SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the thirteen week period ended June 27, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________________ to _____________________
Commission File No. 1-11368
PARAGON TRADE BRANDS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 91-1554663
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
180 Technology Parkway
NORCROSS, GEORGIA 30092
(Address of principal executive offices)
(678) 969-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
The number of shares outstanding of the registrant's common stock was 11,949,714
shares ($.01 par value) as of June 27, 1999.
Page 1
Exhibit Index on Page 47
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q FILING
FOR THE THIRTEEN WEEK PERIOD ENDED JUNE 27, 1999
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition 22
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 36
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 36
Item 2. Changes in Securities (not applicable)
Item 3 Defaults Upon Senior Securities 42
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 42
Signature Page 46
Exhibit Index 47
Exhibits 51
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE
DATA) (NOTE 2)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
JUNE 27, 1999 JUNE 28, 1998 JUNE 27, 1999 JUNE 28, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Sales, net of discounts and allowances. $ 117,848 $ 126,991 $ 244,092 $ 265,288
Cost of sales.......................... 103,380 102,344 212,917 213,143
---------- ---------- ---------- -----------
Gross profit........................... 14,468 24,647 31,175 52,145
Selling, general and administrative
expense........................ 19,707 19,900 41,150 38,952
Research and development expense....... 935 1,129 1,943 2,531
Manufacturing operation closing costs.. 1,491 - 1,491 -
---------- ---------- ---------- -----------
Operating profit (loss)................ (7,665) 3,618 (13,409) 10,662
Equity in earnings of unconsolidated
subsidiaries................... 750 594 1,120 1,518
Interest expense(1).................... 107 - 209 290
Other income........................... 519 619 1,015 1,043
---------- ---------- ---------- -----------
Earnings (loss) before income taxes
and bankruptcy costs........... (6,503) 4,831 (11,483) 12,933
Bankruptcy costs....................... 2,538 1,160 4,464 2,806
Provision for (benefit from) income
taxes.......................... (656) 302 (343) 752
---------- ---------- ---------- -----------
Net earnings (loss).................... $ (8,385) $ 3,369 $ (15,604) $ 9,375
========== ========== =========== ===========
Basic earnings (loss) per common share. $ (.70) $ .28 $ (1.31) $ .79
========== ========== =========== ===========
Diluted earnings (loss) per common
share.......................... $ (.70) $ .28 $ (1.31) $ .79
========== ========== =========== ===========
Dividends paid......................... $ - $ - $ - $ -
========== ========== =========== ===========
<FN>
(1)Contractual Interest $ 1,327 $ 1,349 $ 2,662 $ 2,899
========== ========== =========== ===========
</FN>
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
(NOTE 2)
<TABLE>
<CAPTION>
JUNE 27, 1999 DECEMBER 27, 1998
------------- -----------------
<S> <C> <C>
ASSETS
Cash and short-term investments............... $ 23,293 $ 22,625
Receivables................................... 55,177 79,156
Inventories................................... 50,207 53,282
Current portion of deferred income taxes...... 3,258 4,260
Prepaid expenses.............................. 5,269 4,323
---------- ----------
Total current assets...................... 137,204 163,646
Property and equipment........................ 100,886 106,200
Construction in progress...................... 25,597 19,626
Assets held for sale.......................... 1,463 4,691
Investment in unconsolidated subsidiary,
at cost................................... 22,929 22,743
Investment in and advances to unconsolidated
subsidiaries, at equity................... 68,619 66,041
Goodwill...................................... 31,860 32,819
Other assets.................................. 13,784 13,521
---------- ----------
Total assets.............................. $ 402,342 $ 429,287
========== ==========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Checks issued but not cleared................. $ 6,477 $ 12,433
Accounts payable.............................. 31,350 32,416
Accrued liabilities........................... 30,267 33,646
---------- ----------
Total current liabilities................. 68,094 78,495
Liabilities subject to compromise (Note 10)... 406,423 406,859
Deferred compensation......................... 211 -
Deferred income taxes......................... 4,671 5,773
---------- ----------
Total liabilities......................... 479,399 491,127
Commitments and contingencies (Notes 1 and 12)
Shareholders' deficit:
Preferred stock: Authorized 10,000,000 shares,
no shares issued, $.01 par value.......... - -
Common stock: Authorized 25,000,000 shares,
issued 12,388,464 and 12,378,616
shares, $.01 par value.................... 124 124
Capital surplus............................... 143,736 143,918
Accumulated other comprehensive loss.......... (1,225) (1,840)
Retained deficit.............................. (209,362) (193,758)
Less: Treasury stock, 438,750 and 429,696
shares, at cost........................... (10,330) (10,284)
---------- ----------
Total shareholders' deficit............... (77,057) (61,840)
---------- ----------
Total liabilities and shareholders'
deficit............................... $ 402,342 $ 429,287
========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
(NOTE 2)
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS ENDED
JUNE 27, 1999 JUNE 28, 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)......................... $ (15,604) $ 9,375
Non-cash charges (benefits) to earnings:
Depreciation and amortization............ 17,978 16,877
Deferred income taxes.................... (100) (58)
Equity in earnings of unconsolidated
subsidiaries......................... (815) (870)
Changes in operating assets and liabilities:
Accounts receivable...................... 20,107 1,851
Inventories and prepaid expenses......... 2,129 2,564
Accounts payable......................... (4,915) 30,375
Checks issued but not cleared............ (5,956) (1,259)
Pre-petition reclamation payment
authorized by court.................. (437) -
Accrued liabilities...................... (3,607) 9,969
Other ....................................... (1,655) (2,342)
---------- ----------
Net cash provided by operating activities 7,125 66,482
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property and equipment...... (12,063) (8,425)
Proceeds from sale of property and equipment. 5,870 3,413
Investment in Grupo P.I. Mabe, S. A. de C. V. - (2,779)
Proceeds from sale of Changing Paradigms, Inc. 350 -
Investment in and advances to unconsolidated
subsidiaries, at equity.................. (800) (2,762)
Other ....................................... 186 (4,534)
---------- ----------
Net cash used by investing activities.... (6,457) (15,087)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in short-term borrowings........ - (921)
Pre-petition debt payment authorized by court - (1,867)
---------- ----------
Net cash used by financing activities - (2,788)
---------- ----------
NET INCREASE IN CASH......................... 668 48,607
Cash at beginning of period.................. 22,625 991
---------- ----------
Cash at end of period........................ $ 23,293 $ 49,598
========== ==========
Cash paid during the period for:
Interest, net of amounts capitalized..... $ 207 $ 1,330
========== ==========
Income taxes............................. $ 468 $ 1,309
========== ==========
Bankruptcy costs......................... $ 3,144 $ 83
========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS
FOR THE THIRTEEN AND TWENTY-SIX WEEK PERIODS ENDED JUNE 27, 1999
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
NOTE 1: CHAPTER 11 PROCEEDINGS
On January 6, 1998, Paragon Trade Brands, Inc. ("Paragon" or the "Company")
filed for relief under Chapter 11 of the United States Bankruptcy Code (the
"Chapter 11 filing"), in the United States Bankruptcy Court for the Northern
District of Georgia. The Company is currently operating as a
debtor-in-possession under the Bankruptcy Code.
The Procter & Gamble Company ("P&G") 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 fully and finally settles all matters related to the Delaware Judgment,
the Company's appeal of the Delaware Judgment, P&G's motion to find the Company
in contempt of the Delaware Judgment and P&G's proof of claim filed in the
Company's Chapter 11 reorganization proceeding. The P&G Settlement Agreement was
approved by the Bankruptcy Court on August 6, 1999. As a part of the P&G
settlement, Paragon grants P&G an allowed unsecured prepetition claim of
$158,500 and an allowed administrative claim of $5,000. As a part of the
settlement, the Company has entered into License Agreements for the U.S. and
Canada, which are exhibits to the Settlement Agreement, with respect to certain
of the patents asserted by P&G in its proof of claim, including those asserted
in the Delaware Action. The U.S. and Canadian patent rights licensed by the
Company permitted the Company to convert to a dual cuff baby diaper design. The
product conversion is complete. In exchange for these rights, the Company pays
P&G running royalties on net sales of the licensed products equal to 2 percent
through October 2005, .75 percent thereafter through October 2006 and .375
percent thereafter through March 2007 in the U.S.; and 2 percent through October
2008 and 1.25 percent thereafter through December 2009 in Canada. The Settlement
Agreement also provides, among other things, that P&G will grant the Company
and/or its affiliates "most favored
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
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 Kimberly-Clark Corporation ("K-C") described below, have
had, and will continue to have, a material adverse impact on the Company's
future financial condition and results of operations.
Under the terms of the P&G Settlement Agreement, once the Court's August 6, 1999
order becomes "Final," as defined in the Settlement Agreement, the Company will
withdraw with prejudice its appeal of the Delaware Judgment to the Federal
Circuit, and P&G will withdraw with prejudice its motion in Delaware District
Court to find the Company in contempt of the Delaware Judgment. Because the
Bankruptcy Court's August 6, 1999 order has not yet become a Final Order, as
defined in the Settlement Agreement, the P&G License Agreements described above
are terminable at P&G's option. If the P&G License Agreements are terminated,
the Company could be faced with having to convert to a diaper design other than
the dual cuff design covered by the licenses. At this time, the Company's only
viable alternative product design is the single cuff product which is the
subject of P&G's Contempt Motion in Delaware. P&G has informed the Company that
it is P&G's present intention, while not waiving any contractual or other legal
rights P&G might have, to continue to operate as if the Settlement Agreement has
been approved by a Final Order, as defined therein, and not to terminate the
licenses.
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 subsequently sued the
Company on another patent issued to K-C which is based upon a further
continuation of one of the K-C dual cuff patents asserted in the case.
On March 19, 1999, the Company entered into a Settlement Agreement with K-C
which fully and finally settles all matters related to the Texas action,
including the Company's counterclaims, and K-C's proof of claim filed in the
Company's Chapter 11 reorganization proceeding. The K-C Settlement Agreement was
approved by the Bankruptcy Court on August 6, 1999. Under the terms of the K-C
Settlement Agreement, the Company grants K-C an allowed unsecured prepetition
claim of $110,000 and an allowed administrative claim of $5,000. As a part of
the settlement, the Company has entered into License Agreements for the U.S. and
Canada, which are exhibits to the Settlement Agreement, with respect to the
patents asserted by K-C in the Texas action. The patent rights licensed by the
Company from K-C permitted the Company to convert to a dual cuff diaper design.
The product conversion is complete. In exchange for these patent rights, the
Company pays K-C annual running royalties on net sales of the licensed products
in the U.S. and Canada equal to: 2.5 percent of the first $200,000 of net sales
of the covered diaper products and 1.5 percent of such net sales in excess of
$200,000 in each calendar year commencing January 1999 through November 2004.
The Company has agreed to pay a minimum annual royalty for diaper sales of
$5,000, but amounts due on the running royalties will be offset against this
minimum. The Company also pays K-C running royalties of 5 percent of net sales
of covered training pant products for the same period, but there is no minimum
royalty for training pants. As part of the settlement, the Company has granted a
royalty-free license to K-C for three patents which the Company in the Texas
action claimed K-C infringed.
The Company believes that 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
experienced certain product performance issues the Company believes may have
been related to the SAP the Company initially
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
converted to in December of 1998. As a result, the Company incurred increased
promotional spending in the first half of 1999 to address product performance
issues. In February 1999, the Company converted to a new SAP. The Company is
encountering increased product costs due to the increased price and usage of the
new SAP. While the Company is working diligently with its SAP suppliers to
develop a 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 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.
In accordance with the terms of the K-C Settlement Agreement, unless otherwise
stayed, 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
simultaneously will dismiss with prejudice its counterclaims in the Texas
action.
On July 12, 1999, the Bankruptcy Court approved certain bidding procedures, an
expense reimbursement and a termination fee relating to a proposed investment by
Wellspring Capital Management LLC to acquire the Company as part of a plan of
reorganization. The bidding procedures provide for the consideration of
competing investment proposals from other qualified bidders and for the filing
by the Company of a stand-alone plan of reorganization. The Company expects to
pursue the auction process approved by the Bankruptcy Court while, at the same
time, moving forward with the formation and filing of a stand-alone plan that
embodies the terms of the P&G and K-C settlements. Pursuant to the Bankruptcy
Court's July 12, 1999 order, competing bids to the Wellspring proposal are due
no later than August 30, 1999 and an auction is scheduled to take place on
September 2, 1999. The Equity Committee has filed a motion for amended findings
with respect to the Bankruptcy Court's July 12, 1999 order. The Company has
opposed the Equity Committee's motion.
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 full 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 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 June 27,
1999 and June 28, 1998, as well as the combined balance sheets as of June 27,
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 TWENTY-SIX WEEKS ENDED
JUNE 27, 1999 JUNE 28, 1998 JUNE 27, 1999 JUNE 28, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Sales, net of discounts and allowances $ 7,245 $ 13,101 $ 15,712 $ 27,903
Gross profit.......................... 171 2,042 1,345 4,473
Manufacturing operation closing costs. 1,491 - 1,491 -
Earnings (loss) before income taxes... (1,213) 1,166 334 3,314
Net earnings (loss)................... (608) 903 676 2,567
</TABLE>
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
JUNE 27, 1999 DECEMBER 27, 1998
------------- -----------------
<S> <C> <C>
Current assets............................... $ 17,011 $ 17,863
Non-current assets........................... $ 56,749 $ 54,734
Current liabilities.......................... $ 5,412 $ 5,700
Non-current liabilities...................... $ 8,378 $ 8,495
</TABLE>
NOTE 2: BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING AND
REPORTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Paragon Trade
Brands, Inc. and its wholly-owned subsidiaries. All significant intercompany
transactions and accounts have been eliminated.
The accompanying consolidated balance sheet as of December 27, 1998, which has
been derived from audited financial statements, and the unaudited interim
consolidated financial statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
note disclosures normally included in annual financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to those rules and regulations, although the Company believes
that the disclosures made are adequate to make the information presented not
misleading. It is suggested that these consolidated financial statements be read
in conjunction with the financial statements and the notes thereto included in
the Company's latest annual report on Form 10-K.
In the opinion of management, all adjustments necessary for a fair statement of
the results of the interim periods have been included. All such interim
adjustments are of a normal recurring nature except for the manufacturing
operation closing costs and bankruptcy-related costs. The results of operations
for the thirteen-week period ending June 27, 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 12, 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 includes $519 in
charges as a result of the adoption of the statement.
<PAGE>
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: MANUFACTURING OPERATION CLOSING COSTS
On April 30, 1999, the Company announced that its Canadian subsidiary, PTB
Canada, would cease manufacturing infant disposable diapers at its Brampton,
Ontario facility. The Company announced that the facility would curtail
manufacturing operations over a few weeks' period of time while the Company
transitioned its Canadian customers to its Harmony, Pennsylvania facility.
Thereafter, the Company expected that the Brampton facility would operate as a
warehouse and distribution facility. Manufacturing operations ceased during June
and resulted in severing the employment of approximately 110 employees. The
Company expects to utilize the Brampton diaper making equipment in its U.S.
operations and is evaluating the need for the Brampton facility to continue to
operate as a warehouse and distribution facility. For the period ended June 27,
1999, the consolidated statement of loss includes $1,491 of pre-tax charges as a
result of cessation of manufacturing operations. The following summarizes
amounts accrued and costs incurred for the period ended June 27, 1999:
<TABLE>
<CAPTION>
Amount Costs Balance
Accrued Incurred Remaining
------------- ------------- -----------
<S> <C> <C> <C>
Employee severance and related items $ 1,336 $ 1,312 $ 24
Asset write-downs 155 155 -
----------- ----------- ----------
$ 1,491 $ 1,467 $ 24
=========== =========== ==========
</TABLE>
NOTE 4: BANKRUPTCY COSTS
Bankruptcy costs were directly associated with the Company's Chapter 11
reorganization proceedings and consisted of the following:
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
JUNE 27, 1999 JUNE 28, 1998 JUNE 27, 1999 JUNE 28, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Professional fees..................... $ 2,464 $ 1,224 $ 4,360 $ 2,814
Amortization of DIP Credit Facility
deferred financing costs.......... 204 399 408 399
Other................................. 16 22 17 110
Interest income....................... (146) (485) (321) (517)
----------- ----------- ----------- -----------
$ 2,538 $ 1,160 $ 4,464 $ 2,806
=========== =========== =========== ===========
</TABLE>
NOTE 5: INCOME TAXES
Income tax expense (benefit) for the subsidiaries not included in the Chapter 11
filing was $(342) and $747 during the 26-week periods ended June 27, 1999 and
June 28, 1998, respectively. Income tax expense (benefit) for the subsidiaries
not included in the Chapter 11 filing was $(605) and $263 during the
thirteen-week periods ended June 27, 1999 and June 28, 1998, respectively. The
Company recorded income tax benefits of approximately $2,800 and $5,800 during
the thirteen and twenty-six week periods ended June 27, 1999, respectively. The
benefits were offset by increases in the valuation allowances with respect to
the Company's net deferred and other tax-related assets as realization is
dependent upon sufficient taxable income in the future. The Company recorded
income tax expense of approximately $1,000 and $2,800 during the thirteen and
twenty-six week periods
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
ended June 28, 1998, respectively. The expense was offset by reductions in the
valuation allowances with respect to the Company's net deferred and other
tax-related assets.
NOTE 6: COMPREHENSIVE INCOME (LOSS)
The following are the components of comprehensive income (loss):
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
JUNE 27, 1999 JUNE 28, 1998 JUNE 27, 1999 JUNE 28, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income (loss)..................... $ (8,385) $ 3,369 $ (15,604) $ 9,375
Foreign currency translation
adjustment.................... 307 (274) 615 (262)
----------- ------------ ----------- -----------
Comprehensive income (loss)........... $ (8,078) $ 3,095 $ (14,989) $ 9,113
=========== =========== =========== ===========
</TABLE>
NOTE 7: RECEIVABLES
Receivables consist of the following:
<TABLE>
<CAPTION>
JUNE 27, 1999 DECEMBER 27, 1998
------------- -----------------
<S> <C> <C>
Accounts receivable - trade................ $ 54,745 $ 71,079
Other receivables........................... 11,684 16,777
--------- ---------
66,429 87,856
Less: Allowance for doubtful accounts...... (11,252) (8,700)
--------- ---------
Net receivables............................. $ 55,177 $ 79,156
--------- ---------
</TABLE>
NOTE 8: INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JUNE 27, 1999 DECEMBER 27, 1998
------------- -----------------
<S> <C> <C>
LIFO:
Raw materials - pulp................. $ 242 $ 232
Finished goods....................... 25,794 31,417
FIFO:
Raw materials - other................ 8,096 7,346
Materials and supplies............... 21,933 20,924
---------- ----------
56,065 59,919
Reserve for excess and
obsolete items................... (5,858) (6,637)
---------- ----------
Net inventories.............................. $ 50,207 $ 53,282
========== ==========
</TABLE>
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
NOTE 9: ACCRUED LIABILITIES
Accrued liabilities are as follows:
<TABLE>
<CAPTION>
JUNE 27, 1999 DECEMBER 27, 1998
------------- -----------------
<S> <C> <C>
Payroll - wages and salaries, incentive
awards, retirement, vacation and
severance pay............................ $ 8,629 $ 16,977
Coupons and promotions....................... 5,696 5,994
Royalties.................................... 6,075 718
Other........................................ 9,867 9,957
---------- ----------
Total........................................ $ 30,267 $ 33,646
========== ==========
</TABLE>
NOTE 10: LIABILITIES SUBJECT TO COMPROMISE
Liabilities subject to compromise under the Company's reorganization proceeding
include substantially all current and long-term unsecured debt as of the date of
the Chapter 11 filing. Pursuant to the Bankruptcy Code, payment of these
liabilities may not be made except pursuant to a plan of reorganization or
Bankruptcy Court order while the Company continues to operate as a
debtor-in-possession. The Company has received approval from the Bankruptcy
Court to pay or otherwise honor certain of its prepetition obligations including
a portion of short-term borrowings, claims subject to reclamation and employee
wages, benefits and expenses.
Liabilities subject to compromise are comprised of the following:
<TABLE>
<CAPTION>
JUNE 27, 1999 DECEMBER 27, 1998
------------- -----------------
<S> <C> <C>
Accrued settlement contingency............... $ 278,500 $ 278,500
Bank debt.................................... 81,397 81,397
Accounts payable............................. 39,210 39,752
Accrued liabilities ......................... 5,920 5,920
Deferred compensation........................ 1,396 1,290
---------- ------------
$ 406,423 $ 406,859
========== ============
</TABLE>
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
NOTE 11: 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 TWENTY-SIX WEEKS ENDED
JUNE 27, 1999 JUNE 28, 1998 JUNE 27, 1999 JUNE 28, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net earnings (loss)............ $ (8,385) $ 3,369 $ (15,604) $ 9,375
============= ============= ============= =============
Weighted average number of
common shares used in
basic EPS (000's)....... 11,949 11,928 11,949 11,931
Effect of dilutive securities:
Stock options (000's)... - - - -
Weighted number of common
shares and potentially
dilutive common stock in
dilutive EPS (000's)... 11,949 11,928 11,949 11,931
============= ============= ============ =============
Basic earnings (loss) per
common share........... $ (.70) $ .28 $ (1.31) $ .79
============= ============= ============ =============
Diluted earnings (loss) per
common share........... $ (.70) $ .28 $ (1.31) $ .79
============= ============= ============ =============
</TABLE>
Options to purchase 682,917 and 731,359 shares of common stock outstanding
during the periods ending June 27, 1999 and June 28, 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
June 27, 1999 and June 28, 1998 because the computation of diluted earnings
(loss) per share was anti-dilutive.
NOTE 12: LEGAL PROCEEDINGS
THE PROCTER & GAMBLE COMPANY V. PARAGON TRADE BRANDS, INC. - P&G filed a lawsuit
in January 1994 in the District Court for the District of Delaware alleging that
the Company's "Ultra" infant disposable diaper products infringed two of P&G's
dual cuff diaper patents. The lawsuit sought injunctive relief, lost profit and
royalty damages, treble damages and attorneys' fees and costs. The Company
denied liability under the patents and counterclaimed for patent infringement
and violation of antitrust laws by P&G. In March 1996, the District Court
granted P&G's motion for summary judgment to dismiss the Company's antitrust
counterclaim. The trial was completed in February 1997, the parties submitted
post-trial briefs and closing arguments were conducted on October 22, 1997.
Legal fees and costs for this litigation have been significant.
On December 30, 1997, the Delaware District Court issued a Judgment and Opinion
finding that P&G's dual cuff patents were valid and infringed, while at the same
time finding the Company's patent to be invalid, unenforceable and not infringed
by P&G's products. Judgment was entered on January 6, 1998. Damages of
approximately $178,400 were entered against Paragon by the District Court on
June 2, 1998. At the same time, the District Court entered injunctive relief
agreed upon by P&G and the Company.
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
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
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. 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 believed that if the
Company continued to manufacture its single cuff design and 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 fully and finally settles all matters related to the Delaware Judgment,
the Company's appeal of the Delaware Judgment, P&G's motion to find the Company
in contempt of the Delaware Judgment and P&G's proof of claim filed in the
Company's Chapter 11 reorganization proceeding. The P&G Settlement Agreement was
approved by the Bankruptcy Court on August 6, 1999. As a part of the P&G
settlement, Paragon grants P&G an allowed unsecured prepetition claim of
$158,500 and an allowed administrative claim of $5,000. As a part of the
settlement, the Company has entered into License Agreements for the U.S. and
Canada, which are exhibits to the Settlement Agreement, with respect to certain
of the patents asserted by P&G in its proof of claim, including those asserted
in the Delaware Action. The U.S. and Canadian patent rights licensed by the
Company permitted the Company to convert to a dual cuff baby diaper design. The
product conversion is complete. In exchange for these rights, the Company pays
P&G running royalties on net sales of the licensed products equal to 2 percent
through October 2005, .75 percent thereafter through October 2006 and .375
percent thereafter through March 2007 in the U.S.; and 2 percent through October
2008 and 1.25 percent thereafter through December 2009 in Canada. The Settlement
Agreement also provides, among other things, that P&G will grant the Company
and/or its affiliates "most favored licensee" status with respect to patents
owned by P&G on the date of the Settlement Agreement or for which an application
was pending on that date. In addition, the Company has agreed with P&G that
prior to litigating any future patent dispute, the parties will engage in good
faith negotiations and will consider arbitrating the dispute before resorting to
litigation.
The Company believes that the royalty rates being charged by P&G, together with
royalties to be paid to K-C described below, will have a material adverse impact
on the Company's future financial condition and results of operations.
Under the terms of the P&G Settlement Agreement, once the Court's August 6, 1999
order becomes "Final," as defined in the Settlement Agreement, the Company will
withdraw with prejudice its appeal of the Delaware Judgment to the Federal
Circuit, and P&G will withdraw with prejudice its motion in Delaware District
Court to find the Company in contempt of the Delaware Judgment. Because the
Bankruptcy Court's August 6, 1999 order has not yet become a Final Order, as
defined in the Settlement Agreement, the P&G License Agreements described
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
above are terminable at P&G's option. If the P&G License Agreements are
terminated, the Company could be faced with having to convert to a diaper design
other than the dual cuff design covered by the licenses. At this time, the
Company's only viable alternative product design is the single cuff product
which is the subject of P&G's Contempt Motion in Delaware. P&G has informed the
Company that it is P&G's present intention, while not waiving any contractual or
other legal rights P&G might have, to continue to operate as if the Settlement
Agreement has been approved by a Final Order, as defined therein, and not to
terminate the licenses.
KIMBERLY-CLARK CORPORATION V. PARAGON TRADE BRANDS, INC. -- On October 26, 1995,
K-C filed a lawsuit against the Company in U.S. District Court in Dallas, Texas,
alleging infringement by the Company's products of two K-C patents relating to
dual cuffs. The lawsuit sought injunctive relief, royalty damages, treble
damages and attorneys' fees and costs. The Company denied liability under the
patents and counterclaimed for patent infringement and violation of antitrust
laws by K-C. Several pre-trial motions were filed by each party, including a
motion for summary judgment filed by K-C with respect to the Company's antitrust
counterclaim and a motion for summary judgment filed by the Company on one of
the patents asserted by K-C. In addition, K-C subsequently sued the Company on
another patent issued to K-C which is based upon a further continuation of one
of the K-C dual cuff patents asserted in the case. That action was consolidated
with the 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, Inc.'s infant disposable diaper business ("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.
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
K-C filed alleged claims in the Company's Chapter 11 reorganization proceeding
ranging from approximately $893,000 (without trebling) to $2,300,000 (with
trebling). See "--IN RE PARAGON TRADE BRANDS, INC.," below.
On March 19, 1999, the Company entered into a Settlement Agreement with K-C
which fully and finally settles all matters related to the Texas action,
including the Company's counterclaims, and K-C's proof of claim filed in the
Company's Chapter 11 reorganization proceeding. The K-C Settlement Agreement was
approved by the Bankruptcy Court on August 6, 1999. Under the terms of the K-C
Settlement Agreement, the Company grants K-C an allowed unsecured prepetition
claim of $110,000 and an allowed administrative claim of $5,000. As a part of
the settlement, the Company has entered into License Agreements for the U.S. and
Canada, which are exhibits to the Settlement Agreement, with respect to the
patents asserted by K-C in the Texas action. The patent rights licensed by the
Company from K-C permitted the Company to convert to a dual cuff diaper design.
The product conversion is complete. In exchange for these patent rights, the
Company pays K-C annual running royalties on net sales of the licensed products
in the U.S. and Canada equal to: 2.5 percent of the first $200,000 of net sales
of the covered diaper products and 1.5 percent of such net sales in excess of
$200,000 in each calendar year commencing January 1999 through November 2004.
The Company has agreed to pay a minimum annual royalty for diaper sales of
$5,000, but amounts due on the running royalties will be offset against this
minimum. The Company also pays K-C running royalties of 5 percent of net sales
of covered training pant products for the same period, but there is no minimum
royalty for training pants. As part of the settlement, the Company has granted a
royalty-free license to K-C for three patents which the Company in the Texas
action claimed K-C infringed.
The Company believes that the overall effective royalty rate that the Company
will pay to K-C, together with royalties to be paid to P&G described above, has
had, and will continue to have, a material adverse impact on the Company's
future financial condition and results of operations
As a part of the K-C License Agreement, K-C has agreed not to sue the Company on
two of K-C's patents related to the use of SAP in diapers and training pants, so
long as the Company remains within the SAP Safe Harbor. The Company experienced
certain product performance issues the Company believes may have been related to
the SAP the Company initially converted to in December of 1998. As a result, the
Company incurred increased promotional spending in the first half of 1999 to
address product performance issues. In February 1999, the Company converted to a
new SAP. The Company is encountering increased product costs due to the
increased price and usage of the new SAP. While the Company is working
diligently with its SAP suppliers to develop a 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 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.
In accordance with the terms of the K-C Settlement Agreement, unless otherwise
stayed, 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.
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.
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
Subsequently, damages of approximately $178,400 were entered against Paragon by
the District Court on June 2, 1998. At the same time, the District Court entered
injunctive relief agreed upon by P&G and the Company. See "--THE PROCTER &
GAMBLE COMPANY V. PARAGON TRADe BRANDS, INC.," above.
The Chapter 11 filing prevented P&G from placing liens on the Company's assets,
permitted the Company to appeal the District Court's decision in an orderly
fashion and affords the Company the opportunity to resolve liquidated and
unliquidated claims against the Company which arose prior to the Chapter 11
filing. The Company is currently operating as a debtor-in-possession under the
Bankruptcy Code. The bar date for the filing of proofs of claim (excluding
administrative claims) by creditors was June 5, 1998. P&G filed alleged claims
ranging from approximately $2,300,000 (without trebling) to $6,500,000 (with
trebling), which included a claim of $178,400 for the Delaware judgment. See
"--THE PROCTEr & GAMBLE COMPANY V. PARAGON TRADE BRANDS, INC.," above. The
remaining claims include claims for, among other things, alleged patent
infringement by the Company in foreign countries where it has operations.
On February 2, 1999, the Company entered into a Settlement Agreement with P&G
which fully and finally settles all matters related to the Delaware Judgment,
the Company's appeal of the Delaware Judgment, P&G's motion to find the Company
in contempt of the Delaware Judgment and P&G's proof of claim filed in the
Company's Chapter 11 reorganization proceeding. The P&G Settlement Agreement was
approved by the Bankruptcy Court on August 6, 1999. As a part of the P&G
settlement, Paragon grants P&G an allowed unsecured prepetition claim of
$158,500 and an allowed administrative claim of $5,000. As a part of the
settlement, the Company has entered into License Agreements for the U.S. and
Canada, which are exhibits to the Settlement Agreement, with respect to certain
of the patents asserted by P&G in its proof of claim, including those asserted
in the Delaware Action. The U.S. and Canadian patent rights licensed by the
Company permitted the Company to convert to a dual cuff baby diaper design. The
product conversion is complete. In exchange for these rights, the Company pays
P&G running royalties on net sales of the licensed products equal to 2 percent
through October 2005, .75 percent thereafter through October 2006 and .375
percent thereafter through March 2007 in the U.S.; and 2 percent through October
2008 and 1.25 percent thereafter through December 2009 in Canada. The Settlement
Agreement also provides, among other things, that P&G will grant the Company
and/or its affiliates "most favored licensee" status with respect to patents
owned by P&G on the date of the Settlement Agreement or for which an application
was pending on that date. In addition, the Company has agreed with P&G that
prior to litigating any future patent dispute, the parties will engage in good
faith negotiations and will consider arbitrating the dispute before resorting to
litigation.
The Company believes that the royalty rates being charged by P&G, together with
royalties to be paid to K-C described below, will have a material adverse impact
on the Company's future financial condition and results of operations.
Under the terms of the P&G Settlement Agreement, once the Court's August 6, 1999
order becomes "Final," as defined in the Settlement Agreement, the Company will
withdraw with prejudice its appeal of the Delaware Judgment to the Federal
Circuit, and P&G will withdraw with prejudice its motion in Delaware District
Court to find the Company in contempt of the Delaware Judgment. Because the
Bankruptcy Court's August 6, 1999 order has not yet become a Final Order, as
defined in the Settlement Agreement, the P&G License Agreements described above
are terminable at P&G's option. If the P&G License Agreements are terminated,
the Company could be faced with having to convert to a diaper design other than
the dual cuff design covered by the licenses. At this time, the Company's only
viable alternative product design is the single cuff product which is the
subject of P&G's Contempt Motion in Delaware. P&G has informed the Company that
it is P&G's present intention, while not waiving any contractual or other legal
rights P&G might have, to continue to operate as if the Settlement Agreement has
been approved by a Final Order, as defined therein, and not to terminate the
licenses.
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
K-C filed alleged claims ranging from approximately $893,000 (without trebling)
to $2,300,000 (with trebling), including claims related to the litigation in the
Dallas District Court described above. See "--KIMBERLY-CLARK CORPORATION V.
PARAGON TRADE BRANDS, INC.," above. K-C's claims in the Bankruptcy case include
an attempt to recover alleged lost profits for infringement of the patents
asserted in the Dallas District Court, despite the fact that a lost profits
theory of damages was not pursued by K-C in the Dallas District Court.
On March 19, 1999, the Company entered into a Settlement Agreement with K-C
which fully and finally settles all matters related to the Texas action,
including the Company's counterclaims, and K-C's proof of claim filed in the
Company's Chapter 11 reorganization proceeding. The K-C Settlement Agreement was
approved by the Bankruptcy Court on August 6, 1999. Under the terms of the K-C
Settlement Agreement, the Company grants K-C an allowed unsecured prepetition
claim of $110,000 and an allowed administrative claim of $5,000. As a part of
the settlement, the Company has entered into License Agreements for the U.S. and
Canada, which are exhibits to the Settlement Agreement, with respect to the
patents asserted by K-C in the Texas action. The patent rights licensed by the
Company from K-C permitted the Company to convert to a dual cuff diaper design.
The product conversion is complete. In exchange for these patent rights, the
Company pays K-C annual running royalties on net sales of the licensed products
in the U.S. and Canada equal to: 2.5 percent of the first $200,000 of net sales
of the covered diaper products and 1.5 percent of such net sales in excess of
$200,000 in each calendar year commencing January 1999 through November 2004.
The Company has agreed to pay a minimum annual royalty for diaper sales of
$5,000, but amounts due on the running royalties will be offset against this
minimum. The Company also pays K-C running royalties of 5 percent of net sales
of covered training pant products for the same period, but there is no minimum
royalty for training pants. As part of the settlement, the Company has granted a
royalty-free license to K-C for three patents which the Company in the Texas
action claimed K-C infringed.
The Company believes that the overall effective royalty rates that the Company
will pay to K-C, together with royalties to be paid to P&G described above, has
had and will continue to have a material adverse impact on the Company's future
financial condition and results of operations.
As a part of the K-C License Agreement, K-C has agreed not to sue the Company on
two of K-C's patents related to the use of SAP in diapers and training pants, so
long as the Company remains within the SAP Safe Harbor. The Company experienced
certain product performance issues the Company believes may be related to the
SAP the Company initially converted to in December of 1998. As a result, the
Company incurred increased promotional spending in the first half of 1999 to
address product performance issues. In February 1999, the Company converted to a
new SAP. The Company is encountering increased product costs due to the
increased price and usage of the new SAP. While the Company is working
diligently with its SAP suppliers to develop a 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 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.
In accordance with the terms of the K-C Settlement Agreement, unless otherwise
stayed, 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.
On July 12, 1999, the Bankruptcy Court approved certain bidding procedures, an
expense reimbursement and a termination fee relating to a proposed investment by
Wellspring Capital Management LLC to acquire the Company as part of a plan of
reorganization. The bidding procedures provide for the consideration of
competing investment proposals from other qualified bidders and for the filing
by the Company of a stand-alone plan of reorganization. The Company expects to
pursue the auction process approved by the Bankruptcy Court while, at the same
time, moving forward with the formation and filing of a stand-alone plan that
embodies the terms of the P&G and K-C settlements. Pursuant to the Bankruptcy
Court's July 12, 1999 order, competing bids to the Wellspring proposal
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
are due no later than August 30, 1999 and an auction is scheduled to take place
on September 2, 1999. The Equity Committee has filed a motion for amended
findings with respect to the Bankruptcy Court's July 12, 1999 order. The Company
has opposed the Equity Committee's motion.
By Order of the Bankruptcy Court on July 20, 1999, the Company's exclusivity
period, during which time only the Company can propose a plan of reorganization,
was extended through and including August 31, 1999, with the exclusive right to
solicit acceptances to any plan it files extended through and including October
31, 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 June 27, 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 June 27, 1999. The DIP
Credit Facility contains customary covenants. In early July 1999, the Bankruptcy
Court approved modifications to the terms of the Company's $75,000
debtor-in-possession credit facility with the Chase Manhattan Bank extending the
facility's maturity date to March 26, 2000. See Note 13. Legal fees and costs in
connection with the Chapter 11 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 has entered into a Settlement Agreement, subject to Bankruptcy Court
approval, with Ms. Tracy whereby the Company will pay Ms. Tracy $500 in exchange
for a release from liability from any claims under Ms. Tracy's patent for the
Company, its Affiliates, as defined therein, and retailers who sell products
manufactured by the Company and its Affiliates. Under the terms of the
Settlement Agreement, Ms. Tracy also grants a nonexclusive, fully paid-up,
irrevocable, worldwide license to permit the Company and its Affiliates to make,
have made, lease, use, import, offer to sell, and sell disposable absorbent
products under the terms of Ms. Tracy's patent. This license also extends to
retailers to the extent they are selling products manufactured by the Company
and its Affiliates. The Company intends to file a motion shortly with the
Bankruptcy Court seeking approval of the settlement with Ms. Tracy. The Company
cannot predict when or if the settlement will be approved.
OTHER -- The Company is also a party to other legal activities generally
incidental to its activities. Although the final outcome of any legal proceeding
or dispute is subject to a great many variables and cannot be predicted with any
degree of certainty, the Company presently believes that any ultimate liability
resulting from any or all legal proceedings or disputes to which it is a party,
except for the Chapter 11 filing and the P&G and K-C matters discussed above,
will not have a material adverse effect on its financial condition or results of
operations.
NOTE 13: BANK CREDIT FACILITIES
On January 30, 1998, the Bankruptcy Court entered a final order (the "Final
Order") approving the Credit Agreement (the "DIP Credit Facility") as provided
under the Revolving Credit and Guaranty Agreement dated as of January 7, 1998,
among the Company, as borrower, certain subsidiaries of the Company as
guarantors, and The Chase Manhattan Bank, as agent ("Chase"). Pursuant to the
terms of the DIP Credit Facility, as amended by the First Amendment dated
January 30, 1998, the Second Amendment dated March 23, 1998, the Third Amendment
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
dated April 15, 1998, the Fourth Amendment dated September 28, 1998 and the
Fifth Amendment dated June 14, 1999. Chase and a syndicate of banks have made
available to the Company a revolving credit and letter of credit facility in an
aggregate principal amount of $75,000. The Company's maximum borrowing under the
DIP Credit Facility may not exceed the lesser of $75,000 or an available amount
as determined by a borrowing base formula. The borrowing base formula is
comprised of certain specified percentages of eligible accounts receivable,
eligible inventory, equipment and personal and real property of the Company. The
DIP Credit Facility has a sublimit of $10,000 for the issuance of letters of
credit. In early July 1999, the Bankruptcy Court approved modifications to the
terms of the Company's $75,000 DIP Credit Facility extending the facility's
maturity date to March 26, 2000.
Obligations under the DIP Credit Facility are secured by the security interest
in, pledge and lien on substantially all of the Company's assets and properties
and the proceeds thereof, granted pursuant to the Final Order under Sections
364(c)(2) and 364(c)(3) of the Bankruptcy Code. Borrowings under the DIP Credit
Facility may be used to fund working capital and for other general corporate
purposes. The DIP Credit Facility contains restrictive covenants, including
among other things, limitations on the creation of additional liens and
indebtedness, limitations on capital expenditures, limitations on transactions
with affiliates including investments, loans and advances, the sale of assets,
and the maintenance of minimum earnings before interest, taxes, depreciation,
amortization and reorganization items, as well as a prohibition on the payment
of dividends.
The DIP Credit Facility provides that advances made will bear interest at a rate
of 0.5 percent per annum in excess of Chase's Alternative Base Rate, or at the
Company's option, a rate of 1.5 percent per annum in excess of the reserve
adjusted London Interbank Offered Rate for the interest periods of one, two or
three months. The Company pays a commitment fee of 0.5 percent per annum on the
unused portion thereof, a letter of credit fee equal to 1.5 percent per annum of
average outstanding letters of credit and certain other fees.
As of June 27, 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 June 27, 1999.
At December 28, 1997, the Company maintained a $150,000 revolving credit
facility with a group of nine financial institutions available through February
2001. At December 28, 1997, borrowings under this credit 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
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
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 June 27, 1999.
NOTE 14: SEGMENT REPORTING
The Company operates principally in two segments that are organized based on the
nature of the products sold: (i) infant care and (ii) feminine care and adult
incontinence. Each operating segment contains closely related products that are
unique to that particular segment. The results of Changing Paradigms, Inc.,
which was sold in October of 1998, and the Company's international investment in
joint ventures in Mexico, Argentina, Brazil and China are reported in the
corporate and other segment.
Management evaluates the performance of its operating segments separately to
individually monitor the different factors impacting financial performance.
Segment operating profit is comprised of net sales less cost of sales and
selling, general and administrative expense. Loss contingencies and asset
impairments are recorded in the appropriate operating segment.
Certain administrative expenses common to all operating segments are currently
allocated to the infant care operating segment. International investments,
financial costs, such as interest income and expense, and income taxes are
managed by, and recorded in, the corporate and other operating segment.
<TABLE>
<CAPTION>
Feminine
Care/Adult Corporate/
THIRTEEN WEEKS ENDING JUNE 27, 1999 Infant Care Incontinence Other Total
- ----------------------------------- ----------- ------------ ----- -----
<S> <C> <C> <C> <C>
Net sales $ 115,089 $ 2,759 $ - $ 117,848
Operating loss (4,380) (3,285) - (7,665)
</TABLE>
<TABLE>
<CAPTION>
Feminine
Care/Adult Corporate/
THIRTEEN WEEKS ENDING JUNE 28, 1998 Infant Care Incontinence Other Total
- ----------------------------------- ----------- ------------ ----- -----
<S> <C> <C> <C> <C>
Net sales $ 121,455 $ 1,569 $ 3,967 $ 126,991
Operating profit (loss) 6,147 (2,682) 153 3,618
</TABLE>
<TABLE>
<CAPTION>
Feminine
Care/Adult Corporate/
TWENTY-SIX WEEKS ENDING JUNE 27, 1999 Infant Care Incontinence Other Total
- ------------------------------------- ----------- ------------ ----- -----
<S> <C> <C> <C> <C>
Net sales $ 238,445 $ 5,647 $ - $ 244,092
Operating loss (6,850) (6,559) - (13,409)
</TABLE>
<TABLE>
<CAPTION>
Feminine
Care/Adult Corporate/
TWENTY-SIX WEEKS ENDING JUNE 28, 1998 Infant Care Incontinence Other Total
- ------------------------------------- ----------- ------------ ----- -----
<S> <C> <C> <C> <C>
Net sales $ 253,370 $ 3,056 $ 8,862 $ 265,288
Operating profit (loss) 16,176 (6,014) 500 10,662
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
THIRTEEN WEEKS ENDED JUNE 27, 1999 COMPARED TO THIRTEEN WEEKS
ENDED JUNE 28, 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 fully and finally settles all matters related to the Delaware Judgment,
the Company's appeal of the Delaware Judgment, P&G's motion to find the Company
in contempt of the Delaware Judgment and P&G's proof of claim filed in the
Company's Chapter 11 reorganization proceeding. The P&G Settlement Agreement was
approved by the Bankruptcy Court on August 6, 1999. As a part of the P&G
settlement, Paragon grants P&G an allowed unsecured prepetition claim of $158.5
million and an allowed administrative claim of $5 million. As a part of the
settlement, the Company has entered into License Agreements for the U.S. and
Canada, which are exhibits to the Settlement Agreement, with respect to certain
of the patents asserted by P&G in its proof of claim, including those asserted
in the Delaware Action. The U.S. and Canadian patent rights licensed by the
Company permitted the Company to convert to a dual cuff baby diaper design. The
product conversion is complete. In exchange for these rights, the Company pays
P&G running royalties on net sales of the licensed products equal to 2 percent
through October 2005, .75 percent thereafter through October 2006 and .375
percent thereafter through March 2007 in the U.S.; and 2 percent through October
2008 and 1.25 percent thereafter through December 2009 in Canada. The Settlement
Agreement also provides, among other things, that P&G will grant the Company
and/or its affiliates "most favored licensee" status with respect to patents
owned by P&G on the date of the Settlement Agreement or for which an application
was pending on that date. In addition, the Company has agreed with P&G that
prior to litigating any
<PAGE>
future patent dispute, the parties will engage in good faith negotiations and
will consider arbitrating the dispute before resorting to litigation.
While the Company believes that the royalty rates being charged by P&G are the
same royalties that will be paid by the Company's major store brand competitors
for similar patent rights, these royalties, together with royalties to be paid
to Kimberly-Clark Corporation ("K-C") described below, have had, and will
continue to have, a material adverse impact on the Company's future financial
condition and results of operations. While these royalty costs 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 and maintained.
Under the terms of the P&G Settlement Agreement, once the Court's August 6, 1999
order becomes "Final," as defined in the Settlement Agreement, the Company will
withdraw with prejudice its appeal of the Delaware Judgment to the Federal
Circuit, and P&G will withdraw with prejudice its motion in Delaware District
Court to find the Company in contempt of the Delaware Judgment. Because the
Bankruptcy Court's August 6, 1999 order has not yet become a Final Order, as
defined in the Settlement Agreement, the P&G License Agreements described above
are terminable at P&G's option. If the P&G License Agreements are terminated,
the Company could be faced with having to convert to a diaper design other than
the dual cuff design covered by the licenses. At this time, the Company's only
viable alternative product design is the single cuff product which is the
subject of P&G's Contempt Motion in Delaware. P&G has informed the Company that
it is P&G's present intention, while not waiving any contractual or other legal
rights P&G might have, to continue to operate as if the Settlement Agreement has
been approved by a Final Order, as defined therein, and not to terminate the
licenses. See "--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 subsequently sued the
Company on another patent issued to K-C which is based upon a further
continuation of one of the K-C dual cuff patents asserted in the case.
On March 19, 1999, the Company entered into a Settlement Agreement with K-C
which fully and finally settles all matters related to the Texas action,
including the Company's counterclaims, and K-C's proof of claim filed in the
Company's Chapter 11 reorganization proceeding. The K-C Settlement Agreement was
approved by the Bankruptcy Court on August 6, 1999. Under the terms of the K-C
Settlement Agreement, the Company grants K-C an allowed unsecured prepetition
claim of $110 million and an allowed administrative claim of $5 million. As a
part of the settlement, the Company has entered into License Agreements for the
U.S. and Canada, which are exhibits to the Settlement Agreement, with respect to
the patents asserted by K-C in the Texas action. The patent rights licensed by
the Company from K-C permitted the Company to convert to a dual cuff diaper
design. The product conversion is complete. In exchange for these patent rights,
the Company pays K-C annual running royalties on net sales of the licensed
products in the U.S. and Canada equal to: 2.5 percent of the first $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 also pays K-C running royalties of 5 percent
of net sales of covered training pant products for the same period, but there is
no minimum royalty for training pants. As part of the settlement, the Company
has granted a royalty-free license to K-C for three patents which the Company in
the Texas action claimed K-C infringed.
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 have had, and will continue to have,
together with royalties to be paid to P&G described above, 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
<PAGE>
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 and maintained.
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
experienced certain product performance issues the Company believes may have
been related to the SAP the Company initially converted to in December of 1998.
As a result, the Company incurred increased promotional spending in the first
half of 1999 to address product performance issues. In February 1999, the
Company converted to a new SAP. The Company is encountering increased product
costs due to the increased price and usage of the new SAP. While the Company is
working diligently with its SAP suppliers to develop a 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 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.
In accordance with the terms of the K-C Settlement Agreement, unless otherwise
stayed, 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. 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 12 of Notes to Financial Statements" and "PART
II: OTHER INFORMATION, ITEM 1: LEGAL PROCEEDINGS" herein.
RESULTS OF OPERATIONS
The Company operates principally in two segments that are organized based on the
nature of the products sold: (i) infant care and (ii) feminine care and adult
incontinence. Each operating segment contains closely related products that are
unique to that particular segment. The results of Changing Paradigms, Inc.
("Changing Paradigms"), the Company's household cleaners and air freshener
business that was sold in October 1998, and the Company's international
investments in joint ventures in Mexico, Argentina, Brazil and China are
reported in the corporate and other segment.
A net loss of $8.4 million was incurred in the second quarter of 1999 compared
to net earnings of $3.4 million in the second quarter of 1998. Management
believes that reduced volume, higher royalties and product costs, manufacturing
inefficiencies due to the lower volume and start-up costs associated with new
product initiatives all contributed to the loss in the second quarter of 1999.
The second quarter of 1999 results were also negatively impacted by the costs
associated with cessation of manufacturing operations at the Company's Canadian
subsidiary, Paragon Trade Brands (Canada) Inc.'s Brampton, Ontario facility in
June.
Basic loss per share in the second quarter of 1999 was $.70 compared to basic
earnings per share of $.28 in the second quarter of 1998. Including the effects
of contractual interest, net of tax and excluding the effect of the
manufacturing closing costs and bankruptcy costs, net of tax, and the tax
valuation allowance matters discussed below, basic loss per share was $.32 in
the second quarter of 1999 compared to basic earnings of $.19 per share in the
second quarter of 1998.
Infant care operating losses were $4.4 million in the second quarter of 1999
compared to an operating profit of $6.1 million in the second quarter of 1998.
Lower unit volume, increased royalties and product costs, the manufacturing
operation closure discussed above and manufacturing inefficiencies due to lower
volume and start-up costs associated with new product initiatives all
contributed to the infant care operating loss.
Feminine care and adult incontinence operating losses were $3.3 million in the
second quarter of 1999 compared to operating losses of $2.7 million in the
second quarter of 1998. Losses are expected to continue until volume is
significantly increased to absorb existing manufacturing capacity.
The Company experienced greater than anticipated operating losses in its
feminine care and adult incontinence business in the first half of 1999, 1998
and 1997. While the Company expects these losses to continue near-term,
<PAGE>
the Company has developed a business plan that supports the realization of its
investment in its feminine care and adult incontinence business. Accordingly,
the Company has not recorded any adjustments in its financial statements
relating to the recoverability of the operating assets of the feminine care and
adult incontinence business. The Company's ability to recover its investment is
dependent upon a prompt emergence from Chapter 11 and the successful execution
of the Company's feminine care and adult incontinence business plan. The Company
cannot predict at this time when it will emerge from Chapter 11 protection. The
Company believes that once it emerges from Chapter 11, the feminine care and
adult incontinence business will see an increase in sales and improved results.
The Company cannot predict, however, whether or when such improved results will
be realized. See "RISKS AND UNCERTAINTIES" herein.
NET SALES
Overall net sales were $117.8 million in the second quarter of 1999 compared to
$127.0 million in the second quarter of 1998.
Infant care net sales decreased 5.3 percent to $115.1 compared to $121.5 in the
second quarter of 1998. Unit sales decreased 10.6 percent to 744 million units
compared to 832 million units in the second quarter of 1998. Management believes
that the decrease in sales was due to a number of reasons including the
discontinuation of shipments to a major customer since mid-1998 due to product
design issues, increased consumer preference for premium priced products,
increased consumer preference for the mechanical closure system offered by one
of the national brand competitors, continued pricing and promotional pressures
and the uncertainties related to the Company's Chapter 11 proceedings.
The Company believes that certain product performance issues it had experienced
in the first half of 1999 have been addressed. The Company also believes that
shipments to the major customer that had been suspended in 1998 will resume and
build to more 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 the carryover effects
of product performance and design issues, continued competitive initiatives from
both national brand and store brand competitors and a prolonged Chapter 11 case.
However, the roll-out of an improved Ultra diaper which incorporates stretch
tabs and a new hook and loop closure system, the introduction of a new training
pant product and the launch of certain destination store brand product and
marketing programs are expected to increase volume during the second half of
1999.
The Company has been informed that one of the Company's major customers will
shift a significant portion of the Company's existing volume to a competitor
during the second half of 1999. The Company expects to offset the loss of this
business with a new product introduction during the second half of 1999 with the
same customer, but cannot predict at this time when or whether such new volume
will be sufficient to offset the loss of existing volume.
The Company began to implement a price increase of approximately 5 percent
during the fourth quarter of 1998 in response to price increases announced by
K-C and P&G. As a result, average sales prices during the second quarter of 1999
were higher compared to the second 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 increased to $2.8 million in the
second quarter of 1999 compared to $1.6 million in the second 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 $4.0 million in the second quarter of 1998
relate to Changing Paradigms which was sold in October of 1998.
<PAGE>
COST OF SALES
Overall cost of sales in the second quarter of 1999 was $103.4 million compared
to $102.3 million in the second quarter of 1998. As a percentage of net sales,
cost of sales was 87.8 percent in the second quarter of 1999 compared to 80.6
percent in the second quarter of 1998.
Infant care costs were $97.4 million in the second quarter of 1999 compared to
$95.0 million in the second quarter of 1998. As a percentage of net sales,
infant care cost of sales was 84.6 percent in the second quarter of 1999
compared to 78.2 percent in the second quarter of 1998. Management believes that
this increase in costs as a percentage of sales was due to manufacturing
inefficiencies due to lower volume and start-up costs associated with new
product initiatives, increased raw material costs associated with new products
and higher royalties as a result of the settlement and licensing agreements
reached in the first quarter of 1999 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 a new SAP and increased product and
manufacturing costs associated with the continuing roll-out of the improved
Ultra diaper described above.
Infant care raw material prices, excluding pulp and SAP, were at similar price
levels in the second quarter of 1999 compared to the second quarter of 1998.
Pulp prices were at slightly higher levels in the second quarter of 1999
compared to the second quarter of 1998. SAP costs were also at higher levels
during the second quarter of 1999 compared to the second quarter of 1998 due to
the change to the new SAP in the first quarter of 1999. Raw material prices,
primarily pulp, are expected to increase in the second half of 1999.
Infant care depreciation costs were $6.7 million in the second quarter of 1999
compared to $6.3 million in the second quarter of 1998.
Feminine care and adult incontinence cost of sales was $6.0 million in the
second quarter of 1999 compared to $4.0 million in the second quarter of 1998.
As a percentage of net sales, cost of sales was 222.2 percent in the second
quarter of 1999 compared to 250.0 percent in the second quarter of 1998. Overall
cost of sales is expected to remain greater than net sales until volume is
significantly increased to absorb existing manufacturing capacity.
See "RISKS AND UNCERTAINTIES" herein.
Corporate and other cost of goods sold of $3.3 million in the second quarter of
1998 relates to Changing Paradigms which was sold in October of 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses were $19.7 million in the second quarter of 1999 compared to $19.9
million in the second quarter of 1998. As a percentage of net sales, these
expenses were 16.7 percent in the second quarter of 1999 compared to 15.7
percent in 1998. The decrease in SG&A is primarily attributable to lower
incentive based compensation accruals and non-bankruptcy related legal charges.
These lower costs were partially offset by an increase in packaging design and
artwork, promotional spending, and sales and marketing expenditures.
Depreciation and amortization costs included in SG&A increased to $1.8 million
in the second quarter of 1999 compared to $.9 million in the second 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 $.9 million in the second quarter of 1999
compared to $1.1 million in the second quarter of 1998.
MANUFACTURING OPERATION CLOSING COSTS
For the thirteen week period ended June 27, 1999, the charges related to
cessation of manufacturing operations were $1.5 million, which consisted
primarily of severance and other employee related costs. On April 30, 1999, the
Company announced that its Canadian subsidiary, PTB Canada, would cease
manufacturing infant disposable diapers at its Brampton, Ontario facility. The
Company announced that the facility would curtail manufacturing
<PAGE>
operations over a few weeks' period of time while the Company transitioned its
Canadian customers to its Harmony, Pennsylvania facility. Thereafter, the
Company expected that the Brampton facility would operate as a warehouse and
distribution facility. Manufacturing operations ceased during June and resulted
in severing the employment of approximately 110 employees. The Company expects
to utilize the Brampton diaper making equipment in its U.S. operations and is
evaluating the need for the Brampton facility to continue to operate as a
warehouse and distribution facility.
INTEREST EXPENSE
Interest expense was $.1 million in the second quarter of 1999. There were no
borrowings under the DIP Credit Facility during the second quarter of 1999 or
1998.
EQUITY IN EARNINGS OF UNCONSOLIDATED SUBSIDIARIES
The equity in earnings of unconsolidated subsidiaries was $.8 million in the
second quarter of 1999 compared to $.6 million in the second quarter of 1998.
The increase in earnings reflects improved earnings at Paragon Mabesa
International. These improved earnings were partially offset by start-up losses
associated with the Company's Chinese joint venture.
BANKRUPTCY COSTS
Bankruptcy costs were $2.5 million in the second quarter of 1999 compared to
$1.1 million during the second 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 (benefit) for the subsidiaries not included in the Chapter 11
filing was $(.6) and $.3 million during the quarters ended June 27, 1999 and
June 28, 1998, respectively. The Company recorded an income tax benefit of
approximately $2.8 million during the period ended June 27, 1999, which was
offset by an increase in the valuation allowances with respect to its net
deferred and other tax-related assets. Realization is dependent upon sufficient
taxable income in the future. The Company recorded income tax expense of
approximately $1.0 million during the period ended June 28, 1998, which was
offset by a reduction in the valuation allowances.
TWENTY-SIX WEEKS ENDED JUNE 27, 1999 COMPARED TO TWENTY-SIX WEEKS ENDED
JUNE 27, 1998
RESULTS OF OPERATIONS
A net loss of $15.6 million was incurred in the first half of 1999 compared to
net earnings of $9.4 million in the first half of 1998. Management believes that
reduced volume, higher royalties and product costs, manufacturing inefficiencies
due to the lower volume and start-up costs associated with new product
initiatives and increased SG&A expenditures all contributed to the loss in the
first half of 1999. The first half of 1999 results were also negatively impacted
by a price concession made to an export customer to address product acceptance
issues and by $1.5 million in costs associated with cessation of manufacturing
operations at the Company's Canadian subsidiary, Paragon Trade Brands (Canada)
Inc.'s Brampton, Ontario facility in June. Included in the first half 1999
results are bankruptcy costs of $4.5 million compared to $2.8 million in the
first half of 1998.
Basic loss per share in the first half of 1999 was $1.31 compared to basic
earnings per share of $.79 in the first half of 1998. Excluding the effects of
contractual interest, manufacturing closing costs and bankruptcy costs, net of
tax, and the tax valuation allowance matters discussed below, basic loss per
share was $.64 in the first half of 1999 compared to basic earnings of $.53 per
share in the first half of 1998.
Infant care operating losses were $6.9 million in the first half of 1999
compared to an operating profit of $16.2 million in the first half of 1998.
Lower unit volume, increased product royalties and material costs, the price
concession and cessation of manufacturing discussed above and manufacturing
inefficiencies due to lower volume and start-up costs associated with new
product initiatives all contributed to the infant care operating loss.
<PAGE>
Feminine care and adult incontinence operating losses were $6.6 million in the
first half of 1999 compared to operating losses of $6.0 million in the first
half of 1998. Losses are expected to continue until volume is significantly
increased to absorb existing manufacturing capacity.
The Company experienced greater than anticipated operating losses in its
feminine care and adult incontinence businesses in the first half of 1999, 1998
and 1997. While the Company expects these losses to continue near-term, the
Company has developed a business plan that supports the realization of its
investment in its feminine care and adult incontinence business. Accordingly,
the Company has not recorded any adjustments in its financial statements
relating to the recoverability of the operating assets of the feminine care and
adult incontinence business. The Company's ability to recover its investment is
dependent upon a prompt emergence from Chapter 11 and the successful execution
of the Company's feminine care and adult incontinence business plan. The Company
cannot predict at this time when it will emerge from Chapter 11 protection. The
Company believes that once it emerges from Chapter 11, the feminine care and
adult incontinence business will see an increase in sales and improved results.
The Company cannot predict, however, whether or when such improved results will
be realized. See "RISKS AND UNCERTAINTIES" herein.
NET SALES
Overall net sales were $244.1 million in the first half of 1999 compared to
$265.3 million
in the first half of 1998.
Infant care net sales decreased 5.9 percent to $238.4 compared to $253.4 in the
first half of 1998. Unit sales decreased 9.2 percent to 1,571 million units
compared to 1,731 million units in the first half of 1998. Management believes
that the decrease in sales was due to a number of reasons, including the
discontinuation of shipments to a major customer since mid-1998 due to product
design issues, certain product performance issues experienced by the Company in
the first half of 1999, as well as increased consumer preference for premium
priced products, increased consumer preference for the mechanical closure system
offered by one of the national brand competitors, continued competitive
pressures and the uncertainties related to the Company's Chapter 11 proceedings.
In addition, a price concession was made to an export customer during the first
quarter of 1999 to address product acceptance issues.
The Company believes that the product performance issues it had experienced in
the first half of 1999 have been addressed. The Company also believes that
shipments to the major customer that had been suspended in 1998 will resume and
build to more 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 the carryover effect
of product performance and design issues, continued competitive initiatives from
both national brand and store brand competitors and a prolonged Chapter 11 case.
However, the roll-out of an improved Ultra diaper which incorporates stretch
tabs and a new hook and loop closure system, the introduction of a new training
pant product and the launch of certain destination store brand product and
marketing programs 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 half of 1999 were higher compared to the first half 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.
The Company has been informed that one of the Company's major customers will
shift a significant portion of the Company's existing volume to a competitor
during the second half of 1999. The Company expects to offset the loss of this
business with a new product introduction during the second half of 1999 with the
same customer, but cannot predict at this time when or whether such new volume
will be sufficient to offset the loss of existing volume.
Feminine care and adult incontinence sales increased to $5.6 million in the
first half of 1999 compared to $3.1 million in the first half 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
<PAGE>
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 $8.9 million in the first half of 1998 relate
to Changing Paradigms which was sold in October of 1998.
COST OF SALES
Overall cost of sales in the first half of 1999 was $212.9 million compared to
$213.1 million in the first half of 1998. As a percentage of net sales, cost of
sales was 87.2 percent in the first half of 1999 compared to 80.3 percent in the
first half of 1998.
Infant care costs were $201.0 million in the first half of 1999 compared to
$197.4 million in the first half of 1998. As a percentage of net sales, infant
care cost of sales was 84.3 percent in the first half of 1999 compared to 77.9
percent in 1998. Management believes that this increase in costs as a percentage
of sales was due to manufacturing inefficiencies due to lower volume, increased
raw material costs associated with new products and higher royalties as a result
of the settlement and licensing agreements reached in the first quarter of 1999
with P&G and K-C. Product costs 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.
Infant care raw material prices, primarily pulp, were at similar price levels in
the first half of 1999 compared to the first half of 1998. SAP costs, however,
increased during the first half of 1999 compared to the first half of 1998. Raw
material prices, primarily pulp, are expected to increase in 1999.
Infant care depreciation costs were $12.5 million in the first half of 1999
compared to $12.9 million in first half of 1998.
Feminine care and adult incontinence cost of sales was $11.9 million in the
first half of 1999 compared to $8.3 million in the first half of 1998. As a
percentage of net sales, cost of sales was 212.5 percent in the first half of
1999 compared to 267.7 percent in the first half of 1998. Overall cost of sales
is expected to remain greater than net sales until volume is significantly
increased to absorb existing manufacturing capacity. See "RISKS AND
UNCERTAINTIES" herein.
Corporate and other cost of goods sold of $7.4 million in the second quarter of
1998 relates to Changing Paradigms which was sold in October of 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses were $41.2 million in the first half of 1999 compared to $39.0
million in the first half of 1998. As a percentage of net sales, these expenses
were 16.9 percent in the first half of 1999 compared to 14.7 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 $3.4 million
in the first half of 1999 compared to $1.7 million in the first half of 1998.
This increase resulted from the amortization of software and consulting costs
associated with the implementation of an enterprise resource planning system in
the fourth quarter of 1998. These increases were partially offset by lower
incentive-based compensation accruals and non-bankruptcy related legal charges.
RESEARCH AND DEVELOPMENT
Research and development expenses were $1.9 million in the first half of 1999
compared to $2.5 million in the first half of 1998. The decrease is primarily
due to lower baby diaper product development and testing costs.
<PAGE>
MANUFACTURING OPERATION CLOSING COSTS
As discussed above, $1.5 million in costs were incurred in the first half of
1999 related to the cessation of manufacturing operations at its Brampton,
Ontario facility during the second quarter. The costs were primarily severance
and other employee-related expenses.
INTEREST EXPENSE
Interest expense was $.2 million in the first half of 1999 compared to $.3
million in the first half of 1998. There were no borrowings under the DIP Credit
Facility during the first half of 1999 or 1998.
EQUITY IN EARNINGS OF UNCONSOLIDATED SUBSIDIARIES
The equity in earnings of unconsolidated subsidiaries was $1.1 million in the
first half of 1999 compared to $1.5 million in the first half 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 $4.5 million in the first half of 1999 compared to $2.8
million during the first half of 1998. These costs were primarily related to
professional fees and are expected to continue at similar to higher levels until
the Company emerges from Chapter 11.
INCOME TAXES
Income tax expense (benefit) for the subsidiaries not included in the Chapter 11
filing was $(.3) and $.7 million during the 26-week periods ended June 27, 1999
and June 28, 1998, respectively. The Company recorded an income tax benefit of
approximately $5.8 million during the period ended June 27, 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 $2.8 million during the period ended June 28, 1998, which was
offset by a reduction in the valuation allowances.
LIQUIDITY AND CAPITAL RESOURCES
During the first half of 1999, cash flow from earnings (losses) and non-cash
charges was $1.5 million compared to $25.3 million in the first half of 1998.
The reduction is attributable to the operating losses incurred during the first
half of 1999.
During the first half of 1999, cash flow was positively impacted by a $20.1
million reduction in accounts receivable which offset the impact of operating
losses, reductions in checks issued but not cleared, accounts payable 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 $5.9 million of receipt of
proceeds from property and equipment sales.
The cash produced from operations supported capital expenditures of $13.6
million, including approximately $1.5 million of computer software and
consulting costs, for the first half of 1999 compared to $12.9 million,
including $4.5 million of computer software and consulting costs in the same
period of 1998. The expenditures in the first half 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
<PAGE>
amended by the First Amendment dated January 30, 1998, the Second Amendment
dated March 23, 1998, the Third Amendment dated April 15, 1998, the Fourth
Amendment dated September 28, 1998 and the Fifth Amendment dated June 14, 1999,
Chase and a syndicate of banks has made available to the Company a revolving
credit and letter of credit facility in an aggregate principal amount of $75
million. The Company's maximum borrowing under the DIP Credit Facility may not
exceed the lesser of $75 million or an available amount as determined by a
borrowing base formula. The borrowing base formula is comprised of certain
specified percentages of eligible accounts receivable, eligible inventory,
equipment and personal and real property of the Company. The DIP Credit Facility
has a sublimit of $10 million for the issuance of letters of credit. In early
July 1999, the Bankruptcy Court approved modifications to the terms of the
Company's DIP Credit Facility extending the facility's maturity date to March
26, 2000.
Obligations under the DIP Credit Facility are secured by the security interest,
pledge and lien on substantially all of the Company's assets and properties and
the proceeds thereof, granted pursuant to the Final Order under Sections
364(c)(2) and 364(c)(3) of the Bankruptcy Code. Borrowings under the DIP Credit
Facility may be used to fund working capital and for other general corporate
purposes. The DIP Credit Facility contains restrictive covenants, including
among other things, limitations on the creation of additional liens and
indebtedness, limitations on capital expenditures, limitations on transactions
with affiliates including investments, loans and advances, the sale of assets,
and the maintenance of minimum earnings before interest, taxes, depreciation,
amortization and reorganization items, as well as a prohibition on the payment
of dividends.
The DIP Credit Facility provides that advances made will bear interest at a rate
of 0.5 percent per annum in excess of Chase's Alternative Base Rate, or at the
Company's option, a rate of 1.5 percent per annum in excess of the reserve
adjusted London Interbank Offered Rate for the interest periods of one, two or
three months. The Company pays a commitment fee of 0.5 percent per annum on the
unused portion thereof, a letter of credit fee equal to 1.5 percent per annum of
average outstanding letters of credit and certain other fees.
The Company may utilize, in accordance with certain covenants, its DIP Credit
Facility for continued investments in its foreign subsidiaries. The DIP Credit
Facility, in combination with internally-generated funds, is anticipated to be
adequate to finance these investments and the Company's 1999 capital
expenditures.
As of June 27, 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 June 27, 1999.
At December 28, 1997, the Company maintained a $150 million revolving credit
facility with a group of nine financial institutions available through February
2001. At December 28, 1997, borrowings under this credit facility totaled $70
million. The Company also had access to short-term lines of credit on an
uncommitted basis with several major banks. At December 28, 1997, the Company
had approximately $50 million in uncommitted lines of credit. Borrowings under
these lines of credit totaled $12.8 million at December 28, 1997. As a result of
the Chapter 11 filing, the Company is prohibited from paying any prepetition
liabilities without Bankruptcy Court approval. The Chapter 11 filing resulted in
a default under the Company's prepetition revolving credit facility and its
borrowings under uncommitted lines of credit. See "Note 13 of Notes to Financial
Statements."
YEAR 2000
The "Year 2000 issue" is generally defined as the inability of computer
hardware, software and embedded systems to properly recognize and process
date-related information for dates after December 31, 1999. The Company began
its efforts to address this problem as early as 1995. The Company's efforts
generally are separated into three areas: (i) business information systems
("Business Systems"), (ii) non-information technology systems, including real
estate facilities and manufacturing equipment ("Infrastructure Systems"), and
(iii) vendors, suppliers, customers and third party information interfaces
("Third Party Dependencies").
The Company has established a formal "Y2K Project Office" to assess, manage and
implement its Year 2000 activities. The Company has also established a formal
"Y2K Steering Committee" to oversee the Company's Year 2000 efforts, including
the efforts of the Project Office. The Company has also engaged Deloitte
Consulting/ICS to assist with implementation of certain Year 2000 related
Business Systems and the GartnerGroup to assist with its Year 2000 efforts for
Infrastructure Systems and Third Party Dependencies.
<PAGE>
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 85
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 third
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.
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 75 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 85 percent of the
suppliers surveyed have responded and have not indicated any anticipated Year
2000 problems which, taken on their own, should significantly adversely affect
operations critical to the Company's ability to realize revenues. The Company is
continuing to follow up with suppliers who have not yet responded to the survey
and is otherwise addressing related issues in its contingency planning process.
Contingency planning for Business Systems, Infrastructure Systems and Third
Party Dependencies was substantially completed during the first quarter of 1999.
This process attempted to address critical Year 2000
<PAGE>
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 June 27, 1999 was $21.0
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 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
<PAGE>
expected to be partially offset by the price increases discussed below to the
extent such increases are realized and maintained.
In addition, as a part of the License Agreement entered into in connection with
the K-C Settlement Agreement, the Company has changed to a new SAP for its
diapers and training pants which exhibits certain performance characteristics.
The Company experienced certain product performance issues which it believes
impacted volume for the first half of 1999. As a result, the Company has
incurred increased promotional spending in the first half of 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. Because the Bankruptcy Court's August 6, 1999
order approving the P&G settlement has not yet become a "Final Order," as
defined in the Settlement Agreement, the License Agreements are terminable at
P&G's option. If the P&G License Agreements are terminated, the Company could be
faced with having to convert to a diaper design other than the dual cuff design
covered by the licenses. At this time, the Company's only viable alternative
product design is the single cuff product which is the subject of P&G's Contempt
Motion in Delaware. P&G has informed the Company that it is P&G's present
intention, while not waiving any contractual or other legal rights P&G might
have, to continue to operate as if the Settlement Agreement has been approved by
a Final Order, as defined therein, and not to terminate the licenses. See "PART
II: OTHER INFORMATION, ITEM 1: LEGAL PROCEEDINGS."
PRICING. The Company announced in the fourth quarter of 1998 that it would
implement a price increase of 5 percent. A significant part of this price
increase is required to offset the increased costs of certain of the Company's
infant care product designs. Additional price increases are needed to fully
offset the added royalty cost to be incurred by the Company pursuant to the P&G
and K-C settlements described above. Should the Company not be able to realize
these price increases, its margins are expected to continue to be negatively
impacted.
VOLUME. The Company has been informed that one of the Company's major customers
will shift a significant portion of the Company's existing volume to a
competitor during the second half of 1999. The Company expects to offset the
loss of this business with a new product introduction during the second half of
1999 with the same customer, but cannot predict at this time when or whether
such new volume will be sufficient to offset the loss of existing volume.
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
<PAGE>
emergence from Chapter 11 and the successful execution of the Company's feminine
care and adult incontinence business plan. The Company believes that the P&G and
K-C Settlement Agreements will provide the cornerstone for what it intends to be
a consensual plan of reorganization. The Company cannot predict at this time,
however, when it will emerge from Chapter 11 protection. The Company believes
that once it emerges from Chapter 11 the feminine care and adult incontinence
business will see an increase in sales and improved results. The Company cannot
predict, however, whether or when such improved results will be realized.
BRANDED PRODUCT INNOVATIONS. Because of the emphasis on product innovations in
the disposable diaper, feminine care and adult incontinence markets, patents and
other intellectual property rights are an important competitive factor. The
national branded manufacturers have sought to vigorously enforce their patent
rights. Patents held by the national branded manufacturers could severely limit
the Company's ability to keep up with branded product innovations by prohibiting
the Company from introducing products with comparable features. P&G and K-C have
also heavily promoted diapers in the multi-pack configuration. These packages
offer a lower unit price to the retailer and consumer. It is possible that the
Company may continue to realize lower selling prices and/or lower volumes as a
result of these initiatives.
SUBSEQUENT EVENT
The Company has previously disclosed that it had been notified by the New York
Stock Exchange ("NYSE") during 1998 that as a result of the $200 million
settlement contingency related to the P&G litigation and the Company's net loss
in 1997, certain minimum listing requirements had not been maintained. Trading
in the common stock of the Company on the NYSE was suspended prior to the
opening of trading on Thursday, July 8, 1999. As of July 9, 1999, the common
stock of the Company began trading on the National Association of Securities
Dealers, Inc. Over-the-Counter Bulletin Board under the symbol PGNFQ.
FORWARD-LOOKING STATEMENTS
From time to time, information provided by the Company, statements made by its
employees or information included in its filings with the Securities and
Exchange Commission (including the Annual Report on Form 10-K) may include
statements that are not historical facts, so-called "forward-looking
statements." The words "believes," "anticipates," "expects" and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties that could cause actual results
to differ materially from those expressed in the Company's forward-looking
statements. Factors which could affect the Company's financial results,
including but not limited to: the Company's Chapter 11 filing; increased raw
material prices and product costs; new product and packaging introductions by
competitors; increased price and promotion pressure from competitors; year 2000
compliance issues; and patent litigation, are described herein. Readers are
cautioned not to place undue reliance on the forward-looking statements, which
speak only as of the date hereof, and which are made by management pursuant to
the "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. The Company undertakes no obligation to publicly release the result of any
revisions to these forward-looking statements that may be made to reflect events
or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
NEW ACCOUNTING STANDARDS
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.
<PAGE>
ITEM 3. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk-sensitive instruments and foreign currency exchange
rate risks do not subject the Company to material market risk exposures.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
THE PROCTER & GAMBLE COMPANY V. PARAGON TRADE BRANDS, INC. - P&G filed a lawsuit
in January 1994 in the District Court for the District of Delaware alleging that
the Company's "Ultra" infant disposable diaper products infringed two of P&G's
dual cuff diaper patents. The lawsuit sought injunctive relief, lost profit and
royalty damages, treble damages and attorneys' fees and costs. The Company
denied liability under the patents and counterclaimed for patent infringement
and violation of antitrust laws by P&G. In March 1996, the District Court
granted P&G's motion for summary judgment to dismiss the Company's antitrust
counterclaim. The trial was completed in February 1997, the parties submitted
post-trial briefs and closing arguments were conducted on October 22, 1997.
Legal fees and costs for this litigation have been significant.
On December 30, 1997, the Delaware District Court issued a Judgment and Opinion
finding that P&G's dual cuff patents were valid and infringed, while at the same
time finding the Company's patent to be invalid, unenforceable and not infringed
by P&G's products. Judgment was entered on January 6, 1998. Damages of
approximately $178.4 million were entered against Paragon by the District Court
on June 2, 1998. At the same time, the District Court entered injunctive relief
agreed upon by P&G and the Company.
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. 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 believed that if the
Company continued to manufacture its single cuff design and the motion were
granted it would have a material adverse effect on the Company's financial
condition and results of operations and would seriously jeopardize the Company's
future viability.
The Judgment has had a material adverse effect on the Company's financial
position and its results of operations. As a result of the District Court's
Judgment, the Company filed for relief under Chapter 11 of the Bankruptcy Code,
11 U.S.C. Section 101 et seq., in the United States Bankruptcy Court for the
Northern District of Georgia (Case No. 98-60390) on January 6, 1998. See "--IN
RE PARAGON TRADE BRANDS, INC.," below.
P&G filed alleged claims in the Company's Chapter 11 reorganization proceeding
ranging from approximately $2.3 billion (without trebling) to $6.5 billion (with
trebling), which included a claim of $178.4 million for the Delaware judgment.
See "--IN RE PARAGON TRADe BRANDS, INC.," below. The remaining claims include
claims for, among other things, alleged patent infringement by the Company in
foreign countries where it has operations.
On February 2, 1999, the Company entered into a Settlement Agreement with P&G
which fully and finally settles all matters related to the Delaware Judgment,
the Company's appeal of the Delaware Judgment, P&G's motion to find the Company
in contempt of the Delaware Judgment and P&G's proof of claim filed in the
Company's Chapter 11 reorganization proceeding. The P&G Settlement Agreement was
approved by the Bankruptcy Court
<PAGE>
on August 6, 1999. As a part of the P&G settlement, Paragon grants P&G an
allowed unsecured prepetition claim of $158.5 million and an allowed
administrative claim of $5 million. As a part of the settlement, the Company has
entered into License Agreements for the U.S. and Canada, which are exhibits to
the Settlement Agreement, with respect to certain of the patents asserted by P&G
in its proof of claim, including those asserted in the Delaware Action. The U.S.
and Canadian patent rights licensed by the Company permitted the Company to
convert to a dual cuff baby diaper design. The product conversion is complete.
In exchange for these rights, the Company pays P&G running royalties on net
sales of the licensed products equal to 2 percent through October 2005, .75
percent thereafter through October 2006 and .375 percent thereafter through
March 2007 in the U.S.; and 2 percent through October 2008 and 1.25 percent
thereafter through December 2009 in Canada. The Settlement Agreement also
provides, among other things, that P&G will grant the Company and/or its
affiliates "most favored licensee" status with respect to patents owned by P&G
on the date of the Settlement Agreement or for which an application was pending
on that date. In addition, the Company has agreed with P&G that prior to
litigating any future patent dispute, the parties will engage in good faith
negotiations and will consider arbitrating the dispute before resorting to
litigation.
While the Company believes that the royalty rates being charged by P&G are the
same royalties that will be paid by the Company's major store brand competitors
for similar patent rights, these royalties, together with royalties to be paid
to K-C described herein, have had, and will continue to have, a material adverse
impact on the Company's future financial condition and results of operations.
While these royalty costs 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 have increased. These royalty costs are
also expected to be partially offset by price increases announced by the Company
in the fourth quarter of 1998 to the extent such price increases are realized
and maintained.
Under the terms of the P&G Settlement Agreement, once the Court's August 6, 1999
order becomes "Final," as defined in the Settlement Agreement, the Company will
withdraw with prejudice its appeal of the Delaware Judgment to the Federal
Circuit, and P&G will withdraw with prejudice its motion in Delaware District
Court to find the Company in contempt of the Delaware Judgment. Because the
Bankruptcy Court's August 6, 1999 order has not yet become a Final Order, as
defined in the Settlement Agreement, the P&G License Agreements described above
are terminable at P&G's option. If the P&G License Agreements are terminated,
the Company could be faced with having to convert to a diaper design other than
the dual cuff design covered by the licenses. At this time, the Company's only
viable alternative product design is the single cuff product which is the
subject of P&G's Contempt Motion in Delaware. P&G has informed the Company that
it is P&G's present intention, while not waiving any contractual or other legal
rights P&G might have, to continue to operate as if the Settlement Agreement has
been approved by a Final Order, as defined therein, and not to terminate the
licenses. See "PART 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 summary judgment filed by the Company on one of
the patents asserted by K-C. In addition, K-C subsequently sued the Company on
another patent issued to K-C which is based upon a further continuation of one
of the K-C dual cuff patents asserted in the case. That action was consolidated
with the 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
<PAGE>
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 fully and finally settles all matters related to the Texas action,
including the Company's counterclaims, and K-C's proof of claim filed in the
Company's Chapter 11 reorganization proceeding. The K-C Settlement Agreement was
approved by the Bankruptcy Court on August 6, 1999. Under the terms of the K-C
Settlement Agreement, the Company grants K-C an allowed unsecured prepetition
claim of $110 million and an allowed administrative claim of $5 million. As a
part of the settlement, the Company has entered into License Agreements for the
U.S. and Canada, which are exhibits to the Settlement Agreement, with respect to
the patents asserted by K-C in the Texas action. The patent rights licensed by
the Company from K-C permitted the Company to convert to a dual cuff diaper
design. The product conversion is complete. In exchange for these patent rights,
the Company pays K-C annual running royalties on net sales of the licensed
products in the U.S. and Canada equal to: 2.5 percent of the first $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 also pays K-C running royalties of 5 percent
of net sales of covered training pant products for the same period, but there is
no minimum royalty for training pants. As part of the settlement, the Company
has granted a royalty-free license to K-C for three patents which the Company in
the Texas action claimed K-C infringed.
The Company believes that the overall effective royalty rate that the Company
will pay to K-C, together with royalties to be paid to P&G described above, has
had, and will continue to have, a material adverse impact on the Company's
future financial condition and results of operations. While these royalty costs
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 have increased. These royalty costs are also expected to be
partially offset by price increases announced by the Company in the fourth
quarter of 1998 to the extent such price increases are realized and maintained.
As a part of the K-C License Agreement, K-C has agreed not to sue the Company on
two of K-C's patents related to the use of SAP in diapers and training pants, so
long as the Company remains within the SAP Safe Harbor. The Company experienced
certain product performance issues the Company believes may have been related to
the SAP the Company initially converted to in December of 1998. As a result, the
Company incurred increased
<PAGE>
promotional spending in the first half of 1999 to address product performance
issues. In February 1999, the Company converted to a new SAP. The Company is
encountering increased product costs due to the increased price and usage of the
new SAP. While the Company is working diligently with its SAP suppliers to
develop a 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 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.
In accordance with the terms of the K-C Settlement Agreement, unless otherwise
stayed, 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. See "PART I: FINANCIAL INFORMATION, ITEM 2: MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS:
RISKS AND UNCERTAINTIES."
IN RE PARAGON TRADE BRANDS, INC. -- As described above, on December 30, 1997,
the Delaware District Court issued a Judgment and Opinion in the Company's
lawsuit with P&G which found, in essence, two of P&G's diaper patents to be
valid and infringed by the Company's "Ultra" disposable baby diapers, while also
rejecting the Company's patent infringement claim against P&G. Judgment was
entered on January 6, 1998. While a final damages number was not entered by the
District Court until June 2, 1998, the Company originally estimated the
liability and associated litigation costs to be approximately $200 million. The
amount of the award resulted in violation of certain covenants under the
Company's bank loan agreements. As a result, the issuance of the Judgment and
the uncertainty it created caused an immediate and critical liquidity issue for
the Company which necessitated the Chapter 11 filing.
Subsequently, damages of approximately $178.4 million were entered against
Paragon by the District Court on June 2, 1998. At the same time, the District
Court entered injunctive relief agreed upon by P&G and the Company. See "--THE
PROCTER & GAMBLE COMPANY V. PARAGOn TRADE BRANDS, INC.," above.
The Chapter 11 filing prevented P&G from placing liens on the Company's assets,
permitted the Company to appeal the District Court's decision in an orderly
fashion and affords the Company the opportunity to resolve liquidated and
unliquidated claims against the Company, which arose prior to the Chapter 11
filing. The Company is currently operating as a debtor-in-possession under the
Bankruptcy Code. The bar date for the filing of proofs of claim (excluding
administrative claims) by creditors was June 5, 1998. P&G filed alleged claims
ranging from approximately $2.3 billion (without trebling) to $6.5 billion (with
trebling), which included a claim of $178.4 million for the Delaware judgment.
See "--THe PROCTER & GAMBLE COMPANY V. PARAGON TRADE BRANDS, INC.," above. The
remaining claims include claims for, among other things, alleged patent
infringement by the Company in foreign countries where it has operations.
On February 2, 1999, the Company entered into a Settlement Agreement with P&G
which fully and finally settles all matters related to the Delaware Judgment,
the Company's appeal of the Delaware Judgment, P&G's motion to find the Company
in contempt of the Delaware Judgment and P&G's proof of claim filed in the
Company's Chapter 11 reorganization proceeding. The P&G Settlement Agreement was
approved by the Bankruptcy Court on August 6, 1999. As a part of the P&G
settlement, Paragon grants P&G an allowed unsecured prepetition claim of $158.5
million and an allowed administrative claim of $5 million. As a part of the
settlement, the Company has entered into License Agreements for the U.S. and
Canada, which are exhibits to the Settlement Agreement, with respect to certain
of the patents asserted by P&G in its proof of claim, including those asserted
in the Delaware Action. The U.S. and Canadian patent rights licensed by the
Company permitted the Company to convert to a dual cuff baby diaper design. The
product conversion is complete. In exchange for these rights, the Company pays
P&G running royalties on net sales of the licensed products equal to 2 percent
through October 2005, .75 percent thereafter through October 2006 and .375
percent thereafter through March 2007 in the U.S.; and 2 percent through October
2008 and 1.25 percent thereafter through December 2009 in Canada. The Settlement
Agreement also provides, among other things, that P&G will grant the Company
and/or its affiliates "most favored licensee" status with respect to patents
owned by P&G on the date of the Settlement Agreement or for which an application
was pending on that date. In addition, the Company has agreed with P&G that
prior to litigating any future patent dispute, the parties will engage in good
faith negotiations and will consider arbitrating the dispute before resorting to
litigation.
<PAGE>
While the Company believes that the royalty rates being charged by P&G are the
same royalties that will be paid by the Company's major store brand competitors
for similar patent rights, these royalties, together with royalties to be paid
to K-C described herein, have had, and will continue to have, a material adverse
impact on the Company's future financial condition and results of operations.
While these royalty costs 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 have increased. These royalty costs are
also expected to be partially offset by price increases announced by the Company
in the fourth quarter of 1998 to the extent such price increases are realized
and maintained.
Under the terms of the P&G Settlement Agreement, once the Court's August 6, 1999
order becomes "Final," as defined in the Settlement Agreement, the Company will
withdraw with prejudice its appeal of the Delaware Judgment to the Federal
Circuit, and P&G will withdraw with prejudice its motion in Delaware District
Court to find the Company in contempt of the Delaware Judgment. Because the
Bankruptcy Court's August 6, 1999 order has not yet become a Final Order, as
defined in the Settlement Agreement, the P&G License Agreements described above
are terminable at P&G's option. If the P&G License Agreements are terminated,
the Company could be faced with having to convert to a diaper design other than
the dual cuff design covered by the licenses. At this time, the Company's only
viable alternative product design is the single cuff product which is the
subject of P&G's Contempt Motion in Delaware. P&G has informed the Company that
it is P&G's present intention, while not waiving any contractual or other legal
rights P&G might have, to continue to operate as if the Settlement Agreement has
been approved by a Final Order, as defined therein, and not to terminate the
licenses. See "PART 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 fully and finally settles all matters related to the Texas action,
including the Company's counterclaims, and K-C's proof of claim filed in the
Company's Chapter 11 reorganization proceeding. The K-C Settlement Agreement was
approved by the Bankruptcy Court on August 6, 1999. Under the terms of the K-C
Settlement Agreement, the Company grants K-C an allowed unsecured prepetition
claim of $110 million and an allowed administrative claim of $5 million. As a
part of the settlement, the Company has entered into License Agreements for the
U.S. and Canada, which are exhibits to the Settlement Agreement, with respect to
the patents asserted by K-C in the Texas action. The patent rights licensed by
the Company from K-C permitted the Company to convert to a dual cuff diaper
design. The product conversion is complete. In exchange for these patent rights,
the Company pays K-C annual running royalties on net sales of the licensed
products in the U.S. and Canada equal to: 2.5 percent of the first $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 also pays K-C running royalties of 5 percent
of net sales of covered training pant products for the same period, but there is
no minimum royalty for training pants. As part of the settlement, the Company
has granted a royalty-free license to K-C for three patents which the Company in
the Texas action claimed K-C infringed.
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, together with royalties to be paid
to P&G described above, have had, and will continue to have, a material adverse
impact on the Company's future financial condition and results of operations.
While these royalty costs 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 have increased. These royalty costs are
also expected to be partially offset by price increases announced by the Company
in the fourth quarter of 1998 to the extent such price increases are realized
and maintained.
<PAGE>
As a part of the K-C License Agreement, K-C has agreed not to sue the Company on
two of K-C's patents related to the use of SAP in diapers and training pants, so
long as the Company remains within the SAP Safe Harbor. The Company experienced
certain product performance issues the Company believes may have been related to
the SAP the Company initially converted to in December of 1998. As a result, the
Company incurred increased promotional spending in the first half of 1999 to
address product performance issues. In February 1999, the Company converted to a
new SAP. The Company is encountering increased product costs due to the
increased price and usage of the new SAP. While the Company is working
diligently with its SAP suppliers to develop a 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 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.
In accordance with the terms of the K-C Settlement Agreement, unless otherwise
stayed, 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. See "PART I: FINANCIAL INFORMATION, ITEM 2: MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS:
RISKS AND UNCERTAINTIES."
On July 12, 1999, the Bankruptcy Court approved certain bidding procedures, an
expense reimbursement and a termination fee relating to a proposed investment by
Wellspring Capital Management LLC to acquire the Company as part of a plan of
reorganization. The bidding procedures provide for the consideration of
competing investment proposals from other qualified bidders and for the filing
by the Company of a stand-alone plan of reorganization. The Company expects to
pursue the auction process approved by the Bankruptcy Court while, at the same
time, moving forward with the formation and filing of a stand-alone plan that
embodies the terms of the P&G and K-C settlements. Pursuant to the Bankruptcy
Court's July 12, 1999 order, competing bids to the Wellspring proposal are due
no later than August 30, 1999 and an auction is scheduled to take place on
September 2, 1999. The Equity Committee has filed a motion for amended findings
with respect to the Bankruptcy Court's July 12, 1999 order. The Company has
opposed the Equity Committee's motion.
By Order of the Bankruptcy Court on July 20, 1999, the Company's exclusivity
period, during which time only the Company can propose a plan of reorganization,
was extended initially through and including August 31, 1999, with the exclusive
right to solicit acceptances to any plan it files extended through and including
October 31, 1999.
On January 30, 1998, the Company received Bankruptcy Court approval of a $75
million financing facility with a bank group led by The Chase Manhattan Bank.
This facility is designed to supplement the Company's cash on hand and operating
cash flow and to permit the Company to continue to operate its business in the
ordinary course. As of June 27, 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 June 27, 1999. The DIP
Credit Facility contains customary covenants. In early July 1999, the Bankruptcy
Court approved modifications to the terms of the Company's DIP Credit Facility
extending the facility's maturity date to March 26, 2000. See Note 13. 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 has entered into a Settlement Agreement, subject to Bankruptcy Court
approval, with Ms. Tracy whereby the Company will pay Ms. Tracy $.5 million in
exchange for a release from liability from any claims under Ms. Tracy's patent
for the Company, its Affiliates, as defined therein, and retailers who sell
products manufactured by the Company and its Affiliates. Under the terms of the
Settlement Agreement, Ms. Tracy also grants a nonexclusive, fully paid-up,
irrevocable, worldwide license to permit the Company and its Affiliates to make,
have
<PAGE>
made, lease, use, import, offer to sell, and sell disposable absorbent products
under the terms of Ms. Tracy's patent. This license also extends to retailers to
the extent that they are selling products manufactured by the Company and its
Affiliates. The Company intends to file a motion shortly with the Bankruptcy
Court seeking approval of the settlement with Ms. Tracy. The Company cannot
predict when or if the settlement will be approved.
OTHER -- The Company is also a party to other legal activities generally
incidental to its activities. Although the final outcome of any legal proceeding
or dispute is subject to a great many variables and cannot be predicted with any
degree of certainty, the Company presently believes that any ultimate liability
resulting from any or all legal proceedings or disputes to which it is a party,
except for the Chapter 11 filing and the P&G and K-C matters discussed above,
will not have a material adverse effect on its financial condition or results of
operations.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
At December 28, 1997, the Company maintained a $150 million revolving credit
facility with a group of nine financial institutions available through February
2001. At December 28, 1997, borrowings under this credit facility totaled $70
million. The Company also had access to short-term lines of credit on an
uncommitted basis with several major banks. At December 28, 1997, the Company
had approximately $50 million in uncommitted lines of credit. Borrowings under
these lines of credit totaled $12.8 million at December 28, 1997. The Chapter 11
filing resulted in a default under its pre-petition revolving credit facility
and borrowings under its uncommitted lines of credit. See "Note 13 of Notes to
Financial Statements."
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(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)
<PAGE>
Exhibit 10.10* Employment Agreement, dated as of August 11, 1998, between Paragon and
Bobby V. Abraham(12)
Exhibit 10.11* Employment Agreement, dated as of August 11, 1998, between Paragon and
David W. Cole(12)
Exhibit 10.12* Employment Agreement, dated as of August 11, 1998, between Paragon and
Alan J. Cyron(12)
Exhibit 10.13* Employment Agreement, dated as of August 11, 1998, between Paragon and
Arrigo D. (Rick) Jezzi(12)
Exhibit 10.14* Employment agreement, dated as of August 11, 1998, between Paragon and
Robert E. McClain(12)
Exhibit 10.15* Employment Agreement, dated as of August 11, 1998, between Paragon and
Catherine O. Hasbrouck(12)
Exhibit 10.16* Employment Agreement, dated as of August 11, 1998, between Paragon and
Kevin P. Higgins(12)
Exhibit 10.17* 1995 Incentive Compensation Plan(5)
Exhibit 10.18* Paragon Trade Brands, Inc. Confirmation Retention Plan for Top Eight
Executives and Summary Plan Description(12)
Exhibit 10.19 Amended and Restated Credit Agreement, dated as of February 6, 1996(7)
Exhibit 10.19.1 Amendment Agreement, dated December 13, 1996, to Amended and
Restated Credit Agreement, dated as of February 6, 1996(8)
Exhibit 10.20 Revolving Credit and Guaranty Agreement Among Paragon Trade Brands, Inc.,
a Debtor-in-Possession, as Borrower, the Subsidiaries of the Borrower
Named Herein, as Guarantors, the Banks Party hereto, and Chase Manhattan
Bank, as Agent, dated as of January 7, 1998, as Amended (Conformed to
Reflect the First Amendment to the Revolving Credit and Guaranty Agreement
dated as of January 30, 1998, the Second Amendment to the Revolving Credit
and Guaranty Agreement dated as of March 23, 1998, and the Third Amendment
to Revolving Credit and Guaranty Agreement dated as of April 15, 1998)(10)
Exhibit 10.20.1 Fourth Amendment to Revolving Credit and Guaranty Agreement dated as of
September 28, 1998(13)
Exhibit 10.20.2 Fifth Amendment to Revolving Credit and Guaranty Agreement dated as of
June 14, 1999
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)
<PAGE>
Exhibit 10.25 Asset Purchase Agreement dated December 11, 1995 by and among Paragon
Trade Brands, Inc., PTB Acquisition Sub, Inc., Pope & Talbot, Inc. and
Pope & Talbot, Wis., Inc. (6)
Exhibit 10.26** Sales Contract, dated as of January 30, 1996, between Hoechst Celanese
Corporation and Paragon Trade Brands, Inc.(7)
Exhibit 10.26.1** Sales Contract, dated as of April 30, 1998, between Clariant Corporation
and Paragon Trade Brands, Inc.(11)
Exhibit 10.27 Lease Agreement between Cherokee County, South Carolina and Paragon Trade
Brands, Inc., dated as of October 1, 1996(8)
Exhibit 10.28 Settlement Agreement, dated as of February 2, 1999 between Paragon Trade
Brands, Inc. and The Procter & Gamble Company(13)
Exhibit 10.29 U.S. License Agreement, dated as of February 2, 1999 between The Procter &
Gamble Company and Paragon Trade Brands, Inc. (13)
Exhibit 10.30 Canadian License Agreement, dated as of February 2, 1999 between The
Procter & Gamble Company and Paragon Trade Brands, Inc. (13)
Exhibit 10.31 U.S. License Agreement, dated as of February 2, 1999 between The Procter &
Gamble Company and Paragon Trade Brands, Inc. (13)
Exhibit 10.32 Canadian License Agreement, dated as of February 2, 1999 between The
Procter & Gamble Company and Paragon Trade Brands, Inc. (13)
Exhibit 10.33 Settlement Agreement, dated as of March 19, 1999 between Kimberly-Clark
Corporation and Paragon Trade Brands, Inc. (13)
Exhibit 10.34 License Agreement Between Kimberly-Clark Corporation and Paragon Trade
Brands, Inc., dated as of March 15, 1999(13)
Exhibit 10.35 License Agreement Between Kimberly-Clark Corporation and Paragon Trade
Brands, Inc., dated as of March 15, 1999(13)
Exhibit 11 Computation of Per Share Earnings (See Note 11 to Financial Statements)
Exhibit 27 Financial Data Schedule (for SEC use only)
</TABLE>
(b) Report on Form 8-K dated April 30, 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.
<PAGE>
(4) Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report on
Form 10-K for the fiscal year ended December 25, 1994.
(5) Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly Report
on Form 10-Q for the quarter ended June 25, 1995.
(6) Incorporated by reference from Paragon Trade Brands, Inc.'s Current Report
on Form 8-K, dated as of February 8, 1996.
(7) Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report on
Form 10-K for the fiscal year ended December 31, 1995.
(8) Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report on
Form 10-K for the fiscal year ended December 29, 1996.
(9) Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report on
Form 10-K for the fiscal year ended December 28, 1997.
(10) Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended March 29, 1998.
(11) Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended June 28, 1998.
(12) Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended September 27, 1998.
(13) Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report
on Form 10-K for the fiscal year ended December 27, 1998.
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PARAGON TRADE BRANDS, INC.
By /S/ ALAN J. CYRON
-------------------------------
Alan J. Cyron
Chief Financial Officer
August 11, 1999
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<S> <C>
Exhibit 3.1 Certificate of Incorporation of Paragon Trade Brands, Inc.(4)
Exhibit 3.2 By-Laws of Paragon Trade Brands, Inc., as amended through July 31, 1995(5)
Exhibit 4.1 Certificate of Incorporation of Paragon Trade Brands, Inc. (see Exhibit
3.1)
Exhibit 10.1 Asset Transfer Agreement, dated as of January 26, 1993, by and between
Weyerhaeuser and Paragon(1)
Exhibit 10.2 Intellectual Property Agreement, dated as of February 2, 1993, between
Weyerhaeuser and Paragon(1)
Exhibit 10.3 License, dated as of February 2, 1993, between Weyerhaeuser and Paragon(1)
Exhibit 10.4 Sublicense, dated as of February 2, 1993, between Weyerhaeuser and
Paragon(1)
Exhibit 10.5 Technology Agreement, dated as of October 15, 1987, by and between
Weyerhaeuser and Johnson and Johnson, as amended(1)
Exhibit 10.6.1 Letter Supply Agreement between Weyerhaeuser and Paragon dated as of
October 22, 1997(9)
Exhibit 10.7* Stock Option Plan for Non-Employee Directors(1)
Exhibit 10.8* Annual Incentive Compensation Plan(1)
Exhibit 10.9* 1993 Long-Term Incentive Compensation Plan(1)
Exhibit 10.10* Employment Agreement, dated as of August 11, 1998, between Paragon and
Bobby V. Abraham(12)
Exhibit 10.11* Employment Agreement, dated as of August 11, 1998, between Paragon and
David W. Cole(12)
Exhibit 10.12* Employment Agreement, dated as of August 11, 1998, between Paragon and
Alan J. Cyron(12)
Exhibit 10.13* Employment Agreement, dated as of August 11, 1998, between Paragon and
Arrigo D. (Rick) Jezzi(12)
Exhibit 10.14* Employment agreement, dated as of August 11, 1998, between Paragon and
Robert E. McClain(12)
Exhibit 10.15* Employment Agreement, dated as of August 11, 1998, between Paragon and
Catherine O. Hasbrouck(12)
Exhibit 10.16* Employment Agreement, dated as of August 11, 1998, between Paragon and
Kevin P. Higgins(12)
<PAGE>
Exhibit 10.17* 1995 Incentive Compensation Plan(5)
Exhibit 10.18* Paragon Trade Brands, Inc. Confirmation Retention Plan for Top Eight
Executives and Summary Plan Description(12)
Exhibit 10.19 Amended and Restated Credit Agreement, dated as of February 6, 1996(7)
Exhibit 10.19.1 Amendment Agreement, dated December 13, 1996, to Amended and
Restated Credit Agreement, dated as of February 6, 1996(8)
Exhibit 10.20 Revolving Credit and Guaranty Agreement Among Paragon Trade Brands, Inc.,
a Debtor-in-Possession, as Borrower, the Subsidiaries of the Borrower
Named Herein, as Guarantors, the Banks Party hereto, and Chase Manhattan
Bank, as Agent, dated as of January 7, 1998, as Amended (Conformed to
Reflect the First Amendment to the Revolving Credit and Guaranty Agreement
dated as of January 30, 1998, the Second Amendment to the Revolving Credit
and Guaranty Agreement dated as of March 23, 1998, and the Third Amendment
to Revolving Credit and Guaranty Agreement dated as of April 15, 1998)(10)
Exhibit 10.20.1 Fourth Amendment to Revolving Credit and Guaranty Agreement dated as of
September 28, 1998(13)
Exhibit 10.20.2 Fifth Amendment to Revolving Credit and Guaranty Agreement dated as of
June 14, 1999
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)
<PAGE>
Exhibit 10.30 Canadian License Agreement, dated as of February 2, 1999 between The
Procter & Gamble Company and Paragon Trade Brands, Inc. (13)
Exhibit 10.31 U.S. License Agreement, dated as of February 2, 1999 between The Procter &
Gamble Company and Paragon Trade Brands, Inc. (13)
Exhibit 10.32 Canadian License Agreement, dated as of February 2, 1999 between The
Procter & Gamble Company and Paragon Trade Brands, Inc. (13)
Exhibit 10.33 Settlement Agreement, dated as of March 19, 1999 between Kimberly-Clark
Corporation and Paragon Trade Brands, Inc. (13)
Exhibit 10.34 License Agreement Between Kimberly-Clark Corporation and Paragon Trade
Brands, Inc., dated as of March 15, 1999(13)
Exhibit 10.35 License Agreement Between Kimberly-Clark Corporation and Paragon Trade
Brands, Inc., dated as of March 15, 1999(13)
Exhibit 11 Computation of Per Share Earnings (See Note 11 to Financial Statements)
Exhibit 27 Financial Data Schedule (for SEC use only)
- --------------------------
<FN>
*Management contract or compensatory plan or arrangement.
**Confidential treatment has been requested as to a portion of this document.
(1) Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report on
Form 10-K for the fiscal year ended December 26, 1993.
(2) Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly Report
on Form 10-Q for the quarter ended June 26, 1994.
(3) Incorporated by reference from Paragon Trade Brands, Inc.'s Current Report
on Form 8-K, dated as of December 14, 1994.
(4) Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report on
Form 10-K for the fiscal year ended December 25, 1994.
(5) Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly Report
on Form 10-Q for the quarter ended June 25, 1995.
(6) Incorporated by reference from Paragon Trade Brands, Inc.'s Current Report
on Form 8-K, dated as of February 8, 1996.
(7) Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report on
Form 10-K for the fiscal year ended December 31, 1995.
(8) Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report on
Form 10-K for the fiscal year ended December 29, 1996.
(9) Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report on
Form 10-K for the fiscal year ended December 28, 1997.
<PAGE>
(10) Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended March 29, 1998.
(11) Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended June 28, 1998.
(12) Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended September 27, 1998.
(13) Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report
on Form 10-K for the fiscal year ended December 27, 1998.
</FN>
</TABLE>
EXECUTION COPY
FIFTH AMENDMENT
TO REVOLVING CREDIT
AND GUARANTY AGREEMENT
FIFTH AMENDMENT, dated as of June 14, 1999 (the "AMENDMENT"), to the
REVOLVING CREDIT AND GUARANTY AGREEMENT dated as of January 7, 1998 among
PARAGON TRADE BRANDS, INC., a Delaware corporation (the "BORROWER"), a debtor
and debtor-in-possession under Chapter 11 of the Bankruptcy Code, the Guarantors
named therein (the "GUARANTORS"), THE CHASE MANHATTAN BANK, a New York banking
corporation ("CHASE"), each of the other financial institutions party thereto
(together with Chase, the "BANKS") and THE CHASE MANHATTAN BANK, as Agent for
the Banks (in such capacity, the "AGENT"):
W I T N E S S E T H:
WHEREAS, the Borrower, the Guarantors, the Banks and the Agent are
parties to that certain Revolving Credit and Guaranty Agreement, dated as of
January 7, 1998 (as heretofore amended pursuant to the First Amendment to
Revolving Credit and Guaranty Agreement dated as of January 30, 1998, the Second
Amendment to the Revolving Credit and Guaranty Agreement dated as of March 23,
1998, the Third Amendment to the Revolving Credit and Guaranty Agreement dated
as of April 15, 1998 and the Fourth Amendment to the Revolving Credit and
Guaranty Agreement dated as of September 28, 1998, and as the same may be
further amended, modified or supplemented from time to time, the "CREDIT
AGREEMENT"); and
WHEREAS, the Borrower and the Guarantors have requested that from and
after the Effective Date (as hereinafter defined) of this Amendment, the Credit
Agreement be amended subject to and upon the terms and conditions set forth
herein;
NOW, THEREFORE, it is agreed:
1. As used herein all terms that are defined in the Credit Agreement
shall have the same meanings herein.
2. The definition of the term "Borrowing Base" set forth in Section 1.01
of the Credit Agreement is hereby amended in its entirety to read as follows:
"BORROWING BASE" shall mean on any day an amount that is
equal to the sum, without duplication, of (a) Available Accounts
Receivable PLUS (b) Available Inventory PLUS (c) the Real
Property Component. The Borrowing Base shall be computed in
accordance with Section 5.10. The Borrowing Base at any time in
effect shall be
<PAGE>
determined by reference to the Borrowing Base Certificate most
recently delivered hereunder.
3. The definition of the term "Borrowing Base Certificate" set forth in
Section 1.01 of the Credit Agreement is hereby amended by deleting the
"PROVIDED" clause appearing at the end thereof.
4. The definition of the term "Maturity Date" set forth in Section 1.01
of the Credit Agreement is hereby amended in its entirety to read as follows:
"MATURITY DATE" shall mean March 26, 2000.
5. Section 1.01 of the Credit Agreement is hereby amended by inserting
the following new definitions in appropriate alphabetical order:
"EFFECTIVE DATE" shall have the meaning given such term in
the Fifth Amendment.
"FIFTH AMENDMENT" shall mean the Fifth Amendment to this
Agreement dated as of June 14, 1999.
6. Section 4.02(g) of the Credit Agreement is hereby amended in its
entirety to read as follows:
(g) BORROWING BASE CERTIFICATE. The Agent shall have
received the timely delivery of the most recent Borrowing Base
Certificate required to be delivered pursuant to Section 5.10.
7. Section 4 of the Credit Agreement is hereby amended by inserting the
following new Section 4.03 at the end thereof:
SECTION 4.03. CONDITIONS PRECEDENT TO EXTENSION OF THE
MATURITY DATE. The effectiveness of the extension of the Maturity
Date pursuant to, and of the other modifications to this
Agreement contemplated by, the Fifth Amendment is subject to the
satisfaction of the following conditions precedent:
(a) ORDER. On or before the Effective Date, the Agent and
the Banks shall have received a certified copy of an order of the
Bankruptcy Court, in form and substance satisfactory to the Agent
(the "Extension Order"), approving the terms of the Fifth
Amendment (including the payment of the Amendment Fee required
thereunder)
2
<PAGE>
which Extension Order shall be in full force and effect, and
shall not have been stayed, reversed, modified or amended in any
respect.
(b) OPINION OF COUNSEL TO THE BORROWER. The Agent and the
Banks shall have received the favorable written opinion of
counsel to the Borrower and the Guarantors, dated the Effective
Date, in form and substance satisfactory to the Agent.
(c) PAYMENT OF AMENDMENT FEE. The Borrower shall have paid
to the Agent for the account of the Banks the Amendment Fee
referred to in the Fifth Amendment.
(d) CORPORATE AND JUDICIAL PROCEEDINGS. All corporate and
judicial proceedings and all instruments and agreements in
connection with the transactions among the Borrower, the
Guarantors, the Agent and the Banks contemplated by the Fifth
Amendment shall be reasonably satisfactory in form and substance
to the Agent, and the Agent shall have received all information
and copies of all documents and papers; including records of
corporate and judicial proceedings, which the Agent may have
reasonably requested in connection therewith, such documents and
papers where appropriate to be certified by proper corporate,
governmental or judicial authorities.
(e) REPRESENTATIONS AND WARRANTIES. All representations
and warranties contained in this Agreement and the other Loan
Documents or otherwise made in writing in connection herewith or
therewith shall be true and correct in all material respects on
and as of the Effective Date, and the Agent shall have received a
certificate from a Financial Officer of the Borrower to such
effect.
(f) NO DEFAULT. On the Effective Date (and after giving
effect to the terms of paragraph 11 of the Fifth Amendment), the
Borrower and Guarantors shall be in compliance with all of the
terms and provisions set forth herein to be observed or performed
and no unwaived Event of Default or event which upon notice or
lapse of time or both would constitute an Event of Default shall
have occurred and be continuing, and the Agent and the Banks
shall have received a certificate from a Financial Officer to
such effect.
3
<PAGE>
8. Section 5.10 of the Credit Agreement is hereby amended in its
entirety to read as follows:
BORROWING BASE CERTIFICATE. Furnish to the Agent as soon
as available and in any event (a) on or before Wednesday of each
week a Borrowing Base Certificate for the last day of the
immediately preceding week and (b) within 15 days after the end
of each fiscal month a Borrowing Base Certificate showing the
Borrowing Base as of the close of business on the last day of
such fiscal month, each such certificate to be certified as
complete and correct on behalf of the Borrower by a Financial
Officer of the Borrower, and (c) such other supporting
documentation and additional reports with respect to the
Borrowing Base that are satisfactory to the Agent, PROVIDED that
the Borrower shall not be required to furnish a weekly Borrowing
Base Certificate pursuant to clause (a) above for any week during
which, at all times, (x) the sum of the Borrower's cash PLUS
Permitted Investments PLUS (so long as such cash is maintained
with the Agent) cash of the Guarantors EXCEEDS by more than
$7,500,000 (y) the sum of the aggregate outstanding principal
amount of the Loans PLUS the aggregate Letter of Credit
Outstandings.
9. Section 6.04 (b) of the Credit Agreement is hereby amended in its
entirety to read as follows:
(b) Make Capital Expenditures during each of the four
fiscal quarters ending on each of the dates listed below in an
aggregate amount in excess of the amount specified opposite such
date:
DATE AMOUNT
June 27, 1999 $44,550,000
September 26, 1999 $45,124,000
December 26, 1999 $44,433,000
March 26, 2000 $46,000,000
10. Section 6.05(b) of the Credit Agreement is hereby amended by (i)
deleting the last line of the table appearing therein and inserting the
following in lieu thereof:
June 27, 1999 and the
last day of each fiscal
month thereafter $30,000,000
4
<PAGE>
11. The Banks hereby waive the Borrower's failure to have delivered the
monthly financial projections referred to in Section 5.01(d) of the Credit
Agreement on each occasion that such monthly financial projections were due
(such projections having been actually delivered together with the financial
statements for the periods ended March 29, 1998, September 27, 1998 and March
29, 1999 and, in the case of the latter projections, having been prepared on a
quarterly and not a monthly basis) and the monthly cash flow reports required by
Section 5.01(e) of the Credit Agreement on each occasion that such monthly cash
flow reports were due (such reports having been furnished, subsequent to
November of 1998, on a fiscal year and quarterly basis only), provided that the
Borrower complies with the provisions of Section 5.01(d) for the quarter ended
June 27, 1999 and for each quarter thereafter and the Borrower complies with
Section 5.01(e) for the fiscal month ending May 30, 1999 and each fiscal month
thereafter.
12. The Borrower hereby agrees to pay an amendment fee in connection
with this Amendment in an amount equal to $187,500 (the "AMENDMENT FEE"), which
fee shall be payable on or prior to the Effective Date to the Agent for the
account of the Banks (or their respective successors and assigns, as the case
may be).
13. This Amendment shall not become effective (the "EFFECTIVE DATE")
until (i) the date on which this Amendment shall have been executed by the
Borrower, the Guarantors, the Banks and the Agent, and the Agent shall have
received evidence satisfactory to it of such execution, (ii) the Amendment Fee
shall have been paid to the Agent on behalf of the Banks, and (iii) the Agent
shall have received evidence satisfactory to it that each of the conditions
precedent set forth in Section 4.03 of the Credit Agreement as amended hereby
have been satisfied.
14. The Borrower, the Guarantors and the Banks agree that promptly after
the occurrence of the Effective Date they shall execute and deliver an Amended
and Restated Revolving Credit and Guaranty Agreement reflecting in a single
document the terms and provisions of the Credit Agreement as heretofore modified
and as modified by this Amendment.
15. Except to the extent hereby amended, the Credit Agreement and each
of the Loan Documents remain in full force and effect and are hereby ratified
and affirmed.
16. The Borrower agrees that its obligations set forth in Section 10.05
of the Credit Agreement shall extend to the preparation, execution and delivery
of this Amendment, including the reasonable fees and disbursements of counsel to
the Agent.
17. This Amendment shall be limited precisely as written and shall not
be deemed (a) to be a consent granted pursuant to, or a waiver or modification
of, any other term or condition of the Credit Agreement or any of the
instruments or agreements referred to therein or (b) to prejudice any right or
rights which the Agent or the Banks may now have or have in the future under or
in connection with the Credit Agreement or any of the instruments or agreements
referred to therein. Whenever the Credit Agreement is referred to in the Credit
Agreement or any of the instruments,
5
<PAGE>
agreements or other documents or papers executed or delivered in connection
therewith, such reference shall be deemed to mean the Credit Agreement as
modified by this Amendment.
18. This Amendment may be executed in any number of counterparts and by
the different parties hereto in separate counterparts, each of which when so
executed and delivered shall be deemed to be an original and all of which taken
together shall constitute but one and the same instrument.
19. THIS AMENDMENT SHALL IN ALL RESPECTS BE CONSTRUED IN ACCORDANCE WITH
AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE
AND TO BE PERFORMED WHOLLY WITHIN SUCH STATE.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed as of the day and the year first above written.
PARAGON TRADE BRANDS, INC.
By: /s/ Alan J. Cyron
Title: Executive Vice President and
Chief Financial Officer
PTB INTERNATIONAL, INC.
By: /s/ Alan J. Cyron
Title: Executive Vice President and
Chief Financial Officer
PTB HOLDINGS, INC., FORMERLY KNOWN AS CHANGING
PARADIGMS, INC.
By: /s/ Alan J. Cyron
Title: Executive Vice President and
Chief Financial Officer
PARAGON TRADE BRANDS FSC, INC.
By: /s/ Alan J. Cyron
Title: Vice President
PTB ACQUISITION SUB, INC.
By: /s/ Alan J. Cyron
Title: Executive Vice President and
Chief Financial Officer
THE CHASE MANHATTAN BANK,
INDIVIDUALLY AND AS AGENT
By: /s/ Craig T. Moore
Title: Managing Director
7
<PAGE>
AMSOUTH BANK
By: /s/ Kathleen L. Kerlinger
Title: Attorney in Fact
THE BANK OF NOVA SCOTIA
By: /s/ Alex T. Clarke
Title: Senior Manager
HELLER FINANCIAL, INC.
By: /s/ Albert J. Forzano
Title: Vice President
IBJ WHITEHALL BUSINESS CREDIT CORPORATION
By: /s/ Edward A. Jesser, III
Title: Senior Vice President
PNC BANK, NATIONAL ASSOCIATION
By: /s/ Janeann Fehrle
Title: Vice President
WACHOVIA, N.A.
By: /s/ William J. Darby
Title: Vice President
8
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM FORM 10Q FOR THE QUARTER ENDED JUNE 27, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-26-1999
<PERIOD-START> DEC-28-1998
<PERIOD-END> JUN-27-1999
<CASH> 23,293
<SECURITIES> 0
<RECEIVABLES> 66,429
<ALLOWANCES> 11,252
<INVENTORY> 50,207
<CURRENT-ASSETS> 137,204
<PP&E> 280,386
<DEPRECIATION> 179,500
<TOTAL-ASSETS> 402,342
<CURRENT-LIABILITIES> 68,094
<BONDS> 0
0
0
<COMMON> 124
<OTHER-SE> (77,181)
<TOTAL-LIABILITY-AND-EQUITY> 402,342
<SALES> 244,092
<TOTAL-REVENUES> 244,092
<CGS> 212,917
<TOTAL-COSTS> 212,917
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 209
<INCOME-PRETAX> (15,947)
<INCOME-TAX> (343)
<INCOME-CONTINUING> (15,604)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,604)
<EPS-BASIC> (1.31)
<EPS-DILUTED> (1.31)
</TABLE>