-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BZYOwzSQzhBnwvGRorgs28ZJ9Sh0m2mNoYO3pl/1NQuAexVsPBKWq4zCdEmpbh6I OpZwN/HMUlLkcVJU3yIbDA== 0000889429-00-000013.txt : 20000511 0000889429-00-000013.hdr.sgml : 20000511 ACCESSION NUMBER: 0000889429-00-000013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000326 FILED AS OF DATE: 20000510 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PARAGON TRADE BRANDS INC CENTRAL INDEX KEY: 0000889429 STANDARD INDUSTRIAL CLASSIFICATION: CONVERTED PAPER & PAPERBOARD PRODS (NO CONTAINERS/BOXES) [2670] IRS NUMBER: 911554663 STATE OF INCORPORATION: DE FISCAL YEAR END: 1230 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11368 FILM NUMBER: 624567 BUSINESS ADDRESS: STREET 1: 180 TECHNOLOGY PARLWAY CITY: NORCROSS STATE: GA ZIP: 30092 BUSINESS PHONE: 6789695000 MAIL ADDRESS: STREET 1: 180 TECHNOLOGY PKWY CITY: NORCROSS STATE: GA ZIP: 30092 10-Q 1 QUARTERLY REPORT FOR PERIOD ENDED 3/26/00 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the thirteen week period ended March 26, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________________ to _____________________ Commission File No. 1-11368 PARAGON TRADE BRANDS, INC. (Exact name of registrant as specified in its charter) DELAWARE 91-1554663 - ----------------------------------- ---------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 180 Technology Parkway NORCROSS, GEORGIA 30092 ----------------------------------------- (Address of principal executive offices) (678) 969-5000 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark whether the Registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes X No The number of shares outstanding of the registrant's common stock was 11,996,000 shares ($.01 par value) as of May 5, 2000. Page 1 Exhibit Index on Page 35 PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES INDEX TO FORM 10-Q FILING FOR THE THIRTEEN WEEK PERIOD ENDED MARCH 26, 2000
PAGE NO. PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Operations 3 Consolidated Balance Sheets 4 Consolidated Statements of Cash Flows 5 Consolidated Statements of Changes in Shareholders' 7 Equity (Deficit) Notes to Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of 20 Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk 28 PART II. OTHER INFORMATION Item 1. Legal Proceedings 28 Item 2. Changes in Securities (not applicable) Item 3 Defaults Upon Senior Securities 30 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 30 Signature Page 34 Exhibit Index 35 Exhibits 39
-2- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) (UNAUDITED) (NOTE 2)
Successor Predecessor Company Company --------------------- ----------------------------------------------- Eight Weeks Five Weeks Thirteen Weeks Ended Ended Ended March 26, 2000 January 28, 2000 March 28, 1999 -------------- ---------------- -------------- Sales, net of discounts and allowances.............. $ 78,349 $ 50,738 $ 126,244 Cost of sales....................................... 63,065 42,497 109,537 ----------------- ------------------- ----------------- Gross profit........................................ 15,284 8,241 16,707 Selling, general and administrative expense......... 12,756 6,114 21,443 Research and development expense.................... 685 317 1,008 ----------------- ------------------- ----------------- Operating profit (loss)............................. 1,843 1,810 (5,744) Equity in earnings of unconsolidated subsidiaries................................... 323 - 371 Interest expense (1)................................ 2,857 75 102 Other income........................................ 168 97 496 ----------------- ------------------- ----------------- Earnings (loss) before income taxes, bankruptcy costs and extraordinary item................... (523) 1,832 (4,979) Bankruptcy costs.................................... - 10,399 1,927 Provision for (benefit from) income taxes........... 41 (100) 313 ----------------- -------------------- ----------------- Net loss before extraordinary item.................. (564) (8,467) (7,219) Extraordinary item - gain from discharge of debt........................................ - 123,043 - ----------------- ------------------- ----------------- Net earnings (loss)................................. $ (564) $ 114,576 $ (7,219) ================== =================== ================== Earnings (loss) per common share - basic and diluted: Net loss before extraordinary item.................. $ (.05) $ (.71) $ (.60) Extraordinary gain.................................. - 10.30 - ----------------- ------------------- ----------------- Net earnings (loss) per common share - basic and diluted........................................ $ (.05) $ 9.59 $ (.60) ================= =================== ================= (1)Contractual Interest $ - $ 569 $ 1,335 ================= =================== =================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS -3- PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) (NOTE 2)
Successor Predecessor Company Company March 26, 2000 December 26, 2000 -------------- ----------------- (Unaudited) ASSETS Cash and short-term investments............................................ $ 6,003 $ 11,685 Receivables................................................................ 69,441 85,976 Inventories................................................................ 48,971 48,744 Current portion of deferred income taxes................................... 743 5,557 Prepaid expenses........................................................... 4,352 3,745 ------------------ ------------------- Total current assets.................................................. 129,510 155,707 Property and equipment..................................................... 102,346 113,637 Construction in progress................................................... 4,581 6,525 Assets held for sale....................................................... 1,881 3,312 Investment in unconsolidated subsidiary, at cost........................... 20,911 22,929 Investment in and advances to unconsolidated subsidiaries, at equity ...... 72,990 56,215 Goodwill................................................................... - 30,900 Other assets............................................................... 9,647 11,295 ------------------ ------------------- Total assets ......................................................... $ 341,866 $ 400,520 ================== =================== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Checks issued but not cleared.............................................. $ 6,158 $ 7,525 Accounts payable........................................................... 26,607 34,715 Accrued liabilities........................................................ 30,577 34,259 ------------------ ------------------- Total current liabilities............................................. 63,342 76,499 Liabilities subject to compromise (Note 1)................................. - 406,723 Long-term debt............................................................. 157,000 - Deferred compensation...................................................... 211 211 Deferred income taxes...................................................... 746 6,904 ------------------ ------------------- Total liabilities..................................................... 221,299 490,337 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 12,384,975 shares, $.01 par value............... - 124 Common stock: (Successor Company) Authorized 20,000,000 shares, issued 11,891,000 and 0 shares, $.01 par value............... 119 - Capital surplus............................................................ 118,791 143,736 Common stock warrants: (Successor Company) Issued 625,821, exercisable at $18.91........................................ 2,275 - Accumulated other comprehensive loss....................................... (54) (1,213) Retained deficit........................................................... (564) (222,134) Less: Treasury stock (Predecessor Company), 0 and 438,750 shares, at cost....................................................... - (10,330) ------------------ ------------------- Total shareholders' equity (deficit).................................. 120,567 (89,817) ------------------ -------------------- Total liabilities and shareholders' equity (deficit).................. $ 341,866 $ 400,520 ================== ===================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. -4- PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLAR AMOUNTS IN THOUSANDS) (UNAUDITED) (NOTE 2)
Successor Predecessor Company Company ---------------------- ---------------------------------------------- Eight Weeks Five Weeks Thirteen Weeks Ended Ended Ended March 26, 2000 January 28, 2000 March 28, 1999 -------------- ---------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings (loss)................................ $ (564) $ 114,576 $ (7,219) Non-cash charges (benefits) to earnings: Extraordinary item - gain from forgiveness of debt........................ - (123,043) - Depreciation and amortization.................. 3,801 2,708 8,436 Deferred income taxes.......................... 131 382 (50) Equity in earnings of unconsolidated subsidiaries............................... 18 - (370) Write-down of assets........................... 3 173 - Changes in operating assets and liabilities: Accounts receivable............................ 13,371 (4,079) 16,988 Inventories and prepaid expenses............... 1,806 (2,640) 524 Accounts payable............................... (3,837) (6,404) (152) Checks issued but not cleared.................. (2,876) 1,509 (4,419) Liabilities subject to compromise.............. - (13,032) (332) Accrued liabilities............................ (6,154) 7,254 (3,888) Other ............................................. (1,227) (436) (782) ------------------ ------------------ ------------------ Net cash provided by (used by) operating activities................................ 4,472 (23,032) 8,736 ----------------- ------------------ ----------------- CASH FLOWS FROM INVESTING ACTIVITIES: Expenditures for property and equipment............. (1,110) (745) (11,085) Proceeds from sale of property and equipment........ 2,299 104 4,800 Repayment of advance from unconsolidated subsidiary, at equity.......................... 882 - - Proceeds from sale of Changing Paradigms, Inc....... - - 350 Investment in and advances to unconsolidated subsidiaries, at equity........................ - (1,200) (800) Other ............................................. 78 1,570 648 ----------------- ----------------- ----------------- Net cash provided by (used by) financing activities................................. 2,149 (271) (6,087) ----------------- ------------------ ------------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from credit facility....................... - 15,000 - Repayments of credit facility....................... (4,000) - - ------------------ ----------------- ----------------- Net cash provided by (used by) financing activities................................. (4,000) 15,000 - ------------------ ----------------- ----------------- NET (DECREASE) INCREASE IN CASH..................... 2,621 (8,303) 2,649 Cash at beginning of period......................... 3,382 11,685 22,625 ----------------- ----------------- ----------------- Cash at end of period............................... $ 6,003 $ 3,382 $ 25,274 ================= ================= =================
CONTINUED ON NEXT PAGE. -5- PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (DOLLAR AMOUNTS IN THOUSANDS) (UNAUDITED) (NOTE 2)
Successor Predecessor Company Company ---------------------- ---------------------------------------------- Eight Weeks Five Weeks Thirteen Weeks Ended Ended Ended MARCH 26, 2000 JANUARY 28, 2000 MARCH 28, 1999 -------------- ---------------- -------------- Cash paid (received) during the period for: Interest, net of amounts capitalized........... $ 581 $ 232 $ 102 Income taxes................................... $ (171) $ (619) $ 464 Bankruptcy costs............................... $ 3,345 $ 10,819 $ 1,323 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 $ -
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. -6- PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT) (DOLLAR AMOUNTS IN THOUSANDS)
Accumulated Common Other Common Capital Stock Comprehensive Retained Treasury Stock Surplus Warrants Loss Deficit Stock ---------- ------------ ---------- ------------- ------------ ------------ BALANCE, December 27, 1998 $ 124 $ 143,918 $ - $ (1,840) $ (193,758) $ (10,284) Net loss - - - - (28,376) - Issue common stock 28 - - - - Translation adjustment - - - 627 - - Restricted stock forfeiture - (210) - - - -(46) ---------- ------------ ---------- ------------- ------------ ------------ BALANCE, December 26, 1999 124 143,736 - (1,213) (222,134) (10,330) Net Income - - - - 114,576 - Translation adjustment - - - 159 - - Effect of reorganization and fresh-start accounting: Extinguishment of stock (Predecessor Company) (124) (143,736) - 1,054 107,558 10,330 Issuance of stock and warrants (Successor Company) 119 118,791 2,275 - - - - ---------- ------------ ---------- ------------- ------------ ------------ BALANCE, January 28, 2000 119 118,791 2,275 - - - Net loss - - - - (564) - Translation adjustment - - - (54) - - ---------- ------------ ---------- ------------- ------------ ------------ BALANCE, March 26, 2000 $ 119 $ 118,791 $ 2,275 $ (54) $ (564) $ - ========== ============ ========== ============= ============ ============
The balances on January 28 and March 26, 2000 are unaudited. The following summarizes the changes in the number of shares of capital stock:
Common Stock Common Stock Warrants Treasury Stock ---------------------- ---------------------- ----------------------- BALANCE, December 27, 1998 12,378,616 - 429,696 Issue common stock - Profit Sharing and Savings Plan 9,848 - - Restricted stock forfeiture - - 9,054 ---------------------- ---------------------- ----------------------- 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, March 26, 2000 11,891,000 625,821 - ====================== ====================== =======================
The March 26, 2000 balance is unaudited. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. -7- PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS FOR THE THIRTEEN WEEK PERIOD ENDED MARCH 26, 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 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 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 March 19, 1999, the Company entered into a Settlement Agreement with K-C which fully and finally settled all matters related to the Texas action, including the Company's counterclaims, and K-C's proof of claim filed in the Company's Chapter 11 reorganization proceeding. The K-C Settlement Agreement was approved by the Bankruptcy Court on August 6, 1999 (the "K-C Approval Order"). The Equity Committee appealed the K-C Approval Order. On or about November 15, 1999, the Company and the Official Committee of Unsecured Creditors (the "Creditors' Committee"), as co-proponents, filed the Second Amended Plan of Reorganization (as subsequently modified through January 13, 2000, the "Plan") and a related Disclosure Statement (as subsequently modified through November 18, 1999, the "Disclosure Statement") with the Bankruptcy Court. The Plan incorporated a proposed investment by Wellspring Capital Management LLC ("Wellspring"), a private investment company, to acquire the Company as part of a plan of reorganization (the "Wellspring Transaction"). By order dated November 18, 1999, the Bankruptcy Court approved the Disclosure Statement. At such time, the Bankruptcy Court also approved certain voting procedures and established January 7, 2000 as the voting deadline for the Plan and January 13, 2000 as the date for a hearing to consider confirmation of the Plan. A confirmation hearing was held by the Bankruptcy Court on January 13, 2000. By Order dated January 13, 2000, the Bankruptcy Court confirmed the Plan. On January 28, 2000, Paragon was reorganized pursuant to the Plan through the consummation of the Wellspring Transaction. As contemplated under the Plan, the Equity Committee withdrew with prejudice its appeals of the P&G Approval Order and the K-C Approval Order. -8- PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES NOTES TO 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 a cash contribution of $115,200. 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% 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 that the current valuations of the assets, as stated above, the resulting deficit was allocated proportionally to the non-current assets. -9- PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - (CONTINUED) The effect of the Plan on the Company's consolidated balance sheet as of January 28, 2000 was as follows (unaudited):
Predecessor Adjustments Successor Company To Record Company Balance Sheet Plan of Fresh Start Balance Sheet January 28, 2000 Confirmation Adjustments(8) January 28, 2000 ------------------- ---------------------------- ----------------- -------------------- Current assets $ 157,142 $ (16,478)(1)(2)(3)(5) $ 1,029 $ 141,693 Property and equipment, net 122,878 - (9,571) 113,307 Investments and advances to subsidiaries 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) - 2,275 Foreign currency translation adjustment (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 =================== ============================ ================= ==================== - ------------------ (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 effects of fresh start accounting including recording assets at their current fair values adjusted for the reorganization value.
-10- PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - (CONTINUED) NOTE 2: BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES BASIS OF PRESENTATION The consolidated financial statements include the accounts of Paragon Trade Brands, Inc. and its wholly-owned subsidiaries. All significant intercompany transactions and accounts have been eliminated. The accompanying consolidated balance sheet as of December 26, 1999, which has been derived from audited financial statements, and the unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information presented not misleading. It is suggested that these consolidated financial statements be read in conjunction with the financial statements and the notes thereto included in the Company's latest annual report on Form 10-K. In the opinion of management, all adjustments necessary for a fair statement of the results of the interim periods have been included. All such interim adjustments are of a normal recurring nature except for the bankruptcy-related costs and the extraordinary gain. The results of operations for the thirteen week period ending March 26, 2000 should not be regarded as necessarily indicative of the results that may be expected for the full year. 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. NOTE 3: BANKRUPTCY COSTS Bankruptcy costs were directly associated with the Company's Chapter 11 reorganization proceedings and consisted of the following:
Successor Predecessor Company Company ----------------------- ------------------------------------------------ Eight Weeks Five Weeks Thirteen Weeks Ended Ended Ended March 26, 2000 January 28, 2000 March 28, 1999 -------------- ---------------- -------------- Professional fees.............................. $ - $ 6,990 $ 1,897 Employee confirmation bonuses.................. - 3,308 - Amortization of debtor-in-possession credit facility deferred financing costs......... - 50 204 Other.......................................... - 125 1 Interest income................................ - (74) (175) ----------------- ------------------- ------------------ $ - $ 10,399 $ 1,927 ================= =================== ==================
-11- PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - (CONTINUED) NOTE 4: INCOME TAXES During the eight week period ended March 26, 2000, the Company recorded an income tax benefit of approximately $300 which was offset by a net increase in the valuation allowances with respect to its net deferred and other tax related assets. During the five week period ended January 28, 2000, the Company recorded income tax expense of approximately $47,000 which included approximately $2,800 to account for the effects of certain non-deductible bankruptcy costs. This expense was offset by a decrease in the valuation allowance for its net deferred and other tax-related assets. Income tax expense for the subsidiaries not included in the Chapter 11 filing was $313 during the period ended March 28, 1999. The Company recorded an income tax benefit of approximately $3,000 during the period ended March 28, 1999, which was offset by an increase in the valuation allowances with respect to its net deferred and other tax-related assets. 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 ($47,800) and operating loss carryforwards ("NOLs") ($27,200). 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 $225,500 in future taxable income. Accordingly, the Company has estimated that this limitation on the annual utilization of built-in deductions will be approximately $6,800. The Company currently has fully reserved its net deferred tax asset of $86,800. The Company has provided a full valuation allowance against the net deferred tax asset as it has determined that it is more likely than not that such benefits will not be realized. NOTE 5: COMPREHENSIVE INCOME (LOSS) The following are the components of comprehensive income (loss):
Successor Predecessor Company Company ----------------------- ---------------------------------------------- Eight Weeks Five Weeks Thirteen Weeks Ended Ended Ended March 26, 2000 January 28, 2000 March 28, 1999 -------------- ---------------- -------------- Net income (loss)............................... $ (564) $ 114,576 $ (7,219) Foreign currency translation adjustment......... (54) 159 308 ------------------ ------------------ ----------------- Comprehensive income (loss)..................... $ (618) $ 114,735 $ (6,911) ================== ================== ==================
-12- PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - (CONTINUED) NOTE 6: RECEIVABLES Receivables consist of the following:
Successor Predecessor Company Company -------------------------- --------------------------- March 26, 2000 December 26, 1999 -------------- ----------------- Accounts receivable - trade.......................... $ 56,638 $ 68,011 Current portion of advances to subsidiary............ 11,310 11,059 Other receivables..................................... 14,216 20,705 --------------------- --------------------- 82,164 99,775 Less: Allowance for doubtful accounts................ (12,723) (13,799) ---------------------- ---------------------- Net receivables....................................... $ 69,441 $ 85,976 --------------------- ---------------------
NOTE 7: INVENTORIES Inventories consist of the following:
Successor Predecessor Company Company -------------------------- --------------------------- March 26, 2000 December 26, 1999 -------------- ----------------- LIFO: Raw materials - pulp......................... $ 223 $ 83 Finished goods............................... 25,915 25,235 FIFO: Raw materials - other........................ 7,192 7,995 Materials and supplies....................... 20,850 21,890 ------------------- ---------------------- 54,180 55,203 Reserve for excess and obsolete items........................... (5,209) (6,459) -------------------- ----------------------- Net inventories....................................... $ 48,971 $ 48,744 ==================== =======================
NOTE 8: PROPERTY AND EQUIPMENT Property and equipment, at cost, are as follows:
Successor Predecessor Company Company --------------------------- --------------------------- March 26, 2000 December 26, 1999 -------------- ----------------- Land $ 2,902 $ 3,443 Buildings and improvements 17,016 39,038 Machinery and equipment 87,485 248,927 -------------------- ----------------------- 107,403 291,409 Less: Allowance for depreciation (5,057) (177,772) -------------------- ----------------------- Net property and equipment $ 102,346 $ 113,637 ==================== =======================
-13- PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - (CONTINUED) NOTE 9: ACCRUED LIABILITIES Accrued liabilities are as follows:
Successor Predecessor Company Company -------------------------- --------------------------- March 26, 2000 December 26, 1999 -------------- ----------------- Payroll - wages and salaries, incentive awards, retirement, vacation and severance pay............ $ 8,818 $ 8,369 Coupons and promotions................................. 9,431 8,214 Royalties.............................................. 5,225 8,225 Other.................................................. 7,104 9,451 --------------------- ---------------------- Total.................................................. $ 30,578 $ 34,259 ===================== ======================
NOTE 10: LONG-TERM DEBT Long-term debt is as follows:
Successor Predecessor Company Company -------------------------- --------------------------- March 26, 2000 December 26, 1999 -------------- ----------------- 11.25% Senior subordinated notes due 2005.............. $ 146,000 $ - Credit Facility borrowings............................. 11,000 - --------------------- ---------------------- $ 157,000 $ - ===================== ======================
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. See "PART I, ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION" - Risks and Uncertainties. -14- PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - (CONTINUED) NOTE 11: EARNINGS (LOSS) PER COMMON SHARE Following is a reconciliation of the numerators and denominators of the basic and diluted earnings (loss) per common share:
Successor Predecessor Company Company --------------------- ------------------------------------------- Eight Weeks Five Weeks Thirteen Weeks Ended Ended Ended March 26, 2000 January 28, 2000 March 28, 1999 -------------- ---------------- -------------- Net earnings (loss).......................... $ (564) $ 114,576 $ (7,219) ================= ================= ================= Weighted average number of common shares used in basic and diluted EPS (000's)................................. 11,891 11,950 11,950 Basic and diluted earnings (loss) per common share........................ $ (.05) $ 9.59 $ (.60) ================= ================ =================
Common stock warrants to purchase 625,821 shares of common stock outstanding during the eight week period ending March 26, 2000 and options to purchase 646,667 and 687,247 shares of common stock outstanding during the periods ending January 28, 2000 and March 28, 1999, respectively, were not included in the calculation because the options' exercise price was greater than the average market price of the common shares. Diluted and basic earnings (loss) per share are the same for each of the periods ended March 26, 2000, January 28, 2000 and March 28, 1999 because the computation of diluted earnings (loss) per share was anti-dilutive. NOTE 12: LEGAL PROCEEDINGS THE PROCTER & GAMBLE COMPANY V. PARAGON TRADE BRANDS, INC. - P&G filed a lawsuit in January 1994 in the 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 (the "Delaware Judgment") 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 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, which are exhibits to the Settlement Agreement, with respect to certain of the patents asserted by P&G in its proof of claim, including those -15- PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - (CONTINUED) asserted in the Delaware action. The U.S. and Canadian patent rights licensed by the Company permitted the Company to convert to a dual cuff baby diaper design. While the Company believes that the royalty rates being charged by P&G are the same royalties that will be paid by the Company's major store brand competitors for similar patent rights, these royalties, together with royalties to be paid to K-C described herein, have had, and will continue to have, a material adverse impact on the Company's future financial condition and results of operations. While these royalty costs have been partially offset by projected raw material cost savings related to the conversion to a dual cuff design, the Company's overall raw material costs have increased. KIMBERLY-CLARK CORPORATION V. PARAGON TRADE BRANDS, INC. - On October 26, 1995, K-C filed a lawsuit against the Company in the U.S. District Court in Dallas, Texas, alleging infringement by the Company's products of two K-C patents relating to dual cuffs. As a result of the Company's Chapter 11 filing, the proceedings in the K-C litigation were stayed. On March 19, 1999, the Company entered into a Settlement Agreement with K-C which fully and finally settled all matters related to the Texas action, including the Company's counterclaims, and K-C's proof of claim filed in the Company's Chapter 11 reorganization proceeding. The K-C Approval Order was issued by the Bankruptcy Court on August 6, 1999. As a part of the settlement, the Company entered into License Agreements for the U.S. and Canada, which are exhibits to the Settlement Agreement, with respect to the patents asserted by K-C in the Texas action. The patent rights licensed by the Company from K-C permitted the Company to convert to a dual cuff diaper design. The Company believes that the overall effective royalty rate that the Company will pay to K-C, together with royalties to be paid to P&G described above, has had, and will continue to have, a material adverse impact on the Company's future financial condition and results of operations. While these royalty costs have been partially offset by projected raw material cost savings related to the conversion to a dual cuff design, the Company's overall raw material costs have increased. As a part of the K-C License Agreement, K-C has agreed not to sue the Company on two of K-C's patents related to the use of SAP in diapers and training pants, so long as the Company uses SAP which exhibits certain performance characteristics (the "SAP Safe Harbor"). The Company experienced certain product performance issues the Company believes may have been related to the SAP the Company initially converted to in December of 1998. In February 1999, the Company converted to a new SAP. The Company is encountering increased product costs due to the increased price and usage of the new SAP. While the Company is working diligently with its SAP suppliers to develop a more cost-effective alternative which is still within the SAP Safe Harbor, the Company cannot predict at this time whether or when the added costs will be fully offset. The Company expects that these increased product costs will have a material adverse impact on its financial condition and results of operations for at least 2000 and potentially beyond. 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. -16- PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES NOTES TO 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. 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 and certain subsidiaries of the Company, as guarantors, entered into a three-year $95,000 financing facility with a bank group led by Citicorp USA, Inc. This facility is designed to supplement the Company's cash on hand and operating cash flow. As of March 26, 2000, there were $11,000 in direct borrowings outstanding under this facility and an aggregate of $2,000 in letters of credit issued thereunder. 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. filed suit in the U.S. District Court in Delaware against the Company for allegedly infringing a certain K-C patent related to a method and apparatus for attaching a graphic patch to a disposable absorbent garment. The suit seeks injunctive relief, unspecified treble damages, interest and attorneys' fees and expenses. The Company is currently evaluating the suit. OTHER - The Company is also a party to other legal activities generally incidental to its activities. Although the final outcome of any legal proceeding or dispute is subject to a great many variables and cannot be predicted with any degree of certainty, the Company presently believes that any ultimate liability resulting from any or all legal proceedings or disputes to which it is a party will not have a material adverse effect on its financial condition or results of operations. -17- PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - (CONTINUED) 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 March 26, 2000, there were $11,000 of direct borrowings outstanding and an aggregate $2,000 in letters of credit under this Credit Facility. See "PART I, ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITIONS" - RISKS AND UNCERTAINTIES herein. NOTE 14: SEGMENT REPORTING The Company operates principally in two segments that are organized based on the nature of the products sold: (i) infant care and (ii) feminine care and adult incontinence. Each operating segment contains closely related products that are unique to that particular segment. The results of the Company's international investment in joint ventures in Mexico, Argentina, Brazil and China are reported in the corporate and other segment. Management evaluates the performance of its operating segments separately to individually monitor the different factors impacting financial performance. Segment operating profit is comprised of net sales less cost of sales and selling, general and administrative expense. Loss contingencies and asset impairments are recorded in the appropriate operating segment. Certain administrative expenses common to all operating segments are currently allocated to the infant care operating segment. International investments, financial costs, such as interest income and expense, and income taxes are managed by, and recorded in, the corporate and other operating segment. -18- PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - (CONTINUED) Net sales and operating profit (loss) for the segments were as follows:
Successor Company ------------------------------------------------------------------- Feminine Care/Adult Corporate/ EIGHT WEEKS ENDED MARCH 26, 2000 Infant Care Incontinence Other Total - -------------------------------- --------------- --------------- --------------- -------------- Net sales $ 76,091 $ 2,258 $ - $ 78,349 Operating profit (loss) 3,708 (1,865) - 1,843
Predecessor Company ------------------------------------------------------------------- Feminine Care/Adult Corporate/ FIVE WEEKS ENDED JANUARY 28, 2000 Infant Care Incontinence Other Total - --------------------------------- --------------- --------------- --------------- -------------- Net sales $ 49,422 $ 1,316 $ - $ 50,738 Operating profit (loss) 3,005 (1,195) - 1,810
Predecessor Company ------------------------------------------------------------------- Feminine Care/Adult Corporate/ THIRTEEN WEEKS ENDED MARCH 28, 1999 Infant Care Incontinence Other Total - ----------------------------------- --------------- --------------- --------------- -------------- Net sales $ 123,356 $ 2,888 $ - $ 126,244 Operating loss (2,470) (3,274) - (5,744)
-19- PART I. FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES THIRTEEN WEEKS ENDED MARCH 26, 2000 COMPARED TO THIRTEEN WEEKS ENDED MARCH 28, 1999 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 $178.4 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) on January 6, 1998 (the "Chapter 11 filing"). None of the Company's subsidiaries were included in the Chapter 11 filing. 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 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 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 -20- 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 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 a cash contribution of $115.2 million. See "PART II, ITEM 1: LEGAL PROCEEDINGS." CREDIT FACILITY. On January 28, 2000, the Company and certain subsidiaries of the Company, as guarantors, entered into a three-year $95 million financing facility (the "Credit Facility") with a bank group led by Citicorp USA, Inc. ("Citicorp"). The maximum borrowing under the Credit Facility may not exceed the lesser of $95 million or an amount determined by a borrowing base formula. The borrowing base formula is comprised of certain specified percentages of eligible accounts receivable, eligible inventory, equipment and personal property and real property of the Company. The Credit Facility has a sub-limit of $15 million for the issuance of letters of credit. The Credit Facility contains customary financial covenants. SENIOR SUBORDINATED NOTES. On January 28, 2000, the Company issued $146.0 million of 11.25 percent senior subordinated notes due 2005 (the "New Notes") as contemplated under the Plan. The New Notes are guaranteed by certain domestic subsidiaries and are not callable until February 1, 2003. Interest is payable semi-annually and during the first two years can be paid in kind if free cash flow, as defined in the Indenture, falls below projected levels. The New Notes are subordinated in right of payment to the payment of all senior indebtedness. The New Notes contain customary restrictive covenants. FRESH START ACCOUNTING. The Company has recorded the reorganization and related transactions using "fresh start accounting" as required by Statement of Position 90-7 ("SOP 90-7") issued by the American Institute of Certified Public Accountants. The Company operates principally in two segments that are organized based on the nature of the products sold: (i) infant care and (ii) feminine care and adult incontinence. Each operating segment contains closely related products that are unique to that particular segment. The results of the Company's international investments in joint ventures in Mexico, Argentina, Brazil and China are reported in the corporate and other segment. RESULTS OF OPERATIONS Effective January 28, 2000, the Company emerged from Chapter 11 bankruptcy proceedings and implemented "fresh start accounting." Accordingly, all assets and liabilities were restated to reflect their respective fair values. The consolidated financial statements after that date are those of a new reporting entity and are not comparable to the Pre-Confirmation periods. However, for purposes of this discussion, the eight weeks ended March 26, 2000 (Post-Confirmation) have been combined with the five weeks ended January 28, 2000 (Pre-Confirmation) and then compared to the 13 weeks ended March 28, 1999. Differences between periods due to fresh start accounting adjustments are explained when necessary. The following table is included solely for use in comparative analysis of results of operations, and to complement management's discussion and analysis: -21-
Thirteen Weeks Ended --------------------------------------------------------- MARCH 26, 2000 MARCH 28, 1999 -------------- -------------- Net sales............................................. $ 129,087 $ 126,244 Cost of sales......................................... 105,562 109,537 ------------------- ------------------- Gross profit.......................................... 23,525 16,707 Selling, general and administrative expense........... 18,870 21,443 Research and development expense...................... 1,002 1,008 ------------------- ------------------- Operating profit (loss)............................... 3,653 (5,744) Equity in earnings of unconsolidated subsidiaries..................................... 323 371 Interest expense...................................... 2,932 102 Other income, net..................................... 265 496 ------------------- ------------------- Earnings (loss) before income taxes, bankruptcy costs and extraordinary item..................... 1,309 (4,979) Bankruptcy costs...................................... 10,399 1,927 Provision for (benefit from) income taxes............. (59) 313 -------------------- ------------------- Net loss before extraordinary item.................... (9,031) (7,219) Extraordinary item - gain from discharge of debt.......................................... 123,043 - ------------------- ------------------- Net earnings (loss)................................... $ 114,012 $ (7,219) =================== ====================
Net earnings were $114.0 million in the first quarter of 2000 compared to a net loss of $7.2 million in the first quarter of 1999. Included in the results for the first quarter of 2000 was an extraordinary gain of $123.0 million associated with forgiveness of debt that resulted from the reorganization of the Company in accordance with the Plan. Excluding the extraordinary gain from forgiveness of debt and bankruptcy costs discussed below, improved product mix, lower manufacturing costs and lower selling, general and administrative costs contributed to improved results during the first quarter of 2000 compared to the first quarter of 1999. The first quarter of 1999 results were also negatively impacted by a price concession made to an export customer to address product acceptance issues. Included in the first quarter 2000 results are bankruptcy costs of $10.4 million compared to $1.9 million in the first quarter of 1999. Basic loss per share for the eight weeks ended March 26, 2000 was $.05. Comparison to previous periods is not meaningful due to the Company's emergence from bankruptcy and the implementation of fresh start accounting. Infant care operating profit was $6.7 million in the first quarter of 2000 compared to an operating loss of $2.5 million in the first quarter of 1999. A favorable product mix, lower manufacturing costs and lower selling, general and administrative costs contributed to the improved results. Feminine care and adult incontinence operating losses were $3.1 million in the first quarter of 2000 compared to an operating loss of $3.3 million in the first quarter of 1999. Losses are expected to continue until volume is significantly increased to absorb existing manufacturing capacity. The Company experienced greater than anticipated operating losses in its feminine care and adult incontinence businesses in 1999, 1998 and 1997 and expects these losses to continue near-term. The Company has developed a business plan that supports the realization of its investment in its feminine care and adult incontinence business. Accordingly, the Company has not recorded any adjustments in its financial statements relating to the recoverability of the operating assets of the feminine care and adult incontinence business. The Company's ability to recover its investment is dependent upon the successful execution of the Company's -22- feminine care and adult incontinence business plan. There can be no assurances, however, that such improved results will be realized. See "RISKS AND UNCERTAINTIES" herein. NET SALES Overall net sales were $129.1 million in the first quarter of 2000 compared to $126.2 million in the first quarter of 1999. Infant care net sales increased 1.7 percent to $125.5 million in the first quarter of 2000 compared to $123.4 million in the first quarter of 1999. The increase in net sales 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. In addition, a price concession was made to an export customer during the first quarter of 1999 to address product acceptance issues. The favorable impacts were also partially offset by lower unit sales as volume decreased 4.4 percent to 790.2 million units in the first quarter of 2000 compared to 826.7 million units in the first quarter of 1999. The decrease in unit sales is primarily due to volume lost to competitors during the latter part of 1999. Prices were also negatively impacted by continued competitive pressures. Infant care volume and sales prices are expected to remain under pressure due to continued competitive initiatives from both national brand and store brand competitors. The Company anticipates, however, that volume will be at higher levels in 2000 compared to 1999 due to the training pant product and destination store brand programs discussed above. The Company has become aware of a potential package count change in the latter half of 2000 which may result in an effective price increase. It is difficult to predict if the count change will occur, and the timing and amount of price increase to be realized, if any. Feminine care and adult incontinence sales increased to $3.6 million in the first quarter of 2000 compared to $2.9 million in the first quarter of 1999 due to the shipment of product to new customers. COST OF SALES Overall cost of sales in the first quarter of 2000 was $105.6 million compared to $109.5 million in the first quarter of 1999. As a percentage of net sales, cost of sales was 81.8 percent in the first quarter of 2000 compared to 86.8 percent in the first quarter of 1999. Infant care cost of sales was $99.1 million in the first quarter of 2000 compared to $103.5 million in the first quarter of 1999. As a percentage of net sales, infant care cost of sales was 79.0 percent in the first quarter of 2000 compared to 83.7 percent in 1999. This decrease in costs as a percentage of sales was due to improved manufacturing efficiencies, lower plant overhead costs due to the closure of the Brampton, Canada facility during the second quarter of 1999 and lower depreciation costs. These favorable items were partially offset by higher royalties due to a full quarter impact of the settlement and licensing agreements reached in the first quarter of 1999 with P&G and K-C and higher pulp prices. Infant care raw material prices, with the exception of pulp, were at lower price levels in the first quarter of 2000 compared to the first quarter of 1999. Pulp prices started to increase during the second half of 1999 and are expected to increase during the remainder of 2000. Raw material prices, with the exception of pulp, are expected to decrease slightly during the remainder of 2000. Infant care depreciation costs were $5.0 million in the first quarter of 2000 compared to $5.8 million in first quarter of 1999. The decrease is partially due to lower asset values as a result of fresh start accounting. Feminine care and adult incontinence cost of sales was $6.5 million in the first quarter of 2000 compared to $6.0 million in the first quarter of 1999. As a percentage of net sales, cost of sales was 180.6 percent in the first quarter of 2000 compared to 206.9 percent in the first quarter of 1999. Overall cost of sales in this segment is expected to remain greater than net sales until volume is significantly increased to absorb existing manufacturing capacity. See "RISKS AND UNCERTAINTIES" herein. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES SG&A expenses were $18.9 million in the first quarter of 2000 compared to $21.4 million in the first quarter of 1999. As a percentage of net sales, these expenses were 14.6 percent in the first quarter of 2000 compared to 17.0 percent in 1999. The decrease in SG&A is primarily attributable to lower sales and marketing expenditures and information -23- technology expenses. Depreciation and amortization costs included in SG&A decreased to $.9 million in the first quarter of 2000 compared to $1.6 million in the first quarter of 1999. The decrease in depreciation and amortization is partially due to the elimination of goodwill through fresh start accounting. Overall, SG&A expenses are expected to remain at first quarter levels throughout 2000 unless the Company implements the package count change discussed above. If the package count change is implemented the Company will incur higher packaging artwork and development costs. RESEARCH AND DEVELOPMENT Research and development expenses were $1.0 million in each of the first quarters of 2000 and 1999. INTEREST EXPENSE Interest expense was $2.9 million in the first quarter of 2000 compared to $.1 million in the first quarter of 1999. The increase is due to interest costs associated with borrowings under the Credit Facility and the New Notes bearing an annual interest rate of 11.25%. There were no borrowings under the DIP Credit Facility during the first quarter of 1999. EQUITY IN EARNINGS OF UNCONSOLIDATED SUBSIDIARIES The equity in earnings of unconsolidated subsidiaries was $.3 million in the first quarter of 2000 compared to $.4 million in the first quarter of 1999. Earnings in the first quarter of 2000 were negatively impacted by lower earnings of the Company's South American joint ventures and amortization of goodwill associated with the values assigned to the foreign joint ventures through fresh start accounting. The earnings during the first quarter of 1999 included the write-off of capitalized start-up costs. BANKRUPTCY COSTS Bankruptcy costs were $10.4 million in the first quarter of 2000 compared to $1.9 million during the first quarter of 1999. The increase in costs was primarily due to professional fees associated with the exit from bankruptcy as well as $3.3 million in confirmation bonuses paid to employees. EXTRAORDINARY GAIN FROM DISCHARGE OF DEBT During the period ending January 28, 2000, an extraordinary gain of $123.0 million was recorded for the discharge of indebtedness that resulted from the forgiveness of certain liabilities in accordance with the Company's plan of reorganization. INCOME TAXES During the first quarter of 2000, the Company recorded income tax expense of approximately $46.7 million which included approximately $2.8 million to account for the effects of certain non-deductible bankruptcy costs. This expense was offset by a decrease in the valuation allowances for its net deferred and other tax-related assets. Income tax expense for the subsidiaries not included in the Chapter 11 filing was $.3 million during the period ended March 28, 1999. The Company recorded an income tax benefit of approximately $3.0 million during the period ended March 28, 1999, which was offset by an increase in the valuation allowances with respect to its net deferred and other tax-related assets as realization is dependent upon sufficient taxable income in the future. LIQUIDITY AND CAPITAL RESOURCES On a pro forma basis, the cash flows for the eight weeks ended March 26, 2000 (Successor Company) and five weeks ended January 28, 2000 (Predecessor Company) have been combined for purposes of comparison to the thirteen weeks ended March 28, 1999. During the first quarter of 2000, cash flow from earnings (losses) and non-cash charges was a negative $1.8 million compared to $.8 million in the first quarter of 1999. Despite improved operating results, the decrease in cash flow was caused by the costs associated with the exit from bankruptcy. During the first quarter of 2000, cash flow was positively impacted by a $8.5 million reduction in accounts receivable and inventories. The positive cash flow was offset by a decrease in accounts payable and checks issued but not -24- cleared. Cash flow was also positively impacted by $2.3 million of proceeds from property and equipment sales and $.9 million in scheduled repayments of advances to an unconsolidated subsidiary. Capital expenditures were $1.8 million for the first quarter of 2000 compared to capital expenditures of $11.7 million, including approximately $.7 million of computer software and consulting costs, for the first quarter of 1999. Capital spending is expected to be approximately $28.0 million during 2000 which the Company expects will be funded through a combination of internally generated funds and borrowings under the Credit Facility. Cash produced from operations and cash and short-term investments supported an additional investment of $1.2 million in the Company's Goodbaby joint venture in China during the first quarter of 2000. On January 28, 2000, the Company entered into the Credit Facility. The maximum borrowing under the Credit Facility may not exceed the lesser of $95.0 million or an amount determined by a borrowing base formula. The borrowing base formula is comprised of certain specified percentages of eligible accounts receivable, eligible inventory, equipment and personal property and real property of the Company. The Credit Facility has a sub-limit of $15.0 million for the issuance of letters of credit. Borrowings under the Credit Facility are secured by a security interest in, pledge of and lien on substantially all of the Company's North American assets and properties and the proceeds thereof. Borrowings under the Credit Facility are guaranteed by certain domestic subsidiaries and may be used to fund working capital and other general corporate purposes including acquisitions and investments in existing and new international joint ventures. The Credit Facility contains customary restrictive covenants, including among other things, a prohibition on dividends, limitations on the creation of additional liens and indebtedness, limitations on capital expenditures, investments, loans and advances, the sales of assets and transactions with affiliates. Financial covenants include the maintenance of minimum earnings before interest, taxes, depreciation and amortization, fixed charges, coverage ratio, tangible net worth and a maximum leverage ratio. The Credit Facility provides that borrowings will bear interest at a rate of 1.50 percent in excess of Citibank's base rate, or at the Company's option, a rate of 2.50 percent in excess of the reserve adjusted eurodollar rate for interest periods of one, two, three or six months. After March 31, 2001, borrowing rates will be subject to a pricing grid based upon the Company's leverage ratio and could decrease by a maximum of .5 percent and increase by a maximum of .25 percent. The Company will pay a commitment fee of .5 percent per annum on the unused portion of the Credit Facility, a letter of credit fee equal to 2.75 percent per annum on the average outstanding letters of credit and certain other fees. On January 28, 2000, the Company borrowed approximately $15.0 million to consummate the Plan which was primarily used to extinguish $13.0 million in pre-petition liabilities subject to compromise. As of March 26, 2000, the Company had approximately $11.0 million of borrowings and $2.0 million in letters of credit outstanding under the Credit Facility. In connection with the Chapter 11 filing, on January 30, 1998, the Bankruptcy Court entered a Final Order approving the DIP Credit Facility as provided under the Revolving Credit and Guarantee Agreement dated as of January 7, 1998, among the Company, as Borrower, certain subsidiaries of the Company, as guarantors, and a bank group led by The Chase Manhattan Bank ("Chase"). Pursuant to the terms of the DIP Credit Facility, as amended and restated as of June 14, 1999, Chase and a syndicate of banks made available to the Company a revolving credit and letter of credit facility in an aggregate principal amount of $75.0 million. The Company's maximum borrowing under the DIP Credit Facility could not exceed the lesser of $75.0 million or an available amount as determined by a borrowing base formulation. The borrowing base formulation was comprised of certain specified percentages of eligible accounts receivable, eligible inventory, equipment and personal and real property of the Company. The DIP Credit Facility had a sublimit of $10.0 million for the issuance of letters of credit. The DIP Credit Facility expired on January 28, 2000 in accordance with its terms and was replaced with the Credit Facility. At December 26, 1999, there were no outstanding direct borrowings under the DIP Credit Facility. The Company had an aggregate of $2.0 million in letters of credit issued under the DIP Credit Facility at December 26, 1999. 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 -25- deferred income taxes include temporary differences due to reserves not currently deductible ($47.8 million) and operating loss carryforwards ("NOLs") ($27.2 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 $225.5 million in future taxable income. -Accordingly, the Company has estimated that this limitation on the annual utilization of built-in deductions will be approximately $6.8 million. The Company currently has fully reserved its net deferred tax asset of $86.8 million. See "--Income Taxes." RISKS AND UNCERTAINTIES INCREASED COSTS. As a part of the License Agreements entered into in connection with the Company's settlements with P&G and K-C, the Company has incurred and will continue to incur significant added costs in the form of running royalties payable to both parties for sales of the licensed diaper and training pant products. While the Company believes that the royalties being charged by P&G and K-C under their respective License Agreements are approximately the same royalties that will be paid by the Company's major store brand competitors for similar patent rights, the royalties will have a material adverse impact on the Company's future financial condition and results of operations. While these royalty costs have been partially offset by projected raw material cost savings related to the conversion to a dual cuff product, the Company's overall raw material costs have increased. Further, the Company's operating results may be adversely affected by anticipated increases in raw materials prices, primarily fluff pulp, in 2000. In addition, as a part of the License Agreement entered into in connection with the K-C Settlement Agreement, the Company has changed to a new SAP for its diapers and training pants which exhibits certain performance characteristics. The Company experienced certain product performance issues which it believes impacted volume for the first half of 1999. The Company is encountering increased product costs due to the increased price and usage of the new SAP. While the Company is working diligently with its SAP suppliers to develop a more cost-effective alternative, the Company cannot predict at this time whether or when the added costs will be fully offset. The Company expects that these increased product costs will have a material adverse impact on its financial condition and results of operations for at least 2000 and potentially beyond. PRICING. In the fourth quarter of 1998 the Company implemented a price increase of 5 percent. A significant part of this price increase was required to offset the increased costs of certain of the Company's infant care product designs. The Company has realized some of the benefit of the price increase. However, competitive factors have prevented and may continue to prevent the Company from realizing the full benefit of the price increase. Additional price increases are needed to fully offset the added royalty cost to be incurred by the Company pursuant to the P&G and K-C settlements described above. Should the Company not be able to realize future price increases, its margins are expected to continue to be negatively impacted. VOLUME. During the fourth quarter of 1999, one of the Company's major customers began shifting a significant portion of the Company's existing volume to a competitor. The Company expects to offset the loss of this business with new product introductions that began rollout during the third quarter of 1999 with the same customer. During the fourth quarter of 1999, another large customer began shifting the Company's diaper volume to another store brand competitor. This loss of business is expected to negatively impact results for 2000. REALIZATION OF INVESTMENT IN FEMININE CARE AND ADULT INCONTINENCE BUSINESS. Given the slow start-up of the feminine care and adult incontinence business, which was exacerbated by the Company's Chapter 11 filing, and given the resulting feminine care and adult incontinence losses, the Company's ability to recover its investment in such business is highly uncertain. The Company's ability to recover its investment is dependent upon the successful execution of the Company's feminine care and adult incontinence business plan. There can be no assurances, however, that such improved results will be realized. BRANDED PRODUCT INNOVATIONS. Because of the emphasis on product innovations in the disposable diaper, feminine care and adult incontinence markets, patents and other intellectual property rights are an important competitive factor. The national branded manufacturers have sought to vigorously enforce their patent rights. Patents held by the national branded manufacturers could severely limit the Company's ability to keep up with branded product innovations by prohibiting the Company from introducing products with comparable features. P&G and K-C have also heavily promoted diapers in the multi-pack configuration. These packages offer a lower -26- unit price to the retailer and consumer. It is possible that the Company may continue to realize lower selling prices and/or lower volumes as a result of these initiatives. INCREASED FINANCIAL LEVERAGE. In connection with the Plan, the Company issued the New Notes. As a result of this increased leverage, the Company's principal and interest obligations have increased substantially. The degree to which the Company is leveraged could adversely affect the Company's ability to obtain additional financing for working capital, acquisitions or other purposes and could make it more vulnerable to economic downturns and competitive pressures. The Company's increased leverage could also adversely affect its liquidity and its ability to fund capital expenditures, as a substantial portion of available cash from operations will have to be applied to meet debt service requirements. The indenture related to the New Notes (the "Indenture") provides that, if certain coverage tests are not met, interest on the New Notes may be paid in kind for the first two years. The Indenture contains customary financial covenants restricting the payments of dividends, the repurchase of the Company's stock, the issuance of additional equity or the incurrence of additional indebtedness. Also in connection with the Plan, on January 28, 2000, the Company entered into the Credit Facility. The Credit Facility contains customary financial covenants. Based upon anticipated improvements in the Company's operations and certain cost savings measures, the Company believes that its cash flows from operations, borrowings under the Credit Facility and other sources of liquidity, will be adequate to meet the Company's anticipated requirements for working capital, capital expenditures, interest payments and scheduled principal payments for the foreseeable future. There can be no assurance, however, that anticipated improvements in operations and cost savings will be realized. If the Company is unable to generate sufficient cash flows from operations in the future, it may be required to refinance all or a portion of its existing debt or to obtain additional financing. There can be no assurance that any such refinancing would be possible or that any additional financing could be obtained on terms that are favorable or acceptable to the Company. MARKET FOR THE COMPANY'S COMMON STOCK. Pursuant to the Plan, Wellspring, and its affiliates purchased 11,516,405 shares, or approximately 97.4 percent, of the Company's new common stock. Approximately 309,800 shares, or 2.6 percent of the new common stock, was distributed under the Plan to the Company's then-existing stockholders and purchased through the Rights Offering pursuant to the Plan. The Company's common stock is currently quoted on OTCBB under the symbol PGTR. SUBSEQUENT EVENT On May 4, 2000, the Board of Directors elected Michael T. Riordan as the Company's President & Chief Executive Officer and a member of the Board of Directors effective immediately. At the same time, the Board accepted the resignation of Bobby V. Abraham, as the Company's Chief Executive Officer and from the Company's Board of Directors effective May 4, 2000. 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 STANDARD 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 -27- 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. 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 (the "Delaware Judgment") 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, which are exhibits to the Settlement Agreement, with respect to certain of the patents asserted by P&G in its proof of claim, including those asserted in the Delaware action. The U.S. and Canadian patent rights licensed by the Company permitted the Company to convert to a dual cuff baby diaper design. While the Company believes that the royalty rates being charged by P&G are the same royalties that will be paid by the Company's major store brand competitors for similar patent rights, these royalties, together with royalties to be paid to K-C described herein, have had, and will continue to have, a material adverse impact on the Company's future financial condition and results of operations. While these royalty costs have been partially offset by projected raw material cost savings related to the conversion to a dual cuff design, the Company's overall raw material costs have increased. These royalty costs have been partially offset by price increases announced by the Company in the fourth quarter of 1998 and will continue to be offset to the extent such price increases are maintained. KIMBERLY-CLARK CORPORATION V. PARAGON TRADE BRANDS, INC. - On October 26, 1995, K-C filed a lawsuit against the Company in the U.S. District Court in Dallas, Texas, alleging infringement by the Company's products of two K-C patents relating to dual cuffs. As a result of the Company's Chapter 11 filing, the proceedings in the K-C litigation were stayed. On March 19, 1999, the Company entered into a Settlement Agreement with K-C which fully and finally settled all matters related to the Texas action, including the Company's counterclaims, and K-C's proof of claim filed in the Company's Chapter 11 reorganization proceeding. The K-C Approval Order was issued by the Bankruptcy Court on August 6, 1999. As a part of the settlement, the Company entered into License Agreements for the U.S. and Canada, which are exhibits to the Settlement Agreement, with respect to the patents asserted by K-C in the Texas action. The patent rights licensed by the Company from K-C permitted the Company to convert to a dual cuff diaper design. -28- The Company believes that the overall effective royalty rate that the Company will pay to K-C, together with royalties to be paid to P&G described above, has had, and will continue to have, a material adverse impact on the Company's future financial condition and results of operations. While these royalty costs have been partially offset by projected raw material cost savings related to the conversion to a dual cuff design, the Company's overall raw material costs have increased. These royalty costs have been partially offset by price increases announced by the Company in the fourth quarter of 1998 and will continue to be offset to the extent such price increases are maintained. As a part of the K-C License Agreement, K-C has agreed not to sue the Company on two of K-C's patents related to the use of SAP in diapers and training pants, so long as the Company uses SAP which exhibits certain performance characteristics (the "SAP Safe Harbor"). The Company experienced certain product performance issues the Company believes may have been related to the SAP the Company initially converted to in December of 1998. In February 1999, the Company converted to a new SAP. The Company is encountering increased product costs due to the increased price and usage of the new SAP. While the Company is working diligently with its SAP suppliers to develop a more cost-effective alternative which is still within the SAP Safe Harbor, the Company cannot predict at this time whether or when the added costs will be fully offset. The Company expects that these increased product costs will have a material adverse impact on its financial condition and results of operations for at least 2000 and potentially beyond. IN RE PARAGON TRADE BRANDS, INC. - As described above, on December 30, 1997, the Delaware District Court issued a Judgment and Opinion in the Company's lawsuit with P&G finding that two of P&G's diaper patents were valid and infringed by the Company's "Ultra" disposable baby diapers, while also rejecting the Company's patent infringement claim against P&G. Judgment was entered on January 6, 1998. While a final damages number was not entered by the Delaware District Court until June 2, 1998, the Company originally estimated the liability and associated litigation costs to be approximately $200 million. The amount of the award resulted in violation of certain covenants under the Company's bank loan agreements. As a result, the issuance of the Delaware Judgment and the uncertainty it created caused an immediate and critical liquidity issue for the Company which necessitated the Chapter 11 filing. Subsequently, damages of approximately $178.4 million were entered against Paragon by the Delaware District Court on June 2, 1998. At the same time, the Delaware District Court entered injunctive relief agreed upon by P&G and the Company. See "--THE PROCTER & GAMBLE COMPANY V. PARAGON TRADE BRANDS, INC.," above. The Chapter 11 filing prevented P&G from placing liens on the Company's assets, permitted the Company to appeal the Delaware District Court's decision in an orderly fashion and afforded the Company the opportunity to resolve liquidated and unliquidated claims against the Company which arose prior to the Chapter 11 filing. On February 2, 1999, the Company entered into a Settlement Agreement with P&G which fully and finally settled all matters related to the Delaware Judgment, the Company's appeal of the Delaware Judgment, P&G's motion to find the Company in contempt of the Delaware Judgment and P&G's proof of claim filed in the Company's Chapter 11 reorganization proceeding. See "--THE PROCTER & GAMBLE COMPANY V. PARAGON TRADE BRANDS, INC.," above. On March 19, 1999, the Company entered into a Settlement Agreement with K-C which fully and finally settled all matters related to the Texas action, including the Company's counterclaims, and K-C's proof of claim filed in the Company's Chapter 11 reorganization proceeding. See "--KIMBERLY-CLARK CORPORATION V. PARAGON TRADE BRANDS, INC.," above. On or about November 15, 1999, the Company and the Creditors' Committee, as co-proponents, filed the Plan and Disclosure Statement with the Bankruptcy Court. The Plan incorporated the Wellspring Transaction. By order dated November 18, 1999, the Bankruptcy Court approved the Disclosure Statement. At such time, the Bankruptcy Court also approved certain voting procedures and established January 7, 2000 as the voting deadline for the Plan and January 13, 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. -29- 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 March 26, 2000, there were $11 million in direct borrowings outstanding under this facility and an aggregate of $2 million in letters of credit issued thereunder. 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") filed suit in the U.S. District Court in Delaware against the Company for allegedly infringing a certain K-C patent related to a method and apparatus for attaching a graphic patch to a disposable absorbent garment. The suit seeks injunctive relief, unspecified treble damages, interest and attorneys' fees and expenses. The Company is currently evaluating the suit. OTHER - The Company is also a party to other legal activities generally incidental to its activities. Although the final outcome of any legal proceeding or dispute is subject to a great many variables and cannot be predicted with any degree of certainty, the Company presently believes that any ultimate liability resulting from any or all legal proceedings or disputes to which it is a party will not have a material adverse effect on its financial condition or results of operations. ITEM 3. DEFAULTS IN SENIOR SECURITIES At December 28, 1997, the Company maintained a $150 million revolving credit facility with a group of nine financial institutions available through February 2001. At December 28, 1997, borrowings under this credit facility totaled $70 million. The Company also had access to short-term lines of credit on an uncommitted basis with several major banks. At December 28, 1997, the Company had approximately $50 million in uncommitted lines of credit. Borrowings under these lines of credit totaled $12.8 million at December 28, 1997. The Chapter 11 filing resulted in a default under its pre-petition revolving credit facility and borrowings under its uncommitted lines of credit. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits
EXHIBIT DESCRIPTION ------- ----------- 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(2) Exhibit 10.2 Intellectual Property Agreement, dated as of February 2, 1993, between Weyerhaeuser and Paragon(2) Exhibit 10.3 License, dated as of February 2, 1993, between Weyerhaeuser and Paragon(2) Exhibit 10.4 Sublicense, dated as of February 2, 1993, between Weyerhaeuser and Paragon(2) Exhibit 10.5 Technology Agreement, dated as of October 15, 1987, by and between Weyerhaeuser and Johnson and Johnson, as amended(2) -30- Exhibit 10.6 Letter Supply Agreement between Weyerhaeuser and Paragon dated as of October 22, 1997(3) Exhibit 10.7* Employment Agreement, dated as of August 11, 1998, between Paragon and Bobby V. Abraham(4) Exhibit 10.8* Employment Agreement, dated as of August 11, 1998, between Paragon and David W. Cole(4) Exhibit 10.9* Employment Agreement, dated as of August 11, 1998, between Paragon and Alan J. Cyron(4) Exhibit 10.10* Employment Agreement, dated as of August 11, 1998, between Paragon and Arrigo D. (Rick) Jezzi(4) Exhibit 10.11* Employment agreement, dated as of August 11, 1998, between Paragon and Robert E. McClain(4) Exhibit 10.12* Employment Agreement, dated as of August 11, 1998, between Paragon and Catherine O. Hasbrouck(4) Exhibit 10.13* Employment Agreement, dated as of August 11, 1998, between Paragon and Kevin P. Higgins(4) Exhibit 10.14* Paragon Trade Brands, Inc. Confirmation Retention Plan for Top Eight Executives and Summary Plan Description(4) Exhibit 10.15* Paragon Trade Brands, Inc. Stock Option Plan(1) Exhibit 10.15.1* Paragon Trade Brands, Inc. Stock Option Plan for Non-Employee Directors Exhibit 10.16 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 10.16.1 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 10.17 Indemnification Agreements, dated as of February 2, 1993, between Weyerhaeuser and Bobby V. Abraham and Gary M. Arnts(2) Exhibit 10.18 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 10.19** Sales Contract, dated as of January 30, 1996, between Hoechst Celanese Corporation and Paragon Trade Brands, Inc.(6) Exhibit 10.20** Sales Contract, dated as of April 30, 1998, between Clariant Corporation and Paragon Trade Brands, Inc.(7) Exhibit 10.21 Lease Agreement between Cherokee County, South Carolina and Paragon Trade Brands, Inc., dated as of October 1, 1996(8) Exhibit 10.22 Settlement Agreement, dated as of February 2, 1999 between Paragon Trade Brands, Inc. and The Procter & Gamble Company(9) -31- Exhibit 10.23 U.S. License Agreement, dated as of February 2, 1999 between The Procter & Gamble Company and Paragon Trade Brands, Inc.(9) Exhibit 10.24 Canadian License Agreement, dated as of February 2, 1999 between The Procter & Gamble Company and Paragon Trade Brands, Inc.(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 Settlement Agreement, dated as of March 19, 1999 between Kimberly-Clark Corporation and Paragon Trade Brands, Inc.(9) Exhibit 10.28 License Agreement Between Kimberly-Clark Corporation and Paragon Trade Brands, Inc., dated as of March 15, 1999(9) Exhibit 10.29 License Agreement Between Kimberly-Clark Corporation and Paragon Trade Brands, Inc., dated as of March 15, 1999(9) Exhibit 10.30 Modified Second Amended Plan of Reorganization(10) Exhibit 10.31 Stock Purchase Agreement by and Between PTB Acquisition Company LLC and Paragon Trade Brands, Inc., dated as of November 16, 1999(11) Exhibit 10.32 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 10.33 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 10.34 Indenture for $182,000,000 11.25% Senior Subordinated Notes due 2005, dated as of January 28, 2000(12) Exhibit 10.35 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 1 to Financial Statements) Exhibit 21.1 Subsidiaries of the Company(9) Exhibit 27 Financial Data Schedule (for SEC use only) - ------------------ *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. -32- (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.
(b) Reports on Form 8-K DOCUMENT DATE ITEM - -------- ---- ---- Report on Form 8-K January 20, 2000 5 Report on Form 8-K/A January 20, 2000 5 Report on Form 8-K February 10, 2000 1 -33- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PARAGON TRADE BRANDS, INC. By /S/ ALAN J. CYRON -------------------------------------- Alan J. Cyron Chief Financial Officer May 10, 2000 -34- EXHIBIT INDEX
EXHIBIT DESCRIPTION ------- ----------- 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(2) Exhibit 10.2 Intellectual Property Agreement, dated as of February 2, 1993, between Weyerhaeuser and Paragon(2) Exhibit 10.3 License, dated as of February 2, 1993, between Weyerhaeuser and Paragon(2) Exhibit 10.4 Sublicense, dated as of February 2, 1993, between Weyerhaeuser and Paragon(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 dated as of October 22, 1997(3) Exhibit 10.7* Employment Agreement, dated as of August 11, 1998, between Paragon and Bobby V. Abraham(4) Exhibit 10.8* Employment Agreement, dated as of August 11, 1998, between Paragon and David W. Cole(4) Exhibit 10.9* Employment Agreement, dated as of August 11, 1998, between Paragon and Alan J. Cyron(4) Exhibit 10.10* Employment Agreement, dated as of August 11, 1998, between Paragon and Arrigo D. (Rick) Jezzi(4) Exhibit 10.11* Employment agreement, dated as of August 11, 1998, between Paragon and Robert E. McClain(4) Exhibit 10.12* Employment Agreement, dated as of August 11, 1998, between Paragon and Catherine O. Hasbrouck(4) Exhibit 10.13* Employment Agreement, dated as of August 11, 1998, between Paragon and Kevin P. Higgins(4) Exhibit 10.14* Paragon Trade Brands, Inc. Confirmation Retention Plan for Top Eight Executives and Summary Plan Description(4) Exhibit 10.15* Paragon Trade Brands, Inc. Stock Option Plan(1) Exhibit 10.15.1* Paragon Trade Brands, Inc. Stock Option Plan for Non-Employee Directors -35- Exhibit 10.16 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 10.16.1 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 10.17 Indemnification Agreements, dated as of February 2, 1993, between Weyerhaeuser and Bobby V. Abraham and Gary M. Arnts(2) Exhibit 10.18 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 10.19** Sales Contract, dated as of January 30, 1996, between Hoechst Celanese Corporation and Paragon Trade Brands, Inc.(6) Exhibit 10.20** Sales Contract, dated as of April 30, 1998, between Clariant Corporation and Paragon Trade Brands, Inc.(7) Exhibit 10.21 Lease Agreement between Cherokee County, South Carolina and Paragon Trade Brands, Inc., dated as of October 1, 1996(8) Exhibit 10.22 Settlement Agreement, dated as of February 2, 1999 between Paragon Trade Brands, Inc. and The Procter & Gamble Company(9) Exhibit 10.23 U.S. License Agreement, dated as of February 2, 1999 between The Procter & Gamble Company and Paragon Trade Brands, Inc.(9) Exhibit 10.24 Canadian License Agreement, dated as of February 2, 1999 between The Procter & Gamble Company and Paragon Trade Brands, Inc.(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 Settlement Agreement, dated as of March 19, 1999 between Kimberly-Clark Corporation and Paragon Trade Brands, Inc.(9) Exhibit 10.28 License Agreement Between Kimberly-Clark Corporation and Paragon Trade Brands, Inc., dated as of March 15, 1999(9) Exhibit 10.29 License Agreement Between Kimberly-Clark Corporation and Paragon Trade Brands, Inc., dated as of March 15, 1999(9) Exhibit 10.30 Modified Second Amended Plan of Reorganization(10) Exhibit 10.31 Stock Purchase Agreement by and Between PTB Acquisition Company LLC and Paragon Trade Brands, Inc., dated as of November 16, 1999(11) -36- Exhibit 10.32 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 10.33 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 10.34 Indenture for $182,000,000 11.25% Senior Subordinated Notes due 2005, dated as of January 28, 2000(12) Exhibit 10.35 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) - ------------------ *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. -37- (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.
-38- EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10Q FOR THE QUARTER ENDED MARCH 26, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 1-MO 2-MOS DEC-31-2000 DEC-31-2000 DEC-27-1999 JAN-29-1999 JAN-28-2000 MAR-26-2000 0 6,003 0 0 0 82,164 0 12,723 0 48,971 0 129,510 0 107,404 0 5,058 0 341,866 0 63,343 0 0 0 0 0 0 0 119 0 120,448 0 341,866 50,738 78,349 50,738 78,349 42,497 63,065 42,497 63,065 0 0 0 0 75 2,857 (8,567) (523) (100) 41 (8,467) (564) 0 0 123,043 0 0 0 114,576 (564) 9.59 (.05) 9.59 (.05)
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