-----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, NYXtpOonwobzx9FJUVP2IykDFmTXRT4Ep0vKryPso2iC629u8dYwWFbq43YozHRO q9FuTpiTiV7npyCtndSxGw== /in/edgar/work/20000804/0000889429-00-000021/0000889429-00-000021.txt : 20000921 0000889429-00-000021.hdr.sgml : 20000921 ACCESSION NUMBER: 0000889429-00-000021 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000625 FILED AS OF DATE: 20000804 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PARAGON TRADE BRANDS INC CENTRAL INDEX KEY: 0000889429 STANDARD INDUSTRIAL CLASSIFICATION: [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: 686107 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 0001.txt QUARTERLY REPORT FOR PERIOD ENDED 6/25/00 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 June 25, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File No. 1-11368 PARAGON TRADE BRANDS, INC. (Exact name of registrant as specified in its charter) DELAWARE 91-1554663 - ---------------------------- ---------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 180 Technology Parkway NORCROSS, GEORGIA 30092 ----------------------- (Address of principal executive offices) (678) 969-5000 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark whether the Registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes X No ----- ----- The number of shares outstanding of the registrant's common stock was 11,996,000 shares ($.01 par value) as of June 25, 2000. Page 1 Exhibit Index on Page 36 PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES INDEX TO FORM 10-Q FILING FOR THE THIRTEEN WEEK PERIOD ENDED JUNE 25, 2000
PAGE NO. PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Statements of Operations 3 Condensed Consolidated Balance Sheets 4 Condensed Consolidated Statements of Cash Flows 5 Condensed Consolidated Statements of Changes in 7 Shareholders' Equity (Deficit) Notes to Condensed Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of 20 Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk 29 PART II. OTHER INFORMATION Item 1. Legal Proceedings 29 Item 2. Changes in Securities (not applicable) Item 3 Defaults Upon Senior Securities 31 Item 4. Submission of Matters to a Vote of Security Holders (not applicable) Item 5. Other Information (not applicable) Item 6. Exhibits and Reports on Form 8-K 31 Signature Page 35 Exhibit Index 36 Exhibits 40
2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) (UNAUDITED)
Successor Predecessor Successor Predecessor Company Company Company Company --------------- --------------- --------------- ----------------------------------- Thirteen Thirteen Twenty-One Five Twenty-Six Weeks Ended Weeks Ended Weeks Ended Weeks Ended Weeks Ended June 25, 2000 June 27, 1999 June 25, 2000 January 28, 2000 June 27, 1999 ------------- ------------- ------------- ---------------- ------------- Sales, net of discounts and allowances.... $ 131,732 $ 117,848 $ 210,081 $ 50,738 $ 244,092 Cost of sales............................. 112,710 103,380 175,775 42,497 212,917 --------------- --------------- --------------- ---------------- --------------- Gross profit.............................. 19,022 14,468 34,306 8,241 31,175 Selling, general and administrative expense.............................. 18,117 19,707 30,873 6,114 41,150 Research and development expenses......... 1,003 935 1,688 317 1,943 Manufacturing operation closing costs..... - 1,491 - - 1,491 --------------- --------------- --------------- ---------------- --------------- Operating profit (loss)................... (98) (7,665) 1,745 1,810 (13,409) Equity in earnings of unconsolidated subsidiaries......................... 1,391 750 1,714 - 1,120 Interest expense(1)....................... 4,300 107 7,157 75 209 Other income, net ........................ 758 519 926 97 1,015 --------------- --------------- --------------- ---------------- --------------- Income (loss) before income taxes, bankruptcy costs and extraordinary item................................. (2,249) (6,503) (2,772) 1,832 (11,483) Bankruptcy costs.......................... - 2,538 - 10,399 4,464 Benefit from income taxes................. (250) (656) (209) (100 (343) ---------------- ---------------- ---------------- ---------------- ---------------- Net loss before extraordinary item........ $ (1,999) $ (8,385) $ (2,563) $ (8,467) $ (15,604) Extraordinary item - gain from discharge of debt.............................. - - - 123,043 - --------------- --------------- --------------- ---------------- --------------- Net income (loss)......................... $ (1,999) $ (8,385) $ (2,563) $ 114,576 $ (15,604) ================ ================ ================ ================ ================ Income (loss) per common share - basic and diluted: Net loss before extraordinary item........ $ (.17) $ (.70) $ (.21) $ (.71) $ (1.31) Extraordinary gain........................ - - - 10.30 - --------------- --------------- --------------- ---------------- --------------- Net income (loss) per common share - basic and diluted.................... $ (.17) $ (.70) $ (.21) $ 9.59 $ (1.31) =============== =============== =============== ================ =============== (1) Contractual interest $ - $ 1,327 $ - $ 569 $ 2,662 =============== =============== =============== ================ ===============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS 3 PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Successor Predecessor Company Company June 25, 2000 December 26, 1999 ------------- ----------------- (Unaudited) ASSETS Cash and cash equivalents.................................................... $ 14,524 $ 11,685 Receivables.................................................................. 74,429 85,976 Inventories.................................................................. 42,526 48,744 Current portion of deferred income taxes..................................... 1,059 5,557 Prepaid expenses............................................................. 2,630 3,745 ------------------- ------------------- Total current assets.................................................... 135,168 155,707 Property and equipment, net ................................................. 94,859 113,637 Construction in progress..................................................... 7,166 6,525 Assets held for sale......................................................... 2,358 3,312 Investment in unconsolidated subsidiary, at cost............................. 20,911 22,929 Investment in and advances to unconsolidated subsidiaries, at equity......... 71,779 56,215 Goodwill .................................................................... - 30,900 Other assets................................................................. 9,344 11,295 ------------------- ------------------- Total assets............................................................ $ 341,585 $ 400,520 =================== =================== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Checks issued but not cleared................................................ $ 5,269 $ 7,525 Accounts payable............................................................. 29,276 34,715 Accrued liabilities.......................................................... 40,463 34,259 ------------------- ------------------- Total current liabilities............................................... 75,008 76,499 Liabilities subject to compromise (Note 1)................................... - 406,723 Long-term debt............................................................... 146,000 - Deferred compensation........................................................ - 211 Deferred income taxes........................................................ 1,014 6,904 ------------------- ------------------- Total liabilities....................................................... 222,022 490,337 Commitments and contingencies (Notes 1 and 12) Shareholders' equity (deficit): Preferred stock: (Predecessor Company) Authorized 10,000,000 shares, no shares issued, $.01 par value........................................ - - Preferred stock: (Successor Company) Authorized 5,000,000 shares, no shares issued, $.01 par value........................................ - - Common stock: (Predecessor Company) Authorized 25,000,000 shares, issued 12,388,464 shares, $.01 par value............................... - 124 Common stock: (Successor Company) Authorized 20,000,000 shares, issued 11,996,000 shares, $.01 par value............................... 120 - Capital surplus.............................................................. 119,840 143,736 Common stock warrants: (Successor Company) Issued 625,821, exercisable at $18.91................................................... 2,275 - Accumulated other comprehensive loss......................................... (109) (1,213) Retained deficit............................................................. (2,563) (222,134) Less: Treasury stock: (Predecessor Company), 438,750 shares, at cost................................................................. - (10,330) ------------------- -------------------- Total shareholders' equity (deficit).................................... 119,563 (89,817) ------------------- -------------------- Total liabilities and shareholders' equity (deficit).................... $ 341,585 $ 400,520 =================== ====================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 4 PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLAR AMOUNTS IN THOUSANDS) (UNAUDITED)
Successor Predecessor Company Company ------- ---------------------------------- Twenty-One Five Twenty-Six Weeks Ended Weeks Ended Weeks Ended June 25, 2000 January 28, 2000 June 27, 1999 ------------- ---------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)................................................. $ (2,563) $ 114,576 $ (15,604) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Extraordinary item - gain from forgiveness of debt........... - (123,043) - Depreciation and amortization................................ 10,081 2,708 17,978 Deferred income taxes........................................ 83 382 (100) Equity in earnings of unconsolidated subsidiaries, net of dividends.................................................. (1,056) - (815) Write-down of assets......................................... 3 173 - Changes in operating assets and liabilities: Accounts receivable.......................................... 5,462 (4,079) 20,107 Inventories and prepaid expenses............................. 11,774 (2,640) 2,129 Accounts payable............................................. (1,168) (6,404) (4,915) Checks issued but not cleared................................ (3,765) 1,509 (5,956) Prepetition reclamation payment authorized by court.......... - - (437) Liabilities subject to compromise............................ - (13,032) - Accrued liabilities.......................................... 3,732 7,254 (3,607) Other............................................................. 1,376 (436) (1,655) ----------------- ---------------- ---------------- Net cash provided by (used in) operating activities.......... 23,959 (23,032) 7,125 ----------------- ---------------- ---------------- CASH FLOWS FROM INVESTING ACTIVITIES: Expenditures for property and equipment........................... (4,654) (745) (12,063) Proceeds from sale of property and equipment...................... 2,299 104 5,870 Repayment of advance to unconsolidated subsidiary, at equity...... 3,367 - - Proceeds from sale of Changing Paradigms, Inc..................... - - 350 Investment in and advances to unconsolidated subsidiaries, at equity.................................................... - (1,200) (800) Other............................................................. 121 1,570 186 ----------------- ---------------- ---------------- Net cash provided by (used in) investing activities.......... 1,133 (271) (6,457) ----------------- ---------------- ---------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from credit facility..................................... - 15,000 - Repayments of credit facility..................................... (15,000) - - Proceeds from sale of common stock................................ 1,050 - - ------------------ --------------- --------------- Net cash provided by (used in) financing activities.......... (13,950) 15,000 - ------------------ --------------- --------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............. 11,142 (8,303) 668 Cash and cash equivalents at beginning of period.................. 3,382 11,685 22,625 ----------------- --------------- --------------- Cash and cash equivalents at end of period........................ $ 14,524 $ 3,382 $ 23,293 ================= =============== ===============
CONTINUED ON NEXT PAGE. 5 PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (DOLLAR AMOUNTS IN THOUSANDS) (UNAUDITED)
Successor Predecessor Company Company ------- ---------------------------------- Twenty-One Five Twenty-Six Weeks Ended Weeks Ended Weeks Ended June 25, 2000 January 28, 2000 June 27, 1999 ------------- ---------------- ------------- Cash paid (received) during the period for: Interest, net of amounts capitalized......................... $ 1,028 $ 232 $ 207 Income taxes................................................. $ (3,048) $ (619) $ 468 Bankruptcy costs............................................. $ 3,640 $ 10,819 $ 3,144 Supplemental non-cash disclosures: Settlement of liabilities subject to compromise.............. $ - $ (393,691) $ - Extinguishment of stock (Predecessor Company)................ $ - $ 24,918 $ - Issuance of stock/warrants (Successor Company)............... $ - $ 121,185 $ - Issuance of senior subordinated notes........................ $ - $ 146,000 $ -
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 6 PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES CONDENSED 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 26, 1999 $ 124 $ 143,736 $ - $ (1,213) $(222,134) $ (10,330) Net Income - - - - 114,576 - Translation adjustment - - - 159 - - Effect of reorganization and fresh-start accounting: Extinguishment of stock (Predecessor Company) (124) (143,736) - 1,054 107,558 10,330 Issuance of stock and warrants (Successor Company) 119 118,791 2,275 - - - - -------- ----------- --------- ---------- ---------- ----------- BALANCE, January 28, 2000 119 118,791 2,275 - - - (unaudited) Net loss - - - - (2,563) - Issue common stock 1 1,049 - - - - Translation adjustment - - - (109) - - -------- ----------- --------- ---------- ---------- ----------- BALANCE, June 25, 2000 (unaudited) $ 120 $ 119,840 $ 2,275 $ (109) $ (2,563) $ - ======== =========== ========= ========== ========== ===========
The following summarizes the changes in the number of shares of capital stock:
Common Stock Common Stock Warrants Treasury Stock ---------------------- ---------------------- ----------------------- BALANCE, December 26, 1999 12,388,464 - 438,750 Extinguishment of stock (Predecessor Company) (12,388,464) - (438,750) Issuance of stock and warrants (Successor Company) 11,891,000 625,821 - --------------------- --------------------- ---------------------- BALANCE, January 28, 2000 (unaudited) 11,891,000 625,821 - Issuance of stock 105,000 - - --------------------- --------------------- ---------------------- BALANCE, June 25, 2000 (unaudited) 11,996,000 625,821 - ===================== ===================== ======================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 7 PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRTEEN AND TWENTY-SIX WEEK PERIOD ENDED JUNE 25, 2000 (DOLLAR AMOUNTS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA) NOTE 1: CHAPTER 11 PROCEEDINGS AND REORGANIZATION The Company previously disclosed that The Procter & Gamble Company ("P&G") had filed a lawsuit against it in the United States District Court for the District of Delaware (the "Delaware District Court") alleging that the Company's "Ultra" disposable baby diaper products infringed two of P&G's dual cuff diaper patents. On December 30, 1997, the Delaware District Court issued a Judgment and Opinion (the "Delaware Judgment"), which found that two of P&G's dual cuff diaper patents were valid and infringed by certain of the Company's disposable diaper products, while also rejecting the Company's patent infringement claims against P&G. While the final damages number of approximately $178,400 was not entered by the Delaware District Court until June 2, 1998, the Company originally estimated the liability and associated litigation costs to be approximately $200,000. The amount of the award resulted in violation of certain covenants under the Company's then-existing bank loan agreements. As a result, the issuance of the Delaware Judgment and the uncertainty it created caused an immediate and critical liquidity issue for the Company. On January 6, 1998, the Company filed for relief under Chapter 11 of the Bankruptcy Code, 11 U.S.C. Section 101 ET SEQ., in the United States Bankruptcy Court for the Northern District of Georgia (Case No. 98-60390) (the "Chapter 11 filing"). None of the Company's subsidiaries were included in the Chapter 11 filing. On February 2, 1999, the Company entered into a Settlement Agreement with P&G which fully and finally settled all matters related to the Delaware Judgment, the Company's appeal of the Delaware Judgment, P&G's motion to find the Company in contempt of the Delaware Judgment and P&G's proof of claim filed in the Company's Chapter 11 reorganization proceeding. The P&G Settlement Agreement was approved by the Bankruptcy Court on August 6, 1999, (the "P&G Approval Order"). The Official Committee of Equity Security Holders (the "Equity Committee") appealed the P&G Approval Order. On October 26, 1995, Kimberly-Clark Corporation ("K-C") filed a lawsuit against the Company in U.S. District Court in Dallas, Texas, alleging infringement by the Company's products of two K-C patents relating to dual cuffs. On March 19, 1999, the Company entered into a Settlement Agreement with K-C which fully and finally settled all matters related to the Texas action, including the Company's counterclaims, and K-C's proof of claim filed in the Company's Chapter 11 reorganization proceeding. The K-C Settlement Agreement was approved by the Bankruptcy Court on August 6, 1999, (the "K-C Approval Order"). The Equity Committee appealed the K-C Approval Order. On or about November 15, 1999, the Company and the Official Committee of Unsecured Creditors (the "Creditors' Committee"), as co-proponents, filed the Second Amended Plan of Reorganization (as subsequently modified through January 13, 2000, the "Plan") and a related Disclosure Statement (as subsequently modified through November 18, 1999, the "Disclosure Statement") with the Bankruptcy Court. The Plan incorporated a proposed investment by Wellspring Capital Management LLC ("Wellspring"), a private investment company, to acquire the Company as part of a plan of reorganization (the "Wellspring Transaction"). By order dated November 18, 1999, the Bankruptcy Court approved the Disclosure Statement. At such time, the Bankruptcy Court also approved certain voting procedures and established January 7, 2000, as the voting deadline for the Plan and January 13, 2000, as the date for a hearing to consider confirmation of the Plan. A confirmation hearing was held by the Bankruptcy Court on January 13, 2000. By Order dated January 13, 2000, the Bankruptcy Court confirmed the Plan. On January 28, 2000, Paragon was reorganized pursuant to the Plan through the consummation of the Wellspring Transaction. As contemplated under the Plan, the Equity Committee withdrew with prejudice its appeals of the P&G Approval Order and the K-C Approval Order. 8 PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) As a result of the Chapter 11 filing, the Company incurred significant costs for professional fees. The Company was also required to pay certain expenses of the Creditors' Committee and the Equity Committee including professional fees, to the extent allowed by the Bankruptcy Court. Pursuant to the Plan, a reserve was established from which any remaining professional fees and expenses related to the Chapter 11 reorganization proceeding will be paid. REORGANIZATION. On January 28, 2000, the Company emerged from Chapter 11 protection as contemplated under the Plan. All pre-petition obligations were discharged. Pursuant to the Plan, Wellspring and certain of its affiliates purchased an aggregate of 11,516,405 shares, or approximately 97 percent, of the common stock of the reorganized Company for cash of $115,200. This cash was paid directly to the creditors of Predecessor Company. See "PART II, ITEM 1: LEGAL PROCEEDINGS." CREDIT FACILITY. On January 28, 2000, the Company and certain subsidiaries of the Company, as guarantors, entered into a three-year $95,000 financing facility (the "Credit Facility") with a bank group led by Citicorp USA, Inc. ("Citicorp"). The maximum borrowing under the Credit Facility may not exceed the lesser of $95,000 or an amount determined by a borrowing base formula. The borrowing base formula is comprised of certain specified percentages of eligible accounts receivable, eligible inventory, equipment and personal and real property of the Company. The Credit Facility has a sub-limit of $15,000 for the issuance of letters of credit. The Credit Facility contains customary financial covenants. SENIOR SUBORDINATED NOTES. On January 28, 2000, the Company issued $146,000 of 11.25 percent senior subordinated notes due 2005 (the "New Notes") as contemplated under the Plan. The New Notes are guaranteed by certain domestic subsidiaries and are not callable until February 1, 2003. Interest is payable semi-annually and during the first two years can be paid in kind if free cash flow, as defined in the indenture, falls below projected levels. The New Notes are subordinated in right of payment to the payment of all senior indebtedness. The New Notes contain customary restrictive covenants. FRESH START ACCOUNTING. The Company has recorded the reorganization and related transactions using "fresh start accounting" as required by Statement of Position 90-7 ("SOP 90-7") issued by the American Institute of Certified Public Accountants. Fresh start accounting was required because there was more than a 50 percent change in the ownership of the Company and the reorganization value of the assets was less than the post-petition liabilities and allowed claims in the bankruptcy. The approximate $360,000 reorganization value of the Company was determined by management, with assistance from independent financial professionals. The methodology employed involved estimation of enterprise value which was determined to be approximately $280,000, including approximately $15,000 in borrowings under the Credit Facility, taking into account a discounted cash flow analysis. Approximately $76,000 of post-petition liabilities were assumed by the Company. Current assets and current liabilities have been recorded at their historical carrying values as such amounts approximate their fair market value. Property and equipment have been recorded at their appraised value as determined by an independent appraisal based on a "continued use value", which assumes that the assets will be used for the purpose for which they were designed and constructed. Property held for sale is valued at estimated net realizable value. The Company's foreign investments were valued based on an estimation of enterprise value taking into account a discounted cash flow analysis. Other non-current assets are stated at historical carrying values which approximate fair value. As the reorganization value was less than the current valuations of the assets, as stated above, the resulting deficit was allocated proportionally to the non-current assets. 9 PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) The effect of the Plan on the Company's consolidated balance sheet as of January 28, 2000, was as follows (unaudited):
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) $ 2,830 $ 143,494 Property and equipment, net.......... 122,878 - (11,372) 111,506 Investments and advances to unconsolidated subsidiaries, at equity.......................... 80,344 - 14,030 94,374 Goodwill ............................ 30,749 - (30,749) - Other assets......................... 10,243 1,224 (2) (1,619) 9,848 ------------------ ---------------- ------------------ -------------- Total assets.................... $ 401,356 $ (15,254) $ (26,880) $ 359,222 ================== ================ ================== ============== Current liabilities.................. $ 81,639 $ (921)(3) $ (4,508) $ 76,210 Liabilities subject to compromise.... 406,220 (406,220)(1)(4)(5)(6) - - Long-term debt....................... - 161,000 (4)(5) - 161,000 Other................................ 2,684 - (1,857) 827 ------------------ --------------- ------------------ -------------- Total liabilities............... 490,543 (246,141) (6,365) 238,037 Common stock......................... 124 (5)(6)(7) - 119 Capital surplus...................... 143,736 (24,945)(6)(7) - 118,791 Common stock warrants................ - 2,275 (1)(6) - 2,275 Foreign currency translation adjustments..................... (1,055) - 1,055 - Accumulated deficit.................. (221,662) 243,232 (6)(7) (21,570) - Treasury stock....................... (10,330) 10,330 (7) - - ------------------- --------------- ------------------ ------------- Shareholders' equity (deficit).. (89,187) 230,887 (20,515) 121,185 ------------------- --------------- ------------------ ------------- Total liabilities and shareholders' equity (deficit) $ 401,356 $ (15,254) $ 26,880 $ 359,222 ================== ================ ================== ============= - ------------------ (1) To record reduction of cash to pay certain liabilities subject to compromise and reduction of certain receivables that were offset against liabilities subject to compromise. (2) To record deferred financing costs of the Credit Facility. (3) To record payment of certain accrued professional fees related to the bankruptcy. (4) To record the extinguishment of liabilities subject to compromise per the Plan. (5) To record the issuance of the New Notes and borrowings under the Credit Facility. (6) To record the issuance of 11,891,000 shares of common stock at $10 per share, issuance of 625,821 warrants to purchase common stock, gain from extinguishment of debt and certain fees arising from confirmation of the Plan. (7) To record the extinguishment of common stock (Predecessor Company). (8) To record the effect of fresh start accounting, including recording assets at their current fair values adjusted for the reorganization value.
10 PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) NOTE 2: BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES BASIS OF PRESENTATION The consolidated financial statements include the accounts of Paragon Trade Brands, Inc. and its wholly-owned subsidiaries. All significant intercompany transactions and accounts have been eliminated. The accompanying consolidated balance sheet as of December 26, 1999, which has been derived from audited financial statements, and the unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information presented not misleading. It is suggested that these consolidated financial statements be read in conjunction with the financial statements and the notes thereto included in the Company's latest annual report on Form 10-K. In the opinion of management, all adjustments necessary for a fair statement of the results of the interim periods have been included. All such interim adjustments are of a normal recurring nature except for the bankruptcy-related costs and the extraordinary gain. The results of operations for the twenty-six week period ending June 25, 2000, should not be regarded as necessarily indicative of the results that may be expected for the full year. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Deposits with banks are federally insured in limited amounts. NEW ACCOUNTING STANDARDS The Financial Accounting Standards Board ("FASB") has issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities," which must be adopted in the Company's fiscal year 2001. This statement establishes accounting and reporting standards for derivative instruments - including certain derivative instruments embedded in other contracts - and for hedging activities. The Company is currently evaluating the impact of the statement on the Company's financial statements. The Emerging Issues Task Force (the "Task Force") of the Financial Accounting Standards Board reached a consensus on Issue 00-14, ACCOUNTING FOR CERTAIN SALES INCENTIVES. The issue addresses the accounting for sales incentives offered voluntarily by a vendor without charge to customers that can be used in, or that are exercisable by a customer as a result of a single exchange transaction. For sales incentives resulting in the right to a rebate, the Task Force concluded that recognition should occur at the date of sale, measured based upon the estimated amount of refunds expected to be claimed by customers. Indicators pointing to the ability to make a reasonable and reliable estimate of the amount of future rebates or refunds were developed. If the amount cannot be reliably estimated, it should be assumed that all customers will request a refund. When recognized, a cash incentive should be classified as a reduction of revenue. Upon application of the consensus, which is required for the Company in the fourth quarter of 2000, prior period financial statements should be reclassified to conform to the consensus. To date, the Company has not completed its analysis of the impact which Issue 00-14 may have on the reported amount of sales. 11 PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) NOTE 3: BANKRUPTCY COSTS Bankruptcy costs were directly associated with the Company's Chapter 11 reorganization proceedings and consisted of the following:
Predecessor Predecessor Company Company ------- -------------------------------------- Thirteen Five Twenty-Six Weeks Ended Weeks Ended Weeks Ended June 27, 1999 January 28, 2000 June 27, 1999 ------------- ---------------- ------------- Professional fees............................... $ 2,464 $ 6,990 $ 4,360 Employee confirmation bonuses................... - 3,308 - Amortization of debtor-in-possession credit facility deferred financing costs... 204 50 408 Other........................................... 16 125 17 Interest income................................. (146) (74) (321) ------------------ ------------------ ----------------- $ 2,538 $ 10,399 $ 4,464 ================== ================== =================
NOTE 4: INCOME TAXES Income tax benefits associated with domestic operating losses and deductible temporary differences for the periods presented have been fully reserved with a valuation allowance on the basis that the realization of such benefits is dependent upon sufficient taxable income in the future. The Company has recorded a valuation allowance for substantially all deferred tax assets as the Company does not believe it is more likely than not that the benefits will be realized. Income tax benefits recognized in the accompanying financial statements for the periods presented relate to recoverable income taxes for jurisdictions outside the United States. The Company accounts for income taxes based on the liability method and, accordingly, deferred income taxes are provided to reflect temporary differences between financial and tax reporting. A significant component of deferred income taxes include temporary differences due to reserves not currently deductible ($46,100) and operating loss carryforwards ("NOLs") ($28,900). These deferred tax assets may only be realized as an offset to future taxable income. Also, the ability to utilize the NOLs and a portion of the other deferred tax assets is subject to limitation under Section 382 of the Internal Revenue Code as a result of the change in ownership that occurred in connection with the Bankruptcy Reorganization. To realize the full benefit of the deferred tax asset, the Company needs to generate approximately $223,400 in future taxable income. Accordingly, the Company has estimated that this limitation on the annual utilization of built-in deductions will be approximately $6,800. The Company currently has fully reserved its net deferred tax asset of $86,000. NOTE 5: COMPREHENSIVE INCOME (LOSS) The following are the components of comprehensive income (loss):
Successor Predecessor Successor Predecessor Company Company Company Company ------- ------- ------- ---------------------------------- Thirteen Thirteen Twenty-One Five Twenty-Six Weeks Ended Weeks Ended Weeks Ended Weeks Ended Weeks Ended June 25, 2000 June 27, 1999 June 25, 2000 January 28, 2000 June 27, 1999 ---------------- ---------------- ---------------- ---------------- --------------- Net income (loss)......................... $ (1,999) $ (8,385) $ (2,563) $ 114,576 $ (15,604) Foreign currency translation adjustment... (55) 307 (109) 159 615 ---------------- ---------------- ---------------- ---------------- --------------- Comprehensive income (loss)............... $ (2,054) $ (8,078) $ (2,672) $ 114,735 $ (14,989) ================ ================ ================ ================ ===============
12 PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) NOTE 6: RECEIVABLES Receivables consist of the following:
Successor Predecessor Company Company ---------------------- ---------------------- June 25, 2000 December 26, 1999 ---------------------- ---------------------- Accounts receivable - trade.................................................. $ 59,432 $ 68,011 Current portion of advances to unconsolidated subsidiary, at equity.......... 11,756 11,059 Other receivables............................................................ 13,085 20,705 ----------------------- ---------------------- 84,273 99,775 Less: Allowance for doubtful accounts....................................... (9,844) (13,799) ----------------------- ---------------------- Net receivables.............................................................. $ 74,429 $ 85,976 ======================= ======================
NOTE 7: INVENTORIES Inventories consist of the following:
Successor Predecessor Company Company ---------------------- ---------------------- June 25, 2000 December 26, 1999 ---------------------- ---------------------- LIFO: Raw materials - pulp.................................................... $ 221 $ 83 Finished goods.......................................................... 22,001 25,235 FIFO: Raw materials - other................................................... 5,836 7,995 Materials and supplies.................................................. 20,180 21,890 ----------------------- --------------------- 48,238 55,203 Reserve for excess and obsolete items................................... (5,712) (6,459) ----------------------- --------------------- Net inventories.............................................................. $ 42,526 $ 48,744 ======================= =====================
NOTE 8: PROPERTY AND EQUIPMENT Property and equipment, at cost, are as follows:
Successor Predecessor Company Company ---------------------- ---------------------- June 25, 2000 December 26, 1999 ---------------------- ---------------------- Land $ 2,902 $ 3,444 Buildings and improvements................................................... 17,026 39,037 Machinery and equipment...................................................... 87,844 248,928 ----------------------- ---------------------- 107,772 291,409 Less: Allowance for depreciation............................................ (12,913) (177,772) ----------------------- ---------------------- Net property and equipment................................................... $ 94,859 $ 113,637 ======================= ======================
13 PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) NOTE 9: ACCRUED LIABILITIES Accrued liabilities are as follows:
Successor Predecessor Company Company ---------------------- ---------------------- June 25, 2000 December 26, 1999 ---------------------- ---------------------- Payroll - wages and salaries, incentive awards, retirement, vacation and severance pay.............................................. $ 8,503 $ 8,369 Coupons and promotions....................................................... 8,819 8,214 Royalties.................................................................... 9,702 8,225 Interest .................................................................... 6,723 - Other........................................................................ 6,716 9,451 ---------------------- ---------------------- Total........................................................................ $ 40,463 $ 34,259 ====================== ======================
NOTE 10: LONG-TERM DEBT Long-term debt is as follows:
Successor Predecessor Company Company ---------------------- ---------------------- June 25, 2000 December 26, 1999 ---------------------- ---------------------- 11.25% Senior subordinated notes due 2005.................................... $ 146,000 $ - Credit Facility borrowings................................................... - - ---------------------- ---------------------- $ 146,000 $ - ====================== ======================
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. CREDIT FACILITY. On January 28, 2000, the Company and certain subsidiaries of the Company, as guarantors, entered into a three-year $95,000 financing facility (the "Credit Facility") with a bank group led by Citicorp USA, Inc. ("Citicorp"). The maximum borrowing under the Credit Facility may not exceed the lesser of $95,000 or an amount determined by a borrowing base formula. The borrowing base formula is comprised of certain specified percentages of eligible accounts receivable, eligible inventory, equipment and personal and real property of the Company. The Credit Facility has a sub-limit of $15,000 for the issuance of letters of credit. The Credit Facility contains customary financial covenants. As of June 25, 2000, there was an aggregate of $5,100 in letters of credit issued under the Credit Facility and no direct borrowings. See "PART I, ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - RISKS AND UNCERTAINTIES". 14 PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) NOTE 11: INCOME (LOSS) PER COMMON SHARE Following is a reconciliation of the numerators and denominators of the basic and diluted income (loss) per common share:
Successor Predecessor Successor Predecessor Company Company Company Company ------- ------- ------- -------------------------------- Thirteen Thirteen Twenty-One Five Twenty-Six Weeks Ended Weeks Ended Weeks Ended Weeks Ended Weeks Ended June 25, 2000 June 27, 1999 June 25, 2000 January 28, 2000 June 27, 1999 ---------------- ---------------- ---------------- ---------------- --------------- Net (loss) income......................... $ (1,999) $ (8,385) $ (2,563) $ 114,576 $ (15,604) ================ ================ ================ ================= =============== Weighted average number of common shares used in basic and diluted EPS (000's) 11,996 11,949 11,944 11,950 11,949 ================ ================ ================ ================ =============== Basic and diluted income(loss) per common share......................... $ (.17) $ (.70) $ (.21) $ 9.59 $ (1.31) ================ ================ ================ ================ ===============
Common stock warrants and options during the periods presented were not included in the calculation because the warrants' and options' exercise prices were greater than the average market price of the common shares for the respective periods. Diluted and basic income (loss) per share are the same for each of the periods ended June 25, 2000, January 28, 2000 and June 27, 1999, because the computation of diluted income (loss) per share was anti-dilutive. NOTE 12: LEGAL PROCEEDINGS THE PROCTER & GAMBLE COMPANY V. PARAGON TRADE BRANDS, INC. - P&G filed a lawsuit in January 1994 in the Delaware District Court alleging that the Company's "Ultra" infant disposable diaper products infringed two of P&G's dual cuff diaper patents. On December 30, 1997, the Delaware District Court issued a Judgment and Opinion finding that P&G's dual cuff patents were valid and infringed, while at the same time finding the Company's patent to be invalid, unenforceable and not infringed by P&G's products. Judgment was entered on January 6, 1998. Damages of approximately $178,400 were entered against Paragon by the Delaware District Court on June 2, 1998. At the same time, the Delaware District Court entered injunctive relief agreed upon by P&G and the Company. The Delaware Judgment had a material adverse effect on the Company's financial position and its results of operations. As a result of the District Court's Judgment, the Company filed for relief under Chapter 11 of the Bankruptcy Code, 11 U.S.C. Section 101 ET seq., in the United States Bankruptcy Court for the Northern District of Georgia (Case No. 98-60390) on January 6, 1998. See "--IN RE PARAGON TRADE BRANDS, INC.," below. On February 2, 1999, the Company entered into a Settlement Agreement with P&G which fully and finally settled all matters related to the Delaware Judgment, the Company's appeal of the Delaware Judgment, P&G's motion to find the Company in contempt of the Delaware Judgment and P&G's proof of claim filed in the Company's Chapter 11 reorganization proceeding. The P&G Approval Order was issued on August 6, 1999. As a part of the settlement, the Company entered into License Agreements for the U.S. and Canada with respect to certain of the patents asserted by P&G in its proof of claim, including those asserted in the Delaware action. The U.S. and Canadian patent rights licensed by the Company permitted the Company to convert to a dual cuff baby diaper design. 15 PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) While the Company believes that the royalty rates being charged by P&G are the same royalties that will be paid by the Company's major store brand competitors for similar patent rights, these royalties, together with royalties to be paid to K-C described herein, have had, and will continue to have, a material adverse impact on the Company's future financial condition and results of operations. While these royalty costs have been partially offset by projected raw material cost savings related to the conversion to a dual cuff design, the Company's overall raw material costs have increased. KIMBERLY-CLARK CORPORATION V. PARAGON TRADE BRANDS, INC. - On October 26, 1995, K-C filed a lawsuit against the Company in the U.S. District Court in Dallas, Texas, alleging infringement by the Company's products of two K-C patents relating to dual cuffs. As a result of the Company's Chapter 11 filing, the proceedings in the K-C litigation were stayed. On March 19, 1999, the Company entered into a Settlement Agreement with K-C which fully and finally settled all matters related to the Texas action, including the Company's counterclaims, and K-C's proof of claim filed in the Company's Chapter 11 reorganization proceeding. The K-C Approval Order was issued by the Bankruptcy Court on August 6, 1999. As a part of the settlement, the Company entered into License Agreements for the U.S. and Canada with respect to the patents asserted by K-C in the Texas action. The patent rights licensed by the Company from K-C permitted the Company to convert to a dual cuff diaper design. The Company believes that the overall effective royalty rate that the Company will pay to K-C, together with royalties to be paid to P&G described above, has had, and will continue to have, a material adverse impact on the Company's future financial condition and results of operations. While these royalty costs have been partially offset by projected raw material cost savings related to the conversion to a dual cuff design, the Company's overall raw material costs have increased. As a part of the K-C License Agreement, K-C has agreed not to sue the Company on two of K-C's patents related to the use of Super Absorbent Polymer ("SAP") in diapers and training pants, so long as the Company uses SAP which exhibits certain performance characteristics (the "SAP Safe Harbor"). The Company has encountered increased product costs due to the increased price and usage of new SAP within the SAP Safe Harbor. The Company cannot predict at this time whether or when the added costs will be fully offset. IN RE PARAGON TRADE BRANDS, INC. - As described above, on December 30, 1997, the Delaware District Court issued a Judgment and Opinion in the Company's lawsuit with P&G finding that two of P&G's diaper patents were valid and infringed by the Company's "Ultra" disposable baby diapers, while also rejecting the Company's patent infringement claim against P&G. Judgment was entered on January 6, 1998. While a final damages number was not entered by the Delaware District Court until June 2, 1998, the Company originally estimated the liability and associated litigation costs to be approximately $200,000. The amount of the award resulted in violation of certain covenants under the Company's bank loan agreements. As a result, the issuance of the Delaware Judgment and the uncertainty it created caused an immediate and critical liquidity issue for the Company which necessitated the Chapter 11 filing. Subsequently, damages of approximately $178,400 were entered against Paragon by the Delaware District Court on June 2, 1998. At the same time, the Delaware District Court entered injunctive relief agreed upon by P&G and the Company. See "--THE PROCTER & GAMBLE COMPANY V. PARAGON TRADE BRANDS, INC.," above. The Chapter 11 filing prevented P&G from placing liens on the Company's assets, permitted the Company to appeal the Delaware District Court's decision in an orderly fashion and afforded the Company the opportunity to resolve liquidated and unliquidated claims against the Company which arose prior to the Chapter 11 filing. On February 2, 1999, the Company entered into a Settlement Agreement with P&G which fully and finally settled all matters related to the Delaware Judgment, the Company's appeal of the Delaware Judgment, P&G's motion to find the Company in contempt of the Delaware Judgment and P&G's proof of claim filed in the Company's Chapter 11 reorganization proceeding. See "--THE PROCTER & GAMBLE COMPANY V. PARAGON TRADE BRANDS, INC.," above. 16 PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) On March 19, 1999, the Company entered into a Settlement Agreement with K-C which fully and finally settled all matters related to the Texas action, including the Company's counterclaims, and K-C's proof of claim filed in the Company's Chapter 11 reorganization proceeding. See "--KIMBERLY-CLARK CORPORATION V. PARAGON TRADE BRANDS, INC.," above. On or about November 15, 1999, the Company and the Creditors' Committee, as co-proponents, filed the Plan and Disclosure Statement with the Bankruptcy Court. The Plan incorporated the Wellspring Transaction. By order dated November 18, 1999, the Bankruptcy Court approved the Disclosure Statement. At such time, the Bankruptcy Court also approved certain voting procedures and established January 7, 2000 as the voting deadline for the Plan and January 13, 2000, as the date for a hearing to consider confirmation of the Plan. A confirmation hearing was held by the Bankruptcy Court on January 13, 2000. By Order dated January 13, 2000, the Bankruptcy Court confirmed the Plan. On January 28, 2000, Paragon was reorganized pursuant to the Plan through the consummation of the Wellspring Transaction. As contemplated under the Plan, the Equity Committee has withdrawn with prejudice its appeals of the P&G Approval Order and the K-C Approval Order. On January 28, 2000, the Company and certain subsidiaries of the Company, as guarantors, entered into a three-year $95,000 financing facility with a bank group led by Citicorp USA, Inc. This facility is designed to supplement the Company's cash on hand and operating cash flow. As of June 25, 2000, there was an aggregate of $5,100 in letters of credit under the Credit Facility and no direct borrowings. The Credit Facility contains customary financial covenants. Legal fees and costs in connection with the Chapter 11 reorganization proceeding were significant. KIMBERLY-CLARK WORLDWIDE, INC. V. PARAGON TRADE BRANDS, INC. - On March 20, 2000, Kimberly-Clark Worldwide, Inc. ("K-C Worldwide") filed suit in the U.S. District Court in Delaware against the Company for allegedly infringing a patent related to a disposable absorbent garment with a registered graphic. The suit seeks injunctive relief, unspecified treble damages, interest and attorneys' fees and expenses. On July 31, 2000, the Company and K-C Worldwide executed a settlement agreement. The Company believes that the terms and conditions of the settlement agreement will not have a material business or financial impact on the Company. OTHER - The Company is also a party to other legal proceedings generally incidental to its activities. Although the final outcome of any legal proceeding or dispute is subject to a great many variables and cannot be predicted with any degree of certainty, the Company presently believes that any ultimate liability resulting from any or all legal proceedings or disputes to which it is a party will not have a material adverse effect on its financial condition or results of operations. NOTE 13: BANK CREDIT FACILITIES On January 28, 2000, the Company entered into the Credit Facility. The maximum borrowing under the Credit Facility may not exceed the lesser of $95,000 or an amount determined by a borrowing base formula. The borrowing base formula is comprised of certain specified percentages of eligible accounts receivable, eligible inventory, equipment and personal property and real property of the Company. The Credit Facility has a sub-limit of $15,000 for the issuance of letters of credit. Borrowings under the Credit Facility are secured by a security interest in, pledge of and lien on substantially all of the Company's North American assets and properties and the proceeds thereof. Borrowings under the Credit Facility are guaranteed by certain domestic subsidiaries and may be used to fund working capital and other general corporate purposes including acquisitions and investments in existing and new international joint ventures. The Credit Facility contains restrictive covenants, including among other things, a prohibition on dividends, limitations on the creation of additional liens and indebtedness, limitations on capital expenditures, investments, loans and advances, the sales of assets and transactions with affiliates. Financial covenants include the maintenance of minimum earnings before interest, taxes, depreciation and amortization, fixed charges, coverage ratio, tangible net worth and a maximum leverage ratio. 17 PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) The Credit Facility provides that borrowings will bear interest at a rate of 1.50 percent in excess of Citibank's base rate, or at the Company's option, a rate of 2.50 percent in excess of the reserve adjusted eurodollar rate for interest periods of one, two, three or six months. After March 31, 2001, borrowing rates will be subject to a pricing grid based upon the Company's leverage ratio and could decrease by a maximum of .5 percent and increase by a maximum of .25 percent. The Company will pay a commitment fee of .5 percent per annum on the unused portion of the Credit Facility, a letter of credit fee equal to 2.75 percent per annum on the average outstanding letters of credit and certain other fees. As of June 25, 2000, there was an aggregate of $5,100 in letters of credit issued under the Credit Facility and no direct borrowings. See "PART I, ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITIONS - RISKS AND UNCERTAINTIES " herein. NOTE 14: SEGMENT REPORTING The Company operates principally in two segments that are organized based on the nature of the products sold: (I) infant care and (ii) feminine care and adult incontinence. Each operating segment contains closely related products that are unique to that particular segment. Management evaluates the performance of its operating segments separately to individually monitor the different factors impacting financial performance. Segment operating profit is comprised of net sales less cost of sales and selling, general and administrative expense. Loss contingencies and asset impairments are recorded in the appropriate operating segment. Certain administrative expenses common to all operating segments are currently allocated to the infant care operating segment. International investments, financial costs, such as interest income and expense, and income taxes are managed by, and recorded in, the corporate and other operating segment. Net sales and operating profit (loss) for the segments were as follows:
Feminine Care/Adult Thirteen weeks ended June 25, 2000 Infant Care Incontinence Total - -------------------------------------------------------- ----------- ------------ ----- Net sales....................................... $ 128,512 $ 3,220 $ 131,732 Operating profit (loss)......................... 3,654 (3,752) (98) Depreciation and amortization................... 5,682 597 6,279 Thirteen weeks ended June 27, 1999 - -------------------------------------------------------- Net sales....................................... $ 115,089 $ 2,759 $ 117,848 Operating (loss)................................ (4,380) (3,285) 7,665) Depreciation and amortization................... 8,533 1,009 9,542
18 PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Feminine Care/Adult Twenty-one weeks ended June 25, 2000 Infant Care Incontinence Total - -------------------------------------------------------- ----------- ------------ ----- Net sales....................................... $ 204,603 $ 5,478 $ 210,081 Operating profit (loss)......................... 7,362 (5,617) 1,745 Depreciation and amortization................... 9,267 814 10,081 Five weeks ended January 28, 2000 - -------------------------------------------------------- Net sales....................................... $ 49,422 $ 1,316 $ 50,738 Operating profit (loss)......................... 3,005 (1,195) 1,810 Depreciation and amortization................... 2,328 380 2,708 Twenty-six weeks ended June 27, 1999 - -------------------------------------------------------- Net sales....................................... $ 238,445 $ 5,647 $ 244,092 Operating (loss)................................ (6,850) (6,559) (13,409) Depreciation and amortization................... 15,970 2,008 17,978
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 CHAPTER 11 PROCEEDINGS AND REORGANIZATION The Company previously disclosed that The Procter & Gamble Company ("P&G") had filed a lawsuit against it in the United States District Court for the District of Delaware (the "Delaware District Court") alleging that the Company's "Ultra" disposable baby diaper products infringed two of P&G's dual cuff diaper patents. On December 30, 1997, the Delaware District Court issued a Judgment and Opinion which found that two of P&G's dual cuff diaper patents were valid and infringed by certain of the Company's disposable diaper products, while also rejecting the Company's patent infringement claims against P&G. While the final damages number of approximately $178.4 million was not entered by the Delaware District Court until June 2, 1998, the Company originally estimated the liability and associated litigation costs to be approximately $200 million. The amount of the award resulted in violation of certain covenants under the Company's then-existing bank loan agreements. As a result, the issuance of the Delaware Judgment and the uncertainty it created caused an immediate and critical liquidity issue for the Company. On January 6, 1998, the Company filed for relief under Chapter 11 of the Bankruptcy Code, 11 U.S.C. Section 101 ET SEQ., in the United States Bankruptcy Court for the Northern District of Georgia (Case No. 98-60390) (the "Chapter 11 filing"). None of the Company's subsidiaries were included in the Chapter 11 filing. On February 2, 1999, the Company entered into a Settlement Agreement with P&G which fully and finally settled all matters related to the Delaware Judgment, the Company's appeal of the Delaware Judgment, P&G's motion to find the Company in contempt of the Delaware Judgment and P&G's proof of claim filed in the Company's Chapter 11 reorganization proceeding. The P&G Settlement Agreement was approved by the Bankruptcy Court on August 6, 1999, (the "P&G Approval Order"). The Official Committee of Equity Security Holders (the "Equity Committee") appealed the P&G Approval Order. See "PART II, ITEM 1: LEGAL PROCEEDINGS." On October 26, 1995, Kimberly-Clark Corporation ("K-C") filed a lawsuit against the Company in U.S. District Court in Dallas, Texas, alleging infringement by the Company's products of two K-C patents relating to dual cuffs. On March 19, 1999, the Company entered into a Settlement Agreement with K-C which fully and finally settled all matters related to the Texas action, including the Company's counterclaims, and K-C's proof of claim filed in the Company's Chapter 11 reorganization proceeding. The K-C Settlement Agreement was approved by the Bankruptcy Court on August 6, 1999, (the "K-C Approval Order"). The Equity Committee appealed the K-C Approval Order. See "PART II, ITEM 1: LEGAL PROCEEDINGS." On or about November 15, 1999, the Company and the Official Committee of Unsecured Creditors (the "Creditors' Committee"), as co-proponents, filed the Second Amended Plan of Reorganization (as subsequently modified through January 13, 2000, the "Plan") and a related Disclosure Statement (as subsequently modified through November 18, 1999, the "Disclosure Statement") with the Bankruptcy Court. The Plan incorporated a proposed investment by Wellspring Capital Management LLC ("Wellspring"), a private investment company, to acquire the Company as part of a plan of reorganization (the "Wellspring Transaction"). By order dated November 18, 1999, the Bankruptcy Court approved the Disclosure Statement. At such time, the Bankruptcy Court also approved certain voting procedures and established January 7, 2000, as the voting deadline for the Plan and January 13, 2000, as the date for a hearing to consider confirmation of the Plan. A confirmation hearing was held by the Bankruptcy Court on January 13, 2000. By Order dated January 13, 2000, the Bankruptcy Court confirmed the Plan. On January 28, 2000, Paragon was reorganized pursuant to the Plan through the consummation of the Wellspring Transaction. As contemplated under the Plan, the Equity Committee has withdrawn with prejudice its appeals of the P&G Approval Order and the K-C Approval Order. See "PART II, ITEM 1: LEGAL PROCEEDINGS." As a result of the Chapter 11 filing, the Company incurred significant costs for professional fees. The Company was also required to pay certain expenses of the Creditors' Committee and the Equity Committee including professional fees, to the 20 extent allowed by the Bankruptcy Court. Pursuant to the Plan, a reserve was established from which any remaining professional fees and expenses related to the Chapter 11 reorganization proceeding will be paid. See "PART II, ITEM 1: LEGAL PROCEEDINGS." Trading in the common stock of the Company on the New York Stock Exchange ("NYSE") was suspended prior to the opening of trading on July 8, 1999. As of July 9, 1999, the National Association of Securities Dealers, Inc. Over-the-Counter Bulletin Board (the "OTCBB") began publishing quotations of the Company's common stock under the symbol PGNFQ. As a result of the Plan, on February 2, 2000, the OTCBB ceased quotations of the Company's common stock. Quotation of the Company's common stock resumed on the OTCBB as of March 30, 2000, under the symbol PGTR. REORGANIZATION. On January 28, 2000, the Company emerged from Chapter 11 protection as contemplated under the Plan. All pre-petition obligations were discharged. Pursuant to the Plan, Wellspring and certain of its affiliates purchased an aggregate of 11,516,405 shares, or approximately 97 percent, of the common stock of the reorganized Company for cash of $115.2 million. The cash was paid directly to the creditors of Predecessor Company. See "PART II, ITEM 1: LEGAL PROCEEDINGS." CREDIT FACILITY. On January 28, 2000, the Company and certain subsidiaries of the Company, as guarantors, entered into a three-year $95 million financing facility (the "Credit Facility") with a bank group led by Citicorp USA, Inc. ("Citicorp"). The maximum borrowing under the Credit Facility may not exceed the lesser of $95 million or an amount determined by a borrowing base formula. The borrowing base formula is comprised of certain specified percentages of eligible accounts receivable, eligible inventory, equipment and personal property and real property of the Company. The Credit Facility has a sub-limit of $15 million for the issuance of letters of credit. The Credit Facility contains customary financial covenants. SENIOR SUBORDINATED NOTES. On January 28, 2000, the Company issued $146.0 million of 11.25 percent senior subordinated notes due 2005 (the "New Notes") as contemplated under the Plan. The New Notes are guaranteed by certain domestic subsidiaries and are not callable until February 1, 2003. Interest is payable semi-annually and during the first two years can be paid in kind if free cash flow, as defined in the indenture, falls below projected levels. The New Notes are subordinated in right of payment to the payment of all senior indebtedness. The New Notes contain customary restrictive covenants. FRESH START ACCOUNTING. The Company has recorded the reorganization and related transactions using "fresh start accounting" as required by Statement of Position 90-7 ("SOP 90-7") issued by the American Institute of Certified Public Accountants. The Company operates principally in two segments that are organized based on the nature of the products sold: (I) infant care and (ii) feminine care and adult incontinence. Each operating segment contains closely related products that are unique to that particular segment. The results of the Company's international investments in joint ventures in Mexico, Argentina, Brazil and China are reported in the corporate and other segment. RESULTS OF OPERATIONS Effective January 28, 2000, the Company emerged from Chapter 11 bankruptcy proceedings and implemented "fresh start accounting." Accordingly, all assets and liabilities were restated to reflect their respective fair values. The consolidated financial statements after that date are those of a new reporting entity and are not comparable to the Pre-Confirmation periods. However, for purposes of this discussion, the twenty-one weeks ended June 25, 2000, (Post-Confirmation) have been combined with the five weeks ended January 28, 2000, (Pre-Confirmation) and then compared to 26 weeks ended June 27, 1999. Differences between periods due to fresh start accounting adjustments are explained when necessary. The following table is included solely for use in comparative analysis of results of operations, and to complement management's discussion and analysis: 21
Thirteen Weeks Ended Twenty-Six Weeks Ended -------------------- ---------------------- June 25, 2000 June 27, 1999 June 25, 2000 June 27, 1999 ------------- ------------- ------------- ------------- Net sales............................................ $ 131,732 $ 117,848 $ 260,819 $ 244,092 Cost of sales........................................ 112,710 103,380 218,272 212,917 --------------- --------------- ------------- ------------ Gross profit......................................... 19,022 14,468 42,547 31,175 Selling, general and administrative expense.......... 18,117 19,707 36,987 41,150 Research and development expense..................... 1,003 935 2,005 1,943 Manufacturing operation closing costs................ - 1,491 - 1,491 --------------- --------------- ------------- ------------ Operating profit (loss).............................. (98) (7,665) 3,555 (13,409) Equity in earnings of unconsolidated subsidiaries.... 1,391 750 1,714 1,120 Interest expense..................................... 4,300 107 7,232 209 Other income, net.................................... 758 519 1,023 1,015 --------------- --------------- ------------- ------------ Net loss before income taxes, bankruptcy costs and extraordinary item.......................... (2,249) (6,503) (940) (11,483) Bankruptcy costs..................................... - 2,538 10,399 4,464 Benefit from income taxes............................ (250) (656) (309) (343) --------------- --------------- -------------- ------------- Net loss before extraordinary item................... (1,999) (8,385) (11,030) (15,604) Extraordinary item - gain from discharge of debt..... - - 123,043 - --------------- --------------- ------------- ------------ Net income (loss).................................... $ (1,999) $ (8,385) $ 112,013 $ (15,604) =============== =============== ============= ============
THIRTEEN WEEKS ENDED JUNE 25, 2000 COMPARED TO THIRTEEN WEEKS ENDED JUNE 27, 1999 A net loss of $2.0 million was incurred in the second quarter of 2000 compared to a net loss of $8.4 million in the second quarter of 1999. Increased unit volume, improved product mix, reduced manufacturing and selling, general and administrative costs all contributed to the improvement compared to the second quarter of 1999. The second quarter of 2000 results were negatively impacted by approximately $3.2 million of non-recurring costs, primarily severance for former senior management. The second quarter of 1999 results were negatively impacted by the costs associated with cessation of manufacturing operations at the Company's Canadian subsidiary, Paragon Trade Brands (Canada) Inc.'s Brampton, Ontario facility in June 1999. Basic loss per share for the thirteen weeks ended June 25, 2000, was $.17. Comparison to previous periods is not meaningful due to the Company's emergence from bankruptcy and the implementation of fresh start accounting. Infant care operating profit was $3.7 million in the second quarter of 2000 compared to an operating loss of $4.4 million in the second quarter of 1999. Increased unit volume, improved product mix, lower manufacturing costs and lower selling, general and administrative costs contributed to the improved results. Second quarter operating profit was negatively impacted by approximately $3.2 million of non-recurring costs, primarily severance for former senior management. The second quarter of 1999 operating profit was negatively impacted by the costs associated with cessation of manufacturing operations at the Company's Canadian subsidiary, Paragon Trade Brands (Canada) Inc.'s Brampton, Ontario facility in June 1999. Feminine care and adult incontinence operating losses were $3.8 million in the second quarter of 2000 compared to an operating loss of $3.3 million in the second quarter of 1999. Losses are expected to continue until volume is significantly increased to absorb existing manufacturing capacity. The Company experienced greater than anticipated operating losses in its feminine care and adult incontinence businesses and expects these losses to continue near-term. The Company has developed a business plan for its feminine care and adult incontinence business. The Company has not recorded any adjustments in its financial statements relating to the recoverability of the operating assets of the feminine care and adult incontinence business. The Company's ability to recover its investment is dependent upon the successful execution of the Company's feminine care and adult incontinence business plan. While there can be no assurances, management believes that its investment in the feminine care and adult incontinence business is recoverable. See "RISKS AND UNCERTAINTIES" herein. 22 NET SALES Overall net sales were $131.7 million in the second quarter of 2000 compared to $117.8 million in the second quarter of 1999. Infant care net sales increased 11.6 percent to $128.5 million in the second quarter of 2000 compared to $115.1 million in the second quarter of 1999. Unit sales increased 11.9 percent to 811 million units compared to 725 million units in the second quarter of 1999. The increase in net sales and units was due to a favorable product mix associated with the introduction of a new training pant product and the launch of certain destination store brand product and marketing programs. The Company anticipates higher volume during the second half of 2000 compared to 1999 due to the training pant product and destination store brand programs discussed above. In response to competitive initiatives, the Company intends to implement a package count change in the second half of 2000 which may result in an effective price increase. It is difficult to predict the timing and amount of the price increase to be realized. Feminine care and adult incontinence sales increased to $3.2 million in the second quarter of 2000 compared to $2.8 million in the second quarter of 1999 due to the shipment of product to new customers. COST OF SALES Overall cost of sales in the second quarter of 2000 was $112.7 million compared to $103.4 million in the second quarter of 1999. As a percentage of net sales, cost of sales was 85.6 percent in the second quarter of 2000 compared to 87.8 percent in the second quarter of 1999. Infant care cost of sales was $106.0 million in the second quarter of 2000 compared to $97.4 million in the second quarter of 1999. As a percentage of net sales, infant care cost of sales was 82.5 percent in the second quarter of 2000 compared to 84.6 percent in 1999. This decrease in costs as a percentage of sales was due to improved manufacturing efficiencies, lower plant overhead costs, the closure of the Brampton, Canada manufacturing facility during the second quarter of 1999 and lower depreciation costs. These favorable items were partially offset by higher pulp prices. Infant care raw material prices, with the exception of pulp, were at lower price levels in the second quarter of 2000 compared to the second quarter of 1999. Pulp prices started to increase during the second half of 1999 and are expected to increase during the remainder of 2000. Pulp and oil based raw material prices are expected to increase during the remainder of 2000. Infant care depreciation costs were $4.9 million in the second quarter of 2000 compared to $6.7 million in the second quarter of 1999. The decrease is partially due to lower asset values as a result of fresh start accounting. Feminine care and adult incontinence cost of sales was $6.7 million in the second quarter of 2000 compared to $6.0 million in the second quarter of 1999. Overall cost of sales in this segment is expected to remain greater than net sales until volume is significantly increased to absorb existing manufacturing capacity. See "RISKS AND UNCERTAINTIES" herein. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES SG&A expenses were $18.1 million in the second quarter of 2000 compared to $19.7 million in the second quarter of 1999. As a percentage of net sales, these expenses were 13.8 percent in the second quarter of 2000 compared to 16.7 percent in 1999. The decrease in SG&A is primarily attributable to lower sales and marketing expenditures and information technology expenses which more than offset former senior management severance costs. Depreciation and amortization costs included in SG&A decreased to $.8 million in the second quarter of 2000 compared to $1.7 million in the second quarter of 1999. The decrease in depreciation and amortization is partially due to the elimination of goodwill through fresh start accounting. The Company will incur higher packaging artwork and development costs in the second half of 2000 due to the package count change discussed above. RESEARCH AND DEVELOPMENT Research and development expenses were $1.0 million in the second quarter of 2000 compared to $.9 million in the second quarter of 1999. 23 INTEREST EXPENSE Interest expense was $4.3 million in the second quarter of 2000 compared to $.1 million in the second quarter of 1999. The increase is due to interest costs associated with the New Notes bearing an annual interest rate of 11.25 percent and with borrowings under the Credit Facility. There were no borrowings under the DIP Credit Facility during the first quarter of 1999. EQUITY IN EARNINGS OF UNCONSOLIDATED SUBSIDIARIES The equity in earnings of unconsolidated subsidiaries was $1.4 million in the second quarter of 2000 compared to $.8 million in the second quarter of 1999. The increase in earnings reflects improved earnings at Paragon Mabesa International, S.A. de C.V. BANKRUPTCY COSTS There were no direct bankruptcy costs in the second quarter of 2000 compared to $2.5 million in the second quarter of 1999. INCOME TAXES Income tax benefits associated with domestic operating losses and deductible temporary differences for the periods presented have been fully reserved with a valuation allowance on the basis that the realization of such benefits is dependent upon sufficient taxable income in the future. The Company has recorded a valuation allowance for substantially all deferred tax assets as the Company does not believe it is more likely than not that the benefits will be realized. Income tax benefits recognized in the accompanying financial statements for the periods presented relate to recoverable income taxes for jurisdictions outside the United States. TWENTY-SIX WEEKS ENDED JUNE 25, 2000 COMPARED TO TWENTY-SIX WEEKS ENDED JUNE 27, 1999 RESULTS OF OPERATIONS Net income of $112.0 million were reported in the first half of 2000 compared to a net loss of $15.6 million in the first half of 1999. Included in the results for the first half of 2000 was an extraordinary gain of $123.0 million associated with forgiveness of debt that resulted from the reorganization of the Company in accordance with the Plan. Increased unit volume, improved product mix, reduced manufacturing and selling, general and administrative costs all contributed to the operating improvement compared to the first half of 1999. The first half of 2000 results were negatively impacted by approximately $3.6 million of non-recurring costs, primarily severance for former senior management. The first half of 1999 results were negatively impacted by costs associated with price concessions made to export customers to address product acceptance issues and the cessation of manufacturing operations at the Company's Canadian subsidiary, Paragon Trade Brands (Canada) Inc.'s Brampton, Ontario facility in June 1999. Included in the first half of 2000 results are bankruptcy costs of $10.4 million compared to $4.5 million in the first half of 1999. Basic and diluted income per share for the twenty-six weeks ended June 25, 2000, was $9.38. Comparison to other periods is not meaningful due to the Company's emergence from bankruptcy and the related extraordinary gain. Infant care operating profit was $10.4 million in the first half of 2000 compared to an operating loss of $6.9 million in the first half of 1999. Increased unit volume, improved product mix, lower manufacturing costs and lower selling, general and administrative costs contributed to the improved results. First half infant care operating profit was negatively impacted by approximately $3.6 million of non-recurring costs, primarily severance costs for former senior management. The first half of 1999 results were negatively impacted by the costs associated with price concessions made to export customers to address product acceptance issues and the cessation of manufacturing operations at the Company's Canadian subsidiary, Paragon Trade Brands (Canada) Inc.'s Brampton, Ontario facility in June 1999. Feminine care and adult incontinence operating losses were $6.8 million in the first half of 2000 compared to an operating loss of $6.6 million in the first half of 1999. Losses are expected to continue until volume is significantly increased to absorb existing manufacturing capacity. The Company experienced greater than anticipated operating losses in its feminine care and adult incontinence businesses and expects these losses to continue near-term. The Company has developed a business plan for its feminine care and adult incontinence business. The Company has not recorded any adjustments in its financial statements relating to the recoverability of the operating assets of the feminine care and adult incontinence business. The 24 Company's ability to recover its investment is dependent upon the successful execution of the Company's feminine care and adult incontinence business plan. While there can be no assurances, management believes that its investment in the feminine care and adult incontinence business is recoverable. See "RISKS AND UNCERTAINTIES" herein. NET SALES Overall net sales were $260.8 million in the first half 2000 compared to $244.1million in the first half 1999. Infant care net sales increased 6.5 percent to $254.0 million in the first half of 2000 compared to $238.4 million in the first half of 1999. Unit sales increased 4.2 percent to 1,602 million units compared to 1,538 million units in the first half of 1999. The increase in net sales and units was due to a favorable product mix associated with the introduction of a new training pant product and the launch of certain destination store brand product and marketing programs. Feminine care and adult incontinence sales increased to $6.8 million in the first half of 2000 compared to $5.6 million in the first half of 1999 due to the shipment of product to new customers. COST OF SALES Overall cost of sales in the first half of 2000 was $218.3 million compared to $212.9 million in the first half of 1999. As a percentage of net sales, cost of sales was 83.7 percent in the first half of 2000 compared to 87.2 percent in the first half of 1999. Infant care cost of sales was $205.1 million in the first half of 2000 compared to $201.0 million in the first half of 1999. As a percentage of net sales, infant care cost of sales was 80.7 percent in the first half of 2000 compared to 84.3 percent in first half of 1999. This decrease in costs as a percentage of sales was due to improved manufacturing efficiencies, lower plant overhead costs, the closure of the Brampton, Canada manufacturing facility during the second quarter of 1999 and lower depreciation costs. These favorable items were partially offset by higher pulp prices. Infant care raw material prices, with the exception of pulp, were at lower price levels in the first half of 2000 compared to the first half of 1999. Infant care depreciation costs were $9.9 million in the first half of 2000 compared to $12.5 million in first half of 1999. The decrease is partially due to lower asset values as a result of fresh start accounting. Feminine care and adult incontinence cost of sales was $13.2 million for the first half of 2000 compared to $11.9 million in the first half of 1999. Overall cost of sales in this segment is expected to remain greater than net sales until volume is significantly increased to absorb existing manufacturing capacity. See "RISKS AND UNCERTAINTIES" herein. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES SG&A expenses were $37.0 million in the first half of 2000 compared to $41.2 million in the first half of 1999. As a percentage of net sales, these expenses were 14.2 percent in the first half of 2000 compared to 16.9 percent in 1999. The decrease in SG&A is primarily attributable to lower sales and marketing expenditures and information technology expenses which more than offset former senior management severance costs. Depreciation and amortization costs included in SG&A decreased to $1.7 million in the second quarter of 2000 compared to $3.5 million in the first half of 1999. The decrease in depreciation and amortization is partially due to the elimination of goodwill through fresh start accounting. RESEARCH AND DEVELOPMENT Research and development expenses were $2.0 million in the first half of 2000 compared to $1.9 million in the first half of 1999. INTEREST EXPENSE Interest expense was $7.2 million in the first half of 2000 compared to $.2 million in the first half of 1999. The increase is due to interest costs associated with the New Notes bearing an annual interest rate of 11.25 percent and with borrowings under the Credit Facility. There were no borrowings under the DIP Credit Facility during the first half of 1999. 25 EQUITY IN EARNINGS OF UNCONSOLIDATED SUBSIDIARIES The equity in earnings of unconsolidated subsidiaries was $1.7 million in the first half of 2000 compared to $1.1 million in the first half of 1999. The increase in earnings reflects improved earnings at Paragon Mabesa International, S.A. de C.V. BANKRUPTCY COSTS Bankruptcy costs were $10.4 million in the first half of 2000 compared to $4.5 million in the first half of 1999. The increase in costs was primarily due to professional fees associated with the exit from bankruptcy as well as $3.3 million in confirmation bonuses paid to employees. EXTRAORDINARY GAIN FROM DISCHARGE OF DEBT During the period ending January 28, 2000, an extraordinary gain of $123.0 million was recorded for the discharge of indebtedness that resulted from the forgiveness of certain liabilities in accordance with the Company's plan of reorganization. INCOME TAXES Income tax benefits associated with domestic operating losses and deductible temporary differences for the periods presented have been fully reserved with a valuation allowance on the basis that the realization of such benefits is dependent upon sufficient taxable income in the future. The Company has recorded a valuation allowance for substantially all deferred tax assets as the Company does not believe it is more likely than not that the benefits will be realized. Income tax benefits recognized in the accompanying financial statements for the periods presented relate to recoverable income taxes for jurisdictions outside the United States. LIQUIDITY AND CAPITAL RESOURCES On a pro forma basis, the cash flows for the twenty-one weeks ended June 25, 2000, (Successor Company) and the five weeks ended January 28, 2000, (Predecessor Company) have been combined for purposes of comparison to the twenty-six weeks ended June 27, 1999. During the first half of 2000, cash flow from net income (loss) excluding non-cash charges was a negative $1.3 million compared to a positive $1.5 million in the first half of 1999. Despite improved operating results, the decrease in cash flow was caused by the $10.3 million of costs associated with the exit from bankruptcy. During the first half of 2000, cash flow was positively impacted by a $10.5 million reduction in accounts receivable, inventories and prepaid expenses. The positive cash flow was partially offset by a decrease in accounts payable and checks issued but not cleared. Cash flow was also positively impacted by $2.3 million of proceeds from property and equipment sales and $3.4 million in scheduled repayments of advances to an unconsolidated subsidiary. Capital expenditures were $5.4 million for the first half of 2000 compared to capital expenditures of $13.6 million, including approximately $1.5 million of computer software and consulting costs for the first half of 1999. Capital spending is expected to be approximately $32.0 million during 2000 which the Company expects will be funded through a combination of internally generated funds, cash on hand and borrowings under the Credit Facility. Cash produced from operations and cash and cash equivalents supported an additional investment of $1.2 million in the Company's Goodbaby joint venture in China during the first quarter of 2000. On January 28, 2000, the Company entered into the Credit Facility. The maximum borrowing under the Credit Facility may not exceed the lesser of $95.0 million or an amount determined by a borrowing base formula. The borrowing base formula is comprised of certain specified percentages of eligible accounts receivable, eligible inventory, equipment and personal property and real property of the Company. The Credit Facility has a sub-limit of $15.0 million for the issuance of letters of credit. Borrowings under the Credit Facility are secured by a security interest in, pledge of and lien on substantially all of the Company's North American assets and properties and the proceeds thereof. Borrowings under the Credit Facility are guaranteed by certain domestic subsidiaries and may be used to fund working capital and other general corporate purposes including acquisitions and investments in existing and new international joint ventures. The Credit Facility 26 contains customary restrictive covenants, including among other things, a prohibition on dividends, limitations on the creation of additional liens and indebtedness, limitations on capital expenditures, investments, loans and advances, the sales of assets and transactions with affiliates. Financial covenants include the maintenance of minimum earnings before interest, taxes, depreciation and amortization, fixed charges, coverage ratio, tangible net worth and a maximum leverage ratio. The Credit Facility provides that borrowings will bear interest at a rate of 1.50 percent in excess of Citibank's base rate, or at the Company's option, a rate of 2.50 percent in excess of the reserve adjusted eurodollar rate for interest periods of one, two, three or six months. After March 31, 2001, borrowing rates will be subject to a pricing grid based upon the Company's leverage ratio and could decrease by a maximum of .5 percent and increase by a maximum of .25 percent. The Company will pay a commitment fee of .5 percent per annum on the unused portion of the Credit Facility, a letter of credit fee equal to 2.75 percent per annum on the average outstanding letters of credit and certain other fees. On January 28, 2000, the Company borrowed approximately $15.0 million to consummate the Plan which was primarily used to extinguish $13.0 million in pre-petition liabilities subject to compromise. As of June 25, 2000, the Company had an aggregate of $5.1 million in letters of credit under the Credit Facility and no direct borrowings. In connection with the Chapter 11 filing, on January 30, 1998, the Bankruptcy Court entered a Final Order approving the DIP Credit Facility as provided under the Revolving Credit and Guarantee Agreement dated as of January 7, 1998, among the Company, as Borrower, certain subsidiaries of the Company, as guarantors, and a bank group led by The Chase Manhattan Bank ("Chase"). Pursuant to the terms of the DIP Credit Facility, as amended and restated as of June 14, 1999, Chase and a syndicate of banks made available to the Company a revolving credit and letter of credit facility in an aggregate principal amount of $75.0 million. The Company's maximum borrowing under the DIP Credit Facility could not exceed the lesser of $75.0 million or an available amount as determined by a borrowing base formulation. The borrowing base formulation was comprised of certain specified percentages of eligible accounts receivable, eligible inventory, equipment and personal and real property of the Company. The DIP Credit Facility had a sublimit of $10.0 million for the issuance of letters of credit. The DIP Credit Facility expired on January 28, 2000, in accordance with its terms and was replaced with the Credit Facility. FUTURE REALIZATION OF NET DEFERRED TAX ASSET The Company accounts for income taxes based on the liability method and, accordingly, deferred income taxes are provided to reflect temporary differences between financial and tax reporting. A significant component of deferred income taxes includes temporary differences due to reserves not currently deductible ($46.1 million) and operating loss carryforwards ("NOLs") ($28.9 million). These deferred tax assets may only be realized as an offset to future taxable income. Also, the ability to utilize the NOLs and a portion of the other deferred tax assets is subject to limitation under Section 382 of the Internal Revenue Code as a result of the change in ownership that occurred in connection with the Bankruptcy Reorganization. To realize the full benefit of the deferred tax asset, the Company needs to generate approximately $223.4 million in future taxable income. Accordingly, the Company has estimated that this limitation on the annual utilization of built-in deductions will be approximately $6.8 million. The Company currently has fully reserved its net deferred tax asset of $86.0 million. See "--INCOME TAXES." RISKS AND UNCERTAINTIES INCREASED COSTS. As a part of the License Agreements entered into in connection with the Company's settlements with P&G and K-C, the Company has incurred and will continue to incur significant added costs in the form of running royalties payable to both parties for sales of the licensed diaper and training pant products. While the Company believes that the royalties being charged by P&G and K-C under their respective License Agreements are approximately the same royalties that will be paid by the Company's major store brand competitors for similar patent rights, the royalties will have a material adverse impact on the Company's future financial condition and results of operations. While these royalty costs have been partially offset by projected raw material cost savings related to the conversion to a dual cuff product, the Company's overall raw material costs have increased. Further, the Company's operating results may be adversely affected by anticipated increases in raw materials prices, primarily fluff pulp, in 2000. In addition, as a part of the License Agreement entered into in connection with the K-C Settlement Agreement, the Company has changed to a new SAP for its diapers and training pants which exhibits certain performance characteristics.("the SAP Safe Harbor"). The Company has encountered increased product costs due to the increased price and usage of new SAP within the SAP Safe Harbor. The Company cannot predict at this time whether or when the added costs will be fully offset. 27 PRICING. Price increases are needed to fully offset the added royalty cost being incurred by the Company pursuant to the P&G and K-C settlements described above. The Company expects to implement an effective price increase as a result of a package count change that the Company intends to implement in the second half of 2000. Should the Company not be able to realize future price increases, its margins are expected to continue to be negatively impacted. REALIZATION OF INVESTMENT IN FEMININE CARE AND ADULT INCONTINENCE BUSINESS. Given the slow start-up of the feminine care and adult incontinence business, which was exacerbated by the Company's Chapter 11 filing, and given the resulting feminine care and adult incontinence losses, the Company's ability to recover its investment in such business is highly uncertain. The Company's ability to recover its investment is dependent upon the successful execution of the Company's feminine care and adult incontinence business plan. While there can be no assurances, management believes that its investment in the feminine care and adult incontinence business is recoverable. BRANDED PRODUCT INNOVATIONS. Because of the emphasis on product innovations in the disposable diaper, feminine care and adult incontinence markets, patents and other intellectual property rights are an important competitive factor. The national branded manufacturers have sought to vigorously enforce their patent rights. Patents held by the national branded manufacturers could severely limit the Company's ability to keep up with branded product innovations by prohibiting the Company from introducing products with comparable features. P&G and K-C have also heavily promoted diapers in the multi-pack configuration. These packages offer a lower unit price to the retailer and consumer. It is possible that the Company may continue to realize lower selling prices and/or lower volumes as a result of these initiatives. INCREASED FINANCIAL LEVERAGE. In connection with the Plan, the Company issued the New Notes. As a result of this increased leverage, the Company's principal and interest obligations have increased substantially. The degree to which the Company is leveraged could adversely affect the Company's ability to obtain additional financing for working capital, acquisitions or other purposes and could make it more vulnerable to economic downturns and competitive pressures. The Company's increased leverage could also adversely affect its liquidity and its ability to fund capital expenditures, as a substantial portion of available cash from operations will have to be applied to meet debt service requirements. The indenture related to the New Notes (the "Indenture") provides that, if certain coverage tests are not met, interest on the New Notes may be paid in kind for the first two years. The Indenture contains customary financial covenants restricting the payments of dividends, the repurchase of the Company's stock, the issuance of additional equity or the incurrence of additional indebtedness. Also in connection with the Plan, on January 28, 2000, the Company entered into the Credit Facility. The Credit Facility contains customary financial covenants. Based upon anticipated improvements in the Company's operations and certain cost savings measures, the Company believes that its cash flows from operations, borrowings under the Credit Facility and other sources of liquidity, will be adequate to meet the Company's anticipated requirements for working capital, capital expenditures, interest payments and scheduled principal payments for the foreseeable future. There can be no assurance, however, that anticipated improvements in operations and cost savings will be realized. If the Company is unable to generate sufficient cash flows from operations in the future, it may be required to refinance all or a portion of its existing debt or to obtain additional financing. There can be no assurance that any such refinancing would be possible or that any additional financing could be obtained on terms that are favorable or acceptable to the Company. MARKET FOR THE COMPANY'S COMMON STOCK. Pursuant to the Plan, Wellspring, and its affiliates purchased 11,516,405 shares, or approximately 97.4 percent, of the Company's new common stock. Approximately 309,800 shares, or 2.6 percent of the new common stock, was distributed under the Plan to the Company's then-existing stockholders and purchased through the Rights Offering pursuant to the Plan. The Company's common stock is currently quoted on OTCBB under the symbol PGTR. FORWARD-LOOKING STATEMENTS From time to time, information provided by the Company, statements made by its employees or information included in its filings with the Securities and Exchange Commission (including the Annual Report on Form 10-K) may include statements that are not historical facts, so-called "forward-looking statements." The words "believes," "anticipates," "expects" and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed in the Company's forward-looking statements. Factors which could affect the Company's financial results, including but not limited to: increased raw material prices and product costs; new product and packaging introductions by competitors; increased price and promotion pressure from competitors; and patent litigation, are described herein. Readers are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date hereof, and which are made by management pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. The 28 Company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. NEW ACCOUNTING STANDARDS The Financial Accounting Standards Board ("FASB") has issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities," which must be adopted in the Company's fiscal year 2001. This statement establishes accounting and reporting standards for derivative instruments - including certain derivative instruments embedded in other contracts - and for hedging activities. The Company is currently evaluating the impact of the statement on the Company's financial statements. The Emerging Issues Task Force (the "Task Force") of the Financial Accounting Standards Board reached a consensus on Issue 00-14, ACCOUNTING FOR CERTAIN SALES INCENTIVES. The issue addresses the accounting for sales incentives offered voluntarily by a vendor without charge to customers that can be used in, or that are exercisable by a customer as a result of a single exchange transaction. For sales incentives resulting in the right to a rebate, the Task Force concluded that recognition should occur at the date of sale, measured based upon the estimated amount of refunds expected to be claimed by customers. Indicators pointing to the ability to make a reasonable and reliable estimate of the amount of future rebates or refunds were developed. If the amount cannot be reliably estimated, it should be assumed that all customers will request a refund. When recognized, a cash incentive should be classified as a reduction of revenue. Upon application of the consensus, which is required for the Company in the fourth quarter of 2000, prior period financial statements should be reclassified to conform to the consensus. To date, the Company has not completed its analysis of the impact which Issue 00-14 may have on the reported amount of sales. ITEM 3. QUANTITIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company's market risk-sensitive instruments and foreign currency exchange rate risks do not subject the Company to material market risk exposures. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS THE PROCTER & GAMBLE COMPANY V. PARAGON TRADE BRANDS, INC. - P&G filed a lawsuit in January 1994 in the Delaware District Court alleging that the Company's "Ultra" infant disposable diaper products infringed two of P&G's dual cuff diaper patents. On December 30, 1997, the Delaware District Court issued a Judgment and Opinion finding that P&G's dual cuff patents were valid and infringed, while at the same time finding the Company's patent to be invalid, unenforceable and not infringed by P&G's products. Judgment was entered on January 6, 1998. Damages of approximately $178.4 million were entered against Paragon by the Delaware District Court on June 2, 1998. At the same time, the Delaware District Court entered injunctive relief agreed upon by P&G and the Company. The Delaware Judgment had a material adverse effect on the Company's financial position and its results of operations. As a result of the District Court's Judgment, the Company filed for relief under Chapter 11 of the Bankruptcy Code, 11 U.S.C. Section 101 ET seq., in the United States Bankruptcy Court for the Northern District of Georgia (Case No. 98-60390) on January 6, 1998. See "--IN RE PARAGON TRADE BRANDS, INC.," below. On February 2, 1999, the Company entered into a Settlement Agreement with P&G which fully and finally settled all matters related to the Delaware Judgment, the Company's appeal of the Delaware Judgment, P&G's motion to find the Company in contempt of the Delaware Judgment and P&G's proof of claim filed in the Company's Chapter 11 reorganization proceeding. The P&G Approval Order was issued on August 6, 1999. As a part of the settlement, the Company entered into License Agreements for the U.S. and Canada, - with respect to certain of the patents asserted by P&G in its proof of claim, including those asserted in the Delaware action. The U.S. and Canadian patent rights licensed by the Company permitted the Company to convert to a dual cuff baby diaper design. While the Company believes that the royalty rates being charged by P&G are the same royalties that will be paid by the Company's major store brand competitors for similar patent rights, these royalties, together with royalties to be paid to K-C described herein, have had, and will continue to have, a material adverse impact on the Company's future financial 29 condition and results of operations. While these royalty costs have been partially offset by projected raw material cost savings related to the conversion to a dual cuff design, the Company's overall raw material costs have increased. These royalty costs have been partially offset by price increases announced by the Company in the fourth quarter of 1998 and will continue to be offset to the extent such price increases are maintained. KIMBERLY-CLARK CORPORATION V. PARAGON TRADE BRANDS, INC. - On October 26, 1995, K-C filed a lawsuit against the Company in the U.S. District Court in Dallas, Texas, alleging infringement by the Company's products of two K-C patents relating to dual cuffs. As a result of the Company's Chapter 11 filing, the proceedings in the K-C litigation were stayed. On March 19, 1999, the Company entered into a Settlement Agreement with K-C which fully and finally settled all matters related to the Texas action, including the Company's counterclaims, and K-C's proof of claim filed in the Company's Chapter 11 reorganization proceeding. The K-C Approval Order was issued by the Bankruptcy Court on August 6, 1999. As a part of the settlement, the Company entered into License Agreements for the U.S. and Canada, - with respect to the patents asserted by K-C in the Texas action. The patent rights licensed by the Company from K-C permitted the Company to convert to a dual cuff diaper design. The Company believes that the overall effective royalty rate that the Company will pay to K-C, together with royalties to be paid to P&G described above, has had, and will continue to have, a material adverse impact on the Company's future financial condition and results of operations. While these royalty costs have been partially offset by projected raw material cost savings related to the conversion to a dual cuff design, the Company's overall raw material costs have increased. These royalty costs have been partially offset by price increases announced by the Company in the fourth quarter of 1998 and will continue to be offset to the extent such price increases are maintained. As a part of the K-C License Agreement, K-C has agreed not to sue the Company on two of K-C's patents related to the use of Super Absorbent Polymer ("SAP") in diapers and training pants, so long as the Company uses SAP which exhibits certain performance characteristics (the "SAP Safe Harbor"). The Company has encountered increased product costs due to the increased price and usage of the new SAP within the SAP Safe Harbor. The Company cannot predict at this time whether or when the added costs will be fully offset. IN RE PARAGON TRADE BRANDS, INC. - As described above, on December 30, 1997, the Delaware District Court issued a Judgment and Opinion in the Company's lawsuit with P&G finding that two of P&G's diaper patents were valid and infringed by the Company's "Ultra" disposable baby diapers, while also rejecting the Company's patent infringement claim against P&G. Judgment was entered on January 6, 1998. While a final damages number was not entered by the Delaware District Court until June 2, 1998, the Company originally estimated the liability and associated litigation costs to be approximately $200 million. The amount of the award resulted in violation of certain covenants under the Company's bank loan agreements. As a result, the issuance of the Delaware Judgment and the uncertainty it created caused an immediate and critical liquidity issue for the Company which necessitated the Chapter 11 filing. Subsequently, damages of approximately $178.4 million were entered against Paragon by the Delaware District Court on June 2, 1998. At the same time, the Delaware District Court entered injunctive relief agreed upon by P&G and the Company. See "--THE PROCTER & GAMBLE COMPANY V. PARAGON TRADE BRANDS, INC.," above. The Chapter 11 filing prevented P&G from placing liens on the Company's assets, permitted the Company to appeal the Delaware District Court's decision in an orderly fashion and afforded the Company the opportunity to resolve liquidated and unliquidated claims against the Company which arose prior to the Chapter 11 filing. On February 2, 1999, the Company entered into a Settlement Agreement with P&G which fully and finally settled all matters related to the Delaware Judgment, the Company's appeal of the Delaware Judgment, P&G's motion to find the Company in contempt of the Delaware Judgment and P&G's proof of claim filed in the Company's Chapter 11 reorganization proceeding. See "--THE PROCTER & GAMBLE COMPANY V. PARAGON TRADE BRANDS, INC.," above. On March 19, 1999, the Company entered into a Settlement Agreement with K-C which fully and finally settled all matters related to the Texas action, including the Company's counterclaims, and K-C's proof of claim filed in the Company's Chapter 11 reorganization proceeding. See "--KIMBERLY-CLARK CORPORATION V. PARAGON TRADE BRANDS, INC.," above. On or about November 15, 1999, the Company and the Creditors' Committee, as co-proponents, filed the Plan and Disclosure Statement with the Bankruptcy Court. The Plan incorporated the Wellspring Transaction. By order dated November 18, 1999, the Bankruptcy Court approved the Disclosure Statement. At such time, the Bankruptcy Court also approved certain voting procedures and established January 7, 2000, as the voting deadline for the Plan and January 13, 30 2000, as the date for a hearing to consider confirmation of the Plan. A confirmation hearing was held by the Bankruptcy Court on January 13, 2000. By Order dated January 13, 2000, the Bankruptcy Court confirmed the Plan. On January 28, 2000, Paragon was reorganized pursuant to the Plan through the consummation of the Wellspring Transaction. As contemplated under the Plan, the Equity Committee has withdrawn with prejudice its appeals of the P&G Approval Order and the K-C Approval Order. On January 28, 2000, the Company entered into the Credit Facility with a bank group led by Citicorp. This facility is designed to supplement the Company's cash on hand and operating cash flow. As of June 25, 2000, there was an aggregate of $5.1 million in letters of credit under the Credit Facility and no direct borrowings. The Credit Facility contains customary financial covenants. Legal fees and costs in connection with the Chapter 11 reorganization proceeding were significant. KIMBERLY-CLARK WORLDWIDE, INC. V. PARAGON TRADE BRANDS, INC. - On March 20, 2000, Kimberly-Clark Worldwide, Inc. ("K-C Worldwide") filed suit in the U.S. District Court in Delaware against the Company for allegedly infringing a patent related to a disposable absorbent garment with a registered graphic. The suit seeks injunctive relief, unspecified treble damages, interest and attorneys' fees and expenses. On July 31, 2000, the Company and K-C Worldwide executed a settlement agreement. The Company believes that the terms and conditions of the settlement agreement will not have a material business or financial impact on the Company. OTHER - The Company is also a party to other legal proceedings generally incidental to its activities. Although the final outcome of any legal proceeding or dispute is subject to a great many variables and cannot be predicted with any degree of certainty, the Company presently believes that any ultimate liability resulting from any or all legal proceedings or disputes to which it is a party will not have a material adverse effect on its financial condition or results of operations. ITEM 3. DEFAULTS IN SENIOR SECURITIES At December 28, 1997, the Company maintained a $150 million revolving credit facility with a group of nine financial institutions available through February 2001. At December 28, 1997, borrowings under this credit facility totaled $70 million. The Company also had access to short-term lines of credit on an uncommitted basis with several major banks. At December 28, 1997, the Company had approximately $50 million in uncommitted lines of credit. Borrowings under these lines of credit totaled $12.8 million at December 28, 1997. The Chapter 11 filing resulted in a default under its pre-petition revolving credit facility and borrowings under its uncommitted lines of credit. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits
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 Trade Brands, Inc.(2) Exhibit 10.2 Intellectual Property Agreement, dated as of February 2, 1993, between Weyerhaeuser and Paragon Trade Brands, Inc.(2) Exhibit 10.3 License, dated as of February 2, 1993, between Weyerhaeuser and Paragon Trade Brands, Inc.(2) 31 Exhibit 10.4 Sublicense, dated as of February 2, 1993, between Weyerhaeuser and Paragon Trade Brands, Inc.(2) Exhibit 10.5 Technology Agreement, dated as of October 15, 1987, by and between Weyerhaeuser and Johnson and Johnson, as amended(2) Exhibit 10.6 Letter Supply Agreement between Weyerhaeuser and Paragon Trade Brands, Inc. dated as of October 22, 1997(3) Exhibit 10.7* Employment Agreement, dated as of May 4, 2000, between Paragon Trade Brands, Inc. and Michael T. Riordan Exhibit 10.8* Employment Agreement, dated as of August 11, 1998, between Paragon Trade Brands, Inc. and Bobby V. Abraham(4) Exhibit 10.9* Consulting and Separation Agreement by and between Bobby V. Abraham and Paragon Trade Brands, Inc., dated as of May 5, 2000. Exhibit 10.10* Employment Agreement, dated as of August 11, 1998, between Paragon Trade Brands, Inc. and David W. Cole(4) Exhibit 10.11* Employment Agreement, dated as of August 11, 1998, between Paragon Trade Brands, Inc. and Alan J. Cyron(4) Exhibit 10.12* Employment Agreement, dated as of August 11, 1998, between Paragon Trade Brands, Inc. and Arrigo D. (Rick) Jezzi(4) Exhibit 10.13* Employment agreement, dated as of August 11, 1998, between Paragon Trade Brands, Inc. and Robert E. McClain(4) Exhibit 10.14* Employment Agreement, dated as of August 11, 1998, between Paragon Trade Brands, Inc. and Catherine O. Hasbrouck(4) Exhibit 10.15* Employment Agreement, dated as of August 11, 1998, between Paragon Trade Brands, Inc. and Kevin P. Higgins(4) Exhibit 10.16* Paragon Trade Brands, Inc. Confirmation Retention Plan for Top Eight Executives and Summary Plan Description(4) Exhibit 10.17* Paragon Trade Brands, Inc. Stock Option Plan(1) Exhibit 10.17.1* Paragon Trade Brands, Inc. Stock Option Plan for Non-Employee Directors(13) Exhibit 10.18 Credit Agreement dated as of January 28, 2000 Among Paragon Trade Brands, Inc. as Borrower and The Lenders and Issuers Party Hereto and Citicorp USA, Inc. as Administrative Agent and Salomon Smith Barney as Arranger(1) Exhibit 10.18.1 Pledge and Security Agreement dated as of January 28, 2000 Among Paragon Trade Brands, Inc. and Each Other Grantor from Time to Time Party Hereto and Citicorp USA, Inc. as Administrative Agent(1) Exhibit 10.19 Indemnification Agreements, dated as of February 2, 1993, between Weyerhaeuser and Bobby V. Abraham and Gary M. Arnts(2) Exhibit 10.20 Asset Purchase Agreement dated December 11, 1995 by and among Paragon Trade Brands, Inc., PTB Acquisition Sub, Inc., Pope & Talbot, Inc. and Pope & Talbot, Wis., Inc.(5) Exhibit 10.21** Sales Contract, dated as of January 30, 1996, between Hoechst Celanese Corporation and Paragon Trade Brands, Inc.(6) 32 Exhibit 10.22** Sales Contract, dated as of April 30, 1998, between Clariant Corporation and Paragon Trade Brands, Inc.(7) Exhibit 10.23 Lease Agreement between Cherokee County, South Carolina and Paragon Trade Brands, Inc., dated as of October 1, 1996(8) Exhibit 10.24 Settlement Agreement, dated as of February 2, 1999 between Paragon Trade Brands, Inc. and The Procter & Gamble Company(9) Exhibit 10.25 U.S. License Agreement, dated as of February 2, 1999 between The Procter & Gamble Company and Paragon Trade Brands, Inc.(9) Exhibit 10.26 Canadian License Agreement, dated as of February 2, 1999 between The Procter & Gamble Company and Paragon Trade Brands, Inc.(9) Exhibit 10.27 U.S. License Agreement, dated as of February 2, 1999 between The Procter & Gamble Company and Paragon Trade Brands, Inc.(9) Exhibit 10.28 Canadian License Agreement, dated as of February 2, 1999 between The Procter & Gamble Company and Paragon Trade Brands, Inc.(9) Exhibit 10.29 Settlement Agreement, dated as of March 19, 1999 between Kimberly-Clark Corporation and Paragon Trade Brands, Inc. 9) Exhibit 10.30 License Agreement Between Kimberly-Clark Corporation and Paragon Trade Brands, Inc., dated as of March 15, 1999(9) Exhibit 10.31 License Agreement Between Kimberly-Clark Corporation and Paragon Trade Brands, Inc. Trade Brands, Inc., dated as of March 15, 1999(9) Exhibit 10.32 Modified Second Amended Plan of Reorganization(10) Exhibit 10.33 Stock Purchase Agreement by and Between PTB Acquisition Company LLC and Paragon Trade Brands, Inc., dated as of November 16, 1999(11) Exhibit 10.34 Shareholders' Agreement Among Paragon Trade Brands, Inc., PTB Acquisition Company, LLC, Co-Investment Partners, L.P., Ontario Teachers Pension Plan Board and Certain Other Shareholders, dated as of January 28, 2000(1) Exhibit 10.35 Registration Rights Agreement Among Paragon Trade Brands, Inc. Trade Brands, Inc., PTB Acquisition Company, Co-Investment Partners, L.P., Ontario Teachers Pension Plan Board and Certain Other Shareholders, dated as of January 28, 2000(1) Exhibit 10.36 Indenture for $182,000,000 11.25% Senior Subordinated Notes due 2005, dated as of January 28, 2000(12) Exhibit 10.37 First Supplemental Indenture for $182,000,000 11.25% Senior Subordinated Notes due 2005, dated as of January 28, 2000(12) Exhibit 11 Computation of Per Share Earnings (See Note 11 to Financial Statements) Exhibit 21.1 Subsidiaries of the Company(9) Exhibit 27 Financial Data Schedule (for SEC use only) - ------------------ *Management contract or compensatory plan or arrangement. **Confidential treatment has been requested as to a portion of this document. 33 (1) Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 26, 1999. (2) Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report on Form 10-K (File No. 1-11368) for the fiscal year ended December 26, 1993, copies of which may be obtained at the Public Reference Room of the SEC, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. (3) Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 28, 1997. (4) Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 27, 1998. (5) Incorporated by reference from Paragon Trade Brands, Inc.'s Current Report on Form 8-K, dated as of February 8, 1996. (6) Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1995. (7) Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 28, 1998. (8) Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 29, 1996. (9) Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 27, 1998. (10) Incorporated by reference from Paragon Trade Brands, Inc.'s Current Report on Form 8-K dated January 13, 2000. (11) Incorporated by reference from Paragon Trade Brands, Inc.'s Application for Qualification of Indenture Under the Trust Indenture Act of 1939 on Form T-3, filed with the Commission on January 26, 2000. (12) Incorporated by reference from Paragon Trade Brands, Inc.'s Current Report on Form 8-K dated January 28, 2000. (13) Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 26, 2000.
(b) Reports on Form 8-K DOCUMENT DATE ITEM - -------- ---- ---- Report on Form 8-K April 19, 2000 4 Report on Form 8-K/A April 25, 2000 4 34 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PARAGON TRADE BRANDS, INC. By /S/ ALAN J. CYRON ----------------------- Alan J. Cyron Chief Financial Officer August 4, 2000 35 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 Trade Brands, Inc.(2) Exhibit 10.2 Intellectual Property Agreement, dated as of February 2, 1993, between Weyerhaeuser and Paragon Trade Brands, Inc.(2) Exhibit 10.3 License, dated as of February 2, 1993, between Weyerhaeuser and Paragon Trade Brands, Inc.(2) Exhibit 10.4 Sublicense, dated as of February 2, 1993, between Weyerhaeuser and Paragon Trade Brands, Inc.(2) Exhibit 10.5 Technology Agreement, dated as of October 15, 1987, by and between Weyerhaeuser and Johnson and Johnson, as amended(2) Exhibit 10.6 Letter Supply Agreement between Weyerhaeuser and Paragon Trade Brands, Inc. dated as of October 22, 1997(3) Exhibit 10.7* Employment Agreement, dated as of May 4, 2000, between Paragon Trade Brands, Inc. and Michael T. Riordan Exhibit 10.8* Employment Agreement, dated as of August 11, 1998, between Paragon Trade Brands, Inc. and Bobby V. Abraham(4) Exhibit 10.9* Consulting and Separation Agreement by and between Bobby V. Abraham and Paragon Trade Brands, Inc., dated as of May 5, 2000. Exhibit 10.10* Employment Agreement, dated as of August 11, 1998, between Paragon Trade Brands, Inc. and David W. Cole(4) Exhibit 10.11* Employment Agreement, dated as of August 11, 1998, between Paragon Trade Brands, Inc. and Alan J. Cyron(4) Exhibit 10.12* Employment Agreement, dated as of August 11, 1998, between Paragon Trade Brands, Inc. and Arrigo D. (Rick) Jezzi(4) Exhibit 10.13* Employment agreement, dated as of August 11, 1998, between Paragon Trade Brands, Inc. and Robert E. McClain(4) Exhibit 10.14* Employment Agreement, dated as of August 11, 1998, between Paragon Trade Brands, Inc. and Catherine O. Hasbrouck(4) Exhibit 10.15* Employment Agreement, dated as of August 11, 1998, between Paragon Trade Brands, Inc. and Kevin P. Higgins(4) 36 Exhibit 10.16* Paragon Trade Brands, Inc. Confirmation Retention Plan for Top Eight Executives and Summary Plan Description(4) Exhibit 10.17* Paragon Trade Brands, Inc. Stock Option Plan(1) Exhibit 10.17.1* Paragon Trade Brands, Inc. Stock Option Plan for Non-Employee Directors(13) Exhibit 10.18 Credit Agreement dated as of January 28, 2000 Among Paragon Trade Brands, Inc. as Borrower and The Lenders and Issuers Party Hereto and Citicorp USA, Inc. as Administrative Agent and Salomon Smith Barney as Arranger(1) Exhibit 10.18.1 Pledge and Security Agreement dated as of January 28, 2000 Among Paragon Trade Brands, Inc. and Each Other Grantor from Time to Time Party Hereto and Citicorp USA, Inc. as Administrative Agent(1) Exhibit 10.19 Indemnification Agreements, dated as of February 2, 1993, between Weyerhaeuser and Bobby V. Abraham and Gary M. Arnts(2) Exhibit 10.20 Asset Purchase Agreement dated December 11, 1995 by and among Paragon Trade Brands, Inc., PTB Acquisition Sub, Inc., Pope & Talbot, Inc. and Pope & Talbot, Wis., Inc.(5) Exhibit 10.21** Sales Contract, dated as of January 30, 1996, between Hoechst Celanese Corporation and Paragon Trade Brands, Inc.(6) Exhibit 10.22** Sales Contract, dated as of April 30, 1998, between Clariant Corporation and Paragon Trade Brands, Inc.(7) Exhibit 10.23 Lease Agreement between Cherokee County, South Carolina and Paragon Trade Brands, Inc., dated as of October 1, 1996(8) Exhibit 10.24 Settlement Agreement, dated as of February 2, 1999 between Paragon Trade Brands, Inc. and The Procter & Gamble Company(9) Exhibit 10.25 U.S. License Agreement, dated as of February 2, 1999 between The Procter & Gamble Company and Paragon Trade Brands, Inc.(9) Exhibit 10.26 Canadian License Agreement, dated as of February 2, 1999 between The Procter & Gamble Company and Paragon Trade Brands, Inc.(9) Exhibit 10.27 U.S. License Agreement, dated as of February 2, 1999 between The Procter & Gamble Company and Paragon Trade Brands, Inc.(9) Exhibit 10.28 Canadian License Agreement, dated as of February 2, 1999 between The Procter & Gamble Company and Paragon Trade Brands, Inc.(9) Exhibit 10.29 Settlement Agreement, dated as of March 19, 1999 between Kimberly-Clark Corporation and Paragon Trade Brands, Inc. 9) Exhibit 10.30 License Agreement Between Kimberly-Clark Corporation and Paragon Trade Brands, Inc., dated as of March 15, 1999(9) Exhibit 10.31 License Agreement Between Kimberly-Clark Corporation and Paragon Trade Brands, Inc. Trade Brands, Inc., dated as of March 15, 1999(9) Exhibit 10.32 Modified Second Amended Plan of Reorganization(10) 37 Exhibit 10.33 Stock Purchase Agreement by and Between PTB Acquisition Company LLC and Paragon Trade Brands, Inc., dated as of November 16, 1999(11) Exhibit 10.34 Shareholders' Agreement Among Paragon Trade Brands, Inc., PTB Acquisition Company, LLC, Co-Investment Partners, L.P., Ontario Teachers Pension Plan Board and Certain Other Shareholders, dated as of January 28, 2000(1) Exhibit 10.35 Registration Rights Agreement Among Paragon Trade Brands, Inc. Trade Brands, Inc., PTB Acquisition Company, Co-Investment Partners, L.P., Ontario Teachers Pension Plan Board and Certain Other Shareholders, dated as of January 28, 2000(1) Exhibit 10.36 Indenture for $182,000,000 11.25% Senior Subordinated Notes due 2005, dated as of January 28, 2000(12) Exhibit 10.37 First Supplemental Indenture for $182,000,000 11.25% Senior Subordinated Notes due 2005, dated as of January 28, 2000(12) Exhibit 11 Computation of Per Share Earnings (See Note 11 to Financial Statements) Exhibit 21.1 Subsidiaries of the Company(9) Exhibit 27 Financial Data Schedule (for SEC use only) - ------------------ *Management contract or compensatory plan or arrangement. **Confidential treatment has been requested as to a portion of this document. (1) Incorporated by reference from ParagonTrade Brands, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 26, 1999. (2) Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report on Form 10-K (File No. 1-11368) for the fiscal year ended December 26, 1993, copies of which may be obtained at the Public Reference Room of the SEC, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. (3) Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 28, 1997. (4) Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 27, 1998. (5) Incorporated by reference from Paragon Trade Brands, Inc.'s Current Report on Form 8-K, dated as of February 8, 1996. (6) Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1995. (7) Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 28, 1998. (8) Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 29, 1996. (9) Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 27, 1998. 38 (10) Incorporated by reference from Paragon Trade Brands, Inc.'s Current Report on Form 8-K dated January 13, 2000. (11) Incorporated by reference from Paragon Trade Brands, Inc.'s Application for Qualification of Indenture Under the Trust Indenture Act of 1939 on Form T-3, filed with the Commission on January 26, 2000. (12) Incorporated by reference from Paragon Trade Brands, Inc.'s Current Report on Form 8-K dated January 28, 2000. (13) Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 26, 2000.
39 EX-10.7 2 0002.txt M. RIORDAN EMPLOYMENT AGREEMENT DATED AS OF 5/4/00 EMPLOYMENT AGREEMENT dated as of May 4, 2000 (the "AGREEMENT"), between PARAGON TRADE BRANDS, INC., a Delaware corporation (the "COMPANY"), and MICHAEL T. RIORDAN (the "EXECUTIVE"). WHEREAS, the Company has offered to employ the Executive, and the Executive desires to accept such employment, on the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the covenants and agreements hereinafter set forth, the parties hereto agree as follows: 1. EFFECTIVENESS OF AGREEMENT This Agreement shall become effective as of the date hereof (the "EFFECTIVE DATE"). 2. EMPLOYMENT AND DUTIES 2.1 GENERAL. The Company hereby employs the Executive, and the Executive agrees to serve, as President and Chief Executive Officer of the Company, upon the terms and conditions herein contained. The Executive shall have all of the responsibilities and powers normally associated with such offices. So long as the Executive is employed by the Company, the Executive shall serve as a member of the Board of Directors of the Company (the "BOARD") and of the Company's Executive Committee. The Executive shall preside at all meetings of the Board, determine the agendas for all such meetings in consultation with the Company's Executive Committee and have such further responsibilities and powers as are normally associated with the position of Chairman of the Board. The Executive agrees to serve the Company faithfully and to the best of his ability under the direction of the Board. 2.2 EXCLUSIVE SERVICES. Except as may otherwise be approved in advance by the board, and except during vacation periods and reasonable periods of absence due to sickness, personal injury or other disability, the Executive shall devote his full working time throughout the Employment Term (as defined n Section 2.4) to the services required of him hereunder The Executive shall render his services exclusively to the Company during the Employment Term, and shall use his best efforts, judgment and energy to improve and advance the business and interests of the Company in a manner consistent with the duties of his position. Notwithstanding the foregoing, but subject to the provisions of Section 9, the Executive may (a) serve on corporate, civic or charitable boards or engage in charitable activities, (b) perform outside speaking, lecturing or teaching engagements, (c) continue to serve as an advisor to Kruger Inc. and (d) manage personal investments, PROVIDED that none of the foregoing activities interfere with the performance of the Executive's duties under this Agreement. 2 2.3 PLACE OF PERFORMANCE. 2.3.1 PRE-OCTOBER 31, 2001. Prior to October 31, 2001, the Executive shall continue to reside in his current principal residence in Green Bay, Wisconsin, and shall perform his services under this Agreement as follows: (i) for on day during each work week, the Executive shall perform his services at an office established by the Executive I his principal residence in Green Bay, Wisconsin (or, at the Executive's election with the reasonable consent of the Company, at an office located in Green Bay, Wisconsin outside the Executive's principal residence) (in either case, the "GREEN BAY OFFICE") and (ii) for four days during each work week (inclusive of travel time), the Executive's services shall be performed at the Company's headquarters in Norcross, Georgia (the "NORCROSS OFFICE"). The Executive shall otherwise travel on Company business as reasonably required by the Board. 2.3.2 POST-OCTOBER 31, 2001. Except as the parties may otherwise agree, the Executive shall be required to relocate to the Atlanta, Georgia metropolitan area by October 31, 2001. Following such relocation, the Executive's services under this Agreement shall be principally performed at the Norcross Office, subject to travel on Company business reasonably required by the Board. 2.4 TERM OF EMPLOYMENT. The Executive's employment under this Agreement shall commence as of the Effective Date and shall terminate on the earlier of (i) the third anniversary of the Effective Date, and (ii) termination of the Executive's employment pursuant to this Agreement; PROVIDED, HOWEVER, that the term of the Executive's employment shall be automatically extended without further action of either party for additional one year periods, unless written notice of either party's intention not to extend has been given to the other party hereto at least 90 days prior to the expiration of the then effective term. The period commencing as of the Effective Date and ending on the third anniversary of the Effective Date or such later date to which the term of the Executive's employment under this Agreement shall have been extended is hereinafter referred to as the "EMPLOYMENT TERM." A notice delivered by the Company that it does not intend to extend the term of this Agreement shall hereinafter be referred to as a "NONRENEWAL NOTICE." 2.5 REIMBURSEMENT OF EXPENSES. The Company shall reimburse the Executive for reasonable travel and other business expenses incurred by him in the fulfillment of his duties hereunder upon presentation by the Executive of an itemized account of such expenditures, in accordance with Company policy. The Company shall also reimburse the Executive for reasonable expenses (including, without limitation, for airfare and ground transportation) incurred by him pursuant to Section 2.3.1 in traveling to and returning form the Norcross Office on a weekly basis (or more frequently if necessary in light of the Executive's personal and family obligations). 3 3. COMPENSATION 3.1 BASE SALARY. From the Effective Date, the Executive shall be entitled to receive a base salary ("BASE SALARY") at a rate of $500,000 per annum, payable in arrears in equal installments in accordance with the Company's payroll practices, with such increases as may be provided in accordance with the terms hereof. Once increased, such higher amount shall constitute the Executive's Base Salary. 3.2 ANNUAL REVIEW. The Executive's Base Salary shall be reviewed by the Board, based upon the Executive's performance, not less often than annually, and may be increased but not decreased. In addition to any increases effected as a result of such review, the Board at any time may in its sole discretion increase the Executive's Base Salary. 3.3 BONUS. 3.3.1 2000 FISCAL YEAR. For the 2000 fiscal year, the Executive shall be entitled to receive a bonus (without any proration) based on the level of the Applicable Performance Measure (as defined in Exhibit A attached hereto) for the fiscal year ending December 31, 2000 (as set forth in the Company's audited financial statements for such fiscal year): Amount of Applicable Bonus Amount (as a PERFORMANCE MEASURE PERCENTAGE OF BASE SALARY ------------------- ------------------------- $60 Million 0 $75 Million 60 $90 Million 120 $97 Million 180 The amount of the Executive's bonus shall be adjusted upward to reflect any linear interpolation between the foregoing performance measures. 3.3.2 POST-2000 FISCAL YEARS. For fiscal years after 2000, the Board shall annually adopt a bonus plan and performance criteria upon which the bonuses of executives of the Company shall be based. Commencing with the 2001 fiscal year, during his employment under this Agreement, the Executive shall be entitled to participate in such bonus plan, based on performance criteria to be determined at the beginning of each year by the Board in good faith in reasonable consultation with the Executive, and otherwise in an amount (expressed as a percentage of Base Salary, which shall not be less than 60% if the target performance measures are satisfied and not less than 180% if the maximum performance measures established for the Company's senior executives as a whole are satisfied) and on other terms and conditions that are no less favorable than those applicable to any other senior executive of the Company. 4 3.4 STOCK OPTIONS. Effective as of May 4, 2000, the Executive shall be granted options (the "STOCK OPTIONS") to purchase 700,000 shares of the Company's common stock, par value $.01 per share (the "COMMON STOCK"), on the terms and conditions set forth in the Option Agreement dated as of May 4, 2000 (the "OPTION AGREEMENT") by and between the Company and the Executive. The Executive shall be eligible to receive future grants of options to purchase shares of Common Stock as determined by the Board. 4. EMPLOYEE BENEFITS The Executive shall, during his employment under this Agreement, be eligible to participate in all employee and fringe benefit plans, programs and arrangements which shall be established by the Company for, or made available to, its senior executives ,on terms and conditions that are no less favorable than those applicable to any other senior executive of the Company, PROVIDED that the Executive may elect not to participate, or to defer participation, in the Company's medical and/or dental plans. In addition, the Company shall furnish the Executive with the following benefits during his employment under this Agreement: (i) paid vacation of five weeks per calendar year in accordance with the vacation policy of the Company; (ii) reimbursement of the Executive's reasonable expenses in connection with maintaining and operating the Green Bay Office; (iii) Reimbursement of the Executive's reasonable expenses in connection with tax and financial planning services; (iv) Reimbursement of the Executive's reasonable expenses (including rent and utilities) in connection with maintaining a furnished residence in the Atlanta, Georgia metropolitan area; (v) reimbursement of the Executive's reasonable expenses (including initiation fees and dues) in connection with his memberships in a country club and a health club located in the Atlanta, Georgia metropolitan area; (vi) reimbursement of the Executive's reasonable legal and out-of-pocket expenses in connection with the preparation, negotiation and enforcement (including dispute resolution) of this Agreement and any related documentation; (vii) reimbursement of the Executive's expenses associated with the relocation of his family and moving of his household goods and furnishings to a new residence in the Atlanta, Georgia metropolitan area; 5 (viii) reimbursement of the Executive's broker's fees, closing costs and other similar expenses (including reasonable legal fees) associated with (x) the sale of his residence in Green Bay, Wisconsin and (y) the purchase of a new residence in the Atlanta, Georgia metropolitan area; and (ix) coverage by a customary director and officer indemnification policy on a basis that is no lees favorable than the coverage provided to any other Company officer or director. 5. TERMINATION OF EMPLOYMENT 5.1 TERMINATION WITHOUT CAUSE; RESIGNATION FOR GOOD REASON. 5.1.1 GENERAL. If, prior to the expiration of the Employment Term, the Executive's employment is terminated by the Company without Cause (as defined in Section 5.3), or the Executive terminates his employment hereunder for Good Reason (as defined in Section 5.4), the Company shall pay to the Executive in a lump sum, within 30 days after the date of termination, and amount equal to (x) two times the sum of (i) the Executive's annual Base Salary (at the rate in effect on the date of such termination) and (ii) the average of the Executive's annual bonus pursuant to Section 3.3 for the two fiscal years immediately preceding the fiscal year in which such termination occurs (or, if such termination occurs (A) during the 2001 fiscal year, an amount equal to the bonus for the 2000 fiscal year or (B) during the 2000 fiscal year, an amount equal to 120% of the Executive's annual Base Salary (at the rate in effect on the date of such termination)), and (y) a PRO RATA portion of the target bonus to which the Executive would have been entitled for the year of termination pursuant to Section 3.3 had the Executive remained employed for the entire year. In addition, the Executive shall be entitled to continue to participate in the Company's welfare benefit plans (or, if the Executive is ineligible to continue to participate under the terms thereof, in substitute programs adopted by the Company providing substantially comparable benefits) during the period (the "CONTINUATION PERIOD") beginning on the date of termination and ending on the earlier of (i) the second anniversary of the date of termination and (ii) in the case of any such welfare plan, the date on which the Executive becomes covered by a similar welfare plan maintained by another employer. The Executive shall have no further right to receive any other compensation or benefits after such termination or resignation of employment except as determined in accordance with the terms of the employee benefit plans and programs of the Company. 5.1.2 DEATH DURING CONTINUATION PERIOD. In the event of the Executive's death during the Continuation Period, the Executive's family shall continue to participate during the remainder of the Continuation Period in the Company's welfare benefit plans on the same terms and conditions as were applicable prior to the date of the Executive's death. 5.1.3 DATE OF TERMINATION. The date of termination of employment without Cause shall be the date specified in a written notice of termination to the Executive (which date 6 shall be at least 10 business days after receipt by the Executive of such written notice). The date of resignation for Good Reason shall be the date specified in the written notice of resignation from the Executive to the Company; PROVIDED, HOWEVER, that no such written notice shall be effective unless the cure period specified in Section 5.4 has expired without the Company having corrected, to the reasonable satisfaction of the Executive, the event or events subject to cure. If no date of resignation is specified in the written notice from the Executive to the Company, the date of termination shall be the first day following such expiration of such cure period. 5.2 TERMINATION FOR CAUSE; RESIGNATION FOR GOOD REASON. 5.2.1 GENERAL. If, prior to the expiration of the Employment Term, the Executive's employment is terminated by the Company for Cause, or the Executive resigns from his employment hereunder other than for Good Reason, the Executive shall be entitled only to payment of his Base Salary and other compensation and benefits through and including the date of termination or resignation. The Executive shall have no further right to receive any other compensation or benefits after such termination or resignation of employment, except as determined in accordance with the terms of the employee benefit plans and programs of the Company. 5.2.2 DATE OF TERMINATION. Subject to the proviso to Section 5.3, the date of termination for Cause shall be the date specified in a written notice of termination to the Executive after formal action by the Board at a meeting of the Board, at which meeting the Board, by a two-thirds vote, determines to terminate the Executive for Cause. The Executive shall have the right to receive notice of and appear (with legal counsel) at such meeting to respond to any allegations made against him concerning the contemplated termination. The date of resignation without Good Reason shall be the date specified in the written notice of resignation from the Executive to the Company, or if no date is specified therein, 10 business days after receipt by the Company of written notice of resignation from the Executive. 5.3 CAUSE. Termination for "CAUSE" shall mean termination of the Executive's employment because of: (i) any willful act or omission that constitutes a material breach by the Executive of any of his material obligations under this Agreement; (ii) the willful and continued failure or refusal of the Executive to substantially perform the duties reasonably required of him as an employee of the Company; (iii) the Executive's conviction of a felony involving dishonesty or moral turpitude; or 7 (iv) any other willful misconduct by the Executive which is materially injurious to the financial condition or business reputation of the Company or any of its subsidiaries or affiliates (it being understood that the good faith performance by the Executive of the duties required of him pursuant to Section 2.1 shall not constitute "misconduct" for purposes of this clause (iv)); PROVIDED, HOWEVER, that if any such Cause relates to the Executive's obligations under this Agreement or is otherwise susceptible to cure, the Company shall not terminate the Executive's employment hereunder unless the Company first gives the Executive notice of its intention to terminate and of the grounds for such termination and the Executive has not, within 20 business days following receipt of the notice, cured such Cause, or in the event such Cause is not susceptible to cure within such 20 business day period, the Executive has not taken all reasonable steps within such 20 business day period to cure such Cause as promptly as practicable thereafter. 5.4 GOOD REASON. For purposes of this Agreement, "GOOD REASON" shall mean any of the following (without the Executive's prior written consent): (i) a decrease in the Executive's base rate of compensation or a failure by the Company to pay material compensation due and payable to the Executive in connection with his employment; (ii) a diminution of the responsibilities, positions or titles of the Executive from those set forth in this Agreement; (iii) the Company's requiring the Executive to be based at any office or location that is inconsistent with the provisions of Section 2.3; (iv) the Company's delivery to the Executive of a Nonrenewal Notice; or (v) a material breach by the Company of any term or provision of this Agreement; PROVIDED, HOWEVER, that no event or condition described in clauses (i) through (iii) or (v) of this Section 5.4 shall constitute Good Reason unless (X) the Executive gives the Company written notice of his objection to such event or condition and (Y) such event or condition is not corrected by the Company within 20 business days of its receipt of such notice (or in the event that such event or condition is not susceptible to correction within such 20 business day period, the Company has not taken all reasonable steps within such 20 business day period to correct such event or condition as promptly as practicable thereafter). 8 6. DEATH, DISABILITY OR RETIREMENT In the event of termination of the Executive's employment by reason of death, Permanent Disability (as hereinafter defined) or retirement, the Executive (or his estate, as applicable) shall be entitled to Base Salary and other compensation and benefits through and including the date of termination. In addition, the Company shall pay to the Executive (or his estate, as applicable) in a lump sum, within 30 days after the date of termination, an amount equal to 100% of the Base Salary for six months, plus a pro rata portion of the maximum bonus to which the Executive would have been entitled for the year of termination pursuant to Section 3.3 had the Executive remained employed for the entire year. If the Executive's employment terminates by reason of Permanent Disability, payments to the Executive pursuant to this Section 6 shall be reduced by an amount equal to the sum of all benefits received by the Executive during the six-month period following the date of termination under any disability plan maintained by the Company. Other benefits shall be determined in accordance with the employee benefit plans or programs of the Company, and the Company shall have no further obligation hereunder. For purposes of this Agreement, "PERMANENT DISABILITY" means a physical or mental disability or infirmity of the Executive that prevents the normal performance of substantially all his duties as an employee of the Company, which disability or infirmity shall exist for any continuous period of 180 days. 7. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY 7.1 GROSS-UP PAYMENT. Anything in this Agreement to the contrary or any termination of this Agreement notwithstanding, in the event it shall be determined that any payment or distribution or benefit received or to be received by the Executive pursuant to the terms of this Agreement or any other payment or distribution or benefit made or provided by the Company or any of its affiliates, to or for the benefit of the Executive (whether pursuant to this Agreement or otherwise and determined without regard to any additional payments required under this Section 7) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "CODE"), or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, is hereinafter collectively referred to as the "EXCISE TAX"), then the Executive shall be entitled to receive an additional payment (a "GROSS-UP PAYMENT") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income and employment taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon he Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. Any such Gross-Up Payment shall be reduced by the Offset Amount (as defined below), if any, and shall be subject to applicable tax withholding pursuant to Section 11.5. for purposes of this Section 7, "OFFSET AMOUNT" means the amount of the Gross-Up Payment that would have been payable pursuant to this Section 7.1 had the only Payment taken into account for purposes of calculating the Gross-Up Payment been the acceleration of vesting that occurs pursuant to Section 2(c)(iii) of the Option Agreement as a 9 result of a Sale (as defined in the Option Agreement) with respect to those Performance-Based Options (as defined in the Option Agreement) that did not vest in a fiscal year of the Company preceding the fiscal year in which the Sale occurs as a result of the failure of the Company to achieve the performance targets for such fiscal year set forth in Section 2(c)(ii) of the Option Agreement. 7.2 GROSS-UP PAYMENT CALCULATION. Subject to the provisions of Section 7.3, all determinations required to be made under this Section 7, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by such certified public accounting firm as may be jointly designated by the Executive and the Company (the "ACCOUNTING FIRM"), which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a payment, or such earlier time as is requested by the Company. All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 7, shall be paid by the Company to the Executive within five days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("UNDERPAYMENT"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 7.3 and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. 7.3 CLAIM BY THE IRS. The Executive shall notify the Company in writing of any claim by the U.S. Internal Revenue Service (the "IRS") that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which the Executive gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim; (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, 10 accepting legal representation with respect to such claim by an attorney reasonably selected by the Company; and (iii) cooperate with the Company in good faith in order effectively to contest such claim; PROVIDED, HOWEVER, that the Company shall bear and pay directly all costs and expenses; (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income and employment tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 7.3, the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive shall agree to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; PROVIDED, HOWEVER, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income and employment tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and PROVIDED FURTHER, that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the IRS or any other taxing authority. 7.4 ENTITLEMENT TO REFUND. If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 7.3, the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 7.3) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 7.3, a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 11 8. NO MITIGATION OR OFFSET The Executive shall not be required to mitigate the amount of any payment or benefit provided for herein by seeking other employment or otherwise, and any such payment or benefit will not be reduced in the event such other employment is obtained. 9. NO SOLICITATION; CONFIDENTIALITY; NONCOMPETITION 9.1 NONSOLICITATION. For so long as the Executive is employed by the Company and continuing for one year thereafter, the Executive shall not, without the prior written consent of the Company, directly or indirectly, as a sole proprietor, member of a partnership, stockholder or investor, officer or director of a corporation, or as an employee, associate, consultant or agent of any person, partnership, corporation or other business organization or entity other than the Company or any of its subsidiaries or affiliates: (x) solicit or endeavor to entice away from the Company or any of its subsidiaries any individual who is, or, was during the then most recent 6-month period, employed by the Company or any of its subsidiaries; or (y) solicit or endeavor to entice away from the Company or any of its subsidiaries any person or entity who is, or was within the then most recent 6-month period, a customer of the Company or any of its subsidiaries. 9.2 CONFIDENTIALITY. The Executive covenants and agrees with the Company that he will not at any time, except in performance of his obligations to the Company hereunder or wit the prior written consent of the Company, directly or indirectly, disclose any secret or confidential information that he may learn or has learned by reason of his association with the Company or any of its subsidiaries and affiliates. The term "CONFIDENTIAL INFORMATION" includes information not previously disclosed to the public or tot he trade by the Company's or any of its subsidiaries' or affiliates' management, or otherwise in the public domain, with respect to the Company's o any of its subsidiaries' or affiliates' products, facilities, applications and methods, trade secrets and other intellectual property, systems, procedures, manuals, confidential reports, product price lists, customer lists, technical information, financial information, business plans, prospects or opportunities, but shall exclude any information which (i) is or becomes available to the public or is generally known in the industry or industries in which the Company operates other than as a result of disclosure by the Executive in violation of his agreements under this Section 9.2 or (ii) the Executive is required to disclose under any applicable laws, regulations or directives of any government agency, tribunal or authority having jurisdiction in the matter or under subpoena or other process of law. 9.3 NO COMPETING EMPLOYMENT. For so long as the Executive is employed by the Company and continuing for one year thereafter (the "NONCOMPETE TERM"), the Executive shall not, without the prior written consent of the Company, directly or indirectly, as a sole proprietor, member of a partnership, stockholder or investor (other than a stockholder or investor owning not more than a 5% interest), officer or director of a corporation, or as an employee, 12 associate, consultant or agent of any person partnership, corporation or other business organization or entity other than the Company or any of its subsidiaries or affiliates, render any service to or in any way be affiliated with any business which is engaged in the business of manufacturing store brand infant disposable diapers, located in such geographic areas as the business of the Company and its subsidiaries is located at the time of termination; PROVIDED, HOWEVER, that if (x) the Company delivers a Nonrenewal Notice to the Executive and (y) the Executive's employment is terminated for any reason following the delivery of such Nonrenewal Notice, the Executive's obligations under this Section 9.3 shall terminate as of the date of termination of employment. 9.4 EXCLUSIVE PROPERTY. The Executive confirms that all confidential information is and shall remain the exclusive property of the Company. All business records, papers and documents kept or made by the Executive relating to the business of the Company shall be and remain the property of the Company, except for such papers customarily deemed to be the personal copies of the Executive. 9.5 INJUNCTIVE RELIEF. Without intending to limit the remedies available to the Company, the Executive acknowledges that a breach of any of the covenants contained in this Section 9 may result in material and irreparable injury to the Company or its subsidiaries or affiliates for which there is no adequate remedy a law, that it will not e possible to measure damages for such injuries precisely and that, in the event of such a breach or threat thereof, the Company shall be entitled to seek a temporary restraining order and/or a preliminary or permanent injunction restraining the Executive from engaging in activities prohibited by this Section 9 or such other relief as may be required specifically to enforce any of the covenants in this Section 9. If for any reason, it is held that the restrictions under this Section 9 are not reasonable or that consideration therefor is inadequate, such restrictions shall be interpreted or modified to include as much of the duration and scope identified in this Section 9 as will render such restrictions valid and enforceable. 10. ARBITRATION Any dispute or controversy arising under or in connection with this Agreement that cannot be mutually resolved by the parties hereto shall be settled exclusively by arbitration in New York, New York before one arbitrator of exemplary qualifications and stature, who shall be selected jointly by the Company and the Executive, or, if the Company and the Executive cannot agree on the selection of the arbitrator, shall be selected by the American Arbitration Association (PROVIDED that any arbitrator selected by the American Arbitration Association shall not, without the consent of the parties hereto, be affiliated with the Company or the Executive or any of their respective affiliates). Judgment may be entered o the arbitrator's award in any court having jurisdiction. The parties hereby agree that the arbitrator shall be empowered to enter an equitable decree mandating specific enforcement of the terms of this Agreement. 13 11. MISCELLANEOUS 11.1 NOTICES. All notices or communications hereunder shall be in writing, addressed as follows: To the Company: Paragon Trade Brands, Inc. 180 Technology Parkway Norcross, GA 30092 Telecopier No.: (212) 332-7575 Attention: General Counsel To the Executive: Michael T. Riordan 2964 S. Telemark Circle Green Bay, Wisconsin 54313 Telecopier No.: (920) 497-3641 All such notices shall be conclusively deemed to be received and shall be effective, (i) if sent by hand delivery, upon receipt, (ii) if sent by telecopy or facsimile transmission, upon confirmation of receipt by the sender of such transmission or (iii) if sent by registered or certified mail, on the fifth day after the day on which such notice is mailed. 11.2 SEVERABILITY. Each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if nay provision of this Agreement is held to be prohibited by or invalid under applicable law, such provision will be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. 11.3 ASSIGNMENT. The Company's rights and obligation sunder this Agreement shall not be assignable by the Company except as incident to a reorganization, merger or consolidation, or transfer of all or substantially all of the Company's business and properties. The Company shall require any permitted successor or assign to assume and agree to perform this Agreement in the same manner and to the same extent that the Company wold have been required to perform it had no such succession or assignment taken place. This Agreement shall not be assignable or otherwise subject to hypothecation by the Executive without the prior written consent of the Company. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. 11.4 ENTIRE AGREEMENT. This Agreement, the Stock Option Agreement and the related agreements referred to therein represent the entire agreement of the parties and shall supersede any and all previous contracts, arrangements or understandings between the Company 14 and the Executive relating to the subject matter hereof. This Agreement may be amended at any time by mutual written agreement of the parties hereto. 11.5 WITHHOLDING. The payment of any amount pursuant tot his Agreement shall be subject to the applicable withholding and payroll taxes, and such other deductions as may be required under the Company's employee benefit plans, if any. 11.6 GOVERNING LAW. This Agreement shal be construed, interpreted, and governed in accordance with the laws of the State of New York without reference to rules relating to conflicts of law. IN WITNESS WHEREOF, the Company has caused this Agreement to be duly executed and the Executive has hereunto set his hand, as of the day and year first above written. PARAGON TRADE BRANDS, INC. By: /S/ ALAN J. CYRON ------------------------------------- Name: Alan J. Cyron Title: EVP & Chief Financial Officer EXECUTIVE /S/ MICHAEL T. RIORDAN ------------------------------------------ Michael T. Riordan EXHIBIT A The "Applicable Performance Measure" means the sum of the following measures for the Company's fiscal year ending December 31, 2000:
MEASURES LO TARGET MAX SUPER-MAX (1) US EBITDA 45.0 52.5 60.0 n/a (2) PMI cash flow 6.6 9.1 11.6 n/a (3) 21mm-CAPEX* 0.0 2.0 4.0 n/a (4) Receivable and Inventory 4.0 5.0 6.0 n/a (5) Other Assets to Cash** 1.4 3.4 5.4 n/a (6) Net earnings in Foreign subsidiaries*** 3.0 3.0 3.0 N/A --- --- --- --- MEASURE TOTAL 60.0 75.0 90.0 97.0 * Excluding new Training Pant M/C and any new business investments. ** Includes sales of building and equipment to JV's. *** At current ownership.
DETERMINATION OF WHETHER THE APPLICABLE PERFORMANCE MEASURE HAS BEEN ACHIEVED AT ANY LEVEL WILL BE BASED ON THE "MEASURE TOTAL" FOR SUCH LEVEL, AND NOT WHETHER ANY INDIVIDUAL MEASURE HAS BEEN INDEPENDENTLY ACHIEVED. EX-10.9 3 0003.txt CONSULTING AND SEPARATION AGREEMENT CONSULTING AND SEPARATION AGREEMENT This Consulting and Separation Agreement and Mutual General Release of all Claims (this "Agreement") is entered into on May 5, 2000 by and between Bobby V. Abraham (the "Executive") and Paragon Trade Brands, inc., including its subsidiaries (the "Company"). In Consideration of the promises set forth in this Agreement, the Executive and the Company hereby agree as follows. I. ENTIRE AGREEMENT. ---------------- This Agreement is the entire agreement between the Executive and the Company with respect to the subject matter hereof which includes without limitation any rights which may arise from the separation of the Executive from the Company and contains all of the agreements, whether written, oral, express or implied, between the Executive and the Company and supersedes any other agreement, whether written or oral, express or implied, between the Executive and the Company. Except as set forth herein, all prior agreements and alleged agreements, whether written, oral, express or implied ,between the Executive and the Company including without limitation the Employment Agreement between the Executive and the Company dated August 5, 1997 and the Schedules attached thereto (the "Employment Agreement") are hereby terminated and extinguished effective as of the Separation Date. Other than this Agreement there are no other agreements of any nature whatsoever between the Executive and the Company which survive this Agreement. This Agreement cannot be modified or amended except in a writing signed and agreed to by the Executive and the Company. II. SEPARATION. ---------- As of June 30, 2000 or such earlier time as may be determined by the Company's Board of Directors (the "Board") in its sole discretion (the "Separation Date"), the Executive hereby resigns from any and all appointments as an officer, employee or director he holds with the Company (including as the Chief Executive Officer of the Company) and any appointments as an officer, employee or director of any of its subsidiaries or other affiliates, and hereby agrees that his employment with the Company is terminated as of the Separation Date. Except as expressly set forth in this Agreement, the Executive and the Company shall have no obligations to each other of any nature whatsoever after the Separation Date. After the Separation Date, the Executive shall have no authority to act on behalf of the Company, and shall not hold himself out as having such authority. The Executive will be paid as of the Separation Date, a lump sum cash payment equal to any accrued wage benefits earned prior to the 2 Separation Date, including but not limited to any unused accrued vacation and personal time. III. CONSULTING ARRANGEMENT. ---------------------- In accordance with the understanding between the parties, the Company shall retain the Executive as a consultant for a period commencing on the Separation Date and ending on the first business day following the six-month anniversary of the Separation date (the "Termination Date"); provided that the parties may agree in writing to extend the period of this consulting arrangement (the "Consulting Arrangement") may be extended, by mutual agreement of the parties, for any period of time following the Termination Date, and may be terminated by the Company prior to the Termination Date for "cause." The Executive shall have such reasonable duties as may be assigned by the Board from time to time, including but not limited to, facilitating the transition of Mike Riordan into the position of Chief Executive Officer of the Company, and assisting with employees, customers, vendors and joint venture partners. In respect of his availability to provide consulting services and for any such services rendered, the Executive shall be paid, on January 1, 2001, a lump sum in an amount equal to the excess if any of (i) $500,000 (the "Consulting Fee"), over (ii) the total amount of the Fee Advances (as defined below) previously paid to the Executive. The Executive shall be reimbursed for any reasonable expenses incurred in the performance of his duties hereunder in accordance with Company policy. Executive shall receive monthly advance payments ("Fee Advances") of the Consulting Fee in an amount equal to the product of (i) the number of days consulting services were actually rendered in the preceding month, multiplied by (ii) $5,000. Notwithstanding the foregoing, in the event the consulting Arrangement is terminated by the Company for cause, the Executive shall not be entitled to payment of the Consulting Fee and shall only receive payment for and Fee Advances accrued through the date of such termination. Any amounts received by the Executive under the Consulting Arrangement shall not be reduced or offset by any payments received by the Executive from other employment prior to the Termination date. If the Consulting Arrangement is terminated by the Company without Cause prior to the Executive's receipt of the Consulting Fee, the Company shall pay to the Executive on January 1, 2001, a sum representing the excess of (i) the Consulting Fee over (ii) the total amount of Fee Advances paid to the Executive. For the purposes of this Agreement, "Cause" shall mean (I) the Executive engaging in acts of dishonesty or fraud in connection with his services under the Consulting Arrangement, or (ii) the breach of a term of this Agreement; provided, however, that Executive's unavailability to render services at a given time shall not constitute "Cause." 3 IV. ENTITLEMENTS. ------------ A. The Executive shall receive the following payments: (i) a single lump sum payment of $1,000,000, representing severance payable in accordance with Section 4(C) below; (ii) a deferred compensation award of $100,001.20 payable on the Separation Date; and (iii) an additional deferred compensation payment of $216,048 as reflected in the Company's 1999 proxy payable on the Separation Date. B. The Executive (and the Executive's dependents) shall receive coverage under the Company's health and employee benefit plans in effect as of the Separation Date, to the extent permitted by such plans (in the event such continuation of coverage is not permitted under such employee benefit plan such coverage shall be secured through "COBRA" continuation coverage which shall be provided at the Company's expense), at the Company's expense for a period of two (2) years from the Separation date (provided that substantially the same or equivalent benefits are not available to the Executive by reason of employment obtained following the Separation Date). C. The payment described in Section 4(A)(i) above will be made promptly following the expiration of the seven-day revocation period commencing on the Separation Date, as described in Section 7 of this Agreement. The Company shall withhold from any amounts paid under this Agreement, or otherwise, the amount of any federal, state or local taxes then required to be withheld. IV. DOCUMENTS, CONFIDENTIALITY AND NON DISPARAGEMENT. ------------------------------------------------ A. RETURN OF DOCUMENTS AND PROPERTY. Promptly after the Separation date, the Executive agrees to return to the Company all originals and copies of papers, notes, and documents (in any medium, including computer disks), whether Company property or not, prepared, received or obtained by the Executive or his counsel during the course of the Executive's employment with the Company and related to the Company or its business but not including the Executive's "Rolodex" and calendar, and all equipment and property of the Company which may be in the Executive's possession or under his control, whether or not relating to the claims released hereby, including, without limitation, all such papers, work papers, notes, documents and equipment in the possession of the 4 Executive, Executive's family and counsel; provided, however, that the Executive may keep his "Rolodex" but shall provide the Company with a copy of any information contained thereon. The Executive agrees that the Executive shall not retain copies of any such papers, work papers, notes and documents. Notwithstanding the foregoing, the Executive may keep copies of any benefits agreements between the Executive and the Company, this Agreement with supporting notes and documentation, any publicly filed materials and any employee benefit plan and stock option plan materials distributed generally to participants in any such plan by the Company. B. Confidentiality and Non Disparagement. For purposes of this Section 5 of this Agreement, the term "Communicate" shall include without limitation, any oral or written communication with any other person or entity through any means including any electronic, telephonic or other medium, directly or indirectly publishing, or causing, participating in, assisting or providing any statement or any information or making, publishing, or producing or in any way participating in placing into the public domain any statement, opinion or information in connection with the publication of any diary, memoir, letter story, photograph, interview, article, essay, account or description (whether fictionalized or not, whether written or electronic) publication being deemed to include any presentation or reproduction of any written, verbal or visual material in any communication medium, including any book, magazine, newspaper, theatrical production or movie, or television or radio programming or commercial or electronic medium of any kind. (i) The Executive explicitly and fully agrees that he will not at any time (a) defame, impugn or impair the reputation or public perception of or with respect to, or disparage, criticize or otherwise made negative comments in respect of the Company, its subsidiaries or affiliates, the business, assets, properties, operations, prospects, plans, performance (including stock market performance), strategies, current or former employees, directors, advisors, stockholders, lenders, joint venture partners, customers, tenants or borrowers of any of the foregoing, and (b) will not Communicate the terms or circumstances of the Executive's separation from the Company or of this Agreement (collectively, "Company Matters"). Company Matters shall be deemed not to include the mutually agreed upon departure statement with respect to the Executive's separation from the Company provided for by Section 5.D. of this Agreement. In addition, the Executive explicitly and fully agrees that at any and all times the Executive will hold all confidential and proprietary information (including 5 without limitation the Company's financial affairs or business processes or methods or research, development or marketing programs or plans, any other of its trade secrets, any information regarding customers or customer lists) in confidence for the benefit of the Company, and the Executive will not disclose to any third party in any medium or use for the Executive's benefit or that of any third party, any such confidential information except to the extent required by law or agreed to by the Company. (ii) Without limiting the foregoing, the Executive further agrees that, from the Separation Date until the Termination date, the Executive will not, other than at the request of the Company, Communicate with (a) any reporters or any members of the press or any other representative of any media or publication ("Media Persons"), and (b) any joint venture partners of the Company or its subsidiaries or affiliates. (iii) Notwithstanding anything to the contrary in this Section 5, the Executive may confer in confidence with the Executive's legal counsel, make truthful statements if required by law, and confer with his immediate family members and personal financial or tax advisors. In the event that the Executive is required to make disclosure under any court order, subpoena or other judicial or governmental administrative process, the Executive will promptly notify the Company, take all reasonable steps requested by the Company to defend against compulsory disclosure and permit the Company to participate with counsel of its choice and at its expense in any proceeding relating to the compulsory disclosure. C. The Company and the Executive shall develop a mutually acceptable public departure statement regarding the Executive's separation from the Company. The Company and the Executive shall develop a mutually acceptable standard response for the Executive to unsolicited inquiries from stockholders of the Company, and Media Persons, which statement shall be deemed not to be a violation of any provision of this Section 5 if made in response to any inquiry not solicited by the Executive. The Company and the Executive will also develop a mutually acceptable farewell "E-mail" from the Executive to the employees of the Company. D. Nothing in this Agreement is intended to prevent the Executive from (i) using on the Executive's behalf general knowledge or experience in any area of professional activity, whether or not involving the Executive's services with the Company; and (ii) referring to the 6 Executive's performance of services for the Company as descriptive of the Executive's abilities and qualifications for employment or engagement by any other person. VI. GENERAL RELEASE AND WAIVER OF CLAIMS. ------------------------------------ A. The Executive and the Company hereby unconditionally and forever release, discharge and waive any and all claims of any nature, whatsoever, whether legal, equitable or otherwise which the Executive or the Company may have against the other arising at any time on or before the Separation Date. This mutual release of all claims extends to any and all claims of any nature, whatsoever, whether known, unknown or capable or incapable of being known as of the Separation Date or thereafter, with regard to actions or omissions prior to the Separation Date. This Agreement is a release of all claims of any nature whatsoever by the Executive and the Company against the other with regard to actions or omissions prior to the Separation Date and includes, without limitation, any and all claims, demands, causes of action, liabilities whether known or unknown including those arising from or related to the Executive's employment relationship with the Company, including but without limitation, any and all alleged discrimination or acts of discrimination which occurred or may have occurred on or before the Separation Date based upon race, color, sex, creed, national origin, age, disability or any other violation of any Equal Employment Opportunity Law, ordinance, rule, regulation or order, including but not limited to, Title VII of the Civil Rights Act of 1964, as amended, the Civil Rights Act of 1966; the Civil Rights Act of 1991; The Age Discrimination in Employment Act, as amended ("ADEA") (as further described in Section 7 below); the Fair Labor Standards Act, as amended; the Americans with Disabilities Act; and any similar state statute or regulations. The parties agree and understand and knowingly agree to this release because it is their respective intent in executing this Agreement to forever discharge each other from any and all present, future, foreseen or unforeseen causes of action with regard to actions or omissions prior to the Separation Date. Nothing in this Section 6.A. shall be deemed to limit the remedies of either party set forth in Section 11 of this Agreement. B. The Company and its successors and/or assigns, will indemnify and defend the Executive with respect to any claims that may be brought against the Executive arising out of any action taken or not taken in the Executive's capacity as an officer of the Company. In addition, the Executive shall continue to be covered, in respect of the Executive's activities as an officer of the Company, by the Company's Directors and 7 Officer liability policy or other comparable policies obtained by the Company's successors, to the extent permitted by such policies. VII. RELEASE AND WAIVER OF CLAIMS UNDER THE AGE DISCRIMINATION IN -------------------------------------------------------------- EMPLOYMENT ACT -------------- The Executive acknowledges that the Company encouraged him to consult with an attorney of his choosing, and that he has consulted with such attorney and through this Agreement encourages him to consult with his attorney and he has so consulted with such attorney with respect to possible claims under the ADEA and that the Executive acknowledges that he understands that the ADEA is a federal statute that prohibits discrimination, on the basis of age, in employment, benefits, and benefit plans. The Executive wishes to waive any and all claims under the ADEA that he may have, as of the Separation Date, against the Company, its shareholders, employees, or successors and hereby waives such claims. The Executive further understands that by signing this Agreement he is in fact waiving, releasing and forever giving up any claim under the ADEA that may have existed on or prior to the Separation Date. The Executive acknowledges that the Company has informed him that he has at his option, twenty-one (21) days in which to sign the waiver of this claim under ADEA, and he does hereby knowingly and voluntarily waive said twenty-one (21) day period. The Executive also understands that he has seven (7) days following the Separation Date within which to revoke the release contained in this paragraph by providing a written notice of his revocation of the release and waiver contained in this Section to the Company. The Executive further understands that this right to revoke the release contained in this Section relates only to this Section and does not act as a revocation of any other term of this Agreement. The Executive acknowledges that the cash payment required by Section 4.A. of this Agreement is in consideration for the release contained in this Section 7. The Executive further acknowledges that in the event of the revocation permitted by this Section 7, he shall not receive the payment described in the preceding sentence. VIII. PROCEEDINGS. ----------- The Executive has not filed, and agrees not to initiate or cause to be initiated on his behalf, any complaint, charge, claim or proceeding against the Company or its affiliates before any local, state or federal agency, court, arbitration tribunal or other body relating to his employment or the termination of his employment, other than wit respect to the obligations of the Company to the Executive under this Agreement (each, individually, a "Proceeding"), and agrees not to voluntarily participate in any Proceeding. The Executive waives any right he may have to benefit any manner from any relief (whether monetary or otherwise) arising out of any Proceeding. 8 IX. CONTINUED COOPERATION. --------------------- The Executive agrees to cooperate with all reasonable requests by the Company with respect to matters relating to the Executive's former position as chief Executive Officer of the Company, including agreement to provide sworn testimony. X. SURVIVAL OF COMPETITION, ETC. COVENANTS. --------------------------------------- The Executive acknowledges and agrees that the covenants contained in Section 6 and 7 of the Employment Agreement shall survive the Separation Date and be effective for the periods described therein as if those periods had commenced on the Termination Date. Notwithstanding the foregoing, the aforementioned covenants shall also remain in force from the Separation Date to the Termination date. XI. REMEDIES. -------- The parties acknowledge, consent and agree that the remedies at law available to the Company and the Executive for breach of any of the obligations of this Agreement would be inadequate and that damages flowing from such a breach may not readily be susceptible to being measured in monetary terms. Accordingly, the parties will have the right to seek both damages and specific performance, including immediate injunctive relief as remedies in the case of a breach by the other party of this Agreement and nothing in this Agreement will be deemed to eliminate, limit or otherwise inhibit such rights or the right of either party to seek legal or equitable remedies, including seeking immediate injunctive relief, in connection with or arising out of any other action or omission by the other party on or subsequent to the Separation Date. XII. SEVERABILITY CLAUSE. ------------------- In the event any provisions or part of this Agreement is found to be invalid or unenforceable, only that particular provision or part so found, and not the entire Agreement will be inoperative. If any of the restrictions contained herein are deemed to be unenforceable by reason of the extent, duration or scope thereof, or otherwise, then the court or other tribunal making such determination shall reduce the extent, duration or other provisions hereof to the broadest provision deemed by such tribunal to be enforceable, and in its reduced form, this Agreement will then be enforceable in the manner contemplated hereby. To the extent permitted by applicable law, the parties hereto hereby waive any provisions of law now or hereafter in effect which renders any provision hereof unenforceable in any respect. 9 XIII. RESOLUTION OF DISPUTES AND GOVERNING LAW. ---------------------------------------- This Agreement will be governed by the laws of the State of Georgia. Any dispute under this Agreement (including, but not limited to, disputes regarding the obligations to make payment hereunder) will be decided in accordance with the laws of the State of Georgia, in a court of competent jurisdiction, with each party bearing its own expenses and such dispute will not be subject to arbitration. XIV. NON-ADMISSION. ------------- Nothing contained in this Agreement will be deemed or construed as an admission of wrongdoing or liability on the Executive's part or on the part of the Company, or its officers, employees, directors or representatives or agents. XV. HEADINGS. -------- Headings are given to the sections and subsections of this Agreement solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of this Agreement or any provision thereof. THE PARTIES ACKNOWLEDGE THAT THEY HAVE CONSULTED WITH COUNSEL AND THAT SUCH COUNSEL HAS REVIEWED THIS AGREEMENT AND THE PARTIES ACKNOWLEDGE FURTHER THAT THEY HAVE READ THIS AGREEMENT, THAT THEY FULLY KNOW, UNDERSTAND AND APPRECIATE ITS CONTENTS, THAT THEY EXECUTE SAME AND MAKE THIS AGREEMENT AND RLEEASE AND AGREEMENTS PROVIDED FOR HEREIN VOLUNTARILY AND OF THEIR OWN FREE WILL. 10 IN WITNESS WHEREOF, the parties have executed this Agreement as of the 5th day of May, 2000. PARAGON TRADE BRANDS, INC. By: /S/ ALAN J. CYRON /S/ BOBBY V. ABRAHAM -------------------------------- -------------------- Name: Alan J. Cyron Bobby V. Abraham Title: EVP and Chief Financial Officer Witnessed: /s/ Bill Rothschild Bill Rothschild 5/30/00 EX-27 4 0004.txt FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10Q FOR THE QUARTER ENDED JUNE 25, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 1-MO 5-MOS DEC-31-2000 DEC-31-2000 DEC-27-1999 JAN-29-1999 JAN-28-2000 JUN-25-2000 0 14,524 0 0 0 84,273 0 9,844 0 42,526 0 135,168 0 107,772 0 12,913 0 341585 0 75,008 0 0 0 0 0 0 0 120 0 119,443 0 341,585 50,738 210,081 50,738 210,081 42,497 175,775 42,497 175,775 0 0 0 0 75 7,157 (8,567) (2,772) (100) (209) (8,467) (2,563) 0 0 123,043 0 0 0 114,576 (2,563) 9.59 (.21) 9.59 (.21)
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