-----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, Myb657/pAGoYieEdqUxJu4yX6yquZkr7BESN29KCEIDyzkqAprwFF8EnBSh14IHm YGEN0+RuGN8MDySR+RiREg== /in/edgar/work/20001103/0000889429-00-000026/0000889429-00-000026.txt : 20001106 0000889429-00-000026.hdr.sgml : 20001106 ACCESSION NUMBER: 0000889429-00-000026 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000924 FILED AS OF DATE: 20001103 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: 752683 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 9/24/00 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 September 24, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File No. 1-11368 PARAGON TRADE BRANDS, INC. (Exact name of registrant as specified in its charter) DELAWARE 91-1554663 --------------------------------- ------------------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 180 Technology Parkway NORCROSS, GEORGIA 30092 (Address of principal executive offices) (678) 969-5000 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark whether the Registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes X No ----- ----- The number of shares outstanding of the registrant's common stock was 11,996,300 shares ($.01 par value) as of September 24, 2000. Page 1 Exhibit Index on Page 37 PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES INDEX TO FORM 10-Q FILING FOR THE THIRTEEN WEEK PERIOD ENDED SEPTEMBER 24, 2000
PAGE NO. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Statements of Operations 3 Condensed Consolidated Balance Sheets 5 Condensed Consolidated Statements of Cash Flows 6 Condensed Consolidated Statements of Changes in 8 Shareholders' Equity (Deficit) Notes to Condensed Financial Statements 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of 21 Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk 30 PART II. OTHER INFORMATION Item 1. Legal Proceedings 30 Item 2. Changes in Securities (not applicable) Item 3 Defaults Upon Senior Securities 31 Item 4. Submission of Matters to a Vote of Security Holders (not applicable) Item 5. Other Information (not applicable) Item 6. Exhibits and Reports on Form 8-K 32 Signature Page 36 Exhibit Index 37 Exhibits 41
-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) (NOTE 2)
Successor Predecessor Successor Predecessor Company Company Company Company -------------- -------------- -------------- --------------------------------- Thirteen Thirteen Thirty-Four Five Thirty-Nine Weeks Ended Weeks Ended Weeks Ended Weeks Ended Weeks Ended Sept. 24, 2000 Sept. 26, 1999 Sept. 24, 2000 January 28, 2000 Sept. 26, 1999 -------------- -------------- -------------- ----------------- --------------- Sales, net of discounts and allowances.... $ 135,770 $ 125,031 $ 340,372 $ 49,422 $ 363,476 Cost of sales............................. 108,640 103,487 273,639 40,076 304,521 -------------- ------------- -------------- -------------- -------------- Gross profit.............................. 27,130 21,544 66,733 9,346 58,955 Selling, general and administrative expense.............................. 18,416 20,578 48,969 6,028 61,405 Research and development expenses......... 1,231 840 2,919 313 2,783 Manufacturing operation closing costs..... - 36 - - 1,527 -------------- ------------- -------------- -------------- -------------- Operating profit (loss)................... 7,483 90 14,845 3,005 (6,760) Equity in earnings (loss) of unconsolidated subsidiaries......................... 91 (4) 1,805 - 1,116 Interest expense(1)....................... 4,631 95 11,788 75 304 Other income, net......................... 907 1,007 1,832 97 2,000 -------------- ------------- -------------- -------------- -------------- Earnings (loss) from continuing operations before income taxes, bankruptcy costs and extraordinary item......... 3,850 998 6,694 3,027 (3,948) Bankruptcy costs.......................... - 2,612 - 10,399 7,076 Provision for (benefit from) income taxes. 76 18 (133) (100) (325) -------------- ------------- -------------- -------------- -------------- Earnings (loss) from continuing operations before extraordinary item............ 3,774 (1,632) 6,827 (7,272) (10,699) Loss from discontinued operations - net of income taxes.................. 18,887 3,603 24,503 1,195 10,140 -------------- ------------- -------------- -------------- -------------- Loss before extraordinary item............ (15,113) (5,235) (17,676) (8,467) (20,839) Extraordinary item - gain from discharge of debt.............................. - - - 123,043 - --------------- --------------- --------------- ---------------- --------------- Net (loss) earnings ...................... $ (15,113) $ (5,235) $ (17,676) $ 114,576 $ (20,839) =============== ================ =============== ================ =============== (Loss) earnings per common share - basic Earnings (loss) from continuing operations. .31 (.14) .57 (.61) (.90) Loss from discontinued operations......... (1.57) (.30) (2.05) (.10) (.85) --------------- --------------- --------------- ---------------- --------------- Earnings (loss) per common share - before extraordinary item............ (1.26) (.44) (1.48) (.71) (1.74) Extraordinary item........................ - - - 10.30 - --------------- --------------- --------------- ---------------- -------------- Net (loss) earnings per common share...... $ (1.26) $ (.44) $ (1.48) $ 9.59 $ (1.74) =============== =============== =============== ================ ============== -3- PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) (UNAUDITED) (NOTE 2) Successor Predecessor Successor Predecessor Company Company Company Company -------------- -------------- -------------- --------------------------------- Thirteen Thirteen Thirty-Four Five Thirty-Nine Weeks Ended Weeks Ended Weeks Ended Weeks Ended Weeks Ended Sept. 24, 2000 Sept. 26, 1999 Sept. 24, 2000 January 28, 2000 Sept. 26, 1999 -------------- -------------- -------------- ----------------- --------------- (Loss) earnings per common share - diluted: Earnings (loss) from continuing operations........................... .31 (.14) .57 (.61) (.90) Loss from discontinued operations......... (1.57) (.30) (2.05) (.10) (.85) --------------- --------------- --------------- ---------------- --------------- Earnings (loss) per common share - before discontinued extraordinary item................................. (1.25) (.44) $ (1.48) (.71) (1.74) Extraordinary item........................ - - - 10.30 - --------------- --------------- --------------- ---------------- --------------- Net (loss) earnings per common share...... $ (1.25) $ (.44) $ (1.48) $ 9.59 $ (1.74) =============== =============== =============== ================ =============== - ---------- (1) Contractual interest $ - $ 1,393 $ - $ 569 $ 4,055 =============== =============== =============== ================ ===============
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. -4- PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) (NOTE 2)
Successor Predecessor Company Company --------------------- --------------------- September 24, 2000 December 26, 1999 --------------------- --------------------- (Unaudited) ASSETS Cash and cash equivalents.................................................... $ 9,311 $ 11,657 Receivables.................................................................. 83,763 84,084 Inventories.................................................................. 36,372 40,086 Current portion of deferred income taxes..................................... 846 5,557 Prepaid expenses............................................................. 2,470 2,729 Current assets of discontinued operations.................................... 5,396 11,594 ------------------- ------------------- Total current assets.................................................... 138,158 155,707 Property and equipment....................................................... 73,986 84,904 Construction in progress..................................................... 7,969 5,988 Assets held for sale......................................................... 2,261 2,312 Investment in unconsolidated subsidiary, at cost............................. 20,911 22,929 Investment in and advances to unconsolidated subsidiaries, at equity......... 72,322 56,215 Goodwill .................................................................... - 30,900 Other assets................................................................. 8,607 11,290 Non-current assets of discontinued operations................................ 12,000 30,275 ------------------- ------------------- Total assets............................................................ $ 336,214 $ 400,520 =================== =================== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Checks issued but not cleared................................................ $ 6,121 $ 7,525 Accounts payable............................................................. 34,701 34,715 Accrued liabilities.......................................................... 44,121 34,259 ------------------- ------------------- Total current liabilities............................................... 84,943 76,499 Liabilities subject to compromise (Note 1)................................... - 406,723 Long-term debt............................................................... 146,000 - Deferred compensation........................................................ - 211 Deferred income taxes........................................................ 801 6,904 ------------------- ------------------- Total liabilities....................................................... 231,744 490,337 Commitments and contingencies (Notes 1 and 12) Shareholders' equity (deficit): Preferred stock: (Predecessor Company) Authorized 10,000,000 shares, no shares issued, $.01 par value........................................ - - Preferred stock: (Successor Company) Authorized 5,000,000 shares, no shares issued, $.01 par value........................................ - - Common stock: (Predecessor Company) Authorized 25,000,000 shares, issued 0 and 12,388,464 shares, $.01 par value.......................... - 124 Common stock: (Successor Company) Authorized 20,000,000 shares, issued 11,996,300 and 0 shares, $.01 par value.......................... 120 - Capital surplus.............................................................. 119,843 143,736 Common stock warrants: (Successor Company) Issued 625,821, exercisable at $18.91................................................... 2,275 - Accumulated other comprehensive loss......................................... (92) (1,213) Retained deficit............................................................. (17,676) (222,134) Less: Treasury stock: (Predecessor Company) 438,750 shares, at cost........ - (10,330) ------------------- ------------------- Total shareholders' equity (deficit).................................... 104,470 (89,817) ------------------- ------------------- Total liabilities and shareholders' equity (deficit).................... $ 336,214 $ 400,520 =================== ===================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. -5- PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLAR AMOUNTS IN THOUSANDS) (NOTE 2)
Successor Predecessor Company Company ------------------ --------------------------------- Thirty-Four Five Thirty-Nine Weeks Ended Weeks Ended Weeks Ended Sept. 24, 2000 January 28, 2000 Sept. 26, 1999 ------------------ ------------------ --------------- CASH FLOWS FROM OPERATING ACTIVITIES: Earnings (loss) from continuing operations before extraordinary item.......................................................... $ 6,827 $ (7,272) $ (10,699) Adjustments to reconcile earnings (loss) to net cash provided by (used in) operating activities: Depreciation and amortization................................. 15,293 2,328 24,346 Deferred income taxes......................................... 83 382 (132) Equity in earnings of unconsolidated subsidiaries, net of dividends................................................. (790) - (482) Write-down of assets.......................................... 544 173 (317) Changes in operating assets and liabilities: Accounts receivable........................................... (6,563) (4,039) (274) Inventories and prepaid expenses.............................. 7,708 (1,934) 10,223 Accounts payable.............................................. 3,227 (6,404) 5,786 Checks issued but not cleared................................. (2,913) 1,509 (4,848) Prepetition reclamation payment authorized by court........... - - (439) Liabilities subject to compromise............................. - (13,032) - Accrued liabilities........................................... 7,390 7,254 (3,449) Other......................................................... 2,089 (429) (2,442) ----------------- --------------- --------------- Net cash provided by (used in) operating activities of continuing operations..................................... 32,895 (21,464) 17,273 Net cash used in operating activities of discontinued operations................................... (10,867) (1,569) (12,313) ----------------- --------------- --------------- Net cash provided by (used in) operating activities........... 22,028 (23,033) 4,960 ----------------- --------------- --------------- CASH FLOWS FROM INVESTING ACTIVITIES: Expenditures for property and equipment............................ (8,550) (658) (23,095) Proceeds from sale of property and equipment....................... 3,381 104 6,373 Repayment of advance from unconsolidated subsidiary, at equity..... 4,055 - - Investment in unconsolidated subsidiary, at cost................... - - (186) Investment in and advances to unconsolidated subsidiaries, at equity..................................................... (647) (1,200) (800) Proceeds from sale of Changing Paradigms, Inc...................... - - 350 Other.............................................................. 145 1,570 41 ----------------- --------------- --------------- Net cash used in investing activities of continuing operations................................................ (1,616) (184) (17,317) Net cash used in investing activities of discontinued operations................................... (507) (87) (551) ----------------- --------------- --------------- Net cash used in investing activities......................... (2,123) (271) (17,868) ----------------- --------------- --------------- CONTINUED ON NEXT PAGE. -6- PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (DOLLAR AMOUNTS IN THOUSANDS) (UNAUDITED) (NOTE 2) Successor Predecessor Company Company ------------------ --------------------------------- Thirty-Four Five Thirty-Nine Weeks Ended Weeks Ended Weeks Ended Sept. 24, 2000 January 28, 2000 Sept. 26, 1999 ------------------ ------------------ --------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from credit facility...................................... - 15,000 - Repayments of credit facility...................................... (15,000) - - Sale of common stock............................................... 1,053 - - ----------------- --------------- --------------- Net cash (used in) provided by financing activities........... (13,947) 15,000 - ----------------- --------------- --------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.............. 5,958 (8,304) (12,908) Cash and cash equivalents at beginning of period................... 3,353 11,657 22,537 ----------------- --------------- --------------- Cash and cash equivalents at end of period......................... $ 9,311 $ 3,353 $ 9,629 ================= =============== =============== Cash paid (received) during the period for: Interest, net of amounts capitalized......................... $ 9,592 $ 232 $ 550 Income taxes................................................. $ (3,045) $ (619) $ 470 Bankruptcy costs............................................. $ 3,658 $ 10,819 $ 5,105 Supplemental non-cash disclosures: Settlement of liabilities subject to compromise.............. $ - $ (393,691) $ - Extinguishment of stock (Predecessor Company)................ $ - $ 24,918 $ - Issuance of stock/warrants (Successor Company)............... $ - $ 121,185 $ - Issuance of senior subordinated notes........................ $ - $ 146,000 $ -
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. -7- 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 Income 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 (unaudited) 119 118,791 2,275 - - - Net loss - - - - (17,676) - Issuance of common stock 1 1,052 - - - - Translation adjustment - - - (92) - - -------- ----------- -------- ------------- ---------- ----------- BALANCE, September 24, 2000 (unaudited) $ 120 $ 119,843 $ 2,275 $ (92) $ (17,676) $ - ======== =========== ======== ============= ========== ===========
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 common stock 105,300 - - --------------------- -------------------- ---------------------- BALANCE, September 24, 2000 (unaudited) 11,996,300 625,821 - ===================== ==================== ======================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. -8- PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRTEEN AND THIRTY-NINE WEEK PERIODS ENDED SEPTEMBER 24, 2000 (DOLLAR AMOUNTS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA) NOTE 1: CHAPTER 11 PROCEEDINGS AND REORGANIZATION The Company previously disclosed that The Procter & Gamble Company ("P&G") had filed a lawsuit against it in the United States District Court for the District of Delaware (the "Delaware District Court") alleging that the Company's "Ultra" disposable baby diaper products infringed two of P&G's dual cuff diaper patents. On December 30, 1997, the Delaware District Court issued a Judgment and Opinion (the "Delaware Judgment"), which found that two of P&G's dual cuff diaper patents were valid and infringed by certain of the Company's disposable diaper products, while also rejecting the Company's patent infringement claims against P&G. While the final damages number of approximately $178,400 was not entered by the Delaware District Court until June 2, 1998, the Company originally estimated the liability and associated litigation costs to be approximately $200,000. The amount of the award resulted in violation of certain covenants under the Company's then-existing bank loan agreements. As a result, the issuance of the Delaware Judgment and the uncertainty it created caused an immediate and critical liquidity issue for the Company. On January 6, 1998, the Company filed for relief under Chapter 11 of the Bankruptcy Code, 11 U.S.C. Section 101 ET SEQ., in the United States Bankruptcy Court for the Northern District of Georgia (Case No. 98-60390) (the "Chapter 11 filing"). None of the Company's subsidiaries were included in the Chapter 11 filing. On February 2, 1999, the Company entered into a Settlement Agreement with P&G which fully and finally settled all matters related to the Delaware Judgment, the Company's appeal of the Delaware Judgment, P&G's motion to find the Company in contempt of the Delaware Judgment and P&G's proof of claim filed in the Company's Chapter 11 reorganization proceeding. The P&G Settlement Agreement was approved by the Bankruptcy Court on August 6, 1999 (the "P&G Approval Order"). The Official Committee of Equity Security Holders (the "Equity Committee") appealed the P&G Approval Order. On October 26, 1995, Kimberly-Clark Corporation ("K-C") filed a lawsuit against the Company in U.S. District Court in Dallas, Texas, alleging infringement by the Company's products of two K-C patents relating to dual cuffs. On March 19, 1999, the Company entered into a Settlement Agreement with K-C which fully and finally settled all matters related to the Texas action, including the Company's counterclaims, and K-C's proof of claim filed in the Company's Chapter 11 reorganization proceeding. The K-C Settlement Agreement was approved by the Bankruptcy Court on August 6, 1999 (the "K-C Approval Order"). The Equity Committee appealed the K-C Approval Order. On or about November 15, 1999, the Company and the Official Committee of Unsecured Creditors (the "Creditors' Committee"), as co-proponents, filed the Second Amended Plan of Reorganization (as subsequently modified through January 13, 2000, the "Plan") and a related Disclosure Statement (as subsequently modified through November 18, 1999, the "Disclosure Statement") with the Bankruptcy Court. The Plan incorporated a proposed investment by Wellspring Capital Management LLC ("Wellspring"), a private investment company, to acquire the Company as part of a plan of reorganization (the "Wellspring Transaction"). By order dated November 18, 1999, the Bankruptcy Court approved the Disclosure Statement. At such time, the Bankruptcy Court also approved certain voting procedures and established January 7, 2000, as the voting deadline for the Plan and January 13, 2000, as the date for a hearing to consider confirmation of the Plan. A confirmation hearing was held by the Bankruptcy Court on January 13, 2000. By Order dated January 13, 2000, the Bankruptcy Court confirmed the Plan. On January 28, 2000, Paragon was reorganized pursuant to the Plan through the consummation of the Wellspring Transaction. As contemplated under the Plan, the Equity Committee withdrew with prejudice its appeals of the P&G Approval Order and the K-C Approval Order. -9- PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) As a result of the Chapter 11 filing, the Company incurred significant costs for professional fees. The Company was also required to pay certain expenses of the Creditors' Committee and the Equity Committee including professional fees, to the extent allowed by the Bankruptcy Court. Pursuant to the Plan, a reserve was established from which any remaining professional fees and expenses related to the Chapter 11 reorganization proceeding will be paid. REORGANIZATION. On January 28, 2000, the Company emerged from Chapter 11 protection as contemplated under the Plan. All pre-petition obligations were discharged. Pursuant to the Plan, Wellspring and certain of its affiliates purchased an aggregate of 11,516,405 shares, or approximately 97 percent, of the common stock of the reorganized Company for cash of $115,200. This cash was paid directly to the creditors of the Predecessor Company. See "PART II, ITEM 1: LEGAL PROCEEDINGS." CREDIT FACILITY. On January 28, 2000, the Company and certain subsidiaries of the Company, as guarantors, entered into a three-year $95,000 financing facility (the "Credit Facility") with a bank group led by Citicorp USA, Inc. ("Citicorp"). The maximum borrowing under the Credit Facility may not exceed the lesser of $95,000 or an amount determined by a borrowing base formula. The borrowing base formula is comprised of certain specified percentages of eligible accounts receivable, eligible inventory, equipment and personal and real property of the Company. The Credit Facility has a sub-limit of $15,000 for the issuance of letters of credit. The Credit Facility contains customary financial covenants. SENIOR SUBORDINATED NOTES. On January 28, 2000, the Company issued $146,000 of 11.25 percent senior subordinated notes due 2005 (the "New Notes") as contemplated under the Plan. The New Notes are guaranteed by certain domestic subsidiaries and are not callable until February 1, 2003. Interest is payable semi-annually and during the first two years can be paid in kind if free cash flow, as defined in the indenture, falls below projected levels. The New Notes are subordinated in right of payment to the payment of all senior indebtedness. The New Notes contain customary restrictive covenants. FRESH START ACCOUNTING. The Company has recorded the reorganization and related transactions using "fresh start accounting" as required by Statement of Position 90-7 ("SOP 90-7") issued by the American Institute of Certified Public Accountants. Fresh start accounting was required because there was more than a 50 percent change in the ownership of the Company and the reorganization value of the assets was less than the post-petition liabilities and allowed claims in the bankruptcy. The approximate $360,000 reorganization value of the Company was determined by management, with assistance from independent financial professionals. The methodology employed involved estimation of enterprise value which was determined to be approximately $280,000, including approximately $15,000 in borrowings under the Credit Facility, taking into account a discounted cash flow analysis. Approximately $76,000 of post-petition liabilities were assumed by the Company. Current assets and current liabilities have been recorded at their historical carrying values as such amounts approximate their fair market value. Property and equipment have been recorded at their appraised value as determined by an independent appraisal based on a "continued use value", which assumes that the assets will be used for the purpose for which they were designed and constructed. Property held for sale is valued at estimated net realizable value. The Company's foreign investments were valued based on an estimation of enterprise value taking into account a discounted cash flow analysis. Other non-current assets are stated at historical carrying values which approximate fair value. As the reorganization value was less than the current valuations of the assets, as stated above, the resulting deficit was allocated proportionally to the non-current assets. -10- PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) The effect of the Plan on the Company's condensed consolidated balance sheet as of January 28, 2000, was as follows (unaudited):
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.
-11- PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) NOTE 2: BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES BASIS OF PRESENTATION The condensed consolidated financial statements include the accounts of Paragon Trade Brands, Inc. and its wholly-owned subsidiaries. All significant intercompany transactions and accounts have been eliminated. The accompanying condensed consolidated balance sheet as of December 26, 1999, which has been derived from audited financial statements, and the unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information presented not misleading. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and the notes thereto included in the Company's latest annual report on Form 10-K. In the opinion of management, all adjustments necessary for a fair presentation of the results of the interim periods have been included. All such interim adjustments are of a normal recurring nature except for the bankruptcy-related costs, the discontinued operation and the extraordinary gain. The results of operations for the thirty-nine week period ending September 24, 2000 should not be regarded as necessarily indicative of the results that may be expected for the full year. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Deposits with banks are federally insured in limited amounts. NEW ACCOUNTING STANDARDS The Financial Accounting Standards Board ("FASB") has issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities," which must be adopted in the Company's fiscal year 2001. This statement establishes accounting and reporting standards for derivative instruments - including certain derivative instruments embedded in other contracts - and for hedging activities. The Company is currently evaluating the impact of the statement on the Company's financial statements. The Emerging Issues Task Force of the Financial Accounting Standards Board (the "Task Force") reached a consensus on Issue 00-10, ACCOUNTING FOR SHIPPING AND HANDLING FEES AND COSTS. The issue addresses the income statement classification for shipping and handling fees and costs by companies that record revenue based on the gross amount billed to customers under EITF Issue No. 99-19 "Reporting Revenue Gross as Principal versus Net as an Agent". Upon application of the consensus, which is required for the Company in the fourth quarter of 2000, prior period financial statements should be reclassified to conform to the consensus. To date, the Company has not implemented the change and does not believe the adoption will have a material impact on the financial statements. The Task Force also reached a consensus on Issue 00-14, ACCOUNTING FOR CERTAIN SALES INCENTIVES. The issue addresses the accounting for sales incentives offered voluntarily by a vendor without charge to customers that can be used in, or that are exercisable by a customer as a result of a single exchange transaction. For sales incentives resulting in the right to a rebate, the Task Force concluded that recognition should occur at the date of sale, measured based upon the estimated amount of refunds expected to be claimed by customers. Indicators pointing to the ability to make a reasonable and reliable estimate of the amount of future rebates or refunds were developed. If the amount cannot be reliably estimated, it should be assumed that all customers will request a refund. When recognized, a cash incentive should be classified as a reduction of revenue. Upon application of the consensus, which is required for the Company in the fourth quarter of 2000, prior period financial statements should be reclassified to conform to the consensus. To date, the Company has not implemented the change and does not believe the adoption will have a material impact on the financial statements. -12- 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:
Successor Predecessor Company Company ------------------ ----------------------------------------- Thirty-Four Five Thirty-Nine Weeks Ended Weeks Ended Weeks Ended Sept. 24, 2000 January 28, 2000 Sept. 26, 1999 ----------------- ------------------ ---------------- Professional fees............................... $ - $ 6,990 $ 6,785 Employee confirmation bonuses................... - 3,308 - Amortization of debtor-in-possession credit facility deferred financing costs... - 50 482 Other........................................... - 125 64 Interest income................................. - (74) (255) ----------------- ----------------- ---------------- Bankruptcy costs $ - $ 10,399 $ 7,076 ================= ================= ================
NOTE 4: INCOME TAXES Income tax benefits associated with domestic operating losses and deductible temporary differences for the periods presented have been fully reserved with a valuation allowance on the basis that the realization of such benefits is dependent upon sufficient taxable income in the future. The Company has recorded a valuation allowance for substantially all deferred tax assets as the Company does not believe it is more likely than not that the benefits will be realized. Income tax benefits recognized in the accompanying financial statements for the periods presented relate to recoverable income taxes for jurisdictions outside the United States. The Company accounts for income taxes based on the liability method and, accordingly, deferred income taxes are provided to reflect temporary differences between financial and tax reporting. A significant component of deferred income taxes include temporary differences due to reserves not currently deductible ($50,400) and operating loss carryforwards ("NOLs") ($29,100). These deferred tax assets may only be realized as an offset to future taxable income. Also, the ability to utilize the NOLs and a portion of the other deferred tax assets is subject to limitation under Section 382 of the Internal Revenue Code as a result of the change in ownership that occurred in connection with the Bankruptcy Reorganization. To realize the full benefit of the deferred tax assets, the Company needs to generate approximately $250,900 in future taxable income. Accordingly, the Company has estimated that this limitation on the annual utilization of built-in deductions will be approximately $6,800. The Company currently has fully reserved its net deferred tax asset of $96,600. NOTE 5: COMPREHENSIVE (LOSS) INCOME The following are the components of comprehensive (loss) income:
Successor Predecessor Successor Predecessor Company Company Company Company -------------- -------------- -------------- --------------------------------- Thirteen Thirteen Thirty-Four Five Thirty-Nine Weeks Ended Weeks Ended Weeks Ended Weeks Ended Weeks Ended Sept. 24, 2000 Sept. 26, 1999 Sept. 24, 2000 January 28, 2000 Sept. 26, 1999 -------------- -------------- -------------- ---------------- -------------- Net (loss) income ........................ $ (15,113) $ (5,235) $ (17,676) $ 114,576 $ (20,839) Foreign currency translation adjustment... 17 (1) (251) 159 614 -------------- ------------- ------------- ---------------- -------------- Comprehensive (loss) income .............. $ (15,096) $ (5,236) $ (17,927) $ 114,735 $ (20,225) ============== ============= ============= ================ ==============
-13- 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 ---------------------- ---------------------- September 24, 2000 December 26, 1999 ---------------------- ---------------------- Accounts receivable - trade.................................................. $ 67,545 $ 66,181 Current portion of advances to unconsolidated subsidiary, at equity.......... 11,685 11,059 Other receivables............................................................ 13,326 20,643 ---------------------- --------------------- 92,556 97,883 Less: Allowance for doubtful accounts....................................... (8,793) (13,799) ---------------------- --------------------- Net receivables.............................................................. $ 83,763 $ 84,084 ====================== =====================
NOTE 7: INVENTORIES Inventories consist of the following:
Successor Predecessor Company Company ---------------------- ---------------------- September 24, 2000 December 26, 1999 ---------------------- ---------------------- LIFO: Raw materials - pulp.................................................... $ 207 $ 40 Finished goods.......................................................... 21,478 22,068 FIFO: Raw materials - other................................................... 4,091 5,754 Materials and supplies.................................................. 15,835 17,777 ---------------------- --------------------- 41,611 45,639 Reserve for excess and obsolete items................................... (5,239) (5,553) ---------------------- --------------------- Net inventories.............................................................. $ 36,372 $ 40,086 ====================== =====================
NOTE 8: PROPERTY AND EQUIPMENT Property and equipment, at cost, are as follows:
Successor Predecessor Company Company ---------------------- ---------------------- September 24, 2000 December 26, 1999 ---------------------- ---------------------- Land $ 2,308 $ 2,836 Buildings and improvements................................................... 13,036 29,845 Machinery and equipment...................................................... 74,770 218,443 ---------------------- --------------------- 90,114 251,124 Less: Allowance for depreciation............................................ (16,128) (166,220) ---------------------- --------------------- Net property and equipment................................................... $ 73,986 $ 84,904 ====================== =====================
-14- 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 ---------------------- ---------------------- September 24, 2000 December 26, 1999 ---------------------- ---------------------- Payroll - wages and salaries, incentive awards, retirement, vacation and severance pay.............................................. $ 9,995 $ 8,369 vacation and severance pay.............................................. Coupons and promotions....................................................... 9,197 8,214 Royalties.................................................................... 11,853 8,225 Interest .................................................................... 2,527 - Reserve for discontinued operations ......................................... 4,650 - Other ....................................................................... 5,899 9,451 ---------------------- --------------------- Total........................................................................ $ 44,121 $ 34,259 ====================== =====================
NOTE 10: LONG-TERM DEBT Long-term debt is as follows:
Successor Predecessor Company Company ---------------------- ---------------------- September 24, 2000 December 26, 1999 ---------------------- ---------------------- 11.25% Senior subordinated notes due 2005.................................... $ 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. The Company is current on its interest payments and has not elected to pay interest in kind. Credit Facility. On January 28, 2000, the Company and certain subsidiaries of the Company, as guarantors, entered into a three-year $95,000 financing facility (the "Credit Facility") with a bank group led by Citicorp USA, Inc. ("Citicorp"). The maximum borrowing under the Credit Facility may not exceed the lesser of $95,000 or an amount determined by a borrowing base formula. The borrowing base formula is comprised of certain specified percentages of eligible accounts receivable, eligible inventory, equipment and personal and real property of the Company. The Credit Facility has a sub-limit of $15,000 for the issuance of letters of credit. The Credit Facility contains customary financial covenants. As of September 24, 2000, there was an aggregate of $4,489 in letters of credit issued under the Credit Facility and no direct borrowings. See "PART I, ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - RISKS AND UNCERTAINTIES". -15- PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) NOTE 11: EARNINGS (LOSS) PER COMMON SHARE Following is a reconciliation of the numerators and denominators of the basic and diluted income (loss) per common share from continuing operations:
Successor Predecessor Successor Predecessor Company Company Company Company -------------- -------------- -------------- --------------------------------- Thirteen Thirteen Thirty-Four Five Thirty-Nine Weeks Ended Weeks Ended Weeks Ended Weeks Ended Weeks Ended Sept. 24, 2000 Sept. 26, 1999 Sept. 24, 2000 January 28, 2000 Sept. 26, 1999 -------------- -------------- -------------- ----------------- --------------- Earnings (loss) from continuing operations. $ 3,774 $ (1,632) $ 6,827 $ (7,272) $ (10,699) ============== ============== ============== ================= ============== Weighted average number of common shares used in basic EPS (000's)...... 11,996 11,950 11,961 11,950 11,949 Effect of dilutive securities: stock options (000's)................. 61 - 20 - - ------------- ------------- -------------- --------------- ------------ Weighted average number of common shares and potentially dilutive securities (000's).................. 12,057 11,950 11,981 11,950 11,949 ============== ============== ============== ================ ============= Basic earnings (loss) per common share..... $ .31 $ (.14) $ .57 $ (.61) $ (.90) ============== ============== ============== ================ ============= Diluted earnings (loss) per common share... $ .31 $ (.14) $ .57 $ (.61) $ (.90) ============== ============== ============== ================ =============
Common stock warrants and options during the thirteen and thirty-nine weeks ended September 26, 1999 and the five weeks ended January 28, 2000 were not included in the calculation of diluted earnings per share because the warrants' and options' exercise prices were greater than the average market price of the common shares for the respective periods. The options and warrants outstanding during the thirteen and thirty-nine weeks ended September 26, 1999 and the five weeks ended January 28, 2000 were anti-dilutive. NOTE 12: LEGAL PROCEEDINGS THE PROCTER & GAMBLE COMPANY V. PARAGON TRADE BRANDS, INC. - P&G filed a lawsuit in January 1994 in the Delaware District Court alleging that the Company's "Ultra" infant disposable diaper products infringed two of P&G's dual cuff diaper patents. On December 30, 1997, the Delaware District Court issued a Judgment and Opinion finding that P&G's dual cuff patents were valid and infringed, while at the same time finding the Company's patent to be invalid, unenforceable and not infringed by P&G's products. Judgment was entered on January 6, 1998. Damages of approximately $178,400 were entered against Paragon by the Delaware District Court on June 2, 1998. At the same time, the Delaware District Court entered injunctive relief agreed upon by P&G and the Company. The Delaware Judgment had a material adverse effect on the Company's financial position and its results of operations. As a result of the District Court's Judgment, the Company filed for relief under Chapter 11 of the Bankruptcy Code, 11 U.S.C. Section 101 ET seq., in the United States Bankruptcy Court for the Northern District of Georgia (Case No. 98-60390) on January 6, 1998. See "--IN RE PARAGON TRADE BRANDS, INC.," below. -16- PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) On February 2, 1999, the Company entered into a Settlement Agreement with P&G which fully and finally settled all matters related to the Delaware Judgment, the Company's appeal of the Delaware Judgment, P&G's motion to find the Company in contempt of the Delaware Judgment and P&G's proof of claim filed in the Company's Chapter 11 reorganization proceeding. The P&G Approval Order was issued on August 6, 1999. As a part of the settlement, the Company entered into License Agreements for the U.S. and Canada with respect to certain of the patents asserted by P&G in its proof of claim, including those asserted in the Delaware action. The U.S. and Canadian patent rights licensed by the Company permitted the Company to convert to a dual cuff baby diaper design. KIMBERLY-CLARK CORPORATION V. PARAGON TRADE BRANDS, INC. - On October 26, 1995, K-C filed a lawsuit against the Company in the U.S. District Court in Dallas, Texas, alleging infringement by the Company's products of two K-C patents relating to dual cuffs. As a result of the Company's Chapter 11 filing, the proceedings in the K-C litigation were stayed. On March 19, 1999, the Company entered into a Settlement Agreement with K-C which fully and finally settled all matters related to the Texas action, including the Company's counterclaims, and K-C's proof of claim filed in the Company's Chapter 11 reorganization proceeding. The K-C Approval Order was issued by the Bankruptcy Court on August 6, 1999. As a part of the settlement, the Company entered into License Agreements for the U.S. and Canada with respect to the patents asserted by K-C in the Texas action. The patent rights licensed by the Company from K-C permitted the Company to convert to a dual cuff diaper design. As a part of the K-C License Agreement, K-C has agreed not to sue the Company on two of K-C's patents related to the use of Super Absorbent Polymer ("SAP") in diapers and training pants, so long as the Company uses SAP which exhibits certain performance characteristics (the "SAP Safe Harbor"). The Company has encountered increased product costs due to the increased price and usage of new SAP within the SAP Safe Harbor. The Company cannot predict at this time whether or when the added costs will be fully offset. IN RE PARAGON TRADE BRANDS, INC. - As described above, on December 30, 1997, the Delaware District Court issued a Judgment and Opinion in the Company's lawsuit with P&G finding that two of P&G's diaper patents were valid and infringed by the Company's "Ultra" disposable baby diapers, while also rejecting the Company's patent infringement claim against P&G. Judgment was entered on January 6, 1998. While a final damages number was not entered by the Delaware District Court until June 2, 1998, the Company originally estimated the liability and associated litigation costs to be approximately $200,000. The amount of the award resulted in violation of certain covenants under the Company's bank loan agreements. As a result, the issuance of the Delaware Judgment and the uncertainty it created caused an immediate and critical liquidity issue for the Company which necessitated the Chapter 11 filing. Subsequently, damages of approximately $178,400 were entered against Paragon by the Delaware District Court on June 2, 1998. At the same time, the Delaware District Court entered injunctive relief agreed upon by P&G and the Company. See "--THE PROCTER & GAMBLE COMPANY V. PARAGON TRADE BRANDS, INC.," above. The Chapter 11 filing prevented P&G from placing liens on the Company's assets, permitted the Company to appeal the Delaware District Court's decision in an orderly fashion and afforded the Company the opportunity to resolve liquidated and unliquidated claims against the Company which arose prior to the Chapter 11 filing. On February 2, 1999, the Company entered into a Settlement Agreement with P&G which fully and finally settled all matters related to the Delaware Judgment, the Company's appeal of the Delaware Judgment, P&G's motion to find the Company in contempt of the Delaware Judgment and P&G's proof of claim filed in the Company's Chapter 11 reorganization proceeding. See "--THE PROCTER & GAMBLE COMPANY V. PARAGON TRADE BRANDS, INC.," above. On March 19, 1999, the Company entered into a Settlement Agreement with K-C which fully and finally settled all matters related to the Texas action, including the Company's counterclaims, and K-C's proof of claim filed in the Company's Chapter 11 reorganization proceeding. See "--KIMBERLY-CLARK CORPORATION V. PARAGON TRADE BRANDS, INC.," above. -17- PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) On or about November 15, 1999, the Company and the Creditors' Committee, as co-proponents, filed the Plan and Disclosure Statement with the Bankruptcy Court. The Plan incorporated the Wellspring Transaction. By order dated November 18, 1999, the Bankruptcy Court approved the Disclosure Statement. At such time, the Bankruptcy Court also approved certain voting procedures and established January 7, 2000, as the voting deadline for the Plan and January 13, 2000, as the date for a hearing to consider confirmation of the Plan. A confirmation hearing was held by the Bankruptcy Court on January 13, 2000. By Order dated January 13, 2000, the Bankruptcy Court confirmed the Plan. On January 28, 2000, Paragon was reorganized pursuant to the Plan through the consummation of the Wellspring Transaction. As contemplated under the Plan, the Equity Committee has withdrawn with prejudice its appeals of the P&G Approval Order and the K-C Approval Order. Legal fees and costs in connection with the Chapter 11 reorganization proceeding were significant. KIMBERLY-CLARK WORLDWIDE, INC. V. PARAGON TRADE BRANDS, INC. - On March 20, 2000, Kimberly-Clark Worldwide, Inc. ("K-C Worldwide") filed suit in the U.S. District Court in Delaware against the Company for allegedly infringing a patent related to a disposable absorbent garment with a registered graphic. The suit seeks injunctive relief, unspecified treble damages, interest and attorneys' fees and expenses. On July 31, 2000, the Company and K-C Worldwide executed a settlement agreement. The Company believes that the terms and conditions of the settlement agreement do not have a material business or financial impact on the Company and have been reflected in the year to date financial statements. OTHER - The Company is also a party to other legal proceedings generally incidental to its activities. Although the final outcome of any legal proceeding or dispute is subject to a great many variables and cannot be predicted with any degree of certainty, the Company presently believes that any ultimate liability resulting from any or all legal proceedings or disputes to which it is a party will not have a material adverse effect on its financial condition or results of operations. NOTE 13: BANK CREDIT FACILITIES On January 28, 2000, the Company entered into the Credit Facility. The maximum borrowing under the Credit Facility may not exceed the lesser of $95,000 or an amount determined by a borrowing base formula. The borrowing base formula is comprised of certain specified percentages of eligible accounts receivable, eligible inventory, equipment and personal property and real property of the Company. The Credit Facility has a sub-limit of $15,000 for the issuance of letters of credit. Borrowings under the Credit Facility are secured by a security interest in, pledge of and lien on substantially all of the Company's North American assets and properties and the proceeds thereof. Borrowings under the Credit Facility are guaranteed by certain domestic subsidiaries and may be used to fund working capital and other general corporate purposes including acquisitions and investments in existing and new international joint ventures. The Credit Facility contains restrictive covenants, including among other things, a prohibition on dividends, limitations on the creation of additional liens and indebtedness, limitations on capital expenditures, investments, loans and advances, the sales of assets and transactions with affiliates. Financial covenants include the maintenance of minimum earnings before interest, taxes, depreciation and amortization, fixed charges, coverage ratio, tangible net worth and a maximum leverage ratio. The Credit Facility provides that borrowings will bear interest at a rate of 1.50 percent in excess of Citibank's base rate, or at the Company's option, a rate of 2.50 percent in excess of the reserve adjusted eurodollar rate for interest periods of one, two, three or six months. After March 31, 2001, borrowing rates will be subject to a pricing grid based upon the Company's leverage ratio and could decrease by a maximum of .5 percent and increase by a maximum of .25 percent. The Company will pay a commitment fee of .5 percent per annum on the unused portion of the Credit Facility, a letter of credit fee equal to 2.75 percent per annum on the average outstanding letters of credit and certain other fees. As of September 24, 2000, there was an aggregate of $4,489 in letters of credit issued under the Credit Facility and no direct borrowings. See "PART I, ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITIONS - RISKS AND UNCERTAINTIES " herein. -18- PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) NOTE 14: SEGMENT REPORTING The Company in the past has operated principally in two segments which were organized based on the nature of the products sold: (I) infant care and (ii) feminine care and adult incontinence pad-oriented products. The Company on August 10, 2000 decided to exit the feminine care and adult incontinence segment. The Company plans to source and distribute other non-pad adult products in the future. The change has been accounted for as a discontinued operation as of September 24, 2000. NOTE 15: DISCONTINUED OPERATION On August 10, 2000, the Company made a decision to concentrate on its core infant care business with the intent to sell its Gaffney, South Carolina femcare and adult incontinence segment. The expected disposal date depends on market factors as the Company continues to work towards liquidating the assets of the segment. The Company expects to cease manufacturing operations in October 2000 with continued inventory shipments until approximately December 2000. The condensed consolidated financial statements of the Company for all periods presented have been restated to reflect the discontinued operations. Assets of the discontinued operation have been reflected in the condensed consolidated balance sheets as current or non-current based on the nature of the amounts. No liabilities are anticipated to be assumed by a third party and therefore they are reflected in continuing operations. The following is a summary of the assets of the discontinued operations presented in thousands:
Successor Predecessor Company Company ---------------------- --------------------- September 24, 2000 December 26, 1999 ---------------------- --------------------- Cash and short-term investments..................... $ 9 $ 28 Receivables......................................... 2,174 1,892 Inventories - net................................... 2,437 8,658 Prepaid expenses.................................... 776 1,016 ---------------------- --------------------- Current assets of discontinued operations........... 5,396 11,594 ====================== ===================== Property and equipment.............................. 11,982 30,270 Other............................................... 18 5 Non-current assets of discontinued operations....................................... $ 12,000 $ 30,275 ====================== =====================
The Company reported a loss from operations of the discontinued segment, net of tax, for the thirteen weeks and thirty-nine weeks ending September 26, 1999 of $3,603 and $10,140, respectively. Net sales for discontinued operations for the thirteen and thirty-nine weeks were $3,476 and $9,123, respectively. The Company for the thirteen weeks and thirty-nine weeks ending September 24, 2000 reported a loss from operations of the discontinued segment, net of taxes, of $18,887 and $25,698, respectively. Net sales in those same periods were $3,396 and $10,191, respectively. The balance of the losses was from operations of the discontinued segment in the respective periods prior to the measurement date. The charges are summarized below: -19- PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Inventory write-down....................................... $ 5,650 Equipment write-down....................................... 5,600 Estimated operating losses from measurement date........... 3,228 Severance.................................................. 1,250 Facility holding........................................... 900 Equipment removal.......................................... 700 ------------------ Total loss on disposal..................................... $ 17,328 ================== -20- PART I. FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES CHAPTER 11 PROCEEDINGS AND REORGANIZATION The Company previously disclosed that The Procter & Gamble Company ("P&G") had filed a lawsuit against it in the United States District Court for the District of Delaware (the "Delaware District Court") alleging that the Company's "Ultra" disposable baby diaper products infringed two of P&G's dual cuff diaper patents. On December 30, 1997, the Delaware District Court issued a Judgment and Opinion which found that two of P&G's dual cuff diaper patents were valid and infringed by certain of the Company's disposable diaper products, while also rejecting the Company's patent infringement claims against P&G. While the final damages number of approximately $178.4 million was not entered by the Delaware District Court until June 2, 1998, the Company originally estimated the liability and associated litigation costs to be approximately $200 million. The amount of the award resulted in violation of certain covenants under the Company's then-existing bank loan agreements. As a result, the issuance of the Delaware Judgment and the uncertainty it created caused an immediate and critical liquidity issue for the Company. On January 6, 1998, the Company filed for relief under Chapter 11 of the Bankruptcy Code, 11 U.S.C. Section 101 ET SEQ., in the United States Bankruptcy Court for the Northern District of Georgia (Case No. 98-60390) (the "Chapter 11 filing"). None of the Company's subsidiaries were included in the Chapter 11 filing. On February 2, 1999, the Company entered into a Settlement Agreement with P&G which fully and finally settled all matters related to the Delaware Judgment, the Company's appeal of the Delaware Judgment, P&G's motion to find the Company in contempt of the Delaware Judgment and P&G's proof of claim filed in the Company's Chapter 11 reorganization proceeding. The P&G Settlement Agreement was approved by the Bankruptcy Court on August 6, 1999 (the "P&G Approval Order"). The Official Committee of Equity Security Holders (the "Equity Committee") appealed the P&G Approval Order. See "PART II, ITEM 1: LEGAL PROCEEDINGS." On October 26, 1995, Kimberly-Clark Corporation ("K-C") filed a lawsuit against the Company in U.S. District Court in Dallas, Texas, alleging infringement by the Company's products of two K-C patents relating to dual cuffs. On March 19, 1999, the Company entered into a Settlement Agreement with K-C which fully and finally settled all matters related to the Texas action, including the Company's counterclaims, and K-C's proof of claim filed in the Company's Chapter 11 reorganization proceeding. The K-C Settlement Agreement was approved by the Bankruptcy Court on August 6, 1999 (the "K-C Approval Order"). The Equity Committee appealed the K-C Approval Order. See "PART II, ITEM 1: LEGAL PROCEEDINGS." On or about November 15, 1999, the Company and the Official Committee of Unsecured Creditors (the "Creditors' Committee"), as co-proponents, filed the Second Amended Plan of Reorganization (as subsequently modified through January 13, 2000, the "Plan") and a related Disclosure Statement (as subsequently modified through November 18, 1999, the "Disclosure Statement") with the Bankruptcy Court. The Plan incorporated a proposed investment by Wellspring Capital Management LLC ("Wellspring"), a private investment company, to acquire the Company as part of a plan of reorganization (the "Wellspring Transaction"). By order dated November 18, 1999, the Bankruptcy Court approved the Disclosure Statement. At such time, the Bankruptcy Court also approved certain voting procedures and established January 7, 2000, as the voting deadline for the Plan and January 13, 2000, as the date for a hearing to consider confirmation of the Plan. A confirmation hearing was held by the Bankruptcy Court on January 13, 2000. By Order dated January 13, 2000, the Bankruptcy Court confirmed the Plan. On January 28, 2000, Paragon was reorganized pursuant to the Plan through the consummation of the Wellspring Transaction. As contemplated under the Plan, the Equity Committee has withdrawn with prejudice its appeals of the P&G Approval Order and the K-C Approval Order. See "PART II, ITEM 1: LEGAL PROCEEDINGS." As a result of the Chapter 11 filing, the Company incurred significant costs for professional fees. The Company was also required to pay certain expenses of the Creditors' Committee and the Equity Committee including professional fees, to the extent allowed by the Bankruptcy Court. Pursuant to the Plan, a reserve was established from which any remaining -21- professional fees and expenses related to the Chapter 11 reorganization proceeding will be paid. See "PART II, ITEM 1: LEGAL PROCEEDINGS." Trading in the common stock of the Company on the New York Stock Exchange ("NYSE") was suspended prior to the opening of trading on July 8, 1999. As of July 9, 1999, the National Association of Securities Dealers, Inc. Over-the-Counter Bulletin Board (the "OTCBB") began publishing quotations of the Company's common stock under the symbol PGNFQ. As a result of the Plan, on February 2, 2000, the OTCBB ceased quotations of the Company's common stock. Quotation of the Company's common stock resumed on the OTCBB as of March 30, 2000, under the symbol PGTR. REORGANIZATION. On January 28, 2000, the Company emerged from Chapter 11 protection as contemplated under the Plan. All pre-petition obligations were discharged. Pursuant to the Plan, Wellspring and certain of its affiliates purchased an aggregate of 11,516,405 shares, or approximately 97 percent, of the common stock of the reorganized Company for cash of $115.2 million. The cash was paid directly to the creditors of the Predecessor Company. See "PART II, ITEM 1: LEGAL PROCEEDINGS." CREDIT FACILITY. On January 28, 2000, the Company and certain subsidiaries of the Company, as guarantors, entered into a three-year $95 million financing facility (the "Credit Facility") with a bank group led by Citicorp USA, Inc. ("Citicorp"). The maximum borrowing under the Credit Facility may not exceed the lesser of $95 million or an amount determined by a borrowing base formula. The borrowing base formula is comprised of certain specified percentages of eligible accounts receivable, eligible inventory, equipment and personal property and real property of the Company. The Credit Facility has a sub-limit of $15 million for the issuance of letters of credit. The Credit Facility contains customary financial covenants. SENIOR SUBORDINATED NOTES. On January 28, 2000, the Company issued $146.0 million of 11.25 percent senior subordinated notes due 2005 (the "New Notes") as contemplated under the Plan. The New Notes are guaranteed by certain domestic subsidiaries and are not callable until February 1, 2003. Interest is payable semi-annually and during the first two years can be paid in kind if free cash flow, as defined in the indenture, falls below projected levels. The New Notes are subordinated in right of payment to the payment of all senior indebtedness. The New Notes contain customary restrictive covenants. FRESH START ACCOUNTING. The Company has recorded the reorganization and related transactions using "fresh start accounting" as required by Statement of Position 90-7 ("SOP 90-7") issued by the American Institute of Certified Public Accountants. RESULTS OF OPERATIONS Effective January 28, 2000, the Company emerged from Chapter 11 bankruptcy proceedings and implemented "fresh start accounting." Accordingly, all assets and liabilities were restated to reflect their respective fair values. The condensed consolidated financial statements after that date are those of a new reporting entity and are not comparable to the Pre-Confirmation periods. However, for purposes of this discussion, the thirty-four weeks ended September 24, 2000 (Post-Confirmation) have been combined with the five weeks ended January 28, 2000 (Pre-Confirmation) and then compared to the thirty-nine weeks ended September 26, 1999. Differences between periods due to fresh start accounting adjustments are explained when necessary. The following table is included solely for use in comparative analysis of results of operations, and to complement management's discussion and analysis. The table that follows has been updated to reflect the Company's discontinued operations for all periods presented. -22-
Thirteen Weeks Ended Thirty-Nine Weeks Ended -------------------------------- ------------------------------- Sept. 24, 2000 Sept. 26, 1999 Sept. 24, 2000 Sept. 26, 1999 -------------- -------------- -------------- -------------- Sales, net of discounts and allowances.................. $ 135,770 $ 125,031 $ 389,794 $ 363,476 Cost of sales........................................... 108,640 103,487 313,715 304,521 --------------- ------------- ------------- -------------- Gross profit............................................ 27,130 21,544 76,079 58,955 Selling, general and administrative expense............. 18,416 20,578 54,997 61,405 Research and development expense........................ 1,231 840 3,232 2,783 Manufacturing operation closing costs................... - 36 - 1,527 --------------- ------------- ------------- -------------- Operating profit (loss)................................. 7,483 90 17,850 (6,760) Equity in earnings (loss) of unconsolidated subsidiaries 91 (4) 1,805 1,116 Interest expense........................................ 4,631 95 11,863 304 Other income, net....................................... 907 1,007 1,929 2,000 --------------- ------------- ------------- -------------- Earnings (loss) from continuing operations before income taxes, bankruptcy costs and extraordinary item.............................................. 3,850 998 9,721 (3,948) Bankruptcy costs........................................ - 2,612 10,399 7,076 Provision for (benefit from) income taxes............... 76 18 (233) (325) --------------- ------------- -------------- --------------- Earnings (loss) from continuing operations before ......extraordinary item................................ 3,774 (1,632) (445) (10,699) Loss from discontinued operations - net of income taxes. 18,887 3,603 25,698 10,140 --------------- ------------- ------------- -------------- Loss before extraordinary item.......................... (15,113) (5,235) (26,143) (20,839) Extraordinary item - gain from discharge of debt........ - - 123,043 - --------------- ------------- ------------- -------------- Net (loss) earnings..................................... $ (15,113) $ (5,235) $ 96,900 $ (20,839) ================ ============== ============= ===============
THIRTEEN WEEKS ENDED SEPTEMBER 24, 2000 COMPARED TO THIRTEEN WEEKS ENDED SEPTEMBER 26, 1999 A net loss of $15.1 million was reported in the third quarter of 2000 compared to a net loss of $5.2 million in the third quarter of 1999. The Company has historically operated in two segments consisting of (i) infant care absorbent products and (ii) feminine care and adult incontinence pad-oriented products. On August 10, 2000, the Board of Directors approved management's plan to discontinue operations in the feminine care and adult incontinence pad-oriented products segment. As a result, it is anticipated that the production facility located in Gaffney, South Carolina will be closed. The condensed consolidated financial statements of the Company have been restated for all periods presented to reflect the feminine care and adult incontinence pad-oriented products segment as a discontinued operation. The third quarter net loss includes an $18.9 million loss, net of taxes, for the discontinuance of this segment. Earnings from continuing operations in the infant care segment were $3.8 million in the third quarter of 2000 compared to a loss of $1.6 million in the third quarter of 1999. Increased unit volume, improved product mix, reduced manufacturing and selling, general and administrative costs all contributed to the improvement compared to the third quarter of 1999. The third quarter results for 2000 were negatively impacted by approximately $2.0 million of non-recurring costs, primarily severance for former senior management. The third quarter of 1999 results were negatively impacted by $2.6 million in bankruptcy related costs. Basic earnings per share from continuing operations for the thirteen weeks ended September 24, 2000, was $.31. Including the charges for the discontinued operation, the basic net loss per share was $1.26. On a fully diluted basis, the earnings per share from continuing operations were $.31. Net of charges for the discontinued operations, the fully diluted net loss per share was $1.25. Comparison to previous periods is not meaningful due to the Company's emergence from bankruptcy and the implementation of fresh start accounting in the first quarter of 2000. NET SALES With the feminine care and adult incontinence pad-oriented products segment being reported as a discontinued operation, the remaining infant care segment reported a net sales increase of 8.6 percent to $135.8 million in the third quarter of 2000 compared to $125.0 million in the third quarter of 1999. Unit sales increased 5.8 percent to 838 million units compared to 792 million units in the third quarter of 1999. The increase in net sales and units was due to a favorable -23- product mix associated with the Company's training pant product and the launch of certain destination store brand product and marketing programs. The Company anticipates higher volume during the fourth quarter of 2000 compared to 1999 due to the training pant product and destination store brand programs discussed above. In response to competitive initiatives, the Company has begun to implement a package count change which may result in an effective price increase. Management cannot predict whether competitive pricing pressures will negate a sustained price increase in certain accounts. COST OF SALES Infant care cost of sales was $108.6 million in the third quarter of 2000 compared to $103.5 million in the third quarter of 1999. As a percentage of net sales, infant care cost of sales was 80.0 percent in the third quarter of 2000 compared to 82.8 percent in the third quarter of 1999. This decrease in costs as a percentage of sales was due to improved manufacturing efficiencies, lower plant overhead costs, savings associated with the closure of the Brampton, Canada manufacturing facility during the second quarter of 1999, and lower depreciation costs. These favorable items were partially offset by higher pulp costs. Infant care raw material costs, with the exception of pulp, were at lower cost levels in the third quarter of 2000 compared to the third quarter of 1999. Pulp costs started to increase during the second half of 1999 and are expected to increase during the remainder of 2000. Infant care depreciation costs were $5.3 million in the third quarter of 2000 compared to $6.2 million in the third quarter of 1999. The decrease is partially due to lower asset values as a result of fresh start accounting. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES SG&A expenses were $18.4 million in the third quarter of 2000 compared to $20.6 million in the third quarter of 1999. As a percentage of net sales, these expenses were 13.6 percent in the third quarter of 2000 compared to 16.5 percent in the third quarter of 1999. The decrease in SG&A is primarily attributable to lower sales and marketing and information technology expenses which more than offset former senior management severance costs. Depreciation and amortization costs included in SG&A decreased to $.8 million in the third quarter of 2000 compared to $2.2 million in the third quarter of 1999. The decrease in depreciation and amortization is predominately due to the elimination of goodwill through fresh start accounting and reduced amortization expense of the Company's enterprise software due to fresh start accounting and some of the assets becoming fully amortized in 1999. RESEARCH AND DEVELOPMENT Research and development expenses were $1.2 million in the third quarter of 2000 compared to $.8 million in the third quarter of 1999. INTEREST EXPENSE Interest expense was $4.6 million in the third quarter of 2000 compared to $.1 million in the third quarter of 1999. The increase is due to interest costs associated with the New Notes of $146.0 million bearing an annual interest rate of 11.25 percent. OTHER INCOME, NET Other income, net was $.9 million in the third quarter of 2000 compared to $1.0 million in the third quarter of 1999. Other income, net in the quarter was primarily due to cash investments and interest on receivables from unconsolidated subsidiaries. EQUITY IN EARNINGS OF UNCONSOLIDATED SUBSIDIARIES The equity in earnings of unconsolidated subsidiaries was $.1 million in the third quarter of 2000 compared to zero in the third quarter of 1999. BANKRUPTCY COSTS There were no direct bankruptcy costs in the third quarter of 2000 compared to $2.6 million in the third quarter of 1999. -24- INCOME TAXES Income tax benefits associated with domestic operating losses and deductible temporary differences for the periods presented have been fully reserved with a valuation allowance on the basis that the realization of such benefits is dependent upon sufficient taxable income in the future. The Company has recorded a valuation allowance for substantially all deferred tax assets as the Company does not believe it is more likely than not that the benefits will be realized. Income tax benefits recognized in the accompanying financial statements for the periods presented relate to recoverable income taxes for jurisdictions outside the United States. THIRTY-NINE WEEKS ENDED SEPTEMBER 24, 2000 COMPARED TO THIRTY-NINE WEEKS ENDED SEPTEMBER 26, 1999 RESULTS OF OPERATIONS Net earnings of $96.9 million were recorded for the first three quarters of 2000 compared to a net loss of $20.8 million in the first three quarters of 1999. The results of the first three quarters included an extraordinary gain of $123.0 million associated with forgiveness of debt that resulted from the reorganization of the Company in accordance with the Plan. The Company has historically operated in two segments consisting of (i) infant care absorbent products and (ii) feminine care and adult incontinence pad-oriented products. On August 10, 2000 the Board of Directors approved management's plan to discontinue operations in the feminine and adult incontinence pad-oriented products segment. As a result it is anticipated that the production facility located in Gaffney, South Carolina will be closed. The condensed consolidated financial statements of the Company have been restated for all periods presented to reflect the feminine care and adult incontinence pad-oriented products segment as a discontinued operation. The third quarter year to date financial statements reflect losses of $25.7 million in discontinued operations consisting of an $11.6 million loss from operations and a $14.1 million charge for anticipated losses from disposal of facilities, equipment and inventories. The Company, in the first three quarters, had a loss from the continuing operations of the infant care segment of $.4 million compared to a loss of $10.7 million in the first three quarters of 1999. Increased unit volume, improved product mix, reduced manufacturing and selling, general and administrative costs all contributed to the operating improvement compared to the first three quarters of 1999. Year to date results for 2000 were negatively impacted by approximately $5.5 million of non-recurring costs, primarily related to severance costs to former senior management and $10.4 million of bankruptcy costs. The first three quarters of 1999 results were negatively impacted by costs associated with price concessions made to export customers to address product acceptance issues, the cessation of manufacturing operations at the Company's Canadian subsidiary, Paragon Trade Brands (Canada) Inc.'s Brampton, Ontario facility in June 1999, and bankruptcy costs of $7.1 million. Basic and diluted loss per share from continuing operations for the thirty-nine weeks ended September 24, 2000, was $.04. The basic loss per share net of charges for the discontinued operation was $2.19 and net loss per share was $8.11, respectively. Comparison to previous periods is not meaningful due to the Company's emergence from bankruptcy and the implementation of fresh start accounting in the first quarter of 2000. NET SALES With the feminine care and adult incontinence segment being reported as a discontinued operation the remaining infant care net sales increased 7.2 percent to $389.8 million in the first nine months of 2000 compared to $363.5 million in the first nine months of 1999. Unit sales increased 6.2 percent to 2,415 million units compared to 2,273 million units in the first nine months of 1999. The increase in net sales and units was due to a favorable product mix associated with the introduction of a new training pant product and the launch of certain destination store brand product and marketing programs. COST OF SALES Infant care cost of sales was $313.7 million in the first nine months of 2000 compared to $304.5 million in the first nine months of 1999. As a percentage of net sales, infant care cost of sales was 80.5 percent in the first nine months of 2000 compared to 83.8 percent in the first nine months of 1999. This decrease in costs as a percentage of sales was due to improved manufacturing efficiencies, lower plant overhead costs, savings associated with the closure of the Brampton, Canada manufacturing facility during the second quarter of 1999 and lower depreciation costs. These favorable items were partially offset by higher pulp costs. -25- Infant care raw material costs, with the exception of pulp, were at lower cost levels in the first nine months of 2000 compared to the first nine months of 1999. Infant care depreciation costs were $15.2 million in the first nine months of 2000 compared to $18.7 million in first nine months of 1999. The decrease is partially due to lower asset values as a result of fresh start accounting. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES SG&A expenses were $55.0 million in the first three quarters of 2000 compared to $61.4 million in the first three quarters of 1999. As a percentage of net sales, these expenses were 14.1 percent in the first three quarters of 2000 compared to 16.9 percent in the first three quarters of 1999. The decrease in SG&A is primarily attributable to lower sales and marketing expenditures and information technology expenses which more than offset former senior management severance costs. Depreciation and amortization costs included in SG&A decreased to $2.4 million in the first three quarters of 2000 compared to $5.7 million in the first three quarters of 1999. The decrease in depreciation and amortization is primarily due to the elimination of goodwill through fresh start accounting and reduced amortization expense of the Company's enterprise software due to fresh start accounting and some of the assets becoming fully amortized in 1999. RESEARCH AND DEVELOPMENT Research and development expenses were $3.2 million in the first three quarters of 2000 compared to $2.8 million in the first three quarters of 1999. INTEREST EXPENSE Interest expense was $11.9 million in the first three quarters of 2000 compared to $.3 million in the first three quarters of 1999. The increase is due to interest costs associated with the New Notes and with borrowings under the Credit Facility. There were no borrowings under the DIP Credit Facility during the first three quarters of 1999. OTHER INCOME, NET Other income, net was $1.9 million in the first three quarters of 2000 compared to $2.0 million in the first three quarters of 1999. Other income, net in the first three quarters was primarily due to interest income from cash investments, and interest on receivables due from unconsolidated subsidiaries. EQUITY IN EARNINGS OF UNCONSOLIDATED SUBSIDIARIES The equity in earnings of unconsolidated subsidiaries was $1.8 million in the first three quarters of 2000 compared to $1.1 million for the same time period in 1999. The increase in earnings reflects improved earnings at Paragon Mabesa International, S.A. de C.V. BANKRUPTCY COSTS Bankruptcy costs were $10.4 million in the first three quarters of 2000 compared to $7.1 million in the first three quarters of 1999. The increase in costs was primarily due to professional fees associated with the exit from bankruptcy as well as $3.3 million in confirmation bonuses paid to employees. EXTRAORDINARY GAIN FROM DISCHARGE OF DEBT During the first three quarters of 2000 an extraordinary gain of $123.0 million was recorded for the discharge of indebtedness that resulted from the forgiveness of certain liabilities in accordance with the Company's plan of reorganization. INCOME TAXES Income tax benefits associated with domestic operating losses and deductible temporary differences for the periods presented have been fully reserved with a valuation allowance on the basis that the realization of such benefits is dependent upon sufficient taxable income in the future. The Company has recorded a valuation allowance for substantially all deferred tax assets as the Company does not believe it is more likely than not that the benefits will be realized. Income tax benefits recognized in the accompanying financial statements for the periods presented relate to recoverable income taxes for jurisdictions outside the United States. -26- LIQUIDITY AND CAPITAL RESOURCES On a pro forma basis, the cash flows for the five weeks ended January 28, 2000 (Predecessor Company) and the thirty-four weeks ended September 24, 2000 (Successor Company) have been combined for purposes of comparison to the thirty-nine weeks ended September 26, 1999. During the first three quarters ended September 24, 2000, the Company had a decrease in cash of $2.3 million. Cash provided by operating activities of continuing operations for the three quarters ended September 24, 2000 was $11.4 million compared to $17.3 million for the first three quarters of 1999. The decrease resulted from higher net earnings before depreciation and amortization, excluding the non-cash extraordinary gain, which were more than offset by an increase in net working capital, primarily an increase in accounts receivable. Net cash used in operating activities of the discontinued operation was $12.4 million in the first three quarters of 2000 compared to $12.3 million in the same period of 1999. Net cash used in investing activities of the continuing operations for the first three quarters of 2000 was $1.8 million compared to $17.3 million for the same period in 1999. This decrease was primarily the result of lower capital expenditures. On January 28, 2000, the Company entered into the Credit Facility. The maximum borrowing under the Credit Facility may not exceed the lesser of $95.0 million or an amount determined by a borrowing base formula. The borrowing base formula is comprised of certain specified percentages of eligible accounts receivable, eligible inventory, equipment and personal property and real property of the Company. The Credit Facility has a sub-limit of $15.0 million for the issuance of letters of credit. Borrowings under the Credit Facility are secured by a security interest in, pledge of and lien on substantially all of the Company's North American assets and properties and the proceeds thereof. Borrowings under the Credit Facility are guaranteed by certain domestic subsidiaries and may be used to fund working capital and other general corporate purposes including acquisitions and investments in existing and new international joint ventures. The Credit Facility contains customary restrictive covenants, including among other things, a prohibition on dividends, limitations on the creation of additional liens and indebtedness, limitations on capital expenditures, investments, loans and advances, the sales of assets and transactions with affiliates. Financial covenants include the maintenance of minimum earnings before interest, taxes, depreciation and amortization, fixed charges, coverage ratio, tangible net worth and a maximum leverage ratio. The Credit Facility provides that borrowings will bear interest at a rate of 1.50 percent in excess of Citibank's base rate, or at the Company's option, a rate of 2.50 percent in excess of the reserve adjusted eurodollar rate for interest periods of one, two, three or six months. After March 31, 2001, borrowing rates will be subject to a pricing grid based upon the Company's leverage ratio and could decrease by a maximum of .5 percent and increase by a maximum of .25 percent. The Company will pay a commitment fee of .5 percent per annum on the unused portion of the Credit Facility, a letter of credit fee equal to 2.75 percent per annum on the average outstanding letters of credit and certain other fees. The Company anticipates that the Credit Facility is sufficient to meet its current needs. On January 28, 2000, the Company borrowed approximately $15.0 million to consummate the Plan which was primarily used to extinguish $13.0 million in pre-petition liabilities subject to compromise. The Company repaid those obligations during the second quarter ending June 25, 2000. The Company at September 24, 2000, had an aggregate of $4.5 million in letters of credit under the Credit Facility and no direct borrowings. On January 28, 2000, the Company issued $146 million of 11.25 percent senior subordinated notes due 2005 as contemplated under the Plan. The New Notes are guaranteed by certain domestic subsidiaries and are not callable until February 1, 2003. Interest is payable semi-annually and during the first two years can be paid in kind if free cash flow, as defined in the Indenture, falls below projected levels. The New Notes are subordinated in right of payment to the payment of all senior indebtedness. The New Notes contain customary restrictive covenants, including among other things, limitations on dividends and restricted payments, the incurrence of additional indebtedness, liens, investments, loans and advances, the sales of assets and transactions with affiliates. The Company is current on its interest payments and has not elected to pay interest in kind. FUTURE REALIZATION OF NET DEFERRED TAX ASSET The Company accounts for income taxes based on the liability method and, accordingly, deferred income taxes are provided to reflect temporary differences between financial and tax reporting. A significant component of deferred income -27- taxes includes temporary differences due to reserves not currently deductible ($50.4 million) and operating loss carryforwards ("NOLs") ($29.1 million). These deferred tax assets may only be realized as an offset to future taxable income. Also, the ability to utilize the NOLs and a portion of the other deferred tax assets is subject to limitation under Section 382 of the Internal Revenue Code as a result of the change in ownership that occurred in connection with the Bankruptcy Reorganization. To realize the full benefit of the deferred tax asset, the Company needs to generate approximately $250.9 million in future taxable income. Accordingly, the Company has estimated that this limitation on the annual utilization of built-in deductions will be approximately $6.8 million. The Company currently has fully reserved its net deferred tax asset of $96.6 million. See "--INCOME TAXES." RISKS AND UNCERTAINTIES INCREASED COSTS. As a part of the License Agreements entered into in connection with the Company's settlements with P&G and K-C, the Company has incurred and will continue to incur significant added costs in the form of running royalties payable to both parties for sales of the licensed diaper and training pant products. While the Company believes that the royalties being charged by P&G and K-C under their respective License Agreements are approximately the same royalties that will be paid by the Company's major store brand competitors for similar patent rights, the royalties will have a material adverse impact on the Company's future financial condition and results of operations. While these royalty costs have been partially offset by projected raw material cost savings related to the conversion to a dual cuff product, the Company's overall raw material costs have increased. Further, the Company's operating results may be adversely affected by anticipated increases in raw materials costs, primarily fluff pulp, in 2000. In addition, as a part of the License Agreement entered into in connection with the K-C Settlement Agreement, the Company has changed to a new SAP for its diapers and training pants which exhibits certain performance characteristics ("the SAP Safe Harbor"). The Company has encountered increased product costs due to the increased price and usage of new SAP within the SAP Safe Harbor. The Company cannot predict at this time whether or when the added costs will be fully offset. PRICING. Price increases are needed to fully offset the added royalty costs being incurred by the Company pursuant to the P&G and K-C settlements described above. During the third quarter the Company began the process of implementing an effective price increase as a result of a package count change that the Company began during the third quarter of 2000. Should the Company not be able to realize future price increases, its margins are expected to continue to be negatively impacted. REALIZATION OF INVESTMENT IN FEMININE CARE AND ADULT INCONTINENCE BUSINESS. The Company has decided to concentrate on its core infant care business and liquidate the Gaffney, South Carolina femcare and adult incontinence pad-oriented oriented segment. The expected disposal date depends on market factors as the Company continues to work towards liquidating the assets of the segment. The Company has accounted for the event as a discontinued segment as discussed in Note 15 to the condensed consolidated financial statements. While the Company has estimated the costs associated with the discontinuance of this segment there can be no assurance of the final costs at this time. BRANDED PRODUCT INNOVATIONS. Because of the emphasis on product innovations in the disposable diaper market, patents and other intellectual property rights are an important competitive factor. The national branded manufacturers have sought to vigorously enforce their patent rights. Patents held by the national branded manufacturers could severely limit the Company's ability to keep up with branded product innovations by prohibiting the Company from introducing products with comparable features. P&G and K-C have also heavily promoted diapers in the multi-pack configuration. These packages offer a lower unit price to the retailer and consumer. It is possible that the Company may continue to realize lower selling prices and/or lower volumes as a result of these initiatives. INCREASED FINANCIAL LEVERAGE. In connection with the Plan, the Company issued New Notes in the amount of $146.0 million. As a result of this increased leverage, the Company's principal and interest obligations have increased substantially. The degree to which the Company is leveraged could adversely affect the Company's ability to obtain additional financing for working capital, acquisitions or other purposes and could make it more vulnerable to economic downturns and competitive pressures. The Company's increased leverage could also adversely affect its liquidity and its ability to fund capital expenditures, as a substantial portion of available cash from operations will have to be applied to meet debt service requirements. The indenture related to the New Notes (the "Indenture") provides that, if certain coverage tests are not met, interest on the New Notes may be paid in kind for the first two years. The Indenture contains customary financial covenants restricting the payments of dividends, the repurchase of the Company's stock, the issuance of additional equity or the incurrence of additional indebtedness. Also in connection with the Plan, on January 28, 2000, the Company entered into the Credit Facility. The Credit Facility contains customary financial covenants. -28- Based upon anticipated improvements in the Company's operations and certain cost savings measures, the Company believes that its cash flows from operations, borrowings under the Credit Facility and other sources of liquidity, will be adequate to meet the Company's anticipated requirements for working capital, capital expenditures, interest payments and scheduled principal payments for the foreseeable future. There can be no assurance, however, that anticipated improvements in operations and cost savings will be realized. If the Company is unable to generate sufficient cash flows from operations in the future, it may be required to refinance all or a portion of its existing debt or to obtain additional financing. There can be no assurance that any such refinancing would be possible or that any additional financing could be obtained on terms that are favorable or acceptable to the Company. MARKET FOR THE COMPANY'S COMMON STOCK. Pursuant to the Plan, Wellspring and its affiliates purchased 11,516,405 shares, or approximately 97.4 percent, of the Company's new common stock. Approximately 309,800 shares, or 2.6 percent of the new common stock, were distributed under the Plan to the Company's then-existing stockholders and purchased through the Rights Offering pursuant to the Plan. The Company's common stock is currently quoted on the Over-the-Counter Bulletin Board, OTCBB, under the symbol PGTR. FORWARD-LOOKING STATEMENTS From time to time, information provided by the Company, statements made by its employees or information included in its filings with the Securities and Exchange Commission (including the Annual Report on Form 10-K) may include statements that are not historical facts, so-called "forward-looking statements." The words "believes," "anticipates," "expects" and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed in the Company's forward-looking statements. Factors which could affect the Company's financial results, including but not limited to: increased raw material prices and product costs; new product and packaging introductions by competitors; increased price and promotion pressure from competitors; and patent litigation, are described herein. Readers are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date hereof, and which are made by management pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. The Company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. NEW ACCOUNTING STANDARDS The Financial Accounting Standards Board ("FASB") has issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities," which must be adopted in the Company's fiscal year 2001. This statement establishes accounting and reporting standards for derivative instruments - including certain derivative instruments embedded in other contracts - and for hedging activities. The Company is currently evaluating the impact of the statement on the Company's financial statements. The Emerging Issues Task Force of the Financial Accounting Standards Board (the "Task Force") reached a consensus on Issue 00-10, ACCOUNTING FOR SHIPPING AND HANDLING FEES AND COSTS. The issue addresses the income statement classification for shipping and handling fees and costs by companies that record revenue based on the gross amount billed to customers under EITF Issue No. 99-19 "Reporting Revenue Gross as Principal versus Net as an Agent". Upon application of the consensus, which is required for the Company in the fourth quarter of 2000, prior period financial statements should be reclassified to conform to the consensus. To date, the Company has not completed its analysis of the impact Issue 00-10 may have on the reported net sales and cost of sales. The Task Force reached a consensus on Issue 00-14, ACCOUNTING FOR CERTAIN SALES INCENTIVES. The issue addresses the accounting for sales incentives offered voluntarily by a vendor without charge to customers that can be used in, or that are exercisable by a customer as a result of a single exchange transaction. For sales incentives resulting in the right to a rebate, the Task Force concluded that recognition should occur at the date of sale, measured based upon the estimated amount of refunds expected to be claimed by customers. Indicators pointing to the ability to make a reasonable and reliable estimate of the amount of future rebates or refunds were developed. If the amount cannot be reliably estimated, it should be assumed that all customers will request a refund. When recognized, a cash incentive should be classified as a reduction of revenue. Upon application of the consensus, which is required for the Company in the fourth quarter of 2000, prior period financial statements should be reclassified to conform to the consensus. To date, the Company has not completed its analysis of the impact Issue 00-14 may have on the reported amount of net sales and selling, general and administrative expenses. -29- ITEM 3. QUANTITIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company's market risk-sensitive instruments and foreign currency exchange rate risks do not subject the Company to material market risk exposures. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS THE PROCTER & GAMBLE COMPANY V. PARAGON TRADE BRANDS, INC. - P&G filed a lawsuit in January 1994 in the Delaware District Court alleging that the Company's "Ultra" infant disposable diaper products infringed two of P&G's dual cuff diaper patents. On December 30, 1997, the Delaware District Court issued a Judgment and Opinion finding that P&G's dual cuff patents were valid and infringed, while at the same time finding the Company's patent to be invalid, unenforceable and not infringed by P&G's products. Judgment was entered on January 6, 1998. Damages of approximately $178.4 million were entered against Paragon by the Delaware District Court on June 2, 1998. At the same time, the Delaware District Court entered injunctive relief agreed upon by P&G and the Company. The Delaware Judgment had a material adverse effect on the Company's financial position and its results of operations. As a result of the District Court's Judgment, the Company filed for relief under Chapter 11 of the Bankruptcy Code, 11 U.S.C. Section 101 ET seq., in the United States Bankruptcy Court for the Northern District of Georgia (Case No. 98-60390) on January 6, 1998. See "--IN RE PARAGON TRADE BRANDS, INC.," below. On February 2, 1999, the Company entered into a Settlement Agreement with P&G which fully and finally settled all matters related to the Delaware Judgment, the Company's appeal of the Delaware Judgment, P&G's motion to find the Company in contempt of the Delaware Judgment and P&G's proof of claim filed in the Company's Chapter 11 reorganization proceeding. The P&G Approval Order was issued on August 6, 1999. As a part of the settlement, the Company entered into License Agreements for the U.S. and Canada, - with respect to certain of the patents asserted by P&G in its proof of claim, including those asserted in the Delaware action. The U.S. and Canadian patent rights licensed by the Company permitted the Company to convert to a dual cuff baby diaper design. KIMBERLY-CLARK CORPORATION V. PARAGON TRADE BRANDS, INC. - On October 26, 1995, K-C filed a lawsuit against the Company in the U.S. District Court in Dallas, Texas, alleging infringement by the Company's products of two K-C patents relating to dual cuffs. As a result of the Company's Chapter 11 filing, the proceedings in the K-C litigation were stayed. On March 19, 1999, the Company entered into a Settlement Agreement with K-C which fully and finally settled all matters related to the Texas action, including the Company's counterclaims, and K-C's proof of claim filed in the Company's Chapter 11 reorganization proceeding. The K-C Approval Order was issued by the Bankruptcy Court on August 6, 1999. As a part of the settlement, the Company entered into License Agreements for the U.S. and Canada, - with respect to the patents asserted by K-C in the Texas action. The patent rights licensed by the Company from K-C permitted the Company to convert to a dual cuff diaper design. As a part of the K-C License Agreement, K-C has agreed not to sue the Company on two of K-C's patents related to the use of Super Absorbent Polymer ("SAP") in diapers and training pants, so long as the Company uses SAP which exhibits certain performance characteristics (the "SAP Safe Harbor"). The Company has encountered increased product costs due to the increased price and usage of the new SAP within the SAP Safe Harbor. The Company cannot predict at this time whether or when the added costs will be fully offset. IN RE PARAGON TRADE BRANDS, INC. - As described above, on December 30, 1997, the Delaware District Court issued a Judgment and Opinion in the Company's lawsuit with P&G finding that two of P&G's diaper patents were valid and infringed by the Company's "Ultra" disposable baby diapers, while also rejecting the Company's patent infringement claim against P&G. Judgment was entered on January 6, 1998. While a final damages number was not entered by the Delaware District Court until June 2, 1998, the Company originally estimated the liability and associated litigation costs to be approximately $200 million. The amount of the award resulted in violation of certain covenants under the Company's bank loan agreements. As a result, the issuance of the Delaware Judgment and the uncertainty it created caused an immediate and critical liquidity issue for the Company which necessitated the Chapter 11 filing. -30- Subsequently, damages of approximately $178.4 million were entered against Paragon by the Delaware District Court on June 2, 1998. At the same time, the Delaware District Court entered injunctive relief agreed upon by P&G and the Company. See "--THE PROCTER & GAMBLE COMPANY V. PARAGON TRADE BRANDS, INC.," above. The Chapter 11 filing prevented P&G from placing liens on the Company's assets, permitted the Company to appeal the Delaware District Court's decision in an orderly fashion and afforded the Company the opportunity to resolve liquidated and unliquidated claims against the Company which arose prior to the Chapter 11 filing. On February 2, 1999, the Company entered into a Settlement Agreement with P&G which fully and finally settled all matters related to the Delaware Judgment, the Company's appeal of the Delaware Judgment, P&G's motion to find the Company in contempt of the Delaware Judgment and P&G's proof of claim filed in the Company's Chapter 11 reorganization proceeding. See "--THE PROCTER & GAMBLE COMPANY V. PARAGON TRADE BRANDS, INC.," above. On March 19, 1999, the Company entered into a Settlement Agreement with K-C which fully and finally settled all matters related to the Texas action, including the Company's counterclaims, and K-C's proof of claim filed in the Company's Chapter 11 reorganization proceeding. See "--KIMBERLY-CLARK CORPORATION V. PARAGON TRADE BRANDS, INC.," above. On or about November 15, 1999, the Company and the Creditors' Committee, as co-proponents, filed the Plan and Disclosure Statement with the Bankruptcy Court. The Plan incorporated the Wellspring Transaction. By order dated November 18, 1999, the Bankruptcy Court approved the Disclosure Statement. At such time, the Bankruptcy Court also approved certain voting procedures and established January 7, 2000, as the voting deadline for the Plan and January 13, 2000, as the date for a hearing to consider confirmation of the Plan. A confirmation hearing was held by the Bankruptcy Court on January 13, 2000. By Order dated January 13, 2000, the Bankruptcy Court confirmed the Plan. On January 28, 2000, Paragon was reorganized pursuant to the Plan through the consummation of the Wellspring Transaction. As contemplated under the Plan, the Equity Committee has withdrawn with prejudice its appeals of the P&G Approval Order and the K-C Approval Order. On January 28, 2000, the Company entered into the Credit Facility with a bank group led by Citicorp. This facility is designed to supplement the Company's cash on hand and operating cash flow. As of June 25, 2000, there was an aggregate of $5.1 million in letters of credit under the Credit Facility and no direct borrowings. The Credit Facility contains customary financial covenants. Legal fees and costs in connection with the Chapter 11 reorganization proceeding were significant. KIMBERLY-CLARK WORLDWIDE, INC. V. PARAGON TRADE BRANDS, INC. - On March 20, 2000, Kimberly-Clark Worldwide, Inc. ("K-C Worldwide") filed suit in the U.S. District Court in Delaware against the Company for allegedly infringing a patent related to a disposable absorbent garment with a registered graphic. The suit seeks injunctive relief, unspecified treble damages, interest and attorneys' fees and expenses. On July 31, 2000, the Company and K-C Worldwide executed a settlement agreement. The Company believes that the terms and conditions of the settlement agreement will not have a material business or financial impact on the Company and have been reflected in the year to date financial statements. OTHER - The Company is also a party to other legal proceedings generally incidental to its activities. Although the final outcome of any legal proceeding or dispute is subject to a great many variables and cannot be predicted with any degree of certainty, the Company presently believes that any ultimate liability resulting from any or all legal proceedings or disputes to which it is a party will not have a material adverse effect on its financial condition or results of operations. ITEM 3. DEFAULTS IN SENIOR SECURITIES At December 28, 1997, the Company maintained a $150 million revolving credit facility with a group of nine financial institutions available through February 2001. At December 28, 1997, borrowings under this credit facility totaled $70 million. The Company also had access to short-term lines of credit on an uncommitted basis with several major banks. At December 28, 1997, the Company had approximately $50 million in uncommitted lines of credit. Borrowings under these lines of credit totaled $12.8 million at December 28, 1997. The Chapter 11 filing resulted in a default under its pre-petition revolving credit facility and borrowings under its uncommitted lines of credit. -31- 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) Exhibit 10.4 Sublicense, dated as of February 2, 1993, between Weyerhaeuser and Paragon Trade Brands, Inc.(2) Exhibit 10.5 Technology Agreement, dated as of October 15, 1987, by and between Weyerhaeuser and Johnson and Johnson, as amended(2) Exhibit 10.6 Letter Supply Agreement between Weyerhaeuser and Paragon Trade Brands, Inc. dated as of October 22, 1997(3) Exhibit 10.7* Employment Agreement, dated as of May 4, 2000, between Paragon Trade Brands, Inc. and Michael T. Riordan(14) Exhibit 10.8* Employment Agreement, dated as of August 11, 1998, between Paragon Trade Brands, Inc. and Bobby V. Abraham(4) Exhibit 10.9* Consulting and Separation Agreement by and between Bobby V. Abraham and Paragon Trade Brands, Inc., dated as of May 5, 2000 (14) Exhibit 10.10* Employment Agreement, dated as of August 11, 1998, between Paragon Trade Brands, Inc. and David W. Cole(4) Exhibit 10.11* Employment Agreement, dated as of August 11, 1998, between Paragon Trade Brands, Inc. and Alan J. Cyron(4) Exhibit 10.12* Employment Agreement, dated as of August 11, 1998, between Paragon Trade Brands, Inc. and Arrigo D. (Rick) Jezzi(4) Exhibit 10.13* Employment agreement, dated as of August 11, 1998, between Paragon Trade Brands, Inc. and Robert E. McClain(4) Exhibit 10.14* Employment Agreement, dated as of August 11, 1998, between Paragon Trade Brands, Inc. and Catherine O. Hasbrouck(4) Exhibit 10.15* Employment Agreement, dated as of August 11, 1998, between Paragon Trade Brands, Inc. and Kevin P. Higgins(4) -32- Exhibit 10.16* Paragon Trade Brands, Inc. Confirmation Retention Plan for Top Eight Executives and Summary Plan Description(4) Exhibit 10.17* Paragon Trade Brands, Inc. Stock Option Plan(1) Exhibit 10.17.1* Paragon Trade Brands, Inc. Stock Option Plan for Non-Employee Directors(13) Exhibit 10.18 Credit Agreement dated as of January 28, 2000 Among Paragon Trade Brands, Inc. as Borrower and The Lenders and Issuers Party Hereto and Citicorp USA, Inc. as Administrative Agent and Salomon Smith Barney as Arranger(1) Exhibit 10.18.1 Pledge and Security Agreement dated as of January 28, 2000 Among Paragon Trade Brands, Inc. and Each Other Grantor from Time to Time Party Hereto and Citicorp USA, Inc. as Administrative Agent(1) Exhibit 10.19 Indemnification Agreements, dated as of February 2, 1993, between Weyerhaeuser and Bobby V. Abraham and Gary M. Arnts(2) Exhibit 10.20 Asset Purchase Agreement dated December 11, 1995 by and among Paragon Trade Brands, Inc., PTB Acquisition Sub, Inc., Pope & Talbot, Inc. and Pope & Talbot, Wis., Inc.(5) Exhibit 10.21** Sales Contract, dated as of January 30, 1996, between Hoechst Celanese Corporation and Paragon Trade Brands, Inc.(6) Exhibit 10.22** Sales Contract, dated as of April 30, 1998, between Clariant Corporation and Paragon Trade Brands, Inc.(7) Exhibit 10.23 Lease Agreement between Cherokee County, South Carolina and Paragon Trade Brands, Inc., dated as of October 1, 1996(8) Exhibit 10.24 Settlement Agreement, dated as of February 2, 1999 between Paragon Trade Brands, Inc. and The Procter & Gamble Company(9) Exhibit 10.25 U.S. License Agreement, dated as of February 2, 1999 between The Procter & Gamble Company and Paragon Trade Brands, Inc.(9) Exhibit 10.26 Canadian License Agreement, dated as of February 2, 1999 between The Procter & Gamble Company and Paragon Trade Brands, Inc.(9) Exhibit 10.27 U.S. License Agreement, dated as of February 2, 1999 between The Procter & Gamble Company and Paragon Trade Brands, Inc.(9) Exhibit 10.28 Canadian License Agreement, dated as of February 2, 1999 between The Procter & Gamble Company and Paragon Trade Brands, Inc.(9) Exhibit 10.29 Settlement Agreement, dated as of March 19, 1999 between Kimberly-Clark Corporation and Paragon Trade Brands, Inc. (9) Exhibit 10.30 License Agreement Between Kimberly-Clark Corporation and Paragon Trade Brands, Inc., dated as of March 15, 1999(9) Exhibit 10.31 License Agreement Between Kimberly-Clark Corporation and Paragon Trade Brands, Inc., dated as of March 15, 1999(9) Exhibit 10.32 Modified Second Amended Plan of Reorganization(10) Exhibit 10.33 Stock Purchase Agreement by and Between PTB Acquisition Company LLC and Paragon Trade Brands, Inc., dated as of November 16, 1999(11) -33- Exhibit 10.34 Shareholders' Agreement Among Paragon Trade Brands, Inc., PTB Acquisition Company, LLC, Co-Investment Partners, L.P., Ontario Teachers Pension Plan Board and Certain Other Shareholders, dated as of January 28, 2000(1) Exhibit 10.35 Registration Rights Agreement Among Paragon Trade Brands, Inc., PTB Acquisition Company, Co-Investment Partners, L.P., Ontario Teachers Pension Plan Board and Certain Other Shareholders, dated as of January 28, 2000(1) Exhibit 10.36 Indenture for $182,000,000 11.25% Senior Subordinated Notes due 2005, dated as of January 28, 2000(12) Exhibit 10.37 First Supplemental Indenture for $182,000,000 11.25% Senior Subordinated Notes due 2005, dated as of January 28, 2000(12) Exhibit 11 Computation of Per Share Earnings (See Note 11 to Financial Statements) Exhibit 21.1 Subsidiaries of the Company(9) Exhibit 27 Financial Data Schedule (for SEC use only) - ---------- *Management contract or compensatory plan or arrangement. **Confidential treatment has been requested as to a portion of this document. (1) Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 26, 1999. (2) Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report on Form 10-K (File No. 1-11368) for the fiscal year ended December 26, 1993, copies of which may be obtained at the Public Reference Room of the SEC, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. (3) Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 28, 1997. (4) Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 27, 1998. (5) Incorporated by reference from Paragon Trade Brands, Inc.'s Current Report on Form 8-K, dated as of February 8, 1996. (6) Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1995. (7) Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 28, 1998. (8) Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 29, 1996. (9) Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 27, 1998. (10) Incorporated by reference from Paragon Trade Brands, Inc.'s Current Report on Form 8-K dated January 13, 2000. (11) Incorporated by reference from Paragon Trade Brands, Inc.'s Application for Qualification of Indenture Under the Trust Indenture Act of 1939 on Form T-3, filed with the Commission on January 26, 2000. (12) Incorporated by reference from Paragon Trade Brands, Inc.'s Current Report on Form 8-K dated January 28, 2000. -34- (13) Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 26, 2000. (14) Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 25, 2000.
(b) Reports on Form 8-K DOCUMENT DATE ITEM - -------- ---- ---- Report on Form 8-K September 13, 2000 5, 7 -35- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PARAGON TRADE BRANDS, INC. By /S/ DAVID C. NICHOLSON ------------------------ David C. Nicholson Chief Financial Officer November 3, 2000 -36- 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(14) Exhibit 10.8* Employment Agreement, dated as of August 11, 1998, between Paragon Trade Brands, Inc. and Bobby V. Abraham(4) Exhibit 10.9* Consulting and Separation Agreement by and between Bobby V. Abraham and Paragon Trade Brands, Inc., dated as of May 5, 2000(14) Exhibit 10.10* Employment Agreement, dated as of August 11, 1998, between Paragon Trade Brands, Inc. and David W. Cole(4) Exhibit 10.11* Employment Agreement, dated as of August 11, 1998, between Paragon Trade Brands, Inc. and Alan J. Cyron(4) Exhibit 10.12* Employment Agreement, dated as of August 11, 1998, between Paragon Trade Brands, Inc. and Arrigo D. (Rick) Jezzi(4) Exhibit 10.13* Employment agreement, dated as of August 11, 1998, between Paragon Trade Brands, Inc. and Robert E. McClain(4) Exhibit 10.14* Employment Agreement, dated as of August 11, 1998, between Paragon Trade Brands, Inc. and Catherine O. Hasbrouck(4) Exhibit 10.15* Employment Agreement, dated as of August 11, 1998, between Paragon Trade Brands, Inc. and Kevin P. Higgins(4) -37- Exhibit 10.16* Paragon Trade Brands, Inc. Confirmation Retention Plan for Top Eight Executives and Summary Plan Description(4) Exhibit 10.17* Paragon Trade Brands, Inc. Stock Option Plan(1) Exhibit 10.17.1* Paragon Trade Brands, Inc. Stock Option Plan for Non-Employee Directors(13) Exhibit 10.18 Credit Agreement dated as of January 28, 2000 Among Paragon Trade Brands, Inc. as Borrower and The Lenders and Issuers Party Hereto and Citicorp USA, Inc. as Administrative Agent and Salomon Smith Barney as Arranger(1) Exhibit 10.18.1 Pledge and Security Agreement dated as of January 28, 2000 Among Paragon Trade Brands, Inc. and Each Other Grantor from Time to Time Party Hereto and Citicorp USA, Inc. as Administrative Agent(1) Exhibit 10.19 Indemnification Agreements, dated as of February 2, 1993, between Weyerhaeuser and Bobby V. Abraham and Gary M. Arnts(2) Exhibit 10.20 Asset Purchase Agreement dated December 11, 1995 by and among Paragon Trade Brands, Inc., PTB Acquisition Sub, Inc., Pope & Talbot, Inc. and Pope & Talbot, Wis., Inc.(5) Exhibit 10.21** Sales Contract, dated as of January 30, 1996, between Hoechst Celanese Corporation and Paragon Trade Brands, Inc.(6) Exhibit 10.22** Sales Contract, dated as of April 30, 1998, between Clariant Corporation and Paragon Trade Brands, Inc.(7) Exhibit 10.23 Lease Agreement between Cherokee County, South Carolina and Paragon Trade Brands, Inc., dated as of October 1, 1996(8) Exhibit 10.24 Settlement Agreement, dated as of February 2, 1999 between Paragon Trade Brands, Inc. and The Procter & Gamble Company(9) Exhibit 10.25 U.S. License Agreement, dated as of February 2, 1999 between The Procter & Gamble Company and Paragon Trade Brands, Inc.(9) Exhibit 10.26 Canadian License Agreement, dated as of February 2, 1999 between The Procter & Gamble Company and Paragon Trade Brands, Inc.(9) Exhibit 10.27 U.S. License Agreement, dated as of February 2, 1999 between The Procter & Gamble Company and Paragon Trade Brands, Inc.(9) Exhibit 10.28 Canadian License Agreement, dated as of February 2, 1999 between The Procter & Gamble Company and Paragon Trade Brands, Inc.(9) Exhibit 10.29 Settlement Agreement, dated as of March 19, 1999 between Kimberly-Clark Corporation and Paragon Trade Brands, Inc.(9) Exhibit 10.30 License Agreement Between Kimberly-Clark Corporation and Paragon Trade Brands, Inc., dated as of March 15, 1999(9) Exhibit 10.31 License Agreement Between Kimberly-Clark Corporation and Paragon Trade Brands, Inc., dated as of March 15, 1999(9) -38- Exhibit 10.32 Modified Second Amended Plan of Reorganization(10) Exhibit 10.33 Stock Purchase Agreement by and Between PTB Acquisition Company LLC and Paragon Trade Brands, Inc., dated as of November 16, 1999(11) Exhibit 10.34 Shareholders' Agreement Among Paragon Trade Brands, Inc., PTB Acquisition Company, LLC, Co-Investment Partners, L.P., Ontario Teachers Pension Plan Board and Certain Other Shareholders, dated as of January 28, 2000(1) Exhibit 10.35 Registration Rights Agreement Among Paragon Trade Brands, Inc., PTB Acquisition Company, Co-Investment Partners, L.P., Ontario Teachers Pension Plan Board and Certain Other Shareholders, dated as of January 28, 2000(1) Exhibit 10.36 Indenture for $182,000,000 11.25% Senior Subordinated Notes due 2005, dated as of January 28, 2000(12) Exhibit 10.37 First Supplemental Indenture for $182,000,000 11.25% Senior Subordinated Notes due 2005, dated as of January 28, 2000(12) Exhibit 11 Computation of Per Share Earnings (See Note 11 to Financial Statements) Exhibit 21.1 Subsidiaries of the Company(9) Exhibit 27 Financial Data Schedule (for SEC use only) - ---------- *Management contract or compensatory plan or arrangement. **Confidential treatment has been requested as to a portion of this document. (1) Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 26, 1999. (2) Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report on Form 10-K (File No. 1-11368) for the fiscal year ended December 26, 1993, copies of which may be obtained at the Public Reference Room of the SEC, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. (3) Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 28, 1997. (4) Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 27, 1998. (5) Incorporated by reference from Paragon Trade Brands, Inc.'s Current Report on Form 8-K, dated as of February 8, 1996. (6) Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1995. (7) Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 28, 1998. (8) Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 29, 1996. (9) Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 27, 1998. -39- (10) Incorporated by reference from Paragon Trade Brands, Inc.'s Current Report on Form 8-K dated January 13, 2000. (11) Incorporated by reference from Paragon Trade Brands, Inc.'s Application for Qualification of Indenture Under the Trust Indenture Act of 1939 on Form T-3, filed with the Commission on January 26, 2000. (12) Incorporated by reference from Paragon Trade Brands, Inc.'s Current Report on Form 8-K dated January 28, 2000. (13) Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 26, 2000. (14) Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 25, 2000.
EX-27 2 0002.txt FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10Q FOR THE QUARTER ENDED SEPTEMBER 24, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 1-MO 8-MOS DEC-31-2000 DEC-31-2000 DEC-27-1999 JAN-29-1999 JAN-28-2000 SEP-24-2000 0 9,311 0 0 0 92,556 0 8,793 0 36,372 0 138,158 0 90,114 0 16,128 0 336,214 0 84,943 0 0 0 0 0 0 0 120 0 119,843 0 336,214 49,422 340,372 49,422 340,372 40,076 273,639 40,076 273,639 0 0 0 0 75 11,788 3,027 6,694 (100) (133) (7,272) 6,827 1,195 24,503 123,043 0 0 0 114,576 (17,676) 9.59 (1.48) 9.59 (1.48)
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