SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the thirteen week period ended September 24, 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 11,996,300
shares ($.01 par value) as of September 24, 2000.
Page 1
Exhibit Index on Page 37
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q FILING
FOR THE THIRTEEN WEEK PERIOD ENDED SEPTEMBER 24, 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 5
Condensed Consolidated Statements of Cash Flows 6
Condensed Consolidated Statements of Changes in 8
Shareholders' Equity (Deficit)
Notes to Condensed Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of 21
Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 30
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 32
Signature Page 36
Exhibit Index 37
Exhibits 41
</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)
(NOTE 2)
<TABLE>
<CAPTION>
Successor Predecessor Successor Predecessor
Company Company Company Company
-------------- -------------- -------------- ---------------------------------
Thirteen Thirteen Thirty-Four Five Thirty-Nine
Weeks Ended Weeks Ended Weeks Ended Weeks Ended Weeks Ended
Sept. 24, 2000 Sept. 26, 1999 Sept. 24, 2000 January 28, 2000 Sept. 26, 1999
-------------- -------------- -------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
Sales, net of discounts and allowances.... $ 135,770 $ 125,031 $ 340,372 $ 49,422 $ 363,476
Cost of sales............................. 108,640 103,487 273,639 40,076 304,521
-------------- ------------- -------------- -------------- --------------
Gross profit.............................. 27,130 21,544 66,733 9,346 58,955
Selling, general and administrative
expense.............................. 18,416 20,578 48,969 6,028 61,405
Research and development expenses......... 1,231 840 2,919 313 2,783
Manufacturing operation closing costs..... - 36 - - 1,527
-------------- ------------- -------------- -------------- --------------
Operating profit (loss)................... 7,483 90 14,845 3,005 (6,760)
Equity in earnings (loss) of unconsolidated
subsidiaries......................... 91 (4) 1,805 - 1,116
Interest expense(1)....................... 4,631 95 11,788 75 304
Other income, net......................... 907 1,007 1,832 97 2,000
-------------- ------------- -------------- -------------- --------------
Earnings (loss) from continuing operations
before income taxes, bankruptcy
costs and extraordinary item......... 3,850 998 6,694 3,027 (3,948)
Bankruptcy costs.......................... - 2,612 - 10,399 7,076
Provision for (benefit from) income taxes. 76 18 (133) (100) (325)
-------------- ------------- -------------- -------------- --------------
Earnings (loss) from continuing operations
before extraordinary item............ 3,774 (1,632) 6,827 (7,272) (10,699)
Loss from discontinued operations -
net of income taxes.................. 18,887 3,603 24,503 1,195 10,140
-------------- ------------- -------------- -------------- --------------
Loss before extraordinary item............ (15,113) (5,235) (17,676) (8,467) (20,839)
Extraordinary item - gain from discharge
of debt.............................. - - - 123,043 -
--------------- --------------- --------------- ---------------- ---------------
Net (loss) earnings ...................... $ (15,113) $ (5,235) $ (17,676) $ 114,576 $ (20,839)
=============== ================ =============== ================ ===============
(Loss) earnings per common share - basic
Earnings (loss) from continuing
operations. .31 (.14) .57 (.61) (.90)
Loss from discontinued operations......... (1.57) (.30) (2.05) (.10) (.85)
--------------- --------------- --------------- ---------------- ---------------
Earnings (loss) per common share -
before extraordinary item............ (1.26) (.44) (1.48) (.71) (1.74)
Extraordinary item........................ - - - 10.30 -
--------------- --------------- --------------- ---------------- --------------
Net (loss) earnings per common share...... $ (1.26) $ (.44) $ (1.48) $ 9.59 $ (1.74)
=============== =============== =============== ================ ==============
-3-
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
(NOTE 2)
Successor Predecessor Successor Predecessor
Company Company Company Company
-------------- -------------- -------------- ---------------------------------
Thirteen Thirteen Thirty-Four Five Thirty-Nine
Weeks Ended Weeks Ended Weeks Ended Weeks Ended Weeks Ended
Sept. 24, 2000 Sept. 26, 1999 Sept. 24, 2000 January 28, 2000 Sept. 26, 1999
-------------- -------------- -------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
(Loss) earnings per common share -
diluted:
Earnings (loss) from continuing
operations........................... .31 (.14) .57 (.61) (.90)
Loss from discontinued operations......... (1.57) (.30) (2.05) (.10) (.85)
--------------- --------------- --------------- ---------------- ---------------
Earnings (loss) per common share -
before discontinued extraordinary
item................................. (1.25) (.44) $ (1.48) (.71) (1.74)
Extraordinary item........................ - - - 10.30 -
--------------- --------------- --------------- ---------------- ---------------
Net (loss) earnings per common share...... $ (1.25) $ (.44) $ (1.48) $ 9.59 $ (1.74)
=============== =============== =============== ================ ===============
<FN>
----------
(1) Contractual interest $ - $ 1,393 $ - $ 569 $ 4,055
=============== =============== =============== ================ ===============
</FN>
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
-4-
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
(NOTE 2)
<TABLE>
<CAPTION>
Successor Predecessor
Company Company
--------------------- ---------------------
September 24, 2000 December 26, 1999
--------------------- ---------------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents.................................................... $ 9,311 $ 11,657
Receivables.................................................................. 83,763 84,084
Inventories.................................................................. 36,372 40,086
Current portion of deferred income taxes..................................... 846 5,557
Prepaid expenses............................................................. 2,470 2,729
Current assets of discontinued operations.................................... 5,396 11,594
------------------- -------------------
Total current assets.................................................... 138,158 155,707
Property and equipment....................................................... 73,986 84,904
Construction in progress..................................................... 7,969 5,988
Assets held for sale......................................................... 2,261 2,312
Investment in unconsolidated subsidiary, at cost............................. 20,911 22,929
Investment in and advances to unconsolidated subsidiaries, at equity......... 72,322 56,215
Goodwill .................................................................... - 30,900
Other assets................................................................. 8,607 11,290
Non-current assets of discontinued operations................................ 12,000 30,275
------------------- -------------------
Total assets............................................................ $ 336,214 $ 400,520
=================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Checks issued but not cleared................................................ $ 6,121 $ 7,525
Accounts payable............................................................. 34,701 34,715
Accrued liabilities.......................................................... 44,121 34,259
------------------- -------------------
Total current liabilities............................................... 84,943 76,499
Liabilities subject to compromise (Note 1)................................... - 406,723
Long-term debt............................................................... 146,000 -
Deferred compensation........................................................ - 211
Deferred income taxes........................................................ 801 6,904
------------------- -------------------
Total liabilities....................................................... 231,744 490,337
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 0 and 12,388,464 shares, $.01 par value.......................... - 124
Common stock: (Successor Company) Authorized 20,000,000 shares,
issued 11,996,300 and 0 shares, $.01 par value.......................... 120 -
Capital surplus.............................................................. 119,843 143,736
Common stock warrants: (Successor Company) Issued 625,821,
exercisable at $18.91................................................... 2,275 -
Accumulated other comprehensive loss......................................... (92) (1,213)
Retained deficit............................................................. (17,676) (222,134)
Less: Treasury stock: (Predecessor Company) 438,750 shares, at cost........ - (10,330)
------------------- -------------------
Total shareholders' equity (deficit).................................... 104,470 (89,817)
------------------- -------------------
Total liabilities and shareholders' equity (deficit).................... $ 336,214 $ 400,520
=================== ===================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
-5-
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
(NOTE 2)
<TABLE>
<CAPTION>
Successor Predecessor
Company Company
------------------ ---------------------------------
Thirty-Four Five Thirty-Nine
Weeks Ended Weeks Ended Weeks Ended
Sept. 24, 2000 January 28, 2000 Sept. 26, 1999
------------------ ------------------ ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Earnings (loss) from continuing operations before extraordinary
item.......................................................... $ 6,827 $ (7,272) $ (10,699)
Adjustments to reconcile earnings (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization................................. 15,293 2,328 24,346
Deferred income taxes......................................... 83 382 (132)
Equity in earnings of unconsolidated subsidiaries, net of
dividends................................................. (790) - (482)
Write-down of assets.......................................... 544 173 (317)
Changes in operating assets and liabilities:
Accounts receivable........................................... (6,563) (4,039) (274)
Inventories and prepaid expenses.............................. 7,708 (1,934) 10,223
Accounts payable.............................................. 3,227 (6,404) 5,786
Checks issued but not cleared................................. (2,913) 1,509 (4,848)
Prepetition reclamation payment authorized by court........... - - (439)
Liabilities subject to compromise............................. - (13,032) -
Accrued liabilities........................................... 7,390 7,254 (3,449)
Other......................................................... 2,089 (429) (2,442)
----------------- --------------- ---------------
Net cash provided by (used in) operating activities of
continuing operations..................................... 32,895 (21,464) 17,273
Net cash used in operating activities of
discontinued operations................................... (10,867) (1,569) (12,313)
----------------- --------------- ---------------
Net cash provided by (used in) operating activities........... 22,028 (23,033) 4,960
----------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property and equipment............................ (8,550) (658) (23,095)
Proceeds from sale of property and equipment....................... 3,381 104 6,373
Repayment of advance from unconsolidated subsidiary, at equity..... 4,055 - -
Investment in unconsolidated subsidiary, at cost................... - - (186)
Investment in and advances to unconsolidated subsidiaries,
at equity..................................................... (647) (1,200) (800)
Proceeds from sale of Changing Paradigms, Inc...................... - - 350
Other.............................................................. 145 1,570 41
----------------- --------------- ---------------
Net cash used in investing activities of continuing
operations................................................ (1,616) (184) (17,317)
Net cash used in investing activities of
discontinued operations................................... (507) (87) (551)
----------------- --------------- ---------------
Net cash used in investing activities......................... (2,123) (271) (17,868)
----------------- --------------- ---------------
CONTINUED ON NEXT PAGE.
-6-
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
(NOTE 2)
Successor Predecessor
Company Company
------------------ ---------------------------------
Thirty-Four Five Thirty-Nine
Weeks Ended Weeks Ended Weeks Ended
Sept. 24, 2000 January 28, 2000 Sept. 26, 1999
------------------ ------------------ ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from credit facility...................................... - 15,000 -
Repayments of credit facility...................................... (15,000) - -
Sale of common stock............................................... 1,053 - -
----------------- --------------- ---------------
Net cash (used in) provided by financing activities........... (13,947) 15,000 -
----------------- --------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.............. 5,958 (8,304) (12,908)
Cash and cash equivalents at beginning of period................... 3,353 11,657 22,537
----------------- --------------- ---------------
Cash and cash equivalents at end of period......................... $ 9,311 $ 3,353 $ 9,629
================= =============== ===============
Cash paid (received) during the period for:
Interest, net of amounts capitalized......................... $ 9,592 $ 232 $ 550
Income taxes................................................. $ (3,045) $ (619) $ 470
Bankruptcy costs............................................. $ 3,658 $ 10,819 $ 5,105
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.
-7-
<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 Income 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
(unaudited) 119 118,791 2,275 - - -
Net loss - - - - (17,676) -
Issuance of common stock 1 1,052 - - - -
Translation adjustment - - - (92) - -
-------- ----------- -------- ------------- ---------- -----------
BALANCE, September 24, 2000
(unaudited) $ 120 $ 119,843 $ 2,275 $ (92) $ (17,676) $ -
======== =========== ======== ============= ========== ===========
</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 common stock 105,300 - -
--------------------- -------------------- ----------------------
BALANCE, September 24, 2000 (unaudited) 11,996,300 625,821 -
===================== ==================== ======================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
-8-
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRTEEN AND THIRTY-NINE WEEK PERIODS ENDED SEPTEMBER 24, 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.
-9-
<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 the 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.
-10-
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The effect of the Plan on the Company's condensed 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>
-11-
<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 condensed 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 condensed consolidated balance sheet as of December 26, 1999,
which has been derived from audited financial statements, and the unaudited
interim condensed 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 condensed
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 presentation
of the results of the interim periods have been included. All such interim
adjustments are of a normal recurring nature except for the bankruptcy-related
costs, the discontinued operation and the extraordinary gain. The results of
operations for the thirty-nine week period ending September 24, 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 of the Financial Accounting Standards Board (the
"Task Force") reached a consensus on Issue 00-10, ACCOUNTING FOR SHIPPING AND
HANDLING FEES AND COSTS. The issue addresses the income statement classification
for shipping and handling fees and costs by companies that record revenue based
on the gross amount billed to customers under EITF Issue No. 99-19 "Reporting
Revenue Gross as Principal versus Net as an Agent". 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 implemented the change and does not
believe the adoption will have a material impact on the financial statements.
The Task Force also 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
implemented the change and does not believe the adoption will have a material
impact on the financial statements.
-12-
<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>
Successor Predecessor
Company Company
------------------ -----------------------------------------
Thirty-Four Five Thirty-Nine
Weeks Ended Weeks Ended Weeks Ended
Sept. 24, 2000 January 28, 2000 Sept. 26, 1999
----------------- ------------------ ----------------
<S> <C> <C> <C>
Professional fees............................... $ - $ 6,990 $ 6,785
Employee confirmation bonuses................... - 3,308 -
Amortization of debtor-in-possession
credit facility deferred financing costs... - 50 482
Other........................................... - 125 64
Interest income................................. - (74) (255)
----------------- ----------------- ----------------
Bankruptcy costs $ - $ 10,399 $ 7,076
================= ================= ================
</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
($50,400) and operating loss carryforwards ("NOLs") ($29,100). 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 assets, the
Company needs to generate approximately $250,900 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 $96,600.
NOTE 5: COMPREHENSIVE (LOSS) INCOME
The following are the components of comprehensive (loss) income:
<TABLE>
<CAPTION>
Successor Predecessor Successor Predecessor
Company Company Company Company
-------------- -------------- -------------- ---------------------------------
Thirteen Thirteen Thirty-Four Five Thirty-Nine
Weeks Ended Weeks Ended Weeks Ended Weeks Ended Weeks Ended
Sept. 24, 2000 Sept. 26, 1999 Sept. 24, 2000 January 28, 2000 Sept. 26, 1999
-------------- -------------- -------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
Net (loss) income ........................ $ (15,113) $ (5,235) $ (17,676) $ 114,576 $ (20,839)
Foreign currency translation adjustment... 17 (1) (251) 159 614
-------------- ------------- ------------- ---------------- --------------
Comprehensive (loss) income .............. $ (15,096) $ (5,236) $ (17,927) $ 114,735 $ (20,225)
============== ============= ============= ================ ==============
</TABLE>
-13-
<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
---------------------- ----------------------
September 24, 2000 December 26, 1999
---------------------- ----------------------
<S> <C> <C>
Accounts receivable - trade.................................................. $ 67,545 $ 66,181
Current portion of advances to unconsolidated subsidiary, at equity.......... 11,685 11,059
Other receivables............................................................ 13,326 20,643
---------------------- ---------------------
92,556 97,883
Less: Allowance for doubtful accounts....................................... (8,793) (13,799)
---------------------- ---------------------
Net receivables.............................................................. $ 83,763 $ 84,084
====================== =====================
</TABLE>
NOTE 7: INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
Successor Predecessor
Company Company
---------------------- ----------------------
September 24, 2000 December 26, 1999
---------------------- ----------------------
<S> <C> <C>
LIFO:
Raw materials - pulp.................................................... $ 207 $ 40
Finished goods.......................................................... 21,478 22,068
FIFO:
Raw materials - other................................................... 4,091 5,754
Materials and supplies.................................................. 15,835 17,777
---------------------- ---------------------
41,611 45,639
Reserve for excess and obsolete items................................... (5,239) (5,553)
---------------------- ---------------------
Net inventories.............................................................. $ 36,372 $ 40,086
====================== =====================
</TABLE>
NOTE 8: PROPERTY AND EQUIPMENT
Property and equipment, at cost, are as follows:
<TABLE>
<CAPTION>
Successor Predecessor
Company Company
---------------------- ----------------------
September 24, 2000 December 26, 1999
---------------------- ----------------------
<S> <C> <C>
Land $ 2,308 $ 2,836
Buildings and improvements................................................... 13,036 29,845
Machinery and equipment...................................................... 74,770 218,443
---------------------- ---------------------
90,114 251,124
Less: Allowance for depreciation............................................ (16,128) (166,220)
---------------------- ---------------------
Net property and equipment................................................... $ 73,986 $ 84,904
====================== =====================
</TABLE>
-14-
<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
---------------------- ----------------------
September 24, 2000 December 26, 1999
---------------------- ----------------------
<S> <C> <C>
Payroll - wages and salaries, incentive awards, retirement,
vacation and severance pay.............................................. $ 9,995 $ 8,369
vacation and severance pay..............................................
Coupons and promotions....................................................... 9,197 8,214
Royalties.................................................................... 11,853 8,225
Interest .................................................................... 2,527 -
Reserve for discontinued operations ......................................... 4,650 -
Other ....................................................................... 5,899 9,451
---------------------- ---------------------
Total........................................................................ $ 44,121 $ 34,259
====================== =====================
</TABLE>
NOTE 10: LONG-TERM DEBT
Long-term debt is as follows:
<TABLE>
<CAPTION>
Successor Predecessor
Company Company
---------------------- ----------------------
September 24, 2000 December 26, 1999
---------------------- ----------------------
<S> <C> <C>
11.25% Senior subordinated notes due 2005.................................... $ 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. The Company is current on its interest payments and has not
elected to pay interest in kind.
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 September 24, 2000, there was an aggregate of $4,489 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".
-15-
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 11: EARNINGS (LOSS) PER COMMON SHARE
Following is a reconciliation of the numerators and denominators of the basic
and diluted income (loss) per common share from continuing operations:
<TABLE>
<CAPTION>
Successor Predecessor Successor Predecessor
Company Company Company Company
-------------- -------------- -------------- ---------------------------------
Thirteen Thirteen Thirty-Four Five Thirty-Nine
Weeks Ended Weeks Ended Weeks Ended Weeks Ended Weeks Ended
Sept. 24, 2000 Sept. 26, 1999 Sept. 24, 2000 January 28, 2000 Sept. 26, 1999
-------------- -------------- -------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
Earnings (loss) from continuing operations. $ 3,774 $ (1,632) $ 6,827 $ (7,272) $ (10,699)
============== ============== ============== ================= ==============
Weighted average number of common
shares used in basic EPS (000's)...... 11,996 11,950 11,961 11,950 11,949
Effect of dilutive securities:
stock options (000's)................. 61 - 20 - -
------------- ------------- -------------- --------------- ------------
Weighted average number of common
shares and potentially dilutive
securities (000's).................. 12,057 11,950 11,981 11,950 11,949
============== ============== ============== ================ =============
Basic earnings (loss) per common share..... $ .31 $ (.14) $ .57 $ (.61) $ (.90)
============== ============== ============== ================ =============
Diluted earnings (loss) per common share... $ .31 $ (.14) $ .57 $ (.61) $ (.90)
============== ============== ============== ================ =============
</TABLE>
Common stock warrants and options during the thirteen and thirty-nine weeks
ended September 26, 1999 and the five weeks ended January 28, 2000 were not
included in the calculation of diluted earnings per share because the warrants'
and options' exercise prices were greater than the average market price of the
common shares for the respective periods.
The options and warrants outstanding during the thirteen and thirty-nine weeks
ended September 26, 1999 and the five weeks ended January 28, 2000 were
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.
-16-
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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.
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.
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.
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.
-17-
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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.
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 do not have a material business or financial impact on the
Company and have been reflected in the year to date financial statements.
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.
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 September 24, 2000, there was an aggregate of $4,489 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.
-18-
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 14: SEGMENT REPORTING
The Company in the past has operated principally in two segments which were
organized based on the nature of the products sold: (I) infant care and (ii)
feminine care and adult incontinence pad-oriented products. The Company on
August 10, 2000 decided to exit the feminine care and adult incontinence
segment. The Company plans to source and distribute other non-pad adult products
in the future. The change has been accounted for as a discontinued operation as
of September 24, 2000.
NOTE 15: DISCONTINUED OPERATION
On August 10, 2000, the Company made a decision to concentrate on its core
infant care business with the intent to sell its Gaffney, South Carolina femcare
and adult incontinence segment. The expected disposal date depends on market
factors as the Company continues to work towards liquidating the assets of the
segment. The Company expects to cease manufacturing operations in October 2000
with continued inventory shipments until approximately December 2000. The
condensed consolidated financial statements of the Company for all periods
presented have been restated to reflect the discontinued operations. Assets of
the discontinued operation have been reflected in the condensed consolidated
balance sheets as current or non-current based on the nature of the amounts. No
liabilities are anticipated to be assumed by a third party and therefore they
are reflected in continuing operations.
The following is a summary of the assets of the discontinued operations
presented in thousands:
<TABLE>
<CAPTION>
Successor Predecessor
Company Company
---------------------- ---------------------
September 24, 2000 December 26, 1999
---------------------- ---------------------
<S> <C> <C>
Cash and short-term investments..................... $ 9 $ 28
Receivables......................................... 2,174 1,892
Inventories - net................................... 2,437 8,658
Prepaid expenses.................................... 776 1,016
---------------------- ---------------------
Current assets of discontinued operations........... 5,396 11,594
====================== =====================
Property and equipment.............................. 11,982 30,270
Other............................................... 18 5
Non-current assets of discontinued
operations....................................... $ 12,000 $ 30,275
====================== =====================
</TABLE>
The Company reported a loss from operations of the discontinued segment, net of
tax, for the thirteen weeks and thirty-nine weeks ending September 26, 1999 of
$3,603 and $10,140, respectively. Net sales for discontinued operations for the
thirteen and thirty-nine weeks were $3,476 and $9,123, respectively.
The Company for the thirteen weeks and thirty-nine weeks ending September 24,
2000 reported a loss from operations of the discontinued segment, net of taxes,
of $18,887 and $25,698, respectively. Net sales in those same periods were
$3,396 and $10,191, respectively. The balance of the losses was from operations
of the discontinued segment in the respective periods prior to the measurement
date. The charges are summarized below:
-19-
<PAGE>
PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Inventory write-down....................................... $ 5,650
Equipment write-down....................................... 5,600
Estimated operating losses from measurement date........... 3,228
Severance.................................................. 1,250
Facility holding........................................... 900
Equipment removal.......................................... 700
------------------
Total loss on disposal..................................... $ 17,328
==================
-20-
<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 extent allowed by the Bankruptcy Court. Pursuant to the Plan, a reserve was
established from which any remaining
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<PAGE>
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 the 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.
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
condensed 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 thirty-four weeks ended September
24, 2000 (Post-Confirmation) have been combined with the five weeks ended
January 28, 2000 (Pre-Confirmation) and then compared to the thirty-nine weeks
ended September 26, 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. The table that follows has been
updated to reflect the Company's discontinued operations for all periods
presented.
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<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
-------------------------------- -------------------------------
Sept. 24, 2000 Sept. 26, 1999 Sept. 24, 2000 Sept. 26, 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Sales, net of discounts and allowances.................. $ 135,770 $ 125,031 $ 389,794 $ 363,476
Cost of sales........................................... 108,640 103,487 313,715 304,521
--------------- ------------- ------------- --------------
Gross profit............................................ 27,130 21,544 76,079 58,955
Selling, general and administrative expense............. 18,416 20,578 54,997 61,405
Research and development expense........................ 1,231 840 3,232 2,783
Manufacturing operation closing costs................... - 36 - 1,527
--------------- ------------- ------------- --------------
Operating profit (loss)................................. 7,483 90 17,850 (6,760)
Equity in earnings (loss) of unconsolidated subsidiaries 91 (4) 1,805 1,116
Interest expense........................................ 4,631 95 11,863 304
Other income, net....................................... 907 1,007 1,929 2,000
--------------- ------------- ------------- --------------
Earnings (loss) from continuing operations before
income taxes, bankruptcy costs and extraordinary
item.............................................. 3,850 998 9,721 (3,948)
Bankruptcy costs........................................ - 2,612 10,399 7,076
Provision for (benefit from) income taxes............... 76 18 (233) (325)
--------------- ------------- -------------- ---------------
Earnings (loss) from continuing operations before
......extraordinary item................................ 3,774 (1,632) (445) (10,699)
Loss from discontinued operations - net of income taxes. 18,887 3,603 25,698 10,140
--------------- ------------- ------------- --------------
Loss before extraordinary item.......................... (15,113) (5,235) (26,143) (20,839)
Extraordinary item - gain from discharge of debt........ - - 123,043 -
--------------- ------------- ------------- --------------
Net (loss) earnings..................................... $ (15,113) $ (5,235) $ 96,900 $ (20,839)
================ ============== ============= ===============
</TABLE>
THIRTEEN WEEKS ENDED SEPTEMBER 24, 2000 COMPARED TO
THIRTEEN WEEKS ENDED SEPTEMBER 26, 1999
A net loss of $15.1 million was reported in the third quarter of 2000 compared
to a net loss of $5.2 million in the third quarter of 1999.
The Company has historically operated in two segments consisting of (i) infant
care absorbent products and (ii) feminine care and adult incontinence
pad-oriented products. On August 10, 2000, the Board of Directors approved
management's plan to discontinue operations in the feminine care and adult
incontinence pad-oriented products segment. As a result, it is anticipated that
the production facility located in Gaffney, South Carolina will be closed. The
condensed consolidated financial statements of the Company have been restated
for all periods presented to reflect the feminine care and adult incontinence
pad-oriented products segment as a discontinued operation. The third quarter net
loss includes an $18.9 million loss, net of taxes, for the discontinuance of
this segment.
Earnings from continuing operations in the infant care segment were $3.8 million
in the third quarter of 2000 compared to a loss of $1.6 million in the third
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 third quarter of 1999. The third quarter results
for 2000 were negatively impacted by approximately $2.0 million of non-recurring
costs, primarily severance for former senior management. The third quarter of
1999 results were negatively impacted by $2.6 million in bankruptcy related
costs.
Basic earnings per share from continuing operations for the thirteen weeks ended
September 24, 2000, was $.31. Including the charges for the discontinued
operation, the basic net loss per share was $1.26. On a fully diluted basis, the
earnings per share from continuing operations were $.31. Net of charges for the
discontinued operations, the fully diluted net loss per share was $1.25.
Comparison to previous periods is not meaningful due to the Company's emergence
from bankruptcy and the implementation of fresh start accounting in the first
quarter of 2000.
NET SALES
With the feminine care and adult incontinence pad-oriented products segment
being reported as a discontinued operation, the remaining infant care segment
reported a net sales increase of 8.6 percent to $135.8 million in the third
quarter of 2000 compared to $125.0 million in the third quarter of 1999. Unit
sales increased 5.8 percent to 838 million units compared to 792 million units
in the third quarter of 1999. The increase in net sales and units was due to a
favorable
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<PAGE>
product mix associated with the Company's training pant product and the launch
of certain destination store brand product and marketing programs.
The Company anticipates higher volume during the fourth quarter 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 has begun
to implement a package count change which may result in an effective price
increase. Management cannot predict whether competitive pricing pressures will
negate a sustained price increase in certain accounts.
COST OF SALES
Infant care cost of sales was $108.6 million in the third quarter of 2000
compared to $103.5 million in the third quarter of 1999. As a percentage of net
sales, infant care cost of sales was 80.0 percent in the third quarter of 2000
compared to 82.8 percent in the third quarter of 1999. This decrease in costs as
a percentage of sales was due to improved manufacturing efficiencies, lower
plant overhead costs, savings associated with 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
costs.
Infant care raw material costs, with the exception of pulp, were at lower cost
levels in the third quarter of 2000 compared to the third quarter of 1999. Pulp
costs started to increase during the second half of 1999 and are expected to
increase during the remainder of 2000.
Infant care depreciation costs were $5.3 million in the third quarter of 2000
compared to $6.2 million in the third quarter of 1999. The decrease is partially
due to lower asset values as a result of fresh start accounting.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses were $18.4 million in the third quarter of 2000 compared to $20.6
million in the third quarter of 1999. As a percentage of net sales, these
expenses were 13.6 percent in the third quarter of 2000 compared to 16.5 percent
in the third quarter of 1999. The decrease in SG&A is primarily attributable to
lower sales and marketing 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 third quarter of 2000
compared to $2.2 million in the third quarter of 1999. The decrease in
depreciation and amortization is predominately due to the elimination of
goodwill through fresh start accounting and reduced amortization expense of the
Company's enterprise software due to fresh start accounting and some of the
assets becoming fully amortized in 1999.
RESEARCH AND DEVELOPMENT
Research and development expenses were $1.2 million in the third quarter of 2000
compared to $.8 million in the third quarter of 1999.
INTEREST EXPENSE
Interest expense was $4.6 million in the third quarter of 2000 compared to $.1
million in the third quarter of 1999. The increase is due to interest costs
associated with the New Notes of $146.0 million bearing an annual interest rate
of 11.25 percent.
OTHER INCOME, NET
Other income, net was $.9 million in the third quarter of 2000 compared to $1.0
million in the third quarter of 1999. Other income, net in the quarter was
primarily due to cash investments and interest on receivables from
unconsolidated subsidiaries.
EQUITY IN EARNINGS OF UNCONSOLIDATED SUBSIDIARIES
The equity in earnings of unconsolidated subsidiaries was $.1 million in the
third quarter of 2000 compared to zero in the third quarter of 1999.
BANKRUPTCY COSTS
There were no direct bankruptcy costs in the third quarter of 2000 compared to
$2.6 million in the third quarter of 1999.
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<PAGE>
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.
THIRTY-NINE WEEKS ENDED SEPTEMBER 24, 2000 COMPARED TO THIRTY-NINE
WEEKS ENDED SEPTEMBER 26, 1999
RESULTS OF OPERATIONS
Net earnings of $96.9 million were recorded for the first three quarters of 2000
compared to a net loss of $20.8 million in the first three quarters of 1999. The
results of the first three quarters included 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.
The Company has historically operated in two segments consisting of (i) infant
care absorbent products and (ii) feminine care and adult incontinence
pad-oriented products. On August 10, 2000 the Board of Directors approved
management's plan to discontinue operations in the feminine and adult
incontinence pad-oriented products segment. As a result it is anticipated that
the production facility located in Gaffney, South Carolina will be closed. The
condensed consolidated financial statements of the Company have been restated
for all periods presented to reflect the feminine care and adult incontinence
pad-oriented products segment as a discontinued operation. The third quarter
year to date financial statements reflect losses of $25.7 million in
discontinued operations consisting of an $11.6 million loss from operations and
a $14.1 million charge for anticipated losses from disposal of facilities,
equipment and inventories.
The Company, in the first three quarters, had a loss from the continuing
operations of the infant care segment of $.4 million compared to a loss of $10.7
million in the first three quarters of 1999. Increased unit volume, improved
product mix, reduced manufacturing and selling, general and administrative costs
all contributed to the operating improvement compared to the first three
quarters of 1999. Year to date results for 2000 were negatively impacted by
approximately $5.5 million of non-recurring costs, primarily related to
severance costs to former senior management and $10.4 million of bankruptcy
costs. The first three quarters of 1999 results were negatively impacted by
costs associated with price concessions made to export customers to address
product acceptance issues, the cessation of manufacturing operations at the
Company's Canadian subsidiary, Paragon Trade Brands (Canada) Inc.'s Brampton,
Ontario facility in June 1999, and bankruptcy costs of $7.1 million.
Basic and diluted loss per share from continuing operations for the thirty-nine
weeks ended September 24, 2000, was $.04. The basic loss per share net of
charges for the discontinued operation was $2.19 and net loss per share was
$8.11, respectively. Comparison to previous periods is not meaningful due to the
Company's emergence from bankruptcy and the implementation of fresh start
accounting in the first quarter of 2000.
NET SALES
With the feminine care and adult incontinence segment being reported as a
discontinued operation the remaining infant care net sales increased 7.2 percent
to $389.8 million in the first nine months of 2000 compared to $363.5 million in
the first nine months of 1999. Unit sales increased 6.2 percent to 2,415 million
units compared to 2,273 million units in the first nine months 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.
COST OF SALES
Infant care cost of sales was $313.7 million in the first nine months of 2000
compared to $304.5 million in the first nine months of 1999. As a percentage of
net sales, infant care cost of sales was 80.5 percent in the first nine months
of 2000 compared to 83.8 percent in the first nine months of 1999. This decrease
in costs as a percentage of sales was due to improved manufacturing
efficiencies, lower plant overhead costs, savings associated with 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 costs.
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<PAGE>
Infant care raw material costs, with the exception of pulp, were at lower cost
levels in the first nine months of 2000 compared to the first nine months of
1999. Infant care depreciation costs were $15.2 million in the first nine months
of 2000 compared to $18.7 million in first nine months of 1999. The decrease is
partially due to lower asset values as a result of fresh start accounting.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses were $55.0 million in the first three quarters of 2000 compared to
$61.4 million in the first three quarters of 1999. As a percentage of net sales,
these expenses were 14.1 percent in the first three quarters of 2000 compared to
16.9 percent in the first three quarters of 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 $2.4
million in the first three quarters of 2000 compared to $5.7 million in the
first three quarters of 1999. The decrease in depreciation and amortization is
primarily due to the elimination of goodwill through fresh start accounting and
reduced amortization expense of the Company's enterprise software due to fresh
start accounting and some of the assets becoming fully amortized in 1999.
RESEARCH AND DEVELOPMENT
Research and development expenses were $3.2 million in the first three quarters
of 2000 compared to $2.8 million in the first three quarters of 1999.
INTEREST EXPENSE
Interest expense was $11.9 million in the first three quarters of 2000 compared
to $.3 million in the first three quarters of 1999. The increase is due to
interest costs associated with the New Notes and with borrowings under the
Credit Facility. There were no borrowings under the DIP Credit Facility during
the first three quarters of 1999.
OTHER INCOME, NET
Other income, net was $1.9 million in the first three quarters of 2000 compared
to $2.0 million in the first three quarters of 1999. Other income, net in the
first three quarters was primarily due to interest income from cash investments,
and interest on receivables due from unconsolidated subsidiaries.
EQUITY IN EARNINGS OF UNCONSOLIDATED SUBSIDIARIES
The equity in earnings of unconsolidated subsidiaries was $1.8 million in the
first three quarters of 2000 compared to $1.1 million for the same time period
in 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 three quarters of 2000 compared
to $7.1 million in the first three quarters 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 first three quarters of 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.
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<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
On a pro forma basis, the cash flows for the five weeks ended January 28, 2000
(Predecessor Company) and the thirty-four weeks ended September 24, 2000
(Successor Company) have been combined for purposes of comparison to the
thirty-nine weeks ended September 26, 1999.
During the first three quarters ended September 24, 2000, the Company had a
decrease in cash of $2.3 million. Cash provided by operating activities of
continuing operations for the three quarters ended September 24, 2000 was $11.4
million compared to $17.3 million for the first three quarters of 1999. The
decrease resulted from higher net earnings before depreciation and amortization,
excluding the non-cash extraordinary gain, which were more than offset by an
increase in net working capital, primarily an increase in accounts receivable.
Net cash used in operating activities of the discontinued operation was $12.4
million in the first three quarters of 2000 compared to $12.3 million in the
same period of 1999.
Net cash used in investing activities of the continuing operations for the first
three quarters of 2000 was $1.8 million compared to $17.3 million for the same
period in 1999. This decrease was primarily the result of lower capital
expenditures.
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 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. The Company anticipates that the Credit Facility is
sufficient to meet its current needs.
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. The Company repaid those
obligations during the second quarter ending June 25, 2000. The Company at
September 24, 2000, had an aggregate of $4.5 million in letters of credit under
the Credit Facility and no direct borrowings.
On January 28, 2000, the Company issued $146 million 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. The Company
is current on its interest payments and has not elected to pay interest in kind.
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
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<PAGE>
taxes includes temporary differences due to reserves not currently deductible
($50.4 million) and operating loss carryforwards ("NOLs") ($29.1 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 $250.9 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
$96.6 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 costs, 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.
PRICING. Price increases are needed to fully offset the added royalty costs
being incurred by the Company pursuant to the P&G and K-C settlements described
above. During the third quarter the Company began the process of implementing an
effective price increase as a result of a package count change that the Company
began during the third quarter 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. The
Company has decided to concentrate on its core infant care business and
liquidate the Gaffney, South Carolina femcare and adult incontinence
pad-oriented oriented segment. The expected disposal date depends on market
factors as the Company continues to work towards liquidating the assets of the
segment. The Company has accounted for the event as a discontinued segment as
discussed in Note 15 to the condensed consolidated financial statements. While
the Company has estimated the costs associated with the discontinuance of this
segment there can be no assurance of the final costs at this time.
BRANDED PRODUCT INNOVATIONS. Because of the emphasis on product innovations in
the disposable diaper market, 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
New Notes in the amount of $146.0 million. 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.
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<PAGE>
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, were 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 the Over-the-Counter Bulletin
Board, 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 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 of the Financial Accounting Standards Board (the
"Task Force") reached a consensus on Issue 00-10, ACCOUNTING FOR SHIPPING AND
HANDLING FEES AND COSTS. The issue addresses the income statement classification
for shipping and handling fees and costs by companies that record revenue based
on the gross amount billed to customers under EITF Issue No. 99-19 "Reporting
Revenue Gross as Principal versus Net as an Agent". 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
Issue 00-10 may have on the reported net sales and cost of sales.
The Task Force 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 Issue 00-14 may have on the reported amount of net sales and
selling, general and administrative expenses.
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<PAGE>
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.
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.
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.
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<PAGE>
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, 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 and have been reflected in the year to date financial statements.
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.
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<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<S> <C> <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(14)
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 (14)
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)
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<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., 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)
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<PAGE>
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., 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 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.
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<PAGE>
(13) Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 26,
2000.
(14) Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 25,
2000.
</FN>
</TABLE>
(b) Reports on Form 8-K
DOCUMENT DATE ITEM
-------- ---- ----
Report on Form 8-K September 13, 2000 5, 7
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<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PARAGON TRADE BRANDS, INC.
By /S/ DAVID C. NICHOLSON
------------------------
David C. Nicholson
Chief Financial Officer
November 3, 2000
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<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(14)
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(14)
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)
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<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., dated
as of March 15, 1999(9)
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<PAGE>
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., 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 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.
-39-
<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.
(14) Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 25,
2000.
</FN>
</TABLE>
