<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the thirteen week period ended March 28, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ____________
Commission File No. 1-11368
PARAGON TRADE BRANDS, INC.
(Exact name of registrant as specified in its charter)
Delaware 91-1554663
--------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
180 Technology Parkway
Norcross, Georgia 30092
--------------------------------------------
(Address of principal executive offices)
(678) 969-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
The number of shares outstanding of the registrant's common stock was 11,946,226
shares ($.01 par value) as of March 28, 1999.
Page 1
Exhibit Index on Page 42
<PAGE> 2
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q FILING
FOR THE THIRTEEN WEEK PERIOD ENDED MARCH 28, 1999
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Consolidated Statements of Operations 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of 21
Operations
Item 3. Quantitative and Qualitative Disclosure about Market Risk 31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 31
Item 2. Changes in Securities (not applicable)
Item 3 Defaults in Senior Securities 37
Item 4. Submission of Matters to a Vote of Security Holders (not applicable)
Item 5. Other Information (not applicable)
Item 6. Exhibits and Reports on Form 8-K 37
Signature Page 41
Exhibit Index 42
Exhibits 46
</TABLE>
-2-
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
(NOTE 2)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
--------------------
March 28, 1999 March 29, 1998
-------------- --------------
<S> <C> <C>
Sales, net of discounts and allowances .......... $ 126,244 $ 138,297
Cost of sales ................................... 109,537 110,799
--------- ---------
Gross profit .................................... 16,707 27,498
Selling, general and administrative expense ..... 21,443 19,052
Research and development expense ................ 1,008 1,402
--------- ---------
Operating profit (loss) ......................... (5,744) 7,044
Equity in earnings of unconsolidated subsidiaries 371 924
Interest expense(1) ............................. 102 290
Other income .................................... 496 424
--------- ---------
Earnings (loss) before income taxes and
bankruptcy costs ....................... (4,979) 8,102
Bankruptcy costs ................................ 1,927 1,646
Provision for income taxes ...................... 313 450
--------- ---------
Net earnings (loss) ............................. $ (7,219) $ 6,006
========= =========
Basic earnings (loss) per common share .......... $ (.60) $ .50
========= =========
Diluted earnings (loss) per common share ........ $ (.60) $ .50
========= =========
Dividends paid .................................. $ -- $ --
========= =========
(1)Contractual Interest ......................... $ 1,335 $ 1,550
========= =========
</TABLE>
See Accompanying Notes to Financial Statements
-3-
<PAGE> 4
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(NOTE 2)
<TABLE>
<CAPTION>
March 28, 1999 December 27, 1998
-------------- -----------------
<S> <C> <C>
ASSETS
Cash and short-term investments......................... $ 25,274 $ 22,625
Receivables............................................. 59,324 79,156
Inventories............................................. 51,999 53,282
Current portion of deferred income taxes................ 3,334 4,260
Prepaid expenses........................................ 5,082 4,323
------------ ------------
Total current assets............................... 145,013 163,646
Property and equipment.................................. 102,202 106,200
Construction in progress................................ 28,003 19,626
Assets held for sale.................................... 1,463 4,691
Investment in unconsolidated subsidiary, at cost........ 22,743 22,743
Investment in and advances to unconsolidated
subsidiaries, at equity............................ 67,537 66,041
Goodwill 32,340 32,819
Other assets............................................ 13,308 13,521
------------ ------------
Total assets ...................................... $ 412,609 $ 429,287
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Checks issued but not cleared........................... $ 8,014 $ 12,433
Accounts payable........................................ 32,264 32,416
Accrued liabilities..................................... 29,994 33,646
------------ ------------
Total current liabilities............................... 70,272 78,495
Liabilities subject to compromise (Note 9).............. 406,527 406,859
Deferred income taxes................................... 4,797 5,773
------------ ------------
Total liabilities.................................. 481,596 491,127
Commitments and contingencies (Notes 1 and 11)
Shareholders' deficit:
Preferred stock: Authorized 10,000,000 shares,
no shares issued, $.01 par value................... -- --
Common stock: Authorized 25,000,000 shares,
issued 12,384,975 and 12,378,616
shares, $.01 par value............................. 124 124
Capital surplus......................................... 143,728 143,918
Accumulated other comprehensive loss.................... (1,532) (1,840)
Retained deficit........................................ (200,977) (193,758)
Less: Treasury stock, 438,750 and 429,696
shares, at cost (10,330) (10,284)
------------ ------------
Total shareholders' deficit........................ (68,987) (61,840)
------------ ------------
Total liabilities and shareholders' deficit........
$ 412,609 $ 429,287
============ ============
</TABLE>
See Accompanying Notes to Financial Statements.
-4-
<PAGE> 5
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
(NOTE 2)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
--------------------
March 28, 1999 March 29, 1998
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) ............................. $ (7,219) $ 6,006
Non-cash charges (benefits) to earnings:
Depreciation and amortization .............. 8,436 8,494
Deferred income taxes ...................... (50) (34)
Equity in earnings of unconsolidated
subsidiaries ........................... (370) (602)
Changes in operating assets and liabilities:
Accounts receivable ........................ 16,988 535
Inventories and prepaid expenses ........... 524 (130)
Accounts payable ........................... (152) 25,506
Checks issued but not cleared .............. (4,419) (4,999)
Pre-petition reclamation payment
authorized by court .................... (332) --
Accrued liabilities ........................ (3,888) 1,142
Other ........................................... (782) (1,812)
-------- --------
Net cash provided by operating activities... 8,736 34,106
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property and equipment ......... (11,085) (3,411)
Proceeds from sale of property and equipment .... 4,800 3,408
Proceeds from sale of Changing Paradigms, Inc.... 350 --
Investment in and advances to unconsolidated
subsidiaries, at equity .................... (800) (2,488)
Other ........................................... 648 (2,036)
-------- --------
Net cash used by investing activities ...... (6,087) (4,527)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in short-term borrowings ........... -- 470
-------- --------
Net cash provided by financing
activities ............................ -- 470
-------- --------
NET INCREASE IN CASH ............................ 2,649 30,049
Cash at beginning of period ..................... 22,625 991
-------- --------
Cash at end of period ........................... $ 25,274 $ 31,040
======== ========
Cash paid (received) during the period for:
Interest, net of amounts capitalized ....... $ 102 $ 1,010
======== ========
Income taxes ............................... $ 464 $ 840
======== ========
Bankruptcy costs ........................... $ 1,323 $ 413
======== ========
</TABLE>
See Accompanying Notes to Financial Statements.
-5-
<PAGE> 6
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS
FOR THE THIRTEEN WEEK PERIOD ENDED MARCH 29, 1998
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
NOTE 1: CHAPTER 11 PROCEEDINGS
On January 6, 1998, Paragon Trade Brands, Inc. ("Paragon" or the "Company")
filed for relief under Chapter 11 of the United States Bankruptcy Code (the
"Chapter 11 filing"), in the United States Bankruptcy Court for the Northern
District of Georgia. The Company is currently operating as a
debtor-in-possession under the Bankruptcy Code.
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 infringed two of P&G's dual cuff
diaper patents. The lawsuit sought injunctive relief, lost profit and royalty
damages, treble damages and attorneys' fees and costs. The Company denied
liability under the patents and counterclaimed for patent infringement and
violation of antitrust laws by P&G.
On December 30, 1997, the District Court issued a Judgment and Opinion finding
that P&G's dual cuff diaper patents were valid and infringed by certain of the
Company's disposable diaper products, while also rejecting the Company's patent
infringement claims against P&G. The District Court had earlier dismissed the
Company's antitrust counterclaim on summary judgment. The Judgment entitled P&G
to damages based on sales of the Company's diapers containing the "inner-leg
gather" feature. While the final damages number of approximately $178,400 was
not entered by the District Court until June 2, 1998, the Company originally
estimated the liability and associated litigation costs to be approximately
$200,000. The amount of the award resulted in violation of certain covenants
under the Company's then-existing bank loan agreements. As a result, the
issuance of the Judgment and the uncertainty it created caused an immediate and
critical liquidity issue for the Company. The Chapter 11 filing was designed to
prevent P&G from placing liens on Company property, permit the Company to appeal
the Delaware District Court's decision 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 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.
-6-
<PAGE> 7
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
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 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 resumed on April 13,
14 and 15, 1999. Closing arguments have been scheduled for June 8, 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. 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 SAP. While the Company is working diligently with its SAP suppliers to
develop a better performing alternative
-7-
<PAGE> 8
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
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 has
filed a motion with the Bankruptcy Court to seek approval of the settlement and
a hearing date has been set for June 9, 10 and 11, 1999. 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 a plan of
reorganization for the Company. The Company believes, however, that it may not
be possible to satisfy in full all of the claims against the Company. 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 Official
Committee of Unsecured Creditors (the "Creditors' Committee") and the Official
Committee of Equity Security Holders (the "Equity Committee" and together with
the Creditors' Committee, 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., which was sold in October of 1998. The following information summarizes
the combined results of operations for the thirteen-week periods ended March 28,
1999 and March 29, 1998, as well as the combined balance sheets as of March 28,
1999 and December 27, 1998 for these subsidiaries. This information has been
prepared on the same basis as the consolidated financial statements.
<TABLE>
<CAPTION>
Thirteen Weeks Ended
--------------------
March 28, 1999 March 29, 1998
-------------- --------------
<S> <C> <C>
Sales, net of discounts and allowances................ $ 8,467 $ 14,802
Gross profit.......................................... $ 1,174 $ 2,431
Earnings before income taxes.......................... $ 1,547 $ 2,148
Net earnings.......................................... $ 1,284 $ 1,664
</TABLE>
-8-
<PAGE> 9
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
March 28, 1999 December 27, 1998
-------------- -----------------
<S> <C> <C>
Current assets........................................ $ 17,444 $ 17,863
Non-current assets.................................... $ 55,657 $ 54,734
Current liabilities................................... $ 4,710 $ 5,700
Non-current liabilities............................... $ 8,427 $ 8,495
</TABLE>
NOTE 2: BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
AND REPORTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of Paragon Trade
Brands, Inc. and its wholly-owned subsidiaries. All significant intercompany
transactions and accounts have been eliminated.
The accompanying consolidated balance sheet as of December 27, 1998, which has
been derived from audited financial statements, and the unaudited interim
consolidated financial statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
note disclosures normally included in annual financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to those rules and regulations, although the Company believes
that the disclosures made are adequate to make the information presented not
misleading. It is suggested that these consolidated financial statements be read
in conjunction with the financial statements and the notes thereto included in
the Company's latest annual report on Form 10-K.
In the opinion of management, all adjustments necessary for a fair statement of
the results of the interim periods have been included. All such interim
adjustments are of a normal recurring nature except for the bankruptcy-related
costs. The results of operations for the thirteen week period ending March 28,
1999 should not be regarded as necessarily indicative of the results that may be
expected for the full year.
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 11, 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.
New Accounting Standards
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." This statement requires
capitalization of certain costs of internal-use software. The Company adopted
this statement in the quarter ended March 28, 1999, and it did not have a
material impact on the financial statements.
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on the
Costs of Start-up Activities." This statement requires that the costs of
start-up activities and organizational costs be expensed as incurred. Any of
these costs previously capitalized by a company must be written off in the year
of adoption. The Company adopted this statement in the quarter ended March 28,
1999, and the equity in earnings of unconsolidated subsidiaries included $519 in
charges as a result of the adoption of the statement.
-9-
<PAGE> 10
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
Reclassifications
Certain reclassifications have been made to the prior years' financial
statements to conform them to the current year's presentation.
NOTE 3: BANKRUPTCY COSTS
Bankruptcy costs were directly associated with the Company's Chapter 11
reorganization proceedings and consisted of the following:
<TABLE>
<CAPTION>
Thirteen Weeks Ended
--------------------
March 28, 1999 March 29, 1998
-------------- --------------
<S> <C> <C>
Professional fees..................................... $ 1,897 $ 1,590
Amortization of DIP Credit Facility
Deferred financing costs......................... 204 --
Other................................................. 1 88
Interest Income....................................... (175) (32)
-------------- --------------
$ 1,927 $ 1,646
============== ==============
</TABLE>
NOTE 4: INCOME TAXES
Income tax expense for the subsidiaries not included in the Chapter 11 filing
was $313 and $450 during the periods ended March 28, 1999 and March 29, 1998,
respectively. The Company recorded an income tax benefit of approximately $3,000
during the period ended March 28, 1999, which was offset by an increase in the
valuation allowances with respect to its net deferred and other tax-related
assets as realization is dependent upon sufficient taxable income in the future.
The Company recorded income tax expense of approximately $1,800 during the
period ended March 29, 1998, which was offset by a reduction in the valuation
allowances.
NOTE 5: COMPREHENSIVE INCOME (LOSS)
The following are the components of comprehensive income (loss):
<TABLE>
<CAPTION>
Thirteen Weeks Ended
--------------------
March 28, 1999 March 29, 1998
-------------- --------------
<S> <C> <C>
Net income (loss)..................................... $ (7,219) $ 6,006
Foreign currency translation adjustment............... 308 12
----------- -----------
Comprehensive income (loss)........................... $ (6,911) $ 6,018
=========== ===========
</TABLE>
NOTE 6: RECEIVABLES
Receivables consist of the following:
<TABLE>
<CAPTION>
March 28, 1999 December 27, 1998
-------------- -----------------
<S> <C> <C>
Accounts receivable - trade........................... $ 57,614 $ 71,079
Other receivables..................................... 12,658 16,777
----------- -----------
70,272 87,856
Less: Allowance for doubtful accounts................ (10,948) (8,700)
----------- -----------
Net receivables....................................... $ 59,324 $ 79,156
----------- -----------
</TABLE>
-10-
<PAGE> 11
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
NOTE 7: INVENTORIES
Inventories consist of the following:
March 28, 1999 December 27, 1998
-------------- -----------------
<S> <C> <C>
LIFO:
Raw materials - pulp......................... $ 295 $ 232
Finished goods............................... 28,010 31,417
FIFO:
Raw materials - other........................ 8,196 7,346
Materials and supplies....................... 21,821 20,924
----------- -----------
58,322 59,919
Reserve for excess and
obsolete items........................... (6,323) (6,637)
----------- -----------
Net inventories....................................... $ 51,999 $ 53,282
=========== ===========
</TABLE>
NOTE 8: ACCRUED LIABILITIES
Accrued liabilities are as follows:
<TABLE>
<CAPTION>
March 28, 1999 December 27, 1998
-------------- -----------------
<S> <C> <C>
Payroll - wages and salaries, incentive awards,
retirement, vacation and severance pay........... $ 10,196 $ 16,977
Coupons and promotions................................ 6,806 5,994
Royalties............................................. 3,836 718
Other................................................. 9,156 9,957
----------- -----------
Total................................................. $ 29,994 $ 33,646
=========== ===========
</TABLE>
NOTE 9: 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>
March 28, 1999 December 27, 1998
-------------- -----------------
<S> <C> <C>
Accrued settlement contingency........................ $ 278,500 $ 278,500
Bank debt............................................. 81,397 81,397
Accounts payable...................................... 39,420 39,752
Accrued liabilities .................................. 5,920 5,920
Deferred compensation................................. 1,290 1,290
----------- -----------
$ 406,527 $ 406,859
=========== ===========
</TABLE>
-11-
<PAGE> 12
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
NOTE 10: 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>
Thirteen Weeks Ended
--------------------
March 28, 1999 March 29, 1998
-------------- --------------
<S> <C> <C>
Net earnings (loss) ........................ $(7,219) $ 6,006
======= =======
Weighted average number of common
shares used in basic EPS (000's) ..... 11,950 11,934
Effect of dilutive securities:
Stock options (000's) ................ -- --
------- -------
Weighted average number of common
shares and potentially dilutive common
stock in dilutive EPS (000's) ........ 11,950 11,934
======= =======
Basic earnings (loss) per common share ..... $ (.60) $ .50
======= =======
Diluted earnings (loss) per common share ... $ (.60) $ .50
======= =======
</TABLE>
Options to purchase 687,247 and 760,853 shares of common stock outstanding
during the periods ending March 28, 1999 and March 29, 1998, respectively, were
not included in the calculation because the options' exercise price was greater
than the average market price of the common shares.
Diluted and basic earnings (loss) per share are the same for the periods ended
March 28, 1999 and March 29, 1998 because the computation of diluted earnings
(loss) per share was anti-dilutive.
NOTE 11: 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.
-12-
<PAGE> 13
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
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 $2,300,000 (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 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 resumed on April 13,
14 and 15, 1999. Closing arguments have been scheduled for June 8, 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
-13-
<PAGE> 14
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
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 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
-14-
<PAGE> 15
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
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.
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. 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 SAP in diapers and training pants, so
long as the Company remains 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
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 has
filed a motion with the Bankruptcy Court to seek approval of the settlement and
a hearing date has been set for June 9, 10 and 11, 1999. 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.
-15-
<PAGE> 16
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
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 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 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 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 resumed on April 13,
14 and 15, 1999. Closing arguments have been scheduled for June 8, 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.
-16-
<PAGE> 17
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
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. 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. 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 remains 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 has
filed a motion with the Bankruptcy Court to seek approval of the settlement and
a hearing date has been set for June 9, 10 and 11, 1999. 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.
By Order of the Bankruptcy Court on April 19, 1999, the Company's exclusivity
period, during which time only the Company can propose a plan of reorganization,
was extended initially to May 19, 1999. Should no interested party object by May
12, 1999, the Company's exclusivity period will automatically extend to June 19,
1999. If a timely objection is filed, a hearing is scheduled for May 17, 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 March 28, 1999, there were no outstanding direct
borrowings under this facility. The Company had an aggregate of $3,604 in
letters of credit issued under the DIP Credit Facility at March 28, 1999. The
DIP Credit Facility contains customary covenants. The Company for a period of
time had been unable to fully comply with
-17-
<PAGE> 18
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
certain reporting requirements of such covenants. The Company obtained waivers
with respect to these events of default which were effective through May 10,
1999. The Company believes that it is in compliance with the reporting
requirements of the DIP Credit Facility. 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.
Tracy Patent - The Company had previously received notice from a Ms. Rhonda
Tracy that Ms. Tracy believes the Company's diapers infringe a patent issued in
August 1998 to Ms. Tracy (U.S. Patent No. 5,797,824). The Company responded,
based upon advice of its independent patent counsel, that it believes its
products do not infringe any valid claim of Ms. Tracy's patent. On April 29,
1999, the Company received notice that Ms. Tracy had filed suit in the United
States District Court for the Northern District of Illinois against K-C, Tyco
International, Ltd., Drypers Corporation and a number of the Company's
customers, alleging infringement of her patent. The Company was not named as a
defendant in this suit. Rather, Ms. Tracy indicated in her April 29, 1999 letter
that the Company would be sued upon completion of the current suit. The Company
is currently evaluating its options regarding this lawsuit, including, among
other things, seeking to intervene in the suit.
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 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.
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<PAGE> 19
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
At March 28, 1999, there were no outstanding direct borrowings under the DIP
Credit Facility. The Company had an aggregate of $3,604 in letters of credit
issued under the DIP Credit Facility at March 28, 1999. The DIP Credit Facility
contains customary covenants. The Company for a period of time had been unable
to fully comply with certain reporting requirements of such covenants. The
Company obtained waivers with respect to these events of default which were
effective through May 10, 1999. The Company believes that it is in compliance
with the reporting requirements of the DIP Credit Facility.
At December 28, 1997, the Company maintained a $150,000 revolving credit
facility with a group of nine financial institutions available through February
2001. At December 28, 1997, borrowings under this credit facility totaled
$70,000. Interest was at fixed or floating rates based on the financial
institution's cost of funds. Paragon Trade Brands (Canada) Inc. ("PTB Canada")
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. 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.
PTB Canada entered into a new $3,000 Cdn operating credit facility with a
financial institution dated February 11, 1998. Borrowings under the prior
Canadian revolving credit facility were repaid in full with the proceeds from
borrowings under the new Canadian operating credit facility. Borrowings under
this Canadian operating credit facility are secured by substantially all of PTB
Canada'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 PTB Canada's trade accounts receivable. There were no borrowings outstanding
under this operating credit facility on March 28, 1999. See Note 14.
NOTE 13: SEGMENT REPORTING
The Company operates principally in two segments that are organized based on the
nature of the products sold: (i) infant care and (ii) feminine care and adult
incontinence. Each operating segment contains closely related products that are
unique to that particular segment. The results of Changing Paradigms, Inc.,
which was sold in October of 1998, and the Company's international investment in
joint ventures in Mexico, Argentina, Brazil and China are reported in the
corporate and other segment.
Management evaluates the performance of its operating segments separately to
individually monitor the different factors impacting financial performance.
Segment operating profit is comprised of net sales less cost of sales and
selling, general and administrative expense. Loss contingencies and asset
impairments are recorded in the appropriate operating segment.
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<PAGE> 20
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
Certain administrative expenses common to all operating segments are currently
allocated to the infant care operating segment. International investments,
financial costs, such as interest income and expense, and income taxes are
managed by, and recorded in, the corporate and other operating segment.
<TABLE>
<CAPTION>
Feminine
Care/Adult Corporate/
Period Ending March 28, 1999 Infant Care Incontinence Other Total
----------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
Net sales $ 123,356 $ 2,888 $ -- $ 126,244
Operating profit (loss) (2,470) (3,274) -- (5,744)
<CAPTION>
Feminine
Care/Adult Corporate/
Period Ending March 29, 1998 Infant Care Incontinence Other Total
----------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
Net sales $ 131,915 $ 1,487 $ 4,895 $ 138,297
Operating profit (loss) 10,030 (3,332) 347 7,044
</TABLE>
NOTE 14: SUBSEQUENT EVENT
On April 30, 1999, the Company announced that its Canadian subsidiary, PTB
Canada, would cease manufacturing infant disposable diapers at its Brampton,
Ontario facility. The Company anticipates recording a charge to earnings in the
second quarter of 1999 in connection with costs related to this action. The
Brampton plant employed approximately 113 people. The Company announced that the
facility would curtail manufacturing operations over a few weeks' period of time
while the Company transitions its Canadian customers to its Harmony,
Pennsylvania facility. Thereafter, the Company expects that the Brampton
facility will operate as a warehouse and distribution facility.
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<PAGE> 21
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
THIRTEEN WEEKS ENDED MARCH 28, 1999 COMPARED TO THIRTEEN WEEKS ENDED
MARCH 29, 1998
CHAPTER 11 PROCEEDINGS
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 infringed two of P&G's dual cuff diaper patents. The lawsuit sought
injunctive relief, lost profit and royalty damages, treble damages and
attorneys' fees and costs. The Company denied liability under the patents and
counterclaimed for patent infringement and violation of antitrust laws by P&G.
The Company also disclosed that if P&G were to prevail on its claims, an award
of all or a substantial amount of the relief requested by P&G could have a
material adverse effect on the Company's financial condition and results of
operations.
On December 30, 1997, the District Court issued a Judgment and Opinion which
found, in essence, two of P&G's dual cuff diaper patents to be valid and
infringed by certain of the Company's disposable diaper products, while also
rejecting the Company's patent infringement claims against P&G. The District
Court had earlier dismissed the Company's antitrust counterclaim on summary
judgment. The Judgment entitled P&G to damages based on sales of the Company's
diapers containing the "inner-leg gather" feature. While the final damages
number of approximately $178.4 million was not entered by the District Court
until June 2, 1998, the Company originally estimated the liability and
associated litigation costs to be approximately $200 million. The amount of the
award resulted in violation of certain covenants under the Company's
then-existing bank loan agreements. As a result, the issuance of the Judgment
and the uncertainty it created caused an immediate and critical liquidity issue
for the Company.
On January 6, 1998, the Judgment was entered on the docket in Delaware in such a
manner that P&G would have been able to begin placing liens on the Company's
assets. As a result, the Company filed for relief under Chapter 11 of the
Bankruptcy Code, 11 U.S.C. Section 101 et seq., in the United States Bankruptcy
Court for the Northern District of Georgia (Case No. 98-60390) on January 6,
1998 (the "Chapter 11 filing"). None of the Company's subsidiaries were included
in the Chapter 11 filing. The Chapter 11 filing was designed to prevent P&G from
placing liens on Company property, permit the Company to appeal the Delaware
District Court's decision 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.
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<PAGE> 22
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 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 resumed on April 13,
14 and 15, 1999. Closing arguments have been scheduled for June 8, 1999. Both
the Official Committee of Equity Holders (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 "PART II:
OTHER INFORMATION, ITEM 1: LEGAL PROCEEDINGS."
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. 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.
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<PAGE> 23
As a part of the K-C License Agreement, K-C has agreed not to sue the Company on
two of K-C's patents related to the use of SAP in diapers and training pants, so
long as the Company remains within the SAP Safe Harbor. The Company 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 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 has
filed a motion with the Bankruptcy Court to seek approval of the settlement and
a hearing date has been set for June 9, 10 and 11, 1999. 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 11 of Notes to Financial Statements" and "PART
II: OTHER INFORMATION, ITEM 1: 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.
RESULTS OF OPERATIONS
Net loss was $7.2 million in the first quarter of 1999 compared to net earnings
of $6.0 million in the first quarter of 1998. Reduced volume, higher royalties
and product costs, manufacturing inefficiencies due to the lower volume, product
design-related machine changeovers, and increased SG&A expenditures all
contributed to the loss in the first quarter of 1999. The first quarter of 1999
results were also negatively impacted by a price concession made to an export
customer to address product acceptance issues. Included in the first quarter
1999 results are bankruptcy costs of $1.9 million compared to $1.6 million in
the first quarter of 1998.
Basic loss per share in the first quarter of 1999 was $.60 compared to basic
earnings per share of $.50 in the first quarter of 1998. Excluding the effects
of contractual interest and bankruptcy costs, net of tax, and the tax valuation
allowance matters discussed below, basic loss per share was $.32 in the first
quarter of 1999 compared to basic earnings of $.35 per share in the first
quarter of 1998.
Infant care operating losses were $2.5 million in the first quarter of 1999
compared to an operating profit of $10.0 million in the first quarter of 1998.
Lower unit volume, increased product royalties and material costs, the
concession discussed above and manufacturing inefficiencies due to lower volume
and machine changeovers all contributed to the infant care operating loss.
Feminine care and adult incontinence operating losses were $3.3 million in the
first quarters of 1999 and 1998. Losses are expected to continue until volume is
significantly increased to absorb existing manufacturing capacity.
The Company experienced greater than anticipated operating losses in its
feminine care and adult incontinence businesses in 1998 and 1997. While the
Company expects these losses to continue near-term, the Company has developed a
business plan that supports the realization of its investment in its feminine
care and adult incontinence business. Accordingly, the Company has not recorded
any adjustments in its financial statements
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<PAGE> 24
relating to the recoverability of the operating assets of the feminine care and
adult incontinence business The Company's ability to recover its investment is
dependent upon a prompt emergence from Chapter 11 and the successful execution
of the Company's feminine care and adult incontinence business plan. The Company
cannot predict at this time when it will emerge from Chapter 11 protection. The
Company believes that once it emerges from Chapter 11, the feminine care and
adult incontinence business will see an increase in sales and improved results.
The Company cannot predict, however, whether or when such improved results will
be realized. See "Risks and Uncertainties" herein.
NET SALES
Overall net sales were $126.2 million in the first quarter of 1999 compared to
$138.3 million in the first quarter of 1998.
Infant care net sales decreased 6.3 percent to $123.4 compared to $131.9 in the
first quarter of 1998. Unit sales decreased 6.6 percent to 826.7 million units
compared to 885.4 million units in the first quarter of 1998. The decrease in
sales was due to a number of reasons, including certain product performance
issues primarily related to the SAP used in diapers and training pants
manufactured in late 1998 and early 1999, the discontinuation of shipments to a
major customer since mid-1998 due to product design issues, continued
competitive pressures and the uncertainties related to the Company's Chapter 11
proceedings. In addition, a price concession was made to an export customer
during the first quarter of 1999 to address product acceptance issues.
The Company believes that the product performance issues are being addressed as
a result of the conversion to a dual cuff diaper and the introduction of an
improved SAP in the first quarter of 1999, both of which have been completed,
and other product changes planned for the second quarter of 1999. The Company
also believes that shipments to the major customer that had been suspended in
1998 will reach normal levels during the second half of 1999. Volume remained
under pressure during the quarter from discounts and promotional allowances by
branded manufacturers and value segment competitors. Infant care volume and
sales prices are expected to remain under pressure due to product performance
and design issues, until remedied, continued competitive initiatives from both
national brand and store brand competitors and a prolonged Chapter 11 case.
However, the continuing roll-out of an improved Ultra diaper which incorporates
stretch tabs and a hook and loop closure system, and the introduction of a new
training pant product are expected to increase volume during the second half of
1999.
The Company began to implement a price increase of approximately 5 percent
during the fourth quarter of 1998 in response to price increases announced by
K-C and P&G. As a result, excluding the effect of a price concession made to an
export customer in the first quarter of 1999 described above, average sales
prices during the first quarter of 1999 were higher compared to the first
quarter of 1998. It is difficult to predict the amount of the final realization
of this price increase due to competitive factors previously discussed and the
Company's continuing Chapter 11 case. See "Risks and Uncertainties" herein.
Feminine care and adult incontinence sales nearly doubled to $2.9 million in the
first quarter of 1999 compared to $1.5 million in the first quarter of 1998 due
to the shipment of product to new customers. However, the uncertainty caused by
the Company's chapter 11 filing has significantly impacted the ability to
attract additional sales. The Company expects this condition to persist until
the Company's emergence from Chapter 11. See "Risks and Uncertainties" herein.
Corporate and other net sales of $4.9 million in the first quarter of 1998
relate to Changing Paradigms which was sold in October of 1998.
COST OF SALES
Overall cost of sales in the first quarter of 1999 was $109.5 million compared
to $110.8 million in the first quarter of 1998. As a percentage of net sales,
cost of sales was 86.8 percent in the first quarter of 1999 compared to 80.1
percent in the first quarter of 1998.
Infant care costs were $103.5 million in the first quarter of 1999 compared to
$102.3 million in the first quarter of 1998. As a percentage of net sales,
infant care cost of sales was 83.7 percent in the first quarter of 1999 compared
to 77.5 percent in 1998. This increase in costs as a percentage of sales was due
to manufacturing inefficiencies due to lower volume, increased raw material
costs associated with the single cuff product and higher product royalties as a
result of the settlement and licensing agreements reached in the first quarter
of 1999
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<PAGE> 25
with P&G and K-C. Product costs are expected to increase significantly in 1999
due to the payment of royalties to P&G and K-C, increased price and usage of the
new SAP and increased product and manufacturing costs associated with the
continuing roll-out of the improved Ultra diaper described above. These
increased costs are expected to be partially offset by manufacturing
efficiencies resulting from volume increases anticipated in the second half of
1999 and management cost reduction initiatives.
Infant care raw material prices, primarily pulp, were at lower price levels in
the first quarter of 1999 compared to the first quarter of 1998. SAP costs,
however, increased during the first quarter of 1999 compared to the first
quarter of 1998. Raw material prices, primarily pulp, are expected to increase
in 1999.
Infant care depreciation costs were $5.8 million in the first quarter of 1999
compared to $6.6 million in first quarter of 1998.
Feminine care and adult incontinence cost of sales was $6.0 million in the first
quarter of 1999 compared to $4.3 million in the first quarter of 1998. As a
percentage of net sales, cost of sales was 206.9 percent in the first quarter of
1999 compared to 286.7 percent in the first quarter of 1998. Overall cost of
sales is expected to remain greater than net sales until volume is significantly
increased to absorb existing manufacturing capacity. See "Risks and
Uncertainties" herein.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses were $21.4 million in the first quarter of 1999 compared to $19.1
million in the first quarter of 1998. As a percentage of net sales, these
expenses were 17.0 percent in the first quarter of 1999 compared to 13.8 percent
in 1998. The increase in SG&A is primarily attributable to an increase in
promotional spending, information technology and sales and marketing
expenditures. Depreciation and amortization costs included in SG&A increased to
$1.6 million in the first quarter of 1999 compared to $.8 million in the first
quarter of 1998. This increase resulted from the amortization of software and
consulting costs associated with the implementation of an enterprise resource
planning system in the fourth quarter of 1998. Overall, SG&A expenses are
expected to remain at similar levels throughout 1999.
RESEARCH AND DEVELOPMENT
Research and development expenses were $1.0 million in the first quarter of 1999
compared to $1.4 million in the first quarter of 1998.
INTEREST EXPENSE
Interest expense was $.1 million in the first quarter of 1999 compared to $.3
million in the first quarter of 1998. There were no borrowings under the DIP
credit facility during the first quarter of 1999 or 1998.
EQUITY IN EARNINGS OF UNCONSOLIDATED SUBSIDIARIES
The equity in earnings of unconsolidated subsidiaries was $.4 million in the
first quarter of 1999 compared to $.9 million in the first quarter of 1998. The
decrease in earnings reflects the write-off of capitalized start-up costs and
losses associated with the Company's China joint venture.
BANKRUPTCY COSTS
Bankruptcy costs were $1.9 million in the first quarter of 1999 compared to $1.6
million during the first quarter of 1998. These costs were primarily related to
professional fees and are expected to continue at similar to higher levels until
the Company emerges from Chapter 11.
INCOME TAXES
Income tax expense for the subsidiaries not included in the Chapter 11 filing
was $.3 and $.5 million during the periods ended March 28, 1999 and March 29,
1998, respectively. The Company recorded an income tax benefit of approximately
$3.0 million during the period ended March 28, 1999, which was offset by an
increase in the valuation allowances with respect to its net deferred and other
tax-related assets as realization is dependent upon
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<PAGE> 26
sufficient taxable income in the future. The Company recorded income tax expense
of approximately $1.8 million during the period ended March 29, 1998, which was
offset by a reduction in the valuation allowances.
LIQUIDITY AND CAPITAL RESOURCES
During the first quarter of 1999, cash flow from earnings (losses) and non-cash
charges was $.8 million compared to $13.9 million in the first quarter of 1998.
During the first quarter of 1999, cash flow was positively impacted by a $17.0
million reduction in accounts receivable which offset the impact of operating
losses, reductions in checks issued but not cleared and accrued liabilities due
to the payment of 1998 incentive based compensation. In the fourth quarter of
1998, receivables increased significantly due primarily to an electronic billing
issue related to a few large customers. This issue was corrected and receivables
returned to more normal levels in the first quarter of 1999. Cash flow was also
positively impacted by $5.2 million of asset sales and the receipt of proceeds
from equipment sales in previous quarters.
The cash produced from operations supported capital expenditures of $11.7
million, including approximately $.7 million of computer software and consulting
costs, for the first quarter of 1999 compared to $5.4 million, including $2.0
million of computer software and consulting costs in the same period of 1998.
The expenditures in the first quarter of 1999 were primarily related to the
addition of increased training pant capacity and new product enhancements.
Capital spending is expected to be approximately $46.0 million during 1999 which
the Company expects will be funded through a combination of internally generated
funds and borrowings under the DIP Credit Facility.
In connection with the Chapter 11 filing, on January 30, 1998, the Bankruptcy
Court entered a Final Order approving the DIP Credit Facility as provided under
the Revolving Credit and Guarantee Agreement dated as of January 7, 1998, among
the Company, as Borrower, certain subsidiaries of the Company, as guarantors,
and a bank group led by The Chase Manhattan Bank ("Chase"). Pursuant to the
terms of the DIP Credit Facility, as amended by the First Amendment dated
January 30, 1998, the Second Amendment dated March 23, 1998, the Third Amendment
dated April 15, 1998 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
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 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 March 28, 1999, there were no outstanding direct borrowings under the DIP
Credit Facility. The Company had an aggregate of $3.6 million in letters of
credit issued under the DIP Credit Facility at March 28, 1999. The DIP Credit
Facility contains customary covenants. The Company for a period of time had been
unable to fully comply with certain reporting requirements of such covenants.
The Company obtained waivers with respect to these
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events of default which were effective through May 10, 1999. The Company
believes that it is in compliance with the reporting requirements of the DIP
Credit Facility. 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."
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 80
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.
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.
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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 March 28, 1999 was $20.2
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 $3.5 million. All of the costs are expected to be
funded through operating cash flow and bank borrowings.
Risks Presented by Year 2000 Issues
The Year 2000 presents a number of risks and uncertainties that could affect the
Company. These include, but are not limited to, failure of the Company to
identify and address material issues associated with non-SAP related Business
Systems or with its Infrastructure Systems, failure or inability of customers to
place orders for Year 2000 related reasons, failure of necessary raw materials
manufacturers to deliver their products to the Company in a timely fashion and
the inability of either the Company to collect its receivables or its customers
to process payments for goods. Survey responses submitted to the Company may
also be inaccurate or incomplete; however, the Company currently believes that
the SAP implementation and completion of the Year 2000 project as scheduled will
reduce the incidence and severity of Year 2000 related disturbances in systems
that are within the control of the Company. The Company also has certain
financial investments in foreign joint ventures. If the operations of these
joint ventures were significantly affected by Year 2000 related issues, such
could have a material adverse impact on the Company's results of operations and
its financial position. Information currently 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
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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.
Reorganization. The ability of the Company to effect a successful reorganization
will depend, in significant part, upon the Company's ability to formulate a plan
of reorganization that is approved by the Bankruptcy Court. The Company cannot
predict at this time the effect of the material adverse impact related to the
increased costs described above on the Company's enterprise valuation and on a
plan of reorganization for the Company. The Company believes, however, that it
may not be possible to satisfy in full all of the claims against the Company.
Investment in securities of, and claims against, the Company, therefore, should
be regarded as highly speculative. As a result of the Chapter 11 filing, the
Company has incurred and will continue to incur significant costs for
professional fees as the reorganization plan is developed. The Company is also
required to pay certain expenses of the Equity Committee and the Official
Committee of Unsecured Creditors (together, the "Committees"), including
professional fees, to the extent allowed by the Bankruptcy Court.
The Company is unable to predict at this time when it will emerge from Chapter
11 protection. See "PART I: FINANCIAL INFORMATION, ITEM 2: MANAGEMENT'S
DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION:
Chapter 11 Proceedings."
Termination of License Agreements. 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
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cannot predict when, or if, such approval will be granted. See "PART II: OTHER
INFORMATION, ITEM 1: LEGAL PROCEEDINGS."
Pricing. The Company announced in the fourth quarter of 1998 that it would
implement a price increase of 5 percent. A significant part of this price
increase is required to offset the increased costs of certain of the Company's
infant care product designs. Additional price increases are needed to fully
offset the added royalty cost to be incurred by the Company pursuant to the P&G
and K-C settlements described above. Should the Company not be able to realize
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.
SUBSEQUENT EVENT
On April 30, 1999, the Company announced that its Canadian subsidiary, Paragon
Trade Brands (Canada) Inc., would cease manufacturing infant disposable diapers
at its Brampton, Ontario facility. The Company anticipates recording a charge to
earnings in the second quarter of 1999 in connection with costs related to this
action. The Brampton plant employed approximately 113 people. The Company
announced that the facility would curtail manufacturing operations over a few
weeks' period of time while the Company transitions its Canadian customers to
its Harmony, Pennsylvania facility. Thereafter, the Company expects that the
Brampton facility will operate as a warehouse and distribution facility.
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
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Reform Act of 1995. The Company undertakes no obligation to publicly release the
result of any revisions to these forward-looking statements that may be made to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
NEW ACCOUNTING STANDARD
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued a Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." This statement requires
capitalization of certain costs of internal-use software. The Company adopted
this statement in the quarter ended March 28, 1999, and it did not have a
material impact on the financial statements.
In April 1998, the AICPA issued a Statement of Position 98-5, "Reporting on the
Costs of Start-up Activities." This statement requires that the costs of
start-up activities and organizational costs be expensed as incurred. Any of
these costs previously capitalized by a company must be written off in the year
of adoption. The Company adopted this statement in the quarter ended March 28,
1999, and the equity in earnings of unconsolidated subsidiaries included $.5
million in charges as a result of the adoption of the statement.
ITEM 2. 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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Procter & Gamble Company v. Paragon Trade Brands, Inc. - P&G filed a lawsuit
in January 1994 in the District Court for the District of Delaware alleging that
the Company's "Ultra" infant disposable diaper products infringed two of P&G's
dual cuff diaper patents. The lawsuit sought injunctive relief, lost profit and
royalty damages, treble damages and attorneys' fees and costs. The Company
denied liability under the patents and counterclaimed for patent infringement
and violation of antitrust laws by P&G. In March 1996, the District Court
granted P&G's motion for summary judgment to dismiss the Company's antitrust
counterclaim. The trial was completed in February 1997, the parties submitted
post-trial briefs and closing arguments were conducted on October 22, 1997.
Legal fees and costs for this litigation have been significant.
On December 30, 1997, the Delaware District Court issued a Judgment and Opinion
finding that P&G's dual cuff patents were valid and infringed, while at the same
time finding the Company's patent to be invalid, unenforceable and not infringed
by P&G's products. Judgment was entered on January 6, 1998. Damages of
approximately $178.4 million were entered against Paragon by the District Court
on June 2, 1998. At the same time, the District Court entered injunctive relief
agreed upon by P&G and the Company.
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.
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The Judgment has had a material adverse effect on the Company's financial
position and its results of operations. As a result of the District Court's
Judgment, the Company filed for relief under Chapter 11 of the Bankruptcy Code,
11 U.S.C. Section 101 et seq., in the United States Bankruptcy Court for the
Northern District of Georgia (Case No. 98-60390) on January 6, 1998. See "--In
Re Paragon Trade Brands, Inc.," below.
P&G filed alleged claims in the Company's Chapter 11 reorganization proceeding
ranging from approximately $2.3 billion (without trebling) to $6.5 billion (with
trebling), which included a claim of $178.4 million for the Delaware Judgment.
See "--In Re Paragon Trade Brands, Inc.," below. The remaining claims include
claims for, among other things, alleged patent infringement by the Company in
foreign countries where it has operations.
On February 2, 1999, the Company entered into a Settlement Agreement with P&G
which, 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 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 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 resumed on April 13,
14 and 15, 1999. Closing arguments have been scheduled for June 8, 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 "PART I: FINANCIAL INFORMATION, ITEM
2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS: Risks and Uncertainties" above.
Kimberly-Clark Corporation v. Paragon Trade Brands, Inc. -- On October 26, 1995,
K-C filed a lawsuit against the Company in U.S. District Court in Dallas, Texas,
alleging infringement by the Company's products of two K-C patents relating to
dual cuffs. The lawsuit sought injunctive relief, royalty damages, treble
damages and attorneys' fees and costs. The Company denied liability under the
patents and counterclaimed for patent infringement and violation of antitrust
laws by K-C. Several pre-trial motions were filed by each party, including a
motion for summary judgment filed by K-C with respect to the Company's antitrust
counterclaim and a motion for
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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.
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. 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
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<PAGE> 34
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 SAP in diapers and training pants, so
long as the Company remains 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
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 has
filed a motion with the Bankruptcy Court to seek approval of the settlement and
a hearing date has been set for June 9, 10 and 11, 1999. 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
"PART I: FINANCIAL INFORMATION, ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS: Risks and Uncertainties."
In Re Paragon Trade Brands, Inc. -- As described above, on December 30, 1997,
the Delaware District Court issued a Judgment and Opinion in the Company's
lawsuit with P&G which found, in essence, two of P&G's diaper patents to be
valid and infringed by the Company's "Ultra" disposable baby diapers, while also
rejecting the Company's patent infringement claim against P&G. Judgment was
entered on January 6, 1998. While a final damages number was not entered by the
District Court until June 2, 1998, the Company originally estimated the
liability and associated litigation costs to be approximately $200 million. The
amount of the award resulted in violation of certain covenants under the
Company's bank loan agreements. As a result, the issuance of the Judgment and
the uncertainty it created caused an immediate and critical liquidity issue for
the Company which necessitated the Chapter 11 filing.
Subsequently, damages of approximately $178.4 million were entered against
Paragon by the District Court on June 2, 1998. At the same time, the District
Court entered injunctive relief agreed upon by P&G and the Company. See "--The
Procter & Gamble Company v. Paragon Trade Brands, Inc.," above.
The Chapter 11 filing prevented P&G from placing liens on the Company's assets,
permitted the Company to appeal the District Court's decision in an orderly
fashion and affords the Company the opportunity to resolve liquidated and
unliquidated claims against the Company, which arose prior to the Chapter 11
filing. The Company is currently operating as a debtor-in-possession under the
Bankruptcy Code. The bar date for the filing of proofs of claim (excluding
administrative claims) by creditors was June 5, 1998. P&G filed alleged claims
ranging from approximately $2.3 billion (without trebling) to $6.5 billion (with
trebling), which included a claim of $178.4 million for the Delaware judgment.
See "--The Procter & Gamble Company v. Paragon Trade Brands, Inc.," above. The
remaining claims include claims for, among other things, alleged patent
infringement by the Company in foreign countries where it has operations.
On February 2, 1999, the Company entered into a Settlement Agreement with P&G
which, 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
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<PAGE> 35
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 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 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 resumed on April 13,
14 and 15, 1999. Closing arguments have been scheduled for June 8, 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 "PART I: FINANCIAL INFORMATION, ITEM
2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS: Risks and Uncertainties" above.
K-C filed alleged claims ranging from approximately $893 million (without
trebling) to $2.3 billion (with trebling), including claims related to the
litigation in the Dallas District Court described above. See "--Kimberly-Clark
Corporation v. Paragon Trade Brands, Inc.," above. K-C's claims in the
Bankruptcy case include an attempt to recover alleged lost profits for
infringement of the patents asserted in the Dallas District Court, despite the
fact that a lost profits theory of damages was not pursued by K-C in the Dallas
District Court.
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. 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
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<PAGE> 36
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 SAP in diapers and training pants, so
long as the Company remains 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 has
filed a motion with the Bankruptcy Court to seek approval of the settlement and
a hearing date has been set for June 9, 10 and 11, 1999. 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
"PART I: FINANCIAL INFORMATION, ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS: Risks and Uncertainties."
By Order of the Bankruptcy Court on April 19, 1999, the Company's exclusivity
period, during which time only the Company can propose a plan of reorganization,
was extended initially to May 19, 1999. Should no interested party object by May
12, 1999, the Company's exclusivity period will automatically extend to June 19,
1999. If a timely objection is filed, a hearing is scheduled for May 17, 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 March 28, 1999, there were no outstanding direct
borrowings under this facility. The Company had an aggregate of $3.6 million in
letters of credit issued under the DIP Credit Facility at March 28, 1999. The
DIP Credit Facility contains customary covenants. The Company for a period of
time had been unable to fully comply with certain reporting requirements of such
covenants. The Company obtained waivers with respect to these events of default
which were effective through May 10, 1999. The Company believes that it is in
compliance with the reporting requirements of the DIP Credit Facility. 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.
Tracy Patent - The Company had previously received notice from a Ms. Rhonda
Tracy that Ms. Tracy believes the Company's diapers infringe a patent issued in
August 1998 to Ms. Tracy (U.S. Patent No. 5,797,824). The Company responded,
based upon advice of its independent patent counsel, that it believes its
products do not infringe any valid claim of Ms. Tracy's patent. On April 29,
1999, the Company received notice that Ms. Tracy had filed suit in the United
States District Court for the Northern District of Illinois against K-C, Tyco
International, Ltd., Drypers Corporation and a number of the Company's
customers, alleging infringement of her patent. The Company was not named as a
defendant in this suit. Rather, Ms. Tracy indicated in her April 29, 1999 letter
that the Company would be sued upon completion of the current suit. The Company
is currently evaluating its options regarding this lawsuit, including, among
other things, seeking to intervene in the suit.
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
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<PAGE> 37
proceedings or disputes to which it is a party, except for the Chapter 11 filing
and the P&G and K-C matters discussed above, will not have a material adverse
effect on its financial condition or results of operations.
ITEM 3. DEFAULTS IN SENIOR SECURITIES
At December 28, 1997, the Company maintained a $150 million revolving credit
facility with a group of nine financial institutions available through February
2001. At December 28, 1997, borrowings under this credit facility totaled $70
million. The Company also had access to short-term lines of credit on an
uncommitted basis with several major banks. At December 28, 1997, the Company
had approximately $50 million in uncommitted lines of credit. Borrowings under
these lines of credit totaled $12.8 million at December 28, 1997. The Chapter 11
filing resulted in a default under its pre-petition revolving credit facility
and borrowings under its uncommitted lines of credit. See "Note 12 of Notes to
Financial Statements."
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 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 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)
</TABLE>
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<PAGE> 38
<TABLE>
<S> <C>
Exhibit 10.14* Employment agreement, dated as of August 11, 1998, between Paragon and Robert E. McClain(12)
Exhibit 10.15* Employment Agreement, dated as of August 11, 1998, between Paragon and Catherine O.
Hasbrouck(12)
Exhibit 10.16* Employment Agreement, dated as of August 11, 1998, between Paragon and Kevin P. Higgins(12)
Exhibit 10.17* 1995 Incentive Compensation Plan(5)
Exhibit 10.18* Paragon Trade Brands, Inc. Confirmation Retention Plan for Top Eight Executives and Summary
Plan Description(12)
Exhibit 10.19 Amended and Restated Credit Agreement, dated as of February 6, 1996(7)
Exhibit 10.19.1 Amendment Agreement, dated December 13, 1996, to Amended and Restated Credit Agreement,
dated as of February 6, 1996(8)
Exhibit 10.20 Revolving Credit and Guaranty Agreement Among Paragon Trade Brands, Inc., a
Debtor-in-Possession, as Borrower, the Subsidiaries of the Borrower Named Herein, as
Guarantors, the Banks Party hereto, and Chase Manhattan Bank, as Agent, dated as of January
7, 1998, as Amended (Conformed to Reflect the First Amendment to the Revolving Credit and
Guaranty Agreement dated as of January 30, 1998, the Second Amendment to the Revolving
Credit and Guaranty Agreement dated as of March 23, 1998, and the Third Amendment to
Revolving Credit and Guaranty Agreement dated as of April 15, 1998)(10)
Exhibit 10.20.1 Fourth Amendment to Revolving Credit and Guaranty Agreement dated as of September 28,
1998(13)
Exhibit 10.21 Security and Pledge Agreement, dated as of January 7, 1998(10)
Exhibit 10.22 Revolving Canadian Credit Facility and Parent Guarantee(2)
Exhibit 10.23 Indemnification Agreements, dated as of February 2, 1993, between Weyerhaeuser and Bobby V.
Abraham and Gary M. Arnts(1)
Exhibit 10.24 Rights Agreement dated December 14, 1994 between Paragon Trade Brands, Inc. and Chemical
Bank, as Rights Agent(3)
Exhibit 10.25 Asset Purchase Agreement dated December 11, 1995 by and among Paragon Trade Brands, Inc.,
PTB Acquisition Sub, Inc., Pope & Talbot, Inc. and Pope & Talbot, Wis., Inc.(6)
Exhibit 10.26** Sales Contract, dated as of January 30, 1996, between Hoechst Celanese Corporation and
Paragon Trade Brands, Inc.(7)
Exhibit 10.26.1** Sales Contract, dated as of April 30, 1998, between Clariant Corporation and Paragon
Trade Brands, Inc.(11)
Exhibit 10.27 Lease Agreement between Cherokee County, South Carolina and Paragon Trade Brands, Inc.,
dated as of October 1, 1996(8)
Exhibit 10.28 Settlement Agreement, dated as of February 2, 1999 between Paragon Trade Brands, Inc. and
The Procter & Gamble Company(13)
</TABLE>
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<PAGE> 39
<TABLE>
<S> <C>
Exhibit 10.29 U.S. License Agreement, dated as of February 2, 1999 between The Procter & Gamble Company
and Paragon Trade Brands, Inc.(13)
Exhibit 10.30 Canadian License Agreement, dated as of February 2, 1999 between The Procter & Gamble
Company and Paragon Trade Brands, Inc.(13)
Exhibit 10.31 U.S. License Agreement, dated as of February 2, 1999 between The Procter & Gamble Company
and Paragon Trade Brands, Inc.(13)
Exhibit 10.32 Canadian License Agreement, dated as of February 2, 1999 between The Procter & Gamble
Company and Paragon Trade Brands, Inc.(13)
Exhibit 10.33 Settlement Agreement, dated as of March 19, 1999 between Kimberly-Clark Corporation and
Paragon Trade Brands, Inc.(13)
Exhibit 10.34 License Agreement Between Kimberly-Clark Corporation and Paragon Trade Brands, Inc., dated
as of March 15, 1999(13)
Exhibit 10.35 License Agreement Between Kimberly-Clark Corporation and Paragon Trade Brands, Inc., dated
as of March 15, 1999(13)
Exhibit 11 Computation of Per Share Earnings (See Note 10 to Financial Statements)
Exhibit 27 Financial Data Schedule (for SEC use only)
</TABLE>
(b) Report on Form 8-K dated February 5, 1999.
Report on Form 8-K dated March 26, 1999.
- --------------------------
*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.
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<PAGE> 40
(10) Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended March 29, 1998.
(11) Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended June 28, 1998.
(12) Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended September 27, 1998.
(13) Incorporated by reference from Paragon Trade Brands, Inc.'s Annual
Report on Form 10-K for the fiscal year ended December 27, 1998.
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<PAGE> 41
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PARAGON TRADE BRANDS, INC.
By /s/ Alan J. Cyron
------------------------------
Alan J. Cyron
Chief Financial Officer
May 12, 1999
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<PAGE> 42
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<S> <C>
Exhibit 3.1 Certificate of Incorporation of Paragon Trade Brands, Inc.(4)
Exhibit 3.2 By-Laws of Paragon Trade Brands, Inc., as amended through July 31, 1995(5)
Exhibit 4.1 Certificate of Incorporation of Paragon Trade Brands, Inc. (see Exhibit 3.1)
Exhibit 10.1 Asset Transfer Agreement, dated as of January 26, 1993, by and between Weyerhaeuser and
Paragon(1)
Exhibit 10.2 Intellectual Property Agreement, dated as of February 2, 1993, between
Weyerhaeuser and Paragon(1)
Exhibit 10.3 License, dated as of February 2, 1993, between Weyerhaeuser and Paragon(1)
Exhibit 10.4 Sublicense, dated as of February 2, 1993, between Weyerhaeuser and Paragon(1)
Exhibit 10.5 Technology Agreement, dated as of October 15, 1987, by and between Weyerhaeuser and Johnson
and Johnson, as amended(1)
Exhibit 10.6.1 Letter Supply Agreement between Weyerhaeuser and Paragon dated as of October 22, 1997(9)
Exhibit 10.7* Stock Option Plan for Non-Employee Directors(1)
Exhibit 10.8* Annual Incentive Compensation Plan(1)
Exhibit 10.9* 1993 Long-Term Incentive Compensation Plan(1)
Exhibit 10.10* Employment Agreement, dated as of August 11, 1998, between Paragon and Bobby V. Abraham(12)
Exhibit 10.11* Employment Agreement, dated as of August 11, 1998, between Paragon and David W. Cole(12)
Exhibit 10.12* Employment Agreement, dated as of August 11, 1998, between Paragon and Alan J. Cyron(12)
Exhibit 10.13* Employment Agreement, dated as of August 11, 1998, between Paragon and Arrigo D. (Rick)
Jezzi(12)
Exhibit 10.14* Employment agreement, dated as of August 11, 1998, between Paragon and Robert E. McClain(12)
Exhibit 10.15* Employment Agreement, dated as of August 11, 1998, between Paragon and Catherine O.
Hasbrouck(12)
Exhibit 10.16* Employment Agreement, dated as of August 11, 1998, between Paragon and Kevin P. Higgins(12)
Exhibit 10.17* 1995 Incentive Compensation Plan(5)
</TABLE>
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<PAGE> 43
<TABLE>
<S> <C>
Exhibit 10.18* Paragon Trade Brands, Inc. Confirmation Retention Plan for Top Eight Executives and Summary
Plan Description(12)
Exhibit 10.19 Amended and Restated Credit Agreement, dated as of February 6, 1996(7)
Exhibit 10.19.1 Amendment Agreement, dated December 13, 1996, to Amended and Restated Credit Agreement,
dated as of February 6, 1996(8)
Exhibit 10.20 Revolving Credit and Guaranty Agreement Among Paragon Trade Brands, Inc., a
Debtor-in-Possession, as Borrower, the Subsidiaries of the Borrower Named Herein, as
Guarantors, the Banks Party hereto, and Chase Manhattan Bank, as Agent, dated as of January
7, 1998, as Amended (Conformed to Reflect the First Amendment to the Revolving Credit and
Guaranty Agreement dated as of January 30, 1998, the Second Amendment to the Revolving
Credit and Guaranty Agreement dated as of March 23, 1998, and the Third Amendment to
Revolving Credit and Guaranty Agreement dated as of April 15, 1998)(10)
Exhibit 10.20.1 Fourth Amendment to Revolving Credit and Guaranty Agreement dated as of September 28,
1998(13)
Exhibit 10.21 Security and Pledge Agreement, dated as of January 7, 1998(10)
Exhibit 10.22 Revolving Canadian Credit Facility and Parent Guarantee(2)
Exhibit 10.23 Indemnification Agreements, dated as of February 2, 1993, between Weyerhaeuser and Bobby V.
Abraham and Gary M. Arnts(1)
Exhibit 10.24 Rights Agreement dated December 14, 1994 between Paragon Trade Brands, Inc. and Chemical
Bank, as Rights Agent(3)
Exhibit 10.25 Asset Purchase Agreement dated December 11, 1995 by and among Paragon Trade Brands, Inc.,
PTB Acquisition Sub, Inc., Pope & Talbot, Inc. and Pope & Talbot, Wis., Inc.(6)
Exhibit 10.26** Sales Contract, dated as of January 30, 1996, between Hoechst Celanese Corporation and
Paragon Trade Brands, Inc.(7)
Exhibit 10.26.1** Sales Contract, dated as of April 30, 1998, between Clariant Corporation and Paragon
Trade Brands, Inc.(11)
Exhibit 10.27 Lease Agreement between Cherokee County, South Carolina and Paragon Trade Brands, Inc.,
dated as of October 1, 1996(8)
Exhibit 10.28 Settlement Agreement, dated as of February 2, 1999 between Paragon Trade Brands, Inc. and
The Procter & Gamble Company(13)
Exhibit 10.29 U.S. License Agreement, dated as of February 2, 1999 between The Procter & Gamble Company
and Paragon Trade Brands, Inc.(13)
Exhibit 10.30 Canadian License Agreement, dated as of February 2, 1999 between The Procter & Gamble
Company and Paragon Trade Brands, Inc.(13)
Exhibit 10.31 U.S. License Agreement, dated as of February 2, 1999 between The Procter & Gamble Company
and Paragon Trade Brands, Inc.(13)
</TABLE>
-43-
<PAGE> 44
<TABLE>
<S> <C>
Exhibit 10.32 Canadian License Agreement, dated as of February 2, 1999 between The Procter & Gamble
Company and Paragon Trade Brands, Inc.(13)
Exhibit 10.33 Settlement Agreement, dated as of March 19, 1999 between Kimberly-Clark Corporation and
Paragon Trade Brands, Inc.(13)
Exhibit 10.34 License Agreement Between Kimberly-Clark Corporation and Paragon Trade Brands, Inc., dated
as of March 15, 1999(13)
Exhibit 10.35 License Agreement Between Kimberly-Clark Corporation and Paragon Trade Brands, Inc., dated
as of March 15, 1999(13)
Exhibit 11 Computation of Per Share Earnings (See Note 10 to Financial Statements)
Exhibit 27 Financial Data Schedule (for SEC use only)
</TABLE>
(b) Report on Form 8-K dated February 5, 1999. Report on Form 8-K dated
March 26, 1999.
- --------------------------
*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.
-44-
<PAGE> 45
(11) Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended June 28, 1998.
(12) Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended September 27, 1998.
(13) Incorporated by reference from Paragon Trade Brands, Inc.'s Annual
Report on Form 10-K for the fiscal year ended December 27, 1998.
-45-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10Q FOR
THE QUARTER ENDED MARCH 28, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-26-1999
<PERIOD-START> DEC-28-1999
<PERIOD-END> MAR-28-1999
<CASH> 25,274
<SECURITIES> 0
<RECEIVABLES> 70,272
<ALLOWANCES> 10,948
<INVENTORY> 51,999
<CURRENT-ASSETS> 145,013
<PP&E> 274,744
<DEPRECIATION> 172,542
<TOTAL-ASSETS> 412,609
<CURRENT-LIABILITIES> 70,272
<BONDS> 0
0
0
<COMMON> 124
<OTHER-SE> (68,987)
<TOTAL-LIABILITY-AND-EQUITY> 412,609
<SALES> 126,244
<TOTAL-REVENUES> 126,244
<CGS> 109,537
<TOTAL-COSTS> 109,537
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 102
<INCOME-PRETAX> (6,906)
<INCOME-TAX> 313
<INCOME-CONTINUING> (7,219)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,219)
<EPS-PRIMARY> (.60)
<EPS-DILUTED> (.60)
</TABLE>
