SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the thirteen week period ended September 26, 1999
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 11,949,714
shares ($.01 par value) as of September 26, 1999.
Page 1
Exhibit Index on Page 42
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q FILING
FOR THE THIRTEEN WEEK PERIOD ENDED SEPTEMBER 26, 1999
<TABLE>
<CAPTION>
PAGE NO.
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements
Consolidated Statements of Operations 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of 19
Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 32
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 32
Item 2. Changes in Securities (not applicable)
Item 3 Defaults Upon Senior Securities 37
Item 4. Submission of Matters to a Vote of Security Holders (not applicable)
Item 5. Other Information (not applicable)
Item 6. Exhibits and Reports on Form 8-K 37
Signature Page 41
Exhibit Index 42
Exhibits 46
</TABLE>
-2-
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
(NOTE 2)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
-------------------- -----------------------
SEPT. 26, 1999 SEPT. 27 1998 SEPT. 26, 1999 SEPT. 27 1998
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Sales, net of discounts and allowances.......... $ 128,507 $ 136,993 $ 372,599 $ 402,281
Cost of sales................................... 110,200 109,081 323,117 322,224
----------- ----------- ----------- ------------
Gross profit.................................... 18,307 27,912 49,482 80,057
Selling, general and administrative expense..... 20,945 22,003 62,095 60,955
Research and development expense................ 840 913 2,783 3,444
Manufacturing operation closing costs........... 36 - 1,527 -
----------- ----------- ----------- ------------
Operating profit (loss)......................... (3,514) 4,996 (16,923) 15,658
Equity in earnings (loss) of unconsolidated
subsidiaries........................... (4) 590 1,116 2,108
Interest expense(1)............................. 95 51 304 341
Other income.................................... 1,008 687 2,023 1,730
----------- ----------- ----------- ------------
Earnings (loss) before income taxes and
bankruptcy costs....................... (2,605) 6,222 (14,088) 19,155
Bankruptcy costs................................ 2,612 1,724 7,076 4,530
Provision for (benefit from) income taxes....... 18 474 (325) 1,226
----------- ----------- ----------- -----------
Net earnings (loss)............................. $ (5,235) $ 4,024 $ (20,839) $ 13,399
=========== =========== =========== ===========
Basic earnings (loss) per common share.......... $ (.44) $ .34 $ (1.74) $ 1.12
=========== =========== =========== ===========
Diluted earnings (loss) per common share........
$ (.44) $ .34 $ (1.74) $ 1.12
=========== =========== =========== ===========
Dividends paid.................................. $ - $ - $ - $ -
=========== =========== =========== ===========
<FN>
(1)Contractual Interest $ 1,393 $ 1,449 $ 4,055 $ 4,348
=========== =========== =========== ===========
</FN>
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
-3-
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
(NOTE 2)
<TABLE>
<CAPTION>
SEPTEMBER 26, 1999 DECEMBER 27, 1998
------------------ -----------------
<S> <C> <C>
ASSETS
Cash and short-term investments......................... $ 9,652 $ 22,625
Receivables............................................. 76,718 79,156
Inventories............................................. 49,086 53,282
Current portion of deferred income taxes................ 3,349 4,260
Prepaid expenses........................................ 2,378 4,323
--------------------- ---------------------
Total current assets............................... 141,183 163,646
Property and equipment.................................. 110,153 106,200
Construction in progress................................ 19,822 19,626
Assets held for sale.................................... 1,017 4,691
Investment in unconsolidated subsidiary, at cost........ 22,929 22,743
Investment in and advances to unconsolidated
subsidiaries, at equity............................ 68,956 66,041
Goodwill................................................ 31,380 32,819
Other assets............................................ 14,004 13,521
--------------------- ---------------------
Total assets ...................................... $ 409,444 $ 429,287
===================== =====================
LIABILITIES AND SHAREHOLDERS' DEFICIT
Checks issued but not cleared........................... $ 7,585 $ 12,433
Accounts payable........................................ 41,367 32,416
Accrued liabilities..................................... 30,925 33,646
--------------------- ---------------------
Total current liabilities.......................... 79,877 78,495
Liabilities subject to compromise (Note 10)............. 406,919 406,859
Deferred compensation................................... 211 -
Deferred income taxes................................... 4,730 5,773
--------------------- ---------------------
Total liabilities.................................. 491,737 491,127
Commitments and contingencies (Notes 1 and 12)
Shareholders' deficit:
Preferred stock: Authorized 10,000,000 shares,
no shares issued, $.01 par value................... - -
Common stock: Authorized 25,000,000 shares, issued
12,388,464 and 12,378,616
shares, $.01 par value............................. 124 124
Capital surplus......................................... 143,736 143,918
Accumulated other comprehensive loss.................... (1,226) (1,840)
Retained deficit........................................ (214,597) (193,758)
Less: Treasury stock, 438,750 and 429,696 shares,
at cost............................................ (10,330) (10,284)
--------------------- ---------------------
Total shareholders' deficit........................ (82,293) (61,840)
--------------------- ---------------------
Total liabilities and shareholders' deficit........ $ 409,444 $ 429,287
===================== =====================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
-4-
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
(NOTE 2)
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED
-----------------------
SEPTEMBER 26, 1999 SEPTEMBER 27, 1998
------------------ ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss).................................. $ (20,839) $ 13,399
Non-cash charges (benefits) to earnings:
Depreciation and amortization.................... 27,100 25,703
Deferred income taxes............................ (132) (84)
Equity in earnings of unconsolidated
subsidiaries................................. (482) (1,149)
Changes in operating assets and liabilities:
Accounts receivable.............................. (1,434) (6,829)
Inventories and prepaid expenses................. 6,141 (1,730)
Accounts payable................................. 5,786 34,316
Checks issued but not cleared.................... (4,848) (964)
Pre-petition reclamation payment
authorized by court.......................... (439) -
Accrued liabilities.............................. (3,449) 7,606
Other ............................................... (2,509) (3,466)
--------------------- ---------------------
Net cash provided by operating activities........ 4,895 66,802
--------------------- ---------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property and equipment............... (23,646) (18,640)
Proceeds from sale of property and equipment.......... 6,373 3,433
Investment in Grupo P.I. Mabe, S. A. de C. V.......... (186) (2,779)
Proceeds from sale of Changing Paradigms, Inc......... 350 -
Investment in and advances to unconsolidated
subsidiaries, at equity.......................... (800) (4,474)
Other ............................................... 41 (7,045)
--------------------- ---------------------
Net cash used by investing activities............ (17,868) (29,505)
--------------------- ---------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in short-term borrowings................. - (745)
Pre-petition debt payment authorized by court......... - (1,867)
--------------------- ---------------------
Net cash used by financing activities........ - (2,612)
--------------------- ---------------------
NET INCREASE (DECREASE) IN CASH....................... (12,973) 34,685
Cash at beginning of period........................... 22,625 991
--------------------- ---------------------
Cash at end of period................................. $ 9,652 $ 35,676
===================== =====================
Cash paid during the period for:
Interest, net of amounts capitalized............. $ 550 $ 1,450
===================== =====================
Income taxes..................................... $ 470 $ (2,592)
===================== =====================
Bankruptcy costs................................. $ 5,105 $ 1,965
===================== =====================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
-5-
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS
FOR THE THIRTEEN AND THIRTY-NINE WEEK PERIODS ENDED SEPTEMBER 26, 1999
(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.
The Procter & Gamble Company ("P&G") filed a lawsuit in 1994 against the Company
in the United States District Court for the District of Delaware, alleging that
the Company's disposable baby diaper products infringed two of P&G's dual cuff
diaper patents. The lawsuit sought injunctive relief, lost profit and royalty
damages, treble damages and attorneys' fees and costs. The Company denied
liability under the patents and counterclaimed for patent infringement and
violation of antitrust laws by P&G.
On December 30, 1997, the District Court issued a Judgment and Opinion finding
that P&G's dual cuff diaper patents were valid and infringed by certain of the
Company's disposable diaper products, while also rejecting the Company's patent
infringement claims against P&G. The District Court had earlier dismissed the
Company's antitrust counterclaim on summary judgment. The Judgment entitled P&G
to damages based on sales of the Company's diapers containing the "inner-leg
gather" feature. While the final damages number of approximately $178,400 was
not entered by the District Court until June 2, 1998, the Company originally
estimated the liability and associated litigation costs to be approximately
$200,000. The amount of the award resulted in violation of certain covenants
under the Company's then-existing bank loan agreements. As a result, the
issuance of the Judgment and the uncertainty it created caused an immediate and
critical liquidity issue for the Company. The Chapter 11 filing was designed to
prevent P&G from placing liens on Company property, permit the Company to appeal
the Delaware District Court's decision in the P&G case in an orderly fashion and
give the Company the opportunity to resolve liquidated and unliquidated claims
against the Company which arose prior to the Chapter 11 filing.
Substantially all liabilities outstanding as of the date of the Chapter 11
filing are subject to resolution under a plan of reorganization to be voted upon
by those of the Company's creditors and shareholders entitled to vote and
confirmed by the Bankruptcy Court. Schedules were filed by the Company on March
3, 1998 with the Bankruptcy Court setting forth the assets and liabilities of
the Company as of the date of the Chapter 11 filing, as shown by the Company's
accounting records. Amended schedules were filed by the Company on March 30,
1998 with the Bankruptcy Court. The Bankruptcy Court set a bar date of June 5,
1998 by which time creditors must have filed proofs of claim setting forth any
claims which arose prior to the Chapter 11 filing.
On February 2, 1999, the Company entered into a Settlement Agreement with P&G
which fully and finally settles all matters related to the Delaware Judgment,
the Company's appeal of the Delaware Judgment, P&G's motion to find the Company
in contempt of the Delaware Judgment and P&G's proof of claim filed in the
Company's Chapter 11 reorganization proceeding. The P&G Settlement Agreement was
approved by the Bankruptcy Court on August 6, 1999 (the "P&G Approval Order").
The Official Committee of Equity Security Holders (the "Equity Committee")
appointed in the Chapter 11 reorganization proceeding filed a notice of appeal
of the P&G Approval Order with the Federal District Court for the Northern
District of Georgia and a motion to expedite briefing. On October 14,1999, the
Georgia District Court denied the Equity Committee's motion for expedited
briefing and offered the Equity Committee the option of consenting to the
Georgia District Court's adoption of the P&G Approval Order to permit the Equity
Committee to take its appeal of the P&G settlement directly to the 11th Circuit
Court of Appeals. On October 15, 1999, the Equity Committee consented to the
Georgia District Court's adoption of the P&G Approval Order and has since filed
a notice of appeal in the 11th Circuit Court of Appeals. See Note 12.
-6-
<PAGE>
On October 26, 1995, Kimberly-Clark Corporation ("K-C") filed a lawsuit against
the Company in U.S. District Court in Dallas, Texas, alleging infringement by
the Company's products of two K-C patents relating to dual cuffs. The lawsuit
sought 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. In addition, K-C
subsequently sued the Company on another patent issued to K-C which is based
upon a further continuation of one of the K-C dual cuff patents asserted in the
case.
On March 19, 1999, the Company entered into a Settlement Agreement with K-C
which fully and finally settles all matters related to the Texas action,
including the Company's counterclaims, and K-C's proof of claim filed in the
Company's Chapter 11 reorganization proceeding. The K-C Settlement Agreement was
approved by the Bankruptcy Court on August 6, 1999 (the "K-C Approval Order").
On August 16, 1999, the Equity Committee filed an emergency motion with the
Bankruptcy Court seeking an 80-day stay of the K-C Settlement Agreement pending
an appeal by the Equity Committee to the Georgia District Court. The Bankruptcy
Court denied the Equity Committee's request, but granted a limited stay through
August 25, 1999 to permit the Georgia District Court to consider the matter. On
August 24, 1999, the Georgia District Court heard arguments on the Equity
Committee's motion for an emergency 80-day stay. At that time, the limited stay
was extended to September 3, 1999 by agreement of the parties in order to allow
the Georgia District Court to further consider the matter. On September 2, 1999,
the Georgia District Court issued an order denying the Equity Committee's motion
for an emergency stay. In denying the Equity Committee's request, the Georgia
District Court found, among other things, that the Equity Committee had failed
to show that it has a substantial likelihood of success on its appeal of the K-C
settlement. The Georgia District Court also found that the K-C Approval Order
was thorough and that the Bankruptcy Court did not abuse its discretion in
approving the K-C settlement. The Georgia District Court offered the Equity
Committee the option of consenting to the Georgia District Court's adoption of
the K-C Approval Order to permit the Equity Committee to take its appeal of the
K-C settlement directly to the 11th Circuit Court of Appeals, in which event,
the Georgia District Court stated that it would enter a limited stay through
October 28, 1999. On September 8, 1999, the Equity Committee consented to the
procedure proposed by the Georgia District Court. On October 27, 1999, the 11th
Circuit Court of Appeals denied the Equity Committee's motion for a further stay
of the K-C Approval Order, as well as its motion for an expedited appeal. See
Note 12.
On July 12, 1999, the Bankruptcy Court approved certain bidding procedures, an
expense reimbursement and a termination fee relating to a proposed investment by
Wellspring Capital Management LLC ("Wellspring"), a private investment company,
to acquire the Company as part of a plan of reorganization. The bidding
procedures provide for the consideration of competing investment proposals from
other qualified bidders and for the filing by the Company of a stand-alone plan
of reorganization. The Equity Committee filed a motion for amended findings with
respect to the Bankruptcy Court's July 12, 1999 order. The Bankruptcy Court
denied the Equity Committee's motion. The Equity Committee has appealed the
Bankruptcy Court's order and the denial of its motion to the Georgia District
Court. On November 5, 1999, the Company and the Equity Committee filed a joint
motion seeking to extend the briefing schedule in this matter pending the
completion of ongoing global settlement discussions between the parties.
On August 25, 1999, with the support of the Official Committee of Unsecured
Creditors (the "Creditors' Committee" and, together with the Equity Committee,
the "Committees"), the Company filed a stand-alone plan of reorganization (the
"Plan") with the Bankruptcy Court. The Plan provides an alternative to a
proposal by Wellspring to acquire the Company as part of a plan of
reorganization (the "Wellspring Proposal"). In accordance with Bankruptcy
Court-approved auction procedures, an alternative transaction competing with the
Wellspring Proposal was proposed to the Company on September 15, 1999. An
auction was commenced on September 21, 1999. The auction continued thereafter
until the Company, after consultation with the Committees, P&G and K-C,
determined to conclude the auction on October 4, 1999. At the conclusion of the
auction, the Company, after consultation with the Committees, P&G and K-C,
determined that Wellspring had submitted the best bid. On October 15, 1999, the
Company and the Creditors' Committee, as co-proponents, jointly filed an
amendment to the Plan (the "Amended Plan") which incorporates the Wellspring
Proposal, as modified by the Company after consultation with its various
creditor constituencies. The Amended Plan also provides that, in the event the
proposed Wellspring transaction is not consummated, the proponents may pursue
confirmation of a stand-alone plan of reorganization. The Amended Plan
specifies, among other things, the type and amount of value to be distributed
under either the Wellspring or the stand-alone alternative, as the case may be.
The Bankruptcy Court has set a hearing date of November 17, 1999 to consider
approval of the Disclosure Statement.
-7-
<PAGE>
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. On October 15, 1999, the
Company and the Creditors' Committee, as co-proponents, filed an amended plan of
reorganization with the Bankruptcy Court. The plan filed by the Company and the
Creditors' Committee provides for distributions that the Company believes will
not be sufficient to satisfy in full all of the claims against the Company. As a
result of the Chapter 11 filing, the Company has incurred and will continue to
incur significant costs for professional fees as the reorganization plan is
developed. The Company is also required to pay certain expenses of the
Committees, including professional fees, to the extent allowed by the Bankruptcy
Court. See Note 12.
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., which was sold in October 1998. The following information summarizes the
combined results of operations for the thirteen-week and thirty-nine week
periods ended September 26, 1999 and September 27, 1998, as well as the combined
balance sheets as of September 26, 1999 and December 27, 1998 for these
subsidiaries. This information has been prepared on the same basis as the
consolidated financial statements.
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
-------------------- -----------------------
SEPT. 26, 1999 SEPT. 27, 1998 SEPT. 26, 1999 SEPT. 27, 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Sales, net of discounts and allowances......... $ 7,358 $ 15,754 $ 23,070 $ 43,657
Gross profit................................... 472 3,168 1,817 7,641
Manufacturing operation closing costs.......... 36 - 1,527 -
Earnings (loss) before income taxes............ (158) 2,503 176 5,817
Net earnings (loss)............................ (175) 1,837 501 4,407
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 26, 1999 DECEMBER 27, 1998
------------------ -----------------
<S> <C> <C>
Current assets........................................ $ 10,080 $ 17,863
Non-current assets.................................... $ 56,019 $ 54,734
Current liabilities................................... $ 6,149 $ 5,700
Non-current liabilities............................... $ 1,381 $ 8,495
</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 have been eliminated.
The accompanying consolidated balance sheet as of December 27, 1998, 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 manufacturing
operation closing costs and bankruptcy-related costs. The results of operations
for the thirteen-week period ending September 26, 1999 should not be regarded as
necessarily indicative of the results that may be expected for the full year.
-8-
<PAGE>
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As more fully described in
Notes 1 and 12, the Company has submitted an amended plan of reorganization to
the Bankruptcy Court for approval. The Company remains unable, however, to
predict when it will emerge from Chapter 11. In the event a plan of
reorganization is confirmed and consummated, continuation of the business
thereafter is dependent on the Company's ability to successfully execute the
underlying business plan. The accompanying consolidated financial statements do
not include any adjustments relating to the recoverability and classification of
recorded asset amounts or the amounts and classification of liabilities that
might be necessary should the Company be unable to continue as a going concern.
The Company experienced greater than anticipated operating losses in its
feminine care and adult incontinence businesses during the first three quarters
of 1999 and during 1998 and 1997. While the Company expects these losses to
continue near-term, the Company has developed a business plan that supports the
realization of its investment in its feminine care and adult incontinence
business. Accordingly, the Company has not recorded any adjustments in its
financial statements relating to the recoverability of the operating assets of
the feminine care and adult incontinence business. The Company's ability to
recover its investment is dependent upon a prompt emergence from Chapter 11 and
the successful execution of the Company's feminine care and adult incontinence
business plan. The Company believes that it is positioned to emerge from Chapter
11 protection in the first quarter of 2000. The Company believes that once it
emerges from Chapter 11, the feminine care and adult incontinence business will
see an increase in sales and improved results. The Company cannot predict,
however, whether or when such improved results will be realized.
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board has issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which must be
adopted by the Company's fiscal year 2001. This statement establishes accounting
and reporting standards for derivative instruments - including certain
derivative instruments embedded in other contracts - and for hedging activities.
Adoption of this statement is not expected to have a material impact on the
Company's financial statements.
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." This statement requires
capitalization of certain costs of internal-use software. The Company adopted
this statement in the quarter ended March 28, 1999, and it did not have a
material impact on the financial statements.
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on the
Costs of Start-up Activities." This statement requires that the costs of
start-up activities and organizational costs be expensed as incurred. Any of
these costs previously capitalized by a company must be written off in the year
of adoption. The Company adopted this statement in the quarter ended March 28,
1999, and the equity in earnings of unconsolidated subsidiaries includes $519 in
charges as a result of the adoption of the statement.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' financial
statements to conform them to the current year's presentation.
NOTE 3: MANUFACTURING OPERATION CLOSING COSTS
On April 30, 1999, the Company announced that its Canadian subsidiary, PTB
Canada, would cease manufacturing infant disposable diapers at its Brampton,
Ontario facility. The Company announced that the facility would curtail
manufacturing operations over a few weeks' period of time while the Company
transitioned its Canadian customers to its Harmony, Pennsylvania facility.
Thereafter, the Company expected that the Brampton facility would operate as a
warehouse and distribution facility. Manufacturing operations ceased during June
and resulted in severing the employment of approximately 110 employees. The
Company expects to utilize the Brampton diaper making equipment in its U.S.
operations and has determined that the Brampton facility will be placed for sale
in the fourth quarter of 1999. For the period ended September 26, 1999, the
consolidated
-9-
<PAGE>
statement of loss includes $1,527 of pre-tax charges as a result of cessation of
manufacturing operations. The following summarizes amounts accrued and costs
incurred for the period ended September 26, 1999:
<TABLE>
<CAPTION>
Amount Costs Balance
Accrued Incurred Remaining
-------------- ------------- ------------
<S> <C> <C> <C>
Employee severance and related items......................... $ 1,372 $ 1,361 $ 11
Asset write-downs............................................ 155 155 -
------------- ------------- ------------
$ 1,527 $ 1,516 $ 11
============= ============= ============
</TABLE>
NOTE 4: 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 THIRTY-NINE WEEKS ENDED
-------------------- -----------------------
SEPT. 26, 1999 SEPT. 27, 1998 SEPT. 26, 1999 SEPT. 27, 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Professional fees.............................. $ 2,425 $ 2,006 $ 6,785 $ 4,819
Amortization of DIP Credit Facility
deferred financing costs.................. 74 211 482 611
Other.......................................... 47 12 64 122
Interest expense (income)...................... 66 (505) (255) (1,022)
---------------- ---------------- ---------------- ----------------
$ 2,612 $ 1,724 $ 7,076 $ 4,530
================ ================ ================ ================
</TABLE>
NOTE 5: INCOME TAXES
Income tax expense (benefit) for the subsidiaries not included in the Chapter 11
filing was $18 and $474 during the thirteen-week periods ended September 26,
1999 and September 27, 1998, respectively. Income tax expense (benefit) for the
subsidiaries not included in the Chapter 11 filing was $(325) and $1,226 during
the thirty-nine week periods ended September 26, 1999 and September 27, 1998,
respectively. The Company recorded income tax benefits of approximately $2,100
and $7,900 during the thirteen and thirty-nine week periods ended September 26,
1999, respectively. The benefits were offset by increases in the valuation
allowances with respect to the Company's net deferred and other tax-related
assets as realization is dependent upon sufficient taxable income in the future.
The Company recorded income tax expense of approximately $1,200 and $4,000
during the thirteen and thirty-nine week periods ended September 27, 1998,
respectively. The expense was offset by reductions in the valuation allowances
with respect to the Company's net deferred and other tax-related assets.
NOTE 6: COMPREHENSIVE INCOME (LOSS)
The following are the components of comprehensive income (loss):
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
-------------------- -----------------------
SEPT. 26, 1999 SEPT. 27, 1998 SEPT. 26, 1999 SEPT. 27, 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net income (loss).............................. $ (5,235) $ 4,024 $ (20,839) $ 13,399
Foreign currency translation adjustment........ (1) (212) 614 (474)
---------------- ---------------- ---------------- ---------------
Comprehensive income (loss).................... $ (5,236) $ 3,812 $ (20,225) $ 12,925
================ ================ ================= ===============
</TABLE>
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<PAGE>
NOTE 7: RECEIVABLES
Receivables consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 26, 1999 DECEMBER 27, 1998
------------------ -----------------
<S> <C> <C>
Accounts receivable - trade.......................... $ 74,570 $ 71,079
Other receivables..................................... 15,992 16,777
--------------------- ---------------------
90,562 87,856
Less: Allowance for doubtful accounts................ (13,844) (8,700)
--------------------- ---------------------
Net receivables....................................... $ 76,718 $ 79,156
===================== =====================
</TABLE>
NOTE 8: INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 26, 1999 DECEMBER 27, 1998
------------------ -----------------
<S> <C> <C>
LIFO:
Raw materials - pulp......................... $ 161 $ 232
Finished goods............................... 25,564 31,417
FIFO:
Raw materials - other........................ 7,708 7,346
Materials and supplies....................... 21,066 20,924
-------------------- ----------------------
54,499 59,919
Reserve for excess and
obsolete items........................... (5,413) (6,637)
-------------------- ----------------------
Net inventories....................................... $ 49,086 $ 53,282
==================== ======================
</TABLE>
NOTE 9: ACCRUED LIABILITIES
Accrued liabilities are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 26, 1999 DECEMBER 27, 1998
------------------ -----------------
<S> <C> <C>
Payroll - wages and salaries, incentive awards,
retirement, vacation and severance pay............ $ 8,222 $ 16,977
Coupons and promotions................................. 6,950 5,994
Royalties.............................................. 4,798 718
Other.................................................. 10,955 9,957
-------------------- --------------------
Total.................................................. $ 30,925 $ 33,646
==================== ====================
</TABLE>
NOTE 10: LIABILITIES SUBJECT TO COMPROMISE
Liabilities subject to compromise under the Company's reorganization proceeding
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 prepetition obligations including
a portion of short-term borrowings, claims subject to reclamation and employee
wages, benefits and expenses.
-11-
<PAGE>
Liabilities subject to compromise are comprised of the following:
<TABLE>
<CAPTION>
SEPTEMBER 26, 1999 DECEMBER 27, 1998
------------------ -----------------
<S> <C> <C>
Accrued settlement contingency........................ $ 278,500 $ 278,500
Bank debt............................................. 81,397 81,397
Accounts payable...................................... 39,706 39,752
Accrued liabilities .................................. 5,920 5,920
Deferred compensation................................. 1,396 1,290
-------------------- ---------------------
$ 406,919 $ 406,859
==================== =====================
</TABLE>
NOTE 11: EARNINGS (LOSS) PER COMMON SHARE
Following is a reconciliation of the numerators and denominators of the basic
and diluted earnings (loss) per common share:
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
-------------------- -----------------------
SEPT. 26, 1999 SEPT. 27, 1998 SEPT. 26, 1999 SEPT. 27, 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net earnings (loss)................... $ (5,235) $ 4,024 $ (20,839) $ 13,399
============== ============= ============== ==============
Weighted average number of common
shares used in basic EPS
(000's)...................... 11,950 11,938 11,949 11,933
Effect of dilutive securities:
Stock options (000's)........ - - - 1
-------------- ------------- -------------- --------------
Weighted number of common shares and
potentially dilutive common
stock in dilutive EPS (000's) 11,950 11,938 11,949 11,934
============== ============= ============== ==============
Basic earnings (loss) per common share $ (.44) $ .34 $ (1.74) $ 1.12
============== ============= ============== ==============
Diluted earnings (loss) per common share $ (.44) $ .34 $ (1.74) $ 1.12
============== ============= ============== ==============
</TABLE>
Options to purchase 661,667 and 712,989 shares of common stock outstanding
during the periods ending September 26, 1999 and September 27, 1998,
respectively, were not included in the calculation because the options' exercise
price was greater than the average market price of the common shares.
Diluted and basic earnings (loss) per share are the same for the periods ended
September 26, 1999 and September 27, 1998 because the computation of diluted
earnings (loss) per share was anti-dilutive.
NOTE 12: LEGAL PROCEEDINGS
THE PROCTER & GAMBLE COMPANY V. PARAGON TRADE BRANDS, INC. - P&G filed a lawsuit
in January 1994 in the District Court for the District of Delaware alleging that
the Company's "Ultra" infant disposable diaper products infringed two of P&G's
dual cuff diaper 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 significant.
On December 30, 1997, the Delaware District Court issued a Judgment and Opinion
finding that P&G's dual cuff patents were 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 $178,400 were entered against Paragon by the District Court on
June 2, 1998. At the same time, the District Court entered injunctive relief
agreed upon by P&G and the Company. On August 4, 1998, the Company filed with
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<PAGE>
the Federal Circuit Court of Appeals its amended notice of appeal. The appeal
was fully briefed, and oral argument was scheduled for February 5, 1999.
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. See "--IN
RE PARAGON TRADE BRANDS, INC.," below.
P&G filed alleged claims in the Company's Chapter 11 reorganization proceeding
ranging from approximately $2,300,000 (without trebling) to $6,500,000 (with
trebling), which included a claim of $178,400 for the Delaware judgment. See
"--IN RE PARAGON TRADE BRANDS, INC.," below. The remaining claims include claims
for, among other things, alleged patent infringement by the Company in foreign
countries where it has operations.
On February 2, 1999, the Company entered into a Settlement Agreement with P&G
which fully and finally settles all matters related to the Delaware Judgment,
the Company's appeal of the Delaware Judgment, P&G's motion to find the Company
in contempt of the Delaware Judgment and P&G's proof of claim filed in the
Company's Chapter 11 reorganization proceeding. The P&G Approval Order was
issued on August 6, 1999. As a part of the P&G settlement, Paragon grants P&G an
allowed unsecured prepetition claim of $158,500 and an allowed administrative
claim of $5,000. As a part of the settlement, the Company has entered into
License Agreements for the U.S. and Canada, which are exhibits to the Settlement
Agreement, with respect to certain of the patents asserted by P&G in its proof
of claim, including those asserted in the Delaware Action. The U.S. and Canadian
patent rights licensed by the Company permitted the Company to convert to a dual
cuff baby diaper design. The product conversion is complete. In exchange for
these rights, the Company pays P&G running royalties on net sales of the
licensed products equal to 2 percent through October 2005, .75 percent
thereafter through October 2006 and .375 percent thereafter through March 2007
in the U.S.; and 2 percent through October 2008 and 1.25 percent thereafter
through December 2009 in Canada. The Settlement Agreement also provides, among
other things, that P&G will grant the Company and/or its affiliates "most
favored licensee" status with respect to patents owned by P&G on the date of the
Settlement Agreement or for which an application was pending on that date. In
addition, the Company has agreed with P&G that prior to litigating any future
patent dispute, the parties will engage in good faith negotiations and will
consider arbitrating the dispute before resorting to litigation.
The Equity Committee appointed in the Chapter 11 reorganization proceeding filed
a notice of appeal of the P&G Approval Order with the Federal District Court for
the Northern District of Georgia and a motion to expedite briefing. On October
14, 1999, the Georgia District Court denied the Equity Committee's motion for
expedited briefing and offered the Equity Committee the option of consenting to
the Georgia District Court's adoption of the P&G Approval Order to permit the
Equity Committee to take its appeal of the P&G settlement directly to the 11th
Circuit Court of Appeals. On October 15, 1999, the Equity Committee consented to
the Georgia District Court's adoption of the P&G Approval Order and has since
filed a notice of appeal in the 11th Circuit Court of Appeals.
The Company believes that the royalty rates being charged by P&G, together with
royalties to be paid to K-C described below, will have a material adverse impact
on the Company's future financial condition and results of operations.
Under the terms of the P&G Settlement Agreement, once the P&G Approval Order
becomes "Final," as defined in the Settlement Agreement, the Company will
withdraw with prejudice its appeal of the Delaware Judgment to the Federal
Circuit, and P&G will withdraw with prejudice its motion in Delaware District
Court to find the Company in contempt of the Delaware Judgment. Because the P&G
Approval Order has not yet become a Final Order, as defined in the Settlement
Agreement, the P&G License Agreements described above are terminable at P&G's
option. If the P&G License Agreements are terminated, the Company could be faced
with having to convert to a diaper design other than the dual cuff design
covered by the licenses. At this time, the Company's only viable alternative
product design is the single cuff product which is the subject of a Contempt
Motion by P&G in Delaware. P&G has informed the Company that it is P&G's present
intention, while not waiving any contractual or other legal rights P&G might
have, to continue to operate as if the Settlement Agreement has been approved by
a Final Order, as defined therein, and not to terminate the licenses.
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
-13-
<PAGE>
patents relating to dual cuffs. The lawsuit sought 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 subsequently
sued the Company on another patent issued to K-C which is based upon a further
continuation of one of the K-C dual cuff patents asserted in the case. That
action was consolidated with the then pending action. Legal fees and costs in
connection with this litigation have been significant.
As a result of the Company's Chapter 11 filing, the proceedings in the K-C
litigation were 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, 1998 order, which was denied on June 15, 1998. K-C
has appealed this denial of reconsideration to the District Court for the
Northern District of Georgia. The Company objected to K-C's Appeal and sought to
have it dismissed. K-C also filed a motion with the District Court in Atlanta to
withdraw the reference with respect to all matters pertaining to its proof of
claim from the jurisdiction of the Bankruptcy Court. By order executed February
18, 1999, the appeal, K-C's motion for withdrawal of the reference and the
Company's motion to dismiss the appeal were dismissed by the District Court
without prejudice to the right of either party within sixty days to re-open the
actions if a settlement was not consummated. See "--IN RE PARAGON TRADE BRANDS,
INC." below.
The Company has previously disclosed that should K-C prevail on its claims, an
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.
K-C filed alleged claims in the Company's Chapter 11 reorganization proceeding
ranging from approximately $893,000 (without trebling) to $2,300,000 (with
trebling). See "--IN RE PARAGON TRADE BRANDS, INC.," below.
On March 19, 1999, the Company entered into a Settlement Agreement with K-C
which fully and finally settles all matters related to the Texas action,
including the Company's counterclaims, and K-C's proof of claim filed in the
Company's Chapter 11 reorganization proceeding. The K-C Approval Order was
issued by the Bankruptcy Court on August 6, 1999. Under the terms of the K-C
Settlement Agreement, the Company grants K-C an allowed unsecured prepetition
claim of $110,000 and an allowed administrative claim of $5,000. As a part of
the settlement, the Company has entered into License Agreements for the U.S. and
Canada, which are exhibits to the Settlement Agreement, with respect to the
patents asserted by K-C in the Texas action. The patent rights licensed by the
Company from K-C permitted the Company to convert to a dual cuff diaper design.
The product conversion is complete. In exchange for these patent rights, the
Company pays K-C annual running royalties on net sales of the licensed products
in the U.S. and Canada equal to: 2.5 percent of the first $200,000 of net sales
of the covered diaper products and 1.5 percent of such net sales in excess of
$200,000 in each calendar year commencing January 1999 through November 2004.
The Company has agreed to pay a minimum annual royalty for diaper sales of
$5,000, but amounts due on the running royalties will be offset against this
minimum. The Company also pays K-C running royalties of 5 percent of net sales
of covered training pant products for the same period, but there is no minimum
royalty for training pants. As part of the settlement, the Company has granted a
royalty-free license to K-C for three patents which the Company in the Texas
action claimed K-C infringed.
The Company believes that the overall effective royalty rate that the Company
will pay to K-C, together with royalties to be paid to P&G described above, has
had, and will continue to have, a material adverse impact on the Company's
future financial condition and results of operations
As a part of the K-C License Agreement, K-C has agreed not to sue the Company on
two of K-C's patents related to the use of SAP in diapers and training pants, so
long as the Company uses SAP which exhibits certain performance characteristics
(the "SAP Safe Harbor"). The Company experienced certain product performance
issues the Company believes may have been related to the SAP the Company
initially converted to in December of 1998. In February 1999, the Company
converted to a new SAP. The Company is encountering increased product costs due
to the increased price and usage of the new SAP. While the Company is working
diligently with its SAP suppliers to develop a more cost-effective alternative
which is still within the SAP Safe Harbor, the Company cannot predict at this
time whether or when the added costs will be fully offset. The Company expects
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<PAGE>
that these increased product costs will have a material adverse impact on its
financial condition and results of operations for at least 1999 and potentially
beyond.
On October 29, 1999, in accordance with the terms of the K-C Settlement
Agreement, K-C dismissed with prejudice its complaint in the Texas action and
the Company dismissed with prejudice its counterclaims in the Texas action. On
November 4, 1999, K-C filed a stipulation dismissing with prejudice its related
filings in the Georgia District Court. On November 2, 1999, the parties
exchanged mutual releases pursuant to the Settlement Agreement.
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 entered by the
District Court until June 2, 1998, the Company originally estimated the
liability and associated litigation costs to be approximately $200,000. 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 which necessitated the Chapter 11 filing.
Subsequently, damages of approximately $178,400 were entered against Paragon by
the District Court on June 2, 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 Chapter 11 filing prevented P&G from placing liens on the Company's assets,
permitted the Company to appeal the District Court's decision in an orderly
fashion and affords the Company the opportunity to resolve liquidated and
unliquidated claims against the Company which arose prior to the Chapter 11
filing. The Company is currently operating as a debtor-in-possession under the
Bankruptcy Code. The bar date for the filing of proofs of claim (excluding
administrative claims) by creditors was June 5, 1998. P&G filed alleged claims
ranging from approximately $2,300,000 (without trebling) to $6,500,000 (with
trebling), which included a claim of $178,400 for the Delaware judgment. See
"--THE PROCTER & GAMBLE COMPANY V. PARAGON TRADE BRANDS, INC.," above. The
remaining claims include claims for, among other things, alleged patent
infringement by the Company in foreign countries where it has operations.
On February 2, 1999, the Company entered into a Settlement Agreement with P&G
which fully and finally settles all matters related to the Delaware Judgment,
the Company's appeal of the Delaware Judgment, P&G's motion to find the Company
in contempt of the Delaware Judgment and P&G's proof of claim filed in the
Company's Chapter 11 reorganization proceeding. See "--THE PROCTER & GAMBLE
COMPANY V. PARAGON TRADE BRANDS, INC.," above.
K-C filed alleged claims ranging from approximately $893,000 (without trebling)
to $2,300,000 (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.
On March 19, 1999, the Company entered into a Settlement Agreement with K-C
which fully and finally settles all matters related to the Texas action,
including the Company's counterclaims, and K-C's proof of claim filed in the
Company's Chapter 11 reorganization proceeding. See "--KIMBERLY-CLARK
CORPORATION V. PARAGON TRADE BRANDS, INC.," above.
On July 12, 1999, the Bankruptcy Court approved certain bidding procedures, an
expense reimbursement and a termination fee relating to a proposed investment by
Wellspring to acquire the Company as part of a plan of reorganization. The
bidding procedures provided for the consideration of competing investment
proposals from other qualified bidders and for the filing by the Company of a
stand-alone plan of reorganization. The Equity Committee filed a motion for
amended findings with respect to the Bankruptcy Court's July 12, 1999 order. The
Bankruptcy Court denied the Equity Committee's motion. The Equity Committee has
appealed the Bankruptcy Court's order and the denial of its motion to the
Georgia District Court. On November 5, 1999, the Company and
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<PAGE>
the Equity Committee filed a joint motion seeking to extend the briefing
schedule in this matter pending the completion of ongoing global settlement
discussions between the parties.
On August 25, 1999, with the support of the Creditors' Committee, the Company
filed the Plan with the Bankruptcy Court. The Plan provides an alternative to
the Wellspring Proposal. In accordance with Bankruptcy Court-approved auction
procedures, an alternative transaction competing with the Wellspring Proposal
was proposed to the Company on September 15, 1999. An auction was commenced on
September 21, 1999. The auction continued thereafter until the Company, after
consultation with the Committees, P&G and K-C, determined to conclude the
auction on October 4, 1999. At the conclusion of the auction, the Company, after
consultation with the Committees, P&G and K-C, determined that Wellspring had
submitted the best bid. On October 15, 1999, the Company and the Creditors'
Committee, as co-proponents, jointly filed the Amended Plan which incorporates
the Wellspring Proposal, as modified by the Company after consultation with its
various creditor constituencies. The Amended Plan also provides that, in the
event the proposed Wellspring transaction is not consummated, the proponents may
pursue confirmation of a stand-alone plan of reorganization. The Amended Plan
specifies, among other things, the type and amount of value to be distributed
under either the Wellspring or the stand-alone alternative, as the case may be.
The Bankruptcy Court has set a hearing date of November 17, 1999 to consider
approval of the Disclosure Statement.
By Order of the Bankruptcy Court on July 20, 1999, the Company's exclusivity
period, during which time only the Company can propose a plan of reorganization,
was extended through and including August 31, 1999. By Order of the Bankruptcy
Court on October 26, 1999, the Company's exclusive right to solicit acceptances
to the Amended Plan has been extended through and including January 31, 2000.
On January 30, 1998, the Company received Bankruptcy Court approval of a $75,000
financing facility with a bank group led by The Chase Manhattan Bank. This
facility is designed to supplement the Company's cash on hand and operating cash
flow and to permit the Company to continue to operate its business in the
ordinary course. As of September 26, 1999, there were no outstanding direct
borrowings under this facility. The Company had an aggregate of $1,950 in
letters of credit issued under the DIP Credit Facility at September 26, 1999.
The DIP Credit Facility contains customary covenants. In early July 1999, the
Bankruptcy Court approved modifications to the terms of the Company's $75,000
debtor-in-possession credit facility with the Chase Manhattan Bank extending the
facility's maturity date to March 26, 2000. See Note 13.
Legal fees and costs in connection with the Chapter 11 reorganization proceeding
have been and will continue to be significant. The Company believes it is
positioned to emerge from Chapter 11 protection in the first quarter of 2000.
TRACY PATENT - The Company had previously received notice from a Ms. Rhonda
Tracy that Ms. Tracy believes the Company's diapers infringe a patent issued in
August 1998 to Ms. Tracy (U.S. Patent No. 5,797,824). The Company responded,
based upon advice of its independent patent counsel, that it believes its
products do not infringe any valid claim of Ms. Tracy's patent. On April 29,
1999, the Company received notice that Ms. Tracy had filed suit in the United
States District Court for the Northern District of Illinois against K-C, Tyco
International, Ltd., Drypers Corporation and a number of the Company's
customers, alleging infringement of her patent. The Company was not named as a
defendant in this suit. Rather, Ms. Tracy indicated in her April 29, 1999 letter
that the Company would be sued upon completion of the current suit.
The Company has entered into a Settlement Agreement, subject to Bankruptcy Court
approval, with Ms. Tracy whereby the Company will pay Ms. Tracy $500 in exchange
for a release from liability from any claims under Ms. Tracy's patent for the
Company, its Affiliates, as defined therein, and retailers who sell products
manufactured by the Company and its Affiliates. Under the terms of the
Settlement Agreement, Ms. Tracy also grants a nonexclusive, fully paid-up,
irrevocable, worldwide license to permit the Company and its Affiliates to make,
have made, lease, use, import, offer to sell, and sell disposable absorbent
products under the terms of Ms. Tracy's patent. This license also extends to
retailers to the extent they are selling products manufactured by the Company
and its Affiliates. The Company has filed a motion with the Bankruptcy Court
seeking approval of the settlement with Ms. Tracy and a hearing date has been
set for December 9, 1999. The Company cannot predict when or if the settlement
will be approved.
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<PAGE>
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 13: BANK CREDIT FACILITIES
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, certain 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, the Third Amendment
dated April 15, 1998, the Fourth Amendment dated September 28, 1998 and the
Fifth Amendment dated June 14, 1999, Chase and a syndicate of banks have 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 formula. The borrowing base formula 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. In early July 1999, the Bankruptcy Court approved modifications to the
terms of the Company's $75,000 DIP Credit Facility extending the facility's
maturity date to March 26, 2000.
Obligations under the DIP Credit Facility are secured by the security interest
in, 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.
As of September 26, 1999, there were no outstanding direct borrowings under this
facility. The Company had an aggregate of $1,950 in letters of credit issued
under the DIP Credit Facility at September 26, 1999.
The Company has notified Chase that it believes it will not meet a financial
covenant contained in the DIP Credit Facility during the fourth quarter of 1999.
The Company is currently in discussions with Chase regarding an amendment or
waiver of this covenant.
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. Interest was at fixed or floating rates based on the financial
institution's cost of funds. Paragon Trade Brands (Canada) Inc. ("PTB Canada")
had guaranteed obligations under this revolving credit facility. These
guarantees were subsequently canceled. 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. As
a result of the Chapter 11 filing, the Company is prohibited from paying any
prepetition liabilities without Bankruptcy Court approval. The Chapter 11 filing
resulted in a default under the Company's prepetition revolving credit facility
and its borrowings under uncommitted lines of credit.
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<PAGE>
The terms of the revolving credit facility and the short-term lines of credit
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
accompanying consolidated balance sheet as of December 27, 1998. As a result of
its Chapter 11 filing, the Company is prohibited from paying any prepetition
liabilities without Bankruptcy Court approval. Accordingly, no interest expense
has been recorded with respect to prepetition debt balances in the accompanying
financial statements for the period subsequent to January 6, 1998.
PTB Canada entered into a new $3,000 Cdn operating credit facility with a
financial institution dated February 11, 1998. Borrowings under the prior
Canadian revolving credit facility were repaid in full with the proceeds from
borrowings under the new Canadian operating credit facility. The credit facility
was terminated on September 3, 1999 in connection with the cessation of
manufacturing operations at the Brampton facility.
NOTE 14: SEGMENT REPORTING
The Company operates principally in two segments that are organized based on the
nature of the products sold: (i) infant care and (ii) feminine care and adult
incontinence. Each operating segment contains closely related products that are
unique to that particular segment. The results of Changing Paradigms, Inc.,
which was sold in October of 1998, and the Company's international investment in
joint ventures in Mexico, Argentina, Brazil and China are reported in the
corporate and other segment.
Management evaluates the performance of its operating segments separately to
individually monitor the different factors impacting financial performance.
Segment operating profit is comprised of net sales less cost of sales and
selling, general and administrative expense. Loss contingencies and asset
impairments are recorded in the appropriate operating segment.
Certain administrative expenses common to all operating segments are currently
allocated to the infant care operating segment. International investments,
financial costs, such as interest income and expense, and income taxes are
managed by, and recorded in, the corporate and other operating segment.
<TABLE>
<CAPTION>
Feminine
Care/Adult Corporate/
THIRTEEN WEEKS ENDING SEPTEMBER 26, 1999 Infant Care Incontinence Other Total
- ---------------------------------------- ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales............................... $ 125,031 $ 3,476 $ - $ 128,507
Operating profit (loss)................. 90 (3,604) - (3,514)
</TABLE>
<TABLE>
<CAPTION>
Feminine
Care/Adult Corporate/
THIRTEEN WEEKS ENDING SEPTEMBER 27, 1998 Infant Care Incontinence Other Total
- ---------------------------------------- ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales............................... $ 129,239 $ 1,782 $ 5,972 $ 136,993
Operating profit (loss)................. 7,832 (3,611) 775 4,996
</TABLE>
<TABLE>
<CAPTION>
Feminine
Care/Adult Corporate/
THIRTY-NINE WEEKS ENDING SEPTEMBER 26, 1999 Infant Care Incontinence Other Total
- ------------------------------------------- ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales............................... $ 363,476 $ 9,123 $ - $ 372,599
Operating loss.......................... (6,760) (10,163) - (16,923)
</TABLE>
<TABLE>
<CAPTION>
Feminine
Care/Adult Corporate/
THIRTY-NINE WEEKS ENDING SEPTEMBER 27, 1998 Infant Care Incontinence Other Total
- ------------------------------------------- ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales............................... $ 382,609 $ 4,838 $ 14,834 $ 402,281
Operating profit (loss)................. 24,008 (9,624) 1,274 15,658
</TABLE>
-18-
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
CHAPTER 11 PROCEEDINGS
The Company has previously disclosed that The Procter & Gamble Company ("P&G")
filed a lawsuit in 1994 against it in the United States District Court for the
District of Delaware alleging that the Company's "Ultra" disposable baby diaper
products infringed two of P&G's dual cuff diaper 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 also disclosed that if P&G were to prevail on its claims, an award
of all or a substantial amount of the relief requested by P&G could have a
material adverse effect on the Company's financial condition and results of
operations.
On December 30, 1997, the District Court issued a Judgment and Opinion which
found, in essence, two of P&G's dual cuff diaper patents to be valid and
infringed by certain of the Company's disposable diaper products, while also
rejecting the Company's patent infringement claims against P&G. The District
Court had earlier dismissed the Company's antitrust counterclaim on summary
judgment. The Judgment entitled P&G to damages based on sales of the Company's
diapers containing the "inner-leg gather" feature. While the final damages
number of approximately $178.4 million was not entered by the District Court
until June 2, 1998, the Company originally estimated the liability and
associated litigation costs to be approximately $200 million. The amount of the
award resulted in violation of certain covenants under the Company's
then-existing bank loan agreements. As a result, the issuance of the Judgment
and the uncertainty it created caused an immediate and critical liquidity issue
for the Company.
On January 6, 1998, the Judgment was entered on the docket in Delaware in such a
manner that P&G would have been able to begin placing liens on the Company's
assets. As a result, the Company filed for relief under Chapter 11 of the
Bankruptcy Code, 11 U.S.C. Section 101 et seq., in the United States Bankruptcy
Court for the Northern District of Georgia (Case No. 98-60390) on January 6,
1998 (the "Chapter 11 filing"). None of the Company's subsidiaries were included
in the Chapter 11 filing. The Chapter 11 filing was designed to prevent P&G from
placing liens on Company property, permit the Company to appeal the Delaware
District Court's decision in the P&G case in an orderly fashion and give the
Company the opportunity to resolve liquidated and unliquidated claims against
the Company, which arose prior to the Chapter 11 filing. The Company is
currently operating as a debtor-in-possession under the Bankruptcy Code.
On February 2, 1999, the Company entered into a Settlement Agreement with P&G
which fully and finally settles all matters related to the Delaware Judgment,
the Company's appeal of the Delaware Judgment, P&G's motion to find the Company
in contempt of the Delaware Judgment and P&G's proof of claim filed in the
Company's Chapter 11 reorganization proceeding. The P&G Settlement Agreement was
approved by the Bankruptcy Court on August 6, 1999 (the "P&G Approval Order").
The Official Committee of Equity Security Holders (the "Equity Committee")
appointed in the Chapter 11 reorganization proceeding filed a notice of appeal
of the P&G Approval Order with the Federal District Court for the Northern
District of Georgia and a motion to expedite briefing. On October 14, 1999, the
Georgia District Court denied the Equity Committee's motion for expedited
briefing and offered the Equity Committee the option of consenting to the
Georgia District Court's adoption of the P&G Approval Order to permit the Equity
Committee to take its appeal of the P&G settlement directly to the 11th Circuit
Court of Appeals. On October 15, 1999, the Equity Committee consented to the
Georgia District Court's adoption of the P&G Approval Order and has since filed
a notice of appeal in the 11th Circuit Court of Appeals. See "--Risks and
Uncertainties" below, and "PART II: OTHER INFORMATION, ITEM 1: LEGAL
PROCEEDINGS.
On October 26, 1995, Kimberly-Clark Corporation ("K-C") filed a lawsuit against
the Company in U.S. District Court in Dallas, Texas, alleging infringement by
the Company's products of two K-C patents relating to dual cuffs. The lawsuit
sought 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.
-19-
<PAGE>
In addition, K-C subsequently sued the Company on another patent issued to K-C
which is based upon a further continuation of one of the K-C dual cuff patents
asserted in the case.
On March 19, 1999, the Company entered into a Settlement Agreement with K-C
which fully and finally settles all matters related to the Texas action,
including the Company's counterclaims, and K-C's proof of claim filed in the
Company's Chapter 11 reorganization proceeding. The K-C Settlement Agreement was
approved by the Bankruptcy Court on August 6, 1999 (the "K-C Approval Order").
On August 16, 1999, the Equity Committee filed an emergency motion with the
Bankruptcy Court seeking an 80-day stay of the K-C Settlement Agreement pending
an appeal by the Equity Committee to the Georgia District Court. The Bankruptcy
Court denied the Equity Committee's request, but granted a limited stay through
August 25, 1999 to permit the Georgia District Court to consider the matter. On
August 24, 1999, the Georgia District Court heard arguments on the Equity
Committee's motion for an emergency 80-day stay. At that time, the limited stay
was extended to September 3, 1999 by agreement of the parties in order to allow
the Georgia District Court to further consider the matter. On September 2, 1999,
the Georgia District Court issued an order denying the Equity Committee's motion
for an emergency stay. In denying the Equity Committee's request, the Georgia
District Court found, among other things, that the Equity Committee had failed
to show that it has a substantial likelihood of success on its appeal of the K-C
settlement. The Georgia District Court also found that the K-C Approval Order
was thorough and that the Bankruptcy Court did not abuse its discretion in
approving the K-C settlement. The Georgia District Court offered the Equity
Committee the option of consenting to the Georgia District Court's adoption of
the K-C Approval Order to permit the Equity Committee to take its appeal of the
K-C settlement directly to the 11th Circuit Court of Appeals, in which event,
the Georgia District Court stated that it would enter a limited stay through
October 28, 1999. On September 8, 1999, the Equity Committee consented to the
procedure proposed by the Georgia District Court. On October 27, 1999, the 11th
Circuit Court of Appeals denied the Equity Committee's motion for a further stay
of the K-C Approval Order, as well as its motion for an expedited appeal.
The Company has previously disclosed that it had been notified by the New York
Stock Exchange ("NYSE") during 1998 that as a result of the $200 million
settlement contingency related to the P&G litigation and the Company's net loss
in 1997, certain minimum listing requirements had not been maintained. Trading
in the common stock of the Company on the NYSE was suspended prior to the
opening of trading on July 8, 1999. As of July 9, 1999, the common stock of the
Company began trading on the National Association of Securities Dealers, Inc.
Over-the-Counter Bulletin Board under the symbol PGNFQ.
The Company believes it is positioned to emerge from Chapter 11 protection in
the first quarter of 2000. See "Notes 1 and 12 of Notes to Financial Statements"
and "PART II: OTHER INFORMATION, ITEM 1: LEGAL PROCEEDINGS" herein.
THIRTEEN WEEKS ENDED SEPTEMBER 26, 1999
COMPARED TO THIRTEEN WEEKS ENDED SEPTEMBER 27, 1998
RESULTS OF OPERATIONS
The Company operates principally in two segments that are organized based on the
nature of the products sold: (i) infant care and (ii) feminine care and adult
incontinence. Each operating segment contains closely related products that are
unique to that particular segment. The results of Changing Paradigms, Inc.
("Changing Paradigms"), the Company's household cleaners and air freshener
business that was sold in October 1998, and the Company's international
investments in joint ventures in Mexico, Argentina, Brazil and China are
reported in the corporate and other segment.
A net loss of $5.2 million was incurred in the third quarter of 1999 compared to
net earnings of $4.0 million in the third quarter of 1998. Management believes
that reduced volume, higher royalties and product costs, manufacturing
inefficiencies due to the lower volume, start-up costs associated with new
product initiatives and higher bankruptcy costs all contributed to the loss in
the third quarter of 1999.
Basic loss per share in the third quarter of 1999 was $.44 compared to basic
earnings per share of $.34 in the third quarter of 1998. Including the effects
of contractual interest, net of tax and excluding the effect of the bankruptcy
costs, net of tax, and the tax valuation allowance matters discussed below,
basic loss per share was $.20 in the third quarter of 1999 compared to basic
earnings of $.25 per share in the third quarter of 1998.
-20-
<PAGE>
Infant care operating profit was $.1 million in the third quarter of 1999
compared to an operating profit of $7.8 million in the third quarter of 1998.
Lower unit volume, increased royalties and product costs, manufacturing
inefficiencies due to lower volume and start-up costs associated with new
product initiatives all contributed to the infant care earnings decrease. These
negative items were partially offset by favorable product pricing and a transfer
price reconciliation discussed below.
Feminine care and adult incontinence operating losses were $3.6 million in both
the third quarter of 1999 and third quarter of 1998. Losses are expected to
continue until volume is significantly increased to absorb existing
manufacturing capacity.
The Company experienced greater than anticipated operating losses in its
feminine care and adult incontinence business during the first three quarters of
1999 and during 1998 and 1997. While the Company expects these losses to
continue near-term, the Company has developed a business plan that supports the
realization of its investment in its feminine care and adult incontinence
business. Accordingly, the Company has not recorded any adjustments in its
financial statements relating to the recoverability of the operating assets of
the feminine care and adult incontinence business. The Company's ability to
recover its investment is dependent upon a prompt emergence from Chapter 11 and
the successful execution of the Company's feminine care and adult incontinence
business plan. The Company cannot predict at this time when it will emerge from
Chapter 11 protection. The Company believes that once it emerges from Chapter
11, the feminine care and adult incontinence business will see an increase in
sales and improved results. The Company cannot predict, however, whether or when
such improved results will be realized. See "RISKS AND UNCERTAINTIES" herein.
NET SALES
Overall net sales were $128.5 million in the third quarter of 1999 compared to
$137.0 million in the third quarter of 1998.
Infant care net sales decreased 3.3 percent to $125.0 million in the third
quarter of 1999 compared to $129.2 million in the third quarter of 1998. Unit
sales decreased 8.3 percent to 794 million units in the third quarter of 1999
compared to 866 million units in the third quarter of 1998. Management believes
that the decrease in sales was due to a number of reasons including increased
consumer preference for premium priced products, increased consumer preference
for the mechanical closure system offered by one of the national brand
competitors, continued pricing and promotional pressures and the uncertainties
related to the Company's Chapter 11 proceedings.
The Company believes that certain product performance issues it has experienced
throughout 1999 have been addressed. Volume also remained under pressure during
the quarter from discounts and promotional allowances by branded manufacturers
and value segment competitors and the carryover effects of the product
performance issues experienced throughout 1999. Sales prices are expected to
remain under pressure due to continued competitive initiatives from both
national brand and store brand competitors and a prolonged Chapter 11
reorganization proceeding. However, the roll-out of an improved Ultra diaper
which incorporates stretch tabs and a new hook and loop closure system, the
introduction of a new training pant product and the launch of certain
destination store brand product and marketing programs had a favorable impact on
volume during the third quarter of 1999 and are expected to increase volume, as
compared to the first half of 1999, during the fourth quarter of 1999 and 2000.
In addition, shipments to a major customer that had been suspended in 1998
resumed during the third quarter and are expected to build to more normal levels
during the remainder of 1999.
The Company has been informed that one of the Company's major customers will
shift a significant portion of the Company's existing volume to a competitor
during the fourth quarter of 1999. The Company expects to offset the loss of
this business with a new product introduction that began rollout during the
third quarter of 1999 with the same customer, but cannot predict at this time
when or whether such new volume will be sufficient to offset the loss of
existing volume. The Company has also been notified that another large customer
will shift the Company's diaper volume to another store brand competitor during
the fourth quarter of 1999. This loss of business is expected to negatively
impact results during the fourth quarter and in the future.
-21-
<PAGE>
The Company began to implement a price increase of approximately 5 percent
during the fourth quarter of 1998 in response to price increases announced by
K-C and P&G. As a result, average sales prices during the third quarter of 1999
were higher compared to the third quarter of 1998. Pricing, however, will remain
under pressure due to competitive factors previously discussed and the Company's
continuing Chapter 11 reorganization proceeding. See "RISKS AND UNCERTAINTIES"
herein.
Feminine care and adult incontinence sales increased to $3.5 million in the
third quarter of 1999 compared to $1.8 million in the third quarter of 1998 due
to the shipment of product to new customers. However, the uncertainty caused by
the Company's chapter 11 filing has significantly impacted the ability to
attract additional sales. The Company expects this condition to persist until
the Company's emergence from Chapter 11. See "RISKS AND UNCERTAINTIES" herein.
Corporate and other net sales of $6.0 million in the third quarter of 1998
relate to Changing Paradigms which was sold in October of 1998.
COST OF SALES
Overall cost of sales in the third quarter of 1999 was $110.2 million compared
to $109.1 million in the third quarter of 1998. As a percentage of net sales,
cost of sales was 85.8 percent in the third quarter of 1999 compared to 79.6
percent in the third quarter of 1998.
Infant care cost of sales was $103.5 million in the third quarter of 1999
compared to $99.6 million in the third quarter of 1998. As a percentage of net
sales, infant care cost of sales was 82.8 percent in the third quarter of 1999
compared to 77.1 percent in the third quarter of 1998. Management believes that
this increase in costs as a percentage of sales was due to manufacturing
inefficiencies due to lower volume and start-up costs associated with new
product initiatives, increased raw material costs associated with new products
and higher royalties as a result of the settlement and licensing agreements
entered into in the first quarter of 1999 with P&G and K-C. Product costs have
increased significantly in 1999 due to the payment of royalties to P&G and K-C,
increased price and usage of a new SAP and increased product and manufacturing
costs associated with the continuing roll-out of the improved Ultra diaper
described above. The royalties and increased product costs are expected to
continue into the future. The Company anticipates that the inefficiencies
associated with the product start-ups should improve during 2000. The increased
costs were partially offset by a favorable contractual transfer price
reconciliation of $2.6 million with Paragon-Mabesa International S.A. de C.V.
("PMI"), a joint venture in Tijuana, Mexico in which the Company holds a 49%
interest. The reconciliation covered the fourth quarter of 1998 and first two
quarters of 1999.
Infant care raw material prices, excluding pulp and SAP, were at similar price
levels in the third quarter of 1999 compared to the third quarter of 1998. Pulp
prices were at slightly higher levels in the third quarter of 1999 compared to
the third quarter of 1998. SAP costs were also at higher levels during the third
quarter of 1999 compared to the third quarter of 1998 due to the change to the
new SAP in the first quarter of 1999. Pulp prices are expected to increase
during the fourth quarter of 1999 and throughout 2000. SAP costs are expected to
decrease slightly during the same period. All other raw material prices are
expected to stay at similar levels throughout 2000.
Infant care depreciation costs were $6.2 million in the third quarter of 1999
compared to $6.4 million in the third quarter of 1998.
Feminine care and adult incontinence cost of sales was $6.7 million in the third
quarter of 1999 compared to $4.9 million in the third quarter of 1998. As a
percentage of net sales, cost of sales was 191.4 percent in the third quarter of
1999 compared to 272.2 percent in the third quarter of 1998. Overall cost of
sales is expected to remain greater than net sales until volume is significantly
increased to absorb existing manufacturing capacity. See "RISKS AND
UNCERTAINTIES" herein.
Corporate and other cost of goods sold of $4.6 million in the third quarter of
1998 relates to Changing Paradigms which was sold in October of 1998.
-22-
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses were $20.9 million in the third quarter of 1999 compared to $22.0
million in the third quarter of 1998. As a percentage of net sales, these
expenses were 16.3 percent in the third quarter of 1999 compared to 16.1 percent
in 1998. The decrease in SG&A is primarily attributable to lower incentive-based
compensation accruals, outside broker commissions and non-bankruptcy related
legal charges. These lower costs were partially offset by an increase in
packaging design and artwork and sales and marketing expenditures. Depreciation
and amortization costs included in SG&A increased to $2.2 million in the third
quarter of 1999 compared to $1.1 million in the third quarter of 1998. This
increase resulted from the amortization of software and consulting costs
associated with the implementation of an enterprise resource planning system in
the fourth quarter of 1998. Overall, SG&A expenses, with the exception of
promotional spending, are expected to remain at similar levels during the fourth
quarter of 1999. Promotional spending is expected to increase during the fourth
quarter of 1999 due to introductory marketing costs associated with certain
destination store brand programs.
RESEARCH AND DEVELOPMENT
Research and development expenses were $.8 million in the third quarter of 1999
compared to $.9 million in the third quarter of 1998.
INTEREST EXPENSE
Interest expense was $.1 million in both the third quarters of 1999 and 1998.
There were no borrowings under the DIP Credit Facility during the third quarter
of 1999 or 1998.
EQUITY IN EARNINGS OF UNCONSOLIDATED SUBSIDIARIES
The equity in earnings of unconsolidated subsidiaries was at breakeven levels in
the third quarter of 1999 compared to $.6 million in the third quarter of 1998.
The decrease in earnings primarily reflects the effect of the contractual
transfer price reconciliation discussed above which was partially offset by
improved operating results at PMI.
BANKRUPTCY COSTS
Bankruptcy costs were $2.6 million in the third quarter of 1999 compared to $1.7
million during the third quarter of 1998. These costs were primarily related to
professional fees and are expected to continue at similar to higher levels until
the Company emerges from Chapter 11.
INCOME TAXES
Income tax expense for the subsidiaries not included in the Chapter 11 filing
was $.5 million during the third quarter of 1998. The Company recorded an income
tax benefit of approximately $2.1 million during the third quarter of 1999,
which was offset by an increase in the valuation allowances with respect to its
net deferred and other tax-related assets. Realization is dependent upon
sufficient taxable income in the future. The Company recorded income tax expense
of approximately $1.2 million during the third quarter of 1998, which was offset
by a reduction in the valuation allowances.
THIRTY-NINE WEEKS ENDED SEPTEMBER 26, 1999
COMPARED TO THIRTY-NINE WEEKS ENDED SEPTEMBER 27, 1998
RESULTS OF OPERATIONS
A net loss of $20.8 million was incurred during the first three quarters of 1999
compared to net earnings of $13.4 million during the first three quarters of
1998. Management believes that reduced volume, higher royalties and product
costs, manufacturing inefficiencies due to the lower volume and start-up costs
associated with new product initiatives and increased SG&A expenditures all
contributed to the loss during the first three quarters of 1999. The first three
quarters of 1999 results were also negatively impacted by a price concession
made to an export customer to address product acceptance issues and by $1.5
million in costs associated with cessation of manufacturing operations at the
Company's Canadian subsidiary, Paragon Trade Brands (Canada) Inc.'s
-23-
<PAGE>
Brampton, Ontario facility in June. Included during the first three quarters
1999 results are bankruptcy costs of $7.1 million compared to $4.5 million
during the first three quarters of 1998.
Basic loss per share during the first three quarters of 1999 was $1.74 compared
to basic earnings per share of $1.12 during the first three quarters of 1998.
Excluding the effects of contractual interest, manufacturing closing costs and
bankruptcy costs, net of tax, and the tax valuation allowance matters discussed
below, basic loss per share was $.84 during the first three quarters of 1999
compared to basic earnings of $.78 per share during the first three quarters of
1998.
Infant care operating losses were $6.8 million during the first three quarters
of 1999 compared to an operating profit of $24.0 million during the first three
quarters of 1998. Lower unit volume, increased product royalties and material
costs, the price concession and cessation of manufacturing discussed above and
manufacturing inefficiencies due to lower volume and start-up costs associated
with new product initiatives all contributed to the infant care operating loss.
Feminine care and adult incontinence operating losses were $10.2 million during
the first three quarters of 1999 compared to operating losses of $9.6 million
during the first three quarters of 1998. Losses are expected to continue until
volume is significantly increased to absorb existing manufacturing capacity.
The Company experienced greater than anticipated operating losses in its
feminine care and adult incontinence businesses during the first three quarters
of 1999 and during 1998 and 1997. While the Company expects these losses to
continue near-term, the Company has developed a business plan that supports the
realization of its investment in its feminine care and adult incontinence
business. Accordingly, the Company has not recorded any adjustments in its
financial statements relating to the recoverability of the operating assets of
the feminine care and adult incontinence business. The Company's ability to
recover its investment is dependent upon a prompt emergence from Chapter 11 and
the successful execution of the Company's feminine care and adult incontinence
business plan. The Company cannot predict at this time when it will emerge from
Chapter 11 protection. The Company believes that once it emerges from Chapter
11, the feminine care and adult incontinence business will see an increase in
sales and improved results. The Company cannot predict, however, whether or when
such improved results will be realized. See "RISKS AND UNCERTAINTIES" herein.
NET SALES
Overall net sales were $372.6 million during the first three quarters of 1999
compared to $402.3 million during the first three quarters of 1998.
Infant care net sales decreased 5.0 percent to $363.5 million during the first
three quarters of 1999 compared to $382.6 million during the first three
quarters of 1998. Unit sales decreased 8.9 percent to 2,365 million units during
the first three quarters of 1999 compared to 2,597 million units during the
first three quarters of 1998. Management believes that the decrease in sales was
due to a number of reasons, including the discontinuation of shipments to a
major customer from mid-1998 until the third quarter of 1999 due to product
design issues, certain product performance issues experienced by the Company
during the first half of 1999, as well as increased consumer preference for
premium priced products, increased consumer preference for the mechanical
closure system offered by one of the national brand competitors, continued
competitive pressures and the uncertainties related to the Company's Chapter 11
proceedings. In addition, a price concession was made to an export customer
during the first quarter of 1999 to address product acceptance issues.
The Company believes that the product performance issues it has experienced
throughout 1999 have been addressed. In addition, shipments to the major
customer that had been suspended in mid-1998 resumed during the third quarter
and are expected to build to more normal levels during the remainder of 1999.
Volume remained under pressure during the quarter from discounts and promotional
allowances by branded manufacturers and value segment competitors. Infant care
volume and sales prices are expected to remain under pressure due to the
carryover effect of product performance and design issues, continued competitive
initiatives from both national brand and store brand competitors and a prolonged
Chapter 11 reorganization proceeding. However, the roll-out of an improved Ultra
diaper which incorporates stretch tabs and a new hook and loop closure system,
the introduction of a new training pant product and the launch of certain
destination store brand product and marketing
-24-
<PAGE>
programs had a favorable impact on volume in the third quarter of 1999 and are
expected to increase volume, as compared to the first half of 1999, during the
fourth quarter of 1999 and 2000.
The Company began to implement a price increase of approximately 5 percent
during the fourth quarter of 1998 in response to price increases announced by
K-C and P&G. As a result, excluding the effect of a price concession made to an
export customer in the first quarter of 1999 described above, average sales
prices during the first three quarters of 1999 were higher compared to the first
three quarters of 1998. Pricing, however, will remain under pressure due to
competitive factors previously discussed and the Company's continuing Chapter 11
reorganization proceeding. See "RISKS AND UNCERTAINTIES" herein.
The Company has been informed that one of the Company's major customers will
shift a significant portion of the Company's existing volume to a competitor
during the fourth quarter of 1999. The Company expects to offset the loss of
this business with a new product introduction that began rollout during the
third quarter of 1999 with the same customer, but cannot predict at this time
when or whether such new volume will be sufficient to offset the loss of
existing volume. The Company has also been notified that another large customer
will shift the Company's diaper volume to another store brand competitor during
the fourth quarter of 1999. This loss of business is expected to negatively
impact results during the fourth quarter and in the future.
Feminine care and adult incontinence sales increased to $9.1 million during the
first three quarters of 1999 compared to $4.8 million during the first three
quarters of 1998 due to the shipment of product to new customers. However, the
uncertainty caused by the Company's chapter 11 filing has significantly impacted
the ability to attract additional sales. The Company expects this condition to
persist until the Company's emergence from Chapter 11. See "RISKS AND
UNCERTAINTIES" herein.
Corporate and other net sales of $14.8 million during the first three quarters
of 1998 relate to Changing Paradigms which was sold in October of 1998.
COST OF SALES
Overall cost of sales during the first three quarters of 1999 was $323.1 million
compared to $322.2 million during the first three quarters of 1998. As a
percentage of net sales, cost of sales was 86.7 percent during the first three
quarters of 1999 compared to 80.1 percent during the first three quarters of
1998.
Infant care cost of sales was $201.0 million during the first three quarters of
1999 compared to $197.4 million during the first three quarters of 1998. As a
percentage of net sales, infant care cost of sales was 84.3 percent during the
first three quarters of 1999 compared to 77.9 percent in 1998. Management
believes that this increase in costs as a percentage of sales was due to
manufacturing inefficiencies due to lower volume and new product rollouts,
increased raw material costs associated with new products and higher royalties
as a result of the settlement and licensing agreements reached in the first
quarter of 1999 with P&G and K-C. Product costs have increased significantly in
1999 due to the payment of royalties to P&G and K-C, increased price and usage
of the new SAP and increased product and manufacturing costs associated with the
continuing roll-out of the improved Ultra diaper described above. The royalties
and increased product costs are expected to continue into the future. The
Company anticipates that the inefficiencies associated with the product
start-ups should improve during 2000.
Infant care raw material prices, primarily pulp, were at similar price levels
during the first three quarters of 1999 compared to the first three quarters of
1998. SAP costs, however, increased during the first three quarters of 1999
compared to the first three quarters of 1998. Pulp prices are expected to
increase during the fourth quarter of 1999 and throughout 2000. SAP costs are
expected to decrease slightly during the same period. All other raw material
costs are expected to remain at similar levels throughout 2000.
Infant care depreciation costs were $18.6 million during the first three
quarters of 1999 compared to $19.3 million in the first three quarters of 1998.
Feminine care and adult incontinence cost of sales was $18.6 million during the
first three quarters of 1999 compared to $13.2 million during the first three
quarters of
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1998. As a percentage of net sales, cost of sales was 204.4 percent during the
first three quarters of 1999 compared to 275.0 percent during the first three
quarters of 1998. Overall cost of sales is expected to remain greater than net
sales until volume is significantly increased to absorb existing manufacturing
capacity. See "RISKS AND UNCERTAINTIES" herein.
Corporate and other cost of goods sold of $12.0 million in the first three
quarters of 1998 relates to Changing Paradigms which was sold in October of
1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses were $62.1 million during the first three quarters of 1999
compared to $61.0 million during the first three quarters of 1998. As a
percentage of net sales, these expenses were 16.7 percent during the first three
quarters of 1999 compared to 15.2 percent in 1998. The increase in SG&A is
primarily attributable to an increase in promotional spending, packaging design
and artwork, information technology and sales and marketing expenditures.
Depreciation and amortization costs included in SG&A increased to $5.7 million
during the first three quarters of 1999 compared to $2.8 million during the
first three quarters of 1998. This increase resulted from the amortization of
software and consulting costs associated with the implementation of an
enterprise resource planning system in the fourth quarter of 1998. These
increases were partially offset by lower incentive-based compensation accruals,
outside sales commissions and non-bankruptcy related legal charges.
RESEARCH AND DEVELOPMENT
Research and development expenses were $2.8 million during the first three
quarters of 1999 compared to $3.4 million during the first three quarters of
1998. The decrease is primarily due to lower baby diaper product development and
testing costs.
MANUFACTURING OPERATION CLOSING COSTS
As discussed above, $1.5 million in costs were incurred during 1999 related to
the cessation of manufacturing operations at the Company's Brampton, Ontario
facility during the second quarter. The costs were primarily severance and other
employee-related expenses.
INTEREST EXPENSE
Interest expense was $.3 million during the first three quarters of 1999 and
1998. There were no borrowings under the DIP Credit Facility during the first
three quarters of 1999 or 1998.
EQUITY IN EARNINGS OF UNCONSOLIDATED SUBSIDIARIES
The equity in earnings of unconsolidated subsidiaries was $1.1 million during
the first three quarters of 1999 compared to $2.1 million during the first three
quarters of 1998. The decrease in earnings reflects the write-off of capitalized
start-up costs and losses associated with the Company's China joint venture.
BANKRUPTCY COSTS
Bankruptcy costs were $7.1 million during the first three quarters of 1999
compared to $4.5 million during the first three quarters of 1998. These costs
were primarily related to professional fees and are expected to continue at
similar to higher levels until the Company emerges from Chapter 11.
INCOME TAXES
Income tax expense (benefit) for the subsidiaries not included in the Chapter 11
filing was $(.3) million during the first three quarters of 1999 compared to
$1.2 million during the first three quarters of 1998. The Company recorded an
income tax benefit of approximately $7.9 million during the first three quarters
of 1999, which was offset by an increase in the valuation allowances with
respect to its net deferred and other tax-related assets as realization is
dependent upon sufficient taxable income in the future. The Company recorded
income tax expense of approximately $4.0 million during the first three quarters
of 1998, which was offset by a reduction in the valuation allowances.
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LIQUIDITY AND CAPITAL RESOURCES
During the first three quarters of 1999, cash flow from earnings (losses) and
non-cash charges was $5.6 million compared to $37.9 million during the first
three quarters of 1998. The reduction is attributable to the operating losses
incurred during the first three quarters of 1999.
During the first three quarters of 1999, cash flow was positively impacted by a
reduction in inventory and increases in accounts payable. These benefits were
partially offset by a reduction of checks issued but not cleared and accrued
liabilities due to the payment of 1998 incentive based compensation. Receivable
balances, which increased during the third quarter of 1999, are expected to
decrease in the fourth quarter. Cash flow was also positively impacted by $6.4
million of receipt of proceeds from property and equipment sales.
The cash produced from operations supported capital expenditures of $25.3
million for the first three quarters of 1999, including approximately $1.8
million of computer software and consulting costs compared to $26.0 million,
including $7.5 million of computer software and consulting costs in the same
period of 1998. The expenditures during the first three quarters of 1999 were
primarily related to the addition of increased training pant capacity and new
product enhancements. Capital spending is expected to total approximately $32.0
million during 1999 which the Company expects will be funded through a
combination of internally generated funds and borrowings under the DIP Credit
Facility.
In connection with the Chapter 11 filing, on January 30, 1998, the Bankruptcy
Court entered a Final Order approving the DIP Credit Facility as provided under
the Revolving Credit and Guarantee Agreement dated as of January 7, 1998, among
the Company, as Borrower, certain 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, the Third Amendment
dated April 15, 1998, the Fourth Amendment dated September 28, 1998 and the
Fifth Amendment dated June 14, 1999, 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 formula. The borrowing base formula 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. In early July 1999, the Bankruptcy Court approved modifications to the
terms of the Company's DIP Credit Facility extending the facility's maturity
date to March 26, 2000.
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 1999 capital
expenditures.
As of September 26, 1999 there were no outstanding direct borrowings under this
facility. The Company had an aggregate of $1.9 million in letters of credit
issued under the DIP Credit Facility at September 26, 1999.
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The Company has notified Chase that it believes it will not meet a financial
covenant contained in the DIP Credit Facility during the fourth quarter of 1999.
The Company is currently in discussions with Chase regarding an amendment or
waiver of this covenant.
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 prepetition
liabilities without Bankruptcy Court approval. The Chapter 11 filing resulted in
a default under the Company's prepetition revolving credit facility and its
borrowings under uncommitted lines of credit. See "Note 13 of Notes to Financial
Statements."
YEAR 2000
The "Year 2000 issue" is generally defined as the inability of computer
hardware, software and embedded systems to properly recognize and process
date-related information for dates after December 31, 1999. The Company began
its efforts to address this problem as early as 1995. The Company's efforts
generally are separated into three areas: (i) business information systems
("Business Systems"), (ii) non-information technology systems, including real
estate facilities and manufacturing equipment ("Infrastructure Systems"), and
(iii) vendors, suppliers, customers and third party information interfaces
("Third Party Dependencies").
The Company has established a formal "Y2K Project Office" to assess, manage and
implement its Year 2000 activities. The Company has also established a formal
"Y2K Steering Committee" to oversee the Company's Year 2000 efforts, including
the efforts of the Project Office. The Company has also engaged Deloitte
Consulting/ICS to assist with implementation of certain Year 2000 related
Business Systems and the GartnerGroup to assist with its Year 2000 efforts for
Infrastructure Systems and Third Party Dependencies.
THE COMPANY'S STATE OF READINESS
Most of the Year 2000 issues arising with respect to the Business Systems of the
Company have been addressed by replacement of the majority of those systems with
SAP R/3 enterprise resource planning software. The SAP software was implemented
and operating at the Company's corporate headquarters and in its U.S. infant
care plants in early November of 1998 and is warranted to be Year 2000 compliant
by its manufacturer. The SAP implementation should help significantly minimize
any Year 2000 related disruptions for approximately 80 percent of the Company's
Business Systems at those locations. The Company estimates that the SAP
implementation and its other Year 2000 efforts thus far have addressed 95
percent of the critical Year 2000 exposures related to its Business Systems as a
whole. The remaining systems to the extent necessary are being addressed and are
expected to be fully assessed, remediated or replaced, tested and implemented by
the end of the fourth quarter of 1999. With respect to Business Systems that
will not be addressed by the overall SAP implementation, the Company is
currently addressing certain issues with certain of its desktop computer
operating systems. Approximately 90 percent of the desktop computers used by the
Company have currently been addressed and the Company expects to complete the
remaining 10 percent by the end of the fourth quarter of 1999. Overall, the
Company currently anticipates completion of remediation and testing of all of
its critical Business Systems by the end of the fourth quarter of 1999.
The Company has engaged the GartnerGroup to evaluate and analyze the Company's
overall Year 2000 preparedness. The Company has received formal reports from the
GartnerGroup and has initiated remediation/replacement procedures for certain
processes and systems identified in such reports.
The Company has also internally evaluated certain of its Infrastructure Systems
for Year 2000 related problems. These systems include the manufacturing capacity
for the Company's products and are therefore critical to the Company's ability
to produce products and realize revenue from sales. The manufacturing capacity
of the Company includes any number of automated systems which may include
embedded chips that are difficult to identify and remediate in the event of Year
2000 related problems. While difficult to assess, evaluation of these systems
currently indicates that the Company should not encounter Year 2000 related
problems that would significantly affect the Company's ability to manufacture
products. As part of the evaluation process, the Company
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has surveyed critical machinery, equipment and systems suppliers, and
significant product and service vendors for its material real estate facilities
and security systems. Responses to such surveys have not indicated any problems
which, taken on their own, should materially adversely affect the Company's
ability to manufacture products. The Company is continuing to follow up with
suppliers and vendors who have not yet responded to the survey and has also
addressed Infrastructure Systems in its contingency planning process.
Year 2000 problems with respect to certain material customers that prevent the
taking or filling of orders for products or interfere with the collections
process could have a material impact on the Company. Approximately 80 percent of
the Company's orders for products are delivered via electronic data interchange
facilities ("EDI"). The SAP implementation is designed to address Year 2000
related issues for Company systems required for these EDI exchanges, but the
Company is not able to control the EDI facilities of its customers. The Company
surveyed its customer base as to their EDI facilities and their overall Year
2000 state of preparedness during the fourth quarter of 1998. The Company has
received survey responses from customers who, in the aggregate, represent more
than 90 percent of its 1998 revenues. The Company has also conducted Year 2000
testing of EDI with approximately 90 percent of those customers. Neither the
survey results nor the testing revealed significant Year 2000 related problems
which would materially impair the Company's ability to conduct EDI exchanges
with its customers, although such testing should not be considered a conclusive
indicator of how EDI exchanges will perform in the future. The Company is
attempting to obtain survey responses from those material customers who have not
yet responded and conduct testing with those remaining material customers with
whom it has not yet tested prior to the end of the fourth quarter of 1999. The
Company has also prepared an inventory and surveyed those vendors, service
providers and raw materials suppliers that may have a material impact on the
Company in the event of Year 2000 problems. Approximately 85 percent of the
suppliers surveyed have responded and have not indicated any anticipated Year
2000 problems which, taken on their own, should significantly adversely affect
operations critical to the Company's ability to realize revenues. The Company is
continuing to follow up with suppliers who have not yet responded to the survey
and is otherwise addressing related issues in its contingency planning process.
Contingency planning for Business Systems, Infrastructure Systems and Third
Party Dependencies was substantially completed during the first quarter of 1999.
This process attempted to address critical Year 2000 issues presently known to
the Company and other currently unanticipated (but reasonably possible) internal
and external Year 2000 related events that may have a material impact on the
Company's ability to conduct its operations. The Company expects to continue to
revise these contingency plans as circumstances dictate during 1999.
COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES
The total costs associated with required modifications to address Year 2000
related issues for the Company has been material to the Company's financial
position. The cost of the project through September 26, 1999 was $23.4 million,
the majority of which was related to the SAP implementation. It is not possible
to identify what portion of the total SAP cost is attributable to the Year 2000
remediation. The Company planned to implement an enterprise resource planning
system for its Business Systems, regardless of Year 2000 issues with respect to
its former Business Systems. The future cost of the Year 2000 project is
estimated to be approximately $1.0 million. All of the costs are expected to be
funded through operating cash flow and bank borrowings.
RISKS PRESENTED BY YEAR 2000 ISSUES
The Year 2000 presents a number of risks and uncertainties that could affect the
Company. These include, but are not limited to, failure of the Company to
identify and address material issues associated with non-SAP related Business
Systems or with its Infrastructure Systems, failure or inability of customers to
place orders for Year 2000 related reasons, failure of necessary raw materials
manufacturers to deliver their products to the Company in a timely fashion and
the inability of either the Company to collect its receivables or its customers
to process payments for goods. Survey responses submitted to the Company may
also be inaccurate or incomplete; however, the Company currently believes that
the SAP implementation and completion of the Year 2000 project as scheduled will
reduce the incidence and severity of Year 2000 related disturbances in systems
that are within the control of the Company. The Company also has certain
financial investments in foreign joint ventures. If the operations of these
joint ventures were significantly affected by Year 2000 related issues, such
could have a material adverse impact on the Company's results of operations and
its financial position. Information currently
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known to the Company indicates that internal operations of these joint ventures
should not be materially adversely affected by Year 2000 related issues;
however, the Company is attempting to further confirm this information.
Problems in public utilities and infrastructure systems such as power supply,
telecommunications, transportation and other possible disturbances related to
the Year 2000 in the United States and abroad may have unexpected, material
impacts on the Company's ability to do business in the normal course and
therefore may also have a material adverse impact on the Company's results of
operations and financial position. Public infrastructure and utility systems
outside of the United States are widely reported to be less adequately prepared
than similar systems in the United States.
Any combination of the foregoing risks or other adverse Year 2000 related events
which would not in and of themselves constitute a material adverse event may, in
the aggregate, materially and adversely affect the Company's results of
operations, liquidity and overall financial position.
All statements made herein regarding the Company's Year 2000 efforts are Year
2000 Readiness Disclosures made pursuant to the Year 2000 Information and
Readiness Disclosure Act and, to the extent applicable, are entitled to the
protections of such act.
RISKS AND UNCERTAINTIES
INCREASED COSTS. As a part of the License Agreements entered into in connection
with the Company's settlements with P&G and K-C, the Company will incur
significant added costs in the form of running royalties payable to both parties
for sales of the licensed diaper and training pant products. While the Company
believes that the royalties being charged by P&G and K-C under their respective
License Agreements are approximately the same royalties that will be paid by the
Company's major store brand competitors for similar patent rights, the royalties
will have a material adverse impact on the Company's future financial condition
and results of operations. While these royalty costs have been partially offset
by projected raw material cost savings related to the conversion to a dual cuff
product, the Company's overall raw material costs are expected to increase.
These royalties are also expected to be partially offset by the price increases
discussed below to the extent such increases are realized and maintained.
In addition, as a part of the License Agreement entered into in connection with
the K-C Settlement Agreement, the Company has changed to a new SAP for its
diapers and training pants which exhibits certain performance characteristics.
The Company experienced certain product performance issues which it believes
impacted volume for the first half of 1999. The Company is encountering
increased product costs due to the increased price and usage of the new SAP.
While the Company is working diligently with its SAP suppliers to develop a more
cost-effective alternative, the Company cannot predict at this time whether or
when the added costs will be fully offset. The Company expects that these
increased product costs will have a material adverse impact on its financial
condition and results of operations for at least 1999 and potentially beyond.
REORGANIZATION. 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. The Company cannot
predict at this time the effect of the material adverse impact related to the
increased costs described above on the Company's enterprise valuation and on a
plan of reorganization for the Company. The Company believes, however, that it
may not be possible to satisfy in full all of the claims against the Company.
Investment in securities of, and claims against, the Company, therefore, should
be regarded as highly speculative. As a result of the Chapter 11 filing, the
Company has incurred and will continue to incur significant costs for
professional fees as the reorganization plan is developed. The Company is also
required to pay certain expenses of the Committees, including professional fees,
to the extent allowed by the Bankruptcy Court.
The Company is unable to predict at this time when it will emerge from Chapter
11 protection. See "PART I: FINANCIAL INFORMATION, ITEM 2: MANAGEMENT'S
DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION:
Chapter 11 Proceedings."
TERMINATION OF LICENSE AGREEMENTS. Because the P&G Approved Order has not yet
become a "Final Order," as defined in the Settlement Agreement, the License
Agreements are terminable at P&G's option. If the P&G License Agreements are
terminated, the Company could be faced with having to convert to a diaper design
other than the
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dual cuff design covered by the licenses. At this time, the Company's only
viable alternative product design is the single cuff product which is the
subject of P&G's Contempt Motion in Delaware. P&G has informed the Company that
it is P&G's present intention, while not waiving any contractual or other legal
rights P&G might have, to continue to operate as if the Settlement Agreement has
been approved by a Final Order, as defined therein, and not to terminate the
licenses. See "PART II: OTHER INFORMATION, ITEM 1: LEGAL PROCEEDINGS."
PRICING. The Company announced in the fourth quarter of 1998 that it would
implement a price increase of 5 percent. A significant part of this price
increase is required to offset the increased costs of certain of the Company's
infant care product designs. Additional price increases are needed to fully
offset the added royalty cost to be incurred by the Company pursuant to the P&G
and K-C settlements described above. Should the Company not be able to realize
future price increases, its margins are expected to continue to be negatively
impacted.
VOLUME. The Company has been informed that one of the Company's major customers
will shift a significant portion of the Company's existing volume to a
competitor during the fourth quarter of 1999. The Company expects to offset the
loss of this business with a new product introduction that began during the
third quarter of 1999 with the same customer, but cannot predict at this time
when or whether such new volume will be sufficient to offset the loss of
existing volume. The Company has also been notified that another large customer
will shift the Company's diaper volume to another store brand competitor during
the fourth quarter of 1999. This loss of business is expected to negatively
impact results during the fourth quarter and in the future.
REALIZATION OF INVESTMENT IN FEMININE CARE AND ADULT INCONTINENCE BUSINESS.
Given the slow start-up of the feminine care and adult incontinence business,
which was exacerbated by the Company's Chapter 11 filing, and given the
resulting feminine care and adult incontinence losses, the Company's ability to
recover its investment in such business is highly uncertain. The Company's
ability to recover its investment is dependent upon a prompt emergence from
Chapter 11 and the successful execution of the Company's feminine care and adult
incontinence business plan. The Company believes that the P&G and K-C Settlement
Agreements will provide the cornerstone for what it intends to be a consensual
plan of reorganization. The Company cannot predict at this time, however, when
it will emerge from Chapter 11 protection. The Company believes that once it
emerges from Chapter 11 the feminine care and adult incontinence business will
see an increase in sales and improved results. The Company cannot predict,
however, whether or when such improved results will be realized.
BRANDED PRODUCT INNOVATIONS. Because of the emphasis on product innovations in
the disposable diaper, feminine care and adult incontinence markets, patents and
other intellectual property rights are an important competitive factor. The
national branded manufacturers have sought to vigorously enforce their patent
rights. Patents held by the national branded manufacturers could severely limit
the Company's ability to keep up with branded product innovations by prohibiting
the Company from introducing products with comparable features. P&G and K-C have
also heavily promoted diapers in the multi-pack configuration. These packages
offer a lower unit price to the retailer and consumer. It is possible that the
Company may continue to realize lower selling prices and/or lower volumes as a
result of these initiatives.
SUBSEQUENT EVENT
The Company has previously disclosed that it has accepted a commitment from
Citicorp USA, Inc. for a $75 million working capital facility (the "Citicorp
Commitment") for reorganized Paragon. The Citicorp Commitment is also available
to Paragon should it pursue confirmation of either (i) the Wellspring
transaction or (ii) a stand-alone plan of reorganization, both as provided under
the Amended Plan. The Citicorp Commitment is subject to, among other things, the
completion of legal due diligence, execution by the parties of definitive
documents and approval by the Bankruptcy Court.
FORWARD-LOOKING STATEMENTS
From time to time, information provided by the Company, statements made by its
employees or information included in its filings with the Securities and
Exchange Commission (including the Annual Report on Form 10-K) may include
statements that are not historical facts, so-called "forward-looking
statements." The words "believes," "anticipates," "expects" and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties that could cause actual results
to differ materially from
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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 and product costs;
new product and packaging introductions by competitors; increased price and
promotion pressure from competitors; year 2000 compliance issues; and patent
litigation, are described herein. Readers are cautioned not to place undue
reliance on the forward-looking statements, which speak only 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 STANDARDS
The Financial Accounting Standards Board has issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which must be
adopted by the Company's fiscal year 2001. This statement establishes accounting
and reporting standards for derivative instruments - including certain
derivative instruments embedded in other contracts - and for hedging activities.
Adoption of this statement is not expected to have a material impact on the
Company's financial statements.
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued a Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." This statement requires
capitalization of certain costs of internal-use software. The Company adopted
this statement in the quarter ended March 28, 1999, and it did not have a
material impact on the financial statements.
In April 1998, the AICPA issued a Statement of Position 98-5, "Reporting on the
Costs of Start-up Activities." This statement requires that the costs of
start-up activities and organizational costs be expensed as incurred. Any of
these costs previously capitalized by a company must be written off in the year
of adoption. The Company adopted this statement in the quarter ended March 28,
1999, and the equity in earnings of unconsolidated subsidiaries included $.5
million in charges as a result of the adoption of the statement.
ITEM 3. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk-sensitive instruments and foreign currency exchange
rate risks do not subject the Company to material market risk exposures.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
THE PROCTER & GAMBLE COMPANY V. PARAGON TRADE BRANDS, INC. - P&G filed a lawsuit
in January 1994 in the District Court for the District of Delaware alleging that
the Company's "Ultra" infant disposable diaper products infringed two of P&G's
dual cuff diaper 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 significant.
On December 30, 1997, the Delaware District Court issued a Judgment and Opinion
finding that P&G's dual cuff patents were 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 June 2, 1998. At the same time, the District Court entered injunctive relief
agreed upon by P&G and the Company. On August 4, 1998, the Company filed with
the Federal Circuit Court of Appeals its amended notice of appeal. The appeal
was fully briefed, and oral argument was scheduled for February 5, 1999.
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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. See "--IN
RE PARAGON TRADE BRANDS, INC.," below.
P&G filed alleged claims in the Company's Chapter 11 reorganization proceeding
ranging from approximately $2.3 billion (without trebling) to $6.5 billion (with
trebling), which included a claim of $178.4 million for the Delaware judgment.
See "--IN RE PARAGON TRADE BRANDS, INC.," below. The remaining claims include
claims for, among other things, alleged patent infringement by the Company in
foreign countries where it has operations.
On February 2, 1999, the Company entered into a Settlement Agreement with P&G
which fully and finally settles all matters related to the Delaware Judgment,
the Company's appeal of the Delaware Judgment, P&G's motion to find the Company
in contempt of the Delaware Judgment and P&G's proof of claim filed in the
Company's Chapter 11 reorganization proceeding. The P&G Approval Order was
issued on August 6, 1999. As a part of the P&G settlement, Paragon grants P&G an
allowed unsecured prepetition claim of $158.5 million and an allowed
administrative claim of $5 million. As a part of the settlement, the Company has
entered into License Agreements for the U.S. and Canada, which are exhibits to
the Settlement Agreement, with respect to certain of the patents asserted by P&G
in its proof of claim, including those asserted in the Delaware Action. The U.S.
and Canadian patent rights licensed by the Company permitted the Company to
convert to a dual cuff baby diaper design. The product conversion is complete.
In exchange for these rights, the Company pays P&G running royalties on net
sales of the licensed products equal to 2 percent through October 2005, .75
percent thereafter through October 2006 and .375 percent thereafter through
March 2007 in the U.S.; and 2 percent through October 2008 and 1.25 percent
thereafter through December 2009 in Canada. The Settlement Agreement also
provides, among other things, that P&G will grant the Company and/or its
affiliates "most favored licensee" status with respect to patents owned by P&G
on the date of the Settlement Agreement or for which an application was pending
on that date. In addition, the Company has agreed with P&G that prior to
litigating any future patent dispute, the parties will engage in good faith
negotiations and will consider arbitrating the dispute before resorting to
litigation.
The Equity Committee appointed in the Chapter 11 reorganization proceeding filed
a notice of appeal of the P&G Approval Order with the Federal District Court for
the Northern District of Georgia and a motion to expedite briefing. On October
14, 1999, the Georgia District Court denied the Equity Committee's motion for
expedited briefing and offered the Equity Committee the option of consenting to
the Georgia District Court's adoption of the P&G Approval Order to permit the
Equity Committee to take its appeal of the P&G settlement directly to the 11th
Circuit Court of Appeals. On October 15, 1999, the Equity Committee consented to
the Georgia District Court's adoption of the P&G Approval Order and has since
filed a notice of appeal in the 11th Circuit Court of Appeals.
While the Company believes that the royalty rates being charged by P&G are the
same royalties that will be paid by the Company's major store brand competitors
for similar patent rights, these royalties, together with royalties to be paid
to K-C described herein, have had, and will continue to have, a material adverse
impact on the Company's future financial condition and results of operations.
While these royalty costs have been partially offset by projected raw material
cost savings related to the conversion to a dual cuff design, the Company's
overall raw material costs have increased. These royalty costs are also expected
to be partially offset by price increases announced by the Company in the fourth
quarter of 1998 to the extent such price increases are realized and maintained.
Under the terms of the P&G Settlement Agreement, once the P&G Approval Order
becomes "Final," as defined in the Settlement Agreement, the Company will
withdraw with prejudice its appeal of the Delaware Judgment to the Federal
Circuit, and P&G will withdraw with prejudice its motion in Delaware District
Court to find the Company in contempt of the Delaware Judgment. Because the P&G
Approval Order has not yet become a Final Order, as defined in the Settlement
Agreement, the P&G License Agreements described above are terminable at P&G's
option. If the P&G License Agreements are terminated, the Company could be faced
with having to convert to a diaper design other than the dual cuff design
covered by the licenses. At this time, the Company's only viable alternative
product design is the single cuff product which is the subject of a Contempt
Motion by P&G in Delaware. P&G has informed the Company that it is P&G's present
intention, while not waiving any contractual or other legal rights P&G might
have, to continue to operate as if the Settlement Agreement has been approved by
a Final Order, as defined therein, and not to terminate the licenses. See "PART
I: FINANCIAL INFORMATION,
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<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS: RISKS AND UNCERTAINTIES" above.
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
dual cuffs. The lawsuit sought 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 subsequently sued the Company on
another patent issued to K-C which is based upon a further continuation of one
of the K-C dual cuff patents asserted in the case. That action was consolidated
with the then pending action. Legal fees and costs in connection with this
litigation have been significant.
As a result of the Company's Chapter 11 filing, the proceedings in the K-C
litigation were 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, 1998 order, which was denied on June 15, 1998. K-C
has appealed this denial of reconsideration to the District Court for the
Northern District of Georgia. The Company objected to K-C's appeal and sought to
have it dismissed. K-C also filed a motion with the District Court in Atlanta to
withdraw the reference with respect to all matters pertaining to its proof of
claim from the jurisdiction of the Bankruptcy Court. By order executed February
18, 1999, the appeal, K-C's motion for withdrawal of the reference and the
Company's motion to dismiss the appeal were dismissed by the District Court
without prejudice to the right of either party within sixty days to re-open the
actions if a settlement was not consummated. See "--IN RE PARAGON TRADE BRANDS,
INC." below.
The Company has previously disclosed that should K-C prevail on its claims, an
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.
K-C filed alleged claims in the Company's Chapter 11 reorganization proceeding
ranging from approximately $893 million (without trebling) to $2.3 billion (with
trebling). See "--IN RE PARAGON TRADE BRANDS, INC.," below.
On March 19, 1999, the Company entered into a Settlement Agreement with K-C
which fully and finally settles all matters related to the Texas action,
including the Company's counterclaims, and K-C's proof of claim filed in the
Company's Chapter 11 reorganization proceeding. The K-C Approval Order was
issued by the Bankruptcy Court on August 6, 1999. Under the terms of the K-C
Settlement Agreement, the Company grants K-C an allowed unsecured prepetition
claim of $110 million and an allowed administrative claim of $5 million. As a
part of the settlement, the Company has entered into License Agreements for the
U.S. and Canada, which are exhibits to the Settlement Agreement, with respect to
the patents asserted by K-C in the Texas action. The patent rights licensed by
the Company from K-C permitted the Company to convert to a dual cuff diaper
design. The product conversion is complete. In exchange for these patent rights,
the Company pays K-C annual running royalties on net sales of the licensed
products in the U.S. and Canada equal to: 2.5 percent of the first $2 million of
net sales of the covered diaper products and 1.5 percent of such net sales in
excess of $2 million in each calendar year commencing January 1999 through
November 2004. The Company has agreed to pay a minimum annual royalty for diaper
sales of $5 million, but amounts due on the running royalties will be offset
against this minimum. The Company also pays K-C running royalties of 5 percent
of net sales of covered training pant products for the same period, but there is
no minimum royalty for training pants. As part of the settlement, the Company
has granted a royalty-free license to K-C for three patents which the Company in
the Texas action claimed K-C infringed.
The Company believes that the overall effective royalty rate that the Company
will pay to K-C, together with royalties to be paid to P&G described above, has
had, and will continue to have, a material adverse impact on the Company's
future financial condition and results of operations. While these royalty costs
have been partially offset by projected raw material cost savings related to the
conversion to a dual cuff design, the Company's overall raw material costs have
increased. These royalty costs are also expected to be partially offset by price
increases announced by the Company in the fourth quarter of 1998 to the extent
such price increases are realized and maintained.
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<PAGE>
As a part of the K-C License Agreement, K-C has agreed not to sue the Company on
two of K-C's patents related to the use of SAP in diapers and training pants, so
long as the Company remains within the SAP Safe Harbor. The Company experienced
certain product performance issues the Company believes may have been related to
the SAP the Company initially converted to in December of 1998. In February
1999, the Company converted to a new SAP. The Company is encountering increased
product costs due to the increased price and usage of the new SAP. While the
Company is working diligently with its SAP suppliers to develop a more
cost-effective alternative which is still within the SAP Safe Harbor, the
Company cannot predict at this time whether or when the added costs, as well as
increased promotional and marketing spending, will be fully offset. The Company
expects that these increased product costs will have a material adverse impact
on its financial condition and results of operations for at least 1999 and
potentially beyond.
On October 29, 1999, in accordance with the terms of the K-C Settlement
Agreement, K-C dismissed with prejudice its complaint in the Texas action and
the Company dismissed with prejudice its counterclaims in the Texas action. On
November 4, 1999, K-C filed a stipulation dismissing with prejudice its related
filings in the Georgia District Court. On November 2, 1999, the parties
exchanged mutual releases pursuant to the Settlement Agreement. See "PART I:
FINANCIAL INFORMATION, ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS: RISKS AND UNCERTAINTIES."
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 entered by the District
Court until June 2, 1998, the Company originally estimated the liability and
associated litigation costs to be approximately $200 million. The amount of the
award resulted in violation of certain covenants under the Company's bank loan
agreements. As a result, the issuance of the Judgment and the uncertainty it
created caused an immediate and critical liquidity issue for the Company which
necessitated the Chapter 11 filing.
Subsequently, damages of approximately $178.4 million were entered against
Paragon by the District Court on June 2, 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 Chapter 11 filing prevented P&G from placing liens on the Company's assets,
permitted the Company to appeal the District Court's decision in an orderly
fashion and affords the Company the opportunity to resolve liquidated and
unliquidated claims against the Company which arose prior to the Chapter 11
filing. The Company is currently operating as a debtor-in-possession under the
Bankruptcy Code. The bar date for the filing of proofs of claim (excluding
administrative claims) by creditors was June 5, 1998. P&G filed alleged claims
ranging from approximately $2.3 billion (without trebling) to $6.5 billion (with
trebling), which included a claim of $178.4 million for the Delaware judgment.
See "--THE PROCTER & GAMBLE COMPANY V. PARAGON TRADE BRANDS, INC.," above. The
remaining claims include claims for, among other things, alleged patent
infringement by the Company in foreign countries where it has operations.
On February 2, 1999, the Company entered into a Settlement Agreement with P&G
which fully and finally settles all matters related to the Delaware Judgment,
the Company's appeal of the Delaware Judgment, P&G's motion to find the Company
in contempt of the Delaware Judgment and P&G's proof of claim filed in the
Company's Chapter 11 reorganization proceeding. See "--THE PROCTER & GAMBLE
COMPANY V. PARAGON TRADE BRANDS, INC.," above. See "PART I: FINANCIAL
INFORMATION, ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS: "RISKS AND UNCERTAINTIES" above.
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.
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<PAGE>
On March 19, 1999, the Company entered into a Settlement Agreement with K-C
which fully and finally settles all matters related to the Texas action,
including the Company's counterclaims, and K-C's proof of claim filed in the
Company's Chapter 11 reorganization proceeding. See "--KIMBERLY-CLARK
CORPORATION V. PARAGON TRADE BRANDS, INC.," above. See "PART I: FINANCIAL
INFORMATION, ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS: RISKS AND UNCERTAINTIES."
On July 12, 1999, the Bankruptcy Court approved certain bidding procedures, an
expense reimbursement and a termination fee relating to a proposed investment by
Wellspring Capital Management LLC ("Wellspring"), a private investment company,
to acquire the Company as part of a plan of reorganization. The bidding
procedures provided for the consideration of competing investment proposals from
other qualified bidders and for the filing by the Company of a stand-alone plan
of reorganization. The Equity Committee filed a motion for amended findings with
respect to the Bankruptcy Court's July 12, 1999 order. The Bankruptcy Court
denied the Equity Committee's motion. The Equity Committee has appealed the
Bankruptcy Court's order and the denial of its motion to the Georgia District
Court. On November 5, 1999, the Company and the Equity Committee filed a joint
motion seeking to extend the briefing schedule in this matter pending the
completion of ongoing global settlement discussions between the parties.
On August 25, 1999, with the support of the Official Committee of Unsecured
Creditors (the "Creditors' Committee" and, together with the Equity Committee,
the "Committees"), the Company filed a stand-alone plan of reorganization (the
"Plan") with the Bankruptcy Court. The Plan provides an alternative to a
proposal by Wellspring to acquire the Company as part of a plan of
reorganization (the "Wellspring Proposal."). In accordance with Bankruptcy
Court-approved auction procedures, an alternative transaction competing with the
Wellspring Proposal was proposed to the Company on September 15, 1999. An
auction was commenced on September 21, 1999. The auction continued thereafter
until the Company, after consultation with the Creditors' Committee, the Equity
Committee, P&G and K-C, determined to conclude the auction on October 4, 1999.
At the conclusion of the auction, the Company, after consultation with the
Creditors' Committee, the Equity Committee, P&G and K-C, determined that
Wellspring had submitted the best bid. On October 15, 1999, the Company and the
Creditors' Committee, as co-proponents, jointly filed an amendment to the Plan
(the "Amended Plan") which incorporates the Wellspring Proposal, as modified by
the Company after consultation with its various creditor constituencies. The
Amended Plan also provides that, in the event the proposed Wellspring
transaction is not consummated, the proponents may pursue confirmation of a
stand-alone plan of reorganization. The Amended Plan specifies, among other
things, the type and amount of value to be distributed under either the
Wellspring or the stand-alone alternative, as the case may be. The Bankruptcy
Court has set a hearing date of November 17, 1999 to consider approval of the
Disclosure Statement.
By Order of the Bankruptcy Court on July 20, 1999, the Company's exclusivity
period, during which time only the Company can propose a plan of reorganization,
was extended through and including August 31, 1999. By Order of the Bankruptcy
Court on October 26, 1999, the Company's exclusive right to solicit acceptances
to the Amended Plan has been extended through and including January 31, 2000.
On January 30, 1998, the Company received Bankruptcy Court approval of a $75
million financing facility with a bank group led by The Chase Manhattan Bank.
This facility is designed to supplement the Company's cash on hand and operating
cash flow and to permit the Company to continue to operate its business in the
ordinary course. As of September 26, 1999, there were no outstanding direct
borrowings under this facility. The Company had an aggregate of $1.9 million in
letters of credit issued under the DIP Credit Facility at September 26, 1999.
The DIP Credit Facility contains customary covenants. In early July 1999, the
Bankruptcy Court approved modifications to the terms of the Company's $75
million debtor-in-possession credit facility with the Chase Manhattan Bank
extending the facility's maturity date to March 26, 2000.
Legal fees and costs in connection with the Chapter 11 reorganization proceeding
have been and will continue to be significant. The Company believes it is
positioned to emerge from Chapter 11 protection in the first quarter of 2000.
TRACY PATENT - The Company had previously received notice from a Ms. Rhonda
Tracy that Ms. Tracy believes the Company's diapers infringe a patent issued in
August 1998 to Ms. Tracy (U.S. Patent No. 5,797,824). The Company responded,
based upon advice of its independent patent counsel, that it believes its
products do not infringe any valid claim of Ms. Tracy's patent. On April 29,
1999, the Company received notice that Ms. Tracy had
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<PAGE>
filed suit in the United States District Court for the Northern District of
Illinois against K-C, Tyco International, Ltd., Drypers Corporation and a number
of the Company's customers, alleging infringement of her patent. The Company was
not named as a defendant in this suit. Rather, Ms. Tracy indicated in her April
29, 1999 letter that the Company would be sued upon completion of the current
suit.
The Company has entered into a Settlement Agreement, subject to Bankruptcy Court
approval, with Ms. Tracy whereby the Company will pay Ms. Tracy $500,000 in
exchange for a release from liability from any claims under Ms. Tracy's patent
for the Company, its Affiliates, as defined therein, and retailers who sell
products manufactured by the Company and its Affiliates. Under the terms of the
Settlement Agreement, Ms. Tracy also grants a nonexclusive, fully paid-up,
irrevocable, worldwide license to permit the Company and its Affiliates to make,
have made, lease, use, import, offer to sell, and sell disposable absorbent
products under the terms of Ms. Tracy's patent. This license also extends to
retailers to the extent they are selling products manufactured by the Company
and its Affiliates. The Company has filed a motion with the Bankruptcy Court
seeking approval of the settlement with Ms. Tracy and a hearing date has been
set for December 9, 1999. The Company cannot predict when or if the settlement
will be approved.
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 UPON 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 13 of Notes to
Financial Statements."
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) Exhibits
<S> <C>
EXHIBIT DESCRIPTION
------- -----------
Exhibit 3.1 Certificate of Incorporation of Paragon Trade Brands, Inc.(4)
Exhibit 3.2 By-Laws of Paragon Trade Brands, Inc., as amended through July 31, 1995(5)
Exhibit 4.1 Certificate of Incorporation of Paragon Trade Brands, Inc. (see Exhibit 3.1)
Exhibit 10.1 Asset Transfer Agreement, dated as of January 26, 1993, by and between Weyerhaeuser and
Paragon(1)
Exhibit 10.2 Intellectual Property Agreement, dated as of February 2, 1993, between
Weyerhaeuser and Paragon(1)
Exhibit 10.3 License, dated as of February 2, 1993, between Weyerhaeuser and Paragon(1)
Exhibit 10.4 Sublicense, dated as of February 2, 1993, between Weyerhaeuser and Paragon(1)
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<PAGE>
Exhibit 10.5 Technology Agreement, dated as of October 15, 1987, by and between Weyerhaeuser and Johnson
and Johnson, as amended(1)
Exhibit 10.6.1 Letter Supply Agreement between Weyerhaeuser and Paragon dated as of October 22, 1997(9)
Exhibit 10.7* Stock Option Plan for Non-Employee Directors(1)
Exhibit 10.8* Annual Incentive Compensation Plan(1)
Exhibit 10.9* 1993 Long-Term Incentive Compensation Plan(1)
Exhibit 10.10* Employment Agreement, dated as of August 11, 1998, between Paragon and Bobby V. Abraham(12)
Exhibit 10.11* Employment Agreement, dated as of August 11, 1998, between Paragon and David W. Cole(12)
Exhibit 10.12* Employment Agreement, dated as of August 11, 1998, between Paragon and Alan J. Cyron(12)
Exhibit 10.13* Employment Agreement, dated as of August 11, 1998, between Paragon and Arrigo D. (Rick)
Jezzi(12)
Exhibit 10.14* Employment agreement, dated as of August 11, 1998, between Paragon and Robert E. McClain(12)
Exhibit 10.15* Employment Agreement, dated as of August 11, 1998, between Paragon and Catherine O.
Hasbrouck(12)
Exhibit 10.16* Employment Agreement, dated as of August 11, 1998, between Paragon and Kevin P. Higgins(12)
Exhibit 10.17* 1995 Incentive Compensation Plan(5)
Exhibit 10.18* Paragon Trade Brands, Inc. Confirmation Retention Plan for Top Eight Executives and Summary
Plan Description(12)
Exhibit 10.19 Amended and Restated Credit Agreement, dated as of February 6, 1996(7)
Exhibit 10.19.1 Amendment Agreement, dated December 13, 1996, to Amended and Restated Credit Agreement,
dated as of February 6, 1996(8)
Exhibit 10.20 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)(10)
Exhibit 10.20.1 Fourth Amendment to Revolving Credit and Guaranty Agreement dated as of September 28,
1998(13)
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<PAGE>
Exhibit 10.20.2 Fifth Amendment to Revolving Credit and Guaranty Agreement dated as of June 14, 1999(14)
Exhibit 10.21 Security and Pledge Agreement, dated as of January 7, 1998(10)
Exhibit 10.22 Revolving Canadian Credit Facility and Parent Guarantee(2)
Exhibit 10.23 Indemnification Agreements, dated as of February 2, 1993, between Weyerhaeuser and Bobby V.
Abraham and Gary M. Arnts(1)
Exhibit 10.24 Rights Agreement dated December 14, 1994 between Paragon Trade Brands, Inc. and Chemical
Bank, as Rights Agent(3)
Exhibit 10.25 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 10.26** Sales Contract, dated as of January 30, 1996, between Hoechst Celanese Corporation and
Paragon Trade Brands, Inc.(7)
Exhibit 10.26.1** Sales Contract, dated as of April 30, 1998, between Clariant Corporation and Paragon
Trade Brands, Inc.(11)
Exhibit 10.27 Lease Agreement between Cherokee County, South Carolina and Paragon Trade Brands, Inc.,
dated as of October 1, 1996(8)
Exhibit 10.28 Settlement Agreement, dated as of February 2, 1999 between Paragon Trade Brands, Inc. and
The Procter & Gamble Company(13)
Exhibit 10.29 U.S. License Agreement, dated as of February 2, 1999 between The Procter & Gamble Company
and Paragon Trade Brands, Inc. (13)
Exhibit 10.30 Canadian License Agreement, dated as of February 2, 1999 between The Procter & Gamble
Company and Paragon Trade Brands, Inc. (13)
Exhibit 10.31 U.S. License Agreement, dated as of February 2, 1999 between The Procter & Gamble Company
and Paragon Trade Brands, Inc. (13)
Exhibit 10.32 Canadian License Agreement, dated as of February 2, 1999 between The Procter & Gamble
Company and Paragon Trade Brands, Inc. (13)
Exhibit 10.33 Settlement Agreement, dated as of March 19, 1999 between Kimberly-Clark Corporation and
Paragon Trade Brands, Inc. (13)
Exhibit 10.34 License Agreement Between Kimberly-Clark Corporation and Paragon Trade Brands, Inc., dated
as of March 15, 1999(13)
Exhibit 10.35 License Agreement Between Kimberly-Clark Corporation and Paragon Trade Brands, Inc., dated
as of March 15, 1999(13)
Exhibit 11 Computation of Per Share Earnings (See Note 11 to Financial Statements)
Exhibit 27 Financial Data Schedule (for SEC use only)
(b) Report on Form 8-K dated August 24, 1999 regarding the filing of the
Company's Stand-Alone Plan of Reorganization.
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<PAGE>
<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 Annual Report on
Form 10-K for the fiscal year ended December 28, 1997.
(10) Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended March 29, 1998.
(11) Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended June 28, 1998.
(12) Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended September 27, 1998.
(13) Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report
on Form 10-K for the fiscal year ended December 27, 1998.
(14) Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly
Report on Form 10-Q for the fiscal quarter ended June 27, 1999.
</FN>
</TABLE>
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<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PARAGON TRADE BRANDS, INC.
By /S/ ALAN J. CYRON
-------------------------
Alan J. Cyron
Chief Financial Officer
November 10, 1999
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<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<S> <C>
Exhibit 3.1 Certificate of Incorporation of Paragon Trade Brands, Inc.(4)
Exhibit 3.2 By-Laws of Paragon Trade Brands, Inc., as amended through July 31, 1995(5)
Exhibit 4.1 Certificate of Incorporation of Paragon Trade Brands, Inc. (see Exhibit 3.1)
Exhibit 10.1 Asset Transfer Agreement, dated as of January 26, 1993, by and between Weyerhaeuser and
Paragon(1)
Exhibit 10.2 Intellectual Property Agreement, dated as of February 2, 1993, between
Weyerhaeuser and Paragon(1)
Exhibit 10.3 License, dated as of February 2, 1993, between Weyerhaeuser and Paragon(1)
Exhibit 10.4 Sublicense, dated as of February 2, 1993, between Weyerhaeuser and Paragon(1)
Exhibit 10.5 Technology Agreement, dated as of October 15, 1987, by and between Weyerhaeuser and Johnson
and Johnson, as amended(1)
Exhibit 10.6.1 Letter Supply Agreement between Weyerhaeuser and Paragon dated as of October 22, 1997(9)
Exhibit 10.7* Stock Option Plan for Non-Employee Directors(1)
Exhibit 10.8* Annual Incentive Compensation Plan(1)
Exhibit 10.9* 1993 Long-Term Incentive Compensation Plan(1)
Exhibit 10.10* Employment Agreement, dated as of August 11, 1998, between Paragon and Bobby V. Abraham(12)
Exhibit 10.11* Employment Agreement, dated as of August 11, 1998, between Paragon and David W. Cole(12)
Exhibit 10.12* Employment Agreement, dated as of August 11, 1998, between Paragon and Alan J. Cyron(12)
Exhibit 10.13* Employment Agreement, dated as of August 11, 1998, between Paragon and Arrigo D. (Rick)
Jezzi(12)
Exhibit 10.14* Employment agreement, dated as of August 11, 1998, between Paragon and Robert E. McClain(12)
Exhibit 10.15* Employment Agreement, dated as of August 11, 1998, between Paragon and Catherine O.
Hasbrouck(12)
Exhibit 10.16* Employment Agreement, dated as of August 11, 1998, between Paragon and Kevin P. Higgins(12)
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<PAGE>
Exhibit 10.17* 1995 Incentive Compensation Plan(5)
Exhibit 10.18* Paragon Trade Brands, Inc. Confirmation Retention Plan for Top Eight Executives and Summary
Plan Description(12)
Exhibit 10.19 Amended and Restated Credit Agreement, dated as of February 6, 1996(7)
Exhibit 10.19.1 Amendment Agreement, dated December 13, 1996, to Amended and Restated Credit Agreement,
dated as of February 6, 1996(8)
Exhibit 10.20 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)(10)
Exhibit 10.20.1 Fourth Amendment to Revolving Credit and Guaranty Agreement dated as of September 28,
1998(13)
Exhibit 10.20.2 Fifth Amendment to Revolving Credit and Guaranty Agreement dated as of June 14, 1999(14)
Exhibit 10.21 Security and Pledge Agreement, dated as of January 7, 1998(10)
Exhibit 10.22 Revolving Canadian Credit Facility and Parent Guarantee(2)
Exhibit 10.23 Indemnification Agreements, dated as of February 2, 1993, between Weyerhaeuser and Bobby V.
Abraham and Gary M. Arnts(1)
Exhibit 10.24 Rights Agreement dated December 14, 1994 between Paragon Trade Brands, Inc. and Chemical
Bank, as Rights Agent(3)
Exhibit 10.25 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 10.26** Sales Contract, dated as of January 30, 1996, between Hoechst Celanese Corporation and
Paragon Trade Brands, Inc.(7)
Exhibit 10.26.1** Sales Contract, dated as of April 30, 1998, between Clariant Corporation and Paragon
Trade Brands, Inc.(11)
Exhibit 10.27 Lease Agreement between Cherokee County, South Carolina and Paragon Trade Brands, Inc.,
dated as of October 1, 1996(8)
Exhibit 10.28 Settlement Agreement, dated as of February 2, 1999 between Paragon Trade Brands, Inc. and
The Procter & Gamble Company(13)
Exhibit 10.29 U.S. License Agreement, dated as of February 2, 1999 between The Procter & Gamble Company
and Paragon Trade Brands, Inc. (13)
-43-
<PAGE>
Exhibit 10.30 Canadian License Agreement, dated as of February 2, 1999 between The Procter & Gamble
Company and Paragon Trade Brands, Inc. (13)
Exhibit 10.31 U.S. License Agreement, dated as of February 2, 1999 between The Procter & Gamble Company
and Paragon Trade Brands, Inc. (13)
Exhibit 10.32 Canadian License Agreement, dated as of February 2, 1999 between The Procter & Gamble
Company and Paragon Trade Brands, Inc. (13)
Exhibit 10.33 Settlement Agreement, dated as of March 19, 1999 between Kimberly-Clark Corporation and
Paragon Trade Brands, Inc. (13)
Exhibit 10.34 License Agreement Between Kimberly-Clark Corporation and Paragon Trade Brands, Inc., dated
as of March 15, 1999(13)
Exhibit 10.35 License Agreement Between Kimberly-Clark Corporation and Paragon Trade Brands, Inc., dated
as of March 15, 1999(13)
Exhibit 11 Computation of Per Share Earnings (See Note 11 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.
(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 Annual Report on
Form 10-K for the fiscal year ended December 28, 1997.
-44-
<PAGE>
(10) Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended March 29, 1998.
(11) Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended June 28, 1998.
(12) Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended September 27, 1998.
(13) Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report
on Form 10-K for the fiscal year ended December 27, 1998.
(14) Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly
Report on Form 10-Q for the fiscal quarter ended June 27, 1999.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10Q FOR
THE QUARTER ENDED SEPTEMBER 26, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-26-1999
<PERIOD-START> DEC-28-1998
<PERIOD-END> SEP-26-1999
<CASH> 9,652
<SECURITIES> 0
<RECEIVABLES> 90,562
<ALLOWANCES> 13,844
<INVENTORY> 49,086
<CURRENT-ASSETS> 141,183
<PP&E> 298,961
<DEPRECIATION> 188,808
<TOTAL-ASSETS> 409,444
<CURRENT-LIABILITIES> 79,877
<BONDS> 0
0
0
<COMMON> 124
<OTHER-SE> (82,417)
<TOTAL-LIABILITY-AND-EQUITY> 409,444
<SALES> 372,599
<TOTAL-REVENUES> 372,599
<CGS> 323,117
<TOTAL-COSTS> 323,117
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 304
<INCOME-PRETAX> (21,164)
<INCOME-TAX> (325)
<INCOME-CONTINUING> (20,839)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (20,839)
<EPS-BASIC> (1.74)
<EPS-DILUTED> (1.74)
</TABLE>