quarter of 1997. Basic earnings
per share, excluding bankruptcy costs and adjusted to reflect an effective tax
rate of 38.5 percent and the Company's contractual interest charges, were $.19
per share in the second quarter of 1998.
Basic earnings per share of $.28 in the second quarter of 1998 included a net
loss of $.14 related to the feminine care and adult incontinence businesses.
Basic earnings per share of $.22 in the second quarter of 1997 included a net
loss of $.18 related to the feminine care and adult incontinence businesses. The
lower losses, compared to 1997, are expected to continue throughout 1998 but the
Company does not expect these businesses to break even until sometime in late
1999.
NET SALES
Net sales were $127.0 million in the second quarter of 1998, a 6.5 percent
decrease from the $135.8 million reported in the second quarter of 1997. Diaper
unit sales decreased 7.8 percent to 832 million diapers in the second quarter of
1998 compared to 902 million diapers in the second quarter of 1997. The decrease
in sales was primarily due to lower volumes in the baby diaper business. The
temporary uncertainty caused by the P&G patent judgment and the subsequent
Chapter 11 filing in early January interrupted the Company's customers' normal
13-week promotional planning cycles, negatively impacting volume in April and
May. Volume recovered throughout the quarter. The decrease in baby diaper sales
was partially offset by sales growth in the feminine care, adult incontinence
and household cleaning products businesses.
Volume also remained under pressure from discounts and promotional allowances by
branded manufacturers and value segment competitors, the continued use of
multiple packs and by customer losses experienced during 1997 to a store-brand
diaper competitor. These conditions are expected to continue throughout 1998.
Volume,
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during the second half of 1998, may also be negatively impacted by recently
announced product introductions by branded manufacturers and continued
uncertainties related to the Chapter 11 filing.
Excluding the effect of a favorable product mix, average sales prices during the
second quarter of 1998 decreased approximately 4.5 percent compared to the
second quarter of 1997. The decrease in prices was primarily due to the use of
multiple packs by the branded manufacturers and value segment competitors,
competitive pressure from store-brand diaper competitors and price decreases in
Canada. The Company intends to implement a price increase of approximately 5
percent during the third and fourth quarters of 1998 in response to increases
announced by K-C and P&G. It is difficult to predict the timing and the amount
of final realization of this price increase.
COST OF SALES
Cost of sales in the second quarter of 1998 was $102.3 million compared to
$111.9 million in the second quarter of 1997, an 8.6 percent decrease. As a
percentage of net sales, cost of sales was 80.6 percent in the second quarter of
1998 compared to 82.6 percent in the comparable 1997 period. Costs were lower in
the second quarter of 1998 compared to the same period of 1997 primarily due to
lower raw material costs, improved baby diaper manufacturing efficiencies, lower
baby diaper overhead costs and improved operating results in the feminine care
business. The lower costs were partially offset by the sourcing of products from
PMI under a supply contract and charges related to royalties payable to P&G
under a product conversion agreement. The royalty charges will not continue
during the second half of 1998 as the Company completed the conversion to a new
product early in the third quarter of 1998.
Raw material costs, primarily non-wovens, bags, super absorbent polymer, and
pulp, were at lower price levels in the second quarter of 1998 compared to the
same period of 1997. Raw material prices, including pulp, are expected to remain
at similar levels throughout the remainder of 1998. Product costs, however, are
expected to increase during the second half of the year due to higher costs of
new product designs.
Baby diaper labor costs were lower during the second quarter of 1998 compared to
the second quarter of 1997. The lower costs reflect the increased manufacturing
efficiencies including the use of automated packaging. The second quarter of
1997 included inefficiencies related to new product rollouts. Baby diaper
overhead costs were lower during the second quarter of 1998 compared to the same
period in 1997 due to cost management efforts. Labor and overhead costs were
also lower in the feminine care business as a result of improved operating
results, cost management and the shut down of tampon-related production
equipment during the first quarter of 1998. Labor costs are expected to increase
during the second half of 1998 and early 1999 due to inefficiencies related to
new product designs and introductions.
Depreciation costs were lower in the second quarter of 1998 compared to the
second quarter of 1997 primarily due to lower baby diaper depreciation. These
costs were partially offset by increases related to the adult incontinence
business. Depreciation costs should increase during the third and fourth
quarters of 1998 due to new equipment additions and acceleration of depreciation
on certain training pant and feminine care assets.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
SG&A expenses were $19.9 million in the second quarter of 1998 compared to $17.9
million in the second quarter of 1996. As a percentage of net sales, these
expenses were 15.7 percent in 1998 compared to 13.2 percent for the same period
in 1997. The increase in costs is primarily attributable to an increase in trade
merchandising expenses, incentive-based accruals, selling expenses and
information system costs related to the Company's new information system
installation. It is anticipated that the trade merchandising expenses and
information system costs will increase modestly during the second half of 1998.
The incentive-based accruals and selling expenses should remain at similar
levels during the second half of 1998. These increased costs were partially
offset by lower legal expenses and packaging artwork and design costs. It is
anticipated that the packaging costs will increase during the second half of
1998 and early 1999 due to new product introductions. Legal expenses are
expected to remain at similar levels during the remainder of 1998.
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RESEARCH AND DEVELOPMENT
Research and development expenses were $1.1 million in the second quarter of
1998 compared to $1.0 million in the second quarter of 1997. The increase was
primarily due to baby diaper product development and testing which were
partially offset by decreased feminine care product development costs.
INTEREST EXPENSE
There was no interest expense in the second quarter of 1998 compared to $1.2
million in the second quarter of 1997. The decrease resulted from the suspension
of interest on the credit facilities due to the Chapter 11 filing. There were no
borrowings under the DIP credit facility during the second quarter of 1998. The
second quarter of 1997 included interest on approximate average borrowings of
$75 million under the pre-petition revolving credit facility.
EQUITY IN EARNINGS OF UNCONSOLIDATED SUBSIDIARIES
The equity in earnings of unconsolidated subsidiaries was $.6 million in the
second quarter of 1998 compared to break-even results during the second quarter
of 1997. The increase reflects improved operating results at PMI and earnings of
Stronger Corporation S.A. ("Stronger").
BANKRUPTCY COSTS
Bankruptcy costs were $1.2 million during the second quarter of 1998. These
costs were primarily related to professional fees and are expected to continue
at similar levels until the Company emerges from Chapter 11 protection.
INCOME TAXES
Income tax expense for the subsidiaries not included in the Chapter 11 filing
and filing separate tax returns was $.3 million during the period ended June 28,
1998. The Company recorded income tax expense of approximately $1.0 million
during the second quarter of 1998, which was offset by a reduction in its
deferred tax asset valuation allowance.
RAW MATERIALS
In May 1998, the Company entered into an agreement, effective January 1, 1999
with Clariant Corporation (successor of Hoechst Celanese Corporation)
("Clariant") whereby it agreed, subject to certain limitations, to purchase 100
percent of its requirements of superabsorbent polymer through December 31, 2001.
This agreement replaces a prior agreement with Clariant which expires on
December 31, 1998.
The Company's agreement with Weyerhaeuser Company ("Weyerhaeuser") whereby it
purchases 100 percent of its requirements of bleached chemical fluff pulp
expires August 31, 1998. Thereafter, the Company intends to continue purchasing
100 percent of its fluff pulp requirements from Weyerhaeuser at prices as
favorable as those Weyerhaeuser charges other North American disposable diaper
manufacturers for similar grade pulp. The Company believes that at least two
other sources of supply exist for fluff pulp.
TWENTY-SIX WEEKS ENDED JUNE 28, 1998
COMPARED TO TWENTY-SIX WEEKS ENDED JUNE 29, 1997
RESULTS OF OPERATIONS
Net earnings were $9.4 million in the first half of 1998 compared with net
earnings of $6.5 million in the first half of 1997. The increase in profits in
the first half of 1998 compared to the same period in 1997 was primarily due to
non-operating factors related to lower taxes and lower interest expense. The
first half of 1998 was favorably impacted by a reduction in the Company's
deferred tax asset valuation allowance of $2.8 million. Interest expense in the
first half of 1998 was $1.9 million lower than the same period of 1997. The
decrease resulted from the suspension of interest on the credit facilities due
to the Chapter 11 filing. These benefits were partially offset by bankruptcy
costs of $2.8 million, primarily related to professional fees.
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Pre-tax results from operations and equity in earnings of unconsolidated
subsidiaries were $12.2 million in the first half of 1998 compared to $11.5
million in the first half of 1997. The increase in profits in the first half of
1998 compared to the same period in 1997 was primarily due to improved
manufacturing efficiencies and lower overhead in the baby diaper business, lower
raw material costs, improved results from unconsolidated subsidiaries, lower
packaging artwork expenses and lower operating losses associated with the
feminine care business. These positive factors were partially offset by higher
costs of sourcing products from PMI under a supply contract, royalties payable
to P&G under a product conversion agreement, higher product design costs
associated with the breathable baby diaper product, higher trade merchandising
expenses and higher SG&A.
Basic earnings per share in the first half of 1998 were $.79 compared to basic
earnings per share of $.54 in the first half of 1997. Basic earnings per share,
excluding bankruptcy costs and adjusted to reflect an effective tax rate of 38.5
percent and the Company's contractual interest charges, were $.54 per share
during the first half of 1998.
Basic earnings per share of $.79 in the first half of 1998 included a net loss
of $.31 related to the feminine care and adult incontinence businesses. Basic
earnings per share of $.54 in the first half of 1997 included a net loss of $.48
related to the feminine care and adult incontinence businesses. The lower
losses, compared to 1997, are expected to continue throughout 1998 but the
Company does not expect these businesses to break even until sometime in late
1999.
NET SALES
Net sales were $265.3 million in the first half of 1998, a 2.3 percent decrease
from the $271.5 million reported in the first half of 1997. Diaper unit sales
decreased 4.0 percent to 1,731 million diapers in the first half of 1998
compared to 1,804 million diapers in the first half of 1997. The decrease in
sales was primarily due to lower volumes in the baby diaper business during the
second quarter of 1998, as discussed above. The decrease in baby diaper volume
was partially offset by sales growth in the feminine care, adult incontinence
and household cleaning products businesses. Volume remained under pressure from
discounts and promotional allowances by branded manufacturers and value segment
competitors, the continued use of multiple packs and by customer losses to a
store-brand diaper competitor. Volume during the second half of 1998 may also be
negatively impacted by recently announced product introductions by branded
manufacturers and continued uncertainties related to the Chapter 11 filing.
Excluding the effect of a favorable product mix, average sales prices during the
first half of 1998 decreased approximately 3.0 percent compared to the first
half of 1997. The decrease in prices was primarily due to the use of multiple
packs by the branded manufacturers and value segment competitors, competitive
pressure from store-brand diaper competitors and price decreases in Canada. The
Company intends to implement a price increase of approximately 5 percent during
the third and fourth quarters of 1998 in response to increases announced by K-C
and P&G. It is difficult to predict the timing and the amount of final
realization of this price increase.
COST OF SALES
Cost of sales in the first half of 1998 was $213.1 million compared to $219.7
million in the first half of 1997, a 3.0 percent decrease. As a percentage of
net sales, cost of sales was 80.3 percent in the first half of 1998 compared to
80.9 percent in the comparable 1997 period. Costs were lower in the first half
of 1998 compared to the same period in 1997, primarily due to lower raw material
costs, improved baby diaper efficiencies, lower baby diaper overhead costs and
improved operating results in the feminine care business. The lower costs were
partially offset by the sourcing of products from PMI under a supply contract
and charges related to royalties payable to P&G under a product conversion
agreement. The royalty charges will not continue during the second half of 1998
as the Company completed the conversion to a new product early in the third
quarter of 1998.
Raw material costs, primarily non-wovens, bags, super absorbent polymer, and
pulp, were at lower price levels in the second quarter of 1998 compared to the
same period of 1997. Raw material prices, including pulp, are expected to remain
at similar levels throughout the remainder of 1998. Product costs, however, are
expected to increase during the second half of the year due to higher costs of
new product designs.
Baby diaper labor costs were lower during the first half of 1998 compared to the
first half of 1997. The lower costs reflect increased manufacturing efficiencies
including the use of automated packaging. The first half of 1997 included
inefficiencies related to new product rollouts. Baby diaper overhead costs were
lower during the first half of 1998
18
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compared to the same period in 1997 due to cost management efforts. Labor and
overhead costs were also lower in the feminine care business as a result of
improved operating results, cost management and the shut down of tampon-related
production equipment during the first half of 1998. Labor costs are expected to
increase during the second half of 1998 and early 1999 due to inefficiencies
related to new product designs and introductions.
Depreciation costs were at similar levels in the first half of 1998 compared to
the first half of 1997. Decreases in baby diaper depreciation were offset by
increases related to the adult incontinence business.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
SG&A expenses were $39.0 million in the first half of 1998 compared to $38.4
million in the first half of 1996. As a percentage of net sales, these expenses
were 14.7 percent in 1998 compared to 14.1 percent for the same period in 1997.
The increase in costs is primarily attributable to an increase in trade
merchandising expenses, incentive-based accruals, selling expenses and
information system costs related to the Company's new information system
installation. It is anticipated that the trade merchandising expenses and
information system costs will increase modestly during the second half of 1998.
The incentive-based accruals and selling expenses should remain at similar
levels during the second half of 1998. These increased costs were partially
offset by lower legal expenses and packaging artwork and design costs. It is
anticipated that the packaging costs will increase during the second half of
1998 and early 1999 due to new product introductions. Legal expenses are
expected to remain at similar levels during the remainder of 1998.
RESEARCH AND DEVELOPMENT
Research and development expenses were $2.5 million in the first half of 1998
compared to $1.9 million in the first half of 1997. The increase was primarily
due to baby diaper product development and testing.
INTEREST EXPENSE
Interest expense was $.3 million in the first half of 1998 compared to $2.1
million in the first half of 1997. The decrease resulted from the suspension of
interest on the credit facilities due to the Chapter 11 filing. There were no
borrowings under the DIP credit facility during the first half of 1998. The
first half of 1997 included interest on approximate average borrowings of $72
million under the pre-petition revolving credit facility. These lower interest
expenses were partially offset by the amortization of the DIP facility fees.
EQUITY IN EARNINGS OF UNCONSOLIDATED SUBSIDIARIES
The equity in earnings of unconsolidated subsidiaries was $1.5 million in the
first half of 1998 compared to $.1 million in the first half of 1997. The
increase primarily reflects improved operating results at PMI.
BANKRUPTCY COSTS
Bankruptcy costs were $2.8 million during the first half of 1998. These costs
were primarily related to professional fees and are expected to continue at
similar levels until the Company emerges from Chapter 11 protection.
INCOME TAXES
Income tax expense for the subsidiaries not included in the Chapter 11 filing
was $.8 million during the first half of 1998. The Company recorded income tax
expense of approximately $2.8 million during the first half of 1998, which was
offset by a reduction in its deferred tax asset valuation allowance.
LIQUIDITY AND CAPITAL RESOURCES
During the first half of 1998, cash flow from earnings and non-cash charges to
earnings was $25.3 million compared to $27.4 million in the same period in 1997.
During the first half of 1998, cash flow was positively impacted by
approximately $29.1 million by an increase in post-petition accounts payable and
checks issued but not cleared. Cash was also positively impacted by the receipt
of $3.4 million from previous equipment sales. Overall inventory balances
dropped but were partially offset by an increase in prepaid expenses, primarily
prepaid insurance and deposits to suppliers due to the bankruptcy. Inventory
balances are expected to increase during the second half of 1998 in support of
equipment conversions due to new
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product introductions. Cash flow was also positively impacted by an increase in
accrued liabilities, primarily related to royalties and incentive-pay accruals.
The royalties will be paid during the third quarter of 1998.
The cash produced from operations supported capital expenditures of $12.9
million, including approximately $4.5 million of computer software and
consulting costs, in the first half of 1998 compared to $33.5 million in the
same period of 1997. The expenditures were primarily in support of the baby
diaper business, specifically new product enhancements and automated packaging.
Capital spending is expected to be approximately $39 million during 1998 and
will include further expenditures for product enhancement and a company-wide
information system upgrade.
The cash produced from operations also supported the Company's acquisition of
its share of Goodbaby Paragon Hygenic Products Ltd., a joint venture in China on
December 31, 1997. The joint venture partners are Goodbaby Group and First
Shanghai Investment of Hong Kong. Paragon maintains a 40 percent ownership
position in the venture. Initial registered capital of the venture was approved
at $15 million, to be funded over a two-year period. The Company also made an
additional payment to Grupo P.I. Mabe, S.A. de C.V. ("Mabesa") as an earnout
payment based on 1997 performance.
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 and borrowings under
its uncommitted lines of credit. 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, as amended by the
First Amendment dated January 30, 1998, the Second Amendment dated March 23,
1998 and the Third Amendment dated April 15, 1998, Chase and a syndicate of
banks 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.
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, its DIP 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."
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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 major components 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 $18 million and is being
funded through operating cash flow. As of June 28, 1998, approximately $10
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
was required to modify its current diaper design. Pursuant to an agreement with
P&G, the Company had until July 6, 1998 to complete the conversion to a new
diaper design. The Company completed its conversion to a new diaper design in
accordance with the requirements of the conversion agreement with P&G. The
Company also paid P&G a royalty of approximately $4.1 million, which represents
2 percent of net sales of the previous diapers manufactured during the
conversion period. The Company will pay P&G an additional royalty payment on or
before September 28, 1998 of 2 percent of net sales of the previous diapers
which were manufactured during the conversion period, but sold thereafter. This
2 percent royalty had a material adverse effect on the results of
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operations during the first half of 1998.The Company has been advised by
independent patent counsel that the new diaper design does not infringe any
valid patent. However, if customers do not accept the alternative design, the
outcome 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.
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.
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 multiple 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." 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 in the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission. Readers are cautioned not to place undue
reliance on the forward-looking statements contained herein, which speak only as
of the date hereof, and which are made by management pursuant to the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995. 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.
NEW ACCOUNTING STANDARD
Effective December 29, 1997, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which requires the display of comprehensive income and
its components in the financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," effective for
fiscal years beginning after June 15, 1999. The Statement establishes accounting
and reporting standards requiring that every derivative instrument be recorded
in the balance sheet as either an asset or liability measured at its fair value.
The Statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. The
Company has not determined the timing of or method of adoption of Statement 133.
As the Company currently does not utilize derivatives, adoption of Statement 133
is not expected to have any impact on the financial statements.
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PART II. OTHER INFORMATION
ITEM 1. 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.
On December 30, 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. Damages of
approximately $178.4 million were entered against Paragon by the District Court
on May 28, 1998. At the same time, the District Court entered injunctive relief
agreed upon by P&G and the Company.
The Company had previously filed with the District Court a motion for a new
trial or to alter or amend the Judgment. The District Court denied Paragon's
motion on July 31, 1998. The District Court also denied a motion by P&G seeking
to recover attorneys' fees it expended in defending itself against Paragon's
patent infringement counterclaim. The Company has filed its amended notice of
appeal with the Federal Circuit Court of Appeals and intends to vigorously
pursue its appeal of the Court's decision.
The Judgment has had a material adverse effect on the Company's financial
position and its results of operations. 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.
P&G has asserted alleged claims against the Company regarding similar patent
claims on diaper products sold in other countries. The Company has reviewed such
claims and believes them to be without merit. See "--IN RE PARAGON TRADE BRANDS,
INC." below.
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 denied liability under the
patents and counterclaimed for patent infringement and violation of antitrust
laws by K-C. Several pre-trial motions were filed by each party, including a
motion for summary judgment filed by K-C with respect to the Company's antitrust
counterclaim and a motion for summary judgment filed by the Company on one of
the patents asserted by K-C. In addition, K-C sued the Company on another patent
issued to K-C which is based upon a further continuation of one of the K-C
patents asserted in the case. That action was consolidated with the pending
action. The Court 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. The Bankruptcy Court issued an order on April 10,
1998 permitting, among other things, a partial lifting of the stay to allow the
issuance of the special master's report on the items under his consideration.
K-C filed with the Bankruptcy Court a motion for reconsideration of the
Bankruptcy Court's April 10 order, which was denied on June 15, 1998. K-C has
appealed this denial of reconsideration to the Federal District Court for the
Northern District of Georgia. Briefing on this matter continues. See "--IN RE
PARAGON TRADE BRANDS, INC." below.
On May 26, 1998, the special master issued his report on the majority of the
motions pending before him. His report included a finding, among other things,
that Paragon, as the successor-in-interest to the disposable diaper business of
Pope & Talbot, Inc. ("Pope & Talbot"), has a fully paid-up license to one of the
three asserted K-C inner-leg gather patents, which license runs from the date of
the acquisition by the Company of Pope & Talbot. Pope & Talbot had previously
obtained the license from K-C. The special master also found that K-C should be
held to the narrow interpretation of its patent applied by Judge Dwyer in the
Western District of Washington in
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earlier litigation between P&G and K-C on the patent. In addition, the special
master also recommended that the Company's antitrust counterclaim and any
discovery-related matters in connection therewith be dismissed.
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 believes that the Company's products do not infringe any
valid patent asserted by K-C.
K-C filed alleged claims ranging from approximately $893 million (without
trebling) to $2.3 billion (with trebling). The Company continues to believe that
it does not infringe any valid claim of any K-C patent. The Company further
believes that K-C's attempts to inflate its bankruptcy claims well beyond its
claims in the Dallas District Court are improper. See "--IN RE PARAGON TRADE
BRANDS, Inc.," below.
IN RE PARAGON TRADE BRANDS, INC. -- As described above, 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 claim against P&G. Judgment was
entered on January 6, 1998. While a final damages number was not adjudicated by
the District Court at that time, the Company estimated at that time that the
damages were approximately $200 million. The amount of the damages 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.
Subsequently, damages of approximately $178.4 million were entered against
Paragon by the District Court on May 28, 1998. At the same time, the District
Court entered injunctive relief agreed upon by P&G and the Company. See "--THE
PROCTER & GAMBLE COMPANY V. PARAGON TRADE BRANDS, INC.," above.
The Company had previously filed with the District Court a motion for a new
trial or to alter or amend the Judgment. The District Court denied Paragon's
motion on July 31, 1998. The District Court also denied a motion by P&G seeking
to recover attorneys' fees it expended in defending itself against Paragon's
patent infringement counterclaim. The Company has filed its amended notice of
appeal with the Federal Circuit Court of Appeals and intends to vigorously
pursue its appeal of the Court's decision.
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. The bar date for the filing of
proofs of claim (apparently excluding administrative claims) by creditors was
June 5, 1998. P&G filed alleged claims ranging from approximately $2.3 billion
(without trebling) to $6.4 billion (with trebling), which included a claim of
$178.4 million for the Delaware judgment. The Company intends to vigorously
pursue its appeal of the Delaware judgment. See "--THE PROCTER & GAMBLE COMPANY
V. PARAGON TRADE BRANDS, INC.," above. The remaining claims include claims for
alleged patent infringement by the Company in foreign countries where it has
operations. The Company has reviewed such additional claims and believes them to
be without merit.
K-C filed alleged claims ranging from approximately $893 million (without
trebling) to $2.3 billion (with trebling), including claims related to the
litigation in the Dallas District Court described above. See "--KIMBERLY-CLARK
CORPORATION V. PARAGON TRADE BRANDS, INC.," above. K-C's claims in the
Bankruptcy case include an attempt to recover alleged lost profits for
infringement of the patents asserted in the Dallas District Court, despite the
fact that a lost profits theory of damages was not pursued by K-C in the Dallas
District Court. The Company continues to believe that it does not infringe any
valid claim of the asserted K-C patents. The Company further believes that K-C's
attempts to inflate its bankruptcy claims well beyond its claims in the Dallas
District Court are improper.
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
"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.
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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 3. DEFAULTS IN SENIOR SECURITIES
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. The Chapter 11
filing resulted in a default under its pre-petition revolving credit facility
and borrowings under its uncommitted lines of credit. See "Note 11 of Notes to
Financial Statements."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Stockholders of the Company was held on May 11,
1998.
(b) Mr. Thomas B. Boklund was elected as a director at the Annual Meeting
for a three-year term expiring in 2001. Messrs. Bobby V. Abraham, Adrian
D.P. Bellamy and Robert L. Schuyler continued in office as directors
after the meeting.
(c) The item of business of the meeting was the election of Thomas B.
Boklund as a director. Votes were tabulated as follows:
Votes For: 10,213,281
Votes Withheld: 114,738
Abstentions: 0
Broker Nonvotes: 0
(d) Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
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(a) Exhibits
<S> <C> <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, 19955
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 Paragon1
Exhibit 10.2 Intellectual Property Agreement, dated as of February 2, 1993, between
Weyerhaeuser and Paragon1
Exhibit 10.3 License, dated as of February 2, 1993, between Weyerhaeuser and Paragon1
Exhibit 10.4 Sublicense, dated as of February 2, 1993, between Weyerhaeuser and Paragon1
Exhibit 10.5 Technology Agreement, dated as of October 15, 1987, by and between
Weyerhaeuser and Johnson and Johnson, as amended1
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Exhibit 10.6 Critical Supply Agreement, dated as of February 2, 1993, between
Weyerhaeuser and Paragon1
Exhibit 10.6.1 Letter Supply Agreement between Weyerhaeuser and Paragon dated as of
October 22, 199710
Exhibit 10.7* Stock Option Plan for Non-Employee Directors1
Exhibit 10.8* Annual Incentive Compensation Plan1
Exhibit 10.9* 1993 Long-Term Incentive Compensation Plan1
Exhibit 10.10* Amended and Restated Employment Agreement, dated as of August 5, 1997,
between Paragon and Bobby V. Abraham9
Exhibit 10.11* Amended and Restated Employment Agreement, dated as of August 5, 1997,
between Paragon and David W. Cole9
Exhibit 10.12* Employment Agreement, dated as of August 5, 1997, between Paragon and Alan
J. Cyron9
Exhibit 10.13* Employment Agreement, dated as of August 5, 1997, between Paragon and
Catherine O. Hasbrouck9
Exhibit 10.14* Employment Agreement, dated as of August 5, 1997, between Paragon and
Stanley L. Bulger9
Exhibit 10.15* 1995 Incentive Compensation Plan5
Exhibit 10.16 Amended and Restated Credit Agreement, dated as of February 6, 19967
Exhibit 10.16.1 Amendment Agreement, dated December 13, 1996, to Amended and Restated
Credit Agreement, dated as of February 6, 19968
Exhibit 10.17 Revolving Credit and Guaranty Agreement Among Paragon Trade Brands, Inc.,
a Debtor-in-Possession, as Borrower, the Subsidiaries of the Borrower
Named Herein, as Guarantors, the Banks Party hereto, and Chase Manhattan
Bank, as Agent, dated as of January 7, 1998, as Amended (Conformed to
Reflect the First Amendment to the Revolving Credit and Guaranty Agreement
dated as of January 30, 1998, the Second Amendment to the Revolving Credit
and Guaranty Agreement dated as of March 23, 1998, and the Third Amendment
to Revolving Credit and Guaranty Agreement dated as of April 15, 1998)11
Exhibit 10.18 Security and Pledge Agreement, dated as of January 7, 199811
Exhibit 10.19 Revolving Canadian Credit Facility and Parent Guarantee2
Exhibit 10.20 Indemnification Agreements, dated as of February 2, 1993, between
Weyerhaeuser and Bobby V. Abraham and Gary M. Arnts1
Exhibit 10.21 Rights Agreement dated December 14, 1994 between Paragon Trade Brands,
Inc. and Chemical Bank, as Rights Agent3
Exhibit 10.22 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
26
<PAGE>
Exhibit 10.23** Sales Contract, dated as of January 30, 1996, between Hoechst Celanese
Corporation and Paragon Trade Brands, Inc. 7
Exhibit 10.23.1** Sales Contract, dated as of April 30, 1998, between Clariant Corporation
and Paragon Trade Brands, Inc.
Exhibit 10.24 Lease Agreement between Cherokee County, South Carolina and Paragon Trade
Brands, Inc., dated as of October 1, 19968
Exhibit 11 Computation of Per Share Earnings (See Note 9 to Financial Statements)
Exhibit 27 Financial Data Schedule (for SEC use only)
(b) No reports on Form 8-K were filed during the quarter ended June 28, 1998.
<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.
10 Incorporated by reference from Paragon Trade Brands, Inc.'s Annual report on
From 10-K for the fiscal year ended December 28, 1997.
11 Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly Report
on Form 10-Q for the quarter ended March 29, 1998.
</FN>
</TABLE>
27
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PARAGON TRADE BRANDS, INC.
By /S/ ALAN J. CYRON
---------------------
Alan J. Cyron
Chief Financial Officer
August 12, 1998
28
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
<S> <C> <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, 19955
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 Paragon1
Exhibit 10.2 Intellectual Property Agreement, dated as of February 2, 1993, between
Weyerhaeuser and Paragon1
Exhibit 10.3 License, dated as of February 2, 1993, between Weyerhaeuser and Paragon1
Exhibit 10.4 Sublicense, dated as of February 2, 1993, between Weyerhaeuser and Paragon1
Exhibit 10.5 Technology Agreement, dated as of October 15, 1987, by and between
Weyerhaeuser and Johnson and Johnson, as amended1
Exhibit 10.6 Critical Supply Agreement, dated as of February 2, 1993, between
Weyerhaeuser and Paragon1
Exhibit 10.6.1 Letter Supply Agreement between Weyerhaeuser and Paragon dated as of
October 22, 199710
Exhibit 10.7* Stock Option Plan for Non-Employee Directors1
Exhibit 10.8* Annual Incentive Compensation Plan1
Exhibit 10.9* 1993 Long-Term Incentive Compensation Plan1
Exhibit 10.10* Amended and Restated Employment Agreement, dated as of August 5, 1997,
between Paragon and Bobby V. Abraham9
Exhibit 10.11* Amended and Restated Employment Agreement, dated as of August 5, 1997,
between Paragon and David W. Cole9
Exhibit 10.12* Employment Agreement, dated as of August 5, 1997, between Paragon and Alan
J. Cyron9
Exhibit 10.13* Employment Agreement, dated as of August 5, 1997, between Paragon and
Catherine O. Hasbrouck9
Exhibit 10.14* Employment Agreement, dated as of August 5, 1997, between Paragon and
Stanley L. Bulger9
Exhibit 10.15* 1995 Incentive Compensation Plan5
Exhibit 10.16 Amended and Restated Credit Agreement, dated as of February 6, 19967
Exhibit 10.16.1 Amendment Agreement, dated December 13, 1996, to Amended and Restated
Credit Agreement, dated as of February 6, 19968
29
<PAGE>
Exhibit 10.17 Revolving Credit and Guaranty Agreement Among Paragon Trade Brands, Inc.,
a Debtor-in-Possession, as Borrower, the Subsidiaries of the Borrower
Named Herein, as Guarantors, the Banks Party Hereto, and Chase Manhattan
Bank, as Agent, dated as of January 7, 1998, as Amended (Conformed to
Reflect the First Amendment to the Revolving Credit and Guaranty Agreement
dated as of January 30, 1998, the Second Amendment to the Revolving Credit
and Guaranty Agreement dated as of March 23, 1998, and the Third Amendment
to Revolving Credit and Guaranty Agreement dated as of April 15, 1998)11
Exhibit 10.18 Security and Pledge Agreement, dated as of January 7, 199811
Exhibit 10.19 Revolving Canadian Credit Facility and Parent Guarantee2
Exhibit 10.20 Indemnification Agreements, dated as of February 2, 1993, between
Weyerhaeuser and Bobby V. Abraham and Gary M. Arnts1
Exhibit 10.21 Rights Agreement dated December 14, 1994 between Paragon Trade Brands,
Inc. and Chemical Bank, as Rights Agent3
Exhibit 10.22 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 10.23** Sales Contract, dated as of January 30, 1996, between Hoechst Celanese
Corporation and Paragon Trade Brands, Inc. 7
Exhibit 10.23.1** Sales Contract, dated as of April 30, 1998, between Clariant Corporation
and Paragon Trade Brands, Inc.
Exhibit 10.24 Lease Agreement between Cherokee County, South Carolina and Paragon Trade
Brands, Inc., dated as of October 1, 19968
Exhibit 11 Computation of Per Share Earnings (See Note 9 to Financial Statements)
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.
30
<PAGE>
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.
10 Incorporated by reference from Paragon Trade Brands, Inc.'s Annual report on
From 10-K for the fiscal year ended December 28, 1997.
11 Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly Report
on Form 10-Q for the quarter ended March 29, 1998.
</FN>
</TABLE>
31
SALES CONTRACT
CLARIANT CORPORATION, through its Superabsorbent Materials Business Unit, having
a manufacturing facility at 3340 West Norfolk Road, Portsmouth, Virginia 23703
("Seller"), agrees to sell and deliver to PARAGON TRADE BRANDS, INC., 180
Technology Parkway, Norcross, GA 30092, ("Buyer") for Buyer's own consumption
and Buyer agrees to purchase from Seller and to take delivery of the product
described below subject to the following terms and conditions:
1. PRODUCT: SANWET(R) superabsorbent polymers (the "Product").
2. CONTRACT TERMS: This contract shall become effective January 1, 1999 and
shall be valid for a period of three (3) years.
3. QUANTITY: Quantities shall include the current annual volume requirements
of 30,000 tons at each of the Buyer's existing facilities. In addition, the
possibility for part of Buyer's planned requirements for superabsorbent polymer
at its Paragon Mabesa International facility in Tijuana, Mexico is included in
this Agreement. Incremental volume resulting from Buyer's acquisitions and/or
joint venture activity will be negotiated as they arise. Buyer's estimated
requirements are set forth in Exhibit I, attached hereto and made a part hereof.
4. SPECIFICATIONS: The Product delivered hereunder shall be in conformity with
Seller's product specifications agreed upon by the parties, and as set forth in
Exhibit II, attached hereto and made a part hereof.
5. PRICE: For 1999, the price for the Product shall be * /lb. for the first *
tons and * for the next * tons, F.O.B. Destination, freight prepaid and added to
invoice. The price for the Product will be reviewed by the parties on an annual
basis during the term of this Agreement. For the year 2000, the price for PTB
will be determined using a * approach. The price is not to exceed * price for
existing product. For 2000 the Seller offers the following: the first * tons at
* /lb. and * for the next * tons, FOB destination, freight pre-paid and added to
invoice. Both parties have agreed to continue with the * /lb. * approach.
Therefore, the invoice price will be * /lb. * than the prices agreed to in the
contract. *
6. VALUE COMPETITIVENESS: ***************************************************
*CONFIDENTIAL TREATMENT REQUESTED
********************************************************************************
*CONFIDENTIAL TREATMENT REQUESTED
1
<PAGE>
********************************************************************************
*CONFIDENTIAL TREATMENT REQUESTED
********************************************************************************
"Competitive Cost", as that term is used herein, shall mean the price per gram
of superabsorbent polymer products of equal or superior performance used in
Buyer's diaper and/or any other of its absorbent products, times the number of
grams required per diaper. The method for evaluating competitive cost is
determined as follows:
(a) Buyer will purchase sampling and test quantities only of the
alternate producer's superabsorbent product. Buyer will then produce
diapers on a commercial diaper machine in a manner which will isolate
the superabsorbent polymer products used as the only variable.
(b) Buyer will test the diapers product utilizing "statistically proven
in-vivo consumer leakage tests" as the preferred methodology for
testing.
(c) Seller may verify the competitive cost defined by Buyer through an
independent testing service. Buyer will provide sufficient diapers for
this purpose.
7. TECHNOLOGY CHANGES: If, at any time during the term of this Agreement,
Buyer notifies Seller in writing of its intention to convert its manu-
facturing processes to a technology which is not compatible with the current
form of Seller's Product, Seller shall have six (6) months in which to provide
a compatible product to Buyer. During such period, Buyer shall use its best
efforts to assist Seller in the commercial development of a compatible product.
If, at the end of the six (6) month period, the parties agree that progress is
being made in developing an acceptable product, they may extend the development
period for a mutually agreeable amount of time. If, on the other hand, 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 purchases from other sources.
8. TERMS OF PAYMENT: Net fifteen (15) days after date of invoice for U.S. and
net thirty (30) days after date of invoice for Canada.
9. MEANS OF SHIPMENT: In Seller's standard packaging or as otherwise agreed
upon by the parties.
10. WARRANTY AND LIMITATIONS: Seller warrants only that the Product will
conform to Seller's specifications as described on Exhibit II. Except as
aforesaid, THERE IS NO WARRANTY, REPRESENTATION OR CONDITION OF ANY KIND,
EXPRESS OR IMPLIED (INCLUDING NO WARRANTY OF MERCHANTABILITY OR FITNESS OF THE
PRODUCT FOR ANY USE CONTEMPLATED BY BUYER) CONCERNING THE PRODUCT AND NONE SHALL
BE IMPLIED BY LAW. SELLER SHALL NOT BE LIABLE, AND BUYER WAIVES ALL CLAIMS
AGAINST SELLER, FOR INCIDENTAL OR CONSEQUENTIAL DAMAGES. Seller will not be
liable to
*CONFIDENTIAL TREATMENT REQUESTED
2
<PAGE>
Buyer for any loss, damage or injury to persons resulting from the handling,
storage, transportation, resale or use of the Product alone, or in combination
with other substances or otherwise. Without limiting the generality of the
foregoing, the Seller shall indemnify, hold harmless and, if requested by Buyer,
defend Buyer against any and all liabilities, cost or damages (including out of
pocket expenses, court costs and attorney's fees) arising out of any claims,
demands or judgments (including settlement of any litigation, if such settlement
is made with consent of Seller, which consent shall not be unreasonably
withheld), including, but not limited to, any claims by third parties or Buyer's
customers, that Product sold hereunder infringes any U.S. or foreign letters of
patent, copyright, trademark, or any other rights or arising out of claims,
demands or judgments (including settlement of any litigation, if such settlement
is made with the consent of Seller, which consent shall not be unreasonably
withheld) of unfair competition or trade secret violations; provided Buyer gives
Seller prompt notice in writing of any action or proceeding and, at Seller's
expense, gives Seller necessary information, assistance and authority to do so.
********************************************************************************
*CONFIDENTIAL TREATMENT REQUESTED
*****************Upon request, the Seller will furnish technical advice or
assistance as it has available in reference to the use of its Product by Buyer;
it is expressly understood, however, that all such technical advice or
assistance is given or results obtained, all such advice or assistance being
given and accepted at Buyer's risk. Buyer acknowledges that the Product covered
by this contract may be, or become considered as hazardous materials under
various laws and regulations. Seller has or shall have furnished to Buyer
material safety data sheets including warnings and safety and health information
concerning the Product and/or the containers in which such Product is sold
hereunder. Buyer agrees to disseminate such information so as to give warning of
possible hazards to persons who Buyer can reasonably foresee may be exposed to
such hazards, including but not limited to Buyer's employees, agents,
contractors, and customers. If Buyer fails to disseminate such warnings and
information, Buyer agrees to be responsible for such failure, including but not
limited to liability for injury, sickness, death and property damage; provided
however, that if such liability is based upon Seller's failure to meet written
specifications or Seller's failure to provide accurate information on Seller's
material safety data sheets, then Seller is responsible. Seller will provide
Buyer with reasonable notice and opportunity to defend in the event any claim or
demand that is made on Seller as to which such indemnity relates.
*CONFIDENTIAL TREATMENT REQUESTED
3
<PAGE>
11. FORCE MAJEURE: Except for Buyer's payment obligations hereunder, neither
party will be liable for nonperformance or delay in performance due wholly or
partly to any cause not in its control or not avoidable by reasonable diligence.
Upon the occurrence of any such contingency, the party so affected may suspend
or reduce deliveries during the period of such contingency, and the total
quantity deliverable under this Agreement will be reduced by the quantities so
omitted. The following, while not an exclusive listing, will not be considered
within a party's control or avoidable by reasonable diligence: acts of God,
labor controversies; court decrees; inability to use the full capacity of plants
or facilities as a result of governmental action, machinery malfunctions or
breakdowns; inability to obtain fuel, power, materials necessary to produce the
Product, labor, containers, or transportation facilities without litigation or
the payment of penalties or unreasonable prices or the acceptance of
unreasonable terms and conditions. Seller will have an agreed upon risk
management process in place which addresses securing alternate sources, as well
as priority access to available Seller's supply, without liability for any
failures of performance which may result therefrom.
12. BUYER'S CREDIT: Credit terms may be decreased, canceled or limited by
Seller, both as to time and amount, only upon prior thirty (30) days written
notice to Buyer, and the price of any part of the Product deliverable hereunder
shall, at Seller's option and only upon prior written notice to Buyer, be
payable in cash before shipment or on offer of delivery. Seller shall not be
obligated to make any shipment when Buyer is in default to Seller under this or
any other contract. Buyer shall pay interest on all invoices not paid within the
terms of payment specified, at the maximum rate allowable under applicable
federal or state law but in no event higher than one percent (1%) per month on
the unpaid balance.
13. SHIPMENT NOTICE: Buyer shall give Seller reasonable notice of shipments
required, and take delivery accordingly. Seller will not be required to ship in
any one calendar month more than 10% of the annual quantity specified herein for
the then current contract year. Seller will use its best efforts to make greater
quantities available if requested by Buyer, and Buyer will provide forecasts and
orders for such greater quantities with as much lead time as possible.
14. CLAIMS: Buyer will test and inspect the Product for compliance with this
Agreement within a reasonable time after each shipment, and if Buyer fails to
notify Seller within 45 days after its receipt of any shipment, and before any
part of the Product (except for reasonable test and inspection quantities) has
been changed from its original condition, that the Product is defective or short
in any respect, Buyer will have waived any right or claims against Seller.
Seller's invoice weights, volumes, sizes and tares established in good faith
will govern unless proved erroneous. Variations of 1% or less from invoice
quality of shipment will be disregarded.
15. HANDLING, LOADING, UNLOADING AND CONTAINERS: Buyer acknowledges that the
Product may require special handling, storage, transportation, treatment
or use to comply with applicable safety and environmental laws and will take
4
<PAGE>
all reasonable action to comply with these laws and avoid spills or other
damages to persons, property or the environment. Buyer will (1) unload and
release all transportation equipment promptly so Seller incurs no demurrage,
other expense or loss (2) comply with instructions Seller may give for the
return of the equipment, and (3) pay any invoice for this demurrage, other
expenses or loss within 10 days.
16. LIMITATION OF ACTIONS: Any action against the Seller arising out of this
Agreement or by reason of any sale hereunder, or by reason of any federal or
state statutory provisions relating hereto shall be commenced within one (1)
year from the date such cause of action arises, otherwise the same shall be
barred notwithstanding any statutory period of limitations to the contrary.
Unless otherwise indicated herein, risk of loss and responsibility for all
Product sold hereunder shall pass to Buyer upon Seller's delivery to Buyer
hereunder. Prepayment of freight is negotiated in each particular case, and does
not determine the passing of title. Title to the Product passes from Seller to
Buyer at FOB point.
17. ASSIGNMENT: Either party may assign this Agreement, without the consent of
the other party, to the purchases of all, or substantially all, of the assets of
the business unit responsible for performing the Agreement. Otherwise, this
contract is not transferable or assignable by either party and any attempt by
either party to assign its rights, duties or obligations hereunder shall be
void.
18. MISCELLANEOUS: This Agreement constitutes the entire contract for the sale
and purchase of the Product and Seller shall not be liable for or bound in any
manner by any representation, guarantees or commitments, except as specifically
provided herein. No modifications of this Agreement shall be of any force or
effect unless in writing and signed by the party claimed to be bound thereby,
and no modification shall be effected by the acknowledgment or acceptance of
purchase contract forms containing different conditions.
19. FAIR LABOR STANDARDS ACT: All Product delivered by Seller hereunder will be
produced in compliance with the Fair Labor Standards Act of 1938 as amended.
20. NOTICES: Any notice or request given under this Agreement shall be
addressed as follows:
If to Seller: Clariant Corporation
3340 West Norfolk Road
Portsmouth, Virginia 23703
Attention: General Sales & Marketing Manager
If to Buyer: Paragon Trade Brands, Inc.
180 Technology Parkway
Norcross, GA 30092
Attention: Executive Vice President of Materials
and Technology
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly caused this Agreement
to be executed in duplicate by their duly authorized representatives as of this
30th day of April, 1998.
CLARIANT CORPORATION PARAGON TRADE BRANDS, INC.
By: /s/ C.J. Barnard By: /s/ A.D. Jezzi
----------------- --------------------
Vice President
Date: 5-12-98 Date: 5-7-98
--------------- ------------------
By: /s/ M. Dan Brower
-----------------
Date: 5-13-98
---------------
6
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM FORM 10Q FOR THE QUARTER ENDED JUNE 28, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-27-1998
<PERIOD-START> DEC-29-1997
<PERIOD-END> JUN-28-1998
<CASH> 49,598
<SECURITIES> 0
<RECEIVABLES> 71,599
<ALLOWANCES> 8,690
<INVENTORY> 42,356
<CURRENT-ASSETS> 163,905
<PP&E> 258,100
<DEPRECIATION> 152,979
<TOTAL-ASSETS> 422,252
<CURRENT-LIABILITIES> 77,553
<BONDS> 0
0
0
<COMMON> 124
<OTHER-SE> 13,255
<TOTAL-LIABILITY-AND-EQUITY> 422,252
<SALES> 265,288
<TOTAL-REVENUES> 265,288
<CGS> 213,143
<TOTAL-COSTS> 213,143
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 10,127
<INCOME-TAX> 752
<INCOME-CONTINUING> 9,375
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,375
<EPS-PRIMARY> .79
<EPS-DILUTED> .79
</TABLE>
