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 25, 2000
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
----- -----
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No
----- -----
The number of shares outstanding of the registrant's common stock was 11,996,000
shares ($.01 par value) as of June 25, 2000.
Page 1
Exhibit Index on Page 36
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q FILING
FOR THE THIRTEEN WEEK PERIOD ENDED JUNE 25, 2000
<TABLE>
<CAPTION>
PAGE NO.
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Statements of Operations 3
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Cash Flows 5
Condensed Consolidated Statements of Changes in 7
Shareholders' Equity (Deficit)
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of 20
Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 2. Changes in Securities (not applicable)
Item 3 Defaults Upon Senior Securities 31
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 31
Signature Page 35
Exhibit Index 36
Exhibits 40
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Successor Predecessor Successor Predecessor
Company Company Company Company
--------------- --------------- --------------- -----------------------------------
Thirteen Thirteen Twenty-One Five Twenty-Six
Weeks Ended Weeks Ended Weeks Ended Weeks Ended Weeks Ended
June 25, 2000 June 27, 1999 June 25, 2000 January 28, 2000 June 27, 1999
------------- ------------- ------------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
Sales, net of discounts and allowances.... $ 131,732 $ 117,848 $ 210,081 $ 50,738 $ 244,092
Cost of sales............................. 112,710 103,380 175,775 42,497 212,917
--------------- --------------- --------------- ---------------- ---------------
Gross profit.............................. 19,022 14,468 34,306 8,241 31,175
Selling, general and administrative
expense.............................. 18,117 19,707 30,873 6,114 41,150
Research and development expenses......... 1,003 935 1,688 317 1,943
Manufacturing operation closing costs..... - 1,491 - - 1,491
--------------- --------------- --------------- ---------------- ---------------
Operating profit (loss)................... (98) (7,665) 1,745 1,810 (13,409)
Equity in earnings of unconsolidated
subsidiaries......................... 1,391 750 1,714 - 1,120
Interest expense(1)....................... 4,300 107 7,157 75 209
Other income, net ........................ 758 519 926 97 1,015
--------------- --------------- --------------- ---------------- ---------------
Income (loss) before income taxes,
bankruptcy costs and extraordinary
item................................. (2,249) (6,503) (2,772) 1,832 (11,483)
Bankruptcy costs.......................... - 2,538 - 10,399 4,464
Benefit from income taxes................. (250) (656) (209) (100 (343)
---------------- ---------------- ---------------- ---------------- ----------------
Net loss before extraordinary item........ $ (1,999) $ (8,385) $ (2,563) $ (8,467) $ (15,604)
Extraordinary item - gain from discharge
of debt.............................. - - - 123,043 -
--------------- --------------- --------------- ---------------- ---------------
Net income (loss)......................... $ (1,999) $ (8,385) $ (2,563) $ 114,576 $ (15,604)
================ ================ ================ ================ ================
Income (loss) per common share -
basic and diluted:
Net loss before extraordinary item........ $ (.17) $ (.70) $ (.21) $ (.71) $ (1.31)
Extraordinary gain........................ - - - 10.30 -
--------------- --------------- --------------- ---------------- ---------------
Net income (loss) per common share -
basic and diluted.................... $ (.17) $ (.70) $ (.21) $ 9.59 $ (1.31)
=============== =============== =============== ================ ===============
(1) Contractual interest $ - $ 1,327 $ - $ 569 $ 2,662
=============== =============== =============== ================ ===============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
3
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Successor Predecessor
Company Company
June 25, 2000 December 26, 1999
------------- -----------------
(Unaudited)
ASSETS
<S> <C> <C>
Cash and cash equivalents.................................................... $ 14,524 $ 11,685
Receivables.................................................................. 74,429 85,976
Inventories.................................................................. 42,526 48,744
Current portion of deferred income taxes..................................... 1,059 5,557
Prepaid expenses............................................................. 2,630 3,745
------------------- -------------------
Total current assets.................................................... 135,168 155,707
Property and equipment, net ................................................. 94,859 113,637
Construction in progress..................................................... 7,166 6,525
Assets held for sale......................................................... 2,358 3,312
Investment in unconsolidated subsidiary, at cost............................. 20,911 22,929
Investment in and advances to unconsolidated subsidiaries, at equity......... 71,779 56,215
Goodwill .................................................................... - 30,900
Other assets................................................................. 9,344 11,295
------------------- -------------------
Total assets............................................................ $ 341,585 $ 400,520
=================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Checks issued but not cleared................................................ $ 5,269 $ 7,525
Accounts payable............................................................. 29,276 34,715
Accrued liabilities.......................................................... 40,463 34,259
------------------- -------------------
Total current liabilities............................................... 75,008 76,499
Liabilities subject to compromise (Note 1)................................... - 406,723
Long-term debt............................................................... 146,000 -
Deferred compensation........................................................ - 211
Deferred income taxes........................................................ 1,014 6,904
------------------- -------------------
Total liabilities....................................................... 222,022 490,337
Commitments and contingencies (Notes 1 and 12)
Shareholders' equity (deficit):
Preferred stock: (Predecessor Company) Authorized 10,000,000 shares,
no shares issued, $.01 par value........................................ - -
Preferred stock: (Successor Company) Authorized 5,000,000 shares,
no shares issued, $.01 par value........................................ - -
Common stock: (Predecessor Company) Authorized 25,000,000 shares,
issued 12,388,464 shares, $.01 par value............................... - 124
Common stock: (Successor Company) Authorized 20,000,000 shares,
issued 11,996,000 shares, $.01 par value............................... 120 -
Capital surplus.............................................................. 119,840 143,736
Common stock warrants: (Successor Company) Issued 625,821,
exercisable at $18.91................................................... 2,275 -
Accumulated other comprehensive loss......................................... (109) (1,213)
Retained deficit............................................................. (2,563) (222,134)
Less: Treasury stock: (Predecessor Company), 438,750 shares,
at cost................................................................. - (10,330)
------------------- --------------------
Total shareholders' equity (deficit).................................... 119,563 (89,817)
------------------- --------------------
Total liabilities and shareholders' equity (deficit).................... $ 341,585 $ 400,520
=================== ====================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
4
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Successor Predecessor
Company Company
------- ----------------------------------
Twenty-One Five Twenty-Six
Weeks Ended Weeks Ended Weeks Ended
June 25, 2000 January 28, 2000 June 27, 1999
------------- ---------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................. $ (2,563) $ 114,576 $ (15,604)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Extraordinary item - gain from forgiveness of debt........... - (123,043) -
Depreciation and amortization................................ 10,081 2,708 17,978
Deferred income taxes........................................ 83 382 (100)
Equity in earnings of unconsolidated subsidiaries, net of
dividends.................................................. (1,056) - (815)
Write-down of assets......................................... 3 173 -
Changes in operating assets and liabilities:
Accounts receivable.......................................... 5,462 (4,079) 20,107
Inventories and prepaid expenses............................. 11,774 (2,640) 2,129
Accounts payable............................................. (1,168) (6,404) (4,915)
Checks issued but not cleared................................ (3,765) 1,509 (5,956)
Prepetition reclamation payment authorized by court.......... - - (437)
Liabilities subject to compromise............................ - (13,032) -
Accrued liabilities.......................................... 3,732 7,254 (3,607)
Other............................................................. 1,376 (436) (1,655)
----------------- ---------------- ----------------
Net cash provided by (used in) operating activities.......... 23,959 (23,032) 7,125
----------------- ---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property and equipment........................... (4,654) (745) (12,063)
Proceeds from sale of property and equipment...................... 2,299 104 5,870
Repayment of advance to unconsolidated subsidiary, at equity...... 3,367 - -
Proceeds from sale of Changing Paradigms, Inc..................... - - 350
Investment in and advances to unconsolidated subsidiaries,
at equity.................................................... - (1,200) (800)
Other............................................................. 121 1,570 186
----------------- ---------------- ----------------
Net cash provided by (used in) investing activities.......... 1,133 (271) (6,457)
----------------- ---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from credit facility..................................... - 15,000 -
Repayments of credit facility..................................... (15,000) - -
Proceeds from sale of common stock................................ 1,050 - -
------------------ --------------- ---------------
Net cash provided by (used in) financing activities.......... (13,950) 15,000 -
------------------ --------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............. 11,142 (8,303) 668
Cash and cash equivalents at beginning of period.................. 3,382 11,685 22,625
----------------- --------------- ---------------
Cash and cash equivalents at end of period........................ $ 14,524 $ 3,382 $ 23,293
================= =============== ===============
</TABLE>
CONTINUED ON NEXT PAGE.
5
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Successor Predecessor
Company Company
------- ----------------------------------
Twenty-One Five Twenty-Six
Weeks Ended Weeks Ended Weeks Ended
June 25, 2000 January 28, 2000 June 27, 1999
------------- ---------------- -------------
<S> <C> <C> <C>
Cash paid (received) during the period for:
Interest, net of amounts capitalized......................... $ 1,028 $ 232 $ 207
Income taxes................................................. $ (3,048) $ (619) $ 468
Bankruptcy costs............................................. $ 3,640 $ 10,819 $ 3,144
Supplemental non-cash disclosures:
Settlement of liabilities subject to compromise.............. $ - $ (393,691) $ -
Extinguishment of stock (Predecessor Company)................ $ - $ 24,918 $ -
Issuance of stock/warrants (Successor Company)............... $ - $ 121,185 $ -
Issuance of senior subordinated notes........................ $ - $ 146,000 $ -
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
6
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Accumulated
Common Other
Common Capital Stock Comprehensive Retained Treasury
Stock Surplus Warrants Loss Deficit Stock
-------- ----------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 26, 1999 $ 124 $ 143,736 $ - $ (1,213) $(222,134) $ (10,330)
Net Income - - - - 114,576 -
Translation adjustment - - - 159 - -
Effect of reorganization and
fresh-start accounting:
Extinguishment of stock
(Predecessor Company) (124) (143,736) - 1,054 107,558 10,330
Issuance of stock and
warrants (Successor
Company) 119 118,791 2,275 - - - -
-------- ----------- --------- ---------- ---------- -----------
BALANCE, January 28, 2000 119 118,791 2,275 - - -
(unaudited)
Net loss - - - - (2,563) -
Issue common stock 1 1,049 - - - -
Translation adjustment - - - (109) - -
-------- ----------- --------- ---------- ---------- -----------
BALANCE, June 25, 2000 (unaudited) $ 120 $ 119,840 $ 2,275 $ (109) $ (2,563) $ -
======== =========== ========= ========== ========== ===========
</TABLE>
The following summarizes the changes in the number of shares of capital stock:
<TABLE>
<CAPTION>
Common Stock
Common Stock Warrants Treasury Stock
---------------------- ---------------------- -----------------------
<S> <C> <C> <C>
BALANCE, December 26, 1999 12,388,464 - 438,750
Extinguishment of stock
(Predecessor Company) (12,388,464) - (438,750)
Issuance of stock and warrants
(Successor Company) 11,891,000 625,821 -
--------------------- --------------------- ----------------------
BALANCE, January 28, 2000 (unaudited) 11,891,000 625,821 -
Issuance of stock 105,000 - -
--------------------- --------------------- ----------------------
BALANCE, June 25, 2000 (unaudited) 11,996,000 625,821 -
===================== ===================== ======================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
7
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRTEEN AND TWENTY-SIX WEEK PERIOD ENDED JUNE 25, 2000
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
NOTE 1: CHAPTER 11 PROCEEDINGS AND REORGANIZATION
The Company 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 (the "Delaware District Court") alleging that the Company's "Ultra"
disposable baby diaper products infringed two of P&G's dual cuff diaper patents.
On December 30, 1997, the Delaware District Court issued a Judgment and Opinion
(the "Delaware Judgment"), which found that two of 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. While the final damages number of approximately $178,400 was not entered by
the Delaware 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
Delaware Judgment and the uncertainty it created caused an immediate and
critical liquidity issue for the Company.
On January 6, 1998, 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) (the "Chapter 11
filing"). None of the Company's subsidiaries were included in the Chapter 11
filing.
On February 2, 1999, the Company entered into a Settlement Agreement with P&G
which fully and finally settled all matters related to the Delaware Judgment,
the Company's appeal of the Delaware Judgment, P&G's motion to find the Company
in contempt of the Delaware Judgment and P&G's proof of claim filed in the
Company's Chapter 11 reorganization proceeding. The P&G Settlement Agreement was
approved by the Bankruptcy Court on August 6, 1999, (the "P&G Approval Order").
The Official Committee of Equity Security Holders (the "Equity Committee")
appealed the P&G Approval Order.
On October 26, 1995, Kimberly-Clark Corporation ("K-C") filed a lawsuit against
the Company in U.S. District Court in Dallas, Texas, alleging infringement by
the Company's products of two K-C patents relating to dual cuffs.
On March 19, 1999, the Company entered into a Settlement Agreement with K-C
which fully and finally settled all matters related to the Texas action,
including the Company's counterclaims, and K-C's proof of claim filed in the
Company's Chapter 11 reorganization proceeding. The K-C Settlement Agreement was
approved by the Bankruptcy Court on August 6, 1999, (the "K-C Approval Order").
The Equity Committee appealed the K-C Approval Order.
On or about November 15, 1999, the Company and the Official Committee of
Unsecured Creditors (the "Creditors' Committee"), as co-proponents, filed the
Second Amended Plan of Reorganization (as subsequently modified through January
13, 2000, the "Plan") and a related Disclosure Statement (as subsequently
modified through November 18, 1999, the "Disclosure Statement") with the
Bankruptcy Court. The Plan incorporated a proposed investment by Wellspring
Capital Management LLC ("Wellspring"), a private investment company, to acquire
the Company as part of a plan of reorganization (the "Wellspring Transaction").
By order dated November 18, 1999, the Bankruptcy Court approved the Disclosure
Statement. At such time, the Bankruptcy Court also approved certain voting
procedures and established January 7, 2000, as the voting deadline for the Plan
and January 13, 2000, as the date for a hearing to consider confirmation of the
Plan. A confirmation hearing was held by the Bankruptcy Court on January 13,
2000. By Order dated January 13, 2000, the Bankruptcy Court confirmed the Plan.
On January 28, 2000, Paragon was reorganized pursuant to the Plan through the
consummation of the Wellspring Transaction. As contemplated under the Plan, the
Equity Committee withdrew with prejudice its appeals of the P&G Approval Order
and the K-C Approval Order.
8
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
As a result of the Chapter 11 filing, the Company incurred significant costs for
professional fees. The Company was also required to pay certain expenses of the
Creditors' Committee and the Equity Committee including professional fees, to
the extent allowed by the Bankruptcy Court. Pursuant to the Plan, a reserve was
established from which any remaining professional fees and expenses related to
the Chapter 11 reorganization proceeding will be paid.
REORGANIZATION. On January 28, 2000, the Company emerged from Chapter 11
protection as contemplated under the Plan. All pre-petition obligations were
discharged. Pursuant to the Plan, Wellspring and certain of its affiliates
purchased an aggregate of 11,516,405 shares, or approximately 97 percent, of the
common stock of the reorganized Company for cash of $115,200. This cash was paid
directly to the creditors of Predecessor Company. See "PART II, ITEM 1: LEGAL
PROCEEDINGS."
CREDIT FACILITY. On January 28, 2000, the Company and certain subsidiaries of
the Company, as guarantors, entered into a three-year $95,000 financing facility
(the "Credit Facility") with a bank group led by Citicorp USA, Inc.
("Citicorp"). The maximum borrowing under the Credit Facility may not exceed the
lesser of $95,000 or an amount 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 Credit Facility has a sub-limit of $15,000 for the
issuance of letters of credit. The Credit Facility contains customary financial
covenants.
SENIOR SUBORDINATED NOTES. On January 28, 2000, the Company issued $146,000 of
11.25 percent senior subordinated notes due 2005 (the "New Notes") as
contemplated under the Plan. The New Notes are guaranteed by certain domestic
subsidiaries and are not callable until February 1, 2003. Interest is payable
semi-annually and during the first two years can be paid in kind if free cash
flow, as defined in the indenture, falls below projected levels. The New Notes
are subordinated in right of payment to the payment of all senior indebtedness.
The New Notes contain customary restrictive covenants.
FRESH START ACCOUNTING. The Company has recorded the reorganization and related
transactions using "fresh start accounting" as required by Statement of Position
90-7 ("SOP 90-7") issued by the American Institute of Certified Public
Accountants. Fresh start accounting was required because there was more than a
50 percent change in the ownership of the Company and the reorganization value
of the assets was less than the post-petition liabilities and allowed claims in
the bankruptcy.
The approximate $360,000 reorganization value of the Company was determined by
management, with assistance from independent financial professionals. The
methodology employed involved estimation of enterprise value which was
determined to be approximately $280,000, including approximately $15,000 in
borrowings under the Credit Facility, taking into account a discounted cash flow
analysis. Approximately $76,000 of post-petition liabilities were assumed by the
Company.
Current assets and current liabilities have been recorded at their historical
carrying values as such amounts approximate their fair market value. Property
and equipment have been recorded at their appraised value as determined by an
independent appraisal based on a "continued use value", which assumes that the
assets will be used for the purpose for which they were designed and
constructed. Property held for sale is valued at estimated net realizable value.
The Company's foreign investments were valued based on an estimation of
enterprise value taking into account a discounted cash flow analysis. Other
non-current assets are stated at historical carrying values which approximate
fair value. As the reorganization value was less than the current valuations of
the assets, as stated above, the resulting deficit was allocated proportionally
to the non-current assets.
9
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The effect of the Plan on the Company's consolidated balance sheet as of January
28, 2000, was as follows (unaudited):
<TABLE>
<CAPTION>
Predecessor Adjustments Successor
Company To Record Company
Balance Sheet Plan of Fresh Start Balance Sheet
January 28, 2000 Confirmation Adjustments(8) January 28, 2000
---------------- ------------ -------------- ----------------
<S> <C> <C> <C> <C>
Current assets....................... $ 157,142 $ (16,478)(1)(2)(3)(5) $ 2,830 $ 143,494
Property and equipment, net.......... 122,878 - (11,372) 111,506
Investments and advances to
unconsolidated subsidiaries, at
equity.......................... 80,344 - 14,030 94,374
Goodwill ............................ 30,749 - (30,749) -
Other assets......................... 10,243 1,224 (2) (1,619) 9,848
------------------ ---------------- ------------------ --------------
Total assets.................... $ 401,356 $ (15,254) $ (26,880) $ 359,222
================== ================ ================== ==============
Current liabilities.................. $ 81,639 $ (921)(3) $ (4,508) $ 76,210
Liabilities subject to compromise.... 406,220 (406,220)(1)(4)(5)(6) - -
Long-term debt....................... - 161,000 (4)(5) - 161,000
Other................................ 2,684 - (1,857) 827
------------------ --------------- ------------------ --------------
Total liabilities............... 490,543 (246,141) (6,365) 238,037
Common stock......................... 124 (5)(6)(7) - 119
Capital surplus...................... 143,736 (24,945)(6)(7) - 118,791
Common stock warrants................ - 2,275 (1)(6) - 2,275
Foreign currency translation
adjustments..................... (1,055) - 1,055 -
Accumulated deficit.................. (221,662) 243,232 (6)(7) (21,570) -
Treasury stock....................... (10,330) 10,330 (7) - -
------------------- --------------- ------------------ -------------
Shareholders' equity (deficit).. (89,187) 230,887 (20,515) 121,185
------------------- --------------- ------------------ -------------
Total liabilities and
shareholders' equity (deficit) $ 401,356 $ (15,254) $ 26,880 $ 359,222
================== ================ ================== =============
<FN>
------------------
(1) To record reduction of cash to pay certain liabilities subject to
compromise and reduction of certain receivables that were offset
against liabilities subject to compromise.
(2) To record deferred financing costs of the Credit Facility.
(3) To record payment of certain accrued professional fees related to the bankruptcy.
(4) To record the extinguishment of liabilities subject to compromise per the Plan.
(5) To record the issuance of the New Notes and borrowings under the Credit Facility.
(6) To record the issuance of 11,891,000 shares of common stock at $10 per
share, issuance of 625,821 warrants to purchase common stock, gain from
extinguishment of debt and certain fees arising from confirmation of
the Plan.
(7) To record the extinguishment of common stock (Predecessor Company).
(8) To record the effect of fresh start accounting, including recording assets at their current fair values adjusted for the
reorganization value.
</FN>
</TABLE>
10
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 26, 1999, which has
been derived from audited financial statements, and the unaudited interim
consolidated financial statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
note disclosures normally included in annual financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to those rules and regulations, although the Company believes
that the disclosures made are adequate to make the information presented not
misleading. It is suggested that these consolidated financial statements be read
in conjunction with the financial statements and the notes thereto included in
the Company's latest annual report on Form 10-K.
In the opinion of management, all adjustments necessary for a fair statement of
the results of the interim periods have been included. All such interim
adjustments are of a normal recurring nature except for the bankruptcy-related
costs and the extraordinary gain. The results of operations for the twenty-six
week period ending June 25, 2000, should not be regarded as necessarily
indicative of the results that may be expected for the full year.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Deposits with banks are
federally insured in limited amounts.
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") has issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which must be
adopted in the Company's fiscal year 2001. This statement establishes accounting
and reporting standards for derivative instruments - including certain
derivative instruments embedded in other contracts - and for hedging activities.
The Company is currently evaluating the impact of the statement on the Company's
financial statements.
The Emerging Issues Task Force (the "Task Force") of the Financial Accounting
Standards Board reached a consensus on Issue 00-14, ACCOUNTING FOR CERTAIN SALES
INCENTIVES. The issue addresses the accounting for sales incentives offered
voluntarily by a vendor without charge to customers that can be used in, or that
are exercisable by a customer as a result of a single exchange transaction. For
sales incentives resulting in the right to a rebate, the Task Force concluded
that recognition should occur at the date of sale, measured based upon the
estimated amount of refunds expected to be claimed by customers. Indicators
pointing to the ability to make a reasonable and reliable estimate of the amount
of future rebates or refunds were developed. If the amount cannot be reliably
estimated, it should be assumed that all customers will request a refund. When
recognized, a cash incentive should be classified as a reduction of revenue.
Upon application of the consensus, which is required for the Company in the
fourth quarter of 2000, prior period financial statements should be reclassified
to conform to the consensus. To date, the Company has not completed its analysis
of the impact which Issue 00-14 may have on the reported amount of sales.
11
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 3: BANKRUPTCY COSTS
Bankruptcy costs were directly associated with the Company's Chapter 11
reorganization proceedings and consisted of the following:
<TABLE>
<CAPTION>
Predecessor Predecessor
Company Company
------- --------------------------------------
Thirteen Five Twenty-Six
Weeks Ended Weeks Ended Weeks Ended
June 27, 1999 January 28, 2000 June 27, 1999
------------- ---------------- -------------
<S> <C> <C> <C>
Professional fees............................... $ 2,464 $ 6,990 $ 4,360
Employee confirmation bonuses................... - 3,308 -
Amortization of debtor-in-possession
credit facility deferred financing costs... 204 50 408
Other........................................... 16 125 17
Interest income................................. (146) (74) (321)
------------------ ------------------ -----------------
$ 2,538 $ 10,399 $ 4,464
================== ================== =================
</TABLE>
NOTE 4: INCOME TAXES
Income tax benefits associated with domestic operating losses and deductible
temporary differences for the periods presented have been fully reserved with a
valuation allowance on the basis that the realization of such benefits is
dependent upon sufficient taxable income in the future. The Company has recorded
a valuation allowance for substantially all deferred tax assets as the Company
does not believe it is more likely than not that the benefits will be realized.
Income tax benefits recognized in the accompanying financial statements for the
periods presented relate to recoverable income taxes for jurisdictions outside
the United States.
The Company accounts for income taxes based on the liability method and,
accordingly, deferred income taxes are provided to reflect temporary differences
between financial and tax reporting. A significant component of deferred income
taxes include temporary differences due to reserves not currently deductible
($46,100) and operating loss carryforwards ("NOLs") ($28,900). These deferred
tax assets may only be realized as an offset to future taxable income. Also, the
ability to utilize the NOLs and a portion of the other deferred tax assets is
subject to limitation under Section 382 of the Internal Revenue Code as a result
of the change in ownership that occurred in connection with the Bankruptcy
Reorganization. To realize the full benefit of the deferred tax asset, the
Company needs to generate approximately $223,400 in future taxable income.
Accordingly, the Company has estimated that this limitation on the annual
utilization of built-in deductions will be approximately $6,800. The Company
currently has fully reserved its net deferred tax asset of $86,000.
NOTE 5: COMPREHENSIVE INCOME (LOSS)
The following are the components of comprehensive income (loss):
<TABLE>
<CAPTION>
Successor Predecessor Successor Predecessor
Company Company Company Company
------- ------- ------- ----------------------------------
Thirteen Thirteen Twenty-One Five Twenty-Six
Weeks Ended Weeks Ended Weeks Ended Weeks Ended Weeks Ended
June 25, 2000 June 27, 1999 June 25, 2000 January 28, 2000 June 27, 1999
---------------- ---------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Net income (loss)......................... $ (1,999) $ (8,385) $ (2,563) $ 114,576 $ (15,604)
Foreign currency translation adjustment... (55) 307 (109) 159 615
---------------- ---------------- ---------------- ---------------- ---------------
Comprehensive income (loss)............... $ (2,054) $ (8,078) $ (2,672) $ 114,735 $ (14,989)
================ ================ ================ ================ ===============
</TABLE>
12
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 6: RECEIVABLES
Receivables consist of the following:
<TABLE>
<CAPTION>
Successor Predecessor
Company Company
---------------------- ----------------------
June 25, 2000 December 26, 1999
---------------------- ----------------------
<S> <C> <C>
Accounts receivable - trade.................................................. $ 59,432 $ 68,011
Current portion of advances to unconsolidated subsidiary, at equity.......... 11,756 11,059
Other receivables............................................................ 13,085 20,705
----------------------- ----------------------
84,273 99,775
Less: Allowance for doubtful accounts....................................... (9,844) (13,799)
----------------------- ----------------------
Net receivables.............................................................. $ 74,429 $ 85,976
======================= ======================
</TABLE>
NOTE 7: INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
Successor Predecessor
Company Company
---------------------- ----------------------
June 25, 2000 December 26, 1999
---------------------- ----------------------
<S> <C> <C>
LIFO:
Raw materials - pulp.................................................... $ 221 $ 83
Finished goods.......................................................... 22,001 25,235
FIFO:
Raw materials - other................................................... 5,836 7,995
Materials and supplies.................................................. 20,180 21,890
----------------------- ---------------------
48,238 55,203
Reserve for excess and obsolete items................................... (5,712) (6,459)
----------------------- ---------------------
Net inventories.............................................................. $ 42,526 $ 48,744
======================= =====================
</TABLE>
NOTE 8: PROPERTY AND EQUIPMENT
Property and equipment, at cost, are as follows:
<TABLE>
<CAPTION>
Successor Predecessor
Company Company
---------------------- ----------------------
June 25, 2000 December 26, 1999
---------------------- ----------------------
<S> <C> <C>
Land $ 2,902 $ 3,444
Buildings and improvements................................................... 17,026 39,037
Machinery and equipment...................................................... 87,844 248,928
----------------------- ----------------------
107,772 291,409
Less: Allowance for depreciation............................................ (12,913) (177,772)
----------------------- ----------------------
Net property and equipment................................................... $ 94,859 $ 113,637
======================= ======================
</TABLE>
13
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 9: ACCRUED LIABILITIES
Accrued liabilities are as follows:
<TABLE>
<CAPTION>
Successor Predecessor
Company Company
---------------------- ----------------------
June 25, 2000 December 26, 1999
---------------------- ----------------------
<S> <C> <C>
Payroll - wages and salaries, incentive awards, retirement,
vacation and severance pay.............................................. $ 8,503 $ 8,369
Coupons and promotions....................................................... 8,819 8,214
Royalties.................................................................... 9,702 8,225
Interest .................................................................... 6,723 -
Other........................................................................ 6,716 9,451
---------------------- ----------------------
Total........................................................................ $ 40,463 $ 34,259
====================== ======================
</TABLE>
NOTE 10: LONG-TERM DEBT
Long-term debt is as follows:
<TABLE>
<CAPTION>
Successor Predecessor
Company Company
---------------------- ----------------------
June 25, 2000 December 26, 1999
---------------------- ----------------------
<S> <C> <C>
11.25% Senior subordinated notes due 2005.................................... $ 146,000 $ -
Credit Facility borrowings................................................... - -
---------------------- ----------------------
$ 146,000 $ -
====================== ======================
</TABLE>
SENIOR SUBORDINATED NOTES. On January 28, 2000, the Company issued $146,000 of
11.25 percent senior subordinated notes due 2005 as contemplated under the Plan.
The New Notes are guaranteed by certain domestic subsidiaries and are not
callable until February 1, 2003. Interest is payable semi-annually and during
the first two years can be paid in kind if free cash flow, as defined in the
Indenture, falls below projected levels. The New Notes are subordinated in right
of payment to the payment of all senior indebtedness. The New Notes contain
customary restrictive covenants, including among other things, limitations on
dividends and restricted payments, the incurrence of additional indebtedness,
liens, investments, loans and advances, the sales of assets and transactions
with affiliates.
CREDIT FACILITY. On January 28, 2000, the Company and certain subsidiaries of
the Company, as guarantors, entered into a three-year $95,000 financing facility
(the "Credit Facility") with a bank group led by Citicorp USA, Inc.
("Citicorp"). The maximum borrowing under the Credit Facility may not exceed the
lesser of $95,000 or an amount 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 Credit Facility has a sub-limit of $15,000 for the
issuance of letters of credit. The Credit Facility contains customary financial
covenants. As of June 25, 2000, there was an aggregate of $5,100 in letters of
credit issued under the Credit Facility and no direct borrowings.
See "PART I, ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION - RISKS AND UNCERTAINTIES".
14
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 11: INCOME (LOSS) PER COMMON SHARE
Following is a reconciliation of the numerators and denominators of the basic
and diluted income (loss) per common share:
<TABLE>
<CAPTION>
Successor Predecessor Successor Predecessor
Company Company Company Company
------- ------- ------- --------------------------------
Thirteen Thirteen Twenty-One Five Twenty-Six
Weeks Ended Weeks Ended Weeks Ended Weeks Ended Weeks Ended
June 25, 2000 June 27, 1999 June 25, 2000 January 28, 2000 June 27, 1999
---------------- ---------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Net (loss) income......................... $ (1,999) $ (8,385) $ (2,563) $ 114,576 $ (15,604)
================ ================ ================ ================= ===============
Weighted average number of
common shares used in
basic and diluted EPS (000's) 11,996 11,949 11,944 11,950 11,949
================ ================ ================ ================ ===============
Basic and diluted income(loss) per
common share......................... $ (.17) $ (.70) $ (.21) $ 9.59 $ (1.31)
================ ================ ================ ================ ===============
</TABLE>
Common stock warrants and options during the periods presented were not included
in the calculation because the warrants' and options' exercise prices were
greater than the average market price of the common shares for the respective
periods.
Diluted and basic income (loss) per share are the same for each of the periods
ended June 25, 2000, January 28, 2000 and June 27, 1999, because the computation
of diluted income (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 Delaware District Court alleging that the Company's
"Ultra" infant disposable diaper products infringed two of P&G's dual cuff
diaper patents.
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 Delaware District
Court on June 2, 1998. At the same time, the Delaware District Court entered
injunctive relief agreed upon by P&G and the Company.
The Delaware Judgment 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.
On February 2, 1999, the Company entered into a Settlement Agreement with P&G
which fully and finally settled all matters related to the Delaware Judgment,
the Company's appeal of the Delaware Judgment, P&G's motion to find the Company
in contempt of the Delaware Judgment and P&G's proof of claim filed in the
Company's Chapter 11 reorganization proceeding. The P&G Approval Order was
issued on August 6, 1999. As a part of the settlement, the Company entered into
License Agreements for the U.S. and Canada 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.
15
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
While the Company believes that the royalty rates being charged by P&G are the
same royalties that will be paid by the Company's major store brand competitors
for similar patent rights, these royalties, together with royalties to be paid
to K-C described herein, have had, and will continue to have, a material adverse
impact on the Company's future financial condition and results of operations.
While these royalty costs have been partially offset by projected raw material
cost savings related to the conversion to a dual cuff design, the Company's
overall raw material costs have increased.
KIMBERLY-CLARK CORPORATION V. PARAGON TRADE BRANDS, INC. - On October 26, 1995,
K-C filed a lawsuit against the Company in the U.S. District Court in Dallas,
Texas, alleging infringement by the Company's products of two K-C patents
relating to dual cuffs. As a result of the Company's Chapter 11 filing, the
proceedings in the K-C litigation were stayed.
On March 19, 1999, the Company entered into a Settlement Agreement with K-C
which fully and finally settled all matters related to the Texas action,
including the Company's counterclaims, and K-C's proof of claim filed in the
Company's Chapter 11 reorganization proceeding. The K-C Approval Order was
issued by the Bankruptcy Court on August 6, 1999. As a part of the settlement,
the Company entered into License Agreements for the U.S. and Canada 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 Company believes that the overall effective royalty rate that the Company
will pay to K-C, together with royalties to be paid to P&G described above, has
had, and will continue to have, a material adverse impact on the Company's
future financial condition and results of operations. While these royalty costs
have been partially offset by projected raw material cost savings related to the
conversion to a dual cuff design, the Company's overall raw material costs have
increased.
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 Polymer ("SAP") in
diapers and training pants, so long as the Company uses SAP which exhibits
certain performance characteristics (the "SAP Safe Harbor"). The Company has
encountered increased product costs due to the increased price and usage of new
SAP within the SAP Safe Harbor. The Company cannot predict at this time whether
or when the added costs will be fully offset.
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 finding that two of P&G's diaper patents were 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 Delaware 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 Delaware Judgment and the
uncertainty it created caused an immediate and critical liquidity issue for the
Company which necessitated the Chapter 11 filing.
Subsequently, damages of approximately $178,400 were entered against Paragon by
the Delaware District Court on June 2, 1998. At the same time, the Delaware
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 Delaware District Court's decision in an
orderly fashion and afforded the Company the opportunity to resolve liquidated
and unliquidated claims against the Company 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 settled all matters related to the Delaware Judgment,
the Company's appeal of the Delaware Judgment, P&G's motion to find the Company
in contempt of the Delaware Judgment and P&G's proof of claim filed in the
Company's Chapter 11 reorganization proceeding. See "--THE PROCTER & GAMBLE
COMPANY V. PARAGON TRADE BRANDS, INC.," above.
16
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
On March 19, 1999, the Company entered into a Settlement Agreement with K-C
which fully and finally settled all matters related to the Texas action,
including the Company's counterclaims, and K-C's proof of claim filed in the
Company's Chapter 11 reorganization proceeding. See "--KIMBERLY-CLARK
CORPORATION V. PARAGON TRADE BRANDS, INC.," above.
On or about November 15, 1999, the Company and the Creditors' Committee, as
co-proponents, filed the Plan and Disclosure Statement with the Bankruptcy
Court. The Plan incorporated the Wellspring Transaction. By order dated November
18, 1999, the Bankruptcy Court approved the Disclosure Statement. At such time,
the Bankruptcy Court also approved certain voting procedures and established
January 7, 2000 as the voting deadline for the Plan and January 13, 2000, as the
date for a hearing to consider confirmation of the Plan. A confirmation hearing
was held by the Bankruptcy Court on January 13, 2000. By Order dated January 13,
2000, the Bankruptcy Court confirmed the Plan.
On January 28, 2000, Paragon was reorganized pursuant to the Plan through the
consummation of the Wellspring Transaction. As contemplated under the Plan, the
Equity Committee has withdrawn with prejudice its appeals of the P&G Approval
Order and the K-C Approval Order.
On January 28, 2000, the Company and certain subsidiaries of the Company, as
guarantors, entered into a three-year $95,000 financing facility with a bank
group led by Citicorp USA, Inc. This facility is designed to supplement the
Company's cash on hand and operating cash flow. As of June 25, 2000, there was
an aggregate of $5,100 in letters of credit under the Credit Facility and no
direct borrowings. The Credit Facility contains customary financial covenants.
Legal fees and costs in connection with the Chapter 11 reorganization proceeding
were significant.
KIMBERLY-CLARK WORLDWIDE, INC. V. PARAGON TRADE BRANDS, INC. - On March 20,
2000, Kimberly-Clark Worldwide, Inc. ("K-C Worldwide") filed suit in the U.S.
District Court in Delaware against the Company for allegedly infringing a patent
related to a disposable absorbent garment with a registered graphic. The suit
seeks injunctive relief, unspecified treble damages, interest and attorneys'
fees and expenses. On July 31, 2000, the Company and K-C Worldwide executed a
settlement agreement. The Company believes that the terms and conditions of the
settlement agreement will not have a material business or financial impact on
the Company.
OTHER - The Company is also a party to other legal proceedings 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
will not have a material adverse effect on its financial condition or results of
operations.
NOTE 13: BANK CREDIT FACILITIES
On January 28, 2000, the Company entered into the Credit Facility. The maximum
borrowing under the Credit Facility may not exceed the lesser of $95,000 or an
amount 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 property and real property of the
Company. The Credit Facility has a sub-limit of $15,000 for the issuance of
letters of credit.
Borrowings under the Credit Facility are secured by a security interest in,
pledge of and lien on substantially all of the Company's North American assets
and properties and the proceeds thereof. Borrowings under the Credit Facility
are guaranteed by certain domestic subsidiaries and may be used to fund working
capital and other general corporate purposes including acquisitions and
investments in existing and new international joint ventures. The Credit
Facility contains restrictive covenants, including among other things, a
prohibition on dividends, limitations on the creation of additional liens and
indebtedness, limitations on capital expenditures, investments, loans and
advances, the sales of assets and transactions with affiliates. Financial
covenants include the maintenance of minimum earnings before interest, taxes,
depreciation and amortization, fixed charges, coverage ratio, tangible net worth
and a maximum leverage ratio.
17
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Credit Facility provides that borrowings will bear interest at a rate of
1.50 percent in excess of Citibank's base rate, or at the Company's option, a
rate of 2.50 percent in excess of the reserve adjusted eurodollar rate for
interest periods of one, two, three or six months. After March 31, 2001,
borrowing rates will be subject to a pricing grid based upon the Company's
leverage ratio and could decrease by a maximum of .5 percent and increase by a
maximum of .25 percent. The Company will pay a commitment fee of .5 percent per
annum on the unused portion of the Credit Facility, a letter of credit fee equal
to 2.75 percent per annum on the average outstanding letters of credit and
certain other fees.
As of June 25, 2000, there was an aggregate of $5,100 in letters of credit
issued under the Credit Facility and no direct borrowings. See "PART I, ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITIONS - RISKS AND UNCERTAINTIES " herein.
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.
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.
Net sales and operating profit (loss) for the segments were as follows:
<TABLE>
<CAPTION>
Feminine
Care/Adult
Thirteen weeks ended June 25, 2000 Infant Care Incontinence Total
-------------------------------------------------------- ----------- ------------ -----
<S> <C> <C> <C>
Net sales....................................... $ 128,512 $ 3,220 $ 131,732
Operating profit (loss)......................... 3,654 (3,752) (98)
Depreciation and amortization................... 5,682 597 6,279
Thirteen weeks ended June 27, 1999
--------------------------------------------------------
Net sales....................................... $ 115,089 $ 2,759 $ 117,848
Operating (loss)................................ (4,380) (3,285) 7,665)
Depreciation and amortization................... 8,533 1,009 9,542
</TABLE>
18
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
Feminine
Care/Adult
Twenty-one weeks ended June 25, 2000 Infant Care Incontinence Total
-------------------------------------------------------- ----------- ------------ -----
<S> <C> <C> <C>
Net sales....................................... $ 204,603 $ 5,478 $ 210,081
Operating profit (loss)......................... 7,362 (5,617) 1,745
Depreciation and amortization................... 9,267 814 10,081
Five weeks ended January 28, 2000
--------------------------------------------------------
Net sales....................................... $ 49,422 $ 1,316 $ 50,738
Operating profit (loss)......................... 3,005 (1,195) 1,810
Depreciation and amortization................... 2,328 380 2,708
Twenty-six weeks ended June 27, 1999
--------------------------------------------------------
Net sales....................................... $ 238,445 $ 5,647 $ 244,092
Operating (loss)................................ (6,850) (6,559) (13,409)
Depreciation and amortization................... 15,970 2,008 17,978
</TABLE>
19
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
CHAPTER 11 PROCEEDINGS AND REORGANIZATION
The Company 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 (the "Delaware District Court") alleging that the Company's "Ultra"
disposable baby diaper products infringed two of P&G's dual cuff diaper patents.
On December 30, 1997, the Delaware District Court issued a Judgment and Opinion
which found that two of 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. While the final damages number
of approximately $178.4 million was not entered by the Delaware 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 Delaware
Judgment and the uncertainty it created caused an immediate and critical
liquidity issue for the Company.
On January 6, 1998, 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) (the "Chapter 11
filing"). None of the Company's subsidiaries were included in the Chapter 11
filing.
On February 2, 1999, the Company entered into a Settlement Agreement with P&G
which fully and finally settled all matters related to the Delaware Judgment,
the Company's appeal of the Delaware Judgment, P&G's motion to find the Company
in contempt of the Delaware Judgment and P&G's proof of claim filed in the
Company's Chapter 11 reorganization proceeding. The P&G Settlement Agreement was
approved by the Bankruptcy Court on August 6, 1999, (the "P&G Approval Order").
The Official Committee of Equity Security Holders (the "Equity Committee")
appealed the P&G Approval Order. See "PART II, ITEM 1: LEGAL PROCEEDINGS."
On October 26, 1995, Kimberly-Clark Corporation ("K-C") filed a lawsuit against
the Company in U.S. District Court in Dallas, Texas, alleging infringement by
the Company's products of two K-C patents relating to dual cuffs.
On March 19, 1999, the Company entered into a Settlement Agreement with K-C
which fully and finally settled all matters related to the Texas action,
including the Company's counterclaims, and K-C's proof of claim filed in the
Company's Chapter 11 reorganization proceeding. The K-C Settlement Agreement was
approved by the Bankruptcy Court on August 6, 1999, (the "K-C Approval Order").
The Equity Committee appealed the K-C Approval Order. See "PART II, ITEM 1:
LEGAL PROCEEDINGS."
On or about November 15, 1999, the Company and the Official Committee of
Unsecured Creditors (the "Creditors' Committee"), as co-proponents, filed the
Second Amended Plan of Reorganization (as subsequently modified through January
13, 2000, the "Plan") and a related Disclosure Statement (as subsequently
modified through November 18, 1999, the "Disclosure Statement") with the
Bankruptcy Court. The Plan incorporated a proposed investment by Wellspring
Capital Management LLC ("Wellspring"), a private investment company, to acquire
the Company as part of a plan of reorganization (the "Wellspring Transaction").
By order dated November 18, 1999, the Bankruptcy Court approved the Disclosure
Statement. At such time, the Bankruptcy Court also approved certain voting
procedures and established January 7, 2000, as the voting deadline for the Plan
and January 13, 2000, as the date for a hearing to consider confirmation of the
Plan. A confirmation hearing was held by the Bankruptcy Court on January 13,
2000. By Order dated January 13, 2000, the Bankruptcy Court confirmed the Plan.
On January 28, 2000, Paragon was reorganized pursuant to the Plan through the
consummation of the Wellspring Transaction. As contemplated under the Plan, the
Equity Committee has withdrawn with prejudice its appeals of the P&G Approval
Order and the K-C Approval Order. See "PART II, ITEM 1: LEGAL PROCEEDINGS."
As a result of the Chapter 11 filing, the Company incurred significant costs for
professional fees. The Company was also required to pay certain expenses of the
Creditors' Committee and the Equity Committee including professional fees, to
the
20
<PAGE>
extent allowed by the Bankruptcy Court. Pursuant to the Plan, a reserve was
established from which any remaining professional fees and expenses related to
the Chapter 11 reorganization proceeding will be paid. See "PART II, ITEM 1:
LEGAL PROCEEDINGS."
Trading in the common stock of the Company on the New York Stock Exchange
("NYSE") was suspended prior to the opening of trading on July 8, 1999. As of
July 9, 1999, the National Association of Securities Dealers, Inc.
Over-the-Counter Bulletin Board (the "OTCBB") began publishing quotations of the
Company's common stock under the symbol PGNFQ. As a result of the Plan, on
February 2, 2000, the OTCBB ceased quotations of the Company's common stock.
Quotation of the Company's common stock resumed on the OTCBB as of March 30,
2000, under the symbol PGTR.
REORGANIZATION. On January 28, 2000, the Company emerged from Chapter 11
protection as contemplated under the Plan. All pre-petition obligations were
discharged. Pursuant to the Plan, Wellspring and certain of its affiliates
purchased an aggregate of 11,516,405 shares, or approximately 97 percent, of the
common stock of the reorganized Company for cash of $115.2 million. The cash was
paid directly to the creditors of Predecessor Company. See "PART II, ITEM 1:
LEGAL PROCEEDINGS."
CREDIT FACILITY. On January 28, 2000, the Company and certain subsidiaries of
the Company, as guarantors, entered into a three-year $95 million financing
facility (the "Credit Facility") with a bank group led by Citicorp USA, Inc.
("Citicorp"). The maximum borrowing under the Credit Facility may not exceed the
lesser of $95 million or an amount 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 property and
real property of the Company. The Credit Facility has a sub-limit of $15 million
for the issuance of letters of credit. The Credit Facility contains customary
financial covenants.
SENIOR SUBORDINATED NOTES. On January 28, 2000, the Company issued $146.0
million of 11.25 percent senior subordinated notes due 2005 (the "New Notes") as
contemplated under the Plan. The New Notes are guaranteed by certain domestic
subsidiaries and are not callable until February 1, 2003. Interest is payable
semi-annually and during the first two years can be paid in kind if free cash
flow, as defined in the indenture, falls below projected levels. The New Notes
are subordinated in right of payment to the payment of all senior indebtedness.
The New Notes contain customary restrictive covenants.
FRESH START ACCOUNTING. The Company has recorded the reorganization and related
transactions using "fresh start accounting" as required by Statement of Position
90-7 ("SOP 90-7") issued by the American Institute of Certified Public
Accountants.
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 the Company's international
investments in joint ventures in Mexico, Argentina, Brazil and China are
reported in the corporate and other segment.
RESULTS OF OPERATIONS
Effective January 28, 2000, the Company emerged from Chapter 11 bankruptcy
proceedings and implemented "fresh start accounting." Accordingly, all assets
and liabilities were restated to reflect their respective fair values. The
consolidated financial statements after that date are those of a new reporting
entity and are not comparable to the Pre-Confirmation periods. However, for
purposes of this discussion, the twenty-one weeks ended June 25, 2000,
(Post-Confirmation) have been combined with the five weeks ended January 28,
2000, (Pre-Confirmation) and then compared to 26 weeks ended June 27, 1999.
Differences between periods due to fresh start accounting adjustments are
explained when necessary. The following table is included solely for use in
comparative analysis of results of operations, and to complement management's
discussion and analysis:
21
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<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-Six Weeks Ended
-------------------- ----------------------
June 25, 2000 June 27, 1999 June 25, 2000 June 27, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales............................................ $ 131,732 $ 117,848 $ 260,819 $ 244,092
Cost of sales........................................ 112,710 103,380 218,272 212,917
--------------- --------------- ------------- ------------
Gross profit......................................... 19,022 14,468 42,547 31,175
Selling, general and administrative expense.......... 18,117 19,707 36,987 41,150
Research and development expense..................... 1,003 935 2,005 1,943
Manufacturing operation closing costs................ - 1,491 - 1,491
--------------- --------------- ------------- ------------
Operating profit (loss).............................. (98) (7,665) 3,555 (13,409)
Equity in earnings of unconsolidated subsidiaries.... 1,391 750 1,714 1,120
Interest expense..................................... 4,300 107 7,232 209
Other income, net.................................... 758 519 1,023 1,015
--------------- --------------- ------------- ------------
Net loss before income taxes, bankruptcy costs
and extraordinary item.......................... (2,249) (6,503) (940) (11,483)
Bankruptcy costs..................................... - 2,538 10,399 4,464
Benefit from income taxes............................ (250) (656) (309) (343)
--------------- --------------- -------------- -------------
Net loss before extraordinary item................... (1,999) (8,385) (11,030) (15,604)
Extraordinary item - gain from discharge of debt..... - - 123,043 -
--------------- --------------- ------------- ------------
Net income (loss).................................... $ (1,999) $ (8,385) $ 112,013 $ (15,604)
=============== =============== ============= ============
</TABLE>
THIRTEEN WEEKS ENDED JUNE 25, 2000
COMPARED TO THIRTEEN WEEKS ENDED JUNE 27, 1999
A net loss of $2.0 million was incurred in the second quarter of 2000 compared
to a net loss of $8.4 million in the second quarter of 1999. Increased unit
volume, improved product mix, reduced manufacturing and selling, general and
administrative costs all contributed to the improvement compared to the second
quarter of 1999. The second quarter of 2000 results were negatively impacted by
approximately $3.2 million of non-recurring costs, primarily severance for
former senior management. The second quarter of 1999 results were 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 1999.
Basic loss per share for the thirteen weeks ended June 25, 2000, was $.17.
Comparison to previous periods is not meaningful due to the Company's emergence
from bankruptcy and the implementation of fresh start accounting.
Infant care operating profit was $3.7 million in the second quarter of 2000
compared to an operating loss of $4.4 million in the second quarter of 1999.
Increased unit volume, improved product mix, lower manufacturing costs and lower
selling, general and administrative costs contributed to the improved results.
Second quarter operating profit was negatively impacted by approximately $3.2
million of non-recurring costs, primarily severance for former senior
management. The second quarter of 1999 operating profit was 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 1999.
Feminine care and adult incontinence operating losses were $3.8 million in the
second quarter of 2000 compared to an operating loss of $3.3 million in the
second quarter of 1999. 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 and expects these losses to
continue near-term. The Company has developed a business plan for its feminine
care and adult incontinence business. 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 the successful
execution of the Company's feminine care and adult incontinence business plan.
While there can be no assurances, management believes that its investment in the
feminine care and adult incontinence business is recoverable. See "RISKS AND
UNCERTAINTIES" herein.
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<PAGE>
NET SALES
Overall net sales were $131.7 million in the second quarter of 2000 compared to
$117.8 million in the second quarter of 1999.
Infant care net sales increased 11.6 percent to $128.5 million in the second
quarter of 2000 compared to $115.1 million in the second quarter of 1999. Unit
sales increased 11.9 percent to 811 million units compared to 725 million units
in the second quarter of 1999. The increase in net sales and units was due to a
favorable product mix associated with the introduction of a new training pant
product and the launch of certain destination store brand product and marketing
programs.
The Company anticipates higher volume during the second half of 2000 compared to
1999 due to the training pant product and destination store brand programs
discussed above. In response to competitive initiatives, the Company intends to
implement a package count change in the second half of 2000 which may result in
an effective price increase. It is difficult to predict the timing and amount of
the price increase to be realized.
Feminine care and adult incontinence sales increased to $3.2 million in the
second quarter of 2000 compared to $2.8 million in the second quarter of 1999
due to the shipment of product to new customers.
COST OF SALES
Overall cost of sales in the second quarter of 2000 was $112.7 million compared
to $103.4 million in the second quarter of 1999. As a percentage of net sales,
cost of sales was 85.6 percent in the second quarter of 2000 compared to 87.8
percent in the second quarter of 1999.
Infant care cost of sales was $106.0 million in the second quarter of 2000
compared to $97.4 million in the second quarter of 1999. As a percentage of net
sales, infant care cost of sales was 82.5 percent in the second quarter of 2000
compared to 84.6 percent in 1999. This decrease in costs as a percentage of
sales was due to improved manufacturing efficiencies, lower plant overhead
costs, the closure of the Brampton, Canada manufacturing facility during the
second quarter of 1999 and lower depreciation costs. These favorable items were
partially offset by higher pulp prices.
Infant care raw material prices, with the exception of pulp, were at lower price
levels in the second quarter of 2000 compared to the second quarter of 1999.
Pulp prices started to increase during the second half of 1999 and are expected
to increase during the remainder of 2000. Pulp and oil based raw material prices
are expected to increase during the remainder of 2000.
Infant care depreciation costs were $4.9 million in the second quarter of 2000
compared to $6.7 million in the second quarter of 1999. The decrease is
partially due to lower asset values as a result of fresh start accounting.
Feminine care and adult incontinence cost of sales was $6.7 million in the
second quarter of 2000 compared to $6.0 million in the second quarter of 1999.
Overall cost of sales in this segment is expected to remain greater than net
sales until volume is significantly increased to absorb existing manufacturing
capacity. See "RISKS AND UNCERTAINTIES" herein.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses were $18.1 million in the second quarter of 2000 compared to $19.7
million in the second quarter of 1999. As a percentage of net sales, these
expenses were 13.8 percent in the second quarter of 2000 compared to 16.7
percent in 1999. The decrease in SG&A is primarily attributable to lower sales
and marketing expenditures and information technology expenses which more than
offset former senior management severance costs. Depreciation and amortization
costs included in SG&A decreased to $.8 million in the second quarter of 2000
compared to $1.7 million in the second quarter of 1999. The decrease in
depreciation and amortization is partially due to the elimination of goodwill
through fresh start accounting. The Company will incur higher packaging artwork
and development costs in the second half of 2000 due to the package count change
discussed above.
RESEARCH AND DEVELOPMENT
Research and development expenses were $1.0 million in the second quarter of
2000 compared to $.9 million in the second quarter of 1999.
23
<PAGE>
INTEREST EXPENSE
Interest expense was $4.3 million in the second quarter of 2000 compared to $.1
million in the second quarter of 1999. The increase is due to interest costs
associated with the New Notes bearing an annual interest rate of 11.25 percent
and with borrowings under the Credit Facility. There were no borrowings under
the DIP Credit Facility during the first quarter of 1999.
EQUITY IN EARNINGS OF UNCONSOLIDATED SUBSIDIARIES
The equity in earnings of unconsolidated subsidiaries was $1.4 million in the
second quarter of 2000 compared to $.8 million in the second quarter of 1999.
The increase in earnings reflects improved earnings at Paragon Mabesa
International, S.A. de C.V.
BANKRUPTCY COSTS
There were no direct bankruptcy costs in the second quarter of 2000 compared to
$2.5 million in the second quarter of 1999.
INCOME TAXES
Income tax benefits associated with domestic operating losses and deductible
temporary differences for the periods presented have been fully reserved with a
valuation allowance on the basis that the realization of such benefits is
dependent upon sufficient taxable income in the future. The Company has recorded
a valuation allowance for substantially all deferred tax assets as the Company
does not believe it is more likely than not that the benefits will be realized.
Income tax benefits recognized in the accompanying financial statements for the
periods presented relate to recoverable income taxes for jurisdictions outside
the United States.
TWENTY-SIX WEEKS ENDED JUNE 25, 2000
COMPARED TO TWENTY-SIX WEEKS ENDED JUNE 27, 1999
RESULTS OF OPERATIONS
Net income of $112.0 million were reported in the first half of 2000 compared to
a net loss of $15.6 million in the first half of 1999. Included in the results
for the first half of 2000 was an extraordinary gain of $123.0 million
associated with forgiveness of debt that resulted from the reorganization of the
Company in accordance with the Plan. Increased unit volume, improved product
mix, reduced manufacturing and selling, general and administrative costs all
contributed to the operating improvement compared to the first half of 1999. The
first half of 2000 results were negatively impacted by approximately $3.6
million of non-recurring costs, primarily severance for former senior
management. The first half of 1999 results were negatively impacted by costs
associated with price concessions made to export customers to address product
acceptance issues and the cessation of manufacturing operations at the Company's
Canadian subsidiary, Paragon Trade Brands (Canada) Inc.'s Brampton, Ontario
facility in June 1999. Included in the first half of 2000 results are bankruptcy
costs of $10.4 million compared to $4.5 million in the first half of 1999.
Basic and diluted income per share for the twenty-six weeks ended June 25, 2000,
was $9.38. Comparison to other periods is not meaningful due to the Company's
emergence from bankruptcy and the related extraordinary gain.
Infant care operating profit was $10.4 million in the first half of 2000
compared to an operating loss of $6.9 million in the first half of 1999.
Increased unit volume, improved product mix, lower manufacturing costs and lower
selling, general and administrative costs contributed to the improved results.
First half infant care operating profit was negatively impacted by approximately
$3.6 million of non-recurring costs, primarily severance costs for former senior
management. The first half of 1999 results were negatively impacted by the costs
associated with price concessions made to export customers to address product
acceptance issues and the cessation of manufacturing operations at the Company's
Canadian subsidiary, Paragon Trade Brands (Canada) Inc.'s Brampton, Ontario
facility in June 1999.
Feminine care and adult incontinence operating losses were $6.8 million in the
first half of 2000 compared to an operating loss of $6.6 million in the first
half of 1999. 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 and expects these losses to
continue near-term. The Company has developed a business plan for its feminine
care and adult incontinence business. 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
24
<PAGE>
Company's ability to recover its investment is dependent upon the successful
execution of the Company's feminine care and adult incontinence business plan.
While there can be no assurances, management believes that its investment in the
feminine care and adult incontinence business is recoverable. See "RISKS AND
UNCERTAINTIES" herein.
NET SALES
Overall net sales were $260.8 million in the first half 2000 compared to
$244.1million in the first half 1999.
Infant care net sales increased 6.5 percent to $254.0 million in the first half
of 2000 compared to $238.4 million in the first half of 1999. Unit sales
increased 4.2 percent to 1,602 million units compared to 1,538 million units in
the first half of 1999. The increase in net sales and units was due to a
favorable product mix associated with the introduction of a new training pant
product and the launch of certain destination store brand product and marketing
programs.
Feminine care and adult incontinence sales increased to $6.8 million in the
first half of 2000 compared to $5.6 million in the first half of 1999 due to the
shipment of product to new customers.
COST OF SALES
Overall cost of sales in the first half of 2000 was $218.3 million compared to
$212.9 million in the first half of 1999. As a percentage of net sales, cost of
sales was 83.7 percent in the first half of 2000 compared to 87.2 percent in the
first half of 1999.
Infant care cost of sales was $205.1 million in the first half of 2000 compared
to $201.0 million in the first half of 1999. As a percentage of net sales,
infant care cost of sales was 80.7 percent in the first half of 2000 compared to
84.3 percent in first half of 1999. This decrease in costs as a percentage of
sales was due to improved manufacturing efficiencies, lower plant overhead
costs, the closure of the Brampton, Canada manufacturing facility during the
second quarter of 1999 and lower depreciation costs. These favorable items were
partially offset by higher pulp prices.
Infant care raw material prices, with the exception of pulp, were at lower price
levels in the first half of 2000 compared to the first half of 1999.
Infant care depreciation costs were $9.9 million in the first half of 2000
compared to $12.5 million in first half of 1999. The decrease is partially due
to lower asset values as a result of fresh start accounting.
Feminine care and adult incontinence cost of sales was $13.2 million for the
first half of 2000 compared to $11.9 million in the first half of 1999. Overall
cost of sales in this segment is expected to remain greater than net sales until
volume is significantly increased to absorb existing manufacturing capacity. See
"RISKS AND UNCERTAINTIES" herein.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses were $37.0 million in the first half of 2000 compared to $41.2
million in the first half of 1999. As a percentage of net sales, these expenses
were 14.2 percent in the first half of 2000 compared to 16.9 percent in 1999.
The decrease in SG&A is primarily attributable to lower sales and marketing
expenditures and information technology expenses which more than offset former
senior management severance costs. Depreciation and amortization costs included
in SG&A decreased to $1.7 million in the second quarter of 2000 compared to $3.5
million in the first half of 1999. The decrease in depreciation and amortization
is partially due to the elimination of goodwill through fresh start accounting.
RESEARCH AND DEVELOPMENT
Research and development expenses were $2.0 million in the first half of 2000
compared to $1.9 million in the first half of 1999.
INTEREST EXPENSE
Interest expense was $7.2 million in the first half of 2000 compared to $.2
million in the first half of 1999. The increase is due to interest costs
associated with the New Notes bearing an annual interest rate of 11.25 percent
and with borrowings under the Credit Facility. There were no borrowings under
the DIP Credit Facility during the first half of 1999.
25
<PAGE>
EQUITY IN EARNINGS OF UNCONSOLIDATED SUBSIDIARIES
The equity in earnings of unconsolidated subsidiaries was $1.7 million in the
first half of 2000 compared to $1.1 million in the first half of 1999. The
increase in earnings reflects improved earnings at Paragon Mabesa International,
S.A. de C.V.
BANKRUPTCY COSTS
Bankruptcy costs were $10.4 million in the first half of 2000 compared to $4.5
million in the first half of 1999. The increase in costs was primarily due to
professional fees associated with the exit from bankruptcy as well as $3.3
million in confirmation bonuses paid to employees.
EXTRAORDINARY GAIN FROM DISCHARGE OF DEBT
During the period ending January 28, 2000, an extraordinary gain of $123.0
million was recorded for the discharge of indebtedness that resulted from the
forgiveness of certain liabilities in accordance with the Company's plan of
reorganization.
INCOME TAXES
Income tax benefits associated with domestic operating losses and deductible
temporary differences for the periods presented have been fully reserved with a
valuation allowance on the basis that the realization of such benefits is
dependent upon sufficient taxable income in the future. The Company has recorded
a valuation allowance for substantially all deferred tax assets as the Company
does not believe it is more likely than not that the benefits will be realized.
Income tax benefits recognized in the accompanying financial statements for the
periods presented relate to recoverable income taxes for jurisdictions outside
the United States.
LIQUIDITY AND CAPITAL RESOURCES
On a pro forma basis, the cash flows for the twenty-one weeks ended June 25,
2000, (Successor Company) and the five weeks ended January 28, 2000,
(Predecessor Company) have been combined for purposes of comparison to the
twenty-six weeks ended June 27, 1999.
During the first half of 2000, cash flow from net income (loss) excluding
non-cash charges was a negative $1.3 million compared to a positive $1.5 million
in the first half of 1999. Despite improved operating results, the decrease in
cash flow was caused by the $10.3 million of costs associated with the exit from
bankruptcy.
During the first half of 2000, cash flow was positively impacted by a $10.5
million reduction in accounts receivable, inventories and prepaid expenses. The
positive cash flow was partially offset by a decrease in accounts payable and
checks issued but not cleared.
Cash flow was also positively impacted by $2.3 million of proceeds from property
and equipment sales and $3.4 million in scheduled repayments of advances to an
unconsolidated subsidiary.
Capital expenditures were $5.4 million for the first half of 2000 compared to
capital expenditures of $13.6 million, including approximately $1.5 million of
computer software and consulting costs for the first half of 1999. Capital
spending is expected to be approximately $32.0 million during 2000 which the
Company expects will be funded through a combination of internally generated
funds, cash on hand and borrowings under the Credit Facility.
Cash produced from operations and cash and cash equivalents supported an
additional investment of $1.2 million in the Company's Goodbaby joint venture in
China during the first quarter of 2000.
On January 28, 2000, the Company entered into the Credit Facility. The maximum
borrowing under the Credit Facility may not exceed the lesser of $95.0 million
or an amount 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 property and real property of the
Company. The Credit Facility has a sub-limit of $15.0 million for the issuance
of letters of credit.
Borrowings under the Credit Facility are secured by a security interest in,
pledge of and lien on substantially all of the Company's North American assets
and properties and the proceeds thereof. Borrowings under the Credit Facility
are guaranteed by certain domestic subsidiaries and may be used to fund working
capital and other general corporate purposes including acquisitions and
investments in existing and new international joint ventures. The Credit
Facility
26
<PAGE>
contains customary restrictive covenants, including among other things, a
prohibition on dividends, limitations on the creation of additional liens and
indebtedness, limitations on capital expenditures, investments, loans and
advances, the sales of assets and transactions with affiliates. Financial
covenants include the maintenance of minimum earnings before interest, taxes,
depreciation and amortization, fixed charges, coverage ratio, tangible net worth
and a maximum leverage ratio.
The Credit Facility provides that borrowings will bear interest at a rate of
1.50 percent in excess of Citibank's base rate, or at the Company's option, a
rate of 2.50 percent in excess of the reserve adjusted eurodollar rate for
interest periods of one, two, three or six months. After March 31, 2001,
borrowing rates will be subject to a pricing grid based upon the Company's
leverage ratio and could decrease by a maximum of .5 percent and increase by a
maximum of .25 percent. The Company will pay a commitment fee of .5 percent per
annum on the unused portion of the Credit Facility, a letter of credit fee equal
to 2.75 percent per annum on the average outstanding letters of credit and
certain other fees.
On January 28, 2000, the Company borrowed approximately $15.0 million to
consummate the Plan which was primarily used to extinguish $13.0 million in
pre-petition liabilities subject to compromise. As of June 25, 2000, the Company
had an aggregate of $5.1 million in letters of credit under the Credit Facility
and no direct borrowings.
In connection with the Chapter 11 filing, on January 30, 1998, the Bankruptcy
Court entered a Final Order approving the DIP Credit Facility as provided under
the Revolving Credit and Guarantee Agreement dated as of January 7, 1998, among
the Company, as Borrower, certain subsidiaries of the Company, as guarantors,
and a bank group led by The Chase Manhattan Bank ("Chase"). Pursuant to the
terms of the DIP Credit Facility, as amended and restated as of June 14, 1999,
Chase and a syndicate of banks made available to the Company a revolving credit
and letter of credit facility in an aggregate principal amount of $75.0 million.
The Company's maximum borrowing under the DIP Credit Facility could not exceed
the lesser of $75.0 million or an available amount as determined by a borrowing
base formulation. The borrowing base formulation was comprised of certain
specified percentages of eligible accounts receivable, eligible inventory,
equipment and personal and real property of the Company. The DIP Credit Facility
had a sublimit of $10.0 million for the issuance of letters of credit. The DIP
Credit Facility expired on January 28, 2000, in accordance with its terms and
was replaced with the Credit Facility.
FUTURE REALIZATION OF NET DEFERRED TAX ASSET
The Company accounts for income taxes based on the liability method and,
accordingly, deferred income taxes are provided to reflect temporary differences
between financial and tax reporting. A significant component of deferred income
taxes includes temporary differences due to reserves not currently deductible
($46.1 million) and operating loss carryforwards ("NOLs") ($28.9 million). These
deferred tax assets may only be realized as an offset to future taxable income.
Also, the ability to utilize the NOLs and a portion of the other deferred tax
assets is subject to limitation under Section 382 of the Internal Revenue Code
as a result of the change in ownership that occurred in connection with the
Bankruptcy Reorganization. To realize the full benefit of the deferred tax
asset, the Company needs to generate approximately $223.4 million in future
taxable income. Accordingly, the Company has estimated that this limitation on
the annual utilization of built-in deductions will be approximately $6.8
million. The Company currently has fully reserved its net deferred tax asset of
$86.0 million. See "--INCOME TAXES."
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 has incurred and
will continue to incur significant added costs in the form of running royalties
payable to both parties for sales of the licensed diaper and training pant
products. While the Company believes that the royalties being charged by P&G and
K-C under their respective License Agreements are approximately the same
royalties that will be paid by the Company's major store brand competitors for
similar patent rights, the royalties will have a material adverse impact on the
Company's future financial condition and results of operations. While these
royalty costs have been partially offset by projected raw material cost savings
related to the conversion to a dual cuff product, the Company's overall raw
material costs have increased. Further, the Company's operating results may be
adversely affected by anticipated increases in raw materials prices, primarily
fluff pulp, in 2000.
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 SAP Safe Harbor"). The Company has encountered increased
product costs due to the increased price and usage of new SAP within the SAP
Safe Harbor. The Company cannot predict at this time whether or when the added
costs will be fully offset.
27
<PAGE>
PRICING. Price increases are needed to fully offset the added royalty cost being
incurred by the Company pursuant to the P&G and K-C settlements described above.
The Company expects to implement an effective price increase as a result of a
package count change that the Company intends to implement in the second half of
2000. Should the Company not be able to realize future price increases, its
margins are expected to continue to be negatively impacted.
REALIZATION OF INVESTMENT IN FEMININE CARE AND ADULT INCONTINENCE BUSINESS.
Given the slow start-up of the feminine care and adult incontinence business,
which was exacerbated by the Company's Chapter 11 filing, and given the
resulting feminine care and adult incontinence losses, the Company's ability to
recover its investment in such business is highly uncertain. The Company's
ability to recover its investment is dependent upon the successful execution of
the Company's feminine care and adult incontinence business plan. While there
can be no assurances, management believes that its investment in the feminine
care and adult incontinence business is recoverable.
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.
INCREASED FINANCIAL LEVERAGE. In connection with the Plan, the Company issued
the New Notes. As a result of this increased leverage, the Company's principal
and interest obligations have increased substantially. The degree to which the
Company is leveraged could adversely affect the Company's ability to obtain
additional financing for working capital, acquisitions or other purposes and
could make it more vulnerable to economic downturns and competitive pressures.
The Company's increased leverage could also adversely affect its liquidity and
its ability to fund capital expenditures, as a substantial portion of available
cash from operations will have to be applied to meet debt service requirements.
The indenture related to the New Notes (the "Indenture") provides that, if
certain coverage tests are not met, interest on the New Notes may be paid in
kind for the first two years. The Indenture contains customary financial
covenants restricting the payments of dividends, the repurchase of the Company's
stock, the issuance of additional equity or the incurrence of additional
indebtedness. Also in connection with the Plan, on January 28, 2000, the Company
entered into the Credit Facility. The Credit Facility contains customary
financial covenants.
Based upon anticipated improvements in the Company's operations and certain cost
savings measures, the Company believes that its cash flows from operations,
borrowings under the Credit Facility and other sources of liquidity, will be
adequate to meet the Company's anticipated requirements for working capital,
capital expenditures, interest payments and scheduled principal payments for the
foreseeable future. There can be no assurance, however, that anticipated
improvements in operations and cost savings will be realized. If the Company is
unable to generate sufficient cash flows from operations in the future, it may
be required to refinance all or a portion of its existing debt or to obtain
additional financing. There can be no assurance that any such refinancing would
be possible or that any additional financing could be obtained on terms that are
favorable or acceptable to the Company.
MARKET FOR THE COMPANY'S COMMON STOCK. Pursuant to the Plan, Wellspring, and its
affiliates purchased 11,516,405 shares, or approximately 97.4 percent, of the
Company's new common stock. Approximately 309,800 shares, or 2.6 percent of the
new common stock, was distributed under the Plan to the Company's then-existing
stockholders and purchased through the Rights Offering pursuant to the Plan. The
Company's common stock is currently quoted on OTCBB under the symbol PGTR.
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: increased raw material prices and product costs;
new product and packaging introductions by competitors; increased price and
promotion pressure from competitors; 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
28
<PAGE>
Company undertakes no obligation to publicly release the result of any revisions
to these forward-looking statements that may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") has issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which must be
adopted in the Company's fiscal year 2001. This statement establishes accounting
and reporting standards for derivative instruments - including certain
derivative instruments embedded in other contracts - and for hedging activities.
The Company is currently evaluating the impact of the statement on the Company's
financial statements.
The Emerging Issues Task Force (the "Task Force") of the Financial Accounting
Standards Board reached a consensus on Issue 00-14, ACCOUNTING FOR CERTAIN SALES
INCENTIVES. The issue addresses the accounting for sales incentives offered
voluntarily by a vendor without charge to customers that can be used in, or that
are exercisable by a customer as a result of a single exchange transaction. For
sales incentives resulting in the right to a rebate, the Task Force concluded
that recognition should occur at the date of sale, measured based upon the
estimated amount of refunds expected to be claimed by customers. Indicators
pointing to the ability to make a reasonable and reliable estimate of the amount
of future rebates or refunds were developed. If the amount cannot be reliably
estimated, it should be assumed that all customers will request a refund. When
recognized, a cash incentive should be classified as a reduction of revenue.
Upon application of the consensus, which is required for the Company in the
fourth quarter of 2000, prior period financial statements should be reclassified
to conform to the consensus. To date, the Company has not completed its analysis
of the impact which Issue 00-14 may have on the reported amount of sales.
ITEM 3. QUANTITIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's market risk-sensitive instruments and foreign currency exchange
rate risks do not subject the Company to material market risk exposures.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
THE PROCTER & GAMBLE COMPANY V. PARAGON TRADE BRANDS, INC. - P&G filed a lawsuit
in January 1994 in the Delaware District Court alleging that the Company's
"Ultra" infant disposable diaper products infringed two of P&G's dual cuff
diaper patents.
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 Delaware
District Court on June 2, 1998. At the same time, the Delaware District Court
entered injunctive relief agreed upon by P&G and the Company.
The Delaware Judgment 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.
On February 2, 1999, the Company entered into a Settlement Agreement with P&G
which fully and finally settled all matters related to the Delaware Judgment,
the Company's appeal of the Delaware Judgment, P&G's motion to find the Company
in contempt of the Delaware Judgment and P&G's proof of claim filed in the
Company's Chapter 11 reorganization proceeding. The P&G Approval Order was
issued on August 6, 1999. As a part of the settlement, the Company entered into
License Agreements for the U.S. and Canada, - 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.
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
29
<PAGE>
condition and results of operations. While these royalty costs have been
partially offset by projected raw material cost savings related to the
conversion to a dual cuff design, the Company's overall raw material costs have
increased. These royalty costs have been partially offset by price increases
announced by the Company in the fourth quarter of 1998 and will continue to be
offset to the extent such price increases are maintained.
KIMBERLY-CLARK CORPORATION V. PARAGON TRADE BRANDS, INC. - On October 26, 1995,
K-C filed a lawsuit against the Company in the U.S. District Court in Dallas,
Texas, alleging infringement by the Company's products of two K-C patents
relating to dual cuffs. As a result of the Company's Chapter 11 filing, the
proceedings in the K-C litigation were stayed.
On March 19, 1999, the Company entered into a Settlement Agreement with K-C
which fully and finally settled all matters related to the Texas action,
including the Company's counterclaims, and K-C's proof of claim filed in the
Company's Chapter 11 reorganization proceeding. The K-C Approval Order was
issued by the Bankruptcy Court on August 6, 1999. As a part of the settlement,
the Company entered into License Agreements for the U.S. and Canada, - 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 Company believes that the overall effective royalty rate that the Company
will pay to K-C, together with royalties to be paid to P&G described above, has
had, and will continue to have, a material adverse impact on the Company's
future financial condition and results of operations. While these royalty costs
have been partially offset by projected raw material cost savings related to the
conversion to a dual cuff design, the Company's overall raw material costs have
increased. These royalty costs have been partially offset by price increases
announced by the Company in the fourth quarter of 1998 and will continue to be
offset to the extent such price increases are 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 Polymer ("SAP") in
diapers and training pants, so long as the Company uses SAP which exhibits
certain performance characteristics (the "SAP Safe Harbor"). The Company has
encountered increased product costs due to the increased price and usage of the
new SAP within the SAP Safe Harbor. The Company cannot predict at this time
whether or when the added costs will be fully offset.
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 finding that two of P&G's diaper patents were 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 Delaware 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 Delaware 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 Delaware District Court on June 2, 1998. At the same time, the
Delaware 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 Delaware District Court's decision in an
orderly fashion and afforded the Company the opportunity to resolve liquidated
and unliquidated claims against the Company 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 settled all matters related to the Delaware Judgment,
the Company's appeal of the Delaware Judgment, P&G's motion to find the Company
in contempt of the Delaware Judgment and P&G's proof of claim filed in the
Company's Chapter 11 reorganization proceeding. See "--THE PROCTER & GAMBLE
COMPANY V. PARAGON TRADE BRANDS, INC.," above.
On March 19, 1999, the Company entered into a Settlement Agreement with K-C
which fully and finally settled all matters related to the Texas action,
including the Company's counterclaims, and K-C's proof of claim filed in the
Company's Chapter 11 reorganization proceeding. See "--KIMBERLY-CLARK
CORPORATION V. PARAGON TRADE BRANDS, INC.," above.
On or about November 15, 1999, the Company and the Creditors' Committee, as
co-proponents, filed the Plan and Disclosure Statement with the Bankruptcy
Court. The Plan incorporated the Wellspring Transaction. By order dated November
18, 1999, the Bankruptcy Court approved the Disclosure Statement. At such time,
the Bankruptcy Court also approved certain voting procedures and established
January 7, 2000, as the voting deadline for the Plan and January 13,
30
<PAGE>
2000, as the date for a hearing to consider confirmation of the Plan. A
confirmation hearing was held by the Bankruptcy Court on January 13, 2000. By
Order dated January 13, 2000, the Bankruptcy Court confirmed the Plan.
On January 28, 2000, Paragon was reorganized pursuant to the Plan through the
consummation of the Wellspring Transaction. As contemplated under the Plan, the
Equity Committee has withdrawn with prejudice its appeals of the P&G Approval
Order and the K-C Approval Order.
On January 28, 2000, the Company entered into the Credit Facility with a bank
group led by Citicorp. This facility is designed to supplement the Company's
cash on hand and operating cash flow. As of June 25, 2000, there was an
aggregate of $5.1 million in letters of credit under the Credit Facility and no
direct borrowings. The Credit Facility contains customary financial covenants.
Legal fees and costs in connection with the Chapter 11 reorganization proceeding
were significant.
KIMBERLY-CLARK WORLDWIDE, INC. V. PARAGON TRADE BRANDS, INC. - On March 20,
2000, Kimberly-Clark Worldwide, Inc. ("K-C Worldwide") filed suit in the U.S.
District Court in Delaware against the Company for allegedly infringing a patent
related to a disposable absorbent garment with a registered graphic. The suit
seeks injunctive relief, unspecified treble damages, interest and attorneys'
fees and expenses. On July 31, 2000, the Company and K-C Worldwide executed a
settlement agreement. The Company believes that the terms and conditions of the
settlement agreement will not have a material business or financial impact on
the Company.
OTHER - The Company is also a party to other legal proceedings 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
will not have a material adverse effect on its financial condition or results of
operations.
ITEM 3. DEFAULTS IN SENIOR SECURITIES
At December 28, 1997, the Company maintained a $150 million revolving credit
facility with a group of nine financial institutions available through February
2001. At December 28, 1997, borrowings under this credit facility totaled $70
million. The Company also had access to short-term lines of credit on an
uncommitted basis with several major banks. At December 28, 1997, the Company
had approximately $50 million in uncommitted lines of credit. Borrowings under
these lines of credit totaled $12.8 million at December 28, 1997. The Chapter 11
filing resulted in a default under its pre-petition revolving credit facility
and borrowings under its uncommitted lines of credit.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<S> <C>
Exhibit 3.1 Amended and Restated Certificate of Incorporation of Paragon Trade Brands, Inc.(1)
Exhibit 3.2 Amended and Restated By-Laws of Paragon Trade Brands, Inc., as amended through January 28,
2000(1)
Exhibit 4.1 Amended and Restated 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 Trade Brands, Inc.(2)
Exhibit 10.2 Intellectual Property Agreement, dated as of February 2, 1993, between
Weyerhaeuser and Paragon Trade Brands, Inc.(2)
Exhibit 10.3 License, dated as of February 2, 1993, between Weyerhaeuser and Paragon Trade Brands, Inc.(2)
31
<PAGE>
Exhibit 10.4 Sublicense, dated as of February 2, 1993, between Weyerhaeuser and Paragon Trade Brands,
Inc.(2)
Exhibit 10.5 Technology Agreement, dated as of October 15, 1987, by and between Weyerhaeuser and Johnson
and Johnson, as amended(2)
Exhibit 10.6 Letter Supply Agreement between Weyerhaeuser and Paragon Trade Brands, Inc. dated as of
October 22, 1997(3)
Exhibit 10.7* Employment Agreement, dated as of May 4, 2000, between Paragon Trade Brands, Inc. and
Michael T. Riordan
Exhibit 10.8* Employment Agreement, dated as of August 11, 1998, between Paragon Trade Brands, Inc. and
Bobby V. Abraham(4)
Exhibit 10.9* Consulting and Separation Agreement by and between Bobby V. Abraham and Paragon Trade
Brands, Inc., dated as of May 5, 2000.
Exhibit 10.10* Employment Agreement, dated as of August 11, 1998, between Paragon Trade Brands, Inc. and
David W. Cole(4)
Exhibit 10.11* Employment Agreement, dated as of August 11, 1998, between Paragon Trade Brands, Inc. and
Alan J. Cyron(4)
Exhibit 10.12* Employment Agreement, dated as of August 11, 1998, between Paragon Trade Brands, Inc. and
Arrigo D. (Rick) Jezzi(4)
Exhibit 10.13* Employment agreement, dated as of August 11, 1998, between Paragon Trade Brands, Inc. and
Robert E. McClain(4)
Exhibit 10.14* Employment Agreement, dated as of August 11, 1998, between Paragon Trade Brands, Inc. and
Catherine O. Hasbrouck(4)
Exhibit 10.15* Employment Agreement, dated as of August 11, 1998, between Paragon Trade Brands, Inc. and
Kevin P. Higgins(4)
Exhibit 10.16* Paragon Trade Brands, Inc. Confirmation Retention Plan for Top Eight Executives and Summary
Plan Description(4)
Exhibit 10.17* Paragon Trade Brands, Inc. Stock Option Plan(1)
Exhibit 10.17.1* Paragon Trade Brands, Inc. Stock Option Plan for Non-Employee Directors(13)
Exhibit 10.18 Credit Agreement dated as of January 28, 2000 Among Paragon Trade Brands, Inc. as Borrower
and The Lenders and Issuers Party Hereto and Citicorp USA, Inc. as Administrative Agent and
Salomon Smith Barney as Arranger(1)
Exhibit 10.18.1 Pledge and Security Agreement dated as of January 28, 2000 Among Paragon Trade Brands, Inc.
and Each Other Grantor from Time to Time Party Hereto and Citicorp USA, Inc. as
Administrative Agent(1)
Exhibit 10.19 Indemnification Agreements, dated as of February 2, 1993, between Weyerhaeuser and Bobby V.
Abraham and Gary M. Arnts(2)
Exhibit 10.20 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.(5)
Exhibit 10.21** Sales Contract, dated as of January 30, 1996, between Hoechst Celanese Corporation and
Paragon Trade Brands, Inc.(6)
32
<PAGE>
Exhibit 10.22** Sales Contract, dated as of April 30, 1998, between Clariant Corporation and Paragon Trade
Brands, Inc.(7)
Exhibit 10.23 Lease Agreement between Cherokee County, South Carolina and Paragon Trade Brands, Inc.,
dated as of October 1, 1996(8)
Exhibit 10.24 Settlement Agreement, dated as of February 2, 1999 between Paragon Trade Brands, Inc. and
The Procter & Gamble Company(9)
Exhibit 10.25 U.S. License Agreement, dated as of February 2, 1999 between The Procter & Gamble Company
and Paragon Trade Brands, Inc.(9)
Exhibit 10.26 Canadian License Agreement, dated as of February 2, 1999 between The Procter & Gamble
Company and Paragon Trade Brands, Inc.(9)
Exhibit 10.27 U.S. License Agreement, dated as of February 2, 1999 between The Procter & Gamble Company
and Paragon Trade Brands, Inc.(9)
Exhibit 10.28 Canadian License Agreement, dated as of February 2, 1999 between The Procter & Gamble
Company and Paragon Trade Brands, Inc.(9)
Exhibit 10.29 Settlement Agreement, dated as of March 19, 1999 between Kimberly-Clark Corporation and
Paragon Trade Brands, Inc. 9)
Exhibit 10.30 License Agreement Between Kimberly-Clark Corporation and Paragon Trade Brands, Inc., dated
as of March 15, 1999(9)
Exhibit 10.31 License Agreement Between Kimberly-Clark Corporation and Paragon Trade Brands, Inc. Trade
Brands, Inc., dated as of March 15, 1999(9)
Exhibit 10.32 Modified Second Amended Plan of Reorganization(10)
Exhibit 10.33 Stock Purchase Agreement by and Between PTB Acquisition Company LLC and Paragon Trade
Brands, Inc., dated as of November 16, 1999(11)
Exhibit 10.34 Shareholders' Agreement Among Paragon Trade Brands, Inc., PTB Acquisition Company, LLC,
Co-Investment Partners, L.P., Ontario Teachers Pension Plan Board and Certain Other
Shareholders, dated as of January 28, 2000(1)
Exhibit 10.35 Registration Rights Agreement Among Paragon Trade Brands, Inc. Trade Brands, Inc., PTB
Acquisition Company, Co-Investment Partners, L.P., Ontario Teachers Pension Plan Board and
Certain Other Shareholders, dated as of January 28, 2000(1)
Exhibit 10.36 Indenture for $182,000,000 11.25% Senior Subordinated Notes due 2005, dated as of January
28, 2000(12)
Exhibit 10.37 First Supplemental Indenture for $182,000,000 11.25% Senior Subordinated Notes due 2005,
dated as of January 28, 2000(12)
Exhibit 11 Computation of Per Share Earnings (See Note 11 to Financial Statements)
Exhibit 21.1 Subsidiaries of the Company(9)
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.
33
<PAGE>
(1) Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report on Form 10-K for the fiscal year ended December
26, 1999.
(2) Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report on Form 10-K (File No. 1-11368) for the fiscal
year ended December 26, 1993, copies of which may be obtained at the Public Reference Room of the SEC, Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549.
(3) Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report on Form 10-K for the fiscal year ended December
28, 1997.
(4) Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September
27, 1998.
(5) Incorporated by reference from Paragon Trade Brands, Inc.'s Current Report on Form 8-K, dated as of February 8, 1996.
(6) Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report on Form 10-K for the fiscal year ended December
31, 1995.
(7) Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 28,
1998.
(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
27, 1998.
(10) Incorporated by reference from Paragon Trade Brands, Inc.'s Current Report on Form 8-K dated January 13, 2000.
(11) Incorporated by reference from Paragon Trade Brands, Inc.'s Application
for Qualification of Indenture Under the Trust Indenture Act of 1939 on
Form T-3, filed with the Commission on January 26, 2000.
(12) Incorporated by reference from Paragon Trade Brands, Inc.'s Current Report on Form 8-K dated January 28, 2000.
(13) Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 26,
2000.
</FN>
</TABLE>
(b) Reports on Form 8-K
DOCUMENT DATE ITEM
-------- ---- ----
Report on Form 8-K April 19, 2000 4
Report on Form 8-K/A April 25, 2000 4
34
<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 4, 2000
35
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<S> <C>
Exhibit 3.1 Amended and Restated Certificate of Incorporation of Paragon Trade Brands, Inc.(1)
Exhibit 3.2 Amended and Restated By-Laws of Paragon Trade Brands, Inc., as amended through January 28,
2000(1)
Exhibit 4.1 Amended and Restated 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 Trade Brands, Inc.(2)
Exhibit 10.2 Intellectual Property Agreement, dated as of February 2, 1993, between
Weyerhaeuser and Paragon Trade Brands, Inc.(2)
Exhibit 10.3 License, dated as of February 2, 1993, between Weyerhaeuser and Paragon Trade Brands, Inc.(2)
Exhibit 10.4 Sublicense, dated as of February 2, 1993, between Weyerhaeuser and Paragon Trade Brands,
Inc.(2)
Exhibit 10.5 Technology Agreement, dated as of October 15, 1987, by and between Weyerhaeuser and Johnson
and Johnson, as amended(2)
Exhibit 10.6 Letter Supply Agreement between Weyerhaeuser and Paragon Trade Brands, Inc. dated as of
October 22, 1997(3)
Exhibit 10.7* Employment Agreement, dated as of May 4, 2000, between Paragon Trade Brands, Inc. and
Michael T. Riordan
Exhibit 10.8* Employment Agreement, dated as of August 11, 1998, between Paragon Trade Brands, Inc. and
Bobby V. Abraham(4)
Exhibit 10.9* Consulting and Separation Agreement by and between Bobby V. Abraham and Paragon Trade
Brands, Inc., dated as of May 5, 2000.
Exhibit 10.10* Employment Agreement, dated as of August 11, 1998, between Paragon Trade Brands, Inc. and
David W. Cole(4)
Exhibit 10.11* Employment Agreement, dated as of August 11, 1998, between Paragon Trade Brands, Inc. and
Alan J. Cyron(4)
Exhibit 10.12* Employment Agreement, dated as of August 11, 1998, between Paragon Trade Brands, Inc. and
Arrigo D. (Rick) Jezzi(4)
Exhibit 10.13* Employment agreement, dated as of August 11, 1998, between Paragon Trade Brands, Inc. and
Robert E. McClain(4)
Exhibit 10.14* Employment Agreement, dated as of August 11, 1998, between Paragon Trade Brands, Inc. and
Catherine O. Hasbrouck(4)
Exhibit 10.15* Employment Agreement, dated as of August 11, 1998, between Paragon Trade Brands, Inc. and
Kevin P. Higgins(4)
36
<PAGE>
Exhibit 10.16* Paragon Trade Brands, Inc. Confirmation Retention Plan for Top Eight Executives and Summary
Plan Description(4)
Exhibit 10.17* Paragon Trade Brands, Inc. Stock Option Plan(1)
Exhibit 10.17.1* Paragon Trade Brands, Inc. Stock Option Plan for Non-Employee Directors(13)
Exhibit 10.18 Credit Agreement dated as of January 28, 2000 Among Paragon Trade Brands, Inc. as Borrower
and The Lenders and Issuers Party Hereto and Citicorp USA, Inc. as Administrative Agent and
Salomon Smith Barney as Arranger(1)
Exhibit 10.18.1 Pledge and Security Agreement dated as of January 28, 2000 Among Paragon Trade Brands, Inc.
and Each Other Grantor from Time to Time Party Hereto and Citicorp USA, Inc. as
Administrative Agent(1)
Exhibit 10.19 Indemnification Agreements, dated as of February 2, 1993, between Weyerhaeuser and Bobby V.
Abraham and Gary M. Arnts(2)
Exhibit 10.20 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.(5)
Exhibit 10.21** Sales Contract, dated as of January 30, 1996, between Hoechst Celanese Corporation and
Paragon Trade Brands, Inc.(6)
Exhibit 10.22** Sales Contract, dated as of April 30, 1998, between Clariant Corporation and Paragon Trade
Brands, Inc.(7)
Exhibit 10.23 Lease Agreement between Cherokee County, South Carolina and Paragon Trade Brands, Inc.,
dated as of October 1, 1996(8)
Exhibit 10.24 Settlement Agreement, dated as of February 2, 1999 between Paragon Trade Brands, Inc. and
The Procter & Gamble Company(9)
Exhibit 10.25 U.S. License Agreement, dated as of February 2, 1999 between The Procter & Gamble Company
and Paragon Trade Brands, Inc.(9)
Exhibit 10.26 Canadian License Agreement, dated as of February 2, 1999 between The Procter & Gamble
Company and Paragon Trade Brands, Inc.(9)
Exhibit 10.27 U.S. License Agreement, dated as of February 2, 1999 between The Procter & Gamble Company
and Paragon Trade Brands, Inc.(9)
Exhibit 10.28 Canadian License Agreement, dated as of February 2, 1999 between The Procter & Gamble
Company and Paragon Trade Brands, Inc.(9)
Exhibit 10.29 Settlement Agreement, dated as of March 19, 1999 between Kimberly-Clark Corporation and
Paragon Trade Brands, Inc. 9)
Exhibit 10.30 License Agreement Between Kimberly-Clark Corporation and Paragon Trade Brands, Inc., dated
as of March 15, 1999(9)
Exhibit 10.31 License Agreement Between Kimberly-Clark Corporation and Paragon Trade Brands, Inc. Trade
Brands, Inc., dated as of March 15, 1999(9)
Exhibit 10.32 Modified Second Amended Plan of Reorganization(10)
37
<PAGE>
Exhibit 10.33 Stock Purchase Agreement by and Between PTB Acquisition Company LLC and Paragon Trade
Brands, Inc., dated as of November 16, 1999(11)
Exhibit 10.34 Shareholders' Agreement Among Paragon Trade Brands, Inc., PTB Acquisition Company, LLC,
Co-Investment Partners, L.P., Ontario Teachers Pension Plan Board and Certain Other
Shareholders, dated as of January 28, 2000(1)
Exhibit 10.35 Registration Rights Agreement Among Paragon Trade Brands, Inc. Trade Brands, Inc., PTB
Acquisition Company, Co-Investment Partners, L.P., Ontario Teachers Pension Plan Board and
Certain Other Shareholders, dated as of January 28, 2000(1)
Exhibit 10.36 Indenture for $182,000,000 11.25% Senior Subordinated Notes due 2005, dated as of January
28, 2000(12)
Exhibit 10.37 First Supplemental Indenture for $182,000,000 11.25% Senior Subordinated Notes due 2005,
dated as of January 28, 2000(12)
Exhibit 11 Computation of Per Share Earnings (See Note 11 to Financial Statements)
Exhibit 21.1 Subsidiaries of the Company(9)
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 ParagonTrade Brands, Inc.'s Annual Report on Form 10-K for the fiscal year ended December
26, 1999.
(2) Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report on Form 10-K (File No. 1-11368) for the fiscal
year ended December 26, 1993, copies of which may be obtained at the Public Reference Room of the SEC, Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549.
(3) Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report on Form 10-K for the fiscal year ended December
28, 1997.
(4) Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September
27, 1998.
(5) Incorporated by reference from Paragon Trade Brands, Inc.'s Current Report on Form 8-K, dated as of February 8, 1996.
(6) Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report on Form 10-K for the fiscal year ended December
31, 1995.
(7) Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 28,
1998.
(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
27, 1998.
38
<PAGE>
(10) Incorporated by reference from Paragon Trade Brands, Inc.'s Current Report on Form 8-K dated January 13, 2000.
(11) Incorporated by reference from Paragon Trade Brands, Inc.'s Application
for Qualification of Indenture Under the Trust Indenture Act of 1939 on
Form T-3, filed with the Commission on January 26, 2000.
(12) Incorporated by reference from Paragon Trade Brands, Inc.'s Current Report on Form 8-K dated January 28, 2000.
(13) Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 26,
2000.
</FN>
</TABLE>
39
