SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 27, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-11368
PARAGON TRADE BRANDS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 91-1554663
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
180 TECHNOLOGY PARKWAY
NORCROSS, GEORGIA 30092
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (678) 969-5000
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
Common Stock, par value $.01 per share New York Stock Exchange
Series A participating Cumulative New York Stock Exchange
Preferred Stock Purchase Rights
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
As of March 31, 1999, there were 11,946,226 shares of the Registrant's Common
Stock outstanding, and the aggregate market value of such stock held by
nonaffiliates of the Registrant was $29,865,565 (based on the closing price on
the New York Stock Exchange on March 31, 1999).
Exhibit Index on Page 86
<PAGE>
PARAGON TRADE BRANDS, INC.
TABLE OF CONTENTS TO ANNUAL REPORT
ON FORM 10-K
PART I PAGE
Item 1: BUSINESS 1
Item 2: PROPERTIES 9
Item 3: LEGAL PROCEEDINGS 10
Item 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 15
PART II
Item 5: MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS 16
Item 6: SELECTED FINANCIAL DATA 16
Item 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 18
Item 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 32
Item 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 33
Item 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE 69
PART III
Item 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 69
Item 11: EXECUTIVE COMPENSATION 70
Item 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 79
Item 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 80
PART IV
Item 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 80
Page i
<PAGE>
PART I
ITEM 1: BUSINESS
GENERAL
Paragon Trade Brands, Inc. (the "Company") is the leading manufacturer of store
brand infant disposable diapers in the United States and Canada. Paragon
manufactures a line of premium and economy diapers, training pants and feminine
care and adult incontinence products which are distributed throughout the United
States and Canada, primarily through grocery and food stores, mass
merchandisers, warehouse clubs, toy stores and drug stores that market the
Company's products under their own store brand names. Paragon has also
established international joint ventures in Mexico, Argentina, Brazil and China
for the manufacture and sale of infant disposable diapers and other absorbent
personal care products.
On February 9, 1996, the Company completed the purchase of substantially all of
the assets of Pope & Talbot, Inc.'s ("Pope & Talbot") disposable diaper
business. The purchase price of $63.5 million was paid in a combination of cash
and stock. The Company closed all the acquired disposable diaper operations in
1996. The plants and a major portion of the manufacturing equipment have been
sold. The remaining equipment is being held for sale. In 1996 the Company took a
charge of $8.1 million for the costs of integration and write-downs of duplicate
equipment owned by the Company prior to the purchase transaction.
REORGANIZATION CASE
The Company has previously disclosed that The Procter & Gamble Company ("P&G")
had filed a lawsuit against it in the United States District Court for the
District of Delaware alleging that the Company's "Ultra" disposable baby diaper
products infringe two of P&G's 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 on the P&G case in an orderly fashion and give the
Company the opportunity to resolve liquidated and unliquidated claims against
the Company, which arose prior to the Chapter 11 filing, thereby protecting all
stakeholders' interests. The Company is currently operating as a
debtor-in-possession under the Bankruptcy Code.
In connection with the Chapter 11 filing, on January 30, 1998, the Bankruptcy
Court entered a Final Order approving the Credit Agreement (the "DIP Credit
Facility") as provided under the Revolving Credit and Guarantee Agreement dated
as of January 7, 1998, among the Company, as Borrower, certain subsidiaries of
Page 1
<PAGE>
the Company, as guarantors, and a bank group led by The Chase Manhattan Bank
("Chase"). Pursuant to the terms of the DIP Credit Facility, Chase has made
available to the Company a revolving credit and letter of credit facility in an
aggregate principal amount of $75 million. The Company's maximum borrowing under
the DIP Credit Facility may not exceed the lesser of $75 million or an available
amount as determined by a borrowing base 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. The DIP Credit Facility expires on the earlier of July 7, 1999, or the
date of entry of an order by the Bankruptcy Court confirming a plan of
reorganization. The Company is currently negotiating an extension of the
maturity date on the DIP Credit Facility with Chase. As of December 27, 1998,
there were no outstanding direct borrowings under the DIP Credit Facility. The
Company had an aggregate of $1.3 million in letters of credit issued under the
DIP Credit Facility at December 27, 1998. The DIP Credit Facility contains
customary covenants. The Company for a period of time has been unable to fully
comply with certain reporting requirements of such covenants. The Company has
obtained waivers with respect to these events of default which are effective
through May 10, 1999. The Company believes that it will be in compliance with
the reporting requirements of the DIP Credit Facility by May 10, 1999.
The United States Trustee for the Northern District of Georgia has appointed an
Official Committee of Unsecured Creditors (the "Creditors' Committee") and an
Official Committee of Equity Security Holders (the "Equity Committee" and
together with the Creditors' Committee, the "Committees"). The roles of the
Committees include, among other things: (i) consultation with the Company
concerning the administration of the Chapter 11 case, and (ii) participation in
the formulation of a plan of reorganization. In discharging these
responsibilities, the Committees have standing to raise issues with the
Bankruptcy Court relating to the business of the Company and the conduct and
course of the Chapter 11 case. The Company is required to pay certain expenses
of the Committees, including professional fees, to the extent allowed by the
Bankruptcy Court.
On February 2, 1999, the Company entered into a Settlement Agreement with P&G
which, if approved by the Bankruptcy Court, will fully and finally settle 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. 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 will allow the Company to manufacture a
dual cuff baby diaper design. In exchange for these rights, the Company has
agreed to pay 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.
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 Kimberly-Clark Corporation ("K-C") described below, will have a material
adverse impact on the Company's future financial condition and results of
operations. While these royalty costs are expected to be partially offset by
projected raw material cost savings related to the conversion to a dual cuff
design, the Company's overall raw material costs are expected to increase. 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.
Under the terms of the P&G Settlement Agreement, the Company and P&G jointly
requested modification of the injunction entered in Delaware District Court so
as to allow the Company to begin converting to a dual cuff design pursuant to
the License Agreements described above. The injunction was modified as requested
on February 22, 1999 and the product conversion is substantially complete. As
also provided under the terms of the P&G
Page 2
<PAGE>
Settlement Agreement, once a Final Order, as defined therein, has been entered
by the Bankruptcy Court approving the settlement, 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. A hearing on the Company's motion
to seek approval from the Bankruptcy Court of this settlement was commenced on
March 22 and 23, 1999 and is scheduled to resume on April 13, 1999. Both the
Equity Committee and K-C have objected to the P&G settlement. The Company
intends to continue to pursue approval of the P&G Settlement by the Bankruptcy
Court. Should the P&G Settlement Agreement not be approved by a Final Order of
the Bankruptcy Court by July 31, 1999, however, the License Agreements described
above will become terminable at P&G's option. The Company cannot predict when,
or if, such approval will be granted. See "ITEM 3: LEGAL PROCEEDINGS: --IN RE
PARAGON TRADE BRANDS, INC.," and "ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: RISKS AND UNCERTAINTIES.".
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. In addition, K-C sued the Company on
another patent issued to K-C which is based upon a further continuation of one
of the K-C dual cuff patents asserted in the case.
On March 19, 1999, the Company entered into a Settlement Agreement with K-C
which, if approved by the Bankruptcy Court, will fully and finally settle 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. 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 will allow the
Company to manufacture a dual cuff diaper design. In exchange for these patent
rights, the Company has agreed to pay 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 million of net sales of the covered diaper products and 1.5 percent
of such net sales in excess of $200 million in each calendar year commencing
January 1999 through November 2004. In addition, 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 will also pay
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.
While the Company believes that, based on its projected level of sales, the
overall effective royalty rate that the Company will pay to K-C is less than the
royalty rate that will be paid by the Company's major store brand competitors
for similar patent rights, these royalties will, together with royalties to be
paid to P&G described above, have a material adverse impact on the Company's
future financial condition and results of operations. While these royalty costs
are expected to be 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 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.
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 super-absorbent polymers ("SAP") in
diapers and training pants, so long as the Company uses SAP which exhibits
certain performance characteristics (the "SAP Safe Harbor"). The Company has
experienced certain product performance issues the Company believes may be
related to such SAP. As a result, the Company expects that it will incur
increased marketing and selling, general and administrative expenses ("SG&A")
expenditures in 1999 to address product performance issues. These increased
expenditures are expected to have a material adverse impact on the Company's
financial position and results of operations in 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 better performing alternative which is still within the SAP Safe
Harbor, the Company cannot predict at this time whether or when such an
alternative SAP would be available. The Company expects that these increased
product costs will have a
Page 3
<PAGE>
material adverse impact on its financial condition and results of operations for
at least 1999 and potentially beyond.
Upon the Effective Date, as defined in the K-C Settlement Agreement, K-C will
dismiss with prejudice its complaint in the Texas action, as well as its related
filings in the District Court in Georgia, and the Company will simultaneously
dismiss with prejudice its counterclaims in the Texas action. The Company
intends to file shortly a motion with the Bankruptcy Court to seek approval of
the settlement. If the K-C Settlement Agreement is not approved by an order of
the Bankruptcy Court entered before August 1, 1999, the K-C License Agreement
described above will terminate automatically. The Company intends to vigorously
pursue approval of the settlement but cannot predict when, or if, such approval
will be granted. See "ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS: RISKS AND UNCERTAINTIES."
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 its prepetition revolving credit facility. Pursuant
to the Bankruptcy Code, the Company can seek Bankruptcy Court approval for the
rejection of executory contracts or unexpired leases, including real property
leases. Any such rejection may give rise to a prepetition unsecured claim for
damages arising therefrom.
Substantially all liabilities outstanding as of the date of the Chapter 11
filing are subject to resolution under a plan of reorganization to be voted upon
by 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 date of June 5, 1998
by which time creditors had to have filed proofs of claims setting forth any
claims which arose prior to the Chapter 11 filing.
The ability of the Company to effect a successful reorganization will depend, in
significant part, upon the Company's ability to formulate a plan of
reorganization that is approved by the Bankruptcy Court. 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 the
Company's ability to timely formulate a plan of reorganization. The Company
believes, however, that it may be impossible 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. See "ITEM 7:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS: RISKS AND UNCERTAINTIES."
The Company is unable to predict at this time when it will emerge from Chapter
11 protection. See "Notes 1, 12 and 15 of Notes to Financial Statements" and
"ITEM 3: LEGAL PROCEEDINGS" herein.
PRODUCTS
The Company manufactures several diaper product lines: a premium-quality Ultra
line, an economy line ("Economy") and a Supreme line. The Company also
manufactures a line of training pants. Ultra diaper sales accounted for
approximately 86 percent, 81 percent, and 78 percent of the Company's total unit
sales in 1998, 1997 and 1996, respectively. Economy diaper units represented
approximately 7 percent, 9 percent and 12 percent of the Company's total unit
sales in fiscal years 1998, 1997 and 1996, respectively. The Supreme product
represented approximately 4 percent, 5 percent and 4 percent of the Company's
total unit sales in fiscal years 1998, 1997 and 1996, respectively. Training
pant sales represented approximately 4 percent of the Company's total unit sales
over the same periods.
The Company's Ultra diaper combines fluff pulp with SAP in the absorbent inner
core. SAP is significantly more absorbent and better able to retain liquids than
fluff pulp. To enhance performance and appearance, the Ultra diaper incorporates
a number of product features comparable to those introduced by national branded
manufacturers. The Company now produces its Ultra diaper in six different sizes
which are designed to fit babies better as they grow and develop. Additionally,
the Company continued its agreement with Jim Henson Productions, Inc., pursuant
to which the Company reproduces the Muppet Babies(R) cartoon characters on the
"tape landing zone" of its Ultra diapers. In 1998, the Company introduced an
improved Ultra diaper which
Page 4
<PAGE>
incorporated stretch tabs and a hook and loop closure system. In late 1996 and
1997, the Company introduced an improved Ultra diaper which incorporates a
cloth-like backsheet and breathable side panels.
The Economy diaper is designed to satisfy the needs of the more cost-conscious
value segment shopper. Its absorbent pad contains fluff pulp and SAP. Its
features include a "tape landing zone" allowing for easy fitting and
re-adjustment after fastening. The Company produces the Economy diaper in three
unisex sizes.
The Company's Supreme diaper product is similar to its Ultra diaper but contains
a premium absorbent core and parts of the outer cover and closure systems use
premium materials.
The Company's training pant is designed for use by children primarily during
their transition from diapers. The Company's training pant utilizes an absorbent
core of fluff pulp and SAP and a cloth-like nonwoven outer cover. The Company
produces its training pant in two gender-specific sizes and two unisex sizes.
In 1996, the Company began manufacturing a line of feminine care products that
included ultra thin, maxi and super maxi pads, pantiliners, panty shields and
regular and super absorbent tampons. In 1997, the Company began manufacturing a
line of adult incontinence products that includes guards, undergarments and
bladder control pads. In 1998, the Company curtailed its tampon manufacturing
operations.
PRODUCT DEVELOPMENT
To enhance the Company's objective of providing its trade customers with
premium-quality store brand disposable diapers, training pants and feminine care
and adult incontinence products, the Company devotes significant resources to
market research and product design and development to enable it to improve
product performance and consumer acceptance. The Company believes that it has
the largest product development program of any manufacturer in the U.S.
disposable diaper market, other than the national branded manufacturers. The
Company spent approximately $4.2 million, $5.1 million and $4.2 million on
research and development in fiscal years 1998, 1997 and 1996, respectively.
PATENT RIGHTS
Because of the emphasis on product innovations in the disposable diaper,
feminine care and adult incontinence markets, patents and other intellectual
property rights are an important competitive factor. The national branded
manufacturers have sought to 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. To protect its competitive
position, the Company has created an intellectual property portfolio through
development, acquisition and licensing that includes approximately 300 U.S. and
foreign patents relating to disposable diaper, feminine care and adult
incontinence product features and manufacturing processes. The Company also
subjects new product innovations to a rigorous patent clearance process which
includes a review by the Company's outside patent counsel. This process is
designed to minimize patent risk related to the Company's products. See "ITEM 3:
LEGAL PROCEEDINGS."
MAJOR CUSTOMERS
The Company's net sales to its largest trade customer, Wal-Mart Stores, Inc.,
and Sam's Club, a division of Wal-Mart Stores, Inc., represented an aggregate of
approximately 19 percent, 15 percent and 13 percent of total net sales in fiscal
years 1998, 1997 and 1996, respectively. As is customary in the infant
disposable diaper market, the Company in most cases does not have long-term
contracts with its trade customers. The Company estimates that approximately 7
percent, 7 percent and 9 percent of net sales were to trade customers in Canada
in fiscal years 1998, 1997 and 1996, respectively.
FOREIGN OPERATIONS
On January 26, 1996, the Company through its wholly owned subsidiary PTB
International, Inc. ("PTBI") completed the purchase of a 15 percent interest in
Grupo P.I. Mabe, S.A. de C.V. ("Mabesa"), the second largest manufacturer of
infant disposable diapers in Mexico, for $15.3 million in cash plus additional
consideration based
Page 5
<PAGE>
on Mabesa's future financial results through 2001. The Company also acquired an
option to purchase an additional 34 percent interest in Mabesa at a
contractually determined price. In 1998 and 1997, based on Mabesa's prior year's
financial results, the Company paid additional consideration of $2.8 million and
$3.4 million, respectively.
In addition, PTBI acquired a 49 percent interest for $1.6 million in cash in
Paragon-Mabesa International ("PMI"), a joint venture that developed a diaper
manufacturing facility in Tijuana, Mexico. The Company sold certain assets to
PMI as part of the development of PMI's manufacturing facility in Tijuana,
Mexico. The Company has assisted in financing the equipment, building
construction and start-up of the Tijuana, Mexico facility which is completely
operational. The Company has signed a Product Supply Agreement with PMI and
purchases substantially all of PMI's production for sale to U.S. and European
retail customers.
On August 26, 1997, PTBI purchased a 49 percent interest in Stronger Corporation
S.A. ("Stronger"), a financial investment corporation incorporated under
Uruguayan law. An affiliate of Mabesa owns the remaining 51 percent. Stronger
has been used to establish joint ventures in Argentina and Brazil and can be
used to establish additional Latin American joint ventures.
On August 26, 1997, Stronger acquired 70 percent of Serenity S.A., the third
largest diaper manufacturer in Argentina, for approximately $11.6 million in
cash plus additional consideration based on Serenity's future financial results
through 2000. Stronger also acquired an option to purchase the remaining 30
percent interest in Serenity by 2002 at a contractually determined exercise
price. Serenity manufactures infant disposable diapers, sanitary napkins and
adult incontinence products in two facilities. PTBI advanced $5.7 million to
Stronger, its pro-rata share of the purchase price, and paid additional
consideration of $.6 million in 1998. PTBI has guaranteed Stronger's additional
consideration obligations which are estimated not to exceed an aggregate of $2.3
million through 2000.
On November 10, 1997, Stronger acquired 99 percent of the disposable diaper
business of MPC Productos para Higiene Ltda. ("MPC") for approximately $10.5
million in cash from Cremer S.A., a Brazilian textile manufacturer. MPC is
engaged in the manufacture, distribution, and sale of disposable diapers, skin
lotions for children and other personal care products. PTBI advanced $5.1
million to Stronger, its pro-rata share of the purchase price in 1997. In 1998,
PTBI converted $2.0 million of outstanding notes receivable and accumulated
interest for equipment sales into an additional capital contribution.
In 1998 Paragon established Goodbaby Paragon Hygienic Products Co. Ltd., a
manufacturing and marketing joint venture in China with Goodbaby Group of
Kunshan City and First Shanghai Investment of Hong Kong. Paragon purchased a 40
percent interest in the joint venture with Goodbaby Group and First Shanghai
Investment at 30 percent each. Initial registered capital of the venture was
approved by the Chinese government at $15 million, to be funded over a two-year
period. A joint venture business license was approved by the Chinese government
on December 31, 1997. Groundbreaking for a new factory took place in February
1998. The joint venture began production and distribution of infant disposable
diapers in October 1998. Paragon advanced $4.0 million, its pro-rata share, in
1998.
RAW MATERIALS
The principal raw material components of the Company's products are SAP, fluff
pulp, polyethylene backsheet, polypropylene nonwoven liner, adhesive closure
tape, hotmelt adhesive, elastic and tissue.
One of the primary raw materials used in the production of disposable diapers is
SAP. In early 1998, the Company entered into an agreement with Clariant
International Ltd. (subsequently purchased by BASF Corporation) whereby it
agreed, subject to certain limitations, to purchase 100 percent of its
requirements of SAP through December 31, 2001. Fluff pulp, a product made from
wood fibers, is another primary raw material. The Company's agreement with
Weyerhaeuser Company ("Weyerhaeuser") pursuant to which it purchased 100 percent
of its requirements of bleached chemical fluff pulp expired August 31, 1998. The
Company has continued purchasing substantially all of its fluff pulp
requirements from Weyerhaeuser. The Company believes that at least two other
sources of supply exist for fluff pulp.
Page 6
<PAGE>
The Company's gross margins are significantly impacted by raw material prices,
especially the price of fluff pulp which can fluctuate dramatically. The
Company's operating results benefited from favorable fluff pulp market prices in
1998 and may be adversely affected by increases in raw material prices,
primarily fluff pulp, in 1999. See "ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: Risks and Uncertainties."
COMPETITION-Disposable Diapers
National Branded Manufacturers
The principal aspects of competition from the national branded manufacturers are
price, product quality, product innovation and customer service. The U.S.
disposable diaper market is led by the national brands manufactured by P&G and
K-C. The Company estimates that, in 1998, the national branded manufacturers
accounted for approximately 74 percent of all U.S. disposable diaper sales. The
market position of these manufacturers, relative to the Company, varies from one
geographic region to another, but due to their substantial financial, technical
and marketing resources, each of these companies has the ability to exert
significant influence on the infant disposable diaper market.
The market for disposable diapers is divided into the premium and value
segments. The premium segment accounts for approximately 60 percent of the unit
volume. Both K-C and P&G dominate the premium segment. The value segment of the
industry, which the Company estimates accounted for approximately 40 percent of
unit volume in 1998, is highly competitive. The Company includes store brands,
control labels, P&G's Luvs(R), Drypers(R), Fitti(R), and all other regional
brands in the value segment.
In total, P&G is the dominant manufacturer in the U.S. diaper market, with
approximately 40 percent market share. P&G manufactures two brands: Pampers(R),
its premium brand with approximately 26 percent market share, and Luvs, its
value brand with 14 percent market share. K-C manufactures the number one diaper
brand, Huggies, with approximately 34 percent market share. K-C does not offer a
value brand, but supplies some store brand training pants within the value
segment.
Price has been a significant variable in the competitive strategy of the
national branded companies in the past three years. In recent years, pricing
pressure by the brands has been most evident in the shift of volume to mass
merchants who aggressively sell multi-packs. Multi-packs represent a package
configuration that provides the consumer 2, 3 or 4 times the amount of diapers
found in a standard convenience count package. These multi-packs sell at prices
10 to 15 percent below the branded convenience count package. For most of 1998,
pricing pressures from store brand competitors and a shift of volume to mass
merchants continued. In October of 1998, the national brands instituted a 5
percent price increase on certain of their product offerings. The Company began
implementing a similar price increase on certain of its products in the fourth
quarter of 1998. Competitive factors may prevent the Company from realizing the
full benefit of the price increase. The Company believes that the national
branded manufacturers have lower per unit costs and higher margins than the
Company, principally due to their higher volume and prices, coupled with fewer
variations in product and packaging. In addition, the national branded
manufacturers have access to substantially greater financial resources than the
Company. As a result, the Company believes that the national branded
manufacturers are capable of maintaining or reducing prices, even in an
environment of rising raw material prices.
Product quality and innovation are critical aspects of competition for the
national branded manufacturers. They have substantially larger research and
development budgets than the Company and are able to develop product innovations
more rapidly than the Company and may thereby gain market share at the Company's
expense. The Company estimates that since 1985, the national branded
manufacturers have generally introduced a product innovation approximately every
12 months.
Page 7
<PAGE>
While in recent years the Company has been able to introduce product
enhancements comparable to those introduced by the national branded
manufacturers, there can be no assurance that the Company will be able to
continue to introduce such product innovations at the pace required to remain
competitive with the national branded manufacturers. Producing comparable
products could adversely affect the Company's gross margins, particularly in
light of the significant royalty costs the Company must pay under the P&G and
K-C licenses described herein. To the extent that the Company is unable to
introduce comparable products due to the patent landscape, it could experience a
decline in net sales and net earnings. See "ITEM 3: LEGAL PROCEEDINGS" and "ITEM
7: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS: RISKS AND UNCERTAINTIES."
Customer service is another area where the national brands are able to compete.
The Company believes that each of the national branded manufacturers has an
order-delivery cycle that is significantly shorter than the Company's
order-delivery cycle. In addition, the national branded manufacturers devote
substantially greater financial resources than the Company to providing trade
customers with category expertise, customized promotional campaigns and market
support. The national branded manufacturers have sophisticated electronic data
interchange systems that interface directly with their customers' product
information systems. In 1998, the Company successfully implemented a process
improvement and information technology upgrading project to further enhance its
customer service capabilities. See "ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
Value Segment
The Company competes in the value segment of the market with national value
brands and store brand products. The value segment is characterized by excess
capacity and vigorous price competition. The Company's largest competitor in the
value segment is P&G with its Luvs brand. The next largest competitor is Drypers
Corp. K-C also produces store brand training pants.
The Company seeks to compete against other value segment manufacturers by
emphasizing research and development and by striving to maintain a leading
position among value segment competitors in product quality. Smaller competitors
of the Company are sometimes able to introduce new product features more quickly
than the Company, in part as a result of having fewer diaper machines to convert
to new production processes.
COMPETITION-Feminine Care & Adult Incontinence
The principal bases of competition in the feminine care and adult incontinence
market are price, product quality, product innovation and customer service. The
U.S. feminine care and adult incontinence retail market is led by national
branded manufacturers including K-C, P&G, Johnson and Johnson, Inc., and Playtex
Products, Inc. The Company estimates that in 1998, the national branded
manufacturers accounted for approximately 92 percent of all U.S. feminine care
and approximately 76 percent of all U.S. adult incontinence sales. The market
position of these manufacturers, relative to the Company, varies from one
geographic region to another, but due to their substantial financial, technical
and marketing resources, each of these companies has the ability to exert
significant influence on the feminine care market and adult incontinence market.
Another manufacturer is the dominant supplier of store brand feminine care
products. The Company experienced greater than anticipated operating losses in
its feminine care and adult incontinence businesses in 1998 and 1997 and 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 "ITEM 7: MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: RISKS
AND UNCERTAINTIES."
Page 8
<PAGE>
EMPLOYEES
At December 27, 1998, the Company had approximately 1,211 full-time employees,
including 1,021 employees located at its five manufacturing facilities.
ENVIRONMENT
The Company is subject to federal, state, local and foreign laws, regulations
and ordinances that (i) govern activities or operations that may have adverse
environmental effects, such as discharges to air and water as well as handling
and disposal practices for solid and hazardous wastes or (ii) impose liability
for the costs of cleaning up, and certain damages resulting from, sites of past
spills and disposals or other releases of hazardous substances (together,
"Environmental Laws").
The Company uses certain substances and generates certain wastes that are
regulated by or may be deemed hazardous under applicable Environmental Laws. The
Company believes that it currently conducts its operations, and in the past has
conducted its operations, in substantial compliance with applicable
Environmental Laws. From time to time, however, the Company's operations have
resulted or may result in certain noncompliance with applicable requirements.
The Company believes, however, that it will not incur compliance or cleanup
costs pursuant to applicable Environmental Laws that would have a material
adverse effect on the Company's results of operations or financial condition.
The Company monitors Environmental Laws and regulations, as well as pending
legislation, in each of the markets in which its products are sold. A number of
states have passed or are considering legislation intended to discourage the use
of disposable products, including disposable diapers, or to encourage the use of
nondisposable or recyclable products. The Company does not believe that any such
laws currently in effect will have a material adverse effect on its results of
operations or financial condition.
See "ITEM 7: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS: FORWARD-LOOKING STATEMENTS."
ITEM 2: PROPERTIES
As of December 27, 1998, the Company operated five manufacturing facilities,
with plants located in the United States at Macon, Georgia; Harmony,
Pennsylvania; Gaffney, South Carolina; and Waco, Texas; and in Canada at
Brampton, Ontario. The Company owns four of its manufacturing facilities.
The following table summarizes the physical properties that were held by the
Company at December 27, 1998:
<TABLE>
<CAPTION>
APPROXIMATE
SIZE NUMBER OF
LOCATION USE (SQ. FEET) OWNED/LEASED MACHINES
- -------------------------------- ------------------ ---------------- ---------------- ------------
<S> <C> <C> <C> <C>
INFANT CARE:
Brampton, Ontario Manufacturing 76,000 Owned 3
Harmony, Pennsylvania Manufacturing 173,000 Owned 9
Macon, Georgia Manufacturing 308,000 Owned 8
Oneonta, New York Held for Sale 93,000 Owned --
Porterville, California Held for Sale 69,000 Owned --
Waco, Texas Manufacturing 151,000 Owned 7
FEMININE CARE AND ADULT
INCONTINENCE:
Gaffney, South Carolina Manufacturing 213,000 Leased 6
CORPORATE AND OTHER:
Norcross, Georgia Headquarters 69,000 Owned --
</TABLE>
The facilities in Oneonta, New York and Porterville, California were sold in
February 1999.
Page 9
<PAGE>
ITEM 3: 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.
The Company had previously filed with the District Court a motion under Rule 59
for a new trial or to alter or amend the Judgment. The District Court denied
Paragon's motion by order entered August 4, 1998. The District Court also denied
a motion by P&G seeking to recover attorneys' fees it expended in defending
itself against Paragon's patent infringement counterclaim. 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.
On September 22, 1998, P&G filed a motion in the Delaware District Court seeking
to have the Court find Paragon in contempt of the injunction entered in the case
on account of Paragon's manufacture and sale of its single cuff diaper product.
P&G asserted in its claim that Paragon's single cuff diaper design (i) is no
more than just colorably different from the design found to infringe the P&G
patents at issue in the case and (ii) also infringes such patents. The Company
opposed P&G's motion. Based on the advice of counsel, the Company believes that
P&G's motion is without merit. If the motion were granted, however, the Company
would be forced to discontinue the manufacture and sale of its single cuff
design. In addition, P&G in its motion asked that the Court order the Company to
send letters to all of its customers advising them that the continued resale by
them of its single cuff design would also constitute patent infringement.
Consequently, the Company believes that if the motion were granted it would have
a material adverse effect on the Company's financial condition and results of
operations and would seriously jeopardize the Company's future viability.
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, if approved by the Bankruptcy Court, will fully and finally settle 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. 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 will allow the Company to manufacture a
dual cuff baby diaper design. In exchange for
Page 10
<PAGE>
these rights, the Company has agreed to pay 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.
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, will have a material adverse impact on the Company's
future financial condition and results of operations. While these royalty costs
are expected to be partially offset by projected raw material cost savings
related to the conversion to a dual cuff design, the Company's overall raw
material costs are expected to increase. 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.
Under the terms of the P&G Settlement Agreement, the Company and P&G jointly
requested modification of the injunction entered in Delaware District Court so
as to allow the Company to begin converting to a dual cuff design pursuant to
the License Agreements described above. The injunction was modified as requested
on February 22, 1999 and the product conversion is substantially complete. As
also provided under the terms of the P&G Settlement Agreement, once a Final
Order, as defined therein, has been entered by the Bankruptcy Court approving
the settlement, 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. A hearing on the Company's motion to seek approval from the
Bankruptcy Court of this settlement was commenced on March 22 and 23, 1999 and
is scheduled to resume on April 13, 1999. Both the Equity Committee and K-C have
objected to the P&G settlement. The Company intends to continue to pursue
approval of the P&G Settlement by the Bankruptcy Court. Should the P&G
Settlement Agreement not be approved by a Final Order of the Bankruptcy Court by
July 31, 1999, however, the License Agreements described above will become
terminable at P&G's option. The Company cannot predict when, or if, such
approval will be granted. See "ITEM 3: LEGAL PROCEEDINGS: --IN RE PARAGON TRADE
BRANDS, INC.," and "ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS: RISKS AND UNCERTAINTIES" below.
KIMBERLY-CLARK CORPORATION V. PARAGON TRADE BRANDS, INC. -- On October 26, 1995,
K-C filed a lawsuit against the Company in U.S. District Court in Dallas, Texas,
alleging infringement by the Company's products of two K-C patents relating to
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 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 pending
action. The Court appointed a special master to rule on the various pending
motions. Legal fees and costs in connection with this litigation have been
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.
Page 11
<PAGE>
On May 26, 1998, the special master issued his report on the majority of the
motions pending before him. His report included a finding, among other things,
that Paragon, as the successor-in-interest to the disposable diaper business of
Pope & Talbot, has a fully paid-up license to one of the three asserted K-C
inner-leg gather patents, which license runs from the date of the acquisition by
the Company of Pope & Talbot. Pope & Talbot had previously obtained the license
from K-C. The special master also found that K-C should be held to the narrow
interpretation of its patent applied by Judge Dwyer in the Western District of
Washington in earlier litigation between P&G and K-C on the patent. In addition,
the special master also recommended that the Company's antitrust counterclaim
and any discovery-related matters in connection therewith be dismissed.
Effective September 1, 1998, the Texas action was reassigned to Judge Lindsey, a
newly-appointed judge on the Dallas District Court bench. Judge Lindsey asked
the parties to report on the status of the case and the likelihood of
settlement. The parties responded on November 6, 1998, that negotiations were
underway and that they believed considerable progress was being made.
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. Based on the advice of patent counsel, the Company believes that
the Company's products do not infringe any valid patent asserted by K-C.
K-C filed alleged claims 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, if approved by the Bankruptcy Court, will fully and finally settle 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. 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 will allow the
Company to manufacture a dual cuff diaper design. In exchange for these patent
rights, the Company has agreed to pay 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 million of net sales of the covered diaper products and 1.5 percent
of such net sales in excess of $200 million in each calendar year commencing
January 1999 through November 2004. In addition, 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 will also pay
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.
While the Company believes that, based on its projected level of sales, the
overall effective royalty rate that the Company will pay to K-C is less than the
royalty rate that will be paid by the Company's major store brand competitors
for similar patent rights, these royalties will, together with royalties to be
paid to P&G described above, have a material adverse impact on the Company's
future financial condition and results of operations. While these royalty costs
are expected to be 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 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.
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 super-absorbent polymers ("SAP") in
diapers and training pants, so long as the Company uses SAP which exhibits
certain performance characteristics (the "SAP Safe Harbor"). The Company has
experienced certain product performance issues the Company believes may be
related to such SAP. As a result, the Company expects that it will incur
increased marketing and selling, general and administrative expenses ("SG&A")
expenditures in 1999 to address product performance issues. These increased
expenditures are expected to have a material adverse impact on the Company's
financial position and results of operations in 1999. The Company is
encountering increased product costs due to the increased price and usage of the
new
Page 12
<PAGE>
SAP. While the Company is working diligently with its SAP supplier to develop a
better performing alternative which is still within the SAP Safe Harbor, the
Company cannot predict at this time whether or when such an alternative SAP
would be available. 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.
Upon the Effective Date, as defined in the K-C Settlement Agreement, K-C will
dismiss with prejudice its complaint in the Texas action, as well as its related
filings in the District Court in Georgia, and the Company will simultaneously
dismiss with prejudice its counterclaims in the Texas action. The Company
intends to file shortly a motion with the Bankruptcy Court to seek approval of
the settlement. If the K-C Settlement Agreement is not approved by an order of
the Bankruptcy Court entered before August 1, 1999, the K-C License Agreement
described above will terminate automatically. The Company intends to vigorously
pursue approval of the settlement but cannot predict when, or if, such approval
will be granted. See "ITEM 7: 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, if approved by the Bankruptcy Court, will fully and finally settle 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. 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 will allow the Company to manufacture a
dual cuff baby diaper design. In exchange for these rights, the Company has
agreed to pay 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.
Page 13
<PAGE>
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 below, will have a material adverse impact on the Company's
future financial condition and results of operations. While these royalty costs
are expected to be partially offset by projected raw material cost savings
related to the conversion to a dual cuff design, the Company's overall raw
material costs are expected to increase. 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.
Under the terms of the P&G Settlement Agreement, the Company and P&G jointly
requested modification of the injunction entered in Delaware District Court so
as to allow the Company to begin converting to a dual cuff design pursuant to
the License Agreements described above. The injunction was modified as requested
on February 22, 1999 and the product conversion is substantially complete. As
also provided under the terms of the P&G Settlement Agreement, once a Final
Order, as defined therein, has been entered by the Bankruptcy Court approving
the settlement, 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. A hearing on the Company's motion to seek approval from the
Bankruptcy Court of this settlement was commenced on March 22 and 23, 1999 and
is scheduled to resume on April 13, 1999. Both the Equity Committee and K-C have
objected to the P&G settlement. The Company intends to continue to pursue
approval of the P&G Settlement by the Bankruptcy Court. Should the P&G
Settlement Agreement not be approved by a Final Order of the Bankruptcy Court by
July 31, 1999, however, the License Agreements described above will become
terminable at P&G's option. The Company cannot predict when, or if, such
approval will be granted. See "ITEM 3: LEGAL PROCEEDINGS: --IN RE PARAGON TRADE
BRANDS, INC.," and "ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS: RISKS AND UNCERTAINTIES" below.
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.
On March 19, 1999, the Company entered into a Settlement Agreement with K-C
which, if approved by the Bankruptcy Court, will fully and finally settle 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. 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 will allow the
Company to manufacture a dual cuff diaper design. In exchange for these patent
rights, the Company has agreed to pay 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 million of net sales of the covered diaper products and 1.5 percent
of such net sales in excess of $200 million in each calendar year commencing
January 1999 through November 2004. In addition, 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 will also pay
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.
While the Company believes that, based on its projected level of sales, the
overall effective royalty rate that the Company will pay to K-C is less than the
royalty rate that will be paid by the Company's major store brand competitors
for similar patent rights, these royalties will, together with royalties to be
paid to P&G described above, have a material adverse impact on the Company's
future financial condition and results of operations. While these royalty costs
are expected to be 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 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.
Page 14
<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 stays within the SAP Safe Harbor. The Company has
experienced certain product performance issues the Company believes may be
related to such SAP. As a result, the Company expects that it will incur
increased marketing and SG&A expenditures in 1999 to address product performance
issues. These increased expenditures are expected to have a material adverse
impact on the Company's financial position and results of operations in 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 better performing alternative which is still within the
SAP Safe Harbor, the Company cannot predict at this time whether or when such an
alternative SAP would be available. 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.
Upon the Effective Date, as defined in the K-C Settlement Agreement, K-C will
dismiss with prejudice its complaint in the Texas action, as well as its related
filings in the District Court in Georgia, and the Company will simultaneously
dismiss with prejudice its counterclaims in the Texas action. The Company
intends to file shortly a motion with the Bankruptcy Court to seek approval of
the settlement. If the K-C Settlement Agreement is not approved by an order of
the Bankruptcy Court entered before August 1, 1999, the K-C License Agreement
described above will terminate automatically. The Company intends to vigorously
pursue approval of the settlement but cannot predict when, or if, such approval
will be granted. See "ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS: RISKS AND UNCERTAINTIES."
On February 17, 1999, the Company, P&G, K-C, the Creditors' and Equity
Committees stipulated to an extension of the Company's exclusivity period to
April 19, 1999 during which time only the Company can propose a plan of
reorganization. On March 29, 1999, the Company filed a motion seeking to extend
this period, initially, to May 19, 1999 and, subsequently, to June 19, 1999. A
hearing on this motion is scheduled to occur on April 16, 1999.
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 December 27, 1998, there were no outstanding direct
borrowings under this facility. The Company had an aggregate of $1.3 million in
letters of credit issued under the DIP Credit Facility at December 27, 1998. The
DIP Credit Facility contains customary covenants. The Company for a period of
time has been unable to fully comply with certain reporting requirements of such
covenants. The Company has obtained waivers with respect to these events of
default which are effective through May 10, 1999. The Company believes that it
will be in compliance with the reporting requirements of the DIP Credit Facility
by May 10, 1999. See "Note 12 of Notes to Financial Statements." Legal fees and
costs in connection with the Chapter 11 case have been and will continue to be
significant. The Company is unable to predict at this time when it will emerge
from Chapter 11 protection.
OTHER -- The Company is also a party to other legal activities generally
incidental to its activities. Although the final outcome of any legal proceeding
or dispute is subject to a great many variables and cannot be predicted with any
degree of certainty, the Company presently believes that any ultimate liability
resulting from any or all legal proceedings or disputes to which it is a party,
except for the Chapter 11 filing and the P&G and K-C matters discussed above,
will not have a material adverse effect on its financial condition or results of
operations.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the 1998 fiscal year.
Page 15
<PAGE>
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
As of March 31, 1999, there were 250 holders of record of the Company's common
stock. The Company has not paid dividends on its common stock. The Board of
Directors will determine future dividend policy based upon the Company's results
of operations, financial condition, capital requirements and other
circumstances. The Company's DIP Credit Facility prohibits the Company from
paying cash dividends. The Company's common stock is listed on the New York
Stock Exchange, Inc. under the symbol "PTB." See "ITEM 7: MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: RISKS
AND UNCERTAINTIES." See "Note 19 of Notes to Financial Statements" regarding the
quarterly high and low price range of the Company's common stock. The Company
did not sell any securities of the Company that were not registered under the
Securities Act of 1933, as amended, during the fiscal year ended December 27,
1998.
ITEM 6: SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data of the
Company on a historical basis as described below. The selected consolidated
financial data as of December 27, 1998 and December 28, 1997, and for the three
years in the period ended December 27, 1998 have been derived from the audited
consolidated financial statements of the Company which are included in Item 8 of
this annual report on Form 10-K. The selected consolidated financial data as of
December 29, 1996, December 31, 1995 and December 25, 1994, and for the years
then ended have been derived from the audited consolidated financial statements
of the Company. The Company uses a 52/53-week year for financial reporting
purposes. The fiscal year ended December 31, 1995 reflects 53 weeks of
operations.
The audited consolidated financial statements from which the selected financial
data has been derived have been prepared assuming that the Company will continue
as a going concern. As more fully described in "Notes 1 and 15 of Notes to
Financial Statements" and "ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--RISK FACTORS: REORGANIZATION
CASE," the Company is unable to predict when it will submit a plan of
reorganization that will be acceptable to the Bankruptcy Court. In the event a
plan of reorganization is confirmed and consummated, continuation of the
business thereafter is dependent on the Company's ability to execute the
underlying business plan. The 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.
Page 16
<PAGE>
(Dollar amounts in millions, except per share data)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
-------------- --------------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
EARNINGS STATEMENT DATA(1)
Net Sales $ 535.2 $ 562.0 $ 581.9 $ 518.8 $ 578.6
EBITDA(2) $ 58.4 $ 62.5 $ 91.5 $ 46.2 $ 73.6
Operating profit (loss) $ (58.0)(3) $ (183.8)(4) $ 35.7(5) $ (3.6)(6) $ 42.5
Net earnings (loss) $ (65.4)(3)(7)$ (212.7)(4)(8) $ 21.1(5) $ (3.4)(6) $ 25.0
PER SHARE DATA(1)
Basic earnings (loss) per $ (5.48)(3)(7)$(17.86)(4)(8) $ 1.76(5) $ (.29)(6) $ 2.16
share
BALANCE SHEET DATA(1)
Total assets $ 429.3 $ 376.1 $ 373.1 $ 266.7 $ 275.4
Liabilities subject to
compromise $ 406.9 - - - -
Long-term debt $ - $ 70.0 $ 70.0 - $ 6.0
Shareholders' equity (deficit) $ (61.8) $ 5.0 $ 214.7 $ 191.7 $ 195.7
OTHER DATA(1)
Capital spending $ 28.3 $ 49.4 $ 48.9 $ 17.4 $ 74.9
Depreciation and amortization $ 34.5 $ 35.5 $ 38.8 $ 36.0 $ 31.1
Units sold (millions) 3,463 3,689 3,761 3,378 3,595
- ---------------
<FN>
(1) See Notes 1, 3 and 15 of Notes to Financial Statements.
(2) Operating profit (loss) before interest, taxes, depreciation and
amortization and nonrecurring charges discussed in footnotes 3, 4, 5 and 6 below
("EBITDA").
(3) Includes settlement contingencies of $78.5 for the estimated settlement
costs of P&G's and K-C's claims asserted in the Company's Chapter 11
reorganization proceeding, including the settlement of the P&G patent judgment
and the K-C Texas action, and a $3.4 asset impairment of the Company's tampon
manufacturing line. See Notes 1, 3 and 15 of Notes to Financial Statements and
"ITEM 3: LEGAL PROCEEDINGS."
(4) Includes settlement contingency of $200 for an adverse judgment in a patent
litigation matter with P&G and $10.6 of asset impairments and inventory
adjustments related to the write-off of software and consulting costs and the
discontinuation of the Company's tampon manufacturing operation. See Notes 1, 3
and 15 of Notes to Financial Statements.
(5) Includes costs for the integration of Pope & Talbot's disposable diaper
business purchased in February 1996 and costs related to the relocation of the
corporate headquarters to Atlanta. Excluding these costs, operating profit would
be $52.7, net earnings would be $31.7 and basic earnings per share would be
$2.64.
(6) Includes restructuring and charges taken in the first quarter of 1995 for
the closure of the La Puente, California plant, corporate headquarters staff
reductions, and other charges. Excluding these charges, operating profit would
be $10.1, net earnings would be $5.4 and basic earnings per share would be $.46.
(7) Includes a $32.9 reserve against deferred and other tax-related assets.
(8) Includes a $100.2 reserve against deferred and other tax-related assets.
</FN>
</TABLE>
Page 17
<PAGE>
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company has previously disclosed that "P&G" had filed a lawsuit against it
in the United States District Court for the District of Delaware alleging that
the Company's "Ultra" disposable baby diaper products infringe two of P&G's 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 on the P&G case in an orderly fashion and give the
Company the opportunity to resolve liquidated and unliquidated claims against
the Company, which arose prior to the Chapter 11 filing. 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, if approved by the Bankruptcy Court, will fully and finally settle 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. 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 will allow the Company to manufacture a
dual cuff baby diaper design. In exchange for these rights, the Company has
agreed to pay 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.
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 below, will have a material adverse impact on the Company's
future financial condition and results of operations. While these royalty costs
are expected to be partially offset by projected raw material cost savings
related to the conversion to a dual cuff design, the Company's overall raw
material costs
Page 18
<PAGE>
are expected to increase. 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.
Under the terms of the P&G Settlement Agreement, the Company and P&G jointly
requested modification of the injunction entered in Delaware District Court so
as to allow the Company to begin converting to a dual cuff design pursuant to
the License Agreements described above. The injunction was modified as requested
on February 22, 1999 and the product conversion is substantially complete. As
also provided under the terms of the P&G Settlement Agreement, once a Final
Order, as defined therein, has been entered by the Bankruptcy Court approving
the settlement, 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. A hearing on the Company's motion to seek approval from the
Bankruptcy Court of this settlement was commenced on March 22 and 23, 1999 and
is scheduled to resume on April 13, 1999. Both the Equity Committee and K-C have
objected to the P&G settlement. The Company intends to continue to pursue
approval of the P&G Settlement by the Bankruptcy Court. Should the P&G
Settlement Agreement not be approved by a Final Order of the Bankruptcy Court by
July 31, 1999, however, the License Agreements described above will become
terminable at P&G's option. The Company cannot predict when, or if, such
approval will be granted. See "--Risks and Uncertainties" below, and "ITEM 3:
LEGAL PROCEEDINGS: --IN RE 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. In addition, K-C sued the Company on
another patent issued to K-C which is based upon a further continuation of one
of the K-C dual cuff patents asserted in the case.
On March 19, 1999, the Company entered into a Settlement Agreement with K-C
which, if approved by the Bankruptcy Court, will fully and finally settle 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. 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 will allow the
Company to manufacture a dual cuff diaper design. In exchange for these patent
rights, the Company has agreed to pay 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 million of net sales of the covered diaper products and 1.5 percent
of such net sales in excess of $200 million in each calendar year commencing
January 1999 through November 2004. In addition, 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 will also pay
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.
While the Company believes that, based on its projected level of sales, the
overall effective royalty rate that the Company will pay to K-C is less than the
royalty rate that will be paid by the Company's major store brand competitors
for similar patent rights, these royalties will, together with royalties to be
paid to P&G described above, have a material adverse impact on the Company's
future financial condition and results of operations. While these royalty costs
are expected to be 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 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.
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 super-absorbent polymers ("SAP") in
diapers and training pants, so long as the Company uses SAP which exhibits
certain performance characteristics (the "SAP Safe Harbor"). The Company has
experienced certain product performance issues the Company believes may be
related to such SAP. As a result, the Company expects that it will incur
increased marketing and selling, general and administrative expenses
Page 19
<PAGE>
("SG&A") expenditures in 1999 to address product performance issues. These
increased expenditures are expected to have a material adverse impact on the
Company's financial position and results of operations in 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 supplier to
develop a better performing alternative which is still within the SAP Safe
Harbor, the Company cannot predict at this time whether or when such an
alternative SAP would be available. 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.
Upon the Effective Date, as defined in the K-C Settlement Agreement, K-C will
dismiss with prejudice its complaint in the Texas action, as well as its related
filings in the District Court in Georgia, and the Company will simultaneously
dismiss with prejudice its counterclaims in the Texas action. The Company
intends to file shortly a motion with the Bankruptcy Court to seek approval of
the settlement. If the K-C Settlement Agreement is not approved by an order of
the Bankruptcy Court entered before August 1, 1999, the K-C License Agreement
described above will terminate automatically. The Company intends to vigorously
pursue approval of the settlement but cannot predict when, or if, such approval
will be granted. See "--Risks and Uncertainties."
The Company is unable to predict at this time when it will emerge from Chapter
11 protection. See "Notes 1 and 15 of Notes to Financial Statements" and "ITEM
3: LEGAL PROCEEDINGS" herein.
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 1998, and the Company's international investments in
joint ventures in Mexico, Argentina, Brazil and China are reported in the
corporate and other segment.
YEAR ENDED DECEMBER 27, 1998 VS. YEAR ENDED DECEMBER 28, 1997
RESULTS OF OPERATIONS
A net loss of $65.4 million was incurred during 1998 compared to a net loss of
$212.7 million in 1997. Included in the results for 1998 were accrued settlement
contingencies of $78.5 million representing the balance of the estimated
settlement costs of P&G's and K-C's claims in the Company's Chapter 11
reorganization proceeding, including the settlement of the P&G patent judgment
and the K-C Texas action. See "Notes 1 and 15 of Notes to Financial Statements"
and "ITEM 3: LEGAL PROCEEDINGS" herein. Also included in the results for 1998
was $6.3 million of bankruptcy costs and a $3.4 million asset impairment
writedown relating to the Company's tampon manufacturing line that was taken out
of service in early 1998 and is currently held for sale. The total of the
settlement contingency, bankruptcy costs and asset impairment writedown was
$54.2 million, net of the effect of income taxes. The results in 1998 were also
negatively impacted by a reserve of $32.9 million taken against the Company's
net deferred and other tax-related assets.
Included in the 1997 results was an estimated accrued settlement contingency of
$200 million for the P&G patent litigation judgment and associated litigation
costs. See "Notes 1 and 15 of Notes to Financial Statements" and "ITEM 3: LEGAL
PROCEEDINGS" herein. Also included in the results for 1997 were asset
impairments and other write-offs totaling $10.6 million related to the write-off
of software and consulting costs related to the enterprise-wide information
system installation and discontinuation of the Company's tampon production. The
total of the loss contingency and asset impairments was $129.5 million, net of
the effect of income taxes. The results in 1997 were also negatively impacted by
a reserve of $100.2 million taken against the Company's net deferred and other
tax-related assets.
Basic loss per share in 1998 was $5.48 compared to basic loss per share of
$17.86 in 1997. Basic earnings per share was $1.52 in 1998 compared to $1.43 in
1997, excluding charges discussed above in both periods and bankruptcy costs and
adjusting for the Company's contractual interest charges in 1998.
Infant care operating loss totaled $42.2 million in 1998 compared to an
operating loss of $155.0 million in 1997. The $78.5 million of settlement
contingencies in 1998 and the $200.0 million settlement contingency in 1997
Page 20
<PAGE>
discussed above, materially impacted infant care operating results. Excluding
these contingencies, infant care operating profits were $36.3 million in 1998
compared to $45.0 million in 1997. Reduced volume and increased SG&A were the
major factors contributing to this decline.
Feminine care and adult incontinence operating loss totaled $16.9 million in
1998 compared to an operating loss of $23.7 million in 1997. Operating loss
includes asset impairments related to a tampon manufacturing operation that was
shut down in 1998 of $3.4 million in 1998 and $4.4 million in 1997. The
reduction of the operating loss resulted from increased volume, the
discontinuation of the tampon manufacturing operation and cost management
initiatives.
The Company experienced greater than anticipated operating losses in its
feminine care and adult incontinence businesses in 1998 and 1997 and 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.
NET SALES
Overall net sales were $535.2 million in 1998, a 4.8 percent decrease from the
$562.0 million reported in 1997.
Infant care net sales decreased 5.9 percent to $512.8 million from $545.2
million in 1997. Unit sales decreased 7.5 percent to 3,413 million diapers in
1998 compared to 3,689 million diapers in 1997. The decrease in sales was
primarily due to uncertainties related to the Company's Chapter 11 proceeding
and the temporary discontinuation of shipments to a customer during the second
half of the year due to product design issues associated with a new product
rollout. The Company believes these product design issues have been resolved.
The Company resumed shipments to that customer in the first quarter of 1999.
Volume remained under pressure from discounts and promotional allowances by
branded manufacturers and value segment competitors and by customer losses to
store brand diaper competitors. 1999 infant care volume and sales price are
expected to remain under pressure due to product performance issues until
remedied, continued competitive initiatives from store brand competitors and a
prolonged Chapter 11 case.
Excluding the effect of a favorable product mix, average sales prices for the
Company's products during 1998 were lower compared to 1997. The decrease in
prices was primarily due to the use of multi-packs by the branded manufacturers
and value segment competitors, competitive pressure from store brand diaper
competitors and price decreases in Canada. The Company began to implement a
price increase of approximately 5 percent during the fourth quarter of 1998 in
response to increases announced by K-C and P&G. It is difficult to predict the
amount of the final realization of this price increase due to competitive
factors previously discussed.
Feminine care and adult incontinence sales increased to $6.6 million in 1998
from $4.3 million in 1997 due to the initiation of shipments 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."
Corporate and other net sales increased to $15.8 million in 1998 from $12.5
million in 1997 and relate to Changing Paradigms, which was sold in October of
1998.
COST OF SALES
Overall cost of sales in 1998 was $428.6 million compared to $454.9 million in
1997, a 5.8 percent decrease. As a percentage of net sales, cost of sales was
80.1 percent in 1998 compared to 80.9 percent in 1997.
Page 21
<PAGE>
Infant care costs were $397.1 million in 1998 compared to $423.4 million in
1997, a decrease of 6.4 percent. As a percentage of net sales, infant care cost
of sales was 77.4 percent in 1998 compared to 77.8 percent in 1997. This
improvement was primarily due to lower raw material costs, improved operating
efficiencies and lower overhead costs. The lower costs were partially offset by
the sourcing of products from PMI under a supply contract and charges related to
royalties payable to P&G under a product conversion agreement. Costs were also
higher due to the product design costs associated with the Company's conversion
to a single leg cuff diaper in June of 1998. Costs will increase significantly
in 1999 due to the payment of royalties in accordance with various licensing
agreements included in the settlements of certain patent litigation with P&G and
K-C. See "ITEM 3: LEGAL PROCEEDINGS" and "Risks and Uncertainties."
Infant care raw material costs, primarily pulp and SAP, were at lower price
levels in 1998 compared to 1997. Raw material prices, primarily pulp and SAP,
are expected to increase in 1999. Product costs are expected to increase
significantly during 1999 due to the increased price and utilization of SAP, the
introduction of an improved Ultra diaper, which incorporates stretch tabs and a
hook and loop closure system, and rising fluff pulp prices. See "Risks and
Uncertainties."
Infant care labor costs were lower during 1998 compared to 1997. The lower costs
reflect increased manufacturing efficiencies including the use of automated
packaging. Infant care overhead costs were lower during 1998 compared to 1997
due to cost management efforts. Labor costs are expected to increase during 1999
due to inefficiencies related to new product designs and product introductions.
Infant care depreciation costs were $25.8 million in 1998 compared to $29.1
million in 1997.
Feminine care and adult incontinence cost of sales were $18.6 million in 1998
compared to $20.4 million in 1997, a decrease of 4.1 percent. As a percentage of
net sales, cost of sales was 281.8 percent in 1998 compared to 451.2 percent in
1997. Increased volume, lower labor and overhead costs resulting from cost
management initiatives and the shut down of tampon-related production equipment
were offset by an increase in depreciation to $4.7 million in 1998 from $2.3
million in 1997. Feminine care and adult incontinence cost of sales are expected
to remain greater than net sales until volume is significantly increased to
absorb existing manufacturing capacity.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
SG&A expenses were $78.4 million in 1998 compared to $76.3 million in 1997. As a
percentage of net sales, these expenses were 14.6 percent in 1998 compared to
13.6 percent in 1997. The increase in costs is primarily attributable to an
increase in trade merchandising expenses, incentive-based accruals, selling
expenses and information system costs related to the Company's new information
system installation, which is part of the Company's Year 2000 remediation
project discussed below. These increased costs were partially offset by lower
legal expenses, excluding bankruptcy costs, and packaging artwork and design
costs. It is anticipated that SG&A expenses will increase significantly in 1999
due to increased marketing expenditures and packaging costs due to new product
introductions.
RESEARCH AND DEVELOPMENT
Research and development expenses were $4.2 million in 1998 compared to $5.1
million in 1997. The decrease was primarily due to a reduction of infant care
product development and testing in the second half of 1998.
SETTLEMENT CONTINGENCIES
The settlement contingencies of $78.5 million recorded in 1998 represent
additional accruals for the balance of the estimated settlement costs of P&G's
and K-C's claims in the Company's Chapter 11 reorganization proceeding,
including the settlement of the P&G patent judgment and the K-C Texas action.
The settlement contingency of $200 million in 1997 represents the accrual of the
estimated liability and associated litigation costs from the adverse judgment in
the P&G patent litigation. See "Notes 1 and 15 of Notes to Financial Statements"
and "ITEM 3: LEGAL PROCEEDINGS" herein.
Page 22
<PAGE>
ASSET IMPAIRMENTS
Asset impairments were $3.4 million in 1998 compared to $9.4 million in 1997.
The 1998 asset impairment related to the Company's feminine care and adult
incontinence business tampon manufacturing line which was removed from service
in early 1998 and is currently held for sale. The 1997 asset impairments
included a $5.0 million write-off of software and associated consulting costs
related to the Company's enterprise-wide information system installation, which
was charged to the corporate and other segment. The write-off was due to the
inability of the software to perform as represented during the software
selection process. The Company is currently evaluating its options, including
legal action, to recover the costs of the software and consulting. Also included
in 1997 was a write-down of $4.4 million for the shut down of the feminine care
and adult incontinence business' tampon-related production equipment. In
conjunction with the shut down of the tampon manufacturing operation write-offs
of $.9 million were taken for raw material, finished goods and spare-part
inventories which were charged to cost of sales.
INTEREST EXPENSE
Interest expense was $.5 million in 1998 compared to $4.7 million in 1997. The
decrease resulted from the suspension of interest on the Company's prepetition
credit facilities due to the Chapter 11 filing. There were no direct borrowings
under the DIP Credit Facility during 1998. 1997 included interest on approximate
average borrowings of $80.2 million under the prepetition revolving credit
facility and lines of credit.
EQUITY IN EARNINGS OF UNCONSOLIDATED SUBSIDIARIES
The equity in earnings of unconsolidated subsidiaries, which is included in the
corporate and other segment, was $4.1 million in 1998 compared to $1.0 million
in 1997. The increase primarily reflects improved operating results of PMI and
earnings of Stronger Corporation S.A.
DIVIDEND INCOME
Dividend income of $.9 million was recorded in 1998 compared to $1.1 million in
1997. The dividend represented a distribution from Mabesa, an unconsolidated
subsidiary accounted for using the cost method and included in the corporate and
other segment.
BANKRUPTCY COSTS
Bankruptcy costs were $6.3 million during 1998. These costs were primarily
related to professional fees and are expected to continue at similar levels
until the Company emerges from Chapter 11 protection. The Company cannot predict
at this time when it will emerge from Chapter 11 protection. See "--RISKS AND
UNCERTAINTIES."
INCOME TAXES
Income tax expense was $8.1 million in 1998 as the Company recorded a reserve of
$32.9 million against its net deferred and other tax-related assets. The reserve
is necessary as the utilization of the Company's loss carryforwards is dependent
upon sufficient future taxable income to offset the loss carryforwards. See
"FUTURE REALIZATION OF NET DEFERRED TAX ASSET."
YEAR ENDED DECEMBER 28, 1997 VS. YEAR ENDED DECEMBER 29, 1996
RESULTS OF OPERATIONS
A net loss of $212.7 million was incurred during 1997 compared with net earnings
of $21.1 million in 1996. Included in the results for 1997 was an accrued
settlement contingency of $200 million for the P&G patent litigation judgment
and associated litigation costs. See "Notes 1 and 15 of Notes to Financial
Statements" and "ITEM 3: LEGAL PROCEEDINGS" herein. Also included in the results
for 1997 were asset impairments and other write-offs totaling $10.6 million
related to the write-off of software and consulting costs related to the
enterprise-wide information system installation and discontinuation of the
Company's tampon production. The
Page 23
<PAGE>
total of the settlement contingency and asset impairments was $129.5 million,
net of the effect of income taxes. The results in 1997 were also negatively
impacted by a reserve of $100.2 million taken against the Company's net deferred
and other tax-related assets.
Included in the results in 1996 were charges of $10.6 million, net of the effect
of income taxes, associated with integrating the acquisition of Pope & Talbot
and costs to relocate the corporate headquarters to Atlanta. Excluding charges
discussed here and in the preceding paragraph, net earnings in 1997 were $17.0
million compared to $31.7 million in 1996. This decrease in profits in 1997
compared to 1996 was primarily due to continued price pressure in the infant
care business, operating losses associated with the feminine care and adult
incontinence business, sourcing of products from PMI under a supply contract and
legal costs associated with patent litigation with P&G and K-C. See "ITEM 3:
LEGAL PROCEEDINGS." These negative impacts were partially offset by lower
overall raw material prices, lower trade merchandising expenses and lower
manufacturing overhead in the infant care business.
Basic loss per share in 1997 was $17.86 compared to basic earnings per share of
$1.76 in 1996. Basic earnings per share was $1.43 in 1997 compared to $2.64 in
1996, excluding the charges discussed above for both periods.
Infant care operating loss totaled $155.0 million in 1997 compared to an
operating profit of $52.8 million in 1996. The $200.0 million settlement
contingency in 1997 discussed above and $8.1 million of costs associated with
the integration of the Pope & Talbot acquisition in 1996, materially impacted
infant care operating results. Excluding the settlement contingency and
integration costs, infant care operating profits were $45.0 million compared to
$60.9 million in 1996. Reduced selling price and volume and higher product costs
were the major factors contributing to this decline.
Feminine care and adult incontinence operating loss totaled $23.7 million in
1997 compared to $8.0 million in 1996. 1997 operating loss includes an asset
impairment and other charges of $4.4 million related to the discontinuation of
the tampon manufacturing operation. 1997 was the first full year of operation
for the feminine care and adult incontinence business.
NET SALES
Overall net sales were $562.0 million in 1997, a 3.4 percent decrease from the
$581.9 million reported in 1996.
Infant care net sales decreased 5.0 percent to $545.2 in 1997 from $574.3
million in 1996. Infant care unit sales decreased 1.9 percent from 3,689 million
diapers in 1997 compared to 3,761 million diapers in 1996. Infant care volume in
the first half of 1997 was negatively impacted by increased discounts and
promotional allowances by the branded manufacturers and value segment
competitors, especially the use of multi-packs. Infant care volume was also
further negatively impacted during the same period by product improvements added
by the branded manufacturers. Infant care volume during the second half of 1997
was positively impacted by the rollout of the Company's breathable baby diaper
product which increased the competitiveness of the Company's products. Infant
care volume, however, was negatively impacted during the second half of the year
by the loss of a major customer in Canada.
Excluding the effect of a more favorable product mix, average infant care sales
prices during 1997 decreased approximately 5.0 percent compared to 1996, despite
price increases associated with reduced count packages on some of the Company's
products. The decrease in prices was primarily due to the increased discounts
and promotional allowances discussed above, the use of multi-packs by the
branded manufacturers and value segment competitors and the existence of a new
competitor to the store brand baby diaper business.
Feminine care and adult incontinence sales increased to $4.3 million in 1997.
Sales were negligible in 1996.
Corporate and other net sales increased to $12.5 million in 1997 from $7.1
million in 1996 and relate to Changing Paradigms.
Page 24
<PAGE>
COST OF SALES
Overall cost of sales in 1997 was $454.9 million compared to $449.9 million in
1996, a 1.1 percent increase. As a percentage of net sales, cost of sales was
80.9 percent in 1997 compared to 77.3 percent in 1996.
Infant care cost of sales was $423.4 million in 1997 compared to $438.7 million
in 1996. As a percentage of net sales, infant care cost of sales was 77.8
percent in 1997 compared to 76.4 percent in 1996. 1996 included $5.4 million in
charges for costs primarily associated with the integration of the acquisition
of Pope & Talbot into the Company's existing business. As a percentage of net
sales, excluding such charges, infant care cost of sales was 75.5 percent in
1996. Costs were higher in 1997 compared to 1996 due to the sourcing of products
from PMI under a supply contract, a higher cost product mix and higher product
design costs associated with the breathable baby diaper product introduction.
These higher costs were partially offset by lower overall raw material and
packaging costs. Pulp prices were approximately 7 percent lower in 1997 compared
to 1996. Packaging costs, including bags and corrugated boxes, were also lower
in 1997 compared to 1996. Other raw material prices were generally at similar
price levels in 1997 compared to 1996, except for those materials associated
with the higher product design costs associated with the breathable baby diaper
product.
Infant care labor costs were lower in 1997 compared to 1996. The higher costs of
inefficiencies related to the new product rollouts during the first half of 1997
were more than offset by improved operating results during the second half of
the year. Infant care overhead costs, excluding the charges discussed below,
were lower during 1997 compared to 1996 due to the closure during 1996 of the
manufacturing facilities acquired from Pope & Talbot and cost management
efforts. During 1996, $2.9 million of charges were incurred to support the
integration of the acquisition of Pope & Talbot.
Infant care depreciation costs, excluding charges discussed below, were $29.1
million in 1997 compared to $36.5 million in 1996. The decrease is partially due
to the closure during 1996 of the acquired Pope & Talbot facilities.
Depreciation costs were higher in 1996 due to accelerated depreciation
attributable to obsolescence caused by product innovations. During 1996, $1.6
million of charges were incurred due to the accelerated depreciation of existing
infant care equipment that was to be replaced by equipment acquired from Pope &
Talbot.
Feminine care and adult incontinence cost of sales was $20.4 million in 1997
compared to $4.7 million in 1996. Operating inefficiencies due to the start-up
nature of this operation resulted in a cost of sales significantly in excess of
net sales in 1997 and 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses were $76.3 million in 1997 compared to $92.2 million in 1996. As a
percentage of net sales, these expenses were 13.6 percent in 1997 compared to
15.8 percent in 1996. Included in 1996 were charges of $11.7 million, of which
$9.0 million related to the corporate headquarters relocation to Atlanta,
including severance, outplacement and relocation expenses. The charges also
included $2.7 million in costs associated with the integration of the Pope &
Talbot acquisition.
Excluding the charges discussed above, SG&A expenses were $76.3 million in 1997
compared to $80.5 million in 1996. As a percentage of net sales, these expenses,
excluding the charges, were 13.6 percent in 1997 compared to 13.8 percent in
1996. The decrease in costs was primarily attributable to a decrease in trade
merchandising expenses, lower incentive-based compensation accruals and lower
bad debt expenses. These decreases were partially offset by an increase in legal
expenses, packaging artwork and design and information system costs. The lower
trade merchandising expenses were primarily related to a decrease in
coupon-related expenses.
The increase in legal expenses was related to the P&G and K-C patent litigation.
See "ITEM 3: LEGAL PROCEEDINGS." Information system costs were higher in 1997
compared to 1996. Packaging artwork and design costs in infant care were higher
during 1997 compared to 1996 as a result of product rollouts and changes
Page 25
<PAGE>
in package counts. Lower incentive-based compensation accruals resulted from
lower operating results for 1997 compared to 1996.
RESEARCH AND DEVELOPMENT
Research and development expenses were $5.1 million in 1997 compared to $4.2
million in 1996. The increase was primarily attributable to a general increase
in infant care product development activity and increased feminine care and
adult incontinence business activity.
DIVIDEND INCOME
Dividend income of $1.1 million was recorded in 1997. The dividend represented a
distribution from Mabesa, an unconsolidated subsidiary accounted for using the
cost method, and is included in the corporate and other segment.
SETTLEMENT CONTINGENCY
The settlement contingencies of $200 million in 1997 represents the accrual of
the estimated liability and associated litigation costs from the adverse
judgment in the P&G patent litigation. See "Notes 1 and 15 of Notes to Financial
Statements" and "ITEM 3: LEGAL PROCEEDINGS" herein.
ASSET IMPAIRMENTS
Asset impairments were $9.4 million in 1997. There were no asset impairments in
1996. The 1997 asset impairments included a $5.0 million write-off of software
and associated consulting costs related to the Company's enterprise-wide
information system installation, which was charged to the corporate and other
segment. The write-off was due to the inability of the software to perform as
represented during the software selection process. The Company is currently
evaluating its options, including legal action, to recover the costs of the
software and consulting. Also included in 1997 was a write-down of $4.4 million
for the shut down of the feminine care and adult incontinence business'
tampon-related production equipment. Also included in the shut down of the
tampon manufacturing operation were write-offs of $.9 million for raw material,
finished goods and spare-part inventories which were charged to cost of sales.
INTEREST EXPENSE
Interest expense was $4.7 million in 1997 compared to $2.9 million in 1996. The
increase resulted from higher average borrowings during 1997.
OTHER INCOME
The corporate and other segment reported income of $1.7 million in 1997 compared
to $.6 million in 1996. The increase reflects higher interest income from loans
to PMI, an unconsolidated subsidiary accounted for on the equity method.
INCOME TAXES
Income tax expense was $27.9 million in 1997 as the Company recorded a reserve
of $100.2 million against its net deferred and other tax-related assets. The
reserve is necessary as the utilization of the Company's loss carryforwards is
dependent upon sufficient future taxable income to offset the loss
carryforwards. See "FUTURE REALIZATION OF NET DEFERRED TAX ASSET."
LIQUIDITY AND CAPITAL RESOURCES
During 1998, cash flow from earnings and noncash charges to earnings was $60.7
million compared to $54.1 million in 1997. Cash flow was negatively impacted by
reduced infant care operating profits and continues to be negatively impacted by
operating losses in the feminine care and adult incontinence business. Working
capital, exclusive of cash, short-term borrowings, current deferred taxes and
the settlement contingencies decreased $6.1 million. 1998 cash flow
Page 26
<PAGE>
was positively impacted by an increase of approximately $37.6 million in
postpetition accounts payable and checks issued but not cleared. Cash flow was
also positively impacted by a $6.8 million increase in accrued liabilities,
primarily related to incentive-based compensation accruals. Cash flow has been
negatively impacted by a $16.0 million increase in receivables primarily due to
an electronic billing issue related to a few large customers which has
subsequently been resolved. Cash was also used by an increase in finished goods
and prepaid expenses, primarily prepaid insurance and deposits to suppliers due
to the bankruptcy proceedings. The Company expects the feminine care and adult
incontinence business to continue to generate operating losses and to use cash
throughout 1999.
The cash produced from operations supported capital expenditures of $37.3
million and $55.0 million in 1998 and 1997, respectively. These capital
expenditures include approximately $9.0 million and $5.6 million in 1998 and
1997, respectively, of computer software and consulting costs related to the
installation of a new business information system, which is a primary component
of the Company's Year 2000 remediation efforts discussed below. Capital spending
is expected to be approximately $46.0 million in 1999, which the Company expects
will be funded through a combination of internally-generated funds and
borrowings under the DIP Credit Facility.
Cash produced from operations supported the initial investment of $4.0 million
in the Company's Goodbaby joint venture in China and additional consideration
payments of $2.8 million to Mabesa and $.6 million to Serenity based on their
previous year's performance.
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 and the Fourth Amendment dated September 28, 1998, Chase
and a syndicate of banks has made available to the Company a revolving credit
and letter of credit facility in an aggregate principal amount of $75 million.
The Company's maximum borrowing under the DIP Credit Facility may not exceed the
lesser of $75 million or an available amount as determined by a borrowing base
formulation. The borrowing base formulation is comprised of certain specified
percentages of eligible accounts receivable, eligible inventory, equipment and
personal and real property of the Company. The DIP Credit Facility has a
sublimit of $10 million for the issuance of letters of credit. The DIP Credit
Facility expires on the earlier of July 7, 1999, or the date of entry of an
order by the Bankruptcy Court confirming a plan of reorganization. The Company
is currently negotiating an extension of the maturity date of the DIP Credit
Facility.
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.
At December 27, 1998, there were no outstanding direct borrowings under the DIP
Credit Facility. The Company had an aggregate of $1.3 million in letters of
credit issued under the DIP Credit Facility at December 27, 1998. The DIP Credit
Facility contains customary covenants. The Company for a period of time has been
unable to fully comply with certain reporting requirements of such covenants.
The Company has obtained waivers with
Page 27
<PAGE>
respect to these events of default which are effective through May 10, 1999. The
Company believes that it will be in compliance with the reporting requirements
of the DIP Credit Facility by May 10, 1999. See "Note 12 of Notes to Financial
Statements."
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 12 of Notes to Financial
Statements."
FUTURE REALIZATION OF NET DEFERRED TAX ASSET
The Company accounts for income taxes based on the liability method and,
accordingly, deferred income taxes are provided to reflect temporary differences
between financial and tax reporting. Significant components of deferred income
taxes include temporary differences due to goodwill ($7.2 million) and reserves
not currently deductible ($113.5 million). To realize the full benefit of the
deferred tax asset, the Company needs to generate approximately $343.0 million
in future taxable income before considering the availability of carryback
periods, if any. The Company currently has fully reserved its net deferred tax
asset of $131.9 million. See "--Income Taxes."
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 75
percent of the critical Year 2000 exposures related to its Business Systems as a
whole. The remaining systems are being addressed and are expected to be fully
assessed, remediated or replaced, tested and implemented prior to 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
half of the desktop computers used by the Company have currently been addressed
and the Company expects to complete the remaining half by the end of the second
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 third quarter of 1999.
Page 28
<PAGE>
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 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's revenues. 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 60 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 third 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 60 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 is expected to be material to the Company's
financial position. The cost of the project through December 27, 1998 was $18.6
million, all 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 $5.0 million. All of the costs are expected to be
funded through operating cash flow and/or bank borrowings.
Page 29
<PAGE>
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 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 are expected to be
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.
In addition, as a part of the License Agreement entered into in connection with
the K-C Settlement Agreement, the Company had to change to a new SAP for its
diapers and training pants which exhibits certain performance characteristics.
The Company has experienced product performance issues which it believes have
impacted volume for the first quarter of 1999. As a result, the Company expects
that it will incur increased marketing and SG&A expenditures in 1999 to address
product performance issues. These increased expenditures are expected to have a
material adverse impact on the Company's financial position and results of
operations in 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 better performing alternative,
the Company cannot predict at this time whether or when such an alternative SAP
will be available. 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.
Page 30
<PAGE>
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 the
Company's ability to timely formulate a plan of reorganization. The Company
believes, however, that it may be impossible 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 "ITEM 1: BUSINESS: REORGANIZATION CASE."
TERMINATION OF LICENSE AGREEMENTS. The License Agreements with each of P&G and
K-C provide that if the related Settlement Agreements are not approved, as
specified in each respective agreement, by July 31, 1999 and August 1, 1999,
respectively, the P&G License Agreements will become terminable at P&G's option
and the K-C License Agreement will terminate automatically. If the P&G and K-C
License Agreements are terminated because the respective Settlement Agreements
are not approved in a timely manner, 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 P&G's Contempt Motion in
Delaware. While the Company intends to vigorously pursue approval of both
settlements, it cannot predict when, or if, such approval will be granted. See
"ITEM 3: 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
these price increases, its margins are expected to continue to be negatively
impacted.
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.
MARKET FOR THE COMPANY'S COMMON STOCK. During 1998, the Company was notified by
the New York Stock Exchange ("NYSE") that as a result of the $200 million
settlement contingency and the Company's net loss in 1997, certain minimum
listing requirements had not been maintained. After a review of the Company's
business and prospects, the NYSE agreed to continue the Company's listing
subject to future developments. There can be no assurances that the NYSE will
continue to list the Company's stock.
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.
Page 31
<PAGE>
FORWARD-LOOKING STATEMENTS
From time to time, information provided by the Company, statements made by its
employees or information included in its filings with the Securities and
Exchange Commission (including the Annual Report on Form 10-K) may include
statements that are not historical facts, so-called "forward-looking
statements." The words "believes," "anticipates," "expects" and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties that could cause actual results
to differ materially from those expressed in the Company's forward-looking
statements. Factors which could affect the Company's financial results,
including but not limited to: the Company's Chapter 11 filing; increased raw
material prices 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 2000. 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 new 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 first fiscal quarter of 1999, and it did not have a
material impact on the financial statements.
In April 1998, the AICPA issued a new 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 first fiscal quarter of
1999, and it did not have a material impact on the financial statements.
INFLATION
Inflation has not been a significant factor in the Company's results of
operations in recent years due to the modest rate of price increases in the
United States and Canada.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURE 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.
Page 32
<PAGE>
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES:
PAGE
Responsibility for Financial Reporting 34
Report of Independent Public Accountants 35
Consolidated Earnings (Loss) Statements for the three years in
the period ended December 27, 1998 37
Consolidated Balance Sheets as of December 27,1998 and
December 28, 1997 38
Consolidated Statements of Cash Flows for the three years in
the period ended December 27, 1998 39
Consolidated Statements of Comprehensive Income for the three years in
the period ended December 27, 1998 40
Consolidated Statements of Changes in Shareholders' Equity
for the three years in the period ended December 27, 1998 41
Notes to Financial Statements 42
Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts 68
Page 33
<PAGE>
RESPONSIBILITY FOR FINANCIAL REPORTING
Management is responsible for the preparation of the Company's consolidated
financial statements appearing in this Annual Report. The financial statements
have been prepared in accordance with generally accepted accounting principles
and, in the opinion of management, present fairly the Company's financial
position, results of operations and cash flows. The financial statements
necessarily contain amounts that are based on the best estimates and judgments
of management.
The Company maintains a system of internal controls which management believes is
adequate to provide reasonable assurance as to the integrity and reliability of
the financial statements, the protection of assets from unauthorized use or
disposition and the prevention and detection of fraudulent financial reporting.
The selection and training of qualified personnel, the establishment and
communication of accounting and administrative policies and procedures, and a
program of internal audit are important elements of these control systems.
The Company maintains a strong internal auditing program that independently
assesses the effectiveness of the internal controls and recommends possible
improvements thereto. Management has considered the internal auditors'
recommendations concerning the Company's system of internal controls and has
taken actions that management believes are cost-effective in the circumstances
to respond appropriately to these recommendations.
The Audit Committee of the Board of Directors, comprised entirely of outside
directors, oversees the fulfillment by management of its responsibilities over
financial controls and the preparation of financial statements. The Committee
meets regularly with representatives of management and internal and external
auditors to review accounting, auditing and financial reporting matters.
As part of their audit of the Company's consolidated financial statements,
Arthur Andersen LLP considered the Company's system of internal controls to the
extent they deemed necessary to determine the nature, timing and extent of their
audit tests.
Alan J. Cyron
Executive Vice President & Chief Financial Officer
Page 34
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Paragon Trade Brands, Inc.:
We have audited the accompanying consolidated balance sheets of Paragon Trade
Brands, Inc., a Delaware Corporation, and subsidiaries, as of December 27, 1998
and December 28, 1997, and the related consolidated statements of earnings
(loss), comprehensive income (loss), changes in shareholders' equity (deficit)
and cash flows for each of the three years in the period ended December 27,
1998. These financial statements and the schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and the schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Paragon Trade Brands, Inc. and
subsidiaries as of December 27, 1998 and December 28, 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended December 27, 1998, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Notes 1 and
15 to the accompanying financial statements, on December 30, 1997, the District
Court for the District of Delaware issued a judgment (the "Judgment") finding
that the Company's diaper products infringe certain patents held by The Procter
& Gamble Company ("P&G"). Also, as more fully described in Notes 1 and 15 to the
accompanying financial statements, on January 6, 1998, the Company filed a
voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code. On
February 2, 1999, the Company entered into a settlement agreement with P&G
which, if approved by the Bankruptcy Court, will fully and finally settle all
matters related to the Judgment. In addition, as more fully described in Notes 1
and 15 to the accompanying financial statements, on October 26, 1995, the
Kimberly-Clark Corporation ("K-C") filed a lawsuit against the Company alleging
infringement by the Company's products of certain patents held by K-C. On March
19, 1999, the Company entered into a settlement agreement with K-C which, if
approved by the Bankruptcy Court, will fully and finally settle all matters
related to K-C's lawsuit against the Company. The Company has recorded
litigation settlement losses related to the P&G and K-C matters discussed above
of $278,500,000. After giving effect to these losses, the Company has a total
shareholders' deficit of $61,840,000 as of December 27, 1998. These matters,
among others, raise substantial doubt about the Company's ability to continue as
a going concern. Management's plans in regard to these matters, including its
intent to file a plan of reorganization that will be acceptable to the
Bankruptcy Court and to the Company's creditors, are also described in Notes 1
and 15 to the accompanying financial statements. In the event a plan of
reorganization is accepted, continuation of the business thereafter is dependent
upon the Company's ability to achieve successful future operations. The
accompanying financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
Page 35
<PAGE>
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The financial statement schedule listed in the
index to financial statements and schedules is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
Arthur Andersen LLP
Atlanta, Georgia
April 9, 1999
Page 36
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED EARNINGS (LOSS) STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Year Ended
--------------------------------------------------------------
December 27, 1998 December 28, 1997 December 29, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Sales, net of discounts and allowances $ 535,207 $ 561,975 $ 581,929
Cost of sales 428,572 454,911 449,885
---------- ----------- -----------
Gross profit 106,635 107,064 132,044
Selling, general and administrative expense 78,447 76,347 92,212
Research and development expense 4,248 5,063 4,163
Asset impairments 3,416 9,442 -
Settlement contingencies (Notes 1 and 15) 78,500 200,000 -
---------- ----------- -----------
Operating profit (loss) (57,976) (183,788) 35,669
Equity in earnings of unconsolidated
subsidiaries 4,077 953 423
Dividend income from unconsolidated
subsidiary 922 1,055 -
Interest expense(1) 450 4,667 2,864
Other income, net 2,437 1,664 581
---------- ----------- -----------
Earnings (loss) before income taxes and
bankruptcy costs (50,990) (184,783) 33,809
Bankruptcy costs 6,302 - -
Provision for income taxes 8,091 27,934 12,687
---------- ----------- -----------
Net earnings (loss) $ (65,383) $ (212,717) $ 21,122
========== =========== ===========
Basic earnings (loss) per common share $ (5.48) $ (17.86) $ 1.76
========== =========== ===========
Diluted earnings (loss) per common share $ (5.48) $ (17.86) $ 1.74
========== =========== ===========
Dividends paid $ - $ - $ -
========== =========== ===========
- ---------------
<FN>
(1) Contractual interest $ 5,836
==========
</FN>
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
Page 37
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
December 27, 1998 December 28, 1997
----------------- -----------------
<S> <C> <C>
ASSETS
Cash and short-term investments $ 22,625 $ 991
Receivables 79,156 70,616
Inventories 53,282 48,257
Current portion of deferred income taxes 4,260 1,800
Prepaid expenses 4,323 697
--------- ---------
Total current assets 163,646 122,361
Property and equipment, net 106,200 118,383
Construction in progress 19,626 11,154
Assets held for sale 4,691 11,073
Investment in unconsolidated subsidiary at cost 22,743 19,964
Investment in and advances to unconsolidated
subsidiaries, at equity 66,041 53,844
Goodwill 32,819 34,739
Other assets, net 13,521 4,624
--------- ---------
Total assets $ 429,287 $ 376,142
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Short-term borrowings $ - $ 14,185
Checks issued but not cleared 12,433 9,375
Accounts payable 32,416 40,305
Accrued liabilities 33,646 32,392
Accrued settlement contingency (Notes 1, 15 and 16) - 200,000
--------- ---------
Total current liabilities 78,495 296,257
Liabilities subject to compromise 406,859 -
Long-term debt - 70,000
Deferred compensation - 1,275
Deferred income taxes 5,773 3,656
--------- ---------
Total liabilities 491,127 371,188
Commitments and contingencies (Notes 1, 15 and 16)
Shareholders' equity (deficit):
Preferred stock: authorized 10,000,000 shares,
no shares issued, $.01 par value - -
Common stock: authorized 25,000,000 shares,
issued 12,378,616 and 12,343,324, $.01 par value 124 123
Capital surplus 143,918 144,368
Accumulated other comprehensive loss (1,840) (1,066)
Retained earnings (deficit) (193,758) (128,376)
Less: treasury stock, 429,696 and 388,658 shares, at cost (10,284) (10,095)
--------- ---------
Total shareholders' equity (deficit) (61,840) 4,954
--------- ---------
Total liabilities and shareholders' equity (deficit) $ 429,287 $ 376,142
========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
Page 38
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended
-------------------------------------------------------
December 27, 1998 December 28, 1997 December 29, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ (65,383) $ (212,717) $ 21,122
Non-cash charges to earnings:
Depreciation and amortization 34,459 35,514 38,828
Deferred income taxes (343) 36,464 1,656
Equity in (earnings) loss of unconsolidated
subsidiaries (2,807) 615 (34)
Write-down of assets 3,408 7,967 69
Changes in working capital:
Accounts receivable (16,010) (5,430) (12,300)
Inventories and prepaid expenses (12,230) (3,997) 8,117
Accounts payable 34,529 3,238 (224)
Accrued liabilities and loss contingency 85,255 192,615 11,777
Prepetition reclamation payment
authorized by court (1,034) - -
Checks issued but not cleared 3,058 (858) 1
Other (1,598) 652 (723)
---------- ---------- ----------
Net cash provided by operating activities 61,304 54,063 68,289
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property and equipment (28,283) (49,420) (48,867)
Proceeds from sale of property and equipment 3,435 10,266 3,822
Proceeds from sale of Changing Paradigms,
Inc. 5,163 - -
Acquisition of Pope & Talbot, Inc.'s disposable
diaper business assets - - (56,963)
Investment in Grupo P.I. Mabe, S.A. de C.V. (2,779) (3,433) (15,908)
Investment in and advances to
unconsolidated subsidiaries, at equity (5,375) (24,102) (11,033)
Other (9,043) (9,104) (1,731)
---------- ---------- ----------
Net cash used by investing activities (36,882) (75,793) (130,680)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in short-term
borrowings (921) 14,185 (1,760)
Prepetition debt payment authorized by court (1,867) - -
Proceeds from U.S. bank credit facility - 25,000 85,000
Repayments of U.S. bank credit facility - (25,000) (15,000)
Sale of common stock - 239 641
Purchases of treasury stock - - (10,083)
---------- ---------- ----------
Net cash provided (used) by financing
activities (2,788) 4,424 58,798
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH 21,634 (7,306) (3,593)
Cash at beginning of period 991 8,297 11,890
---------- ---------- ----------
Cash at end of period $ 22,625 $ 991 $ 8,297
========== ========== ==========
Cash paid (received) during the year for:
Interest (net of amounts capitalized) $ 1,557 $ 4,259 $ 2,961
========== ========== ==========
Income taxes $ 78 $ (4,242) $ 15,189
========== ========== ==========
Bankruptcy costs $ 2,461 $ - $ -
========== ========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
Page 39
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended
-------------------------------------------------------
December 27, 1998 December 28, 1997 December 29, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net earnings (loss) $ (65,383) $ (212,717) $ 21,122
Other comprehensive income (loss), net of tax
Foreign currency translation adjustments(1) (774) (452) 47
----------- ------------ ------------
Comprehensive income (loss) $ (66,157) $ (213,169) $ 21,169
=========== ============ ============
<FN>
- ---------------
(1) Tax expense (benefit) $ (485) $ (283) $ 29
=========== ============ ============
</FN>
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
Page 40
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Accumulated
Other Retained
Common Capital Comprehensive Earnings Treasury
Stock Surplus Income (Loss) (Loss) Stock
------- -------- -------------- -------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995 $ 119 $132,722 $ (661) $ 63,219 $ (3,710)
Net earnings - - - 21,122 -
Issue common stock 4 10,483 - - 1,443
Translation adjustment - - 47 - -
Purchase of treasury stock - - - - (10,083)
------- -------- -------- ---------- ---------
BALANCE, December 29, 1996 123 143,205 (614) 84,341 (12,350)
Net loss - - - (212,717) -
Issue common stock - 1,163 - - 2,255
Translation adjustment - - (452) - -
------- -------- -------- ---------- ---------
BALANCE, December 28, 1997 123 144,368 (1,066) (128,376) (10,095)
Net loss - - - (65,383) -
Issue common stock 1 150 - - -
Translation adjustment - - (774) - -
Restricted stock forfeiture - (600) - - (189)
------- -------- -------- ---------- ---------
BALANCE, December 27, 1998 $ 124 $143,918 $ (1,840) $ (193,758) $ (10,284)
======= ======== ======== ========== =========
</TABLE>
The following summarizes the changes in the number of shares of capital stock:
<TABLE>
<CAPTION>
Common Stock Treasury Stock
-------------------- -------------------
<S> <C> <C>
BALANCE, December 31, 1995 11,851,504 245,322
Issue common stock - Pope & Talbot
disposable diaper business 387,800 -
Issue common stock - 1995 Incentive Compensation Plan 26,157 (3,000)
Issue common stock - 1996 Non-Officer Employee
Incentive Compensation Plan - (30,000)
Issue common stock - Profit Sharing and Savings Plan - (54,372)
Issue common stock - Exercise of stock options 22,832 (10,500)
Purchase of treasury stock - 387,800
---------- -------
BALANCE, December 29, 1996 12,288,293 535,250
Issue common stock - 1995 Incentive Compensation Plan 36,655 -
Issue common stock - 1996 Non-Officer Employee
Incentive Compensation Plan 12,279 -
Issue common stock - Profit Sharing and Savings Plan 3,597 (135,845)
Issue common stock - Exercise of stock options 2,500 (10,747)
---------- -------
BALANCE, December 28, 1997 12,343,324 388,658
Issue common stock - Profit Sharing and Savings Plan 35,292 -
Restricted stock forfeiture - 41,038
---------- -------
BALANCE, December 27, 1998 12,378,616 429,696
========== =======
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
Page 41
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1: CHAPTER 11 PROCEEDINGS
On January 6, 1998, Paragon Trade Brands, Inc. ("Paragon" or the "Company")
filed for relief under Chapter 11 of the United States Bankruptcy Code (the
"Chapter 11 filing"), in the United States Bankruptcy Court for the Northern
District of Georgia. The Company is currently operating as a
debtor-in-possession under the Bankruptcy Code.
The Procter & Gamble Company ("P&G") had filed a lawsuit against the Company in
the United States District Court for the District of Delaware, alleging that the
Company's disposable baby diaper products infringe two of P&G's 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 on the P&G case in an orderly fashion and
give the Company the opportunity to resolve liquidated and unliquidated claims
against the Company which arose prior to the Chapter 11 filing.
Substantially all liabilities outstanding as of the date of the Chapter 11
filing are subject to resolution under a plan of reorganization to be voted upon
by 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, if approved by the Bankruptcy Court, will fully and finally settle 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. 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 will allow the Company to manufacture a
dual cuff baby diaper design. In exchange for these rights, the Company has
agreed to pay 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
Page 42
<PAGE>
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 Company believes that the royalty rates being charged by P&G, together with
royalties to be paid to Kimberly-Clark Corporation ("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, the Company and P&G jointly
requested modification of the injunction entered in Delaware District Court so
as to allow the Company to begin converting to a dual cuff design pursuant to
the License Agreements described above. The injunction was modified as requested
on February 22, 1999 and the product conversion is substantially complete. As
also provided under the terms of the P&G Settlement Agreement, once a Final
Order, as defined therein, has been entered by the Bankruptcy Court approving
the settlement, 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. A hearing on the Company's motion to seek approval from the
Bankruptcy Court of this settlement was commenced on March 22 and 23, 1999 and
is scheduled to resume on April 13, 1999. Both the Official Committee of Equity
Security Holders and K-C have objected to the P&G settlement. The Company
intends to continue to pursue approval of the P&G Settlement by the Bankruptcy
Court. Should the P&G Settlement Agreement not be approved by a Final Order of
the Bankruptcy Court by July 31, 1999, however, the License Agreements described
above will become terminable at P&G's option. The Company cannot predict when,
or if, such approval will be granted.
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. In addition, K-C sued the Company on
another patent issued to K-C which is based upon a further continuation of one
of the K-C dual cuff patents asserted in the case.
On March 19, 1999, the Company entered into a Settlement Agreement with K-C
which, if approved by the Bankruptcy Court, will fully and finally settle 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. 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 will allow the
Company to manufacture a dual cuff diaper design. In exchange for these patent
rights, the Company has agreed to pay 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. In addition, 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 will also pay 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 these royalties will, together with royalties to be
paid to P&G described above, 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 super-absorbent polymers ("SAP") in
diapers and training pants, so long as the Company uses SAP which exhibits
certain performance characteristics (the "SAP Safe Harbor"). The Company has
experienced certain product performance issues the Company believes may be
related to such SAP. As a result, the Company expects that it will incur
increased marketing and selling, general and administrative expenses ("SG&A")
expenditures in 1999 to address product performance issues. These increased
expenditures are expected to have a material adverse impact on the Company's
financial position and results of operations in 1999. The Company is
encountering increased product costs due to the increased price and usage of the
new
Page 43
<PAGE>
SAP. While the Company is working diligently with its SAP suppliers to develop a
better performing alternative which is still within the SAP Safe Harbor, the
Company cannot predict at this time whether or when such an alternative SAP
would be available. 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.
Upon the Effective Date, as defined in the K-C Settlement Agreement, K-C will
dismiss with prejudice its complaint in the Texas action, as well as its related
filings in the District Court in Georgia, and the Company will simultaneously
dismiss with prejudice its counterclaims in the Texas action. The Company
intends to file shortly a motion with the Bankruptcy Court to seek approval of
the settlement. If the K-C Settlement Agreement is not approved by an order of
the Bankruptcy Court entered before August 1, 1999, the K-C License Agreement
described above will terminate automatically.
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. 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 the Company's
ability to timely formulate a plan of reorganization. The Company believes,
however, that it may be impossible 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.
The License Agreements with each of P&G and K-C provide that if the related
Settlement Agreements are not approved, as specified in each respective
agreement, by July 31, 1999 and August 1, 1999, respectively, the P&G License
Agreements will become terminable at P&G's option and the K-C License Agreement
will terminate automatically. If the P&G and K-C License Agreements are
terminated because the respective Settlement Agreements are not approved in a
timely manner, 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 P&G's Contempt Motion in Delaware. While the Company
intends to vigorously pursue approval of both settlements, it cannot predict
when, or if, such approval will be granted.
The Chapter 11 filing did not include the Company's wholly owned subsidiaries
including Paragon Trade Brands (Canada) Inc., Paragon Trade Brands
International, Inc., Paragon Trade Brands FSC, Inc. and Changing Paradigms, Inc.
The following information summarizes the combined results of operations for the
fiscal years ended December 27, 1998, December 28, 1997 and December 29, 1996,
as well as the combined balance sheets as of December 27, 1998 and December 28,
1997 for these subsidiaries. This information has been prepared on the same
basis as the consolidated financial statements.
<TABLE>
<CAPTION>
DECEMBER 27, 1998 DECEMBER 28, 1997 DECEMBER 29, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Sales, net of discounts and
allowances $ 55,338 $ 53,523 $ 60,948
Gross profit $ 10,161 $ 8,649 $ 15,069
Earnings before income taxes $ 10,034 $ 4,814 $ 11,695
Net earnings $ 7,277 $ 4,121 $ 7,982
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 27, 1998 DECEMBER 28, 1997
----------------- -----------------
<S> <C> <C>
Current assets $ 17,863 $ 14,782
Non-current assets $ 54,734 $ 48,840
Current liabilities $ 5,700 $ 8,424
Non-current liabilities $ 8,495 $ 8,873
</TABLE>
Page 44
<PAGE>
NOTE 2: BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING AND
REPORTING POLICIES
BASIS OF PRESENTATION AND RELATED INFORMATION
Paragon is the leading manufacturer of store brand infant disposable diapers in
the United States and Canada. Paragon manufactures a line of premium and economy
diapers, training pants, and feminine care and adult incontinence products,
which are distributed throughout the United States and Canada, primarily through
grocery and food stores, mass merchandisers, warehouse clubs, toy stores and
drug stores that market the products under their own store brand names. Paragon
has also established international joint ventures in Mexico, Argentina, Brazil
and China for the manufacture and sale of infant disposable diapers and other
absorbent personal care products.
The consolidated financial statements include the accounts of Paragon Trade
Brands, Inc. and its wholly owned subsidiaries, Paragon Trade Brands (Canada)
Inc. and Paragon Trade Brands International, Inc. ("PTBI"). All significant
intercompany transactions and accounts have been eliminated.
The consolidated financial statements were prepared in conformity with generally
accepted accounting principles and necessarily include amounts based on
management's estimates and assumptions. The estimates and assumptions of
management affect the reported amounts of assets, liabilities, revenues and
expenses, including disclosures regarding contingent assets and liabilities.
Actual results may differ from those reported due to these estimates and
assumptions.
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 15, the Company is unable to predict when it will submit a plan of
reorganization that will be acceptable to the Bankruptcy Court. 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 uses a 52/53-week year. The fiscal years ended December 27, 1998,
December 28, 1997 and December 29, 1996 include 52 weeks.
CASH AND SHORT-TERM INVESTMENTS
For purposes of cash flow and fair value reporting, short-term investments with
original maturities of 90 days or less are considered as cash equivalents.
Short-term investments are stated at cost, which approximates fair value. The
obligation for outstanding checks is reflected as checks issued, but not
cleared.
FINANCIAL INSTRUMENTS - FOREIGN CURRENCY FORWARD CONTRACTS
The Company occasionally enters into forward contracts to hedge certain foreign
currency denominated purchase commitments for periods consistent with the terms
of the underlying transactions. While the forward contracts affect the Company's
results of operations, they do so only in connection with the underlying
transactions. Gains and losses on these contracts are deferred and offset
exchange gains and losses on the transactions hedged. At December 27, 1998 and
December 28, 1997, the Company did not have any forward contracts outstanding.
The Company's other off-balance sheet risks are not material.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company estimates that the fair value of its financial instruments
approximate their carrying values as of the balance sheet dates, other than the
guarantees of PTB International, Inc. discussed below. The Company has
determined that it is not practicable to determine the fair value of such
guarantees. Accordingly, no separate disclosure of fair value is made.
Page 45
<PAGE>
NONCASH TRANSACTIONS
During the fiscal years ended December 27, 1998 and December 28, 1997, the
Company issued 35,292 and 188,376, respectively, shares of common stock to key
management and employees through the Company's Long-Term Incentive Compensation
Plan and its Profit Sharing and Savings Plan (see Note 7). The balance sheet
effect of issuing these shares of common stock was a decrease in accrued
liabilities of $150 and $3,354, respectively, and an increase in equity by an
equal amount without the use of cash.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost includes labor,
materials and production overhead. The last-in, first-out ("LIFO") method is
used to cost domestic pulp and diaper-related finished goods inventories. The
first-in, first-out ("FIFO") method is used to cost all other inventories. Had
the FIFO method been used to cost the domestic pulp and finished goods
inventories, the amounts at which they are stated would have been $346 and $509
greater at December 27, 1998 and December 28, 1997, respectively. During 1996,
the Company liquidated certain LIFO inventories that were carried at higher
costs prevailing in prior years. The effect of this liquidation was to decrease
earnings before taxes by approximately $1,100.
PROPERTY AND EQUIPMENT
Paragon's property accounts are maintained on an individual asset basis.
Betterments and replacements of major units are capitalized. Maintenance,
repairs and minor replacements are expensed. Depreciation is provided on the
straight-line method at rates based upon estimated useful lives as follows:
Buildings 20 to 40 years
Building improvements 10 years
Machinery, equipment, furniture and fixtures 2 to 10 years
The cost and related depreciation of property sold or retired is removed from
the property and allowance for depreciation accounts and the gain or loss is
recorded.
PATENTS AND TRADEMARKS
The Company operates in a commercial field in which patents relating to the
products, processes, apparatus and materials are more numerous than in many
other fields. The Company takes careful steps in designing, producing and
selling its products to avoid infringing any valid patents of its competitors.
However, there can be no assurance that the Company will not be challenged with
respect to patents in the future (see Notes 1 and 15).
Purchased patents and trademarks are amortized on a straight-line basis over a
five- to ten-year life. In 1997, the Company evaluated the remaining value of
one of the purchased patents and wrote-off the entire amount of $255.
Amortization expense was $676 for the year ended December 28, 1997, including
the write-off. Amortization expense was $501 for the year ended December 29,
1996. Accumulated amortization was $5,523 at December 27, 1998 and December 28,
1997, respectively. All purchased patents were fully amortized as of December
28, 1997.
INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES
On January 26, 1996, the Company through its wholly owned subsidiary PTB
International, Inc. ("PTBI") completed the purchase of a 15 percent interest in
Grupo P.I. Mabe, S.A. de C.V. ("Mabesa"), a diaper manufacturer located in
Mexico, for $15,300 in cash plus additional consideration based on Mabesa's
future financial results through 2001. In 1998, based on Mabesa's 1997 financial
results, the Company paid additional consideration of $2,800. In 1997, based on
Mabesa's 1996 financial results, the Company paid additional consideration of
$3,400. The Company also acquired the option to purchase an additional 34
percent interest in Mabesa at a contractually determined price. The investment
is carried at cost in the accompanying consolidated balance sheets.
Page 46
<PAGE>
The Company also owns a 49 percent interest in Paragon-Mabesa International,
S.A. de C.V. ("PMI"). The investment is accounted for using the equity method.
On August 26, 1997, PTBI purchased a 49 percent interest in Stronger Corporation
S.A. ("Stronger"), a financial investment corporation incorporated under
Uruguayan law. An affiliate of Mabesa owns the remaining 51 percent. Stronger
will be used to establish additional Latin American joint ventures. The
investment is accounted for using the equity method.
On August 26, 1997, Stronger acquired 70 percent of Serenity S.A. ("Serenity"),
a diaper manufacturer in Argentina, for approximately $11,600 in cash plus
earn-out payments based on Serenity's future financial results over the next
three years. Stronger also acquired an option to purchase the remaining 30
percent interest in Serenity by 2002 at a contractually determined exercise
price. Serenity manufactures infant disposable diapers, sanitary napkins and
adult incontinence products in two facilities. PTBI advanced $5,700 to Stronger,
its pro-rata share of the purchase price, and made a $601 earn-out payment in
1998. PTBI has guaranteed earn-out payments estimated not to exceed $2,300
through 2000.
On November 10, 1997, Stronger acquired 99 percent of the disposable diaper
business of MPC Productos para Higiene Ltda.("MPC") for approximately $10,500 in
cash from Cremer S.A., a Brazilian textile manufacturer. MPC is engaged in the
manufacture, distribution, and sale of disposable diapers, skin lotions for
children and other personal care products. PTBI advanced $5,100 to Stronger, its
pro-rata share of the purchase price. In 1998, the Company converted $2,000 of
outstanding notes receivable and accumulated interest for equipment sales into
an additional capital contribution.
The investment in Stronger exceeds the underlying net assets by $6,392. The
difference is being amortized over a 20 year life.
On December 31, 1997, the Company completed the acquisition of its share of
Goodbaby Paragon Hygenic Products Ltd., a diaper manufacturing joint venture in
China. The joint venture partners are Goodbaby Group and First Shanghai
Investment of Hong Kong. Paragon maintains a 40 percent ownership position in
the venture with Goodbaby Group and First Shanghai Investment at 30 percent
each. Initial registered capital of the venture was approved by the Chinese
government at $15,000, to be funded over a two-year period. During the year
ended December 27, 1998, the Company contributed $4,000 of capital to Goodbaby.
There have been no dividend distributions to the Company from PMI, Stronger or
Goodbaby. The Company has recorded a dividend of $922 declared by Mabesa in the
year ended December 27, 1998 to be paid in 1999. The Company received a dividend
distribution of $1,055 from Mabesa in the year ended December 28, 1997. There
was no dividend distribution from Mabesa for the year ended December 29, 1996.
GOODWILL
On February 8, 1996, the Company completed the purchase of substantially all of
the assets of Pope & Talbot, Inc.'s ("P&T") disposable diaper business. Goodwill
represents the excess of the cost of these assets over their estimated fair
value at the date of acquisition and is amortized on a straight-line basis over
20 years. Management continually evaluates whether events or circumstances have
occurred that indicate the remaining useful life of goodwill may warrant
revision or that the remaining balance of goodwill may not be realizable. When
factors indicate that goodwill should be evaluated for possible impairment, the
Company compares an estimate of the related business segment's undiscounted net
cash flow over the remaining life of the related goodwill to determine whether
the goodwill is recoverable.
Amortization expense was $1,919, $1,919 and $1,735 for the years ended December
27, 1998, December 28, 1997 and December 29, 1996, respectively. Accumulated
amortization was $5,573 and $3,654 as of December 27, 1998 and December 28,
1997, respectively.
OTHER ASSETS - SOFTWARE
The primary component of other assets is capitalized software and development
costs. During 1998, the Company implemented SAP-R3 software at corporate
headquarters and in its U.S. infant care plants.
Page 47
<PAGE>
The SAP-R3 software and development costs are being amortized on a straight-line
basis over a 10-year life. Other software and development costs related to the
project are being primarily amortized on a straight-line basis over a one- to
three-year life. Amortization expense was $442 for the year ended December 27,
1998. Accumulated amortization was $442 at December 27, 1998.
TREASURY STOCK
In July 1995, the Board of Directors authorized the repurchase of up to 1.0
million shares of the Company's outstanding common stock. Purchases may be made
periodically in the open market or in privately-negotiated transactions over an
extended period of time, if and when management believes market conditions
warrant. The Company reissued 135,845 of these shares through its Long-Term
Incentive and Profit Sharing Plans in the year ended December 28, 1997. The
Company also reissued 10,747 shares for the exercise of stock options in the
year ended December 28, 1997 (see Note 7). During the fiscal year ended December
27, 1998, the Company acquired 41,038 shares through employee forfeiture of
restricted stock.
SIGNIFICANT CUSTOMER
During the years ended December 27, 1998, December 28, 1997 and December 29,
1996, the percentages of net sales to an individual customer whose sales
represent in excess of 10 percent of net sales were 19 percent, 15 percent and
13 percent, respectively. These sales consisted entirely of infant care
products.
INCOME TAXES
The Company accounts for income taxes based on the liability method and,
accordingly, deferred income taxes are provided to reflect temporary differences
between financial and tax reporting. Deferred tax assets and liabilities are
measured based on enacted tax laws and rates without anticipation of future
changes. Effects on deferred taxes of enacted changes in tax laws are recognized
in income for financial statement purposes in the period of enactment.
As of December 27, 1998, there were approximately $19,158 of cumulative
undistributed earnings of the Company's foreign subsidiaries and investments
accounted for by the equity method. U.S. taxes have not been provided for on
these earnings. Under existing law, undistributed earnings are not subject to
U.S. tax until distributed as dividends. Any future earnings are intended to be
indefinitely reinvested in these operations. Furthermore, any taxes that are
paid to foreign governments on such future earnings may be used, in whole or in
part, as credits against the U.S.
tax on any distributions from such earnings.
Income taxes have been provided for all items included in the consolidated
earnings (loss) statements, regardless of the period when such items will be
deductible for tax purposes. The principal temporary differences between
financial and tax reporting arise from tax-basis goodwill and reserves not
currently deductible.
FOREIGN CURRENCY
Non-U.S. assets and liabilities are translated into U.S. dollars using
period-end exchange rates. Revenues and expenses are translated at average rates
during the period.
PROFIT SHARING AND 401(K) PLANS
Effective February 2, 1993, Paragon adopted both a defined contribution profit
sharing plan and a 401(k) savings plan covering most of its employees. On
October 1, 1993, the two plans were merged, amended and restated into one plan,
the Paragon Trade Brands, Inc. Profit Sharing and Savings Plan. The name of the
plan was changed by resolution of the Board of Directors in December 1995 to
Paragon Retirement Investment Savings Management Plan ("PRISM"). The plan
provides for both employer-matching contributions based on voluntary salary
deferrals of employees and discretionary employer contributions. Plan
participants are fully vested with respect to employer contributions after three
years of service. Employee contributions vest immediately. Contributions to the
plan are based on various levels of employee participation. Plan expense for the
fiscal
Page 48
<PAGE>
years ended December 27, 1998, December 28, 1997 and December 29, 1996 was
$2,589, $1,141 and $2,607, respectively.
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 2000. 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 new 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 first fiscal quarter of 1999, and it did not have a
material impact on the financial statements.
In April 1998, the AICPA issued a new 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 first fiscal quarter of
1999, and it did not have a material impact on the financial statements.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' financial
statements to conform them to the current year's presentation.
NOTE 3: ASSET IMPAIRMENTS
Asset impairments were $3,416 and $9,442 for the years ended December 27, 1998
and December 28, 1997, respectively. There were no asset impairments for the
year ended December 29, 1996.
The asset impairment for the year ended December 27, 1998 represented a further
write down of the tampon-related manufacturing equipment that was shutdown in
early 1998. The equipment has been written down to estimated net selling price
and is categorized as assets held for sale on the accompanying consolidated
balance sheet.
The asset impairments for the year ended December 28, 1997 include a $5,000
write-off of software and associated consulting costs related to the Company's
enterprise-wide information system installation. The write off was due to the
inability of the software to perform as represented during the software
selection process. The asset impairments also include a write-down of $4,442 for
the shut-down of the tampon-related manufacturing equipment at the feminine care
products operation. Also included in the shut-down of the tampon producing
operation were write-offs of $900 for raw material, finished goods and
spare-part inventories which were charged to cost of sales for the year ended
December 28, 1997.
The Company experienced operating losses in its feminine care and adult
incontinence business in 1998 and 1997 and expects these losses to continue in
the 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.
Page 49
<PAGE>
NOTE 4: OTHER INCOME, NET
Other income was $2,437, $1,664 and $581 in 1998, 1997 and 1996, respectively,
and consisted primarily of interest income from PMI.
NOTE 5: BANKRUPTCY COSTS
Bankruptcy costs were directly associated with the Company's Chapter 11
reorganization proceeding and consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED
----------
DECEMBER 27, 1998
-----------------
<S> <C>
Professional fees $ 6,772
Amortization of DIP credit facility deferred
financing costs 813
Other 160
Interest Income (1,443)
-----------
$ 6,302
===========
</TABLE>
NOTE 6: INCOME TAXES
Taxes on income are based on earnings (losses) before taxes as follows:
<TABLE>
<CAPTION>
December 27, 1998 December 28, 1997 December 29, 1996
------------------- ------------------- -------------------
<S> <C> <C> <C>
Domestic $ (62,239) $ (188,784) $ 22,035
Foreign 4,947 4,001 11,774
------------ ------------- ------------
$ (57,292) $ (184,783) $ 33,809
============ ============= ============
</TABLE>
Provisions for (benefits from) income taxes include the following:
<TABLE>
<CAPTION>
December 27, 1998 December 28, 1997 December 29, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Federal:
Current $ 4,647 $ (6,594) $ 8,651
Deferred 967 33,494 (1,098
---------- ---------- ---------
5,614 26,900 7,553
---------- ---------- ---------
State:
Current 598 (1,197) 1,496
Deferred 161 833 (200)
---------- ---------- ---------
759 (364) 1,296
---------- ---------- ---------
Foreign:
Current 2,096 1,803 1,578
Deferred (378) (405) 2,260
---------- ---------- ---------
1,718 1,398 3,838
---------- ---------- ---------
$ 8,091 $ 27,934 $ 12,687
========== ========== =========
</TABLE>
Page 50
<PAGE>
A reconciliation between the federal statutory rate and the effective tax rate
follows:
<TABLE>
<CAPTION>
December 27, 1998 December 28, 1997 December 29, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Expected provision (benefit) at
the statutory rate $ (20,052) $ (64,674) $ 11,833
State income taxes, net of
federal tax benefit (2,005) (6,640) 1,319
Undistributed earnings of
subsidiaries (983) 215 (12)
Change in valuation allowance 32,585 99,052 (78)
All other, net (1,454) (19) (375)
--------- ---------- ----------
$ 8,091 $ 27,934 $ 12,687
========= ========== ==========
</TABLE>
Net deferred tax liabilities at December 27, 1998 and December 28, 1997 were
$1,513 and $1,856, respectively. The amounts recorded primarily reflect the
following: (1) reserves not currently deductible and (2) deferred tax assets due
to the enactment of the Omnibus Budget Reconciliation Act of 1993, which allows
amortization of intangibles, including goodwill. Net deferred income taxes are
attributable to the following temporary differences:
<TABLE>
<CAPTION>
December 27, 1998 December 28, 1997
----------------- -----------------
<S> <C> <C>
Intangible assets $ (1,992) $ (2,127)
---------- ----------
Deferred tax liabilities (1,992) (2,127)
---------- ----------
Depreciation/amortization (1,737) 389
Goodwill 7,168 9,902
Reserves not currently deductible 113,465 85,814
Package design costs 2,045 2,099
Land 392 393
Net operating loss carryforwards 3,057 648
Credit carryforwards 9,045 344
All other, net (1,038) 15
---------- ----------
Deferred tax assets 132,397 99,604
---------- ----------
Deferred tax assets valuation allowance (131,918) (99,333)
---------- ----------
Total deferred taxes, net $ (1,513) $ (1,856)
========== ==========
</TABLE>
The Company has recorded a valuation allowance with respect to its net deferred
tax assets as realization is dependent upon sufficient future taxable income.
NOTE 7: LONG-TERM INCENTIVE, DEFERRED COMPENSATION, PROFIT SHARING AND
PENSION PLANS, INCLUDING 401(K)
LONG-TERM INCENTIVE PLANS
The Company's Long-Term Incentive Compensation Plan ("LTIC Plan") and its 1995
Incentive Compensation Plan ("1995 Plan") are administered by the Compensation
Committee of the Board of Directors. In February 1996, the Company adopted its
1996 Non-Officer Employee Incentive Compensation Plan ("1996 Plan"). The 1996
Plan is administered by an Administrative Committee appointed by the Board of
Directors. The LTIC, 1995 and 1996 Plans are designed to link management rewards
with the long-term interests of Paragon's shareholders. Given the uncertainties
related to the Company's Chapter 11 filing, the Compensation Committee of the
Company's Board of Directors decided in early 1998 to suspend the grant of stock
option awards or stock appreciation rights ("SARs") until the Company
successfully emerges from Chapter 11. As a result, no options or SARs were
granted in 1998.
Page 51
<PAGE>
RESTRICTED STOCK GRANTS
In 1997, restricted shares of common stock were issued at a discounted value in
lieu of some or all of cash bonuses for key employees, at the employee's
discretion. During the fiscal year ended December 28, 1997, there were 12,279
shares of common stock issued under the 1996 Plan as restricted shares and
36,655 shares of common stock issued under the 1995 Plan as restricted and bonus
shares. The restricted shares are non-transferable for two years. During the
year ended December 27, 1998, 41,038 shares of restricted stock previously
granted under the various plans were forfeited by employees. The 1995 and 1996
Plans provide that a maximum of 150,000 and 250,000 shares, respectively, are
available for grant thereunder as restricted shares or other stock based awards.
Compensation expense is recorded for the stock grants at their discounted
amounts. Compensation expense (income) recorded for the fiscal years ended
December 27, 1998, December 28, 1997 and December 29, 1996 was $(788), $856 and
$800, respectively. The weighted average fair value per share of stock granted
was $17.50 and $24.52 for the years ended December 28, 1997 and December 29,
1996, respectively. The weighted average fair value per share at the date of
grant of stock forfeited for the year ended December 27, 1998 was $19.20.
STOCK OPTIONS AND SARS
The LTIC, 1995 and 1996 Plans have a maximum of 800,000, 450,000 and 400,000
shares available, respectively, for grant as stock options or SARs. Stock
options, when granted to key management, are granted at amounts that approximate
market value at the date of the grant. Awards, when made, vest 25 percent per
year for four years and have a term of 10 years. The Company also has a maximum
of 100,000 shares available for grant under the Stock Option Plan for
Non-Employee Directors ("Director Plan"). Stock options are awarded to directors
at amounts that approximate market value at the date of the grant. Awards vest
100 percent after one year and have a term of 10 years. Awards under the
Director Plan were also suspended in 1998 until the Company successfully emerges
from Chapter 11.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company applies APB Opinion 25 in accounting for stock options granted under
the 1995, LTIC and Director Plans. Accordingly, no compensation cost has been
recognized for these plans in 1998, 1997 or 1996. Had compensation cost been
recognized on the basis of fair value pursuant to FASB Statement No. 123, net
earnings (loss) and earnings (loss) per share would have been affected as
follows:
<TABLE>
<CAPTION>
December 27, 1998 December 28, 1997 December 29, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
NET EARNINGS (LOSS)
- ------------------
As reported $ (65,383) $ (212,717) $ 21,122
Pro forma $ (65,646) $ (213,265) $ 20,486
BASIC EARNINGS (LOSS) PER SHARE
- -------------------------------
As reported $ (5.48) $ (17.86) $ 1.76
Pro forma $ (5.50) $ (17.90) $ 1.70
DILUTED EARNINGS (LOSS) PER SHARE
- ------------------------------------
As reported $ (5.48) $ (17.86) $ 1.74
Pro forma $ (5.50) $ (17.90) $ 1.68
</TABLE>
The fair value of each option grant was estimated on the date of the grant using
the Black-Scholes multiple option pricing model with the following assumptions
for the years ended December 28, 1997 and December 29, 1996: a range of
risk-free interest rates of 6.15 - 6.43 percent was used for the years ended
December 28, 1997, and December 29, 1996; a dividend yield of 0.0 percent was
used for both years; and an estimated volatility of 40 percent was used for the
year ended December 28, 1997, and 44 percent was used for the year ended
December 29, 1996.
Page 52
<PAGE>
Following is a summary of the status of the 1995, LTIC and Director Plans during
the years ended December 27, 1998, December 28, 1997 and December 29, 1996.
<TABLE>
<CAPTION>
December 27, 1998 December 28, 1997 December 29, 1996
----------------------- ----------------------- -----------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
------------ --------- ------------ --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding,
beginning of
period 774,935 $20.46 735,932 $21.00 703,678 $20.40
Granted - - 91,000 $16.42 89,000 $24.78
Exercised - - 13,247 $18.03 33,332 $19.00
Forfeited 75,444 $20.54 38,750 $22.10 23,414 $20.30
Expired - - - - - -
------- ------ ------- ------ ------- ------
Outstanding, end of
period 699,491 $20.45 774,935 $20.46 735,932 $21.00
======= ======= =======
Options exercisable
end of period 569,407 $20.96 518,103 $21.18 368,361 $21.53
======= ======= =======
Weighted average
fair value of
options granted
during the period - $ 8.95 $ 14.05
======= ======= =======
</TABLE>
Following is a summary of the status of options granted under the 1995, LTIC and
Director Plans at December 27, 1998:
<TABLE>
<CAPTION>
Outstanding Options Exercisable Options
---------------------------------------------------- ----------------------------
Weighted Average
Remaining Weighted
Exercise Price Contractual Weighted Average Average
Range Number Life (Years) Exercise Price Number Exercise Price
- -------------- ------ ------------ -------------- ------ --------------
<S> <C> <C> <C> <C> <C>
$12.69-$16.44 242,447 6.94 $14.62 151,363 $14.15
$19.00-$22.13 245,500 4.10 $19.80 245,500 $19.80
$22.25-$31.13 211,544 5.96 $27.88 172,544 $28.57
------- -------
$12.69-$31.13 699,491 5.64 $20.45 569,407 $20.96
======= =======
</TABLE>
Page 53
<PAGE>
The following summarizes transactions involving SARs granted to key management
during the years ended:
<TABLE>
<CAPTION>
December 27, 1998 December 28, 1997 December 29, 1996
------------------------- ---------------------- ----------------------
Number Weighted Number Weighted Number Weighted
of Average of Average of Average
SARs Exercise SARs Exercise SARs Exercise
Price Price Price
---------- ------------ --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding,
beginning of
period 235,660 $20.35 121,330 $24.32
Granted - - 122,330 $16.64 121,330 $24.32
Forfeited 84,920 $20.63 8,000 $23.82 - -
------- ------- -------
Outstanding, end of
period 150,740 $20.19 235,660 $20.35 121,330 $24.32
Exercisable, end of
period 61,917 $21.26 28,585 $24.28 - -
</TABLE>
SARs, when granted, are granted at amounts that approximate market value at the
date of the grant. Awards, when made, vest 25 percent per year for four years
and have a term of 10 years. Compensation expense (income) is recorded based on
the period-ending stock price in relation to the SAR exercise price.
Compensation expense (income) recorded in 1998, 1997 and 1996 was $(184), $(34)
and $220, respectively. Redemption of the SARs, when exercised, will be in cash.
DEFERRED COMPENSATION PLAN
The Company adopted a Paragon Trade Brands, Inc. Deferred Compensation Plan
("DCP") in April 1997. The DCP was an unfunded, non-qualified deferred
compensation plan under which eligible employees of the Company and members of
the Board of Directors could elect, on a voluntary basis, to defer compensation
until retirement or termination from the Company or the Board. Eligible
participants were selected for participation by a committee (the "Plan
Committee") which consisted of the Board or a committee appointed by the Board.
As of December 31, 1997, the DCP was terminated and no further compensation
deferrals were permitted under the DCP.
Under the DCP, eligible participants could elect to defer up to 50 percent of
their annual base salary, up to 100 percent of their annual bonus or, in case of
the directors, up to 100 percent of their director fees. A participant would be
fully vested in their elective deferrals. If a participant were employed at the
end of the calendar year, the Company would credit the participant's account 50
percent of their elective deferrals not to exceed 25 percent of the
participant's combined base salary and annual bonus for the calendar year.
Participants would become fully vested in the Company contribution after five
years of service with the Company.
Participants, at the discretion of the Plan Committee, could request that their
account be invested in one or more Measurement Funds, which were chosen by the
Plan Committee and were based on one or more mutual funds. To the extent that
the request was approved by the Plan Committee, the funds credited to a
participant's account would be adjusted to reflect gain, loss, income and
expense as though the account had actually been invested in such Measurement
Funds. In this regard, the Company also adopted in April 1997 a so called "rabbi
trust" known as the Paragon Trade Brands, Inc. Deferred Compensation Plan Master
Trust Agreement (the "Trust Agreement") with Wachovia Bank, N.A. as Trustee
which was intended to serve as a funding vehicle for the DCP. However, as of
December 28, 1997, the Company had not transferred any funds to the Trustee
under the Trust Agreement. The expense recorded for the DCP was $16 and $247 in
the years ended December 27, 1998 and December 28, 1997, respectively.
PROFIT SHARING AND 401(K) PLANS
To further encourage the ownership of common stock by all employees, the Company
maintains the PRISM Plan, formerly known as the Profit Sharing and Savings Plan,
that offers both profit sharing and 401(k) features. There were no profit
sharing contributions made during the fiscal year ended December 27, 1998.
Profit sharing
Page 54
<PAGE>
contributions made during the fiscal years ended December 28, 1997 and December
29, 1996 consisted of 110,520 and 29,613 shares of common stock, respectively.
For the years ended December 27, 1998 and December 28, 1997, the Company's
401(k) contributions consisted of 35,292 and 28,915 shares of common stock,
respectively and cash. The Company's 401(k) contributions consisted of 24,759
shares of common stock for the year ended December 29, 1996.
NOTE 8: RECEIVABLES
Receivables consist of the following:
<TABLE>
<CAPTION>
December 27, 1998 December 28, 1997
----------------- -----------------
<S> <C> <C>
Accounts receivable - trade $ 71,079 $ 52,583
Other receivables 16,777 24,568
---------- ----------
87,856 77,151
Less: Allowance for doubtful accounts (8,700) (6,535)
---------- ----------
Net receivables $ 79,156 $ 70,616
========== ==========
</TABLE>
NOTE 9: INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
December 27, 1998 December 28, 1997
----------------- -----------------
<S> <C> <C>
LIFO:
Raw materials - pulp $ 232 $ 381
Finished goods 31,417 25,770
FIFO:
Raw materials - other 7,346 8,561
Materials and supplies 20,924 20,942
---------- ----------
59,919 55,654
Reserve for excess and obsolete
items (6,637) (7,397)
---------- ----------
Net Inventories $ 53,282 $ 48,257
========== ==========
</TABLE>
NOTE 10: PROPERTY AND EQUIPMENT
Property and equipment, at cost, are as follows:
<TABLE>
<CAPTION>
December 27, 1998 December 28, 1997
----------------- -----------------
<S> <C> <C>
Land $ 3,715 $ 3,741
Buildings and improvements 40,150 40,191
Machinery and equipment 227,433 226,951
----------- ----------
271,298 270,883
Less: Allowance for depreciation (165,098) (152,500)
----------- ----------
Net property and equipment $ 106,200 $ 118,383
=========== ==========
</TABLE>
Page 55
<PAGE>
NOTE 11: ACCRUED LIABILITIES
Accrued liabilities are as follows:
<TABLE>
<CAPTION>
December 27, 1998 December 28, 1997
----------------- -----------------
<S> <C> <C>
Payroll - wages and salaries,
incentive awards, retirement,
vacation and severance pay $ 16,977 $ 10,375
Coupons and promotions 5,994 7,826
Integration/relocation reserves - 2,575
Income taxes payable - current - 195
Other 10,675 11,421
---------- ----------
Total $ 33,646 $ 32,392
========== ==========
</TABLE>
NOTE 12: 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 and the Fourth Amendment dated September 28, 1998, 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. The DIP Credit
Facility expires on the earlier of July 7, 1999, or the date of entry of an
order by the Bankruptcy Court confirming a plan of reorganization. The Company
is currently negotiating an extension of the maturity date on the DIP Credit
Facility with Chase.
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.
At December 27, 1998, there were no outstanding direct borrowings under the DIP
Credit Facility. The Company had an aggregate of $1,300 in letters of credit
issued under the DIP Credit Facility at December 27, 1998. The DIP Credit
Facility contains customary covenants. The Company for a period of time has been
unable to fully comply with certain reporting requirements of such covenants.
The Company has obtained waivers with respect to these events of default which
are effective through May 10, 1999. The Company believes that it will be in
compliance with the reporting requirements of the DIP Credit Facility by May 10,
1999.
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
Page 56
<PAGE>
facility totaled $70,000. Borrowings under this credit facility are reflected as
long-term debt in the accompanying balance sheet at December 28, 1997. Interest
was at fixed or floating rates based on the financial institution's cost of
funds. Paragon Trade Brands (Canada) Inc. has guaranteed obligations under this
revolving credit facility. The Company also had access to short-term lines of
credit on an uncommitted basis with several major banks. At December 28, 1997,
the Company had approximately $50,000 in uncommitted lines of credit. Borrowings
under these lines of credit totaled $12,800 at December 28, 1997. Borrowings
under these lines of credit were reflected as short-term borrowings in the
accompanying balance sheet at December 28, 1997. 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.
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.
Paragon Trade Brands (Canada) Inc. 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.
Borrowings under this Canadian operating credit facility are secured by
substantially all of Paragon Trade Brands (Canada) Inc.'s assets and will bear
interest at a rate of 1 percent over the financial institution's prime rate. The
Company does not guaranty borrowings under the Canadian operating credit
facility. The maximum borrowings under the Canadian operating credit facility
are limited to the lesser of $3,000 Cdn or 75 percent of Paragon Trade Brands
(Canada) Inc.'s trade accounts receivable. There were no borrowings outstanding
under this operating credit facility on December 27, 1998.
NOTE 13: 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.
Liabilities subject to compromise are comprised of the following:
<TABLE>
<CAPTION>
December 27, 1998
-----------------
<S> <C>
Accrued settlement contingencies $ 278,500
Bank debt 81,397
Accounts payable 39,752
Accrued liabilities 5,920
Deferred compensation 1,290
----------
$ 406,859
==========
</TABLE>
NOTE 14: RELATED PARTY TRANSACTIONS
The Company has entered into various agreements with its subsidiaries and
affiliates to sell certain diaper making equipment and purchase a portion of its
diaper needs. Prices for the various transactions are established through
negotiations between the related parties. The following is a summary of
significant transactions and balances with its subsidiaries and affiliates as of
or for the years ended December 27, 1998, December 28, 1997 and December 29,
1996:
Page 57
<PAGE>
PMI
Pursuant to the Joint Venture Agreement dated January 26, 1996 whereby the
Company acquired a 49 percent interest in PMI, the Company agreed to sell to PMI
certain diaper manufacturing equipment, finance the construction of a building
and purchase a portion of its diaper needs from PMI.
<TABLE>
<CAPTION>
December 27, 1998 December 28, 1997 December 29, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Sale of equipment $ - $ 194 $ 14,650
Purchase of diapers from PMI $ 67,346 $ 40,823 $ 11,860
Due from PMI $ 43,381 $ 39,725 $ 27,857
Due to PMI $ 7,340 $ 5,313 $ -
</TABLE>
The amounts due from PMI are primarily for equipment purchased, the financing of
the building construction and working capital funding. They are evidenced by an
interest-bearing promissory note and corresponding Purchase Loan and Security
Agreements. The amounts due under these agreements are carried as investments in
and advances to unconsolidated subsidiaries, at equity on the balance sheet.
Amounts due to PMI are carried as accounts payable and liabilities subject to
compromise on the balance sheets. Loans due from PMI are evidenced by
interest-bearing promissory notes. The notes bore an interest rate of 10 percent
until December 1, 1997. The notes currently bear an interest rate of
approximately 6 percent.
MABESA
The Company has purchased certain diaper product needs from Mabesa and also sold
excess diaper making equipment to Mabesa.
<TABLE>
<CAPTION>
December 27, 1998 December 28, 1997
----------------- -----------------
<S> <C> <C>
Sale of equipment $ - $ 4,843
Purchase of diapers from Mabesa $ 1,733 $ 2,196
Due from Mabesa $ 2,732 $ 3,623
Due to Mabesa $ 312 $ 119
</TABLE>
The amounts due from Mabesa for equipment purchased are classified as
receivables on the balance sheets. The amounts due to Mabesa are classified as
accounts payable and liabilities subject to compromise on the balance sheets.
Depending on the expected payment terms under the purchase agreements, certain
amounts due bear an interest rate of approximately 7 percent.
MPC
The Company has sold certain diaper making equipment to MPC.
<TABLE>
<CAPTION>
December 27, 1998 December 28, 1997
----------------- -----------------
<S> <C> <C>
Sale of equipment and technology transfer $ - $ 2,400
Due from MPC $ 287 $ 2,000
</TABLE>
The amounts due from MPC for equipment purchased are classified as receivables
on the balance sheets. The loan to MPC, which bore an interest rate of LIBOR
plus 4 percent, was converted into an additional capital contribution in 1998.
Page 58
<PAGE>
GOODBABY
The Company has sold certain diaper making equipment to Goodbaby.
<TABLE>
<CAPTION>
December 27, 1998 December 28, 1997
----------------- -----------------
<S> <C> <C>
Sale of equipment $ - $ 2,415
Due from Goodbaby $ 1,182 $ 2,710
</TABLE>
The amounts due from Goodbaby are classified as receivables on the balance
sheets.
At December 27, 1998 and December 28, 1997, the Company had deferred gains on
the sales of equipment of $3,927 and $4,583, respectively. These gains will be
amortized to income over the depreciable life of the equipment.
NOTE 15: 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.
The Company had previously filed with the District Court a motion under Rule 59
for a new trial or to alter or amend the Judgment. The District Court denied
Paragon's motion by order entered August 4, 1998. The District Court also denied
a motion by P&G seeking to recover attorneys' fees it expended in defending
itself against Paragon's patent infringement counterclaim. 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.
On September 22, 1998, P&G filed a motion in the Delaware District Court seeking
to have the Court find Paragon in contempt of the injunction entered in the case
on account of Paragon's manufacture and sale of its single cuff diaper product.
P&G asserted in its claim that Paragon's single cuff diaper design (i) is no
more than just colorably different from the design found to infringe the P&G
patents at issue in the case and (ii) also infringes such patents. The Company
opposed P&G's motion. Based on the advice of counsel, the Company believes that
P&G's motion is without merit. If the motion were granted, however, the Company
would be forced to discontinue the manufacture and sale of its single cuff
design. In addition, P&G in its motion asked that the Court order the Company to
send letters to all of its customers advising them that the continued resale by
them of its single cuff design would also constitute patent infringement.
Consequently, the Company believes that if the motion were granted it would have
a material adverse effect on the Company's financial condition and results of
operations and would seriously jeopardize the Company's future viability.
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.
Page 59
<PAGE>
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, if approved by the Bankruptcy Court, will fully and finally settle 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. 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 will allow the Company to manufacture a
dual cuff baby diaper design. In exchange for these rights, the Company has
agreed to pay 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 Company believes that the royalty rates being charged by P&G, together with
royalties to be paid to K-C described above, 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, the Company and P&G jointly
requested modification of the injunction entered in Delaware District Court so
as to allow the Company to begin converting to a dual cuff design pursuant to
the License Agreements described above. The injunction was modified as requested
on February 22, 1999 and the product conversion is substantially complete. As
also provided under the terms of the P&G Settlement Agreement, once a Final
Order, as defined therein, has been entered by the Bankruptcy Court approving
the settlement, 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. A hearing on the Company's motion to seek approval from the
Bankruptcy Court of this settlement was commenced on March 22 and 23, 1999 and
is scheduled to resume on April 13, 1999. Both the Equity Committee and K-C have
objected to the P&G settlement. The Company intends to continue to pursue
approval of the P&G Settlement by the Bankruptcy Court. Should the P&G
Settlement Agreement not be approved by a Final Order of the Bankruptcy Court by
July 31, 1999, however, the License Agreements described above will become
terminable at P&G's option. The Company cannot predict when, or if, such
approval will be granted.
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 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 pending
action. The Court appointed a special master to rule on the various pending
motions. Legal fees and costs in connection with this litigation have been
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
Page 60
<PAGE>
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.
On May 26, 1998, the special master issued his report on the majority of the
motions pending before him. His report included a finding, among other things,
that Paragon, as the successor-in-interest to the disposable diaper business of
Pope & Talbot, has a fully paid-up license to one of the three asserted K-C
inner-leg gather patents, which license runs from the date of the acquisition by
the Company of Pope & Talbot. Pope & Talbot had previously obtained the license
from K-C. The special master also found that K-C should be held to the narrow
interpretation of its patent applied by Judge Dwyer in the Western District of
Washington in earlier litigation between P&G and K-C on the patent. In addition,
the special master also recommended that the Company's antitrust counterclaim
and any discovery-related matters in connection therewith be dismissed.
Effective September 1, 1998, the Texas action was reassigned to Judge Lindsey, a
newly-appointed judge on the Dallas District Court bench. Judge Lindsey asked
the parties to report on the status of the case and the likelihood of
settlement. The parties responded on November 6, 1998, that negotiations were
underway and that they believed considerable progress was being made.
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. Based on the advice of patent counsel, the Company believes that
the Company's products do not infringe any valid patent asserted by K-C.
K-C filed alleged claims 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, if approved by the Bankruptcy Court, will fully and finally settle 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. 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 in the Texas
action. In addition, the patent rights licensed by the Company from K-C will
allow the Company to manufacture a dual cuff diaper design. In exchange for
these patent rights, the Company has agreed to pay 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 $200,000of 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. In addition, 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 will also pay
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 will, together with royalties to be paid to P&G described above,
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 super-absorbent polymers ("SAP") in
diapers and training pants, so long as the Company uses SAP which exhibits
certain performance characteristics (the "SAP Safe Harbor"). The Company has
experienced certain product performance issues the Company believes may be
related to such SAP. As a result, the Company expects that it will incur
increased marketing and selling, general and administrative expenses
Page 61
<PAGE>
("SG&A") expenditures in 1999 to address product performance issues. These
increased expenditures are expected to have a material adverse impact on the
Company's financial position and results of operations in 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 supplier to
develop a better performing alternative which is still within the SAP Safe
Harbor, the Company cannot predict at this time whether or when such an
alternative SAP would be available. 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.
Upon the Effective Date, as defined in the K-C Settlement Agreement, K-C will
dismiss with prejudice its complaint in the Texas action, as well as its related
filings in the District Court in Georgia, and the Company will simultaneously
dismiss with prejudice its counterclaims in the Texas action. The Company
intends to file shortly a motion with the Bankruptcy Court to seek approval of
the settlement. If the K-C Settlement Agreement is not approved by an order of
the Bankruptcy Court entered before August 1, 1999, the K-C License Agreement
described above will terminate automatically. The Company intends to vigorously
pursue approval of the settlement but cannot predict when, or if, such approval
will be granted.
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, if approved by the Bankruptcy Court, will fully and finally settle 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. 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 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 will allow the Company to manufacture a dual cuff
baby diaper design. In exchange for these rights, the Company has agreed to pay
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
Page 62
<PAGE>
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 Company believes that the royalty rates being charged by P&G, together with
royalties to be paid to Kimberly-Clark Corporation ("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, the Company and P&G jointly
requested modification of the injunction entered in Delaware District Court so
as to allow the Company to begin converting to a dual cuff design pursuant to
the License Agreements described above. The injunction was modified as requested
on February 22, 1999 and the product conversion is substantially complete. As
also provided under the terms of the P&G Settlement Agreement, once a Final
Order, as defined therein, has been entered by the Bankruptcy Court approving
the settlement, 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. A hearing on the Company's motion to seek approval from the
Bankruptcy Court of this settlement was commenced on March 22 and 23, 1999 and
is scheduled to resume on April 13, 1999. Both the Equity Committee and K-C have
objected to the P&G settlement. The Company intends to continue to pursue
approval of the P&G Settlement by the Bankruptcy Court. Should the P&G
Settlement Agreement not be approved by a Final Order of the Bankruptcy Court by
July 31, 1999, however, the License Agreements described above will become
terminable at P&G's option. The Company cannot predict when, or if, such
approval will be granted.
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, if approved by the Bankruptcy Court, will fully and finally settle 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. 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 in the Texas
action. In addition, the patent rights licensed by the Company from K-C will
allow the Company to manufacture a dual cuff diaper design. In exchange for
these patent rights, the Company has agreed to pay 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. In addition, 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
will also pay 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 rates that the Company
will pay to K-C will, together with royalties to be paid to P&G described above,
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 stays within the SAP Safe Harbor. The Company has
experienced certain product performance issues the Company believes may be
related to such SAP. As a result, the Company expects that it will incur
increased marketing and SG&A expenditures in 1999 to address product performance
issues. These increased expenditures are expected to have a material adverse
impact on the Company's financial position and results of operations in 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 better performing alternative which is still within the
SAP Safe
Page 63
<PAGE>
Harbor, the Company cannot predict at this time whether or when such an
alternative SAP would be available. 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.
Upon the Effective Date, as defined in the K-C Settlement Agreement, K-C will
dismiss with prejudice its complaint in the Texas action, as well as its related
filings in the District Court in Georgia, and the Company will simultaneously
dismiss with prejudice its counterclaims in the Texas action. The Company
intends to file shortly a motion with the Bankruptcy Court to seek approval of
the settlement. If the K-C Settlement Agreement is not approved by an order of
the Bankruptcy Court entered before August 1, 1999, the K-C License Agreement
described above will terminate automatically. The Company intends to vigorously
pursue approval of the settlement but cannot predict when, or if, such approval
will be granted.
On February 17, 1999, the Company, P&G, K-C, the Creditors' and Equity
Committees stipulated to an extension of the Company's exclusivity period to
April 19, 1999 during which time only the Company can propose a plan of
reorganization. On March 29, 1999, the Company filed a motion seeking to extend
this period, initially, to May 19, 1999 and, subsequently, to June 19, 1999. A
hearing on this motion is scheduled to occur on April 16, 1999.
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 December 27, 1998, there were no outstanding direct
borrowings under this facility. The Company had an aggregate of $1,300 in
letters of credit issued under the DIP Credit Facility at December 27, 1998. The
DIP Credit Facility contains customary covenants. The Company for a period of
time has been unable to fully comply with certain reporting requirements of such
covenants. The Company has obtained waivers with respect to these events of
default which are effective through May 10, 1999. The Company believes that it
will be in compliance with the reporting requirements of the DIP Credit Facility
by May 10, 1999. See Note 12. Legal fees and costs in connection with the
Chapter 11 case have been and will continue to be significant. The Company is
unable to predict at this time when it will emerge from Chapter 11 protection.
OTHER -- The Company is also a party to other legal activities generally
incidental to its activities. Although the final outcome of any legal proceeding
or dispute is subject to a great many variables and cannot be predicted with any
degree of certainty, the Company presently believes that any ultimate liability
resulting from any or all legal proceedings or disputes to which it is a party,
except for the Chapter 11 filing and the P&G and K-C matters discussed above,
will not have a material adverse effect on its financial condition or results of
operations.
NOTE 16: COMMITMENTS
Paragon has operating lease agreements for certain facilities that expire during
the years 1999 through 2001. Future minimum lease payments required under these
noncancelable operating leases are: $391 in 1999, $134 in 2000 and $46 in 2001.
Rental expense for facilities and equipment was $2,676, $3,015 and $2,967 for
the years ended December 27, 1998, December 28, 1997 and December 29, 1996,
respectively.
Commitments for capital expenditures as of December 27, 1998 are $13,780. Other
Company commitments include purchase commitments for raw materials at prevailing
market rates. In early 1996, the Company entered into an agreement with Clariant
International Ltd. (subsequently purchased by BASF Corporation) whereby it
agreed, subject to certain limitations, to purchase 100 percent of its
requirements of SAP through December 31, 2001. Fluff pulp, a product made from
wood fibers, is another primary raw material. The Company's agreement with
Weyerhaeuser whereby it purchased 100 percent of its requirements of bleached
chemical fluff pulp expired August 31, 1998. The Company believes that at least
two other sources of supply exist for fluff pulp.
As a result of the Chapter 11 filing, the Company is prohibited from paying any
prepetition liabilities. Pursuant to the Bankruptcy Code, the Company can seek
Bankruptcy Court approval for the rejection of executory contracts or unexpired
leases, including real property leases. Any such rejection may give rise to a
prepetition unsecured claim for damages arising therefrom.
Page 64
<PAGE>
NOTE 17: NET EARNINGS PER COMMON SHARE
Following is a reconciliation of the numerators and denominators of the basic
and diluted earnings (loss) per common share:
<TABLE>
<CAPTION>
Year Ended
--------------------------------------------------------
December 27, 1998 December 28, 1997 December 29, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net earnings (loss) $ (65,838) $ (212,717) $ 21,122
========== ========== ===========
Weighted average number of common
shares used in basic EPS (000's) 11,9387 11,913 12,022
Effect of dilutive securities:
Stock options (000's) - - 139
---------- ---------- -----------
Weighted average number of common
shares and potentially dilutive
common shares in diluted EPS (000's) 11,937 11,913 12,161
========== ========== ===========
Basic earnings (loss) per common share $ (5.48) $ (17.86) $ 1.76
Diluted earnings (loss) per common share $ (5.48) $ (17.86) $ 1.74
</TABLE>
Options to purchase 699,491, 313,612 and 223,987 shares of common stock
outstanding during the years ended December 27, 1998, December 28, 1997 and
December 29, 1996, respectively, were not included in the calculation because
the options' exercise price was greater than the average market price of the
common shares.
Diluted and basic earnings per share are the same for the years ended December
27, 1998 and December 28, 1997 because the computation of diluted earnings per
share was anti-dilutive.
NOTE 18: SEGMENT REPORTING
Basis of Presentation. 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. and the Company's international investment in joint
ventures in Mexico, Argentina, Brazil and China are reported in the corporate
and other segment. Identifiable assets included in the corporate and other
segment include deferred tax assets, international investments in joint ventures
and cash and other financial instruments managed by the corporate treasury
department. Inter-segment net sales are not significant. Segment accounting
policies are the same as those described in Note 2.
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.
Page 65
<PAGE>
Corporate and other capital expenditures include substantially all of the
Company's spending for Year 2000 and information technology. Related
depreciation and amortization is allocated to each operating segment.
<TABLE>
<CAPTION>
Feminine
Adult/Care Corporate/
1998 Infant Care Incontinence Other Total
- ---- ----------- ------------ ----- ----------
<S> <C> <C> <C> <C>
Net sales $ 512,759 $ 6,608 $ 15,840 $ 535,207
Operating profit (loss) (42,209)(1) (16,916)(2) 1,149 (57,976)
Equity in earnings of unconsolidated - - 4,077 4,077
subsidiaries
Dividend income from unconsolidated subsidiary - - 922 922
Interest expense - - 450 450
Other income - - 2,437 2,437
Earnings (loss)before income taxes and
bankruptcy costs (42,209) (16,916) 8,135 (50,990)
Identifiable assets 245,772 39,614 55,118 340,503
Investments - - 88,783 88,784
Capital expenditures 24,410 1,256 11,655 36,453
Depreciation and amortization 29,536 4,742 181 34,459
Feminine
Adult/Care Corporate/
1997 Infant Care Incontinence Other Total
- ---- ----------- ------------ ----- ----------
Net sales $ 545,225 $ 4,264 $ 12,486 $ 561,975
Operating profit (loss) (154,989)(3) (23,721)(4) (5,078)(5) (183,788)
Equity in earnings of unconsolidated - - 953 953
subsidiaries
Dividend income from unconsolidated subsidiary - - 1,055 1,055
Interest expense - - 4,667 4,667
Other income - - 1,664 1,664
Earnings (loss) before income taxes (154,989) (23,721) (6,073) (184,783)
Identifiable assets 234,707 45,540 22,087 302,334
Investments - - 73,808 73,808
Capital expenditures 31,607 12,415 11,013 55,035
Depreciation and amortization 33,127 2,294 93 35,514
Feminine
Adult/Care Corporate/
1996 Infant Care Incontinence Other Total
- ---- ----------- ------------ ----- ----------
Net sales $ 574,297 $ 470 $ 7,162 $ 581,929
Operating profit (loss) 52,852(6) (7,999) (9,184)(7) 35,669
Equity in earnings of unconsolidated - - 423 423
subsidiaries
Interest expense - - 2,864 2,864
Other income, net - - 581 581
Earnings (loss) before income taxes 52,852 (7,999) (11,044) 33,809
Identifiable assets 231,926 36,825 58,324 327,075
Investments - - 46,015 46,015
Capital expenditures 15,160 24,223 9,484(8) 48,867
Depreciation and amortization 38,187 587 54 38,828
- ---------------
<FN>
(1) Includes $78,500 accrued settlement contingency for estimated settlement costs.
(2) Includes asset impairment of $3,408 related to tampon-related machinery.
(3) Includes $200,000 accrued settlement contingency for P&G patent litigation.
Page 66
<PAGE>
(4) Includes asset impairment of $4,442 related to tampon-related machinery.
(5) Includes $5,000 write-off of software and associated consulting.
(6) Includes $8,032 in cost for the integration of the Pope & Talbot acquisition.
(7) Includes $9,005 in costs related to the corporate headquarters relocation to Atlanta.
(8) Includes $6,844 for purchase of the corporate headquarters in Atlanta.
</FN>
</TABLE>
The following table presents net sales by country based on the country of
origin, including exports from such countries:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
United States $ 497,919 $ 521,487 $ 528,143
Canada 37,288 40,488 53,786
--------- --------- ---------
Consolidated 535,207 561,975 581,929
========= ========= =========
</TABLE>
The following table presents net property, plant and equipment, including assets
held for sale, based on location of the asset:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
United States $ 106,705 $ 123,313 $ 122,140
Canada 4,186 6,143 8,619
--------- --------- ---------
Consolidated 110,891 129,456 130,759
========= ========= =========
</TABLE>
NOTE 19: QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
FISCAL YEAR ENDED DECEMBER 27, 1998
<TABLE>
<CAPTION>
First Second Third Fourth
----- ------ ----- ------
<S> <C> <C> <C> <C>
Net sales $ 138,297 $ 126,991 $ 136,993 $ 132,926
Gross profit 27,498 24,647 27,912 26,578
Net earnings (loss) 6,006 3,369 4,024 (78,782)
Basic earnings (loss) per share of
common stock $ .50 $ .28 $ .34 $ (6.59)
Diluted earnings (loss) per share of
common stock $ .50 $ .28 $ .34 $ (6.59)
Price Range of the Company's common stock:
High $ 20.25 $ 6.81 $ 4.63 $ 3.63
Low $ 4.19 $ 2.63 $ 2.63 $ 1.75
</TABLE>
FISCAL YEAR ENDED DECEMBER 28, 1997
<TABLE>
<CAPTION>
First Second Third Fourth
----- ------ ----- ------
<S> <C> <C> <C> <C>
Net sales $ 135,685 $ 135,819 $ 154,066 $ 136,405
Gross profit 27,838 23,929 28,601 26,696
Net earnings (loss) 3,802 2,652 5,761 (224,932)
Basic earnings (loss) per share of
common stock $ .32 $ .22 $ .48 $ (18.82)
Diluted earnings (loss) per share of
common stock $ .32 $ .22 $ .48 $ (18.82)
Price Range of the Company's common stock:
High $ 30.00 $ 18.00 $ 19.13 $ 23.50
Low $ 14.88 $ 15.25 $ 15.38 $ 17.50
</TABLE>
Page 67
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
FOR THE THREE YEARS IN THE PERIOD ENDED DECEMBER 27, 1998
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Balance at Charged Deductions Balance at
Beginning to From End of
Description of Period Earnings Reserve Period
- --------------------------------------------- --------- -------- -------- ------
<S> <C> <C> <C> <C>
Reserve deducted from related assets:
Doubtful accounts - accounts receivable
1998............................... $ 6,535 $ 3,787 $ (1,622) $ 8,700
======== ======== ========= =========
1997............................... $ 7,637 $ (587) $ (515) $ 6,535
======== ======== ========= =========
1996............................... $ 5,866 $ 2,965 $ (1,194) $ 7,637
======== ======== ========= =========
Excess and obsolete items - inventories
1998............................... $ 7,397 $ 3,000 $ (3,760) $ 6,637
======== ======== ========= =========
1997............................... $ 7,803 $ 6,140 $ (6,546) $ 7,397
======== ======== ========= =========
1996............................... $ 5,051 $ 6,841 $ (4,089) $ 7,803
======== ======== ========= =========
</TABLE>
Page 68
<PAGE>
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The following table sets forth certain information regarding the Company's Board
of Directors:
<TABLE>
<CAPTION>
Name Age Principal Occupation
------------------------- ----- ---------------------------------------------------------------
<S> <C> <C>
Bobby V. Abraham 57 Chief Executive Officer and Chairman of the Board,
Paragon Trade Brands, Inc.
Adrian D.P. Bellamy 57 Nonexecutive Director of Companies
Thomas B. Boklund 59 Chief Executive Officer, Oregon Steel Mills
Robert L. Schuyler 63 Retired
</TABLE>
BOBBY V. ABRAHAM has been a director and the Chief Executive Officer of the
Company since its initial public offering in February 1993, has been Chairman of
the Company's Board of Directors since August 1993 and served as President of
the Company from its inception until November 1993. Prior to the Company's
initial public offering, Mr. Abraham had been President of the Personal Care
Products Division of Weyerhaeuser since February 1988.
ADRIAN D.P. BELLAMY has been a director of the Company since February 1996 and
has served as a member of the Compensation Committee of the Company's Board of
Directors since February 1996 and as its Chairman since November 1996. Mr.
Bellamy has also served as a member of the Governance Committee of the Company's
Board of Directors and as a member of the Company's Audit Committee since
November 1996. Mr. Bellamy formerly served as Chairman and Chief Executive
Officer of DFS Group Limited, an international specialty retailer, from 1983 to
1995. Mr. Bellamy currently serves on the Boards of Directors of Airport Group
International Holdings LLC, an airport management company; The Gap, Inc., a
clothing retailer; Gucci Group NV, a manufacturer and retailer; The Body Shop
International PLC and its USA subsidiary, Buth-Na-Bodhaige Inc., a skin and hair
care products manufacturer and retailer; Williams-Sonoma Inc., a home products
retailer; Shaman Pharmaceuticals, Inc., a pharmaceutical developer, and
Benckiser N.V., a home products company. Mr. Bellamy has served as Chairman of
Gucci Group NV since January 1996, and Airport Group International Holdings LLC
since July 1995.
THOMAS B. BOKLUND has been a director of the Company since April 1993 and served
as Chairman of the Compensation Committee of the Company's Board of Directors
from May 1993 until November 1996. Mr. Boklund has served as a member of the
Company's Audit Committee since November 1996 and as its Chairman from November
1996 to February 1999. Mr. Boklund has also served as a member of the Governance
Committee of the Company's Board of Directors since November 1996, and was
appointed its Chairman in February of 1999. Mr. Boklund continues to serve as a
member of Compensation Committee. Mr. Boklund has been the Chief Executive
Officer of Oregon Steel Mills, an industrial steel manufacturer, since 1985, and
also serves as its Chairman of the Board.
ROBERT L. SCHUYLER has been a director of the Company since April 1993 and
served as Chairman of the Audit Committee of the Company's Board of Directors
from May 1993 until November 1996. Mr. Schuyler has also served as a member of
the Compensation Committee of the Company's Board of Directors since February
1995, and as Chairman of the Governance Committee of the Company's Board of
Directors from November 1996 to February 1999. Mr. Schuyler continues to serve
as a member of the Governance Committee, and was
Page 69
<PAGE>
reappointed as Chairman of the Audit Committee in February 1999. Mr. Schuyler
formerly served as the President of Nisqually Partners, an investment company,
from 1991 through 1997. Mr. Schuyler currently serves on the Boards of Montrail,
a manufacturer and wholesaler of outdoor footwear; and Grande Alberta Paper, a
Canadian pulp and paper development company.
EXECUTIVE OFFICERS
The following table sets forth certain information regarding the Company's
executive officers:
<TABLE>
<CAPTION>
Name Age Position
------------------------- ----- ---------------------------------------------------------------
<S> <C> <C>
Bobby V. Abraham 57 Chief Executive Officer and Chairman of the Board
David W. Cole 51 President, Sales and Marketing
Alan J. Cyron 46 Executive Vice President and Chief Financial Officer
Catherine O. Hasbrouck 34 Vice President, General Counsel and Secretary
Robert E. McClain 49 Executive Vice President - Sales and Marketing
</TABLE>
BOBBY V. ABRAHAM has been a director and the Chief Executive Officer of the
Company since its initial public offering in February 1993 and has been the
Chairman of the Company's Board of Directors since August 1993.
DAVID W. COLE has served the Company as President, Sales and Marketing since
March 1998. Prior to assuming his current responsibilities, Mr. Cole had served
the Company as President and Chief Operating Officer from November 1993 to March
1998, and as Executive Vice President and Chief Operating Officer from February
1993 to November 1993.
ALAN J. CYRON has been the Executive Vice President, Chief Financial Officer and
Assistant Secretary of the Company since February 1997. Prior to assuming his
current responsibilities, Mr. Cyron had served as Vice President since April
1995 and as Treasurer from May through July 1995. Prior to joining the Company,
Mr. Cyron served as Managing Director of Chemical Securities, Inc., a subsidiary
of Chemical Banking Corp., from January 1992 through March 1995.
CATHERINE O. HASBROUCK has been the Vice President, General Counsel and
Secretary of the Company since June 1996. Prior to joining the Company, Ms.
Hasbrouck practiced law as an associate with the law firm of Troutman Sanders
LLP from January 1992 to June 1996.
ROBERT E. MCCLAIN has served the Company as Executive Vice President - Sales and
Marketing since March 1997. Prior to March 1997, Mr. McClain served the Company
as Vice President - Business Development from September 1996 to March 1997.
Before joining the Company, Mr. McClain was the Senior Vice President, Sales and
Marketing for Nice Pak Products from 1992 to 1996.
ITEM 11: EXECUTIVE COMPENSATION
The following table discloses information concerning the compensation of those
persons who were, at December 27, 1998, the last day of the Company's 1998
fiscal year, the Company's Chief Executive Officer and four other most highly
compensated executive officers on that date (the "named executive officers").
Page 70
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
------------------- -------------------
OTHER RESTRICTED SECURITIES
ANNUAL STOCK UNDERLYING
NAME AND FISCAL BONUS COMPENSATION AWARD(S) OPTIONS/ ALL OTHER
PRINCIPAL POSITION YEAR SALARY($) ($)(1)(2) ($)(3) ($)(4) SARS(#) COMPENSATION
------------------ ---- --------- --------- ------------ -------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Bobby V. Abraham... 1998 519,237 561,004 0 0 0 234,191
Chief Executive 1997 500,006 0 0 0 30,000 104,885
Officer and 1996 472,151 525,000 186,590 186,562 30,000 215,382
Chairman of the
Board
David W. Cole...... 1998 269,537 224,400 9,230 0 0 18,143
President 1997 304,954 0 13,985 0 20,000 3,146
1996 290,658 221,265 97,244 124,375 20,000 14,459
Alan J. Cyron...... 1998 228,422 210,375 0 0 0 16,318
Executive Vice 1997 206,612 0 4,615 0 15,000 3,158
President and 1996 193,865 156,450 212,626 49,750 15,000 12,614
Chief Financial
Officer
Arrigo D. Jezzi(6). 1998 224,423 210,375 0 0 0 18,289
Executive Vice 1997 173,679 0 32,179 0 10,000 4,250
President,
Operations,
Technology and
International
Robert E. McClain . 1998 177,355 196,350 0 0 0 12,974
Executive Vice
President, Sales
and Marketing
- ------------------
<FN>
(1) As a result of the Company's performance in fiscal 1997, no annual bonus
payment was made to any of the named executive officers for 1997.
(2) In addition to amounts earned under the Company's Annual Bonus program, Mr.
McClain earned a sales bonus in the amount of $71,210.
(3) Messrs. Cole and Cyron received tax gross-up payments in 1997 for
reimbursements by the Company of taxable relocation expenses incurred in
connection with their relocation in 1996 from Washington to Georgia. Amounts
paid to Mr. Jezzi include $14,365 for reimbursement of taxable relocation
expenses, $6,904 for reimbursement of nontaxable relocation expenses and $10,190
for tax gross-up payments, each made in connection with his relocation in 1997
from Pennsylvania to Georgia. Included in such taxable and nontaxable relocation
expenses reported above for Mr. Jezzi were $6,583 in payment of moving expenses
and $9,873 reimbursement for loss on the sale of his Pennsylvania residence.
Messrs. Abraham, Cole and Cyron recognized income in 1997 in the amounts of
$84,721, $13,748 and $24,825, respectively, on the difference between the price
paid for shares of the Company's common stock purchased in lieu of the 1996
bonus and the fair market value of those shares on the date of purchase.
Additional amounts paid in 1996 to Mr. Abraham were $64,359, $12,725 and
$24,786; to Mr. Cole were $37,035, $20,733 and $25,728; and to Mr. Cyron were
$118,250, $5,579 and $63,971; in each case, for reimbursement of taxable and
nontaxable relocation expenses, and tax gross-up payments, respectively.
Payments to Messrs. Abraham and Cole were made in 1996 in connection with
relocation of the Company's corporate headquarters from Washington to Georgia.
Payments to Mr. Cyron were made in 1996 in connection with his relocation from
New York to Washington as a result of joining the Company in 1995, and with his
subsequent relocation from Washington to Georgia. Included in such taxable and
nontaxable relocation expenses reported above for Mr. Abraham were $29,000 in
payment of a home sale bonus and $57,101 in closing costs on the sale of his
Washington residence; for Mr. Cole were $21,498 in payment of a home sale bonus,
$42,726 in closing costs on the sale of his Washington residence and
Page 71
<PAGE>
$20,231 in moving expenses; and for Mr. Cyron were $41,662 in payment for loss
on the sale of his Washington residence and $40,707 in closing costs on the sale
of his Washington residence.
(4) Restricted stock is valued at the closing price of the Common Stock as
reported on the New York Stock Exchange, Inc. (the "NYSE") on the date of grant.
Restricted stock awards are forfeitable and vest, generally, in either two or
three equal annual installments from the date of grant, subject to acceleration
in the event of certain mergers or consolidations involving the Company, a sale,
lease, exchange or other transfer of all or substantially all of the Company's
assets, or a liquidation or dissolution of the Company. Such awards may be
granted at up to a 20% discount to the market price of the Common stock on the
date of award. A restricted stock award in the amount of $186,562 was made in
1996 in recognition of Mr. Abraham's efforts relating to the Company's
acquisition of the Pope & Talbot disposable diaper business and the investment
in Mabesa.. A restricted stock award in the amount of $49,750 was made in 1996
in recognition of Mr. Cyron's efforts in connection with the investment in
Mabesa, and such award vested 33.4% on February 19, 1997, 33.3% on February 19,
1998 and 33.3% on February 19, 1999. A restricted stock award in the amount of
$124,375 was made in 1996 in recognition of Mr. Cole's efforts in connection
with the integration of the Pope & Talbot disposable diaper business.
Under ordinary circumstances, recipients of restricted stock are able to
pay the tax liability arising upon vesting out of the proceeds of the sale of
Company stock. Since the filing of the Company's Chapter 11 proceeding, however,
certain corporate insiders have been unable to trade in the Company's stock. As
a result, on January 31, 1999 and February 18, 1999, in order to avoid incurring
a tax liability in connection with the vesting of certain restricted stock
awards, Mr. Abraham forfeited 4,887 shares awarded February 1, 1994 and
scheduled to vest on February 1, 1999, and 2,500 shares awarded February 19,
1996 and scheduled to vest on February 19, 1999; and on February 18, 1999, Mr.
Cole forfeited 1,666 shares awarded February 19, 1996 and scheduled to vest on
February 19, 1999. In addition, on February 13, 1998, Messrs. Abraham and Cole
forfeited 22,505 and 13,506 shares of restricted stock, respectively, awarded
February 14, 1995 and February 19, 1996 and scheduled to vest on February 16,
1998 and February 19, 1998, respectively.
On December 27, 1998, Messrs. Abraham, Cole and Cyron held 7,387 shares,
1,666 shares and 666 shares, respectively, of restricted Common Stock, with
market values, based on the closing price of the Common Stock as reported on the
NYSE on such date, of $17,544, $3,957 and $1,582, respectively. Dividends are
payable on restricted stock at the same rate payable to all stockholders.
(5) The amounts shown for fiscal 1998 represent: (i) matching 401(k)
contributions under the Paragon Retirement Savings Investment Management Program
(the "PRISM Plan") in the amounts of $4,250, $4,250, $4,276, $4,396 and $932 for
Messrs. Abraham, Cole, Cyron, Jezzi and McClain, respectively; (ii) profit
sharing contributions under the PRISM Plan in the amounts of $13,893, $13,893,
$12,042, $13,893 and $12,042 for Messrs. Abraham, Cole, Cyron, Jezzi and
McClain; and (iii) a $216,048 deferred compensation award for Mr. Abraham under
the terms of his employment agreement and as approved by the Creditors'
Committee and the Bankruptcy Court.
(6) Mr. Jezzi resigned effective as of April 15, 1999.
</FN>
</TABLE>
1998 OPTION GRANTS AND EXERCISES
There were no option grants under any of the Company's incentive compensation
plans in 1998. SEE "BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE
COMPENSATION: LONG-TERM INCENTIVES," BELOW.
Page 72
<PAGE>
The following table provides information on the aggregated option/SAR exercises
by named executive officers in 1998 and the value of the named executive
officers' unexercised options/SARs at December 27, 1998.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED NUMBER OF SECURITIES
OPTION/SAR OPTIONS AT UNDERLYING UNEXERCISED SARS
EXERCISES FISCAL YEAR-END(#) AT FISCAL YEAR END(#)
--------- ------------------ ---------------------
SHARES
ACQUIRED
ON VALUE
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Bobby V. Abraham...... 0 0 170,411 81,249 0 0
David W. Cole......... 0 0 93,750 53,750 0 0
Alan J. Cyron......... 0 0 13,750 36,250 0 0
Arrigo D. Jezzi....... 0 0 20,000 0 7,500 12,500
Robert E. McClain..... 0 0 0 0 22,500 17,500
</TABLE>
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
IN-THE -MONEY OPTIONS/SARS
AT
FISCAL YEAR-END($)(1)
---------------------
NAME EXERCISABLE UNEXERCISABLE
---- ----------- -------------
<S> <C> <C>
Bobby V. Abraham...... 0 0
David W. Cole......... 0 0
Alan J. Cyron......... 0 0
Arrigo D. Jezzi....... 0 0
Robert E. McClain..... 0 0
- ---------------
<FN>
(1) The value of the options/SARs on December 27, 1998 is based on the average
of the high and low sales prices per share of the Common Stock as reported on
the NYSE on December 24, 1998 ($2.375). None of the outstanding options or SARs
were in the money at December 27, 1998.
</FN>
</TABLE>
COMPENSATION OF DIRECTORS
FEES. Directors who are employees of the Company do not receive any fees for
their services as directors. Directors who are not employees of the Company are
paid an annual retainer of $13,000 for serving on the Board of Directors and
$2,500 for serving on a committee of the Board of Directors. Each nonemployee
director receives an additional fee of $1,000 per day for attending each meeting
of the Board of Directors and $750 for attending each meeting of a committee of
the Board of Directors. A nonemployee director serving as a committee chairman
receives an additional $1,000 per annum.
OPTIONS. Directors who are not employees of the Company are eligible to receive
grants of options to purchase Common Stock under the Company's Stock Option Plan
for Non-Employee Directors (the "Director Plan"). Under the Director Plan, each
nonemployee director is eligible to automatically receive an option to purchase
5,000 shares of Common Stock on the first business day following his or her
initial election as a director of the Company and thereafter is eligible to
receive annually, on the first business day following the date of each annual
meeting of stockholders of the Company, an option to purchase 2,000 shares of
Common Stock, at an
Page 73
<PAGE>
exercise price for all grants equal to the fair market value of the Common Stock
on the date of grant. The Board has suspended the Director Plan until the
Company emerges from Chapter 11 protection and, as such, no options were granted
to Directors in 1998.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE - IN - CONTROL
ARRANGEMENTS
CONFIRMATION RETENTION PLAN FOR TOP EIGHT EXECUTIVES. In August 1998, the
Company received Bankruptcy Court approval of its Confirmation Retention Plan
for Top Eight Executives (the "Confirmation Retention Plan"), which had
previously been adopted by the Compensation Committee of the Company's Board of
Directors (the "Committee"). The Confirmation Retention Plan is designed to
provide additional incentive for the Company's top eight executives to remain
with the Company through the conclusion of the Company's Chapter 11
reorganization proceeding and to ensure their continued dedication and efforts
without undue concern for their personal financial and employment security in
order to expedite the Company's emergence from Chapter 11. In particular, the
Confirmation Retention Plan includes a bonus payable to the top eight executives
upon emergence from Chapter 11 (the "Confirmation Bonus") and enhanced severance
protection, as described below.
In conjunction with the Confirmation Retention Plan, each of the top eight
executives of the Company, including Mr. Abraham and the other named executive
officers, entered into Employment Agreements with the Company which provide,
among other things, that the executives are eligible to participate in the
Confirmation Retention Plan. These Employment Agreements supersede any prior
employment agreement that any of the top eight executives had with the Company.
Under the Confirmation Retention Plan, the Company shall be obligated to pay the
Confirmation Bonus to the eligible executives upon confirmation of a plan of
reorganization by the Bankruptcy Court. In order to receive a Confirmation
Bonus, an executive must (i) be an active employee of the Company on the date of
confirmation of a plan by the Bankruptcy Court, and (ii) must not have been
terminated for Cause, as defined in the Confirmation Retention Plan, or have
voluntarily resigned from employment on or before the date such Confirmation
Bonus is paid. Notwithstanding the foregoing, if an executive's employment with
the Company is terminated by reason of death, retirement or disability, or if
the executive is terminated for any reason other than Cause, as defined in the
Confirmation Retention Plan, the Executive shall receive the Confirmation Bonus
if such termination occurs no earlier than three (3) months before the
confirmation of a plan of reorganization. If such termination occurs more than
three (3) moths before the confirmation of a plan of reorganization, the Board,
as defined in the Confirmation Retention Plan, shall have the discretion to
award the executive a pro-rata portion of his or her Confirmation Bonus.
The Confirmation Bonus for each eligible executive shall be equal to the
executive's then base salary plus any amounts for which the executive qualified
under the Company's 1998 Bonus Plan , subject to enhancement based on the date
the Bankruptcy Court confirms a plan of reorganization. If a plan of
reorganization is confirmed on or before May 15, 1999, the Confirmation Bonus
shall be multiplied by a factor of 1.25. For each full month prior to May 15,
1999 that a plan of reorganization is confirmed by the Bankruptcy Court, this
enhancement shall be increased by 10 percent. Likewise, for each full month
after May 15, 1999 during which a plan of reorganization is confirmed,
enhancement shall be decreased by 10 percent to a floor of 1.00 times the
Confirmation Bonus should a plan be confirmed on or after July 16, 1999. A
minimum aggregate Confirmation Bonus of $2 million shall be immediately paid in
cash upon consummation of the plan of reorganization. If the aggregate of all
the executives' Confirmation Bonuses exceeds $2 million, the Board shall pay any
or all of the excess in common stock of the Company unless the Board determines,
in its complete discretion, to pay such amount in cash. Any stock received as
part of the Confirmation Bonus shall be fully vested, and the Company shall
provide a loan program, secured solely by the shares of stock issued, to assist
recipients of the stock with any tax liabilities arising from the receipt of the
stock.
The Confirmation Retention Plan also contains a severance program pursuant to
which an eligible executive shall be entitled to receive severance benefits from
the Company equal to two times base salary, plus a continuation of benefits for
two years, upon a Board Requested Termination, Resignation for Good Reason, or
upon a termination based on Permanent Disability or death (each such capitalized
term as defined in the Confirmation Retention Plan). In general, severance
benefits shall be paid in a lump sum on the last day of employment. No severance
benefits shall be paid upon a termination for Cause or upon voluntary
termination of employment for any reason other than very limited circumstances
specified in the Confirmation Retention Plan
Page 74
<PAGE>
Under the Confirmation Retention Plan, an executive may voluntarily resign and
still receive severance benefits if (i) the Company does not make an offer to
the executive of continued employment of at least one additional year during the
tenth month after confirmation of a plan of reorganization; (ii) the Company
does make such an offer, but such offer contains terms that would provide the
executive with the option to Resign for Good Reason; or (iii) the executive
Resigns for Good Reason. Should the Company make an offer to the executive of
continued employment of at least one additional year during the tenth month
after confirmation of a plan, which offer does not contain terms that would
provide the executive with the option to Resign for Good Reason, and the
executive resigns anyway, then the executive shall receive a lump sum equal to
only one times the executive's base salary upon termination of employment. The
remainder of the severance benefits shall be paid in 12 monthly installments and
shall be reduced in an amount equal to the salary compensation received by the
executive due to other employment, including fees from consulting services.
In addition to the above, the terms of the individual employment agreements with
the top eight executives also require that each executive diligently perform all
acts and duties and furnish such services as are customary for the position that
such executive holds. Each of the top eight executives must also comply with a
noncompete provision contained in their respective employment agreements which
runs during the tenure of the executive's employment and for a period of two
years thereafter. Each of the top eight executives was also required, as part of
their respective employment agreements, to enter into a confidentiality
agreement with the Company. A breach by the executive of his or her obligations
under either the employment agreement or the confidentiality agreement will
result in a forfeiture of the executive's rights under their employment
agreement and will make the executive ineligible to participate in the
Confirmation Retention Plan.
1993 LONG-TERM PLAN. In the event of a merger, consolidation or acquisition of
the Company, a sale or transfer of all or substantially all of the Company's
assets, a tender or exchange offer for shares of Common Stock (other than offers
by the Company) or other reorganization, as a result of which the Company is not
likely to continue as an independent, publicly owned corporation, the 1993
Long-Term Plan provides that the Committee may take such action as it determines
necessary or advisable, and fair and equitable to participants, with respect to
stock options, SARs and other awards under the 1993 Long-Term Plan. In addition,
shares of restricted stock awarded for 1995 in lieu of cash bonuses will become
fully exercisable, subject to certain exceptions, in the event of certain
mergers or consolidations involving the Company, a sale, lease, exchange or
other transfer of all or substantially all of the Company's assets or a
liquidation or dissolution of the Company.
1995 INCENTIVE PLAN. In the event of certain mergers or consolidations involving
the Company, a sale, lease, exchange or other transfer of all or substantially
all of the Company's assets or a liquidation or dissolution of the Company,
outstanding options, SARs and restricted stock under the 1995 Incentive Plan
will become fully exercisable, subject to certain exceptions. In addition, the
Committee may take such further action as it deems necessary or advisable, and
fair to participants, with respect to outstanding awards under the 1995
Incentive Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended December 27, 1998, members of the Committee were
Adrian D.P. Bellamy (Chairman), Thomas B. Boklund and Robert L. Schuyler. No
executive officers or employees of the Company served on the Compensation
Committee.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Committee, as noted above, is composed entirely of nonemployee directors.
The Committee is responsible for establishing and administering the Company's
executive compensation programs.
COMPENSATION POLICIES
The Committee establishes compensation according to the following guiding
principles:
(a) Compensation should be directly linked to the Company's operating and
financial performance.
Page 75
<PAGE>
(b) Total compensation should be competitive when compared to compensation
levels of executives of companies against which the Company competes for
management.
(c) Performance-related pay should be a significant component of total
compensation, placing a substantial portion of an executive's compensation at
risk.
COMPENSATION PRACTICES
Compensation for executives includes base salary, annual bonuses and long-term
incentive awards, including stock options, SARs and restricted stock awards.
Consistent with the above principles, a substantial proportion of executive
compensation depends on Company performance and on enhancing stockholder value.
BASE SALARY. The Company uses externally-developed compensation surveys to
assign a competitive salary range to each salaried position, including executive
positions. The companies included in the survey are selected by the Company's
outside compensation consultants and include companies engaged in nondurable
manufacturing with annual revenues of between $400 million and $1 billion.
The Committee sets actual base salary levels for the Company's executives based
on recommendations by management. The Committee bases its decisions on the
executive's performance, the executive's position in the salary range, the
executive's experience and the Company's salary budget.
ANNUAL BONUS. The Company employs a formal system for developing measures of and
evaluating executive performance. Bonuses are determined with reference to
quantitative measures established by the Committee each year. At the beginning
of each year, the Committee also approves performance targets relating to the
quantitative measures that, if achieved, will establish a bonus pool equal to
the sum of the individual target bonuses for all executives. The Committee also
establishes performance targets that could result in a range of bonus payouts
from a minimum of zero to a maximum bonus payout of 200 percent of target bonus.
At the end of the year, Company performance, as compared to the quantitative
measures described above, determines the bonus pool for the executive group.
Target bonuses for individual executives are in the range of 25 percent to 60
percent of base salary. The Committee retains the discretion to adjust any
individual bonus if deemed appropriate.
In the event Company performance exceeds the performance targets established for
the maximum 200 percent bonus payout, the bonus pool is funded in excess of such
200 percent payout. Such excess bonus funding is retained by the Company and may
be paid out, at the Committee's discretion, in any year in which performance
targets are not achieved, if the Committee determines such event to be the
result of factors unrelated to management performance.
In 1998, the quantitative measure for bonus payments was earnings before
interest, taxes, depreciation and amortization ("EBITDA"). The maximum possible
bonus payout was 200 percent of target. The Company's performance in fiscal
1998, with EBITDA of $58.4 million, satisfied the quantitative measures designed
to fund bonuses at 187.3 percent of target, and the Committee accordingly
awarded such bonuses.
As a result of the Chapter 11 filing, and in recognition of the need to drive
the operating performance of the Company and to incent employees to remain with
the Company throughout the course of the Chapter 11 proceeding, the Committee
altered the Company's existing incentive compensation plans. The revised plans
include (i) a retention incentive for employees of the Company, other than the
top eight executives, following the Chapter 11 filing and (ii) the Confirmation
Retention Plan described above. These revised plans were approved by the
Bankruptcy Court in August 1998.
For 1999, the Committee has determined that the quantitative measure for bonus
payments will again be EBITDA. The plan will provide minimum and target payout
levels. There is no upward limit on the maximum payout level.
LONG-TERM INCENTIVES. Long-term incentives are designed to link management
reward with the long-term interests of the Company's stockholders. Through 1997,
the Committee granted stock options, stock appreciation rights ("SARs") and
restricted stock as long-term incentives. Individual stock option awards and
Page 76
<PAGE>
SARs were based on level of responsibility, the Company's stock ownership
objectives for management and upon the Company's performance versus the
financial performance objectives set each year for the annual bonus plan
described above. The Company's long-term performance ultimately determines the
level of compensation resulting from stock options and SARs, since stock option
and SAR value is entirely dependent on the long-term growth of the Common Stock
price.
In 1998, the Committee determined, in connection with the Confirmation Retention
Plan described above, that in light of the uncertainties associated with the
Chapter 11 process, the Company should discontinue future stock option, SAR
grants and restricted stock awards until its emergence from Chapter 11 and, as
such, no options, SARs or restricted stock awards were granted to employees for
1998.
Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"),
limits the Company's ability to deduct compensation in excess of $1 million paid
during a tax year to the Chief Executive Officer and the four other highest paid
executive officers of the Company. Certain performance-based compensation is not
subject to such deduction limit. Total 1998 compensation for Mr. Abraham
exceeded $1 million. The Company intends, at the appropriate time, to qualify
stock option and SAR awards for the "performance-based" exception to the $1
million limitation on deductibility and otherwise to maximize the deductibility
of executive compensation while retaining the discretion necessary to compensate
executive officers in a manner commensurate with performance and the competitive
market of executive talent.
CHIEF EXECUTIVE OFFICER COMPENSATION
Mr. Abraham has served as the Company's Chief Executive Officer since its
initial public offering in February 1993. Prior to such time, Mr. Abraham was in
charge of the Company's operations as a division of Weyerhaeuser. Mr. Abraham's
base salary was realigned in 1996 from prior year levels to $500,000. Pursuant
to Mr. Abraham's previous employment agreement entered into at the time of the
Company's initial public offering, as amended and restated in 1997, and pursuant
to the discretion afforded the Board and the Committee pursuant to Mr. Abraham's
current Employment Agreement described above (SEE "--CONFIRMATION RETENTION PLAN
FOR TOP EIGHT EXECUTIVES"), Mr. Abraham is entitled to receive additional
deferred compensation for the first seven years of service as Chief Executive
Officer equal to 20 percent of his base salary and incentive awards. As such, a
reserve of $216,048 was taken by the Company which represents Mr. Abraham's
deferred compensation award for 1998.
Given the challenges presented by the Company's Chapter 11 filing, the Committee
determined to pay all 1998 bonuses based on the corporate EBITDA performance
factor, with no adjustment for personal performance. Mr. Abraham's target bonus
was $300,000. Based on the Company's EBITDA performance, Mr. Abraham received a
1998 bonus payout of $561,690. Mr. Abraham will also participate in any
Confirmation Bonus payable under the Confirmation Retention Plan described
above. SEE "--CONFIRMATION RETENTION PLAN FOR TOP EIGHT EXECUTIVES."
The Committee has discontinued the use of annual grants of stock options, SARs
and restricted stock as incentive compensation for Mr. Abraham until the Company
emerges from Chapter 11 protection. In the past, annual stock option grants were
determined by reference to the external compensation survey data discussed
above, as well as the Company's performance versus the financial performance
objectives set each year for the annual bonus plan described above.
COMPENSATION COMMITTEE
Adrian D.P. Bellamy, Chairman
Thomas B. Boklund
Robert L. Schuyler
Page 77
<PAGE>
STOCK PRICE PERFORMANCE GRAPH
Set forth below is a line graph comparing the cumulative total return on the
Common Stock during the period beginning on December 26, 1993 and ending on
December 27, 1998, the last day of the Company's 1998 fiscal year, with the
cumulative total return on the Standard & Poor's 500 Index and the combined
Value Line Household Products and Toiletries/Cosmetics Indices (weighted
equally). The comparison assumes $100 was invested on December 26, 1993 in the
Common Stock, the Standard & Poor's 500 Index and the combined Value Line
Household Products and Toiletries/Cosmetics Indices and assumes reinvestment of
dividends. The stock price performance shown on the graph is not necessarily
indicative of future price performance.
[OBJECT OMITTED]
PERFORMANCE GRAPH DATA POINTS
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURN AS OF:
------------------------------
NAME 26-DEC-93 25-DEC-94 31-DEC-95 29-DEC-96 28-DEC-97 27-DEC-98
- ---- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
PARAGON TRADE BRANDS, INC. 100.00 44.92 79.24 101.70 43.64 7.20
Standard & Poor's 500 100.00 101.60 139.71 172.18 229.65 294.87
Combined Value Line 100.00 109.45 147.08 196.16 269.10(1) 305.20
Household Products and
Toiletries/Cosmetics Indices
- ----------
<FN>
(1) Tambrands, Inc. ("Tambrands") was a member of the Combined Value Line
Household Products and Toiletries/Cosmetics Indices ("Peer Group") for the years
1993-1996. Tambrands was acquired by P&G during 1997 and total return data for
1997 is not available. Tambrands was removed from the Value Line Household
Products and Toiletries/Cosmetics Indices as of 1997.
</FN>
</TABLE>
Page 78
<PAGE>
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of the Common Stock as
of March 31, 1999, by (a) each stockholder known by the Company to be the
beneficial owner of more than 5 percent of the Common Stock, (b) the Company's
directors, (c) the Company's named executive officers, as defined herein, and
(d) all the Company's directors and executive officers, as a group. Each of the
named persons and members of the group has sole voting and investment power with
respect to the shares shown, except as otherwise stated.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
--------------------
AMOUNT AND NATURE OF PERCENTAGE
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP OUTSTANDING
- ------------------------------------ -------------------- -----------
<S> <C> <C>
Wellington Management Company, LLP........ 1,637,800 (1) 13.71%
75 State Street
Boston, MA 02109
Vanguard Specialized Funds ...............
Vanguard Health Care Fund 1,124,100 (2) 9.41%
P.O. Box 2600
Valley Forge, PA 19482-2600
Capital Guardian Trust Company............ 1,042,700 (3) 8.73%
333 South Hope Street, 55th Floor
Los Angeles, CA 90071
Appaloosa Management L.P.................. 965,200 (4) 8.08%
26 Main Street, 1st Floor
Chatam, NJ 07928
Bobby V. Abraham.......................... 282,563 (5) 2.32%
Adrian D.P. Bellamy....................... 12,000 (6) *
Thomas B. Boklund......................... 14,000 (7) *
Robert L. Schuyler........................ 13,100 (7) *
David W. Cole............................. 149,505 (8) 1.24%
Alan J. Cyron............................. 62,241 (9) *
Arrigo D. Jezzi........................... 35,198 (10) *
Robert E. McClain......................... 5,017 (11) *
All directors and executive officers as a
group (10 persons) ....................... 602,985 (12) 4.84%
- ---------------
<FN>
* Represents holdings of less than 1%.
(1) Wellington Management Company, LLP has shared power to vote 513,700 shares
and shared power to dispose of 1,637,800 shares of Common Stock, based on a
Schedule 13G filed with the SEC and dated January 29, 1999.
(2) Vanguard Specialized Funds - Vanguard Health Care Fund has sole power to
vote 1,124,100 shares and shared power to dispose of 1,124,100 shares of Common
Stock, based on a Schedule 13G filed with the SEC and dated February 10, 1999.
(3) Capital Guardian Trust Company has sole power to vote 1,042,700 shares and
sole power to dispose of 1,042,700 shares of Common Stock, based on a Schedule
13G filed with the SEC and dated February 8, 1999.
Page 79
<PAGE>
(4) Appaloosa Management L.P. ("AMLP") has sole power to vote 965,200 shares and
sole power to dispose of 965,200 shares of Common Stock, based on a Schedule 13G
filed with the SEC and dated February 5, 1999. AMLP is the general partner of
Appaloosa Investment Limited Partnership I, the investment advisor to Palomino
Fund Ltd., and the managing member of Tersk LLC, which are the holders of record
of the reported securities (419,947, 491,765 and 53,488 shares, respectively).
David A. Tepper is the sole stockholder and president of Appaloosa Partners Inc.
("API"). API is the general partner of AMLP, and Mr. Tepper owns a majority of
the limited partnership interests of AMLP.
(5) Includes options to purchase 229,160 shares of Common Stock, exercisable
within 60 days of the date hereof.
(6) Includes options to purchase 9,000 shares of Common Stock, exercisable
within 60 days of the date hereof.
(7) Includes options to purchase 13,000 shares of Common Stock, exercisable
within 60 days of the date hereof.
(8) Includes options to purchase 132,500 shares of Common Stock, exercisable
within 60 days of
the date hereof.
(9) Includes options to purchase 38,750 shares of Common Stock, exercisable
within 60 days of the date hereof.
(10) Includes options to purchase 20,000 shares of Common Stock, exercisable
within 60 days of the date hereof, and stock appreciation rights on 12,500
shares of Common Stock, exercisable within 60 days of the date hereof.
(11) Includes stock appreciation rights on 10,000 shares of Common Stock
exercisable within 60 days of the date hereof.
(12) Includes options to purchase 476,820 shares of Common Stock, exercisable
within 60 days of the date hereof, and stock appreciation rights on 22,500
shares of Common Stock exercisable within 60 days of the date of this document.
</FN>
</TABLE>
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Report of Independent Public Accountants
Consolidated Earnings (Loss) Statements for the three years in the
period ended December 27, 1998
Consolidated Balance Sheets as of December 27, 1998 and December 28,
1997
Consolidated Statements of Cash Flows for the three years in the period
ended December 27, 1998
Page 80
<PAGE>
Consolidated Statements of Comprehensive Income for the three years in
the period ended December 27, 1998
Consolidated Statements of Changes in Shareholders' Equity for the
three years in the period ended December 27, 1998
Notes to Financial Statements
FINANCIAL STATEMENT SCHEDULE:
Schedule II: Valuation and Qualifying Accounts
(b) The registrant filed no Reports on Form 8-K during the fiscal quarter
ended December 27, 1998.
(c) EXHIBITS
<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 Director 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
Page 81
<PAGE>
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 Plan5
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
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. Arnts1
Exhibit 10.24 Rights Agreement dated December 14, 1994 between Paragon Trade Brands,
Inc. and Chemical Bank, as Rights Agent3
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
Page 82
<PAGE>
Exhibit 10.28 Settlement Agreement, dated as of February 2, 1999 between Paragon Trade
Brands, Inc. and The Procter & Gamble Company.
Exhibit 10.29 U.S. License Agreement, dated as of February 2, 1999 between The Procter &
Gamble Company and Paragon Trade Brands, Inc.
Exhibit 10.30 Canadian License Agreement, dated as of February 2, 1999 between
The Procter & Gamble Company and Paragon Trade Brands, Inc.
Exhibit 10.31 U.S. License Agreement, dated as of February 2, 1999 between The Procter &
Gamble Company and Paragon Trade Brands, Inc.
Exhibit 10.32 Canadian License Agreement, dated as of February 2, 1999 between
The Procter & Gamble Company and Paragon Trade Brands, Inc.
Exhibit 10.33 Settlement Agreement, dated as of March 19, 1999 between Kimberly-Clark Corporation and Paragon
Trade Brands, Inc.
Exhibit 10.34 License Agreement Between Kimberly-Clark Corporation and Paragon Trade
Brands, Inc., dated as of March 15, 1999
Exhibit 10.35 License Agreement Between Kimberly-Clark Corporation and Paragon Trade
Brands, Inc., dated as of March 15, 1999
Exhibit 11 Computation of Per Share Earnings (See Note 17 to Financial Statements)
Exhibit 21.1 Subsidiaries of the Company
Exhibit 23.1 Consent of Independent Public Accountants
Exhibit 27 Financial Data Schedule (for SEC use only)
- --------------------------
<FN>
*Management contract or compensatory plan or arrangement.
**Confidential treatment has been requested as to a portion of this document.
(1) Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report on
Form 10-K for the fiscal year ended December 26, 1993.
(2) Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly Report
on Form 10-Q for the quarter ended June 26, 1994.
(3) Incorporated by reference from Paragon Trade Brands, Inc.'s Current Report
on Form 8-K, dated as of December 14, 1994.
(4) Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report on
Form 10-K for the fiscal year ended December 25, 1994.
(5) Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly Report
on Form 10-Q for the quarter ended June 25, 1995.
(6) Incorporated by reference from Paragon Trade Brands, Inc.'s Current Report
on Form 8-K, dated as of February 8, 1996.
(7) Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report on
Form 10-K for the fiscal year ended December 31, 1995.
Page 83
<PAGE>
(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.
</FN>
</TABLE>
Page 84
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on this 12th day of April,
1999.
PARAGON TRADE BRANDS, INC.
By: /S/ BOBBY V. ABRAHAM
-------------------------
Bobby V. Abraham
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on this 12th day of April, 1999.
/S/ BOBBY V. ABRAHAM
----------------------------
Bobby V. Abraham
Chairman and Chief Executive Officer
/S/ ALAN J. CYRON
----------------------------
Alan J. Cyron
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
/S/ GARY M. ARNTS
----------------------------
Gary M. Arnts
Vice President and Controller
(Principal Accounting Officer)
/S/ ADRIAN D.P. BELLAMY
----------------------------
Adrian D.P. Bellamy
Director
/S/ THOMAS B. BOKLUND
----------------------------
Thomas B. Boklund
Director
/S/ ROBERT L. SCHUYLER
----------------------------
Robert L. Schuyler
Director
Page 85
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<S> <C> <C>
Exhibit 3.1 Certificate of Incorporation of Paragon Trade Brands, Inc. 4
Exhibit 3.2 By-Laws of Paragon Trade Brands, Inc., as amended through July 31, 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
Exhibit 10.17* 1995 Incentive Compensation Plan 5
Page 86
<PAGE>
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
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.
Exhibit 10.29 U.S. License Agreement, dated as of February 2, 1999 between The Procter &
Gamble Company and Paragon Trade Brands, Inc.
Exhibit 10.30 Canadian License Agreement, dated as of February 2, 1999 between
The Procter & Gamble Company and Paragon Trade Brands, Inc.
Exhibit 10.31 U.S. License Agreement, dated as of February 2, 1999 between The Procter &
Gamble Company and Paragon Trade Brands, Inc.
Exhibit 10.32 Canadian License Agreement, dated as of February 2, 1999 between
The Procter & Gamble Company and Paragon Trade Brands, Inc.
Page 87
<PAGE>
Exhibit 10.33 Settlement Agreement, dated as of March 19, 1999 between Kimberly-Clark
Corporation and Paragon Trade Brands, Inc.
Exhibit 10.34 License Agreement Between Kimberly-Clark Corporation and Paragon Trade
Brands, Inc., dated as of March 15, 1999
Exhibit 10.35 License Agreement Between Kimberly-Clark Corporation and Paragon Trade
Brands, Inc., dated as of March 15, 1999
Exhibit 11 Computation of Per Share Earnings (See Note 17 to Financial Statements)
Exhibit 21.1 Subsidiaries of the Company
Exhibit 23.1 Consent of Independent Public Accountants
Exhibit 27 Financial Data Schedule (for SEC use only)
- --------------------------
<FN>
*Management contract or compensatory plan or arrangement.
**Confidential treatment has been requested as to a portion of this document.
(1) Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report on
Form 10-K for the fiscal year ended December 26, 1993.
(2) Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly Report
on Form 10-Q for the quarter ended June 26, 1994.
(3) Incorporated by reference from Paragon Trade Brands, Inc.'s Current Report
on Form 8-K, dated as of December 14, 1994.
(4) Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report on
Form 10-K for the fiscal year ended December 25, 1994.
(5) Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly Report
on Form 10-Q for the quarter ended June 25, 1995.
(6) Incorporated by reference from Paragon Trade Brands, Inc.'s Current Report
on Form 8-K, dated as of February 8, 1996.
(7) Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report on
Form 10-K for the fiscal year ended December 31, 1995.
(8) Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report on
Form 10-K for the fiscal year ended December 29, 1996.
(9) Incorporated by reference from Paragon Trade Brands, Inc.'s 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.
</FN>
</TABLE>
Page 88
FOURTH AMENDMENT
TO REVOLVING CREDIT
AND GUARANTY AGREEMENT
FOURTH AMENDMENT, dated as of September 28, 1998 (the
"AMENDMENT"), to the REVOLVING CREDIT AND GUARANTY AGREEMENT dated as of January
7, 1998 among PARAGON TRADE BRANDS, INC., a Delaware corporation (the
"BORROWER"), a debtor and debtor-in-possession under Chapter 11 of the
Bankruptcy Code, the Guarantors named therein (the "GUARANTORS"), THE CHASE
MANHATTAN BANK, a New York banking corporation ("CHASE"), each of the other
financial institutions party thereto (together with Chase, the "BANKS") and THE
CHASE MANHATTAN BANK, as Agent for the Banks (in such capacity, the "AGENT"):
W I T N E S S E T H:
WHEREAS, the Borrower, the Guarantors, the Banks and the Agent
are parties to that certain Revolving Credit and Guaranty Agreement, dated as of
January 7, 1998 (as heretofore amended pursuant to the First Amendment to
Revolving Credit and Guaranty Agreement dated as of January 30, 1998, the Second
Amendment to 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 and as the same may be further amended, modified or supplemented
from time to time, the "CREDIT AGREEMENT"); and
WHEREAS, the Borrower and the Guarantors have requested that from
and after the Effective Date (as hereinafter defined) of this Amendment, the
Credit Agreement be amended subject to and upon the terms and conditions set
forth herein;
NOW, THEREFORE, it is agreed:
1. As used herein all terms that are defined in the Credit Agreement
shall have the same meanings herein.
2. Section 6.09 of the Credit Agreement is hereby amended by inserting
the words (a) "and in Section 6.13" immediately following the parenthetical
phrase "(the "SECTION 6.09 AGREEMENTS")" set forth in the first sentence
thereof, (b) "or any of the Guarantors" immediately following the words "the
Borrower" set forth in clause (y) of the second sentence thereof, and (c) "and
Section 6.11(iv)" immediately following the words "Section 6.11(ii)" set forth
in subclause (y).
3. Section 6.10 of the Credit Agreement is hereby amended by deleting
the word "and" immediately preceding clause (v) appearing therein and inserting
in lieu thereof a comma, and by inserting the following new clause (vi) at
the end thereof:
<PAGE>
"and (vi) loans and advances, not to exceed one year in duration,
to employees of the Borrower and the Guarantors that are being
relocated and which are made in the ordinary course of business
in an aggregate principal amount not in excess of $1,000,000 at
any one time outstanding."
4. Section 6.11 of the Credit Agreement is hereby amended by deleting
the word "and" immediately preceding clause (iii) appearing therein and by
inserting the following new clause (iv) at the end thereof:
"and (iv) the sale or disposition, upon the terms of that certain
Asset Purchase Agreement dated as of September 1, 1998, among the
Borrower, Changing Paradigms, Inc. ("CP") and House, Home and
Hardware, LLC (or pursuant to a higher and better offer that is
approved by the Bankruptcy Court from such purchaser or another
Person), of substantially all of the assets (and assumption of
certain trade payables) of CP."
5. Section 6 of the Credit Agreement is hereby amended by inserting
the following new Section 6.13 at the end thereof:
"SECTION 6.13 CHANGING PARADIGMS TRANSACTION.
Notwithstanding anything to the contrary set forth in Sections
6.03, 6.09 and 6.10 of the Credit Agreement , the Borrower, CP
and PTB International shall be permitted, in connection with the
sale of substantially all of CP's assets described in Section
6.11(iv), to enter into a series of intercompany transactions
pursuant to which (x) the Borrower may assign to PTB
International an intercompany receivable owing by CP to the
Borrower in the amount of approximately $7,800,000, with PTB
International to be obligated under an intercompany payable to
the Borrower in the same amount in consideration of such
assignment and (y) CP shall use the proceeds of such asset sale
to repay such intercompany receivable owing by CP. It is
understood and agreed that such intercompany payable from PTB
International to the Borrower shall not be treated as a loan or
advance by the Borrower to PTB International for purposes of the
formulas appearing in the "PROVIDED" clause of the first sentence
of Section 6.09 and in the "PROVIDED" clause of Section 6.10."
6. This Amendment shall not become effective until the date (the
"EFFECTIVE DATE") on which this Amendment shall have been executed by the
Borrower, the Guarantors and Banks constituting the Required Banks and the
Agent, and the Agent shall have received evidence satisfactory to it of such
execution.
2
<PAGE>
7. The Borrower agrees that its obligations set forth in Section 10.05
of the Credit Agreement shall extend to the preparation, execution and delivery
of this Amendment.
8. This Amendment shall be limited precisely as written and shall not
be deemed (a) to be a consent granted pursuant to, or a waiver or modification
of, any other term or condition of the Credit Agreement or any of the
instruments or agreements referred to therein or (b) to prejudice any right or
rights which the Agent or the Banks may now have or have in the future under
or in connection with the Credit Agreement or any of the instruments or
agreements referred to therein. Whenever the Credit Agreement is referred to in
the Credit Agreement or any of the instruments, agreements or other documents
or papers executed or delivered in connection therewith, such reference shall
be deemed to mean the Credit Agreement as modified by this Amendment.
9. This Amendment may be executed in any number of counterparts and by
the different parties hereto in separate counterparts, each of which when
so executed and delivered shall be deemed to be an original and all of which
taken together shall constitute but one and the same instrument.
10. This Amendment shall in all respects be construed in accordance
with and governed by the laws of the State of New York applicable to contracts
made and to be performed wholly within such State.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed as of the day and the year first above written.
PARAGON TRADE BRANDS, INC.
By: /s/
Title:
PTB INTERNATIONAL, INC.
By: /s/
Title:
3
<PAGE>
CHANGING PARADIGMS, INC.
By: /s/
Title:
PARAGON TRADE BRANDS FSC, INC.
By: /s/
Title:
PTB ACQUISITION SUB, INC.
By: /s/
Title:
THE CHASE MANHATTAN BANK,
INDIVIDUALLY AND AS AGENT
By: /s/
Title:
AMSOUTH BANK
By: /s/
Title:
THE BANK OF NOVA SCOTIA
By: /s/
Title:
4
<PAGE>
BHF-BANK AKTIENGESELLSCHAFT
By: /s/
Title:
By: /s/
Title:
HELLER FINANCIAL, INC.
By: /s/
Title:
IBJ BUSINESS CREDIT CORPORATION
By: /s/
Title:
PNC BANK, NATIONAL ASSOCIATION
By: /s/
Title:
WACHOVIA, N.A.
By: /s/
Title:
5
SETTLEMENT AGREEMENT
This Settlement Agreement is made and entered into as of February
2, 1999, between Paragon Trade Brands, Inc., a Delaware corporation, debtor and
debtor in possession ("Paragon"), and The Procter & Gamble Company, an Ohio
corporation ("P&G").
W I T N E S S E T H:
WHEREAS, Paragon and P&G are partie to an action entitled THE
PROCTER & GAMBLE COMPANY V. PARAGON TRADE BRANDS, INC., C.A. No. 94-16 (LON),
filed in the United States District Court for the District of Delaware (the
"Action"), in which, among other things (a) an Opinion and Judgment was issued
on December 30, 1997, and entered on the court's docket on January 6, 1998, in
favor of P&G and against Paragon; a Money Judgment was entered on June 2, 1998;
and a Permanent Injunction was entered on June 2, 1998 (collectively, the "Final
Judgment"); and (b) an Opinion and Order was entered on August 4, 1998 (as more
fully defined below, the "Rule 59 Denial"), denying Paragon's motion pursuant to
Fed. R. Civ. P. 59;
WHEREAS, Paragon has appealed both the Final Judgment and the
Rule 59 Denial;
WHEREAS, on January 6, 1998, Paragon filed a voluntary petition
for relief under chapter 11 of title 11 of the United States Code with the
United States Bankruptcy Court for the Northern District of Georgia, Atlanta
Division, which chapter 11 case currently is pending;
WHEREAS, on or about June 5, 1998, P&G filed a proof of claim
(the "Bankruptcy Claim") in Paragon's chapter 11 case asserting, among other
things, both unsecured prepetition claims in excess of $1.8 billion (without
trebling) and unsecured administrative claims in excess of $300 million (without
trebling) against Paragon in respect of Paragon's alleged infringement of
certain P&G patents;
WHEREAS, P&G served a motion, dated September 22, 1998, in the
United States District Court for the District of Delaware for a finding of
contempt against Paragon regarding the Permanent Injunction entered by that
court on June 2, 1998, which motion Paragon is opposing;
WHEREAS, Paragon and P&G have agreed to effectuate a settlement
of the claims and disputes relating to the Bankruptcy Claim and as otherwise set
forth in the Ancillary Agreements (as defined below) in accordance with the
terms and conditions set forth herein; and
<PAGE>
WHEREAS, this Settlement Agreement is essential to, and an
integral part of, Paragon's efforts to emerge successfully from its chapter 11
case;
NOW, THEREFORE, for good and valuable consideration, and in order
to settle the Bankruptcy Claim and as otherwise set forth in the Ancillary
Agreements, and to facilitate Paragon's expeditious and effective
reorganization, the parties hereto agree as follows:
1. DEFINITIONS. In addition to such other terms as are defined in other
sections of this Settlement Agreement, the following terms (which appear in the
Settlement Agreement as capitalized terms) have the following meanings as used
in the Settlement Agreement:
1.1. "Action" shall have the meaning ascribed to such term in the
first "WHEREAS" clause of this Settlement Agreement.
1.2. "Administrative Expense Claim" means a Claim for costs and
expenses of administration that is entitled to administrative expense priority
under sections 503(b) and 507(a)(1) of the Bankruptcy Code.
1.3. "Affiliate" means any Entity that is (a) an affiliate as
such term is defined in section 101(2) of the Bankruptcy Code, (b) an existing
or future direct or indirect subsidiary or parent corporation of Paragon or P&G
(as the case may be), or (c) an existing or future joint venture or general or
limited partnership in which (i) Paragon or P&G (as the case may be) or any
existing or future direct or indirect subsidiary or parent corporation of
Paragon or P&G (as the case may be) is a joint venturer or general or limited
partner, as the case may be, or (ii) a joint venture or general or limited
partnership in which Paragon or P&G (as the case may be) is a joint venturer or
general or limited partner, as the case may be. The defined term "Affiliate"
also includes all successors and assigns of each of the foregoing.
1.4. "Allowed Claim" means any Claim (a) proof of which was filed
within the applicable period of limitation fixed by the Bankruptcy Court and (i)
as to which no objection to the allowance thereof has been interposed within the
applicable period of limitation fixed by the Bankruptcy Code, the Bankruptcy
Rules, order of the Bankruptcy Court, or any plan of reorganization for the
Debtor, or (ii) as to which an objection has been interposed, to the extent such
Claim has been allowed by a Final Order, (b) if no proof of which was so filed,
which has been listed by the Debtor in its schedules of assets and liabilities
filed with the Bankruptcy Court (as amended from time to time) as liquidated in
amount and not disputed or contingent as to liability, or (c) arising from the
recovery of property under section 550 or 553 of the Bankruptcy Code and allowed
in accordance with section 502(h) of the Bankruptcy Code.
-2-
<PAGE>
1.5. "Ancillary Agreements" means the P&G Licenses annexed hereto
as Exhibit A, the Paragon Release annexed hereto as Exhibit B, and the P&G
Release annexed hereto as Exhibit C.
1.6. "Appeal" means that certain appeal taken by Paragon from the
Final Judgment and Rule 59 Denial, which appeal is evidenced by Paragon's Notice
of Appeal, filed July 2, 1998, and Paragon's Amendment to Notice of Appeal,
filed August 4, 1998, which appeal is docketed in the United States Court of
Appeals for the Federal Circuit as No.
98-1480.
1.7. "Bankruptcy Claim" shall have the meaning ascribed to such
term in the fourth "WHEREAS" clause of this Settlement Agreement.
1.8. "Bankruptcy Code" means the Bankruptcy Reform Act of 1978,
11 U.S.C. Sections 101, ET seq., as the same was in effect on the Petition Date,
as amended by any amendments applicable to the Chapter 11 Case.
1.9. "Bankruptcy Court" means the United States Bankruptcy Court
for the Northern District of Georgia, Atlanta Division, or, to the extent that
such court ceases to exercise jurisdiction over the Chapter 11 Case, such other
court or adjunct thereof that exercises jurisdiction over the Chapter 11 Case.
1.10. "Bankruptcy Court Approval Order" means an order (which may
be a Confirmation Order) of the Bankruptcy Court approving this Settlement
Agreement and the Ancillary Agreements pursuant to, INTER ALIA, Bankruptcy Rule
9019 and Bankruptcy Code sections 105, 363, 365, 1123 and/or 1129.
1.11. "Bankruptcy Rules" means the Federal Rules of Bankruptcy
Procedure, effective August 1, 1991, in accordance with the provisions of 28
U.S.C. ss. 2075, as now in effect or hereafter amended.
1.12. "Business Day" means any day, other than a Saturday, Sunday
or "legal holiday" (as such term is defined in Bankruptcy Rule 9006(a)).
1.13. "Chapter 11 Case" means Paragon's case pending in the
Bankruptcy Court pursuant to chapter 11 of the Bankruptcy Code and administered
under case number 98 B 60390 (Murphy, J.).
1.14. "Claim" means a claim as such term is defined in section
101(5) of the Bankruptcy Code.
1.15. "Confirmation Date" means the date on which the Bankruptcy
Court enters an order confirming, pursuant to section 1129 of the Bankruptcy
Code, a Plan proposed for Paragon.
-3-
<PAGE>
1.16. "Confirmation Order" means an order of the Bankruptcy Court
confirming a Plan pursuant to section 1129 of the Bankruptcy Code.
1.17. "Contempt Motion" means The Procter & Gamble Company's
Motion For A Finding Of Contempt Against Paragon Trade Brands, Inc., dated
September 22, 1998, which, by Order dated September 24, 1998, was filed by P&G
in the Delaware District Court on January 8, 1999.
1.18. "Creditors' Committee" means the Official Committee of
Unsecured Creditors in the Chapter 11 Case, as appointed by the Office of the
United States Trustee for the Northern District of Georgia, Atlanta Division,
and reconstituted from time to time.
1.19. "Debtor" means Paragon.
1.20. "Delaware District Court" means the United States District
Court for the District of Delaware.
1.21. "Effective Date" means the first Business Day that the Plan
becomes effective in accordance with its terms by the commencement of
distributions thereunder.
1.22. "Entity" means an entity as such term is defined in section
101(15) of the Bankruptcy Code (including defined terms used in such section of
the Bankruptcy Code).
1.23. "Estate" means the estate created in the Chapter 11 Case
for Paragon by section 541 of the Bankruptcy Code.
1.24. "Federal Circuit Court" means the United States Court of
Appeals for the Federal Circuit.
1.25. "Final Judgment" shall have the meaning ascribed to such
term in the first "WHEREAS" clause of this Settlement Agreement.
1.26. "Final Order" means an order or judgment of the Bankruptcy
Court, as entered on the docket in the Chapter 11 Case, that has not been
reversed, stayed, modified or amended and as to which the time to appeal or seek
review, rehearing, reargument or certiorari has expired and as to which no
appeal or petition for review, rehearing, reargument, stay or certiorari is
pending, or as to which any right to appeal or to seek certiorari, review, or
rehearing has been waived, or, if an appeal, reargument, petition for review,
certiorari or rehearing has been sought, the order or judgment of the Bankruptcy
Court that has been affirmed by the highest court to which the order was
appealed or from which the reargument, review or rehearing was sought, or
certiorari has been denied, and as to which the time to take any further appeal
or seek further reargument,
-4-
<PAGE>
review or rehearing has expired; PROVIDED, HOWEVER, that for purposes of this
Settlement Agreement, the Bankruptcy Court Approval Order approving this
Settlement Agreement and allowing the P&G Allowed Unsecured Claim and the P&G
Allowed Administrative Expense Claim (each as defined in Section 2.1 of this
Settlement Agreement) shall be deemed a Final Order upon the occurrence of the
Effective Date.
1.27. "Impaired" means impaired within the meaning of section
1124 of the Bankruptcy Code.
1.28. "Paragon Release" means the general release annexed hereto
as Exhibit B.
1.29. "Parties" means Paragon and P&G, and their respective
successors and assigns, collectively.
1.30. "Plan" means a plan of reorganization for Paragon confirmed
by the Bankruptcy Court pursuant to section 1129 of the Bankruptcy Code in the
Chapter 11 Case, as the same may be amended or modified, relying upon and/or
incorporating and, INTER ALIA, implementing the terms of this Settlement
Agreement.
1.31. "Petition Date" means January 6, 1998.
1.32. "P&G Allowed Claims" shall have the meaning ascribed to
such term in Section 2.1 of this Settlement Agreement.
1.33. "P&G Licenses" means the license agreements annexed hereto
as Exhibit A.
1.34. "P&G Patents" means the patents identified on Exhibit D
hereto.
1.35. "P&G Release" means the general release annexed hereto as
Exhibit C.
1.36. "Rule 59 Denial" means that certain Opinion and Order of
the Delaware District Court, both entered August 4, 1998, denying Paragon's
Motion for a New Trial or, in the Alternative, for the Court to Alter or Amend
Its Judgment pursuant to Federal Rule of Civil Procedure 59.
1.37. "Unimpaired" means not impaired within the meaning of
section 1124 of the Bankruptcy Code.
2. ALLOWED AMOUNT AND TREATMENT OF P&G CLAIMS.
2.1. ALLOWED AMOUNT OF CLAIMS. P&G shall be granted on account of
its agreements hereunder and account of, and in full settlement and satisfaction
of, the Bankruptcy Claim, two Allowed Claims in the Chapter 11 Case as follows:
(a) an Allowed Claim
-5-
<PAGE>
(the "P&G Allowed Unsecured Claim") in an amount equal to the sum of (i) one
hundred fifty eight million five hundred thousand dollars and zero cents
($158,500,000.00) plus (ii) to the extent permitted in accordance with Section
2.3 of this Settlement Agreement, interest on the principal amount of
$158,500,000.00 from April 15, 1999 and through and including the Effective
Date; and (b) an Allowed Claim (the "P&G Allowed Administrative Claim" and
together with the P&G Allowed Unsecured Claim, the "P&G Allowed Claims")) in an
amount equal to the sum of five million dollars and zero cents ($5,000,000.00).
For purposes of the preceding clause (a)(ii), interest shall accrue at six
percent (6%) on a per annum 365 day year basis.
2.2. TREATMENT OF THE P&G ALLOWED UNSECURED CLAIM. The P&G
Allowed Unsecured Claim shall be treated as a prepetition, general unsecured
claim under the Plan. Nothing contained herein shall in any way limit, or be
construed to limit, P&G's rights to object to the classification or treatment of
the P&G Allowed Unsecured Claim under the Plan; provided, however, that P&G
shall not contest the status or priority of the P&G Allowed Unsecured Claim as a
prepetition, general unsecured claim.
2.3. LIMITATION ON THE PAYMENT OF POSTPETITION INTEREST.
Notwithstanding anything to the contrary set forth in Section 2.1 of this
Settlement Agreement, the P&G Allowed Unsecured Claim shall include interest
calculated in accordance with Section 2.1(a)(ii) above only if (a) the Plan
provides for the payment of postpetition interest to substantially all holders
of Allowed Claims against Paragon that arose or accrued prior to the Petition
Date, or (b) Kimberly-Clark Corporation receives interest on its Allowed Claims,
if any, against Paragon that arose or accrued prior to the Petition Date.
2.4. TREATMENT OF THE P&G ALLOWED ADMINISTRATIVE CLAIM. The P&G
Allowed Administrative Claim shall be afforded treatment under the Plan as an
Administrative Expense Claim in accordance with section 1129(a)(9)(A) of the
Bankruptcy Code; PROVIDED, HOWEVER, that if the Effective Date does not occur on
or before July 1, 1999, then Paragon shall pay to P&G one million eight hundred
thousand dollars and zero cents ($1,800,000.00) of the P&G Allowed
Administrative Claim on July 1, 1999.
3. STAY AND WITHDRAWAL OF THE APPEAL.
3.1. Upon execution of this Settlement Agreement, Paragon and P&G
shall file a joint motion in the Federal Circuit requesting that the Appeal be
stayed pending entry of a Final Order approving the Settlement Agreement.
3.2. As soon as reasonably practicable (but in no event later
than five (5) Business Days) after the Bankruptcy Court Approval Order becomes a
Final Order, Paragon shall, with P&G's written consent, and with each party to
bear its own costs on appeal, withdraw the Appeal with prejudice.
-6-
<PAGE>
3.3. Neither Party shall seek to vacate the Final Judgment.
3.4. As provided in the P&G Licenses, P&G shall waive any and all
rights to sue (including, but not limited to, actions to enjoin and/or recover
damages from) Paragon from making, having made with the prior written consent of
P&G, using, offering for sale or selling Licensed Products (as such term is
defined in the P&G Licenses) in the United States or Canada, provided: (a) the
P&G Licenses have not been terminated by either Paragon or P&G; (b) Paragon is
in full compliance with the material terms of this Settlement Agreement and the
Ancillary Agreements and is current in meeting its material obligations to pay
the running royalties under the respective P&G Licenses; and (c) Paragon is
otherwise in full compliance with the material terms of the respective P&G
Licenses. As soon as reasonably practicable (but in no event later than five (5)
Business Days) after the date of execution of this Settlement Agreement, Paragon
and P&G shall file a joint motion in the Delaware District Court requesting that
the Permanent Injunction referenced in the first "WHEREAS" clause hereof be
modified for the purpose of permitting Paragon's sale of its products in
accordance with the terms of the P&G Licenses.
4. STAY AND WITHDRAWAL OF THE CONTEMPT MOTION.
4.1. Upon execution of this Settlement Agreement, P&G shall file
a letter motion in the Delaware District Court requesting that the Contempt
Motion be stayed pending entry of a Final Order approving the Settlement
Agreement.
4.2. As soon as reasonably practicable (but in no event later
than five (5) Business Days) after the Bankruptcy Court Approval Order becomes a
Final Order, P&G shall withdraw the Contempt Motion with prejudice.
5. DISCONTINUANCE OF CURRENT ULG DIAPER. Paragon shall discontinue
its manufacture of the product annexed hereto as Exhibit E (the "ULG Diaper")
as soon as commercially reasonable. Commencing January 7, 1999, Paragon shall
be required to pay to P&G royalties at the agreed upon rate and in accordance
with the terms and conditions set forth in the P&G Licenses.
6. LICENSES.
6.1. Contemporaneously with the execution of this Settlement
Agreement, P&G shall execute and deliver to Paragon the P&G Licenses. The
provisions of this Section 6 shall be deemed a part of each of the P&G Licenses.
The P&G Licenses shall be effective as of January 7, 1999; PROVIDED, THAT, if
the Bankruptcy Court Approval Order is not obtained on or before July 31, 1999,
then the P&G Licenses shall be terminable by P&G in accordance with the terms
set forth therein.
-7-
<PAGE>
6.2. P&G represents, warrants and covenants that the P&G Patents
are the only patents owned by P&G in the United States, Canada, Mexico, Brazil,
Argentina or China (collectively, including any territories of any of the
foregoing, the "Approved Countries"), or as to which P&G has any right to assert
or prosecute against an alleged infringer in the Approved Countries, that P&G
asserts have been infringed by products of Paragon and/or its Affiliates made,
used or sold in the Approved Countries as of the date of execution of this
Settlement Agreement. P&G further represents, warrants and covenants that (a)
P&G shall not seek to assert or prosecute the P&G Patents or any claims relating
to patents or patent applications pending, including continuations and
continuations-in-part, owned or assertable by P&G as of the date of execution of
this Settlement Agreement, or any reissues or reexaminations of such patents or
patent applications (the "Additional P&G Patents"), in the Approved Countries
with respect to the manufacture, use or sale of any products by Paragon and/or
its Affiliates up to and including the date of execution of this Settlement
Agreement, and (b) P&G shall not seek to assert Additional P&G Patents against
either Paragon and/or its Affiliates after the date of execution of this
Settlement Agreement with respect to the manufacture, use or sale of the product
designs attached as exhibits to the P&G Licenses (collectively, the "Approved
Products") in any Approved Country in which Paragon or its Affiliates have the
right to make, use or sell the Approved Products under the P&G Licenses.
Notwithstanding the foregoing, P&G shall be entitled to assert or prosecute
against Paragon and/or its Affiliates (i) claims related to the P&G Patents or
the Additional P&G Patents in any Approved Country in which Paragon or its
Affiliates do not have the right to make, use or sell the Approved Products
under the P&G Licenses with respect to any Approved Products manufactured, used
or sold after the date of execution of this Settlement Agreement, (ii) claims
related to either the P&G Patents or the Additional P&G Patents in any country
or territory not included within the definition of Approved Countries
(collectively, the "Non-Approved Countries") with respect to any products of
Paragon and/or its Affiliates manufactured, used or sold after the date of
execution of this Settlement Agreement, (iii) claims related to patent rights
acquired by P&G after the date of execution of this Settlement Agreement (other
than the Additional P&G Patents) with respect to any products of Paragon and/or
its Affiliates manufactured, used or sold in any country after the date of
execution of this Settlement Agreement, or (iv) claims related to either the P&G
Patents or the Additional P&G Patents with respect to the manufacture, use or
sale by Paragon and/or its Affiliates in any country after the date of execution
of this Settlement Agreement of a product design other than the Approved
Products unless manufactured, used or sold pursuant to a license from P&G.
6.3. To the extent that (i) Paragon or its Affiliates make, use
or sell any products, including the Approved Products, in any country or
territory in which Paragon or its Affiliates do not have the right to make, use
or sell such products under the
-8-
<PAGE>
P&G Licenses or (ii) Paragon or its Affiliates alter the designs of the Approved
Products after the date hereof such that P&G believes any of the P&G Patents or
the Additional P&G Patents, as the case may be, are infringed, if P&G, at that
time, has licensed the patent(s) in question to other Entities, then P&G shall
make available to Paragon and/or its Affiliates a license (an "MFL License")
on such patent(s) on terms and conditions no less favorable than those P&G
licenses. If there is an unresolved dispute between the Parties regarding
whether a product infringes a P&G Patent or an Additional P&G Patent, any such
dispute shall be handled pursuant to the provisions of Section 8 of this
Settlement Agreement. Notwithstanding the foregoing, (a) this Section 6.3 shall
not apply to licenses (i) given by P&G in connection with litigation settlements
or cross-licenses or (ii) given with respect to patents other than the P&G
Patents and the Additional P&G Patents, the rights to which are acquired by P&G
after the date hereof, (b) P&G shall not be required to make available an MFL
License if the effect of the license would be to allow an Affiliate of Paragon
to make, have made, import, use, offer for sale and/or sell licensed products
without entering into a mutually agreeable settlement agreement with P&G for any
past infringing activity by such Affiliate with respect to the patents to be so
licensed.
6.4. The P&G Licenses shall be personal to Paragon and shall be
nontransferable and nonassignable to third parties without the prior written
consent of P&G, which consent P&G shall not unreasonably withhold or
unreasonably delay. It shall not be unreasonable for P&G to withhold or delay
its consent if the effect of the proposed transfer or assignment would be to
allow a transferee or assignee to obtain the prospective right to make, import,
use, offer for sale or sell Licensed Products without entering into a mutually
agreeable settlement agreement for any past infringing activity by the
transferee or assignee. In addition, subject to Section 6.3 hereof, the P&G
Licenses shall not apply to the manufacture, import, use or sale of Licensed
Products by any other business entity acquired by Paragon, by which Paragon is
acquired, merged with Paragon, consolidated with Paragon, partnered with Paragon
or in any other business arrangement with Paragon after the effective date of
this Settlement Agreement without the prior written consent of P&G, which
consent P&G shall not unreasonably withhold or unreasonably delay. It shall not
be unreasonable for P&G to withhold or delay its consent if the effect of the
proposed transaction would be to allow an acquiring, merging or consolidating
entity or partner to obtain the prospective right to make, import, use, offer
for sale or sell Licensed Products in the United States without entering into a
mutually agreeable settlement agreement with P&G for any past infringing
activity by the acquiring, merging or consolidating entity or partner with
respect to the patents included in the definition of "Licensed Products."
6.5. If Paragon so elects in writing, Paragon and P&G shall
arbitrate the issue of whether any of Paragon's products
-9-
<PAGE>
infringe a valid claim of U.S. Patent No. 4,963,140 (the "Robertson Patent")
and/or U.S. Patent No. 4,681,578 (the "Anderson Patent"). The arbitration(s)
shall be binding and conducted before a panel of three arbitrators, one of which
shall be selected by each of Paragon and P&G and the third of which shall be
selected by the other two arbitrators. The arbitration(s) shall be conducted
further pursuant to other terms to be agreed upon by the Parties. If the
arbitrators find that one or more Paragon products infringe a valid claim of
either the Robertson Patent and/or the Anderson Patent, as the case may be,
then Paragon shall continue to pay royalties to P&G pursuant to the respective
license(s) for such patent(s) for any infringing products manufactured and sold
after the execution of this Settlement Agreement. If Paragon prevails in the
arbitration(s), it shall not owe royalties under either the Robertson Patent
and/or the Anderson Patent, as the case may be, for the products involved in the
arbitration(s) manufactured or sold after the arbitration decision. Any P&G
Claims under the Robertson Patent or Anderson Patent relating to products made
or sold prior to the execution of this Settlement Agreement are compromised
as part of the P&G Allowed Claims under Section 2.1 hereof.
7. ASSUMPTION OF THE VAN TILBERG LICENSE. As part of the procedures
seeking the entry of the Bankruptcy Court Approval Order, Paragon shall seek the
Bankruptcy Court's approval of Paragon's assumption, under section 365 of the
Bankruptcy Code, of the non-exclusive License Agreement, dated April 23, 1997,
between Paragon and P&G (the "Van Tilberg License") relating to United States
Patent Nos. 4,589,876 (including its Reexamination Certificate B1 4,589,576) and
5,267,992 and Canadian Patent No. 1,232,702 owned by P&G. Paragon and P&G agree
that, as of June 30, 1998, the date of the most recent annual accounting for the
fiscal year ended December 28, 1997, in accordance with the terms of the Van
Tilberg License, Paragon is owed a credit under the Van Tilberg License in an
amount equal to $173,005.82 (the "Credit") and that there are no defaults under
the Van Tilberg License that are required to be cured pursuant to section 365 of
the Bankruptcy Code as of such date. Paragon shall be entitled to apply the
Credit until exhausted against royalties becoming due under the Van Tilberg
License from and after December 29, 1997, in accordance with the terms of the
Van Tilberg License.
8. FUTURE PATENT DISPUTES. In order to potentially avoid the expense
and delay of patent litigation going forward, both for themselves and for their
Affiliates, Paragon and P&G agree that before any patent litigation is commenced
(including declaratory judgment actions), any patent dispute that may arise
following the execution of this Settlement Agreement will be subject to good
faith negotiations, including escalation to a high-ranking business executive of
each of Paragon and P&G or their respective Affiliate, as the case may be, for
resolution; if the dispute remains unresolved after such good faith negotiation
and escalation, then the parties will discuss in good faith whether some form of
alternative dispute resolution ("ADR")
-10-
<PAGE>
mechanism could be employed. If, after such good faith discussions, either Party
rejects ADR in writing, litigation may be commenced. Notwithstanding the
foregoing, none of the statements made or actions taken by any Party during good
faith negotiations or discussions of ADR may be the basis of a declaratory
judgment action.
9. CLAIMS ASSERTED BY P&G. P&G represents and warrants that (a) it
has not filed any proofs of claim in the Chapter 11 Case other than the
Bankruptcy Claim, and (b) it has not acquired or transferred or entered into any
agreement to acquire or transfer any claims asserted against Paragon in the
Chapter 11 Case. P&G represents, warrants and covenants that it (x) has not and
will not amend, modify or supplement, or seek to amend, modify or supplement
the Bankruptcy Claim, except in a manner consistent with the terms of this
Settlement Agreement and (y) shall not acquire any claims asserted against
Paragon in the Chapter 11 Case without Paragon's prior written consent.
Notwithstanding the foregoing, nothing stated in this Settlement Agreement (i)
shall restrict P&G's rights to assert Administrative Expense Claims that (1) P&G
could not have, with the exercise of reasonable due diligence, discovered prior
to the date of execution of this Settlement Agreement or (2) arise after the
date of execution of this Settlement Agreement, or (ii) shall in any way limit,
or be construed to limit, the legal effect of any Administrative Expense Claims
bar date to be established in the Chapter 11 Case, or any discharge granted to
Paragon pursuant to section 1141 of the Bankruptcy Code.
10. RELEASES.
10.1. Contemporaneously with the execution of this Settlement
Agreement, Paragon shall execute and hold in escrow the Paragon Release. Paragon
shall release and deliver to P&G the Paragon Release as soon as reasonably
practicable (but in no event later than five (5) Business Days) after the
Bankruptcy Court Approval Order becomes a Final Order.
10.2. Contemporaneously with the execution of this Settlement
Agreement, P&G shall execute and hold in escrow the P&G Release. P&G shall
release and deliver to Paragon the P&G Release as soon as reasonably practicable
(but in no event later than five (5) Business Days) after the Bankruptcy Court
Approval Order becomes a Final Order.
11. RESTRICTIONS ON TRANSFER OF P&G ALLOWED CLAIMS. P&G shall not
sell or otherwise transfer all or any portion of the Bankruptcy Claim or the P&G
Allowed Claims for a period of ninety (90) days following the filing of the
motion to obtain the Bankruptcy Court Approval Order. Following such ninety (90)
day period, P&G shall not sell or otherwise transfer all or any portion of the
Bankruptcy Claim or the P&G Allowed Claims to any Entity or Entities unless such
Entity or Entities (i) agree(s) to be bound to the terms and conditions of this
Settlement
-11-
<PAGE>
Agreement, and (ii) sign(s) an agreement that specifically provides that Paragon
is an intended third party beneficiary of such Entity(ies)' agreement to be so
bound to, and subject to the enforcement of, the terms and conditions of this
Settlement Agreement. Notwithstanding any assignment or transfer by P&G of all
or any portion of the Bankruptcy Claim or the P&G Allowed Claims in accordance
with the terms hereof, P&G shall continue to remain bound by each of the
provisions of this Settlement Agreement, including, but not limited to, P&G's
obligations to execute, deliver and perform its obligations under each of the
Ancillary Agreements. In the event that P&G sells or otherwise transfers all or
any portion of the Bankruptcy Claim or the P&G Allowed Claims, and
notwithstanding any provisions contained herein or in the P&G Licenses to the
contrary, the P&G Licenses shall remain in full force and effect notwithstanding
the lack of entry of the Bankruptcy Court Approval Order on or before July 31,
1999, or the reversal or modification of such order on appeal.
12. EXCLUSIVITY AND PLAN CONFIRMATION.
12.1. If Paragon complies with its obligations under this
Settlement Agreement, P&G shall not oppose any requests by Paragon for
extensions of its exclusive periods to file a plan of reorganization and to
solicit acceptances thereto (collectively, the "Exclusive Periods") under
section 1121 of the Bankruptcy Code through and including May 31, 1999 and July
31, 1999, respectively, as long as it appears reasonably probable that the
Effective Date can occur on or before July 31, 1999.
12.2. Notwithstanding the provisions of section 12.1 hereof, P&G
shall have the right to object to (a) any motion filed by Paragon seeking an
extension of the Exclusive Periods if Paragon is not diligently pursuing final
approval of this Settlement Agreement (including its obligations under Section
22 of this Settlement Agreement), or (b) confirmation of the Plan if the P&G
Allowed Claims are not treated in accordance with the terms and conditions of
this Settlement Agreement or the Plan does not otherwise comply with section
1129 of the Bankruptcy Code except to the extent such compliance has been waived
by P&G with respect to the payment of interest under Section 2.3 of this
Settlement Agreement.
13. AMENDMENT. This Settlement Agreement may not be amended except by
an instrument in writing signed by both Parties hereto after prior written
notice to counsel to the Creditors' Committee and, if such amendment constitutes
a material modification of this Settlement Agreement, approval of the Bankruptcy
Court if the Effective Date has not yet occurred.
14. NOTICES. Any notices or other communications hereunder or in
connection herewith shall be in writing and shall be deemed to have been duly
given when delivered in person, by facsimile
-12-
<PAGE>
transmission or by registered or certified mail (postage prepaid, return receipt
requested) addressed, as follows:
If to Paragon, to:
Paragon Trade Brands, Inc.
180 Technology Parkway
Norcross, Georgia 30092
Telephone: 678-969-5000
Facsimile: 678-969-4959
Attention: Chairman of the Board
Attention: General Counsel
with a copy to:
Willkie Farr & Gallagher
787 Seventh Avenue
New York, New York 10019-6099
Telephone: 212-728-8000
Facsimile: 212-728-8111
Attention: Myron Trepper, Esq.
Cravath Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, New York 10019
Telephone: 212-474-1000
Facsimile: 212-474-3700
Attention: Richard W. Clary, Esq.
Alston & Bird LLP
One Atlantic Center
1201 West Peachtree Street
Atlanta, Georgia 30309
Telephone: 404-881-7000
Facsimile: 404-881-7777
Attention: Neal Batson, Esq.
O'Melveny & Myers LLP
Citicorp Center
153 East 53rd Street
New York, New York 10022
Telephone: 212-326-2000
Facsimile: 212-326-2061
Attention: Joel B. Zweibel, Esq.
If to P&G, to:
The Procter and Gamble Company
6090 Center Hill Avenue
Cincinnati, Ohio 45224
Telephone: 513-634-5142
-13-
<PAGE>
Facsimile: 513-634-1927
Attention: Patrick D. Lane
with a copy to:
Jones, Day, Reavis & Pogue
North Point
901 Lakeside Avenue
Cleveland, Ohio 44114
Telephone: 216-586-3939
Facsimile: 216-579-0212
Attention: David G. Heiman, Esq.
O'Melveny & Myers LLP
Citicorp Center
153 East 53rd Street
New York, New York 10022
Telephone: 212-326-2000
Facsimile: 212-326-2061
Attention: Joel B. Zweibel, Esq.
or such other address as shall be furnished in writing pursuant to these notice
provisions by any Party. A notice of change of address shall not be deemed to
have been given until received by the addressee.
15. EFFECT ON LITIGATION. Neither this Settlement Agreement, the
Ancillary Agreements, nor any of the terms hereof or thereof, nor any
negotiations, documents, pleadings, proceedings or public reports in respect of
any of the foregoing, shall constitute or be construed as or be deemed to be
evidence of an admission on the part of either Paragon or P&G of any liability
or wrong doing whatsoever, or of the truth or untruth of any of the claims made
by either Paragon or P&G in their disputes or of the merit or lack of merit of
any of the defenses thereto; nor shall this Settlement Agreement (including the
Ancillary Agreements), or any of the terms hereof, or any negotiations,
documents, pleadings, proceedings or public reports in respect of any of the
foregoing, be offered or received in evidence or used or referred to in any
proceeding against either Paragon or P&G except with respect to (i) effectuation
and enforcement of this Settlement Agreement or the Ancillary Agreements and the
discontinuance of the Appeal or the Contempt Motion, or (ii) with respect to
proceedings in the Chapter 11 Case to authorize and approve this Settlement
Agreement and the execution and delivery hereof, and to confirm the Plan.
16. HEADINGS. The descriptive headings of the several sections of
this Settlement Agreement are inserted for convenience of reference only and do
not constitute a part of this Settlement Agreement, nor in any way affect the
interpretation of any provisions hereof.
-14-
<PAGE>
17. APPLICABLE LAW. This Settlement Agreement shall be governed in
all respects, including validity, interpretation and effect, by the Bankruptcy
Code and the laws of the State of New York, without giving effect to the
principles of conflicts of law thereof.
18. COUNTERPARTS. This Settlement Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
19. ENTIRE SETTLEMENT. This Settlement Agreement (including the other
documents referred to herein) (a) constitutes the entire settlement, and
supersedes all other prior agreements and understandings, both written and oral,
between the parties with respect to the subject matter hereof, and (b) except as
otherwise expressly provided herein, is not intended to confer upon any other
person any rights or remedies hereunder.
20. RULES OF CONSTRUCTION.
20.1. Any term used in this Settlement Agreement that is not
defined herein, but that is used in the Bankruptcy Code or the Bankruptcy Rules,
shall have the meaning assigned to that term in (and shall be construed in
accordance with the rules of construction under) the Bankruptcy Code or the
Bankruptcy Rules. Without limiting the foregoing, the rules of construction set
forth in section 102 of the Bankruptcy Code shall apply to the Settlement
Agreement, unless superseded herein.
20.2. The words "herein", hereof," "hereto," "hereunder" and
others of similar import refer to the Settlement Agreement as a whole and not to
any particular section, subsection or clause contained in the Settlement
Agreement, unless the context requires otherwise.
20.3. Any reference in this Settlement Agreement to an existing
document or exhibit means such document or exhibit as it may be amended,
modified or supplemented in writing by the Parties.
20.4. Whenever from the context it is appropriate, each term
stated in either the singular or the plural shall include both the singular and
the plural, and each pronoun stated in the masculine, feminine or neuter
includes the masculine, feminine and neuter.
20.5. In computing any period of time prescribed or allowed by
this Settlement Agreement, the provisions of Bankruptcy Rule 9006(a) shall
apply.
21. CONDITIONS. As an express condition precedent to Paragon's
obligations under this Settlement Agreement:
-15-
<PAGE>
21.1. BANKRUPTCY COURT APPROVAL. A Final Order shall have been
entered approving this Settlement Agreement in all respects. In the event the
Bankruptcy Court Approval Order does not become a Final Order, the terms of this
Settlement Agreement shall not be binding on any of the Parties hereto, except
that (a) Section 15 hereof shall remain binding and (b) the P&G Licenses shall
continue to be effective and terminable by P&G in accordance with the terms of
the P&G Licenses.
21.2. EXECUTION OF ANCILLARY AGREEMENTS. Paragon and P&G shall
execute and deliver each of the Ancillary Agreements annexed hereto.
22. AGREEMENT TO COOPERATE. As soon as reasonably practicable after
the date of execution of this Settlement Agreement, Paragon shall take
reasonable good faith steps to promptly obtain the Bankruptcy Court Approval
Order (either through the filing of a motion seeking approval of this Settlement
Agreement, the confirmation of a Plan embodying the terms of the Settlement
Agreement, and/or a combination of the foregoing), and P&G shall take such
steps as reasonably requested by Paragon in good faith to obtain entry of the
Bankruptcy Court Approval Order.
23. REQUISITE AUTHORITY. Each of the undersigned Parties represents
and warrants that, except as affected by the requirements of the Bankruptcy Code
for the approval of this Settlement Agreement, (a) this Settlement Agreement and
all other documents executed or to be executed by such Party in accordance with
this Settlement Agreement are valid and enforceable in accordance with their
terms, (b) such Party has taken all necessary corporate action required to
authorize the execution, performance and delivery of this Settlement Agreement
and the related documents, and (c) upon this Settlement Agreement being approved
by a Final Order of the Bankruptcy Court, it will perform this Settlement
Agreement and consummate all of the transactions contemplated hereby.
24. ANNOUNCEMENTS. All press releases by any Party regarding this
Settlement Agreement shall be approved by both Paragon and P&G prior to the
issuance thereof; provided that either Party may make any public disclosure it
believes in good faith is required by law or regulation (in which case the
disclosing Party shall advise the other Party prior to making such disclosure
and provide such other Party an opportunity to review and comment on the
proposed disclosure). Paragon's filing of a motion with the Bankruptcy Court
seeking approval of this Settlement Agreement shall not be considered a public
announcement requiring P&G's approval for purposes of this Section 24.
25. CONFIDENTIALITY. Nothing contained in this Settlement Agreement
modifies, or is intended to modify, the obligations of P&G or Paragon or their
respective employees, advisors and agents
-16-
<PAGE>
under any confidentiality agreements that such Entities have executed.
26. JURISDICTION. The Bankruptcy Court shall retain exclusive
jurisdiction, and the Parties consent to such exclusive jurisdiction, to hear
and determine any and all matters, claims or disputes arising from or relating
to the interpretation and/or implementation of this Settlement Agreement;
PROVIDED, HOWEVER, that the Bankruptcy Court shall not retain jurisdiction
following the Effective Date to determine matters, claims and disputes
concerning the interpretation and enforcement of the P&G Licenses.
-17-
<PAGE>
IN WITNESS WHEREOF, each of the Parties hereto has caused this
Settlement Agreement to be executed on its behalf by its officers thereunto duly
authorized, all as of the day and year first above written.
PARAGON TRADE BRANDS, INC.
Debtor and Debtor in Possession
By: /S/ BOBBY V. ABRAHAM
----------------------------
Name: B. V. Abraham
Title: Chairman and Chief
Executive Officer
THE PROCTER & GAMBLE COMPANY
By: /S/ MARK D. KETCHUM
-----------------------------
Name: Mark D. Ketchum
Title: President-Global Baby Care
U.S. LICENSE AGREEMENT
This Agreement, effective as of the date of execution by both parties,
is by and between THE PROCTER & GAMBLE COMPANY, an Ohio Corporation having a
principal place of business at One Procter & Gamble Plaza, Cincinnati, Ohio
45202, (hereinafter referred to as "P&G") and PARAGON TRADE BRANDS, INC., a
Delaware Corporation having a principal place of business at 180 Technology
Parkway, Norcross, Georgia 30092 (hereinafter referred to as "Paragon"). P&G and
Paragon will be jointly referred to as the "parties".
WHEREAS, P&G is the owner of U.S. Patent 4,695,278 issued to Lawson on
September 22, 1987 relating to an absorbent article having dual cuffs;
WHEREAS, P&G owns patents corresponding to U.S. 4,695,278 in a number
of other countries;
WHEREAS, Paragon is aware that the presently extant claims of U.S.
Patent 4,695,278 to Lawson are 3,8,9,13,15,17,21,25,27 and 28.
WHEREAS, P&G is the owner of U.S. Patent 4,795,454 issued to Dragoo on
January 3, 1989 relating to an absorbent article having dual leakage resistant
cuffs;
WHEREAS, P&G owns patents corresponding to U.S. Patent 4,795,454 in a
number of other countries;
<PAGE>
2
WHEREAS, P&G is the owner of U.S. Patent Re. 34,920 issued to Aziz
et al. on April 25, 1995 relating to a disposable absorbent article having
elasticized flaps provided with leakage resistant portions;
WHEREAS, P&G owns patents corresponding to U.S. Patent Re. 34,920 in a
number of other countries;
WHEREAS, P&G is the owner of U.S. Patent 5,085,654 issued to Buell on
February 4, 1992 relating to a disposable absorbent article having breathable
leg cuffs;
WHEREAS, P&G owns patents corresponding to U.S. Patent 5,085,654 in
a number of other countries;
WHEREAS, Paragon makes, uses, offers for sale and sells integral
disposable infant diapers having barrier cuffs throughout the United States;
WHEREAS, P&G believes that the diapers made and sold by Paragon fall
within the scope of one or more of the extant claims of U.S. Patent 4,695,278
to Lawson, U.S. Patent 4,795,454 to Dragoo, U.S. Patent Re. 34,920 to Aziz
et al. and U.S. Patent 5,085,654 to Buell;
WHEREAS, the United States District Court for the District of Delaware
has held that certain diapers made and sold by Paragon fall within the scope of
one or more of the extant claims of U.S. Patent 4,695,278 to Lawson, and U.S.
Patent 4,795,454 to Dragoo; and
<PAGE>
3
WHEREAS, Paragon desires to obtain from P&G and P&G is willing to grant
to Paragon a royalty bearing, non-exclusive right to make, to have made for
Paragon with the prior written consent of P&G, to use, to offer for sale and to
sell in the United States integral disposable absorbent articles which are
within the scope of one or more of the extant claims of U.S. Patent 4,695,278 to
Lawson, U.S. Patent 4,795,454 to Dragoo, U.S. Patent Re. 34,920 to Aziz et al.
and U.S. Patent 5,085,654 to Buell;
NOW THEREFORE, in consideration of the promises, mutual covenants, and
agreements contained herein, the parties agree as follows:
DEFINITIONS
"Licensed Product" as used herein, shall mean an integral disposable absorbent
article comprising an infant diaper, an adult diaper, or a training pant falling
within the scope of one or more, valid and enforceable claims of U.S. Patent
4,695,278 to Lawson, U.S. Patent 4,795,454 to Dragoo, U.S. Patent Re. 34,920 to
Aziz et al., or U.S. Patent 5,085,654 to Buell, including any continuations,
continuations-in-part, divisionals, reexaminations, reissues or extensions
thereof.
"Training Pant", as used herein, shall mean a disposable absorbent pant marketed
for use in transitioning children from diapers to underwear.
"Net Sales Price", as used herein, shall mean the revenue received by Paragon
from the sale of Licensed Products to independent third parties in the United
States less the following amounts: (i) discounts, including cash discounts, or
rebates actually allowed or granted, (ii) credits or
<PAGE>
4
allowances actually granted upon claims or returns regardless of the party
requesting the return, (iii) freight charges paid for delivery, (iv) revenue for
defective articles sold exclusively as scrap, and (v) taxes or other
governmental charges levied on or measured by the invoiced amount whether
absorbed by the billing or the billed party.
"Settlement Agreement", as used herein, shall mean the Settlement Agreement
entered into between Paragon and P&G concurrently with this License Agreement.
REPRESENTATIONS AND WARRANTIES
With the exception of non-exclusive license rights granted to others, P&G
represents and warrants that: 1) it is the owner of all right, title and
interest in and to U.S. Patent 4,695,278 to Lawson, U.S. Patent 4,795,454 to
Dragoo, U.S. Patent Re. 34,920 to Aziz et al., and U.S. Patent 5,085,654 to
Buell; and 2) it has the right to enter this Agreement without breaching any
other agreement or obligation to a third party.
Paragon represents and warrants that it is an independent entity and that it has
the right to enter into this Agreement without breaching any other agreement or
obligation to a third party.
LICENSE GRANT
1. Upon execution of this License Agreement by both parties, and in
consideration of Paragon's agreement to pay prospective running royalties on
Licensed Products in accordance with Paragraph (2) below, P&G agrees to
grant and hereby does grant to Paragon, as of January 7, 1999, a
non-exclusive license to make, to have made for Paragon with the prior
written
<PAGE>
5
consent of P&G, to use, to offer for sale and to sell in the United States,
without the right to grant sublicenses, Licensed Products.
2. As consideration for the prospective license rights herein granted by P&G,
Paragon agrees that it will, commencing upon January 7, 1999, begin to pay
to P&G a running royalty in accordance with each applicable provision of the
following schedule:
(A) For a restricted, non-exclusive license in the United States
under P&G's U.S. Patent 4,695,278 to Lawson to make, to have made
for Paragon with the prior written consent of P&G, to use, to
offer for sale and to sell, without the right to grant
sublicenses, Licensed Products restricted to the configuration
and characteristics specifically depicted in attached Drawing No.
105674-2 identified as Appendix No. 1 -- One Percent (1.00%) of
the Net Sales Price of Licensed Products;
(B) For an unrestricted, non-exclusive license in the United States
under P&G's U.S. Patent 4,695,278 to Lawson to make, to have made
for Paragon with the prior written consent of P&G, to use, to
offer for sale and to sell, without the right to grant
sublicenses, Licensed Products which fall within the scope of one
or more valid and enforceable claims of U.S. Patent 4,695,278 to
Lawson, other than those exhibiting the configurations and
characteristics specifically depicted in attached Drawing No.
105674-2 identified as Appendix No. 1 -- One and One Quarter
Percent (1.25%) of the Net Sales Price of Licensed Products;
<PAGE>
6
(C) For an unrestricted, non-exclusive license in the United States
to make, to have made for Paragon with the prior written consent
of P&G, to use, to offer for sale and to sell, without the right
to grant sublicenses, Licensed Products which are within the
scope of the license granted in section (B) above, but which also
fall within the scope of one or more valid and enforceable claims
of U.S. Patent 4,795,454 to Dragoo -- Two percent (2.00%) of the
Net Sales Price of Licensed Products;
(D) For an unrestricted, non-exclusive license in the United States
under P&G's U.S. Patent Re. 34,920 to Aziz et al. to make, to
have made for Paragon with the prior written consent of P&G, to
use, to offer for sale and to sell, without the right to grant
sublicenses, Licensed Products:
(i) No additional royalty for Licensed Products for which
Paragon has paid a royalty to P&G pursuant to Section (A),
(B) or (C) above, for the period in question; or
(ii) Three Eighths of One Percent (0.375%) of the Net Sales
Price of Licensed Products which Licensed Products are
within the scope of one or more valid and enforceable
claims of the aforementioned Aziz et al. Patent, U.S.
Patent Re. 34,920, and for which Paragon has paid no
royalty to P&G under Section (A), (B) or (C), above, for
the period in question.
<PAGE>
7
(E) For an unrestricted, non-exclusive license in the United States
under P&G's U.S. Patent 5,085,654 to Buell, to make, to have made
for Paragon with the prior written consent of P&G, to use, to
offer for sale and to sell, without the right to grant
sublicenses, Licensed Products:
(i) No additional royalty for Licensed Products for which
Paragon has paid a royalty to P&G pursuant to Section (A),
(B) or (C) above, for the period in question; or
(ii) Three Eighths of One Percent (0.375%) of the Net Sales
Price of Licensed Products for Licensed Products which are
within the scope of one or more valid and enforceable
claims of the aforementioned Buell Patent, U.S. Patent
5,085,654, and for which Paragon has paid no royalty to
P&G under Section (A), (B) or (C) above, for the period in
question.
The parties agree that non-limiting examples of Licensed Products falling
within subsection (C) are Paragon's Ultra products sold prior to July 6,
1998 (a sample of which is attached hereto as Appendix 2). In addition, it
is Paragon's intention to transition from its current product design with
a unitary cuff design, which it began manufacturing for sale on or about
July 6, 1998 (a sample of which is attached hereto as Appendix 3), to the
Ultra product design as described above. The parties, therefore, agree
that Paragon will pay to P&G a royalty of two percent (2%) of the Net Sales
Price for sales of the current Paragon product line with a unitary cuff
design from January 7, 1999 until the transition to
<PAGE>
8
the Ultra product design is complete and Paragon no longer sells such
unitary cuff design product. Paragon agrees to notify P&G in writing within
ten (10) days if it changes any of its product lines in such a way that it
no longer intends to make running royalty payments pursuant to subsections
(A), (B) or (C) hereof.
3. The license rights granted in Paragraph (1) under U.S. Patent 4,695,278
to Lawson shall automatically expire on the date of expiration of said
patent, including any continuations, continuations-in-part, divisionals,
reexaminations, reissues or extensions thereof. The license rights granted
in Paragraph (1) under U.S. Patent 4,795,454 to Dragoo shall automatically
expire on the date of expiration of said patent, including any
continuations, continuations-in-part, divisionals, reexaminations, reissues
or extensions thereof. The license rights granted in Paragraph (1) under
U.S. Patent Re. 34,920 to Aziz et al. shall automatically expire on the date
of expiration of said patent, including any continuations,
continuations-in-part, divisionals, reexaminations, reissues or extensions
thereof. The license rights granted in Paragraph (1) under U.S. Patent
5,085,654 to Buell shall automatically expire on the date of expiration of
said patent, including any continuations, continuations-in-part,
divisionals, reexaminations, reissues or extensions thereof. Should any
patent licensed hereunder be held to have lapsed for the failure to pay
maintenance fees, royalties for said patent shall not be due for the period
of any such lapse. However, should any such lapsed patent subsequently be
considered by the U.S. Patent and Trademark Office as not having expired
by its acceptance of delayed payment of the maintenance fee, the license
rights granted under said patent shall automatically revive and royalties
shall again accrue beginning on the date that the term of the patent has
been maintained as a result of the acceptance of a payment of the
maintenance fee by the U.S.
<PAGE>
9
Patent and Trademark Office. P&G agrees to provide written notice to
Paragon of the lapse of any such patent, and if applicable, the date that
the patent has been maintained as a result of the acceptance by the U.S.
Patent and Trademark Office of a delayed payment of the maintenance fee.
4. Within thirty (30) days of June 28, 1999, Paragon shall provide P&G with an
initial statement reporting Paragon's Net Sales Price of Licensed Products
covered by this License Agreement for the period beginning on January 7,
1999 and ending on June 27, 1999 and be accompanied by the appropriate
royalty payment. On an ongoing basis, the Paragon fiscal year ends on the
last Sunday of December. Therefore, after making said initial report,
Paragon shall, within 30 days after the end of each subsequent Paragon
fiscal year, commencing on December 26, 1999, provide P&G with an annual
statement reporting Paragon's Net Sales Price of Licensed Products covered
by this License Agreement for the preceding one year period. The parties
recognize that the report and payment for the 1999 fiscal year will cover
only the six month period commencing on June 28, 1999 and ending on December
26, 1999 in light of the previous initial report and payment. Each report
shall specify the Net Sales Price of Licensed Products attributable on an
individual basis to each of the categories (A), (B), (C), (D)(i) and (ii)
and (E)(i) and (ii) set forth in Paragraph (2) of this License Agreement.
Each such report is due within thirty (30) days of the close of the fiscal
year for which the report is made, and shall be accompanied by the royalty
payment owed to P&G by Paragon.
Each such report shall be treated as confidential and proprietary
information of Paragon and shall only be used for the purposes set forth
herein. The report shall only be shared within P&G with such persons at P&G
who need to know such information for the
<PAGE>
10
purposes set forth herein. Each such report may be shared with P&G's outside
counsel or auditors who need to know such information for the purpose of
verifying such report.
5. Once each year, at P&G's election and expense, Paragon's independent
public accountant shall certify to P&G that the annual report for the
previous period or year is true, complete and that royalties have been paid
for Licensed Products sold during the previous year. Paragon shall keep
correct and complete records containing all information required for
computation and verification of the amounts to be paid hereunder for a
period of at least three (3) years after making each such report. Upon
reasonable notice, during regular business hours, independent "Big Six"
public accountants selected by P&G, and paid for by P&G in the event the
Paragon payment being verified proves accurate to within two percent
(2.00%), may make such examinations of Paragon's records, not more
frequently than once a year, as P&G deems necessary to verify such reports
and payments provided for hereunder. Such examination shall occur at
such location as designated by Paragon, and such verification shall only
state the amount of payments due in each of categories (A), (B), (C), (D)(i)
and (ii) and (E)(i) and (ii) of Paragraph (2) of this License Agreement.
If the Paragon payment does not prove accurate to within two percent
(2.00%), royalties being underpaid, then Paragon shall pay for such
independent public accountants.
6. If Paragon shall be in default in making any payments hereunder at the times
and in the manner herein provided or in complying with the financial
obligations it assumed pursuant to the concurrently executed Settlement
Agreement with P&G, P&G may give written notice to Paragon specifying the
particulars of such default, and in the event Paragon does
<PAGE>
11
not fully remedy such default within thirty (30) days after such notice,
P&G may at its option, terminate this License Agreement by giving ten
(10) days prior written notice to Paragon to that effect. In addition, P&G
may proceed to enforce the defaulted obligation of Paragon by any legally
available means. No waiver on the part of P&G in respect to a default by
Paragon shall be construed as a waiver of P&G's right to proceed under this
Paragraph with respect to subsequent defaults.
7. Neither expiration of this License Agreement in accordance with its
provisions nor termination of this License Agreement shall relieve Paragon
of its obligations for payment of unpaid royalties under Paragraph (2)
or for enforcement of any other obligation or liability accrued hereunder
prior to the effective date of such expiration or termination.
8. The failure of either party to strictly enforce this License Agreement, or
to insist upon the strict compliance with its terms shall not at any time be
considered a waiver or condonation by such party of the default or failure
by the other party to strictly perform the covenants, conditions and
agreements on its part to be performed.
9. Paragon agrees, when its existing supply of packaging has been exhausted, to
mark the packages of its Licensed Products to be sold within the United
States with the following statement: "Licensed under one or more of the
following U.S. Patents (with appropriate patent numbers filled in per
Paragraph (2))", and if a reexamination certificate or a reissue of any
such patent occurs, to place on its packages appropriate statements
relating to that reexamination certificate and/or that reissue patent. There
shall be no reference to "The
<PAGE>
12
Procter & Gamble Company", "Procter & Gamble", "P&G", any variation
or affiliate thereof, or any trademark or tradename owned or controlled by
P&G on the packaging.
10. No patent rights outside the United States are granted by P&G in this
License Agreement. However, P&G agrees that it will, upon request by
Paragon, negotiate in good faith in an attempt to establish mutually
acceptable terms and conditions for Paragon to obtain non-exclusive royalty
bearing license rights under P&G's foreign patents corresponding to the U.S.
Patents licensed herein on a case by case basis. The parties recognize that
the terms and conditions, including the royalty rates, for said foreign
license rights may not be the same as those herein set forth nor the same
with respect to one another.
11. Should U.S. Patent No. 4,695,278 to Lawson expire or all extant claims
covering Licensed Products be held invalid or unenforceable in a decision
by a court of competent jurisdiction from which no appeal can or has been
taken, each provision of Paragraph (2) shall remain valid and enforceable
with a royalty rate reduction of One Percent for Licensed Products in
category (A) and One and One Quarter Percent (1.25%) for Licensed Products
in category (B) or (C). Should U.S. Patent No. 4,795,454 to Dragoo expire
or all claims covering Licensed Products be held invalid or unenforceable in
a decision by a court of competent jurisdiction from which no appeal can or
has been taken, each provision of Paragraph (2) shall remain valid and
enforceable with a royalty rate reduction for Licensed Products in category
(C) of Three Quarters of One Percent (.75%). Should U.S. Patent Re. 34,920
to Aziz et al. expire or all claims covering Licensed Products be held
invalid or unenforceable in a decision by a court of competent jurisdiction
from which no appeal can or has been taken, the royalty rate will be reduced
<PAGE>
13
Three Eighths of One Percent (0.375%) for Licensed Products in category
(D)(ii). Should U.S. Patent 5,085,654 to Buell expire or all claims covering
Licensed Products be held invalid or unenforceable in a decision by a court
of competent jurisdiction from which no appeal can or has been taken, the
royalty rate will be reduced Three Eighths of One Percent (0.375%) for
Licensed Products in category (E)(ii). Should all claims of the patents
covering Licensed Products expire or be held invalid or unenforceable in a
decision by a court of competent jurisdiction from which no appeal can or
has been taken this License Agreement will terminate. Any such decision
shall have no impact upon Paragon's liability to pay any running royalties
accrued prior thereto pursuant to Paragraph (2), nor shall Paragon have any
right to recover any portion of the running royalties already paid to P&G.
Other than as expressly set forth in this License Agreement, P&G makes no
warranties whatsoever with respect to Paragon's manufacture, use, offer for
sale or sale of Licensed Products pursuant to this License Agreement.
12. P&G hereby waives any and all rights to sue (including, but not limited to,
actions to enjoin and/or recover damages from) Paragon for making, having
made for Paragon with the prior written consent of P&G, using, offering
for sale, and/or selling Licensed Products in the United States, provided:
(1) this License Agreement has not been terminated by either party; (2)
Paragon is in full compliance with all material terms of the concurrently
executed Settlement Agreement with P&G and is current in meeting its
obligation to pay the running royalties provided in Paragraph (2) hereof;
and (3) Paragon is otherwise in full compliance with the material terms
of this License Agreement.
<PAGE>
14
13. Notices relating to this Agreement shall be in writing and shall be
considered served when deposited as certified or registered U.S. mail,
return receipt requested, in a sealed envelope with sufficient postage
affixed, addressed as follows:
P&G: Attention: Vice President & General Counsel - Patents
The Procter & Gamble Company
Winton Hill Technical Center
6090 Center Hill Avenue
Cincinnati, Ohio 45224
Paragon: Attention: Vice President & General Counsel
Paragon Trade Brands, Inc.
180 Technology Parkway
Norcross, GA 30092
14. The parties agree that this License shall be personal to Paragon and
shall be nontransferable and nonassignable to third parties without the
prior written consent of P&G, which consent P&G agrees not to unreasonably
withhold or unreasonably delay. In this context, the parties agree that it
is not an unreasonable ground for P&G to withhold or delay its consent if
the effect of the proposed transfer or assignment would be to allow a
transferee or assignee to obtain the prospective right to make, import, use,
offer for sale and/or sell Licensed Products in the United States without
entering into a mutually agreeable settlement agreement for any past
infringing activity by the transferee or assignee with respect to the
patents included in the definition of "Licensed Products". In addition,
the parties agree that this License shall not apply to the manufacture,
import, use or sale of Licensed Products by any other business entity
acquired by Paragon, by which Paragon is acquired, merged with Paragon,
consolidated with Paragon, partnered with Paragon, or in any other business
arrangement with Paragon after the effective date of this Agreement without
the prior written consent of P&G, which consent P&G agrees not to
<PAGE>
15
unreasonably withhold or unreasonably delay. In this context, the parties
agree that it is not an unreasonable ground for P&G to withhold or delay
its consent if the effect of the proposed transaction would be to allow
an acquiring, merging or consolidating entity or partner to obtain the
prospective right to make, import, use, offer for sale and/or sell Licensed
Products in the United States without entering into a mutually agreeable
settlement agreement with P&G for any past infringing activity by the
acquiring, merging or consolidating entity or partner with respect to the
patents included in the definition of "Licensed Products".
15. In the event the Settlement Agreement executed concurrently herewith is not
approved by the Bankruptcy Court (as defined in the Settlement Agreement) or
in the event that the order approving the Settlement Agreement does not
become a Final Order by July 31, 1999 (as defined in the Settlement
Agreement), this License Agreement shall be terminable by P&G, at P&G's
option. Termination in such circumstance shall not relieve Paragon of its
obligation to pay royalties accrued hereunder for the period before
termination. P&G agrees to provide Paragon with a three month conversion
period after the date of termination. Royalties, as set forth above, shall
be due on the Licensed Products manufactured and/or sold during the
conversion period and such royalties shall be payable within 30 days of the
end of the conversion period.
16. P&G agrees to give Paragon notice of all future running royalty based
private label or brand manufacturer licenses granted under any of the P&G
U.S. patents herein, and, upon written request, provide Paragon copies
of all such subsequent running royalty based agreements within thirty (30)
days of execution of any such agreements. Paragon shall be
<PAGE>
16
entitled, upon thirty (30) days written request to P&G, to have this License
Agreement brought into conformity with any such subsequent running royalty
based license to any private label or brand manufacturer other than Paragon
in the event P&G grants any license under any of the P&G U.S. patents herein
under terms more favorable than those set forth herein.
17. This Agreement and the Settlement Agreement set forth the entire
understanding of the parties with respect to the subject matter herein set
forth. There are no ancillary understandings or agreements with respect to
the subject matter of this License Agreement.
18. This Agreement may be executed in counterparts. Each part shall constitute
an original.
19. This Agreement shall become effective as of the date of acceptance by the
last party to sign.
FOR: PARAGON TRADE BRANDS, INC. FOR: THE PROCTER & GAMBLE COMPANY
By /S/ B.V. ABRAHAM By /S/ MARK D. KETCHUM
-------------------------------- --------------------------------
Title CHAIRMAN AND CEO Title PRESIDENT - GLOBAL BABY CARE
------------------------------ ------------------------------
Date FEBRUARY 2, 1999 Date FEBRUARY 2, 1999
------------------------------ ------------------------------
CANADIAN LICENSE AGREEMENT
This Agreement, effective as of the date of execution by both parties,
is by and between THE PROCTER & GAMBLE COMPANY, an Ohio Corporation having a
principal place of business at One Procter & Gamble Plaza, Cincinnati, Ohio
45202, (hereinafter referred to as "P&G") and PARAGON TRADE BRANDS, INC., a
Delaware Corporation having a principal place of business at 180 Technology
Parkway, Norcross, Georgia 30092 and its wholly-owned subsidiary, Paragon Trade
Brands (Canada) Inc., a Canadian corporation having a principal place of
business at 1600 Clark Boulevard, Brampton, Ontario, Canada L6T 3V7 (hereinafter
collectively referred to as "Paragon"). P&G and Paragon will be jointly referred
to as the "parties".
WHEREAS, P&G is the owner of Canadian Patent 1,311,879 issued to Lawson
on December 29, 1992 relating to an absorbent article having dual cuffs;
WHEREAS, P&G owns patents corresponding to Canadian Patent 1,311,879
in a number of other countries;
WHEREAS, P&G is the owner of Canadian Patent 1,290,501 issued to Dragoo
on October 15, 1991 relating to an absorbent article having dual leakage
resistant cuffs;
WHEREAS, P&G owns patents corresponding to Canadian Patent 1,290,501
in a number of other countries;
2
<PAGE>
WHEREAS, P&G is the owner of Canadian Patent 1,175,602 issued to Aziz et
al. on October 9, 1984 relating to a disposable absorbent article having
elasticized flaps provided with leakage resistant portions;
WHEREAS, P&G owns patents corresponding to Canadian Patent 1,175,602
in a number of other countries;
WHEREAS, P&G is the owner of Canadian Patent 1,216,702 issued to Buell
on January 20, 1987 relating to a disposable absorbent article having breathable
leg cuffs;
WHEREAS, P&G owns patents corresponding to Canadian Patent 1,216,702
in a number of other countries;
WHEREAS, Paragon makes, uses, offers for sale and sells integral
disposable infant diapers having barrier cuffs throughout Canada;
WHEREAS, P&G believes that the diapers made and sold by Paragon fall
within the scope of one or more of the extant claims of Canadian Patent
1,311,879 to Lawson, Canadian Patent 1,290,501 to Dragoo, Canadian Patent
1,175,602 to Aziz et al. and Canadian Patent 1,216,702 to Buell; and
WHEREAS, Paragon desires to obtain from P&G and P&G is willing to grant
to Paragon a royalty bearing, non-exclusive right to make, to have made for
Paragon with the prior written
3
<PAGE>
consent of P&G, to use, to offer for sale and to sell in Canada integral
disposable absorbent articles which are within the scope of one or more of the
extant claims of Canadian Patent 1,311,879 to Lawson, Canadian Patent 1,290,501
to Dragoo, Canadian Patent 1,175,602 to Aziz et al. and Canadian Patent
1,216,702 to Buell;
NOW THEREFORE, in consideration of the promises, mutual covenants, and
agreements contained herein, the parties agree as follows:
DEFINITIONS
"Licensed Product" as used herein, shall mean an integral disposable absorbent
article comprising an infant diaper, an adult diaper, or a training pant falling
within the scope of one or more extant, valid and enforceable claims of Canadian
Patent 1,311,879 to Lawson, Canadian Patent 1,290,501 to Dragoo, Canadian Patent
1,175,602 to Aziz et al., or Canadian Patent 1,216,702 to Buell, including any
continuations, continuations-in-part, divisionals, reexaminations, reissues or
extensions thereof.
"Training Pant", as used herein, shall mean a disposable absorbent pant marketed
for use in transitioning children from diapers to underwear.
"Net Sales Price", as used herein, shall mean the revenue received by Paragon
from the sale of Licensed Products to independent third parties in the Canada
less the following amounts: (i) discounts, including cash discounts, or rebates
actually allowed or granted, (ii) credits or allowances actually granted upon
claims or returns regardless of the party requesting the return, (iii) freight
charges paid for delivery, (iv) revenue for defective articles sold exclusively
as scrap,
4
<PAGE>
and (v) taxes or other governmental charges levied on or measured by the
invoiced amount whether absorbed by the billing or the billed party.
"Settlement Agreement", as used herein, shall mean the Settlement Agreement
entered into between Paragon and P&G concurrently with this License Agreement.
REPRESENTATIONS AND WARRANTIES
With the exception of non-exclusive license rights granted to others, P&G
represents and warrants that: 1) it is the owner of all right, title and
interest in and to Canadian Patent 1,311,879 to Lawson, Canadian Patent
1,290,501 to Dragoo, Canadian Patent 1,175,602 to Aziz et al., and Canadian
Patent 1,216,702 to Buell; and 2) it has the right to enter this Agreement
without breaching any other agreement or obligation to a third party.
Paragon represents and warrants that it is an independent entity and that it has
the right to enter into this Agreement without breaching any other agreement or
obligation to a third party.
LICENSE GRANT
1. Upon execution of this License Agreement by both parties, and in
consideration of Paragon's agreement to pay prospective running royalties on
Licensed Products in accordance with Paragraph (2), below, P&G agrees to
grant and hereby does grant to Paragon, as of January 7, 1999, a
non-exclusive license to make, to have made for Paragon with the prior
written consent of P&G, to use, to offer for sale and to sell in Canada,
without the right to grant sublicenses, Licensed Products.
5
<PAGE>
2. As consideration for the prospective license rights herein granted by P&G,
Paragon agrees that it will, commencing upon January 7, 1999, begin to pay
to P&G a running royalty in accordance with each applicable provision of the
following schedule:
(A) For a restricted, non-exclusive license in Canada under P&G's
Canadian Patent 1,311,879 to Lawson to make, to have made for
Paragon with the prior written consent of P&G, to use, to offer
for sale and to sell, without the right to grant sublicenses,
Licensed Products restricted to the configuration and
characteristics specifically depicted in attached Drawing No.
105674-2 identified as Appendix No. 1 -- One Percent (1.00%) of
the Net Sales Price of Licensed Products;
(B) For an unrestricted, non-exclusive license in Canada under P&G's
Canadian Patent 1,311,879 to Lawson to make, to have made for
Paragon with the prior written consent of P&G, to use, to offer
for sale and to sell, without the right to grant sublicenses,
Licensed Products which fall within the scope of one or more
valid and enforceable claims of Canadian Patent 1,311,879 to
Lawson, other than those exhibiting the configurations and
characteristics specifically depicted in attached Drawing No.
105674-2 identified as Appendix No. 1 -- One and One Quarter
Percent (1.25%) of the Net Sales Price of Licensed Products;
(C) For an unrestricted, non-exclusive license in Canada to make,
have made for Paragon with the prior written consent of P&G, to
use, to offer for sale and to sell, without the right to grant
sublicenses, Licensed Products which are within the scope of the
license granted in section (B) above, but which also fall within
the
6
<PAGE>
scope of one or more valid and enforceable claims of Canadian
Patent 1,290,501 to Dragoo -- Two percent (2.00%) of the Net
Sales Price of Licensed Products;
(D) For an unrestricted, non-exclusive license in Canada under P&G's
Canadian Patent 1,175,602 to Aziz et al. to make, to have made
for Paragon with the prior written consent of P&G, to use, to
offer for sale and to sell, without the right to grant
sublicenses, Licensed Products:
(i) No additional royalty for Licensed Products for which
Paragon has paid a royalty to P&G pursuant to Section (A),
(B) or (C) above, for the period in question; or
(ii) Three Eighths of One Percent (0.375%) of the Net Sales
Price of Licensed Products which Licensed Products are
within the scope of one or more valid and enforceable
claims of the aforementioned Aziz et al. Patent and for
which Paragon has paid no royalty to P&G under Section
(A), (B) or (C) above, for the period in question.
(E) For an unrestricted, non-exclusive license in Canada under P&G's
Canadian Patent 1,216,702 to Buell, to make, to have made for
Paragon with the prior written consent of P&G, to use, to offer
for sale and to sell, without the right to grant sublicenses,
Licensed Products:
7
<PAGE>
(i) No additional royalty for Licensed Products for which
Paragon has paid a royalty to P&G pursuant to Section (A),
(B) or (C) above, for the period in question; or
(ii) Three Eighths of One Percent (0.375%) of the Net Sales
Price of Licensed Products for Licensed Products which are
within the scope of one or more valid and enforceable
claims of the aforementioned Buell Patent and for which
Paragon has paid no royalty to P&G under Section (A), (B)
or (C), above, for the period in question.
The parties agree that non-limiting examples of Licensed Products falling
within subsection (C) are Paragon's Ultra products sold prior to July 6,
1998 (a sample of which is attached hereto as Appendix 2). In addition,
it is Paragon's intention to transition from its current product design
with a unitary cuff design, which it began manufacturing for sale on or
about July 6, 1998 (a sample of which is attached hereto as Appendix 3), to
the Ultra product design as described above. The parties, therefore, agree
that Paragon will pay to P&G a royalty of two percent (2%) of the Net Sales
Price for sales of the current Paragon product line with a unitary cuff
design from January 7, 1999 until the transition to the Ultra product design
is complete and Paragon no longer sells such unitary cuff design product.
Paragon agrees to notify P&G in writing within ten (10) days if it changes
any of its product lines in such a way that it no longer intends to make
running royalty payments pursuant to subsections (A), (B) or (C) hereof.
8
<PAGE>
3. The license rights granted in Paragraph (1) under Canadian Patent 1,311,879
to Lawson shall automatically expire on the date of expiration of said
patent, including any continuations, continuations-in-part, divisionals,
reexaminations, reissues or extensions thereof. The license rights granted
in Paragraph (1) under Canadian Patent 1,290,501 to Dragoo shall
automatically expire on the date of expiration of said patent, including
any continuations, continuations-in-part, divisionals, reexaminations,
reissues or extensions thereof. The license rights granted in Paragraph
(1) under Canadian Patent 1,175,602 to Aziz et al. shall automatically
expire on the date of expiration of said patent, including any
continuations, continuations-in-part, divisionals, reexaminations, reissues
or extensions thereof. The license rights granted in Paragraph (1) under
Canadian Patent 1,216,702 to Buell shall automatically expire on the date
of expiration of said patent, including any continuations, continuations-
in-part, divisionals, reexaminations, reissues or extensions thereof.
Should any patent licensed hereunder be held to have lapsed for the failure
to pay maintenance fees, royalties for said patent shall not be due for the
period of any such lapse. However, should any such lapsed patent
subsequently be considered as not having expired by the acceptance by the
relevant Canadian Patent Authority of delayed payment of the maintenance
fee, the license rights granted under said patent shall automatically revive
and royalties shall again accrue beginning on the date that the term of
the patent has been maintained as a result of the acceptance by the
relevant Canadian Patent Authority of a payment of the maintenance fee. P&G
agrees to provide written notice to Paragon of the lapse of any such patent,
and if applicable, the date that the patent has been maintained as a result
of the acceptance by the relevant Canadian Patent Authority of a delayed
payment of the maintenance fee.
9
<PAGE>
4. Within thirty (30) days of June 28, 1999, Paragon shall provide P&G with
an initial statement reporting Paragon's Net Sales Price of Licensed
Products covered by this License Agreement for the period beginning on
January 7, 1999 and ending on June 27, 1999 and be accompanied by the
appropriate royalty payment. On an ongoing basis, the Paragon fiscal year
ends on the last Sunday of December. Therefore, after making said initial
report, Paragon shall, within 30 days after the end of each subsequent
Paragon fiscal year, commencing on December 26, 1999, provide P&G with
an annual statement reporting Paragon's Net Sales Price of Licensed Products
covered by this License Agreement for the preceding one year period. The
parties recognize that the report and payment for the 1999 fiscal year
will cover only the six month period commencing on June 28, 1999 and ending
on December 26, 1999 in light of the previous initial report and payment.
Each report shall specify the Net Sales Price of Licensed Products
attributable on an individual basis to each of the categories (A), (B), (C),
(D)(i) and (ii) and (E)(i) and (ii) set forth in Paragraph (2) of this
License Agreement. Each such report is due within thirty (30) days of the
close of the fiscal year for which the report is made, and shall be
accompanied by the royalty payment owed to P&G by Paragon.
Each such report shall be treated as confidential and proprietary
information of Paragon and shall only be used for the purposes set forth
herein. The report shall only be shared within P&G with such persons at P&G
who need to know such information for the purposes set forth herein. Each
such report may be shared with P&G's outside counsel or auditors who need
to know such information for the purpose of verifying such report.
10
<PAGE>
5. Once each year, at P&G's election and expense, Paragon's independent
public accountant shall certify to P&G that the annual report for the
previous period or year is true, complete and that royalties have been paid
for Licensed Products sold during the previous year. Paragon shall keep
correct and complete records containing all information required for
computation and verification of the amounts to be paid hereunder for a
period of at least three (3) years after making each such report. Upon
reasonable notice, during regular business hours, independent "Big Six"
public accountants selected by P&G, and paid for by P&G in the event the
Paragon payment being verified proves accurate to within two percent
(2.00%), may make such examinations of Paragon's records, not more
frequently than once a year, as P&G deems necessary to verify such reports
and payments provided for hereunder. Such examination shall occur at
such location as designated by Paragon, and such verification shall
only state the amount of payments due in each of categories (A), (B), (C),
(D)(i) and (ii) and (E)(i) and (ii) of Paragraph (2) of this License
Agreement. If the Paragon payment does not prove accurate to within two
percent (2.00%), royalties being underpaid, then Paragon shall pay for
such independent public accountants.
6. If Paragon shall be in default in making any payments hereunder at the times
and in the manner herein provided or in complying with the financial
obligations it assumed pursuant to the concurrently executed Settlement
Agreement with P&G, P&G may give written notice to Paragon specifying the
particulars of such default, and in the event Paragon does not fully remedy
such default within thirty (30) days after such notice, P&G may at its
option, terminate this License Agreement by giving ten (10) days prior
written notice to Paragon to that effect. In addition, P&G may proceed to
enforce the defaulted obligation
11
<PAGE>
of Paragon by any legally available means. No waiver on the part of P&G in
respect to a default by Paragon shall be construed as a waiver of P&G's
right to proceed under this Paragraph with respect to subsequent defaults.
7. Neither expiration of this License Agreement in accordance with its
provisions nor termination of this License Agreement shall relieve Paragon
of its obligations for payment of unpaid royalties under Paragraph (2)
or for enforcement of any other obligation or liability accrued hereunder
prior to the effective date of such expiration or termination.
8. The failure of either party to strictly enforce this License Agreement, or
to insist upon the strict compliance with its terms shall not at any time be
considered a waiver or condonation by such party of the default or failure
by the other party to strictly perform the covenants, conditions and
agreements on its part to be performed.
9. Paragon agrees, when its existing supply of packaging has been exhausted, to
mark the packages of its Licensed Products to be sold within Canada with
the following statement: "Licensed under one or more of the following
Canadian Patents (with appropriate patent numbers filled in per Paragraph
(2))", and if a reexamination certificate or a reissue of any such patent
occurs, to place on its packages appropriate statements relating to that
reexamination certificate and/or that reissue patent. There shall be no
reference to "The Procter & Gamble Company", "Procter & Gamble", "P&G",
any variation or affiliate thereof, or any trademark or tradename owned or
controlled by P&G on the packaging.
12
<PAGE>
10. No patent rights outside Canada are granted by P&G in this License
Agreement. However, P&G agrees that it will, upon request by Paragon,
negotiate in good faith in an attempt to establish mutually acceptable terms
and conditions for Paragon to obtain non-exclusive royalty bearing license
rights under P&G's foreign patents corresponding to the Canadian Patents
licensed herein on a case by case basis. The parties recognize that the
terms and conditions, including the royalty rates, for said foreign license
rights may not be the same as those herein set forth nor the same with
respect to one another.
11. Should Canadian Patent No. 1,311,879 to Lawson expire or all extant claims
covering Licensed Products be held invalid or unenforceable in a decision
by a court of competent jurisdiction from which no appeal can or has been
taken, each provision of Paragraph (2) shall remain valid and enforceable
with a royalty rate reduction of One Percent for Licensed Products in
category (A) and One and One Quarter Percent (1.25%) for Licensed Products
in category (B) or (C). Should Canadian Patent 1,290,501 to Dragoo expire
or all claims covering Licensed Products be held invalid or unenforceable in
a decision by a court of competent jurisdiction from which no appeal can or
has been taken, each provision of Paragraph (2) shall remain valid and
enforceable with a royalty rate reduction for Licensed Products in category
(C) of Three Quarters of One Percent (.75%). Should Canadian Patent
1,175,602 to Aziz et al. expire or all claims covering Licensed Products be
held invalid or unenforceable in a decision by a court of competent
jurisdiction from which no appeal can or has been taken, the royalty rate
will be reduced Three Eighths of One Percent (0.375%) for Licensed Products
in category (D)(ii). Should Canadian Patent 1,216,702 to Buell expire or all
claims covering Licensed Products be held invalid or unenforceable in a
decision by a court of competent jurisdiction from which
13
<PAGE>
no appeal can or as been taken, the royalty rate will be reduced Three
Eighths of One Percent (0.375%) for Licensed Products in category (E)(ii).
Should all claims of the patents covering Licensed Products expire or be
held invalid or unenforceable in a decision by a court of competent
jurisdiction from which no appeal can or has been taken this License
Agreement will terminate. Any such decision shall have no impact upon
Paragon's liability to pay any running royalties accrued prior thereto
pursuant to Paragraph (2), nor shall Paragon have any right to recover any
portion of the running royalties already paid to P&G. Other than as
expressly set forth in this License Agreement, P&G makes no warranties
whatsoever with respect to Paragon's manufacture, use, offer for sale or
sale of Licensed Products pursuant to this License Agreement.
12. P&G hereby waives any and all rights to sue (including, but not limited to,
actions to enjoin and/or recover damages from) Paragon for making, having
made for Paragon with the prior written consent of P&G, using, offering
for sale, and/or selling Licensed Products in Canada, provided: (1) this
License Agreement has not been terminated by either party; (2) Paragon is
in full compliance with all material terms of the concurrently executed
Settlement Agreement with P&G and is current in meeting its obligation to
pay the running royalties provided in Paragraph (2) hereof; and (3) Paragon
is otherwise in full compliance with the material terms of this License
Agreement.
13. Notices relating to this Agreement shall be in writing and shall be
considered served when deposited as certified or registered U.S. mail,
return receipt requested, in a sealed envelope with sufficient postage
affixed, addressed as follows:
14
<PAGE>
P&G: Attention: Vice President & General Counsel - Patents
The Procter & Gamble Company
Winton Hill Technical Center
6090 Center Hill Avenue
Cincinnati, Ohio 45224
Paragon: Attention: Vice President & General Counsel
Paragon Trade Brands, Inc.
180 Technology Parkway
Norcross, GA 30092
14. The parties agree that this License shall be personal to Paragon and
shall be nontransferable and nonassignable to third parties without the
prior written consent of P&G, which consent P&G agrees not to unreasonably
withhold or unreasonably delay. In this context, the parties agree that it
is not an unreasonable ground for P&G to withhold or delay its consent if
the effect of the proposed transfer or assignment would be to allow a
transferee or assignee to obtain the prospective right to make, import, use,
offer for sale and/or sell Licensed Products in Canada without entering
into a mutually agreeable settlement agreement for any past infringing
activity by the transferee or assignee with respect to the patents included
in the definition of "Licensed Products". In addition, the parties agree
that this License shall not apply to the manufacture, import, use or sale
of Licensed Products by any other business entity acquired by Paragon, by
which Paragon is acquired, merged with Paragon, consolidated with Paragon,
partnered with Paragon, or in any other business arrangement with Paragon
after the effective date of this Agreement without the prior written consent
of P&G, which consent P&G agrees not to unreasonably withhold or
unreasonably delay. In this context, the parties agree that it is not an
unreasonable ground for P&G to withhold or delay its consent if the effect
of the proposed transaction would be to allow an acquiring, merging or
consolidating entity or partner to obtain the prospective right to make,
import, use, offer for sale and/or sell
15
<PAGE>
Licensed Products in Canada without entering into a mutually agreeable
settlement agreement with P&G for any past infringing activity by the
acquiring, merging or consolidating entity or partner with respect to the
patents included in the definition of "Licensed Products".
15. In the event the Settlement Agreement executed concurrently herewith is not
approved by the Bankruptcy Court (as defined in the Settlement Agreement) or
in the event that the order approving the Settlement Agreement does not
become a Final Order by July 31, 1999 (as defined in the Settlement
Agreement), this License Agreement shall be terminable by P&G, at P&G's
option. Termination in such circumstance shall not relieve Paragon of its
obligation to pay royalties accrued hereunder for the period before
termination. P&G agrees to provide Paragon with a three month conversion
period after the date of termination. Royalties, as set forth above, shall
be due on the Licensed Products manufactured and/or sold during the
conversion period and such royalties shall be payable within 30 days of the
end of the conversion period.
16. P&G agrees to give Paragon notice of all future running royalty based
private label or brand manufacturer licenses granted under any of the P&G
Canadian patents herein, and, upon written request, provide Paragon copies
of all such subsequent running royalty based agreements within thirty
(30) days of execution of any such agreements. Paragon shall be entitled,
upon thirty (30) days written request to P&G, to have this License Agreement
brought into conformity with any such subsequent running royalty based
license to any private label or brand manufacturer other than Paragon in the
event P&G grants any
16
<PAGE>
license under any of the P&G Canadian patents herein under terms more
favorable than those set forth herein.
17. This Agreement and the Settlement Agreement set forth the entire
understanding of the parties with respect to the subject matter herein set
forth. There are no ancillary understandings or agreements with respect
to the subject matter of this License Agreement.
18. This Agreement may be executed in counterparts. Each part shall constitute
an original.
19. This Agreement shall become effective as of the date of acceptance by the
last party to sign.
FOR: PARAGON TRADE BRANDS, INC. FOR: THE PROCTER & GAMBLE COMPANY
By /S/ B.V. ABRAHAM By /S/ MARK D. KETCHUM
-------------------------------- --------------------------------
Title CHAIRMAN AND CEO Title PRESIDENT - GLOBAL BABY CARE
------------------------------ ------------------------------
Date FEBRUARY 2, 1999 Date FEBRUARY 2, 1999
------------------------------ ------------------------------
FOR: PARAGON TRADE BRANDS (CANADA), INC.
By /S/ CHRIS OLIVER
--------------------------------
Title PRESIDENT
------------------------------
Date FEBRUARY 2, 1999
------------------------------
U.S. LICENSE AGREEMENT
This Agreement, effective as of the date of execution by both parties,
is by and between THE PROCTER & GAMBLE COMPANY, an Ohio Corporation having a
principal place of business at One Procter & Gamble Plaza, Cincinnati, Ohio
45202, (hereinafter referred to as "P&G") and PARAGON TRADE BRANDS, INC., a
Delaware Corporation having a principal place of business at 180 Technology
Parkway, Norcross, Georgia 30092 (hereinafter referred to as "Paragon"). P&G and
Paragon will be jointly referred to as the "parties".
WHEREAS, P&G is the owner of U.S. Patent 4,963,140 issued to Robertson
et al. on October 16, 1990 relating to an absorbent article having a mechanical
fastening system with disposal means;
WHEREAS, P&G owns patents corresponding to U.S. 4,963,140 in a number of
other countries;
WHEREAS, P&G is the owner of U.S. Patent 4,681,578 issued to Anderson et
al. on July 21, 1987 relating to an absorbent article having ventilation areas;
WHEREAS, P&G owns patents corresponding to U.S. Patent 4,681,578 in a
number of other countries;
WHEREAS, Paragon makes, uses, offers for sale and sells a Supreme line
of disposable infant diapers having breathable ear panels and a mechanical
fastening system with a nonwoven outer cover;
<PAGE>
2
WHEREAS, P&G believes that the Supreme diapers made and sold by Paragon
fall within the scope of one or more of the claims of U.S. Patent 4,963,140 to
Robertson et al. and U.S. Patent 4,681,578 to Anderson et al.; and
WHEREAS, Paragon desires to obtain from P&G and P&G is willing to grant
to Paragon a royalty bearing, non-exclusive right to make, to have made for
Paragon with the prior written consent of P&G, to use, to offer for sale and to
sell in the United States certain integral disposable absorbent articles with a
mechanical fastening system having a disposal means consisting of a nonwoven
outer cover which are within the scope of one or more of the claims of U.S.
Patent 4,963,140 to Robertson et al. and U.S. Patent 4, 681,578 to Anderson et
al.;
NOW THEREFORE, in consideration of the promises, mutual covenants, and
agreements contained herein, the parties agree as follows:
DEFINITIONS
"Licensed Product" as used herein, shall mean an integral disposable absorbent
article comprising an infant diaper or an adult diaper having a mechanical
fastening system consisting of (i) a closure member of a hook fastening member;
(ii) a landing member of a loop fastening member; and (iii) disposal means
consisting of a nonwoven outer cover having a limited degree of engageability
with the hook fastening member of less than 750 grams as defined by the Test
Method designated "Strength Of Attachment Of Mechanical Fastening Member To
Diaper Backsheet" (attached hereto as Appendix 1) and falling within the scope
of one or more of the valid and enforceable claims 1, 2, 5, 6, 7, 8, 10, 11, 13,
14, 15, 16, 17, 19 and 20 of U.S. Patent 4,963,140
<PAGE>
3
to Robertson et al. and/or any of the claims of U.S. Patent 4,681,578 to
Anderson et al., including any continuations, continuation-in-part, divisionals,
reissues, reexaminations, or extensions thereof.
"Net Sales Price", as used herein, shall mean the revenue received by Paragon
from the sale of Licensed Products to independent third parties in the United
States less the following amounts: (i) discounts, including cash discounts, or
rebates actually allowed or granted, (ii) credits or allowances actually granted
upon claims or returns regardless of the party requesting the return, (iii)
freight charges paid for delivery, (iv) revenue for defective articles sold
exclusively as scrap, and (v) taxes or other governmental charges levied on or
measured by the invoiced amount whether absorbed by the billing or the billed
party.
"Settlement Agreement", as used herein, shall mean the Settlement Agreement
entered into between Paragon and P&G concurrently with this License Agreement.
REPRESENTATIONS AND WARRANTIES
With the exception of non-exclusive license rights granted to others, P&G
represents and warrants that: 1) it is the owner of all right, title and
interest in and to U.S. Patent 4,963,140 to Robertson et al. and U.S. Patent
4,681,578 to Anderson et al. and 2) it has the right to enter this Agreement
without breaching any other agreement or obligation to a third party.
Paragon represents and warrants that it is an independent entity and that it has
the right to enter into this Agreement without breaching any other agreement or
obligation to a third party.
<PAGE>
4
LICENSE GRANT
1. Upon execution of this License Agreement by both parties, and in
consideration of Paragon's agreement to pay prospective running
royalties on Licensed Products in accordance with Paragraph (2) below,
P&G agrees to grant and hereby does grant to Paragon, as of January 7,
1999, a non-exclusive license to make, to have made for Paragon with the
prior written consent of P&G, to use, to offer for sale and to sell in
the United States, without the right to grant sublicenses, Licensed
Products.
2. As consideration for the prospective license rights herein granted by
P&G, Paragon agrees that it will, commencing upon January 7, 1999, begin
to pay to P&G a running royalty in accordance with each applicable
provision of the following schedule:
(A) For a restricted, non-exclusive license in the United States
under P&G's U.S. Patent 4,963,140 to Robertson et al. to make,
to have made for Paragon with the prior written consent of P&G,
to use, to offer for sale and to sell, without the right to grant
sublicenses, Licensed Products which fall within the scope of
one or more valid and enforceable claims 1, 2, 5, 6, 7, 8, 10,
11, 13, 14, 15, 16, 17, 19 and 20 of U.S. Patent 4,963,140 to
Robertson et al. having an engageability between the hook
fastening member and the nonwoven outer cover, as defined by the
Test Method attached hereto, of less than 500 grams - Three
Eighths of One Percent (0.375%) of the Net Sales Price of
Licensed Products;
<PAGE>
5
(B) For a restricted, non-exclusive license in the United States
under P&G's U.S. Patent 4,963,140 to Robertson et al. to make,
to have made for Paragon with the prior written consent of P&G,
to use, to offer for sale and to sell, without the right to grant
sublicenses, Licensed Products which fall within the scope of
one or more valid and enforceable claims 1, 2, 5, 6, 7, 8, 10,
11, 13, 14, 15, 16, 17, 19 and 20 of U.S. Patent 4,963,140 to
Robertson et al. having an engageability between the hook
fastening member and the nonwoven outer cover, as defined by the
Test Method attached hereto, of between 500 grams and 750 grams
-- One Half of One Percent (0.5%) of the Net Sales Price of
Licensed Products;
(C) For an unrestricted, non-exclusive license in the United States
under P&G's U.S. Patent 4,681,578 to Anderson et al. to make, to
have made for Paragon with the prior written consent of P&G, to
use, to offer for sale and to sell, without the right to grant
sublicenses, Licensed Products:
(i) No additional royalty for Licensed Products for which
Paragon has paid a royalty to P&G pursuant to Section (A)
or (B) above, for the period in question; or
(ii) One Tenth of One Percent (0.1%) of the Net Sales Price of
Licensed Products which Licensed Products are within the
scope of one or more valid and enforceable claims of the
aforementioned Anderson et al. Patent and for which
Paragon has paid no royalty to P&G under Section (A) or
(B) above, for the period in question.
<PAGE>
6
Subject to Paragraph 6.5 of the Settlement Agreement, the parties agree
that a non-limiting example of Licensed Products falling within
subsection (A) and (C) is Paragon's Supreme product (a sample of which
is attached hereto as Appendix 2). Paragon agrees to notify P&G in
writing within ten (10) days if it changes any of its products in such a
way that it no longer intends to make running royalty payments pursuant
to subsections (A), (B) or (C) hereof.
3. The license rights granted in Paragraph (1) under U.S. Patent 4,963,140
to Robertson et al. shall automatically expire on the date of expiration
of said patent, including any continuations, continuations-in-part,
divisionals, reexaminations, reissues or extensions thereof. The license
rights granted in Paragraph (1) under U.S. Patent 4,681,578 to Anderson
et al. shall automatically expire on the date of expiration of said
patent, including any continuations, continuations-in-part, divisionals,
reexaminations, reissues or extensions thereof. Should any patent
licensed hereunder be held to have lapsed for the failure to pay
maintenance fees, royalties for said patent shall not be due for the
period of any such lapse. However, should any such lapsed patent
subsequently be considered by the U.S. Patent and Trademark Office as
not having expired by its acceptance of delayed payment of the
maintenance fee, the license rights granted under said patent shall
automatically revive and royalties shall again accrue beginning on the
date that the term of the patent has been maintained as a result of the
acceptance by the U.S. Patent and Trademark Office of a payment of the
maintenance fee. P&G agrees to provide written notice to Paragon of the
lapse of any such patent, and if applicable, the date that the patent
has been maintained as a result of the acceptance by the U.S. Patent and
Trademark Office
<PAGE>
7
of a delayed payment of the maintenance fee. P&G acknowledges that as
of the date hereof, U.S. Patent 4,963,140 to Robertson et al. has
lapsed due to failure to pay maintenance fees, and, therefore, that
royalties under U.S. Patent 4,963,140 to Robertson et al. are not
presently due in accordance with this Paragraph.
4. Within thirty (30) days of June 28, 1999, Paragon shall provide P&G with
an initial statement reporting Paragon's Net Sales Price of Licensed
Products covered by this License Agreement for the period beginning on
January 7, 1999 and ending on June 27, 1999 and be accompanied by the
appropriate royalty payment. On an ongoing basis, the Paragon fiscal
year ends on the last Sunday of December. Therefore, after making said
initial report, Paragon shall, within 30 days after the end of each
subsequent Paragon fiscal year, commencing on December 26, 1999, provide
P&G with an annual statement reporting Paragon's Net Sales Price of
Licensed Products covered by this License Agreement for the preceding
one year period. The parties recognize that the report and payment for
the 1999 fiscal year will cover only the six month period commencing
on June 28, 1999 and ending on December 26, 1999 in light of the
previous initial report and payment. Each report shall specify the
Net Sales Price of Licensed Products attributable on an individual basis
to each of the categories (A), (B) or (C) set forth in Paragraph (2) of
this License Agreement. Each such report is due within thirty (30) days
of the close of the fiscal year for which the report is made, and shall
be accompanied by the royalty payment owed to P&G by Paragon.
Each such report shall be treated as confidential and proprietary
information of Paragon and shall only be used for the purposes set forth
herein. The report shall only be
<PAGE>
8
shared within P&G with such persons at P&G who need to know such
information for the purposes set forth herein. Each such report may be
shared with P&G's outside counsel or auditors who need to know such
information for the purpose of verifying such report.
5. Once each year, at P&G's election and expense, Paragon's independent
public accountant shall certify to P&G that the annual report for the
previous period or year is true, complete and that royalties have been
paid for Licensed Products sold during the previous year. Paragon shall
keep correct and complete records containing all information required
for computation and verification of the amounts to be paid hereunder for
a period of at least three (3) years after making each such report. Upon
reasonable notice, during regular business hours, independent "Big Six"
public accountants selected by P&G, and paid for by P&G in the event the
Paragon payment being verified proves accurate to within two percent
(2.00%), may make such examinations of Paragon's records, not more
frequently than once a year, as P&G deems necessary to verify such
reports and payments provided for hereunder. Such examination shall
occur at such location as designated by Paragon, and such verification
shall only state the amount of payments due in each of categories (A),
(B) or (C) of Paragraph (2) of this License Agreement. If the Paragon
payment does not prove accurate to within two percent (2.00%), royalties
being underpaid, then Paragon shall pay for such independent public
accountants.
6. If Paragon shall be in default in making any payments hereunder at the
times and in the manner herein provided or in complying with the
financial obligations it assumed pursuant to the concurrently executed
Settlement Agreement with P&G, P&G may give written notice to Paragon
specifying the particulars of such default, and in the event Paragon
does
<PAGE>
9
not fully remedy such default within thirty (30) days after such
notice, P&G may at its option, terminate this License Agreement by
giving ten (10) days prior written notice to Paragon to that effect. In
addition, P&G may proceed to enforce the defaulted obligation of Paragon
by any legally available means. No waiver on the part of P&G in respect
to a default by Paragon shall be construed as a waiver of P&G's right
to proceed under this Paragraph with respect to subsequent defaults.
7. Neither expiration of this License Agreement in accordance with its
provisions nor termination of this License Agreement shall relieve
Paragon of its obligations for payment of unpaid royalties under
Paragraph (2) or for enforcement of any other obligation or liability
accrued hereunder prior to the effective date of such expiration or
termination.
8. The failure of either party to strictly enforce this License Agreement,
or to insist upon the strict compliance with its terms shall not at any
time be considered a waiver or condonation by such party of the default
or failure by the other party to strictly perform the covenants,
conditions and agreements on its part to be performed.
9. Paragon agrees, when its existing supply of packaging has been
exhausted, to mark the packages of its Licensed Products to be sold
within the United States with the following statement: "Licensed under
one or more of the following U.S. Patents (with appropriate patent
numbers filled in per Paragraph (2))", and if a reexamination
certificate or a reissue of any such patent occurs, to place on
its packages appropriate statements relating to that reexamination
certificate and/or that reissue patent. There shall be no reference to
"The
<PAGE>
10
Procter & Gamble Company", "Procter & Gamble", "P&G", any variation or
affiliate thereof, or any trademark or tradename owned or controlled by
P&G on the packaging.
10. No patent rights outside the United States are granted by P&G in
this License Agreement. However, P&G agrees that it will, upon request
by Paragon, negotiate in good faith in an attempt to establish mutually
acceptable terms and conditions for Paragon to obtain non-exclusive
royalty bearing license rights under P&G's foreign patents corresponding
to the U.S. Patents licensed herein on a case by case basis. The parties
recognize that the terms and conditions, including the royalty rates,
for said foreign license rights may not be the same as those herein
set forth nor the same with respect to one another.
11. P&G hereby waives any and all rights to sue (including, but not
limited to, actions to enjoin and/or recover damages from) Paragon for
making, having made for Paragon with the prior written consent of P&G,
using, offering for sale, and/or selling Licensed Products in the United
States, provided: (1) this License Agreement has not been terminated
by either party; (2) Paragon is in full compliance with all material
terms of the concurrently executed Settlement Agreement with P&G and
is current in meeting its obligation to pay the running royalties
provided in Paragraph (2) hereof; and (3) Paragon is otherwise in full
compliance with the material terms of this License Agreement.
12. Notices relating to this Agreement shall be in writing and shall be
considered served when deposited as certified or registered U.S. mail,
return receipt requested, in a sealed envelope with sufficient postage
affixed, addressed as follows:
P&G: Attention: Vice President & General Counsel - Patents
The Procter & Gamble Company
<PAGE>
11
Winton Hill Technical Center
6090 Center Hill Avenue
Cincinnati, Ohio 45224
Paragon: Attention: Vice President & General Counsel
Paragon Trade Brands, Inc.
180 Technology Parkway
Norcross, GA 30092
13. The parties agree that this License shall be personal to Paragon
and shall be nontransferable and nonassignable to third parties without
the prior written consent of P&G, which consent P&G agrees not to
unreasonably withhold or unreasonably delay. In this context, the
parties agree that it is not an unreasonable ground for P&G to withhold
or delay its consent if the effect of the proposed transfer or
assignment would be to allow a transferee or assignee to obtain the
prospective right to make, import, use, offer for sale and/or sell
Licensed Products in the United States without entering into a mutually
agreeable settlement agreement for any past infringing activity by
the transferee or assignee with respect to the patents included in the
definition of "Licensed Products". In addition, the parties agree that
this License shall not apply to the manufacture, import, use or sale of
Licensed Products by any other business entity acquired by Paragon, by
which Paragon is acquired, merged with Paragon, consolidated with
Paragon, partnered with Paragon, or in any other business arrangement
with Paragon after the effective date of this Agreement without the
prior written consent of P&G, which consent P&G agrees not to
unreasonably withhold or unreasonably delay. In this context, the
parties agree that it is not an unreasonable ground for P&G to withhold
or delay its consent if the effect of the proposed transaction would
be to allow an acquiring, merging or consolidating entity or partner
to obtain the prospective right to make, import, use, offer for sale
and/or sell Licensed Products in the United States without entering
into a mutually agreeable
<PAGE>
12
settlement agreement with P&G for any past infringing activity by the
acquiring, merging or consolidating entity or partner with respect to
the patents included in the definition of "Licensed Products".
14. In the event the Settlement Agreement executed concurrently herewith is
not approved by the Bankruptcy Court (as defined in the Settlement
Agreement) or in the event that the order approving the Settlement
Agreement does not become a Final Order by July 31, 1999 (as defined in
the Settlement Agreement), this License Agreement shall be terminable
by P&G, at P&G's option. Termination in such circumstance shall not
relieve Paragon of its obligation to pay royalties accrued hereunder for
the period before termination. P&G agrees to provide Paragon with a
three month conversion period after the date of termination. Royalties,
as set forth above, shall be due on the Licensed Products manufactured
and/or sold during the conversion period and such royalties shall be
payable within 30 days of the end of the conversion period.
15. P&G agrees to give Paragon notice of all future running royalty based
private label or brand manufacturer licenses granted under any of the
P&G U.S. patents herein, and, upon written request, provide Paragon
copies of all such subsequent running royalty based agreements within
thirty (30) days of execution of any such agreements. Paragon shall
be entitled, upon thirty (30) days written request to P&G, to have this
License Agreement brought into conformity with any such subsequent
running royalty based license to any private label or brand manufacturer
other than Paragon in the event P&G grants any license under any of the
P&G U.S. patents herein under terms more favorable than those set forth
herein.
<PAGE>
13
16. This Agreement and the Settlement Agreement set forth the entire
understanding of the parties with respect to the subject matter herein
set forth. There are no ancillary understandings or agreements with
respect to the subject matter of this License Agreement.
17. This Agreement may be executed in counterparts. Each part shall
constitute an original.
18. This Agreement shall become effective as of the date of acceptance by
the last party to sign.
FOR: PARAGON TRADE BRANDS, INC. FOR: THE PROCTER & GAMBLE COMPANY
By /S/ B.V. ABRAHAM By /S/ MARK D. KETCHUM
-------------------------------- --------------------------------
Title CHAIRMAN AND CEO Title PRESIDENT - GLOBAL BABY CARE
------------------------------ ------------------------------
Date FEBRUARY 2, 1999 Date FEBRUARY 2, 1999
------------------------------ ------------------------------
CANADIAN LICENSE AGREEMENT
This Agreement, effective as of the date of execution by both parties,
is by and between THE PROCTER & GAMBLE COMPANY, an Ohio Corporation having a
principal place of business at One Procter & Gamble Plaza, Cincinnati, Ohio
45202, (hereinafter referred to as "P&G") and PARAGON TRADE BRANDS, INC., a
Delaware Corporation having a principal place of business at 180 Technology
Parkway, Norcross, Georgia 30092, and its wholly-owned subsidiary, Paragon Trade
Brands (Canada) Inc., a Canadian corporation having a principal place of
business at 1600 Clark Boulevard, Brampton, Ontario, Canada L6T 3V7 (hereinafter
collectively referred to as "Paragon"). P&G and Paragon will be jointly referred
to as the "parties".
WHEREAS, P&G is the owner of Canadian Patent Application 585,807,
"Mechanical Fastening Means With Disposal Means For Disposable Absorbent
Articles" filed on December 13, 1988 to Robertson et al. (the Canadian
counterpart of U.S. Patent 4,963,140) relating to an absorbent article having a
mechanical fastening system with disposal means;
WHEREAS, P&G owns patents corresponding to Canadian Patent Application
585,807 in a number of other countries;
WHEREAS, Paragon makes, uses, offers for sale and sells a Supreme line
of disposable infant diapers having a mechanical fastening system with a
nonwoven outer cover;
<PAGE>
2
WHEREAS, P&G believes that the Supreme diapers made and sold by Paragon
fall within the scope of one or more of the pending claims of Canadian Patent
Application 585,807 to Robertson et al.; and
WHEREAS, Paragon desires to obtain from P&G and P&G is willing to grant
to Paragon a royalty bearing, non-exclusive right to make, to have made for
Paragon with the prior written consent of P&G, to use, to offer for sale and to
sell in Canada certain integral disposable absorbent articles with a mechanical
fastening system having a disposal means consisting of a nonwoven outer cover
which are within the scope of one or more of any issued claims of any patent
issuing from Canadian Patent Application 585,807 to Robertson et al.;
NOW THEREFORE, in consideration of the promises, mutual covenants, and
agreements contained herein, the parties agree as follows:
DEFINITIONS
"Licensed Product" as used herein, shall mean an integral disposable absorbent
article comprising an infant diaper or an adult diaper having a mechanical
fastening system consisting of (i) a closure member of a hook fastening member;
(ii) a landing member of a loop fastening member; and (iii) disposal means
consisting of a nonwoven outer cover having a limited degree of engageability
with the hook fastening member of less than 750 grams as defined by the Test
Method designated "Strength Of Attachment Of Mechanical Fastening Member To
Diaper Backsheet" (attached hereto as Appendix 1) and falling within the scope
of one or more of any valid and enforceable claims of any patent issuing from
Canadian Patent Application 585,807 to Robertson et al.
<PAGE>
3
including any continuations, continuation-in-part, divisionals, reissues,
reexaminations, or extensions thereof.
"Net Sales Price", as used herein, shall mean the revenue received by Paragon
from the sale of Licensed Products to independent third parties in Canada less
the following amounts: (i) discounts, including cash discounts, or rebates
actually allowed or granted, (ii) credits or allowances actually granted upon
claims or returns regardless of the party requesting the return, (iii) freight
charges paid for delivery, (iv) revenue for defective articles sold exclusively
as scrap, and (v) taxes or other governmental charges levied on or measured by
the invoiced amount whether absorbed by the billing or the billed party.
"Settlement Agreement", as used herein, shall mean the Settlement Agreement
entered into between Paragon and P&G concurrently with this License Agreement.
REPRESENTATIONS AND WARRANTIES
With the exception of non-exclusive license rights granted to others, P&G
represents and warrants that: 1) it is the owner of all right, title and
interest in and to Canadian Patent Application 585,807 to Robertson et al. and
2) it has the right to enter this Agreement without breaching any other
agreement or obligation to a third party.
Paragon represents and warrants that it is an independent entity and that it has
the right to enter into this Agreement without breaching any other agreement or
obligation to a third party.
LICENSE GRANT
<PAGE>
4
1. Upon execution of this License Agreement by both parties, and in
consideration of Paragon's agreement to pay prospective running
royalties on Licensed Products in accordance with Paragraph (2) below,
P&G agrees to grant and hereby does grant to Paragon, as of January 7,
1999, a non-exclusive license to make, to have made for Paragon with the
prior written consent of P&G, to use, to offer for sale and to sell in
Canada, without the right to grant sublicenses, Licensed Products.
2. As consideration for the prospective license rights herein granted by
P&G, Paragon agrees that it will, commencing upon the issuance of any
patent issuing from Canadian Patent Application 585,807 to Robertson et
al., begin to pay to P&G a running royalty in accordance with each
applicable provision of the following schedule:
(A) For a restricted, non-exclusive license in Canada under P&G's
Canadian Patent Application 585,807 to Robertson et al. to make,
to have made for Paragon with the prior written consent of P&G,
to use, to offer for sale and to sell, without the right to grant
sublicenses, Licensed Products which fall within the scope of
one or more valid and enforceable claims of any patent issuing
from Canadian Patent Application 585,807 to Robertson et al.
having an engageability between the hook fastening member and
the nonwoven outer cover, as defined by the Test Method attached
hereto, of less than 500 grams - Three Eighths of One Percent
(0.375%) of the Net Sales Price of Licensed Products;
(B) For a restricted, non-exclusive license in Canada under P&G's
Canadian Patent Application 585,807 to Robertson et al. to make,
to have made for Paragon with
<PAGE>
5
the prior written consent of P&G, to use, to offer for sale and
to sell, without the right to grant sublicenses, Licensed
Products which fall within the scope of one or more valid and
enforceable claims of any patent issuing from Canadian Patent
Application 585,807 to Robertson et al. having an engageability
between the hook fastening member and the nonwoven outer cover,
as defined by the Test Method attached hereto, of between 500
grams and 750 grams -- One Half of One Percent (0.5%) of the Net
Sales Price of Licensed Products.
Subject to Paragraph 6.5 of the Settlement Agreement, the parties agree
that a non-limiting example of Licensed Products falling within
subsection (A) is Paragon's Supreme product (a sample of which is
attached hereto as Appendix 2). Paragon agrees to notify P&G in writing
within ten (10) days if it changes any of its products in such a way
that it no longer intends to make running royalty payments pursuant to
subsections (A) or (B) hereof.
3. The license rights granted in Paragraph (1) under Canadian Patent
Application 585,807 to Robertson et al. shall automatically expire on
the date of expiration of any said patent issuing therefrom, including
any continuations, continuations-in-part, divisionals, reexaminations,
reissues or extensions thereof. Should any patent licensed hereunder
be held to have lapsed for the failure to pay maintenance fees,
royalties for said patent shall not be due for the period of any
such lapse. However, should any such lapsed patent subsequently be
considered as not having expired by the acceptance by the relevant
Canadian Patent Authority of delayed payment of the maintenance fee,
the license rights granted under said patent shall automatically revive
and royalties shall again accrue
<PAGE>
6
beginning on the date that the term of the patent has been maintained as
a result of the acceptance by the relevant Canadian Patent Authority of
a payment of the maintenance fee. P&G agrees to provide written notice
to Paragon of the lapse of any such patent, and if applicable, the date
that the patent has been maintained as a result of the acceptance by the
relevant Canadian Patent Authority of a delayed payment of the
maintenance fee.
4. Within thirty (30) days of June 28, 1999, Paragon shall provide P&G with
an initial statement reporting Paragon's Net Sales Price of Licensed
Products covered by this License Agreement for the period beginning
on January 7, 1999 and ending on June 27, 1999 and be accompanied by the
appropriate royalty payment. On an ongoing basis, the Paragon fiscal
year ends on the last Sunday of December. Therefore, after making said
initial report, Paragon shall, within 30 days after the end of each
subsequent Paragon fiscal year, commencing on December 26, 1999, provide
P&G with an annual statement reporting Paragon's Net Sales Price of
Licensed Products covered by this License Agreement for the preceding
one year period. The parties recognize that the report and payment for
the 1999 fiscal year will cover only the six month period commencing
on June 28, 1999 and ending on December 26, 1999 in light of the
previous initial report and payment. Each report shall specify the Net
Sales Price of Licensed Products attributable on an individual basis
to each of the categories (A) and (B) set forth in Paragraph (2) of
this License Agreement. Each such report is due within thirty (30) days
of the close of the fiscal year for which the report is made, and shall
be accompanied by the royalty payment owed to P&G by Paragon.
Each such report shall be treated as confidential and proprietary
information of Paragon and shall only be used for the purposes set forth
herein. The report shall only be
<PAGE>
7
shared within P&G with such persons at P&G who need to know such
information for the purposes set forth herein. Each such report may be
shared with P&G's outside counsel or auditors who need to know such
information for the purpose of verifying such report.
5. Once each year, at P&G's election and expense, Paragon's independent
public accountant shall certify to P&G that the annual report for the
previous period or year is true, complete and that royalties have been
paid for Licensed Products sold during the previous year. Paragon shall
keep correct and complete records containing all information required
for computation and verification of the amounts to be paid hereunder
for a period of at least three (3) years after making each such report.
Upon reasonable notice, during regular business hours, independent
"Big Six" public accountants selected by P&G, and paid for by P&G in
the event the Paragon payment being verified proves accurate to within
two percent (2.00%), may make such examinations of Paragon's records,
not more frequently than once a year, as P&G deems necessary to verify
such reports and payments provided for hereunder. Such examination
shall occur at such location as designated by Paragon, and such
verification shall only state the amount of payments due in each of
categories (A) or (B) of Paragraph (2) of this License Agreement. If
the Paragon payment does not prove accurate to within two percent
(2.00%), royalties being underpaid, then Paragon shall pay for such
independent public accountants.
6. If Paragon shall be in default in making any payments hereunder at
the times and in the manner herein provided or in complying with the
financial obligations it assumed pursuant to the concurrently executed
Settlement Agreement with P&G, P&G may give written notice to Paragon
specifying the particulars of such default, and in the event Paragon
does
<PAGE>
8
not fully remedy such default within thirty (30) days after such notice,
P&G may at its option, terminate this License Agreement by giving ten
(10) days prior written notice to Paragon to that effect. In addition,
P&G may proceed to enforce the defaulted obligation of Paragon by any
legally available means. No waiver on the part of P&G in respect to a
default by Paragon shall be construed as a waiver of P&G's right to
proceed under this Paragraph with respect to subsequent defaults.
7. Neither expiration of this License Agreement in accordance with its
provisions nor termination of this License Agreement shall relieve
Paragon of its obligations for payment of unpaid royalties under
Paragraph (2) or for enforcement of any other obligation or liability
accrued hereunder prior to the effective date of such expiration or
termination.
8. The failure of either party to strictly enforce this License Agreement,
or to insist upon the strict compliance with its terms shall not at any
time be considered a waiver or condonation by such party of the default
or failure by the other party to strictly perform the covenants,
conditions and agreements on its part to be performed.
9. Paragon agrees, when its existing supply of packaging after the issuance
of any patent from Canadian Patent Application 585,807 to Robertson et
al. has been exhausted, to mark the packages of its Licensed Products
to be sold within Canada with the following statement: "Licensed under
one or more of the following Canadian Patents (with appropriate patent
numbers filled in per Paragraph (2))", and if a reexamination
certificate or a reissue of any such patent occurs, to place on its
packages appropriate statements relating to that reexamination
certificate and/or that reissue patent. There shall be no
<PAGE>
9
reference to "The Procter & Gamble Company", "Procter & Gamble", "P&G",
any variation or affiliate thereof, or any trademark or tradename owned
or controlled by P&G on the packaging.
10. No patent rights outside Canada are granted by P&G in this License
Agreement. However, P&G agrees that it will, upon request by Paragon,
negotiate in good faith in an attempt to establish mutually acceptable
terms and conditions for Paragon to obtain non-exclusive royalty bearing
license rights under P&G's foreign patents corresponding to the Canadian
Patent Application licensed herein on a case by case basis. The parties
recognize that the terms and conditions, including the royalty rates,
for said foreign license rights may not be the same as those herein set
forth nor the same with respect to one another.
11. P&G hereby waives any and all rights to sue (including, but not limited
to, actions to enjoin and/or recover damages from) Paragon for making,
having made for Paragon with the prior written consent of P&G, using,
offering for sale, and/or selling Licensed Products in Canada, provided:
(1) this License Agreement has not been terminated by either party;
(2) Paragon is in full compliance with all material terms of the
concurrently executed Settlement Agreement with P&G and is current in
meeting its obligation to pay the running royalties provided in
Paragraph (2) hereof; and (3) Paragon is otherwise in full compliance
with the material terms of this License Agreement.
12. Notices relating to this Agreement shall be in writing and shall be
considered served when deposited as certified or registered U.S. mail,
return receipt requested, in a sealed envelope with sufficient postage
affixed, addressed as follows:
<PAGE>
10
P&G: Attention: Vice President & General Counsel - Patents
The Procter & Gamble Company
Winton Hill Technical Center
6090 Center Hill Avenue
Cincinnati, Ohio 45224
Paragon: Attention: Vice President & General Counsel
Paragon Trade Brands, Inc.
180 Technology Parkway
Norcross, GA 30092
13. The parties agree that this License shall be personal to Paragon
and shall be nontransferable and nonassignable to third parties without
the prior written consent of P&G, which consent P&G agrees not to
unreasonably withhold or unreasonably delay. In this context, the
parties agree that it is not an unreasonable ground for P&G to withhold
or delay its consent if the effect of the proposed transfer or
assignment would be to allow a transferee or assignee to obtain the
prospective right to make, import, use, offer for sale and/or sell
Licensed Products in Canada without entering into a mutually agreeable
settlement agreement for any past infringing activity by the transferee
or assignee with respect to the patents included in the definition of
"Licensed Products". In addition, the parties agree that this License
shall not apply to the manufacture, import, use or sale of Licensed
Products by any other business entity acquired by Paragon, by which
Paragon is acquired, merged with Paragon, consolidated with Paragon,
partnered with Paragon, or in any other business arrangement with
Paragon after the effective date of this Agreement without the prior
written consent of P&G, which consent P&G agrees not to unreasonably
withhold or unreasonably delay. In this context, the parties agree
that it is not an unreasonable ground for P&G to withhold or delay
its consent if the effect of the proposed transaction would be to allow
an acquiring, merging or consolidating entity or
<PAGE>
11
partner to obtain the prospective right to make, import, use, offer for
sale and/or sell Licensed Products in Canada without entering into a
mutually agreeable settlement agreement with P&G for any past infringing
activity by the acquiring, merging or consolidating entity or partner
with respect to the patents included in the definition of "Licensed
Products".
14. In the event the Settlement Agreement executed concurrently herewith is
not approved by the Bankruptcy Court (as defined in the Settlement
Agreement) or in the event that the order approving the Settlement
Agreement does not become a Final Order by July 31, 1999 (as defined in
the Settlement Agreement), this License Agreement shall be terminable
by P&G, at P&G's option. Termination in such circumstance shall not
relieve Paragon of its obligation to pay royalties accrued hereunder for
the period before termination. P&G agrees to provide Paragon with a
three month conversion period after the date of termination. Royalties,
as set forth above, shall be due on the Licensed Products manufactured
and/or sold during the conversion period and such royalties shall be
payable within 30 days of the end of the conversion period.
15. P&G agrees to give Paragon notice of all future running royalty based
private label or brand manufacturer licenses granted under the P&G
Canadian Patent Application herein, and, upon written request, provide
Paragon copies of all such subsequent running royalty based agreements
within thirty (30) days of execution of any such agreements. Paragon
shall be entitled, upon thirty (30) days written request to P&G, to have
this License Agreement brought into conformity with any such subsequent
running royalty based license to any private label or brand manufacturer
other than Paragon in the event P&G
<PAGE>
12
grants any license under any of the P&G Canadian Patent Applications
herein under terms more favorable than those set forth herein.
16. This Agreement and the Settlement Agreement set forth the entire
understanding of the parties with respect to the subject matter herein
set forth. There are no ancillary understandings or agreements with
respect to the subject matter of this License Agreement.
17. This Agreement may be executed in counterparts. Each part shall
constitute an original.
18. This Agreement shall become effective as of the date of acceptance by
the last party to sign.
FOR: PARAGON TRADE BRANDS, INC. FOR: THE PROCTER & GAMBLE COMPANY
By /S/ B.V. ABRAHAM By /S/ MARK D. KETCHUM
-------------------------------- --------------------------------
Title CHAIRMAN AND CEO Title PRESIDENT - GLOBAL BABY CARE
------------------------------ ------------------------------
Date FEBRUARY 2, 1999 Date FEBRUARY 2, 1999
------------------------------ ------------------------------
FOR: PARAGON TRADE BRANDS (CANADA), INC.
By /S/ CHRIS OLIVER
--------------------------------
Title PRESIDENT
------------------------------
Date FEBRUARY 2, 1999
------------------------------
SETTLEMENT AGREEMENT
This Settlement Agreement is made and entered into as of March
19, 1999, between Paragon Trade Brands, Inc., a Delaware corporation, debtor and
debtor in possession ("Paragon") and Kimberly-Clark Corporation, a Delaware
corporation ("K-C").
W I T N E S S E T H:
WHEREAS, Paragon and K-C are parties to an action entitled
KIMBERLY-CLARK CORPORATION V. PARAGON TRADE BRANDS, INC., Case No. 3:95-cv-2574
(N.D. Tex.) filed by K-C on or about October 25, 1995, in the United States
District Court for the Northern District of Texas (the "Action");
WHEREAS, Paragon has denied liability in the Action and asserted
counterclaims therein;
WHEREAS, on January 6, 1998, Paragon filed a voluntary petition
for relief under chapter 11 of title 11 of the United States Code with the
United States Bankruptcy Court for the Northern District of Georgia, Atlanta
Division, which chapter 11 case currently is pending;
WHEREAS, on or about June 5, 1998, K-C filed a proof of claim in
Paragon's chapter 11 case asserting, among other things, unsecured prepetition
claims in excess of approximately $890 million (without trebling) against
Paragon in respect of Paragon's alleged infringement of certain K-C patents (as
further defined in Section 1.31 hereof, the "K-C Proof of Claim");
WHEREAS, on or about June 5, 1998, K-C filed the Withdrawal
Motion (as defined below) seeking withdrawal of the reference to the United
States Bankruptcy Court for the Northern District of Georgia, Atlanta Division,
with respect to all matters relating to the K-C Proof of Claim;
WHEREAS, Paragon and K-C have agreed to effectuate a settlement
of all claims, counterclaims and disputes asserted or assertable by and against
the other, including, but not limited to, the Action and the K-C Proof of Claim,
in accordance with the terms and conditions set forth herein; and
WHEREAS, this Settlement Agreement is essential to Paragon's
efforts to emerge successfully from its chapter 11 case;
NOW, THEREFORE, for good and valuable consideration, and in order
to settle all claims and disputes between Paragon and K-C, and to facilitate
Paragon's expeditious and effective reorganization, the parties hereto agree as
follows:
<PAGE>
1. DEFINITIONS. In addition to such other terms as are defined in other
sections of this Settlement Agreement, the following terms (which appear in the
Settlement Agreement as capitalized terms) have the following meanings as used
in the Settlement Agreement:
1.1. "Action" shall have the meaning ascribed to such term in the
first "WHEREAS" clause of this Settlement Agreement.
1.2. "Administrative Expense Claim" means a Claim for costs and
expenses of administration which is entitled to administrative expense
priority under sections 503(b) and 507(a)(1) of the Bankruptcy Code.
1.3. "Affiliate" means any Person that is (a) an affiliate as
such term is defined in section 101(2) of the Bankruptcy Code, (b) an
existing or future direct or indirect subsidiary or parent corporation of
Paragon or K-C (as the case may be), or (c) an existing or future joint
venture or general or limited partnership governed by any applicable law in
which (i) Paragon or K-C (as the case may be) or any existing or future
direct or indirect subsidiary or parent corporation of Paragon or K-C (as
the case may be) is a joint venturer or general or limited partner or (ii)
a joint venture or general or limited partnership governed by any
applicable law in which Paragon or K-C (as the case may be) is a joint
venturer or general or limited partner, as the case may be. The defined
term "Affiliate" also includes all successors and assigns of each of the
foregoing.
1.4. "Allowed Claim" means a Claim which is finally allowed in
the Chapter 11 Case and is not subject to further allowance or disallowance
by the Bankruptcy Court or an objection being filed by any party in
interest.
1.5. "Ancillary Agreements" means the K-C License Agreement
annexed hereto as Exhibit A, the Paragon License Agreement annexed hereto
as Exhibit B, the Paragon Release annexed hereto as Exhibit C, and the K-C
Release annexed hereto as Exhibit D.
1.6. "Appeal" means that certain appeal taken by K-C from the
April 10th Order.
1.7. "April 10th Order" means (a) that certain order of the
Bankruptcy Court, dated April 10, 1998, and entered on the Bankruptcy
Court's docket on April 10, 1998, as evidenced by docket number 619,
together with (b) that certain order of the Bankruptcy Court, dated June
17, 1998, and entered on the Bankruptcy Court's docket on June 18, 1998, as
evidenced by docket number 841, denying K-C's motion for reconsideration of
the order referenced in clause (a) of this definition.
-2-
<PAGE>
1.8. "Bankruptcy Code" means the Bankruptcy Reform Act of 1978,
11 U.S.C. ss.ss. 101, ET seq., as the same was in effect on the Petition
Date, as amended by any amendments applicable to the Chapter 11 Case.
1.9. "Bankruptcy Court" means the United States Bankruptcy Court
for the Northern District of Georgia, Atlanta Division, or, to the extent
that such court ceases to exercise jurisdiction over the Chapter 11 Case,
such other court or adjunct thereof that exercises jurisdiction over the
Chapter 11 Case.
1.10. "Bankruptcy Court Approval Order" means an order (which, if
not previously entered as a separate order despite Paragon's reasonable
good faith efforts, may be a Confirmation Order) of the Bankruptcy Court,
in form and substance acceptable to Paragon and K-C, approving this
Settlement Agreement, the Paragon Release and the K-C Release; PROVIDED,
that if the Bankruptcy Court Approval Order also is a Confirmation Order,
(i) only those provisions relating to approval of this Settlement Agreement
must be in form and substance acceptable to K-C, and (ii) K-C shall have
the right to object to the other provisions of any such Confirmation Order.
1.11. "Bankruptcy Rules" means the Federal Rules of Bankruptcy
Procedure, effective August 1, 1991, in accordance with the provisions of
28 U.S.C. ss. 2075, as now in effect or hereafter amended.
1.12. "Business Day" means any day, other than a Saturday, Sunday
or "legal holiday" (as such term is defined in Bankruptcy Rule 9006(a)).
1.13. "Chapter 11 Case" means Paragon's case pending in the
Bankruptcy Court pursuant to chapter 11 of the Bankruptcy Code and
administered under case number 98 - 60390 (Murphy, J.).
1.14. "Claim" means a claim as such term is defined in section
101(5) of the Bankruptcy Code.
1.15. "Confirmation Date" means the date on which the Bankruptcy
Court enters an order confirming, pursuant to section 1129 of the
Bankruptcy Code, a Plan for Paragon.
1.16. "Confirmation Order" means an order of the Bankruptcy Court
confirming a Plan pursuant to section 1129 of the Bankruptcy Code.
1.17. "Creditors' Committee" means the Official Committee of
Unsecured Creditors in the Chapter 11 Case, as appointed by the Office of
the United States Trustee for the
-3-
<PAGE>
Northern District of Georgia, Atlanta Division, as reconstituted from time
to time.
1.18. "Debtor" means Paragon.
1.19. "Effective Date" means the first Business Day that the Plan
becomes effective in accordance with its terms.
1.20. "Estate" means the estate created in the Chapter 11 Case
for Paragon by section 541 of the Bankruptcy Code.
1.21. "Federal Circuit Court" means the United States Court of
Appeals for the Federal Circuit, or, to the extent that such court ceases
to exercise jurisdiction over the P&G Appeal, such other court or adjunct
thereof that exercises jurisdiction over the P&G Appeal.
1.22. "Final Order" means an order or judgment which has not been
reversed, stayed, modified or amended and as to which the time to appeal or
seek review, rehearing, reargument or certiorari has expired and as to
which no appeal or petition for review, rehearing, reargument, stay or
certiorari is pending, or as to which any right to appeal or to seek
certiorari, review, or rehearing has been waived, or, if an appeal,
reargument, petition for review, certiorari or rehearing has been sought,
the order or judgment which has been affirmed by the highest court to which
the order was appealed or from which the reargument, review or rehearing
was sought, or certiorari has been denied, and as to which the time to take
any further appeal or seek further reargument, review or rehearing has
expired.
1.23. "Georgia District Court" means the United States District
Court for the Northern District of Georgia, Atlanta Division, or, to the
extent that such court ceases to exercise jurisdiction over the Appeal or
the Withdrawal Motion, such other court or adjunct thereof that exercises
jurisdiction over the Appeal or Withdrawal Motion, as applicable.
1.24. "Impaired" means impaired within the meaning of section
1124 of the Bankruptcy Code.
1.25. "K-C Allowed Administrative Claim" shall have the meaning
set forth in Section 2.1 hereof.
1.26. "K-C Allowed Claims" means, collectively, the K-C
Conditionally Allowed Claim, the K-C Fixed Allowed General Unsecured Claim
and the K-C Allowed Administrative Claim.
-4-
<PAGE>
1.27. "K-C Conditionally Allowed Claim" shall have the meaning
set forth in Section 2.1 hereof.
1.28. "K-C Fixed Allowed General Unsecured Claim" shall have the
meaning set forth in Section 2.1 hereof.
1.29. "K-C License Agreement" means the license agreement annexed
hereto as Exhibit A.
1.30. "K-C Licensed Patents" means the patents identified in
Exhibit E hereto.
1.31. "K-C Proof of Claim" shall have the meaning ascribed to
such term in the fourth "WHEREAS" clause of this Settlement Agreement,
which proof of claim has been assigned claim number 469 in the Chapter 11
Case. As used herein, K-C Proof of Claim also shall include the proof of
claim number 110 filed by K-C in the Chapter 11 Case on or about January
21, 1998.
1.32. "K-C Release" means the general release annexed hereto as
Exhibit D.
1.33. "License Agreements" means the Paragon License Agreement
and the K-C License Agreement.
1.34. "Paragon License Agreement" means the license agreement
annexed hereto as Exhibit B.
1.35. "Paragon Patents" means the patents identified in Exhibit F
hereto.
1.36. "Paragon Release" means the general release annexed hereto
as Exhibit C.
1.37. "Parties" means Paragon and K-C and their respective
successors and assigns, collectively.
1.38. "Person" means any individual, corporation, partnership,
association, indenture trustee, organization, joint stock company, joint
venture, estate, trust, governmental unit or any political subdivision
thereof, the Creditors' Committee, holders of equity interests in and/or
claims against Paragon or any other entity.
1.39. "Petition Date" means January 6, 1998.
1.40. "Plan" means a plan of reorganization for Paragon confirmed
by the Bankruptcy Court pursuant to section 1129 of the Bankruptcy Code in
the Chapter 11 Case, as the same may be amended or modified, relying upon
and/or incorporating and, INTER ALIA, implementing the terms of this
Settlement Agreement.
-5-
<PAGE>
1.41. "P&G" means The Procter & Gamble Company, an Ohio
corporation.
1.42. "P&G Appeal" means that certain appeal taken by Paragon
from the P&G Judgment and Rule 59 Denial, which appeal is evidenced by
Paragon's Notice of Appeal, filed July 2, 1998, and Paragon's Amendment to
Notice of Appeal, filed August 4, 1998, which appeal is docketed in the
Federal Circuit Court as No. 98-1480.
1.43. "P&G Judgment" means, collectively, that certain (a)
Opinion and Judgment, issued on December 30, 1997, and entered on the
docket for the United States District Court for the District of Delaware on
January 6, 1998, in favor of P&G and against Paragon; (b) Money Judgment
entered on June 2, 1998; and (c) Permanent Injunction entered on June 2,
1998.
1.44. "P&G Judgment Amount" means one hundred seventy-eight
million four hundred twenty-nine thousand five hundred thirty-six dollars
($178,429,536.00), plus accrued interest thereon, from the date of entry of
the Money Judgment described in the preceding paragraph until the date that
the Litigated Reduction or Consensual Reduction (as defined in Section
2.1(c) hereof) is approved by a Final Order, at the rate applicable to such
Money Judgment.
1.45. "Rule 59 Denial" means that certain Opinion and Order, both
entered August 4, 1998, denying Paragon's motion for relief from the P&G
Judgment pursuant to Federal Rule of Civil Procedure 59.
1.46. "Settlement Effective Date" means the first Business Day
after the Bankruptcy Court Approval Order is entered and is not subject to
any stay.
1.47. "Texas District Court" means the United States District
Court for the District of Texas, or, to the extent that such court ceases
to exercise jurisdiction over the Action, such other court or adjunct
thereof that exercises jurisdiction over the Action.
1.48. "Unimpaired" means not impaired within the meaning of
section 1124 of the Bankruptcy Code.
1.49. "Withdrawal Motion" means that certain motion dated June 5,
1998, filed by K-C in the Georgia District Court, seeking withdrawal of the
reference to the Bankruptcy Court with respect to all matters relating to
the K-C Proof of Claim.
2. ALLOWED AMOUNT AND TREATMENT OF K-C CLAIMS.
-6-
<PAGE>
2.1. ALLOWED AMOUNT OF CLAIMS. K-C shall be granted three Allowed
Claims in the Chapter 11 Case (and the K-C Proof of Claim shall be deemed
amended accordingly):
(a) an Allowed Administrative Expense Claim (the "K-C Allowed
Administrative Claim") in an amount equal to the sum of five
million dollars and zero cents ($5,000,000.00);
(b) an Allowed Claim (the "K-C Fixed Allowed General Unsecured
Claim") in an amount equal to the sum of (i) one hundred ten
million dollars and zero cents ($110,000,000.00) plus (ii)
interest on the principal amount of $110,000,000.00 from
April 15, 1999 and through and including the Effective Date
of the Plan; and
(c) an Allowed Claim (the "K-C Conditionally Allowed Claim") in
an amount equal to (i) forty percent (40%) of the amount by
which the P&G Judgment Amount is reduced (the "Litigated
Reduction") by a Final Order as a result of Paragon's
prosecution (if Paragon so elects, in its sole and absolute
discretion, to continue such prosecution) of the P&G Appeal,
minus (ii) twenty million dollars and zero cents
($20,000,000.00). In the event that Paragon and P&G
consensually resolve the P&G Appeal after a decision on the
merits of the P&G Appeal by the Federal Circuit Court, the
K-C Conditionally Allowed Claim shall equal (i) forty
percent (40%) of the amount by which the agreed payment to
P&G on account of the claims which are the subject of the
P&G Judgment is less than the P&G Judgment Amount (the
"Consensual Reduction"), minus (ii) twenty million dollars
and zero cents ($20,000,000.00). In the event that Paragon
and P&G consensually resolve the P&G Appeal prior to the
issuance of any decision on the merits by the Federal
Circuit Court, K-C shall not be entitled to receive the K-C
Conditionally Allowed Claim and such Claim shall be deemed
not to exist.
For purposes of the preceding clause 2.1(b)(ii), to the extent the payment
of same is permitted under applicable law, or either P&G or other holders
of allowed prepetition, general unsecured claims receive payment of
postpetition interest, interest shall accrue at six percent (6%) on a per
annum 365 day year basis (the "Postpetition Interest Rate").
-7-
<PAGE>
2.2. TREATMENT OF THE K-C ALLOWED ADMINISTRATIVE CLAIM. The K-C
Allowed Administrative Claim shall be afforded treatment under the Plan as
an Administrative Expense Claim in accordance with section 1129(a)(9)(A) of
the Bankruptcy Code.
2.3. CLASSIFICATION AND TREATMENT OF THE K-C FIXED ALLOWED
GENERAL UNSECURED CLAIM. Paragon shall classify and treat the K-C Fixed
Allowed General Unsecured Claim as a prepetition, general unsecured claim
in any Plan proposed by Paragon, and shall classify such claim in the same
class as all other holders of prepetition, general unsecured Allowed Claims
against Paragon in any such Plan; PROVIDED, HOWEVER, that Paragon may
include a usual and customary "convenience," "small claims" or other
similar class of prepetition, general unsecured Allowed Claims that does
not include the K-C Fixed Allowed General Unsecured Claim in its Plan if
Paragon determines it is necessary or appropriate.
2.4. CLASSIFICATION AND TREATMENT OF THE K-C CONDITIONALLY
ALLOWED CLAIM. Paragon shall classify and treat the K-C Conditionally
Allowed Claim, to the extent that the Litigated Reduction or the Consensual
Reduction occurs, in the same manner under its Plan as the K-C Fixed
Allowed General Unsecured Claim. In the event that the Confirmation Date of
a Plan proposed by Paragon is before the date on which the K-C
Conditionally Allowed Claim is determined, Paragon shall establish under
such Plan an adequate reserve, as agreed to by the Parties and/or
determined by the Bankruptcy Court, to provide for the treatment of the K-C
Conditionally Allowed Claim provided for herein as and when the amount, if
any, of such Allowed Claim is determined. The principal amount due to K-C
with respect to the K-C Conditionally Allowed Claim shall, to the extent
the payment of same is permitted under applicable law, or either P&G or
other holders of allowed prepetition, general unsecured claims receive
payment of postpetition interest, bear interest at the Postpetition
Interest Rate from the date on which the Litigated Reduction or Consensual
Reduction, as applicable, is approved by a Final Order or, in the event
Bankruptcy Court approval is not required, otherwise becomes binding upon
Paragon and K-C (the "Interest Commencement Date") until and through (a)
the Effective Date, if the Interest Commencement Date occurs prior to the
Effective Date, or (b) the date upon which Paragon effects its distribution
to K-C on account of the K-C Conditionally Allowed Claim under the Plan, if
the Interest Commencement Date occurs after the Effective Date.
2.5. CONVERSION OF CHAPTER 11 CASE. Notwithstanding anything to
the contrary contained herein, in the event the Chapter 11 Case is
converted to a case under chapter 7 of the Bankruptcy Code, each K-C
Allowed
-8-
<PAGE>
Claim shall (a) have all the rights of any other claim of equal priority
against Paragon that shall have become an Allowed Claim prior to the date
of such conversion, and (b) be treated as an Allowed Claim in any such
chapter 7 case.
2.6. DISMISSAL OF CHAPTER 11 CASE. Notwithstanding anything to
the contrary contained herein, in the event that the Chapter 11 Case is
dismissed, the K-C Allowed Claims shall be deemed obligations of Paragon
following dismissal of the Chapter 11 Case, and (a) in the case of the K-C
Allowed Administrative Claim and the K-C Fixed Allowed General Unsecured
Claim, such claims shall become due and payable on the date the Chapter 11
Case is dismissed, and (b) in the case of the K-C Conditionally Allowed
Claim, such claim shall become due and payable on the first date that is on
or after the date that both (i) the Chapter 11 Case is dismissed and (ii)
the Litigated Reduction or the Consensual Reduction shall have been
approved by a Final Order.
3. DISMISSAL OF THE ACTION, THE APPEAL AND THE WITHDRAWAL MOTION.
3.1. By Order of the Georgia District Court dated February 18,
1999, the Appeal, Paragon's motion to dismiss the Appeal, and the
Withdrawal Motion were dismissed without costs and without prejudice to the
right, of either Party within sixty (60) days, to re-open such proceedings
if settlement of such proceedings is not consummated. If the Bankruptcy
Court denies approval of this Settlement Agreement, the Parties shall
cooperate with one another to take such steps as are necessary and
appropriate to ensure that these proceedings are re-opened.
3.2. Within five (5) Business Days after the Settlement Effective
Date: (a) K-C shall dismiss with prejudice (i) the Action, (ii) the Appeal
and (iii) the Withdrawal Motion; and (b) Paragon shall dismiss with
prejudice its counterclaims in the Action. From and after the Settlement
Effective Date, Paragon shall not contest any Valid Claim (as defined in
the K-C License Agreement) held or asserted by K-C.
4. LICENSES.
4.1. Contemporaneously with the execution of this Settlement
Agreement, K-C shall execute and deliver to Paragon the K-C License
Agreement.
4.2. In consideration for the payments to K-C set forth in this
Settlement Agreement, and subject to the truth of the representation and
warranties of Paragon described on Exhibit G hereto, K-C, on behalf of
itself and Kimberly-Clark Worldwide, Inc. (who K-C represents and warrants
are
-9-
<PAGE>
the only holders of patents issued as of March 1, 1999, including any
reissues and reexaminations thereof, in the United States or Canada,
including any territories thereof, as to which K-C or any of its current
Affiliates has any right to assert or prosecute against an alleged
infringer), covenants not to sue Paragon or its wholly-owned Canadian
subsidiary for infringement of any of its current patents which have been
issued as of March 1, 1999, including any reissues and reexaminations
thereof, in the United States or Canada (collectively, including any
territories of any of the foregoing, the "Approved Countries") with respect
to the specific products attached hereto as Exhibits H-1 through H-12,
including dual cuff versions of any of Exhibits H-1 through H-9 where the
only product change is the replacement of the single leg cuff feature on
such products with the dual leg cuff feature found on Exhibits H-10 through
H-12 (the "Approved Products"). Notwithstanding the foregoing and subject
to the K-C Release, (X) K-C covenants not to sue Paragon or its
wholly-owned Canadian subsidiary for infringement of U.S. patent number
5,879,341 issued on March 9, 1999 in the name of Odorzynski, with respect
to products of Paragon that are made, used or sold on or before June 7,
1999 (provided that such covenant not to sue shall not apply to products of
Paragon that are made, used or sold after June 7, 1999, other than products
made on or prior to June 7, 1999 but sold thereafter), and (Y) K-C shall be
entitled to assert or prosecute against Paragon and/or its Affiliates: (a)
claims under (i) U.S. patent number B1 5,147,343 issued on March 17, 1998
to Kellenberger, (ii) U.S. patent number 5,601,542 issued on February 11,
1997 to Melius, and (iii) U.S. patent number 5,843,056 issued on December
1, 1998 to Good, to the extent that Paragon's products do not remain within
the respective "safe harbors" described in Exhibit I hereto; and (b) claims
related to patents owned by K-C or as to which K-C has any right to assert
or prosecute against an alleged infringer with respect to (i) products
other than the Approved Products, (ii) process/method patents claims, (iii)
patents issued under the laws of countries other than the Approved
Countries, or (iv) U.S. patent number 5,176,671 issued on January 5, 1993
in the name of Roessler et al., with respect to products of Paragon
(including the Approved Products attached hereto as Exhibits H-1, H-5 and
H-11) that are made, used or sold on and after the date that is two years
after the date of execution of this Settlement Agreement; and nothing in
the covenant not to sue contained in this Section 4.2, which was issued in
exchange for good and valuable consideration, shall be admissible against
K-C in connection with any patent claim which it has preserved the right to
bring under this Section.
4.3. Subject to the occurrence of the Settlement Effective Date,
Paragon agrees that in any future dispute regarding a Valid Claim (as such
term is defined in the K-C License Agreement), Paragon shall not contest
the validity of the K-C
-10-
<PAGE>
Licensed Patents and the validity of such patents shall be presumed.
Subject to the occurrence of the Settlement Effective Date, the entry of
the Bankruptcy Court Approval Order shall be deemed to be a judgment
binding upon Paragon and K-C as to the provisions of this Settlement
Agreement, including this Section 4.3.
4.4. Contemporaneously with the execution of this Settlement
Agreement, Paragon shall execute and deliver to K-C the Paragon License
Agreement.
4.5. On or before the date hereof, Paragon shall have changed the
superabsorbent material in its products to fit within the
Kellenberger/Melius "safe harbor" described in Exhibit I hereto.
5. RELEASES.
5.1. Contemporaneously with the execution of this Settlement
Agreement, Paragon shall execute and hold in escrow the Paragon Release.
Paragon shall release and deliver to K-C the Paragon Release within five
(5) Business Days after the Settlement Effective Date.
5.2. Contemporaneously with the execution of this Settlement
Agreement, K-C shall execute and hold in escrow the K-C Release. K-C shall
release and deliver to Paragon the K-C Release within five (5) Business
Days after the Settlement Effective Date.
6. REPRESENTATIONS OF THE PARTIES.
6.1. K-C represents and warrants that (a) it has not filed any
proofs of claim in the Chapter 11 Case other than the K-C Proof of Claim,
and (b) it has not acquired or transferred or entered into any agreement to
acquire or transfer any proofs of claim, including the K-C Proof of Claim,
filed against Paragon in the Chapter 11 Case. K-C represents, warrants and
covenants that it (a) has not and will not amend, modify or supplement, or
seek to amend, modify or supplement the K-C Proof of Claim and, (b) shall
not acquire any claims asserted against Paragon by any Person in the
Chapter 11 Case without Paragon's prior written consent.
6.2. Paragon represents and warrants that the statements
contained in Exhibit G hereto are true and correct.
7. RESTRICTIONS ON TRANSFER OF K-C ALLOWED CLAIMS. Unless Paragon, in its
sole and absolute discretion, otherwise agrees in writing, K-C shall not sell or
otherwise transfer all or any portion of the K-C Allowed Claims for a period of
ninety
-11-
<PAGE>
(90) days following the date of execution of this Settlement Agreement.
Following such ninety (90) day period, K-C shall not sell or otherwise transfer
all or any portion of the K-C Allowed Claims to any Person or Persons unless
such Person or Persons (i) agree(s) to be bound to the terms and conditions of
this Settlement Agreement, and (ii) sign(s) an agreement that specifically
provides that Paragon is an intended third party beneficiary of such Person(s)'
agreement to be so bound to, and subject to the enforcement of, the terms and
conditions of this Settlement Agreement. Notwithstanding any assignment or
transfer by K-C of all or any portion of the K-C Allowed Claims in accordance
with the terms hereof, K-C shall continue to remain bound by each of the
provisions of this Settlement Agreement, including, but not limited to, K-C's
obligations to execute, deliver and perform its obligations under each of the
Ancillary Agreements. In the event that K-C sells or otherwise transfers all or
any portion of the K-C Proof of Claim or the K-C Allowed Claims, and
notwithstanding any provisions contained herein or in the K-C License Agreement
to the contrary, the K-C License Agreement, if not previously terminated
pursuant to its terms, shall remain in full force and effect notwithstanding (a)
the lack, if any, of entry of the Bankruptcy Court Approval Order on or before
July 31, 1999, or (b) the reversal or modification of such order on appeal.
8. EXCLUSIVITY AND PLAN CONFIRMATION.
8.1. If Paragon complies with its obligations under this
Settlement Agreement, K-C shall not oppose any requests by Paragon for
extensions of its exclusive periods to file a plan of reorganization and to
solicit acceptances thereto (collectively, the "Exclusive Periods") under
section 1121 of the Bankruptcy Code through and including May 31, 1999 and
July 31, 1999, respectively, as long as it appears reasonably probable that
the Effective Date can occur on or before July 31, 1999.
8.2. Notwithstanding the provisions of section 8.1 hereof, K-C
shall have the right to object to (a) any motion filed by Paragon seeking
an extension of the Exclusive Periods if Paragon is not diligently pursuing
final approval of this Settlement Agreement (including its obligations
under Section 19 below), or (b) confirmation of any Plan proposed in the
Chapter 11 Case.
9. AMENDMENT. This Settlement Agreement may not be amended except by an
instrument in writing signed by both Parties hereto after prior written notice
to counsel to the Creditors' Committee and, if such amendment constitutes a
material modification of this Settlement Agreement, approval of the Bankruptcy
Court if the Effective Date has not yet occurred.
10. NOTICES. Any notices or other communications hereunder or in connection
herewith shall be in writing and shall
-12-
<PAGE>
be deemed to have been duly given when delivered in person, by facsimile
transmission or by registered or certified mail (postage prepaid, return receipt
requested) addressed, as follows:
If to Paragon, to:
Paragon Trade Brands, Inc.
180 Technology Parkway
Norcross, Georgia 30092
Telephone: 678-969-5000
Facsimile: 678-969-4959
Attention: Chairman of the Board
Attention: General Counsel
with a copy to:
Willkie Farr & Gallagher
787 Seventh Avenue
New York, New York 10019-6099
Telephone: 212-728-8000
Facsimile: 212-728-8111
Attention: Myron Trepper, Esq.
Cravath Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, New York 10019
Telephone: 212-474-1000
Facsimile: 212-474-3700
Attention: Richard W. Clary, Esq.
Alston & Bird LLP
One Atlantic Center
1201 West Peachtree Street
Atlanta, Georgia 30309
Telephone: 404-881-7000
Facsimile: 404-881-7777
Attention: Neal Batson, Esq.
O'Melveny & Myers LLP
Citicorp Center
153 East 53rd Street
New York, New York 10022
Telephone: (212) 326-2000
Facsimile: (212) 326-2061
Attention: Joel B. Zweibel, Esq.
If to K-C, to:
Kimberly-Clark Corporation
P.O. Box 619100
Dallas, Texas 75261-9100
-13-
<PAGE>
Telephone: (972) 281-1215
Facsimile: (972) 281-1492
Attention: General Counsel
with a copy to:
Sidley & Austin
One First National Plaza
Chicago, Illinois 60603
Telephone: (312) 853-7000
Facsimile: (312) 853-7036
Attention: Shalom L. Kohn, Esq.
O'Melveny & Myers LLP
Citicorp Center
153 East 53rd Street
New York, New York 10022
Telephone: (212) 326-2000
Facsimile: (212) 326-2061
Attention: Joel B. Zweibel, Esq.
or such other address as shall be furnished in writing pursuant to these notice
provisions by any Party. A notice of change of address shall not be deemed to
have been given until received by the addressee.
11. EFFECT ON LITIGATION. Neither this Settlement Agreement, the Ancillary
Agreements, nor any of the terms hereof or thereof, nor any negotiations,
documents, pleadings, proceedings or public reports in respect of any of the
foregoing, shall constitute or be construed as or be deemed to be evidence of an
admission on the part of either Paragon or K-C of any liability or wrong doing
whatsoever, or of the truth or untruth of any of the claims made by either
Paragon or K-C in their disputes or of the merit or lack of merit of any of the
defenses thereto; nor shall this Settlement Agreement (including the Ancillary
Agreements), or any of the terms hereof, or any negotiations, documents,
pleadings, proceedings or public reports in respect of any of the foregoing, be
offered or received in evidence or used or referred to in any such proceeding
against either Paragon or K-C or used or referred to in any such proceeding for
any purpose whatsoever except with respect to (i) effectuation and enforcement
of this Settlement Agreement or the Ancillary Agreements and the discontinuance
of the Action, the Appeal or the Withdrawal Motion, or (ii) with respect to
proceedings in the Chapter 11 Case to authorize and approve this Settlement
Agreement and the execution and delivery hereof, and to confirm the Plan.
12. EQUITABLE REMEDIES. The Parties hereto agree that irreparable damage
would occur in the event that any of the provisions of this Settlement Agreement
were not performed in accordance with its specific terms or otherwise were
breached. It accordingly is agreed that the Parties shall be entitled to
-14-
<PAGE>
specific enforcement of the terms and provisions hereof and to injunctive and
other equitable relief in the Bankruptcy Court or any other court of the United
States or any state thereof having jurisdiction in addition to any other remedy
to which they are entitled to at law or in equity. To the extent such injunctive
or other equitable relief requires the posting of a bond or other similar
requirement, each Party expressly waives the satisfaction of such requirement by
the other Party.
13. HEADINGS. The descriptive headings of the several sections of this
Settlement Agreement are inserted for convenience of reference only and do not
constitute a part of this Settlement Agreement, nor in any way affect the
interpretation of any provisions hereof.
14. APPLICABLE LAW. This Settlement Agreement shall be governed in all
respects, including validity, interpretation and effect, by the Bankruptcy Code
and the laws of the State of New York, without giving effect to the principles
of conflicts of law thereof.
15. COUNTERPARTS. This Settlement Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
16. ENTIRE SETTLEMENT. This Settlement Agreement (including the other
documents referred to herein) (a) constitutes the entire settlement, and
supersedes all other prior agreements and understandings, both written and oral,
between the parties with respect to the subject matter hereof, and (b) except as
otherwise expressly provided herein, is not intended to confer upon any other
person any rights or remedies hereunder.
17. RULES OF CONSTRUCTION.
17.1. Any term used in this Settlement Agreement that is not
defined herein, but that is used in the Bankruptcy Code or the Bankruptcy
Rules, shall have the meaning assigned to that term in (and shall be
construed in accordance with the rules of construction under) the
Bankruptcy Code or the Bankruptcy Rules. Without limiting the foregoing,
the rules of construction set forth in section 102 of the Bankruptcy Code
shall apply to the Settlement Agreement, unless superseded herein.
17.2. The words "herein", hereof," "hereto," "hereunder" and
others of similar import refer to the Settlement Agreement as a whole and
not to any particular section, subsection or clause contained in this
Settlement Agreement, unless the context requires otherwise.
17.3. Any reference in this Settlement Agreement to an existing
document or
-15-
<PAGE>
exhibit means such document or exhibit as it may be amended, modified or
supplemented by the Parties.
17.4. Whenever from the context it is appropriate, each term
stated in either the singular or the plural shall include both the singular
and the plural, and each pronoun stated in the masculine, feminine or
neuter includes the masculine, feminine and neuter.
17.5. In computing any period of time prescribed or allowed by
this Settlement Agreement, the provisions of Bankruptcy Rule 9006(a) shall
apply.
18. CONDITIONS. As an express condition precedent to the obligations of
Paragon and K-C under this Settlement Agreement:
18.1. BANKRUPTCY COURT APPROVAL. An order shall have been entered
approving this Settlement Agreement in all respects, which order shall not
be subject to any stay. In the event that the Bankruptcy Court Approval
Order is not entered, the terms of this Settlement Agreement and the
Ancillary Agreements shall not be binding on any of the Parties hereto,
except that (a) Sections 11 and 24 hereof shall remain binding, and (b) the
License Agreements shall continue to be effective and terminable by the
Parties in accordance with the terms thereof.
18.2. EXECUTION OF THE LICENSE AGREEMENTS. Contemporaneously with
the execution hereof, Paragon and K-C shall execute and deliver each of the
License Agreements.
19. AGREEMENT TO COOPERATE. As soon as reasonably practicable after the
date of execution of this Settlement Agreement, Paragon shall take reasonable
good faith steps to promptly obtain the entry of the Bankruptcy Court Approval
Order through the filing of a motion pursuant to, INTER ALIA, Bankruptcy Rule
9019, and K-C shall take such steps as reasonably requested by Paragon in good
faith to obtain entry of the Bankruptcy Court Approval Order.
20. REQUISITE AUTHORITY. Each of the undersigned Parties represents and
warrants that, except as affected by the requirements of the Bankruptcy Code for
the approval of, and subject to the terms of, this Settlement Agreement, (a)
this Settlement Agreement and all other documents executed or to be executed by
such Party in accordance with this Settlement Agreement are valid and
enforceable in accordance with their terms, (b) such Party has taken all
necessary corporate action required to authorize the execution, performance and
delivery of this Settlement Agreement and the related documents, and (c) upon
this Settlement Agreement being approved by an order of the Bankruptcy Court, it
will perform this Settlement Agreement and consummate all of the transactions
contemplated hereby.
-16-
<PAGE>
21. ANNOUNCEMENTS. All press releases by any Party regarding this
Settlement Agreement shall be approved by both Paragon and K-C prior to the
issuance thereof; provided that any Party may make any public disclosure it
believes in good faith is required by law or regulation (in which case the
disclosing Party shall advise the other Party prior to making such disclosure
and provide such other Party an opportunity to review and comment on the
proposed disclosure). Paragon's filing of a motion with the Bankruptcy Court
seeking approval of this Settlement Agreement shall not be considered a public
announcement requiring K-C's approval for purposes of this Section 21.
22. JURISDICTION. Unless and until the Chapter 11 Case is closed or
dismissed, the Bankruptcy Court shall retain exclusive jurisdiction, and the
Parties consent to such exclusive jurisdiction, to hear and determine any and
all matters, claims or disputes arising from or relating to the interpretation
and/or implementation of this Settlement Agreement; PROVIDED, HOWEVER, that the
Bankruptcy Court shall not retain jurisdiction following the Effective Date to
determine matters, claims and disputes concerning the interpretation and
enforcement of the License Agreements.
23. CONFIDENTIALITY. Nothing contained in this Settlement Agreement
modifies, or is intended to modify, the obligations of K-C and/or its employees,
advisors and agents under any confidentiality agreements that such Entities have
executed with Paragon.
(REST OF PAGE INTENTIONALLY LEFT BLANK)
-17-
<PAGE>
IN WITNESS WHEREOF, each of the Parties hereto has caused this
Settlement Agreement to be executed on its behalf by its officers thereunto duly
authorized, all as of the day and year first above written.
PARAGON TRADE BRANDS, INC.
Debtor and Debtor in Possession
By: /S/ B.V. ABRAHAM
--------------------------------
Title: Chairman and CEO
KIMBERLY-CLARK CORPORATION
By: /S/ O. GEORGE EVERBACH
--------------------------------
Title: Senior Vice President -
Law and Government
Affairs
-18-
LICENSE AGREEMENT
BETWEEN
KIMBERLY-CLARK CORPORATION
AND
PARAGON TRADE BRANDS, INC.
<PAGE>
LICENSE AGREEMENT
This License Agreement is made and entered into as of this 15th day of
March, 1999, between Kimberly-Clark Corporation, a Delaware corporation having
offices at 351 Phelps Drive, Irving, Texas 75038 ("LICENSOR") and Paragon Trade
Brands, Inc., a Delaware Corporation having a principal place of business at 180
Technology Parkway, Norcross, Georgia 30092 (including any entity which it
controls or as to which it is under
common control, "LICENSEE").
WITNESSETH
WHEREAS, LICENSEE has requested a license from LICENSOR under certain
patents in order to manufacture disposable absorbent products with containment
flaps; and
WHEREAS, the parties desire to enter into this License Agreement under the
terms and conditions hereinafter recited.
NOW THEREFORE, it is agreed as follows:
ARTICLE I
DEFINITIONS
As used throughout this Agreement, each term shall have the meaning set
forth in this Article I:
1.01 "ABSORBENT PANT(S)" shall mean absorbent articles which are intended
to be pulled on to fit about the waist of the wearer, whether infant or child,
and includes training pants.
1.02 "CALENDAR YEAR" shall mean the twelve (12) month period commencing on
the Effective Date and ending on the last day of the twelfth month thereafter,
and each subsequent twelve (12) month period thereafter.
1.03. "CONVERSION DATE" shall mean the earlier of (a) August 1, 1999, if
the Effective Date has not yet occurred; or (b) 90 days after the Court Order
has been stayed or modified in any manner not approved by LICENSOR in writing,
unless the Court Order has been reinstated or
<PAGE>
modified in a manner approved by LICENSOR in writing prior to the expiration of
such 90 day period. In further clarification of the foregoing, no Conversion
Date shall occur if the Court Order has been entered prior to August 1, 1999 and
remains in full force and effect.
1.04 "COURT ORDER" shall mean an order of the Bankruptcy Court in
Bankruptcy Case No. 98-60390 (U.S. Bankruptcy Court, Northern District of
Georgia, Atlanta Division) approving the Settlement Agreement between the
LICENSEE and the LICENSOR.
1.05 "DALLAS LITIGATION" shall mean the action captioned KIMBERLY-CLARK
CORPORATION V. PARAGON TRADE BRANDS, INC., pending before the U.S. District
Court, Northern District of Texas, Dallas Division (Civil Action
3:95-CV-2574-T).
1.06 "EFFECTIVE DATE" shall mean the first day of the month following the
entry of the Court Order.
1.07 "ENLOE PATENTS" shall mean U.S. Patent 4,704,116, U.S. Patent
4,846,823, U.S. Patent 5,413,570, U.S. Patent 5,415,644 and U.S. Patent
5,599,338 and/or any U.S. continuations, continuations-in-part, divisions,
extensions, reissues and reexaminations thereof; and any U.S. patent issued
pursuant to U.S. Patent Application Serial No. 437,358 dated 05/09/1995, and/or
any U.S. continuations, divisions, continuations in-part, extensions, reissues,
and reexaminations of the Serial No. 437,358 application; and any counterpart
patent applications and patents issued in Canada.
1.08 "INFANT DISPOSABLE DIAPER(S)" shall mean absorbent articles which are
intended to be manually fastened about an infant or a child and are not intended
to be pulled on to fit about the waist of the wearer.
1.09 "NET SALES" shall mean the gross amount of sales invoiced to
independent third parties by LICENSEE, less Reductions in Sales, for Infant
Disposable Diapers or Absorbent Pants which (a) are made, used, or sold by
LICENSEE and (b), but for this license, would infringe a Valid Claim in the
place where such products are made, used or sold by LICENSEE. For the purpose of
this Agreement, products which have been accused of infringement in the Dallas
Litigation shall be deemed to infringe a Valid Claim. Net Sales for the purpose
of calculating royalties hereunder shall reflect a selling price which results
from a bona fide, arm's length
2
<PAGE>
transaction between LICENSEE and an independent, unrelated third party customer.
If the selling price is reduced in light of other consideration from the buyer,
or is a sale to a related third party, such selling price shall not be deemed a
selling price derived from a bona fide, arm's length transaction, and a selling
price for the same product resulting from a bona fide, arm's length transaction
between LICENSEE and an independent, unrelated third party customer shall be
substituted for purposes of calculating "Net Sales" under this Agreement, or, at
LICENSOR's option, in the event the sale by LICENSEE is not to an independent
third party, Net Sales shall be measured on the basis of the highest price in
any of the succession of sales or other transfers of the applicable products
until such products come into an independent third party's hands. "Net Sales"
shall not include bulk sales of defective product not sold or resold for use as
Infant Disposable Diapers or Absorbent Pants.
1.10 "REDUCTIONS IN SALES" shall mean,
(a) transportation charges or allowances actually paid or granted;
(b) credits or allowances actually given or made on account of
rejects, returns, or retroactive price reductions;
(c) any tax or other governmental charge directly on sale,
transportation, use or delivery of products included in the invoice, paid by
LICENSEE and not recovered from the purchaser; and
(d) rebates, discounts and broker commissions.
"Reductions in Sales" do not include (a) slotting fees or other payments made to
a retailer to induce it to stock a manufacturer's product(s), or (b) any
reimbursement, credit or payment for retailer advertising or retailer promotion
expenses; and no deduction of such fees, payments, reimbursements or credits
shall be made in calculating Net Sales.
1.11 "Safe Harbor Absorbent Pants" shall mean Absorbent Pants that:
(a) employ no superabsorbent material having an Absorbency Under
Load value of 27 grams per gram or greater as described in and determined by the
teachings of U.S. Patent B1 5,147, 343 issued March 17, 1998 to Kellenberger
("Kellenberger Patent"); and
(b) employ no superabsorbent material having a Pressure Absorbency
Index of 100 or greater as described in and determined by the teachings of U.S.
Patent 5, 601,542, issued February 11, 1997 to Melius ("Melius Patent"); and
3
<PAGE>
(c) employ a liquid impermeable, vapor permeable film which has a
basis weight of not less than 22 grams per square meter in any backsheet that
employs a substantially liquid impermeable, vapor permeable film as a component
of the backsheet; and
(d) employ a containment means ("ULG") as illustrated in the drawing
attached hereto as Exhibit A and as described (substituting "training pant" for
"diaper"), both as to physical structure and as to performance, in the letter
attached hereto as Exhibit B; and
(e) which are otherwise of the same construction, configuration and
formed from the same materials as the training pant attached hereto as Exhibit
C.
1.12 "Safe Harbor Infant Disposable Diapers" shall mean Infant Disposable
Diapers that:
(a) employ no superabsorbent material having an Absorbency Under
Load value of 27 grams per gram or greater as described in and determined by the
teachings of U.S. Patent B1 5,147, 343 issued March 17, 1998 to Kellenberger;
and
(b) employ no superabsorbent material having a Pressure Absorbency
Index of 100 or greater as described in and determined by the teachings of U.S.
Patent 5, 601,542, issued February 11, 1997 to Melius; and
(c) employ a liquid impermeable, vapor permeable film which has a
basis weight of not less than 22 grams per square meter in any backsheet that
employs a substantially liquid impermeable, vapor permeable film as a component
of the backsheet; and
(d) employ a containment means ("ULG") as illustrated in the drawing
attached hereto as Exhibit A and as described, both as to physical structure and
as to performance, in the letter attached hereto as Exhibit B; and
(e) which are otherwise of the same construction, configuration and
formed from the same materials as the Infant Disposable Diaper attached hereto
as Exhibit D.
1.13 "SETTLEMENT AGREEMENT" shall mean the settlement agreement between
LICENSEE and LICENSOR settling LICENSOR'S claims as defined therein.
1.14 "TERRITORY" shall mean the United States of America, its territories
and possessions and Canada, its territories and possessions.
1.15 "VALID CLAIM" shall mean a claim of an unexpired Enloe Patent which
has not been found invalid or unenforceable by a U.S. or Canadian governmental
tribunal or a U.S. or
4
<PAGE>
Canadian court of competent jurisdiction in a decision from which no appeal has
or may be taken.
ARTICLE II
LICENSE
2.01 LICENSE GRANT: LICENSOR grants to LICENSEE, subject to the terms and
conditions of this Agreement, a non-exclusive right and license under the Enloe
Patents to make, have made, use and sell Infant Disposable Diapers and Absorbent
Pants in the Territory. LICENSEE has no right to grant sublicenses under the
Enloe Patents. The term for the license grant under this Section 2.01 shall
commence on January 1, 1999 and, unless terminated in accordance with any other
provision hereof, shall remain in full force and effect until the expiration of
the last to expire of the Enloe Patents. No implied license is granted to
LICENSEE other than under the Enloe Patents.
2.02 COVENANT NOT TO SUE:
(a) So long as LICENSEE is in compliance with the material terms of
this Agreement, LICENSOR covenants not to sue LICENSEE for infringement, if any,
of the Enloe Patents arising from the manufacture, use or sale of Infant
Disposable Diapers or Absorbent Pants by LICENSEE occurring on or after January
1, 1999.
(b) So long as LICENSEE is in compliance with the material terms of
this Agreement, LICENSOR covenants not to sue LICENSEE for infringement, if any,
of the Kellenberger Patent (as defined in Section 1.11(a)), the Melius Patent
(as defined in Section 1.11(b)) or U.S. Patent 5,843,056 issued December 1, 1998
to Good ("Good Patent") or any counterpart patent issued in Canada to the
Kellenberger Patent, Melius Patent or Good Patent, arising from the manufacture,
use or sale by LICENSEE on or after January 1, 1999, of Infant Disposable
Diapers which conform with Section 1.12(a), (b) and (c) or of Absorbent Pants
which conform with Section 1.11(a), (b) and (c).
2.03 CONVERSION DATE: The license and covenant not to sue set forth in
Sections 2.01 and 2.02, respectively, shall, except with respect to products
manufactured prior to the Conversion Date and sold pursuant to Article III and
Section 4.05, terminate and be of no further force and effect on and after the
Conversion Date.
5
<PAGE>
ARTICLE III
CONVERSION DATE
On or before the Conversion Date, LICENSEE shall cease manufacture of any
Infant Disposable Diapers and any Absorbent Pants which infringe a Valid Claim.
LICENSOR may continue to sell Infant Disposable Diapers and Absorbent Pants
manufactured prior to the Conversion Date subject to payment of the royalties
set forth in Section 4.05.
ARTICLE IV
ROYALTIES
4.01 ROYALTIES: Royalties shall be payable at different rates for
different products.
(a) INFANT DISPOSABLE DIAPERS
From the Effective Date through the term of this Agreement, LICENSEE
shall pay LICENSOR a royalty of two and one-half percent (2.5%) for the first
two hundred million dollars of Net Sales of Infant Disposable Diapers in each
Calendar Year and shall pay LICENSOR a royalty of one and one-half percent
(1.5%) of Net Sales of Infant Disposable Diapers in excess of two hundred
million dollars in each Calendar Year if such royalties are paid voluntarily by
LICENSEE provided, however, that for the term of this Agreement, royalties shall
be payable at the higher rate of two and one-half percent (2.5%) as to any
product design as to which LICENSOR is required to enforce its rights hereunder
through litigation or arbitration; and provided further, however, that no
percentage royalty under the Enloe Patents shall be due on Safe Harbor Infant
Disposable Diapers.
(b) ABSORBENT PANTS:
From the Effective Date through the term of this Agreement, LICENSEE
shall pay LICENSOR a royalty of 5.0 percent (5.0%) of Net Sales of Absorbent
Pants; provided, however, that no percentage royalty under the Enloe Patents
shall be due on Safe Harbor Absorbent Pants.
4.02 MINIMUM ANNUAL ROYALTY: In each Calendar Year during which this
Agreement is in effect, LICENSEE shall pay to LICENSOR a minimum annual royalty
for Infant Disposable Diapers of five million dollars ($5,000,000.00). Royalties
on Infant Disposable Diapers paid pursuant to Section 4.01(a) shall count
towards the minimum annual royalty.
6
<PAGE>
4.03 ONE ROYALTY: Royalties shall be payable only once on each unit of
product and shall accrue upon sale by LICENSEE.
4.04 ROYALTY BEFORE EFFECTIVE DATE. Commencing as of January 1, 1999 and
until the Effective Date, LICENSEE shall pay LICENSOR a royalty of two and
one-half percent (2.5%) of Net Sales of Infant Disposable Diapers and a royalty
of 5.0 percent (5.0%) of Net Sales of Absorbent Pants; provided, however, that
no percentage royalty under the Enloe Patents shall be due on Safe Harbor Infant
Disposable Diapers or Safe Harbor Absorbent Pants; and provided further that
anything to the foregoing notwithstanding, the minimum payment to LICENSOR under
this Section 4.04 with respect to the month of January, 1999 shall be $250,000,
and with respect to any month thereafter shall not be less than $500,000.
4.05 ROYALTY AFTER CONVERSION DATE. Sales of product manufactured before
the Conversion Date but sold after the Conversion Date will be subject to a
royalty at the same rates as set forth in Section 4.04, which shall be
calculated by applying such royalty rates to LICENSEE's inventory on hand as of
the Conversion Date, except that the royalty payable under this Section 4.05
with respect to such inventory shall not be less than $500,000.
ARTICLE V
PAYMENT AND ACCOUNTING
5.01 MINIMUM PAYMENTS: Except as otherwise provided in Section 5.02, the
minimum annual royalty for Infant Disposable Diapers set forth in Section 4.02
shall be paid by LICENSEE to LICENSOR in quarterly installments of one million
two hundred-fifty thousand dollars ($1,250,000.00) on the last day of each
quarter of the Calendar Year until such time as the minimum annual royalty for
Infant Disposable Diapers for that Calendar Year has been paid to LICENSOR. The
minimum payment of $500,000 per month under Sections 4.04 and 4.05 shall be paid
on the 15th of each month, and any additional percentage royalties shall be paid
on or before the 30th of the following month. The royalty payment under Section
4.05 shall be paid 15 days after the Conversion Date.
5.02 ONGOING ROYALTIES AND ACCOUNTINGS: Within sixty (60) days after the
close of each quarter of the Calendar Year during the term of this Agreement,
and within thirty (30) days after each month during the time prior to the
Effective Date, LICENSEE shall render an accounting to
7
<PAGE>
LICENSOR with respect to all royalty payments due under the provisions of
Article IV. Such accounting shall be accompanied by payment from LICENSEE of the
amounts by which the cumulative royalties due to the end of the period which is
the subject of the accounting for Infant Disposable Diapers and Absorbent Pants,
respectively, exceed the amount of royalties as to such products theretofore
paid for such period. Such accounting shall indicate, for such period, the
monetary amount of Net Sales with respect to which royalty payments are due.
LICENSEE shall keep accurate records in sufficient detail to enable royalties to
be determined and shall maintain such records at its principal place of business
in the United States. Each such accounting shall be treated as confidential and
proprietary information of Paragon to the extent the information therein is not
substantially available elsewhere, and shall only be used for the purposes set
forth herein, PROVIDED, HOWEVER, that the dollar amount of the royalties paid or
payable to LICENSOR hereunder shall not be deemed confidential. LICENSOR's
in-house patent counsel shall maintain the confidentiality of each such
accounting and the information contained therein, and shall only share such
accounting and the information contained therein with such persons at LICENSOR
or its outside counsel or auditors who need to know such information for
purposes of verifying such accounting.
5.03 ROYALTIES UPON TERMINATION: Within sixty (60) days of the Conversion
Date or of termination of this Agreement according to the provisions of Article
VII or Article VIII, LICENSEE shall render an accounting to LICENSOR with
respect to all royalty payments which it is obligated to pay under the
provisions of Article IV and shall pay such royalties to LICENSEE. Such
accounting shall be subject to the confidentiality treatment set forth in
Section 5.02.
5.04 AUDIT: At LICENSOR's request and expense, LICENSEE shall permit an
independent certified public accountant selected by LICENSOR, except one to whom
there shall be some reasonable objection by LICENSEE, to have access, once in
each Calendar Year during regular business hours and upon reasonable notice to
LICENSEE, to such of the records of LICENSEE as may be necessary to verify the
accuracy of the reports and payments made under this Agreement, but said
accountant shall not disclose to LICENSOR any information except that which
relates to the information which should properly have been contained in such
reports as provided for in Sections 5.02 and 5.03. The right to review
LICENSEE's records as to any given time period shall terminate two (2) years
after LICENSOR's receipt of royalties in respect to such time periods.
8
<PAGE>
5.05 INCOME TAX: Any income or other tax that LICENSEE is required to
withhold and pay on behalf of LICENSOR with respect to the royalties payable to
LICENSOR under the Agreement shall be deducted from said royalties prior to
remittance to LICENSOR; provided, however, that in regard to any tax so
deducted, LICENSEE shall give or cause to be given to LICENSOR such assistance
as may reasonably be necessary to enable LICENSOR to claim exemption therefrom
or credit therefor, and in each case shall furnish LICENSOR proper evidence of
the taxes paid on its behalf. Notwithstanding the foregoing, LICENSEE shall not
withhold any income or other tax, if LICENSOR provides its tax number to
LICENSEE, unless a change in law requires withholding notwithstanding the
furnishing of such number.
ARTICLE VI
ARBITRATION
Any dispute between LICENSOR and LICENSEE as to whether or not a given
Infant Disposable Diaper or Absorbent Pant is subject to payment of a percentage
royalty under the terms of this Agreement or the amount of any royalty hereunder
shall be subject to mandatory binding arbitration by a panel of three
arbitrators, one of which will be selected by each of LICENSOR and LICENSEE and
the third of which shall be selected by the other two arbitrators. Any party
which fails to select an arbitrator within 45 days of a written demand for
arbitration hereunder shall be deemed to have waived its right to designate an
arbitrator, and such arbitrator may be selected by such office of JAMS/Endispute
or the American Arbitration Association as the other party shall designate. Any
such arbitration shall be limited in scope to the question of whether or not a
given Infant Disposable Diaper or Absorbent Pant is subject to payment of a
percentage royalty under the terms of this Agreement (including the proper
construction of the Valid Claim(s) of the Enloe Patent asserted to be infringed)
or the required amount of such payment and shall not address any aspect or issue
concerning the validity of any of the Enloe Patents, which validity shall be
presumed. The party losing any such arbitration shall bear the costs of the
three arbitrators, and, in the event the arbitrators conclude that the losing
party was acting in bad faith, the winner's reasonable attorneys' fees, as
determined by the arbitrators. The arbitration shall be conducted pursuant to
such rules and proceedings as the parties shall agree at that time; in the event
of any disagreement between the parties about the terms, conditions or timing of
the arbitration, the arbitrators shall have the authority to resolve the
dispute. The arbitration and any decision rendered shall be confidential to the
parties and shall not be
9
<PAGE>
disclosed to third parties except to the extent required by law, by rules
governing litigation, or by court order.
ARTICLE VII
EFFECTIVE DATE AND TERM
Except as otherwise provided herein, this Agreement will become effective
on the day first written above, and, unless previously terminated in accordance
with any of the provisions hereof, shall remain in effect until the last of the
Enloe Patents to expire, except that the provisions of Section 2.02(b) shall
remain in effect until the last of the Kellenberger Patent, Melius Patent and
Good Patent and any counterpart patents issued in Canada has expired.
ARTICLE VIII
TERMINATION
8.01 BREACH: Failure by LICENSEE or LICENSOR to comply with any of its
obligations and covenants contained in this Agreement shall entitle the other
party to give to the party in default a written notice requiring it to cure such
default(s). If a default is not cured within thirty (30) days after receipt of
notice, the notifying party shall be entitled, without prejudice to any other
rights conferred by this Agreement or by law, to terminate this Agreement by
giving written notice to take effect immediately. The right of each party to
terminate this Agreement shall not be affected by waiver of, or failure to
terminate for any previous default.
8.02 INSOLVENCY: LICENSOR may, at its election, terminate this Agreement
upon the bankruptcy or insolvency of LICENSEE. In such event, termination shall
be deemed effective as of the date of LICENSEE's insolvency but in no event
later than a time prior to LICENSEE's filing of a petition in bankruptcy. This
Section 8.02 shall not apply to LICENSEE'S Chapter 11 Bankruptcy Case No.
98-60390 (United States Bankruptcy Court, Northern District of Georgia, Atlanta
Division).
8.03 SURVIVAL: Termination of this Agreement under Section 8.01 or Section
8.02 shall not terminate the parties' obligations to one another for the period
prior to termination. Without limiting the generality of the foregoing, the
provisions of Article VI shall survive termination of this Agreement under
Section 8.01 or Section 8.02, but the arbitration described in such Article
shall
10
<PAGE>
be limited to Infant Disposable Diapers and Absorbent Pants manufactured, used
or sold by LICENSEE prior to the date of termination.
ARTICLE IX
ASSIGNMENT
9.01 GENERAL: Subject to the provisions of this Article IX, this Agreement
shall be binding upon and inure to the benefit of the successors and assigns of
all or substantially all of LICENSEE'S Infant Disposable Diaper business and the
successors and assigns of all or substantially all of LICENSEE'S Absorbent Pants
business; provided, however, that a successor or assign of only one of such
Infant Disposable Diaper business or Absorbent Pants business shall have the
benefit and burdens of this Agreement only with respect to such line of
business. This Agreement shall not create a license for or otherwise apply to
the activities of successors or assigns prior to the date of any such succession
or assignment.
9.02 EXISTING DIAPER ENTITIES: Notwithstanding Section 9.01 hereof, in the
event of assignment hereunder to or any combination of LICENSEE and an existing
business which sells Infant Disposable Diapers, then (a) the phrase "two hundred
million dollars" in Section 4.01(a) shall be increased by an amount equal to the
sales by such existing business of Infant Disposable Diapers for the twelve
months preceding the date of such assignment or combination ("Existing Business
Diaper Sales"); (b) the figure $5,000,000 in Section 4.02 shall be increased by
an amount equal to two and one half percent (2.5%) of Existing Business Diaper
Sales; (c) the figure $1,250,000 in Section 5.01 shall be increased by an amount
equal to five-eighths of one percent (0.625%) of Existing Business Diaper Sales;
and (d) the royalty rate under Section 4.01(a) shall be two and one-half percent
(2.5%) with respect to such amount of all annual sales by LICENSEE, in excess of
the sum ("Combined Twelve Month Diaper Sales") of Existing Business Diaper Sales
and the sales of Infant Disposable Diapers by LICENSEE in the twelve months
preceding the date of such assignment or combination ("Prior LICENSEE Diaper
Sales"), as shall equal the ratio (i) Existing Business Diaper Sales to (ii)
Combined Twelve Month Diaper Sales (the amount of incremental sales so
determined under this subsection 9.02(d), "Existing Business Attributable Diaper
Increase").
9.03 SUCCESSIVE COMBINATIONS: In the event of more than one assignment or
combination of LICENSEE and an existing business which sells Infant Disposable
Diapers, then the
11
<PAGE>
provisions of Section 9.02 shall continue be applied to each such successive
assignment and thereafter, except that (a) "Existing Business Diaper Sales"
shall equal the sum of (i) all Existing Business Diaper Sales as previously
determined under Section 9.02 (without regard to this Section 9.03), (ii) the
Existing Business Attributable Diaper Increase for the twelve months preceding
such successive assignment or combination (the sum of (i) and (ii), "Old
Existing Business Diaper Sales"); and (iii) the sales of Infant Disposable
Diapers by the existing business which is the subject of such successive
assignment or combination for the twelve months preceding such successive
assignment or combination; and (b) "Prior LICENSEE Diaper Sales" shall equal the
sales by LICENSEE for the twelve months preceding such successive assignment or
combination, less Old Existing Business Diaper Sales.
9.04 CONSENT TO ASSIGNMENT: The license grant hereunder shall be personal
to Paragon and shall be nontransferable and nonassignable to third parties
without the prior written consent of K-C, which consent K-C shall not
unreasonably withhold or unreasonably delay. It shall not be unreasonable for
K-C to withhold or delay its consent if the effect of the proposed transfer or
assignment would be to allow a transferee or assignee to obtain the prospective
right to make, import, use, offer for sale or sell Infant Disposable Diapers or
Absorbent Pants in the Territory without entering into a mutually agreeable
settlement agreement with K-C for any past infringing activity by the transferee
or assignee with respect to the K-C patents identified in this License
Agreement. In addition, the license grant hereunder shall not apply to the
manufacture, import, use or sale of Infant Disposable Diapers or Absorbent Pants
by any other business entity acquired by Paragon, by which Paragon is acquired,
merged with Paragon, consolidated with Paragon, partnered with Paragon or in any
other business arrangement with Paragon after the effective date of this
Settlement Agreement without the prior written consent of K-C, which consent K-C
shall not unreasonably withhold or unreasonably delay. It shall not be
unreasonable for K-C to withhold or delay its consent if the effect of the
proposed transaction would be to allow an acquiring, merging or consolidating
entity or partner to obtain the prospective right to make, import, use, offer
for sale or sell Infant Disposable Diapers or Absorbent Pants in the Territory
without entering into a mutually agreeable settlement agreement with K-C for any
past infringing activity by the acquiring, merging or consolidating entity or
partner with respect to the K-C patents identified in this License Agreement.
12
<PAGE>
ARTICLE X
GOVERNING LAW
This Agreement shall be construed and all questions relating hereto shall
be determined in accordance with the laws of the State of Delaware.
ARTICLE XI
REPRESENTATIONS AND WARRANTIES; LIMITATIONS
11.01 REPRESENTATIONS AND WARRANTIES OF LICENSOR: LICENSOR hereby
represents and warrants the following:
(a) LICENSOR has the full right, power and authority to enter
into this Agreement and perform in accordance with its terms.
(b) LICENSOR has good and complete title in and to (or beneficial
interest to) the Enloe Patents and has the right to license them to LICENSEE in
accordance with the terms of this Agreement.
(c) LICENSOR has good and complete title in and to (or beneficial
interest to) the Kellenberger Patent, Melius Patent and Good Patent (including
any Canadian counterpart patents) and has the right to grant a covenant not to
sue LICENSEE in accordance with the terms of Section 2.02(b) of this Agreement.
11.02 REPRESENTATION AND WARRANTIES OF LICENSEE:
(a) LICENSEE has the full right, power and authority to enter into
this Agreement and perform in accordance with its terms.
(b) LICENSEE has no knowledge of any existing or contingent
impediment, including the effect of its pending bankruptcy proceeding or any
lack of liquidity, to its performing in accordance with the terms of this
Agreement.
11.03 LIMITATIONS:
(a) Except as set forth above, neither party has made, or intends
to make, any express or implied warranty to the other. In particular, LICENSOR
has made no express or implied warranty in this Agreement that LICENSEE's
making, using, or selling of products will not infringe another patent held by
LICENSOR or held by a third party.
13
<PAGE>
(b) Nothing in this Agreement shall be construed as granting by
implication, estoppel, or otherwise, any licenses or rights under patents of
LICENSOR other than the Enloe Patents.
ARTICLE XII
NOTICES
Any notice required or permitted to be given under this Agreement by one
of the parties to the other shall be in writing and shall be deemed to have been
sufficiently given for all purposes hereunder if personally delivered or mailed
by registered or certified mail, postage prepaid, addressed to such party at its
address below or as from time to time may be directed otherwise by such party by
notice to the other party. Any such mailed notice shall be deemed to have been
given three (3) business days after mailing.
All notices to LICENSOR shall be addressed as follows:
Kimberly-Clark Corporation
351 Phelps Drive
Irving, Texas 75038
Attention: Senior Vice President, Law and Government Affairs
All notices to LICENSEE shall be addressed as follows:
Paragon Trade Brands, Inc.
180 Technology Parkway
Norcross, Georgia 30092
Attention: General Counsel
ARTICLE XIII
PATENT MARKING
LICENSEE shall mark each package containing Infant Disposable Diapers or
Absorbent Pants (as the case may be) which, but for this license, would infringe
a Valid Claim with a statement substantially equivalent to
"The products are made under one or more of the following U.S.
Patents: 4,704,116, 4,846,823, 5,413,570, 5,415,644 and 5,599,338."
14
<PAGE>
LICENSEE shall modify such statement upon request of LICENSOR to add a
reference to Enloe Patents which cover LICENSEE's product and that issue after
the date of this Agreement.
LICENSEE shall commence the marking program upon exhaustion of LICENSEE's
current supply of packaging materials.
ARTICLE XIV
WAIVER
The waiver by either of the parties to this Agreement of any breach of any
provision hereof by the other party shall not be construed to be a waiver of any
succeeding breach of such provision or a waiver of the provision itself.
ARTICLE XV
ENFORCEABILITY
If and to the extent that any court or governmental tribunal of competent
jurisdiction holds any of the terms, provisions or conditions or part thereof of
this Agreement, or the application hereof to any circumstances, to be invalid or
unenforceable in a final nonappealable order, the remainder of this Agreement
and the application of such term, provision or condition or part thereof to
circumstances other than those as to which it is held invalid or enforceable
shall not be affected thereby and each of the other terms, provisions and
conditions of this Agreement shall be valid and enforceable to the extent it is
consonant with the intention of the parties upon entering into this Agreement.
ARTICLE XVI
HEADINGS
The headings appearing herein have been inserted solely for the
convenience of the parties hereto and shall not affect the construction, meaning
or interpretation of this Agreement.
15
<PAGE>
ARTICLE XVII
ENTIRE AGREEMENT
This Agreement is entered into as part of a Settlement Agreement. The
terms and provisions contained in this Agreement and the Settlement Agreement
(including its attachments) attached hereto as Exhibit E constitute the entire
agreement and understanding between the parties to this Agreement. Neither party
has relied or will rely on any representation or agreement of the other except
to the extent set forth herein or in the Settlement Agreement (including its
attachments), and neither party shall be bound by or charged with any oral,
written or implied agreements, representations, warranties, understandings,
commitments or obligations not specifically set forth herein or in the
Settlement Agreement (including its attachments). These Agreements may not be
released, discharged, abandoned, changed or modified in any manner except by an
instrument in writing signed by a duly authorized officer of each of the parties
hereto.
Each of the parties hereto has caused this instrument to be executed by
its respective duly authorized representative as of the day and year first above
written.
KIMBERLY-CLARK CORPORATION PARAGON TRADE BRANDS, INC.
BY: /s/ O. George Everbach BY: /s/ B. V. Abraham
-------------------------- ------------------------
O. George Everbach B. V. Abraham
-------------------------- ------------------------
(print) (print)
TITLE: Senior Vice President - TITLE: Chairman and CEO
Law and Government Affairs
-------------------------- ------------------------
(print) (print)
16
LICENSE AGREEMENT
BETWEEN
PARAGON TRADE BRANDS, INC.
AND
KIMBERLY-CLARK CORPORATION.
<PAGE>
LICENSE AGREEMENT
This License Agreement is made and entered into as of this 15th day of
March, 1999, between Paragon Trade Brands, Inc., a Delaware Corporation having a
principal place of business at 180 Technology Parkway, Norcross, Georgia 30092
("LICENSOR"), and Kimberly-Clark Corporation, a Delaware corporation having
offices at 351 Phelps Drive, Irving, Texas 75038 ("LICENSEE").
WITNESSETH
WHEREAS, LICENSEE has requested a license from LICENSOR under certain
patents in order to manufacture disposable products; and
WHEREAS, the parties desire to enter into this License Agreement under the
terms and conditions hereinafter recited.
NOW THEREFORE, it is agreed as follows:
ARTICLE I
DEFINITIONS
As used throughout this Agreement, each term shall have the meaning set
forth in this Article I:
1.01 "LICENSED PATENTS" shall mean U.S. Patent 4,977,011 issued December
11, 1990 to Smith; U.S. Patent 5,209,801 issued May 11, 1993 to Smith; and U.S.
Patent, 4,687,477 issued August 18, 1987 to Suzuki; and/or any U.S.
continuations, divisions, continuations in-part, reissues, and reexaminations
thereof.
1.02 "TERRITORY" shall mean the United States of America, its territories
and possessions.
1.03 "VALID CLAIM" shall mean a claim of the Licensed Patents which has
not been found invalid or unenforceable by a U.S. government tribunal or a U.S.
court of competent jurisdiction in a decision from which no appeal has or may be
taken.
<PAGE>
ARTICLE II
LICENSE
2.01 LICENSE GRANT: LICENSOR grants to LICENSEE, subject to the terms and
conditions of this Agreement, a fully-paid, non-exclusive, right and license
under the Licensed Patents to practice the methods and to make, have made, use
and sell the products therein described and claimed in the Territory. LICENSEE
has no right to grant sublicenses under the Licensed Patents. The term for the
license grant under this Section 2.01 shall commence on January 1, 1999 and,
unless terminated in accordance with Section 2.03, shall remain in full force
and effect until the expiration of the last to expire of the Licensed Patents.
No implied license is granted to LICENSEE other than under the Licensed Patents.
2.02 COVENANT NOT TO SUE: So long as LICENSEE is in compliance with this
Agreement, LICENSOR covenants not to sue LICENSEE for infringement, if any, of
the Licensed Patents arising from the manufacture, use or sale of products by
LICENSEE occurring on or after January 1, 1999.
2.03 TERMINATION: LICENSEE and LICENSOR have entered into a license
agreement dated March 15, 1999, relating to the Enloe Patents (as those patents
are defined in that license agreement) ("Enloe License Agreement"). In the event
that the Enloe License Agreement is terminated and is of no further force and
effect pursuant to Section 2.03 of the Enloe License Agreement, then the license
and covenant not to sue set forth in Section 2.01 and 2.02, respectively, of
this Agreement shall, except with respect to products manufactured prior to the
date of that termination, terminate and be of no further force and effect on and
after the termination date.
ARTICLE III
EFFECTIVE DATE AND TERM
This Agreement will become effective on the day first written above and,
unless previously terminated in accordance with Section 2.03, shall remain in
effect for the term of the last of the Licensed Patents to expire.
2
<PAGE>
ARTICLE IV
ASSIGNMENT
4.01 ASSIGNMENT: This Agreement shall be binding upon and inure to the
benefit of the successors and assigns of all or substantially all of one or more
of LICENSEE's disposable products businesses. This Agreement shall not create a
license for or otherwise apply to the activities of successors or assigns prior
to the date of any such succession or assignment.
4.02 CONSENT TO ASSIGNMENT: The license grant hereunder shall be personal
to LICENSEE and shall be nontransferable and nonassignable to third parties
without the prior written consent of LICENSOR, which consent LICENSOR shall not
unreasonably withhold or unreasonably delay. It shall not be unreasonable for
LICENSOR to withhold or delay its consent if the effect of the proposed transfer
or assignment would be to allow a transferee or assignee to obtain the
prospective right to make, import, use, offer for sale or sell disposable
products in the United States without entering into a mutually agreeable
settlement agreement with LICENSOR for any past infringing activity by the
transferee or assignee with respect to the Licensed Patents.
ARTICLE V
GOVERNING LAW
This Agreement shall be construed, and all questions relating hereto shall
be determined, in accordance with the laws of the State of TEXAS.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES; LIMITATIONS
6.01 REPRESENTATIONS AND WARRANTIES OF LICENSOR: LICENSOR hereby
represents and warrants the following:
(a) LICENSOR has the full right, power and authority to enter into this
Agreement and perform in accordance with its terms.
(b) LICENSOR has good and complete title in and to (or beneficial interest
to) the Licensed Patents and has the right to license them to LICENSEE in
accordance with the term of this Agreement.
3
<PAGE>
6.02 REPRESENTATION AND WARRANTIES OF LICENSEE:
(a) LICENSEE has the full right, power and authority to enter into this
Agreement and perform in accordance with its terms.
(b) LICENSEE has no knowledge of any existing or contingent impediment to
its performing in accordance with the terms of this Agreement.
6.03 LIMITATIONS:
(a) Except as set forth above, neither party has made, or intends to make,
any express or implied warranty to the other. In particular, LICENSOR has made
no express or implied warranty that LICENSEE's making, using, or selling of
products will not infringe another patent held by LICENSOR or held by a third
party.
(b) Nothing in this Agreement shall be construed as granting by
implication, estoppel, or otherwise, any licenses or rights under patents of
LICENSOR other than the Licensed Patents.
ARTICLE VII
NOTICES
Any notice required or permitted to be given under this Agreement by one
of the parties to the other shall be in writing and shall be deemed to have been
sufficiently given for all purposes hereunder if personally delivered or mailed
by registered or certified mail, postage prepaid, addressed to such party at its
address below or as from time to time may be directed otherwise by such party by
notice to the other party. Any such mailed notice shall be deemed to have been
given three (3) business days after mailing.
All notices to LICENSEE shall be addressed as follows:
Kimberly-Clark Corporation
351 Phelps Drive
Irving, Texas 75038
Attention: Senior Vice President, Law and Government Affairs
All notices to LICENSOR shall be addressed as follows:
Paragon Trade Brands, Inc.
180 Technology Parkway
Norcross, Georgia 30092
Attention: General Counsel
ARTICLE VIII
PATENT MARKING
4
<PAGE>
LICENSEE shall mark each package containing products which, but for this
license, would infringe a Valid Claim with a statement substantially equivalent
to one of the following:
"The products are made under one or more of the following U.S. Patents:
4,687,477"
"The products are made under one or more of the following U.S. Patents:
4,977,011 and 5,209,801."
LICENSEE shall modify such statement upon request of LICENSOR to add a
reference to Licensed Patents which cover LICENSEE's product and that issue
after the date of this Agreement.
LICENSEE shall commence the marking program upon exhaustion of LICENSEE's
current supply of packaging materials provided, however, such marking of all
packages shall commence no later than June 1, 1999.
ARTICLE IX
WAIVER
The waiver by either of the parties to this Agreement of any breach of any
provision hereof by the other party shall not be construed to be a waiver of any
succeeding breach of such provision or a waiver of the provision itself.
ARTICLE X
ENFORCEABILITY
If and to the extent that any court or governmental tribunal of competent
jurisdiction holds any of the terms, provisions or conditions or part thereof of
this Agreement, or the application hereof to any circumstances, to be invalid or
unenforceable in a final nonappealable order, the remainder of this Agreement
and the application of such term, provision or condition or part thereof to
circumstances other than those as to which it is held invalid or enforceable
shall not be affected thereby, and each of the other terms, provisions and
conditions of this Agreement shall
5
<PAGE>
be valid and enforceable to the extent it is consonant with the intention of the
parties upon entering into this Agreement.
ARTICLE XI
HEADINGS
The headings appearing herein have been inserted solely for the
convenience of the parties hereto and shall not affect the construction, meaning
or interpretation of this Agreement.
ARTICLE XII
ENTIRE AGREEMENT
This Agreement is entered into as part of a Settlement Agreement. The
terms and provisions contained in this Agreement and the Settlement Agreement
(including its attachments) attached hereto as Exhibit A constitute the entire
agreement and understanding between the parties to this Agreement. Neither party
has relied, or will rely, on any representation or agreement of the other except
to the extent set forth herein or in the Settlement Agreement (including its
attachments), and neither party shall be bound by or charged with any oral,
written or implied agreements, representations, warranties, understandings,
commitments or obligations not specifically set forth herein or in the
Settlement Agreement (including its attachments). These Agreements may not be
released, discharged, abandoned, changed or modified in any manner except by an
instrument in writing signed by a duly authorized officer of each of the parties
hereto.
Each of the parties hereto has caused this instrument to be executed by
its respective duly authorized representative as of the day and year first above
written.
KIMBERLY-CLARK CORPORATION PARAGON TRADE BRANDS, INC.
BY: /s/ O. George Everbach BY: /s/ B. V. Abraham
-------------------------- ------------------------
O. George Everbach B. V. Abraham
-------------------------- ------------------------
(print) (print)
TITLE: Senior Vice President - TITLE: Chairman and CEO
Law and Government Affairs
-------------------------- ------------------------
(print) (print)
6
PARAGON TRADE BRANDS, INC.
Subsidiaries of the Company
<TABLE>
<CAPTION>
SUBSIDIARY JURISDICTION OF INCORPORATION
---------- -----------------------------
<S> <C>
Paragon Trade Brands (Canada) Inc. Canada
Paragon Trade Brands FSC, Inc. U.S. Virgin Islands
PTB International, Inc. State of Delaware
PTB Acquisition Sub, Inc. State of Delaware
PTB Holdings, Inc. State of Ohio
Paragon-Mabesa International, S.A. de C.V. (49%) Mexico
</TABLE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K into Paragon Trade Brands, Inc.'s previously
filed Registration Statements on Form S-8, File Nos. 33-73726, 33-61802,
33-95344 and 33-34626.
Arthur Andersen LLP
Atlanta, Georgia
April 9, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM FORM 10K FOR THE YEAR ENDED DECEMBER 27, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-START> DEC-29-1997
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-27-1998
<PERIOD-END> DEC-27-1998
<CASH> 22,625
<SECURITIES> 0
<RECEIVABLES> 87,856
<ALLOWANCES> 8,700
<INVENTORY> 53,282
<CURRENT-ASSETS> 163,646
<PP&E> 271,298
<DEPRECIATION> (165,098)
<TOTAL-ASSETS> 429,287
<CURRENT-LIABILITIES> 78,495
<BONDS> 0
0
0
<COMMON> 124
<OTHER-SE> (61,964)
<TOTAL-LIABILITY-AND-EQUITY> 429,287
<SALES> 535,207
<TOTAL-REVENUES> 535,207
<CGS> 428,572
<TOTAL-COSTS> 428,572
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 450
<INCOME-PRETAX> (57,292)
<INCOME-TAX> 8,091
<INCOME-CONTINUING> (65,383)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (65,383)
<EPS-PRIMARY> (5.48)
<EPS-DILUTED> (5.48)
</TABLE>
